Taiwan Semiconductor Manufacturing Company Ltd.

Thank you very much. Good afternoon, everyone, and welcome to TSMC's third quarter 2022 earnings conference call. This is Jeff Su, TSMC's Director of Investor Relations, and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2022, followed by our guidance for the fourth quarter 2022. Afterwards, Mr. Huang and TSMC's CEO, Dr. Cici Wei, will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor Notice that appears in our press release. And now I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today. My presentation will start with financial highlights for the third quarter 2022. After that, I will provide the guidance for the fourth quarter. The third quarter revenue increased 14.8% sequentially in NT dollar, or 11.4% in U.S. dollars, as our third quarter business was supported by strong demand for our industry-leading 5 nanometer technology. Third quarter gross margin increased 1.3 percentage points sequentially to 60.4%, slightly ahead of our guidance as we enjoyed a more favorable foreign exchange rate and cost improvement efforts. Total operating expenses accounted for 9.8% of net revenue as compared to 10% in the previous quarter. Operating margin increased 1.5 percentage points sequentially to 50.6%, mainly due to better operating leverage. Overall, our third quarter EPS was 10.83 NT, and ROE was 42.9%. Now let's move on to revenue by technology. 5 nanometer process technology contributed 28% of wafer revenue in the third quarter, while 7 nanometer accounted for 26%. Advanced technologies, which are defined as 7 nanometer and below, accounted for 54% of wafer revenue. Moving on to revenue contribution by platform. Smartphone increased 25% quarter over quarter to account for 41% of our third quarter revenue. HPC increased 4% to account for 39%. IoT increased 33% to account for 10%. Automotive increased 15% to account for 5%. And DCE decreased 2% to account for 2%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 1.5 trillion NT. On the liability side, current liabilities decreased by 38 billion NT, mainly due to the decrease of 116 billion NT in short-term loans, partially offset by the increase of 70 billion NT in accrued liabilities and others. Long-term interest-bearing debt increased by 88 billion NT, mainly as we raised 60 billion NT of corporate bonds during the quarter. On financial ratio, accounts receivable turnover days decreased one day to 36 days. Inventory days decreased five days to 90 days, primarily due to higher wafer shipment during the quarter. Now, let me make a few comments on cash flow and CAPEX. During the third quarter, we generated about $413 billion NT in cash from operations, spent $266 billion in CAPEX, distributed $71 billion in fourth quarter 21 cash dividends, and raised $60 billion from corporate bond issuances. Overall, our cash balance increased by $43 billion to $1.3 trillion NT at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $8.75 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $19.9 billion and $20.7 billion U.S., which represents a 0.4% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to 31.5 NT, growth margin is expected to be between 59.5% and 61.5%, operating margin between 49% and 51%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our third quarter and fourth quarter profitability. Compared to the second quarter, our third quarter gross margin increased by 130 basis points sequentially to 60.4%, mainly due to a more favorable foreign exchange rate and cost improvement efforts, despite continued inflationary cost pressures. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago, as our guidance was based on exchange rate assumption of one US dollar to 29.7 NT, whereas the actual third quarter exchange rate was one US dollar to 30.32 NT. This created about 80 basis point difference in our actual third quarter gross margin versus our original guidance. We have just guided our fourth quarter gross margin to be flattish sequentially to 60.5% at the midpoint as a more favorable exchange rate assumption will be offset by a lower capacity utilization rate. As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp-up, pricing, cost reduction, capacity utilization, technology mix, and foreign exchange rate. Looking ahead to 2023, we face challenges from N3 ramp dilution, higher year-over-year increase in depreciation costs, rising inflationary costs, semiconductor cyclicality, and overseas fab expansions. To manage our profitability in 2023, we are working closely with our customers to support their growth and continue to strategically and consistently sell our value. We are also working diligently on our internal cost improvement. Excluding the impact of foreign exchange rate, of which we have no control over, and taking the other five factors into consideration, we believe a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2022 CAPEX. As I have stated before, every year our CAPEX is spent in anticipation of the growth that will follow in future years. Three months ago, we said our 2022 CAPEX would be closer to the lower end of our $40 to $44 billion range. Now, We are further tightening up this year's capital spending and expect our 2022 CAPEX to be around $36 billion. About half of the change is due to capacity optimization based on the current medium-term outlook, and the other half is due to continued tool delivery challenges. Out of the around $36 billion CAPEX for 2022, between 70% to 80% of the capital budget will be allocated for advanced process technologies. About 10% will be spent for advanced packaging and mask making, and 10% to 20% will be spent for specialty technologies. Looking ahead, we will continue to manage our business prudently given the near-term uncertainties and adjust and tighten up our capital spending where appropriate. That said, our commitment to support customers' growth remains unchanged, and our disciplined CAPEX and capacity planning remains based on the long-term structural market demand profile. We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge and specialty technologies to support their growth while delivering profitable growth to our shareholders. Now, let me turn the microphone over to CC.

Good afternoon, everyone. First, let me start with TSMC's more resilient near-term demand outlook. We concluded our third quarter with revenue of NT 613.1 billion, or U.S. dollar 20.2 billion, supported by strong demand for our industry-leading 5 nanometer technologies. Moving into the first quarter of 2022, we expect our business to be flattish, as customers' ongoing inventory adjustment is balanced by the continuous ramp-up of our 5nm technologies, supported by smartphone and HPC applications. We expect our four-year growth in 2022 to be mid-30% in U.S. dollar terms. On the demand side, we continue to observe softness in consumer and market segments. Other end market segments such as data centers and automotive related remain steady for now for TSMC. But we start to see the possibility of adjustment down the road. On the inventory side, our customers and the supply chain continue to take action to adjust their inventory. We expect the semiconductor supply chain inventory to peak in third quarter this year and start to reduce in fourth quarter this year. We also expect it will take a few quarters through first half 2023 to rebalance to a healthier level. While the ongoing inventory correction will also affect TSMC, we expect our business to be less volatile and more resilient than the overall semiconductor industry during this period, supported by three key factors that are TSMC's core strengths in the front-end industry. First, our technology leadership and differentiation is much stronger today as compared to previous years. This enables TSMC to win business and enables our customers to win business in their end markets despite the semiconductor secrecy. Secondly, through our comprehensive design ecosystem and optimized process technologies, We are able to address and capture the structural increase in demand for computation and build a strong portfolio in high-performance computing. Third, our strategic relationship with our customers are long-term in nature, and we continue to work closely with our customers on technology development, capacity planning, and pricing to support their long-term demand and goals. As a result, we continue to see strong demand for our leading node, accepted N7, and steady demand for our differentiated spatial technologies on mature nodes. Looking ahead to 2023, with the successful ramp-up of N5, N4P, N4X, and the upcoming ramp-up of N3, we will continue to expand our customer product portfolio and increase our addressable market. Thus, while the ongoing semiconductor inventory correction will affect our first half 2023 utilization rate, we expect our business to be supported by stronger demand for our differentiated and leading advanced and specialty technologies, and for 2023 to be a growth year for TSMC. Next. Let me talk about the N7, N6 demand outlook. Due to the market weakness in smartphones and PCs, and customers' product schedule delay, starting 4Q this year, our N7, N6 capacity utilization will not be as high as it has been in the past three years. We expect this to persist for a few quarters through first half 2023. As the semiconductor supply chain inventory takes a few quarters to rebalance to a healthy level, and we have adjusted our N7-N6 CAPEX accordingly. We believe the N7, N6 demand is more a cyclical issue rather than structural, and expect our N7, N6 demand to pick up in second half 2023. Longer term, we continue to work closely with our customers to develop specialty and differentiated technology and are confident to drive additional wave of structural demand to backfill our N7 and N6 capacity over the next several years. Thus, our 7 nanometer family will continue to be a large and long lasting node for TSMC. Now I will talk about our N3 and N3E status. N3 is on track for volume production later this quarter, with good yield. We expect a smooth ramp in 2023, driven by both HPC and smartphone applications. Our customers' demand for N3 exceeds our ability to supply, partially due to the ongoing tool delivery issues, and we expect N3 to be fully utilized in 2023. We expect N3 revenue in 2023 to be higher than N5 revenue in its first year in 2020, and for N3 to contribute a mere single-digit percentage of our wafer revenue in 2023 as our overall revenue base is much larger today than in 2020. N3E will further extend our N3 family with enhanced performance, power, and yield, and offer complete platform support for both smartphone and HPC applications. N3E development is progressing ahead of plan, and volume production is now scheduled for second half 2023. Despite the ongoing inventory correction, we observe a high level of customer engagement at both N3 and N3E, with a number of tap-outs more than 2x than that of N5 in its first and second year. We are working closely with our tool supplier to address the tool delivery challenges and prepare more 3 nanometer capacity to support our customers' strong demand in 2023, 2024, and beyond. Our 3 nanometer technology will be the most advanced semiconductor technology in both PPA and transistor technology when it is introduced. We are confident that N3 firmly will be another large and long-lasting node for TSMC. Finally, let me talk about the future driver of leading node adoption. TSMC's mission is to be the trusted technology and capacity provider for the global logic IC industry for years to come. Our job is to help our customers unleash their innovations and enable them to capture greater value and win in their end markets. As the industry continues to pursue scaling, it is true that the geometry shrink is slowing down and becoming more challenging for everyone due to rising process complexity. However, it is also true that demand for energy-efficient computing is accelerating in an intelligent and connected world as technology is becoming more pervasive and essential in people's lives. Thus, the semiconductor industry value in the supply chain is increasing. and the value of technology platform is expanding beyond the scope of geometry shrink alone and increasingly toward greater power efficiency. As a result, our customers value much more than simply transistor cost. System performance and power efficiency has become key motivation for customers to adopt our leading node technologies. By working closely with our customers on technology development, our N3 and N2 will deliver full-node strikes in performance and power benefits while offering the industry's most advanced transistor scaling. We expect strong demand for our leading-node technologies driven by both smartphone and and HPC applications to fuel our long-term revenue growth of 15% to 20% CAGR over the next several years in U.S. dollar terms. With our leadership in both leading-edge process technology and 3D solutions, TSMC's technology cadence remains constant to deliver the value of our technology platform. We will continue to extend our overall competitiveness and technology leadership while delivering a predictable technology cadence that helps our customers to enhance their product competitiveness and grow their markets well into the future. This concludes our key message, and thank you for your attention.