Taiwan Semiconductor Manufacturing Company Ltd.

Good evening, friends of the investment world and the media. I am Su Zhikai from Taichi.com's Legal Relations Department. I would like to welcome you to participate in the legal explanation meeting of the fourth quarter of Taichi's company in 2023. Due to the fact that this law will be broadcasted to global investors at the same time, we will use English all the time. Please forgive us. Good afternoon, everyone, and welcome to TSMC's fourth quarter 2023 earnings conference and conference call. It's great to see everyone in person once again. This is Jeff Hsu, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com, where you can also download the earnings release materials. If you're 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 fourth quarter 2023 and full year of 2023, followed by our guidance for the first quarter 2024. Afterwards, Mr. Huang, TSMC's CEO, Dr. Cici Wei, and TSMC's chairman, Dr. Mark Liu, will jointly provide the company's key messages. Then TSMC's chairman, Dr. Mark Liu, will host the Q&A session where all three of our executives will take your questions. As usual, I'd 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 on our press release. And now, I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full year 2023. After that, I will provide the guidance for the first quarter 2024. Fourth quarter revenue increased 14.4% sequentially in NT dollar, or 13.6% in US dollars, as our fourth quarter business was supported by the continued strong ramp of our industry leading three nanometer technology. Gross margin decreased 1.3 percentage points sequentially to 53%, primarily due to margin dilution from three nanometer ramp. Operating margin decreased 0.1 percentage points sequentially to 41.6%, slightly ahead of our guidance, mainly due to operating leverage on higher revenue. Overall, our fourth quarter EPS was 9.21 NT and ROE was 28.1%. Now, let me move on to revenue by technology. Three nanometer process technology contributed 15% of wafer revenue in the fourth quarter, while five nanometer and seven nanometer accounted for 35% and 17% respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 67% of wafer revenue. On a full year basis, 3 nanometer revenue contribution came in at 6% of 2023 wafer revenue. 5 nanometer was 33%, and 7 nanometer was 19%. Advanced technologies accounted for 58% of total wafer revenue, up from 53% in 2022. Moving on to revenue contribution by platform, HPC increased 17% quarter over quarter to account for 43% of our fourth quarter revenue. Smartphone increased 27% to account for 43%. IoT decreased 29% to account for 5%. Automotive increased 13% to account for 5%. And DCE decreased 35% to account for 2%. On a full year basis, smartphone, IoT, DCE decreased 8%, 17%, and 16% respectively. HPC remained flat, while automotive increased 15% in 2023. Overall, HPC accounted for 43% of our 2023 revenue. Smartphone 38%, IoT 8%, and automotive 6%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of 1.7 trillion NT or 55 billion US dollars. On the liability side, current liabilities decreased by 56 billion NT, mainly due to the decrease in accounts payable. On financial ratios, accounts receivable days decreased four days to 31 days, while days of inventory also declined 11 days to 85 days, primarily due to higher three nanometer wafer shipments. Regarding cash flow and CAPEX, during the fourth quarter, we generated about 395 billion NT in cash from operations, spent 170 billion in CAPEX, and distributed 78 billion for the first quarter 23 cash dividend. Overall, our cash balance increased 154 billion to 1.47 trillion at the end of the quarter. In US dollar terms, our fourth quarter capital expenditures totaled 5.24 billion. Now let's look at the recap of our performance in 2023. 2023 was a challenging year for the global semiconductor industry, but our technology leadership enabled TSMC to outperform the foundry industry. Our revenue decreased 8.7% in US dollar terms to 69 billion US, or decreased 4.5% in NT terms to 2.16 trillion NT. Gross margin decrease 5.2 percentage points to 54.4%, mainly reflecting lower overall capacity utilization and three nanometer ramp, partially offset by a more favorable foreign exchange rate. To extend our technology leadership, We continue to expand our R&D investment in three nanometer and two nanometer development despite a lower revenue base in 2023. Thus, operating margin decreased 6.9 percentage points to 42.6%. Overall, full year EPS declined 17.5% to 32.34 NT and ROE was 26.2%. On cash flow, we spent 30.45 billion US dollars, or 950 billion NT in CAPEX, while generating 1.7 trillion NT in operating cash flow and 292 billion in free cash flow. We also paid 292 billion NT in cash dividends in 2023. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business in the first quarter to be impacted by smartphone seasonality, partially offset by continued HPC related demand. Based on the current business outlook, we expect our first quarter revenue to be between 18 billion and 18.8 billion US dollars, which represents a 6.2% sequential decline at the midpoint. Based on the exchange rate assumption of one US dollars to 31.1 NT, gross margin is expected to be between 52 and 54%. operating margin between 40 and 42 percent. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our fourth quarter 23 and first quarter 24 profitability. Compared to third quarter, our fourth quarter gross margin decreased by 130 basis points, sequentially to 53%, primarily due to the margin dilution from the continued ramp up of our three nanometer technology. We have just guided our first quarter gross margin to be flat sequentially at 53% at the midpoint, primarily as a less favorable foreign exchange rate assumption is offset by product mix changes due to smartphone seasonality. Looking at full year 2024, given the six factors that determine our profitability, there are a few puts and takes I would like to share. On the plus side, we expect our utilization rate to rise in 2024 as our business recovers. However, as we have said before, N3 is expected to dilute our gross margin by about three to four percentage points for the full year of 2024, as the revenue contribution will be much higher than in 2023. In addition, we have a strategy so that some of our N3 capacity can be supported by N5 tools, given the strong multi-year demand. Such a plan will enable higher capital efficiency in the mid to long term, but requires cost and effort in the near term. Most of this conversion will occur in second half of 2024, and we expected to dilute our gross margin by about one to two percentage points in second half of 2024. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2024. Long-term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2024 capital budget and depreciation. Every year, our CAPEX is spent in anticipation of the growth that will follow in future years. In 2023, we spent 30.4 billion US dollars, lower than our prior guidance of approximately 32 billion, as we continue to tighten up our capital spending where appropriate, given the near-term uncertainties. In 2024, our capital budget is expected to be between 28 billion and 32 billion US dollars as we continue to invest to support customers' growth. Out of the 28 to 32 billion CAPEX for 2024, between 70 and 80% of the capital budget will be allocated for the advanced process technologies. About 10 to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making and others. Our depreciation expense is expected to increase close to 30% year over year in 2024. Mainly as we ramp up our three nanometer technologies. Finally, let me make some comments on our long-term CAPEX and cash dividend distribution policy. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In the past few years, we have sharply increased our CAPEX spending in preparation to capture and harvest the growth opportunities from HPC, AI, and 5G megatrends. Despite a challenging 2023, Our revenue remains well on track to grow between 15 and 20% CAGR over the next several years in US dollar terms, which is the target we communicated back in January 2022 investor conference. With our 2024 CAPEX guidance of 28 to 32 billion, the rate of increase of our capital spending has begun to level off as we capture and harvest the growth. The objectives of TSMC's capital management are to fund the company's growth organically, generate good profitability, preserve financial flexibility, and distribute a sustainable and steadily increasing cash dividend to shareholders. As a result of our rigorous capital management, in November, TSMC's board of directors approved the distribution of a 3.5 NT per share cash dividend for the third quarter of 2023, up from 3 NT previously. This will become the new minimum quarterly dividend level going forward. Third quarter 23 cash dividend will be distributed in April 2024. In 2023, TSMC's shareholders received a total of 11.25 NT cash dividend per share, and they will receive at least 13.5 NT per share cash dividend for 2024. In the next few years, we expect the focus of our cash dividend policy to continue to shift from a sustainable to a steadily increasing cash dividend per share. Now let me turn the microphone over to CC.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our 2024 outlook. 2023 was a challenging year for the global semiconductor industry, but we also witnessed the rising emergency of generative AI-related applications, with TSMC as a key enabler. In 2023, weakening global macroeconomic conditions and high inflation and interest rates exacerbated and prolonged the global semiconductor inventory adjustment cycle. Concluding 2023, The semiconductor industry, excluding memory industry, declined about 2%, while foundry industry declined about 13% year-over-year. TSMC's revenue declined 8.7% year-over-year in U.S. dollar term. Despite the near-term challenges, our technology leadership enabled TSMC to outperform the funding industry in 2023, while we are positioning us to capture the future AI and high performance computing related growth opportunities. Entering 2024, we forecast fiberless semiconductor inventory to have returned to a wholesale level exceeding 2023. However, macroeconomic weakness and geopolitical uncertainties persist. potentially further weighing on consumer sentiment and the market demand. Having said that, our business has buttoned out on a year-over-year basis. and we expect 2024 to be a healthy growth year for TSMC, supported by continuous strong ramp of our industry-leading 3nm technologies, strong demand for the 5nm technologies, and robust AI-related demand. Coming off the steep inventory correction and low base of 2023, for the full year of 2024, we forecast the overall semiconductor market excluding memory to increase by more than 10% year-over-year, while foundry industry growth is forecast to be approximately 20%. For TSMC, supported by our technology leadership and broader customer base, we are confident to outperform the foundry industry growth. We expect our business to grow over quarters throughout 2024, and our four-year revenue expect to increase by low to mid 20% in U.S. dollar terms. Next, let me talk about our N3 and N3E ramp-up and progress. Our 3 nanometer technology are the most advanced semiconductor technology in both PPA and transistor technology. As a result, almost all the world's smartphone and SPC innovators are working with TSMC on 3 nanometre technologies. Our N3 successfully entered volume production and enjoyed a strong ramp in second half 2023, accounting for 6% of our total waiver revenue in 2023. N3E further leveraged the strong foundation of N3 to extend our N3 family with enhanced performance, power, and yield. N3E has already entered volume production in the fourth quarter of 2023. Supported by robust demand from customers in both smartphone and HPC applications, We expect revenue from our 3 nanometer technology to more than triple in 2024 and account for mid-teens percentage of our total waiver revenue. We also continue to provide further enhancement of our N3 technology, including N3P and N3X. With our strategy of continuous enhancements of our 3nm process technologies, we expect strong multi-year demand from our customers and are confident that our 3nm family will be another large and long-lasting node for TSMC. Now, I will talk about AI-related demand and our end-to-end status. The surge in AI-related demand in 2023 supports our already strong conviction that the structural demand for energy efficient computing will accelerate in an intelligent and connected world. TSMC is a key enabler of AI applications. No matter which approach is taken, AI technology is evolving to use more complex AI models as the amount of computation required for training and inference is increasing. As a result, AI models need to be supported by more powerful semiconductor hardware, which requires use of the most advanced semiconductor process technologies. The value of TSMC technology position is increasing, and we are all well positioned to capture the major portion of the market in terms of semiconductor component in AI. To address in cerebral, AI-related demand for energy efficient computing power, customers rely on TSMC to provide the most leading edge processing technology at scale, with a dependable and predictable cadence of technology offering. At the same time, as process technology complexity increase, the engagement lead time with customers also start much earlier. Thus, almost all the AI innovators are working with TSMC and we are observing a much higher level of customer interest and engagement at N2 as compared with N3 at a similar stage from both HPC and the smartphone applications. 2 nanometre technology will adopt narrow-sheet transistor structure and be the most advanced semiconductor technology in the industry in both density and energy efficient when it is introduced in 2025. N2 technology development is progressing well, which divides performance and yield on track or ahead of plan. N2 is on track for volume production in 2025 with a RAM profile similar to N3. As part of our N2 technology platform, we also developed the N2 with backside power rail solution, which is better suited for specific HPC applications based on performance, cost and maturity considerations. N2 with backside power rail will be available in the second half of 2025 to customers with production in 2026. With our technology of continuous enhancement, N2 and its derivative will further extend our technology leadership position and enable TSMC to capture the AI-related growth opportunities way into the future. Finally, let me talk about our specialty technology strategies at mature node. For TSMC today, around 70% of our total revenue is 16 nanometre and more advanced node. With rising contribution from 3 nanometre and 2 nanometre technologies in the next several years, this number will only increase. Thus, our mature node exposure is around 20% of our total revenue. TSMC's strategy at Mature Knowledge is to work closely with strategic partners to develop specialty technology solutions to meet customers' requirements and create differentiated and long-lasting value to customers. Our focus is to build a high yield capacity for specialty technologies rather than just a nominal capacity. through the deployment of differentiated specialty technologies, the profitability of our mature nodes can be around our corporate average gross margin. Looking ahead, we forecast 28 nanometres will be the sweet spot for our embedded memory applications, and we expect our long-term structural demand at 28 nanometer to be supported by multiple types of specialty technologies. Thus we are expanding our 28 nanometer specialty manufacturing capacity overseas to support the long-term structural market demand. We believe demand for the differentiated specialty technology will remain steady despite the potential industry capacity increase and our utilization rate and structural profitability can be well protected in the future. This concludes my prepared remarks and now let me turn the microphone over to Mark.