Taiwan Semiconductor Manufacturing Company Ltd.

Hello, friends of the investment world and the media. Good evening, everyone. I am Su Zhikai from Taichi.com's Legal Relations Department. I would like to welcome you to participate in the Legal Explanation Conference of Taichi Company in the second quarter of 2024. Since this conference will be broadcast to global investors at the same time, we will use English throughout the conference. Please excuse us. Good afternoon, everyone, and welcome to TSMC's second quarter 2024 earnings conference and conference call. This is Jeff Su, 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 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 Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2024, followed by our guidance for the third quarter 2024. Afterwards, Mr. Huang and TSMC's chairman and CEO, Dr. Cici Wei, will join me to provide the company's key messages. Then we will open both the floor and the line for the Q&A session. As usual, I'd like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risk and uncertainties, which would 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 microphone over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the second quarter of 2024. After that, I will provide the guidance for the third quarter of 2024. Second quarter revenue increased 13.6% sequentially in NT, or 10.3% in US dollars, as our business was supported by strong demand for our industry-leading three and five nanometers technologies, partially offset by the continued smartphone seasonality. Gross margin increased 10 basis points sequentially to 53.2%, mainly reflecting cost improvement and the more favorable foreign exchange rate, partially offset by the margin dilution from N3 ramp. Due to the operating leverage, total operating expense accounted for 10.5% of net revenue as compared to 11.1% in the first quarter. Thus, operating margin increased 0.5 percentage points sequentially to 42.5%. Overall, our second quarter EPS was 9.56 NT and ROE 26.7%. Now let's move on to revenue by technology. Three nanometer process technology contributed 15% of wafer revenue in the second quarter. while five nanometer and seven nanometer accounted for 35% and 17% respectively. Advanced technology defined as seven nanometer and below accounted for 67% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 28% quarter over quarter to account for 52% of our second quarter revenue, surpassing 50% for the first time. Smartphone decreased 1% to account for 33%. IoT increased 6% to account for 6%. Automotive increased 5% to account for 5%, and DCE increased 20% to account for 2%. Moving on to the balance sheet, we ended the second quarter with cash and marketable securities of 2 trillion NT, or 63 billion U.S. dollars. On the liability side, current liabilities increased by 23 billion NT mainly due to the increase of 16 billion in accounts payable. Long-term interest bearing debt increased by 9 billion NT mainly as we raised 12 billion in corporate bonds. On financial ratios, accounts receivable turnover days decreased by three days to 28 days. Days of inventory decreased by seven days to 83 days, primarily due to higher N3 wafer shipment. Regarding cash flow and CAPEX, during the second quarter, we generated about 378 billion NT in cash from operations, spent 206 billion in CAPEX, and distributed 91 billion for third quarter 23 cash dividend. Overall, our cash balance increased 101 billion NT to 1.8 trillion at the end of the quarter. In US dollar terms, our second quarter capital expenditures totaled 6.36 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between 22.4 billion and 23.2 billion US dollars, which represents a 9.5% sequential increase or 32% year over year increase at the midpoint. Based on the exchange rate assumption of one US dollar to 32.5 NT, gross margin is expected to be between 53.5% and 55.5%. Operating margin between 42.5% and 44.5%. This concludes my financial presentations. Now let me turn to our key messages. I will start by talking about our second quarter 24 and third quarter 24 profitability. Our second quarter gross margin was 53.2%, slightly ahead of the high end of our guidance, mainly as we saw a higher than expected overall capacity utilization rate as compared to our forecast three months ago. We have just guided our third quarter gross margin to increase by 1.3 percentage points to 54.5% at the midpoint. This is primarily due to the higher overall capacity utilization rate in the third quarter and better cost improvement efforts, including productivity gains, partially offset by continued dilution from N3 ramp-up, N5 to N3 tool conversion costs, and higher electricity prices in Taiwan. Excluding the impact of foreign exchange rate, of which we have no control over, and factoring in the margin impact from 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. Every year, our CAPEX is spent in anticipation of the growth that will follow in the future years. And our CAPEX and capacity planning is always based on the long-term market demand profile. As the strong structural AI-related demand continues, we continue to invest to support our customers' growth. We are narrowing the range of our 2024 capital budget to be between 30 billion and 32 billion US dollars as compared to 28 to 32 billion US dollars previously. Between 70 and 80% of the capital budget will be allocated for 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. At TSMC, a higher level of capital expenditures is always correlated with the higher growth opportunities in the following years. Now, let me turn the microphone over to CC.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of U.S. dollar 20.8 billion, above our guidance in U.S. dollar terms. Our business in the second quarter was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies. particularly offset by continuous smartphone seasonality. Moving into third quarter 2024, we expect our business to be supported by strong smartphone and AI related demand for our leading edge process technologies. Looking at the full year 2024, we forecast the overall semiconductor market excluding memory to increase by about 10%, which is unchanged from our forecast three months ago. At this time, we would like to expand our original definition of foundry industry to Foundry 2.0. which also includes packaging, testing, mass making, and others, and all IDM excluding memory manufacturing. We believe this new definition better reflects TSMC's expanding addressable market opportunities in the future. However, I want to emphasize here that TSMC will only focus on the most advanced back-end technologies which help our customers in leading-edge products. Under this new definition, the size of the foundry industry was close to $250 billion in 2023, as compared to $115 billion under the previous definition. With our new definition, we forecast the foundry industry growth to be close to 10% year over year in 2024. TSMC's share of the foundry industry, under our new definition, was 28% in 2023. Supported by our strong technology leadership and broad customer base, we expect this one to further increase in 2024. Over the past three months, we have observed strong AI and high-end smartphone-related demand from our customers. As compared to three months ago, leading to increasing overall capacity utilization rate for our leading-age 3 nm and 5 nm process technologies in the second half of 2024. Thus, we continue to expect 2024 to be a strong growth year for TSMC. We are raising our full-year guidance and now expect our 2024 revenue to increase slightly above mid-20s percent in US dollar terms. Next, I will talk about TSMC's capacity planning process and investment disciplines. This is important, especially when we have such high forecasted demand from AI-related business. TSMC's mission is to be the trusted technology and capacity provider for the global logic IC industry for years to come. The continued surge in AI-related demand supports a strong structural demand for energy-efficient computing. As a key enabler of AI applications, the value of our technology position is increasing. as customers rely on TSMC to provide the most advanced process and packaging technology at scale in the most efficient and cost-effective manner. As such, TSMC employs a disciplined framework to address the structural increase in the long-term market demand profile underpinned by the industry megatrend of AI, HPC, and 5G. We work closely with our customers to plan our capacity. We also have a rigorous and roll-out system that evaluates and judges market demand from both a top-down and a bottom-up approach to determine the appropriate capacity to build. Our capital investment decisions are based on four disciplines. that is technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning a sustainable and healthy return. To ensure a proper return from our investment, both pricing and cost are important. TSMC's pricing strategy is strategic, not opportunistic, to reflect the value that we provide. Today, we are investing heavily in leading-edge specialty and advanced packaging technologies to support our customers' growth and enable their success. If customers do well, TSMC should do well. For example, we are happy to see many of our customers' structured profitability improving in these past few years. At the same time, we face rising cost challenges due to increasing process complexity at leading nodes, higher electricity costs in Taiwan, global fare expansion in higher cost regions, and other cost inflation challenges. Therefore, We will continue to work closely with our customers to share our value. We will also work diligently with our suppliers to deliver on-cost performance. We believe such actions will help TSMC earn a sustainable and healthy return so that we can continue to invest in technology and capacity to support our customers' goals and fulfill our mission as a trusted, friendly partner who are delivering profitable growth for our shareholders. Finally, I'll talk about our N2 status and A16 introduction. Our two nanometer and A16 technologies lead the industry in addressing the insatiable need for energy efficient computing. And almost all the AI innovators are working with TSMC. We expect the number of the new tape-outs for two nanometer technologies in its first two years to be higher than both three nanometer and five nanometer in their first two years. And to what deliver full load performance and power benefit, with 10 to 15 speed improvement at the same power, or 25 to 30% power improvement at the same speed, and more than 15% chip density increase as compared with the N3E. And to technology development, its progression well, with device 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. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family. N2P features a further 5% performance with the same power or 5% to 10% power benefit at the same speed on top of the N2. N2P will support both smartphone and SPG applications, and volume production is scheduled for the second half of 2026. We also introduced the A16 as our next network-based technology, featuring Super Power Rail, or SPR, as a separate offering. TSMC's SPR is an innovative, best-in-class, backside power delivery solution that is a force in the industry to incorporate another backside contact scheme to preserve gate density and device with flexibility. Compared with the N2P, A16 provides a further 8-10% speed improvement at the same power, or 15-20% power improvement at the same speed, and additional 7-10% chip density gain. H16 is best suited for specific HPC product with complex signal route and dense power delivery network. Volume production is scheduled for second half 2026. We believe N2, N2P, A16, and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This concludes our key message, and thank you for your attention.