Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's third quarter 2024 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 webcasts 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 Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2024, followed by our guidance for the fourth quarter 2024. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. Cici Wei, will jointly provide the company's key messages. Then, we will open the line for a question and answer session. 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 do 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. Thank you for joining us today. My presentation will start with the financial highlights for the third quarter of 2024. After that, I will provide the guidance for the fourth quarter of 2024. Third quarter revenue increased 12.8% sequentially in NT, as our business was supported by strong smartphone and AI-related demand for our industry-leading 3 nanometer and 5 nanometer technologies. Growth margin increased by 4.6 percentage points sequentially to 57.8%, mainly reflecting a higher capacity utilization rate and cost improvement efforts. Due to operating leverage, total operating expenses accounted for 10.4% of net revenue. Thus, operating margin increased by five percentage points sequentially to 47.5%. Overall, our third quarter EPS was 12.54 NT and ROE was 33.4%. Now let's move on to revenue by technology. Three nanometer process technology contributed 20% of wafer revenue in the third quarter. while 5 nanometer and 7 nanometer accounted for 32% and 17% respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 69% of wafer revenue. Moving on to revenue contribution by platforms. HPC increased 11% quarter over quarter to account for 51% of our third quarter revenue. Smartphone increased 16% to account for 34%. IoT increased 35% to account for 7%. Automotive increased 6% to account for 5%. DCE decreased 19% to account for 1%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 2.2 trillion NT, or 69 billion US dollars. On the liability side, current liabilities increased by 31 billion NT, while long-term interest bearing debt decreased by 38 billion NT. This change was primarily driven by the reclassification of 42 billion NT in bonds payable from non-current to current liabilities. In terms of financial ratios, Accounts receivable turnover days remain steady at 28 days. Inventory days increased by 4 days to 87 days, primarily due to the pre-build of M3 and M5 wafers. Regarding cash flow and CAPEX, during the third quarter, we generated about 392 billion NT in cash from operations. spent $207 billion in CAPEX, and distributed $91 billion for fourth quarter 23 cash dividend. Overall, our cash balance increased $88 billion NT to $1.9 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $6.4 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 26.1 billion and 26.9 billion US dollars, which represents a 13% sequential increase or a 35% year-over-year increase at the midpoint. based on exchange rate assumption of one US dollar to 32 NT. Gross margin is expected to be between 57% and 59%. Operating margin between 46.5% and 48.5%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by talking about our third quarter 24 and fourth quarter 24 profitability. Compared to second quarter, our third quarter gross margin increased by 460 basis points sequentially to 57.8%, primarily due to a higher capacity utilization rate and better cost improvement efforts, including productivity gains. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 230 basis points, mainly due to a higher than expected overall capacity utilization rate. We have just guided our fourth quarter gross margin to increase by 20 basis points to 58% at the midpoint. This is primarily due to a higher overall capacity utilization rate in the fourth quarter, partially offset by continued dilution from N3 ramp-up, higher electricity prices in Taiwan, and N5 to N32 conversion cost. Next, let me talk about our 2024 CAPEX. Every year, our CAPEX is spent in anticipation of the growth that will follow 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 now expect our 2024 CAPEX to be slightly higher than $30 billion. 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 higher growth opportunities in the following years. And as long as our growth outlook remains strong, we will continue to invest. 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 third quarter with revenue of US dollar 23.5 billion, above our guidance in US dollar terms. Our business in the third quarter was supported by strong smartphone and AI-related demand for our industry-leading three nanometer and five nanometer technologies. Moving into first quarter, We expect our business to continue to be supported by strong demand for our leading-edge process technologies. We continue to observe extremely robust AI-related demand from our customers throughout the second half of 2024, leading to increasing overall capacity utilization rate for our leading S3nm and 5nm process technologies. At TSMC, we define server AI processors as GPUs, AI accelerators, and CPUs performing training and inference functions, and do not include networking, edge, or on-device AI. We now forecast the revenue contribution from several AI processors to more than triple this year and account for mid-teens percentage of our total revenue in 2024. Supported by our technology leadership and broader customer base, we are well positioned to capture the industry's growth opportunities. We now forecast our four-year revenue to increase by close to 30% in U.S. dollar terms. Next, let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global logic IC industry for years to come. All of our overseas decisions are based on our customers' needs. They value some geographic flexibility and necessary level of government support. This is also to maximize the value of our shareholders. In Arizona, we have received a strong commitment and support from our U.S. customers and the U.S. federal, state, and city governments and have made significant progress in the past several months. Our plan to build three fabs will help create greater economies of scale as each of our fabs in Arizona will have a clean room area that is approximately double the size of a typical logical fab. Our first fab entered engineering wafer production in April with four nanometer process technology. And the result is highly satisfactory with a very good yield. This is an important operational milestone for TSMC and our customers. demonstrating TSMC's strong manufacturing capability and execution. We now expect volume production of our first fab to start in the beginning of 2025 and are confident to deliver same level of manufacturing quality and reliability from our fab in Arizona as from our fabs in Taiwan. Our second and third fabs will utilize more advanced technologies based on our customers' needs. The second fab is scheduled to begin volume production in 2028, and our third fab will begin production by the end of the decade. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner and enabler of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan's central, prefectural, and local governments, our progress is also very successful. Our first specialty technology fab has completed all process qualification. Volume production was started this quarter, and we are confident to deliver the same level of manufacturing quality and reliability from our fab in Kumamoto as from our fabs in Taiwan. The land preparation for our second specialty technology fab in Kumamoto has already begun, and construction will begin in first quarter next year. This second FAB will support our strategic customers for consumer, automotive, industrial, and HPC-related applications, and volume production is targeted by the end of 2027. In Europe, We have received strong commitment from the European Commission and the German federal, state and city governments. Together with our JV partners, we held a groundbreaking ceremony in August for our specialty technology fab in Dresden, Germany. This fab will focus on automotive and industrial applications utilizing 12, 16 and 28 process technologies. Volume production is scheduled to begin by the end of 2027. Under today's fragmented globalizing environment, our C5 costs are higher for everyone, including TSMC and all other semiconductor manufacturers. Having said that, we are leveraging our fundamental competitive advantage of manufacturing technology leadership and large-scale manufacturing base. Thus, TSMC will be the most efficient and cost-effective manufacturer in the region that we operate while continue to provide our customer with the most advanced technology at scale to support their growth. This concludes our key message and thank you for your attention.