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1q21 performance teleconference record From TSMC

The following is the 1q21 performance teleconference record From TSMC recommended by recordtrend.com. And this article belongs to the classification: artificial intelligence, Strategic emerging industries.

On April 9, 2021, TSMC released its latest financial report. In the first quarter of 2021, TSMC’s revenue reached NT $362.41 billion (about RMB 83.5 billion), a month on month growth of 0.24% and a year-on-year growth of 16.7%, setting a record for three consecutive quarters; In March, revenue was about NT $129.127 billion (about RMB 29.8 billion), up 21.2% month on month and 13.7% year on year. After the financial report was issued, TSMC launched a teleconference. The following is the content of the conference:

Sue, Jeff

Good afternoon and welcome to the TSMC earnings conference call for the first quarter of 2021. This is Jeff Su, director of investor relations at TSMC, and your host today.

To prevent the spread of * *, TSMC will use the company’s website www.tsmc.com The real-time audio webcast on can host our revenue conference call, where you can also download revenue release materials. If you join us via conference call, your dial in line is in listen only mode.

The format of today’s activity is as follows. First, Mr. Wong Wendell, vice president and chief financial officer of TSMC, will give an overview of our operations in the first quarter of 2021, followed by our guidance in the second quarter of 2021. Mr. Huang and Dr. CC Wei, TSMC’s chief executive, will then work together to provide key information about the company. Then, we will open the question and answer session.

As always, I would like to remind you that today’s discussion may contain forward-looking statements, which are subject to significant risks and uncertainties and may result in significant differences between the actual results and the statements in the forward-looking statements. Please refer to the safe harbor statement in our press release.

Now, I’d like to transfer the call to Mr. Wong Wendell, TSMC’s chief financial officer, for an operational summary and current quarterly guide.

Huang Wendell

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial summary for the first quarter of 2021. After that, I will provide guidance for the second quarter of 2021.

In the first quarter, revenue increased by 0.2% in the new Taiwan dollar and 1.9% in the US dollar.

Our business in the first quarter was supported by HPC related demand, while smartphone seasonality was milder than in recent years. The gross profit margin decreased by 1.6 percentage points to 52.4% on a month on month basis, which was mainly due to the low capacity utilization rate and unfavorable exchange rate.

Total operating expenses increased slightly by NT $800 million, mainly due to the increase in R & D activities of N5 series. As a result, the operating profit margin fell by 2 percentage points to 41.5%.

Overall, our first quarter earnings per share was NT $5.39, and our return on equity was 29.5%.

Now, let’s look at the revenue from technology. 5nm technology accounted for 14% of wafer revenue in the first quarter, while 7Nm accounted for 35%. We now define advanced technologies of 7Nm and below as 49% of wafer revenue.

Now, revenue by platform. Smartphones fell 11% quarter on quarter, accounting for 45% of first quarter revenue. HPC increased by 13%, accounting for 35%. The Internet of things grew by 10%, accounting for 9%. The auto industry grew by 32%, accounting for 4%. DCE increased by 10%, accounting for 4%.

Go to balance sheet. At the end of the first quarter, our total cash and securities were NT $797 billion.

In terms of liabilities, current liabilities increased by NT $45 billion, mainly due to an increase of NT $49 billion in short-term loans and an increase of NT $50 billion in accrued liabilities, which was partly offset by a decrease of NT $51 billion in accounts payable.

Long term interest bearing debt increased by NT $23 billion, mainly because we raised NT $21.1 billion in corporate bonds this quarter.

In terms of financial ratio, the turnover days of accounts receivable increased from 1 day to 40 days. Inventory days increased from 10 days to 83 days, mainly due to the pre build of N5 wafers.

Now, let me make some comments on cash flow and capital expenditure. In the first quarter, we generated about NT $228 billion in cash from operations, spent NT $248 billion on capital expenditure, and distributed a cash dividend of NT $65 billion for the second quarter of 2020.

Short term loans increased by NT $52 billion, while bonds payable increased by NT $18.5 billion due to the issuance of bonds.

Overall, our cash balance increased by NT $4.6 billion to NT $665 billion at the end of the quarter.

In dollar terms, our total capital expenditure in the first quarter was $8.8 billion.

I have completed the financial summary. Now, let’s look at the guidance for the second quarter. Based on the current business outlook, we expect revenue to be between $12.9 billion and $13.2 billion in the second quarter, with a median of 1% month on month growth.

The revenue guide includes the minor impact of yesterday’s blackout at Tainan’s No. 14 plant.

According to the exchange rate assumption of 28.4 TWD to the US dollar, the gross profit margin is expected to be between 49.5% and 51.5%, and the operating profit margin is expected to be between 38.5% and 40.5%. The decline in gross profit margin in the second quarter was mainly due to the dilution of profit margin caused by the increased contribution of 5 nm. As our Fab continues to operate at a high utilization rate, and the lack of active inventory revaluation, the cost improvement rate decreased.

This concludes my financial introduction. Now let me talk about our key message. I will start with recent demand and inventory. Our revenue at the end of the first quarter was NT $362.4 billion, which was in line with our expectations. The slight increase on a month on month basis was mainly due to demand related to HPC, while the seasonality of smartphones was less than in recent years.

Entering the second quarter of 2021, we expect our revenue to remain stable as HPC related demand continues to grow, offset by seasonal demand for smartphones.

In terms of inventory, the overall inventory of fabless customers will remain healthy until the fourth quarter of 2020. Under the influence of macro and continuous uncertainties, we expect our customers and supply chain to gradually prepare for higher seasonal inventory levels throughout the year than in history. Given the industry’s continued demand for secure supply, we expect this to continue for some time.

Looking ahead to the second half of the year, we expect our capacity to remain tight throughout the year due to strong demand for industry-leading advanced and special technologies.

Now, for the whole year of 2021, we predict that the semiconductor market excluding memory will grow by about 12%, while the OEM industry is expected to grow by about 16%. For TSMC, we are confident that we can surpass the growth of wafer foundry revenue and grow by about 20% in US dollars in 2021.

Next, let me talk about our capital budget this year. Every year, our capital expenditure is used to forecast growth in the next few years. As we enter a high growth period supported by the multi-year structural trend of 5g related and HPC applications, we believe that a higher level of capital investment is needed to seize future growth opportunities.

In order to meet the increasing demand for advanced and professional technology in the next few years, we have decided to increase our capital expenditure for the whole year of 2021 to about US $30 billion. About 80% of the 2021 capital budget will be used for advanced process technologies, including 3nm, 5nm and 7Nm. About 10% will be used for advanced packaging and mask manufacturing, and about 10% will be used for special technology.

Now let me turn the microphone to CC

Wei Wei

Thank you, Wendell. I hope you will be safe and healthy during this period.

First, let me talk about capacity shortages and demand prospects. Due to the structural growth of long-term demand and short-term imbalance of supply chain, our customers are facing the challenge of semiconductor capacity shortage in the whole industry. We are witnessing a structural growth in potential semiconductor demand as the multi-year trend of 5g and HPC related applications is expected to drive strong demand for our advanced technologies in the next few years** It also accelerates the digital transformation fundamentally, making semiconductor more popular and indispensable in people’s life.

In addition, the supply chain disruption caused by * * and the uncertainty caused by geopolitical tensions have prompted the demand to ensure supply security, which is causing short-term imbalance in the supply chain.

Now let me talk about TSMC’s investment plan and discipline. TSMC’s mission is to become a reliable technology and capacity provider in the global logic IC industry in the next few years. In order to support the growth of our customers, TSMC has taken some actions to help solve the capacity shortage of our customers. We are trying to increase productivity to increase production and support our customers in the short term.

To address structural growth in long-term demand, we are working closely with our customers and investing to support their needs. We have purchased land and equipment and started the construction of new facilities. We are recruiting thousands of employees and expanding our capacity in multiple locations. TSMC expects to invest about $100 billion over the next three years to increase production capacity to support manufacturing and R & D of leading and special technologies.

It is expected that the increase in capacity will increase the certainty of supply for our customers and help to enhance confidence in the semiconductor dependent global supply chain.

Our capital investment decisions are based on the following four principles: leading technology, flexible and responsive manufacturing, retaining the trust of customers and obtaining appropriate returns. At the same time, due to the increasing process complexity of leading nodes, new investment in mature nodes and rising material costs, we are faced with manufacturing cost challenges. As a result, we will continue to work closely with our customers to sell our value. Our value includes the value of technology, the value of service and the value of ability support to customers. We will try to set the wafer price at a reasonable level.

We will continue to work with our suppliers to achieve cost improvement.

By taking such actions, we believe that we can continue to get the right return, so that we can invest to support the growth of our customers and fulfill our mission as a reliable OEM partner. With our leading position in technology, excellent manufacturing and customer trust, we are in a favorable position to grow from favorable industry trends.

We reiterate that in dollar terms, our long-term revenue will grow at a compound annual growth rate of 10% to 15% from 2020 to 2025.

Next, let me talk about the car supply update. The auto market has been weak since 2018. In 2020, * * will further impact the automobile market. The automotive supply chain was affected throughout the year and our customers continued to reduce demand in the third quarter of 2020. We only started a sudden recovery in the fourth quarter of 2020.

However, the automobile supply chain is long and complex, which has its own inventory management practice. From chip production to automobile production, it takes at least six months, and several layers of suppliers are needed in the middle. TSMC is doing its best to solve the chip supply challenges for our customers.

TSMC announced in January this year that providing capacity support for automotive customers is our top priority. Since then, we have been working dynamically with other customers to reallocate wafer capacity to support the global automotive industry. However, the shortage was exacerbated by unexpected snowstorms in Texas and production disruptions at Japanese wafer factories. Combined with the productivity improvement, we expect that TSMC’s customers will greatly reduce the shortage of semiconductor auto parts by the next quarter.

Now let me talk about the renewal of water supply in Taiwan. Due to the lack of rainfall last year, Taiwan’s water supply is tight. We are ready for that. TSMC has established a long-standing enterprise risk management system, which also covers water supply risks. Through our existing water saving measures, we can manage the government’s current water consumption reduction requirements without affecting our operations.

We also have detailed response procedures to deal with water shortage at different stages. We will continue to work with the government and the private sector on water conservation and new water sources. With our comprehensive enterprise risk management system, we do not expect to have any material impact on our operations.

Finally, I’ll talk about the state of N5 and N3. TSMC’s N5 is the most advanced solution in foundry industry with the best PPA. N5 has entered the second year of mass production, and its output is better than our original plan. Driven by smartphones and HPC applications, N5 demand continues to be strong, and we expect N5 to contribute about 20% of wafer revenue by 2021.

N4 will take advantage of the powerful foundation of N5 to further expand our 5nm series. N4 is the direct transplantation of N5 with compatible design rules, and provides further performance, power and density enhancement for the next wave of 5 nm products. The target of N4 venture production is the second half of this year, and mass production will be achieved in 2022. As a result, we expect demand for the N5 series to continue to grow, driven by strong demand for smartphones and HPC applications.

N3 will be another complete node of our N5. It will use FinFET transistor structure to provide our customers with the best technology maturity, performance and cost. Our N3 technology is progressing well. Compared with N5 and N3 at similar stages, we continue to see higher customer engagement in N3’s HPC and smartphone applications.

Risk production is planned for 2021. The mass production target is in the second half of 2022. Our 3nm technology will be the most advanced casting technology in PPA and transistor technology. I’m sorry. Therefore, we are confident that our 5nm and 3nm are both large and lasting nodes for TSMC.

This is our key message. Thank you for your attention.

Sue, Jeff

Thank you, CC. This concludes our statement[ If you want to ask questions in Chinese, I will translate them into English before our management answers your questions

Now let’s start the Q & a session. Operator, can you continue to call the first caller on this line?

Sue, Jeff

All right, Brett? Is there a second question?

Brett Simpson

Yes, I did.

Sue, Jeff

yes. i ‘m sorry.

Brett Simpson

yes. I want to – yes. I want to talk about the current inventory level of TSMC. It’s growing very significantly. I want you to mention that this has something to do with N5.

Now, many of your smartphone customers stay, they’ve always been in the lead, and you’re building inventory at 5 nanometers. So how do we reconcile?

Then just look at the second quarter. Do you expect the inventory to increase again in June?

Sue, Jeff

well. Brett, so you want to ask TSMC’s inventory days, right? So Brett asked what caused the increase in inventory days at the end of the first quarter. So how do we predict this trend in the second quarter?

Huang Wendell

All right, Brett. As before, we pre build for our customers at low seasonal levels. Now, when we start to enter the peak season, inventory usually falls as naturally as before.

Sue, Jeff

well. Does this answer your question?

Brett Simpson

yes.

Sue, Jeff

great. perfect. Thank you, Brett.

operator

Now welcome Roland Shu of Citigroup.

Roland Shu

My first question is capital expenditure of 100 billion US dollars. Can you clarify whether the $100 billion includes the $30 billion capital expenditure this year?

Also, I use your long-term capital intensity target. Last time, you said that the long term was three to five years. Then, I might use about $30 billion of capital expenditure in 2024. This means that your revenue in 2024 could exceed $90 billion or more, more than twice the level in 2020.

So my question is, do you have any challenges in recruiting and training enough people to support your rapid growth?

Sue, Jeff

well. Roland, let me summarize your question. So, first of all, Roland asked for this $100 billion in capital spending. Does that include about $30 billion in 2021?

Then he asked if we should look at long-term capital intensity, what does it mean for capital expenditure and capital intensity in 2024 and 25?

And then the other part is, at this growth rate, how can we recruit talents to support our operations?

Huang Wendell

Roland, yes, including this year’s capital expenditure, it’s $100 billion. We have discussed three-year, 100 billion dollar “21 years”, “22 years” and “23 years”. I think, as I said before, you can make some calculations about the capital intensity and have some idea about the capital intensity in these three years. In the long run, we do see that the current capital intensity will return to the level of the mid-1930s.

Sue, Jeff

Then his second question is how we recruit talents to support our growth.

Wei Wei

Roland, that’s a good question. Good question. Recruitment is our top priority in recent years. Fortunately, we have communicated with the government and received strong support from the Taiwan government. So they are now pushing for a new program of recruitment – not Recruitment – to actually enable students to enter the field of semiconductors.

Inside, TSMC also has a very crude system. Now, we’re just set up to train all the novices and new engineers to become more – they can grow faster.

So externally, we have the help of the government. Internally, we also do our part to strengthen training. This is how we try to meet the demand for enough talents within TSMC.

Sue, Jeff

well. Thank you, Roland. I think so.

Roland Shu

yes. This is actually a problem.

Sue, Jeff

These are two questions, Roland. OK. Roland, we’re glad you’re back in line.

operator

The next question to ask is Lu ande of Hualian securities.

Lu Ande

yes. My first question is, can we know the capacity increase percentage of 8-inch professional foundry and 12 inch mature foundry – 12 inch advanced foundry in the next three years? Maybe it’s just an average.

Sue, Jeff

well. So Andrew’s first problem is capacity growth. He wants to know how much capacity has been added to 8 inches in the next three years, and then how much capacity has been added to 12 inches.

Huang Wendell

Andrew, let me share with you, we won’t disclose such details. But basically, 80% of capital expenditure will go to advanced technology, about 10% to advanced packaging and mask manufacturing, and another 10% to special technology.

Sue, Jeff

In the next three years.

Huang Wendell

In the next three years.

Sue, Jeff

well. Andrew, do you have a second question?

Lu Ande

yes. I do have a second question, but the first one is not really answered. Can I buy two more?

Sue, Jeff

No. I don’t think, as Wendell just said, we’re going to comment on an 8-inch or 12 inch capacity.

Lu Ande

well. well. Then, the second question has nothing to do with price. Suppose next year, our rebate to customers has been cancelled. What percentage – should we consider additional growth in the model?

Sue, Jeff

well. So Andrew’s second question is how much growth will be driven by the assumption that the tax rebate will be cancelled next year, and how he should incorporate it into the model.

Wei Wei

What kind of pricing is strictly confidential between TSMC and TSMC’s customers. So I don’t think we can comment on this, whether it’s kickbacks or other activities.

Sue, Jeff

well. thank you. thank you.

operator

The next question is from sunny Lin at UBS.

Lin Xinxin

So my first question is also about capital expenditure. So when you plan your capital expenditure for this year and the next few years, do you think that equipment supply may become a potential bottleneck because you can spend more money? Well, I think some equipment manufacturers have mentioned that based on this year’s industry capital expenditure, they have explained the supply shortage, especially for EUV. So any color would be appreciated.

Sue, Jeff

well. So sunny’s first question is, do we see or face any equipment bottlenecks in protecting tools and equipment in our capex plan. And I think part of your question is also about EUV.

Wei Wei

Well, let me answer that. In fact, when we plan our $100 billion capital expenditure, we work closely with our suppliers and – well prepared in advance. So we don’t expect – of course, we don’t expect any bottlenecks, whether it’s euvs or not, and we actually work closely with them.

Lin Xinxin

got it. correct. So, it’s fair to assume that when you announce a capital expenditure of $100 billion over the next three years, have you made a commitment to the supplier?

Wei Wei

The answer is yes.

Lin Xinxin

got it. My second question is 3 nanometers. It is only one year before mass production in the second half of 2022. Therefore, at this point, how should we consider its revenue contribution in the first year of commercial production? I think for 5nm and 7Nm, their income may reach very high single digits in the first year, even close to 10%. So I just want to think about it.

Sue, Jeff

well. So sunny’s second problem is 3 nanometers. And production schedule, how should we consider the revenue contribution of nanotechnology in the first year?

Huang Wendell

It’s sunny. It’s too much to talk about. We’ll update later. About two to three years, yes. But we do want it to be as large and persistent as the previous N5.

Sue, Jeff

well. Thank you, sunny.

operator

Now, we have Laura Chen from KGI.

Laura Chen

yes. My first question remains the same – similar to the previous questions about days and levels of inventory. I think Wendell and CC have mentioned that excessive inventory may last for some time.

But at what level might we start to worry? What is the checkpoint? Because so far, we all know that the demand prospect and the market prospect of TSMC (especially in advanced nodes) are very tight. But what are the checkpoints we’re chasing? This is my first question.

Sue, Jeff

well. So Laura’s first question is about inventory and inventory levels. She knew the demand was tight. But are we worried about inventory levels? What kind of checkpoints are we going to check.

Wei Wei

Well, let me answer that. Yes, I did say that our customers actually want to ensure supply at this moment. That’s due to some imbalance in the supply chain. They are also preparing for the future.

But how we’re going to test and what the checkpoints are actually let me say that we’re working closely with our customers. It’s not every day, at least we have to check it regularly. What’s more, we make sure that all the demands of TSMC are guaranteed and we are ready for that.

Laura Chen

well. My second question is also about mature nodes. I think CC mentioned some special designs and technologies for mature nodes.

I remember you mentioned the development of CIS and Gan. Can you give me more updates or you are using some special technologies of mature nodes, which may be an extension in the next few years?

Sue, Jeff

well. So, Laura’s second question is to look at the mature notes, and CC mentioned that our strategy is to work with customers to develop special technologies on those mature nodes. So she wanted to know if we could provide more examples of specific types of technology.

Laura, right?

Laura Chen

yes. If possible, there is fd-soi.

Sue, Jeff

And fd-soi in other fields.

Wei Wei

OK, let me answer the last one first. We don’t work in fd-soi. However, as I mentioned earlier, we have developed the special technology of CMOS image sensor, and the technology is still improving, because if you apply CMOS image sensor to smart phones and cars, is there still a lot to do? And, in fact, the most important one is the ultra-low power that we develop to meet the needs of the mobile world. I mean, everything’s portable. Therefore, ultra-low power consumption is very important.

Gallium nitride is a professional product of all kinds. We will continue to cooperate with customers and cooperate with customers in high frequency or high voltage applications in the future.

We are also committed to RF technology. With the advent of 5g era, radio frequency is very important. RF has become very important in the field of WiFi communication and many applications.

Laura Chen

So, after raising this question, do we have space or any ability to further expand these technologies in Taiwan?

Sue, Jeff

So, Laura asked, is space a limitation or a limitation of the profession.

Wei Wei

Good question. We are working with our customers to expand our capabilities when necessary.

Sue, Jeff

well. well. correct. Thank you, Laura

operator

Next online is Rick Hsu of Daiwa Securities.

Xu Ruike

yes. I have only one problem here. I think your top requirement – Guidance on your second quarter. Revenue will continue to grow in dollars. And, if I remember wrong, Wendell would really say that the increase in your inventory in the first quarter was mainly due to your customers’ pre established inventory for 5nm. So assume that your 5 nm contribution will also increase in the second quarter.

So – the exchange rate won’t get worse, will it?

Therefore, in the context of three positive factors: correct, revenue increase, 5nm increase and favorable exchange rate, why did your gross margin guidance in the second quarter lower than that in the first quarter.

Sue, Jeff

well. So, Rick’s question is to look at the second quarter, as well as gross margin guidance. If the midpoint is used, why is it basically lower than the first quarter or falling continuously?

Huang Wendell

well. Rick, let me explain. The decrease is mainly due to the mixing caused by the increase of N5 contribution, but it still has the effect of dilution. Second, as our Fab continues to operate at a high utilization rate, we find that cost reduction is slow, which makes the last cost raising activity possible. Finally, more technically, there was a lack of a positive inventory revaluation in the quarter.

Sue, Jeff

well. Thank you, Rick.

operator

The next question to ask is Aaron Jeng of Nomura Securities.

Jane Allen

I haven’t asked this question before, so I hope to ask it before the end of the call. You declare that customer participation in N3 and N5 is stronger than what you saw three months ago, which will drive us $100 billion of capital expenditure in the next three years, OK?

Then, let’s ask in this way: compared with three months ago, do you plan to have a larger market share in the next three years, because the pure wafer foundry market and your current best technology leadership will continue to expand? That’s my only problem.

Sue, Jeff

All right, Alan. So the question for Aaron is to consider the fact that we say the customer engagement of 5nm and 3nm is stronger than we saw a few months ago. So does that mean we will expect – and thus gain more and more market share. Is that right, Alan?

Jane Allen

yes. And a bigger market share than expected three months ago.

Sue, Jeff

Yes, three months ago.

Wei Wei

well. Let me answer that question. Of course, compared with three months ago, we have made some progress in interacting with customers to realize their commitment to cooperate with TSMC on 5nm and 3nm. Whether or not this shows that TSMC is in a leading position in technology, I would be happy to say yes. We’re continuing – but most importantly, we’re actually continuing to work with our customers to develop the technology they need for their products.

Every customer has different preferences and we can always meet their needs.

Sue, Jeff

well. Thank you, Alan

operator

The next question is Mehdi hosseinii of SIG.

Medi Hussain

yes. My first question relates to some of the comparisons you provided during the last earnings call, where you are comparing capital intensity and growth prospects between 2010 and 2015.

In this case, my problem is related to depreciation. Since then, depreciation has grown by 20% between 2010 and 2015. What do you think of the growth rate change from 2020 to 2025? I have follow-up action.

Sue, Jeff

well. Therefore, I think the first problem of Mehdi is basically to study depreciation and what our depreciation looks like when we enter a higher growth period. Moreover, he is asking about the increase or increase in depreciation. What will depreciation look like this year and beyond, given that we expect a 25-year CAGR of 10% to 15% by 2020?

Huang Wendell

well. I can share with you that this year’s depreciation rate will be about 30% higher than last year’s. We are not prepared to share the remaining 5-year depreciation with you at this time.

Sue, Jeff

well. Do you have a second question, Mehdi?

Medi Hussain

well. of course. Yes, I have a second question. You’ve increased your capital expenditure in view of increased customer demand. But your revenue growth target remains between 10% and 15%.

Why not raise the income target when increasing capital expenditure?

Sue, Jeff

well. So I think Mehdi is asking us to increase capital expenditure. So why – what do we think of the 10% to 15% growth target? Why don’t we put it forward?

Huang Wendell

Mehdi, in fact, if you consider the 5-year compound growth rate of 10% to 15%, that’s a large range. According to our current forecast, the revenue target is still in this range, which may be higher than last time – close to higher end.

Sue, Jeff

well. Thank you, Mehdi. thank you.

operator

Now, we have Randy Abrams from Credit Suisse.

Randy Abrams

well. yes. The first one on the back end stays in sync. Can you provide the latest information about the expenditure and momentum of the new SOIC, as well as the progress of cowos and info?

Sue, Jeff

well. So Randy’s first question is about our advanced packaging solutions. He wants to know – he wants to know the progress of SOIC and the latest information about cowos and other solutions. Is that right, Randy?

Randy Abrams

yes. you ‘re right

Sue, Jeff

well.

Wei Wei

well. First, let me comment on SOIC. In my opinion, this is the most advanced back-end technology we provide to our customers. It will start small batch production in 2022. In fact, it has been adopted by high performance HPC applications.

As for info and cowos, we will continue to expand our customer base. I hope that the business of info and cowos will continue to grow in the next few years.

Randy Abrams

well. great. I just want to talk about it briefly. You mentioned very high performance applications. Will the growth rate of SOIC be very fast in a few years? Is it growing as much as you expected before, or should it become a good competitor of TSMC?

Then I want to ask the second question. In the second half of the year, only some clarifications were made on the gross profit rate. 5 will be more and more mature. So, I’m curious, considering your depreciation guidance, 5 will become more mature. If your view is 50% gross profit rate, or if your utilization rate is very strict, then we may be able to keep it above the long-term level in the second half.

Sue, Jeff

well. So fast. He wants – Randy wants to know about SOIC, is it going to be a huge contributor? How big can it be in a few years? Then, in terms of gross margin, the outlook for gross margin in the second half of the year is the same.

Wei Wei

We hope that SOIC will be adopted by all these HPC application customers. But I’m not sure what the future revenue figures will be. But we do hope that our back-end services will continue to grow. And growth rate – growth rate will be a little higher than the company average.

Huang Wendell

well. Randy, about the gross profit margin for the second half of the year, it’s too early to provide details. However, you have mentioned a few things. N5 will contribute more to revenue. It still has a negative or diluting effect on profit margin, about 2 to 3 percentage points.

Very good utilization – still very strict. And we will continue to work to increase costs in this highly utilized environment. That’s all we can share with you right now.

Randy Abrams

well. If I can adapt.

Sue, Jeff

Sorry, Randy. Sorry, these are two questions, because we – yes, thank you.

operator

well. Next will be Gokul Hariharan of JPMorgan.

Gokul Hariharan

My first question is, from the demand rhythm of the second and third wave, how should we consider HPC? I think that in the past decade, when smart phones are the main driving force for our growth, we have achieved leading growth in terms of processors. However, in smart phones and our applications, we have many other ICs, which promote the second, third and fourth wave of demand for any process node.

So, since HPC seems to be one of the main drivers of growth, how do we view the second and third wave of demand? Will it keep up with the first and second waves of N5, N3, etc? Or should we consider that TSMC will carry out more capacity conversion than in the past? This is my first question.

Sue, Jeff

well. Therefore, Gokul’s first problem is to study HPC, and how HPC and smart phones become the first wave of adopters of our leading nodes. However, he would like to know, for the second and other demand waves, what will HPC do – how do we see HPC driving other demand waves, or will we convert capacity.

Wei Wei

Let me comment. In fact, HPC applications include many different sub parts, such as CPU, GPU, network, FPGA, AI accelerated video games and so on. Everyone has their own migration path and product life cycle.

Therefore, we hope that we will not only see HPC in the first wave, but also actually support our leading nodes in other demand waves in the future. Does that answer your question?

Gokul Hariharan

well. It’s very clear

Sue, Jeff

Do you have a second question?

Gokul Hariharan

The second question, I just want to – yes. I just want to follow up any ideas of TSMC on the capacity of the Arizona plant. I think you have announced that by 2024, there will be 20000 5nm wafers per month. Have you discussed with your customers any potential benefits of this capacity? Are customers asking for more capacity?

Do you think we – now it looks more like an n-1 rhythm, because 5-nano has started in Taiwan in 2020. Do we feel like we’re going to move faster or faster, like Arizona or the ability of the United States? I just want to know how TSMC considers this now.

Sue, Jeff

well. Gokul’s second question is about our production in the United States and our Fab in Arizona. He wants to know that our customers are asking for more capacity or more production.

What’s more, we’ll start with N5, and I think your question is, what’s the plan and pace of introducing more technology into the program in the future?

Wei Wei

well. We are working on our schedule in Arizona, and construction will begin this year. As you said, the first phase of production will start in 2024, using 20000 pieces of 5nm technology per month. But in fact, we’ve got a lot of land in Arizona to provide flexibility. So it’s possible to expand further, but we will first improve to the first stage, and then decide what to do next based on operational efficiency and cost-effectiveness as well as customer needs.

Our customer world trade will build capacity in the United States, and our Fab in Arizona will support all customers around the world, just like all other customers – all of TSMC’s fabs, no matter where they are, no matter where they are repositioned.

Sue, Jeff

well. thank you.

operator

yes. The last person to ask is Sebastian Hou of the CLSA.

Sebastian Hou

yes. I have only one question. Therefore, just a follow-up to CC’s previous comments, CC mentioned that TSMC has been working closely with customers to analyze the gap between the capacity and demand of back-end nodes.

So, I wonder if you can share some colors with us. If we exclude the overbooking part, and according to your best analysis, is the demand still much more than the supply? If you have any rough numbers you can share, how big is the gap?

In addition, based on your capital expenditure, you and your partner are investing in the lead time of capacity expansion. When do you think it can alleviate the tightness or eliminate the overall shortage? That’s my only problem.

Sue, Jeff

well. Let me try to summarize your question, Sebastian. What you want to ask is that TSMC works closely with our customers on mature nodes, but also considers the supply / demand of these older nodes. Therefore, by increasing capacity, when and when will we finally see the supply tension of mature nodes ease? Sebastian, right?

Sebastian Hou

yes. Moreover, if we can, if we use the best estimate to exclude the overbooking, will the demand still exceed the supply.

Wei Wei

well. Frankly, as I said, we work closely with our customers. Therefore, although we did not exclude overbooking from this possibility, we did not calculate the possibility of overbooking. But we do a very detailed analysis internally and, as I said, work closely with our customers. Therefore, we have prepared mature node capacity for them.

However, the plant will be built and installed from the green plant and will not be put into operation until 2023. Therefore, this year and next year, I still expect that the capacity contraction will continue, and it may be the same next year. In 2023, I hope we can provide more capabilities to support our customers. At that time, we began to see that the tightening of the supply chain would be eased.

Sue, Jeff

well. Sebastian, does that answer your question?

Sebastian Hou

yes. Therefore, we can conclude that in the next 18 months, we can conclude that we are still in short supply, which is very safe, right?

Wei Wei

For our customers, we are working with them, I say. But it’s still tight. Yes, you are right.

Sue, Jeff

well. Thank you, Sebastian. This concludes our Q & a session. Before closing today’s meeting, please note that the replay of the meeting will take place in the current 4 hours, while the transcript will be available in the current 24 hours. Both can be accessed through TSMC’s website www.tsmc.com get.

So thank you for joining us today. We hope everyone will continue to be healthy and safe, and we hope you will join us again next quarter. Goodbye and have a good day.

TSMC: 4q20 revenue reached 12.68 billion US dollars, a year-on-year increase of 22%. TSMC: 1q21 revenue reached 12.919 billion US dollars, a year-on-year increase of 16.7%. TSMC: 3q20 revenue reached 356.43 billion new Taiwan dollars, a year-on-year increase of 36%. SMIC’s decline expanded to 8%. The company said that the increase in depreciation will bring pressure on net profit. Intel: senior executives’ interpretation of 1q21 financial data center business SMIC: 3q20 Revenue $1.08 billion net profit $256 million SMIC: 2q20 phone conference record annual revenue target still increased by 15-20% gross margin higher than last year SMIC: 2q20 Revenue $938.5 million net profit $138 million Intel: 1q21 Revenue $19.7 billion year-on-year decrease of 1% still exceeding expectations a total cost of TSMC 5nm chip more than 2900 yuan? TSMC, how did this enterprise start in Taiwan? ASML: 2q20 net sales 3.3 billion euro, sales growth expected to remain unchanged AMD: 4q19 net profit 170 million US dollars, year-on-year growth Accenture: 2019 semiconductor industry technology vision report Gartner: 2017 global semiconductor market reached 420.4 billion US dollars

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