[News] TSMC 2023 Third Quarter Earnings Call Excerpts

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TSMC held its third-quarter earnings conference today (October 19th), with TSMC CEO C.C. Wei and CFO Wendell Huang presenting the company’s third-quarter financial results, fourth-quarter outlook, and updates on advanced processes and overseas expansion. TrendForce transcribed the event using AI tools and made slight edits, providing the most comprehensive report on TSMC’s conference in real-time.

First, TSMC’s Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2023, followed by our guidance for the fourth quarter 2023. Afterwards, Mr. Huang and TSMC’s CEO, Dr. C.C. Wei, will jointly provide the company’s key messages.

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’s 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 financial highlights for the third quarter 2023. After that, I will provide the guidance for the fourth quarter 2023.

Third quarter revenue increased 13.7 percent sequentially in NT dollars, or 10.2 percent in U.S. dollars, as our third quarter business was supported by the strong ramp of our industry-leading three nanometer technology and higher demand for five nanometer technologies, partially offset by customers’ ongoing inventory adjustment. Growth margin increased 0.2 percentage points sequentially to 54.3 percent, mainly reflecting higher capacity utilization, partially offset by the margin dilution from N3 ramp.

Total operating expenses accounted for 12.6 percent of net revenue, as compared to 12.1 percent in the second quarter, mainly due to higher R&D expenses to support our three nanometer and two nanometer development. Operating margin was 41.7 percent, down 0.3 percentage point from the previous quarter. Overall, our third quarter EPS was 8.14 NT dollars, and ROE was 25.8 percent. Now, let’s move on to the revenue by technology.
Three nanometer process technology contributed 6 percent of wafer revenue in the third quarter, while five nanometer and seven nanometer accounted for 37 percent and 16 percent, respectively. Advanced technologies, defined as seven nanometer and below, accounted for 59 percent of wafer revenue.

Moving on to revenue contribution by platform, HPC increased 6 percent quarter over quarter to account for 42 percent of our third quarter revenue.Smartphone increased 33 percent to account for 39 percent. IoT increased 24 percent to account for 9 percent. Automotive decreased 24 percent to account for 5 percent, and DCE decreased 1 percent to account for 2 percent.

Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 1.55 trillion NT, or 48 billion U.S. dollars. On the liability side, current liabilities increased by 159 billion NT, mainly due to the increase of 95 billion in accounts payable and the increase of 59 billion in accrued liabilities and others. Long-term interest-bearing debt increased by 30 billion NT, of which 10 billion from new issuance and 20 billion from foreign exchange rate movement.

On financial ratio, accounts receivable turnover days increased three days to 35 days, while days of inventory decreased three days to 96 days. Regarding cash flow and CAPEX, during the third quarter, we generated about 295 billion NT in cash from operations, spent 227 billion in CAPEX, and distributed 71 billion for fourth quarter 2022 cash dividend.
Overall, our cash balance increased 35 billion to 1.31 trillion NT at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures total 7.1 billion. I have finished my financial summary. Now let’s turn to our current quarter guidance.

Based on current business outlook, we expect our fourth quarter revenue to be between 18.8 billion and 19.6 billion U.S. dollars, which represents a 11.1 percent sequential increase at the midpoint. Based on the exchange rate assumption of one U.S. dollar to 32 NT, gross margin is expected to be between 51.5 percent and 53.5 percent, operating margin between 39.5 percent and 41.5 percent.

This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our third quarter 23 and fourth quarter 23 profitability.

Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 80 basis points, mainly due to a more favorable foreign exchange rate. Compared to second quarter, our third quarter gross margin increased by 20 basis points sequentially to 54.3 percent, primarily due to a higher capacity utilization rate and a more favorable foreign exchange rate, partially offset by the margin dilution from the initial ramp up of our three nanometer technology.

We have just guided our fourth quarter gross margin to decline by 1.8 percentage points to 52.5 percent at the midpoint, primarily due to the continual margin dilution from this steep ramp of our three nanometer technology.

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. To manage our profitability in the next several years, we will work diligently on our internal cost improvement while continuing to strategically sell our value. Excluding the impact of foreign exchange rate, of which we have no control over, we continue to forecast a long-term gross margin of 53 percent and higher is achievable.

Next, let me talk about our 2023 CAPEX and depreciation. Every year our CAPEX is spent in anticipation of the growth that will follow in future years. Given the near-term uncertainties, we continue to manage our business prudently and have tightened up our capital spending throughout the year where appropriate. We now expect our 2023 CAPEX to be approximately 32 billion U.S. dollars. Out of the approximately 32 billion CAPEX for 2023, about 70 percent of the capital budget will be allocated for advanced process technologies. About 20 percent will be spent for specialty technologies and about 10 percent will be spent for advanced packaging, testing, mask making, and others.

Our depreciation expense is now expected to increase by low 20s percentage year-over-year in 2023 as compared to our January forecast of approximately 30 percent year-over-year increase. Despite the near-term inventory cycle, our commitment to support customers’ growth remains unchanged and our disciplined CAPEX and capacity planning remains based on the long-term structure market demand profile.

We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge specialty and advanced packaging technologies to support their growth while delivering profitable growth to our shareholders. Now let me turn the microphone over to C.C.

Good afternoon, everyone. First, let me start with our near-term demand and inventory. We concluded our third quarter with revenue of U.S. $17.3 billion in line with our guidance in U.S. dollar terms. Our business in the third quarter was supported by the strong brand of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset by customers’ ongoing inventory adjustment. Moving into fourth quarter 2023, while AI-related demand continues to be strong, it is not enough to offset the overall cyclicality of our business.

We expect our business in the fourth quarter to be supported by the continuous strong brand of our 3-nanometer technology, partially offset by customers’ continual inventory adjustment.

On the inventory side, we expect the fabless semiconductor inventory to have continuously reduced in the third quarter. However, due to the persistent weaker overall macroeconomic conditions and slow demand recovery in China, customers remain cautious in their inventory control. Thus, we expect the inventory digestion to continue in the fourth quarter.

Having said that, we are observing some early signs of demand stabilization in the PC and smartphone end market. Together with such level of inventory control, we forecast the fabless semiconductor inventory to further reduce and exit 4Q23 at a healthier level.
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. As we have said before, our strategy is to expand our global manufacturing footprint to increase customer trust, expand our future growth potential, and reach for more global talents. Our overseas decisions are based on our customers’ needs and the necessary level of government support. This is to maximize the value for our shareholders.

In Europe, after conducting extensive due diligence, we announced our plan to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications. We have received a strong commitment to support this project from our JV partners, the European Commission government, and German federal, state, and city governments. This fab will utilize 22 and 28 nanometer and 12/16 nanometer technologies for semiconductor wafer fabrication. Fab construction is scheduled to begin in second half of 2024, and production is targeted to begin in late 2027.

In Arizona, we are receiving strong support from the city of Phoenix, state of Arizona, and U.S. federal government, and continue to develop positive relationships and work closely with our local trade and union partners. We are making good progress on the fab infrastructure, utilities, and equipment installation issues in our first fab, and the situation is improving. We have also begun early preparation for our Arizona fab operations and hired close to 1,100 local TSMC employees so far. Many of them have been brought to Taiwan for extensive hands-on experience in our fab, so that they can further their technical skills while being immersed in TSMC operation environment and culture.
We continue to target volume production of N4 process technology in first half 2025, and are confident that once we begin operations, we will be able to deliver the same level of manufacturing quality and reliability in Arizona as from our fabs in Taiwan.

In Japan, we build a specialty technology fab, which will utilize 12 and 16 nanometer and 22 and 28 nanometer process technologies. We have hired approximately 800 local TSMC employees so far, with the majority having similar being brought to Taiwan for hands-on experience. Equipment moving has begun this month, and volume production is on track for late 2024.

In China, we have recently received an extension from the U.S. Bureau of Industry and Security to continue our operation in Nanjing. We are currently in the process of applying for validated end-user authorization and expect to receive a permanent authorization in the near future.

From a cost perspective, the initial cost of oversea fabs are higher than TSMC fabs in Taiwan due to first, smaller fab scale, second, higher cost throughout the supply chain, and third, the early stage of semiconductor ecosystem overseas as compared to a matured ecosystem in Taiwan.

TSMC’s responsibility is to manage and minimize the cost gap to maximize the return for our shareholders. Our pricing will also remain strategic to reflect our value, which includes the value of geographic flexibility. We will also work closely with government to secure their support. At the same time, we are leveraging our fundamental competitive advantage of manufacturing technology leadership, large volume, economies of scale to continuously drive our cost down. By taking such actions, TSMC will have the ability to absorb the higher cost of oversea fabs and still deliver the long-term gross margin of 53% and higher and sustainable ROE of greater than 25%. We remain firm in our commitment to maximize the value for our shareholders.

Now let me talk about N3 and N3E ramp-up and progress. Our 3-nanometer technology, the most advanced semiconductor technology in both PPA and transistor technology. N3 is already in volume production with good yield, and we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3 will contribute a single-digit percentage of our total wafer revenue in 2023, and we expect a much higher percentage in 2024, supported by robust demand for multiple customers.

N3E will leverage the strong foundation of N3 to further extend our N3 family with enhanced performance, power, and yield, and provide complete platform support for both HPC and smartphone applications. N3E has passed qualification and achieved performance and yield targets, and will start volume production in fourth quarter of this year. We also continue to provide further enhancement of N3 technology, including N3P and N3X.

With our strategy of continuous enhancement of our 3-nanometer process technologies, we expect strong multi-year demand from our customers, and we are confident that our 3-nanometer family will be another large and long-lasting node for TSMC.

Finally, I will talk about N2 status. The recent surge in AI-related demand supports our already strong conviction that demand for energy-efficient computing will accelerate in an intelligent and connected world. Thus, the value of our technology platform is expanding beyond the scope of geometry shrink alone and increasing toward greater power efficiency.
In addition, as process technology complexity increases, the lead time and engagement with customer also start much earlier. As a result, we are observing a strong level of customer interest and engagement at our N2, similar to or higher than N3 at the similar stage from both HPC and smartphone applications.

Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy efficiency when it is introduced in 2025. Our N2 technology development is progressing well and on track for volume production in 2025. Our N2 will adopt nano-sheet transistor structure, which has demonstrated excellent power efficiency and will deliver four-node performance and power benefit to address the increasing need for energy-efficient computing.

As part of N2 technology platform, we also develop N2 with backside power rail solution, which is the best suited for HPC applications. We are targeting backside power rail to be available in the second half of 2025 to customers with production in 2026. With our strategy of continuous enhancement, N2 is derivative will further extend our technology leadership way into the future.

(Image: TSMC)