Taiwan Semiconductor 1Q17 Earnings Call Notes

Mark Liu – President and co-CEO

Fabless inventory high

“We now estimate fabless DOI is still high, high above seasonal exiting first quarter ‘17. Our second quarter revenue guidance that reflects a quite severe inventory adjustment by our customers, particularly in smartphone and PC markets. However, the overall end market smartphone demand appears stable in second quarter ‘17.”

ARM and accelerator use in data centers driven by AI

“Artificial intelligence application and services and five key infrastructures are the major driving force with leading edge technology behind this HPC growth. For example, more than half of our customer product tape-outs with our 7-nanometer today we see our HPC products. Recently we are also very encouraged by the support of a major AI service provider on ARM-based processor or datacenter in Open Compute Project Summit this year. Accelerators used in datacenter are also increasing, adopting the GPUs, FPGAs and ASICS, we expect HPC to become our major growth engine from 2020. The trend of ubiquitous AI also shows up in many IoT and consumer devices such as robot, drones, surveillance devices, smart TV and set-top box. Ubiquitous AI will also be widely used in the fast developing autonomous car market.”

Weakness in smartphone and PC but most because of inventory

“Second quarter weakenings, smartphone is one. We think PC is another one. Mostly because of inventory though and industrial, I don’t see the weakness at all and to come to your question about the, what is your second question.”

Industrial is heating up

“I don’t typically noticed particularly the strengths that are in pocket. Industrial is considered heating up. We have – that’s the number. So showing the overall second quarter. Okay, automotive although a small percentage is heating up.”

Taiwan Semiconductor 4Q16 Earnings Call Notes

Morris Chang

We have created 100s of thousands of jobs by creating the fabless industry

“But having said all that, I will say that Mr. Trump, President-Elect Trump, has said many times that he wants to create jobs in the United States. And we highly applaud that. TSMC actually has created, we believe, hundreds of thousands of jobs in the United States in the last 20-30 years of our existence. We for all practical purposes, we have created an industry, the fabless industry, in the United States, and we have grown it, and the fabless industry, I believe, employs hundreds of thousands of people in the United States. And we have done that by being here ourselves. So I think that we’ll continue to create more jobs in the United States by helping the fabless industry in the United States. And the IDMs, the users, there are many IDMs in the United States that use us. And by using us, they have grown faster. And they create jobs too.”

We wont rule out setting up a fab in the US but that would come with sacrifices

“I do not rule it out, but I see a lot of sacrifices that we and our customers will have to make if we do that. Keep in mind that we earned our business in the United States, not by lower labor costs in Taiwan. In fact, on the whole, our labor costs in Taiwan – our labor costs in Taiwan are not lower than the United States.

Now, we earn our business by being good. Let’s give you an example. Every year we send thousands of engineers from one location to another, and we have three locations in Taiwan, Taichung, Hsinchu and Tainan. Now Taichung and Hsinchu are within daily commuting distance…every year we send literally over a 1000, 2000 engineers from one location to another who’ll be there for months and that allows us to ramp up things quickly and to solve problems quickly also where one location, one fab has got a problem then another fab – engineers from another fab can go ahead and help them. Literally thousands, thousands of engineers do that every year. Now if we have a plant in the U.S. we won’t be able to do that anymore.

Second point, we have thousands of vendor people here. Actually they’re already in Hsinchu – already in Hsinchu, Tainan and some in Taichung also. Thousands of engineers from our partners located here. These are things that are not low labor cost. These are things that we’re going to lose if we set up a plant in the U.S. And if we lose these things our customers will lose too.

Yes, I don’t rule it out and actually I would never rule that out but year–after-year time and again we consider the subject and we have not made the decision to go there.”

Mark Liu

AI discussion

I think AI is coming a killer application for the industry and people are excited. And one of the reason is there is a tremendous progress in the algorithms that makes the machine into much more than traditional programming – programmable machine. This is the machine can think and do things. So for the application side it’s immense, as many of you must have read on these growing opportunities. All the cloud provider are in this field.

Now, in AI, for us, I think it’s also an important opportunity for us. Let me just talk about the computing side of AI. AI needs a deep learning [ph] and collecting a lot of data, therefore it requires very massive computation. And in the past years our technology development is collecting apace and we now can provide the world’s most competitive technology for those artificial intelligence computing purposes. That’s number one. So the people who can get into this field is across the industry, using our technologies.

Secondly is this AI is – this is new, so the all the algorithm or the architecture, they are all new. So the computing…basically it’s the playing field is level. It’s not as before, where the high component is computing. It has to be a certain architecture to get into this field. This is a leveling playing field, so many players are into this field. That is where the massive innovation can come. So we are very excited. Also because of this we see the application will include many segments.”

Taiwan Semiconductor 1Q16 Earnings Call Notes

Lora Ho

Expecting 6-7% revenue increase in second quarter

“We expect our business in the second quarter will benefit from continued inventory restocking and the recovery of the delayed shipments from the earthquake. Based on our current business outlook and exchange rate assumptions of US$1 to NT$32.30, we expect second quarter revenue to be between NT$215 billion and NT$218 billion, which represents 6% to 7% sequential increase.”

Mark Liu

May see above seasonal growth in 2Q due to inventory restocking

“Most of our fabless customers may see an above seasonal growth in 2Q 2016, driven by OEMs’ new product launches and inventory restocking in the supply chain. We estimate days of inventory will still be close to seasonal level exiting 2Q 2016”

Reducing estimates of growth for consumer electronics to minus 5%.

“Due to the world macroeconomic uncertainties, we reduced our estimate of 2016 smartphone growth from 8% to 7%, PC from minus 3% to minus 6%, tablet from minus 7% to minus 9%, while maintaining digital consumer electronics growth rate at minus 5%. In spite of the reductions of these growth rates, there are still growth areas in smartphones, broadband network, wireless infrastructures and gaming.”

Smartphone growth will still benefit from 4G deployment in China and possibly GPU in VR applications

“For smartphone growth, momentum comes from China’s 4G Plus deployment, through increases of operator subsidy and the continued 3G to 4G upgrade in emerging markets. These factors will also drive the associated infrastructure growth. Recently, we also see good demand from gaming GPU and game console processors for VR applications.”

We estimate world semiconductor growth to be ~1% in 2016

“For the whole year of 2016, we estimate the growth of world semiconductor to be about 1%.”

Will begin N7 production in 2018

“We have expanded our N7 design ecosystem development to include both mobile and high-performance computing, to enable our customers to deliver their first-to-market products. Our N7 adoption is very strong with customers ranging from mobile GPU, game console, FPGA, network processors and other consumer product applications. We have more than 20 customers in intensive design engagement with us and expect to have 15 customer tape-outs in 2017. The volume production of N7 will start from first half 2018.”

Advancement in a number of applications drive demand for leading edge technologies

“We see continuing technology advancement in baseband, application processors, RF transceivers and wireless connectivity to meet the demand of LTE-advanced specifications. The growth of 4G data rate through carrier aggregation and high-frequency Wi-Fi drives the need for more complex and larger chips. the above drive the demand for our N10 and N7 technologies which will enter production in 2017 to 2019.”

VR/AR, deep learning and AI are the applications that require leading edge tech

“VR/AR, deep learning and artificial intelligence, artificial AI are the emerging applications that will require leading-edge technologies. Consumer-oriented VR/AR products for immersed gaming and immersive video viewing have begun shipment in 1Q this year. The data transfer rate of VR/AR products in interactive design, remote training and multisite conferencing must still be enhanced by 10x from today’s level in order to enable quality viewing experience.”

We do see end market demand increasing

“we do see the customers and even the end market demand is increasing. The inventory restocking is still cautious. And going forward, we’re still watching this month by month to see if demand will change or not. But this is currently our perspective.”

People are still cautious on inventories

“Well what we see, the fourth quarter last year, you remember, is people drastically reduced their inventory. We only see the restocking almost after the Chinese New Year. So that’s where you count the cycles. And what – I don’t see very, very – I don’t see signs of overbuild at this point. People are still cautious. So that’s what we see, the cycle.”

C.C. Wei

There are high, mid and low end smartphones. High end moving to 16nm

“In the smartphone we have high-end smartphone, mid and low-end smartphone. For the high-end smartphone moving to the 16-nanometer, it’s a natural choice and they are moving very fast. Yes. But then the mid and low-end smartphone, that demand increases, so a lot of them adopting TSMC’s 28-nanometer technology.”

Taiwan Semiconductor 4Q15 Earnings Call Notes

Taiwan Semiconductor Manufacturing Company’s (TSM) CEO Mark Liu on Q4 2015 Results

Mark Liu

very severe inventory reduction during 4Q

“I will start with demand outlook messages. As the semiconductor supply chain went through a very severe inventory reduction during the fourth quarter 2015.”

Inventory is at or slightly below seasonal level. Customers likely to remain cautious

“The severe inventory reduction in the fabless industry during the fourth quarter was fabless data inventory to about or slightly below the seasonal level as we exited 2015. However each strong U.S. dollar environment and a volatile financial market that strengthened the market demand for overall semiconductor last year may continue for some time. Therefore we expect our customers will likely remain cautious in their inventory control and keep inventory close to seasonal level.”

Smartphone demand in China and other emerging markets shows signs of recovery

“For our first quarter 2016 this quarter, we see a reduction of high end smartphone demand. On the other hand, demand for smartphones in China and other emergent markets shows signs of recovery with a upward momentum. We thus forecast a mild revenue decline of minus 1.3% to minus 2.7% quarter-to-quarter for the first quarter 2016. Beyond the first quarter 2016, we expect to be back to a growth trajectory. For 2016 we forecast the world smartphone shipment unit growth rate to be plus 8%, PC minus 3%, tablet minus 7%, and the digital consumer electronics minus 5%.”

Inventories are much lower than last year but the macro economic uncertainty is very high

“Compare this year and last year, there is these two major differences leaders to make the current forecast. One is when we enter the beginning of last year, we did not know of inventory buildup is very, very high. Its — I still remember 11 or 12 days above seasonal. And then this year however, we considered the traffic reduction of inventory during the fourth quarter, we have a better estimate how the starting point of the year. And secondly of course is macro economics of this year as you know is still several uncertain factors in it. Therefore we are just taking those two factors on account to make our current forecast, therefore it will lead to a bigger range.”

Morris Chang

We’re everyone’s foundry

” we’re everyone’s foundry. Being everyone’s foundry has advantage of participating in the growth of whoever succeeds the best, where the customer succeeds the best. We participated in it and we have been in everyone’s foundry ever since while maybe not when we started it, but certainly for the last 10-15 years we have been virtually everybody’s foundry and we intend to remain that way.”

We don’t build capacity unless we have very high confidence that we will have customers using it

“in restaurant, you care about the margin, right but mostly you care even more filling the restaurant to customers that’s how utilization you see, that’s very, very important so anyway that also as explains always said it, we are very careful in building our capacity and building up capacity. You don’t want to rent a big whole for restaurant and then have enough customers so thus far we are very careful in building capacity. And I have said that many times in the past, we don’t build capacity unless we have very high confidence that we will have customers using that capacity.”

Smartphone sell through estimated at 1.5B

” I think Mark said that our estimate of handset, smartphone sell though is 1.5 billion units worldwide. 8% I think. 8% over last year.”

Capital intensity should continue to decline

“We’ve predicted our capital intensity, the way you’ll find it. CapEx divided by current year revenue. We predicted it quite a few years ago that it will go down and that it’s going down. So the update is that yes, our prediction was correct. It will go down.”

There were three big acquisitions last year in the semiconductor space

“Well the three big ones last year as far as we were concerned were Intel, Intel’s acquisition of Altera, Avago and Broadcom and XP and Prescale. All six of them, I’m talking about both the acquirer and the acquired, all six of them were our good customers and after the combination there will be three and I hope and I have reason to expect that the three combined entities will continue to be our good customers. That’s what being everybody’s foundry means.”