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Taiwan Semiconductor Manufacturing Company Limited (TSM) Q4 2020 Earnings Call Transcript

Taiwan Semiconductor Manufacturing Firm Restricted (NYSE: TSM) This autumn 2020 earnings name dated Jan. 14, 2021

Presentation:

Jeff Su — Director of Investor Relations

[Foreign Speech] Good afternoon, everybody, and welcome to TSMC’s Fourth Quarter 2020 Earnings Convention Name. That is Jeff Su, TSMC’s Director of Investor Relations and your host for at present.

To stop the unfold of COVID-19, TSMC is internet hosting our earnings convention name by way of dwell audio webcast via the Firm’s web site at www.tsmc.com, the place you can too obtain the earnings launch supplies. In case you are becoming a member of us via the convention name, your dial-in strains are in listen-only mode.

The format for at present’s occasion can be as follows. First, TSMC’s Vice President and CFO, Mr. Wendell Huang, will summarize our operations within the fourth quarter 2020, adopted by our steering for the primary quarter 2021. Afterwards, Mr. Huang and TSMC’s CEO, Dr. C.C. Wei, will collectively present the Firm’s key messages. Then TSMC’s Chairman, Dr. Mark Liu, will host the Q&A session, the place all three executives will entertain your questions.

As common, I wish to remind everyone that at present’s discussions might include forward-looking statements which can be topic to vital dangers and uncertainties, which might trigger precise outcomes to vary materially from these contained within the forward-looking statements. Please consult with the Protected Harbor discover that seems in our press launch.

And now, I wish to flip the decision over to TSMC’s CFO, Mr. Wendell Huang, for the abstract of operations and the present quarter steering.

Wendell Huang — Vice President, Finance and Chief Monetary Officer

Thanks, Jeff. Completely satisfied New Yr, everybody. Thanks for becoming a member of us at present. My presentation will begin with the monetary highlights for the fourth quarter and a recap of full-year 2020. After that, I’ll present the steering for the primary quarter of 2021.

Fourth quarter income elevated 1.4% sequentially in NT phrases or 4.4% in US greenback phrases, as we noticed sturdy demand for our 5-nanometer expertise pushed by 5G smartphone launches and HPC-related purposes.

Gross margin elevated 0.6 proportion factors sequentially to 54%, primarily because of price enchancment, partially offset by the margin dilution from 5-nanometer ramp and an unfavorable change charge. Our utilization charge within the fourth quarter was at an especially high-level, partially attributable to extra manufacturing output, of which a few of the wafers can be shipped within the first quarter.

Whole working bills barely decreased by TWD2.6 billion, due to this fact working margins elevated by 1.4 proportion factors sequentially to 43.5%. Total, our fourth quarter EPS was TWD5.51 and ROE was 31.4%.

Now, let’s transfer on to the income by expertise. 5-nanometer course of expertise contributed 20% of wafer income within the fourth quarter, whereas 7-nanometer and 16-nanometer contributed 29% and 13%, respectively. Superior applied sciences, that are outlined as 16-nanometer and under, accounted for 62% of wafer income. On a full-year foundation, 5-nanometer income contribution got here in at 8% of 2020 wafer income. 7-nanometer was 33% and 16-nanometer was 17%. Superior applied sciences accounted for 58% of complete wafer income, up from 50% in 2019.

Now, transferring on to the income contribution by platform. Smartphone elevated 13% quarter-over-quarter to account for 51% of our fourth quarter income. HPC decreased 14% to account for 31%, IoT decreased 13% to account for 7%, automotive elevated 27% to account for 3%, digital client electronics elevated 29% to account for 4%. On a full-year foundation, smartphone, HPC and IoT noticed sturdy progress of 23%, 39%, and 28%, respectively. DCE additionally elevated 2%, whereas auto decreased 7% in 2020. Total, smartphone accounted for 48% of our 2020 income, HPC accounted for 33% and IoT accounted for 8%.

Shifting on to the stability sheet. We ended the fourth quarter with money and marketable securities of TWD791 billion. On the legal responsibility aspect, present liabilities elevated by TWD29 billion, primarily to — because of the enhance of TWD57 billion in accounts payable and the rise of TWD38 billion in accrued liabilities and others, offset by the lower of TWD69 billion in short-term mortgage.

Lengthy-term interest-bearing debt elevated by TWD28 billion, primarily as we raised TWD30.5 billion of company bonds throughout the quarter.

On monetary ratios, accounts receivable turnover days decreased 1 day to 39 days. Days of stock elevated 15 days to 73 days, primarily because of the ramp of main nodes.

Now, let me make just a few feedback on money movement and capex. In the course of the fourth quarter, we generated about TWD259 billion in money from operations, spent TWD89 billion in capex and distributed TWD65 billion for first quarter ’20 money dividend. Quick-term loans decreased by TWD67 billion whereas bonds payable elevated by TWD30.5 billion because of the bond issuances. Total, our money stability elevated TWD56 billion to TWD660 billion on the finish of the quarter. In US greenback phrases, our fourth quarter capital expenditures totaled $3.2 billion.

Now, let’s have a look at the recap of our efficiency in 2020. We noticed a powerful progress in 2020 as our expertise management place enabled us to seize the {industry} megatrends of 5G and HPC. Our income elevated 31.4% in US greenback phrases and 25.2% in NT greenback phrases to succeed in TWD1.34 trillion.

Gross margin elevated 7.1 proportion factors to 53.1%, primarily attributable to the next degree of capability utilization and price enchancment. Working margin elevated 7.5 proportion factors to 42.3%. Total, full-year EPS elevated 50% to TWD19.97.

On money movement, we spent TWD507 billion in capex whereas we generated TWD823 billion in working money movement and TWD315 billion in free money movement. We additionally paid TWD259 billion in money dividends in 2020.

I’ve completed my monetary abstract. Now, let’s flip to our first quarter steering. Based mostly on the present enterprise outlook, we count on our first quarter income to be between $12.7 billion and $13 billion, which represents a 1.3% sequential enhance on the midpoint. Based mostly on the change charge assumption of $1 to TWD27.95, gross margin is anticipated to be between 50.5% and 52.5%, working margin between 39.5% and 41.5%. The sequential decline in first quarter gross margin is especially attributable to a barely decrease utilization charge within the first quarter, albeit it’s nonetheless staying on the high-level, in addition to an unfavorable international change charge.

Now, I wish to discuss in regards to the tax charge. We count on our 2020 tax charge to be within the vary of 10% to 11%, and this can be equally utilized to all 4 quarters of the yr. This concludes my monetary presentation.

Now, I wish to begin with the important thing messages for the quarter. I’ll begin by making some feedback on our capital price range in 2020 and 2021. Yearly, our capex is invested in anticipation of the expansion that may comply with within the subsequent few years. Our capital funding selections are based mostly on 4 disciplines: expertise management, versatile and responsive manufacturing, retaining prospects’ belief, and incomes the correct return. In 2020, we spent $17.2 billion to seize the sturdy demand for our superior applied sciences and help our prospects’ capability wants. With a view to meet the rising demand for our superior and specialty applied sciences and additional help of consumers’ capability wants, our 2021 capital price range is anticipated to be between $25 billion and $28 billion. Out of the $25 billion to $28 billion capex for 2021, about 80% of the capital price range can be allotted for superior course of applied sciences, together with 3-nanometer, 5-nanometer and 7-nanometer. About 10% can be spent for superior packaging and masks making and about 10% can be spent for specialty applied sciences.

Subsequent, let me discuss our capital depth outlook. As now we have mentioned beforehand, our long-term capital depth is within the mid-30s proportion vary. Nevertheless, after we enter a interval of upper progress, our capex must be spent forward of the income progress that may comply with, so our capital depth can be increased. For instance, throughout 2010 to 2014, our capex spending elevated threefold as in comparison with the previous couple of years and our capital depth vary between 38% to 50%. Due to the elevated funding, we had been capable of seize the expansion alternatives and ship above 15% progress CAGR from 2010 to 2015. Right this moment, as we enter one other interval of upper progress, we consider the next degree of capability — capital depth is acceptable to seize the long run progress alternatives. We now count on the next progress CAGR within the subsequent few years, pushed by the {industry} megatrends of 5G and HPC-related purposes, which C.C. will talk about in additional element.

We additionally count on this increased degree of capital funding to proceed to drive our expertise management, allow versatile and responsive manufacturing and earn prospects’ belief. Whereas our main these capital price continues to extend attributable to rising course of complexities, it’s anticipated to be compensated by persevering with to promote our price, which incorporates the worth of our expertise, service, high quality and capability help and diligently engaged on price enchancment. With this degree of capex spending in 2021, we reiterate that TSMC stays dedicated to a sustainable money dividend on each an annual and quarterly foundation.

Now, let me flip the microphone over to C.C.

C.C. Wei — Chief Govt Officer

Thanks, Wendell. Hello, everybody. That is C.C. Wei. Good afternoon. We hope everyone is staying protected and wholesome throughout this time.

Now, let me begin with our near-term demand and stock. We concluded our fourth quarter with income of TWD361.5 billion or $12.7 billion, which was according to our steering, primarily attributable to sturdy demand for our 5-nanometer expertise, pushed by 5G smartphone launches and HPC-related purposes. Concluding 2020, the semiconductor {industry}, excluding reminiscence recourse, was about 10%, whereas foundry {industry} elevated about 20% year-over-year. TSMC’s income grew 31.4% year-over-year in US greenback phrases.

Shifting into first quarter 2021, our enterprise continues to be shrunk, supported by HPC-related demand, restoration within the automotive phase, and a milder smartphone seasonality, once more, in recent times.

On the stock entrance, our fabless prospects’ general stock was digested all through the fourth quarter. We now count on it to strategy the historic season exiting 2020 higher than our forecast three months in the past. We observe that the availability chains are altering their approaches to stock administration amidst the lingering macro uncertainties. Trying forward, we count on the availability chain and our buyer to organize the next degree of stock in comparison with the historic season degree for an extended time frame, given the {industry}’s continued want to make sure provide safety.

Subsequent, let me discuss in regards to the automotive provide tightness. The automotive market has been tender since 2018. Getting into 2020, COVID-19 additional impacted the automotive market. The auto provide chain was affected all year long and our prospects continued to lower their demand within the third quarter. We solely started to see sudden restoration within the fourth quarter. Nevertheless, the automotive provide chain is lengthy and sophisticated, the place a lot of our expertise nodes has been tight all through 2020 attributable to sturdy demand from our different prospects. Due to this fact, within the near-term, as demand from the automotive provide chain is rebounding, the scarcity in automotive provide has develop into extra apparent. In TSMC, that is our high precedence and we’re working carefully with our automotive buyer to resolve the capability help difficulty.

Now, I’ll discuss our 2021 outlook. For the full-year of 2021, we forecast the general semiconductor market, excluding reminiscence, to develop about 8%, whereas foundry {industry} progress is forecast to be about 10%. For TSMC, we’re assured we will outperform the foundry income progress and develop by mid-teens proportion in 2021 in US greenback time period. Our 2021 enterprise can be supported by sturdy demand for our industry-leading superior and specialty applied sciences, the place we see sturdy curiosity from all 4 progress platforms, that are smartphone, HPC, automotive and IoT.

Subsequent, let me discuss TSMC’s long-term progress outlook. We’re getting into a interval of upper progress because the multi-year megatrend of 5G and HPC-related purposes are anticipated to gas sturdy demand for our superior applied sciences within the subsequent a number of years. We count on international smartphone items to develop 10% year-over-year in 2021. We forecast the penetration charge for 5G smartphone of the entire smartphone market to rise from 18% in 2020 to greater than 35% in 2021.

We count on the silicon content material of a 5G smartphone to proceed to extend as in comparison with a 4G smartphone. We proceed to count on sooner penetration of 5G smartphone as in comparison with 4G over the following a number of years as 5G smartphone profit from the numerous efficiency and with a latency enchancment of 5G community to drive extra AI purposes and extra cloud providers. We consider 5G is a multi-year megatrend that may allow a world the place digital computation is more and more ubiquitous, which can gas the expansion of all 4 of our progress platforms within the subsequent a number of years.

As we enter the 5G period, a wiser and extra clever world would require huge will increase in computation energy and better want for energy-efficient computing, and due to this fact, require modern applied sciences. Thus, HPC is an more and more essential driver of TSMC’s long-term progress and the biggest contributor by way of our incremental income progress. With our expertise management, we’re properly positioned to seize the expansion from the favorable {industry} megatrend. We now count on our long-term income progress to be 10% to fifteen% CAGR from 2020 to 2025 in US greenback phrases.

Now, I’ll discuss in regards to the N3 standing. N3 can be one other full node stride from our N5 with as much as 70% logic density acquire, as much as 15% efficiency acquire and as much as 30% energy discount as in contrast with 5-nanometer. Our N3 expertise will use FinFET transistor construction to ship the perfect expertise maturity, efficiency and price for our prospects. Our N3 expertise growth is on observe with good progress. We’re seeing a a lot increased degree of buyer engagement for each HPC and smartphone software at N3 as in contrast with N5 and N7 at the same stage. Threat manufacturing is scheduled in 2021 and quantity manufacturing is focused in second half of 2022. Our 3-nanometer expertise would be the most superior foundry expertise in each PPA and transistor expertise when it’s launched. Thus, we’re assured our 3-nanometer can be one other giant and long-lasting node for TSMC.

Lastly, I’ll discuss TSMC’s 3D material. TSMC has developed an industry-leading and complete wafer-level 3DIC expertise roadmap to reinforce system-level efficiency. Our differentiated chiplet and heterogeneous integration applied sciences drive higher energy effectivity, as smaller type issue profit for our buyer, whereas shortening their time to market. This expertise, together with CHIPS stake in resolution, similar to SoIC, in addition to our superior packaging options, similar to InFO and CoWoS. We observe chiplets have gotten an {industry} development. We’re working with a number of prospects on 3D material to allow chiplet structure. SoIC’s full quantity manufacturing is focused in 2022. SoIC is anticipated to be first adopted by HPC purposes, the place bandwidth efficiency, energy effectivity and type issue are aggressively pursued. We count on income from our back-end providers, which embody InFO’s superior packaging and testing to develop at a charge increased than company common within the subsequent few years.

This concluding our key message. Thanks in your consideration.

Jeff Su — Director of Investor Relations

Thanks, C.C. This concludes our ready statements. Earlier than we begin the Q&A session, I wish to remind everyone to please restrict your questions to 2 at a time to permit all of the contributors a chance to ask their questions. Do you have to increase to — want to increase your query in Chinese language, I’ll translate into English earlier than our administration solutions your query.

[Operator Instructions] Now, let’s start the Q&A session. Operator, please proceed with the primary caller on the road.

We’re nonetheless processing the Q&A portion of the convention name. We can be updating it as quickly as we analyze and course of the con name. Keep tuned right here for extra updates.

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