Ladies and gentlemen, welcome to TSMC's Second Quarter 2020 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. To prevent the spread of COVID-19, TSMC is hosting our earnings conference call via live audio webcast 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 listen-only mode. The format for today's event will be as follows. First, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2020, followed by our guidance for the third quarter 2020. Afterwards, Mr. Huang, and TSMC's CEO, Dr. C. C. Wei, will jointly provide the Company's key messages. Then TSMC's Chairman, Dr. Mark Liu will host a Q&A session, where all three executives will entertain your questions. 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 current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Second quarter revenue was flat sequentially, as the continued 5G infrastructure deployment and HPC related product launches offset weaknesses in other platforms. Gross margin increased 1.2 percentage points sequentially to 53%, mainly due to continuing high level of utilization and the absence of unfavorable inventory valuation adjustment, partially offset by NT$ appreciation in the second quarter. Total operating expenses increased by NT$1.19 billion, mainly as TSMC supported a range of COVID-19 relief efforts. Operating margin increased by 0.8 percentage points sequentially to 42.2%. Overall, our second quarter EPS was NT$4.66 and ROE was 28.5%. Now let's move on to the revenue by technology. 7 nano process technology contributed 36% of wafer revenue in the second quarter, while 16 nanometer contributed 18%. Advanced technologies, which are defined as 16 nanometer and below, accounted for 54% of wafer revenue. Moving onto revenue contribution by platform, smartphones decreased 4% quarter-over-quarter to account for 47% of our second quarter revenue. HPC increased 12% to account for 33%. IoT decreased 5% to account for 8%. Automotive decreased 13% to account for 4%. Digital consumer electronics decreased 9% to account for 5%. Moving on to the balance sheet, we ended the second quarter with cash and marketable securities of NT$605 billion. On the liabilities side, current liabilities increased by NT$25 billion, mainly due to the increase of NT$30 billion in short-term loans. On financial ratios accounts receivables turnover days increased 2 days to 44 days. Days of inventory also increased 2 days to 55 days mainly due to N5 ramp and stronger N7 demand. Now let me make a few comments on cash flow and CapEx. During the second quarter, we generated above NT$170 billion in cash from operations, spent NT$127 billion in CapEx and distributed NT$65 billion for third quarter cash dividend. We also increased NT$30 billion in short-term loans and issued NT$36 billion of corporate bonds. Overall, our cash balance increased NT$37 billion to NT$468 billion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures amounted to US$4.2 billion. I finished my financial summary. Now, let's turn to our third quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between US$11.2 billion and US$11.5 billion, which represents a 9.3% sequential increase at the midpoint. Based on the exchange rate assumption of US$1 to NT$29.5 gross margin is expected to be between 50% and 52%, operating margin between 39% and 41%. Now, I will hand over the call to CC for his key messages. Dr. C. C. Wei: Thank you, Wendell. Good afternoon ladies and gentlemen. Let me start with our near-term demand outlook. We concluded our second quarter with revenue of NT$310.7 billion or US$10.4 billion in line with our guidance given three months ago. Our second quarter business increased slightly in U.S. dollar terms as continued 5G infrastructure deployment and HPC related portal launches offset weakness in other platforms. Moving into third quarter 2020, we expect our business to be supported by strong demand for our industry-leading 5 nanometer and 7 nanometer technologies, driven by 5G smartphone, HPC and IoT related applications. Looking at the second half of this year, COVID-19 continues to bring some level of disruption to the global economies and uncertainty remained. We have observed weak consumer demand in the first half of this year and now expect global smartphone units to declined low teens percentage year-over-year in 2020. However, amid the COVID-19 pandemic, we also observed the supply chain making efforts to ensure supply chain security and actively preparing for new 5G smartphone launches. We raised our forecast for 5G smartphone penetration rate to high teens percentage of the total smartphone market in 2020. For the full year of 2020, 5G and HPC related applications will continue to drive semiconductor content enrichment. We now forecast overall semiconductor market, excluding memory growth, to be flat to slightly increased, while foundry industry growth is expected to increase to be mid-to-high-teens percentage. For TSMC also COVID-19 related uncertainties remain. Our technology leadership position enables us to outperform the foundry revenue growth. We believe we can grow above 20% in 2020 in US dollar terms, including the impact from the new U.S. regulations, which I will discuss in the next sheet [ph]. Our 2020 business will be supported by strong demand for our industry-leading 5 nanometer and 7 nanometer technologies and our specialty technology solutions, driven by customers of 5G smartphone related product launches and expanding HPC related opportunities. Now let me talk about the impact of new U.S. regulations. On May 15, the U.S. Department of Commerce announced a set of new export control regulations. As a global and law-abiding company, TSMC will follow all the rules and regulations fully, no doubt about it. While there may be some impact from the new U.S. regulations, TSMC's propose to unleash innovation remained unchanged. Our leading position in the semiconductor industry [indiscernible] on our technology leadership, manufacturing excellence, and customers' trust also remained unchanged. We will continue to build upon our opportunities of strength and conduct our business with integrity to ensure our value and contribute to the semiconductor industry. In the near-term we will work dynamically with our customers to minimize the impact to our business from new U.S. regulations. In the mid-to-long-term, we believe the underlying megatrend of 5G related and HPC applications remained intact, and supply chain can adjust and rebalance themselves. With our technology leadership, we are well positioned to capture all the mid-to-long-term growth opportunities. We reaffirm our goal to grow at the high end of our long-term growth projection of 5% to 10% CAGR in U.S. dollar terms. Next, let me talk about our N5 ramp up and N4 introduction. N5 is the foundry industry's most advanced solution with best PPA. N5 is already in volume production with good yield, while we continue to improve the productivity and performance of the EUV tools. We are seeing robust demand for N5 and expect a strong ramp of N5 in the second half of this year, driven by both 5G smartphones and HPC applications. As we observed some delays earlier this year in N5 toward deliveries due to COVID-19, we now expect 5 nanometer to contribute about 8% of our wafer revenue in 2020. We also introduced N4 as an exchanging of our 5 nanometer family. N4 [indiscernible] have comparable design rules [ph] and a highly competitive performance tool cost advantages as compared to N5, and we are targeting next wave of N5 products. Volume production is targeted for 2022. Thus we are confident that our 5 nanometer family will be another large and long-lasting node for TSMC. Now I will talk about our N3 status. N3 will be another full node stride from our N5 with about 70% larger density gain, 10% to 15% speed gain, and 25% to 30% power improvement as compared with 5 nanometer. Our industry technology will use FinFET transistor structure to deliver the best technology maturity, performance and cost. Our industry technology development is on track with good progress. N3 which production is scheduled in 2021 and volume production is targeted in second half of 2022. We have already demonstrated to handle 56 mega [indiscernible] from [indiscernible]. N3 documented test is fully functional we see ahead of plan. The device performance is also on track. Our 3 nanometer technology will be the most advanced foundry technology in most PPA and transistor technology when it is introduced which will also extend our leadership position well into the future. Finally, let me talk about our U.S. fab plan. On May 15, we announced our intention to build an advanced semiconductor fab in the U.S. We have received a commitment to support this project from both, the U.S. Federal Government and the State of Arizona. We are working closely with them as well as our supply chain partners to build an effective supply chain and make up the cost scale. This fab will start with 5 nanometer technology with 20,000 wafers per month capacity. Production is targeted to begin in 2024. The U.S. trade war [ph] enabled TSMC to expand our technology ecosystem and better service our customers and partners. At the same time, as TSMC global presence increases, it will allow us to better reach global talent to sustain our technology leadership. Now let me turn the microphone over to our CFO.

Thank you, CC. Let me start by making some comments on our second half profitability outlook. We have just guided third quarter 2020 gross margin to decline by 2 percentage points sequentially to 51% at the midpoint, primarily due to the margin dilution from the initial ramp up of our 5 nanometer technology in the third quarter and a less favorable foreign exchange rate. As compared with our expectations three months ago, our third quarter gross margin midpoint is higher, mainly supported by a high level of overall capacity utilization despite the uncertainty from COVID-19. Looking ahead to the fourth quarter, we expect a continued steep ramp up of our 5 nanometer to dilute our fourth quarter gross margin by about 2 to 3 percentage points. Now let me talk about our capital budget for this year. Every year our CapEx is spent in anticipation of the growth that will follow in the next few years. While the impact of COVID-19 virus brings uncertainties in 2020, we have seen our business holding up well so far. Thanks to our technology leadership of 5 and 7 nanometer nodes. Looking ahead, the multi-year megatrends of 5G related and HPC applications are expected to continue to drive strong demand for our advanced technologies in the next several years. In order to meet this demand and support our customers' capacity needs, we have decided to raise our full year 2020 CapEx to be between US$16 to US$17 billion. We also reiterate that TSMC is committed to sustainable cash dividends on both an annual and quarterly basis. That concludes my key messages.

Thank you, Wendell. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all participants an opportunity to ask questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Instructions] Now let's begin the Q&A session. Operator, please proceed with the first caller on the line.

Yes, thank you. The first to ask questions, Gokul Hariharan, J.P. Morgan. Go ahead please.

Yes, hi. Good afternoon and thanks for taking my questions and great results in a tough time. Just a quick question on how we think about N3 development? Do we feel that N3, since we talk about mass production in the second half of 2022, usually then you don’t start sometime in Q2, I just wanted to understand, are we thinking about a slightly slower ramp for N3, compared to what we have had in the first year for N5 as well as N7? That is my first question. My second question is, when you think about leading edge once the U.S. regulation starts to come in, how do we think about managing capacity? Do we feel that the capacity can get filled up relatively quickly when one of our leading customers, you have just talked [ph] to them, or do we feel that there could be a couple of, there could be some time where there could be a little bit of under utilization?

Okay, thank you Gokul. Let me try to, allow me to summarize your question. Your first question is related to N3, how do we think about the N3 development? We have said the mass production timing is in second half 2022 versus typically the second quarter, so should we expect a slightly lower ramp of N3? This is your first question. Dr. C. C. Wei: Okay, let me answer that Gokul. In fact we develop our new leading edge technology. We work closely with our customer. So, the schedule and also the ramp up, also the progress we are all working with customer closely and determine when and to be the best of timing. So far, N3 development is very smooth and successful, and we still target the rich production in next year and ramp up in the second half. There is all the schedules, it is working with our customers.

Okay, and then Gokul, your second question is on the leading edge, and in light of the recent U.S. regulations how will we manage our capacity at the leading edge? Will we see a gap in the utilization, or will we be able to fill it up? Dr. C. C. Wei: We should be no problem because as we just stated that the 5G is a megatrend and also HPC related applications continue to be very strong. And we observed that all our customers are very actively prepared for these two applications 5G and HPC. In addition to that, we also observed that all our customers are trying to secure their supply chain security, and which is very important, with this COVID-19 uncertainty.

Do we feel that even for N5 that is applicable or… Dr. C. C. Wei: Yes, even with N5, yes. Dr. Mark Liu: Let me answer that. I think for the short-term some impact is inevitable. Currently, we work closely with our customer very dynamically trying to fill up the capacity. And for the long-term, as CC mentioned, we are very, we are still optimistic.

Okay, thank you Gokul. Can we have the next caller, please?

Next question is from Sebastian Hou, CLSA. Go ahead please.

Hi, good afternoon gentlemen. Thank you for taking my questions. So my first one is, I wanted to get some, get your brain about how do you evaluate the feasibility and probability of building up advanced new fab without American content, be it technology equivalent IP material et cetera in the next five years or 10 years or even longer? Does it work or even if it take a long time instrumented efforts would SMC ever consider that? Thank you. Dr. C. C. Wei: Well, let me answer that question. We know that the U.S. fab as compared with the fab in Taiwan, the cost structure is actually little bit higher and that's why we say that we are working with Federal Government and also the State of Arizona, due to close okay?

Yes, sorry. Just to repeat the question. I think Sebastian's question is asking about building up an advance node fab or production line without using any so called American content, whether in terms of equipment, technology, or IP materials. He wants to know in the next five to 10 years, is it feasible? Is it worth it? And is this something that TSMC would consider? Dr. Mark Liu: Let me pick up this one here. The semiconductor technology is very unique in this industry. The technology continued to improve, every two years, you'll be a new generation of technology come out to serve the best performance product. And therefore, we I think our main force is still pursuing the technology leadership, trying to overcome each generation's challenge. And to do that, I think our current focus still working with our equipment partners, dealing with utilize the best of the kind equipments, that we can have, to pursue our business growth. So, you're right, if we do that otherwise, technology advancement will be extremely challenging. It will be extremely difficult, not to talk about 5 to 10 years alone. So that is not our current effort at this point.

Okay, Sebastian. Do you have a second question?

Yes, yes, thank you for that very clear one. Second question is I'd like to follow about the payment situation. The first, can you update us on how you see the fabless data inventory at the end of Q2 and how you see that in the second half of this year? And also on the inventory side, it looks like it is getting increasingly difficult to get the inventory from a comprehensive perspective, fabless DOI [ph] may not be enough because apparently there's a lot of the Chinese companies stockpile the inventory in fear of being sanctioned and also across the board globally, the whole supply chain has been raising the stakes or level of inventory in the past few months a fear of supply the disruption caused by COVID-19. So, but those are not reflected in fables DOI [ph]. So, how do we see about this inventory and potentially hidden excessive inventory situation going forward? Did you consider about that to be a potential [indiscernible] and at some point the destocking could come. Thank you.

Okay, let me summarize your second question Sebastian, both of it relates to the inventory situation. The first part is, what is in for TSMC tracking our fabless customers? What is the fabless DOI exiting to queue and the outlook into second half? That's the first part of your question. And then the second part of your question is, are we concerned that the inventory situation may see some hidden or discrepancies due to whether it's COVID related supply chain disruption, or the U.S. regulation and such, will this lead to a hidden inventory risk, and is there a risk of inventory correction? Dr. Mark Liu: Let me answer that. The inventory level of our fabless customers that we track exited first quarter above the seasonal level. We expect a further increase in second quarter, and then stay at the high level in the second half as the supply chain is making efforts to ensure supply chain security and our customers are in high anticipation and preparing for new 5G smartphone product launches in the second half of this year. We cannot rule out the possibility of an inventory correction sometime down the road. We observe the supply chain active, making efforts to ensure the securities, and active preparation for 5G smartphone launches. We will just have to wait and see how the sell-through goes.

Okay, thank you Sebastian. Can we move on to the next caller please? Operator, please move on to the next caller.

Thank you. The next caller is Bill Lu from UBS. Go ahead, please.

Yes, hi. Thank you. Thanks for taking my question. I'm wondering if you can comment on the CapEx guidance for this year, it's now raised to 16 billion to 17 billion. I'm wondering what that increase is, whether it's 5 nanometer or something different? Secondly, related to that, can you talk about your CapEx intensity structurally whether this is, this increase is temporary and whether this is pull of in front from [indiscernible] for maintaining the dollar driven intensity or how we should think about that? Thanks.

Okay, let me summarize your two questions Bill. Your first question is in relation to our 2020 CapEx guidance and the range of 16 billion to 17 billion. So, Bill wants to know what is driving this increase? And then secondly, in terms of the capital intensity outlook over the next few years?

Okay. The CapEx increase from three months ago for this year is basically comes from the advanced technologies, and the capital intensity this year will be slightly lower than 40% and over the long-term, it will gradually go down to above mid-30s.

Okay, thank you, Bill. Let's move on to the next caller, please? Operator?

The next caller is Brett Simpson from Arete Research. Go ahead please.

Yes, thanks very much. I wanted to ask about your relationship with Huawei and how you see the impact of the U.S. regulation on your business with Huawei in the second half of the year. My understanding is that you will still have a relation - you will still be shipping wafers, probably at elevated levels in Q3. So can you confirm whether or not you'll have any sales with Huawei in Q4? And in a note how do you manage your 5 nanometer utilization, given the importance of Huawei as a customer? Thank you.

Okay. Let me summarize your question, Brett, is regard to the relationship with Huawei, but wants to know what is the impact on our business from Huawei in the second half of this year? Will we continue to ship wafers to this customer in the fourth quarter? If we do not, then how will we manage the impact to our 5 nanometer?

Okay, let me answer your question. As CC just reported we are complying fully with all the regulation and we did not take any new orders or production starts from this customer since May 15. Although this regulation is just finished their public common period, the BIS has not, did a final ruling change at this point and so it's very early, still early to confirm. But under this current status we do not planning to ship wafers after September 14. And yes, there will be a challenge to work dynamically with other customers, thus currently we're working with them. And, but as you heard, we made a - CC Just made our 2020s guidance is above 20%. That tells you we are relatively progressing well in filling up the left - capacity left open.

Okay, Brett. Thank you. Do you have a second question?

Yes, thanks Jeff. Just a follow-up and I wanted to ask about depreciation for this year. I think previously you've talked about mid-to-high teen growth of this depreciation in 2020. Can you confirm whether that's still the case? And I look at the first half depreciation and it looks like depreciation costs are down year-on-year. So in order to get to the mid-to-high teens growth, that would imply a large increase in depreciation in the third and fourth quarter. So if you can just clarify exactly how we should think about depreciation for the next couple of quarters that would be great? Thank you.

Okay, Brett is asking his second question is our depreciation outlook for 2020, do we still maintain, what is our depreciation for 2020 year-on-year, and then does this imply a pickup in depreciation in the second half on a quarterly basis?

Okay, Brett our current estimate on 2020 depreciation year-on-year growth is still high teens growth. So that gives you an idea of what the second half depreciation will be. It will be higher than the first half.

Thank you.

Okay, thank you, Brett. Can we have the next question on the line, please?

The next one on the line is Mehdi Hosseini from SIG. Please ask your question.

Yes, thanks for taking my questions. I wanted to go back to your N4 and N3, and how should we think about the migration and specifically to what extent it is driven by converting rather than installing new equipment? And I have a followup.

Okay, sorry Mehdi. Let me make sure we understood your first question. You're asking about N4 and N3, how to think about the migration and is there a conversion, tool conversion involved between N4 and N3? Is that your question?

Correct.

Okay. Dr. C. C. Wei: All right, actually the N4 is kind of improvement, continuous improvement from N5, so it has improves the speed, improved geometry just a little bit. N3 is totally new node alright? So that’s N4 used in the same equipment as N5. N3 we expect to have a high percentage of the tool continue to be used from the N5, but N3 is a totally new node.

Okay, thank you. Do you have a second question Mehdi?

Yes and my second question has to do with your HPC revenue growth in Q2 you were significantly higher compared to Q1 within the - and can you please elaborate which specific sub segment within HPC is doing better, is it driven by communication or computer and how do you see those trends trending into Q3?

So Mehdi, your second question is looking at our HPC sequential growth in the second quarter, Mehdi wants to know what specific sub segments are driving that increase and what is the outlook?

Well Mehdi, I don't think we - we want to breakdown the details on the different platforms. Sorry about that.

Okay, Mehdi?

The concern is that maybe perhaps Huawei may have pulled in before you stopped taking orders and I'm trying to understand how that particular customer has computed wafer in the first half versus second half?

Sorry Mehdi, no we don’t comment on specific customer.

Okay, thank you Mehdi.

Thank you

Thank you. Can we have the next caller on the line, please operator?

Yes. Next one Randy Abrams from Crédit Suisse. Go ahead please.

Okay, yes. Thank you. My first question, I wanted to ask a bit more on the CapEx rates as that’s more of a function of what you mentioned the forward demand outlook. If you could give a view on 2021, I know it’s in early stage, we just factoring a full year, how we mentioned Huawei and also mentioned potential, but you don't rule out an inventory correction, and it does seem like Samsung and this is discussing a bit about some graphics and high-end smartphone business, some [indiscernible] like it is the - the CapEx rate is what’s driving it, if there are certain drivers that may be lifted on the 2021, how you’re seeing that and implication is it follows up on Bill Lu’s question, but implication for 2021 if it’s impact it might be a bit lower CapEx that you are spending at a bit head of that now.

Okay, so Randy, let me summarize your first question. Your first question is really, what is driving our rates for the 2020 CapEx? What is the drivers for that? And then what is the outlook for 2021 CapEx?

CapEx and sales, the sales just factored in your comments about inventory. If your competitor is taking a bit of a sound [ph] business and also your view that we could have a - or don't rule out the inventory adjustment? Dr. C. C. Wei: Let me discuss, CapEx is a - we do the CapEx based on long-term perspective. If you talk about '20, this year's CapEx, mainly of course this shows our demand of N5 is very strong. And if you talk about the next year's CapEx, is really talk about 2022's demand, which we see the continued increase of N5 demand and also we see them starting the launch of N3 technology. And will see by then, how much the CapEx will increase and we will report to you in due time.

Okay. Do you have a second question, Randy?

Yes, and if I could follow up because you mentioned, like to the higher CapEx for this year is a function that you expect next year to be even stronger. So could you talk a bit about when - I know you talked about the megatrends, but I'm curious if you're thinking about just what you mentioned also, could next year have impact from the high base this year on the inventory build-up? And also you have a full year, like in the first quarter far ways out, there's probably pent-up demand being tight. But how do you view a full year if you're not shipping the following, unless you're counting on by that point some partial license to work in your base case you're assuming not shipping to Huawei by next year?

Okay, Randy's second question. He wants to - he is thinking that with potential possibility of inventory correction with the U.S. regulations will that impact - what is the impact to 2021 growth outlook and CapEx?

Yes, Randy. It's just too early for us to discuss anything about 2021. So we'll just wait until when the time approaches.

Okay. Thank you, Randy. Let's move on to the next caller please.

The next one is Roland Shu from Citigroup. Please ask the question.

Hi, there, good afternoon. First question is, can you remind me again how does the inventory ratio adjustment work every quarter? How about the 3Q, if based on your inventory ratio adjustment favorable or unfavorable to the gross margin? This is my first question. Second question, which is you talked about that you are working with top customer to minimize the impact of the U.S. new regulation and how are you going to – are working on that? Thanks.

Okay. So, Roland your two questions. Your first question is, what is the impact of inventory revaluation and then in the third quarter will it be a favorable or unfavorable impact? And your second question is, you want to know how we are dynamically working with customers to mitigate the impact of the new U.S. regulation?

Roland, let me make some comments on the inventory valuation adjustment first. The impact on margins from inventory valuation adjustment is inversely correlated to that from changes in utilization. We normally report the net impact on margins from these two factors together. We will compare margins quarter-over-quarter, we will report the Q-on-Q change in impact from inventory valuation adjustments when it is more significant. In the second quarter, the quarter-over-quarter change and impact from inventory valuation adjustments was more significant. And if you ask about third quarter, at this moment, we believe the impact is less significant. Dr. C. C. Wei: Okay. And then asking about how we work customers dynamically to mitigate the impact of Huawei ban, I cannot tell you that how we are going to do it because this is our company's strategy and our strength, but one thing I can tell you we are based on the technology leadership and the excellent manufacturing. That's all we did.

Okay, thank you. Operator, can we move on to the next caller please?

Yes. The next question, Charlie Chan, Morgan Stanley. Go ahead please.

Hi, good afternoon, management team. So, my first question is really about your upward revision of the full year revenue guidance. So compared to last time, it was a mid-to-high-teen percent and now it is above 20%. I think this is a lift of 5 percentage points of revenue growth in 2020. But last time your assumption is that the pandemic can get controlled by June and now generally there is a second wave of the pandemic in many countries. So how are you going to reconcile this kind of weak economy or a healthcare-related issue versus your very strong revenue guidance? Should I just attribute that to the higher 5G smartphone penetration or there are other factors that we should pay attention to?

Okay. Let me summarize your first question, Charlie. You are asking, basically we have increased the full-year outlook, but the risk of COVID-19 continues to remain. So how to reconcile a weak global economy with TSMC's full-year outlook and what will be driving this besides 5G smartphone preparation? Dr. C. C. Wei: Well, Charlie, we too observe the 5G's smartphone, the momentum is getting stronger, so we understand the situation. However, we also observed our customers are making efforts to ensure supply chain security. So they might expect there's a second wave, third wave of COVID-19, but since that end demand looks very promising, so they are not afraid to make sure that their supply chain will not be disrupted. Because of a 5G, as you just mentioned, 5G smartphones demand has continued to increase.

Okay. Do you have a second question, Charlie?

Yes, I do thanks. Thanks Jeff. So, I think a lot of things happened over the past months, right. And other - I would take it as a U-turn is your decision for the U.S. fab intention, because half-year ago I remember the comment was like the cost is pretty high, logistics doesn't makes sense. So what exactly is the trigger for you to change this U.S. operation decision? And it will be very kind of you, if I can - had a very small question, because [indiscernible] as well, your first quarter seasonality, because based on your new full-year guidance, if we would take it as a 20% or 25% - 21% lower, the fourth quarter revenue may decline sequentially. Is that a kind of fair comment? Thank you.

Okay. Well, Charlie your second question relates to our U.S. fab plant and you want to know why six months ago we were talking about the cost gap being the major challenge and now we have decided to go ahead. So what has changed?

Yes. What's the trigger, yes. Dr. C. C. Wei: Well, as you know, with expanding our technology ecosystem and reach to global talent, closer to our customer and to get a better service, all benefits are the fab in U.S. But, in the past, indeed, the cost, the gap prohibited us to make those decisions. More recently, I think since last December and I think the things is getting a turn, and we did get the positive encouragement from the U.S. administration and about the cost gap, and actually they – U.S. administration and the State of Arizona combined, they do - they seems to be able to close the cost gap. We used to hold up against this decision with their commitment and we are preparing for that. And how do they close the cost gap? As you have reading, we - the U.S. Congress both in Senate and the House are all driving for the incentive packages aimed at revive U.S semiconductor manufacturing. And with that, I think they do have a way to fulfill that commitment to make up the cost gap and that was the major decision turning point.

And then, Charlie, he snuck in a third question, which he wants to know our outlook for fourth quarter, given the full-year guidance.

Okay. Well, Charlie, it's also too early to talk about fourth quarter. But I think you can do the math and come up with certain estimation, but what we can say is our second half will be growing - will be higher than the first half.

Yes. Okay, thank you. Let's move on to the next caller on the line, please?

The next one to ask questions, Bruce Lu, Goldman Sachs. Go ahead, please.

Hi, thank you for taking my question. I think given your positive progress in 3 nanometer and 5 nanometer and special vision of CapEx, can we assume that similar to previous node like 7 nanometer or 12 nanometer that the first year of 3 nanometer can achieve 10% of the wafer revenue in the second year of the 5 nanometer can achieve 30% of the wafer revenue?

Okay. So, Bruce your first question is regards to N5 and N3. Bruce wants to know with the progress in 3, can it be contribute 10% of the wafer revenue in the first year? And he also wants to know can N5 contribute 30% of the wafer revenue in its second year? Dr. Mark Liu: Okay, Bruce, both of them are really too early to talk about. We certainly hope that they will be pretty big nodes, but we will definitely let you know when time is closer.

Do you have a second question, Bruce?

Yes, I think to just double-check that, we raised our 5G penetration shipment or forecast, but we lowered the overall smartphone shipment forecast for 2020. And how about the actual number for the 5G smartphone shipment, is that the penetration is up because of the lower total smartphone shipment or the 5G smartphone shipment, is service going up as well?

Okay. So your question - second question, Bruce is that we - the global smartphones shipment we now lowered to low teens decline, but we raised the 5G penetration to high teens. Is this simply because of a lower, smaller global base or what is the 5G penetration number? Dr. C.C. Wei: Well, the 5G penetration, as I said, momentum continued to increase. So even with the total smartphone number being decreased at the low-teens, but 5G's percentage continued to increase and that's what we observed and also the 5G's semiconductors content is higher than the 4G and high - especially high-end is much higher, so that's what we based on.

Okay. Thank you, Bruce. Operator, can we move on to the next question on the line, please?

The next on the line is Aaron Jeng from Nomura Securities. Go ahead please.

Hey, thank you for taking my question. Can I ask a followup to Bruce's question, just right now. He was asking, by lowering the total smartphone demand to low teens, 10% to 15% now from earlier version of 5% to 10%, but raising 5G penetration rate to 15% to 20% from earlier on in mid-teens, say 15% and - but in terms of the absolute 5G phone demand or selling number, is the number being raised or it's pretty much the same as the prior version? That's a followup. Actually this is a part of my first question, but just happened to be a followup to Bruce question.

Okay. Aaron, let me summarize your first question. Basically Aaron wants to know, is the - is our forecast for 5G smartphone in terms of units increased?

The answer is yes.

Okay?

Okay, thank you.

What is your second question?

Okay, good. Let me - so, okay, let me ask my - this question that - I was trying to compare the outlook offered by TSMC for the industry and the outlook given six months ago. In the year beginning of the year, year beginning TSMC was saying that semi excluding memory was going to grow by 8% and now it's going to be flattish to slightly grow, which means I think overall demand including everything is lower than it was six months ago. But total growth in the year beginning was 17%, but now it's pretty much unchanged, mid-to-high-teens growth. TSMC's growth in the year beginning was above the industry growth, now it's above 20% growth. Okay. So my question is over the next six months TSMC along with actually everyone in the world, particularly in tech have - has experienced two difficult challenges, including, one, COVID-19 and two Huawei issue, but it turns out that TSMC is doing even better than there was no two - these issues. So I wonder - actually I think the CEO already said that the 5G absolute unit demand is going to be higher than you saw six months ago, which is one I think key reason, but it looks to me that, that factors - two negative factors are still huge. Actually one - either one of them is big, right? So - but even turn out be better than if there is no, these two negative impacts. So how should we think about this? Earlier also Chairman said that…

Okay. I think, let me summarize your question because it is quite long. I think to - in essence what you're asking is, when you look at the industry framework that TSMC provided in the beginning of the year and you look at the framework now, you point out that the semi ex memory growth in January, we said plus 8, now we said flat to slightly up. Foundry growth in January, we said 17% increase year-on-year, now we say mid-to-high-teens. But for TSMC growth, we're now saying greater than 20%. So, given the challenges in this year from COVID-19 and such, what is driving TSMC's stronger growth? Dr. C.C. Wei: Well, I can answer that question by simply one word, technology leadership. Actually we see a very strong demand from our 7 nanometer and 5 nanometers technology. And 5G again, I would like to say that 5G's momentum is getting strong.

Okay. Dr. C.C. Wei: And including also HPC, I'm sorry. Yes.

All right, thank you. Operator, can we move on to the next question please, from the line?

Next we're having Gokul Hariharan, JPMorgan. Go ahead please.

Thanks for taking my followup question. First of all, I just wanted to understand, we are running at 20-plus percent growth this year. Any thoughts on - I mean we expect some of these megatrends to last. Any thoughts on why we aren't changing our long-term 5% to 10% target, especially given you're also spending more CapEx for - I know IP [ph] is similar and probably we need to be at a slightly higher growth rate. That's my first question. Second, just wanted to understand what is management's view on how much of this year's outgrowth compared to the semiconductor industry has been some of this inventory build [indiscernible] and over the last several years, is very good years that you've simply outgrown the semiconductor industry or the foundry industry by a significant margin. And this seems to be one of those years where even smartphone is not really growing, but you are declining, while TSMC is growing more than 20%. So just wanted to understand, there is quite a bit of gap between the real demand and market share gain in leading edge, but any thoughts on how much of that do you feel that some of this inventory and supply chain security inventory that your customers are building?

Okay. Gokul, let me summarize your two questions. Maybe I'll start with the second question first. You just want to know management's view, the fact that TSMC's growth in 2020 is outpacing the foundry industry, can we break down what is driving this? How much of it is from supply chain - efforts to ensure supply chain security, how much of it is market share gains, how much of it is due to leading edge? Dr. C.C. Wei: We certainly - at this time, I don't think we can separate them so clearly each one, that is because of our technology, because of the share gain, because of HPC or something like that. Again, I would like to emphasize the need and the leading edge technology node on 7 and 5 and that's what we are getting our advantage.

Okay. And then, your second question, Gokul to repeat again, is that with the strong growth we see this year and the megatrends that we identified for the next several years, is there - will there be a change in our long-term growth target? Dr. C.C. Wei: Well, we continue to emphasize that we will be at the high end of 5% to 10% CAGR. Remember, this kind of forecast is a rolling forecast. So we continue to have confidence in our technology and also our market share and so our growth.

Okay. Thank you, Gokul. Operator, can we move on to the next caller from the line?

Next one, we are having Sebastian Hou from CLSA. Go ahead please.

Sebastian, are you on the line?

Sorry, I forgot to unmute. Can you hear me now?

Yes, we can hear you. Please go ahead.

Okay. Okay, thank you. So I have two follow ups. First one is that the 5 nanometer revenue contribution is lower from 10% to 8%, but total revenue outlook is raised. So if we do the math and 5 nanometer revenue probably lower by 15% compared to April, if we further compare to January guidance then actually 20% lower. So how do we attribute this? Is it to the customers that got sanctioned in May, or any other reasons? And furthermore it also means that the other technology nodes are actually growing stronger. So I wonder what's your - what was driving the other applications, node and also can you give us an update on your expectation for growth for the four major platforms with the new revised up guidance? Thank you.

Okay. So, let me summarize Sebastian's question. He wants to know what is driving the difference in terms of N5 today versus six months ago and what other nodes then are stronger? And then he also wants to know the 2020 outlook - growth outlook by platform.

Okay, Sebastian. Actually compared to six months ago our N5 revenue actually increases and so do the other nodes. Maybe you can double check the math.

And then the 2020 growth outlook by the four platforms.

On okay. All the platforms will grow, except the automotive.

Okay.

Okay. My second question is also follow-on the 5G smartphone, also the total smartphone guidance you just - just gave and the other hand it impacts about, so what are the - it looks like the total 5G smartphone numbers - absolute number is raised. And I want to - was it based on the forecast on the final sell-out numbers or based on the forecast that you're seeing from your smartphone SOC fabs? Thank you.

Well we based on the one what we saw customer. So that's our numbers, that our customer demand to TSMC. Of course, they are also doing their forecast as we did.

Okay, thank you, Sebastian.

Yes, Sebastian, sorry. Okay, let's move on to the next caller.

Next one, we're having Mehdi Hosseini of SIG. Go ahead please.

Yes, sir. Thank you so much for taking my followup. I'm a little bit confused and I was wondering if you could help me, all the 5G smartphone data points suggest that the smartphones that are selling through are priced well less than US$300 and also your commentary suggests that despite the fact that COVID has had a second wave your outlook is actually stronger. So how can we reconcile this 5G smartphone, which is mostly driven by low-end and the second wave of COVID with your outlook?

Okay. Mehdi, your question is, how - your observation is that 5G smartphone sell-through is mainly coming through at the low end 5G smartphones, priced at US$300 or less and with the potential second wave of COVID, how can you reconcile this low-end demand with what TSMC has seen? Is that correct?

And also, your update for the year, because early in the last conference call you said your outlook is based on COVID normalizing by June, but it seems like there is a second wave.

So, Mehdi is also asking because in April, we said our outlook was premised on stabilization of COVID by June, but now it looks like COVID-19 continues. Dr. C. C. Wei: We don't - actually we don't confirm there is a second wave of COVID-19 per se. But we leave that one alone. We do observe that our customers have demand to TSMC. And you mentioned that the 5G is only in the low end, we do expect there is a lot of new 5G phones, pretty high-end in the second half of 2020 and that's what we based our assumption.

Okay, thank you.

May I ask one followup on CapEx?

Okay.

There is one detail of increase to 2020 CapEx, is that equally distributed between front-end equipment and backend or is it more in one particular area? What's driving the incremental increase?

Okay. So Mehdi, your second question is what – was the increase in the CapEx guidance, is it more driven by the front-end or the backend for 2020? Dr. C. C. Wei: Yes, well, basically it's front-end.

Okay, thank you. Operator, let's move on to the next caller.

Next one, we are having Laura Chen from KGI. Go ahead please.

Hi, there. Good afternoon. Thank you for taking my question and congratulations for the good results. Actually my question is also related to the advanced packaging. I recall that we mentioned that we have about 3 billion [indiscernible] for the advanced packaging last year for the revenue contribution. I'm just wondering what the latest guidance for this year. Any revenue target for advanced packaging, and also, what's our trend looking forward in this space? On the incremental increased CapEx do we also have some trend [ph] in this space?

Okay. So, Laura's question is related to the advanced packaging. She wants to know last year it was not 3 billion it was 2.85 billion. So what is the growth outlook for this year? Number one. And then what's the plan for advanced packaging, the outlook going forward? Dr. Wendell Huang: Okay. We expect that the advanced packaging will grow probably similar to our corporate average this year. As to the CapEx increase yes, a little bit, but mostly at the front-end, and with the advanced technology.

Okay. Do you have a second question, Laura?

Yes. My second question is about the legacy process and also like 28-nanometer, we all know that advanced packaging we are very strong and fully loaded. I'm just wondering that for the legacy capacity and the utilization rate and especially for 28-nanometer as CC also mentioned before that you see structurally overcapacity in this space. Looking forward, can we expect improvement in second half of next year, given our good progress in the RFID or the CIS, et cetera?

Okay. So let me summarize your second question, Laura is looking at our mature nodes, what is the utilization outlook for our mature nodes and specifically for 28-nanometer? Do we see improvement in second half of 2021? Dr. C. C. Wei: All right, let me answer that. Our mature node or we call it specialty, our mature nodes I don’t think actually is quite good except 28-nanometer. Okay? I still want to emphasize that 28 nanometer has been overcapacity for the whole industry, but we continue to improve it, and slowly, of course, we can see that CMOS [ph] and also other applications that were moving to 28-nanometer, but it is slower than we thought. However, it will be improved. We have confidence to say that.

Okay. Thank you, Laura. Operator, let's move on to the next caller.

Next want to ask questions, Randy Abrams, Credit Suisse. Your line is open now.

Okay. Yes, thank you for the followup questions. First one I wanted to just go back with a clarification on the Huawei, if you're factoring in for the future view and the potential shipments, I think one is the regulation seemed to allow some ways to shift about, I know you will comply by the rules, but it seems to allow some way to ship directly to OSAT. I am curious, either from that or perspective that you get a partial or full license, if you're building that into the base case? Dr. Mark Liu: Actually, the current, the current regulation spells do not prohibit the standard product or general product to be able to ship to Huawei. And therefore, we think Huawei's smartphone business, will most likely they may strategize to stay by procuring general purpose products.

I think Randy part of your question is that from TSMC's perspective are there alternative ways to ship to this customer such as shipping to OSAT or will we have a partial license? Dr. C. C. Wei: No, no, we don't, we don't have alternative way to ship.

Okay. Okay if I can get the second question, if you could?

Randy, did you, are you still there?

Nanometer if that's a bit of a steep ramp up [technical difficulty] sorry, maybe available in 2020.

Sorry. Randy, you dropped off for a second. Can you repeat your second question again?

Yes, it's actually more about these half nodes. The 4-nanometer will be available, I think mass production early 2022, so with 3 coming out late in the year, if you're expecting that would be the steep ramp, so we could see high volume, it also could allow you I think with the tool reuse a bit lower spend. So I'm curious how you're thinking about that? And then also on the 6-nanometer, if you're still seeing most of the customers from 7 migrate to 6. Well, I think previously expected majority could end up going to that half node. Thank you.

Okay. Your second question, Randy is related to, and N4 and N3 and thus will we with the timing differences of N4 and N3 will we see lower spend as a result? Randy's view is that N4 will be early 2022, N3 will be late 2022 and then so with some conversion will that result in lower spend? And he also wants to know for N6, we've talked about it before. Do we see still a strong migration of our customers from N7 to the ex N6? Dr. C. C. Wei: But let me answer the second one first. On the N6, yes, we have been over to our customer with compatible of actually the fully compatible to N7, so it will have a very good opportunity to catch the second wave of 7-nanometers product. With the same kind of strategy we offer N4 to follow that N5. So we do expect that N5 as product finally, a lot of a large portion of the N5 product will move to N4. So, it's not the two mix that we say N3 is appropriate so N3 is ramp up. N3 is another full node, it's not a - it's more advanced, that's by nature. So again N5, so N3 is a N3, N4 is a N4.

And then N6, do we see a strong…? Dr. C. C. Wei: Yes, we - I already said that N6 is following the N7. Okay?

Okay, operator, let's move on to the next caller.

Next one we are having, Charlie Chan, Morgan Stanley. The line is open to you, now.

Thanks for taking my followup question. So two parts, firstly is that the N3 and CapEx do you spend some CapEx for N3 this year so that's another reason why you'll see a CapEx upward revision?

Okay. Charlie, your first question is that for 2020 CapEx, do we spend - does it include spending for N3? Dr. C. C. Wei: Charlie, part of the CapEx this year is for N3, but that's not the reason for our increase in CapEx.

Okay. And do you have a second question, Charlie.

Yes, I do. So every quarter, I ask this question about the time of completion and notably, you're trying to compete [indiscernible] to make the Asia IPO with a very high valuation, and suppose the both money can spend for the future of CapEx or even revenue growth. And so - and I'm not saying that - in the recent quarter that in the long-term do you think that there is a threat, and you probably may lose market share to China players given they won the localization or you have any China strategy to accommodate to China's localization policy? Thank you.

Okay. So Charlie, your question is that what is the threat from Chinese foundry competition, do we see it as a growing threat, how do we respond? Dr. C. C. Wei: Charlie, I also answer every time that we compete the technology and the manufacturing and the customer relationship and localization in China in other area we stay the same, we compete in technology, manufacturing and we have been keeping very good relationship with our customer, we won their trust.

Okay, thank you. In the interest of time, I think we'll take the last two callers on the line.

Next one, we are having Bruce Lu, Goldman Sachs. Go ahead please.

Thank you for taking my follow-up question. The first quarter is known for the capital intensity. I think, I remember, like six months ago, management was talking about capital intensity will go back to 30% to 35% for 2021, but earlier management was talking about, you will go back to closer to 35%. So do we foresee that the capital intensity norm will be closer to 35% or the norm will still remain at 30% to 35%?

Okay, Bruce. I think our comment is over the long run it will go to above 35% and that remains the same.

Okay I understand that. My second question is that, we saw that TSMC announced two new factories for the packaging this year just did the groundbreaking the sites for the factory is pretty big. Do we anticipate that the advanced packaging penetration rate will be a lot higher in the advanced node and what's the future outlook for the advanced packaging?

Okay, so your second question is the - Bruce wants to know that we announced a large advanced packaging site recently. So he wants to know what is the penetration rate, so to speak, for advanced packaging in the leading nodes going forward and what is the outlook? Dr. C. C. Wei: Well, we do work with our customer closely, and we do see some increase on the demand of advanced packaging and therefore we try to enlarge our capacity, that's for sure. But then these traits that we enlarged our advanced packaging capacity is for leading edge also for specialties. There is a new demand coming out and we have to work with our customer to mitigate their requirement.

Okay. Operator, thank you, Bruce. Operator, can we take the last caller on the line, please?

Yes, the last one to ask questions is Sebastian Hou, CLSA. Go ahead please.

Thank you. Next on the CapEx increase, the 1 billion CapEx increase, which particularly node did that go to? Thank you.

Sebastian wants to know with the increase in the CapEx to 16 to 17 billion from 15 to 16 previously, what node is the CapEx spending going to be it? Dr. C. C. Wei: It's leading edge.

Okay, got it. Then maybe one last question is, I think the U.S. senator has proposed to bills, the CHIPS Act and American Foundry Act in June. So I am wondering that the, how does that cover with TSMC Arizona plant and if that were to be passed that they will be passed will TSMC or a non-American company are eligible for the potential subsidy? Thank you.

Well, Sebastian, just to make sure we understand your question. Your question is related to some of the proposed regulations in the U.S., such as the CHIPS Act and the AFA, if these bills were to be passed, whether it would be eligible for TSMC or the industry? Dr. Mark Liu: Yes, it's well aligned with our request and if those bills in different form passed, I think the administration in the State of Arizona will make this project happen.

Okay. Thank you, Sebastian. Thank you.

Thank you. This concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within four hours from now. The transcript will be available 24 hours from now and both of them will be available through TSMC's website at www.tsmc.com. Thank you for joining us today. We hope everyone continues to stay healthy and safe and we hope you will join us again next quarter. Goodbye and have a good day.