Taiwan Semiconductor Manufacturing Co Ltd

TWSE:2330

Earnings Call Transcript 2018-Q4

[Elizabeth Sun, executive]

[Foreign Language] Happy New Year to everyone. Welcome to TSMC's Fourth Quarter 2018 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Senior Director of Corporate Communications and your host for today. Today's event is webcast live through TSMC's website at www.tsmc.com. [Operator Instructions] As this is conference is being viewed by investors around the world, we will conduct this event in English only.

The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the fourth quarter 2018 followed by the guidance for the first quarter of 2019. Afterwards, Ms. Ho and TSMC's CEO, Dr. C.C. Wei, will jointly provide company's key messages. Then TSMC's Chairman, Dr. Mark Liu, will host the Q&A session, where all 3 executives will entertain your questions.

For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation.

As usual, I would like to remind everyone 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 microphone to TSMC's CFO, Ms. Lora Ho, for the summary of operations and current quarter guidance.

[Lora Ho, executive]

Thank you, Elizabeth. First of all, Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights, as usual, for the fourth quarter and a recap of 2018 for the whole year. Then after that, I will provide a guidance for the first quarter.

Fourth quarter revenue increased 11.3% sequentially to TWD 290 billion as our business benefited from the strong demand for our 7-nanometer technology, covering both mobile and high-performance computing applications. Gross margin increased 30 basis points sequentially to 47.7%, reflecting the absence of the virus incident that occurred in the third quarter and an improvement in back-end profitability, higher capacity utilization and the more favorable foreign exchange rate. These factors helped offset the unfavorable technology mix. Total operating expenses increased by TWD 2.7 billion, thanks to the operating leverage only represented 10.6% of the revenue versus 10.8% in the prior quarter. And operating margin increased by 40 basis points sequentially to 37%. Overall, our fourth quarter EPS reached $3.86, and ROE was 24.6%.

Now let's take a look at revenue by technology. 7-nanometer process technology continued to ramp strongly and accounted for 23% of wafer revenue in the fourth quarter. 10-nanometer was 6%, and the combined 16/20-nanometer contribution accounted for 21%. Advanced technologies, 28-nanometer and below, accounted for 67% of wafer revenue, up from 61% in the third quarter.

On a full year basis, 7-nanometer contribution reached 9% of wafer revenue in 2018. 10-nanometer was 11%. And the combined 6/20-nanometer (sic) [ 16/20-nanometer ] contributions was 23% of wafer revenue. Advanced technologies accounted for 63% of total wafer revenue, up from 58% in 2017.

Now let's take a look at revenue contribution by application. During the fourth quarter, Communication increase 27%, while Computer, Consumer and Industrial/Standard decreased 2%, 35% and 3%, respectively. On a full year basis, Computer, Communication and Industrial/Standard increased 61%, 1% and 3%, respectively, while Consumer decreased 17%.

Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of TWD 695 billion, an increase of TWD 91 billion from the last quarter. On the liability side, current liabilities increased by TWD 19 billion. On financial ratios, accounts receivable turnover days was 41 days. Days of inventory decreased 6 day to 67 days due to stronger wafer shipment during the fourth quarter.

Now let me make a few comments on cash flow and CapEx. During the fourth quarter, we generated about TWD 189 billion cash from operations and spent $114 billion in capital expenditures. As a result, we generated free cash flow of TWD 75 billion, and our overall cash balance increased TWD 89 billion to reach TWD 578 billion at the end of the fourth quarter. In the U.S. dollar terms, our fourth quarter capital expenditure reached USD 3.7 billion and a total USD 10.5 billion for the full year CapEx.

Now I would like to give you a recap of our performance in 2018. 2018 was another growth year for TSMC as we continue to set new records in both revenue and earnings. Despite the weakening macroeconomic outlook and demand headwinds in certain end applications, our revenue grew 6.5% year-over-year in U.S. dollar term and 5.5% in NT dollar terms to reach about TWD 1 trillion. Main contributor was the strong demand for our 7- and 10-nanometer wafers. Gross margin decreased 2.3 percentage points to 48.3%, reflecting a lower level of capacity utilization, the unfavorable technology mix and an unfavorable foreign exchange rate during the year. Our operating margin decreased 2.2 percentage point to 37.2%, while we continue to increase investment in R&D for 7-nanometer and 5-nanometer technologies. Our effective tax rate was 11.7% in 2018, which was lower than 13.5% in 2017 due to lower retained earning tax. Full year earnings per share was $13.54.

On cash flow, we generated TWD 574 billion in operating cash flow for the whole year, spent TWD 316 billion or USD 10.5 billion in capital expenditure, leaving $258 billion in free cash flow. We also paid TWD 207 billion or $8 per share in cash dividend, which is an increase of 14% from the 2017 level.

I have finished my financial summary. Now let's turn to the forecast first quarter guidance. Based on the current business outlook, we expect first quarter revenue to be between USD 7.3 billion and USD 7.4 billion, representing 22% sequential decline. Based on the exchange rate assumption of USD 1 to TWD 30.6, our first quarter gross margin is expected to be between 43% and 45%. And operating margin is expected to be between 31% and 33%.

This concludes my financial presentation. Let me follow by making a few comments about the near-term demand and inventory, CapEx and profitability.

Now on near-term demand and inventory, we conclude the fourth quarter with revenue of TWD 287.8 billion or USD 9.4 billion, in line with the guidance given 3 months ago. This result was mainly driven by the continued steep ramp of our industry-leading 7-nanometer technology. Concluding 2018, semiconductor, excluding memory, growth was 8%, while foundry grew 6%. TSMC's revenue grew 6.5% year-over-year in U.S. dollars, mainly due to strong demand for our 7-nanometer technology.

Moving into first quarter '19, our business will be dampened by the overall weakening of the macroeconomic outlook, mobile product seasonality and the high level of inventory in the semiconductor supply chain. Due to the overall softening economic environment, semiconductor supply chain inventory exiting 2018 stayed at a much higher level than seasonal, we expect the excess inventory in the semiconductor supply chain will take a couple of quarters to digest. And the overall supply chain inventory will gradually approach to the seasonal level around the middle of this year.

Now let me make comments about the CapEx. As I have said it before, we believe USD 10 billion to USD 12 billion capital budget will be sufficient to support our average growth of 5% to 10% per annum in the next few years. Given the macroeconomic outlook in 2019, we are tightening this year's capital spending by several hundred million dollars to a level between USD 10 billion to USD 11 billion. That said, our commitment to support customers' product ramp remain unchanged. Out of this USD 10 billion to USD 11 billion CapEx for 2019, about 80% of the capital budget will be allocated for advanced process technologies, which includes 7-nanometer, 5-nanometer and 3-nanometer. A little more than 10% will be spent for advanced packaging and mask making, and about 10% will be spent for specialty technologies. So this is about CapEx.

Let me follow on by making some comments about our profitability. Okay, as I stated in our first quarter 2018 earnings call, I said TSMC's profitability is determined by the following 6 factors: number one is leadership technology development and ramp-up; and pricing; and cost reduction; and capacity utilization; and foreign exchange rate; and last one is technology mix. All these factors, except capacity utilization, determine our standard gross margin.

I have just guided first quarter gross margin to decline by 3.7 percentage points sequentially, at the midpoint of the guidance. This is primarily attributable to a lower utilization due to the overall weakening macroeconomic environment and the mobile product seasonality and the high level of inventory in the supply chain.

Due to the recent changes in high-end smartphone business condition, our 7-nanometer capacity will see a substantial cutback on utilization rate in fourth quarter -- in first quarter and second quarter, which is expected to hit our gross margin by more than 4 percentage point each quarter. Going forward, to better manage our leading-edge utilization rate, we will be working closely with customers for more effective capacity planning.

Looking at other profitability factors for 2019. Our 7-nanometer ramp-up remains very strong. We continue to provide value to customer and drive aggressive cost reduction. In the meantime, we are increasing our resource in specialty technologies development to backfill our mainstream technology capacity. With all the above factors, we expect our gross margin in the second half of this year will be better than first half. And we believe our long-term gross margin target of about 50% is still a good target.

Thank you for your listening. Now let me turn the podium to C.C. for his mark -- remark.

[C.C. Wei, executive]

Thank you, Lora. Good afternoon, ladies and gentlemen.

Let me start with our 2019 full year outlook. We forecast a slowdown in global GDP growth from 3.2% in 2018 to 2.6% in 2019 due to the weakening macroeconomic conditions leading to a dull growth for the semiconductor industry. For the full year of 2019, we forecast the overall semiconductor market, excluding memory, will grow 1%, while foundry growth will be flat.

For TSMC, we estimate our business will grow only slightly in 2019 given the slowing economic environment. Our 2019 business will be supported by the continuing demand for our 7-nanometer, where we see stronger interest from our customer in high-performance computing, mobile and automotive.

Even with a slow year like 2019, we firmly believe AI and 5G are the megatrends that will drive the future semiconductor growth. And we reaffirm our long-term growth projection of 5% to 10% CAGR.

Now I will talk about our 5-nanometer status. Our N5 technology development is well on track, with customer tapeout schedule for first half 2019 and volume production ramp in first half 2020. We are already in preparation for N5's ramp. All applications that are using 7-nanometer today will adopt 5-nanometer. In addition, we are expanding the customer product portfolio at N5 and see expanding addressable market opportunities. We expect more application in HPC to adopt N5. Thus, we are confident that N5 will also be a large and long-lasting node for TSMC.

Now I will talk about the ramp-up of N7 and N7+. Our 7-nanometer has been a very steep and successful ramp in second half 2018, and we expect continued ramp through 2019. Our customer portfolio is growing stronger while more applications such as HPC and automotive are coming to N7 as well. Customer tapeouts activity at N7 continue to be strong despite the cautious macro outlook. We are actually seeing increase in silicon content for AI and 5G-related product designs. We expect the 7-nanometer to contribute more than 25% of our wafer revenue in 2019.

Our N7+ yield rate is progressing well and comparable to N7. N7+ volume production is scheduled to begin in second quarter this year. As I have stated before, we are working with several customers on N7+ to support their second- and third-wave product designs. And we expect the N7+ contribution to the 7-nanometer family will grow increasingly larger over the next few years.

Now I will talk about TSMC's mature node strategy and our new 8-inch facility. For mature nodes, our strategy is that we do not increase larger capacity at mature nodes, but rather, we work with customers to develop specialty technologies that create differentiated and longer-lasting value to customers. Our recent plan for an extension at Fab 6 in Tainan is a part of this strategy. The extension is not an increase of wafer capacity per se, but the purpose is to increase the clean room space for more specialty tools. With successful execution of our mature node strategy, we believe we will be able to continually deliver good profitability in the future.

Finally, I will talk about our most important growth contributor in the next 5 year. As I just stated, we believe 5G and AI will be the megatrend underlying the ubiquitous computing which will drive the semiconductor growth in the future. With the successful ramp of 7-nanometer, we are able to expand our customer product portfolio and can add applications related to PC and tablets to the HPC platform. With this inclusion, we believe HPC will become the largest contributor to our business in terms of revenue growth in the next 5 years.

Thank you for your attention.

[Elizabeth Sun, executive]

All right. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants opportunity to ask questions. Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question. [Operator Instructions]

Now let's begin the Q&A.

[Elizabeth Sun, executive]

First question will go to -- will be coming from Crédit Suisse, Randy Abrams.

[Randy Abrams, analyst]

The first question I had was on the guidance both for the sales and the CapEx. You're lowering sales outlook to just slight growth but only making a small change to CapEx. Could you talk about the assumptions you're making for further market share gains or demand recovery and also the assumptions for 5-nanometer and EUV to keep the CapEx intact?

[Mark Liu, executive]

Okay. Good afternoon. I want to say Happy New Year again. Yes, welcome to the investor conference. Your first question, I would like C.C. to answer.

[C.C. Wei, executive]

You're asking about we'd only grow slightly, but CapEx did not decrease dramatically. Good question. We now become more conservative on CapEx. It's because of we forecast a slower -- a lower 5-nanometer's demand at the initial ramp. However, we still have to prepare enough capacity to support our customer. And we believe that today, with lower than a few hundred million U.S. dollar is to reflect the reality of expecting the high-end smartphone a little bit slower growth. But this year, this year is because of 7-nanometer's capacity has been good and that the demand -- actually, we forecast the number of the units of the smartphone, especially high-end smartphone, to be negative growth. Although we are -- I still want to say that for TSMC, the year-on-year from 2019 compared to 2018, the smartphone -- the mobile business, we still grow slightly on this year regardless of the unit is dropping, okay. And as a result, we expect -- as I just said, we expect the foundry business will be flat, but TSMC still grows slightly.

[Randy Abrams, analyst]

Yes, one follow-up to that, and then I'll ask a second question. For that capital spending change you mentioned on EUV, could you talk now about kind of magnitude and steepness? Like what type of ramp we should expect next year for that node? And on the CapEx, are you making any consideration with the slower environment to reuse more equipment? So that's a follow-up to the first question.

[C.C. Wei, executive]

Yes, we do expect that we, in the 5-nanometer, will use some of the 7-nanometer's equipment. To answer your question more correctly, actually, that why it's only dropped a little bit, a few hundred million U.S. dollar, because of an EUV tool, actually, we already buy a lot, all right? And we expect that one to continue to grow also. So the ramp-up of the 5-nanometer now definitely was slower than we expected, but we still think it's a long-lasting node because of all our customer who are using 7-nanometer today are engaged with TSMC today in their product design. So -- and in addition to that, we also increased our product portfolio, our customers' product portfolio. And that will be -- add something to HPC application. So look, it's not a blurry promise in this year, but we still have the confidence that 5% to 10% CAGR will be sustained.

[Randy Abrams, analyst]

Okay. I'll change -- the second question, but I'll follow up one more. For the 5-nanometer, if you could just talk a little bit more what's driving some of the change in consideration, if it's anything about the EUV readiness versus cost structure, mature 7 versus 5. Maybe if you can go into if now you expect a bigger 7 initially and what the factor for that is.

[C.C. Wei, executive]

Let's talk about EUV's readiness. We are progressing really well. So that's why I said the 7+, which are using the EUV, was started -- will start the production in second quarter this year. And our 5-nanometer's technology development, a lot are based on the EUV's progress. And 5-nanometer's technology development is on track. So that's one thing. And why we draw down our CapEx is because of we expect the high-end smartphones' growth will not be as strong as we used to project before, okay? We're already down a little bit, but still, we still see that the high-end smartphone will grow is because of 5G and AI's application.

[Randy Abrams, analyst]

I guess the question was more EUV, for it to be slower than original, maybe what drove the change to the EUV or to the 5-nanometer?

[C.C. Wei, executive]

I did not say the EUV will be slower.

[Randy Abrams, analyst]

5-nanometer?

[C.C. Wei, executive]

5-nanometer, no. It continue.

[Mark Liu, executive]

We -- the CapEx this year, majority of it is spent on 5. It's not even 3-nanometer. EUV's productivity continued to improve. And that modulate the CapEx we need to invest. So from the number, we are very confident that our 5-nanometer will ramp according to our previous plan. However, we do put a more conservative -- tighten up our CapEx under the -- those confidence to improve the productivity and make sure the lead time is tightened up enough to minimize the CapEx.

[Randy Abrams, analyst]

Okay. The lower 5-nanometer initial ramp though, could you talk about that, like what's the rationale for that lower initial 5-nanometer ramp?

[C.C. Wei, executive]

Okay. Well, I just said we expect a higher growth. But right now, we are -- will be more conservative on the high-end smartphones' growth.

[Randy Abrams, analyst]

5-nanometer's ramp?

[C.C. Wei, executive]

Yes.

[Elizabeth Sun, executive]

Next question will be coming from Citigroup's Roland Shu.

[Roland Shu, analyst]

First question is, C.C., you've said for the mobile business this year, you still expect some growth. But under your overall year, on the whole year, revenue grows just slightly. So how about the growth for your -- the other platform product, IoT, HPC and the automotive?

[C.C. Wei, executive]

Okay, Roland, you asked a good question. Smartphone grows slightly. IoT grow double digit. Automotive will be flat. HPC, if we're excluding the cryptocurrency mining, HPC also grows slightly. But cryptocurrency is a big drop from 2018 to 2019. So if we put the cryptocurrency together in the HPC, it's a big drop. It's almost a double digit.

[Roland Shu, analyst]

Okay. May we have more color for the breakdown for this 4 platform, the revenue breakdown in last year, in 2018?

[Lora Ho, executive]

Last year.

[Mark Liu, executive]

This one maybe, Lora, you can directly answer it on the number.

[Lora Ho, executive]

For 2018, smartphone roughly accounts for 45% of our wafer revenue; HPC, about 30% -- 32%; IoT, single digit, 6%; automotive, 5%; digital electronics, 6%; and there's other, 5%.

[Roland Shu, analyst]

Okay. And may I know how big are the contribution for cryptocurrency last year?

[C.C. Wei, executive]

A lot.

[Mark Liu, executive]

We don't want to specify too much on the segments, particularly it belongs to one of the big customers. So...

[Roland Shu, analyst]

Okay. And the other question is Lora said about 7-nanometer utilization will be dropped a lot in first half. But the whole year, the 7-nanometer revenue contribution, a comment by C.C., will be about 25%. So that means that -- or above 25%. That means the second half, the 7-nanometer contribution will be very strong. So may we have more color? What kind of application is driving such a strong 7-nanometer demand, in 7-nanometer?

[C.C. Wei, executive]

Okay. A lot of it because of seasonality of the high-end smartphone. So in the second half, we expect to ramp up the high-end smartphone again. The first half is a little bit kind of cyclical in the high-end smartphone.

[Mark Liu, executive]

To be honest, this high-end smartphone drop in the first quarter is -- came a little bit sudden, so the inventory in the supply chain is quite a lot. So that may push the first half drop. But the second half, we expect the new product launching will carry on another wave of ramp.

[C.C. Wei, executive]

So Roland, I'll give you more color. How about that? In the second half, we already said that we have more customers' product portfolio. So that will expand into the high-performance computing. Some of the product will enter into production slightly from first quarter and extended to the next year.

[Roland Shu, analyst]

For the 7-nanometer follow-up, I think 7+ will be also included in the whole 7-nanometer. N7+ total revenue will be still somewhere around the TWD 1 billion.

[C.C. Wei, executive]

That's correct.

[Mark Liu, executive]

7+ is not a major node, but rather it is a technology good for second-wave and third-wave customers. So it is -- come up slower when the first-wave product or first-wave customer ready to convert to the lower -- to another improved version. So it doesn't conflict with our 5. 5 is another major node.

[Elizabeth Sun, executive]

Next question will be coming from Goldman Sachs' Bruce Lu.

[Bruce Lu, analyst]

So I want to ask about like smartphone semi content addressable market. TSMC management used to provide that, some semi content growth for high-end smartphone, medium-end smartphone and low-end smartphone in the past. Can we ask like what kind of like semi content growth in the coming 1 or 2 years would be like in different segments of smartphone? And also, what kind of semi content growth for smartphone moving from 4G to 5G, especially for the addressable market for TSMC?

[C.C. Wei, executive]

If we want to specify what is semiconductors' content into the high-end smartphone, actually, you want me to untangle a specific number just like before. I don't think we can do it today because of there's a lot of application -- new application that are in 2, not 1, such as AI and something. We expect in the future, AR/VR will be inside. The second thing is 5G, it is here that increased a lot and frequency band, and so that will add the silicon content inside. I'll give you a kind of feeling that the smartphone unit will drop a few percentage, but TSMC will still grow the smartphone business. So that means a lot of increase in that revenue is because of silicon content in terms of the smartphone business.

[Bruce Lu, analyst]

But moving to 5G, as you mentioned that there are a lot of RF content, those kind of semi content increase. Do we see that having any impact to our business?

[C.C. Wei, executive]

You could -- you have a good question. Yes, moving into 5G, then the RF become more complicated. And so you have to add more chips or add more larger area in the RF chip. And so we expect silicon content per se, that will increase. And so the silicon in -- the content in the smartphone will increase. That's true.

[Bruce Lu, analyst]

But can we somehow quantify the number?

[C.C. Wei, executive]

Not very...

[Mark Liu, executive]

Let me put some color. I mean, this is based on, of course, the forecast number, so nothing -- may not be accurate. But we have a picture about the silicon content supporting C.C. Wei's description. On a high-end smartphone, we'd see the silicon content increase. Actually, it's increased every year very fast. On the mid end, it will increase slightly. On the low end, it's less predictable, but we take the model currently is decrease slightly. So that's the picture. And most of our business in the smartphone is -- belongs to the high end, so we are going to enjoy the silicon content with the equipment of our technology, leading-edge technology.

[Bruce Lu, analyst]

Okay. My second question will be that management just mentioned that the 5% revenue growth CAGR will maintain. I think management first mentioned that in 2017. And with like slower growth in 2019, if you do that after math, you can now expect that more than double-digit growth for the coming 2 years.

[C.C. Wei, executive]

You can calculate it.

[Bruce Lu, analyst]

Do I read it correctly?

[C.C. Wei, executive]

I want to reaffirm that the 5% to 10% CAGR was sustained. That's -- we have confidence on that. And you calculate it.

[Bruce Lu, analyst]

Okay. So the 5-year time frame is 2017 to 2021, right?

[C.C. Wei, executive]

Yes.

[Elizabeth Sun, executive]

All right. Next question will be coming from CL Securities' Sebastian Hou.

[Sebastian Hou, analyst]

My first question is I'd like to get TSMC's brains on the overall semi-cycle inventory. Remember, 3 months ago, the company talked about that you are not too worried about the inventory situation compared to the 4Q '17. But today, you're talking about -- or you just talked about that there's a lot of excess in inventory out there. So I'm just wondering what has happened in the past 3 months. Is it more due to demand slowdown a lot, or it's still more due to there are some hidden inventory now they emerged?

[C.C. Wei, executive]

I will say it's more due to the sudden drop in the demand rather than there's some hidden inventory that we did not see.

[Mark Liu, executive]

Okay?

[Sebastian Hou, analyst]

Okay. Then can you elaborate more on the -- which application, which end application has seen the most significant decline in demand?

[C.C. Wei, executive]

High-end smartphone is one thing. And then others seeing the drop are largely, essentially, you can imagine that cryptocurrencies mining that dropped quite a lot. And then related to that one, this might be some of the high-performance computing that you can see from other applications that related to the cryptocurrency mining.

[Sebastian Hou, analyst]

Okay, got it. And in terms of the inventory digestion, I think Lora talked about that the inventory will go back to more seasonal average level by mid of this year. So usually, the downcycle, we will likely see the -- we usually see the supply chain will tend to overcut inventory to below normal. So is the mid this year, is that -- or it means that we already -- or is the below-normal level came before or after that?

[C.C. Wei, executive]

We expect to be at reasonable level, that it can sustain the business. And we expect that this kind of a demand will recover gradually from first quarter, second quarter and then moving to the second half of this year. So that's why we expect at mid--- in the middle of this year, all the inventory will go back to the reasonable or seasonal level. Whether it will be much lower or something like that, we did not expect that yet.

[Sebastian Hou, analyst]

Okay. Just one last question from me is that if we compare this downcycle to the past, the current -- I know that TSMC has not offered utilization rate details for many years already. But just to give us a rough idea, at the current utilization rate you are seeing now in first half of this year compared to the UTR we've seen in 2015, 2012, or say post the financial crisis, is it likely to be the lowest point that we've seen since then?

[Mark Liu, executive]

This -- as Lora just presented, the utilization impact this quarter is really mostly coming from 7-nanometer. Although other nodes' utilization is lower, but if you compare with the last downturn, if you take 2009 for example, it's not that low. So our 7-nanometer really is major underutilized. We think it's temporary.

[Sebastian Hou, analyst]

So can we assume -- is it fair for us to assume that the UTR, certainly not as low as the 2009 yet, but it is already lower than what we've seen in 2011, '12, that cycle, and also 2015 cycle?

[C.C. Wei, executive]

You are right. You are right.

[Elizabeth Sun, executive]

Next question will be coming from UBS, Bill Lu.

[William Lu, analyst]

First question is we've seen a pretty sharp drop-off in demand. And Dr. Wei, I think, made a comment that in the future, we will work with customers to plan for capacity differently. Wondering if you could talk a little bit more about that as far as what can be done. Is it more -- is it better planning? Is it diversification? Is it different payment terms? Can you just talk a little bit about what are some of the things?

[C.C. Wei, executive]

Well, in fact, this is kind of the way we deal with our customer. So it will be a better planning process. TSMC as well as TSMC's customer, I believe that we are learning a lot during this cycle and then we'll be more prudent or help find ways that TSMC and the customer can work together for the better planning of the capacity in the future without -- to summarize in one wording, we will be more conservative. But again, we will not lose our support to our customer.

[Mark Liu, executive]

Wider product portfolio is another factor you mentioned.

[William Lu, analyst]

Great. Second question is for Lora. Can you talk about the depreciation for this year? And I'm asking that because I feel like TSMC over the last year, 1.5 years has bought quite a few EUV tools. And I believe you don't depreciate until these tools are in production, right? And so if you look at the CapEx trend versus the depreciation trend, is there a different linearity because all of a sudden the tools you buy, I don't know, 10, 15 tools, need to be depreciated?

[Lora Ho, executive]

You're right. We start depreciated the tool when it gets into the productions. The depreciation pattern versus the CapEx changes is not linear, also because the -- whether the CapEx is front-end loaded, back-end loaded, also will impact the whole year depreciation. But I can tell you based on the USD 10 billion to USD 11 billion CapEx for this year, we expect the depreciation will increase by mid-single digit, which is versus last year was double digit, yes. So you see, it's all about USD 10 billion to USD 11 billion, but depreciation change can be quite different.

[William Lu, analyst]

Yes, sorry. I need to walk through the math a little bit. But what is that assuming for, I guess, 7+? Because I just want to figure out the next couple of years, as EUV ramps up, are we going to see a pickup? Or how does that work?

[Lora Ho, executive]

I don't recall. I remember there is a sudden increase and it's a small modest increase year-over-year.

[Elizabeth Sun, executive]

All right. I think it's about time that we should go to the line for the questions from analysts waiting in the line.

So operator, could you please have the first caller on the line?

[Operator]

Yes, the first question is from the line of Brett Simpson of Arete Research.

[Brett Simpson, analyst]

I did have a question on inventory levels. Can you help maybe frame where the industry inventory levels are at the moment, maybe in weeks or inventory days versus a quarter ago? And what would you say is normal inventory levels in weeks or days, just so we can look at -- we can frame exactly how elevated the inventory levels are at the moment?

[Mark Liu, executive]

Can you repeat the question?

[Elizabeth Sun, executive]

Brett, I think you probably talked too close to the microphone, so I'm not hearing you quite well. But I think you are asking the inventory level. The excess inventory that we see it now versus we saw 3 months ago, and you like to have a little bit color on that difference. Is that your question?

[Brett Simpson, analyst]

Yes. And also just to understand what normal inventory levels are continuously.

[Elizabeth Sun, executive]

What's the normal level?

[Mark Liu, executive]

3 months ago, we estimate the inventory exiting 2018 is several days above seasonal. Now we look at it more like 10 days above seasonal.

[Brett Simpson, analyst]

Okay. And you said smartphone seasonality was also going to be a weak event in Q1. What are you suggesting the Communication division will do in Q1 versus Q4 revenues?

[C.C. Wei, executive]

Well, I think the main reason is because of high-end smartphone seasonality. So that's -- and typically, Q1 is a low season for the high-end smartphone. But this kind of high inventory is because of a sudden drop from the 4Q last year and extended to the first quarter this year. And that's why the inventory started to increase so much. Did that answer your question?

[Brett Simpson, analyst]

Can you help maybe quantify -- can you perhaps quantify how big a drop in Q1 your Communication revenue will be because of the smartphone seasonality?

[Mark Liu, executive]

Okay. Lora, would you answer this?

[Lora Ho, executive]

So you're asking the -- by segment, how do we see the changes in first quarter. Communication in the first quarter will drop the most followed by the Computer. Consumer actually will grow slightly and Industrial/Standard will grow very significant. So I think the decline in these sector are all double-digit decline in the first quarter.

[Brett Simpson, analyst]

Okay. And one last question on 7-nanometer, what percent of sales in Q1 do you expect to come from 7-nanometer? And you're suggesting a very strong 7-nanometer ramp in second half when the industry gets back to normal inventory levels. Is there a risk that demand for 7-nanometer exceeds supply? And to what extent can you get customers to approve and order 7-nanometer and start ramping earlier in, say, Q2 this year?

[Mark Liu, executive]

Are you going to repeat the question?

[Elizabeth Sun, executive]

We're trying to understand your question. So you're asking us about 7-nanometer since we said that there's going to be a strong cutback on 7-nanometer. You -- are you asking what percentage of 7-nanometer is part of our Q1 revenue and then what will be the level in the second half for 7-nanometer?

[Brett Simpson, analyst]

Yes.

[Mark Liu, executive]

Let me answer. Let me try to clarify the ramping of 7-nanometer this year. We already ramped the 7-nanometer last year and that's our first generation 7-nanometer. Coming to the first quarter, the 7-nanometer composition is about 21% of our corporate revenue already. Now this year, we are preparing to ramp the second generation 7-nanometer. We don't have a specific name, different customer have different flavors. But overall, it's their second generation product to be launched this year. So all the 7-nanometer number for the second generation will be drastically increased during this ramp in the second half of this year.

[Brett Simpson, analyst]

I'm sorry, just to clarify, can you indicate what 7-nanometer as a percent of sales might be in Q1? And does this mark the trough for 7-nanometer in 2019?

[Elizabeth Sun, executive]

Question is what's the percentage of 7-nanometer in our revenue in Q1 and whether or not that percentage is the trough, is the lowest for this year.

[Mark Liu, executive]

Lora, can you answer that?

[Lora Ho, executive]

Okay. Mark just mentioned the 7-nanometer accounts for 21% of our first quarter revenue. We see that percentage of total revenue will continue to grow. So I will say that percentage-wise, first quarter will be the trough.

[Operator]

Next question is from the line of Mehdi Hosseini from SIG.

[Mehdi Hosseini, analyst]

I have one follow-up regarding your high-performance compute expectation for 2019. I believe cryptocurrency accounted for only a few percentage of overall revenues in the first half of '18. So why is that there's still an overhang on your HPC revenue mix? I believe you said including crypto, it will be -- HPC will be down double digit, and I'm just trying to better understand how it has changed from '18 to '19. And I have a follow-up.

[Elizabeth Sun, executive]

So Mehdi, I think you are asking us about HPC this year, if crypto accounted for a few points of our business in 2018 and how much crypto will be accounting for our business in 2019.

[Mehdi Hosseini, analyst]

Yes.

[C.C. Wei, executive]

Okay. This year, we don't forecast -- we become conservative in forecasting this volatile business. So the cryptocurrencies mining this year is much, much less than last year. And to what percentage, I don't think it's -- I can't release it right now.

[Mark Liu, executive]

It is a conservative...

[Mehdi Hosseini, analyst]

I think what ramp...

[Mark Liu, executive]

This is a conservative estimation of cryptocurrency.

[Mehdi Hosseini, analyst]

I think what I'm confused about is if you have had a new HPC customer program, how come those ramps are not enabling you to ramp HPC in 2019 better than just slightly up?

[Elizabeth Sun, executive]

So Mehdi's comments is that if we have this expanding customer portfolio in HPC, why is it that HPC, excluding crypto-mining, can only grow slightly this year?

[C.C. Wei, executive]

All right, good question, it's because of our customer -- we expand in our customer portfolio and product portfolio. But their ramp was starting from probably in the second half this year with a small volume and then going to the mass production next year. That's why this year, we saw just a slightly increase on the HPC business excluding the cryptocurrency.

[Mehdi Hosseini, analyst]

Okay, very clear. And my second follow-up has to do with the 5-nanometer ramp. And I'm trying to better understand your visibility and tapeout engagement. Should we expect a 5-nanometer ramp in 2020 to look more like a 7 or is that going to be steeper? Any color will be appreciated.

[C.C. Wei, executive]

Why don't we comment on that? 5-nanometer are ramping 2020, I would expect that product portfolio is expanding more as compared with the 7-nanometer since -- in 2018. How much of a steeper of that one, it will be similar or probably we're a little bit conservative. But today, we saw the better product portfolio, better customer portfolio, but steeper ramp probably very similar.

[Mehdi Hosseini, analyst]

Sure. Should we assume that 5 would become bigger than 7 in 2021? Is that have been the true benefits of 5 and the customer diversification that will materialize?

[C.C. Wei, executive]

From today's situation and the customer we engage with, yes, 2021, 5-nanometer will be bigger than the 7-nanometers same period of time.

[Elizabeth Sun, executive]

All right. Let's come back to the floor.

Next question will be coming from Morgan Stanley's Charlie Chan.

[Charlie Chan, analyst]

So my first question is about smartphone semi demand for this year. Because the management attribute the weakness in 1Q to the seasonality. But do you see any structural issues, for example, the last year replacement cycle leg of assets issue of the smartphone semi demand? And also, I cannot really get the math, right, because the high-end smartphone, even it's a higher content, it should contribute more of your revenue. But you're assuming this segment will decline and units will decline, right, so why can you get a number that a full year mobile revenue can still grow slightly?

[C.C. Wei, executive]

Good question. Actually, high-end smartphone this year, at least for the first half, it still have some kind of inventory issue. But in the second half, we expect the new model coming out. It's ramping up starting from the second quarter and all the way to the end of this year with a new model coming out. However, the total units as we expected or we forecasted, that one will drop slightly. The content will increase more than the unit drop in the percentage-wise. So TSMC still grow slightly on the mobile business, that's why. And your question is...

[Charlie Chan, analyst]

Yes. So I just want to get a confidence why you think, second half, that recovery could happen, right? Because it's possible that a new product disappoints again, right? And also, yes, if I can get more color, do you think it's kind of a specific brand issue or is that kind of across different brands of that kind of a high-end smartphone demand issue?

[C.C. Wei, executive]

All right. Second half -- that's a good question also. Second half, why we still expect a recovery because we have a better customer portfolio. That all I can say.

[Charlie Chan, analyst]

Okay, that's fair enough. So I would assume some market share again there. And also I want to follow up the previous question regarding HPC, right? So because compared to your previous targets to grow 20% year-on-year every year for HPC, I feel like, except for crypto, there is also some demand issue, right? For example, I'm not sure what you will see the demand in AI, cloud and those telecommunication, right? Because there -- that will be some demand issue to get only kind of slightly growth for HPC versus your targets of 20%. Can you comment on the demand?

[C.C. Wei, executive]

Okay, let me comment on that. We used to be very optimistic. We're still very optimistic because of the AI and 5G. But AI and 5G -- AI is picking up, 5G was started from this second half, start to install some of the base station, the infrastructure was started to build up. So we did not expect the 5G smartphone will be a big number this year. It will be a big number next year. And all the smartphone, we expect that the AI will be included inside with some kind of a content that we did not get the full picture yet, but we know is increasing. And you are talking about HPC, we used to say the 20% CAGR. Did we say that?

[Charlie Chan, analyst]

This last year and the year before.

[C.C. Wei, executive]

Oh no. The last year compared with a year before because there is one uncertain -- not one uncertain, one surprise that's called cryptocurrency mining. It suddenly increased dramatically. And TSMC, because of our technology offering, so we have to say that we are the -- we get most of the benefit of the cryptocurrencies mining business. Now you saw volatility drop. However, without the cryptocurrency, we still see strong momentum on the high-performance computing: one, because we have very competitive or actually we are, I want to say, the industry-leading technology that which fit the requirement of HPC business; second, again, I would like to say we have a stronger customer portfolio.

[Charlie Chan, analyst]

Let's look beyond 2019, right? So for 2 or 3 very high growth profile segment, HPC, IoT and auto, in those, I'm also very surprised your company is only flat year-on-year, right? So for coming maybe 2 or 3 years, what do you think should be the right CAGR for HPC, IoT and auto?

[Mark Liu, executive]

I think the strongest growth is high-performance computing. The second strong growth in terms of the dollar increase is still smartphone, yes. So in terms of dollar increase.

[Charlie Chan, analyst]

But auto, you got those kind of EV -- I'm not sure how you classify the autonomous driving, right? But auto I think used to be kind of a segment the company expect a strong growth. Why this year, we don't see...

[Mark Liu, executive]

Yes. Auto, if you look at the past 2 years, a very strong growth, 27%. But as you know, that since last year, suddenly the automotive markets almost stopped growing. Many of our customers say the same thing very consistently, and some of them has to attribute to the steel and aluminum tariffs. And that is a -- I think is the structure of the automotive. In terms of the long term, we still see the innovation of automotive will come out of this, yes.

[Charlie Chan, analyst]

So yes, I guess one question from lots of investors. Yes, so it's about dividend payout hesitation, right, because comments was to steadily grow every year, right? But it happened over the past 2 years, EPS growth that was around 3% every year; and this year, I'm not sure, right, it will be flat, right? So does the company think that this year you want to increase the dividend dollars again?

[Lora Ho, executive]

Despite the short-term market weakness, like if we look at free cash flow that we can generate, it remain to be very strong. So we plan to further increase dividend in 2019. We will get a board approval in February, so we will make announcement after that.

[Elizabeth Sun, executive]

All right. Next question will be coming from JPMorgan's Gokul.

[Gokul Hariharan, analyst]

My first question, could you talk a little bit about any recalibration in the China expansion given what we have seen with cryptocurrency and some the China demand as well? Could you talk about the plans on China expansion? I think last time, you mentioned maybe go up to 20k in Phase 1 and then potentially expand beyond that. Is there any timeline difference on the Nanjing fab?

[C.C. Wei, executive]

The plan did not change because this is a short-term kind of market softenings. No, it did not change our strategy. The plan continues.

[Gokul Hariharan, analyst]

Is there any timing differential in terms of when you get into Phase 2 given the...

[C.C. Wei, executive]

It will depend on the business situation, definitely. But 20,000 wafer per month is the plan, continue to be executed.

[Gokul Hariharan, analyst]

Okay. Next question I had was on N5, so just building on some of the other questions as well. So it is -- for many customers, it's going to be the first node with significant EUV insertion. So could you help us understand what is the feedback you're getting from customers? Are customers planning to stay on at N7 longer, given N7 has been a successfully proven node and as you mentioned a lot more customers are coming through there? Or do we expect to see the same number of tapeouts, like 50 tapeouts that you had by end of 2017? Are we going to be at similar kind of levels as we get into end of this year? Can you give us some idea about how that progress from our breadth of customer base is progressing in N5?

[C.C. Wei, executive]

Okay. On the N5 progress, I just reported that our progress is on track and we work with our customers. And you say that whether our customer are worried or have concern on EUV's readiness or the stability or those kind of things, no, they are happy with us. We worked with supplier, we worked with the customer on both side and our progress is so far, so good. Now whether that they want to move into N5 or stay in the 7, all I say is all the customer who are working with us on N7 are engaging with us at N5. The product, when they want to introduce into the market, that to our customer's judgment. Because N5 did offer very good performance per se as compared with N7. So some of the high-speed computing, some of the high-end smartphone, they still need to go into N5. So you would expect those customer will adopt the N5 immediately that when it is available, okay. So number of the tapeouts, I cannot tell you right now. But I already told you that all the customers are engaging with us.

[Elizabeth Sun, executive]

Next question will be coming from Crédit Suisse, Randy Abrams.

[Randy Abrams, analyst]

I wanted to ask a follow-up on your guidance for 2019. Last year, you gave a guidance at the beginning of the year for first half year-over-year growth and also second half year-over-year. So if you could give a view or maybe split how you see first half versus second half?

[C.C. Wei, executive]

So Lora, can you give the number?

[Mark Liu, executive]

Second half definitely is better than first half, okay?

[C.C. Wei, executive]

That's good, much better.

[Lora Ho, executive]

First quarter of '19 is quite weak, and we think it's going to take another quarter to recover. So from what I have seen now for this year, if you compare year-over-year, our first half may not be higher, maybe worse than last year, okay? But second half definitely will be better.

[Randy Abrams, analyst]

Okay. A follow-up on the application and inventory issue, could you talk how broad? Because you did flag smartphone as inventory, but could you flag how broad you think that inventory issue is? Is it across applications? And the guidance by product had Industrial up significantly, Consumer up slightly. If you could talk a bit about that factoring in the inventory comments, what's driving those increases?

[Mark Liu, executive]

You mean supply chains inventory?

[Randy Abrams, analyst]

Yes, just -- because you mentioned it's a broad inventory or you have an inventory issue, how you see it across the other applications and then what's driving the segments...

[Mark Liu, executive]

Exiting 2018, I think the inventory increase is broad range, yes, because of the macroeconomic and uncertainty on this trade tension, pretty much put people really on a whole very careful. So it seems to be across the board.

[Randy Abrams, analyst]

Okay. And then, I guess, the rationale then for Industrial up significantly and Consumer up slightly.

[C.C. Wei, executive]

Well, I think the Industrial...

[Lora Ho, executive]

Randy, your question is Industrial segment is down in first quarter?

[Randy Abrams, analyst]

No, I think you said Industrial was up significantly and Consumer up slightly in the first quarter.

[Lora Ho, executive]

Oh, no, no. I said Industrial down significantly, yes. Only Consumer up slightly. The other sector are all down, okay?

[Randy Abrams, analyst]

Okay, okay. And if I could squeeze one more. In the back end, it's still another significant CapEx. Could you talk, maybe a snapshot, what you expect for the back-end business this year and what you're seeing for InFO and CoWoS expansion this year?

[C.C. Wei, executive]

The back-end business is, this year, it will grow double digit. Still a very good business because we offer the solution to the customer, so that they can get a higher performance and a better cost structure that they can offer in the other place.

[Mark Liu, executive]

The back-end last year is about TWD 2.5 billion. And going forward, currently, we see the double-digit growth at least year-over-year. To clarify, back-end business still is initial stage because, as you remember initially, our back-end was adopted by the smartphone. But now more and more, we see the high-performance computing customer in the 5-nanometer. Almost all of them adopt -- wants to adopt the what we call advanced packaging. So we see the advanced packaging business is coming to support our high-performance computing products across the leading-edge customers. Just to make the record, from now on, we call -- we don't call it back-end, we call it advanced packaging because we realize that packaging is very different than the back-end or the business we use to know.

[Elizabeth Sun, executive]

Follow-up question from CL Securities, Sebastian Hou.

[Sebastian Hou, analyst]

First follow-up is can you provide us some update on the tapeout numbers that you have received on 5-nanometers now or your expectation by the end of this year?

[C.C. Wei, executive]

Well, I just said that I cannot give you the numbers today. But I repeat it again, all the 7-nanometer customers are working with us right now on their design.

[Sebastian Hou, analyst]

Okay. And the 7-nanometer tapeout number is still on track to exceed 100 by the end of this year?

[C.C. Wei, executive]

It's still.

[Sebastian Hou, analyst]

Or it could be earlier?

[C.C. Wei, executive]

Well, it will depend on the -- how quickly that our customer can adopt our N7, N7+. But still, the numbers still meet our expectation; on the HPC, probably even more higher, yes.

[Sebastian Hou, analyst]

And given the current macro uncertainty, have you noticed any of your customers, which are doing the tapeout on 7 right now, become more hesitant or cautious in terms of the production schedule?

[C.C. Wei, executive]

No, they are being very aggressive because of 7-nanometer is very good performance, so that can help them to gain the market to their product going to the market. So it's not slowing down, it's actually accelerating a little bit.

[Sebastian Hou, analyst]

Okay. So I think last year and this year, I think probably only not a big portion of these 7-nanometer tapeout customers are reaching -- already reached production, is that a fair assumption?

[C.C. Wei, executive]

Yes.

[Sebastian Hou, analyst]

Just one of the big customers account for big wafer volume, but the tapeout number is small. And -- which means that do you expect more of this smaller volume type of customers, but they together account for the big numbers of the tapeout, will reach production in 2020?

[C.C. Wei, executive]

Well, I just mentioned yes, some of the second wave or third wave of product design get into the 7, 7+ will start to ramp probably second half or the fourth quarter of this year. Mass production will be expected in 2020.

[Sebastian Hou, analyst]

Okay. So it sounds like you don't notice or feel any bubbling in terms of the tapeout booming.

[C.C. Wei, executive]

No, we did not see that.

[Sebastian Hou, analyst]

Okay, it's great. My next question is -- sorry, I only have one question.

[Elizabeth Sun, executive]

Okay. All right, follow-up questions from Citi's Roland Shu.

[Roland Shu, analyst]

Last year, the raw wafer negative impact our gross margin. How about this year? Are we going to still see the same trend? Or we're going to see either will be reversed maybe or benefit for this raw wafer price in our margin?

[Lora Ho, executive]

We have signed a long-term contract with our suppliers in 2017 and '18, so lock in the long-term supply and also lock in the price. So we do not see any further price deterioration for us, yes.

[Roland Shu, analyst]

Okay. Yes, but given now that demand is declining and that -- are we going to renegotiate these longer contracts with these wafer suppliers?

[Mark Liu, executive]

Yes.

[Roland Shu, analyst]

So this is the follow-up, 2019 and 2020, this will fill up going forward?

[C.C. Wei, executive]

Going forward.

[Roland Shu, analyst]

Going forward.

[Mark Liu, executive]

Going forward, we hope we achieve some cost saving.

[Roland Shu, analyst]

Okay. Second question is that by when you will see your CPU revenue to reach 1% of your total revenue, and also, by when you will see the CPU function outsourcing coming from multiple customers?

[C.C. Wei, executive]

As so very specific of what percent, but they say that we start to working with the CPU customers and starting from 7, 7+ and all the way to 5, okay? And when time's up, report it here to say what is percentage that we got from the CPU, okay.

[Mark Liu, executive]

I think you can calculate from our customers that are finished or...

[Roland Shu, analyst]

Okay. I think just to clarify, C.C., you've said that you start to work with a CPU customer or customers.

[C.C. Wei, executive]

Customers.

[Elizabeth Sun, executive]

All right. Next question will be coming from UBS, Bill Lu.

[William Lu, analyst]

A couple of questions on the trade tension and tariffs. One is that with tariffs becoming, I guess, more prevalent, does that change your outlook on where to place the fabs? And secondly, you've got more competition at the trading edge if you look at the Chinese fabs. Are you seeing an opportunity to take share with the trade tension?

[Mark Liu, executive]

Okay. You talked about fab location, right, it is -- as you know, we have -- when we build fab, we -- nowadays we only build the leading-edge fabs, that is we build -- we are doing 5-nanometer fabs preparation and we're building 3-nanometer. And the decision was made to building Tainan, okay, and of course, with across-the-board support from the local and administration here. Upon the trade tension, I think they appears that we will -- at this point, it seems that they have nudged that, "Hey, is it good to build a fab in Taiwan?" But actually, we have almost none request from our customer to change the plan we have. We -- but however, we do constantly assessing and deliberation about what's the pro and the cons of that plan and whether there are other options. But so far, we haven't changed our plan. The prime reason is this. When we ramp the leading-edge fabs, as you know, those are the, really, for the high-performance computing or smartphone launch, the ramp is very tight. Time-to-market is critical. And to have a leading-edge fab ramp, not only this fab has to be closely coupled with an R&D fab, which is in Hsinchu, the 2 teams almost work as 1 team, also this fab has to collaborate with other fabs in TSMC. As our founder mentioned, there are thousands of engineer transported from fab to fab to cope with the sudden ramp of those resources needed. So those are the background of those leading-edge fab. When we open book with our customers, this is the best sure way to ensure their product announcement and product launch, and the request conversation will take them back. But we're constantly watching this bigger geopolitical change, of course, but at this present time, we do not have plan to change that.

[William Lu, analyst]

The second part of the question is are you seeing an opportunity to take share, for example, if U.S. customers don't want to use Chinese fabs?

[Mark Liu, executive]

The question is -- say it again?

[William Lu, analyst]

Is there an opportunity at the trailing edge 28-nanometers, 8-inch, to take market share?

[Mark Liu, executive]

Oh, Chinese fab?

[Elizabeth Sun, executive]

If U.S. customers don't want to use the Chinese fabs?

[Mark Liu, executive]

Well, most of the U.S. customer -- currently, the Chinese fab is still not used by the local customers, let me put it this way. Intention of the other U.S. customer, we didn't encounter those comments, yes.

[Elizabeth Sun, executive]

All right. Follow-up questions coming from Morgan Stanley's Charlie Chan.

[Charlie Chan, analyst]

Yes. So I want to follow up a little bit about the trade tension issue because another topic is about Huawei's 5G and information security issue, right? So how does the company kind of evaluate this kind of business risk, I mean, in exposure to Huawei's supply chain? And have you got any concern from governments or U.S. government on this topic?

[C.C. Wei, executive]

No. And we are everybody's foundry, and we did not see any kind of instruction or information from the government, so business as usual.

[Charlie Chan, analyst]

Okay. Okay. And also, another question is regarding your specialty semiconductor strategy. As you mentioned, you want to build up a new 8-inch fab in Tainan, I would guess it's for lots of niche demand. But how do you deal with this kind of outsourcing or partnership with your subsidiary, Vanguard, going forward in the 8-inch business?

[C.C. Wei, executive]

Well, if you look at the market, 8-inch is a business actually sometimes the capacity is seeing a shortage. But regardless of Vanguard or not, TSMC did not increase the capacity. We increased the specialty's capability and also that our service to the customer. So we built the new building to give more room to put the specialty tool inside to support our customer.

[Charlie Chan, analyst]

Okay, okay. And that's the -- I guess, this year could be tough, right, it could be the first downturn that 2 gentlemen become the new management, right? So is there any initiative that you want to take the company get through this potential downturn, any new initiatives in the company?

[C.C. Wei, executive]

Why do you say this is a new management? We have been here for more than 20 years at least. The new manager -- I mean, that's -- we follow a very good guidance from the previous chairman. And so far, so good. The strategy continues, the management style continues. So new management, hard to say.

[Charlie Chan, analyst]

Sorry about the phrasing, sorry.

[Mark Liu, executive]

Let me comment on this. This is -- we, over the years -- I mean, right now probably is the -- in terms of technology portfolio, TSMC has built both leading edge and specialty. I think this is the strongest position at present time. You agree? And also about the customer engagement or customer portfolio, this time is about the widest customer portfolio we ever have. And C.C. is talking about getting into high-performance computings even to CPUs, including data center CPU, accelerators and the client CPUs. It's probably the widest addressable market we ever have. So we're going to continue this 3 thrusts. We're going to invest further on the R&D and we're going to continue to engage with our customers' design, closely build it as a team. Actually, we sent people to our customers to build the design of 5-nanometer, some of them on 3-nanometer discussion. And also, we just want the high-performance computing can adopt our technology development features more tightly. So we think this is a -- although we're facing some headwinds on the macro economy and just on the -- another uncertainty is, not in our control, is the trade dispute tension. We just hope the 2 country can come to a win-win or at least not lose-lose solution. I think we are on the road to the -- to climb our next peak, yes.

[Elizabeth Sun, executive]

With TSMC's business under the steady stable hands and the expanding addressable market, we will conclude today's conference.

So please be advised that the replay of the conference will be accessible within 4 hours from now. The transcript will become available 24 hours from now, both of which will be available through our website at www.tsmc.com.

Thank you for joining us today. We hope you will join us again next quarter. Goodbye, and have a good day.

[Mark Liu, executive]

Thank you. Thank you, everybody.