2330.TW - Taiwan Semiconductor Manufacturing Company Limited

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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 in listen-only mode. The format for today's event will be as follows: first, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2025, followed by our guidance for the fourth quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Jen-Chau Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT as our business was supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9 percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 23% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 37% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. And DCE decreased 20% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 2.8 trillion or USD 90 billion. On the liability side, current liability decreased by TWD 101 billion quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others as we paid out 2025 provisional tax of TWD 136 billion. In terms of financial ratios, accounts receivable turnover days increased 2 days to 25 days. Days of inventory decreased 2 days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx. During the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx and distributed TWD 117 billion for fourth quarter '24 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between USD 32.2 billion and USD 33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 30.6, gross margin is expected to be between 59% and 61%, operating margin between 49% and 51%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter '25 and fourth quarter '25 profitability. Compared to second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided 3 months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91 compared to our guidance of $1 to TWD 29. In addition, we also delivered better-than-expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remain higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1% to 2% as compared to 2% to 3% previously. Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2% to 3% in the early stages and widen to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now let me make some comments on our 2025 CapEx. As the structural AI-related demand continues to be very strong, we continue to invest to support our customers' growth. We are narrowing the range of our 2025 CapEx to be between USD 40 billion and USD 42 billion as compared to USD 38 billion to USD 42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mass making and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to C.C. C.C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of USD 33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading edge process technologies. Moving into fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading edge process technologies. We continue to observe robust AI-related demand throughout 2025, while non-AI end market segment have bottomed out and are seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full year 2025 revenue to increase by close to mid-30s percent year-over-year in U.S. dollar terms. While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risk from the potential impact of tariff policies, especially in consumer-related and price-sensitive end market segment. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 by continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence and customer trust, to further strengthen our competitive positioning. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in AI market continue to be very positive. The explosive growth in token volume demonstrate the increasing consumer AI model adoption which means more and more computation is needed, leading to more leading-edge silicon demand. Companies such as TSMC, we are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly received very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening and we believe the demand for semiconductor will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and thorough capacity planning system. Externally, we work closely with our customers and our customers' customer to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customer is now at least 2 to 3 years in advance. Therefore, we probably get the deepest and widest look possible in the industry. Internally, our planning system involve multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approach to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related business. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading edge specialty and advanced packaging technologies to support their growth. We will also remain disciplined and thorough in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' need as they value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to -- and to a more advanced process technologies in Arizona, given the strong AI-related demand from our customers. Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multiyear AI-related demand. Our plan will enable TSMC to scale up through an independent giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI and HPC applications. Next, in Japan, thanks to the strong support from the Japan central, prefectural and local government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from European Commission and the German federal state and city government. Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' need and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2-nanometer fab in both Hsinchu and Kaohsiung Science Parks. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next several years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of global logic IC industry for years to come. Finally, let me talk about our end-to-end A16 status. Our 2-nanometer and A16 technologies lead the industry in addressing sizable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter. With full year, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family. N2P feature further performance and power benefits on top of N2 and volume production is scheduled for second half '26. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. A16 is best suited for specific HPC product with compressed signal routes and dense power delivery networks. Volume production is on track for second half '26. We believe N2, N2P, A16 and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared statements. [Operator Instructions] Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line. Thank you. Operator: First one, Gokul Hariharan, JPMorgan. Gokul Hariharan: Great results again. So on the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. And as you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40s data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number? Definitely feels like the growth today seems to be much stronger. And related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. But in this cycle, TSMC revenues have grown 50% from the previous peak in '22, CapEx has only grown about 10%. So how should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand like are we looking at much higher CapEx in the next couple of years, given all these conversations you've had. And I have a follow up after that. Jeff Su: Okay. So Gokul's first question, sorry, Gokul, let me summarize for everyone's benefit. So again, he wants to know, firstly, related to the AI-related demand that TSMC works with many, if not everyone, who is doing AI. And many of the customers seem to be even more positive today. So I guess he would like to ask C.C. sort of what are we seeing or hearing from our customers. And then we had previously said that the next 5 years from 2024 to '29, we expect AI accelerator to grow at a mid-40s CAGR. Is there any update to this? I think this is the first part, then I'll get to the second part on CapEx. C.C. Wei: That's a long question, isn't it? Gokul, the AI demand actually continue to be very strong, it's more -- more stronger than we thought 3 months ago, okay? So in today's situation, we have talked to customers and then we talk to customers' customer. So the CAGR we -- previously we announced is about mid-40s. It's still -- it's a little bit better than that. We will update you probably in beginning of next year. So we have a more clear picture. Today, the number are insane. Jeff Su: And then the second part of Gokul's question are related to CapEx. He notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CapEx significantly to prepare to drive the future growth. But he notes, this cycle, actually, though, while CapEx is increasing, the revenue is increasing even faster. So his question really, I think, how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth. Jen-Chau Huang: Okay. Gokul, every year, we spend the CapEx based on the -- our business opportunity in the following few years. As long as we believe there are business opportunities, we will not hesitate to invest. And if we do our job right, the growth of our business, of our revenue should outpace the growth of the CapEx. And that's what we have been delivering in the past few years. Now going forward, assuming we're doing -- still doing a very good job, then we will continue to see that happening again. So a company of our size, the CapEx number, it's unlikely to certainly go up significantly in any given year. When we continue to invest and our growth is outpacing our CapEx growth, then you see the growth like what we have done in the past few years. Gokul Hariharan: Understood. I know that it is unlikely to drop, but it is also likely to grow quite a bit given what C.C. mentioned in terms of every customer asking you and every customers' customer requesting you for capacity addition, right? Jen-Chau Huang: Yes. As I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. So as C.C. said, next year looks to be a healthy year, and we are confident on the mega trend that we'll continue to invest. Gokul Hariharan: Yes. Maybe one more follow-up question from me. C.C., I think last year also, you gave us an indication of how much CoWoS capacity you would be building. I think you talked about 2x, of doubling the CoWoS capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity would you be building next year just to get some idea about what you are seeing in terms of AI demand? And also just to get some understanding of TSMC's data center AI exposure, I think last year, we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI? Jeff Su: Okay. So Gokul, your second question, really, he wants to understand can we provide any detail or color on the CoWoS capacity plan for 2026 in terms of year-on-year increase. And also in terms of our definition of AI accelerated revenue, the narrow definition, how much will it contribute for 2025 revenue? Is it 30%? C.C. Wei: Well, Gokul, this is C.C. Wei again. Talking about the CoWoS capacity, all I can say is continue the 3 months ago, we are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about the AI everything related like front-end and back-end capacity is very tight. We are working very hard to make sure that the gap will be narrow, but all I can say is we are working very hard. Jeff Su: Okay. Thank you, Gokul. I think we need to move on in the interest of time. So operator, can we move to the next participant, please? Operator: Yes. Next one, Charlie Chan, Morgan Stanley. Charlie Chan: And again, congratulations for very strong results, C.C., Wendell and Jeff. So my first question is really about your business demand. As C.C. just mentioned, your front-end demand is also very strong into next year. But one of your major customer said that more so is that -- I think his point is that doing maybe a system-level innovation in thermal, et cetera, can boost up more kind of performance. So just a kind of a dumb question. How do we reconcile your very, very strong leading edge demand and the customers continue to migrate to your most advanced nodes? And also you continue to reflect value, whereas the customer continue to think that Moore's law is dead. Can we get some clarification from TSMC? Jeff Su: So Charlie's question is very specific although -- he wants us to comment on a customer saying Moore's law is dead but how do we reconcile this with a very strong leading edge demand into 2026 and also with system-level innovations? C.C. Wei: Okay. Charlie, this is C.C. Wei. Yes, one of my customers, very important customer say Moore's law is dead, but what he meant is it's not only we rely on the chip technology anymore, now we have to focus on that whole systems' performance. So he want to emphasize the whole systems' performance rather than just talking about the Moore's law, which is not enough to meet his requirement. So again, we work very closely with his people and to design our technology both in front-end and back-end and also in all the packaging to meet his requirement. That's all I can say. Jeff Su: Okay. Thank you, C.C. Do you have a second question, Charlie? Charlie Chan: Yes, I do, Jeff. Yes. So anyway, I would interpret it as so-called Moore's Law 2.0 that your co-COO, Mr. Cliff Hou also comes here during the SEMICON Taiwan. But anyway, thanks, C.C., for your commentary. And my second question is actually a follow-up from last quarter's same question. Back then, I consulted you about China AI GPU demand, right, whether you can seize the market opportunity because China, certainly, they also expanding their AI infrastructure very rapidly. But given the recent kind of back and forth between U.S. and China, whether China can really import NVIDIA GPU, would that kind of discount your potential long-term growth of the AI CAGR? Is that something that TSMC would worry about? Jeff Su: Okay. So Charlie's second question is related around AI demand and specific to China. With the sort of the export control and restriction, his question is, does that impact our ability to address the market opportunity and will this impact our AI CAGR growth if we are not allowed to fully serve China. Charlie Chan: Yes. I think it's a little bit of both sides, meaning restriction from the U.S. but also China government's kind of discouragement to procure U.S. chip. Sorry for the interruption. C.C. Wei: Well, Charlie, to speak the truth, I have confidence on my customers, both in graphic or in ASIC, they are all performing well. And so if the China market is not available, but I still think the AI's growth will be very dramatically and as I said, very positive, and I have confidence that our customers' performance, and they will continue to grow, and we will support them. Charlie Chan: So even with limited opportunity from China for the time being, you are still confident that a 40% CAGR or even higher can be achieved in coming years? C.C. Wei: You are right. Jeff Su: Operator, can we move on to the next participant, please? Operator: Yes. Next one, Sunny Lin, UBS. Sunny Lin: Congrats on the very strong gross margin. So my first question is how should we think about 2026. I understand we should get better color maybe into January, but just want to get some directional major puts and takes for gross margin trending going to 2026. Especially, how should we think about the gross margin impact from 2-nanometer ramp for 2026? Jeff Su: Okay. So Sunny's first question is regarding gross margin. She would like to know directionally, how do we see the gross margin for next year 2026 in terms of certain puts and takes. And also if Wendell is able to comment specifically, Sunny, sorry if I heard you right, on the N2 dilution impact, correct? Sunny Lin: Yes, that's right. Jeff Su: Okay. That's her first question. Jen-Chau Huang: Okay. Sunny. Yes, it's too early to talk about 2026. But you already mentioned about the N2 dilution. And as all the new node, when they just come out, the N2 will have dilution in our gross margin in 2026. But at the same time, the N3 dilution is gradually coming down, and we expect the N3 to catch up to the corporate average sometimes in 2026. The other factors include like overseas fabs dilution, which will continue and which we said that it will be about 2% to 3% dilution in the early stage of the next several years. That will also be there. And also we all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. But every percentage move of dollar against NT will affect our gross margin by 50 -- 40 basis points. So that just gives you some rough idea. Sunny Lin: Got it. Sorry, if I may, yes, a very quick follow-up. And so on 2-nanometer, would the typical 2% to 3% dilution by new node for the first 7 to 8 quarters of mass production be a good reference for 2-nanometer as well for 2026? Jeff Su: Okay. So Sunny, a quick follow-up. She wants to know for the 2-nanometer dilution, if we're able to provide any detail. And can she still think about it in terms of 7 to 8 quarters or 6 to 8 quarters dilution to reach the -- time, sorry, to reach the corporate average? Jen-Chau Huang: Yes. Sunny, let me share with you. N2's structural profitability is better than the N3, okay? Secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach to a corporate average in terms of profitability. And that's because the corporate profitability, the corporate gross margin moves and generally, it has been moving upwards. So less meaningful to talk about that, okay? Sunny Lin: Got it. No problem. That's very helpful. My second question is maybe for C.C. Thanks a lot for sharing with us the details on how you think about the capacity expansions and planning. And so my question is now cloud AI is ramping a lot faster than the prior opportunities like smartphones and PCs. Yes, I think the demand for cloud AI is also may be harder to forecast. So just want to maybe get a bit more color from you that now versus the prior rounds of capacity expansions, what is TSMC doing differently versus before? And how do you ensure that while you are ramping up the capacities more quickly while still having good risk control? Jeff Su: Okay. Thank you, Sunny. So Sunny's second question is regarding capacity planning and expansion. In a capital-intensive business, she notes this is very important. But in the past smartphone and PC megatrends; today, it's AI and cloud AI. She is wondering, does that make this planning process more difficult to forecast? And what are we doing differently or how do we forecast this to make sure that we are investing appropriately? C.C. Wei: Sunny, indeed, right now because of -- I believe we are just in the early stage of the AI application. So very hard to make the right forecast at this moment. What do we do differently? There's a big difference because right now, we pay a lot of attention to our customers' customer. We talk to and then discuss with them and look at their applications, be it in the search engine or in social media application, we talk with them and see how they view the AI application to those functions. And then we make a judgment about what AI going to grow. And so this is quite different as compared with before, we only talk to our customers and have an internal study, this is different. Did I answer your question? Sunny Lin: Got it. Yes, yes, yes, and looking forward to the CapEx guide in January. C.C. Wei: You're welcome. Jeff Su: All right. Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one, Bruce Lu, Goldman Sachs. Zheng Lu: I think Jensen talked about like $3 trillion to $4 trillion AI infrastructure opportunity by 2030, right? This compared to like 600 billion CapEx recent -- for this year implies for about 40% CAGR growth. This is similar to Jensen's guidance for the AI growth, right? But for me, first of all, what I want to know is what's TSMC's view for the AI infrastructure growth for the next 5 years? And what's TSMC's forecast for the token growth rate in the next few years? TSMC used to provide like semi industry growth, foundry growth and how much TSMC can outperform the industry, right? Given the context that can we assume like TSMC AI-related revenue can track -- will track with the CapEx growth of AI or the major cloud service provider? Or should we expect even higher growth rate for TSMC considering you're potentially getting more value out of it? Jeff Su: Okay. Let me try to summarize your question, Bruce. He notes that one of our customers has highlighted a $3 trillion to $4 trillion infrastructure opportunity over the next few years compared to 600 billion current CapEx, implying a 40-something percent CAGR or growth rate, which is similar to ours. Bruce's question is, he wants to know what is TSMC's forecast or view for AI infrastructure growth. He would also like to know what is TSMC's forecast or view for the token growth. And then what is TSMC's AI-related revenue growth? Can it track that of the cloud service providers? And his question is, should it be even higher -- shouldn't it be even higher given the value that we capture. That's actually several questions, but is that correct, Bruce? Zheng Lu: That's right. C.C. Wei: Well, Bruce, essentially just want to know that how accurate that we can predict the AI demand. We give you a number, roughly 40 -- the mid-40s is the CAGR, not including all the infrastructure build up and also align with our major customers' forecast for their view. More than that, I think if we are talking about the tokens, the number of tokens increase is exponential. And I believe that almost every 3 months, it will be exponentially increase. And that's why we are still very comfortable that the demand on leading edge semiconductor is real. And as I continue to say that we look at all the demand and look at our capacity expansion, we need -- TSMC need to work very hard to narrow the gap. That's what we are doing right now. Exact number that we probably will share with you in next year, so that when we have a very better, clear picture. Zheng Lu: I just had a quick follow-up. I'll use that as my second question anyway. I think the question is that the token growth seems to be substantially higher than the AI-related revenue guidance on TSMC, right? So the gap is actually enlarging if you compound in the outer years, right? That's why -- that's the differences between the -- what we see for the current TSMC outlook and the potential token consumption, right? So the gap is continue to see enlarging. How do we solve this? And do we really see that as a major issue? Jeff Su: Okay. So Bruce's second question, which is a follow-on from his first, is that the token growth is growing at a much higher rate or exponentially than TSMC's AI revenue growth, and this gap will only enlargen or widen in the next few years. So he wants to know -- sorry, Bruce, basically, what's the implication to TSMC or how do we see this? Is that correct? Zheng Lu: That's right. C.C. Wei: Okay, Bruce, you are right, you are right. The tokens and the number of tokens increase exponentially is much, much higher than TSMC's CAGR as we forecasted. And let me tell you that, first, our technology continue to improve. And so our customer moving from one node to the next node so that they can handle much more tokens number in their basic fundamental calculation. So that's one thing. We progressed very well for one node into the other node, and our customer working with TSMC to continuously to improve their performance. And that's why when we say that we have about 40%, 45%, CAGR, then the token number are exponentially increased because of our customer and TSMC's technology combined that can handle much more or much efficient than before. Did I answer your question? Zheng Lu: I see. So you believe your node migration plus your customer design change can fulfill or can meet the exponential growth for the token consumption? C.C. Wei: Exactly. Zheng Lu: Is that the conclusion? C.C. Wei: Yes. Jeff Su: Sorry, Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce. Operator: Next on, Laura Chen, Citi. Chia Yi Chen: Appreciate C.C. sharing your view on TSMC strategy on the AI capacity planning. I think along with very strong advanced node demand, I believe that advanced packaging like CoWoS is also one of the focus for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. So can you give us an update here? And also, I mean, for the time being, just very stretched demand at the moment. So TSMC will work more closely with your OSAT partner to fulfill the strong demand at the same time? That's my first question. Jeff Su: Okay. Thank you, Laura. So her first question is on capacity planning. We have talked earlier on the call about the planning for leading nodes. She wants to understand also on the CoWoS capacity and specifically, I guess, advanced packaging in Arizona and how do we work with our OSAT partners. C.C. Wei: Okay. We have announced our plan to build two advanced packaging fab in Arizona and to support our customers. But at the same time, actually, right now, we are working with one OSAT, a big company and our good partner, and they are going to build their fab in Arizona, and we are working with them because they're already breaking ground, and the schedule is earlier than TSMC's two advanced packaging fabs. And we are working with them. And our main purpose is to support our customer, and so we can many in the U.S. Jeff Su: Laura, do you have a second question? Chia Yi Chen: Yes. Certainly, I mean, obviously, we see that the advanced node, advanced packaging are quite strong. And also at the same time, we are also seeing that the migration is also happening for N2 and N3. So just wondering that from the revenue growth perspective, I know it's still early to predict next year based on your guidance. But I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell in your value or more that will be driven by the capacity or volume growth on both N2 ramp-up? And also, C.C., you mentioned some of the mild silicon recovery. So that may also drive some of the volume growth into next year. So just wondering, like if you look at the growth outlook, that will be more driven by the technology upgrade ASP increase or also more like a volume? That's my second question. Jeff Su: Okay. So Laura's, again, second question is looking at 2026. She would like to understand what will be the key drivers of the growth. Is it more from the technology mix migration, things like N2? Is it more from ASP upgrade? Or is it more from just pure wafer volume growth? C.C. Wei: Laura, all the above. All right? You knew it, right? Chia Yi Chen: May I also follow up that because we see that actually N3 is very tight. And at the same time, we are also kind of expanding on N2. And C.C., you previously mentioned that you will migrate some of that to even N7, N6, and also N5G like -- but specifically on N3, do we also need to add more capacity into next year, newly added capacity? Jeff Su: Sorry, Laura is saying that will -- next year, will we continue -- sorry, Laura, if I understand correctly, will we need to add new capacity? Will we continue to do conversion? What will we do to support the very strong demand we see at leading edge next year? Chia Yi Chen: Right. Yes. C.C. Wei: Well, let me answer that question. We continue to optimize the N5, N3 capacity to support our customer. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan. Jeff Su: Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you. Operator: Yes. Next one, Krish Sankar, TD Cowen. Sreekrishnan Sankarnarayanan: My first one is, C.C., about 10 years ago, back in the smartphone days, TSM would talk about the revenue opportunity for TSM per phone. I was wondering in today's world, can you talk about how much 1 gigawatt of AI data center capacity could translate in terms of wafer demand or revenue for TSMC? And then I have a follow-up. Jeff Su: Okay. So Krish's first question, he noted in the past, in the smartphone megatrend, we talked about the content per phone opportunity for TSMC. So now with AI, is there a way to frame or quantify 1 gigawatt of data center capacity, what is the revenue opportunity for TSMC? C.C. Wei: We -- recently, as I said, the AI demand continue to increase, and then my customer say that 1 gigawatt, they need about -- invest about 50 billion, how much of TSMC's wafer inside, we are not ready to share with you yet because of different from different projects, okay? Sreekrishnan Sankarnarayanan: And then a quick follow-up. C.C. Wei: Yes, excuse me, I just want to say that right now, it's not only one chip. Actually, it's many chip together to form a system, all right? Sreekrishnan Sankarnarayanan: Got it, got it. Very helpful for that. Then a quick follow-up. Obviously, you first forecast long-term trend and then build capacity toward that. I'm kind of curious, when you look at the AI demand over the next several years, from a TSMC angle, does it matter whether it's -- that demand is coming through a GPU or an ASIC? Does it have an impact on your revenue or gross margin mix? Jeff Su: Okay. Thank you, Krish. So his second question is, again, with our business outlook. Again, we forecast the long-term trends. We plan our capacity, as C.C. said, in a thorough and disciplined manner. His question is, what are the implications, for example, of -- I believe you said GPU versus ASIC in terms of the AI market. Do we have a preference or what? Is there a difference for TSMC? Is that correct, Krish? Sreekrishnan Sankarnarayanan: That's right. The impact to revenue and gross margin, whether it's a GPU or an ASIC. Jeff Su: Right. Okay. C.C. Wei: Krish, no matter if it's GPU or it's an ASIC, it's all using that our leading-edge technologies. And from our perspective, we are working with our customer, and we all know that they are going to grow strongly in the next several years. So no differentiation in front of TSMC. We support all kinds of types. Jeff Su: Operator, can we take -- thank you, Krish. So we'll take the question from the final participant, please. Operator: Last one, Arthur Lai, Macquarie. Yu Jang Lai: Congrats on a strong outlook. I'm Arthur Lai from Macquarie. So my question is about competition. So C.C., you define the Foundry 2.0 market. And I wonder what's the strategic initiative that TSMC's undertaking to further strengthening your competitive landscape and also in this broader ecosystem. So some context. I got the question from the U.S. investor as your clients have announced they invest in Intel. Jeff Su: Okay. So Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the U.S., how do we focus on the competition? Is that correct? Yu Jang Lai: Yes, yes. C.C. Wei: Okay. Let me answer that one. When we introduced our Foundry 2.0, we set a purpose that -- as I said, one of my customers say that the system performance is very important in these days, they're not only a single chip. And also -- let me share with you that our advanced packaging revenue is approaching close to 10% and it's significant in our revenue, and it's important for our customer. So that's why we introduced Foundry 2.0 to categorize this foundry business. Not as usual, previously, we only look at the front-end portion. Now it's the whole thing, the front-end, the back-end and also important for our customer. That's why we introduced 2.0. Talking about our competition in the U.S. Well, that competitor happened to be our customer, very good customer. So in fact, we are working with them to -- for their most advanced product. Other than that, I don't want to make any more comment. Yu Jang Lai: Can I ask one more question? Jeff Su: Yes, you have two. So your second question, sure. Yu Jang Lai: Yes. My second question is very quick on the end demand. So I recall, C.C., you, last time, mentioned that we should also monitor and worry about the prebuild, especially in the consumer electronics. And then this quarter, our number suggest that there's a Q-o-Q 19% growth in the smartphone. So my question is, do you still worry about the prebuild? Jeff Su: All right. So Arthur's second question is on smartphone. Do we -- are we concerned about prebuild or sort of, I guess, pulling prebuild from customers in that regard? C.C. Wei: No. We don't worry about the prebuild because of -- when you have a prebuild, you have inventory. And in this stage, the inventory already go to the very seasonal level and very healthy. So no prebuild. Jeff Su: Okay. Thank you, C.C. Thank you, Arthur. Thank you, everyone. So 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 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you, and have a good day.

Jeff Su: [Foreign Language] Good afternoon, everyone, and welcome to TSMC's Second Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call [Operator Instructions] The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2025, followed by our guidance for the third quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open both the floor and the line for the question-and-answer session. 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 on our press release. And now I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Jen-Chau Huang: Thank you. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the second quarter 2025. After that, I will provide the guidance for the third quarter of 2025. Second quarter revenue increased 11.3% sequentially in NT as our business was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by an unfavorable foreign exchange rate. In U.S. dollar terms, revenue increased 17.8% sequentially to TWD 30.1 billion and exceeded our second quarter guidance. Gross margin decreased 0.2 percentage points sequentially to 58.6% primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially balanced by higher capacity utilization and cost improvement efforts. Due to operating leverage, operating margin increased 1.1 percentage points sequentially to 49.6%. Overall, our second quarter EPS was TWD 15.36, up 60.7% year-over-year and ROE was 34.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 24% of wafer revenue in the second quarter, while 5-nanometer and 7-nanometer accounted for 36% and 14%, respectively. Advanced technologies, defined as 7- nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 14% quarter-over-quarter to account for 60% of our second quarter revenue. Smartphone increased 7% to account for 27%. IoT increased 14% to account for 5%. Automotive stayed flat and accounted for 5%, and DCE increased 30% to account for 1%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD 2.6 trillion or USD 90 billion. On the liability side, current liabilities decreased by TWD 22 billion quarter-over-quarter, mainly due to the decrease of TWD 38 billion in accrued liabilities and others. The decrease in accrued liabilities and others was mainly due to the payment of income tax. On financial ratios, accounts receivable turnover days decreased 5 days to 23 days. The decrease in accounts receivable was mainly due to NT dollar appreciation as almost all of our accounts receivables are in U.S. dollars. Days of inventory decreased 7 days to 76 days, primarily due to higher N3 and N5 wafer shipments. Regarding cash flow and CapEx. During the second quarter, we generated about TWD 497 billion in cash from operations, spent TWD 297 billion in CapEx and distributed TWD 117 billion for third quarter '24 cash dividend. Taking the unfavorable exchange rate into consideration, our cash balance decreased TWD 30.3 billion to TWD 2.36 trillion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures totaled TWD 9.6 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between TWD 31.8 billion and USD 33 billion, which represents an 8% sequential increase or a 38% year- over-year increase at the midpoint. Based on the exchange rate assumption of $1 to TWD 29, gross margin is expected to be between 55.5% and 57.5%. Operating margin between 45.5% and 47.5%. In addition, we maintain our 2025 capital budget to be between USD 38 billion and USD 42 billion. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our second quarter ' 25 and third quarter '25 profitability. Compared to first quarter, our second quarter gross margin slightly decreased by 20 basis points sequentially to 58.6%. This was primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially offset by higher-than-expected overall capacity utilization and cost improvement efforts. Compared to the first quarter, foreign exchange rate of $1 to TWD 32.88, the actual second quarter exchange rate was $1 to TWD 31.05. This created about 220 basis points margin headwind to our actual second quarter gross margin. We also experienced slightly more than 100 basis points impact from the ramp-up of our overseas fabs, mainly as the margin dilution from our Arizona fab started to kick in. We have just guided our third quarter gross margin to decrease by 210 basis points to 56.5% at the midpoint, primarily due to the continued unfavorable foreign exchange rate and more pronounced dilution from overseas fabs as we ramp up further in Kumamoto and Arizona. We continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next 5 years starting from 2025 to be between 2% to 3% every year in the early stages and widen to 3% to 4% in the later stages. Despite the higher cost of overseas fabs, we will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now let me make some comments on the impact of foreign exchange rate on TSMC's revenue and profitability. NT dollar is the reporting currency of our financial statements. Nearly all of our revenue is in U.S. dollars, while about 75% of cost of goods sold is in NT. Therefore, fluctuations in the exchange rate between U.S. dollar and NT will have a sizable impact to our reported revenue and gross profit margin. The sensitivity of the revenue to dollar NT exchange rate is nearly 100% -- that is every 1% appreciation of NT against U.S. dollar will reduce our reported NT revenue by 1%. The sensitivity of our gross margin to the same 1% exchange rate change is about 40 basis points. That is if NT appreciate 1% against the dollar, our gross margin will come down by about 40 basis points. Compared with our second quarter exchange rate guidance of $1 to TWD 32.5 provided on April 17, the NT dollar has appreciated by an average of about 4.4% sequentially, which negatively impacted our second quarter revenue by about 4.4% in NT and our gross margin by about 180 basis points. For third quarter of '25, based on the current exchange rate of $1 to TWD 29, the average NT dollar will appreciate by another 6.6% sequentially, which will negatively impact our third quarter revenue by 6.6% in NT and reduce our gross margin by about 260 basis points. As a reminder, 6 factors determine TSMC's profitability: Leadership technology development and ramp-up, pricing, capacity utilization, cost reduction, technology mix and foreign exchange rate, which is not in our control. When the foreign exchange rate is unfavorable as it is currently, we will focus on the fundamentals of our business and lean on the other 5 factors to manage through it, and we have successfully done in the past. Thus, even with the unfavorable foreign exchange rate, we believe a long-term gross margin of 53% and higher remains well achievable. Now let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of USD 30.1 billion, above our guidance in U.S. dollar terms, mainly due to continued robust AI and HPC- related demand. Moving into the third quarter of 2025, we expect our business in the third quarter to be driven by strong demand for our leading-edge process technologies. Looking into second half of 2025, we have not seen any change in our customers' behavior so far. However, we understand there are uncertainties and risk from the potential impact of tariff policies, especially on consumer- related and price-sensitive end market segment. While we observe rebate program in China are stimulating some near-term demand upside, we believe this is a short term in nature and continue to expect a mild recovery in overall non-AI end market segment in 2025. Having said that, we believe the demand for semiconductors is very fundamental and will continue to be robust. Recent developments are also positive to AI's long-term demand outlook. The explosive growth in token volume demonstrate increasing AI model usage and adoption, which means more and more computation is needed, leading to more leading-edge silicon demand. We also see AI demand continuing to be strong. including the rising demand from sovereign AI. Therefore, we now expect our full year 2025 revenue to increase by around 30% in U.S. dollar terms, supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies underpinned by growth in our HPC platform. Amidst the uncertainties, we will remain mindful of the potential tariff- related impact and be prudent in our business planning going into second half 2025 and 2026 while continuing to invest for the future megatrends. We will also focus on the fundamentals of our business, technology leadership, manufacturing excellence and customer trust to further strengthen our competitive position. Next, let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on customers' needs, the value some geographic flexibility and the necessary level of government support. This is also to maximize the value of our shareholders. With a strong collaboration, and support from our leading U.S. customers and the U.S. federal state and city government, we announced our intention to invest a total of USD 165 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for 6 advanced wafer manufacturing fab in Arizona, 2 advanced packaging fabs and a major R&D center to support the strong multiyear demand from our customers. Our first fab in Arizona has already successfully entered into high-volume production in 4Q 2024, utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize 3-nanometer process technology is already complete. We are seeing strong interest from our leading U.S. customers and are working on speeding up the volume production schedule by several quarters to support their need. Construction of our third fab, which will utilize 2-nanometer and 16 process technologies has already begun, and we will look into speeding up the production schedule as well based on the strong AI- related demand from our customers. Our fourth fab will utilize N2 and A16 process technology and our fifth and sixth fab will use even more advanced technology. The construction and ramp schedule for those fabs will be based on our customers' needs. Our expansion plan will enable TSMC to scale up to a giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI and HPC applications. We also plan to build 2 new advanced packaging facilities and establish an R&D center to complete the AI supply chain. After completion, around 30% of our 2-nanometer and more advanced capacity will be located in Arizona, creating an independent leading- edge semiconductor manufacturing cluster in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success. We also maintain a key partner and enabler of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan central manufacture and local government, our first specialty technology fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second specialty fab is scheduled to start later this year, subject to the readiness of the local infrastructure. The ramp schedule will be based on our customers' need and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state and city government and are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany. The ramp schedule will also based on our customers' need and market conditions. In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fab and 4 advanced packaging facilities over the next several years. We are preparing for multiple phases of 2-nanometer fab in both in both Hsinchu and Kaohsiung Science Parks to support the strong structural demand from our customers. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global IC industry for years to come while delivering profitable growth for our shareholders. Now let me talk about our N2 and A16 status. Our N2 and A16 technologies lead the industry in addressing the insatiable demand for energy-efficient computing and almost all the innovators are working with TSMC. We expect the number of new tape-outs for 2-nanometer technology in the first 2 years to be higher than both 3-nanometer and 5-nanometer in the first 2 years, fueled by both smartphone and HPC applications, N2 will deliver full node performance and power benefit with 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and more than 15% chip density increase as compared with N3E. N2 is well on track for volume production in the second half of 2025 as scheduled with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family, N2P features further performance and power benefits on top of N2 and volume production is scheduled for second half 2026. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. Compared with N2P, A16 provides a further 8% to 10% speed improvement at the same power or 15% to 20% power improvement at the same speed and additional 7% to 10% chip density gain. A16 is best suited for specific HPC products with complex signal routes and dense power delivery network. Volume production is on track for second half 2026. We believe N2, N2P, A16 and its derivatives will fuel our N2 family to be another large and long-lasting node for TSMC. Finally, let me talk about our A14 status. Featuring our second-generation nanosheet transistor structure, A14 will deliver another full node stride from N2 with performance and power benefits to address the increasing structural demand for high-performance and energy-efficient computing. Compared with N2, A16 will provide 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and about 20% chip density gain. Our A14 technology development is on track and progressing well with device performance and yield improvement on or ahead of schedule. Volume production is scheduled for 2028. We will and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This is concluding our key message, and thank you for your attention. Jeff Su: Thank you, C. C. Wei. This does conclude our prepared statements. So before we begin the question and answer session [Operator Instructions] So now let's begin the question and answer session. Jeff Su: We will take the first few questions from the floor, then we'll flip and alternate to those on the line. Maybe we'll go left, center and then right sort of sequence, and we'll start here with Gokul Hariharan from JPMorgan. Gokul Hariharan: First question on demand. I think C. C. you mentioned data center AI demand definitely looks better than maybe 3 months back. Last quarter, you also mentioned CoWoS capacity will probably come into balance by 2026. Is that still our view? Or you think that the capacity now starts to look tighter? Second, I think you talked about on-device AI as a potential future driver. Are you seeing more development on the on-device AI part? Is it better compared to maybe 3, 6 months back? And lastly, near term, your 4Q looks like you're expecting revenue to decline. Is that based on what your customers are telling, especially on the consumer side? Or is it just TSMC being cautious and conservative in terms of the guidance? Jeff Su: Okay. Gokul, thank you. Again, for the benefit of those, of course, here in person on the line, please allow me to summarize your questions. So maybe we'll take them one by one. His first question is on the demand, particularly data center and AI-related demand. As C.C. said in his remarks, it is certainly still even stronger. So his question is about the advanced packaging and CoWoS demand into 2026. How do we see the supply-demand gap narrowing or becoming more balanced for CoWoS specifically? Jen-Chau Huang: Gokul, the demand from the AI getting stronger and stronger, if you pay attention to what -- for trading companies, the CEO said. And so the megatrend for the AI continue to be strong and so is the CoWoS. And so now we are -- again, we are in a mode trying to narrow the gap. I don't want to use the balance. The last time you guys misunderstood what I said is -- sorry it's bad worded. So I will say we try to narrow the gap, all right? So momentum is still there and very healthy. Jeff Su: Okay. And then the second question or second part is on on-device or edge AI. Gokul wants to know how is the development of customers to work on on-device AI compared to maybe 3 to 6 months ago? What is the interest or activity level? And how do we see this? C. C. Wei: As the last time I say, I say that it takes 1 to 2 years for my customer to complete their new design on the product. The momentum is still going. They are still continue to -- as time goes by, as I said, the increase on the edge device, the number of the units is actually mild. But then the die size increase. We continue to see that. And the die size increased by about 5% to 10%. And that kind of trend continued. Okay? So you have to wait another probably 6 months or 1 year to see an explosion. Jeff Su: Okay. And then the second question and the final part on the near term. I think, Gokul, your question is with our third quarter guidance implies fourth quarter. Is there any particular reason or any comment that we want to make about the implied fourth quarter business momentum? C. C. Wei: I think you did not mention Gokul is convinced or you become conservative. That comment is more real. We are a company that what we say we will achieve and achieve the high target. So your calculation, I think Charlie also is nodding. So a lot of you is calculating our reported numbers so that you can easily see that our first quarter is decreasing. We take into the consideration of the possible impact of tariff and a lot of other uncertainties. So we become more conservative. That's our current attitude. But I guarantee you with our technology leadership position and excellent manufacturing. If there are any opportunities, we will catch. And be expected that we will achieve our high-end target. Jeff Su: Okay. Sorry, let's go one by one. Second question then maybe Charlie Chan from Morgan Stanley. Charlie Chan: So first of all, congrats for very strong results and especially on the gross margin side, a very good execution indeed. So my first question is really also on the gross margin because the accumulated FX impact is almost like 4.4 percentage points. It's too big to ignore. So when TSMC consider your 2026 wafer pricing, so-called reflecting your value, would you consider this FX impact and is confident to keep your margin similar to this year's level. I feel like 53% is a low bar. So I just want to remain a little bit high and see if that FX impact can be considered to reflect to your value. Jeff Su: Okay. So Charlie's first question is on margin and I guess, pricing. He notes, obviously, as Wendell said, the big move in the exchange rate and therefore, a big impact to our profitability and gross margin. So his question is, looking ahead to 2026. Can we reflect or earn our value from the including the FX impact into the pricing? And therefore, what is our confidence level on the gross margin for next year? Can it keep a similar level as this year? C. C. Wei: Well, let me assure you that, yes, the impact from the exchange rate is huge. But you try to imply that whether we are -- still our value. Let me answer that. We are working on it. And we have confidence that the 53% gross margin and higher, I still want you guys to pay more attention to and higher. Charlie Chan: Hopefully, it will work out well. My second question is also a very hot topic recently about the -- H20 chip shipping to China. I remember 3 months ago, there was another question on this matter, right, meaning that back then, I believe that chip was suspend, but you're still very confident about your mid-40% CAGR for cost saving growth in the coming 5 years. Right now China becomes your addressable market again, do you think that mid-40% CAGR target can be revised up? Jeff Su: 6 Okay. Thank you, Charlie. So Charlie's second question is around the AI accelerator demand. He notes, of course, our customers' product, H20 recently now seems to be able to ship to China versus 3 months ago, it was not. So his question really is our long-term AI accelerator growth CAGR to grow close to mid-40s. Can it be higher? Do we think it will be higher? Is there upside to this? C. C. Wei: 6 Charlie, the H20 now is again, according to the trading companies CEO, we did not receive the signal yet. So it's too early to give you an estimate. But certainly, this is a good news, right? I mean that's -- China is a big market and my customer can still continue to supply the chip to the big market. And it's a very positive news for them. And in return, it's a very positive news to TSMC. Whether we are ready to increase our forecast, not yet. Another quarter probably will be more appropriate to answer your question. Jeff Su: Okay. Then we'll move on to the right side of the room for us, Bruce Lu from Goldman Sachs. Zheng Lu: I think Charlie already asked the profit question already. So I just move on to your N2 ramp. So what's the revenue contribution you expect for the N2 ramp for next year? I'm a little bit surprised to hear that the N2 ramp is similar rate with N3 with N2, you do have both HPC and smartphone customers ramping up at the same pace in the first -- year 1 or year 2, right? Can we expect like 15% revenue contribution coming from N2 for next year or a similar level compared to N2, which is around like 10%, 11% for the year 2? Jeff Su: 6 Okay. Bruce's first question is around the N2 ramp. His question is about the ramp and the ramp profile because we said the N2 ramp profile is similar to N3. So what does that mean? And then also, of course, what revenue contribution do we expect or can we share for N2 in 2026? C. C. Wei: Bruce, you have a good argument. Usually, we ramp up a new node using the smartphone. We knew that everybody knew it. Now it's not only smartphone, but also HPC product. However, the ramping profile I just reported is similar to 3-nanometer. It's limited by our capability to build a new fab to ramp it up and also a little bit straightforward is constrained by the capacity. So we say the ramp profile is similar to N3, but the revenue contribution certainly will be bigger because you don't expect our N2 is the same price as N3, right? Zheng Lu: If that is the case, we should assume like in '27, the N2 ramp-up will be faster, right? Because you take 12, 18 months for you to build new fab, you should be able to achieve even higher growth in N2 in '27, right? Jeff Su: So Bruce is asking if the revenue contribution is much -- is higher in '26, then should it be even greater in '27? C. C. Wei: We will answer that question in '26. Zheng Lu: Okay. The next question is for N5 and N3, right? So I want to understand the supply demand for the N5 and N3 in the coming 2 years as most of the AI will migrate to N3 next year. But it seems to me that the N5 conversion is mostly done -- and N5, N3 conversion is mostly done. And we don't really see like greenfield capacity expansion from N3. So it becomes like super tight for the N3 for the coming years. So does that mean that N5 will be lower utilized or we try to build more N3 in the future? Or what kind of -- or we should see we can fill out more value for N3, N5 next year? Jeff Su: Okay. Bruce's second question is around N5 and N3. He wants to know what is the outlook, the supply-demand at these 2 advanced nodes in the coming 2 years. His observation, AI products will migrate to N3 and the N5, N3 conversion is mostly done. So his question is, will 3-nanometer supply be very tight in the next 3 years? And I think the last part, therefore, can we earn our value or price for that tightness? And then on the flip side, what about 5-nanometer? Will it become lower utilization? C. C. Wei: I like your comment, we have to share our value because of very tight in N3 capacity. It will be continued for a couple of years, very tight. And in fact, N5 also very tight. The demand is high because of a lot of AI products still in the 4-nanometer technology node, and they will transition to 3-nanometer probably in next 2 years. So in meanwhile, N5 are still very tight in capacity. N3 even tighter. And so we are working hard. One of the TSMC's advantage is that we have giga fab cluster. And so we have between N7, N5, N3, even the future N2, we have almost for each node, we have about 85% to 90% [indiscernible] tools. So it's not free, but it's much easier for TSMC to adjust or convert the capacity between those nodes. And today, let me share with you, we are using the N7 capacity to support N5 because the N5 is too tight. And then we are converting N5 to N3 as you just pointed out. We'll continue to do that. And so today, we are -- our leading edge technology is capacity. We define N7 and below are all very tight. And at same time, we are working very hard to, again, using my sentence to narrow the gap between the demand and the capacity. Jeff Su: Okay. Thank you, Bruce. Let's go to the participants online. Maybe we'll take 2 questions from the online, and then we'll come back to the floor. Operator? Operator: Now asking question Brett Simpson from Arete. Brett William Simpson: I had a question for Wendell on gross margins. And it's always helpful you've laid out a framework for some of the puts and takes to TSMC's gross margins. But my question is really some of these headwinds like FX and the dilution from overseas fabs are more structural cost increases. And to what extent can TSMC adjust wafer pricing higher to neutralize these cost increases in your business? And I guess, secondly, on this point, how much economic benefits are you seeing from applying AI across the fabs? I mean I think NVIDIA has mentioned that they're working with TSMC closely strategically in areas like computational lithography to try to drive further fab efficiencies. So can you maybe just give us some examples where you're seeing real gains in your cost structure? And are we at a point where you're starting to see several points of gross margin benefit from AI efficiencies? Jeff Su: 6 All right, Brett. So Brett's first question is a little bit involved, but looking at our gross margin and profitability, he notes that the unfavorable exchange rate and the dilution from the overseas due to the higher costs, these are structural headwinds. So his question is, can we -- how can we or can we earn our value or adjust our wafer price to help offset some of these? And also how much we've talked about before about using AI ourselves in our operations, how much economic benefit are we deriving from things such as EUV litho with our customers, such as -- and are there other examples of using AI where it's helping our cost structure? And can we quantify that -- quantify the benefit, sorry. That's your question, right? Brett? Brett William Simpson: That's right. Jen-Chau Huang: Okay. Brett, the first question, gross margin, that's the reason why we've been talking about the 6 factors affecting our profitability. I don't think I need to repeat those 6 factors. But whenever, for example, using foreign exchange example, a few years ago, there were also a period of time that foreign exchange rates were against us. So we are able to lean on the other factors to help us mitigate the negative impact from certain factors and therefore, still achieve our gross margin targets. And you specifically asked about ASP, raising the price, but the price is just one of the factors. And I believe C.C. just elaborate a lot on earning our value. And at the same time, there are other factors that we can leverage on. So all in all, that's why we're saying 53% and higher gross margin is still achievable. Your second question on AI benefits. I think we also talked about that before. We use that in operation, in manufacturing. We also use that in R&D. And just think about if we are able to produce 1% of productivity gains in a company of our size, that equals to USD 1 billion. So that's the number we can share with you without going into too much other details. Jeff Su: Does that answer your question, Brett? Brett William Simpson: Yes, that's great. I guess my follow-up question, I guess, just digesting your prepared remarks, C.C., you mentioned 11 fabs in Taiwan. I think I count 8 fabs for overseas that you're planning that aren't commercially online yet. Can you maybe just talk a bit about -- I mean I've never seen that type of -- that type of road map before from TSMC. It's quite big. Can you maybe share with us if you're planning a bigger expansion of new capacity next year? And I say this because in the last few months, we've seen so many gigawatts data center announcements. I think this week, we had one from Meta that was significant. So are you -- the demand looks very strong. And I'm just wondering whether you have enough capacity to satisfy demand next year and whether you plan to convert further 5-nanometer to 3-nanometer. And how you see the N2 capacity plan for 2026? Jeff Su: Okay. Brett's second question, he notes that we are building many fabs, both in Taiwan and also overseas. He's never seen this size or scale of the capacity expansion from TSMC before. So it's very -- and he also notes that the demand from data centers continues to be very strong. So his question is basically very simply, do we have enough capacity to support the strong demand specific to next year and also very specifically to 2-nanometer and will we further also convert more 5-nanometer to 3? That's, I think, all of his question. C. C. Wei: Thank you Brett. Your observation is right. Recently, we saw a lot of announcement of the AI data center all over the world and the demand on 3-nanometer, actually on 5-nanometer, 3-nanometer and the future 2-nanometer are very high. And we did not see this kind of strong demand for a long time, but will be enough to support them, I still want to use my word, say that we try very hard to narrow the gap. between the demand and the supply. We're working very hard. Jeff Su: Okay. Thank you Brett. Let's go to the next participant on the call. Operator: Now it's Arthur Lai from Macquarie. Yu Jang Lai: Arthur Lai from Macquarie. Again, congrats on a strong result. I would like to follow up on the N2. I think as C. C. highlight, this is a very exciting node we are all heard. And then I want to follow up on the return on investment. Can you compare to the N2 and N3, the return on investment and then give us more color? Second one is the reason we ask this question is because the CapEx per area actually N2 is higher, right? And then we also heard from industry that the company's yield on the N2 is also pretty good. So can you give us some put and take on how we think of the N2's future development? Jeff Su: Okay. So Arthur's question, both questions, I think, are around N2. N2, as you said, is a very exciting node. He would like to know understand what is the return or the return on investment that we see from N2 compared to N3 and also, can we talk a little bit N2, the CapEx is higher, but the yield is still very good. What is the developments that we're seeing for 2-nanometer? I think that's -- is that your question, Arthur? Yu Jang Lai: Yes, yes. Yes, exactly. Jen-Chau Huang: Arthur, N2 return, as we said before, N2, the profitability is better than N3. Now there were questions asking how many quarters to catch up with the corporate before. And N3 was -- it took N3 longer. But for N2, we think it will be back to the old days. Having said that, I need to remind everyone that in the old days, we're talking about corporate average of, say, 50% gross margin. Nowadays, we're talking about 53% gross margin. So it becomes less meaningful to talk about how much time it takes to catch up with corporate nowadays. But having said that, structurally, N2 does have a better profitability than N3, okay? And N2 development is right on track. We're ramping it in the second half of this year. We expect the revenue to come up in the first half of next year. Jeff Su: Okay. Thank you, Wendell. Thank you, Arthur. Let's come back to the floor. We'll go left middle right. So maybe Sunny Lin from UBS. Sunny Lin: Very good results and congrats. So my first question is to follow up on CapEx. So obviously, full year sales guidance is stronger. You are turning more constructive on high-performance compute and AI. Yet you are keeping your CapEx guidance -- so is it fair to assume that you are considering some conservatism for CapEx for this year given the ongoing macro uncertainty? Or is it because in the short term, your capacity expansion is somewhat constrained by the ability that you can ramp up more capacity. And therefore, maybe in 2026 and 2027, we should expect some acceleration of your CapEx spending? Jeff Su: Okay. So Sunny's first question is around CapEx. She notes, of course, that we raised our 2025 revenue guidance this year, and we certainly still see a very robust demand from AI, yet we kept our CapEx guidance in the same range of $38 million to $42 million. So she wants to understand why? Is it because of macro uncertainty? Is it because of constraints in the construction? And her other part of this question is what is the CapEx outlook for '26 and '27, I guess? Jen-Chau Huang: Sunny, the CapEx, as we said before, the CapEx invested in a given year is for the business opportunities in the following years. And as long as there are business opportunities, we will not hesitate to invest. Having said that, nowadays, as C.C. also said, with all these macro uncertainties, we are mindful of these uncertainties. So we also take that into consideration in our capacity and CapEx plan. Going forward, it's too early to talk about future years CapEx, but I can share with you a company of our size, it's unlikely that you see CapEx dollar amount suddenly drop a lot in any given year. That's all I can share with you. Sunny Lin: Got it. It sounds like CapEx could be going higher in the coming years. My second question is on cloud AI. And so you think like earlier attribute most of the sales upside for 2025 to cloud AI. And therefore, I wonder if you have an update on the cloud AI growth in 2025, which you guided before to be about 100% for 2025 and the implication to your CoWoS capacity expansion, would you be -- are you able to maybe expect a bit more CoWoS capacity for this year to support the stronger cloud AI growth for this year? And any early insight that you could share with us for your CoWoS capacity expansion for 2026? Jeff Su: Okay. So Sunny's second question is asking about our AI -- well, she said cloud AI, basically our AI accelerated growth in 2025 and related the CoWoS capacity. So her question is, what is the AI accelerated revenue growth we expect in 2025? And then what is our CoWoS capacity expansion plan for 2025? And she asked a similar question to Charlie or someone earlier, what is the plan for CoWoS capacity in 2026? C. C. Wei: Well, my answer stays the same. We are trying very hard to narrow the gap for now and for 2026, the demand momentum are very healthy and very strong. And so we are building many new facilities in the back end to increase the CoWoS capacity to support our customers. AI demand is very strong. And so the CoWoS capacity, the demand is very strong. Jeff Su: Okay. Thank you, Sunny. Then we'll move on to Laura Chen from Citi. Chia Yi Chen: Congrats for the good results and outlook. My question is also about the AI chip. C. C. You mentioned that AI chip is getting bigger and bigger and also the power consumption is getting much more. So I'm just wondering that among like your advanced technology, including like the advanced node, we also noted that during the symposium, TSMC also announced some of the new technology in advanced packaging as well. Just wondering how do you kind of prioritize your leading-edge advanced packaging. During the symposium, we see that system now wait for that kind of a new design. Do you have any like plan or time line for the new technology? And should we think about that, that should be kind of aligned with our most advanced node process like N2 or N16 going forward? Jeff Su: Okay. So Laura's first question is on advanced packaging nodes. AI, the die sizes are increasing, the need for power consumption or energy efficiency is rising. So she wants to understand how our strategy for advanced packaging along with the advanced node development. Are there any specific packaging solutions that we're prioritizing? What about the time line and road map? How does that match up with our advanced node road map? C. C. Wei: Laura, I think TSMC's philosophy to develop a technology is working with the customer. The customer has such demand, we develop the technology, we increase the capacity for that. So priorities, every customer is important to TSMC. So -- and in the advanced packaging side, a lot of customers use different approaches. So we are developing a variety of different back-end packaging, advanced technology for all the customers. Whether it is related to the advanced leading edge technology, the answer is yes, okay? So we have a system integration. We have CoWoS [indiscernible] that's terminology. We have a lot of different names that I cannot even remember, but there's a lot of varieties and we work with our customers to meet their demand. I can answer you. Chia Yi Chen: Is that easy to kind of leverage or transfer different kind of technology from your perspective? Jeff Su: So Laura is asking how fungible are these different packaging technologies, how interchangeable or easy to transfer the technology between different packaging solutions? C. C. Wei: Of course, there are some similarities in between. Otherwise, we are going to put too much of the effort and did not get the return. Yes, there's a lot of similarities, but a lot of varieties also. Chia Yi Chen: Okay. And my second question is we know that obviously, the AI demand advanced node, advanced leading-edge packaging is very tight. And -- but I'm just wondering that industry-wise, we still see probably overcapacity in mature nodes. Yet TSMC also have like more mature 16-nanometer or more above that kind of process. So can we kind of consolidate our mature nodes to kind of make better efficiency and capabilities to enhance the -- like those capacity to fulfill the demand across the board. Jeff Su: 5 Okay. So Laura's second question is on mature nodes. She notes that there is overcapacity on the industry-wide in older nodes. So she wants to understand for TSMC specifically, if we take, for example, 16-nanometer and older nodes, what is our strategy? Can we consolidate amongst the different nodes? How do we protect our profitability? C. C. Wei: Good question. If you read the newspaper, there are so much of mature node capacity. TSMC's strategy actually is on the mature node technologies, we develop kind of specialties. For example, that RF technology or CMOS image sensor or the high voltage. So we develop the technology at the request of our customer. So we don't worry too much about what you say, overcapacity. If it is really overcapacity, we will not build a fab in Japan. We will not build a fab in Germany. So it's not overcapacity. It's all related to customers' need, customers' demand, and those are all specialty technologies. Did I answer your question? Chia Yi Chen: Yes. Jeff Su: Okay. Thank you, Laura. I think in the interest of time, we'll go to Brad Lin from Bank of America. Then we'll take one more from the line and then if there's one more from the floor. Brad Lin: I have 2 questions. My first one is on the humanoid robot. So we have learned that humanoid robot started to contribute to TSMC and it is gaining momentum as the next frontier of the AI hardware. How does TSMC evaluate the market size of humanoid robot in the semiconductor and in terms of the potential market TAM, compute and also sensor requirements? And what do you think that might be another driver potentially for mature nodes, too. Jeff Su: Okay. Thank you, Brad. So Brad's first question is around humanoid robot. We're starting to see some contribution. He wants to understand how do we evaluate the market size? What is the addressable opportunities for TSMC in the long term at the leading edge and also on the mature nodes with certain type of specialty? C. C. Wei: Brad, it's too early -- actually, it's too early to say the humanoid robot will play a role in this year. Next year, probably still too early because it's so complicated. You know that humanoid robot will be most of the time will be used. I think the first one will be used in the medical industry to taking care of the people getting over like me. And I probably someday I need some humanoid robot to help me. But it's very complicated because it's not -- we are talking about the brand only. Actually, you are talking about a lot of sensor -- sensor technology, the image sensor, the pressure sensor, the temperature sensor and all the feedback to the CPU. And so it's very complicated. And since it's dealing with human being directly, has to be very, very careful. But then once you start to fly, it was a big, big plus. I talked to one of my customers and he say that the EV car is nothing -- is robot will be 10x of that. I'm waiting for that. Does that answer your question? Brad Lin: Yes, yes. I believe the client definitely owns EV cars and robots, too, so he knows it well. So my second question will be on the potential pulling ahead of the so-called recycling the value into 2026. So we know -- well, normally, we continue to recycle value into our pricing. So given the potentially higher pricing into 2026, are you observing any signs of demand pulling from the customers in the second half of the year and potentially, well, given the tight pipeline of N3, N5, would we see a continuous trend into 4Q, even though we already guided potential decline, but yes, any pull in potentially. Jeff Su: Okay. Brad second question, very specifically, he's asking as we -- C.C. talked about that we will continue to earn our value do we see any customers trying to pull in their demand ahead of 2026 into the second half of this year? And do we have any additional comments to offer on the fourth quarter besides what we have already shared? C. C. Wei: Well, the answer is no, we did not see any different customers behavior so far, okay? But let me share with you, add more color. If you are talking about the 3-nanometer's demand, for example, the cycle time is still what takes about 4 months. So there's no way you can pull in anything. I mean that's -- yes. And we have -- as I said, our capacity is very, very tight. So we already have all the schedules. And so breakeven room for full year, let me say that, even [indiscernible]. But, no. The answer is no. So 2026 is 2026, we will share with you. Jeff Su: Thank you C. C. Thank you, Brad. All right. Operator, let's go to the -- we'll take questions from the last participant on the line. Operator: Yes. The last one to ask question from Mehdi Hosseini from SIG. Mehdi Hosseini: The first one has to do with capital intensity. When I look at the past 5 years when you were ramping N3 and N5, the capital intensity was at or above 40%. And you also highlighted how N2 tape-out is tracking better than N3 and N5 combined. Does that imply that the capital intensity would need to go back up to 40% -- in other words, an initial investment for N2 to accommodate these tape-outs? Is that the right way of thinking about how investment are going to play out? And I have a follow-up. Jeff Su: Okay, Mehdi. Sorry, -- we couldn't hear you exactly clearly. Let me try to summarize your question, all right, which is Mehdi's question is around capital intensity. He notes that in the past, when we invest in new nodes or structural the megatrends like we have with N3 and N5, our capital intensity has jumped up to greater than 40%. So if I heard you correctly, Mehdi, your question is this time, we talked about the strong demand for 2-nanometer multiyear upcoming, what is our expectation on capital intensity. Is that correct, Mehdi? Mehdi Hosseini: Yes, that's correct. Jen-Chau Huang: Okay. Mehdi, let me answer this question. As we just said, the capital expenditure invested in any year is the future growth opportunities. So if we do our job right, the growth in the next few years is likely to exceed the growth in CapEx dollars, even though, as I said, the CapEx dollars is unlikely to drop significantly in any given year. So you see a higher growth in revenue than the growth in capital expenditure, then you don't have it such a high capital intensity. And we actually demonstrated that in the past few years. And also, let me just share with you that because of this, we're not operating setting a capital intensity as a goal. It's the dollar amount invested is really on the structural demand growth in the following years. So talking about capital intensity is also less meaningful than before. Mehdi Hosseini: Okay. And a follow-up for me. You highlighted N2P -- I'm sorry, you highlighted A16, which will be very applicable for high- performance compute. Is that the node where AI and HPC would actually be at par with smartphone as an end market that would drive demand for the most leading-edge nodes? Jeff Su: Sorry, Mehdi, again, I apologize. We apologize. I could not hear you clearly, but I think his question is about on A16, where we said it's more for specific HPC-related offering. So his question is, I think, Mehdi, your question is, is that where the AI demand also comes in for the 2-nanometer family? Mehdi Hosseini: Yes. I don't know answer because so far, AI has been N+1, N+2. Is that A16 the first node where AI would move to the leading edge? Jeff Su: Okay. His question -- okay, maybe let me rephrase it. I think I understand better. His question is really about AI adoption of the leading-edge node, the N node. We see smartphone, we see HPC. This question very specifically, how do we see the AI adoption of the most leading node for TSMC. He observed in the past, it has generally been one node behind. So how do we see that going forward with things such as A16? C. C. Wei: Well, Mehdi, you are right. Usually, the HPC's customers are always one step behind using N+1 or N+2 technologies. Now because of AI demand is so strong, that's one thing. But the most important thing is we need some kind of performance, but the power consumption is very, very important. And when we talk about A16, we have another power efficiency improvement close to 20%. That's a big value for all the AI data center applications. So that help my customer moving faster because of -- every time when we talk about the AI data center, if you notice that the first thing they talk about is power supply, electricity, right? So they did not tell you say the power efficiency is very important, but they tell you that we have to build a very big electricity power plant to support the AI data centers. So that tells you how important it is. And TSMC is the technology, by the way. A16 is a further improvement of the N2 node. So it's not a surprise for TSMC to expect for those people in AI data centers industry, they want to use in A16. Jeff Su: Okay. Thank you, C. C. Thank you, Mehdi. We'll take the last question from the floor. We have one participant here, Felix Pan from KGI. Junhong Pan: I only have one question about the overseas expansion. I think C.C. earlier mentioned that the second fab for the N3, there's a strong demand. So you guys need to speed up several quarters for that. Together with, I think the U.S. government also raised the investment tax credit cap for next year. So I wonder how this shape or how this speed up your ramping schedule for the second fab and how this impact to the overseas fab dilution for the guidance windows given earlier. And I think the follow-up question will be if you guys speed up the U.S. investment, how -- is that impact to other regional investment like Japan and Germany as well? And lastly, is that possible to break down the overseas CapEx and domestic CapEx going forward? That's all my questions. Jeff Su: Okay. Yes, that's pretty much 2 questions. But okay. So -- but Felix's question on our overseas expansion plans. He notes that, yes, C. C. said we're speeding up the schedule for the second fab in the U.S. So how -- and he also notes the recent passage of the U.S. ITC bill. So how does this impact or affect our ramp schedules in our U.S. expansion? And what is the implication or impact to the overseas dilution? That's number one. C. C. Wei: Well, that's 2 questions. Okay. Let me share with you about our ramp-up schedule. It's totally because of our customers' demand. We appreciate the U.S. government increased the ITC from 25% to 35%. We appreciate that. It helps. But the real schedule is because of our customers' demand. So we have to prepare the capacity to meet the demand. That's the #1 consideration. Jen-Chau Huang: The margin impact, it is positive, although not that significant in the 5-year period. Think about this, the ITC is used to offset the asset value. And the benefit comes when depreciation starts. So it gets amortized. Jeff Su: And then Felix's second question is how does the ramp and speed up of the U.S. cluster expansion, how is this impacting our expansion plans in Japan and Europe, if it does at all? C. C. Wei: Well, you think about the TSMC expansion, the overseas fab in the U.S. is leading edge. In Japan, it's on specialty technology. To be specific, most of the time, it's for the CMOS image sensor. For Germany, it's automotive industry. So they are all not in the same field. So actually, it's not affect. The investment in the U.S. or invest on the leading edge does not affect the investment in Japan or in Germany. Jeff Su: Thank you, C.C. Thank you, Felix. Okay, everyone. So this concludes our question-and-answer session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you very much for joining us today. We hope everyone continues to stay well, and we hope you will join us again next quarter. Goodbye, and have a good day. Thank you.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's First Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is holding 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 in listen-only mode. The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fist quarter 2025, followed by our guidance for the second quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the Company's key messages. Then we will open the line for questions and answers. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now, I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2025. After that, I will provide the guidance for the second quarter of 2025. First quarter revenue decreased 3.4% sequentially in NT dollar or 5.1% in U.S. dollars as our business was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. In spite of the January 21 earthquake and several aftershocks, we work diligently to recover much of the lost production. Thus, our revenue in the first quarter was slightly above the midpoint of our guidance. Gross margin decreased 0.2 percentage points sequentially to 58.8%, primarily due to the earthquake impact as well as the start of overseas dilution, partially offset by the cost improvement efforts. Total operating expenses accounted for 10.2% of net revenue. Operating margin decreased 0.5 percentage points sequentially to 48.5%. Overall, our first quarter EPS was TWD13.94 and ROE was 32.7%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 22% of wafer revenue in the first quarter, while 5-nanometer and 7-nanometer accounted for 36% and 15%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 73% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 7% quarter-over-quarter to account for 59% of our first quarter revenue. Smartphone decreased 22% to account for 28%. IoT decreased 9% to account for 5%. Automotive increased 14% and accounted for 5% and DCE increased 8% to account for 1%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD2.7 trillion or US$81 billion. On the liability side, current liabilities increased by TWD135 billion quarter-over-quarter, mainly due to the increase of TWD111 billion in accrued liabilities and others. The increase in accrued liabilities and others was mainly due to the accrual of income tax payables. On financial ratios, accounts receivable turnover days increased one day to 28 days. Days of inventory increased three days to 83 days, primarily due to the ramping of new overseas fabs. Regarding cash flow and CapEx. During the first quarter, we generated about TWD626 billion in cash from operations, spent TWD331 billion in CapEx and distributed TWD104 billion for second quarter 2024 cash dividend. In addition, we raised TWD16 billion in cash from bond issuances. Overall, our cash balance increased TWD267 billion to TWD2.4 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled 10.06 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between US$28.4 billion and US$29.2 billion, which represents a 13% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of US$1 to TWD32.5, gross margin is expected to be between 57% and 59%, operating margin between 47% and 49%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. The tax rate will then fall back to 14% to 15% level in the third and fourth quarter, and the full-year tax rate will be between 16% and 17%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our first quarter 2025 and second quarter of 2025 profitability. Compared to fourth quarter, our first quarter gross margin slightly decreased by 20 basis points sequentially to 58.8%. This was primarily due to 60 basis points impact from the January 21 earthquake and its aftershocks as well as the start of dilution from our Kumamoto fab partially offset by cost improvement efforts. We have just guided our second quarter gross margin to decrease by 80 basis points to 58% at the midpoint, primarily as the margin dilution impact from our Arizona fab starts to kick in. We expect the impact from overseas fab to grow more pronounced throughout the year as we ramp up further in Kumamoto and Arizona and forecast 2% to 3% margin dilution impact for the full-year 2025. As we have said before, under today's fragmented globalization environment, overseas fab costs are higher for everyone, including TSMC and all other semiconductor manufacturers. With our additional $100 billion investment plan in Arizona, we forecast the gross margin dilution from the ramp up of our overseas fabs in the next five years to start from 2% to 3% every year in the early stages and widened to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacture in the region that we operate. Thus, even considering our global manufacturing expansion plans, we believe a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget. At TSMC, higher level of capital expenditures is always correlated with higher growth opportunities in the following years. We reiterate our 2025 capital budget is expected to be between US$38 billion and US$42 billion as we continue to invest to support customers' growth. About 70% of the capital budget will be allocated for advanced process technologies. About 10% to 20% will be spent for specialty technologies and about 10% to 20% will be spent for advanced packaging, testing, mass-making and others. Our 2025 CapEx also includes a small amount related to our recently announced additional $100 billion investment plan to expand our capacity in Arizona. Even as we invest for the future growth with this level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to C.C. C.C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. But before that, I would like to mention the earthquake during Lunar New Year. On January 21, Taiwan experienced a 6.4 magnitude earthquake under Richter scale, followed by several significant aftershocks. Although a certain number of wafers in process were impacted and have to be scrapped, we worked tirelessly and were able to recover much of the lost production, demonstrating the resilience of our operation in Taiwan. I want to recognize and deeply [sense] all of our employees and our suppliers for their dedication and hard effort over the Lunar New Year holiday. I would also like to extend our great appreciation to our customers for their understanding and support during this time. Now let me talk about the first quarters result. We concluded our first quarter with revenue of US$25.5 billion. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. Moving to second quarter 2025, we expect our business to be supported by strong growth of our 3-nanometer and 5-nanometer technologies. Looking at the full-year of 2025, we expect Foundry 2.0 industry growth to be supported by robust AI-related demand and a mild recovery in other end market segments. In January, we had forecast a Foundry 2.0 industry to grow 10 points year-over-year in 2025, which is consistent with IDC's forecast of 11% year-over-year growth for Foundry 2.0. Now let me talk about the recent tariff. We understand there are uncertainties and risk from the potential impact of tariff policies. However, we have not seen any change in our customers behavior so far. Therefore, we continue to expect our full-year 2025 revenue to increase by close to mid-20s percent in U.S. dollar term. We might get a better picture in the next few months, and we will continue to closely monitor the potential impact to the end market demand and manage our business prudently. Amidst that uncertainties, we continue to focus on fundamentals of our business with our technology leadership, manufacturing excellence and customer trust to further strengthen our competitive position. As such, we are confident TSMC can continue to outperform the Foundry 2.0 industry growth in 2025. Now I'll talk about our AI demand outlook. We continue to observe robust AI-related demand from our customers throughout 2025. We reaffirm our revenue from AI accelerators to double in 2025. The AI accelerators will define as AI GPU, AI ASIC and HBM controllers for AI training and inference in the data center. Based on our customers' strong demand, we are also working hard to double our CoWoS capacity in 2025 to support journeys. Recent developments are also positive to AI's long-term demand outlook. In our assessment, the impact from AI recent models, including DeepSeek, will drive greater efficiency and help lower the barrier to future AI development. This will lead to wider usage and greater adoption of AI models, which all require use of leading-edge silicon. Thus, these developments only serve to strengthen our conviction in the long-term growth opportunities from the industry megatrend of 5G, AI and HPC. To address the structural increase in the long-term market demand profile, TSMC employed a disciplined and revolved capacity planning system. This is especially important when we have such high forecasted demand from AI-related business. Externally, we work closely with our customers and our customers are customers to [pan out] capacity. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both a top-down and bottom-up approach to determine the appropriate capacity build. Based on our planning framework, we are confident that our revenue growth from AI accelerators will approach a mid-40s percentage CAGR for the next five years period starting from 2024. Next, let me talk about TSMC's additional US$100 billion investment plan to expand in Arizona. All our overseas decisions are based on our customers' need, they value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. Federal state and city government, recently announced our intention to invest an additional US$100 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for three additional wafer manufacturing fabs to advice packaging fabs and a major R&D center. Combined with our previously announced plan to build three advanced semiconductor manufacturing fab in Arizona, this brings our total investment in the U.S. to US$165 billion to support the strong multiyear demand from our customers. Our first fab in Arizona has already successfully entered high-volume production in 4Q 2024, utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize the 3-nanometer process technology is already complete, and we are working on speeding up the volume production schedule based on the strong AI-related demand from our customers. Our third and fourth fab will utilize N2 and A16 process technologies and with the expectation of receiving all the necessary permits, are scheduled to begin construction later this year. Our fifth and sixth fab will use even more advanced technologies. The construction and ramp schedule for this fab will be based on our customers' demand. We also plan to build two new advanced packaging facilities and establish an R&D center in Arizona to compete the AI supply chain. Our expansion plan will enable TSMC to scale up to a giga-fab cluster to support the needs of our leading-edge customers in smartphone, AI and HPC applications. With this additional US$100 billion investment plan to expand our leading-edge capacity in Arizona, I would also like to mention that TSMC is not engaged in any discussion with other companies regarding any joint venture technology licensing or technology transfer and sharing. After completion, around 30% of our 2-nanometer and more advanced capacity will be located in Arizona creating an independent leading edge semiconductor manufacturing cluster in the U.S. It will also create greater economies of scale and help foster a more complete semiconductor supply chain ecosystem in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success, while remaining a key partner in enabling all the strength and leadership of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan Central, Prefecture and local government, our first specialty technology fab in Kumamoto has already started volume production in late 2024 with a very good yield. The construction of our second specialty fab is scheduled to start later this year, subject to the readiness of the local infrastructure. In Europe, we have received strong commitment from the European Commission and the German Federal state and city government. We are on track with our plan to build a specialty technology fab in Dresden, Germany. In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fab and four advanced packaging facility over the next several years. Volume production of N2 is expected to start in second half 2025, and we are preparing for multiple phases of 2-nanometer fabs in both Hsinchu and Kaohsiung Science Parks to support the strong structural demand from our customers. By expanding our global footprint for continuing investment in Taiwan, TSMC, can continue to be the trusted technology and capacity provider of the global logic IC industry for years to come, while delivering profitable growth for our shareholders. Finally, I'll talk about our N2 status and A16 introduction. Our 2-nanometer and A16 technology is the industry in addressing the insatiable need for energy-efficient computing and almost the innovators – almost all the innovators are working with us. We expect the number of new tapeout for 2-nanometer technology in the first two years to be higher than both 3-nanometer and 5-nanometer in their first two years, fueled by both smartphone and HPC applications. N2 will deliver full-node performance and power benefits with 10% to 15% speed improvement at the same power or 20% to 30% power improvement at the same speed and more than 15% chip density increase as compared with N3E. N2 is well on track for volume production in the second half of 2025 are scheduled with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduced N2P as an extension of N2 family, N2P featured further performance and power benefits on top of N2 and volume production is scheduled for second half 2026. We also introduced a 16 feature in super power rail or SPR as a separate offering. Compared with the N2P, A16 provides a further 8% to 10% speed improvement at the same power of 15% to 20% power improvement at the same speed and additional 7% to 10% chip density gain. A16 is best suited for specific HPC products with complex signal route and dense power delivery network. Volume production is scheduled for second half 2026. We believe N2, N2P, A16, and its derivatives will further extend our technology leadership position enable TSMC to capture the growth opportunities well into the future. This concludes our key message, and thank you for your attention. A - Jeff Su: Thank you, C.C. 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 the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Operator Instructions] Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Operator: The first one to ask question Gokul Hariharan from JPMorgan. Gokul Hariharan: Thank you very much. Good afternoon. And first of all, thanks for clearing the air on all those JV-related news reports. I think a lot of people needed that. Thank you. My first question is on AI demand. So C.C., there has been a lot of talks about CoWoS order adjustment and some concerns about AI demand. You did talk about CoWoS capacity doubling. Could you talk a little bit about how you see demand versus supply? I think last time we talked about this, you did indicate CoWoS demand is still well above supply. Could you talk a little bit about how the situation is looking for CoWoS demand versus supply this year? And maybe a little bit of early color on 2026 also as you plan for the capacity? Jeff Su: All right. Thank you, Gokul. For everyone's benefit, let me try to summarize your first question. So again, Gokul's first question is on the AI-related demand. He notes there's been a lot of noise around CoWoS and order cuts and such. So he would like to ask C.C. what is the thinking or strategy for TSMC CoWoS still doubling this year? Is the demand still exceeding the supply? And how is the CoWoS capacity and supply or supply and demand, I should say, look like going into 2026, if C.C. is able to provide any color? C.C. Wei: Okay. Gokul, I know there's a lot of rumors about the CoWoS. The last time when we talk about the CoWoS, the demand is almost insane and much, much higher than we can prepare. And now it's a little bit better. I think still we need to build a lot of capacity to meet the demand. As I said, we have to double our CoWoS capacity. Still fully loaded. And for 2026, I cannot say the number, but it's still a [indiscernible] momentum while we continue. Okay. Did that answer your question? Gokul Hariharan: So do you still think 2026 is going to be supply limited still, but demand is still going to be much more than supply even in 2026? Is that your current expectation C.C.? Jeff Su: So Gokul was asking, then do we still see demand exceeding supply for CoWoS in 2026? C.C. Wei: Well, we will work very hard to make sure that we don't have this kind of a demand is much, much higher than the capacity. We're working very hard, and I believe that you will be more balanced next year. Gokul Hariharan: Thank you. My second question is on the U.S. investment and all this like persistent rumors about involvement in your competitors, operations, et cetera. You have interacted with the U.S. government, the new administration for the last several months and C.C. made a big announcement at the White House as well. Just wanted to understand what does TSMC kind of impression in terms of what is required? Now that there is also the semiconductor tariffication going on. What is TSMC's impression of what is required over the next two, three years in terms of reassuring of capacity both from a U.S. administration productive also from your U.S. customers perspective. And I also – I think Wendell also indicated that the margin dilution maybe slightly bigger as we go along. So could you talk a little bit about how much of the value can you pass on to the customers as the expansion becomes a little bit more accelerated? Thank you. Jeff Su: Okay. So Gokul's second question is a bit involved, but he's asking about again, a lot of talk about our recent announcement for an additional 100 billion expansion in the U.S. again, talk about this involving a competitor. C.C. has been speaking to the U.S. government. There's still potential semiconductor tariff. So his question is really from TSMC's point of view, what do we think is required for more onshoring in the U.S.? Can we share the perspective from the U.S. government? Or more directly what our customers are asking us to do in terms of reshoring? That's the first part. And the second part will – maybe Wendell can address on the margin? C.C. Wei: Really. Okay. I thought that's a very long, long question. Let me answer that. Yes, we – indeed, we have talked with U.S. government officials. And the reason we are expanding in Arizona actually, let me say again, it's all because of our customers' request, and that because of the very high, high demand. I announced in other occasions say that very strong AI demand from U.S. customers such as Apple, NVIDIA, AMD, Qualcomm and Broadcom. And so that we need to expand our capacity in the U.S. and to support them. We talked with the U.S. government and to ask for their help in getting the necessary permits so we can start the fab. And as a result, I would expect our 2-nanometer capacity around 30% will be in Arizona. And that will be also independent leading-edge semiconductor manufacturing cluster. Okay. Jeff Su: And then, Gokul, the second part of your question is related to the – sorry, Wendell had mentioned that the margin may widen. So Gokul's second part of the question, I think was related to pricing and what is our strategy or approach here as we expand overseas. Is that correct? Gokul Hariharan: Yes, that's right. Yes. Wendell Huang: Hey, Gokul, you're asking about the pricing. As we always said, reflecting our value is a continuous and ongoing process for TSMC as we're in a very capital-intensive business. So we need to have a very high gross margin to earn the sustainable and healthy return. And that is why we set up our pricing strategy. Geographic manufacturing flexibility is an important part of our value proposition to the customers. We are already discussing this with our major customers, and the progress is so far so good. Jeff Su: Okay. Gokul? Gokul Hariharan: Okay. Understood. Thank you. Jeff Su: All right. Thank you. Operator, can we move on to the next participant, please? Operator: The next to ask question, Bruce Lu from Goldman Sachs. Please ask your question. Bruce Lu: Okay. Thank you for taking my question. I think the geopolitical risk [indiscernible] is one of the major uncertainty nowadays. Last two days, we have like H20 being banned in China. So how does that impact to TSMC focus and production planning, right? Do we have enough other customer and demand to keep our advanced node capacity fully utilized? Or how does that change our long-term production planning moving forward? Jeff Su: Okay. Bruce, thank you. Your first question is related. He's talking about geopolitical risk or I guess some of the recent rules and announcements, specifically the ban on H20. So his question is how does this impact TSMC's business? How does this impact our capacity planning and our strategies? C.C. Wei: Bruce, let me answer this question. Of course, we do not comment on specific customer product, but let me assure you that we have taken this into consideration when providing our full-year growth outlook. Did I answer the question? Bruce Lu: Yes, but I want a little bit more about like – I'm sure you guys did a lot of sensitivity analysis, like what kind of impact is going to be? Or can you show us like how much buffer we got, like you've assume, like how comfortable we have to maintain our current capacity planning moving forward or current utilization right now? Jeff Su: Okay. So Bruce is asking for some more color in terms of what type of buffer or what type of room we have in making our decisions for the long-term capacity planning? C.C. Wei: Well, actually, we know a lot of people right now speculate a lot of things. But again, certainly, we are mindful of the potential impact from all the recent tariff announcements, especially the potential impact to the end market demand. We'll continue to watch it carefully. Having said that, we have not seen any change in our customers' behavior so far. And so we stick on our forecast. Bruce Lu: I see. Thank you. Let me switch gears to a little bit for the non-U.S. capacity expansion. I think yes, as we understand that the current capacity [utility for] mature node is under utilized, right? Do we consider to slowdown the capacity expansion in Japan or Europe? Or just relocate the current equipment from Taiwan to Japan or Europe instead of building the new one? We don't want – why do we want to expand the capacity for the mature node, which management already mentioned that it's a oversupply industry though. If we relocate them, we can squeeze more space, clean room in Taiwan for more advanced nodes? Jeff Su: Okay. So Bruce's second question is around mature node and our expansion into Europe and Japan. His question really is given that the capacity of mature node 7-nanometer underutilized. Number one, are we concerning to slowdown our expansions in these places? And then number two, would we consider using current relocate equipment from Taiwan to overseas rather than just the pure new expansion or greenfield expansion? C.C. Wei: Bruce, let me answer the first part of the question. Are we considering slowing down, the answer is no. We executed our plan are scheduled. The reason is very simple because of this kind of mature node is a specialty technologies demand, which my competitors did not have capacity or capability to support. So it is kind of a free form. You mentioned the underloading of the mature node, and so again I would emphasize no, we are not going to slowdown our plan in Japan or in Germany. The second question is how to do it. We have a good idea, but it's TSMC's the confidential information, I'll let you know later. Bruce Lu: Okay. Thank you. Jeff Su: All right. Thanks, Bruce. Operator, can we move on to the next participant, please. Operator: Now the line is open to Charlie Chan, Morgan Stanley. Charlie Chan: Hi. Good afternoon, gentlemen. Thanks for taking my question. So my first question is really very specific on the semiconductor tariffs on either Taiwan or TSMC's leading-edge. So I'm wondering, first of all, does the TSMC get involved in all those tariff negotiations between Taiwan government and the U.S. government? And secondly, do you believe that your commitment of US$165 billion investments can get us bear on these semiconductor tariff? Because in your previous comment, it seems to only concerned about the tariff impact on consumer tech demand. But I think global investors are also very concerned about additional tariffs on this semiconductor category. Can you give us some color? Thank you. Jeff Su: Okay. Let me summarize your question. First question, Charlie. So Charlie's first question is on semiconductor tariffs. He wants to know what is our comment or view on potential tariffs on Taiwan, reciprocal tariffs or semiconductor-specific tariffs. His question specifically, is TSMC get involved in the negotiations between the Taiwan government and the U.S. government? C.C. Wei: Charlie, this kind of tariff discussion is between countries. We are a private company. Certainly, no, we are not getting involved. What is the second question? Charlie Chan: Okay. Yes. So actually, do you have any visibility that the semiconductor specific tariffs can be exempt? Jeff Su: Sorry, Charlie, I think your question was with our total investment of US$165 billion in Arizona. Do we believe does TSMC believe semiconductors will be exempt from these tariffs? Charlie Chan: Yes. C.C. Wei: Charlie, all policy especially this tariff decision are government's responsibility to decide. And as a private company, we are fully respect of this, but we are not getting involved. Charlie Chan: Okay. Got you. I think you were to moderate, but let's move on to my second question. So based on your second quarter guidance, which is very strong, up 13% quarter-on-quarter. I can't help to think whether there are [customers pooling] given the tariffs? Or is it kind of real demand? And also based on your full-year guidance, so called the mid-20%, it seems like second half recovery will be very, very gradual or flattish. So I'm wondering if you're already bake in kind of consumer tech demand impact. And if a tariff have some kind of turnaround, right, meaning, for example, major smartphone brands whether there's a chance for you to revise your full-year revenue guidance? Thank you. Jeff Su: Okay. So Charlie, second question is on the revenue outlook. His first part is on the second quarter. He noted second quarter, 13% at the midpoint in U.S. dollar terms, Q-on-Q is very strong. So he wonders, is this – are we seeing already some tariffs pull-in impact? Or is this part of that guidance? I'll stop here first. Wendell Huang: Yes, Charlie, we have – as we said in the prepared remarks, we haven't seen any changes in customers' behavior so far. Our second quarter growth was driven mainly by strong demand for the 3-nanometer and 5-nanometer technologies underpinned by the growth in our HPC platform. As I said, we haven't seen any – observed any changes in customer behavior in terms of pooling or due to tariffs, you're probably better to ask them directly. Jeff Su: And the second part then Charlie is asking about what the second quarter guidance implies limited half-on-half growth. So is that also because we are assuming something from tariff impact to consumer demand? Or why is that? Wendell Huang: Charlie, as we also said in the prepared remarks, there are uncertainties and potential risk from tariffs exist. So far, that's what we are able to share with you is we stick to the mid-20% or close to mid-20% year-over-year growth. No different from the previous quarter. Charlie Chan: I see. Yes, so I think that's real. But I think your answer to focus the previous question on long-term margin dilution was a little bit unclear because we thought that a 2% to 3% margin dilution from overseas should remain to be the case, but it seems like is widening. So I'm not sure if you use because you are further accelerating your U.S. fab expansion or some cost item or pricing item not in your stations versus maybe one or two months ago? Jeff Su: Okay. I think – so Charlie is asking basically how come the dilution in the latter period widens to 3% to 4%? What are the drivers or reasons behind it? Wendell Huang: Yes, Charlie, the widening of dilution on the gross margin in the later part of the five-year period is mainly from inflation in cost and also potential tariff-related cost increases. Those are the reasons. Charlie Chan: I see. Okay. Thank you. Jeff Su: Okay. Thank you, Charlie. Okay, operator, let's move on to the next participant, please. Operator: Next one Charles Shi from Needham. Go ahead, please. Charles Shi: Thanks for taking my questions. Maybe I'll ask a relatively higher level question. It's a two-part question. Both are regarding your expansion plan in the United States. I think management – another occasion that what TSMC wants the most is really fairness. Nothing monetary, nothing about tariffs, but fairness and management kind of elaborate a little bit what fairness means, give us a little bit more specifics. But the other part of the question regarding the U.S. expansion, it's about the R&D team center you announced, so we understand, yes, the TSMC's R&D in the U.S. does need to start from somewhere, right, you said it's more about the production improvements related to R&D on derivative nodes. But since this seems to be something U.S. really cares about that the R&D capability on the U.S. soil on the leading-edge, is there any longer-term plan to have the U.S. R&D center to be involved, let's say, in the primary R&D, let's say, brand new processes, that the major nodes divestment. That's my two-part question. Thank you. Jeff Su: All right. Thank you, Charles. So again, to summarize, both questions are related to the expansion in the U.S. So first part of the question is we – C.C. has mentioned, all we want is fair treatment. So what do we mean by fair or fairness? C.C. Wei: Well, let me answer this question. What we mean the fair treatment it's very simple. If anybody gets a subsidy or get the incentive, it should be everybody should get the same. Either we got all or we got zero, all right? So that's what we call it fair. So again, I would like to assure you that we are – will be very competitive in either conditions. Jeff Su: Okay. And then the second part of the question is regarding the R&D. Charles is saying he understands the R&D needs to start from somewhere, but with our major R&D center in Arizona, what will be the purpose or the focus? And will it be involved at some point in ramping new technologies? C.C. Wei: As I said before, TSMC is a fab, never be stagnant. We always continue to improve it. And we need to establish a major R&D center in Arizona with about 1,000 engineers. That's a big amount. But the focus will be support our manufacturing cluster improve its technology and allow it to operate independently. Okay. Did I answer the question? Charles Shi: Maybe let me just really follow-up because there has been a good amount of chatters about the U.S. R&D center more supporting manufacturing rather than doing a brand – major R&D, the brand new nodes, but it looks like that's not the plan, but over the longer term, is there any thoughts of our management, maybe they will get involved in brand-new nodes development one way or the other. I think that's the question people have been discussed about over the last quarter. Jeff Su: Okay. So Charles is asking, will the R&D center over the mid to long-term. Can you also focus on things like new node development or path finding opportunities, long-term research, these type of things? C.C. Wei: Okay. Actually, the first purpose is to that Arizona fab can operate independently. But of course, we have done and we are doing it right now to some kind of test funding, exploratory work and cooperate with university, blah, blah, blah. It's actually a lot of activities. 1,000 engineers is not a small amount. Of course, it's not comparable to TSMC right now, it's a 10,000 R&D people, but it's a beginning, okay? So we do a lot more. Jeff Su: Okay. Charles, do you have a second question? Charles Shi: No, I don't. Thank you. Jeff Su: Okay. Great. Thank you. Operator, the next participant, please? Operator: Next one to ask question Sunny Lin from UBS. Sunny Lin: Good afternoon. Thank you very much for taking my questions. So my first question is to follow-up on the Arizona expansions. So first part is on the timeline or the pace of your expansion now given the stronger demand for your U.S. capacities. To what extent could you pull in the wrap of the original second and third phase? And for your fourth phase, you earlier mentioned that you will be constructing the [indiscernible] there this year. So would that will be possible that you start to ramp the fourth phase at the same time as the third phase? Jeff Su: Okay. So Sunny's first question is regarding our Giga fab cluster in Arizona. She wants to understand the timeline of expansion, particularly given the strong AI-related demand. Can we pull in the timing for both the second fab and the third fab? And also, can we, at the same time, start the production of the third and fourth fab simultaneously? C.C. Wei: Well, Sunny, we are working very hard to speed it up of our production in the second fab and the construction of the third fab. All I can say around is customers demand is strong. We have to – ready to speed it up. And the following all the fab definitely will depend on our customers' demand, of course. Jeff Su: Okay. Sunny? Sunny Lin: Well, so sorry, just to clarify. So the second phase originally is planning for production in 2028. So now should we assume it to be from maybe mid-2027 or even first half 2027? And for the third phase since you are building the [indiscernible] this year, so will the production stop maybe one year ahead versus the original timeline of 2030? Jeff Su: Okay. So Sunny, specifically, so the second one, we said we're speeding up. Can we give some context of the timeframe? And then for the third fab, will we also speed it up, could that also be moved forward? C.C. Wei: Okay. Yes, we are speeding up. How fast? The second fab, as you said, it should be pulled in. And this one, we are working hard to pull in at least a couple of quarters that's at least. On the third fab, actually, I did not speak the whole thing is also being constrained by the labor shortage of Arizona, and we need to get all the permits everything, et cetera. So I cannot give you a very definite date yet, but we are going to update you probably in the next quarter or one quarter after that. Sunny Lin: Got it. No problem. My second question is on the pricing and margin of the overseas expansions. And so now with the – especially stronger demand for the U.S. capacities, would you be able to sell more value given the stronger onshoring requirements? And then for margin, earlier, you mentioned the 2% to 3% margin dilution for the coming two, three years and then expanding to 3% to 4% maybe into 2029 to 2030. I just wonder what the underlying whether price assumption for that gross margin dilution estimate? If you are able to raise the AZ pricing a bit, will the gross margin dilution could be less? Jeff Su: Okay. So Sunny's question is on the overseas expansion in both pricing and margin, given the strong demand in terms of pricing, can we reflect even greater value to our customers? And therefore – and also her question is given that the dilution from overseas will widen to 3% to 4% in the latter stages of the five-year period. She wants to know what is our underlying wafer price assumption behind us. Wendell Huang: Sunny, let me answer that. These two things are actually go together. As we said, reflecting our value is a continuous and ongoing process. And we – because of our business nature, we need very high gross margin to earn a sustainable healthy return. Now geographic manufacturing flexibility is an important part of our value proposition to the customers. Therefore, we are already discussing this with our major customers. And the progress is so far so good, okay? Now at the same time, the margin dilution from the overseas fabs, the additional dilutions come from the cost inflation as well as potential cost increases from the tariff policies. Of course, with that, we also want to reflect the value and therefore, the discussion with the customers are continuous. Jeff Su: Okay. Sunny? Sunny Lin: Got it. Jeff Su: All right. Thank you. Sunny Lin: All right. Very clear. Thank you very much. Jeff Su: Thank you. Operator, can we move on to the next participant, please. Operator: Next one to ask question Brett Simpson from Arete. Brett Simpson: Yes. Thanks very much. I have a two-part question on this year's guidance for C.C. First. C.C., you mentioned that AI is still expected to double this year despite the U.S. ban on AI GPUs into China. And I guess, China was a meaningful portion of accelerated shipments well over 10% of volumes. So factoring this in, it would imply your AI outlook this year, still doubling would mean that the AI orders have improved meaningfully outside of China in the last sort of three months? Is that how we should interpret your comment about you still expect the business to double? And then second, we're in the June quarter where tariffs have been paused for 90 days. So to what extent due to above seasonal June quarter guidance reflect customer pull-ins ahead of potential tariffs being applied in the September quarter? Thank you. Jeff Su: Okay. So Brett, this question is on, again, the one part is on the AI demand that although there is a ban in China, on certain AI chips or products that we reiterated our AI accelerated growth will double this year. So his assumption is that implies a strong non-China AI-related demand. I'm wondering what is the mechanics or can we comment behind that? C.C. Wei: Brett, three months ago. Now I can tell you that three months ago, we are barely – we just cannot supply enough wafer to our customer. And now it's a little bit balanced, but still the demand is very strong. And you are right. Other than China, the demand is still very strong, especially in U.S. And so we are confident that we are going to double our AI revenue this year. Jeff Su: Yes. And then very quickly, he was asking about the second quarter revenue guidance. And do we see any tariff-related pull-in? I think Wendell answered this earlier. Wendell Huang: Yes. I think that we have – as C.C. said in his prepared remarks, we haven't seen any changes in customer behavior. The growth in second quarter was primarily due to the demand from our 3-nanometer and 5-nanometer technologies underpinned by the demand from the HPC platform. Jeff Su: Okay. Do you have a second question, Brett? Sorry. Brett Simpson: Yes. Thanks, Jeff. My second question was for Wendell, and thanks for clarifying that Wendell. Follow-up is on shareholder returns. And TSMC traditionally has always favored growing the dividends as the main policy. But many shareholders would argue that the dividend payouts are not having that much of an impact on the discounted multiple that TSMC traded versus some of your U.S. big tech peers. So my question is why does TSMC management not adopt a buyback framework particularly with the strength of the cash position on your balance sheet at the moment? Thank you. Jeff Su: Okay. Thank you, Brett. So Brett's second question is circulated on shareholder return. He noted TSMC's policy has always been stable and steadily increasing cash dividend and focused on cash dividend payout. His question is why – would we consider why do we not consider adopting more of a share buyback policy? Wendell Huang: Okay, Brett. We've done studies a long time ago, and we continue to revisit that. We also talk to investors, our conclusion stays the same. The sustainable and steadily increasing dividend is a better way of returning cash to the shareholders. So we're maintaining the policy. Brett Simpson: Okay. Thanks. Jeff Su: All right. Operator, in the interest of time, can we take the questions from the last two participants, please? Operator: Yes. Now the line is open to Laura Chen of Citi. Laura Chen: Hello. Hi. Thank you very much for taking my question. Can you hear me clearly? Jeff Su: Yes. Laura Chen: Yes. Thank you. My question is also about the AI and also the U.S. expansion. Since you just mentioned that CoWoS supply demand will be more balanced into 2026. Do you see any structural change in the future AI chip design when moving to N3 such as like a triplet that kind of a design? And also in that kind of new trend what TSMC's view on the new technologies, such as CPO or PLP panel base. Will that still start from Taiwan first? Or you would also consider to further invest the new like back-end technology in Arizona since C.C. just mentioned that you would also start to build-up the fab in advanced packaging in Arizona. That's my first question. Thank you. Jeff Su: Okay. Laura's first question is a very broad question. But basically, if I just try to distill. She wants to know do we see any changes in the chip design, particularly moving to chiplets? With N3, do we see this more and more? What about the role of things like co-packaged optics and panel level packaging. And I think the essence of her question, will we continue to use our leading – sorry, advanced packaging technologies like CoWoS or SoIC in Taiwan first? Or is this also part of the plan for the expansion in Arizona? C.C. Wei: That's a long question. But Laura, yes, our customers, they continue to using that TSMC's the leading-edge technology and they also adopt the advanced packaging technologies more and more. And also, we are more advanced, right? This year is probably most of CoWoS-S and then next years CoWoS [indiscernible] et cetera. And we can see that customers start to picking up the SoIC and more advanced packaging technologies. As for the – what we call is panel level packaging, we are aggressively developing it. And today, still the feasibility study stage. Too early to say, Europe, in Taiwan or in U.S, but most likely, it will be in Taiwan first, we ramp it up and then bring to U.S. Laura Chen: Okay. Thank you very much guys. That's very clear. And also my second question is also about the capacity allocation between Taiwan and also Arizona. I think you just shared with us that for about like 30% of N2 capacity will be in Arizona, we know it will be starting from when or what kind of timeframe you are looking for? Can we also assume that the same scale like 30% of your Arizona fab for the advanced node in the longer term? Jeff Su: Okay. So Laura's second question is about the capacity allocation between how do we allocate between Taiwan and the U.S. maybe is it duplicative or extra capacity. And then very specific, C.C. had mentioned that N2 and more advanced capacity, 30% – around 30% will be in Arizona once we scale up to the cluster. Will that be kind of the percentage for the leading node in the future? C.C. Wei: Well, we have – right now, we plan a six fab in Arizona. And in that six fab, the 2-nanometer will be a major node, and that's what I say, 30% will be there. As time goes by, after the 2-nanometer will be 1.4 and 1.0, that has not been discussed yet. Laura Chen: Okay. Thank you. Thank you very much. That's very clear. Jeff Su: All right. Thanks, Laura. Operator, can we take the last question from the last participant, please? Operator: The last one to ask questions, Krish Sankar, Cowen. Go ahead, please. Sreekrishnan Sankarnarayanan: Yes. Hi. Thanks for taking the question. My first one is very impressive given uncertainty. You're still maintaining full-year revenue guidance and also your N2 capacity planned for this year and next year. Kind of curious, what is your visibility on second half revenues and also N2 demand for wafers into next year? And then I have a follow-up? Jeff Su: Okay. So Krish's first question is sort of in the near-term, what is our visibility into the second half business outlook? And then also, how do we see the demand for N2 progressing this year and also next year? Wendell Huang: Okay. Let me talk about the first one. We're only at second quarter. So I think it's too early to talk about the second half. We did mention that the uncertainties and risks from tariffs exist, and we might get a better picture in the next few months. So we can probably update you in the next earnings call. Jeff Su: And then the second part of it is on the demand visibility of our 2-nanometer. C.C. Wei: So far actually – so far, it's very strong. As we said, all the new tape-out customers – the number of the tape-out is exceeding what we expected. And as we said, the number of the new tape-out is much higher than the 3-nanometer and 5-nanometer in the same period of time. Jeff Su: Okay. And did you have a second question, Krish? Sreekrishnan Sankarnarayanan: Got it. Very helpful. Yes, Jeff. Yes. Just one quick follow-up. You spoke about the Japan fab. I'm curious what is the capacity installed in Japan today? And how do you think about the revenue contribution this year from Japan? Jeff Su: Okay. Krish's second question is related to our first specialty technology fab in Japan. He wants to know what is the capacity installed for this specialty technology fab and also the revenue contribution from JASM? Wendell Huang: Yes. The capacity for the fab will be 40,000 when its ramp up. The revenue for this year compared to the whole company is really not significant at this moment. Jeff Su: Okay, Krish? Sreekrishnan Sankarnarayanan: Got it. Thank you, Wendell. Thank you, Jeff. Thank you very much. Jeff Su: No problem. Okay. Thank you, everyone. This concludes our question-and-answer session. Before we conclude today's conference, please be advised that the replay of the conference call will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both will be available through TSMC's website at www.tsmc.com. So thank you again for joining us today. We hope everyone continues to stay well and hope to join – you will join us again next quarter. Goodbye, and have a good day. Take care. Thank you.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Fourth Quarter 2024 Earnings Conference and Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC'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 in listen-only mode. The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter 2024, followed by our guidance for the first quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open both the floor and the line for the question-and-answer session. 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 microphone over to TSMC's CFO, Mr. Wendell Huang for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter of 2024. After that, I will provide the guidance for the first quarter of 2025. Fourth quarter revenue increased 14.3% sequentially in NT, supported by strong demand for our industry-leading 3 nanometer and 5 nanometer technologies. Gross margin increased by 1.2 percentage points sequentially to 59%, mainly reflecting a higher capacity utilization rate and productivity gains, partially offset by the dilution of 3 nanometer ramp-up. With operating leverage, total operating expenses accounted for 10% of net revenue. Thus, operating margin increased by 1.5 percentage points sequentially to 49%. Overall, our fourth quarter EPS was 14.45 NT and ROE was 36.2%. Now let's move on to revenue by technology. 3 nanometer process technology contributed 26% of wafer revenue in the fourth quarter. 5 nanometer and 7 nanometer accounted for 34% and 14%, respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 74% of wafer revenue. On a full year basis, 3 nanometer revenue accounted for 18% of 2024 wafer revenue, 5 nanometer 34%, 7 nanometer 17%. Advanced technologies accounted for 69% of total wafer revenue, up from 58% in 2023. Moving on to revenue contribution by platform. HPC increased 19% quarter-over-quarter to account for 53% of our fourth quarter revenue. Smartphone increased 17% to account for 35%. IoT decreased 15% to account for 5%. Automotive increased 6% to account for 4%, DCE decreased 6% to account for 1%. On a full year basis, HPC increased 58% year-on-year. Smartphone, IoT, Automotive, DCE increased 23%, 2%, 4% and 2%, respectively, in 2024. Overall, HPC accounted for 51% of our 2024 revenue, Smartphone accounted for 35%, IoT accounted for 6%, and Automotive accounted for 5%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of TWD2.4 trillion or $74 billion. On the liabilities side, current liabilities increased by TWD184 billion, mainly due to the increase of TWD71 billion in accounts payable and increase of TWD99 billion in the accrued liabilities and others. In terms of financial ratios, accounts receivable turnover days declined by one day to 27 days, while inventory days decreased by seven days to 80 days, primarily due to shipment of N3 and N5 wafers. Regarding cash flow and CapEx. During the fourth quarter, we generated about TWD620 billion in cash from operations, spent TWD362 billion in CapEx and distributed TWD104 billion for the first quarter 2024 cash dividend. Overall, our cash balance increased TWD241 billion to TWD2.1 trillion at the end of the quarter. In US dollar terms, our fourth quarter capital expenditures total $11.2 billion. Now, let me recap our performance in 2024. Due to the strong demand for our 3 nanometer and 5 nanometer process technologies, we continue to outperform the foundry industry in 2024. Our revenue increased 30% in US dollar terms to $90 billion, or increased 33.9% in NT to TWD2.89 trillion. Gross margin increased 1.7 percentage points to 56.1%, mainly reflecting improvements in overall capacity utilization, partially offset by 3 nanometer dilution and higher electricity costs. With operating leverage, our operating margin increased 3.1 percentage points to 45.7%. Overall, full year EPS increased 39.9% to TWD45.25 and ROE increased 4.1 percentage points to 30.3%. On cash flow. We spent $29.8 billion or TWD956 billion in CapEx, generated TWD1.8 trillion in operating cash flow and TWD870 billion in free cash flow. We pay TWD363 billion in cash dividends in 2024, up 24.5% year-over-year. I've finished my financial summary. Now, let's turn to our current quarter guidance. We expect our business in the first quarter to be impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. Based on the current business outlook, we expect our first quarter revenue to be between $25 billion and $25.8 billion, which represents a 5.5% sequential decline, or a 34.7% year-over-year increase at the mid-point. Based on the exchange rate assumption of $1 to TWD32.8, gross margin is expected to be between 57% and 59%, operating margin between 46.5% and 48.5%. Regarding tax rate, our effective tax rate was 16.7% in 2024. For 2025, we expect our effective tax rate to be between 16% and 17%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our fourth quarter 2024 and first quarter 2025 profitability. Compared to third quarter, our fourth quarter gross margin increased by 120 basis points sequentially to 59%, primarily due to a higher capacity utilization rate and productivity gains, partially offset by dilution from the continued ramp-up of our 3 nanometer technology. We have just guided our first quarter gross margin to decrease by 100 basis point to 58% at the mid-point. This is primarily due to ramp costs associated with N2 and CoWoS expansion, and the start of dilution from our overseas fabs. As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp-up, pricing, cost reduction, technology mix, capacity utilization and foreign exchange rate. Looking at full year 2025, given the six factors, there are a few puts and takes I would like to share. On the one hand, we are working hard to increase our value. The dilution impact from our N3 ramp is expected to gradually reduce and we expect our overall utilization rate to moderately increase in 2025. On the other hand, as we have said before, we forecast 2% to 3% margin dilution impact from the ramp-up of our overseas fabs. The impact is less than 100 basis points in the first quarter of 2025, but we expect it to grow more pronounced throughout the year as our fabs in Kumamoto and Arizona ramp up. We also expect inflationary costs, including higher electricity prices in Taiwan to impact our gross margin by at least 1% in 2025. In addition, there are some ramp-up costs associated with N2 and further conversion of N5 to N3 capacity, which together we expect to impact our gross margin by about 1%. Finally, we have no control over the foreign exchange rate but that may be another factor in 2025. Longer-term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget and depreciation. Every year our CapEx is spent in anticipation of the growth that will follow in the future years, and our CapEx and capacity planning is based on the long-term market demand profile. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In 2024, we spent $29.8 billion, as we continue to invest to support our customers growth. With our strong technology leadership and differentiation, we are well-positioned to capture the multi-year structure demand from the industry megatrends of 5G, AI and HPC. In 2025, we expect our capital budget to be between $38 billion and $42 billion, as we invest to capture the future growth. Out of the $38 billion to $42 billion CapEx for 2025, about 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mask making and others. Our depreciation expense is expected to increase by high-single-digit percentage year-over-year in 2025, as newly incurred depreciation will be partially offset by other nodes rolling off depreciation. Even as we invest for the future growth with this level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increased cash dividend per share on both an annual and quarterly basis. Now, let me turn the microphone over to CC. C.C. Wei: Thank you, Wendell. Good afternoon everyone. First, let me start with conclusion of 2024 and our 2025 outlook. 2024 was a mixed year of recovery for the global semiconductor industry. AI-related demand was strong while our other applications saw only a very mild recovery, as macroeconomic conditions weigh on consumer sentiment and end market demand. Concluding 2024, the Foundry 2.0 industry, which we define as all logic wafer manufacturing, packaging, testing, mask making and others increased 6% year-over-year, slightly lower than our previous forecast. Supported by strong demand for our leading edge process technologies, TSMC's revenue increased 30% year-over-year in US dollar term, outperformed the foundry industry growth. Entering 2025, we expect fabless semiconductor inventory to have returned to a healthier level, exceeding 2024. We forecast the Foundry 2.0 industry to grow 10% year-over-year in 2025, supported by robust AI-related demand and a mild recovery in other end market segments. Supported by our technology leadership and broader customer base, we are confident we can continue to outperform the industry growth. We expect 2025 to be another strong growth year for TSMC, and forecast our full year revenue to increase by close to mid-20s percent in US dollar term. Now, I will talk about AI demand and TSMC's long-term growth outlook. We observed robust AI-related demand from our customers throughout 2024. Revenue from AI accelerators, which we now define as AI GPU, AI ASICs and HBM controller for AI training and inference in the data center, accounted for close to mid-teens percent of our total revenue in 2024. Even after more than tripling in 2024, we forecast our revenue from AI accelerator to double in 2025, as a strong surge in AI-related demand continues. As a key enabler of AI applications, the value of our technology platform is increasing as customers rely on TSMC to provide the most advanced process and packaging technologies at scale in the most efficient and cost-effective way. To address the structural increase in the long-term market demand profile, TSMC is working closely with our customer to plan our capacity and investing in leading edge specialty and advanced packaging technologies to support their growth. As we have said before, TSMC employs a disciplined and a rough capacity planning system to evaluate and judge the market demand to determine the appropriate capacity build. This is especially important when we have such high forecast demand from AI-related business. At the same time, we are committed to earning a sustainable and healthy return that enable us to continue to invest to support our customers, of course, while delivering profitable growth for our shareholders. Underpinned by our technology leadership and broad customer base, we now forecast the revenue growth from AI accelerators to approach a mid-40% CAGR for the five-year period, starting off the already higher base of 2024. We expect AI accelerators to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years. Looking ahead, as the world's most reliable and effective capacity provider, TSMC is playing a critical and integral role in the global semiconductor industry. With our technology leadership, manufacturing excellence and customer trust, we are well positioned to address the growth from the industry megatrend of 5G, AI and HPC with our differentiated technologies. For the five-year period starting from 2024, we expect our long-term revenue growth to approach a 20% CAGR in US dollar term, fueled by all four of our growth platforms which are smartphone, HPC, IoT and automotive. Next, let me talk about our global manufacturing footprint update. All our overseas decisions are based on our customers need, as they value some geographic flexibilities and the necessary level of government support. This is also to maximize the value for our shareholder. In the US, we have a long-standing good relationship with the US Government, dating back to even before our Arizona fab project announcement in May 2020. We have received strong commitment and support from the U.S. customers and the U.S. federal, state and city government, and are making substantial progress. Building on the successful result of our earlier engineering wafer production, we were able to pull ahead the production schedule of our first fab in Arizona. Our first fab has already entered the high-volume production in 4Q 2024 utilizing N4 process technology with a yield comparable to our fabs in Taiwan. We expect a smooth ramp-up process and with our strong manufacturing capability and execution, we are confident to deliver the same level of manufacturing quality and reliability from our fab in Arizona as from our fab in Taiwan. Our plans for second fab and third fab in Arizona are also on track. These fabs are utilizing even more advanced technologies, such as N3, N2, and A16 based on our customers' need. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner in enabling of the US semiconductor industry. Next, in Japan, thanks to the strong support from the Japan central, prefectural, and local government, our progress is also very good. Our first specialty technology fab in Kumamoto has started volume production at the end of 2024 with record yield. Construction of our second fab, specialty fab, is scheduled to begin this year. In Europe, we have received strong commitment from the European Commission and the German federal, state and city government. We are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications. In Taiwan, we continue to receive support from Taiwan government, and we are investing in and expanding our advanced technology and packaging capacities. Given the robust multi-year demand for our 3 nanometer technology, we continue to expand our 3 nanometer capacity in Tainan Science Park. We are also preparing for multiple phases of 2 nanometer fabs in both Hsinchu and Kaohsiung Science Park to support the strong structural demand from our customers. We are also expanding our advanced packaging facilities across several locations in Taiwan. As we have said before, under today's fragmented globalization environment, overseas fab costs are higher for everyone, including TSMC and all other semiconductor manufacturers. We are leveraging our fundamental competitive advantage of manufacturing technology leadership and large-scale manufacturing base to be the most efficient and cost-effective manufacturer in the region that we operate while supporting our customers' growth. Finally, I will talk about N2 and A16 introduction. Our 2 nanometer and A16 technologies lead the industry in addressing the insatiable need for energy-efficient computing, and almost all the innovators are working with TSMC. We expect a number of the new tapeout for 2 nanometer technology in the first two years to be higher than both 3 nanometer and 5 nanometer in their first two years, fueled by both smartphone and HPC applications. N2 will deliver full-node performance and power benefit with 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed, and more than 15% chip density increase as compared with the N3E. N2 is well on track for volume production in second half of 2025 as scheduled, with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduced N2P as an extension of N2 family. N2P features further performance and power benefit on top of N2. N2P will support both smartphone and HPC applications, and volume production is scheduled for second half 2026. We will also introduce A16 featuring Super Power Rail, or SPR, a separate offering. TSMC's SPR is an innovative best-in-class backside power delivery solution that is first in the industry to incorporate a novel backside network scheme that preserves gate density and device with flexibility to maximize the product benefit. Compared with the N2P, A16 provide a further 8% to 10% speed improvement at the same power, or 15% to 20% power improvement at the same speed, and additional 7% to 10% chip density gain. A16 is best suitable for specific HPC products with a complex signal route and dense power delivery network. Volume production is scheduled for second half 2026. We believe N2, N2P, A16 and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunity well into the future. This concludes our key message. And thank you for your attention. A - Jeff Su: Thank you C.C. 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 the participants an opportunity to ask their questions. Questions will be taken from both the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Operator Instructions] Now we will begin the Q&A session. We'll take the first few questions here from the floor and then go to online. I think maybe left, middle, right. So why don't we start. I think first question Gokul Hariharan from JP Morgan. Gokul Hariharan: Thanks, Jeff. Happy New Year management team. My first question is on the TSMC's US future strategy. There has been a lot of changes recently, one relaxed N minus 1 restriction. There was a news about that a week back. C.C., you met Elon Musk as well recently. So you said there are a lot of developments that you've discussed. Your key IDM competitor seems to be struggling as well, while your Arizona fab seems to be ramping up quite well. So in light of all these, I just wanted to understand the longer-term strategy. Would you start -- would you consider investing in latest node in the US because so far it has been N minus 1. Now you don't have the restriction from the Taiwan government to go and invest in the latest node. What has been your feedback in whatever discussions you have had with the incoming President Trump administration, because they have talked a lot about CHIPS Act and everything but they're also supportive. Your original investment was during President Trump's first term. And lastly, I think -- Wendell, I think last time you had mentioned you're not very keen on taking over any IDM fabs. Has that thinking changed, especially given TSMC has the potential to become even-more stronger partner for the US in terms of bringing up US local manufacturing? Sorry, long question. Wendell Huang: Yes. Okay, thank you, Gokul. Indeed, a very long question. I think Gokul's question is looking at TSMC and our strategies in terms of global expansion, particularly in the U.S. He notes that Taiwan has recently relaxed or said they relaxed the N minus 1 rule and C.C. has met several -- many of our large customers in the US and our Arizona fab is ramping quite well. So his question really is on the longer-term strategy, I believe, three parts. Number one, what is the feedback or sort of discussions ongoing with the next administration in the U.S.? Secondly, would we consider taking over IDM fabs? Has that thinking changed? And last on the new node. Maybe we'll go one by one. C.C. Wei: I almost forgot your question already. Okay, first one, the technology node, actually it's not we don't want to ramp up the same technology as in Taiwan. But if you look at it, the one we're ramping up, introduced a new technology into manufacturing. The fab is -- the process is so complicated, so it has to be very close to the R&D people. So the initial phase of the ramping-up always come from the fab close to R&D. So in that sense, we want to ramp up the same kind of technology in US, but that practically is a little bit difficult. So Taiwan will always be first. That answer your question? It's not because of N or N minus 1 certification. No, it's critically we just have to ramp up a new node in Taiwan. Gokul Hariharan: Okay. C.C. Wei: And the second, do we change our strategy to expand faster or something, again, this is -- we always say that we build the capacity overseas, it's due to customers need. If my customer has a very high demand, what should I do? I build more fab, right? With the necessary government's support, by the way. Okay, talking about the government, let me assure you that we have a very frank and open communication with the current government and with the future one also. I cannot say anything more than that. Okay, what is -- Gokul Hariharan: IDM fab? C.C. Wei: That's my customer. And now that we -- again, our strategy is not based on my IDM competitors' status. They are our very good customers. I like them and they are very important to TSMC's business also. That all I can say. Thank you. Gokul Hariharan: Okay, thanks, C.C. Maybe my next question going to gross margins. So Wendell, we are almost approaching 60% gross margin. Last cycle, we peaked at about 60% towards the peak of the cycle. You are expecting the cycle to even strengthen based on guidance that C.C. provided for both AI as well as some improvement in non-AI. So how should we think about gross margins in this cycle? Is it realistic that we can get to more than 60% gross margin in this upcycle? And related to that, could you help us understand the US, especially the US fab -- overseas fabs, but especially US fab dilution, what are the key factors there because as you mentioned, yield is already approaching or almost close to Taiwan yield. So is it basically cycle time is longer, or is it that some other costs are much higher in the U.S. fab? Because new fab depreciation is probably fairly similar compared to the Taiwan fab. Jeff Su: Okay. So Gokul's second question is on gross margin. Again two parts. He notes gross margin is almost approaching 60%. In 2022, the last cycle, it was also around this type of level. We have said that this year is another very strong growth year for TSMC. So his question is how should we think about gross margins in this current cycle? Can we approach or get to 60% or low 60s type again? And then the second part is more specific to the US in terms of the cost gap. What are the US cost factors leading to the dilution impact? Wendell Huang: Okay. Gokul, first question on the gross margin. As we said, there are six factors affecting the profitability. Every year, different factors play different roles. But, for example, if the utilization is extremely high like the last cycle, it is not impossible for us to reach what you just said. And secondly, the US fab cost, it is more expensive in the US, mainly because of several reasons. Number one, the smaller scale; number two, the higher price in the supply chain; and number three, the very early stage of the ecosystem. So if you add all these up, as we said, 2% to 3% dilution from our overseas fabs every year in the next five years. Gokul Hariharan: If I use the 2% to 3% and do some math, it feels like the overseas fab is starting at, I don't know, 10% gross margin or 5% gross margin, just adding in factors. Obviously, it's not how it works, but I'm just doing outside in. Is that right? Is that the right kind of ballpark in terms of thinking about margin? Wendell Huang: All we can share is the 2% to 3%. Yes. Gokul Hariharan: I don't think TSMC has ever started a fab at 10% gross margin. Thank you. C.C. Wei: Gokul, we are working hard to improve it. Jeff Su: Okay, thank you Gokul. We'll go to the middle. Laura Chen from Citigroup -- Citibank. Laura Chen: Thank you, and congratulations for the good result. I just want to have more details about your review. I mean, I think people are kind of looking for your updated long-term CAGR growth. So I believe that 20% starting from a very -- already very high base in 2024 is a really good long-term objective. But just wondering that aside from the strong AI demand, what's your view on the traditional applications like a PC and the smartphone growth, and particularly for this year? Jeff Su: Okay, so Laura's first question is looking -- she notes that we have updated our long-term CAGR to be approaching 20% revenue growth in US dollars, starting off even the high base of 2024. So her question is, of course, AI demand is part of that, but what about smartphone and PC? And I think your question is specific to this year, CC, 2025. C.C. Wei: This year is still a mild growth for PC and smartphone, but everything is AI-related. So you can start to see why we have confidence to give you a close to 20% CAGR in the next five years. AI, you look at a smartphone, they will put the AI functionality inside. And not only that, so the silicon content will be increased. In addition to that, actually the replacement cycle will be shortened. And also they need to go into the very advanced technology because of -- if you want to put a lot of functionality inside a small chip, you need a much more advanced technology to put those [indiscernible]. Put all together that even smartphone, the unit growth is almost low single-digit, but then the silicon and the replacement cycle and the technology migration, that give us more growth than just a unit growth. Similar reason for PC. Laura Chen: So we can kind of expect those AI-capable devices, they were all based on 2 nanometer next year second half? C.C. Wei: Leading edge technology. That's what I say. Laura Chen: Okay, thank you. And also my next question is about AI. I noted that these times you include the HBM controller into your AI business revenues definition. So can you provide us more update about what the HBI base die business opportunities could be? And previously TSMC kind of announced cooperation with the key memory suppliers globally. Can you give us more details or updates on the progress of this business engagement? Jeff Su: Okay, thank you, Laura. So Laura's second question is on HBM controllers. She notes that our definition of AI accelerators includes memory controllers or HBM controllers. So her question is how do we see this opportunity or what is the opportunity for TSMC, and what is the progress of this working with our memory partners? C.C. Wei: We are working with all the memory suppliers, all of them, and that is because of TSMC's logic chip or logic technology more advanced, and that means our customers' requirement. So all of them are working with TSMC. Now, we start to see some of the product coming out, but the high volume, probably you need to wait for another half or one year to see the high volume and big contribution to TSMC's revenue. Jeff Su: Okay, thank you. We'll move to this side of the room. I guess we have Charlie Chan from Morgan Stanley. Charlie Chan: Hey, C.C., Wendell and Jeff. First of all, Happy New Year. I think it's going to be a very exciting year given your bullish outlook and also lots of news going on. Right? So let me start with, overnight the US seems to put a new framework on restricting China's AI business. Right? So I'm wondering whether that will create some business impact to your China business and how are we going to manage it? And also for some chips in the middle, high performers, like crypto mining, autonomous driving chip, do you think those count as cloud AI and would TSMC be able to continue to service your China customers? Thank you. Jeff Su: Okay, thank you, Charlie. So Charlie's first question, if I may, sort of extrapolate or summarizes about the announcements of different types of US export restrictions this week pertaining to China and AI-related chips. So his question is what is the impact to TSMC? How does it impact our business? C.C. Wei: So far we look at -- we don't have all analysis yet, but the first look is not significant. It's manageable. So not meaning that my customers who are being restricted or something, we are applying for the special permit for them, and we believe that we have confidence that they will get some permission so long as they are not in the AI area, especially automotive industry or even you talk about the crypto mining. Charlie Chan: Yes, thank you. This is super helpful. And my second question is actually a very hot topic recently as well, the CPO. I think your main partner, Jensen, came to Taiwan this time probably -- besides meeting you, right, probably he also want to enable this supply chain. So based on your recent technology symposium, right, you already get ready for your COUPE or COUPE optical engine. But do you think the Taiwan supply chain can really facilitate this CPO, because we thought these are key components, the next-generation Rubin schedule could have some issue? So I think this is part of -- first part of question about how you're going to facilitate this CPO supply chain. And secondly to TSMC, your foundry service, do you see significant upside when an [indiscernible] network can migrate to CPO, because -- I ask this because some conventional product like optical transceiver, DSP, could be replaced? Thank you. Jeff Su: Well, Charlie's second question is a very specific topic. He wants to know, well, if I can generalize because we certainly don't comment on customers or their products, but in terms of our progress on silicon photonics and CPO, how are we working with customers? How are we preparing as part of our advanced packaging solutions, and what are the opportunities for TSMC as optical moves to silicon photonics and other type of solutions on a general basis? C.C. Wei: Charlie, he's had a very technical question. Silicon photonics, we are working on it, as you said, and we got a good result also. However, a big volume, I don't think it will be in this year, or probably we have to wait for one or one and a half year to -- you can see that contribution or the volume production. The initial results are quite good, no doubt about it. And so my customers are quite happy. Jeff Su: Okay, thank you, C.C. Operator, we'll now move to the questions online. We'll take the first call from the online participant, please. Operator: Yes, first question, Brett Simpson, Arete Research. Brett Simpson: Yes, thanks very much. And can I just say congratulations on reaching 100 billion in annual sales in Q4. It's quite a milestone. So my first question is on Arizona. I think, Wendell, you mentioned that we need to see some higher scale. So can you update us on the status of phase two? It looks like the construction of its shell is nearly complete, but would be great to understand more about how you see P2 developing over the course of 2025. And in terms of pricing US wafers, how are you planning to do this? Will you have a US price and a Taiwan price, or are you more likely to have a global price regardless of where you make the wafers? Thank you. Jeff Su: Okay. So Brett's question, first question is on Arizona, maybe split into two parts. First is in terms of we have already started the volume production of the first fab. So Brett would like an update on the progress of the second fab, in terms of the construction of the buildings and the shelves, et cetera. And then the second part would be on the pricing of overseas, as we say there's value to our customers. He wants to know do we charge a separate price or is it part of the overall pricing, et cetera, et cetera. C.C. Wei: Let me answer the second question first. Do we charge a little bit higher? Yes, we did because of -- we have a value of geographic flexibility. Right? And you guys know, bearing USA is a premium product. Yes, we discuss with our customer and they all agree and happy to work with TSMC, so that we can -- because of the cost structure over there, so it's a little bit higher price over there. The progress of the first fab is right now in volume production. Second fab, we almost finished all the building and start to put the facility, et cetera, et cetera. And we expect that we'll move the tools this year also. And we have a plan that our third fab probably will start very soon, and we will announce it in the later days. Okay? Jeff Su: Okay, thank you, C.C. Brett, does that answer your first question, and do you have a second one? Brett Simpson: Yes, very clear. And the second question, I wanted to get your perspective. Broadcom CEO recently laid out a large SAM for AI hyperscalers building out custom silicon. I think he was talking about a million accelerator clusters from each of the customers he has in the next two or three years. What's TSMC's perspective on all this? I'm sure you've spent a lot of time verifying what hyperscalers are planning over the years to come. And how comfortable are you with the scale of what's being implied here? Thanks. Jeff Su: Okay. So Brett's second question is looking at AI, I guess, specifically AI custom chips or ASICs. He notes that one of our customers recently laid out a very strong or large addressable SAM market for AI hyperscalers using custom silicon. Lots of them talking about clusters of 1 million chips. So he wants to know what is TSMC's view? How do we see this trend in terms of AI ASICs as part of the AI demand megatrend? C.C. Wei: Brett, I'm not going to answer the question of the specific number, but let me assure you that whether it's ASIC or it's a graphic, they all need a very leading-edge technology and they are all working with TSMC. Okay? So -- and the second one is, is the demand real? Was this a number that my customer said? I would say that the demand is very strong. That's enough to answer your question, Brett? Brett Simpson: Yes, that's great. Thank you. Jeff Su: Okay, thank you, Brett. Operator, do we have anyone else on the line? It seems not. Then let's -- Operator: No, we don't. Jeff Su: Okay, we don't. Then let's go back to the floor. I think on the left side, Bruce Lu from Goldman Sachs. Bruce Lu: Hi. Thank you for taking my question. To be honest, I'd be a bit surprised that the long-term gross margin target doesn't really change it. I believe TSMC's value is definitely more than selling the -- pass on the cost. I believe that TSMC need to invest a lot more in R&D to maintain their leadership. TSMC suggested or raised the gross margin target in 2022 with higher R&D requirement, with higher profitable target, right? So I asked the same question two quarters ago, which is in the process of price negotiation, which is understandable, but I think the price negotiation is pretty much done. What's the discrepancy here? Why TSMC cannot raise the profitability target? Jeff Su: Okay. So Bruce's first question, he wants to know again our long-term gross margin, why are we not changing the target of 53% and higher? Okay. He correctly notes that certainly TSMC's value is increasing and certainly TSMC, we need to invest a lot of money in R&D and capacity to support our customers' growth. So we have always had a focus on earning the right return. He also notes in 2022, while our gross margin used to be about 50%, then we raised it to 53% and higher. So his question is why is it not -- and higher, I guess? Wendell Huang: Hi, Bruce. As we said, six factors affecting the profitability. Every year, different factors have different weights. Now two things to note. Number one, starting from this year, overseas fab expansion, 2 to 3 percentage point impact every year for the next five years. The other things to note. Macro environment uncertainty, which may lead to impacting the global economy, which may lead to end market demand. Now having said that, we are in the capital-intensive industry, so we will need to have to earn a healthy return to continue to invest, to support our customer, support their growth, and also deliver a profitable growth to our shareholders. And you mentioned about the raising of long-term gross margins back in 2022 to 53% and higher, and we have been able to deliver that in higher part since then. So given all the above, we continue to think that 53% and higher gross margin is achievable and we work very hard to achieve on the higher part. Bruce Lu: Okay, I'll try next two quarters. For the CoWoS capacity, TSMC has been very aggressive in expanding the capacity. However, the application is highly concentrated in AI at the current stage, which there are certain noise around it. When can we see non-AI applications such as servers, smartphone or anything else can be -- can start to adapt CoWoS capacity in case there is any fluctuation in the AI demand? Jeff Su: Okay, thank you Bruce. So Bruce's second question is on CoWoS capacity. In his words, we have been very aggressive to expand the capacity but his concern, it's highly concentrated with AI-related demand. So his question is when do we expect or to see more non-AI application adoption of CoWoS solutions? C.C. Wei: Well, yes, today is all AI-focused and we have very tight capacity and cannot even meet customers' need. But will the other product will adopt this kind of CoWoS approach? They will. It's coming, and we know that it's coming. So that's all I can say. Bruce Lu: When? C.C. Wei: It's coming. Bruce Lu: Okay, I'll try next quarter. C.C. Wei: All right. And the CPO and the server chip, let me give you a hint. Bruce Lu: Thank you. Jeff Su: Okay. Thank you, Bruce. We'll go to the middle. Arthur Lai from Macquarie. Arthur Lai: Hi C.C. and Wendell and Jeff. Arthur Lai from Macquarie. So first of all, congrats on the strong gross margin. Just have a very quick follow-up on the US and JP expansion as this is important. My clients keep chasing me. So do you have operational strategy to mitigate the cost gap between the overseas fab and Taiwan fab? I think CC you hint, like, you work on it and improve the gross margin. But during the Chinese New Year I read Morris Chang's -- his autobiography and he mentioned that the strategy is copy exactly from the Taiwan mother fab. So I want to understand how we maintain the high yield and also drive the cost down. Thank you. Jeff Su: Okay, so Arthur's question is about our overseas expansion. His question is related to the cost gap and what is our operational strategies to mitigate the cost gap. How are we doing this internally in our fab operations and strategies to do so? Wendell Huang: Well, you mentioned my boss' book. Okay, that's meaning that you really read it. What he says copy exactly is whatever Taiwan's improvement, the US will copy over there. Doesn't mean that this year, next year and the following year will be the same. We continue to improve. That's improve the cost structure, both in Taiwan and in the US, and we also try very hard to find out a new methodology or whatever that I cannot share with you right now, but it will give Arizona fab some benefit. And so that will improve -- will minimize the gap between -- the cost structure between US and Taiwan. And we are working on that. But no matter what I said, we will be the best fab over there. Okay? Arthur Lai: Second follow-up question, probably is on Wendell. You just mentioned that there's a 200 bps or 300 bps margin dilution. Right. So can you give us a one level down, like, the variable cost and the fixed cost? Maybe [FM] (ph) or maybe which one is higher? Jeff Su: Okay. So Arthur's second question is on the overseas dilution of 2% to 3%. He is asking if we can provide a further breakdown in terms of how much of that is composed from variable cost, how much of that is from the fixed cost, et cetera. Wendell Huang: Arthur, we really don't give -- break down these numbers, but both of them are higher. That's all I can share with you. Jeff Su: Okay, thank you. We'll move to the right side of the room. I think Rick Hsu from Daiwa Securities. Rick Hsu: Yes. Hi. Happy New Year and thank you for taking my question. So first one is C.C., can you share with us your view on this year's global semiconductor revenue forecast as memory or any driver by applications in priority across the main application? Thank you. Jeff Su: Okay. So Rick's first question, he's asking for our forecast of the semiconductor industry, what we used to provide as semi ex mem, but of course, we have already given Foundry 2.0. Then he would like the outlook by end market application in terms of ranking. Maybe just a comment on the overall end markets as a whole. C.C. Wei: Rick, I think the memory business will grow this year also. But all I can say is that HBM will grow very fast. And I don't comment on other memories because of -- it's not logic. Wendell Huang: And we have already provided Foundry 2.0 to grow 10% year-over-year. That's our industry forecast for 2025. Rick Hsu: Just a quick follow-up. Can I use your Foundry 2.0 market growth as a proxy of the global semi ex mem? Jeff Su: So his question is can we use Foundry 2.0 as a proxy for semiconductor ex memory? Rick Hsu: Yes, thank you. The second one is very quick about your CoWoS and SoIC capacity ramp. Can you give us more color here, because recently there seemed to be a lot of market noises, some add orders, some cut orders. So I would like to see your view on the CoWoS ramp. Jeff Su: Okay. So Rick's second question is lots of market rumors here. So he would like to know any comment we can provide on CoWoS ramp in 2025. C.C. Wei: Rick, as you said, there's a lot of rumor. That's a rumor, I assure you. We are working very hard to meet the requirement of my customers' demand. So cut the order, that won't happen. Actually continue to increase. So we are -- again, I will say that, we are working very hard to increase the capacity. Jeff Su: Okay, thank you. Okay, let's move back to operator. Is there anyone online? Operator: Yes, we have next one, Robert Sanders, Deutsche Bank. Go ahead, please. Robert Sanders: Yes, hi there. I just had a question on AI demand. Is there a scenario where HBM is more of a constraint on the demand rather than CoWoS, which seems to be the bigger constraint at the moment? And I have a follow-up. Thanks. Jeff Su: Okay. So Rob is asking us to comment on AI demand and HBM status constraint or what is the bigger constraint in AI demand. C.C. Wei: I don't comment on other suppliers, but I know that we have a very tight capacity to support the AI demand. I don't want to say I'm the bottleneck. TSMC, always working very hard with customer to meet their requirement. That's all I can say. Jeff Su: You have a second question? Robert Sanders: Yes. Just on SoIC, there's been more discussion in the market around your smartphone customers adopting SoIC. Can you just discuss if there's any kind of inflection point here, whether it's in the PC domain or the smartphone domain? Or is this still more of a data center story? Thanks. Jeff Su: Okay. Well, Rob's second question is on SoIC adoption. His question basically in a nutshell is when do we see an inflection point for smartphone application to adopt SoIC? C.C. Wei: Today, SoIC's demand still can focus on AI applications. For PC or for other area is coming, but not right now. Jeff Su: Okay, thank you, Rob. Thank you, C.C. I think in the interest of the time, we'll take the last two questions, please. Okay, I guess we'll go to Sunny Lin from UBS. Sunny Lin: Good afternoon. Thank you for taking my questions. And so, my first question is to try to get a bit more clarity on the cloud growth for 2025. I think longer term, without a doubt, the technology definitely has lots of potential for demand, but what is -- but I think if we look at 2025 and 2026, I think there could be increasing uncertainties coming from maybe CSP spending, macro or even some of the supply chain challenges. And so, I understand the management just provided a pretty good guidance for this year for the sales to double. And so, if you look at that number, do you think there's still more upside than downside as we go through 2025, or how should we think about the demand profile for this year and next year? Jeff Su: Okay. Well, Sunny's question is about the AI-related demand. We have said that even after tripling -- more than tripling last year, it will double again in 2025. She wants to know is there upside or downside to this. And also for us to provide an outlook on the 2026 AI growth. C.C. Wei: Sunny, I certainly hope there is an upside, but I hope I get -- my team can supply enough capacity to support it. Did that give you enough hint? Okay. And we also forecast -- based on the 2024's high number, we also forecast a mid-40s CAGR for the five years. That'll give you some kind of estimate that you can calculate. Sunny Lin: Yes. Also mid-40% is the long-term expectation in terms of growth by next few years. But how should we think about the trajectory of the growth? For sure, this year is still pretty strong growth but do you think at some point maybe we see a moderation of growth temporarily, and then followed by another ramp? Jeff Su: Well, I think Sunny's question again is asking us to comment on 2026 outlook, which is a little bit early, or that how do we see the trajectory of the growth? C.C. Wei: I have already say, it's a little bit too early. All right. Sunny Lin: Sure, no problem. So I will follow up maybe next quarter as well. And so, my second question is on Edge AI. And so, last year management thinks by maybe 2025 to be the inflection point for it to see more content related to Edge AI. So based on your current visibility, are you seeing clients ramping for this year for the Edge AI products maybe into second half? And before you also mentioned Edge AI could potentially drive 5% to 10% die size increase. Will that be a one-time increase or do you think beyond the 5% to 10% increase for maybe first-gen product, there should be sustainable increase going forward. Jeff Su: Okay. So Sunny's second question is related to Edge AI. She would like some more detail or color, do we see customers ramping Edge or what we call on-device AI products in second half of this year? And the second part in terms of the content increase, 5% to 10% increase, is this a one-time thing? Is this an ongoing thing? How do we estimate the content benefit from on-device AI? C.C. Wei: Okay. On the Edge AI, our observation, we found out that our customers start to put more neural processors inside. And so we estimated the 5% to 10% more silicon being used. Can it be every year 5% to 10%? Definitely it's no. Right? So they will move to next node, the technology migration, that's also to TSMC's advantage. Not only that. I also say that the replacement cycle, I think it will be shortened because of -- when you have new toy that with AI functionality inside, everybody was replacing, replaced their smartphone, replaced their PCs. And I count that one much more than a mere 5% increase. All right? Did I answer your question? Sunny Lin: Yes, thank you very much. Jeff Su: Okay, Thank you. Operator, I think there's one more participant online. So we'll take the last question from online participant, please. Operator: I think the last caller just dropped the line. Thank you. Jeff Su: Okay, then we'll take the last question from Brad Lin from Bank of America. Brad Lin: Thank you for squeezing me in. So, Happy New Year, and taking my questions. I would like to answer two questions. First question would be on the CoWoS as well. So we have observed an increase in margin of advanced packaging. Could you remind us the CoWoS contribution of last year and do you expect the margin to kind of approach the corporate average or even exceed it after the so-called value reflection this year? That would be my first question. Thank you. Jeff Su: Okay. So Brad's first question is very specific to CoWoS. Basically he wants to know what is the revenue contribution from CoWoS last year and what is the margin profile. Maybe we can talk about advanced packaging. Wendell Huang: Hey, Brad, we don't break it down in different segments of the advanced packaging. But overall speaking, advanced packaging accounted for over 8% of revenue last year and it will account for over 10% this year. In terms of gross margins, it is better. It is better than before but still below the corporate average. Thank you. Brad Lin: Thank you, Wendell, that's very helpful. And then my second question would be on the IDM. So we have seen IDMs increasingly rely on TSMC, and then do we still expect the IDM to support our long-term growth? Jeff Su: Okay. So Brad's second question I think is on IDM and IDM outsourcing. He does note that we do see more IDM outsourcing business. So is this part of our long-term growth outlook CAGR? C.C. Wei: Again, let me repeat again. They are our very good customers and we work together. I don't say they rely on TSMC. We are partners and I really hope that a long-term relationship will be there, for sure. Jeff Su: Okay, thank you C.C. Thank you, Brad. Thank you everyone. 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 30 minutes from now. The transcript will become available 24 hours from now. And certainly both will be available through TSMC's website at www.tsmc.com. So thank you everyone for joining us today online and in person. We'd like to wish everyone a Happy New Year and hope everyone continues to stay well, and hope you'll join us again next quarter. Goodbye and thank you. Have a good day.

Gokul Hariharan - JPMorgan Chase & Co.: Sunny Lin - UBS: Charlie Chan - Morgan Stanley: Bruce Lu - Goldman Sachs Group: Brett Simpson - Arete Research: Krish Sankar - TD Cowen: Laura Chen - Citigroup: Rick Hsu - Daiwa: Jeff Su: Good afternoon, everyone, and welcome to TSMC's Third Quarter 2024 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting our earnings conference call via live audio webcasts 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 in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2024, followed by our guidance for the fourth quarter 2024. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for a question and answer session. 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 do refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the third quarter of 2024. After that, I will provide the guidance for the fourth quarter of 2024. Third quarter revenue increased 12.8% percent sequentially in NT, as our business was supported by strong smartphone and AI-related demand for our industry-leading 3-nanometer and 5-nanometer technologies. Gross margin increased by 4.6 percentage points sequentially to 57.8%, mainly reflecting a higher capacity utilization rate and cost improvement efforts. Due to operating leverage, total operating expenses accounted for 10.4% of net revenue. Thus, operating margin increased by 5 percentage points sequentially to 47.5%. Overall, our third quarter EPS was 12.54 NT and ROE was 33.4%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 20% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 32% and 17% respectively. Advanced technologies, defined as 7-nanometer and below accounted for 69% of wafer revenue. Moving on to revenue contribution by platform, HPC increased 11% quarter-over-quarter to account for 51% of our third quarter revenue. Smartphone increased 16% to account for 34%. IoT increased 35% to account for 7%. Automotive increased 6% to account for 5%. DCE decreased 19% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of 2.2 trillion NT or $69 billion U.S. dollars. On the liability side, current liabilities increased by 31 billion NT, while long-term interest bearing debt decreased by 38 billion NT. This change was primarily driven by the reclassification of 42 billion NT in bonds payable from non-current to current liabilities. In terms of financial ratios, accounts receivable turnover days remained steady at 28 days. Inventory days increased by four days to 87 days, primarily due to the pre-build of N3 and N5 wafers. Regarding cash flow and CapEx, during the third quarter, we generated about 392 billion NT in cash from operations, spent 207 billion NT in CapEx, and distributed 91 billion NT for fourth quarter ‘23 cash dividend. Overall, our cash balance increased 88 billion NT to 1.9 trillion NT at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures total $6.4 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $26.1 billion and $26.9 billion U.S. dollars, which represents a 13% sequential increase or a 35% year-over-year increase at the midpoint. Based on exchange rate assumption of $1 U.S. dollar to 32 NT, gross margin is expected to be between 57% and 59%. Operating margin between 46.5% and 48.5%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter ‘24 and fourth quarter ‘24 profitability. Compared to the second quarter, our third quarter gross margin increased by 460 basis points sequentially to 57.8%, primarily due to a higher capacity utilization rate and better cost improvement efforts, including productivity gains. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 230 basis points, mainly due to a higher than expected overall capacity utilization rate. We have just guided our fourth quarter gross margin to increase by 20 basis points to 58% at the midpoint. This is primarily due to a higher overall capacity utilization rate in the fourth quarter, partially offset by continued dilution from N3 ramp up, higher electricity prices in Taiwan, and N5 to N3 tool conversion cost. Next, let me talk about our 2024 CapEx. Every year, our CapEx is spent in anticipation of the growth that will follow the future years, and our CapEx and capacity planning is always based on the long-term market demand profile. As the strong structural AI-related demand continues, we continue to invest to support our customers' growth. We now expect our 2024 CapEx to be slightly higher than $30 billion U.S. dollars. Between 70% and 80% of the capital budget will be allocated for advanced process technologies. About 10% to 20% will be spent for specialty technologies, and about 10% will be spent for advanced packaging, testing, mass making, and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years, and as long as our growth outlook remains strong, we will continue to invest. Now let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of U.S. dollar $23.5 billion, above our guidance in U.S. dollar terms. Our business in the third quarter was supported by strong smartphone and AI-related demand for our industry-leading 3-nanometer and 5-nanometer technologies. Moving into fourth quarter, we expect our business to continue to be supported by strong demand for our leading-edge process technologies. We continue to observe extremely robust AI-related demand from our customers throughout the second half of 2024, leading to increasing overall capacity utilization rate for our leading-edge 3-nanometer and 5-nanometer process technologies. At TSMC, we define server AI processor as GPUs, AI accelerators, and CPUs performing training and inference functions, and do not include networking, edge, or on-device AI. We now forecast the revenue contribution from server AI processors to more than triple this year and account for mid-teens percentage of our total revenue in 2024. Supported by our technology leadership and broader customer base, we are well-positioned to capture the industry's growth opportunities. We now forecast our four-year revenue to increase by close to 30% in U.S. dollar terms. Next, let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global logic IC industry for years to come. All of our overseas decisions are based on our customers' needs. They value some geographic flexibility and necessary level of government support. This is also to maximize the value of our shareholders. In Arizona, we have received strong commitment and support from our U.S. customers and the U.S. federal, state, and city governments and have made significant progress in the past several months. Our plan to build three fabs, will help create greater economies of scale, as each of our fabs in Arizona will have a clean room area that is approximately double the size of a typical logical fab. Our first fab entered engineered wafer production in April with 4-nanometer process technology, and the result is highly satisfactory with a very good yield. This is an important operational milestone for TSMC and our customers, demonstrating TSMC's strong manufacturing capability and execution. We now expect volume production of our first fab to start in the beginning of 2025 and are confident to deliver same level of manufacturing quality and reliability from our fab in Arizona as from our fabs in Taiwan. Our second and third fabs will utilize more advanced technologies based on our customers' needs. The second fab is scheduled to begin volume production in 2028, and our third fab will begin production by the end of the decade. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner and enabler of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan's central, prefectural, and local government, our progress is also very successful. Our first specialty technology fab has completed all process qualification. Volume production will start this quarter, and we are confident to deliver the same level of manufacturing quality and reliability from our fab in Kumamoto as from our fabs in Taiwan. The land preparation for our second specialty technology fab in Kumamoto has already begun, and construction will begin in fourth quarter next year. This second fab will support our strategic customers for consumer, automotive, industrial, and HPC-related applications, and volume production is targeted by the end of 2027. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city governments. Together with our JV partners, we held a groundbreaking ceremony in August for our specialty technology fab in Dresden, Germany. This fab will focus on automotive and industrial applications utilizing 12, 16, fab and 28 process technologies. Volume production is scheduled to begin by the end of 2027. Under today's fragmented globalization environment, overseas fab costs are higher for everyone, including TSMC and all other semiconductor manufacturers. Having said that, we are leveraging our fundamental competitive advantage of manufacturing technology leadership and large scale manufacturing base. Thus, TSMC will be the most efficient and cost-effective manufacturer in the region that we operate, while continuing to provide our customers with most advanced technology and scale to support their growth. This concludes our key messages, and thank you for your attention. A - Jeff Su: Okay, thank you, C. C. This does conclude 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 the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it into English before our management answers your question. [Operator Instructions]. Now let's begin the Q&A session. Operator, can we proceed with the first participant on the line please? Operator: The first one to ask questions Gokul Hariharan from JP Morgan. Go ahead please. Gokul Hariharan : Yes, thank you. Good afternoon C.C., Wendell, and Jeff. My first question is on the AI investments and the growth that you see. Recently, obviously, there's been a lot of questions about ROI of Gen AI investments, whether this could end up being a bubble. How does TSMC view this trend as you're making your capacity plans given you are enabling pretty much the processing capacity for pretty much everybody? And what gives you the confidence that this is going to be a more longer run growth cycle? And relative to this, could C.C. also talk a little bit about what do you think about the duration of this current semiconductor up cycle? Do you think it will continue into the next couple of years or are we getting closer to the peak of the cycle? That's my first question. Jeff Su: Okay, thank you Gokul. Please allow me to summarize your first question. So Gokul's first question has two parts. The first part I believe is more focused on the AI related demand, the ROI and sustainability of this. He notes recently there's been a lot of questions about the return or ROI from generative AI investments and therefore how do we view this trend? Is there a worry that this demand sustainability or maybe a bubble? And very importantly, certainly what gives us the confidence that this could be a more long-run sustainable demand cycle for AI? C. C. Wei: Okay Gokul, let me answer your question. Simply, whether this AI demand is real or not, okay? And my judgment is real. We have talked to our customer all the time, including our hyperscaler customers who are building their own chips. And almost every AI innovator is working with TSMC. And so we probably get the deepest and widest look of anyone in this industry. And why I say it's real, because we have our real experience. We have using the AI and machine learning in our fab and R&D operations. By using AI, we are able to create more value by driving greater productivity, efficiency, speed, qualities. And think about it, let me use you know 1% productivity gain, that was almost equal to about 1 billion to TSMC. And this is a tangible ROI benefit. And I believe we cannot be the only one company that has benefited from this AI application. So I believe a lot of companies right now are using AI for their own improving productivity, efficiency, everything. So I think it's real. Did I answer your question? Gokul Hariharan: Yes, that's clear. Maybe, yes. Could you also talk a little bit about how this feeds into your view of the current semiconductor cycle also, C.C? Jeff Su: So, Gokul, the second part is so we have, we believe the AI demand is real. But how do we view the overall semiconductor demand and cycle? Do we, I think, Gokul, you’re saying, do we think its reached peak, peak out already? C. C. Wei: Oh, okay. I forgot to answer this one. The demand is real. And I believe it's just the beginning of this demand. All right. So one of my key customers said, the demand right now is insane. That's it's just the beginning, it's a form of scientific to be engineering. Okay. And it will continue for many years. Jeff Su: And then the overall semiconductor demand? I think. C. C. Wei: Overall semiconductor demand, except that the AI, I think is everything stabilized and start to improve. Jeff Su: Okay, Gokul? Gokul Hariharan: Understood. That's clear. Thanks, C.C. My second question is more to do with CapEx. I think usually, if you look at the past cycles of strong demand uptick, TSMC's CapEx also starts to move up quite a bit. This time round, 2023 and 2024, your CapEx has been reasonably stable. It's still a large number, but not really growing a lot in the 30 billion, 31 billion range. How should we think about look forward? When we look forward into the next couple of years, what are you doing? What are you planning for CapEx growth? Is there any reservations that TSMC has about the pace of growth that the CapEx is still a little bit lower? Or should we expect that the CapEx also should start accelerating given you're growing at 30% this year and looks like you're preparing for pretty strong growth the next couple of years as well? Jeff Su: Okay, so Gokul's second question is related to CapEx and looking out the next few years. So he notes that in past cycles when demand is very strong, our CapEx starts to move up. But however, this time, even with what C. C. described as very real and the beginning of a strong AI demand, these last two years we've kept our CapEx, it's not really been growing much. So his question is, is that because we have any concerns or reservations around the demand sustainability? Or what will the CapEx start to look like the next several years? Will we have to begin to step it back up? Is that roughly what you're asking, Gokul? Gokul Hariharan: Yes, that's right. Thanks, Jeff. Wendell Huang: Okay, Gokul. We do not have a number for 2025 CapEx today to share with you. However, we always use a disciplined and thorough system to determine the appropriate capacity to build. And we always review our CapEx plans on an ongoing basis. For TSMC, a higher level of capital expenditures is always going to be related with higher growth opportunities in the coming years. And as long as our growth outlook remains strong, we will continue to invest. Now, as C.C. said, next year looks to be a healthy year. So it is very likely that our CapEx next year will be higher than this year. And we will provide you more updates in January conference. Gokul Hariharan: Okay, that's very clear. Thanks, Wendell. I'll go back to the queue. Jeff Su: Okay, thank you, Gokul. Operator, can we move on to the next participant, please? Operator: Yes, Sunny Lin from UBS. The line is open to you now. Sunny Lin : Thank you very much for taking my question. Good afternoon. Very strong executions and margin. So my first question is to follow-up on the gross margin outlook. How should we think about into 2025? Last quarter, management quantified overseas expansion to about 2% to 3% margin. But besides that, could you help us understand some of the other puts and takes? How should we think about the depreciation growth into 2025? Jeff Su: Okay, Sunny, thank you for your question. So Sunny's question first is on the gross margin outlook into 2025. She notes last time Wendell had already shared that overseas fab would dilute our gross margin probably by 2% to 3%. She wants to know besides that, what other factors should we consider? And also in terms of depreciation growth. Wendell Huang: Okay. Sunny, again, it's too early to talk about 2025 in detail. But there are a few things I can share with you, the puts and takes for 2025. Indeed, we expect the dilution from N3 ramp to gradually reduce next year. We continue to sell our value. So these things will help, plus next year will be a healthy growth year. So utilization is also a positive. On the other hand, as we said, there'll be 2 to 3 percentage point dilution from the overseas fabs when we begin to ramp them. At the same time, we are also converting some of our N5 capacity to N3 to meet the strong demand for N3. And also, don't forget there's ramping the N2 in 2026. There will also be some preparation costs for ramping N2. And as we migrate every leading notes, more and more events, this preparation costs will become bigger and bigger. Now, you also know that electricity costs has also risen very recently and the second time in the year. 14% higher for TSMC in October. This is after 15% increase in 2022, 17% increase in 2023, and 25% increase in 2024. Basically, the price has doubled in the last few years. So next year, we think that electricity price for us in Taiwan will be the highest in all the regions that we operate. And the higher electricity price plus other inflationary cost is expected to impact our gross margin by at least 1%. And finally, of course, we do not have any control or cannot forecast foreign exchange rate movement. 1% of foreign exchange rate movement, dollar NT, will have an impact of 40 basis point to our growth margin. Jeff Su: Thank you, Wendell. So Sunny, does that sort of give you a better understanding of the puts and takes for next year? Sunny Lin: Yes, that's very helpful. Thank you very much, Wendell. So quick follow-up if any of you on depreciation increase into 2025. Should we expect similar magnitude as this year, which grew about 25%? And also, a quick follow-up on the 2% to 3% gross margin dilution for overseas. If I calculate correctly, that would imply your overseas fabs in the US and Japan could be running at close to 0% or very low gross margin to start with. Would that be a conservative assumption that you are assuming at this point? Yes. Jeff Su: Okay, well, that's two follow-ups. So I might take that as the second question. But the first one is, again, Sunny had asked about depreciation next year. Wendell Huang: Yes, Sunny, that does give you more depreciation guidance in the January conference. Jeff Su: And then the second question really is about our overseas fabs as we ramp up Arizona and Arizona and Japan. Sunny, I believe your question is, with that ramp and dilution of 2% to 3%, does that imply the overseas fabs profitability is more closer to break even or something like that? Correct, Sunny? Sunny Lin: Right. Thank you, Jeff. Wendell Huang: Yes, Sunny, the overseas fabs have basically a lower profitability than the fabs in Taiwan, mainly because of the smaller scale and next year will be initial ramp and higher cost. So it will have a lower profitability, but it will gradually improve over the years. Now, don't forget, in Arizona and in Kumamoto, we are ramping more than 1 phase 1 fabs. So when fab 1 begin to improve its profitability, the second phase comes in. And in Arizona, when fab 2 improves, the third phase comes in. Similar situation in Kumamoto. And that's the reason why we're saying that in the next three or five years, we expect 2 to 3 percentage point dilution every year. Sunny Lin: Got it. Thank you very much. Jeff Su: Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one, we have Charlie Chang from Morgan Stanley. Go ahead now. Charlie Chan: Thanks, Jeff. And C.C. Wendell, good afternoon. First of all, also, congrats for your very, very strong results and the guidance. So my first question is really about your future buying power to your customers and vendors, and what would that mean to your long-term gross margin targets? Because right now, even without the price adjustment next year, your gross margin is already blow up, right? It's already 57%, 58%, higher than most of your customers. So with that, do you think you will be a little bit too aggressive to further hike price to your customers? And I'm also wondering for those kind of mature nodes, what's your pricing strategy here? So all I want to ask, are there implications to, number one, your long-term gross margin label? And secondly, are you going to handle the potential antitrust risk, given your -- near monopoly and also prepare to do some price adjustment? Thanks. Jeff Su: Okay. So, I think Charlie's question is sort of, we always say that we value selling, and it's a continuous and ongoing thing. So, he wants to know what does this status will look like with both customers and vendors, and then what is the implication to our long-term gross margin target? And are we concerned about monopoly or things like that? Let me start. That, I think, is the first part, and then the mature part, I'll summarize later. C. C. Wei: Okay, Charlie. This is C. C. Wei. Let me answer your question. Selling our value, actually, is a continuous and ongoing process for TSMC. We view all our customers as a partner, and the progress of this effort on selling our value is so far so good. Also, you are talking about we have more backing power with our equipment supplier. Again, we view them as our partner, so I don't use the backing power. We always work with them and to move to the next step. And so, you know, both TSMC and suppliers and customers are all working together, and with the purpose of that we can have a TSMCs customer to be successful in their market. Okay, that's my goal. If our customers are doing well, we can be good also. Okay? And you mentioned one thing that I have a little bit concern. You say that TSMC's gross margin now is higher than my customer. It's not true. You know, look at one of the biggest AI supplier, they have a gross margin that I probably never be able to reach in my life. But anyway, we are very happy to see them be successful, and we are in a different kind of business. We are capital-intensive businesses, so we need a very high gross margin to survive and to have sustainable and healthy growth. That's why we set up our pricing strategy. Jeff Su: And then a quick one, I think part of Charlie's question, the second part. Charlie, if I heard you right, is sort of the outlook for mature note in terms of pricing? C. C. Wei: No, I think, Charlie, you're talking about the way that the antitrust concern or something like that. Did I hear you right? Charlie Chan: Yes, I'm a little bit concerned, same as other investors as well. C. C. Wei: Okay, the antitrust meaning that TSMC has a very high market share and with some of unnecessary competition methodology. Let me assure you that the last time we proposed a new version of the Foundry 2.0, which including the wafer manufacturing and packaging and testing, mass making, and all others. All these kind of things become more growing importance, like packaging, testing, mass making. Right now probably is a little bit higher than 10% of TSMC's total revenue. That's one. And all my competitors, their IDMs in particular, they also have their packaging, testing, and mass making. And so I think Foundry 2.0 is a better reflect TSMC's traceable market. And our share is probably around 30%, so not a dominant yet. We are big, yes, because we perform very well. But no, it's not a kind of antitrust concern. It's not in our picture, actually. Charlie, did I answer your question? Charlie Chan: Yes, yes, thanks. So just a feeling a little bit, I guess you won't stop your margin improvement until 75%. But anyway, I'll leave that kind of long-term margin target or guidance to the next caller or your next January guidance. But I do have a second question. Is that okay, Jeff? I can ask a second one. Jeff Su: Quickly, yes. Charlie Chan: Okay. The second one is about your IDM outsourcing opportunity, right? Also part of your Foundry 2.0. Because one of the major IDM opportunities at Intel, and recently announced they want to spin off their Foundry segments, right? So number one, TSMC, do you really favor more outsourcing from Intel, given this change? And even would TSMC consider to acquire part of Intel's fabs in the long term? So I think that's that. And also, quickly comment on news reporting about Samsung's IDM outsourcing opportunity. So that's my second part of the question. Jeff Su: Okay, so Charlie's second part is on IDM outsourcing. He wants to know, with the, I guess, U.S. IDM and Foundry 2.0, do we expect more outsourcing from this U.S. IDM? And how do we plan for the capacity? Would we consider, I think, to acquire part of this IDM's fabs or manufacturing? And then how do we see outsourcing from Samsung? C. C. Wei: That's a lot of questions. Let me answer one of the easiest one. Are we interested to acquire one of IDM's software? The answer is no. Okay. No, not at all. Now let's talk about the business part. It always a customer's decision for their outsourcing strategy. But I look at the business of the IDM's, one of the IDM's in California, which has been a very good customer to TSMC and we continue to receive a sizable business from them, to be frank with you. So your question is whether that we continue to increase, that is too specific. So let's wait for the next few quarter to answer your question. Charlie Chan: Okay. Thank you. Jeff Su: All right. Thank you, Charlie. Operator, can we move on to the next person? Caller, please. Operator: Yes. Next one, Bruce Lu from Goldman Sachs. Go ahead, please. Bruce Lu : Okay. Thank you for taking my question. My question is going back to the longer-term growth outlook. I think TSMC has been guiding for 15% to 20% revenue CAGR from ‘21 to ‘26. On the back of the insane AI demand, do we have an updated outlook for the revenue guidance beyond 2026? In addition, when TSMC guided in 2021, TSMC achieved 25% growth almost every year except for 2023. So what kind of revenue growth outlook or the growth pattern in the next five years? Do we expect to be a more stable growth every year or do we expect to be a stronger growth for most of the year and the one-year weakness? Jeff Su: Okay. So thank you, Bruce. So Bruce's first question is about our long-term growth outlook. He notes, yes, we did provide a long-term revenue growth CAGR of between 15% to 20% CAGR in U.S. dollar terms from ‘21 to ‘26. So he wants to know what is the updated revenue guidance, the outlook beyond 2026. And he also notes that when we provided this, you know, guidance in 2022, we basically were able to grow greater than 25% every year except for 2023. So he wants to know the next five years, will the growth be, you know, a similar level every year or will there be like strong years followed by, you know, down year sort of the pattern of the growth? C. C. Wei: Okay, Bruce. Lots of big questions. You ask us whether the next five years will be as good as the past five years from ‘21 to ‘24 right now. We accept the 2023. We have a very good growth. As you said, it's always a 20% to 30%. Next five years, it will be very healthy also to TSMC, but I don't have a long-term CAGR number to update you, but they will be very healthy also. That's so far I can assure you. Bruce Lu: So a quick follow-up, does that insane AI demands got to help you to grow slightly faster than before? Jeff Su: So Bruce wants to know with the very robust AI related demand, can we grow faster than before? C. C. Wei: I hope so. But as I said, today we don't have a long-term CAGR number to share with you. Okay. Bruce Lu: Okay. Let me switch gears to 2-nanometers and A16. So I think that, you know, the HPC demand and -- for the node is very strong. We do see more customer engagement for 2-nanometers, but at the same time, we also see more chip load design in 2-nanometers, which might effectively lower the 2-nanometer wafer area requirement. So how should we think about your 2- nanometer capacity bill versus the 3, 5, and 7 in the past? And how do we see the A16 migration beyond 2-nanometers? Jeff Su: Okay. So Bruce's second question, as he says, is on 2-nanometer and A16. He notes certainly with HPC and AI related more and more engagement at 2-nanometer, but he also notes or his observation with chiplets that could reduce the demand for 2-nanometer. So he really wants to know sort of what is the capacity build or capacity outlook for 2-nanometer that we are looking at. And also how do we see the migration from 2-nanometer to A16? Is that correct, Bruce? Bruce Lu: Yes. C. C. Wei: Okay. Let me answer this question. Yes, the chiplets have become kind of, you know, our HPC, especially our HPC customers' strategy. It's going to reduce capacity for 2-nanometer because it become chiplets. The answer is no, actually. We have many, many customers are interested in the 2-nanometer. And today with their activity with TSMC, we actually see more demand than we ever dreamed about it as compared with N3. So we have to prepare more capacity in N2 than in N3. And following by A16, again, A16 is very, very attractive for the AI servers chips. And so actually the demand is also very high. So we are working very hard to prepare both 2-nanometer A16's capacity. Okay, Bruce, did I answer your question? Bruce Lu: Yes, perfect. Thank you. All right. Jeff Su: Thank you. Operator, can we move on to the next participant, please? Operator: Now, Brett Simpson from Arete. The line is open to you now. Brett Simpson : Ys, thanks very much. My question was on the long-term planning around AI. I'm keen to understand how TSMC gets comfortable with customer demand for AI beyond 2025. And I ask this because it takes a couple of years before you can build a fab. So you need to be taking an early view on what does AI look like in 2026, 2027. So how are you specifically cooperating on long-term plans for capacity with these AI customers? What commitments are these customers giving you? And I guess historically, we've seen hyperscaler CapEx go through digestion period. So how do you de-risk the capacity plans here for AI as we go through this really heavy demand period? Thank you. Jeff Su: Okay. So Brett's first question, again, is on the long-term planning around AI demand. His question is really for beyond 2025, given the lead times, how do we plan our capacity for the long term? How do we get comfortable around the customer demand related to AI beyond 2025? I think that is the gist of your question, Brett. C. C. Wei: Well, okay, Brett. Let me say again that we did talk to a lot of customers. Almost every AI innovator are working with us, and that including the hyperscalers. So if you look at the long-term market, long-term structural market demand profile, I think we have some picture in our mind, and we make some judgment, of course, and we work with them on a rolling basis. And so how we prepare our capacity? Actually, just like Wendell said, we have a disciplined and a rough system to plan the appropriate level of capacity. And to support our customers' need, also to maximize our shareholders' value. That's what we always keep in our mind. Brett Simpson : My follow-up -- Yes, that's great. Thanks, C. C. I guess my follow-up question, we've read a lot about Taiwan having energy challenges, and this comes at a time when TSMC is preparing for a big node with 2-nanometer. So my question is, are there any power challenges to overcome when you're building out your N2 fabs, especially in Hsinchu and Kaohsiung? And does it make sense for TSMC to plan for nuclear power? I mean, we see a lot of hyperscalers are planning for nuclear power in the U.S. to build that gigawatt facilities. How do you think about nuclear power in future for TSMC fabs? Thank you. Jeff Su: Okay. Thank you, Brett. So Brett's second question, he notes that Taiwan electricity and energy, there are a lot of challenges with this. So how do we plan for this, especially when we're bringing on new nodes? What are the power challenges to overcome, given the state of Taiwan's energy? And then would we consider even nuclear power for ourselves to help support? C. C. Wei: Okay, Brett. Yes, we are building many fabs in Taiwan, and that requires electricity, water, and the land. We continue to work with the government. Actually, we have a very close communication with government, and to tell them that our requirement, our plan, and we got assurance from the government saying that they will support TSMC's growth, and we believe that. And so how they prepare for the electricity from the nuclear power plant or from just some kind of other sources like green energy, something. We are not ready to share with you yet, but we got assurance that we're going to get enough electricity support, including the water and the land. Brett Simpson : That's clear. Thank you very much. Jeff Su: Okay, thank you, Brett. Can we move on to the next participant, please? Operator: Next one to ask a question, Krish Sankar from TD Cowen. Krish Sankar : Yes, hi. Thanks for taking my question. The first one I had was, I'm kind of curious on the non-AI demand. How do you look at your wafer demand for PC and mobile into calendar ‘25, and have you seen any meaningful revision upwards or downwards on that? And then I had a follow-up. Jeff Su: Okay, so Krish's first question is really focused on PC and mobile demand. How do we see this demand going into 2025? Have we seen it improve or revision up or downwards, and how would we look at it going into next year? C. C. Wei: Okay, Krish. The unique growth of PC and smartphone is still in a low single digit, but the more important is the content. The content now we put more AI into their chip, and so the silicon area increase faster than the unique growth. So again, I would like to say that for this PC and smartphone business, not only -- is gradually increased, and we expect it to be healthy in the next few years because of AI-related applications. Krish Sankar : Got it, got it. Very helpful. And then my quick follow-up is, I'm kind of curious, you know, on your packaging side, advanced packaging today is part of the non-wafer revenues. Obviously, we're investing in cobots and other technologies. How do you think about that advanced packaging revenue growth over the next few years, and do you think at some point in the next couple of years, advanced packaging can reach corporate-level growth margins, or would it always be below that? Thank you very much. Jeff Su: Okay, thank you, Krish. So Krish's second question is on advanced packaging. So we have been putting a lot of effort. So his question is, what is the revenue growth outlook for advanced packaging in the next few years? And also, when or do we think it can reach the corporate average growth margin as well? So maybe Wendell can address. Wendell Huang: Yes, Krish, advanced packaging in the next several years, let's say five years, will be growing faster than the corporate average. This year, it accounts for about high single-digit of our revenue. In terms of margins, yes, it is also improving. However, it's still approaching corporate, but not there yet. Krish Sankar : Thank you very much. Wendell Huang: Okay, Krish. Operator, in the interest of time, we'll take questions from the last two participants, please. Operator: Yes. Now the line is open to Laura Chen from Citi. Laura Chen : Thank you for taking my question, gentlemen, and also congratulations for the strong performance. I'm just wondering that with the decent free cash flow increase in the recent quarter, and I believe that next year will be a decent year for TSMC to grow. So is there any opportunity for TSMC to consider increased cash dividends in the near future? And how do you view the balance of the capital allocation between shareholder returns and also the continued investment in advanced technology like 2 and 3-nanometer? That's my first question. Jeff Su: Okay, thank you, Laura. So Laura's first question is related around -- her question really is looking at our free cash flow generation, noting that it continues to increase, and then with next year being a healthy, good year, it should continue to grow. So her question is, is there room or how do we see the cash dividend as related to free cash flow? And also, I think, Laura, really her question was also a balance sheet ramification. How do we balance the shareholder return interest set against what C. C. said, our capital intensive industry and CapEx? So two parts to it, first on the cash dividend and then sort of on the balance sheet management. Wendell Huang: Right, Laura. Certainly, our dividend policy, as we said before, is sustainable and steadily increasing. It's steadily increasing when we are harvesting the investment that is made in the past. And as the free cash flow increases, that means we are harvesting the investment in the past. So it's going to be steadily increasing. That's for the dividends. Balance sheet, where the primary objective of our using our balance sheet or our cash resources is organic growth. So that will bring our shareholders the biggest return. And then whatever the free cash flow is left, then we will return part of those to our shareholders. That's always our policy. Laura Chen: Okay, yes, that's very consistent. But I think given our like a rich cash flows generating capability and also, I mean, we can probably be able to harvest. So I think investors are kind of expecting the dividends increase gradually. Yes. And also, my second question is about our Foundry 2.0 model that has been discussed since last time. But could you share more details on how the Foundry 0.2 is being implemented and found different aspects like the traditional logic foundry business and advanced packaging and also maybe the IDMs customers. Can you give us kind of an idea of what will be the growth outlook for a different kind of segmentation in that new definition? Jeff Su: OK, so Laura, your second question is on Foundry 2.0. So I think her question is looking at the different components of this. She's asking if we can provide a growth outlook for the different components such as the logic, wafer manufacturing, advanced packaging segment, IDM segment, et cetera, et cetera, the growth outlooks for each specific one. Laura Chen: Right. I appreciate it. Thank you. C. C. Wei: Well, Laura, I think, you know, again, in this Foundry 2.0, among the content inside the leading process nodes, advanced packaging, well, it has much stronger growth. And on those mature nodes and conventional packaging, that is not so rosy as advanced packaging and leading process node. Did that answer your question? Laura Chen: Okay, got it. Thank you. Jeff Su: Okay, thank you, Laura. Operator can move on to the last participant, please. Operator: Yes, the last one to ask questions, Rick Hsu from Daiwa. Rick Hsu : Yes, hi. Thank you for taking my questions. So a very quick one from me. The first one, can you update your forecast for this year's global semiconductor revenue as memory? I remember you were talking about around 10% growth. So can you give us a new update and also share with us a preliminary outlook for next year? Jeff Su: Okay. So Rick's question is really, can we, you know, provide an update to our forecast for whether it's semiconductor excluding memory, industry growth, and Foundry 2.0 for 2024 first? C. C. Wei: Well, our forecast stays the same, very similar to what we say the last time. Of course, TSMC's growth is a little bit better than the last time we estimate. But overall, the whole industry is almost the same as we said in last quarter. Jeff Su: And then the second part of Rick's question, then what about next year? C. C. Wei: Well, we continue to say that it's too early to make a comment on 2025's gross outlook, but we are going to share with you in the next quarter's early release. Okay? Rick Hsu: All right. Thank you so much. A little question as a follow up, the second one. Can you share with us your CoWoS capacity buildup for this year and next year? I know you guys seem to have revised it up several times, so can you share the latest one? Jeff Su: Yes. So Rick's second question, then, is to update on our CoWoS capacity plan for both 2024 and 2025 to the extent that we can share. C. C. Wei: Okay, Rick. In fact, we are putting a lot of effort to increase the capacity of the CoWoS. Roughly, let me share with you, today's situation is our customers' demand far exceeds our ability to supply. So even we work very hard and increase the capacity by about more than twice, more than two times as this year compared with last year, and probably double again, but still not enough. But anyway, we are working very hard to meet the customers' requirement. Rick Hsu: All right. Thank you so much. Jeff Su: Thank you, Rick. Thank you, everyone. 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 30 minutes from now, and the transcript will become available 24 hours from now, both of which you can find and are available throughout TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope everyone continues to be well, and we hope to see you again, and you will join us again next quarter. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Second Quarter 2024 Earnings Conference and Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC'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 in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2024, followed by our guidance for the third quarter 2024. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the Company's key messages. Then, we will open both the floor and the line for the Q&A session. As usual, I'd like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risk and uncertainties, which would 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 over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the second quarter of 2024. After that, I will provide the guidance for the third quarter 2024. Second quarter revenue increased 13.6% sequentially in NT, or 10.3% in U.S. dollars, as our business was supported by strong demand for our industry-leading 3 and 5 nanometers technologies, partially offset by the continuous smartphone seasonality. Gross margin increased 10 basis points sequentially to 53.2%, mainly reflecting cost improvement and a more favorable foreign exchange rate, partially offset by the margin dilution from N3 ramp. Due to the operating leverage, total operating expense accounted for 10.5% of net revenue, as compared to 11.1% in the first quarter. Thus, operating margin increased 0.5 percentage points sequentially to 42.5%. Overall, our second quarter EPS was 9.56 NT, and ROE 26.7%. Now, let's move on to revenue by technology. 3-nanometer process technology contributed 15% of wafer revenue in the second quarter, while 5-nanometer and 7-nanometer accounted for 35% and 17% respectively. Advanced technology, defined as 7-nanometer and below, accounted for 67% of wafer revenue. Moving on to revenue contribution by platform, HPC increased 28% quarter-over-quarter to account for 52% of our second quarter revenue, surpassing 50% for the first time. Smartphone decreased 1% to account for 33%. IoT increased 6% to account for 6%. Automotive increased 5% to account for 5%, and DCE increased 20% to account for 2%. Moving on to the balance sheet, we ended the second quarter with cash and marketable securities of 2 trillion NT, or $63 billion US dollars. On the liability side, current liabilities increased by 23 billion NT, mainly due to the increase of NT$16 billion in accounts payable. Long-term interest bearing debt increased by NT$9 billion, mainly as we raised NT$12 billion in corporate bonds. On financial ratios, accounts receivable turnover days decreased by three days to 28 days. Days of inventory decreased by seven days to 83 days, primarily due to higher N3 wafer shipment. Regarding cash flow and CapEx, during the second quarter, we generated about NT$378 billion in cash from operations, spent NT$206 billion in CapEx, and distributed NT$91 billion for third quarter '23 cash dividend. Overall, our cash balance increased NT$101 billion to NT$1.8 trillion at the end of the quarter. In US dollar terms, our second quarter capital expenditures total $6.36 billion. I've finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between $22.4 billion and $23.2 billion US dollars, which represents a 9.5% sequential increase, or a 32% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 US dollar to NT$32.5, gross margin is expected to be between 53.5% and 55.5%. Operating margin between 42.5% and 44.5%. This concludes my financial presentations. Now let me turn to our key messages. I will start by talking about our second quarter '24 and third quarter '24 profitability. Our second quarter gross margin was 53.2%, slightly ahead of the high end of our guidance, mainly as we saw a higher than expected overall capacity utilization rate as compared to our forecast three months ago. We have just guided our third quarter gross margin to increase by 1.3 percentage points to 54.5% at the midpoint. This is primarily due to the higher overall capacity utilization rate in the third quarter and better cost improvement efforts, including productivity gains, partially offset by continued dilution from N3 ramp up, N5 to N3 tool conversion costs, and higher electricity prices in Taiwan. Excluding the impact of foreign exchange rate, of which we have no control over, and factoring in the margin impact from our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2024 capital budget. Every year our CapEx is spent in anticipation of the growth that will follow in the future years, and our CapEx and capacity planning is always based on the long-term market demand profile. As the strong structural AI related demand continues, we continue to invest to support our customers' growth. We are narrowing the range of our 2024 capital budget to be between $30 billion and $32 billion as compared to $28 billion to $32 billion previously. Between 70% and 80% of the capital budget will be allocated for advanced process technologies. About 10% -- 20% will be spent for specialty technologies, and about 10% will be spent for advanced packaging, testing, mask making, and others. At TSMC, a higher level of capital expenditures is always correlated with the higher growth opportunities in the following years. Now, let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of U.S. dollar $20.8 billion, above our guidance in U.S. dollar terms. Our business in the second quarter was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, particularly offset by continuous smartphone seasonalities. Moving into third quarter 2024, we expect our business to be supported by strong smartphone and AI-related demand for our leading-edge process technologies. Looking at the full year 2024, we forecast the overall semiconductor market excluding memory to increase by about 10%, which is unchanged from our forecast three months ago. At this time, we would like to expand our original definition of foundry industry to Foundry 2.0, which also includes packaging, testing, mask making, and others and all IDM, excluding memory manufacturing. We believe this new definition better reflects TSMC's expanding addressable market opportunities in the future. However, I want to emphasize here that TSMC will only focus on the most advanced backend technologies which help our customers in leading-edge products. Under this new definition, the size of the foundry industry was close to $250 billion in 2023, as compared to $115 billion under the previous definition. With our new definition, we forecast the foundry industry growth to be close to 10% year-over-year in 2024. TSMC's share of the foundry industry, under our new definition, was 28% in 2023, supported by our strong technology leadership and broader customer base, we expect this one to further increase in 2024. Over the past three months, we have observed strong AI and high-end smartphone related demand from our customers, as compared to three months ago, leading to increasing overall capacity utilization rate for our leading-edge 3-nanometer and 5-nanometer process technologies in the second half of 2024. Thus, we continue to expect 2024 to be a strong growth year for TSMC. We are raising our four-year guidance and now expect our 2024 revenue to increase slightly above mid-20s percent in US dollar terms. Next, I will talk about TSMC's capacity planning process and investment disciplines. This is important, especially when we have such high forecasted demand from AI related business. TSMC's mission is to be the trusted technology and capacity provider for the global logic IC industry for years to come. The continual surge in AI related demand supports a strong structural demand for energy efficient computing. As a key enabler of AI applications, the value of our technology position is increasing as customers rely on TSMC to provide the most advanced process and packaging technology at scale in the most efficient and cost-effective manner. As such, TSMC employs a disciplined framework to address the structural increase in the long-term market demand profile underpinned by the industry megatrend of AI, HPC, and 5G. We work closely with our customers to plan our capacity. We also have a rigorous and roll-out system that evaluates and judges market demand from both a top-down and a bottom-up approach to determine the appropriate capacity to build. Our capital investment decisions are based on four disciplines, that is, technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning a sustainable and healthy return. To ensure a proper return from our investment, both pricing and cost are important. TSMC's pricing strategy is strategic, not opportunistic to reflect the value that we provide. Today, we are investing heavily in leading-edge specialty and advanced packaging technologies to support our customers' growth and enable their success. If customers do well, TSMC should do well. For example, we are happy to see many of our customers' structural profitability improving in these past few years. At the same time, we face rising cost challenges due to increasing process complexity, a leading load, higher electricity costs in Taiwan, global fiber expansion in higher cost regions, and other cost inflation challenges. Therefore, we will continue to work closely with our customers to share our value. We will also work diligently with our suppliers to deliver on cost performance. We believe such actions will help TSMC earn a sustainable and healthy return, so that we can continue to invest in technology and capacity to support our customers' growth and fulfill our mission as a trusted foundry partner, while delivering profitable growth for our shareholders. Finally, I'll talk about our N2 status and A16 introduction. Our 2-nanometer and A16 technologies lead the industry in addressing the insatiable need for energy-efficient computing, and almost all the AI innovators are working with TSMC. We expect the number of the new tape-outs for 2-nanometer technologies in its first two years to be higher than both 3-nanometer and 5-nanometer in their first two years. N2 will deliver full load performance and power benefit, with 10 to 15 speed improvement at the same power, or 25% to 30% power improvement at the same speed, and more than 15% chip density increase as compared with the N3E. N2 technology development is progressing well, with device performance and yield on track or ahead of plan. N2 is on track for volume production in 2025 with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduce N2P as an extension of our N2 family. N2P features a further 5% performance at the same power or 5% to 10% power benefit at the same speed on top of N2. N2P will support both smartphone and HPC applications, and volume production is scheduled for the second half of 2026. We also introduce A16 as our next nanosheet-based technology, featuring Super Power Rail, or SPR, as a separate offering. TSMC's SPR is an innovative, best-in-class backside power delivery solution that is forcing the industry to incorporate another backside contact scheme to preserve gate density and device with flexibility. Compared with N2P, A16 provides a further 8% to 10% speed improvement at the same power, or 15% to 20% power improvement at the same speed, and additional 7% to 10% chip density gain. A16 is best suited for specific HPC products with complex signal routes and dense power delivery network. Volume production is scheduled for the second half of 2026. We believe N2, N2P, A16, and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities way into the future. This concludes our key message, and thank you for your attention. A - Jeff Su: Thank you, C.C. Thank you, Wendell. This does conclude our prepared remarks. 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 the participants an opportunity to ask their questions. Questions we will take both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Operator Instructions] Now we will begin the Q&A session, I would like to take the first few questions from the floor, then we will go on to the call. So let's begin. The first question we please take from Gokul Hariharan from JP Morgan. Thank you. Gokul Hariharan: Thanks, Jeff. Good afternoon, C.C., and good afternoon, Wendell. Thanks for giving us the picture in terms of how you are planning future capacity. Just on AI accelerator and related capacity, both front end and advanced packaging, clearly every customer is queuing up at TSMC for capacity. I think last time we talked about this maybe a couple of quarters back, C.C., you mentioned, we expect to see supply to kind of reach balance, supply demand to reach balance by end of this year. Just wanted to see what is your current remark? How do you think about supply demand balance for AI accelerator and CoWoS advanced packaging capacity? And I think in your symposium you talked about 60% CAGR, component growth for CoWoS capacity in the next four, five years. So, could you talk a little bit about how much capacity for CoWoS would you be planning to build next year as well? Like last year you said you're going to be doubling the capacity this year. Now that we are in the middle of this year, maybe can we get a view on what is the capacity expansion for next year? That's my first question. Thank you. Jeff Su : Okay. Gokul, all right. For the benefit of the audience online and in-person, please allow me to kind of try to summarize your question. So Gokul's question, first of all, he understands and appreciates TSMC's discipline framework in terms of looking at how to build capacity. His question is that it seems that everyone today, AI accelerators and advanced packaging is queuing at TSMC to ask for capacity. So his question is, when do we, C. C. expect supply demand to reach a balance both for the accelerator side and then for the CoWoS. At the symposium, we said CoWoS capacity will grow at a 60% CAGR the next few years. He also wants to know what are we planning to build or increase for 2025 CoWoS? C. C. Wei: Gokul, I also try to reach the supply and demand balance, but I cannot today. The demand is so high, I have to work very hard to meet my customers' demand. We continue to increase, I hope sometime in 2025 or 2026 I can reach the balance. You're talking about the CAGR or those kind of increase of the CoWoS capacity. Now it's out of my mind. We continue to increase whatever, wherever, whenever I can. Okay. The supply continues to be very tight, all the way through probably 2025 and I hope it can be eased in 2026. That's today's situation. Gokul Hariharan: Any thoughts on next year capacity? Are you going to double your capacity again next year for CoWoS? C. C. Wei: The last time I said that, this year I doubled it, right? More than double. Okay. So next year, if I say double, probably I will answer your question again next year and say more than double. We are working very hard, as I said. Wherever we can, whenever we can. Gokul Hariharan: Okay, thank you. My second question is regarding gross margins. I think second half guidance already seems to be better than what originally we were thinking, that gross margin could drop in second half, but it looks like it's actually going up. And it looks like a lot of the headwinds on gross margin is coming in this year. So, how should we think about gross margin looking forward for TSMC? Are we going to get back to the high 50%, 60% gross margin that we saw in 2022? Given that you got, you're selling more of your value, you have some of the entry tailwinds in terms of yield improvement coming through. Into that, I will also ask, how should we think about impact of subsidies and ITC credits as you start ramping your overseas locations? How does that impact cost and gross margin? Because there's also some subsidies coming in, and currently TSMC is mostly talking about gross CapEx and gross spend? Jeff Su: Okay, so let me summarize Gokul's second question, it's around gross margin and profitability. He notes second half '24 gross margin seems to be better than the expectation. So his question is really, how should we think about gross margin in the next several years? He notes, you know, as we said, we will sell our value and the dilution of entry will gradually reduce. So, where can the gross margins go back to a high 50% or 60% that kind of level that we saw a few years ago in 2022? Maybe that's the first part of his question. I'll stop here, then I'll get to the second. Wendell Huang: Sure. Gokul, let me share with you some of the puts and takes on gross margin 2025 and a little bit beyond that. You already talked, there are positives and there are negatives. You already mentioned positive will be a decreasing dilution from N3. We're selling our value and we continue to drive down our cost, increase the productivity. That is, we are very good at that. On the other hand, let's use N5 conversion to N3 as an example. We are not ruling out the possibility of further converting more N5 to N3 because we're seeing very strong demand for N3. If we decided to do that, of course, there will be a negative impact on the year that we do that, but in the future years, that will be beneficial. We continue to face cost challenges, inflation cost challenges, including electricity prices, et cetera. And also, we are beginning the production of our overseas fab, two overseas fabs next year, the Phase 1 of Arizona fab and Phase 1 of the Kumamoto fab. We expect that the overseas fabs will dilute our gross margins by -- between 2 to 3 percentage point next year and in the next several years. So those are the puts and takes to give you the concept. However, we've taken all that into considerations with our efforts in managed the cost gap, especially between the overseas fab in Taiwan. We're repeating and confident to say that 53% and higher gross margin is achievable. So I think that's the first part of your question. Gokul Hariharan: Yes, that's right. Jeff Su: And then maybe also just Gokul asked, if it's possible to get back to the high 50%, 60% level that we saw in 2022? Wendell Huang: Yes, if we have a very high utilization rate, everything else stays the same, possible. Jeff Su: Okay. And then the second part of his question was, what is the impact from the different government incentives including the CHIPS Act, ITC credits in the U.S., et cetera, through the financials and also I think partly gross CapEx and net CapEx? Thank you. Wendell Huang: Generally speaking, when subsidies are received, then you see that on the cash flow statement. It will be used to offset the asset value that will be on the balance sheet. When this fab begins to production, the P&L impact will come in. So generally speaking, it's like that. Different government has different approach in providing the grants. So that's a different story. But you can look at our financial statements. There will be actual subsidy received in the previous quarter and previous year. For example, 2023, we receive a total subsidies of slightly higher than $1.5 billion US equivalent. And we receive that mainly in Japan. Jeff Su : Okay. All right. Great. Thank you. Let's move on. We'll take the next one from Charlie Chan from Morgan Stanley and then we'll go to Bruce Lu from Goldman. Thank you. Charlie Chan: Thanks. Hi, C.C., Wendell and Jeff. Great to see you in person again. So my first question is really about your progress of selling the value. I'm not sure what's the progress. And do you think for next year your leading-edge capacity is going to be in shortage? Is that's the case, whether that increase your chance to sell more value to your customers? Thank you. Jeff Su: Okay. So Charlie's first question is around pricing. And he wants to understand the progress of, I guess, selling our value. And also in next year, looking at next year, particularly for the leading-edge nodes, do we expect that in terms of the demand to be very full? C. C. Wei: Charlie, this kind of pricing strategy is very strategic. You are asking me about the status. So far, so good. And this is an ongoing and continuous process, we are continuing to sell our value. And by the way, my customers are doing very well also. You knew that. So we should do well also. Charlie Chan: So that is actually my follow-up question on this first question. For different segments, for example, HPC customers are doing very, very well. But for smartphone customers, probably more sensitive to the cost. Do you expect that kind of difference of value increase for different customers, even at the same node? Jeff Su: So Charlie is asking, how will we do the pricing? Will it be different between, for example, an HPC customer versus a smartphone customer at the same node? And also his question earlier was, do we expect the demand for the leading nodes to be very high next year? C. C. Wei: Since the pricing is strategic, so it won't be flat for every product sector. So it will be different. That's all I can share with you. And all my customers, they are looking for leading-edge capacity for the next few years and we are working with them. And so far, we try our best to support them, both in pricing and in capacity. Charlie Chan: Thank you. And second topic is definitely over the past two days there’s a geopolitical risk? So, Mr. Donald Trump talked about maybe a few years ago, right, Taiwan/TSMC took a 100% chip business from U.S. So congrats on the positive high market share. However, the concern is growing, right, that the U.S. continues to depend on our Island TSMC and the chip production. So, our question is for shareholders, right, how TSMC is going to mitigate this potential geopolitical risk? For example, whether you are going to further expand your U.S. capacity or even share the ownership, right, with the U.S. government? And maybe a technical question to Wendell, for today, right, if we are shipping a chip to the U.S. customers, do we need to pay for the U.S. tariff? Jeff Su: Okay. Sorry. So Charlie's second question is around sort of overseas expansion and geopolitical risk. He notes the comments from former President Trump a few days ago that Taiwan semiconductor has taken 100% of the business. So his question is really how does TSMC plan to mitigate the geopolitical risk? Does this include expanding capacity overseas, particularly in the U.S.? Would we consider -- I think part of this question was some JV or joint investments, whether with government or whether with partners. And the last question, I think, was more for Wendell, about the tax or the tariffs, so to speak. C. C. Wei: Okay, Charlie. So far, we did not change any of our original plan of expansion of our overseas fab. We continue to expand in Arizona, in Kumamoto and maybe future in Europe. No change to our strategy. We continue our current practice. You mentioned about the JV, No. Okay. Wendell Huang: On the tariff, not that we know of. Normally, if there's an import tariff, the customers will be responsible for that, but no discussion, nothing. Jeff Su: Okay. Thank you, Charlie. All right. We'll take the next question from Bruce Lu from Goldman Sachs in the front, then we’ll move online. Bruce Lu : Thank you for taking my question. Alright, my question is that, why don't we take up our gross margin or structural profitability target. I mean TSMC has been saying for selling your value for past couple of quarters without changing the margin target, i.e., most likely you are passing through all the costs. But please, I can recall in 2021, I mean, TSMC do raise the gross margin target by them because to support the future growth with more R&D, as the technology continues to be enhanced and more difficult and one of your customers at this is supportive that to suggest that you should charge even more. So my question is that, why is that you don't raise your gross margin target when you are trying your -- when you try to sell your value, which we believe we deserve much higher value. Jeff Su: Okay. So thank you, Bruce. So Bruce's first question is about profitability and value. Bruce seems to agree that TSMC is providing value to our customers. He also notes in 2021, indeed, a few years ago, our gross margin target, long-term gross margin target was about 50%, and we're able to increase that to 53% and higher. So his question is really with everything that is going on today with the value of our technology, enabling our customers more and more, why doesn't TSMC increase or revise up our long-term gross margin target from the current 53% and higher? Is that the essence? C. C. Wei: Bruce, thank you for recognizing TSMC's value. I'm working with our customer. As I said, this kind of pricing is strategic. And certainly, we want to sell our value. Changing the target in -- at this moment, I think I would like to emphasize 53% and higher, please put more attention to and higher. The number, I'm not going to change it at this time. When I have a more conversation with my customer and discuss with them, and I probably will give you and the higher portion, okay? Thank you. Bruce Lu: Thank you. My next question is for advanced packaging. So management used to mention that Advanced Packaging margin was lower than the corporate average, but with higher ROICs. But given the reason progress for the CoWoS and everything, do we see a much better profitability for the CoWoS? And given that it's so difficult to expand the capacity, are you planning to work with more partners to increase your CoWoS supply, which will start your current supply and demand issues? Jeff Su: Okay. Thank you, Bruce. So Bruce's second question is around advanced packaging. Part of it is in terms of the profitability. He notes we used to say, which is true, it's lower than the corporate average profitability but can earn a similar return or ROE, but his question is now with more and more CoWoS demand in greater scale, is the profitability of advanced packaging, I think, approaching or at or above the corporate average? And also, given the tight supply, would we consider to work with more partners to help increase the capacity for CoWoS to support our customers' growth. C. C. Wei: You are right, for advanced packaging, the gross margin used to be much lower than the corporate average. Now it's approaching corporate average. We are improving it because of scale of the economics, and we put a lot of effort to reduce our cost. So gross margin is greatly improving in these two years. As for the working with OSAT partners, yes, we are doing it. Because of -- I just answer the question whether the CoWoS capacity is now or not, is not enough. And in great shortage, and that limited my customer’s growth. So we are working with our OSAT partner and try to give more capacity to my customer, so that they can grow healthily. And so the TSMC's wafer can be sold healthily. Okay. Jeff Su: Okay. Thank you, C.C. Thank you, Bruce. Operator, can we move to the first participant online for their -- his or her questions, please? Operator: Yes. First one, we've got Brett Simpson, Arete. Brett Simpson : Yes. Thanks very much. My question was really about your capacity plans for the next nodes, at N2, including 16. We're hearing that AI chip makers are looking to migrate more aggressively from N minus 1 to the leading-edge, particularly due to backside power because they're trying to lower their power budgets going forward. So my question, can you support this move? And if so, should we be expecting N2, A16 to be structurally a much bigger nodes, than we've seen in the past few nodes? Thank you. Jeff Su: Okay. Brett, thank you. So Brett's first question is on capacity planning, particularly at the leading-edge N2 and A16. So he notes rightly that AI customers are migrating aggressively from N minus 1 in the past to the most leading node. He notes particularly A16 driven by the interest in backside power. So his question is, can we support this move in terms of capacity to support the customers and also whether thus N2 and A16 will be a much bigger node than our nodes in the past? C. C. Wei: Brett, you are right. All the people want to move into kind of a power-efficient mode. And so they are looking for the more advanced technology so that they can save power consumption. And so a lot of my customers want to move into N2, N2P, A16 quickly. We are working very hard to build the capacity to support them. Today, it's a little bit tight, not a little bit, actually, today is very tight. I hope in next year or the next two years, we can build enough capacity to support this kind of demand. Today, yes, we are working hard to support them. And enough, not yet, but we are working hard to get it. Jeff Su: Does that answer your first question, Brett? Brett Simpson: Okay. Thank you. Yes, that's great. Thank you, C. C. Wei. My follow-up question was for Wendell. I wanted to just dig into the gross margin dilution from N3, where is that at today? And does the introduction of N3E structurally improve your N3 returns? I guess N3 is less capital intensive, there's less EUV layers, so I'm keen to understand that this drives better economics for TSMC, particularly as you start to ramp more entry capacity in the second half of this year. Thank you. Jeff Su: All right. Thanks, Brett. So Brett's second question is on the gross margin dilution from N3. He notes that N3 uses less EUV layers, less capital intensity. So his question is, as we ramp N3 more and more, does N3E structurally improve the returns and gross margin of N3 as a whole. Wendell Huang: Okay. Brett, we don't break it down between the different nodes within the family. But I can share with you, overall speaking, as we said before, N3E takes a longer while to reach the copper mark. In the past, it was about 8 to 10 quarters. For N3, we're looking at 10 to maybe 12 quarters. But it is improving, and we expect it to continue to improve. Jeff Su: Okay. Thank you, Brett. Operator, let's take the next set of questions from the next participant on the call, please. Operator: Next one to ask a question, Charles Shi from Needham. Go ahead, please. Charles Shi : Yes, thanks for taking my questions. Maybe the first one, just want to follow up. Wendell, I think I heard you talking about that potentially more N5 to N3 conversion. Maybe what you're trying to do right now, the conversion. I just want to understand the overall philosophy here because I think in the past, the TSMC does do this node-to-node conversion quite actively, let's say, 10-nanometer to 7-nanometer, probably even earlier 20-nanometer to 16-nanometer. And I think you told us basically treat 10 and 7 as one large node, 20 and 16 as one large node. Should we start to really think about maybe 5 and 3 are just one big node and maybe more conversion, we should think about more of the N3 capacity growth will come from conversion going forward less from the greenfield investment? That's the first question. Jeff Su: Okay, Charles. So Charles first question is really look at our conversion strategy. He notes that we have always talked about building in tool commonality to provide us flexibility. We have done so in the past that certain nodes like 20 and 16, 10 and 7. So his question is really we had said that we potentially convert more N5 tools to support the strong demand for N3 capacity. So his question is should we, investors, and we'll start to think about N5 and N3 as one big node? Wendell Huang: Right. You mentioned about 12 and 16, they are a big foundry. 7 and 10 are a big family. But 5 and 3 are not a big family in our definitions. At the same time, there are node-to-node two commonality in TSMC is pretty high. So for 5 and 3, the commonality of tools is over 90%, and these two nodes are adjacent. They're all in Tainan Science Park. And so it's very easy to do the conversions. Did I answer your questions? Charles Shi: Yes. May I ask a second question? Jeff Su: Certainly. Charles Shi: Thanks. Maybe a question about CoWoS. I think I heard C.C., you said maybe there's some technical difficulty on my side. I just want to clarify, maybe you may double the CoWoS capacity again in 2025. But a little bit more technical question, I do want to better understand the technology constraints because your customers seems to be migrating from CoWoS-S to the more advanced version CoWoS-L, CoWoS-R: and we learned that CoWoS-L-R does not require TSV, does not require a large silicon interposer, does that help at least to some degree, the capacity constraints you're facing on overall CoWoS, and does that help to maybe to achieve that goal of maybe getting to the supply/demand balance some point in 2025, 2026. That's a two-part question. Thank you. Jeff Su: Okay, Charles. Is really on CoWoS. First, he would like to clarify, we said that CoWoS capacity is more than doubling in 2024. He said, did we say, is he correct to understand, we said it will double again in 2025. That's the first clarification. And then he would like to know as customers migrate from CoWoS-S to CoWoS-L and CoWoS-R solution, a lot of technical challenges or benefits -- changes, sorry, not challenges. Does it help alleviate the capacity constraints? And would that allow CoWoS to reach supply/demand balance in 2025? So I wanted to clarify and one on the different solutions. C. C. Wei: Well, all right. Charles, you really know all the details of the technology. The CoWoS-R, CoWoS-S, CoWoS-L, blah, blah, blah. All these kind of things because of our customers' requirement. So even the same customer, they have different approaches for their different products. When I say that we doubled the capacity, this is some in or the different version of the CoWoS together. Which portion is really double, which portion is much more than the other one, not going to share with you because this is related to my customer demand. So from last year to this year, we have more than doubled. And as I said, from this year to next year, we want to double again or probably we want to more than double again. But still, I have to work with our OSAT partner to increase the overall supply to support my customer. Whether that this kind of different version of the CoWoS will give me some flexibility today, yes, and no, because different version has a different tool set. But in common, some of the tool can be used by all the CoWoS, okay, but different versions have a different demand. Jeff Su: Okay. Thank you, C.C. Thank you, Charles. We'll come back to the floor for the next two questions, please. We'll take the first one from Laura Chen from Citigroup, and then we'll go to Sunny Lin from UBS. Laura Chen : Thank you, Jeff. Thank you for taking my question. My first question is also on the advanced node. I remember C.C., you mentioned earlier that every clients are now engaged with you on the 2-nanometer migration. So I'm just wondering that when we enter in maybe 2026, the second year, can we expect that the revenue contribution initially will be larger than what we had comparing to N3. And also wondering that since the performance is much better. So can we expect the dilution period will also be shorter than N3? Jeff Su: Okay. So Laura's first question is about N2 basically that almost every customer is engaging with TSMC on 2-nanometer technology. So her question is, do we expect the revenue contribution from N2 in 2026, therefore, to be larger than compared to N3 at a similar point in time of the ramp and also correspondingly with the N2 margin dilution be less or better than N3, basically? C. C. Wei: I will give this kind of money's question to the CFO. Wendell Huang: All right. Laura, the revenue, yes, it's going to be bigger, okay? Gross margin dilution, it will be faster to reach corporate average. Laura Chen: That's very clear and helpful. Thank you. And also my second question is also on the packaging side. So we know that last time we also discussed an edge AI will also benefit for TSMC in terms of the advanced nodes, the die areas. Just wondering that do you also see your edge AI device clients are moving to 3D IC or SoIC anytime in the next two years? Or before that happening, can we expect more clients on the smartphone side, they will also adapt maybe info first. Because so far, our understanding is that info only have one advanced one single client. I'm just wondering that if we see that more clients to move to on the edge AI side on advanced packaging? Thank you. Jeff Su: Okay. So Laura, second question is very specific, but again, in regards to advanced packaging with more and more customers working on edge AI devices without -- well, being overly specific, but what does it mean or the implication for advanced packaging solutions that we expect in the next two years to see these edge AI customers start to use SoIC or 3D IC particularly smartphone? Will they still be using info? Or will they also consider these solutions as well. Is that correct, Laura? Okay. C. C. Wei: Well, very technical questions. Let me share with you as my customer moving into 2-nanometer or N16, they all need to probably take in the approach of chiplets. So once you use your chiplets, you have to use in advanced packaging technologies. On the edge AI, for those kind of smartphone customer, as compared with the HPC customers, HPC is moving faster because of bandwidth concerns, latency of footprint or those kind of thing. For smartphone customer, they need to pay more attention to the footprint as well as the functionality increase. So you observe my big customers taking the info first and then for few years, nobody catch it up. They are catch it up okay? Jeff Su: Okay. Thank you, Laura. We'll take the next question from Sunny Lin from UBS, and then we'll go back to the call. Sunny Lin : Thank you, Jeff. Good afternoon, C. C. and Wendell, thank you for taking my question. So my first question is on your business opportunities for smartphone and PC. Last few years, both were like x [ph] growth for quite some time. And so how we should think about the units and silicon content for the coming two, three years? First part, a lot of questions on the tight supply 5 and 3-nanometer? And so are your customers engaging with you early on the planning into 2025 capacities for a better upgrade cycle? And then for silicon content, recall a few years back when 5G just started to ramp are used to provide the silicon content expectations of 5G high-end and low-end smartphones, so I wonder at this point of time, if you have any estimates for AI for smartphone going to next two, three years? Jeff Su: Okay. Several parts to Sunny's first question. She's looking at smartphone and PC. So the first part is she wants to know in terms of unit in silicon content, what is our expectation for smartphone and PCs in the next few years? N5 and N3 supply is very tight in terms of the capacity. Can -- do we have enough capacity to support a potential unit or upgrade cycle? And last but not least, she's asking us to quantify the silicon content per device per segment from edge AI? C. C. Wei: That's a very long question. But let me answer the content first. AI is so hard. So that's right now everybody -- all my customers want to put their AI functionality into the edge devices and so the die size will be increased, okay? How much? I mean it's different from my customer-to-customers product. But basically, probably 5% to 10% die size increase will be a general rule. Unit growth, not yet, okay? Because we did not see kind of unit growth suddenly increased, but we expect this AI functionality was stimulated some of the demand to stimulate the replacement to be shorter. So in terms of unit growth that in a few years later, probably two years later, you will start to see a big increase in the edge device that's a smartphone and the PC. Jeff Su: And will we have enough capacity to support? C. C. Wei: That's the one I tried to avoid the answer. It's very, very tight, and we are working very, very hard to get enough capacity to support my customer from now all the way to next year to 2026. Sunny Lin: Thank you, C. C. for the answer. So my second question is try to look at the demand profile from different perspectives. If we look back in 2021 or early 2022, backend demand was also pretty high. Customers were very aggressive on the demand forecast. Now looking at GenAI, obviously, the technology has lots of great potential, but a new technology also have lots of volatilities where you start to ramp. And so how are we managing the volatility of the demand? Why do you think this time around is different versus COVID period? How do we get comfortable with our capacity planning? Jeff Su: Okay. Thank you, Sunny. So Sunny's second question, it goes back to TSMCs capacity planning and CapEx framework. So she notes, today generative AI-related demand is very strong, but she also notes a few years ago back in 2021 and '22, demand was also very strong. Many customers were also very positive or being on the future demand. And so today, with such strong generative AI demand, how does TSMC plan its capacity appropriately? How do we manage, I think your word was volatility? How do we manage the risk? Basically, I guess, of not overbuilding capacity in this type of environment? C. C. Wei: I thought I explained that our capacity premium process, right, and the investment, we have, I put wording of discipline. That means we are not going to repeat the same kind of mistake that we have in 2021, 2022. Now this time, again, we look at the overall very big demand forecast for my customer. And so I look at it into actually the whole company with many people now examining and study that really is AI is so used for will be used by a lot of people or not. And we test our sales force inside TSMC, while using AI, we are using machine learning scale to improve our productivity, and we found out it's very useful. And so I also in the line to buy my customer's product, and we have perform in the line, like I get no privilege, I'm sorry, but it's useful. And so I believe that this time, AI demand is more real than two or three years ago. That timing is because people are afraid of a shortage, and so automotive, everything, you name it, they are all in shortage. This time, AI alone only AI alone. It will be a very useful tool for the human being to improve all the productivity in our daily life, be it in medical, industry or in any product, manufacturing industry or autonomous driving, everything you need the AI. And so I believe it's more real. But even with that, we also have a top-down bottom-up approach and discuss with our customers and ask them to be more realistic. I don't want to repeat the same kind of mistake two or three years ago, and that's what we are doing right now. Sunny Lin: Great to know. Thank you very much. Jeff Su: Okay. Thank you. Operator, can we move on to the next participant from the line, please? Okay. If not, then maybe we'll take the last two questions from the floor or one or two. Let's start here and then here. So we'll start with our third line from Arthur Lai from Macquarie. Arthur Lai : Hi, C. C. and Wendell and Jeff. Thanks for taking my question. Arthur Lai from Macquarie. I used to cover the downstream tech and especially data center before. And so I want to ask C. C. about the SPR because I think this is very important from the data center perspective. So when you bring the new technology, you can save around 20% power. Can we also think about you can save the total systems power consumption by another20%? So is a big change. And from the customer you asked -- you spoke to, they can also you said the total cost of our own operation. So it becomes the more you buy, the more you sell. Yes, thank you. Jeff Su: Okay. So Arthur's first question, he would like to understand more about Super Power Rail or our best-in-class backside power solution as it relates to data center demand. He knows as we said that it brings greater power efficiency from the chip level. His question without specific numbers, but what does the mean for the system level power consumption saving? What does it mean for our customers' ability in terms of total cost of ownership in terms of the power savings? And does it mean that the more you buy, the more you save? C. C. Wei: The more you buy TSMC's wafer, the more you save. Yes. Sorry, I just want to -- I like my customer. Your question, Arthur, you say that 20% sales in the chips power consumption does that directly reply to indicate that the system power consumption was reduced by 20%. Probably not because of the whole system including the connection, including the networking, including the processes of power consumption. So unless every component save 20%, then you can achieve 20%. But again, the accelerator or the CPU is a big portion of the whole system's power consumption. So even it is not 20%, it's a significant portion of it. And so that's why all my customers want to using the leading edge, and they are very aggressive to move into the 2-nanometer technology. Arthur Lai: Thank you. So I also encourage company to do the right thing. So energy efficiency computing is definitely our goal for human beings. And so I also, I would like to give more color about, when you go into the A16 and when we expand the capacity, what do you think the biggest bottleneck would be? Jeff Su: Okay. So Arthur, second question is in terms of A16, what would be the biggest bottleneck to expand our capacity of A16 to support our customers, if any? C. C. Wei: We always say that when TSMC wants to expand the capacity, we need the land, we need the electricity, we need the talented people and so all the above. Okay? Arthur Lai: Thank you, C. C. Jeff Su: Okay. Thank you. And then in the interest of time, we'll take questions from the last participant on the floor, which is Brad Lin from Bank of America Merrill Lynch. Brad Lin: Thank you, Jeff for taking my questions. So I have two questions. The first one would be on the, during the Computex. We obviously have seen quite some big tech companies announced that they are going to accelerate the launch cadence. So what's the implication to TSMC? Should that give TSMC a better visibility on the pipeline and also the capacity planning? And on the other side, so what are the major challenges that you might face with this Phase 3 cadence? Jeff Su: Okay. So Brad's first question is that Computex recently, several companies announced their intention to accelerate their product cadence or product launches. So his question is, what does this mean implications to TSMC in terms of capacity planning in terms of supporting our customers, et cetera, et cetera. Is that right? Brad Lin: Yes. Jeff Su: Okay. C. C. Wei: Well, we like this kind of a trend because of TSMC is very good at the leading-edge development. And so we -- actually, every product once they design it takes 1.5 years to 2 years. So we got this kind of message, but quite a long time ago. My customer announced it because they are so happy and so we are happy also because they want us to see our value. So I take that otherwise. But -- Gokul don’t laugh. Okay. So to answer your question, yes, we have been prepared. And not only because of in June, they announce it, we much earlier, we already discussed with them, and we prepare for these kind of changes. Brad Lin: Got it. Thank you very much. So I would assume that would help us kind of sell the value easier. So the second question will be on the -- well, obviously, we also see the bigger footprint of the AI chips. So while there are quite some activities about fan-out panel-level packaging. So do you think that, that solution will be mentioned in the mid- to long run? Or does TSMC have any plan to do the related investment? Thank you. Jeff Su: Okay. So Brad, second question is that, again, with AI-related chips that they're larger and larger die sizes. So his question is in terms of advanced packaging and specifically fan-out panel-level packaging. Is this something that TSMC is looking at or exploring to do? Would this be something for TSMC in the mid- to long term? C. C. Wei: Yes. We are looking at this as kind of a panel level fan-out technology. But the maturity today is not yet, so I, personally, I would think it’s about at least three years later, okay? In this, within these three years, we don't have any very solid solution for a die size bigger than 10 times of the radical size. Today, we support our customer all the way to 5x, 6x chip size. I'm talking about the fuel size, the biggest fuel size. Three years later, I believe the panel fan-out will be -- start to be introduced and we are working on it. Brad Lin: And we will be ready for it as well. C. C. Wei: Of course. Jeff Su: All right. Thank you, C.C. Thank you, Brad. Thank you, everyone. 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 30 minutes from now, and the transcript will become available 24 hours from now, both of which are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope everyone continues to stay well, and we hope you will join us again next quarter. Goodbye, and have a great day.

Operator: Jeff Su: Good afternoon, everyone, and welcome to TSMC's First Quarter 2024 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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 shortly. [Operator Instructions]. The format for today's event will be as follows: first, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the first quarter 2024, followed by our guidance for the second quarter 2024. Afterwards, Mr. Huang and TSMC's CEO, Dr. C. C. Wei, will jointly provide the company's key messages. Then we will open the lines for the question-and-answer session. 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 on our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the first quarter 2024. After that, I will provide the guidance for the second quarter 2024. First quarter revenue decreased 5.3% sequentially in NT dollars or 3.8% in U.S. dollars as our business was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Gross margin increased 0.1 percentage point sequentially to 53.1%, mainly reflecting product mix changes due to smartphone seasonality, partially offset by a less favorable foreign exchange rate. Total operating expenses accounted for 11.1% of net revenue, which is lower than the 12% implied in our first quarter guidance, mainly due to tighter expense controls. Thus, operating margin increased 0.4 percentage points sequentially to 42%. Overall, our first quarter EPS was TWD8.7 and ROE was 25.4%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 9% of wafer revenue in the first quarter, whilst 5-nanometer and 7-nanometer accounted for 37% and 19%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 65% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 3% quarter-over-quarter to account for 46% of our first quarter revenue. Smartphone decreased 16% to account for 38%. IoT increased 5% to account for 6%. Automotive remained flat and accounted for 6%, and DCE increased 33% to account for 2%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD1.9 trillion or USD 60 billion. On the liability side, current liabilities increased by TWD113 billion, mainly due to the increase of TWD140 billion in accrued liabilities and others, partially offset by the decrease of TWD44 billion in accounts payable. The increase in accrued liabilities and others was mainly due to the reclassification of the temporary receipt from customers from long-term liabilities. Our financial ratios, accounts receivable turnover days remained at 31 days, while days of inventory increased 5 days to 90 days, primarily due to ramp of 3-nanometer technologies. Regarding cash flow and CapEx. During the first quarter, we generated about TWD436 billion in cash from operations, spent TWD181 billion in CapEx and distributed TWD78 billion for second quarter 2023 cash dividend. In addition, we raised TWD23 billion in cash from bond issuances. Overall, our cash balance increased TWD233 billion to TWD1.7 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled $5.77 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second quarter revenue to be between USD 19.6 billion and USD 20.4 billion, which represents a 6% sequential increase and 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full year tax rate will be between 15% to 16% compared to 14.5% in 2023. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on the impact from the April 3 earthquake. On April 3, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude of our fabs was 5. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power outages, no structural damage to our fabs, and there's no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimum impact to our second quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first quarter '24 and second quarter '24 profitability. Compared to fourth quarter 2023, our first quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to the impact from the earthquake on April 3, as just discussed, and higher electricity cost in Taiwan. After last year's 17% electricity price increase from April 1, TSMC's electricity price in Taiwan has increased by another 25% starting April 1 this year. This is expected to take out 70 to 80 basis points from our second quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity cost to continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemical and gases and other variable costs. In addition, we expect our overall business in the second quarter of the year to be stronger than the first half. And the revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half of '24 as compared to 2 to 3 percentage points in first half of '24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second half 2024, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Jeff Su: Okay. Sorry to interrupt, Wendell, because we have been informed that some of the audience are having difficulty linking through the website to the call. So let's pause a few minutes, and we'll continue once we resolve the IT issue. Thank you, everyone, for your patience. [Technical Difficulty] on the telephone call, sorry, we're having a little bit of IT issue. We should expect hopefully to resolve it very soon. So just please hang on for a few more minutes, and thank you for your patience. Okay. Thank you, everyone, for your patience. Sorry about the technical issues. We believe the webcast, if you're through the TSMC website, you should be able to log back in and listen to the webcast. For those of you on the line or having difficulty with the telephone, I think try the webcast first and the telephone line should be available shortly. Again, sorry for the inconvenience, and thank you for the patience. In light of the fact that we had these technical issues, I think we'll start with Wendell Huang, our CFO, to give our guidance, and then we will go into our prepared remarks. Thank you. Wendell Huang: Thank you, Jeff. Sorry, everyone. Let me repeat the guidance for second quarter again. For the second quarter of 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second quarter revenue to be between USD 19.6 billion and USD 20.4 billion, which represents a 6% sequential increase or a 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full year tax rate will be between 15% to 16% compared to 14.5% in 2023. Now that concludes the financial presentation. Let me now repeat our key messages. I will start by making some comments on the impact from the April 3 earthquake. On April 3, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude at our fabs was 5. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power shortages, no structure damage to our fabs and there is no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimal impact to our second quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first quarter 2024 and second quarter 2024 profitability. Compared to fourth quarter of 2023, our first quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to impact from the earthquake on April 3, as just discussed, and higher electricity costs in Taiwan. After last year's 17% electricity price increase from April 1, TSMC's electricity price in Taiwan was -- has increased by another 25% starting April 1 this year. This is expected to take out 70 to 80 basis points from our second quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity costs continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemicals and gases and other variable costs. In addition, we expect our overall business in the second half of the year to be stronger than the first half. And revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half '24 as compared to 2 to 3 percentage points in first half of '24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second half of '24, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Finally, let me talk about our 2024 capital budget. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. Our CapEx and capacity planning is always based on long-term market demand profile. We reiterate our 2024 capital budget is expected to be between USD 28 billion and USD 32 billion as we continue to invest to support customers' growth. Out of the USD 28 billion to USD 32 billion CapEx for 2024, between 70% and 80% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making and others. Now let me turn the microphone over to C. C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. Before I start, I would like to take a moment and make a few remarks. On April 3, TSMC experienced a major-scale earthquake of 7.2 magnitude. Our deepest sympathies and heart go out to all those who are affected by this tragedy. I also want to recognize and deeply thank all of our employees and our suppliers for their dedication and hard effort during this time. Although it was largest earthquake in Taiwan in the last 25 years, we worked together tirelessly and were able to resume for operation at all our fab within 3 days with minimal disruptions, demonstrating the resilience of our operation in Taiwan. Lastly, I would also like to extend our great appreciation to our customers with their understanding and support as we work to recover the lost production during the second quarter. Now let me start my prepared remarks with our near-term demand outlook. We concluded our first quarter with revenue of USD 18.9 billion, slightly above our guidance in U.S. dollar terms. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Moving into second quarter 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Looking at the full year 2024, macroeconomic and geopolitical uncertainty persists, potentially further weighing on consumer sentiment and end-market demand. We thus expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024. We lowered our forecast for the 2024 overall semiconductor market, excluding memory, to increase by approximately 10% year-over-year, while foundry industry growth is now forecast to be mid- to high-teens percent, both are coming off the steep inventory correction and/or base of 2023. Having said that, we continue to expect 2024 to be a healthy growth year for TSMC. Supported by our technology leadership and broader customer base, we expect that our business to grow quarter-over-quarter throughout 2024 and reaffirm our full year revenue to increase by low to mid-20% in U.S. dollar terms. Next, I will talk about the strong AI-related demand outlook. The continued surge in AI-related demand supports our already strong conviction that structural demand for energy-efficient computing is accelerating in an intelligent and connected world. TSMC is a key enabler of AI applications. AI technology is evolving to use ever increasingly complex AI models, which needs to be supported by more powerful semiconductor hardware. No matter which approach is taken, it requires use of the most advanced semiconductor process technologies. Thus, the value of our technology position is increasing as customers rely on TSMC to provide the most advanced process and packaging technology at scale with a dependable and predictable cadence of technology offering. In summary, our technology leadership enable TSMC to win business and enables our customer to win business in their end market. Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power. We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024. For the next 5 years, we forecast it to grow at 50% CAGR and increase to higher than 20% of our revenue by 2028. Several AI processors are narrowly defined as GPUs, AI accelerators and CPU's performing, training and inference functions and do not include the networking edge or on-device AI. We expect several AI processors to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years. Now let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global IC -- logic IC industry for years to come. Given the strong HPC and AI-related demand, it is strategically important for TSMC to expand our global manufacturing footprint to continue to support our U.S. customers' growth, increase customers' trust and expand our future growth potential. In Arizona, we have received the strong commitment and support from our U.S. customers and plan to build 3 fabs, which help to create greater economies of scale. Each of our fab in Arizona will have a clean-room area that is approximately double the size of a typical logical fab. We have made significant progress in our first fab, which has already entered engineering wafer production in April with the N4 process technology. We are well on track for volume production in first half 2025. Our second fab has been upgraded to utilize 2-nanometer technologies to support a strong AI-related demand in addition to the previously announced 3-nanometer. We recently completed the , in which the last steel construction beam was raised into place, and volume production is scheduled to begin in 2028. We also recently announced plans to build a third fab in Arizona using 2-nanometer or more advanced technologies, with production beginning by the end of the decade. We are confident that once we begin volume production, we will be able to deliver the same level of manufacturing quality and reliability in each of our fab in Arizona as from our fab in Taiwan. In Japan, we held an opening ceremony in February in Kumamoto for our first specialty technology fab. This fab will utilize the 12/16 and the 22/28-nanometer process technologies and is on track for volume production in the fourth quarter of this year. Together with our JV partners, we also announced a plan to build a second specialty fab in Japan with 40, 12/16 and the 6/7-nanometer process technologies to support a strategic customer for consumer, automotive, industrial and HPC-related applications. Construction is scheduled to begin in second half '24 with production target by the end 2027. In Europe, we plan to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications with our JV partners where construction is scheduled to begin in fourth quarter this year. Our overseas decision are based on our customers' need and the necessary level of government support. This is to maximize the value for our shareholders. In today's fragmented globalization environment, cost will be higher of everyone, including TSMC, our customers, our competitors and the entire semiconductor industry. We plan to manage and minimize the overseas cost gap by, first, pricing strategically to reflect the value of geographic flexibility; second, working closely with government to secure their support; and third, leveraging our fundamental advantage of manufacturing technology leadership and our large-scale manufacturing base, which no other manufacturer in this industry can match. Thus, even after factoring in the higher cost of overseas fab, we are confident to deliver a long-term gross margin of 53% and higher and sustainable ROE of greater than 25% that we have committed to our shareholders. At the same time, TSMC will be the most efficient and cost-effective manufacturer in the region that we operate. We are continuing to provide our customers with the most advanced technology at scale to support their growth. Finally, I will talk about our N2 status. Our N2 technology leads our industry in addressing the insatiable need for energy-efficient computing, and almost all AI innovators are working with TSMC. We are observing a high level of customer interest and engagement at N2 and expect the number of the new tape-outs from 2-nanometer technology in its first 2 years to be higher than both 3-nanometer and 5-nanometer in their first 2 years. Our 2-nanometer technology will adopt the nanosheet transistors structure and be the most advanced semiconductor industry technology in both density and energy efficiency. N2 technology development is progressing well with device performance and yield on track or ahead of plan. N2 is on track for volume production in 2025 with a ramp profile similar to N3. With our strategy of continuous enhancement, N2 and its derivative will further extend our technology leadership position and enable TSMC to capture the AI-related growth opportunities well into future. This concludes our key message, and thank you for your attention. Jeff Su: Okay. Thank you, C. C. This concludes our prepared remarks. Again, thank you, everyone, for your patience. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Operator Instructions]. So now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you. Operator: [Operator Instructions]. The first one to ask questions is Gokul Hariharan, JPMorgan. Gokul Hariharan: My first questions are on demand. So C. C., you kind of reduced the expectation for the overall semiconductor industry growth. Could you talk a little bit about where is the area where you have seen that slower pickup in demand? I think you talked about smartphone a couple of times in the call. Is it primarily the smartphone area where you've seen a slower pickup in terms of demand? And previously, a couple of quarters back, you talked about cannibalization or decline in regular data center demand due to the crowding out of AI and being a drag for TSMC. Do you see that the regular compute, regular data center networking kind of demand is coming back? Or is it still remaining muted and most of the demand uptick is still focused on AI? Jeff Su: Okay. So Gokul, thank you. So Gokul's first question is a little bit 2 parts. So he notes that we have lowered our overall semiconductor ex memory growth forecast for this year to approximately 10% and foundry now to mid to high teens. So Gokul wants to understand, in what segments or applications or areas are we seeing a slower pickup in demand? And then also, in terms of specifically AI versus traditional servers, how are you seeing that demand shape out? And what is the impact to TSMC? Is that generally correct, Gokul? Gokul Hariharan: Yes. And I think maybe since you called out smartphone, just maybe mention how you see the smartphone demand compared to maybe 3 months back as well. C. C. Wei: Well, Gokul, this is C. C. Wei. Let me answer your questions and some of your comment also. Yes, smartphone end-market demand is seeing gradual recovery and not a steep recovery, of course. PC has been bottomed out and the recovery is slower. However, AI-related data center demand is very, very strong. And the traditional server demand is slow, lukewarm. IoT and consumer remain sluggish. Automotive inventory continue to correct, okay? What does that mean to TSMC? The budget for a hyperscale player, their wallet share shifted from traditional server to AI server is favorable for TSMC. And we are able to capture most of the semiconductor content in an AI server's area as we define the GPU, networking processor, et cetera. Well, we have a lower presence in those CPU-only, CPU-centric traditional server. So we expect our growth will be very healthy. Do I answer your question, Gokul? Gokul Hariharan: Okay. So yes, I just wanted to ask, is it smartphone the main change compared to, let's say, back in January when you had more than 10% growth for semi? Or is it across the board you're seeing a slower recovery? Jeff Su: So Gokul is asking sort of versus 3 months ago, where have we seen the major shift in the overall end market? Is there a particular area that we have seen? Wendell Huang: Yes, Gokul, three months ago, we project that one of the platforms, the automotive platform was -- will increase this year, but now we're expecting it to decrease. So I think that is the one area that we saw was different. Gokul Hariharan: Okay. My second question, just wanted to understand gross margin trends. We talked about 3 to 4 percentage point gross margin dilution from N3 ramp in second half of the year. Should we think that the N3-related gross margin drag is more severe than usual for what we have seen for leading-edge nodes in the past? Or is it largely similar to what we have seen in N5 or N7? And when we go to N2, do you think that this will kind of be the similar pattern? Or do you think that the gross margin dilution will be lower when we go to like future process nodes given that N3 seems to be, at least compared to previous cycle, seems to be dragging a little bit more compared to like N5 or N7 in the past few years? Jeff Su: Okay. Thank you, Gokul. So let me summarize your second question, basically, is on gross margin. Gokul notes that N3, as Wendell said, will dilute our margin by 3 to 4 points, percentage points in the second half. So his question is, it seems that N3, the gross margin dilution or drag is more severe than past nodes such as N5 and N7. Is that the case? And also, of course, with N2 upcoming, will we face a similar pattern? Or what is the margin profile for N2? Which I think Wendell can address, yes. Wendell Huang: Yes, Gokul, it is true that N3 is taking longer time to reach the corporate margin than the other nodes like N5 or N7. N5 or N7 before, it was like 8 to 10 quarters to reach the corporate. But for N3, we think it will take about 10 to 12 quarters. And this is probably because N3 process complexity has increased, and also our corporate average gross margin also increased during the period. But another reason is that we set the pricing of N3 very early, several years ahead of production. However, we experienced a lot of cost inflation pressures in the following years. So as a result, N3 will take a longer time than N5 and N7 to reach the corporate average gross margin. For N2, based on what we can see so far is that we are doing a better job in cost and selling our value, and we expect N2 to have a better margin profile than N3. Operator: The next one to ask a question, Brett Simpson, Arete. Brett Simpson: I had a question on the AI returns at TSMC. So I think it's clear that AI is producing a large profit pool at your customers. And the HBM is also driving super-normal returns for memory players. So my question is, does TSMC believe they're getting their fair share of the returns in the AI value chain today? And is there scope for TSMC to raise pricing for AI chips in the future? Jeff Su: Okay. Thank you, Brett. So Brett's first question is looking at the AI-related demand. He notes that AI customers are earning very good returns, HBM and other components as well. So his question is that whether TSMC, do we feel we are earning or capturing our fair value or right value of the returns? And I think on pricing, how would we price for AI basically, I think. Brett, sorry, that's your question, right? Brett Simpson: That's it. C. C. Wei: Well, let me answer the questions. We always say that we want to sell our value, but it is a continuous process for TSMC. And let me tell you that we are working on it. We are happy that our customers are doing well. And if customers do well, TSMC does well. So let me summarize it. We are working on it, and we hopefully that we can sell our value. Brett Simpson: Right. For my follow-up question, I wanted -- yes, that's great, Jeff. And my follow-up question was on the lighting edge nodes at TSMC. And looking at Q1 sales for 12-nanometer and above, your overall revenues for these nodes collectively was off 20% year-on-year, and it's only 35% of your overall sales. Can you maybe share with us whether you see a recovery at all this year at these nodes? And we're seeing a lot of government support in building out new fabs in the U.S. and China around lighting edge nodes. So are you concerned at all about structural overcapacity for the older nodes to the cycle? Jeff Su: Okay. Thank you, Brett. So Brett's second question is more on the mature nodes. He notes that the demand for our mature nodes, 12-nanometer and older, are down year-over-year. So he wonders sort of what is the outlook for the recovery of mature nodes in the second half of the year. I think that's the first part of his question. C. C. Wei: Okay. Brett, let me answer this question. First, the mature node demand remains sluggish because of a site. As we just announced it, the whole semiconductor industry is gradually recovering, but not fast enough. So we expect to gradually improve in the second half of 2024. As you mentioned that you -- do we have a concern on the overcapacity because of some of the companies, they continue to build a lot of mature node capacity. For us, actually, our strategy at a mature node is work closely with our strategic customers to develop specialty technology solution to meet their requirement. And we create and long-lasting value to customers. So we have less exposed to this possible overcapacity environment. And we believe that our utilization and profitability on mature node can be well protected. Jeff Su: Does that answer your second question, Brett? Brett Simpson: That's clear. Operator: Next one, we have Randy Abrams, UBS. Randy Abrams: I wanted to ask a question, following up on C. C.'s comment about a ramp profile similar to 3-nanometer for 2-nanometer. Could you clarify for the timing of the meaningful revenue ramp for that node? Is the expectation that would be starting early 2026 and ramping up steep through 2026? Or any potential to pull that in? And then just a second question on that is you noted that tape-outs are higher. Would there be potential with higher tape-outs in 3 and 5 for either steeper or it ramps to be larger than the prior nodes once underway or looking out a couple of years? Jeff Su: Okay. So Randy's first question is around 2-nanometer. So his first question is to C. C. with that we said that the N2 ramp profile will be similar to N3. We also said, of course, the production begins in 2025. So his question partly is, when do we expect to see the revenue contribution, meaningful revenue contribution from N2? And then also that with N2, the tape-outs being higher, what is the multiyear opportunity or contribution from N2 maybe in terms of the revenue as compared to N3 or other nodes? C. C. Wei: Randy, the N2's ramp profile we say is very similar to N3 because of, look at the cycle time, we start the N2 production in the second half of 2025, actually in the last quarter of 2025. And because of the cycle time and all the kind of back-end process, and so we expect the meaningful revenue will start from the end of the first quarter or beginning of the second quarter of 2026. That's what we mean that is the profile is very similar to N3. Now your second question is there have been a lot of engagement and the tape-out will be higher, and do we see a very steep kind of a production? Well, we do expect that, but let me say again, N2 is a very complicated work or a very complex technology node. So my customer, they also take a little bit longer time to prepare for the tape-out. So that's why they all engage with TSMC in the early stage. And -- but for their product ramp-up, they will have their own product road map and their own business consideration. However, we still say that N2 will be a very, very big node for TSMC. Randy, does that answer your question? Randy Abrams: Okay. Great. No, that's helpful color. Yes. Yes, it does. No, helpful color. My second question is just relating to the upward expectations you gave for the AI accelerators. Curious how that ties to how you're looking at the CapEx, if you say that we're entering either higher growth or investment cycle, where capital intensity could need to rise up above that mid-30s range that you set or at least in absolute dollars from the $30 billion this year, we should start growing or thinking about CapEx at least growing with revenue. Jeff Su: Okay. So Randy's second question is basically, I think, with such strong AI-related demand, what does this mean for our CapEx and capacity planning? And also, what does this mean for our capital intensity outlook? Wendell Huang: Yes. Randy, for TSMC, a higher level of capital expenditure is always correlated with higher growth opportunity in the following years. We work with our customers closely, and our CapEx and capacity planning are always based on the long-term structural market demand profile that is underpinned by the multiyear megatrends. We always review our CapEx plan on an ongoing basis. And as a key enabler of AI, we will work with our customers closely to plan the appropriate level of capacity to support their needs. Jeff Su: And then in terms of the capital intensity and CapEx dollar outlook. Wendell Huang: Yes. The capital intensity, in the past few years, it was high as we invested heavily to meet the strong customer demand. Now the increase -- the rate of increase for the CapEx is leveling off. So this year and the next several years, we are expecting that the capital intensity is somewhere at the mid-30s level. But as I just said, if there are opportunities in the future years, then we will invest accordingly. Jeff Su: Does that answer your second question, Randy? Randy Abrams: If I could ask a quick follow-up. Yes, it does. Sorry, I'll ask a quick follow-up. Is this -- would this be viewed as a bit of a digestion year since you ramped a lot of the 3-nanometer spending in the past couple of years? So then as you kick off to -- like I mean, should we look at it at a lower -- or should we see this as kind of a normal in that trend? Jeff Su: So I think Randy's question is with -- Randy, you're still asking about CapEx. So is that correct? Randy Abrams: Yes. Sorry, still on CapEx. If it's a CapEx digestion year, since you've ramped a lot of 3 spending already in the 2-nanometer still, a lot of that is still in front of us. Wendell Huang: Yes, Randy, I wouldn't call it a digestion year. I mean every year, we invest based on the forward-looking business opportunities, and we constantly review that. So this is what we're seeing in the future, and that's why we're -- the funds that we're investing in. So no, I wouldn't call it a digestion year. Okay? Randy Abrams: Okay. Good. Operator: And next one to ask questions, Charlie Chan from Morgan Stanley. Charlie Chan: So my first question is about selling the value. I think another caller also addressed this topic, but I want to go a little bit deeper. Because given all the efforts you made, right, and also ongoing cost challenge made at the coming U.S. fab, electricity cost hike, I'm not sure if you can give investors kind of a range about a potential price adjustment or kind of the value you're going to sell to your customers. Based on our back testing, I think based on your revenue and shipments in 2022 and 2023, we calculate your price hike could be around 10% in 2022 and the price hike of 5% in 2023. So C. C., I'm not sure whether you are planning to hike price in this kind of a range or magnitude for 2025, so we can be comfortable you can achieve the 53% gross margin in 2025. Jeff Su: Okay. So Charlie's first question is about TSMC's pricing strategy. He notes that TSMC, of course, makes a lot of efforts to deliver technology leadership and manufacturing excellence to our customers, but we also face a lot of cost challenges, whether from electricity price hikes or the higher cost of overseas fabs. So his question is, number one, I guess, what is our intention about pricing strategy to sell our value; and then, number two, he would like to know what percentage range, if any? C. C. Wei: Okay, Charlie, this is C. C. Wei. First, I would like to emphasize again this kind of a pricing strategy is very confidential and totally between TSMC and the customer. However, let me expand a little bit, we do encounter some kind of higher cost in the overseas or even recently, the inflation and the electricity. We expect our customers to share some of the higher cost with us, and we already started our discussion with our customers. And as I said, for the overseas fab, we want to share our value, which also includes the flexibility of location or something like that. If my customer requests to be in some certain area, then definitely, TSMC and the customer had to share the incremental cost. Charlie, did I answer your question? Charlie Chan: Yes, I think that answers my question. I think passing through some cost or all the cost to -- incremental cost to customers should be fair, especially you are creating lots of value to your customers. And my second question is about AI. I know the -- your cost capacity has been very tight, very strategic. But I'm wondering how you're going to judge the demand and allocate the capacity to all the different type of AI semi customers. Because we're hearing your major customer is demanding for 2x capacity next year. So I'm wondering how you're going to allocate, so I mean, will you still reserve a certain percentage for some smaller or strategic customers no matter if it's ASIC or smaller GPU vendors? So what is the kind of benchmark you're going to allocate those capacity to customers? And are you okay with that if your major customers' demand cannot be fulfilled by you? Are you okay to give out or do some market share to some of your industry competitors? Jeff Su: Okay. So Charlie's second question is around, I guess, basically, our advanced packaging and more specifically, CoWoS. And he, of course, notes that the CoWoS capacity, the demand is very strong today and also into 2025. So the capacity is very tight. So his question is, how does TSMC decide on how to allocate the capacity to customers, where we have large customers, but will we reserve capacity to support smaller customers as well? And then lastly, would we be okay if customers want to use somebody else, so to speak? So several parts to this question. C. C. Wei: Charlie, let me say it again, the demand is very, very strong, and we have done our best where we put all the effort to increase the capacity. It's probably more than double this year as compared with last year. However, it's still not enough to meet the customers' demand, and we leverage our OSAT partners to complement of TSMC's capacity to fulfill our customers' need. Still not enough, of course. But in my mind, my first priority is to make our customer to be successful, no matter which one. And of course, the long-term partners will have a better cooperation with TSMC in terms of technology and processing complexity, so much easier to be ramped up. However, no matter what, let me say again, the demand is very high, extremely high. And we do our best to increase the capacity to alleviate the shortage. We also leverage the OSAT partners. We want to make sure that all our customers get supported, probably not enough this year; but for next year, we try, we try very hard. And you mentioned about giving up some market share, that's not my consideration. My consideration is to help our customers to be successful in their market. Charlie Chan: I see. So since your major customers said there's no room for other type of AI computing chips, but it seems like TSMC is happy to see some similar customers, right? So is that the right interpretation about your comments? C. C. Wei: Yes. Jeff Su: Yes. C. C. said all customers, yes. Thank you, Charlie. Operator: Next one to ask questions, Bruce Lu from Goldman Sachs. Bruce Lu: I think, again, the question is coming back to AI still. I think currently, most of the AI accelerators are mostly in 5-nanometers, which is N minus 1 comparing to a smartphone for now. So when do we expect them to catch up or surplus in terms of technology node? Do we see them to be the technology driver in 2-nanometers or above? Jeff Su: Okay. So Bruce's first question is about, again, looking at AI accelerators. He notes that in his view, they're currently at 5-nanometer now. His question is, do we expect them to catch up? How do we see AI accelerators and also maybe HPC as a whole being the driver or adopter of TSMC's most leading-edge or advanced technology node? Is that correct, Bruce? Bruce Lu: Yes, that's correct. C. C. Wei: Okay. Bruce, let me answer the questions. Yes, your observation is right. Today, all the AI accelerators, most of them are in the 5- or 4-nanometer technology. But my customers are working with TSMC for the next node. Even for the next, next node, they have to move fast because, as I said, the power consumption has to be considered in the AI data center. So the energy-efficient is fairly important. So our 3-nanometer is much better than the 5-nanometer. And again, it will be improved in the 2-nanometer. So all I can say is all my customers are working on this kind of a trend from 4-nanometer to 3 to 2. Bruce? Bruce Lu: But if that is the case, do we see -- yes, if that is the case, do we see a bigger revenue in the first 2 years of the 2-nanometers? Because in the past, it's only smartphone. But in 2-nanometer, it would be both smartphone and HPC customers. Jeff Su: So Bruce is asking then, well, then with such strong AI-related demand, should we see more revenue from 2-nanometer in its first 2 years compared to past nodes? Wendell Huang: Yes, Bruce, as we said, we believe that it will be -- our advanced technologies will be long-lasting nodes and larger nodes, N2, then N3 or N5. So the dollar value will certainly be larger. Jeff Su: I think, Bruce, we're locating at these opportunities in a multiyear period. So as Wendell and C. C. just said, certainly, with the demand that we're seeing, we do expect N2 revenue contribution to be even larger than N3, just like 3 has a larger contribution or larger node than 5, et cetera, et cetera. Bruce Lu: I see. So my second question is for dividends. We do see very strong free cash flow in the first quarter. And the capital intensity, as Wendell mentioned, is stabilizing. And we even started to pay a huge amount of return in tax. So do we -- can we turn more aggressive in terms of dividends? The current dividend level is much, much lower than 70% of free cash flow in the back-of-envelope calculation. So can we expect to see more dividends in the coming quarters? Jeff Su: Okay. Thank you, Bruce. So Bruce's second question is on the cash dividend policy. He notes that in the first quarter, we're generating very, very strong free cash flow. As we have said, the capital intensity is beginning to stabilize and also that we are paying a very high retained earnings tax. So his question, I think, is, what is the outlook? Can we pay more dividends in the coming quarters? Or what should investors expect? Wendell Huang: Yes. Bruce, the -- our dividend policy is, in principle, to pay 70% of our free cash flow in a year as cash dividends. So I would not just look at quarterly cash, free cash flow to make a judgment. But indeed, as we said before, now that we're harvesting the heavy investment that we did in the past few years, we expect our dividend policy to switch to steadily increasing from the sustainable in the past few years. Operator: Next one, we have Laura Chen from Citi. Laura Chen: My question is about the edge AI. We know that C. C. mentioned that the smartphone and the PC recovery is still probably prolonged, yet we are also seeing that the AI PC or AI smartphone is getting quite topical. So I'm just wondering, what's TSMC's view on this kind of edge AI device take off maybe later or 2025? And what's the implication to TSMC? That's my first question. Jeff Su: Okay. Thank you, Laura. So Laura's first question is on AI, but more specifically edge or what we call on-device AI. She notes that there's AI being added to smartphones and also AI for PCs. It's quite topical. So she wants to know how do we see this trend, more importantly, what is the implication to TSMC. Is that correct, Laura? Laura Chen: Yes. C. C. Wei: Okay, Laura. Let me answer the question. The edge AI or the on-device AI, the first order of magnitude is the die size. We saw without the AI -- with the AI for neuroprocessor inside. The die size will be increased, okay? That's the first we observed. And it's happening. And then for the future, I would think that replacement cycle for smartphone or for those kind of a PC will be accelerated a little bit in the future, at least. It's not happening yet, but we do expect that it will happen soon. And all in all, I would say that on-device AI will be very positive for TSMC because we capture the larger share of the market. Did I answer the question, Laura? Laura Chen: Yes. And so in that case -- yes, very helpful. So in that case, can we expect that our demand -- and see, because now it's still mostly on the smartphone or mobile. So can we expect that N3's revenue contribution in second half or next year will be bigger, say, like a 20% plus in the second half of this year? Jeff Su: Okay. So well, Laura's follow-on to the first question is then should we expect that N3 demand in the second half or into 2025. Sorry, I didn't catch the exact percentage, but a large percentage or significantly larger than it is today. Is that correct, Laura? Laura Chen: Yes. C. C. Wei: Okay. Certainly, as I said, we expect to happen at a larger die size. As I said, we already observed that. And for the replacement cycle to be accelerated, it will happen, but I cannot give you a definite number because of -- it's too early to predict in 2025. But it's an upward trend, no doubt about it, and we expect we have a good business. Wendell Huang: Just to follow up on C. C.'s comments. Last time, we also said that this year, N3 revenue will be more than triple than the revenue in 2023. Laura Chen: Okay. That's very clear. My second question is about, again, advanced packaging. We know that TSMC is working on the 3DIC for many years. So I'm just wondering that what's the current progress? Will we expect to see more meaningful take-off with our N2 ramp-up for like a high-computing PC? And between different kind of technology, like hybrid bonding or TSV, what's TSMC's major consideration? Jeff Su: Okay. So Laura's, I guess, second question, although -- yes, fine. Second question is about our advanced packaging solutions and 3DIC solutions. She is wondering, what is the outlook or take-up for the demand for the next several years? And she also would like us to comment on the consideration of TSV versus hybrid bonding and such. C. C. Wei: Wow, you asked a very technical question about the TSV and the hybrid bonding. It's all together. The 3DIC's packaging technology is very complicated, and our customers start to adopt it. Not a big volume yet, but we expect it to start to grow from this year. How big it will be? It's hard to say, but I think it is a trend. Whether it is a micro-bumping or it's a hybrid connection, that it depends on the customer's product requirement. Jeff Su: Okay, Laura? Laura Chen: So starting from this year, we'll see -- yes, yes, just very quickly. So starting from later this year, we will see that 3DIC products from our customers, that's the current progress? Jeff Su: So Laura is asking, will we start to see 3DIC products from our customers when? C. C. Wei: Now. I'm sorry, I just said that the customers start to adopt it from now, and you would expect that product in the market soon. All right? Jeff Su: Thank you, Laura. Okay. In the interest of time, maybe we'll take questions from the last two participants on the call. Thank you. Operator? Operator: Next one, we have Rolf Bulk from New Street Research. Rolf Bulk: Earlier on the call, you mentioned the possibility of converting so much your N5 capacity to N3. But what I was wondering, considering the strong demand for AI chips and a recovery in smartphones, is there a scenario in which you would consider similar conversions from some of your older nodes such as N7 given that utilization and revenues there are still well below peak levels? Jeff Su: Okay. So Rolf's first question is about our tool commonality and conversion. He notes that we have already said we are converting some of the capacity -- using some of the N5 tools to support the strong multiyear demand for N3 for AI-related and such. His question is that given our 7-nanometer is still underutilized, will we also consider converting 7-nanometer tools to support more leading-edge stronger demand? C. C. Wei: Well, let me answer this question. We can convert one technology node capacity to the next one is because of our GI's physical advantage, meaning, let me give you one example, our 3-nanometer and 5-nanometer are adjacent to each other, the fabs, and they are all connected. So it's much easier for TSMC to convert from 5 to 3. And that doesn't mean that every node can do the same. That's one. And your question about the N7 converted to N5, presumably. No, because we expect the N7 in the next couple of years, it will pick up, the demand will pick up again. And you want repeat -- probably repeat the same kind of experience we have in 28-nanometer. So today, no, we don't have any solid plan to convert the N7 into N5. Jeff Su: Okay. Rolf, does that answer your first question? Rolf Bulk: Yes. An unrelated follow-up? Jeff Su: Sure. Rolf Bulk: Yes, it does. And unrelated follow-up, it's a follow-up to Laura's question, actually. On SoIC, given that the technology is now being adopted more broadly, do you see beginning of interest of your smartphone customer base to also adopt the technology? Could you comment on the likely time line of adoption of SoIC in smartphones? Jeff Su: Okay. So Rolf's second question is basically going back to SoIC adoption. His question really is pretty straightforward. Do we see a time line or can we give a time line for adoption of SoIC by smartphone applications? C. C. Wei: Well, let me answer the question. Just HPC product is the first one. HPC customer is the first one to adopt, that is a 3DIC or SoIC's advanced packaging technology. And the other area, let's wait, wait and see. I cannot make any comment. We are working on it. Okay? Jeff Su: Okay, Rolf? Rolf Bulk: Yes. Operator: The last one to ask question, Mehdi Hosseini from SIG. Mehdi Hosseini: Two from my end. You had a very nice upside to revenue expectation for the first half of '24, but has kept the year-end unchanged. Is that a reflection of that slow recovery that you were highlighting? Or would you prefer to wait to have more visibility before updating 2024 target? Jeff Su: Okay. So Mehdi's first question is about our revenue outlook and guidance. His question is saying we have a nice upside to our revenue in the first half of this year, but we have kept the full year guidance in to grow low to mid-20s. So is that because we are more cautious on the second half? Or is it because we will see how things go? But I'm not sure if you mean by upside to the first half, Mehdi. You're saying, of course, our first quarter, as C. C. said, was slightly ahead of our guidance in U.S. dollar term, but very minutely. But -- yes? Wendell Huang: Yes. Mehdi, our guidance for the quarterly profile did not change. We always said that quarter-over-quarter, there will be growth. And also, the full year guidance will stay the same. So I don't think there is a so-called upside, as you just said. Jeff Su: To the first half, yes. Wendell Huang: Yes. Mehdi Hosseini: Okay. And regarding the investment in U.S., especially for 2-nanometer, does that include advanced packaging? Or would advanced packaging be mostly concentrated in Taiwan region? Jeff Su: Okay. So Mehdi's second question is that, of course, that we have announced to build 3 fabs in the U.S., including 2-nanometer, given the strong AI-related demand. So his question is then what about the advanced packaging side, will we also build advanced packaging in Arizona? Or yes, what is our plan? C. C. Wei: Well, let me answer this question. It is always customer's decision for where the back-end service are done for their product. So in Arizona, we are happy to see that Amkor's recent announcement to build an advanced packaging facility that's very close to our AZ fab. Actually, we are working with Amkor and try to support all our customers in AZ and for their demand, for their need. Jeff Su: Okay, Mehdi, does that address your second question? Mehdi Hosseini: Yes. Jeff Su: Okay. Great. All right. Everyone, this concludes our question-and-answer session. Again, we do apologize for the technical difficulties. If you have anything unclear or need to follow up, please contact TSMC's IR, and we'll be more than happy to help. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now, and the transcript will become available 24 hours from now, both of which are going to be available through TSMC's website at www.tsmc.com. So thank you again for joining us today. We hope everyone continues to stay safe and healthy, and we hope to see you again next quarter. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Fourth Quarter 2023 Earnings Conference and Conference Call. It's great to see everyone in person once again. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com, or you can also download the earnings release materials. [Operator Instructions]. The format for today's event will be as follows. First, TSMC's Vice President and CFO, Mr. Wendell Huang, we'll summarize our operations in the fourth quarter 2023 and full year of 2023, followed by our guidance for the first quarter 2024. Afterwards, Mr. Huang, TSMC's CEO, Dr. C. C. Wei, and TSMC's Chairman, Dr. Mark Lu, will jointly provide the company's key messages. Then TSMC's Chairman, Dr. Mark Lu, will host the Q&A session, where all three of our executives will take your questions. As usual, I'd 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 on our press release. And now I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang for the summary of operations and the current quarter guidance. Wendell Huang : Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation were start with financial highlights for the fourth quarter and a recap of full year 2023. After that, I will provide the guidance for the first quarter 2024. Fourth quarter revenue increased 14.4% sequentially in NT dollar or 13.6% in U.S. dollars. as our fourth quarter business was supported by the continued strong ramp of our industry leading 3-nanometer technology. Gross margin decreased 1.3 percentage points sequentially to 53%, primarily due to margin dilution from 3-nanometer ramp. Operating margin decreased 0.1 percentage points sequentially to 41.6%, slightly ahead of our guidance, mainly due to operating leverage on higher revenue. Overall, our fourth quarter EPS was NT$9.21 and ROE was 28.1%. Now let me move on to revenue by technology. 3-nanometer process technology contributed 15% of wafer revenue in the fourth quarter, while 5-nanometer and 7-nanometer accounted for 35% and 17%, respectively. Advanced Technologies defined as 7-nanometer and below, accounted for 67% of wafer revenue. On a full-year basis, 3-nanometer revenue contribution came in at 6% of 2023 wafer revenue. 5-nanometer was 33% and 7-nanometer was 19%. Advanced Technologies accounted for 58% of total wafer revenue, up from 53% in 2022. Moving on to revenue contribution by platform. HPC increased 17% quarter-over-quarter to account for 43% of our fourth quarter revenue. Smartphone increased 27% to account for 43%. IoT decreased 29% to account for 5%. Automotive increased 13% to account for 5% and DCE decreased 35% to account for 2%. On a full-year basis, Smartphone, IoT, DCE decreased 8%, 17%, and 16% respectively. HPC remained flat while automotive increased 15% in 2023. Overall, HPC accounted for 43% of our 2023 revenue. Smartphone, 38%, IoT, 8%, and automotive, 6%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of NT$1.7 trillion or US$55 billion. On the liabilities side, current liabilities decreased by NT$56 billion mainly due to the decrease in accounts payable. On financial ratios, accounts receivable days decreased four days to 31 days, while days of inventory also declined 11 days to 85 days, primarily due to a higher 3-nanometer wafer shipment. Regarding cash flow and CapEx, during the fourth quarter, we generated about NT$395 billion in cash from operations, spent NT$170 billion in CapEx, and distributed NT$78 billion for the first quarter '23 cash dividend. Overall, our cash balance increased NT$154 billion to NT$1.47 trillion at the end of the quarter. In U.S. dollar terms, our fourth quarter capital expenditures totaled NT$5.24 billion. Now let's look at the recap of our performance in 2023. 2023 was a challenging year for the global semiconductor industry, but our technology leadership enabled TSMC to outperform the foundry industry. Our revenue decreased 8.7% in U.S. dollar terms to US$69 billion or decreased 4.5% in NT terms to NT$2.16 trillion. Gross margin decreased 5.2 percentage points to 54.4%, mainly reflecting lower overall capacity utilization and 3-nanometer ramp, partially offset by a more favorable foreign change rate. To extend our technology leadership, we continue to expand our R&D investment in 3-nanometer and 2-nanometer development, despite a lower revenue base in 2023. Thus, operating margin decreased 6.9 percentage points to 42.6%. Overall, full-year EPS declined 17.5% to NT$32.34 and ROE was 26.2%. On cash flow, we spent US$30.45 billion or NT$950 billion in CapEx, while generating NT$1.7 trillion in operating cash flow and NT$292 billion in free cash flow. We also paid NT$292 billion in cash dividends in 2023. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business in the first quarter to be impacted by smartphone seasonality, partially offset by continued HPC-related demand. Based on the current business outlook, we expect our first quarter revenue to be between US$18 billion, and US$18.8 billion, which represents a 6.2% sequential decline at the midpoint. Based on the exchange rate assumption of US$1 to NT$31.1, gross margin is expected to be between 52%, and 54%. Operating margin between 40%, and 42%. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our fourth quarter '23 and first quarter '24 profitability. Compared to third quarter, our fourth quarter gross margin decreased by 130 basis points sequentially to 53%, primarily due to the margin dilution from the continued ramp-up of our 3-nanometer technology. We have just guided our first quarter gross margin to be flat sequentially at 53% at the midpoint, primarily as a less favorable foreign exchange rate assumption is offset by product mix changes due to smartphone seasonality. Looking at full year 2024, given the six factors that determine our profitability, there are a few puts and takes I would like to share. On the plus side, we expect our utilization rate to rise in 2024 as our business recovers. However, as we move, as we have said before, and three is expected to dilute our gross margin by about 3 percentage points to 4 percentage points for the full year of 2024 as the revenue contribution will be much higher than in 2023. In addition, we have a strategy so that some of our N3 capacity can be supported by N5 tools, given the strong multiyear demand. Such a plan will enable higher capital efficiency in the mid to long-term but requires cost and effort in the near-term. Most of this conversion will occur in second half of 2024 and we expect it to dilute our gross margin by about 1 percentage point to 2 percentage points in second half of 2024. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2024. Long-term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2024 capital budget and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. In 2023, we spent US$30.4 billion lower than our prior guidance of approximately US$32 billion as we continue to tighten up our capital spending where appropriate given the near-term uncertainties. In 2024, our capital budget is expected to be between US$28 billion and US$32 billion as we continue to invest to support customers' growth. Out of the US$28 billion to US$32 billion CapEx for 2024, between 70% and 80% of the capital budget will be allocated for the advanced process technologies. About 10% to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making, and others. Our depreciation expense is expected to increase close to 30% year-over-year in 2024, mainly as we ramp up our 3-nanometer technologies. Finally, let me make some comments on our long-term CapEx and cash dividend distribution policy. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In the past few years, we have sharply increased our CapEx spending in preparation to capture and harvest the growth opportunities from HPC, AI, and 5G megatrends. Despite a challenging 2023, our revenue remains well on track to grow between 15% and 20% CAGR over the next several years in U.S. dollar terms, which is the target we communicated back in January 2022 investor conference. With our 2024 CapEx guidance of US$28 billion to US$32 billion, the rate of increase of our capital spending has begun to level-off as we capture and harvest the growth. The objectives of TSMC's capital management are to fund the company's growth organically, generate good profitability, preserve financial flexibility, and distribute a sustainable and steadily increasing cash dividend to shareholders. As a result of our rigorous capital management, in November, TSMC's Board of Directors approved the distribution of a NT$3.5 per share cash dividend for the third quarter of 2023, up from NT$3 previously. This will become the new minimum quarterly dividend level going forward. Third quarter '23 cash dividend will be distributed in April 2024. In 2023, TSMC's shareholders received a total of NT$11.25 cash dividend per share, and they will receive at least NT$13.5 per share cash dividend for 2024. In the next few years, we expect the focus of our cash dividend policy to continue to shift from a sustainable to a steadily increasing cash dividend per share. Now let me turn the microphone over to C.C. C. C. Wei : Thank you, Wendell. Good afternoon, everyone. First, let me start with our 2024 outlook. 2023 was a challenging year for the global semiconductor industry, but we also witnessed the rising emergency of generative AI related applications with TSMC as a key enabler. In 2023, weakening global macroeconomic conditions and high inflation and interest rate exaggerate and prolong the global semiconductor inventory adjustment cycle. Concluding 2023, the semiconductor industry excluding memory industry declined about 2%, while foundry industry declined about 13% year-over-year. TSMC's revenue declined 8.7% year-over-year in U.S. dollar term. Despite the near-term challenges, our technology leadership enable TSMC to outperform the foundry industry in 2023 while we are positioning us to capture the future AI and high-performance computing related growth opportunities. Entering 2024, we forecast fabless semiconductor inventory to have returned to a higher level exceeding 2023. However, macroeconomic weakness and geopolitical uncertainties persist, potentially further weighing on consumer sentiment and the end market demand. Having said that, our business has buttoned out on a year-over-year basis and we expect 2024 to be a healthy growth year for TSMC, supported by continued strong ramp of our industry-leading 3-nanometer technologies, strong demand for the 5-nanometer technologies and robust AI-related demand. Coming off the steep inventory correction and low base of 2023. For the full year of 2024, we forecast the overall semiconductor market, excluding memory to increase by more than 10% year-over-year. While foundry industry growth is forecast to be approximately 20%. For TSMC, supported by our technology leadership, a broader customer base, we are confident to outperform the foundry industry growth. We expect our business to grow quarter-over-quarters throughout 2024 and our full-year revenue expect to increase by low-to-mid 20% in U.S. data terms. Next, let me talk about our N3 and N3E ramp-up and progress. Our 3-nanometer technology are the most-advanced semiconductor technology in both PPA and transistor technology. As a result, almost all the world's smartphone and HPC innovators working with TSMC on 3-nanometer technologies. Our N3 successfully entered volume production and enjoy a strong ramp in second half '23, accounting for 6% of our total wafer revenue in 2023. N3E further leveraged the strong foundation of N3 to extend our N3 family with enhanced performance, power, and yield. N3E has already into volume production in the fourth quarter of 2023. Supported by robust demand from customers in both smartphone and HPC applications, we expect revenue from our 3-nanometer technology to more than triple in 2024 and account for mid-teens percentage of our total wafer revenue. We also continue to provide further enhancement of our N3 technology, including N3P and the N3X. With our strategy of continuous enhancements of our 3-nanometer process technologies, we expect strong multiyear demand from our customers and are confident that our 3-nanometer family will be another large and long-lasting node for TSMC. Now I will talk about the AI-related demand and our N2 status. The surge in AI-related demand in 2023 supports our already strong conviction that the structural demand for energy-efficient computing will accelerate in an intelligent and connected world. TSMC is a key enabler of AI applications. No matter which approach is taken, AI technology is evolving to use more complex AI models, as the amount of computation required for training and influence is increasing. As a result, AI model need to be supported by more powerful semiconductor hardware, which requires use of the most advanced semiconductor process technologies. Thus, the value of TSMC technology position is increasing and we are well-positioned to capture the major portion of the market in terms of semiconductor component in AI. To address unassessable AI-related demand for energy-efficient computing power, customers rely on TSMC to provide the most leading-edge processing technology at scale with a dependable and predictable cadence of technology offering. At the same time, as process technology complexity increased the engagement lead time with customer also started much earlier. There is almost all the AI innovators are working with TSMC and we are observing a much higher level of customer interest and engagement at N2 as compared with N3 at a similar stage from both HPC and the smartphone applications. Our 2-nanometer technology will adopt narrow sheet transistor structure and be the most advanced semiconductor technology in the industry in both density and energy efficient when it is introduced in 2025. Our N2 technology development is progressing well with device performance and yield on track or ahead of plan. N2 is on track for volume production in 2025 with the ramp of similar to N3. As part of our N2 technology platform, we also developed the N2 with backside power rail solution, which is better suited for specific HPC applications based on performance, course, and maturity considerations and we expect at power rail will be available in the second half of 2025 to customers with production in 2026. With our technology of continuous enhancement, N2 its derivative will further extend our technology leadership position and enabled TSMC to capture the AI-related course opportunities going to the future. Finally, let me talk about our specialty technology strategies at mature mode. For TSMC today around 70% of our total revenue is 16-manometer and more advanced node, which ranging contribution from 3-nanometer and 2-nanometer technologies in the next several years. This number will only increase. Our mature node exposure is a run 20% of our total revenue. TSMC's strategy at mature node is to what we closure with strategic partner to develop specialty technology solutions to mid-customers the requirement and create differentiated and long-lasting where you to customers. Now focus is to pure higher capacity for specialty technologies rather than just a nominal capacity. To the development of the differentiated specialty technologies, the profitability of our mature node can be around our corporate average gross margin. Looking ahead, we forecast 28-nanometer will be the sweet spot for our embedded memory applications and we expect our long-term structural demand at 28-nanometer to be supported by multiple types of specialty technologies. Thus, we are expanding our 28-nanometer specialty manufacturing capacity overseas to support the long-term structural market demand. We believe demand for the differentiated specialty technology will remain steady despite the potential industry capacity increase and our utilization rate and structural profitability, and but you all know can be well protected in the future. This concludes my present prepared remarks. And now, let me turn the microphone over to Mark. Mark Liu : Thank you, C.C. Good afternoon, everyone. First, let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider for the global logic IC industry for years to come. In today's fractured globalization environment, our strategy is to expand our global manufacturing footprint to increase our customer trust, expand our future growth potential, and reach for more global talent. Our overseas decision are based on our customers' needs and a necessary level of government subsidy or support. This is to maximize the value for our shareholders. Firstly, in Japan, we are building a specialty technology fab in Kumamoto, which will utilize 12-nanometer, and 16-nanometer, and 22-nanometer, and 28-nanometer process technologies. We will hold an opening ceremony for this fab on February '24, next month. And volume production is on track for the fourth quarter of 2024. In Arizona, we are in close and constant communication with U.S. government on incentive and tax credit support and making strong progress in facility supply chain infrastructure, utility supply, and equipment installation for our first fab. We continue to work closely and develop strong relationships with our local union and trade partners in Arizona, including recently signed an agreement with Arizona Building and Construction Trades Council our new framework for cooperation. This agreement extends our collaboration across enhanced workforce training and development, shared commitment to site safety, hiring local workers, and establishing regular communication. It is a win-win for all parties. We are well on track for volume production of N4, or 4-nanometer process technology in first half of '25 and are confident that once we begin operations, we will be able to deliver the same level of manufacturing quality and reliability in Arizona as from our fabs in Taiwan. In Europe, we plan to build a specialty technology fab invest in Germany, focusing on automotive and industrial applications with our joint venture partners. We continue to be in close communication with the German federal, state, and city governments and their commitment to this project remains strong and unchanged. Fab construction is scheduled to begin in Q4 2024 this year. In Taiwan, of course, we continue to invest in and expand our advanced technology capacities to support our customers' needs and their growth. Given the robust multiyear demand for our 3-nanometer technologies, we are expanding our 3-nanometer capacity in Taiwan Science Park. We are also preparing our N2 volume production starting in 2025. We plan to build multiple fabs or multiple phases of 2-nanometer technologies in both Hsinchu and Kaohsiung Science Parks to support a strong structural demand from our customer C.C. just mentioned. In Kaohsiung Science Park, the government approval process is ongoing and is also on track. While the initial cost of overseas fab, I previously mentioned are higher than TSMC's fab in Taiwan. We are confident to manage and minimize the cost gap and remain committed to deliver profitable growth and maximize the value for our shareholders. Now let me talk about my retirement. On December 19th last year, I announced that, I have decided not to seek nomination of Board members for the next term and will retire from the company after the 2024 Annual Shareholders Meeting in June. Allow me to say this, over the past 30 years, I have been incredibly fortunate to be able to work at and contribute to TSMC. I started at TSMC 30 years ago as a leader of a small four-person fab construction team. It has been my privilege to serve as Chairman of TSMC and after our legendary Founder, Dr. Morris Chang, over the last six years. During this time, we have reaffirmed our commitment to our mission, to be the trusted technology and capacity provider to the global logic IC industry for years to come, while adhering to our core values of integrity, commitment, innovation, and customer trust. TSMC's success is predicated on providing the industry's most leading-edge processing technology at scale, in a most efficient and cost-effective manner, to enable all the innovators to successfully offer their best products to the world. We together have worked diligently to enhance our focus on our technology leadership, competitiveness, global manufacturing footprint, digital excellence, sustainability, and corporate governance to maximize the value for our customers and our shareholders. The past 30 years with TSMC has been an extraordinary journey for me and I want to extend my sincerest thanks to our incredible, talented team and all our TSMC's colleagues whose diligence, dedication, and can-do spirit have made the company into what it is today. Now TSMC's nomination, corporate governance and sustainability committee of the board has recommended Dr. C. C. Wei to succeed as the company's next Chairman, subject to the election of the incoming board in June 2024. If Dr. Wei is elected to be Chairman, he should also continue in his current role as CEO. Supported by a deep and experienced team of Senior Executives, many of whom have been with TSMC for many, many years. As I look ahead to spend more time with my family and starting the next chapter of my life after my -- our AGM in June, I remain fully confident in TSMC's strategy, leadership, and execution and firmly believe TSMC will continue to perform outstandingly in the years ahead. Thank you for your trust in TSMC, and the best is yet to come for the company and its shareholders. This conclude my messages and our key messages together. Thank you for your attention. Jeff Su: Thank you, Chairman. This concludes our prepared statements. So, before we begin the Q&A session, I would like to remind everybody to please again limit your questions to two at a time, so we can allow all the participants an opportunity to ask their questions. Questions will be taken both from the floor and also from the call online. Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question. [Operator Instructions]. So now let's begin the Q&A session. Again, our Chairman, Dr. Mark Lui will be the host. Let's take the first two questions from the floor, please. A - Jeff Su: Okay. Our first question comes from Charlie Chan from Morgan Stanley. Charlie Chan: It's great to see you again in person, Happy New Year. Allow me to remain seated. I have some long question to you. So, first question is to C. C. I am very curious about your comments about the technology leadership, because your competitor knows all customer intel, states that their PPA is ahead of your 2-nanometer, even the cost is lower. So, I want to consult your opinion, why there's a different story and how do we judge. And given these debates, how TSMC is going to plan the future capacity for this customer and also competitor, we want to seize this opportunity, but also avoid any overexpansion? Jeff Su: Okay. Thank you, Charlie. Just please allow me for the benefit of the audience here in person and online to summarize your question. So, Charlie, first question is around sort of the technology leadership and also our relationship, I guess, or capacity planning with a specific IDM. So, the first part of his question is on the technology part. He notes this IDM. It says their PPA is ahead of TSMC's 2-nanometer and the cost can be lower. We said our technology is industry leading, so how do we reconcile the difference? And also, how do we plan the future capacity planning for such type of customer? C. C. Wei: Charlie, you named my customer's name, that's my customer and my competitor. Let me repeat the last time when I come in on their technology. The comment stays the same, so that they are new is the technology would be very similar or equivalent to TSMC's N3P. We further check again with all the specs or the possible published in technology, transistor technology and everything. My comment stays the same with a big advantage in the technology maturity. Because of, in 2025, when they say that their newest technology will be go on production. For TSMC, that will be the third year with a very high-volume production in the fabs. So again, I don't want to make too much of a comment on my customers' claim, but let me assure you. We continue to have a technology leadership and we continue to have a broader base of customer and almost everybody, almost. They are working with TSMC. Charlie Chan: In that case, would you aggressively spend the capacity because outsourcing is more likely? C. C. Wei: Certainly. We are expanding our capacity with US$28 billion to US$32 billion. That's a big money. That what we used for 3-nanometer and 2-nanometers at capacity. Mark Liu: Let me add some color to this. I think C. C. has been very modest. I think he's claimed that N3P is comparable to their 18A. We still affirm our statement. But I would like you to look at a different perspective. And what C. C., what the other side, the claim might be right, but it's only to their own product. And IDN typically their technology for their own product. We have foundry us, we optimize our technology for our customers' product. So, that's a big difference. What you use for the high-power server could be very different than what used was the sketches on your hands, smartphone or even the large data edge AI processors. So, you should look at this, I think the time compared with PPA, we still affirm our statement, but I think just look at our customers' action that just tell us all the stories. Charlie Chan: Thanks, Mark. So, Jeff, can I go to the second one? Yes. So, Mark, so first of all, I really appreciate your leadership. I believe our global investors appreciate your past six-year, create lots of shareholders value. Thank you. My question is about the content of your speech in November. The speech was about the TSMC in the era for AI. You mentioned some, very interesting data points. You used AI technology to improve the defense clarification, also the EUV throughput by, for example, 10%. Now it's the generative AI can be very big breakthrough in terms of technology. Do you think Samsung or Intel, by leveraging the generative AI, can really break through and catch up your technology? And also, before your retirement, any kind of a big unfinished goal or targets for TSMC? Thank you. Jeff Su: Thank you, Charlie. Charlie's second question is directed to Chairman. He noted in November, Chairman gave a speech where he shared how TSMC has always been utilizing big data, machine learning and AI to improve our operational efficiencies. His question is, whether now with generative AI, will this enable or allow our competitors to do the same thing and catch-up and narrow the gap? Mark Liu: Thank you, Charlie. The talk I gave in last November was the audience is the Taiwan's industry companies. The purpose I want to give that is, I see artificial intelligence can be a great opportunity for the industry in Taiwan. Just like Taiwan is a big country for semiconductor, it can be a good big country for artificial intelligence in the future, that's how I encourage them. As far as whether our competitor are using AI, of course, they use AI. Just look at the all the company AI company in Silicon Valley or in US, that's not a secret. But on the other hand, AI is only in its nascent stage. Only last November, the first large language data is announced, ChatGPT announced. We only see the tip of the iceberg. I want to give a industry a optimistic note that, even though 1-nanometer or sub 1-nanometer could be challenging, but we have a new technology capability using AI to accelerate the innovation in science and that is our part. And we have been working on that for many years already. So, of course, it's a fair competition. It's no secret. Jeff Su: You have another question about one? Mark Liu: Yes. Indeed. I will retire in June and from now to June is a long time. In the company, a lot of thing can happen. I hope we definitely execute to C.C.'s forecast of this year. I think by the middle of this year, I think we are pretty sure, we can accomplish that. Of course, C.C. just mentioned our technology development is on the slew of success. By June this year, we will know what we are going to fare in 2025. I give our executive a milestone. I don't want to share with you, but it's going to be very exciting for TSMC. And of course, from now on, I simply want to encourage our people in TSMC that the world has changed. Just like you mentioned, we have to use artificial intelligence for future technology. So, we will go into global, we try our global footprint, and we are trying our digital excellence. By digital excellence, you mean we can't count on the hardworking of Taiwan engineer. Only we have to recreate our job to tap their talents and lift up the semiconductor technology engineering to a different level base on what we already have. And of course, the corporate governance is one thing I always in my heart. During this transition, I want every executive and our board to adhere to the sound corporate governance so that we make sure all the process steps is abided by our ethical governance rules. Thank you. Jeff Su: Okay. Thank you, Chairman. Let's take the, move on to the second person from the floor. I think in front, Bruce Lu of Goldman Sachs, please. Bruce Lu: Thank you. Again, the question is definitely coming from the AI for sure. I think as C. C. mentioned, almost every AI chip is working with TSMC. However, the investors' concern is always like the dollar content as a percentage of customers' cost for AI is a lot lower than smartphone or other chips. So as also, C.C. mentioned that, you sell a wafer for your customer, but when you buy it back, it's a lot more expensive. So, can we expect that the dollar generated by TSMC from AI, can be increased in the coming years, whether it's through like no migration or advanced packaging or anything we can expect or what kind of rate we can expect for that? Jeff Su: Let me summarize Bruce's first question. I think, again, he is around AI related. He notes that, basically, almost all the innovators are working with TSMC at AI, but the value per chip that we seem to be capturing is lower than for a smartphone or PC. So, his question is that, I think can we expect the dollar value captured by TSMC to increase in the next few years? And will this be, this additional value more come from the front-end process node wafer production or will it be through the advanced packaging solutions? C. C. Wei: Well, let me answer the easiest one first. The revenue come from the front end and back end together. To capture the value, yes, we are working on it, definitely. But first, let me say that I'm very happy that my customer has been very successful in the AI area and we are a key enabler for the AI applications. So far today, everything you saw on the AI, it's come from TSMC. Now, here come the questions, how we're going to capture the value. We are working on it, and actually, we see today, they say that the component of total value in the AI, the whole AI data center is a very small percentage amount. If we narrow down the AI component or the semiconductor's value in the whole system, yes, it's a small percentage. But for TSMC, we look at our sales. The AI's CAGR, that's the gross rate every year is about 50%, and we are confident that we can capture more opportunities in the future. So, that's what we said that up to 2027, we are going to have high teens of the revenue from very narrow, we define the AI application processor, not to mention about the networking, not to mention about all others. And to further extend our value, actually, all the edge device including smartphone, including the PC, they start to put the AI's application side, they have some kind of a neural processor, for example. So, the silicon content will be greatly increased. Although the unit it's actually a low single digit in CAGR, but the silicon content is more important. So, put all together, if we run some of the AI related application, actually, it's quite a big amount for TSMC to grow. Jeff Su: Okay. Bruce, do you have a second question, please. Bruce Lu: The second question is more for the technology leadership. I mean, as we're moving into the nanosheet or advanced node, we see another technology defined DeFi, nowadays. For example, like a high-NA, EUV tools, TSMC seems to have a different view with other peers. I mean, in the past, like, 20 years, 30 years, there are several technology DeFi that TSMC always choose the right decisions, right? So, can you tell us that why you choose your current route compared to your peers? What is the pros and cons? What's the advantage? And how confident that TSMC can leverage that to be the key sectional factor for the leading edge? Jeff Su: Okay. Bruce's second question is in regards, I think, to technology development and decision-making, basically. He notices that, today there's divergence or his words DeFi between different companies' technology decision whether to adopt nanosheet transistor structure, whether to adopt high-NA tools, he knows in the past that this has always occurred in our industry, but TSMC has somehow managed to make the right decision. So, he is asking especially how, what do we look at or evaluate in our decision-making process? What are the pros and cons and advantages and probably most importantly, how confident are we about our technology decisions going forward whether nanosheet or high-NA given our competitors' actions? C. C. Wei: Bruce, you asked a very technical question, I'm not very sure everybody know the high-NA or is nanosheet or that all run, but let me answer the question. We always make the right decision and our track record show that. Is that enough? Okay. Let me elaborate a little bit more because of technology itself is no value, only one can serve your customer. So, we always work with our customer to give them the best transistor technology and the best power-efficient technology and at a reasonable cost. More importantly, the technology maturity that in the high-volume production, that's all important. Everything comes together, so every time we know that there are some new structure, new tools such as high NA UV, we look at it carefully, look at the maturity of the tools, look at the cost of the tools and look at the schedule of that, how to achieve it. We always make the right decision at the right moment to serve our customers. And so far, all our customers are happy with TSMC's progress. Did I answer your question? Almost everybody work with TSMC on 2-nanometer, except one. Jeff Su: All right. Let's go to the online. Take the next two questions from the participants, who are dialing in via the conference call, please. Operator, could you please state the name and company. Operator: Our question from the line is Gokul Hariharan from JPMorgan. Gokul Hariharan: Yes. [indiscernible] I simply mentioned that the AI proposition [indiscernible]. Jeff Su: Okay. Gokul, I need you to slow down a bit because the line is not that clear. I do think I got his question, which is, he wants to confirm, C. C., you mentioned that, we have a very narrow definition, we call server AI processor contribution and that you said it can be high teens in five years' time because the last time we said low teens. C. C. Wei: The demand is suddenly being increased since last, I think last year, the Q1, up to March or April, when ChatGPT became popular. So, customer respond quickly and ask TSMC to prepare the capacity both in front-end and the back-end and that's why we have confidence that this AI's revenue will increase. We only narrow down to the AI application process, by the way. So, we look at ourselves that, we prepare the technology and the capacity in both our front-end and also our back-end. And so, it's in the early stage so far today. We already see the increase the momentum and we expect, if you guys continue to track this one, the number will increase. I have confidence to say that, although I don't know how much. Jeff Su: So high teens, you confirm? C. C. Wei: Or higher. Jeff Su: Okay. Gokul, hopefully that clarifies that first question. Gokul Hariharan: Thank you so much. The second is about gross margin. In the downturn, we are forming up at much higher [indiscernible] than before. talk a little bit about what happens when we get back to close to full utilization? I think we are still running at well below full utilization in 2023. And could you also explain the gross margin dilution that you're expecting in second half '23, because of this capacity conversion. What exactly leads to that gross margin dilution? And is that like a onetime kind of dilution that lasts for a little bit of time and kind of levels off in 2025? Jeff Su: Okay. Thank you, Gokul. So, If I heard correctly, Gokul's second question is around gross margin. So, two parts to it, maybe the second part first, which is he is asking I believe about this gross margin in the second half of this year, particularly with what Wendell had described, they are plan to convert some of the capacity. The gross margin impact here and is this a onetime thing? Is this better capital? What does this mean in the mid- to long-term profitability? That's the first part. And then I'll go to the second part. Wendell Huang: Right. Second half, as I said, there are two negative factors affecting our gross margin this year. The first one is the N3 dilution. N3 volume will be much bigger in the second half than in the first half. So the second half impact from N3 dilution will be between 3 percentage points to 4 percentage points. And also, the N5 capacity converted to N3 that will mostly take place in the second half as well. So that will be 1 to 2 percentage point. That's for this year. For the longer term, if you look at these two factors, our N3 dilution will gradually reduce, because the profitability will continue to improve or increase in the next several years. And N5 converted to N3, it's a onetime short-term impact on profitability, which will bring capital efficiency to us in the middle to long-term. And the benefits together would be much bigger than the onetime hit in the short-term. So, if you're talking about the longer-term profitability, including these two factors plus we are selling our value, our technology value, as C. C. mentioned. We continue to drive down the cost. We build our capacity based on the long-term market profile and not the short-term cyclicality and therefore enable us to have a pretty good utilization. The only thing we are not able to control is foreign exchange rate. So, if you put all these together, we still believe that 53% and higher long-term gross margin is achievable. Jeff Su: Gokul, does that answer both parts of your question? Gokul Hariharan: Yes. So just to clarify, so given we are at a much lower utilization than normal, what you suggest Wendell is that gross margin should get back to the mid to high-50s once the up cycle starts to gain more momentum, just like what we saw in 2022. Is that a reasonable expectation? Jeff Su: Okay, thank you. So Gokul really, he's asking 53% and higher, can it be higher? Because of course he looks at last year the utilization was lower and we still managed to deliver. So, he's wondering once utilization goes back to four, can it get to mid to high-50s? C. C. Wei: We are working on it. Certainly, we prepare our capacity according to customers' demand. Last year is very challenging because everybody missed their forecast and so did TSMC and we saw the utilization rate is pretty bad. And I believe everybody got more experience in the next few years and so TSMC's utilization rate will continue to increase, I guarantee that. Gokul Hariharan: So, the question is, we're working on it, it can be. Jeff Su: Okay. Thank you, Gokul. Thank you. Operator, let's move on to the take the question from the second participant on the call. Operator: The second one to ask question is Randy Abrams from UBS. Randy Abrams: Okay. Yes. And good luck to both Mark and C.C. as you go through the upcoming transition. I wanted to ask, going back to the question on the IDM, I think earlier you conceded that your competitors' process is actually pretty good for optimizing to their own products. Could you talk about your view on sustainability of the ramp of that IDM outsourcing with your own products in HPC? If you look out over the next two to three years. If you see that continuing to grow or reversed where there could be a bit of a cooling off from some of the opportunity you have right in front of you now? Jeff Su: Okay. Thank you, Randy. So, Randy's first question goes back to the IDM. His question is with IDM saying their technology is pretty good. What is the risk or how do we see the sustainability of this IDM's outsourcing business to TSMC in the next two to three years? Can this continue to grow? Or will this reverse and go back in house to the IDM? And how do we manage our plan for this? C. C. Wei: Randy, that's a good question. Actually, we have taken into account all the considerations, including the IDM, can do it by MCO. We pull that one into consideration. We actually in our capacity pending. Actually, we took very conservative way to prevail our capacity in this kind of a situation. I cannot speak more because of that's our strategy. Randy Abrams: Okay. If I can ask a follow-up actually just through the CapEx, where I think earlier you stated rate of increase would slowdown, but I think still in finance should increase over time as you grow. If you could discuss the CapEx that you guided was flat, should we think of it as a pause where as you start to move into 2-nanometer, there should be another wave of increase? And second part somewhat related, but curious about the geographic expansion. There's been a lot of press about new fabs in Japan, second fab and potential third advanced fab. And it feels like the first fab went smoothly. So, are you starting to redirect or think more expansion to Japan rather than U.S. or potentially both? So, you have both options as you move to 3-nanometer? Jeff Su: Okay. Randy, that's a lot of questions. So, I'm going to take that as your second question, okay, basically. So, the first part of it is about the CapEx. He notes that, Wendell said, the rate of increase is beginning to level off. Randy's question is for this year and take the midpoint, NT$30 billion is basically flat. So, is this just a temporary pause in the CapEx? And with 2-nanometer in the upcoming years, should we expect the dollar amount to go back up, that's the first part. Wendell Huang: Okay, Randy, the CapEx dollar amount every year, may vary. It depends on the different situation. The rate of increase definitely is slower than the past three years. If you look at, I think the other way of looking at that is the capital intensity. In the past three years, the highest point is 2021. It was over 50%, and then followed by 47% and 43%. And this year, if you do the math, it's going to be mid-30s. We expect in the next several years, it will remain around mid-thirty percentage capital intensity. Jeff Su: And then the other part of Randy's question is on the geographic expansion. He notes a lot of reports saying, we may build a second fab in Japan and that we even may build a third. His question is really, are we redirecting our overseas expansion focus more to Japan or has it changed anything in the U.S.? Randy, I think that's what you're trying to ask, right? Randy Abrams: Yes, that's what I'm trying to ask. Mark Liu: Can you repeat the question again? Jeff Su: Randy is saying, look, he knows there is a lot of talk going to build a second fab in Japan, maybe three. He just wants to know, are we shifting our overseas expansion focus to Japan from the U.S. or is there any big significant change? Mark Liu: No, no. I think, the second fab in Japan is in serious evaluation stage. We haven't announced to the public yet and we are still discussing with the Japan government. Although they are very cooperative, so you might be waiting for that. But that technology will still be either 7 or 16, 12 technologies. And remember, the our Kaohsiung fab, the first fab used to be 28-nanometer or 7-nanometer. Now it's becoming 2-nanometer. That is the shift, if there is a second fab in Japan, that's our current plan. Randy Abrams: That's helpful. Quickly on 3-nanometer, because 5-nanometer was slightly-delayed. Would 3-nanometers still come two years after the new plan for 5-nanometer in Arizona? Thank you. Jeff Su: In Arizona, Randy wants to know, that we have 5-nanometer in first half '25. What's the plan for the second fab with 3-nanometer? Mark Liu: Yes. The second fab shale is under construction. But what technology in that shell is still in under discussion. I think that also has to do with how much incentives that fab, the U. S. Government can provide. And yes, there will be a gap. At least, current planning is '27 or '28, that will be time frame. To be honest, most of the fab in overseas, what actually be loaded, what technology is being set up, really, it's a decision of customers' demand in that area at that timing. So, nothing is definitive, but we are trying to optimize value for the overseas fab for TSMC. Jeff Su: Thank you, Chairman. Thank you, Randy. In the interest of time, we will take the next two from the floor. I think there is one here first Laura Chen from Citibank. Laura Chen: I think we got a lot of discussion about the leading position in the most advanced node. So, I just have a question about, what's your view on the mature node dynamic. In particularly, we are seeing that globally, considered geopolitical tension, so we are seeing that the fab over the place in the world, so do you see that, in the longer term, any concern on industry wise overcapacity? So, what's TSMC's strategy? And also, what's your view on your mature nose profitability as well? That's my first part. Jeff Su: Okay. Thank you, Laura. So, Laura's first question is on mature node strategy and profitability. She notes with the geopolitical dynamics that there's a lot of capacity being built on the mature nodes, so her question is, do we see or expect an industry wide oversupply? And probably more importantly, what is the impact to TSMC's mature node strategy and profitability? C. C. Wei: I think your observation is right. There might be too much of a capacity being built right now for mature nodes. So, the concern on overcapacity is valid. Now let's talk about TSMC. As I said, TSMC increased the mature node capacity for specialty technology differentiated with others. We work with customer and that kind of capacity, actually effective capacity as we name it, is with commitment from customers loading and for the future of business, because we offer the value for our customer to design their product. So, we believe that they can retain their products value even the capacity is flattered in the industry. And so long as our customer is doing well, TSMC is doing well. And so, the profitability, as I said in my statement, it will be around the corporate average, so we don't have concern. Mark Liu: We speak for TSMC, okay? It could be industry issues. Laura Chen: That's very helpful. Thank you. And also, my second question is back to AI related. As we know that a lot of investors care a lot about your advanced packaging progress, we also know that TSMC got a very good progress on 3D IC SoIC. So, can you share with us your progress development beyond CoWoS what's your plan on the 3D IC and what's the schedule and capacity you are aiming for in the next two, three years? Jeff Su: Thank you, Laura. So, Laura's second question is on advanced packaging. She notes again the strong demand for AI related applications, so advanced packaging, the progress, of course, CoWoS demand is very strong. Her question is really, I think, beyond CoWoS into true 3D IC or integration solutions such as SoIC. What is the progress that we see the engagement from customers, the capacity and basically the outlook for these segments of the business? C. C. Wei: The demand actually is very strong. Today's situation that we cannot offer enough capacity to support our customer. And that condition will continue probably all the way to next year. Although, we are working very hard to increase the capacity, for example, this year, we are doubling our output and still not enough, and so we continue to increase for the next year. The progress, so far so good because we invested on the advanced packaging technology for more than 10 years already. So, we expect the growth rate for CoWoS for 3D IC or for SoIC per se, it will be more than 50% CAGR in the next few years, at least. And so, we are confident that the demand is there. It's TSMC's capability to offer enough capacity to support our customer. Laura Chen: For CoWoS, you will be doubling and what's the idea about the next year? Do you have any preliminary thought? C. C. Wei: I will talk to you next year. Jeff Su: We have a question here from Brad Lin from Bank of America Merrill Lynch. I think in the interest of time, we'll take one question sorry, from yourself, and then we'll take one more from the line and then one more in person, if there's any. Brad Lin: Thank you, for taking my question. So, my question will be still around N3 and also IDM. So, as we understand, the demand is uncertain, but we can definitely increase our business certainty by gaining market share. So, do we expect, some more contribution or market share gain especially from IDM side or any more contribution from PC side? Maybe, well, by the end of the year or any time soon? Jeff Su: Okay. So, Brad's first question is about IDM outsourcing. I think, again, given the technology leadership that we have. He wants to know, do we expect more business or outsourcing from the IDM by the end of this year? And how do we see it? Or is it uncertain going forward? C. C. Wei: That is too specific. You say the IDM outsourcing, I know whom you talk about, so I better not to make any comment. I state what I said, we take everything into consideration, we welcome the business, but we prepared our capacity expansion. Brad Lin: Got it. Thank you, very much. Jeff Su: Your second question? Brad Lin: Yes. So, it's on the advanced packaging. So, we know that the CoWoS S right now is a mainstream, so have the management seen the clients converting to either CoWoS R, CoWoS L? And then what's the implication to revenue and margin profile? Jeff Su: So, it's also a very specific, too specific question. But again, Brad wants to know, CoWoS S seems to be the mainstream today to see customers switching to CoWoS L or CoWoS R and what's the margin implication? C. C. Wei: Well, let's make a joke, I even didn't know what is called CoWoS R, CoWoS L. But anyway, we are working with customer to support them with adequate capacity, although it's not 100% now but we do our best. And we're developing that next generation, CoWoS A or something like that for our customer, and it's overwhelming that it welcomed by all my customers, so we are preparing the capacity for you. Brad Lin: Got it. That's the last one, but not the least, not the question. Jeff Su: That's 2 questions. Brad Lin: No, not a question. So basically, I want to say, well thank you, Mark, for your leadership, contribution and endeavor for the past 30 years, not just for not just TSMC, but also for Taiwan. We wish you a happy retirement and also the new chapter of life. Thank you. Jeff Su: We will take the final questions from the last two participants. Let's go online first, then we have one final in-person, okay? Operator? Operator: Next from the call is Krish Sankar from TD Cowen. Krish Sankar: Thanks for taking my questions. I have two of them. First one, I think Wendell, you spoke about revenue growth for the year and again from gross margin guidance. I'm just trying to wonder how to think about gross margin for the full year in the context of the fact that, TSMC is going to grow in the low to mid-20%, how do you think about growth margin for full year 2024? And then I had a follow-up. Jeff Su: Okay, Krish, again, sorry, we could not hear you that clearly online. But I think his question is, correct me if I'm wrong, with revenue outlook that we gave, low to mid-20s growth in U.S. dollar term, what is the outlook for the full year gross margin? Is that what you are asking? Krish Sankar: That's right, yes. Wendell Huang: I just mentioned a couple of puts and takes on the gross margin of this year. And I also said that, the second half, we will have a higher dilution from two factors. But we are not ready to give out a full year guidance on gross margin yet. We will talk about that as time goes by. But let me say this, longer-term, with all the factors together, still 53% or higher is definitely we are very confident that, we will achieve that. Jeff Su: Sorry, Krish, why don't you go ahead? Krish Sankar: Yes. Just a quick follow-up and I just want to say thanks a lot for all support. Just to follow-up, in terms of the revenue growth for this year, December quarter you exited HPC and smartphone, roughly 43% of revenue. What's going to drive the growth this year? Is HPC or smartphone, which is going to be better this year to get to the low to mid-20%? Jeff Su: Okay. Krish, Sorry. Again, we could not hear you that clearly, but I think I got the gist just for your question. Maybe the way Krish's question is what the components that's driving the revenue growth this year, maybe we can share with him by the four growth platforms? Wendell Huang: Chris, the HPC will have the highest growth, actually much higher than the corporate. The other three platforms will all grow, although slower than the corporate. Krish Sankar: Thank you very much. Thank you, C. C. Thank you, Wendell. Jeff Su: Yes, no problem, Krish. Then we will take the final question from the floor. The first row here. Nicholas Barrett of Macquarie. The microphone is on. You can ask. Nicholas Barrett: Very quick question. Thank you very much, Jeff. Is it possible or would you expect that some of your Arizona customers could be only customers in Arizona, but some U.S. customers only want to buy wafers made in the U.S.? Jeff Su: Sorry. Your question is, will customers in Arizona only be U.S. customers? Nicholas Barrett: Is it possible that some U.S. customers only want U.S. made wafers? C. C. Wei: Why do we answer that question? Arizona fab's for everybody. But majority is a U.S. customer, you are right. Jeff Su: Do you have another question? No? Okay. Well, if not, then this does conclude our Q&A session before we conclude today's conference. Please be advised that the replay of the conference will be accessible within 30 minutes from now and the transcript will become available 24 hours from now, both of which are going to be available through our website, TSMC's website at www.tsmc.com. So, thank you again everyone for joining us today. We hope everyone continues to stay well and we hope you will see join us again next quarter. Goodbye and have a great day. Thanks.

Jeff Su: This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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 in 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 third quarter 2023, followed by our guidance for the fourth quarter 2023. Afterwards, Mr. Huang and TSMC CEO, Dr. C. C. Wei, will jointly provide the Company's key messages. Then, we will open the line for the Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now, I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2023. After that, I will provide the guidance for the fourth quarter 2023. Third quarter revenue increased 13.7% sequentially in NT dollars or 10.2% in U.S. dollars as our third quarter business was supported by the strong ramp of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset customers' ongoing inventory adjustment. Gross margin increased 0.2 percentage points sequentially to 54.3%, mainly reflecting higher capacity utilization, partially offset by the margin dilution from N3 ramp. Total operating expenses accounted for 12.6% of net revenue as compared to 12.1% in the second quarter mainly due to higher R&D expenses to support our 3-nanometer and 2-nanometer development. Operating margin was 41.7%, down 0.3 percentage point from the previous quarter. Overall, our third quarter EPS was TWD8.14 and ROE was 25.8%. Now let's move on to the revenue by technology. 3-nanometer process technology contributed 6% of wafer revenue in the third quarter while 5-nanometer and 7-nanometer accounted for 37% and 16%, respectively. Advanced technologies, defined as 7-nanometer and below accounted for 59% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 6% quarter-over-quarter to account for 42% of our third quarter revenue. Smartphone increased 33% to account for 39%. IoT increased 24% to account for 9%. Automotive decreased 24% to account for 5%. And DCE decreased 1% to account for 2%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD1.55 trillion or US$48 billion. On the liability side, current liabilities increased by TWD159 billion, mainly due to the increase of TWD95 billion in accounts payable and the increase of TWD59 billion in accrued liabilities and others. Long-term interest-bearing debt increased by TWD30 billion, of which TWD10 billion from new issuance and TWD20 billion from foreign exchange rate movement. On financial ratio, accounts receivable turnover days increased 3 days to 35 days while days of inventory decreased 3 days to 96 days. Regarding cash flow and CapEx. During the third quarter, we generated about TWD295 billion in cash from operations, spent TWD227 billion in CapEx and distributed TWD71 billion for fourth quarter '22 cash dividend. Overall, our cash balance increased TWD35 billion to TWD1.31 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled TWD7.1 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on current business outlook, we expect our fourth quarter revenue to be between TWD18.8 billion and US$19.6 billion, which represents a 11.1% sequential increase at the midpoint. Based on the exchange rate assumption of US$1 to TWD32, gross margin is expected to be between 51.5% and 53.5%, operating margin between 39.5% and 41.5%. This concludes the financial presentation. Now let me turn to our key messages. I will start by making some comments on our third quarter '23 and fourth quarter '23 profitability. Compared to second quarter, our third quarter gross margin increased by 20 basis points sequentially to 54.3%, primarily due to a higher capacity utilization rate and a more favorable foreign exchange rate, partially offset by the margin dilution from the initial ramp-up of our 3-nanometer technology. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 80 basis points, mainly due to a more favorable foreign exchange rate. We have just guided our fourth quarter gross margin to decline by 1.8 percentage points to 52.5% at the midpoint, primarily due to the continued margin dilution from this steep ramp of our 3-nanometer technology. As a reminder, six factors determine TSMC's profitability: Leadership, technology development and ramp-up pricing, cost reduction, capacity utilization, technology mix and foreign exchange rate. To manage our profitability in the next several years, we will work diligently on our internal cost improvement while continuing to strategically sell our value. Excluding the impact of foreign exchange rate, of which we have no control over, we continue to forecast a long-term gross margin of 53% than higher is achievable. Next, let me talk about our 2023 CapEx and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. Given the near-term uncertainties, we continue to manage our business prudently and have tightened our capital spending throughout the year where appropriate. We now expect our 2023 CapEx to be approximately US$32 billion. Out of the approximately US$32 billion CapEx for 2023, about 70% of the capital budget will be allocated for advanced process technologies, about 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask-making and others. Our depreciation expense is now expected to increase by low 20s percentage year-over-year in 2023 as compared to our January forecast of approximately 30% year-over-year increase. Despite the near-term inventory cycle, our commitment to support customers' growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term structure market demand profile. We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge specialty and advanced packaging technologies to support their growth while delivering profitable growth to our shareholders. Now let me turn the microphone over to C. C. Dr. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand and inventory. We concluded our third quarter with revenue of US$17.3 billion, in line with our guidance in U.S. dollar terms. Our business in the third quarter was supported by the strong ramp of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset by customers' ongoing inventory adjustment. Moving into first quarter 2023. While AI-related demand continues to be strong, it is not enough to offset the overall cyclicality of our business. We expect our business in the fourth quarter to be supported by the continuing ramp of our 3-nanometer technology, partially offset by customers' continued inventory adjustment. On the inventory side, we expect the fabless semiconductor inventory to have continuously reduced in the third quarter. However, due to the persistent weaker overall macroeconomic conditions and slow demand recovery in China, customers remain cautious in their inventory control. Thus, we expect the inventory digestion to continue in the fourth quarter. Having said that, we are observing some early sign of demand stabilization in the PC and smartphone end market. Together with such level of inventory control, we forecast the fabless semiconductor inventory to further reduce and exit 4Q '23 at a healthier level. Next, let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global logic IC industry for years to come. As we have said before, our strategy is to expand our global manufacturing footprint to increase customer trust, expand our future growth potential and reach for more global talents. Our overseas decisions are based on our customers' need and the necessary level of government support. This is to maximize the value for our shareholders. In Europe, after conducting extensive due diligence, we announced our plan to build a specialty technology fab in Dresden, Germany focusing on automotive and industrial applications. We have received a strong commitment to support this project from our JV partners, the European Commission government and German federal, state and city governments. These fabs will utilize 22- and 28-nanometer and 12-, 16-nanometer technologies for semiconductor wafer fabrication. Fab construction is scheduled to begin in second half 2024 and production is targeted to begin in late 2027. In Arizona, we are receiving strong support from the city of Phoenix, State of Arizona and U.S. federal government and continue to develop positive relationship and work closely with our local trade and union partners. We are making good progress on the fab infrastructure, utilities, and equipment installation issues in our first fab and the situation is improving. We have also begun early preparation for our Arizona fab operations and hired close to 1,100 local TSMC employees so far. Many of them has been brought to Taiwan for extensive hands-on experience in our fab, so that they can further their technical fields who are being emerged in TSMC operation environment and culture. We continue to target volume production of N4 process technology in first half 2025 and are confident that once we begin operations, we will be able to deliver the same level of manufacturing, quality and reliability in Arizona as from our fabs in Taiwan. In Japan, we built a specialty technology fab, which will utilize 12- and 16-nanometer and 22- and 28-nanometer process technologies. We have hired approximately 800 local TSMC employees so far with the majority having similar being brought to Taiwan for hands-on experience. Equipment moving has begun this month and volume production is on track for late 2024. In China, we have recently received an extension from the U.S. Bureau of Industry and Security to continue our operation in Nanjing. We are currently in the process of applying for validated end user authorization and expect to receive a prominent authorization in the near future. From a cost perspective, the initial cost of overseas fabs are higher than TSMC fab in Taiwan due to, first, smaller fab scale; second, higher costs throughout the supply chain; and third, the early stage of semiconductor ecosystem overseas as compared to a matured ecosystem in Taiwan. TSMC's responsibility to manage and minimize the cost gap to maximize the return for our shareholders. Our pricing will also remain strategic to reflect our value, which include the value of geographic flexibility. We will also work closely with government to secure their support. At the same time, we are leveraging our fundamental competitive advantage of manufacturing technology leadership, large volume economies of scale to continuously drive our cost down. By taking such actions, TSMC have the ability to absorb the higher cost of overseas fabs and still deliver the long-term gross margin of 53% and higher and sustainable ROE greater than 25%. We remain firm in our commitment to maximize the value for our shareholders. Now let me talk about N3 and N3E ramp-up and progress. Our 3-nanometer technology, the most advanced semiconductor technology in both PPA and transistor technology. N3 is already involving production with good yield, and we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3 will contribute a mid-single-digit percentage of our total wafer revenue in 2023, and we expect a much higher percentage in 2024 supported by robust demand for multiple customers. N3E will leverage the strong foundation of N3 to further extend our N3 family with enhanced performance, power and yield and provide complete platform support for both HPC and smartphone applications. N3E has passed qualification and achieved performance and yield targets and will start volume production in fourth quarter of this year. We also continue to provide further enhancement of N3 technology, including N3P and N3X. With our strategy of continuous enhancement of our 3-nanometer process technologies, we expect strong multi-yield demand from our customers and we are competent that our 3-nanometer family will be another large and long-lasting node for TSMC. Finally, I will talk about the N2 status. The recent surge in AI-related demand supports our already strong conviction that demand for energy-efficient computing will accelerate in an intelligent and connected world. The value of our technology platform is expanding beyond the scope of geometry string along and increasing toward great power efficiency. In addition, as process technology complexity increases, the lead time and engagement with customers also started much earlier. As a result, we are observing a strong level of customer interest and engagement at our N2 similar to or higher than N3 at a similar stage from both HPC and smartphone applications. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy efficiency when it is introduced in 2025. Our N2 technology development is progressing well and on track for volume production in 2025. Our N2 adopt nanosheet transistor structure, which has demonstrated excellent power efficiency and toward deliver full node performance and power benefit to address the increasing need for energy-efficient computing. As part of N2-technology platform, we also developed N2 with backside power rail solution, which is the best suited for HPC applications. We are targeting backside power rail to be available in the second half of 2025 to customers with production in 2026. With our strategy of continuous enhancement, N2 and its derivative will further extend our technology leadership well into the future. This concludes our key messages, and thank you for your attention. Jeff Su: Thank you, C. C. 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 their questions. 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 session. Operator, can we please proceed with the first caller on the line. Thank you. Operator: Yes, the first one to ask question, Gokul Hariharan from JPMorgan. Gokul Hariharan: Congratulations on a great result, and thanks for the details on N3 and N2. My first question is on the technology leadership. Given we are hearing a lot of competitive messaging from your U.S. IDM competitors/customer in the last few months, Intel seems to think that they will be getting into technology or process technology leadership in 2025. Just wanted to hear what does TSMC think of Intel's claim? And when TSMC thinks about customer engagement, do you feel you will lose a little bit of market share to Intel when it comes to the N2 or the first generation of nanosheet transistors? Or you think you're very high market share in N3 will continue into N2? That's my first question. Jeff Su: Okay. Thank you, Gokul. Please allow me to summarize your first question. So Gokul's first question is about technology leadership and competition with, I think, particularly IDM. He notes this IDM is very, messaging about taking over process technology leadership from TSMC. And so Gokul's question is, how do we see this? Are we concerned that we will lose market share at nanosheet or N2 to this IDM given their claims of regaining process technology leadership. Is that correct, Gokul? Gokul Hariharan: Yes, that's right. Dr. C. C. Wei: Well, Gokul, this is C. C. Wei. Let me answer your question with a very simple answer, said, no. But what I was stated a little bit long? Actually, we do not underestimate any of our competitors or take them lightly. Having said that, our internal assessment shows our N3P, now I repeat again, N3P technology, demonstrated comparable PPA to 18A, my competitors' technology, but with an earlier time to market, better technology, maturity and much better cost. In fact, let me repeat again, our 2-nanometer technology without backside power is more advanced than both N4P and 18A, and while the semiconductor industry is most advanced technology when it is introduced in 2025. Does that answer your question, Gokul? Gokul Hariharan: Okay. That's quite clear. Could you talk -- also talk about -- my second question is, could we talk a little bit about the AI-related demand. You've seen a pretty strong demand on the data center side, and you talked about AI being about 6% of revenues this year, mostly on the data center side. Are we starting to see more engagement on AI demand on edge devices? Based on TSMC's expectations, is this going to be a big growth driver in the next one to two years for TSMC's leading-edge AI devices -- sorry, AI on edge devices? Do you think that, that is bigger driver for you? Jeff Su: Okay. Thank you, Gokul. So Gokul's second question is on AI-related demand. He notes, of course, that we have talked last time also about AI-related demand outlook and particularly focused on what we call server AI processes, or Gokul referring to data centers. So this question is really more about on the edge devices. Are we starting to see AI-related demand for edge devices? Do we expect it to be a big growth driver in the next one to two years for our leading-edge technologies as well? Dr. C. C. Wei: Well, the answer is also very simple, yes. We do see some activities from customers who add AI capability in end devices such as smartphone and PCs, so new role engine and AI and PC -- whatever. And we certainly hope that this one will add to the course, help TSMC more strengthen under our AI's business. Gokul Hariharan: So do you see that happen in the next one year? Or is it something that will happen in a more lower term horizon? Just wanted to understand when to think about the cadence of this growth? Dr. C. C. Wei: Okay. Let me answer briefly. It started right now, and we will expect that the more and more customer will put that AI's capability into the end devices, into their product. Jeff Su: Okay. Thank you, Gokul. Operator, can we move on to the next participant, please. Operator: Next one to ask question, Charlie Chan from Morgan Stanley. Charlie Chan: So my first question is about the cycle recovery. So much appreciate about your comments about and demand. So my question is about when do you expect that there will be an uptick of the fab utilization,, assuming demand is stabilizing and also inventory get back to the healthy level? Because it's just very hard to believe your fab utilization outside of leading edge will stay at only 70%, 80%. So first question is about, do you see that overall fab utilization to pick up anytime soon? Jeff Su: Okay. So Charlie, I think your first question is sort of, if I'm correct, around the cycle and in terms of -- how do we see the cycle and the recovery. When do we see the fab utilization picking up, which really is a function of, I guess, do we see the cycle bottoming out and when we expect the recovery. Is that correct? Charlie Chan: Yes. Dr. C. C. Wei: Well, Charlie, this is C. C. Wei, again. Let me answer your question. As I said, we do observe some early signs of demand stabilization in PC and smartphone end markets. Those two segments are the biggest segment for TSMC's business. We want to say that 2024 will be a very healthy growth. But right now, did we see the bottom very close. We want to -- I cannot give you a number, it's because it's too early to call it a sharp rebound. But even with the American environment remain uncertain, we're weighing customers inventory control in first half of 2024 -- that we already said that we are strong technology leadership and the broad customer base. And those two are unique and specific to TSMC, enable our customers to win business in their end market and TSMC continues to deliver healthy growth, and that's why we can do better than overall industry. And that's why we have confidence that we will have here see growth next year. Charlie Chan: Okay. Okay. Yes. So just want to kind of verify because we do see some green shoots and some rush orders to -- foundry sector. But second question is also about AI. My question is that over the past three months, do you see any -- revision of the forecast you may have found from the GPU or the -- chip? And I know it's a very, very recent, right, just two days ago, you said put some additional control on the AI shipment China. Do you think that, that is going to have any kind of near-term or long-term impact to your AI semi revenue growth assumption? Jeff Su: Okay. Thank you, Charlie. So Charlie second question is related to AI, two-parter. First, do we see over the last three months, I think his words were an upward revision in the demand from AI in the last three months. And then he wants to know, given the recent additional regulations announced, what would the impact to the AI demand beef to TSMC, both for the short term and the long term? Dr. C. C. Wei: Charlie, the AI demand continues to grow stronger and stronger. So from TSMC's point of view, now we have about -- we have a capacity limitation to support them, to support the demand. We are working hard to increase the capacity to meet their demand, that's for one thing. Now U.S. government put a new regulation and to -- for some of the product cannot be shipped to Mainland China. However, it is -- just for a couple of days, we are still evaluating the -- we are still doing our assessment. But so far, we can tell you that the impact to TSMC is limited and manageable, at least for the short term. For the long term, we are still evaluating what is the consequence. Charlie Chan: Got it. So actually, there was one embedded question about the custom chip. So may I know your perspective about this custom chip, long-term may kind of gain share or outgrow the GPU products. So what's your assumption for this custom chip in terms of the real contribution within AI or to TSMC? May I ask as a follow-up? Dr. C. C. Wei: Okay. Let me answer, whether customer developed the CPU, GPU, AI accelerator or ASIC for all the type for AI applications, the commonality is that they all require usage of leading-edge technology with stable yield delivery to support larger die size and a strong -- design ecosystem. All of those are TSMC's strength. So, we are able to address and capture a major portion of the market in terms of a semiconductor component in AI. Jeff Su: Operator, can we move on to the next participant, please? Operator: Next one to ask question, Bruce Lu from Goldman Sachs. Bruce Lu: I think the question is try to ask about the outlook for next two years. I think -- I do recall that management mentioned about like 15% to 20% revenue CAGR from '21 to '26. The smartphone business supposed to be in line or slightly below the corporate average in terms of the growth rate, but the smartphone business was down meaningfully in 2023. Do we expect to see a sharp rebound for the smartphone business to get back to the corporate average in terms of growth rate? Also, but -- the management also mentioned that the back-end business will grow in line with the corporate average. Will we see a much stronger growth from the back-end business in the two years? Jeff Su: Okay. So Bruce, this question, really is looking at -- we have -- indeed, you're right, Bruce we have said we will grow between 15% to 20% revenue CAGR in U.S. dollar terms from 2021 to 2026. So Bruce's question wants to break down the components here to look at smartphone, in particular, given that it has been slower growing market these last few years, how do we see the growth of the smartphone market the next one to two years in the context of this CAGR. And then also, I think Bruce is also asking about the back-end growth. We have said previously, we'll grow slightly faster than the corporate average. What is the current expectation now also for the next one to two years. Is that correct, Bruce? Bruce Lu: Yes. Thank you. Wendell Huang: Bruce, this is Wendell. Yes, in the next two to three years, backing up to '21 to '26, we still expect that the smartphone, as a whole, will grow slightly slower than the corporate average. We still think that HPC will be the strongest one and will be the major growth contributor to our multiyear growth. This is your first question. As to the growth of back-end business, we still expect that the back-end business, as a whole, will grow slightly faster than the corporate average in the five-year time period. Bruce Lu: So, the next question is for the technology cadence. I mean, for TSMC, for revenue contribution for 5-nanometer, we start to see the meaningful revenue contribution for final starting in the third quarter 2020, and 3-nanometer is third quarter 2023. So the cadence, it looks like is longer for 3-nanometers versus 5-nanometer and 7-nanometers. What is the technology cadence moving forward? Are we able to see a meaningful revenue contribution by 2-nanometer in 2-year time frame or two years' time? I think the technology migration cadence is an important indicator. Jeff Su: Bruce's second question, again, as you said, is around the technology cadence. He notes that 5-nanometer started contributing revenue in 3Q '20, but I think you're saying 3-nanometers revenue is contribution in 3Q '23. So the cadence is growing longer to kind of three years between five and three. So what will be the technology cadence in the future? And thus, for 2-nanometer, when should we expect meaningful revenue as well. Is that correct, Bruce? Bruce Lu: That's correct. Dr. C. C. Wei: Okay. Bruce, let me answer the question. I think that we developed the technology to meet the customers' demand. That's first priority to us. But then different customers may have different product, scheduled consideration. And as time goes by, the technology complexity actually become more and more complicated and our customer will design their product and react to the market situation. So let me answer the question that's very simple way, TSMC's technology cadence remain constant and to support our customers' growth. But when we got the same amount or some percentage of the revenue, it will depend on customers' product schedule. Bruce Lu: But the follow-up question is that if the customer doesn't really need the advanced technology as fast as before, maybe we slow it down a bit, which will make better returns, right? Jeff Su: So Bruce's follow up is, so if the customers do not need the leading node as fast or as soon as before, then slow down the cadence, does that mean we will see better returns. Dr. C. C. Wei: Well, we don't slow down our technology development per se. We might slow down our capacity expansion according to customer demand. Did I answer your question, Bruce? That's what we are doing right now. Bruce Lu: I see. Understand. Jeff Su: Operator, can we move on to the next participant, please? Operator: The next one, we have Laura Chen from Citi. Laura Chen: I think my question is also similar to what Bruce mentioned about the capacity expansion plan. As we see that healthier inventory situation right now, and at the same time, the most advanced process now depends on customers' demand. So just wanted to get your feeling about the overall CapEx outlook or capacity outlook into the next two years, do you feel that we'll be better to resume the year-on-year CapEx next year or later, considering there's still quite strong demand on N2 and N2 ramp up? At the same time, the most advanced now seems you will see maybe 2x more expensive on N2 versus N3. So my question is just about the future capacity expansion. Jeff Su: Okay. So Laura's first question again is on the capacity expansion plan. She notes that, of course, the inventory, as we said, is becoming healthier but also with N3 and N2. So she really wants to know what is the CapEx and capacity outlook planned for the next one to two years. Wendell Huang: Right. Laura, it's Wendell. This is just mentioned our capacity plan will really depend on the customers' product plan. Now in terms of CapEx, what we can see now is that we, in the past few years, have invested very heavily to capture the growth in the next few years. And as we begin to harvest those investments, we expect our -- the increase of our CapEx to be leveling off in the next few years. That doesn't mean the dollar amount is going to reduce. But the capital intensity is expected to decline in the next few years. That's what we can see at this moment. Laura Chen: I recall that previously, we mentioned about like we target longer term to back to like mid-30s for our CapEx intensity. So is any possibility we see we achieve that target next year? Wendell Huang: It's -- first of all, it's not a target. It's a forecast based on the customers' demand. And secondly, it's like three or five years out. It's not the immediate next year. Laura Chen: Okay. Very clear. And also my second question is about N2 progress. I appreciate C. C.'s previous sharing on the progress and also the backside power time line. I'm just wondering that what would be the most challenging part if we migrate to like a backside power? And also since the sister density will become a totally different on nanosheet. So, I'm just wondering that the clients' migration or intention to adopt the most advanced nodes into next two, three years? And what will be the most challenging technology perspective? Jeff Su: Okay. So Laura, let me make sure I got this right. So your second question is about N2, and you want to know, with, the adoption of backside power rail, what is the most challenging part from a technology perspective, and then how do we see the customer adoption? Laura Chen: Yes. Correct. Dr. C. C. Wei: I'll answer that other as technology moving into more and more advanced node, the challenge is always there. Technology complexity increase dramatically. But we can do it, no doubt about it. And we still remain the technology leadership in this industry. If you ask me, what is the most challenging part, I would say it's cost. I mean, that you look at it today inflation, everything, and the tool have become more and more expensive. Although, we can do it on time to meet customers' requirement. Our challenge right now, actually, I would say, number one, cost. I want to reduce the cost so more customers can afford it. But even with that, actually, we have a lot of customer interested and engaged with the TSMC today. Actually, it's probably higher than the N3 at a similar stage. Okay. Did I answer your question? Laura Chen: Yes, very clear, sir. Thank you very, C. C. Jeff Su: Okay. Thank you, Laura. Operator, can we move on to the next participant, please? Operator: Right now, we have Brett Simpson from Arete Research. Brett Simpson: I had a question for C. C. regarding the hyperscalers. Major U.S. hyperscalers are hiring a lot of chip designers at the moment and looking to make their own AI silicon going direct to TSMC, much like Apple has done over the years. Are you -- is TSMC generally supportive of this trend or not? And can you give us your perspective as to whether hyperscalers have the in-house IP and skills to cut out the ASIC suppliers or not and go direct to TSMC? Jeff Su: Okay. Brett, thank you. So Brett's first question is looking at his observation, U.S. hyperscale companies are hiring a lot of people to do AI custom chips, silicon and working directly or coming directly to work with TSMC. So his question is, is TSMC support such efforts and how do we see such type of customers, I guess? Is that your question, Brett? Brett Simpson: Yes. And generally, just share your perspective on how you see this part of the business developing at TSMC. Dr. C. C. Wei: Brett, Okay. Those are hyperscalers. I don't comment on the specific customer. But all we know or our fundamental rule is whether the customer develop CPU, TPU AI accelerator or ASIC for their own application or for any purpose in the AI area, we will support them, actually. And because of our technology leadership and our good manufacturing, so we are able to address and capture a major portion of the market. And so you are asking whether we support it or not, we support every customer all over the world. Brett Simpson: Okay. That's very clear. And maybe just as a follow-up, I wanted to ask about some of the areas in the quarter that were weaker than expected, namely 7-nanometer, I think it's half year-on-year and also automotive that saw a decline sequentially, a meaningful decline sequentially. Can you just help us understand how you build back up 7-nanometer? What led to the weakness? And what's happening in automotive? And how do you assess prospects for automotive over the next six, nine months or so? Jeff Su: Okay. So two parts to Brett's question. Maybe I'll start with the second, by anyway, looking at automotive demand and the weakness in the past quarter. How do we see the automotive demand? And then also his question is about 7-nanometer, also year-on-year sharp revenue decrease. So how do we see the outlook for 7-nanometer as well. Dr. C. C. Wei: So let me answer the question on automotive demand. In fact, in the past three years, automotive demand is very strong. And we deliver whatever they asked. And today, I think the automotive demand already entered the inventory adjustment mode in the second half of 2023. However, we still expect the automotive demand will increase again in 2024 because the more and more EV, more and more functionality being added to automotive. And that's what we saw. Now talking about the N7, the 7-nanometer technology, why we have such a low utilization or the revenue decrease, it's go beyond our initial original plan because of -- we expect the N7 to be very fully utilized even now, but it is not. Let me answer the question because of -- we suddenly have -- in 10 years, the smartphone demand dropped dramatically from about 1.4 billion units to about 1.1 billion now. So that exactly, in this time frame, the N7's utilization has been impacted and followed by one major customer who delayed their product introduction. And so that's why we have a low utilization. But saying that, we are confident to backfill our 7-, 6-nanometer capacity with additional wave of specialty demand from consumer, RF, connectivity and other applications and will return to a healthy level of utilization over the next several years. This is very similar to a situation that we have 28-nanometer, back in 2018 and 2019 time frame, okay? At the beginning, it was underutilized for a period of time, and we worked hard to -- with our customer and then for developers, some specialty technologies and then now we have to expand 28-nanometer specialty capacity. That's the same kind of a story. Brett, did I answer your question? Brett Simpson: Yes. Jeff Su: All right, Brett. Thank you. Operator, can we move on to the next participant, please. Operator: Next one to ask questions, Brad Lin from Bank of America. Brad Lin: So first of all, congrats on the strong results and then also the impressive gross margin. So I have two questions. One is on the end device AI, edge AI and the other is on the CPO. So appreciate the management's constructive comments and growth outlook on the edge AI. So besides the -- well, interesting engagement with the clients, what are the implications for the wafer consumption for the firm? And also, eyeing on the computing power and energy consumption angle on the end device with AI in the additional functions, should we expect it to reaccelerate the node migration for the end devices? That's my first question. Jeff Su: Okay. So Brad's first question is about edge and device AI. He wants to know what is the implications for wafer consumption and then with the increasing need for energy efficiency and power. He's wondering, does this reaccelerate or increase the node for, I guess, his words is node migration or adoption of leading-edge technologies. Dr. C. C. Wei: Well, the edge device start to -- that's including smartphone and PC, start to incorporate the AI functionality inside. We observed some of the neural engines has been added increasingly. So, the die size will increase even the unit did not increase dramatically. But the die size is in mid-teens -- or no, I mean, mid-single digit is the die-size increase so far. And I expect that this kind of trend will continue. And so more and more application of the -- on the AI side, what be incorporated into those kind of edge device. And that one need a very power-efficient chips to put into the edge device, especially when it is mobile. So I do expect -- for my own perspective, I do expect that my customer will move into the leading edge node more and more quickly to compete in the market. Brad Lin: So -- well, so a bit of a follow-up is that, well, now it accounts for some mid-single digit of the die size incremental for a chip. So does that -- or are we seeing that to enlarge to something like mid-teens or, well, even bigger in the -- well, mid- to long term? Jeff Su: So Brad's quick follow-up is, if the AI portion is kind of mid-single digit now, how should we expect -- can we expect mid-teens or what type of percentage in a few years' time. Dr. C. C. Wei: Well, I will answer the question. Actually, we see the increase in the die size for we cannot nail down, we say, the mid-single digit, but I expect it to start to increase. And whether that will increase our forecast and our growth or something, it's still too early to say to at this moment. Wendell Huang: Yes, but we are still quantifying the impact from this development. So,, we're maintaining the previous statement that we expect it to grow to about in five years about mid-single digits -- I'm sorry, mid-teens of our revenue. Jeff Su: Yes. I think, Brad, probably just very simply, as we said, edge AI, we do see some activity. It will drive silicon content, but this will occur over time, okay? And we don't have any quantitative number to share, right? Brad Lin: Got it. Jeff Su: Okay. What is your second question? Brad Lin: Okay. So the second question is on CPO. So basically, we have learned that TSMC is doing quite well, also leading the industry in CPO or so-called silicon photonics and has introduced a platform to clients with the technologies. So, we learn that the opportunities and implications of the new technology for the industry and for our firm. And also, should we expect the platform to offer additional competitive advantage for TSMC in the long run? Jeff Su: So Brad, your second question is on silicon photonics. Is that correct? Brad Lin: Yes. Jeff Su: So, he wants to know our positioning or progress on silicon photonics. How important is this, and will this be a competitive advantage for TSMC going forward in the future. Dr. C. C. Wei: Okay. Let me answer that question. Silicon photonics actually is growing its importance because of just a larger amount of data need to be collected to process and transfer in an energy-efficient manner. Silicon photonics tends to be the best to fit that role. And TSMC have been working on silicon photonics for years and most importantly, we're collaborating with multiple leading customer and -- to support their innovations in this field. It takes a lot of time to develop the technology and to build the capacity. And when we increased the volume production, we believe that TSMC's silicon photonics will be the best technology and when customer roll out all their innovations. But as I said, it's gradually increasing in their activity and gradually increasing their demand as of today. Brad Lin: Got it. Thank you very much. Jeff Su: All right. Thank you. Operator, can we move on to the next caller, please? Operator: Next one, we have Sunny Lin from UBS. Sunny Lin: So my first question is on advanced packaging. Incrementally, we are hearing more customer interest in the adoption to achieve better heterogeneous integrations. But want to get your thoughts on what could be the potential impact of customers relying up more on packaging to improve the system performance and perhaps last on the price migration given cost considerations? Meanwhile, SOIC has been introduced for quite a while, whereas the customer adoption still seems to be limited at this point. And so when should we expect a more meaningful pickup of SOIC? And what could be the major catalyst. Jeff Su: Okay. So Sunny, sorry, I may have missed a little bit of the first part. But I think her question is on overall advanced packaging, looking at this trend and the move to more, of course, heterogeneous integration. What are the cost implications and how does advanced packaging work and go together with the process technology standpoint? And then also a question about the update or progress of SOIC, is that correct, Sunny? Sunny Lin: Well, so maybe if I may clarify, but -- so for the first part, I wonder if customers may consider relying up more on packaging whereas slowing down on the process migration because of increasing costs. Jeff Su: Okay. So she's asking, will customers -- because of the increasing cost of the process technologies, will customers rely more on advanced packaging as a result. Dr. C. C. Wei: Let me answer that. It's not because of increasing of the cost in the more advanced node. And actually, they tried to -- our customers tried to maximize the system performance. That's the major portion. That, including the kind of speed improvement or the power consumption decrease, all those kind of things, put it all together and maybe cost is also part of the consideration which we noticed about. And so more and more customers moving into the very advanced technology node, and they start to adopt the chip-based approaches. And so, that no matter what, TSMC provide industry-leading solution in both leading technology and also well-advanced packaging technology, and to work with our customer for their product and have a best system performance. And the other one is, you are asking about the SOIC, when it will become a high volume and more substantial revenue for TSMC. It's coming. It's coming. Actually, the customer already ready to announce their new product, which are widely adopt, and I expect starting from now and next year, the SOIC will generate revenue and become one of the faster-growing advanced packaging solution in the next few years. Sunny Lin: Got it. If I may, a quick follow-up. Three months ago, you had a target to double your CoWoS capacities. And just now you mentioned AI demand continued to surprise on the upside. So I wonder if there's any update on your CoWoS capacity expansion? Jeff Su: Okay. So I will take this as your second question, Sunny, but she's asking about CoWoS expansion. We had said that we will double the capacity three months ago. Can we provide an update on the overall as CoWoS capacity and, I guess, CapEx and capacity go hand-in-hand. What is our plan? Dr. C. C. Wei: Well, Sunny, the last time we said that we will double our CoWoS capacity. We are working very hard to increase the capacity more than double, but today is limited by my suppliers' capability or their capacity. So we still maintain that we will double our CoWoS capacity by the end of 2024. But the total output actually is more than double from 2023 to 2024 because of a very high demand in -- from our customer. So actually then, this kind of a trend will continue to increase our CoWoS capacity to support our customers even into 2025. Jeff Su: Okay. Sunny, does that answer. Okay. Thank you. Operator, can we move on to the next caller, please? Operator: Next one, please welcome Mehdi Hosseini from FIG. Mehdi Hosseini: I understand there are a number of new products that you're ramping into year-end and into first half of '24 in various -- for various end markets. And I want to understand how the ramp of these new products are to impact the seasonality, could we see a scenario where the first half, the ramp of these new products, especially at the leading edge to somewhat offset the seasonal factors? And any thoughts there and I have a follow-up. Jeff Su: All right, Mehdi well, Mehdi's first question is in terms of new products, which, of course, customer products, we don't comment on, but he said we are ramping products into the second half. And so how will this ramp of new products go is into as we go into first half '24. And can this offset or mitigate some of the seasonality. Mehdi Hosseini: No, let me rephrase that, contribution of customers' new products. And how would that impact or how could that offset the seasonal factors. Wendell Huang: Yes. Mehdi, I don't think we can comment on specific customer products, but I can tell you that we're not seeing any dramatic change in the seasonality as of now. Mehdi Hosseini: Okay. Because I'm looking at your year calendar '23, and given your Q4 guide, you're actually doing better than what you guided three months ago, once you said, revenues could be down 10% U.S. dollar and now it could actually be down high single digit. Is that a combination of a stronger new product ramp and better pricing? Is that a fair assessment? Jeff Su: Okay. So Mehdi is really looking at he rightly noted that three months ago, we said this year will decline around 10% in U.S. dollar term. Now with the fourth quarter implied guidance is slightly better. So he wants to know, what is the implication behind this? Dr. C. C. Wei: Well, let me give you one simple reason because our ramp-up of N3, because of the demand of N3 is strong. So we ramp up quickly to meet customer demand. So, the final result is better than we expected three months ago. Jeff Su: And we have also said that strong ramp of N3 will continue in next year, okay? That's about all the seasonality color we can give. Mehdi Hosseini: Got you. Okay. And then perhaps, if I were to ask a second question, I just want to better understand your view on your customers' inventory correction. We're reaching the bottom where we don't have any visibility on how quickly they're going to refresh inventory. The slope of the recovery is still not clear. Did I understand you correctly? Jeff Su: So, Mehdi's second question, he would like to clarify. So are we saying that customers' inventory is reaching or approaching the bottom, but the slope of the inventory is not clear, is that what we are saying? Dr. C. C. Wei: Okay. I'll answer the question. Actually, in these couple months, we start to see the demand stabilized in the PC and smartphone end market. And in fact, we see some kind of an urgent PO ask for more device to be shipped to their place to meet the demand. That give us a hint of the inventory can -- already become more healthier than we thought. So in terms of uncertain macro, it probably will continue, but our expectation is very close to a healthy condition. So that's why we say we can expect 2024 to be healthy growth year for TSMC. Mehdi, did I answer your question? Mehdi Hosseini: Great. Thank you. Jeff Su: Okay. In the interest of time -- thank you, Mehdi. In the interest of time, we'll take questions from the last two participants, please. Operator: Next one to ask question is Krish Sankar from TD Cowen. Krish Sankar: I have two of them. First one is on gross margin. Where do you expect N3 to reach corporate average gross margin? And as you look into next year, as more mature node capacity comes online across the industry, how to think about mature node gross margins also? And I have a follow-up after that. Jeff Su: Okay. So Krish's first question is on gross margin. When do we expect 3-nanometer or N3, I should say, to reach the corporate average gross margin. And how do we see the gross margin trend for the more mature nodes? Wendell Huang: Yes. Krish, in the past, our leading node normally reach gross margins -- corporate margin in about eight quarters. But as we progress with more and more leading nodes, it will become more and more challenging because of several reasons. Well, first of all, our corporate margin, higher than before. And secondly, the leading node, as I just said, is becoming more and more complex. And also, in the past few years, the inflation pressure that was not expected also contribute the higher cost in the N3. So it's going to be pretty challenging for future leading nodes to reach corporate margin as in before -- like before in the same time frame. The mature nodes, I can tell you that our mature nodes are -- the gross margins are really congregated around the corporate average in a pretty narrow band because we focus on specialty technology. It's not a commodity capacity. Krish Sankar: That's very helpful. And then I'll -- and then as a follow-up. On Arizona, you mentioned that you'd hired about 1,100 local employees. I'm kind of curious, is that critical mass enough for you to start 4-nanometer production? Or do you have another target level of employees before we can actually start getting this production since you're still maintaining the output to being first half of 2025? Jeff Su: Okay. So thank you, Krish. So Krish's second question on is about our first fab in Arizona. He notes that we have said we hired 1,100 local employees. So his question is this enough critical mass or enough people basically to support the ramp of the first fab as we plan, as we said today in first half. Dr. C. C. Wei: Of course, we continue to hire the local talent to join the TSMC's fab in Arizona. So, when we start to have a volume production, we are confident that we will have enough resources to support our ramp-up in Arizona. Jeff Su: Okay. All right. Thank you, Krish. Operator, can we move on to the last participant, please? Operator: The last one to ask question, Charles Shi from Needham. Charles Shi: First off, I really want to congratulate the TSMC for delivering good results for Q3 and very good guidance for Q4. But I want to really call out the reported revenue for 5-nanometer in the third quarter. It looks like you are showing some really good countercyclical strength and probably a record high. I want to understand the rebound in the 5-nanometer business in Q3. Is that going to be more in the following quarters? And what's behind that? And relative, let's say, your expectation like three to six months ago when you were reducing the '23 outlook, is 5-nanometer doing better than expected? And how has the demand trending in the last two, three months for 5-nanometer? Jeff Su: Okay. So Charles' first question is about 5-nanometer. He's asking in the very near term. He notes that he saw very strong sequential revenue increase in the third quarter. So, he's wondering what is driving this. And then he's asking about what is the outlook for the next three to six months, 4-, 5-nanometer specifically. Wendell Huang: Yes. Charles, I can share with you the increase in revenue, N5 in the third quarter mainly comes from two platforms, HPC and smartphone. HPC also includes the AI-related demand, smartphone, basically, customers -- some customers' product seasonalities. Now forward-looking wise, I'm not going to share with you, but we will tell you in January what actual the next quarter N5 revenue will be? Jeff Su: The overall revenue. We don't provide revenue by process node, okay? What's your second question, Charles? Charles Shi: Yes. Thanks, Jeff. The other question is about CapEx. It sounds like that you're expecting CapEx on an absolute dollar might still grow. Going forward, I know that's a long-term comment. But I look at the near term, TSMC CapEx seems to be running at US$7 billion per quarter in the second half '23, which kind of is at US$28 billion annualized run rate. But if we are expecting total CapEx for '24 to grow in the dollar term over '23, it seems like you're expecting CapEx ramp in 2024. Maybe that's your planning for some of the CapEx ramp in '24. Is that the right way to think about like CapEx? Is US$7 billion really like really the bottom level run rate for TSMC CapEx at this point? Jeff Su: All right. So Charles' second question is also -- is on CapEx. Basically, he's saying, given the guidance he's looking at our CapEx, it's running at about US$7 billion run rate. So, he is assuming or although we do not comment on '24, he's assuming if next year's CapEx dollar amount is going to increase, but if we're running at US$7 billion run rate, does that imply US$28 billion, how should he reconcile this. Wendell Huang: Charles, every year, the CapEx is invested based on the future opportunity to growth, and we invested to capture those future opportunities. Too early to talk about 2024, really, we will share the guidance with you in January quarterly release. Jeff Su: Okay. All right. Thank you, Charles. Thank you everyone. 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 30 minutes from now. The transcript will become available 24 hours from now. Both of these, you -- are available and you can find through TSMC's website at www.tsmc.com. So thank you, everyone, for taking the time to join us today. We hope everyone continues to be well, and we hope to see you join us again in January. Goodbye, and have a good day. Thank you.

Jeff Su: [Foreign Language] Good afternoon, everyone, and welcome to TSMC's Second Quarter 2023 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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 in 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 2023, followed by our guidance for the third quarter 2023. Afterwards, Mr. Huang, TSMC's CEO, Dr. C. C. Wei; and TSMC's Chairman, Dr. Mark Liu, will jointly provide the company's key messages. Then we will open the line for a question-and-answer session. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today. My presentation will start with financial highlights for the second quarter of 2023. After that, I will provide the guidance for the third quarter. Second quarter revenue decreased 5.5% sequentially in NT or 6.2% in U.S. dollars as our second quarter business was impacted by the overall global economic conditions, which dampened the end market demand and led to customers' ongoing inventory adjustment. Gross margin decreased 2.2 percentage points sequentially to 54.1%, mainly reflecting lower capacity utilization and higher electricity cost, partially offset by more stringent cost control and a more favorable foreign exchange rate. Despite the industry's cyclical downturn, we continue to invest in R&D to support our N3 and N2 development. Thus, operating margin was 42%, down 3.5 percentage points sequentially. Overall, our first quarter EPS was NT7.01 and ROE was 23.2%. Now let's move on to revenue by technology. 5-nanometer process technology contributed 30% of our wafer revenue, excuse m e, in the second quarter, while 7-nanometer accounted for 23%. Advanced technologies, defined as 7-nanometer and below, accounted for 53% of wafer revenue. Moving on to revenue contribution by platform. HPC decreased 5% quarter-over-quarter to account for 44% of our second quarter revenue. Smartphone decreased 9% to account for 33%. IoT decreased 11% to account for 8%. Automotive increased 3% to account for 8%, and DCE increased 25% to account for 3%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of NT1.5 trillion or USD 48 billion. On the liability side, current liabilities decreased by NT62 billion, mainly due to the net decrease of NT87 billion in income tax payable as we pay NT120 billion for 2022 income tax, offset by NT33 billion accrued tax payables for the second quarter. Long-term interest-bearing debt increased by NT53 billion mainly as we raised NT41 billion in corporate bonds. On financial ratios, accounts receivable turnover days decreased 2 days to 32 days, while days of inventory increased 3 days to 99 days, primarily due to entry ramp during the quarter. Regarding cash flow and CapEx. During the second quarter, we generated about NT167 billion in cash from operations, spent NT251 billion in CapEx, distributed NT71 billion for third quarter 2022 cash dividend and raised NT41 billion from corporate bond issuances. Overall, our cash balance decreased by NT109 billion to NT1.3 trillion at the end of the quarter. Free cash flow was negative NT83 billion during the quarter as operating cash flow was more than offset by capital expenditures, partly due to the income tax payment of NT120 billion. In U.S. dollar terms, our second quarter capital expenditures totaled NT8.17 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between NT16.7 billion and USD 17.5 billion, which represents a 9.1% sequential increase at the midpoint. Based on the exchange rate assumption of USD 1 to NT30.8, gross margin is expected to be between 51.5% and 53.5%, operating margin to be between 38% and 40%. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our second quarter '23 and third quarter '23 profitability. Compared to first quarter, our second quarter gross margin decreased by 220 basis points sequentially to 54.1%, primarily due to a lower capacity utilization. Compared to our second quarter guidance, our actual gross margin slightly exceeded the high end of the range provided 3 months ago, mainly due to more stringent cost control efforts and a slightly more favorable foreign exchange rate. We have just guided our third quarter gross margin to decline by 1.6 percentage points to 52.5% at the midpoint, primarily as the higher level of capacity utilization rate is offset by 2 to 3 percentage points margin dilution from the initial ramp-up of our 3-nanometer technology. Looking ahead to the fourth quarter, we expect the continued steep ramp-up of our 3-nanometer to dilute our fourth quarter gross margin by about 3 to 4 percentage points. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of N3, overseas fab expansion and inflationary costs, including higher utility costs in Taiwan. To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to sell our value. While we face near-term challenges, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2023 capital budget and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. Given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. We now expect our 2023 capital budget to be towards the lower end of our range of between USD 32 billion and USD 36 billion. Our depreciation expense is now expected to increase by mid-20s percent year-over-year in 2023, mainly as we ramp our 3-nanometer technologies. Despite near-term inventory cycle, our commitment to support customers' structural growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term market demand profile. We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge specialty and advanced packaging technologies to support their growth while delivering profitable growth to our shareholders. Now let me make a few comments on our cash dividend distribution policy. The objectives of TSMC's capital management are to fund the capital - the company's growth organically, generate good profitability, preserve financial flexibility and distribute a sustainable and steadily increasing cash dividend to shareholders. As a result of our rigorous capital management, in May, TSMC Board of Directors approved the distribution of NT3 per share cash dividend for the first quarter of 2023, and up from NT2.75 previously. This will become the new minimum quarterly dividend level going forward. First quarter '23 cash dividend will be distributed in October 2023. For 2023, TSMC shareholders will receive a total of NT11.25 per share dividend and at least NT12 per share cash dividend for 2024. Going forward, as our capital intensity begins to decline in the next several years, the focus of our cash dividend policy is expected to shift from a sustainable to a steadily increasing cash dividend per share in the next few years. Now let me turn the microphone over to C. C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand and inventory. We concluded our second quarter with revenue of USD 15.7 billion [ph] in line with our guidance in U.S. dollar terms. Our business in the second quarter was impacted by the overall global economic conditions, which dampened the end market demand and customers' ongoing inventory adjustment. Moving into third quarter 2023. While we have recently observed an increase in AI-related demand, it is not enough to offset the overall cyclicality of our business. We expect our business in the third quarter to be supported by the strong ramp of our 3-nanometer technologies, partially offset by customers continued inventory adjustment. In the last quarterly conference, we said we expect fabless semiconductor inventory to rebalance to a healthier level exiting the third quarter. This statement continue to hold true. However, due to persistent weaker overall mega economic conditions slower-than-expected demand recovery in China and overall softer end market demand conditions, customers are more cautious and intend to further control their inventory into 4Q '23. Thus while we maintain our forecast for the 2023 semiconductor market, excluding memory, to decline mid-single digit year-over-year, we now expect the foundry industry to decline mid-teens and our full year 2023 revenue to decline around 10% in U.S. dollar term. With such inventory control, we also forecast the fabless semiconductor inventory to exit 4Q '23 at a healthier and lower level as compared to our expectation 3 months ago. Next, let me talk about the HPC and TSMC's long-term growth outlook. As we have said before, the massive structural increase in demand for computation underpinned by the industry megatrend of 5G and HPC continues to drive greater need for performance and energy-efficient computing, which require use of leading-edge technologies. These megatrends are expected to fill TSMC's long-term growth. Even with a more challenging 2023, our revenue remains well on track to grow between 15 and 20 CAGR over the next several years in U.S. dollar terms, which is a target we communicated back in January 2022 Investor Conference. The recent increase in AI-related demand is directionally positive for TSMC. Generative AI requires higher computing power and interconnect bandwidth, which drive increasing semiconductor content. With using CPUs, GPUs or AI accelerator and related ASIC for AI and machine learning, the commonality is that it requires use of leading-edge technology and a strong foundry design ecosystem. These are all TSMC's strengths. Today, server AI processor demand, which we define as CPUs, GPUs and AI accelerators that are performing training and influence [ph] functions accounts for approximately 6% of TSMC's total revenue. We forecasted this to grow at close to 50% CAGR in the next 5 years and increase to low teens percent of our revenue. The sensible [ph] need for energy-efficient computation is starting from data centers, and we expect [indiscernible] proliferate to edge and devices of time, which will further long term, which will drive further long-term opportunities. We have already embedded a certain assumption for AI demand into our long-term CapEx and growth forecast. Our HPC platform is expected to be the main engine and the largest incremental contributor to TSMC's long-term growth in the next several years. While the quantification of the total addressable opportunity is still ongoing, generative AI and large language model only reinforce the already strong conviction we have in the structural mega trend to drive TSMC's long-term growth, and we will closely monitor the development for further potential upside. Now let me talk about our N3 and N3E status. Our 3-nanometer technology is the most advanced semiconductor technology in both PPA and transistor technology. N3 is already involved in production with good yield. We are seeing robust demand for N3 and we expect a strong ramp of N3 in the second half of this year, supported by both HPC and smartphone applications. N3 is expected to continue to contribute mid-single-digit percentage of our total wafer revenue in 2023. N3E further extend our N3 family with enhanced performance, power and yield and provide complete platform support for both HPC and smartphone applications. N3E has passed the qualification and achieved performance and yield target and will start volume production in the fourth quarter of this year. With our continuous enhancement of 3-nanometer process technologies, we expect strong multi-yield demand from our customers and are confident that our 3-nanometer family will be another large and long-lasting node for TSMC. Finally, I'll talk about our N2 status. Our N2 technology development is progressing well and on track for volume production in 2025. Our N2 top [ph] nanosheet transistor structure to provide our customer with the best performance, cost and technology maturity. Our nanosheet technology has demonstrated excellent power efficiency and our N2 watt delivered full node performance and power benefits to address the increasing need for energy-efficient computing. As part of N2-technology platform, we also developed N2 with backside power rail solution, which is best suited for HPC applications. Backside power rail will provide 10% to 12% additional speed gain and 10% to 15% large density boost on top of the baseline technology. We are targeting backside power rail to be available in the second half of 2025 to customers with production in 2026. We are observing a high level of customer interest and engagement at N2 from both HPC and smartphone applications. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy efficiency when it is introduced and to further extend our technology leadership right into the future. This concludes my prepared remarks, and now let me turn the microphone over to Mark. Mark Liu: Thank you, C. C. And good afternoon, everyone. Today, I want to talk about TSMC's global manufacturing footprint, status update. TSMC's mission is to be the trusted technology and capacity provider of the global logic IC industry for years to come. Our strategy is to expand our global manufacturing footprint to increase customer trust and to expand our future growth potential and to reach for more global talents. Our overseas decisions are based on our customers' needs and the necessary level of government support. That is to maximize the value of our shareholders and to fulfill our fiduciary duty. In Arizona, we are building our first fab to provide U.S. most advanced semiconductor technology in mass production to support the needs for U.S. semiconductor infrastructure. Our fab in Arizona started construction in April, 2021 with an aggressive schedule. We are now entering a critical phase of handling and installing the most advanced and dedicated equipment. However, we are encountering certain challenges, as there is an insufficient amount of skill workers with those specialized expertise required for equipment installation in a semiconductor grade facility. While we are working on to improve the situation, including sending experienced technicians from Taiwan to train the local skill workers for a short period of time. We expect the production schedule of N4 process technology to be pushed out to 2025. In Japan, we are building a specialty technology factory, which will utilize 12, 16 and 22, 28 process technologies. Volume production is on track for late 2024. In Europe, we are engaging with customers and partners to evaluate building a specialty fab in Germany, focusing on automotive specific technologies based on the demand from our customers and the level of government support. In China, we are expanding 28-nanometer in Nanjing as we planned to support our customer in China, and we continue to follow all rules and regulations fully. At the same time, we continue to invest in Taiwan and to expand our capacity to support our customers' growth. From a cost perspective, the initial cost of overseas fab are higher than TSMC's fabs in Taiwan due to: one, the smaller fab scale; two, higher costs throughout the supply chain; and three, the early stage of semiconductor ecosystem on those overseas sites, as compared to a matured ecosystem in Taiwan. In our recent meetings with senior government officials in the U.S., Japan and Europe, we discussed our plans to expand our global manufacturing footprint to them. We also emphasize one of our major responsibility is to manage and minimize the cost gap to maximize return for our shareholders. Those discussions went very well. All sites understand the critical and integral role TSMC plays in the semiconductor industry, and we appreciate all the government's ongoing support in working with TSMC to help narrow down the cost gap. We will continue to work closely with all the governments to secure the further support. Our pricing will also remain strategic to reflect our value, which includes the value of geographic flexibility. At the same time, we will leverage our fundamental competitive advantage of manufacturing technology leadership, large volume and economies of scale to continuously drive our cost down. By taking such actions, TSMC will have the ability to absorb the higher cost of overseas fab, while remaining the most efficient and cost-effective manufacturer no matter where we operate. Thus, even as we expand our capacity overseas, TSMC's long-term gross margin of 53% and higher and sustainable ROE of greater than 25% is achievable, and we will continue to maximize the value for our shareholders. This concludes our key messages. Thank you for your attention. Jeff Su: Thank you, Chairman. This concludes our prepared statements. Before we start the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Operator Instructions] Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Operator: The first one – question, Gokul Hariharan from JPMorgan. Go ahead please. Gokul Hariharan: Yes. Thank you. Good afternoon. And thanks for a lot of clarity on the AI-related exposure. My first question is on the AI front. A lot of TSMC's customers have been talking about capacity shortage and having to kind of queue up for capacity for AI accelerators, including GPUs and ASICs. Could TSMC talk a little bit about what TSMC is doing on the capacity side, especially on the advanced packaging, but also on other areas? And when do you expect to get back to some degree of demand and supply balance for these AI accelerators? Is it going to be only sometime next year? Or you think it could happen quicker based on what you see on demand from your customers and the capacity plan? Jeff Su: Okay. Gokul, thank you. Let me try to - please allow me to summarize your first question. So first question from Gokul is that he notes that we are - customers are seeing strong demand from AI-related, but they're facing capacity tightness or shortage. So his question is, what are we doing in terms of the capacity side, maybe both in terms of the advanced packaging, as well as the logic? And then when do we see the demand-supply imbalance returning to a better, healthier balance level? Is it sometime next year? Is that correct, roughly, Gokul? Gokul Hariharan: Yes. Right. C. C. Wei: Okay. Gokul, this is C. C. Wei. Let me answer your question. For the AI, right now, we see a very strong demand, yes. For the Tongan [ph] part, we don't have any problem to support. But for the back end, the advanced packaging side, especially for the cohorts, we do have some very tight capacity to - very hard to fulfill 100% of what customer needed. So we are working with customers for the short term to help them to fulfill the demand, but we are increasing our capacity as quickly as possible. And we expect these tightening will be released in next year, probably towards the end of next year. But in between, we're still working closely with our customers to support their growth. Gokul Hariharan: Okay. And C. C., maybe one follow up. Could you let us show what kind of capacity expansion, like how much capacity you're expanding on the cohort side? Like any kind of quantity, what kind of capacity you are adding? Jeff Su: Okay. So Gokul, just an additional to the first question, how much capacity are we going to increase in terms of cohorts [ph] C. C. Wei: Let me give you - I will not give you the exact number, but let me give you a roughly probably 2x of the capacity will be added. Okay, Gokul. Jeff Su: Gokul? Okay, Gokul, are you there? If not, operator, maybe we move on to the next participant. Gokul, are you there? Okay. I think there was - disconnected. All right. Let's move on to the next caller, person, please. Operator: Next one to ask question, Bruce Lu from Goldman Sachs. Go ahead please. Bruce Lu: Okay. Thank you for taking my question. I still want to know about like, the TSMC maintained the 15% to 20% up in CAGR, when we cut this year's revenue to minus 10%, right. That's all – will you use that 15% revenue CAGR to 2026, that seem slight above like 25-plus percent present data [ph] from the coming 2 years, which means that the overall semi growth is not increased like a lot for the next 2 years. And you just mentioned that the AI only accounts for 6% with low teens potentially. That is not big enough to get back to the trend. So what is the underlying growth you have with the global training in the coming years? And what are the key assumptions for the growth for each segment? Jeff Su: Okay. Bruce, let me try to summarize your first question. So Bruce's first question is on our long-term growth CAGR, which we have said is to be between 15% to 20% from '21 to '26 CAGR period. So Bruce's question, this year, C.C., just said we will decline around 10%. Under his calculation, I think he's saying, well, this implies you should grow 25% the next several years, which, of course, this is a CAGR, but nonetheless. And so Bruce's question is that, therefore, if that's the type of growth, then shouldn't that imply a much higher growth level for the overall semiconductor excluding memory industry. I think that is your question, Bruce. Am I correct? Bruce Lu: Yes. What are the key assumptions for this quarter? C. C. Wei: Okay. Let me handle this question. The - your rationale is correct. However, some of the factors may not be totally included. For one thing, in your model that the customer's gross margin, 60% plus, I don't think that will represent the average customer's gross margin and maybe some specific ones. However, the other one is the market share. The market share factor, you assumed the constant, that is not - one thing that could be different than in your formula. So the semiconductor growth, right now, we are forecasting 4% to 5%. It may increase, but definitely, as you said, it won't increase to 10%. But those longer-term semiconductor, excluding memory growth is still yet to be evaluated. Did I answer your question? Bruce Lu: Yes. But the reason - the reason I do that is I'm assuming that you have like 1 million [ph] market share in the advanced node and also the growth is mostly coming from an advanced node, which customers growth lines is supposed to be higher. So I think that the gap is wide enough. That's what I'm wondering right, whether I miss anything, which might be big enough to move the needle that might - investments that the management might - can give us some color? C. C. Wei: I don't - this is a factor. As far as the market share value, you might not totally included all the factors. That's my perspective. But I cannot dig into the numerical comparison at this point here. What I mean, the market share is not just the advanced leading-edge technologies, but also the share of the outsourcing. Jeff Su: So maybe, Bruce, if I summarize again, TSMC's growth is driven by both the underlying structural megatrends but also by our technology leadership and differentiation. So our CAGR is a combination of those two factors. Bruce Lu: Okay. Thank you. Jeff Su: Do you have any... Bruce Lu: Yes. My next question is regarding to the guidance changes. The previous guidance for the full year was long to mid-single digit, now is about like 10% decline. So the gap is like 5% of the total revenue, which is like quite sizable in terms of revenue. With that $3 billion, $4 billion highly concentrated in the second half of fourth quarter. Can you give us like what are the changes in terms of this shortfall? Where are the weakness come from? Jeff Su: Okay. So Bruce's, second question is looking at our 2023 full year guidance. He noticed last time, we had said low to mid-single-digit decline. This time, we have guided to around 10%. So his question is the delta of this seems to be all - a lot of it also in the fourth quarter. So what - is there any particular segment or market that is driving this? And what are the factors behind this? Is that correct, Bruce? Bruce Lu: Yes. Thank you. C. C. Wei: Okay. Bruce, let me answer the question. Yes, we did see something different. The first, the maker is weaker than what we thought. Three months ago, we probably - probably more optimistic, but now it's not. Also that is - for example, China economy’s recovery is actually also weaker than what we thought. And so the end market demand actually did not grow as we expected. So put all together, even we have a very good AIs processor demand is still not enough to offset all those kinds of macro impact. So now we expect that the whole year will become minus 10%. That's what we thought. Jeff Su: And in terms of by particular segment or is there a particular market? C. C. Wei: It's almost - well, thank you. You are asking me the question. It's almost intact... Bruce Lu: I understand my question. Thank you. C. C. Wei: Yes. It's overall market segment is being impacted because of - it's a combination of the macroeconomics. Bruce Lu: So can we conclude that other than AI, almost every application see some weakness in the second half? C. C. Wei: You got it. Bruce Lu: Thank you. Jeff Su: Okay. Thank you, Bruce. Operator, can we move on to the next participant, please? Operator: Next one to ask question is Gokul Hariharan from JP Morgan. Jeff Su: Gokul, you are back. Okay. Gokul Hariharan: Yes, sorry about that. So next question, just wanted to ask about TSMC management's view on the current inventory cycle. It looks like this cycle is a much - taking it much longer to get through the down cycle compared to '19 and 2015. When do you think we kind of bottom out? And do you feel that the recovery in next year is going to be a strong recovery? Or you think it's going to be a more gradual recovery? What are the kind of plans that we are putting in place as we think about next year's recovery once inventory situation last cycle [ph] Thank you. Jeff Su: Okay. So Gokul's second question is about the inventory correction cycle. He notes this cycle seems to be taking much longer to get through as compared to 2019 and/or 2015. So his second question is when do we think this cycle can bottom out? What will 2024 next year look like? Do we expect a strong recovery? And what factors are we looking at? Is that correct, Gokul? Gokul Hariharan: Yes. Thanks. Thanks a lot. C. C. Wei: Okay. Gokul, this is a good question. Let me answer it in a short one sentences, all about the bank core [ph] I mean I just say the macroeconomic is not so - it's become weaker than we thought. In fact, higher inflation and interest rate impact end demand in all market segments, in every region in the world. As we said, under such situation, our customers are more cautious in their inventory control in the second half of this year. So while we expect the fabless semiconductor industry, their inventory to be cleaner and healthier existing this year, but we're much closer to the seasonal level, but our expectation for them, they will continue to manage their inventory. And 2024, it is still dependent on the macro situation. Gokul? Gokul Hariharan: Okay. So, excuse me, so that - it sounds like you're still expecting at least early part of next year to still be a little bit challenging, similar to what it is looking like right now. Is that fair to say? C. C. Wei: Look, if you are... Gokul Hariharan: About next year... C. C. Wei: Gokul, we will give you our comment next time for 2024. Gokul Hariharan: Thank you. Jeff Su: Thank you, Gokul. Operator, can we move on to the next participant, please? Operator: Next one, we have Charlie Chan from Morgan Stanley. Charlie Chan: Hey, gentlemen. Good afternoon. Thanks for taking my questions. So my first question is about the overseas fab cost seems to get higher. So would the TSMC consider to further adjust your pricing to absorb those increased costs? And also management mentioned that you're doubling or more than doubling your advanced packaging, given the AI Russia [ph] order. Would that give you a chance to reprice the back end foundry service? Because I remember there was a kind of below company's gross margin average. Would that be a chance to bring that back to the corporate average? Thank you. Jeff Su: Okay. Charlie. Charlie's first question is, I guess, regarding pricing, two parts or two angles. First on the overseas fab, given that the costs are higher, would TSMC consider to further adjust our wafer price. And also along similar lines related to advanced packaging, given we are – C.C. said doubling roughly the capacity would we consider to also charge more or higher given that the returns of the back end are lower? Wendell Huang: Right. Let me answer the first question first. Yes, the overseas fab will cost higher, at least for the near future, where their supply ecosystem is not mature yet. And the labor cost is from our experience, actually it's a little bit higher than we expected. But to answer your question, yes, as we try to get the maximum government subsidy, and we also really look at the - how the price value for the overseas geographical flexibilities, these are all considered. The aim is to, one, to increase our customer trust, make them continue to work with us going forward under the geopolitical concerns. Secondly is to maximize shareholders' value. To answer your question on price is strategically yes. C. C. Wei: All right... Wendell Huang: C.C, can you answer second question? C. C. Wei: Okay. I think the second question is about the pricing or the - on the cohorts. As I answer the question, we are increasing the capacity as soon as possible manner, of course, not including actual cost. So in fact, we are working with our customers. And the most important thing for them right now is supply assurance, is supply to meet their demand. So we are working with them. We do everything possible to increase the capacity. And of course, at the same time, we share our value. Wendell Huang: And then... Charlie Chan: Thanks. So may I - may ask a second question, its a different topic. Is that, okay? Wendell Huang: Sure. Jeff Su: You get two questions. So, sure. Charlie Chan: Thank you. Thanks, Jeff. So another question is about the AI SME demand, right, since you're providing your revenue contribution, growth assumption that is super helpful. But I'm wondering how TSMC can judge the AI demand? Because right now, it's [indiscernible] right now, customers are very aggressive booking capacity. So I'm wondering how company can judge whether those AI SME demand is for real? And also in terms of breakdown, I'm wondering whether companies said ASIC, the customer ship is outgrowing GPU. I think the more important one should be the first part of the question, especially investors are concerned whether AI is cannibalizing the CPU server demand. So - so those are kind of the questions are in our mind. Thank you. Jeff Su: Okay. Let me summarize your second question, Charlie. Charges on AI demand. He wants to know how do we judge the demand properly because customers are very aggressive, but how in his words, how do we know that this demand is real. And then also, how do we see the demand specifically for ASIC as it relates to AI? Wendell Huang: Okay. You want to answer? C. C. Wei: Let me try first and you probably... Wendell Huang: Sure... C. C. Wei: This is a very deep question. Of course, we have a model, basically. The short-term fancy about the AI demand definitely cannot extrapolate for the long term. Neither can we predict the near future, meaning next year, how the sudden demand will continue or will flatten out. However, our model is based on the data center structure. We assume a certain percentage of the data center processor are AI processors. And based on that, we calculate the AIs processor demand. And this model is yet to be fitted to the practical data later on. But in general, I think the - our trend of a big portion of data center processor will be AI processor is a sure thing. And we can cannibalize the data center processors. In the short term, when the CapEx of the cloud service provider are fixed, yes, it will. It is. But as for the long term, when their data service, when the cloud services having the generative AI service revenue, I think they will increase the CapEx, that should be consistent with the long-term AI processor demand. And I mean, the CapEx will increase because of a generative AI services. Anything more for you? Wendell Huang: Yes, Charlie, I think part of Charlie's question is also how do we see ASIC related in AI development? C. C. Wei: Well, actually, the customer also have a high demand on the ASIC part for the AI application. And as Mark pointed out, a short-term sudden increase, you can extrapolate to be long term. But again, let me emphasize that. Those kind of application in the AI, be it CPUs, GPUs or AI accelerator or ASIC, they all need leading-edge technologies. And they all have one symptom. They are using the very large die size, which is TSMCs strength. Charlie Chan: Got it. Thank you. Thank you very much. Jeff Su: Okay. Thank you, Charlie. Thank you. Operator, we'll move on to the next participant, please. Operator: Next one to ask questions. Randy Abrams, Credit Suisse. Randy Abrams: Okay, yes. Thank you. I wanted to shift to the profitability, maybe more for Wendell. For - looking at the fourth quarter, you mentioned the 3 to 4 point dilution from N3. I think that is 2 to 3 points in the third quarter. Is that what you're suggesting, the directional change could be a little bit down margin profile? Or do you have positive offsets that could keep it more stable? And then a follow-up on the margin, where you discussed is a tough year for margins on these factors, like the energy ramp up 3. But could you discuss 2024, do you think we're going into a period of a bit more challenging profitability or you see factors that we could comfortably get back to the 53 and above next year? Jeff Su: Okay. Thank you, Randy. So Randy's first question is on gross margin. Fourth quarter with the N3 dilution of 3% to 4%, does that mean directionally, fourth quarter margin is sequentially down? Are there any positive offsets? And then for looking to 2024 for the full year, if Wendell can give some comments about 2024 gross margin, will it also be challenging? Or do we still feel confident in a 53% and higher gross margin? Wendell Huang: Okay, Randy. Starting from the second half of this year, as we said, we faced certain cost challenges, including the ramp up N3 which will dilute about 2 to 3 percentage points in third quarter and 3 to 4 in the fourth quarter, plus the higher electricity cost. But we're not giving our guidance on the fourth quarter at this moment. We're just spelling out some of the challenges that we're seeing. And of course, we are going to continue to drive down our costs and sell our value to ensure that we will have a good return on the node. That's for this year. For next year, we're seeing - we're not talking about the whole gross margin, but we still see that N3 will dilute about 3 to 4 percentage points of next year's gross margin. And although the yield will be better next year, at the same time, the percentage of revenue contributed by N3 will be bigger. So net-net, worth, we also see some dilution from the N3 next year. But the margin - the guidance will be given out next year. Randy Abrams: Okay. A quick follow-up to the first question. I think the last few nodes was 2 to 3 points dilution in the first year or 2 of ramp. The factor for it larger, is it the higher capital intensity or something different versus 3 - versus 5 and 7 or it looks like a little bit more dilution? Wendell Huang: Yes. The increasing process complexity does add on to the challenges of a newer node. However, the other important factor is that our corporate averages has become higher than before. We used to have 50% gross margin. We're now talking about 53% and higher gross margin, okay? Randy Abrams: Yes. Okay. And the second question, I wanted to ask how you're thinking about CapEx, just netting a few things, the geographic expansion, the 3 and then the start of 2-nanometer, the first ramp up or tool move in versus the mixed outlook you're looking at for macro for a ballpark CapEx into next year? And if I could maybe within it, ask if the Arizona fab delays, does that push out where you mentioned the low end of guidance, push out some of this year to get some lift to next year? Jeff Su: Okay. So Randy's second question is on CapEx. He wants to know basically focusing on 2024 CapEx to some of the delays in the Arizona fab push out CapEx from this year to next year, as we expand overseas, as we invest in N2, but at the same time as the macro remains uncertain, how does this impact 2024 CapEx? Wendell Huang: Yes. Randy, the push out of fabs does push out some part of the CapEx, but that doesn't affect a big part. For 2024, it's too early to talk about the overall CapEx. However, our CapEx, if you - as we said before, every year, we spend the CapEx to capture the future growth opportunities. And in the past few years, our CapEx has risen very fast to capture the megatrend. And going forward, the next few years, when we started to harvest those investment, we believe that CapEx will begin to level off in terms of dollar amount and that will lead to - start to lower the capital intensity in the next several years. Jeff Su: Sorry, Randy. Sorry, do... Randy Abrams: Yes, my quick follow-up. I think you mentioned that as you could use your 5-nanometer to support the ramp up 3. Given the AI and some of that pickup, do you still see that potential that could help optimize CapEx? Or do you need to keep it for existing node? And that's my final one. Thank you. Jeff Su: Yes. So Randy is just also asking then how does tool commonality play a role in our future CapEx? Wendell Huang: Yes. We always build two commonality between nodes to provide greater flexibility. We mentioned last time the strong multiyear demand from N3, we are able to support that using some of the tools from N5. We're not going to comment on the CapEx beyond this year. However, as I just mentioned, every year, the CapEx spend to capture the future growth opportunities. Randy Abrams: Thank you, Wendell. Wendell Huang: Okay. Jeff Su: Thank you, Randy. Operator, can we move on to the next participant. Operator: Next one to ask questions, Laura Chen from Citi. Laura Chen: Thank you very much for taking my question. Good afternoon, gentlemen. Very appreciate C.C. and Mark sharing on TSMC's view on the longer-term outlook in AI. So I'm just wondering how does TSMC evaluate your second capacity expansion to think with foundry and wafer side. Since there is no problem in the foundry space, were you kind of concerned about potential overcapacity in the back-end side beyond next year? Or actually, we may see more upside at the foundry wafer side. So our - say, like advanced node utilization rate may go higher into next year? Thank you. That's my first question. Jeff Su: Okay. So Laura's first question is looking at our expansion of advanced packaging or back end versus the front end wafer as we are expanding the back end, but not the front end, does that imply that first, that our front-end wafer particularly leading node, we expect the utilization to increase next year? And then conversely, or is there a risk that we are over expanding or overcapacity risk for the packaging side? C. C. Wei: Okay, Laura. Let me answer the question. AI today is a very hot topic. A lot of my customers right now increase their demand, and that will increase their front end demand, of course. TSMC almost have the major share or the largest share, let me say that in the front end wafer. According to the front ends adopting [ph] we really work closely with our customer and to decide what is the back end that they need. And so on that perspective, we are planning our cohorts capacity, although probably still not enough, but we're working very hard to increase it. Overcapacity, not today is a concern, that it is concerns, its not enough capacity to support all the very strong demand. Jeff Su: Okay. Thank you, C.C. Laura Chen: Yes. Thank you. That's very clear. Thank you very much C.C. And my second question is also about the gross margin outlook. If I am wrong, please correct me. I recall that the previous cycle, like 7 or 5-nanometer, the capacity usually will be three times in the third year of the new technology ramping. So I'm still - I'm wondering is still the case for N3. And particularly, we have seen that significant capacity intensity increase may lead some margin pressure, particularly in the first few years. So I'm just wondering how does TSMC balance your technology leadership and also the margin situation? Thank you. Jeff Su: Laura, you said three times - sorry, are you referring to the revenue contribution? Sorry, you said N7... Laura Chen: The capacity, yes. Jeff Su: Okay. So all right, let me try to summarize your question. I think Laura is asking N7, N5, we substantially expand the capacity. And so what is the case for N3 and then also in terms of the profitability of N3 or gross margin, to be more specific as it compares to N5 and N7 previously. Is that roughly correct, Laura? Laura Chen: Yes. Thank you, Jeff. C. C. Wei: Okay, Laura. Let me answer this question. As I just mentioned, the N3, due to the increasing process complexity is becoming more challenging than the previous nodes. We - but at the same time, we will continue to sell our value and drive down the cost at the same time. But the - we still believe that N3 will be a long-lasting and long lasting or a large node for TSMC. With all the efforts and we still believe that the whole company's gross margin will be 53% and higher. Jeff Su: Okay. Laura, does that answer your question... Laura Chen: Thank you. Really, appreciate. Jeff Su: Yes. Okay. Thank you, Laura. Operator, let's move on to the next participant, please. Operator: Yes. Right now, we have Rolf Bulk from New Street Research. Go ahead please. Rolf Bulk: Thank you for taking my question. This quarter, you're also using the legacy node 16 and 28-nanometer in particular, were down around 15% to 20% Q-on-Q. And my question is, were there any particular end markets that caused this decline? And how do you think about the recovery of those legacy nodes? Should we still expect recovery in the fourth quarter of this year? Or is that more 2024 event? Thank you. Jeff Su: Okay. So Rolf's first question is looking on the mature nodes, such as 16 and 20, 18 nodes – he notes, sorry, that those all saw sequential declines in the second quarter. So his question is, what is driving this - what end markets are driving this decline? And what is the expectation for this in the second half? C. C. Wei: Well, let me answer that question. The mature nodes wafer actually or the product actually try to be convenient for the smartphone or for the PC market or for the HPC. So while the total unit of smartphone become weaker and PC become weaker. So it's a high - the leading-edge technology node being also demand dropping and so the mature node. That's together. Did I answer your question? Rolf Bulk: Yes. Thank you. That's very clear. My second question, maybe you focus on cohorts and advanced packaging in general and also the weakness that you see in the remainder of your business. Could you maybe comment on the percentage of your CapEx spending that will go towards leading nodes, specialty nodes and packaging this year compared to last year? Jeff Su: Okay. So Rolf second question is for 2023 CapEx, which our CFO has said towards the lower end of the 32 to 36%range, can we give a breakdown between leading-edge, specialty technologies and then the packaging testing, mass-making and others. Wendell Huang: Leading-edge technology accounts for between 70% to 80% of our total CapEx in the year, mature specialty technology between 10% to 20%, and the remaining are split between advanced packaging and EBO and some others, okay? Jeff Su: Thank you, Rolf. Rolf Bulk: Perfect. Thank you. Jeff Su: All right. Operator, let's move on to the next participant, please. Operator: Next one, we have Sunny Lin from UBS. Sunny Lin: Thank you very much. Good afternoon. Thank you for taking my questions. So my number one question is on 3-nanometer ramp-up. As we are going through third quarters on mass production, I think you must have a pretty good visibility for customer engagement for the coming few years. So I wonder now how should we think about the overall ramp of 3-nanometer if we compare with 5 and 7-nanometer? If we look at 5, you reach towards 18% of revenue in the second year of mass production and then about 24% of revenue in the third year. Whereas for 3-nanometer, I think the concerns by smartphone customers have been on cost. Then the question will be if HPC is significant enough to still drive a meaningful pickup of 3-nanometer. And so it will be greatly appreciate if you could provide us any kind of thoughts. Thank you very much. Jeff Su: Okay. So Sunny's first question is on the ramp of 3-nanometer. Her question really, I believe, is coming from a percentage of revenue contribution. She wants to know how is the ramp-up 3-nanometer? And then can it contribute to the revenue like N5, N7 in the past? C. C. Wei: Yes. As I just said, we believe N3 will be a long-lasting and large node for TSMC. Now in terms of percentage, I think it's sometimes less important because our overall corporate revenue is much, much bigger these days than before. So I think you should also take that into consideration. But dollar amount-wise, it's a much bigger node. Wendell Huang: And C.C. also said it's a multiyear strong structural demand. Yes. I am sorry, okay. Sunny Lin: Got it. Well, so I have a quick follow-up on 3-nanometer profitability. And so Wendell has provided a pretty good insight about the dilution for 2024. But historically, a new node would take about 7 to 8 quarters to get to corporate average after mass production. I understand now corporate average gross margin is also higher. But any expectations that N3 will become in line with corporate average gross margin? Jeff Su: Yes. So Sunny's question is looking at the 3-nanometer. Her question is really that with 3-nanometer and process complexities. Sunny, you're asking really kind of reach the corporate average over time? Sunny Lin: Or is there a time line that you are expecting? Jeff Su: Or and time line to reach. Wendell Huang: Yes. Sunny, as I just mentioned, it's becoming more challenging for the leading nodes because of the process complexity increases a lot. It applies to N3. So it will be challenging for N3. And we actually mentioned that at the beginning of last year already, it will be challenging that for N3 to reach the corporate leverage in the - in 7 to 8 quarters time frame like before. Yes. But however, part of it is really because of the higher corporate margin that we currently have. Sunny Lin: Got it. Thank you. My second question is on 2-nanometer. And so if we look at your target for 2-nanometers improvement over 3-nanometer in terms of speed and power, the upgrade seems to be actually less than 3-nanometer over 5-nanometer. So I wonder what's actually the implication of GA [ph] transition to cost versus performance. Is the target somewhat conservative? Or there is other technological challenges that we need to consider? Jeff Su: Okay. Sunny, second was - it's really a third, but the question is on N2. She notes that the performance and the improvement seems to be less than 3-nanometer versus 5-nanometer. So could we talk more about that? C. C. Wei: Yes, let me answer the question. Sunny you have a very good observation. Yes, you are right. As I compare node to node from 5 to 3, the improvement, it becomes less from 3 to 2. But let me point it out, usually, we are talking about the performance, the speed and also the density so that the geometry shrinkage. Now we focus on the power consumption reduction, which is still a poor node as a performance because as time goes by more and more customer, really, they are increasing towards greater power efficiency. This is very important for the data center very important for the server. And that's what we are working on. So did I answer your questions, Sunny? Sunny Lin: Got it. Thank you for the color. And good to know that you are on track to deliver a second generation of 2-nanometer in 2026. Thank you. Jeff Su: Thank you, Sunny. Operator, let's move on to the next participant, please. Operator: Next one to ask questions, Brett Simpson from Arete. Brett Simpson: Yes. Thanks very much. And the first question is for C.C. I was interested in getting a read on the customer reception you're getting for the new variants for N3, I think you talked about N3P and 3x. Are customers still as focused on N3E or are you seeing a preference for them to migrate to the new variants such as N3P, N3X rather than the N3E. And this as a follow-on for AI, when do we actually start to see N3 adoption for N3? Thank you. Jeff Su: Okay. So Brett's first question is looking at our 3-nanometer families and the continuous enhancements that we always have. He is asking what is the customer reception of N3P and N3X? How does this compare or cannibalize N3? And when do we expect AI related to adopt 3-nanometer family solutions? C. C. Wei: Let me answer the last one first. AI application already adopting that our N3 technology node, we continue to improve our technology, as we always do. So we have an N3E, N3P, N3X, X is the actual performance that's for very high speed, very high let me say, performance computing for some of the CPUs application. But N3Es are widely accepted by all my customer and the design starting from N3E, and we help them for some of them go to the N3P. So all together, every version, every variation, there's a lot of customer engagement right now. Jeff Su: Okay. Thank you, C.C. Brett Simpson: And maybe just my second question for Mark. Mark, you were talking about the - building up the ecosystem in some of the overseas markets like the U.S., and you're talking about skill shortage. But can you talk about what you think the like-for-like wafer cost difference is to operate in the U.S. versus Taiwan? I think your TSMC Founder talked previously about a 50% premium to operate in the U.S. Can you just quantify if that's - if it's likely to be that high. And then when would you expect the cash support from the U.S. Chips Act to be made available to TSMC? Thank you. Jeff Su: Okay. So Brett, second question is for Chairman. He wants to know, in basically the cost gap, how big is the cost gap of fab in the U.S. versus in Taiwan. Founder has said 50% or more? Is it that high? And then concurrently, with the Chips Act, when or how and when do we expect to receive the incentives to support? Mark Liu: Yes, Simpson. I think the Founder is right. I mean at this point, if we're using the current supply chain and labor cost, indeed, as that differences. However, we try to work with the U.S. administration. First of all, on the subsidy, cash subsidy and tax - investment tax credit, that is to cover the gap in the first 5 years approximately. When the tool is depreciated, then the ecosystem becomes prominent. That is what is the material costs, chemical costs and the labor cost. And we are working with the - our supplier to set up some of the more efficient supply sites and to be lower, but the - and the U.S. administration has decided also to subsidize the supply - our suppliers. So that is still in the work. How much it can further decrease? I don't know. But I think either way, we will strengthen our pricing values and be able to keep the corporate profitability as we forecasted now. Jeff Su: Thank you, Chairman. Okay. Thank you, Brett. Brett Simpson: Thank you. Jeff Su: In the interest of time, operator, we'll take questions from the last two participants in the queue, please. Operator: Yes. Next one to ask question, Mehdi Hosseini from SIG. Mehdi Hosseini: Yes. Thanks for taking my questions. I'm going to go back to the gross margin. And I think you highlighted the fact that for '23, you're still tracking to 53% gross margin on a USD basis. That would imply that Q4 could be flat to up. And I just want to better understand how it's tracking. I'm not asking for a guide on Q4, but if 2023 gross margin is going to be 53% plus, so that would imply Q4 flat to up. Is that correct? Jeff Su: All right, Mehdi. I think we'll let Wendell answer this question. But Mehdi is asking basically, are we saying that 2023 will be 53% and higher? Wendell Huang: Mehdi, we're not giving our guidance beyond this third quarter. So we're not saying what Jeff just said. What we're saying is only some of the negative factors will affect the second half of the year. As to 53% and higher, that's a long-term growth margin target for TSMC. Jeff Su: Yes. We did not provide a guidance for 2023 specifically, Mehdi. As Wendell just said, 53% higher is our long-term target, which we believe is achievable. Do you have a second question? Mehdi Hosseini: Okay. Thank you. Yes. Your updated guide suggests that revenues in the second half would be up 10% to 12% versus the first half. Obviously, a step-up is lower than prior expectations. What I want to better understand is how should we think about continued inventory correction among your customer versus new product ramp by some of the other customers. Is there any way you can differentiate these two trends? Jeff Su: Okay. Mehdi is asking with our full year guidance, it implies a more mild second half seasonality. So he wants to know how much strength of the new customer product launches is offset by continued inventory correction. Sort of if we can provide more color on that. C. C. Wei: That's a tough question to answer. Mehdi, your observation is right. Our second half seasonality is more minor than previous years. But of course, we have N3 ramp up and for the new product launch. But what is the impact, how to separate them. No, I cannot share too much of the detail of that. Jeff Su: Okay, Mehdi. Thank you. Operator, then let's move on to the last participant, please. Operator: Yes. The last one on queue is Charles Shi from Needham. Charles Shi: Thanks. Hi, thanks for squeezing me in. I have two questions. The first question is I want to ask about AI, especially around TSMC's monetization of AI trend. We did hear some commentary that for certain AI applications, TSMCs is selling chips for a few hundred bucks, but TSMC customers can actually sell for 10 bucks, thousands of bucks to their end customers. So I mean, some investors I spoke with really still – it pain them to see TSMC to create an advanced technology to probably give the greater value than this. So the question really is how does TSMC think about maybe a monetization going forward for the capability to produce all these AI chips. And really I want to tie back to one thing management mentioned in the prepared remarks, the AI growth, 50% CAGR, how much of that is volume? And how much of that could be the pricing driven IN terms of TSMC expected the growth over the next few years in areas? Thank you. Jeff Su: Okay. Charles, his question. First is on AI. Again, basically, he's asking about monetization or capturing value, let's say. He notes that TSMC, we may be selling chips for a few hundred dollars, but our customers are able to sell it for tens of thousands or even more. So is TSMC giving away too much of the value? Can we better sell our value or monetize to capture greater value with the AI trend? C. C. Wei: Well, Charles, I used to make a joke on my customers say that I [indiscernible] a few hundred dollars of a chip and then he sold it back to me with USD 200,000. But let me say that, we are happy to see customers doing very well. And if customers do well, TSMC does well. And of course, we work with them and we share our value to them. And fundamentally, we want to say that we are able to address and capture a major portion of the market in terms of a semiconductor component in AI. Did I answer your question? Charles Shi: Yes. What about the part about 50% CAGR, how much of that is volume? And should we expect some pricing element in that, the long-term growth? Jeff Su: Yes. So the second part is about close to 50% CAGR for AI - sorry, server with AI processor. How much of that is volume? How much of that is price? C. C. Wei: We cannot separate out, but let me share with you again, we talk to the customers because we have a major share of all the leading-edge technology node. So we know that we can make our judgment and so we forecast a 50% CAGR. How much of that is on the front end, back end or others? I am not able to share with you about it. But let me assure you that TSMC is going to capture a major portion of the market in terms of semiconductor component. Jeff Su: Okay, Charles? Charles Shi: Thank you. Can I ask you a second question? Jeff Su: Last question. Charles Shi: Yes, no problem. Last one. May I ask about the CapEx. I think I heard a comment that maybe some window about our dollar amount. CapEx stock is going to level up from here. And I think the management used to point us analysts to look at the 2010 to 2013 period with a high capital tenancy. CapEx actually went up $3 billion, $4 billion per year to 10. And actually, after that, TSMC CapEx did a level off around $10 billion level for roughly 5 years until 2019. By telling us the CapEx is probably going to level off, are you telling us or are you alluding to maybe there will be some steady state CapEx numbers going forward, maybe starting from '24 or '25, around NT30 billion-ish [ph] level. That's just a clarification on that comment to level it up. Thank you. Jeff Su: Okay. So Charles, second question is on our CapEx. He wants to know capital spending starting to level off. I think Wendell said in the next several years. So not any specific, but what does that mean? Is it going to stay around the 30-some level? Or what does that mean by spending leveling off? Wendell Huang: Yes. The - Charles, as I mentioned in the past few years, our CapEx increased dramatically from NT10 billion to NT36 billion last year. As we start to harvest those investments, the increase in CapEx will be slower than before. That's what I mean by leveling off. Jeff Su: Okay. All right, Charles. Charles Shi: Okay. Got it. Jeff Su: Okay. Thank you. Charles Shi: Yes, thank you. Jeff Su: Okay. Operator, this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the call will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, both of which you can be find and available through TSMC's website at www.tsmc.com. So thank you for joining us today. We hope everyone continues to stay well. Have a good rest of the summer, and we hope you will join us again next quarter. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's First Quarter 2023 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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. [Operator Instructions]. 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 first quarter 2023, followed by our guidance for the second quarter 2023. Afterwards, Mr. Huang, and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for questions and answers. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the first quarter 2023. After that, I will provide the guidance for the second quarter 2023. First quarter revenue decreased 18.7% sequentially in NT or 16.1% in U.S. dollar as our first quarter business was impacted by weakening macroeconomic conditions and softening end market demand, which led customers to adjust their demand accordingly. Gross margin decreased 5.9 percentage points sequentially to 56.3%, mainly reflecting lower capacity utilization and a less favorable foreign exchange rate, partially offset by a more stringent cost controls. Total operating expenses accounted for 10.8% of net revenue, which is lower than the 12% implied in our first quarter guidance mainly due to stringent expense control and lower employee profit sharing. Operating margin was 45.5%, down 6.5 percentage points from the previous quarter. Overall, our first quarter EPS was TWD 7.98 and ROE was 27.5%. Now let's move on to revenue by technology. 5-nanometer process technology contributed 31% of wafer revenue in the first quarter, while 7-nanometer accounted for 20%. Advanced Technologies, defined as 7-nanometer and below, accounted for 51% of wafer revenue. Moving on to revenue contribution by platform. HPC declined 14% quarter-over-quarter and accounted for 44% of our first quarter revenue. Smartphone declined 27% to account for 34%. IoT declined 19% to account for 9%. Automotive increased 5% to account for 7% and DCE decreased 5% to account for 2%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD 1.59 trillion or USD 52 billion. On the liability side, current liabilities decreased by TWD 71 billion, mainly due to the decrease of TWD 65 billion in accounts payable. On financial ratio, accounts receivable turnover days decreased 2 days to 34 days, while days of inventory increased 3 days to 96 days. Regarding cash flow and CapEx. During the first quarter, we generated about TWD 385 billion in cash from operations, spent TWD 302 billion in CapEx and distributed TWD 71 billion for second quarter 2022 cash dividend. Overall, our cash balance increased TWD 42 billion to TWD 1.39 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled $9.94 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business in the second quarter to continue to be impacted by customers' further inventory adjustment. Based on the current business outlook, we expect our second quarter revenue to be between to USD 15.2 billion and USD 16 billion, which represents a 6.7% sequential decline at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 30.4, gross margin is expected to be between 52% and 54%, operating margin between 39.5% and 41.5%. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our first quarter '23 and second quarter '23 profitability. Compared to fourth quarter, our first quarter gross margin decreased by 590 basis points sequentially to 56.3% primarily due to a lower capacity utilization. Compared to our first quarter guidance, our actual gross margin exceeded the high end of the range provided 3 months ago, by 80 basis points, mainly due to more stringent cost control efforts. We have just guided our second quarter gross margin to be 53% at the midpoint mainly due to a lower capacity utilization rate and higher electricity costs in Taiwan. After last year's electricity price increase of 15% in the second half of 2022, TSMC's electricity price in Taiwan has increased by another 17% starting April 1 this year. This is expected to take out 60 basis points from our second quarter gross margin. We expect the impact from higher electricity costs to continue throughout the second half of this year and dilute our full year gross margin by about 50 basis points. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of N3, overseas fab expansion and inflationary costs, including higher utility costs in Taiwan. To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to sell our value. Excluding the impact of foreign exchange rate, which we have no control over, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about 2023 capital budget. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. As I've stated before, given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. That said, our commitment to support customers' structural growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term market demand profile. Thus we expect our 2023 capital budget to be between USD 32 billion and USD 36 billion. With this level of CapEx spending in 2023, we reiterate that TSMC remains committed to a sustainable and steadily increasing cash dividend on both an annual and quarterly basis. We will continue to work closely with our customers to plan our long-term capacity and invest in leading edge, and specialty technologies to support their growth while delivering profitable growth to our shareholders. Now let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand and inventory. 3 months ago, we said we expect fabless semiconductor inventory to start gradually reducing 4Q 2022 and we forecast a sharper reduction throughout the first half of 2023. However, due to weakening macroeconomic conditions and softening end market demand fabless semiconductor inventory continued to increase in the fourth quarter and exited 2022 at a much higher level than we expected. In addition, the recovery in end market demand from channels reopening is also lower than our expectation. Therefore, the fabless semiconductor inventory adjustment in first half '23 is taking longer than our prior expectation. It may extend into third quarter this year before rebalancing to a healthier level. For the full year of 2023, we do our forecast for the semiconductor market, excluding memory, to decline mid-single-digit percent while foundry industry is forecast to decline high single-digit percent. We now expect our full year 2023 revenue to decline low to mid-single-digit percent in U.S. dollar terms and our business to do better than both semiconductor ex memory and foundry industries, supported by our strong technology leadership and differentiation. We concluded our first quarter with revenue of USD 6.7 billion, which is towards the low end of our guidance range, provided in U.S. dollar terms. Moving into second quarter 2023, we expect our business to continue to be impacted by customers for the inventory adjustment. We now expect our revenue in the first half of 2023 to decline by about 10% over the same period last year in U.S. dollar terms as compared to mid- to high single-digit percent decline previously. Having said that, we believe we are passing through the bottom of the cycle of TSMC business in the second quarter. While we forecast only a gradual recovery, for the semiconductor ex memory industry in second half 2023, TSMC's business in the second half of this year is expected to be stronger than the first half, supported by customers' new product launches. Next, let me talk about our N3 and N3E status. Our 3-nanometer technology is the first in the semiconductor industry to high-volume production with good yield. As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023 supported by both HPC and smartphone applications. Sizable N3 revenue contribution is expected to start in third quarter and N3 will contribute mid-single-digit percentage of our total wafer revenue in 2023. N3 will further extend our N3 family with enhanced performance, power and yield and offer complete platform support for both HPC and smartphone applications. N3E has passed the qualification and achieve performance and yield targets and volume production is scheduled for second half '23. Despite the ongoing inventory correction, we continue to observe a high level of customer engagement at both N3 and N3E with a number of tape-outs more than 2x that of N5 in the first and second half year -- in the second year, I'm sorry. Our 3-nanometer technology is the most advanced semiconductor technology in both PPA and transistor technology. Thus we expect customers a strong multi-yield demand for our N3 technologies and are confident that our 3-nanometer family will be another large and long-lasting node for TSMC. Now I will talk about our N2 status. Our N2 technology development is progressing well and on track for volume production in 2025. Our N2 top neurosis transistor structure to provide our customers with the best performance, cost and technology maturity. Our nanosheet technology has demonstrated excellent power efficiency and our N2 deliver full node performance and power benefits to address the increasing need for energy-efficient computing. At N2, we are observing a high level of customer interest and engagement from both HPC and the smartphone applications. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy efficiency when it is introduced, and will further extend our technology leadership well into the future. Finally, I will talk about TSMC's global footprint and talent development status. As we have said before, we are expanding our global manufacturing footprint to increase customer trust, expand our future growth potential and reach for more global talents. In Arizona, despite some challenges in obtaining permits our fourth fab is scheduled to begin production of N4 processing technology in late 2024. In Japan, we are building a specialty technology fab the volume production is scheduled for late 2024. In Europe, we are engaging with customer and partners to evaluate the possibility of building a specialty fab focusing on automotive specific technologies based on the demand from customers and level of government support. In China, we are expanding 28-nanometer in Nanjing as planned to support our customer in China, and we continue to follow all rules and regulation fully. At the same time, we continue to invest in Taiwan and expand our capacity to support our customers' growth. In Kaohsiung, our fab construction continues, but we have adjusted our previous 28-nanometer expansion plan to now focus on capacity expansion for more advanced nodes, and we will remain flexible going forward. In terms of talent development, a key to TSMC's success is adherence to our core value of integrity, commitment, innovation and customer trust and our discipline and spirit of working together as 1 team. In both the U.S. and Japan, we recruiting from the top local colleges and universities and our progress is well on track. We have hired more than 900 US employees today in Arizona and more than 370 in Japan. We also plan to hire more than 6,000 employees in Taiwan in 2023. All of our hirings are to support our future growth potential. In addition to providing extensive training program for new overseas employees, many of them are brought to Taiwan for [indiscernible] experience in our fabs so that they can further their technical skills, while being emerged in TSMC's operation, environment and culture. As we expand our global footprint, our priority work continue to be identified, attract and hire talent whose core values and principles are aligned with TSMC's so that we can establish TSMC culture in all our employees, no matter where we operate. This concludes our key message. Thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. [Operator Instructions]. Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Operator: Yes, Jeff. The first one to ask a question, Gokul Hariharan from JPMorgan. Gokul Hariharan: First of all, can I talk -- can I ask a bit about the near-term demand dynamics? Could you talk a little bit about what you're seeing by segments? Is the inventory correction trend largely similar across HPC, smartphone, IoT and auto? Or are you seeing any different dynamics in these segments, especially auto, you saw some shortage still in the last quarter. And maybe also talk a little bit about 7-nanometer. Previously, we had an expectation, 7-nanometer will start recovering in second half of this year. Do we think 7-nanometer will still be recovering in second half? That's my first question. Jeff Su: Okay. Thank you, Gokul. Let me -- please allow me to summarize your first question. So Gokul's first question is more focusing on the near-term dynamics. He wants to know basically about the inventory trend across different segments and also the end demand status across the different segments, including auto. And then also, what about particularly for TSMC 7-nanometer status in terms of the utilization recovery. C. C. Wei: Okay. Gokul, let me answer the question. We observed the PC and smartphone market continue to be soft at the present time, while automotive demand is holding steady for TSMC and it is showing signs of soften into second half of 2023. I'm talking about automotive. On the other hand, we have recently observed incremental upside in AI-related demand, which helps the ongoing inventory digestion. What is the second question? Jeff Su: The second part is on 7-nanometer. We had really -- previously said 7-nanometer utilization is lower. Do we expect this to pick up or recover in the second half? C. C. Wei: It will be recovered but slowly. As I said, most of the N6 and N7's technology loading still in HPC and smartphone. However, looking into the future, some of the specialties such as RF, connectivity, WiFi, all those kind of things will start to build up the loading their demand. And we expect in the long term, 7-nanometers loading will become more healthier. Did I answer the question? Gokul Hariharan: Yes. That's very clear. My second question, I just wanted to get TSMC's opinion on competitive landscape. Your IDM competitor is getting into foundry. Intel has been claiming that they will be attaining process parity and then process leadership by 2025 and talking about engaging with several fabless companies. How does TSMC see this competitive threat? And how do you benchmark TSMC N3 and N2, which is coming in 2025 with Intel's offerings over the next, let's say, 2 to 3 years? And maybe I think TSMC has not commented about foundry market share for quite some time. So could you talk a little bit about what you see, N3 market share, in the next couple of years with TSMC now that you're ramping up that node as well. Jeff Su: Okay. Thank you, Gokul. Let me summarize your second question. A lot of it is related to the competitive landscape. I think Gokul's question is specifically in terms of IDM that has been claimed meaning it will achieve process parity in terms of technology with TSMC and absolute process leadership. So he wants to know and they're also talking about engaging with several large fabless customers. So Gokul would like to know how do we see or comment on this competitive threat. How do we benchmark our N3 or our N2 process technologies versus this IDMs offerings for the next 2 to 3 years. And lastly, if we have any comment on what market share we believe we can achieve. C. C. Wei: That's a long question. Gokul, this is C.C. Wei again. Let me say that, as usual, we don't comment on our competitors' status, but then we emphasize again on our 3-nanometer and 2-nanometer. Our 3-nanometer is the first in the semiconductor industry to high-volume production. And I believe it is the most advanced semiconductor technology in both PPA and transistor technology. And for 2-nanometer technology, that was, again, to be the most advanced semiconductor technology in the industry and when we introduce into mass production. And this one, we're fully confident that we will further extend our leadership position well into the future. As for the market share we are very confident that we continue to have a very high market share. And I cannot tell you that the real number, but very high percentage. Gokul Hariharan: Okay. Maybe if I ask- thanks C.C. for that, if I ask, is N3 -- your expectation that N3 market share will be higher than N5 at the same time based on what you see today? C. C. Wei: Very hard to answer your question, but let me say that it's well very similar in a very high percentage. Jeff Su: Okay. Thank you, Gokul. Operator, can we move on to the next participant, please. Operator: The next one to ask questions, Bruce Lu from Goldman Sachs. Bruce Lu: I want to ask about AI, for the machine learning AI, which management has been saying that, that is a key growth driver. Can we have more quantitative implication to TSMC? What is the dollar content per server or how big the addressable market for TSMC in 2025? Is the reason new AI or ChatGPT, the business already embedded in your long-term growth target, which is 15% to 20%? Or can we see some incremental upside? Jeff Su: Okay. Bruce, thank you. So Bruce's first question is around, I guess, AI and machine learning. He wants to know if we have any quantitative numbers to give in terms of, for example, dollar content -- sorry, semiconductor content per server, dollar value or in terms of the addressable TAM. How do we see this growth of this market? And have we already embedded this into our forecast. Is that correct, Bruce? Bruce Lu: That's right. C. C. Wei: Bruce, let me answer this question. We certainly, we have observed an incremental increase in AI-related demand. It will also help the ongoing inventory digestion. The trend is very positive for TSMC. But today, if you ask me to quantitatively to say that how much of the amount increase or what is the dollar content in the server, it's too early to say. It still continue to be developed. And ChatGPT right now reinforce the already strong conviction that we have in HPC and AI as a structurally megatrend for TSMC's business growth in the future. Whether this one has been included in our previous announcement that said that we have a 15% to 20% CAGR, the answer is probably partly yes, because of -- for [server] (ph), we have accelerated into our consideration. But this ChatGPT is a large language model is a new application. And we haven't really have a kind of a number that put into our CAGR. But is definitely, as I said, it really reinforced our already strong conviction that HPC and AI will give us a much higher opportunities in the future. Jeff Su: Okay, Bruce. Does that answer your first question? Yes, sorry, go ahead. Bruce Lu: Yes. Yes, I want to move on to a different topic, which is the cash dividend. I mean TSMC distribute like -- dividend policy was 70% of the free cash flow. And we do see the free cash flow is getting stronger, especially CapEx growth rate is slower, especially for next year. Can we expect TSMC to maintain the dividend policy, which is 70% of the free cash flow next year? Or we would like to improve our balance sheet given the current rate hike environment. Jeff Su: Okay. Thank you, Bruce. So Bruce's second question is around our cash dividend policy. He notes that in the past, we have said our cash dividend will be based on 70% of free cash flow distribution. But his question is, as our CapEx is slowing, our free cash flow is going stronger. Do we still adhere to 70% of free cash flow or because of the environment, are we more focused on, I think, Bruce, in terms of maintaining a -- improving our balance sheet strength. Wendell Huang: Okay, Bruce. This is Wendell. Let me make a few comments on the dividends. TSMC is committed to a sustainable and steadily increasing dividends. During the periods of high capital intensity or high capital investment, more of the focus is on sustainable. But when we start to capture and harvest the capital investment spend, the commitment is -- or the focus is more towards steadily increasing. The 70% ratio is a guidelines. Let me give you an example. If in the particular year, the free cash flow is much lower because of higher CapEx or lower profit than the -- to maintain a sustainable dividend, the ratio of free cash flow to be dispersed could be higher. And on the other hand, in a year where free cash flow is particularly high, the ratio can be 70%, but it can be lower because we need to look forward into the year behind that specific year, and to make sure it is sustainable. Okay, does that answer your question? Bruce Lu: Yes. Yes. But if we do see a comfortable range about the free cash flow, we still expect like reasonable high payout ratio, right? Wendell Huang: Yes. Yes. As I said, the principle is 70%, but it has to be sustainable and steadily increasing. Bruce Lu: I understand. Jeff Su: Thank you, Bruce. Operator, can we move on to the next participant, please. Operator: Next one to ask questions, Randy Abrams from Credit Suisse. Randy Abrams: I wanted to ask a question just on the CapEx in 2 parts. First, as you look at the 3-nanometer where you mentioned supply still short of demand and have a lot of applications coming in. Do you have plans for potential reuse of 5-nanometer in the next 1 to 2 years as you bring up more of the 3-nanometer? And then the second part of the question, I wanted to ask more on that Kaohsiung fab shift. If you could go through why the plan to pull back on 28. And then with the intention for where you would shift that investment. Because I know you did cancel the 7-nanometer for that line. So if you could discuss the change you're making to Kaohsiung and does it affect the timing to ramp that fab? Jeff Su: Okay. Thank you, Randy. So Randy's first question is kind of related to our CapEx and capacity plan. His question partly is in terms of C.C. noted that the N3 demand exceeds our ability to supply. So he's asking, will we consider to reuse or convert tools -- N5 tools to N3 in the next few years. And also, he wants to know related to our plans in Kaohsiung. What is the thinking or the reasoning for pulling back on the 28-nanometer expansion in Kaohsiung.. C. C. Wei: Okay, Randy. You got a very good question about whether we converted some of the N5's capacity to N3 because N3 today, we are short of support to our customer. Instead of saying the convert N5 capacity to N3, let me say that we developed a strategy and a methodology to make some of the N3's tool can be supported by N5. And we take this kind of flexibility into our consideration so that we can fulfill our commitment to support our customer in N3 as much as possible. Although still not enough, but we are doing that. So that answer one of your -- the first part of your question. You asked about Kaohsiung's TAM. Let me say that we look at the market situation today, and we are going to build -- initially the 28 nanometers that demand is so high so that we have to put Kaohsiung into our consideration. However, the market situation is so dynamic, and we look at our plan. One of the plan is in Japan, we build a new fab for 28 nanometers of specialty. By the way, TSMC expand the mature node's capacity or for specialties. We don't increase capacity just for pure logic application. The other one, no, we don't do. So in order to avoid some of the overcapacity. So we built 1 in Japan. We're also expanding our capacity, 28-nanometer capacity in Nanjing. That's the second one. And then we are considering of the euro. That might be the third one for automotive application. Put all 3 together, we don't think today that Kaohsiung's -- if we build 28-nanometer probably, it won't be kind of financially feasible. So we diverted now adjusted to become a more advanced node, which we are still in shortage. And Kaohsiung is so close to Tainan so that we can have more flexibility in between. Randy, did that answer your question? Randy Abrams: Yes. No, that's helpful. It sounds like it will be very much advanced capacity than like the 5, 3 and below. And just -- maybe I have one follow-up on the first question is on the CapEx framework. With the expectation second half kind of rebound with the share gains comes through considering the new nodes more capital-intensive, should we think of this CapEx having an up direction as we look ahead to next year? Jeff Su: Okay. So Randy, I'll allow this to be a follow-up, but Randy's question is basically, well, considering the second half business will be stronger. I think, Randy, basically, you're asking, we have provided the guidance range of between $32 billion to $36 billion. Are you asking could that be upside or revised higher, is that correct? Randy Abrams: Yes, more the framework into next year since this is more kind of prudent management, a bit recessionary. Wendell Huang: Randy, let me answer that. As we stated before, every year, our CapEx is spent for the opportunities in the future years. So although there are short-term cyclicality in the industry, but we believe if the structural long-term demand is there, and the future opportunities is there, and we will continue to invest. That will be the framework that we can provide to you. Jeff Su: Okay, Randy. You have a quick second question. Randy Abrams: Yes, I'll do the quick second. So for 2-nanometer, if you could clarify the ramp, do you expect this steep ramp to be in 2025? Or is it more 2026? And do you also view that ramp being much more with the SOIC, the back-end integration throughput? Jeff Su: Okay. So Randy, second question is on 2-nanometer. We have said volume production in 2025. Will the large volume be in '25 or '26 as part of this question. And does this mean you will go hand-in-hand, I guess, with SoIC and advanced packaging? C. C. Wei: Randy, let me answer the question. 2-nanometer technology definitely will start to ramp in 2025. And you asked about the volume. The volume in 2023 certainly is much higher than 2025 because 2025 is the year. But saying that, I mean that we are having HPC customer and the smartphone customer now engaged with N2 and what we'll be ramping up in 2025. Now whether it's related to CHIPS Act or not, it depends on customers' product and their plan. And today, I don't have -- I cannot share with you all those kind of minor details because it's related to customer's product plan. Jeff Su: Okay. Thank you, Randy. Operator, can we move on to the next participant, please? Operator: The next one to ask question, Charlie Chan from Morgan Stanley. Charlie Chan: C.C., Wendell and Jeff, so first of all, congrats for the first quarter gross margin and great to hear that N3E continue to improve. So let me stay with the CapEx question for a little bit as my first question. So first of all, the major equipment supplier ASML, to suggest that EUV orders get pushed out a little bit. And we all know that your company is a major user of EUV. So can anyone answer the question? First of all, whether the CapEx this year will be lower end of your guidance range? And also for next year, whether your CapEx intensity would decline year-on-year given that EUV push out? Jeff Su: Okay. So Charlie's first question is related to CapEx. He points out that newspaper talks about EUV orders being pushed out. So his question is really for our CapEx in 2023, do we think it will be towards the lower end of the range? And then also any indication for 2024 in terms of both CapEx and capital intensity. Is that correct, Charlie? Charlie Chan: Yes. Jeff Su: Okay. Maybe Wendell can answer. Wendell Huang: Charlie, this is Wendell. First of all, we don't comment on specific suppliers or customers or competitors. Regarding this year's CapEx when we gave out the CapEx range, $32 billion to $36 billion, we have already started or tightened up our 2023 capital budget. At this moment, we believe this range is appropriate and it's prudent under today's economic environment, that range is still valid. Now for next year, it's too early to talk about next year. But as I just stated, if the CapEx spend this year will be for future years, and CapEx spend next year will be for even future years. So if we see the growth opportunities is there, then we will continue to invest. That's the main policy, the principle that we have. Charlie Chan: Yes. Yes, thanks for the clarification. So I guess the question is if, right, whether those growth drivers still there, meaning because it was outsourcing for 2024, and whether your customers are aggressively adopting your N3 and N2. Yes, I guess that's why we are concerned about whether 2024, you're reducing some CapEx. But anyway, let me shift to the next one. I think a lot of investors also quite interested about the U.S. CHIPS Act. So I remember Chairman showed some concern about those requirements. I'm not sure which one is specifically concerned, for example, I need to disclose customer information, profit sharing, some restrictions for the future China fab investments. So my question is that how TSMC is going to reconcile your own interest versus the U.S. government's requirement. And if it is hard to reconcile, whether TSMC would consider not to take U.S. government's grants. Jeff Su: Okay. So Charlie's second question is regarding the CHIPS Act. He notes we have recently said that some of the terms may be not acceptable. So he wants to understand how will TSMC reconcile its own interest versus some of the guidelines or guardrails around the CHIPS Act. And is there a possibility that we will not accept or participate in the CHIPS Act. Wendell Huang: Okay, Charlie, let me make a few comments on this one. We are currently in the application process and, therefore, we're not able to comment on specific details. However, we are in close and constant communication with the U.S. government so that we fully understand all the details and provide our feedback and comments to them. At the end, all the decisions that we make will be based on the best interest of TSMC. Operator: The next one to ask question, Brett Simpson from Arete Research. Brett Simpson: Yes. Wendell, I wanted to just talk a bit about Arizona. And now that you're scheduled to move into production next year and you've been hiring a lot of people, how do we think about the cost premium for TSMC operating in the U.S.? And then when it comes to the pricing for the wafers, would this be something that you charge a premium for, for accessing U.S. capacity? Or would you be sort of offering similar wafer pricing to what you offer in Taiwan? Jeff Su: Okay. Thank you, Brett. So Brett's first question is around -- regarding our Arizona fab. He notes that the volume manufacturing schedule is on track, and we've hired lots of people. So his first question is to Wendell around sort of what is the cost premium that we face in Arizona and how will we manage this, including our wafer pricing. Will we charge a different price for a different fab? Or how do we intend to do it? Wendell Huang: Okay, Brett. The overseas fab is indeed the cost is higher, at least in the first several years. And we stated last time that some of the components like the construction costs may be as high as 5x. Now the way to mitigate that, first of all, it's -- it represents our global expansion represent a value to the customers, then we will be selling that value as well. And secondly, because of our large base and volume, we'll be able to leverage that big base and volume to lower down the cost. And at the same time, of course, we will need to secure the necessary level of government support. So putting all these efforts together, we will -- our job is to minimize the cost gap and make appropriate return. For the whole company on a combined basis, the 53% and higher gross margin remains our long-term financial goal and is achievable. Brett Simpson: Great. And maybe just a follow-up. I wanted to ask about the subsidies that TSMC are getting today, particularly in areas like Japan. How much is this going to be in 2023? And are you expecting a meaningful increase in support in the second half of the year? I'm just trying to understand what's embedded in guidance and how to think about accounting for the support that you're expecting over the medium term. Jeff Su: Okay. So Brett has a quick follow-up with regards to Japan. His question in terms of the government support or incentives we may receive. How will we account for it? How much will it be in 2023 and how significant? Is it most of it in the second half? Wendell Huang: Okay. Brett, let me reply this matter. In Japan, we will -- our total CapEx is about $8 billion, and we expect about 50% to receive from the government. And we will be production -- stop production at the end of next year. So the incentives from the government will be according -- will be based on the progress that we are building our fabs. So that gives you some idea of how much we can receive this year and next year. How do we account for it? Basically, we will be -- that will be accounted for as an offset of depreciation. Okay? Jeff Su: Okay. Thank you, Brett. Operator, can we move on to the next participant then? Operator: Next, we have Sunny Lin from UBS. Sunny Lin: So my first question is on the pricing. So I think, just now, management again reiterated that your supply chain value is increasing and you look to sell that value. And so with that, as you are about to start ramping overseas capacity more significantly into next couple of years, how should we think about your ASP trend? Jeff Su: Okay. So Sunny's first question is also related to pricing. She knows that semiconductor industry value in the supply chain TSMC is increasing. Her question is that, Sunny, I believe as we expand our footprint and capacity beyond Taiwan and go overseas, what will be the ASP trend in the next few years. Is that correct? Sunny Lin: That's right. C. C. Wei: Okay. Sunny, I answer this question. First, actually, our pricing strategy actually is strategic and long term. We work with our customer. Yes, you are right. I mean, that the inflation or all others, the cost is increasing, especially in the overseas fab. However, we already put all those kind of things into consideration. And we have a lot of action items to work with internally and also with our partners, our supply partners and to lower down all the costs. And we're also working on the supply chain management. So we hope that we will control that, even with today's very tough situation. Sunny Lin: Got it. Sorry, if I could have a very quick follow-up. And so how should we think about the mechanism? For you to reflect that supply chain value, would it be an annual pricing negotiation? And I also wonder what's the customer feedbacks under the current situations. Jeff Su: All right. So Sunny wants to know how will we do the pricing. Is it on an annual basis? How -- what's the feedback from customers? C. C. Wei: Sunny, this is very specific, but let me emphasize again. Our pricing is strategic, and we reflect our value. Now our value includes the value of a geographic flexibility. Did that give you some hint? Sunny Lin: Got it. That's very helpful. My second question is on your CapEx expansion. And so I wonder, if we look at the equipment lead time, are you seeing ongoing improvement? What I'm trying to understand, if you need to tighten up the CapEx. But let's say, if later on, demand start to recover or get better into second half of the year, how much flexibility you have to pull in the equipment? Jeff Su: Okay. So Sunny's, second question is around capacity expansion and equipment lead time. She notes that we have said we're tightening up our CapEx this year and being prudent given the economic environment. But her question is if the demand recovers in the second half, how quickly can we adjust our equipment and capacity? And would the equipment lead time then become a bottleneck? Is that correct, Sunny? Sunny Lin: That's right. C. C. Wei: Okay. Sunny, this is a very, very good question. We are tightening up on the CapEx. But at the same time, we also remain flexible that once the demand pick up quickly, we should be -- have prepared enough capacity for our customers to grow. And so both factors are very important, and we are working with all the suppliers preparing for that. In fact, we are planning our long-term capacity expansion and then with some kind of adjustment in between. So we have a flexibility to increase quickly. We also have a flexibility to tighten the CapEx. But the main trend stays the same because we believe AI, 5G, the megatrend will continue to grow, and TSMC business will continue to grow. Jeff Su: All right. Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one, we have Laura Chen from Citi. Laura Chen: My first question is about the data center and server space. We know that in the high computing PC category that also includes some of the PC CPU or consumer-related applications. So that may show some weakness that we see the quarter-on-quarter decline in Q1. But I'm just wondering that since we see quite promising AI server growth, what's -- specifically, if we look at the AI-related contribution at current right now or what's the growth outlook you may be looking for? Jeff Su: Okay. So Laura's question, she notes that our HPC platform includes more consumer-facing things such as PC CPUs, but it also includes data and server -- data center and server, sorry. So her question is, really, I guess, what is TSMC's view on the growth outlook for AI data centers? And how significant this could be for HPC business. Laura Chen: Yes. So if we -- excluding those like gaming GPU or consumer PC CPU in this category, so what's the data center and server business looks right now? C. C. Wei: Laura, let me answer this question. We did see some positive signs of the people getting much more attention to AI application, especially the ChatGPT's area. However, as I said, quantitatively, we haven't have enough data to summing it up to see what is the contribution and what kind of percentage to TSMC's business. But we remain confident that this trend is definitely positive for TSMC. Jeff Su: And we don't break down our HPC platform into those type of subsegments. Laura Chen: Okay. Understood. And then my second question is also related to the high computing PC angle. Just wondering that your expansion and trend in advanced packaging, so we know that many of those like AI or server high-computing PC CPU, they require the advanced packaging like a CoWoS or a 2.5D, 3D packaging. So I'm just wondering that any more capacity you require right now. And what's the current capacity or revenue you can share with us and also the growth trend? Jeff Su: Okay. So Laura's second question is on the advanced packaging. She notes that applications like HPC, PC CPUs, et cetera, require CoWoS or 3D stacking, 3D IC advanced packaging technology. So her question is, what is the capacity expansion outlook or plan for our advanced packaging? And also what is the revenue growth outlook, I guess, over the next few years. Is that correct, Laura? Laura Chen: Yes. Wendell Huang: Okay. Laura, let me start. For the advanced packaging, the back-end services, we think that its growth in next about 5 years will be slightly higher than the corporate average. However, for this year, is -- the revenue will be lower than that of last year because of customer demand. Last year, the revenue accounted for about 7% of our total revenue. This year is somewhere between 6 to 7. So that should give you an idea of the overall packaging. Laura Chen: Okay. So in terms of the capacity, is there any change in this year versus last year? Jeff Su: So her question -- also a part of the question is specific to the capacity for packaging. What is the year-on-year growth in the advanced packaging capacity? C. C. Wei: Well, Laura -- no, no, no. I mean, that's -- semi says that, actually, just recently in these 2 days, I received a customer's phone call requesting a big increase on the back-end capacity, especially in the CoWoS. We are still evaluating that. Jeff Su: Okay. Thank you . Operator, please move on to the next participant, please. Operator: Yes. Next one to ask questions, Mehdi Hosseini from SIG. Mehdi Hosseini: Yes. Your guide for June and also 2023 revenue suggests revenues in the second half of the year would be up by 25% versus the first half. And what I want to better understand is how will new product ramps drive this growth. Is there anything quantitative or qualitative that you can offer us to understand the mechanics or the drivers behind this 25% growth in revenue from first half into the second half? And I have a follow-up. Jeff Su: Okay. Thank you, Mehdi. So Mehdi's first question is in looking at our guidance, his calculation implies around mid-20s half-on-half growth in the second half. So he wants to know how much is new projects or new business driving that percentage of the growth. C. C. Wei: Well, I can answer that question. To give you a hint, I mean, that we talk about customer's new product launch and which use a 3-nanometer. So you can understand that we start to ramp up 3-nanometer quickly because it fully utilize and still not enough to meet customers' demand. In addition to that, actually, all the platforms, their performance, their demand will increase in the second half. Mehdi Hosseini: So as these new products drive wafer shipment increase, we should assume that utilization rates would bottom in June and improve into the second half, right? Jeff Su: So Mehdi wants -- so can -- he wants to know, can you assume utilization bottoms in 2Q and improves in second half. Wendell Huang: Yes, Mehdi, that's a reasonable view. Jeff Su: C.C. has already said second half will be stronger than first half. Do you have a second question, Mehdi? Mehdi Hosseini: Yes. I have one for Wendell. This question comes from every earnings conference call, capital intensity. Should we assume that as you tighten your CapEx project for this year? And especially in the context of declining revenues for the whole year, are we at the tail end of elevated capital intensity? Or should we assume that you -- over the past couple of years, there has been significant investment and starting next year, you're going to be able to scale your revenues? Is that the right way of thinking about all these investments that you have done? Jeff Su: Okay. So Mehdi's second question is on -- around capital intensity. He wants to know, given the guidance we have provided for 2023, are we at the tail end of the higher capital intensity period or elevated capital intensity period? And then will we start to, I guess, harvest or see that capital intensity come down next year or into the next few years? Wendell Huang: Mehdi, I am not going to share with you the peak, where the peak is. But I can tell you from my current 5-year outlook, we are looking at about mid-30s percentage of capital intensity. Jeff Su: Thank you, Mehdi. Operator, let's move on to the next participant. Operator: Yes. The next one to ask questions, Krish Sankar from TD Cowen. Krish Sankar: My first one is on your comment that the N3 capacity will be fully utilized this year, is that capacity that will be online in the second half same or higher or lower than what you planned a year ago? And also at this point, do you see the N3 wafer demand profile to be similar or better than N5 at the same point in the cycle? And then I have a follow-up. Jeff Su: Okay. So Krish's first question is on N3 capacity. Note we said they will be fully utilized this year. He wants to know the capacity that we build or plan for N3 this year and in the second half. How does that capacity amount compared to what we expected a year ago? C. C. Wei: Well, I can answer the question. Actually, the demand is higher than we thought a year ago, and that's why that we need to work very hard to meet customer's demand. Did that answer your question, Krish? Krish Sankar: Got it, got it. And then just a quick follow-up. You spoke about AI being a positive and all the innovation happening in generative AI today. Just from a TSMC standpoint, is this fair to assume that what you're going through today is more on the training stage and therefore is more semiconductor and wafer intensive, but when you go into more inference, that intensity has to decrease? Is that a fair assumption? Or do you think that this level of intensity will continue growing from a TSMC standpoint for AI? Jeff Su: Okay. So Krish's, second question is regards to generative AI and these type of applications. His observation is that the majority is training today, which seems to be beneficial. But as training moves to inference, would it be less semi-intensive or semi content intensive? And then, therefore, would that be, i.e., lower benefit to TSMC? C. C. Wei: Krish, I mean, that today, your observation is right because, right now, most of the AI concentrate or focus on training. And in the future, it will be inference. But let me say that, no matter what kind of application, they need to use a very high-performance semiconductor component, and that actually is a TSMC's advantage. So we expect that semiconductor content starting from a data center for [indiscernible] to device and edge device or those kind of things, put all together, they need a very high-speed computing with a very power-efficient one. And so we expect it will add to TSMC's business a lot. Qualitatively, as I said, we didn't know yet. We hope that in the next few quarters, we can give a more clear picture. Jeff Su: Okay. Thank you. Operator, in the interest of time, we will take the last 2 questions from the last 2 participants, please. So can we proceed to the next participant? Operator: Next one is Brad Lin from Bank of America. Brad Lin: I have two questions, one on the internal organization change and the other on the recently announced strategic alliance. So while the global expansion is a key focus of TSMC, I noticed that TSMC set up a new unit called overseas operations office, OOO. What are the targets and impact that the TSMC management will look for from this new unit? That's my first question. Jeff Su: Okay. So Brad's first question is about our internal organization change. We set up an overseas office we call OOO. So he wants to know what is the purpose of this organization or office. What is its targets and purpose? C. C. Wei: Well, the purpose is very simple, because we need to have all the organization. Now the fab is overseas fab's number and the amount would be more and more. So we need to have a coherence or -- and the culture, everything aligned to the headquarter to TSMC's core value. So we established this overseas operation office to make sure that headquarter's support to each overseas fab, what is sufficient and enough. And so that the performance will be aligned or matched with the TSMC's fab in Taiwan. But more importantly, because of we have this organization, so we can help them to be succeed and, in the future, can be more profitable. Jeff Su: Thank you, C.C. Brad, do you want to -- yes, your second question. Brad Lin: Sure. So my second question will be on the recently announced strategic alliance. As there no migration is the foundry's competition focus, and we know that TSMC leadership in the leading edge. We recently see TSMC hang up with NVIDIA, Synopsys and ASML on 2-nanometer production and beyond. And what is the target? And how is the progress so far? And TSMC is currently the only foundry within that group. Should we expect an even larger gap to peers with this? Or should we allow more companies or competitors to join this group? Jeff Su: Brad, sorry. Let me clarify, make sure we understand your second question. So your second question is talking about, you call it, an alliance. But I think you referred to ASML and NVIDIA. So are you referring to this announcement recently of the -- what is called the cuLitho? Brad Lin: Exactly, yes, computational litho. Jeff Su: Yes. Okay. So -- okay. Got it. So Brad really wants to know what is management's view towards this recently announced cuLitho. What is the implication? And what does this mean for TSMC's competitiveness, sorry, going forward? C. C. Wei: Okay. That's a good question. It is initiative invented by TSMC's customer NVIDIA. And actually, we are working with them. And this, particularly the software and the hardware, together will help speed up computational lithography by moving expensive operation to GPU, which will help us deploy lithography solution like inverse lithography technology, deeper learning more broadly or et cetera. And because of this one, we got involved with our customer and our supplier. And we expect that this will give us some advantage over our cost improvement and also competition. Jeff Su: Sure. Thank you, Brad. Operator, then can we move on to the last participant, please? Operator: The last questions are from Charles Shi from Needham & Company. Charles Shi: I have a question about your CapEx. Maybe I want to start with one item you disclosed in your filings. On your balance sheet, you have an item called equipment under installation and construction in progress. That number has hit a record high, I think, over USD 40 billion as of the end of fourth quarter '22, which kind of means there are $40 billion investment. You put money in, but you are not harvesting that investment yet. But there's no revenue dollars being generated. But now I think you said you're tightening the CapEx for 2023, but you're reiterating that $32 billion to $36 billion CapEx. That seems to be adding on top of that $40 billion. A lot more investment is still expected in this year. So my question really is about this. Are you expecting a significantly higher incremental revenue opportunity in 2024 and beyond to justify that $40 billion plus, maybe another $32 billion investment? Or is the cycle time between you put the money in, put the investment into the time you harvest the investment, the generated revenue is getting a little bit longer than usual? So hopefully, you can clarify this. Jeff Su: Okay, Charles. That is a very long question. Please let me try to summarize it a little bit into 2 parts. I think Charles' question, he does rightly note that on our balance sheet, equipment under installation reached roughly about $40 billion at the end of 2022. He notes this is a very high level. His concern, maybe Wendell can address, as we also guided for $32 billion to $36 billion CapEx this year, so is this number going to only increase? And what is driving this? Is this preparing for significant revenue opportunities in 2024 and beyond? So this is his first question. Wendell Huang: Okay, Charles. The $40 billion asset under construction at the end of last year primarily come from 2 nodes, an N3 node and the N5 node. N3 node, that is because we're ramping up the N3 nodes. And N5, we continue to increase our capacity. Therefore, these 2 add together, you see a big -- a bigger asset under construction at the end of last year. From what I can see going forward, this number will be -- will gradually come down in the next few years. Jeff Su: Okay, Charles. Charles Shi: Yes. Maybe the other part of this question is because you are proceeding with that $32 billion to $36 billion, that -- it's hard for me to reconcile how this number comes down, at least in the next one year or so over the next 12-month horizon. How do I reconcile that? Or are you expecting, like, next year, there's going to be a significant revenue -- incremental revenue come in to TSMC? Wendell Huang: Charles, as we said, it's too early to talk about next year. But we also said that if we continue to see the future growth opportunities there, we will continue to invest. Charles Shi: May I ask the second question? Jeff Su: Sure. Charles Shi: Yes. So the second question is about CHIPS Act. I heard you provided some help to the question from another analyst. But can you kind of quantify the potential benefits from the U.S. CHIPS Act, the manufacturing incentives, which to my understanding, including both grants and investment tax credit? I know this is kind of relevant to our modeling going forward. And maybe if I may, can I ask -- one of your U.S. peers seems to be favoring investment tax credit over grants. They seem to only want the investment tax credit, not the grants. What is TSMC's thinking between these 2 different funding opportunities? Jeff Su: Okay. Thank you, Charles. So Charles' second question is around the CHIPS Act. He is asking if you can quantify the potential benefits, both in terms of grants and also in terms of tax credits. And also, do we favor one over the other or preference for one over the other? Wendell Huang: Charles, as I said, we are in the process of the application, so we're not in a position to disclose any details. I will refrain from sharing more information at this moment. Jeff Su: Okay. Thank you, Wendell. All right. So thank you, everyone. 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 30 minutes from now, and the transcript will become available 24 hours from now. Both of these will be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we look forward to joining us again next quarter. Goodbye, and have a great day.

Jeff Su: [Foreign Language] Good afternoon, everyone and welcome to TSMC’s Fourth Quarter 2022 Earnings Conference Call. This is Jeff Su, TSMC’s Director of Investor Relations and your host for today. 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 in 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 fourth quarter 2022, followed by our guidance for the first quarter 2023. 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 the 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 and which could actual results could differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears in our press release. And now, I would like to turn the call over to TSMC’s CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Happy New Year everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full year 2022. After that, I will provide the guidance for the first quarter 2023. First quarter revenue decreased 1.5% sequentially in U.S. dollar terms as our business was dampened by the end market demand softness and customers’ inventory adjustment despite the continued ramp up of our industry leading 5-nanometer technologies. It is at the low end of our previous guidance. In NT dollar terms, revenue increased 2% in the fourth quarter due to a more favorable foreign exchange rate. Gross margin increased 1.8 percentage points sequentially to 62.2% mainly due to a more favorable foreign exchange rate and cost improvement efforts, partially offset by lower capacity utilization. Total operating expenses accounted for 10.3% of net revenue. Operating margin was 52%, up 1.4 percentage points from the previous quarter. Overall, our fourth quarter EPS was TWD11.41 and ROE was 41.7%. Now, let’s move on to the revenue by technology. 5-nanometer process technology contributed 32% of wafer revenue in the fourth quarter while 7-nanometer accounted for 22%. Advanced Technologies defined as 7-nanometer and below, accounted for 54% of wafer revenue. On a full year basis, 5-nanometer technology contributed 26% of 2022 wafer revenue. 7-nanometer was 27%. Advanced Technologies accounted for 53% of total wafer revenue, up from 50% in 2021. Moving on to revenue contribution by platform. HPC increased 10% quarter-over-quarter to account for 42% of our fourth quarter revenue. Smartphone decreased 4% to account for 38%, IoT decreased 11% to account for 8%, automotive increased 10% to account for 6% and DCE decreased 23% to account for 2%. On a full year basis, all 6 platforms had year-on-year growth. HPC increased 59% year-on-year to account for 41% of our 2022 revenue. Smartphone increased 28% to account for 39%, IoT increased 47% to account for 9%, automotive increased 74% to account for 5%, and DCE increased 1% to account for 3%. Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of TWD1.56 trillion or $51 billion. On the liability side, current liabilities increased by TWD137 billion, mainly due to the increase of TWD48 billion in accounts payable, an increase of TWD93 billion in accrued liabilities and others. On financial ratios, accounts receivable turnover days remain at 36 days while days of inventory increased 3 days to 93 days. Regarding cash flow and CapEx, during the fourth quarter, we generated about TWD487 billion in cash from operations, spent TWD337 billion in CapEx and distributed TWD71 billion for first quarter 2022 cash dividend. Overall, our cash balance increased TWD47 billion to TWD1.34 trillion at the end of the quarter. In U.S. dollar terms, our fourth quarter capital expenditures totaled $10.82 billion. To recap our performance in 2022, we had a strong growth in 2022 as our technology leadership position enabled us to capture the industry’s megatrends of 5G and HPC. Our revenue increased 33.5% in U.S. dollar terms to reach $76 billion and 42.6% in NT terms to reach TWD2.26 trillion. Gross margin increased 8 percentage points to 59.6%, mainly reflecting a more favorable foreign exchange rate, value-selling efforts and cost improvement, partially offset by lower capacity utilization. Thanks to better operating leverage, operating margin increased 8.6 percentage points to 49.5%. Overall, full year EPS increased 70.4% to TWD39.2 and ROE was 39.8%. On cash flow, we spent $36.3 billion or TWD1.1 trillion in CapEx. We generated TWD1.6 trillion in operating cash flow and TWD528 billion in free cash flow. We also paid TWD285 billion in cash dividends in 2022, up from TWD266 billion in 2021. I have finished my financial summary. Now, let’s turn to our current quarter guidance. As overall macroeconomic conditions remain weak, we expect our business to be further impacted by continued end market demand softness and customers’ further inventory adjustment. Based on the current business outlook, we expect our first quarter revenue to be between $16.7 billion and $17.5 billion, representing a 14.2% sequential decline at the midpoint. Based on the exchange rate assumption of $1 to TWD30.7, gross margin is expected to be between 53.5% and 55.5%, operating margin between 41.5% and 43.5%. Starting in 2023, certain tax exemptions from the Taiwan government have expired. However, the government has recently passed the amendments to the statute for industrial innovations. All things considered, we expect our effective tax rate in 2023 and beyond to be approximately 15%. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our fourth quarter ‘22 and first quarter ‘23 profitability. Compared to third quarter, our fourth quarter gross margin increased by 180 basis points sequentially to 62.2%, of which 140 basis points was contributed by a more favorable foreign exchange rate. Meanwhile, cost improvement efforts also helped offset the impact from lower capacity utilization. Compared to our fourth quarter guidance, our actual gross margin exceeded the high-end of the range provided 3 months ago, mainly due to cost improvement efforts. We have just guided our first quarter gross margin to be 54.5% at the midpoint mainly due to a lower capacity utilization rate as customers further adjust their inventory levels and a less favorable foreign exchange rate. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of entry, overseas fab expansion and inflationary cost. In addition, R&D expenses accounted for 7.2% of our net revenue in 2022. In 2023, we as we increase our focus on technology development and add more resources, we expect R&D expenses to increase by about 20% year-on-year and account for 8% to 8.5% of our net revenue. To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to strategically and consistently sell our value. Excluding the impact of foreign exchange rate, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2023 capital budget and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. As I have stated before, given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. That said, our commitment to support customers’ structural growth remains unchanged and our disciplined CapEx and capacity planning remains based on the long-term market demand profile. In 2022, we spent $36.3 billion to capture the structural demand and support our customers’ growth. In 2023, our capital budget is expected to be between $32 billion and $36 billion. Out of the $32 billion to $36 billion CapEx for 2023, about 70% will be allocated for advanced process technologies, about 20% will be spent for specialty technologies, and about 10% will be spent for advanced packaging, mass making and others. Our depreciation expense is expected to increase by approximately 30% year-over-year in 2023 mainly as we ramp our 3-nanometer technologies. With this level of CapEx spending in 2023, we reiterate that TSMC remains committed to sustainable cash dividends on both an annual and quarterly basis. We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge and specialty technologies to support their growth while delivering profitable growth to our shareholders. Now, let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our 2023 outlook. Concluding 2022, the semiconductor industry growth excluding memory, was about 10%, while foundry industry increased about 27% year-over-year. TSMC’s revenue grew $33.5 million year-over-year in U.S. dollar terms. Our business was supported by our strong technology leadership and differentiation, even as our semiconductor inventory correction began to dampen the momentum in second half 2022. Entering 2023, we continue to observe softness in consumer end market segment, while other end market segments such as data center related have softened as well. As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduced sharply through first half 2023, to rebalance to a healthier level. In the first half of 2023, we expect our revenue to decline mid to high single-digit percent over the same period last year in U.S. dollar terms. Having said that, we also start to observe some initial signs of demand stabilization and we will watch closely for more signals. We forecast the semiconductor cycle to bottom sometimes in first half 2023 and to see a healthy recovery in second half this year. In the second half of 2023, we expect our revenue to increase over the same period last year in U.S. dollar terms. For the full year of 2023, we forecast the semiconductor market, excluding memory, to decline approximately 4%, while foundry industry is forecast to decline 3%. For TSMC, supported by our strong technology leadership and differentiation, we will continue to expand our customer product portfolio and increase our addressable market and we expect 2023 to be a slight growth year for TSMC in U.S. data terms. Next, let me talk about the N7, N6 demand outlook. 3 months ago, we set our N7, N6 capacity utilization in first half ‘23 will not be as high as it has been in the past 3 years due to end market weakness in smartphone and PCs and customer’s product schedule delay. Since then, the end market demand for smartphone and PCs has further weakened and the capacity utilization of N7, N6 is lower than our expectation 3 months ago. We expect this to persist through first half ‘23 as our semiconductor supply chain inventory takes a few quarters to rebalance to a healthier level and we expect a mild pickup in our N7, N6 demand in second half 2013 than our prior expectation. However, we continue to believe N7, N6 demand is more a cyclical issue rather than structural. We are working closely with our customers to develop specialty and differentiated technologies to drive additional wave of structural demand from consumer, RF, connectivity and other applications to backfill our N7, N6 capacity over the next several years. Thus, we are confident our 7-nanometer family will continue to be a large and long-lasting node for TSMC. Now, I will talk about our N3 and N3E status. Our N3 has successfully entered volume production in late fourth quarter last year as planned with good yield. We expect a smooth ramp in 2023 driven by both HPC and smartphone applications. As our customers’ demand for N3 exceeds our ability to supply, we expect the N3 to be fully utilized in 2023. Sizable N3 revenue contribution, we expect to start in third quarter ‘23 and N3 will contribute mid single-digit percentage of our total wafer revenue in 2023. We expect the N3 revenue in 2023 to be higher than N5 revenue in its fourth year in 2020. N3E will further extend our N3 family with enhanced performance, power and yield and offer complete platform support for both smartphone and HPC applications. Volume production is scheduled for second half ‘23. Despite the ongoing inventory correction, we continue to observe a high level of customer engagement at both the N3 and N3E with a number of tape-outs more than 2x that of N5 in its first and second year. Our 3-nanometer technology is the most advanced semiconductor technology in both PPA and transistor technology, thus, we expect customers a strong demand in 2023, 2024, 2025 and beyond for our 3-nanometer technologies and are confident that our N3 family will be another large and non-large node for TSMC. Finally, let me talk about our plans to expand TSMC’s global manufacturing footprint to increase customers’ trust and expand our future growth potential. TSMC submission is to be trusted technology and capacity provider for the global IC, logic IC industry for years to come. Our job is to provide the optimal solutions for our customers to enable their success, this including technology leadership, manufacturing, cost, trust and recently also including more geographic manufacturing flexibility. Based on customers’ request, we are increasing our capacity outside of Taiwan to continue to provide our customers the optimal solution they need to be successful. TSMC’s decisions are based on our customers’ need and the necessary level of government support. This is to maximize the value for our shareholders. Our decisions are also based on the talent pool, land, electricity and water needs for TSMC’s long-term growth. In the U.S., we are in the process of building two advanced semiconductor fabs in Arizona. Our U.S. customers welcome us to build capacity in the U.S. to support their needs and have placed their strong commitment and support. We had an opening ceremony on December 6 last year to celebrate the arrival of the fourth batch of state-of-the-art semiconductor manufacturing equipment and Fab 1 is on track to begin production of N4 process technology in 2024. We also announced the construction of a second fab, which is scheduled to begin production of 3-nanometer process technology in 2026. TSMC Arizona will continue to provide the most advanced semiconductor technology commercially available in the U.S., enabling next-generation, high-performance and low-power computing products in the future years. Each of our fab will have a clean-room area that is approximately double the size of a typical logic fab. We will also consider building additional mature node capacity outside of Taiwan. In Japan, we are building a specialty technology fab, which will utilize 12 and 16-nanometer and 22, 28-process technologies. Volume production is scheduled for late 2024. We are also considering building a second fab in Japan as long as the demand from customers and the level of government support makes sense. In Europe, we are engaging with customers and partners to evaluate the possibility of building a specialty fab, focusing on automotive-specific technologies based on the demand from customers and level of government support. In China, we expand 28-nanometer in Nanjing as planned to support local customers and we continue to follow all the rules and regulation fully. At the same time, we continue to invest in Taiwan and expand our capacity to support our customer’s growth. Our N3 has just entered volume production in Tainan Science Park. We are also preparing for N2 volume production starting in 2025, which will be located in Chengdu and Taichung Science Park. While capacity is not born overnight and takes time to build, we are committed to expanding our global manufacturing footprint to increase customer trust and expand our future growth potential. Depending on the demand from customers and level of government support, our 28-nanometer and below overseas capacity could be 20% or more of our total 28 and below capacity in 5 years or more time. While initial cost of overseas fab are higher than TSMC software in Taiwan, our goal is – and minimize the cost gap. Our pricing will remain strategic to reflect our value, which also including the value of geographic flexibility. At the same time, we are leveraging our competitive advantage of lost volume, economies of scale and manufacturing technology leadership to continuously drive cost down. We will also continue to work closely with our government to secure their support. By taking such actions, TSMC will have the ability to absorb the higher cost of overseas fabs while remaining the most efficient and cost effective manufacturer, no matter where we operate. Even we increased our capacity outside of Taiwan, we believe long-term gross margin of 53% and higher continue to be achievable and we can earn a sustainable and healthy ROE of greater than 25%, while delivering profitable growth for our shareholders. This concluding our key message. Thank you for your attention. Jeff Su: Thank you, C. C. This concludes our prepared remarks. [Operator Instructions] Now we will begin the Q&A session. Our Chairman, Dr. Mark Liu, will be the host. Mark Liu: Hello, everyone. It’s good to meet every one of you online again. At the beginning of the year, I wish you all stay healthy and have a happy new year. Now, let’s have answer your question. Jeff Su: Thank you, Chairman. Operator, let’s begin. Please proceed with the first caller on the line. Operator: Thank you. The first question is come from Randy Abrams with Credit Suisse. And Randy, please go ahead. Randy Abrams: Okay. Yes, thank you. I wanted to ask the first question just about the rising investment costs and also the cost differential with the U.S. Just based on the two press releases, the Taiwan fab, you cited Fab 18, about $60 billion investment for eight phases, which would be, I estimate about 200,000 capacity, that’s about $300 million per thousand wafer. The Arizona fab was $40 billion for about 50,000, $800 million per thousand wafers. So, just two questions on it. If you could maybe discuss a bit more if there is differences in those releases on the investment in calculation and a bit more color on the relative costs since you did the U.S. expansion? And then the second part of the question is, is the cost seeing a significant acceleration? It’s been rising with each new node. But are you seeing an accelerating pace as you move through 3 and 2-nanometer? Jeff Su: Okay. Randy, thank you. Please allow me to summarize your question. So Randy’s first question is he wants to understand, I think, he’s referring, I think, to our press release when we – about N3 in Tainan and the total investment there, and how does that compare to our announcement of the investment in Arizona for two phases. Randy, if I got you correctly, basically what Randy is asking is, what is the cost in the U.S. seem much higher in terms of the investment? So what is driving this big difference or a gap, so to speak. That’s the first part of your question, right, Randy. Okay. So that’s the first part. Randy Abrams: Right. Yes, that’s right. That’s the first part. Wendell Huang: Okay. Hi, Randy, this is Wendell. Let me share with you this. The Arizona fab, we make the decision based on customers’ request. And so we’re planning on building the two fabs, one N5, actually N4 and the other one N3. We’re not able to share with you a specific cost gap number between Taiwan and U.S., but we can share with you that the major reason for the cost gap is the construction cost of building and facilities, which can be 4 to 5x greater for U.S. fab versus a fab in Taiwan. The high cost of construction includes labor cost, cost of permits, cost of occupational safety and health regulations, inflationary costs in recent years and people and learning curve costs. Therefore, the initial cost of overseas fabs are higher than our fabs in Taiwan. Jeff Su: And I think the second part of Randy’s question was about the – how do we see the CapEx per K as we go from, I guess, Randy, you’re asking N5, N3 and 2. Randy Abrams: Yes, it’s seeing a faster pace of expansion through these next couple of nodes. Wendell Huang: Right. Randy, we’re not able to disclose the specific CapEx per K for each node, but certainly, the CapEx is, K is more expensive for a new node as the process capacity increases. Okay? Randy Abrams: Okay. And the second question, just on actually two areas that came up in the remarks. The R&D, the over 20% increase. If you could give a feel like what’s mainly driving that additional step up, is it the development cost for the new nodes, the packaging? Or is it some now expanding R&D into new geographic areas? And if I can fit in the second part, just the tax rate, Taiwan was hyping a pretty big program of CapEx and R&D, but tax breaks, but your tax rate is going up from 11% to 15%. Is that alternative minimum tax or global tax? Just want to understand why not any benefit from that? Jeff Su: Okay. So Randy’s second question, I guess, is sort of two parts financial related. First, we – our CFO said, our R&D spending will increase about 20% year-on-year. So Randy wants to know what is driving behind that? Is it customer going overseas? Is it more technology development as a technology leader, etcetera? And then the second part, he wants to understand the guidance of effective tax rate of 15% given the recent legislation passed in Taiwan. Why is it not lower? Wendell Huang: Okay. Randy, for the first question, we’re the technology leader, and we intend to continue to maintain the leadership. Therefore, we are devoting more and more resources in R&D, including people and other kind of resource. That’s the reason why our R&D expense will increase in 2023 and probably beyond. The other thing about tax in 2023, part of the tax exemptions – or incentives in Taiwan have expired. Without the new amendments to this industrial innovation, the statute of industrial innovation, our tax rate would have become between 18% to 19%. With this new amendment, our tax rates will drop to about 15%. Jeff Su: Okay. Does that answer your question, Randy? Randy Abrams: Yes, that does, I mean this mid-term R&D do you think the rate stays at this level or could go up one more? That’s my final one. Thank you. Wendell Huang: From what we are seeing at this moment, we expect the R&D to revenue ratio to be between 8% to 8.5% in the next several years. Randy Abrams: Okay, thank you, Wendell. Jeff Su: Thank you, Randy. Operator, can we move on to the next participant, please? Operator: Sure. And our next question is come from Bruce Lu with Goldman Sachs. Bruce, please go ahead. Bruce Lu: Okay, thank you for taking my question. The first question is focused on the overseas capacity expansion. So I think you just mentioned that even though we cannot disclose it, but the cost is definitely higher for the overseas capacity, but the management believes that the margin will stay the same. So I mean – I think I asked this question back to 2019, the manager was talking about the pricing will be the same across the board regardless of geographical locations. So what has changed now? So with the different pricing, can we say the overseas capacity will generate a similar return on profitability throughout the cycle? So – or what is the benchmark you’re looking for when you set of the different pricing scheme? Jeff Su: Okay. So Bruce from Goldman Sachs actually, his question is regarding – first question regarding overseas expansion. His question is we said overseas costs are higher, yet that – so his question is in regards to our pricing. Are we a higher price overseas? Or if it’s overall? And what is the benchmark that we use when we go overseas in terms of financial returns and price? Is that roughly correct, Bruce? Bruce Lu: Yes, that’s correct. Wendell Huang: Okay, Bruce, this is Wendell, we’re not able to comment on pricing details, but our pricing is always strategic and consistent to reflect our value. Now value to our customers as C. C. said in this statement includes technology leadership, manufacturing efficiency and quality, cost, trust and recently also includes more geographic manufacturing facilities. Therefore, our overall pricing will remain strategic to reflect our value, which includes the value of geographic flexibilities. Does that answer your question? Bruce Lu: Well, to some extent. Let me ask the question in different ways is that we do understand it will reflect TSMC’s value, i.e., geographical location is a bad, but at the end of the day, it’s a cost plus for everybody across the board. I mean, how confident that TSMC feels that the customers can swallow all the cost and the end customer with one of the costs, i.e., without triggering the potential wafer price inflation or semiconductor inflation at the end of the day with more and more global capacity for TSMC. Wendell Huang: Yes. Okay. Bruce, let me add that in C. C.’s statement, he also mentioned that we will – aside from selling our value, we will continue to drive down our cost, but also to leverage our competitive advantages of large volume, economy of scale and manufacturing technology leadership. And with all these actions plus the government support, we are able to absorb the higher cost of overseas fabs and maintain our long-term financial goals, gross margin of 53% and higher. C. C. Wei: Let me add some color. this is C. C. Wei. Actually, in our view, the semiconductor becomes more essential and more pervasive in people’s life. And the semiconductor industry value in the supply chain is increasing. And if we look at our customers’ performance, they are rising structural gross margin over the past 5 to 6 years, it continued to improve. That reflects what I just said, the semiconductor value has been recognized and also very important in our daily life. And so we set up our pricing strategy to reflect all the values we share to customer and customer also in the value from the end market. Jeff Su: Thank you, C. C. Bruce? Do you have a second question? Bruce Lu: Yes, please. The second question is for the N7. I think we spent some time for 7-nanometer, which is more cyclical. I think after 3 months, I think the correction is even bigger. So how – can you share us the full year outlook for 7-nanometer? When we can expect the customer or the 7-nanometer capacity return to normal back to like fully utilized? Or can we avoid the same cyclical symptom in 5-nanometer and 3-nanometer in 2, 3 years from now? Jeff Su: Okay. So Bruce’s second question was on 7-nanometer. So his question is 7-nanometer seems to have deteriorated versus 3 months ago. So what is our view? Can it fully recover in this year? And then I think, Bruce, the second part of your question is also how can we avoid the same cyclical systems at other nodes in the future. Is that correct? Bruce Lu: Yes. Jeff Su: Okay. C. C. Wei: So I answer this one? First, N7 most of business for TSMC in the last 2 years is from the PC and smartphone. And that happened to correct – or let me say that inventory correct happened to be the most severe one. And so the end market dropped most severely generally thought. In fact, the unit will not increase, but the content will be increased, so is demand be more softened than we thought 3 months ago? Why be repeated at 5 or 3? Cyclicality of the semiconductor always exist, but it’s unlikely this time the scenario was to be repeated because our current downturn actually, it’s kind of being enhanced or being degraded by the pandemic. Due to the pandemic, the digital transformation progress have been enhanced. And so the demand being increased dramatically. But then due to the pandemic, the supply chain disruption happened. And people during this time, probably changed their strategy or their thoughts on the inventory buildup. So artificially, the inventory has been built up quickly and dramatically. And then the response to the each industry are different. And so they manage the inventory correction also differently. This kind of phenomenon all because of – largely because of pandemic, and we don’t think that it will happen again. And in the next 5-nanometer, 3-nanometer, I believe TSMC and TSMC’s customer will be more prudent on planning that what is the demand and also the supply. Jeff Su: Okay. Bruce, does that answer your second question? Bruce Lu: Yes, let me follow-up a little bit. I mean C. C. just mentioned external factors, right? So what did TSMC do to avoid the same thing for 5 and 3 in the future for someone like if you are cutting your capacity plan into a more conservative way or something like that? Is that something we should expect in future nodes? Jeff Su: So Bruce is asking sort of a follow-on. So then with 7-nanometer, how do we avoid the same thing happening at 5 or 3 in the future? Will we cut our capacity? How do we change our capacity planning and build to avoid a similar situation? C. C. Wei: Bruce, this is a very good question. Actually, let me share with you how we deal with it. In fact, between the N5, N3, the technology node our capacity buildup and with a lot of tools that can be company used by these two nodes. So in fact, for TSMC to build capacity, we put N5, N3 and maybe in the future N2 as a total picture to look at it. And we will keep our flexibility to create or to adjust for the future. So we will be better prepared. That’s what I can tell you. Bruce Lu: That’s good to hear. Thank you. Jeff Su: Thank you, Bruce. Operator, can we move on to the next participant, please? Operator: Sure. And our next question is come from Gokul Hariharan with JPMorgan. And Gokul, please go ahead. Gokul Hariharan: Hey, thanks. Happy new year. And let me take my first question on the near-term 2023. So you mentioned first half, we have seen a worse kind of environment compared to 3 months back. Is it mainly HPC data center that has seen further reduction? Or are we seeing it across the board, including smartphone for first half? And also on second half, just putting in rough numbers on your guidance, looks like we are looking for a pretty sharp rebound in second half of 2023, something like 25% to 30% second half versus first half of this year. Could we have some more color on what is that gives you the confidence for such a strong rebound in the second half of the year to get us back to like a flattish revenue growth for the year? Jeff Su: Okay. So Gokul’s first question is on the near-term outlook. He wants to understand first half, we said the inventory correction in sharper. So he wants to understand what are we seeing in different end market segments? Is the sharper correction driven by data center? Is it smartphone PC? What are we seeing across the different segments first? C. C. Wei: Well, let me answer the question. The inventory correction actually began last year. And at the peak of the third quarter, and we think the inventory has been picked in third quarter last year and gradually reduced in the fourth quarter, and we did see some inventory reduced sharply recently, and it will continue to be so to first half of this year. So that’s why we say we have confidence that in the second half, the business will rebound. But is that a very strong V shape? We didn’t know yet, but certainly, it’s not a U shape for the business to recover in the second half. Gokul Hariharan: Okay. I think N3 is clearly one part of that ramp. But is there anything else that is – that you are already seeing that strong confidence for the second half rebound in addition to the N3 ramp-up? Jeff Su: Sorry. So Gokul is asking sort of in terms of second half, why can TSMC’s business be better than the overall industry besides N3. Are there any other factors when you think about technology leadership? C. C. Wei: Gokul, you are right. enters a ramp-up here of the business to rebound, and also actually, let me share with you some of the HPC customer. Also, I have a new product launch in the second half, especially in the AI area or in computing area. Did that answer your question? Gokul Hariharan: Understood. Okay, thank you. That’s my first question. Jeff, can I move on to the second one? Jeff Su: Yes, please. Gokul Hariharan: Yes, thank you. My second question is on CapEx and capital intensity. CapEx, we are taking it down a notch for this year given the downturn, I guess, and some conservatism. Are we already seeing the peak in CapEx intensity in the cycle? Or we are likely to given the plans in Europe plans to expand more capacity in U.S.? Are we likely to see higher CapEx intensity in the out years as well? Jeff Su: Okay. Sorry. Is that your okay, Gokul. I think I got the gist of your question. So Gokul’s second question is on CapEx and capital intensity. He notes this year, we have guided 32% to 36% given sort of some tightening up and such. So his question is – does this represent, have we already seen or past the peak in terms of our capital intensity this cycle, or as we may continue to evaluate and expand overseas and such? Will there be another step-up in our capital intensity? Wendell Huang: Okay. Gokul, this is Wendell. As we said before, we invest the CapEx this year for the growth in the future years. So we also said earlier that we are tightening up the spending where appropriate. But as long as we believe the growth opportunity is there, we will continue to invest. Now we’ve given the guidance for this year, so you can calculate the capital intensity. It will be over 40%. From what we are able to see at this moment, several years down the road, we’re seeing the CapEx intensity to be between mid to high 30s. That’s the current view. Gokul Hariharan: Thanks, Wendell. Is that several years like 5 years out or is it like close to like that? Wendell Huang: Yes. Something like that. Something like that. Gokul Hariharan: Okay, understood. Thank you very much. Jeff Su: Alright. Thank you, Gokul. Operator, can we move on to the next participant. Operator: Thank you. And our next question is come from Charlie Chan with Morgan Stanley. And Charlie, please go ahead. Charlie Chan: Thanks for taking my questions, gentlemen. So first of all, a question to C. C. And so thanks for your sharing during the [indiscernible] association, presentation on semiconductor challenge was pretty insightful. So my question is that you mentioned during your speech saying that the biggest change for semiconductor cost is getting higher, better long so-called [indiscernible] supply chain. So I wanted to ask C. C., what’s the true value add of worth low going forward becomes much more expensive and whether you really see that customers can continue to expand our gross margin and create value to this world. So this is my first question. Thank you. Jeff Su: Okay. So Charlie’s first question is around technology. He notes that the cost, I guess, and cost per transistor is getting higher and overall global costs are increasing as well. So his question is, what is the value or is there still value in the so-called Moore’s Law going forward? How does TSMC view this issue? C. C. Wei: Well, Charlie, let me share with you, nowadays, we look at our technologies value not only geometries shrinkage actually. More important actually is the power consumption efficiency. And also, we try to help our customers with our advanced 3D IC Fabric technology to improve the system performance, and that’s where it’s important. In the future, we want the world to be more greener more safer, better. So power consumption needs become very, very important. And while we still improve the system performance and that’s where our customer can get their value. And that’s what we view in the future. Charlie Chan: Thank you. Thanks for the explanation. So the follow-up to that is that we noticed that for your major smartphone SoC customers, they seem to slow down the migration to the newer nodes, right, or so-called bifurcation for their new SoC adoption. So do you think for mobile computing, particularly do you think a value-add is diminishing based on what you just said. And also another structural trend we are seeing is about the cost of chip by ASIC in HPC segment. So can management talk about that part of business, meaning the ASIC design themselves of total revenue contribution in HPC and the growth rate of the 8-figure business? Thank you. Jeff Su: Okay. So Charlie, I’m going to interpret. So he has a follow-up to his first question and then his second question. So the follow-up to his first question is then in terms of going back to cost again, do we see any sign of slowdown in smartphone SoC migration at the leading node. That’s his follow-up. And then his second question is then do we see more companies designing ASICs? And can we disclose the revenue contribution from such customers? Correct, Charlie? Charlie Chan: Yes, correct, please. C. C. Wei: Okay. Charlie, let me answer your question. In fact, we do not see any slowdown on our customer to adopt the TSMC’s leading-edge technology. Actually, they might have a different kind of product schedule. They might have a different kind of product plan and etcetera. But the technology adoption, actually, it did not slow down. That’s my answer to your first follow-up question. And the whether that some kind of customer, some of the hyperscale customers want to develop their own chip. Yes, but I cannot give you more information than that. However, I can tell you that they also look at compute for their own business, the positioning for the opportunity actually increase our opportunity. And that requires TSMC is a leading-edge technology. So we do have quite a few hyperscale customers working with TSMC to develop their own chips. Jeff Su: Okay, thank you. Charlie Chan: And would that cannibalize your merchant business, for example, those on change CPU, GPU are they going to be replaced or impacted by those custom design growth? If I may? Jeff Su: Okay. Last question, Charlie is asking then his concern is that any hyperscalers are developing will that cannibalize business for other types of companies? C. C. Wei: I cannot comment, but I don’t think so. They also developed the specific purpose for own I mean it’s not a kind of to replace, generalize the purpose of CPU, GPU, all those kind of things. Jeff Su: And I think also for TSMC, we’re happy to work with all types of customers, whatever type they may be. Okay, thank you, Charlie. Let’s move on to the next participant. Charlie Chan: Thank you. Operator: Thank you. And our next question is come from Sunny Lin with UBS. And Sunny, please go ahead. Sunny Lin: Sure. Thank you. Good afternoon. Thank you for taking my questions. So my first question is on the SoC ramp up and so if we look at the share revenue could be higher than 5-nanometer for the first year. But if we look at the sales contribution as a percentage of total sales, it’s actually a bit lower. And so I wonder for this year, perhaps there is some market issue. But looking into 2024 and 2025 based on your current customer engagement, should we model a faster ramp up into 2024 or 2025 or its overall ramp-up could be slower because of maybe customer schedule issues or planning? And if we think about the peak revenue contribution for 3-nanometer over time, do you think you will be able to reach 30% range, as N5 and N7. That’s the first question. Thank you. Jeff Su: Okay. Sunny’s first question is on 3-nanometer. She notes 3-nanometer revenue is greater than 5-nanometer in its first year, but the revenue percentage contribution of mid-single digit is smaller or lower. So she’s wondering why is that. Is it because the market slowed down? Is it less customer adoption and interest? What is the reason behind that? And does that mean what is our expectation for that ramp to continue? [Technical Difficulty] Wendell Huang: N3, N3E the number of tape-outs more than double that N5 in the first and the second year. So as a result, we expect the strong demand will continue in 2023, ‘24, ‘25 and beyond, for our N3 technologies driven by both the HPC and smartphone applications. Jeff Su: Yes. Okay. Yes, does that answer... Sunny Lin: Got it. Yes, partially. So any thoughts on the potential peak revenue contribution in the next couple of years? C. C. Wei: Too early to talk about that N3, but we continue to believe that it will be a large and long-lasting node for us. Jeff Su: It will be an important contributor to our 15% to 20% revenue CAGR in the next several years. Sunny Lin: Got it. Thank you. My second question is a quick one. And so, for you to growth by [indiscernible] share, just wonder what kind of industry growth are you assuming for the major end markets, including smartphone, PC, server, automotive? Jeff Su: Okay. Sunny, second question is TSMC. We have said we will grow – have slight growth year-on-year in U.S. dollar terms this year. Her question is what are we assuming for the end market growth in areas like smartphones, PCs, automotive and others? C. C. Wei: Well, let me answer the question, Sunny. What do we look at in 2023, actually, we look at smartphone and PC unit, we think there’s a little bit drop in terms of units. And the content will continue to increase. And for TSMC, actually, we increased our product portfolio. We also extend our market segment – available market segment to TSMC, so that’s why we expect the whole industry to drop slightly and TSMC still grow slightly. Sunny, did that… Sunny Lin: Sorry. Yes. So, just a quick follow-up on server and automotive. So, any expectations on server units for this year? And for auto, I think October earnings call, you mentioned there could be some slowdown going to first half of the year. Have you started to see the deceleration? That’s all my questions. Thank you very much. Jeff Su: Okay. So, Sunny also wants to know what is our forecast for server units, automotive units, and then we said in October, three months ago, we said automotive demand was holding steady. What is the case now? C. C. Wei: Well, the automotive demand continued to be very tight. I meant that – I mean demand continued to increase actually. And today, we are still probably not 100% supply enough wafers to them. But it’s improving, and we expect the automotive to – the shortage to be relaxed quickly. And the units, for the units to grow, we expect the automotive to grow this year, but that’s OEM stuff. Jeff Su: Okay. Thank you, Sunny. Operator, can we move on to the next participant. Sunny Lin: Thank you very much. Jeff Su: Thank you. Operator, can we move on to the next participant. Operator: Sure. Our next question is come from Laura Chen with Citigroup. And Laura, please go ahead. Laura Chen: Hello. Hi. Thank you very much for taking my questions. My first question is also about the overseas expansion. Like C. C. mentioned that the overseas more advanced than 20-nanometer, we account for 20% in the longer term perspective. And also, we are expanding more in the advancement in the U.S. I am just wondering that will you also expand more like second or the advanced packaging, along with your advanced now say like 5-nanometer or 3-nanometer in Arizona as well. Jeff Su: Okay. So, Laura’s first question is actually, C. C. said the 20-nanometer below capacity could be 20% and more in several years’ time depending on customer demand and government support. But her question is, would we consider expanding advanced packaging overseas as well? C. C. Wei: Well, today, we actually don’t have a plan, but we do not rule out the possibility because the back end is a part of the total wafer service for our customer, okay. Laura Chen: Okay. Got it. And because we see that a lot of advanced now used for the high-computing PC, so along with that kind of application, we see now TSMC is very to that both 3D IC or the advanced packaging. So, I am just wondering that longer term perspective, whether that is also the direction in the U.S. Jeff Su: So, I think what Laura is saying because, of course, that TSMC 3D IC solutions leading and HPC adoption is strong. So, with advanced technologies, will there be a need to build or have packaging in the U.S. as we move advanced technology portion to the U.S.? C. C. Wei: Alright. Laura, I just answer that we don’t rule out the possibility. But today, we don’t have a plan yet. Laura Chen: Sure. Thank you very much. And my second question is about the gain around roadmap. Can you give us more color on the current progress? We know that we have the schedule to ramping up in 2025 versus the EUV, the high-voltage equipment will probably only ready then. Do you think that could be any like potential pushback to like a 2026 onward? Jeff Su: Okay. So, Laura’s second question is on the nanosheet transistor structure. She wants to know what is the progress for TSMC as we are adopting nanosheet structure at our N2. Will this be impacted or pushed out by the availability of things such as, I think you are asking high NA, Laura and things like that, correct? Laura Chen: Right. Thank you. C. C. Wei: Okay. Actually, our N2 technology development is on track, actually is better than what we thought. We have very good progress recently, and our risk production will be in 2024 and volume production in 2025. The schedule is not changed if we don’t put it in, but so far so good, let me assure you that. Jeff Su: Okay. Laura Chen: Okay. Thank you very much. Jeff Su: Thank you, Laura. Operator, can we move on to the next participant, please. Operator: Thank you. And our next question has come from Rolf Bulk with New Street Research and please go ahead. Rolf Bulk: Yes. Thank you for taking my question. I had a question on your 2023 CapEx budget and your fab build-out plan. You, earlier on in the conference call, you talked about the build-out cost of hats in the U.S. being 5x higher versus Taiwan. And in that context, I was wondering if you could talk about the share of CapEx spending that you expect to go towards that build-out versus equipment this year versus last year? Will the larger share of CapEx go to those fab build-outs and if so, how much more? Thank you. Jeff Su: Okay. Sorry. Rolf, let me try to summarize your first question. His first question is on our CapEx in 2023, and our fab build-out plans. I believe Rolf, you are referring to fab build-out plans overseas, correct? Rolf Bulk: Yes, exactly. What I am trying to understand is if I think about your CapEx such as for this year versus last year, what share will go towards infrastructure of that build-out, what percentage will go to equipment roughly? Jeff Su: Okay. So, Rolf wants to know for our CapEx, how much is going to building and facilities, how much is your tools? Rolf, I want to make one correction when our CFO said that the, when you refer to 5x greater, I think our CFO was saying the construction costs are 4x to 5x higher, not the CapEx cost, but nonetheless, Rolf is asking for a breakout, of the CapEx? Wendell Huang: Well, Rolf, we provide the breakdown of CapEx per year, advanced versus specialty technology, but we do not provide the breakdown between tools and constructions. But as I have said, in the U.S., the construction of building and facilities is probably 5x that of Taiwan. And it lasts for a few years, right. Jeff Su: Okay. Rolf, do you have a second question? Sorry. Rolf Bulk: Okay. Thank you very much. Yes, as the second question. Could you talk about the growth that you achieved in your Advanced Packaging segment in 2022? And what growth you are expecting in 2023? And in particular, could you talk about your SoIC products and whether interest in those products is accelerating? Thank you. Jeff Su: Okay. Thank you, Rolf. So, Rolf’s second question is on the advanced packaging business. What was the growth in advanced packaging last year? And what do we expect the growth to be this year? And then also more specifically in terms of our SoIC technology, what is the outlook or the momentum there? Wendell Huang: Okay. Rolf, this is Wendell again. In 2022, our advanced packaging grew at a similar rate to our corporate rate. So, it accounted for about 7% of our total revenue in 2022. And we think that in this year, the growth will be also similar pretty – well, slightly lower than the corporate, it will be probably flattish for the back end. Jeff Su: Okay. Thank you, Rolf. Alright, in the interest of… Rolf Bulk: Thank you very much. Jeff Su: Thank you. In the interest of time, maybe we will take questions from the last three participants. Operator, can we move on to the next participant, please. Operator: Sure. The next question is come from Charles Shi with Needham. And Charles, please go ahead. Charles Shi: Okay. Thank you for taking my question. I just want to ask a little bit about the 20% R&D expense step-up in this year. Can you provide a little bit more detail what the incremental R&D expenses are going to be directed at? Well, for one thing, if I understand correctly, your N3 R&D team are going to move on to the N+2 [ph] node if we are seeing nanometers current end node, or is there any other incremental R&D spending this year you are expecting to be around design enablement of as packaging, specialty technology. Can you kind of give us a sense where the big step-up is coming from? Thank you. Jeff Su: Okay. So, Charles first question is on R&D. He wants to understand or actually more details in terms of the 20% approximately year-on-year increase. What is driving – or the R&D spending going to be focused on? Is it N3? Is it N2? Is it design enablement by specific breakdown? C. C. Wei: Charles, let me answer your question. All your comments are correct. I mean that is because of a newer technology like N2, N1.4 and also a lot of new teams are more expensive than before. And actually, the technology complexity continued to increase exponentially. So, that’s why we spend much more R&D budget. We want to continue to be number one in the world. So, we continue to invest including the geometric shrinkage, including the new transistor architecture, including the design enablement and including buying the new equipment that all is. Jeff Su: Okay. Charles, do you have a second question? Charles Shi: Yes, I do. Maybe a second question, I want to ask about specialty technology. Obviously, you expect specialty technology to backfill your 7-nanometer fabs. I think this may be a more common knowledge inside the industry, but I recently spoke to some of your customers who are more on the analog mixed signal side. A lot of them are, I mean driving volumes more from 28-nanometer and above, and they could tell me that the benefit of going to 14-nanometer, 16-nanometer for 7-nanometer is there, but it’s not large as in the past, moving node-to-node. And at the same time, the cost is much higher, and I look at your technology roadmap, specialty technology roadmap, it does seems to me that the specialty technology platforms are not as broad at the 7-nanometer if I compare with the 28-nanometer and above. I just want to get some insights from you. How do you think about the progression of specialty technology going forward, as it seems to me that it’s kind of slowing down a little bit more slowing a little bit down faster for the analog mixed signal customers? Thank you. Jeff Su: Charles’ second question is on specialty technology. His observation is that the technology, specialty technology portfolio at 7-nanometer seems not as broad as prior nodes and that the – his question is, do we see the slowing scaling of analog and mixed signal areas in terms of the specialty technology development and moving down to lower nodes or more advanced nodes? C. C. Wei: Charles, your observation is quite good. Actually, you are right. But then let me share with you a little bit more detail inside. Actually, you are right, for the analog portion or mixed signal portion, we do not need to really move into 7-nanometer or more ones now. But as time goes by, now is more and more computing functionality needed to be added into the product. Let me share with you that one thing like the WiFi, you need a really very high speed to move to the next generation and also the RF. For those kind of things, you need a very high-performance of the computing together with low-power consumption. It is important. And if you want to get the lower power consumption, the only the leading-edge node can give you that kind of opportunities, all the footprint stays the same. Then if you want to have a higher functionality with a lower power consumption, that’s where you have to move into the 7-nanometer or more end node even with the analog product. Did that answer your question? Charles Shi: Yes. So, I think this is about the reason that you feel so quite comfortable about 7-nanometer utilization will come back. You said it will mildly come back a little bit in ‘23, but you are still confident ‘24 and forward that the 7-nanometer will also be a very, very long-lasting node for you. C. C. Wei: You are right. Jeff Su: Okay. Charles Shi: Alright. Thank you. Jeff Su: Thank you, Charles. Operator, let’s move on to the last two participants. Operator: Thank you. The next question is come from Brad Lin with Bank of America. And Brad, please go ahead. Brad Lin: Hi. Happy New Year. Thank you for taking my question. I have two questions. One is on the globalization challenge and the other on the mature nodes. So, first of all, we know TSMC is excellent in managing the supply chain and the cluster in Taiwan. However, when we now expand Japan and U.S. footprint with the last of the cluster there, would management please share with us why the strategy is to maintain the strong efficiency and the excellence that TSMC has been delivering? Thank you. Jeff Su: Okay. Brad’s first question is on our global footprint. He notes that TSMC has done a good job in terms of supply chain and cluster management. But as we go overseas to U.S. and Japan, how will we continue to ensure that we do a good job? Mark Liu: Alright. Okay, let me answer. I think Wendell has answered this question earlier, let me summarize a little bit. TSMC is a service business, not in just pure production. The service depends on the trust from the customers. So, in the past, our trust and service depends on our technology leadership, manufacturing excellence and the lowest cost and quality. But recently, the geopolitical development is evolving just in front of us. That 100% in one place cannot suffice our customers’ needs. Therefore, we started the overall global footprint planning. Now of course, the cost will be higher. And I think our team has been focused on how do we do this at the same time, keep our minimum gross margin to be 53% and above. And that is the standard that we decide how the pace of our global expansion going to be, and there are other segments in terms of the space, of course. The global expansion increased the value to our customers and the new geopolitical environment. And therefore, the pricing, how the customer can shoulder the increased cost in terms of pricing. And of course, the – geopolitically, the semiconductor in the U.S. and Japan are all new. So, I believe we are working hard on how to reduce the cost by building up the semiconductor supply ecosystem in U.S. and Japan. And I think indeed, both governments echo are – not just us, also rather other major companies to build a similar capacity in this place to reduce the costs. So, that is the general arrangement we are planning. There is no fixed rate. Of course, the government support will be another factor. And so that is, we are cautiously step-by-step to make sure our shareholders’ value still be kept. Jeff Su: Thank you, Chairman. Brad, do you have a second question? Brad Lin: Yes. Thank you very much for that juncture. So, my second question is on the three node. And there will be no mature node is investing and generates pretty good progress with TSMC technology leadership. So, while we are expanding overseas, what is the strategy for mature node in the long run, especially China expansion baked by – also by the government subsidies? And also R&D is quite valuable for TSMC. And should we continue to allocate the R&D to mature node when maintaining group pace in testing adds [ph] and advanced packaging? Thank you. Jeff Su: Okay. So, Brad, second question, I think maybe to summarize this more on the mature nodes. So, he wants to better understand our strategy on the mature nodes. As we expand our manufacturing footprint and increase capacity outside of Taiwan, what is our strategy for mature nodes? Will we bring mature nodes overseas? What is the product status in China? How are we allocating R&D resources to mature nodes already specialty technology strategies, etcetera? C. C. Wei: Well, actually, our mature node capacity strategy is very simple. We develop differentiated specialty technology for our customer. In fact, we are working with customers and to define what they need and then what kind of technology that we need to develop. We don’t add any commonly used the large technology per se, but we develop specialty and differentiated and for the long-term, structural market demand, and that’s our current strategy. And because of that, of course, we put R&D’s effort and resources to cooperate with our customer. And so we can generate profitability with reasonable utilization. Jeff Su: Okay. Thank you, C. C. Brad Lin: Got it. Thank you very much C. C. Thank you very much. Jeff Su: Yes. Okay. Thank you. Operator, well, can we move on to the last participant, please? Operator: Sure. Our last question is come from Mehdi Hosseini with Susquehanna International Group and please go ahead. Mehdi Hosseini: Yes. Thanks for letting me ask the questions. I want to go back to gross margin. I am a little bit confused if you could clarify something. Your wafer shipment in Q4 declined and also FX actually strengthened by a little bit, which should be negative on gross margin. So your cost-cutting efforts must have been greatly exceeding these trends and I want to get a better feel for it, and I have a follow-up? Jeff Su: Mehdi’s first question is on gross margin. He is – he notes wafer shipments declined sequentially in the fourth quarter. The – but with the foreign exchange movement, he notes it’s a negative for gross margin. So, he wants to – and then he wants to understand what is the magnitude or rate of cost improvement. Maybe our CFO can clarify some of these, particularly the FX. Wendell Huang: Right. Our fourth quarter gross margin is 180 basis points higher than that in the third quarter. Foreign exchange rate actually went towards our favor. The NT depreciated in the fourth quarter from TWD32 in the third quarter to TWD31, TWD39, so that gave us about 140 basis points of gross margin expansion. Now, the remaining one, there are cost improvement but offset by, as we said, lower wafer utilization. Mehdi Hosseini: Okay. So, the volume helped. Now, if I just take your comment about the first half, declining 5% to 10% on a year-over-year basis, it does imply that there is a chance that revenues in Q2 would decline on a sequential basis. Would that also drive gross margin down on a sequential basis? Jeff Su: Okay. So Mehdi’s second question is then we have noted, we did not say 5% to 10%, but our first half revenue will decline mid to high-single digit year-on-year. So, he wants to know does this mean that second quarter revenue will be down sequentially? And is there – does that mean that the gross margin will go below 53% or decline into…? Wendell Huang: Okay. Right. We give you the guidance, so you can really calculate yourself on the revenue growth on the second quarter. And it’s too early to talk about the gross margin in the second quarter and beyond. However, we can tell you that we work very diligently to make sure our gross – long-term gross margins of 53% and higher is achievable even in this year. Mehdi Hosseini: Understood. Sure. Understood. But could it go below 53% and then rebound, so it would average to 53%? Wendell Huang: It’s too early to talk about that. But as I have said, we work very diligently to make sure this long-term gross margin target of 53% and above can be achievable, including this year. Jeff Su: And we will give you the second quarter gross margin outlook in April, Mehdi, in three months, okay? Mehdi Hosseini: Thank you. Jeff Su: Alright. Thank you. Okay. 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 30 minutes from now. The transcript will be available 24 hours from now, both of which you can find and is available through TSMC’s website at www.tsmc.com. Thank you again for joining us today. We wish everyone a happy Lunar New Year and we hope you will join us again next quarter. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Third Quarter 2022 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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 in 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 third quarter 2022, followed by our guidance for the fourth quarter 2022. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. And thank you for joining us today. My presentation will start with financial highlights for the third quarter 2022. After that, I will provide the guidance for the fourth quarter. The third quarter revenue increased 14.8% sequentially in NT dollar, or 11.4% in US dollars, as our third quarter business was supported by strong demand for our industry leading 5-nanometer technology. Third quarter gross margin increased 1.3 percentage points sequentially to 60.4%. Slightly ahead of our guidance, as we enjoyed a more favorable foreign exchange rate and cost improvement efforts. Total operating expenses accounted for 9.8% of net revenue as compared to 10% in the previous quarter. Operating margin increased 1.5 percentage points sequentially to 50.6%, mainly due to better operating leverage. Overall, our third quarter EPS was NT$10.83, and ROE was 42.9%. Now, let's move on to revenue by technology. 5-nanometer process technology contributed 28% of wafer revenue in the third quarter, while 7-nanometre accounted for 26%. Advanced technologies, which are defined as 7-nanometer and below accounted for 54% of wafer revenue. Moving on to revenue contribution by platform. Smartphone increased 25% quarter-over-quarter to account for 41% of our third quarter revenue. HPC increased 4% to account for 39%, IoT increased 33% to account for 10%. Automotive increased 15%, to account for 5% and DCE decreased 2% to account for 2%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of NT$1.5 trillion. On the liability side, current liabilities decreased by NT$38 billion, mainly due to the decrease of NT$116 billion in short term loans, partially offset by the increase of NT$70 billion in accrual liabilities and others. Long-term interest bearing debt increased by NT$88 billion mainly as we raise NT$60 billion of corporate bonds during the quarter. Our financial ratio, accounts receivable turnover days decreased 1 day to 36 days. Inventory decrease -- inventory days decreased five days to 90 days, primarily due to higher wafer shipment during the quarter. Now, let me make a few comments on cash flow and CapEx. During the third quarter, we generated about NT$413 billion in cash from operations, spent NT$266 billion in CapEx, distributed NT$71 billion in fourth quarter '21 cash dividends and raised NT$60 billion from corporate bond issuances. Overall, our cash balance increased by NT$43 billion to NT$1.3 trillion at the end of the quarter. In US dollar terms, our third quarter capital expenditures total NT$8.75 billion. I have finished my financial summary, now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $19.9 billion and $20.7 billion US, which represents 0.4% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to NT$31.5. Gross margin is expected to be between 59.5% and 61.5%, operating margin between 49% and 51%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our third quarter and fourth quarter profitability. Compared to the second quarter, our third quarter gross margin increased by 130 basis points sequentially to 60.4% mainly due to a more favorable foreign exchange rate and cost improvement efforts, despite continued inflationary cost pressures. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago, as our guidance was based on exchange rate assumption of $1 to NT$29.7, whereas the actual third quarter exchange rate was $1 to NT$30.32. This created about 80 basis point difference in our actual third quarter gross margin versus our original guidance. We have just guided our fourth quarter gross margin to be flattish sequentially to 60.5% at the midpoint, as a more favorable exchange rate assumption will be offset by a lower capacity utilization rates. As a reminder, six factors determine TSMC's profitability, leadership technology development and ramp up, pricing, cost reduction, capacity utilization, technology mix and foreign exchange rate. Looking ahead to 2023, we face challenges from entry ramp dilution, higher year-over-year increase in depreciation cost, rising inflationary cost, semiconductor cyclicality and overseas fab expansions. To manage our profitability in 2023, we are working closely with our customers to support their growth and continue to strategically and consistently sell our value. We are also working diligently on our internal cost improvement. Excluding the impact of foreign exchange rates of which we have no control over and taking the other five factors into consideration, we believe a long term gross margin of 53% and higher is achievable. Next, let me talk about our 2022 CapEx. As I have stated before, every year our CapEx is spent in anticipation of the growth that will follow in future years. Three months ago, we said our 2022 CapEx will be closer to the lower end of our $40 billion to $44 billion range. Now, we are further tightening up this year's capital spending and expect our 2022 CapEx to be around $36 billion. About half of the change is due to capacity optimization based on the current medium term outlook. And the other half is still to continue to delivery challenges. Out of the around $36 billion CapEx for 2022, between 70% to 80% of the capital budget will be allocated for advanced process technologies, about 10% will be spent for advanced packaging and mask making and 10% to 20% will be spent for specialty technologies. Looking ahead, we will continue to manage our business prudently given the near term uncertainties and adjust and tighten up our capital spending where appropriate. That said, our commitment to support customer’s growth remains unchanged. And our discipline CapEx and capacity planning remains based on the long-term structure and market demand profile. We will continue to work closely with our customers to plan our long-term capacity and invest in leading edge and specialty technologies to support their growth while delivering profitable growth to our shareholders. Now, let me turn the microphone over to C.C. C. C. Wei: Good afternoon everyone. First, let me start with TSMC's more resilient near term demand outlook. We concluded our third quarter with revenue of NT$613.1 billion or US dollar $20.2 billion, supported by strong demand for our industry leading 5-nanometer technologies. Moving into fourth quarter 2022, we expect our business to be flattish, as customers are ongoing inventory adjustment is balanced by continued ramp up of our 5-nanometer technologies supported by smartphone and HPC applications. We expect our full year gross in 2022 to be mid 30% in US dollar terms. On the demand side, we continue to observe softness in consumer end market segment. Other end market segments such as data center and automotive related remain steady for now for TSMC. But we start to see the possibility of adjustment unrolled. On the inventory side, our customers and the supply chain continue to take action to adjust their inventory. We expect the semiconductor supply chain inventory to pick in third quarter this year and start to reduce in fourth quarter this year. We also expect it will take a few quarters, so first half 2023 to rebalance to a healthier level. While the ongoing inventory correction will also affect TSMC, we expect our business to be less volatile and more resilient than the overall semiconductor industry during this period. Supported by three key factors that are TSMC's cost raise in the foundry industry. First, our technology leadership and differentiation is much stronger today as compared to previous years. This enable TSMC to win business and enables our customer doing business in [high] (ph) end markets, despite the semiconductor cyclicality. Secondary, through our comprehensive design ecosystem and optimize the process technologies, we are able to address and capture the structure increase in demand for computation and build a strong portfolio in high performance computing. Third, our strategic relationships with our customers are long term in nature, and we continue to work closely with our customer and technology development, capacity planning and pricing to support their long term demand and growth. As a result, we continue to see strong demand for our leading node except N7 and steady demand for our differentiated specialty technologies and mature node. Looking ahead to 2023 with the successful ramp up of N5, N4P, N4X and the upcoming ramp of N3, we're continue to expand our customer product portfolio and increase our addressable market. While the ongoing semiconductor inventory correction will affect the first half 2023 utilization rate we expect our business to be supported by stronger demand for our differentiated and leading advanced and specialty technologies, and for 2023 to be a growth year for TSMC. Next, let me talk about the N7, N6 demand outlook. Due to end market weakness in smartphone and PCs and customer’s products scheduled delay starting 4Q this year, our N7, N6 capacity utilization, will not be as high as it has been in the past three years. We expect this to persist for a few quarters through first half 2023 as the semiconductor supply chain inventory takes a few quarters to rebalance to a healthier level, and we have adjusted our N7, N6 CapEx accordingly. We believe the N7, N6 demand is more a cyclical issue rather than structural and we expect our N7, N6 demand to pick up in second half 2023. Longer term, we continue to work closely with our customers to develop specialty and differentiated technology and are confident to drive additional wave of structural demand to backfill our N7, N6 capacity over the next several years. The 7-nanometer family will continue to be a large and long-lasting node for TSMC. Now I will talk about our N3 and N3E status. Our N3 is on track for volume production later this quarter with good year. We expect a smooth ramp in 2023, driven by both HPC and smartphone applications. Our customers' demand for N3 exceeds our ability to supply partially due to the ongoing tool delivery issues, and we expect N3 to be fully utilized in 2023. We expect N3 revenue in 2023 to be higher than N5 revenue in its first year in 2020 and for N3E to contribute mid-single-digit percentage of our wafer revenue in 2023, as our overall revenue base is much larger today than in 2020. N3E will further extend our N3 family with the enhanced performance, power and yield, and offer complete platform support for both smartphone and HPC applications. N3E development is progressing ahead of plan, and volume production is now scheduled for second half 2023. Despite the ongoing inventory correction, we observe a high level of customer engagement at both N3 and N3E with a number of tape-outs more than 2x than that of N5 in its first and second year. Thus, we are working closely with our tool supplier to address towards delivery challenges and prepare more 3-nanometer capacity to support our customers’ strong demand in 2023, 2024 and beyond. Our 3-nanometer technology will be the most advanced semiconductor technology in both PPA and transistor technology when it is introduced. We are confident that N3 family will be another large and long-lasting node for TSMC. Finally, let me talk about the future driver of leading node adoption. TSMC's ambition is to be the trusted technology and capacity provider for the global logic IC industry for years to come. Our job is to help our customers unleash their innovations and enable them to capture greater value and win in their end markets. As the industry continues to pursue scaling, it is true that damage shrink is slowing down and becoming more challenging for everyone due to rising process complexity. However, it is also true that demand for energy-efficient computing is accelerating in an intelligent and connected world as technology is becoming more pervasive and essential in people's lives. The semiconductor industry value in the supply chain is increasing, and the value of technology platform is expanding beyond the scope of geometry shrink alone and increasingly toward greater power efficiency. As a result, our customers value much more than simply transistor cost. System performance and power efficiency has become key motivation for customers who adopt our leading node technologies. By working closely with our customer and technology development, our N3 and N2 will deliver full node stride in performance and power benefits while offering the industry's most advanced transistor scaling. We expect strong demand for our leading node technologies, driven by both smartphone and HPC applications to fuel our long-term revenue growth of 15% to 20% CAGR over the next several years in U.S. dollar terms. With our leadership in both leading-edge process technology and 3D solutions, TSMC's technology cadence remain constant to deliver the value of our technology platform. We will continue to extend our overall competitiveness and technology leadership while delivering a predictable technology cadence that help our customers to enhance their product competitiveness and grow their market well into the future. This concluding our key message, and thank you for your attention. Jeff Su: Thank you, C.C. 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 the 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. [Operator Instructions]. Now let's begin the Q&A session, operator can we please proceed with the first participant on the line. Operator: Yes, Jeff. The first one to ask questions Gokul Hariharan from JPMorgan. Go ahead please. Gokul Hariharan: Yes, good afternoon and thanks for taking my question. Congrats on the great results, especially on the margins. So the first question is on N7 and N6, this utilization slack that we are observing. Could we give a little bit more detail on why that is happening and why we think this is short-lived, a couple of quarters issue and we get a pick back in the utilization in the second half of the year? And I think last time we saw, this was for 28-nanometer, but that lasted for a much longer period of time. So could you also give us some kind of comparison with what happened back in 28-nanometer and why this is going to be very different? And maybe a little bit more color on what are the areas of backfill demand for N7 and N6 as the high-end smartphone processors and HPC start to move on to N5 and then N3. That's my first question. Jeff Su: Okay, Gokul, let me please allow me to summarize your first question. So Gokul's first question is on N7 and N6. He wants to understand what is driving the utilization slack. Why do we believe it is short-lived and that the demand for N7 and N6 can pick up in the second half? And then also on the little bit longer-term outlook, why we believe that N7 can be backfilled, and it will not be like N28 a few years ago with a few years of underutilization. C. C. Wei: Well, Gokul, maybe answer your question first on the why demand dropped. Demand dropped because of market becomes soft. As we said, in the weakness in the smartphone and PCs. And also a big factor is our customers' product schedule delay. And all in all, put all together, so we think that our utilization has been affected in fourth quarter this year and all the way to the first half of 2023. For the longer term, we continue to work closely with our customers. And actually, let me also say that this is a cyclical issue. So it will pick up anyway. And we believe we will pick up in the second half of 2023. And for the longer term, we continue to work closely with our customers to develop specialty and differentiated technology to drive additional wave of structural demand from consumer, RF, connectivity, et cetera, and other application to backfill our N7, N6 capacity and so for the next several years. That’s all I… Jeff Su: Does that answer your first question, Gokul? Gokul Hariharan: Yes. My second question would be on the CapEx outlook. Now that we bring down the CapEx slightly for 2022, could you talk a little bit about what is the outlook direction for 2023 at least, if not absolute numbers, but just direction? Are we going to be flattish or it's likely to be going down? Second is, also, could you also give us an update on the schedule for the new fabs, Cauchon, Kumamoto, Nanjing and Arizona? Is there any change in the schedules in terms of these fabs coming into production? Thank you. Jeff Su: Okay, thank you, Gokul. So Gokul's second question is on CapEx and capacity. So first, he wants to hear, of course, he says that we have tightened up our CapEx in 2022. So he is asking for 2023 directionally, is there an indication of 2023 CapEx? And then he would also like an update on our expansion plans in Guosheng, Nanjing, Arizona and Kumamoto. Wendell Huang: Okay, Gokul, let me answer you the first part. For 2023 CapEx, it is too early to comment. We will provide you with a specific guidance in January. However, as we said, we have tightened up our 2022 CapEx to reflect the current medium outlook, as well as two delivery issues. Looking ahead to 2023, we will continue to be careful and manage our business prudently given the near-term uncertainties. We will adjust and tighten up our capital spending where appropriate, but we will continue to work closely with our customers to invest for the long-term structural market demand profile to support their growth. C. C. Wei: Well, let me answer the second part of Gokul's question. Gokul, you asked about the progress of our Arizona fab, Nanjing fab and the Gaozong. And let me say that Arizona fab work will continue and on schedule. There's no doubt about it because this is a N5 family which still have a very strong demand. And for Nanjing we just get our one-year authorization for 28-nanometer expansion. So it is on schedule also. For Gaozong, initially, we planned 2 fab at the beginning of 28-nanometer expansion and the N7. Now N7 has been adjusted. And so but 28-nanometer expansion is continued and on schedule. Jeff Su: And also Kumamoto. C. C. Wei: Okay. Also the Japan fab is on schedule to meet the customer's demand. Gokul Hariharan: Got it. Thank you very much. Jeff Su: Alright, thank you, Gokul. Operator, can we move on to the next participant please. Operator: The next one to ask questions is Bruce from Goldman Sachs. Go ahead, please. Bruce Lu: Thank you for taking my questions. So my first question is regarding to the HPC, which is a key growth driver for TSMC for the coming years. However, with the reason U.S. new restriction to China, what do you think about the HPC demand moving forward. What kind of impact is going to see a slowdown from China? Or are you going to see the collaboration from the non-China side? Jeff Su: Okay, so Bruce's first question is on HPC. He notes HPC, we have said repeatedly, will be TSMC's key growth driver and main engine in the next few years. He wants to know, I believe, Bruce, the impact of the recent U.S. regulations, does that affect the overall HPC demand or the overall profile. Is that correct? Bruce Lu: Yes, what's the impact from this new restriction to TSMC and overall industry? C. C. Wei: Okay, let me answer that. Bruce, it's based on our initial reading and feedback from our customers. The new regulation set the control was called at very high-end specification, which is primarily used for AI or supercomputing applications. Therefore, our initial assessment is the impact to TSMC is limited and manageable. We will continue to closely monitor the situation to ensure that we are all in full compliance with all the rules and regulation. And for the longer term, it's too early to really assess all the true impact or influence, but we will give you the update in the following earnings call. Bruce Lu: Okay, understand that. Thank you. So my next question is regarding to the cyclical nature for the 7-nanometer. But we also noticed that most of your other nodes, the capacity utilization rate is still at a very, very high level or at least much better than 7-nanometers as management mentioned. Why is 7-nanometer so cyclical? Because maybe because you guys are too big, you have to industry or what is the difference between your 7-nanometers and your other nodes? Jeff Su: Okay, so Bruce's second question is looking at N7 specifically. He wants to know our other nodes seem -- the utilization still seems to be holding up well. So why specifically N7 is more cyclical and utilization is not as high as it has been. Is that correct, Bruce? Bruce Lu: Yes. C. C. Wei: Okay. It just happened that most of my smartphone and PCs customer are using N7 and N6 node. And it just happened, the market weakness in the smartphone and PC happening at the same time. And also other customers or product schedule delay, all in all, that's why it becomes lower utilization rate as compared with other node. If you want to compare with the N5 or compare with the 28-nanometer, our orders are very -- is still at a very high demand, and we will continue to enjoy the higher market share. Bruce Lu: I want to dig in a bit because we get used to like TSMC will manage your customers' product and overall outlook even with some tape-out you can make it out with someone else. But anything different with this time that 7-nanometer, you cannot have as good as your other nodes? Jeff Su: So Bruce wants to still understand why the 7-nanometer utilization cannot be as high as the other nodes if we work closely with customers, and is well planned. C. C. Wei: Well, again, Bruce, we work closely with our customers, but our customers get caught in this inventory correction and the market downturn. They didn't know this one, probably two quarters before. And at the beginning of this year, they will still give us a very high number of their forecast. And it just happened, it just happened. But as we said, we believe this is a cyclical issue. And it will pick up. But before that, it probably will take a few quarters. Bruce Lu: I see, understand. Thank you. We just get too used to it to be like -- to expect TSMC always deliver a much better result. C. C. Wei: I understand. Jeff Su: Okay. Thank you, Bruce. Operator, can we move on to the next caller please. Operator: Next, we have Randy Abrams from Credit Suisse. Randy Abrams: Yes, okay. Thanks for taking my question. I wanted to ask a two-part first question. You mentioned in the prepared remarks about HPC and auto continue to be stable, but seem to signal it may change. If you could give your view how you see inventory levels and some of the forward demand outlook from those areas. And the second part, I just want to see if we could get a bit better visibility on first half first quarter, how do you see it versus normal seasonal? And then for the trough, do you expect first quarter could be the bottom, or do you see the trend that we could be towards the second quarter? Jeff Su: Okay, so Randy's question is really looking at again from the end demand segment. Data center and automotive, we say are remaining steady at TSMC for now. He wants to understand though, what is the outlook down the road, and what does that mean for inventory levels? And then secondly is also he wants to see if we can provide some more granularity about first quarter outlook versus seasonality and whether we think the first quarter can be the bottom for the industry. Is that correct, Randy? Randy Abrams: Yes, that's correct. C. C. Wei: Okay, let me answer this one. Of course, we say that so far, our customers give us their demand forecast -- so the data center and automotive related are still steady. But now the market becomes solved and will take a more conservative way in our planning for 2023. And that's why we say that we don't rule out the possibility. They might have some correction also, but we did not see it right now, to be frank with you. And for the inventory correction in 2023, all we want to say is like that. We expect probably 2023, the semiconductor industry were likely to decline. But TSMC also is not immune, we believe our technology position, strong portfolio in HPC and longer-term strategic relationship with customers will enable our business to be more resilient than the overall semiconductor industry. And that's why we say in 2023 still a growth year for TSMC and the overall industry probably will decline. Randy Abrams: Okay. Again, and I'll ask a quick follow-up, and then the second question. I guess just a sense because it's still very firm in fourth quarter, if you're seeing a pretty meaningful falloff into first quarter, like some years 10%. 2019 declined over 20%. So just trying to get a rough feel of the type of decline factoring you're gaining some content and share. That's fell to the first. And then the second question, actually, just on gross margin because of a lot of headwinds, I think, Wendell, you talked about. If you could give -- just on a couple of these depreciation factoring the recent CapEx, how much up and whether it's also front end or more back half loaded given the 3-nanometer ramp. And then for the start-up costs for N3 if you expect similar to N5, given smaller percent of revenue, how much dilution from N3? Thank you. Jeff Su: Okay, Randy. So let me summarize. So Randy, quick, I think we will not comment on the first quarter, but I think we can make some comment just sort of in terms of the overall inventory picture in looking into next year. C. C. Wei: Well, actually, if you ask my opinion on the inventory picture and the inventory correction, it's too early to provide a specific number. However, the inventory correction were likely see its biggest impact sometimes in the first half 2023. Jeff Su: Okay, and then the second part related to the gross margin, maybe Wendell can address what is the outlook for depreciation next year, some of the -- and then is it front or back-end loaded? And also what type of dilution we expect from 3-nanometer as it ramps in 2023. Wendell Huang: Okay, Randy. For full year depreciation for next year, it's too early to talk about that. But this year is mid-single-digit increase year-on-year. But next year, we expect it will likely to be meaningfully higher. We will give you the guidance in January. As to the dilution from N3, it will be between 2 to 3 percentage points on a whole year basis on our gross margins. Randy Abrams: Okay, and actually, one follow-up. Do you think on a single quarter with the inventory correction, do you expect to keep the 53 and above factoring were coming from a very high level even through that first half inventory correction? Jeff Su: Right. It is too early to talk about 2023, gross margin including quarter-over-quarter. But even with all these cost challenges, we believe our structural profitability can be maintained, and we are confident to deliver a long-term gross margin of 53% and higher. Okay. Randy Abrams: Okay, great, thanks. Jeff Su: Thank you, Randy. Operator can we move on to the next participant, please. Operator: Next one to ask questions, Charlie Chan from Morgan Stanley. Charlie Chan: Good afternoon, and thanks for taking my questions. So my first question to management is about whether the company consider a share buyback because the company seems to suggest recent inventory correction is just a cyclical, you're still very positive on the long term. And I think the share price really revealed comes long-term value, right, also shareholders' value. So I'm not sure if a company wants to do share buyback or cash returns? Jeff Su: Okay. So Charlie's first question is that although there's cyclicality, the long-term outlook appears good. Would the company consider doing a share buyback? Wendell Huang: Yes, Charlie, we constantly review all the different options of returning cash to shareholders. For share buyback, at this moment, we are not considering it. We think our cash on hand will be better kept to invest in our capital expenditure to make a better return for our shareholders. Charlie Chan: Okay, understood. Thank you. And also, my second question is also about the U.S. sanction impact? I know the company said that NPAs limited and the long-term impact remains to be seen, right, but my question is about your -- the China market to TSMC, is that as strategic as before after these events? Jeff Su: Okay, so Charlie, second question, he wants to know with the recent U.S. regulations and the impact, how do we see the China market? Is it still a strategic market for TSMC? Is that correct, Charlie? Charlie Chan: Yes, meaning whether -- how this company think about China for TSMC's long-term picture, how important it is to China going forward? C. C. Wei: Charlie, I would like to say that every region is important to TSMC. However, let me say that, under the condition of work compliance with all the rules and regulations, TSMC will continue to serve all the customer all over the world. That's our position. Charlie Chan: Okay, including China? C. C. Wei: All the customers. Charlie Chan: Okay, got it. Thank you. Those are my questions. Thank you. Jeff Su: Thank you, Charlie. Operator can we move onto the next participant please. Operator: Next one to ask questions, Sunny Lin from UBS. Sunny Lin: Hi, thank you for taking my questions. Congrats on the steady performance. My first question is on the geopolitical tensions. I wonder, given some of the considerations regarding the geopolitical issues, how would you evaluate a longer-term impact from customers potentially diversifying from Asian foundries? And how are you managing the risk? Thank you. Jeff Su: Okay, so Sunny's first question is that given the geopolitical tensions, how do we evaluate the long-term impact and the risk of customers using other foundries? Is that correct, Sunny? Sunny Lin: Correct. Thank you. C. C. Wei: Sunny, we still believe the most important is in is a technology leadership, manufacturing and our customer trust. And so in different locations, manufacturing or whatever, we still think that technology leadership is the most important thing. And so that's our strategy. We make it simple, the technology, manufacturing and customer trust. Sunny Lin: Got it. And so a quick follow-up. Is that going forward, should we assume an acceleration of your overseas expansions just to diversify the production site, i.e., if there could be a fab built in Europe? Jeff Su: Okay, so Sunny's second question then, does that -- can we assume that we will continue to increase the overseas global footprint expansion and also particularly in Europe? C. C. Wei: Well, we will continue to increase our overseas portion in manufacturing based on customers' need, in fact, based on the business opportunity and also based on the operations efficiency and economics. And so whether we are going to be in Europe, we are in preliminary evaluation and to not rule out any possibility. Again, I would like to say the decision were based on customers' need, business opportunities, operational efficiency and the cost economics. Sunny Lin: Got it, thank you. I actually have a second question on HPC. So with the increasing usage of chiplets, how would you manage the risk in the case that some dies are made at the other foundries and that have production issues and therefore, impacting the production at TSMC as well? Thank you very much. Jeff Su: So Sunny, second question is with increasing usage and adoption of shipments -- sorry, chiplets in HPC, how would we manage the risk in case I think Sunny you're saying it dies at other companies or places have production issues, would how do we manage the risk of that impacting TSMC? C. C. Wei: Sunny, in fact, we would like our customer manufacturing every chip inside TSMC for sure. But if there is a case that they have to use other companies' dies, we will work with our customers closely and minimize all the risk that some goes by. That's what we are doing right now. Sunny Lin: Got it. Thank you, that's very helpful. Thank you. Jeff Su: Thank you, Sunny. Operator, can we move on to the next participant please. Operator: Right now, we have Laura Chen from Citi. Laura Chen: Thank you, for taking my question. I appreciate that if you can share with your latest plan in your Nanjing fab. Like C.C. already mentioned, you got the license for the 28-nanometer in Nanjing. So I'm just wondering that do you also need a license for the 16-nanometer in the Nanjing fab? And also going forward, what's your trend of your operation in China? That's my first question. Thank you. Jeff Su: Okay, so Laura's first question is about Nanjing fab and our plans. She notes that we have received the one-year authorization. So our 28-nanometer expansion continues as planned. Her question is, do we also need a license for the 16-nanometer that we have in Nanjing? And then also her -- also what is our long-term future expansion plans in China. Wendell Huang: Sunny, let me answer the first part. Jeff Su: Laura. Wendell Huang: Sorry, it's Laura. Let me answer the first part. The one-year authorization that we received cover the Nanjing facility. So it's both the 28 and 16. Laura Chen: Okay, great. Thank you. Jeff Su: And then the second part is what is our long-term expansion plans for China? Wendell Huang: Okay. As C.C. said, we will be operating -- serving all the customers under the condition that we will fully follow in compliance with all the rules and regulations. Laura Chen: Okay, that's very clear. My second question is also about the fab globally in the longer term. We know that in overseas operation, usually, they will have a much higher operational cost. So how would that impact the TSMC's long-term margin trend in our view, or maybe you can give us some information about your estimate of the percentage of the margin in different region or the cost difference comparing to Taiwan? Jeff Su: Okay, so Laura's second question is around our expansion of our global manufacturing footprint. She wants to know that overseas fabs, are the costs higher? Do we have a breakdown how much the cost difference is in Japan, U.S. versus Taiwan? And then overall, with overseas expansion and if there are higher costs, how does this impact our long-term profitability and margin? Wendell Huang: Okay, Laura, let me answer this question. The initial cost of overseas fabs are indeed higher than TSMC's fab in Taiwan. And it's mainly because of higher labor costs in different layers of the supply chain. We continue to work closely with the U.S. government, as well as with our customers and supply chain partner to manage and minimize the cost gap. Now through these efforts, we believe we can continue to earn the proper return and deliver the long-term gross margin of 53% and higher. Laura Chen: Okay, that's very clear. Thank you very much. Jeff Su: Thank you, Laura. Operator, can we move on to the next participant, please. Operator: Next one to ask questions is Rolf Bulk from New Street Research. Rolf Bulk: Thank you for taking the question. I was hoping you could give some more context around the 3-nanometer tool shortages that you mentioned. Is that primarily lithography, and then specifically EUV related, or do you also see shortages in other tool segments? Thank you. Jeff Su: Okay. So Rolf's first question is around 3-nanometer and the tool shortages. He wants to know if this is very -- just specific to lithography tools and EUV specifically, or is it more I guess, broad-based? C. C. Wei: Let me answer the question. Actually, it's more broad based because of our demand is high -- and certainly, the photo lithography tool is included and one of the most important one. Rolf Bulk: Thank you. That's reasonable. As my follow-up question, it would be great to get an update on your N2 notes, which your current visibility is now it's still on track timing-wise and is there anything you can share on how you think about yields of N2 versus N5 and N3 at the same stage of development? Jeff Su: Okay, so Rolf's second question is on N2. He would like an update. Are we still on track? What is the timing for N2? And also if there's any update on yields as compared to N3 and N5 at similar stage. C. C. Wei: Okay, I said before, N2 is a very deep quarter one, but our progress so far, so good. Actually, it's a little bit ahead. And we are going to have a mass production introduced in 2025. And our customers' engagement so far are very -- let me say that, comparable with the N3, N5. And the status today is very comparable to the N5 and also N3. So we are happy to see that our progress so far. Jeff Su: Does that answer your question, Rolf? Rolf Bulk: Thank you very much. Jeff Su: Thank you, Rolf. Okay, operator let’s move on to the next participant please. Operator: Next one, we have Charles Shi from Needham & Company. Charles Shi: Good afternoon. Thank you for taking my questions. I have two, both on CapEx. The first question is really -- and I understand you're not here to guide 2023 CapEx. But I think a few years ago, you did provide some long-term CapEx, a range of CapEx when your long-term CAGR guidance was 5% to 10%. And you think 10 to 12 billion CapEx is going to support that long-term CAGR. I think you just reiterated your long-term CAGR to be 15% to 20%. Do you kind of have a similar range of CapEx for us to think about over long term? Again, I'm not asking you about '23 CapEx year. Jeff Su: Okay, so Charles' first question is about -- really, I think, Charles, you're asking about CapEx correlation with growth. So he notes that. In the past, we have said our long-term growth would be 5% to 10%. So during that period, we said we would spend between NT$10 billion to NT$12 billion. So without asking about 2023 specifically, Charles wants to know, now we believe we will grow between 15% to 20% CAGR in the next few years. What type of CapEx range does that imply or should he assume? Is that correct, Charles? Charles Shi: Yes, correct. Wendell Huang: Okay, Charles, I think it will be -- let me try to answer this question from the capital intensity point of view. When we invest heavily to capture the future growth, the capital intensity will be high like last year and this year. But if the growth slows down, the capital intensity may become lower. Now longer term wise, we think that a normal reasonable capital intensity may be somewhere between mid to high 30 percentages longer-term-wise. Charles Shi: The second question is about very near term into the next quarter basically because you just slashed your 2022 CapEx, I mean from what you guided one quarter ago by about 4 billion. If I hear correctly, half of that is can be attributed to the tool delivery issues. But the other half, can you clarify a little bit, because you kind of said it's about capacity optimization. Is that the kind of like a 2 billion reduction in CapEx, mostly a reduction of the equipment spending, or is it something else you are reducing here and trying to improve the capital capacity optimization here? Thank you. Jeff Su: Okay, so Charles' second question is on the CapEx and he is asking we have now guided to around 36 billion versus close to 40 billion last time. We have said half of it is related to tool delivery and the other half is capacity optimization for the midterm demand outlook. So his question is with the capacity optimization is this mainly also a reduction in tools, or is there some other issue right? Is that correct, Charles? Charles Shi: Yes, correct. Thank you. Wendell Huang: Okay. Charles, I think the -- you're right that the half of that difference comes from tool delivery issue. The other half is the capacity optimization by that, and that's because of the current uncertainty in market conditions. So we're tightening up our capital budget. And it relates to the whole capacity. It's including tools, including the other stuff within the CapEx. Yes, and it's mainly N7. Charles Shi: Thank you very much. Jeff Su: Yes, it's tools and also as C.C. and Wendell mentioned, some of the adjustments we have made to our N7 and N6 capacity and CapEx due to the aforementioned reasons. Thanks. Okay, thank you Charles. Operator can we move on to the next participant. Operator: Next one, we have Brad Lin from BoA Securities. Go ahead please. Brad Lin: Thank you very much for taking my questions. First of all, congratulations on the strong earnings, and my first question is about, well, if we look at the loan pages of the new regulations from the U.S. on China, it can be really broad and with the -- of course, with the key on the supercomputing. But however, given the wide variety and also wider application of chips that TSMC makes, isn't it, in theory, difficult to identify and make sure the chipset is business compliant with the regulation, or will there be some extra costs and overhead costs by that which wish you notice in the future? Thank you. That's my first question. Jeff Su: Okay. So Brad's first question is with the new U.S. regulations, he knows it's very long and very wide in scope. So he is wondering if it's very hard to interpret and therefore, will this result in greater overhead cost for TSMC to ensure that we are and continue to be fully compliant with all the regulations. C. C. Wei: Well, actually, although it's rule is about more than 100 pages, but initial region and feedback from our customer, actually, the regulation is very simple to be understood like control switch hold at a very high-end specification. For example, like 600 bit per second bandwidth or those kind of things, it's very easily to be understood, and we continue to work with our customers to make sure that we fully comply with the regulation. Jeff Su: And so Brad would also like to know, Wendell, from a financial standpoint, will we incur more overhead cost as a result? Wendell Huang: At this moment, we don't think so. Brad Lin: I see, thank you very much. Just a slight follow-up because the regulation is just aiming at the first supercomputing, but I know in a supercomputer, definitely, there are some -- still some low-end chips used inside. So if we happen to make those, and we are not sure that it is going there when we produce them with that, will that cause some confusion or bring some trouble to us? Jeff Su: So Brad's second question is in a super computer, there may be very specific high-end restrictions, but there's also companion chips, other chips used. Would that cause us an issue? C. C. Wei: The company achieved, there is no restriction or no regulation at all. So we reran on our customer to work with their own customer for that kind of a product. Brad Lin: Got it. Thank you very much. And then maybe, if I may, second question will be clearly, many countries would like to build their own foundry or their own domestic supply chain. We have learned that the cost will be a major downside. So my question would be can we charge different pricing that's basically demanded by our clients, right? So with higher costs, if they want to buy from U.S. or buy from Europe, can we charge a higher pricing if that's based on the node? And also, if we think about the bright side, would you please share how TSMC could well utilize these kind of opportunities to strengthen our competitiveness in the long run? That will be my all questions. Jeff Su: So Brad's second question is about he notes that many countries would like to have domestic semiconductor manufacturing. TSMC, we are, as C.C. said, also increasing and expanding our global manufacturing footprint. So with higher cost, will we be able to charge a higher price? I guess that is essentially his question. C. C. Wei: Actually, TSMC's pricing is strategic and consistent, and we -- all I can say is we will continue to see our value. The values come from the technology manufacturing, and also that our relationship with our customers, whether it is in a different country or a different place, it's not in our consideration. Again, I would like to say we'll continue to see our value and our pricing is strategic. Okay? Jeff Su: Okay. Thank you, Brad. Operator can we move on to the next participant please. Operator: Next one, we have Mehdi Hosseini from Susquehanna International. Mehdi Hosseini: Yes, thanks for taking my questions. I also have my first multipart question. I'm just looking at your customers' inventories that are on a days of inventory are at a 25-year high. And it seems based on your commentary that the demand forecast, especially looking at the first half, has weakened. So it seems to me that the inventory correction is going to sustain to Q2 and more slightly, your shipment would be declining sequentially in Q1 and Q2. Just looking at your customers' inventory, is that a realistic view of the first half? Because you also highlighted the fact that inventory correction is going to sustain throughout the first half. And we're not asking for a guide, I'm just trying to better reconcile your customers' inventory with your comment. And I have a follow-up. Jeff Su: Okay, so Mehdi's first question is on inventory. He notes customers' inventory levels are very high. We have talked about our observation from an industry level that demand is softening in consumer segment. And so his question is what is the outlook and do we expect the inventory correction, I guess, to be more notable as we go into first half '23. Is that correct, Mehdi? Mehdi Hosseini: Yes, and particularly, you've always had your wafer shipment up in Q2, but I think '23 could be an exception, and it could probably decline. And that's how I explained my question. So the question is could wafer shipment decline in Q2 for the first time in many, many years. C. C. Wei: Well, Mehdi, our current forecast, actually, our supply chain inventory will peak in third quarter this year. And we observed that the inventory will start to reduce in the fourth quarter -- last quarter of this year. And we expect we will see the biggest impact in the first half, actually, first half of 2023. The detail of the first quarter, second quarter or something like that, we are not ready to share with you yet because of -- we continue to work with our customer and to understand their demand. Mehdi Hosseini: And if I may have a quick follow-up to that? Does that imply that your customer focus changing so rapidly that we have to wait for January pulse to get the final read on the first half? Jeff Su: No, Mehdi. I think we have always in the past, we will guide for 2023 and talk about 2023 outlook in first quarter during the January conference, right? But I think C.C. has already said that with the inventory correction, we expect our business to be more resilient during both the down and upturn given our technology leadership, and that 2023 is a growth year for TSMC, okay? We will not comment further on first quarter or second quarter. Mehdi Hosseini: And my second question has to do with depreciation that was down in Q3, down year-over-year and Q-over-Q. And this is despite the fact that CapEx was up 65% in 2021. Does that have anything to do with tool optimization? And to that extent, as the second part of the question, would you consider converting 7-nanometer to 5 and 3? Jeff Su: So, Mehdi’s, second question first is depreciation, why it is down Q-on-Q and year-on-year. And then also, would we consider converting capacity? Wendell Huang: Okay. Mehdi, the depreciation, we look at it from a whole year point of view. For this year, as I mentioned, we expect it to be up year-on-year by mid-single digits of -- and for next year, it will be meaningfully higher, meaningfully higher, but we will share with you more in January. Please understand that every year, there are depreciation newly going into the depreciation table and also there are depreciation coming off of the depreciation table. So what you're looking at is the net result. As to converting N7 capacity to N5, as we mentioned earlier, N7 demand issue is cyclical rather than structural. So at this moment, I don't think we have that kind of plan. Jeff Su: Thank you, Mehdi. In the interest of time, operator, maybe we can take the last -- the questions from the last two participants, please? Operator: Yes, sir. Next one to ask a question, Patrick Chen from CLSA. Go ahead, please. Patrick Chen: Thank you for taking my questions. You talked about 2023 to be still a growth year. Would you say that growth is pretty much the same compared to what you expected a quarter ago or it is lower? And if so, what's driving this lower growth expectation? Jeff Su: Okay, so Patrick's first question is about 2023. Is the growth that we see for 2023, how does it compare versus our expectation for 3 months ago for 2023? And what is driving this? Wendell Huang: Yes, well, I think it's too early to talk too much about the 2023, but we maintain our statement that 2023, we still expect as a growth year, okay? Jeff Su: Do you have a second question, Patrick? Patrick Chen: Okay. Yes, that’s very helpful. And maybe a follow-up. If I may, any leading indicators that you are monitoring that could help you or help us determine the growth outlook aside from monitoring the clients' wafer orders? Jeff Su: Okay, so Patrick's second question is looking with inventory correction. He wants to know if there's any leading indicators that we can look at or he should look at to see when indication that the cycle is bottoming. C. C. Wei: That's really hard to answer your question. Actually, if you look at the whole industry, that's from the smartphone and PCs, and you read all the quarterly report from our major player, you can change that one to go up and one is the downturn. So we definitely have some information. Internally, we do the analysis, and today, we are taking a very conservative way for our planning. That's all I can share with you. Patrick Chen: Thank you. And I guess that's what we've been doing as well. But obviously, we don't have a crystal ball. Well I don’t have any further question. Thank you for taking my questions. Jeff Su: Okay, thank you. Operator, can we take the last participant, please? Operator: Yes, the last one to ask question is Frank Lee from HSBC. Go ahead, please. Frank Lee: Thank you. I wanted to ask, I guess, a question on your N3, N3E. Is the ramp for both nodes going to be around the same time, or is there going to be some difference in scheduling? Jeff Su: Okay, so Frank's first question is on the ramp for N3 versus N3E, is it at the same time. C. C. Wei: Okay. Actually, it's not at the same time. Right now, we are ramping up by N3. And N3E is supposed to be one-year apart, but because of the progress so well, so we might pull in a little bit for 2 or 3 months, that's all. So they are still not at the same time. Frank Lee: Okay, and my second question is, I know you've related your margin -- long-term gross margin target being unchanged. But I guess given the headwinds you're seeing now through the first half of next year with the currency move already gone up quite a bit, utilization rates dropping. Is this -- are you going to see any potential change in the pricing strategy? I know I can't comment too specifically, but you have seen some price increases in the last 12 months or so. So from going forward, with the pricing strategy still be relatively unchanged given the change in the overall market environment? Jeff Su: Okay, so Frank's second question is related to pricing with the inventory correction and with some of the cost challenges, he wants to know, will there be any changes to our pricing strategy during this correction. Is that correct Frank? Frank Lee: Yes. C. C. Wei: Okay, frank, let me answer the question. Again, I want to stress that our pricing actually is a strategic and consistent. So you say that do we have any plan to change it? No, it will be consistent. And not based on any cycle or opportunistic. And we actually -- most importantly, we always work closely with our customers to provide our value and to help them to win their own end markets. Frank Lee: Right -- no, I'm not suggesting there's an opportunistic pricing, but I just get a market situation has changed for your clients who are probably going through a more difficult time. Would there be some change to the strides to help align with them as well? Or would they largely still be the same policy that we've seen? C. C. Wei: We stay the same. We are consistent. Frank Lee: Okay. Thank you. Jeff Su: Thank you, Frank. All right. 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 one hour from now. The transcript will become available 24 hours from now, both of which will be available through TSMC's website at www.tsmc.com. Thank you for joining us today, and we hope you will join us again next quarter. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Second Quarter 2022 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 in 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 2022, followed by our guidance for the third quarter 2022. 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 the 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 on our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today. My presentation will start with financial highlights for the second quarter 2022. After that, I will provide the guidance for the third quarter. Second quarter revenue increased 8.8% sequentially in NT or 3.4% in U.S. dollars, as our second quarter business was supported by strong HPC, IoT and automotive-related demand. Second quarter gross margin increased 3.5 percentage points sequentially to 59.1%, slightly ahead of our guidance, as we enjoyed a more favorable foreign exchange rate, cost improvement and value selling. Likewise, operating margin increased 3.5 percentage points sequentially to 49.1%, in line with our gross margin increase. Overall, our second quarter EPS was TWD 9.14 and ROE was 39.4%. Now let's move on to revenue by technology. 5-nanometer process technology contributed 21% of wafer revenue in the second quarter while 7-nanometer accounted for 30%. Advanced technologies, which are defined as 7-nanometer and below, accounted for 51% of wafer revenue. Moving on to revenue contribution by platform. All six platforms increased in the second quarter. Smartphone increased 3% quarter-over-quarter to account for 38% of our second quarter revenue. HPC increased 13% to account for 43%. IoT increased 14% to account for 8%. Automotive increased 14% to account for 5%. And digital consumer electronics increased 5% to account for 3%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD1.4 trillion. On the liability side, current liabilities increased by TWD 22 billion, mainly due to the increase of TWD 47 billion in accounts payable, partially offset by the decrease of TWD 29 billion in short-term loans. Long-term interest-bearing debts increased by TWD 124 billion, mainly as we raised TWD 109 billion of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days decreased one day to 37 days while days of inventory increased seven days to 95 days as we prebuild M5 wafers and increased raw materials inventory. Now let me make a few comments on cash flow and CapEx. During the second quarter, we generated about TWD 339 billion in cash from operations, spent TWD 218 billion in CapEx and distributed TWD 71 billion for third quarter '21 cash dividend. Bonds payable increased by TWD 109 billion as a result of this quarter's bond issuances. Overall, our cash balance increased by TWD 102 billion to TWD 1.3 trillion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures totaled $7.34 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between $19.8 billion and $20.6 billion, which represents a 11.2% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to TWD 29.7, gross margin is expected to be between 57.5% and 59.5%, operating margin between 47% and 49%. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our second quarter and third quarter profitability. As a reminder, six factors determine TSMC's profitability: leadership technology development and ramp up, pricing, cost, capacity utilization, technology mix and foreign exchange rate. Compared to first quarter, our second quarter gross margin increased by 350 basis points sequentially to 59.1%, mainly due to a more favorable foreign exchange rate, cost improvement and value selling. Compared to our second quarter guidance, our actual gross margins exceeded the high end of the range provided 3-month ago as our guidance was based on exchange rate assumption of $1 to TWD 28.8 whereas the actual second quarter exchange rate was $1 to TWD 29.42. This created about 90 basis point difference in our actual second quarter gross margin versus our original guidance. We have just guided our third quarter gross margin to decline 60 basis points sequentially to 58.5% at the midpoint, as a slightly more favorable exchange rate assumption will be more than offset by higher inflationary costs, including higher raw material and electricity costs. Looking ahead on our profitability, we will face challenges from rising inflationary costs from raw materials, utilities and tools, increasing process complexity of leading nodes, new investments in mature nodes and overseas fab expansions. Despite the manufacturing cost challenges, and excluding the impact of foreign exchange rate, of which we have no control over, taking the other 5 factors into consideration, we continue to believe a long-term gross margin of 53% and higher is achievable. Next, let me talk about our effective tax rate. For 2022, we expect our tax rate to be between 10% and 11%. Starting in 2023, we will see the expiration of certain tax exemptions in Taiwan, and our effective tax rate will increase. However, Taiwan government is in the process of drafting certain new tax exemption regulations and is currently in the common period. Therefore, we will provide a further update on the outlook of our tax rate in 2023 and beyond when more details become available. Now let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our near-term growth outlook. We concluded our second quarter with revenue of TWD 534 billion or $18.2 billion, supported by HPC, IoT and automotive-related demand. Moving into third quarter 2022, we expect our business to be supported by continued demand for our industry-leading 5-nanometer and 7-nanometer technologies. On the inventory side, due to the softening device momentum in smartphone, PC and consumer end market segments, we observe the supply chain is already taking action and expect inventory level to reduce throughout the second half 2022. After two years of pandemic-driven stay to home demand, and this type of adjustment is reasonable, in our view. Our expectation is for the excess inventory in the semiconductor supply chain to take a few quarters to rebalance to a healthier level. We believe the current semiconductor cycle will be more similar to a typical cycle, with a few quarters of inventory adjustment likely through first half 2023. We have also internally modeled and prepared ourselves for various different scenarios in case it is necessary. On the demand side, while we observe softness in consumer end market segment, the end market segments such as data center and automotive-related remains steady. And we are able to reallocate our capacity to support these areas. Despite the ongoing inventory correction, our customers' demand continues to exceed our ability to supply. We expect our capacity to remain tight throughout 2022 and our full year growth to be mid-30% in U.S. dollar terms. Three key factor in supporting TSMC's strong structural demand are our technology leadership and differentiation, our strong portfolio in high-performance computing and our strategic relationship with customers. All of these factors are TSMC's strength in the foundry industry. First, on technology leadership and differentiation, TSMC's technology position is much stronger today as compared to previous years. Looking ahead to 2023, we are working diligently to provide the industry most advanced technologies and making it available to all the product innovators with the successful ramp of N5, N4P, N4X and the upcoming ramp-up of N3, we will expand our customer product portfolio and increase our addressable market. The macroeconomic uncertainty may persist into 2023. Our technology leadership will continue to advance and support our growth. Secondly, the massive structural increase in the demand of computation, underpinned by the industry megatrend, continues to fill greater need for performance and energy-efficient computing, which require use of leading-edge technologies. Through our comprehensive IP ecosystem and optimized process technology, we are able to address and capture the structural demand and build a strong portfolio in high-performance computing. We expect HPC to be the main engine of TSMC's long-term growth and the largest contributor in terms of our incremental revenue growth in the next several years. Third, our strategic relationship with our customers are long-term in nature, developed and built through many years of collaboration and investment to enable customers' success in the high-end market. We continue to work closely with our customer and technology development, capacity planning and pricing to support their long-term demand and growth. With all these three differentiating factors, we expect our capacity utilization to remain healthy in 2023. And our business to be less volatile and more resilient, supported by the strong demand for our differentiated and leading advanced and specialty technologies. Now let me talk about TSMC's long-term growth outlook. While macroeconomic headwinds bring near-term uncertainties that may persist, we believe the fundamental structural growth trajectory in the long-term semiconductor demand remains firmly in place. We continue to observe silicon content increase across many end devices, fueled by process technology migration and increased functionality. For example, the number of CPUs, GPUs and AI accelerators in the data center are increasing. 5G smartphone carries substantially higher silicon content as compared to 4G smartphone. The amount of silicon content in today's car continue to rise. While the device unit growth of many electronics device may be flattish to low single-digit percentage range, in the next several years, the silicon content growth will be higher, in the mid- to high single-digit percentage range and support the long-term structural semiconductor demand and increase our addressable wafer demand. TSMC's CapEx and capacity planning are always based on the long-term structural market demand profile, not near-term factors. We are working closely with our customer to plan our long-term capacity and investing in leading edge and specialty technology to support their growth. We will manage our business prudently through the near-term uncertainties, and we remain highly confident in our long-term growth outlook. With our technology leadership, manufacturing and capacity support and customers trust, TSMC is well positioned to capture the strong multiyear growth from the favorable structural megatrend of 5G and HPC related applications and deliver profitable growth for our shareholders. We reiterate our long-term revenue to be between 15 and 20 CAGR over the next several years in U.S. dollar terms. Next, let me talk about the tool delivery update. As a major player in the global semiconductor supply chain, TSMC work closely with all our tool supplier to plan our CapEx and capacity in advance. However, like many other industries, our suppliers have been facing greater challenges in their supply chains, which are extending toward delivery lead times for both advanced and mature nodes. As a result, we expect some of our CapEx this year to be pushed out into 2023. TSMC is actively doing its part to help our tool suppliers address the supply chain challenges. In April, we said that we have increased regular high-level communications to trace the progress and send several teams on site to support our suppliers. Since then, we have worked closely to identify critical chips that are gauging toward delivery. We are working dynamically with our customers and prioritize our wafer capacity to support these critical chips to help mitigate the chip constant issues. While challenges remain, the situation is improving. We do not expect any impact to our 2022 capacity plan. And we are able to put in the delivery schedule for certain amount of tools for our 2023 capacity. We have been working closely with our customer for 2023 so that we can support their demand. Now let me talk about the N3 and N3 status. Our N3 is on track for volume production in second half of this year, fiscal year. We expect revenue contribution starting first half of 2023, with a smooth ramp in 2023, driven by both HPC and smartphone applications. N3 will further extend our N3 family with the enhanced performance, power and yield. N3 will offer complete platform support for both smartphone and HPC applications. We observed a high level of customer engagement at N3. And volume production is scheduled for around one year after N3. Our 3-nanometer technology will be the most advanced semiconductor technology in both PPA and transistor technology when it is introduced. Thus, we are confident that our N3 family will be another large and long-lasting node for TSMC. Finally, let me talk about the N2 status. Our N2 technology development is on track and progressing well to our expectation, with risk production schedule in 2024 and volume production in 2025. After careful evaluation and extensive period of development, our 2-nanometer technology will adopt the narrow sea transistor structure to provide our customers with the best performance, cost and technology maturity. N2 deliver full node performance and power benefited to address the increasing need for energy-efficient computing, with 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and larger density of more than 20% increase as compared with N3E. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy-efficient when it is introduced and will further extend our leadership position well into the future. This concludes our key message, and thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared remarks. Now let's begin the Q&A session. Our Chairman, Dr. Mark Liu, will be the host. Mark Liu: Hello, everyone. Thank you for coming to this conference. I wish you all healthy and well. I think the -- we hope the above reports already answered some of your question, but it definitely shows we -- this company stands on firm ground. And we will be prepared prudently going through this near-term uncertainty. In the meantime, we will be also confident and well prepared for our next growth period. So now the floor is open for your question. Jeff Su: Thank you, Chairman. Operator, please proceed with the first caller on the line. Operator: The first one to ask question, Randy Abrams, Credit Suisse. Randy Abrams: Thank you. Congratulations on the good outlook. My first question, I wanted to ask on your view on the business cycle. You raised your outlook to 35% in the strong third quarter. Could -- with that strong outlook, I wanted to see what is driving your expectation for inventory drawdown in second half? And how broad you're seeing the inventory drawdown? And the follow-up question I wanted to ask to that is, what is your view on the first half? With your view customers will be drawing down through the first half, do you see underutilization? And how severe do you expect that correction? Jeff Su: Okay. Randy, please allow me to summarize your first question. So I think, Randy, the first part -- his first question is in looking at TSMC's third quarter guidance and also looking at our full year growth to be mid-30s. He's wondering, I believe, Randy, how to reconcile this with our expectation of the inventory adjustment in the second half and also into the first half next year. So how do we reconcile our view on the inventory cycle against our own business? Is that correct, Randy? Randy Abrams: Yes. That's correct. Just an initial view on first half. How much correction you're aiming for in your business? C. C. Wei: Randy, this is C.C. Wei. Let me answer your question. Yes, we do have mid-30s growth in this year. But we also expect our customers start to take action to decrease their inventory level. How far? We expect that a few quarters, at least into the first half of 2023, they will continue to do the inventory correction. And the awarded to TSMC's evaluation, let me say that despite ongoing inventory adjustment and macro uncertainties, the structural growth trajectory in the long-term semiconductor demand remained firm. With our leading and differentiated advance and specialty technologies and a strong HPC portfolio and strategic customer relationships, we expect our capacity remain tight and our business to be more resilient. And we are confident in both our near-term and long-term growth outlook. Did that answer your question? Randy Abrams: Yes. I mean, to clarify, do you expect even through first half to remain tight, factoring in your tech position and some of the projects you have? C. C. Wei: Yes. You remain. Jeff Su: So I think Randy wants to ask, in the first half of next year, do we expect -- how do we see our capacity utilization given the ongoing inventory adjustment? C. C. Wei: I cannot give you exactly the number that we are talking about, but let me say, it's hearsay. Okay. Randy Abrams: Okay. Great. My second question, on the CapEx, two parts. Just want to understand the push-outs, a little more what it's affecting the 3-nanometer. How much ramp the 5-nanometer or mature nodes? And if you could also discuss the framework for next year's CapEx. I think you've made comments about we could be above TWD 40 billion. If you could give a framework for how you're thinking about next year CapEx. Jeff Su: Okay. So Randy's second question is on the CapEx. He wants to know, with some of the tool delivery issues, the CapEx pushout, is this more for 3-nanometer? Is this for 5-nanometer? Or is this more on the mature node side? And he also wants to know how does this impact our CapEx for 2023. As we said before, that 2023 could be TWD 40 billion or higher. Wendell Huang : Okay. Randy, this is Wendell. The first question, as C.C. said in his prepared remarks that the schedule, the tool delivery schedule changes currently as in both the advance and the mature nodes. Okay. And your second question is about next year's CapEx. It's too early to talk about next year's CapEx. But as we always said, we invest the CapEx in the year for the future opportunities. So as long as the outlook, the future outlook is good, we will continue to invest, but of course, in a disciplined manner. Randy Abrams: Okay. And just for this year, with the pushout, what's your expectation for how much this year would be? And that's my final question. Thank you. Wendell Huang: I think next year will be too early. But I can tell you that this year, it will be closer to the lower end of our previous guidance. Jeff Su: So closer to the lower end of the guidance of TWD 40 billion to TWD 44 billion, Randy. Okay. Great, thank you. Operator can we move onto the next participant please. Operator: Next one to ask questions is Bruce Lu from Goldman Sachs. Bruce Lu : Hi, thank you for taking my question. Congrats on the great result. I think I may say that the next few years, the revenue growth will still at the 15% to 20% growth, and it is driven by the compound -- dollar content growth. Can you -- this is actually the most difficult part for the investor or the biggest discrepancy when we talk to the investor, how much is driven by the dollar content growth? Because investors do not really see the die fab side . So for example, by 50% to 20% growth for the next few years, how much is driven by dollar content growth? How much is driven by shipment? Or how much driven by the ASP or product mix improvement? Jeff Su: Okay. Let me -- Bruce, thank you. Let me summarize your first question. So Bruce is really looking at our long-term growth. We said that between -- we will grow between 15% to 20% CAGR in the next several years. He wants to know, out of this 15% to 20%, how much is driven by silicon content? How much is driven by, Bruce, I think you said shipment? How much is driven by ASP? C. C. Wei: Bruce, let me answer the question. But exactly the number, I cannot share with you because it's confidential. But let me say that. The content increase actually is at least mid- to high single digit for our edge devices. And then even all the electronics devices, even the growth is flattish or some kind of a low single-digit. It's still growing. It’s still growing. And combined with all these and our value selling with our customer, so we are confident to say 15% to 20% CAGR is achievable. Okay. Bruce Lu: Okay, thank you. So to my next question is for the mature node and the specialty capacity expansion. I think Chairman recently commented that you will expand your mature node that specialized capacity by 50%, 50, in the next three years. I mean, this number looks a bit big. I mean can you tell us how do you achieve this 50% capacity expansion by the new capacity or conversion? And where are those demand? How do you see the mature node supply and the demand in the coming few years? Jeff Su: Okay. Bruce, let me summarize your second question, please. All right. So Bruce's second question is on mature node and specialty capacity expansion. He is looking to say TSMC expanding our mature node specialty capacity by 50%. That looks very big. Is that all new capacity expansion? Is some of this also coming from logic conversion to specialty? And then also, what applications are driving this? C. C. Wei: Well, let me answer the question. 50% increase, we mean that 50% is in specialty technologies capacity. It doesn't mean the overall capacity increase. Okay. We did this because of our customers' need, and we work closely to support the growth. So it's not a 50% increase in the logic capacity, no. it's specialties. Wendell Huang: And if I may add a little bit. The expansion also includes both the new capacity and conversion of existing capacity. Bruce Lu: So how confident you are, I mean, in terms of this kind of capacity expansion, what kind of application which will keep you confident for this kind of increase? So because in the past like 20 years, your capacity expansion is mostly in the advanced node? Jeff Su: So Bruce wants to know what is keeping TSMC confident to have such expansion on the specialty technologies as most of our expansion in the past has been focused on the advanced nodes. C. C. Wei: Bruce, you are right. In the past years, TSMC always increased the leading-edge capacity. We did not increase any specialties in the past few years, except a few upgrade from logical to specialty. But this time, it's different. First, because we can see the silicon content continue to increase on all the edge devices. It's not -- it's included on the demand on the leading-edge capacity. It also requires the specialties content inside. And so at the urge of our customers' request, TSMC closely work with our customer and to expand our specialty capacities. Okay. How confident? Very, very confident. Bruce Lu: I believe. So, thank you. Jeff Su: Thank you, Bruce. Operator can we move on to the next participant, please. Operator: Next one to ask question, Sunny Lin from UBS. Sunny Lin: Hi, good afternoon. Thank you for taking my questions, and congrats on the strong results. So my first question is on the semi cycle earlier, that you have done some scenario analysis on the semi cycle for 2023. So I just wonder what your current base case for semi growth for 2023. Do you think it will be like a typical down cycle like in 2015, 2019? Or would it be a more meaningful correction? Thank you. Jeff Su: Okay. Sunny, thank you. Sunny's first question is on the semiconductor cycle. She wants to know what is TSMC's base case for 2023. Do we think it will be more of a typical cycle such as in 2015 or 2019? Or it will be more of a meaningful correction, I believe, are her words. Wendell Huang: Yes. Sunny, yes, our base case is a typical -- more of a typical down cycle. The inventory correction maybe go for a few quarters, through the first half of 2023. It's not like a big down cycle back in 2008 or something like that. Sunny Lin: Got it. Thank you. And so my second question is on 3-nanometer. As we are ramping up the technology in second half, how should we think about the revenue contribution into 2023? In terms of profitability, will the 3-nanometer ramp-up have any impact into Q4 or if the impact will be mostly from Q1 next year? Jeff Su: Okay. And so thank you, Sunny. So Sunny's second question is on 3-nanometer. With the ramp, she wants to know what type of revenue contribution from N3 in 2023. And also, with the ramp of N3, what would be the impact to profitability? When should we see it? And what type of impact from N3. Thank you. That's correct. Right, Sunny? Sunny Lin: That's right. Thank you, Jeff. Jeff Su: Sure. Wendell Huang: Okay, Sunny. In terms of revenue contribution from N3, I have to say that nowadays, it's less meaningful to talk about the revenue contribution of a leading node at the very beginning when we start to ramp it compared to the -- in the past because the total pie is increasing and we believe it will continue to increase. Dollar amount-wise, it's certainly bigger than the previous nodes at the very beginning stage. This is your first question. In terms of profitability dilution, we expect that it will impact between 2 to 3 percentage points in gross margins in 20 -- in the first year, 2023. Thank you. Sunny Lin: Got it. Thank you. That’s very clear. Thank you very much. Jeff Su: Thank you, Sunny. Operator can we move on to the next participant, please. Operator: Now let's turn for Gokul Hariharan, JPMorgan. Go ahead, please. Jeff Su: Gokul, are you on the line. You might have to unmute. Gokul Hariharan: Sorry. My first question is on the... Jeff Su: Gokul, sorry, you're breaking up. Can you try again? Repeat your question, please. Gokul Hariharan: Yes. Sure. My first question, inventory cycle. Jeff Su: Gokul, so sorry. Okay. Let's try one more time because you continue to break up. Let's try one more time. If not, I will have to ask you to dial back in. Sorry. Please repeat your question again. Gokul Hariharan: Sure. Can you hear me now? Jeff Su: Yes. Gokul Hariharan: Okay. My first is investor's impact. Could you talk to what is your expectation? Jeff Su: Okay. Gokul, I'm sorry. I'm sorry. Your line is very unstable. So I will ask you to please try to get back into the queue, and we'll address your question. Okay? Operator can we move on to the next caller please. Apologize for that. Operator: Next one to ask question, Brett Simpson, Arete Research. Brett Simpson: Yes, thanks very much. I had a question on the inventory burden off that you were signaling potentially for first half '23. Can you talk more broadly about fabless days of inventory today and how you see this trending in the second half of the year? And then in terms of your outlook for the overall semi industry, what is your current view for 2022 growth and 2023 growth? And has your view changed in the last three months? Thank you. Jeff Su: Okay. Thank you, Brett. So Brett's first question is looking at inventory and the overall industry. So his first question is about the inventory adjustment. We have said that it will likely be through first half 2023. So what do we see for the fabless DOI trending in second half of this year? Wendell Huang: Yes. Yes, Brett. We expect the fabless DOI to come down in the second half of the year gradually. And your second question? Jeff Su: Come down throughout second half of this year. Correct. Wendell Huang: Yes, yes. Jeff Su: And then the second part of this question is -- Brett, sorry, again, your second part is looking at the industry, what is our current view on the semiconductor industry for 2022 and 2023? And how has our forecast changed or not? Brett Simpson: That's right. C. C. Wei: Well, let me answer the question. Our forecast for the semiconductor exclude memory and the forecast on the foundry growth in 2022 remain the same as we projected earlier. For 2023, it's too early to forecast. But as we said, the inventory correction will continue to go on. And for TSMC, because our technology position is much stronger today and we also have a very strong portfolio in HPC and we have a long-term strategic relationship with customer, so we see 2023, even just inventory correction, is still a growth year for TSMC. Brett Simpson: Okay. Jeff, can I just have a second question? Is that possible? Jeff Su: Sure. One more second question. Yes. Brett Simpson: So we've been hearing from some other leading-edge chip manufacturers that they are looking at the opportunity to work with project financing companies when it comes to new fab builds. I think companies like Brookfield has been mentioned. How does TSMC view this trend? And is there a fab rental model or a way to reduce the free cash flow burden in this industry as you bring on new fabs? Thank you. Jeff Su: All right. So Brett second question is, he wants to know what is TSMC's view. His observation is other companies in the industry are using project financing to build new fabs, this new fab rental model. So what is TSMC's view on this? Wendell Huang: Brett, we are not considering project financing now. Normally, project financing entails stringent, stricter terms and higher costs. We will finance the expansion mainly from our operating cash flow and borrowing using our strong balance sheet. That's our current policy. Brett Simpson: Right. Thank you. Jeff Su: Alright operator, let’s move on to the next participant, please. Operator: Next one to ask question, Charlie Chan from Morgan Stanley Charlie Chan: Hello, good afternoon. And also, congratulations for great results. So my first question is about your HPC and smartphone demand, because our view is that the macro slowdown or recession should impact the core CapEx and the consumption. So management, do you think that the so-called inventory digestion will sooner later apply to your data center same customers and the high-end smartphone customers order in the coming quarters? Thank you. Jeff Su: Okay. So Charlie's first question is looking at the inventory adjustment in light of the macro slowdown. He wants to know, do we believe or see impact to cloud service provider CapEx or high-end smartphone sort of to have inventory adjustment next? Is that correct, Charlie? Charlie Chan: Yes. Thank you, Jeff. C. C. Wei: Charlie, this is C.C. Wei. I think to answer your question, you might think they have too much of inventory in the HPC area. But as we said, that in our life, there are so many edge devices continue to create data. And those data need to be processed. And with sufficient speed and efficient power consumption, and that require our leading-edge technology to provide the solution. So even the inventory correction or something like that, we expect our business to be less volatile and more resilience through the near-term uncertainties. And also, we are highly confident in our long-term growth outlook. Charlie Chan: Yes, yes. So how about the high-end smartphone inventory correction? Do you expect that top brand inventory -- smartphone inventory to see correction as well on the semiconductor demand? Thank you. Jeff Su: So Charlie also wants to know, do we expect high-end smartphone inventory correction on the semi demand? C. C. Wei: To be frank with you, we did not see too much of inventory on the high-end smartphone buildup. So no. Charlie Chan: Okay. Great. That's very helpful. And my second question is about your future technology demand installment. So either Mark or C.C., can you please help me. So this is the first time you've disclosed the N2 DAA large density improvement. I think more than 20% large density increase still better than market share. But compared to the previous node, there's a significant slowdown. So do you think -- first of all, N2 is a full node migration. And do you think that there is a kind of a significant slowdown of more slow? And what does that mean to your CapEx per k for N2 versus N3? And lastly, backside power via. So I'm very interested in your kind of N2, what it means to your long-term technology and also CapEx. Thank you. Jeff Su: Okay. Maybe I'll summarize Charlie's second question into through different parts. His first question is on N2 Technology. And he notes that the logic density gain is more than 20%. But does this represent a significant slowdown, especially in the context of Moore's Law? And what does this mean for technology as a whole? Maybe Chairman can address. Mark Liu: Let me answer your question. First of all, C.C. just mentioned, our N2 will be the most advanced semiconductor technology in the industry when it is introduced, because this technology, we work closely with our customers, and about -- regarding the scaling factor included. But Charlie, we -- from now on, we have to look at the technology in a platform fashion. The N2 technology is not just the wafer scaling. The N2 technology include transistor scaling, but also include the new power line structure and also include a new chiplet technology to allow the more architectural innovation in our customers. So this is a whole set of technology offering composed to be N2 nanometer. The scaling factor is smaller, but we really know the customers' needs is -- today is really about the power efficiency. And this will be a full node power efficiency migration. And to control the cost, that is the reason we control the scaling factor while maintain the same value for the new generation of technology. So that's my report, yes. Jeff Su: Great. And also Charlie is asking about the backside power on N2. C. C. Wei: Okay. Let me add some viewpoint. On the backside power delivery, actually, we call the super power rail is part of our N2 platform offering. And at the proper time, who are introduced to the market whenever our customer need it. Charlie Chan: Yes. So if you put that together, right, it seems like lower -- you have this power via -- what does that mean to your CapEx burden in the coming years? Thank you very much. Jeff Su: Yes. Okay, thank you, Charlie. Operator can we move on to the next participant, please. Operator: Next one to ask questions, Laura Chen from KGI Group. Laura Chen: Thank you for taking my questions. And congrats for the good result. My first question is about your view on the key applications. Actually, starting from the last quarter, we already see that high computing PC has been the key categories for TSMC. So I'm just wondering your view from various architecture, like on base or X86, can we share with our view that what will be the key driver for TSMC for the next few years? Do you see that will more from the on-base CPU or more upside from the X86? And also, on the smartphone space, I recall that in the previous analyst call, you mentioned that penetration rate for the on 5G, you expect there will be about like 50%. But given the weak demand growth, well, what's your latest view on the 5G smartphone penetration? That's my first question. Thanks. Jeff Su: Okay. So Laura's first question. First, she wants to know on HPC. She notes HPC has become the largest contributor by platform to our revenue. So she wants to know what -- when we look out over the next several years, how do we see HPC? Is this driven by ARM-based or versus x86. I think that's the first part of her first question. C. C. Wei: Laura, our HPC definitely is growing here. And since TSMC, everybody's foundry. So we support both X86 and ARM based for what you say for the high-performance computing, both. And both are significantly growing in TSMC. Jeff Su: And then she also wants to -- sorry? Laura Chen: Yes. It seems like TSMC already has a very high exposure on the ARM base. So can we expect the next few years still a growth driver to more come from the X86? C. C. Wei: Can I answer this question? We have very high exposure to X86 also. Jeff Su: But Laura, I think we have said numerous times and it still remains holds true that HPC will be the largest contributor and increasingly the main driver of TSMC's growth over the next several years. Wendell Huang: Yes. And Laura, your second question is the 5G smartphone penetration rate. We're still working at about 50% at this moment. Laura Chen: Okay, thank you. And if I can add the second question about the gross margin outlook. I think 59% is really amazing. And considering your CapEx discipline and the consistent delivery in advanced node or maybe price hike as well, can we expect that will have more upside to your current 53% gross margin target? Jeff Su: So Laura’s, second question is on the gross margin. She notes that gross margin for second quarter, 59.1%, is very high. So is there an upside to our long-term gross margin target of 53% and higher? Wendell Huang: Laura, as we mentioned before, there are 6 factors that affect our profitability every year. Excluding the foreign exchange rate, of which we do not have any control on, the other factors taking into consideration, we are confident that a long-term gross margin of 53% and higher is achievable. And we certainly -- we'll try to work hard to deliver better than that. Laura Chen: Okay, thank you very much. That’s very helpful. Jeff Su: Okay, thank you. Operator can we move on the next participant please. Operator: Next one, we have Gokul Hariharan from JPMorgan. Gokul Hariharan: Thanks. Let me try again. My first question is on the U.S. expansion. There's been a lot of commentary around very high cost for U.S. expansion. I think Founder Chairman -- the U.S. perhaps compared to Taiwan. Could you talk a little bit about the U.S. expansion and how they are going? What kind of cost differential is TSMC seeing? And what is your negotiations with the Arizona government solar customers in terms of filling up the cost differential? That's my first. Jeff Su: Okay. Gokul, I have to say again, you're breaking in and out. Let me try to summarize your question, make sure I -- we got it right. So Gokul's first question is about our U.S. fab. He notes that the cost is higher. Our founder has recently said this as well. So Gokul, I think your question, again, you broke up, but I think your question is about how do we manage the -- how will we manage the cost gap and close the cost gap? Is that your question? Gokul Hariharan: Yes. What is your discussions and negotiation with customers and governments regarding higher cost as well as subsidies? Jeff Su: So okay. Thank you, Gokul. So Gokul wants to know, with the higher cost, how our negotiations and discussions with governments? How our negotiations and discussions with customers about this cost differential? Mark Liu: Okay. Gokul, yes. Yes, I did mention that the cost in the fab in the U.S. is higher than we expected. We are still in the construction stage of the fab. And during this past two years, we found that the labor cost in the States is higher than we planned. And also, some of the COVID supply chain interruption also was an unexpected. And we did confer this information to the government at the location, give them a full perspective of the cost gap. But Gokul, is indeed the -- our customer in U.S., they all want to load that fab. I mean, this is the needs from our customers. And we also believe there is ample -- amplify our business opportunity at there. So the cost is increasing, but cost is not the only factors. And we are still working on the government subsidy and we'll continue working on the cost reduction. And every company have different ways to reduce the cost. So that is the work in the process. Gokul Hariharan: Thank you, thank you very much. My second question, would the TSMC consider any kind of a joint venture fab in the U.S. with potential large customers? Historically, TSMC has done this with some of the customers like Altera and NXP long back. Would you consider any kind of joint venture fabs potentially with any of the customers in the U.S. if the outsourcing opportunity big enough? Thank you. Jeff Su: Okay. So Gokul's second question is, again, would TSMC consider any type of joint venture fab in the U.S. for outsourcing? He notes we have done certain JVs in the past. So is this something we will consider in the U.S. for outsourcing opportunities? Mark Liu: Yes. Let me answer this question again. This -- our -- yes, TSMC indeed has some joint venture arrangement maybe 20 years ago within U.S. But right now, we understand -- with that experience, we understand, our customers' demand will go up and down. And we don't -- and also, we don't want to limit this fab into a specific set of customers. It's open to the RO customer base to utilize. So no, at this point, we do not plan to have a joint venture arrangement in the U.S. Jeff Su: Okay, Gokul. Operator -- okay, thank you Gokul. Operator can we move on to the next participant, please. Operator: Next one to ask question, Charles Shi from Needham and Company. Charles Shi: Yes, good afternoon. Thank you for taking my question. I want to go back, a quick clarification about N3 gross margin. You kind of mentioned probably first time quantified how much dilution that you're expecting, 2% to 3%. Can you let us know dilution relative to which number because there is one long-term gross margin number to see, 3% and higher, and there is another one which is where your gross margin is tracking? That's a few points above your long-term target. This is kind of a little bit moving target here. So can you clarify with us? Thank you. Jeff Su: So Charles is asking if we can clarify our gross margin target. His question, well, I think, again, when we talk about N3 diluting 2% to 3%, it is for the first year, by which is 2023. And so he's wondering I think, Charles, your question is, does this dilution continue? Does this change our long-term gross margin target? And more -- maybe more, I think he is thinking about what are the gross -- yes, sorry, let me stop there. Is that your question, Charles? Charles Shi: No, no, no. The 2% to 3% dilution relative to what, is my question. Is it relative to your long-term growth target, 2% to 3% and higher, or where you're tracking, which is 59%, 58%, yes, that's my question? Jeff Su: Thank you, Charles. So Charles is asking, when we talk about 2% to 3% dilution, are we looking at 53% diluting from there? Or are we looking at 59% diluting from here? Wendell Huang: Charles, it's diluting from next year's gross margin as we forecast. It's neither 53% nor 59%. Bear in mind that when we talk about 53% and higher, it already included the dilution effects from the N3 dilutions. Jeff Su: Okay, Charles? Do you have a second question? Charles Shi: I do. I have a more long-term question. Thank you, Chairman, for mentioning N2 package, which that includes chiplets. I want to specifically ask you about chiplets. I think you recently talked about expanding SOIC capacity by 20 times through 2026. That's quite a big amount of capacity application. I think one year ago, you sort of mentioned SOIC is something you're targeting for high-performance computing application. But given the amount of capacity increases you're planning, any updated thoughts on whether that can be a technology possibly at N2 to use for smartphone platform? Any other color you can give us would be great. Thank you. Jeff Su: Okay. Thank you, Charles. So Charles second question is on 3D IC. He notes that, in particular, we have talking about SOIC and also expanding the capacity there. We have said in the past, this is primarily adopted by HPC applications. His question is, with such capacity expansion, do we also expect smartphone customers to adopt 3D IC solutions like SOIC at some point in the future? Is that correct, Charles? Charles Shi: Yes. Thank you very much. C. C. Wei: Okay. Let me answer this question, Charles. So far, the SOIC is primarily adopted by the HPC applications. Okay. Because of that it's very fit for their high-speed and power efficient. But for mobile adoption, it will depend on their chiplet's architecture, interconnect density requirement, thermal or other requirement. And we will have other solution to address the mobile requirement. Jeff Su: Okay, alright. Thank you, Charles. Operator, can we move on to the next participant, please. Operator: Next one to ask questions, Mehdi Hosseini from Susquehanna International. Mehdi Hosseini: Yes, thank you for taking my question. I just want to go back to the CapEx. I think the Chairman has guided back in 2021, the shipment guide to worth TWD 100 billion of CapEx during the 2021 through 2023 period. And now this morning, you're highlighting the fact that CapEx this year could be TWD 40 billion. So if I was to use the TWD 100 million, the both suggests to me that your CapEx could be down by as much as 8% to 10% in 2023, unless you are really that TWD 100 billion guide. I just want to get some color on this, and I have a follow-up. Jeff Su: Okay. So Mehdi’s first question is on our CapEx. He notes back in April of 2021, we had guided for TWD 100 billion CapEx in the next three years. And so now he's adding the math up for last year and this year, and wondering, does that apply -- sorry, imply a decline in our CapEx for 2023? Or do we have a new revised guidance for the CapEx spend? Wendell Huang: Mehdi, let me answer this. We're not going to talk about the TWD 100 billion today. We're not going to comment CapEx beyond 2022. We've already given the guidance range of 2022. Now as we mentioned before, every year, when we invest in CapEx, it is for the future growth opportunities. So as long as there -- we believe the future outlook is good, we will continue to invest in a disciplined manner. Mehdi Hosseini: Got it. And just a quick follow-up here. Despite the fact that CapEx was up 76% last year, 2021, the depreciation so far has been tracking flattish. It was flat in Q1, down 2% in Q2. Should I expect a big step-up in depreciation going forward? Jeff Su: Okay. So Mehdi also wants to follow up to ask about depreciation. Despite the increase in CapEx, why is the depreciation growth pretty flattish or low so far this year? And then should we expect a step-up in depreciation for 2023? Wendell Huang: Mehdi, every year, there are new depreciation coming in. But at the same time, there are depreciation getting out of the depreciation table. So some comes in, some goes out. This year, we expect that depreciation will grow above mid-single-digits from last year. It is slower -- lower than when we guided at the beginning of the year because of some two delivery schedule change, as C.C. mentioned earlier. Now for next year, the -- it's too early to give a specific number, but the depreciation will be much higher than this year. Mehdi Hosseini: Okay. And just since everyone had most second question, may I squeeze one quick follow-up? Jeff Su: Well, you have 1.5. I'll let you another half question, please, Mehdi, because we still have a few people on the line. Yes. Mehdi Hosseini: Sure. I'll make it very quick. When I look at your customers, their inventories are at a 25-year high. And I think everyone is going to take a look at the seasonality in the second half. And I'm just curious, what are the key variables? What are the key metrics? Or what are the key strategies that you have in place that could mitigate the gross margin balance by this if your customers become more aggressive in inventory correction into next year? Jeff Su: Okay. So Mehdi's question is noting customer inventory at customers are very high. So what would be the key variables or metrics for TSMC to mitigate our gross margin downside or risk if customers were to adjust their inventory further? Is that correct, Mehdi? Mehdi Hosseini: Yes. If they become more aggressive in inventory correction into first half next year. Jeff Su: If they were customers were to become more aggressive on their inventory correction into first half next year. C. C. Wei: Well, let me answer the question. As I stated in the remark, our customer are doing the inventory correction. But I said that customers demand still exceeds the TSMC's capability to support for this year. So even they do the inventory adjustment, what I say that they decrease their demand versus their original number, TSMC's capacity is still very tight and will remain very healthy in the utilization. So that's why we can keep our gross margin intact. Did I answer your question? Jeff Su: Thank you, Mehdi. Operator, let’s move on to the next participant, please. Operator: Next one to ask questions, Brad Lin from Bank of America. Brad Lin: Hello, good afternoon everyone. Thank you for taking my question. So firstly, our congratulations once again on the strong earnings. And my first question is about advanced packaging. We learned the advanced packaging is very, very important for TSMC's long-term growth and TSMC has a great variety of offering to provide higher value to customers. So would you please share your insights on what are the key barriers are for wider adoption by plants? And would you expect the contribution mix to increase gradually? Or if there is a point to see an explosive growth from the advanced packaging? And by the way, we saw the news about the DDIC in Japan and how will that can accelerate their progress. Thank you very much. Jeff Su: Okay. So Brad's question is on advanced packaging. I believe if I heard you correctly, what are the key barriers for wider adoption of our packaging solutions by customers? What is the long-term revenue growth outlook of advanced packaging? Is it going to be explosive growth or growth similar to the corporate average and also the role of our 3DIC center in Japan in developing advanced packaging solutions? C. C. Wei: Okay. That's a very long question, but let me answer one by one. First, we developed a very advanced packaging technology to meet the customers' demand. So far today, 3DIC or SOIC, we develop for the high-speed performance, HPC applications first. And the other one, mostly starting to be adopted by all HPC customers starting from today. So we expect is gradually will ramp up. And until that's 2-nanometer, I think I have much more demand in that technology node for the 3DIC. That's what we expect. And we expect the growth of these 3DIC business will be healthy, probably a little bit ahead of TSMC's growth forecast. Now let me turn to the 3DIC center in Japan. We established 3DIC center because of Japan has a fundamental advantage on the raw material also under packaging area. For example, the substrate, they are the number 1 in the world. And we need that one technology to complement the TSMC's 3DIC technology so we can serve our customer better. And that's why we established a 3DIC center technology development center over there. Did I answer your question? Brad Lin: Yes, yes. Very clear. Thank you, sir. So maybe another follow-up, that's also about the IC substrate. So ABF actually substrate currently plays a very important role in advance packaging, of course, especially for coax and the substrate demand potentially in largest with the increasing advanced packaging penetration. So with the rising integration level of a chip, do you expect new material to potentially replace ABF? And any plan to secure substrate supply or upgrade the designs for TSMC for future requirements? And maybe one last follow-up is that, if we compare 2.5D and 3D, would you need more substrate for 3D? Thank you. Jeff Su: Okay. Well, Brad's second question is on substrates. He wants to know, with the development of substrates and the adoption, do we see further developments in terms of new materials? Will we see more substrates used in 3DIC versus 2.5D? And will we -- how do we secure the substrate supply? C. C. Wei: Well, this one we are working with the substrate partner. And your question is the 2D, 2.5D or 3D, both, both are important. But let me tell you one further step. We're only interested in the very advance technology. We are not going to develop any commodity of the substrate technology to compete in the market. No. We are developing for the very high performance computing or very large substrate to support TSMC's customer. That's our purpose. Jeff Su: Okay. Thank you, C.C. Operator, can we move on to the next participant. Operator: Next one to ask question, Krish Sankar from Cowen & Company. Krish Sankar: Yes, hi. Thanks for taking my questions. I have two of them. The first one is, when I look at your full year guidance of 35% revenue growth, it looks like calendar 4Q or the December quarter is going to be sequentially down more than 10%. And that hasn't happened in a long time. So I'm kind of curious, how much of that is driven by demand versus FX? And then the second question, a follow-up is, if I look at your CapEx run rate, the first half is running at about TWD 17 billion, which is below the lower end of your full year guidance. So I'm kind of curious, what are the tool delays that's causing the pushout of CapEx into next year? Is it like EUV? Is it like depth edge tools? Any color on that would be super helpful. Thank you very much. Jeff Su: Okay. So Krish has two questions. First is looking at our full year guidance to grow mid-30s, and he says this implies a decline in the fourth quarter? C. C. Wei: No, I don't think so. We did the calculation. Maybe you can do that again. It's at least up. Wendell Huang: Yes. Krish, I would note that when we talk about mid-30s guidance, as C.C. said, that is in U.S. dollar terms. Okay. Jeff Su: And then his second question is on CapEx and sort of looking at the CapEx. His question is we have already said it will be closer to the lower end of the range. He wants to know what is driving the CapEx. Is it tool delays? Is it EUV? What types of equipment? Wendell Huang: No. I don't think we can go into that kind of details. But some of them got pushed out to next year, as C.C. mentioned. And every year, the CapEx profile can be difference quarter-by-quarter. Jeff Su: Okay, thank you. Operator, in the interest of time, I think we’ll take questions from the last two participants, please. So, let’s move on to the next. Operator: The next one to ask questions, Frank Lee from HSBC. Frank Lee: Thank you. I wanted to just ask a question on, I guess, the overall profitability and also pricing. It seems like this year, we start to see a foundry price increase and a bit unusual for TSMC. And going into next year, it looks like there's some manifestation of further price increases. But at the same time, we're also seeing potentially inventory correction. So just trying to understand the pricing strategy itself, is this more of a reflection of perhaps the structural profitability for this cycle being different than the past? Or are there any kind of cost that we're seeing this time that we haven't seen in past cycles. Jeff Su: Okay. So Frank's first question is on pricing. He wants to know what is driving our pricing strategy. How do the cost inflation or factors play into it? And really what drives TSMC's pricing? Wendell Huang: Yes. We do not comment on our pricing details. These are the private discussion between us and our customers. Having said that, our pricing is strategic and value-driven, not opportunistic or cost plus. We work closely with our customers to provide our value. And we will continue to ensure that our pricing reflects our value creations, including technology, ecosystem, and services and capacity support. By taking all these actions, we believe we can achieve a long-term gross margin of 53% and higher. We do face manufacturing cost challenges. As we mentioned, rising raw materials, utilities and tool costs, et cetera. But having said that, we still think that the 53% long-term gross margin is achievable, and 53% and higher. Jeff Su: Okay. Frank, do you have a second question? Frank Lee: My second question is, I understand the overall view on that. But given what you guys just talked about the overall cycle, I know you still have some -- the leadership in the event side and everything else. But is there a potential bill effect where customers could see a stronger second half this year in anticipation of price increases? And with the adjustment going into next year, that we see some more weakness in the first half more than anticipated in the first half? Jeff Su: Okay. Well, Frank's second question is with pricing, will -- could there be a situation where customers, I guess, will pull in more of their business to second half of this year, and thus, we would see a weaker first half next year. C. C. Wei: No, we did not see that. We are actually -- we are working with our customers and we try our best to support our customers. As I said, even right now, our capacity remains very tight. So the switching between the next year's first quarter and this year's second half, no, we did not see that, just simply put it. Jeff Su: Great. Thank you, Frank. Operator, can we take questions from the last participant, please. Operator: The last one to ask questions, Robert Sanders from Deutsche Bank. Robert Sanders: Yes. Thanks for taking my questions. I just have two. The first one is just if you could just discuss how much of next year's revenue is under LTA. The reason I'm asking is because there are some people in the market thinking that customers may be fearful of pushing our wafers because they may be jeopardizing agreements for next year. And then the second question would be just to on the chiplet question. I was just wondering what percentage of the 2-nanometer HPC designs will be using a chiplet architecture. Is it the majority? What's the adoption rate? Thanks. Jeff Su: Okay. So Robert's first question is he wants to know how much percentage of revenue to long-term agreements with customers represent for TSMC. Maybe Wendell can address this question. Wendell Huang: Yes. Robert, we don't discuss the details like that. We work very diligently and closely with the customers to plan the capacity including receiving the prepayments for capacity support. And we will continue to work with them to decide to determine the best way to support them going forward. Jeff Su: Okay. And then his second question is on N2. He wants to know, for HPC applications on N2, what is the percentage or that may adopt a chiplet architecture approach? C. C. Wei: I cannot release the number. But let me assure you that the number of the customers using the chiplet in the N2 or the 2-nanometer technology will start to increase and that will become a major approach in the 2-nanometer and the following technologies. Jeff Su: Okay. Thank you, C.C. Thank you, Robert. And thank you, everyone. 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 one hour from now and the transcript will become available 24 hours from now. Both of which you can find available through TSMC's website at www.tsmc.com. So 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.

Jeff Su: Good afternoon, everyone, and welcome to TSMC’s First Quarter 2022 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. 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 first quarter 2022, followed by our guidance for the second quarter 2022. Afterwards, Mr. Huang and TSMC’s CEO, Dr. C.C. Wei, will jointly provide the company’s key messages. Then we will open the line for Q&A. 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 on our press release. And now I would like to turn the call over to TSMC’s CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2022. After that, I will provide the guidance for the second quarter. First quarter revenue increased 12.1% sequentially at NT terms or 11.6% in U.S. dollar terms as our first quarter business was supported by strong HPC and automotive-related demand. First quarter gross margin increased 2.9 percentage points sequentially to 55.6%, mainly as we continue to sell our value and improve cost. Operating margin increased 3.9 percentage points sequentially to 45.6%, primarily due to lower vaccine donation expense as compared to the fourth quarter. Overall, our first quarter EPS was TWD 7.82, and ROE was 36.2%. Now let’s move on to revenue by technology. 5-nanometer process technology contributed 20% of wafer revenue in the first quarter, while 7-nanometer accounted for 30%. Advanced technologies, which are defined as 7-nanometer and below, accounted for 50% of wafer revenue. Now moving on to revenue contribution by platform. All 6 platforms increased in the first quarter. Smartphone increased 1% quarter-over-quarter to account for 40% of our first quarter revenue. HPC increased 26% to account for 41%. IoT increased 5% to account for 8%. Automotive increased 26% to account for 5%. And DCE increased 8% to account for 3%. Moving on to balance sheet. We ended the first quarter with cash and marketable securities of TWD 1.3 trillion. On the liability side, current liabilities increased by TWD 83 billion, mainly due to the increase of TWD 63 billion in accrued liabilities and others and the increase of TWD 30 billion in short-term loans, partially offset by the decrease of TWD 21 billion in accounts payable. Long-term interest-bearing debt increased by TWD 19 billion as we raised TWD 20 billion of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days decreased 2 days to 38 days, while days of inventory remained at 88 days. Now let me make a few comments on cash flow and CapEx. During the first quarter, we generated about TWD 372 billion in cash from operations, spent TWD 262 billion in CapEx and distributed TWD 71 billion for second quarter ‘21 cash dividend. Bonds payable increased by TWD 20 billion due to the bond issuances. Overall, our cash balance increased TWD 87 billion to TWD 1.2 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled $9.38 billion. I have finished my financial summary. Now let’s turn now to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between USD 17.6 billion and USD 18.2 billion, which represents a 1.9% sequential increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 28.8, gross margin is expected to be between 56% and 58%, operating margin between 45% and 47%. In addition, we maintain our 2022 capital budget to be between USD 40 million and USD 44 billion. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our first quarter and second quarter profitability. As a reminder, 6 factors determine TSMC’s profitability: leadership, technology development and ramp-up, pricing, cost reduction, capacity utilization, technology mix and foreign exchange rate. As we discussed earlier, our first quarter gross margin increased by 290 basis points sequentially to 55.6%, mainly due to cost improvement and value-selling efforts and a more favorable foreign exchange rate. Our gross margin guidance provided 3 months ago was based on exchange rate assumption of USD 1 to TWD 27.6, whereas the actual first quarter exchange rate was USD 1 to TWD 27.95. This created about 50 basis point difference in our actual first quarter gross margin versus our original guidance. We have just guided our second quarter gross margin to further increase by 140 basis points sequentially to 57% at the midpoint primarily due to a more favorable exchange rate assumption of USD 1 to TWD 28.8, which brings more than 100 basis points gross margin tailwind and continued cost improvement and value-selling efforts. Looking ahead on our profitability, we continue to face challenges from rising inflationary costs, increasing process complexity of leading nodes, new investments in mature nodes and overseas fab expansions. Despite the manufacturing cost challenges and excluding the impact of foreign exchange rate, of which we have no control over, taking the other 5 factors into consideration, we continue to believe a long-term gross margin of 53% and higher is achievable. Now let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our near-term demand and inventory. We concluded our first quarter with revenue of TWD 491.1 billion or USD 17.6 billion, which is above the high end of our guidance, mainly due to better demand from smartphone and automotive-related applications than our forecast 3 months ago and customer’s continuing need to ensure supply security with the emergency of COVID-related uncertainties. Moving into second quarter 2022. We expect our business to be supported by HPC and automotive-related demand, partially offset by smartphone seasonality. On the inventory front, we expect the supply chain to continue to maintain a higher level of inventory as compared to the historical seasonal level for a longer period of time, prolonged by recent COVID-related supply chain disruptions and uncertainties brought about by geopolitical tension. On the demand side, despite the recent macro-related uncertainties, we continue to observe the structural increase in long-term semiconductor demand, underpinned by the industry makeup trend of 5G and HPC-related applications. This multiyear megatrend will support , the device unit volume growth, and much more importantly, drive substantial semiconductor content enrichment in many young devices across HPC, smartphone, automotive and IoT applications. With our technology leadership, TSMC is well positioned to capture the strong structural demand with our advanced and specialty technologies. And we expect our capacity to remain tight throughout 2022. 2022 will be another strong growth year for TSMC. And we expect our full year growth to likely be at or exceed the high end of our guidance range of mid- to high 20s percent in U.S. dollar terms. Next, given the recent constraint in the tool supply chain, let me talk about the tool delivery update. As a major player in the global semiconductor supply chain, TSMC worked closely with all our tool suppliers to plan our CapEx and capacity in advance. However, like many other industries, our suppliers are facing great challenges in their supply chain from the continued impact of COVID-19, which are creating labor component and chip constraint in their supply chains and extending towards delivery lead time for both advanced and mature nodes. TSMC is working closely with our suppliers and taking several actions to do our part to the supply chain challenges. We have increased regular high-level communications to trace the progress. We have sent several teams on-site to support our suppliers and are working closely with them to identify critical chips that are gauging the tool delivery. We are working with our customers to prioritize our wafer capacity to support those critical chips to help mitigate the chip constraint issue. By taking such actions, we do not expect any impact to our 2022 capacity plan, and we continue to work closely with our suppliers on 2023 and beyond so that we can ramp-up our capacity to meet customers’ demand. Now I will talk about the materials supply update. TSMC operates a well-established enterprise risk management system to identify and access all relevant risk and proactively implement risk mitigation strategies. In terms of material supply, TSMC’s strategy is to continuously develop multi-source supply solutions to build a well-diversified global supplier base and to improve the local supply chain. For specialty chemicals and gases, including neon and geon we source from multiple suppliers in different regions, and we have prepared a certain level of inventory stock on hand. We are also working closely with our suppliers to further strengthen the resilience and the sustainability of our supply chain. Thus, we do not expect any impact on our operations from materials supply. Finally, let me talk about the N3 and N3E status. Our N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance and cost for our customers. Our N3 schedule is unchanged, and we’re on track for volume production in second half of 2022 with good year. We expect the ramp of N3 to be driven by both HPC and smartphone applications. We continue to see a high level of customer engagement at N3 and expect more new tape-outs for N3 for the year as compared with N5 and N7. N3E will further extend our N3 family with enhanced performance, power and yield. We also observed a high level of customer engagement at N3E, and volume production is scheduled for 1 year after N3. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. In terms of profitability, the initial outlook for new node is always challenging. And the increasing process complexity of leading nodes such as the N3 bring even greater challenges to achieving the corporate average gross margin in 7 to 8 quarters, particularly as our corporate profitability has improved with long-term gross margin target of 53% and higher. As we have done at prior nodes, we will continue to work diligently with our cost improvement and reducing our effort to ensure that we earn the right profitability and return on N3. With our technology leadership and strong customer demand, we are confident that our N3 family will be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared remarks. Should you wish to raise your question in Chinese, I will translate into English before our management answers your question. Now let’s begin the Q&A session. Operator, can we please proceed with the first caller on the line? Operator: Yes. The first one to ask question is Bruce Lu from Goldman Sachs. Bruce Lu: Congratulations for the great result. I think the first one is still focused on the macro and inflation concern. How does TSMC evaluate the impact from the inflation and the geopolitical tension? We understand that TSMC worked with customers closely, but most of your customers probably don’t have the full picture of end demand fluctuation. At the same time, TSMC has beared the risk to build capacity a couple of years ahead to make the decision earlier, so how can TSMC provide more color to strengthen the investor confidence? Do we have any changes on our multiyear capacity expansion plan? Jeff Su: Okay. Bruce, please allow me to summarize your first question. I think Bruce’s question is related to the macro environment and inflationary concerns. He wants to know how do we evaluate the impact from inflation and macro environment. And also in terms of our capacity, our customers may not have the full clear picture of end demand but TSMC has to bear the risk of building the capacity multiple years ahead of time. And will the CapEx amplify our volatility, so he wants to know, if there’s any color on what keeps basically management confident for the CapEx plan and color to strengthen investors’ confidence in our CapEx. C. C. Wei: Bruce, this is C.C. Wei. Let me answer your question. As you said, TSMC works closely with our customers to plain capacity. And our CapEx and capacity expansion plan are actually based on customers’ long-term demand profile, underpinned by the industry megatrend. We do not build capacity based on speculation. In advanced technology node, we have a leading position. In our mature node, our capacity is built to support customer demand for our differentiated specialty technologies. And we focus on building effective capacity, which is capacity that products and produce the specialized technology with high yield rather than just plain capacity. Thus, we are confident our capacity is built to support our customers’ growth, and our utilization and profitability will be sustained. Jeff Su: And then also, how do we -- I think the impact of inflation. C. C. Wei: Well, the inflation definitely impact the consumers’ buying pattern. But let me stress then on overall demand, under the inflation environment, while the momentum in certain end market segment may slow down or adjust in terms of device units, other end market segment remains strong. In fact, we expect our HPC platform to be TSMC’s strongest growing platform in 2022 and the largest contributor to our growth, fueled by the structural megatrend driving increasing need for greater computation power and energy-efficient computing. But then more importantly, the increasing silicon content in end devices such as 5G smartphones, PCs, servers, networking and automotive applications are a much more important factor in supporting our strong semiconductor demand. And with our industry-leading technology, we are well positioned to capture all the opportunities. Jeff Su: Okay. Bruce, does that answer your first question? Bruce Lu: Yes. Okay. I want to go for the second question. I think in the prepared remarks, I noticed that there was no mentioning about the N2 schedule. Both of your competitors accelerated their schedule for the next-generation transistor. Can you comment on TSMC’s status for the especially in performance and the ramp-up schedule? Jeff Su: Okay. So I think Bruce’s second question -- Bruce, please allow me to make sure we got it is on the N2 schedule. He said that our competitors have commented on their N2 schedule, and Bruce wants to know what is our N2 plan? C. C. Wei: Our N2 development is on track, including new transistor structure and progressing to our expectation. We expect our N2 delivery to be the best technology, maturity, performance and cost for our customers. And we are confident that N2 will continue our technology leadership to support our customer growth. And we still plan the production in 2025. Bruce Lu: So the 2-year cadence remain unchanged for the N2? C. C. Wei: It won’t. Jeff Su: Okay. Thank you, Bruce. Operator, can we move on to the next participant, please? Operator: The next one to ask question is Gokul Hariharan from JP Morgan. Gokul Hariharan: My first question is on N3. Given we are less than 1 year from N3 mass production start, could we talk a little bit about how should we expect N3 revenues to be ramping up next year? Would it be similar to what we have seen with N5 and N7 with roughly about 10% of next year’s revenues being N3? And also, could you talk -- I think you highlighted that there would be a little bit more challenge to get N3 to profitability closer to corporate average given some of the moving parts. Could we elaborate a little bit more on that as well? That’s my first question. Jeff Su: Okay. Gokul, please allow me to summarize your question. So Gokul’s question is really related to N3. He wants to know with the ramp-up of N3 what kind of revenue contribution can we expect. Will it be similar to the past patterns of N5 and N7 for about 10% of wafer revenue in the first year. And also, he would like to ask given C.C.’s comment about process complexity challenges, what is the profitability outlook for N3. Is that correct, Gokul? Gokul Hariharan: Okay. Jeff Su: Yes. Okay. Maybe Wendell can address. Wendell Huang: Yes. Gokul, this is Wendell. It’s too early to talk about the revenue contribution as N3 will not begin volume production until second half of 2022 with revenue contribution starting 2023. In addition, as the structural demand underpinned by the industry megatrends is driving growth across all our nodes, the specific percentage of the new nodes as compared to the historical pattern may be less meaningful in the future. But overall, we are confident that our 3-nanometer will be the most advanced foundry technology when it is introduced. And with the strong customer engagement and tape-out activity, our N3 family will be another large and long-lasting node for TSMC, just like N5 and N7 families. Now about the gross margin, as C.C. said, the initial outlook for new node is always challenging. And the increasing process complexity of leading nodes such as N3 brings even greater challenges to achieving the corporate average gross margin in 7 to 8 quarters, and partially also because our corporate profitability has increased and our new long-term gross margin target of 53% and higher. Now it is a bit early to say when N3 can reach the corporate average gross margin at this stage because the volume production hasn’t started yet. However, we will continue to work diligently on selling our value and cost improvement to ensure that we earn the right profitability and return. Now even considering the increasing process complexity of advanced nodes such as N3, we believe our technology leadership, manufacturing and capacity support and ability to earn our customers’ trust will enable us to earn a long-term gross margin of 53% and higher. Gokul Hariharan: Got it. My second question is on the more mature process technologies, could TSMC give us some view on the industry growth for specialty and mature technologies? I think based on the data we look at, historically, that has only grown at maybe low to mid-single digit. But right now, we see a lot of capacity being announced from many foundries in these older specialty and mature process technologies, let’s say, defined as 28-nanometer and above. So could TSMC talk a little bit about growth rate for these mature process technologies going forward? Is it going to be materially higher than the 3% to 5% that we have seen in the past? In most cases, we have seen older nodes grow for 4 to 5 years and then kind of stagnate. Do we see that pattern changing because of some of the content per box or content per device dynamics that you talked about? Yes. Jeff Su: Okay. Gokul, let me summarize your second question. I think your second question is -- Gokul’s second question is on the mature node and the outlook -- growth outlook for mature notes. His question is, how do we see the growth outlook at mature nodes? In the past, it has grown, in his words, about 3% to 5%. Do we think it can be materially higher than that on the mature nodes, which he defines as 20-nanometer and above? Wendell Huang: Okay. Gokul, we forecast the growth rate of the overall semiconductor ex memory industry to accelerate to high single-digit percentage level in the next 5 years as compared to around 4% CAGR in the past 10 years. The higher demand at mature nodes will be driven by structural factors, such as an increase in long-term demand for certain specialty technologies due to the multiyear industry megatrends of 5G and HPC and increasing silicon content in many end devices as well as the acceleration of digitalization. TSMC’s strategy at mature nodes is to work closely with our customers to develop specialty technology solutions to meet their requirements and create differentiated and long-lasting value to customers. We believe our differentiated specialty technologies will enable us to capture the structural demand generated from the industry megatrends and continue to support our customers’ growth. Jeff Su: Gokul, does that answer your second question? Gokul Hariharan: Yes. Jeff Su: Okay. Thank you, Gokul. Operator, can we move on to the next caller, please? Operator: Next one to ask question, Charlie Chan from Morgan Stanley. Charlie Chan: Congratulations for the great results, management. My first question is about the semi inventory debate. So may I clarify with C.C. that the company still believe that supply chain need to keep high inventory for several reasons. But in fact, we are seeing that PC, smartphone OEMs, they’re working down channel inventory even, as you know, that the they are working down the channel inventory. So do you think that the high inventory is actually a signal of a weaker demand? Or anything that we miss here because, in fact, we are seeing consumer tech inventory, we are seeing a correction? Jeff Su: Okay. Charlie, let me summarize your first question. So Charlie’s question is on inventory and end demand. He wants to know or he notes that the consumers -- parts of the consumer end demand seem to be weaker or softer than expected. And so how does this also affect our view on the higher level of inventory, sort of our view? I guess, Charlie, your question is really what is our view on the end demand given potential weakness in consumer end market segments? And then what is our view on inventory. Is that correct? Charlie Chan: Yes. Yes. And if the demand is indeed deteriorating, do you think the actual inventory level should come down? C. C. Wei: Charlie, this is C.C. Wei. You are right, some of the end market segment, actually, we start to see a little bit soft in these days for those smartphone, PC or tablets, load. But as I indicated, other end market segment remain very strong, all right? And so if you look at some of the imbalance in the supply chain, particularly in the MCU or the power managed IT side, we still see very strong demand. And also because of those kind of supply chain disruption by the emerging COVID-19 uncertainty, so we are continuing to observe that our customer will maintain a higher level of inventory for a longer period of time. We continue to observe that. And as a result, actually for TSMC, we -- our capacity remain very tight throughout the whole year of 2022. Charlie Chan: I see. Okay. So is it more specific to those industrial automotive industry inset for consumer tech? Am I right about your comments about inventory level? C. C. Wei: Yes, you are right. In fact, the very important thing is a structural megatrend. So for the great -- you know that my customer require a greater computation power and energy-efficient computing and which is actually the strong point of TSMC’s technology. Charlie Chan: I see. And my second question is about your N3 progress. So we continue to hear a lot of good news and anecdotes about your N3E is actually progressing very, very well. So do you think there is a possibility that you could actually pull in your N3E for maybe 1 or 2 quarters to address the customers’ demand, right? So I think it could be a win-win for both TSMC and your customers. Do you see that kind of a possibility and maybe convert some N3 projects to N3E earlier? Jeff Su: Okay. So Charlie’s second question is on N3E. He notes the progress is going very well. So his question is, is there a possibility to bring in the timing of N3 to earlier? And will we convert N3 capacity to N3E? Charlie Chan: Exactly. C. C. Wei: Okay. Charlie, you are right again. I mean that our N3E result is quite good. And the progress is actually -- is ahead of our schedule. And pull in, yes, we are considering that. So far, I still did not have a very solid data to share with you that how many months we can pull in. But yes, it’s in our plan. And also the capacity, since we have a very strong demand on the N3 and N3E, we are still planning to have enough capacity to support our customer. Jeff Su: All right. Thank you, Charlie. Operator, can we move on to the next participant, please? Operator: Next one to ask question is Randy Abrams from Credit Suisse. Randy Abrams: My first question, I wanted to follow up on your changed outlook where you took up from mid- to high 20s to now high 20s or above. Could you discuss because it is in light of the macro and the softening you’ve seen on consumer? Could you discuss the factors for the change if -- how much might be attributed to market share technology or how much to a certain platform? If you could give an update on your view of the different platforms if certain platform drove it? And did you see any downward change on any of the 4 platforms? Jeff Su: Okay. Thank you, Randy. So let me summarize Randy’s first question is about our full year outlook, which as C.C. mentioned in his key messages that we expect to be at -- likely to be at or exceed the high end of our guidance of mid- to high 20s. So Randy’s question is, what is driving the higher or better full year outlook given the macro environment looks a bit more shaky. Is it technology? Is it market share, et cetera? And what is the outlook by platform? C. C. Wei: Randy, we expect our HPC platform to be TSMC’s strongest growing platform this year and the following years. And it will be the largest contributor to our growth. And this is all because of a structural megatrend driving increasing need for greater computation power and energy-efficient computing. As I said, these kind of technologies happen to be TSMC’s strong point. So that all I can share with you is that we have confidence that it will be exceed or at on the high end of our guidance. Randy Abrams: Okay. And a follow-up just on the first. Did you change your view on...? Wendell Huang: Yes, and then also... . Randy Abrams: Yes, so I wanted to know the other platforms, and if you take your view on . Wendell Huang: Now for this year, Randy, we can share with you that we expect HPC and automotive to grow faster than the corporate average. IoT, similar. And smartphone, approaching the corporate average. Jeff Su: For the full year. Wendell Huang: For the full year. Jeff Su: Yes. Randy Abrams: Okay. So it sounds like not much change. My second question is more tied to -- there’s a lot of fear about do we head into the downturn or a slowdown. If you can give the other way in terms of flexibility on expansion plans, if hopefully we don’t, but if we go into a more of a recession, how much flexibility with your fab plants across U.S., Taiwan, Japan and Nanjing? And on the other side, with the prepayment in deposits, is there flexibility on timing of shipments, full flexibility for customers if they need to respond to a slowing demand? Jeff Su: Okay. So Randy’s second question is about if there’s a downturn or a slowdown, will this change? Or how flexible is the timeline for our new fab and capacity expansion plans whether in Taiwan, Japan and overseas if the outlook changes for the worse? And what is the flexibility of our prepayments with customers if there was a downturn or slowdown? C. C. Wei: Randy, this is C.C. Wei. Our CapEx and capacity expansion plan are always based on our customers’ long-term demand profile. This is underpinned by an industry megatrend. As long as the mega trend continues, which we believe it will, we will continue to invest to capture the growth that will follow. So even a short term with the possibility of downturn, which we don’t think it will impact too much to TSMC, if even it happens, we will continue our plan and we have confidence to invest to capture the growth that will follow. Randy Abrams: Okay. And on the customer side for their -- the deposits and capacity they’re locking in? Wendell Huang: Randy, actually, we believe signing contracts to guarantee the loading in the future is not a common practice. We focus really on technology leadership, manufacturing excellence and earning customer trust as a more effective way to secure customer commitments. Now we work closely with our customers to plan the capacity, including receiving their prepayments for capacity support. And we will continue to work with them to determine the best way to support them. Jeff Su: Yes, Randy. So I think the answer for customer side and capacity side is pretty aligned or similar. Does that answer your second question? Randy Abrams: Yes. I mean, I guess, just like in the past, it was the flexibility like we saw the slowdown in utilization. So I mean I would think it’s still work with customers on their plans if they need to reschedule because we’ve seen in the past like if they have to adjust their utilization. Like I don’t know if anything’s changed in the model on that element? Wendell Huang: No, no, nothing changed in the model. Yes. Jeff Su: Okay. Thank you, Randy. Operator, can we move on to the next caller, please? Operator: Next one is Sunny Lin, UBS. Sunny Lin: Congratulations on the strong performance. So my first question is on the pricing strategy for you going forward. I mean if we look at this up-cycle, the tight supply and the strong restocking demand has supported pretty meaningful price increase for foundry industry and TSMC throughout 2021. So from here, would you look to further raise price for some of the technologies to justify rising cost of expansion? And on the other hand, if the supply demand start to normalize, do you think there could be any risk to pricing? Jeff Su: Okay. So Sunny, let me -- please allow me to summarize your first question. Her question is on pricing on both sides sort of in an up-cycle. But as we face cost challenges, will TSMC consider to further raise the price. And then on the flip side, on the other hand, if demand were to soften, I think, Sunny, you -- on the other hand, was will there be any risk to pricing to lower price. Is that correct? Sunny Lin: That’s right. C. C. Wei: Okay. Sunny, this is C.C. Wei. We do not comment on our pricing detail. But let me assure you that our pricing strategy is strategic, not opportunistic or short term. And customer understands our effort to support their growth. As you said that if there is a downturn coming and on the flip side, the TSMC going to drop our price, the answer is no. Did I answer your question? Sunny Lin: That’s very helpful. So my second question is to follow up on the N3 ramp-up. So just trying to get a bit of a color on 2023. I understand the demand is pretty robust. But when we think about the potential revenue contribution for 2023, with the less equipment supply and delivery time, would that be a capping factor for 3-nanometer to exceed the typical 10% revenue contribution for next year? Or do you think there’s still some time for you to try to accelerate the equipment expansion? Jeff Su: Okay. So, Sunny’s second question is on N3 and the ramp-up. Her question once again is sort of around the revenue contribution of N3. And specifically, she is asking whether the equipment supply or some of the tool delivery issues would affect the ramp-up of N3 in next 2023 and, thus, the revenue contribution. C. C. Wei: Well, we did see some of the issues on the tool delivery and we are still working on it. As I said in the statement, we are working on 2023 right now, and we hope that we won’t have any big issue. But right now, we are not ready yet to share with you that how much we can resolve the issue. But we have strong demand. We try to build enough capacity for our customers. And we are working with our equipment supplier to get enough tool to expand our capacity. Jeff Su: Okay. Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one to ask questions, Rick Hsu from Daiwa. Rick Hsu: Yes. My first question is regarding your revenue guidance for this year. I think you think that it should be at or even exceed your mid- to high 20s guidance in U.S. dollar terms. So in that case, are you revising your forecast for the global semiconductor ex memory for this year and also the global foundry market forecast for this year? Jeff Su: Okay. Rick’s first question is about our 2022 outlook. Sorry, Rick, let me try to summarize. So Rick notes that C.C. said, our 2022 growth will likely be at or exceed the high end of our revenue guidance of mid- to high 20s. So he wants to know what does this mean for our forecast or expectation for the semiconductor ex memory and foundry markets. C. C. Wei: So let me answer your question. So far, we are confident on TSMC’s performance. But the whole industry, semiconductor’s foundry industry remain that it will be around 20% year-over-year as a growth. All others, we are still trying to understand the status and not very ready to share with you yet. Rick Hsu: Okay. So basically, the strength is more TSMC company specific, right? C. C. Wei: That’s because our dealership in the technology, and you are right. Rick Hsu: Okay, great. C.C., and second question, I think your customers have been waiting in the long queue since last year. And I know this year, there’s some macro issues, there’s some change and you mentioned some demand slowdown. But some others still very strong. So I assume for any customers releasing capacity will be quickly filled up by others. But are you saying the queue is shortening? Or if that’s the case, when do you think the queue -- there’s no more queue? When do you think that will happen? Jeff Su: Okay. So Rick’s second question is about the -- C.C. mentioned that our capacity will remain tight throughout 2022. But C.C.’s -- sorry, Rick’s question is more about the queue or the line to wait because, as we said, certain end market segments may slow down or adjust, but others remain strong. Rick’s question is really is that wait or list line shortening, or when do we expect that to shorten? C. C. Wei: Rick, so far, as I said, TSMC’s capacity will be very tight, not enough to support our customers. So if you ask whether the list in the queue will be longer was smaller, it doesn’t matter. It’s still just not enough to support our customers. And we are working very hard to support them. That’s what I can share with you. Jeff Su: Okay. Thank you, Rick. Operator, can we move on to the next participant, please? Operator: Next one online Brett Simpson from Arete Research. Brett Arete: Yes. I had a question on your overseas fab expansion plans. I guess today, if we look at your wafer capacity, it’s 100% in Taiwan. Are you seeing any pressure from your strategic customers to accelerate your overseas plans for fab expansion? And can you also share with us if you have a target for what portion of your wafer capacity long term might come from your overseas fabs? And in what time period might that happen? Jeff Su: Okay. So Brett’s first question is about our overseas expansion and global manufacturing footprint. His question is that, are we seeing any pressure from strategic customers to expand overseas? And he wants to know what proportion or percentage of our capacity will be overseas by what time frame? C. C. Wei: Okay. Let me answer the question. In fact, talking about the overseas supply or the capacity we are building, our responsibility as TSMC’s management is to make the best decision for our customers and in the best interest of TSMC. And we are in close and constant communication with all of our customers. And so far, actually, their priority are securing capacity, enough capacity to support their business and also working with TSMC on technology development. That’s TSMC to focus on. And for the how much of the capacity to build out site, let me share with you, right now, we have fab in Arizona with 5-nanometer, a fab in Japan which are 28 and 16 FinFET technology and expanding our capacity in China with 16 FinFET and 28. Also, we’re building in Taiwan for 28 nanometers more capacity. We definitely have some future plan, but while increase in the next several years, but not enough to share with you say how many percentage in total were compared with TSMC’s technology. Does that answer your question? Brett Arete: Yes, that’s great. And maybe just a second question. On -- you mentioned N3E is coming 1 year after N3. But you can give us an update around timing of 2-nanometer, which I believe is going to have a new transistor architecture gate all around. I guess the move from N5 to N3 was more than 2 years, which is what you’ve typically been -- that cadence you’ve typically been running at. Are we going to get back to 2 years with N2, between N3 and N2, so that we’ll see an end of 2024 introduction for N2? Or will it take longer? Jeff Su: Okay. So Brett’s second question is really on N2 and the cadence. He wants to know that N5 to N3 is about more than 2 years cadence between those 2 nodes. For N3 to N2, will it be back on a 2-year cadence? And what’s the time frame for N2? C. C. Wei: Brett, our progress so far today for the N2 is on track. And all I want to say is, yes, at the end of 2024, you will enter the risk production. 2025, it will be in production, probably close to the second half or the -- or the end of 2025. That’s our schedule. Jeff Su: All right. Thank you, Brett. Operator, can we move on to the next participant, please? Operator: Next one, we have Laura Chen, KGI. Laura Chen: My first question is about the advanced packaging development. Can you share with us your view on TSMC’s current progress in advanced packaging in terms of the revenue contribution and the growth trend? And since we know that there are a lot of high computing PC clients relied on TSMC advanced packaging or 3D packaging service, so can we expect your advanced packaging revenue will be kind of part of your high computing PC growth outlook? That’s my first question. Jeff Su: Okay. So Laura’s first question is on our 3D IC or advanced packaging progress. She wants to know the progress in terms of the revenue contribution, the growth outlook for the packaging business and how correlated is it to the high HPC platform. Wendell Huang: Right. Lauren, let me answer the first part. In 2021, the advanced packaging generated $4.1 billion of revenue. Now we expect that this year, the growth will be similar to the corporate growth. And during the 5-year -- in the next 5 years, we expect its growth in CAGR will be slightly higher than the corporate. Jeff Su: And the correlation with HPC? C. C. Wei: Well, let me answer that correlation. Actually, very advanced SoICs technology actually serve for the HPC high-end applications. So that required high bandwidth and very low power and very high performance. And so far, we just entered a small volume of the production in 2022 and we expect this one will continue to grow. That’s what we have today. Laura Chen: Okay. That’s very clear. And my second question is more like a follow-up. I think C.C. already mentioned a lot about the strategy of the CapEx expansion in longer term. But we know that the equipment lead timeline has been quite longer. So I’m just wondering any specific area or process you are seeing the biggest impact? And what’s your action accordingly? Or do you have any priorities for various technology nodes? Jeff Su: Okay. So Laura’s second question is about capacity expansion and equipment lead time. Given the tool delivery that C.C. talked about, she wants to know what areas or nodes are we seeing the biggest impact? And are we prioritizing -- how are we prioritizing this? C. C. Wei: Laura, I mean that’s -- we see this kind of tool delivery problem unexpectedly from beginning of this year. And we are working very hard with our tool suppliers to resolve all the issues. And so as for which technology node or which technology or what are being impacted, all the leading-edge technology and mature node technologies capacity expansion are being impacted. And certainly, in order to support our customers’ strong demand, we’re working very hard for the tool suppliers to resolve all the issues. And so far, 2022, no problem. We’re working on 2023 and beyond. I hope a few months later that we can report that the issue will be resolved. But we’re still working very hard with our suppliers and to resolve all the issue. That’s all I can say right now. Jeff Su: Okay. Thank you, Laura. Operator, can we move on to the next participant, please? Operator: Next one to ask questions, Mehdi Hosseini from SIG. Mehdi Hosseini: Yes. My first one has to do with better understanding demand dynamics. You highlighted better than average growth from HPC. And in that context, I’m just wondering how I should think about the mix of 5 and 7-nanometer node by year-end ‘22 or second half of ‘22? Jeff Su: Okay. So Mehdi’s first question is looking at the demand and also by node, he wants to know how should he expect the contribution or the mix from N5 and N7 in the second half of this year. C. C. Wei: It will be greater than we just reported of 50%, right? I mean for the second half of this year, the contribution to TSMC’s revenue were greater than 50%, combining 7 and 5 together. Mehdi Hosseini: Okay. I was just trying to better understand how that increase would look like compared to prior years where in the second half, usually the advanced node contribution increases and with the leap in mix. I was just trying to better understand how the second half of ‘22 will look like in the past prior years. Wendell Huang: Yes. Mehdi, I think that the second half revenue is normally higher partially because of seasonality of some of the products. Mehdi Hosseini: Okay. Great. And one more follow-up. And thank you so much for the color on the next technology migration of 2-nanometer. You highlighted the transistor change. But I also want to understand what is underlying assumption, especially as it relates to lithography. We also have another change coming up as going from EUV to high NA. And I’m just curious to know if you are assuming if you will be using EUV, or you would need high NA as you go into HBM for 2-nanometer in the second half of ‘25? Jeff Su: Okay. So Mehdi’s second question is on N2, a very specific question. He wants to know with N2, there’s a change in transistor structure. He also wants to know on the lithography side, will we be using EUV or high NA, correct, Mehdi? Mehdi Hosseini: Yes. C. C. Wei: Well, let me answer the question. We are the largest user of EUV tool today in the industry. And so we have intensively evaluated and are very familiar with those high-end EUV tools for wire. And we will continue to evaluate and adopt the high-end tool whenever we think is necessary and is ready and cost effective. Whether it is a N2 or not, I have not yet to be able to share with you. Jeff Su: Okay. Thank you, Mehdi. Operator, can we move on to the next participant? Operator: Next one to ask questions, Charles Shi from Needham & Company. Charles Shi: I want to ask my first question a little bit longer term. One of your IDM customers, well, I don’t want to call the name. But their CEO, I believe, revisited you twice over the last 6 months. They think they can both buy wafers from you and, at the same time, compete with your technology. And they are hoping in 2025 and beyond, we’ll compete with you in the foundry business. So there has been concerns that you may not really get a fair deal out of this a little bit of complex relationship. One concern, very specifically, I heard this that you may end up basically teaching this competitor, enabling their accelerated road map. But in the end, they will break away from you and compete against you, especially in the foundry business. So maybe can you address this concern and provide us some high-level thinking to the investor community and the public? Jeff Su: Okay. Charles, let me summarize your first question. His first question is on the IDM customer that wants to buy wafers or outsource to TSMC, but also said that they would like to compete in the foundry industry. So Charles, your question is really, I guess, 2 parts in the sense that how will TSMC end up teaching this IDM and enabling the road map? And how will we compete on the foundry side? C. C. Wei: Well, Charles, let me answer the question first on the competition. As a leading pure-play foundry, TSMC have never been short on competition in our 35-year history. And we know how to compete, all right? And you asked about how to protect the TSMC’s IP or technology detail. In fact, we have a well-established process and design enablement system to ensure a productive engagement with all our customers and while we can protect our own IP as well as customers’ IP. We do not anticipate any issues at all. And for the future, actually, these are IDM -- I take back, they are business back into their own house. We have already taken this into our capacity planning consideration already. Did I answer your question, Charles? Charles Shi: Yes. C.C., so maybe really just to follow up, the second question and then actually is a follow-up to my first question. There has been some press reports, I believe, over the last 2, 3 months saying TSMC is building -- potentially building a dedicated fab for this particular customer. I’m not sure if dedicated fab or production line for specific customers is really TSMC’s standard practice. However, can you kind of provide your thinking? Would the answer be no, even if like this customer is going to bring you a significant volume? Jeff Su: Okay. So Charles’ second question is there’s been certain media reports saying that we will build a decade fab or production for certain IDM. Is this our practice? Or -- and would the answer still be no even if there is large volume behind such a dedicated capacity? C. C. Wei: Well, Charles, to be frank with you, our capacity planning, as we said many times, is based on the long-term market demand profile, underpinned by the industry’s megatrend of 5G and SPC and the semiconductor content enrichment in many young devices. We are not dependent on any single customer or product. Did I answer your question? Charles Shi: Yes. Jeff Su: Okay. Thank you, Charles. Operator, in the interest of time, I think we’ll take the last 2 participants’ questions, please. Operator: Okay. And the next one to ask question is Krish Sankar from Cowen & Company. Krish Sankar: I had 2 of them. The first one is for Wendell. In the March quarter, there’s quite a big difference between the revenue growth and the shipment growth. So I’m kind of curious on your full year guidance of high 20s or even beyond that for revenue growth, how much is coming from pricing? Any color there would be helpful. And then I had a follow-up for C.C. Jeff Su: Okay. So, Krish’s first question is in looking at our full year outlook. He wants to know how much of our growth this year, how much of it is coming from price versus volume, I guess? Wendell Huang: Yes. Krish, volume, price and product mix are important contributing factors in driving our growth. But we do not have a specific breakdown to share with you. Krish Sankar: All right. No worries. And then I had a follow-up for C.C. Clearly, investors seem to be worried about a recession or a slowdown. So C.C. from your experience, when you look at price cyclical slowdowns or even macro corrections, what are the leading indicators TSMC looks for specifically? Is it a pricing slowdown? Is it pushed out of capacity? Is it customers breaking LTAs? What do you think is the first shoe to drop? Any color there would be helpful. Jeff Su: Okay. Krish’s second question is in terms of looking at, again, the demand environment. He wants to ask C.C. and based on past recessions or slowdowns, what are some of the leading indicators that we watch for to -- as a signal? Do we look at pricing slowdown? Do we look at slowdown in capacity and CapEx? What are the indicators that we look at? C. C. Wei: Krish, this is a tough question to be asked because we always in close working with our customers. So we know that each customer’s demand and their forecast and we plan our capacity, we plan our technology by working with them. So if there is a downturn, sure, we’ve got the firsthand information from our customers. And we collect them together, and we do get it. And we decide our long-term CapEx and capacity. But which one is a leading indicator, that, I don’t have a specific answer for your questions. Jeff Su: Okay. Thank you. Operator, we’ll take the questions from the last participant, please then. Thank you. Operator: Yes. The last one to ask question is Rolf Bulk from New Street Research. Rolf Bulk: At the beginning of the year, you guided for advanced processes to account for 70% to 80% of CapEx and specialty nodes for 20%. Now with the year now underway and you’re having better visibility on the demand in your different end markets, can you share with us if you’re thinking on capacity additions of advanced versus specialty have changed? Or whether those ratios that you gave originally still hold? Jeff Su: Okay. Rolf’s first question is about our CapEx and CapEx spending. His question is with the -- in the past 3 months, has the allocation or breakdown between events and specialty technologies in terms of our CapEx, has that changed? Wendell Huang: No, no, it has not. Rolf Bulk: That’s helpful. Now as a follow-up, you mentioned that you’re working with suppliers to secure and further diversify your material supply. Can you discuss whether you expect your material input cost increase in the second half of the year? And how we should think about gross margin in the second half of 2022 in that context? Jeff Su: Okay. So Rolf’s second question is a little bit on materials cost. We have said that we’re diversifying our material supplier. So are we seeing the input cost increase? And then what does this mean for the margin outlook in the second half? Wendell Huang: Yes. Well, let me answer that. Yes, we do face manufacturing cost challenges, partially due to the rising materials inflationary cost. But we always work closely with our customers to provide our value. And we will continue to ensure that the pricing strategy reflects the value creation. We will also work diligently in our fab operations and with our suppliers to deliver on cost improvements. So by taking such actions, we believe we can achieve the long-term gross margin of 53% and higher and earn greater than 25% ROE through the cycle. That will enable us to invest to support our customers’ growth and to deliver profitable growth for our shareholders. Jeff Su: Okay. Rolf, does that answer? Rolf Bulk: Very helpful. Jeff Su: Yes. Thank you, Rolf. Okay. So thank you, everyone. 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 1 hour from now. The transcript will become available 24 hours from now, both of which 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.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's Fourth Quarter 2021 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 in 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 fourth quarter 2021, followed by our guidance for the first quarter 2022. 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 the 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 on our press release. And now, I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full-year 2020. After that, I will provide the guidance for the first quarter 2022. Fourth quarter revenue increased 5.7% sequentially in NT dollar or 5.8% in U.S. dollar. As our fourth quarter business was supported by the strong demand for our industry-leading 5-nanometer technology, gross margin increased 1.4 percentage points sequentially to 52.7%, mainly due to the continuous cost improvement efforts. Operating margin increased 0.5 percentage points sequentially to 41.7%, slightly ahead of our guidance as we enjoyed higher operating leverage and a portion of the vaccine donation expenses got pushed out to the first quarter. Overall, our fourth quarter EPS was NT$6.41 and ROE was 31.3%. Now let's move on to the revenue by technology. 5-nanometer process technology contributed 23% of wafer revenue in the fourth quarter, while 7-nanometer accounted for 27%. Advanced Technology which are defined as 7-nanometer and below, accounted for 50% of wafer revenue. On a full-year basis, 5-nanometer revenue contribution came in at 19% of 2021 wafer revenue. 7-nanometer was 31%. Advanced technologies accounted for 50% of total wafer revenue, up from 41% in 2020. Now moving on to revenue contribution by platform. All platforms increased in the fourth quarter. Smartphone increased 7% quarter-over-quarter to account for 44% of our fourth quarter revenue. HPC increased 3% to account for 37%. IoT increased 3% to account for 9%. Automotive increased 10% to account for 4%, and Digital Consumer Electronics increased 2% to account for 3%. On a full-year basis, all six platforms experienced year-on-year growth. HPC, IoT and Automotive saw strong growth of 34%, 21% and 51%, respectively. Smartphone also increased 8%, and DCE increased 2% in 2021. Overall, smartphone accounted for 44% of our 2021 revenue. HPC accounted for 37%, and IoT accounted for 8%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of NT$1.2 trillion. On the liability side, current liabilities increased by NT$84 billion, mainly due to the increase of NT$22 billion in accounts payable and the increase of NT$61 billion in accrued liabilities and others. Long-term interest-bearing debt increased by NT$150 billion, mainly as we raised NT$157 billion of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days remained at 40 days, while days of inventory increased three days to 88 days. Now let me make a few comments on cash flow and CapEx. During the fourth quarter, we generated about NT$378 billion in cash from operations, including NT$80 billion prepayment from customers, spent NT$236 billion in CapEx and distributed NT$71 billion for first quarter 2021 cash dividends. Bonds payable increased by NT$157 billion due to the bond issuances. Overall, our cash balance increased NT$211 billion to NT$1.1 trillion at the end of the quarter. In U.S. dollar term, our fourth quarter capital expenditures totaled US$8.46 billion. Now let's look at the recap of our performance in 2021. We saw a strong growth in 2021 as our technology leadership position enabled us to capture the industry's megatrend of 5G and HPC. Our revenue increased 24.9% in U.S. dollar terms to reach US$57 billion. In NT dollar terms, revenue increased 18.5% as the NT appreciated by 5% during the year. Such unfavorable foreign exchange rate also impacted our gross margin by about 2 percentage points. In addition, N5 dilution also created a headwind to our margin. However, as we continue to drive cost improvements, we were able to achieve gross margin of 51.6% and operating margin of 40.9% in 2021. Overall, full-year EPS increased 15.2% to NT$23.01, and ROE was 29.7%. On cash flow, we spent NT$839 billion in CapEx, while we generated NT$1.1 trillion in operating cash flow and NT$273 billion in free cash flow. We also paid NT$266 billion in cash dividends in 2021. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business in the first quarter to be supported by HPC-related demand, continued recovery in the Automotive segment and a milder smartphone seasonality than in recent years. Based on the current business outlook, we expect our first quarter revenue to be between US$16.6 billion and US$17.2 billion, which represent 7.4% sequential increase at the midpoint. Based on the exchange rate assumption of US$1 to NT$27.6, gross margin is expected to be between 53% and 55%, operating margin between 42% and 44%. Lastly, our 2022 effective tax rate is between 10% to 11%. This concludes my financial presentation. Now I will move on to key messages. I will start by making some comments on our 2022 capital budget and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in the future years. We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G-related and HPC applications. In 2021, we spent US$30 billion to capture the strong demand and support our customers' growth. In 2022, our capital budget is expected to be between US$40 billion to US$44 billion. Out of the US$40 billion to US$44 billion CapEx for 2022, between 70% and 80% of the capital budget will be allocated for advanced process technologies, including 2-nanometer, 3-nanometer, 5-nanometer and 7-nanometer. About 10% will be spent for advanced packaging and mask making and 10% to 20% will be spent for specialty technologies. Our depreciation expense is expected to increase by low to mid-teens percentage year-over-year in 2022 as newly incurred depreciation will be partially offset by other notes rolling off depreciation. With this level of CapEx spending in 2022, we reiterate that TSMC remains committed to a sustainable cash dividend on both an annual and quarterly basis. Now, let me turn the microphone over to C.C. C. C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our 2022 outlook. We expect 2022 to be another strong growth year for TSMC. For the full-year of 2022, we forecast the overall semiconductor market, excluding memory, to grow approximately 9%, while foundry industry growth is forecast to be close to 20%. For TSMC, we are confident we can outperform the foundry revenue growth and grow between mid-to-high 20s percent in 2022 in U.S. dollar term. Our 2022 business will be fueled by strong demand for our industry-leading advanced and specialty technologies, where we see strong interest from all four growth platforms, which are smartphone, HPC, IoT and automotive. Entering 2022, we expect the supply chain to maintain a higher level of inventory as compared to the historical seasonal level given the industry's continued need to ensure supply security. While the short-term imbalance may or may not persist, we continue to observe the structural increase in long-term semiconductor demand underpinned by the industry megatrend of 5G and HPC-related applications. We also observed the higher silicon content in many end devices, including automotive, PCs, servers, networking and smartphones. As a result, we expect our capacity to remain tight throughout 2022 as we believe our technology leadership will enable TSMC to capture the strong demand for our advanced and specialty technologies. Next, let me talk about TSMC's long-term growth outlook and profitability. We are entering a period of higher structural growth. As the technology becomes more pervasive and essential in people's lives and the digital transformation accelerates, the semiconductor industry value in supply chain is increasing. As we embark upon the 5G era, an intelligent and more connected world will fuel a massive requirement for computation power and propel greater need for energy-efficient computing, which demand greater use of leading-edge technologies. The multiyear megatrend of 5G and HPC-related applications will drive multi unit volume growth and more importantly, spur substantial semiconductor content enrichment in HPC, smartphone, automotive and IoT applications to address the structural increase in the long-term market demand profile. TSMC is working closely with our customers to plan our capacity and investing in leading-edge and specialty technology to support their group demand. At the same time, we are committed to achieve a sustainable and proper return that enable us to invest to support our customers' growth and deliver long-term profitable growth for our shareholders. Over the last three years, we have raised our CapEx spending from US$14.9 billion in 2019 to US$30 billion in 2021 as we invest in anticipation of the growth that will follow. During the same period, our revenue in U.S. dollar terms has increased from US$34.6 billion in 2019 to US$56.8 billion in 2021 or 1.6x and our EPS by 1.7x. Looking ahead, as the world's largest reliable and effective capacity provider with our technology leadership, manufacturing excellence and customer trust, we are well positioned to capture the growth from the favorable industry megatrend with our differentiated technologies. We expect our long-term revenue to be between 15% and 20% CAGR over the next several years in U.S. dollar terms, of course, fueled by all four growth platform, which are smartphone, HPC, IoT and automotive. With the increasing need for computation, HPC will be the strongest driver of TSMC's long-term growth and expect it to be the largest contributor in terms of our incremental revenue growth with the CPU, GPU and AI accelerators are the main growth area for our HPC platform. As we invest in leading-edge and specialty technology to support our customers' demand, we continue to face manufacturing cost challenges due to increasing process complexity at leading-edge node, new investment in mature node, expansion of our global manufacturing footprint and rising materials and basic commodity costs. We are continuing to work closely with our customers to support their growth, and our pricing strategy will remain strategic, not opportunistic, to reflect our value creation. We will also work diligently in our own fab operation and with our suppliers to deliver on cost improvement. By taking such actions, we believe our long-term gross margin of 53% and higher is achievable, and we can earn a sustainable and proper return of greater than 25% ROE through that cycle. Thus, even as we showed a greater burden of CapEx investment for the industry, we can continue to invest to support our customers' growth and deliver long-term profitable growth for our shareholders. Now I will talk about N5, N4P and N4X status. As our N5 entered its third-year ramp, demand continues to be very strong, driven by smartphone and HPC applications. Our N5 has proven to be the industry's most competitive leading-edge technology. To further enhance our N5 family's performance, power and density improvement for next-wave 5-nanometer product, we also introduced N4P and N4X technologies. N4P offers 11% performance boost as compared to N5 with 22% improvement in power efficiency and 6% density gain. N4P is designed for easy migration from N5 with its products taking our schedule for second half 2022. We also introduced N4X as an offering especially optimized for workload-intensive HPC applications. N4X will offer much more circuit performance boost over N5 and we expect it to enter risk production in first half 2023. Without continuous enhancement of our N5 process technologies, we expect demand for our N5 family to continue to grow in the next several years and for N5 family to be a large and long-lasting node for TSMC. Next, let me talk about N3 and N3E status. Our N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance and cost for our customers. Our N3 technology development is on track. We have developed complete platform support for both HPC and smartphone applications. N3 production will start in second half of 2022. We continue to see a high level of customer engagement at N3 and expect the more new tape-outs for N3 for the first year as compared with N5. N3E will further extend our N3 family with the enhanced performance, power and yield. We also observed a high level of customer engagement at N3E, and volume production is scheduled for one year after N3. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. With our technology leadership and strong customer demand, we are confident that our N3 family will be another large and long-lasting node for TSMC. Finally, let me talk about our mature node capacity strategy. TSMC's strategy at a mature node is to work closely with our customers to develop specialty technology solutions to meet customers' requirement and create differentiated and long-lasting value to customers. We expect the multiyear industry megatrend of 5G and HPC and the higher silicon content in many end devices to drive increasing demand and mature node for certain specialty technologies. We forecast 28-nanometer will be the sweet spot for our embedded memory applications and our long-term structural demand at 28-nanometer to be supported by multiple specialty technologies. In support of our specialty technology strategies, we are expanding our 28-nanometer manufacturing capacity and size in China, Japan and Taiwan. Our capacity expansion is based on customers' need, business opportunities, operating efficiency and cost economic considerations. We believe the expansion of our mature node capacity will enable us to better serve our customers' need and reach global talents, and our differentiated specialty technology will enable us to capture the demand generated from the industry megatrend and deliver long-term profitable growth for our shareholders. This concluding our key message. Thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared remarks. 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 the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. Now we will proceed to the Q&A session. Our Chairman, Dr. Mark Liu, will be the host. Mark Liu: Hello, everyone. This is Mark Liu. I want to send my regards to every one of you during this pandemic and wish we have a happy and successful 2022. Thank you. Jeff Su: Thank you, Chairman. Let's begin the Q&A session now. Operator, can we please proceed with the first caller on the line? Operator: The first to ask questions, Randy Abrams from Credit Suisse. Randy Abrams: Okay. Yes. Thank you. Congratulations on the results and the outlook and margins. First question on the growth outlook. When we compare the growth expectation mid-to-high 20% versus – if I rollup the fabless and IDM customers, they're about mid-teens growth. So your outgrowth looks much wider than most years. Could you break it down a bit more the factors between share gain, pricing moves? And also if there's any component of inventory build in there? Jeff Su: Okay. Randy, let me summarize your first question. I believe your question is referring to the 2022 growth outlook? And Randy... Randy Abrams: That's right. Jeff Su: Right. And so Randy is saying, TSMC's guidance of mid-to-high 20s percentage, his calculation show that the fabless industry is growing maybe around mid-teens. So we will outgrow the foundry sorry, the fabless. And so he is wondering what is driving this outgrowth. Is it share gain, pricing? Are there other factors such as inventory build into this? And if we can share… C. C. Wei: Okay. Let me answer the question. This is C.C. Wei. Actually, the growth in 2022 is all the above you just mentioned. It's a share gain, it's a pricing and also it's a unit growth. Did I answer your question? Randy Abrams: Yes, mostly. And maybe just a quick – two quick follow-ups to that. If you could break the growth by platform and if you could indicate just how much – like how much do you think your customers want to put in place more inventory? Like how big a component do you think that factor is? Jeff Su: Okay. So Randy's follow-up is can we give our 2022 growth by platform outlook? And then how much of a role is inventory build playing in this growth? Wendell Huang: Hi, Randy. This is Wendell. Let me answer the platform question. In 2022, we expect the HPC and automotive to grow faster than the corporate average. IoT, similar, smartphones close to the corporate average. That's the platform growth. Jeff Su: And then, Randy’s second part is how much of a role is inventory build playing in this? Wendell Huang: Well, Randy, as C.C. mentioned that the key messages, we expect the inventory level to remain high, higher than before for a longer period of time, but we're not able to quantify that factor. Randy Abrams: Okay. No, I understand. Hey, if I could ask a second question, you disclosed about the – you're getting more prepayments and a lot of customers have been disclosing those. If you could talk about the strategy behind this as far as the main objectives of the program and the protection you're looking for if we go into a downturn, what the scenario would be? So if you could disclose kind of the strategy behind that. Wendell Huang: Okay. Randy, the prepayment, yes, we work closely and diligently with the customers plan the capacity, including receiving their prepayments for capacity support. And we will continue to work with them to determine the best way to support them. Such commitments or prepayment will strengthen our cash position and help mitigate our capital risk in capacity. Now talking about securing commitment, we always work closely with our customers, and we believe that technology leadership, manufacturing excellence and earning customer trust are the best or the most effective way to secure customer commitments. So as long as we plan our capacity well based on the structural increase in the long-term market demand profile, we believe our utilization and profitability can be well protected. Jeff Su: Okay. Thank you, Wendell. Randy, does that address your second question? Randy Abrams: Yes. It's more about in a downturn, I guess, is it also a – to be assurance in terms of volume or still some cash flow, like to protect the amount you have to outlay, so is it also kind of an insurance policy of some sort? Wendell Huang: Well, yes, Randy, I think, as I just mentioned, the best way is to work with the customers and getting their commitment through our technology leadership, manufacturing excellence and therefore earning their trust. So if we plan our capacity well based on the structural demand in the industry, then I think our utilization and profitability can be maintained. Randy Abrams: Okay. Great. Thank you, Wendell. Jeff Su: Yes. Thank you, Randy. Operator, can we proceed to the next participant on the line please? Operator: Next one to ask questions, Bruce Lu from Goldman Sachs. Go ahead, please. Bruce Lu: Hi. Thank you for taking my question. Congratulations on a pretty good result. I think management mentioned about a NT$1 trillion semiconductor market pricing in 2020 around 2030. So can we have more color about the foundry market stocks by end or for the key growth drivers such as HPC, can TSMC provide a more quantitative focus, for example, like what is the addressable market for ARM-based CPU in 2025 or 2030? Jeff Su: Okay. Bruce, let me summarize your first question. So Bruce is saying we have talked about a NT$1 trillion foundry market by 2030. So he wants to know what can be the key drivers here and also the role of HPC, including ARM-based in this outlook? Mark Liu: Okay. Bruce, this is Mark. We don't have a very specific forecast for 2030 to share with you, NT$1 trillion is our model and so has been quoted by general industrial comments. However, we do believe the high growth approached that number is happening. We believe the semiconductor industry growth will continue to fuel by the C.C. just mentioned structural megatrend 5G and high-performance computing. And also, our leading-edge technology provide the most energy-efficient technology for computation and accelerate the digital transformation for the next several years. But if you look at the – if we want me to comment on the foundry industry, it's pretty clear, the foundry industry growth will be higher because in addition to a fabless company, IDM outsourcing will continue increasing in a fast growth rate. And most importantly, system companies will grow, particularly faster during this period of time. So in that sense that, we believe the foundry growth – foundry industry growth will have a good year better than other sectors. Jeff Su: And then, Bruce also asking about the role of HPC in this growth outlook, including the ARM? Mark Liu: Well, ARM is a new phenomenon. I think the CPU architecture no longer been dominant by one architecture. Multiple architecture provided their better integration with software, provide a much wider application of CPUs. And that no matter what the CPU, which architecture they are, currently, we are engaging to all CPU architecture customers. Jeff Su: Okay. Bruce, does that answer your first question? Bruce Lu: Yes, but I try to ask a follow-up for the – addressing for HPC. I mean within that HPC, we understand that this is the faster growing segment. Can you provide some more like different like growth magnitude within the HPC, which part of the HPC is growing faster and how big would that be in three to five years? C. C. Wei: Well, Bruce, this is C.C. Wei, again. No we cannot disclose all the details on each segment, for example, CPU, GPU and AI accelerator, which one is more what kind of percentage. In fact, they are all growing, but for the specific percentage, we don't comment right now. Jeff Su: Okay, Bruce? Bruce Lu: Understand. Thank you. Jeff Su: Okay. Do you have a second question? Bruce Lu: Yes. The second question is regarding to the 28-nanometer, as we know that 28-nanometer is the biggest node among all the process node within TSMC and which suffer lower utilization rate in 2018 and 2019. So with the recent announcement in Nanjing or Japan or even we suggest another 16% of capacity growth in 28-nanometer alone in TSMC, not to mention like your industry peers are all aggressive in expanding the 28-nanometer. Can you provide like more like growth driver? And how can you feel comfortable to expand the capacity in this magnitude in the coming years when a lot of financial industry were talking about like downside or a cycle peak or oversupply in 2023? Jeff Su: Okay. Bruce's second question is on 28-nanometer, he notes that we are – as C.C. said, expanding our capacity in 20-nanometer in various locations, but he also notes that other foundry peers in the industry are also expanding as well. So he wants to know the risk, I guess, of oversupply? C. C. Wei: Well, good question. As you pointed out in 2018, 2019, we have a lower utilization rate. It's just a little bit above by 80%. But right now, we do observe that our long-term structural demand at 28-nanometer was to be well supported by multiple specialty technologies such as CMOS image sensor for multi-camera trend and better non-volatile memory application and other specialty technologies. To be in one word, actually, the enrichment in the silicon content in many end devices that developed in recent years helped to support this demand. Jeff Su: Okay, Bruce? Bruce Lu: Okay. Thank you. Jeff Su: Thank you. Operator, can we move on to the next participant, please? Operator: Next one to ask question, Charlie Chan from Morgan Stanley. Jeff Su: Hello, Charlie. Are you on the line? Charlie Chan: Yes. Hello, can you hear me okay? Jeff Su: We can hear you now. Please go ahead. Charlie Chan: Okay. Thank you. And also Happy New Year and congratulations for good results. So to management, my first question is about the macro economy risk, right? For example, inflationary pressure on the consumer tech demand. And also, standalone demand has been strong for two years. Will the management would consider that could fade away and impact your PC, TV in semis. And also lastly, the crypto mining demand has been very volatile, right? And now it seems like crypto price also falls down. So we'd like to know whether you consider those kind of macro risk into your full-year revenue growth forecast? Thank you. Jeff Su: Okay. So Charlie's first question is related to the macro outlook, looking at concerns of inflation, work-from-home fading, consumer demand and also crypto volatility. What impact could this have on end demand for PC, TV and semiconductors and have we considered this into our outlook? Maybe C.C. can address this. C. C. Wei: Yes. Charlie, we expect the supply chain to maintain a higher level of inventory for a longer period of time given the industry's continued need to ensure the supply security. But then we also observed the end market momentum in certain segment may slowdown or adjust in terms of units, but the increasing silicon content in many end devices is a more important factor in supporting the strong semiconductor demand and will continue. So even if there's a correction or to occur, we believe it could be less volatile for TSMC due to our technology leadership position, and the structural megatrend demand of 5G-related and HPC application, the substantial increase in silicon content, that will make sure we expect our capacity to remain very tight throughout 2022. You also mentioned about the crypto currency. Yes, we have factored our own yield. Jeff Su: Okay. Great. Charlie, do you have a second question? Charlie Chan: Yes, if I may. So my second question is maybe to Wendell, that our first quarter revenue see a great sequential growth, right? So may I know that there's price hike benefit mostly reflected in 1Q? Or there will be still some price hike benefits in the second quarter? And also, can you please repeat the depreciation growth guidance year-on-year for 2022? Thank you. Jeff Su: Okay. Charlie, let me summarize your second question. So his question is directed to Wendell. In terms of the first quarter revenue sequential growth, how much of the price hike is reflected in this, and will a price hike be reflected in subsequent quarters? Wendell Huang: Charlie, we're not able to break down those numbers for you. But we continue to work closely with our customers, meet their demand and also sell our value. That's what we are focusing on. Jeff Su: Yes. And the depreciation guidance, Charlie, this year is low to mid-teens year-on-year increase. Thank you. Charlie Chan: Okay. Thanks. Jeff Su: Okay. Thank you. Operator, can we move on to the next participant please? Operator: Next one to ask questions, Gokul Hariharan from JPMorgan. Gokul Hariharan: Happy New Year and thanks for taking my questions. First of all, could you give us an update on how we think about CapEx going into next couple of years as well, given the growth expectation is also now higher in the 15% to 20% range. Do we expect CapEx to peak out this year? Or should it continue to grow into next year? And maybe Wendell, could you also talk a little bit about how we think about capital intensity? When do we expect that to peak? And what is more like the steady-state as we get to the end of this particular growth period 2020 to 2025? That's my first question. Jeff Su: Okay. Gokul, let me summarize, allow me to summarize your first question. Gokul was asking about our CapEx outlook. He notes that our growth is now higher at 15% to 20% CAGR for the next several years. So his question is how should he think about the CapEx. Is 2022 the peak? How does CapEx look for the next few years and also in terms of the long-term capital intensity? Wendell Huang: Hi, Gokul. This is Wendell. Regarding CapEx number, this year, we guided $40 billion to $44 billion. Now remember that we spent the CapEx in the given year for the growth prospect in the next several years. So whenever there is – we think the growth outlook is good, we will continue our discipline investment going forward. We're not able to give guidance on CapEx beyond 2022 today. And also the capital intensity, whenever we enter into a higher period of growth like today, the capital intensity will be high and which is appropriate. Now if the growth were to slowdown, the capital intensity will decline accordingly. From what we can see at this moment, longer term, maybe mid-30s remains appropriate level. Jeff Su: Okay. Thank you. Does that answer your first question Gokul? Hello, Gokul. Are you on mute? Gokul Hariharan: Sorry. Thanks for answering the first question. My second question is about one of your IDM customer, which has been a top 10 customer for TSMC, but now they are also reentering the foundry market aggressively and wanting to compete head-to-head with TSMC. How does TSMC navigate this situation given the market is also expecting this customer to be a bigger revenue contributor for TSMC in the HPC area over the next couple of years? Just wanted to understand how management thinks about this business relationship given that for some of the other IDM customers who are foundry competitors, TSMC doesn't do much direct business with them. Jeff Su: Okay. Gokul, let me summarize your second question. Gokul's second question is in terms of a specific IDM customer of TSMC, but this customer is also entering foundry and also – so his question is how do we navigate the relationship given that in the past, we do not really work with IDMs who compete with us? C. C. Wei: Okay. Gokul, this is C.C. Wei. Let me emphasize that we always operate in a good pace and support all our customers openly and fairly. And the IDM customer has been the same. That's also that TSMC's good customer. We also understand that the IDM customer has their own plans for future insourcing, and we already have taken this into our capacity planning consideration. Did I answer your question? Gokul Hariharan: Is there any ways for you to protect your longer-term growth when you deal with this kind of a customer? Just wanted to understand how it differs from your traditional fabless customers where I think that insourcing question is not really on the table? C. C. Wei: Well, as I said, we have already taken this into our capacity planning consideration. And our capacity planning is based on the long-term market demand profile, underpinned by the industry megatrend of 5G and HPC and the semiconductor content enrichment in very end devices. And we do not depend on any one single customer or product. Jeff Su: Okay, Gokul. Gokul Hariharan: Yes. Thank you very much. Jeff Su: Thank you, Gokul. Operator, can we move on to the next participant please? Operator: Next one to ask questions, Roland Shu from Citigroup. Roland Shu: Hi, good afternoon, and congrats for your very good results and good outlook. First question of me is on your – C.C. you also mentioned you always build your capacity according to customers' long-term demand profile. But in the past, from time-to-time, you overbuild capacity for some nodes due to customers' focus always change. So how confident you are this time to spend huge CapEx from 2021? And why do you think customers focused this time are more real than any time before? And also, what's your take of this semiconductor cycle? Will this cycle change at risk? Are your CapEx spending plan going forward? Thanks. Jeff Su: Okay, Roland. So Roland's first question is really C.C. said that we build our capacity according to the long-term demand profile. His question is, though customers' forecasts can change. So how confident can we be? And how do we see this current cycle playing out? Is that correct, Roland? Roland Shu: Yes. C. C. Wei: Okay. Let me answer this question. For the difference actually this time, we see a structural increase in long-term market demand due to the multi-year industry megatrend of 5G, HPC and digitalization as well as some of the short-term imbalance that interruption of the supply chain brought about COVID-19 and geopolitical tension. Let me say that how confident we are, very confident because, as I said, long-term structural increase in the content and in the unit. This time we add the content increase as one of the important factors which we never reported before, and it was driven that semiconductor industry at a higher utilization rate because we have a very good technology leadership. Roland Shu: Yes. I think I have also a question, part of the question is for the cycle. What's your take of the semiconductor cycle now? C. C. Wei: Well, we cannot predict the cycle, right? But even if there is a cycle coming, we do believe that TSMC with its technology leadership and excellent manufacturing and the customers trust will be in a better position in the upturn or downturn cycle. Roland Shu: Okay. Understood. Thanks. Yes, for my second question, with your faster revenue growth and better margin going forward. For TSMC, apparently needs more capable and experienced management and employees for continuous growth going forward. However, some of your senior management are approaching legitimately retired age. So how are you going to retain the experience and the valuable management going forward? And also, by the way, what's the progress of your talent recruiting for your R&D and manufacturers set worldwide? Thanks. Jeff Su: Okay. So Roland's second question is that his question really is around our talent. Part of it is our senior management. How do we keep our experienced and senior executives? And also as we expand our global manufacturing footprint, what is the progress of our talent recruitment of engineers and R&D? Mark Liu: Roland, this is Mark. You're right. Our capable executives are our treasurers and they will bring the company forward. And as long as they are energetic, and they will want to contribute for this company, there's no forced retirement. For those top-notch executives, we will work with them if they want to stay. Jeff Su: And then also, how about our talent recruitment globally as we expand? Mark Liu: Yes. Talent recruitment, it is currently our focus as the company deal with this fast pace expansion, and we recruit particularly emphasized on the overseas recruiting. And as you can see, our expansion into U.S. manufacturing and also in Japan manufacturing and are the vehicle that we will be able to reach for more global talent through those operations and may extend to local R&D. So that is part of our strategy. Jeff Su: Okay. Roland Shu: Okay. Thanks. Jeff Su: Thank you, Roland. Operator, can we move on to the next participant please? Operator: Next one, we have Brett Simpson from Arete Research. Brett Simpson: Yes. Thanks very much. My first question is for Wendell. Wendell, can you share with us how much prepayments and government subsidies TSMC received in 2021, and how we should think about prepayments and subsidies in 2022? And also how do you account for this, particularly the subsidies, how do we account for this in the P&L going forward? Thank you. Mark Liu: Yes, go ahead. Jeff Su: Sorry. Just to summarize Brett's question. So his first question, he wants to know how much prepayments and government subsidies that we received in 2021? How much do we expect in 2022? And how do we account for these in our financial statements? Wendell Huang: Okay, Brett. Let me talk about the prepayment first. At the end of last year, we have received a total of US$6.7 billion in prepayment, and you can – those are included in the financial statement as temporary receipts from the customers. So going forward, you can look at our quarterly financial statement and find that numbers. As to subsidies, different countries have different incentives and they come in different forms. So they are – some of them are related to asset reductions, some of them offset expenses and some of them tax reductions. And we follow that. We use different accounting treatment to record that in the financial statements. Brett Simpson: Okay. Thank you, Wendell. I guess the prepayments this year will be higher than 2021. Is that a fair statement? Wendell Huang: Well, I cannot share with you the details, but we expect that there are more. Brett Simpson: Okay. Thank you. And my second question, looking at the Smartphone segment of your business, it grew 8% in 2021, which is well below some of your big customers. Can you talk about silicon content drivers? 5G has been a really big silicon content driver in 2021, and it will continue to in 2022. So I'm just wondering, can you maybe just share with us your perspective on what happened in 2021 in smartphones? Why only 8% growth? And how should we think about smartphones and the positive silicon content drivers from 5G this year? Jeff Su: Okay. So Brett's question is focused on the smartphone. He notes that our smartphone platform grew 8% in NT dollar terms year-on-year in 2021. So his question, I guess, Brett, if I'm hearing you correctly, your question is sort of what is driving the slower growth in the smartphone despite the higher silicon content? C. C. Wei: Well, let me answer the question. I mean that in terms of NT dollars, of course, it's only 8%, but in terms of the U.S. dollar, it's much higher. And the silicon content continued to increase every year. So we expect that will be one of the major contributor to TSMC's growth continuously. Brett Simpson: Okay. Thank you very much. Mark Liu: Yes, I think – let me add. The global smartphone unit growth last year is about 6%. So some of the – you see some of the company smartphone revenue may grow, it could be due to the pricing. But our pricing strategy, as you understand, is strategic, not optimistic. So we'll grow with the smartphone units in our business. Brett Simpson: Thank you very much. Jeff Su: Okay. Thank you, Brett. Operator, can we move on to the next caller, please? Operator: Next one is Charles Shi from Needham & Company. Charles Shi: Hi. Thank you for taking my question. Just a very quick clarification. C.C., I think you mentioned about the N3 number of tapeouts in the first year, you expect that to exceed the number of N5 tapeouts in the first year since now you have both N3 and N3E, is that a common on the original N3 alone or with N3E family, which includes both N3 and N3E? Jeff Su: Okay. So Charles first question is that he wants to clarify in terms of tapeouts. When we say N3 tapeouts are greater than N5 in its first year. Is this N3 alone or N3 plus N3E? C. C. Wei: Well, it's N3 for right now because of N3E – technology will be ready soon, and the mass production will be one year later. So now most of that tape-out if all of them are N3. Charles Shi: Thank you. So now, I want to ask my question on potentially the gross margin profile for N3. I know it's going to start to meaningfully contribute to revenue next year. You've said in the past that the newest process node will take about seven to eight quarters to reach the corporate average. But now this time, I think one difference about N3 is that you have both smartphone and HPC being supported at the right – at the beginning of the launch of the N3 node. So my guess is that the revenue for smartphone and HPC ramp could really go parallel instead of one after another and which could really help your volume, your revenue. And could you comment on whether that seven to eight quarters of the margin dilution of the newest process node, maybe starting from N3, it will become shorter. That's my question. Thank you. Jeff Su: Thank you, Charles. Please allow me to summarize your second question. So Charles second question is looking at the N3 profitability and gross margin. He observes in the past and you know typically it takes seven to eight quarters to reach the corporate average, But at N3, we have both – developed both smartphone and HPC platform. So these ramp in parallel, could N3 actually reach the corporate average in a shorter duration of time? Wendell Huang: Okay. Charles, this is Wendell. It is too early to say when N3 can reach the corporate average gross margin at this stage as the volume production has not started yet. However, the initial outlook for every new node always looks challenging, and the increasing process complexity of leading nodes such as N3 brings even greater challenges. We will continue to work on selling our value and cost improvement to ensure that we earn the right profitability and returns. Jeff Su: Okay. Charles, does that answer your second question? Charles Shi: Yes, indeed. Thank you very much. Jeff Su: Okay. Thank you. Operator, can we move on to the next participant, please? Operator: Next one to ask questions, Mehdi Hosseini from SIG. Mehdi Hosseini: Yes. Thanks for taking my question. The first one actually is a follow-up on the gross margin. For the March quarter, you're guiding to 53% to 55%, but your longer-term gross margin is around 53%. So does that mean that as we look beyond the Q1, there is a downward trend in gross margin? And also, how should we think about the long-term operating margin? And I have a follow-up. Jeff Su: Okay. So Mehdi's first question is around gross margin. He notes our first quarter gross margin guidance is 53% to 55%. But Mehdi, let me clarify, our long-term gross margin guidance is 53% and higher gross margin. But nonetheless, Mehdi is asking, therefore, are we implying saying the margin outlook for the rest of the year will come down or decline. Wendell Huang: Okay. Mehdi, this is Wendell. We're not prepared to talk about gross margin outlook for the subsequent quarters of the year, but please be reminded that there are six factors affecting our profitabilities. Those factors include the ramp and development of our advanced technology, price, cost, mix, utilization and foreign exchange rate. The foreign exchange rate is something that we cannot control and hard to predict. So summarizing all those factors together, we're saying that the long-term, we expect our gross margin to be 53% and higher. As to our operating margin, we're not giving out the operating margin guidance as of now. Mehdi Hosseini: Okay. Thank you. And a quick follow-up. Can you also help us understand how the mix of revenue by process technology like seven, five and three will change in 2022 versus 2021? Jeff Su: Okay. Mehdi's second question is asking revenue contribution by node. He is asking that N7, N5 and N3, what contribution will that be in 2022? And how is that different versus 2021? Wendell Huang: Okay. Mehdi, we're not prepared to give the breakdown for the revenue contribution by node today, but the N5 will continue to ramp. So we expect the revenue contribution to continue to rise throughout the year. Jeff Su: Yes. And I think we have said before, Mehdi, that N3 will begin the volume production in second half 2022, and you will start to see the revenue contribution in 2023. Mehdi Hosseini: Okay. Great. Congratulations on great execution. Jeff Su: Okay. Thank you, Mehdi. Operator, can we move to the next participant? Operator: Next one to ask questions, Sunny Lin from UBS. Sunny Lin: Hi. Good afternoon. Thank you for taking my question. Happy New Year. So my first question is on N3. So you mentioned that the number of tapeouts for N3 is higher than N5 in the first year. So now that we are getting pretty close to the mass production, I want to get your sense on the overall capacity outlook for N3 compared with N5? And also, if you could give us any sense of N3 revenue contribution in the first year of mass production? Jeff Su: Okay, Sunny. So let me – please allow me to summarize your question. Her first question is on N3. Will N3 have a higher capacity or scale than N5? C. C. Wei: Well, this is C.C. Wei. I would like to say I'm not able to comment on the specific capacity by node, but with a strong level of customer interest and engagement, N3 will be another large and long-lasting node for TSMC just like our N5 and N7. Jeff Su: And then Sunny is also asking about the revenue contribution of N3? C. C. Wei: It's still too early to talk about. Sunny Lin: Sure. C. C. Wei: Yes. Sunny Lin: No problem. So a follow-up will be that if we think about the N5 ramp-up, I think the second wave customer adoption seems to only occur in 2022, which is about two years after mass production. Looking at N3, with higher contribution and faster adoption of HPC, could you help us think about what the ramp-up could be like? Would the scale pick up a bit faster because of HPC? Thank you. Jeff Su: Okay. Sunny’s second question is also on N3. And she notes her question is that in N5, the second wave of adoption occurred two years after the initial production, but with N3 and the higher and greater interest from HPC customers, would N3 see a faster ramp-up? C. C. Wei: Well, all I can say right now is our customers are engaged with N3, N3E quite more than what we observed in the N5. However, how to quantify that ramp up, it's too early to say. The engagement is very strong. All I can say that. Sunny Lin: Sure. Maybe a very quick follow-up is the equipment supply. Are you seeing any potential bottleneck for you to ramp up a larger capacity for N3 next few years, especially considering potential disruptions for ASML's EUV tools? Jeff Su: Okay. So last question from Sunny is that in terms of our capacity expansion, are we seeing any bottlenecks or potential bottlenecks in our capacity plans, particularly in terms of ASML's EUV tools? C. C. Wei: Sunny this is a very good question. All I can say right now is that 2022, we are okay. And now we are working on 2023, so that we can ramp up the capacity to meet customers' demand. Sunny Lin: Got it. Thank you very much. Jeff Su: Thank you, Sunny. Operator, let's move on to the next participant, please? Operator: Next one, we have Sebastian Hou from Neuberger Berman Sebastian Hou: Hello. Can you hear me? Jeff Su: Yes. We can. Sebastian Hou: –: Jeff Su: Okay. Sebastian’s question really is about the relationship between CapEx and revenue. He is asking on his calculations, of course, how long does it take CapEx to translate into revenue. He observed in the past that the CapEx doubling in three years led to revenue doubling in about five years. So now he wants to apply it to this time to say, well, if CapEx has tripled from 2018, then can he expect TSMC revenue to be US$100 billion. Sebastian, you said in 2024? Sebastian Hou: 2024. Yes. Jeff Su: So US$100 billion level in kind of 2024, US$130 billion to US$140 billion in 2025. Wendell Huang: Okay. Sebastian, this is Wendell. Well, frankly, speaking, we didn't do that kind of math ourselves. But what our guidance is, as C.C. mentioned earlier today, its 15% to 20% CAGR in the next several years. So CAGR doesn't mean that every year will grow that kind of numbers. And also its next several years is a longer-term numbers. So I would not try to use the mathematics that you just used. Things are not that simple, I think. Sebastian Hou: Yes. Thank you. Definitely not that simple. But maybe let me simplify the question a bit or put another way is that the CapEx to revenue translation time, do you see any change on that now versus five or 10 years ago? Is it getting slower or faster or the same kind of the pace? Mark Liu: Yes, go ahead. Jeff Su: Yes. So I think Sebastian is asking, so to try to simplify it in terms of CapEx to revenue. Are we seeing it at the same pace as in the past? Is it getting longer? Is it getting shorter? I think Chairman can address this. Mark Liu: Let me answer this. I think because of the equipment lead time is much longer and also the technology complexity is longer. So that might increase a little bit in terms of the lead time leading to revenue. Sebastian Hou: Okay. That's fair. That's all for me. Thank you. Jeff Su: Okay. Thank you, Sebastian. Operator, can we move on to the next participant, please? Operator: Next one, we have Laura Chen from KGI. Go ahead please. Laura Chen: Hi. Thank you. Happy New Year. Thanks for taking my question. I have questions on your overseas expansion. Just wondering would TSMC consider joint venture in Europe like what you announced in Japan? And what's your current preference? Do you prefer 100% owned or you would be more open for potential joint venture like what TSMC did a long time ago in WaferTech and Singapore with NXP before? That’s my first question. Jeff Su: Okay. So Laura, let me summarize your first question. It is about our overseas fabs, and she's wondering will we consider joint venture as a future model going forward, whether it's in Europe or elsewhere? Is this something that we have done with WaferTech in the past and also recently with Japan, is JV the new model going forward? Mark Liu: Yes. Laura, this is Mark. To answer your first question about Europe, this is still very early stage we are assessing. To start the overseas fab, there are many, many considerations. Among them top few is the – first is the – our customers' needs. And so in this current planning in the Japan fab, indeed, it was a joint venture. We haven't done joint venture for many years. And we think this joint venture is also a special case. Typically, every TSMC fab no matter where it's located, we will serve all the customers from around the world and this Japan joint venture were also the same. However, in Japan, we have a very large customer who is a – have a single technology, and we can also leverage their operating and manufacturing experience in Japan, which help us ramp in the learning curve. So that made us make the decision of a joint venture fab with Sony, where we have a majority share. So this is a special case. And we typically, we are considered to proceed a solely-owned fab with 100% ownership. Laura Chen: Yes. Thank you. That's very clear. And also, my second question is specifically on the N6-based RF transceiver, I recall that in back in June last year, you mentioned that the N6-based transceiver for 5G. Can you give us more update as we know that there's not much expansion on 16-nanometer or 12-nanometer which are the major technology node for 5G RF transceiver? And with the limited supply, just curious about the N6-based 5G RF transceiver, would that become the mainstream or what TSMC's capacity plan in this area and also the client engagement for the N6-based RF? Thanks. Jeff Su: Okay. Laura, let me try to summarize. Her question is about RF transceivers for 5G. She wants to know there doesn't seem to be any major capacity expansion. So what is TSMC's strategy for RF transceivers for 5G and also N6? You're talking N16 or N6, sorry, Laura? Laura Chen: N6 because right now, most of that transceiver are in 16, my understanding. Yes. But there is not much difference. Jeff Su: So she wants to update on our N6 RF transceiver. Laura Chen: Yes. Thank you very much. C. C. Wei: Okay. Laura, we always are working with our customers closely, right? And the customer makes their decision to choose which technology node and to match their product design best and you are right. Right now, transceiver is start moving from 28-nanometer to 16 and now moving to N6. We are expanding our capacity to meet the demand. That's all I can say. Did that answer your question? Laura Chen: Yes. Thank you. I think, can I follow-up that will – we expect that N6-based RF will be the majority sometime, say, in 2023 or 2024? Jeff Su: So Laura's follow-up is, can we expect N6 RF to be the majority by 2023 or 2024? C. C. Wei: Well, Laura I should not comment on that. This is between TSMC and the TSMC's customers. Laura Chen: Got it. Thank you very much. Jeff Su: Okay. Thank you. Operator, in the interest of time, I think we'll take the final two questions. Operator: Next one to ask questions, Krish Sankar from Cowen and Company. Krish Sankar: Yes. Thanks for taking the question and congrats on the really strong results. My first question is on gross margins. Wendell, you said long-term gross margin about 53%. The last couple of quarters, you said it will be over 50%. So is it safe to assume that the price increases are the big reason for this increase in gross margin? And are these structural or are they cyclical? And is there some other variable in play given in gross margin improvement since it's interesting that CapEx is going up, but the depreciation is not having an impact longer term on the gross margins? That's my first question. Jeff Su: Okay. Krish, let me summarize your first question. So Krish notes that Wendell and C.C. said, our long-term gross margin target, last time we said 50% and higher. Now today, we said 53% and higher. So is this because of price? And is this a cyclical element only? Or is there something structural in terms of a higher 53% and higher long-term gross margin target? Wendell Huang: Yes. Well, let me share with you that. We are talking about long-term. So several years down the road. I think that shouldn't be a cyclical issue. So previously, it's long-term 50% and higher. Now it's long-term, 53% and higher, okay. So that's the difference. And we are working closely with our customers and suppliers to both sell our value and drive our cost improvements. So those are the – this is the result of all these efforts together. Krish Sankar: Got it. All right. And then my second question is kind of a two part question. The CapEx and the OpEx question, you spoke about $40 billion to $44 billion in CapEx. Can you just tell us how much of the CapEx is going to be split between Taiwan and U.S. and Japan, like a geographic breakdown of that $40 billion to $44 billion? And then on the OpEx side, I understand you don't want to comment on long-term OpEx. But I'm just kind of curious, it's rising global inflation and your interest in recruiting talents in Arizona, how to think about OpEx growth relative to inflation growth? Jeff Su: Okay. So Krish’s second question. First is in terms of the CapEx guidance that we gave this year, $40 billion to $44 billion. He wants to know what portion is for overseas capacity as compared to Taiwan. Wendell Huang: Okay. For this year, out of the $40 billion and $44 billion, we really don't – cannot comment on the split between overseas and Taiwan. We normally split or give the breakdown guidance between advanced and mature specialty nodes. Jeff Su: And then the second part is on OpEx. What is the impact – although we're not giving an operating margin guidance, but rising global inflation, we're trying to recruit talent overseas. What is the outlook for our OpEx? Wendell Huang: Well, we try very hard, work very hard to control our operating expenses and to achieve operating leverage. You can probably see from the track record in the past few years and past few quarters that we're always able to achieve operating leverage. And that's something that we will continue to work very hard on. Krish Sankar: Okay. Thank you very much. Jeff Su: Okay. Thank you, Krish. Operator, in the interest of time, we will take the last participant's questions. Operator: Last one to ask questions, Frank Lee from HSBC. Go ahead, please. Frank Lee: All right. Thank you for taking the question. Just had a question, maybe if I can follow-up on the CapEx. I think a year ago, you guys gave a longer term fee or CapEx target. I understand at this time, your CapEx is only given for 2022. Just wanted to understand are there any – is there more uncertainties about giving the longer-term CapEx that we're not seeing in the longer-term target being given? And I think last quarter you guys have also talked about your CapEx intensity was going to be more than 50% in 2021, but long-term target you said in the 30s. But last quarter, I think it was implied that it was not going to come down to the 30s in the next two or three years. Is that still the case? That's the first question. Jeff Su: Okay. So Frank's first question is on CapEx. He said we had talked about $100 billion CapEx in the next three years. His question is why are we not guiding for next three years CapEx now? Is there some concern we have? Wendell Huang: Okay. Frank, we will not comment on the CapEx outlook beyond 2022 to date. Please be reminded that every year, our CapEx is spent in anticipation of the growth that will follow. So as long as our growth outlook looks good, then we will continue our investment approach, the disciplined investment approach to support our customers and capture the growth opportunities. And as regarding the capital intensity, yes. As I said earlier that in the period of high growth like today, it is quite normal or it is appropriate for the capital intensity to be high. And if our growth were to slowdown, then the capital intensity is expected to decline accordingly. So from what we can see at this moment, you're asking several years from now or probably – a normal situation will probably be in the mid-30s. Frank Lee: Okay. But is that likely in the next two or three years? Or it's going to be further out could we get at that level? Wendell Huang: Long-term, several years. Frank Lee: Okay. Thank you. Jeff Su: I think we'll give you year-by-year updates. Yes. Okay? Frank Lee: Okay. Great. And then I guess my second question is, I think, a consistent message on this call was really about the semi content structure, semi content growth. I think you guys have mentioned this a couple of times in this call. Over the past year though, I guess, just wanted to get your sense of the semi content growth, something that seems like it's been well understood. But has there been an incremental surprise in terms of the semi content for you guys over the past year that has a more positive structural long-term growth? And if so, can you share maybe by what application? Or are we seeing content growth and mature nodes as well? Jeff Su: Okay. So Frank's second question is on the semiconductor enrichment. His question is what are we seeing? Have we seen upside in the last year? And in terms of what specific applications are driving the semiconductor content enrichment. Maybe C.C. can address this last question. C. C. Wei: Yes, sure. I will give you a live example. If you look at the new car being introduced in the market, you will find out that the semiconductor content has been dramatically increased. And the same happened to data centers, server and et cetera, et cetera. Frank Lee: Okay. is it fair to say then that the semi content growth is something that is structured across all nodes, including advanced as well as some of the specialty… Jeff Su: So Frank's question then with the semiconductor enrichment, is this only for the leading nodes? Will this also – is this also hold true at the mature nodes as well? C. C. Wei: Well, it’s across all the technologies that I can say. I'll give you one example, again. If you look at the ADAS, that's a leading-edge technology, if you look at the power management, that's a mature technology. Jeff Su: Okay. All right. Frank, thank you. Frank Lee: Okay. Thank you. Jeff Su: Thank you, C.C. Thank you, Frank. 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 one hour from now. The transcript will become available 24 hours from now. Both are going to be available through TSMC's website at www.tsmc.com. So thank you for joining us today. We hope everyone continues to stay healthy and safe. Happy New Year and we hope you join us again next quarter. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone and welcome to TSMC's Third Quarter 2021 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 in a 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 3rd quarter of 2021, followed by our guide for the fourth quarter of 2021. Afterward, Mr. Huang and TSMC CEO, Dr. C.C. Wei, will join and provide the Company's key messages, then we will open the line for Q&A. 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 on our press release. And now I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang: Thank you, Jeff. Third-quarter revenue increased 11.4% sequentially in NT terms, or 12% in dollar terms. Our 3rd quarter business was driven by strong demand across all four growth platforms, which are smartphone, HPC, IoT, and automotive-related applications. Gross margin increased 1.3 percentage points sequentially to 51.3%, mainly due to the improvement in back-end profitability in a more favorable technology mix. The operating margin increased 2.1 percentage points sequentially to 41.2%, mainly due to better operating leverage. Overall, our third quarter EPS was TWD6.03 and ROE was 30.7%. Now let's move on to the revenue by technology. 5-nanometer process technology contributed 18% of wafer revenue in the third quarter, while 7-nanometer accounted for 34%. Advanced technologies, which are defined as 7 - nanometer and below, accounted for 52% of the way for revenue. Now, moving on to revenue contribution by platform. Smartphone increased 15% quarter-over-quarter, to account for 44% of our 3rd quarter revenue. HPC increased 9% to account for 37%. IoT increased 23% to account for 9%. Automotive increased 5% to account for 4%, and DCE decreased 2% to account for 3%. Moving on to the Balance Sheet. We ended the 3rd quarter with cash and marketable securities of TWD976 billion or equivalent $35 billion. On the liability side. Current liabilities increased TWD8 billion, mainly due to the increase of TWD24 billion in accounts payables and the increase of TWD6 billion in dividend payable, partially offset by the decrease of TWD21 billion in short-term loans. Long-term interest-bearing debt increased by TWD50 billion, mainly as we raised TWD49 billion corporate bonds during the quarter. On financial ratios. Accounts receivable turnover days decreased 2 days to 40 days, while days of inventory remained at 85 days. Now, let me make a few comments on cash flow and Capex. During the third quarter, we generated about 319 billion NT cash from operations, including some customer prepayments. Spend 189 billion in Capex and distributed 56 billion for fourth-quarter 20 cash dividend. Short-term loans decreased 18 billion while bonds payable increased by 49 billion. Overall, our cash balance increase from 106 billion to 854 billion at the end of the quarter. In U.S. dollar terms, our third quarter, capital expenditures totaled $6.77 billion. I have finished my financial summary. Now, let's turn on our 4th quarter guidance. Based on the current business outlook, we expect our 4th quarter revenue to be between $15.4 billion and $15.7 billion, which represents a 4.5% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to TWD28, the gross margin is expected to be between 51% and 53%. The operating margin is between 39% and 41%. On July 12th, we announced that we have completed the purchase of 5 million doses of vaccine as part of our efforts to help fight against the COVID-19 pandemic in Taiwan, we recognized a small portion of the vaccine donation expense in the third quarter, and the majority of it will be recognized in the fourth quarter, which will have around one percentage point impact on our operating margin. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our 2021 capital budget. Every year, our Capex is spent in anticipation of the growth that will follow in future years. We are witnessing a structural increase in underlying semiconductor demand, underpinned by the industry megatrends of 5G related in HPC applications. In order to support our customer's growth, and meet the increasing demand for our advanced and specialty technologies in the next several years, we have budgeted our full-year 2021 Capex to be around $30 billion. Next, let me talk about our profitability. Our 3rd quarter gross margin increased 1.3 percentage points sequentially to 51.3%, mainly due to better back-end profitability and technology mix. Based on the exchange rate assumption of $1 to TWD28, we have just guided the 4th quarter 2021 gross margin to be 52% at the midpoint. The midpoint of our 4rth quarter gross margin guidance also implies that our full-year 2021 gross margin is expected to be higher than 50%, despite the rapidly rising depreciation costs, the dilution from the N5 ramp, and the unfavorable foreign exchange rate in 2021, as compared to 2020. As we have discussed before, 6 factors determine TSMC's profitability leadership, technology development, and ramp up pricing, cost, capacity utilization, technology mix, and foreign exchange rate, which is not controllable. Taking all these factors into consideration, we believe a long-term gross margin of 50% and higher is achievable. Now let me turn the microphone over to C. C. C. C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our near-term demand and inventory. We can credit our 3rd quarter with revenue of TWD414.7 billion or $14.9 billion, driven by strong demand across all four core platforms, which are smartphone, HPC, IoT, and automotive-related applications. Moving into the 4th quarter of 2021, we expect our sequential growth to be supported by strong demand for our industry-leading 5 - nanometer technology. Based on the midpoint of our fourth-quarter revenue guidance, our full-year 2021 revenue is expected to grow about 24% year-over-year in the U.S. dollar term. On the inventory front, we continue to expect our customers and the supply chain to gradually prepare a higher level of inventory in the second half of this year as compared to the historical seasonal level. Given the industry continually needs to ensure supply security, we expect the supply chain to maintain a higher level of inventory for a longer period of time. In the near term, we continue to observe short-term imbalances due to interruptions in the supply chain brought over by COVID-19. We also continue to observe the structure increase in long-term demand, underpinned by the industry megatrends of 5G and HPC-related applications, and the higher silicon content in many end devices, including automotive, PCs, servers, networking, and smartphones. While the short-term imbalances may or may not persist, we believe our technology leadership, will enable TSMC to capture the strong demand for our advanced and specialty technologies. And we expect our capacity to remain tight in 2021 and throughout 2022. Next, let me talk about TSMC as a long-term growth driver and return. We are entering a period of higher structural growth. The multiyear megatrend of 5G and HPC-related applications are expected to fuel massive requirement for computation power and propel the greater need for energy-efficient computing, which demand the use of leading-edge technologies. This megatrend will not only spur unit growth, but also drive increasing semiconductor content in HPC, smartphone, automotive, and IoT applications. COVID-19 has also fundamentally accelerated the digital transformation making semiconductors more pervasive and essential in people's lives. With our technology leadership, manufacturing, excellence, and customer’s trust. TSMC is better positioned to capture the course from its favorable industry megatrend. We sell differentiated technologies. Towards raise the structural increase in the long-term market demand profile. TSMC is working closely with our customers to plan our capacity and investing in leading-edge and specialty technologies to support their demand. Our capital investment decisions are based on four disciplines; technology leadership, flexible and responsive manufacturing, retaining customers' trust and earning the proper return. At the same time, we faced manufacturing cost challenges due to an increase in process complexity at DD Note, new investment in mature notes, expansion of our global manufacturing footprint, and rising material in basic commodity cost. As we continue to work closely with our customers to support their goals, our pricing strategy will remain strategic, not opportunistic, to refer to our creation. We will also continue to work diligently with our supplier to deliver, and cost improvement. Even us, we showed a greater burden of investment for the industry, by taking such actions we believe we can achieve a proper return that enables us to invest to support our customers, of course, and deliver long term profitable goals with 50% and higher gross margin for our shareholders. Now let me talk about our Japan fab print. We are expanding our manufacturing footprint to extend and enhance our competitive advantage in providing industry-leading technologies. The world's largest capacity, efficient and cost-effective manufacturing, and to better serve our customer. Our global manufacturing expansion strategy is based on customers' needs, business opportunities, operating efficiency, and cost-economic considerations. After conducting due diligence, we announced our intention to build a specialty technology fab in Japan, subject to our Board of Directors' approval. We have received a strong commitment to supporting these projects from both our customers and the Japanese government. This fab will utilize 22, 28-nanometer technology for semiconductor wafer fabrication. Fab construction is scheduled to begin in 2022 and production is targeted to begin in May 2024. Further details will be provided subject to the board's approval. We believe the expansion of our global manufacturing footprint will enable us to better serve our customer's needs in the rich, global talent, while early in the proper return from our investments and deliver long-term profitable quarters for our shareholders. Finally, I will talk about the N-3 and N-3E status. Our N-3 technology will use FinFET transistor’s structure to deliver the best technology maturity, performance, and cost for our customers. Our N3 technology development is on track. We had developed complete platform support for both HPC and smartphone applications. N-3 risk production is scheduled in 2021, and production was starting in the 2nd half of 2022. We continue to see a high level of customer engagement at N-3, and expect a newer tap-out for N-3 for the first year as compared with N-5. We also introduced N3E as an extension of our N3 family. N3E while feature improved manufacturing process window, with better performance, power, and yield. Volume production of N3E is scheduled for one year after N3. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. With our technology leadership and strong customer demand, we are confident that the N3 family will be another long and vast -- will be a large and long-lasting node of TSMC. This concludes our key message. Thank you for your attention. Jeff Su: Thank you, C. C. This concludes our prepared statements. Before we begin the Q&A session, I will like to remind everybody to please limit their questions to 2 at a time to allow all the 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. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the question in queue, please press 0, 2. Now let's begin the Q&A session. Operator, please 77proceed with the first caller on the line? Operator: The first one to ask questions, Gokul Hariharan, J.P. Morgan. Gokul Hariharan: Good afternoon. Congrats on the good results and thanks for taking my question. My first question is on the long-term road map. Intel has now unveiled their long-term road map until 2025 with four process nodes looking to catch up with TSMC and potentially even overtake. Could TSMC talk a little bit more about its own longer-term roadmap timing of adoption of some of the new technologies, like, get all-round, high-end EUV, battery power line, etc.? And where is TSMC itself from a profit technology leadership perspective in the next 3 to 5 years? The entry message is definitely well-received, but couldn't we talk a little bit longer term, given some of your competitors are addressing that time frame as well. That's my first question. Jeff Su: Okay. Thank you. Gokul, please let me summarize your first question. Gokul's first question is about -- regards our long-term technology roadmap. He notes that in IDM is outlined there is a long-term road map for the next 3 to 5 years. And talking about catching up and overtaking. Gokul wants to know what are our views or plans -- or our road map I guess around the timing of new technologies, such as new transistor structure, like get all around, , etc. And how do we see our technology leadership position in the next 3 to 5 years? C. C. Wei: Okay. Gokul I don't comment on my competitor's technology road map or their technology approaches. But for TSMC, we are confident that we'll be very competitive and we do have a very competitive schedule actually, let me say that, in all 3 - nanometer technology and the 2 - nanometer technology. And I can share with you that in our 2-nanometer technology is the density and performance will be the most competitive in 2025. And of course, I can also share with you that again. All around the structure is being considered. Although I am not going to -- not ready to release more information about it. So that's -- again, let me conclude in one sentence. What becomes very competitive and we are confident that our technology leadership will be maintained. Jeff Su: Okay. Thank you, C.C. Gokul, do you have a second question? Gokul Hariharan: Yes. Thanks for that answer. Looking at Capex, I think back in Q1 results definitely indicated spending a 100 billion-plus in Capex over the next 3 years. Since then, you have talked about Japan's capacity expansion. Looks like there are some capacity expansion plans for leading-edge in Kaohsiung as well. Could we talk a little bit about -- is a TWD100 billion going to be enough or do you still need to see -- do you still see some upside for this TWD100 billion budget on the Capex over the next 3 to 4 years since the growth seems to be stronger. And if we see that upset in Capex, are we still looking at the high end of 10% to 15% growth CAGR, or do we believe that there could be faster growth than this 10% to 15% or high end of 10% to 15% that we had talked about previously? Thank you. Jeff Su: Okay, Gokul. Let me see if I can catch your second question, is around our Capex and growth -- longer-term CapEx and growth outlook. Gokul is asking what are our plans in Japan and plans for expansion in Taiwan. Will there be upsides to this 100 billion CapEx number that we have talked about in the previous -- for the next few years? And then also will there be a higher long-term growth CAGR target as a result as well? Wendell Huang: Gokul, this is Wendell. Let me answer your question. We are not able to comment specifically on the next few years, CapEx. Our capital investment decisions are based on 4 disciplines; technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning the proper return as C. C., just mentioned. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. As we said, we are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5 G-related and HPC applications and increasing silicon content. As soon as our growth outlook looks good, there could be an upside to our CapEx plans, and we will continue our disciplined investment approach to support our customers and capture the growth opportunities. Now, in terms of our revenue CAGR, we're not planning to make any changes at this moment. We will provide you with more information at our January conference. Gokul Hariharan: Thank you very much. Jeff Su: Okay. Thank you, Gokul. Operator, can we move on to the next participant on the line, please? Operator: Next one to ask questions, Bruce Lu from Goldman Sachs. Go ahead, please. Bruce Lu: Hi. Thank you for picking my question. I think my first question is that 80% of the TSMC's Capex is focused on an advanced node capacity expansion. And do you see that the mature nodes become the bottleneck for your customers? How do you ensure your customer can have enough mature node -- or chip? Jeff Su: Okay, sorry. Bruce, let me repeat your question. Question is around the mature nodes and that with AT -- typically a majority of our Capex is for the leading nodes. So how can we ensure that our customers will not be bottlenecked or have enough on the mature nodes as well? Wendell Huang: Okay. Bruce, let me answer that question. TSMC's strategy at mature nodes is to work closely with our customers to develop and invest in specialty technology solutions to meet customers' requirements and create differentiated and long-lasting value for customers. We take a holistic view and work with our customers to decide the optimal capacity to support their demand. Jeff Su: Okay. Does that answer your first question, Bruce? Bruce Lu: Yes. Let me try to answer -- ask a different question. I think recently we have had a lot of investors asking that there is a lot of noise just on the such as some TV or China's smartphone. The inventory level you saw that at a higher level. But the foundry all along remained very, very positive, and every -- almost everyone is raising the capacity and CapEx, can you try to tell the investor what's the discrepancy and where is the -- why the foundry can continue to see such a strong demand, while the end demand is deteriorating? Jeff Su: Okay, so Bruce, let me summarize your second question. The second question for Bruce is around looking at end-demand and the foundry. Bruce notes that there's a lot of, I guess, noises about different types of end demand. However, the foundry outlook seems to be very positive. So how do we explain this disconnect or discrepancy? C. C. Wei: Okay, Bruce, let me say that while we do not rule out the possibility of an inventory correction, but we expect TSMC’s capacity remains very tight in 2021 and throughout 2022. This is because of our technology leadership position. And even there's a correction to occur, it could be less volatile for TSMC given the previous downturn as our underlying structural mega trend of 5G related and HPC applications. And, the increasing silicon content, in addition to the unit CoWoS in the end devices were continuing. And again, we saw our technology leadership; we are better positioned to capture the mid to long-term CoWoS activities. I hope that answers your question. There's a discrepancy between the demand and why still a very tightening capacity. Bruce Lu: Okay. I understand. Thank you. Jeff Su: Thank you, Bruce. Operator, can we move on to the next participant, please? Operator: Next one, Randy Abrams, Credit Suisse. Randy Abrams: Hey, yes, thank you. Good afternoon. I wanted to ask probably for Wendell, a few questions on the margins. You mentioned 50% and above, just a couple of follow-ups on that. Should we think it's still within a couple of points of 50 or with an effort to firm up pricing, you could push that higher? Just reflecting to maintain return on capital, you will have a higher asset base. And that's the first part of that question. And then within margin, if you could update us on the inefficiency if you had to operate at a high level if you've worked that out. And also if you have an initial view on depreciation for 2022. Jeff Su: Okay. Randy, let me summarize your question. Your question is about our margin. Randy notes that we now say 50% and above. He wants to know, is this a couple of points above, how high above, and will we be able to maintain our, I guess, RIC or ROE as a result? And also that in last time we had talked about running at a high level of utilization in certain inefficiencies. Has that now become more improved or what is the outlook there? And also, the depreciation outlook for 2022. Wendell Huang: Okay. Let me answer the last question first. Depreciation in 2022 will increase, but the magnitude, we are going to tell you next year in January. For the margin, how many percentage points are over 50%? We don't want to disclose it right now, but we hope we can tell you more at the January Investor Conference and that will of course bring a better ROE than before due to the higher-margin targets. You also asked about utilization? Jeff Su: Randy also asking about inefficiencies when we had talked previously about when we run at a high level of utilization, less efficiency, cost improvement, and things like that. So Randy is wondering, is this -- is it continuing? Is it? Wendell Huang: The utilization continues to be pretty high. At the same time, the cost improvement activities are ongoing. As a matter of fact, in the fourth quarter, we believe the margin will be better partially because of the cost improvement activities. Randy Abrams: Okay. Great. Then -- a question I'll ask. And it's one quick follow-up actually related to utilization 15 above, if you have utilization view is that 90% or that full capacity? And then the second question I have is on capital intensity. One of the equipment suppliers, Tokyo Electron, put up a slight but moderate increase in capital intensity. So CapEx perk, they have it by 2-nanometers, just rising gradually to 210 million per thousand wafers. Could you discuss it, if you can a CapEx per case -- absolute or how you see that trending? And do you see that continuing to accelerate up or actions you're taking to keep it more stable after the increase we've seen in the past few years? Jeff Su: Okay. So Randy's second question is about capital intensity. He notes that Tokyo Electron is showing that the capital intensity or the CapEx per K is moderating the pace of increase, particularly as you get into 2 nanometers, so he is wondering if we can just comment on our CapEx per K. Wendell Huang: Well, Randy, I -- what I can share with you is that the Capex for advanced -- more and more advanced technology is normally higher. That's for sure. But at the same time, through selling our values and working with the customers and the suppliers, we believe we are able to still earn a profit return, which is at this moment at 50% and a higher gross margin is achievable. Jeff Su: Okay, Randy? Randy Abrams: Thank you. Jeff Su: Thank you, Randy. Operator, can we move on to the next participant, please? Operator: The next one is to ask questions. Brett Simpson from Arete Research. Brett Simpson: Yes. Thanks very much. My question was on the N3 introduction next year, can you talk a bit about the ramp-up of N3? Is it going to be a typical ramp, very similar to the last couple of node ramps, or do you see the timing of this being different? And also, just in terms of the costs, there's a lot of talk about costs rising above expectations for N3, as you add more layers, can you just clarify how you see costs and then three and whether you can still achieve a 70% density gain at that note? Thank you. Jeff Su: Okay, Brett, so that means your first question is around N3. Brett wants to know with N3 ramping in the second half of next year, what type of ramp do we expect versus the prior notes? Will it be typical or will the timing be different? And also on the N3 cost, what does the N3 cost structure look like? Is that your question, Brett? Brett Simpson: That's right. Thanks, Jeff. C. C. Wei: Okay. Great. Hi. This is C. C. Wei. Let me answer the second part of the question first. costs definitely it is higher than N5. That is because of technical complexity and we have to use many new pieces of equipment which is -- cost higher. But then the ramp-up is very similar to the previous node. We saw many customers engagement actually is higher than what we observed in the previous node. The second half of 2022 will be our mass production but you can expect the revenue will be seen in the first quarter of 2023 because it takes a long tech cycle time to have all those wafers out. Brett Simpson: Okay. So basically on three-nanometer, this won't be -- typically, you see your first revenue Q2 or Q3 it's going to be later next year. Is that right? C. C. Wei: That's right. Jeff Su: Yeah. Brett, I think we have been consistently saying that N3 will begin production in the second half of 2022. That has been a consistent message since we first introduced N3 in 2019. Brett Simpson: Okay, great. And maybe just a follow-up on 28-nanometer. You just talked about a new fab that's coming on stream in 2024 in Japan. And can you clarify the latest thinking in terms of Europe? Is that another that we could be new fab, an expansion for TSMC? And then in terms of looking at the 28-nanometer node, there's a lot of capacity being expanded at the moment. Can you talk about what's driving this and why you think this will not lead to an oversupply situation in time? Thanks. Jeff Su: Thank you, Brett. Brett, the second question is around 20 nanometers, 2 parts. First, of course, that C. C. just announced our intention to build 28 nanometers in Japan, so Brett wants to know, do we have plans in Europe? And then the second part is that, with 28 nanometers, what is driving the longer-term structural demand for 28, is there a risk of oversupply of 28 nanometers? C. C. Wei: We don't rule out the possibility of building a fab in other areas that include Europe. However, we do emphasize when we build up a new capacity for 28-nanometer is almost all to serve the specialty technologies. For some of the specialty technologies that are not offered by our competitor, and TSMC is working with our customers to meet their demand. So you got any possibility of oversupply? Not for TSMC. Okay. That's all I can let you know. Brett Simpson: That's great. Thank you, C. C. Jeff Su: Okay. Thank you, Brett. Operator, can we move on to the next participant, please? Operator: Next one to ask questions, Roland Shu, Citigroup. Roland Shu: Hi. Good afternoon. Thanks for taking my questions. My question is, you have a global manufacturing expansion strategy to build more fabs overseas are going for -- as you said, you also thought is good about the possibility to build a fab in Europe. My question is on your -- is a joint venture with a local government or key customers an option for you to build this new fab overseas, or you prefer to build a fab, and 100% own, all like what you did for those fab in China or the U.S. or Europe now? Jeff Su: Okay. Roland, your first question is about our overseas fabs. Roland wants to know as we expand overseas, will we consider joint ventures with local governments or our key customers, or will we continue to -- or will it be 100% owned like what we have done in China and in the U.S.? Wendell Huang: Okay. Roland, let me answer this question first. Normally, as you mentioned, our OVC fabs we normally own 100%. We do not consider a JV with governments. However, JV with other Companies or key customers can be considered on a case-by-case basis. Roland Shu: Okay. Thank you. Yeah, my second question is now you expect a short-term goal up of 0 emission course up by 2025, but you have to continue to invest in 5-nanometer, 3-nanometer, or even 2 - nanometer before 2025. So how are you going to achieve the 0 emission course target and also, in the meantime, keep up with your expansion plans? So where this like no, these aggressive 0 emission admission quotes, to decelerate your investment plans to meet your target. Thank you. Jeff Su: Okay, Roland. Roland's second question is asking in -- that our commitment recently announced to zero emissions growth by 2025. But as we continue to invest and expand on N5 and N3, how will we be able to achieve this target? Wendell Huang: Okay. Lauren (ph) it's actually a net-zero in 2050, not zero-emission in 2025. We are going to do this. The first phase, make -- working ourselves to say -- to become more energy efficient because a lot of the carbon emission comes from the electricity. In our production, we can try to minimize the carbon emission, and secondly, we are going to use more green energy, which is the -- which will emit the most part of the carbon. And for whatever is left, it will depend on carbon trading, the carbon rights in the future. That's the basic framework of achieving this net 0 in 2015. Roland Shu: No, actually I'm talking about 0 emission call. You have this near-term target, 0 emission growth by 2025. I know this is different from Europe in 2050. Jeff Su: Right. Yes. Wendell Huang: -- but the way to achieve those are pretty much the same. Jeff Su: I think -- sorry. Roland, your question is about net 0 emissions growth by 2025 and Wendell -- Roland Shu: Yes. Jeff Su: -- said we have net zero emissions by 2050, right? So I think what Wendell, is saying is that our -- we will continue to invest in technology, but we also as Wendell just said, our own internal efforts, our use of renewable energies, carbon credits, and also working with our suppliers and our supplying chain on green manufacturing to achieve and deliver on these targets. Roland Shu: Okay. Understood. Thanks. Jeff Su: Okay. Thank you, Roland. Operator, can we move on to the next caller, please? Operator: Next one to ask a question, Charlie Chan from Morgan Stanley. Charlie Chan: Thanks. Good afternoon, gentlemen. My question -- the first question is about the chip shortage situation. I think Chairman interviewed by Time Magazine and his view he says there should be more than sufficiency of finished chip in the supply chain. So can you help us or global investors to understand when do you think that chip shortage, especially for the automotive, can be fixed? And also your revised 2-nanometer governments or carmakers. And besides asking you to provide customer data, what would be a better way to manage the shortage issue going forward. Thank you. Jeff Su: Okay. Thank you, Charlie. Charlie's first question is around the chip shortage with several aspects to it. Charlie wants to know about the chip shortage, and also observations of customers stockpiling chips. He wants to know that, how do we see the situation, and when can this be fixed, particularly for the automotive segment. And that -- and let me stop there first. C. C. Wei: For the automotive, let me specifically point it out. The automotive supply chain actually it's quite long and complex. It's more complicated than we initially thought. But let me say that TSMC 's participation in the global automotive IC market, is only about 14%, and we are doing our part to support our automotive customers with what they need. However, we cannot solve the entire industry's supply challenge. And recent factors such as a pandemic in Southeast Asia also affecting the auto IC supply. Again, we are actively taking the steps throughout the first half of this year to trace the chips supply challenges for our automotive customers. And we are -- we also believe the wafer supply shortage is greatly reduced for our automotive customers, starting probably in the 3rd quarter. At the end of OEM probably we'll wait for a couple of quarters to see it. That's our estimate. Charlie Chan: Thank you very much. It's super helpful. Another question is that -- again, the price hike, right? So I think the news we're reporting you decided to hike the price by 5% to 20%. May we know how do you determine the different ranges applying to different customers? What's the strategic reason behind a different range of price hikes? And I know you don't really want to give the next year's guidance, but based on that 5%, 20% price hike in terms of a percentage of a gross margin improvement, can your comment on the margin improvement? Thank you. Jeff Su: Okay. Charlie's second question is asking about pricing. And he is asking that recently there's lots of news that we have increased our price by anywhere from 5% to 20%, so he wants to know how do we decide how much to increase for what types of nodes or customers. And then also, what will be the impact on the 2022 gross margin. Is that correct, Charlie? Charlie Chan: Yes. Thank you. C. C. Wei: Hi, Charlie. In fact, we do not come in on all pricing. This is a very private discussion between TSMC and our customers, but let me say that we continue to work closely with our customers to support their growth. That one needed TSMC to expand the capacity to support their growth. Is for both leading-edge technologies and specialty technologies. And so our wafers pricing strategy continues to be strategic, not opportunistic, or short-term. And so that we can be better prepared to support the capacity expansion. As for the return, maybe emphasize again, our gross margin was 50% higher. TSMC needs to earn a proper return that can enable us to invest for future expansion to support our customers ac across. Charlie Chan: Okay. Got it. I guess my question is whether your desired ROI or desired margin changed, right? Meaning, you -- for example you hike the price by certain percentage points. But besides that hiking, there's a cost you just mentioned. But that would be due to further margin expansion. I think that should be all of my questions. Thank you. Wendell Huang: Right. Charlie, I think we just said that in the past we always say above 50% gross margin. But now we're saying that 50% and higher gross margins are achievable. Charlie Chan: Okay. I see. Jeff Su: Okay. Thank you, Charlie. Charlie Chan: Okay. Understood. Jeff Su: Thank you. Charlie Chan: Thank you. Jeff Su: Operator, can we move on to the next participant, please? Operator: Right now, we have Nick Gaudois, UBS. Nick Gaudois: Yes. Good afternoon. Thanks for taking my question. Just going back to the confirmation you just did on investing in Japan. Should we understand what portion of CapEx in '22 - '23 is incorporated in your overall guidance of $100 billion or would that come on top, and would you -- could you specify it, if you can at all? A related question to that would be, what capacity are we talking about for 22 and 28-nanometer. Thank you. Jeff Su: Nick's First question is about our fab plans in Japan. He wants to know that with today's announcement, is the CAPEX for the Japan fab already incorporated in the -- this $100 billion target that we have talked about previously. And also, can we disclose the capacity for Japan? Wendell Huang: Okay. Nick, the CapEx for this project, as we said last time -- in the last quarterly release was not included in the $100 billion budget as you mentioned, so it will be incremental. Other than this, we really are not able to comment on the investment amount and other details until after our board's review and approval. Nick Gaudois: Right. Okay. Fair enough. Understood. Going back to N3, you talked about the improved process window for N3E, is that the only main difference or is there a difference in performance as well between the two? Thank you. Jeff Su: Okay. So Nick's second question is on N3E. He knows that we have talked about the improved manufacturing process window. He wonders if there are any other improvements in things like performance and etc. C. C. Wei: There's a difference. As we said N3E is an improvement. Improvement in that the manufacturing window. However, the majority in the design rule or something is similar. We're using the N3 to enhance the manufacturing window with a better performance. Nick Gaudois: Got it. Thank you very much. Jeff Su: Thank you, Nick. Operator, can we move on to the next participant, please? Operator: Next one we have Laura Chen, KGI. Laura Chen: Hi. Thank you for taking my question. I think we're talking about -- we've seen this solid demand across the world thanks to strong position in technology. But on the other hand, on the demand side, we're also seeing that some growth slowing down particularly in China. So I think back in the early -- earlier this year, we mentioned the 5G smartphone shipment, we estimate that will be 500 to 550 million units. Just wondering, do you still keep that target? And also, do you have any idea or preliminary projection for the 5G smartphone into next year? And also, what if the smartphone 5G moving to a lower end or entering that kind of segment what's the implication to TSMC? That's my first question Thank you. Jeff Su: Okay, Laura. Laura's first question is focusing on the smartphone. She notes that recently, it seems the smartphone momentum in markets like China is slower. So she is wondering about what is our forecast for the smartphone market this year, as well as how do we see the 5G penetration this year and then also the trend for the next few years. Is that correct, Laura? Laura Chen: Yes. Thank you. Wendell Huang: Okay, Laura, let me answer this question. We see the proliferation of your 5G smartphone is still higher than the 4G at the same period of time before. And also, we're looking at about -- probably slightly over 500 million units of 5G smartphones for this year. Laura Chen: Right. So do you have any preliminary thoughts about the next year's gross and will that mainly be driven by the lower-end segment, in that case, what's the implication to our outlook? Wendell Huang: We'll update you about that information in January. Laura Chen: Okay, thank you. And also, my second question is also regarding our CapEx intensity. We already talked about the three-year . But just wondering that, do we still expect the CapEx intensity to maintain high beyond 2023 since we are launching again around or 2 nanometers in 2025? Can we expect TSMC like our previous intensity -- comeback intensity hike back in 2011, and thus we will maintain the high CAGR growth going forward? Thanks. Jeff Su: Okay. So Laura's second question is on capital CAPEX intensity. She's asking, what is the outlook for our capital intensity beyond 2023? Will we still have a very high level of capital intensity? Or she notes back in 2010, 20 11 periods, of course, our capital intensity was higher, but then we were able to harvest the growth and grow -- capture the growth. How do we see the next few years playing out? Wendell Huang: Okay. Laura, in 2020, the capital intensity was 38%. 2021, this year is going to be over 50%. As we said earlier, C. C. mentioned this earlier, our CapEx spend every year in anticipation of the growth in the future years. If we think the future growth is good then there's a possibility of higher CapEx. We're entering into a higher growth period because of the industry megatrends of 5G and HPC applications, plus the silicon content increase. The higher capital investment in the next few years is appropriate. As a result, we expect the capital intensity to be relatively higher than the previous year, like in 2020, for the next two to three years, before gradually coming down maybe to mid to high-30s level from what I can see at this moment. And your observation on the previous investment cycle from 2011 to 2014 will be a good one. Laura Chen: Thank you very much. Jeff Su: Okay. Thank you, Laura. Operator, can we move on to the next participant, please? Operator: The next one is to ask questions. Sebastian Hou, Neuberger Berman. Go ahead, please Sebastian Hou: Thank you for taking my questions. I only have one. It's on pricing. I think last quarter the Company talk about firming up pricing to reflect the cost. And based on the higher long-term gross margin guidance that the CFO gave this time of 50% plus, I'm curious if this round of pricing adjustment is enough to absorb the higher CapEx intensity only for this year or the next multiple years. I have a follow-up to this question, so I will stop here. Jeff Su: Sebastian, his first question is on pricing and we have talked about firming our pricing, actually also talking about selling our value in the past. So he is wondering now that we say 50% in higher gross margin, does that mean we -- if it's enough to cover the costs? Wendell Huang: Okay. Sebastian, let me answer this way. Well, first of all, we're not able to comment on detailed pricing discussions with the customers, but we worked closely with the customer to provide our value. And after providing our value, we're not expecting that a long-term gross margin of 50% and higher, is achievable as compared to the 50 -- above 50% gross margin previously. Sebastian Hou: Got it. My follow-up is that given that the next couple of years, the CapEx plan is still fluid. And I think CFO's mentioned there could be an upside to our CapEx plan either because of Japan or any other regions. So does that imply this will be a continuous adjustment, meaning that then it won't be just one shop, but we will evaluate the future pricing and what kind of value we can offer to customers based on the CapEx, based on -- and also to balance infrastructure possibility? So that means that we may continue to see potential upside in the pricing in the coming years. Jeff Su: Sebastian, your follow-up is again -- let me summarize. I think Sebastian is asking about our pricing. Is it a one-time or will this be an ongoing thing? C. C. Wei: Sebastian, this is C. C. Wei. Certainly, I will not be able to comment on the pricing discussion with our customers. But we work with them, and we continue to pin our capacity and share our value. The capacity is one of the very important venues of TSMC to support customers' growth. And so our pricing is accordingly, we serve our value, and so we prepare for that. This is a one-time or this is not a question. We do it strategically and not opportunistically. And continue to work with our customers. Sebastian Hou: Thank you, C. C. and Wendell, but at least I think we can make a fair conclusion that the higher-margin guidance outlook this time is a strong reflection or evidence of that the customer is willing to pay higher because of -- we offer value-add service, is that right to -- fair to interpret it as it? Wendell Huang: Yes. Simple. Sebastian Hou: Got it. Thanks. That's all from me. Jeff Su: Okay. Thank you, Sebastian. Operator, can we move on to the next participant, please? Operator: The next one to ask a question is Mehdi Hosseini, Susquehanna International. Go ahead, please. Mehdi Hosseini: Yes, and thanks for taking my question. I want to go back to your comments on the N3 and N3 plus. And can you tell me how I should think about EUV double patterning and how you're gonna impact your cost structure? And I have a follow-up Jeff Su: Okay. Mehdi's first question is about -- on N3, and actually, Mehdi, its N3E, not N3 plus. His question is on in N3 and N3E. He is wondering about the impact of things like EUV and double-patterning, what impact does this have on the cost structure for N3 and N3E? C. C. Wei: Let me answer that question. From N3 to N3E we provide a better value on the transistor performance and have a better manufacturing window. As for the cost, they are similar. But we think our customers will enjoy a better yield, better diversity, and better transistor performance. Mehdi Hosseini: Thank you. And my follow-up has to do with your earlier commentary on customer prepayment. In the past, you've had one or two largest customers that had a large prepayment. Should I assume that there is diversification and a larger number of customers that are providing these prepayments? Jeff Su: Okay. Mehdi's second question is on customer prepayments. He observes that in the past we may have -- may have had 1 or 2 customers who do prepayments. He wants to know, are we seeing a diversification, are we seeing a larger number of customers doing prepayments today? Wendell Huang: Okay, Mehdi. Let me answer this question. Yes, in the past, there was only 1 or 2 customers providing the prepayments. But as we've been talking about now, we expect to invest higher capacity, higher capital expenditures in the next few years to satisfy the strong demand. And in order to secure our customers' commitment, we are able to secure the prepayments for some of those customers, and the number of the customer, I cannot disclose, but it's more than before. Mehdi Hosseini: Thank you. Jeff Su: Okay. Thank you, Mehdi. Operator, can we move on to the next participant, please? Operator: The next one will be Rick Hsu from Daiwa Capital Markets. Rick Hsu: Hi, this is Rick, and thank you so much for taking my questions. The first question is about -- I think it's a follow-up to Bruce's question earlier about the disconnect between sell-in and sell-through demand. And I think C. C. mentioned that he doesn't rule out the possibility of inventory crashing. May I know, if that happens -- do you -- when do you expect that to happen? And also, if that happened, which area will feel the more impact in terms of technology node and in terms of the end applications? Thank you. Jeff Su: Okay. So Rick's question is again, going back to the disconnect or sell-in versus sell-through. And also that we have said we do not rule out the possibility of an inventory correction. Rick wants to know if one were to occur, when would it occur, what particular M segments or applications could be more impacted? C. C. Wei: Rick, I say we do not rule out the possibility, it's just a possibility. And all I say is TSMC 's capacity, where we have been very tight, in 2021 and throughout 2022. which market sector? So far we observe a little bit soft in the smartphone and PC market. But you've asked me to predict, I cannot give you a very accurate prediction. We are the only one -- I can't give you a hint as we continue to say, it's not a -- for the semiconductor industry, the demand does not only come from the unit course, also it's increasing silicon content in any devices. So even you saw some smartphone unit becomes soft or even decrease, that doesn't mean that semiconductor – the or the demand . Does that answer your question? Rick Hsu: Yes. Perfect. Yes, that's very good. Thank you so much. And the second question is on the technology, my question; I remembered that a 7-nanometer you can find a 7 plus as a note for you guys to have a very good transition I'm just wondering, are you going to do the same thing to define a particular technology note for the transition. Jeff Su: Rick's second question is about technology migration and transition. He notes that in N7, we had introduced also N7 plus to transition and start to adopt EUV. He's asking if we will incorporate a similar transition as we move to a new transistor structure. C. C. Wei: Well, I don't think we can have any more information to share with you as we move from N3 to go to the next mode, the advanced node. Today, I only announced that the N3 to N3E that why have better transistor performance and a better manufacturing window. For N2 GAA, we will share it with you when we're getting more ready. Rick Hsu: Okay. Thank you. Thank you so much. Jeff Su: Okay. Thank you, Rick. In the interest of time, Operator, let's take the last two participants, please. Operator: Okay. Now, the one who is going to ask the question is Krish Sankar, Cowen, and Company. Go ahead, please. Krish Sankar: Hi, thanks for taking my question. I just wanted to follow up. One is on C. C. prepared comments. You said the industry is going to maintain a higher level of inventory, instead of the specific end markets on which specific technology nodes we're seeing with a high level of inventories, and your comment that we're seeing softness in smartphones and PCs. Is there are a function of end demand or is it a function of not being able to get the components to make those products? And then I had a quick follow-up. Jeff Su: Okay, Krish. Krish's first question is on the higher level of inventory that we see preparing in the supply chain. He wants to know which end markets or applications specifically, or which technology nodes do we see this higher level of inventory. And then also, the slower momentum in the sell-through of smartphones or PCs, is this related to component tightness or shortages? C. C. Wei: Let me answer the question. The high inventory is actually closed by some of the necessity for not to be disruption in the supply chain, so is across the board. Actually, it's not any node or any product is across the board. And we say what we continue for a period of time. That is because of what today or those adamant to drive the people to prepare more inventories, still continue to exist. Does that answer your question? Krish Sankar: Got it. Yes, it is. And then, just like the second part of the question which is the softness in smartphones and PCs, is that end demand related or component tightness related? And then I'll ask one final question along with it. The gross margin upside you saw in Q3 from the back-end, was it a one-time thing, or is there more upside for that in the future? Thank you. Jeff Su: Okay. So Krish's question also this weakness that we see in areas like smartphones, is it -- and PCs. Is this related to end demand or is it related to component shortages? C. C. Wei: Both actually, let me answer the question quickly. Actually, the end market is a little bit soft, is slow, but we think is possible due to the component shortage. Jeff Su: And then the second part of this Krish's second question I should say, is on the gross margin side. And also the improved back-end profitability. Wendell Huang: The back-end profitable -- back-end business is sort of seasonal. It has a high season, the low season during the years. Normally, the second half is a high season, especially the third quarter. As a result, the profitability of background will be better in that quarter. Krish Sankar: Thank you very much, gentlemen. Thank you. Jeff Su: Thank you. And then, Operator, we will take the last participant, please. Operator: Yes. The last one to ask questions is Andrew Lu from Sinolink Securities. Go ahead, please. Andrew Lu: Thank you for taking my questions. C. C., I want to ask, this year you just guided 24% year-over-year growth. I think this number is probably in line with the industry. It's clear we have a stronger grossing advanced technology, but losing some share in the legacy. Very build more mature technology based on customers' demand. If our CapEx changed, are we adjust down our advanced CapEx, but increased more CapEx on mature technology? Jeff Su: Okay. St Andrew's first question, he's looking at our growth in 2021 to be around 24%. He sees the strong leadership in the advanced nodes, but his note is that we're losing share in the mature notes, so going forward, will there be an adjustment in our CAPEX strategy, leading versus mature? Is that correct, Andrew? Andrew Lu: Yes. Correct. Thank you, Jeff. C. C. Wei: Andrew, let me answer that. We did not change our strategy or philosophy in our Capex pin. But certainly, the most important thing is, we're working with our customers to support their demand. This is way important, that including on the specialty technologies. We share the -- actually, we share them to increase the mature nodes' capacity. But as we announced that Japan fab actually is a mature technology. It's a 2228 node. Andrew Lu: Can we say that in the future, we should have a higher percentage of CAPEX in terms of total CAPEX compared to the past? Jeff Su: Andrew really wanted to know -- Andrew wants to know will the CAPEX spending proportion of the mature notes versus leading edge, or will we have a higher proportion for the mature notes in the future years? C. C. Wei: Andrew, not yet, because we increased our CAPEX. Even the same proportion, the mature nodes, actually we spend a lot of money also. Did that answer your question? Andrew Lu: Yes. My last question is, it seems that we are adjusting our price based on the cost increase or whatever, how do we factor into our model for next year? What can plan the AST increase? Should we factor into our model? Because I had been observing average price on plenty basis over the last three years, including this year. Our price for last 3 years, including this year above 7% to 9%. If next year we have additional adjustments on the Apple-to-Apple pricing level. Should we say easy to have a 10% blended basis increase on ASP? Thank you. Jeff Su: Okay. Andrew's second question is on the blended ASP outlook. He wants to know in essence, can he model a 10% or greater blended ASP increase for 2022? Wendell Huang: Andrew, it's too early to comment on 2022. We will provide you with more color in January. Plus, we don't really comment on ASP, anyway. Andrew Lu: Thank you. Jeff Su: Okay. 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 and the transcript will become available 24 hours from now. And both of which are 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 in January. Goodbye, and have a good day.

Jeff Su: Good afternoon, everyone. Welcome to TSMC's Second Quarter 2021 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 in listen-only mode. Wendell Huang: Thank you, Jeff. Second quarter revenue increased 2.7% sequentially in NT dollar terms or 2.9% in U.S. dollar term. Our second quarter business was supported by continued strength in HPC and automotive-related demand. Gross margin decreased 2.4 percentage points sequentially to 50% mainly due to N5 dilution, the slower rate of cost improvement and the absence of positive inventory revaluation. Total operating expenses slightly increased TWD1.47 billion. Therefore, operating margins decreased 2.4 percentage points sequentially to 39.1%. Overall, our second quarter EPS was TWD5.18 and ROE was 27.3%. Let's move on to revenue by technology. 5-nanometer process technology contributed 18% of wafer revenue in the second quarter, while 7-nanometer accounted for 31%. Advanced technologies, which are defined as 7-nanometer and below, accounted for 49% of wafer revenue. Moving on to revenue contribution by platform. Smartphone decreased 3% quarter-over-quarter to account for 42% of our second quarter revenue. HPC increased 12% to account for 39%. IoT decreased 2% to account for 8%. Automotive increased 12% to account for 4%. And DCE decreased 12% to account for 4%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD871 billion. On the liability side, current liabilities decreased TWD14 billion mainly due to the decrease of TWD23 billion in accrued liabilities and others, partially offset by the increase of TWD6 billion in dividend payable. Long-term interest-bearing debt increased by TWD134 billion mainly as we raised TWD137 billion of corporate bonds during the quarter. On financial ratios. Accounts receivables turnover days increased 2 days to 42 days, while days of inventory also rose 2 days to 85 days primarily due to N5 wafer prebuild. C. C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with TSMC's long-term growth outlook and investment plan. We are witnessing a structural increase in underlying semiconductor demand as the multiyear megatrend of 5G- and HPC-related applications are expected to fuel massive increase in computation power and greater need for energy-efficient computing, which will require leading-edge technologies. COVID-19 has also fundamentally accelerated the digital transformation, making semiconductors more pervasive and essential in people's lives. With our technology leadership, manufacturing excellence and customer trust, we are well positioned to capture the structural growth from the favorable industry megatrend with our differentiated technologies. We now expect our long-term revenue CAGR from 2020 to 2025 to be near the high end of our 10% to 15% CAGR range in U.S. dollar terms. In the near term, we continue to observe both short-term imbalances in the supply chain driven by the need to ensure supply security, as well as a structural increase in long-term demand. While the short-term imbalance may or may not persist, we expect our capacity to remain tight throughout the year and into 2022 fueled by strong demand for our industry-leading advanced and special technologies. For the full year of 2021, we now forecast the overall semiconductor market excluding memory to grow about 17% while foundry industry growth is forecast to be about 20%. We now expect -- for TSMC, we are confident we can outperform the foundry revenue growth and grow above 20% in 2021 in U.S. dollar terms. Wendell Huang: Thank you, C.C. Let me start by making some comments on our near-term demand and inventory. We concluded our second quarter with revenue of TWD372.1 billion or USD 13.3 billion, slightly above our guidance mainly due to better demand from HPC, IoT and automotive-related applications than our forecast 3 months ago. Moving into third quarter 2021. We expect our business to be supported by strong demand for our industry-leading 5-nanometer and 7-nanometer technologies driven by all four growth platforms, which are smartphone, HPC, IoT and automotive-related applications. On the inventory side, we expect our fabless customers' overall inventory to exit second quarter of '21 at a healthy level. We expect our customers and the supply chain to gradually prepare higher levels of inventory in the second half of the year as compared to the historical seasonal level, given the industry's continued need to ensure supply security following supply chain disruptions due to COVID-19 and uncertainties brought about by geopolitical tensions. Next, let me talk about our profitability. Our second quarter gross margin of 50% was slightly below the midpoint of our guidance, mainly due to an unfavorable foreign exchange rate. Our gross margin guidance provided 3 months ago was based on exchange rate assumption of USD 1 to TWD28.4, whereas the actual second quarter exchange rate was USD 1 to TWD28.01. This created about 0.5 percentage point difference in our actual second quarter gross margin versus our original guidance. In other words, if the exchange rate had maintained at $1 to TWD28.4, our second quarter gross margin would have been 50.5%. Based on the exchange rate assumption of USD 1 to TWD27.9, we have just guided third quarter 2021 gross margin to increase by 0.5 percentage point sequentially to 50.5% at the midpoint, mainly due to better back-end profitability. Mark Liu: Thank you. Thank you, Wendell, and good afternoon, everyone. Today, I will talk about TSMC's global manufacturing footprint. TSMC's mission is to be the trusted technology and capacity provider for the global logic IC industry for years to come. TSMC always treat our customers as partners. We do not compete with our customers. We grow our business by unleashing our customers' innovations and enabling their success. We earn our business by providing solid values, by providing industry-leading technologies, the world's largest logic capacity and efficient and cost-effective manufacturing to our customers, while maintaining trusting relationship with them. In our capital investment, our responsibility as TSMC management is to make the best decision in the interest of the company and our customers. And our fiduciary duty is to our shareholders. As the need for semiconductor infrastructure security has increased in recent years, we are expanding our global manufacturing footprint to sustain and enhance our competitive advantages and to better serve our customers in the new geopolitical environment. In Taiwan, we are building capacity for N5 and N3 in Tainan Science Park. Due to the strong customer demand, we have further expand -- plan to expand in Northern, Central and Southern Science Parks in Taiwan. And Taiwan will continue to be the home base and center of R&D for TSMC. As the initial phase of volume production of a leading-edge technology has to be in close proximity and closely coupled with R&D fab due to massive collaborative engineering activities, our leading node will continue to be ramped in Taiwan as well. Jeff Su: Thank you, Chairman. This concludes our prepared statements. . Now let us begin the Q&A session. Operator, can we please proceed with the first caller on the line? Operator: Yes. The first caller, Gokul Hariharan, JPMorgan. Gokul Hariharan: Maybe my first question I would focus on the semiconductor supply and demand. C.C., you mentioned that you're expecting demand to still remain extremely strong, supply to remain tight through end of this year potentially through next year as well. Could you talk about when do you expect supply and demand to come back into balance? Do you see a situation where your customers go into a bit of an inventory correction mode sometime soon? Or you think that the structurally higher inventory is something that is likely to last for a much longer period of time than what originally the market thought? Jeff Su: Okay. Gokul, let me summarize your first question. Gokul's first question is on the semiconductor supply-and-demand outlook. He notes that C.C. has said our capacity will be tight throughout this year and into 2022. All right. So let me summarize Gokul's question again on semiconductor supply and demand. He's wondering or asking, when do we see supply and demand in the semiconductor coming back into the balance? Is there a risk of an inventory correction anytime soon? And how long can a higher level of inventory continue? C. C. Wei: Well, Gokul, let me answer your question. Let's -- let me share with you our perspective on the shortage right now. The current semiconductor capacity shortage is being driven by both a structural increase in long-term market demand and also a short-term imbalance in the supply chain due to uncertainties from COVID-19 and geopolitical tensions. And that may or may not persist. We do not rule out the possibility of an inventory correction in the future, but we expect our capacity will remain tight throughout this year and extend at least into 2022. But let me share with you also that even inventory correction to occur, we believe it will be less volatile than previous downturn as our underlying structural megatrend of 5G-related and HPC application will continue. Do I answer your question? Jeff Su: Gokul, does that address your first question? And do you have a second question, if so? All right. Operator, I think we have lost Gokul. Maybe we'll move on to the next caller first. Operator: Yes. The next one is Randy Abrams, Credit Suisse. Randy Abrams: I wanted to ask the question on the trend per cost purchase. I'm curious for 5-nanometer and 3-nanometer, how you're seeing continued improvement? And for the customer motivation to migrate, how is that shifting between how our power performance density and cost versus also increasingly seek out the back-end system level integration? Jeff Su: Okay. Randy, let me summarize your first question. Your first question is on the cost per transistor. Randy wants to know what is the cost per transistor trend at 5-nanometer and 3-nanometer. And also what do -- I guess, Randy, your question is sort of what are the customers value -- or evaluate when they look at the technologies as well. Is that correct? Randy Abrams: Yes, right, between power performance density versus cost and also back-end integration. Jeff Su: Okay. Mark Liu: Randy. No, actually, today, the technology has getting more complex than the simple scaling. Actually, we work with our customers very closely and we have been working on the performance and energy efficiency of a technology. And we took several approach, of course, material innovation, transistor structure innovation. We also, in recent generations, we work heavily on the design and technology cooperation. And also more recently, we work on the 3D ICs. All these innovation combined is to deliver the value for our customer to improve the system performance and the system's power efficiency. And TSMC is at the forefront of delivering this value and as evidenced by the strong demand and continued technology migration at 5 to 3. So in doing that, we believe we can continue earn a proper return for our investment. Thank you, Randy. Randy Abrams: Okay. My second question, if you could give an update on the 5-nanometer where there's still some dilution. Maybe how much dilution you see in the second half? And update on how you see it trending towards the corporate gross margin. And as we look to next year, if 3-nanometer ramping late in the year, could we see a favorable like a bit more of a sweet spot for profitability as you have a more mature 5-nanometer, but not a new node yet ramping? Wendell Huang: Okay. Randy, this is Wendell. Let me answer your question. The 5-nanometer contribution to our revenue will be much higher this year compared to last year. Therefore, we expect that the margin dilution from N5 this year will be between 2 to 3 percentage points. Now we also expect that N5, like previous nodes, will be able to reach -- the margin will reach the corporate average in about 7 to 8 quarters. With respect to 2022, it's a bit too early to talk about it. But we believe our long-term gross margin target of 50% continues to be achievable. Jeff Su: Okay. Thank you, Randy. Operator: Yes. And the next one is Bruce Lu from Goldman Sachs. Bruce Lu: I think a lot of your customers have like different supply chain management policies. A lot of your customers find a long-term contract with other flagship players with favorable pricing and payment terms. So does TSMC expect this will become the new norm for the foundry industry? Does the industry-wide profit pool become bigger and the earnings fluctuation will be less in the future? Jeff Su: Okay. Thank you, Bruce. Let me summarize your first question. Bruce's first question is about the semiconductor supply chain, and he's observed that a lot of customers seem to be signing long-term contracts with foundries. So do we expect this to be the new norm in the future? And could this drive a bigger or larger industry-wide profit pool? C. C. Wei: Okay. Bruce, let me answer the question. We are not able to comment on specific business terms with customers. However, we are working closely with our customers on different ways to secure their commitment. And customers understand our effort to support their growth. And if we plan our capacity well based on the structural increase in the long-term market demand profile, we believe our utilization and profitability can be maintained. Jeff Su: Okay. Thank you. Bruce, do you have a second question? Bruce Lu: Sure. So I want to focus on the automotive like automotive revenue is roughly less than $2 billion in 2020 out of a $40 billion market. So with most of the automotive IDM companies are passive in capacity expansion, this creates a big addressable market for the foundry. So what is the addressable market for foundry in the automotive semi industry in the coming years? Jeff Su: Okay. Bruce, let me summarize your second question. So Bruce is asking about the longer-term outlook for the automotive industry. Automotive was less than $2 billion of our revenue last year, but he points out the automotive TAM is about $40 billion. So he's wondering about sort of the long-term TAM addressable market for TSMC. C. C. Wei: Well, let me answer again. We are quite positive on the long-term trend of the semiconductors in -- semiconductor content in automotive as the trend towards safer, greener and smarter vehicles will continue to drive silicon content increase as well as the demand for advanced and specialty technology, both. Jeff Su: Okay. Thank you. Does that answer your question, Bruce? Bruce Lu: Can we have somehow like some specific numbers? Can you quantify that a little bit? C. C. Wei: We cannot forecast in the future very accurately, right? I mean that is so dynamic. But let me assure you that silicon content will be very important and will be increased. Jeff Su: Thank you, Bruce. Operator: The next one is a question from Gokul Hariharan, JPMorgan. Gokul Hariharan: Yes, let me ask my second question. My second question is that on your 3-nanometer business, clearly the market is expecting you to make a lot more inroads into the HPC segment. One of your existing IDM customers have redoubled their efforts to get back into the foundry business. Could you talk a little bit about how you manage this kind of what they call as coopetition, competition as well as cooperation? How does TSMC think about this when it thinks about capacity allocation, given that HPC is now becoming a very important driver for growth and this is probably the biggest HPC customer out there in terms of revenue size? Jeff Su: Okay. Gokul, thank you for your second question. Let me summarize. He points out that HPC is -- seems to become a larger and larger contributor or driver, particularly at our 3-nanometer. He also points out that existing IDM customers are redoubling their efforts. So his question is really how -- I guess, how do we manage this duality? How do we manage the capacity allocation and the relationship? C. C. Wei: Okay. Let me answer the question by, first, you mentioned that IDM is our important customer. Let me say that. And we are collaborating in some area and might competing in other areas. But let me explain again, TSMC is everybody's foundry and we support all our customers openly and fairly. We will allocate the necessary engineering resources to ensure all of our customers' product success, both existing customer and for the future customer. How to plan our capacity to support? Actually our capacity planning is based on the long-term market demand and thus is underpinned by the industry megatrend, okay? Does that answer your question, Gokul? Gokul Hariharan: So maybe just one follow-up. Do you require a lot more assurance in terms of demand, solidity and demand longevity from IDM customers given they are also competing on process technology with you compared to pure fabless? Jeff Su: So Gokul is asking whether that we would require more longer-term assurance from our IDM customers versus our fabless customers. C. C. Wei: We will not specifically comment on that and a certain customer, okay? Jeff Su: Okay. Thank you, Gokul, and sorry for the disruption. Operator: Next one to ask question, Charlie Chan from Morgan Stanley. Charlie Chan: First of all, I would like to thank TSMC for the donation of the vaccine to Taiwan. I think that ensures business continuity of TSMC and also global semi supply chain. And my question is about still your gross margin trend. So first of all, is your 3D IC or advanced packaging. It seems like Wendell mentioned that the back end product possibilities are getting better in 3Q, I'm not sure if that's true. So the question is that currently the percentage of advanced packaging of TSMC's revenue. And would the company still believe 3D packaging can still outgrow the wafer business and whether they would create a margin dilution. So the first question is about the 3D advanced packaging. Jeff Su: Okay. Let me summarize your question, Charlie. You're asking about our 3D IC business. Charlie is asking the back-end profitability that Wendell cited improvement in the third quarter. Is this the truth? And then also sort of the outlook for our 3D IC business in comparison to our overall business. And whether 3D IC business will dilute our profitability. Wendell Huang: Okay, Charlie. First of all, the gross margin that I was talking about, improvement of back-end service in the third quarter actually is a seasonal factor. As you know, our back-end services has seasonality. So second half normally has a higher gross margin. But longer term, we expect its margin to continue to improve although it's still not as high as a gross margin of our wafer revenue. But it has a lower asset capital intensity, therefore, the returns from back-end services is satisfactory. In terms of a revenue percentage, we expect back-end services to account for about 8% of our total revenue this year. And in the next 5 years, we expect it will grow slightly higher than the corporate average. Jeff Su: Okay. Thank you, Wendell. Do you have a second question, Charlie? Charlie Chan: Yes, I do. Yes, my next question is about the long-term gross margin trend, right? Because we did create something better about the thrust -- or the higher CapEx intensity, your bargaining power against different vendors and those customers. So really, I want to ask this openly to company management. Does TSMC believe you has acquired the monopoly of the leading edge in the industry, why and why not? And if yes, do you think you have the monopoly, why cannot TSMC charge higher wafer price to cover the increase of CapEx intensity? And lastly, if the company were to -- need to choose between the margin sustainability and also the market share, what would be your choice? Jeff Su: Okay. Let me summarize your second question, Charlie. So Charlie is asking about the long-term gross margin trend and bargaining power. And he is wondering -- he wants to know whether we see or believe we have a monopoly at the leading edge or not. And if we do, I guess, part of your question, Charlie, is then how -- pricing. And then also, if we have to choose between market share and profitability, how should we choose? C. C. Wei: Charlie, let me answer this question. First, we do have a very high market share on the leading-edge technology node. But our pricing strategy is strategic, and we don't take an optimistic approach. And it's far away from you say that we try to bargaining power. In fact, we work with our customers closely and we want to help them to be successful while we get a proper return. That's all I can answer for you for our pricing. And looking ahead, we continue our practice, try our best to hear our customers, to grow and we want to get the proper return. So that's why we are firming up our wafer pricing. And we are confident that we can get our gross margin about 50% or above in the long term. Jeff Su: Okay. Thank you. All right. Operator: The next one to ask a question, Nicolas Gaudois from UBS. Nicolas Gaudois: Earlier, you referred to your expansion of capacity at 28-nanometer in Nanjing for about 16,000 -- 15,000 since the launch. If the demand in trailing edge is effectively structurally higher and tying up to the leading edge, are we going to see additions in capacity in the trailing edge becoming more of a recurring feature for TSMC as for the rest of the industry going forward? Jeff Su: Okay, Nick, let me try to summarize your first question. So Nick is saying that, as Chairman said, we are expanding our capacity in Nanjing for 28-nanometer. So his question is that do we see the demand at the trailing edge or the mature nodes becoming structurally higher? And then will we consider or add capacity in those trailing edge nodes? Mark Liu: Okay. This is Mark. Let me answer your question. Our strategy more recently in mature node is to work closely with our customer to develop specialty technology solution. This is not described by the numbers. Actually, we are leading in many 28-nanometer specialty technologies and we can meet their requirement and create differentiated long-term value for them. And we expect this structural demand will continue. And of course, we'll focus on our investment on specialty technology to support that. So for the manufacturing greenfield, no expansion. And we do not rule it out, we will build case by case as long as the economics can justify and customer commitment can be secured. Jeff Su: Okay. Thank you. Nick, do you have a second question? Nicolas Gaudois: Yes. Very quickly. Thank you, Jeff. A clarification effectively for the investment in the U.S., you say the equipment moving in, in H2 '22 and then production in Q1 '24. A reasonably long runway, I guess. So is that because new fab you need to obviously run preproduction, that qualification time will be reasonably low? Mark Liu: Yes. We make -- prepared a little bit longer preparation time just because that's a new semiconductor environment for our operations. But of course, we will continue to compress the schedule as much as we can, yes. Jeff Su: Okay. Thank you, Nick. Operator: The next one to ask question, Roland Shu from Citigroup. Roland Shu: My first question is for your Japan R&D center. So it is stated more than 20 Japanese companies will work with you at your 3D IC R&D center in Japan. So I want to know what are the roles and responsibility for every party including yourself in this Japan R&D center? And also, do you plan to start 3D IC packaging mass production in Japan one day? And do you plan to build a wafer fab in Japan for foundry business going forward? Jeff Su: Okay. Roland's first question. He wants to know about our 3D IC research center in Japan. There's more than 20 companies involved according to him. So what are the roles and responsibilities of that? And also, will we build a packaging -- 3D IC packaging integration facility in Japan. And will we consider a wafer fab in Japan. So three parts to this question. C. C. Wei: Okay. Roland, let me answer your question. First, yes, there is more than 20 membership to join this Japan's 3D ICs research center. In fact, what's the role and responsibility, TSMC is in charge of this one. And we also -- in technology, we're also in charge of the integration for all the major partner together, too, so that we can be successful in the most advanced packaging technology, which includes TSMC's 3D IC and some of our partner's advanced material and our partner's most advanced substrate technology. Everything put together, which is necessary for the future HPC's application that we needed. Do we have a plan to mass production in the 3D IC in Japan? It's not in our current planning yet, okay? And what's your next question? Jeff Su: And will we consider... Roland Shu: How about the wafer fab, yes. C. C. Wei: The wafer fab, we are -- actually, let me say that we are -- we do not rule out any possibility. And in Japan, we are in due diligence process now to expect to do that wafer fab, let me say that, clearly. Roland Shu: Okay. My second question is Mark also said that the key concern to build a fab overseas is considering the cost gap, and you are working with the governments to close the cost gap. However, recently there were some noises in the U.S. to request the U.S. government to invest wisely in domestic companies to support U.S. authority. So it changed U.S. government's plan and lead to fail to close the cost gap to TSMC in U.S. operations. And how are you going to close the cost gap if there is no adequate support from the U.S. government, okay? Jeff Su: Okay. Let me summarize Roland's second question, it's about our U.S. fab and the cost gap. He points out that recently there is some discussion for U.S. incentives to invest in domestic companies. And so therefore, if this were to be the case, how would that affect TSMC and how would we manage the cost gap? Mark Liu: Okay. Roland, right? This is -- I think this current event is still developing. You know that in U.S., the originally proposed CHIPS for America Act has gained bipartisan support. And we are very happy that in the Senate they passed a bill of U.S. Innovation and Competitive Act already passed in Senate. Right now it's in the hands of the House of Representatives, and we are very optimistic that they will gain bipartisan support. The reason we -- the bipartisan support for this is to create a level playing field for the semiconductor fab investment in U.S. so that there will be a renewal fab industry in the U.S. Of course, how well it can be done in operation up to each company to do the operating well. And we are still learning the cost structure in the U.S. But in the meantime, in addition to take on this level playing field opportunities and further on, the operating cost will have to be shared with our customers. So that's a part of our firm up price -- firming up pricing, including the increased global manufacturing footprint. So we believe then... Roland Shu: So pricing from the other companies? Mark Liu: Yes. Yes. We believe in that way, we can continue to sustain our profitability as before. Jeff Su: Okay. Thank you, Chairman, and thank you, Roland. Operator: Next one, we have Laura Chen from KGI. Laura Chen: Can you hear me? Jeff Su: Yes, we can hear you, Laura. Laura Chen: First of all, I just want to ask about our global expansion plan. Can you give us more details about our expansion plan other than like the advanced node in the U.S.? Mark just mentioned that the 28-nanometer will be the sweet spot. So will we expand more other than China or other regions, would we consider that? And how would that impact our already announced USD 100 billion CapEx for the next 3 years? That's my first question. Jeff Su: Okay, Laura, let me summarize your question. Your question is about our global manufacturing footprint. And I think your question is on our mature node. Do we have plans for further expansion of mature nodes in different locations? And if so, how will this affect our CapEx in the next few years? Laura Chen: Yes. Mark Liu: Yes. Laura, I think several project is still under planning. We do not rule out the possibility in Japan. Actually, C.C. just mentioned that we are in the due diligence process now to have a specialty technology fab in Japan. But of course, the decision is still too early to disclose because the final decision will be based on our customer needs, operating efficiency, evaluation and cost economics. So for those projects, we have not included into the $100 billion CapEx budget. Okay? Laura Chen: Okay, very clear. Yes. And my second question is about the 16- and 12-nanometer. We know that the current supply is also quite tight and the client demand is very strong, particularly for the RF transceiver, et cetera. So I'm just wondering, do we also have the plan to expand on 16 and 12? Jeff Su: Okay. And so Laura's second question continues to more specifically on 16-nanometer/12-nanometer. The supply continues to be tight, demand is very strong. Do we have any plans to expand at this node? C. C. Wei: Well, Laura, let me answer this question. We -- again, this is the kind of mature node for TSMC. And we will expand our capacity with the customer's commitment. And also, we have to consider the economics. And so if everything is positive, in fact, we will consider to expand the capacity to support our customer actually. Jeff Su: Okay. Thank you, Laura. Operator: Next one, we have Brett Simpson from Arete Research. Brett Simpson: I had a question on gross margins. I guess you've talked about 50% gross margin as a long-term target for quite some time now. And I understand there's been FX headwinds and the 5-nanometer ramp as a headwind. If I look at your big fabless customers, they are delivering structurally much higher gross margins as a result of accessing your leading-edge capacity, particularly in the last 12 months when your gross margins are going down. And I'd just like to ask, given your position in the industry, do you really think 50% is an appropriate level of return. And doesn't your position warrant some structural margin expansion at the gross margin level? Jeff Su: Okay. Brett's first question is about our gross margin. He notes that, of course, we have been facing headwinds from the foreign exchange rate and also the 5-nanometer ramp, which carries some level of dilution. But he points out that our customers' gross margin is, particularly in the last 12 months, has been structurally higher than ours. So he wants to know, given our position, do we think 50% is achievable? Why would it not be something structurally higher? Is that correct, Brett? Brett Simpson: Yes. Really whether 50% is an appropriate level of return. Given everyone else is right -- is seeing -- delivering higher gross margins, why wouldn't TSMC look for structurally higher gross margins as well like everyone else? Wendell Huang: Right. This is Wendell. Let me answer your question. First, if we look at shorter term, you talked about in the last 12 months. Foreign exchange does play a very big role in the gross margin between last year and this year, year-to-date. Last year, the dollar against NT rate was $29.43 in average. This year, year-to-date, is 28% -- somewhere around 28%. That creates a 2 percentage point difference in gross margin, i.e., if the gross margin -- I mean, if foreign exchange rate stays where it was last year, we would be having a 52% gross margin in the second quarter already. And also, I talked about the dilution from the N5 this year, another 2 to 3 points. So with all these negatives, we still can make 50% in second quarter and the third quarter. That's the short term. Now longer term, the investment that we are making is for future business growth. At some point of time, at the beginning, we made -- the short-term advanced technology is getting more and more challenging in cost. Then we are working closely with our customers to firm up the wafer pricing and also working with our suppliers to ensure that the cost improvement can be delivered. And with all these efforts, we still think that 50% is a good target and is achievable. Brett Simpson: Okay. Thank you, Wendell. And maybe just a follow-up. I noticed your China business grew from 6% of sales in Q2 -- sorry, 6% of sales in Q1 to 11% of sales in Q2. Can you talk about some of the drivers that delivered that upside? And long term, how do we think about China scaling within your business? Do you think we'll get back to sustainably double-digit percent of sales? And what would drive that? Jeff Su: Okay. So Brett's second question is related to our China business. He notes in the near term that China contribution has gone from 6% in the first quarter to 11%. So he wants to know what is driving this. And then he asked a longer-term question, which is how should we think about our China business over the next few years? And can it return or sustain at an improving or double-digit level? C. C. Wei: Well, Brett, let me summarize it. I think China remains a very strong and growing market. And we have developed a large customer base in China and we'll work with them to grow our business and expect our business from China will continue to increase in all the market sector that we're talking about, smartphone, HPC, IoT and automotive also. Jeff Su: And also, Brett's question on the improvement from China from 6% in first quarter to 11% in the second quarter. What is driving that? Wendell Huang: That's because mainly the HPC platform. Jeff Su: Okay. Thank you, Brett. Operator: Next one, we have Charles Shi from Needham & Company. Charles Shi: Can you guys hear me? Jeff Su: Yes, we can hear you fine, Charles. Charles Shi: So I want to ask the first question really is about your -- the adoption of your most leading-edge node process. Historically, if I understand correctly, your smartphone platform seems to lead the adoption in the past, at least especially in the first year of the production ramp. And I think you did say that the high-performance computing will be coming increasingly important. So the question really is about 3-nanometer, which we are about a year away from the mass production. So could high-performance computing, from what you see today, really play a bigger role or even like the leading role in the first ramp of the 3-nanometer especially in the first year? Do you even see like high-performance computing could eventually be like the actual lead adopter of the leading-edge nodes going forward? Jeff Su: Okay. So Charles' first question is about the drivers of leading node adoption. He notes in the past traditionally it's mainly come from smartphones, but HPC also seems to becoming more important. So his question is on N3, do we expect HPC to play a bigger role in the ramp of N3, particularly in the first year? And could N3 become the first adopter or primary adopter? C. C. Wei: Charles, This is C.C. Wei. Let me answer this one. The N3's first year is ramping up, still smartphone plays the biggest role. Of course, your observation is correct. HPC application is also important and getting more and more important. And in fact, HPC will be our largest revenue driver in the next 5 years. So in the N3 node, in addition to the smartphones, we do expect the HPC's application will become important also. Did that answer your question? Charles Shi: Yes, yes. Excellent. So maybe the second question, I still want to touch upon your global expansion. I know you probably are tired of answering that already, but forgive me, I'm going to ask another one. You announced your fab in Arizona, which the technology node will be 5-nanometer. And as I understand, 5-nanometer wafers will very likely require your in-house advanced packaging solutions like either InFo, CoWoS or maybe even SoIC going forward. So -- but your current packaging facilities, as I know, are 100% in Taiwan. And I can imagine that if you are really out putting wafers in Arizona for 5-nanometer, based on your current footprint, you got to ship those back to Taiwan for packaging then send back to your customers, which I can imagine it could be a little bit challenging in terms of cost, logistical efficiency. So I'm not going to ask for a specific plan, but do you kind of foresee maybe you want to set up an advanced packaging facility in Arizona in the near future? Jeff Su: Right. So Charles, I'll shorten your second question. I think Charles is asking in Arizona we are building wafer capacity with 5-nanometer. Will we also consider setting up 3D IC integration capacity or -- in Arizona as well? Mark Liu: This is Mark, Charles. I understand your concern. But if you look at the current industry landscape, what you just said is nothing new. Everyone have their wafer produced in one location and packaged in another even including major chip producer in U.S. So for that matter, we do not see and compose any logistical difficulties. We just continue to evaluate, and currently, we do not have that 3D IC fab in Arizona at this point. Jeff Su: Okay. Thank you, Chairman. Thank you. Operator: Next one, we have Andrew Lu from Sinolink Securities. Andrew Lu: Can you hear me? Jeff Su: Yes. Andrew Lu: Okay. My first question is regarding 3-nanometer ramp-up for second half, starting from second half next year. I recall the 7-nanometer ramp-up in year 2018 second quarter with some revenue contribution and the 5-nanometer in second quarter last year, year 2020. But it seems like 3-nanometers clearly some delay for second half next year. So I want to ask, is that because the technology difficulty, we cannot ramp up in second quarter or we don't have a big customer to use 3-nanometer at the beginning stage that's why we push back the ramp-up in second half next year? That's my first question. Jeff Su: Okay. So Andrew's first question, let me summarize, is asking about our 3-nanometer ramp. He notes that 5-nanometer and 7-nanometer in the past few years basically ramped in the middle of the year. And 3, we said the ramp will be in second half of next year. So what is the reason behind this? C. C. Wei: Andrew, you have a very good observation and you calculate that, yes, about 3 to 4 months is a delay as compared with 5-nanometer. Yes, 3-nanometer technology actually is very complicated and in both processing technology and also the customers' product design. So we work with a customer, and finally, we decided to ramp up in the second half of next year. And this is -- we decided with our customer with the best fit their need. Jeff Su: Okay. Thank you. Andrew Lu: Okay. My second question is recently, we believe NXP, Infineon, Renesas earlier either have some power down outage and also the fire resulting their second quarter or first quarter utilization down to almost 0. And recently, we are hearing these guys are back in the utilization rate to 100%. The wafer output may start appear in Q4. Most of these companies are leading company in automotive semiconductor, including MCU. Do we have some concern once these customers are ramping up their own fab and that will result the next year or starting from Q4 the order automotive semiconductor to us will be reduced -- largely reduced. Jeff Su: Okay. So Andrew's second question is on automotive. He asked as IDMs ramp up their production in the second half, are we concerned or do we have concerns that heading into the end of this year or into 2022, that TSMC's automotive customers will greatly reduce their orders to TSMC? C. C. Wei: Andrew, this is C. C. Wei again. Let me answer your question. A very short answer is that, no, we don't have any concern. The reason is very simple: because of we offer the technology and our customer working closely with us. And for some of the technologies, mostly in the leading edge -- not the leading edge, I'm sorry, it's 55-, 40-nanometer and 28-nanometer that our customers need TSMC's support and the demand will continue to grow. And so we don't worry about once they bring up their fab and then TSMC's demand will be decreased. The answer is no, and remember tight and actually very tight in 2022 also. Jeff Su: Okay. Thank you, Andrew. Operator: Next one, we have Martin Lau from FSSA. Martin Lau: The first question relates to politics. I counted, you said geopolitical risk 5x during today's call. And someone mentioned about the fact it seems in Taiwan with vaccines are getting even more political. I just wonder, for management, how concerned are you with politics? It seems the U.S. sometimes is fighting against China; China, Taiwan. And what things have you thought about to mitigate, if anything, such political risk? And also, are your customers concerned when COVID happened in Taiwan, when China from time to time threatened a war against Taiwan? And are your customers concerned that they are so reliant on you? Jeff Su: Okay. So Martin's question is about politics and geopolitical risks. He notes that geopolitical is talked about more and more. His observation is that vaccines in Taiwan has become a political issue as well. So he wants to know how does TSMC manage or mitigate the political risks looking at U.S., China, Taiwan relations? And do our customers have concerns on things such as the recent increase in COVID or the threat of invasion from China? And how does TSMC manage these risks? Mark Liu: Martin, this is Mark. Thank you for asking. First of all, the -- on the recent COVID situation in Taiwan, I think the confirmed case has dropped. And of course, the current -- first priority is to get the people of Taiwan get vaccinated upon variants keep coming. But I'm really grateful that us and YongLin and Foxconn come together a humanitarian donation of 10 million doses of vaccine to the Taiwan government, CDC -- Taiwan's CDC and be able to vaccinate our people in Taiwan because TSMC's employees is inevitably embedded in the community of Taiwan, and that is important. The reason -- you know this could be political in the beginning. But at the end, we completed the contract and we did get support from all sites. So I don't think at the end it's as political anymore. Otherwise, this donation wouldn't be successful. In a global sense, the geopolitical development is continuing. I think this is a challenge for every company. Every company's management has to deal with it. And -- but I think in the new administration from U.S., I think the development is more predictable, more rule-based. So as long as rule-based, I think it's better for every company to adopt it, too. So that also prompted the talk I have earlier -- given earlier that the global manufacturing footprint may need to do an adjustment for our customers. Our customers in different countries, their infrastructure, supply security -- semiconductor-related infrastructure, supply security maybe come up a higher priority, and we do that adjusted to it. But of course, there is the customers' needs that we are adjusting it to upon the greater geopolitical development. As to the invasion of China, let me tell you, nobody -- I mean, everybody wants to have a peaceful Taiwan Strait. And because not only -- because it is to every country's benefit, but also because of the semiconductor supply chain in Taiwan, no one wants to disrupt it. You have a COVID -- only a COVID situation already made a major disruption for the global economy. And I don't think that any disability in Taiwan Strait is any country wish to make it happen. So I'm optimistic on that. Thank you, Martin. Jeff Su: Thank you. Do you have a second question, Martin? Martin Lau: Yes, yes. Can I follow up with a second one? It's kind of related. You mentioned about global manufacturing. You also mentioned about the need to maintain your highest -- most of your technology in Taiwan because of the proximity to R&D. My understanding is majority of our engineers are from Taiwan. As you go for this global manufacturing, do you -- can you talk about how you are changing, say, for example, your talent acquisition? Like how you try to get more people outside Taiwan so that maybe over time you can become more manufacturing outside Taiwan? And also maybe on the Board, I mean, because when I look at the Board, it remains largely Taiwanese. The recent two additions, one is Dr. Kung who's a minister; Yancei who's from Delta. Do you see also the Board maybe changing, become more international? Or maybe if I try to propose some debate, have a Mainland Chinese on the Board? Jeff Su: Okay. So Martin's second question is around talent and Board composition. Basically, with our expanding manufacturing footprint, he wants to know what is our strategy to attract more global talent for TSMC. And his secondary question is also on the Board. His observation is that we -- the new Board members are primarily only from Taiwan. So will we consider board members from other countries? Mark Liu: The question about talent. Indeed, I think the -- we have been advocating the talent development in semiconductor field in Taiwan as well as in U.S. I think semiconductor industry talent has been underdeveloped over the past decades. And today, everyone look at the semiconductor as a key economic drivers. So the talent needs to be connected with that. And in Taiwan, I think we have been advocating the government to set up the high-end advanced research colleges across the Taiwan major universities. In the U.S. and also President Biden talked about semiconductor human infrastructure, that is to develop the human talent in semiconductor through the vast investment of the R&D. So this is catching up in every place. And particularly in Taiwan, we get very strong support from the local government to be able to continue to supply talents in Taiwan. As far as the Board member, yes, Delta, Yancei has joined a year ago. And more recently, I think this coming shareholder meeting, we will nominate Rafael Reif, who is the President of MIT, to come to our Board. And we hope that it will go through the blessing of our shareholders. And that is a major increment of our corporate governance and particularly in the area of the talent development. We invited chair -- Board members upon they have a very strong knowledge and experience on the corporate governance. And that is we will continue to look for without any differentiation about nationalities. Jeff Su: Okay. Thank you, Chairman. Thank you, Martin. Operator: Yes. The last one to ask question, Krish Sankar from Cowen and Company. Krish Sankar: I had two of them. The first one, you spoke about investing $100 billion in CapEx over the next three years and how that does not include specialty process nodes like the ones in Japan. I'm kind of curious, can you just be more specific on how much you plan to invest in your U.S. Arizona fab or fab clusters over the next 3 years in terms of CapEx? And then I have a follow-up. Jeff Su: Okay. So Krish's first question is about our investment in CapEx looking at the next three years. He wants to know how much specifically we are investing in Arizona? Mark Liu: Okay, Chris. We have announced that the Arizona project will be a $12 billion project. This was announced last year. Krish Sankar: Got it. And can you just elaborate how much you plan to do it over the next 3 years? Jeff Su: So he wants -- Chris is asking how much will we invest in Arizona over the next 3 years. Wendell Huang: Yes, $12 billion. Jeff Su: Next three. Wendell Huang: Next three. Mark Liu: Close to. Wendell Huang: Well, basically, is next 3 years is about $8 billion. Krish Sankar: Okay. All right. Perfect. And then a quick follow-up. Your auto revenues was 4% of total revenue. What technology node is that predominantly? Jeff Su: Okay. So Krish, your second question is on automotive. It was 4% of our revenue. What particular specific nodes is automotive using? C. C. Wei: Krish, I think I have mentioned that automotive MCU is the biggest one that we have and it's in 55-, 40- and 28-nanometer with the majority still in 55 and 40. And in the next 2 to 3 years, it will be moved to 28-nanometer. That's in our current plan, and we are working with our customers on that. Jeff Su: Thank you, C.C. Thank you, Krish. All right. 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 4 hours from now. And the transcript will become available 24 hours from now. Both of these, which will be available through TSMC's website at www.tsmc.com. So thank you for joining us today. We hope everyone continues to stay safe and healthy, and we hope you will join us again next quarter. Thank you, and have a good day or good evening.

Jeff Su: Good afternoon, everyone, and welcome to TSMC's First Quarter 2021 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 live 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 in listen-only mode. Wendell Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2021. After that, I will provide the guidance for the second quarter 2021. First quarter revenue increased 0.2% sequentially in NT dollars or 1.9% in U.S. dollars. Our first quarter business was supported by HPC-related demand, balanced by a milder smartphone seasonality than in recent years. Gross margin decreased 1.6 percentage points sequentially to 52.4%, mainly due to relatively lower level of capacity utilization and an unfavorable foreign exchange rate. Total operating expenses slightly increased by TWD 0.8 billion, mainly due to higher level of R&D activities for the N5 family. Therefore, operating margin decreased by 2 percentage points sequentially to 41.5%. Overall, our first quarter EPS was TWD 5.39, and ROE was 29.5%. Now let's move on to revenue by technology. 5-nanometer process technology contributed 14% of wafer revenue in the first quarter, while 7-nanometer accounted for 35%. Advanced technologies, which we now define as 7-nanometer and below, accounted for 49% of wafer revenue. Now moving on to revenue contribution by platform. Smartphone decreased 11% quarter-over-quarter to account for 45% of our first quarter revenue. HPC increased 13% to account for 35%. IoT increased 10% to account for 9%. Automotive increased 32% to account for 4%. DCE increased 10% to account for 4%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD 797 billion. On the liability side, current liabilities increased by TWD 45 billion, mainly due to the increase of TWD 49 billion in short-term loans, an increase of TWD 50 billion in accrued liabilities and others, partially offset by the decrease of TWD 51 billion in accounts payable. C.C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me talk about the capacity shortage and demand outlook. Our customers are currently facing challenges from the industry-wide semiconductor capacity shortage, which is driven by both a structural increase in long-term demand as well as short-term imbalance in the supply chain. We are witnessing a structural increase in underlying semiconductor demand as a multi-year megatrend of 5G and HPC-related applications are expected to fuel strong demand for our advanced technologies in the next several years. COVID-19 has also fundamentally accelerate the digital transformation, making semiconductors more pervasive and essential in people's life. In addition, the need to ensure supply security is creating short-term imbalance in the supply chain, driven by supply chain disruption due to COVID-19 and uncertainties brought about by geopolitical tensions. Now let me talk about TSMC's investment plan and disciplines. TSMC's mission is to be the trusted technology and capacity provider for the global logical IC industry for years to come. In order to support our customers' growth, TSMC is taking several action to help address the capacity shortage for our customers. We are working hard to increase our productivity, to drive more output, to help support our customers for the near term. Jeff Su: Operator: The first one to ask question, Randy Abrams, Crédit Suisse. Randy Abrams: Okay. Yes. Thank you. And I wanted to ask the first question just about Intel. They did announce their plans to reengage in the foundry sector and also, I think making it clear, their goals are to get back to manufacturing leadership. So could you discuss how you're viewing them now as a customer and also the assurances you're getting in business sustainability and how you're managing the potential risk if they improve manufacturing and pull back on some of the outsourcing plans? Jeff Su: Okay. Randy, let me summarize your first question. Randy's first question relates to Intel and their recent announcement to reengage on foundry and get back to a manufacturing leadership position. So Randy's question is how does TSMC view Intel as a customer? What kind of business assurances are we getting on the sustainability of the business? And how do we manage any of the potential risks? C.C. Wei: Randy, let me start with TSMC is everyone's foundry and support all our customer openly and fairly. Intel is an important customer, and we will collaborate in some areas and compete in other area. And we always work with our customer to develop the necessary technology to support their products. Now let me comment a little bit on the competition. As a leading pure-play foundry, TSMC has never been short on competition in our 30-plus-year history, yet we know how to compete. We are -- we will continue to focus on delivering technology leadership, manufacturing excellence and earning our customers' trust. The last point, customers' trust, is fairly important because we do not have internal products that compete with our customer. So we can be the trusted technology and capacity provider and for years to come. And if you ask other comment, how we support Intel, we support them as an important customer. And we plan our capacity for the long-term industry megatrend also. It's not for the short-term demand. Jeff Su: Okay. Does that answer your first question, Randy? Randy Abrams: Yes. No, that's good on the first question. The second question and topic I wanted to discuss, you mentioned in your prepared remarks about the -- there is a bit more geopolitical pressure with particularly U.S. but also Europe and China. They all are being aggressive about domestic capacity. If you could give an updated view on your strategy, if any, shifts at the margin where you've traditionally won at the high scale in Taiwan. I'm curious for U.S. with the big land, just any plans to accelerate positioning with the potential eventually to do mega fab? If you could give an update on Nanjing, if there's plans to expand from the current -- I think you're at 20,000. And, if from a customer level, you're seeing shifts where more customers are starting to consider geographic location in the foundry consideration. Jeff Su: Okay. Randy, let me try to summarize your second question. I think there's quite a few parts. I think first, Randy's question is on looking at sort of the geopolitical landscape and looking at this talk of fabs in different countries. So I think Randy, first, wants to know what is our progress or how do we see particularly U.S manufacturing; secondly, in other areas; and then thirdly, he would like an update on the Nanjing expansion; and lastly, how do customers feel about the need to manufacture in different countries. Is that correct, Randy? Randy Abrams: Yes. That's correct. Yes. Thank you. C.C. Wei: Randy, that's a lot of questions. Randy Abrams: Sorry. You only gave us two. C.C. Wei: Let me try to answer. The first one, actually, I would like to say TSMC have been a global company. We have a lot of manufacturing sites outside Taiwan, U.S., Mainland China, Singapore. But let me comment on the U.S. first. We have been in the U.S. for a long time, though. We set up WaferTech, got an 8-inch fab located in upstate Washington back in 1996 and has continued to operate the manufacture of chips for our customers today. And now we are increasing our presence in the U.S. with an advanced 12-inch semiconductor fab in Arizona and the progress is executing to our plan. And we are happy that we are joined the effort to support semiconductor manufacturing in the U.S. You also asked about our status in Nanjing. Did -- that you asked? Randy Abrams: Yes. Yes. C.C. Wei: The fab in Nanjing is progressing well. We already completed the first phase of 20,000-wafers capacity installation, and actually, it's in production for a while. And we are -- we also have a plan. Depend on the customers' demand and depends on the economics, we have a plan to expand the capacity also, okay? And other question in Taiwan, why we… Jeff Su: Also, two others. One, Randy is asking with other regions also. C.C. Wei: We never rule out any possibility with other region. But today, we already announced plan. We currently have no further fab expansion plan in other areas such as Europe. But we did not rule out any possibility. However, I want to emphasize, Taiwan will continue to be the main focus for TSMC. Our center of R&D and majority of production line will continue to be located in Taiwan, okay? Did that answer your questions? Randy Abrams: Yes. That's clear. And maybe if you can clarify, for customer decisions, just that approach with Taiwan, is there -- are you starting to see it get raised a bit more about customers choosing location? Or are they still focused on the traditional just getting the best PPA, the best cost and delivery time? Jeff Su: Right. So Randy's -- the last part of his question is, from a customer's perspective, is there a push by customers for this geographic diversification. Or what do customers want? C.C. Wei: Well, our customer welcome we established a new fab in Arizona state. Let me say that. However, the most important one to them is technology, is the manufacturing, it's the efficiency that TSMC provides, okay? Actually, that's the most important one other than the consideration of geopolitical locations. Jeff Su: Okay, Randy? Thank you, Randy. All right. Operator: Next one on the line, Gokul Hariharan, JPMorgan. Gokul Hariharan: My first question, could we talk a little bit about the $100 billion capacity plan for the next 3 years? Is that primarily a CapEx number? Just as you -- just seeing that this year already, we are spending about $30 billion. Should we be assuming that our CapEx is going to run around these levels or even higher in the next 2 years as well? So just wanted to clarify because there was some confusion whether that's a CapEx number or a CapEx plus R&D number. Jeff Su: Okay. So I think, Gokul, your first question is that we intend to spend USD 100 billion in the next 3 years. Is that a CapEx number? And then also, what does that mean for the spending of the CapEx in the next 2 years? Wendell Huang: Gokul, this is Wendell. Yes, $100 billion is CapEx number. Now we've already guided that this year will be $30 billion, but we're not going into the linearity in the next 2 years. You can actually have a feeling about what we will be spending in the next 2 years. Gokul Hariharan: Got it. That's very clear. My second question is on the inventory cycle and a lot of the capacity expansion that we are seeing in older technologies. TSMC also is spending about roughly $3 billion based on the new guidance on specialty technologies as well. The industry also seems to be spending quite a bit of capacity there. What is TSMC's stake in terms of when we are going to see a bit more normalization in some of the older capacity? Does TSMC also subscribe to the view that even in 2022, we are likely to see some degree of capacity tightness or capacity shortage or TSMC feels that we will likely resolve this towards the end of this year or early next year? Jeff Su: Okay. Gokul, thank you. Let me try to summarize your second question. Your second question is looking -- asking about the inventory cycle and particularly on the mature nodes, looking at the expansion in the mature nodes. And Gokul wants to know, I think, that on the mature notes, could we see some type of overcapacity and can the tightness continue to persist? Or will we start to see some kind of overcapacity or oversupply towards the end of this year or in 2022? Is that correct, Gokul? Gokul Hariharan: Yes. Just to highlight, I think many of your competitors are talking about 2022 also being undersupplied in many of these process nodes. Just wanted to hear TSMC's view on that. C.C. Wei: Well, Gokul, let me answer the question carefully because of -- we cannot rule out the possibility of an inventory correction or overbooking, something like that. But actually, we expect the structural demand to continue and we will work with our customer closely actually to develop some technology solution to meet customers' requirement and create differentiation and long-lasting value to our customer. As a result, actually we see the demand continue to be high. And the shortage will continue throughout this year and may be extended into 2022 also. Did that answer your questions? Gokul Hariharan: Okay. So do you also feel that customers will continue to hold down to a higher level of inventory for quite some period of time? Is that the way you think about inventory as well? C.C. Wei: Yes. We expect the customer, almost all of them, to prepare a higher level of inventory. That is because of, today, geopolitical tension continue to persist. Even the COVID-19 will recede sometimes, we hope as soon as possible, but it will continue for a while. And put 2 factor together and we do expect them to prepare a higher level of inventory, and I believe we've already seen that. Jeff Su: Yes. Okay, Gokul? Does that answer your second question? Gokul Hariharan: Thank you. Operator: Now we have a Sebastian Hou from CLSA. Sebastian Hou: So first one is on the pricing strategy. So I remember, 6 months ago, the company talked about sticking to the principle of respecting long-term partnership with customers. And the company doesn't seem to want to change the pricing on the mature technology nodes, which I mean28 nanometers above. So I'm wondering if that's still the case now or if the company now considers some upward adjustment. And if it's the latter, what has changed versus 6 months ago? Jeff Su: Okay, Sebastian. So Sebastian's first question is regards to pricing. And he says that we always talk about long-term partnership with our customers. And he's saying, in particular, on the older nodes, 28-nanometer and such, we -- would we raise the price. So he's asking sort of what is the pricing strategy today and what has changed versus previously. C.C. Wei: Sebastian, let me answer that. For more than 30 years, TSMC has provided stable and predictable pricing and we have refrained from opportunistic or short-term actions. But now as I said in my statement, the cost structure start to change, structural change, because of -- we have to invest on the leading-edge technology, which is more complex than ever. And we also increased the mature technology node capacity, which a lot of them already been fully depreciated and now we have to invest on the new tools. So we refrain from opportunistic and short-term action, but we also had to sell our value. So we are working with our customer closely, and we want to firm up our wafer pricing to a reasonable level. And we also work with our supplier to deliver the cost reduction, and we want to earn a proper return that enable us to continue to invest to support our customers' growth. And in today's term, capacity support is the most important one they are looking for. Okay. Jeff Su: Okay. Sebastian Hou: Got it. That's fair. And my. Jeff Su: Do you have a second question? Yes, sorry, go ahead. Sebastian Hou: Yes. I do have a second question. I think we're -- for many reasons, we have seen in many countries globally, they plan or they want to increase their -- build their own semiconductor fabrication capacity domestically. We're also seeing some IDM, they are forced to increase their in-sourcing or add some internal capacity because of the chip crunch. So my question is that IDM outsourcing has been one favorable driver for the foundry industry and TSMC growth in the past 3 decades and how TSMC see this trend evolving in coming years. And would you be concerning this could lead to some overcapacity in a few years even if some of those may not be effective? That is my second question. Jeff Su: Okay. Sebastian, let me summarize your question. Your observation that countries are pushing for more domestic manufacturing and IDMs are also looking at expanding capacity. So Sebastian's question is looking at IDM outsourcing. Do we see this trend slowing down? Or how do we see it in the next coming few years? And could this result, this capacity that's being built, result in excess capacity? C.C. Wei: Well, Sebastian, let me say that in our long-term forecast, we continue to see the IDMs outsourcing continue to increase. And so we prepare the capacity for that also. And we don't think that IDM tried to expand their own capacity will result in overcapacity situation because of we -- technology is the most important thing, let me say that. And we expand our capacity based on the customers' need. And we saw the technology leadership that provided their product to be very competitive in the market. So they are all happy to work with TSMC in developing their product for now, for the future. And so as a result, we continue to see the increased outsourcing from IDMs. Jeff Su: Okay. Sebastian, does that answer your second question? Sebastian Hou: Yes. Yes, it does. Operator: Next one to ask question, Charlie Chan from Morgan Stanley. Charlie Chan: So first of all, can I ask about the change of the 2021 revenue guidance? Can you explain where is the upside coming from, I mean, by applications will be great. And does that include some pricing adjustments for those revised in the guidance? Jeff Su: All right. I think Charlie's first question is relating to our 2021 revenue guidance from now of around 20% to say what has changed versus last time. And he also wants to know, can we talk about, by application, what is driving this change. And what was the last part of the question, Charlie? Sorry. Charlie Chan: Actually, that's it. And does that include -- capture some price hike as well? Jeff Su: So his question is what is driving the change in the growth guidance for this year. And he would like to know which applications are driving it. And does it include some price increases in this guidance? Wendell Huang: Okay. Charlie, first of all, we don't comment on price. I can share with you that we're everyone's foundry, our CapEx and capacity planning are based on the long-term demand profile underpinned by the industry megatrends, not short-term cyclical factors. We are seeing stronger engagements with more customers on 5-nanometer and 3-nanometer as compared to 3 months ago. And we work closely with our customers to plan the capacity, and we'll continue to focus our investments on advanced and specialty technology to support our customers' structural growth. Now this year, we expect -- in terms of platform, we expect that HPC and automotive platform growth will be higher than the corporate average, and the smartphone and IoT will be close to the corporate average. Charlie Chan: Okay. Understood. So it seems like the upside coming cross-border or just some specific application. I know that HPC automotive are growing better. But just compared to last guidance, what was driving the upside? Wendell Huang: Okay. Actually, all the platforms have upside compared to 3 months ago. Charlie Chan: Okay. Got you. And then my next question is about your capital intensity in the long term. I mean I think 1 or 2 quarters ago, company updated capital intensity, and at some point, can flow back to like 35% capital intensity. I'm not sure if that's the case for the coming 3 years. And also, linked to that, what does that mean to the long-term gross margin trend? Because in today's conference call, I keep hearing some comments about structural cost increase. I'm not sure you said about the chemicals or equipment price. But would that kind of impact company's long-term gross margin trend? Wendell Huang: Sure. Charlie, let me share with you. Capital -- I'm sorry. Go ahead. Jeff Su: Yes. It's okay. Yes, I think, Charlie, your question is on capital intensity, looking at what is the capital intensity looking like the next few years. And how does this correlate with our stated long-term capital intensity of kind of mid-30s range? And then he also -- on the back of that, what does this mean for the long-term gross margin trend? Wendell Huang: Okay. Charlie, in terms of capital intensity, I've actually given out several points already. First of all, if you look at -- we're saying in the next 3 years, we'll be spending USD 100 billion and this year will be $30 billion. We also say that in the next 5 years, we expect to grow between 10% to 15% revenue CAGR. So if you do math, you probably will have a good idea about where our capital intensity will be in the next 3 years. Now at this moment, we still expect that the capital intensity will go back to mid-30 level in the longer term. That's the capital intensity. In terms of gross margins, I think as C.C. has already mentioned, we see some challenges from manufacturing costs due to the increasing complexity of leading nodes, the new investment in mature nodes and some rising material costs. And therefore, we are taking actions to ensure that we earn a proper return by firming up our price, working with the supplier to drive the cost improvement. We expect that the 50% gross margin remains our target and is achievable. Jeff Su: Okay? Charlie Chan: Okay. Yes. That's a very, very quick -- so can I assume part of that $100 billion CapEx also associated to a cost increase? And if that's the case, how much of that is due to the cost increase versus the demand? Jeff Su: This is -- I think the last part of this question is that then out of the $100 billion and this higher capital intensity, how much is due to the cost versus the demand. Charlie Chan: Yes. Exactly. Wendell Huang: Okay. Charlie, basically, we're seeing more engagement of our demand in the next few years. So I would say most of the CapEx come from the strong demand for our advanced technology and specialty technology, especially 5 and 3 nanometers. Jeff Su: Okay. Thank you, Charlie. Operator: Next one to ask questions, Bruce Lu from Goldman Sachs. Bruce Lu: My question I'll just stick with the $100 billion CapEx. I mean assume this is the first time for TSMC to announce a multi-year CapEx. I think this suggests a very, very strong growth even beyond 2023, over $300 billion and plus. So can you give us a little bit more color about like what kind of application demand, which is strong enough to give the company such as high confidence for the CapEx? I mean we've seen through several cycles, but how can we have confidence just for the demand, like 3 to 5 years down the road? Also, assuming TSMC mostly invests in advanced nodes, do you foresee the mature node profit tightness continue and how and when this can be resolved? Jeff Su: Okay. So Bruce has two questions. Both -- first is related to our CapEx. With such a high level of spending, what is giving us the confidence that we see out over the next several years to spend -- an intention to spend this $100 billion? And then his second -- well, maybe we'll go that first and then second question. C.C. Wei: Okay. Let me answer that one first. In fact, we are seeing stronger engagement with more customers on 5-nanometer and 3-nanometer. And the engagement is so strong that we have to really prepare the capacity for it. And that's the main reason. So what is the second? Jeff Su: And then his second question is then looking at our CapEx, with the majority of our CapEx being on advanced nodes, on the mature nodes then, will the, I think, the supply-demand gap in mature nodes further widen? C.C. Wei: We did see the gap that mature node capacity not enough to support all the products in the market. So we are working with our customer closely to analyze the gap and we are also preparing to invest on the mature node, as I said in my statement. But most important, we are developing the technology, specialty technology, with the mature node to support our customers' need so their product can be very competitive in the market. And so we can have demand secured for the next few years and we decide to invest on the mature node capacity. Jeff Su: Okay. Bruce, does that answer your 2 questions? Bruce Lu: Okay. Can I take one? Jeff Su: We have to limit to 2, sorry. There's a lot of people still waiting. Thank you. Operator: Next one to ask questions, Robert Sanders from Deutsche Bank. Robert Sanders: Yes. My first question is regarding your CapEx rising up to the mid-30s by 2023. Are you asking customers to commit earlier than normal on that capacity? And are you considering asking customers for prepayments? How do you derisk those capacity plans? And are you seeing an increased willingness to single source? My second question was how far are you actually booked out on capacity? And at which node is the biggest gap between demand and your capacity? Jeff Su: Okay. Robert, we'll take your questions one at a time. So his first question is looking at our CapEx for the next few years. With this level of spending, do we see customer commitments that are earlier than normal? Are we looking for things like prepayments from customers to secure their commitments? This is the first question. Wendell Huang: Okay. Robert, let me answer this first. The $100 billion of CapEx is decided because we see the fundamental structure demand increase from the megatrend, multi-year megatrend and the acceleration of the digital transformations. Now we cannot disclose the detail of our commercial terms with our customers. However, for us to make the investment decision will definitely require proper returns and secure customer commitments. Jeff Su: Okay. And then Robert's second question is how far are we booked in advance in terms of our demand and which nodes do we see the biggest gap between what customers may want. C.C. Wei: Well, I cannot comment on which node because almost all the nodes are in -- today is a high demand. However, let me stress again that our investment in the capacities for the future, many years to come because we work with customer closely to plan for the next few years as capacity support to them. And the customer talking to TSMC and they out their product plan for the next few years and it is 3 to 4 years, and we plan the capacity for that. Jeff Su: Okay. Thank you. Thank you, C.C. Thank you, Robert. Operator: Now we have Brett Simpson from Arete Research. Brett Simpson: Yes. I had a question on the crypto activity at TSMC. I guess we've seen record hash rate expansion around Bitcoin basics and GPU mining in the last couple of quarters. So can you maybe share with us what portion of sales -- HPC sales is crypto at the moment? And then as we get into the second-half of the year, should we expect this to decline? And I wanted to get your perspective. A couple of years ago, we had extreme volatility around crypto. Bitcoin is now $1 trillion market cap. Is this good business for TSMC? Do you think this time will be different? I just wanted to get your perspective on this. Jeff Su: Okay. So let me repeat your first question, Brett. He's asking about -- within HPC, looking at cryptocurrency, and he's asking what is the contribution we're seeing from cryptocurrency -- or crypto mining, I should say, to our revenue. And do we expect this -- how do we expect this to go in the second-half of this year? And then a longer-term question, which is how do we view this business. C.C. Wei: Let me answer the question. TSMC's technology is a leading technology, and that's why even cryptocurrencies mining using TSMC technology a lot. But I don't -- and I cannot comment on what is the percentage or how much of this particular market sector to our revenue. However, I can say that cryptocurrency mining today is more mature than it was 2 or 3 years ago. And it remains a volatile market. However, we will continue to work closely with our customers in this field. Jeff Su: Okay, Brett? And do you have a second question? Brett Simpson: Yes, I did. Jeff Su: Yes. I'm sorry. Brett Simpson: Yes. I wanted -- yes. I wanted to talk about the inventory levels at TSMC at present. It grew quite significantly. And I think you mentioned that it was N5 related. Now many of your smartphone customers are staying they have shortages at leading edge and you're building inventories at 5-nanometer. So how do we reconcile that? And then just looking at Q2, would you expect inventories to rise again in the June quarter? Jeff Su: Okay. Brett, so you're asking about TSMC's inventory days, right? And so Brett is asking what is leading to the increase in the inventory days at the end of first quarter. And then how do we expect this to trend in the second quarter? Wendell Huang: Okay, Brett. We prebuild for our customers during seasonal low level as we did before. Now when we start to ramp in the higher season, the inventory usually come down naturally as before. Jeff Su: Okay. Does that answer your question? Brett Simpson: Yes. Jeff Su: Great. Perfect. Thanks, Brett. Operator: Now please welcome Roland Shu from Citigroup. Roland Shu: My first question is also for this $100 billion CapEx. Can you clarify, is this year's CapEx of $30 billion included in this $100 billion or not? And also, I use your long-term capital intensity target. Last time, you said long-term is 3 to 5 years. And then I used this about $30 billion CapEx maybe in 2024. Then it implies your revenue in 2024 will likely to exceed $90 billion or even bigger, which is more than double than 2020's level. So my question is, are there any challenges to you to recruit and train up enough amount of the talent to support such a fast growth for you going forward? Jeff Su: Okay. Let me summarize your questions, Roland. So first, Roland is asking this $100 billion CapEx. Does this include 2021 of around $30 billion? And then he's asking about if we look at the longer-term capital intensity, what does this kind of imply for 2024 and '25 CapEx and capital intensity? And then another part is that with this pace of growth, how do we recruit the talent to support our operations? Wendell Huang: Roland, yes, $100 billion include this year's CapEx. And we've talked about the 3-year, $100 billion, '21, '22 and '23. The capital intensity, I think, as I said earlier, you can probably do some calculation and have a feeling about the capital intensity in those 3 years. Longer term, we do see that the capital intensity will go back to about mid-30s level at this moment. Jeff Su: And his second question is then how do we recruit talent to support our growth. C.C. Wei: Roland, this is a very good question. Very good question. The talent people recruiting is one of our top priorities in recent years. And fortunately, we have communicated with the government and get Taiwan government's strong support. So they are now pushing for a new program to hire -- not to hire, to actually to enable the student to be in the semiconductor area, major in this area. And internally, TSMC also have a very rough system. Right now, we just established to train all the newcomer and all the new engineer to be more -- they can grow faster. So externally, we got the help from government. Internally, we do our own part also to enhance the training. And that's the way that we try to meet the requirement of enough talent people inside TSMC. Jeff Su: Okay. Thank you, Roland. I think that was. Roland Shu: Yes. This actually is one question. Jeff Su: That's two questions, Roland, okay. Roland, we're happy to have you get back in the queue. Operator: Next one for question is Andrew Lu from Sinolink Securities. Andrew Lu: Yes. My first question is can we know what kind of percentage capacity increase on 8-inch specialty foundry and 12-inch mature -- 12-inch advanced for the next 3 years? Maybe just the average will be fine. Jeff Su: Okay. So Andrew's first question is on the capacity increase. He wants to know, in the next 3 years, how much capacity already increasing on 8-inch and then how much capacity are we increasing on the 12-inch. Wendell Huang: Andrew, let me share with you, we don't disclose that kind of details. But basically, 80% of the CapEx will be spent in advanced technology, about 10% in advanced packaging and mask making and another 10% in specialty technologies. Jeff Su: In the next 3 years. Wendell Huang: In the next 3 years. Jeff Su: Okay. Andrew, do you have a second question? Andrew Lu: Yes. I do have the second question, but the first question doesn't really answer. So can I have 2 more? Jeff Su: No. We do not comment on the capacity by 8-inch or 12-inch, I think, Wendell has just said. Andrew Lu: Okay. Okay. Then second question is not related to price. Assuming the next year, our rebate to the customer has been removed. What kind of percentage -- additional growth we should factor into our model? Jeff Su: Okay. So Andrew's second question is assuming next year that the rebates have been removed, how much will this drive additional growth in next year and how should he factor this into his model. C.C. Wei: What is kind of pricing is strictly confidential between TSMC and TSMC's customer. So I don't think that we can comment on that one, whether it's rebate, whether it's any other activities. Jeff Su: Okay. Thank you. Thank you. Operator: Next one to ask question, Sunny Lin from UBS. Sunny Lin: So my first question is also on CapEx. So when you plan for CapEx for this year and next few years, do you think the equipment supply could be a potential bottleneck in terms of the additional upside that you can spend? Well, I think several equipment makers have mentioned that based on this year's industry CapEx, they are already -- explain supply tightness, especially for EUV. So any color would be appreciated. Jeff Su: Okay. So Sunny's first question is that with our CapEx plan, do we see or face any equipment bottlenecks in terms of securing the tools and equipment. And I think part of your question is also particularly with regards to EUV. C.C. Wei: Well, let me answer the question. In fact, when we plan $100 billion CapEx, we also work closely with our supplier and -- to prepare in advance. So we don't expect -- certainly, we don't expect any bottleneck, whether it is EUV or not and actually we work closely with them. Sunny Lin: Got it. Right. So would it be fair to assume that when you announced this $100 billion CapEx for next 3 years, it's already -- you already have a commitment from your suppliers? C.C. Wei: The answer is yes. Sunny Lin: Got it. My second question is 3-nanometer. Now we are just about a year before the mass production in second-half of 2022. So at this point, how should we think about the revenue contribution in its first year of commercial production? I think for 5- and 7-nanometer, they could get to high single digit of revenue or even close to 10% in first year. So just want to get your thought on that. Jeff Su: Okay. So Sunny's second question is looking at 3-nanometer. And with the schedule for production, how should we think about the revenue contribution from 3-nanometer in its first year? Wendell Huang: Sunny, that's too far to talk about that. We will update you later on. That is about 2 or 3 years away, yes. But we do expect it's big and long-lasting nodes, just like the former N5. Jeff Su: Okay. Thank you, Sunny. Operator: Right now, we have Laura Chen from KGI. Laura Chen: Yes. My first question is still same -- similar to previous question about inventory days and inventory level. I think both Wendell and C.C. mentioned already that high inventory probably will proceed for a while. But in what level we may start to worry about that? Or what would be the checking point? Because so far, we all know that the demand outlook and TSMC's -- and particularly in the advanced node are quite tight. But what would be the checking point we closely follow? That's my first question. Jeff Su: Okay. So Laura's first question is with regards to inventory and inventory levels. She understands the demand is tight. But do we worry about the inventory levels? What are the type of checking points that we would look at. C.C. Wei: Well, let me answer that question. Yes, I did say that our customer want to secure the supply, actually, at this moment. That's due to some imbalance in the supply chain. And they are preparing for the future also. But how we are going to do to test this, what is the checking point, actually let me say that we are working with our customer closely. It's not daily, it's at least that we check very often. And we make sure that all the demand to TSMC has been secured, and we prepare the capacity for that. Laura Chen: Okay. And my second question is also about the mature node. I think C.C. mentioned about some specialty design, special technology for mature node. I recall you mentioned before about the CIS progress and also the gallium nitride progress. Can you give me more update or some special technology you are working now with the mature node, which may be the expansion in the next few years? Jeff Su: Okay. So Laura's second question is looking at the mature notes and that C.C. mentioned that our strategy is to work with customers to develop specialty technologies at those mature nodes. So she is wondering if we can give little more examples of what types of specialty technologies. Is that correct, Laura? Laura Chen: Yes. And also FD-SOI as well, if it's possible. Jeff Su: And FD-SOI in other areas. C.C. Wei: Well, let me answer the last one first. We don't work on the FD-SOI per se. But we develop the specialty technology for CMOS image sensor, as I mentioned previously, and the technology continue to improve because if you look at the application of the CMOS image sensor in the smartphone, in the automotive, there are a lot, okay? And we also -- in fact, the most important one also is ultra-low power that we develop the technology to meet the requirement of the mobile world. I mean that everything is portable. So ultra-low power is very important. Gallium nitride, all those kind of specialty, we continue to work with our customer, and for the future, high-frequency application or the high-voltage applications. We also work on the RF technology. Radio frequencies is important because of 5G's era. The RF become fairly, fairly important in application in the WiFi communication area and a lot of them. Laura Chen: So following that question, do we have space or any capacity to further expand those technology here in Taiwan? Jeff Su: So Laura is asking then will space be a constraint or limitation for the specialty. C.C. Wei: Good question. We are working with our customer to expand our capacity whenever necessary. Jeff Su: Okay. Okay. Right. Thank you, Laura. Operator: Next on the line is Rick Hsu from Daiwa Securities. Rick Hsu: Yes. I just got one question here. I think your top -- regarding your second quarter guidance. The revenue is going to grow sequentially in U.S.dollar terms. And also, if I don't remember wrong, Wendell did say that your inventory increase in Q1 was mainly because your customers prebuilt inventory for 5-nanometer. So that assumes that your 5-nanometer contribution will also increase in second quarter. So -- and also the exchange rate, also not getting worse, right? So against the backdrop of these 3 positive factors, right, revenue increase, 5-nanometer increase and favorable exchange rate, why your gross margin guidance for the second quarter is below your first quarter. Jeff Su: Okay. So Rick's question is looking at the second quarter and looking at the gross margin guidance. Why is it basically lower than the first quarter or is sequential declining if you use the midpoint? Wendell Huang: Okay. Rick, let me explain to you. The sequential decline is mainly due to mix as the contribution from N5 will increase, but it still carries a dilutive effect. And secondly, we see a slower rate of cost improvement as our fabs continue to run at a very high level of utilization, leaving last time to do cost-improvement activities. And lastly, a more technical thing is the absence of a positive inventory revaluation in the quarter. Jeff Su: Okay. Thank you, Rick. Operator: Next one to ask questions is Aaron Jeng from Nomura Securities. Aaron Jeng: This question was not asked before, so I wish to ask before end of the call. You state customers' engagement on N3 and N5 are stronger than what you saw 3 months ago, which drives your $100 billion CapEx for the next 3 years, okay? Then let's ask in this way: compared with 3 months ago, are you now projecting a bigger market share gain potential over the next 3 years as pure foundry market and your widening technology leadership at the best now? This is my only question. Jeff Su: Okay, Aaron. So Aaron's question is looking at the fact that we said customer engagement at 5-nanometer and 3-nanometer are stronger than what we saw a few months ago. So does this mean that we're going to -- expect to gain bigger or larger market share as a result. Is that correct, Aaron? Aaron Jeng: Yes. And a bigger market share than expected 3 months ago. Jeff Su: Versus 3 months ago. C.C. Wei: Okay. Let me answer that question. Certainly, as compared with 3 months ago, we have some progress in engaging with the customer to get their commitment to work with TSMC on 5-nanometer and 3-nanometer. And whether this one is the indication of TSMC's technology leadership, I would happily to say yes. We are continuing -- but the most important thing actually is that we are continuing to work with customer to develop the technology they need for their product. Each customer has a different kind of preference and we always can meet their demand. Jeff Su: Okay. Thank you, Aaron. Operator: Next one to ask question, Mehdi Hosseinii, SIG. Mehdi Hosseinii: Yes. My first question has to do with some of the comparisons that you provided during last earnings conference call, you were comparing the capital intensity and a growth prospect to the period of 2010 and 2015. In that context, my question has to do with depreciation. Back then during the period of 2010 through 2015, depreciation increased at a growth rate of 20%. How do you see that growth rate changing in the period of 2020 and 2025? And I have a follow-up. Jeff Su: Okay. So Mehdi's first question is looking at, I think, basically, looking at depreciation and looking at as we enter a higher period of growth, what does our depreciation look like. And also, he is asking about the depreciation growth or increase. Given that we expect to grow between 10% to 15% in 2020 to '25 CAGR period, what does the depreciation growth look like this year and then beyond? Wendell Huang: Okay. I can share with you that the depreciation this year will be around 30% higher than last year. And we are not ready to share with you the rest of the 5-year period depreciation at this moment. Jeff Su: Okay. Do you have a second question, Mehdi? Mehdi Hosseinii: Okay. Sure. Yes, I have a second question. You raised your CapEx spending, given the increased demand by your customer. But your revenue growth target remains the same at 10% to 15%. Why aren't you raising the revenue target as you're raising the CapEx? Jeff Su: Okay. So I think Mehdi is asking that we raised the CapEx spending. And so why -- what is our view of the growth target, 10% to 15%? Why are we not raising that as well? Wendell Huang: Mehdi, actually, if you think about this 10% to 15% 5-year CAGR, it's a pretty big range. From what we currently forecast, the revenue target is still within that range, maybe higher to the -- closer to the higher end than last time. Jeff Su: Okay. Thank you, Mehdi. Thank you. Operator: Now we have Randy Abrams from Crédit Suisse. Randy Abrams: Okay. Yes. The first one on the back end, that's keeping pace. Could you give an update on the spending and momentum you're seeing for the new SoIC and then also how the CoWoS and InFO are progressing? Jeff Su: Okay. So Randy's first question is on our advanced packaging solutions. He wants to know -- want an update on how SoIC is progressing as well as CoWoS and the other solutions. Is that right, Randy? Randy Abrams: Yes. That's correct. Jeff Su: Okay. C.C. Wei: Okay. Let me comment on the SoIC first. This is the most advanced back-end technology, I think, that we offer to our customer. And it will start to small volume production in 2022. And it's also actually adopted by a very high-performance HPC applications. As for InFO and CoWoS, we continue to expand our customer portfolio. And I expect that the business from InFO and CoWoS will start to -- will continue to increase in the next several years. Randy Abrams: Okay. Great. And just I have one quick one on that. You mentioned very high-performance applications. SoIC, in a couple of years, as it ramps, should that be a big -- like also, do you expect a pretty big ramp like we saw in the past for InFO or it should be a good volume runner for TSMC? And then I wanted to ask a second question. Just a couple of clarification on gross margin in second-half. 5 will be getting more mature. So I'm curious, factoring your depreciation guidance, 5 getting more mature, if your view is 50% gross margin or if you're running very tight utilization, we may be able to stay a bit above the long-term range in the second-half. Jeff Su: Okay. So a quick one. He wants -- Randy wants to know SoIC, will it be a large contributor? How large can it be in a few years' time? And then also on gross margin, the gross margin outlook for second-half. C.C. Wei: We hope that SoIC going to be adopted by all those HPC applications customer. But I cannot nail down what is the specific revenue number in the future. But we do expect our back-end service will continue to grow. And the rate -- the growth rate will be a little bit higher than the corporate average. Wendell Huang: Okay. Randy, about second-half gross margin, it's a bit too early to give details on that. However, you've already mentioned several things. N5 will become bigger in contribution to the revenue. It still has -- carries a negative or dilutive effect on the margins, about 2 to 3 percentage points. Utilization is pretty -- still pretty tight. And we continue trying to improve our cost under this very high-utilization environment. So that's all the things we can share with you at this moment. Randy Abrams: Okay. And if I can fit in. Jeff Su: Sorry, Randy. I'm sorry, that's 2 questions because we're -- yes, thank you. Operator: Okay. The next one will be Gokul Hariharan from JPMorgan. Gokul Hariharan: My first question is how should we think about HPC in terms of the demand cadence for second and third wave? I think when smartphone was our big growth driver in the last 10 years, we had leading-edge growth from processors, et cetera, but we also had a lot of other ICs in smartphones as well as our applications, which drove the second, third, fourth wave of demand for any process node. So now that HPC seems to be one of the key drivers for growth, how do we think about second-, third-wave demand? Would it keep up with the first and second wave for N5, N3, et cetera? Or should we think about TSMC will be doing more capacity conversion compared to in the past? That's my first question. Jeff Su: Okay. So Gokul's first question is looking at HPC and looking at how HPC is also, along with smartphone, becoming the first-wave adopters of our leading-edge nodes. He's wondering then, though, for the second and additional waves of demand, will HPC -- how do we see HPC driving additional waves of demand or will we convert capacity. C.C. Wei: Let me make some comment. Actually, the HPC application includes many different subsegment such as CPU, GPU, networking, FPGA, AI-accelerated video gaming, et cetera, et cetera. And each one will have their own migration path and product life cycle also. So we expect to see HPC, not only in the first wave, but in additional waves of demand to support our leading node in the future, actually. Did that answer your questions? Gokul Hariharan: Okay. That's clear. Jeff Su: Do you have a second question? Gokul Hariharan: Second question, just wanted to -- yes. Just wanted to follow up on any thoughts from TSMC on the Arizona fab capacity. I think you've already announced 20,000 of wafers per month of 5-nanometer coming up in 2024. What has been your discussion with customers regarding any potential upside to this capacity? Are customers asking for more capacity there? Do you feel that we -- right now, this seems more like an n-1 cadence because 5-nano started in Taiwan in 2020 already. Do we feel that we will move to a more -- shorter or a quicker cadence for leading edge in, let's say, Arizona or U.S. capacity? I just wanted to understand how TSMC is thinking about this right now. Jeff Su: Okay. Gokul's second question is on our U.S. manufacturing and our fab in Arizona. He wants to know that our customer is asking for more capacity or more production. And also, we start with N5, I guess your question is what about the future plans for bringing additional technologies there and the cadence. C.C. Wei: Okay. We are executing our plan in Arizona according to the schedule and construction will start this year. Phase 1 production, as you said, we are starting 2024 with a 20,000 wafer per month 5-nanometer technology. But in fact, we have acquired a large piece of land in Arizona to provide flexibility. So further expansion is possible, but we will ramp up to Phase 1 first, then based on the operation efficiency and cost economics and also the customers' demand to decide what the next steps we are going to do. Our customer world commerce to build capacity in the U.S., and our fab in Arizona will be available to support all our customers from around the world and just like other -- all the TSMC's fab, no matter where they are and no matter where they're located. Jeff Su: Okay. Thank you. Operator: Yes. The last one to ask question, Sebastian Hou, CLSA. Sebastian Hou: Yes. I only have one question. So just a follow-up on C.C.'s comments earlier, that C.C. mentioned that TSMC has been working closely with the customer to analyze the gap between capacity and demand on the trailing-edge nodes. So wondering if you could share some color with us. If we exclude the overbooking portion and based on your best analysis, does the demand still significantly exceed supply? And how big is the gap, if you have any rough number that can be shared? Furthermore, based on the CapEx you and your peers are investing in the capacity expansion lead time, when do you think the tightness can be eased or the whole shortage situation can be removed? That's the only question I have. Jeff Su: Okay. Let me try to summarize your question, Sebastian. You're asking, on the mature nodes, the fact that TSMC works with our customers very closely, but also in looking at the supply/demand of those older nodes. So with the additional capacity added, will -- when and will we eventually see an easing of the supply tightness at the mature nodes? Is that correct, Sebastian? Sebastian Hou: Yes. And also, if you can, if we exclude the overbooking part, with your best estimate, whether the demand is still exceeding supply right now. C.C. Wei: All right. To be frank with you, as I said, we work with customer closely. And so the overbooking is not in our calculation, although we did not exclude it out of this possibility. But we do the very detailed analysis internally, and as I said, work with customer closely. And so we prepare the mature node capacity for them. However, building a fab from a green fab start and also to install the capacity, it won't be available until 2023. And so this year and next year, I still expect the capacity tightening will continue and probably also next year. 2023, I hope that we can offer more capacity to support our customers. And at that time, we start to see the supply chains tightening will release a little bit. Jeff Su: Okay. Sebastian, does that answer your question? Sebastian Hou: Yes. So is it fair for us to conclude that in the next 18 months, it is very safe to assume that we will still be in the supply tight situation, is that right? C.C. Wei: For our customers, we are working with them, let me say that. But it's still very tight. Yes, you are right. Jeff Su: Okay. Thank you, Sebastian. 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 4 hours from now and the transcript will become available 24 hours from now, both of which are going to be available through TSMC's website at www.tsmc.com. So 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.