Taiwan Semiconductor Manufacturing Co., Ltd. ( TSM)

Q3 2011 Earnings Call

October 27, 2011 08:00 am ET

Executives

Elizabeth Sun - Head, Investor Relations

Lora Ho - SVP, CFO & Spokesperson

Morris Chang - Chairman & CEO

Analysts

Randy Abrams - Credit Suisse

Mehdi Hosseini - Susquehanna International Group

Mike McConnell - Pacific Securities

Donald Lu - Goldman Sachs

Dan Heyler - Bank of America

Robert Lea - Jefferies

Presentation

Operator

Welcome to the TSMC’s 3Q11 Results Webcast Conference Call. This conference call is being webcast live via the TSMC website at www.tsmc.com and only in audio mode. Your dial-in lines are also in listen-only mode.

I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC’s Head of Investor Relations.

Elizabeth Sun

Thank you Andrea. Good morning, and good evening, everyone. Welcome to TSMC’s third quarter 2011 conference call. Joining us on the call are Dr. Morris Chang, our Chairman and Chief Executive Officer; and Ms. Lora Ho, our Senior Vice President and Chief Financial Officer.

The format for today’s conference call will be as follows. First, Lora will summarize our operations in the third quarter and give you our guidance for the next quarter. Afterwards, TSMC’s Chairman, Dr. Chang, will provide his general remark on the business outlook and a couple of key messages. Then we will open the floor to questions.

For those participants who do not yet have a copy of the press release, you may download it from TSMC’s website at www.tsmc.com. Please also download the summary slides in relation to today’s quarterly review presentation.

I would like to remind all listeners that the following 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.

Information as to those factors that could cause actual results to differ materially from TSMC’s forward-looking statements may be found in TSMC’s Annual Report on Form 20-F filed with the United States Securities and Exchange Commission on April 15, 2011 and such other documents as TSMC may file with or submit to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

And now, I will like to turn the call over to Lora.

Lora Ho

Thank you, Elizabeth. Good morning, and good evening to everyone. Welcome to our 2011 third quarter earnings conference call. I’ll start with the financial highlights in the third quarter. Then we will move on to the outlook for the fourth quarter. All dollars presented are the NT dollars unless otherwise stated.

In the third quarter our revenue was higher than the guidance provided on July 28 thanks to some rush orders in August and some and more favorably change rate. Third quarter revenue decreased 3.6% sequentially to NT$106.5 billion and the wafer shipments decreased 3% with 3.2 million inch equivalent wafer.

Our wafer demand was expected by a weakened slow growth economy conditions in customer’s inventory adjustment.

Computer and consumer related revenue was more of packet and decreased by 16% and 18% respectively whereas communication and industrial increase by a 3% and 9% from the second quarter. Overall, communication accounted for 48% of our total wafer revenue in this quarter, while computer, consumer and industrial accounted for 21%, 10% and 41% of wafer sales respectively.

By technology demand for 40-nanometer and below technologies jumped up relatively well and the reached 27% of wafer revenue in third quarter, including 0.5% from 28-nanometer and we expect our 28-nanometer ramp to accelerate in our next few quarter.

Combined contributing for 65-nanometer and below, represented 54% of total wafer sales in the third quarter which is 1 percentage point lower than the second quarter as revenue from the 65 now decreased by two percentage points in the third quarter.

Gross margin was 42% and operating margin was 49.7%. The sequential decline in margins was mainly due to lower utilization. Operating expense increased 1.4% on a previous quarter mainly due to higher R&D spending on 20-nanometer and higher patent filing fees. In the future, we will continue to increase R&D spending to expand our leading technology and keep SG&A tight at the same time.

Overall our third quarter net margin arise at 28.5% EPS or $1.17. In nine weeks what we said in the last conference, we have successfully reduced the inventory level during this quarter. Our inventory turnover days significantly reduced by 8 days to the company’s normal level of 45 days mainly reflecting lower inventory levels in finished goods and working process inventories.

Cash from operation totaled $55 billion, free cash flow was $17 billion during the quarter, up from an outflow of $1.8 billion in the second quarter due to less capital expenditure. Combined with $78 billion cash dividend payment and $18 billion proceeds from a corporate bond issuance. Our cash and short-term investment decreased $39 billion to $120 billion.

In the light of weakening demand, we decided to further revise down 2011 capital expenditure to $7.3 billion. Total capital expenditure in the first three quarters reached $6.3 million. As a result of the adjustment, our total capacity would be flat in the fourth quarter. Full-year total capacity will increase 17% to 13.2 million 8-inch equivalent wafers while 12-inch way for capacity will increase by 29%.

Now, let's turn to the outlook for the fourth quarter. Based on current business expectations and a forecast exchange rate of $38.3 we expect our consolidated revenue in the fourth quarter to come in between NT$103 billion and NT$105 billion. In terms of margins, we expect our fourth quarter gross margin to be between 43.5% and 45.5%.

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