Taiwan Semiconductor Manufacturing Company Ltd. (TSM) Q1 2012 Earnings Call April 26, 2012 8:00 a.m. ET Executives Lora Ho - CFO and Vice President Morris Chang - Chairman and CEO Elizabeth Sun - Head, Investor Relations Analysts Daniel Heyler - Bank of America Merrill Lynch Mehdi Hosseini - Susquehanna International Randy Abrams - Credit Suisse Steven Pelayo - HSBC Michael Chou - Deutsche Bank Satya Kumar – Credit Suisse Dan Malkoun – Viking Global Szeho Ng - BNP Paribas Presentation Elizabeth Sun
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And now, I would like to turn the call over to Lora.Lora Ho Thank you, Elizabeth. Good morning and good evening to everyone. Thank you for joining us in the first quarter earnings conference call. Tonight I will start with the financial results for the first quarter and give you the outlook for the second quarter followed by some comments on the supply chain inventory. The first quarter 2012 was the stronger than seasonal quarter for TSMC. Compared to a normal seasonal decline, our revenue increased 0.8% to NT$105 billion. In the U.S. dollar terms, the increase was 2.7% over last quarter, which was a slightly better than our guidance. During our last earnings conference call, we had expected the beginning of inventory replenishment in certain applications to drive first quarter demand. On top of that, the better technology also contribute to the first quarter trends. On the margin side, first quarter gross margin was 47.7%, or 3 percentage points higher than that in the fourth quarter of 2011. This is also about 3 points higher than our guidance. Thus the first quarter utilization rate was a lot higher than we had expected, reflecting a stronger demand in the first quarter and second quarter. The first quarter gross margin also include the negative impact from NT dollar’s appreciation and the temporary margin dilution effect from 28-nanometer which takes place during the initial ramping stage of every technology node. Operating margin was 33.6%, up 2.2 percentage points. Operating expense increased about NT$1 billion, mainly due to higher operating expense for Fab 15 in preparation for 28-nanometer ramp-up, as well as the increased R&D investments for 20-nanometer technology. Overall our first quarter EPS was NT$1.29. ROE for the first quarter was 20.8%. Let’s move on to revenue analysis. For applications, computer, consumer and industrial related revenue benefit from the customers’ inventory replenishment and increased by 11%, 17% and 11% respectively. Whereas communication decreased by 9% due to the product transitions in emerging markets.
By technology, as we had expected last quarter, 28-nanometer contribution more than doubled to 5% of total wafer sales in the first quarter. This was the fastest ramp in foundry’s history as we tried to chase customers’ massive demand. Meanwhile 40/45-nanometer continued to be solid and contributed to 32% of our total wafer revenue, exceeding 65-nanometer for the first time. Overall contribution from 65-nanometer and below technologies increased 4 percentage points to 63%.Our days of inventory increased by 4 days to 39 days in the first quarter – sorry, the days of inventory increased by 4 days to 47 days in the first quarter. The increase was mainly from the higher working process inventory in response to the strong second quarter demand. On the cash flow side, we generated NT$57 billion from operations, invested NT$49 billion in capital expenditures, raised NT$17 billion through corporate bonds, and increased NT$9 billion in short term loans for currency hedge purpose. As a result, our cash balance increased NT$27 billion to NT$171 billion at the end of the first quarter. Let me move on to our full year capacity plan. We expect our total capacity to increase about 12% to reach 14.8 million wafers in 2012. Majority of the increase comes from a 17% increase in 12-inch wafers. Our third GigaFab, Fab 15, begins 28-nanometer volume production this month, and then ramp at a fastest speed in our history to reach about 50,000 wafers per month by the end of this year. On the supply chain inventory, after the inventory adjustment through the second half of last year, supply chain DOI related dropped below seasonal level by the end of fourth quarter. We estimate now the DOI exiting the first quarter will be even lower and then approach the seasonal level by the end of second quarter.
Before I turn to our next quarter guidance, I would like to talk about some dynamics in our second quarter gross margin, including utility costs, exchange rate, production costs and utilization. First of all, the utility rate in Taiwan will start to increase from the middle of next month. For TSMC, this means about 38% increase in the average utility rate, which will take out 0.4 percentage points from the second quarter gross margin, or 0.5 percentage point from operating margin.Read the rest of this transcript for free on seekingalpha.com