Q4 FY2023 Earnings Call
TSM · Preprocessing Report
2024-01-18
Quality
100%
96
Turns
13
Speakers
4
Sections
8
Exchanges
668
Claims

Entities by group 48

process technology 6
N3technologyN5technologyN3PtechnologyN3EtechnologyN3XtechnologyN4technology
sell-side financial institution 3
CitibankcompanyGoldman SachscompanyJPMorgancompany
advanced packaging 2
CoWoStechnologySoICtechnology
semiconductor process node 4
N2technology3-nanometertechnology2-nanometertechnology18Atechnology
ai workloads 1
AItechnology
3d integration 1
3D ICtechnology
llm service 1
ChatGPTproduct
government 1
Japanese governmentcompany
wireless communications 1
5Gtechnology
transistor structure 1
Narrow Sheet Transistortechnology
shareholder meeting 1
2024 Annual Shareholders Meetingevent
lithography technique 1
EUVtechnology
semiconductor company 1
Intelcompany
end-user devices 1
PCsproduct
Ungrouped 23
TSMCcompanyWendell HuangpersonC. C. WeipersonMark LiupersonJeff SupersonGokul HariharanpersonLaura ChenpersonRandy AbramspersonCharlie ChanpersonHPCotherBrad LinpersonBruce LupersonUnited StatesotherKrish SankarpersonIoTotherIDMotherDCEotherMorris ChangpersonNicholas BarrettpersonNT$otherUS$otherSamsungcompanySilicon Valleyother
REPORTING 99PROJECTING 88POSITIONING 186EXPLANATORY 43ANALYST 72

Topics 90

node×43revenue×39fab×36capacity×30capital×29gross margin×27technology×22ai×19packaging×13advanced packaging×11utilization×10semiconductor×10outsourcing×10margin×9customer×9dividend×8foundry×8leadership×8strategy×8process×7

Themes 309

ai×16capacity×15leadership×15advanced×10japan×10mature node×10arizona×8overseas×7idm×72-nanometer×6profitability×5demand×5revenue mix×4technology leadership×4gross×4growth outlook×4guidance×4full-year guidance×43-nanometer ramp×3sequential decline×3operating×3annual decline×3product mix×3cash payout×3volume production×3competitive advantage×3revenue contribution×3dilution×3outsourcing business×3planning×3government incentives×33-nanometer mix×2hpc mix×2smartphone mix×2iot mix×2automotive mix×2investment×2n3 dilution×2tool strategy×2timing×2long-term outlook×22024 guidance×2shareholder returns×2excluding memory×2development progress×2global expansion×2manufacturing×23-nanometer expansion×2future planning×2expansion×2november speech×2future technology×2front-end and back-end×2high-na tools×2decision-making×2long-term target×2customer demand×2growth rate×2geographic×2cowos conversion×2fourth-quarter and full-year results×1first-quarter 2024 outlook×1sequential growth in nt dollars×1sequential growth in us dollars×1ahead of guidance×15-nanometer mix×17-nanometer mix×1dce mix×1smartphone segment×1iot segment×1digital consumer electronics segment×1hpc segment×1automotive segment×1liquidity×1current liabilities decline×1days outstanding×1days on hand×1capex spending×1cash distribution×1balance increase×1quarterly spending×1decline from utilization and node ramp×1full-year decline×1free cash flow×1cash return×1smartphone seasonality×1first-quarter guidance×1quarterly decline×1forward guidance×1full-year outlook×1n3 and n5 tools×1node conversion dilution×1headwind×1growth investment×12023 spending×1specialty technology allocation×1rising due to 3nm ramp×1growth opportunity correlation×1ramping to capture hpc ai and 5g demand×1minimum quarterly payout×1distribution timing×1policy outlook×12023 adjustment and macro headwinds×1industry decline year over year×1decline in u.s. dollar terms×1fabless semiconductor×1macroeconomic weakness and geopolitical uncertainty×1correction×1industry growth×1outperformance×1quarter-over-quarter growth×13-nanometer adoption×1performance power and yield×13-nanometer technology growth×1enhancement with n3p and n3x×13-nanometer demand×13-nanometer family×1energy-efficient computing demand×1applications enablement×1training and inference compute×1technology position in ai chip market×1leading-edge ai demand at scale×1earlier customer engagement lead times×1broad industry adoption of tsmc×1n2 customer interest×12nm leadership×1n2 volume ramp×1backside power rail×1solution availability×1future contribution×1revenue exposure×1specialty technology strategy×1specialty technology focus×1mature-node profitability×1embedded applications×1specialty technology demand×1utilization and profitability×1government support×1maximization×1opening ceremony×1union and trade partners in arizona×1n4 volume in arizona×1specialty technology in germany×1germany project×1germany construction×1n2 ramp×1kaohsiung approval×1profitable×1chairman retirement×130-year history×1started at tsmc×1core values×1leading-edge scale×1company tenure×1board nomination×1board succession×1succession×1senior executives×1customer competitor×1technology equivalence×1spec verification×1maturity advantage×12025 ramp×1high-volume fabs×1claim dispute×1broad adoption×1aggressive spending×1personal profile×1rival comparison×1company position×1investor framing×1competitive claim×1technology optimization×1customer product optimization×1application-specific technology choices×1long-term creation×1november content×1euv improvement×1technology breakthrough×1technology catch-up×1operational×1taiwan×1opportunity×1competitor use×1adoption×1nascent stage×1first data release×1tip of the iceberg×1process technology capability×1long-term capability development×1execution×1achievement timeline×12025 visibility×1executive recognition×1positive expectation×1adapting to change×1global footprint×1engineering talent×1talent attraction×1corporate×1ethical transition×1cost content×1resale pricing×1contribution growth×1value captured×1future value capture×1value source×1capture more×1applications and enabler×1current business focus×1narrow ai application processor outlook×1content increase×1cagr outlook×1ai-related growth×1technology transition×1strategic divergence×1peer comparison×1pros and cons×1leading edge×1track record×1customer service×1transistor and power efficiency×1high-volume maturity×1tool evaluation×1service×1satisfaction×1communication×1proposition×1definition×1increasing momentum×1expected to keep increasing×1second question×1utilization levels×1underutilization×1capital allocation×1mid- to long-term×1negative factors×1volume growth×1conversion to n3×12023 impact×1capital efficiency improvement×1net benefit outlook×1technology value×1reduction×1long-term market profile×1foreign exchange risk×1upcycle outlook×1historical comparison×1higher utilization×1missed forecasts×1increasing over time×1higher capacity×1hpc ramp sustainability×1future outlook×1growth trajectory×1technology quality×1insourcing risk×1mco capability×1pending×1conservative approach×1flat before renewed increase tied to advanced-node ramp×1moderator questions×1pace of spending×1annual variability×1annual planning×1slower growth×1capital intensity framing×1three-year peak×1historical trend×1multi-year outlook×1fab process node×1technology node×1technology shift×13-nanometer timing×1construction×1technology selection×1technology mix×1overcapacity×1oversupply at mature nodes×1mature capacity and product value×1flat industry supply and product value retention×1customer-driven operating performance×1speaking for company×1issue attribution×1ai-related demand×1progress and demand×13d ic and integration solutions×1technology investment×1customer support×1future plans×1next-year plans deferred×1idm-side and pc contribution×1business outlook×1potential opportunity×1question specificity×1cowos variants×1cowos capacity×1next-generation cowos×1appreciation×1full year 2024 outlook×1mix×1mix-driven growth×1segment outlook×1growth drivers×1growth platforms×1u.s.-only demand×1u.s. only×1u.s.-made demand×1customer base×1

Key Metrics 67

revenue×37gross margin×37capacity×25capital expenditure×11demand×9utilization×9process node×8revenue share×7capex×7profitability×7growth×7capital intensity×5operating margin×4capital expenditures×4inventory×3capital budget×3cash dividend per share×3market growth×3volume production×3revenue contribution×3market share×3revenue growth×3utilization rate×2dividend×2dividend per share×2yield×2ppa×2cagr×2eps×1return on equity×1cash and marketable securities×1current liabilities×1accounts receivable days×1cash from operations×1cash dividend×1cash balance×1r&d investment×1earnings per share×1roe×1operating cash flow×1free cash flow×1cash dividends×1capital efficiency×1foreign exchange rate×1depreciation expense×1outperformance×1production×1computation×1customer interest×1cost×1throughput×1operational efficiency×1dollar content×1price×1dollar contribution×1value captured per chip×1dollar value captured×1value×1percentage×1sales×1revenue cagr×1volume×1costs×1exchange rate×1output×1investment×1margin×1

Entities 862

TSMC×417Wendell Huang×96C. C. Wei×82Mark Liu×32Jeff Su×22N3×20Gokul Hariharan×15Laura Chen×15Randy Abrams×14Citibank×14CoWoS×14Charlie Chan×12HPC×11Brad Lin×11Bruce Lu×10United States×7N2×6Goldman Sachs×6N5×5AI×5Krish Sankar×5IoT×3N3P×3IDM×33D IC×3SoIC×3DCE×2N3E×2Morris Chang×2ChatGPT×2Japanese government×2Nicholas Barrett×2NT$×1US$×15G×13-nanometer×1N3X×12-nanometer×1Narrow Sheet Transistor×1N4×12024 Annual Shareholders Meeting×118A×1EUV×1Samsung×1Intel×1Silicon Valley×1PCs×1JPMorgan×1

Business Segments 56

Wafer Fabrication×32High Performance Computing×9Foundry×7Internet Of Things×3Automotive×3Digital Consumer Electronics×2

Sectors 48

artificial intelligence×23smartphones×5foundry×5data center×3high performance computing×3consumer electronics×2cloud computing×1telecommunications×1fabless semiconductor×1construction×1automotive×1defense×1semiconductor equipment×1

Regions 70

U.S.×20Japan×15Arizona×12Taiwan×9Kaohsiung×4Kumamoto×3Germany×3world×1Hsinchu×1US×1EU×1

Metadata Distributions

Sentiment
positive 128negative 48neutral 312
Temporality
backward 93forward 146current 249
Certainty
definitive 108confident 144moderate 135tentative 99speculative 2
Magnitude
major 90moderate 244minor 154
Direction
improvement 32decline 25flat 5mixed 7none 419
Time Horizon
immediate 63near_term 140medium_term 99long_term 24unspecified 162
Verifiability
quantitative 157event 31qualitative 300
Analyst Intent
probing 29challenging 5confirming 10seeking_detail 24seeking_guidance 4

Speakers

Executives
CWC. C. WeiCEOMLMark LiuexecutiveWHWendell HuangCFO
Analysts
BLBrad LinanalystBLBruce LuanalystCCCharlie ChananalystGHGokul HariharananalystKSKrish SankaranalystLCLaura ChenanalystNBNicholas BarrettanalystRARandy Abramsanalyst
Other
JSJeff SuirOPOperatoroperator

Sections

TypeLabelSpeaker
preamblePreambleJeff Su
prepared_remarksPrepared RemarksC. C. Wei, Wendell Huang, Mark Liu, Jeff Su
qa_sessionQ&A Session—
closing_remarksClosing RemarksJeff Su

Q&A Exchanges 8

#AnalystFirmTurns
1
CCCharlie Chan
Morgan Stanley12
2
BLBruce Lu
Goldman Sachs9
3
GHGokul Hariharan
JPMorgan16
4
RARandy Abrams
UBS15
5
LCLaura Chen
Citibank10
6
BLBrad Lin
Bank of America Merrill Lynch13
7
KSKrish Sankar
TD Cowen10
8
NBNicholas Barrett
Macquarie5

Claim Taxonomy 488

REPORTING99
resultFinancial outcome for a completed period73
metricNon-financial quantitative fact6
operationalDiscrete completed event20
PROJECTING88
guidanceQuantitative expectation with number + time53
commitmentPromise with binary verifiable outcome30
targetLong-term aspirational quantitative goal5
POSITIONING186
strategyPriority, direction, or initiative145
competitiveCompany's position or advantages8
opportunityMarket condition framed as growth driver17
riskHeadwind, constraint, or uncertainty16
EXPLANATORY43
attributionWhy a specific outcome happened4
contextNon-company macro/industry fact39
FRAMING0
thesisFalsifiable belief about how the world works0
ANALYST72
questionInterrogative seeking information49
observationRestates a fact or data point17
concernFlags a risk or challenge2
estimateAnalyst's own projection or calculation1
sentimentOpinion, praise, or critique3

Transcript

Preamble
JS
Jeff SuirTSMC
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.
Prepared Remarks
WH
Wendell HuangCFOTSMC
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.
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#105
CW
C. C. WeiCEOTSMC
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.
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ML
Mark LiuexecutiveTSMC
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.
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Jeff SuirTSMC
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.
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Q&A Session
Q&A 1/8
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Jeff SuirTSMC
Okay. Our first question comes from Charlie Chan from Morgan Stanley.
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Charlie ChananalystMorgan Stanley
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Charlie ChananalystMorgan Stanley
In that case, would you aggressively spend the capacity because outsourcing is more likely?
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C. C. WeiCEOTSMC
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.
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Mark LiuexecutiveTSMC
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.
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Charlie ChananalystMorgan Stanley
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.
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Jeff SuirTSMC
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?
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Mark LiuexecutiveTSMC
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.
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Jeff SuirTSMC
You have another question about one?
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Mark LiuexecutiveTSMC
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.
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Q&A 2/8
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Jeff SuirTSMC
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.
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Bruce LuanalystGoldman Sachs
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Jeff SuirTSMC
Okay. Bruce, do you have a second question, please.
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Bruce LuanalystGoldman Sachs
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Jeff SuirTSMC
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.
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Q&A 3/8
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Operatoroperator
Our question from the line is Gokul Hariharan from JPMorgan.
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Gokul HariharananalystJPMorgan
Yes. [inaudible] I simply mentioned that the AI proposition [inaudible].
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Jeff SuirTSMC
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.
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C. C. WeiCEOTSMC
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.
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Jeff SuirTSMC
So high teens, you confirm?
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C. C. WeiCEOTSMC
Or higher.
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Jeff SuirTSMC
Okay. Gokul, hopefully that clarifies that first question.
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Gokul HariharananalystJPMorgan
Thank you so much.
The second is about gross margin. In the downturn, we are forming up at much higher [inaudible] 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?
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Jeff SuirTSMC
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.
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Wendell HuangCFOTSMC
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.
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Jeff SuirTSMC
Gokul, does that answer both parts of your question?
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Gokul HariharananalystJPMorgan
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Gokul HariharananalystJPMorgan
So, the question is, we're working on it, it can be.
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Jeff SuirTSMC
Okay. Thank you, Gokul. Thank you. Operator, let's move on to the take the question from the second participant on the call.
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Operatoroperator
The second one to ask question is Randy Abrams from UBS.
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Randy AbramsanalystUBS
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Randy AbramsanalystUBS
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?
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Jeff SuirTSMC
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.
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Wendell HuangCFOTSMC
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.
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Jeff SuirTSMC
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?
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Randy AbramsanalystUBS
Yes, that's what I'm trying to ask.
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Mark LiuexecutiveTSMC
Can you repeat the question again?
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Jeff SuirTSMC
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?
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Mark LiuexecutiveTSMC
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.
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Randy AbramsanalystUBS
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.
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Jeff SuirTSMC
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?
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Mark LiuexecutiveTSMC
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.
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Q&A 5/8
JS
Jeff SuirTSMC
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.
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LC
Laura ChenanalystCitibank
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.
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Mark LiuexecutiveTSMC
We speak for TSMC, okay? It could be industry issues.
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Laura ChenanalystCitibank
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Laura ChenanalystCitibank
For CoWoS, you will be doubling and what's the idea about the next year? Do you have any preliminary thought?
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C. C. WeiCEOTSMC
I will talk to you next year.
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Q&A 6/8
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Jeff SuirTSMC
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.
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Brad LinanalystBank of America Merrill Lynch
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Brad LinanalystBank of America Merrill Lynch
Got it. Thank you, very much.
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Jeff SuirTSMC
Your second question?
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Brad LinanalystBank of America Merrill Lynch
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?
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Jeff SuirTSMC
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?
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C. C. WeiCEOTSMC
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.
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Brad LinanalystBank of America Merrill Lynch
Got it. That's the last one, but not the least, not the question.
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Jeff SuirTSMC
That's 2 questions.
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Brad LinanalystBank of America Merrill Lynch
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.
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Jeff SuirTSMC
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?
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Q&A 7/8
OP
Operatoroperator
Next from the call is Krish Sankar from TD Cowen.
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Krish SankaranalystTD Cowen
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.
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Jeff SuirTSMC
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?
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Krish SankaranalystTD Cowen
That's right, yes.
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Wendell HuangCFOTSMC
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.
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Jeff SuirTSMC
Sorry, Krish, why don't you go ahead?
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Krish SankaranalystTD Cowen
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%?
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Jeff SuirTSMC
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?
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Wendell HuangCFOTSMC
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.
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Krish SankaranalystTD Cowen
Thank you very much. Thank you, C. C. Thank you, Wendell.
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Q&A 8/8
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Jeff SuirTSMC
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.
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Nicholas BarrettanalystMacquarie
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.?
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Jeff SuirTSMC
Sorry. Your question is, will customers in Arizona only be U.S. customers?
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Nicholas BarrettanalystMacquarie
Is it possible that some U.S. customers only want U.S. made wafers?
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C. C. WeiCEOTSMC
Why do we answer that question? Arizona fab's for everybody. But majority is a U.S. customer, you are right.
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Closing Remarks
JS
Jeff SuirTSMC
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.
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