Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) Q2 2018 Earnings Conference Call - Final Transcript

(foreign language) Welcome to TSMC's Second Quarter 2018 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Senior Director of Corporate Communications and your host for today. Today's event is webcast live through TSMC's website at www.tsmc.com. (Operator Instructions) As this conference is viewed by investors around the world, we will conduct this event in English only.

The format for today's event will be as follows: first, TSMC's SVP and CFO, Ms. Lora Ho, will summarize our operations in the second quarter 2018, followed by our guidance for the third quarter. Afterwards, Ms. Ho 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. For those participants on the call, if you do not yet have a copy of today's press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation.

(Forward-Looking Cautionary Statements) And now, I would like to turn the microphone to TSMC's CFO, Ms. Lora Ho, for the summary of operations and current quarter guidance.

Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. I will first summarize our second quarter financial results and then provide the guidance for the third quarter. Our second quarter revenue in was $7.85 billion, a decrease of 7.2% sequentially, but an increase of 11.2% year-over-year. In NT dollars, revenue declined 6% sequentially mainly due to the impact from mobile product seasonality.

Gross margin was 47.8% in the second quarter, a decrease of 2.5 percentage points versus first quarter. About 2 percentage points of the decrease was attributable to the absence of the favorable inventory valuation that I had mentioned in April, while the remainder was attributable to a lower level of capacity utilization, partially offset by cost improvements and a slightly more favorable foreign exchange rate.

Operating expenses ratio was 11.3% as our revenue decreased more than our expense decrease. Operating margin decreased 2.8 percentage points Q-over-Q to reach 36.2% in the second quarter. As I said during the last quarterly conference, the corporate tax rate was increased to 17.5% in the second quarter as we accrued the 10% tax on undistributed retained earnings. The tax rate will fall back to 10% to 11% level in the second half, and the full-year tax rate will be about 12%. Overall, our second quarter EPS was $2.79 and ROE was 18.7%.

Now let's take a look at wafer revenue contribution by application. During the second quarter, communication and industrial standard decreased 14% and 1%, respectively, while computer and consumer increased by 34% and 23%, respectively. Now let's take a look at revenue by technology. We begin volume production of 7-nanometer process technology in the second quarter. The revenue contribution was less than 1% in second quarter, and it will ramp to above 10% in the third quarter. 10-nanometer contributed 13% of total wafer revenue during