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

Jul 19, 2018 • 02:00 am ET

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

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Presentation
Executive
Lora Ho

the second quarter, while the combined revenue from 16 and 20 nanometer accounted for 25%, and 28-nanometer was 23%. Advanced technologies defined as 28-nanometer and more, accounted for 61% of total wafer revenue.

Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD749 billion, an increase of TWD65 billion from the first quarter. On the liability side, current liabilities increased by TWD121 billion as we accrued about TWD208 billion for cash dividends, which will be paid out today. On financial ratios, accounts receivable turnover days decreased 4 days to 38 days. Days of inventory increased 11 days to 74 days, primarily due to the ramp-up of 7-nanometer, which has a longer cycle time and a slightly increase in raw wafers.

Now let me make a few comments on cash flow and CapEx. During the second quarter, we generated about TWD130 billion cash from operations and spent TWD60 billion in capital expenditures. As a result, we generated free cash flow of TWD70 billion. Overall, cash balance increased by TWD54 billion to TWD632 billion at the end of the second quarter. In US dollar terms, the capital expenditure spent in the first half of the 2018 totaled $4.5 billion.

Now I have finished my financial summary of the second quarter. Now let me provide you the third quarter guidance. Based on the current business outlook, we expect third quarter revenue to be between $8.45 billion and $8.55 billion, which is an 8.2% sequential increase at the midpoint. Based on exchange rate assumption of $1 to TWD30.50, our third quarter gross margin is expected to be between 48% and 50%. And our third quarter operating margin is expected to be between 36.5% and 38.5%. This concludes my financial summary.

Now let me make remarks on capital expenditure and profitability. I'll first talk about the capital expenditure. In our last Investor Conference in April, we stated our 2018 CapEx budget to be between $11.5 billion to $12 billion. However, we now plan to trim our CapEx budget by about $1.5 billion and expect our 2018 CapEx to be between $10 billion and $10.5 billion. The reduction of 2018 CapEx come from the following three factors. The first one, about $700 million came from delay of payment to 2019 due to leading edge tools relocation schedule adjustment. However, the planned capacity remained unchanged.

Second, about $600 million comes from efficiency gains that allow us to spend less on tools. Third, about $200 million comes from the US dollar appreciation against euro and Japanese yen. My second remark is regarding profitability. Now I will talk about third quarter 2018 gross margin and the overall outlook of our profitability. Our third quarter gross margin is expected to improve from second quarter by more than 1 percentage point. The increase mainly comes from better utilization rate, more favorable foreign exchange rate and improved profitability of our back-end business, offset however, by the unfavorable technology mix, which include the ramp of