Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) Q3 2019 Earnings Conference Call - Final Transcript

[Foreign Speech] Welcome to TSMC's Third Quarter 2019 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. If you are joining us through the conference call, your dial-in lines are in listen-only mode.

As this conference is being 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 Vice President and Chief Financial Officer, Mr. Wendell Huang will summarize our operations in the third quarter 2019, followed by the guidance for the fourth quarter. Afterwards, Mr. Huang and TSMC CEO, Dr. C.C. Wei, will jointly provide company's key messages. Then we will open both the floor and the line for the Q&A.

For those participants on the call, if you 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 earnings conference presentation.

As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause the actual results to differ from -- materially from those contained in the forward-looking statements. So please refer to the safe harbor notice that appears on our press release.

And now I would like to turn the microphone to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and current quarter guidance.

Thank you, Elizabeth. Good afternoon, everyone and thank you for joining us today. My presentation will start with the financial highlights for the third quarter, followed by the guidance for the current quarter. Third quarter revenue increased 21.6% quarter-over-quarter to NT293 billion, driven by new product launches, both in premium smartphone and high-performance computing applications using TSMC's industry-leading 7-nanometer technology.

Gross margin increased by 4.6 percentage point sequentially to 47.6% mainly due to a solid improvement in capacity utilization. Total operating expenses accounted for 10.7% of net revenue, compared to 11.2% in the second quarter due to better operating leverage. Operating margin increased by 5.1 percentage points sequentially to 36.8%. Overall, our third quarter EPS was NT3.9 and ROE was 25.7%.

Now let's take a look at revenue by technology. 7-nanometer technology saw very strong demand and accounted for 27% of wafer revenue in the third quarter. 10-nanometer was 2% and 16-nanometer was 22%. Advanced technologies which are defined as 16-nanometer and below accounted for 51% of wafer revenue, up from 47% in the second quarter.

Now let's take a look at revenue contribution by platform. All four of our growth platforms saw demand increases in the third quarter. Smartphone increased 33% quarter-over-quarter to account for 49% of our third quarter revenue. HPC increased 10% to account for 29%. IoT increased 35% to account for 9% and automotive increased 20% to account for 4%.

Moving on to the balance sheet. We ended the third