Taiwan Semiconductor Manufacturing ADR Earnings Call Nuggets: LED and Solar Strategies and CapEx Spending

Taiwan Semiconductor Manufacturing ADR (NYSE:TSM) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

LED and Solar Strategies

Michael Chou – Deutsche Bank: Could you give some date for your LED and solar business?

Dr. Morris Chang – Chairman and CEO: LED – on both LED and solar, our strategy is first to achieve a technological distinction, either better performance than current competitors or better cost than current competitors. Anyway, a technological distinction before we start large-scale production, before we put a lot of capital money into et cetera. That’s the philosophy. That is the strategy, philosophy for both solar and LED. At this point, I think we are perhaps a little further ahead in LED than in solar. I think the environment is a bit more friendly to the LED also. So in LED, we are forging our way ahead, and in fact, in the fourth quarter, last quarter we already had some commercial revenue. By commercial revenue I mean more than samples, but really real product for real money. So we already had some revenue and we expect the revenue to increase, put it dramatically this year. I don’t know whether it’s going to be (pretty) forward or not, but it will increase pretty dramatically this year. Now, on solar — as I said the environment is not as friendly because the world has at least silicon solar capacity glut and major countries putting up incentives for more production and however, we think that our thin-film, our CIGE technology is pretty promising one, and we are spending a lot of our R&D money to try to achieve a distinction with the CIGE technology, but we are not in the a commercial production, commercial revenue stage yet.

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Michael Chou – Deutsche Bank: Follow-up question is, would your LED be based on silicon substrate or traditional software substrate?

Dr. Morris Chang – Chairman and CEO: I guess, I think we said that earlier.

Elizabeth Sun – Director, TSMC Corporate Communication Division: We actually have both. We have both.

Dr. Morris Chang – Chairman and CEO: You answer the question Liz.

Elizabeth Sun – Director, TSMC Corporate Communication Division: Yes, I think we have both.

Michael Chou – Deutsche Bank: Second question is…

Dr. Morris Chang – Chairman and CEO: Well, I’m not sure the answer is right, but…

Elizabeth Sun – Director, TSMC Corporate Communication Division: I will verify this and let you know.

Michael Chou – Deutsche Bank: My second question is, what is your total capacity increase in 2013 and would you increase some capacity for 20-nanometer as well?

Lora Ho – SVP, CFO and Spokesperson: With the NT$9 billion CapEx, we expect to increase the total capacity this year versus last year about 10%. We are putting money on 20-nanometer. Yeah, we have (some more pile) around for 20-nanometer.

Dr. Morris Chang – Chairman and CEO: (Indiscernible) I said, we are calling – we are planning our capacity accordingly. That means we are spending money on 20-nanometer. We will be spending money on 20-nanometer capacity.

CapEx Spending

Roland Shu – Citigroup: Chairman and Lora, my first question is to Lora, under your NT$9 billion CapEx spending this year, so how is the depreciation increase this year?

Lora Ho – SVP, CFO and Spokesperson: With the NT$9 billion which is very much frontend loaded, about two-third frontend loaded in first half and one-third in second half. We expect depreciation will go up around 23%, 24% year-over-year. This was similar to this year, this year depreciation went up by 22%.

Roland Shu – Citigroup: So this is a bigger a little bit bigger than 20% you’ve guided us last quarter, so what is the reason?

Lora Ho – SVP, CFO and Spokesperson: As I just said, it will be frontend loaded so depreciation will happen earlier for the whole year.

Roland Shu – Citigroup: So how about first quarter depreciation?

Lora Ho – SVP, CFO and Spokesperson: First quarter depreciation will be only slightly higher than fourth quarter, but starting from second quarter you will increase faster.

Roland Shu – Citigroup: I think my follow-up question for this one is under IFRS actually the depreciation years actually can be revisit every year by the Company. So are you considering to change your depreciation year on your 28-nanometer, 20-nanometer or even 16-nanometer investment, since there most of these, investment on this (indiscernible) equipment for this metal interconnect actually can be shared, so that means the investment on the (indiscernible) definitely will be longer than previously — are you considering to revisit the depreciation years for the investment on this node?

Lora Ho – SVP, CFO and Spokesperson: Actually our economic life of our technology has always been longer in the depreciation year which we used five years, we have no plan to make it longer, but for certain detour actually the economic life might be lower than five year, for those part we may consider to use lower depreciation years.

Dr. Morris Chang – Chairman and CEO: That’s the other way. I think he is suggesting that since the larger equipment can be used for 20-nanometer and 16 and so on we can make the life longer. Thank you for the thought, we will think about it.

Roland Shu – Citigroup: My second question actually is to Chairman. Chairman is commenting this year TSMC’s growth will be much greater than 7% of the foundry, so can you comment about what the growth driver to drive such great growth and also do you see any momentum change for the (IPM) outsourcing in this year?

Dr. Morris Chang – Chairman and CEO: First of all let me say that I am not trying to be coy when I say that our growth will be much higher than 7% without specifying a number, I’m not trying to a coy. It’s just that if I say – if I predict more specifically, I think that there will get a call from the Taiwan SEC that will want it. So that’s the reason. Now, you asked about the driver. The driver is the 28-nanometer and you will just say — a quick back of the envelope calculation will show you that the growth of 28-nanometer this year will actually be greater than the total growth of the Company. If the total growth of the Company – even if the total growth of the Company is much higher than 7%. Wait, I was talking about what – this year’s production of 28 – triple, yes. So that growth is and I think your question was originally on what customers and I’m not going to comment on customers, but I will say that the driver is 28-nanometer technology.

Roland Shu – Citigroup: So how about the IDM company’s contribution this year. IDM especially for Japanese IDM Company?

Dr. Morris Chang – Chairman and CEO: You know the answer or should I answer it?

Elizabeth Sun – Director, TSMC Corporate Communication Division: I also know the answer.

Dr. Morris Chang – Chairman and CEO: I think yeah, I do expect the IDMs in Japan to contribute more, but compared to the contribution that the 28-nanometer technology will make, the Japanese IDMs increase outsourcing to us, it will be relatively small.

Elizabeth Sun – Director, TSMC Corporate Communication Division: I think somehow at this time, there are quite a few analysts who use to attend our conference in person here are actually overseas this time and they are on the call. So I think we will now take our next question from the call. Operator, please proceed with the first caller.