Elizabeth Sun: 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 dialing 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 Senior 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's CEO, Dr. C.C.

Wei, will jointly provide the 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'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 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.

Wendell Huang: 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 NT$293 million driven by new product launches both in premium smartphones 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 point sequentially to 36.8%.

Overall, our third quarter EPS was NT$3.9 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 quarter with cash and marketable securities of NT$585 billion, a decrease of NT$180 billion from the second quarter, mainly as we distributed NT$207 billion of cash dividend for 2018. On the liability side, current liabilities decreased by NT$127 billion quarter-over-quarter as we distributed 2018 cash dividend and accrued another NT$65 billion or NT$2.5 per share for the second quarter 2019 cash dividend.

And that will be paid in January of next year.On financial ratios, accounts receivables turnover days decreased one day to 41 days. Days of inventory decreased 11 days to 65 days, reflecting higher wafer shipments during the quarter.Now let me take -- make a few comments on cash flow and CapEx. During the third quarter, we generated about NT$142 billion of cash from operations, spent NT$98 billion in capital expenditures and distributed NT$207 billion of cash dividend. As a result, our overall cash balance decreased by NT$197 billion to NT$452 billion at the end of the quarter. In U.S dollar terms, our third quarter capital expenditures was $3.14 billion.I have finished my financial summary.

Now let's turn to fourth quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between US$10.2 billion and US$10.3 billion, which is a 9% sequential increase at the midpoint. Based on the exchange rate assumption of US$1 to NT$30.6, gross margin is expected to be between 48% and 50%.Operating margin is expected to be between 37% and 39%.This concludes my financial presentation. Let me follow by making a few comments about 2019 capital expenditures and TSMC's long-term financial objectives.I will first talk about our capital budget for this year. In TSMC, we build capacity according to our customers demand.

To forecast such demand, we take into consideration not only from each individual customer's indication, but also our own forecast based on macro as well as market segment outlook. Given the stronger outlook for 5G deployment next year, the demand for our 7 nanometer and 5 nanometer has increased significantly in the last few months. We have therefore decided to raise our full-year 2019 CapEx by US$4 billion to meet this increased demand.We now expect our 2019 CapEx to be between US$14 billion and US$15 billion. About US$1.5 billion of the US$4 billion CapEx increase is for 7 nanometer capacity and US$2.5 billion is for 5 nanometer capacity. Although we're not able to give you our formal guidance for our next year's CapEx until next January, we currently plan next year's CapEx to be somewhat similar to our revised 2019 CapEx.Now let me state our long-term financial objectives.

As the company's new CFO, I'm happy to tell you that TSMC's long-term financial objectives remain the same. Our goal is to achieve revenue and net income CAGR in the next few years to be between 5% and 10% in U.S dollar terms. Gross margin to be about 50%, operating margin to be 39% and ROE to be above 20%.Regarding our cash dividend policy, we reiterate that we will distribute about 70% of free cash flow as cash dividend. More importantly, TSMC is committed to sustainable cash dividends on both an annual and quarterly basis.Now I will turn the microphone to C.C. Dr.

C. C. Wei: Thank you, Wendell. Good afternoon ladies and gentlemen. Let me start with our near-term demand in inventory.

We conclude our third quarter just reported by CFO, with revenue of NT$293 billion or US$9.4 billion. That is slightly above our guidance due to better demand from smartphone related applications than our forecast three months ago.Moving into fourth quarter this year, we expect demand from both smartphone and high-performance computing related applications will continue to increase. Thanks to our industry-leading 7 nanometer technology that powers these applications. On the inventory front, our fabless customers' overall inventory is being gradually digested throughout the third quarter. We now expect it to reduce to a few days above seasonal level exiting third quarter then approach seasonal level by the end of this year.For the full-year of 2019, we forecast both the overall semiconductor market, excluding memory and the foundry segment to decline by a low single-digit from the year 2018 level.

However, we continue to expect TSMC to do better and achieve a slight annual growth.Now let me talk about the progress and development of 5G. 5G will drive AI applications and bring many benefits to the market. Performance will be greatly improved with data transmission speed up to 10x faster as compared to 4G network. In addition, 5G latency will have about a 19% reduction as compared to 4G allowing for real-time response and control. The benefit from 5G will unlock new usage cases, such as AR, VR, real-time translation and high-quality gaming to name a few.We believe smartphone OEMs will come out with many more innovative application to take advantage of the 5G infrastructure.

Since the middle of this year, we’ve been seeing an acceleration in the worldwide 5G development. This will speed up the introduction and deployment of 5G network in smartphone in several major market around the world, which leads to the increase of our CapEx for this year.We expect the faster ramp of 5G smartphones as compared to 4G with the penetration rate of 5G smartphones to reach mid-teens percentage of the total smartphone market in 2020. Meanwhile, we expect the silicon content of 5G smartphones will be substantially higher than that of 4G smartphones. That is due to increase in functionalities and additional ICs for more camera, RF circuit, modem, power management IC etcetera. Power efficient, speed and ability to incorporate additional functionality are critically important to 5G smartphones, which require TSMC's leading edge technology and will continue to feel our growth for the next several years.Now I will talk about our N5 and N3 status.

Our N5 technology has already entered risk production with good yield. N5 will adapt EUV extensively and is well on track for volume production in the first half of next year. With 80% logic density gain and about a 20% speed gain compared with the 7 nanometer, our N5 technology is a true full node stride from our N7. We believe it will be the foundry industry's most advanced solution with the best density, performance, and power until our 3 nanometer arrives.With N5, we are further expanding our customer product portfolio and increasing our addressable market, the initial ramp will be driven by both mobile and HPC applications. We are confident that 5 nanometer will have a strong ramp and be a large and long lasting node for TSMC.Now I will talk about N3.

While working with customers on N3 and the technology development progress is going well. Our N3 will be another full node from our N5 with PPA gain similar to the gain from N7 to N5. We expect our 3 nanometer technology will be the most advanced foundry technology in both PPA and the transistor technology when it is introduced.Now I will talk about the ramp up of N7, N7+ and the status of N6. Today we are completing our second year ramp of N7. We continue to see very strong demand across a wide spectrum of products for mobile, HPC and IoT applications.

Our N7 process is the industry's first commercially available EUV lithography technology. N7+ provide 15% to 20% higher density with improved power consumption when compared to N7.N is already in high volume production with yield similar to N7. We expect the strong demand for N7+ continue into next year and are increasing CapEx to meet this demand for multiple customers.Now N6. Our N6 provide a clear migration path for the second wave N7 product as its design rules are 100% compatible with N7, while providing 18% logic density gain with performance to cost advantage. N6 use one more EUV layer than N7+.

N6 risk production is scheduled to begin in first quarter next year with volume production starting before the end of 2020.We reaffirm N7 nanometer will contribute more than 25% of our wafer revenue in 2019 and we expect even higher percentage in 2020 due to worldwide development of 5G accelerated demand from HPC, mobile and other applications continue to grow.Finally, I will talk about TSMC's advanced packaging business. Our advanced packaging solution enable system integration with wafer level process, allowing seamless integration of front end wafer process and back-end chip packaging. The solution consist of CoWoS, InFO, System on Integrated Chips or SoIC and Wafer-on-Wafer or WoW. We are seeing strong momentum for CoWoS and InFO for HPC applications as we continue to enlarge the integrated chip area to about -- to above [indiscernible] size in one module.We are also working with a few leading customer on SoIC which is an industry leading 3D IC packaging solution. SoIC enables 3D integration of multiple chips in close proximity to deliver the best possible performance, power and form factor.

We target to start production in 2021 time frame with early adoption by HPC applications. As the industry continued to see innovation to enhance system level performance, TSMC is differentiating advanced packaging solution will allow us to grow the business at the pace faster than corporate in the next few years.And thank you for your attention.

Elizabeth Sun: This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit your questions to two at a time to allow all participants an opportunity to ask their questions. Questions will be taken both from the floor and from the call.

Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question. [Operator Instructions] Now we will begin.First, we will have questions coming from Credit Suisse's Randy Abrams.

Randy Abrams: Thank you. Good results and outlook. Wanted to ask the first question given the high CapEx for this year and next year, if you could talk about the capital requirements for 5 nanometer in EUV.

Maybe how the equation with EUV coming in. How does that affect the capital intensity or say the CapEx per 1,000 wafers? And how do you see this node in terms of pricing and maintaining the same level of profitability on prior nodes?

Wendell Huang: Okay. So, Randy, you’re asking about the -- how much EUV accounts for the capital expenditures?

Randy Abrams: [Indiscernible] or how EUV changes your capital intensity or CapEx per K if you’re getting some benefits that is actually lowering that. But given the CapEx, is it still the same you’re seeing the higher CapEx per K? And then how does that translate into profitability? How you expect [indiscernible] to compare to, say, some of the prior nodes?

Wendell Huang: I cannot talk too much about details, but definitely CapEx for K for 5 is certainly higher than previous nodes. However, if we combined everything together, as we stated at the beginning, we are still seeing our profit -- structure profitability remains the same.

Randy Abrams: Okay. I will ask one follow-up to that then a second question. It's this year, like second half strong demand leading edge type the gross margin guidance for fourth quarter is still -- it's a good margin, its 48 to 50 and I think the targets may hit 50. So maybe if there's still a little bit of drag on the margin and with next year bringing in a new node [indiscernible], if you think you can get to that 50 for next year? I’ve just a follow-up.

Wendell Huang: Okay.

For the fourth quarter, it's just like we stated all along for our structure profitability. When we reach 90% of utilization we target to reach 50% of gross margins. For next year, it's still early to say. The structure profitability or margins may be affected by the ramp in a 5 nanometer as at the beginning of ramping of every nano -- technology nodes, somehow will be affected. However, if the utilization is good, then we’re still expecting to see the structure profitability continues.

Randy Abrams: Okay. The second question I wanted to ask, because you had a strong third quarter recovery, guiding another good fourth quarter. As you look to maybe an early look at next year, how should we think about seasonality? There's some concerns before 5G ramps, we have a correction in 4G and then we have -- if the tariffs hit, we might have had some prebuild. So how do you see kind of early year risk of, say, a correction? And can you pull in some demand, say, if capacity is tight to maybe mitigate the magnitude of correction early in the year?

Wendell Huang: You’re talking about the seasonality of the smartphone, that we observe almost every year. So I don't expect next year to be dramatically different.

However, we can see some of the 5G smartphones, the growth momentum is higher than we expected. So I would expect next year's seasonality is not so strong as we observe for this year. But it is too early to say, of course, because of the market is very dynamic.

Randy Abrams: Thank you.

Elizabeth Sun: Next question will be coming from JP Morgan's Gokul Hariharan.

Gokul Hariharan: Thanks for taking my question. So first of all, if you look at the history whenever TSMC has had step up in CapEx, that is typically accompanied by a step up in growth as well. So just wanted to kind of narrow down a little bit on the 5% to 10% growth, which is still kind of -- the kind of growth that we were expecting and we were spending 10 billion to 11 billion. So could you give a little bit more details or maybe narrow down that forecast a little bit more for us, because if we say a 14 billion to 15 billion range of CapEx that’s closer to the high 30s or 40% capital intensity higher than our previous range. Dr.

C. C. Wei: Gokul, let me answer the question carefully. Let's say that TSMC always build capacity, working closely with customer and to meet their demand. That’s our number one, okay? We discuss with the customer on their demand, we make our judgment also.

Now we are increasing the CapEx quite a lot, no doubt about it. But then that’s due to some of the reason I can foresee for the future for us, the 5G's ramp up is much faster than 4G as we expected. Second, TSMC actually is expanding our customer portfolio and in the same times, we are also expanding our product portfolio. And so put all the factor together, we have a good reason that we increase our CapEx this year and probably next year.

Gokul Hariharan: Okay.

So that basically suggest that 5% to 10% is not the growth for the next couple of years, but -- maybe just given the higher growth in 5G and accelerated build out, could you talk a little bit about going into next year, do you expect 5G in smartphone to be the main growth driver, or do you feel that HPC momentum is going to be even faster than smartphone, given that some of your customers starting to take a lot of market share?
Dr. C. C. Wei: To answer your question, actually it's both. We expect smartphone to grow faster than -- I mean, that’s not in terms of unit, but in terms of silicon content.

And HPC also grow as I said, we are expanding our product portfolio and also our customer portfolio. So the addressable market is increased. That’s all.

Gokul Hariharan: Okay. So just a follow-up question.

I think at the beginning of the year we had a more conservative view on 5 nanometer build out. Obviously, that view has changed. So just to calibrate, should we expect now that 5 nanometer revenues next year are likely to be higher than, let's say, 7 nanometer last year, first year of ramp up 7 nanometer?
Dr. C. C.

Wei: I don't want to say exactly what is the percentage, but let me say that now we have more optimistic than six months ago. Six months ago, I believe what I said is that we will be very careful and a little bit conservative in building the 5 nanometers capacity. Now we changed to be more aggressive in the 5 nanometer capacity build out, because of we -- as I said, we work closer with customers in both -- all the application like a smartphone, HPC, now even IoT and automotive.

Gokul Hariharan: Okay. Thank you.

Elizabeth Sun: Next question will be coming from UBS's Bill Lu.

Bill Lu: Thank you. First of all, Mr. Huang, congrats on the new post and looking forward to working with you. Going back to CapEx, given the big increase, can you give us some guidance for modeling depreciation?

Wendell Huang: Depreciation for this year will be flattish compared with last year, because a big chunk of the increase happens in the fourth quarter.

As to depreciation next year, based on what I just indicated about our capital expenditures for next year, it will be higher. However, the detailed number or more specifics we plan to discuss it in January next year.

Bill Lu: So if I look at when the new capacity is going to come online, is it mostly, say, Q2, Q3, is that the right way to think about it?
Dr. C. C.

Wei: Well, if you look at the tools lead time, your estimate is very good, Q2, Q3 time.

Bill Lu: Okay, great. Thank you. Dr. Wei, for 7 nanometers, obviously demand looks quite good.

Can you give us some guidance for 7 nano as a percentage of revenues by the end of next year?
Dr. C. C. Wei: Higher than this year.

Bill Lu: Okay.

Thank you.

Elizabeth Sun: Next question will be coming from Citigroup's Roland Shu)

Roland Shu: Good afternoon. First, congrats for the very good result in 3Q and I think first question is, you talked about next year for 5G smartphone will be the key growth driver. So -- and also you talked about not only because of unit growth, but also for the semiconductor content increase. So do you have the number for the [indiscernible] content per 5G smartphone compared to your 4G?
Dr.

C. C. Wei: Let the CFO to answer this.

Wendell Huang: The answer is we don’t have that number.

Roland Shu: But if you compare to the 4G, where does the increase come from? It's because from this bigger die size or because of a more semiconductor circle, or I think you probably have a assessment more or less, right?

Wendell Huang: We do have some assessment to be frank with you, because we know the die size, we know the number of the chips inside.

I give you some of the feed in. We are using the more advanced technology, so the die size increase and the leading-edge is not so much, but it did increase because of more functionality. You can expect that people put AI application inside or those kind of thing. More important, as the last time I believe I already mentioned that camera, for one example, now you can see more and more camera in smartphone, especially the high-end smartphone. And also the more resolution, nano one, silicon real estate 2 from 12, what is that, 20 megapixel to 40 megapixel.

So more camera, higher resolution, more pixel. And then also you need a lot of power management to control the power consumption because of 5G today consume a lot of power. So your power management IC has to be more advanced, so you put a more power management IC inside. Then you’re talking about the more channel in the communication, so the RF front end, the transceiver, everything, you are not only the die size will increase actually to adopt the more channel. So it's even moving to the higher leading-edge technology also.

Roland Shu: Thanks. So I guess for the high-end phone probably, the power content will increase more, right? So for your -- the total 5G smartphone you only focus to be about mid-teens of the total shipment. So do you have this 5G smartphone breakdown by high-end and low end?
Dr. C. C.

Wei: We will talk about in January.

Roland Shu: Okay. Thank you. My second question is, now we are ramping up N7+ fastly. So is N7+ gross margin going to be very different from N7 we are enjoying now?
Dr.

C. C. Wei: It's very close.

Roland Shu: Okay. Thank you.

And how about for N7+ is going to take 7 to 8 quarters to bring up the gross margin to corporate average?

Wendell Huang: Let me take that. We look at 7, 7 plus and 10 as a big note. So from that point of view, N7 nodes actually has reached corporate margins.

Roland Shu: Okay. Thank you.

I think just a follow-up for -- I know you don't comment on the ASP, but for the same amount of the wafer shipment on N7+, is it going to contribute more revenue upside to TSMC?
Dr. C. C. Wei: You just mentioned we don't …

Roland Shu: No, I talk about revenue. I don’t talk about ASP.

Dr. C. C. Wei: That’s the same thing.

Roland Shu: Okay.

Thank you.

Elizabeth Sun: Next question will be coming from CLSA's Sebastian Hou.

Sebastian Hou: Thank you. My first question is to, I want to ask about the CapEx intensity. So with the hike in this year CapEx, so apparently we can do the math that this CapEx, if the sales will go up to shoot over to 40% this year.

So how do you see this trend into 2020? And then is there any updated guidance on the CapEx intensity going forward versus prior guidance?

Wendell Huang: Okay. Yes. As you just mentioned, you can calculate the CapEx intensity this year will be over 40%. At the same time, as we indicated that next year's CapEx although preliminary is about the same level as this year and we also see strong demand for our business next year. Our CapEx intensity will be lower next year.

And what -- from what we can see at this moment, it will then gradually come down to probably between 30% or 35% level going -- after next year.

Sebastian Hou: So we're not seeing falling to 30% to 35% range in 2020 yet?

Wendell Huang: In a couple of years after 2020.

Sebastian Hou: Or could potentially next year? You just -- you don’t want to talk about that right now?

Wendell Huang: Right. The potential of capital intensity you mean?

Sebastian Hou: No, you meet 30s by 2020 or …

Wendell Huang: It's lower than 40%.

Sebastian Hou: Okay.

Thank you. Second question is on the gross profit margin. I recall that a couple of quarters or two quarters ago in the first half of this year when TSMC [indiscernible] table saying that we are past the bottom, we are seeing the strong rebound in the second half this year and also expect the gross margin will go back to 50% level second half. And indeed now we see the utilization rate coming back. Revenue coming back in second half as expected, but it looks like the gross margin is lagging a little bit compared to -- if you -- yes, compared to the revenue direction.

So can you explain was these factors that driving gross margin recovery behind the revenue recovery? Thanks.

Wendell Huang: Yes. I think you’re talking about the third quarter gross margins. Whenever there's a big jump up in utilization quarter-over-quarter, there will be a negative hit on gross margins. It's called the inventory evaluation.

I think, I believe we mentioned about this some time ago. So, yes, you can imagine the utilization in third quarter is much higher than that in the second quarter. And therefore there is a element of negative inventory valuation happen in the third quarter. The amount is slightly over 1 percentage point, okay? Now if utilization remains at similar level, that factor will not have happened.

Sebastian Hou: Okay.

But when we are looking at the fourth quarter gross margin guidance, I know the high-end will reach the 50%, but it still looks like the -- it's ranged between 48% to 50%. So I mean there's still a chance for to come in to go back to 50%, but it looks like the midpoint doesn’t reach that yet. So I think not just about the 3Q, but also the fourth quarter.

Wendell Huang: Yes. As I mentioned earlier, I -- our structure profitability remains the same.

i.e. if we reach 90% of utilization we’re targeting 50% of gross margins.

Sebastian Hou: Okay. Thank you.

Elizabeth Sun: Next question will be coming from Morgan Stanley's Charlie Chan.

Charlie Chan: Thank you. Congratulations for very strong results. So, sorry to coming back to this question. So since you’re raising kind of a long-term CapEx outlook, including next year, why don’t you just revise up your revenue CAGR assumption? I think 5% to 10% remains to be too conservative. Can you comment on that for us?
Dr.

C. C. Wei: It's not about time to change that target. I would say still 5% to 10%, but it's in the upper side, …

Charlie Chan: Okay. Dr.

C. C. Wei: … I can say, all right. Thanks.

Charlie Chan: Yes.

And in other words you -- on this capital intensity question you said about the payback period, right? Because for me as you can add up why your structural profitability can remain the same. Whereas your capital intensity increase so much, right. So in other way, can you just comment about the payback period for your 7 nanometer and 5 nano investment? You said becoming longer going forward?

Wendell Huang: I remember this topic was discussed last time. And I think our answer was that we don't look at payback period. We do look at return on invested capital.

And from that part, we don't see that big a difference with the advanced technologies.

Charlie Chan: Okay. Thanks. And my next question is about the advanced packaging. I remember, previous quarters you commented at advanced packaging, should outgrow the front end business.

So first of all, is this remains the same trend and also how about the potential margin dilution from the packaging business?
Dr. C. C. Wei: The forecast on the advanced packaging business, the growth is -- the growth rate is still faster than silicon growth rate that Wafer's revenues of growth rate stays the same, okay? Still that statement still valid. The gross margin, that’s another consideration,The gross margin of the back end business actually is lower, today still lower than the wafer magic.

But we do get of course is a good business to go or not on two factors. One, we really want to support our customer to improve their system performance. So we have to do it because of TSMC is the only one company right now can support the customers advance packaging. Second actually is the CapEx intensity on the backend that's advanced packaging business is smaller. And so the basic turnover is better.

So put all in altogether, we still think it's a very good business to pursue.

Charlie Chan: Yes. And last one, this is quick one, maybe for CFO, because you revise up your CapEx, right. So what is the free cash flow trend coming quarters? I guess, we want to know potential -- the next potential quarterly dividend hike. What would be the timing?

Wendell Huang: Let me just answer it by saying that we will not lower our dividends quarter-on-quarter basis.

So investor will get at least the same amount, if not more compared to previous quarter or compared to previous year.

Charlie Chan: Okay. How about the base, I mean, the free cash flow projection? Do you have the number for coming quarters?

Wendell Huang: Yes. We do. But I don't think that really matters to your questions.

Charlie Chan: Okay. Thanks.

Elizabeth Sun: If I may, I would like to remind, Charlie, that today all our shareholders are getting the $2 per share dividends today going into their bank account. And we have already announced that the next quarter quarterly dividend is going to be $2.50. So it has already gone up.Next question will be coming from Goldman Sachs's Bruce Lu.

Bruce Lu: Can I ask what is your 5G penetration forecast about six months ago? 5G smartphone penetration forecast six months ago. Dr. C. C. Wei: Six months ago, we don't see the 5G smartphone will be any significant amount for this year.

And so its …

Bruce Lu: No, I mean, six months ago what's your forecast for 5G smartphone shipment in 2020?
Dr. C. C. Wei: Oh, single-digit.

Bruce Lu: So basically you increased from single-digit to mid-teens …
Dr.

C. C. Wei: Yes.

Bruce Lu: … for the past six months?
Dr. C.

C. Wei: Yes.

Bruce Lu: Can you tell us what's the rationale behind your changes, because for the past six months we still have a lot of concern for the 5G smartphone such as NSA, SA, that the specs not finalized, the cost structure is getting a lot higher, global telcos they are not as aggressive. So can you -- because from single-digit to mid-teens, which is the big changes?
Dr. C.

C. Wei: It's a big change. And all I can say is with this NSA, SA or those kind of 5G base station installation, we work with our customer actually, we listen to them and they also have their own customer to consider. And so some of the areas in the world, they accelerated 5G's deployment. And that's why it result as compared with the six months ago.

We did not see this momentum again in the six months. The momentum is going bigger and bigger. And so that's why we -- I cannot give you the specific number of which country or which region, but we did see the momentum continue to grow. And now our own estimate had almost doubled.

Bruce Lu: But the concern still -- it's still there from a lot of investor such as the NSA or SA, because you still cannot see the clear indication from at the end of day from the telco.

So that's why we are a bit surprised to see these kind of meaningful changes, right?
Dr. C. C. Wei: Yes. I have no way to comment on the carrier how they think about this kind of 5G deployment.

But they are moving ahead. And for the 5G applications, especially with some of the big countries, that’s what we see.

Bruce Lu: Okay. My next question is that we always rely on management to comment about the fabless inventories. I mean you always talk about that.

But moving forward, your top two customer, in my account for 30%, 40% of your business pretty soon. And they might account for 70%, 80% of your advanced geometry and they don't really report their inventory anyway. So how -- can you give us something -- some other indicator for us to judge the industry growth or just the inventory level for the industry?
Dr. C. C.

Wei: Judge for the industry level, we -- the fabless company is still one of the big factor that we consider. As for my customer, actually for TSMC the more importantly, we really walk with our customer closely. So I'm not going to give you the exact number of my big customers inventory, but we work with them. Believe me, we very closely work together so we understand their strategy and their inventory.

Bruce Lu: That’s why -- and that’s why I wanted you to give us some hint, right, we cannot just tell my investor that we have to trust TSMC, even though I say that all the time.

Dr. C. C. Wei: You can trust TSMC, no doubt about it.

Bruce Lu: Thank you.

Elizabeth Sun: All right. I think this is probably about the right time that we go to the lines for questions. I think there are quite a few analysts waiting on the line for questions. So operator, could you please go to the first person on the line. Thank you.

Operator: Yes. We have question from Brett Simpson from Arete Research. Please ask your question.

Brett Simpson: Yes. Thanks very much [indiscernible].

I have a question really on China. I guess in the last couple of years, we’ve seen the business doubled with Chinese customers. And I guess at the moment, it's pretty clear you're going through a very healthy inflection point in the Chinese customers at the moment. So can you talk about how you see this part of your business evolving over the next one or two years? And then, I guess from a planning perspective, are you concerned that the rise of your China business comes at the sacrifice of other customers, particularly U.S companies? Thanks so much. Dr.

C. C. Wei: Can you repeat the question?

Elizabeth Sun: Brett, your question is with respect to the business we derive from China as you’ve observed that our business has doubled in the last couple of years from China. And you like to see the outlook for our business in China in the next one to two years. And also the strong growth coming from China, whether it's coming at the expense of our other customers in other regions?
Dr.

C. C. Wei: Well, we did see the strong course from China because that's a very big market, especially in the semiconductor area. And we are happy to see that growth and TSMC is offering the most leading edge technology to support our customer in China. And so to be exact, we are going to grow with the China market.

At the expense of other customer, the answer is no, because we support all the customer with all our strength and our capacity.

Brett Simpson: Okay. And maybe just a follow-up on 5 nanometer specifically. I guess maybe you can talk about whether you think the ramp-up 5 nanometer will be similar to prior nodes in virtual terms of revenue, how should we think about the ramp up, particularly as you get through into the second half of 2020. And on the CapEx increase, I think you said in the past you want to -- you plan to grow -- you’ve been quite consistent.

You want to grow your top line 5% to 10%, but your capital intensity to support that growth would be around about 14, maybe even low 14s as a percent of sales. Now you’re stepping up your capital intensity significantly, but you’re not changing your growth outlook. Maybe perhaps you could explain the thinking there? Thank you.

Elizabeth Sun: So first part of the question is with respect to 5 nanometer ramp. Whether the ramp profile next year will be similar to our prior nodes ramp profile.

The second question is related to the substantial increase in the CapEx, because in the past TSMC has indeed said that we could have $10 billion to $12 billion CapEx to support a 5% to 10% CAGR. Now our CapEx is substantially higher than the $10 billion to $12 billion. And therefore does that mean that it's going to support a much higher CAGR on the revenue growth?
Dr. C. C.

Wei: Well, let me answer the first question, first the 5 nanometer ramp for next year. Certainly as compared with the six months ago, we are right now more aggressive and more optimistic about it. And hopefully because we spend big money, hopefully that it will ramp up much in terms of revenue, be much faster than 7 nanometer. In next January we’re going to talk about more. And so that also answers the second question that we spend -- we increased the CapEx quite a lot, of course from $10 billion to $11 billion to about $14 billion to $15 billion.

With that money we spend to buy the tools to prepared everything. We do expect that, of course, this will go beyond 5% to 10%. But right now we are not ready to change the long-term five years target yet. However, we are working on that.

Brett Simpson: Okay.

Thank you very much.

Elizabeth Sun: Operator, please go to the next caller on the line. Thank you.

Operator: Yes. Your next question comes from the line of Mehdi Hosseini from SIG.

Please ask your question.

Mehdi Hosseini: Yes. Thank you for the opportunity to ask question. A couple of follow-ups. When you make a reference to 5G, how should we think about opportunities from the networking, specifically base station? Thanks for the detailed color on the smartphone units.

You expect a mid-teen penetration, but how would you quantify opportunities from the networking, specifically base station? And I have a couple of follow-ups.

Elizabeth Sun: So maybe your question is that although we have talked about 5G smartphone units for next year, but you would like for our management to talk about the 5G base station business next year?

Mehdi Hosseini: Yes. Dr. C. C.

Wei: Actually the networking is a fundamental for the 5G's infrastructure. And because of its shorter wavelength, so that you can expect that the base station will be much more than 4G's base station under SA or even the NSA implement. So we expect networking process will be much higher. The opportunity will dramatically increase. Whether it is exactly for the number, we don't have a exact number for right now.

Mehdi Hosseini: Is networking included in the HPC category?
Dr. C. C. Wei: Yes.

Mehdi Hosseini: Okay.

So the reason I ask this question is, if your customers are building candidly a 5G smartphone, could opportunities in networking actually help offset any downside risk to excess inventory built on a smartphone?

Elizabeth Sun: I think, Mehdi, you’re asking whether or not the increasing demand in the networking side will offset the higher inventory, or the inventory correction on the smartphone side. Is that your question?

Mehdi Hosseini: Yes. Is this an inventory -- I’m trying to better understand how networking could offset any risk of inventory built?
Dr. C. C.

Wei: I did not catch what you say the relation between the networking or the base stations are set up with the 5G smartphones inventory.

Mehdi Hosseini: Let me clarify. I think one of the concern among investment community is, yes there is a very strong build plans for the 5G smartphone, but the risk is these phones are too expensive and perhaps there is a risk that your customers' build plans are too aggressive. In that context, could opportunities on the networking side be large enough for TSMC to help alleviate any downside risk on the phone or excess inventory on the phone side?
Dr. C.

C. Wei: Oh, I see. Okay. Let me repeat your question. You say that my customer are making the smartphone quite a large number if the base station or networking do not catch up, is that the smartphone going to be inventory? The answer is no, because of the 5G's application will be implemented.

And you bought a 5G smartphone, you still can use a 4G functionality by the way. So it won't be a kind of a inventory as you mentioned about it, provided if there is not enough 5G base station.

Elizabeth Sun: So, Mehdi, I think what C.C. is saying is that you don't have to worry too much about 5G smartphone inventory because there will be sufficient demand to take up those products.

Mehdi Hosseini: Yes.

Thank you. And then just real quick follow-up. In the past you have talked about advanced packaging accounting for high single-digit of overall revenue in 2019 and that mix would grow into the teens in the next decade. Are those targets remain intact?

Elizabeth Sun: Advanced packaging used to account for about high single-digit percent of TSMC's revenue. Mehdi's question is will that continue to increase to maybe high teens of TSMC's revenue?
Dr.

C. C. Wei: It will continue to increase, but it's not a high teens. It's still the high single-digit but the growth rate is higher than the silicon wafers growth rate.

Mehdi Hosseini: Okay.

Thank you. And is cryptocurrency stable? Should we be concerned and maybe some of these growth is driven by crypto, or do you see crypto as pretty stable and could even be a downside risk?
Dr. C. C. Wei: All right.

You're talking about cryptocurrency's mining. We did see the Bitcoin prices that increase starting from this year until now. However, let me state TSMC's policy and strategy. We will support cryptocurrency mining as a business with available capacity. That's all we say.

We're not going to be adding more CapEx for that.

Mehdi Hosseini: Great. Thanks so much for answering the questions.

Elizabeth Sun: Thank you. Operator, could you please go to the next caller on the line? Thank you.

Operator: Even next question comes from the line of [indiscernible]. Please ask your question.

Unidentified Analyst: Yes. Hi. Thank you for the opportunity.

I just wanted to understand given the recent developments that are happening in Hong Kong, and the elections that we're heading in Taiwan next financial -- next calendar year. Do you see that you might have to revisit the CapEx plan given the trade war and the intensity of the trade wars that are increasing?
Dr. C. C. Wei: You think about the trade war between the two big countries, is that going to affect TSMC's CapEx plan? We …

Unidentified Analyst: Yes, in terms of …
Dr.

C. C. Wei: In terms of Hong Kong situation, what do you think about it? Let me say again, TSMC build capacity working closely with the customer to meet customers' demand and our own judgment. We did not put that kind of trade tension in the world into consideration. Although we think that any trade tension or trade over between any countries will have a negative impact to the semiconductor industry.

Did I answer your question?

Unidentified Analyst: Right. But, I mean there's no -- so hypothetically, if you were to believe that the election that comes in -- presidential election in January, if things were to go towards the party that's in more favor of a one-state kind of thing, would that have an incremental impact in terms of how the trade war is seen from TSMC's perspective?
Dr. C. C. Wei: No, we don't think so.

Even we have general election in the next January, that won't affect TSMC's strategy, because of we can -- we do the business according to the demand, according to the market situation and have very little impacted from the politics in Taiwan. Did I answer the question?

Unidentified Analyst: Okay. Good to hear that. And finally, yes, to a large extent, yes, and that was helpful. And one more thing in terms of the 5G CapEx that we have been talking about, so there has been -- on the high-speed HPC segment, there have been delays in terms of the [indiscernible] next node coming through from your large customers.

When you see that your 5G rollout is pretty strong and also the HPC side, things will pick up strongly, is there any indication from your customers that the long-term on the next node is going to be pretty soon? What gives us visibility here?
Dr. C. C. Wei: Can you repeat the question?

Elizabeth Sun: Let me try to see if I understand your question. You're asking us about the visibility of our customers demand for our next node technology.

How much visibility we have with respect to seeing the demand from the for the next node?

Unidentified Analyst: Right. Dr. C. C. Wei: Oh, next node you’re mentioning about the 5 nanometer and the 3 nanometer?

Unidentified Analyst: 5 nanometer for now.

Dr. C. C. Wei: Let's say 5 nanometer. Judging from we increase the CapEx for the 5 nanometer, you know our position and you know our forecasts on the 5 nanometer business.

So it will be good and I cannot tell you how many percentage more, but I think the 5 nanometer, TSMC is going do a very good job and going to have a high market share.

Unidentified Analyst: Great. Thanks a lot. Dr. C.

C. Wei: Thank you.

Elizabeth Sun: Thank you. Operator, let's move to the next caller on the line.

Operator: Your next question comes from the line of [indiscernible] from S&P Global.

Please ask your question.

Unidentified Analyst: Hi. Thank you for taking my question. I just have a brief question for -- on the China issue. I was wondering is there any change in numbers of your Chinese clients in recent years, especially in this year.

And is it possible that we can get specific number of the Chinese customers or the percentage of the Chinese customers as of the total clients? Thank you. Dr. C. C. Wei: The number of customers in China actually is more than 100.

So it changes -- some of them changes all the time. Of course, there is some bigger ones and smaller ones. I am not sure if this is your question.

Unidentified Analyst: Yes, sure. Just is there any change of this number in this year?
Dr.

C. C. Wei: The number of customers generally increases.

Unidentified Analyst: It increases. And maybe know the portion of the Chinese customers in terms of your overall customers or the percentage?
Dr.

C. C. Wei: Oh, you mean the revenue number of customers?

Elizabeth Sun: The number of customers.

Unidentified Analyst: The number of customers. Dr.

C. C. Wei: We have over 400 active customers globally. And if you look at the China, if it's somewhere over 100, that gives you an idea. Does that answer your question?

Unidentified Analyst: Yes, yes.

Great. Thanks. Very helpful. Yes, that’s all my question. Thanks.

Elizabeth Sun: Okay. Thank you. Do we have any questions on the floor? Okay, let me come back to the floor. First of all, we will have the follow-up question from Citigroup's Roland Shu.

Roland Shu: Thank you.

I would like to follow-up on the inventory question. However, [indiscernible] for your inventory. I look at in 3Q, your inventory level actually have been decreased to 97 billion. Even though we had a very strong revenue in 3Q and a very upbeat guidance in 4Q. So the wafer in process should increase, however overall inventory decreased a lot.

So does that mean that our finished goods and also even for our materials like wafer inventory had decreased a lot. Dr. C. C. Wei: And you're right.

Actually let me -- suppose that the process actually enlarged, so the inventory should increase, but it decreased is because of some of the wafer we work with our customer at the beginning of this year. We produced in early-stage to make sure that we don't have a wafer coated at the end of this year and then we ship it out. And so the inventory actually decreased quite a lot because of that.

Roland Shu: Being the finished goods?
Dr. C.

C. Wei: Yes, finished goods.

Roland Shu: Okay. Now how about for the wafers? I mean for the raw wafer inventory?
Dr. C.

C. Wei: The raw wafer almost stayed the same, because we prepare -- TSMC's business increasing, so actually the raw wafer we require a lot of months in preparation for the good business. So it stays the same in terms of percentage -- in terms of days, I’m sorry.

Roland Shu: Okay. And for the very upbeat outlook next year for the 7 nanometer and 5 nanometer.

Are we securing all of these wafers for our production next year?
Dr. C. C. Wei: You bet.

Roland Shu: Okay.

Thank you. Okay. And the second question is you announced that your EUV tools have been reached potentially maturity. But how about for the infrastructure? It means that for other component like photoresist, pellicle, photomask or even for this inspection to chemical and materials. So yes, we have -- going to have very fast ramp on 5 nanometer because of very strong demand from customer.

But are there any gating items for this EUV infrastructure would be potentially a risk?
Dr. C. C. Wei: So far we did not see any gating item or the infrastructure, actually TSMC, we are prepared. We have -- we produced our own pellicle.

We have a large number of masking capacity and everything. So even photoresist those kind of thing we have being taking into account. So we are ready for the -- actually we are in a high-volume production for the EUV lithography technology. For next year, you have big even higher volume and I can assure you that we are all prepared.

Elizabeth Sun: Next coming -- next question will be coming from Credit Suisse's Randy Abrams.

Randy Abrams: Okay. Yes. Thank you. I want to ask as you kind of handed the growth -- the utilization still below 90%. So to get to 50%, you need to get utilization up.

Could you talk about the 28 node prospects, how you see that? And then also 16 and 12 some of the applications like we move on, some of the mobile and graphics. So your view on utilization and backfill to hold up that technology node?
Dr. C. C. Wei: Let me answer that question.

On 28 nanometers this technology node right now I believe in the industry is over capacity. And so the utilization is very low, not to TSMC's expectation. So we prepare a lot of derivative technology, specialty technology, let me say that. And we expect 2 years later from now, it will have the -- again, in the high utilization, but not today. It takes time to walk with customer and to utilize the capacity.

For 16 and 12 node, today we are still in a very healthy utilization, but we are prepared. And if our competitor is continued to increase the capacity just like a 28 nanometer node, we expect a couple of years later something like that, it will be over capacity again. So right now we are prepared all the specialty technology like RF, like even some of the ISP or something like that. So it won't happen to TSMC.

Randy Abrams: Okay.

The second question just to ask about the segment revenue. I think into third quarter mobile and HPC were both going to be strong. The HPC was good, but it wasn't quite as strong. So I’m curious just in that mix may be factor for HPC and then IoT was quite strong. So maybe some of the things you’re seeing in that.

And then if you could extend to give the outlook for fourth quarter by segment?
Dr. C. C. Wei: In the first quarter, of course every segment is increased. The HPC itself consists a lot of different market segment that including network processing, including GPU, including accelerator, and including all the cryptocurrency mining.

And we expect that HPC will grow significantly in the fourth quarter.

Randy Abrams: Could you give the other segments? I guess, you [multiple speakers] any lagging and any picking up stronger segment?
Dr. C. C. Wei: Let me give you -- okay.

The IoT this quarter, the third quarter of the IoT increased quite a bit. So in the fourth quarter probably will be level of slightly decreased. While our all other segment will continue to grow.

Randy Abrams: Okay. Okay.

Thank you.

Elizabeth Sun: Next question will be coming from UBS's Bill Lu.

Bill Lu: Yes. Hi, thank you. If you look at the foundry industry historically, what we typically see is a big node followed by a smaller node, right? And now essentially what you’re seeing is a big 7 and a big 5.

Can you maybe just discuss what you're seeing that is different now versus before? Now clearly, TSMC is addressing new markets. I think the demand drivers are different now versus before, but I'm curious as to what you're seeing that is different now?
Dr. C. C. Wei: You mentioned, yes, big and then followed by a small node.

I don't really catch what you mean, but let me say that TSMC introduced a 2 nanometer and then 12 and then 10 and then 7 and then 5. Now let's talk about the 7 and 5. We are looking at the new market in the 5G because the 5G is a requirement on the speed and the power consumption reduction is quite a lot is not the same experience that we have before. And so that after the 7 nanometer all the customer asked us to develop the technology to meet their requirement, which are the higher speed, lower power consumption. So it will be a 4 node kind of improvement.

It's not say, that’s a 10% improvement will be good enough. Now look at our 7 nanometer. We have a 7 nanometer, we have 5 and then we have a 6 nanometer. The 6 nanometer being introduced as kind of for second wave product. But the leading wave of product are always at a full node and marching ahead.

We saw about two years cadence that we expect.

Elizabeth Sun: Next question will be coming from JP Morgan's Gokul.

Gokul Hariharan: Thank you. So if we compare the change in expectations in the last six months, would you characterize almost all of it as market growth, faster market growth for 5G, HPC or is there any meaningful change that in your market share expectation for some of your future nodes as well?
Dr. C.

C. Wei: Well, compared with six minutes ago, we are a little bit kind of conservative at the time because of our 7 nanometers utilization is quite low. So we become conservative. But then in these six months, a lot of things changed. Let me say that, first, the 5G's momentum is larger than we expected.

The second one is we also at the same time because our technology over to the customer, we expand our customers portfolio. And because of the performance again, we also expand to new product portfolio. And so now we look at the future, we are more optimistic again six months ago, much more.

Gokul Hariharan: Any increase in market share that you expect compared to 6 months back?
Dr. C.

C. Wei: I cannot comment on that, but it will be increasing, right, if you expect.

Gokul Hariharan: Okay. Quickly on the breadth of customers on N5. I think around this time one year or nine months before N7 ramp up, you were talking about roughly I think 50 to 100 tape outs on N7.

Could we talk about what is the breadth of number of customers or number of tape outs on N5? And how do you expect that to progress? And I know that number of tape outs is not equal to number of -- or revenue or wafer volume, but just wanted to understand the breadth of the customer base?
Dr. C. C. Wei: Whenever you say that, tape out is one thing that see that how popular it is, but the more important is high-volumes products that tape out. And right now we have many high-volume products that tape out.

And that is the main reason why we increase our CapEx. High-volume and also in addition to smartphone, we’ve more market segment that we entered at the end.

Gokul Hariharan: Okay. Just one quick follow-up. If you think about N7 family, N7, N7+, N6, is it your expectation that pretty much most of the N7 current customers will eventually end up using N6, N7+? Will most of your capacity eventually be EUV enabled for N7 as well, or it will still be some EUV, some still using the current N7?
Dr.

C. C. Wei: We still expect some using the EUV and some will stay in the N7, because for those customer in the N7 quantum, in the two-year cadence they move to N5 already. So they have no reason to go back to use a N6. However, as I said for the second wave of the product they’re using N6 with the benefit of lower die cost and better performance.

Gokul Hariharan: So we should expect eventually majority will be N6?
Dr. C. C. Wei: Yes.

Elizabeth Sun: Next follow-up question will be coming from Morgan Stanley's Charlie Chan.

Charlie Chan: Thank you. So first of all, I want to follow-up Bill's question on the future technology. Since you mentioned that there are lots of benefit from power consumption from performers from 5 nanometer etcetera. So how about the per transistor cost, right? Some of the customers talking about -- they don’t see the benefit from the transistor cost saving going forward. Do you think that is true statements?
Dr.

C. C. Wei: I still believe that per transistor cost is decreasing because right now, geometry is smaller and smaller. Although for TSMC we more pay attention to what customer need, right, because of they need the speed, we give them speed, they need the power -- lower power consumption, we give them the lower power consumption. But higher density is always the one that we are moving into the next generation technology.

So per transistor wise, I did not do the very detailed calculation, but I still think the per transistor cost is low.

Charlie Chan: Okay. Thanks. And you also mentioned that for those new tape out actually volume is quite big. Can I interpret it in another way? Meaning those smaller customers, they cannot really afford those future technology unless they have a very big volume.

Is that the right thinking?
Dr. C. C. Wei: Not really. I mean that depend on their product.

Your last question about the transistors cost, let me give you some kind of a taste. We improved the logic density by 80%, but I did not judge my customer 80% more. So you know that per transistor is lower.

Charlie Chan: Okay. Dr.

C. C. Wei: And again in the market I would say that a product to be successful is more important than you really calculate these improvement, these costs, that costs. Product has to be competitive in the market. So that people will give them the price that they deserve, okay? So now the small customer cannot afford it.

Actually some of the small customer they’re working on the CPU kind of a performance. They need a very high-performance technology that they are working with TSMC.

Charlie Chan: Okay. Thanks. Next is on EUV.

So over the past three years there were some kind of challenge in terms of power, throughput, pellicle, etcetera. So now do you see any kind of new issues, new challenge for your EUV or from now onwards like a blue sky? Thanks. Dr. C. C.

Wei: Okay. In TSMC, EUV lithography technologies now in the production stage. But are we happy with it? Not yet. We are still improving the availability. We have output power of 250 watts as we expected.

Now we can operate the tool with 250 watts consistently. However, there's still something that we need to improve, so that we can improve the throughput, we can improve the availability, so we can reduce the cost. Continue to improve.

Elizabeth Sun: So in the interest of time we will just have the last question that will be coming CLSA's Sebastian Hou.

Sebastian Hou: Thank you.

I want to follow-up -- first one is, I want to follow-up on EUV. Because overnight ASML seems to talk about some supply constraints on the EUV tool, the new EUV tool. So it looks like this guidance -- preliminary expectation for next year EUV unit growth and this seems to be like amazing either. So I wonder are they -- what would that impact TSMC's and TSMC -- has TSMC secured what you need for this 14 billion to 15 billion cap at this year and next year?
Dr. C.

C. Wei: The answer is yes, we secure whatever we need. We work with ASML very closely and we are ordering all the tools that we need.

Sebastian Hou: So which means that the supply constraints could affect someone else, but not us more?
Dr. C.

C. Wei: I don't want to comment on that.

Sebastian Hou: Okay. My second question is that on the -- it looks like this CapEx step up this year and next year and what you think about that in 28 nanometer will also saw very strong demand, we continue to build the capacity. But then couple of years later It turns into the underutilization overcapacity, although there's some factors that because of the competition and laggards catching up.

But how do you see this risk going forward for 7 and 5? And have you consider that whether there will be strong enough second wave or third wave of a demand to backfill this capacity when your current customer is migrating to 3 or 2 or whatever it is, three years from now?
Dr. C. C. Wei: To answer your second question first, we do have confidence that a lot of product will fill up TSMC's capacity. Now few years later if you compare with a 28 nanometer to 7 to 5, it's not a good comparison because of 7 and 5 with EUV, that technology barrier is much, much, much higher than you can expect from the high-K metal gate.

And so they -- anyway I don’t want to comment on my competitor.

Sebastian Hou: Right. Good. Just last one -- it's the last one, promise last one. The -- when we look at the CapEx step up this time, it looks like the company has been staying around like 10 or 10 billion in the CapEx plus, minus 1 billion to 2 billion for a few years right now.

If we go back to look at in 2010, when we walked out of the downturn in 2009 and also we -- there's a huge step up of your CapEx from 2010 to -- or 2009 to 2010 and that we know what happened to TSMC, it's a golden year for TSMC for a couple of years. So now we have a lot of step up out of the semi downturn in the past 12 months, do you think this similar -- similarity now or there's been and when you make this bold CapEx decision this time?
Dr. C. C. Wei: I know what you ask.

But let me say that TSMC is getting smarter, definitely. And by the way the technology barrier is much higher than -- as I said, much higher than 28 nanometer. So we have a confidence that the capacity we built is closely -- is a result we closely work with our customer. And so we -- we decided to increase the capacity at this time with a lot of detailed analysis. And I certainly -- I have a confidence that we won't repeat the same kind of whatever that we did.

Sebastian Hou: Actually, not means error. I will say that that was a very bright and bold decision CapEx …
Dr. C. C. Wei: Oh, thank you.

Sebastian Hou: … in 2010. And then …
Dr. C. C. Wei: 2010, yes, I’m sorry.

I’m sorry. Those are the 28 nanometers is the golden years, very good.

Sebastian Hou: So I was asking whether we consider another few of a golden years after this?
Dr. C. C.

Wei: Oh, you say that -- of course, what you expect.

Sebastian Hou: Okay. Thank you.

Elizabeth Sun: Officers, [indiscernible] conclude. Dr.

C. C. Wei: Yes. Well, before we conclude our conference, ladies and gentlemen, I would like to announce that a important news that the beautiful lady sitting right beside me, Elizabeth, have decided to retire from the company at the end of this year. As you all know, Elizabeth has been with TSMC as Head of Investor Relations for 17 years.

17, that’s a long time, isn't it? She's also the Head of our Public Relations for 10 years. And well the beautiful lady had been called in the public, say, the face of TSMC. TSMC is beautiful also. In her IR role, Elizabeth has won numerous awards and recognitions all over the world, not in as IR, the best IR officer. That’s in Taiwan, in Asia, and in the world.

So many of you have been in frequent contact with her, I believe. So you know that she's a brilliant and enthusiastic and energetic lady. And you can definitely sense how much she loves TSMC. In the last many years, she has build a world-class IR team and developed successfully a competent successor, who is sitting right there. On behalf of TSMC, I would like to thank her for all her dedication and contribution to the company's success and wish her the best for her retirement.

Now ladies and gentlemen, let's ask Elizabeth to give us a few words.

Elizabeth Sun: Thank you, and thank you very much C.C. I’m very privileged to have been able to work for TSMC in the last almost 17 years. Under the leadership of our founder Dr. Morris Chang and the current management team.

I have witnessed how this company is able to move from strength to strength and still remains true to its mission and its value. I have been blessed with the opportunity to represent this company that I deeply admire in front of the investment community and the press. I had enjoyed every minute of it and I hope I have served the company well. Dr. C.

C. Wei: You did.

Elizabeth Sun: With all my heart to the investors, to the analyst and to the press, I want to thank you for your friendship and trust. I very much enjoyed our interactions, communications and discussions in the past. And I do hope that you will extend your goodwill to my IR successor, Jeff [indiscernible], who has been working closely with me in the last four years and many of you are already familiar with Jeff.

I have had the most wonderful, exciting and rewarding time in my career at TSMC. I’m leaving the company at a time when its future is brighter than ever. And I'm confident that you will continue to derive handsome returns from owning our shares. So with that, let me wish you good fortune and good health and we will conclude today's conference here. Dr.

C. C. Wei: Thank you.