台積電 ADR (TSM) 0 Q0 法說會逐字稿

Welcome to the Taiwan Semiconductor Manufacturing Company's third quarter 2002 results Webcast teleconference. Today's event is hosted by Mr. Harvey Chang, Senior Vice President and Chief Financial Officer, and Dr. Rick Tsai, President and Chief Operating Officer. This conference call is being Webcast live via the TSMC Web site at www.tsmc.com and only in audio mode. Your dial-in lines are also in a listen-only mode. At the conclusion of the management presentation, we will be opening the floor for questions. At that time, further instructions will be provided as to the procedure to follow if you would like to ask any questions. Please be advised for those participants who do not yet have a copy of the press release, you may download it directly from the TSMC Web site at www.tsmc.com. Please also download the summary slides in relation to today's quarterly review presentation. Once again, the URL is www.tsmc.com.

I would now like to turn the conference over to Mr. Leon Ku, Head of Investor Relations for TSMC for the cautionary statement before the main presentation by Mr. Chang and Dr. Tsai. Please go ahead.

Good morning and good evening to all participants. This is Leon Ku, Head of the Investor Relationship for TSMC. Before we begin our conference call, I would like to state that the management's comments about TSMCs current expectations made during this conference call are forward-looking statements subject to significant risks and uncertainties and that actual results may differ materially from those contained in the forward-looking statements. Information as to those factors that could cause actual results to differ materially from TSMCs forward-looking statement may be found in TSMCs annual report on Form 20F filed with the United States Securities and Exchange Commission on May 9th, 2002, and such other documents as the Company may file with or submit to the SEC from time to time.

And now I would like to turn the conference call over to Mr. Harvey Chang, Senior Vice President and the Chief Financial Officer.

Good morning and good evening. Welcome to our third quarter results conference call and I would begin by sharing with you the financial results of the third quarter, and with some business highlights. And then, we will go into some of the remarks, and

my chairman, Morris Chang, the

, and also offering the guidelines for the fourth quarter and onwards.

Let me begin by giving you some highlights of third quarter results. Our total revenue in the third quarter amounted to

, and net income was 3.1 billion. Earnings per share was 16 cents. And this compared to last quarter -- there was a 10 percent

on the sales, and there was 66 percent

on the net income. But, compared to previous year, it is favorable. Gross

for 48 percent, and profit growth 136 percent.

On the balance sheet side, you can see that cash and equivalent amounted to 64 billion. Long-term debt was 44. The total debt was 44, and the

equity is 293. This compared to last quarter -- essentially there is no significant change. Compared to a year ago, I think we are holding 34 billion more cash. Also, we had issued a 15 billion

dollar corporate bond this year.

On the

-- the amount of

in the third quarter is 677,000 wafers, versus last quarter's 719, versus a year ago which was 414. Utilization was 79 percent versus 85 percent in the last quarter, and 41 percent a year ago.

Let's take a comparison between this quarter and the quarter a year ago. I have mentioned that compared to last year, revenue has grown 48 percent, and gross margin is

percent, which compares favorably to last year's 25 percent gross margin, primarily because the utilization was 79 percent, which was much higher than last year's 41 percent.

Operating income is 83 billion -- 8.3 billion, which is much higher than last year's 1.9 billion.

The other, more significant difference is on the

expense. This year, our tax expense -- in the third quarter we have booked 2.8 billion in

-- in tax expense, versus last year, which was 1.4 billion tax credit.

And later on, I will give you some details on the

of the tax expenses, so bear with me for a minute.

We come to net income off the tax -- is 3.1 billion, which is 155 percent higher than last year's 1.2 billion.

On the balance sheet and tax flow -- compared to last year, I have indicated that our tax and tax equivalents have been increased 33.8 billion. Long-term debt increased six billion. That is because we have issued 15 billion corporate debt early part of the year, but also there are nine billion. They are - they will mature within less than 12 months. So in terms of long-term debt, only an increase of six billion. Depreciation expenses have increased from last year's third quarter 12.3 billion to 14.7 billion.

On a sequential comparison basis, if we compare revenue with last quarter, revenue was down 10 percent and gross margin was down from 37 percent last quarter to 32 percent. And operating expenses are basically comparable, and operating income was down from last quarter's 16.4 billion to 12.8 billion this quarter. Gross profit was down primarily impacted by, first of all, the falling of utilization rate which fall from last quarter's 85 percent to 79 percent; secondly, falling of average selling price. Average selling price fall around five percent including 1.6 percent impact by the change of

. And then on the investment losses due to the downturn of the

industry, not only the

that we had on, say, Vanguard,

, and

they reported bigger losses also the venture funds that we had invested in both in

and the

, they also reported roughly 200 million

losses due to asset write-down or asset write-off. In addition, I have already mentioned the tax expense is also higher compared to second quarter.

A quick at the balance sheet, you can see there's no significant change. The only thing maybe that should - I think is worth noticing is that depreciation expense actually went up another five percent from 14 billion to 14.8 - 14.7 billion.

Now, let's take a look at the income tax situation. The income tax I think that's not surprising Taiwan is the same as many other countries including U.S. can be an extremely complex. And according to the tax law here, first of all, when we calculate the income tax, since we are a company that have enjoyed certain tax holidays, the law says basically we have to exclude it on impact from the long-term investment. So, we have to affect the

investment losses, so the calculation

from calculation is our net income plus investment losses, which is a total of 7.8 billion. And secondly, things that we are getting tax incentives from are new investment

as well as the expansion of

.

Actually each of our plants has a different tax holidays. Some of them are already totally graduated from the tax holidays and some of them are still in tax holiday either due to the expansion or because they are still fairly new.

So, the calculation of our total income tax according to the tax law there have to be calculated plant by plant and then add up them all together for filing. So, if one of the plants is still in tax holidays, even he has very -- generally very high profits the profits from this particular plant does not have to pay any tax.

On the other hand if the plant already graduated from the tax holidays, even their profits are much lower, still the tax rate is -- they have to pay tax and the tax rate will be much higher.

At the beginning of the year, first half, that when we did our tax estimate, during that period that we actually take more optimistic view in terms of the outlook for the whole year and we, at that time, our view is that we believe most of our newer plants will be generating a higher portion of our total profits and therefore when we estimate our tax, the tax rate we use is a lower number because since the -- our total effective tax rate is weighted average of each of these plants.

So, at that time, since we believe those plants are taking lower tax that will account for higher percentage of total profits, so we believe that we should use a high effective tax rate. But, due to the downturn, the sudden downturn in the second half, several of our plants that were supposed to make very high profits, they end up making much lower profit than we had expected. Therefore that we -- the total weighting of their profit in our company-wide profit calculation is much lower number and therefore we will have to adjust and increase an additional provision for the total year tax.

So this is the situation. Now, let's take a look at the numbers. As I said, we begin with the 7.8 billion and we estimated now that if we look at the first three quarters, first 9 months of 2002, we estimated that we would have to pay roughly 4.9 billion tax. The tax expense is 4.9 billion. Let me correct -- have it correct there. So a total 4.9 billion tax expense and effective tax rate is 18 percent. So, for this quarter actually if you use 7.8 times 18 percent you will get 1.4 billion which is the tax expense for this quarter and then if you look at the -- the first two quarters, actually total -- the tax base for first two quarters is roughly 19.7 billion if you apply that by 18 percent you will get roughly 35 percent and the last -- the first two quarters we have already made roughly 1.7 billion tax available in the first and second quarter so we have to make additional provision of 1.8 billion.

This 1.8 billion plus the 1.4 will make our total tax expense for the quarter 3.2 billion and this is offset by a .3 billion tax credit. So on the financial statement, you will see on the P&L that the tax exempt for the quarter will be at 2.9 billion. And I hope that this is clear for you. And so these are the financials and let me also go into the business that

during the third quarter. During the third quarter, if we look at our revenue breakdown by technology, you will see that .13

revenue in our account for five percent of total revenue, which is a big increase from the one percent in the second quarter. .15 is 20 percent, and with

, it's 23 percent, which makes our

technology 48 percent with this last quarter's 52 percent. .25 is 27 percent, plus

and

and the above is 12 percent. So that's the breakdown by technology.

And then the

breakdown by applications. Computer is

percent in the third quarter. Communications 34 percent and the consumer is roughly at 22 percent. And here the breakdown now, very look like, similar like what we had in first quarter last year. And then by geographical regions and America accounted about 76 percent, Europe five percent, Asia Pacific 13 percent, Japan six percent. And last by different customer types, you will see that our Fab

in the third quarter accounts for 64 percent,

35 percent and

companies one percent.

The next slide is our Fab utilization and ASP

. I have already indicated our ASP that actually fall in the range of four to five percent that quarter-over-quarter basis and on a

basis, just doing the arithmetic, is roughly four percent in total. And

and Fab utilization I've already talked about.

The next chart is our install capacity. Here we have provided the--our total capacity that

will be ready for the fourth quarter this year as long as monthly capacity at end of the year. You will see that fourth quarter total capacity will be a little bit over the one million versus a

is 1.06, which is roughly six percent higher than the third quarter because of that one unit capacity.

So these are--the last one is recap. I'll turn the major events that took place during the third quarter and I will not spend time and I think for those of you who are interested and who--you can actually check our Web site, at least

Web site for each of these events.

And that's a very quick summary that's our third quarter results. And I will also talk a little bit about some of the remarks made by our chairman, Morris Chang.

Morris begins by showing some of the

ratio charts, and talk about

we have already seen in the past three to four months that our

ratio is below one. And he has -- his feeling on the situation is that he's

that actually, the situation that we are in is actually quite similar to where we were during the February/March timeframe, 2001. So, he thinks that probably

take another two quarters to consolidate the supply and the demand. Most likely that some time in the first quarter next year that we will

.

The reason that

as during that time that we'll see the

ratio going up to above one again.

, the

ratio chart, and also that he -- according to what he sees, the forecast from the customer, as well as some of the macro-forecasts of the growth of the semi-conductor industry -- that the consensus on the macro-growth of the industry right now should be somewhere between 10 to 20 percent. And his feeling is that if the growth of the industry is going to be more than 10 percent, the recovery is sure to

sometime in the second quarter next year. Otherwise, we will be too late.

So, this is his sort or outlook on what's happening to the industry.

And then, he has

the falling guidance. The first one is that we expect our revenue to

in the next two quarters, as I have just said, and we expect to see

growth from .13-Micron technology.

One of the reasons we think that we will see significant growth is that we do see, as I have mentioned, that

growth in terms of the wafer shipment volume on the 1.3-Micron. And this product -- the last quarter, already, amounted to account for five percent of our revenue, and we think that the percentage will continue to go up. And we believe that right now that our -- we think that our total year

in terms of year 2003 -- our .13 product should account for up to 20 percent of our total revenue.

And then, during the next two quarters, the consolidation

, and then this

-- and we still expect to make some profit, so we expect to see a positive

result.

And as far as the next quarter is concerned, we expect to see the

amount of wafers for shipment will be declining, that by a

percentage rate on a sequential basis. However, the ASP -- we expected to improve by a low single-digit percentage sequentially due to a better product mix

. And on our overall utilization rate, they will look forward to the range of low to mid-50 percent range. This is primarily due to a reduced wafer output and then on the back of six percent higher capacity increase.

And the last point for the next quarter is that the customer demand makes the product application in terms of consumer computer and communications, we believe that the breakdown will be fairly close to what we see in the third quarter.

And the other guidance that we're offering is that we expect to see a reduced sequential quarterly growth starting second quarter next year. We expect the year 2000 revenue to represent a double-digit growth over the year 2002. Our principal recovery area will be communications, both wired and wireless, and the

consumer factors. On computers

, we'll show a milder growth.

The last point we offer is on the cap ex for this year. The right now I think we have a pretty good grasp on how much capital expenditure will be for the year, and that number right now is around 1.65 billion.

With that and I am concluding my tonight's presentation, and Rick and I will be happy to answer questions.

At this time, we will open the floor for questions. If you would like to ask a question, please press star, followed by the one on your touch-tone phone. Questions will be taken in the order they are received. If at any time you would like to remove yourself from the question in queue, please press star, followed by the two. Please limit your questions to one at a time to allow all participants an opportunity to ask questions from management members. One moment, please.

Our first question comes from

with J.P. Morgan. Please go ahead with your question.

Yes, hi. I had a - one clarification I think when I look at the utilization and the capacity for third quarter, it looks like there were about 120,000 wafers that might have been either engineering or to be shipped in fourth quarter. And I was just wondering if you can share some thoughts on the mix. I was just doing the calculation based on capacity and wafer

utilization.

And secondly, if there are some substantial wafers that were produced but not shipped at the end of third quarter, shouldn't the fourth quarter output be somewhat higher? Or is there a calculation that are used where especially for 0.13-Micron perhaps the effective wafers based on

is much higher? In other words, based on certain yield

customers you are delivering high number of wafers

on an effective basis. Is there any mathematics that - like that that I - we should be - should be taking into account?

, on your - the first part of your question I think which I can understand better than your second part, yes, it is true there are some wafers that to be shipped during the early part of fourth quarter due to - these are primarily for the seasonal demands from the - that experienced by our customers -- end customers. But they ask us to ship in the early part of the first quarter. So it is true, there is certain

they are in that category. So if you see sort of a pick up in the October revenue, that is a reflection of that. That does not mean that we have experienced a total recovery.

On your second part of the question, I'm not sure that I actually totally understand it.

, can you say anything about what

is trying to ask?

I don't

quite either.

Let me clarify my question. What I'm asking is when you look at -- when you report the very first ship number, is that the -- is that adjusted for use? In other words, if you have agreed to deliver certain number of wafers based on

to customers, but especially for .13 micron where use may still be low, you might have to deliver more wafers to meet a particular

target, so I'm just -- the basic question is the wafer chip number, is that a -- is that adjusted for any such calculation?

No. I don't think so

and also, after all, if you look at all the others, we see an encouraging sign of the growth in the .13 micron wafer shipments, but those are just a revenue. So in terms of number of wafers there's a much lower number so they wouldn't have such a significant impact so those are not caused by the

.

Right, and just one last thing, on a sequential basis every one extra, let's say, 1 dollar reduction in revenue, how much decline in gross profits should we assume based on that?

For which period?

Let's say from Q3 to Q4, you know, let's say either 1 dollar or 1 percent change in revenue down, how much would be corresponding change in gross profits?

For the next quarter?

Yes, please.

on a gross margin, I don't think I can answer that.

OK. Thanks.

Our next question comes from

with

. Please go ahead with your question.

Yeah, you mentioned that your customer mix or end market mix is going to remain more or less the same on lower revenue base, what are you hearing from consumer segment for Q4 in particular, since you had 22 percent in Q3 and, you know, you're targeting probably 5 to 10 percent down in revenues in Q4?

Rick, go ahead.

I think the

the market assessment mix for the Q4 will be essentially the same as that of Q3 but we do not see something really standing out from either good or bad point of view. Just a weakening.

So, in consumer segment are there any particular areas which are doing better or worse than the others?

Well, I think

we've seen the consumer sector for how do we see it so far, I think, we see dropping in the area of DVD player and

player, toys, these are some of the areas, I think, that we see dropping.

They are declining or growing?

Declining.

OK. Thank you very much.

Our next question comes from

from Prudential Securities. Please go ahead with your question.

Hi, good evening. Two questions, if I could. You know, you talked about that for 2003 20 percent of your revenue's going to be from .13 micron technology. What's your current .13 capacity is, and to do a 20 percent for that year I will assume that for the fourth quarter

that's a 30, 35 percent of your revenues. What kind of capacity numbers do you need to go there? And then I have one more.

Well, capacity for the end of the fourth quarter this year will be roughly--how many

is that--22K roughly, 8-inch

per month capacity ...

Rick?

... up?

Rick, I think his question is what capacity do we need end of next year to meet our sort of 20 percent .13 share goal?

That's correct.

Well, let me see, roughly--I would say roughly--I don't have the event number, but I would say roughly 45 ...

That would be my--my sort of a--my guess, too. 45K per month.

8-inch, yes. 8-inch equivalent.

Great. One more question, if I can. You know you talked about the consumer PC wireless mix for Q4 to be relatively flat with Q1, Q3, but do you expect for Q1, if you look out, your PC mixture actually increase because, maybe, some of the graphics issues?

Well, I think we do--already, we do expect the first quarter '03 to be relatively stable from application breakdown point of view. There's some up and down, but I don't think--I think communication will continue to grow somewhat ..

Yes, ...

... about a

. That should be on the computer side, improving graphics and we are sort of, you know, flat, and we don't see a big increase. So there'll be some growth, but it will be very mild growth.

OK, and lastly, on a wafer start tends, have wafer start kind of--have stopped declining and flattened out or do you think they will still decline for another few weeks?

you have stabilized, but I think we need to see a few more weeks, because

Christmas season time.

Thank you.

You're talking about the wafer shipment, are you?

No, wafer starts.

Wafer starts, OK.

And our next question comes from

with

. Please go ahead with your question.

that woman.

Just

one three revenues -- you are expecting it to jump again this quarter. Can you give us an idea of what's driving -- or what segments are driving the increase

by .13-Micron, and maybe a sense of how broad-based this adoption of -- migration to .13-Micron is?

Well, that question was raised during the afternoon. But, right now, we only have few .13 customers who really don't want us to talk about it. So, sorry, we can't really give you more details.

OK. I see. But -- OK, for quarter four, are you expecting about the same magnitude of jump in terms of revenues? Because, quarter three went up by more than five percent, and quarter four -- I'm sorry, five times, sorry. And do you expect quarter four to jump about that same magnitude as well?

Magnitude -- probably. And in terms of wafer shipment, close. Yes, I would say so.

OK. And just finally, for next year -- it looks like .13 is also going to grow very rapidly. Is it going to be more broad-based as compared to this year, or is it going to be that same few customers that are ramping

with the .13 micron.

I believe it will be more broad-based. We have, of course -- we have several customers that

reduction. But, on the other hand, we do have a lot more

out from different customers

different applications. Yes. The answer is yes to your question.

OK. Can you just give some clarity as to which particular applications where you see .130-Micron adoption for next year?

Well, if I answer that I will be violating

your answer. It will be more broad-based in terms of sectors.

OK. Thank you very much.

Our next question comes from

with Goldman Sachs. Please go ahead with your question.

Good evening.

Just a question on everybody's least favorite topic, which is tax. Historically, can you just indicate roughly how much tax you've actually paid to the Taiwan tax authorities? And then, looking forward over the next five years or so -- or whatever, three years -- do you see how that actual tax payment might be changing, or will it pretty much be the same? And I have a follow-

.

You sound like an IRS auditor. Well, actually, we -- in terms of cash flows, we have not made any cash payments to the cash authorities so far. And we are using some tax credit we have accumulated in the past to offset all these tax expenses. But, accounting-wise, this is the way we reflect it: we -- well, whenever we have

has credit, we reflect on the net income for that year. Whenever we incur a tax expense, we

on the

year period as well.

But, so far, we haven't really had any cash out in terms of tax payments. And then, in looking forward -- actually, this taxing is extremely complex, you know, because we have multi-fabs. We have 10 or so fabs. Each fab's in a different tax situation. So, and it varies depending on which fab had what loading. So, it's not an easy forecast.

Actually, it's - essentially I really cannot - for example, if you ask me what will be next year's effective tax rate, actually I don't really have a very good number for you. But this year's, we have went through three quarters. I know now it is roughly 18 percent for the year. But for next year, the people asked me

I can only tell him that - well, if you want you can try to use 18 percent, but it can be lower and it can be higher depending on a lot of factors including how much profit we're making particularly from the fabs are making - they're enjoying tax holidays. So, basic thing - basic situation is that if we are more profitable situations, the effective tax rate is actually lower.

So, after said all that, then in terms of your question on the tax payment in cash, right now I think we can tell is the next probably two - maybe three years, we don't anticipate to pay any tax. We can reforecast any further.

OK. Thank you. And you only booked about 300 million in tax credits in this last quarter - in the third quarter. And if you're not expecting to actually pay taxes this year in terms of actual tax payments, does that mean that you'll - should be booking tax credits in the fourth quarter? Should be expect large tax credits booked in the fourth quarter? What can you ...

Well, no, actually not. The way we book tax credit is whenever we get approval from the tax authority that, "Here is your tax credit," then we'll book it during that quarter. What I'm saying here is that these tax

we'll be using the tax credit and we receiving the

which on the book are actually booked as

asset. We will use those to offset a tax expense. Yes, and then timing-wise, yes, it just so happened that during the third quarter timeframe that we are booking less tax credit. And, yes, we are anticipating a higher tax credit amount in the fourth quarter.

OK. Great. Just a quick follow-up question on another subject in terms of utilization by geometry. Can you give a little bit of color there for the guidance in the fourth quarter talking about low to mid-50 percent. Is there significant variation by geometry?

I -

, I don't know that - I - my sense is that we don't really see a big variation. For more mature, they are - they are a little bit lower, I think, than the more advanced technology. But it's not - it's not like sky and ground that kind of business.

OK. Thank you.

Our next question comes from

with

. Please go ahead with your question.

Hi. Just two questions - one is on the

and one is on the investment loss.

really started to turn in July. How come we booked the fourth loss in the third quarter? Can we understand the involvement in these

area?

Secondly is the one-off investment losses. Are we expecting more in the fourth quarter? And what is the book value of these investments in TSMC's books? That's all my questions.

On the foreign exchange, basically that I think we have talked about it in the past that the way we dealt with foreign exchange rates is we tried to hedge them, to take a sort of neutral position. Unfortunately during July period there is very rapid fluctuations on exchange rate and actually during that time frame

dollar appreciate quickly and also the percentages they appreciate on a daily basis. Actually it's wider than people had expected.

But, on the other hand, because of those rapid movements which makes the forward market as the

hedging mechanism not as expected. And on top of that we have regulatory agencies, such as Central Bank, who try to give bigger players in the market, well, we're not exactly a player, but we are a sizeable participant in the market, friendly advice and not to buy or sell, not do transactions too quickly. So a lot of times we are actually constrained on our hedging capability because of those fluctuations and we end up that we reported a foreign exchange loss and that's what happened during July time frame.

You have -- really have to be in the market to understand that. Otherwise, you would not be able to understand why this would happen. But if you talk to, say, some of the major US banks who are active in the foreign exchange market, I'm sure they can give you good run down on what's going on in the marketplace.

And then our investment law says -- the investment law says, actually, there's nothing -- nothing secret about it and a big chunk of it coming from

coming from

coming from

and I really don't have the book value with me. But, basically, all these three, they are recorded according to equity method. So, basically, we are reflecting the book value.

Right, Harvey, I was actually referring to the others area including

and emerging alliance of basically, when are these investments, I assume that some of them are actually not listed entities, and when are the investments actually made? So, can we expect more write offs or write downs in the fourth quarter and going forwards?

The answer is, I don't know. That, I guess it also depends on how the high tech company industry is doing in the US and these are -- these are basically our house

and so they are certainly also done under equity method. We are not that closely involved on the management side, although we do try to understand their financial situations. Right now we -- I really cannot tell you that -- but certainly I don't think that we are particularly anticipating or looking forward to booking more losses or write downs.

Thanks.

Our next question comes from Michael

with Pacific Crest Securities. Please go ahead with your question.

Good evening. Looking at the balance sheet, we've seen days inventory scale throughout the course of this year. I was just trying to get a sense of where you think inventories will come in at in the fourth quarter and what your target in terms of days inventory is at this point.

You are talking about days inventory, is that what you said your question?

That's correct.

Our inventory, right now they are--at end of the quarter they were at around 45 days

which is a little bit favorable compared to the 43 days in the previous quarter. And certainly, I think, it is always that our goal to keep the inventory in the--as low as we can. But if you look at these 45 days and actually is not such a

of ordinary business transaction. On the other hand that we also--certainly, we're watching them very, very carefully. Actually they are subject to review every week.

OK. And looking a little bit forward, maybe into the first quarter, given the fact that you say you're expecting renewed acceleration in terms of revenues beginning in the second quarter--I know it's a little bit forward looking given your visibility at this time--but should we maybe expect the first quarter in terms of the top line flat or do you expect that to decline? Any type of color you can give us there would be helpful. Thank you.

The inventory line?

No, revenues in the first quarter of next year. In terms of do you--are you expecting it to just continue to decline or maybe flatten out in terms of fourth quarter to first quarter ...

We are not--we don't really have enough visibility to tell you on the first quarter right now.

OK, great. Thank you very much.

Our next question comes from Matt

with

Capital. Please go ahead with your question.

Hi. I was wondering if you could break out in U.S. dollars what your cap ex was for Q2 and Q3 of this year. And also talk about 2003.

For the first half, if based on cash basis, it's around 500 U.S. million and third quarter, I think, is another 550 million U.S.

OK. And what do you see Q3 as being in dollars, in U.S. dollars?

About $600 million.

In 2003 as a whole, for the year?

2003, right now we don't have a very good number to report, but I'll say it's right now that it's going to be lower than 2002 number.

Do you think it'll be meaningfully lower or slightly lower?

We don't have a good sense to tell you that right now.

OK. Thank you very much.

Our next question comes from

with UBS Warburg. Please go ahead with your question.

Hi, guys.

Just want to get some clarification. In terms of the -- on the tax issue for the 1.8 billion, in terms of the tax provisioning, is that an adjustment for the prior two quarters?

adjustment for our assumption for the prior two quarters' tax rate. We talked about

in the afternoon.

And the second question I have was sort of in view of the -- I know

earlier, but in view of the guidance for utilization going from 79 percent going down to 55 percent, can you just elaborate a little bit more so we can get a better understanding how this utilization rate is calculated, and how that really relates to wafer shipments?

Utilization are calculated -- basically, we just look at the whole quarter and see how many wafers are considered finished wafers -- finished goods. And then, we just use that, divided by our quarterly

capacity.

OK. Because, we actually -- I mean we have the wafer sort of guidance being down in the low teens, but it seems like utilization numbers dropped a little bit more than what maybe the numbers may work out. So, I just want to make sure I'm not missing anything.

Yeah. But, I think the numbers will work out. I think, William, that we actually -- I don't know if you joined us right from the beginning or not, but during the first

we have talked about -- there are some wafers to be shipped, and

fourth quarter. They are finished this quarter.

That's finished in third quarter?

Yes.

OK. Gotcha. Thank you very much.

Our next question comes from

with Banc of America Securities. Please go ahead with your question.

Thank you.

Can you give us some color on where the yields on the .13-Micron copper process stand at this point?

I don't think I can comment directly on the yield numbers. But, what I can say is during the past couple of months, we have made very significant improvements in the yields. And, you know, our -- and we have produced a large quantity of wafers - .13-Micron wafers.

And is there a lot of room for improvement in order to get up to what you would call acceptable levels?

They are quite acceptable now, otherwise it

account for five percent of our revenue.

It's much better than acceptable. We can always improve upon what we have now, but it's a lot better than quote, unquote acceptable. Actually, customers were quite pleased with the

.

All right. And can you give us some timelines for your 90-nanometer process technology, in terms of when you plan to have that on line?

For the 90-nanometer, I think the first -- we plan to have the first version, which we call

-- 90-nanometer

version, qualified by end of second quarter, early third quarter next year timeframe -- in

-- in 300-millimeter wafers.

And is that with a

?

Yes. We start with a

for 90-nanometer.

OK. And then, just one final question. Can you give us some sense of where you are with the ramp of 300-millimeter -- where you would plan to be at the end of 2003?

Well, that's still being worked on right now because the - our - we do not have the cap ex plan and the capacity plan totally settled for next year yet. So, I don't have a fixed number for that.

Can you give us some sense where that is in terms of the mix at this point or by the end of the year?

Rick,

by the end of the year this year's we'll have about 5,000-plus 12-inch per month capacity and the other loads are mostly about

for 0.15-Micron. The other one - the

is the 0.13-Micron. But the after - from last year and on, we will add only 0.13-Micron capacity in the 300-millimeter wafer fab.

And as final - is

14 still on for the - in terms of taking equipment in the first half of next year? Is that the plan?

Yes, that's also still under discussion. It has been performed from originally fourth quarter of this year by about couple quarters. We need to - the fab is ready to move the equipment in, so we just have to look at the business environment at the - well, how strong the recovery will be at the quarter and on.

OK. Thank you.

Our next question comes from

with Deutsche Bank. Please go ahead with your question.

Hi, guys. I know that you're not going to say too much about '03 cap ex, but can you maybe give us an idea of what the increment might be depending on kind of how you move forward with

- what that increment next year might be?

Increment ...

Increment of what capacity or

?

Cap ex - sorry. Cap ex. So, in other words, let's say that you moved ahead with

next year, what's the incremental capital spending dollar that that would be?

Actually, our Chairman made the comment this afternoon that the - our current thinking is that the cap ex for 2003 may very well be lower than that of this year, which is 1.65 billion. So I don't - right now, we're not planning on any

.

Right, right. But if you just tried to isolate

and if you tried to look at if you moved ahead with your plans to install equipment, say in - say in Q1 or Q2, what would be - what is the dollar amount that's specifically related to

? Is it an incremental half a billion dollars? Is it $250 million?

I think more toward the - between 250 and a half if we do that.

OK. And that would be on top of the base line spend number next year? What's your - what's your maintenance spending number next year?

Oh, I cannot comment right now because the number is still being worked out.

OK. OK, great. And I guess second question - is there something different that you're going to be doing at 90-nanometer that's going to enable you to maybe re-use equipment more than you were able to at 0.13-Micron, or is the same old story that it's been the last - the last several process shrinks?

I think the two factors, the first, well of course the 90 nanometer and .13 share the same metal and design electric system copper and the

, or at least

for the .13 microns. So obviously we have a lot more compatibility between the equipment for the two technologies.

And number two, we are developing 90 nanometer technology in

0 which we are also rendering our .13 micron simultaneously in addition to

which is our

. So, you know, we are -- we implement some of those 90 nanometer equipment already for

for it's .13 microns, so we are doing everything to minimize the equipment conversion later on.

Is there -- is there anything else that you can do to kind of decrease your intensity, kind of your cap ex to sales ratio?

Oh, anything -- we are doing -- in terms of the equipment, I think the best thing to do is to increase our yield. We can sell more dies with same capital investment per wafer and I think we have been fairly successful recently in .12 micron and we really expect to continue improving our yields now that we have made the break through during the past few months. Probably the biggest factor.

OK. Great. Thanks a lot.

Our next question comes from Jordan Wand with Maverick Capital. Please go ahead with your question.

Hi guys, good evening. If I could just follow up on the cap ex question a little bit. If I understand the

ramp correctly, I think you're still at 5k and not intending to increase that until 2003, so I'm a little -- could you help me understand a little better where the sequential increase in cap ex occurred in the third quarter and as well, you know, what specifically you're intending to spend out in the fourth quarter because sequentially you've doubled cap ex, you know, third quarter over second and, you know, slight increase in the fourth? I'm just, you know, wondering where, specifically, that's going if not on the 300 millimeter?

We are adding .12 micron 8 inch capacity aggressively in

. Right now most of the production, if not all, in the .13 microns is from

and we -- as Harvey said earlier, we are going to be further increasing our wafers and revenue from .12 micron in fourth quarter and first quarter next year, so the

right now and for the next probably two quarters will be our main -- main

so .12 micron production.

What is the current capacity at .13?

I think we said that earlier about 22k 8 inch equivalent per month by fourth quarter time. Late fourth quarter.

OK. And last question, if that's OK, would be, I know you don't want to comment on the '03 number, but on the '02 number can you comment on the maintenance cap ex? In other words, out of the 1.65, how much of that is, you know, ramp of .13 versus the 5K 300mm versus the maintenance cap ex number.

Roughly 15, 20 percent. I don't have the ...

OK. I'm sorry, 15, 20 percent is maintenance?

15 to 20 million, I'm sorry. Fairly low for the existing

.

OK, so 15 to 20 million for the entire year is maintenance cap ex.

Per Fab.

Per Fab, OK.

Yes.

OK. Great. Well, thank you guys very much.

Sure.

Your next question comes from Dan

with Merrill Lynch. Please go ahead with your question.

Yes, I had a follow-up question on just looking at this

issue? You guys haven't commented in the past what your margins were like on--on your

business, I don't think. Could you give kind of a sense of that now? Is it--is it higher or lower than your current average gross margin?

They are higher.

OK. Specifically .13?

Well, I think all our

business are higher.

OK, so does--discussion about the .13 being expensive and a potential bottleneck to the Fab

community, do you anticipate that, you know, your efficiencies are going up on your

and, therefore, there'd be an opportunity to potentially lower, you know, pricing to stimulate the--stimulate demand and more rapid adoption across more applications?

Well, Dan, that's not our business model. I think we have been efficient and we'll continue to be efficient and we never try to use price to get people to make more

for it--with us.

So you think at the current prices that a million plus dollars or whatever, that that's--I guess what I'm saying is, not that you would just lower prices and not be

cost, do you think that you have some ability to lower the cost, first of all, in order to bring prices down?

Well, Dan, I think TSMC are being probably the largest

.

Yep.

As making operations--I think we are obviously lowering our costs continuously. You know, lowering prices is a totally different thing, but I think the key there is the efficiency does not let the

pricing become a bottleneck for our wafer manufacturing business. We work with our customers all the time to solve a particular problem, so ...

OK, so what would--yes, OK.

Go ahead, go ahead.

Yes, but no, what I was trying to get a sense of, I guess, is where we can expect

costs to go over the next few quarters, from a user standpoint. Pricing. I mean, as an average is it a 20 percent average reduction you think at this stage of the technology, for example, for maybe looking back to how .18 came down fairly quickly? Would you expect that same kind of curve?

I don't think I can comment on that, Dan, directly, other than what I just said earlier. We work with our customers.

Right.

Right, OK. And then with regard to, you know, some of the comments that were made today on potential slowing in technology adoption by Morris -- was he referring to potentially getting a longer life cycle out of .13, given .13 seems to be moving fairly quickly, so that appears to be a fairly rapid adoption, in fact. So, was he referring to the life cycle of .13, Harvey? Or, was he referring to the ramp rate of 90-nanometer?

Right now, actually, it really depends on how the market reacts at the end of the day. But, I would not

the possibility this is directly applicable to a .13 generation.

I think

, actually,

.13-Micron being lowered in being adopted. If you think about it, the industry has been talking .13-Micron for quite some time. But, then if you count how many companies are really producing .13-Micron wafers in volume, I don't think you need too many fingers.

Right. So, what, in fact, is coming -- so, a number of factors that are coming together, you think, although,

lead you to be pretty upbeat about it -- high yields and costs, and other factors. Is that in reading our upbeat comments about .13 -- that it is technology coming together at this point?

Yes, yes. I think the yields, the quality, the production, the

- you know. We can get now high volume with high -- very good yield.

But, in the past, you drive was driven by graphics, and the

, et cetera. Would we expect that similar pattern for .13, or do you see a broader adoption at once?

Broader. It is broader.

OK. Great. Thanks a lot.

Our next question comes from

with HLM and Company. Please go ahead with your question.

Hi. I was wondering if you could clarify in fairly simple terms the migration process into the 300-millimeters. I'm getting some mixed signals regarding -- you need to get scale up to get the high-cost efficiencies, yet some of the customers don't want to use it because it's a new process. How is that migration really likely to happen? Who's gonna take the first step in the chicken and the egg game in terms of pull or push? And where are you now?

We started the migration -- quote, unquote migration process for 300-millimeter use in .13-Micron technology. I think that

, but, still very high-end advanced technology with

. And we, of course, work with some of the high-volume customers to move their product

.

The .13-Micron being -- as we discussed quite a bit earlier -- being quite a bit more difficult for the past year, about. So, we actually spent more energy on the

development until about the last three or four months.

So, .13-Micron right now in 300-millimeter is being qualified by several customers, and we do have potentially a brand new

using .13-Micron on 300-millimeter wafers.

It's really a -- I think it's a combination of maturity of the technology and the 300-millimeter after all is not a - it is a brand-new technology. And if you combine that 0.13, it's taken us a while, but we're on our way to

to ramp that up I think the - by end of fourth quarter

.

But is this - sort of a natural process that just happens on a double-technology shift or is it exacerbated by the downturn where some of the very high-end customers may not really have the scale and volumes that they normally would sort of in better times? Would you consider this a normal process or do you think it's a drag-back by the cycle problems now in terms of how quickly you get people to move into your premium and geometry?

I think the combination of both. But the - I also look back at our history of our - almost all our

with the industry being so volatile, it is very difficult now to have a fab without - starting without going through some kind of a

. So, I think - but to - that's why kind of ironically to answer your question is - it is now kind of a

for any new fab to go through some low cycle at the early stage of its lifetime.

OK. And if you'd permit one more quick question in regards to inventory, and that relates to wafer-back which is ultimately a product problem for your end customer and the other part of inventory is raw materials and supplies. And just in terms of the policy of TSMT not really keeping any inventory, per se, or discretionary finished goods or

, this number seems to have come up and down in conversations as well as the balance sheet. Could you clarify what is sort of raw material and manufacturing inventory and to what degree you're still carrying around wafer-back where customers are basically stalling production within your process?

Rick, you want it there or let me answer it?

the earlier question about the

inventory, right?

Yes, basically, I think that we have talk about our inventory policy. Many times the basically we don't really carry inventory for our customer. But on the other hand, if the customer using perfect excuse - for example, they have the

issue or they just need to - need us to hold on for a few days and sometimes it's very difficult to say, "No." So, the way we run our business - we don't

manufacturing, we don't - we don't really - not in the business of carrying inventory for them, but based on relationships, there are situations they might be on the book for two - three weeks. And it does happen. But

as I have indicated, we do watch them very carefully and once they're over two weeks, we do try to push a customer very hard to get them to take the delivery.

OK. All right. Thank you very much.

Our next question comes from

with Morgan Stanley. Please go ahead with your question.

Hi. A few questions here - first, how

mention that

to the first quarter make a next year

loud and clear, but doesn't it seem that the company prefers that since the

quarter of next year, the recovery will be strong. So if the company, you know, gets a commitment from the clients regarding the quarter, I mean, two quarter from now or if the company has some

concern with that, this is the first question?

I think chairman made the comments, as Harvey said earlier, based on three elements for the present quarter coming back. You know firstly in the

ratio for the quarter, the second be in the

forecast for the -- for the next couple of quarter's business. Of course, we know the -- now the customers do not give PO's until the last moment, like anybody else. Of course, we do not have all the PO's for the fourth quarter out there, but more based on their forecast.

OK. Thank you. And I've been told to ask you a question. OK. Second question is, could you comment on the -- the pricing

of

Services? We know price is driving down, but how fast and compare it to the

recently?

Did you ask pricing trend or?

Trend or -- yeah, pricing trend for the

services? We've been told the same .15, you know pricing trend

in the past

quality may be down 3 or 5 percent, do you think it's

and the kind of pressure the company are facing because these things are

of probably

50s is

asking for more pricing pressure from you actually?

Over the short term, the pricing pressure is there, definitely is there. Business being still quite uncertain so I think we're still seeing the pricing pressure although I -- fortunately our

is moving toward .13 so --

OK.

-- and how we can get the moderate price reduction for the fourth quarter. It's our guidance that --

Right. Thank you. The last question actually, sorry I still have the comments of additionally Ms.

because I think the

of the production, Ms.

actually started from the second quarter. In the second quarter the -- your

was 85 percent, so if you think the capacity at the time is a shift, your expansion should be 770,000 wafers. The actual shipment is only 720 so in the second quarter the difference will be already at 50,000 wafer different at the time. And then the third quarter

another 120,000 wafers. So, in total, there's like 170,000 wafer, is this the chip

the shipment delay or actually the

scrap because of the

?

Is not a matter of category. And these fluid numbers, these are inventories that sitting there that don't move. These are fluid numbers.

I don't quite understand. Fluid numbers?

Fluid number means that these wafers come and goes. It doesn't mean--and so--it doesn't mean that those 50 thousand wafers stay there until now and they're not moving and--I mean, these wafer numbers, they come and they go. And ...

Yes, so what I mean was, you know, the second quarter, given what's 50 thousand and third quarter is 120 thousand. So maybe those 50 thousand wafers already shipped in the third quarter, but so actually the

push the

wafer

to fourth quarter. Actually, it's 170 thousand. Is that what it means?

.

OK. Thank you.

Our next question comes from Alec

with

. Please go ahead with your question.

Yes, I think you covered everything. Thank you very much.

Our next question comes from Michael

with Soundview Technology Group. Please go ahead with your question.

Yes, hi. Just a question on the

wafers that are delayed in shipping from third quarter to fourth quarter. Are they any specific end markets because I would expect then you would see, you know, the drop off fairly significantly in wafers for November, December if you're going to have a 13 percent wafer decline. Is it any particular end market that you're holding up wafers or was it across all the end markets?

We really can't talk about it.

OK. Maybe then you could just talk about how the end markets--you're expecting to progress as you go through the quarter? You know, as a--are communication, consumer, computer, all staying steady as you progress through the quarter?

Yes, I thought we already gave that in our guidance. Basically, if we look at the breakdown for the next quarter, we think we'll be fairly close over the

this quarter. So in terms of the amount of wafer shipments or revenue you can see that that's

revenue is from the

will sort of fall a little bit across the board.

No, I understand that, the quarter to quarter. I'm trying to understand the monthly trend as we go through the--as we go through the quarter. You know, October, November, December. Is there something that's different in any particular end market segments or are they all performing fairly similarly? You know, is it DVDs stronger at the beginning of the quarter and slower as we go through because of holiday, is wireless staying steady going through, is wire line? Maybe you just could give us a little bit of color.

Boy, you're asking the resolution. I think it's a--which is finer than the--we have in front of us, but the--we see a steady pattern, really. Of course I think we'll--we probably see being in the Christmas season the October shipment, in general, probably will be higher because of the seasonal factor. But we do not see a, you know, something spending out across the quarter on different applications.

...

.

... the resolution here.

In the interest of time we can take only one more question.

Thank you. Our final question comes from

with Bear Stearns. Please go ahead with your question.

Hi.

It's a two-part question. Your communications business, after increasing in Q2 and Q3, looks like it's slowing in Q4 and Q1. Can you tell us what in the communications business is slowing down? Is it handsets? Is it wireless LAN? Or, is it networking? Where do you see a faster pace of decline?

We actually -- our guidance of the communications is not slowing. Actually, it's growing.

Well, I mean if your revenue is declining and your obligation mix is remaining the same in Q4 and Q1, it would imply that the communications business is also declining in terms of revenue.

Yeah, again, it's the -- nothing really stands out, as we said earlier, from either good or bad point of view. Earlier,

different segments.

Yeah. The second part of the question is, you know, the fact that you've seen, you know, now, sort of top-tier communications business -- I mean does that indicate that the

we're seeing on the handset side are sort of, in a way, over, and that customers are saying, "look, we have enough inventory on the handset side"?

No, we're not seeing that. I think most of the products on the handset point of view are new products --

buying new products rather than the -- I guess we're not seeing that the

.

OK. So, the handset business is relatively steady?

Yeah.

OK. Thank you.

Mr. Chang, please go ahead with your closing remarks.

OK. I want to thank you -- everyone -- for attending this conference call. And we will

you again on the next one. Thank you very much for participating.

Thank you, sir.

Before we conclude TSMC's third quarter 2002 earnings web cast conference call for today, please be advised that the replay for the conference call will only be accessible through TSMC's website at www.tsmc.com.

We thank you all.