台積電 ADR (TSM) 2005 Q3 法說會逐字稿

Welcome to the TSMC third quarter 2005 results webcast conference call.

Today's event is chaired by Ms. Lora Ho, Chief Financial Officer and Vice President, and Dr. Rick Tsai, Chief Executive Officer and President.

This conference is being webcast live via the TSMC website at www.TSMC.com and only in audio mode.

Your dial-in lines are also in listen-only mode.

At the conclusion of management's presentation we will be opening the floor for questions.

At that time, further instructions will be provided as to the procedures to follow if you would like to ask any questions.

Please be advised for those participants who did 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 quarterly review presentation.

Once again, the URL is www.TSMC.com.

I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC's Head of Investor Relations for the cautionary statement.

Please proceed.

Good morning and good evening to all participants.

This is Elizabeth Sun, Head of Investor Relations for TSMC.

Before we begin, I would like to state that management's comments about TSMC's 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.

The information as to those factors that could cause actual results to differ materially from TSMC's forward-looking statements may be found in TSMC's annual report on form 20 S filed with the United States Securities & Exchange Commission on May 16, 2005.

TSMC's registration statement on form S 3 filed with the SEC on July 5, 2005, and such other documents as TSMC may file with or submit to the SEC from time to time.

Except as required by law, we undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Today our conference call will have three parts.

First, TSMC's CFO, Ms. Lora Ho, will discuss our third quarter financial results.

Followed by CEO, Dr. Rick Tsai, who will be speaking about our recent developments in the advanced technologies.

Finally, we will open the floor for questions.

And now I would like to turn the conference call over to Ms. Lora Ho, our chief financial officer and vice president.

Good morning and good evening, everybody.

Welcome to TSMC's third quarter conference call.

The end of September TSMC revenue has continued going up for eight consecutive months.

September revenue of NT$25.2 billion was another historical high.

Due primarily to continued demand increase from our customers, our third quarter business had improved better than we guided previously.

We expect a healthy growth continue into the fourth quarter.

I will now take you through our overall results for the quarter.

We have prepared some slides on the TSMC website for you to look at as you listen to the call.

During the call, I will refer to the slides by their individual numbers. .

To start with, let's look at some highlights of our third quarter 2005 operating results, which would shown in slide number four.

Our Q3 revenue was NT$69 billion and net income after tax total 24 billion.

These numbers were higher than our guidance.

Meanwhile, earnings per share reached NT$0.99.

TSMC ended the third quarter with 107 billion in cash and short-term investments, shareholder's equity totaled 411 billion.

During the third quarter, we shipped a total of 1.5 million 8-inch equivalent wafer.

Our overall utilization rate improved to 96% for the third quarter.

Return on equity was 24.6%, about 6 percentage points higher that the 18.4 achieved in quarter 2.

Let us now go to slide number five and look at the quarter on quarter comparisons.

Compared to Q 2, revenue increased by about 18%.

Strong market demand pushed the overall utilization up to 96% this quarter.

Additionally, U.S. dollar appreciated 2.6%.

Again, NT$ due in the third quarter and it made a positive contribution of 1.2 percentage points to our gross margin.

Despite a lower AS, our gross margin reached 44%, about 4 percentage points higher than what we have achieved previously.

Operating expenses account for 8.1% of our total sales.

Non-operating income for the quarter was 0.6 billion lower than that of our quarter 2, many due to our realized revaluation losses in certain marketable securities and the [lakeof] lawsuit settlement received from SMIC.

With better performance from WaferTech at SSMC, our long term investment item improved by 0.1 billion.

As a result, net income before tax reached 24.4 billion, income after tax comes to 24.5 billion while EPS improved 33% to NT$0.99 per share.

Slide number 6 provides a year over year comparison.

Prior shipment was more than offset by lower ASP and unfavorable exchange rate resulted in a 1% reduction in revenue.

Gross margin was 2 percentage points down, mostly due to lower utilization and unfavorable exchange rate.

Despite higher spending over 65 and 90-nanometer development, there was a significant reduction in opening costs of fab-12 and fab-14 starting volume production, which push our operating expenses down by about 0.4 billion.

Non-operating items reduced by 0.6 billion, mostly due to higher heating costs and our realized revaluation losses in certain marketable securities.

Total investment items were loss of 0.5 billion this quarter, many due to lower profitability levels from WaferTech and Vanguard and higher losses in TSMC Shanghai.

Pretax income was 13% lower, while profit after tax and EPS were both 12% lower than that of Q3 or 4.

Slide number seven give you an overview of a few important items from TSMC's balance sheet and some key financial ratios.

Our cash and short-term investments for the quarter was 107 billion.

Account receivable balance went up to 37 billion, mainly reflecting higher September sales.

Accounts receivable turn over days was 46 days for the quarter.

The reduction incurred in liability at the end of quarter was mainly due to the payout of 47 billion of 2004 cash dividend and 3 billion of employee cash bonus.

Our Q3 inventory balance came to 15 billion.

Inventory turn over day was 40 days for the quarter.

Total ratio for the quarter was 3.8 times.

TSMC continued to maintain a very solid balance sheet.

Slide number eight summarized TSMC cash flow.

During the third quarter, TSMC generated 38 billion of cash in flow, many from net profit of 24 billion and depreciation amortization of 17 billion.

Net cash used in investing activities was dominantly over capital expenditure, movement in financing activity was mainly payout of cash dividend and employee bonus.

Overall speaking, our cash was reduced by 20 billion for the quarter.

Let's turn to slide number nine, which is summarize our install capacity by fab.

TSMC's total capacity during the third quarter was 1.55 million 8-inch equivalent waiver, in line with our guidance.

For quarter 4, we estimate our 12" fab capacities to increase by 27 K pieces.

TSMC Shanghai will contribute another 14K of 8-inch wafers, bringing our overall capacity to 1.63 million 8-inch equivalent wafers.

Our capacity for year 2005 is expected to be around 5.96 million pieces, which is 24% higher than this last year.

You can see in slide number ten that our capital expenditure for the quarter was U.S.$319 million, 275 million from TSMC itself and 44 million from TSMC Shanghai.

Of this number, there are about 74% of the K packs this quarter was expand to build up capacity for 12-inch fab. or 2005, total capital expenditure for TSMC as a whole is expected to be in the range of U.S.$ 2.5 to 2.7 billion.

Now let us look at some analysis by technology in slide number 11.

With strength in market demand in Q3, revenue for all technologies went up.

The advanced technologies account for 43% of this quarter total revenue.

I am also pleased to point out that our 90-nanometer revenue has now reached 10% of our total revenue and this number is expected to reach high teens in quarter 4.

Slide number 12 provides a view by application.

We saw significant quarter over quarter growth in communication and consumer sectors.

Communications revenue took up 41% of total revenue with high seasonal demand and recover [INAUDIBLE].

Growth was seen in all segments, mobile phone alone increased by more than 50% in a single quarter.

The [sinabo chain] was visible for the consumer sector, pushing overall weighting to 23% of total revenue.

Growth in game player was the most prominent revenue from DVD player, also increased significantly the expectation of the coming holiday season.

Computer revenue was reduced to 30% of total revenue as PC graphic went through a phase of inventory adjustment affecting growth in the other segments.

In slide number 13, we can see that revenue from North America, Asia Pacific, Europe and Japan now accounts for 71%, 11%, 9% and 5% of our total revenue.

Slide number 14 shows that in the third quarter, revenue generated from fabers and system customers accounts for 71% of the total sales, while IBM took up 29%.

Now let's move to slide number 15 and look at our fab utilization and ASP trend.

TSMC's utilization rate for third quarter went up to 96% due to improved demand.

ASP, however, dropped 4.9% as we guided.

From slide number 16, you can see that TSMC's profit making ability continues to improve throughout cycles.

If we take two data points from this chart, take Q4 '04 and Q2 '03, for example, while utilization rate were both 88%, our gross margin for Q4 '04 was 43%, 6 percentage points higher than the 37% achieved in Q2 '03.

If we compare Q3 2000 and Q4 2003, again, at the first quarter of 2005, we made a same 39% growth margin with only 78 utilization rate in Q1 '05, much lower than the 101% utilization in Q2 2000 and Q4 2003.

Furthermore, we achieved 44% gross margin on the 96% utilization in this quarter, which is better than an 40% gross margin in Q1 '04 with high a utilization rate of 105%.

This shows how TSMC cost structure improved across the year and our ability to manage Kpcs and utilization rate through the cycle under -- on the highly competitive environment.

Therefore, we have been able to deliver a season possibility.

Now let's move to the guidance.

Based on the current business outlook, the management expectation for the fourth quarter of 2005 [promote] performance are the following;

Revenue to be between NT$77 billion and NT$79 billion;

Overall utilization rate would be about 100%;

Gross profit margin to reach between 47% to 49%;

Operating profit margin to be approximately 40%.

You may have noticed the minor change and wonder why we are not guiding blended ASP anymore.

The reasons are three reasons.

Number one, blended ASP is a misleading indicator of profitability.

A falling blended ASP can mean rising profitability, while a rising blended ASP can mean falling profitability.

We believe it is of the utmost importance that [earnings] conference like this, we do not mislead you about profitability.

Second, in the past, we could not guide revenue and profit directly.

Just recently Taiwan stock exchange passed a new regulation and now, with non-operating income and losses less than 10% of our income before tax and full disclosure of material events, TSMC is officially allowed to guide revenue and profit directly.

Number three, if we look at the big company like Intel, TI, and Samsung, none of them guided blended ASP as a rule.

This is why we modified the way we guide -- we deliver guidance.

So starting from this quarter, we will use this way to guide you of profit.

We believe this will give you a more accurate picture of our profitability.

Lastly, slide number 18 and 19 provide a recap of major events during the third quarter.

I will leave them for your own reference.

This ends my presentation.

Let's welcome CEO, Dr. Rick Tsai, to make his comments.

Hello, everyone.

This is Rick Tsai.

Welcome to our conference call.

I'm going to give you a short talk of where we are with our technology, especially the advanced technology.

What I'm going to talk about will be divided into 90-nanometer, 80-nanometer, and 65-nanometer technology status.

Let's move now to the first slide, which shows the ramp of our advanced technology in terms of revenue.

In this case, the advanced technology, in our definition, covers 0.13-micron, 0.11-micron and 90-nanometer production.

As you can see, starting from early '02, 2002, to the past quarter, 3Q '05, our revenue from those technologies have consistently grown over every quarter, just about every quarter, while the rest of the industry moved more in a more fluctuating way and significantly less than TSMC.

Now, the next slide.

More specifically, lets take a look at the 90-nanometer ramp situation.

I'm happy to say that we have a very strong ramp in our 90-nanometer technology production.

In the top graph, you can see an accumulative table count from first quarter 2004 to fourth quarter 2005, which is the forecast number.

We will have roughly a little over 100 production product, real product tape-out from our many customers by the end of the year, this year.

And of course, we expect the tape-out to continue to increase.

Actually, the number of customers who are using 90-nanometer technology has really increased.

In last year, early this year, most of the tape-out and the production were from a few customers with really large volume.

However, we have seen, as we said last quarter's conference call, we have seen, already, the second wave and the third wave of customers now coming in using our 90-nanometer technology, including some of the start-up companies.

In the lower part of the graph shows the cumulated shipment in terms of 12" 1000 wafers.

Again, you can see by the end of the third quarter, we started to have a very strong ramp and this ramp will continue into the fourth quarter '05.

And that's why we believe we're going to have a very strong 90-nanometer revenue also in the fourth quarter.

This momentum will continue also into next year, 2006.

Next slide shows, I would say, a demonstration of TSMC's capability to ramp very difficult advanced technology.

That is if you look at a [INAUDIBLE] reduction rate of 90-nanometer.

In this graph, there are really five [INAUDIBLE] reduction rate for five different technology over roughly five years.

The slope of each line, of course, represents the rate of the reduction, the steeper the flow, of course, the better.

You can see -- let's not even talk about the older technology.

Let's just look at 90-nanometer versus 0.13-micron.

In 90-nanometer the improvement of the [INAUDIBLE] is about 25% per quarter, the rate of the improvement, while that is 13.5% a quarter, 0.13 micron.

The advantage of this fact [INAUDIBLE] reduction rate is tremendous because it means lower cost for TSMC, much higher ability for our customers to ramp their products with a very good yield, very, very high quality, although we will definitely give customer a lot of flexibility.

And this [INAUDIBLE] is also tremendously important for especially large dies.

By large dies, I mean, the dies from one centimeter precise -- one centimeter by one centimeter all the way up to two centimeter by two centimeter.

That's a huge die.

And a few tenths point of the [INAUDIBLE] density can mean 10 points, 20 points even up to 30 points of yield rate difference.

So for our customers who need to have large dies, excellent [INAUDIBLE] performance for the most advanced technology is a tremendous help to them.

Otherwise, even if they have a good product, it will be difficult for them to produce in large volume in order to meet their customer's requirement.

Now let's move into 80-nanometer.

80-nanometer is a half note of 90-nanometer.

Half note technology has been TSMC's strategy for many years.

We started at 0.35-microns.

With 0.35 we had 0.30 and 0.25, 0.22, 0.18, 0.15, 0.13, 0.11.

Now along with 90-nanometer, we have 80-nanometer.

The half note technology mainly is a cost reduction path for the customers.

Usually it can provide up to 20% of cost advantage with a minimal redesign effort.

And this 80-nanometer node we now are working with more than ten customers on different technologies.

This is the first time for a half note that TSMC is offering three different flavors of technology.

That is G, generic, GT, that's our higher performance version of the generic, and low powered.

So we can -- and, again, our customers want different applications with lower cost.

We are now having already a high volume production product tape-out and we expect the production to start sometime early next year.

Early first quarter, I will say.

Now, let's moving to our net major node, 65-nanometer.

This graph shows basically the road map of 65-nanometer versus 90-nanometer.

Some major changes.

For 90-nanometer we started production with a generic G technology.

But for 65-nanometer we moved our resource first into low power LP process.

That, followed by a T process [INAUDIBLE], that just stands for high speed process, those are more for the programmable larger device, customers and graphics customers.

We also are offering now in a much -- at a much earlier stage the embedded HDM, which stands for high density memory technology.

Because we found that many of customers are very interested in the embedded high density memory, especially with the low power application because it offers a very strong cost advantage.

We offer a 65, also, in a SOI process and, of course, Mixed Signal and RF.

The other thing to note in this road map is we not only are providing all those technology with -- this is the broadest portfolio that he can find, but we're accelerating the offering in terms of time to our customers.

It used to take us up to seven quarters to complete the portfolio offering.

Now we are inputting more resources of our R&D and our goal is to provide all those technology in about five quarters of time, so that our customers can leverage our advanced technologies capability.

Of course, I probably want to add one point.

In addition to those TSMC technologies, we are also doing one customer-specific process, which also will bring in a large volume at the early space.

All those technologies are well on its way to production, I'm happy to report, too.

Both TSMC's own technology, as well as the customer process.

Of course, technology about itself cannot be used by customers, especially with advanced technology at 90-nanometer, 80-nanometer or 65-nanometer.

We all know that a design using advanced technology is getting much more complicated and much more difficult.

That's why TSMC had spent a lot of resources to build a solution platform for and with our customers.

We start from the design side, we start with a reference flow, 6.0, which covers all the design tools that we have verified to be working with our technology.

And starting with 65-nanometer, we have provided not just the normal design tools, but also the ones for power optimization, basically to get the best balance between power and performance.

And we also have a lot of DFM, design for manufacturing tools for our customers so that we can have a built-in high yield.

In semiconductor industry today, with event technology so difficult to develop and so complicated to design, yet with so much economical advantage with it, it is imperative that our customers working with TSMC to have the designing cost, performance and power so that their product can be ramped, can be not only verified the first time, sent to their customers the first time worked, and even more importantly, to be ramped fast to the market so that they can make the most money.

Along with the reference flow, TSMC now offers our in-house library, both for standard sale and for memory compilet.

We also work with outside third parties so that the customer has a portfolio of IT and library to choose from, so the customer can have a lot of flexibility and capability from TSMC and our partners.

Mask technology is now getting more and more important and, as I would even say, is one of the critical element of the yield improvement for our advanced technologies.

There's a -- now, if you're checking value, for 65-nanometer you can now readily have one billion transistors in one chip.

And that constitutes huge data base.

Just to manage the data base so that they can be put into a 65-nanometer mask takes a lot of technology and knowledge.

And TSMC has long -- has been running our own mask operations for the past 15 years.

And our mask operation has been working with our process technologies for all those times.

And we believe we're one of the leading mask operations in the whole world.

And in such a way we can offer our customer the best yield from that. [Derkin], now things -- well, technology now all use the low-k dielectrics, which has its advantage through power and performance.

However, structurally, it is weaker than the traditional conventional oxide.

So, with the Backend, it is the critical for TSMC to work with our Backend supplier to qualify, to verify, to qualify all those silicone technology with [INAUDIBLE] technology.

We have invested also heavily in our Backend organization to serve our customers, together with our packaging house [INAUDIBLE].

Last but also very importantly, the service of our bi-monthly CyberShuttle, which enables our customers to effectively and efficiently and, even more importantly, cost effectively, to run -- to verify their IT, to verify their test circuits, even to verify their product design.

And without having to spend too much money on the expensive set of mask or go in through many revision.

And we will be providing a CyberShuttle every two months for our customers and, if there is enough demand, we will do that on an even more frequent manner.

My last slide shows to summarize our 65-nanometer technology development.

We have solid customer engagement with seven large [travelers] at IDM, customers who are working with us.

And not only that, our [INAUDIBLE], technology's alliance partners, are also developing their technology, together with TSMC, to be sure a map for the portable profit between the four of us, so that they can run their wafers in our wafer fabs with ease, with the fastest possible cycle time.

TSMC's 65-nanometer, of course, has the broadest portfolio, as I mentioned earlier, and we are not only on track to deliver our technology to our customers and to be in production starting early the first quarter next year, we're now even putting in more resources so that we can accelerate the development of all versions of technology.

And we will be building production capacity next year so that we want to make sure our customers can enjoy the benefit of the advanced technology and the platform solution that TSMC will provide to them.

That's my report, thank you, and Elizabeth, should we -- ?

Let's open the floor for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Matt Gable of Calypso Capital.

Please proceed.

Hi.

A couple questions.

Anything on -- in terms of changes in customer demand patterns very recently?

We've heard a lot of mixed data points out there in the last ten days.

So wafer starts, any new trend that's been established there?

And also, going into '06, I mean, you're going to be at 100% utilization in Q4.

Do you have any kind of thoughts on what you may spend in '06 on CapEx?

Thank you.

From waiver thoughts point of view, we are not seeing too much of a aberration.

TSMC has so many customers with so many different applications, we even in the best of times, we will have customers moving their waiver jobs forward or backwards.

And now I would say if I characterize this way, we do have more customers who want to -- well, I would say the majority of our customers want to pull in their waiver shipment rather than push out.

Of course, I mean, that's the customers who want to make changes.

The question also was raised during the afternoon conference at the -- .

Although we do expect, of course, a certain seasonality, because TSMC now has so much production go into more consumer type of application.

I mean, in this case, I would characterize a cell phone as a consumer product rather than communication product.

Also about asking by whether we have 2006 pretax plan.

We are working on that number, but it's kind of premature to -- we're not ready to disclose the number until next January.

But I can tell you that we will add sufficient capacity to serve our advanced geometry customer and we may also consider to add [bottleneck] equipment to increase our trading technologies capacity with minimum investment.

But here I say that we are still working on a number.

We have not finalized.

We will able to tell you by next January, as we usually do.

So maybe -- maybe flattish year on year is sort of not a bad thing to think about here?

We just add enough to support our advanced customers and otherwise, we'll still working on that and have not finalized that number yet.

Okay.

Last question.

What is your maintenance level of CapEx?

In U.S. dollars?

It's roughly 10%, our total yearly CapEx.

Real close to spending level of Kpcs.

Includes on the.

Okay.

Thank you very much.

I appreciate it.

Your next question comes from Bhavin Shah.

Proceed.

Hello?

Yes.

Hello.

Okay.

A few questions I had.

You mentioned you were actually working on a one customer specific technology.

Did you mean 65-nanometer or some other technology and what kind of product that is for?

In this case, I meant 65-nanometer technology.

Right.

And can you say anything about what kind of product?

No.

We don't comment on a customer specific questions.

Sorry about that.

Right.

Do you -- is it a departure from your previous strategy?

What motivates you to entertain customer technology and also the -- I mean how -- do you expect profitability to be similar to overall business?

No.

It's just [INAUDIBLE].

We have been doing this, actually, for many generations.

It's a matter of how many.

I do -- I would say that the -- we are doing now much fewer, much, much fewer.

That points in the three generations before.

But TSMC -- you know, we provide our generic technology to the big majority of our customers, but we do still have some of those customers [INAUDIBLE] technology.

Right.

On, again, on 65-nanometer, with all the effort that you described earlier, do you think the move from a initial availability of technology to the meaningful revenues, for 90-nanometer it took almost two years.

Do you think that time is going to shorten for 65-nanometer and if so, why, please.

I believe that the -- you know, we learn from our experiences that the -- to do that, first -- I think it's always good to provide the different version technology to customers sooner, which basically will give customer a lot of flexibility and also to optimize the performance, the power and the cost.

However, I mean it's not an easy thing.

It's quite difficult.

And I think TSMC has learned over the past couple of years, as evidenced by the rate of the TSMC improvement of the 90-nanometer generation that we would be able to accelerate somewhat the development with the people from our R&D and from our waiver fab and design service people.

All right.

You earlier mentioned what you see from your customers in terms of more customers wanting to pull in rather than push out.

Now, could this be led by lengthening lead times, especially in the Backend, where the waiver bank are seem to be rising?

And if so, does this increase the risk of an overbuild?

I think it varies from customer to customer.

We have heard sometimes somewhere those description.

I -- the experience we have with our key and major customers, they seem to be doing okay with their back end supplier.

Or I believe the back end that's behind that has been longer than before.

So we do -- and as I said also earlier, we look at -- we look through the overall supply chain inventory.

By that, we mean from OEM distributor, contract manufacturers, IT suppliers, foundry , backend, houses.

The total, the overall inventory seems to be still in a reasonable -- reasonably good shape.

So there may be some occasional spot.

But I think overall, industry seems to be doing all right.

You are approaching 50% gross margin and 100% in utilization.

Do you think you can potentially go back to the gross margins you saw back in '95, '96 time frame if the -- you know, you have an opportunity to run at more than a 100% utilization over the next couple of years at some point?

Bhavin, we do not propose 50%. [INAUDIBLE] But if you look at our -- our guidance.

If you talk about back in the dates of 1997 where we have more than 50% utilization and in the 2000 time frame gross margin we were like a 48%.

If you look at our fourth quarter guidance with 100% utilization, we are talking about 47 to 49.

It's actually quite close to our 2000 level.

You're asking whether it is possible to go back to 50.

More than 50.

Well, competition [around] is different than 1997.

But since I'm talking about 47, 49, couple points utilization may give us 50.

I wouldn't be surprised if that can happened.

'95 seems so long ago.

Well, we'll definitely we'll try.

We will try for that.

But the competition, as Loro just said, the competition nowadays is certainly much more fierce than before.

But on the other hand, I think TSMC, as Loro also showed earlier, has also improved tremendously, our execution capability, our technology and our cost structure.

I would hope you're right.

Thanks.

This is the last question from me.

In the afternoon, you mentioned about raising -- possibility of raising cash dividends.

Would you be raising your reg -- sort of what is now expected as a regular dividend, I think you are paying out what, 50% of profits?

Is that -- is that -- if ever do I assume that that percentage will go up?

How would you characterize this likelihood of -- how would you quantify -- just give some color on these increase in dividend expectations.

Thanks.

Okay.

We'll been study the cash dividend and buyback recently.

And we see strong cash flow from operation, we will continue maintain very high cash level and investor will generate concern how do we use our cash.

And we have been able to issue a $2 cash dividend and we said that $2 is sustainable for two years and we are thinking about whether we should do buyback.

And our study tells us, although some U.S. company is using a lot of money to do buybacks because of tax efficient and some flexibility.

But if you look at entire involvement, actually is the flexibility is actually quite limited.

So if we are not considering doing -- aggressively consider doing buybacks, how are we going to use our cash.

And actually we're seriously thinking about raising our regular cash dividend, maybe next year.

So -- but I cannot quantify the magnitude.

But this is something we're trying and working hard on it.

Thank you.

Thank you.

Your next question comes from William Dong of UBS.

Please proceed.

Okay, thank you.

I was wondering can you provide some color on the dynamics of the pricing of wafers for some of your older fabs.

As we think about depreciation near the end for some of the older 8-inch fabs, would that incremental sort of benefit be shared with customers and what kind of implication is that for ASP if we were to think in those terms.

Well, pricing really is the product of the supply and demand at the end of the day.

What we're being, I think just shorten -- I'm pretty much at shorten starting third quarter this year and fourth quarter time, I think the pricing environment is more moderate compared to earlier quarters, you know, that which applies to mature technology to.

Okay.

So would you say the pricing environment for mature note is pretty stable at this point.

It's moderating.

Okay.

And one more question.

Maybe it's -- coming back to the 65-nanometer, I was wondering as we think about further shrink, would the same type of products that's currently running on 90 be the early adopters for 65?

And with the shrink, how would the average die-side change, would that be relatively stable or would that actually begin to decrease?

Excuse me.

I'm sorry, let me repeat the question.

As we, you know, think about the faster ramp on the 65-nanometer node, I'm just wondering what type of product, I guess, would be early adopters for 65.

Would they be the same type of product that were early adopters for the 90?

Yeah.

I think about right, about right.

And just -- my question on that was also with this shrink, with the -- would that actually start decreasing the average die size going forward?

Or would sort of a customer just continue to increase the number of transistors per die?

Again, it varies from customer to customer.

But the -- an observation that the customer usually will add some more functionality so that there's a -- I wouldn't necessary call it a stable die size, but it's not shrinking all the way.

I think your characterization of adding more transistor is more correct.

Okay.

Thank you very much.

Sure.

Your next question comes from Doug Reid from Thomas Weisel Partners.

Please proceed.

Thanks for taking my question.

Wondering if you could comment on signals you're getting from customers regarding inventory levels aside from communications?

Mentioned that in wireless, notably mobile, business has been very strong in the third quarter.

I'm just wondering what that implies for the 1Q '06 outlook?

We are not really commenting on 1Q '06 now.

We did say that the overall of the supply chain inventory seemed to be all right in control.

We certainly do not -- we certainly recognize the seasonality factor of the holiday season and afterwards.

So we have not changed our view of 2006 overall for the semiconductor industry.

But, you know, the fluctuation among the quarters is certainly [powerful] and likely weak right now.

I don't think we can comment from quarter to quarter.

Okay.

Thank you.

And secondly, hearing that on the Chinese language call earlier today you mentioned TSMC is gaining share in '05.

I think two to three percentage points is the number I heard.

And I'm just wondering where that -- where that share gain is coming from given the increasing competition you've acknowledged as well.

Where the gain come from, I think -- you really can just collect the revenue data from -- or major foundry -- I don't think we -- we particularly want to comment on our competitors.

What's your second question on that?

No.

I was wondering where those -- where that market share gain was coming from by segment, hoping you could give a little color on that.

Well, I'm sorry.

We haven't gotten down to that kind of a granularity.

Thought I'd try.

Thanks.

Yeah.

Thank you.

Your next question comes from Michael McConnell from Pacific Crest Securities.

Please proceed, sir.

Thank you.

So I just wanted to make sure I'm getting this straight too.

Essentially what you're saying is you're about 200 basis points away from what you think will be your peak gross margins and you're expecting some seasonality in Q1.

So can we be looking at Q4, at least in the next six months, being both your peak for utilizations and your gross margins?

Well, it's difficult to say.

Anything's possible, but depending on the 2006 utilization and the overall demand status, up to this moment I think we can only tell you about our fourth quarter and nothing about that.

Okay.

And then just with respect to the seasonality, would this be more PC related, just looking at Q1 typically, that is, when you see the most acute seasonality on the PC side?

Or is this just broad based seasonality across the board?

And then maybe any comments with respect to the end market strength in Q4 would be helpful, as well, in terms of what's good and what's maybe not so good.

Mike, again, I think the -- you know, we're not talking more the seasonal factor in a generic sense.

You know, the PCs seasonality factor is well known.

I think consumer -- not to mention consumer product.

But some of the -- of course, the wireless communication product is very much a consumer -- it's a big portion of the consumer product.

So having said that, another important factor, of course, is the new product introduction.

I think for 90-nanometer points -- for 90-nanometer technologies, almost all of the product are new product.

And when new products are being introduced, they don't necessarily follow the seasonality factor.

These are, of course, just observations.

You know, we do not know -- have that clear picture from application point of view other than just market observation.

Okay.

And then with respect -- that is helpful.

Thank you.

With respect to the revenue guidance for Q4, can you maybe just give a rough indication of kind of the pricing trend within Q4?

I mean, are you expecting, you know, your prices are going to be flat to up or are we looking at declines and wafer shipments being the majority of the strength in Q4 as we've kind of seen in the last two quarters?

Or are we seeing pricing now, on a blended basis, start to stabilize?

Okay.

We are seeing the pricing, average blended ASP, for the fourth quarter will go up by low single-digits and with shipment also go by low double-digits.

That will give us the guidance of 77 billion to 79 billion.

Thank you very much

Your next question comes from Tim Arcuri from Citigroup.

Please proceed.

Hi.

Thanks.

I jumped on late so this could have been asked already.

But you ordered no more equipment for the next six months, what -- what would your spending be into the first half of next year?

So what I'm asking is what's the deferred capital spending that's a result of the tools that you've already placed orders for?

Thanks.

I don't quite understand your question, but I can repeat the Kpcs pattern for this year.

We have guided 2.5 to 2.7, which pretty much front-end loaded.

We have spend more than half in the first half of the year.

And up to now, we have spent 2 billion already.

So for next year, we are not ready to guide.

So you're asking whether we have deferral?

Of course we're continue ordering equipment because we are building capacity for 90-nanometer.

As we need capacity the [INAUDIBLE] will continue to move in.

Right.

I'm just -- I'm just wondering whether you can quantify what that deferred capital spending is.

What's already been allocated but not yet spent.

I'm sorry.

I cannot quantify.

It's too detailed.

Okay.

Okay.

And then, I guess, the second question.

Can you kind of dive a little bit deeper into your 90-nanometer, you know, capacity utilization and, you know, what you think that, that based upon your current customer forecast, what you think that you're going to have to ramp your 90-nanometer capacity, maybe on a sequential basis through next year to meet customer forecast.

Thanks.

I can answer your first part of the questions and then I'll have Rick answer the second part.

You're asking our utilization for 90-nanometer?

As you recall, we are adding capacity to track the demand.

So when we add a capacity, we would expect it's going to be very high and I can tell you that all utilization for 90-nanometer is very high.

And your second part of the question was asking --?

Yeah.

On sequential basis?

Yeah.

With sequential basis, how do we add capacity?

Yeah.

I'm basically asking what, you know -- if you want to do it on sequential or on a annual basis, what you think that your 9-nanometer capacity will have to be by either the middle or the end of next year relative to what it is right now.

Well, again, we cannot really give you any details on the 90-nanometer capacity plan.

So we are still working with our customer and our own forecastings on that.

What I can only say -- what I can certainly say, of course, is we will build enough 90-nanometer capacity to meet all our customers' demand next year.

That's the principal for that.

Okay.

So just to kind of finish up that thought, so you're saying that your 90-nanometer utilization is no lower than your overall corporate utilization.

So your overall corporate is 100% in the fourth quarter, so your 90-nanometer utilization is also that high?

It's doing pretty well, it's doing pretty well in the last quarter and this quarter.

Yeah.

Okay, thanks.

Your next question comes from Mehdi Hosseini from FBR.

Please proceed.

Thank you.

Several questions.

First, in terms of the cost of materials, such as low waiver, has there been any changes or are they remaining stable going up or down.

And then, regarding the 65-nanometer, you talked about one customer being involved in trying to get tape-out out.

Can you give us any kind of color as to what would it take in terms of capacity or actually CapEx to have the equipment available for customers to actually work on 65-nanometer tape-outs for next year?

And then the third question, if you could give us a color on depreciation for Q4, as well as the trend next year.

Thank you.

I will try to answer your first question first.

You're asking about a waiver supply, are we going to see any problems.

I can tell that we have mighty good sources of wafer supply.

And I believe we have pretty strong bargaining power, too.

So we are not seeing any pressure or that we are facing, of course, increase in that area.

And your number three question regarding depreciation, this number has to do with our Kpcs plan for 2006.

As I said I would have finalized the number.

But I can tell you that depreciation for 2006 will be very similar to 2005.

Our depreciation, amortization together for 2005 will be approximately 60 [AB] to NT$.

I'm sorry.

Did you say that depreciation would be higher in '06?

I didn't hear you.

No.

I say that would be very similar to 2005.

But the numbers are not confirmed yet.

Sure.

Sure.

And then regarding 65-nanometer capacity for next year, just -- this is for R&D at your customers and having enough capacity to have tape-outs.

Oh, yes.

We have, now, already what I will call R&D/Hyler 65-nanometer line.

So I think even -- as we said earlier, we have already seven customers who are working with us and we have actually some tape-outs already.

For that, there's no problem.

We are -- what we are working on now is to add production capacity next year.

I see.

So if lithography lead times are still in the six-month range, would it be fair to say that in order to get 65-nanometer capacity, you would have to start ordering litho tools?

Well, we planned in such a way for the long, what we call long lead time tools we would have ordered earlier.

We wouldn't wait for the -- until the last moment.

In addition, I think we have also a very strong relationship with our supplier.

And we have certain arrangement for better lead time.

And one equal mention to your questions, on the 65-nanometer capacity, we are going to have some commercial production in the second half of 2006 for 65-nanometer.

So we're adding capacity on 65.

It will start in from second quarter next year.

Great.

If I may just one follow-up a litho.

Would it be fair to say that, or to assume that you're going to be using wet or emersion for a 65-nanometer?

Probably not.

Probably not.

I mean, it seems now the dry 193-nanometer can do the job.

Because your competitor yesterday said that they're going to actually going to move ahead and use wet technology.

Well, I -- I really cannot comment on our competitor's way of doing things.

Every company sometimes is different and ought to be.

Sure.

Understood.

Thank you.

Your next question comes from Dan Heyler from Merrill Lynch.

Please proceed.

Sir, your line is open, you may proceed with your question.

Dan, are you on line?

Sir, if your line is on mute, please unmute your line.

Operator, move to the next one, please.

Your next question comes from Shailesh Jaitly from Nomura Securities.

Please proceed.

Yeah.

Hi.

Thanks for taking my question.

Firstly wanted to ask about this IDM absolute revenues.

When I look at this quarter, your quarterly run rate is pretty similar to the peak revenue run rate on IDM, so what you saw in last year.

So if you could just help explain the differences, what you're seeing this year versus last in terms of number of new IDM engagements or your NT shares.

Ir is it primarily just the increase in businesses from your customers, what you had the last year.

Actually, if you look at our IDM versus fabless system companies, [INAUDIBLE] it's quite constant.

We have roughly 30% IDM and 70% fabless.

Just talk about a revenue contribution, I think we have the revenue increase from both IDM fabless together, that will give us today's revenue.

We are increasing market share with certain IDM companies, cannot really comment on who, but we are -- we are penetrating a little bit more into IDM.

In terms of number of IDM customer engagements, have they changed from the middle of last year to now.

Oh, from last year to this year?

Yeah.

I'd say it's about the same, you know, sometimes the business takes -- is taking usually a very long time to grow up a customer to reach volume production.

Okay.

Also, if you could comment on meniality through the quarter in 4Q, which of the three months, October, November, December, you expect to be the peak month in terms of your shipments.

I cannot comment on the individual month revenue.

Sorry about that.

Okay.

You mentioned about this one customer engagement where you're basically the production volumes for the 65-nanometer next year.

When do you expect significant contribution to start from this customer.

Of course, we are engaging with, as I said, seven customers and I can only answer your question in a generalized manner.

I cannot answer your question for one specific customer.

But in general, we expect our 65-nanometer production to start early next year, thereby, probably have a not to big a volume, but we do expect the volume to accelerate in the second half of the year.

Okay.

One question.

Lora, you mentioned about, if I -- I just want to check this that I got it correctly.

You said that DVD player shipments rose quite strongly in 3Q whereas your PC graphics were impacted by inventory adjustments.

How are you seeing these trends going forward in 4Q.

Let's see.

Okay.

In 4Q in the communications sector, we believe wireless and wireline will continue to improve and handset grow, the wireless lengthy kind.

On the computer side, PC I see recover across the board.

So all product in PC segment will going up in both quarters.

Okay.

One last question on your IDM revenues, do you expect sequential improvements in 4Q?

We do not classify the revenue focus in that manner.

Only when we close the quarter we will try to identify where the revenue come from, IDM or fabless.

Usually on a forecast basis, we don't characterize it like that.

Okay.

Thank you.

Ladies and gentlemen, due to the time constraints, from now on please limit your questions to two questions per piece.

Your next question comes from Nicholas Gaudois from Deutsche Bank.

Please proceed, sir.

Yeah, hi.

Nicholas Gaudois from Deutsche Bank.

Two questions.

First of all, for 65-nanometer, your initial production in H206, could you qualify which process this is, where it is, low power, generic or high frequency?

I think most likely low power and generic.

I think we have customer in both technology.

Okay.

Great.

And a question on the [INAUDIBLE] capacity for the [INAUDIBLE] correct, you added, basically resell.

You will be adding about 36,000 wafers per month of capacity both at fab-12 and fab-14.

Could you qualify again qualitatively, not quantitatively, whatever you may add a similar amounts less or more as a basic scenario in 2006.

It really depends on the demand so I can't really give you a -- considering what magnitude is going to be.

Could you try to define [INAUDIBLE], in bad case, worst case and best case for what you can see? .

Can you repeat your question?

Yeah.

If I totally understand that it's demand dependent, but is it possible for you to define bandwaves, i.e. worst case you may have let's say 20, best case 40, or just --?

We don't have that kind of scenario.

But I can tell you that we are seeing our advanced geometry, which many produce, in fact 12 and 14, the demand for the forecast for that is quite strong.

So we will continue to expand fab 14 and 12.

Okay.

So when you were thinking earlier on about you have enough capacity to meet your customers' demand or requirements for enough for leading edge, you were referring to the next couple of quarters, I guess.

Let me -- we certainly will continue building capacity in the next couple of quarters, just you know, we are not ready to announce it yet.

But certainly, it will be fairly continuous matter.

Okay.

Thank you very much.

Your next question comes from Mark Fitzgerald.

Please proceed, sir.

Two short questions.

Can you give us some guidance on the share count for the next quarter here and the second question is are ASPs holding up in the advanced technology nodes, the pricing pressures when we seeing moderating are really in the trailing edge?

Sorry, your first question break in the middle of your questions.

Can you say it again?

Yes.

I'm looking for any guidance on share count for the December quarter.

Share count.

Oh, number of shares?

Yes.

It remain the same.

It won't change.

It only change once a year.

The 24.6.

Correct.

Okay.

Second question?

Second question was the average selling price declines is -- can we assume that's basically in the trailing edge technologies and that the average selling prices have held up in the leading edge technologies?

You're talking about fourth quarter?

No.

I'm talking about the current quarter that you just reported where ASPs were down.

Oh, okay.

What's the explanation behind that?

Is it trailing edge or is there pricing pressure in leading edge, as well.

Actually, covered so both trailing edge and the leading edge.

So there was pricing pressures in the leading edge.

We always have pricing pressure.

Okay.

Thank you.

Your next question comes from Shailesh Jaitly from Nomura Securities.

Please proceed.

Yeah, hello.

Just a follow-up question on Rick's comments regarding the customer order pull ins.

Given that there are shortages on the Backend and these customers are not be able to package enough to meet the demand in 4Q, is there a risk of a step function decline in shipments as we get into 1Q.

Shailesh, sorry, you have to repeat your question again.

Yeah.

I was just referring to Rick's earlier comments regarding majority of the customers pulling in the wafers at this stage and your utilization for going up in 4Q.

I was asking that given that Backend is not able to step-up the capacity and packaging units in the same way as you guys are able to do and that's why you are seeing waiver banks building up at the Backend.

So is there a risk, as we get into 1Q, there could be a step function decline, given this waiver bank inventory buildup.

Well, I think we basically have answered that question earlier.

By the way, we did not say that most -- majority of customers are pulling in.

What I was saying was for those customers who want to make changes, the majority of whom are for pulling in than push off.

But of course, there are many customers who do not change their requirements.

As to the -- basically, you're talking about inventory situation.

There is probably bumps here and there.

You know, we -- our investigation shows the overall supply chain being in reasonable control.

Okay.

Thank you.

Your next question comes from Pranab Sarmah from Daiwa.

Please proceed.

Thank you for taking the call.

My first question is on the tax side.

On the fourth quarter, Lora, how do you take the tax guidance, will there be any tax credit for the fourth quarter?

Oh, okay.

For tax credit, you can assume that very similar to third quarter.

and tax on 2006, any thought on that side.

Okay, let's see.

I would suggest you use a tax rate of 14% to calculate your tax expenses.

14%.

And next one is probably you have to spend about 500 million on CapEx on the fourth quarter.

That capacity will come on the first quarter '06 or it may prolong to second quarter?

I think some of them may come in first quarter and some on second quarter.

I think in the beginning of 2005, you have guided like about 30% of your revenue intend to spend on the CapEx.

And that is probably necessary to maintain a competitive strength within the industry.

Do you think that practical statement is still valid or it may change going forward in 2006 as and when we go sell 90 or 65-nanometer?

I don't think we command a 30% is our guidance for the Kpcs.

I think we did mention, although it's not -- we are not using revenue to gauge how big our Kpcs would be, but in the ballpark range, as we have seen history, a year like this, we will roughly spend 20% to 30%, is what we said.

But having said that, I think it's different year by year.

And some year is strong demand and we would like to spend higher and some weaker we could spend less.

We are not using the revenue.

It's only guidance for Kpcs.

Okay.

Okay.

That's it, thank you very much.

Ladies and gentlemen, this concludes your question and answer portion for today's call.

I would now like to turn the presentation back to Lora Ho for closing remarks.

Thank you very much for participating our third quarter conference and we thank you for your questions and we looking forward to see you in next quarter.

Bye-bye

Ladies and gentlemen, this concludes your presentation for today.

Thank you for your participation.

You may now disconnect.

Good day.