Welcome to TSMC's first quarter 2015 earnings conference and conference call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Today's event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dial-in number -- your dial-in lines are in listen-only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows. First TSMC's Senior Vice President and CFO, Ms. Lora Ho will summarize our operations in the first quarter followed by our guidance for the current quarter. Afterwards, TSMC's two Presidents and Co-CEOs, Dr. Mark Liu and Dr. C.C. Wei will jointly provide a couple of key messages. Then we will open both the floor and the line for the Q&A. For those participants on the call, if you do not yet have a copy of the press release you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor Notice that appears on our press release. And now I would like to turn the podium to TSMC's CFO, Ms. Lora Ho for the summary of the operations and the current quarter guidance.

Thank you Elizabeth. Good afternoon everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter and followed by the guidance for the second quarter. First let me summarize our first quarter performance. In the first quarter, we have achieved NT$222 billion in revenue, 49.3% gross margin, 39% operating margin and NT$3.05 in EPS, which are all within our guidance range. On a year-over-year basis, first quarter showed very strong growth versus last year. Our revenue increased 50%. Gross margin and operating margin went up by 1.8 percentage point and 3.6 percentage point respectively. Net income and EPS both increased 65% versus the same period last year. On a sequential basis, the wafer demand for the first quarter remained strong. But NT dollar was stronger than the assumption in our first quarter guidance by about 1% which reduced our revenue by NT$1.9 billion. Despite that our first quarter revenue remained essentially flat versus fourth quarter last year. On the profitability side, gross margin was slightly lower than fourth quarter mainly due to lower capacity utilization, offset by cost improvement, favorable inventory valuation adjustments and a favorable foreign exchange rate. Let's take a look at the revenue by application. During the first quarter, communication and computers declined 9% and 10% sequentially while consumer and industrial increased 32% and 19% respectively. By technology, 20-nanometer revenue contribution decreased from 21% in the fourth quarter last year to 16% in the first quarter this year due to key customers' product seasonality. Meanwhile customer demand for our 28-nanometer wafers remained solid and contributed 30% of wafer revenue. Accordingly, these two advanced technologies, 20-nanometer and 28-nanometer represented 46% of our first quarter wafer revenue, 5 percentage points lower than the fourth quarter last year. Now let's move on to…

Now our two Presidents and Co-CEOs will deliver the key messages. We'll start with Mark.

Good afternoon. I will deliver the key messages. First, on the near term demand. The demand of TSMC wafers remained strong in the first quarter. This led to our 1Q quarterly revenue to be essentially flat from fourth quarter last year. In the second quarter, some of our customer appear too optimistic on their own market outlook. As a result, inventory level of them appear to be higher than they planned. Recently we saw several mobile customers cut back their delivery schedule because their demand did not come to what they anticipated. Therefore, we forecast our second quarter demand will be below normal and the quarterly revenue will decline by about 7% to 8% from first quarter. Our near term market demand will then be more moderate than we estimated in January. We now estimate fabless companies exit the first quarter with inventory days higher than seasonal level. However, we think that it will be back to normal towards the end of the second quarter this year. So forward looking for full year we will be continuously working for double digit revenue growth year 2015. Next I want to comment a few on our long-term outlook. TSMC target our long-term revenue, CAGR compound annual growth -- average growth rate to be 10% in the next five years. We intend to maintain our structural profitability and the net profit growth will be in line with revenue growth. The continuous demand of more functionality and integration in smartphones drives for more silicon content. We expect smartphones will continue to drive our growth in the next several years. In the meantime, we see IoT appears to present us new growth opportunities. The proliferation of IoT not only will bring us growth in the sensor, connectivity and advanced packaging areas, the associated application and…

Okay, thank you Mark. Good afternoon, ladies and gentlemen. I will update you the 28-nanometer, 20 and 16 FinFET status and also our InFO business. First, 28-nanometer. This is the fifth year since TSMC's 28-nanometer entered mass production. 28-nanometer has been the very large and successful node for us. Our market segment share at this node has held up well and is in the mid-70s this year. We expect this to continue in year 2016. In comparison this is better than what we had in the 40-nanometer node. The demand for 28-nanometer is expected to grow this year due to the growth of mid and low end smartphones and as well as the second wave segment such as radio frequency, circuit product and the flash controllers that migrate into this node. However, due to some customers inventory adjustments, which we believe is only going to be for the short term, the demand for 28-nanometer in the second quarter will be lower than our previous quarter resulting in 28-nanometer capacity utilization rate to be in the high 80s range. But we expect the utilization rate of the 28-nanometer to recover soon and to be above 90% in the second half of this year. While we are in the mass production, we also continue to improve the performance of our technology. Last year we have introduced our 28-HPC, which is a compact version of 28-HPN. For the purpose of helping 64 bit CPU conversion for mid to low end market, this year we further improved the 28-HPC to 28-HPC Plus. For a comparison 28-HPC Plus will have 18% power consumption, lower power consumption at the same speed or 15% faster speed at the same kind of power. As for the competitive position, we are confident that we will continue to lead in…

Alright, thank you, CC. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit your questions to two at a time, so to allow all participants an opportunity to ask questions. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate that to English before management answers your question. For those of you on the call, if you would like to ask a question please press the star and then 1 on your telephone keypad now. Questions will be taken in the order in which they were received. If at any time, you would like to remove yourself from the questioning queue, please press the pound or the hash key. Now let's begin the Q&A session. Our first question comes from -- I see Andrew first, so Barclays, Andrew Lu.

Thank you, Mark and CC Wei and Lora. I have a couple of questions. Thank you Dr. Sun because I haven't picked as the first one for a very, very long time. Earlier CC Wei mentioned 16 FinFET ramp-up was faster than earlier expected a few months ago. So can you give us some color on the revenue contribution by Q4? I suppose it should be also a few percentage points higher than a few months ago. I think earlier guidance is 9% high single digit for Q4 revenue contribution from 16 FinFET.

Andrew, I think you already answered the question by yourself, a few percentage more.

So no precise number, like 12% or 15% or something like that.

That's too specific.

Okay. My second question for Mark. I think Mark presented at the Technology Symposium in San Jose mentioned that 16 FinFET competing technology is about 10% performance better. So can you elaborate what's 10% performance better? If our [die] size is larger than our competitors, how can we get the 10% performance better? Thank you.

In the conference we talked about 16 FinFET Plus. That is our second generation FinFET transistor. In that we improved our transistor performance a great deal. According to our information, that transistor speed -- [of course the speed at fixed power] is higher than the competitor by 10%. That's what I meant.

How? Because of the transistor?

Yes, the transistor structure, the transistor engineering.

Compared to competing -- is that competing the current competitor's solution or the next generation competitor's solution? For example, LPE versus LPP or something like that.

The fastest one. The fastest.

Thank you.

Our next question will go to Bank of America Merrill Lynch, Dan Heyler.

Thanks, Elizabeth. So a couple of quick questions. Congratulations on the 16-nanometer success and faster yield ramp than previously planned. As you go to convert your 20 capacity to 16 due to those better yields, I guess two parts to the question. What's the implication on margin as you're converting a fab from -- I know you do this a lot, but this is a big transition with limited product. So as you're going from 20 to 16, what are the implications on margins? Can you -- do you take maybe one quarter hit on margin before you get back to trend? Thank you.

Dan, I will firstly talk about the implication for CapEx. Probably that's the more important which will lead to the margin in a later stage. You know conversions; it costs less than adding new capacity. So when we see a node need to be converted, if we can do it faster, that mean we can spend less CapEx. That's actually how this $1 billion reduction coming from. In terms of margin, actually it has multiple factors. Depreciation of course is number one. The other thing is how fast can you bring up your yield and how does economic scale get into play. So from what we have seen right now, we believe the 16-nanometer margin will be even better than our 20-nanometer margin because we have the basis of 20-nanometer. So as we have said many times, we don't want to separate 20 versus 16 and always -- you guys always ask 20 margin and 16 margin separately. So I would say if we combine 16 and 20 margin, it will be a pretty good progress. And we have seen 20 has progressed quite well and 16 will be even better. So although this 20 plus 16 will still have some small dilution to TSMC in the year in 2015 and 2016, for 2015 maybe 2 to 3 percentage point and 2016 will be 1 to 2 percentage points, but we are targeting to achieve corporate level margin by year 2017.

Okay, thank you. And then just as a quick follow-up on that, does 20-nanometer still grow from its lower level in the first quarter sequentially? Will it -- in absolute dollar terms, can you maintain the current level throughout the year? I think you've implied that in your guidance. I think you said mid-single digit, just to confirm that. And is that throughout the year? Does 20 stay at that 15% of revenue throughout the year?

Dan, would you please repeat your question again?

Do you think 20-nanometer will remain at the current revenue level throughout the year? Given that some customers are not successful in 20 products and maybe didn't succeed and some customers are more successful. So if you put everything together if 20 stays at the current revenue level.

In my statement, I say that contributing 20% revenue cannot hold because of our customers demand. But I also say that second quarter we continue to increase the 20-nanometer business, so that means in the second half we cannot maintain that same level of business.

In dollar terms.

In dollar terms.

Okay, cannot. And then my second question is relating to [28-nanometer]. Here you certainly have a lot of growth in 16 with customers taping out aggressively especially next year. Given your high share of 28, how do you keep 28 full? You obviously have a lot of technology there. Customers will move forward. So I'm wondering, could you elaborate on new areas that are actually creating new demand in 28 such that you can continue to grow 20 next year. And do you think you can grow? I think previously you said maybe hold it at the current levels even with 16 growing. So just maybe revisit that question thank you.

Okay. To answer the question, I think the high end smartphone will move to 16 FinFET. However, the mid to the lower end smartphone will stay in the 28-nanometer because that's very cost effective. And mid and low end smartphone continues to grow significantly. So that will gives a very strong demand on 28-nanometer. In addition, we still have the second wave product like RF and flash controller, as I used as an example move into 28-nanometer. So summing it up, I think the 28-nanometer's demand continue to grow while we move into the 16 FinFET for high end smartphone.

Excellent, thank you. And is there an element of -- as you add value on 28-nanometer -- as you add value is there an element of being able to hold pricing there because it's an old node and all the old nodes face pricing pressure. And I think we get a lot of questions from investors on old nodes getting pricing pressure but at the same time you're adding a lot of value there. So maybe you'd give us a little bit of sense of 28-nanometer kind of pricing environment next year.

What I can say is that we remain more competitive -- very competitive in our value proposition. That gives you some idea about the [capacity support], yield, and performance and also include pricing. But all combined together we are better than the competitor.

Alright. Next the questions will be coming from Deutsche Bank's Michael Chou.

Hi. Two questions. The first is for EUV. So Mark has highlighted your EUV progress. At some time, you may consider using EUV in the second stage of the 16-nanometer -- 10-nanometer ramp up, potentially in 2018 or 2019. Thank you.

No, we always look for opportunity to insert EUV in both 10-nanometer and 7-nanometer. The EUV technology provides not only some cost benefit but also simplify the process. That means you can replace multiple layers with one layers that helps your yield improvement. So this opportunity both in quality and cost always exist so long as EUV's productivity comes to the threshold point. And as you noticed, on 10-nanometer, our capacity build will be largely done in 2016 and 2017. So 2018 will be inserted, if inserted it will be combined with some other tools upgrade, some tool upgrade to 7 for example and replaced by the EUV tools. In that node it will not be a fresh capacity build with EUV at that time because that's a little bit late in the schedule for the 10. 7 nanometer of course it will be higher probability adopting EUV. And the benefit will be bigger because the 7 nanometer has a lot of multiple layers, quadruple, even multiple patterning layers that EUV can be more effective in reducing the cost and improve the yield, for example. So that's our current status. But today EUV is still in the engineering mode. The productivity, as you heard, will still have some gaps for practical installation of the technology. So we'll be working on that -- in that mode. And we have -- although we have one-day performance up to 1,000 wafer per day, but I was talking about average is still a few hundreds. And we need to get to more than 1,000 to consider the schedule to put it into the production. Thank you.

Second question is regarding the outlook by segment. That's for CFO outlook by segment in Q2.

In Q2?

Yes.

Okay. Q2 I have just said there will be 7% to 8% decline. I think mainly it's in telecommunications segment. As you can see in my presentation the communication and industrial and standard both segment constitute about 80% of TSMC revenue. So the decline mainly come from those two segments.

Thanks.

Alright. Next we will -- the questions will be coming from UBS Eric Chen.

Hi Mark, C.C. Wei and Lora and Elizabeth. Okay my first question probably go to Lora regarding to the CapEx. You just mentioned we cut the CapEx by $1 billion but we will maintain our [competitive] schedule. How about for the 28 nanometer process in term of the competitive, in term of the CapEx for the 28 nanometer process, the schedule is going to changing?

We only spent a very little money on 28, especially in the first half to add capacity. In addition to that then we have continued productivity improvements. So overall year 28 capacity will still grow.

How many percent year-on-year growth are we talking about?

Well I will not specify the percentage but it will grow with the combination of both.

Okay. To maintain the original schedule.

Yes.

Okay. How about the depreciation costs given that we cut $1 billion CapEx.

I think I have said in last quarter we expect total depreciation will be -- increase will be around 20%. With this $1 billion cut down, the increase will be in high teens, will not be 20%.

Okay, high teens. Okay. The other question probably go to the Mark or C.C. Wei, regarding to the -- our investment in China. Any update or any improvement or any logic behind? And some newspaper talk about we would like to build out our own. So any strategy behind? Thank you.

Thank you. Let me take this one.

Okay.

You know we have an 8 inch fab and it's running very well in Shanghai and its making profit. And we are growing our China business quite nicely in the past few years. Now it accounts for 5% of TSMC revenue. And we have seen a very big -- still big, very big fabless company engaging with TSMC more closely. And we have sales office in the north part, the middle part and southern part of China. So we are participating the China's growth. And we will continue to participate the growth in the future.

Okay. How about the capacity growth for like 8-inch fab in China?

We are aggressively evaluating what's the best way for us to do it.

Okay. And on your evaluation, what kind of geometries you have put as first priority for your 8 inch fab in China?

It's probably too detailed; we are still evaluating. We will let you know when we have a better picture, okay.

Okay, thank you.

Alright. Next we will ask Credit Suisse, Randy Abrams for questions.

Okay, thank you. The first question, I want to ask about the duration of the pull back because second quarter you're seeing the issue from mobile, the inventory exiting your normal levels. And so to what extent do you see a [feed-up] in second half? And as you go to fourth quarter, how broad is the customer base. Is it a single key product or are you seeing broadening out of 16 FinFET as you ramp that in fourth quarter.

The question -- the second quarter scheduled delay we see in the mobile product area in several of our customers, so it's not in one single customer. But of course there is one single customer impact the most which is last year to the captive IDM. As for the second half, we think, first of all, the inventory adjustment will largely complete towards the end of second quarter. We think the end market of smartphone is still healthy growth this year. Therefore the second half will [resume] the growth. And, more importantly, our 16 FinFET technology will start to ramp in the second half. So that will contribute a lot of growth, more than the 20 nanometer shipment reduction. So those two factors.

Okay. And the follow up question -- and I'll ask on the 16 [effect], multiple customers contributing this year or if it's a single key product. But the second question I wanted to ask about the internalized silicon. One of the impacts was the -- it's well known now that Samsung's ramping up with more of its own silicon. If you could talk about how much is that impact versus the broader smartphone weakness in inventory. And if you look forward, do you see that risk staying with you as far as Samsung, Intel internalizing silicon; if there is way you can prevent that or mitigate that risk.

Well we definitely see the impact on second quarter, yes. But as far as the future, how that internal captive portion will take away from the foundry, it's really hard to say because each product they always have some competition considerations. So -- but we are on the -- and also this year the two big smartphone sells very well and that squeezed the Android [indiscernible] on non-Apple phones at this point. But that part I think will recover. This is probably a competitive -- competition status in the -- for the period of time only. So but we know that we do not compete with our customers. So the relationship with us and our customer to build the best product to compete is still the best solution seen by many of our customers. And that is we are continuing to work on. And so we will try to produce the best product with our customer to compete.

Alright. Next one in line actually is Citi's Roland Shu.

Thank you Elizabeth, Mark, C.C. and Lora, my first question is on your given the [fast] ramp of 16 nanometer, so are we going to see significant revenue contribution for 16 in 2Q?

We ramped up in third quarter this year, but its many layers of process plus about one month is back-end. So in 3Q we expect just the revenue just very minimum.

Okay. But we will start reporting 16-nanometer revenue from 3Q?

Yes.

Okay, thank you. And with this faster ramp on 16 nanometer, so how do you think about your 16 nanometer overall market share this year? Are we going to see a bigger market share than our major competitor on the 16 nanometer this year?

I only can say that it's better than we expected.

Okay. Okay, thank you. And my second question is, in terms of CapEx this year, and also we are talking about -- we are also [modeled the] CapEx spending by $1 billion, converting more 20-nanometer to 16-nanometer. And I think this is ASML also today, they also say this is a rising trend to convert the [N-plus 1] node to a [minus 1] -- a minus 1 to N-plus 1 going forward. So the question is will this trend continue whether or not this year CapEx spending is peaking out in the near term to TSMC, the overall CapEx spending? Because I didn't -- Mark also said for 7-nanometer we probably are also going to need similar tool as 10-nanometer as well. So with this continue towards conversion, whether or not the CapEx spending is peaking out this year. Thank you.

It's probably too early to say that, peaking out, because we are still ramping our 16-nanometer and we're going to spend more money next year in 16. Go above 7 nanometer and we will continue to spend money. So I won't say it's peaking up for now.

Okay. So how about the capital intensity? What's the longer term view on the foundry for the capital intensity?

What I can say now is capital intensity came down from previous year close to 50% to a 40% range. And at least for now I can see we will at the 40% range. And more specific we have to be wait for later time.

Okay.

Alright. Also in the order of questions received I have to go to Morgan Stanley's Bill Lu.

Hi. Good afternoon. Thanks for taking my question. This is a follow-up to Randy's question. But I'm going to go over some numbers with you first before I ask the question, which is we did the math. I don't think these are exactly right. But over the last five years we've got IDM zero growth, fabless 8%, but system houses above 20%, right. So system houses, I'm excluding memory, just the system LSI, the logic portion. I think that might be slightly conservative. Now that's a bit of a change and I'm wondering how we should think about that, how we should -- if you look at TSMC addressing the system houses versus the fabless customers, if you look at for example your market share, if you look at your margins for the system houses versus the fabless, how do you think about that. Thank you.

Yes. Indeed in the past five years the system houses sourcing foundry business to us has a much higher growth rate, as you quoted? But remember that came from a very small base, okay? But we welcome system house sourcing because we consider them are fabless too, fabless companies, the companies without fabs, bring business to us. So it's not necessarily the margin has to do with what type of company sourced. It has to do with our value to that company and also the size, the size of the business. If the business is bigger, of course the -- we probably can enjoy a slightly -- a little bit better price. So it just depends on the size of the business. It does not depend on what company, system company or non-system company's business.

I guess my question is pretty simple, which is when the fabless is outgrowing the industry; it's easy for me to understand that foundry's going to benefit, right? When the system houses outgrowing the industry, some of them have their own fabs. And so is it a positive or negative?

I'm sorry, system company, someone…

For example you had said earlier that one of your customers lost market share to an internal solution. I consider that to be a system house as well right. So overall system house could be in IDM or they might outsource.

Okay. Our system houses are considered fabless system houses, what you just quoted. Mainly it's the fabless system houses. We have very little business from the system houses with their own fabs.

Sure.

Okay. So, so long as they're fabless companies, how well the business of that system house depends on their business [composition].

Thank you. I guess we'll take it offline. My second question, I'm not trying to pin you down, but Mark here said earlier that the inventory correction in 2Q and second half of the year will be more normal. Now typical normal seasonality, second half is better than first half. Are we saying that second half revenue this year is going to be higher than the first half?

Okay. Yes, that's what we see; second half this year will be better than first half.

Great, thank you.

Alright. Next one will be from HSBC's Steven Pelayo.

For the last three years or so, TSMC's been growing 20%, 30% year-on-year revenue growth rates. First quarter 50% year on year. But to Bill's question there, it does look like in the second half of the year, if I play around with your full-year guidance and what you're doing, low single-digit year-on-year growth rates. And if we exclude maybe 16-nanometer, above 16-nanometer, maybe it's flat to down. Is that the new industry? What are we talking now for industry growth rates for both the semi industry and in the foundry market this year?

So your question is…

90 days ago you suggested the semi market was going to grow 5% this year with foundries growing 12%. In light of your new guidance, in light of what it looks like you're going to have very slight year-on-year growth rates in the second half of the year, what do you think that means for the overall industry?

We think the semiconductor growth this year currently is indeed we adjusted down from 5% earlier to 4% [at] this time. Yes. We think it's really due to the macroeconomic situation around the world today. And therefore the foundry market -- foundry growth rate will adjusted down too. We are looking at about 10% range. So that's why we revised our view on the current semiconductor growth.

I was just trying to get some specific numbers there. For you, Lora, spending $1b less on CapEx is going to help with what already is a pretty good free cash flow story this year. Can you talk a little bit about maybe the free cash flow targets for this year and what you'll do with some of that excess cash? You had $14b in cash but now it sounds like you have an extra $1b coming from a lower CapEx budget too. I think you're going to generate free cash flow that's maybe double your dividend payment this year. Can you talk a little bit about free cash flow goals and dividend plans?

We are confident with our free cash -- capability to generate free cash flow. If we want to use all the money to pay dividend, which is not a good idea, but certainly we have some capability to do so. Our view on dividend is that we need to sustain the level without going down. And we will try our best to maintain that level therefore. So the cash may go up and then we have several ways to consider. Mark was mentioning we have new target for the five years. We want to grow 10% revenue and EPS. And for that we need to continue to invest, also in capacity and also in R&D. So we need to have some ability to do that too. Okay? Thank you.

How much cash do you need from your balance sheet to support a 10% revenue figure over the next five years? Is $14 billion enough?

It's difficult to make a quantify. It depends on how much we need to expand to keep that 10% growth. So I would not answer this question for now.

Alright. I think it's about time for us to actually go to the line. So we will now take our next question from the call. Operator, please proceed with the first caller on the line.

Our first question comes from the line of Mehdi Hosseini from SIG. Please ask your question.

Thanks for letting me ask a question. Two follow up. You talked about converting 20 to 16 nanometer. Can you elaborate on the magnitude of this conversion? And I have a follow up.

Without going too specific, what I can say is the early of this year we expected to have more 20 than 16 capacity. Now with the conversion more aggressively, we now see 16 nanometer capacity will be bigger than 20 nanometer for this year.

Sure. As this conversion actually takes place, would that impact the installed base of the equipment and therefore would that help you with a one-time positive impact to gross margin?

It -- I don't think it would help our one-time improvement in gross margin. As I said earlier, the two technology nodes share the same facilities so the depreciation has to go to the two nodes for a period of time, okay.

Okay. And then just one quick follow up on the CapEx cut. What -- can you help me better understand what has happened over the past few months that has given you the confidence that you can re-use the equipment? I imagine the re-use is something that has happened very often in the past. What happened in the past couple of months that made you decide to cut the CapEx?

There were two things that made us do this decision. Number one is we did improve our capital efficiency, meaning we are reducing our CapEx per K investment; that's pure savings. Another thing is the conversion is faster from 20 to 16, as we see customer migrate to 16 faster than we thought. So there will be some excess capacity for 20 nanometer going forward if we don't do it. It's not a magic, and at the very beginning we know these two nodes has very, very high commonality in equipments. The commonality is about 95%. So it's just a matter of timing, what's the timing we do the transition, and we decided to do it now.

Great, thanks so much.

Alright. We will continue on the line. Operator please ask the next caller on the line.

The next question comes from the line of Brett Simpson from Arete Research. Please ask you question.

Yes, thanks very much. My question, on 10 nanometer, I know it's still 18 months away from ramp up, but can you talk about how fast this ramp might scale relative to 20 nanometer or 28 nanometer? And as you ramp up 10 nanometer for high-end smartphones, would you expect low-end smartphones to start migration from 28 to 16 FinFET in 2017? Thank you.

Alright. So Brett we just want to make sure we hear you correctly. Your question seems to say that if we ramp 10 nanometer in the future, which will be targeting the high-end smartphone, will the low-end smartphone be migrating from 28 nanometer into 16 nanometers. Is that your question?

Yes. And just to add to that Elizabeth, how quickly will 10 nanometer scale up relative to the scaling of 20 nanometer -- the ramp up of 20 nanometer and 28? Will it be as fast?

Alright. So the profile of the 10 nanometer ramp, will that be steeper than the profile of the 20 or the 28 nanometer?

Yes.

Yes, thank you.

The first part of the question has to do with 10 nanometer ramp for the high-end smartphone, will the mid, low-end move to 16? I think -- it is up to our customer's product portfolio. We definitely know a lot of customer is looking at 28 nanometer to use -- to do as a the low end. But the specification, the smartphone processor specification changes constantly. So what portion of that product will move to 16 nanometer, we think definitely there are some portion, but how a big portion really depends on their product strategy? On the 10 nanometer ramp, I wouldn't say it's bigger, but at least its similar scale of our ramp as we do in 16 and as we do in 20.

Thank you. And let me just have a follow-up here. There's been a lot of talk in the industry about one of your larger customers planning to introduce a new application processor on both Samsung's 14-nanometer process as well as your 16 FinFET for the same chip later this year. And we haven't really seen a single chip get taped out on two new processors at the same time before in the industry. So my question, how does this really work between the two foundries? Does it mean that that one customer can adjust dynamically, month to month, how they allocate wafers between you and Samsung or how might this work? Thank you.

Brett, I think I tried to understand your question, well; the photographer's camera is very noisy here. Okay. So your question seems to say that there is a customer that appeared to be working with two different foundries on the 14 and 16 nanometer node. And the products are about to arrive. You would like to understand how this customer will be allocating month by month the -- what's the production or the orders with both of the two foundries. Is that your question?

Yes, that's right. Whether they can move around dynamically how they allocate wafers, that's right.

Well my answer is very typical. Our 16 FinFET is really very competitive. And we did not know the customer going to -- how they're going to allocate. I cannot even make any comment on that.

Maybe --

Brett, can you hear the answer? Yes.

Okay.

Maybe instead if I can perhaps just ask, you previously said 16 FinFET will be a high percent of -- high single digit percent of sales in Q4. And what's the latest update on that?

Alright. I think that question has already been asked earlier. I think it was Andrew right? Yes. He, Andrew suggested that whether it will be 12%, right?

Thank you.

Okay. Now we come back to the floor. Next the questions will be coming from Goldman Sachs, Donald Lu.

My first question is about InFO. Just to confirm you said by Q3 next year the quarterly revenue from InFO will be $100 million? And also -- Q4 sorry -- what will be the gross margin for this business and also how many customers you have. So that's question number one. The question number two is, I think Mark talked about 10 nanometer and 7 nanometer. Will TSMC offer 8 nanometer similar to 20 nanometer? Thank you.

Well on InFO you asked about what is the margin. The margin is line with the TSMC's back-end business that I can say. I'm pretty sure for that. And how many customers, that I cannot tell you; many.

Many. So you will have more than one customer next year.

Yes.

Thank you.

To answer your question, we will not offer 8 nanometer.

Okay. Next we'll go to JP Morgan's Gokul.

Thanks for taking my question. First of all on 16 nanometer, since Dr. Wei mentioned that next year a lot of demand on entry-level to mid-end smartphone is still going to stay at 28 nanometer, could you talk about your visibility for second-wave demand for 16 nanometer? And a related question would be, would your combined 20, 16 nanometer capacity plan, as it stands right now, how much below 28 nanometer would it be or it would be at the same level of whatever you built for 28 nanometer in the last five years? Thanks.

So you talk about the second wave for 16 FinFET?

Yes, what is the visibility that you have? Is it going to be really strong, because you mentioned that a lot of the cost-sensitive customers would still stay on 28, at least for next year.

Okay. For 28 nanometer I said mid to low-end this year that -- and next year probably, that smartphone will stay in 28 nanometer because it's very cost effective and performance wise it's very good. For 16 FinFET I think that people will start to move with their product plan and some of the mid-end smartphone will move into 16 nanometer. That's for sure. In addition to that, we also see improving our 16 FinFET out to lower power, Mark just mentioned, and that will have a lot of application. And every product lower power consumption is one of that advantage. So that would be our second wave of 16 FinFET.

Okay. Just wanted to add on to that, so when you think about capacity planning for 20 combined with 16 or 16 right now, given that you've accelerated conversion, would you be building similar level of capacity as 28 that you built over the last three, four years?

Well that is too early to say right now. We expect 16 FinFET is a long-lasting node and very similar to 28 nanometer.

Okay, thank you.

Alright. Dan Heyler has a follow-up question. Dan.

Thank you Elizabeth. So on 16 this FinFET compact, which is getting introduced, when would we expect to see that in volume production?

16 FinFET compact FFC?

FFC.

FFC. That will be ready next year. And we expect that high-volume production start probably two years later. That's year 2017, 2018 we reach the high volume.

Okay. So is there a -- so the cast-down version for mid-end phones of FinFET that you alluded to, plus low power, when is that available?

Probably in 2017 second half.

Okay, great. And then on just number of customers that are in volume production in the third quarter and fourth quarter of 16 FinFET, just the number of customers that are in volume production?

You ask a very specific question now. We have a few customers in the volume production, but not as -- I cannot tell you it's 10, 20 or -- I cannot say. No.

A few meaning three.

Too specific.

Thank you very much.

Alright Michael. Yes.

A follow up question for InFO. Is your customer very concerned about concerned about concentration risk for your InFO? Is that possible for you to concede the outsourcing to, licensing to also a vendor or you will try to do InFO in the long term, since you are developing 10 nanometer InFO?

Whether we are going to license this technology out to outside, it will all depend on the business. At the beginning when we ramp it up of course it will be 100% inside TSMC. After that we will work with customer, see whether the business need or not, and whether we want to start with outside. There is a lot of flexibility and possibilities.