Taiwan Semiconductor Manufacturing Company Limited  (NYSE:TSM)
Q1 2019 Earnings Call
April 18, 2019, 2:00 a.m. ET

Contents:

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Image source: The Motley Fool.

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Unidentified Speaker --

(Foreign Language) In English, the earthquakes that just took place at 1:10 this afternoon has no impact to TSMC's fabs or the back-end packaging fab. So there's no impact. Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

(Foreign Language) Welcome to TSMC's first quarter 2019 earnings conference and conference call. This is Elizabeth Sun, TSMC's Senior Director of Corporate Communications and your host for today. Today's event is webcast live through TSMC's website at www.tsmc.com. If you are joining us through the conference call, your 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 of 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 2019, followed by the guidance of the second quarter. Afterwards, Ms. Ho and TSMC's CEO, Dr. C.C. Wei will jointly provide company's key messages. Then we will open, both the floor and the line for the Q and A.

For those participants on the call, if you do not yet have a copy of the press release you may download it now from our website at www.tsmc.com. Please also download the summary slides in relation to today's conference presentations.

As usual, I would like to remind everyone 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 statement. So please refer to the Safe Harbor notice that appears on our press release.

And now, I would like to turn the microphone to TSMC's CFO, Ms. Lora Ho for the summary of operations and current quarter guidance.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Thank you, Elizabeth. Good afternoon, everyone and thank you for joining us today. My presentation will start with financial highlights for the first quarter, followed by the guidance of the second quarter. First quarter revenue decreased 24.5% quarter-over-quarter, as our business was impacted by the overall global economic conditions which dampened the end market demand. Also customer's inventory corrections and high end smartphones seasonality and the photoresist defect material incident.

Due to a lower level of capacity utilization and the negative impact from our photoresist defect material incident, gross margin decreased 6.4 percentage points sequentially to 41.3%. Total operating expenses decreased by about TWD4.8 billion and they represented 11.9% of total net revenue in the first quarter. So operating margin decreased by 7.6 percentage points sequentially, to 29.4%. Overall our first quarter EPS was TWD2.37, and ROE for the first quarter was 14.4%.

Now let's take a look at revenue by technology. 7 nanometer technology accounted for 22% of wafer revenue in the first quarter, 10 nanometer was 4% and 16 nanometer was 16%. Advanced technologies, which we now define as 16 nanometer and below accounted for 42% of wafer revenue.

Now let's take a look at revenue contribution by application. During the first quarter, communication, computer, consumer and industrial standard decreased 27%, 31%, 10% and 16% respectively. Now this is the last time we provide a revenue breakdown by application. From this quarter on, we will report revenue breakdown by platform, as we believe this change will better represent the company's results.

Now let me explain how to read the tariff -- the table. The table shows the -- between the four application and the six platforms, how do they relate to each other. In general within computer application, almost all revenue is from HPC. Within communication, about two-third is from smartphone. HPC is about one-fifth. And other platforms are single digit each.

Consumer is mainly distributed between HPC and the digital consumer electronics, whereas industrial/standard spread across all platforms, with smartphones and HPC each representing about 30%.

Now let's take a look at revenue contribution by platform for the first quarter. Smartphone decreased 33% to accounted for 47 of our first quarter revenue. HPC decreased 26% to accounted for 29%, while IoT, automotive, digital consumer electronics and others accounted for 5% to 7% each.

Now I would like to move on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD760 billion, an increase of TWD65 billion from the last quarter. On the liability side, current liabilities increase by TWD38 billion. On financial ratios, accounts receivable turnover days increased 8 days to 49 days. Sales decreased faster than average accounts receivable. Days of inventory increased 12 days to 79 days, reflecting 7 nanometer wafer prebuild and an increase in raw wafers.

Now let me take a few comments on cash flow and CapEx. During the first quarter, we generated about TWD153 billion cash from operations and spent TWD76 billion in capital expenditures. As a result, we generated free cash flow of TWD77 billion and our overall cash balance increased TWD88 billion to reach TWD646 billion at the end of the quarter. In US dollar terms, our first quarter capital expenditure was $2.46 billion.

I have finished my financial summary. Now let me provide second quarter guidance. Based on the current business outlook, we expect second quarter revenue to be between $7.55 billion and $7.65 billion, which is a 7.1% sequential increase at the midpoint. Based on exchange rate assumption of $1 to TWD30.85, our first quarter gross margin is expected to be between 43% and 45%. Our first quarter operating margin is expected to be between 31% and 33%.

Also in the second quarter, we will again need to accrue the 10% return -- 10% tax on undisputed retained earnings. As a result, our second quarter tax rate will be about 18%. The tax rate will then fall back to 10% level in the third and the fourth quarter, and the full year tax rate will be about 12%. This concludes my remark.

Let me follow by making a few comments about the profitability, CapEx and cash dividend. First let me talk about the profitability in the first and second quarter. Our first quarter gross margin declined by 6.4 percentage points sequentially, as our 7 nanometer saw a substantial cutback in utilization in first quarter due to high-end smartphone seasonality, which impacted our gross margin by close to four percentage points.

In addition, the photo material -- photoresist material incident impact our gross margin by about 2.6 percentage points, as we indicated in our press release in February. I have just guided second quarter gross margin to improve my 2.7 percentage points sequentially at the midpoint. Since most of the wafers scrapped in first quarter due to the photoresist incident will be made up in second quarter, gross margin can improve by about 1.5 percentage point in this quarter.

In addition the 7 nanometer dilution in second quarter as compared to fourth quarter '18 will be close to 3 percentage point, which is about 1 percentage points improvement from the first quarter in terms of dilution. And we also expect a slight improvement in other nodes utilization rate. Our gross margin in first and second quarter are primarily impacted by a lower capacity utilization rate. As our business and utilization rates improves in the second half of this year, we believe above 50% is still a target for our gross margin going forward.

Now I will talk about the CapEx outlook. We reiterate our 2019 CapEx to be between $10 billion to $11 billion. About 80% of the CapEx budget will be allocated for advanced process technologies, including 7 nanometer, 5 nanometer and 3 nanometer. About 10% will be spent for advanced packaging and mask making, and about 10% will be spent for specialty technologies. As I have stated before, we see our CapEx forecast between $10 billion and $12 billion to support our average growth rate of 5% to 10% per annum in the next few years.

My last comment is about the cash dividend distribution. In the future, TSMC intend to return about 70% of free cash flow to shareholder every year, by distributing quarterly dividends. TSMC also remains committed to a sustainable cash dividends on both an annual and quarterly basis. In June, TSMC will hold the annual shareholder meeting to approve the Board's proposed TWD8 cash dividend per share for the full year of 2018, and the shareholder meeting will also approve the revision of the Articles of Incorporation to adopt quarterly dividends.

Subject to the approval by the annual shareholder meeting, the Board plans to approve TWD2 cash dividend per share for the first quarter 2019, and to be paid in the fourth quarter 2019. Therefore TSMC's shareholder will receive a total of TWD10 per share cash dividend in 2019. That also means in 2020, shareholders will receive at least TWD10 per share cash dividend for the whole year. That concludes my remarks.

Let me turn the podium to C.C.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Thank you, Lora. Good afternoon, ladies and gentlemen. Let me start with our near-term demand and inventory. We concluded our first quarter with revenue of TWD218.7 billion or $7.1 billion, in line with our revised guidance. Our business in the fourth quarter was impacted by three factors. First, the overall global economic condition, which dampened the end market demand. Second, customers' ongoing inventory adjustment. And third, the high end mobile product seasonality. Meanwhile, the net effect from the photoresist defect material incident also impact our first quarter revenue by about 3.5%.

Moving into second quarter this year, while the economic factor and mobile product seasonality still linger we believe we may have passed the bottom of the cycle of our business as we are seeing customers' demand stabilizing. Based on customer indications for their business in wafer volume (ph) in second quarter, we also expect our customers' overall inventory to be substantially reduced and approach the seasonal level around the middle of this year.

In the second half of this year TSMC's business will be supported by these healthier inventory base, as well as strong demand from our industry leading 7 nanometer technology, which support high-end smartphone new product launches, initial 5G deployment and the HPC related applications.

For the whole year of 2019, we forecast the overall semiconductor market excluding memory as well as foundry growth to both be flattish. For TSMC, we reiterate that we expect to grow slightly in 2019.

Now let me update photoresist material incident. On February 15, in order to ensure quality of wafer delivery, TSMC announced it scrapped a large number of wafers as a result of a batch of bad photoresist material from a chemical supplier. This batch of photoresist contain a foreign polymer that created undesirable effect and resulted in yield deviation on 12 nanometer and 16 nanometer wafers at -- Fab14B. We have since taken corrective action to enhance our defenses and minimize future risk.

Our actions including the following, improved TSMC's own in-house incoming material, conforming tests and controls, upgrade control and methodology with all suppliers for incoming material quality certification, establish robust in-line and offline monitoring process to prevent defect escape.

Now I'll talk about our N5 status. Our N5 technology development is well on track. N5 has entered risk production in first quarter and we expect customer tape-outs starting this quarter and volume production ramp in first half of 2020, with 1.8x logic density and 15% speed gain and an ARM A72 core compared with 7 nanometer, we believe our N5 technology is the most competitive in the industry, with the best density, performance, power and the best of transistor technology.

We expect most of our customers who are using 7 nanometer today will adopt 5 nanometer. With N5, we are expanding our customer product portfolio and increasing our addressable market. Thus we are confident that 5 nanometer will also be a large and long lasting node for TSMC.

Now I talk about the ramp up of N7 and N7 plus and introduction of N6. We are seeing strong tape-out activity at N7, which include HPC, IoT and automotive. Meanwhile, our N7 plus, which adopts EUV4 (inaudible) has already started volume production now. The yield rate is comparable to N7. We reaffirm N7 and N7 plus will contribute more than 25% of our wafer revenue in year 2019.

As we continue to improve our 7 nanometer technology and by leveraging the EUV learning from N7 plus, we now introduced N6 process.

N6 has three major advantage. First, N6 have 100% comparable design rules with N7, which allows customers to directly migrate from N7 base design, which substantially shorten the time to market. Second, N6 can deliver 18% higher logic density, as compared to N7 and provide customer with a highly competitive performance to cost advantage. Third, N6 will offer shortened cycle time and better defect density. Risk production of N6 is scheduled to begin in fourth quarter year 2020 with volume production starting before the end of 2020.

Now let me talk about our advanced packaging technology. TSMC's advanced packaging strategy focuses on providing advanced wafer level system integration technologies to meet customers' product needs. Currently, we have offer info and cores (ph) for several generation and recently introduced SOIC. We believe heterogeneous integration, and the package endeavor has become a clear trend for many applications. All our advanced packaging platforms enable efficient system level integration and will continue to do so.

Our first generation in-force solutions provide a final interconnected line with anticipation to enable both mobile and HPC products. Cores continue to see good growth momentum and demand from HPC and the AI applications, as we continue to expand beyond the radical size. We are also working with a few leading customer and SOIC, which is an industry leading 3D IC packaging solution. We targeted to start production in 2021 timeframe. The traction of our advanced packaging solution has been strong in mobile and HPC segment and we have seen inquiry from automotive segment as well. We therefore believe our advanced packaging solutions will contribute to our business growth for years to come.

Finally, I will talk about HPC as our most important growth driver in the next five years. CPU AI, accelerator and networking will be the main course area for our HPC platform. With a successful ramp of N7, N7 plus, and the upcoming N6 and N5, we're able to expand our customer product portfolio and increase our addressable market to support applications such as a data center, PC and tablets. Meanwhile we also see networking growing thanks to 5G infrastructure deployment over the next few years.

We are truly excited about our core opportunities in HPC. Thank you for your attention.

Questions and Answers:

Elizabeth Sun -- Senior Director of Corporate Communications

All right this concludes our prepared statements. Before we begin in Q&A session. I would like to remind everybody to limit your questions to two at a time, to allow all participants an opportunity to ask their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese I will translate it to English before our management answers your question. (Operator Instructions).

First question will be coming from Citigroup's Roland Shu.

Roland Shu -- Citigroup -- Analyst

Good afternoon, C.C., and Lora and Elizabeth. The first question, C.C., said, you maintain your view for the whole year revenue to growth slightly. So that means, according to your first quarter revenue second quarter guidance means that second half is going to grow very fast. So can you just let us know, what kind of applications are driving our so strong second half for TSMC this year. Thank you.

C.C. Wei -- Chief Executive Officer and Vice Chairman

The strong demand I just mentioned from 7 nanometer actually include in the mobile platform, HPC platform and IoT. We said it would be flat use of automotive. But that's all that -- what we rely on. Actually we will say, that's seasonality of the mobile phone, the new product launch that to make the major contribution.

Roland Shu -- Citigroup -- Analyst

Yes and I just -- this doing this calculation, I think for second half your revenue actually is going to go up year-by-year. I think I may be missing a bit year-on-year. So I think except for this seasonality, do you gain share or do you have more new applications in second half?

C.C. Wei -- Chief Executive Officer and Vice Chairman

We actually gain some shares, because of 7 nanometer, and for the new product portfolio that probably you'll see the effect in 2020, not much in this year.

Roland Shu -- Citigroup -- Analyst

Okay. Thank you. Yeah, and also for the second half gross margin, Lora says with this higher utilization and also with less dilution from 7 nanometer, so you said your long term gross margin will be -- target would be 50%. So this means that for second half or just for the long term?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Both.

Roland Shu -- Citigroup -- Analyst

Okay. Thank you. My second question is, C.C., last quarter you said, now we are at the market with -- this addressable market, driven by HPC and the CPU, and C.C., also said that HPC is going to be our most important growth driver. So can you quantify how big our foundry addressable market would be driven by HPC and the CPU respectively?

C.C. Wei -- Chief Executive Officer and Vice Chairman

I don't think I have enough data to tell you that how much we can quantify the percentage, but I believe that HPC platform will grow double digit, excluding the crypto currency, of course.

Roland Shu -- Citigroup -- Analyst

How about the CPU?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Too specific.

Roland Shu -- Citigroup -- Analyst

Okay. Thank you. And I think lastly --

Elizabeth Sun -- Senior Director of Corporate Communications

Roland, you had more than two.

Roland Shu -- Citigroup -- Analyst

This is a follow-up on the second question. So do you have any competition on this CPU front you are servicing? Thank you.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Again, I don't want to be too more specific on the CPU area. All right?

Roland Shu -- Citigroup -- Analyst

Right.

Elizabeth Sun -- Senior Director of Corporate Communications

Our next -- the question will be coming from JPMorgan's Gokul.

Gokul Hariharan -- JPMorgan -- Analyst

Thank you for taking my question. So my first question is on 5 nanometer. I think in the last conference call, C.C., you mentioned that TSMC will be initially building a few percentage points or some lower capacity on 5 nanometer in 2020, compared to 7 nanometer. Now that you have more visibility into your customers' plans, could you let us know what does that mean, is it 30% lower, 10% lower, what does it mean and why is that -- is it because customer is a little bit hesitant to go to 5 nanometer and has other options or you just believe that, like you previously mentioned the only reason is that high end smartphone demand expectation, you are taking a more cautious view on that? That's my first question.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Actually I'd like -- Gokul, I like your last sentences here, that's a more cautious view. Let me repeat again, that we say N5's initial ramp it might be slower than the N7. First, we learned a lesson from the N7. We forgot it. Look at this year's first quarter and second quarter right now, is actually very low. So we learned the lesson. So we are working with the customer to be more cautiously and effectively manage the capacity ramping.

So that's what I say that you it will be a little slow. But that being said the N5 as a business, I want to reassure everybody that N5 as a business will be bigger than N7 because of our expanding the product portfolio. And what I mean, in the HPC we have very good opportunities and understand of where we are getting in the market share. So I would believe that N5 initial ramp probably a little bit more cautiously slower than the N7. But it will pick up quickly.

Gokul Hariharan -- JPMorgan -- Analyst

Okay. Got it. My second question is on the technology leadership. I think TSMC clearly now seems to be ahead of even IDMs in terms of technology leadership. How should we think about how that translates in a financial basis? What we have seen in semiconductor industry in the last several years is when one player becomes the dominant player, typically margins go up. How should we think about this? What is TSMC's philosophy in terms of utilizing this technology leadership?

Are we looking for higher than market revenue growth? Or we should expect structurally higher margins in the future years, now that we are kind of getting through the smartphone saturation period and getting into HPC?

C.C. Wei -- Chief Executive Officer and Vice Chairman

As you pointed out we have technology leadership and suppose -- and we are working on it also, actually want to grow the market share. We want to do bigger businesses with a higher profitability. I don't have enough data in my hand to give you all the analysis in the future years, but we are working on it. And that, the core we are working on actually, higher profitability and gain market share.

Gokul Hariharan -- JPMorgan -- Analyst

So just one sub question there. I think, if we observe the last couple of years, TSMC -- foundry industry has not outgrown semis ex memory, and TSMC also has not grown much faster than the foundry industry, which was not the case in the past. So in the past foundry was growing much faster than semis and TSMC was growing much faster than semis -- than foundries. So when do we expect that gap to open up between TSMC's growth and foundry growth? And potentially foundry growth and semis growth itself?

C.C. Wei -- Chief Executive Officer and Vice Chairman

You are asking more and more specific on the schedule. I would expect that starting from the second half of this year and extended through the next few years, we will start to widen the gap. Did that answer your question?

Gokul Hariharan -- JPMorgan -- Analyst

Okay, that's specific enough.

Elizabeth Sun -- Senior Director of Corporate Communications

Next question will be coming from UBS, Bill Lu.

Bill Lu -- UBS Securities -- Analyst

Hi. Thank you very much for taking my question. So in the last couple of months, I had a chance to visit a few fabless customers and I feel like the feedback that I'm getting is that maybe previously there was more concerns about EUV feasibility. That is now mostly going away, maybe it's just less. But on the flip side, I hear maybe a bit more concerns about cost per transistor for 5 nanometers. I'm wondering if you agree with that? And what can be done about that?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Well. That's a good question. We did some calculation by ourself. We're still seeing that cost per transistors still decreasing, but not as fast as used to be. That's one thing. As you mention about the EUV, today we put the EUV into mass production already and we learned some kind of experience so that we can introduce N6. But is EUV's productivity is very good already, not yet. We expect it to continue to improve every year, just as we did for the emerging photoresist problem.

So we expect in the future that EUV will offer a best tool in terms of cost, in terms of our technologies moving forward, but not today yet. There's still a lot of process complexity. So we are using the EUV to replace some of the very critical areas and the cost are probably are equal today. In the future we hope it will improve. Once we improve, the cost per transistor will decreased faster.

Bill Lu -- UBS Securities -- Analyst

Is there timing for that?

C.C. Wei -- Chief Executive Officer and Vice Chairman

No. But as fast as possible.

Bill Lu -- UBS Securities -- Analyst

Sorry, same question it's just a clarification. I think previously Dr. Wei said that the HPC ex-crypto grows double digits. Is that for this year or is that longer term?

C.C. Wei -- Chief Executive Officer and Vice Chairman

For this year it's closed, for longer term, that's what I mean, for longer term.

Bill Lu -- UBS Securities -- Analyst

Yeah. Really appreciate the breakout by platform. Can you help me with this year's growth, maybe just for smartphone versus HPC?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Both are probably in the middle single digit, somewhere around that.

Bill Lu -- UBS Securities -- Analyst

Okay so HPC is close is (multiple speakers)

C.C. Wei -- Chief Executive Officer and Vice Chairman

Yeah.

Bill Lu -- UBS Securities -- Analyst

Without crypto, missing on this year, including crypto.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Oh no, HPC without the crypto currency it will be somewhere mid-single digit, with the crypto currency it's dropped down.

Bill Lu -- UBS Securities -- Analyst

Okay, got it. Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

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

Charlie Chan -- Morgan Stanley -- Analyst

Thanks. First of all I just want to follow that HPC segments, because just I compared the notes, last quarter we said HPC excluding crypto up slightly, right, including crypto down more than 10%. So it seems like they -- the number seems to be a little bit better. You said the right comments about HPC market doing better than expected.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Yes. Doing better, because of one of the factors, one of the component in the HPC is a networking and you know that the 5Gs deployment, so that help the course of the networking quickly.

Charlie Chan -- Morgan Stanley -- Analyst

Okay, yeah, so I think this is related to my second question. I think a lot of chatter saying that some big customers in the smartphone and the play station segment is building up inventory for whatever reason, share gain or some strategic inventory. But management also said that you believe that inventory level will be back to normal, around the mid-year. So my question is that, you worry about this kind of over built inventory and how you're going to manage that kind of risk?

C.C. Wei -- Chief Executive Officer and Vice Chairman

We don't specifically comment on one customer's particular business behavior. But let me share with you why we say that the inventory will be greatly reduced, and it goes to the seasonal level, around the middle of this year. We actually we look at our history and the second quarter, the customers are of course right, and we're using that number and look at the customer's demand number to give to us in the second quarter. And we do some calculation and we come to a conclusion that they are digesting their inventory quickly. And so that's why we say that, in the second quarter they are not building the inventory. They actually -- they are reducing the inventory quickly, and that's why we come to the conclusion that in the second half we will -- here's your inventory base.

Charlie Chan -- Morgan Stanley -- Analyst

Okay. Yeah, maybe quick question to Lora on cash dividend. So you -- so this year I think the quarterly run rate is like TWD2 per quarter. Right. But annual dividend payout is actually TWD10 in total. So for next year, what will be the kind of minimum dividend payout, should we use a TWD2 rate, so we get like TWD8 for the full year for 2020, you said the guidance.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

This year, as it is a transition year so we issued twice cash dividend. The first were TWD8 followed by the TWD2 on quarterly basis. Starting from first quarter next year, we will only have a quarterly dividend and we want to have sustainable on quarterly dividend and on annual both. So we would like to see more stable dividend on a quarterly basis as well. So since I said, the dividend will be no less than TWD10. We want to be stable on a quarterly basis. So you can assume or expect we will issue TWD2.50 on quarterly basis at least.

Charlie Chan -- Morgan Stanley -- Analyst

Okay. Thanks. Very clear.

Elizabeth Sun -- Senior Director of Corporate Communications

All right. Next question will be coming from Credit Suisse's Randy Abrams.

Randy Abrams -- Credit Suisse -- Analyst

Yes. Thank you. I want to ask a follow up on -- it was good disclosure moving to the new platform segmentation. Could you talk about sequential pick up on how you see the different four platforms, how they're sequentially improving from this low level? And then for full year, since we got the other pieces, also the IOT and automotive, what are your views on the other segments for the full year?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

I will first come on the second quarter sequential basis on by platform and followed by the full year picture. Is that what you're asking Randy, OK? For second quarter, we are expecting smartphone to grow single digit, HPC grow double digit and IOT automotive and others will grow single digit and the digital consumer electronic will slightly decline. That's for second quarter.

For the whole year, we expect smartphone will grow high single digit. HPC, excluding crypto will grow high single digit as well. And IOT will grow double digit, automotive will decline single digit and digital still coming around, and others will decline single digit. That's the overall picture for this year.

Randy Abrams -- Credit Suisse -- Analyst

Okay, great, appreciate that. And then follow up on the migration for these derivatives 7 plus and 6 nanometer. It seems to-date, the adoption has been rather slow for this year. If you could talk maybe about factors, why a lot of customers are staying on 7 for now and as the node matures, if you could talk about the pace, how you see customers, say as a percent of the node? Or how meaningful next one or two years for those derivative process?

C.C. Wei -- Chief Executive Officer and Vice Chairman

As I said, we have a very high tape-out activity for N7 for this year. Actually a lot of customer from the four platform, and mostly is from the HPC area, they're all designing their product with the N7. A few of them, adopt the N7 plus, but then that's why we introduce N6. That can be 100% compatible to the N7. So I'll give you a pace that probably starting year 2020, most of the customer in the N7 will move to N6. And from that beyond probably, the N6 will pick up all the momentum and pick up all the volume production.

Randy Abrams -- Credit Suisse -- Analyst

Okay, great. If I can ask a follow-up too. Given the strength on these derivative, 6 nanometer, 5 and optimism, do you have any different view on 28 (ph) about -- if any of this equipment could be migrated to these advanced nodes? Or do you think it would be all new capacity?(

C.C. Wei -- Chief Executive Officer and Vice Chairman

From node to node we have about 90% of the current tool, or bigger than 90% of the percentage of the current tool to a being used for the next node. So you bet, that some of the tools from 28 nanometer can be used for 7 or for 5, OK.

But of course is less and less. But too for the over capacity in the 28 nanometer, because of some of the non-market driven capacity increase, we -- our strategy to develop some of the derivative technology like the 22 nanometer and so that we can ensure that we still have a -- we will here see growth in the future.

Randy Abrams -- Credit Suisse -- Analyst

Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

Next question will be coming from Daiwa's Rick Hsu.

Rick Hsu -- Daiwa Capital Markets -- Analyst

Hi, it's Rick from Daiwa. So I think the first question is about the follow up on the N6. My question is would you worry whether the N6 will cannabalize N5 development because this now looks pretty close?

C.C. Wei -- Chief Executive Officer and Vice Chairman

The number N6 and N5 looks pretty close. But actually the performance they still have a big gap. N5 compared with N7, actually the logic density increased by 80%. N6 compared with N7 is only 18. So you can see there is a big difference in their logic density and transistor performance also. And so as a result, the total power consumption in the chip is lower in the N5 and also that's -- yes, a lot of benefit, if you move into N5. But nevertheless, N5 is one of the node, four node and it takes time for the customer to design their new product.

The beauty of the N6 is they are already designing N7, they spend very minimal effort. They can move into the N6 and gain some benefit. And so some of the customer, they depend on their product as a catalystic in their market, they define, which one go to N6, which one go to N5.

Rick Hsu -- Daiwa Capital Markets -- Analyst

Can I have one quick follow-up to the first question, before I ask the second one? Just a quick follow up. Can you share the number of the critical layer that will be built by EUV for -- I know for 7 plus you -- I think last year you mentioned just a few layers, critical layer from EUV, what are N6 and N5?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Okay, N6 is a few critical layer plus one. Okay, that give you a hint. N5 is a plus many, so --

Rick Hsu -- Daiwa Capital Markets -- Analyst

Okay, thank you. That's very clear. And my second question is, if you look at the your end first quarter inventory there is 79, if I don't remember wrong, I think this is kind of all-time high in history. As majority of this inventory were finished wafers or can you share some idea, and also, can you elaborate a bit more, what's the rationale behind that 79 days?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Yeah, OK. Rick, this 79 is really high, but there's a good reason for that, because we anticipated 7 nanometer capacity will be very tight in the second half. It's not so tight, it's very empty in first half. So we're trying to preview some of the inventory for our customer in the working process. So they will not be constrained by our second half capacity. So by doing so that work-in-process value will suddenly go up, right?

So when we move into the second half, when we digest those inventory and the demand start to pick up, our days of inventory will come down in the second half.

Rick Hsu -- Daiwa Capital Markets -- Analyst

Thank you so much.

Elizabeth Sun -- Senior Director of Corporate Communications

Next question will be coming from Bruce Lu who is now with Goldman Sachs.

Bruce Lu -- Goldman Sachs -- Analyst

Hello everyone. Thank you. My first question is still going back to the smartphone. Management mentioned that their smartphone growth is going to be high single digit. Is -- this is substantially stronger than the smartphone human growth. And management also guided that previously that the next couple of years, the smartphone growth would be mid-single digit, again is also higher than the smartphone human growth in our (inaudible). So where is the growth coming from, it's many driven by that content growth or our share gain either by your customer or yourself share gain? And can we somehow quantify that a little bit?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Quantify, I probably cannot. But the answer to your question is both, we gained the market share and the content increased quite a lot.

Bruce Lu -- Goldman Sachs -- Analyst

Can we know that which one is stronger?

C.C. Wei -- Chief Executive Officer and Vice Chairman

You got me. I want both of them to be as high as possible, but I don't have a calculation, because of the market share gain, you have to be careful to do the calculation and also the content increase. Let me say that content increase in the 5G area or in the AI area, every customer are different. So they put a different functionality inside and we don't have a very good detail or detailed insight to give you an exact number to quantify what is the percentage per se.

Bruce Lu -- Goldman Sachs -- Analyst

I see the reason why I try to dig down a bit further is that if the content growth, which it means that there would be add expense of the smartphone cost structures. So if you have higher content growth which means that the semi content, in terms of cost structure is higher, which at the end of the day will then pin the smartphone shipment as a price inelasticity. So how do you -- you will perceive that very, very strong content growth which means that the cost structure work for your customer would be much higher at the end of the day. So there would be certain trade off at the end of the day.

C.C. Wei -- Chief Executive Officer and Vice Chairman

There will be certain trade-off of the high end smartphones pricing, and their cost of course. But for TSMC our job is to fully support customers' need. When their need is functionality, their need is kind of a speed we support them. Whether that will increase their pricing or smartphones end market strategy, that's not in our concern. We support them all the way.

Bruce Lu -- Goldman Sachs -- Analyst

Okay, my second question is more for Lora. So can you somehow help us to quantify the margin impact in 2020, as we can expect very high, a quick ramp up on the final number that was naturally in the first year, that will be in the negative margin impact and we will come into this third year of 7 nanometer, so the margin negative impact should be less but you have new margin negative impact from 5. So how do we -- can we get some color on it?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

The margin impact actually has two front, number one introduction of new technology, as you just mentioned. Usually in the first year, there is a dilution to corporate gross margin. The other factor is the utilization of each technology node, particularly the advanced technology node, is more sensitive between utilization. So if we look at a corporate margin we have to take consideration of both.

But if we just talk about the leading edge introductions, N5 would be like N7, you'll have some dilution next year. And so we have indicated before it takes seven or eight quarters to reach to corporate level, we believe M5 will follow same pattern.

Bruce Lu -- Goldman Sachs -- Analyst

But you know, can we assume that the first two quarters of M5 in the second half next year, when you remember that negative impact for the margins slightly at 2% or 3%, like what we have N7?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

No. We need to look at what's the ramping speed as well. Because if you ramp faster eventually you can get through the learning curve quicker. So if you ramp slower you take a long time. So it's manufacturing will affect that.

Bruce Lu -- Goldman Sachs -- Analyst

I see, because most of investor concern is that is UV potential higher CapEx, bigger parts or they may have higher negative impact for in terms of their gross margin when we ramp up 5. So we just want to get some color to clear the concern.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

I think the N5 impact will not have much difference than our previous leading nodes.

Bruce Lu -- Goldman Sachs -- Analyst

On this day (ph). Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

I think this is about time that we should go to the line for the questions. Operator could you please have the next caller on the line?

Operator

Sure. Next question is from the line of Brett Simpson of Arete Research. Please go ahead.

Brett Simpson -- Arete Research -- Analyst

Yes. Thanks very much. I have two questions for C. C. First on FD-SOI. It seems to be getting more traction in 5G than we first thought, both on the -- in RF-SOI (ph) and then the modem side and for handsets. So I'm just keen to understand if TSMC might consider supporting FD-SOI or RF-SOI and if not how you plan defending against it?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Okay. The question is FD-SOI has some good momentum in 5G area and does TSMC consider to develop the FD-SOI. The answer is no. We actually -- we also offer a very good technology, 22 nanometers technology that this performance is very comparable to FD-SOI if not better. And we are talking to the customer right now and a lot of customers start to adopt the TSMC's approach. So no, we are not going to develop FD-SOI technology.

Brett Simpson -- Arete Research -- Analyst

Okay. Thank you for that. And just a follow up, C. C., can you give us your perspective on TSMC's strategy for quantum semiconductor materials like gallium nitrate or silicon carbide. It seems to be very, very small market but the potential long term seems to be quite significant. So how does TSMC plan to deploy in these areas? Thank you.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Okay. The question is about semi compound -- that compounds semiconductors. TSMC actually develop in the gallium nitrate technology to support the power management IC or the high voltage, high current, power management. And on others like gallium arsenide who have high frequency or those kind of things, no, we are not doing it. We actually -- we are doing the gallium nitrite project to support our customers' need. That's the reason we are doing. Silicon carbide, no we are not doing it also.

Brett Simpson -- Arete Research -- Analyst

Okay, thanks very much.

Elizabeth Sun -- Senior Director of Corporate Communications

Operator, can you have the caller on the next -- the next caller on the line please?

Operator

Sure, we have Mehdi Hosseini of SIG. Please go ahead.

Mehdi Hosseini -- SIG -- Analyst

Yes, thank you for taking my questions. Two questions, first one, is your guide on the smartphone revenue growth of high single digit, this year impacted by one of the leading semiconductor company exiting the business? I'm just trying to better understand how are you going to capitalize on the opportunity. And I have a follow up.

Elizabeth Sun -- Senior Director of Corporate Communications

Mehdi's question is that whether or not this year, our high single digit growth in the smartphone platform is affected by one very large company's exit from the baseband market?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Well. Again, we don't comment on specific customers' business situation. But I would say this year, that we have a high single digit smartphones of course, is that because of, one, we get market share. Two, again that the silicon content is higher. So that's why we say we have a high single digit of course.

Mehdi Hosseini -- SIG -- Analyst

Okay, great, and then further on the 6 nanometer, I'm just trying to better understand the applications that would utilize 6 nanometer, and if I heard you correctly, 6 is going to be ramping less than 5, and if you could elaborate on the current application that would be used in, would be great in understanding that particular number.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Right, the question is about N6. It looks like the N6 is behind N5 in terms of the schedule. So what is the application?

Well, again I want to reiterate that N6 is coming from the N7 -- N7 plus experience learning. And so the N6, if you -- a lot of customers already enter N7 and we saw lot of tape out. So N6 provide them a very good path that they can easily port in their current product into N6. So again the benefit of -- either the performance the day area, and also the shortened cycle time.

N5 is a totally new node. So you enter into a very new area, if you start to design the N5 today as compared with you want to enter the N6, with the N7 already in your pocket, I think the N6 will be much easier. I did not say that N5 is a very big product, but TSMC will help you to move into N5 of course. But if you look at that effort that you build that ecosystem. Ecosystem is the one that's very important for all the product company want design their new product.

N7 the ecosystem has been very complete, even over to the automotive grade, OK, and not to mention about mobile, HPC everything. The ecosystem are ready and equally mature is the N6, because it is 100% compatible. Of course you still have to do some modification if you want to shrink your die, you had to rerun your timing, (inaudible) those kind of thing, but still much easier from N7 go to N6 rather than N7 go to N5 and that's the beauty of these two technology.

2Did I answer the question?

Mehdi Hosseini -- SIG -- Analyst

Yes, thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

Thank you. And follow up question from Citi's Roland.

Roland Shu -- Citigroup -- Analyst

Thank you, thanks for taking my question again. So it looks like 2020 would be a very busy year to you. You are ramping up N7 plus, N6 and the N5 together in the same year. So what kind of the revenue growth potentially, are underlying these three key technology ramp next year?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Roland, we don't forecast next year. Please attend the fourth quarter next year's --

Roland Shu -- Citigroup -- Analyst

Okay, then you have so many new technology ramp up next year. So how about 2021? So any new technology, what kind of new technology you are going to launch in 2021?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Please attend next year's --

Roland Shu -- Citigroup -- Analyst

Thank you. Okay, my next question is for Lora. So I look at your 20 -- I know your total accumulated legal capital reserve, had -- is it paying capital in 2018, but still both direct mid-teen in February had been approved to continue appropriating 10% of 2018 net income to legal reserve. So why don't you just pay this 10% to investors in order to improve your ROE?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

You know, we are increasing the dividend and it's all come from returning -- including the capital surplus, which we accrue every year. So we can choose not to, but we choose to because we want to be more conservative. And if we need it, we can issue dividend from that pool as well. So no impact with shareholders.

Roland Shu -- Citigroup -- Analyst

Okay understood. So means that from next year going forward you are still appropriate this 10% legal reserve.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Currently that's how we're thinking. Yeah, we will decide each year. We have a very big retaining pool, you know that.

Roland Shu -- Citigroup -- Analyst

Okay. Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

Next question will be coming from CL Securities, Sebastian Hou.

Sebastian Hou -- CL Securities -- Analyst

Thank you. My first question is, can you give us the numbers of fabless DOI existing 1Q'19 and what's your expectation by end of this quarter? How many days above?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Probably at the end of a 1Q '19, probably around 10 days. Roughly, OK. This is based on our own calculation by the way. And in the middle of this year, probably reduced down to very low single digit. That's why we say is close to the seasonal level.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

I need to add a little clarification here. The so called fabless DOI is according to TSMC's own top 32 fabless customers' DOI. It is not the entire fabless industry. Thank you.

Sebastian Hou -- CL Securities -- Analyst

Okay, thank you. So for just also one follow on that is the definition of your fabless. Does that include some system company? No, so just only the fabless, the pure semiconductor companies, OK. So I had the impression that earlier the company mentioned that the days -- fabless days of inventory may continue to stay a few days above seasonal levels throughout the second half of this year. So is that still the case based on the current outlook?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Recall to seasonal. So we cannot come in a few days above, no.

Sebastian Hou -- CL Securities -- Analyst

Okay, OK, but a close decision of this maybe not like really at the seasonal level.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Well, I would like to say that probably below seasonal level, but we -- it's too early for us. We don't have enough data to do all that analysis and too early for us to forecast it accurately. How many days or below or above. All right. But we make our own judgment from the wafer roll in and there are positive histories data. So we make our own calculation. So we observe that their inventory, greatly reduced in the second quarter. And we are confident actually, that in the middle of this year we will very close to the seasonal level.

Sebastian Hou -- CL Securities -- Analyst

Thank you. My second question is on the smartphone growth outlook for this year. Remember, last quarter the company guided smartphone to grow slightly this year and now it is like high single digit. So it seems like about 5 percentage point higher based on our own calculation and I think last time you mentioned also market share come to increase, this time also the same reason. So I just wonder which of these two factors have surprised on the upside in the past three months?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Well, we gained market share, that's -- and actually our customer gained market share. Let me say that, and it's kind of a good news to TSMC, although we did not forecast that at the beginning of this year.

Sebastian Hou -- CL Securities -- Analyst

Great. Thanks. That was actually my follow up question. So in terms of the market share again and was a surprise on the upside in the past three months, how much of that is your own share again in the APU base band or semiconductor chip, or how much of that is your customers gained share, so you benefit. Which one is more important?

C.C. Wei -- Chief Executive Officer and Vice Chairman

How can we separate that one out, because of all the high yield smartphones are APs are in TSMC? So you want me to separate out these customer's gain or TSMC's gain, I cannot separate out, it all in TSMC.

Sebastian Hou -- CL Securities -- Analyst

Right, but are you -- would you be worried about like potential, like, maybe you some of your high end smartphone customers gain share right now, but that might cannibalize some of the -- your other high end smartphone customers in second half of this year?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Well so long the high end smartphone continue to grow or so long TSMC has a very high market share, we just do our job to support them.

Sebastian Hou -- CL Securities -- Analyst

Okay. Dr. Sun, can I have just one more follow-up?

Elizabeth Sun -- Senior Director of Corporate Communications

Do you object? There's no objection so you may continue.

Sebastian Hou -- CL Securities -- Analyst

Thank you. So on the HPC side also, it seems that growth is better than last quarter guidance. Remember it was a slight growth without crypto, now is high single digits, so also about a 5% point higher. I think that C.C. you earlier mentioned about is major due to the networking on the 5G deployment. So is it mainly driven by one or two few customers or several customers across the board?

C.C. Wei -- Chief Executive Officer and Vice Chairman

In the 5G area, there many players and all of them are now very optimistic. And so the 5G deployment is faster than we initially planned. Okay? That's a trend right now. So we are forecasting a higher core gain three months ago.

Sebastian Hou -- CL Securities -- Analyst

So it's very widespread rather than one or two chipset customers. Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

JPMorgan's Gokul has a follow-up question.

Gokul Hariharan -- JPMorgan -- Analyst

Thanks for taking the follow up question. My first question, just want to clarify, I think last time you mentioned in N7 plus could be about a TWD1 billion or slightly higher than that of revenue in 2019. Are we still seeing that or customers are still staying on N7 for this year?

C.C. Wei -- Chief Executive Officer and Vice Chairman

We are ramping up N7 plus right now. But the revenue for this year is still little bit less than TWD1 billion. And as I just mentioned next year is the one we try to look at it. I would believe most of the customer will adopt the N6 because that's much easier for them to move in to. And the benefit almost similar to N7 plus. So I would say N7 plus this year a little bit below TWD 1billion, next year probably won't grow, but N6 will start to pick up.

Gokul Hariharan -- JPMorgan -- Analyst

Okay. That's very clear. My second question Dr. Wei, could you explain a little bit more on what you encompass, when you talk about heterogeneous integration? I think some of your customers have talked about packaging multiple process technologies in the same package. I think some of the customers forward running research has even talked about multiple process in the same wafer.

Could you talk a little bit about what is TSMCs vision when it comes to heterogeneous integration, maybe in the next couple of years since you are starting to showcase the technology and potentially go into production?

C.C. Wei -- Chief Executive Officer and Vice Chairman

Oh, that. It's very complex question that to be answered.

Actually while working with a customer, and the different customer has a different need, but the trend and the heterogeneous integration is quite we believe that what the future, that a lot of customers will adapt, not because of the benefit, that when the circuit, at some speed, now it's limited by the connection from the chip to chip is the connection, chip to chip is the communication. So that has to be shortened. And to gain the benefit of your single chip is the high performance.

So you want to put them together, you better to reserve your signals or integrity, you better have very minimal capacitance, a minimal inductance, minimal loss in the resistance. So we -- that's what I say heterogeneous in the equation become important, because we are using the info, we are using the cores to help our customer to integrate all them together with the most efficient way to connect all the chip together and also extending if you need heightened -- which module that will be one of the benefits that using TSMCs cores or info.

And so, if you ask me, what is the application in the future HPC will be the one that adopt this kind of process. That's the first one to go into but of course today mobile, smartphone already adopted the info technology, as you knew already and more and more of the high end smartphone, and more and more of the HPC's customer will adopt TSMC's advanced packaging method, including heterogeneous integration.

Gokul Hariharan -- JPMorgan -- Analyst

And then, we shouldn't expect that advanced packaging just keeps rising as a percentage of your revenue in a pretty steady manner for the next few years?

C.C. Wei -- Chief Executive Officer and Vice Chairman

You're right.

Elizabeth Sun -- Senior Director of Corporate Communications

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

Charlie Chan -- Morgan Stanley -- Analyst

Thank you. So first of all that new breakdown by application was very helpful. Just a -- can you give us some by application, for example the consumer application on a smartphone platform, can you give us some illustration for these kind of semiconductors, what is the consumer application about the play in the smartphone platform?

C.C. Wei -- Chief Executive Officer and Vice Chairman

All right. You can just ignore. Those are kind of minor contribution. Probably I -- do you have any good answer to that one, the consumer inside a smartphone.

Charlie Chan -- Morgan Stanley -- Analyst

I don't know.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

You mean -- customer inside a smartphone.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Yes. Well, if you using a smartphone to do the gaming, can I say it's a consumer function inside a smartphone?

Charlie Chan -- Morgan Stanley -- Analyst

Yes, I think your definition for example, for a GPU in -- for gaming or for AI or for PC I think that was clear. But no provide more a breakdown we appreciate. Just I want to make sure, we don't get it wrong.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Video games is a consumer application now is in HPC. And set-top box, digital TV, cordless phone, these are consumer applications now in the digital consumer electronics.

Charlie Chan -- Morgan Stanley -- Analyst

Okay. Thanks. So also my next question is about your kind of supply chain management, right, related to your kind of raw wafer inventory level. So now how is the raw wafer inventory at the foundry and do you plan to reduce some shipment from those (inaudible) vendors? And also regarding that the previous chemical issue, would you get any compensation from your chemical vendors?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

I will answer first part of the questions. Our DOI actually including a increase of raw wafer inventory. So on Q-o-Q basis, it does increase a few days of our own DOI, because we have very low first and second quarter and we have a contract with those wafer companies. But moving to the second half, as our demand pick up those DOI of raw wafer will gradually digest it to a normal level. This is the first part of your question.

C.C. Wei -- Chief Executive Officer and Vice Chairman

What is the second question?

Charlie Chan -- Morgan Stanley -- Analyst

That chemical issue caused some damage, right. So will you get any reimbursement or compensation from your -- TSMC will book it as kind of expense.

C.C. Wei -- Chief Executive Officer and Vice Chairman

So what is our --

Charlie Chan -- Morgan Stanley -- Analyst

Chemical quality issue.

C.C. Wei -- Chief Executive Officer and Vice Chairman

The photoresistor event, and what do we do?

Charlie Chan -- Morgan Stanley -- Analyst

Yes, in terms of financial.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Do we ask for financial compensation?

Charlie Chan -- Morgan Stanley -- Analyst

Yes.

C.C. Wei -- Chief Executive Officer and Vice Chairman

I have no comment on that one.

Charlie Chan -- Morgan Stanley -- Analyst

Okay, no problem. Okay. And also C.C., regarding your comments about 5 nanometer will have a bigger larger scale than 7 nanometer because kind of what wider applications. So my question is that besides exceeding 7 nanometer customers in applications, what will be the new customer raw application for 5 nanometer?

C.C. Wei -- Chief Executive Officer and Vice Chairman

We are -- actually we are engaging with the new big customers and they are expanding their product portfolio in to HPC area, and that's what we've rely on.

Charlie Chan -- Morgan Stanley -- Analyst

Okay.

C.C. Wei -- Chief Executive Officer and Vice Chairman

Okay. So that's why we say that 5 nanometers business probably will be bigger than the 7 nanometer.

Charlie Chan -- Morgan Stanley -- Analyst

And lastly, I guess on M&A, right because your subsidiary, Vanguard acquired GLOBALFOUNDRIES inch fab. This -- early this year, right? So would you consider to do any M&A from those kind of overseas fab at some points?

C.C. Wei -- Chief Executive Officer and Vice Chairman

We don't have plan right now. Of course if there is a good opportunity or everything that meets our strategy, we will consider. But we don't have any plan of M&A right now.

Charlie Chan -- Morgan Stanley -- Analyst

Okay. Yeah, and a follow question to Gokul's question regarding the profitability. So I guess last year on one big event you said a GLOBALFOUNDRIES exceed the leading edge (ph). But if you look at first half gross margin I think it was much below our previous cycles' margin. So do you think that your bargaining power really improved after this industry consolidation and how do you think about Samsung's UV technology compared to your 5 or 6 nanometer? Thanks.

C.C. Wei -- Chief Executive Officer and Vice Chairman

You're talking about margin profitability. Let me say that I think that the first quarter, second quarters, most of the difficulties in the 7 nanometers are loading (ph). The loading is so low that affect our margin by 4 points in the first quarter, by 3 points in the second quarter. So the loading is actually is a dominant one, is not because of our others. Now you are talking about the UV status as compared with my competitor.

All I can say is that we are very confident that we can ramp up the UV right now. And we believe our -- the maturity or the readiness of the UV technology, TSMC definitely is better than others.

Elizabeth Sun -- Senior Director of Corporate Communications

Follow-up question from Credit Suisse, Randy Abrams.

Randy Abrams -- Credit Suisse -- Analyst

Hi, I just have two quick follow-ups. One for Lora on the dividend. Since you're moving to quarterly, in first quarter approving for fourth quarter this year, next quarter would you declare for first quarter of 2020? And is it the view for 2020 you will declare quarterly or we'll get a set amount for the full year next year?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

After the shareholder meeting, we will declare the $2, which is the first quarter dividend, will be paid in the fourth quarter this year. And so every quarter from then, we will declare cash dividend, and it will be paid within six months. So first quarter next year, you will get the dividend from our Board approval in the third quarter this year. So that will continue going on. Did I make myself clear?

Randy Abrams -- Credit Suisse -- Analyst

Yeah, that part is clear. And then so every quarter we will declare -- is your goal --

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Yeah, every quarter, we will declare dividend.

Randy Abrams -- Credit Suisse -- Analyst

Okay. And is your goal then for each year to still be stable or can it rise to anywhere?

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Yeah, that's right. Stable.

Randy Abrams -- Credit Suisse -- Analyst

Okay. And then one follow up, just on the margins, just relative to the revision you made, sales actually came in a little bit better but the gross margin came in toward the lower end of the range. I guess just relative, if there were some factors that you saw in the last month that might have affected near-term because it looks like by medium term you have margin getting back toward 50.

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

Actually when we have gave the guidance on February is a range. So we are still within the range. So there are a few factors may swing the gross margin, photoresist definitely one actually the -- actual number will slightly deviate from what we have fared in February but still within the range. Okay.

Going forward, as I said in my remarks, we are thinking the 50% gross margin is still a good target for us, and really meaning if we can achieve better utilization, we can go back to 50. But you are depending on each quarter's demand profile. I am not ready to give you third quarter and fourth quarter separately, but what I can say is our gross margin will improve in third quarter and we will further improve in fourth quarter.

Randy Abrams -- Credit Suisse -- Analyst

Thank you.

Elizabeth Sun -- Senior Director of Corporate Communications

Now with this very positive note on the margins and also as our CEO said, we have passed the bottom of the cycle for our business and we're launching the industry's competitive leading edge technologies with volume production already taken place using EUV.

I think let's end our conference today with such a high note. Thank you for coming to our event today and we hope to see you next quarter. Thank you.

Duration: 85 minutes

Call participants:

Unidentified Speaker --

Elizabeth Sun -- Senior Director of Corporate Communications

Lora Ho -- Senior Vice President, Finance / Europe & Asia Sales and Chief Financial Officer / Spokesperson

C.C. Wei -- Chief Executive Officer and Vice Chairman

Roland Shu -- Citigroup -- Analyst

Gokul Hariharan -- JPMorgan -- Analyst

Bill Lu -- UBS Securities -- Analyst

Charlie Chan -- Morgan Stanley -- Analyst

Randy Abrams -- Credit Suisse -- Analyst

Rick Hsu -- Daiwa Capital Markets -- Analyst

Bruce Lu -- Goldman Sachs -- Analyst

Brett Simpson -- Arete Research -- Analyst

Mehdi Hosseini -- SIG -- Analyst

Sebastian Hou -- CL Securities -- Analyst

More TSM analysis

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