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Executives

Dr. Elizabeth Sun - Head of IR

Lora Ho - VP, CFO and Spokesperson

Dr. Rick Tsai - CEO and President

Analysts

Mehdi Hosseini - Friedman Billings Ramsey

Timothy Arcuri - Citi Investment Research

William Lu - Morgan Stanley

Steven Pelayo - HSBC

Bhavin Shah - J.P. Morgan

Satya Kumar - Credit Suisse

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) Q4 FY07 Earnings Call January 31, 2008 8:00 AM ET

Operator

Good day ladies and gentlemen and welcome to TSMC Fourth Quarter 2007 Results Webcast Conference Call. Today's event is chaired by Ms. Lora Ho, Chief Financial Officer and Vice President; and Dr. Rick Tsai, Chief Executive Officer and President. This conference is being webcast live via the TSMC website, at www.tsmc.com, and only in audio mode. Your dial-in lines are also only in audio mode. At the conclusion of the management presentation, we will be opening the floor for questions. At that time, further instructions will be provided as to the procedure to follow if you would like to ask any questions. Please be advised, for those participants who do not yet have a copy of the press release, you may download it from TSMC's website, at www.tsmc.com. Please also download the summary slides in relation to today's quarterly review presentation. Once again, the URL is www.tsmc.com.

I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC's Head of Investor Relations, for the cautionary statement before the main presentation by Ms. Ho and Dr. Tsai. Please proceed.

Dr. Elizabeth Sun - Head of Investor Relations

Good morning and good evening to all participants. This is Elizabeth Sun, Head of Investor Relations for TSMC. Before we begin, I would like to state that management's comments made about TSMC's current expectations during this conference call are forward-looking statements subject to significant risks and uncertainties, and that actual results may differ materially from those contained in the forward-looking statements.

Information as to those factors that could cause actual results to differ materially from TSMC's forward-looking statements may be found in TSMC's annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 20th, 2007, TSMC's registration statement on Form F-3 filed with the SEC on May 8, 2007 and such other documents as TSMC may file with or submit to the SEC from time-to-time. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

And now, I would like to turn the conference call over to Ms. Lora Ho, our Chief Financial Officer and Vice President.

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

Thank you, Elizabeth. Good morning and good evening to everyone. Welcome to our fourth quarter 2007 earnings conference call. First, I would go over the highlights from our fourth quarter and 2007 full year results and will then give you an outlook of the first quarter 2008. Finally, I will go over a few items that have an impact on our TSMC's 2008 financial. Please refer to the quarterly financial summary slide on our website, where dollar figures are in NT dollars unless otherwise stated.

To begin with the highlights for the fourth quarter; we ended 2007 with a strong quarter in which we set another record for revenue, wafer shipments and net income. We delivered quarter-over-quarter and year-over-year improvement in our gross margin and operating margin. And our earnings per share reached $1.31 for the quarter. Free cash flow generated during the fourth quarter totaled $40 billion, up 52% q-over-q; return of equity with 27.9% for the quarter.

And now with our guidance, demand for computer related applications grew the strongest in the fourth quarter follow by communications. Revenue from computer and communications increased by 15% and 5% q-over-q respectively. In the meantime, revenue from consumer applications declined by 7%, reflecting this seasonal pattern. Overall, revenue from computer, communication and consumer applications accounted for 35%, 42% and 50% of our wafer revenue growth in the fourth quarter 2007.

In terms of revenue by technology, we continue our strong ramp for 65-nanometer during the quarter, as revenue from 65-nanometer accounts for 10% of our wafers sales. We started out the year with 1% revenue contribution from 65-nanometer in the first quarter and we ended the year with 10% revenue from 65-nanometer. Our revenue dollars from 65-nanometer increased by more than 17 fold in the fourth quarter.

Total revenue from advanced technologies accounted for 59% of total wafers sales. Compared with third quarter it went up by 3 percentage point.

Now let's take a closer look at our income statement. Revenue was $94 billion in the quarter, up 25% year-over-year and 5.5% quarter-over-quarter. Gross margin was 47.8% for the quarter, up 2 percentage points to over Q mainly due to higher capacity utilizations and the cost improvement offset in part by our depreciated U.S. dollar.

Total operating expenses declined both in absolute dollar term and as a percentage of sales, largely due to lower legal fee in fourth quarter. Operating margin was 39.2% for the quarter, up 2.8 percentage point from the previous quarter. Income from non-operating items and long-term investments increased to $2.6 billion, net margin was 36.7%.

Moving to balance sheet and cash flow statement; during the fourth quarter 2007, we completed our share buyback plan. We repurchased 800 million or 3% of our outstanding common shares over the open market on Taiwan stock exchange. We paid a total of $48.5 billion, $45 billion of which was paid in 2007 and the remaining was paid in early January 2008. We also repaid $4.5 billion in corporate bond. As a result, we ended the quarter with $175 million in cash and short-term investment, essentially flat from $176 billion in the last quarter. Our asset productivity also improved to 1.4 times.

Now, let's turn to CapEx and capacity. Total installed capacity for the fourth quarter was above 2.3 million 8-inch equivalent wafers. Total 2007 capacity was 8.3 million wafers, a year-over-year increase of 17%. We expect our first quarter 2008 capacity to be about 2.2 million wafers, down 4% q-over-q largely due to the scheduled annual maintenance and certain adjustments to capacity due to change in the product mix. We spent US$611 million in CapEx during the fourth quarter. Our 2007 CapEx standing at US$2.6 billion with CapEx-to-sales ratio at 26% for the year, directly up from 2006 level.

Now, let me go through our 2007 full year highlights. 2007 was a challenging year for us. We start-off the year with weakened demand in the first quarter, due to inventory corrections. However, our revenue recovered in the second quarter with rising revenue and improving profits every single quarter. As a result, we delivered our six straight year of top line growth in 2007. We also achieved our financial target of ROE 20% or more throughout the cycle for a fourth straight year. However, due to low utilization, lower ASP, our profitability declined. With our strong balance sheet and our consistent profitability, we believe that we are well positioned for our future growth and for delivery increasing long-term return to our shareholders.

Starting from 2004, TSMC began returning cash to our shareholder through a combination of cash dividends and share buyback. We started with paying NT$0.60 per share in cash dividend in 2004 and have since then raised the dividend level every single year, with 2007 cash dividend at NT$3 a share. We also excluded two share buyback plans in 2004 and in 2007. In 2007, we returned a record amount of cash to our shareholder with ascending 126% of the free cash flow generated in the year. We have returned a total of NT$253 billion or US$7.8 billion in cash to our shareholder over the past four years.

With that, let me give you the outlook for the first quarter of '08. Based on our current business and foreign exchange rate expectations, we expect our consolidated revenue to come in between NT$87 billion to NT$89 billion. In terms of margins, we expect our first quarter growth margin to be between 42% and 44% including around 2.5 percentage point impact for the employee profit sharing expensing; and our operating profit margin to be between 32% to 34%. This number including around 4.7 percentage points impact on our employee profit sharing. We also expect our 2008 CapEx to be around US$1.8 billion.

The above is my report, but before I hand the call over to Rick, I would like to make a few comments on employee profit sharing, our CapEx of 2008, depreciation expense and capital management.

Let me start the first one, regarding the profit sharing expensing. As you all know, starting this year, our accounting will require the expensing of employee profit sharing in company's financial statement. We at TSMC, we accrue such expense in our quarterly financial report. As we have informed the market as well as our employees back in November of 2006 that 2008 profit sharing expense will be at 15% of that year's net income. We now can inform you that based on all our first quarter '08 business performance outlook, we expect this expensing to have an impact to our gross profit margin are about 2.5 percentage points and to impact our operating profit margin by about 4.7 percentage points. Our first quarter 08 guidance has reflected both.

For the full year again, based on our forecast of our 2008 business performance today, we expect profit sharing expensing to impact our gross profit margin by 2.4 percentage points to 2.6 percentage point, and to our operating margin by 4.6 percentage point to 4.8 percentage points.

By our next quarterly conference in April, we will provide you with the actual result from 2008 first quarter and we will also provide you with the comparable numbers of our 2007 result, such that you will be able to assess our performance on a like-for-like basis.

The next one is regarding CapEx and depreciation. Based on our current forecast of 1.8 billion CapEx this year, we expect depreciation and amortization together, will only go up 1% compared with 2007 number. As our CEO Rick Tsai will share with you the business outlook shortly after my remark, we believe our wafer shipments and revenue of growth this year will be at a higher rate than the increase in depreciations, which is 1% as I just mentioned. Therefore, depreciation for revenue and depreciation for wafer should both come down. This should improve our gross margin rate.

Other than the depreciation, we are also aware of the impact of foreign exchange rate and impact of inflation to our margins. And we have viewed our mix and long-term financial plan taking into consideration of those factors. In the mean time we will monitor the impact and we'll try to manage the downslide, if there is any.

My third comment is regarding our capital management. Regarding how we use our free cash flow and how we return the cash to shareholder, I want to share with you our thinking of cash dividend and share buyback. Our policy is to steadily increase the cash dividend per share. In the past three years, we have steadily increased the cash dividend per share. The average payout ratio was around 70%. I can tell you, in the future, we will maintain the cash dividend per share not less than the current level, and the payout ratio will not be less than 80% of the distributable earnings of each year.

Meanwhile, as part of the multi-phased plan that we have jointly announced with Philips in early 2007, the remainder of Philips Holding will be retaining 5% of TSMC share, currently valued at US$2.3 billion, will be either bought back by TSMC and cancelled in the next two years or will be placed with some long-term financial institutional investors. Without Philip Holding of TSMC shares we may also conduct share buyback on the market on discretionary basis from time to time.

Above is my remark, now let's turn the call to Rick for his comments.

Dr. Rick Tsai - Chief Executive Officer and President

Hello everyone, I would like to make a few comments also before the Q&A. First, on the outlook for the year 2008; we believe that the semiconductor industry should grow by above mid single-digit this year compared to 2007. If you were here looking into us a quarter ago, we were talking about mid single-digit to high single-digit growth for 2007. So, the new number does reflect our feeling about the potential impact of the uncertain macroeconomic environment in the recent months and going forward. However, we still firmly believe that the growth of the fund resettlement of the semiconductor industry will still outperform the semiconductor industry by at least a few point, a few percentage points. And TSMC of course will also grow faster than the semiconductor industry in 2008.

Then the inventory situation, we have looked into the inventory situation mainly within our customer supply chain and we have talked to our customers what we have seen, what we have observed, basically again showing that the supply chain inventory level at the customers is at a normal level.

Demand this year for our advanced technology in particular in 65-nanometer and 55-nanometer, remains very strong throughout the year. In this environment what are we doing, what is TSMC doing? I think during the last couple of years we have seen our price of our advanced technologies declining faster than that of our cost. And because of that we have worked up on our pricing, starting this year. We expect starting in 2008 and certainly into 2009, the price trends will be more inline with our cost trend.

In addition, we are managing our CapEx and our capacity installation in such a way so that we can achieve high utilization rate especially for the advanced technology throughout the year, while we can still meet our customers demand. As a result, we will be able to continue improving our return on investment. I think the $1.8 billion was just set as a big part of our CapEx management.

We are also focusing on improving our structure profitability. What is the structure profitability? We define our structure profitability as the profitability at a standard utilization rate. That is profitability which is more or less independent of our utilization rate. Now we are working to improve our structure profitability mainly by reducing our cost in a structured manner by realizing our values to our customers and by managing our prices.

Lastly, I also want to make a few remarks on the semiconductor foundry business model. There has been... there were some talks in the press recently, I guess touching the liability of the foundry business model and we figure we should respond to that. TSMC again firmly believes that the win-win partnership and the seamless collaboration with our customers remain the cornerstone for the success for the foundry business model. And TSMC continue to develop advanced technology, if anything we continue to invest aggressively for those advanced technology development.

We also continue to make long-term commitment in capacity for our partners and customers. There is no question that if you look at the industry during the last year, a year before, you can see that the fab industry in particular all partners has grown robustly. They have all grown the semiconductor industry consistently, and I am happy to say we saw those very good gross margins.

Many IDMs that you also know have come fab-light and are relying on these. And more IDMs are in the process of going fab-light and are relying more and more on foundry service too. As a result, we really believe that the foundry business model is strong, is dynamic and it's vibrant and it will be like that going forward for many, many more years. That's my remarks for now and we'd like to entertain your questions. Thank you.

Question And Answer

Operator

At this time, we will open the floor for questions. [Operator Instructions]. Your first question comes from the line of Mehdi Hosseini with FBR. Please proceed.

Mehdi Hosseini - Friedman Billings Ramsey

Yes, thank you for taking my question. Regarding your capital intensity return asset and so forth and the demand for 65, 55-nanometer, does that imply that the 45-nanometer technology node may not be getting much momentum in the near term and we are seeing a dramatic change in the costs and benefits of Mozilla?

Dr. Rick Tsai - Chief Executive Officer and President

Hello. No, I don't think so. The 45-nanometer technology is moving along fairly well for both the low power version and the generic version. Our customers, actually we have really many customers looking on the deal line and the take out will occur starting second quarter and goes down. Actually the production will start in probably somewhat more of volume in the fourth quarter timeframe, and certainly I think it will go into a much more slim-looking level in 2009. I think if you look at the two 65-nanometer ramping schedule and the 45-nanometer ramping schedule, there is really not much difference from the time point of view.

Mehdi Hosseini - Friedman Billings Ramsey

Okay. But for your customers to be able to afford to go down to 45-nanometers and at the same time you will be able to improve the profit margin for this particular node, something has to give, either you mass production to reduce the cost or your customers would be able to charge more from their customers. I just don't... I am still not clear the dynamics of the supply and demand for these expensive project nodes?

Dr. Rick Tsai - Chief Executive Officer and President

I think you can say that the... and so your question, if you think about it, you can ask this question when we started the ramping 65-nanometer vis-à-vis 90-nanometer. 65-nanometer is more expensive from a cost point of view compared to the 90-nanometer. However, it also does provide more values in performance, in power and in die cost, really that's not a whole lot difference if you look at 45-nanometer. I think you finish them we'll put even more emphasis on working on the wafer cost right from the beginning during the technology development for 45-nanometer. We have as I said just now, we have customers and those customers are volume users, they are not a small quantity devices, these are being designed and scheduled to take off this year, later this year. We will see the migration to 45-nanometers. However, I am not saying also that every one is moving towards 45-nanometer either.

Mehdi Hosseini - Friedman Billings Ramsey

Is the marginal cost benefit change as we move from 65 to 90, I am sorry, from 65 to 45 compared to 90 to 65, the marginal cost benefit?

Dr. Rick Tsai - Chief Executive Officer and President

The all idea of understanding marginal cost benefit?

Mehdi Hosseini - Friedman Billings Ramsey

I do agree with you yes, as you migrate to smaller nodes you're still going to have benefits in terms of performance and so forth, but would the marginal gain from 65 to 45 be comparable to marginal gains from 90 to 65?

Dr. Rick Tsai - Chief Executive Officer and President

I think yes, if you... again, if you put it straight forwardly, if you look at the leading product, but to over the 65-nanometer migration, during the last couple of years and if you apply those products in 45-nanometer, the benefits does justify the migration.

Mehdi Hosseini - Friedman Billings Ramsey

Okay, got you. Thank you very much.

Dr. Rick Tsai - Chief Executive Officer and President

Thank you.

Operator

Your next question comes from the line of Timothy Arcuri with Citi. Please proceed.

Timothy Arcuri - Citi Investment Research

Hi, couple of things. First of all, if I look at your CapEx, you spend kind of give or take roughly 2.5 billion in the last four years. So your CapEx has been pretty flat since 04 and you added... capacity adds in those years have been kind of plus or minus 20%, it's been within a pretty tight band around 20%. So, I am trying to figure out what the blend in 07 was that added capacity and what the technology spending? So what the upgrade spending was in '07? I am basically trying to figure out what your maintenance CapEx would be if you didn't add any wafer capacity?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

I think typically, in 07 where we had spend money basically on two things, the 90-nanometer capacity on 12-inch and also this 65-nanometer on 12-inch. Now we have two 12-inch. If we don't pay anything, the sustaining capital, any R&D and other sustaining type of measure will be roughly 14% of total spending, that's translating to maybe US$300 million to US$400 million a year.

Timothy Arcuri - Citi Investment Research

Okay, so that --

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

-- sorry, the number doesn't change much year-over-year with regard of how much CapEx we spend on a yearly basis.

Timothy Arcuri - Citi Investment Research

I see, okay. So that's the number that if you wanted to in any given year, if you do not want to add any capacity which is not so you will do that, but if you did want to do that you would only have to spend something less than $500 million?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

That's basically it is, yes.

Timothy Arcuri - Citi Investment Research

Okay. And then I guess the other question is, all of the big foundry customers, all the big fabless customers, QUALCOMM, Broadcom, nVidia, they are all talking about migrating designs pretty aggressively down the 65-nanometer this year and I think they have done that in recent quarters. So, it seems like demand at the leading edge this year is going to be up pretty significantly and you did comment that pricing has come down quite a bit at the leading edge as well. It kind of seems like things have clicked a little bit recently at the leading edge to allow these customers to actually migrate designs down there and yet you are cutting CapEx pretty significantly or you're signaling in which you are going to cut it pretty significantly in '08. So, it seems like maybe you can spend that little in '08, but it seems like there is somewhat of a change versus the last couple of years at the leading edge and if that could start to put upward pressure on your spending levels since you don't have that much leading edge capacity, is that an accurate assessment?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

If I may give you some color on this 1.8 billion. Firstly, this 1.8 billion though is 30% cap on last year. It will give us year-over-year capacity increase of about 13%, majority of that number goes to 12-inch. So the 12-inch itself year-over-year capacity increase will be 24%, which is quite significant. Now 8-inch it would be 7%. And also we have productivity improvement, which we will try the best to contribute every year. That means if we don't spend any money, the capacity would go up by x percentage.

So the two things add together, will give us quite significant capacity increase in 2008, even the CapEx only 1.8 billion. Another thing is the 1.8 billion actually was pretty much front-end loaded. I mean, we put more capacity in the first half of the year. Spread out by first half and second half is roughly 70% in first half year and 30% in second half year. So, that's how we feel that the 1.8 even is not as high as last year and we are asking ourselves to around very high utilization, with continued productivity improvement, it still represent a pretty significant about the increase for the whole year.

Timothy Arcuri - Citi Investment Research

Okay, I see. I guess I am just trying to true-up what you are saying with some of the equipment suppliers are saying that you are getting more aggressive on actually ordering more leading edge equipment recently. So I am trying to true up the fact that you are saying the CapEx is going to come down so much with the fact that it seems like you are actually getting little more aggressive at the leading edge. So, thanks.

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

Yes.

Operator

Your next question comes from the line of Bill Lu with Morgan Stanley, please proceed.

William Lu - Morgan Stanley

Yes hi, good evening Rick and Lora. I have two questions as well. Just to start with the simple one, I don't think I heard you on the call, did you provide some comments on the ASP trends in the near term?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

What trend?

William Lu - Morgan Stanley

ASP price trends?

Dr. Rick Tsai - Chief Executive Officer and President

Well, as I said to you earlier, you look at 2008 pricing, a significant part of the 2008 pricing was discussed and negotiated with the customer back in mid last year and third quarter time frame. So we did have... we do have some price decline because of that. Well after that, we have worked to erect the decline of the pricing so that the price decline would be more moderate. So for 2008, it would be a combination. I think that 2008 certainly will represent a better decline rate compared to that of the 2008 and 2006. Into 2009, we definitely believe that our price trend will be much more inline with our cost trend.

William Lu - Morgan Stanley

Okay, great. Rick, the second question is for you as well. I just heard you talking about improving the structural profitability now for a few months and a part of that is getting paid for the values provided by TSMC. Now that makes a lot of sense to me, but I've got to say that within your overall offerings, there are some things that offer more value and some other things will be offering a little less value, for instance, leading edge. You know, by having this plan in place, does that also necessarily change the strategy going forward or this is type of business not to take?

Dr. Rick Tsai - Chief Executive Officer and President

Excuse me, Bill what is your question? I heard your advanced technology and trading technology out here.

William Lu - Morgan Stanley

Yes, my question is that you want to get paid for the value provided, I've got to think that this value differs for the different offerings that TSMC has. So is there going to be a change in strategy where part of the business is not going to be as emphasized going forward. Are you going to focus more on certain business that you don't have before for instance. I'm just wondering, what this implies with your whole strategy going forward?

Dr. Rick Tsai - Chief Executive Officer and President

I think what we have just talked about a price in general of course to all our offering in terms of technology or otherwise. I also understand what you are saying about the differences in advanced and the more mature technologies. However, you also understand that the investment level for them is quite different. One in a fair large capital investment every year, the other one; it takes relatively small, also with much different cost structure. So even then, I think if we look at mature technology, it's not just geometry difference. Now what do we have been doing in mature technology area really is to develop differentiating modules or you can say derivative technologies so that we can offer them to... for more almost some more applications to this technologies. We certainly... I think we certainly can get a reasonable pricing that again as you said in line with our cost structure and then still also maintain a very strong relationship with our customers.

William Lu - Morgan Stanley

Okay, great. Thanks very much.

Dr. Rick Tsai - Chief Executive Officer and President

Sure.

Operator

Your next question comes from the line of Steven Pelayo with HSBC. Please proceed.

Steven Pelayo - HSBC

Yes Rick. It's been about 90 days since you first talked about your significant cut for 2008 CapEx, I'm kind of curious about actually, I mean after all that you've been very successful here in fact just on the December quarter, and the March quarter, you really outperforming your peers, you're gaining a lot of market share and I combine that with your comments and your desire, both time on pricing and your 30% CapEx cut. What the customer reaction been like, does this force them to engage with your competition a little bit more? A fear of just how successful you are being and more successful you would like to be in the future?

Dr. Rick Tsai - Chief Executive Officer and President

Well, really I don't think I can comment on my customers. Well basically, although as I said in the comments on the business model, at the end of the day, a winning partnership and the accomplished collaboration really remain the cornerstone. And we are not talking about this as a propaganda; it's not a marketing word. We live on that, we execute those things. Again, looking at our customers and I think, I mean most of them have done well. We will certainly just continue working with some of them so that they get their values out of our technologies or design services. I think we will also continue investing in capacity. Overall, I think with the very competitive environment, we do need to manage our CapEx so that we can maintain a higher utilization rate for long period of time, so that we can get a reasonable return.

Steven Pelayo - HSBC

Okay, I just wanted to check that is the customers telling to change at all are there any tensions in light of you guys just incredible success yet plan to cut CapEx there? My other question is really just related to your 65-nanometer outlook this year. You had about 10% of revenue, I think you said you wanted to double it about 20% of revenue by the end of this year. What were your expectations 90 days ago? At one point I was actually monitoring I can give in a greater contributions with 65-nanometer by the end of this year? And your expectations actually incur what I concentrate will be by the end of the year or sustain say, 100 days?

Dr. Rick Tsai - Chief Executive Officer and President

It has improved somewhat during the year plus quarter also.

Steven Pelayo - HSBC

Okay.

Dr. Rick Tsai - Chief Executive Officer and President

I think the demand for 65-nanometer has increased.

Steven Pelayo - HSBC

Okay fair enough, maybe my models were aggressive, thank you.

Dr. Rick Tsai - Chief Executive Officer and President

: Thank you.

Operator

Your next question comes from the line of Bhavin Shah with J.P. Morgan. Please proceed.

Bhavin Shah - J.P. Morgan

Yes, hi Rick, Lora and Liz. First of all, I just wanted to congratulate TSMC for such a strong performance in spite of the turbulence there in the world. I wanted to ask few questions; first, in your opinion when you look at your order book, you feel that customers are ordering with an intention of maintaining their inventory levels exiting first quarter, or do you think they are sort of becoming even more cautious and might even be trying to reduce their inventories at the end of first quarter, I mean sort of a tough question for you to answer, but maybe you have a perspective and then I have some other question.

Dr. Rick Tsai - Chief Executive Officer and President

All right Bhavin, thank you. It is a difficult question because I can give you my general signals getting from the customers deal, the major customers. Most of them are seeing business going forward to be normal. I really haven't seen many, if at all, who having a significant demand softening. I am not saying, it's not going to happen it's just what I have heard. However, of course everyone is exercising caution. My belief of what you are asking is probably true for our customer mix; we have so many customers in India. Somehow, I think the few ordering fairly aggressively especially for their product, which I said vary in the market. Everyone is looking at inventory carefully, but I really do not know whether they are reducing inventory purposely or not.

Bhavin Shah - J.P. Morgan

Thanks.

Operator

Ms. Ho, there are no more question in queue at this time.

Dr. Rick Tsai - Chief Executive Officer and President

What about you, Bhavin, you have more questions?

Operator

My apologizes. I am showing a question, it just came in the queue from the line of Satish [ph] with KFA Capital. Please proceed.

Unidentified Analyst

Hello Lora and Rick, how are you?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

Fine.

Dr. Rick Tsai - Chief Executive Officer and President

Fine.

Unidentified Analyst

Lora can you give us the ending share count after all the share buyback at the end of the year?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

The 25.6 million shares.

Unidentified Analyst

That is the ending share count?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

Sorry.

Unidentified Analyst

Is that the ending share count diluted or is it the basic share count?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

The share as of December 31st, the number of outstanding shares.

Unidentified Analyst

Okay great. And then as I am looking at next year 2008 for you guys, I believe free cash flow is going to exceed probably net income and that's a change compared to last several years. So have you given any thought as to ramping up the share buyback program, especially given the amount of cash you have on the balance sheet?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

As I said in my comments earlier, other than the cash dividend, which will stay at a low percent level of this year, there is full phase of Philips program that will be carried out in the coming two years. Philips, they are holding 5% of TMSC share now and that translate into US$2.3 billion. On the phase four program, we will either buy back from that 2.3 billion in the coming two years or should they find the low [indiscernible] financials between investor, they can also sell to them. So with that in mind and we still anticipate there will be a [indiscernible] agreed that we will do the buy back at least for the past from Philips in 2008.

Unidentified Analyst

Okay, great, thank you.

Operator

Your next question is a follow-up from the line of Bhavin Shah with JP Morgan. Please proceed.

Bhavin Shah - J.P. Morgan

Thank you. I was actually being taken off. The other question I wanted to ask was you are doing much better than comparatively in first quarter. Do you think is a result of strength that you are seeing from your customers or do you think that is gaining share from the customers that you share with the competitor?

Dr. Rick Tsai - Chief Executive Officer and President

I think is that Bhavin, is a more... I think our customers. The strength during the first quarter, I don't know whether I want to call it strength, because after all we do have a decline, a sequential decline, I wouldn't call it strength, but let me put this way. The business in first quarter that's coming somewhat unevenly from customers point of view. Some customers do come in very strong and some customers are not doing as well. But the high... if you look at the differences are all... I will not put differences in the category of that of our gaining that much share from our competitors.

Bhavin Shah - J.P. Morgan

Okay. And what is the trajectory of the quarter in terms of January versus March?

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

Bhavin, it is probably too early to tell, we don't know.

Dr. Rick Tsai - Chief Executive Officer and President

I think we have a... we probably have a stronger, I think the quarter will start stronger for first quarter.

Bhavin Shah - J.P. Morgan

Okay.

Operator

Your next question comes from the line of Satya Kumar with Credit Suisse. Please proceed.

Satya Kumar - Credit Suisse

Yes hi, thanks. Is there an improvement in pricing that you are getting for equipment from your suppliers, which is also giving you perhaps more capacity increase for the given amount of CapEx?

Dr. Rick Tsai - Chief Executive Officer and President

Are you asking the equivalent pricing?

Satya Kumar - Credit Suisse

Yes.

Dr. Rick Tsai - Chief Executive Officer and President

Well, let me put this way. We work with our suppliers, both from pricing and productivity point of view. We have aggressive targets for productivity and I think in most cases, we have cooperated with our suppliers quite well and they usually achieve most of the targets or at least close to them.

Satya Kumar - Credit Suisse

If I look at your end of the year utilization rates or just looking at your sort of shipment of wafer pieces and your wafer capacity at the end of last year. That level is significantly higher than you ended at calendar '06. I know you are adding capacity more in the first half of the year, but even if you get sort of a 10% wafer shipment growth for you this year, you would probably end up at a substantially higher utilization rate all of this year. Since '08 is a weaker year just because of your macro view and you get some sort of rebound in overall market next year, so would you not have to increase your capital spending rather substantially in calendar '09?

Dr. Rick Tsai - Chief Executive Officer and President

Well, I certainly hope what you say will be true going forward, but right now, it's still not clear. So we really don't have the number for 09 for now. But as I said earlier, we definitely will invest the number and also as Lora said earlier, but we also expect to see the EBIT CapEx ratio be lower in the next five years compared to that of past five years, the ratio

Satya Kumar - Credit Suisse

Okay thank you

Dr. Rick Tsai - Chief Executive Officer and President

Sure.

Operator

There are no further questions in queue at this time.

Dr. Elizabeth Sun - Head of Investor Relations

Well operator, if this is the case, let's conclude the conference call.

Lora Ho - Vice President, Chief Financial Officer and Spokesperson

Thank you everybody for you participation, looking forward to see you next quarter. Thank you so much. Bye-bye. Good night.

Operator

Ladies and gentlemen. Before we conclude TSMC's fourth quarter 2007 results webcast conference call today, please be advised that the replay of the conference call will only be accessible through TSMC's website at www.tsmc.com. Thank you all and have a great day.

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Source: Taiwan Semiconductor Manufacturing Co. Ltd. Q4 2007 Earnings Call Transcript
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