"The issue is whether depreciation is used in "gross margin" calculation.”
Sorry Sarmad, I had not realized you had responded to me until this morning. The question about gross margins and capital expenditures the gist of which can be explained I think best here in the last TSM conference call.
Li Mei He - Chief Financial Officer and Senior Vice President of Finance “Dan, we are confident we can either maintain or slightly improve our structure profitability. I know many analysts was concerned about our capital intensity being so high, how can we maintain our structural profitability? I have went through the number myself. So let me explain it to you this way. Our depreciations, there's about 85% of our depreciation that goes to COGS. If you just look at the depreciation increase, you will see, "Oh, year-over-year increased so high. Now this year versus last year is around 20%, next year will be more than 35%. So how can you sustain your structural profitability?" The thing is, we will invest in capital expenditure, actually we're adding the capability to do more business, so our quantity will also increase. So if you divide it by the unit cost with depreciation cost, actually it doesn't increase that much. Other than that, since we have migrated technology to more leading-edge, so our average ASP will go higher, as you have seen the past few years. In addition to that, with the continued productivity improvement from our operation people, we were able to drive the non-depreciation costs go down on a per annual basis. That means we can maintain the structural profitability. So make it simple, if we invest in CapEx, and those capacity get utilized, and we continue to drive the efficiency, and then we can maintain the same structure, and so does EPS will growth. I hope my explanation is clear.”
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