Wendell Huang: Thank you, Jeff. Sorry, everyone. Let me repeat the guidance for second quarter again. For the second quarter of 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second quarter revenue to be between USD 19.6 billion and USD 20.4 billion, which represents a 6% sequential increase or a 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings.
As a result, our second quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full year tax rate will be between 15% to 16% compared to 14.5% in 2023. Now that concludes the financial presentation. Let me now repeat our key messages. I will start by making some comments on the impact from the April 3 earthquake. On April 3, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude at our fabs was 5. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC’s deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day.
There were no power shortages, no structure damage to our fabs and there is no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimal impact to our second quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first quarter 2024 and second quarter 2024 profitability. Compared to fourth quarter of 2023, our first quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality.
We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to impact from the earthquake on April 3, as just discussed, and higher electricity costs in Taiwan. After last year’s 17% electricity price increase from April 1, TSMC’s electricity price in Taiwan was — has increased by another 25% starting April 1 this year. This is expected to take out 70 to 80 basis points from our second quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity costs continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemicals and gases and other variable costs.
In addition, we expect our overall business in the second half of the year to be stronger than the first half. And revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half ’24 as compared to 2 to 3 percentage points in first half of ’24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second half of ’24, we will work diligently on internal cost improvement efforts while continuing to sell our value.
Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Finally, let me talk about our 2024 capital budget. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. Our CapEx and capacity planning is always based on long-term market demand profile. We reiterate our 2024 capital budget is expected to be between USD 28 billion and USD 32 billion as we continue to invest to support customers’ growth. Out of the USD 28 billion to USD 32 billion CapEx for 2024, between 70% and 80% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making and others.
Now let me turn the microphone over to C. C.
C. C. Wei: Thank you, Wendell. Good afternoon, everyone. Before I start, I would like to take a moment and make a few remarks. On April 3, TSMC experienced a major-scale earthquake of 7.2 magnitude. Our deepest sympathies and heart go out to all those who are affected by this tragedy. I also want to recognize and deeply thank all of our employees and our suppliers for their dedication and hard effort during this time. Although it was largest earthquake in Taiwan in the last 25 years, we worked together tirelessly and were able to resume for operation at all our fab within 3 days with minimal disruptions, demonstrating the resilience of our operation in Taiwan. Lastly, I would also like to extend our great appreciation to our customers with their understanding and support as we work to recover the lost production during the second quarter.
Now let me start my prepared remarks with our near-term demand outlook. We concluded our first quarter with revenue of USD 18.9 billion, slightly above our guidance in U.S. dollar terms. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Moving into second quarter 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Looking at the full year 2024, macroeconomic and geopolitical uncertainty persists, potentially further weighing on consumer sentiment and end-market demand. We thus expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024.
