Welcome to Semiconductor Manufacturing International Corporation first quarter 2020 webcast conference call. Today's conference is hosted by Dr. Zhao Haijun, Co-Chief Executive Officer, Dr. Liang Mong Song, Co-Chief Executive Officer, Dr. Gao Yonggang, Chief Financial Officer, and Mr. Tim Kuo, Director and Head of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet of SMIC's website. Please be advised that your dial-ins are in listen-only mode. However, at the conclusion of the management's presentation, we will be having question and answer session, at which time you will receive further instructions as to how to participate. The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event. Without further ado, I would like to introduce to you Mr. Tim Kuo, Director and Head of Investor Relations for the cautionary statement.
Good morning and good evening. Welcome to SMIC's first quarter 2020 earnings webcast conference call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter. Then our co-CEO, Dr. Zhao, will provide some business commentary. This will be followed by our Q&A session hosted by Dr. Zhao, Dr. Liang, and Dr. Gao. As usual, our call will be approximately 60 minutes in length. The earnings press release and financial presentation are available for you to download at www.smics.com under Investor Relations in the IR Calendar section. Let me also remind you that the presentation we'll be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance, but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements.
For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the Hong Kong Stock Exchange Limited. During the call, we will make reference to financial measures that do not conform to International Financial Reporting Standards, IFRS. These measures may be calculated differently than similar non-IFRS data presented by other companies. Please refer to the tables in our press release for a reconciliation of IFRS to the non-IFRS numbers we will be discussing. Please note that all currency figures are in US dollars, unless otherwise stated. I will now hand the call to our CFO, Dr. Gao, for financial highlights.
Thank you, Tim. Greetings to all our listeners. First, I will highlight our first quarter results and give second quarter 2020 guidance. In the first quarter 2020, our revenue was $905 million, an increase of 8% quarter-over-quarter, and 35% year-over-year, higher than our original guidance range, mainly due to the increase in wafer shipment. Gross margin was 26%, a sequential increase, mainly due to the better product mix in the first quarter. Non-GAAP operating expenses were $239 million, lower than guidance range, mainly because of control of R&D and G&A expenses in the first quarter. Profits for the period attributable to SMIC was $64 million, while non-controlling interest was $13 million of credits to SMIC's attributable profits in the first quarter. Moving to the balance sheet.
At the end of the first quarter, cash on hand, including financial assets, excluding restricted cash, were close to $5.3 billion. Gross debt to equity was 48%. Net debt to equity was negative 3%. In terms of cash flow, we generated $260 million of cash from operating activities in the first quarter. Looking ahead into the second quarter of 2020. Our revenue is guided to be up 3%-5% quarter-over-quarter. Gross margin is expected to range from 26%-28%. Non-GAAP operating expenses are expected to range from $240 million-$245 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from zero to positive $10 million, which are losses borne by non-controlling interests. The planned 2020 CapEx is ranged from $3.2 billion-$4.3 billion.
The incremental CapEx is for mature technology product lines, and the equipment, and the facility in our majority-owned Shanghai 12-inch fab. Our planned 2020 D&A is still $1.4 billion. Our 2020 gross margin is expected to be higher than 2019, which was 20.6%. Earlier this month, we announced a proposed issue of RMB shares on the Sci-Tech Board of SSE. The initial number of shares will not exceed 25% of total shares, including the new issuance. We plan to use the proceeds of our fab project, advanced and mature technology R&D, and working capital. In the meantime, the proposed share issue is subject to shareholder and regulatory approvals. I will now hand the call over to our Co-CEO, Haijun, for general remarks.
Thank you, Yonggang. Thank you all for joining us today. I hope all of you are healthy and safe. Today, I will give the overall business commentary first, then Mong Song, Yonggang, and I will answer the questions from the line. Several months have passed since the beginning of COVID-19 outbreak. We continue to monitor the situation closely and carefully. At present, there have been zero cases of infection at SMIC. The company took quick measures to safeguard the health and safety of our employees. As it is always our priority to put the health and safety of our employees first. Currently, we continue to monitor all the employees' health by keeping strict protocols, such as required temperature checks and a face mask whenever entering the company, self-declaration of keep track of employees' whereabouts, and keeping social distance.
In addition, we suspended all the business travels and restricted visitors on site. Although certain customers are seeing dampened consumer demands from emerging markets as a result of the virus, our sites remains full as we're seeing strong orders from our customers as a result of diversified technology offerings and versatile capacity conversions. In fact, overall orders in this first half have been stronger than initially anticipated. In the meantime, demand is still good, and our sites continue to operate near fully loaded. Logistically, some deliveries were slower than usual due to the virus. However, the impact is not material. Our offsite adjusted capacity expansion is still continuing as planned for this year. In February, SMIC made a donation to support prevention and control of the coronavirus and the protection of medical personnel. We are happy to see that things have been much improved in Hubei and all over China.
We are also thankful that we are getting through this situation with resilience. At the same time, our hearts and souls are with those around the world who are still affected by this pandemic. Let me continue my remarks by highlighting the results of the first quarter, and then I will update you on our mature nodes technology and advanced technology platforms and business, capacity plans, and future outlook. I'm pleased to say that our first quarter 2020 revenue has reached a historically high of $905 million. Our revenue increased 8% sequentially and 35% year-over-year compared to first quarter last year, significantly beating the original guidance, which was guided to be flat to up 2% only. Gross margin, previously guided to be 21%-23%, actually hit 26%, also higher than our initial guidance as a result of better-than-expected demand and better product mix.
Earlier this year, we have held a more cautious and conservative view due to the uncertainties around the health situation. However, orders remained strong throughout the quarter without interruptions. At the same time, through process optimization and improved efficiency, wafer shipments increased in Q1 to meet high demands. Growth came across the board from various customers, nodes, and applications. Reported gross margin was 26% in Q1, compared to 24% in Q4 last year and 18% in Q1 last year, as we maintained a close to full utilization with better product mix. Overall wafer shipments in Q1 increased 5% quarter-over-quarter and 29% year-over-year. By application, our communications sector is up by 19% quarter-over-quarter and 54% year-over-year. Computer and consumer sectors also grew 34% and 47% year-over-year respectively.
From a regional perspective, business continued to be strong in the China region, which increased 2% quarter-over-quarter and 55% year-over-year, contributing to 32% of our revenue. North America region is up 24% quarter-over-quarter and 7% year-over-year. Revenue from our Eurasia customers is up 9% quarter-over-quarter and 27% year-over-year. Our goal is to healthy balance overseas and domestic revenues as we maintain our strategy to be an international company, developing global markets and customers. To address our mature nodes product application platforms and business. We continue to see strong momentum in our CMOS image sensor, image sensor processor, BCD analog power, RF, IoT, and specialty memory platforms. Our wafer revenue from CIS, BCD power analog, fingerprint, specialty memory ICs are up 15% quarter-over-quarter and 40% year-over-year during the first quarter of 2020.
In these segmentation markets, the overall demand is increasing every year. To highlight specifically, our RF IoT platform demands is mounting as we have expanded into optical solutions for fingerprint sectors. Meanwhile, CMOS image sensor, including image sensor processors, continue to be strong with applications in automotive accessories, surveillance, and mobile phones. Notable growth in Q1 came from 65 and 55 nanometer nodes and 28-nanometer nodes under their respective application platforms. 65 and 55 nanometer is up 13% quarter-over-quarter and 96% year-over-year. These increases are largely due to logic, specialty, NOR flash and NAND flash, and CMOS image sensor application platforms, such as TWS for wearables. We are proud to say that our customers are using our specialty flash capabilities to manufacture components, successfully penetrating international top-tier smartphone accessory supply chains. 28 nanometer is up 40% quarter-over-quarter due to an increase in phone-related output.
We also see some increased 28-nanometer demands this year as we began to ramp up more consumer-related applications. We will moderately expand in order to reasonably meet these needs of strategic customers. As we continue on with our mature technology R&D and a close partnership with our customers, our mature technology platform will continue to cover a vast and diversified portfolios of communications and consumer end devices, which include a wide range of smartphone-related ICs. Now moving on to our advanced technology platform and business. As we mentioned previously, our 14-nanometer entered production last year as we continue to ramp up new capacity throughout this year. We are progressing well with Q1 14-nanometer wafer revenue surpassing 1% contribution as quality continued to climb and customer gave positive feedbacks. Our 14-nanometer FinFET technology continued to benchmark against the industrial standard.
We are pleased to see increased penetration and content share gains in various applications through collaborative efforts in enriching our advanced and overall technology portfolios. Our 14-nanometer covers a range of multiple application platforms in communications and automotive sectors, such as mobile phones, smartphones, and auto-related accessories. We are ramping gradually at a good, cautious pace, balancing customer demands and capital spending. Meanwhile, we continue with NTO products with both domestic and global customers. The first wave of FinFET applications include mid- to low-end application processors, baseband, and consumer-related applications. Furthermore, we also have auto-related NTO and extended our portfolio to RF connectivity products. Our 12-nanometer process technology is an extension of our 14-nanometer, and we are pleased to have already begun our pilot production. 12-nanometer have been progressing well and is on track with NTOs.
To address our progress on R&D, we are currently in the customer product verification at a qualification stage with next generation FinFET. We continue to engage with domestic and global customers. We are happy to see our customers utilizing our full array of services, which include design services, mask-making, fabrication, and middle and back-end manufacturing with our partners. Now to look at our 2020 capital expenditures. We are adding $1.1 billion to our CapEx, increasing the total to $4.3 billion, mostly for ramping up our FinFET lines, also for the expanding of our mature technology lines, which are running at a full capacity. We continue to see healthy demand from our customers. Thus, we are expanding our 8-inch and 12-inch lines to de-bottleneck our current capacity tightness and to fill in the gaps between our supply and customer demand.
We will add on 30,000 wafers per month of 8-inch capacity in our Tianjin, Shanghai, and Shenzhen fabs, and also add on 20,000 wafer per month capacity of 12-inch in our Beijing fabs. Our FinFET will continue to cautiously ramp up with our customer demands as we expand prudently. To give insight on our outlook. Q2 is expected to be up 3%-5% in revenue. It will be another strong quarter. Business continue to be stable and strong. Customer continue to place orders and are not seeing much slowdown yet. We continue to accelerate the commercialization of our advanced technology business as we anticipate our 14-nanometer revenue contribution to continue to grow. We continue to monitor the COVID-19 situation and the impacts that may result from end markets and the supply chain as we aim to minimize or eliminate the possible impacts.
Compared to three months ago, we have increased assurance in our growth and business. Given our current outlook and growth confidence, we raise and clarify our annual revenue growth targets to mid to high teens growth. We also aim to increase our gross margin targets, which will be higher than 2019. We continue to take our top-line growth seriously and continue overall improvement in product mix and growth momentum. Our customers are displaying healthy inventory levels, and thus we continue to feel strongly about 2020. Visibility remains limited with regards to the second half of this year. However, we remain cautiously optimistic as current customer feedback will still support a healthy year of growth for SMIC. As many of you know, SMIC has taken initial steps in exploring financing opportunities in the Chinese equity market.
We see this as a good opportunity to take advantage of new sources for funding our growth. We believe this is good avenue to expand SMIC's option for sourcing capital for the future expansion of leading-edge technologies, debottlenecking our mature capacity, supporting R&D, and funding our growth-driven pursuits. This also present us with opportunities channel to connect with domestic industry and local markets in order to expand our customers and support growth. Our board has approved the issuance of renminbi shares, which will be listed on the SSE Sci-Tech Innovation Board. We are now considering the market conditions and awaiting shareholder and regulatory approvals, we will continue to issue updates as the project progress.
To conclude, overall demands for semiconductor ICs continue to be strong in the first half of this year. Although the macro situation is clouded by the uncertainty in the second half, SMIC is seeing fairly strong year-over-year growth. SMIC has invested efforts and capital to refine its strategy, solidify its offerings, and accelerate technologies. We have expanded our technology platforms to make sure we can deliver increased diversity and solutions to our customers. Now SMIC is entering a period of growth as customers take advantage of our expanded capacity, capabilities, and new technologies. We thank you for your continued support, and thank you for joining us today. I will now hand the call back to Tim for the Q&A sessions of this call.
Thank you, Dr. Zhao. Today's Q&A will be hosted by our co-CEOs, Dr. Zhao, Dr. Liang, and our CFO, Dr. Gao. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Operator, please assist.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. Participants are requested to limit two questions each. Our first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Yes. Thank you. Again, good job on the results and managing through some of the COVID-19 impacts. I wanted to ask the first question on the CapEx versus the capacity plans. It looks like the fab plans are similar to what you outlined last quarter. The FinFET ramp, 15,000, 30,000, 8-inch and 20,000 of 12-inch. Could you talk about for that increase of capacity or CapEx, with the change in the plan, so where the CapEx, or if it's a timing that you're pulling in some of those fab ramp-ups?
Hi, Randy. Thank you for the question. On overall the situations for the technology deliverables, platform setting up, customer demands, we see very positive feedback from our customers on both the advanced technologies like FinFET , 14 nanometer to 12 nanometer, and the 28 nanometer, all the way to aluminum endpoint on 0.18 micron technologies. We are in a very sharp supply. The gap is big. We continue our expansion plan for this capacity expansion, we maintain the commitment to our customers. The incremental capital, this time from $3.1 billion-$4.3 billion, that's $1.1 billion, will be used to fulfill this gap in both the FinFET technologies and 28 and below, all the way to 0.18 μm aluminum technologies.
Okay. If I could ask on the advanced nodes, for 14 nm, where you'll be adding a good amount of capacity. If you could give how that may apply to the revenue ramp-up. Like what % of revenue, where it's been about 1% now, but how you see it ramping toward 10% of revenue. How concentrated is the customer base? Just if U.S. were to move ahead with restrictions on one of your top customers, if you can use that capacity for other application or for customers. On the other U.S. restriction, if you could just talk if you have any impact from some of the license requirements. It seems kind of vague and broad, but on military use, if any impact on your ability to secure tools.
Randy.
Too many.
too many questions. We try to minimize it to two. One is the 14 nm contribution, and Mong Song will give you the answer. Another question is the potential impact from the restrictions of U.S. government on the machines that they sold to SMIC. I answer the second question first. SMIC is international company. We have been, to have the communications with the supplier side on U.S. Department of Commerce pretty well in the past 20 years. We follow the rules for the compliance, and so far perfectly. We have the commitment for the non-military use from day one, 20 years back. Now we are in the same situation. We have the full commitment. We have the full compliance. At this moment, we do not see a big change in policy or way of doing things.
Now I give back to Mong Song for the comments on contribution of the advanced technologies.
Hi, Randy. This is Mong Song. Let me try to address your question related to the FinFET. As you probably know, we are in a very careful ramping stage in capacity of the fab because that really depends on the customer demands and the tools we can move in, okay, in the right timing. You ask, when can we reach 10%? 10% is, for SMIC fab is a big number. That I don't see it until sometime next year. Okay. This year it will be still at low single digits portion to the overall revenue.
Okay. Thank you. If I can follow up, though, do you still have the plan to have 15,000 wafer capacity? Would we have a period of some underutilization as you bring up those applications? Thanks, I can get back in the queue.
That is also very critical questions, okay. By end of the year, we're going to ramp up to the 15,000 per month capacity. That means is the fab in wafer, okay? It's not building wafer. It's not fab up, okay? That is one clarification. Since we have to build in the big capacity in order to fully utilize the fab. For example, we build 15K capacity, but we probably were not able to ship the 15K per month, it's just because of the operation efficiency. We have to have a certain reservoir for efficiency improvement.
Okay. Thanks a lot.
Thank you.
Our next question comes from the line of Junjie Chen from Tianfeng Securities. Please ask your question.
Okay. Thank you. Hi, Junjie. Thank you for the questions. On our customers, fluctuations on these kind of things. You know the COVID-19 also impact some developing countries. The customer who are sending the components to these kind of developing countries, they see some slowdown of the demands for mobile phones and smart homes and IoTs. Overall, for SMIC, the loading, there's no impact at all. We have been in a shortage. There's a very big shortage for capacity demands and on diversified platforms. This is one of the thing I give the comments. The second, there are two other factors that still support the markets. One is the worry on the supply chain. You know even though the customer ordered a lot of wafers, overall logistics in the supply chain getting slower. The building up is slow.
Enhanced inventory is still at a very low level. They have to make sure that for the very tight bottleneck in the supply chain can deliver the parts they need. For example, labor-intensive in developing countries. This kind of industry manufacturing capacity not fully recovered yet. The customers still worry a lot on the stability of the supply chain instead of worrying oversupply. The second thing is for the 5G smart home and IoT demand this year is much higher than last year. For the first quarter, and including April, for the first 4 months, the mobile phone made in China actually have 75% of 5G chips inside. For the 5G mobile phones, they not necessarily just demand for the CPU, APUs at a 7 nm, 6 nm, 5 nm.
They also have much larger demands on the RF chips and much larger numbers of PMU. Give you the samples. Minimum need six PMUs or PMIC ICs inside a mobile phone. The demands for 0.15 to 0.25 aluminum got almost doubled for the 5G mobile phone demands. You also need the cameras. From two cameras to four to six. Each camera CIS, they got larger density from original eight megapixel to 16 meg. Currently standard setting the 40 million pixel to 60 million pixel. My point is, even though the mobile phone size number, the hand set number, quantity decreased
Possibly 15% in the fourth quarter, but the total silicon usage is higher than before. If the capacity in the whole world is the same, then we will see every foundry fab are in the shortage to the suppliers. Okay, that's my answer.
Okay. Thank you, Haijun. Very thorough. My second question is about our thin fab capacity. Earlier, Mong Song also explained that our capacity is calculated based on installation. I want to understand, if calculated this way, does the forecast we're giving now refer to wafer start capacity? If we were to calculate wafer out, I'd like to know about our current thin fab cycle time situation. Thank you.
Yeah. As I have mentioned I answered to Randy previously. The number I quote is wafer start, not wafer out.
Okay.
The other is, when we quote that wafer start number, we have to build more than that number in order to have a full utilization of the fab efficiency. Okay? Your second question is cycle time. Okay. The cycle time actually depends on the scale of the fab. At this moment, we only have a few K a month fab in capacity. Actually, our cycle time definitely cannot compare with the industry standard. As our capacity gradually building up toward the second half, and our target is our cycle time by Q4 will reach to the industry, the standard numbers.
Okay, thank you. That's it for my questions. Thank you, leaders.
Our next question comes from the line of Bill Lu from UBS. Please ask your question.
Yeah. Hi. Thank you very much for taking my question. I'd like to go back to CapEx for a second. I am wondering, if you look at the $4.3 billion this year, can you give me a breakdown for first half versus second half?
Okay. Hi, Bill. Basically, our plan is to spend 50/50 first and second half. You know, because of the pandemic, COVID-19, and the logistic got slowed down. The plan possibly a little bit shift and one month to two months delay, but overall plan is 50/50.
Okay. The reason I ask that is you're guiding for mid to high double-digit teens growth for this year. I think in the first half, given that the first half of last year was off to a slightly weaker start, that seems very doable. If you look at the second half, second half of last year was already pretty good. For you to continue growing at that pace, you will have to have some new capacity ramped up. Am I reading that right? Is there maybe an ASP angle or something that I'm not paying attention to?
Okay, Bill. Actually, before this conference, we also collect all the numbers. We should say the first quarter type of growth, we do not use too much of the capacity expansion. For the second half growth, we can make a full use of the expansion capacity. Last time, during the last conference, we already mentioned that because the slowdown of the shipments and overall capacity can only show up in the fourth quarter this year, the last quarter this year. Basically, we could not fully benefit from the expansion, but overall still a very good performance.
I guess I'm just wondering how you get that growth in the second half, right? I think you're running pretty full already. I expect that the new capacity is going to be not until end of the year. How do you get that growth in the second half of the year? Is it ASP or is it something different?
You are doing the mathematics. Okay. You know, the first quarter compared with last year, we grew by 35%. This is the first quarter. Second quarter, we already gave the forecast and also much higher than last year. The first half of this year, we already beat the forecast of a high teens percentage compared with the first half last year. We need to make sure that the second half this year, compared with the second half last year, we can grow high teens percentage. Based on the capacity build-out and the wafer order
Customer demands. We believe that can be true. The incremental you can add on, compare with the last year's second half, we have the FinFET contribution. We also have additional 30,000 wafer per month, 8-inch. We also have on the 12-inch, additional 20,000 wafer per month. Our efficiency in general, we can improve 5% in our mature wafer fab. Mainly by product mix adjustments and de-bottlenecking. I give you one of the examples. Probably, for example, we have a lot of 31 layers logic on 0.18 μm. The product actually range for photo layers from 22 layers all the way to MCU can be 40 layers. If our bottleneck hits the photo layers, under the situation of over demands, we can really adjust on the product mix and de-bottlenecking.
The bottleneck actually ship out more wafers from our mature fab. Even though their original citing is 100, we can ship out 105.
That's very helpful. Thank you. My second question is, I wonder if you can give us an update on your N+1 node.
N+1 node right now, we finished the customer product verification.
Okay.
We are waiting for the customer to qualification and wait for market recover, and we're ready to ramp up that technology.
Can you give us an update on when that might hit production?
Probably the end of this year, yes. It really depends on the customer's demands. Yeah.
Yeah. Thank you. That was what I was going to ask as well, was can you give us an update on the customer engagement?
Customer engagement, right now we are target I think last time I explained to the person about is N+1 definition. N+1, we target for the low cost and customization technology. Okay, this is not a general purpose technology. Okay. We will target for those product, they don't want to migrate to the N+2 for cost technology. They want is really limited to a specific application and specific customer. For that technology, we probably will not build a comprehensive IP portfolio. We will wait for the next node. Those customers applications are limited, and customization customer is also limited. That's why we're waiting for the customer signal for ramping up the product.
Got it. Thank you very much.
Our next question comes from the line of Zhi Hong from China Renaissance. Please ask your question.
Oh, hi. Good morning, gentlemen. Two questions from my side. First one regarding 12 nm and 14 nm. For the equipment that you are adding right now, are they going to be upgradeable for the N+1 or N+2?
Yes. Certainly, the N to N+1 or N+2, all the equipment commonality is over 80%.
Okay, cool. Good. Do you have plan to upgrade them, or you will just keep them for 12 and 14 nano manufacturing?
That's a very good question. Of course, if we keep the 14 or 12, we would not get much profitability. We will build certain capacity for the N, and we will migrate to the N+1 and N+2, and to search for higher profitability. Yes.
Yeah. That's good. Yeah. Dr. Liang, actually, I think a year ago, you mentioned that there were three phases of a ramp up the FinFET technology. When we get to phase 2, we should achieve the ASP similar to the cost. When should we expect that to be achieved?
Okay. That's also very critical question. I've been thinking this all the time, okay? When is the break even point? That really depends on the fab scale, as you know, right?
Shipment volume, ASP, and our product yield, and our manufacturing costs, our OpEx, and so on. Okay. In general, we believe the 15K shipment
With the 20,000 capacity is the minimum criteria for.
Right
cash breakeven. That we are working on that.
Okay. Sounds great. Last question, a very easy one. Could you provide us the 2020 depreciation and amortization guidance, given the fact that the company's raised their CapEx aggressively?
Yes. We see that amount here.
Okay, great.
The depreciation and amortization for year 2020 is still target $1.4 billion.
Okay. Got you. Okay. Thank you very much. Congratulations.
Our next question comes from the line of Andrew Lu from Sinolink Securities. Please ask your question.
Andrew Lu. The first one is visibility for second half and also for second quarter, what would be the stronger application and technology node compared to the average? That's my first question.
Hi, Andrew. For SMIC, currently, we see two things. One thing is the market change because of the 5G smartphone, smart home, and wearable IoTs. The markets of that kind of applications are getting larger. They grow very fast. The second thing we see is that our customers are getting larger. They get more market shares. The growth of the segmentation of the market is one thing. The growth of our customer, their own market share, is another thing. Combine these two factors, and yeah, at SMIC, we thought it could be a very big gap of demands and supplies. The very tight area at this moment we see one is the 14 nanometer. All the 5G mobile phones, they demand for RF type of applications in 14 nanometer.
Sometimes back, we believe 28 nm, 22 nm are also in a short supply because the millimeter wave 5G will demand the RF on 22, 28 nm inside of FinFET because the degradations of RF performance in FinFET. Now, since the majority of 5G mobile phones are running in sub-6 GHz, all the demands are focused on 14 nm, 12 nm FinFET technologies. That's one of the areas in a very big shortage. Besides, everybody knows the 5 nm type of shortage. Second shortage, 14 nm. We see a very big shortage in aluminum 0.15 to 0.18 micron area. Because the PMUs, the original mobile phone for 3G, 4G, possibly two to three PMU chips. Now for 5G, for the American designer designed the mobile phone 5G, they need eight or more than eight chips for PMU and the controllers.
For the local Chinese designer, they need more than six ICs for power management. For that area, got a very big demand. You also know for the mobile phones, they need this under glass fingerprint. They need a quick charger. They need larger, more cameras. Together, the silicon and the cameras mainly focus on 55 nm, 40 nm. The fingerprint also squeezed in into 0.15 to 0.18 aluminum. Let alone to say the camera module for 5G and the smartphones these days, they pipe together with a 40 million to 60 million pixel with another two 8 million pixel, add on another two 2 million pixel. There are actually six CMOS image chips inside.
Basically, right away, we see the shortage on 0.18 micron aluminum technology and wafer fabs, and we see very big shortage in 55 nm, 65 nm wafer fabs, and also 40 nm fabs. 20 nm still very loose capacity, not that big demand. 40 nm, 55 nm, and 55 nm, 65 nm also correlated with another demand. That's a NAND flash, and high quality SPI NOR NAND flash because the two stereo chips, we call it TWS. They have very big demands because the high-quality music need minimum 128 megabit for each ear this TWS. For the top tiers need a 256 megabit. Originally, sometime back, one year, two years back, they only need 2 megabit, 4 megabits NAND flash. Now, the density, even for single chip, already transit from 2 meg-format all the way to 128, 256.
The silicon demands, the area demands, even though the available earphone is still the same quantity possibly, but the silicon demands are 10 times increased. The area just now I shared with you. We also have the others, like high voltage drivers and the processors. Smart home is another area, very big, and this is expansion. The processors, the connectivities, the Wi-Fi, the Bluetooth, mostly are all in one. That means Bluetooth, Wi-Fi, communications, and the processors are all in one. We see the 40 nanometer get a very big boom. Definitely without 40 nanometer capacity, this kind of application will move down to 28 and 22 nanometers. For SMIC, we are in a shortage, not just in 55, 0.18, and 40 nanometer. We also started to see 28 nanometer demands for smart homes and consumer.
Consumer, same as the smart home, like your TV, there's a smart TV. They also have the connectivity and they also have this kind of auto communication and synchronization type of functions.
Thank you. My second question is for Gao. Why the operating expenses guidance has been revised non-IFRS, has been revising down from the first quarter? I remember first quarter guided $294 million-$300 million, but this quarter come down to $ 240 million-$245 million. Is this a structure coming down going for the rest of the year or just a one-off? Thank you.
You got it very right. When we guided in Q1, it was indeed higher than the actual execution. Starting this year, the management team has been reducing every expense. You can see that including R&D expenses and management expenses, all of them are down. For Q2 guidance, we basically maintained it flat to slightly up from Q1. I think since 2020, the management team has also focused on operating profit as a KPI, and has always placed great importance on this KPI. We are also very happy that our operating profit in Q1 was positive. We hope to maintain this state in Q2 as well. Our control over the three expenses should be stricter than before.
So-
It is possible for Q3 and Q4 to maintain this level, right? It is hard to predict the following quarters, but at least Q1 and Q2, the overall OPEX has been stable.
Thank you.
Okay.
Let me translate on the question regarding Andrew's question on the OPEX. We see the first quarter OPEX is actually down from original guidance. It's because the management is really focused on controlling the expenses, ranging from R&D and administrative expenses as well. The first quarter, we actually realized Operating Margin positive, and also we target that will continue to the second quarter. For the third quarter and fourth quarter, it's still not visible to comment yet. This is our comment on the OPEX. Thank you.
Due to limited time, I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.
In closing, we would like to thank everyone who participated in today's call, and again, thank all of you for your trust and support to SMIC. Thank you very much.
This is the end of SMIC's first quarter earnings conference call. We thank you for joining us today.