Welcome to Semiconductor Manufacturing International Corporation's 2nd Quarter 2019 Webcast Conference Call. Today's conference call is hosted by Doctor. Zhao Haijun, Co Chief Executive Officer Doctor. Liang Mong Song, Co Chief Executive Officer Doctor. Gao Yonggang, Chief Financial Officer and Mr.
Tin Kuo, Director of Investor Relations. Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's website. Please be advised that your dial ins are in listen only mode. However, at the conclusion of the management presentation, we will be having a question and answer session, at which time The earnings press release is available for download at www. Smic.com.
Webcast playback will also be available approximately 1 hour after the event. Without further ado, I would like to introduce to you, Mr. Tim Kuo, Director of Investor Relations, for the cautionary statements.
Good morning and good evening. Welcome to SMIC's Q2 2019 Earnings Webcast Conference Call. Today, our CFO, Doctor. Gao, will highlight our financial performance and give guidance for the next quarter. And then our Co CEO, Doctor.
Zhao, will provide some business commentary. This will be followed by our Q and A session hosted by Doctor. Zhao, Doctor. Liang and Doctor. 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 ww dotsmics.com under Investor Relations in the IR Calendar section. Let me also remind you that the presentation we will 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 U. S. Securities and Exchange Commission and the Hong Kong Stock Exchange Limited, including our annual report of Form 20 F filed with the United States Securities and Exchange Commission on April 30, 2019. During the call, we will make reference to financial measures that do not conform to Generally Accepted Accounting Principles, GAAP. These measures may be calculated differently than similar non GAAP data presented by other companies.
Please refer to the tables in our press release for a reconciliation of GAAP to the non GAAP numbers we will be discussing. Please note that all currency figures are in U. S. Dollars unless otherwise stated. I will now hand the call to our CFO, Doctor.
Gao for financial highlights.
Thank you, Tim. Greetings to our listeners. First, I will highlight our 2nd quarter results and give the 3rd quarter 2019 guidance. In Q2 2019, our revenue was $791,000,000 an increase of 18% quarter over quarter, mainly due to the increase in wave shipments. Gross margin was 19%, a sequential increase mainly due to the rise in utilization and batch product mix in the 2nd quarter.
Non GAAP operating expenses were $249,000,000 lower than Guardian's range, mainly because of the control of R and D and G and A expenses in the 2nd quarter. Profits for the period attributable to SMIC was $90,000,000 Non controlling interest were $44,000,000 of credit to SMS's attributable profit, higher than the guidance range, mainly due to the currency exchange loss from RMB depreciation for our joint venture. Moving to the balance sheet. At the end of the second quarter, cash on hand, including financial assets, were close to 3,700,000,000 dollars Gross debt to equity was 44%, and net debt to equity was 5%. In terms of cash flow, we generated 190,000,000 dollars of cash from operating activities in the Q2.
Now looking ahead into the Q3 of 2019. Our revenue is guided to be flat to up 2% quarter over quarter. If excluding revenue from LFoundry, our revenue is guided to be up 2% to 4% quarter over quarter. Gross margin is expected to range from 19% to 21%. Non GAAP operating expenses are expected to range from $294,000,000 to $300,000,000 Non controlling interest of our majority owned subsidiaries are expected to range from positive $25,000,000 to positive $27,000,000 which are losses performed by non controlling interests.
We maintained the planned 2019 CapEx for foundry operations of approximately $2,100,000,000 which is mainly for the equipment and facility in our majority owned Shanghai 300,000,000 millimeter pipe and FinFET R and D line. The plane's 2019 CapEx for non foundry operations is approximately $106,000,000 Our planned 2019 D and A is approximately 1,100,000,000 dollars Our 2019 gross margin is expected to be in the range of high teens to 20s. 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. Today, I will give an overall business and technology overview. Then, Mengshun, Yun Gang and I will answer questions from the line. Let's begin by highlighting the results of our Q2, then I will update you on our mature node technology and application platforms, advanced technology progress, capacity plans, business development and our outlook for the year.
As guided, our 2nd quarter results are much better than our Q1 with a strong rebound in sales as our customers digested inventories to higher sales levels. Our 2nd quarter revenue increased by 18% quarter over quarter due to strong seasonality and robust recovery in the demands for 12 inches maternals. Meanwhile, our gross margin improved to 19% compared to 18% in the Q4 due to better product mix and fab utilizations. From a geographic point of view, revenue from China and Eurasia grew significantly, 25% and 30% respectively. And our sales from North America experienced a slight growth of 0.5%.
Our communication applications grew strongest with an increase of 34%, largely from the rebound of demands from our customers' smartphone and connectivity related applications. Overall wafer shipments in the 2nd quarter increased by 18% quarter over quarter. Looking at breakdown by nodes, 65 nanometer node, revenue grew notably across a variety of customers and device applications such as logic, RF, back end illumination CMOS image sensors, image sensor processors and the non flash. 14 nanometer node also grew substantially as connectivity increased sequentially. We are pleased to see a significant growth coming from our mature node technology platforms.
We have also developed a number of new customers in application areas using existing process platforms. Allow me to highlight some of that. One mention of our platform is our CMOS RF connectivity for IoT, which is a strong growth driver for us in this year, which we are ramping using our 12 inches technologies. We are also seeing good demand in our 8 inches mixed signal and RF connectivity with new products ramping, such as electronic toll collection, ETC, which use 0.11 and 0.18 micron technologies. Moreover, we see good performance from our CMOS image sensor platform from the notable growth of image sensor processors and the back end CMOS illumination sensors, and we look forward to this platform's continued growth.
Our Now Flash platform is providing stable business. As orders recovered in the 2nd quarter, revenue from Now Flash nearly doubled compared with the Q1. In addition, our 28 nanometer is still progressing prudently on technology and manufacturing. Our 28 HKC plus has begun shipments and has strong demands. We are expanding our customer base and have new customers tipping up.
Our 28 Polysane on will phase out as high ks shipments continue to grow. Demand for 28 nanometer high ks is stemming from applications such as application processors, Internet of Things, set top box and IPTV. In the meantime, we seek to fulfill current customers' demands. However, we do not plan to expand 28 nanometer capacity in the short term. During 2019, we've seen an increase in shipments of HiK, which will be majority of our 28 nanometer output.
We will engage with customers and diversifying our 28 nanometer technology offerings. Furthermore, our research and development is accelerating and we continue to focus on FinFET development. As the 1st generation of FinFET technology, our 14 nanometer is progressing quite smoothly. We are proud to say our 14 nanometer is in risk production. This marks an important milestone for SMIC as we now have the most advanced technology in Mainland China.
We are being approached and engaged with good number of global customers. We like to take this chance to thank our customers for their trust and continued support as we advance forward on FinFET technology parts. Meanwhile, there are more than a dozen TPA projects and our customer base is expanding. On top of that, we are ahead of schedule and expect to start seeing meaningful revenue contribution from 14 technology by year end. We express our gratitude to our employees for all the hard work and the long hours they put into company.
Without them, we will not be where we are today. In addition, our FinFET technology is ready for auto related applications with successful TPAP delivery. This expands our FinFET portfolio into automotive and represent a breakthrough for SMIC. Subsequently, our team has made steady progress on 12 nanometer, which provides an enhanced version of our 1st generation FinFET technology. Customer engagement is going smoothly and we are expecting several tape up by the end of this year.
The initial development of our FinFET technology has provided the foundation for accelerated R and D progress. As a result, development of our 2nd generation FinFET and plus 1 technology is moving along rapidly. In the meantime, we are starting to engage with customers for N plus 1 business opportunities. We began customer engagement for 14 nanometer a year ago and now for N plus 1. This is unprecedented in the history of SMIC.
We are expanding our FinF5 product portfolio to address various applications, including application processors, high end customers, auto and AI. In terms of automotive electronics, although the global automotive demands and shipments have shrunk, the number and the contents of wafer per vehicle has increased and the growth of momentum of the market demands in the future is still promising. To add, the arrival of 5 gs will urge in new spurs of developments of AI, cloud computing, smart city, automotive electronics and other applications, it is the nice way of our opportunities for SMIC. We can grasp on these opportunities through diligent planning, preparation and development. Now let me talk about our CapEx and capacity plan.
Our original foundry CapEx plan of US2.1 billion dollars was mainly for the purchasing of equipment and the facility constructions of our Shanghai JV FinFET line. We now increased our planned foundry CapEx to $2,300,000,000 This incremental spending is in line with increased confidence in demand as we spend to upgrade capacity to capture the growth spurred by the trends such as IoT and the migration from 4 gs to 5 gs. At the same time, we are making changes to address economics of scale and to centralize operations. During this period, we have focused on making adjustments to our business in Italy and capacity in our Shanghai R and D fab. And so this transition impacts our revenue growth this year.
We target to complete this transition in the next few quarters. Moving on to SMIC South, our JV FinFET fab. The first batch of fab equipment has moved in and we're manufacturing the most advanced wafers in Mainland China. The new mini LAN will release capacity and start production in the fall of this year. As we adjust and expand our capacity to support the needs of our customers, We'll continue to utilize a joint venture model for our advanced node facilities.
To address recent business development, the transaction to transfer our foundry ownership was completed in July. As a result, Q3 will account for 1 month of rfoundry revenue only and thereafter will no longer be included in our reporting. Looking at 2019, our Q1 bottom up, 2nd quarter bounced back with increased demand as inventory digested, and we expected our second half will be better than the first. For Q3, we expect another growing quarter. Strength coming from mature nodes applications such as CMOS RF, CIS, BSI and ISP and the muted revenue growth, mainly as the result of our foundry disposal and higher second quarter revenue base.
Uncertainty in the market environment still remains. Customers are regaining some confidence, but remain cautious. We maintain a conservative view because of ongoing trade frictions between China and the U. S, which has impacted the global consumer demand and the investment confidence. In spite of economic situation, our 8 inches 12 inches mature technology is in a healthy state.
To conclude, we strive ahead through expanding reformation and building a sturdy foundation, while shaping our capacities to grow in diversities. We are pleased to say that we have delivered on our technology development from a 1st generation FinFET 14 nanometer to 2nd generation N plus 1, secured business opportunities from our platforms from Bluetooth, CIS to specialty memory and are running new product applications from ETC to ISP. We proceed to focus on building comprehensive platforms, advancing technology, is publishing strong relations as well as maintaining our position as the preferred foundry partner in China. Moreover, we played a role in the global semiconductor industry by providing competitive services and compete solutions. We are confident that SMIC will continue to be the most advanced IC foundry in Mainland China.
We thank you all of our shareholders in their ongoing support and we work to keep our commitment to balance growth and profitability. Once again, thank you for joining us today. I will now hand the call back to Tim for the Q and A session of this call.
Thank you, Doctor. Zhao. Today's Q and A will be hosted by our Co CEOs, Doctor. Zhao Doctor. Liang and our CFO, Doctor.
Gao. I would now like to open up the call for Q and A for the audience. As usual, please be reminded to limit your questions to 2 per person. Operator, please assist.
Your first question comes from the line of Randy Abrams of Credit Suisse. Please ask your question.
Okay. Yes. Hi. Thank you. Good morning.
I wanted to ask the first question just on the second quarter. It looked like you had a good mix or recovery on the advance, the more advance like 65, 40 nanometer and a bit from 28. Based on the shipment growth though, it looks like blended ASPs were only relatively stable rather than picking up. So I'm curious if it was certain product mix within the nodes or if there's ongoing pricing or maybe the factor if you could go through that?
Hi, Randy. Good morning. Thank you for the question. The second quarter, basically, we add on one of the things is the recovery of the market for the existing products. And second thing is that we add on the incremental, that means new customers, new products in our 12 inches For the 8 inches definitely ASP will be stable because our 8 inches fab has been fully loaded from last year until this moment and the next stage.
And so for 8 inches they should be the same. And for 12 inches and the ASP for the new product more or less they are on the mature technology nodes and they are comparable to the previous case. And basically, we should say the recovery of the demands of the existing customer, we maintain the same. And for the new products, especially for the volume, and for example, we say CIS, memories and BCD, analog power, these kind of products, we already have the existing base. So even though we have the item and incremental customer and the demand and ASP more or less the same.
Okay. Yes, great. Thanks for clarifying. And I wanted to ask on the CapEx. It sounded like in the prepared remarks, the comments were a bit better feeling on the new capacity to pull in a bit more CapEx.
So could you recap on the mini line how much capacity you'll get? And then based on that, how are you starting to see the ramp up from customers, if you could talk about like second stage beyond this initial mini line for next year, if we should expect, say, a bigger CapEx year for FinFET? And are you also seeing that it sounded like you're a bit conservative on FinFET you're waiting for N plus-one last quarter, but are you starting to change your expectation on the FinFET ramp over the next 1 to 2 years that it could actually grow in line or better than 28?
Randy, actually, this question contains quite many different angles. And I'll answer the CapEx first. CapEx in February, we already forecast that we have US2.5 billion dollars Majority of this will be used for the building up of FinFai line in Shanghai joint venture to manufacturing the most advanced technology products. And just now, Doctor. Gao and my reports also highlights that we have one disposal of our operations in Yigitling.
So the overall capacity in SMIC on a mature technology node actually reduced. And the second thing is that because we ramp up the FinFET, we increased the activities in Shanghai RMB5 And we also slowed down and finally stopped the routine operation of the original technology nodes like 14 nanometer and 20 nanometer in Shanghai. We consolidated into Beijing 12 inches microfab. And because today, our 12 inches manufacturing capacity also reduced, decreased, but we have very strong demand. We are running both 8 inches 12 inches fully loaded.
And we have the customer there. We have to make sure that we can meet their essential requirements. That's why just now we mentioned that for the mature technology nodes, at the beginning of this year, we do not plan for the expansion. At that moment, we are we were not so firm about the disposal of the operation in Italy and the shutdown of the operation for the mature technology in R and D fab. But finally, we make that decision and this kind of thing already completed and we have to make sure during the transition stage, we top up our mature technology capacity.
That's why Doctor. Gao and I are highlighting that to catch the opportunity in the markets and meet the minimum requirements of our customers and we need to add up certain capacities on the mature technologies. That's why the CapEx were mentioned this year and we are working on the increased part on the mature technology. And this is for the CapEx part And for the mini line just now for 14 nanometer Shanghai joint venture, most of the ones already answered. And your question is that for the ramp up N plus-one for the next 1 or 2 years and that will be 5% in 8 months.
Okay. Let me try to add on some comments about this new fab capacity ramp up trend. At this moment, we have the 2 phase, right? The 8 inches web is a Phase 1, Phase 2. The Phase 1 mainly is converted for the R and D for the N plus 1 and N plus 2.
And MiniLine's current building is 3 ks. 3 ks is for the 14 and 12 production, and we will gradually ramp up to 6 ks, 9 ks, 15 ks hopefully by the end of next year to fulfill current customer demands. And that P2, Phase 2 line will contain not only the 14 and 12 and also our N+1 and some of the portion of N+2 R and D. So I think that at this moment is our grand plan from now to end up next year. I hope I answered your questions.
Okay. Yes. Thank you. The final question I want to ask. On the OpEx, you mentioned cost control and spend a bit below the non GAAP operating expense guidance, actually the last couple of quarters.
It is rising into next quarter. So could you talk about the driver on the spending for that increase? And do you expect that to be a new kind of base to build from or if it's a short wave of spending coming through?
Hi, Randy. We are setting our deal advanced fab in Shanghai as the joint venture. And with the starting of the running of the fab and definitely see the running cost of this wafer fab in the ramp up stage. So that's the major addition of the old pipes. Okay.
And is that Yes. And the other thing for the R and D is we already have the forecast.
Okay. When you ramp, does it shift to COGS at some point when you go into production or that will stay in OpEx?
And just now, Doctor. Liang also mentioned that I also say that we started this kind of manufacturing in the new wafer fab. And we expect it in the starting in the second half of this year or the near year end. So we expect this kind of running cost of the new Wafer fab, we will convert it to manufacturing cost at the beginning of next year.
Okay, great. Thank
you. Thanks, Randy.
Your next question comes from the line of Leaping Wang from CICC. Please ask your question.
Okay. Thank you for taking my question. So the first question is about your full year guidance. I remember in the beginning of this year, you mentioned that your target to achieve in line with the industrial growth or flattish revenue growth. After this, a lot of adjustment on the from the centralization process of the disposal of AirFaW.
What's your current guidance for the full year revenue?
Yes, we can, Le Bin. So we're working on.
Yes. Le Bin, thank you for the questions.
Basically, we should say with that means include
the RFfoundry revenues, we have this kind of forecast. So current forecast is that we will do same or like the better spend if we exclude the R300 revenue. And we should say that if we exclude the disposal revenue from the second half of this year, our whole year's revenue will be in line with the industrial trend.
Okay. So if my calculation is correct, so it's implied that it's close to 20% sequential growth in the 4th quarter versus Q3. Is my understanding correct?
Our second quarter revenue is higher than the first quarter. And original plan, that means the number in our revenue for our foundry for the second half of this year is $120,000,000 to 130,000,000 dollars So if we exclude that part and the deal region that means flattish type of revenue this year and last year because of we have the transition for the R and D operations. And now we further dispose the RF foundry, I mean, second half of this year and the revenue part will be reduced by RMB 120,000,000. But we are trying better the second half performance even though without our foundry's contribution, second half the performance is better than the first half.
Okay. So yes, thank you. And the second question is also about the CapEx. So because for this year, you spent $2,300,000,000 for around for the media lines around 3 ks. So how we should expect the when we ramp up or when we start the P2 or the complete Phase 1 and also the we start ramp up the introduction of the Phase II equipment.
So should we expect a lot increase of the CapEx next year?
Yes, later I'll answer something first and later ask Doctor. Liang to give the comments on this question. And basically, the timing for US2.5 billion dollars is for the whole company. And now because we have the disposal of our foundry into the operation and we have the transition of the machines from Shanghai to Beijing, there's a breakdown of the operations in 12 inches also and we have the shortage of the capacity. So this year, we made up some new capacity to meet our customers' request.
So RMB2.1 billion, RMB2.3 billion come to this point for the whole company. And the joint venture 3 ks FinFET capacity is just a part of it. It doesn't mean all the money 2.1 got into the joint venture. It's too early to make the comments on the spending of last year. We are still working on this.
Your next question comes from the line of Sihong Hoeng of China Renaissance. Please ask your question.
Hi. Good morning, gentlemen. Congratulations on the technology breakthrough. Regarding the N plus 2, now you're already in the client engagement phase. Is it fair to assume that revenue contribution could happen probably in later part of 2021?
Sorry, I mean 2021, right?
Hi, Zhi. Nice to get your question again. Actually, it's N plus-one. Just now, we did not mention anything about N plus-two.
Oh, no. I mean the revenue contribution for N plus 1. When should we assume it?
Okay. Let me try to answer this question. The N plus-one, we are still at the early stage of the customer engagement. So it's very difficult to predict contribution for this product, for this technology yet.
Okay. And then the other question, as 14 nanobustat ramping up in Q4, how should we expect the cost structure changing for the company? Because historically, when you ramp up a new node, some of the OpEx will be shift to cost of goods sold. Just want to have some idea how we should moderate going forward?
Ziho, could you say your question again?
Yes, yes. In Q4, you will start ramping up to 14 nano. So historically, when you ramp a new node, there's some change in the charge booking, right, from the OpEx level to cost of goods sold. Just want to get some idea how it's going to change at this time.
Okay. Let me translate on this statement. So for 2019, we estimated around US100 $1,000,000 in terms of the 14 nanometer FinFET technology related expense at the OpEx level, which will be converted into the COGS in 2020. So therefore, the overall COGS will be more realistic in 2020.
Congratulations.
Your next question comes from the line of Peter Chan of CIMB. Please ask your question.
Hi, good morning, everybody. Thanks for taking my question. My first question is that I go back to the utilization rate improvement in the second quarter. Could you comment on how much of that is maybe coming from the market share gain? And how much of that is coming from the new business development?
Just now we say that for the 8 inches operations in SMIC, we have been running full capacity for the past 2 years. So basically, we say that we are our 8 inches business, mainly from the existing customer base and existing market shares, we do not see big change in the market share or incremental things on 8 inches But for the 12 inches and the Q1, the Q4 last year, we experienced the adjustment in the market. So currently, we are controlling the allocations. Basically, we should say, and we have big incremental demands for our 12 inches capacity. But to balance the recovery of existing customer demands and the new customer new demands, and we try to balance that.
And I'll give you a number, possibly I should say 30% or onethree is the recovery of existing market and customers and 2 thirds are coming from incremental new customer, new demand.
Okay. Thank you. The reason I asked the question is because the utilization rate of your peers in the same period may not be so high. So if it's industry wide, the demand recovery, out of foundry, they should see a similar improvement in utilization rate. But SMIC, particularly, since you have the federalization rate.
That's why I'm wondering maybe some part of that is for market share gain. My second question would be the a lot of other functions are starting offering advanced packaging such as Fan Out, such as the CoWoS. Is becoming increasingly popular due to the some cost sensitive application who need to have a high level integration but can't afford a very expensive wafer technology. What's SMIC's current the status in the advanced packaging, the offering?
Okay. I think that's a strategic question. It's a great question. Indeed, for packaging side, we also have mid- and long term plans. As you know, we have a joint venture of the SMIC, SJC.
SJC Semi. SJC Semi and JHCCC. These are 2 partners. And these 2 partners have different technology capability. So for general purpose type of packaging, we could work with the SSA Meet.
And for more advanced part, we could work with JCCC. So we make the plan for advanced particularly for the advanced FinFET type of different technology noise, different package plan and we make long term plans to develop those packaging technology for our customer. And this will start we will see results start from second half of this year and more results year 2020 2021.
Okay. Thank you for the update. In terms of the revenue recognition, since there you work with the partners on this, how is the revenue recognition going to be how do we model the revenue recognition from the best package and service to your mutual customers?
Okay. Let me translate. So for these advanced technology packaging, the revenue contribution will be recognized at the strategic partner. So for SJ Semi or JSAT, the revenue doesn't belong to SMIC.
Okay. Thank you. Just a follow-up to that.
Okay. So the advanced packaging expenses will be listed in our strategic partners, not here in SMIC.
Your next question comes from the line of Sebastian He from CLSA.
I think that in your prepared remarks, you talked about this. We have already received a dozen of the tail outs on the 14 nanometer. So can I just try to clarify that is all on 14 nanometers and or if not, what's the typical progress?
Yes. At this moment, most of the takeout is from the 14th and there is a few of them from 12, yes. But most of them indeed, you're right, is on 14.
Okay.
Okay. So actually, it doesn't affect our increase of 14 to 14 accounts for the majority?
Yes, right.
Okay. Got it. And I remember last quarter, I fully understand about the 4.12 nanometer is more likely to on schedule to reach production by the end of this year and the total schedule?
Sebastian, we lost you in some words. So could you say your question again?
Okay. Yes. Yes. Okay. I just wanted to have an update on the production schedule of 12 nanometers?
Are you still on track to reach risk production by the end of this year and does it have too much difference in terms of timing between 14 nanometer?
That's correct. As the last quarter, I mentioned about the risk production will be end of this year. And right now, we're seeing a couple of the early tap out, but it's also approaching end of this year. So there's not much change from last quarter's announcement.
Okay. Okay. Thank you. My second question is regarding the 5 gs opportunity for SMIC. Just can you help us in this year.
And we wondered maybe not
to Maybe I will try to answer this question. For the 5 gs, we all know 5 gs will start second half of this year and will move strongly from next year. So in our side, for FinFET part, okay, FinFET part, since our advanced technology cannot really serve like a server or networking or even kind of mainstream mobile part because those applications required 5 nanometer, 6 nanometer or at least 7 nanometer. So we were not doing that planned at this moment. But there is there are a lot of other areas such as sub-six gs IFC MOS or even the higher frequency like millimeter wave, the RFC MOS.
Also, we have our 14th RF to serve the customer, okay? And for those kind of a little bit mid low end and millimeter width. We also have 28, 20, 22 nanometer RF to fulfill that market area. And also for the automotive part, as Doctor. Zhao mentioned earlier, we also have a grade 1 levels of 14 nanometer plus RF.
And we also will try to move into the connectivity part that is also using our 14 and 12 RF. So there are plenty of things we are preparing right now to kind of enter this 5 gs booming market.
Great. Thank you, Doctor. Liang. Just one follow-up on your comment that it looks to me that automotive millimeter wave is good progress, but may not contribute to revenue immediately, maybe in the next 12 months. But your comment on the subsidy drivers, RTC modes, that would probably like to see some revenue contributions into 2020, for example, such as our transceiver.
Am I interpreting that right?
I think that's a great question. But to be practically, okay, the technology RF technology to start with and to start and to really mass production normally it will take 36 months, nearly 3 years, okay, to see really the volume production. So I will say, maybe by end of the next year, we will see a small volume of production. But for the major production, we're way until year 'twenty one. So next year, probably the revenue wise for this kind of sub-six gs is also very minimal, yes.
Okay. But based on the if we combine this with what you mentioned about the dozen of 10,000 pound 14 and 12 nanometers, We do see some of these subsegathers RBC modes design already on 14 and
12 nanometers?
Yes, I think you asked also very detailed questions. When I mentioned the risk production or the type out, it means there's a real product. But start this year and also next year, we will have many MPW related to this sub-six gs and millimeter wave, IFC MOS, and that's preparing for the later part of next year and earlier year 2021 for the product NCO.
Okay. Got it. Thank you.
Last question comes from the line of Rick Hsu from Daiwa Securities. Please ask your question.
Yes. Hi, good morning guys and thank you so much for taking my questions. My first question is probably for Yonggang that I remember last quarter you mentioned about something about $17,000,000 plus disposal gain from the LFoundry sale. Did you recognize that gain in your Q2 or you pushed back to
So the disposal gain of Hill Foundry is not listed in the 2nd quarter. It will be listed in 3rd quarter.
Okay. Great. Now, Diego, Wendy, just about your 28 nanometer revenue contribution, I think you guys are making a very good progress about your ramp up of the HKC plus So could you give us guidance that how much do you expect the 28,000,000 Altogether to ramp up the revenue contribution in Q3 and Q4?
Hi, Rick. For 28 nanometer, our stance is very clear. We already build up the capacity to meet the strategic customer's requirements, and we keep running that way. And on the average, for the whole year, we expect that 4% of the revenue come from 28 nanometer high ks metal gate. And the customer do require small capacity to support, but we maintain at a healthy and safe volume to run this 28 nanometer.
And you know the situation we mentioned that before in previous quarter release.
Okay, great. Last question is about your 14 millimeter ramp up. I guess you also mentioned earlier about it takes some time to ramp up to reach the scale economies. And I guess, during the initial ramp up, it should be kind of margin dilutive. So, would that impact your overall gross corporate gross margins in 2020?
If so, could you give us some guidance about your 2020 gross margin? How does it
look like?
And Eric, just now actually we are Meng Sohong already answered certain part of the question. And Doctor. Gao also mentioned the US100 $1,000,000 will be counted into the operation cost the early next year. And we haven't really come up the detailed exact numbers and we are working on this. It's too early to mention that.
And we are trying our best to increase to balance the maturity of technologies revenues, gross margins and the burden of the ramp up of the new technology wafer fab.
Sure. Fair enough. Okay. Thank you so much.
Thanks, Ray.
We have run out of time for any more questions. I would now like to hand the call back to our Director, Tim Kuo, for closing remarks.
In closing, we would like to thank everyone, fund managers, analysts who participated in today's call and again thank all of you for your trust and support. Thank you very much.
This is the end of SMIC's 4th quarter earnings call. Please go ahead. Thank you for joining us today. You may now all disconnect.