Welcome to Semiconductor Manufacturing International Corporation second quarter 2019 webcast conference call. Today's conference call 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 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 you will receive further instruction as to how to participate. The earnings press release is available for download at www.smic.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 of Investor Relations, for the cautionary statements.
Good morning and good evening. Welcome to SMIC's second quarter 2019 earnings webcast conference call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter, and 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.smic.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 U.S. Securities and Exchange Commission and The Stock Exchange of Hong Kong 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, Dr. Gao, for financial highlights.
Thank you, Tim. Greetings to all our listeners. First, I will highlight our second quarter results and give third quarter 2019 guidance. In second quarter 2019, our revenue was $791 million, an increase of 18% quarter-over-quarter, mainly due to the increase in wafer shipment. Gross margin was 19%, a sequential increase mainly due to the rise in utilization and the better product mix in the second quarter. Non-GAAP operating expenses were $249 million, lower than guidance range, mainly because of the control of R&D and G&A expenses in the second quarter. Profit for the period attributable to SMIC was $90 million. Non-controlling interest were $44 million of credits to SMIC's attributable profit, higher than the guidance range, mainly due to the currency exchanges 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 $3.7 billion. Gross debt to equity was 44%, and net debt to equity was 5%. In terms of cash flow, we generated $190 million of cash from operating activities in the second quarter. Looking ahead into the third quarter 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%-4% quarter-over-quarter. Gross margin is expected to range from 19%-21%. Non-GAAP operating expenses are expected to range from $294 million-$300 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from positive $25 million-positive $27 million, which are losses performed by non-controlling interests.
We maintain the planned 2019 CapEx for foundry operations of approximately $2.1 billion, which is mainly for the equipment and the facility in our majority-owned Shanghai, 300-millimeter fab and FinFET R&D line. The planned 2019 CapEx for non-foundry operations is approximately $106 million. Our planned 2019 G&A is approximately $1.1 billion. Our 2019 gross margin is expected to be in the range of high teens to twenties. 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. Mong Song, Yonggang, and I will answer questions from the line. Let's begin by highlighting the results of our second quarter. 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 second quarter results are much better than our first quarter, with a strong rebound in sales as our customers digested inventories to higher CR levels. Our second quarter revenue increased by 18% quarter-over-quarter due to strong seasonality and a robust recovery in the demands for 12-inch mature nodes. Our gross margin improved to 19% compared to 18% in the first quarter 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. 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 of smartphone and connectivity-related applications. Overall wafer shipments in the second quarter increased by 18% quarter-over-quarter. Looking at breakdown by nodes, 35 and the 55 nanometer node revenue grew notably across a variety of customers on device applications such as logic, RF, back-end illumination, CMOS image sensors, image sensor processors, and NAND flash. 40 nanometer node also grows substantially as connectivity increased sequentially. We are pleased to see the 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 these. One mentionable platform is our CMOS RF connectivity for IoT, which is a strong growth driver for us in this year, which we are re-ramping using our 12-inch technologies. We are also seeing good demands in our 8-inch mixed signal and RF connectivity with new products ramping, such as electronic toll collection, ETC, which use 0.11, 0.18 micron technologies. More, 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. We look forward to this platform's continued growth. Our NAND flash platform is providing stable business. As orders recovered in second quarter, revenue from NAND flash nearly doubled compared with the first quarter. In addition, our 28 nanometer is still progressing prudently on technology and manufacturing. Our 28nm HKC+ has begun shipments and has strong demands.
We are expanding our customer base and have new customers tapping us. Our 28 Poly/SiON will phase out as High-K shipments continue to grow. Demands for 28 nanometer High-K 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 High-K, which will be majority of our 28 nanometer output. We've engaged with customers on diversifying our 28 nanometer technology offerings. Furthermore, our research and development is accelerating, and we continue to focus on FinFET development. As the first 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'd like to take this chance to thank our customers for their trust and continued support as we advance forward on FinFET technology paths. There are more than a dozen tape-out 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 would not be where we are today. Our FinFET technology is ready for auto-related applications. With successful tape-out 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 first generation of FinFET technology. Customer engagement is going smoothly, and we are expecting several tape-out by the end of this year. The initial development of our FinFET technology has provided the foundation for accelerated R&D progress. As a result, development of our second-generation FinFET N+1 technology is moving along rapidly. In the meantime, we are starting to engage with customers for N+1 business opportunities. We began customer engagement for 14 nanometer a year ago, and now for N+1. This is unprecedented in the history of SMIC. We are expanding our FinFET product portfolio to address various applications, including application processors, high-end customers, auto, and AI.
In term of automotive electronics, although the global automotive demands and the 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. The arrival of 5G will usher in new spurs of developments of AI, cloud computing, smart city, automotive electronics, and other applications. It is a nice wave of opportunities for SMIC. We can grasp on these opportunities through diligent planning, preparation, and development. Let me talk about our CapEx and capacity plan. Our original foundry CapEx plan of $2.1 billion was mainly for the purchasing of equipment and the facility constructions of our Shanghai JV FinFET line. We now increase our planned foundry CapEx to $2.3 billion.
This incremental spending is in line with increased confidence in demands as we expand to upgrade capacity to capture the growth spurred by the trends such as IoT and the migration from 4G to 5G. At the same time, we are making changes to address economies of scale and to centralize operations. 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 are manufacturing the most advanced wafers in Mainland China.
The new mini line 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 one month of our foundry revenue only, and thereafter, will no longer be included in our reporting. Looking at 2019, our first quarter bottomed out, second quarter bounced back with increased demand as inventory digested, and we expected our second half will be better than the first. For third quarter, we expect another growing quarter. Streams coming from mature nodes applications such as CMOS RF, CIS, BSI, and ISP.
Muted revenue growth, mainly as the result of our foundry disposal and a 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 demands and investment confidence. In spite of economic situation, our eight-inch and 12-inch 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 diversity. We are pleased to say that we have delivered on our technology development from a first generation FinFET 14 nanometer to second generation N+1, secured business opportunities from our platforms from Bluetooth, CIS, to specialty memory, and are ramping new product applications from ETC to ISP.
We persist to focus on building comprehensive platforms, advancing technology, establishing strong relations, as well as maintaining our position as the preferred foundry partner in China. We'll play the role in the global semiconductor industry by providing competitive services and complete 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&A session 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 for the audience. 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 your request, please press the pound or hash key. Once again, to ask a question, it is star one on your telephone. 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 more advanced node, 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. I'm curious if it was a 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. You know, the second quarter, basically, one of the things is the recovery of the market for the existing products. The second thing is that we add on the incremental. That means new customers, new products in our 12-inch. For the 8-inch, definitely ASP will be stable because our 8-inch fab has been fully loaded from last year until this very moment on the U.S. For 8-inch, this should be the same. For 12-inch, the ASP for the new product, more or less they are on the mature technology nodes, and they are comparable to the previous case. Basically, we should say, the recovery of the demands of the existing customer remain the same.
For the new products, especially for the volume, for example, we say CIS, memories, and BCD, analog power, this kind of product. We already have the existing base. Even though we have the add-on and incremental customer on the demands, it seem more or less the same.
Okay. Yeah, great. Thanks for clarifying. 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. Could you recap on the mini-line how much capacity you'll get? Then based on that, how are you starting to see the ramp-up from customers, if you could talk about second stage beyond this initial mini-line for next year, if we should expect, let's say, a bigger CapEx year for FinFET. Are you also seeing, it sounded like you were a bit conservative on FinFET. You were waiting for N+1 last quarter. Are you starting to change your expectation on the FinFET ramp over the next one to two years, that it could actually grow in line or better than 28?
Randy, actually, this question contains quite many different angles. I answer the CapEx first. CapEx, in February, we already forecast that we have $2.1 billion. Majority of this will be used for the building up of FinFET line in Shanghai joint venture to manufacture the most advanced technology products. Just now, Dr. Gao and my reports also highlights that we have one disposal of our operations in Italy. The overall capacity in SMIC on a mature technology nodes actually reduced. The second thing is that because we ramp up the FinFET, we increased the activities in Shanghai R&D Fab, and we also slowed down and finally stopped the routine operation of the original technology nodes, like a 14 nanometer and 20 nm in Shanghai. We consolidated them into Beijing 12-inch Mega Fab. Because of this, our 12-inch manufacturing capacity also reduced, decreased.
We have very strong demands. We are running both 8-inch, 12-inch fully loaded. We have the customer there. We have to make sure that we can meet their essential requirements. That is 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 were not so firm about the disposal of the operation in Italy and the shutdown of the operation for the mature technology in R&D Fab. 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 Dr. Gao and I are highlighting that to catch the opportunity in the markets and meet the minimum requirements of our customers, we need to add up certain capacities on the mature technologies. That's why the CapEx were mentioned that this year, we are working on the increased part on the mature technology. This is for the CapEx part. For the 15 nanometer Shanghai joint venture, most of ones already answered. Your questions that for the ramp-up N+1 for the next one or two years, and the 5% in Mong Song.
Okay. Let me try to add on some comments about this new fab capacity ramp-up plan. At this moment, we have the two phase, right? The 8-inch fab is a phase 1, phase 2. The phase 1, the mainly is converted for the R&D, for the N+1, and N+2. Mini-line is current building is a 3K. 3K is for the 14 and 12 production, we will gradually ramp up to 6K, 9K, 15K, hopefully by the end of the next year to fulfill current customer demands. That P2, phase 2 lines, will contains not only the 14 and 12 and also our N+1, and some of a portion of N+2 R&D. I think that at this moment is our grand plan from now to end of the next year. I hope I answer your questions.
Okay. Yeah. Thank you. The final question I wanted 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. Could you talk about the driver on the spending for that increase, and if 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. You know we are setting our D advanced fab in Shanghai that is the joint venture. With the starting of the running of the fab, and definitely we see the running costs of this wafer fab in the ramp-up stage. That's the major addition of the OPEX.
Okay. Is that-
Yeah. Other thing for the R&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'll stay in OPEX?
Just now, yeah, Dr. Liang also mentions that, I also say that, and we started this kind of manufacturing in the new wafer fab. We expected starting in the second half of this year or the near year-end. We expected this kind of running cost of the new wafer fab, we will convert it to manufacturing costs at the beginning of next year.
Okay, great. Thank you.
Thanks, Randy.
Your next question comes from the line of Leping Huang from CICC. Please ask your question.
Thank you to take my question. The first question is about your full year guidance. I remember in the beginning of this year, you mentioned that you target to achieve in line with the industrial growth of flatish revenue growth. After this, a lot of adjustment on different centralization process or the disposal of LFoundry. What's your current guidance for the full year revenue? Thank you. Can you hear me?
Yes, we can, Leping. We are working on.
Yeah.
Leping, thank you for the questions. basically, we should say That means include the other foundry revenue, which we have this kind of forecast. Current forecast is that we will do same or likely be better than, if we exclude the other foundry revenue. We should say that if we exclude the disposal revenue from the second half this year, our whole year's revenue will be in line with the industrial trend.
Okay. If my calculation is correct, so it imply that it's close to 20% sequential growth in the fourth quarter versus third quarter. Is my understanding correct?
Our second quarter revenue is higher than the first quarter.
Yeah
on original plan, that mean the number, unit number revenue for our foundry for the second half of this year is $120 million-$130 million. If we exclude that part, and the original, that means a flattish type of revenue this year and last year because of we have the transition for the R&D operations. Now we further dispose the other foundry, that means second half of this year. The revenue part will be reduced by $120 million something. We are trading better the second half performance. Even though without our foundry's contribution, second half the performance is better than the first half.
Okay. The second question is also about the CapEx. Because for this year, you spent $2.3 billion for the mini lines around 3K. How we should expect when we ramp up or when we start the P2 or complete the phase one and also we start the introduction of the phase two equipment. Should we expect a large increase of the CapEx next year?
Yeah.
Okay.
Yeah. Later. I answer something first, and later ask Dr. Liang to give the comments on this question. Basically, the planning for $2.1 billion is for the whole company. Now because we have the disposal of our foundry, LFoundry operation, and we have the transition of the machines from Shanghai to Beijing, there's a breakdown of the operations in 12-inch also. We have the shortage of the capacity. This year, we made up some new capacity to meet our customers' requests. $2.1 billion-$2.3 billion mainly come to this point for the whole company. The joint venture 3K FinFET capacity is just a part of it. It doesn't mean all the money, $2.1 billion, get into the joint venture.
Yeah.
Too. It's too early to make the comments on the spending of next year. We are still working on this.
Okay, yeah. Thank you.
Your next question comes from the line of Zhihong Ning of China Renaissance. Please ask your question.
Hi. Congratulations on the technology breakthrough. Regarding the N+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? I'm sorry. I mean 2021. Right.
Hi, Zhi.
Right.
Nice to get your question again. Actually, it's N+1. Just now we did not mention anything about N+2.
Oh, no. I mean the revenue contribution for N+1, when should we assume it?
Okay, let me try to answer this question. The N+1, we are still at the early stage of the customer engagement. It's very difficult to predict the contribution for this product or this technology yet.
Oh, okay. The other question, as 14 nano will start ramping up in Q4, how should we expect the cost structure changing for the company? Because historically, when you ramp a new node, some of the OPEX will be shift to cost of goods sold. I just want to have some idea how we should model it going forward.
Zhihong, could you say your question again?
Oh, yeah. In Q4, you will start ramping up the 14 nano. 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 this time.
From cost. Yeah. Thank you. Okay, let me translate on this statement. For 2019, we estimated around $100 million in terms of the 14 nanometer FinFET technology related expense at the OPEX level, which will be converted into the COGS in 2020. Therefore, the overall cost will be more realistic in 2020.
Oh, okay. All right. Okay. That's useful. Thank you. Congratulations.
Your next question comes from the line of Peter Chen 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 at 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-inch operations here at SMIC, we have been running full capacity for the past two years. Basically, we say that our 8-inch business, mainly from under the existing customer base and existing market shares. We do not see a big change in the market share or incremental things on the 8-inch. For the 12-inch, at the first quarter last year, we experienced the adjustment in the markets. Currently, we are controlling the allocations. Basically, we should say, we have big incremental demands for our 12-inch capacity. To balance the recovery of existing customer demands and the new customer new demands, and we try to balance them. I give you a number, possibly, I should say, 30% or one-third is the recovery of existing market and customers, and two-thirds come from the incremental new customer, new demands.
Okay. Thank you. The reason I ask the question is because the utilization rate of your peers in the same period may not be so high. If it's industry-wide, the demand recovery, other foundry, they should see a similar improvement in utilization rate. SMIC particularly seems to have the better realization rate. That's why I'm wondering, maybe some part of that is from market share gain. My second question would be, a lot of other functions now start offering advanced packaging, such as Fan-Out, such as CoWoS. It's becoming increasingly popular due to 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 status in the advanced packaging they're offering?
Okay. I think that's a strategic question. It's a great question. For the packaging side, we also have made a long-term plan. As you know, we have a joint venture of the SMIC.
SJ Semiconductor.
JCET.
SJ Semiconductor.
SJ Semiconductor and JCET is our two partners. These two partners have different technology capability. For the general purpose type of the packaging, we co-work with SJ Semiconductor. For more advanced part, we co-work with JCET. We make the plan, particularly for the advanced Fan-Out type of different technology. Now it's a different package plan, and we make a long-term plan to develop those packaging technology for our customer. This will start, we will see results start from second half of this year, and more results year 2020 and 2021.
Okay, thank you for the update. In terms of the revenue recognition, since you work with the partners on this, how is the revenue recognition going to be? How do we model the revenue recognition from the advanced packaging service to your mutual customers?
Okay, let me translate. For these advanced technology packaging, the revenue contribution will be recognized at the strategic partner. For SJ Semiconductor or JCET, the revenue doesn't belong to SMIC.
Okay, thank you. Just a follow-up to that.
Okay, the advanced packaging expenses will be listed in our strategic partners, not here in SMIC.
Okay, thank you very much. I'll go back to the queue. Thank you.
Your next question comes from the line of Sebastian Hou from CLSA. Please ask your question.
Thank you. I think that in your prepared remarks, you talked about this, you have already received dozens of the tape-outs on the 14 nanometer. Can I just try to clarify that, is all on 14 nanometers? Or if not, what's the tape-out progress?
Yes, at this moment, most of the tape-out is from the 14, and there is a few of them is from 12, yes. Most of them, indeed, you're right, is on the 14.
Actually, the dozens of tape-out includes both 14 and 12, but the 14 accounts for the majority?
Yes, right.
Okay. Got it. I remember last quarter, Dr. Liang mentioned about the 12 nanometers on schedule to reach the risk production by the end of this year, and the total schedule
What? Sebastian, we can't hear you.
Are you guys still on track? Okay.
Sebastian, we lost you in some words. Could you say your question again?
Okay. Yeah. I just want to have the update on the production schedule of 12 nanometers. Are you still on track to reach risk production by the end of this year? Does it have too much difference in terms of timing between 14 nanometer?
That's correct. As last quarter, I mentioned about risk production will be end of this year. Right now, we're seeing a couple of the early tap out. It's also approaching the end of this year. There's not much change from last quarter's announcement.
Okay. Thank you. My second question is regarding the 5G opportunity for SMIC. Just can you help us understand what's the opportunity or kind of the chip you're seeing here, particularly in here? I wonder how much-
Maybe I will try to answer this question. For the 5G, we all know 5G will start second half of this year, and will move strongly from next year. In our side, for FinFET part, since our advanced technology cannot really serve like a server or networking or even the kind of mainstream, the mobile part. Those application required 5 nanometer, 6 nanometer or at least 7 nanometer. We were not doing that trend at this moment. There are a lot of other area, such sub-6 GHz RF CMOS or even the higher frequency, like millimeter wave, the RF CMOS. Also, we have our 14 RF to serve that customer. Okay. For those kind of a little bit mid low end and millimeter wave, we also have 28, 22 nanometer RF, to fulfill that market area.
Also for the automotive part, as Dr. Zhao mentioned earlier, we also have a gray one levels of 14 nanometer plus RF. We also will try to move into the connectivity part that is also used in our 14 and 12 RF. There are plenty of things we are preparing right now to kind of enter this 5G booming market.
Great. Thank you, Dr. 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. Your comment on the sub-6 GHz RF CMOS, that would probably like to see some revenue contribution into 2020. For example, such as RF transceiver. Am I interpreting that right?
I think that's a great question. To be practical, RF technology to start with and to really mass production normally, it will take 36 months, nearly three years, to see really the volume production. I would say maybe by end of the next year, we will see a small volume of the production. For the major production, it will wait until the year 2021. Next year, probably the revenue-wise for this kind of sub-6 G is also very minimal. Yeah.
Okay. Based on the If we combine this with what you mentioned about the 12 of tape-outs on 14 and 12 nanometers, we do see some of this sub-6 GHz RF CMOS design tape-out in already on our 14, 12 nanometers.
Okay. Yeah, I think you ask also very detailed questions. When I mentioned the risk production or the tape-out, it means there's a real product. Start this year and also next year, we will have many MPW related to this sub-6 GHz and millimeter wave RFCMOS. That's preparing for the data part next year and earlier year 2021 for the product NGO. Yeah.
Okay. Got it. Thank you.
Last question comes from the line of Rick Hsu from Daiwa Securities. Please ask your question.
Hi. Good morning, guys, 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 million plus disposal gains from the LFoundry itself. Did you recognize that gain in your second quarter, or you push back to Q3?
The disposal gain of LFoundry is not listed in second quarter. It will be listed in third quarter.
Okay, great. The other one is about your 28 nanometer revenue contribution. I think you guys are making a very good progress about your ramp-up of the HKC+. Could you give us a guidance that how much you expect the 28 nanometer altogether to ramp up the revenue contribution in Q3 and Q4?
Hi, Rick. You know that for 20 nanometer, our stance is very clear. We already built out the capacity to meet the strategic customers' requirements, we keep running that way. On the average for the whole year, we expect that 4% of the revenue come from 20 nanometer high-K metal gate. The customer do requires more capacity to support. We maintain at a, how say, on a safe volume to run this 20 nanometer, and you know the situation we mentioned that before in previous quarter release.
Okay, great. Thank you. Last question is about your 14 nanometer 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. Would that impact your overall corporate gross margins in 2020? If so, could you give us some guidance about your 2020 gross margin? How does it look like?
Rick, just now, actually, Liang Mong-Song already answered certain part of the question. Dr. Gao also mentioned that $100 million will be counted into the operation cost the early next year. We haven't really come up with the detailed exact numbers. We are working on this. It's too early to mention that. We are trying our best 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, Rick.
We have run out of time for any more questions. 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, fund managers, analysts who participated in today's call. Again, thank all of you for your trust and support. Thank you very much.
This is the end of SMIC's fourth quarter earnings conference. Thank you for joining us today. You may now all disconnect.