Welcome to Semiconductor Manufacturing International Corporation's 4th Quarter 2018 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.
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. The earnings press release is available for download at www.smics.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 statement.
Good morning and good evening. Welcome to SMIC's Q4 2018 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 CEOs, Doctor. Zhao and Doctor.
Liang, will provide some business commentary. This will be followed by our Q and A session. 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'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 Hong Kong Stock Exchange Limited, including our annual report on Form 20 F filed with the United States Securities and Exchange Commission on April 27, 2018.
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, Steve. Greetings to our listeners. First, I will highlight our 2018 full year unaudited results, which are based on the submission of our unaudited quarterly results for the year of 2018. And then I will summarize our 4th quarter results and give the Q1 2019 guidance. Revenue in 2018 was $3,360,000,000 a record high compared to $3,100,000,000 in 2017.
Gross margin in 2018 was 22.2% compared to 23 point 9% in 2017. Profits for the period attributable to SMIC in 2018 was $134,000,000 compared to $180,000,000 in 2017. EBITDA reached a record high of $1,160,000,000 in 2018, compared to $1,120,000,000 in 2017. In the Q4 of 2018, our revenue was $788,000,000 a decrease of 7.4% quarter over quarter, mainly due to a decrease in wafer shipments in the 4th quarter. Gross margin was 17% compared to 20.5%, mainly due to the low utilization rate in the 4th quarter.
Non GAAP operating expenses were $243,000,000 Profit for the period attributable to SMIC was $27,000,000 while non controlling interest was $60,000,000 of credit to SMS's attributable profit. Moving to the balance sheet sheet at the end of the 4th quarter, cash on hand, including financial assets, were close to $3,800,000,000 Gross debt to equity ratio was 38 percent and net debt to equity ratio was negative 4%. In terms of cash flow, we generated $377,000,000 of cash from operating activities in the Q4. Now look ahead into Q1 of 2019. Our revenue is guided to be down 60% to 80% quarter over quarter, mainly due to low seasonality and macro uncertainty.
Gross margin is expected to range from 20% to 22%. Non GAAP operating expenses are expected to range from $250,000,000 to 255,000,000 dollars Non controlling increase of our majority owned subsidiaries are expected to range from positive 10 dollars to positive $12,000,000 which are losses borne by non controlling interest. The planned 2019 CapEx for foundry operations of approximately $2,100,000,000 mainly for the equipment and facility in majority owned Shanghai fab and FinFET's R and D line. The planned 2019 CapEx for non foundry operations is approximately $106,000,000 Our planned 2019 D and A is approximately $1,100,000,000 Our 2019 gross margin is expected to be range of high teens to 20%. I will hand the call over to our Co CEO, Haijun, for general remarks.
Thank you, Yonggang. Happy Lunar New Year to our listeners. Thank you all for joining us on today's call. Today, I'll begin by highlighting the results of our 4th quarter and our annual 2018 unaudited results. Then I will update you on our platform strategy, our capacity plans and the market situation and our near term outlook.
2019 is a year of uncertainty and also a year of opportunity. With trade frictions winning on the market environment, we are actively seeking growth opportunities through steady progress in expanding our customer base and reaching mature and specialty technology, product mix and applications and is providing value added opportunities. We continue to strive to be fundamentally strong as we tighten our customer partnerships and further expand our technology development. To highlight our Q4 results, our revenue was on the high end of our guidance and decreased 7.4% quarter over quarter due to low seasonality and soft demand. Revenue from communication, consumer, computer and auto industry segments applications respectively declined 11%, 9%, 21% and 2% sequentially, largely due to weaker handsets and tablet demands.
Revenue from North America and China customers declined 11% and 8% respectively. Eurasia revenue increased by 9% due to some increase in consumer related applications. Gross margin was 17% in Q4 2018 compared to 20.1% in the Q3 of that year on the high end of our original guidance. For the full year of 2018, SMIC had a record high revenue of US3.36 billion dollars an increase of 8.3% year over year, representing our 4th consecutive year of growth. Gross profit in 2018 increased $6,000,000 from $740,700,000 in 20.17 to 746,700,000 dollars Profit attributable to SMIC was at US134.1 million dollars compared to US179.7 million dollars last year.
In 2018, we spent only US1.8 billion dollars on CapEx compared to the planned US2.1 billion dollars In 2019, our planned CapEx is at US2.2 billion dollars which will be mainly used to build up our new advanced fab. Our new joint venture Advanced fab in Shanghai is targeted to have a mini line ready in the second half of this year. As we expand our capacity to support the needs of our customers, we continue to utilize a joint venture model for our advanced mode facilities. The reported CapEx of US2.2 billion dollars includes the contribution from our joint venture partners. In Q4 2018, the company received capital injection of $935,000,000 to our joint venture fabs.
Uncertainty and limitations in the overall economic environment and the soft farming semi industry demand have trickled down to our customer and to us. The Q1 is rough for the industry and for SMIC across most segments as customers work to digest their inventories and hesitate to rebuild given macroeconomic uncertainty. Nevertheless, we believe that Q1 should be the bottom of 2019 for SMIC. Although we have limited visibility for the year of 2019, we target to be in line with the foundry growth forecast. At the same time, we currently anticipate 8 inches capacity will be full for the year as we have healthy mature nodes technology demands.
We continue to refine and build up our various mature nodes platforms. Mature technology is still a growth driver for SMIC as we plan to have multiple products ramping up this year, including power management, memory, high voltage RCD driver, CMOS image sensor and fingerprint sensors. We are conservatively optimistic as we see an abundance of opportunity knocking at our door. This year, we'll begin to see the ramp up of shipments for some of our newly developed technologies and partnerships in our CMOS image sensor, power management, fingerprint, memory and high voltage platforms. The CMOS image sensor market is growing, and we are expanding our customer reach.
We will see growth this year from revenue related to image processors and backside illuminations. Power management ICs are another area for growth and opportunities. Our power management business platforms continued to be one of our key revenue drivers and we continue to be one of the top players in the area. Memory, especially specialty memory is another platform where SMIC saw growth and increase in new customers. Flash memory had been a very key growth driver in 2018 as revenue from now flash doubled in 2018 compared to 2017.
We also began to ramp up NAND flash in the second half of twenty eighteen and have been running 38 and 24 nanometer specialty NAND flash memory with high quality and good yield. We believe this will continue to contribute to the utilizations of our mature 12 inches capacity. We are also seeing growth from fingerprint related ICs as we have expanded our biometric offers to include under glass solutions. SMIC's revenue from power management ICs, CMOS image sensor and fingerprint grew around 4% in Q4 2018 compared to Q4 2017. High voltage display drivers represent a new addressable market for SMIC in which our strategy is to work with our customers to gain new market share.
High voltage drivers have already begun production and shipment in Q4 2018, thus increasing our competitiveness. We expect China business to continue to be strong, but also continue to serve a diverse range of customers. Revenue from our China customers was at 57.5% in Q4 2018 and it grew 12.1% year over year. With the upgrade of our customer devices, IoT and the migration to 5 gs in the future, we believe we are in a position to benefit from the future market trends. There will be a plan before gain in this transitional period.
Our aim is still to be fundamentally strong company And in the near to medium term future, we must withstand the growth plans of developing and laying a strong foundation for our strategies and business mechanisms. 2019 is an overall slow year. However, we are conservatively optimistic as we begin to see the fruit of our strategies as some of our newly developed technologies on the platform began to ramp up towards the second half of this year. We continue to target a balanced strategy to maintain growth and profitability. I will now turn the call over to our Co CEO, Meng Song for further comments.
Thank you, Haijun. Happy Chinese New Year to everyone and thank you for joining us today. I would like to take this opportunity to share our current progress on R and D and business development. Since we always have very limited time left for Q and A session, therefore, this time, except some sensitive data, I will try my best to provide you as much as possible information and hope to cover most of your concerns. In 2018, we qualified our 14 nanometer FinFET process and developed delivered our version 1.0 process design kit for customer circuit evaluations.
Reliability and years have readily improved. As customer engagement is going well and smooth, we have already begun the customer product verification process. The functionality and performance of our customers' 14 nanometer products were proven by multi project wafers. Multiple products ranging from consumer to mid end mobile will be tapped out this year. In addition to 14 nanometer, our 1st generation FinFET includes 12 nanometer, which is an enhanced shrink of our 14 nanometer process.
We have qualified our process and our process design kit is ready. Meanwhile, IP verifications are ongoing. When compared to 14 nanometer, our 12 nanometer provides 20% reduction in power, 10% performance enhancement and 20% reduction of area. Our 1st generation FinFET portfolio is more comprehensive, and we have increased confidence in our competitiveness. Our 2nd generation FinFET is our N plus 1 technology.
Our N plus 1 technology development is on track, demonstrating good device performance and SGM year. Meanwhile, we target to offer a performance competitive solution with better power consumption and area shrinkage. In addition to our FinFET foundry manufacturing services, we are dedicated to offer our customers a total solution with a full product portfolio on FinFET, including masks, IP, manufacturing, testing and packaging. Based on the current schedule, we plan to move in equipment in our new facility in Shanghai in Q2 and target to install a mini line by end year to support advanced node manufacturing. SMIC also has the most advanced mask shop in Mainland China, and we work to provide FinFET masks for our customers.
We also offer a full range of IP to serve a variety of applications, Furthermore, SMIC is bumping, testing and packaging options through our subsidiaries and partners. Our business model is to provide our customers with a complete solution to enable long term customer relations. To best serve our customers, we are expanding our FinFET product portfolio with various applications under development. We see a lot of business opportunities that include mid end smartphone application processors and consumer related products, which are migrating from 20 nanometer to 14 nanometer and 12 nanometer. We see growing advanced demand for mobile and wireless connectivity stemming from 4 gs, LTE and upcoming 5 gs, which are areas that our customers traditionally have strong market demand.
Furthermore, FinFET technology may also address applications such as automotive industry sectors, AI and IoT. We plan to expand our portfolios to cover these areas based on SMIC's customers' requirements and demand as well as our internal capacity. We also benchmark on the industry practice and market demand to assure both technology readiness and competitiveness. To conclude, we have made solid progress on FinFET and this can be attributed to our strong and capable R and D team. Process optimization, we are confident in our ability to capture future opportunities.
Our team has met commendable efforts in meeting milestones, enhancing effectiveness and coming through with results. Meanwhile, we are providing a total solution business model, including IP, masks, manufacturing, testing and packaging, all of which enable long term commitment and customer engagement. With a committed team, optimized the offerings and strong customer relations, we are on the path of planned transformation to be the foundry of choice. We thank you for your ongoing support and 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. Liang. 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. As usual, please be reminded to limit your questions to 2 per person. Operator, please assist.
Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Okay.
Yes. Hi, thank you. I appreciate the good details in the prepared remarks. The first question, I wanted to ask maybe 2 parts just on the growth when you mentioned the outlook in line with the industry. If you could give more color your view on the industry growth rate?
And then for your own business, would that exclude the licensing last year for your calculation of growth? And maybe within that how you see the ramp through the year? The second part of the question is on the gross margin. If you could go through the factors driving the lift sequentially in your guidance for gross margin and how you see that like whether that higher level can sustain or improve from there as utilization comes back?
Hi, Randy. Thank you for the question. And the first question is, yes, my comment is on the industrial growth and for SMIC side first to say with the trend. And the industry for this year and overall the demand ratio say are still there. And we do not expect a drastic job of the industry overall for foundry.
But we really see the uncertainty and worry about the customers at this moment from the Q1 last year and we start to see their reluctance of taking wafers to build up the inventory. And they are trying their best to consume the existing inventory and we really start to see the inventory getting low and we already start to receive the 2nd quarter orders and to rebuild and refurbish this kind of inventory. Overall growth for the industry should be flat and or some very low single digit type of growth. We already observed the announcement from different companies. But for SMIC, we will see that existing and mobile phone related demands and standard digital logic will be down definitely.
But for SMIC in order to keep the growth of type of trends, we add on the incremental business. That means the new business probably will never run. And just now from my statement, I already mentioned that we started working on this kind of platform, more than 7 new platforms from last year. And like the BCD charters and like the CMOS imagers, like the advanced technology that was for specialty NAND flash and like the high voltage AMOLED drivers. And these kind of platforms are add on revenues and wafer orders on top of the existing platform SMIC already running in the past couple of years.
And we also expand our platforms for 20 nanometer. Probably, we say that we have the Polycom, low power RF. Right now we have the C plus and we also work with the other people on this kind of area. And the total forecast for 28 nanometer will getting higher. And with this kind of incremental business and we see that we will maintain the growth trend, but not that much because overall the Q1 we already forecast that and the demands from last quarter is getting low.
So we have to experience the down quarter for the beginning of this year. And the second question you asked that why with this kind of reduced shipments and revenue, but gross margin getting better. And that's a very good question. And basically, we have 3 factors there. The first one is for Shanghai the R and D fab we have been using it to run 20 and 40 nanometer production And you know that's a very small size mainly do advanced RMB research.
Now we put it to minimum running and slowly phase out the production. We dedicated R and D fab to advanced technology FinFry research And with the closing down of the production there and we got a better performance in operation. This is the first one. The second just now Doctor. Liang already mentioned for the mask shop, for the past 2 years, we have been building up and very advanced and expensive facilities for leading edge mask making, but that's the running, that's the cost operation.
But now we start to see and mature the technology, we start to see the business of mask making, they contribute and the benefits. And Doctor. Gao, our CFO just now mentioned that we also have the income from others and big part of the others are coming from Maerskop. And the third is the engineering efforts. We mentioned a lot of platform specialty technology development in the manufacturing group.
Previously, these kind of wafers are 100% under the manufacturing and are the production cost. But now we are separate this kind of specialty technology development efforts from the standard or pure manufacturing. So they are not allocated to the normal operation part and they grew into the OpEx. But this kind of factor together and our Q1 and even though the revenue getting down, but we see a better gross margin. And to be exact, our pure manufacturing that means a standalone manufacturing for the mature technology nodes, production in our 8 inches 12 inches are the same.
They are still running gross margin about 17%.
Okay. I appreciate the color. And then I guess just a second question. On the 14 nanometer, if you could give a feel of the capacity that you'll have for that mini line and if that's a segment what we should expect for 2020. If everything goes to plan to ramp into production, the capacity or contribution of it, if you can, by this time?
And then at the stage you're seeing industry pricing and cost structure, is there a way to think about the profitability for this node, like if it will take a certain scale to get to breakeven or get to near corporate profitability?
Randy, for this one just now we mentioned the schedules. We are still in the business stage with our customers and in the acquisition of the machines. And yes, I apologize that we cannot give too much comments on that. But we already say that we are building up the fab already and we will move in the machine in the Q2 of this year. We will get mini LAN ready
in the
second half of this year. The plan is there and we also announced the CapEx for this year.
Okay. And one final clarification. The OpEx in the first point about the cost from the Shanghai R and D fab and from the specialty technology, what would be the change in the OpEx? Is that, I guess, explaining the R and D increase in Q2, but maybe how much would shift the R and D line then?
Actually, Jonathan, I mentioned 2 factors. One of the factors that we shut down the production in the R and D fab that save us our operational margins. And this is one thing, because previously we run the 20, 49 meter production and very early stage we introduced the customer to the R and D fab. We can't stop them. And even though very low volume, we have to maintain the fab to run the minimum production in the R and D fab.
Finally, we work together with our customer to relocate production to Beijing microfab and that will save us a lot of efforts and cost in operation. And another thing is that just now I mentioned from last year we started a lot of study and the development work on mature technology for the new platform like CMOS image sensor, high voltage, IMCU, memory, etcetera. But this kind of cost has been under the manufacturing cost, but they are pure R and D. So now in the Q1 we group them into the OpEx. And for Shanghai fab, actually the effect already showed up in the Q1.
And currently, we are already running very, I should say smaller production than before. We already allocate majority of the customers and the product to Beijing fab.
Okay. But the mature technology, the shift, is that a shift to R and D, like a certain amount of expense that we shift to R and D instead of cost of goods sold?
Previously this kind of mature technology, they don't work between our high quarter TD and fab manufacturing group and majority running group into the manufacturing cost. But now since we already allocate all the efforts to a dedicated team and efforts and activities, So this is one of the area. And to streamline the manufacturing yield improvement and the new platform development. There's a relative factor, no major factors. There's a relative factor.
So just now I mentioned that for the pure manufacturing in the Q1 for the gross margin maintained as a 4th quarter, they are 17% for gross margin in the pure manufacturing. But we have add on revenues from our new mask shop, this kind of area and then we have the top up additional percentage. That's why we forecast we will have 20% to 22% gross margin in the Q4. Yes.
Okay, great. Thanks. I appreciate the clarification.
Your next question comes from the line of Leping Huang from CICC. Please ask your question.
Okay. Thank you for taking my question. So the first question is a financial question. So if you look your profit from operations, so you are making around $40,000,000 loss in the 4th quarter versus around $5,000,000 in the 3rd quarter. But if you look your profit attributable to the SMIC, you are roughly the same, CNY 26,000,000.
So I see the non operating side is quite changing quarter to quarter. So can you clarify, especially you have income tax benefit, not the expense this time. So can you further elaborate what's inside these two items, other income and income tax benefit? Thank you.
Hi, Leping. Happy New Year. Yes, that's a very good question. Basically this way, and we have 2. One thing you see the gross margins and when we run the lower revenue, but we control the cost everything very well and we have other revenues.
Just now I mentioned that the other revenues come from our and work with the mask shops and we also have the others with our joint ventures. And one of the thing we highlight a couple of times is for the R and D cost actually will be shared by the joint ventures because we develop the technology to run the production in joint venture. We are utilizing joint venture mode to get CapEx and also get to share the R and D cost. And we treat this kind of thing also other incomes. And in the meantime, we increased significantly the R and D on the leading edge technology and according to the plan and the government grant for R and D support also I cannot say linearly prorated, but we're also getting higher.
So to answer your question that what's the other income, one of the things is mask shop. We finally made the advanced technology in mask shop into business so that we have income and other things that we have to joint venture to share the R and D cost, but we treat this kind of sharing as other income. And the number 3 is side, we increase our R and D spending and then prorated to this kind of total amount, we will have higher government grant to this technology development.
So let me add 2 additional points on the other income part. So the first part is actually from our financial investment. So if we calculate that at the end of 2018, that will be around US20 $1,000,000 At the same time, we also have a bunch of financial asset, which is around US4 $1,000,000,000 So that also injected some of the financial gains from the financial products.
Okay.
Thank you very much. My second question is about your leading edge progress. So now your customer now you are offering and you have 2 choice, you process 14 and 12 nanometer under development. So how you ask your client to choose between the 14 and 12 nanometers? And do you have any timetable for the mass production on the 12 nanometer?
And what's your current status of the 14 nanometer mass production timetable? Thank you.
Hi, Leqing. Lebing. We already announced that we're getting into production in 2019 and our customer first worked with us on the 14 nanometer, but definitely we are also working with to further down on the 12 nanometer. The production first will be 14 nanometer.
So, is the same group of customers using 14 nanometer or will it be different?
Applications and different customers. But we do have the same customer working with us on both the 14 nanometer and 12.
Okay. Thank you. Very clear.
Yes. Thanks, Lupe.
Your next question comes from the line of Peter Chan from CIMB. Please ask your question.
Hi, thanks for taking my questions. My first question would be, your competitor on the other side of the street saying that 7 nanometer, 7 nanometer plus are transition node and assume they will migrate the customer to the 5 nanometer. As I say that, what is your view on that? And what's your strategy to compete with the competitors' 5 nanometer node? Thank you.
Hi, Peter. Happy New Year. That's a very good question. Yes, that's very good. We like to see our leaders in the industry to advance very quickly and every year move to new technology nodes.
That gave a lot of push to the growth of this industry and we indirectly benefit in this from this kind of advancements. For SMIC, we are serving our customers and investors and we do the things to benefit our customer and investors. So our customer asked us to develop leading edge technology to get the price results for the market segmentations and SMIC just follow suit to deliver on schedule. So at this moment, our customer hope that SMIC can move faster, but what they need SMIC to do first is still this year 14 nanometer and 12 nanometer. They hope us that after we finish this kind of technology nodes, we can also go on further and we'll try our best to serve our customers' needs.
So may I take your comment as you also see the 7 nanometer as a transition node, not a long node. I mean, long node will be like a 20 nanometer. Is that also the view of SMIC?
In In SMIC, we consider it as a customer strategy and we do see that some customers really like to skip 7 nanometer directly to 5, but other customers like to stay long on 7. And we respect customers' choice.
Okay. Thank you. The other question is regarding your competitors, the presence of Nanjing. One of the advantage that SMIC has is you being local and serving the local customers. Having that proximity has been the definition of energy in my view.
Now your competitors are increasing its presence ashore. How would you deal with that? And would that be an issue to your differentiation advantage in the China market?
Okay. That's a very good question. And even though I'd like to be sensitive, generally we do not comment on our peers in the industry. But we can generally say this way, we are happy to see more players join the group in China, Mainland to work for semiconductor to serve our customers. That's a very good thing.
And SMIC, we never treat ourselves as local company, just our name. And like our name SMIC is international manufacturing company. We have been so many years have been running fifty-fifty overseas customers and local customers and we try our best to balance the foreign and customer and the local customers. And we see this way, we see SVIC no difference from other companies in China and we do not see them local, they are also international company. At this moment, what we want to see and we do not see very big change in SMIC's strategy.
We still like to do like to follow our customers' requests. And in the meantime, we also diversified our technology service. And previously SMIC, we got limited resources, we mainly focus on the COT and we focus on the digital and IC technologies. But now and since we could now move every year to build up 1 new fab, every year we move to a new node, horizontally we move to the other part to serve a larger base of customer. From today's conversation you know that we already have very strong hold in memory, specialty memory.
And we start to ramp up high voltage drivers and the IoT, ultra low power CMOS RF and CIS and we got a larger base, so that's the way for SMIC to serve better our customers both local and internationally. And in general we should say and we're happy to see the industry getting better in Mainland China is a benefit SMIC in overall supply chain and customer base.
Okay. Thank you. That's great. One final question. You commented on various notes.
So I want to hear, are you still pursuing the 22 nanometer? And is that still strategically important to SMIC at this point? That's my final question.
And we already received from our customers a lot of requests on this 22 technology nodes. And our understanding is this way and Peter you know that SMIC build up 28 nanometer fab pretty late, very recently. So our machine are more capable, more advanced in the industry. And the technology for that machine actually are capable of doing 22 nanometer. And we have been working on 22 nanometer more than a year and we already completed the baseline setup.
But now we are running off 20 high ks C plus type of performance. Some of our customers request us to try 22 production soon. We are working on this now.
Okay. Thank you very much, sir. That will be all.
Your next question comes from the line of Shihong Ng from China Renaissance. Please ask your question.
Hi, good morning, gentlemen. Two questions from my side. The first one regarding the operating expense OpEx. It has been going up pretty fast last 2 years, I can tell. When should we expect the OpEx to achieve some sort of steady state?
So can you repeat your question?
Okay. The OpEx has been growing up very fast last 2 years. So where should we expect the OpEx to stabilize?
Okay. Let me explain on the OpEx. As everybody could see, the OpEx has increased substantially in the past 2 years. If you look at the guidance for the Q1, it's around $250,000,000 to $255,000,000 That's a non GAAP. So the major two reasons behind that is the first one is about R and D because we are advancing our R and D project.
So R and D expenses is increasing. The second part is about the SMIC South because we are calculating SMIC South related expenses into the OpEx before the fab is officially set up.
All right. Second question on the capacity. I can tell that the Shanghai 300,000,000 actually the capacity has come down quite a bit in Q4. What's the reason for that?
Hi, Zhi. Just now I mentioned that for the first question from Randy that why the operation margin and getting better. And one of the action is for so many years, when the customer base is small, we use our R and D fab in Shanghai to run-in very small volume for this kind of 14 nanometer and 28 PolySonic Metal Gate Productions. And we have been running around 15,000 wafer to 20,000 wafer range for past 3, 4 years. But now we already have a fully fledged and manufacturing fab in Beijing that's a very big size And finally, we decided to merge the operation into the microfab in Beijing.
So we shut down the machines slowly after working with customers to relocate a product to Beijing to run a 5 manufacturing. And so for this kind of machines and currently we start and we'll relocate this kind of machine to Beijing and the newly set up FinFET5 if they are compatible to the more advanced technologies. And that's why you see the R and D fab productions going for lower and that's very true. And we're trying to totally shut down the production of this kind of legacy technology in R and D fab by the middle of this year or second half of this year up to the agreements of customers.
Okay. Got you. So we should not expect the fab to grow in Shanghai as we intermediate fab?
Effect. And now they will grow, but they do not grow 14 nanometer, 28 nanometer capacities. They will merge into the new wafer fab for FinFET. And just now we announced that for the second half of this year, we will have the mini line of FinFET manufacturing fab fully ready for production.
Okay. Got you. Okay. All right. Thank you very much.
Thanks, Zhi.
Your next question comes from the line of Bill Lu from UBS. Please ask your question.
Yes. Hi. Thank you very much. So I just want to be clear because you've got some moving pieces this year. If you assume that revenue this year is roughly flat, but grows quarter on quarter into the end of the year.
What should I expect for gross margins and operating margins by the Q4.
Hi, Bill. For the whole year and just now we already mentioned that we think the Q1 is at the bottom of the whole year for SMIC and we'll have more platform of products to ramp up as incremental revenues tied down to fill out the fab. And the whole year, we are targeting the high teens to 20% type of gross margin for the whole year. We see a down quarter for the first quarter and the beginning of this year and we say that our revenue overall will be tied together with the industrial trend. Are you there?
Sorry about that. So I think I'm a little bit unclear. So you're saying that gross margin in the first quarter is 20% to 22%. And by the end of the year, revenue is likely going to be at a higher run rate, but margin might be slightly lower?
Okay, Bill, you got the point. You really catch the point. Basically this way, when we ramp up and like the new wafer fab capacity like 28 nanometer technology, some other new technologies, At the beginning, their margin is not go for higher, it's below average. So that's very true in the industry. For new wafer fab running leading edge technology when the volume is very small at the beginning the margin could not be made up with the mature technologies.
And for example, if I spend really today stop all the production of the leading edge and we're only running the mature fab, the gross margin is much, much better than what we see today. And so when we have a higher volume of productions and we have more revenue, but in normalized gross margin could go for lower. Yes, that's very true, Bill.
Understood. Thank you. I guess, based on your comments, I was under the impression that maybe 14 won't be that big this year. Is the drag mostly coming from 28 then?
I did not really catch your points. Can you repeat it?
I thought maybe 14 nanometer revenue contribution this year will be fairly small. Is that correct? And if so, is the margin for that mostly coming from 28 nanometers?
Okay. Okay. I got your point. And we will ramp up production for 14 nanometer, but we do not expect the very big contribution from that volume. And so when you mentioned that the margin drag is mainly 28 nanometer, that's true.
And in previous quarter, we also say that and we really see the whole industry got oversupplied on 28 nanometer and 28 nanometer we build out very late. Now the machines are still at a peak of depreciation. So 20 nanometer is a really big burden for any fab for running big production.
Got it. Thank you very much. My second question is, Doctor. Liang mentioned a N plus one technology node that is under development. Could you explain that a little bit more?
Is that an iteration of 12 or is that the next node after 12?
Hi, Bill. Just now I mentioned that SMIC follow the customer strategies for leading edge technologies. They give us the timelines, they give us the request and we reply to them, we put up a project to follow through. And at this moment, the N plus 1 is our 2nd generation of FinFET based on customers' request.
Okay, thank you.
Thanks, Neil.
I would now like to hand the call back to IR Director, Tim Kaul, for closing
remarks.
In closing, we would like to thank everyone who participated in today's call and again thank all of your trust and support. Happy Chinese New Year. Thank you.
This is the end of SMIC's 4th quarter earnings conference call. We thank you for joining us today.