Welcome to Semiconductor Manufacturing International Corporation's fourth quarter 2018 webcast conference call. Today's conference call is hosted by Dr. Zhao Haijun, Co-Chief Executive Officer, Dr. Liang Meng 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 statement.
Good morning and good evening. Welcome to SMIC's fourth quarter 2018 earnings webcast conference call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter. Then our Co-CEOs, Dr. Zhao and Dr. Liang, will provide some business commentary. This will be followed by our Q&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 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 Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed with the U.S. Securities and Exchange Commission on April 27th, 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 know 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 2018 full year unaudited results, which are based on the summation of our unaudited quarterly results for the year of 2018. Then I will summarize our fourth quarter results and give the first quarter 2019 guidance. Revenue in 2018 was $3.36 billion, a record high, compared to $3.1 billion in 2017. Gross margin in the 2018 was 22.2% compared to 23.9% in 2017. Profit for the period attributable to SMIC in 2018 was $134 million, compared to $118 million in 2017. EBITDA reached a record high of $1.16 billion in 2018, compared to $1.12 billion in 2017. In the fourth quarter of 2018, our revenue was $788 million, a decrease of 7.4% quarter-over-quarter, mainly due to a decrease in wafer shipment in the fourth quarter.
Gross margin was 17% compared to 20.5%, mainly due to the low introduction rate in the fourth quarter. Non-GAAP operating expenses were $243 million. Profit for the period attributable to SMIC was $27 million, while non-controlling interest was $16 million of credits to SMIC's attributable profit. Moving to the balance sheet at the end of the fourth quarter, cash on hand, including financial assets, were close to $3.8 billion. Gross debt to equity ratio was 38%, and net debt to equity ratio was negative 4%. In terms of cash flow, we generated $377 million of cash from operating activities in the fourth quarter. Now look ahead into first quarter of 2019. Our revenue is guided to be down 60%-80% quarter-over-quarter, mainly due to low seasonality and micro uncertainty. Gross margin is expected to range from 20%-22%.
Non-GAAP operating expenses are expected to range from $250 million-$255 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from positive $10 million to positive $12 million, which are losses borne by non-controlling interests. The plan is 2019 CapEx for foundry operations of approximately $2.1 billion, mainly for the equipment and the facility in majority-owned Shanghai fab and FinFET R&D line. The plan is 2019 CapEx for non-foundry operations is approximately $106 million. Our plan is 2019 D&A is approximately $1.1 billion. Our 2019 gross margin is expected to be range of high teens-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 join us on today's call. Today, I will begin by highlighting the results of our fourth quarter and our annual 2018 unaudited results. 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 weighing on the macro environment, we are actively seeking growth opportunities through steady progress in expanding our customer base and reaching mature and specialty technology product makes and applications, and exploring 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 hand size 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 fourth quarter 2018, compared to 20.1% in the third quarter of that year, on the high end of our original guidance. For the full year of 2018, SMIC had a record high revenue of $3.36 billion, an increase of 8.3% year-over-year, representing our fourth consecutive year of growth. Gross profit in 2018 increased $6 million from $740.7 million in 2017 to $746.7 million.
Profit attributable to SMIC was at $134.1 million compared to $179.7 million last year. In 2018, we spent only $1.8 billion on CapEx compared to the planned $2.1 billion. In 2019, our planned CapEx is at $2.2 billion, which will be mainly used to build up our new advanced fab. Our new joint venture at 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 $2.2 billion includes the contribution from our joint venture partners. In fourth quarter 2018, the company received a capital injection of $965 million to our joint venture fabs.
Uncertainty and the limitations in the overall economic environment and the semi industry demand have trickled down to our customer and to us. The first quarter is rough for the industry and for SMIC across most segments as customer 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 eight-inch capacity will be full for the year as we have healthy mature nodes technology demands. We continue to refine and build out 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 back-side 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 an increase in new customers. Flash memory had been a very key growth driver in 2018 as revenue from NOR flash doubled in 2018 compared to 2017. We also began to ramp up NAND flash in the second half of 2018 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-inch 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 grow around 4% in fourth quarter 2018 compared to fourth quarter 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 fourth quarter 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 fourth quarter 2018 and grew 2.1% year-over-year. With the upgrade of our customer devices, IoT, and migration to 5G in the future, we believe we are in a position to benefit from the future market trends. There will be a pain before gain in this transitional period. Our aim is still to be a fundamentally strong company.
In the near to medium-term future, we must withstand the growth pains 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 and 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, Haijin. 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&D and business development. Since we always have very limited time left for Q&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 delivered our Version 1.0 process design kit for customer circuit evaluations. Reliability and yields have greatly 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 first 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 first generation FinFET portfolio is more comprehensive, and we have increased confidence in our competitiveness. Our second generation FinFET is our N+1 technology. Our N+1 technology development is on track, demonstrating good device performance and SRAM yield. 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 equipments in our new facility in Shanghai in Q2. 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 4G, LTE, and upcoming 5G, 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 the industry practice and market demand to assure both technology readiness and competitiveness. To conclude, we have made solid progress on FinFET. This can be attributed to our strong and capable R&D team. Through our team's continuous innovation and process optimizations, we are confident in our ability to capture future opportunities. Our team has made 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 offerings, and strong customer relations, we are on a 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&A session of this call.
Thank you, Dr. Liang. Today's Q&A will be hosted by our co-CEOs, Dr. Zhao, Dr. Liang, and our CFO, Dr. Gao. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Operator, please assist.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. 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 two 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. The first question is, my comments on the industrial growth, for SMIC side first to say with the trend. The industry for this year and overall demands, we should say are still there. We do not expect a drastic job of the industry overall for foundry. We really see the uncertainty and the worry about the customers at this moment from the fourth quarter last year, we start to see their reluctance of taking wafers to build up the inventory. They are trying their best to consume the existing inventory, we really start to see the inventory getting low, we already start to receive the second quarter orders to rebuild and refurbish this kind of inventory. Overall growth for the industry should be flat and some very low single digit type of growth.
You already observed the announcement from different companies. For SMIC, we will see that existing and mobile phone related demands and standard digital logic will be down definitely. For SMIC, in order to keep the growth type of trends, we add on the incremental business. That means the new business probably that we never run. Just now from my statement, I already mentioned that we start work on this kind of platform, more than seven new platforms from last year. Like the BCD charters
Like the CMOS imagers, like the advanced technology nodes for specialty NAND flash, and the high voltage AMOLED drivers. These kind of platforms are add-on and revenues and wafer orders on top of the existing platform as [inaudible] rerun in the past couple years. We also expand our platforms for 20 nanometer. Previously, we say that we have the Polysilicon, low power, RF. By now we have the [C+] , we also work with the other people on this kind of area. The total forecast for 20 nanometer, we're getting higher. With this kind of incremental business, we see that we'll maintain the growth trend, but not that much. Because overall, the first quarter, we already forecast that, the demands from last quarter is getting low, so we have to experience on the down quarter for the beginning of this year.
The second question, you asked that why with this kind of a reduced shipments and revenue, but the gross margin getting better. That's a very good question. Basically we have three factors there. The first one is, for Shanghai, the R&D fab, we have been using it to run 20 and 40 nanometer production. You know that's a very small size when they do advanced R&D research. Now we've put it to minimum running and slowly phase out the production. We dedicated the R&D fab to advanced technology FinFET research. With the closing down of the production there, we got a better performance in our operation. This is the first one. The second, just now Dr. Liang already mentioned for the mask shop. For the past two years, we have been building up the very advanced and expensive facilities for leading-edge mask making.
That is running. That's the cost operation. Now we start to see the mature, the technology, we start to see the business of mask making. They contribute, the benefits. When Dr. Gao, our CFO, just now mentions that we also have the income from others, big part of the others are come from mask shop. The third is the engineering efforts. We mentioned a lot of platform specialty technology development in the manufacturing group. Previously, these kind of efforts are 100% under the manufacturing and the production costs, manufacturing costs. Now we already separate this kind of specialty technology development efforts from the standard or pure manufacturing, so they are not allocated to the normal operation part, they group into the OpEx.
By this kind of factor together in our first quarter, and even though the revenue getting down, but we see a better gross margin. To be exact, our pure manufacturing, that means a standalone manufacturing for the mature technology nodes production in our eight-inch and 12-inch are the same. They are still running gross margin about 17%.
Okay. I appreciate that, Carl. 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. If that's a segment, what we should expect for 2020, if everything goes to plan to ramp into production, the capacity or contribution, if you can by this time. 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'll take a certain scale to get to breakeven or get to near corporate profitability.
Hi, 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. I apologize that we cannot give too much comments on that. We already say that we are building up the fab already, and we'll move in the machine in the second quarter of this year. We'll get mini line ready in the second half of this year. We also announced the CapEx for this year.
Okay. One final clarification. The OpEx in the first point about the cost from the Shanghai R&D fab and from the specialty technology, what would be the change in the OpEx? Is that, I guess, explaining the R&D increase in second quarter, but maybe how much would shift to the R&D line then?
Actually, just now I mentioned two factors. One of the factors that we shut down the production in the R&D fab. That save us operation margins. This one thing, because previously we run the 20, 40 nanometer production. In a very early stage, we introduced the customer to the R&D fab. We can't stop them, and even though very low volume, we have to maintain a fab and to run the minimum production in the R&D fab. Finally, we work together with our customer to relocate the production to Beijing Mega-Fab. That save us a lot of efforts and the cost in operation. Another thing that just now I mentioned, from last year, we started a lot of study and the development work on the mature technology for the new platform, like a CMOS image sensor, high voltage, MCU, memory, et cetera.
This kind of cost has been under the manufacturing cost, but they are pure R&D. Now in the first quarter, we group them into the OpEx. For Shanghai fab, actually, the effects already show up in the first quarter. Currently, we are already running very, should say, smaller production than before. We already allocate majority of the customers and the product to Beijing fab.
Okay. The mature technology, the shift, is that a shift to R&D? Like a certain amount of expense that we shift to R&D instead of cost of goods sold?
Previously, this kind of mature technology, they don't work between our high quarter TD and the fab manufacturing group. Majority runnings group into the manufacturing cost. Now since we already allocate all the efforts to a dedicated team and the efforts and activities, so this one of the area. To streamline the manufacturing yield improvement and the new platform development. That's one of the factor, not the major factors. That's one of the factor. Just now I mentioned that for the pure manufacturing in the first quarter, for the gross margin maintained as of fourth quarter, they are 17% for gross-
Okay
margin in the pure manufacturing. We have add-on revenues from our new mask shop, this kind of area, and then we have the top half additional percentage. That's why we forecast we will have 20%-22% gross margin in the first quarter. Yeah.
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 to take my question. The first question is a financial question. If you look your profit from the operation, you are making around $40 million loss in the fourth quarter versus around $5 million in third quarter. If you look your profit attributable to SMIC, you are roughly the same, $26 million. I see the non-operating side is quite changing quarter-to-quarter. Can you clarify, especially you have income tax benefit, not the expense this time. Can you further elaborate what's inside these two items, other income and income tax benefits? Thank you.
Hi, Leping. Happy New Year. Yeah, that's a very good question. Basically, this way, we have two. One thing you see the gross margins, when we run the lower revenue, we control the cost, everything very well. We have other revenues. Just now I mentioned that the other revenues come from our work with the mask shops, we also have the others with our joint ventures. One of the things we highlight a couple times, is for the R&D cost, actually, will be shared by the joint ventures. Because we developed the technology to run the production in joint venture. We are utilizing joint venture mode to get the CapEx and also to share the R&D cost. We treat this kind of thing also other incomes. In the meantime, we increase significantly the R&D on the leading-edge technology.
According to the plan and the government grant for R&D support also, I cannot say linearly prorated, but we're also getting higher. To answer your question that what's the other income, one of the thing is mask shop. We finally make the advanced technology in mask shop into business, so that we have income. The other things that we have the joint venture to share the R&D cost, but we treat this kind of sharing as other income. The number three is that we increase our R&D spending, prorated to this kind of total amount. We will have higher government grant to this technology development.
Let me add two additional points on the other income part. The first part is actually from our financial investment. If we calculate that at the end of 2018, that would be around $20 million. At the same time, we also have a bunch of financial asset, which is around $4 billion. That also injected some of the financial gains from the financial products.
Okay. Thank you. Very clear. My second question is about your leading-edge progress. Now you are offering and you have two choices. You process 14 and 12 nanometer under development. How you ask your client to choose between the 14 and 12 nanometers? 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, Leping. We already announced that we are getting into production in 2019. Our customer first worked with us on the 14 nanometer. Definitely, we are also working with them to further down on the 12 nanometer. The production first will be 14 nanometer.
It's the same group of customer using your 14 and the 12 nanometer, or will it be different? Yeah.
For applications and different customer. We do have the same customer working with us on both 14 nanometer and 12.
Okay. Thank you. Very clear.
Yeah. Thanks, Leping.
Your next question comes from the line of Peter Chen 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 their customer to the 5 nanometer. As they say that, what is your view on that, and what's your strategy to compete with the competitor's 5 nanometer node? Thank you.
Okay. Yeah. Hi, Peter. Happy New Year. That's a very good question. Yeah, that's very good. We like to see our leaders in the industry to advance very quickly. Every year move to a new technology nodes. That gave a lot of push to the growth of this industry. We indirectly benefit from these kind of advancements. For SMIC, we are serving our customers and the investors. We do the things to benefit our customer and the investors. Our customer ask us to develop a leading-edge technology to get the best results for their market segmentations. SMIC just follow suit to deliver on schedule. At this moment, our customer hope that SMIC can move faster, but what they need SMIC to do first is still on this year 14 nanometer and 12 nanometer.
The hope was that after we finish this kind of technology nodes, we can also go on further. We'll try our best to serve our customers' needs.
May I take your comment as you also see the 7 nanometer as a transition node, not a long node. Long node will be like a 20 nanometer. Is that also the view of SMIC?
In SMIC, we consider it as a customer strategy. We do see that some customer really like to skip 7 nanometer directly to 5, other customers like to stay long on 7. We respect customers' choice.
Okay. Thank you. The other question is regarding your competitors, the presence in Nanjing. One of the advantage that SMIC has is you being local, serving the local customers. Having that proximity has been the differentiation advantage in my view. Your competitor is increasing its presence ashore. How would you deal with that, with that being an issue to your differentiation advantage in the China market?
Okay. That's a very good question, even though a little bit sensitive, generally we do not comment on our peers in the industry. 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. SMIC, we never treat ourself as a local company, just our name. Our name, SMIC, is International Manufacturing Company. Many years has been running 50/50 overseas customers and local customers. We try our best to balance the foreign customer and the local customers. We see it this way. We see SMIC no different from other companies in China, we do not see them local. They are also international company.
At this moment, what we want to see, we do not see very big change in SMIC's strategy. We still like to follow our customers' request. In the meantime, we also diversified our technology service. Previously, at SMIC, we got limited resources. We mainly focus on the COT, we focus on the digital and IC technologies. Now, since we could not move every year to build up one 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. We start to ramp up high voltage drivers and the IoT, ultra-low power, CMOS, RF, and CIS.
We got a larger base, so that is the way for SMIC to serve better our customer, both local and internationally. In general, we should say, and we are happy to see the industry getting better in mainland China. It's a benefit that SMIC in overall supply chain and customer base.
Okay. Thank you. That's great. One final question. You commented on various nodes. Just want to hear, are you still pursuing the 22 nanometer, is that still strategically important to SMIC at this point? That's my final question.
We already received from our customers a lot of requests on these on 22 technology nodes. Our understanding is this way, Peter, you know that SMIC build up 20- nanometer fab pretty late, very recently. Our machines are more capable, more advanced in the industry. The technology for the machine actually are capable of doing 22 nanometer. We have been working on 22 nanometer more than a year, and we already completed the baseline set up. Now we are ramping up 20 high-K 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'll be all.
Your next question comes from the line of Xie Hongcheng 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 two years, I can tell. When should we expect the OpEx to achieve some sort of steady state?
Can you repeat your question?
Okay. The OpEx has been growing up very fast last 2 years. When 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 first quarter, it's around $250 million-$255 million. That's a non-GAAP. The major 2 reasons behind that is, the first one is about R&D, because we are advancing our R&D project, R&D expense 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 millimeter fab, actually, the capacity has come down quite a bit in Q4. What's the reason for that?
Hi, Xie.
Hey.
Just now, I mentioned that for the first question from Randy that why the operation margin getting better. For so many years, when a customer base is small and we use our R&D fab in Shanghai to run a very small volume of this kind of 40 nanometer and 20 polysilicon high-k metal gate productions. We have been running around 15,000 wafer to 20,000 wafer range for past three, four years. Now we already have a fully-fledged manufacturing fab in Beijing that's a very big size. Finally, we decided to merge the operation into the mega fab in Beijing. We shut down the machines slowly after working with customers to relocate a product to Beijing to run a mass manufacturing.
For these kind of machines, we'll relocate this kind of machine to Beijing and the newly set up FinFET fab if they are compatible to the more advanced technologies. That's why you see the RD5 productions going for lower. That's very true. We're timing to totally shut down the production of this kind of legacy technology in RD5 by the middle of this year or second half of this year, up to the agreements of customers.
Oh, okay. Got you. We should not expect the fab to grow as in Shanghai 300 millimeter fab.
No. They will grow, but they do not grow 40 nanometer or 20 nanometer capacities. They will merge into the new wafer fab for FinFET. 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.
Oh, okay. Got you. Okay. All right. Thank you very much.
Thanks, Xie.
Your next question comes from the line of Bill Lu from UBS. Please ask your question.
Yeah. Hi. Thank you very much. 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 fourth quarter?
Hi, Bill. For the whole year, just now we already mentioned that we think the first quarter is the bottom of the whole year for SMIC, we'll have more platform of products to ramp up as incremental revenues item to fill out the fab. The whole year, we are targeting the-
High teens to 20
High teens to 20% type of gross margin for the whole year. With the down quarter for the first quarter and the beginning of this year, we say that our revenue overall will be tied together with the industrial trend. Are you there?
Okay. Yeah, sorry about that. Hi. I guess I'm a little bit unclear. You're saying that gross margin in the first quarter is 20%-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?
Bill, you get the point. You really captured the point. This way, when we ramp up and the new wafer fab capacity, like 28 nanometer technology or some other new technologies. At the beginning, their margin is not go for higher, is below average. 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 met up with the mature technologies. For example, if SMIC really today stop all the productions of the leading edge, and we're only running the mature fab, the gross margin is much, much better than what we see today. We will have a higher volume of productions, and we have more revenue. The 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? If so, is the margin drag-
Yeah, that's true
mostly coming from 28 nanometers?
Okay. Okay, I got your points. We will ramp up production for 14 nanometer, but we do not expect the very big contribution from that volume. When you mentioned that the margin drag is mainly 28 nanometer, that's true. Previous quarter, we also say that. We really see the whole industry got oversupplied on 28 nanometer. 28 nanometer, we build out very late. Now the machines are still at the peak of depreciation. 28 nanometer is a really big burden for any fab for running big production.
Got it. Thank you very much. My second question is, Dr. Liang mentioned a N+1 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 requires, and we reply to them. We put up on a project and to follow suit. At this moment, the N+1 is our second generation of a FinFET based on customers' requires.
Oh, okay. Thank you.
Thanks, Bill.
I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.
In closing, we would like to thank everyone who participated in today's call, and again, thank all of your trust and support. Happy Chinese New Year. Thank you.
This is the end of SMIC's fourth quarter earnings conference call. We thank you for joining us today.