Welcome to Semiconductor Manufacturing International Corporation Second Quarter 2018 Webcast Conference Call. Today's conference call is hosted by Doctor. Zhao Haijun, Co Chief Executive Officer Doctor. Liang Bong 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's presentation, we'll 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 Koh, Director of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's Q2 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 www.smics.com under Investor Relations in the IR Calendar section.
Let me also remind you that the presentation we'll be making today includes forward looking statements. These statements and other comments are not guarantees of future performance, but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the 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. 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, Keith. Greetings to all our listeners. First, I will highlight our second quarter and the first half twenty eighteen results and then give Q3 2018 guidance. In Q2 2018, our revenue was $891,000,000 including the recognition of technology licensing revenue of 53,000,000 dollars an increase of 7.2% quarter over quarter. Excluding the technology licensing revenue, revenue was $838,000,000 an increase of 15.8 percent quarter over quarter, mainly due to an increase in wafer shipments in the 2nd quarter.
Gross margin was 24.5 percent. If excluding the technology license revenue, gross margin improved 4.1 percentage points quarter over quarter to 19.7%, mainly due to the increased utilization and product mix change in the 2nd quarter. Non GAAP operating expenses were $270,000,000 Profit for the period attributable to SMIC was $52,000,000 while non controlling interest was $20,000,000 of credit to SMIC's attributable profits. Moving to the balance sheet. At the end of Q2, cash on hand, including financial assets, were 2,700,000,000 dollars Gross debt to acquisition was 45% and net debt to acquisition was 10%.
In terms of cash flow, we generated $111,000,000 of cash from operating activities in the Q2. If we look at our first half twenty eighteen, our audited results, our revenue was $1,700,000,000 gross profit was 438,000,000 dollars and EBITDA was $637,000,000 all achieved record highs. Now looking ahead into Q3 of 2018, our revenue is guided to be down 4% to 6% quarter over quarter, mainly due to technology licensing revenue recognized in the Q2. If closing the technology license revenue, our revenue is guided to be flat to up 2% quarter over quarter in the Q3. Gross margin is expected to range from 19% to 21%.
Non GAAP operating expenses are expected to range from $232,000,000 to $238,000,000 Non controlling interest of our majority owned subsidiaries are expected to range from positive $90,000,000 to positive 21,000,000 dollars which are losses be borne by non controlling interest. We reiterate our planned 2018 CapEx for foundry operations of approximately $2,300,000,000 of which approximately $1,300,000,000 are expected to be spent for the expensing of capacity and approximately $400,000,000 for R and D equipment. The planned 2018 CapEx for non foundry operations are approximately $137,000,000 mainly for the construction of employees' living quarters. Our plan is 2018 D and A is approximately $1,100,000,000 If excluding the technology license revenue, our 2018 gross margin is expected to be in the high teens. I will now hand the call over to our Co CEO, Haijun for general remarks.
Thank you, Yoonga. Thank you all for joining us on today's call. SMIC is in a period of transition and preparation. We are making encouraging progress in advancing our technology, building up our technology platforms and forging partnerships. At the same time, we are on track to grow high single digit annual revenue as demand and the utilizations recovered in Q2.
And as we continue to enhance our technology platforms and push forward on R and D. In the 2nd quarter, our total revenue grew 7.2% quarter over quarter and 18.6% year over year. We met our Q2 gross margin guidance on the high end as utilization increased. When excluding the US52.8 million dollars from the technology licensing, our revenue increased 15.8% Q over Q and 11.5 percent year over year. Revenue growth was mainly from the sequential increase of 28 nanometer, 55 nanometer and 0.18 micron.
We benefited from the recovery of smartphones and tablet PC business. Meanwhile, newly growing home appliance business also added some incremental revenue. Our revenue from these 3 segments grew 27% sequentially and 32% year over year. Gross margin excluding technology licensing revenue was at 19.7% an increase from 15.6% as we recovered from low seasonality and utilization. Through rigorous planning and efficient execution, we have made good progress on expanding and enhancing our mature nodes platforms.
Our power management business platform is among the leading in the market share in the foundry industry. Power is one of the key revenue drivers for this year and we see good momentum. Our revenue from power, CIS and nonvolatile memory grew 5% sequentially and 34% year over year in the Q2 of 2018. Our revenue in the Q2 from the China region grew 53.2% year over year and WAN excluding the technology license revenue grew 14% sequentially and 38% year over year. As the preferred foundry partner in China, we are positioned to benefit from the growth opportunities of China IC market.
China continues to represent single largest market from consumer electronics with a CAGR of 6% from 2016 to 2021. And the home appliance are the largest sub segments within consumer electronics and represent one of the largest IoT opportunities for us. We already see an increase in demand in home appliance and other consumer applications from our 2nd quarter revenue with 12% sequential growth and 18% year over year growth when compared to Q2 last year. As we look into the second half of this year, our business has stabilized and the margins are looking better than previously expected. As mentioned last quarter, we target revenue growth in high single digit percentage, which is in line with the foundry industry growth rate.
We also target a positive annual net profitability attributable to shareholders. We are pleased to adjust our previous gross margin target from teens percentage now to high teens percentage when excluding the technology license revenue. In closing, we are in a mid days of transition. It still takes time to be fundamentally strong, but we are confident that we are well positioned in China. We'll secure our position by working closely with our customers, setting up long term relations and aim to capture the market opportunities presented before us.
Moreover, we'll continue to expand and enhance both our mature and advanced technology platforms to provide our customers with comprehensive and competitive services in the mainstream foundry I will now turn the call over to our Co CEO, Moon Sung for further comments.
Thank you, Haijun, and good morning, everyone. Thank you for joining us today. I would like to take this opportunity to share the latest progress on R and D and business development. Before that, I want to thank our hardworking employees that worked tirelessly in the past quarters, I have witnessed our engineers pulling consecutive late nights to help the company achieve its goals. As we find SMIC culture has begun to evolve.
Because of our team's execution, we have seen increased customer engagement and tighter relations with partners. I'm happy to announce we have reached yet another important milestone in our R and D. In addition to our 28 nanometer TALI SiO N and HKC, our HKC plus technology development is now complete. Our 28 nanometer HKC continues to ramp up as its year meets industry benchmark. As we complete our 28 nanometer HKC plus R and D, we target tighter production by the end of this year.
We continue to enhance our 28 nanometer performance outlook and expand portfolios and derivatives to address applications such as application processes, radio frequency, high voltage controllers and embedded memory used in consumer, Internet of Things and auto related products. We target to become more competitive by narrowing the gap with leading peers on these derivatives. We are pleased to say that we have achieved significant progress on our 14 nanometer FinFET development. Now R and D, our first version of FinFET technology is now ready for business engagement. We are in the process of customer assessments, IP alignments and reliability verification.
We are on target to start rich production in the first half of next year. I'm confident to say that we are now at full speed to further expand our FinFET technology portfolios. To conclude my remarks, today, we continue to fulfill our customers' needs by providing more comprehensive and competitive technology platforms. We strive hard to accelerate, execute and deliver for the sustainable profitability and growth of the company. As we are preparing for the future, we accelerate our technology and solidifying partnerships to secure our position as the preferred foundry partner in China.
Thanks to all our listeners for your continued support and look forward to giving you our future developments. I will now hand the call back to Tim for a 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 and 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.
Thank you. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Okay. Yes, thank you. Good morning. Yes, first question, just a couple of parts to it. For the second half outlook, for Q3, just the factors to guide flat to up 2% after the strong 16% rebound in 2nd quarter.
If there's applications or technology nodes that are relatively stronger in any areas that are weaker? And the second part of that, in the full year, where you mentioned the high single digit growth, does that include the $150,000,000 license, as it would have some implications for the 4th quarter implied guidance? And then the final part of the question is just factoring in the gross margin and OpEx. It looks like it will be loss making, but I'm curious if you could talk about outlook for some of the other items like the grants, whether you can still maintain breakeven?
Hi, Randy. Nice to get the questions. And basically you covered the overall business things for
the second
half and taking into consideration of the first half then we come to the over year forecast. Okay. The first one, you asked why the Q3 is a flat after a very strong rebound in the Q2. And we should say this way SMIC is in a very good situation in utilization. So second quarter we already found this kind of utilization, already made this type of utilization, so quite difficult to make the Q3 even more, even higher utilization unless we build up more capacities.
And traditionally if you look at the backtrack of many years, I might see the Q2 always be the best season of the year and the 3rd quarter more or less the similar sequential. And we should say we're in a very good situation, but quite difficult to adding more because we are running at full capacity stage. And I suppose the whole year you mentioned that we forecast high single digits. Yes, that's true. And we might have a very strong pricing pressure for the mobile phone related type of business.
That's the overall in this market and so to make a full use of the capacity with a very high utilization and taking into the overall situation in the market on the average and this year we could now expect very high growth in the revenue. Especially when we think about it, there are a lot of transitions that means a 40 nanometer loadings transfer to 28 nanometer loadings, 55 nanometer loadings we converted to CIS, memories, IMCU, Hi V and this kind of thing they take time to make it 100% converted. That's in a conversion stage, that's why this year we do not target that high. And your last question is whether this company can make it realize the promise that it's a breakeven profitable. Yes, that's our guidance to our shareholders that will make the company profitable.
And we're already running now in August and this year got 4 months left. So the visibility to the end of this year at least we see through the Q3 and the early Q4 the situation is there and we have the confidence that and we can make the, just now you used the word breakeven and make the company profitable.
Okay. And then the second question I wanted to ask for the blended pricing, it looks like it dipped in first half. And I think you did talk about more pricing, just ongoing pressure. Could you give a view just pricing from here now that you're operating pretty full on capacity, if you're seeing, I guess, on both areas, firming pricing on mature nodes. And then from the 28 work you're doing, if any potential that can start to lift as you bring out more HKC or HKC plus
And for the pricing things, everybody knows for 8 inches and the price stabilize and the demand is over the capacity that is in a very solid situation. But for the 12 inches when everybody knows the overcapacity situation in 20 nanometer technology knows and when customer want to move and from 55 nanometer and 40 nanometer to 28 nanometer technology and on the average of the market pricing and gross margin is getting lower, that's the situation. So SMIC we are balancing both. On the one hand side we need to support our customers technology transfer from the legacy technology of 14 nanometer and 55 nanometer to 28 and in the meantime we need to consolidate the other part running to make sure that they cancel out each other so that we can guide the overall revenue and in the same time maintain the profitability. 20 nanometer, yes.
And we see the pressure from the market on pricing, yes.
Okay. And then finally to clarify on the $150,000,000 license, when you mentioned high single digit growth, is that including the RMB150 1,000,000 or you'll grow high single even excluding that license fee?
Yes, including that.
Okay. All right. Thanks a lot.
Thanks, Randy.
Your next question comes from the line of Liping Huang from CICC. Please ask your question.
So I have two questions. So the first question about the 14 nanometer. So can you help us to understand what does the ready for business engagement actually means from the technology perspective? And what's your plan to develop your 14 nanometer business? And the second question is, what's your plan beyond the 14 nanometer?
Thank you.
Thank you, Mr. Huang. That is a very good question and it's also not easy to clarify. But let me try my best to answer your question. The definition of the customer engagement that means we've reached our process as well as we deliver our version 1.0 PDK for customer to do the circuit evaluation.
So that is we call the business engagement start. And of course, we also qualify our process already. Then your second part of the first question is our business plan, okay? So other than the high speed AP application process, I think the mainstream mobile application are just migrating from 20 nanometer to 14 or more advanced nodes. So we do see growing mobile and wireless connectivity with the more 4 gs, LTE and the future 5 gs in China, where we think our customer traditional have strong demands in their areas.
And in addition to mobile application, we are also seeing demands from emerging applications such as AI, IoT, automotive and industry sectors. So we will plan to expand our 14 nanometer portfolios to cover those areas that I just described. And your second question actually is also very important. I've been thinking this for long time. After the 14 nanometer, there are many nodes like 10 nanometer, 8 nanometer, 7 nanometer, 6 nanometer, 5 nanometer, some people even have 4 nanometer.
So indeed, it's a bit confusing for technology node naming and contents. We were based on SMIC customers' requirements as well as the internal capability to define our 2nd generation FinFET. Of course, we will also benchmark industry practice and market demands. The most important thing, I think we will assure both technology competitiveness that means PPAC, Power Performance Area Cost and as well as the SMIC, the long term business growth and that will determine and define our next generation FinFET technology. I hope I answered most of your questions.
Yes. Thank you very much.
Your next question comes from the line of Charlie Chan from Morgan Stanley. Please ask your question.
Hi, Doctor. Jiang and Doctor. Gao. So my first question is more about near term. Can you comment a little bit on the second half demand by end markets?
Because recently, we are seeing some noise about same comp buffer demand no matter from automotive vendor like businesses and also the Microchip also reported kind of a bearish outlook. So can you give us some color about your second half business outlook?
Hi, Charlie. Thank you for the questions. Actually what we saw at this moment and the demands just stabilize. We do not see obvious downtrend. And for SMIC, we are no debt big size, you know that Charlie.
And we've diversified our mature technologies. Just now in my quarterly review I already say that we expand our technology platform in the materials such as analog power, BCD, high voltage driver, CMOS, C major, memory, MCU, IoT, these type of things And we are in the transition stage. When this kind of platform fully in position and we expect from IC point of view, we expect SMIC's demand will getting much higher than today and to fulfill our expansion plan. And at this moment, my comments for the market for the mature technology nodes is that it stabilized. And we know that for the 8 inches the capacity is still in a very shortage to support the analog power and the power devices.
And for 12 inches we really see the high V's and IoT, CIS in high demand. And you are right, we see the stabilization of LED downturns on the competitiveness of memory, standalone memory, especially for now flash. But for SMIC, the exposure to this area is not that big. And we also have the conversion of our now flash convertible to the technology nodes just now I mentioned.
Okay, thanks. And next one is more about your mid long term plan, right? So it's about your capital intensity, right? So now currently, company is still investing.
So what will be
the long term capital intensity if you want to benchmark in the foundry peer TSMCs at 25% to 30%? And what does that mean to your mid- to long term cash flow and some recent plans? So actually, I'm curious, right, since you are converting your 40 and 55 nanometer capacity to 28 nanometer? Why do you still need to spend such high CapEx for this year?
Charlie, this year we say that we just now and Doctor. Gao already specified the total spending of US2.3 billion dollars this year for CapEx and we split this kind of spending a part of the 0.4% for the new equipment for leading edge technology R and D and the remaining to build out the pilot lines for the FinFET manufacturing and we do not build out that much for 28 nanometer. Currently, we should say that SMIC size is small. We account for 5% of the total foundry markets only. But our customer demand is way above this 5% capability and we do not build up capacity for potential market, but build up the capacity for the true customer demands and we reach strategic alliance with our customers and both the leading edge and mature technology nodes and then we make the long term like a 3 years of planning and then we gave the promise that we will build up the capacity accordingly.
So for this year, we have this kind of spending and for next year, the more or less the visibility now is to see 3 years and we expect the similar type of spending year on year. That's mainly to support our customers' demands and in the meantime for a very stable and healthy growth of SMIC in capacity.
Okay. Thanks for taking my question. Very solid execution for last quarter.
Yes. Thanks.
Your next question comes from the line of Rick Hsu from Daiwa Securities. Please ask your question.
Yes. Hi. Good morning. This is Rick. Thank you for taking my questions.
My first question is a bit housekeeping. In the Q2, how much the subsidies on the government did you guys receive in the Q2?
Hi, Rick. I like this question to our CFO, Doctor. Gao, to give you the
answer. Okay.
So we are seeing the R and D expenses has increased since the beginning of this year. So if you look at our 2nd quarter R and D expenses to sales ratio is around 20%. So the R and D funding that we have received in the second quarter is around US19 $1,000,000 and for the full year, we are expecting to have roughly US100 million dollars for the R and D funding.
Great. Yes, that's very helpful. My second question is regarding your 28 nanometer development. So you mentioned about the price competition because this capacity is still underutilized industry wide. So I'm a bit curious, could you give me a could you give us more guidance about your $28,000,000 revenue contribution in Q3 and also the trend toward second half of next year.
I know you did a pretty good job in the second quarter. I think it rose to almost like high single digits. So will you expect this rise in trend to continue in Q3 and Q4?
Hi, Dave. We are running our 28 nanometer loading to customer demands. And as you said and Justin also mentioned the same, 20 nanometer in the worldwide overcapacity and the pricing game is very high. And so we do not really push very hard for the ramp up of 28 to the maximum and capacity stage. We just balanced just now we say that we like to achieve a balancing loading both 28 and the other technology node and the specialties so that we can meet our guidance of the gross margin.
For 28 nanometer revenue for this year and we'll maintain as mid single digit percentage.
All right, great. Thank you so much. Just one quick follow-up. When you start to commercialize your HKC plus I assume starting to commercialize in Furotech next year. Can I assume your 28 nanometer revenue contribution will accelerate in 2019 to double
digit? At this moment, our planning is to maintain the gross margin for the overall, we do not have the aggressive plan to push very hard to the high volume of 28 high key Metal Gate C plus even though we have the demands there, but we need to balancing both. Okay, great. Thank you so much. Yes, those
are all my questions.
Okay. Thank you. Great. Yes.
Your next question comes from the line of Bill Lu from UBS. Please ask your question.
Yes. Hi. My first question is on technology. It was in the news that SMIC order a EUV tool and it will be delivered in 2019. I'm wondering if you could talk a little bit more about your strategy in terms of using that EUV tool.
What is the timing for production? What now will it be? Thank you.
Okay. That's a very good question as well. We don't comment on the procurements of any specific equipment. And what I can say is we don't have problems of purchasing equipment from our vendors. So we will carefully
make the
equipment procurement plan based on our needs. That is the things I can tell you. But you asked a specific question about which note to use the EUV. I think that is depends on each company strategy. As I mentioned earlier, the PPAC, the last one, C, the cost is very critical, of course, area.
The EUV will help area shrinkage as well as cost reduction if the EUV technology mature. The part I believe most company understand this. For SMIC, which node will use the EUV that is still under debating, okay, because of area reduction and cost benefit at this moment still not very clear. What I can see is probably if we think our 14 is N node, our N plus node will be our next one. And EUV will use probably at N plus 2 nodes.
And N plus 2 node in which is 5 or 6 or 7 really not decided yet. That's all I can tell you at this moment.
Great. That's very helpful. My second question is on your growth outlook. This year, the revenue growth is a little bit below your long term guidance. I'm wondering if we can talk a little bit more about 2019.
Do you think there's a possibility that you get back on the trend line? And secondly, you've talked about some of the conversions and capacity being an issue. How do we think about that capacity next year? And what nodes can we debottleneck next year? Thank
you. You.
SMIC has announced a couple of constructions of new wafer fab shells. We have Tianjin, we have Beijing and Shenzhen and Shanghai. Shanghai won specialized in the FinFET. Next year we will see low volume ramp up. That's the FinFET portion.
But for Tianjin, some legacy fab will ramp up 8 inches At this moment, not only limited by the supply of the machines and the delivery of the machines these days become very long lead time. And basically what we want to go for a very conservative and solid growth in the mature node and so far we already have very big customer base demands for 8 inches 8 inches is in the shop supply. But just now I mentioned that even though we want to expand by the supply of 8 inches both the brand new and the second hand are very, very long lead time. And so next year we do not see a very big jump in this kind of capacity. For 12 inches just now we mentioned that for 20 nanometer we'll maintain the similar capacity because the oversupply stage for 20 nanometer overbuild capacity type in the market.
And what we expand for 12 inches last year mainly on the area we have very strong customer demand and market demands. We mentioned a couple of segmentations just now. For this kind of area, next year we will see a ramp up and we're mainly buying the machines to cover the missing part. That means a lot of capacity converted from the original logic production line, but we need other unique tools to cover that, so that we can run analog power, CIS, MCU and the standalone memory, high V driver type. So we will see the mature nodes next year like 55, 65, 40 nanometer will do the transition and that capacity will see increase mainly to cover make full use of the existing logic, EMI station to meet customers' requests in the market.
Yes, thank you.
In general we do now see a very big jump in the capacity building.
Okay. Do you think you
could clarify a little bit more on the mature 12 inches much capacity might increase next year?
We do not have a solid number, because that need a high board director's approval and our 12 inches wafer fab currently we only have 2. In Shanghai we have 1 R and D fab and that's up to 15,000 wafer per month we are running already running for capacity, additional capacity mainly for R and D. And for Beijing we have the mature fab, the capacity is 50,000 wafer per month and currently running full capacity. And for the 2nd phase of Beijing, that's the joint venture. We already fulfill the first half and the only missing part in SMIC inside the that means inside the fab shell, inside the fab only have the Beijing Phase 2 that can be filled out next year.
Thank you. Sorry, can I
ask one last follow-up on that topic? So if I also think about the company getting back on a higher growth trajectory, should I be looking at really a bigger increase in 8 inches at some point in the future as well as 14 nanometer ramping up? Are those the key growth drivers maybe 2019 beyond or what should I be thinking about?
I see currently we can say that we more or less build we build up the things balance type of capacity, match our technology and strengths. And so for the mature technology nodes, we do have more customers than our capacity, but we need to build up the fab and also take a very long time to get a machine. And so we cannot expect mature technology nodes to get a very high percentage of growth next year. For the leading edge just now I already say that for 28 nanometer overall, I mean in the world technology node, the capacity is seriously overbuilt. And when we move to the FinFET and we just build out capacity to meet our customers' request, we will slowly build out customer base.
So in that sense, we do not really build up at a very high pace on this kind of capacity. We should say overall SMIC will go for very solid and healthy growth rate in the capacity build up and depends on customers' request and our competitiveness in markets.
Got it. Thank you very much.
Your next question comes from the line of Zhehun from China Renaissance. Please ask your question.
Hi, good morning, gentlemen. Two questions from my side. The first one regarding 28 nano. What would be the long term strategy going forward? Should we expect more derivative solution coming out like the 22 nano or 22 nano FD SOI?
And then the second question would be on 14 nanometer. What are the products that you guys are targeting initially and when we should expect revenue coming out from 14 nanometer?
Okay. Mr. Lin, let me try to answer the first question. And for the second part of the second question, I will about the revenue of the 14, I will leave to Doctor. Zhao to answer that.
So let me try to 28 nanometer technology. We think 28 nanometer will be a long note, okay, particularly for high ks metal gate. So we are working closely with our customer to roll out multiple enhancement of the 28 nanometer HiKM MLK. And as Doctor. Zhao mentioned, in fact, for SMIC, the technology, 28 nanometer high ks Metal Gate Technology is not a bottleneck in terms of process period.
The more important is because 28 has been such a long node, so the worldwide capacity is overbuilt. But we still think there are other derivatives for the future business opportunity. So such as
like AP
and Consumer RF, high voltage driver, embedded in unwanted memory and as well as auto grade products. So we think there are still good opportunity business opportunity over there. So by doing that, we think we could utilize our capacity and also narrow the gap with the leading peers on those derivatives and become more competitive. And you asked about 22 nanometer. 22 nanometer, we also have 22 nanometer in our technology portfolio.
At this moment, our 22 nanometer development is nearly complete. But our schedule and customer engagement were based on customer actual needs and the market demands as well as SMIC overall 28 nanometer ramp up trend. So that is my question about 28 nanometer, 22 nanometer. Then your second question, your first half of this year's Okay. So I will give the call back to Doctor.
Zhao to answer your second question about its revenue contribution about $14,000,000
Okay. And at this moment, we are working closely with our customers on the new products design and it takes time to guide the products in and based on the current schedule, we expect the revenue of 14 nanometer start guiding in the later part of next year.
Yes. I think that's probably the good answer because our as we said, our 14 nanometer ramp up will start first half next year with a small volume of course, right? So to project those revenue contribution is a little bit difficult to see at this moment.
Yes. And Zee, a little bit more comments on the 28 nanometer technology or another so called 22 nanometer is this way. It is very important technology now SMIC has put in a lot of resources and we compare it to the long nose of 35 nanometer and a 0.18 micron technology. You know that 0.18 micron technology aluminum today is still the very big part of every foundry, very, very strong and this is still the capacity is in shortage. But 0.8 micron technology has been there for almost 20 years, it is long nodes and another 65 nanometer currently is also in a shortage in high stakes because it's another long nose.
It's just before the transition to the Immersion scanner and we really believe at 2822 we consider that's a same nodes will be a long nose, maybe in the next 20 years, continue to be there. But it takes time to absorb the current overview capacity. For SMIC to stay with a very healthy momentum is that we do not overview additional things, But we need to deepen our technology understanding and platforms diversify guiding customer base and for the future we still have very big hope there. At this moment, we will also do just now we say that mid single digits type of percentage revenue on this technology nodes, but just maintain very high stage on this technology volume.
Yes. Sounds great. And last question from my side. Do you expect 14 nano to be a bigger than 28 nano from SMIC's perspective?
Biyo, could you say your question again?
Yes, yes. We just expect 14 nano revenue potential will be a lot bigger than 28 nano for SMIC's case.
Let me try to answer part of that. I do believe because of 14 nanometer and 20 nanometer in terms of technology they are very different ingredient in there. 28 high ks metal gate is the last planner high performance low power planner technology 28 or 2022. But for the FinFET that's a different thing. FinFET will be have a technology shrinkage plus higher performance as well as lower power.
So to compare the 2018 and 14 lifetime, I believe we think 14 FinFET should have longer nodes, longer lifetime than 28. But of course that it depends on the application as well. So depends on those mainstream mobile migration. Right now mainstream mobile application start from the 14 nanometer migrate to 28. Then if they migrate to 14 faster, or the cost is more justified than we believe the speed, the migration speed will be faster.
So to maintain the 14 nanometer PPAC advantage as well as the low cost is very important for SMIC and as well as for the industry Technology Migration. That's my comments.
Question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question.
Yes, hi. Thanks for taking my questions. First of all, I just had a quick question on R and D spending. It has gone up quite a bit as the focus on leading edge has come back in the last couple of years. What do you think is the optimal level to support your ambitions, especially on 14 nanometer and beyond?
And now that we are tuning down the expansion in terms of capacity on 28 to adjust to market reality, will we also think about adjusting R and D expense to kind of adjust to slower industry revenue growth or that is still going to continue regardless? That's my first question.
Gohu, could you specify your question again about the R and D part?
Yes. So I was asking, R and D has stepped up quite a bit in the last couple of years. Are we expecting this to continue to move up in the next couple of years as we get into closer to 14 nanometer? 2nd part of that is, if the newer nodes are slower in terms of ramp up, would we adjust down R and D spending just like we are adjusting down the capacity spend or R and D spending is going to move up regardless of the ramp up of the new process nodes?
Okay. Let me try to address this one, okay? The R and D spending definitely is not uncontrolled, okay? R and D spending were based on our revenue and as well as our gross margin consideration. At this moment, the reason our R and D spending is higher because we try to speed up our 1st generation FinFET technology.
Beyond that, actually the 2nd generation, 3rd generation FinFET, it doesn't need to build doesn't use the whole new equipment. There's a lot of commodity equipment could be used. So R and D spending will increase slightly, but not as rapidly as you can see recently. That's my comment.
Okay. That's very helpful. My second question is on all the trade wars and tariff. I think there's been a lot of discussion about that. Could you talk about what has been your feedback talking to both your customers, both the non China customers as well as China customers, as well as maybe with your equipment and material vendors also, many of them are from the U.
S. As well. Talk about what has been your feedback over the last 3, 4 months while this has been in a very high degree of focus?
Hi, Gokul here. Here is Haijun. Yes, we saw the impacts are very limited, because SMIC does not produce the end products and our percentage in overall IC world is also quite limited. And at this moment we just carefully and observe the development of the situation internationally, but we strictly follow our commitment to our customers. And SMIC in China actually is an international company.
We are listed in Hong Kong ADR in states and we have maintaining a very good balance between the overseas customers and domestic customers in the past many years. We do not comment on specific equipment or materials, but at this moment, we do not made up any problems with these kind of things and we do not see in the short term such kind of problems. But just now I mentioned that we worked very carefully on the development of the situation.
Okay. That's very clear. Just one more clarification, if I may, on one of the earlier questions. You mentioned that the high single digit growth for 2018 is including the tech licensing. Does it imply that in Q4, we are kind of expecting sequential decline in revenues for wafer revenues.
Just wanted to understand what is the rationale behind that given in the last few years, Q4 has been largely flattish or even higher than Q3? Thanks.
At this moment, we do not have the full visibility on the 4th quarter. Tentatively just now you already calculate the guidance we gave, you run up certain conclusions and we haven't reached that conclusion yet. On our side, we are still work with our customers. At this moment, we do see very good trend for customer loading. But again, the visibility is not that clear for the Q4.
Okay. Thank you. Sure.
Your next question comes from the line of Roland Xu from Citigroup. Please ask your question.
Hi, good morning. Thanks for taking my question. First question is on your second quarter product mix change, positive or negative to your gross margin? If I look at your technology breakdown, you have about 5.4 percentage points of revenue increase on 28 nanometer. And 40 and 65 nanometer together was similar as the Q1 and 90 and above actually our lower than Q1.
So just wondering for this kind of the product mix change, was it positive or negative to your gross margin in Q2?
Thanks. Hi, Rex. Basically this way, our almost every foundry companies have the similar situations there. Their 8 inches the legacy node are fully loaded and they are in shortage. So more or less we say the product mix in the 8 inches wafer fabs, there's no impact, almost no impact to the gross margins.
When heavily swap to meet customers that requires their loadings there, their margins there. And the product mix impact mainly come from 12 inches and just now I mentioned that 28 nanometer overcapacity situation is a series. When we convert from 40, 55 nanometer to 28 nanometer because the series depreciation of the capacity, the gross margin from 28 nanometer is very low. So the product mix when we have more 28 nanometer high end metal gate type of product running and we have less 40 or 55 nanometer then we see the gross margin guiding lower. That's why from previous question, we keep answering that to maintain a balance between 28 nanometer revenue and the other revenue is very important.
We have to balance that to maintain the guidance of gross margin.
Understood. So 10 nanometer, now your gross margin is still below corporate average. Is that right?
Yes.
Okay. Thank you. My second question is, you're talking about your 2nd generation of FinFET. So is this a 2nd generation FinFET going to be adopted on the 14 nanometer or adopt on your M plus 1 or M plus 2 technology? And the second, a follow-up is what's the difference between your 1st generation and second generation Zintech?
Thank you.
Okay. Well to answer your question, N, N plus-one, our 2nd generation FinFET, we define again is power performance area and cost. So power will be 40% reduction and speed will be 30% enhanced. For the logic area, we'll have a 50% reduction. That is our technology definition.
Yes. So this is going to be a top on 40 nanometer of N plus 1.
Okay. The definition of the technology node as I mentioned earlier, right, up to 14 they are from 10 to 5 nanometer definition. So as I told you, we have we work based on our customers' demands and our company's core structure and define our 2nd generation FinFET technology.
Okay. Thank you.
Your last question comes from the line of Chenwen Zhang from Poddai Securities. Please ask your question. Chen Wen Zhang, your line is open. You can now ask your question.
Thank you. Thank you. Thank you for taking my question and congratulations for our great progress in R and D. And my question is 14 nanometer is relatively for our competitors. So what is relative competitiveness or advantage for our company in 14 nanometer?
Thank you.
Okay. So for the 14 nanometer technology definition at beginning, we benchmark our 28 nanometer 2nd generation high ks metal gate that means 28 HKC plus So using 28 HKC plus as a reference we define our 40 nanometer, which can provide 60% speed, GANDS and 70% power reduction, as well as 50% logic area reduction. So those are numbers and targets we already achieved and before the process frozen. So that is the definition of our 1st generation FinTech.
Okay. Thank you.
I would now like to hand the call back to IR Director, Tim Goh for closing remarks.
In closing, we would like to thank you everyone who participated in today's call and again thank all of you for your trust and support to SMIC. Thank you very much.
This is the end of SMIC's 2nd quarter earnings conference call. We thank you for joining us today.