Welcome to Semiconductor Manufacturing International Corporation's First Quarter 2018 Webcast Conference Call. Today's call is hosted by Doctor. Haijun Zhao, Co Chief Executive Officer Doctor. Mong Song Yang, Co Chief Executive Officer Doctor. Yonggang Gao, 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 be receiving further instructions as how to participate. The earnings press release is available for download at www.smics dotcom.
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
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 Events and Presentations 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 principle, GAAP.
These measures may calculated differently than similar non GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non GAAP numbers we will be discussing. Please note that all currency figures are in U. S. Dollars unless otherwise stated.
I will now hand the call to our CFO, Doctor. Gao for financial highlights.
Thank you, Tim. Greetings to all our listeners. First, I will summarize our first quarter results and then give the Q2 2018 guidance. In the Q1 2018, our revenue was RMB831 1,000,000 an increase of 5.6 percent quarter over quarter, mainly due to the recognition of RMB108 1,000,000 in technology license revenue. Our revenue in the Q4 2018, excluding the technology license revenue was RMB723 1,000,000 a decrease of 8 0.1% quarter over quarter, mainly due to the product mix change, lower ASP and a decrease in wafer shipment.
Gross margin was 26.5%. And if excluding the effect of license revenue in Q1 2018, the gross margin was 15.6 percent. Non GAAP operating expenses were RMB196 1,000,000. Profit for the period attributable to SMIC was RMB29 1,000,000 while non controlling interest was RMB2 1,000,000 of credit to SMIC's attributable profit. EBITDA was a record high of RMB325 1,000,000 Moving to the balance sheet.
At the end of Q1 of 2018, cash on hand including other financial assets were RMB2.3 billion. Gross debt to equity was 50% and net debt to equity was 16%. Now looking ahead into Q2 of 2018. Our revenue is guided to be up 7% to 9% quarter over quarter, including the forecast to recognize the technology license revenue estimated at RMB56 $6,000,000 If excluding the effect of license revenue in Q1 and Q2, revenue in the 2nd quarter is guided to increase mid teens percent quarter over quarter. Gross margin is expected to range from 23% to 25 percent.
If excluding effect of license revenue is expected to be 18% to 20%. Non GAAP operating expenses are expected to range from RMB227 million to RMB233 million. Non controlling interest of our majority owned subsidiaries are expected to range from positive RMB17 1,000,000 to positive RMB90 1,000,000 which are losses be borne by non controlling interest. The planned 2018 CapEx for foundry operations is adjusted from RMB1.9 billion to RMB2.3 billion. The increase of CapEx is mainly for R and D equipment and the expensing of capacity of 8 inches fabs in Tianjin and Shenzhen.
The planned 2018 CapEx for non foundry operations is adjusted from RMB48 1,000,000 to RMB137 1,000,000 mainly for the purchase of land and the construction of employee living quarters and new high quarter. Our planned 2018 D and A is approximately RMB1.1 billion, mid teen increase comparing to previous year. I will hand the call over to our Co CEO, Haijun, for general remarks.
Thank you, Yonggang. Thank you all for joining us
on today's call. SMIC is undergoing a period of transition. As mentioned in the last quarter, we are confronting many challenges. However, through the efforts of recent quarters, I'm pleased to say that things are looking better than originally expected with the demands picking up, utilizations rebounding and encouraging progress on R and D and business platform development. In Q4, our revenue grew by 5.6% quarter over quarter and 4.8% year over year, mainly due to the technology license revenue of $107,600,000 from the Xiaoxing project.
The Xiaoxing Project is a startup company located in Shaoxing, Zhejiang Province, Image SMIC has jointly invested as a minority shareholder and a JV partner. In line with our strategy to focus our resources on key platforms, some of our specialty technologies have been licensed to and will be utilized by the Shaoxing JV project. When excluding revenue from technology licensing, our revenue decreased by 8.1% quarter over quarter, in line with industry seasonality. This decline was mainly due to the seasonal weakness, particularly in the smartphone sector. Although there was a general decline in output, we still benefited from the sequential growth from power AC, RF connectivity and the non flash related devices.
Gross margin excluding technology licensing was at 15.6%, higher than originally expected as utilizations made a turn for the better. Our revenue in 4th quarter from China region grew by 28% sequentially and 40% year over year. And when excluding the technology license revenue, grew by 2% sequentially and 11% year over year. We firmly believe that our position as the foundry of choice in China continues to bring us great opportunities. As artificial intelligence, electrical vehicles, autonomous driving and IoT become more prevalent, China will be a focal point of considerable activities.
We forecast that the China fabless market will continue to grow around 20% per year for the next couple of years. We are well positioned to capture the meaningful prospects and can expand our addressable market opportunities by accelerating the development of our technology. Given our progress in recent quarters, we have increased confidence in our technology development execution, which include both advanced nodes and mature nodes platforms. Both our power and image sensor business platforms are among the leading in the foundry industry, providing our customers with competitive services and technologies. In addition, our flash memory business, which has utilized a strategic customer model, is now one of the key revenue drivers for this year.
Our revenue from power, image sensor and flash memory grew more than 30% year over year in the Q1 2018. We work to develop our business platform into a comprehensive services offerings in areas that aligned with meaningful opportunities stemming from the China market. Our current view on this year's Seco business is better than when we last spoke on the 4th quarter earnings call. We see positive signals from current orders and our customers' forecasts, yet remain cautious. We continue to target a revenue growth of high single digit percentage.
Apart from technology license revenue, growth drivers including power, now flash and connectivity related ICs. We maintain our profitability targets of annual teen growth margin and annual net profitability attributable to shareholders. We are happy to see our technology development has been progressing well. With the accelerated activities and improved business outlook, we have raised our CapEx guidance to US2.3 billion dollars from the original guidance of US1.9 billion dollars This increase is mainly for the manufacturing equipment, R and D equipment and facility constructions. In closing, we are in a period of transition, but we are optimistic with utilizations bottom up in the Q4 and a general momentum picking up in orders.
SMIC is moving quickly to align with customers to capture the opportunities before us. We take each step with vigor and caution and strive to advance SMIC to the next level, while targeting profitability. I now turn the call over to our Co CEO, Meng Song for further comments.
Thank you, Haijun, and thank you to everyone on the call for joining us. Over the last few quarters, we review our business, markets, organizations, resources and capabilities, And we have formulated an overall strategy, which we have begun to implement through changes in the company's day to day work culture. Our long term strategy and focus are to build a solid foundation for SMIC, starting with strong organization and culture, which strives for continuous and innovative improvements. Our aim is to insteer a driven team culture. Meanwhile, we accelerate the development of our technology, aiming to build up complete technology platforms, which integrate competitive technology, ready to use IP and comprehensive design service in order to increase competitiveness and capture the timing of meaningful market opportunities.
I am pleased to say that I'm increasingly confident in our R and D team's execution as we swiftly meet each of our key milestones. Today, I'm going to highlight the progress
of
our 28 nanometer versions are progressively rare as we walk our way one version at a time. Our 20 nanometer HKC, which entered production in the second half of last year has seen tremendous and rapid improvements recently, reaching industry competitive years. We have quickly reached our 20 nanometer HKC plus R and D milestones, and we aim to start production in the second half of this year. Instead, we continue to enhance our 28 nanometer offering to provide better power and performance. 28 nanometer continues to be an important node for the industry.
With its massive market size, 28 nanometer is forecasted to continue to grow as an increasing number of applications begin to migrate into the 20 nanometer node. As the largest foundry in China, we are in a position to benefit from these coming opportunities. FinFET technology will also be an important area of growth in the semiconductor industry in the coming years. We accelerate our technology development, striving to close the gap between us and our customers' advanced loan requirements. We first target to serve our customers' needs for FinFET spring from the low end mobile and digital consumer development.
As mentioned last quarter, in our target rich production for our first version of FinFET to begin in the first half of next year. Our aim is provide customer with easy note migration, various device integration and full IP coverage. On mature technology platforms, we have notable improvements in increasing cell density and reducing mask services and aim to develop a 300 millimeter BCD offering. With our mature platform development, we strive to be a leading foundry source with diversified applications and customers. As we develop technology portfolio, we continue to enlarge our addressable market size.
Finally, to conclude my remark to date, we are working hard to accelerate, execute and deliver for the future growth and profitable development of the company. We believe the current investments will will listeners for your continued support and looking forward to giving you our future updates. 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 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. Your line is now open.
Yes. Thank you. First question is 2 parts. For the second quarter, where you're guiding pretty good strength or rebound up mid teens. Could you talk about if that's being driven or how much is being driven by 28 nanometer rebounding from the Q1 correction?
And how much coming from the mature applications and which applications there? And the which ex licensing would be low to mid single digit growth. But curious with the 2nd quarter pickup, what your view is rest of the year, why staying with the original outlook?
Hi, Randy. Thank you for the questions.
For the first question
for 28 nanometer recovery. And you know the Q1 is the traditional seasonal season for the mobile phones and our 28 nanometer horizontal dominated by the mobile phone products. So we saw the corrections of inventory in the Q1. And Q2 we see is better than the Q4. And in addition for our we already been running our 20 megahertz products for a while and we continue to ramp up.
The time delay mainly because the long lead time of 20 high metal game machines from our vendor side. But we already build up the capacity in a certain part and continue to build up 28 100 gig capacity. So in the second quarter, we make a full use of our existing capacity for 28, both polysilicon and high end metal gate. So that you see that we already forecast there will be a recovery there. And but you know that for the existing capacity, the ASPs are rose pretty big from the competitive markets.
So we do not mean that we recover to the Q1 level, but we really go for high single digits. And for your second question yes, second question is that for the second quarter, we forecast a better outlook and the revenue come from where? Actually from all the technology platforms SMIC already build up and I already mentioned that 28 nanometer and for 40 nanometer 55 nanometer we also so SMIC's NAND flash MCU, CMOS image and we also mentioned the RF Bluetooth. More or less we say that because of the recovery of the overall markets, especially the connectivity markets. And the demand for the power analog power are very strong.
I guess it's possibly because the electrical cars are orders. They need more capacity dedicated to discrete power devices and IGBT that make the whole industry 8 inches and power devices capacities in a very tight situation. And then I believe everybody in the foundry markets benefit from the over demand of the power devices. And then the utilization utilization go for almost full loading for everyone.
Okay. And the second question, just the last part of it, I guess, you maintained the full year outlook, but it sounds like there is good strength on 8 inches and then a question was more on the increase in CapEx. If you could give an update how that translates to capacity additions, if now it sounds like it's more tied to 8 inches but if you can give an update like which fabs would be expanding and how much capacity you'll add this year?
You know that we are expanding by the demands of our strategic customers and currently we have very strong demand for 8 inches capacities running from 90 nanometer copper all the way to 0.25 micron, 0.35 micron power devices aluminum technologies. And part of our the CapEx, we'll move to Shenzhen 5. We'll build up Shenzhen 5 to full capacity. We also complete the clean room setting up in Tianjin New Wafer 5, where we equipped that fab with additional capacity to analog power. And at this moment, we saw and because of the delay of the equipment shipments and the expansion in 8 inches we will try our best to these 2 fabs.
And our foundry fab has been running the commercial CMOS imager technology as well and the logic has been running full capacity there. We try to move up capacity to better meet customers' forecast. For 12 inches you know that we are running pretty well 55 nanometer connectivity things and we are expanding the LensFlash, Now Flash, CIS and power devices in that area. In addition to just now I mentioned that 28 nanometer high and mid gig capacity. That's the thing, so that's the capacity expansion you asked for.
Yes, that means we expand 28 high key metal gate and 14 nanometer and 55 nanometer, 35 nanometer to meet up the spectral requirements for the devices I just mentioned. For the 8 inches we fill out our 5 in Shenzhen, the 8 inches fab. Also like to make a very big ramp up in changing the wafer fab, 8 inches
Okay. And I guess your full year outlook, you didn't change it, but it sounds like there's better strength. But could you talk kind of what you're seeing or at this stage for second half, if it's more of a pickup in second quarter, but keeping conservative on the incremental ramp in second half?
And actually, a lot of things happens on the market. Even though we have a lot of preparation in the diversification of technology platform, Yutu mentioned, we hope quite many will focus on analog power, PMICs, finger prints, CMOS major flash, IMCO, high VX, high VX, high metal gate. And we do believe that we are well prepared for the market change. But because of the additional things in the market, you know that and also because of the delay of the equipment shipment for our additional capacity and also the new capacity is coming up from the competitors. We do not have very good visibility into the second half, but we still obtain mistake and very cautiously aiming at high single percentage annual growth.
Okay. Great. Thanks a lot.
Your next question comes from the line of Charlie Chan of Morgan Stanley. Please ask your question.
So my first question is regarding the recent issue between U. S. And China on that trade war, right? So for example, if U. S.
Will have that ban on DT or Huawei, what would that mean to SMIC in the midterm and long term? Does company expect to benefit from more domestic semiconductor replacement? Can you give some comments on that?
Hi, Charlie. Thank you for the questions. So first thing first, SMIC has been a very international company. We follow strictly the commitment we already made to the technology and equipment vendors to SMIC. So we should say for SMIC, we are in a very good situation and I'm very confident in this.
And SMIC does not produce any products. And this kind of limitation on the application on the productions mainly happens to our customer side. SMIC has been maintaining a well balance between international customer, overseas customer and the domestic customers for the past many years. You can see our revenue segmentation is that we maintain a very big chunk of international customers just to balance maintain a balance of that. And our customer in China are very, very diversified.
So we see that the impacts from this round of trade tensions are very limited to SMIC. And for our guidance to second quarter, we already include this type of impacts. And with the time going, I believe that we can slowly minimize the impacts and 0 out the impacts.
Okay. Okay. Thanks for that. And my next question is about your comments on 28 nanometer price inflation and also the power IGBT opportunity. So on that 20 nanometer, can I interpret that there will be some more ASP pressure?
I guess your key competitor TSMC also said they need to build up their fab, right? So I guess there's where the ASP pressure comes from. But in that case, you seems to have bigger revenue scale, lower ASP. What does that mean to your gross margin trend in 28 nanometer? Do you think the gross margin trend is worse than your or better than your previous expectation?
For 28 nanometer technologies, you know that our customer do need SMIC set up this technology and continue to grow the capacity and the performance in this area. So we are committed to our customer. We will continue to run 20 high metal gate and the polysilon and the further technology developments there. And yes, the competition in the market of 28 nanometer is very, very tense. And we saw the ASP erosions and the pricing pressure, but we already made that commitment.
We will continue to do this production. And to cope with the pricing pressure, on the one hand side, we will do better in technology performance, give the added values. And on another side, we will do the flexibility in the production line to make sure that when we run the 20 nanometer technology and the capacity and can share with the other technology like a 40 nanometer and we can share with another manufacturing base and lower the cost.
Okay. So in that case, what would be your new gross margin guidance for full year then?
Yes. Just now I already said that gross margin guidance we will go for. And yes, this is a teens percentage level.
Okay. IGBT, what was your progress here? Do you already got the IGM outsourcing with a significant revenue contribution? Or RIGBT is just a new opportunity you are looking for?
Actually, for the power device, I mean, decreased power devices and ADBT type of markets are showing up very, very small strong demand. So we believe these markets will continue growing. The power management for the artificial intelligence high performance computing, for the motor controls, for the automobiles, charge station, etcetera. And we also saw the requirements from the customer side. But for SMIC for past many years, it is difficult power devices IGBT in the same fab with the other devices like logic, CMOS, image or RF.
So for SMIC, SMIC, you know that we already announced the building up of joint ventures outside of Shanghai. And they will set up their facilities and to ramp up this kind of specific technologies.
The next question comes from the line of Liqing Wang of CICC. Please ask your question.
Thank you for taking my questions. I asked in Chinese and the follow-up see the revenue of 28,000,000 was quite significant for you this quarter. So what's the reason? And where you recover for Q2, what will be the major application, the major mix between the poly and hedge mitigation centers?
Hi, Leping. Thank you for the question. And for the first one, just now, we've mentioned that for 28 nanometer in the Q1, actually at the beginning and the Q4 timeframe, we work very well with our customers to forecast the Q1, Q2 28 nanometer demand. And the high endings in the Q1 and especially in the fab rate and we see we saw the adjustments on the inventory. So even though we already started a lot of wafers, but customer hope that we can hold them and hold the shipments, these kind of things.
So the final results in the Q1 is that $28,000,000 revenue just go down. And with the recovery of mobile phone market and ramping up of 20 Hacking Metal Gate and we really see the demands of the 2nd quarter for the shipments. So we already forecast that we will go for high single digit sub shipments in the 2nd quarter. And this demand for 20 8 Mega Metal Gear C at this moment, we are running mainly consumer logic products and the demand is high. We are very short in the 2nd quarter 20 8 gigabytes revenue and the shipments that will causing the 28 Polycom.
Thank you. The second question is about the SMIC's business strategy in memory market. So can you elaborate the detail about your innovative or the business model on this current NOR flash and what's your future plan whether you have interest to enter other bigger markets like NAND or next specialty memory? Thank you.
Hi, Lexin. You know that. So the first thing first is the business model. You know that nobody can really run a logic foundry for memory foundries. And in the past many years, quite many people tried and then they just gave up.
And this strategic type of business model just refer that and we need to form a strategic alliance with our customers and targeting either specific market area, so that we can invest the money and the resources to do the technology development and to a high quality level. So currently for SMIC, we do not do anything commodity or generate products with customers. And what we did, we worked together with customer targeting the specific niche markets with high qualities, especially for servers and automotive and data applied to both the non flash and non flash. Just now you mentioned that non flash is a small market. That's very true.
For specialty non flash, the market is relatively small and without further growth possibly, they will be stable there. And the things that not many players that's active. So for the established players there and they do have the market shares there. And as long as we can provide a very high quality performance there, we can continue in our business. And the things exactly same for specialty NAND flash.
And the demand actually grow very fast for specialty NAND flash. And we also use a similar model strategic alliance with customer targeting at high quality and niche market and develop a specific technology for that. And we have already been running 13 nanometer NAND flash specialty and 24 nanometer specialty for quite a while and running very high quality and a good year.
Thank you.
The next question is from Steven Pillai of HSBC. Please ask.
Let's see. First question, I guess, you talked a little bit about targeting profitability, but I'd like to try to explore what's the breakeven for the model right now? In the first quarter, if we exclude the licensing revenue and the $17,000,000 in R and D credit, it looks like kind of on an ongoing operating losses basis, operating profit would have been a loss of about $60,000,000 $70,000,000 or so. And it looks like, I guess, in the Q2, if I exclude the licensing agreement again and with the higher OpEx and even a 20% gross margin, we're still probably leaving money and even the 20% gross margin, we're still probably losing money at the OP level. So can you talk a little bit
about what do we need to see in terms
of revenue and gross margins to generate a breakeven at the operating profit line, once again excluding things like R and D subsidies and extra licensing revenue?
Stephen, that's a very good question actually. That's the formula calculation every day I'm doing. And 3 factors. The first factor is the ASP versus the quality and the performance and the competitiveness on the market. And some very hard nodes, many people are working on there and the ASP is changing every day.
And that's a valid factor. And when we plan, debt factor is already very hard and we intend to ramp up. And this is the first thing. The second thing is the portfolio of the equipment or depreciation of the high eyesight. And if we invest a lot of new eyesight and they get into heavy and the depreciation and definitely the breakeven ratio will guiding higher.
But if we lower down the CapEx spending and lower bound the new machine IDing, maintain for a while, we can guiding better utilization and lower and the ratio can getting lower. I mean, lower ratio get a breakeven point. And currently for SMIC, we set up our targets for gross margins for net profitability. And with this kind of and also comes into customer demand and the forecast for the next one and a half year to 3 years. And with this kind of factor fit in, we control our pace in procurements on new machines.
We calculate more or less we go for the allocation type of diversified and profitability. We come up with the amount and control our spending and pace. For example, if I give the forecast high teens of gross margin and we have the year over year, we calculate every quarter for the next 3 years. And we have a lot of communication with our customers and also the depreciation, many things. And when we the new request for capacity spending and we have a new project to set a new wafer fab guiding new capacities, we're putting this kind of thing into the number to see what's the results.
If the results go for non controllable and we have to make sure that either we can have a measure to get cost reduction or we slow down or delay the new spending. So I share with you the factors AIP, the quality of SMIC performing and the depreciation and expansion plan we have. So with these kind of dynamic factors in our hands and we should say prudently in the past couple of years, we do have a lot of spending and capacity building up. The depreciation getting higher. And with this kind of depreciation we calculate, we get the number for the gross margin.
And once we committed the gross margin to the market, we will maintain these 2. That means cost reductions, ASPs and the pace for further spending. Yes, that's my answer to you.
Yes.
Yes. Yes.
We're looking to quantify it bit more, but I Yes, you
can calculate the number of hubs from our gross margin, these kind of things. Utilization, we also announced and gross margin also announced. You can know right away today was our breakeven points. Last year was our breakeven points. And with our amount of spending and our commitment to the numbers of gross margin, you can calculate what's the next breakeven points.
Okay. Why don't we just refocus a little bit on 28 nanometer then? I was a little confused. Were you did you say that you expected high single digit growth quarter on quarter in the second quarter or you expected 28 nanometer to be high single digits as a percentage of revenue?
Second
quarter? The second, that means our 28 nanometer shipment revenue will recover to high single digits of total. And we do not I did not really calculate how much percentage on itself. Just now I it is off. Just now I mentioned high single digits, the revenue ratio.
Okay. So it was roughly 3% of the 1st quarter revenues and now you're saying it's going to rebound to high single digit. I guess what does that mean then for the remainder of SMIC? Is it above 28 nanometer actually flat to down for you? I haven't done the math here, but what does that suggest then for above 28 nanometer?
We should say this way, we continue to build up 28 nanometer high ks metal gate type of capacity because our customer requests that. We need to make sure to fulfill our commitment to them to support their business. And what we are doing today to make the flexibility to make a full use of the build up capacity. So when the market really got a frustration seasonally and we still have the other applications just now mentioned 24 nanometer NAND flash and the other applications because we build up 28,000,000 capacity, they can share with the 14 nanometer. 14 nanometer, we have even more HiVs.
So we can always use other fillers to fully use the big capacity we newly build up. But the expansion mainly depends on because of 20 nanometer, we already have the technology, the customer there, it mainly depends on the business. We do not have a subjective number to say how big we need to build up. We mainly build up to the stage that customer currently work with SMIC. We follow the market.
Okay. Do you
have an estimate?
Last question for me. Just when you look at the full year, 2018, if you're guiding to revenues to grow kind of high single digit quarter year on year, how much do you think 28 nanometer grows year on year or as a percentage of revenues for the full year? And then once again, then it begs the question, what are the revenues excluding 20 nanometer growth? So can you talk a little bit about full year outlook for 20 nanometer alone and then for above 28 nanometer?
At this moment, just now we said that we follow the market demands and fulfill our commitment to our customers. We recover to high single digits. And possibly, we maintain possibly, I shall say possibly. And we will maintain that kind of high single digits through the year. And by the way, we're really open to the additional demand from our customers.
Okay. Thank you very much.
Okay. Thanks, Stephen.
Your next question
I'm from Jinkong Securities. And I have 2 questions for Haijun and Long Song. And my first question is for the maturity node. On the 12 inches I know that do you see any change from 8 inches to the material of 12 inches because I see the Texas Instruments, they use 12 inches to do some products for analog products. So they have cost effective.
But I noticed that you mentioned that you have the capacity and the CapEx for the 8 inches but do not have any some CapEx and capacity on the mature node of the 12 inches so how do we think this transition or seismic roadmap for the product transition from 8 inches to the mature node on the 12 inches
Okay. And actually you mentioned a very good point. And 8 inches type of wafer fab, the total capacity will be limited. You know that nobody really built up a brand new 8 inches So in order to we have 2 challenges. On the one hand side, we need to make sure that the 8 inches keep competitive.
Another thing that we have to meet up our customer requirement for additional requires on capacity and currently running 8 inches We have to find solutions to that. And we are trained. And you mentioned that like the industry leaders already use 12 inches to do the analog in the inner edges. That's exactly true. And previously many customers choose to use 8 inches mainly because on the one hand side their expertise especially in design, testing, packaging everything is on 8 inches The second thing is that 12 inches at that moment was still very expensive.
8 inches are fully depreciated and 12 inches are still running high depreciation. But today the situation changed. 8 inches cannot meet up these requirements and the 12 inches also finished the the same technologies between 8 inches 12 inches such as fingerprint, CMOS image, analog power, BCD, etcetera. SMIC has been successfully running the same exactly same products in both 8 inches and 12 inches And the only concern is on 12 inches whether or not we have enough capacity to take in additional orders to cover 8 inches The second thing is whether or not the customer can have the supply chain in the back end for bumpings, for stacking and for casting. And because 12 inches back end capacity probably were also very expensive and very limited And 8 inches back end capacity were overbuilt.
They were very cheap. And if they can find justification they will do, for example, the back end bumping can account for 15% cost reduction if they are running both 8 inches and 12 If they can find a good solution in the back end customer they will want to go for 12 inches So to answer your question in general, yes, that's the transition. And SMIC has been doing that. And I believe that in the future stage, we will continue to run both this way. And in Shenzhen, we're running 12 inches together with 8 inches wafer fab.
And in Tianjin and Beijing actually for same product we're running both Beijing 12 inches and Tianjin 8 inches and the Beijing model and technology transfer has been proving successful.
Okay. Thank you. My second question is for the 14 nanometer. I just want to know how to balance the revenue and profit for the 14 nanometer. I see the 28 nanometer, the contribution of the revenue is okay, but the profit may not contribute too much.
Always, if we do the 40 nanometers, our competitors, for example, TSMC may also leverage on some of their ASPs and we may also facing the same demand. For example, CSMT has installed their fab in Nanjing and the 16 nanometer capacity is ready maybe. So, I think if we have the risk reduction in the first half in 2019, and we're also facing the ASP problem and how to balance the profit and the revenue debt demand.
Mr.
Chen's question. Thank you for question from Mr. Chen. This indeed is a very difficult question and I've been thinking this for quite a long time. At this moment, of course, our 14 nanometer is not in production yet.
So talking about revenue and profit, it's a little bit early. So my thinking is that in two phase, okay? First thing is, how do we learn from the 28 nanometer high kilometers NOG development lessons, not to repeat that development time too long and missing the better market window and resulting at this moment a lot of pricing pressure. So, our thinking is that for new technology ramp up normally we need to have about 3 phases. Okay.
1st phase, definitely our cost is higher than ASP. And second phase, we will try to balance make ASP and cost crossover. In the surface, we definitely will aim for ASP higher than the cost. So in order to do that, we have to carefully adjust our production volume. For example, 1st phase, we can assume is running about 5 ks per month, 2nd phase about 10 ks per month, surface about 15 ks per month in that ballpark, okay.
So in order to make that ASP and cost and of course, the crossover, we have to carefully select our market segment, our product. And of course, we also need to watch our intrinsic cost and also enhance our performance, reduce our power to attract customer. So in terms of the product segment, we are thinking, for example, like a 14 nanometer, at first phase, we will try to focus on high end consumer and media applications. And for the 2nd phase, we're thinking to go for the mid low end mobile application and we also were prepared for AI and some ASIC IP for cryptocurrency mining applications, blockchain application. But for the final surface in order to make the higher ASP, we will develop the RF applications.
So that's just an example of our production ramp up and our product segment selections and all these we are discussing closely with our customers. So we understand we shouldn't repeat 28 high key metal case current situations. And we have to in the execution phase, in fact, we have restructured our R and D organization and arrange more resources and just focus on essential technology. So, we believe the 14 nanometer will bring a new face to the SMIC in the near future. And that's to answer your questions.
Okay. Next question.
Your next
I'm hoping to get a little bit more clarity on the guidance. First of all, you talked about 28 nanometers going from 3% to high single digits. Can you give us the same math for power and also for flash? What was it as a percentage of sales in 1Q? And what's your guidance for 2Q?
Thanks.
Hi, Bill. In general, we do not go for so much detail. Actually, I do not have the data in front of me to give very detailed for the different platforms' contribution and growth in our revenue. Inside, we gave the overall and guidance for overall revenues. But I can assure you that the analog power devices platform, we have multiple platforms ready for production and also develop further to add value to these kind of platforms.
And for the flash, just now I already mentioned that for the non flash, we're mainly targeting further and for the high quality, especially for automotive and cellular applications and make it a steady production and maintain the ASP there. And for 24 nanometer NAND flash, we'll ramp up further. And the growth will be there, but I do not have the data or breakdown to say what's exactly the growth for the next couple of quarters. But we do mention probably that we saw for the Flash year over year, about 30% growth in revenue.
Okay. I guess, I'm just trying to think through the gross margin trends. If you look at this year, it seems like as 28 rates go up, margins should start to improve. And I've got to assume that power margin is above your corporate average. So why shouldn't margins go a little bit higher in the second half of the year?
Is it depreciation? Or can you help me with that?
The factors mainly come from 2 sides. The first side is from the depreciation. You mentioned that for the couple of years, we have been spending in the CapEx in building up capacity. And this kind of depreciation, we strictly follow the financial accounting rules that the late start to show up. That's the burden of building up new wafer fab, building up new capacities.
And the second thing comes from the utilization. That means the Q1, the wafer orders, the total demand for SMIC capacity lowered than before. Previously, we're almost running 100% loading, full loading. But in the first quarter, our utilization is slow. And for some technology nodes, actually the demands just shift from one node to another.
And we need time to ramp up to fulfill the capacity. I mean the new capacity and the capacity they developed to new applications. And I guess, MELFI comes from these two things. And the competition on pricing, the price erosion also play a little bit role there. And for this part SMIC has been trying every year for the cost reduction to compensate and to balance, cancel out this kind of price erosion.
That's a play a little bit, but not the big portion. The big portion, number 1, comes from the depreciations and the number 2 comes from the overall SMIC wafer fabs utilizations. And we already say that Q1 utilization is not that
good. Thank you. Second question is on China fabless. You talked about a 20% CAGR over the next several years. Now from the outside looking in, it seems like a lot of the new growth is coming from crypto and AI.
I'm sure you've got a much better view than I do. I'm wondering if you if you look at where the fabless industry is growing in China versus your own capabilities, it seems like a lot of the crypto AI guys want leading edge. How do you think about your own development in the next several years versus where the customers are going?
And we should say this way, the growth of China fabless come from all front, all levels. And if you look at today, the power devices, IGBTs, I think, in mobile phones, the set of box, these kind of consumers from our front. And the ASIC high performance computing, like you mentioned, the big content is pretty new. We also learned that some system companies like Alibaba, like Baidu, like Transcend, and they're also thinking about building up their capability in designing ASICs and something like a memory and CPU type of things. They did announce something in the market.
And we should say this way SMIC has been very closely worked with these kind of customers from the low end to the high end to the potential system players and try to add to build up the technology platform to fulfill their requirements beforehand. And we are doing so on 3 parts. The first thing first, we build up the technology platform, meet up their probably we are very strong in the mature nodes. But now with Mengstone Cyphers, the R and D team speed up the technology development cycles and we can quickly deliver the high performance things to meet our requirements. The second thing is that we build our capacity to meet up these additional requirements.
The third, for manufacturing side, we deliver the best cycle time and the competitiveness of PDKs, design menus, IPs to make sure that we can meet both power devices, BCDs, fingerprint, CMOS, C Major, PMIC, MIME, C, everything. This kind of demand growth, 20% growth, they come from all fronts. They remain, they require both 8 inches and the technologies, IPs, data manuals, PDKs, capacity, cycle time. Also the leading edge technologies, the new performance. Money will move into purchasing of R and D equipment.
To speed up the R and D also use this kind of equipment to do the advanced technology early production. And Mengshu, you can make the comments.
Okay. Yes. Mr. Ru, yes. Let me try to add some comment about you mentioned earlier about AI and cryptocurrency mining.
Yes, indeed, we have confidence and we are preparing for the ASIC IP and to for this kind of new applications in first half of next year, just to align with your early comments.
At this point, I would now like to hand the conference 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, thanks all of you for your and support. Thank you.
Thank you. This is the end of SMIC's Q1 earnings conference call. We thank you for joining us today. You may all disconnect.