Welcome to Semiconductor Manufacturing International Corporation's first quarter 2018 webcast conference call. Today's conference call is hosted by Dr. Zhao Haijun, Co-chief Executive Officer, Dr. Liang Mong Song, Co-chief Executive Officer, Dr. Gao Yonggang, Chief Financial Officer, and Mr. Tim Kuo, Director of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet at SMIC's website. Please be advised that your dial-ins are in listen-only mode. However, at the conclusion of the management presentation, we will be having a question and answer session, at which time you will be receiving further instructions as 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 first 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 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 principles, GAAP. These measures may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non-GAAP numbers we will be discussing. Please note that all currency figures are in US 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 summarize our first quarter results and then give the second quarter 2018 guidance. In the first quarter 2018, our revenue was $831 million, an increase of 5.6% quarter-over-quarter, mainly due to the recognition of $108 million in technology license revenue. Our revenue in the first quarter 2018, excluding the technology license revenue, was $723 million, a decrease of 8.1% 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 first quarter 2018, the gross margin was 15.6%. Non-GAAP operating expenses were $196 million. Profit for the period attributable to SMIC was $29 million, while non-controlling interest was $2 million of credits to SMIC's attributable profit. EBITDA was a record high of $325 million.
Moving to the balance sheet. At the end of first quarter of 2018, cash on hand, including other financial assets, were $2.3 billion. Gross debt to asset was 50%, and net debt to asset was 16%. Looking ahead into the second quarter of 2018. Our revenue is guided to be up 7%-9% quarter-over-quarter, including the forecast to recognize the technology license revenue estimated at $56 million. If excluding the effect of licensing revenue in Q1 and Q2, revenue in the second quarter is guided to increase mid-teens % quarter-over-quarter. Gross margin is expected to range from 23%-25%. If excluding effect of licensing revenue, is expected to be 18%-20%. Non-GAAP operating expenses are expected to range from $227 million-$233 million.
Non-controlling interests of our majority-owned subsidiaries are expected to range from positive $17 million-$19 million, which are losses performed by non-controlling interests. The planned 2018 CapEx for foundry operations is adjusted from $1.9 billion-$2.3 billion. The increase of CapEx is mainly for R&D equipment and the expanding of capacity of 8-inch fabs in Tianjin and Shenzhen. The planned 2018 CapEx for non-foundry operations is adjusted from $48 million-$137 million, mainly for the purchase of lands and the construction of employees' living quarters and new headquarter. Our planned 2018 D&A is approximately $1.1 billion, mid-teen increase comparing to previous year. I will now hand 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. Mentioned in the last quarter, we are confronting many challenges. Through the efforts of recent quarters, I'm pleased to say that things are looking better than originally expected. With demands picking up, utilizations rebounding, and encouraging progress on R&D and business platform development. In fourth quarter, our revenue grew by 5.6% quarter-over-quarter, and 4.8% year-over-year, mainly due to the technology license revenue of $107.6 million from the Shaoxing project. The Shaoxing project is a start-up company located in Shaoxing, Zhejiang Province. SMIC has jointly invested as a minority shareholder and a JV partner. 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.
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. There was a general decline in output, we still benefited from the sequential growth from Power IC, 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 first quarter from China region grew by 28% sequentially, and 40% year-over-year. 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 prospect, 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 solutions 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 first quarter 2018. We worked to develop our business platform into a comprehensive services offerings in areas that, along with meaningful opportunities stemming from the China markets. Our current view on this year's core business is better than when we last spoke on the fourth quarter earning 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 digits percentage. Apart from technology license revenue, growth drivers including power, NAND flash, and connectivity-related ICs. We maintain our profitability targets of our 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 $2.3 billion from the original guidance of $1.9 billion. This increase is mainly for the manufacturing equipment, R&D equipment, and facility constructions. In closing, we are in a period of transition, but we are optimistic with utilization's bottom up in the first quarter 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, Mong 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 a strong organization and culture which strives for continuous and innovative improvements. Our aim is to instil 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&D team's execution as we swiftly meet each of our key milestones.
Today, I'm going to highlight the progress of our technology development and platforms in more detail. First, our 28 nanometer versions are progressing well as we work our way one version at a time. Our 28 nanometer HKC, which entered production in the second half of last year, has seen tremendous and rapid improvements recently, reaching industry competitive yields. We have quickly reached our 28 nanometer HKC+ R&D milestones, and we aim to start production in the second half of this year. 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 28 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 node requirements. We first target to serve our customers' needs for FinFETs springing from the low-end mobile and digital consumer markets. We are pleased that we are pulling targets for FinFET development. As mentioned last quarter, in our target risk production for our first version of FinFET to begin in the first half of next year. Our aim is to provide customer with easy node migration, various device integration, and full IP coverage. On mature technology platforms, we have strong positioning in Power IC.
I'm pleased with our team's progress on Power IC, which has met notable improvements in increasing share density and reducing mask layers. We are making continuously enhancement to our BCD technology to provide competitive 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 evolve technology portfolio, we continue to enlarge our addressable market size. Finally, to conclude my remarks today , 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 translate into business as we aim to gain share and expand scale. Thank you to all our 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&A session of this call.
Thank you, Dr. Liang. Today's Q&A will be hosted by our co-CEOs, Dr. Zhao and 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.
Thank you. Ladies and gentlemen, to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Randy Abrams from Credit Suisse. Your line is now open.
Okay, yes. Thank you. First question is two 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 first quarter correction, and how much coming from the mature applications and which applications there? The second part is for the full-year outlook. I think you maintained the full-year outlook, which ex licensing would be low to mid-single digit growth. Curious with the second quarter pickup, what your view is rest of the year why you're staying with the original outlook.
Hi, Randy. Thank you for the questions. For the first question, for 28 nanometer recovery. You know the first quarter is the traditional seasonal season for the mobile phones and our 28 nanometer PolySiON dominated by the mobile phone products. We saw the corrections of inventory in the first quarter, and second quarter, we see is better than the first quarter. In addition, we are living running our 28 high-K metal gate products for a while, and we continue ramp up. The time delay mainly because the long lead time of 28 high-K metal gate machines from our vendor side. We already build up the capacity and in a certain part and continue to build up to 28 high-K metal gate capacity. In the second quarter, we make a full use of our existing capacity for 28, both PolySiON and high-K metal gate.
You see that we already forecast there will be a recovery there. You know that for the existing capacity, the ASPs are erode pretty big from the competitive markets. We do not mean that we recover to the first quarter level. We really go for high single digits. As for your second question. Yes, second question said for the second quarter, we forecast a better outlook and the revenue come from where? Actually from all the technology platforms as you might see already build up, I already mentioned that 28 nanometer, and for 40 nm, 55 nm, as you might see the NAND flash
MCU, CMOS imager, and we also mentioned the RF Bluetooth. More or less, we say that that's because of the recovery of the overall market, especially the connectivity market. The demands for the 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, eight-inch and power devices capacities in a very tight situation. I believe everybody in the foundry market benefit from the overdemand of the power devices. The utilization go for almost full loading for everyone.
Okay. 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 eight-inch and then a decent rebound on 28. I guess for the full year, if there's any view, why not say is it more visibility second half? The second question was more on the increase in CapEx. If you could give an update on how that translates to capacity additions, if now it sounds like it's more tied to eight-inch. 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. Currently, we have very strong demands for eight-inch capacities running from 90 nanometer copper all the way to 0.25-micron, 0.35 micron power devices aluminum technologies. Part of the CapEx, we'll move to Shenzhen Fab. We'll build out Shenzhen Fab to full capacity. We'll also complete the clean room setting up in Tianjin New Wafer Fab, where we equip that fab with additional capacity to analog power. At this moment, because of the delay of the equipment shipments and the expansion in eight-inch, we will try our best to equip these two fabs. Our Foundry Fab has been running the commercial CMOS imager technology as well, and the logic. It has been running up for capacity there. We try to move up capacity to better meet customers' forecasts.
For 12-inch, you know that we are running pretty well, 55 nm connectivity things. We are expanding the NAND flash, NOR flash, CIS, and power devices in that area. In addition to just now, I mentioned 28nm high-k metal gate capacity. That's the capacity expansion you asked for. That means we expand 28nm high-k metal gate capacity and 40 nm and 55 nm, 65 nm to meet up the special requirements for the devices I just mentioned. For the 8-inch, we fill up our fabs in Shenzhen, the 8-inch fab. I also like to make a very big ramp-up in Tianjin new wafer fab, 8-inch.
I guess your full-year outlook, you didn't change it sounds like there's better strength. 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?
Actually, a lot of things happened on the market. Even though we have a lot of preparation in the diversifications of a technological platform, you too mentioned we have quite many. We are focused on analog power, PMICs, fingerprints, CMOS imager, flash, MCU, high-voltage semiconductor, high-k metal gate. We do believe that we're well prepared for the market change. 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 capacities coming up from the competitors, we do not have very good visibility into the second half. We still are optimistic and very cautiously aiming at high single % annual growth.
Okay, great. Thanks a lot.
Thanks.
Your next question comes from the line of Charlie Chen of Morgan Stanley. Please ask your question.
Hi. Thanks, good morning. My first question is regarding the recent issue between U.S. and China on that trade war. For example, if U.S. will have that ban on ZTE 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 question. First thing first, SMIC has been a very international company. We follow strictly the commitment we already made to the technology and the equipment vendors to SMIC. We should say, for SMIC, we are in a very good situation, and I'm very confident in this. You know that SMIC does not produce any products. This kind of limitation on the applications, 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 segmentations that we maintain a very big chunk for international customers just to maintain a balance of that. Our customers in China are very, very diversified. We see the idea.
The impacts from this round of trade tensions are very limited to SMIC. For our guidance to second quarter, we already include this type of impacts. With the time going, I believe that we can slowly minimize the impacts and they wear off the impacts.
Oh, okay. Thanks for that. My next question is about your comments on 28 nanometer pricing pressure and also the power IGBT opportunity. On that 28 nanometer, can I interpret it that there will be some more ASP pressure? I guess your key competitor, TSMC, also said they need to build up their fab, right? I guess there is where the ASP pressure comes from. In that case, you seem to have a bigger revenue scale, lower ASP. What does it 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?
On 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. We already committed to our customer, we will continue to run 28 high-k metal gate and the PolySiON and the further technology developments there. Yes, the competition in the markets of 28 nanometer is very, very tense. We saw the ASP erosions and the pricing pressure, we already made that commitment. We will continue to do this production. To cope with the pricing pressure, on one hand side, we will do better in technology performance, give the added values.
On another side, we will do the flexibility in the production line to make sure that when we run the 28 nanometer technology and the capacity can share with the other technology, like a 40 nm, and we can share with a larger manufacturing base and lower the cost.
Okay. In that case, what would be your new gross margin guidance for full-year then?
Just now I already said that gross margin guidance will go for.
Yeah.
There's a teen percentage level.
IGBT, what was your progress here? Do you already got the IDMs outsourcing with a significant revenue contribution, or IGBT is just a new opportunity you are looking for?
Actually, for the power devices, I mean discrete power devices and IGBT type of markets are showing a very, very strong demands. We believe these markets will continue growing. You know the power management for the artificial intelligence, high-performance computing, for the motor controls, for the automobiles charge station, et cetera. We also saw the requirements from customer side. For SMIC, for past many years, it is difficult for us to run power devices, IGBT, in the same Foundry Fab with the other devices like logic, CMOS, image, RF. For SMIC, you know that we already announced the building up of Joint Ventures outside of Shanghai. They will set up their facilities and to ramp up these kind of specific technologies.
Okay. It's very clear. Thank you.
Sure.
The next question comes from the line of Leping Wang of CICC. Please ask your question.
Thank you. To take on my questions. I ask in Chinese and then follow my check. My first question is about the 28 nanometer. We see the revenue of 28 dropped quite significantly this quarter. What's the reason? When you recover for second quarter, what will be the major application, the major mix between the poly and the HPC?
Hi, Leping. Thank you for the question. For the first one, just now we've mentioned that for 28 nanometer in the first quarter. At the beginning of the fourth quarter time frame, we worked very well with our customers to forecast the first quarter, second quarter, 28 nanometer demands. The happenings in the fourth quarter, especially in February, we saw the adjustments on the inventory. Even though we are starting a lot of wafers, but customer hope that we can hold them and hold the shipments, these kind of things. The final result in the first quarter is that 28 revenue just go down. With the recovery of mobile phone markets and running out of 28nm HKMG, we really see the demands of second quarter for the shipments.
We already forecast that we will go for high single digits of shipments in the second quarter. The demand for 28nm HKMG, at this moment, we are running mainly consumer logic product. The demand is high. We are very sure that in the third quarter, 28nm HKMG revenue and the shipment will crossing the 28nm PolySiON. Thank you. The second question is for the SMIC's business strategy in memory market. Can you elaborate the detail about your innovation or the business model on this current NOR flash? What's your future plan? Whether you have interest to enter other bigger markets like NAND or specialty memory. Thank you. Hi, Leping. You know that. The first thing first is the business model. You know that nobody can really run a logic foundry for memory foundries.
In the past many years, quite many people tried, and then they just gave up. The strategic type of a business model just refers that we need to form a strategic alliance with our customers and targeting at a specific market area, so that we can invest the money and the resources to do the technology development and to a high quality level. Currently for SMIC, we do not do anything commodity or generic products with customers. What we did, we work together with customer targeting at a specific niche market and with high quality, especially for servers and automotive. This apply to both the NOR flash and NAND flash. Just now you mentioned that the NOR flash is a small market. That's very true. For specialty NOR flash, the market is relatively small and without further growth, possibly. They'll be stable there.
The things that not many players that enter. For the established players there, they do have the market shares there. As long as we can provide a very high-quality performance there, we can continue the business. The thing is exactly same for specialty NAND flash. The demands actually grow very fast for specialty NAND flash. We also use a similar model strategic alliance with customer targeting at high quality and a niche market and develop a specific technology for that. We are already been running 30 nanometer NAND flash specialty and 24 nanometer specialty for quite a while, and running very high quality and good yield. Thank you. Thank you.
The next question is from Steven Pelayo 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 break even for the model right now? In the first quarter, if we exclude the licensing revenue and the $17 million in R&D credit, it looks like, kind of on an ongoing operating losses basis, operating profit would have been a loss of about $60 million-$70 million or so. It looks like, I guess in the second quarter, if I exclude the licensing agreement again, with the higher OPEX and even a 20% gross margin, we're still probably losing money at the OP level. Can you talk a little bit about what do we need to see in terms of revenue and gross margins to generate a break even at the operating profit line?
Once again, excluding things like R&D subsidies and extra licensing revenue.
Hi, Steven. That's a very good question, actually. That's the formula and calculation every day I'm doing. Three factors. The first factor is the ASP versus the quality and the performance and the competitiveness on the market. Some are very hard nodes. Many people are working on there, and the ASP is changing every day. That's one of the factor. When we plan, that factor usually 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 hard assets. If we invest a lot of new assets, they get into heavy depreciations and definitely the breakeven ratio will be getting higher.
If we lower down the CapEx spending and lower down [audio distortion] for a while, we can get better utilization, lower depreciation, and the ratio can get lower. I mean, a lower ratio get a breakeven point. Currently for SMIC, we set up our targets for gross margins for net profitability. Also comes into customer demands and the forecast for the next one and a half year to three years. With this kind of factor fit in, we control our pace in procurement of new machines. We calculate more or less, we go for the [allocation based on efficiency and pofitability] . We come up with the amount and control our spending on a pace.
For example, if I give the forecast high teens gross margin, we have the [audio distortion], we calculate every quarter for the next three years, we have a lot of communication with our customers and also the depreciation, many things. When we have the new request for capacity expanding, we have a new project to set a new Foundry Fab getting new capacities, we are putting this kind of thing into the number to see what's the results. If the results go for uncontrollable, we have to make sure that either we can have a measure to get a cost reduction, or we slow down or delay the new spending. I share with you the things that affect the ASP, the quality of SMIC performing, and the depreciation and expansion plan we have.
With these kind of dynamic factors in our hands, we should say precisely, in the past couple years, we do have a lot of spending on capacity building up, the depreciation getting higher. With this kind of depreciation, we calculate, we get the number for the gross margin. Once we committed the gross margin to the markets, we will maintain these two. That means cost reductions, [ASPs], and the pace for further spending. Yeah, that's my answer to you.
Yeah.
That's the way we look.
Actually, I was looking to try to quantify it a bit more, but I.
You can calculate the number out from our gross margin, these kind of things. Utilization we also announced, and gross margin also announced. You can know right away today what's our breakeven points and last year was our breakeven points. With our amounts of spending and our commitment to the numbers of gross margin, you can calculate what's the next breakeven points.
Why don't we just refocus a little bit on 28 nanometer then? I was a little confused. 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? What were you suggesting for the second quarter?
The second. That means our 28 nanometer shipment revenue will recover to high single digits of total. I did not really calculate on how much percentage on itself. Just now I mentioned high single digits.
Okay
The revenue ratio, yes.
Okay. It was roughly 3% of the first quarter revenues, and now you're saying it's going to rebound to high single digits. I guess what does that mean for the remainder of SMIC? Is above 28 nanometer actually flattened down for you? I haven't done the math here, but what does that suggest for above 28 nanometer?
We should say it this way, we continue to build up 28 nanometer High/K Metal Gate type of capacity because our customer requires that. We need to make sure to fulfill our commitment to them to support their business. What we are doing today to make the flexibility, to make a full use of the build-up capacity. When the markets really get a fluctuation seasonally, we still have the other applications, just now mentioned 24 nanometer NAND flash and the other applications. We build up 28 capacity, they can share with 40 nm. 40 nm we have even more applications like MCU, say, embedded flash, CMOS image, NAND flash, NOR flash, and high-voltage. They can always use other fillers to fully use the capacity we newly build up.
The expansion mainly depends on, 28 nanometer, we already have the technology, the customer there, 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 digits year-over-year, how much do you think 28 nanometer grows year-over-year or as a percentage of revenues for the full year? Once again, it begs the question, what are the revenues excluding 28 nanometer growth? Can you talk a little bit about full year outlook for 28 nanometer alone and 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, I'll say possibly, we'll maintain this kind of high single digits through the year. We really open to the additional demands from our customers.
Okay, thank you very much.
Okay, thanks. This is Steven.
Your next question comes from the line of Junji Chen from Fanfeng Securities. Please ask.
Thank you for taking my question. I am from Fanfeng Securities, and I have two questions for Haijun and Mong Song. My first question is for the mature node. On the top, there is a stage of the mature node on the 12-inch. I know that with the niche production from 8-inch to the mature node of 12-inch, because I see Texas Instruments, they use the 12-inch to do some production for analog products, so they have the cost-effective. I noticed that you mentioned that you have the capacities and the CapEx for the 8-inch, but do not have some CapEx on the mature node of the 12-inch. How do you think of this transition or technical roadmap for the product transition from 8-inch to the mature node on the 12-inch?
Hi, Junji. Actually, you mentioned a very good point. 8-inch type of wafer fab, the total capacity will be limited. You know that nobody really built up a brand new 8-inch. We have two challenges. One, on the one hand side, we need to make sure that the 8-inch keeps competitive. Another thing is that we have to meet up our customer requirement for additional requirements on capacity and currently running in 8-inch. We have to find solutions to that, and we are trying. You mentioned that the industry leaders already use 12-inch to do the analog niche. That is exactly true. Previously, many customers choose to use 8-inch mainly because, on the one hand side, their expertise, especially in design, testing, packaging, everything is on 8-inch. The second thing is that 12-inch, at that moment, were still very expensive.
8-inch are fully depreciated, and 12-inch are still running high depreciation. Today, the situation changed. 8-inch cannot meet up these requirements, and the 12-inch also finished the depreciation cycles. We already work together with customer to run, first thing first, to run exactly same technologies between 8-inch and 12-inch, such as fingerprint, CMOS imager, analog power, BCD, et cetera. SMIC has been successful in running the same, exactly same products in both 8-inch and 12-inch. The only concern is on 12-inch, whether or not we have enough capacity to take in additional orders to cover 8-inch. The second thing is whether or not a customer can have the supply chain in the back end for bonding, bumping, for stacking, and for testing. Because 12-inch back-end capacity previously were also very expensive and very limited, and 8-inch back-end capacity were overbuilt. They were very cheap.
If they can find the justifications, they will do. For example, the back-end bumping can account for 15% cost reduction if they are running both 8-inch and the 12-inch. If they can find a good solution in the back end, customer, they will want to go for 12-inch. To answer your question, in general, yes, that is the transition, and SMIC has been doing that. I believe that in the future stage, we will continue to run both this way. In Shenzhen, we are running 12-inch together with 8-inch wafer fab. In Tianjin and Beijing, actually, for the same product, we are running both Beijing 12-inch and Tianjin 8-inch, and the business model and technology transfer has been proving successful.
Okay. Thank you. My second question is for the 14 nm. I just want to know how to balance the revenue and profit for the 14 nm. I see the 28 nm, the contribution of the revenue is okay, but the profit may not contribute too much. Always, if we do the 14 nm, our competitors, for example, TSMC, may also leverage on downside their ASPs, we may also face the same dilemma, I think. For example, TSMC has installed their fab in Nanjing, the 16 nanometers, the capacity is ready, maybe. I think if we have the risk production in the first half in 2019, right? We may also face the ASP problem and how to balance the profit and the revenue dilemma.
Thank you for the question from [Mr. Chen] . This indeed is a very difficult question, I've been thinking this for quite a long time. At this moment, of course, our 14 nm is not in production yet, talking about revenue and profit is a little bit early. My thinking is that, in two phases. First thing is, how do we learn from the 28 nanometer High-K Metal Gate development lessons not to repeat that development time, too long, missing the better market window and resulting, at this moment, with our pricing pressure. Our thinking is that for a new technology ramp-up, normally we need to have about three phases. First phase, definitely our cost is higher than ASP. In second phase, we will try to balance, make ASP and cost crossover.
In the third phase, we definitely will aim for ASP higher than the cost. In order to do that, we have to carefully adjust our production volume. For example, first phase, we can assume it's running about 5K per month, second phase about 10K per month, third phase about 15K per month, in that ballpark. In order to make that ASP and cost crossover, we have to carefully select our market segment, our product. Of course, we also need to watch our intrinsic cost and also enhance our performance, reduce our power to attract customer. In terms of the product segment, we are thinking, for example, like a 14 nm. At first phase, we will try to focus on the high-end consumer and media applications.
For the second phase, we're thinking to go for the mid-low end mobile application, we also will prepare for the AI and some basic IP for the cryptocurrency, the mining application, the blockchain application. For the final, the third phase, in order to make the higher ASP, we would develop the RF applications. That's just an example of our production ramp-up and our product segment selections. All this that we are discussing closely with our customers. We understand we shouldn't repeat 28 High-K Metal Gate current situations. We have to, in execution phase, in fact, we have restructured our R&D organization and arranged more resources and just focus on essential technology. We believe the 14 nm will bring a new phase to the SMIC in the near future. That's to answer your questions.
Okay. Next question.
Your next question comes from the line of Bill Lu of UBS. Please ask.
Yeah. Hi, good morning, and thank you for taking my question. I am 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 Q1, and what is your guidance for Q2? 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 much detail for the different platforms contribution and growth in our revenue. This side, we gave the overall guidance for overall revenues. I can assure you that the analog power devices platform, we have multiple platforms ready for production, also develop further to add values to these kind of platforms. For the flash, Zhao already mentioned that for the NAND flash, and we are mainly targeting further and for the high quality, especially for automotive and server applications, and make it a steady production and maintain the ASP there. For 24 nanometer NAND flash, and we will ramp up further
The growth will be there, I do not have the data or breakdown to say what exactly the growth for the next couple quarters. We do mention probably like that, where 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 utilization rates go up, margins should start to improve. I've got to assume that the Power IC margin is above your corporate average. 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?
On the factors that mainly come from two sides. The first side is from the depreciation. You mentioned that for the past couple years, we have been spending in the CapEx in building up capacity. This kind of depreciation, we strictly follow the financial accounting rules that this data should show up. That's the burden of building up new wafer fab, building up new capacities. The second thing comes from the utilization. That means the first quarter wafer orders, the total demand for SMIC, the capacity lower than before. Previously, we're almost running 100% loading, full loading. The first quarter, our utilization is low. For some technology nodes, actually, the demands just shift from one node to another. We need time to ramp up to fulfill the capacity. I mean, the new capacity and the capacity they give up to new applications.
Again, mainly come from these two things. The competition pricing, the price erosion also play a little bit role there. For this part, SMIC has been trying every year for the cost reduction to compensate and to balance, cancel out this kind of a price erosion. That's play a little bit part but not the big portion. The big portion, number 1, come from the depreciations, and the number 2 come from the overall SMIC wafer fab utilizations. We already say that first quarter utilization is not that good.
Thank you. Second question is on China fabless. You talked about a 20% CAGR over the next several years. 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 agree with that or if you could help me a little bit with the growth areas. 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 next several years versus where the customers are going?
We should say this way, the growth of China fabless come from all fronts, all levels. If you look at today, the power devices, IGBTs, in mobile phones, et cetera, box, this kind of consumers, from all fronts. The ASIC high-performance computing, like you mentioned, the Bitcoin things, it's pretty new. We also learned that some system companies like Alibaba, like Baidu, like Tencent, they also thinking about building up their capability in designing the ASICs and something like memory and CPU type of things. They did announce something in the market. We should say it this way, SMIC has been very closely work with these kind of customers from the low-end to the high-end, to the potential system players, and try best to build up the technology platform to fulfill their requirements beforehand. We are doing so on three parts.
The first thing first, we build up the technology platform, meet up their specifications. Previously, we are very strong in the mature nodes. Now with Mong Song first, the R&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 up capacity to meet up this kind of additional requirements. The third, for manufacturing side, we deliver the best cycle time and the completeness of PDKs, design manuals, IPs, to make sure that we can meet both the power devices, BCDs, fingerprint, CMOS image, [audio distortion], PMICs, MCUs, everything. These kind of demands growth, 20% growth, they come from all fronts. These requires both aging and the technologies, IPs, design manuals, PDKs, capacities, cycle time. Also the leading-edge technologies, the new performance.
Just now we mentioned that this year we increase the CapEx. Majority of this kind of money will move into purchasing of R&D equipment to speed up the R&D, also use this kind of equipment to do the advanced technology early production. Mong Song, you can make the comments.
Oh, okay. Yeah. Mr. Lu, 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 for this kind of new applications in first half of next year. Just to align with your early comments.
Great. Thank you very much.
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. Again, thanks all of you for your trust and support. Thank you.
Thank you. This is the end of SMIC's first quarter earnings conference call. We thank you for joining us today. You may all disconnect.