Welcome to Semiconductor Manufacturing International Corporation's third quarter 2017 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 receive further instructions as to how to participate. The earnings press release is available for download at www.smic.com. Webcast playback will also be available approximately one hour after the event. Without further ado, I would like to introduce to you Mr. Tim Kuo, Director of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's third quarter 2017 earnings webcast conference call. Today, it is our honor to have our Chairman, Dr. Zhou Zixue, with us to make some opening remarks and introduce our Co-CEO, Dr. Liang. After that, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter, and then our Co-CEO, Dr. Zhao, 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 quarterly 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 will 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 Stock Exchange of Hong Kong Limited, including our annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 27, 2017. During the call, we will make reference to financial measures that do not conform to generally accepted accounting principles, GAAP. These measures may be calculated differently than similar non-GAAP data presented by other companies.
Please refer to the tables in our press release for a reconciliation of GAAP to the non-GAAP numbers we will be discussing. Please note that all currency figures are in U.S. dollars, unless otherwise stated. I will now turn the call over to our Chairman, Dr. Zhou Zixue.
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Thank you everybody for joining today's earnings call and for your continuous support. As one of China's most important semiconductor companies, we have always considered how to strengthen the company's competitiveness.
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During this period of time, we have been focusing on putting together resources and building up a solid foundation for SMIC's future development. In October this year, we established a new management team, and today I want to take the opportunity to introduce to you the management. You should already be familiar with our Co-CEO, Dr. Zhao, and CFO, Dr. Gao.
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Last month, we appointed Dr. Liang Mong Song as one of our co-CEOs. For decades, Dr. Liang has focused on advanced node R&D. His expertise and management skills will strengthen SMIC's R&D program and help to narrow our advanced technology gap. I believe that our new team will bring SMIC to new heights and drive contributions to the development of the IC industry. With Dr. Liang's excellent and successful experience in the IC industry, I'm confident in SMIC's bright future. Welcome, Dr. Liang. Now I will hand the webcast over to our two co-CEOs and CFO. Thank you, Dr. Zhou. Now we will have our co-CEO, Dr. Liang, say a few words.
Thank you, Chairman Zhou. Thank you to everyone on the call for your support. I am greatly honored to take on this position at SMIC, which is both an opportunity and a challenge. SMIC's rapid development in recent years have been noteworthy in the industry, and I'm happy to be working closely with Dr. Zhao Haijun and the management team to contribute to SMIC's competitiveness. Since joining SMIC, I have reviewed our strategic targets, and we have begun formulating execution plans. Having been on board for one month, I leave all business commentary and Q&A to Zhao Haijun and Gao Yonggang to date. I believe that SMIC is in a great position with many good opportunities, and I hope to work with the team on precise execution to meet our targets. Once again, it's an honor and a pleasure to work together with Zhao Haijun and the SMIC team.
Together, we work hard to deliver good results to all our stakeholders. Thank you.
Thank you, Dr. Liang. I'll now hand the call to our CFO, Dr. Gao, for financial highlights.
Thank you, Tim. Greetings to all our listeners. First, I'll highlight our third quarter results and then give our fourth quarter 2017 guidance. In Q3 2017, our revenue was $770 million, an increase of 2.5% quarter-over-quarter, mainly due to the increase of wafer shipment. Gross margin was 23%, a decrease of 2.8 percentage points, mainly due to low fab utilization, which was 83.9%. Non-GAAP operating expenses were $184 million. Profit for the period attributable to SMIC was $26 million, while non-controlling interests were $5 million, due to SMIC's attributable profit. Moving to the balance sheet. At the end of the quarter of 2017, cash on hand, including our financial assets, were $1.7 billion. Gross debt to equity was 52%, and net debt to equity was 24%. In terms of cash flow, we generated $420 million of cash from operating activities in the third quarter.
Looking ahead into the fourth quarter of 2017, our revenue is guided to be 1%-3% quarter-over-quarter. Gross margin is expected to range from 18%-20%. Non-GAAP operating expenses are expected to range from $204 million-$210 million. Non-controlling interests of our majority-owned subsidiaries are expected to range from $48 million-$50 million, which are losses borne by non-controlling interests. We reiterate our planned 2017 CapEx for foundry operations of approximately $2.3 billion. The planned 2017 CapEx for non-foundry operations is approximately $70 million, mainly for the construction of employees' living quarters. I will now hand the call over to Haijun for general remarks.
Thank you, Yonggang. Greetings to all the listeners and thank you for joining us. Today, I will highlight our third quarter results, near-term outlook, opportunities, technology development, and strategic directions.
Our third quarter revenue was in line with guidance and grew 2.5% quarter-over-quarter. This sequential growth came largely from the broad-based recovery in smartphone-related shipments. By process nodes, 28 nanometer grew 38.9% quarter-on-quarter, and 0.18-micron grew 33.8%. By devices, application processors, baseband power management ICs, NOR flash, and fingerprint sensors each contributed to the sequential growth. Though inventory levels are sequentially healthier, some customers are still digesting higher than normal levels of inventory. Given this situation, we target annual revenue growth in line with the foundry industry growth. In the three years preceding 2017, SMIC has grown revenue and profitability on high utilization. In these next two years, we enter a period of transition as we prepare our technology and our facilities for the next stage of growth.
With a strong and capable team located in Mainland China, SMIC is presented with a unique position to benefit from a variety of long-term trends, includes China IC design winning increasing market share. We estimate Chinese fabless revenue growth of 20% CAGR from 2016 to 2020, while SMIC's revenue from Chinese customer is 45.7%. Another trend is the rise of IoT, Internet of Things, in our everyday life. In September, we announced the successful fabrication of the first domestically designed and manufactured NB-IoT in China with ZTE. This NB-IoT can be widely used in smart meters, shared bikes, smart applications, smart city, and others. We also announced the availability of the low-power platform for IoT using our 55 ultra-low power process. The platform is optimized for functionality common in IoT designs, such as voice recognition, face detection, and sensor fusion.
In addition, we announced with Chengdu Analog Circuit Technology Inc. the availability of our analog IP solution using our 55-nanometer eFlash technology, engineered for very low power IoT applications that need low cost and extended battery life. These are just two long-term trends SMIC will benefit from. In the near term, our growth drivers include our continued ramp-up of 28-nanometer technologies, continued growth in flash memories, fingerprint sensors recoveries, and power management ICs. On 28-nanometer, I am glad to see that we are on track to meet our targets for 28-nanometer. Our 28 PolySiON has successfully been in mass production, while our HKC into a risk production stage from last quarter. HKC+ is targeted to begin production by the end of next year, and we have already started R&D on 22-nanometer. 28-nanometer overall contributed 8.8% of our wafer revenue in the third quarter.
Meanwhile, 40-nanometer development is also well on course. I would like to comment on SMIC's strategic directions. SMIC is positioned as the long-term viable foundry partner of choice in China. We hope to establish a comprehensive technology roadmap with our customers on mature and advanced nodes. In order to meet some of the great future demands of our customers, we must accelerate our execution and narrow our technology gap. When we talk about narrowing the gap, we are not only speaking of the advanced nodes, but especially mature nodes to which we believe can greatly serve the Chinese and foreign IC markets. In addition, we believe in the importance of focusing our investments into strategic areas that support the long-term growth, profitability, and the viability of our business.
We have taken the time to first narrow our focus to a small number of specific platforms for which we aim to be the foundry of choice. We have consolidated resources to support the technological platform of greatest strategic importance to SMIC. With the long-term opportunities lying before us, we prepare our technologies in close cooperation with our customers to capture their demands, and we appreciate your patience as we work to execute and deliver the results of our strategies. We believe that the near-term impact of the investment and the transition are growing pains to the right direction as SMIC grows in scale, ability, and prominence. This year, our CapEx plan remained unchanged. The incremental increase in year-end capacity in 2017 compared to last year are as the following. For our 8-inch wafer fabs, including Shanghai, add on 1,000 wafers.
Tianjin, add on 6,500 wafers, and Shenzhen, add on 5,000 wafers. For our 12-inch wafer fabs, Beijing, add on 5,000 wafers. Beijing's joint venture, add on 12,000 wafers, and Shenzhen, add on a mini fab of 3,000 wafers. To conclude, we work diligently to maintain our position as the foundry of choice in China. With our strengthened team and focused direction, SMIC is well-positioned to execute on our long-term targets and benefits from the opportunities in the IoT markets. We at SMIC work hard to grow the sustainable value of the company for all our stakeholders. Thank you for your support. I will now hand the call back to Tim for the Q&A session of this call.
Thank you, Dr. Zhao. Today's Q&A will be hosted by our Co-Chief Executive Officer, Dr. Zhao, and Chief Financial Officer, Dr. Gao. Most of the questions today will be redirected to Dr. Zhao and 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. Just a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Your first question is from Randy Abrams of Credit Suisse. You may ask your question.
Okay. Yeah. Thank you. I wanted to ask the first question about the characterization of the transition period, where it seems to be implying this year, the first year, then next year will be the second year of the transition period. If there's a way to think about next year in a transition period, how you're thinking at this stage about growth and CapEx, then also for the margins. The guidance implied a few point decline. Maybe if you could go through the factors for the decline and if you think in that transition period, it may kind of continue at that level or maybe able to improve back to the recent levels?
Hi, Randy. Thank you for the question. I just focus on the characterization of this transition, I won't talk too much about next year's scenario. You understand the situations that we cannot see very clearly about the market. We are not ready for the comments on next year. For the transition, just now we already said that we have two transitions. One of the transitions, definitely we have the management change, and we turn on the new page. Just now we say that on the one hand side, we position, strengthen the strategy on positioning SMIC as the foundry of choice in China. We got closer relations with the customers who want to do business in China. Just now we say that in the past couple years, we enjoyed a very good growth and a very good profitability.
We still enjoy that, but that's to the maximum usage of the existing fabs. Since last year, we already officially announced we will build up additional capacity to support future growth. Just now we also said that we'll refocus, optimize the use of existing resources, and to develop SMIC's strength in technologies to narrow down the gap from the leaders. This technology, not just the other ones node, but the technology nodes in the mature area. We like to go for diversification, go for multiply of the usage so that we can cover all the needs of our customers. These two things are the transition stage. That means management team rebuild up, refocus, and go for expansion, go for technology catching up.
Okay. If I can ask one follow-up, just the margin that you guided. If you could talk about the factors for the sequential decline, because sales are relatively stable or up a bit in fourth quarter. For the margins, maybe how much was depreciation versus mixture utilization or if there were other factors. If it's anything in one time in nature, or if you think it may be around that kind of a new level for gross margin for at least a couple of quarters.
Just now we gave the guidance for the first quarter, we already gave some explanation on the changes of this margin. The first one come from the products change on the mix, product mix, the change of that. Definitely that impacts the margin thing. The second thing is the ASP. During the last, this earnings release call, we also said that last year was a wonderful year because the shortage of the capacities and almost no process change or even retail price. For this year, overall the market got a relaxation, so we just make up the price erosion happens a lot here. That happens to the whole industry, where we also see all around the other companies. This is the second. The third, just now we say that last year we started to spend the CapEx and to build up the capacity.
The good thing is that this kind of capacity already went into production, the pressure is this kind of capacity also went into the depreciation timeframe. We also see the depreciation, just from the spending of the CapEx last year and the year before, we start to hold these kind of depreciations. Overall, we should say that this kind of margin erosion has been predicted. What we believe is that even though we got into this kind of difficult timeframe, our target is still set, and to maintain profitability for the company.
The final question I wanted to ask was on the ramp up. You gave the High-K process. You mentioned pilot production. If you could talk about the, I guess, overall 28, how you're expecting to ramp up, and then for High-k metal gate specifically, when you see the meaningful volume ramp up for that technology to move from pilot into high volume on the High-K process in some of those early applications.
For the 28-nanometer technology, last time during the conference call, my comments that we'll make it into 3 stage. The first stage is make full use of the existing capacity for PolySiON that's really running the same situation. We also say that the second half this year, we will ramp up High-k metal gate stage 1. As SMIC, we call that HKC. That's a transition stage between the stage 1 of High-k metal gate and to the last stage of High-k metal gate. We are ramping up from last quarter, ramping to the full capacity of the existing building up. We expect to see the increase further of the percentage of 28-nanometer technology in the overall revenue. We aim to see that about 10% or over a 10% type of a ratio of 28-nanometer revenue in the overall.
All right. Great. No, thanks a lot.
Yeah.
Your next question comes from the line of Steven Pelayo of HSBC. Please ask your question.
Just to follow up on the margins a bit. I guess maybe focusing a little bit more on EBIT margins. As you look into your fourth quarter, can you first give us some guidance a little bit on R&D subsidies that you expect to be getting? Could you just comment in general, if we were, I don't know, to exclude those R&D subsidies, is the fourth quarter the trough for structural profitability at the EBIT line for SMIC, or what do we need to be thinking about your breakeven rate as we go through the fourth quarter and into 2018, especially if I were to exclude some of those subsidies?
Hi, Steven. Thank you for the questions. Yes, you are right. You mentioned that the first quarter, the margin erosion. We can say the number one factor, one of the biggest factor, is the increase of R&D spending. That's very true. We really refocus on to expedite the research area. Just now I mentioned the product mix, also the depreciation from the CapEx we spent last year and the year before and this year. As for this R&D spending, you mentioned that the grant or subsidies, actually, we have very big sharing of this R&D cost is the joint venture we formed. In the future, we also have a new joint venture get formed to share this R&D spending. That's another area. Besides this, we mentioned this R&D grant, supported by the partners and the governments.
We also have the joint venture cost-sharing for this one.
Okay
just for your subsidies in total
Maybe I'll just ask a longer term question.
for fourth quarter is $20 million-$25 million. Yeah.
$20 million-$25 million. Okay.
Yeah.
Maybe just ask a little bit of a longer-term question. You talked about a review of strategic targets. Can you share some of those with me? Are those targets margin- or capital intensity- or free cash flow-focused? Are they focused more on just revenue growth or technology milestones? Can you share with us some of those strategic targets that we should be asking you about, I don't know, every quarter or a year from today?
Yes, Steven, you almost mentioned everything. On my radar, I mainly monitor three things. Of course, all of them are on the radar screen, but the top three are: the first one is maintain the profitability, the second one is the revenue growth percentage, and the third one is the ratio of the leading-edge technology in overall revenue. Yeah, monitor these kind of numbers every day.
Okay. What would be good targets?
Pardon?
Can you share with us some targets for that? You shared with us, you said you'd like to maintain profitability, but you also said you had revenue growth targets and percentage of leading-edge mix targets. What would you like to see the revenue growth and the percentage leading-edge mix, say, year four?
Steven, you know that I can only give you the things for fourth quarter. I can't say too much for even further. At this moment, we cannot give too much for next year and long future.
Okay, thank you. I'll get back with you.
Your next question is from Charlie Chan of Morgan Stanley. Please ask your question.
Yeah, hi. Welcome, Dr. Liang. My first question is regarding your technology development after Dr. Liang's joining. First of all, do you see that you can possibly bring in your 28 nanometer schedule because of Dr. Liang's expertise? Also, can you talk about your potential capacity increase for 28 nanometer CapEx, even the 14 nm schedule? Thanks.
Hi, Charlie. Just now, Tim already said that Dr. Gao and me will take care of all the questions today. Yes.
Sure, sure.
After Dr. Liang's join, definitely we'll reschedule, replan the overall strategy for the company. Dr. Liang is Co-CEO, is not a person focused on technologies only. We together to remake up the strategy and the plans for the future for SMIC. For 28 nanometer, actually, before Dr. Liang's join in, we already run into production, even for the High-k metal gate from last quarter. Run into the full capacity we already built up in our fabs. Of course, 28 nanometer will be a long node. We'll continue to optimize the technology to the High-k/metal gate plus stage. The production will be happening in next year, the later part of next year. High-k/metal gate running from this year all the way to next year. So far, the learning curve running very well.
From CapEx and the capacity on this 28 nanometer node point of view, we'll very carefully plan the CapEx on this 28 nanometer technology. More like that means, we form the strategic relations with the existing 28 nanometer technology and the customers, and to prevent the overbuild the capacity on this technology. In the meantime, we keep very long-term relation with our customer to support them to the market needs.
Okay, thanks. My next question is more related to your mature nodes. First of all, on NAND flash, when do you think you will start the capacity increase? Do you think the customer demand is now satisfied for NAND flash? Given those growth drivers in the mature nodes, do you think first quarter next year, we can see efficient sequential growth like you did last year?
Okay, Charlie, you know that SMIC has been working on this kind of fab-filler and diversified technology platform for the past many years, all the time. Actually, SMIC came from a memory company. Along the way, we already built up the technology from 0.18-micron all the way to 24 nm technologies with the logic-compatible technology platform for NAND flash, CMOS image, HV drivers, MCUs, et cetera. Turn on this production, actually, it is very easy for SMIC because 95% of the machine are compatible. 95% depends on which nodes. We should say 85%-95% of the machines are 100% compatible with the existing logic productions. That means when we have the needs, we just need to change a couple of tools. The ramp-up or the transition from one production to another production, especially in our 12-inch wafer fabs, are super fast.
We should say we ramp up this NAND flash, CMOS image, this kind of thing, just depends on customer's schedule. My point is, their qualification to the increase of markets takes time longer than our production preparation. Everything we ramp up to that stage, everything depends on customers' orders and demands.
Mm-hmm.
Okay. Thank you. Let's be very quick on the financials. Dr. Gao, it would be very helpful if you can sort of quantify the depreciation for Q, and also maybe a range for next year's depreciation. Thanks.
The fourth quarter depreciation would be $255 million. For 2017, it is unchanged, it is approximately $975 million. For next year, the CapEx plan is still under planning. Charlie, you have no further questions?
Is that fair to assume that in the following quarters, depreciation should at least maintain at or above $255 million? Is that a fair assumption?
Yes.
Okay. That's clear. Thank you.
Thanks, Charlie.
The next question comes from the line of Rick Hsu of Daiwa Securities. You may ask your question.
Yeah. Hi. Thank you for taking my questions. I just got one question on the CapEx side, especially for next year. I know you don't provide guidance at this call, but maybe just give us some ballpark number, because you guys keep highlighting that you are aiming to close the technology gap, presumably with the industry leader, and that's definitely one of the missions for Dr. Liang. In order to close the technology gap, can I assume your CapEx will continue to be pretty high in the next couple of years, although you have already spent quite a big buck in the last two years?
Hi, Rick. How are you? I will answer your question. For the CapEx point of view, you know that in the past two years, what we have spent, not just the leading-edge technologies, also the expanding in the mature nodes. Basically, SMIC never built up the capacity on the trend of industry type. We built up the capacity with CapEx money to meet customers' requirements. In a sense, we can say, no build-up of the capacity without customers' commitment, and more or less, we just meet up the demands of the markets. For next year, our expectations are, we do not have the detail. We gave up these kind of details at next earnings, but we can say that the CapEx, we won't see significant increase compared with the current situation.
Right. Maybe just a quick follow-up, because investment cost for a leading edge, for example, the next-gen, you guys are going to develop 14 nm and also build behind 14 a few years after. The development costs are just going to rise very substantially. Would that keep your CapEx high in the next couple of years? You want to close the technology gap.
I wish to say this way. On the one hand side, for the leading-edge technology, we provide, we will build up with the joint ventures. The burden definitely got shared with the other investors, and we really found out this kind of investor. We already got a very good example in Beijing's joint venture. Another thing that just now I say, and we build out a capacity, just to the level for customer demands. As well as we do not have an overview, we do not have an idling capacity, and the overall should not be a big cost to SMIC.
All right. Good. Fair enough. Just one quick follow-up. Can you remind us your 14-nanometer FinFET development time horizon? Like when you expect to start to contribute revenue?
We should say this way, currently, and the program went pretty well on cost, and previously, we already say that, and we'll put it into production for FinFET in 2019, two years' time.
2019 in production. Right.
Yes.
Thank you so much.
Thanks, Rick.
Your next question is from Liting Wang of CICC. Please ask your question.
Okay. Thank you for taking my question. I have two questions. First is that, concerning for the management team, can you, management team, explain how the co-CEO structure will operate in the future? Yes, thank you.
For the industry, SMIC is not the first company to use the management team of co-CEO. That co-CEO system has been proved in the industry, and we found that more and more companies, especially in our foundry business, start to adopt this co-CEO scheme. Mainly because, for the company like SMIC and the other companies, we are in a very fast-paced type of movements in both technology, marketing, and internal management. A co-CEO can give us the benefits. Chinese always got a saying that two heads is better than one. Exactly, with Liang Mong Song's join, and as co-CEO, we work together. Every week, we settle down the settlements for the company, different area for the decisions, and together with our chairman.
After we settle down that kind of strategic decision, big decisions, and individually, we just go for work, for detail to drive the team, and individually. That mean we do have different focuses. Like myself, I focus more day in, day out on the operations, the marketing, sales, so on and so forth. Liang Mong Song also drive the area and to get breakthroughs. Overall, co-CEO in SMIC, we should say, for the decision-making procedure and flows, we work together. Then, we just go for day in, day out type of detail management in the assigned area. I guess that for the industry, for the other company, they more or less have the similar job assignments and responsibilities while doing things.
Okay. Thank you very much. It's very clear. The second question is that, your fourth quarter, actually, previous investors asked, the fourth quarter gross margin went down to 18%-20%, also the utilization rate also down to, I think, 84%. Do you think this is roughly the bottom of the quarterly margin on the utilization rate if you have so many new applications to come in, like the NOR flash or these things? Also, the related question is that, because I think SMIC delivered very good results for, I think, continuously maintain profitability for more than 20 quarters. Okay, now, do you think looking forward, when you drive up your leading-edge technology, do you think you will still keep profitability or at least maintain the profitable as a minimum bottom line when you drive the scale?
Do you think it will be dependent on the operations side? Thank you.
Okay, Liting. The first thing first, that our plan or intention still to maintain the profitability. This is the first one, never change. As for whether or not the fourth quarter is the bottom, we can't say too much since we do not have full judgments on next year's situation. We have different ways of handling the situation. The fourth quarter, usually from utilization point of view, based on the accounting rules we are adopting, and that means linked to the first quarter. First quarter for the mobile communication, this kind of industry, that's usually the changing season. You know that. It's always got a seasonal type of cycling for foundries for mobile communications. That impact the fourth quarter, also impact the first quarter. That's a very common things.
As for additional CapEx, for the building of the capacities, additional spending on the R&Ds, just now I already said that. For the leading-edge wafer fab, at the beginning, the burdens are very heavy, but we use the joint venture because the other shareholder investor also share with the cost with us to push up this new wafer fab. For the R&D, is exactly the same thing, that the joint venture absorb, and the certain part, according to the percentage of their shareholdings, absorb the cost of that part. By doing so, I still believe that SMIC can move fast in advancement, I mean, of technology and the new wafer fab settings, while we still maintain the profitability.
For your new application you developed, like the NOR flash or these things, will, I think, start to contribute significantly on your revenue from already fourth quarter, or it will, I think your LCD driver or the IoT you mentioned in the beginning. These things will be a major contributor for your revenue in 2018. Because your mature node process, actually, utilization rate, I think, also below the 84% corporate average, if I understand correctly.
In this quarter, we already see that more than double-digit growth for this kind of NOR flash contribution to compare with itself. Just now, I mentioned that for SMIC, a NOR flash definitely is the pre-built up for many years. For the past six years, we continue producing the NOR flash. Just recently, we have additional capacity. We have the demands from customer. We eye down the ratio of this capacity and the production scale. You know, here at SMIC, we are also running this standalone NAND flash for more than three years. It's also in a very good trend. We are also running CMOS image, MCU, and we really found that the demand for MCU, for NAND flash, for CMOS image also got increased significantly recently.
We say that NAND flash is the first product to cover the seasonal frustrations, and we may see the second and third and fourth products continue to fill out the sides.
Thank you very much.
Sure.
Next question comes from Gokul Hariharan of J.P. Morgan. Please ask your question.
Yeah. Hi. Thanks for taking my question. I have a couple of questions. First, I think previously you had talked about a 20% revenue CAGR target. Now that management has reviewed the target, et cetera, could you say whether you are still abiding by those 20% kind of growth targets for the next few years? Second question is, when you activate your R&D investment, also bring in 14-nanometer development. Could you talk about what kind of rough R&D spending do you need to have? Right now, I think you're running at about $400 million, $450 million less than a year. What is the rough ballpark in terms of R&D spending that you would need to have to support some of these advanced process node technologies? Thanks.
Hi, Gokul. Thank you for the questions. 20% CAGR is our goal. We aim to hit this target. This is a component, that means we have this kind of growing pains. For certain years, we can running higher, like last year we did very well, this year, we still got a growth, even though we met up with market adjustment. Just now I mentioned quite a couple of the diversifications of technology like NAND flash, NOR flash, MCU, CMOS image, et cetera. These are the mature technologies, as you might see, has been running pretty well. Currently, we do not have any capacity to run up this kind of platform to meet up the demands. So now we have more capacity. We build up. We start to enjoy and to harvest this kind of technology platforms.
Overall, we still aim to get the, just now we say, the CAGR growth. For this year, it depends on the market. We really met up with the market adjustment. Just now we say that the fingerprints and the smartphones and the demands and the product mix change, these kind of things. We say, for this growth, definitely we adjust everything, meet up the demands of the markets. We are very practical, but we really aim high. The second thing, you talk about the R&D spending. We continue a balance of spending on the R&D. With the revenue growth year by year, and definitely our R&D, yeah, balance the R&D spending. That means we balance the profitability. We balance the CapEx growth. We also benefit the R&D spending there.
The thing definitely we found that the R&D spending to develop a technology, actually the money is almost fixed. If you spend less, you take longer years. You spend more, you take a shortcut.
Understood. I think since you are pulling in the schedule, does that mean that we go from a $400 million per year to, I don't know, $600 million, $800 million per year? Is that something that is going to be spread out over a three, four-year period, at least?
Hi, Gokul. I believe the idea, we just balance that. We do not. Just now we say that, we keep the profitability, we will find a grant, we set up joint ventures to share the cost of the R&D, so on and so forth. That's the balancing things. I don't think we go for from $400 million all the way to $800 million. We won't go for that way, unless we find special solutions.
Okay. Got it. Thank you.
Yeah. Thanks, Gokul.
Your next question comes from the line of Rex Wu from Jefferies. You may ask your question.
Oh, hi. Thank you, management. My first question is, in Q3, we see a weakness in 55 nanometer at 0.13 micron. What were the reasons? Thank you.
Okay. Very interesting question. For 55 nanometer, the weakness, very simple. The money come from two parts. One of the things that we saw the add-on of the computation on 55 nanometer from the partners in this industry. Also, we saw the switch, the shape of the products from our existing customers from 55 nanometer to 40 nanometer ultra-low power applications. That's the product change. Because the computation at a 55 nanometer get very strong, they shift the product from 55 nanometer to 40 ultra-low power. As you might see, overall, the load is still there, but we saw that one technology load get less, another technology get more. Yeah, that's the thing. In the meantime, just now you mentioned the eFlash CMOS image, this kind of ramp-ups. This kind of ramp-up also need a 55 nanometer capacity.
We also see the switch from logic to memory. Just now you also mentioned 0.13, the reasons, right?
Yes.
0.11, 0.13, actually, that's very interesting. That's for eight-inch, but mainly focus on copper technologies. For copper technology this year, for 0.11, 0.13, the majority application on this platform actually is the low-frequency RF. The Bluetooth, the small Wi-Fi, the automotive monitor, and low now is earphone, so on and so forth. You have this Google Home, this kind of smart speaker structure. We saw the migration from 0.11 copper design migrate to 55 nanometer. Majority player on this area are small players. Look at the EDA upgrading, they have the supporting from IPs. We saw majority of them, almost none of them left on 0.11, 0.13. All of them are shaped to 55 nanometer. From wafer to wafer change point of view, from 0.11 to 0.13, when it reached to 55, the wafer counts reduced, from eight-inch to 12-inch.
For SMIC, the majority of the tools are actually compatible. That means they can switch between copper and aluminum, except the micro-loop. What we did, we just switched the capacity from copper 0.11, 0.13, to aluminum 0.15 and 0.18. Capacity point of view, there's no way without capacity. We really see the technology and the different nodes, the loading get changed, switched from one node to another node.
Okay, thank you. That's very clear. Since you mentioned about the migration from eight-inch to 12-inch, what's your view on the future eight-inch demand? Do you still see the demand outstrip the supply, or where do you see as fast growth drivers in the eight-inch in longer term? Thank you.
Okay. Actually, we do not have the consensus prepared for this question. I give you my personal comments on this one. At this moment, eight-inch will stay there for a while. The reason not because of eight-inch running is better than 12-inch on mature technologies, but because of the back-end. Back-end testing, back-end bumping, back-end packaging. The current back-end capacity for eight-inch are over-supplied. But for 12-inch are short-supplied. The back-end cost of 12-inch is much, much higher than eight-inch. Not simply one 12-inch is similar to eight-inch for back-end, much higher than that. That will keep the eight-inch loading for a couple of years because nobody really spend that much money on 12-inch for back-end. Once this result, say that we're spending on 12-inch back-end, get fully depreciated like eight-inch, at that moment, 12-inch really get a significant benefit running than the eight-inch.
Actually, currently dominant running for eight-inch like CMOS image, fingerprints, PMIC, power management, so on and so forth, these kind of things, and the major cost come from the back-end. Back-end eight-inch at this moment, except the bumping, get over-capacity. Yeah.
Okay. That's very clear. Thank you. That's all my question.
We'll take the final question from Alan She of Macquarie. Please ask your question.
Doctor, thank you very much for helping us understand SMIC better. Quickly, two questions. One on visibility first quarter. Could you clarify what you might be seeing, if you are seeing anything, the visibility and maybe the seasonality, how it's going to change next year? The second question is basically drilling a little bit deeper into the margin. You mentioned that product mix and ASP were part of the problem. Can you share with us some of your insights on the competitiveness on the ASP side as well as the product mix, which I think you've gone into a little bit. First, visibility, seasonality, first quarter, and then what you're seeing for ASP competitiveness. Thank you.
Overall, we should say that we do not go for too much detail for the next year. The visibility is not that clear, and in general, we do not give aggressive or something not that predictable. As a general, we should say for mobile communications, the first quarter is always be the weakest one. For the foundry, for every foundry makers, they have a huge amount of consumer and mobile communication loadings. From the industry trend, the first quarter for the mobile communication is always be weak. We do not expect the first quarter is the best quarter for next year. Definitely that's true if you look at the past three to four years. That's the seasonal trend for mobile communications.
For the ASPs, in general, the people, the customer settle down with the foundry everything, and they usually just go for the calendar year. That means the new quarter, new year, they will start to implement the new ASPs. For the consumer products and the mobile communication products, the ASP pricing game is very competitive. We fully recognize that. Especially when we have the new capacity push up to the markets, and we see the more competition there. What we need to do, I admit, this moment, we just go for industrial trends. This is the first one. We can now run different from industry for this performance. For SMIC, what we are doing at this moment is that we do not overbuild. We build out capacity with customers' commitment.
In the meantime, we build up the multiple and backup plans, just now mentioned, the memory, NAND flash, CMOS image, and MCU [manufacturer], to cover the seasonal fluctuations. One more, everybody is doing hard is for the cost reduction. To improve the operation efficiency, improve the utilization of the fab, and to counter the ASP and competition in the industry.
Thank you very much, doctor.
That's my answer. Just general comments.
At this time, I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.
In closing, we would like to thank everyone who participated in today's call, and again, thank all of our shareholders, customers, employees, and suppliers for their trust and support. Thank you.
Thank you. Ladies and gentlemen, this is the end of SMIC's third-quarter earnings conference call. We thank you for joining us today.