Welcome to Semiconductor Manufacturing International Corporation Second Quarter 2017 Webcast Conference Call. Today's conference call is hosted by Doctor. Haijun Zhao, Chief Executive Officer Doctor. Yonggang Gao, Chief Financial Officer and Mr. Enling Feng, Vice President of Investor Relations.
Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's website. Please be advised that your dial ins are in listen only mode. However, at the conclusion of the management's presentation, we 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.smics.com. Webcast playback will also be available approximately 1 hour after the event.
Without further ado, I would like to introduce to you Mr. Enling Feng, Vice President of Investor Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's Q2 2017 earnings webcast conference call. For today's call, our CFO, Doctor. Gao Yonggang, will comment on our financial performance first and give guidance on the next quarter. And then our CEO, Doctor.
Haijun Zhao will provide some business remarks. This will then be followed by our Q and A session. As usual, our call will be approximately 60 minutes in length. The earnings release and the quarterly financial presentation are available for you to download at our website. 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 subject to risk and uncertainty. Our actual results may differ significantly from those projected or 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, 2017.
During the call, we will make reference to financial measures that do not conform to General 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 CFO, Doctor. Gaoyoung Gang.
Thank you, Annie. Greetings to all our listeners. First, I will highlight our Q2 and first half twenty seventeen results and then give our Q3 2017 guidance. In Q2 2017, our revenue was RMB751,000,000, a decrease of 5.3% quarter over quarter, mainly due to the soft market. On a year on year basis, our revenue increased 8.8%.
Gross margin was 25.8%, mainly due to low fab utilization, which was 85.7% in Q2 compared to 91.8% in Q1. Non GAAP operating expenses were RMB187 1,000,000 in Q2. Profit for the period attributable to SMIC was RMB36 1,000,000 while non controlling interest were RMB3 1,000,000 of credits to SMIC attributable profits. Moving to the balance sheet, at the end of Q2 of 2017, cash on hand, including other financial assets were RMB1.4 billion. Gross debt to equity ratio was 48% and net debt to equity ratio was 25%.
In terms of cash flow, we generated RMB245 1,000,000 of cash from operating activities in the second quarter. If we look at our first half twenty seventeen unaudited results, our revenue was RMB1.54 billion, gross profit was RMB450 1,000,000 and EBITDA was RMB509 1,000,000 or attributed call wise. Now, looking ahead into the Q3 of 2017, our revenue is guided to be flat to up 3% quarter over quarter. Gross margin is expected to range from 22% to 24%. Non GAAP operating expenses are expected to range from 100 and 79,000,000 to 185,000,000.
Non controlling interest of our majority owned subsidiaries are expected to range from 0 to positive 3,000,000, which are losses be borne by non controlling interest. We reiterate our planned 2017 CapEx for foundry operations of approximately RMB2.3 billion. We plan it 2017 CapEx for non foundry operations is approximately $70,000,000 mainly for the constructions of employees in quarters. I will now hand the call over to our CEO, Haijun, for general remarks.
Thank you, Yoon Ka. Greetings to all listeners and
thank you for joining us.
Today, I will highlight our second quarter and first half performance, outlook for the second half, challenges, opportunities, technology development and strategic directions SMIC. Our 2nd quarter revenue grew 8.8% year over year and declined 5.3% quarter over quarter. Most of our year over year growth by application came from auto and industrial. Auto and industrial revenue grew almost 7 fold year on year and 16.2% quarter on quarter, mainly as a result of our acquisition of our Foundry and it is improving utilizations. By device, most of our year on year revenue growth came from CMOS image sensors, now flash, application processors and power ICs.
From a technology node perspective, 28 nanometer grow 12 fold year on year and 24.8 percent quarter on quarter. 0.13 micron nearly doubled year on year and it grew 5% quarter on quarter. The sequential decline in our revenue resulted primarily from our smartphone related applications. This decline on the muted growth guidance was the result of high inventory levels in the first half. Currently, customer inventory levels have come down.
However, the buildup of inventory for China smartphone supply chain is slower than the seasonal due to end market uncertainty, resulting in a smaller than seasonal growth in Q3. Given this situation, we now target annual revenue growth of mid to high single digits in line with foundry industrial growth. We acknowledge the near term challenges and take hold of upcoming opportunities. The challenge which we are facing this year include note transition, pricing environment, customer inventory, market uncertainty and new technology execution. In spite of the challenges we are facing, we are encouraged by our team's hard work and continued progress in capturing opportunities.
This year, our team continued to ramp up 28 nanometer, which will be one of our primary growth drivers. In addition, we are happy to see fingerprint sensors picking up strongly in the second half. We also see a continued growth in flash memory and collaborative closely with our clients to capture opportunities in the near handset models, IoT, auto and industrial control segments. Our technology development, I'm glad to see our team reach several milestone achievements on 28 nanometer. As mentioned previously, our 28 nanometer has 3 platforms, Polysilon, HiK, HKM and HiK C.
The first platform, 28 Polycom is our major growth driver for this year, serving communications related applications. We maintain our belief that Polycom will continue to have demand in the long term. The second platform, 28 nanometer HKM, has already been in small volume production since last year. This platform is suitable for and is serving communication applications.
The 3rd platform,
28HKC, successfully entered risk production as scheduled this quarter. This platform is being used for communications and consumer applications. In addition, we plan to have HKC plus ready in next year. 28 nanometer overall contributed 6.6 percent of our wafer revenue in the 2nd quarter and is expected to reach high single digit contribution by Q4 this year. 14 nanometer development is also underway at our advanced technology development joint venture, where SRAM EO has been demonstrated.
I would like to now reiterate SMIC's strategy. SMIC continues to be an independent and international business. Our sustainable profitability strategy remains to fully utilize our existing assets, differentiate technology and advanced technology to serve the migration of our customers' products. Since assuming my role as a CEO, I have been taking time to refine our strategy actions and review various projects, their market potentials and return on investment. In the past quarter, I have worked with my team to refocus resources on area of greater foreseeable markets and profit opportunities.
To expand upon SMIC's strategy, I have identified 3 areas of focus and action. First, we must work to expand our cooperation with existing customers. We aim to tighten relationship, increase the service, enhance quality and technology and to broaden customers' portfolio to build customer trust and increase our shares with existing customers. 2nd, we aim for excellence in virtual technology. SMIC already has a great position as a leader in virtual nodes.
We work to drive greater increments to our existing base, generic logic technology to become the most competitive in the industry for mature nodes by pushing better quality, deliver second time performance and IP support. 3rd, we aim to build up investment into specialty platforms in which we already hold good market shares, such as CIS, Special MCU, Flash Memory and others. We strive to improve our specialty technology for our customers, so that they can gain a competitive edge and win shares in their respective markets. SMIC is in a state of growth and by pursuing these three directions, we can more clearly consolidate, solidify our positions in the foundry market as the preferred foundry partner in Mainland, China. Thus, SMIC continues to expand capacity in mature nodes and new nodes with the needs of our customers.
This year, our CapEx remains unchanged. The incremental increase in capacity in 27 compared to 26 year end for our 8 inches fabs includes Shanghai adding 9.8 1,000 Tianjin adding 3,600, Shenzhen adding 2,000. For our 12 inches fabs, Beijing B1 adding 8,600, Beijing Joint Venture add on 10,000 and Shenzhen adding a mini line of 3,000. To conclude, although the near term outlook is not as seasonally expected, we work diligently to maintain our position as the foundry of choice in China. Through deepening cooperation with our customers, enhancing product quality, service and offerings, SMITA is in a great position to benefit from the broad based growth in semiconductor markets.
Together with SMIC team, we will work harder to contribute to long term sustainable value and growth for you, our shareholders. Thanks for your support. I will now hand the call back to Erling for the Q and A session of this call.
Thank you, Haijun. I would now like to open up the call for Q and A. As usual, please be reminded to limit your questions to 2 questions per person. Operator, please
Your first question comes from the line of Randy Abrams of Credit Suisse. You may ask your question.
Okay. Yes. Thank you. Good morning. Yes, I wanted to ask the first question.
If you could talk a bit more about what is driving the slower pickup in 3rd quarter? You mentioned smartphone, but I'm just curious if it's just relating to the smartphone weakness. And if you could talk looking past that you were targeting to backfill applications, if you could give an initial view for Q4 considering the lower base product delay and strategy for backfill, maybe potential for things to start to pick up in Q4?
Hi, Randy. Thank you for the question. And your question, you mentioned the points I made that we see the recovery in the loadings and utilizations in the coming quarters. Yes, we do see the recovery trend from the smartphone market. For SMIC, and our side, we do not see that margin from end smartphone, but the connected part and like auto CMOS major, now flash and this kind of our products.
And we do see the recovery of the loadings from our customers. And one of the big area we see the downturn probably is the fingerprint applications and set up box of these kind of jobs, but now we see the recovery of these kind of applications. And for the coming quarters, we already gave the guidance and I really consider this way that the smartphone related market areas, especially for the customers of SMICs looks better.
Okay. And if I could ask, is any just a follow-up on the first one, but if any of this is relating to the 28, just a slow migration, if any bit has been a transition issue just from 40 where you've had a strong position in broadening customer base and 28 is starting to ramp. Is any of this relating to transition or say competitors already on 28? And if that's the case, is there potential you get some of that business back once your 28 high ks ramps up?
And probably we already say the revenue change really related to the markets. And one of the factors is the softening of the markets. Another thing that we also say that we did see the product transition from 14 nanometer to 28 nanometer. And that's true. And We do see the recovery of this kind of applications also back to 14 nanometer.
In the meantime, for 28 nanometer, we also got a pickup loadings. We already showed up the number and forecast we have the high single digits revenue from our 28 nanometer in the 4th quarters.
Okay. And the second Could you go through the factor Could you go through the factor how much is mix of 28 versus the depreciation coming up? And maybe an outlook where you see margin kind of range if these lower 20s maybe the right range with depreciation rising? Or if you fill up this capacity, we can get back up toward high 20s?
Yes, Randy. We do not really break down to different technology nodes on the gross margins. We give the guidance on the 22% to 24% in our forecast for the 2nd quarters. We already announced that. And for the gross margin job from the Q1 to Q2, we already mentioned the reasons.
The first reasons from the soft end markets of smartphone that impact our fab utilizations. And the biggest factor impact the gross margin is the fab utilization. Another thing we really saw that last year the fab capacity was very tight and about this year we see the relaxation of the fab capacity across the markets and that's led to the pricing competition. And we are using the market price, but overall market price can become more competitive. That also affects the gross margin.
And just now you mentioned that the 4 gs new technologies and for SMIC, we have been through so many years in the mature nodes and in new technology nodes, we have our successful way of doing things to controlling the cost, so that we believe we will make another successful story on the new technology on 28 nanometer.
Okay. Thank
you. Thanks, Randy.
Your next question comes from the line of Steve Pelaez of HSBC. Please go ahead.
Yes. First, if I can follow-up on Randy's questions. On 28 nanometer, I'm curious, can you talk you mentioned that the majority this year is more PolySign, but I'm wondering if you could just talk a little bit about number of customers, tape outs, how you see the high ks version ramping up? Will that be a meaningful percentage by the Q4? Or just give us a little bit more color on 20 nanometer resize just percentage of revenues?
We can't disclose the names of the customers, but we do have more than 2 customers. And on the 29, we are calling some currently we have enough products, new products to keep the loadings going. And for 28 nanometer, yes, you are right. For the Q2, the majority of revenue comes from 28 nanometer Polysilicon. And second quarter, we increased 26% compared with the Q1 and the total contribution already accounted for 6.6% of the revenue.
And we target the total loadings and the percentage of 28 nanometer in our total revenue. We continue to increase to high single digits in the last two quarters. And we do have the HKD right into production. Will see the contribution to our revenue in the second half year.
Okay. Second question for me is going to be a little bit on cash flow. Yes, you guys have fairly good cash flow from operations, but your CapEx is still 2x to 3x bigger than your operating cash flow. Looks like kind of a negative $500,000,000 to $700,000,000 per quarter burn, a decrease in cash each quarter. You have about $1,400,000,000 in total cash on hand.
So I mean, do we really only have kind of 2 to 3 quarters here? Are we going to have to do another financing event there? What are you thinking on cash flow over the next 2 to 4 quarters?
For SMIC, actually, we have very conservative policy in controlling these cash flow things. Currently, we do have sufficient cash and cash in our hands from our operation revenues. And in the meantime, we also have sufficient guarantees of this financial tools. And you'll see the job of this kind of cash flow, mainly because for the investments, it's never really run through month by month. We already agree with guided here and we just get out this kind of investments at a specific time points.
Overall, this we are very conservative on the cash
and we do not see issues at this moment. And Steve, I'd like to also remind that we do have a joint venture, which will also contribute cash into this CapEx. And also, you probably noticed we also exercised some of the leasing program and to fund this installment of equipment. And so, overall, we see we should be fine with our cash position.
Okay. Are you expecting capital contributions from the JV partner in the second half of the year and how much will
that be? Our largest joint venture is the joint venture in Beijing together with the investors SMIC accounted for 51% of the share in the company and controlling. And for the CapEx, we have the investment in Beijing and that 150% comes from our partners in the joint venture.
I'm sorry, last time I was trying to understand, will there be capital injection from the JV partners in the second half of the year?
Yes. Because this year's CapEx is mainly for the fab expansion in 12 inches and the largest 12 inches expansion actually happens in Beijing joint venture. And that cash injection is 50% of the CapEx spending we announced.
I'm sorry, how much were you expecting?
So we didn't say. We did not owe the detail of individual fab.
Okay. And then last quick question, just for a term question I wanted. There's a lot of Chinese capacity that's coming online, right? Huawei, Powerchip, UMC, TSMC, GlobalFoundries, they're all building in China. So as you think about 2 years from today, maybe at all those fabs are up and running, how are you thinking about kind of the competitive landscape in China?
You guys have kind of had Seoul running there for a while. So what are you thinking a couple of years from there?
Hi, Stephen. You are very familiar with the current situation in China. And the strategy for SMIC is to focus on our own and further development. Just now I mentioned the strategy, 3 parts for SMIC. And the first part is that we'll strengthen our relations and build up strategic partnership with our existing customers and expand portfolio for corporations.
And the second is that we'll strengthen and enhance our mature nodes and become the best quality, best delivery type of foundry. And for so many years, we already have very solid base in the mature technology nodes and quality and the technology strength and the relationship with our customers. And really and the third that we do have the specialty technologies like CMOS image and Flash Memory. At this moment, we really just like you mentioned, we really seriously studied the situation and the challenges to SMIC and we are very confident that we can maintain SMIC's position in China and continue our success story.
Okay. I'm just going to sneak one last quick one in here for me. Depreciation, what are you targeting for the full year? And I noticed that depreciation in the cost of goods sold in the Q2 actually decreased. So how are you thinking about the depreciation with the cost of goods sold?
What's embedded in your Q3 guidance there? So full year depreciation and amortization and then 3rd quarter depreciation in cost of goods sold. Last question for me. Thanks guys.
Yes. Actually, Stephen, we already announced previously that for the whole year the depreciation will be reaching US1 $1,000,000,000 And we really see a quarter tied up, but the whole year overall still we think that guidance US1
$1,000,000,000 Thank you.
Thanks, Stephen.
The next question comes from the line of Rex Wu. You may ask your question.
Thank you, management. So can you comment a little bit on your like Taiwan peers like UMC start to focusing more on the mature node. So can you talk about more SMIC's competitive advantage in these mature nodes? Thank you.
Hi, Rex. Thank you for the question. And just now we already mentioned the strategies taking into consideration the challenges we have from Ylan China, new wafer fabs and the competitors overseas. And actually, for so many years, overseas situation more or less the same. They want to be a change.
And the competition has been there for many years and also from today. So, we will take focus on SMIC's strategy, just continue to strengthen our strengths in the maternal and in the relations with our customer and in the quality and time delivery to market. And for these mature nodes, we do not comment on a specific competitor, But the things I'd like to say, the competition has been there for many years. And we do now see doesn't matter they have the facility in China overseas and the competition is no big change. We have been facing this kind of competition in the past 4, 5 years.
And we really say that in our maternal, just now I mentioned that for the communication sectors, fingerprints, CMOS images, flash memories and the general logic, RF analog, this kind of MCU. And we have been very successfully have our market share and we have our product base and customer base. We will continue our strategy on these parts.
Okay. Thank you. So, my second question is, can you update on your NOR Flash like an outlook for the next year?
Okay. That's a very good question. Actually, I'd like to mention that. As you know, SMIC from the start up was a memory company. Of course, at that moment, it was doing the DRAM technology.
And after SMIC completely withdrew from the DRAM foundry business, we focus on logic, but actually we kept one of the areas is the flash memory technology for special customers, specialty applications. And for so many years, XYZ has been very strong in this area. That's one of our strongholds for the specialty flash memory and for the non flash and even the standalone NAND flash. And this year, from the end of last year, we saw very strong recovery and a very strong demand for specialty memories. And SMIC benefits from the preparation of so many years of flash memory technology, also from the building up accumulation of the customer base and the market shares for the our customers' market shares of the flash memory.
And we saw very, very strong demand for the non flash area. And the only thing is that is at the time SMIC, even though we like to cater to our customers as well as strong request, it will take time to build up the capacity. And the flash area, especially the non flash area, for our customer, they already qualify this kind of thing into the automotive and the server. And this is a very stable area for long term demand. And we already convert part of our capacity to support this demand.
That's one of the area for our revenue growth and the fab utilization in the coming quarter and next year. And Wei Fei also comments that the probability of such a special memory is quite good than before, much better than before. Okay. Thank you. Okay.
Your next question comes from the line of Charlie Chan of Morgan Stanley. Please ask your question.
Hi, management. Thanks for taking my question. So my first question is regarding the raw wafer supply. Can you give us some comments on the supply situation and whether that constraints your business development in those flash memory or other fab filler business that you mentioned last time? Thanks.
Hi, Charlie. Roll wafer supply has been a very big topic these days in the market. And so far, we do not see a very big concern on this area. The reason one of the reasons that SMIC has been in the foundry markets for so many years and we already qualified all the major suppliers, we got a mix. And just to preempt these kind of sudden situations, This is one of the factors.
The second factor is that SMIC, since 2 years back, we already forecast a very strong growth in our revenue. And we already beforehand, we already start to have this kind of forecast with our supplier side. So, we're still on the trend of revenue growth and wafer demanding. So, we do not suffer from this kind of sudden change type of things, mainly because of the planning. We will have to forecast for additional requests on the wafer quantities.
And just now we mentioned for the non flash, for the non flash, for this kind of memory, special things, It has been in our forecast. This is one of the reason. Another reason is that actually for the raw material supply these days, mainly limited by the overall quantity inside of these special requirements, it doesn't matter and what kind of wafer specialty and on the requirement on the special occasions, the true bottleneck actually is the silicon ingot, is the silicon slides or silicon wafers. Instead of the later part of process treatment side, like somebody like a light speaker IP, light speaker center and different concentration of the dopants in the wafer. So, we should say SMIC is still on the trend of a forecast that each year how much percentage of the revenue growth, how much more wafer we need to produce and this kind of cooperation and the contract already settled on with our suppliers.
So, we want to change with the product mix change inside SMIC. So the situation is very good so far. Yes.
Okay. Thanks. And my next question is regarding your fab utilization and your CapEx plan. So I think at the beginning, the company revised down the full year revenue growth guidance while you maintain your full year CapEx guidance at RMB2.3 billion. So fab utilization rate I think in 2Q is a high 80s, right?
So I'm not sure how to reconcile this lower utilization versus your strategy that you want to utilize the current assets instead of spending CapEx when your fab still has space. So, can you sort of reconcile this long term strategy versus this year's challenge?
Sure. I got your point, Charlie. And for the long term, we already announced before communicate with our investors that long term we target 20% CAGR growth. And that portion, no change. We still maintain that for the long term.
We have this 20% across years of growth. And in order to make this kind of target realistic, we need to have the growth. And this is the first thing that really for the capacity expanding and for the technology development will continue. And the second thing is we do have the flexibility and really take into the market change, dynamic change. We have the criteria for the tools of procurement and the capacity release.
For that portion, we are very cautious. So, so far, we're still able to handle that. Come back to the Q2, soft market utilization job, you mentioned the high 80s and we do see the recovery from the markets and the situation for the Q4 last year looks better than before. So, at this moment, we do not have the strong motivation to slow down or to stop. But just now I mentioned that we do have the criteria, we do not suddenly buy auto machine gear just prepared for next year.
We do have the trigger points by what kind of utilization to trigger and how much capacity we need to acquire in the next quarter, in the next 6 months, we have very accurate adjustments on this part.
Okay, understood. So just a very quick clarification on your second half fingerprint business recovery, right. So you said the company is adding new customer or the exceeding big customer, their demand comes back? Can you clarify a little bit?
First things first, we do have new customer coming and this account for part of the things. And for the existing customer, for the fingerprint applications as similar to the image applications, we also see the recovery, yes.
Okay. That's perfect. Thank you.
Thanks, Charlie.
Your next question is from Roland Xu of Citigroup. You may ask your question.
Hi. Thank you for taking my question. First question, for your strategy, now you are going to work on your existing customer and mature technology and also improve the specialty platforms. So it looks like your CapEx spending next year or going forward probably won't be as big as this year. Is this right?
Hi, Roland. We have to say no comments for next year. But just now, we mentioned that for the long term, we are targeting at 20% growth CAGR. And definitely we need to prepare the things for these kind of targets.
Yes, agree. But at least 20% growth CAGR, so you need to expand the capacity. But for your strategy, actually, you are trying to focus on more mature technology and specialty platform. So, for the leading edge technology, probably intensity, will it be as big as this year or previously?
And we are expanding like previous years, we are expanding on both the mature and the leading edge. And we are working with our customers. We build out the capacity and on the basis of the customer demands. And definitely, we have the plans with our customer on what kind of technology platform, what kind of capacity, what kind of timeline and mainly the targeted marketing area, customer name and the product name and the timelines, which is kind of a realistic base to expand the capacity. So, it turned out to be there's a mix of different products even in the same fab.
And for example, even in the 12 inches fab, we do now have the same fab setting as the other peers. Let me dedicate 1 fab just to 1 technology node, but for our side, and we have to make some mature nodes and the leading edge in the same fab. So, when we're talking about mature, they're including the 12 inches of our established type of platform to get a spending expansion, just now I mentioned that for the Now Flash, these kind of things. And currently, for the CapEx, we have more than 2 thirds of equipment CapEx spending in Beijing B1 and B2 joint venture and also Shenzhen 12 inches wafer fab. And we already mentioned that for the Beijing B1 and the 12 inches wafer fab in Shenzhen, that's mainly on the materials and Beijing B2 that's the brand new fab.
Okay. Thanks. So for your mature nodes, are you considering to use a 12 inches mature node to do the production for applications such like driver IC or MCU or even for this power management IC?
Actually SMIC already qualified this kind of technology in 12 inches and currently for the 3 products you mentioned that we are running both 8 inches fab and the 12 inches fab. And some are even exactly the same platform, same technology nodes, we are running both 8 inches 12 inches It depends on the fab spaces and the flexibility of the machines when we add on the mature nodes capacity. For example, if we add on the mature nodes in 12 inches we can cover all the way from 55 to 0.18. We may choose to add on the machines to 12 inches wafer fabs. And especially in SMIC, we also consider the 5 spaces, which are 5 spaces where add on machines and they can contribute to the revenue quickly.
So that's true. And your point is that we also do the things, expand the capacity in 12 inches yes.
Okay. Thank you. Yes, my second question is, I see the revenue on your 0.11, 0.13 micron and 5565 nanometer nodes increased, but the revenue contribution from 0.15, 0.18 have been decreased a lot in the past quarters. So what kind of applications change for each node?
And just mainly from the soft market of smartphones and they changed the product mix. So, when we have the product mix and you really also impact the fab utilizations because for some customers, for some applications, they need many layers of front end implantation this kind of thing for another product when you switch to and you need to add on a lot of metal loop. So, that's a product mix, make the utilization change. And outside, for the our foundry fabs, we really see very strong demand for the automotive products and that gave us a very big increase. And in the Q2, for the fingerprint products, we see a serious job.
So that one product getting higher and another product getting lower, that's the product mix change.
Okay. So I can assume this auto, auto parts actually probably increase at least contribute with 0.11, 0.3 micron. Yes. And non flash probably contribute at least 50five-sixty 5 nanometer. Am I right?
You can say that. On 0.18 And how about the
decrease from 5.18? So laser learning from the fingerprint sensor decrease?
I guess you are right.
Okay. So how about for 3Q for Q3, how does each end application work in 3Q?
And we could not comment too much on this part, but just now we already mentioned that we really saw the recovery of the mobile phone area, especially for the fingerprint, these kind of products, also the flash memory products, yes. Okay. Thank you. Yes. Thanks, Roland.
The next question is from Rick Xu of Daiwa Securities. You may ask your question.
Yes. Hi. Good morning, guys, and thank you for taking my questions. I just have two questions here.
The first one is regarding your Q2 OpEx. The number looks pretty high compared with the Q1. So did you guys not receive any government subsidies or can you elaborate that part?
Hi, Rick.
And so first thing first, yes, that's right. For the Q2, you see the OpEx percentage higher than the Q1. But for the overall, we maintained the same level, around the same level for the next quarter. And because of the OpEx, we invest in the R and D and Shenzhen 12 into Wafer 5,000,000 and setting up. And Yes.
Yes. Yes. Yes. I mentioned that whether or not we received the government funding grant and we do have that in our financial table you can see that we have $16,000,000 grant for R and D contract from the government side, yes.
Okay. So I just want to clarify that in Q2, you did not receive the funding from government. Am I right?
No. We received, just now I mentioned the number RMB60 1,000,000 grant from the government on the R and D contract, yes.
We received
$1,000,000
$15,000,000 $16,000,000 $16,000,000
$16,000,000 Yes, dollars 15,000,000 Okay. Then you also provided guidance a quarter earlier that in total you expect to receive $75,000,000 to $80,000,000 from government for the whole year. The number is still true?
Yes. Still true. We still maintain that we will receive that much. Yes.
Okay. Yes. Thank you so much. And then second question is, I know you talked about your full year revenue growth expectation. And you also talked about your Q4 and this year's revenue will likely be better than before.
So could you elaborate more about your Q4 visibility? I know it's a little bit too early, but I want
to see how your Q4 look like
in the visibility. Would that be kind of seasonal?
And I cannot give too much comments on the Q4, but at this moment, we really saw the PEO momentum picking up. Just now we say that the situation looks better than previous expectation.
Okay. All right. Thank you so much. That's all I have.
Your next question is from Chris Yim of BoComm International. Please ask your question.
Hi, good morning and thanks for taking my question. My first question is on what you mentioned earlier regarding to ASP pressure.
Can you give us a little
bit more color on where you're seeing the ASP pressure and how much is impacting your gross margin? That's my first question. Thank you.
Actually, this year, the capacity got a relaxation than last year. So, the overall market become very competitive, not just to SMIC, everybody feels pressure. And we recognize the pricing competition and we are picking up the market price. So, the trend we should say, your understanding of the market situation, that's the normalized pricing game for SMIC, I can say that. And for SMIC, we have been sold for so many years and we are mainly running on the maternal, we are later on the leading edge And we have our way of handling the cost control.
We will continue the way of doing this. Probably we might have the CD5 nanometer, 40 nanometer. We might have with similar competition on the pricing side. And you know the market not every year they have the very tight situation like last year. So for so many realized years, we run through with a similar strategy.
We just focus on our internal management cost reduction and we will finally we'll work through the competition in the pricing.
And my follow-up is on your revised annual revenue guidance. Given that you're guiding a little bit lower for 2017, would do you still maintain the gross margin target for mid-20s this year?
Yes, we'll maintain that. Yes, mid-twenty for the overall gross margin for this year.
Thank you. My second question has to do with your 28 nanometer technology. I was wondering if you can tell us how like more detail on HKC and HKC plus Would you be able to tell us the demand you're seeing in HKC? And for HKC plus you mentioned being ready in 2018. Is that more like risk production, mass production?
And compared to HKC, in terms of performance and some power consumption and maybe die size, how much is HKC plus better compared to HKC?
Hi, Chris. And for 28 nanometer high case and technology nodes prices, we already said that we will make the production and on HKC in the second quarter and second half year and we will deliver the technology at the end of this year so that we can ramp up next year. Currently, we are very carefully ramp up the high ks capacity. And performance point of view, SMIC is foundry compatible. We deliver the compatible performance to the similar technology nodes in this foundry industry.
That's a standard sizing performance. So for high KC plus for SMIC and we give very competitive edge. That means the customer running the product needed this high performance and more like different foundry how to agree that different foundry and gave a lot of different number. But our number when we really look at our HKC that's the most competitive in the foundry area. In the performance of die size reduction performance and the standby current dynamic power.
We just match the most competitive.
Thank you. Thank you. That's all I have.
Okay. Thanks, Chris.
Your next question comes from the line of Sebastian Hu of CLSA. Please ask your question.
Hi, yes. Thanks for taking my questions. My first question, Seth, is on your Alefoundry contribution. So if I look at your application breakdown, can I assume that most of your automotive industrial revenue is coming from airfoundry?
The first question is yes. But in SMIC side, in China side, we also got other products like MCU, NAND Flash also running the auto area.
Okay. Yes, I understand. So if you look at AO Foundry, the revenue run rate that in the past few years before you acquired, it's probably around like $200,000,000 or $200,000,000 $215,000,000 revenue per year. And since you just accounted that into your started to book the revenue from that since August last year, if I remember correctly, so that's 5 months impact last year. So if we do the math, this year we have full year, last year we only have 5 months.
So basically that can help you to grow about like 5% incremental revenue. And your full year revenue guidance is mid to high single digit, which means that most of your growth for this year is driven by Air Liquide acquisition as your but your organic growth probably will be 0% or just a very, very small growth. Am I right?
Yes, more or less your numbers has been there. But we also got a growth from the joint ventures from Beijing fab this year. They also ramp up to very high capacity. And for the mature fab, you know that, and last year we already announced that iSpanci is running more than 100% utilization. Naturally, we won't expect growth from there.
Okay, thank you. My second part of the question is on the NOR Flash that you mentioned I ordered the you mentioned the probability is better than before. So I wonder that how much better wafer price do you get, say, per like 10% increase in NOR flash chipset price hike since the Eurofoundry but not IDM. So you probably need to share the price increase with your fabless customers. So, what was the profit sharing?
And so, how much better is that? And in terms of the profitability, is it above or similar to your corporate average margin?
Sebastian, we are already able to not disclose such a detailed information, the sensitive information, But we should say that the profit margin mainly comes from definitely the market getting better, customer can afford for higher price, but in the meantime, we also simplified the process flow and so that the cost is lower than before.
Okay, okay. I understand. I understand it's competition. Just wonder just like the bookmark number in terms of the probability, is it right now standing above your coverage average or similar?
Okay, similar.
Similar. Okay. Got it. And also just a follow-up on the Novartis that you say that these are going to be I think you mentioned a couple of times in your prepared remarks and the Q and A session that this has been the driver for your part of the growth driver for your 2nd quarter revenue and also you see very positive in second half of the year into next year. But when I look if I understand correctly, I think most of your NOI is manufacture 55 or 65 nanometers, but your that node revenue only increased by 2%.
So it seems sequentially, so it seems not very significant. And I wonder how and when do you see the more significant revenue ramped or contribution to you, which quarter is it going to have this year or next year? And also I think this is Norfetch is every die size is pretty small. So it doesn't come from a lot of wafers. And so how will this put into the numbers to contribute to your growth for next year, given it doesn't consume a lot of wafer?
We should say this way, this kind of memory demand has been there, but to convert capacity or build up the bottleneck capacity takes time and the revenue contribution only showed up in the Q4 this year. And the things that the final the contribution to the company is mainly from the overall utilization increments. So, for the overall we recovered to a stage, but we add up so much new capacities and later stage we will see better utilization for this kind of area we have the non flash contribution because they fill out the capacity we build out.
Okay. Just clarify, CEO, so you mentioned that the revenue contribution just started in Q1 this year or when? Sorry, I didn't hear that clearly. Q4 this year. 4Q this year.
Okay. 4Q this year. So in the past, I understand that the Norflex were probably similar to like a filler for you when the utilization rate is high or low and like a filler. But are you now more serious than this compared to before?
Okay. The first thing the first comment is, yes, probably the fab filler, but the total capacity is very minimum. Even though we treat it as a filler, but it did not really perform the functions that fill the fab. But now, we build our money, build our bottleneck area. So, in the future, we still have the flexibility we can convert by 100% the capacity we use for non flash today.
So we say that we can treat it for the coming timeframe when the memory market is very hot is considered one of the strategic with our customer together. But once the market gets soft and we can convert back all the capacity back to loading and other applications. And the things that will follow our customers.
Okay, great. Thank you. Thanks a lot.
Yes, Sebastian. Yes, thank you.
We'll take our last question from the line of Gokul Hariharan of JPMorgan. Please go ahead.
Yes, hi. Thanks for taking my question. First question is on your plans on 14 nanometer development and the R and D spending required for that over the next couple of years? Previously, you had mentioned 2019 is when you would see 14 nanometer coming into production. Is there any update on that?
And I had a follow-up question as well.
Hi, Gopo. Yes. On the timelines for this technology delivery and the production and the spending, I'll maintain the same. Just as currently since our 20 nanometer program went smoothly and we have more resources to support this 14 nanometer FinFET development because 28 nanometer HKC plus, HKC has been running the same R and D fab with 14 nanometer with one technology moved faster than schedule, so we have more resources to support the 14 FinFET development. And so far just now mentioned that 14 nanometer FinFET and we got a very good progress in the SRAM yield and the process and setting up, yes.
The timeline still maintain the same, yes.
Okay. Any color on how much of your R and D spend as we go into next year will be focused on 14, because it looks like this year a lot of it is still 28 related, right?
No specific type of comments on the 14 nanometer fee fad. And at this moment we still do not have the full visibility of next year's situation. And SMIC's overall R and D spending has been within a certain percentage. We do not go for rush spending on one technology and nodes. And we need to really need to balance the overall planning for capacity, overall gross margin and the customer requirements.
And just now I mentioned that when we do the R and D, we mainly have 4 factors on the table. The number 1 is the market segmentation, the second customer's name, third is the product and then timelines. And we're taking all the factors into consideration for the R and D speed and the spending.
Okay, got it. My last question is on the leasing program for some of the capital expenditure. It looked like this year, you are taking advantage of more of the leasing facilities, especially in first half of the year. Could you talk a little bit about what is the strategy around that? How big a portion of the CapEx could be supported by the leasing program going forward?
And how do you see that from a how does it impact the P and L as we exercise more of those facilities?
Hi, Gokul. The financial situation in China has been improved significantly in the past 2 years. And we have all different choices, financial loans and listings and other borrowings in many different ways. And you used the terms that SMIC took advantage of the available financial tools. So that's very right.
We really have multiple leasing companies working together with SMIC so that we can have very good preferred type of leasing scheme for SMIC. That's a very good situation. But again, just our progress and Frank already asked the question that for SMIC and for the cash flow, the cash balance and overall Kaipay spending for the CAGR 20% growth of capacity on mature nodes and the leading edge and we really need to meet our different requirement to reach a balancing point, gross margins, R and D spending, the capacity expansion, mature nodes are leading edge and we just take into the consideration the overall balancing points since we have different choices. And for the leasing, this is the first time for SMIC to use these 2, probably they will not get this kind of 2. I consider it's very positive, but how much we want to use it and mix together with the own cash borrowings and other things.
And at this moment, we do not have the fixed number. We do not like to define ourselves how to go for that kind of percentage. It's really a balancing point for SMIC and when we see the needs.
Okay, fair enough. Thanks.
Okay, thank
you.
I would now like to hand the call back to CEO, Doctor. Zhao, for closing remarks.
In closing, I would like to thank everyone who participated in today's call and again thank all of the shareholders, customers, employees and suppliers for their trust and support. Thank you.
Thank you. This is the end of SMIC's 1st quarter earnings conference call. We thank you for joining us today. You may all disconnect.