Welcome to the Semiconductor Manufacturing International Corporation First Quarter 2015 Webcast Conference Call. Today's conference call is hosted by Doctor. T. Y. Chu, Chief Executive Officer Doctor.
Yonggang Goh, Chief Financial Officer Mr. Gareth Kung, Executive Vice President of Strategy, Business Development, Finance and Company Secretary and Mr. Yiling Feng, Vice President of Relations. Today's webcast conference call will be simultaneously streamed through the Internet as SMIC website. Please be advised that your dial ins are in listen only mode.
However, at the conclusion of the management presentation, we will have question and answer session at which time you will receive further instructions on how to participate. The earnings press release is available for download at www.smics.com. Webcast playback will be available approximately 1 hour after the event at www.smics dot com. Without further ado, I would like to introduce you to Mr. Yiling Zheng, Vice President of Relations, for the cautionary statement.
Good morning and good evening. Welcome to SMIC's Q1 2015 earnings webcast conference call. For today's call, our CEO, Doctor. T. Y.
Qiu will first provide some general remarks. Afterwards, CFO, Gao Yonggang will highlight our financial performance and give next quarter's guidance. And then our Executive VP of Strategic Business Development, Finance and Company Secretary, Mr. Gareth Gong, will give the detailed financials commentary. This will then be followed by our Q and 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.smics.com under Investor Relations in the Events and Presentations sections. Before I turn the call over to Doctor. T. Y.
Chu, let me remind you that the presentation 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. Or a more complete discussion of the risks and uncertainties and could impact our future operating results results and financial condition. Please see our filings 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 28, 2015. 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 from 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 CEO, Doctor. T. Y.
Chu for the opening remarks.
Thank you, An Lin. Good morning and good evening. Thank you all for joining us. Utilization were high for our 8 inches fab last year when we ended in 2014 with 93 percent utilization in Q4. Most of our upside potential for the first half of twenty fifteen was dependent on the rise of existing 12 inches utilizations, namely 65 nanometer and 40 nanometer.
In preparation last year, we successfully taped out new products over a broad range of applications for 6540. We have growth in Q1 and we are guiding additional growth in Q2. Today, I'm happy to highlight our Q1 achievements and will follow with our recent technology progress, project status, company update and outlook. In the Q1, we utilized most of our existing assets on both 8 inches 12 inches as a result of good market demand and diverse product mix exposure. In the Q1, our revenue increased 13% year over year and 4.9% quarter over quarter.
Revenue hit $509,800,000 our highest Q1 revenue in record. Gross margin was 10 year high of 29.4 percent and we achieved our 12th consecutive profitable quarter. Profit attributable to SMIC was $55,500,000 If the living quarter sales were excluded, we have achieved an all time record high profit of 55,300,000 dollars China region revenue grew to 47%. Revenue from 40 nanometer and 65 nanometer grew more than 25% quarter over quarter and more than 58% year over year. To address our technology progress, we continue to work on 28 nano product qualification.
We are pleased to report that we have already received an initial appeal and will begin small volume risk production in Q2. We still target Hi K Metal Gate to be 2 to 3 quarters after polysilon process ramp successfully and 28 RF later in 2016. The specialty technology demand continues to be strong. PMIC, CIS and the e Square prom account around 1 third of our revenue. Meanwhile, our new applications will be begin ramping throughout this year.
Bank card IC are already shipping and undergoing high volume large area system testing and our forecast to be more than tripled this year. Our customers' 8 megabit BSI CMOS image sensors started production in the Q1 and will begin shipping in the Q2. Our new fabs are coming in line on schedule. To address 8 inches demand, we have started operation in Shenzhen and installed 10,000 wafer per month capacity at the end of 20 14. Since then, we have revenue from metallization related manufacturing in support of bottlenecked back end of the existing 8 inches fabs.
We will have shipment during the Q2 and we plan to have full flow manufacturing revenue from Shenzhen in the 3rd quarter. By the end of this year, we plan to install an additional 10,000 wafer per month of capacity in Shenzhen. We are also incrementally increasing our 8 inches capacity in Shanghai and Tianjin. Our Beijing V2 is qualifying both 4028 technology and is entering initial production at this moment. Our 12 inches fab in Shanghai has 14,000 per month capacity, mainly for 40, 45 and R and D, of which the 6 ks is capable of 28 nano production.
In early March, we welcomed our new Chairman to SMIC, Doctor. Zou Zixue, whose extensive experience in electronic information industry in China provide us with great insight. And we would also like to thank our previous Chairman, now an advisor as well as honorary Chairman, Mr. Zhanwen Yi for his exceptional contribution and continued dedication to this company. Our steadfast commitment to be an independent and international company remains strong.
And the primary goal is to maintain sustainable profitability and this goal has not been changed. Our aim to grow the company and service our global customers is our primary goal in mind. To execute our goal, our strategy remains the same in 3 folds: maintain full utilization differentiate and diversify our technology portfolio to provide value for our customer and to address broad market need and profitable area of growth. And lastly, to expedite advanced technology in preparation for the migration of the application we serve. We increased our capacity carefully according to the need of our customers and our own capability.
We always carefully consider partnership, which will benefit SMIC in the long run and which contribute to our goal of growth and sustainable profitability. In August last year, we formed a bumping joint venture with JSAT. This project is on schedule with equipment currently being moved in and production targeted to begin in the second half of this year. This JV has already begun to generate revenue from wafer probe testing during the last quarter. Last year, many are asking about the Chinese government, how the Chinese government would support the IC industry after the formation of the IC Investment Fund.
In mid February, we announced that China Integrated Circuit Industry Investment Fund was to invest approximately US400 $1,000,000 in SMIC. We believe this demonstrates the fund's confidence in SMIC's strategy, track record and execution and further support our long term goal of gaining the stronger foothold in China and the global IC market. As the largest and the most advanced foundry in China, we are looking forward to benefit from the overall growing IC ecosystem in China. In conclusion, we are witnessing a relatively strong first half with very high utilization and a broad range of application. Growth in the first half is being driven from a diversified base of 65 and 40 products.
We are cautiously optimistic about the second half during the industry's sorry, we are cautious about the second half given the industry's inventory situation. However, we remain optimistic about our long term future as we work on our 28 nano and the new 8 inches capacity in CenTIP. We stay committed to maintain sustainable profitability and building value for all stakeholders. Thank you for your time. I will now hand the call to Yonggang for the financial highlight and 2015 Q2 guidance.
Okay. Thank you, Kevin. Greetings to all our listeners. First,
I will now highlight our Q1 2015 results and our Q2 guidance. Our revenue was $509,800,000 in 1Q 15, an increase of 4.9% quarter over quarter, an increase of 13% year over year. Gross margin was 29.4% in 1Q, 2015, our highest since 1Q, 2024, compared to 22.5% in 4Q 'fourteen and 21.3% in 1Q 'fourteen. Profit for the period attributable to SMIC was $55,500,000 in 1Q, twenty fifteen, compared to $28,400,000 dollars in 4Q 'fourteen and $20,300,000 in 1Q 'fourteen. If closing gain from disposal of lean quarters, our profits for the period attributable to SMIC was $55,300,000 in 1Q 'fifteen, a record high.
And the
channel raising revenue grew to a record high of 47 points of overall revenue in 1Q15. Now looking ahead into Q2 of 2015. Our revenue is expected to increase by 2% to 5% quarter over quarter. Gross margin is expected to range from 27% to 29% and the non GAAP operating expenses excluding the effect of employee bonus accrual, government funding and gain from the disposal of linked quarters are expected to range from $120,000,000 to $125,000,000 Non controlling interest of our majority owned subsidiaries will range from positive $5,000,000 to positive $10,000,000 which are losses to be borne by non controlling interest. The plan is 20.15 capital expenditures for foundry operations are adjusted to approximately $1,500,000,000 while the plan is 20.15 capital expenditures for non foundry operations adjusted to approximately 150,000,000 dollars I will now hand the call over to Gareth for more detailed financial commentary.
Thank you, Gaozong, and thank you everyone for joining us today. I will now comment on the details of our last quarter financial results. On the income statement, revenue increased to RMB509.8 million in Q1 2015, up 4.9% Q1Q from RMB485.9 million in Q4 of 2014, mainly because of an increase in wafer shipment for 65 nanometers and 40 nanometers. Cost of sales decreased to RMB359.9 million in Q1 2015, down 4.4 percent Q1Q from RMB376.6 million in the previous quarter, mainly due to the decrease of depreciation as some equipment had been fully depreciated. Gross margin increased to 29.4% in Q1 2015, up from 22.5% in the previous quarter.
The change was mainly due to, a, an increase in fab utilization and b, a decrease of depreciation within the cost of sales. Operating expenses in Q1 2015 were RMB 104,400,000, a decrease of 3% Q on Q from RMB107,700,000 in Q4 2014. R and D expenses was RMB53,500,000 in Q1 2015 as compared to RMB53,100,000 in Q4 2014. Excluding the funding of R and D contracts from the government, R and D expenses decreased by RMB6.7 million Q.Q to RMB58.8 million in Q1 2015. Funding of R and D contract from the government was RMB5,300,000 in Q1 2015 compared to RMB12,400,000 in Q4 2014.
General and administrative expenses decreased to RMB42.5 million in Q1 2015, down 7.7% Q on Q from RMB46 1,000,000 in Q4, twenty fourteen, mainly because of decrease in share based compensation expenses, tax related expenses, legal, audit and consulting expenses in Q1 2015. Excluding the effect of employee bonus accrual, government funding of R and D contracts and gain from disposal of living quarters. Non GAAP operating expenses was RMB99.7 million in Q1 2015 compared to CNY113.2 million in Q4 2014. Profit from operations in Q1 2015 was RMB45,500,000 compared to RMB1.6 million dollars in Q4 2014. Other income was $6,100,000 in Q1 2015 compared to $10,300,000 in Q4 2014.
Interest income was $1,400,000 in Q1 2015 compared to $6,400,000 in the previous quarter. The change was due to lower bank deposit balances during the period as a result of the repayment of bank borrowings. Income tax expense was RMB54,000 in Q1 2015 compared to RMB10.4 million in the previous quarter. The change was mainly due to the land value added tax incurred in Q4 of 2014. Non controlling interests were RMB3.9 million credit to SMIC's attributable profit in Q1 2015 compared to RMB26,900,000 in the previous quarter.
The change was mainly because part of the group's R and D expenses were recharged to Semiconductor Manufacturing North China Beijing Corporation in Q4 of 2014. Moving to the balance sheet. At the end of the Q1 of 2015, cash and cash equivalents decreased to $402,400,000 in Q1 2015 from $603,000,000 in Q4 2014. Other financial assets, which mainly comprise of short term investment, decreased to RMB586 1,000,000 in Q1 2015 from RMB644.1 million in Q1 in Q4 2014, mainly because of the repayment of bank borrowing during Q1 of 2015. Including other financial assets, we had approximately RMB1 1,000,000,000 cash on hand in Q1 2015 compared to approximately $1,200,000,000 in Q4 of 2014.
Our long term borrowings decreased $217,100,000 and short term borrowings increased $30,700,000 compared to the previous quarter. At the end of Q1 2015, our total debt to equity ratio was 32.9% compared to 39% in the previous quarter. Our net debt to equity ratio was 3.5% compared to 1.3% in the previous quarter. In terms of the cash flow, we generated $134,300,000 cash from operating activities in Q1 of 2015 compared to $195,200,000 in Q4 of 2014 mainly because of changes in working capital and others. Cash used in investing activities decreased to RMB148,900,000 in Q1 2015 compared to RMB644,800,000 in Q4 2014, mainly because of less financial asset investment made by SMIC in Q1 twenty fifteen.
Cash flow from financing activities changed from an inflow of RMB690,200,000 in Q4 20 14 to an outflow of RMB185.8 million in Q1 2014 mainly because of the issuance of corporate bonds and capital contribution from non controlling interest in Q4 of 2014 and the repayment of bank borrowings during Q1 of 2015. The funds from the private placement to the China Integrated Circuit Industry Investment Fund is expected to come in during the Q2 of 2015. To examine our revenue by application, Consumer and Communications segments contributed 46.3% and 44.2% of our revenue, respectively. Geographically, revenue from China contributed 47% of total revenue. Revenue from North America contributed 41.1 percent of total revenue.
Revenue from EuroAsia contributed 11.9%. In terms of technology, revenue from 45 40 nanometers contributed 16%, revenue from 6555 nanometers and 90 nanometers contributed 26.1% and 4.6%, respectively. Meanwhile, 0.13 micron and above line width contributed 53.3% of total revenue. In terms of our overall capacity, total monthly capacity at the end of the first quarter was 251,500,8 inches equivalent wafers compared to 247,500 wafers in the previous quarter. The change was mainly due to the expansion of capacity in our Tianxing 8 inches fab.
The overall utilization was 99.7% in the Q1 of 2015 compared to 93% in the Q4 of 2014. The planned 2015 capital expenditure for foundry operations adjusted to approximately RMB1.5 billion, which are mainly for 1st, capacity expansion in SMNC's 12 inches fab, which is around $800,000,000 of which only $450,000,000 is to be funded by SMIC and 2, capacity expansion in our new 8 inches fab in Shenzhen and 3, investment in the R and D tools, our Marsh shop tools as well as in our intellectual property areas. The planned 2015 capital expenditure for non functional operations, mainly for the construction and living quarters, are adjusted to approximately RMB 150,000,000 The group plans to rent out or sell these living quarters to employees in future. I will now hand the call back to Armin for the Q and A session.
Thank you, Gary. And let's open up for the Q and A. As usual, please be reminded to limit your questions to 2
per person. Operator, please assist.
Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Yes. Thank you. The first question I wanted to ask a little more on the outlook where I think you mentioned cautious for a second half. If you could talk about what that is implying for the growth outlook maybe versus historical or seasonality? And if you could also put in context your CapEx, you increased a bit, where that increase is tied to if it's more confidence on 8 inches or if it's tied to more 40 or actually more progress on the 28?
Okay. I think we are aware of the various results from various sectors of the industry. However, we are also a bit optimistic because our 6540 has seen a lot of strong demand and we have diversified the applications in this technology sectors. And so in some of these new applications, which is quite independent of the handset area and we maintain our optimistic projection.
Yes. Randy, I just want to add to what TY said. Yes, we do recognize that there could be some inventory adjustments, especially relating to the handset side. But the main of our new application in the 40, 45 nodes are actually more geared for the consumer applications. And also, we have a new a number of new technologies to be ramped up this year, including our bank cards for 8 inches applications as well as our BSI applications.
So hopefully, with this more diverse customer base as well as on the application side, we're able to cushion this weak market in the second half.
Okay. And if I could ask on the outlook, the $40,000,000 $55,000,000 which ramp well, I guess do you expect that to continue to ramp into your new capacity, say, when you do the Beijing JV, do you have the flexibility to do 40? And if you could talk about the margin implications, the $40,000,000 has more mature yield, but it's lower wafer price in $28,000,000 So how the margin outlook as you ramp up the Beijing fab? What we should expect the profitability 40% versus 28% and overall profitability as you ramp up the new fab?
Okay.
Definitely our new B2 fab will have the capacity that is that can address both 28 as well as the 40 demand. And I think the margin will be high when the utilization is high. So we are happy to see this strong demand both in 4 d as well. So in that sense, we are able to maintain a high utilization in the new fab that's coming up.
Randy, I think as we go to ramp up 2 new fabs in the second half, which is the new Beijing fab as well as Southern fab, you expect there will be some pressure on the margin. However, if we can maintain a relatively high loading in our existing fabs, As mentioned by T Y, because of the broad range of application that we are running in those fabs, We are hopeful that that could help to cushion some of this impact. Okay. And if I could ask
you a quick thought, The 6 ks for Shanghai, I think is what you have available for 28. You're starting risk production. Do you expect by end of year that 6 ks at least would be doing the 28 where it's still subject to yield ramp at this stage?
We have the flexibility to move the 28 both in Beijing as well as staying in Shanghai. So it will be a very dynamic planning process where we can optimize for the best of profitability.
On the 28th, as T. Y. Mentioned, we are going to start small volume risk production in Q2. But I think it's a bit too early for us to say in terms of revenue contribution of 28 by the end of the year. And I think we're going to report to the investor as we make more progress.
Okay. All right. Great. Thanks a lot.
Thank you.
Your next question comes from the line of Suji Desilva from Tobeyka. Please ask your question.
Hi, guys. How should I think about the opportunity in 28 nanometer for you? Should I think about it in terms of number of tape outs or customers you have lined up versus maybe 40 or 65 a year ago? Or how can I
think about the opportunity there?
Okay. We have about 5 new products coming in for both polycyon as well as high k metal gate. So this is a very, I think, robust interest when comparing to the 40 nanode at the same stage. So we remain very optimistic in terms of our 28 technology.
That's very helpful. And then how should I think about your capacity, your 8 inches capacity? Is it constrained now? And how does the new investment, the $400,000,000 you got investment, how does that perhaps help you increase the capacity? Or is that not the strategy there?
We are, as we speak, in the process of ramping up our new fab in Shenzhen and we should be we are talking to have about 20 ks available by end of 2015 and we'll continue to ramp up the fab in Shenzhen next year. So we expect there will be continued shortage in the inch capacity. So we've been actively looking at opportunity to expand that mature node capacity.
Okay. Congratulations on the results.
Thank you. Let me just add that as a matter of fact that our SendGrid, we were lucky last year that we have bought a couple of set of old tools and so we have some of the tools can meet the capacity beyond the 20,000. So if there is even more stronger demand in the mature node, we will be able to accelerate our capacity expansion. And so that flexibility remains there in Simpson.
Very good. Thanks.
Your next question comes from the line of Steve Peleo from HSBC. Please ask your question.
Yes. Quick follow-up on the 200 millimeter. Excuse me, I guess when I look at 0.15 micron and above, that looks like it maybe was down more than 10% or so. So 200 millimeter, you're adding capacity yet your utilization rates were probably down as well. Could you talk a little bit about 200 millimeter utilization rates?
And is this creating any excess capacity and potential pricing pressure on the 200 millimeter, which has really been kind of fully loaded for, I don't know, many, many quarters?
Steve, actually, you see the contribution is down because proportionally, we are increasing more in our 65 and 40 nanometers. So actually, the shipment of 8 inches is not down quarter on quarter. And secondly, yes, as we mentioned earlier, some of our communication customers are impacted and somewhat impacted our 8 inches as well. But at the same time, as we mentioned earlier that we have some new technology being introduced this year, including a bank card. We do see a quite important ramp up for the bank card this year as well as the introduction of our new BSI technologies.
So that could help our 8 inches capacity. All the more, given the 8 inches capacity is limited in supply globally, so we are still quite positive about our mature business.
I guess what I'm getting at there is in your annual report you disclosed your largest customer I think about 25% of revenue and I think that customer is pretty large 200 millimeter buyer for power management ICs. When I look at 0.15 and 0.18 micron revenues down 8% quarter on quarter. When I look at kind of the in sourcing Samsung kind of internalizing things like power management ICs, I'm just curious, do you see any risk there at 200 millimeter? Or it sounds like given the fact that you're increasing capacity and see opportunities with bank cards that no, in fact, you're going to be no problem keeping 200 millimeter full including the new capacity being added?
Hello, Steve. This is T. Y. It's a good question. And indeed, as you say that there are some decrease in certain from our certain customers, but we have a fairly diverse new applications coming up.
So in this year, the 8 inches utilization is still very, very high. There is no decrease in utilization. There is somewhat of a difference because in the past, our power management IC is a turnkey IC. So we also are responsible for the back end and that contribution and the revenue on per wafer count is higher than a like BSI or other wafer mode, business mode. But however, the utilization will remain very high in the 8 inches demand.
And so we have a very high confidence that our sensors fab will be fully utilized.
Steve, actually I think I would say that from a measurement point of view, we anticipate that there could be an issue where we have too high loading from a single customer. So in the last 2 years, we've been active in terms of trying to diversify in terms of our customer base as in terms of our application. So I think we are seeing some benefit from it right now.
Great. If I can just sneak in 2 quick more. With the capacity plans that you have in the 28 nanometer ramp plan and Beijing 2 ramp plan, could you just talk a little bit about the impacts to your depreciation costs in the second half of the year and really outlook in 2016 as well. So depreciation is 1. And then the final question for me is talk just to me a little bit about their system companies business.
I guess I wasn't aware this has gone up from 11% to 16% of revenues. It really drove the bulk of the growth, I guess you could say quarter on quarter. So any more clarity you can provide us on system companies there and depreciation? That's my last question. Thank you.
Steve, in terms of depreciation, as you can see from our the depreciation expenses have come down in Q1 and then it will remain relatively flat in Q2. But as we start to ramp up of our 2 new fabs in the second half, it is going to step up. And I think our guidance for the whole year depreciation remained the same, which is about 3% higher year on year. And then in terms of your question about system company, yes, we do have exposure to a pretty good system companies. And that again shows that actually we are widening our customer base.
Steve, let me also add that we are in an area where it's also unique. In China now there are quite a number of system companies that are trying to also be involved in specializing their product and getting into the IP design too so that their product can be more unique. And these companies has been approaching SMICs for our not only for our production capability, but also design service as well as our ecosystem where we have design service companies such as private.
Okay. And did you answer on 2016 depreciation thoughts in the expense increase?
Steve, I think we are still in the first half of twenty fifteen. I think it's a bit too early for us to comment on the depreciation for 2016. We will talk more about it in the second half.
Okay.
Your next question comes from the line of Lip Buen Hu from Nomura. Thank you. Please ask your question. Thank you for taking my questions.
I have two questions. First is we see a
lot of news report about the China want to enter the DRAM business. So what is SMIC's view on the DRAM business is interesting? Or if this happens, what will be the role of SMIC in this DRAM, yes, out of the China, whether this will be partnered with China National IT Fund or this? Yes, these are the first question.
Okay. Hello, Wei Ping. We also hear about a lot of these report in the press. SMIC had always maintained a certain capability in memory business. We have had a NOR business from auto wave from 0.1390 nanometer, 65 nanometer and we had last year announced our 38 nanometer NAND technology.
However, we do not have DRAM capability. So at this point of time, we have no firm plan to get into memory high very high volume memory production. But we if there are very good opportunity out there, which we need to be convinced And so we at this moment, we do not have the plan.
So it will be consolidated into SMIC lease go or it will be a separate? So since DRAM is just worried about whether this will have negative impact on the SMIC's profitability if this
Excuse me, we have not had said there will be any consolidation into SMIC and we have at this moment, we have no firm plans on the separate memory business. Sleeping, I think
in the foreseeable future, our main focus will still be in our core foundry business. Okay. The second question is that we see quite a lot
of local news about the Zhongxin Zhu and the venture slightly describe how big of the venture capital business in your end and what's the relation with your core business? Thank you.
We have a venture funds, which is about US100 million dollars that we have been managed by independent team and investing in different projects. But they are quite separate from our core
business. So I think this is very similar to other investment funds set up by major foundries. So I think that hopefully we will see that in the long term that these investments will bring more synergy between in the whole IT ecosystem and bring SMIC additional revenue in the future.
Thank you.
Your next question comes from the line of Zio Hu from BNP. Please ask your question.
Hi, good morning gentlemen. Just want to know for Q1, Q4, Q2 accelerate lumpy minority interest credit or you have already tried to see another impact for Abert already this year?
Yes. In terms of the non controlling interest, it was pretty high in Q4 because we have a one time recharge of our R and D expenses to our majority owned subsidiary in Beijing for the use of our technology. Okay. And then for this quarter, it's lower and we have given the guidance for Q2. So I think that is the main reason for fluctuations because of the one time charge in
Q4. So we should still expect another lumpy credit in Q4 this year?
We have this arrangement that given our new Beijing fab, which is a majority owned by SMIC, we're going to allocate part of this R and D cost to them. So there could be another charge at the end of this year. But this amount is not finalized yet.
Okay. All right. And second question for OpEx.
I'm sorry, I don't quite get your question. Can you repeat your question again?
Okay. Sure. Yes, for Q1 the OpEx actually trended a lot lower than guidance. So I'm just trying to see if there's a chance that you may aspire also overestimate the OpEx to guide?
Yes. No, we did our estimate the best we could, but it is always our philosophy to be a little bit more conservative in our guidance. But yes, I think the Q2 expenses should be in line with what we guided. Yes.
Okay. All right. Okay. Thank you very much. And good quarter.
Yes. Thanks.
Your next question comes from the line of Rick Hsu from TY Securities. Please ask your question.
Yes. Hi, good morning. Just a few questions from me. Okay. Regarding your Shenzhen fab, I think this fab has already started up and running.
Why are you guys not including your capacity, the total capacity calculation here?
Yes. The reason is that we are still not in the full flow manufacturing mode right now. So basically it's more like a risk production mode. Yes.
So when do you expect to include this fab into your calculation?
We expect in Q3, the Sunshine Fed will commence commercial production for full flow and that is when we're going to reclassify the fab as a production fab.
I see. Okay. Fair enough. Then could you remind me because I think I missed this part. Talking about your CapEx breakdown this year, can you go run through that again?
Sure. The CapEx this year is RMB1.5 billion, which is for the Fangzhou operation, of which about RMB800 1,000,000 is for our new fab in Beijing. As you know, for that fab, we have 55% ownership and the other 45% is held by other shareholders. So the amount that we are going to fund out this RMB 800,000,000 is about RMB 450,000,000 and the balance of the CapEx is mainly for our new Samsung fab as well as the investment we are making in the R and D areas, in the mask shops, as well in the IP areas. And then for the non foundry operation, our CapEx is about $150,000,000 this year.
That would be mainly goes towards building of the living quarters for our employees.
Okay. Thank you. That's very clear. One last question is, I know you don't have a clear visibility for your full year depreciation, but could you give us some idea about your 2nd quarter depreciation guidance?
Actually, I did mention about
for Q2,
the depreciation will be flat compared to Q1. But as we're going to start the ramp up of the 2 new fabs in second half twenty fifteen, the depreciation is going to step up. And on a year over year basis, the depreciation in 2015 will be 3% higher than 2014.
All right. Great. Thank you so much and congratulations for the results.
Thank you.
Your next question comes from the line of Daniel Helya from Bank of America Merrill Lynch. Please ask your question.
Yes. Thanks for taking my questions. I wanted to focus on cash flow questions here. I wanted a clarification sorry on the CapEx. You mentioned $1,500,000,000 CapEx $800,000,000 for the new fab, but you then said you're only paying $450,000,000 So that means $1,000,000,000 is going to be spent on everything else including 8 inches Could you
CapEx? I'm sorry. Let me clarify that. It's 1,500,000,000 RMB 1,500,000,000 include the RMB 800,000,000 CapEx for our new job the new fab in Beijing. So this RMB1.5 billion is a consolidated CapEx, okay?
But what we are seeing is that because the Beijing fab is only partly owned by SMIC, we are not going to contribute all the RMB800 1,000,000. We only contribute about RMB450 1,000,000,000 out of this RMB800 1,000,000. So if you work out these numbers effectively for this year, the amount of CapEx that out of this RMB1.5 billion CapEx, we from SMIC would need to fund about RMB1 1,000,000,000.
Your cash CapEx will be $1,000,000,000 is that what you're saying?
The amount that SMIC need to be we need to fund ourselves is about $1,000,000,000
And what about the cash CapEx this year?
The cash CapEx will depend on all the payment terms and things like that. Yes.
Okay. So when I look at your cash and cash equivalents, they dropped from $600,000,000 to $400,000,000 quarter on quarter. Your cash flow from operations also declined from $195,000,000 to $135,000,000 per quarter. So could you walk us through how you're going to get to the $1,000,000,000 CapEx to meet the funding of that because your it looks like your cash balance is pretty low $400,000,000 Your quarterly cash flow is around $130,000,000 So how do we get to $1,000,000,000 this year to fund this?
Thank you. Yes. Dan, what you saw on the balance sheet, the cash balances is only cash and cash equivalent we have on hand. At the same time, we have about close to RMB 590,000,000 of short term investment, which is actually cash as well. So altogether, we have about RMB 1,000,000,000 cash that we can deploy right away.
And then at the same time, as I mentioned, we have did a private placement to the National ISV funds that will be closed before end of June this year. Then we're going to bring in enough RMB 100,000,000. Okay? In addition, every year, we generate about $700,000,000 to $800,000,000 cash from operations. So I think we are in a very comfortable cash situation.
So the $1,000,000,000 funding is going to come from the investment fund $400,000,000 Should we assume that that's going to go directly to the cash?
No, no, no, no. The $400,000,000 has not been reflected in the balance sheet yet. So what we have right now on hand is about $1,000,000,000 cash that we can deploy. And then in addition, dollars 400,000,000 will come in before end of June. And then we still have cash generation from our operations.
Okay. So we'll probably deploy next year then, the $400,000,000 for next year CapEx, is that right?
Well, the money goes in the pool and then we'll deploy it as we need it.
Okay. And moving on to the income statement. So you hit the upper end of your gross profit margin guidance is at 29%. You guided 27% to 29%. And then the depreciation though exceeded your guidance.
You said flat previously and it was down 3%. So I'm wondering why given the depreciation drop so much, what the dynamics there, why aren't we seeing actually higher margins? Was that depreciation number a surprise to you? Or I'm just trying to understand why the margins are not going up more given your revenue grew, right? And you also had a drop your utilization went up quite a bit.
Your depreciation fell 3%, but your GPU margin was kind of up a tiny bit. Is it mix related or why not more operating leverage there?
Okay. Dan, trying to respond to your question point by point. Our gross margin went up obviously for two reasons. 1 is because of the high utilization. I think there's big chunk of utilization there.
And then the second reason for the high gross margin is because I think our depreciation had dropped off about RMB 10,000,000 in Q1 compared to Q4. And as I mentioned, this drop off in depreciation because some of the equipment had been fully depreciated, okay? And then we have guided in Q2, this depreciation will be flat compared to Q1, okay? And then for the whole year, because of the note, our 2 new fabs are going into production in Q3 and Q4, you're going to see step up in the depreciation in Q3 and Q4. So on a year on year basis, depreciation in 2015 will go up by 3% compared to 2014.
Okay. I hope this is clear to you. Okay.
Yes. No, just trying to figure out the operating leverage because as you look at the Q2, you're guiding up again 2% to 5%, but your GP margin is kind of below, you're saying 27% to 29%. So implying potential downside to margin in the second quarter, yet depreciation is flat. So I just want to understand the operating leverage there.
Okay. I think they are first of all, I think we have to consider some of the product mix change. At the same time, we try to be conservative in terms of our guidance. So yes.
Okay. And then on the operating expense side, finally, your you had a big drop in G and A. And I'm wondering pretty much your well, how sustainable that is. So if you could guide us 2nd quarter, your G and A and R and D expectations please for Q2 that would be great.
Okay. In terms of our OpEx, actually, our OpEx have been increasing in the last few quarters. In terms of R and D, it's already in the 10% to 12% range, and we expect that to be remain at a fairly high level throughout this year. In terms of G and A expenses, it's been higher because a lot of the staff are cost from 2 new fabs in Beijing and Shenzhen are still the unrecorded SG and A expenses now because it's preproduction. But as we move to production in second half of twenty fifteen, that portion of expenses will came down slightly.
But overall, I think our total OpEx will still be in the around 20% range.
Could you be adding a lot of people in the second half of the year? So maybe just an absolute number, $40,000,000,000 $42,000,000,000 G and A and $53,000,000 sorry, 1,000,000 dollars And so if we look at the second half, is that where should that number go? Can we run operating expenses at 104 $1,000,000 overall for the 3rd Q4? Is that going to go up substantially? I assume you're hiring people and you're expanding operations.
So maybe walk us through your operating expense for second half the dynamics there and quantitative guidance would be great.
Okay. In terms of non GAAP OpEx, we are at about RMB100 1,000,000 in Q1 and we should see a little bit higher in Q2 because of the higher R and D expenses and also higher spending on our new fab in Beijing in Shenzhen because we are intensively building up the fab for production in the second half of twenty fifteen. So we should see I think we have guided the OpEx for Q2 already, which is in about RMB120 1,000,000 range. And then as we know in Q3 and Q4 because some of the G and A expenses which is relating to the start cost for the new fabs will move in the cost of sales and that number will came down again will be no so that will be what we can share at this point in time.
Okay. So about 100,000,000 you're thinking in sustained about 105,000,000 dollars operating expense on a quarterly run rate in the second half of the year. That should be pretty close to that is what you're saying because expenses go up, but then they shift to cost of goods sold in the second half of the year. Is that right?
That's correct. Yes. Okay. Thank you.
Your next question comes from the line of Ken Wie from Jefferies. Please ask your question.
Good morning. Thank you for taking my questions. My first question is regarding your 28 nanometer. How many customers would you expect to contribute to your revenue towards end of this year? Would it be just one single customer?
Or would it be possible to have some additional customers? That will be my first question. Thank you.
Hi, Ken. This is T. Y. Okay. We think that there is potentially one additional customer that can give us some small revenue by the end of the year.
So indeed, there are opportunities that we are trying to address as much as
possible. Okay. Thank you. And then my second question is regarding your WAM of the new port at 65 nanometer and 40 nanometer. As the contribution is going to get higher, how we should think about your overall change in wafer ASP going forward?
Yes. We expect wafer ASP should be remain relatively flat throughout this year. Yes.
So the and the drivers behind that would be because I thought the new products may have relatively better ASP or is it because there are some other products which have lower ASP going up as well?
Yes. No. Actually our mix will be right now based on our visibility, the mix will be pretty stable in terms of our technology mix. So there should not be material impact on our ASP.
Okay. Thank you very much.
So let me just add one complementary comment. Yes, as we ramp up 45 and 40, there is also additional ramp up in terms of the sensing capacity. And so the sensing capacity, because it is a mature node, the ASP will tend to pull in the opposite direction. Yes. So they kind of balance each other.
And so the ASP overall ASP will remain more or less constant.
All right. Thank you.
Your next question comes from the line of Bill Lu from Morgan Stanley. Please ask your question.
Yes. Hi, good morning. Thanks for taking my questions. If I look at CapEx and depreciation, you're raising CapEx a little bit for $1,400,000,000 to $1,500,000,000 and yet your depreciation, you're guiding for lower up 3% year on year versus what you said previously. Is this a timing issue?
Are you changing how you depreciate? Or can you talk a little bit more about that?
Bill, just want to clarify. Actually, we are saying year on year the depreciate will go up 3%, not down 3%.
Yes, up 3%. I think previous year, I said it will be up $70,000,000
Okay. I think there are some timing issues. The depreciation will depend on where we pull in the equipment and where we actually start commercial production. So as Mark mentioned, even though the depreciation is sort of lower in Q1, Q2 because some of the existing 2 are fully depreciated and we start the commercial production in Shenzhen and in our new Beijing fab in the second half, that is going to step up. So overall, year over year is going to go up by about 3%.
So what is different now in terms of the ramp schedule? Is it more on the leading edge or is it the 8 inches stop?
Well, when we mentioned about the increase of $70,000,000 last year, I think that's based on a relatively early estimate in terms of our Q2 in timetable and also in terms of when we're going to start production. So right now, I think we have a better visibility now. We can give a more accurate estimate.
Got it. Okay. Thanks. The second question, I think Steve, Steve Plater asked this as well. You saw a big increase in the system house revenues.
What application is that for? Is that the communications?
Actually, it is a very, very wide applications. It covers both communication as well as consumer areas. And so I think that we are fortunate here in China, there will be more and more system house that with a very, very wide applications coming in seeking support from SMIC in terms of the design service as well as final production.
Okay. Sorry, if I could sneak in one last question. I know you're not ready to talk about 28 contribution by the end of the year, but you also said that you've received a PO for 28 already. Can you talk about how big that PO is?
Sorry. At this moment, we are not going to talk about the size of the PO. So we will report progress of our 28 as we go along in the following few quarters.
Okay, great. Thank you very much.
Thank you.
I would like to hand the call back to your CEO, Doctor. Qiu for closing remarks.
In closing, I would like to thank everybody who participated in today's call and again thank all of our shareholders, customers, employees and suppliers for their trust and support. Thank you very much and see you next quarter.
This is the end of SMIC's 1st quarter earnings conference call. We thank you for joining us today.