Ladies and gentlemen, welcome to the Semiconductor Manufacturing International Corporation's third quarter 2011 webcast conference call. Today's conference call is chaired by Dr. T.Y. Chiu, Chief Executive Officer, Mr. Gary Tse ng, Chief Financial Officer, and Mr. En-Ling Feng , Senior Director of Investor Relations. Today's webcast conference call will be simultaneously streamed through the internet at SMIC's website. Please be advised that your dial-ins are in listen-only mode. However, at the conclusion of the management presentation, we will be having a question-and-answer session, upon which you will receive further instructions as how to participate. The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately one hour after the event at www.smics.com. Without further ado, I would now like to introduce to you Mr. En-Ling Feng, Senior Director of Investor Relations, for the cautionary statement. Please go ahead, sir.
Good morning and good evening, everyone. Welcome to SMIC's third quarter 2011 earnings conference call. For today's call, our CEO, T.Y. Chiu, will give an opening statement. Then our CFO, Gary Tseng, will give the financial commentary. This will be followed by our Q&A session. As usual, our call will be approximately 60- minutes in length. The earning press release and the quarterly financial presentation are available for you to download at www.smics.com under the Events and Presentations section. Please also be reminded of the safe harbor statement, which provides as follows: SMIC's statements of its current expectations are forward-looking statements subject to significant risks and uncertainties. The actual results may differ materially from those contained in such forward-looking statements.
Information as to those factors that could cause actual results to vary can be found in SMIC's Form 20-F filed with United States Securities and Exchange Commission on June 28, 2011. I will now turn the call over to our CEO, T.Y. Chiu, for the opening remark.
Thank you, En-Ling. Good morning and good evening to everyone. Thank you for joining our earning webcast. Since the last update, we have concluded extensive assessment of SMIC's situation from various aspects. Today, I would like to address what has been completed, our direction and strategy, technology status, and the state of our business. In the past three months, our focus was on stabilization of both external and internal stakeholders. I met with all of our key customers in North America and greater China, which I will continue to do so on a quarterly basis. We have communicated to our customers that SMIC intends to be a globally competitive foundry powerhouse and will continue to be their long-term partner. We remain committed to pushing advanced technology R&D. I am pleased that our customers maintain their high expectations of SMIC, and the partnerships remain unwavered. Stability has returned to SMIC organizations.
Our fabs are running smoothly, and our technology development is making steady progress. We have enlarged our core management team from five to seven individuals, including a new technology development head and two operations leaders. These changes ensure attention to execution is followed through to the details, and decision is made with speed. As a result, our teamwork and coordination improved, thus improving our overall execution and effectiveness. In fact, we witnessed a shortened cycle time, process enhancement, better defect density level, and simply continued overall operational improvement. As a result of the initiative to better execution, one of our 65 nm products from a key customer has recently passed full qualification. We believe these positive improvements in coordination and execution will result in improved overall loading. Let me address SMIC's direction and strategy. Our objectives remain steadfast.
We will work towards sustainable profitability as the preferred foundry provider in China as we continue our partner and the domestic customers. In order to achieve this, our strategy is twofold. In the near term, we will work on boosting overall fab utilization and efficiency. Secondly, we will maintain our technology advancement as well as pursuing value-added differentiation. In the near term, we will focus on effectively filling our fab to improve our profitability. To do this, we are working closely with our customers on enhancing each fab's technology flexibility and in shortening the project cycle for production. As an example of recent actions, we have qualified our Tianjin fab for CIS production to accommodate business expansion and thus increase Tianjin fab's utilization. For long term, we will continue our technology advancement and pursue value-added differentiation by focusing on market that is best addressed by our position in China.
We are now in process of researching and analyzing methods for differentiation as well as identifying specific markets, especially in China, that are best suited for SMIC. We will update you more on our progress in due time. As for technology development, we are very encouraged by our 45 and 40 nm progress, with very positive feedback from our customers. We are targeting some 45 nm wafer revenue by the end of the year. Our 32 and the 28 nm development is on schedule as planned, and we target to have both PolySiON and the High-k Metal Gate ready in 2013. As far as the business is concerned, the third and fourth quarters are very weak in contrast to the normal business cycle. We believe this is mainly due to global economic uncertainties and industry-wide inventory adjustments. We remain cautious despite our strong improvement in customer sentiment.
All in all, we are cautious on the market outlook, and we will be preparing ourselves for the worst-case scenario. In doing so, we will continue to focus on execution of new technology and product phase-ins, improving loading, and implementing our differentiation strategies. To conclude, we have stabilized our own team, our customer, and other important stakeholders. We continue to strengthen execution. Given the current business condition, we recognize the challenge ahead and will continue to work to increase fab loading, speed up technology development and the differentiation, aiming for sustainable, profitable growth for the long term. I thank you for your continued support and look forward to meeting with some of you in the future. I will now hand the call over to our CFO, Gary Tseng, for overall business and financial commentary.
Thank you, T.Y. Good morning and good evening to everyone. I will now take a few moments to highlight our third quarter financial results and the fourth quarter guidance. You may also refer to our quarterly financial presentation on our website. Please note that our currency figures are in U.S. dollars unless otherwise stated. Looking at the Q3 2011 financials, total revenue decreased 12.9% quarter-on-quarter to $306.9 million and was down by 24% year-on-year, primarily due to overall weak market demand. Wafer revenue from Xinxin was $31.9 million in the third quarter, contributing 10.4% of our total revenue. Excluding wafer revenue from the managed fab for both quarters, the company revenue decreased 14.9% quarter-over-quarter. Gross margin in the third quarter was 1.4% compared to 14.3% in the second quarter. The decrease of 12.9 percentage points was mainly due to decrease in capacity utilization.
The recorded OpEx in the third quarter was $18 million after being offset by government subsidy of $9 million. Thus, the normalized OpEx was $89 million compared to $86.8 million in the second quarter. Before offset by management income from Xinxin, government subsidies, and the bad debt recovery, the $2.2 million increase was mainly due to the larger R&D expenses for advanced node development in the third quarter. The loss attributable to holder of ordinary share was $88.1 million in the third quarter of 2011, and the fully diluted EPS was about $ -0.16 per ADS, compared to a loss of $0.01 full ADS in the previous quarters. Let's move to the balance sheet. At the end of our Q3 2011, our debt-to-equity ratio lowered to 42.4%, compared to 47.1% in the second quarter of 2011, as we paid down $142 million of short-term borrowing in the third quarter.
On the equity side, following CIC's new investment received by us in June, we received the cash proceed of $58.9 million in September from issuing convertible preferred share to Datang at HKD 5.39 per share as they exercise their preemptive right. Datang remain SMIC's largest shareholder. In terms of cash flow, we generated $106.9 million in operating cash in the third quarter, an increase from $79.4 million in the previous quarter, mainly due to improvement in working capital, as we managed to decrease account receivable by $70.8 million quarter-over-quarter, from $236.7 million to $165.9 million. Cash used in investing activity decreased primarily due to less CapEx spending in the third quarter. Meanwhile, there was cash outflow from financing activity as we paid down $142 million of short-term borrowings.
All in all, cash and cash equivalent at the end of the third quarter was $315.7 million compared to $410.9 million in the previous quarter. Regarding the revenue breakdown by end market application, our consumer revenue dropped about 19.4% sequentially as the overall demand on consumer goods was weak, contributing 45.8% to the total revenue. Meanwhile, communication revenue was less impacted, with a sequential decline of 3.5% compared to the second quarter, contributing 41.7% to the total revenue in the third quarter. Due to the weakened macro demand across the board, regionally, revenue from North America decreased about 15.7% quarter-over-quarter, contributing 55.7% to our total revenue, while revenue from China decreased 11.7% quarter-over-quarter, contributing 13.7% of revenue. Eurasia contributed 13.6% in revenue, representing a slight sequential decrease of 3% in the third quarter.
In terms of capacity, our overall monthly capacity will remain at the current level throughout the end of this year. The Tianjin capacity variation was mainly due to product mix change. CapEx for the first three quarters of 2011 totaled $709.3 million. We target to maintain our planned 2011 CapEx for around $800 million. Our equipment utilization rate in the third quarter is 61%, down from 73.3% in the second quarter due to the overall weakened market. In the third quarter 2011, capacity utilization rate is reported based on actual equipment usage in the manufacturing process, whereas in the prior report, utilization had been reported based on the total wafer out divided by estimated capacity. Utilization rate for previous quarter has been updated in our report accordingly for comparison purpose, and we plan to continue using equipment utilization going forward.
Looking ahead at the fourth quarter of 2011, revenue will continue to decline more than seasonally. We are guiding revenue to decrease 5% to 8% quarter-over-quarter as market demand is still weak. Gross margin is expected to range from - 3% to - 6% due to product mix change. We expect our OpEx to range from $89 million- $92 million, slightly higher than normalized OpEx of $89 million in the third quarter, primarily due to higher spending in advanced node development. I will now hand the call back to En-Ling for the Q&A section of this call.
Thank you, Gary. I would now like to open up the call for Q&A. As usual, please be reminded to limit your questions to two per person. Operator, please assist.
Thank you. We will now begin the question-and-answer session. If you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from Bill Lu, Morgan Stanley. Please ask a question.
Yeah. Hi, good morning. Thanks for taking my question. Dr. Chiu, you had mentioned just now that the company is trying to look at some ways to differentiate and address markets that are suitable for SMIC. It sounds like you're not quite ready to talk about what these opportunities are, but can you just give us a little bit more detail as far as what you think are SMIC's core competencies and differentiation? Maybe just give us a hint of where you might be going with this.
Bill, thank you for asking this question. Yes, we are doing a lot of study right now. I can give you one example where we feel that SMIC has a core competence, and that is very suitable for China markets. We have very good embedded NVM technology, which is very suited for the smart card application in China. We realized that this particular product category is getting a lot of different application in China. We feel that we are particularly advantaged to use this particular competence and to our advantage in China. Okay, does that answer your question?
It does.
That we—
Sorry, go ahead.
We are looking at other opportunities similar to this, and that we need to spend a little bit more time to identify such kind of markets.
Okay. To use your example, maybe I am wrong, but my impression is that the smart card type of applications are big volume but not necessarily good margins. As you look at the company going forward, as you look at your competencies, are there certain thresholds in terms of margins and profitability that you are shooting for? Or how do you think about that?
As we look at this market, some of the emergent smart card applications, we believe the margin will be fairly good, at least higher than our present margin. That is all I can say.
Okay, great. Second question is for Gary. If you look at your guidance for fourth quarter OpEx, it looks like if you X out the government subsidies, it's basically flat quarter-on-quarter. I'm assuming that guidance is without any subsidies. The question will be, one, given that you're fairly cautious on your business conditions in the short term, is there room to reduce OpEx over the next couple of quarters? And then two is, what can we expect as far as government subsidies in the next several quarters?
Thanks, Bill. For the government subsidy, somewhat just like the past, it's very difficult to predict. That's the reason why when every time we giving the guidance on OpEx, we did not include the government subsidy. But as the fourth quarter goings on, I would expect we probably would have a good chance to get the same level of the government subsidy as the third quarter. But still, there is no guarantee because the government, the bureaucratic process sometimes take time to let us have been granted for those subsidy. To what the other question you ask, what room can we move ahead in order to reduce our OpEx? There is two direction in our OpEx. On one hand, we still need to spend a substantial amount in order to push ahead our advanced technology node development, especially in the engineering wafer usage.
This will somewhat increase our OpEx in the R&D sectors. But on the other hand, beginning from almost 18 months ago, we started to trying to automating our back office in a more efficiency way, and also doing the business process re-engineering. But it takes a little bit longer time than we expected. So after we've been able to implement our new automatic back office system, I believe we will be able to either decrease our expense in OpEx in more efficiently, or when we scale up our sales, we should be able to keep our fixed cost in the back office level.
Assuming revenue stays at roughly the same level, where might OpEx be, let's say, by the middle of next year?
I would hope we will be able to maintain in the current level at our best.
Okay. All right. Thanks.
Thank you.
Thank you. Our next question comes from Randy Abrams from Credit Suisse. Please ask a question.
Yes, good morning. Thank you. I wanted to follow up on the research on the areas of differentiation. As you do that research, or maybe in the meantime over the next year, if you see applications or programs for SMIC that could allow it to grow above the foundry sector, or do you think you need to go through this research process and bring in applications before we start to see growth beyond the industry?
We are, in certain areas, I think that certainly we want to enter them because of the growth and the profit is better than our present product mix.
Well, Randy, if I can add some comments. Before T.Y. joined SMIC, we have already executed a six-month ahead of five years forward-looking study through a world-class consulting company. They gave us a lot of perspective into the future, what is our core competence in technology, and what is the application market we should shooting for, especially fit for the China market. As T.Y. just mentioned, after he joined, he has been spend more time to dig into the detail and starting to pick up one by the other application, which should for us. Still, it will take some time, if not a few quarter, it will be extended in order for us to be able to make a deeper R&D and make our core competence even have more added value into our customer.
At this point of time, still, Randy, we have a difficult time to give it more specific answer on this part. As our speech, by due time, we will starting to give all of the market a more insight about our development.
Okay. And thank you. If I could ask on recent tone of business, if you've seen any order stabilization? Normally we have seasonality in first quarter, but do you think given the second half, and what you're seeing from orders, you'll start to see recovery or how you see that playing out?
Hi, Randy. This is T.Y. Yes. We are very cautious, even though we are seeing some stabilization of customer order and even some positive sentiment. But, I think with the really macro economic uncertainty, it's very difficult to project beyond next quarter.
Okay. If I can ask a follow-up, I guess your projection with excess capacity, how aggressive you want to be in your capital spending? Or is it limited just to some technology buys to roll out 40 [nm] and early 28 [nm] or 32 nm?
Our capital investments are still being planned. We will definitely give you a better picture as we report it in the next quarterly report.
Okay. Thank you.
Thank you. Your next question comes from Dan Haley from Bank of America. Please ask the question.
Thank you. Good morning, Dr. Chiu, and good morning, Gary. I wanted to ask a question on your current business status. You had mentioned that much of the decline was in the consumer electronics area, which has been an area that is weak for all foundries. I also noticed a pretty sharp decline in the North American customers from about $200 million to about $160 million. My question is, to what do you attribute those declines? Is it mostly inventory related? Is it demand related? Or are these products that would effectively come back at some point? When would you see that business normalizing? To what extent could we also see some new businesses come in and new customer engagements to offset some of the weakness in consumer? Thank you.
Hi, Dan. This is T.Y. Yes, we do see a pretty big drop in the last quarter, and we believe mostly this is related to macroeconomic issue as experienced by other foundry. We are hopeful that better execution can allow us to get new product qualified in our line. As well as we are getting an increased tape-out in our 65/55 nm technology node. We have reason to think that by next year, we hope that loading will improve.
Yeah, I guess just as a follow-up on that, I am wondering if you have visibility into your customer inventory digestion. It is obviously demand, and there is some inventory component to this. Do you have insights into how far along they are in their inventory reduction, and how concentrated is this correction? Is it a few customers? Thanks.
We did study the inventory level among our customers. The inventory, there are about half of the customers that have improving inventory level, and half of them having about worsening inventory levels. However, these conditions are an improvement over the third quarter, where in the third quarter, there are a lot more customers having worsening inventory levels. So that particular indicator shows us that perhaps things are stabilizing. Does that answer your question, Dan?
Yes, it does. Thank you. On the capital spending side, I am trying to get a sense of what you think under your new strategy to focus on areas of differentiation, which appear to be a little less capital intensive, I think. I am trying to get a sense of what capital spending needs this business may need next year. Would it be roughly at the same run rate, or would you anticipate the capital spending needs to be below the current level? How do you go about funding those needs, whatever you think they are?
Hi, Dan. Thank you. This is Gary. For CapEx, into the future, definitely we are going to be very conservative. As we move to differentiate in our technology by using our core competence, yes, you are right, we will be spending less. While we are working on the 2012 budget in CapEx, so I will not be able to comment on the number yet. But still, we are going to be very conservative. Compared with last year's level, definitely I would believe it will be a substantial decrease.
Okay. I appreciate that. Thank you, gentlemen.
Thank you.
Thank you. Your next question comes from Steven Pelayo from HSBC. Please ask the question.
Great. You mentioned that your customers' partnerships were unwavering. I am just concerned if any of them are expressing concern about your cash level. I guess cash and equivalents are probably at the lowest, I think, I have in my balance sheet, but you do have a lot of unrestricted cash. Can you talk a little bit about your cash plans at this point in time, and what you need to run the business and plans for funding, if any?
Thank you, Steven. Gary again. Yes, our cash level is in the pretty low side for the time being, as we have a lot of restricted cash, which has been restricted from our banking transaction with the bank. Still, into the future, I would expect our CapEx will be slowing down. But as you can see, our annual depreciation still will be in the $500 million to $600 million level. We believe we should be able to bring in a lot of operating cash when we're slowing down our CapEx. I would expect our cash will keep going down into the fourth quarter, but I would definitely expect it will be coming back gradually into the next years, quarter by quarter, as we're slowing down our CapEx.
Do you anticipate any needs for external funding?
Not in the equities, I believe, in the short run. But we're still working with banks in order to increase our long-term funding from the bank loan.
Okay. You talked about a goal, a strategy of filling the fab, and the example you gave was, I think, a little bit more 200 mm related. SMIC's strategy over the last couple of years was really to get this 65 nm capacity in place, and that was going to be the path to sustainable profitability. It's unfortunate the downturn's come, and probably pricing curves are a little different than what you guys originally thought now. Can you help me understand filling the fab really at the 300 mm level? Could you maybe also start by putting it in context? What are the utilization rates of 200 mm versus 300 mm, and then how you plan to fill the 300 mm fabs?
Okay. This is Steven. This is T.Y. Yes. I only gave you the example of the 200 mm case. But indeed, we are implementing actions in the 300 mm fab. We have a great number of new tape-outs, and we are actually focusing on qualifying those new products that have been running in the fab in the last half a year. We do see that there are a couple of products, very high volume products, that will be going into the 300 mm fab being qualified, some of it already being qualified this quarter, and some of it will be qualifying soon.
What would the relative utilization rates be, 200 mm versus 300 mm in Q3 and Q4?
Okay. Our 200 mm loading is higher than our 12 in loading.
Okay.
200 mm loading is about 80%, and our 12 in loading is about below 50%. It will stay flat over the fourth quarter, but hopefully some of these new products we were mentioning will improve the overall 12 in loading.
Okay, that brings me to really my last question, which is kind of a break-even analysis. Your operating expenses are still kind of flat to up on down revenues. You are doing, I guess, 30% of revenues, 90 nm and below, 20% of revenue, 65 nm, and still kind of doing, let us just say, gross margins around flat or 0%, somewhere around that, ± 1% Q3 or down 3%-5% or so in Q4. Help me understand what is going to be required for break even. It looks like 15%-20% of revenues are spent in OpEx, so you need that in gross margin. What kind of mix are you going to need to do that? Just help me understand a break-even analysis in terms of mix utilization rates and what kind of assumptions you would put into that.
Steven, this is Gary. Our current break-even utilization will probably in the high- 80% to low- 90%, depends on our product mix. For the third quarter, we did experience, as we mentioned earlier, the product mix change, which means the high-margin product shipment is decreasing and the lower margin product shipment is increasing. So that was really get hurt in the third quarter as well. But moving to the future, unless definitely we can control our cost, otherwise, we probably will be maintain our break-even utilization in the 90% for the next two or three quarters.
As we are starting to moving into looking in more detail about the cost structure in the factory, and also, as I mentioned earlier, in automatic back office, when we are moving into more product in the 65 [nm] and then the next year in the 40 [nm], I hope the break-even point will be able dropping from the high- 80% to the low- 80s. Thank you.
Okay. Thank you.
Thank you. Once again, if you have a question, please press star one on your keypad. Your next question comes from Dan Haley, from Bank of America. Please ask a question.
Yeah. Hi, Gary. I just had a few follow-up questions on some housekeeping questions, if I may. Could you give us the depreciation target for next year, where you think that would be? If you don't have that, preferably the next couple of quarters, what would be the quarterly depreciation and cost to goods sold?
I would expect for the next year. Again, the [2012] budget is still preparing, but I would expect very much different from this year.
Okay. Do you have the fourth quarter and first quarter numbers in front of you?
The fourth quarter?
Yeah, depreciation forecast for fourth quarter and the first quarter.
Not for the next year first quarter, but the next quarter, in the quarter four , I would expect the depreciation will be somewhere around [$145 million to $150 million].
Okay, excellent. What do you think your interest expenses will be next year? What are you targeting for interest expenses?
Well, I don't have a number with me, but as we probably will increase our long-term funding for the next few quarters, as everybody knowing, the U.S. dollars funding in China right now is very tight. I would expect the spread point for the money we're borrowing will be moving, I would say, 100, 150 point higher than we used to borrow. I would expect our interest expenses will moving higher a little bit. I'm not expecting it's going to be a big number. You're talking about maybe $2 million, $3 million more interest expense level than we used to be.
Excellent. Thanks. Lastly, on the accounting front, the cash flow from operations had a nice surge from $79 million to $161 million on the cash flow from operations. You had alluded to depreciation declining over the next couple quarters. So where would the operational cash flow be in the fourth quarter and first quarter on your estimate?
I would expect our fourth quarter operation cash flow will be still negative because as we still have some commitment from our previous CapEx, which we still have the cash outflow in investing activity. But from the operation cash flow, we will have a small positive inflow. So net in net, I would expect the fourth quarter still will have somewhere around $60 million - $80 million negative cash outflow, or the free cash flow will be $ -60 million to $80 million. In the first quarter, our visibility at this point of time is still low, but I would not expect a negative free cash flow as our CapEx is slowing down and all the commitment has been finished.
Okay, but some of those prior commitments, I know that in downturns, companies renegotiate with their suppliers. I'm wondering to what extent you can push out some of these prior commitments.
We have hard negotiated with all our vendors, especially the machine vendor, and thanks for their support. We did push out a lot, but some of the commitment, we also need some machine in order to improve our fab efficiency. So that part, we still execute in the third quarter and fourth quarter. But moving into the next year, as we mentioned earlier, we are very conservative, so we are going to be very careful for future commitment. I would not expect there is going to be a high level of cash CapEx into the next few quarters. I mean, first quarter and onward.
Okay. But I don't think your CapEx number declined much, though. $800 million, isn't that where it was last quarter? Your full-year CapEx is still $800 million. Were the pushouts, is that $800 million going to be cash CapEx, or will the cash CapEx be below $800 million?
No. Actually, the cash CapEx from this year is a little bit higher, probably reaching $900 million to $950 million in cash CapEx.
Okay. So what exactly was pushed out then? How much was pushed out?
I would say somewhere around $100 million-$150 million.
Okay. So it would have been higher otherwise. All right. Well, thank you very much. That is it from me.
Thank you.
Thank you. Your next question comes from Steven Pelayo from HSBC. Please ask a question.
Yeah. I'm looking to next year. I know you don't have a capital spending budget, but this concept of a maintenance level of CapEx, what's the bare minimum you think you need to run? I mean, $400 million or $500 million a year, or is that something that I can use as a floor? What would that number be?
No, if you are talking about for the maintenance CapEx, then we are talking about $50 million to $100 million is quite enough for our situation. When we have CapEx into the new capacity, then as you know, every 1,000 capacity for 65 [nm] will cost us $50 million to $70 million. If there is no new capacity at all, then our CapEx will be, I would say, below $100 million for the next years. But again, as we discuss with our customer for the newer technology capacity, at this point of time, we have not decided yet, but still, as I mentioned, we are going to be more conservative into the future for our CapEx.
I guess I'm trying to quantify the comment that CapEx would likely be significantly down. What is significant? I mean, can you stay on Moore's Law and meet all your commitments and still spend less than $500 million next year?
Steven, I'm sorry because for 2012, there is not decided yet, so I really have hard time to give you the number. Please give us some more time to make it works out.
All right. Understood. Looking at your IDM levels revenues, I think maybe one quarter 2008 or maybe two quarters, they were at a lower level. But this is a fairly low level. I guess my question is, can it get any worse? Do you get the feeling that your IDM level business is at a bottom and do you have some visibility for it to improve, let's say, maybe in fourth quarter, but maybe first quarter instead?
Well, for 2010, I really feel sorry to report our result in this way because originally we think we should have a reasonable good year of 2010. As everybody knowing, we report it in the last two quarters, some of our customer either change their product direction with us. 2011, I'm sorry. 2011, some of our customer changing their product direction and some of the customer, they losing their end market. When we prepare our capacity for that IDM demand, it is all of a sudden disappear. We have to work hard to get something new back. As T.Y. mentioned, through the last two quarter, we did work out and starting to get a couple of good new tape-outs, and we believe our long-term with IDM business will be still maintained in a critical level. We have the confidence.
I guess—
Does that answer your question?
Yeah, a little bit. The second part to that question is your IDM business recovery tied to the next technology node really ramping more 45 nm? Or do you think that you can get your IDM business back above these very low levels with just 65 nm?
No. Actually, the IDM business is not only for the advanced technology, it is also for the legacy technology as well. So on both sides, we work very well with our IDM partner or our IDM customer. So, unless we are talking about 40 nm and 45 nm capacity, our current capacity in 60/ 65 nm, 50/ 55 nm and also all of the 200 mm capacity, it somewhat fit into the niche market our IDM customer needs still.
Okay.
Next year, when we are talking about the CapEx, we are really talking about more in the advanced technology, not capacity expansion.
I guess, just in general, is your IDM business, which meaningfully underperformed in Q3, underperformed overall revenue growth. Do you think that is at a low level now where it will maybe outperform the overall company going forward? Or what do you think about IDM business for Q4 and maybe looking into next year?
I would expect the fourth quarter still will be in a very low side, but starting from the next year as the tape -out become mature and starting going to the volume production, yes, the IDM business will be starting to move up gradually into the next year, quarter by quarter.
Okay. Then your outlook for mix in the fourth quarter, 65 nm and below, then you started to mention that you may get some 4X node coming in. How much of that will that come in the fourth quarter or maybe the month of December or something like that? And how much can 4X be maybe by the end of next year?
Okay. As we have reported, there will be a very small amount of revenue on the 4X technology, and we do hope that the 4X will give us a reasonable revenue by the end of next year. We should see revenue around in the mid-10s. And at the end of the year, we hope to have it in the high-10 s, high single- digits by end of 2012. Does that answer your question?
Yes, for 40 nm. Then what about at 65 nm and below into the fourth quarter?
Okay. Let me say that we continue to have very robust 60 and 55 nm new tape-outs, and we hope that the 65 nm loading will be actually in the high- teens, in the mid-20s by the end of Q4 next year.
Okay.
Thank you. Your next question comes from Patrick Lau from Nomura Securities. Please ask the question.
Hey, Dr. Chiu, I got a question that you mentioned for the advanced technology revenue. Could you also give a kind of color for the advanced technology capacity readiness? Then we have more idea about the likely CapEx needed or not. Thank you.
Patrick, this is Gary. For the most advanced technology to SMIC at this point of time, definitely is 40/ 45 nm. From the financial perspective, I really like to be very cautious to our management team when we expand our 40/ 45 nm capacity because I saw two of the other foundry friends when they get into the first step into the 40 nm, they experience quite a challenging time in order to ramp things up. So on one hand, I am quite encouraged by our newer development in 40/ 45 nm progress, but on the other hand, I would like to be a little bit more conservative on the CapEx side for the 40 and 45 nm until we see both, one, good ramping up the yield, and second, good commitment from our customer. At this point of time, we are working very hard with our customer on this part.
I am somewhat still quite promising. We should have some more 40 and 45 nm capacity add up in the next year. At the current point, we have some 4,000, 40 and 45 nm capacity.
Okay, thanks. Would you consider if not really increase the total capacity but kind of enhance the technology content of the current capacity? Would that be a likely viable strategy? Thank you.
Actually, no. For our Beijing fab, we are more focused on 65 nm capacity. For our Shanghai 12 in fab, it will be focused on 40 and 45 nm capacity. So when we increase our capacity in 40/ 45 nm, it will be most probably in Shanghai, and we will probably keep our 65 nm capacity, as I said, current level, in Beijing fab.
Right. Thanks. Would that be a likely idea of, say, cash level balance inflow, outflow utilization rate? Would there be a kind of sense on that, or it really depends on the product mix?
I'm sorry, can you ask again?
Yeah. Just thinking, would it be a very simple idea, since people asking lots about the cash questions, would that be easy idea that at what kind of level, not just the breakeven but also cash balance position for the utilization level. Would there be a kind of sense on that? Would be very helpful.
Well, definitely when utilization is going down below our breakeven point or even low to lower level, it will cause a loss, and we will not be able to fully recover our depreciation, which is a cash inflow in a general sense. From that perspective, definitely we need to make our business been able to bring up our utilization rate, enable to get us the cash inflow into the company. In that situation, we have to maintain a good scale of the operation in order to have a very healthy cash inflow.
Okay. Thank you.
Thank you. I would now like to hand the call back to CEO, Dr. Chiu, for closing remarks.
In closing, I would like to take this opportunity to again thank all of our shareholders, customers, employees, and suppliers for their trust and support. We also thank the analysts who participated today for their questions and comments. I look forward to speaking to you again in the future. Thank you.
Thank you. This is the end of SMIC's third quarter earnings conference call. We thank you for joining us. You may now hang up your lines.