Welcome to the Semiconductor Manufacturing International Corporation's third quarter 2012 webcast conference call. Today's conference call is chaired by Dr. Tzu-Yin Chiu, Chief Executive Officer, Mr. Gareth Kung, 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 to 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 like to introduce you to Mr. En-Ling Feng, Senior Director of Investor Relations, for the cautionary statement.
Hello, everyone. Good morning and good evening. Welcome to SMIC's third quarter 2012 earnings conference call. For today's call, our CEO, Dr. Tzu-Yin Chiu, will first provide some general remarks. Then our CFO, Gareth Kung, will present the financial commentary. This will be followed by our Q&A session. As usual, our call will be approximately 60 minutes in length. The earnings press release and quarterly financial presentation are available for you to download at www.smics.com under Investor Relations in 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 the United States Securities and Exchange Commission on April 27, 2012. I will now turn the call over to our CEO, Dr. Tzu-Yin Chiu, for the opening remarks.
Thank you, En-Ling. Greetings, everyone. Good morning and good evening. Thank you for joining us for our third quarter's earnings webcast. Let me begin by saying SMIC has demonstrated another quarter of significant improvement. This management team came on board Q3 2011, and since then, our capacity had grown 6% with 50% revenue growth. Our gross margin improved from 1.4%- 27.5%, and we are back in the black. We are now three quarters through the year, and we anticipate 2012 to mark a year of record high revenue. In the past two quarters, we successfully achieved our short-term goal. That is to fully utilize our existing capacity and improved efficiency. Our medium-term goal of technology differentiation is on track. We have already seen the fruit of some initial results. We expect this strategy of leveraging existing assets for differentiated application to bear bountiful fruits as the time progresses.
We are on track with our long-term objective, that is to continue advanced technology development and offering, and to service the expanding demand from the fast-growing China market, while deepening our relationship with leading customer through quality and services. Now in detail, I am very pleased to report that we achieved our record high quarterly revenue in the third quarter with a sequential growth of 9.3%, which exceeded our original guidance. Revenue growth was mainly driven by increased demand for our 65 nanometer and the 0.18 micron processes. This was a result of smartphone, feature phone, and tablet growth. Enhancing our efficiency and maintaining a good utilization resulted in better Q3 gross margin of 27.5% versus Q2's 24.1%.
Despite a relatively lowered amount of R&D contract payment of $ 2.2 million compared to $ 16 million in the previous quarter, we again achieved profitability in the third quarter at both the operating and the net income level. When excluding the above factor, net income improved by $ 18.7 million in the third quarter sequentially. Notably, we have effectively lowered our break-even utilization rate from 90% last year to the current level of around 85%. As we ramp up our 45/40 nanometer capacity in our Shanghai 12 in fab, the break-even point will be further lowered. We anticipate flat to slight growth for the fourth quarter sequentially, also as a result of our 65 nanometer and the 0.18 micron strength. I would like to add that SMIC is in the right market, benefiting from the rapid growth of the communication and the consumer sector in China.
Because of SMIC's weight in the communication and consumer sectors, we are less sensitive to PC weaknesses. For the near term, we have achieved full production, and we are still focused on maintaining high utilization, improving our overall efficiency, quality, and service. As a result of this effort, we continue to see good loading into the fourth quarter. We continue to execute on our midterm strategy of finding differentiation on our technology offering. In September, we announced the availability of our 0.13 1.2 volt low power embedded EEPROM platform. This technology will allow us to address the high-endurance, very low power market, include IP bank cards. On the advanced technology front, our 45/40 process will ship in volume starting in the fourth quarter.
We have more than a dozen tape-outs in the pipeline from over six customers on our 45/40 technology, and a number of these we have recently engaged. 45/40 is now 0.8% of the revenue, and we will continue to ramp up to low single-digit percentage contribution in Q4. This is somewhat lower than expected, due partly to a larger revenue basis. In addition, one of our leading customer has continued to suffer a drop in their end market demand. Fortunately, our team has identified replacement loading within a very compressed schedule. Although our 45/40 momentum has been temporarily reduced, we are still very confident that our 45/40 capability will significantly contribute to our total revenue in 2013. And we are observing that our U.S. and China customers continue to design into our 45/40 technology with enthusiasm.
Our 28 nanometer offering, including both High-K metal gate and polysilicon processes, is on track to be ready by the fourth quarter of 2013. Regarding the China market, our China revenue continued to grow sequentially by 18% in the third quarter, accounting for 35.3% of our total revenue in the third quarter. Of our top 10 customers, five are now from China region. Our China customer strength and revenue growth was primarily due to our customers' increased market presence in smartphone, feature phone, and tablet business. Feature phones made from China are rapidly penetrating into emerging countries in Asia, Africa, Central America, and Eastern Europe. Leading Chinese fabless are the key player in supplying such feature phone IC demand, and thus benefiting SMIC greatly. According to iSuppli, Chinese companies will ship an estimated 480 million feature phone units this year.
Although feature phone shipment will decrease to an estimated 260 million units in 2016, the absolute number is still relatively large. Meanwhile, iSuppli data also shows Chinese companies' smartphone shipment will expand from 148 million units this year to 321 million in 2016. SMIC is currently supporting China's leading IP player with diverse solutions for baseband, Bluetooth, Wi-Fi, Flash, CIS, RF, AP, and more. We believe we are well-positioned to benefit from these growing market opportunities. For many of these applications, SMIC is the sole supplier as a result of long-term collaboration with our partners. In addition to mobile phones, set-top box, data cards, smart grid, and smart cards in China are also driving growth for SMIC's China revenue. Apart from benefiting from high-growth Chinese customers, we also have successfully deepened the relationship with U.S. leading customers and successfully engaged new customers.
In the third quarter, the U.S. region experienced a 7.2% growth and will strengthen in the fourth quarter, primarily due to smartphone, set-top box, and tablets. We have won a good pipeline of tape out on both 65 and 45 nanometer from new and existing customers. With our advanced technology ramp-up, we have wider capability to service our customers, especially those who are aggressively targeting the China mobile phone market. Chinese mobile phone vendors are growing to be some of the largest sellers in the world, and SMIC is the obvious leader in capacity and technology amongst Chinese foundries, and is a clear partner of choice for fabless trying to penetrate the Chinese mobile phone supply chain. In conclusion, we are proud of our progress to date in 2012, and I am very proud of the very capable SMIC team that has been executing our strategy with speed and precision.
We will continue to capture growth opportunities in China and worldwide via technology advancement and value-added differentiation. Looking forward, our revenue for 2012 is projected to reach a historical record for SMIC, representing more than 25% year-over-year growth. This is a strong testimony of our enhanced competitive position in value creation through improved quality, enhanced operational efficiency, product differentiation, as well as strengthened partnership with both global and domestic customers. I thank you for your continued support and looking forward to update you again in the future. I will now hand over the call to Gareth for overall business and financial commentary.
Thank you, TY. Thank you, everyone, for joining us today. I will now take a few moments to summarize our Q3 2012 financial results and provide our Q4 2012 guidance. You may also refer to our quarterly financial presentation on our website, smics.com. Please note that all currency figures are in U.S. dollars unless otherwise stated. We are pleased to report an exciting third quarter. We achieved record revenue of $461.2 million, representing an increase of 9.3% from the previous quarter, and an increase of 50.3% year-over-year. The strong revenue growth exceeded our original guidance, mainly driven by our 65 nanometer and 0.18 micron processes. We also achieved significant improvement in the operating income, which increased from $13.7 million in the previous quarter to $20.4 million. Similarly, net profit greatly enhanced from $7.1 million in the second quarter to $12 million in the third quarter.
Revenue from Wuhan Xinxin Semiconductor Manufacturing was $47.4 million in the third quarter, contributing 10.3% to our total revenue. Excluding the revenue from Wuhan Xinxin Semiconductor Manufacturing for both quarters, our revenue increased 8.9% quarter-over-quarter. Gross margin expanded by 340 basis points to 27.5%, a seven-year high. This was mainly a result of our continuous improvement in manufacturing efficiency. In terms of operating expenses, the overall OpEx was $106.5 million, which was offset by R&D grants of $2.2 million. Therefore, the nominal OpEx for the third quarter was $108.7 million compared to $104 million normalized OpEx in the second quarter. This was due to increased R&D costs. Compared to our OpEx guidance for the third quarter, there is a $12 million difference. Our original guidance assumes that 45/40 nanometer mass production will begin in September. However, the schedule was pushed to October.
Therefore, in Q3, all expenses related to Shanghai 12 in fab, including depreciation and other manufacturing costs, were all booked in R&D expenses as part of the OpEx. However, when Shanghai 12 in fab enters volume production in the fourth quarter, all the production-related costs will be removed from the R&D expense line and treated as manufacturing costs. Looking closer to our operating income, R&D grants totaled $2.2 million in the third quarter as compared to $16 million in the second quarter. If excluding these grants, operating income increased from negative $2.3 million to a positive $18.2 million in the third quarter. All in all, the gain attributable to holders of ordinary shares was $12 million in the third quarter of 2012. The fully diluted EPS was $0.02 per ADS. Moving to the balance sheet.
At the end of the third quarter 2012, our debt-to-equity ratio was 48%, compared to 50% in the second quarter. The ratio slightly decreased as we repaid a portion of our short-term debt. In terms of cash flow, we generated $190 million of operating cash, compared to $109.4 million in the second quarter of 2012. Cash and cash equivalents, together with restricted cash, at the end of third quarter was $475.9 million, compared to $514.8 million in the previous quarter. To examine our revenue by application, the communication sector was our biggest contributor to revenue growth this quarter. Revenue from this sector increased to $215.4 million, representing a sequential growth of 24.2%. Revenue from the consumer segment was flattish quarter-over-quarter, contributing $198.8 million, approximately 43.1% of revenue in the third quarter.
Geographically, revenue from the China region recorded a strong quarterly growth of 15%, while U.S. grew 7.2% quarter-over-quarter. In terms of technology, revenue from 65 nanometer and below increased 18.4% sequentially, contributing 35.6% to our wafer revenue for the third quarter. With regard to capacity, our Shanghai 8 in fab increased from 84,600 8 in wafers per month to 90,000 by the end of the third quarter. This increase enhanced our capacity for more specialty processes, such as PMIC and e2v products. At our Shanghai fab, overall capacity increased slightly from 34,000 12 in wafers per month in the second quarter to 35,000 in the third quarter, mainly from the addition of the bottleneck equipment. In the third quarter, there was no change to our Tianjin fab capacity.
Overall utilization was 92% in the third quarter, compared to 95.2% in the second quarter, as we had a 5.6% increase in overall capacity in the third quarter compared to the second quarter. Looking ahead at the fourth quarter of 2012, we are guiding a flat to 2% increase in revenue. Gross margin is expected to range from 18%-20%. We are guiding down our gross margin due to several factors. Firstly, as Shanghai 12 in fab enter into volume production in the fourth quarter, all the production-related costs will be removed from the R&D expense line and treated as manufacturing costs. If we exclude this change, the gross margin in the fourth quarter will be in the range of 22%-24%. The second reason for the decreased growth margin is lower utilization in the fourth quarter.
Operating expenses is expected to range from $70 million-$74 million, excluding foreign change effect and R&D grants. I now hand the call back to En-Ling for a Q&A session.
Thank you, Gareth. Before we go to the Q&A session, I want to make one correction regarding the 12 in capacity from 34,000 to 35,000. That's for our Beijing fab. I want to make that correction. Now, I'd like to open up for the call for Q&A. Operator, please assist.
If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your first question comes from the line of Randy Abrams from Credit Suisse. Please ask your question.
Yes. Hi, good morning. I wanted to, I guess, start by clarifying on the guidance, first for the OpEx, where you are guiding to $70 million - $74 million. Is that decrease, I think you quantified in gross margin, but is the full decrease coming from the Shanghai fab expenses? Maybe a look forward to gross margins, I guess, a scenario in mid-90s utilization, if you think now with the Shanghai fab, it would be low to mid-20%s, or you see potential to get back to that high 20%s as you ramp up that fab.
Hi, Randy. The reduced OpEx guidance, as you mentioned, is mainly because of the change in the way we account for the Shanghai 12 in fab. Before end of Q4, all the expenses in running the fab was considered R&D costs. Going forward, as we start mass production for the 40, 45 nanometers production, all the production-related costs will go into manufacturing costs, and that will be impacting our gross margin.
Okay. If you could clarify then gross margins, should we think then the new range is low to mid-20% gross margin at these 90s utilization, now that you have the Shanghai fab? Could you clarify too, the amount of capacity? I guess it will show up in the capacity metrics. But in fourth quarter and maybe your plans to ramp up the Shanghai 12 in fab.
We are guiding the gross margin for the fourth quarter to 18%-20%. I think that has to be looked at in context, because what happened is that our 12 in fab in Shanghai right now is still running at very low utilization because we're just starting to mass production for the 40, 45 nanometer productions. Obviously, you could appreciate that right now, the gross margin is actually in negative region. As we gradually ramp up the fab, and ship more for the 40, 45 nanometers, we should see improvement in our gross margin.
Okay. If I could follow up then, for the, I guess your capacity rollout plans and maybe it gets into the Shanghai fab, your plans to ramp up capacity. If you could think how you're thinking about CapEx, do you plan to fund it from operating cash flow so that operating cash flow is pretty close to what your CapEx spending, which I guess would put it similar levels to this year? Or given some of the growth opportunities, could we see you start to get more aggressive on CapEx?
I think there are the two boundary conditions in terms of our CapEx. First of all, we will only expand CapEx based on our customer demand. Secondly, our target right now is to continue to fund our CapEx through operating cash flow. So, within these two boundary conditions, I think we are looking at our CapEx probably in our single target current year.
I'm sorry, that last comment. CapEx?
Oh, what I am saying, within these two boundary conditions
Okay
We are looking at our CapEx in near future will be almost the same level as this year.
Okay. No, thank you. The last follow-up, if you could mention, because you talked about tablet, feature phone, smartphone, what is the percent of contribution you would estimate from these end markets? Is that most of the communications revenue? If you could quantify that.
Yeah. I think the increase we are seeing, about 50% is from the communication sector. Another 50% is from the consumer sector. Maybe 50/50 to maybe 60/40. Yeah.
Randy, this is En-Ling. One thing is, we respect our customers' classification of whether that is a customer or communication. A lot of our device are sharing between those two applications.
Okay. Thanks for the clarification. Thank you.
Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
Yeah, just a couple quick ones here. First, on your fourth quarter guidance being flat to up a bit. Your peers, TSMC, UMC, are down high single digits or so. Could you help me understand where that strength is coming from? How much is China fabless? How much is U.S. customer related? How much is maybe getting the Shanghai 8 in fab moving into volume and then also having revenue on it as well as, COGS? Could you just try to help me understand the fourth quarter guidance with a little more detail?
Yeah, I think you can see, actually, our guidance is a little bit different from our peers. I think there are two main reasons for that. First of all, as mentioned by our CEO, we are overweight in the communication consumer sectors. As a result, we are less affected by the weakness in the PC sectors. Secondly, we are also starting major shipment for our 40, 45 nanometers in the fourth quarter. That also helped in our fourth quarter results. In terms of the breakdown, I think, the strength in the fourth quarter were mainly in the 65 and 40 nanometers for shipments. In terms of application, will be mostly in the communication sectors.
I am just curious by region as well, do you expect growth in your China fabless business and your U.S. business and down elsewhere? Help me understand.
Actually, I think in the fourth quarter, the strengths were mostly in our U.S. customers.
Okay. All right, and then a question on your capacity. Because you guys are really de-bottlenecking to create capacity. You are finally now moving Shanghai up as well. It starts to beg questions that if you are running over 90% utilized, where are you out of capacity? Could you talk a little bit about your utilization rates by node? Then you just mentioned also answering Randy's question about a negative gross margin because of low utilization rates in Shanghai. Help me understand, what is that running at today? What does it need to be at to break even or to drive a better than corporate average gross margin?
In Q3, basically all fabs are running at pretty high utilization. They are pretty even for all the fabs for Q3. In terms of the question on the Fab 8, right now, as we are just starting mass production for 40, 45 nanometers. In terms of the gross margin, it is in the negative territory. But we think that as we continue ramp up to production, we were able to achieve at least a breakeven gross margin for our Fab 8.
Can you quantify a little bit at what utilization levels or timing? When do you think you are going to break even there? Give me a little bit more detail on because that is obviously going to be a big drag on gross margins until it is really contributing. Could you help us time that a little bit more or size that a little better?
Well, as you mentioned earlier, our Fab 8, the capacity to grow to about 12K to 15K, probably by the end of this year. We think that by then, on a monthly or quarterly basis, it should be breakeven.
Okay. Okay, great. I will get back in the queue.
Your next question comes from the line of Apurva Patel from S&P Capital. Please ask your question.
Back to follow up on gross margin. At what point do you need 40/45 nanometer node, in terms of percentage of sales, all else being equal, for gross margin to move higher?
What happens is that, as I mentioned just now in the call, we think that as we continue to ramp up the fab to about 12,000-15,000, we should be able to achieve a breakeven on a gross margin level for that fab. That will be based on our estimation, contributing to about mid to low teen revenue, on a quarterly basis.
Okay, thank you. In terms of your OpEx, I know you mentioned that you are going to move some of the cost into the manufacturing. Is this one time, or is this going to be ongoing? How should we think about going forward as you start to ramp your capacity down the road for 40/45 nanometer? Are we going to see the same kind of movement, or is it going to be a step down in terms of your operating cost?
Oh, the switch, in terms of our country, moves one time. As I mentioned, before end of Q3, the entire fab was considered R&D fab. As a result, all the running costs are considered R&D expenses. From October 1 onwards, the fab is designated to be a production fab. As a result, all the production-related costs will be moved from the R&D line into the manufacturing cost line. It is a one time and could affect the way we account for the fab going forward.
Just to follow then, how should we think about your OpEx going forward? I know it's frustrating. I don't want to ask about next year, but how should we think about your OpEx next year, as I assume it should increase, but what's the linearity? Is it going to be a step up, or is it going to be gradual? Thank you.
I think the increase will be gradual. I think the main increase will be in the R&D, because we'll continue to invest R&D resources. I think that you will see gradual increase in our OpEx expenses throughout this year. Thanks.
Just a reminder, if you do wish to ask a question, please press star one on your telephone. Your next question comes from the line of Rick Hsu from JPMorgan. Please ask your question.
Hello, Rick.
Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
One of your prior answers there, you talked about low teens percent of revenues, for Shanghai contribution to break even gross margin. To me, that really seems like, this is really going to be hurting corporate average margins all through 2013. The question was also asked, when do you think it actually is margin additive? So, if you're doing a blended average today of roughly 18%-20% gross margins, when is Shanghai doing more than 18%-20% gross margins?
Oh, Steve, let me clarify. I think we are not about Shanghai as a whole. It's just all about the Shanghai 12 in fab. Okay.
Understood, yeah. Mm-hmm.
Let me just clarify my comments. What we're seeing is that, as we continue to ramp up the 40, 45 nanometer production to about 12,000-15,000, at this point in time, we think that we are pretty confident that we can achieve at least gross margin neutral for that fab.
Okay. So gross margin neutral to the current reported gross margin, not break even as in a zero percent gross margin
in that fab. Do I understand that correctly?
That is our target, yeah.
Okay. I just want to make sure that was clear. The last question I wanted to ask was a little bit about on customer concentration. Could you help me understand what your maybe top three customers represent as a percentage of revenues in Q3?
Our top five customers currently account for about 55%-60% of our total revenue.
Okay. How did that change versus Q2? What was Q2?
I think, if we look at all our top 10 customers, it has been quite consistent, throughout the last few quarters. Of course, certain quarters, one customer will be higher, another customer is lower, but in terms of mix, it is pretty consistent.
Okay. If I could just sneak one final one. You guys have very little PC exposure. You also have good exposure to some of the leader guys in smartphones, Qualcomm, Broadcom of the world. It does appear more recently that this kind of non-branded white box market in China is quite strong. If I just asked you to try to quantify your percentage of revenues that is specific to that area, what would you say is the percentage of revenues that are coming from China non-branded white box market?
Steve, actually, we will have to do a little bit study, to get a number to you the next time. That part, I don't think we have done a very thorough study as yet.
You did make an interesting comment recently, though, about, maybe being, I think, the number one supplier of like CMOS image sensors to that type of market. I don't know, maybe you can somehow provide some color a little bit about what you do provide to that market and maybe how much, each one of those segments represent. Can you just maybe talk a bit about it?
Yes. We do believe that, right now, our CIS volume is very high, and this, our customers in the non-branded cellphone area, I think that they should have a market share in the range of maybe 50% of the worldwide white brands area.
Okay, fair enough. Last quick question, just Wuhan contribution in the fourth quarter, what are you thinking there? Is there much change in what they did in the third quarter?
Right now, actually, we are still working in active partnership with the Wuhan fab. We are still managing the sales and marketing, and they're still using our technologies.
The revenue contribution will maintain the same. About 10% of our total revenue come from Wuhan. That part, we do not see a change in the coming quarters.
Okay. Wuhan actually goes from 8%- 10%, so it does grow sequentially as well. It is tracking kind of in line with the rest of your flat-to-up guidance.
That is right.
Excellent. Thank you.
Your next question comes from the line of Patrick Liao from Nomura Securities. Please ask your question.
Thanks for taking my question. First question is about the trends in 65, 55 nanometer and the 0.18 micron technology. Could you please give some color about what kind of products you likely get those trends from?
Okay, the 65, 55 technology is mainly in the Wi-Fi and mobile phone, as well as maybe the set-top box. Our 0.18 strength comes from the power management IC, and we continue to see a very robust loading from these areas.
Okay. Then, maybe a very high levels idea that I think the current sense for your peers and even the OSAT, your assembly testing companies, looking the first quarter we're going to have some kind of a correction, and the second quarter will come back good growth. How's the feeling on target? Do you think the same? Anything quite important for SMIC in the next one or two quarters?
Okay. The first quarter is still a bit far away, and we do not have complete visibility. However, we are seeing perhaps a slight decline to more or less a flat quarter in the first quarter 2013.
Sounds great. My last question is about your break-even level utilization idea, that if I remember correctly, that's true, you are saying it's improving from 90% level to 85% level. You will see further lower down the break-even level, and 40, 45 nanometer will be the driving force. I'm not quite understand because I think there will be certain time for the learning curve or the era for a new technology. Could you help to understand how it works? Thanks.
Okay. I think you can understand it this way. In the past, our Fab 8 costs, they are basically generating a lot of costs without much revenue generation. As we ramp up our 45/40 technology, we are actually generating revenue much faster than incurring the cost. That's why we are saying that, as we ramp up our 40/45, that we will see a better net profit. Okay. As far as the learning curve is concerned, we already are seeing good yield from the various pilot as well as from our initial delivery to our customers. This is not just limited to a small samples. We have already got four or five different customers' feedback as well as some initial volume delivery. We are seeing a very, very comfortable yield improvements.
Okay, sounds great. Thanks.
Your next question comes from the line of David Yu. Please ask your question.
Hello. [Non-English content] Nick, congratulations for achieving the best operational results in years. Everything like revenue, gross profit, and gross margin are all records in eight years. Thanks for the very good management delivery here. Thanks for your leadership. By the way, I am just a private shareholder of your company, holding about 100 million shares. So actually, my questions are coming most from a shareholder side. Your Q4 guidance implies about $10 million higher operating results if I work out the margins and expenses than your guidance for Q3, both the lower end and the higher end of your guided range. Can we expect that your actual results to be also better, implying about $10 million or higher better operating results in Q4? As for the bottom line, we have a net loss about $23 million year-to-date.
Your Q4 guidance could imply that we break even or be profitable for the whole year. Could you confirm on that? Second question, we are running interest expense about $8 million-$10 million on a quarterly basis. Could we replace this with equity finance such that the firm can enjoy $30 million higher operating results on a yearly basis, improving the outlook of our profitability? Third question, the company and management is doing a great job fundamentally, and the firm needs finance for technology and capacity and also for the Beijing fab as well. Why we are so silent as a company and management team in news flows and company activities? I am saying, are we expecting any updates about shareholders, any one of them increasing stake, buy more shares in the market or any financial activities?
Also, as for TSMC, when will it go below 5% in the stake, then they would stop making noises in the equity market there, causing volatilities in the share price? Last question. Last one, but not the least important. Beijing phase II has started. Could you give us a little bit of details on the current capital arrangement for that facility because there is huge investments over there? Thank you both.
Hi. Okay, David, thank you so much to be a part of your show, first of all. Let me try to answer first on your question about the guidance. I think we have given the guidance for Q4, and I think that is based on current outlook. I think we are going to stick with that guidance for now. Your same question about our CapEx. Actually, our plan is continue to fund our CapEx through operating cash flow. So we do not have any other plan at this point in time.
Okay. Now, for the Q4 guidance, because if I work out through from top line to the expense line to the bottom line, operating results and all that, your guidance implies actually $10 million higher operating results than your guidance for Q3. If I work all that out, if you had the Q3 guidance and you get $12 million operating profit or something, net profit. If you are guiding for $10 million higher results for Q4, then I reckon that you might deliver something like $24 million, even net profit for the fourth quarter, making the whole year like a first breakeven even year for the company and for the investors. Could you give more light on that or just answer me yes or no?
David, I am sorry. I think we can only provide what we provide as a Q4 guidance. We cannot really comment.
Okay. That is good enough.
More than that.
Yeah.
Yeah. Thank you.
Your guidance works out to be $10 million better than Q3 anyway. Okay. On the financing side, we are running up on $9 million U.S. interest expense. Can we somehow replace with equity finance? As an investor, I am willing to do that because that could lower our interest expense by $30 million per annum.
Thank you for your comments. We will take your comments, and we will consider internally.
Okay. Thank you. Great.
Your next question comes from the line of Steven Pelayo from HSBC. Please ask your question.
Yeah, a couple of follow-ups. Your last comment about Q1 not having much visibility but suggesting flat to slightly down, it really impresses me here. Morris Chang talking a lot about a two quarter inventory correction, and you're not seeing any of it. I certainly understand PCs are partially to blame, but heck, expectations have been low there all year long. I'm curious, your confidence has to be coming, I guess, from somewhere else. Is this just share gains? Can you give me some more color on how you're really relatively outperforming the two quarter inventory correction that the industry leader is talking about?
Steve, I think as you mentioned, there are two reasons that our guidance may be slightly different than our peers. One is that we overweight on the communication sector and consumer sectors, and we are not affected by the PC weakness as such. Secondly, Q4, we just started major shipment for 40, 45 nanometers, and that will continue to ramp up in Q1. That will also have a positive impact on our Q1 outlook as well.
Okay. Just two more quick questions. The niche markets that you're going after, a little bit more stable, things like some of the smart cards and some of the things you're doing with some leveraging more trailing edge capacity. Could you help us understand, I guess, what percentage of revenue this is? What are the largest components, product types that are within there? Help me understand where you think it'll be a year from today, let's say.
At this point of time, our mature technology still accounts for probably 50% or greater of our revenue. As we ramp 45, 40 nanometer, we will see an increase in our advanced technology revenue surpassing our mature technology. That is inevitable. But as our new specialties technology come out of line from the mature fabs, we will also see an enhanced mature technology revenue, again, probably later part of next year. We will generally maintain maybe 40% mature technology to 40%- 50% of the revenue coming from mature technology. But we expect that they are going to be increasing in terms of the margin. Does that answer your question?
We have time for one more question. Your next question comes from the line of Roshan. Please ask your question.
Hello, Kung and Chiu. Regarding the mature technology, could you elaborate more on the gross margins? Are they better than the corporate average or lower than the corporate average? Can we say that SMIC's success in this field is actually taking shares from the local foundries like Hua Hong and Shanghai Hongli Semiconductor, et cetera? Thanks.
Actually, I think our mature technology margin is actually going to be better than the corporate average as we gradually offering more and more of them and into a better and better market segment. However, we see that we are still in a different market segment as compared to Hua Hong Semiconductor. We do not believe that we are competing with Hua Hong Semiconductor in this particular area.
Great. Thank you.
Okay.
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 thank all of our shareholders, customers, employees, and suppliers for their trust and support. Thanks also to the analysts who participated today for their questions and comments, and we will see you next quarter. Thank you. Bye-bye.
Bye.
This is the end of SMIC's third quarter earnings conference call. We thank you for joining us today.