Welcome everyone to UMC's 2017 fourth quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcasted live over the internet, and webcast replay will be available within an hour after the conference is finished. Please visit our website, www.umc.com, under the Investor Relations Investors Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, you may begin.
Thank you, and welcome to UMC's conference call for the fourth quarter of 2017. I am joined here by Mr. Jason Wang, the President of UMC, and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our President's key message to address UMC's forecast and the first quarter 2018 guidance. Once our President and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors Financial section. During this conference, we will make forward-looking statements based on management's current expectation and belief. These forward-looking statements are subject to a number of risks and uncertainty that could cause actual results to differ materially, including the risk that may be beyond company's control.
For this risk, please refer to UMC's filing with the SEC in the U.S. and the ROC security authorities. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss our fourth quarter 2017 results.
Thank you, Michael. I would like to go through the Q4 2017 investor conference presentation material, which can be downloaded from our website. Starting on page three, the fourth quarter of 2017, consolidated revenue was TWD 36.63 billion , with gross margin at 17.2%. Net income attributable to shareholders of the parent was TWD 1.77 billion , and earnings per ordinary shares were TWD 0.15. For loading in Q4 2017, capacity utilization rate was 90%, compared to 96% in the previous quarter and 94% in the same quarter of previous year. Please turn to page four. We can take a look at the income statement on a quarterly basis. Revenue declined around 2.8% to TWD 36.6 billion. This is in line with our previous guidance. Gross margin stay around at a similar level of 17.2%, or TWD 6.3 billion .
We see a 3.8% quarter-on-quarter decline in operating expenses, which lead to our operating income to reach TWD 1.9 billion, or 16.7% quarter-over-quarter growth. Due to third quarter usually is our high seasons for dividend income, that's not the case for Q4. Our net non-operating income in Q4 was a negative of TWD 152 million. Net income, as a result, declined 51.6% to TWD 1.19 billion, or the net income attributable to shareholder of the parent declined 49% quarter-over-quarter to TWD 1.77 billion. EPS is TWD 0.15. For the full year, on page five, revenue grow in NT dollars about 1% year-over-year to TWD 149.2 billion. In US dollar term, however, considering the 6% NT dollar appreciation, our US dollar-denominate revenue base actually grow over 7% on an annual basis. Gross margin around 18.1% to TWD 27 billion. This, again, is largely due to the NT dollar appreciation impact.
For the net income attributable to shareholder of the parent, grow 15.8% year-over-year to TWD 9.6 billion, or equivalent of EPS TWD 0.79 per share. On page six is our simple balance sheet. Our cash and cash equivalent quickly climbed to TWD 81.6 billion at the end of Q4 last year, with total asset around TWD 394 billion. ASP on page seven in Q4 remain relatively flat as our previous guidance. On page eight is our sales breakdown by location. Asia in Q4 represent 45% of revenue, and U.S. represent another 43%. On page nine, for the full year result, I think that's probably the first time that Asia is actually larger than North America in terms of sales breakdown, represent 47% and 43% respectively in 2017. On page 10, IDM still remain around 9% in Q4, and same number for the whole year on page 11.
On page 12, communication remain our largest segment of 49% sales, and consumer is another 29%. For the full year, number wise, it's very similar in terms of the three major segments breakdown. For technology breakdown on page 14, 14 nm has grown to 2%, and 28 nm stay around the same, around 15%. For the full year breakdown on page 15, 14 nm is now about 1%, and 28 nm about 15%. For the capacity, we continue to debottleneck our 8-in capacity given the strong demand. So, there will be some meaningful increase in our AN or the China 8-in wafer fab, along with some debottlenecking for the 8-in wafer fabs in Taiwan. 12X, our new joint venture 12-in wafer fab, will also continue to see capacity increase. However, for Q1, there will be a shorter working days along with the annual maintenance.
So capacity-wise for Q1 will show a minor decrease over Q4 of last year. 2018 foundry capital expenditure plan so far is around $ 1.1 billion. It's quite a meaningful decline compared to 2017. The actual result for 2017 CapEx was actually $ 1.44 billion instead of the previously budget $ 1.7 billion. Also, the distribution between 8-in and 12-in is quite different compared to the past experience. For the 2018, about one-third of the $ 1.1 billion budget was spent on 8-in, and two-third will be on 12-in. That's the summary for the UMC's result for Q4 2017. More details are available in the report, which can be downloaded or posted on our website. I now turn the call over to our President, Mr. Wang.
Hey, thank you, Chi-Tung, and good evening, everyone. Here let me update the fourth quarter operating result of UMC. In the fourth quarter of 2017, UMC's foundry revenue was NT$36.54 billion. During the quarter, our capacity utilization from legacy 8-in and 12-inch technology continued to reflect the robust demand despite a decrease in 28 High-K contributions. The utilization rate of 90% led to an overall wafer shipment of 1.67 million 8-in equivalents. For the full year of 2017, UMC posted a 7% year-over-year revenue increase in the US dollar as wafer shipment increased nearly 11% annually. As a result, our 2017 net income of the parent company grew nearly 16% year-over-year, despite experiencing unfavorable movement of the NT dollar in the foreign exchange market.
Looking into first quarter 2018, we do anticipate our foundry business to remain relatively flat, and we are continuing our effort to capture new 28 nm business by working to secure new design opportunities, which will help rebuild our 28 nm momentums. As this new product tape-out, I expect to enter production in the following months. In addition, we will leverage our manufacturing excellence to invest in the area with a better ROI, potentially including 12-in mature technology, as well as tool and equipment upgrade at 8-in facility. As such, our CapEx in 2018 budget will be approximately $1.1 billion. I believe our approach to optimizing the offering across 8-in and 12-in mature technology while moderating the pace of leading-edge expansion will lead to a better financial performance that will preserve the best interest of our shareholder and employees. That was our fourth quarter results.
Let me go over the first quarter 2018 guidance. Our wafer shipments will probably show an increase of 2%-4%. ASP in US dollars is expected to decline 2%. Gross profit margin will be in the low tens percentage range, and the capacity utilization rate will be approximately 90%. For foundry CapEx in 2018, as we mentioned earlier, it will be around $1.1 billion. That concludes my comments. Thank you all for your attention, and now we are ready for questions.
Thank you, sir. Ladies and gentlemen, we will now begin our question-and-answer session. If you have a question for any of today's speakers, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question. Thank you. Our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.
Yes. Hi, good afternoon. I wanted to ask the first question, if you could give an update on your plans for your China fab, and if you could recap for both this year and also for the potential capacity in that fab. If you still plan that full fab for the logic, or if you now intend to also devote that capacity to the memory business, so that the necessary logic capacity may not reach the full 50,000. You may split it with the memory business.
Okay. Hi, Randy. Let me go over the fab for China. Our goal for the 12-in. Okay. So for the 12-in fab in China, our Xiamen fab, our goal is try to reach quickly. So for the mid-year 2018, we will reach about 17,000 a month. From the current 11,500. By end of 2018, our goal is to reach about 22,000 for that fab. And the maximum capacity for the clean room space at this time is about 25,000 for the facility. So that-
Okay. Well, if I-
Fall back.
Okay. If I could ask a follow-up, if the maximum now is 25,000 for logic, if you could discuss your strategy now on the advanced capacity. Once you reach that 25,000, is it your view now to cap the investment? So more to stop the incremental expansion and more focused on cash flow to reach a certain level of scale and then more move to an area where you're more optimizing mix but less focused on expansion. Or, I guess the latter, if you see opportunity for more business or market share, would you have a potential to look at additional fab options?
Well, Randy, as you know, our current direction for the CapEx expansion is following our ROI justifications. So we're cautiously evaluating all the expansion options and the choices. So, at this point, our plan into 2018 is only up to about 22,000 by end of the year. We haven't had any plan beyond that right now. Okay. As far as the application goes, whether is it logic or memory going to that fab, the memory is not at this time, and we'll continue to focus on the logic device. Then following the market dynamic, and we will expand out.
Okay. If I could ask just on the guidance, if you could discuss both the shipments, it looks like has a bit of relative strength, where you're growing. Normally, first quarter can be a down quarter. But if you could discuss the areas of strength by application or maybe strength and weakness by application. The flip side, it looks like the gross margin on better sales is coming down. If you could talk about the factors on the gross margin affecting that, and I guess, too, we've seen some pressure from bare wafer pricing and some others, but if you could talk about your ability on pricing to pass some of that on. Or as we go through the year, efforts to, let's say, drive some improvement on the gross margin.
Sure. From the Q1 application point, the computer remained to be the strongest one in terms of the Q1 outlook from quarter to quarter basis. Both consumer and communications will be weaker. I think the consumer is actually the weakest area. On the gross margin question, there's a few reasons, some that you mentioned. But the major reason for us is really due to a lighter 28 nm utilization in Q1. That leads to weaken our sales mix. Beside the 28 nm, in Q1, we have a few working days that Chi-Tung mentioned earlier, and the two maintenance, that affects the gross margin. The NT dollar appreciation as well. So the last is, what you said about the higher material costs, especially in the 8- and 12-in wafer substrates increase. So, that combination, that affects our gross margin in Q1.
But I will still say the major contribution is really coming out from the lower 28 nm loading.
Okay
As far as the passing on the cost increase of the wafer substrate to the end users, actually, we have that discussion with our customers. Some is already happening to mitigate some of the cost increase, but not on all the customer yet. So that is not 100% at this point, but we are deploying that, and we are having our conversation with the customer right now.
Okay, thanks. And the final question I had, just since you mentioned the 28 nm lower utilization, if you could give expectations, say, for 28 nm, where it may come down roughly as percent of sales, say, in Q1 or Q2. And then from the new applications, I think where you're working on like a second wave by end of year, if maybe there's an early target for where it might be able to get back to.
Well, I'm probably not going to comment about it percentage-wise. But from the revenue contribution in Q1 is definitely softer than the Q4. And some of it coming from the mobile sector, particularly in Q1. We see a much weaker area on the mobile sector. And we do see that Q2 2018, the revenue contribution will improve, okay? On a quarter-to-quarter basis.
Okay. All right, great. Thanks a lot. And sorry for the background noise. Thank you.
Yeah. Thank you, Randy.
Thank you. Ladies and gentlemen, to keep the quality of this conference call, please turn on the speakerphone mode of your device. Thank you very much for your cooperation. Next we will have Sebastian Hou from CLSA for questions. Go ahead, please.
Hi. Yes. Good afternoon, everyone. Thanks for taking my questions. My first one is on the 28 nm outlook for 2018. I think one of your competitor recently talked about the lower addressable market for 28 nm in 2018 versus 2017. I just wondered, what is the UMC view, and also, what is your outlook for this year-over-year growth for 28 nm? Is it possible to increase year-over-year?
Well, as we've been talking about this for a few quarters now, we are under the 28 nm recovery mode. At this point, we do see some good momentum on our 28 nm HPC+, and with some of the customer engagements. One data point is the number of the new tape out at 28 nm is expected to grow double than last year. There are some momentums. In general, from a technology readiness standpoint, I think we're on track with our recovery. As for the revenue, our expectation is we're going to see something on second half of 2018 as we planned from the HPC+. Then we should continue to see an increase once the 22 nm is released, which is probably toward to end of this year. We expect that to improve in 2019.
However, the business recovery was still subject to those successful the project ramp. We do have high hope there, but I think we're still going through that recovery mode. This 28 nm business recovery momentum will probably continue throughout the year. Your question about year-over-year from the 2017 to 2018 in terms of revenue contribution, I'm still cautious about that recovery. But we're just working diligence on that right now.
Okay. Thank you. It's very clear. My second question is on the first quarter outlook on the margin and profitability guidance. With the low teens gross profit margin, and also your OpEx to sales ratio seems to be also at the low teens range. Is it possible we see the almost breakeven at the operating level in first quarter?
Well, you're very accurate about that. That's also what we are seeing. Right now, based on the projection, this result may approach to operating breakeven. However, if we add back the losses carried by the minority interest, we will be in black. At this time, we'll continue to improve the efforts in the area to improve this result. But I think we definitely will be in black, but we are approaching to that breakeven point, yes.
Okay, understand. But I think there's also a factor that, which is the other operating income, which if I remember correctly, that's the subsidy received in Xiamen fab. This number seems to be quite big in fourth quarter. How do we forecast that throughout 2018 and also the first quarter?
For first quarter, our president mentioned we are approximately breakeven in terms of financial statement. But if we add back the minority interest, the loss carried by minority interest, we should be in black on a pro forma concept. As for the subsidies, the number should be similar to the quarterly average of 2017. I think that's also valid for the whole four quarters in 2018.
Thanks, Chi-Tung. For first quarter, even we include the subsidy which is at the operating level in first quarter, is it still possible to reach the breakeven level, or actually it should be better?
It won't be better. It's already included for the statement of approximately breakeven.
Okay. I see. Thank you. My last question is on the CapEx side. For 2017, the CapEx ended up lower than original guided. I wonder what was the reason. Also, can you give us the update on the CapEx distribution between 8 in and 12 in in 2017?
2017, I think roughly 9% is in 8 in and 91% in 12 in.
The actual number was about $1.44 billion, as I mentioned, versus our budget of $1.7 billion. The reason of the decrease was mainly due to a slower installation across the board. Some of the $1.7 billion or the $300 million also, our CapEx has been included in the $1.1 billion budget for 2018 already.
Okay. Thank you. To follow on that, is that based on your 2018 outlook and also your guidance for the distribution, it seems like your 8-in CapEx will double or more than double this year. What time of the capacity addition we can expect on your 8-in?
Well, for the 8-in, really not much of a capacity increase because we have limited clean room space. Most of that is actually spending in the upgrade in tools and the product mix. That will help us to improve our 8-in overall product portfolios. Yeah.
Okay. Thank you. That is all from me.
Thank you.
The next question is coming from Charlie Chan from Morgan Stanley. Go ahead, please.
Hi. Thanks for taking my question. My first question is actually, your exposure or your potential opportunity in so-called high performance computing, especially now lots of those AI semiconductors. What kind of technology or process that UMC can supply to address these opportunities?
Well, at this point, most high performance computing requires advanced technology. We are having a 14 nm and but with a very limited capacity.
Right.
We do not have a whole lot of exposure there. We are engaging with several customers in the area, more to ASIC model. Because some of the customer in this space, they are not typical a COT type of customer. Sometimes they have leverage in the ASIC service. We are engaging some of the customers through that.
At this point, I would say our exposure in that space is relatively limited.
Yeah. I think it is fair because your 14 nm development is complete, right? My question is really whether the recent development of this AI HPC would change your company's decision, to slow down those leading-edge development because, I remember your strategy said build up capacity based on demand, right? Now those 16 nm, 14 nm capacity seems to be quite under supply, right? So I'm asking whether you consider to invest more capacity CapEx in those 14 nm going forward?
Well, again, our past strategy in CapEx spending is really the growth and the affordability. Means as long as we can afford, we actually put in the capacity to meeting the customer needs and growth. We have changed that from July last year. One of the considerations by adding to that strategy is ROI justifications. So if the ROI justifies, and that will actually help us in financial performance, and that means, yes, we'll put in the capacity for that. That's still remains to be our important factor to evaluate the CapEx expansion. Right now for the 14 nm engagement is continued, and engineering activity is committed because as we also reported a mid-year last year, and we will wrap up our 14 nm technology, and we'll try to take advantage of the 14 nm technology. That's why we'll continue engaging with the customer.
As far as the capacity expansion goes, we still have to go through that disciplines in terms of CapEx spending. Yeah.
Mm-hmm. Thank you. My next question is regarding your 8-in business, right? So I'm not sure if I interpret this guidance right, but it seems like 8-in revenue should increase in 1Q, because 28 nm declines. Can you give us some comments on what kind of 8-in products are driving this kind of above seasonal demand?
Well, for our 8-in, actually throughout 2017, our 8-in demand has been very robust. We have been running a full capacity throughout 2017. We continue to see a strong demand in 8-in for 2018. It is coming from various application. We see particular strong in the mobile space for the RF switch, the MCU, the embedded area, as well the display area. The most challenging thing today is actually managing customers because the demands are overwhelming right now.
Right. Okay. That is all I need for now. Thank you.
All right. Thank you.
Thanks.
Next, we will have Bill Lu from UBS for questions. Go ahead, please.
Yeah. Hi, good afternoon. I got on the call a little late, so apologies if these questions have been asked. My first question is on depreciation. Can you talk about 2018 depreciation versus 2017? Also, how do you think about that on a quarter-on-quarter basis?
For the 2018 depreciation on a full annual basis, is likely to show 0%-3% decline compared to 2017. 2017 over 2016 was around 0%-3% increase. So we start to show some minor decrease, at least from a budgeting point of view, that 2018 will show low single-digit decline if all the plan goes on track. As for quarterly breakdown, it is very linear. So this is quarter-over-quarter should be very flat.
Okay, great. Thank you. Second question is on 28 nm. Management has said in the past that we are going through a transition, but that demand should start to rebound for 28 nm around the middle of 2018. I am just wondering if you still feel that way.
Hi, Bill. Yes, we still feel that way. I actually reported earlier about that when Randy asked the question. Let me, in case you did not get that. We will focus on the 28 nm HPC and HPC+ recovery. Our goal for 2018 is deliver the, in the early part of 2018, we want to deliver the 28 nm HPC+. Later this year, we want to deliver the 22 nm, as we reported in the past couple of quarters. Right now for the HPC and HPC+, we have demonstrated some good momentum of customer engagement. I mentioned earlier, and the index was based on the tape outs. For the tape outs, right now, we see project about growth double from last year. So from a technology readiness point of view, we are on track, and we are working diligently on the 22 nm as well.
At this point, the project is also on track for end of year release. Our expectations, we should see some recovery from second half of 2018, first from the HPC and following 2019 with 22 nm. Of course, those are the current engagement, but the actual business recovery was still subject to those success of those project ramp. We have high expectation of this. More 28 nm tape outs does translate to we're diversifying our 28 nm customer base, not as vulnerable as what we have done in the past couple of years. But on the flip side, in the early wave of customers, they have a single product higher volume, and now we have a smaller volume, but multiple projects. We just continue working on our plan, and right now the plan are on track.
Thank you very much for clarifying. If I could sneak in one last question. On 8-in, you talked about CapEx not being spent on capacity, but spent on upgrades. As you get through these upgrades, do you have any targets as far as where pricing and margins can get to for your 8-in capacity?
Well, one of the biggest reason for driving the upgrade is try to improve our product mix. By focus on the PMIC and the auto switch, those area, that does give us a better returns. But at the same time, we have to managing our current customer. We can't just switch over overnight. That means, we're going through this transition of improvement. We continue upgrading our tool, focus on new engagement for the better mix. But at the same time, we also need to manage in the current portfolios.
Yeah. I totally understand that this will take time, but if you look at the PMIC and the auto-related customers, how much better is the margin currently in those segments versus the overall 8-in business?
Well, I won't be able to get into specific percentage of each application. But, from the 8-in ASP point of view, we hope our goal is at least we have to stay flat. If not increase. That's our target.
Yeah.
Blend ASP point of view. To operate-
Great. Thank you very much.
Thank you, Bill.
Now, as a reminder, please press zero one on your keypad if you would like to ask the question. Thank you. The next one is from Steven Pelayo from HSBC. Please ask your question.
Yeah. I am curious if you could maybe talk a little bit about a target business model, I guess. With CapEx falling to this $1.1 billion, it looks like CapEx to sales falling to maybe low 20s or so, maybe 20%, depending on what revenue grows. Is this the sustainable level you think for UMC? Is there an official target for the company now to keep it around that level? How should we think about capital intensity for UMC over the next few years?
Well, we do not really have a set target for capital intensity, per se. I guess we really go back to the corporate direction. All the capacity spending will be ROI verified. Without these ROI incentives, there shouldn't be any expansion other than so-called maintenance CapEx. We, however, continue to look for low-cost capacity for potential acquisition if there is any good targets. So there could be a different form of spending. Instead of buying new equipment, we may looking for existing older capacity. So it is really go back to the ROI enhancement. I am not sure if Jason Wang want to admit.
Yeah, I think Chi-Tung's right. In principle, it is truly a ROI issues, right? We look at the, in the past, we are definitely seeking for growth, and financially we can afford it. So we pursue that CapEx decision. At this point, if we only look at that again, then we are going to become vulnerable with our business model. So our goal is try to strengthen our financial flexibility as a first. So, reducing CapEx is just one of the tactics at this time. But the principle behind it is the future CapEx expansion has to go through ROI justifications. It is really not the revenue intensity issue. It is about the how can we make our model cost competitive. Yeah.
Okay, understood. You also mentioned about the reason why you are cutting CapEx is to moderate the pace of leading-edge expansion. I am curious, will we see some of this also result in a moderating of R&D, for example? Will we see maybe impacts on the operating expense line as well over time?
Relatively speaking, the R&D cost is much smaller than the CapEx spending in the past.
Sure. Mm-hmm.
We are cautious about our R&D spending. The goal again, is for the ROI reason. If the project can definitely bring us potential returns, then we will continue to fuel that. We truly do not have objective of cutting it or increase it. It is more of a focus on each project's returns. Right now, from the R&D spending side, we have not seen a significant decrease yet. So it is relatively flat at this point. But we continue going through a project review to ensure those projects worth spending our investments. Again, we try to have a discipline following our guidance of ROI consideration and whether it is on the CapEx side or on the R&D expansion side.
Okay. Last question for me is just 28 nm. It looks like the competitive landscape is certainly a lot more capacities kind of ramping up in China, and just a little bit everywhere, actually. I am curious about pricing pressure, specifically at 28 nm. I remember last year that it was fairly intense through the year. Is that pressure still continuing given that it is not like 200 mm where you are struggling to meet all the demand?
Yeah. The pricing pressure is always there. We do see the China players being aggressive in that area. But instead commenting about the other players, our focus is trying to make sure we are cost competitive. We follow the market price. In order to be competitive in that space, just like what we discussed earlier, our business model need to be competitive. So we have to have a lower break-even point. That means we can stay competitive. That is why we deploy this ROI-driven approach, because we want to quickly reduce our BEP as fast as we can. For the 28 nm competitiveness point of view, we still believe our technology is competitive, and we are still probably the only one in the market today that offering 28 nm HPC+, or HPC as well, and HPC+. We are on track with our 22 nm.
I think we are going to be competitive in terms of technology offering. Compared to within this market space. That is why we actually continue investing R&D. At the same time, we are seeking way to reduce our cost in order to stay competitive.
All right. If I could just sneak one more in. I was talking to a fabless chipmaker, and I was discussing the strategy to moderate your leading-edge expansion, and the response was that, "Well, we still like to buy into people's roadmaps." So I am wondering if you think that could potentially impact if you are moderating your pace of leading edge, that clients maybe won't be able to migrate with you if you are not as aggressive on the leading edge. Does that ultimately impact demand?
Well, there was definitely some impact. But I think the impact is limited. Not every application will go into 7 nm or 5 nm. Giving our technology offering from 8 in to 12 in, all the way to 14 FinFET, we think we address most of that market, from an application standpoint. We may not address the HPC, which is the highest growth area. But if you look at the overall foundry market of a $40 billion size market, we have a good, bright. We have pretty much covered 99.5% of that $ 40 billion. I think if we only add around $4.5 billion to $5 billion in size, there is still plenty of room for us to serve our customer.
Okay. Thanks a lot. Appreciate it.
Sure. Thank you.
Next, we will have Sebastian Hou from CLSA for questions. Go ahead, please.
Okay, thank you. Thanks for taking my follow-up questions. Just a few follow-up on the. Do you have any revenue growth outlook for 2018?
Let me see. We definitely have a projection, but let me see how should I answer this. From an external market sector, the foundry growth for 2018, we are projecting about high single digits. Okay. It is driven by many different applications, including from cryptocurrency, AI, 5G, smartphone. So we are participating in that space. But for UMC, we still expect to grow year-over-year 2018. However, it may not be in line with the foundry industry average. We are behind that, and mainly because we are recalibrating ourself right now. We still going to see some increase in the communication computer area, but I think our growth will be moderate and will not in line with the foundry industry in general.
Okay. Thank you. I noticed that your 14 nm revenue has doubled quarter-on-quarter in Q4. What was the main application? Is it still cryptocurrency mining?
I do not think we ever comment about that before. So, I am not denying, I am not confirming. But again, it is not because the application itself is sensitive, it is really because we have a very limited customer there. By commenting, that is kind of too specific. But from an application standpoint, the application process has already moved on. Our addressable area in this space is mainly in the cryptocurrency or AI area. So, yeah. I do not know if I answered your question. Sorry.
No. That is clear already. Thank you. Also, Jason Wang, you already mentioned about on the 8-in side, you see strength in MCU, RF switch, and also displayed area. So when you say displayed, is that driver IC?
Yes. I am mentioning about the driver IC. Yes, right.
So overall. Sorry.
Go ahead. Sorry.
Oh, no. I am trying to just say, so overall, you see the driver IC is, on your side, is seeing a year-over-year growth this year?
Yes. We continue to see very strong demand coming from the display driver side, yes. Not only on the existing side, also because the AMOLED is replacing some of the LCD panels, so we see some of the new application as well.
Okay. Got it. Last from me is that I noticed that in your 2017, the revenue from Europe also doubled year-over-year. Japan, the revenue from Japan also grew strongly, like 20%-30%. I just wondered what was the driver. It is mainly the IDM outsourcing? Also, what is the outlook for 2018 from these two regions?
Well, for the Europe and Japan region, it is mainly coming out from the mobile space as well. Most of our customers in Europe are IDM customers. I just do not want to comment specifically which customer. It is in the mobile and smartphone space. We continue engaging with the customer in Europe and Japan as well. We hope that we can continue grow our Europe and Japan business. We just continue engaging right now. Will that continue to grow in 2018? Again, our overall 2018 revenue is not going to grow significantly. So I expect the overall ratios stay the same.
Okay. So, that is a little bit different from what I thought. I thought it would be mostly driven by automotive and industrial. Not automotive.
No, most of it, the majority of it is not, no.
Okay. Got it. Thank you.
The next question is coming from Charlie Chan from Morgan Stanley. Go ahead, please. Sorry, Mr. Chan, are you on the line right now?
Yes, hello. Yeah. I actually have a similar question to what Sebastian has asked. If it is not the automotive, what kind of product in mobile for consumer that will consume that many MCU? Can you elaborate a little bit?
Well, I think the question was about our Europe revenue growth. Europe revenue growth-
Oh, okay.
is not MCU growth. Our 8-in growth is mainly coming out from including MCU, but the Europe is not. Yeah.
Oh, okay. For that MCU strength, what kind of end markets that you see the demand coming from?
Oh, we see that coming from IoT, coming from automotive and the communication. They are different, yeah. And coming from different applications, yeah.
Oh, okay. Also, my next question is about your free cash flow projection for this year and coming years. Given you are reducing the CapEx, right? Do you expect free cash flow to increase in coming years? And what was your preliminary dividend payout for this year?
Well, certainly we expect to see strong free cash flow in 2018, made up the declined CapEx. And we will, of course, propose to have higher dividend payout to our board, which will happen in March.
Mm-hmm. But you said the dividend payout, dividend per share is going to be higher than last year's EPS, or is it still within this last year's earnings, not doing any special dividend?
There will be no special dividend, but we will certainly propose a higher dividend payout to the board.
Okay. Last one, I am not sure if it is sensitive now to discuss about your DRAM projects. I remember there are some lawsuits between you and other memory companies. Can you explain a little bit? At the end of the day, what is the progress there? When do you think the DRAM project will start mass production?
Yeah. There is a lawsuit filed against us about DRAM, related to DRAM manufacturing. Our position is clear, and we iterate this many times, and we has always developing our DRAM internally, and future DRAM technology will also build from the ground up. So our position right now is we are defending our intellectual property, including our patent in the memory technology to preserve this right, and the best interest of our shareholder, okay? As well as our employees, right? We are defending their right. As far as the legal proceeding goes, we will fully cooperate with the authorities, and we have repeat that many times as well. We never copy any technology and has always conduct our R&D activity with integrity.
We are confident that after due process, the court will rule in UMC favor, but unfortunately, there is the case against us, so we just have to deal with it. Then we have faith in terms of our deliveries and our own technology development integrity. We just have to go through this process.
Before that clear out, can you continue your DRAM developments or did the lawsuits delay your schedule for the DRAM production?
No. As I said, we have developed this internally and from the ground up. The project is not being affected. We will continue our project, and as a matter of fact, the project is on track.
We continue working on the project without any delay.
Okay. Thanks for your help.
Sure. Yeah.
Ladies and gentlemen, we are running out of time, so we are taking the last question, and the last question is from Steven Pelayo from HSBC. Go ahead, please.
Yeah, just two quick follow-ups. First of all, congratulations after eight years of negative free cash flow, getting back into the positive. I am curious what is the minimum cash needed on hand to run your business? Will you be thinking about your dividend from that perspective? Companies like Texas Instruments like to brag about paying out 100% of free cash flow. I am curious if you think about it in terms of cash on hand, or you think about it in terms of just a payout of previous year's net income.
Well, I have to say, the capital market in Taiwan doesn't really reward too much creativity in the special dividend side. We tried that before.
So it's unlikely we will do that again. So high dividend payout and coupled with our balance sheet enhancement or improvement, and maybe from time to time we will consider the share buyback program. But that would be pretty much it.
Chi-Tung, is there a minimum amount of cash that you think you need on your balance sheet?
It really depends. As I mentioned, we are also looking for existing used fab that can bring down our break-even point. So we do need to stay a certain pocket in order to trigger those kind of merger if necessary. So it won't be too low. It's unlikely to be extreme, to answer your question.
All right. My last question is, I guess under this new business model, much more ROI focused. You are guiding the growth slower than the foundry market, but I am curious, what does this mean for structural margins as we go through 2018? I cannot help but look, first quarter of 2017, your revenues were about 2% higher, but your gross margins were about 200 basis points higher. Admittedly, the NT dollar was less of a headwind then. Can you talk a little bit about your structural margins going forward and if revenues are growing, let us just say, I do not know, around 5%, something less than what you say foundry growth is, what kind of gross margin potential do you think you can drive with this company now?
Well, this whole restructuring thing will take at least one, if not two years. In the near term or one to two years, we are still driven by the demand supply, especially our recovery in the 28 nm. That will actually, along with the NT dollar currency movement, will have a lot more impact than anything else. For the mid to longer term, I think after one or two years, I think the slower CapEx, the better cash management, together with our approach to the specialty side of the technology, all together probably will start to kick in. That is actually a two years away scenario. In the near term, for the following one or two years, I would say the key element for UMC is still how to quickly recover our 28 nm customer base and also continue to improve our production efficiency.
Let me just summarize it real quick. Do you think it is possible to be over 20% gross margin in any quarter this year?
This question we can never answer.
I had to ask. Thanks a lot, guys.
Thanks.
Sure. Thank you.
Thank you for all your questions. That concludes today's Q&A session. I will turn it over to UMC Head of IR for closing remarks.
Thank you for joining us today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir@umc.com. Have a good day. Thank you.
Thank you, ladies and gentlemen. That concludes our conference for fourth quarter 2017. Thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.