Semiconductor Manufacturing International Corporation Q2 2009 Earnings Call Transcript

Semiconductor Manufacturing International Corporation (NYSE:SMI)

Q2 2009 Earnings Call Transcript

July 28, 2009 8:30 pm ET

Executives

En-Ling Feng – Director, IR

Morning Wu – Acting CFO and Chief Accounting Officer

Richard Chang – President and CEO

Gareth Kung – Senior Director, Finance and Accounting

Analysts

Steven Pelayo – HSBC

Randy Abrams – Credit Suisse

Dan Heyler – Banc of America-Merrill Lynch

Eric Chen – BNP

Bill Lu – Morgan Stanley

Donald Lu – Goldman Sachs

Ke Chen – Shah Capital Management

Rick Hsu – Nomura International

Pranab Sharma [ph] – Daiwa Securities

Operator

Welcome to the Semiconductor Manufacturing International Corporation's second quarter 2009 webcast conference call. Today's conference call is chaired by Dr. Richard Chang, Chief Executive Officer and President; Ms. Morning Wu, Acting Chief Financial Officer; Mr. Gareth Kung, Senior Director, Finance and Accounting; and Mr. En-Ling Feng, Director, Investor Relations.

Today's webcast conference call will be simultaneously streamed through the Internet at SMIC's web site at www.smics.com. Please be advised that your dial-ins is 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.

Without further ado, I would like to introduce to you Mr. En-Ling Feng, Director, Investor Relations for the cautionary statements.

You may now proceed, sir.

En-Ling Feng

Welcome to today's SMIC second quarter 2009 earnings conference call. Joining me here on the call today are Dr. Richard Chang, Chief Executive Officer and President; Ms. Morning Wu, Acting Chief Financial Officer; and Mr. Gareth Kung, Senior Director, Finance and Accounting. Our call will be approximately 60 minutes in length. The earnings press release and the presentation are available for download at www.smics.com.

Please note the following Safe Harbor statement. 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 the 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 June 22, 2009.

For today's agenda, Morning will highlight our second quarter 2009 financial results and the third quarter 2009 guidance with a summary of the cash flow statements and balance sheet in the appendix for your ease of reference. Following that, Richard will provide an update on our business.

I will now turn the call over to Morning. Morning?

Morning Wu

Thank you, En-Ling. I would like to highlight the following items, which are all stated in US dollars. Overall revenue in the second quarter of 2009 increased to $267.4 million, up by 82.5% quarter-over-quarter from the first quarter of 2009. Specifically, advanced logic sales from 0.13 microns and 90 nanometer nodes have significantly increased by 135.3% quarter-over-quarter in the second quarter of 2009.

Gross margin improved significantly to negative 4.8% in the second quarter 2009 compared to the negative 88.3% in the first quarter 2009 due to a significant increase in wafer shipments and fab utilization.

The company reduced net loss to $97.9 million in the second quarter 2009 compared to a net loss of $178.1 million in the first quarter 2009. We are all pleased to report that with strong support from our relationship banks, we have successfully refinanced the remaining $300 million long-term loans for our Beijing subsidiary during the quarter and extended the loan maturity by 2.5 years.

Summary of our income statement, balance sheet and cash flow statements are available in the appendix.

Our guidance for the third quarter of 2009 is as follows: Revenue is expected to increase 14% to 18% quarter-on-quarter. Operating expenses, excluding foreign exchange difference, are expected to range from $90 million to $93 million. Capital expenditures are expected to range from $60 million to $65 million. Depreciation and amortization is expected to be around $190 million to $201 million. Total capital expenditures for 2009 is still expected to be around $190 million and will be adjusted based on market conditions.

I will now turn the call over to Richard for the business update and the review.

Richard Chang

Good morning and thank you all for joining us today. In the second quarter of 2009, we witnessed strong business recovery on all fronts.

Total revenue increased 82.5% quarter-over-quarter, exceeding our original stated guidance. Our utilization rate increased to 75% in the second quarter, as our logic shipment increased by 102% quarter-over-quarter. Advanced logic revenue for 0.13-micron and below grew by more than 135% from the first quarter of 2009, increasing to 41% as a portion of total revenue from 32% in the first quarter. This significant recovery was driven largely by our customer’s strong performances in the Communications and the Consumer segments.

Our book-to-bill ratio has been greater than 1 in the past five consecutive months and a new tape outs in the second quarter reached a record high for the last six quarters and are up 58.5% from the first quarter of 2009, preliminarily indicating a sustained recovery.

Second quarter recovery was fueled by recovered customer demand across all regions and a robust end demand in Asian markets. Regionally, our Greater China revenue in the second quarter increased by 87.5% and North America revenue increased by 85.3% quarter-over-quarter. We also saw a healthy increase in our Europe sales this quarter.

In terms of advanced technology development, we have already commenced risk production of our 65 nanometer low-power process in the beginning of the third quarter. In addition, our 45 nanometer low-power technology qualification process is on schedule with products from multiple customers under development, and we plan to pass full-scale technology qualification by first quarter of 2009. Moreover, we have achieved successful completion of our first 45 nanometer high-performance GP yield lot, enabling us to further serve our customers with competitive advanced technology.

Moving forward, we are confident that our continual efforts to strengthen our technology and overall product mix will lead us to a better position for profitability.

We have maintained a positive EBITDA margin throughout the global economic cyclical downturn. We have also continued to exercise tight control over capital expenditures and enhance our financial position.

For the six-month period ended June 30, 2009, we have spent in total $44.9 million on capital expenditures while for the same period, we have generated $121.3 million net cash from operations. Our $190 million annual capital expenditure budget is unchanged. With tight discipline over capital expenditures, we forecast that total depreciation and amortization expenses will decline around 13% year-on-year in 2010.

As our customer orders remain strong, we see current momentum for recovery to continue in the third quarter with double-digit revenue growth over the second quarter of 2009. We remain vigilant on our cost controls and continue to focus on enhancing our product portfolio, and commit to strengthening our operational and financial performances on all fronts as we strive toward our goal of achieving profitability.

I will now hand the call back to En-Ling who will moderate the Q&A session of this call. En-Ling?

Question-and-Answer Session

En-Ling Feng

Thank you, Richard. I would now like to open up the call for Q&A and please limit your questions to one per person. Operator, please proceed.

Operator

(Operator instructions) Our first question comes from the line of Steven Pelayo with HSBC. You may proceed.

Steven Pelayo – HSBC

Thank you. Thank you for taking my question. I guess, my one question would be really with your guidance. You are guiding operating expenses to increase from the $82 million range to the $90 million to $93 million range. I was expecting you to benefit from some R&D credit in the second half of this year. I guess, does your guidance imply any R&D credits grant in the third quarter? And if it doesn’t, then do you assume that the fourth quarter, you could have a very large, maybe even a positive R&D number, net number to help you? Help me understand what’s going on with R&D credits and what’s in the guidance and what does it mean for the fourth quarter too? Thank you.

Richard Chang

Thank you, Steven. Your question is very, very good. Yes, in Q3, we did not book any R&D credits or subsidy for this moment. The reason is we have been approved by the authority to start a lot of R&D projects, already getting started. But the funding, releasing of the funding still takes a while for completing all the paperwork. We are not so sure either whether Q3 we’re going to receive those or not, so we did not book any. However, in Q4, we expect we are going to receive it. So your expectation, I believe, is correct. Definitely by the end of this year, we’re going to receive a significant amount of R&D credit grant and subsidy. Thank you, Steven.

Steven Pelayo – HSBC

Thank you. Just a follow-up. So, it seems like excluding any R&D credit, you spend about $50 million a quarter in R&D. Help me understand how much credit or funding you could get by the government in the remainder of the year, whether it’s in the third quarter or the fourth quarter. What do you think the total amount would be?

Richard Chang

As we mentioned, the total amount is very significant but distributed in three years because it takes time to complete all the documentations. Just for a rough estimate, I expect at the end of this year, we should be able to receive maybe $50 million or a little bit more.

Steven Pelayo – HSBC

Okay, thank you.

Richard Chang

Thank you.

Operator

Our next question comes from the line of Randy Abrams with Credit Suisse. You may proceed.

Randy Abrams – Credit Suisse

Okay, thank you. Yes, for my question, I wanted to ask on the gross profit. Maybe talk about the substantial improvement in the second quarter. What was the driver for that? It looks like it improved almost as much as revenue improved. And then, thinking forward for third quarter, with the incremental drivers on the gross margin line, if you could go through depreciation in COGS, your expectation for third and fourth quarter, and then also what could happen whether you get mixed benefits for more 90 nanometer. So we want to understand and potentially, would you get to positive gross profit in third quarter?

Richard Chang

Thank you, Randy. I will ask Gareth to answer this question. Gareth, please?

Gareth Kung

Yes, Randy. We do anticipate that we are able to achieve positive gross margin in Q3. And on your question about depreciation, basically, it will still be – I think we've given out depreciation guidance for Q3, so that would be in that range.

Randy Abrams – Credit Suisse

Okay. But, the component of depreciation in COGS, it’ll be the same percent of overall depreciation?

Gareth Kung

It will be pretty stable, yes.

Randy Abrams – Credit Suisse

Okay. And if you could just go through then, what was the big driver for the gross profit. I mean, one, it’s just growing [ph] the fab, was there the mix benefit or were 90 nanometer, that’s what’s driving the real strong incremental profitability? And then your expectation for 90 relative to the other nodes in third quarter?

Gareth Kung

Right. Well, I think Q2, we benefit from the much high fab utilization. As you can see, there’s a positive change in our product mix, moving towards 0.13 and 90 nanometer and we think that it will continue in Q3. And potentially, as mentioned, we have started with production of 65 nanometer and we expect that will be ramped up in the course of the second half of this year.

Randy Abrams – Credit Suisse

Okay.

Gareth Kung

So, we will see the mix to continue to improve.

Randy Abrams – Credit Suisse

Okay. Do you have an expectation for percent of sales on 65 by fourth quarter?

Gareth Kung

Right now, we are (inaudible) about 3% to 5%.

Randy Abrams – Credit Suisse

Okay. Thanks a lot.

Richard Chang

Thank you.

Operator

Our next question comes from the line of Dan Heyler with Banc of America-Merrill Lynch. You may proceed.

Dan Heyler – Banc of America-Merrill Lynch

Good morning, Richard.

Richard Chang

Dan.

Dan Heyler – Banc of America-Merrill Lynch

I had a question on utilization in terms if you could give us some color on how utilization varies between your 8-inch fabs and your 12-inch fabs right now.

Richard Chang

Okay. Overall, utilization rate in Q2 was about 75%. In Q3, we expect to be better than 80%. And so far, utilization rate in our 12-inch fab and 8-inch fab in Q3 is close to 80%. And for our Tianjin 8-inch fab, utilization rate is higher, maybe about 85%. In Shanghai, slightly lower than 80%. So overall, we expect the overall utilization rate for Q3 to be over 80%.

Dan Heyler – Banc of America-Merrill Lynch

That’s great. And then, on the 12-inch-related business, so I presume as you’re ramping 65 towards the end of the year, what portion of that will be new business and what percentage of that is the migration from 90 to 65? Will there be any new businesses coming in or is this more of a process shrink amongst existing customers, if you could give roughly a quantitative split between what is new and what is existing?

Richard Chang

Good question. The first six products of our 65 logic foundry services are all new products. It’s not a shrink from 90. The 90 nanometer customers still remain to be strong and 65 nanometer, they are all new products. The first six products are all new ones.

Dan Heyler – Banc of America-Merrill Lynch

Are these new customers, Richard? Or do you mean a new application or a new product?

Richard Chang

Okay. Basically, they are in the telecom area and also for computer applications.

Dan Heyler – Banc of America-Merrill Lynch

Great. And then finally, if you could give us some mix end of the third quarter, breaking down areas of strength and weakness across the applications, nodes, which areas are picking up stronger relative to others?

Richard Chang

From SMIC’s experience, competition [ph] is still very strong. Consumer products start to pick up in China. Computer, from our own information, also start to grow.

Dan Heyler – Banc of America-Merrill Lynch

Interesting. Okay. Thanks, Richard.

Operator

Our next question comes from the line of Eric Chen with BNP. You may proceed.

Eric Chen – BNP

Hi, Richard; and Hi, En-Ling. Good morning. My question is quite simple. That’s regarding to the depreciation and based on your Q3, the guidance, how do you think about your whole year depreciation? Is there any significant guide? And how about your breakeven and the utilization rate, do you have any idea to your highlight? Thank you.

Richard Chang

Yes, Eric. Thank you for this question also. Very good. I will ask Morning to answer this question please.

Morning Wu

Okay. Towards our depreciation, I think the Q3 and Q4 are stable. For the total year, around $800 million. So our full-year [ph] model, I think that we are entering [ph] the 2010, our target utilization is 85% utilization. Thank you.

Eric Chen – BNP

Okay. How about depreciation? I mean, for your focus for the next year, it’s more like you’re not declining this year in terms year-on-year. How about for the next year?

Morning Wu

Yes. We forecast our depreciation will decline in 2010 around 13%.

Eric Chen – BNP

Okay, around 13% year-on-year decline. Thank you.

Richard Chang

1-3, 1-3.

Morning Wu

1-3.

Eric Chen – BNP

1-3, okay. Thank you. Okay, and one more question, Richard. Richard, you just mentioned the revenue growth significant in second quarter from the China was probably 88%, if I'm right. I would like to make clear what kind of demand from the China is so strong and would you mind to give us some highlight of what kind of sector and what kind of products are high growth in Q2 and from China? Thank you.

Richard Chang

Okay, Eric. The China market sector, telecommunication is the strongest.

Eric Chen – BNP

Okay. China, I mean, the product consumption in China (inaudible)?

Richard Chang

Not only.

Eric Chen – BNP

Okay.

Richard Chang

Well, some of the products are consumed internally and also some of the products in China – our customers told us, they export it to outside China.

Eric Chen – BNP

I see, so that’s from the China (inaudible), right?

Richard Chang

Yes.

Eric Chen – BNP

Okay. Thank you.

Richard Chang

Thank you, Eric.

Operator

Our next question comes from the line of Bill Lu. You may proceed.

Bill Lu – Morgan Stanley

Good morning. Hi there. Can you hear me?

Richard Chang

Yes, Bill. We’re with you.

Bill Lu – Morgan Stanley

Okay, great. Thanks. Hey, just – I’m sorry. Another question on depreciation. It looks like the first quarter depreciation was restated. Is that correct? And if so, can you just explain to us why that was?

Gareth Kung

This is Gareth. Let me explain to you. The reason why we amended disclosure is because actually Q1 has become the core result [ph] in the LCM’s provision for inventory loss, so we actually got (inaudible) in terms of trying how to understand the number, which is why we actually amended the disclosure in Q1 to break out the LCM into a depreciation and a cash cost.

Bill Lu – Morgan Stanley

Okay. So basically, you’ve just moved depreciation into variable cost, but the overall cost could still stay the same. Is that what you did?

Gareth Kung

Yes. Overall cost is the same, but because in the original disclosure, we included in the cash cost, there’s a thick portion which is the provision for inventory loss. And now, we have stripped out this provision for inventory loss into the depreciation and non-depreciation elements, (inaudible).

Bill Lu – Morgan Stanley

Got it. And then, if you look at the 2Q depreciation, I think last quarter, you had said that it was going to be a bit of with component because revenues went up still so much. Do we have any of that in 2Q?

Gareth Kung

I’m sorry. Can you repeat your question again?

Bill Lu – Morgan Stanley

Yes. So last quarter, I think – I forget who, but somebody made a statement that the second quarter depreciation would be a little bit higher just because of how it was accounted for given that revenues ramped up a lot and with that increase, did we see that in fact in the second quarter?

Gareth Kung

I think if you look at our overall depreciation, actually the Q2 is pretty much in consistent with Q1 for overall amount.

Bill Lu – Morgan Stanley

Okay.

Gareth Kung

So, I’m not clear, whether I’m responding to your question.

Morning Wu

Q2 rate utilization allocates to the inventory and the cost of goods sold. So in Q1, we posted our inventory as even lower so the most utilization is in the cost of goods sold. The total utilization is very stable.

Bill Lu – Morgan Stanley

Okay, got it. And then just one last question for Richard. Do you have any thoughts on 4Q right now given that your book-to-bill has been increasing? Can you talk about your visibility into 4Q, where that stands right now?

Richard Chang

Bill, you asked a very difficult question. 4Q is still not very – visibility is not very clear. We are constantly communicating with our customers. So far, their forecast and their commitment are firm and based on those submissions, we see a continued positive recovery. So at this moment, we are very – we are cautiously optimistic. So, we think it’s still good, still good.

Bill Lu – Morgan Stanley

So, the current customer forecast has 4Q up quarter-on-quarter. Is that what you’re saying?

Richard Chang

Yes.

Bill Lu – Morgan Stanley

Okay, great. Thank you very much.

Richard Chang

We’re just – again, I’m cautious. I hope there is no surprise to us.

Bill Lu – Morgan Stanley

That’s good. Thanks.

Operator

(Operator instructions) Our next question comes from the line of Donald Lu with Goldman Sachs.

Donald Lu – Goldman Sachs

Hi, everyone. Yes, my first question is on the demand for a lagging technology, more like a .25, .35. What is driving the growth in those areas? Is that – and also, is that mostly at your Tianjin fab and also the outlook for the demand for those technology nodes?

Richard Chang

Okay, Donald. Thank you. Yes, .35 and .25 are my problems [ph]. Basically, the BiCMOS technology have multiple customers. They are using this technology. And application of those is basically for power management of ICs and they can use these in a PC, in handset, in many – especially wireless devices. The demand is very strong. You can see we’re continuing to grow in .35 micron. BiCMOS, however, is not easy to make. And for the future, we are developing .18 micron to gradually replace the BiCMOS technologies.

It is not easy to very quickly convert everything from BiCMOS to BCD. Customers give us a period of time – they told us on (inaudible), a period would be one year. Another customer told us will be two years. They expect the .35 micron BiCMOS will gradually reduce, but the .18 micron BCD will gradually increase. Donald, did I answer your question?

Donald Lu – Goldman Sachs

Yes, yes. And – yes. My second question is, is there any recent ownership change from your majority shareholders or in – like Shanghai Industrial? I mean, has it transferred the shares to somewhere else, or am I wrong?

Richard Chang

This is a good question. Shanghai Industrial holding company is a Hong Kong-listed company. And they are communicating with us that their mother company, SIIC, in fact hold our shares for long term. SIIC request that they want to hire [ph] Shanghai Industrial holding company's share for long-term purposes. So recently, they just made this transition. SIIC, as I know, is the mother company of Shanghai Industrial holding company. So the shares are, basically, still owned by the mother company anyway. There is no major change as I know.

Donald Lu – Goldman Sachs

I see. And how about Asia listing and I think recently, this (inaudible) which is HCR Company has been listed on the Asia market with a great success. Well, I know SMIC is interested in that and what’s the status there?

Richard Chang

We -- again, we always has been study the possibilities and have studied the rules how to do the A-listing and turn to H-listing. So, we are still studying this to learn different actions and different approach. After we find the best way and also if the results will be good for all the shareholders, we will proceed. We will consider to proceed timely. Donald, this is what I can answer you as of today.

Donald Lu – Goldman Sachs

Okay. Thank you very much, Richard.

Richard Chang

Thank you, Donald.

Operator

Our next question comes from the line of Ke Chen with Shah Capital Management. You may proceed.

Ke Chen – Shah Capital Management

Yes, thanks. Richard, just want to go back to the profitability question. I guess, Morning has mentioned breakeven utilization rate is 85%. Does that mean, in the third quarter, you are very close to a breakeven? Could you give us any guidance on which quarter you may be profitable on an operational level?

Richard Chang

Q3, we’re still not profitable because of the product mixture.

Ke Chen – Shah Capital Management

Okay.

Richard Chang

The process of migration from higher geometry to the more advanced geometry. But in 2010, based on our forecast, product mixture will be profitable range. So in 2010, if the utilization we can maintain, the 85%. Also, in 2010, we expect our depreciation will reduce 13%, which is almost more than $100 million, so that can help us to reach profitability. Easier when I put this way.

Ke Chen – Shah Capital Management

Okay. Just wondering, you’re talking about product mix. I’m wondering in terms of pricing, do you get a better pricing because of the new technology and new product?

Richard Chang

Yes, definitely. If the technology node maintained to be the same, always see the (inaudible), but when we migrate to the more advanced technology node, overall ASP increase.

Ke Chen – Shah Capital Management

Okay. So, that will help your gross margin going forward?

Richard Chang

Yes. Yes, Ke.

Ke Chen – Shah Capital Management

Okay. Lastly, I’m wondering, you – SMIC has made several progress in the 65- nanometer and the 45-nanometer. Could you talk about the comparison between TSMC and the Chartered in those areas?

Richard Chang

We don’t know how to compare with them, but as you all know that a 65-nanometer, we developed this (inaudible) with a lot of support from, a research grant from Chinese government. So, it is again mass production this quarter and a lot of customers are interested to use this technology. But I can say at this moment, we want to continue to give out research grant and enhance 65-nanometer like IT, portfolio, and a cell library and the engine of this technology. And 45-nanometer, we transferred the talent from IBM to help us to speed up much faster. But based on our information that by the end of June, we are already be qualified in the 65-nanometer low leakage technology, and we also get the 45-nanometer higher performance node -- the test chip from IBM we run it also with very good yield.

Ke Chen – Shah Capital Management

Okay.

Richard Chang

We – 45 is our technology or basically, the IBM technology. We try to get qualify it by the end of this year.

Ke Chen – Shah Capital Management

Okay, thanks.

Richard Chang

Thank you, Ke.

Operator

Our next question comes from the line of Rick Hsu with Nomura International. You may proceed.

Rick Hsu – Nomura International

Hi, thank you. Good morning, Richard, En-Ling, and Morning. This is Rick from Nomura.

Richard Chang

Yes, Rick.

Rick Hsu – Nomura International

I just have one question here, but before I ask the question, let me just clarify here. Your recent development cost in the second quarter roughly is about $48 million. That’s increased quite substantially from Q1. Was it mainly because there was no subsidy from the government, right?

Richard Chang

Morning, please answer.

En-Ling Feng

That’s correct, yes.

Rick Hsu – Nomura International

Okay, okay. Then my question is when you look at your revenue in the second quarter, right, it was up very strongly about 82%, but your cost of goods is only up about 1%. So that substantially reduced your quarter loss. So, your gross margin is only making like 4%, 5% range, so there was a very phenomenal improvement over your cost of goods sold. Can you share with us how you managed down your costs?

Morning Wu

Yes. Actually, in Q2, we reversed LTM of $47 million and also we improved our cost. So that’s why the cost of goods sold has improved a lot.

Rick Hsu – Nomura International

Sorry. $47 million?

Morning Wu

Yes. In Q1, it’s also where you recall the LTM is $45 million. But in Q2, we reversed to $47 million in cost of goods LTM. And also, we improved some costs, so that’s why the cost of goods sold improved.

Gareth Kung

Maybe I can just add on to what Morning said. Just in Q1, due to the relatively low utilization, so our unit cost has gone up a lot. So as part of accounting rule, we have to make some provision on our WIP inventory in Q1. So, we have absorbed the cost in Q1. So, when we actually -- when we sell this inventory in Q2, the cost is lower.

Rick Hsu – Nomura International

I see, okay. I got you. Thank you so much.

Richard Chang

Thank you, Rick.

Rick Hsu – Nomura International

Thank you.

Operator

Our next question comes from the line of Pranab Sharma [ph] with Daiwa Securities. You may proceed.

Pranab Sharma – Daiwa Securities

Hi. Good morning, Richard. Hi, En-Ling. This is Pranab from Daiwa. Basically, my one question is, could you elaborate a bit on the blended ASP we have seen in second quarter? It was down quite a bit and what do you think that trend would be on Q3 this year and what is the reason that blended ASP was down on that Q2?

Richard Chang

Sharma, I will ask Gareth to answer the question. Thank you.

Gareth Kung

Thank you. Hi, Pranab. Actually -- the simple ASP has gone down in Q2 for two reasons. First of all, the reason ASP has come down a little bit (inaudible) in downturn, I think there are some pressure from our customers to reduce prices. And I think that happened in our industry. And secondly, I think we also have a reduction in our other income. So that’s the breakdown of our simplified ASP in Q2. Going forward, we think that there could still be slight erosion in our ASP in Q3, but as we started this production on 65-nanometer and are going to ramp up 65-nanometer in Q4, I think the trend may improve in Q4 because of the product mix change.

Pranab Sharma – Daiwa Securities

Okay, got it. And the next one is, could you give some update on what is going on at Wuhan and Chengdu at this point? And also, that mark in other revenue which was a little bit low on the Q2 as I mentioned, how do you think that it will turn out in the Q3?

Richard Chang

Okay. I will answer the situation in Wuhan and Chengdu. Wuhan is prepared to start to make some flash products in NROM technology, ETOX technology, Split-Gate, so many different kind of flash started in Wuhan. Some are still in the classification process -- the qualification stage and some already started risk production. But Wuhan, I believe, is doing okay and we will continue to strengthen the flash production in Wuhan. Chengdu has been doing actively on power IC on the MEMs. Also, Chengdu will run some specialty DRAM at Chengdu, for example, for communication applications, those kinds of DRAM, not for PC. But Chengdu, again, some of the power IC has been qualified. Some of the power ICs are still in the process of qualification. MEMs start [ph] production and already ramp up gradually and the specialty DRAM especially for communication applications is in the process of qualification now.

Pranab Sharma – Daiwa Securities

Can you give us some utilization rate on those two fabs and the capacity you have?

Richard Chang

Capacity, Wuhan now is, depending on the product mixture, the capacity is anywhere between 3,000 to maybe 4,000 wafers per month. And in Chengdu, currently, close to 20,000 wafers per month now.

Pranab Sharma – Daiwa Securities

And utilization rate at Chengdu is more than 70 or less than?

Richard Chang

Sorry, I don’t have the number. I have to ask – Gareth, do you have – roughly, do you have the number?

Morning Wu

You mean, at Chengdu?

Richard Chang

Chengdu, yes.

Pranab Sharma – Daiwa Securities

Chengdu, yes.

Morning Wu

The total – it’s making around 60% utilization.

Pranab Sharma – Daiwa Securities

Okay, got it. Thanks.

Richard Chang

In the process of qualification.

Pranab Sharma – Daiwa Securities

And the 3Q mark and other revenue, how should you model it out, that part?

Richard Chang

Other revenue is – for example, like testing, assembly testing for the back-end services, Q1 is very, very slow and Q2, we see they are recovering. And Q3, it seemed -- especially the last month in June, is recovering very fast. Expect Q3, other income will also increase.

Pranab Sharma – Daiwa Securities

Okay. And Richard, could you maybe comment on the linearity of the 3Q as and when you move towards the latter part of the 3Q, is your revenue will keep on rising or it will be quite flat toward 3Q?

Richard Chang

Sorry. Because you see – I am not in Shanghai today. I am dialing out for – I’m traveling on the road. How about – Gareth, can you help me to answer this part?

Gareth Kung

Yes, sure. Actually, we have given out the Q3 guidance for revenue growth to be a 14% to 18% range.

Pranab Sharma – Daiwa Securities

Yes.

Gareth Kung

Right now, it has a visibility of – we are receiving August or September. Right now, it’s all on track, so – as far as Richard mentioned that Q4, we are cautiously optimistic.

Pranab Sharma – Daiwa Securities

Okay, got it.

Richard Chang

Thank you, Sharma.

Pranab Sharma – Daiwa Securities

Thank you very much.

Operator

I would now like to turn the presentation over to Richard Chang for closing remarks.

Richard Chang

Ladies and gentlemen, as I just mentioned, I am traveling outside Shanghai visiting customers. Sorry, I have to dial in from outside, so starting today, we had some technical difficulties. Apologies for that. Thank you for the operator and our team members solve the problem for us.

For this year, the worst was over for foundries in the first quarter, and the second quarter was our time for recovery, and I believe further recovery will continue into the third quarter. We are cautiously optimistic about the recovery in Q4. So, we will continue to commit and strengthen our technology and the financials to drive for profitability. Thank you for joining us on today’s call. And again, we extend our invitation to you all to call us anytime (inaudible) and God bless you all. Bye.

Operator

Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect.

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