United Microelectronics' (UMC) CEO Po Wen Yen on Q2 2016 Results - Earnings Call Transcript

| About: United Microelectronics (UMC)

United Microelectronics Corp (NYSE:UMC)

Q2 2016 Earnings Conference Call

July 27, 2016, 05:00 ET

Executives

Bowen Huang - Head, IR

Chitung Liu - CFO

Po Wen Yen - CEO

Analysts

Randy Abrams - Credit Suisse

Steven Pelayo - HSBC Global Research

Donald Lu - Goldman Sachs

Rick Hsu - Daiwa Securities Markets Hong Kong Ltd

Roland Shu - Citi

Charlie Chan - Morgan Stanley

Sebastian Hou - CASA

Gokul Hariharan - JPMorgan

Operator

Welcome everyone to UMC's 2016 Second Quarter Earnings Conference Call. [Operator Instructions]. And now, I would like to introduce Mr. Bowen Huang, Head of Investor Relations at UMC. Mr. Huang, you may begin.

Bowen Huang

Thank you and welcome to UMC's conference call for the second quarter of 2016. I am joined by Mr. Po Wen Yen, the CEO of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the second quarter financial results, followed by our CEO's key message to address UMC's focus and the third quarter guidance. Once our CEO 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 investors' financial section.

During this conference, we may make forward-looking statements based on management's current expectation and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the Company's control. For these risks, please refer to UMC's filing with the SEC in the U.S. and the ROC securities authorities.

I would now like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's second quarter 2016 business results.

Chitung Liu

Thank you, Bowen. I would like to go through the 2Q 2016 investor conference presentation material which can be downloaded from our website. Starting on page 3, the second quarter of 2016, consolidated revenue was nearly TWD37 billion, with gross margins at 22.4%. Net income attributable to the stockholders of the parent was TWD2.58 billion and the earnings ordinary shares were TWD0.21.

On page 4, our revenue quarter over quarter shows 7.5% increase to nearly TWD37 billion. Gross margin was 22.4% or TWD8.2 billion. Operating expenses because of our starting costs in our 12X or Xiamen fab has increased about 15.7% quarter over quarter to TWD5.8 billion in the second quarter. So the operating income or percentage is 6.6% or TWD2.44 billion. EPS is TWD0.21 per share. For the first six months of the year, revenue showed 5.6% decline to TWD71.4 billion, partially due to lower utilization rate and partially due to the less consolidating entities compared to the same period of last year and gross margin dropped to 18.7% or TWD13.3 billion, mainly due to lower utilization rate. And operating income is 3.4% or TWD2.4 billion in the first six months of 2016. EPS for the whole six months is TWD0.23 per share. Cash around TWD50 billion and stockholder equity is TWD219.5 billion.

In terms of operating segment breakdown, most of the profit of TWD1,579 million was generated by our wafer fabrication or foundry business which was around TWD1,641 million. Our new business, when the revenue had come down to a minimum scale, still accounts for about TWD278 million loss in the second quarter of 2016. ASP mainly due to the ramp of 28 nanometers show a meaningful growth in the second quarter of 2016. In terms of revenue breakdown, we see some weakness in our Japanese clientele which dropped the Japanese business to around 2%. And U.S. and Asia stay relatively similar to the breakdown in the first quarter of 2016. IDM, due to similar reasons, came down to about 7% in second quarter.

And in terms of application breakdown, we see strong growth, especially in the communication segment which accounts for about 55% of our total revenue breakdown; and consumer is about 27%. The strong communication demand has continued to drive our leading edge revenue growth. 28 nanometer in second quarter now is account for 17% of our total revenue, significantly grows compared the 8% numbers in the first quarter. Total revenue below 40 nanometer is now 43% of our total sales. Capacity, we will continue to see some minor growth in third quarter mainly coming from 12A, our leading edge wafer fab in Tainan and most of the capacity expansion is 28 nanometer base.

And for the time being, our CapEx number still remain around $2.2 billion. Although, given the stronger demand in 28 nanometer, there may be some speed up in terms of 28 nanometer capacity installation. But the CapEx number-wise for the time being stays at around $2.2 billion. So that's pretty much the second quarter financial report. More details are available in the report which can be downloaded from our website.

I will now turn the call over to our CEO, Mr. Yen.

Po Wen Yen

Thank you, Chitung. Hello, everyone. I'd like to update you, everyone, UMC's second quarter operating results. In the second quarter of 2016, our foundry revenue increased 7.5% sequentially to TWD36.87 billion. We achieved foundry operating margin of 7.1%. The overall capacity utilization was 89% bringing, wafer shipments to TWD1.51 million 8-inch equivalent wafers. As the latest semiconductor inventory cycle came to the end of the year, the 2Q 2016 reflected a return to semiconductor seasonality as chip demand improved. As a result, UMC experienced a surge in 28 nanometer business, especially from communication customers.

Many of the chips found in the newly released smartphone models have adopted UMC's 28 nanometer solutions which helped trigger our 28 nanometer revenue growth that began in 2Q 2016. For the consumer segment, UMC has also delivered other 28 nanometer volume production ICs in areas such as DTV and set-top box to help further boost 28 nanometer utilization.

The widespread adoption of our 28 nanometer process technologies underscores the technology readiness and value that UMC provides to the IC industry. Looking to the next quarter, we anticipate a slight increase to our overall foundry revenue with 28 nanometer revenue contribution expected to reach 20% or more. Our 40 nanometer demand is also expected to remain stable. As our advanced node performance remains on track, we do anticipate a decline in 8-inch demand due to the changes in customer mix and market dynamics.

While we continue to expand additional 28 nanometer capacity at Fab 12A in Tainan, Taiwan, UMC's 12-inch Xiamen operation in China, 12X, is set to begin pilot production. As such, UMC will accrue higher quarterly depreciation and operating expenses. However, we expect our high 28 nanometer utilization rate and the revenue recognition when 12X enters production at the year's end to somewhat offset a portion of the accrued depreciation and operating expense.

We foresee 12X to aggressively capitalize on the fast-growing Chinese semiconductor market and provide our customers with a viable solution for local foundry services in China. We believe 12X will play a key role as a critical manufacturing base as it ramps to economy of scale.

Now please allow me some time to summarize the recent highlights in Chinese.

[Foreign Language]

I have finished my remarks and now we may go over the third quarter 2016 guidance. Our wafer shipments in third quarter will show an increase of 2% to 3%. The ASP in NT dollar will remain flat. Our gross margin will be approximately 20%. The capacity utilization rate will be approximately mid 80% range. Our foundry CapEx for 2016 remains as $2.2 billion.

That concludes my remarks. We're now ready for questions.

Operator, please open the lines up. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question is from Randy Abrams from Credit Suisse. Please ask your question.

Randy Abrams

The first question, I wanted to ask about the portion of the outlook that is a little bit slower, the mature 12-inch and the 8-inch nodes. If you could talk a bit more about the mix and market dynamics that is affecting your business, as some of the China foundries are still pretty tight on 8-inch, so maybe some of the weakness that you're seeing there. And looking forward, if you expect this to sustain for a few quarters or if there's some new projects, you could talk about new products that may boost the 8-inch and mature 12-inch.

Chitung Liu

Our 8-inch loading in the third quarter will not be as high as expected during the peak season. And, yes, our 8-inch business reflects the changes in customer mix and market dynamics. So we did not realize 8-inch revenue due to customer mix and market shifts. However, we're taking lots of efforts and actions with respect to our 8-inch business to recover by the first half 2017. UMC has a strong market leadership in many areas, including embedded high voltage, bipolar/CMOS/DMOS technology and RF SOI and the manufacturing experience in MEMS microphone.

So we will leverage our fundamental knowhow as well in the CMOS image sensor and fingerprint sensors to broaden our market share and diversify our customer and product mix to minimize the impact of market dynamics.

Randy Abrams

Okay. And could you talk about the areas of 8-inch that are seeing the weakness now, if it's display driver or some other applications; or if it's a market share, it's a temporary market share shift that might be happening.

Chitung Liu

In our case, our weakness is in the demand in the consumer part. We have some, especially the IP cam and some in communications, the driver IC, especially the LDDI, large panel display driver.

Randy Abrams

Okay. And the second question, I wanted to ask about the Xiamen startup and two parts to this. The first part is how we should offset the -- you mentioned the cost, like some OpEx and also depreciation, but then also some benefit from loading. And if there's a way to net out, I guess, relative to current levels, how much impact to gross margin or OpEx from the new fab? And the second part is the non-controlling line. This quarter, it absorbed about TWD1 billion, so how we should think about how much you'll get back on non-controlling.

Chitung Liu

The non-controlling part is always around 2 to 3 percentage points. So at the net level we always add back about 2% to 3% of profit because of the loss-making status of the current Xiamen startup. And started production date for Xiamen is early December, so we will start to see revenue contribution starting from December of 2015.

Randy Abrams

Okay. And I guess the costs, should we model any OpEx into second half? Any change before we do startup or after the fab? And any incremental change on gross margin as the fab ramps up?

Chitung Liu

After we approach December of 2016 when the fab starts volume production, all the cost items will transfer to each appropriate accounting items. So some of the cost of goods sold will go under gross margin and some of the real OpEx will stay as operating expenses. For the time being before the mass production, all the Xiamen-related expenses is under operating expenses only.

Randy Abrams

Okay. Would that be a meaningful growth though in OpEx the next couple of quarters? Or you already have most of that expense already coming in?

Chitung Liu

Third quarter will be even higher and I think that will be the peak.

Randy Abrams

Okay. The last question, the memory project. Now that there's a partner, how much--? Is there a way to think of a rough--? Could you see any meaningful NRE? Like it would come in as a revenue or royalty income or if there's a way to think about the benefit that you'll get from the memory project. And then is there a longer term structure where you'll receive royalties or ongoing development? Or if you can go through the economics for UMC just during R&D and then the production phase.

Chitung Liu

Well, NRE is definitely, according to our own calculation, it will be more than enough to cover any of our incurred costs. And on top of that, there will be a consigned machine, leading-edge scanner if you will, to help to develop this project. And the same time, UMC will be able to share the machine if there's any spare utilization for that particular DRAM project. For longer term, we do try to integrate the DRAM knowhow into our SOC foundry solutions and there will be also ongoing royalty involved if there is any success on that.

Po Wen Yen

We will also leverage both parties' procurement power to lower our tool purchase cost in the future.

Randy Abrams

Okay. So it sounds like in DRAM production, if it's profitable, where just subject to their ability to ramp, you'll starting receiving a percentage royalty off of their production?

Chitung Liu

We're not involved in any investment so it will be only NRE for the time being and ongoing royalty.

Randy Abrams

Okay. Can you clarify ongoing royalty for--? But is that for a production based royalty, the ongoing royalty? Like what would that be tied to?

Chitung Liu

It would be tied to the after mass production.

Operator

And the next one is from Steven Pelayo from HSBC. Please ask your question.

Steven Pelayo

My questions are actually the same as Randy's. I'm just looking for a little bit more details than that. There's a lot of moving parts going on with these startup costs and different lines are moving from OpEx to COGS. I wonder if you can just be a little bit more specific in the third quarter; then what happens in the fourth quarter; maybe even looking out to even next year for some lines like OpEx, depreciation within COGS in the third quarter.

And then maybe even talking about what that non-controlling interest line could maybe do even next year. I don't think it will stay at 2% to 3% of net profit forever. So can you be a little bit more specific in the near term as well as the medium term, on these 12X impacts?

Chitung Liu

For near term, all the costs related to Xiamen fab will continue to rise given the scale and probably continue to increase. So third quarter, for the expenses coming from Xiamen fab will continue to increase and it will all be categorized under the operating expenses item from a UMC point of view. In the December of 2015 when the fabs start operating and generating revenues, it will be on a full consolidated basis. All cost items will be allocated to where it belongs. So again, cost of goods sold goes to cost of goods of UMC's and OpEx will go under OpEx of UMC's. So it will be 100% consolidated basis.

However, given that we only own about one-third of the operation, two-thirds of the loss or most likely loss in 2016 at least, will go to minority shareholders at the net level. So we will in return gain back some of the profit at the net earnings level. According to our calculation right now, it's about 2 to 3 percentage points of profit.

Steven Pelayo

I understand the accounting mechanics of it all. Just trying to get more specific on the actual dollar impact in the third and fourth quarter. You're saying OpEx goes higher. What's the magnitude? How much higher? In the fourth quarter, as it shifts to cost of goods sold, how much shifts over there? Can you be a little bit more specific on the dollar magnitude of these impacts?

Chitung Liu

Yes. We don't have that number for now. I think what we can talk about is gross margin will be likely around 20% range for the third quarter and operating expenses mostly because of Xiamen will continue to be higher. The magnitude is 3 percentage points of margins.

Steven Pelayo

Okay. Maybe just one more question then on 200 millimeter. You talk about mix and market dynamics. I guess I still didn't understand. Is some of this potential market share shifts, as companies like SMIC really don't have much 28 nanometer but are fully loaded on 200 millimeter, trying to buy more capacity. So could you talk a little bit more? What do you mean by mix and market dynamics impacting 200 millimeter?

Po Wen Yen

Yes. In some mature node technologies, some segments, UMC is kind of weak in that area; for example, the fingerprint sensor and the CMOS image sensor. And so UMC did not have a strong position in that area. And that is even the business coming up and that is a portion we did not catch the business opportunity.

Steven Pelayo

Okay. If I understand your guidance correctly, you're talking about 4X remaining stable and 28 nanometer going to over 20% of revenues. I guess that's roughly 45% of the Company probably -- it looks like maybe if I'm doing the arithmetic right, up about 10% or so and then the other 55% or so down roughly 5% or so. Does that seem to match with your -- what you're guiding here?

Po Wen Yen

It's about that what we're talking about.

Steven Pelayo

Okay. And so 55% of revenues are declining and most of that is going to be the 200 millimeter. I'm just curious. What are the margin implications from that? We know margins are being pressured from 28 nanometer higher depreciation. I'm wondering how much margins are being pressured from lower utilization rates at 200 millimeter and more mature 300 millimeter nodes.

Chitung Liu

They all factor in. That comes down to our gross margin 20% guidance and operating expenses in the third quarter because of Xiamen will be a few percentage higher as well.

Operator

And the next question is from Donald Lu from Goldman Sachs. Please ask your question.

Donald Lu

First is, Chitung, I just want to verify. You just said OpEx will be up by a few percentage points. Is that relative a few percentage of your revenue or is that a sequential increase by a few percentage points?

Chitung Liu

Percentage of revenue.

Donald Lu

And what is the capacity plan for your own 28 nanometer by the end of this year and potentially next year, given the demand is so strong; and also, the capacity plan for Xiamen for this year and next year?

Chitung Liu

For the 28 nanometer capacity plan, we will reach the 29,500 combined capacity by the end of this year. That is in our Tainan fab. And we will have 10,000 to 15,000 more wafer capacity expansion for the year 2017. And that portion will be [Technical Difficulty] Xiamen fab.

Donald Lu

You mean to add 28 nanometer capacity in Xiamen fab next year?

Chitung Liu

That's according to the plan, but I think the country plan is we're going to ramp from 30,000 to around 39,000 and eventually to 45,000 in Taiwan.

Donald Lu

So in Taiwan, 28 nanometer capacity will go up to 40,000 to 45,000 next year?

Chitung Liu

Yes.

Donald Lu

And also the Xiamen fab will go up to 10,000 to 15,000 next year?

Chitung Liu

Xiamen, by the end of this year, the initial capacity is around 3000 to 6000 in 40 nanometers and the ultimate goal is to have around 10,000 40 nanometer first and we'll see how it goes.

Operator

And the next one is from Rick Hsu from Daiwa Securities. Please ask your question.

Rick Hsu

Just one question from me. Could you elaborate a little bit more about the breakdown, utilization rate breakdown for Q3 in between 12-inch and 8-inch? Or maybe in Xiamen, how much increase 12-inch is versus how much decline the 8-inch?

Chitung Liu

Yes. Our Q3 utilization rate will be around -- as I guided it just now is mid 20 percentage range and -- mid-80 and for 8-inch will be mid 80 as well and 12-inch will be a mid to high 80 range.

Rick Hsu

Okay. What about the gross margin breakdown between 8-inch and 12-inch?

Chitung Liu

We don't have that numbers. Basically, company-wise, it's about 20% and 8-inch certainly is higher than 12-inch.

Operator

And the next one is from Roland Shu from Citigroup. Go ahead please.

Roland Shu

First question is on the depreciation. You've said depreciation in 3Q will be higher due to the startup costs of this Xiamen project. So question is how high it will be in 3Q. And also, the whole year depreciation increased by 20% year on year. Is that number still hold? Thank you.

Chitung Liu

Yes. Whole year is still 20% increase in depreciation and the third quarter actually only increased slightly.

Roland Shu

Okay. So 20% still holds. Okay. Second question is for your 40 nanometer. Previously, you expect to start mass production from second half next year. Is this status still hold or are you going to pull in or push up this 40 nanometer production?

Po Wen Yen

The figures still hold. Yes. Our 40 nanometer development is still on track and we expect to receive customers tape-outs in the end of this year, Q4 range and we're targeting to have initial production in the first half 2017.

Roland Shu

Okay. So in order to do the production for 40 nanometer, how big capacity you are going to build for 40 nanometer next year?

Po Wen Yen

We will not -- very minimum for capacity [indiscernible].

Roland Shu

Yes. But still you need to at least have a pilot ready for 40 nanometer. Right?

Po Wen Yen

Sure. We have a 2000 capacity for 40 nanometer pilot, 2,000 wafer production.

Roland Shu

Okay. But I bet in second half next year, if you are going to mass production, I think that your capacity definitely need to be much higher than this 2,000. Am I right?

Po Wen Yen

Yes. That's correct.

Roland Shu

Okay. So then my follow-up question is it looks like next year will be a very busy year to you. I think that you have intensive new projects. You need to start injecting CapEx to Xiamen fab. And also, you are going to ramp up 40 nanometer. I think that you also have this DRAM project ongoing. And also, you continue expand 20 nanometer capacity. So question is, how do you think next year capacity will be? Because there's many new projects ongoing simultaneously. Thank you.

Chitung Liu

For DRAM project, we don't involve any production, so it's only R&D effort. So there will be no CapEx from UMC side. And for Xiamen it's a joint venture, although we have the controlling power. But in terms of real cash flow, it's still mainly supplied by the Xiamen JV itself. And UMC up to now actually hasn't really putting any capital into the Xiamen JV yet from UMC Taiwan.

Roland Shu

But for next year it will be, right?

Chitung Liu

Yes. But the amount is actually quite minimum. The main focus still will be the CapEx in Taiwan. So as you mentioned, our 28 nanometer, most of the spending will happen this year and the rest will be -- some we're extending to 2017 and the rest depends on how much we want to ramp our 40 nanometer capacity.

Roland Shu

Okay. So can we say, can we expect next year CapEx will be higher than this year or that would be at the most probably of flat as this year?

Chitung Liu

We don't have the figure for now. Again, there are several variables, 40 nanometer capacity, as well as the schedule for our Xiamen installation.

Operator

And the next question is from Charlie Chan from Morgan Stanley. Please ask your question.

Charlie Chan

First question is when will you migrate to 28 nanometer for the Xiamen fab? Thanks.

Chitung Liu

Xiamen fab we do have plans, but everything has to go according to our regulations on both sides. And I think we will have to generate either 20 nanometer revenue or 40 nanometer revenue first for our Tainan fab before talk about 28 nanometer in Xiamen.

Charlie Chan

Right. So what is the progress of the next generation R&D?

Chitung Liu

We already talked about 40 nanometer by our CEO just now that we do expect to see some initial pilot production of 40 nanometer in Q1 2017.

Charlie Chan

Okay. And regarding your memory project, what would be the DRAM technology source?

Chitung Liu

We're the source. And also, we have the previous DRAM source and we're also recruiting new teams to develop new DRAM technology.

Charlie Chan

Okay. So will it be more from a previous [indiscernible] or any camps for this DRAM technology?

Chitung Liu

It would a UMC proprietary technology, but we do recruit some -- all the developer talent out there.

Charlie Chan

Okay. So for your memory project again, so can you disclose what kind of geometry and application you target for?

Chitung Liu

Well, initially it will be 32 nanometer; as I said, specialty technology.

Operator

And the next one is from Sebastian Hou from CASA. Please ask your question

Sebastian Hou

My first one is on your guidance for third quarter on the blend on ASP in dollar terms will be flat. But looking at your guidance at the 28 nanometers, if my calculation is right, for 17% to 20% revenue contribution, that means about 20% increase of the revenue in 28 nanometers. In 40 nanometers stable, but 8-inch wafer revenue are going to decline. So supposedly, this kind of product mix should translate into a blended ASP increase. So I just wondered what do I miss here.

Chitung Liu

Partially, it's because this NT dollar appreciation projection. So our guidance is ASP in NT dollar to remain flat. But in U.S. dollar terms, it probably will go up a little bit and second reason is there will be some product shift in our client bases, even though they are the same geometry, but there will be some weaker pricing, especially in the 40 nanometers in the third quarters.

Sebastian Hou

Okay. Do you feel any pricing pressure on you outlook for comparison perspective?

Chitung Liu

No. Of course, our available inch capacity we will try and be aggressive. But for 20 and 40 nanometers which is running at nearly 100% loading, that pricing pressure is very, very minimum.

Sebastian Hou

And my second question is on the -- based on page 13, your quarterly capacity at this stage, from second quarter to third quarter, your capacity is going to increase 3%. Your wafer shipment guidance also about 2% to 3%, but your overall utilization rate guidance for third quarter will be mid-80s, but your second quarter was 89%. So I just wonder what do I miss again here.

Chitung Liu

Again, there's always the old reason. Sometimes wafers produced and wafer shipped are not always the same and mid 80s is also a range.

Sebastian Hou

Okay. And I want to follow on the 28 nanometers. What's your 28 nanometer utilization rate in second quarter and third quarter?

Po Wen Yen

In the second quarter, our 28 nanometer utilization is around high 70% range. In the third quarter, it's in the over 95%. Actually, our 28 nanometer utilization for the rest quarter of the year will be over 95%.

Sebastian Hou

I'm sorry. I see you mentioned about second quarter your UTR was 70%?

Po Wen Yen

Yes. 28 nanometer in the second quarter is high 70%.

Sebastian Hou

High 70%.

Po Wen Yen

80% range.

Sebastian Hou

Okay. And my follow-up question is on the -- if you do some calculation, your third quarter gross margin will come down to 20% and today earlier mentioned about the OpEx to sales will go up by a few percentage points. So do you still expect your operating margin to stay at positive territory in the third quarter?

Chitung Liu

Yes, definitely. Not only will it stay positive and also, we want to remind that 100% of the OpEx will come in at the OpEx level. And the minority share will share, 2/3rds of the operating expenses at the net level.

Sebastian Hou

The last question is on the depreciation. So for the third quarter and fourth quarter, we're likely to expect the depreciation expense to go up sequentially, I think.

Chitung Liu

Slightly, yes.

Sebastian Hou

Slightly. Okay. So when you say slightly, it's about like less than 10% per quarter?

Chitung Liu

Well, less than 1%.

Sebastian Hou

Less than 1% per quarter?

Chitung Liu

I mean increase, yes.

Operator

And the next question is from Gokul Hariharan from JPMorgan. Please ask your question.

Gokul Hariharan

First of all, on the 20-nanometer plan, could you talk a little bit about beyond this year when you reach 29,500 capacity, any thoughts about how much you would want to expand? And what kind of tape-outs are you already getting to indicate that the capacity could be higher than what you end up with at the end of this year?

Po Wen Yen

I'll answer the tape-outs first. We expect we will have 15 tape-outs in the second half of this year which are in the communication, AP and baseband and connectivity and networking. And regarding the capacity, again, our plan on 28 nanometer expansion is based on our customer collaboration and engagement. We projected it to be around 45,000 to 50,000 per month capacity.

And with our competitive technology offering and stable yield and they're coming more and more in tape-outs. The tape-outs also are including a very diversified customer base and applications. So we're confident to achieve around 50,000 wafers per month capacity range.

Gokul Hariharan

Any timeline for that? Is it like end of next year plan or is it like a two-year?

Po Wen Yen

In 2017, as we just explained, we're targeting to increase 10,000 wafers to 15,000 wafers, 10 nanometer capacity.

Gokul Hariharan

For the 12X in Xiamen, could you talk a little bit about how the ramp up--? What is the speed of the ramp up? What is the speed of the customer qualifications? And are you transferring any customers from Taiwan to China or are these all fresh products or fresh customers coming in the China fab?

Po Wen Yen

The initial pilot is certainly is on 40 nanometer communication application and this is the initial pilot results; very, very successful, very promising. The yields demonstrated in these new facilities are comparable with our Tainan 12A fab. So it's very promising and so we're looking for the -- up to finish the customer core, we're expecting to have some revenue contribution by the end of this year.

Gokul Hariharan

And this is primarily one customer? Is that right?

Po Wen Yen

Many diversified customers, including many on the China customers.

Gokul Hariharan

Okay. And last question from me, one of your competitors did talk about potential inventory correction in Q4. Any thoughts on what you think about how the landscape could look like, both at the 28 nanometer where you definitely had new tape-outs and for the other amounts going into the end of the year?

Po Wen Yen

I'm not quite catch up your question.

Chitung Liu

I think for 28 and 40 nanometer, we do see there -- at least current forecast suggests a very high production rate throughout the end of this year. And for Q4 overall, we have very limited visibility as well. So we do believe there could be some kind of uncertainty so we won't be able to comment on Q4 yet.

Operator

Ladies and gentlemen, we're running out of time, so that concludes today's Q&A session. I'll turn things over to UMC Head of Investor Relations for closing remarks.

Bowen Huang

Thank you, everyone, 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.

Operator

Thank you, ladies and gentlemen. That concludes our conference for second quarter 2016. We 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 investor relations investors' events section. You may now disconnect. Goodbye.

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