Chartered Semiconductor Manufacturing Q2 2007 Earnings Call Transcript

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Chartered Semiconductor Manufacturing (CHRT)
Q2 2007 Earnings Call
July 26, 2007, 8:30 PM ET

Executives

Suresh Kumar - VP of IR
Chia Song Hwee - President and CEO
George Thomas - CFO, Sr. VP

Analysts

Randy Abrams - Credit Suisse First Boston
Pranab Kumar - Daiwa Securities
Mark FitzGerald - Banc of America Securities
Shailesh Jaitly - Nomura Securities
Daniel Heyler - Merrill Lynch
Donald Lu - Goldman Sachs
Sunil Gupta - Morgan Stanley
William Dong - UBS
Pyari Menon - Deutsche Bank
Szeho Ng - BNP Paribas Peregrine
Horng Han Low - Citigroup Smith Barney
Tse-yong Yao - HSBC Equity Research
Steven Pelayo - HSBC

Presentation

Operator

Good day, everyone. Management would like to welcome everyone to Chartered Semiconductor's second quarter results conference call. We would like to remind you that today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Suresh Kumar, Vice President of Investor Relations. Please go ahead, Mr. Kumar.

Suresh Kumar - Vice President of Investor Relations

Thank you, Rebecca. Good day, and thanks for joining the Chartered 2007 results conference call. Our news release was issued a few hours ago, and you can find it on our website. As we do each quarter, we have posted an updated investor presentation to the website and also an updated Excel Spreadsheet that provide several quarters and years of historical, financial and operational data.

Joining me for the call today are Chia Song Hwee, President and CEO, George Thomas, Senior VP and CFO and Li Chuen Lim, Director of Investor Relations.

Before we get underway, a reminder on our Safe Harbor Statement. We will be making forward-looking statements in today's call. While the statements reflect our current views on these matters, they are subject to risks and uncertainties. We encourage you to read our second quarter news release and our Form 20-F on file with the U.S. Securities and Exchange Commission which contain descriptions of these risks and uncertainties which could cause our actual results to differ materially from those anticipated.

And now for his perspective on this quarter and beyond, I would like to turn the call over to Chia, Chia Song Hwee, Chartered's President and CEO. Chia.

Chia Song Hwee - President and Chief Executive Officer

Thanks, Suresh. And thanks to all of you for joining the call today. I'll briefly comment on the second quarter results, and then we'll talk about the business dynamics that are expected to impact our business in the second half of the year. George will then cover the second quarter results in detail, and take us through the details of the third quarter forecast.

We finished the second quarter with total business based revenues, slightly achieving the high-end of our earlier guidance. Operationally, we have essentially executed per our outlook back in April. Though our income before tax slightly exceeded our earlier expectations, as a result of additional taxes spent that had to be recognized in the second quarter, we ended up with a net loss for the quarter. George will cover the tax aspect in detail later.

As we get into the second half of the year, we have a mixed bag of factors that are weighing in on our business. First, let me touch on the 0.13 micron and above technologies. We are seeing healthy growth across several of our customers, and applications in this space. And utilization of 0.13 micron and above technologies is higher than the company average, and significantly higher than the leading edge. We are seeing volume ramp of first-source customers and products in PC peripherals, TV related devices and digital baseband for low-end handsets.

The RF baseband business at 0.25 micron technology node which we have been talking about is now happening in significant volume. We believe the efforts we have undertaken in the last several years in diversifying our customer and product portfolio is a contributing factor aided by the backdrop of a healthy inventory situation, and typical seasonal strength expected in the second half of the year.

Now let me switch to the leading edge technologies, i.e. 90 nm and 65 nm. The weakness we started seeing in the 90 nm node in the second quarter from the computer sector is continuing into the third quarter with further declining revenues. Though our 65 nm revenues are expected to increase by as much as 70% in dollar terms compared to the second quarter from applications such as video game device and mobile phones, it is not enough to completely offset the decline in 90 nm business. In addition, despite being on track for all customers' programs, we are seeing a slower ramp in our 65 nm business than we had anticipated before. Due to these factors, the growth outlook for the second half of the year is weaker than what we had thought before. No doubt this temporary change in the outlook and business mix will put pressure on our margins and profitability in 2007. While disappointing, I do believe that is a temporary issue.

In conclusion I would like to say that we are very much committed to our growth strategy at leading edge technology and there is no change in our direction. We will continue to establish our technology capabilities and diversify our customer base. As you will recollect, we started commercial production of 90 nm in the third quarter of 2005 and within a period of less than two years we started the production of 65 nm in the second quarter of 2007. This demonstrates the faster pace at which we are able to introduce technologies into volume production.

Lastly, we also expect to enable our customers in using our 45 nm technology starting from the end of this year.

With that note, let me pass on to George.

George Thomas – Chief Financial Officer, Senior Vice President

Thank you, Chia. I'll cover the highlights of the second quarter 2007 results, and then I'll take you through our guidance for the third quarter.

Net revenue at $324.3 million, was virtually flat from previous quarter. Revenue including our share of SMP was $353 million, up 2% sequentially.

Similar to what we had anticipated earlier, during the quarter we saw strength in the consumer and communications sector significantly offset by weakness in the computer sector. Revenue from the consumer sector increased 29% sequentially. The increase was primarily due to the strength in video game devices partially offset by a weakness in set top boxes. Revenue from the communications sector increased 19% sequentially. The increase was primarily due to strength in mobile phone handsets and the DSL line cards.

Revenue from the computer sector declined 26% sequentially. The decline was mainly in the workstation PC, PC motherboard, partially offset by a strength in the optical storage device. ASP was $908 per wafer, down 15% compared to a $1,071 in the first quarter of 2007, primarily due to a less favorable product mix. ASP including Chartered's share for SMP was $896 down 15% compared to a $1,051 per wafer in the prior quarter.

Gross profit was $60 million in the second quarter compared to a gross profit of $72 million in the previous quarter. This was primarily due to a less favorable product mix arriving from lower shipment of 90 nm products partially offset by the higher shipment from the 0.13 micron and above technology.

Chartered’s net loss for the second quarter was $25 million compared to a net income of $6 million in the previous quarter.

Though our pre-tax income of $3.8 million came in higher than our earlier expectation, our net loss was significantly higher than previous guidance primarily due to a higher than expected tax expense recognized in the second quarter. Let me spend a few minutes to explain this. Under US GAAP, we use the effective tax rate or ETR methodology to account for tax during interim periods, meaning the first third quarters of the year. In the fourth quarter tax is recognized based on the total year’s tax minus what was recognized in the first three quarters. ETR is calculated by the percentage of the forecast tax expenses for the year over the forecast profit before tax or PBT for the year. In the first quarter we recognize tax for that quarter based on an ETR which was based on forecast tax expenses and the forecast PBT for the year at that time. The forecast tax expenses for the year has no changed significantly since then and most of it is for the factual income and interest income. However when finalizing the tax recognition for the second quarter due to the less optimistic business outlook at leading edge for the second half of the year, our forecast outlook for the leading edge capacity has increased. Therefore the ETR and PBT used in the second quarter is significantly higher than what we used in the first quarter.

For the tax expense in the second quarter we had to also include a cumulative adjustment to bring first quarter tax expense level up to reflect the revised ETR bringing the year-to-date tax expenses to about $30 million. I would like to highlight that despite the significant higher tax expense which we had to recognize in the second quarter, the tax expense for the full year is estimated to be approximately $25 million, and is not expected to change.

And capacity utilization averaged 79% in the second quarter, compared to 70% in the first quarter of 2007.

Now coming forward to the third quarter financial outlook. Turning now to the third quarter 2007 revenue at the Chartered level, and revenues including our share of SMP are expected to be up 2%, to about 6% sequentially in the third quarter of 2007. These peak trends in the consumer sector, and to a lesser extent in the communication sector, partially offset by the weakness in the computer sector. We expect 0.13 micron and below revenues, including 65nm revenue to represent around 48% of our total business based revenues, somewhat similar to the second quarter 2007 level.

Revenue from 65 nm or lower are expected to grow sequentially around 70% and represent around 10% of our total business based revenue.

We expect utilization in third quarter to be approximately 84% with a range of plus minus 3%. Gross profit is expected to be approximately $64 million with a range of plus minus $6 million. After comprehending the set top R&D expenditure, which is expected to be around $4 million to $5 million higher than the second quarter of 2007, that is the part of the cost needed to be incurred for the 45 nm process technology, bringing out and qualification phase, we expect to approximately break even at the bottom line for third quarter.

Let me now turn to liquidity. In the second quarter, our cash flow from operations was $101 million compared to $125 million for the previous quarter. We enter third quarter 2007 with $542 million in cash and $858 million in unused credit facilities. To give you a projection for our target cash balance at the quarter end, we have updated the Sources and Uses chart that we provide you each quarter, and you can find it on our website.

Let me walk you through the major elements in the investing and financing portions of our cash flow statement from the second quarter through the end of the year. The cash flow takes into account $345 million of CapEx and scheduled debt repayment of approximately $37 million. We expect to end 2007 with a targeted cash flow from operations and cash balance of approximately $700 million and approximately $553 million in credit business [ph].

That concludes my comments. Let me now turn the call back to Suresh.

Suresh Kumar - Vice President of Investor Relations

Thanks George. Rebecca, could you now poll for questions? And in the interest of time, please limit yourselves to a maximum of two questions each and the operator has been asked to move on to the next question after the two questions. Rebecca.

Question and Answer

Operator

Ladies and gentlemen our question and answer session will be conducted electronically. [Operator Instructions].

And our first question comes from Randy Abrams of Credit Suisse.

Randy Abrams – Credit Suisse First Boston

Yes, I wanted to follow up on your comments on 65 nm, maybe elaborate a bit more on what is keeping some of those customers from ramping more aggressively. Some of the new ones beyond your processor customers. And could you talk about any new applications that you’re adding or have added over the last quarter on 65 nm.

Chia Song Hwee - President and Chief Executive Officer

Yes Randy. We have actually… we have multiple customers being qualified and ready for production. However the volume that is showing up is somewhat less than what we were told previously. So this is basically a reply [ph] to our comment that the ramp is slower than anticipated. I think in general, it is not surprising to see that we have technology migration and new product introduction. The pace at which customers' products are able to go into production, the timing is very hard to call. So we are facing that kind of issues that are not uncommon in the new technology migration.

Now, as far as the applications standpoint, other than the game device as well as the baseband… and we do have other customers that are… that will bring out their product on 65 nm baseband. Other products would be in the wireless space and also in the high definition TV space.

Randy Abrams – Credit Suisse First Boston

Okay, thanks for that. And if your PC customer, following again in the third quarter, maybe talk you could about how close you are to the minimum in that customer? And is there any visibility into rebound beyond third quarter with that customer reselling or a bit better revenue growth in the next quarter?

Chia Song Hwee - President and Chief Executive Officer

The inter-quarter level is down to the minimum. There is a risk of us going below the minimum beyond the third quarter. That’s as much as we can say at the moment. But I think you will be able to see that the inventory level of the customer in that space is still at the high level.

Operator

And moving on to next from Daiwa Securities, we’ll hear from Pranab Kumar.

Pranab Kumar Sarmah - Daiwa Institute of Research

Thank you for taking my questions. Chia, since you are talking about technology, could you give us a little bit of color on 45 nm? You have mentioned like you are going to start some engagement by fourth quarter, where you are seeing some risk production and what type of activities you are looking at. That is my first question?

And the second question is on the breakeven utilization rate, it looks like your current breakeven utilization rate is about 84% based on third quarter guidance. Given like ASP pressure has been quite sharp on some of the advanced technology node, will you think that you will be able to move that below 70% breakeven utilization rate anytime in next one year or so.

Chia Song Hwee - President and Chief Executive Officer

Yeah, on the 45 nm engagement, we have pretty wide spread of products and customers relative to where we were at a similar stage at 65 nm. So, from video game device type of product to baseband to wireless communication type of devices, we have customers engaged in those areas. Now I must say that at this stage, no customers are ready with the full product. But many of them are validating their IPs, their macro blocks [ph] and stuff like that.

As far as production is concerned, we should be looking at the typical industry type of migration timing. As 65 nm just started production in the last two quarters, you would expect a 45 nm to come on stream about 18 months from that timeframe. I don’t think 45 nm will be any different. And Chartered obviously will want to continue to stay in that same time window.

As far as breakeven utilization is concern, from the cost structure standpoint, we do not believe that our breakeven point is of… relative to where we came from, we now have the actual mix of business being not optimized, under utilizing the leading edge technology, where fixed cost are high. So if we were to be able to get our business mix back, which we are confident that we will, our breakeven point will reduce.

And to the expansion, continued expansion of our 12-inch capacity as well as to a later extent., our 8-inch capacity, we expect to get our breakeven point back on track. And this is a temporary setback because of the mix change. But structurally, from the cost structure standpoint, we don’t see much of the de-structured.

Operator

And from Banc of America Securities, we’ll hear from Mark FitzGerald.

Mark FitzGerald - Banc of America Securities

Does the weaker demand in this leading edge cause any pause to you in terms of your capital spending plans in the second half of the year, or into '08?

Chia Song Hwee - President and Chief Executive Officer

We are not changing our CapEx plan. Equipment durably [ph] is proceeding per plan. We typically, historically will have some timing differences in the payment relative to what we guided as CapEx. But, so there might be some spill over to next year. Usually those amounts are not big. So, other than that, well we are not altering our CapEx plan.

Mark FitzGerald - Banc of America Securities

And just to follow on this, some of the weakness in this wafer starts that you expected in this leading edge, is that due to this inventory correction for some of these customers still spilling into the second half of the year?

Chia Song Hwee - President and Chief Executive Officer

Well as I say earlier, all practically all the products that we are doing are new products with new features and things like that. I don’t believe that customers have inventory. So, I think it's more of when their product will be able to launch in volume basically waiting for their end customers to adopt and start ramping production.

Operator

And from Nomura Singapore, we'll move on to Shailesh Jaitly.

Shailesh Jaitly - Nomura Securities

Hi, thanks. How many customers do you have on 90 nm now and if you were to exclude the well publicized CPU customer inventory wars, 90 nm business ex the CPU customer, how it has moved or was there a decline there?

Chia Song Hwee - President and Chief Executive Officer

We have raised narrow customer base at 90 nm, as we have communicated in the past, given the market window of 90 nm rather limited. We don’t foresee much expansion on customer base there, as most customers are skipping straight to 65 nm. So the only remaining significant customer at 90 nm is on baseband product. So, what we have to focus on instead is to make sure that we capture as much opportunity as we can at 65 nm, and grow our business that way. Since the two sets between 90 nm and 65 nm are interchangeable, so from an investment standpoint given the limited opportunity at 90 nm, but more opportunity at 65 nm, that’s where we should focus on.

Now if we were to exclude the computer sector customers that is costing us this big disruption on 90 nm, in the second quarter, we actually see our revenue increasing by 20% plus, 27%. If we look into the third quarter, again as growing that business, we will see our revenue grow in the low teens percent.

Operator

And from Merrill Lynch, we’ll hear from Daniel Heyler.

Chia Song Hwee - President and Chief Executive Officer

Hi there.

Daniel Heyler - Merrill Lynch

Hi, good morning, Chia.

Chia Song Hwee - President and Chief Executive Officer

Good morning.

Daniel Heyler - Merrill Lynch

I want to ask you on in terms of the design activities that’s taking place on 45 nm, if you could give us a way to quantify the amount of engagement given your new 45 news is occurring rather early relative to say the design activity that’s taking place on 65 nm?

Chia Song Hwee - President and Chief Executive Officer

Well, I am not sure what other color I can give you other than we have customers' activity for products in the CPU space in… that goes into video game device. We have engagement in… we have three customers in baseband related product. And the rest of the customers are in the communication, both wireless and wireline type of products.

Daniel Heyler - Merrill Lynch

Okay. And then, as you look at the 65 nm situation, it appears that TSMC has guided a pretty aggressive fourth quarter potentially getting to 10%, 11% of their business. So it looks as though that technology is, as you said mature. Are your customers giving you any indication as to when they will start to launch product and if it's not in the third or fourth quarter, is there a kind of a catch-up launch that takes place in those companies as they launch the new products? And do you see a much steeper ramp say in the first quarter, as a result of that?

Chia Song Hwee - President and Chief Executive Officer

Yes, then we actually are seeing the ramp in 65 nm also wholesale. But the point that we are trying to make is we had higher expectations. So in the second quarter, in the first quarter, revenue was really 6% of our sales and we are expecting it to be 10% of our sales in the third quarter. And so it is ramping up. But I guess, we are just trying to point out that, but we had higher expectations earlier. So I don’t think that that is an issue of customers launching products. It's launched, and we believe that as the other customers start incorporating in their product and started to build up inventories to prepare for the sales, then naturally the ramp will happen. And with the diversity of the customer base and products there we are very confident that 65 nm will be a good business driver for us.

However, when it comes to timing it is really hard for us to call because we have already this issue of not having that visibility before. But I think you will be… the easiest way to look at it is, with all these products being launched and getting ready for ramp, I would assume, and it's reasonable to assume that the high-end customers will want to prepare for the seasonality in the second half of ’08, and therefore preparing the supply chain, and you can work it out. Normally, we should see that kind of momentum starting in the second quarter of the year.

Operator

Next question comes from Donald Lu with Goldman Sachs.

Donald Lu - Goldman Sachs

[Inaudible - off the mic]

Chia Song Hwee - President and Chief Executive Officer

Hey Donald, we can barely hear you. Hello? I think operator, we might need to move to another question because we can’t hear him.

Operator

No problem next question comes from Morgan Stanley. We will hear from Sunil Gupta.

Sunil Gupta - Morgan Stanley

Thank you. Chia, I wanted to get your comments on ASP trends. How is the ASP beginning on a same node basis and if you were to compare and contrast, what do you expect in second half of this year, versus what you have seen in the first half. Are you seeing any change at all in the rate of ASP change?

Chia Song Hwee - President and Chief Executive Officer

Yeah, in the leading edge technology we are expecting it to be continue to be under pressure. But perhaps the client will be more moderated. We are expecting 0.13 and above to be stable.

Sunil Gupta - Morgan Stanley

And why do you expect that decline to moderate in the leading edge?

Chia Song Hwee - President and Chief Executive Officer

There is a price point, in which I believe that at all technology nodes, at a particular given time, it makes little sense to go lower.

Sunil Gupta - Morgan Stanley

Okay. And this year I think, do I presume there is 90 nm predominantly, right?

Chia Song Hwee - President and Chief Executive Officer

Yes, and to a certain extent, I think I have commented that the decline on 65 nm pricing has been quite big as well, tracking the 90 nm. So what I am saying is actually applying to both.

Operator

And next question posed by Donald Lu again, with Goldman Sachs.

Donald Lu - Goldman Sachs

Yes, good morning. Sorry for the earlier situation. Two questions, one is, are you... why do you still keep your CapEx in light of the loading at 12 inch. Do you expect to ramp it, demand recovery in Q4?

Chia Song Hwee - President and Chief Executive Officer

Okay we are… Donald, the equipment delivery is taking place pretty much as scheduled. We see very little advantage for us to delay two delivery. We will accept the two but we may not hook it up and qualify that for production. So we use that hooking up phase to moderate our installation space rather than stopping the equipment from coming in. Because we have significant engagement at the 65 nm node, we do not want to be in the position where we cannot ramp when the demand actually materialize. And you know that for new product launch usually, the ramp is quite steep, and we do not want to be in a position that we cannot react.

Donald Lu - Goldman Sachs

Okay. Second question is, your ASP guidance for the third quarter has a very wide range from down 2% to down 7%. My understanding is, you should have booked most of your two or three orders by now. Why is the ASP guidance still at such a wide range?

Chia Song Hwee - President and Chief Executive Officer

Donald, that’s our usual practice. If you look at what we have done in the past, on revenue or in ASP, we consistently use those ranges.

Operator

And next we will hear from William Dong with UBS.

William Dong - UBS

Hi, good morning. Just a quick question. Your future technology plan, I mean, I think with the CPU business sort of trending lower, just wanted to get your thoughts on your plans for devoting your resources for both, for SOI versus bulk larger going forward.

Chia Song Hwee - President and Chief Executive Officer

We are not going to change our focus. For SOI, as you know we do not incur the development as per that. It is basically, a handmade [ph] transfer from our customers. So we will just be bringing up and matching the so-called model with that performance. So that is relatively a cost effective way of brining up that technology node. So we are not... our R&D expenditure does not include the SOI piece. So we… there is not going to be any change as far as this model is concerned.

William Dong - UBS

And one final question is, on the CPU outsourcing side, do you see the sort of competition intensify? It seems like your competitors are also now talking about going to CPU foundry. I mean, does that actually change your thought process going forward?

Chia Song Hwee - President and Chief Executive Officer

No we believe that we have a pretty good position in that space. We are the only foundry that have manufactured the most number of CPUs in the last two years. And with the skill and knowledge on SOI we believe that we are in an advantageous position. I do think that our competition is more with our customers themselves, in terms of their own fab and the inventory position, and how that is going to work out over time.

Operator

And moving on next we will hear from Pyari Menon with Deutsche Bank.

Pyari Menon - Deutsche Bank

Yes, again just following up on that CPU question. Yesterday, I am not sure if you listened to the TSMC call. But they were talking with quite a lot of confidence with regards to how they are working on the 45 nm and the 32 nm. And they are going to be working on the high K but they didn’t say that it’s a done deal. But the confidence with which they were speaking… there are two things. One is, I don’t know if they are going to optimize all the processes to suit AMD’s requirements or if AMD is going to make a shift out of SOI into bulk. But there was a lot of confidence with which Rick Tsai was speaking. And I mean, they are not going to do that, at least if they didn’t have some level of confidence. Do you want to comment on that? In fact I think the confidence which they were speaking on 45 nm and the engagement of the CPU would possibly be a little… I mean you are quite confident of holding your own... holding onto your business. But I think they were not any less than what you are speaking. So, do you want to comment on that?

Chia Song Hwee - President and Chief Executive Officer

Actually, I really do not know how, and I can’t. The person of authority to speak about it is the company, AMD itself, right? So I think it’s better to direct to them than to me.

Pyari Menon - Deutsche Bank

Just, I think okay and out of your, this thing, you have had chances to talk to AMD. I mean are they going to go continue with SOI, or have they told you in as many words that your business is going to be quite steady, or they’ve not been able to.

Chia Song Hwee - President and Chief Executive Officer

I thought that there are, that those statements being made, and I read what everybody else reads. So, I thought that their plan on 45 nm for their CPU is very purely [ph] reinforced. So I’m not too sure why this is coming up again.

Operator

Our next query we will hear from Patrick Yau.

Patrick Yau – Macquarie Securities

Good morning.

Chia Song Hwee - President and Chief Executive Officer

Good morning, Patrick.

Patrick Yau – Macquarie Securities

Hi good morning. Just to bring the attention back to the legacy nodes where that’s actually being strained. And also essentially capacity utilization is high there. Are there things like, moves to actually augment the capacity in those nodes?

Chia Song Hwee - President and Chief Executive Officer

Yes, with the rebalancing of the capacity, and capacity expansion on 8 inch is actually is ongoing. Especially in this market, in round one we have to show our customers that we are going to cater for their needs. So we have catered some of the expansion already in our guidance of the CapEx. And in the next couple of quarters we’re continuing to look at ways to expand capacity costs effectively to meet the customers' needs.

Patrick Yau – Macquarie Securities

All right. And then just a follow up question on an earlier question asked on CapEx. I mean really it’s much slower utilization among your, like more advanced product, I mean isn’t there a case to at least have like a slight delay in terms of the planned 21K to 25K by the end of the 2007?

Company Speaker

Yes, Patrick, if you recall what we have planned for is planning for equipment forecast up to 21K. But we will have equipment on a roll, about in the area of 25 K. So like I said, if we don’t feel that we need the capacity, we will not install it. But we’d like to have the flexibility of having the equipment on the floor so that we can rise to change in customers' demand and I’m very positive at this period of time because we believe that when the customers do ramp out, it's going to be across multiple fallout, across multiple customers. So if we do not have sufficient equipment that we can activate quickly we’re going to be leaving opportunities on the table, which I do not think that it makes sense for us to do that, by just trying to avoid the timing of payment of $50 million, $60 million.

Operator

Next question comes from Szeho Ng of BNP.

Szeho Ng – BNP Paribas Peregrine

Hi good morning, Chia. I realize that your 8 inch fabs are running at fairly high utilization. Just wanted to get your idea, what percentage of your, this year’s CapEx will be allocated for 8 inch, and also do you find it difficult to source 8 inch equipment from the market now?

Chia Song Hwee - President and Chief Executive Officer

We have of the $800 million we have allocated about $50 million plus for the expansion. We have been able to secure the tools that we needed. Some tools have a little bit longer lead time because it takes a bit of time for refurbishment and things like that. But we have not seen any issue of us getting our hands on the used tools.

Szeho Ng – BNP Paribas Peregrine

I see. Okay. Okay thanks very much.

Chia Song Hwee - President and Chief Executive Officer

Thank you.

Operator

From Citi, we'll hear from Horng Han Low.

Horng Han Low - Citigroup Smith Barney

Hi good morning, Chia. I may have heard the replay wrongly earlier, just wanted to clarify on the earlier question on the AMD business. Given the customer’s outlook, I’m just trying to understand for 3Q, do you expect CPU business to really bottom? And the volume could… does it mean that the minimum contractual agreement could go down to an even lower level, so as to keep you lines running? Or there could be a possibility coming to 4Q-1Q queue next year that might be a factor due to the customers' under-utilization problem?

Chia Song Hwee - President and Chief Executive Officer

What I have said earlier is for customers in the computer sector, we are down to the contractual level in Q3. And I mentioned that we may have a risk of it going down below the minimum, beyond Q3.

Horng Han Low - Citigroup Smith Barney

Sure. And for this minimum does it mean that the contractual remains at another lower minimum level or the agreement is off and your volume will be a little more fluid for going on?

Chia Song Hwee - President and Chief Executive Officer

Yes. It will be more fluid. Of course we would like to work with our customer. It is a situation that they did not… I think given the situation, I think we have to work our customers rather than trying to be contractual about it.

Operator

And from HSBC we’ll hear from Tse-yong Yao.

Tse-yong Yao – HSBC Equity Research

Hi, thanks for taking the call. Kind of getting back to pricing pressures and just trying to get a better read on where it’s coming form. So kind of the thing that I noticed in common with both you and two of your other competitors is that a lot of the growth is very heavily centered in Asia Pacific region. First of all, I guess would you agree that some pricing pressure's kind of coming from these types of customers? And then if you do agree, could you give us a bit of color, a little bit of, just kind of give us some idea what type of products, what type of device types are causing this pricing pressure?

Chia Song Hwee - President and Chief Executive Officer

I think we’ll have to go back a little bit in time. I’ve said that in the past few quarters that we are seeing a lot of pricing pressure across the board. Even at the mature capacity. But we’re not going to see that showing up in numbers until we're actually starting to ship those products. And this is very typical as the foundry industry is going through, entering the recovery phase. It is very common and historically, it has always happened that you will see the price declining. Because prior to the recovery, everybody is trying to compete for that piece of our business and waiting for a recovery. So this is very normal to see. So I would not attribute it to, because it is Asia-Pacific customer. I think this applies across the border.

It is true that we are seeing a lot of strength from the Asia-Pacific, customer base and the products that we are seeing a strength from this group of customers include items like TV related devices, optical storage, digital baseband for low-end handsets and also PC peripherals. So those are the applications that we are seeing a strong growth.

Tse-yong Yao – HSBC Equity Research

Okay. And then I guess if I just, the second question. With ST Micro joining the IBM line, I’m not quite sure if this is the same line as Chartered is part of or if it's kind of a parallel line, for 32 nm and 22 nm. I guess the first question is, is this kind of same line that Chartered is involved with?

And then second is, with more partners entering this IBM, this IBM platform, this IBM line, do you see an opportunity for cost savings?

Chia Song Hwee - President and Chief Executive Officer

Firstly, we are very excited and pleased with ST’s decision to draw the alliance. And yes, it is the same alliance, so we’ll be working with our new partner, ST on 32 nm for the CMOS development. The advantage that we expect to see with additional partner like ST is more resources as well as the talent contribution that we have a better chance of delivering better solution and hopefully we have better time-to-market as well. We are not able to go into too much of the cost sharing part of the discussion.

Operator

And next we will hear from Steven Pelayo with HSBC.

Steven Pelayo - HSBC

Yes, just a quick one here. I know it’s difficult to quantify the volume of revenue from 65 nm customers. I am curious relative to the number of them. How many 65 nm customers are you starting May 1st [ph] for today and how many do you expect at the end of the year? Has that changed in any way?

Chia Song Hwee - President and Chief Executive Officer

Well, I cannot give you the number, but we are expecting by the end of year to have a couple of more customers to be in the production phase.

Operator

And we do have a follow up from Daniel Tyler with Merrill Lynch.

Daniel Tyler - Merrill Lynch

Yes, hi Chia. On the follow-up on the… on the AMD business, in a recent call they talked about capital spending a bit and seemed increasingly conservative on the spending. Has there been any renegotiation in terms of the longer-term engagement that you can talk about? Or is there… I guess from the capacity standpoint, that is really a decision that has to be made from their standpoint on the new fab or not. So, are you getting any color on, on their needs for next year?

Chia Song Hwee - President and Chief Executive Officer

Dan, I really can’t get into specifics, but I just think that you can think about it from the standpoint of why my reluctance of not pushing our CapEx and adjusting quickly [ph] on our equipment installation plan.

Daniel Tyler - Merrill Lynch

Okay, fair enough. And then we… actually TSMC has been pretty clear about their engagement CPUs, where they need to move to low power type of devices, and not performance. But have you had any engagements on the CPU side in terms of going that route as well. I guess the mobile market that Intel talks more about in terms of low power, et cetera, is an area you've obviously done very well in dominating the foundry business on high performance. And would there be anything in your roadmap that’s related more to moving down the power side of the microprocessor business.

Chia Song Hwee - President and Chief Executive Officer

Yes, I think if that is the direction that our customer is going, we will definitely be able to derive from our baseband technology that will serve their needs. I think from the positioning standpoint, we… our capability is well established, and well known within the customers. So, for us to try to expand into the new product area, I don’t see why we are not in a position to do so.

Operator

And next we will take a follow up from Shailesh Jaitly with Nomura Singapore.

Shailesh Jaitly - Nomura Securities

Yes, hi. George, if I could just check on this fall through rate for the second quarter. It had fallen to about 27%. Is there any one-off event there or shall we take that this would be the new fall through rate? How is this changing?

George Thomas – Chief Financial Officer, Senior Vice President

Well, Shailesh, I guess there is the impact of the ASP but again I guess to a certain extent, I would say that the inventory builds into the third quarter isn’t as it was, when we moved from first quarter to second quarter. So, I guess you are seeing the impact of the slowing down a bit, which is impacting and which has definitely causes your fall through because you are not moving some of your fixed cost rate into the inventory to the balance sheet, which would typically happen, when you are sort of ramping up a lot faster.

Shailesh Jaitly - Nomura Securities

Okay. And have you done any numbers say, if SIO business, right from your this one customer which is uncertain, right. And you have been very explicit about it. Without this SOI customer, where will your breakeven levels be?

Chia Song Hwee - President and Chief Executive Officer

I think we discussed this subject before in the previous call. We don’t see a great difference in the breakeven point, on the cost structure standpoint, because the way that it’s been priced is based on complexity, and if we do not have that complexity, what it means is, then we have more capacity for the lower mass count about CMOS technology. So, there will be some impact because of the different… our ability to price better in certain markets, but it does not really change the cost breakeven point structure to a very noticeable number.

Operator

And next from Goldman Sachs, we do have a follow up from Donald Lu.

Donald Lu - Goldman Sachs

Yes. I just wanted to ask some housekeeping questions. George, what is the tax expense guidance for the rest of the year and next year? And also give us… maybe you can give us a color on the increase to expense as well as the income from SMP. Thanks.

George Thomas – Chief Financial Officer, Senior Vice President

On the tax, as I mentioned earlier, we have indicated that we have booked around $13 million year-to-date up to the second quarter, while we think that our tax expense is hovering around the $25 million, so what you would expect is that if our tax number remained around $25 million, you should see a credit of about $5 million into the second half of the year, right. So, I think for the purpose of modeling you need to factor in about $5 million tax credits.

Then moving on to the interest expense, I think if you sort of modeled around $10 million net after interest income, I think that’s kind of a good number that you can use. So does that answer the question? Okay, I know there’s also one part of the tax expense of 2008. I think… I don’t want to go that far but the $25 million approximately is kind of a good number that you could use, Donald.

Operator

And next we’ll hear from Pranab Kumar with Daiwa Securities.

Pranab Kumar Sarmah - Daiwa Institute of Research

Thank you. Chia, you have mentioned like you are going to start 65 nm even the wireless space outside the baseband. Will the customer ramp up from fourth quarter this year or it may spill over to next year?

Chia Song Hwee - President and Chief Executive Officer

Well, that space is likely going to be next year.

Pranab Kumar Sarmah - Daiwa Institute of Research

Okay. And what about the game console, 65 nm. It’s already on the mass productions now or it may go to fourth quarter?

Chia Song Hwee - President and Chief Executive Officer

No. It is already in mass production.

Pranab Kumar Sarmah - Daiwa Institute of Research

Okay. Thank you.

Suresh Kumar - Vice President of Investor Relations

Rebecca, can we take the last question, please?

Operator

And our last question will come from Randy Abrams with Credit Suisse.

Randy Abrams - Credit Suisse First Boston

Yes. I wanted to ask if you were to get to a similar high utilization on the reading edge as you are in writing edge. Where do you think your target growth and operating margins would be?

Chia Song Hwee - President and Chief Executive Officer

I think we will be in the 30% range for gross margin and probably in the lower teens at the net level.

Randy Abrams - Credit Suisse First Boston

Okay and just on that, you mentioned breakeven utilization could start to come down… at that where do you project that could come down to?

Chia Song Hwee - President and Chief Executive Officer

We have a target of 65% that is what we believe we need to get to, to run a sustainable long term business, that we can generate free cash flow. However, we have not given out the time in which we will accomplish it, especially given these current business that I make, I will be reluctant to set a date at the moment.

Randy Abrams - Credit Suisse First Boston

Okay. Thanks a lot.

Chia Song Hwee - President and Chief Executive Officer

Thanks.

Suresh Kumar - Vice President, Investor Relations

That completes the Q&A. if you missed a portion of today’s call, a recorded playback will be available in a few hours. It can be accessed in two ways, one by telephone, by dialing 1-719-457-0820 and by using the access code 4132840 or in the Chartered website which is charteredsemi.com. Both the telephone and web cast replays will be available to August 9th, 2007. Thanks very much for your participation today, and this concludes the call.

Operator

Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation and have a wonderful day.

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