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Chartered Semiconductor Manufacturing Ltd. (CHRT)

Q3 2007 Earnings Call

October 25, 2007, 8:30 PM ET

Executives

Suresh Kumar - VP of IR

Chia Song Hwee - President and CEO

George Thomas - Sr. VP and CFO

Analysts

Randy Abrams - Credit Suisse First Boston

Daniel Heyler - Merrill Lynch

Bhavin Shah - J.P. Morgan

Steven Pelayo - HSBC Equity Research

Pranab Kumar Sarmah - Daiwa Institute of Research

Horng Han Low - Citigroup Smith Barney

Shailesh Jaitly - Nomura Securities

Pyari Menon - Deutsche Bank

Szeho Ng - BNP Paribas Peregrine

William Dong - UBS

Donald Lu - Goldman Sachs

Patrick Yau - Macquarie Securities

Harsh Agarwal - Lehman Brothers

Roxy Wong - Bear Stearns

Presentation

Operator

Good day, everyone. Management would like to welcome everyone to the Chartered Semiconductor's Third Quarter 2007 Earnings Conference Call. We will 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 third quarter 2007 results conference call. Our earnings release was issued a few hours ago and you can find it on our website. And as we do each quarter, we have posted and updated investor presentation to the website and we also have an updated excel spreadsheet that provide several quarters and several 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 third quarter results release and our Form 20-F filed 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 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 third quarter results and then we'll talk about the business outlook for the fourth quarter of the year. George will then cover the third quarter results in detail and also take us through the details of the fourth quarter forecast.

We finished the third quarter with revenues exceeding the high end of our earlier guidance. Operationally, we have executed better than our outlook in July, which we also reiterated in early September. The revenue upside of $15 million compared to mid point of our prior guidance came from two factors. First, we were able to generate more moves than anticipated across our eight-inch fabs, resulting in higher shipment despite the higher utilization.

Secondly, there was some pooling of shipments from the fourth quarter to the third, based on customers' requirements. As a result of the higher revenues, we ended up the quarter with a pre-tax profit of about $7 million higher than our earlier expectation. George will cover the tax aspect and its impact in detail later. As we go through the last quarter of the year, we are continuing to see the same factors weighing on our business as in the third quarter. We continue to see high utilization of our eight-inch fabs.

Utilization there is higher than the company average and significantly higher than the leading edge. The strength of the business is expected to come from various implications such as xDSL related devices, LAN, switches and routers and TV [ph] related devices. However for the leading edge technologies, the weakness we had at 90-nanometer node from the computer sector is continuing into the fourth quarter with further decline in revenues. We are also seeing the typical impact of seasonality from 65-nanometer product in the consumer space, again negatively impacting revenues into the fourth quarter. Due to these reasons we are looking at revenues to sequentially decline low to mid single digit in the fourth quarter. I do believe what we are seeing at the leading edge is a temporary issue and growth should resume as our 65-nanometer customers' programs start ramping.

In conclusion, I would like to reemphasize that there is no change in our direction, despite these short-term challenges at a leading edge ramp. We are very much committed to our growth strategy and we will continue to improve our technology capabilities and further diversifying our customer base. I am competent that customer engagements we had at a leading age group will see production ramp in 2008. We are aligned with the market leaders in several end markets and as their new generation products ramp out in the 65 node that should support our growth in 2008.

Lastly, we are sparing no efforts in our 45-nanometer development and productization and expect to enable our customers with the technology from the end of this year. With that note, let me pass on to George. George?

George Thomas - Senior Vice President and Chief Financial Officer

Thank you Chia. I will cover the highlight for the third quarter 2007 results and then I will take you through our guidance for the fourth quarter. Net revenues were $354.8 million, up 9% sequentially. Revenues including our share of SMP were at $381.8 million, up 8% sequentially.

Similar to what we had anticipated earlier during the quarter, we saw strength in the consumer and communication sectors offset by weakness in the computer sector. Revenue from the consumer sector increased 40% sequentially. The increase was primarily due to strength in the video game devices and TV related devices, slightly offset by weakness in the digital still cameras.

Revenues from the communication sector increased 3% sequentially. The increase was primarily due to strength in the mobile phone handsets, wireless broadband access, wireless LAN, partially offset by cordless telephone, LAN switches, routers, hubs, cards, xDSL line cards, and xDSL PPE. Revenues from the computer sector declined 9% sequentially. The decline was mainly in work-station, PC, PC motherboard, partially offset by strength in the PC peripherals, printers, monitors and optical storage devices.

ASP was $888 per wafer, down 2% compared to the $908 in the second quarter of 2007. ASP including Chartered's share of SMP was $881, down 2% compared to the $896 per wafer in the prior quarter. Gross profit was $67 million in the third quarter compared to a gross profit of $60 million in the previous quarter. This was primarily due to lower cost per wafer resulting from higher production volume over which fixed costs are allocated.

Profit before tax was $7 million higher than we had anticipated during our prior guidance. Chartered's net income for the third quarter was $115 million compared to a net loss of $25 million in the previous quarter. Net income was significantly higher than in the previous quarter, primarily due to a tax benefit of $119 million resulting from a retroactive change of tax status for Fab 3 from pioneer to non pioneer.

Let me spend a few minutes to explain this. Fab 3 was granted pioneer status for a 10 year period beginning July 1, 1999. During this period, income arising from the pioneer trade is exempt from income tax. Income arising from activities not covered under the pioneer status or non-qualifying income is tax at the normal corporate tax rate. Since obtaining its pioneer status, Fab 3 has accumulated a substantial amount of tax allowance relating to capital expenditures on its plant and machinery, which it has not been able to fully utilize against its pioneer income.

As a result, Chartered has not fully benefited from any tax exemption afforded by the pioneer status and apply to have it revoked in order to be able to utilize Fab 3, unabsorbed tax allowance against Chartered non-qualifying income. The approval of the application resulted in a tax benefit of $119 million. This benefit arises primarily from prior allowances related to wear and tear of plant and machinery and losses of Fab 3, which are now available to offset taxes paid or incurred by the company in prior years with the balance available to offset against future liabilities.

This balance will be utilized in 2007. Net income in the third quarter 2007 also included a tax expense of $13 million, which is calculated based on the effective tax rate methodology. This was due to the higher than anticipated profit before tax in the third quarter. This tax expense also includes accumulative adjustments so as to bring first and second quarter 2007 tax expenses to a level that reflects the revised ETR, bringing the year-to-date tax expenses to about $44 million. I would to like to highlight that despite the significant higher tax expenses we had to recognize in the second and third quarter, the tax expenses for the full year estimated to be approximately $27 million is not expected to change. Capacity utilization averaged 85% in the third quarter compared to 79% in the second quarter of 2007.

Turning now to the financial outlook for the fourth quarter of 2007. Revenues at the chartered level and revenues including our share of SMP are expected to be down 2% to down 6% sequentially in the fourth quarter of 2007. We see weakness in the computer sector and to a lesser extent in the consumer sector, partially offset by strength in the communication sector. We expect 0.13-micron and below revenues including 65-nanometer to represent around 46% of our total business base revenue. Revenues from 65-nanometer alone are expected to represent around 10% of our total business base revenue. We expect utilization in third quarter to be approximately 81% with the range of plus/minus 3% after comprehending 2% sequential increase in capacity. Gross profit is expected to be approximately $63 million with the range of plus/minus 6 million and net income is expected to be approximately $6 million with the range of plus/minus $5 million.

Let me now turn to liquidity. In the third quarter, our cash flow from operations was $94 million compared to $101 million for the previous quarter. We enter fourth quarter 2007 with $460 million n cash and $1.1 billion in unused credit facilities. To give you a projection for our target cash balance at the quarter end, we have updated the sources and use of chart that we provide you each quarter and you can find it on our website. It walks you through the major elements in the investing and financing portion of our cash flow statements from the third quarter through the end of the year. This cash flow takes into account $163 million of CapEx. We expect to end 2007 with the positive cash flow from operations and cash balance of approximately $700 million, and approximately $803 million in credit facilities. 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 pose for questions and in the interest of time, we'll appreciate if you could limit yourselves to a maximum of two questions each, and the operator has been requested to move to the next person after the first two questions. If you have an additional one, please reenter the queue. Rebecca?

Question And Answer

Operator

[Operator Instructions]. And our first question will come from Randy Abrams of Credit Suisse.

Randy Abrams - Credit Suisse First Boston

Yes, good morning. I wanted to ask about your PC customer. They're finally seeing better growth and lower inventory. Could you talk about your visibility into rebound there, and what are your opportunities with their asset like push?

Chia Song Hwee - President and Chief Executive Officer

I think we are pleased to see the positive change on their business. I think before we can see any meaningful rebound in our business, there are couple of things that have to happen. One is they continue to regain their market share and the utilization of their Fab improves over time before we can see any meaningful business to us. But I would say that at the current level that we are expecting for Q4, we probably will not go any further southwards. So, it's all upside from here. As to their SLI model, we are trying to stay very close to the development and to make sure that we can be helpful in implementing their strategy.

Randy Abrams - Credit Suisse First Boston

And if you could talk with your leading-edge utilization coming down a bit. What is your outlook for capital spending now for next year and where are you planning on your Fab 7 ramp at this stage? Thank you.

Chia Song Hwee - President and Chief Executive Officer

We usually provide that guidance in the beginning of the year as we formalize our plan for our fiscal year. Looking at our customers' forecast and all that, we believe that we are well positioned to support their needs on 65. So, we will make sure that we have sufficient capacity to ensure that the customers' requirement and the growth opportunity are capitalized. Right now, our capacity installed in Fab 7 is at about 19,000 wafers as we finished the year, which is about 3,000 wafers per month less than what we had for our guidance in the beginning of the year. However, we did not slow down the equipment delivery, we continued to take equipment in as planned and we still expect us to have about 25,000 wafers per month of equipment on the floor. With regard to the ramp for '08, I will reserve that to be talked in January of next year.

Operator

Next question will come from Dan Heyler with Merrill Lynch.

Daniel Heyler - Merrill Lynch

Good morning. Two questions, the first one is on the tax allowance accumulated on a senior status. Will that be a continued benefit going forward or is this a one off?

George Thomas - Senior Vice President and Chief Financial Officer

This is a one off, Dan.

Daniel Heyler - Merrill Lynch

Okay. And as you look at the wireless partnerships that you had talked about and clearly you are working with several. Could you update us on the ramp rate and the types of products and applications that will drive your non-PC 65-nanometer ramp and non-gain account for business? Thanks.

Chia Song Hwee - President and Chief Executive Officer

We have other... than the base band products, which we have multiple engagements, outside of the space we still have quite a few opportunities for example in the graphic space, we are expecting to have business there that will help us grow in 2008. We also have applications that are in mobile application may end up in a hand full but is non-base band devices and also some wire communication devices. So, the customers' engagement as well as the spread of the business is quite wide. Well, I forgot, there is one more application which is very strong, which is in the TV, high-definition TV area, which has got a very strong growth opportunity.

Operator

And next, we will hear from Bhavin Shah with J.P. Morgan.

Bhavin Shah - J.P. Morgan

Yes. I have few questions. First, the tax allowance... exactly how does it change the historical numbers, for example let's say take 2006, does it... how much cash tax you paid in 2006 and how does this change, and also 2007, what is the tax, sorry, cash tax payout if any? And will you have a similar opportunity to change status of any other fabs in future? And then I have a second question.

George Thomas - Senior Vice President and Chief Financial Officer

Okay. In terms of the cash, we have about... overall tax credit is about $118 million of which about $90 million would be what we will be getting cash refund. The rest is essentially a deferred tax credit adjustment that we will make against current year taxes. So, as a result of that, the net tax payable for 2007 from a cash-out will get netted off and we will not be paying.

Bhavin Shah - J.P. Morgan

And can I --

George Thomas - Senior Vice President and Chief Financial Officer

Okay, Bhavin, let me just tell you for your modeling purposes what I would suggest is you can... your net tax will be a credit of approximately $95 million for the year of 2007.

Bhavin Shah - J.P. Morgan

I think what I am driving at is, should we just focus on pre-tax because it looks like after that $90 million tax insurance, you probably effectively have no cash tax liability for the prior years, and I think also current years. So, maybe the best way to think about it is that look at your pre-tax income.

George Thomas - Senior Vice President and Chief Financial Officer

That's exactly right. I think that's what you should do, yes.

Bhavin Shah - J.P. Morgan

Okay, all right. And then the... in terms of, I think Chia you mentioned several engagements. Can you just update on the base band, what's the outlook there looking at, if not Q4, maybe 2008?

Chia Song Hwee - President and Chief Executive Officer

We do see the base band ramp continuing from Q3 to Q4 but not as high of a rate compared to the growth between Q2 and Q3. However, this is only on one customer. The rest of the customers' ramp up is expected in 2008. Hopefully, the ramp would be more significant to capture the seasonality in the back half of the year, which then we expect to have ramp production by the second quarter of next year.

Operator

And next from HSBC, we will hear from Steven Pelayo.

Steven Pelayo - HSBC Equity Research

First question, may be you can just at least comment on a direction for capital spending next year, TSMC last night talking about significantly down, that may actually present an opportunity for some of the other players to benefit. Have you got a little bit of that just on a directional basis?

Chia Song Hwee - President and Chief Executive Officer

From a directional basis, I think in the past, myself and George have talked about a range between $650 million to $800 million. So directionally that's what we have been talking about it... about our CapEx in '08 in the past.

Steven Pelayo - HSBC Equity Research

Okay. And then it looks like your Fab 7 capacity was up pretty solid in the third quarter despite some more utilization rates there. And I think you are getting it up again in the fourth quarter there. What's the thinking with such a steep ramp given the low utilization there?

Chia Song Hwee - President and Chief Executive Officer

Firstly our capacity number also tie into our accounting policies where we would start depreciating our assets in a defined period of time. So even as we see the business does not necessarily substantiate the ramp, nevertheless we have to comply with the policy and therefore we declared the capacity accordingly.

Operator

Next we will hear from Pranab Sarmah with Daiwa Securities.

Pranab Kumar Sarmah - Daiwa Institute of Research

: Chia, regarding this depreciation policy, I think previously you have guided for 2008... 2007 $525 million and 2008 probably in $550 million, so we... to slow our ramp up for Fab 7. What should be the depreciation policy for fourth quarter as well as 2008, any color on that?

George Thomas - Senior Vice President and Chief Financial Officer

It's about $500 estimate for the year, depreciation and amortization, and for Q4 you can take about $132, which will sort of get to the number of 500 that I just mentioned.

Pranab Kumar Sarmah - Daiwa Institute of Research

And for 2008, any color on that?

George Thomas - Senior Vice President and Chief Financial Officer

Well, I guess, I think you are going to have to wait till January when we come out with our guidance for the CapEx. We will give you that estimate there.

Pranab Kumar Sarmah - Daiwa Institute of Research

Okay. My second question is on the pricing side. Chia, could you comment a little bit on pricing on different nodes on the technology, and how do you see going forward in may be early part of the 2008. And a little bit of color on which segment you are seeing strength or weakness in fourth quarter and probably early part of 2008?

Chia Song Hwee - President and Chief Executive Officer

Pranab, the pricing we saw going into the fourth quarter is some major [ph] price decrease across, but they are 1% kind of stock, so nothing to be concerned about across all technology node as 90-nanometer where we see a little bit more than but of a low base, again it's not of a concern. I think when we look out to the first half of '08, as you know many of our customers when they work with us, we do have to give our pricing commitment or agreement. So some of these prices have been done at a time where the pricing has been competitive. So we do not see any... we should not expect to see any pricing strength but we also do not see... we also do not expect to see much of a decline relative to what we are seeing the first half of the year of 2007.

As to the areas of strength of the business, we see the more strength coming up from the communication areas, for example xDSL, cordless phones, LAN, switches, routers, wireless, broadband and wireless LAN. So those are the application within the communication that growing nicely into the fourth quarter. In the consumer space, we also see TV relative devices continue to do well into the fourth quarter, so those are the areas that continue to do well. As we look out into 2008, we believe that areas such as mobile phone, handset, wireless broadband access, xDSL, TV related devices as well as PC peripherals, PC motherboard will see strength as we move into 2008.

Operator

And moving on, from Citi, we'll hear from Horng Han Low.

Horng Han Low - Citigroup Smith Barney

Hi, good morning. Thank you. My question has just been asked.

Suresh Kumar - Vice President of Investor Relations

Thanks.

Operator

And moving on, we'll hear from Shailesh Jaitly with Nomura Singapore.

Shailesh Jaitly - Nomura Securities

Hi. First, if you could help clarify on eight-inch capacity, is there any unused eight-inch capacity as we exit 3Q? And the second part of the question is any room for further expansion of eight-inch capacity beyond 4Q at the existing space?

George Thomas - Senior Vice President and Chief Financial Officer

Shall I... we do have pockets of capacity that are not fully capitalized and this is mainly due to the mix changes that we have seen in our business over the last two quarters. So it will take us some time to rebalance the line to exploit the unused equipment and capacity. So we've been making those type of adjustments. So as we looked out into... beyond Q4, we're expecting to increase our eight-inch capacity across all of our fabs, probably in the 10% range increase is what we're expecting to get over the next two to three quarters.

Shailesh Jaitly - Nomura Securities

Okay. And about 65-nanometer RAM, I believe that you had two customers contributing to revenues in 3Q. How do you see that changing in 4Q and perhaps 1Q?

Chia Song Hwee - President and Chief Executive Officer

We do not expect much change in the fourth quarter. That's the reason why our overall revenue guidance is down slightly. We do expect that picture to change pretty significantly in the second half of '08, what we need to do in the first half of '08 is to go through the transition and the RAM.

Operator

And from Deutsche Bank, we will hear from Mr. Pyari.

Pyari Menon - Deutsche Bank

Actually most of my questions have been answered but one... when recently you took this loan from some Japanese Bank, which kind of forces you to buy their equipments from Japanese companies. Just kind of in your Fab 7, what percentage of equipments... okay, what I am trying to see is would that... buying those equipments specifically from some vendors kind of not allow you to optimize your Fab in the way you would like or you think that's not the case?

Chia Song Hwee - President and Chief Executive Officer

Pyari, this is totally incorrect. We would never base our business and the way we could... because of financing, we never run our business that way. There are very good equipment and equipment supply coming out from Japan that they are basically leader in their field and that's where we make our decision to purchase equipment from them. And it is very consistent with, already I'll add that base in Fab 7. It is just a continued expansion of the base equipment that we really have and if we look at the equipment that we have in our eight-inch facility, we also see the similar type of arrangement, so nothing to repent that you were speculating.

Pyari Menon - Deutsche Bank

No, I was not saying that is true, Chia, by the way. I was just asking you if there was any kind of this thing for better --

Chia Song Hwee - President and Chief Executive Officer

Yes, now you know it [ph].

Pyari Menon - Deutsche Bank

Okay. Thanks.

Chia Song Hwee - President and Chief Executive Officer

Thanks.

Operator

And next moving on from BNP, we will hear from Szeho Ng.

Chia Song Hwee - President and Chief Executive Officer

Yes, Szeho, go ahead please.

Szeho Ng - BNP Paribas Peregrine

Can you hear me?

Chia Song Hwee - President and Chief Executive Officer

Yes.

Szeho Ng - BNP Paribas Peregrine

In your 3Q results basically, the incremental projects fall through [ph] has been, stayed weak. Just want to know if it's more like a short-term issue or you are seeing some sort of deterioration in your subsidy structures?

Chia Song Hwee - President and Chief Executive Officer

Well, we have maintained... the gross margin is about 19%, but again I guess you need to factor in the lower revenues going into Q4. So, again I guess it's the function of the idea.

Szeho Ng - BNP Paribas Peregrine

Okay. But do you have any idea about... a rough figure for profit for modeling purposes?

George Thomas - Senior Vice President and Chief Financial Officer

Rough figures for modeling purposes, I don't think there is any change. I think you should sort of get factor in the revenue projections that you have and sort of factor that, the usual we say for very dollar about 60% fall through 60%-65%, I think you should still follow.

Szeho Ng - BNP Paribas Peregrine

I see. Okay.

George Thomas - Senior Vice President and Chief Financial Officer

But in some quarter it is about cost --

Chia Song Hwee - President and Chief Executive Officer

Yes, any one of items.

Szeho Ng - BNP Paribas Peregrine

Okay. And my second question is on the R&D, do you have any update on your R&D expense or full year?

George Thomas - Senior Vice President and Chief Financial Officer

While we are looking at about $116 million total for the year, which makes it around approximately $45 million for Q4.

Szeho Ng - BNP Paribas Peregrine

I see. Okay, thanks so much.

Operator

And from UBS, we will hear from William Dong.

William Dong - UBS

Good morning. Can you provide an update on the 45-nanometer ramp especially as it relates to SOI? Now, given the slow down from one of your key SOI customers, should I get a sense of your thoughts on your future technology road map?

Chia Song Hwee - President and Chief Executive Officer

Our 45-nanometer technology bring up is on track. So, as I said that earlier, we are expecting to be enabling our customer by the end of this year, so no change there. But I have also talked in the past that from the industry adoption and ramp standpoint, we should all see any meaningful volume until probably in early part of mid 2009, which roughly kind of worked out to be about two years after the start of production for 65, which is kind of pretty typical. So, like I said, we are sparing no efforts to make sure that we continue to expand our customer engagement there to make sure that we are well positioned. I will not have... and specifically on the SOI, we do not see any change in terms of the timing as well. It's going to be around that kind of timeframe in late first half of 2009 production.

William Dong - UBS

Okay. And my second question is relating to some DRAM makers talking about converting to eight-inch fab into making logic such as fiber [ph] or CMOS sensors, any thoughts on potential threat from your perspective?

Chia Song Hwee - President and Chief Executive Officer

We are certainly aware of that kind of development. So, we have to be very careful where we want to spend our resources to develop solution. For example, CMOS imaging sensor is an area that we do not have any development effort as we have decided about three years ago that this is the area that we do not want to focus. So, we will be able to avoid the hit-on competition in that area that will put us in position where we will face very severe pricing competition. And in the high voltage for display business, we are more focusing on making sure that we are well positioned for the next generation of technology to stay ahead of the curve, so that the newcomers trying to get into the market, we have a competitive advantage over them. And that is very evident in our point. One is I'll follow [indiscernible] operating where we are getting tremendous amount of traction and we believe that we are actually ahead of our competition in introducing that technology. So our strategy is pretty simple here. We try to get ahead in terms of timing and where we believe there is going to be just intense price competition is what we are trying to avoid.

Operator

And from Goldman Sachs, we will hear from Donald Lu.

Donald Lu - Goldman Sachs

Yes, my line was cut off earlier, so you stated redundant, I apologize for that. In terms of the 4Q guidance, I see the... what is the guidance for operating expense at the bottom line?

George Thomas - Senior Vice President and Chief Financial Officer

Operating expense I think, if you look at R&D, it's about 45, sales and marketing about 18, about G&A 10, is what you can model.

Donald Lu - Goldman Sachs

Okay, great. Another question is for the next year, I think the people have been asking about the CapEx guidance. You said it's $650 million to $800 million. Is there any capacity guidance associated with that and also what is the current 2007 CapEx?

George Thomas - Senior Vice President and Chief Financial Officer

2007, we are looking including what we will be spending approximately $160 million in Q4, we are looking at above total year above $750 million.

Donald Lu - Goldman Sachs

$750 million in total.

George Thomas - Senior Vice President and Chief Financial Officer

Yes. I guess in terms of the 2008 other than the direction that we mentioned, I think, Donald you are going to have to wait till our January announcement.

Donald Lu - Goldman Sachs

Sure. You based the direction, what is that for Fab 7 to ramp up to 35K at end of '08, basically the direction of CapEx?

George Thomas - Senior Vice President and Chief Financial Officer

Well, I think, Donald, I think that's getting into a little more detail than what we would like to say right now, so --

Suresh Kumar - Vice President of Investor Relations

Yes, Donald, other than that you can say, please assume that most of this CapEx will go towards Fab 7 expansion. At this point in time, we are not going to be able to speak specifically to a capacity number.

Donald Lu - Goldman Sachs

Sure. My last question is, you mentioned the 65-nanometer, they have broad based customer engagement, if I recall that this is a lot more active then when you were at 90-nanometer. And so this kind of customer engagement, will this kind of '08 CapEx be sufficient to satisfy the customer needs because do you have to promise customer certain capacity for them to really do any technology development this year, in other words?

George Thomas - Senior Vice President and Chief Financial Officer

Yes, I think it is a good question. I don't think any customer will want to engage a supplier if there is no agreement or expectation side in terms of demand and supply. So, yes we do have that and as I say, we are not in a position to announce the plan yet, but definitely what we will be trying to do as we go into '08 is to make sure that we have sufficient capacity to meet the needs of the customers. So that will be our win time. We have come so far in terms technology, get closure and customer engagement and all the 65 engagements are all the blue chip customers, so we will do our best to make sure that this opportunity comes to realization.

Donald Lu - Goldman Sachs

Right. Thank you very much.

Operator

Next we hear from Patrick Yau with Macquarie.

Patrick Yau - Macquarie Securities

Hi, good morning. This is really a question with more for the industry where the leader seems to be indicating a move towards the running CapEx and trying to boost returns. I mean is there something that world benefit in company as well as far as the competitive volumes concern.

Chia Song Hwee - President and Chief Executive Officer

Any kind of capacity we strain to make sure that the demand and supply are in moderation rather than the extreme where we have seen most part of this year where supply in the leading edge have outstripped demand in a very significant way. That will be healthy for all. So there is no question in my mind that we will happy to see that. However, every company have a different baseline to start with, so the capital expenditure may vary from company to company depending on the adjusting install base versus the outlook of their customer base in terms of growth. So why should I expect everybody to be doing the same thing, but on the other hand any kind of behavior kept or incapacity expansion, we better... anticipating what the month's situation is going to be, is going to be helpful for all the players.

Patrick Yau - Macquarie Securities

Okay. Thank you.

Operator

And moving on, we'll now hear from Harsh Agarwal with Lehman Brothers.

Harsh Agarwal - Lehman Brothers

Hi. My question has being answered. Thanks so much.

Operator

[Operator Instructions]. And we do have a follow-up from Bhavin Shah with J.P. Morgan.

Bhavin Shah - J.P. Morgan

Yes, thank you. Can you give the information on some depreciation in COGS in third quarter and Q4?

George Thomas - Senior Vice President and Chief Financial Officer

The overall depreciation and amortization was 500. The depreciation --

Suresh Kumar - Vice President of Investor Relations

I can give you, Bhavin, third quarter about $107 million.

Bhavin Shah - J.P. Morgan

Okay, thank you.

Suresh Kumar - Vice President of Investor Relations

And fourth quarter, you can assume around $110 million, $111 million in that range.

Bhavin Shah - J.P. Morgan

Okay. And I had a question for Chia. When I look at Fab 7, assuming some slack plus the fact that you have equipment that is purchased but to be installed next year, and given that you're about the ramp. Basically, in maybe little bit in second quarter but focusing more on second half of next year. Can one not conclude that you may not need to spend as much in '08?

Chia Song Hwee - President and Chief Executive Officer

Well, there's couple of points here. One is if we are expecting the ramp to occur in the second half of the year, we cannot wait till Q3 then to start installing equipment. The equipment installation qualification work could be done in a more or less linear basis in order for us to hit the production output that we are anticipating. So the CapEx has to be incurred earlier in order for us to realize the capacity. The other... the reason why we are hesitant to talk about specific number and capacities because the back half of the year, cash CapEx will also be determined by our view and outlook into the first part of 2009.

So at this point in time, it is very helpful as to make a call. So if we believe that 2009, the demand will continue to grow, we may have to cater for the CapEx in the back half of the year to ensure to continue ramp in Fab 7. However, if that is not the case, we are expecting some tapering off of the demand then that may allow us to hold back the CapEx to a little bit later into 2009. So that is the type of consideration you need to take into account when you look at the total year CapEx because unlike some other players, we only go by cash CapEx and not what we intend to purchase.

Bhavin Shah - J.P. Morgan

All right. And just one final question. Exiting the year, could you comment on what your bulk process SOI break up is at 65?

Chia Song Hwee - President and Chief Executive Officer

The bulk in SOI mix, it will still be SOI being the dominant part of our business. I think this is where we have indicated last quarter that we are disappointed that about 65-nanometer ramp is lower than we stated. I did say in earlier calls this year that we expect the mix to be more above than SOI by the time we get to this year, but it is not happening. The decline in the SOI is more or less there but what we did not see is the increase in the bulk side. But I think this is... this will be so called adjusted as we move to 2008.

Operator

Next is Roxy Wong with Bear Stearns.

Roxy Wong - Bear Stearns

Hi, Chia. One thing is regarding the CapEx for '07 in terms of the cash flow because you mentioned earlier that the... by the end of the year, you are looking at 19K per month of capacity but you'll have 25K per month of capacity sitting on the floor. I just want to know whether those 25K are all paid within the same quarter. That means in terms of cash flow, does $715 million U.S. includes all the 25K capacity?

George Thomas - Senior Vice President and Chief Financial Officer

This is George. Let me answer that. We had initially indicated that we would have by the end of the year 25, but I think we have sort of scaled back a little bit of it and it's more in the 22K wafer... 22K to 23K equipment that we have on the floor now. Of course we will be continuing to do... bring that into the Q1. So the cash CapEx that we are talking of about $750 million corresponds to about 22,000 to 23,000 wafers equipment on the floor.

Roxy Wong - Bear Stearns

But you are not turning it on until probably in Q1 next year?

Chia Song Hwee - President and Chief Executive Officer

Yes, that's right, yes.

Roxy Wong - Bear Stearns

So in that case are you anticipating first quarter to be, continue to grow in terms of your 65 or 90-nanometer 12-inch business?

Chia Song Hwee - President and Chief Executive Officer

I guess that's again talking about Q1, which I don't think I can get into that level of detail here.

Roxy Wong - Bear Stearns

And other question is regarding, also mentioned that Q3 has also pulled in, of pulling request from customers, I'm not sure whether you are still seeing it, going into Q4 at this point?

Chia Song Hwee - President and Chief Executive Officer

Yes, Roxy, we do continue to see customers asking us to as we dial [ph], especially in the month of October and November, as you imagine, all trying to get through that... before the Christmas time period. So, yes, we continue to see customers request for us to do so, but more pulling in for the month of December into November and October rather than from January.

Roxy Wong - Bear Stearns

Thank you.

Operator

We will hear from Daniel Heyler with Merrill Lynch.

Daniel Heyler - Merrill Lynch

Thank you. I got a follow-up question, Chia. As you have been engaged in the IBM alliance, there has been quite a bit of the initial momentum. However, I am wondering how that momentum is continuing. I guess specifically, as you look at your 65-nanometer engagements, which are multiple. Have any of those current partnerships exclusive of AMD and Microsoft resulted in some partnering for the 45-nanometer node or are we still very much focused on 65 and you would expect some news potentially later 45 on those customers?

Chia Song Hwee - President and Chief Executive Officer

Well, actually the 45 node, practically every customer that we have engaged on 65, is already working with us on 45 including the companies in the... that we are working in the alliance.

Daniel Heyler - Merrill Lynch

Right, okay. So I guess that indicates, I guess, a high level of confidence in the bulk CMOS road map. And if so, since you haven't really ramped into the 65 as of yet, what's been driving those early engagements?

Chia Song Hwee - President and Chief Executive Officer

It's our cost or loaded volume has not started, but clearly pulled up either already qualified waiting for RAM or in the assembling stage with their end customers. So all the 65 program, if today we are not there to demonstrate our capability, we are in trouble. So that has actually... we have re-passed those milestone. So, clearly the capability has been demonstrated that give the confidence on 45.

Daniel Heyler - Merrill Lynch

Great. Thank you.

Operator

And from Macquarie Securities, we will hear from Patrick Yau.

Patrick Yau - Macquarie Securities

Hi. Just a quick follow-up question. As far as the RAM and 65 is concerned for the base one customers that's slightly delayed a little bit this year. Looking ahead, do we expect for like, for any linear progression as far as the progress in 2008 is concerned?

Chia Song Hwee - President and Chief Executive Officer

Ideally that's why I like to see, but it will never happen that way. And typically, the product especially new ones, everybody will be gearing up for the next seasonality high, so our expectation is that it is not going to be linear and in fact it's going to be pretty lumpy.

Patrick Yau - Macquarie Securities

Okay. Thank you.

Operator

And we will here from Shailesh Jaitly with Nomura Singapore.

Shailesh Jaitly - Nomura Securities

Hi. I just wanted to follow-up on that high voltage technology, which you alluded to. You said that you are focusing on the next generation, so if you can provide some more details, right, as to some more color on that as to what exactly it is?

Chia Song Hwee - President and Chief Executive Officer

For example, the high voltage technology at 0.18 is for the next generation drivers for portable devices like cell phone, portable game devices, which have just started getting into production, which will come out with the OEMs for their new model phones, this holiday season. So that is what I mean by that and that we will have started, we have started that over two years ago. And to make sure that we stay... continue to stay on that good attraction and good path, we have already engaged customers that we have worked on this 0.18 for a next generation at 0.13, and the program is already on-going for a year or so now.

Shailesh Jaitly - Nomura Securities

Okay. So do you have the mass production and the wafer outs on 0.13 now.

Chia Song Hwee - President and Chief Executive Officer

No, no. Currently, mass production is at 0.18. We are in the process of ramping last quarter.

Shailesh Jaitly - Nomura Securities

And when do you expect here to have the wafer outs on 0.13.

Chia Song Hwee - President and Chief Executive Officer

In terms of capability, we are more on that [ph] then the question is the design win that have to occur at our customer base and the qualification, and all that which is going to take some time. But I think from timing standpoint, our voluntary is even more aggressive that what we have rolled out at 0.18. So, I think we are positioned well.

Shailesh Jaitly - Nomura Securities

Chia, would it be possible to share as to roughly what proportion of your business is driver ICs?

Chia Song Hwee - President and Chief Executive Officer

It is still a small portion of our business to-date. Bear in mind what I talked about is for potable devices, if not large panels. Our presence on the large panels is relatively small as that area that while we want to allocate briefly, but that's not the area where we want to commit a lot of our capacity to, so our focus is more on the small panel side, which like I said the business is just one thing. It's still a small portion of our business.

Shailesh Jaitly - Nomura Securities

Thank you.

Operator

And today's final question will come from Donald Lu with Goldman Sachs.

Donald Lu - Goldman Sachs

Yes, two follow-up questions. One is on the... one is what is your plan for this 32-nanometer R&D or shuttle whatever, if you can shed some light?

Chia Song Hwee - President and Chief Executive Officer

Yes. 32-nanometer development has started. Again, we have the same partnership with IBM, Samsung, Infineon, Freescale and STM have also joined. That development activities have begun and there is significant amount of more resources both in terms of people as well as silicon commitment to make sure that we position ourselves very well at 32. Actually, I am very optimistic with the progress at 32. It is something that I am very excited about.

Donald Lu - Goldman Sachs

Is there a timeframe that... will that be just like 45-nanometer. It would be like two years after 45-nanometer --?

Chia Song Hwee - President and Chief Executive Officer

That is our expectation to make sure that we stay very close to the IT --

Donald Lu - Goldman Sachs

Sure. My next question is SD-micro have recently gained significant market share probably at Sony Ericsson and will be at Nokia, and SD-micro has been one of your major customers, if I am correct in the past. What kind of business are you engaging SDM right now?

Chia Song Hwee - President and Chief Executive Officer

Yes. Up to now, our business with them is more in the, it is that will capacity. So we have not been... it's actually in engaging them into lineage technology like the 90 and 65. Obviously, we are working really hard to spend our business relationship to the leading edge technology site, but I have nothing to report at this stage.

Donald Lu - Goldman Sachs

So you are working with SD-micro on the 0.13, is that correct?

Chia Song Hwee - President and Chief Executive Officer

I think for any technologies that can be covered on eight-inch, we are engaged. I cannot disclose that.

Donald Lu - Goldman Sachs

Sure. Thank you very much.

Suresh Kumar - Vice President of Investor Relations

That completes the Q&A. If you have 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 171-9457-0820 and using the access code 3834268 or at the Chartered website, which is www.charteredsemi.com. Both the telephone and webcast replays will be available through November 8, 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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