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United Microelectronics Corporation (NYSE:UMC)

Q2 2012 Earnings Call

July 25, 2012, 8:00 a.m. ET

Executives

Bowen Huang - Head of IR

Shih-Wei Sun – CEO

Chitung Liu – CFO

Analysts

Mehdi Hosseini – Susquehanna International

Szeho Ng – BNP

(Richard Cload – Pioneer)

Steven Pelayo - HSBC

Donald Lu - Goldman Sachs

Satya Kumar – Credit Suisse

Randy Abrams - Credit Suisse

Donald Lu - Goldman Sachs

Operator

Welcome everyone to UMC's 2012 quarter two earnings conference call. (Operator Instructions)

For your information, this conference call is now being broadcasted live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website at www.umc.com under the investor relations investor events section.

I would now 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 2012. With me today is the CEO of UMC, Dr. Shih-Wei Sun and the CFO, Mr. Chitung Liu.

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

I would now like to introduce you UMC's CFO, Mr. Chitung Liu to explain UMC's second quarter 2012 basis results.

Chitung Liu

Thank you, Bowen. So the second quarter of 2012, revenue was NT $27.62 billion. That's 15.2% quarter over quarter increase from NT $27.77 billion in Q1, 2012. And 1.9% year-over-year decrease from NT $28.15 billion in Q2, 2011.

Gross margin was 24.4%. Operating margin was 11.5%. Net income was NT $2.99 billion, and earnings per owner share were NT $.24.

The above summary of UMC results for Q2, 2012, most details are available in the report, which has been posted on our website.

I will now turn the call over to Dr. Sun.

Shih-Wei Sun

Thanks, Chitung. Good morning, good afternoon, and good evening, Ladies and Gentleman.

In Q2, 2012, UMC's results exceeded our expectations. Wafer shipments grew 18.6% quarter-over-quarter to reach $1.14 million, eight inch equivalent wafers bringing overall capacity utilization to 84%. Strength from the communication in the consumer sectors mainly contributed to the increase in shipments.

For the upcoming quarter, we expect mild revenue growth with 40 nanometer percentage contributions increasing significantly as the volume production begins for several new products.

40 nanometers, 28 nanometers, 20 nanometers FinFet that 3D transistor technologies and the groundbreaking for our FAB 12A Phase 5 and the Phase 6 in Tainan, Taiwan will solidify UMC's leading edge technology and the capacity foundation to further advance UMC into the next round of growth.

Obtaining IBM's 20 nanometer process design kit and the FinFet technology will expedite the development of our internal technologies enabling customers to realize the next generation of low power consumption chips for mobile communication and the computing applications.

With a complete portfolio of 28 nanometer and the 20 nanometer process technologies, Fab 12A Phase 5 and the Phase 6 readiness is timed to provide sufficient advanced capacity to propel UMC and its customers into a new growth phase. These efforts to secure forefront technology and adequate capacity demonstrates UMC's leadership under our customer driven foundry solutions approach. And have been overwhelming well received from our customers and partners.

UMC's advanced technology business is entering another growth cycle. Though our upcoming efforts to enhance mass production technology, capacity expansion, and the customer service, we anticipate leading edge revenue contribution to increase substantially during the second half of this year. However, we are cautious due to the potential for chip demand volatility in the near future as end demand uncertainties elevates in light of a growing European sovereign debt issues, supply chain inventory, and the customers adopting a conservative stance. We are watching the situation closely so we may respond accordingly to any status change, while at the same time, developing leading edge in the specialty technologies thus strengthening UMC's solid foundation to ensure stable and long term growth.

Now let me provide you with the guidance for the third quarter of 2012. Wafer shipments were increased marginally. Wafer ASP in U.S. dollars were increased marginally as well.

Gross margins will be in the mid 20% range. Capacity utilization will remain flat from previous quarter. The computer and the consumer segments were out pace communication segment.

That concludes my comments. We are now ready for questions. Operator, please open the lines up. Thanks.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Mehdi Hosseini of Susquehanna International.

Mehdi Hosseini – Susquehanna International

Yes, thank you. Mehdi Hosseini, Susquehanna International. Can you please provide me an update with your process technology migration? When would you start trial production for High K-Metal gate and when would that tend to volume ramp up? And I have a follow on.

Shih-Wei Sun

Okay. For 28-nanometer, UMC offers two process options. One is a Poly-SiON and one is a High K-Metal gate. High – if you’re asking High K-Metal gate, we are having our first real High K-Metal gate product this summer. So we are in the pilot production phase in the second half of this year.

And UMC is one of the few foundries offering the K-[inaudible] High K-Metal gate technology.

Mehdi Hosseini – Susquehanna International

Yes. And then on Poly-SiON, or low-power tone anatomy there, can you give me a sense where the yields are and also how aggressively your ramping capacity?

Shih-Wei Sun

For 28-nanometer Poly-SiON, we are still working very hard, especially on the parametric matching and the [inaudible] improvement. But we are still targeting to reach a 5% of our revenue from 28-nanometer Poly-SiON by the end of this year, 2012.

Mehdi Hosseini – Susquehanna International

Okay, great. And then just a question on the big picture. Your main competitor, last time you talked about concern on channel inventory building up that would have an adverse impact on fab loading and wafer shipment in Q4/Q1. I know there’s lack of visibility, but maybe you can provide us a qualitative assessment of how you see the channel inventory and how you would impact the fab loading beyond Q3?

Shih-Wei Sun

Yeah. During last quarter’s conference call, we said the Q1 inventory reached the bottom. However, in Q2 and now Q3, the inventory does go up. So we may see the inventory recycle. But overall speaking, this year’s pattern is somewhat similar to last year. During the summertime, we see some deterioration and then the second half may be weaker. You can also see that the inventory cycle is much shorter now from the system OEM to [inaudible] to IBM. The inventory will go up to some extent.

As far as the global demand, the macro situation is very unpredictable. Europe’s sovereign debt is continuing. The emerging markets are slowing down. U.S. is kind of a mix; retail is going down. The employment seems not high, but the housing seems to be making some recovery.

On the other hand, there are lots of new products to be released in Q4. So I think buyers, psychologically are holding out to wait for the new products. It’s very uncertain and unstable and it’s difficult to project.

We will give you the guidance for next quarter, Q4, next time.

Mehdi Hosseini – Susquehanna International

Sure. Just very quickly as a follow up, would it be fair to say that if there’s this uptick in inventory is more communication related, wireless communication because of – in advance of new product introduction or is it across the board?

Shih-Wei Sun

I think it’s in general, yeah.

Mehdi Hosseini – Susquehanna International

Okay.

Shih-Wei Sun

I think it’s general, yeah.

Mehdi Hosseini – Susquehanna International

Okay, thank you.

Shih-Wei Sun

Thank you.

Operator

Your next question comes from the line of Szeho Ng of BNP.

Szeho Ng – BNP

Good day, gentlemen. One question on [inaudible]. You spend roughly 900 million U.S. on [inaudible] in the first half of this year, but the capacity hasn’t really changed much for the last three to four quarters. How would we think about that?

Chitung Liu

For our CapEx, a significant portion, actually over 20% is for capacity conversion from that legacy note. Also, I think [inaudible] in Q4, we’ll have more significant capacity release and also, these CapEx will be carried over. There’s a one-quarter lag, so some portion of the capacity release will happen in Q1 next year.

Szeho Ng – BNP

I see. Can you talk about the install – the 28-nano capacity by the end of the year?

Shih-Wei Sun

I cannot give you the exact number, [inaudible].

Szeho Ng – BNP

All right. Okay.

Shih-Wi Sun

Sorry.

Szeho Ng – BNP

No problem, that’s okay. Thanks very much.

Shih-Wi Sun

Thank you.

Operator

Your next question come from the line of (Richard Cload) of Pioneer.

(Richard Cload – Pioneer)

Hi. Thanks for taking the questions. Just to follow up on what people have been talking about before, for the second half and this inventory correction, could you give us a bit more color as to, you know, how customers have reacted to what’s been happening in terms of macro? You know, how the order book kind of changed for Q3 resulting in the guidance you’re now giving and because obviously before I think it was looking much stronger. And then you know, you do have a slightly different customer base, the TSMC and so, they’re seeing a slightly different sort of cycle and you perhaps had a stronger Q3 and then sort of seeing more of a correction into Q4. How would you kind of see your customers and how that inventory correction progresses in the second half?

Shih-Wei-Sun

Every customer is managing their inventory level differently and psychologically, every segment is kind of slightly different. But let me try to give you our Q3 strengths and weakness.

For our Q3 in several areas for UMC, there are quite – our customers are stronger. For example, Wi-Fi, Setup Box, DTV, TPS and also in the domain of [inaudible] and touch controller. These areas in Q3 are stronger. And we also guide the communication relatively to Q3 is relatively weaker such as a [inaudible]. I guess these are the general kind of things. Also the PC peripherals is relatively weaker, you know.

(Richard Cload – Pioneer)

But if we look at the deterioration we’ve seen in the outlays of Q3, where did that come from primarily?

Shih-Wei Sun

The weakness, as I mentioned, for example the communications…

(Richard Cload – Pioneer)

Versus say where we were if we roll back three months and you look to your order book for Q3 and then you look at your order book now, where’s the change come from rather than which is stronger and weaker in the quarter? Where’s the change, the delta come from?

Shih-Wei Sun

I think the most of them are coming from, in general, the 8-inch legacy and the 12-inch legacy technology nodes. The rest of those are pretty strong for us in general.

(Richard Cload – Pioneer)

And would you …

Shih-Wei Sun

The 12-inch legacy.

(Richard Cload – Pioneer)

And would you say your customers react maybe a bit faster than the competitors and so that commentary about being more of a – more of an inventory correction from Q4, would you say that you think you’re seeing more of an inventory correction maybe from Q3?

Shih-Wei Sun

Q3? It’s a continuous – I’m sorry. I didn’t get your question exactly. Would you try again?

(Richard Cload – Pioneer)

Given your slightly different set of exposure in terms of customer, do you think that you’re seeing the inventory correction earlier than your competitor who’s obviously seeing a stronger Q3 than you are but then talking about a much weaker Q4? Do you think that you’ll see perhaps a weaker Q3 but then not such a drop off into Q4?

Shih-Wei Sun

I don’t have that visibility with our competitor and we say that we are not giving any guidance on Q4. So let’s try the next question.

(Richard Cload – Pioneer)

Okay. Sorry. All right, thank you.

Shih-Wei Sun

Thank you.

Operator

Your next question comes from the line of Steven Pelayo.

Steven Pelayo - HSBC

Yeah, a couple quick questions here. As you ramp for the nanometer here to 15% of revenues actually in the year, I’m curious about margin implications. You know, it does seem like your capacities are growing very rapidly so you are getting pretty high reuse rate I guess. So I think that would have a favorable impact, but could you help me understand where 40-nanometer margins are today, where you think they’d be kind of exiting the year and how that could help your overall margins?

Shih-Wei Sun

The 40-nanometer margin is on track, I think, to our expectation. I guess you’re asking the comparison between 14 and the older generation?

Steven Pelayo – HSBC

I’m trying to understand, is 40 nanometer a drag for you today, but will likely be better than corporate average, let’s just say, by the end of the year? Are you on track for that type of thing where 40 nanometer increases is actually good for continued margin expansion for you?

Shih-Wei Sun

Definitely. I think we need to be moving forward, 40-nanometer, we have to do it and it will help on our overall margin.

Steven Pelayo – HSBC

Okay. I’ll follow up later on that.

Shih-Wei Sun

No, it’s not a drag. It’s definitely not a drag at all.

Steven Pelayo – HSBC

Is 40 nanometer gross margins at kind of a corporate average, mid-20s kind of gross margin today?

Shih-Wei Sun

I think for us, the 8-inch and the 12-inch are different where we’re counting the – I guess it would depend on your accounting practice, how you account your – there’s a big chunk of depreciation and other things. I think in the 12-inch domain, our 40-nanometer margin is good, relatively speaking.

Steven Pelayo – HSBC

Okay. And then you talked about, you know, fourth quarter will see significant more capacity release and some going into the first quarter. Could you help me understand the sequential growth in total capacity in the fourth quarter and the first quarter?

Chitung Liu

For the full year, we are expecting 4% capacity gross. And almost all of the 4% coming from choppage, so that will be about 8% in choppage alone. And you see mild growth for the first three quarters of the year and we’re probably talking about close to 3% gross in the first quarter.

Shih-Wei Sun

Yeah, [inaudible] of growth in the fourth quarter.

Steven Pelayo – HSBC

Okay. And then can you just talk about – I mean, that’s – that still seems like relatively minor amounts given the CapEx that you’re increasing your – will there be a step function somewhere out there where you end up having a 5%-plus type sequential capacity growth? Are you seeing like roll offs elsewhere that are offsetting this? I’m actually quite surprised that your capacity is not growing more quickly.

Shih-Wei Sun

So our capacity, as I mentioned, over 20% this year for conversion and I think over 20% for the aggressive facility and other things. So overall speaking, we are just moving along as well we planned. And also as I mentioned, there will be a one-quarter lag too in some capacity release next year based on [inaudible] CapEx.

Chitung Liu

It’s a continuous release.

Steven Pelayo – HSBC

All right, and then last question for me, a little longer term. I think we’ve seen with TSMC certainly in ramping 28-nanometer, the capital intensity really picked up there and they’re spending obviously a significant amount, over $8 billion or so this year. You know, that investment cycle is still very much ahead of you. I know you guys don’t like to talk about CapEx plans for next year or the year beyond, but could you just help me think about kind of longer term models with this type of investment cycle ahead of you and you know, what should we be thinking about for UMC in the next couple years, maybe just CapEx as a percent of revenue, some way of targeting it?

Shih-Wei Sun

Well, I think one thing we want to achieve is really a cash flow balance. So most of the capital expenditures should be funded so we can generate cash. So that will be the major [inaudible]. So we don’t want to overleverage and we don’t want to dilute. It’s too much our equity, our shareholder’s equity base. So pretty much it all depends on how we generate our internal cash. So how we come to profitability and returns, our investment we make over the last two or three years will be a key indicator for the future capital expenditures.

Steven Pelayo – HSBC

Okay. So can I walk away from that comment thinking that, you know the negative free cash flow you’re seeing – while you’re seeing this year, you’re hoping for next year to maybe keep that a little bit more in balance and you’ll control CapEx relative to the operating cash flows available?

Shih-Wei Sun

Yeah, it may not be a one-year target. I mean, we’re talking about multi-years and so that’s the idea.

Steven Pelayo – HSBC

All right. And if I can just sneak one last quick one in, the quarterly depreciation charges, obviously capacity is not stepping up very quickly here, so I just want to make sure I’m not going to see the same thing in depreciation. When you look out – especially the depreciation specific to your cost of goods sold, when you look out over the next one, two, three quarters, is it a steady increase or help me understand how that line items within COGS changes?

Chitung Liu

For 2012, depreciation should grow less than 10% year over year compared to last year. And we estimate CapEx of a certain amount. We expect the depreciation increase in 2013 will be slightly bigger than 10%. And it’s…

Steven Pelayo – HSBC

And linear. Thank you.

Operator

And your next question comes from the line of Donald Lu.

Donald Lu - Goldman Sachs

Good evening. I have two questions. First is on the margins structure. I think in second and third quarter you have had about 25% growth margin at around 85%, 84% utilization rate. That’s quite stable relative to your historical trend. But with the 28-nanometer run in Q4 and early next year, would you expect the margin structure to maintain at the same level or is there going to be under some pressure as was the case with TSMC?

Shih-Wei Sun

I think the margin, there’s quite a few factors. One is the depreciation. The other is the utility cost increasing in Taiwan. [Inaudible] utility is generating increasing top line. As far as the 28-nanometer, that really depends on the year, years of progress and the standards.

Donald Lu - Goldman Sachs

Right. So …

Shih-Wei Sun

[Inaudible] effecting the overall margin for that specific node. And overall – depending on the ratio to their overall revenue [inaudible], we are targeting 5% revenue and I don’t think it will case much impact either way at this stage in Q4.

Donald Lu - Goldman Sachs

I see. And for the overall company, is there – is there a asking rate on the overall return on the different nodes? For example, it what’s the ROE or ROIC for 14-nanometer or 28-nanometer or 90-nanometer, is there a plan that we can follow for UMC at this point on whether the ROE – basically what I'm trying to get is whether – what’s the trend for ROE if you start to increase CapEx at that 20-nanometer and also [inaudible]?

Shih-Wei Sun

So the leading edge in nodes, again as I mentioned, here there’s a big factor. If we can hit our year roadmap, the leading edge node for UMC is actually margin of credit. But it may take some time to reach the year roadmap target. If we can reach the year target margin for the leading node, it’s actually a margin of credit.

Donald Lu - Goldman Sachs

I see. Okay, great. Now my last question is more on the demand side. Since like the full for the Q3 [inaudible] are [inaudible]. Is that a demand issue or is that a market share issue from your customers, or is it more like a customer’s customers are not doing well?

Shih-Wei Sun

Well, that’s – I think that’s pretty much UMC, it’s our UMC specific. We have a [inaudible] customer. We probably do that too much, they order quite a lot in Q2, it’s just an adjustment in Q3.

Donald Lu - Goldman Sachs

I see.

Shih-Wei Sun

So that’s why the segment trends, for UMC specific, may not reflect the overall market situation.

Donald Lu - Goldman Sachs

Great. Thank you.

Shih-Wei Sun

Thank you.

Operator

And your next question comes from the line of Satya Kumar of Credit Suisse.

Satya Kumar – Credit Suisse

You suggested that you will do a FinFet node at 20 nanometer at some point in 2014. I was wondering what the plan is after 20 nanometer? Are you going to 16 nanometer or are you going to 14 nanometer? And how do those decisions – how will you make the – for example, the availability of [inaudible] technology?

Shih-Wei Sun

So the – with UMC, we will follow the industry technology roadmap and after 20 nanometer, it’s kind of a little bit confusing . Somebody has a 16 and then we are still having the 14 roadmap and it goes up to the maturity of the UV to see if it gets pushed out further, maybe it’s most over the company [inaudible] 10 nanometer. Now, whether or not you want to do another node in between, it’s multiple patenting, either [inaudible]. It’s a question. We are still watching it. They may have some change in the industry. But we’re not seriously committed on the 20 nanometer and the 20 nanometer that we [inaudible] have from that. Whether you define that was 16 nanometer or some other things, it’s really a marketing kind of a thing.

Operator

Your next question comes from Randy Abrams of Credit Suisse. One moment. Mr. Abrams, your line is open, thank you.

Randy Abrams – Credit Suisse

Yes, hi, can you hear me?

Shih-Wei Sun

Yes.

Randy Abrams – Credit Suisse

Yes, okay, sorry about that. A follow up to the last question from Chitung Liu 40 nanometer where the capacity is spongeable. If you install new capacity for 28 nanometer, but the demand comes through stronger on 40, would you have a margin hit for that incremental capacity if you need to load that with 40? I'm just trying to understand because it seems like the 40 nanometer is taking off with better momentum now.

Chitung Liu

I don’t have the calculation, but our goal is – first of all, our capacity at maximum with customers are ranging early. Usually we check with them very seriously and carefully, so we reserve the capacity. But for some other reason, they cannot come or the market situation change, we can move the capacity around between 28 and 40.

But for you to see, I guess to move aggressively forward even at the early state 20 nanometer even though it's not as good as a 40, but we need to move forward. That's very clear for us.

Randy Abrams – Credit Suisse

Okay, makes sense, and as you into a slowdown into second half, it seems like that this year, industry foundry pricing held up reasonably well. How is the pricing environment as you go in the second half and start to think about negotiating for next year if you continue to expect it to hold up at these levels?

Chitung Liu

I see no change. I mean these are, even the recycles I think are become very frequent and shallow in the short, so if customers come to us ready to negotiate and negotiate really hard, usually they don’t do that. It's really the pricing is a longer term cycle kind of a thing. It's not a scar market. I don’t think it's an issue.

Randy Abrams – Credit Suisse

Okay, great, and you talked about trying to maintain stable free cash flow where you can fund operations or use operations to fund the CapEx. For your dividend just thinking about it over the next couple years, what would the target payout be, and you continue to use – I guess you can get low cost financing to maintain the dividends?

Chitung Liu

Well, we will try out best. We have been paying certain amount of [inaudible] over the last few years, and that's certainly our goal. And that's also included when we talk about the balance in terms of cash flow.

Randy Abrams – Credit Suisse

Okay, thanks a lot.

Operator

Your next question comes from the line of Steven Pelayo of HSBC.

Steven Pelayo – HSBC

Yes, just a couple quick follow ups here. Maybe kind of a status check on 40 nanometer and 28 nanometers. Any number you can kind of quote to us on number of tape outs, products in production, number of customers, and where that currently stands? Can you give some kind of milestones we can kind of follow?

Chitung Liu

So 40 nanometer, we have 101 product tape outs. And therefore 28 nanometer however, I think 18. Yes, 18 IDO product tape outs so far.

Steven Pelayo – HSBC

Okay, and then a couple a weeks ago, I guess you guys at the press release aligned with IBM, I guess I'm trying to understand a little bit of the motivation behind this. I know you had been positioning yourself as a viable second source TSMC. You talked about your date last alternatives. Your press release also talks about you guys have an internally developed 20 nanometer and that solution as well, so are you just trying to make sure you can be a second source to any product made at any foundry out there? Or help me understand the alignment with IMB then.

Shih-Wei Sun

The IBM alignments in the technology licenses are mainly for the FinFet three dimensional transistor license. And since today, the FinFet is available on the 20 nanometer IBM framework, so it's the natural development for us to work with IBM. You know, IBM, their R&D's they're world class. And we have the strength of our manufacturing pigmentation. We also see to develop FinFet from scratch is very challenging, so this is a great arrangement to help us get driver to kick start our FinFet effort. So that's the main purpose, and those at 20 nanometer. They are okay last from the industry. There are no more [inaudible], so also our 20 nanometer, we just aligned with IBM on the design environment. And also, that's the base to view the FinFet, so give us a great opportunity to head start our FinFet technology development. That's the main purpose.

Steven Pelayo – HSBC

Okay, and then last question from me. I'm trying to understand when you talk about legacy nodes being relatively I guess softer for you, or lower utilizations, or something like having access capacity. I forget how you phrased it. On 300 millimeter legacy, I'm just trying to understand. Do you consider 65 nanometer legacy or what's the most challenging nodes you're still doing at 300 millimeter?

Shih-Wei Sun

We have been doing 12 inch for over ten years I guess. Today, the largest node for us to 12 inch, I should define as .13. We still have some .13 capacities, some 90, and 80, so for the legacy, we are in a transition. We are trying to back fill with specialty technology like high voltage [inaudible] sensor. So the legacy like .13's and the 90 transition, so those are the 65 relative speaking, you can define as a legacy today.

Steven Pelayo – HSBC

Relative to increased IDM outsourcings, there's even rumblings certainly out of Japan, but there's even been some rumblings about maybe even major customers like Samsung looking to move some more parts over to Taiwan. Is that UMC is benefitting from?

Shih-Wei Sun

I cannot discuss with any specific customers. Even IDM, they are always having a portion even actually growing portion of outsourcing. Whereas we are definitely engaging with many of them, yes.

Steven Pelayo – HSBC

Okay, thank you.

Shih-Wei Sun

Yes, thank you.

Operator

Your next question comes from the line of Donald Lu of Goldman Sachs.

Donald Lu – Goldman Sachs

Hi, I have a follow up question on the IBM alliance. I remember years back that UMC had some unpleasant experience to license technology from IBM. Why would you think this time around IMB technology would be much better? And also related to that is when will UMC deploy FinFet? Would that be at 20 nanometer or at 40 nanometer?

Shih-Wei Sun

So the first question, yes, in the past, we worked with IBM many years ago. It's another technology license. It's GDP. It's a joint development program. So we sent people to New York to, sent lots of people to there to have a joint development program. And notice that's the very, very beginning of the IBM alliance.

So but through the years, I think IMB intend their leadership in R&D, their research and development I think is still world class. And UMC's trends is really in the manufacturing implementation. I think their FinFet is very competitive. And by working with them, and this time, the difference is, we license the technology. Other implementation, everything will be inside of a UMC factory in our Tainan factory. We will not send any people to IBM's facility. So that's the very big difference. So combining two company's strengths, I think is very good.

So the second question is about FinFet implementation. Today, I think almost all the companies including all the other foundries, many companies are trying to implement FinFet in the 20 nanometer back end kind of a design rule. And for foundry, we define the technology find that is for UMC, we define that technology note by the back end design.

So in other words for 20 nanometer, the back end of a rule, [inaudible] teaches at 64 nanometer. So first, we are the planner technology. And then we were under the same back end metal rule where we had FinFet technology going out. And understand, some other companies define that as a 14 or 16. But that's really the advantage, so it's really a marketing definition.

So our first generation will be 20 nanometer back end with a FinFet front end.

Donald Lu – Goldman Sachs

Okay, so that's basically in sync with other foundries announced roadmap?

Shih-Wei Sun

We believe so, and the customers are driving it.

Donald Lu – Goldman Sachs

Sure. Oh, and another question is Qualcomm recently has indicated that it would be interested in investing in manufacturing capacity. Would UMC be willing to take adequate stake if there's such a [inaudible]?

Shih-Wei Sun

I cannot make any comments on specific customer. But UMC actually did announce the [inaudible] after our general stockholders meeting, we are offering private equity placement of a 10% for UMC equity. And we are welcoming strategic partners. This is not for financial purpose, really for looking for strategic partners.

And as you know, the industry landscape is shifting aggressively now. The country is changing. The radical supply chain partnership is getting more and more important. So we very much welcome the partnership.

Donald Lu – Goldman Sachs

So the strategic investors are more like a customer or is that more a technology partner or both?

Shih-Wei Sun

Either way, we welcome them to any discussions. But it has to be helping UMC strategically in either technology or above and beyond the business collaboration.

Donald Lu – Goldman Sachs

And just to help us understand, I mean UMC has basically I mean for 28 nanometer, you are probably a year out, so behind more than a year maybe behind your USMC, but it's not any worse than 40 nanometer. Does that mean it's not really – I mean, is that really getting much more difficult as you from 40 to 28, 28 to 20? Or it's not really the case in terms of R&D intensity?

Shih-Wei Sun

I think as you know the new technology are much more difficult. And today, the industry technology is Intel. They are ahead of anybody by a large distance I think. If you consider FinFet, they are having FinFet product [inaudible] at 22 nanometer today compared products out of that. And everybody else, FinFet is quite a few years behind them. So on technology, that's one of the reasons why we are also collaborating with IBM on the FinFet licensing. And so it's yes, just how much behind of Intel.

Donald Lu – Goldman Sachs

If that's the case, is there let's say a minimum [inaudible] or capacity requirement for UMC to let's say still maintain 5% ROE for a new note? In other ways, more like a break even in your capacity certain scale you would need at 40, 28, 20 nanometer?

Shih-Wei Sun

I think we should be fine. I think today, it's very clear down to 20 nanometer FinFet, we are fine. And there's a new note, I think the capital intensities are high. And we expect the ASB will be high also. Not too many companies can offer this, so the overall supply chain profit and the risk distribution should be reasonable.

But beyond that for example, 10 nanometer, we see UV in the 450, that's a different story. But down to I think 20 nanometer, FinFet will last a long time. In the foreseeable future, I think we are fine.

Donald Lu – Goldman Sachs

Right, thank you.

Shih-Wei Sun

Thank you.

Operator

And our final question comes from the line of Richard Cload of Pioneer.

Richard Cload – Pioneer

Hi, just a follow up on 20, 80. Beyond the tape outs, is there anything you consider say to give us some confidence in terms of the ramp? I know in the past, you've worked on polyscion, and so you're quite comfortable with that process. But there seems to be a lot of debate in the market in terms of delivering on your 28 strategies.

Shih-Wei Sun

Your question on the high part of the 28 nanometer?

Richard Cload – Pioneer

No, the polyscion.

Shih-Wei Sun

Polyscion, I mentioned earlier, so internally, we are targeting 5% of our revenue by the end of this year from polyscion 28 nanometer.

Richard Cload – Pioneer

Beyond the 5% that you've had for a while and the take out number, is there anything in between that you can give us to give us more comfort now that we are starting to get closer to that sales target in terms of yield improvements, in terms of the capacity such as installation, anything like that?

Shih-Wei Sun

So far designing customers, the yield is quite encouraging. And with some other programs I mentioned earlier, we are working hard on the parametric matching and soft year improvement. We're working there, and it's a tedious series of matching program between the process and design.

Richard Cload – Pioneer

Okay, but everything is on track in terms of what you were thinking in line with your targets?

Shih-Wei Sun

Yes, I think so.

Richard Cload – Pioneer

Great, thank you.

Shih-Wei Sun

Thank you.

Operator

At this time, I would like to turn the call back over to management.

Shih-Wei Sun

Thank you again for your interest in UMC. Please feel free to contact directly if you have any additional questions. Now operator, back to you.

Operator

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 investor events section. You may now disconnect. Good bye.

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