Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to Semiconductor Manufacturing International Corporation's First Quarter 2019 Webcast Conference Call. Today's conference call is hosted by Dr. Zhao Haijun, Co-Chief Executive Officer; Dr. Liang Mong Song, Co-Chief Executive Officer; Dr. Gao Yonggang, Chief Financial Officer; and Mr. Tim Kuo, Director of Investor Relations.

Today's webcast conference call will be simultaneously streamed to the Internet at SMIC's website. [Operator Instructions] The earnings press release is available for download at www.smics.com. Webcast playback will also be available approximately 1 hour after the event.

Without further ado, I would like to introduce to you Mr. Tim Kuo, Director of Investor Relations, for the cautionary statement.

[Tim Kuo, executive]

Good morning, and good evening. Welcome to SMIC's First Quarter 2019 Earnings Webcast Conference Call. Today, our CFO, Dr. Gao, will highlight our financial performance and give guidance for the next quarter. And then our Co-CEOs, Dr. Zhao and Dr. Liang, will provide some business commentary. This will be followed by our Q&A session. As usual, our call will be approximately 60 minutes in length.

The earnings press release and financial presentation are available for you to download at www.smics.com under Investor Relations in the IR Calendar section.

Let me also remind you that the presentation we'll be making today includes forward-looking statements. These statements and other comments are not guarantees of future performance but represent the company's estimates and are subject to risk and uncertainty. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings and submissions with the U.S. Securities and Exchange Commission and The Hong Kong Stock Exchange Limited, including our annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 30, 2019.

During the call, we will make reference to financial measures that do not conform to generally accepted accounting principles. These measures may be calculated differently than similar non-GAAP data presented by other companies. Please refer to the tables in our press release for a reconciliation of GAAP to the non-GAAP numbers we will be discussing. Please note that all currency figures are in U.S. dollars unless otherwise stated.

I will now hand the call to our CFO, Dr. Gao, for financial highlights.

[Yonggang Gao, executive]

Thank you, Tim. Greetings to all our listeners. First, I will highlight our first quarter results and give the second quarter 2019 guidance.

In the first quarter 2019, our revenue was $669 million, a decrease of 15% quarter-over-quarter mainly due to a decrease in wafer shipment and product mix change in the first quarter. Gross margin was 18.2%, an increase compared to 17% in the previous quarter but lower than the guided 20% to 22% mainly due to the inventory and production situation in the first quarter. Non-GAAP operating expenses were $202 million. Profit for the period attributable to SMIC was $12 million, while noncontrolling interests were $12 million debited from SMIC's attributable profit mainly due to currency exchange gain from RMB appreciation for our Shanghai joint venture.

Moving to the balance sheet. As of the end of the first quarter, cash on hand, including financial assets, were close to $3.9 billion. Gross debt-to-equity ratio was 41%, and net debt-to-equity ratio was minus 3%. In terms of cash flow, we generated $166 million of cash from operating activities in the first quarter.

Now looking ahead into the second quarter of 2019. Our revenue is guided to be up 17% to 19% quarter-over-quarter mainly due to overall recovery of demand. Gross margin is expected to range from 18% to 20%. Non-GAAP operating expenses were expected to range from $269 million to $273 million. Noncontrolling interests of our majority-owned subsidiaries are expected to range from positive $34 million to positive $46 million, which are losses to be borne by noncontrolling interests.

We elect to reach the planned 2019 CapEx for foundry operations of approximately $2.1 billion mainly for the equipment and the facility in our majority-owned Shanghai 12-inch fab and FinFET R&D line. The planned 2019 CapEx for non-foundry operations is approximately $106 million. Our planned 2019 G&A is approximately $1.16 billion. Our 2019 gross margin is expected to be in the range of high teens to 20s.

I will now hand the call over to our Co-CEO, Haijun, for general remarks.

[Haijun Zhao, executive]

Thank you, Yonggang. Thank you all for joining us on today's telephone call. Today, I will begin by highlighting the results of our first quarter. Then I will update you on our capacity plans, our near-term outlook, the market situation and our platform strategy.

To summarize our first quarter results, it was a seasonal and down quarter in term of revenue. But with the internal efforts of cost control, our profit margin gradually improved. Our first quarter revenue decreased by 15.1% quarter-over-quarter due to low seasonality and soft demand. To give you more color on this sales trend, our revenue from communication, consumer and computer segment applications respectively declined 18.3%, 14% and 32.3% sequentially. These drops were a general decline across the board as our customers adjusted their inventory levels.

From a geographical viewpoint, revenue from our customers for the quarter in North America and China declined sequentially 13.5% and 20.4%, respectively, from the broad industry slowdown, while revenue from our Eurasia customers actually increased by 8.5% due to the introduction of new product incremental revenues. I would like to take the time to commend our team on their good efforts to diversify our technology portfolio offerings and win the trust of our new customers.

Meanwhile, our gross margin increased to 18.1% in first quarter compared to 17% in fourth quarter last year, an increase of 1.1 percentage as a result of the product mix and the inventory situations. Although it was a down quarter, we were able to maintain the utilization of our fabs at 89.2% compared to 89.9% in fourth quarter last year as we have seen the return in confidence and order momentum from our customers.

Our operation profit grew from a loss of 41%, meaning in fourth quarter last year, to a gain of $23 million in first quarter this year. Likewise, our consolidated net profit from the period doubled quarter-over-quarter from USD 10.9 million to USD 23.2 million. And our EBITDA grew 22.1% quarter-over-quarter to an EBITDA margin of 48.2%. We've improved our profit during the quarter by enhancing our product mix and by using cost-controlling efforts, resulting in a reduction in spending.

Our capacity at the end of the first quarter was 459,000 wafers per month, 8-inch equivalent, compared to 451,000 as we adjusted capacity in our fully owned Beijing fab. We maintained our foundry CapEx plan of USD 2.1 billion, which is mainly for the purchasing of the equipment and the facility of our Shanghai joint venture for FinFET lines. In first quarter, we already extended USD 443 million, which leaves us with a remainder of $1.7 billion this year. The capacity is getting tight in many of our mature facilities as our mature platform develops.

During Q2, we disclosed an agreement for the sales of our majority stake in LFoundry Italy. We had acquired 70% of the LFoundry shares for the price of EUR 49 -- EUR 49 million in 2016. We are now selling the stake for the amount of USD 112.8 million, booking a disposal gain of USD 77 million, which should be reflected in our -- in other revenue -- other income in second quarter. This was a strategic sales for SMIC as we seek to centralize our manufacturing in China. The result of this sale is profitable income and long-term improved profitability structure. Furthermore, we have already diversified our customer base to include auto-related applications such as CMOS image sensors and memories and BCD power devices.

Looking at 2019, the first quarter seems to be the bottom for us as the customers are gaining confidence and restocking their inventories. The second quarter is guided to be better than the first quarter with a strong rebound. And with our current outlook, we believe second half of this year should be better than the first half.

Q2 growth will be partially driven by new incremental revenues from 55-nanometer loading and mobile applications such as image -- CMOS image sensor processors, RF-related applications as well as general recovery across the board from handset, tablet, other consumer electronics and connectivity. Our mature nodes fab utilizations are in a very healthy state.

Despite a general decline from the seasonality in the first quarter, certain specialty applications continued to maintain a good demand and even grow. We have built up and reached and completed specialty platforms with a solid customer base and a sufficient market demand. Our platforms include analog power, CMOS RF for IoT, CMOS image sensor, IFP, fingerprint sensors, specialty memory and microcontrollers. Our wafer revenue from analog power, CIS and fingerprint contributed almost 40% in first quarter and had grown 6.5% quarter-over-quarter and 14% year-over-year.

Our analog power platforms include technologies like BCD, [ REED ] and wireless charging. Analog power continues to be an important revenue driver for us. Our CMOS RF platform is aggressively growing in Internet of Things, consumer markets, including smart applications, wearables and other connectable smart electronics.

Our fingerprint sensor platforms also continues to be one of the most camera sensitive, and it includes biometric under-glass solutions. We have increased our share in fingerprint sensors this year and have positioned ourselves as a top player in the sector.

Our specialty memory platforms, which includes standalone NOR Flash and standalone NAND Flash, will begin to see restocking throughout this year. During 2019, we will see an increase of shipments of 28-nanometer high-KC+, which will be a majority of our 28-nanometer output. We have engaged with our customers and are diversifying our technology offerings. We'll work hard to meet the requirements of strategic customers. Meanwhile, we do not plan to expand in short term the capacity and work to maintain an efficient and a cost-effective production line.

To conclude, we continue to work hard to build up comprehensive, mature technology solutions and strong strategic long-term relations with our customers. We continue to strengthen our position as the key players in the China semiconductor industry and work hard to improve our competitiveness. We aim to build values for our stockholders in the long term.

Thank you for your continued support. I will now turn the call over to our Co-CEO, Mong Song, for further comments.

[Mong Song Liang, executive]

Thank you, Haijun. Thank you all for joining us today on our earnings call. At this stage, I catch a cold, but I will try my best to complete my duty this morning. Okay.

I would like to take this opportunity to share some details on our current progress on FinFET R&D and business development. Our advanced technology and research and development is on track and progressing smoothly. I'm proud to say that our FinFET development continues to advance faster than the development of our previous technologies. We are seeing our 14-nanometer is rapidly rising to meet the customers' requirements. We know that we have a handful of decent projects which have been verified through multi-project wafers, also called MPWs, after proving functionality and performance of our customers' 14-nanometer design on MPWs.

Many of these designs are ready to develop, to add our 12-nanometer, which provides enhanced performance, power and die size, and have more customer project engagements in the pipeline. Our 12-nanometer process development is complete and now under customer verification. Meanwhile, we are expecting to see rich production of 12-nanometer around the end of the 2019.

Our team has been working to both accelerate and strengthen our technology development. We have built a robust foundation on FinFET and R&D execution. And as a result, our N-plus-1 technology development is progressing much faster than previous FinFET nodes. Our N-plus-1 technology is on track with rapid progress on development, while our device [ and ear ] demonstrated competitive performance. Compared to the previous node, [ ears ] are climbing at a rate surpassing the previous node [indiscernible]. Meanwhile, we are closely working with customers for potential engagement opportunities.

Besides the smooth R&D progress, we are also working diligently on necessary preparation of providing comprehensive service and advanced node manufacturing. We are developing wide range platforms, conducting multiple generations of FinFET research and development and building complete and robust libraries.

Our in-house FinFET mask making is ready all the way down to N-plus-1. In addition, we have already completed the construction of our new Shanghai advanced fab in the first quarter of 2019. We are now undergoing capacity installation. This marks an important milestone for us now that we have built the advanced technology foundation to move into production. We are now marching ahead with FinFET technology. This represents one big step for SMIC.

Our new FinFET fab will be the most fully automated, most artificially intelligent, effective and safe fab at SMIC. It will be the most advanced 14-nanometer and beyond semiconductor technology R&D manufacturing space in Mainland China. This will be [ placed ] under the highest standard of quality, benchmarked against industry leaders. At the same time, we are working closely with customers to provide advanced node capacity to meet their production demand.

To best serve our customers, we are expanding our FinFET product portfolio with various applications under development. We will expand our portfolio to address a variety of applications including communications, high-performance computing, consumer, cryptocurrency and others. Meanwhile, mid-end smartphone application processors and other consumer products are migrating from 20-nanometer to 14- and 12-nanometer.

Furthermore, growing FinFET demands for mobile and wireless connectivity is stemming from the launch of 5G network globally. SMIC had built strong relationships with customers who had a solid footing in communications and networking market. Overall, we are building up momentum and stronger partnership as we accelerate our technology and prove our technological capability.

Furthermore, we are working to provide our customers with best-of-class comprehensive solutions to be the preferred foundry partner in China. We will prepare ourselves to be ready for rapid transition in customer technology migration to face the ever-changing semiconductor industry environment. We thank you for your support as we work to deliver on our commitments to bringing SMIC to the next level.

Thank you for joining us today. I will now hand the call back to Tim for the Q&A session of this call.

[Tim Kuo, executive]

Thank you, Dr. Liang, Dr. Zhao and Dr. Gao. Today's Q&A will be hosted by our Co-CEOs, Dr. Zhao and Dr. Liang; and our CFO, Dr. Gao. I would now like to open up the call for Q&A. [Operator Instructions] Operator, please assist.

[Operator]

[Operator Instructions] Your first question comes from the line of Randy Abrams from Credit Suisse.

[Randy Abrams, analyst]

I wanted to ask the first question on the technology mix. In first quarter, most of the revenue fall-off looks like it came from 28, 40, 65. Could you talk about in second quarter if that's the area driving most of the improvement? And on the other side, the 8-inch held firm. And I think you mentioned some areas getting tight. If you could talk about your plans to add additional capacity and if you have further headroom to grow the 8-inch business or you're running up against capacity constraints on the 8-inch side.

[Haijun Zhao, executive]

Randy, thank you for the questions. Basically, the first quarter, like the industry is seasonality because in the first quarter last year, majority of the customers in the industry got uncertainties about the future. They lowered their inventory demand. So you see every company saw the same thing. And because the inventory are running low, everyone in the industry started to see the rush orders, especially for SMIC, simply because we have the diversities. And quite many small, medium-sized customers, they are very quick to the market demand. And we see the recovery across but primarily come from the BCDs and the CMOS image sensors, IFPs and the CMOS RF stand-alone memory, consumer-related, mobile phone-related and communication-related.

And 28-nanometer definitely, we see the rebound and linearly, I should say this way, similar to the other technology nodes and different segmentations of the markets. But for 28-nanometer, SMIC had been running the full capacity there. We do not have the intention to expand capacity quickly. Overall, in the world, 28-nanometer capacity has been overbuilt. And we'll wait to see the reasonable market balance for the capacity and the demand.

And for the 65- and 55-nanometer nodes, that's the most hotspot at this moment. We are running short capacity, and we are trying our best to squeeze out kind of more efficiency of the equipment with our capacity to meet the customer request.

And for the 8-inch, we have been running even for the lowest season of the first quarter and last quarter, before first quarter, and we have been running at full capacity in SMIC's 8-inch. And for the 0.8-micron, 0.15-micron, mainly running the BCD, analog power, CMOS image sensor, fingerprint, these kind of applications, they are very sensitive to market. But because we have been positioned in the area as the major player for many years, so we are in a very good situation.

And to answer your questions that -- from these points, we saw that and we have seen that and this healthy trend will continue in the second quarter and the third quarter.

[Randy Abrams, analyst]

Okay. And a follow-up to that first question, just maybe 2 parts. The 8-inch, since it's tight, I guess, the incremental capacity maybe would add to -- if you need to, to squeeze out more capacity. And from the utilization pickup, it looks like a lot of that wafer started to happen because you had the high utilization in first quarter. Are you continuing to see the utilization pick up as we go through second quarter, I guess, suggesting third quarter another continued decent pickup or maybe a bit of uncertainty, it might be early because of the trade war kind of coming back in focus again?

[Haijun Zhao, executive]

Well, 8-inch, even last year, we have been experiencing the uncertainties and the international [indiscernible] type of situation. Even for that kind of situation, we have been running 8-inch in full capacity simply because SMIC has been built up with the capacity and with a lot of diversified platforms for different products. For example, just now I already mentioned the fingerprint, the CIS and MCU and analog power.

And we have been managing the complexity of the customer base and different requests for many years, and we do not rely on single customers. And that is why even though the market is fluctuating, we'll still be able to maintain how they're loading. At this moment, just I already said, we are under capacity for the demand. And visibility into second quarter and third quarter, definitely we'll be in full loading station.

[Randy Abrams, analyst]

Okay. Yes. I'll take the rest off-line, but the last question I wanted to ask is on this 14 and 12 or how you're planning FinFET. Are customers now with the 12-nanometer option risk production and towards the end of this year starting to shift their focus and -- or even wait for the 12 sort of ramp on that node? Or how do you see the segmentation in customer demand between 16 or if more customers are waiting for 12?

[Mong Song Liang, executive]

I think that's a very good question. Both 14 and 12, they all have customers' base, okay? 14-nanometer, they are migrating from 28. For example, like 5G's application and RF. And they were migrated from 28, using the 14. But for mid-end mobile processes, application process, they will tend to use 12. And some auto application also tend to use 12. So we are preparing both technology to serve our -- to grow with our customer demands.

[Randy Abrams, analyst]

Okay. And can you give a rough frame, I guess, for next year, if there's a way to think on revenue? If it starts to ramp up, it will be like single-digit percent of revenue next year. If you can forecast it out at this stage.

[Mong Song Liang, executive]

That's a million-dollar question. I also think of that every day, okay? But to be honest to you, it's a little bit early to give you the exact number on that questions. Yes.

[Operator]

Your next question comes from the line of Leping Huang from CICC.

[Leping Huang, analyst]

So my first question is about the second half, the outlook. So I think you mentioned that the -- you said that second half should be better than first half. So what's the reason? Can you share some color on what will be the incremental demand or the confidence behind it? Or which node will be the new -- will the high -- can I assume that the 28-nanometer process will have the high utilization rate?

[Haijun Zhao, executive]

Leping, nice to have your questions. Basically, we see it this way. This moment, we have the rush orders to restock the inventories simply because first quarter last year, the whole industry and the people were worried, pessimistic about the future. So they lowered the inventory. So they do not take the wafers, and now they rush orders just to fill up the inventory to a healthy level. And we see the rebound, the overall demand in the whole world, quite well maintained for BCD, CMOS RF, standalone and specialty NOR Flash, NAND Flash, analog power, CIS, IFP. For these kind of consumer and communication applicants -- applications, usage type of ICs are in a very healthy situation in the whole world.

Actually, I should emphasize a little bit here that for these kind of applications, they do not very much depend on the technology nodes. For example, for fingerprint, even though everybody is running 0.15 to 0.18-micron, but we can run it in both 8-inch and 12-inch. And similarly for the set-top box, we can run it in 14-nanometer and also run it in 28-nanometer. And we run in both 28 high-KC and also high-KC+.

And my point for BCD power devices, the applications run from 0.18, 0.15, 0.13 and 19-nanometer, 8-inch, 12-inch. So my point is when the market is running in a healthy mood on the similar applications, their demand for different usage, they are running from 8-inch to 12-inch and in different nodes. And currently, we are catering to customer demands by product applications inside of technology nodes.

And to come back to the question on 28-nanometer, we are running at full capacity. For 28-nanometer, we are running 24-nanometer NAND Flash, high-KC and high-KC+ 28-nanometer for the different applications. And for the [ portion ], we can now fully satisfy customer's requirement, meet the customer requirements, and we are using our 14-nanometer to do the similar type of products.

[Leping Huang, analyst]

So when you talk with your customers, so you think your customers are mainly in inventory restocking stage? Or do you worry that they also do the inventory destocking again? Because the cycle is so short these days. Yes.

[Haijun Zhao, executive]

Definitely. Definitely depends on different customers' momentum. Some customers are very cautious. They may rush in, rush out. Very seasonal, very dynamic. And some other customers are very -- they are the industry leaders. So they know how much they need to restock. And we see both. Because the diversification of setting up of customer base and the platforms currently, we're balancing this kind of demands and make sure that we are running full loading stage.

[Leping Huang, analyst]

Okay. The second question is about the JCET. So I noticed that Dr. Gao is appointed as the Board of Director of the JCET. So are there any change in your relation between JCET and SMIC in the future?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

This is Tim. Let me translate.

[Interpreted] So for SMIC, we treat JCET as a long-term strategic investment. This is the same. Just because there is a new board member coming out for this new term, but for SMIC, we still sit for 2 seats in this board. So the situation is actually the same. So we treat JCET again as the long-term strategic partner on one of the collaborative projects. So we anticipate more stronger relationship on that basis. Thank you on that.

[Operator]

Your next question comes from the line of Peter Chan from CIMB.

[Yiqun Chan, analyst]

My first question would be earlier, you're talking about the product migrating from the 28-nanometer to 14-nanometer. Could you provide more details? What are the main products on the first wave? And what did the schedule look like for that migration?

[Mong Song Liang, executive]

There are -- a series of products will be migrated from 28 to the next generation. For the 5G application, sub-6 gigahertz, those type of transceiver/receiver will be the first wave, migrate from 28 RF to the 14 RF. And across, they are consumer product like set-top box, [indiscernible] AI, IoT. Those type of device are also migrating from 28 to 14. And also, we look at our customers' product road map that probably happened at end of the year to the beginning of the next year time frame.

[Yiqun Chan, analyst]

Okay. The other question, sir, you were saying the mask shops are capable of doing the N-plus-1 node mask. May I interpret that N-plus-1 as the 7-nanometer?

[Mong Song Liang, executive]

That I will separate into the 2 questions, okay? First thing is what is N-plus-1, okay? I believe you probably would like to ask that kind of question. Our N-plus-1 is defined, our technology node basically defined by the PPAC, power, performance, area and cost. Cost, we use it as a mask count, as an index, okay? For the N-plus-1, we refer to previous node, our 12. 14 is the [indiscernible] phase out and the 12-nanometer. You compare with 12-nanometer N-plus-1 in performance, we enhance 15%. Power will reduce 35%. And SoC, SoC chip, area will reduce 15%. And we use that to define N-plus-1, okay?

Then back to your original question about our mask capability. In fact, that mask capability, the N-plus-1, N-plus-2, N-plus-3, those capability, we all build it using the newly purchased [indiscernible] right. So today, we will just tell you our capability down to the N-plus-1 because our customer demand is at N-plus-1. But we do have capability to do N-plus-2, N-plus-3 as well.

[Yiqun Chan, analyst]

Okay. Just one follow-up to that, my last question. The industry is facing the challenge, the EUV, the tool. And one of the problem -- actually, many problem probably is the vertical for the mask. There seems like there's no very effective solution yet that can be adopted by either the internal mask shop or external mask vendor. So sooner or later, as SMIC are migrating to the EUV process, that may be a challenge that the SMIC has to deal with. Any comment on the progress of that particular technology challenge?

[Mong Song Liang, executive]

I really appreciate your comments on that. The EUV project you referred is still on the paperwork stage, okay, so we haven't had any activity on the EUV yet.

[Operator]

Your next question comes from the line of Szeho Ng from China Renaissance.

[Szeho Ng, analyst]

The first question, could you provide us an update in 2019 sales guidance, especially after the exit of the LFoundry?

[Haijun Zhao, executive]

Szeho, for the guidance this way, basically, we already have the news release. And this kind of business transaction will be completed by the end of second quarter. So for the second quarter, the business still got into -- LFoundry into SMIC's forecast. Just now we already gave the guidance for the third -- second quarter, and that portion are already there.

And for the second half this year, our forecast had excluded LFoundry's contribution. So even with today's kind of change, we still target a flat growth year-over-year for our annual and excluding the second half of LFoundry's contribution. And for the gross margin, we're still targeting the high teens to 20% type of range.

[Szeho Ng, analyst]

Okay. Good. So I interpret that the business outlook is actually improving compared with actually 3 months ago because at that time, you're still targeting flat growth for the foundry business. But now you're sticking to that guidance even without the LFoundry contribution in the second half.

[Haijun Zhao, executive]

LFoundry, we have been running there. But LFoundry, they do not contribute too much to our gross margin. And for the revenue part, the first half year is still there. And the second half, we already excluded the LFoundry's contribution. And for SMIC

I'll give you one additional point. It's that for last year, we have been running almost at full capacity, some 94%, 95% type of capacity utilization. For this year, the first quarter is at the bottom. And for the remaining year, we have been -- we are running at this moment full capacity stage excluding the R&D usage. And so until the end of this year, second half, more or less, we believe if we do not have a big change in our maturity capacity, we just target a flat type of growth of revenue.

[Szeho Ng, analyst]

Okay. All right. And my second question, could you provide some update regarding the time line for EUV adoption? And also, how does SMIC build the SOI market? Yes. And that's my second question.

[Haijun Zhao, executive]

I believe Dr. Liang just now already gave the comment that SMIC are just doing paperwork at this stage. So no further comments on that.

[Operator]

Your next question comes from the line of Rick Hsu from Daiwa.

[Rick Hsu, analyst]

So the first one is about the number for your first quarter OpEx because your OpEx actually finish below USD 100 million as compared with your previous guidance of about USD 250 million. So what is the reason behind that big gap? How much subsidies did you guys actually received from the government for first quarter?

[Haijun Zhao, executive]

So yes, thank you for the question. Basically, we should say this way. And we just now gave the -- some comments on the difference between our guidance and the actual results for this gross margin things. And we adjust the inventory values. That means some customers, they delayed their shipments. So this kind of inventory actually changed from the -- changed across the quarters.

And the second impact come from the R&D activities. And just now, Dr. Gao already mentioned that for that portion, the OpEx for R&D portion, the first quarter, we make certain change. So the total value -- volume and value showed up in the first quarter, kind of slowed down. And that also impacted gross margin. But for the second quarter currently, we already settled down. Just now, we mentioned the inventory things. And in the meantime, we already phased our engineering activities. So we believe the second quarter won't be that much fluctuations. But we give the guidance for second quarter for the gross margin. It's similar to our first quarter's actual results.

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

This is Tim. So let me translate on that.

[Interpreted] So Rick asked about the OpEx, why there is a big difference in first quarter. So we think that the differences on OpEx is mainly on the control of our R&D expenses in the first quarter.

So for the R&D funding, actually, according to the rules, a lot of them are actually back-end loaded. Once you have completed the project, then you can apply for the funding. That's why we have seen, in the first quarter, the R&D funding is with substantial increase in the first quarter.

So based on that situation, as we mentioned, these projects are mostly back-end loaded. So for the whole year, R&D funding is actually subject to how many projects we can complete for the whole year.

[Rick Hsu, analyst]

Okay. That's very clear. The second question is about your 28-nanometer. It's only 3% of your revenue contribution in Q1. But I think Yonggang said that it's going to be fully loaded soon because there's an order coming back in second -- starting from second quarter. So can you give some more idea about how we're going to see the revenue contribution trend in the next few quarters on 28-nanometer?

[Haijun Zhao, executive]

For 28-nanometer, we have been running 2 small-volume productions in both Shanghai and Beijing, and now we consolidate them into one production line in Beijing. And we are running full capacity for 28 setting up. But it's a slow migration. And at the beginning, we're running combined 28 PolySiON products and High-K Metal Gate products. Now we consolidated to run full loading of High-K production line. And I believe the percentage were getting higher but not that much because our total revenue base are getting higher. Whatever you saw in the first quarter mainly come from USD 660 million type of base revenue. When we got 800 -- more than USD 800 million revenue, even though we have higher 28-nanometer, the percentage may not be getting higher.

[Rick Hsu, analyst]

Okay. Fair enough. Good. Can I just have one quick follow-up? Because you talked about the stake sale, the LFoundry. And can you remind me the number? How much is the [ non-op ] gain you guys are going to receive in the second quarter from this LFoundry sale?

[Haijun Zhao, executive]

We haven't closed the deal. We need to wait until the end of second quarter. But the forecast gain is USD 77 million.

[Rick Hsu, analyst]

USD 77 million.

[Operator]

Your next question comes from the line of Sebastian Hou from CLSA.

[Sebastian Hou, analyst]

My first question is to follow up on the 14-nanometer that the -- do you -- what's your feeling like in terms of the production ramp of this node compared to 28-nanometer? And in terms of the -- in 2 years from now, how do you see the capacity and wafer output on 14-nanometer compared to 28? Would it be the bigger TAM for you?

[Mong Song Liang, executive]

Okay. The 14-nanometer production ramping, we will be much more cautious than 28-nanometer. And there are also difference between 28 and 14, okay? The 28-nanometer, the industry is at full capacity. The capacity is overloaded, as described by Haijun. 14-nanometer, we consider this is also much bigger node with - for a variety of applications. But because of the lower ASP, so we will have more cautious on building FinFET capacity on 14 and 12, and we will try to build more higher capacity using N-plus-1 and following technology nodes. So in other words, we will have more cautious capacity building strategy than the previous nodes, okay?

[Sebastian Hou, analyst]

And just one follow-up on this one is that the more cautious attitude toward 14 is because of the lesson we learned from 28 or it's just because of the economy.

[Mong Song Liang, executive]

I think it's probably more on -- not on economy, okay? Probably more on our customer base, okay? We build the technology, then we must also expand our customer base. So we are at -- right now, we are at this stage of engaging with a variety of the applications. So it's a little bit earlier to talk about our capacity building plan at this moment.

[Sebastian Hou, analyst]

Okay. Okay. And your earlier comments seem to suggest that you're more positive about the overall bigger opportunity in N-plus-1 compared to 14 and 12 combined.

[Mong Song Liang, executive]

Right. Yes.

[Sebastian Hou, analyst]

Any -- some initial estimate on the time line for N-plus-1 node in terms of the risk production by when or mass production by when?

[Mong Song Liang, executive]

Okay. As I mentioned earlier, the N-plus-1, we are at the stage of discussing with the potential customers. So it will be a little bit early to tell you when N-plus-1 will be in a risk production stage at this moment.

[Sebastian Hou, analyst]

Okay. That's fair. My second question is more on the financial side. So maybe more for CFO. Is that -- I noticed the second quarter guidance, the revenue is up pretty nicely, high teens, but the gross margin seems to just like up a little bit or maybe flat. So the -- presumably, it looks like the utilization rate is -- on 12-inch side will be improving a lot. But it's just -- I'm just wondering what's the -- what's causing -- what's preventing the gross profit margin from getting higher in your second quarter guidance?

[Yonggang Gao, executive]

[Foreign Language]

[Tim Kuo, executive]

[Interpreted] So when we compare to the similar time line of last year 2018, actually our gross margin is improving.

So when we estimate the gross margin for our second quarter, it's in the range of 18% to 20%. I think that's a pretty reasonable estimate.

So actually, when we foresee the sales momentum and orders momentum, we would anticipate a more favorable margin increase.

But for the full year of 2019, we still target the high teens to 20% gross margin.

[Haijun Zhao, executive]

Okay. I can give the additional points on this, our gross margin things. And basically, let me say this way. For the mature technologies and the mature fabs like Shanghai, Beijing, 12-inch first fab and Tianjin fab, [ it's factored ]. They have been running and at the average or above average performance of this kind of gross margins.

But for the past couple of years, SMIC has been spending quite a lot of CapEx building up new capacities, especially 12-inch for 14-nanometer and 28-nanometer. This kind of fabs are running in full depreciation. And in the meantime, we are running at full capacity. So the balancing points between the mature fully depreciated fab and the brand-new fab running in full capacity. And in a ramp-up stage, that's the balancing point. At this moment, we are running the setting up. And I believe that with the learning curve and the competitive base on market, 18% to 20%, that's the forecast we can give at this moment.

[Operator]

I would now like to hand the call back to IR Director, Tim Kuo, for closing remarks.

[Tim Kuo, executive]

In closing, we would like to thank everyone who participated in today's call, and again, thank all of you for your trust and support for SMIC. Thank you very much.

[Operator]

This is the end of SMIC's First Quarter Earnings Conference Call. We thank you for joining us today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]