United Microelectronics Corp

TWSE:2303

Earnings Call Analysis

UMC Navigates Headwinds with Steady Outlook

UMC experienced a 3.7% quarterly revenue drop to TWD 54.9 billion and 20% year-over-year decrease. Q4 gross margin fell to 32.4%, and EPS reached TWD 1.06. The company's yearly gross margin was 34.9%, down from 45.1% due to lower capacity utilization, which resulted in a 27% decline in wafer shipment. Additionally, the book value per share was close to TWD 29 at year-end, with cash on hand around TWD 132 billion. Despite macroeconomic challenges reducing the overall fab utilization rate to 66%, UMC's 22/28 nanometer segment claimed 36% of their Q4 wafer revenue. Looking ahead, Q1 2024 shows a mild increase in overall wafer demand, estimated 2%-3% growth in shipments, 30% gross margins, and low 60% capacity utilization. The company committed to a USD 3.3 billion CapEx for 2024 to enhance its 12-nanometer FinFET technology and expand capacity.

UMC's Fourth Quarter in 2023: A Macro-Economic Challenge Met with Resilience

In the final quarter of 2023, UMC encountered headwinds characteristic of a tumultuous macro-economic climate. Elevated by the challenges of a prolonged inventory adjustment within the semiconductor industry, the company saw a 3.7% decrease in quarterly revenues, culminating at TWD 54.9 billion. Quarter-over-quarter gross margin also nudged lower by 3.5 percentage points to 32.4%. However, the company's net income held steady at TWD 13.19 billion, translating to TWD 1.06 in earnings per ordinary share.

Yearly Financials and Key Metrics Show Pockets of Strength Amidst Declines

Examining UMC's 2023 performance through a year-over-year lens reveals a revenue reduction of approximately 20% to TWD 222 billion. This decline was primarily attributed to underutilization of capacity which saw wafer shipments nosedive by 27%. Nevertheless, the net income rate curved at a respectable 27.4%, albeit lower than the 31.3% recorded in the previous year. Overall, the annual net earnings were TWD 50.99 billion, and the earnings per share for 2023 pitched at TWD 4.93, compared to a more robust TWD 7.09 in 2022. The company remains financially sturdy, holding TWD 132 billion in cash with a book value per share nearing TWD 29.

Geography and Technology Mix Showcase Strategy in Trade Winds

Geographically, the tapestry of UMC's revenue sources sees Asia accounting for a slightly expanded 62% of total revenue, with North America trailing at 23%. A notable strategic pivot can be observed in the company's IDM (integrated device manufacturer) focus, which has burgeoned from 15% to 22%, indicative of a concerted shift in its customer base. On the technology front, UMC has crossed a threshold, with revenues from nodes of 40-nanometers and below now representing half of the total, underpinning the company's commitment to advancing its technological capabilities.

Strategizing for the Future: Capacity Expansion and Capital Expenditure Outlays

UMC's foresight in enhancing capacity is marked by plans to extend 12-inch equivalents, having already amassed over 1.2 million per quarter in available capacity. Reflecting strategic prudence, the 2024 capital expenditures are pegged at USD 3.3 billion, vested almost entirely in 12-inch capacities. This endeavor will not sway the company's cash dividend policy, emphasizing a balanced approach between growth investment and shareholder value.

Intel Collaboration: Complementing Tech Offerings and Financial Projections

On the innovation frontier, UMC has charted a new course through a 12-nanometer collaboration with Intel. The joint development will be mutually funded, thereby minimizing upfront costs for UMC and is expected to have a positive impact on the company's profit and loss statement as volumes scale up. The venture aims to bridge technology gaps and enhance the product array available to customers, with anticipated production commencement in 2027. While the company remains tight-lipped on certain operational specifics, the overarching sentiment is one of a commercial cooperation that aligns with UMC's profitability trajectory.

First Quarter of 2024: Pricing Strategy and Market Realignment

UMC approaches the first quarter of 2024 with strategic clarity, acknowledging an annual one-off pricing adjustment coupled with product mix changes. Reflecting acumen in navigating competitive markets, UMC reaffirms its stance on not engaging in price wars, choosing instead to safeguard its market position through value augmentation for its clientele. The primary focus for Q1 includes expanding the 22 and 28-nanometer businesses, catering to diverse applications. Despite softer wafer demand in automotive and industrial sectors, the company stays the course, reasserting a stable price outlook for the remainder of 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome everyone to UMC's 2023 Fourth Quarter Earnings Conference Call. [Operator Instruction] 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, www.umc.com under the Investor Relations, Investors Events section.And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

[Michael Lin, executive]

Thank you, and welcome to UMC's conference call for the fourth quarter of 2023. I'm joined by Mr. Jason Wang, the President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our President's key message to address UMC's focus and the first quarter of 2024 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com under the Investors financial section.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 the risk that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the Internet.Now I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's fourth quarter 2023 financial results.

[Chi-Tung Liu, executive]

Thank you, Michael. I'd like to go through the 4Q '23 investor conference presentation material which can be downloaded or viewed in real time from our website.Starting on Page 4, the fourth quarter of 2023. Consolidated revenue was TWD 54.96 billion, with gross margin at 32.4%. Net income attributable to the stockholder of the parent for TWD 13.2 billion. Earnings per ordinary shares were TWD 1.06 in Q4 2023.Page 5, this is the sequential performance. Revenue declined 3.7% quarter-over-quarter to TWD 54.9 billion. Gross margin rate dropped roughly 3.5 percentage point to 32.4% or TWD 17.8 billion. With a net non-operating income of TWD 2.22 billion, the net income comes to TWD 13.19 billion or EPS of TWD 1.06. This is compared to TWD 1.29 in the previous quarter of 2023.For year-over-year comparison on Page 6, revenue declined roughly by 20% year-over-year to TWD 222 billion. This is largely due to the lower capacity utilization rate. Wafer shipment declined roughly 27% year-over-year from 2022 to 2023. Gross margin rate as a result, declined from 45.1% in 2022 to 34.9% in 2023. Overall, net earnings in 2023 was TWD 50.99 billion or close to TWD 51 billion. Net income rate was 27.4% compared to 31.3% in the year of 2022. EPS, as a result, is TWD 4.93 in 2023 compared to TWD 7.09 in 2022.On Page 7, our cash on hand still around TWD 132 billion and total equity of the company has come to TWD 359.5 billion. Book value per share is close to TWD 29 per share at the end of 2023.On Page 8, starting from 2024, we have changed our ASP units as well as capacity unit to 12-inch equivalent to express the ASP number as well as the capacity number. So for the past five quarters, as you can see the trend chart here, the first three quarter was edging up and the last two quarter was relatively firm on 12-inch wafer equivalent ASP trend.So on Page 9, for the revenue breakdown by geography, Asia is getting a little bit bigger to 62% of our total revenue, and North America is about 23% of our total revenue. For year-over-year comparison, on Page 10, Asia actually declined from 61% in 2022 to 57% in 2023. And the rest of the three main regions didn't change much.On Page 11, IDM continue to increase [indiscernible] to 22% and fabless is around 78% in Q4 of 2023. On a year-over-year comparison on Page 12, the increase in IDM is more notable from 15% in 2022 to 2023 of 22%. And in terms of application breakdown on Page 13, communication remained the biggest of 47%, and the spread among different applications didn't change much quarter-over-quarter. As for year-over-year change, computer declined from 15% in 2022 to 11% in 2023. We continue to see bigger exposure to other segment, which is mostly automotive and industrial, around 20% compared to 14% in the previous year.For technology breakdown, we are happy to see that revenue come from 40-nanometer and below now represents 50% of our total revenue, and this is compared to about 45% in the previous quarter and 22 and 28 is our largest share of revenue around 36% in the Q4 of '23. For the full year numbers, the trend is also similar. We see the 22/28 revenue of 31% compared to 24% in the previous year.On Page 17, as I mentioned earlier, the unit of capacity wafer also changed to 12-inch equivalent. Right now, our quarterly available capacity is a bit over 1.2 million per quarter in terms of 12-inch equivalent capacity, and we will continue to see some minor increase out of our 12A capacity, given our PC expansion is continuing.On the last page of my presentation, CapEx for 2024 is currently budget at USD 3.3 billion, with majority of that over 95% close to 12-inch capacity expansion in both Tainan and also Singapore. The above is a summary of UMC's results for Q4 2023. More details are available in the report, which has been posted on our website.I will now turn the call over to President of UMC, Mr. Jason Wang.

[Jason Wang, executive]

Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's fourth quarter results. In the fourth quarter, challenging macroeconomic conditions continue to prolong the inventory correction in the semiconductor industry as our wafer shipment decreased to 2.5% quarter-over-quarter while overall fab utilization rate slightly fell to 66%. As our Tainan 12A P6 facility continues to ramp, our 22/28 nanometer represented 36% of our Q4 wafer revenue, reflecting record high in revenue as well as percentage of the wafer sales.Overall, 2023 was a year where UMC demonstrated its financial resilience in face of a challenging external environment. We were able to achieve yearly 34.9% gross margin despite the utilization rate significantly declined in 2023. This resilience can be attributed to our relentless pursuit of technology innovation differentiation, customer synergy and stickiness enhancement and manufacturing quality excellence and cost reductions. As a result, we have improved our product mix and customer portfolio, which led ASP by single digit in 2023.Looking into the first quarter of 2024, we anticipate overall wafer demand will increase mildly. However, customer maintains a cautious approach in their inventory management. Moving forward, UMC will continue to navigate headwinds amid an increasing competitive landscape and swelling geopolitical tensions via diversified manufacturing base and differentiation in 12-inch specialty technologies. Our 12-nanometer FinFET collaboration is a step forward in advancing our strategy of pursuing cost-efficient capacity expansion and technology node advancement in continuing our commitment to customers.This effort will enable our customers to smoothly migrate to these critical new nodes and also benefit from the resiliency of an added Western footprint. We anticipate 12-nanometer FinFET collaboration will broaden our addressable market and significantly accelerate our development roadmap.Now let's move on to first quarter 2024 guidance. Our wafer shipments will increase by 2% to 3%. ASP in US dollars were decreased by 5%. Gross margins will be approximately 30%. Capacity utilization rate will be in the low 60% range. Our 2024 cash-based CapEx will be budgeted at USD 3.3 billion.That concludes my comments. Thank you all for your attention. Now we are ready for questions.

[Operator]

[Operator Instructions] And the first question will be coming from Randy Abrams, UBS.

[Randy Abrams, analyst]

I wanted to ask the first question, probably multipart because I wanted to get a few more details on the Intel partnership, which looks like a big move in a new direction. Maybe I'll run off the questions we had. First, if you could discuss funding of the CapEx, and then if there's any IP or NRU proceeds that UMC would get by supplying the technology, I'll start with those. I have a few follow-ups.

[Jason Wang, executive]

Well, I mean for the 12-nanometer collaboration with Intel, on the funding side, the development cost for the collaboration will be shared mutually. And there are some used equipment that will significantly reduce the upfront investment for both parties for this collaboration. So there's not much more to discuss in detail for the funding part. This collaboration will result positive impact to our P&L once the volume ramps up and the profit will be recognized at the time.

[Randy Abrams, analyst]

Okay. So it sounds like there's no process transfer because it's a co-development, so you'll co-fund it in R&D. And then as it ramps, how is the sales approach? Would it be each company, respectively, sells to their respective customer base, that offering? And would it be the same offering or you would focus on different parts of the market?

[Jason Wang, executive]

Well, first of all, the 12-nanometer address the gap in the node portfolio for both parties. So those 12-nanometer is the offering that we're expanding our product offering, and we will be serving our customers. And this will be a vertical cooperation between us and Intel.

[Chi-Tung Liu, executive]

So if I may add on to that. Basically, you can see this is an extension of our technology offering to our existing customers and potential customers. So coming from 28/22 from 14, and certainly, this technology roadmap will be perceived as the continuous advancement for a lot of UMC-based customers and potential customers.

[Randy Abrams, analyst]

Okay. And a question on the timeline. I think previously, you were talking about freezing the process in early 2025 and then a year to go into volume from that initial freezing. So the timeline was listed at '27. I guess, two questions. Would you still do a process in your existing Asian fabs, or is this a new focus? And would the timeline push out, or could you try to pull that development timeline in?

[Jason Wang, executive]

I mean, from our original milestone, we targeted to have the process ready by 2025 as reported in the past. And now while we joint develop with Intel to complete this development we will follow that timeline from PDK readiness from customer engagement to the production ramp, there's still going to be a 1.5 year beyond that. So now we put it to expecting shipment, I mean, the production will begin in 2027. In the meantime, we will align with our customers and to finalize the final rent schedule.

[Randy Abrams, analyst]

Okay. The last one I just have on this topic, the cost of product, I mean, would it be considered as an Intel fab, so you'd be paying a foundry fee like their manufacturing and on their line, or would you have operators, so it's -- yeah, how do you handle the transfer pricing as the cost structure is not there? How much control do you have on the process?

[Jason Wang, executive]

Well, I mean these are comprehensive cooperation details that I can't -- I'd not be able to elaborate in here. As a result, like I said, the result will be a positive impact to our P&L based on that collaboration agreement.

[Randy Abrams, analyst]

Okay. Yes, it looks like an asset-light way to do it versus at least building, I think the original plan, if you would build a line to do FinFET and one of the other fabs if this is the approach.

[Chi-Tung Liu, executive]

Right. This is truly just a commercial cooperation. The party will be able to share the cost while leveraging the expertise. So we believe this will be a good way to leverage the synergy of both parties and to accelerate to this market.

[Randy Abrams, analyst]

Okay. And I know it was a multipart. I'll just ask one other question. If you could talk about -- so just on the pricing with the first quarter, it was a 5% ASP decline. Could you talk how much is a mix, like the tech migration is moving very aggressively to 28. Is there a shift in mix involved? How much is like-for-like pricing? And just after that, because there are more concerns about the mature node, the 8-inch ongoing pressure, should we view it as a onetime reset on pricing, or do you expect we may start getting into -- as long as the fabs aren't full, and there's competition, mild price erosions, like how do you see it, I think, first, the mix versus pricing? And then from the first quarter level, how you see pricing environment?

[Chi-Tung Liu, executive]

Maybe I'll start off. So first of all, there is no change in our pricing strategy, which is in respect to the foundry market. The Q1 ASP guidance included an annual one-off pricing adjustment of 2024 as well as the change in product mix. Nevertheless, I mean, UMC is being fully aware of the market dynamics and the competition situation. And we will support our customers and we will closely monitoring the market, align with them and on appropriate pricing position to safe start and protect UMC towards our customers rather than market share.We will only support our customers in order to maintain or increase their market share in selected markets. And we have no intention to fall into a price war, often reflected in the commodity market. From a mix standpoint, although the annual one-off pricing adjustment, this will lead to a slightly lower planned ASP for Q1, and we expect this ASP will remain firm beyond Q1 '24 for the rest of the year 2024, which already fast in, including the product mix and LTA terms, for example, yes.

[Randy Abrams, analyst]

Okay. And just to clarify, in first quarter, is mix -- how is 28-nanometer doing versus the mature node? Are they coming back a little bit with shipment rebound, or is it relatively stable mix across?

[Jason Wang, executive]

Well, I mean, the overall Q1 28-nanometer loading is slightly lighter again in Q4 '23, mainly due to the seasonality effect and some urging order in Q4 '23. And our overall 22 and 28 loading continue to be resilient amid the market fluctuation. And we will also continue to grow our 22 and 28 business with our customers for the application of OLED driver, ISP, Wi-Fi SoC processor, while the further expansion of technology offering in the advanced NCU product and automotive, industrial segment. For Q1, we're experiencing a slightly lighter of the loading for 28.

[Operator]

Next one, Nicolas Baratte, Macquarie.

[Nicolas Guy Gabriel Baratte, analyst]

Last quarter, I think you mentioned some weaker demand in automobile and industrial. Is it still the case? And does that contribute to lower loading your ASP in 1Q '24?

[Jason Wang, executive]

Yes, for the Q1 on the segment side, we expect that automotive and industrial end market will continue experiencing the inventory correction. Hence, the wafer demand in automotive and industrial segment will remain soft. The communication and computer and consumer segments have stabilized for now, and the contribution will remain flattish quarter-over-quarter.

[Nicolas Guy Gabriel Baratte, analyst]

So you mentioned USD 3.3 billion CapEx in 2024, 95% in 12-inch, right? I think that's correct. This entirely include -- is it entirely 28/22 nanometer capacity increase, or is there something else?

[Jason Wang, executive]

Well, for our 2024 cash-based CapEx budget is USD 3.3 billion. Out of that, the 20% of CapEx was budgeted towards to 22 and 28 expansion in our -- the remaining expansion in P6 and the 12X, which was pushed out during the 2022 and 2023 times. This reflects our effort to managing our CapEx. Around 60% of the 2024 CapEx will be spent on the 12 IP3 infrastructure as well as the minimum tool and equipment. We expect the rent of the 12 IP3 will start at April 2025, so the infrastructure is ongoing. And we project the CapEx will peak out this year and will not impact company's cash dividend policy, as we have stated in the past, our CapEx strategy will continue to remain disciplined in ROI-driven phase and on our affordability as well where we invest towards future growth back with the customer commitment. If the markets do not rebound as expected in 2025, we will further adjust our CapEx accordingly.

[Nicolas Guy Gabriel Baratte, analyst]

Is there a change in the planned capacity of IP3 in Singapore?

[Jason Wang, executive]

I mean the P3, the 12i Singapore P3, the infrastructure at the [indiscernible]. For the infrastructure, it means the overall structure of the building and the facilities but now it is only with a very minimum to equipment.

[Operator]

Next one, Gokul Hariharan, JPMorgan.

[Gokul Hariharan, analyst]

My first question, just a follow-up on the Intel collaboration. Would you be also using the same node in some of your future fabs, the 12-nanometer node, or like, let's say, your lateral phase of expansion in Singapore? Or is that going to be all the 12-nanometer capacity will be only in the U.S. fabs of your partner?

[Jason Wang, executive]

Well, I mean, not at this point, and we'll focus on to ramp the Western footprint first. And if it comes to the market demands or the customer commitments that we were looking to the other option as well, but not at this point, no.

[Jason Wang, executive]

Okay, understood. And Jason, maybe a little bit more on the pricing front. Could you talk a little bit about what you're seeing in various parts of your portfolio, 8-inch, 28-nanometer and mature 12-inch? Are you seeing very different kind of pricing? And given your firm pricing strategy, how is your market share holding up with your key customers? Are you seeing any market share losses given all these concerns about capacity expansion in China?

[Jason Wang, executive]

I mean, in the boundary landscape, some markets are more likely to become commoditized. However, our strategy has always focused on technology differentiation that will drive our long-term growth and shift away from commoditized the market with a low entry barrier. So right now, there's still a mix of the type of product within our portfolio, and we are gradually moving away from that. We have proactively increased our effort in technology advancement, including 12-nanometer like we talked about it and 22/28. For example, we expect to see higher revenue contribution from the technology nodes such as 22/28 [indiscernible] 55-nanometer RFSOI in 2024. Beyond 2024, our broader technology offering, along with the geographically diverse manufacturing location and customer stickiness, where all of it are overall competitive. So we expect this action will reduce our exposure by half in the next couple of years and for our current commoditized product by half in the next few years, yes.

[Gokul Hariharan, analyst]

So I think a couple of years back, you had given us some numbers on specialty product mix. I think it was about 30%-35%, if I remember right, two, three years back. Is there any update in terms of how much of your product mix is now specialty and how much of it is single sourced in terms of the total business that you have?

[Jason Wang, executive]

For specialty right now is, in Q1, is in a high 50% range. So the single sourced product is actually quite high. It's higher than that. However, we also have to look in the end market competition. So some of those products also consider as the commoditized area, and we're gradually moving out from that space, yes.

[Gokul Hariharan, analyst]

Last question on how do you think about overall order visibility into the next few months? Are you starting to see customers come back, or you think the customer stance is still a little bit more cautious, given some of your other companies have been starting to talk about utilization bottoming out and growth kind of resuming? Any thoughts about how you expect growth to look like for the foundry industry this year and also for UMC?

[Jason Wang, executive]

Sure. I mean, we start off on the maybe industry. We do expect the 2024, the semi industry will grow probably to a mid-single digit year-over-year. But for foundry, we project that it will grow in the high single-digit range. And for the UMC, we will strive to grow in line with the foundry industry. Despite that, our addressable market will probably remain flattish. As far as the demand outlook, of course, we start off with the inventory situation. And although we have observed healthier inventory level in PC and smartphone market segment in Q4 '23, the customer remained cautious after the Q1 '24 restocking of the mobile applications.For the auto and industrial segment, they will likely require more time to digest the inventory and return back to normal in the second half of 2023. So overall, the visibility of 2024 is relatively limited due to macro uncertainties. And while there is a lingering inventory issue in auto and industrial segment, we are cautiously optimistic about the market demand given the PC and mobile inventory have returned to a bit healthier level in Q4 '23 already. So I think customer is behaving a little bit cautious after the Q1 restocking and we'll continue monitoring the market dynamics.

[Operator]

Next one, Bruce Lu of Goldman Sachs.

[Zheng Lu, analyst]

So first of all, I want to double check about the foundry growth you just mentioned that you talked about like the foundry is going to grow about like 10% and your addressable market is going to be flattish. I think this is meaningfully lower than what your peers were talking about 20%. Can you tell us where is the discrepancy? Why you are so much more conservative than your peers?

[Jason Wang, executive]

Well, I mean, I can't really comment on our peers because I don't know what data they're using on, but I'm sure all of us are collecting the data from both the market and our customer and different market segments. Our data shows that the 2024, on the foundry side, I mean, foundry market will probably grow to high single digits and close to 10%. And while the foundries at least within our addressable will probably stay flattish. That's what our data shows. Since I don't have our peers' information, so I can't really comment about the discrepancy.

[Zheng Lu, analyst]

The second thing is that regarding the Intel collaborations. I think can you provide us a couple milestones that we can check or follow-up because I think the key for this strategy is all about the executions, right? I mean, how can we track the execution from both parties? I mean, for example, what timeframe you can complete your process development, what kind of timeframe you can avail for tape-out, what kind of timeframe customer can get -- we can recognize some revenue or profit. Can we have some timeline for that? And also, is the collaboration only limited to 12-nanometers? What about like 10-nanometer or 7-nanometers or any advanced process development?

[Jason Wang, executive]

Well, first of all, this collaboration is focused on the 12-nanometer process. And we look at this 12-nanometer, it represents a long-term commitment and the opportunity for both parties. And as far as the future opportunity, we hope there will be, but it's probably going to be in the future. And once there is anything we're glad to report that. For the milestone, you're right, there's a very comprehensive project milestones under this joint development program. The major milestone is we like to freeze our process in 2025 and get everything ready for customer engagement after that and hopefully the pilot at '26 and the production in '27, which is aligned to what we have reported is production in '27.And hopefully, we see a meaningful revenue contribution started from year 2027. And that's probably in a very high level a milestone. There are many, many details that we understand, that we're fully aware of it. So we just have to executing it and we're putting great attention to it. We believe this collaboration actually already been mitigated by leveraging the existing manufacturing footprint without going to the complicated setup of a greenfield facility. So we have mitigated some of the risk in terms of execution. And within the rest of us, we just have to execute and report it accordingly.

[Chi-Tung Liu, executive]

Yes. And also for both Intel and UMC are listed companies, of course, this collaboration in small material, given our size relatively to Intel. So certainly, we will report the progress on quarterly basis to our stakeholders. And as Jason mentioned, once we freeze the PDK and with customer engagement, hopefully, we have some kind of customer announcement in between.

[Operator]

Next one, Charlie Chan from Morgan Stanley.

[Charlie Chan, analyst]

First of all, happy new year, and also truly congratulations for your partnership with Intel. I think this should be a win-win situation. But maybe we kind of come back with some details. First of all, it's the long-term profitability with this Intel partnership. So maybe Chi-Tung or Jason, so what was the kind of estimated kind of gross margin or IRR -- ROE compared to your own investments to be your fully owned investment? What would be the difference in terms of gross margin and ROE?

[Chi-Tung Liu, executive]

We agreed, I mean, both sides, not to touch upon these numbers because probably it's three years away. And again, the material impact for both companies are relatively different. But what we can say is all the questions you asked, we have internal pro forma or simulated numbers support our decision to go into this collaboration. And we do believe 12-nanometer is a multibillion-dollar market and currently is dominant by a few players. With the collaboration and the setup of the contribution from both sides, we think we can offer a very competitive technology 12-nanometer solutions at the Western footprint to our existing customers as well as our potential customers. So we do have high hope for this collaboration, including the P&L impact to UMC.

[Jason Wang, executive]

Yes. And Charlie, first of all, happy new year to you too. I also like to add the background of this 12-nanometer cooperation is very much aligned to our growth strategy that we have set up to do five years or five or six years ago. Our growth strategy has always been to pursue a cost-effective capacity expansion and technology advancement, to continue our commitment to our customers while enlarging our addressable market and increase our market relevance.And so, as such, we have always been exploring potential collaboration to align with our strategic objectives. So this actually fits that very well, like you don't say, there's many benefit about this 12-nanometer collaboration. And so, we set up our goal and we will execute this. And we think at the end of the day, this will be a win-win-win scenario for our customers, Intel as well as ourselves.

[Charlie Chan, analyst]

So a follow-up to that question. So I think you seem to imply the business is not just exceeding customers' migration, right? It should be also some share gain in this 12-nanometer foundry business. So since you mentioned about a win-win-win, the customers use your industry peer, right? Would you be able to provide some key process? The reason I'm asking you is that, if you add a second source foundry, you probably need to spend some upfront cost for the mask, et cetera. How do you justify that customers to use your 12-nanometer as a second source?

[Jason Wang, executive]

Well, I mean, first of all, in our view, this 12-nanometer, it is a competitive solution. And not only that, from a market standpoint, it's a long-life node that address many high-growth markets, such as the mobile communications, infrastructure and networking. Now many of the products actually just count to the 12. So they're not necessary to be a second source product. So many of the product pipeline actually arrive at this time. So we are aligning our milestone with the end market demand.Now from a competitive standpoint, this 12-nanometer process will be a comparable industrial standalone and utilize our [indiscernible] process experience and foundry know-how and as well as the Intel FinFET transistor foundation. So I think we will provide a very compelling and competitive solution to the customer.

[Charlie Chan, analyst]

And then also another question on this one. Yes, I'm wondering, you said before 2027 there is some [indiscernible] demand. Would you use your current 14-nanometer capacity in Taiwan or convert them 20-nanometer to fulfill the demand before 2027?

[Jason Wang, executive]

No, I mean, right now, we have to evaluate all options. We believe this is the best option for us, but in our primary [indiscernible] implement for the 12-nanometer production, and we expect it will have required some conversion kits and limited new tools, which is going to be more efficient than we're producing in our facility. So overall, leveraging the equipment -- existing equipment will tremendously reduce the upfront investment for this project.

[Charlie Chan, analyst]

And lastly, just on this Intel partnership, right, just two kind of logistic question. So first of all, who will be in charge of the fab operation? I saw the news today, you suggest you will run the fab, but I feel like it could be pretty challenging. I'm not sure who's going to be in charge of operation. Can you answer this one?

[Jason Wang, executive]

No. I mean, we have people that assist for the joint development on the profit development side. So yes, from operation, Intel will operate that facility.

[Charlie Chan, analyst]

Would that require additional government approval for this collaboration?

[Jason Wang, executive]

We'll file all the filing for any regulatory requirement and we will comply to that.

[Charlie Chan, analyst]

And switch gears to [indiscernible] I mean the long-term [indiscernible] is great, but back to near term. So Jason, do you think the fab utilization will have a second leg down this year? I noticed some of your customers' inventory days is running pretty low, right? So can you give us some kind of observation about the cycle recovery for this year, just quarterly [ cadence ]?

[Jason Wang, executive]

Yes. I kind of stated earlier, we're cautiously optimistic about it, the 2024. However, the visibility of 2024 is still relatively limited due to the macro uncertainties. The consumer spending, higher interest rates and inflationary pressure. So our customers remain very cautious even after the Q1 restocking that we have observed. So we're hanging in with our customers going through this turbulence. And meanwhile, our primary focus on '24 is we will continue to enhance the company's resilience to weather through this market turbulence and then embrace the market upturn. So I am cautiously optimistic about the upturn. But meanwhile, we will continue to focus on the company's resilience.

[Charlie Chan, analyst]

The last question is a financial question to Chi-Tung. So now you have the 2024 CapEx guidance, you have the full year revenue forecast. Can you give us some update about your full year depreciation growth and also your full year gross margin guidance?

[Chi-Tung Liu, executive]

Well, the depreciation estimate for 2024 is about 20% higher than that of 2023. As I mentioned, 2023 was really a trough for recent depreciation curve. So the 2024 with 20% increase is probably back to the 2021 level.

[Jason Wang, executive]

Well, I mean for the margin, we understand there is a softer market demand. So like I said, our focus is with relentless effort. And in the past year, as well as in 2024, we'll continue to improve our structural operability. And so our margin highly depends on the capacity utilization, like you know. We expect we'll gain market share in second half, which will lift our utilization rate as some of the new product will start ramping in the second half. However, we expect the depreciation expense like Chi-Tung said, will increase 20% year-over-year in 2024.

[Chi-Tung Liu, executive]

So we don't really give the full year guidance in terms of margins. Of course, we have a goal for a very longer-term structural trend for our gross margin and not the 2024 gross margin guidance.

[Charlie Chan, analyst]

So use the first quarter 30% as a benchmark, do you think full year can keep at the similar level?

[Chi-Tung Liu, executive]

Again, we don't comment on the full year on margins I think as a long-term goal, right?

[Jason Wang, executive]

Maybe I can share this with you then. We hope to stay around the midpoint of 2022 and 2023 gross margin numbers while continuing to add resilience to our profit margin.

[Chi-Tung Liu, executive]

The structural gross margin target, not for 2024.

[Jason Wang, executive]

Yes.

[Operator]

Next one Szeho Ng, Renaissance.

[Szeho Ng, analyst]

I have a question on R&D. In Q4, the numbers edged up quite a bit. Is it due to the fact that we are starting to do the 12-nano R&D activities?

[Chi-Tung Liu, executive]

Yes, of course. 12-nanometer is one of the key focus for our R&D activities. But there's also some year-end adjustments for R&D efforts. So I would say the overall R&D budget will continue to increase, but we will try to manage as a fixed number in terms of percentage of revenue.

[Szeho Ng, analyst]

But can you share with us what would be the R&D run rate going into, let's say, '24 and '25?

[Chi-Tung Liu, executive]

Sorry, say that again, please?

[Szeho Ng, analyst]

The R&D run rate into 2024 and '25, can you share with us, let's say, as a percentage?

[Chi-Tung Liu, executive]

I think the run rate will be similar to 2023.

[Szeho Ng, analyst]

And second question regarding the cash dividend policy. Would that still be based on the payout?

[Chi-Tung Liu, executive]

So as Jason mentioned, even though we may see a big CapEx in 2024, that will not affect our dividend policy. So we still intend to balance the payout ratio as well as the absolute dollar terms in terms of cash dividends.

[Szeho Ng, analyst]

And then last question regarding the partnership with Intel. Would the fab be targeting those customers serving the European and also the U.S. market primarily?

[Jason Wang, executive]

I mean the solution will be serving customer growth globally. So it's not limited to any market, no.

[Chi-Tung Liu, executive]

It's a good Western footprint for the first time for UMC's perspective.

[Szeho Ng, analyst]

Would that be biased or focused more on the overseas market than the Asia side of the market?

[Jason Wang, executive]

We're serving the customer worldwide.

[Operator]

And the next question, Brett Simpson from Arete.

[Brett Simpson, analyst]

Most of my questions have been answered, but I had a follow-up on the FinFET partnership with Intel. I mean, I guess the 3 Intel fabs in question equates to about 60,000 wafers a month capacity. Is that the rough plan we're talking about as part of this partnership? And can you just help us with the math around the CapEx assumption to convert these fabs to your process?

[Jason Wang, executive]

Well, first of all, the capacity planning, it has subject to the customer engagement. So while we refrain where the project, the 12-nanometer where we develop in that location, but it doesn't mean that the capacity numbers. We're aligned with the customer and finalize the capacity size, but the size is actually available for us to plan that accordingly. For the CapEx, like I also mentioned earlier, primarily, we'll reuse the existing equipment that will be very limited, the new tools and also some of the conversion kits required of the CapEx but the CapEx number is relatively small, yes.

[Brett Simpson, analyst]

And is Intel taking any of the capacity for internal means as part of this agreement? And then is there any CHIPS Act funding -- does this qualify for any CHIPS Act funding going forward?

[Chi-Tung Liu, executive]

We cannot speak for Intel. I think they will make their own decision. As for us, we won't do that.

[Operator]

Next question is from Gokul Hariharan, JPMorgan.

[Gokul Hariharan, analyst]

I just had one question. So Chi-Tung you mentioned the CapEx will probably peak out this year, how should we think about depreciation going forward? I think you have this 20% bump in depreciation this year. Should we expect depreciation to continue to keep growing at this kind of pace into the next couple of years as well, or is it kind of largely kind of -- this is like the big jump in depreciation that we're going to see in 2024?

[Chi-Tung Liu, executive]

Yes, we see a little bit delay impact from the peak of CapEx to depreciation. So we will probably see a peak of depreciation in year 2026, two years after that -- two years after 2024.

[Operator]

The last question, Laura Chen from Citi.

[Chia Yi Chen, analyst]

Just a follow-up on the Intel cooperation as well. Just wondering that based on your agreement with Intel, is there any like a license fee or IP transaction of the cooperation?

[Chi-Tung Liu, executive]

No, there's not.

[Chia Yi Chen, analyst]

And also, I know there's a lot of different kind of type and demand could adapt to 12-nanometers, but just wondering, do you have any priorities or your first generation of the FinFET ramp you are scheduling put into your first consideration right now?

[Chi-Tung Liu, executive]

Well, I mean, they are the customers that we're engaging with. So we will first finalize our discussion with the customer and then try to align with our development milestones. And then, hopefully, we can comfort the engagement. So we are at a very early stage of this joint development. And while we just announced it, we're already having a customer discussion, but we have not finalized it yet.

[Operator]

Ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. And now I'll turn things over to UMC Head of IR for closing remarks.

[Michael Lin, executive]

Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at www.umc.com. Have a good day.

[Operator]

Thank you. Ladies and gentlemen, that concludes our conference for 4Q '23. Thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors Events section. You may now disconnect. Thank you, and goodbye.