Semiconductor Manufacturing International Corporation Q2 2010 Earnings Call Transcript

Semiconductor Manufacturing International Corporation Q2 2010 Earnings Call Transcript
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Semiconductor Manufacturing International Corporation (SMI)

Q2 2010 Earnings Call

August 10, 2010 8:30 pm ET

Executives

En-Ling Feng - Director, IR

David Wang - President and CEO

Gary Tseng - CFO

Analysts

Pranab Sarmah - Daiwa Capital Markets

Steven Pelayo - HSBC

Rick Hsu - Nomura International Ltd

Daniel Heyler - Bank of America-Merrill Lynch

Charlie Chan - Morgan Stanley

Presentation

Operator

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Previous Statements by SMI
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Welcome to the Semiconductor Manufacturing International Corporation second quarter 2010 webcast conference call. Today's conference call is chaired by Dr. David N.K. Wang, Chief Executive Officer and President; Mr. Gary Tseng, Chief Financial Officer; and Mr. En-Ling Feng, Director, Investor Relations.

Today's webcast conference call will be simultaneously streamed through 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 one hour after the event at www.smics.com.

Without further ado, I would like to introduce you to Mr. En-Ling Feng, Director, Investor Relations, for the cautionary statement.

En-Ling Feng

Good morning and good evening. Welcome to SMIC's second quarter 2010 earnings conference call. For today's call, we have our CEO, David Wang; our CFO, Gary Tseng.

As usual, our call will be approximately 60 minutes in length. The earnings press release and the quarterly financial presentation are available for you to download at www.smics.com under the Financial Information section in the Investor Relations tab.

Please also be reminded of the Safe Harbor statement, which provided as follows. SMIC's statements of its current expectations are forward-looking statements, subject to significant risks and uncertainties. The actual results may differ materially from those contained in such forward-looking statements. Information as to those factors that could cause actual results to vary can be found in SMIC's Form 20-F filed with the United States Securities and Exchange Commission on June 29, 2009.

For today's agenda, CFO, Gary Tseng, will highlight our second quarter 2010 financial results and the third quarter 2010 guidance. Following that, our President and CEO, Dr. David N.K. Wang, will speak on SMIC's key initiatives and comment on our business. Then we will open the call for Q&A.

I will now turn the call over to Gary.

Gary Tseng

Thank you, En-Ling. Good morning and good evening to all of you. I will now take a few moments to outline our financial results for the second quarter ended June 30, 2010, and then I will provider our third quarter 2010 guidance. You may also refer to our quarterly financial presentation through our website. Please note that all currency figures are in U.S. dollars unless otherwise stated.

Let me start with the income statement. In the second quarter of 2010, total revenue exceeded our original guidance and increased by 8.4% to $381.1 million due to an increase in shipment and utilization and also due to a change in business model relating to our managed fabs in Xinxin in Wuhan and Cension in Chengdu.

Under a new agreement, customers' purchase orders are signed directly with SMIC, with orders outsourced to our foundry partner, Xinxin and Cension. The model affects how we record our managed fab revenue, while the net margins remained the same as (inaudible) under previous commission-based business model.

The new model enables to deepen relationships with our customers and also more truly reflects our sales capability. We will continue to operate under this business model and (inaudible) as discussions continue between SMIC and the Wuhan and Chengdu local government on how to maximize the benefit of the managed fabs to their region and to SMIC.

Revenue from Xinxin and Chengdu totaled $17.7 million this quarter, which was 4.6% of our total revenue. Excluding revenue from business model change, the company's revenue increased 3.3% quarter-over-quarter.

Q2 marks our third consecutive quarter of gross margin growth, as gross margin improved to 15.6%, up 1 point from the last quarter. The increase was primarily due to an increase in utilization and the reducing depreciation. Using the previous business model with managed-to-fit, the company's gross margin would have been 16.3%.

In addition, extra costs totaling $7.7 million were incurred from annual preventive maintenance in our Shanghai fab, and there are some idle equipment that we started (inaudible) from Beijing fab. Excluding these two items, the gross margin will be 18.3%.

Total operating expenses amounted to $71.5 million in the second quarter compared to $79.5 million in the first quarter of 2010. The decrease was mainly due to a foreign exchange gain of $5.4 million and a $1.5 million subsidy from the government in the second quarter.

Looking forward, R&D expenses are expected to increase as we increase R&D for our advanced nodes. With this in mind, our current and ongoing operating expenses should be in the range of $80 million to $84 million per quarter.

The gain attributable to holder of ordinary shares was $96 million in the second quarter of 2010 compared to a loss of $181.9 million in the first quarter of 2010, sliding by a change in the fair value of commitment to grant shares and warrants. This change amounted to $105.9 million. Excluding this non-operation gain, the company would have put a second quarter loss of $9.9 million.

Fully diluted EPS was $0.20 per ADS in the second quarter 2010 compared to negative $0.41 per ADS in the previous quarter.

I'll move to the balance sheet. Last month, we completed the placing of 1.5 billion new shares issued at HKD0.52 per share to raise $100 million. The increase in equity rate is not reflected yet in the financial result of this quarter as the placing was completed on July 15.

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