United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2023 fourth quarter earnings conference call. All lines have been placed and moved to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, this conference call is now being broadcast 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.

Thank you and welcome to UMC's conference call for the fourth quarter of 2023. I'm joined by Mr. Jason Wong, the President of UMC. and Mr. Chi-Dong Liu, the CFO of UNC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our president's key message to address UNC's focus and the first quarter of 2024 guidance. Once our president and CFO complete their remarks, there will be a Q&A session. UNC's quarterly financial reports are available at our website, www.unc.com, under the investor's 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 Authority. 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-Dong Liu, to discuss UMC's fourth quarter 2023 financial results.

Thank you, Michael. I'd like to go through the 4Q23 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 $54.96 billion NT, with gross margin at 32.4%. Net income attributable to the stockholder of the parent was $13.2 billion NT. Earnings per ordinary shares were 1.06 NT dollars in Q4 2023. On page five, this is the sequential performance. Revenue declined 3.7 percent quarter over quarter to 54.9 billion. Cost margin rate dropped roughly 3.5 percent, percentage point, to 32.4 percent or 17.8 billion NT dollars. With a net non-operating income of 2.22 billion NT, the net income comes to 13.19 billion NT, or EPS of 1.06. This is compared to 1.29 in the previous quarter of 2023. For year-over-year comparison on page six, Revenue declined roughly by 20% year-over-year to $222 billion. This is largely due to the lower capacity utilization rate. I saw wafer shipment decline 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 EPA net earnings in 2023 was $50.99, or close to $61 billion NT. Net income rate was 27.4%. compared to 31.3% in the year of 2022. EPS as a result is 4.93 in 2023, compared to 7.09 in 2022. So on page seven, our cash on hand is still around 132 billion NT, and total equity of the company has come to 359.5 billion NT. Hook value per share is close to $29 per share at the end of 2023. On page A, starting from 2024, we have changed our ASP unit as well as capacity unit to 12-inch and 12-inch equivalent to express the ASP number as well as the capacity number. So, for the past five quarters, you can see the trend chart here. The first three quarters was edging up, and the last two quarters was relatively firm on a 12-inch wafer equivalent ASB trend. So, on page nine, for the revenue breakdown by geography, Asia is getting a little bit bigger to 62 percent of our total revenue. when North America is about 23% of our total revenue. For year-over-year comparison on page 10, Asia actually declined from 51% in 2022 to 57% in 2023. And the rest of the three main regions didn't change much. On page 11, IDM continued to increase HR to 22%, and Fabless is around 78% in Q4 of 2023. On our 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 in quarter over quarter. As for year over year change, computer declined from 15% in 2022 to 11% in 2023. And we continue to see bigger exposure to other segments, 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 represent 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 four-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, KPAX for 2024 is currently budget at $3.3 billion. With majority of that, over 95% goes 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 Wong.

Thank you, Chih-Tung. Good evening, everyone. Here I would like to share UMC's fourth quarter results. In the fourth quarter, challenging macroeconomic conditions continued to prolong the inventory correction in the semiconductor industry. as our wafer shipment decreased 2.5% quarter-over-quarter, while overall FAP utilization rate slightly fell to 66%. As our TINAN 12AP 6 facility continues to ramp, our 2228 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% growth 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 left ASP by a single digit in 2023. Looking into the first quarter of 2024, we anticipate overall wafer demand will increase mildly. However, customers maintain a cautious approach in their inventory management. Moving forward, UMC will continue to navigate headwinds amid an increasing competitive landscape and swelling geopolitical tensions. We have diversified the manufacturing base and differentiation in 12-inch specialty technologies. Our 12-nm ThinkBack cooperation is a step forward in advancing our strategy of pursuing cost-efficient capacity expansion and technology-known advancement in continuing our commitment to customers. This effort will enable our customers to smoothly migrate to this critical new node and also benefit from the resiliency of an added Western footprint. We anticipate 12 nanometer ThinkBack collaboration will broaden our addressable markets and significantly accelerate our development roadmap. Now let's move on to first quarter 2024 guidance. Our wave assurance will increase by 2% to 3%. ASP in US dollar will decrease 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 US $3.3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wong. And ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press star 1 on your telephone keypad and you are into the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star 2 to cancel the question. Thank you. Now the first question will be coming from Randy Abrams, UBS. Go ahead, please.

Okay, yes, thank you. I wanted to ask the first question, probably multi-part, 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 NRE proceeds that UMC would get by supplying the technology. I'll start with those. I have a few follow-ups.

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

Okay, okay, so it sounds like no, 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's 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?

Well, I mean, these, well... First of all, the 12 nanometer address the gap in the node portfolio for both parties. So this 12 nanometer is the offering that we're extending, our product offering, and we will be serving our customer. And this will be a very vertical cooperation between us and Intel.

So if I may head on to that. Basically, you can see this is an extension. of our technology offering to our existing customer and potential customers. So coming from 20-22, some 14, and certainly this technology roadmap will be perceived as a continuous advancement for a lot of UMC-based customers and potential customers.

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 as 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?

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

Okay. And probably just – sorry, so many on this one. The last one I just have on this topic, the cost of product. I mean, would it be considered it's an Intel fab, so you'd be paying a foundry fee, like they're manufacturing it on their line? Or would you have operators? So it's – yeah, how do you handle the – transfer pricing if the cost structure is not there, or how much control do you have on the process?

Well, I mean, there is comprehensive cooperation details that I can't, you know, I'm not able to elaborate it here. As a result, like I said, the result will be a positive impact to RP and L based on that cooperation agreement.

Okay. Yeah, it looks like an asset-light way to do it versus at least 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.

Right. So 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.

Okay. And I know it was a multi-part. 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, or how much is 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 one-time reset on pricing, or do you expect we may start getting into, as long as the FAFSA aren't full and there's competition, mild price erosion? Like, how do you see it? So I think first the mix versus pricing, and then from the first quarter level, how you see pricing environment?

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

Okay. Just to clarify, in the first quarter, is mixed Like, 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?

Well, I mean, the overall, the Q128 nanometer loading is slightly lighter than Q423, mainly due to the seasonality effect and some urging order in Q423. 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 customer for the application of an OLED driver, ISP, Wi-Fi, SOC processor, while the further expansion of technology offering in the advanced NCU product and automotive industrial segment. Okay, great. Thanks a lot, Jason.

Thanks, Chita. Thank you, Randy. Next one, Nicholas Barrett, Macquarie. Go ahead, please.

Yes, hi, good morning. Do you hear me okay or not?

Yes, I think we can.

Okay, thank you. Sorry. Last quarter, I think you mentioned some weaker end demand in automobile and industrial. Is it still the case, and does that contribute to lower loading your ASP in 1 through 24?

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

Thank you very much. So you mentioned 3.3 billion capex in 2024. 95% in 12-inch, right? I think that's correct. Does this entirely include, you know, is it entirely 28, 22-annuitary capacity increase, or is there something else?

Well, for our 2024 cash-based capex budget at $3.3 billion, Out of that, the 20% of CAPEX was budgeted toward the 22 and 28 expansion in our, the remaining expansion in P6 and the 12X, which was pushed out during the 2022 and 2023 time. This reflects our effort to managing our CAPEX. Around 60% of the 2024 CAPEX will be spent on the 12I P3 infrastructure, as well as the minimum two in equipment. We'll expect the rent of the 12i P3 will start at April 2025, so the infrastructure is ongoing. And we project the CapEx will peak out this year and will not impact companies' cash dividend policy. As we have stated in the past, our CapEx strategy will continue to remain a disciplined and ROI-driven base and on affordability as well. where we invest toward future growth back with a customer commitment. If the markets do not rebound as expected in 2025, we will further adjust our CapEx accordingly.

Understood. Is there a change in the plant capacity of IP3 in Singapore?

I mean, the 12i Singapore P3 The infrastructure as a planet is a pursuit as a planet. For the infrastructure, it means the overall structure of the building and the facilities. But now, it's only with a very minimum two of equipment.

For 2024. Yes. Okay.

Okay.

Good. Thank you very much.

Thank you, Nico. Next one, Goku Harihalan, JP Morgan. Go ahead, please.

Yeah, hi. Thanks for taking my question. My first question is 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 latter phase of expansion in Singapore, or is that going to be all the 12 nanometer capacity will be only in the US fabs of your partner?

Well, I mean, not at this point. And we'll focus on to ramp this, you know, the Western footprint first. And if it comes to the market demands or the customer commitment, then we'll look into the other option as well, but not at this point, no.

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, 20 nanometer and mature 12 inch. Are you seeing any 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?

I mean, in a boundary landscape, some markets are more likely to become commoditized than However, our strategy has always focused on technology differentiation that will drive our long-term growth and shift away from commoditizing 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're gradually moving away from that. We have proactively increased our effort in technology advancement, including 12 nanometers, like we talked about it, and 2228. For example, we expect to see higher revenue contribution from the technology nodes such as 2228 e-high V, 55-millimeter RFSOI in 2024. Beyond 2024, our broader technology offering, along with the geographically diverse manufacturing location and the customer stickiness, will elevate our overall competitive. So we expect this action will reduce our exposure by half in the next couple of years. in-house for our current commoditized product by half in the next few years.

Thank you. 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?

For the specialty right now is in the Q1. It's in a high 50% range. So the single source 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 the commoditized area. And we're gradually moving out from that space.

Understood. Thank you. 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 competitors 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?

Sure. I mean, we start off on the maybe industry. We do expect the 2024, the semi-industry will grow probably to a mere single digit year over year. But for foundry, we project that it will grow in a high single digit range. And for the UMC, we will strive to grow in line with the function industry. Despite that, our addressable market will probably remain flattish. As far as the demand outlook, of course, we start out 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 the 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 then we'll continue monitoring the market dynamics.

Got it. Thank you very much.

Thanks.

Sure.

Thank you. Next one, Bruce Liu of Goldman Sachs. Go ahead, please.

Hello, can you hear me?

Yes.

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

I mean, I can't really comment out here because I don't know what data they're using, 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 a high single digit and close to 10%. And while the foundry is At the least, we think our addressable will probably stay flat-ish. That's what our data shows. Since I don't have our peers' information, so I can't really comment about the discrepancy.

I see. I understand. Okay. The second thing is that, you know, regarding to, again, for 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, like, you know, what time or timeframe you can complete your process development, what kind of timeframe you can available for table, what kind of timeframe, you know, a customer can get, you know, we can recognize some, some revenue or profit. Can we have some, time there for that? And also, is the collaboration only limited to 12 nanometers? You know, what about like 10 nanometers or 7 nanometers, you know, or any advanced process development?

Well, first of all, this cooperation is focused on the 12 nanometer process. And, you know, we look at this 12 nanometer, it represents a long-term commitment and the opportunity for 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 milestone 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. So which is aligned to what we have reported is production in 27. And we hope we see a meaningful revenue contribution started from the year of 2027. And that's probably in a very high level of a milestone. There are many, many details. that, you know, we understand that. We're fully aware of it. So we just have to executing it. And we, you know, we're putting a great attention to it. We believe this cooperation actually already been mitigated by leveraging the existing manufacturing footprint without going through you know, the complicated setup of a greenfield facility. So we have mitigated some of the risks in terms of execution. And we've seen the rest of it. We just have to execute and report it accordingly.

Yeah, and also for both Intel and UMC are public listed companies. Of course, this collaboration is more material given our size relatively to Intel. So certainly we will report the progress on a quality 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.

Okay, thank you.

Thank you. Next one, Charlie Chan from Morgan Stanley. Go ahead, please.

Thank you. Hi, Jason and Qidong. 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 is the long-term profitability with this Intel partnership. So maybe Qidong or Jason, so what was the kind of estimated kind of gross margin or IRR, ROE, you know, compared to your own investments, right, or to be your fully owned investment? What would be the difference in terms of gross margin and ROE?

We agreed, I mean, both sides not to touch upon these numbers because probably three years away, And again, the material impact for both companies are relatively different. But what we can say is all the questions you ask, we have internal performa or simulate numbers support our decision to go into this collaboration. And we do believe 12 nanometer is a multi-billion dollars 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 hopes for this collaboration, including the P&L impact to UMC.

And Charlie, first of all, thank you. Happy New Year to you, too. I also like to add the background of this 12 nanometer cooperation is it very much aligned to our growth strategy that we have set up to do, you know, five years or five or six years ago. Our growth strategy has always been to pursue a cost-effective capacity expansion and technology not 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 cooperation aligned with our strategic objectives. So this actually fits that very well. You know, like Chidong said, there's many benefits about this 12 nanometer cooperation. And, you know, so we set up our goal and we will execute this. And we're seeing at the end of the day, this will be a win-win-win scenario for our customer Intel as well as ourselves.

Yeah, thanks Jason and Jidong. 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, for the customers use your industry fear, right? They Would you be able to provide some T-like process? The reason I'm asking 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?

Well, I mean, first of all, in our view, this 12-millimeter, it is a competitive solution. And not only that, from a market standpoint, it's a long-life note that addresses many high-growth markets, such as mobile, communication, infrastructure, and networking. Now, many of the products actually just come to the 12, so they're not necessary to be a second-source product. So many of the product pipelines actually arrive at this at this time, so we are aligning our milestone with the end market demands. Now, from a competitive standpoint, this 12 nanometer process will be comparable with industrial standard nodes, and it utilizes our process experience and the foundry know-how, as well as the the Intel Fintech Transistor Foundation. So I think we will provide a very compelling and competitive solution to the customer.

I see. Thank you. And then also another question on this one. Yeah, I'm wondering if before 2027, there is some cost of demand. Would you use your current 14 nanometer capacity in Taiwan or convert some 20 nanometer to fulfill the demand before 2027? No.

I mean, right now we have to evaluate all options. We believe this is the best option for us. We'll primarily reuse existing equipment for the 12 nanometer production. And we expect it will have required some of the 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.

OK. Thank you. And lastly, just on this Intel partnership, Two kind of logistic questions. 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, right? I'm not sure who's going to be in charge of the operation. Can you answer this one?

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

Okay. And would that require additional government approval for this collaboration?

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

Okay, okay. Okay, thank you. Yeah, and switch gears to near-term, right? I mean, the long-term dream 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 data is running pretty low, right? So can you give us some kind of observation about the cycle recovery for this year, just like query pattern?

Yeah, like 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 rate, and inflationary pressure. So our customers, you know, is remain very cautious even after the Q1 restocking that we have observed. So we'll hang in hand with our customer going through this turbulence. And meanwhile, our primary focus on 24 is we will continue to enhance the company's resilience and 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.

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

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

Well, I mean, for the margin, we understand there is a software 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 profitability. And so our margins highly depends on the capacity utilization, like you know. We expect we'll get market share in second half, which will lift our utilization rate. Some of the new product will stop ramping in the second half. However, we expect the depreciation expense, like she don't say, will increase 20% year over year in 2024.

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 structure trend for our gross margin, but not the 2024 gross margin guidance.

Okay. So use the first quarter 30% as a benchmark. Do you think full-year can keep at a similar level?

Again, we don't come around the full year margin.

I think we have a long-term goal, right? Maybe I can share this with you. We hope to stay around the midpoint of 2022 and 2023 growth margin number while continuing to add resilience to our profit margin, I guess.

As a structure, growth margin target, not for 2024? Yeah.

Okay, okay. I will need to go back to check my model. Anyway, thanks for the tips. Okay, good luck, gentlemen. Thanks for your answers. Thank you.

Thank you.

Thank you.

Next one, Zhihong, China Renaissance. Go ahead, please.

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

Yes, of course, 12 nanometer is one of the key focus for R&D activities. But there's also some year-end adjustment 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.

I see. But can you share with us what would be the R&D run rate going into, let's say, 2024 and 2025?

Sorry, say that again, please.

The R&D run rate into 2024 and 2025, can you share with us, let's say, as a percentage?

I think the run rate will be similar to 2023.

Okay. All right. I see. And second question regarding the cash dividend policy, would that still be based on the payout?

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

I see, I see. Fair enough. And then as last question regarding the partnership with Intel, would the Fed be targeting those customers or serving the European and also the U.S. markets primarily?

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

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

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

No, it was serving the customer more wise.

Okay. Okay. All right. Okay. Thank you very much.

Thank you. And the next question, Brad Simpson from Eritech. Go ahead, please.

Yeah, thanks very much. Most of my questions have been answered, but I had a follow-up on the FinFET partnership with Intel. I mean, I guess the three 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? Thank you.

Well, first of all, the capacity planning, it has to subject to the customer engagement. So, you know, while we're referring where the project, the 12 nanometer will be developed in that location, but doesn't mean that the capacity numbers will align 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, the primary will reuse the existing equipment that will be very limited, the new tools, and also some of the conversion kits that are required of the CAPEX, but the CAPEX number is relatively small.

And is Intel... Is Intel taking any of the capacity for internal means as part of this agreement? And then is there any CHIP Act funding qualification? Does this qualify for any CHIP Act funding going forward? Thank you.

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

Okay. Thanks very much.

Thank you. Next question is from Goku Harihalan, JP Morgan. Go ahead, please.

Yeah, hi. I just had one question. So, given, Chitong, 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?

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

Okay. Understood. Yeah. Thank you very much.

Thanks. Thank you. Ladies and gentlemen, we are running out of time, so we are taking the last one. The last question, Laura Chen from Citi. Go ahead, please.

Hi. Thank you for taking my question. Just a follow-up on the...in terms of cooperation as well. I'm just wondering that based on your agreement with Intel, is there any, like, a license fee or IP transaction of the cooperation?

No, there's not.

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

Well, I mean, they are the customers that we are engaging with, so we will first finalize our discussion with the customer and then try to align with our development milestone, and then hopefully we can confirm the engagement. We are at 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.

Okay. Thank you very much, and Happy New Year.

Thank you. Happy New Year to you, too.

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

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 ilac.umc.com. Have a good day.

Thank you. Ladies and gentlemen, that concludes our conference for 4Q23. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. Please visit www.umc.com. under the Investors Events section. You may now disconnect. Thank you and goodbye.