Michael Lin - Head, IR Po Wen Yen - CEO Chitung Liu - CFO

Randy Abrams - Credit Suisse Bill Lu - UBS Securities Michael Chou - Deutsche Bank Charlie Chan - Morgan Stanley Donald Lu - Goldman Sachs Roland Shu - Citigroup Steven Pelayo - HSBC Rick Hsu - Daiwa Securities Sebastian Hou - CLSA Gokul Hariharan - JP Morgan

Welcome everyone to UMC's 2017 First Quarter Earnings Conference Call. All lines have been placed on mute 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. And 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, you may begin.

Thank you and welcome to UMC conference call for the first quarter of 2017. I'm joined by Mr. Po Wen Yen, the CEO of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the first quarter financial results followed by our CEO key message to address UMC's forecast and the second quarter 2017 guidance. Once our CEO and CFO will 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 will make forward-looking statements based on management's current expectation and their beliefs. These forward-looking statements are subject to a number of risk and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company's control. For these risks, please refer to UMC's filing with the SEC in the U.S. and the ROC securities authorities. Now, I would now like to introduce UMC's CFO, Mr. Chitung Liu to discuss our first quarter 2017 business results.

Thank you, Michael. I would like to go through the first quarter 2017 investor conference presentation material, which can be downloaded from our website. Starting on page three, first quarter of 2017 consolidated revenue was NT$37.42 billion with our gross margin at 19.9%. The net income attributable to the stockholders of the parent was NT$2.29 million and EPS for ordinary shares were NT$0.19 for capacity utilization rate due to shorter working days and also annual maintenance in first quarter, loading is around at 96% compared to the previous quarter of 94%. So, on page four, revenue in first quarter NT$37.4 billion was down 2.3% compared to the previous quarter. Gross margin, 19.9%, was mainly due to higher NT dollar exchange rate that was higher cost in Xiamen JV. And net income NT$1.49 billion and also NT$2.28 billion attributable to the parent relate -- result to NT$0.19 EPS. For the first three months, we can see compared to the same period of last year, revenue grow by 8.8%. And last year same quarter was impacted by earthquake, so the base was rather low. And gross margin also show a significant growth of 47.6% to NT$7.4 billion. And our net earnings to the parent grow almost 10 times to NT$2.28 billion. On page six is our balance sheet highlight. Our cash on hand is over NT$60 billion with total asset near NT$380 billion. On page seven, there's operating segment breakdown. The new business segment has become less and less significant and most of the consolidated earnings are NT$1.49 billion coming from wafer fabrication segment. And we expect that term will continue and the loss coming from new business will continue to decline. On page eight, our ASP in the first quarter declined by a few percentage points, mainly due to the product mix deterioration. On page nine, in terms of sales breakdown by geography, North America come down to 41% compared to 48% in the previous quarter. And Asia took over to become our largest share of sales to 50% with Japan and Europe did not change much. Still stay around 9% in combined. On page 10, IDM stay at 7% of revenue unchanged. And for page 11 for segment application breakdown, communication remain over 50% of our revenue by consumer around 28% in first quarter of 2017. And for 20-nanometer, this weakness demand and also revenue -- percentage of revenue has come down to 17% from 22% in the previous quarter. And 40-nanomter continue to be strong with 29% of the total revenue. On page 13 there's capacity -- quarterly capacity breakdown in Q1 due to a shorter working days as well as some maintenance we see a minor decline in our quarterly capacity. But the quarter two, we will see a good recovery in terms of the total capacity. And for the time being, the annual budget for capital expenditure remain at $2 billion, unchanged with 91% goes to 12-inch. And [Indiscernible] summary of UMC result for first quarter 2017, more details are available in the report, which has been posted on our website. I will now turn the call over to Mr. Yen, CEO of UMC.

Okay. Thank you, Chitung. Hello, everyone. I would like to update to everyone UMC's first quarter operating results. In the first quarter of 2017, UMC's revenue from foundry operation was NT$37.35 billion. The robust ship demand lifted overall capacity utilization to 96%, bringing wafer shipments to 1.68 million 8-inch equivalents wafers. The gross margin was 20.1%. During the quarter, the utilization rates in 8-inch fabs as well as 12-inch for the last node approaches near full capacity driven by the trends in consumer and communication segments. Recently, Taiwan's government authorities approved UMC's application to license 28-nanometer technology to our subsidiary company, United Semiconductor in Xiamen. This licensing approval will help over 12X fab to ramp its manufacturing scale, expand its process technology offerings, and complete UMC's overall growth strategy. The potential ramp of Fab 12X will also help our customers by diversifying their foundry manufacturing and enhance UMC's exposure to the Chinese semiconductor supply chain. Looking into the second quarter, despite recent headwinds in foreign exchange markets, we anticipate relatively flat outlook for 2Q 2017. Furthermore, current forecasts reflect a pickup in material turned wafer business due to higher demand from wireless Internet of Things and consumer electronics. However, the increase of demand in legacy 12-inch wafer shipments will be offset by a decline in 28-nanometer business. In terms of advanced nodes, we started shipping 14-nanometer wafers to customer in first quarter of 2017. As we transition from 28-nanometer to 14-nanometer manufacturing, we expect our 14-nanometer shipments to sequentially increase in 2Q 2017. With our manufacturing technologies making steady progress, we continue to strike a balance between maintaining discipline in CapEx trending while assuring the interest of our stakeholders -- the shareholders. As a result of our Board of Directors has proposed a cash dividend distribution of approximately NT$0.50 per share, which will be subject to shareholders' approval during the UMC's Annual General Meeting on June 8, 2017. Now, please allow me some time to summarize the recent highlights in Chinese. [Foreign Language] I finished my remarks. And now let me go over the second quarter 2017 guidance. Our wafer shipments in second quarter 2017 will be remain flat. The ASP in U.S. dollar will be remain flat as well. UMC gross profit margin will be in the mid-teens percentage range. The capacity utilization rate will be in the low-90 percentage range. The foundry CapEx for 2017 will be $2.0 billion. That concludes my remarks. We are now ready for questions. Operator, please open the lines up. Thanks.

Thank you, Mr. Yen. And ladies and gentlemen, we will now begin question-and-answer session. [Operator Instructions] Thank you. And the first question is from Randy Abrams from Credit Suisse. Go ahead please.

Okay. Thank you. The first question I wanted to ask was on your higher outlook for the mature 12-inch nodes. If you could give more details on the pickup, if you're seeing it coming from certain applications, market share gain or if it's more of just a normal seasonal pickup. And if you could also talk if you're seeing -- I think you were talking about 8-inch a couple of quarters ago qualifying new customers, just how the traction and application ramp on 8-inch is coming through.

Thank you for your question. And in our 12-inch mature nodes, we expect a higher demand. In the application, we saw the integrated touch driver SoC solutions, PTI and connectivity and the solid-state fiber controllers. And for our 8-inch, we are fully loaded to meet the growing demand of our customers on the power management and RF switch and embedded non-volatile memory and the larger panel driver, controllers.

Okay. And if I could ask on the 28-nanometer. As we go towards second half, do you see the mix reverting back from mature 12-inch back to 28? And maybe in a -- to frame that percent of revenue, if it can get back to fourth quarter 2016 or even get above that. So, maybe how you see both the mature 12-inch and the 28 as we go towards second half?

Yes. For the -- our mature 12-inch nodes, we believe that demand remain very strong throughout the year. And for our 28-nanometer demand, it is -- for the second half 2017, it's too early to give a guidance on our demand on the second half.

Okay. I guess can you give color on 28? Just maybe -- if some of the customers that corrected, if you -- if it's just low visibility into those coming back or any visibility into new application or customers, just maybe in terms of like product activity, how you're seeing aside from just market environment?

Yes, we are -- currently, we do have a challenge on our 28-nanometer demand. And that is due to a very concentrated customer base and applications. And, however, we're doing our top efforts to improve -- to diversify our customer base and applications [Indiscernible]. So, we believe in the quarters -- in a few quarters, we will improve our 28-nanometer loading.

Okay. The final question I had on the gross margin, if you could talk what triggered -- in first quarter, I think gross margin versus original guidance, it looks like depreciation may be a little bit lower in first quarter than expected. But then as we look to second quarter, maybe the factor to guide it into flat shipment in ASP compared to margin down for second quarter?

Second quarter was mainly due to unfavorable ForEx outlook as well as the rising cost from our Chinese JV. And the lighter loading in our 28-nanometer capacity also will lead to lower profitability. So, that's probably the main reason in combination for second quarter gross margin.

Okay. With the non-op -- or I guess, the other controlling interest from minority, will that change or come to -- because that came down quite a bit this quarter. Would that portion come down or that will stay at your similar levels?

Well, that's -- current JV structure is now 50/50. So, we will always recognize the 50% of the net from our Chinese JV. The other partners or investors will recognize the remaining 50%.

Okay. But I guess, it implies near -- you'll recognize similar but probably not much change then.

No, not much.

Okay. Okay, all right. Thanks a lot.

Thanks.

And the next one is from Bill Lu from UBS. Go ahead please.

Yes, hi there. Good afternoon. On 28 nanometers, a couple of questions. One is I think previously you talked about targeting capacity of 35K by end of the year. It now looks like maybe demand is a little bit more uncertain. Is that still the target or are you going to adjust that?

We have a target on the -- by the end of 2017, we'll reach the -- actually reach the 39.5K per month capacity. There is additional 5K in our 12X.

All right.

The 35 is already in place in Q1.

Yes. Yes. So, no change to the capacity planning even though demand seems a bit more uncertain?

For the Chinese JV ramp-up, in terms of the momentum, can adjust accordingly. But for the time being, the initial 5K is on schedule.

Okay. TSMC talked about doing 22 nanometers as sort of an upgrade to 28. I'm wondering what you think about that. And is that something you would consider doing as well?

We're considering to develop 22 ultra-low-power solution for our customers. Yes, based on our customers' demand and their interest, we're considering to do that.

If you do, do that, what will be the timing?

For those customers without IP requirements, the timing will be in the first half of next year. For those customers require IP, that would depend on what kind of IP and the lead-time of the IP and so it will be likely in 2019.

Okay. So, you talked about diversifying the customer base at 28 nanometers. I know right now the customer base is very much wireless driven that you looked to diversify? What are some of the opportunities that you're looking at? And I guess, related to that, last quarter, you said that the poly will be stronger in the first half with High-K coming back in the second half. Is that still the outlook?

Yes, that is our plan. We do see our customer -- while we are diversifying our customer base and applications, we do see our customers' applications towards -- they are moving more on the 28-nanometer High-K/Metal Gate version, especially on the DTV set-top box and solid-state drivers and some controllers. Yes, they are all on the High-K/Metal Gate version. So, we believe we're still on the right track. However, for the current moment, we have some -- we encounter some customers, they have some products migration scheduled earlier than our original expectation.

Okay, got it. Thank you.

Thank you.

And the next one is from Michael Chou from Deutsche Bank. Go ahead please.

Hi. Some follow-up questions for 28 nanometers. So, you mentioned before 28-nanometer should account for more than 20% of sales in Q4, is that still the target?

In the Q4 2017?

Yes.

It's still our target. Yes, we -- as I mentioned, that we are working very hard to see -- engage more diversified customers and applications.

Okay. So, given that the 28-nanometer sales could decline quarter-on-quarter in Q2, so the sales portion should come down. But do you expect it will go up again in Q3 and Q4 this year? So, based on your guidance -- Q4 to be up, if more than 20%, but do you think the 28-nanometer sales portion in Q3 will go up quarter-on-quarter versus Q2?

Yes. For the moment, we don't have sufficient visibility to give this guidance. However, we are working hard to see any recovery from our 28-nanometer capacity utilization. In the meanwhile, we are also engaged more in 14 [Indiscernible] customers.

You mentioned SST, DTV set-top box chip for 28-nanometer High-K/Metal Gate. But aren't your requirement for this product -- some of this product should be quite high in terms of performance requirements. So, are you quite confident that you should be able to deliver all this three major product, which you just mentioned in the second half of this year?

Technology-wise, we are -- I'm pretty confident to deliver those applications with UMC's High-K/Metal Gate -- 28-nanometer High-K/Metal Gate solutions.

Okay.

But demand size, as I just mentioned, we don't have enough visibility to do the forecast for now.

Okay. Some housekeeping questions for Chitung. What's currency in Q1 and what's your currency assumption for Q2?

Q1 was -- weighted average was 31.1. And quarter two, we normally don't have a forecast. Basically, we just take however it has. So, our guidance, as you heard from our CEO, the ASP guidance was in U.S. dollars instead of NT dollars. So, that would suggest our Q2 revenue is subject to the currency fluctuation.

Sure. Okay. What would be the outlook for Q2 by application? CEO mentioned several application in 12-inch legacy product and 8-inch, but in terms of communication, consumer PC, can you give some color?

Yes, we -- for the 2Q 2017, we have a growth on the consumer segment and little bit dip in the communication segment and some growth in the computer segment.

Also consumer PC to grow quarter-on-quarter and communication to be down, am I right?

Yes.

Thank you so much. And back to the queue. Thank you.

Thank you.

And the next question is from Charlie Chan from Morgan Stanley. Please ask your question.

Hi, good afternoon. So, my first question is back to your first quarter results. It seems like your wafer shipments is around the 2%, better than your previous guidance. I know you mentioned that is due to better consumer communication demand, but can you solidify which products -- end products doing better?

Yes. Our -- the first quarter, our -- for the consumer segment, the Wi-Fi and FPGA, our sub-segment, they are some up -- and DTV set-top box, they are some down -- the downside.

Okay.

And for the communication, there are very strong upside in the AP, application processor, and baseband combo chip, and RF and some Wi-Fi in upside and small display driver IC in the downside. So, for the computer segment, the tablet application processor in the upside.

Okay. So, I'm curious about your comments regarding strong trends in AP and baseband because it seems like China's smartphone industry was going through the inventory digestion. So, do you get any market share? Or what can you explain the difference?

I can comment on the -- that is based on our customers' demand because, yes, they do have a very good market share in China in smartphone business. So, they have very strong demand in the first quarter.

Okay. Thanks. And my second question also on your first quarter results gross margin because your guidance was the mid-teen, and that was 19% even with some FX impact. So, besides the better utilization, was there any positive factor to your gross margin? And I guess, the same question on your second quarter margin guidance because, again, you guide you'll be mid-teen. Is there any conservatism for the second quarter margin guidance as well?

I think the main reason is probably our Taiwan part. The depreciation has been tapering off, it's peaking. But the new depreciation coming from our JV in China continue to increase. So, I think this is slightly a tailwind, if you will, coming from our depreciation curve in Taiwan. But overall, I think, this is still a number we need to work on. For quarter two at mid-teens is going to be rather challenging.

Okay. So, I'm not sure if I take it right. So, it means that some depreciation caused a pushback from 1Q to 2Q, is that correct?

It's not really pushing back. Our full year 2017 depreciation will be somewhat offset or grow less than 5% compared to that of 2016 even including the JV in China. The Taiwan portion actually will show certain degree of decline in depreciation cost.

Okay. Got you. Okay, thank you.

Thank you.

The next question is from Donald Lu from Goldman Sachs. Please ask your question.

Yes, hey, thank you. Can you give us some outlook for your Xiamen stat given that now you have this 28-nanometer license? So, for next year, would you expand most of your capacity in Xiamen? And if so, what's the longer term plan there?

Yes. Our Xiamen, we started to ship our 14 nanometers in 4Q of last year. And we're now build out capacity on the 40-nanometer up to -- by the end of this year, we're up to 6.5K per month. And in the meantime, also we've got the Taiwan government's approval for the 28-nanometer licensing to this ramp. And so we are now start to set up a [Indiscernible] line on the 28-nanometer technology development. And for now, we have several customers with more than five products for 40-nanometer products running in this fab. And all the 40-nanometer products are running very good yield, ranging from 95% to 99% average. So, we are pretty happy on this plant's operation so far. And we actively set up our 28-nanometer [Indiscernible] line right now. That is above our status on this plant.

Can you repeat what is the 40-nanometer capacity by the end of the year -- this year?

You mean the 4-0 nanometers?

Yes.

40 nanometers? Yes, by the end of this year, we'll have 6.5K per month.

6.5K?

Yes, 6.5K per month. As I just explained, we're going to have a 5K on 28-nanometer capacity.

Right. Okay, great. And another question I have is on the 28-nanometer weakness. That is mostly in smartphone, right, in communication. But then you said, in the second quarter, the total communication wireless given this revenue should increase, right, quarter-over-quarter in the statement, wireless is strong.

That was quarter one. Quarter two, wireless will decline.

In quarter one, wireless increase?

Yes.

And in quarter two, wireless will decline? Okay. But in quarter one, your wireless communication declined from Q4 last year?

Yes, but wireless increased.

I see. Okay. So, wireless -- communication, wireless and wireline?

Yes.

Got it. Okay. Thank you. Maybe can I ask another question on the 14-nanometer development? I guess, you wouldn't comment on the name of this customer or the application and also how fast to ramp it?

We -- of course, we cannot talk -- disclose the customer's name and also application. However, we're not in the development stage. We're actually in -- we began shipping our 14-nanometer products in 1Q last quarter, February timeframe. So, we're now entering into the production stage. And we are now engaged with more than five customers. We're [Indiscernible] validation stage.

Right. Okay. Thank you.

Thank you.

And the next one is from Roland Shu from Citigroup. Go ahead please.

Hi, good evening. So, first question is for the depreciation. Chitung Liu said that the overall depreciation would be increased -- be flat to increase about 5%. But last quarter, you talked about to be increased by 5% to 10%. So, why is the change?

Well, again, I think it has something to do with the momentum of our ramp in new capacity. But basically, we are talking about much less increase compared to that of 2015. So, I think 5% to 0% is our new increase range.

Okay. Thank you. So, how about for the quarterly -- by quarterly?

Pretty flattish.

Okay. Yes. Thank you. Second question is for the 28-nanometer. I mean, going forward, if 28-nanometer demand is still weak, how are you going to prioritize to allocate 28-nanometer capacity in Taiwan and in China?

In -- yes, actually, the -- so we have very good demand -- in general, we have very good demand on our 28-nanometer poly-SiON version. And so our next phase 28-nanometer capacity expansion will be on the poly-SiON version on the -- at the Xiamen fab. So, that is also aligned with our customer engagement in China and the other areas.

So, for -- if I'm right, you said for the next 28-nanometer capacity expansion in Xiamen will be for the poly-SiON only. So, you are not going to build High-K/Metal Gate in China in the near-term?

Yes, for the 2017, yes, that's correct.

Okay. So, how about in time for 2018?

Yes. That quite depends on -- depend on our customers' engagement because, currently, we already have a 26K High-K/Metal Gate versions right now in our 12A Tainan campus. So, we believe with this 26K per month capacity, we can fulfill. We can fulfill and supply our customers' need in the short-term range.

Understood. Okay. Thank you. So, next question is for the 14-nanometer. So, now you are in [Indiscernible] now. The capacity, I think, in the last quarter, you talked about maybe 2,000 to 3,000 wafer per month. So what's your capacity expansion plan for 14-nanometer? And when do you think it will reach economies of scale for 14-nanometer?

Yes, we currently have around 2,000 wafer per month capacity. And based on customer engagements, they are still in test vehicle verification stage. So, we think -- we believe with this 2K per month capacity, we can support our current customers' needs. So, for the short-term, we don't have plan to expand meaningful 14-nanometer capacity.

Okay. Thank you. And then last question is, recently wafer price has been up a lot. So, what's the impact to your gross margin? And how are you going to react for this wafer price increase? And how do you think about the wafer price in the second half? Thank you.

Yes, we already -- we track the wafer substrate price rising. And we have taken many costs down actions. And so we already -- we have some [Indiscernible] activities along the way, so we can assault this wafer substrate price issue.

Yes, but for the wafer price up itself, what's the impact to your gross margin?

Sometimes it depends on what kind of wafers, some specialty wafers. So, it varies. We're talking about very few percentage points, less than one or two percentage points. But then as we mentioned, we're working hard on cost reduction to even out the impact.

Okay. Yes, understood. How do you think about the wafer price in the second half this year?

Based on our understanding and it looks like it will continue to grow in the second half this year.

Okay. This is for both 12-inch and 8-inch?

It's mainly for 12-inch. Actually, for 6-inch and 8-inch, 6-inch is almost no growth from the wafer price, and 8-inch, they're only a very minimum growth, and 12-inch is -- there are some growth.

Okay, understood. Thank you.

Thank you.

And the next question is from Steven Pelayo from HSBC. Please ask your question.

I'm trying to understand where 28-nanometer bottoms. So, you've guided it down sequentially. Have you tried to qualify what it will be as percentage of mix or sequential decline in the second quarter?

In the second quarter, yes, we -- on the 28-nanometer, we have some, yes -- we just guide the 2Q 2017 on 28-nanometer revenue contribution will be in mid-teens.

Okay. I guess it was 17% in the first quarter. So, it doesn't look like it's falling off that significantly. I guess, maybe it falls to the 15% or something. Okay. I'm curious, just a longer term question. You have seen some negative cash flow for a couple of years now. And it sounds like a bit slower ramp, but you're also rolling off some appreciation in Taiwan. Can you talk a little bit about maybe some the longer term goals and the business model that maybe you're trying to put into place to try to get you back to positive free cash flow? Is there any changes planned over the next couple of years that will be different than the last couple of years when it comes to free cash flow?

I think today is many focus on quality -- I mean, it's probably not the most ideal platform to talk about it, but what I can say is, first of all, we're paying out $0.50 in cash, which is a pretty high payout ratio compared to the EPS of last year. And UMC is also very frequent share buyback company. So, from time-to-time we do that. And certainly, we will take advantage of any positive cash flow to enhance our overall return. I think that's all I can answer you today.

TSMC has gone public to say CapEx to sales will remain in the 30% to 35% range for the foreseeable future. Do you have any kind of capital intensity targets for the next few years?

We are mainly coming from self-sustainable foundry. Basically, average CapEx shouldn't be more than our total self-generate cash.

Okay. And last question is, TSMC is definitely rolling off of some depreciation burdens for their 28-nanometer given that they've done this for, I don't know, five, six years. I'm curious have you seen any more intense pricing pressure, that 28-nanometer, if some of the decline in revenue could also be due to pricing in addition to pure wafers.

Yes. Our price declined. Q1 already reflect a certain degree of price reduction and by also coming from mix shift as well. So, that's already happened in first quarter. For second quarter, our outlook is flattish in U.S. dollars despite the [Indiscernible] mix.

Okay, fair enough. Thank you very much.

Thanks.

And the next one is from Rick Hsu from Daiwa Securities. Go ahead please.

Yes, hi. Thank you so much for taking my questions. I still have some question about -- a question about your first quarter gross margin. Because I remember your guidance was talking about only mid-teens. But if I don't remember wrong, you actually reported about 20% gross margin for your foundry business in Q1. So, I guess this 5% difference, it can't be something more than just depreciation cost. Do you have any kind of overhead cost savings as well for Q1?

Now, cost saving, of course, is continuous. But the mid-teens guidance could be referring to 17% and we end up, we said 19.9%.

Okay. All right. Fair enough. Then some numbers I want to clarify. I think you mentioned about 39.5K total capacity for 28-nanometer this year. Does that include the 5K for -- that the JVs had?

Yes. Yes, 5K is included.

All right. Then you also talk about your 28-nanometer revenue contribution target by the end of this year, can you remind me what the target is?

That is 4Q. It's not for the -- the 4Q this year was targeting the 20% revenue share from 28-nanometer.

Okay. All right. That's very clear. So, by Q4 this year, you still target 20% of revenue contribution from 28-nanometer?

Yes.

All right. And just a little bit follow up on the 14-nanometer. Can you elaborate this a little bit? What kind of applications you are doing for mass production?

Yes, we -- because we now only have one customer in production, so we cannot comment on that.

Okay, got you. All right. Thank you so much.

Thank you.

And the next one is from Sebastian Hou from CLSA. Go ahead please.

Hi, good afternoon guys. So, my first question is to follow-on your 28-nanometer. Can you quantify how much of your 28-nanometer revenue would decline in second quarter? Or could you give us the utilization rate in first quarter and second quarter, respectively, for 2018?

Yes, our 28-nanometer, our revenue contribution in the 2Q 2017 will be again in the mid-teens percentage range. And I'm not sure if I answer your question.

Yes. And I think in the previous quarter is you also gave us some -- give us about the utilization rate. So, how about the UTR on 28-nanometer in first quarter and second quarter?

Yes, our UTR in the first quarter is around 83%. And we actually -- we have some conversion with our 20 and 40. So, I can only give you the number in the 2Q together with 40-nanometer and 28-nanometer. Internationally, we'll be around 80% range.

So, 80% for 40-nanometer and 28-nanometer combined?

Yes.

Okay. And how is your 40-nanometers tracking in second quarter? Because earlier, you talked about your legacy 12-inch nodes, which I presume should be referring to 55, 65 or 80, 90. How about 40-nanometer in second quarter?

We cannot comment on that.

Okay. All right. Then I think in your earlier -- I feel you mentioned about the second quarter strong, you also saw the connectivity demand. Can I assume that is Wi-Fi and Bluetooth mostly?

We have combined our -- some mature nodes, 12-inch matured nodes. We expect there's somewhat growing demand in integrating the touch panel -- the touch display driver combo solution. It's the [Indiscernible] and some other connectivity and some are SSD, solid state driver devices.

Okay. Sorry, I was -- I understand that. I just want to know the specifics about connectivity. So, I think its Wi-Fi and Bluetooth mainly, right?

Yes, yes.

Okay. Thank you. And we noticed that in your application breakdown, the others segment has been growing pretty nicely in the past few quarters, both from quarter-on-quarter perspective and year-on-year perspective. Can you share some colors with us on what specific product is there and how is the outlook going?

Please, sorry. Could you repeat your question again?

Okay. So, in your application breakdown, you have computer, communication, consumers, et cetera and also have the others segments. And others segment has been growing pretty nicely from year-on-year and quarter-on-quarter perspective for a couple of quarters already. And year-on-year growth pretty strong in first quarter, about 40% and I just wondered what's exactly inside there? And also how do you see this going forward, will this kind of momentum will continue?

Yes. Yes, I understand. So, the -- we do see a very strong demand on the automotive industry, automotive, especially in the power management, the power IC and some MCU, microcontroller. There's a very strong demand on that.

Okay. So, your others segment is mainly composed of automotive. So, can we assume that automotive already accounts for -- say, high single-digit of your total revenue?

It's still less than 5%. Others also includes industrial -- some industrial and automotive. And we do see growing demand on that areas.

And the industrial, I guess, is also growing?

Yes.

Okay. Thank you. And last question is that can you share with us with your UTR on 8-inch and 12-inch in first quarter and second quarter, respectively? Thank you.

Yes. Our utilization rates in the 8-inch will be 24% around the full capacity and in the first quarter. And for the 12-inch, it's around mid-80% range. For the second quarter, our 8-inch demand is still in the full capacity. And almost the same situation here, for the 12-inch, the overall 12-inch utilization rate would be still in mid-80% range.

Okay. Thank you. That's all from me.

Thank you.

Ladies and gentlemen, we're running out of time. So, we're taking the last question. And our last question is from Gokul Hariharan from JPMorgan. Go ahead please.

Yes, hi. Thanks for taking my question. Just one quick question on 28-nanometer again. You guys are expanding capacity, TSMC seems to be expanding capacity even now. You got capacity coming online in China from [Indiscernible] as well. Could you talk a little bit about -- I think it's been a couple quarters of decline in 28-nanometer revenue, looks like. Can you talk a little bit about how the supply and demand is shaping up? And any comments that you have in terms of how this utilization on 28-nanometer recover has been going in the second half? What is your anticipation in terms of demand recovery? Or should we anticipate that there could be a reasonable chance that you might have to pull back a little bit on the capacity addition in 28-nanometer as we go to the second half of the year? Thanks.

As I just explained, we don't have a sufficient visibility to give it a number on the second half of 28-nanometer utilization rate and demand. But however, we're doing -- we're doubling our efforts to recover our 28-nanometer demands. So, we believe the -- it would take a few quarters to have a significant recovery of our 28-nanometer demand situation.

Would that have an adverse impact on pricing and profitability given that it feels like there is, at least at the time being, there is some degree for oversupply on 28-nanometer in both in Taiwan and China?

Yes, I can only say that it's a very dynamic market situation. And however, we are -- based on our customer engagement and also UMC's 28-nanometer, our strengths, especially on the High-K/Metal Gate -- actually our High-K/Metal Gate version we delivered, are outperforming them in this industry's [Indiscernible]. So, it will take a while, but we believe that we're coming back on the 28 nanometers [Indiscernible] demand situation.

Okay. And maybe if I can squeeze last question for Chitung. On the operating expenses, given that you have 40-nanometer R&D plus capacity expansion in the Xiamen fab, are we going to see OpEx remaining fairly stable in this NT$6 billion to NT$6.5 billion per quarter kind of level? Or are we going to see anything moving up in the next couple of quarters?

Yes, we will be stable. We try to control in the current range. So, hopefully, it won't go up.

All right. Thanks. That's all from me.

Thank you.

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.

Thank you everyone for joining us today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir@umc.com. Have a good day.

Thank you, Mr. Lin. And ladies and gentlemen, that concludes our conference for 2017 first quarter. And we thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com under the Investors, Events section. You may now disconnect. Good bye.