SMIC Reports 2007 Fourth Quarter Results

Semiconductor Manufacturing International Corporation

2008-01-29 20:17 2386

-- All currency figures stated in this report are in US Dollars unless

stated otherwise.

-- The financial statement amounts in this report are determined in

accordance with US GAAP.

SHANGHAI, China, Jan. 29 /Xinhua-PRNewswire/ -- Semiconductor Manufacturing International Corporation (NYSE: SMI; SEHK: 981) (“SMIC” or the “Company”), one of the leading semiconductor foundries in the world, today announced its consolidated results of operations for the three months ended December 31, 2007.

(Logo: http://www.prnasia.com/sa/200611101605.jpg )

2007 Highlights:

-- Revenue up by 5.8% over 2006 to $1,549.8 million despite unprecedented

difficult condition in the DRAM market.

-- Gross profit up by 20% to $152.7 million from 2006 due to solid growth

in the non-DRAM business.

-- Gross margin were 9.9% in 2007 compared to 8.7% in 2006.

-- Net loss of $40.0 million in 2007,compared to a net loss of $44.1

million in 2006.

Fourth Quarter 2007 Highlights:

-- Revenue up by 3.0% over 4Q06 to $395.3 million and up by 1.0% from

$391.4 million in 3Q07.

-- Gross margins were 8.9% in 4Q07 compared to 10.8% in 3Q07 primarily due

to the continual price decline in the DRAM market.

-- Net loss of $21.2 million in 4Q07, compared to a net loss of $25.6

million in 3Q07, mainly from the DRAM business.

-- Fully diluted EPS was ($0.0570) per ADS.

Over a conference call, Dr. Richard Chang, Chief Executive Officer of SMIC, spoke with analysts about the quarterly results. “SMIC has continued to grow its revenue in the fourth quarter of 2007 on a year-on-year and a quarter-on-quarter basis,” he said. “Operationally, our capacity at the end of the fourth quarter of 2007 has increased to 185,250 8-inch-equivalent wafers per month, with a high utilization rate of 94%. For 2007, our wafer shipments and sales increased by 14.6% and 5.8%, respectively, over 2006.

“As part of our plan to mitigate the continuing DRAM pricing erosion, we reduced our DRAM foundry services in the fourth quarter. We have successfully reduced our DRAM shipments by about 22% since 1Q07, excluding a single large shipment in 4Q07 to clear inventory of discontinued DRAM product lines. Confronted with a more difficult DRAM market in 4Q07 than in the previous quarter, we still managed to reduce our net loss in the fourth quarter. We expect DRAM revenue as a portion of total revenue to decrease to below 20% in the first quarter of 2008, with further reduction throughout the remainder of the year.

“SMIC experienced solid growth in its non-DRAM business. Revenue from non-DRAM business increased by 13.5% to $1,121 million in 2007, compared to $988 million in 2006. Gross profit from non-DRAM business saw a 104% year-on-year increase in 2007. As more of our logic customers migrated to more advanced technology process nodes, our logic sales from 0.13 micron and 90-nanometer technology nodes also significantly increased by 42% over 2006.

“As the overall semiconductor market continues to expand rapidly in China, SMIC has captured this significant growth trend, demonstrated by a 56% growth in our China sales in 2007. We are pleased to see continuous progress from our customers in China and remain committed to further growth and expansion within the China market.

“In 2007, we saw strong foundry demand for handset ICs, power management ICs, WLAN, and consumer applications such as STB, DTV and MP3/MPEG4, indicative of demand in the industry at large. We also enjoyed the addition of 77 new customers worldwide in 2007, a large number of which are PRC-based, representing a 23.3% increase in our customer base.

“To complement our ongoing in-house research and development, and to strengthen our capabilities in serving customers, we are pleased to announce that we have entered into a licensing agreement with IBM, in which IBM will license its 45-nanometer bulk CMOS technology to SMIC. This agreement will allow SMIC to accelerate its technology advancement in logic process technology and help provide optimal solutions for customers at the 12-inch facilities. With the roadmap extended to 45 nm technologies, we observed the trend of more customers seeking our foundry services in the 90 nm and 65 nm technology nodes as well.

“Our capital expenditure in the fourth quarter increased to $260 million, due in part to investment in the 45-nanometer technology project. We expect our CAPEX to be around $700 million in 2008 as we continue to invest in the development of advanced technology nodes and continue the planned conversion of DRAM capacity to logic in our Beijing fabrication facility.

"In terms of operations, we are pleased to announce that SMIC plans to start a new IC production project in Shenzhen. In connection with this project, SMIC will register an independent legal entity, the Semiconductor Manufacturing International (Shenzhen) Corporation Ltd., which will set up an IC technology research and development center, an 8-inch wafer production line and a 12-inch fab. The 12-inch fab will introduce advanced process technology licensed from IBM pursuant to the licensing agreement. With the support of the Shenzhen municipal government in financing, incentive policies and ways of operations, we expect this project to break ground in the first half of 2008.

“We believe that as we continue to execute our business plans and reach technological milestones, we are laying a solid foundation for long-term growth and development and serving the interests of our shareholders.”

Conference Call / Webcast Announcement

Date: January 30, 2008

Time: 8:30 a.m. Shanghai time

Dial-in numbers and pass code: U.S. 1-617-597-5342 or HK 852-3002-1672

(Pass code: SMIC).

A live webcast of the 2007 fourth quarter announcement will be available at http://www.smics.com under the “Investor Relations” section. An archived version of the webcast, along with an electronic copy of this news release will be available on the SMIC website for a period of 12 months following the webcast.

About SMIC

Semiconductor Manufacturing International Corporation (“SMIC”; NYSE: SMI; SEHK: 981) is one of the leading semiconductor foundries in the world and the largest and most advanced foundry in Mainland China, providing integrated circuit (IC) manufacturing service at 0.35 micron to 65 nanometer and finer line technologies. Headquartered in Shanghai, China, SMIC has a 300-millimeter wafer fabrication facility (fab) and three 200 mm wafer fabs in its Shanghai mega-fab, two 300 mm wafer fabs in its Beijing mega-fab, a 200 mm wafer fab in Tianjin, and an in-house assembly and testing facility in Chengdu. SMIC also has customer service and marketing offices in the U.S., Europe, and Japan, and a representative office in Hong Kong. In addition, SMIC manages and operates a 200 mm wafer fab in Chengdu owned by Cension Semiconductor Manufacturing Corporation and a 300 mm wafer fab under construction in Wuhan owned by Wuhan Xinxin Semiconductor Manufacturing Corporation. For more information, please visit http://www.smics.com .

Safe Harbor Statements

(Under the Private Securities Litigation Reform Act of 1995)

This press release contains, in addition to historical information, “forward-looking statements” within the meaning of the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements, including statements concerning our expectation for first quarter 2008 revenue, our expectation that DRAM revenue as a percentage of overall revenue will decrease in 2008, expected timing for beginning commercial production for our 65nm technology, SMIC’s ability to grow and improve profitability in 2008, and statements under “Capex Summary” and “First Quarter 2008 Guidance”, are based on SMIC’s current assumptions, expectations and projections about future events. SMIC uses words like “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements are necessarily estimates reflecting the best judgment of SMIC’s senior management and involve significant risks, both known and unknown, uncertainties and other factors that may cause SMIC’s actual performance, financial condition or results of operations to be materially different from those suggested by the forward-looking statements including, among others, risks associated with cyclicality and market conditions in the semiconductor industry, intense competition, timely wafer acceptance by SMIC’s customers, timely introduction of new technologies, SMIC’s ability to ramp new products into volume, supply and demand for semiconductor foundry services, industry overcapacity, shortages in equipment, components and raw materials, orders or judgments from pending litigation, availability of manufacturing capacity and financial stability in end markets.

Investors should consider the information contained in SMIC’s filings with the U.S. Securities and Exchange Commission (SEC), including its annual report on 20-F, as amended, filed with the SEC on June 29, 2007, especially in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, and such other documents that SMIC may file with the SEC or SEHK from time to time, including on Form 6-K. Other unknown or unpredictable factors also could have material adverse effects on SMIC’s future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this press release may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this press release. Except as required by law, SMIC undertakes no obligation and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise.

Material Litigation

Recent TSMC Legal Developments:

On August 25, 2006, TSMC filed a lawsuit against the Company and certain subsidiaries (SMIC (Shanghai), SMIC (Beijing) and SMIC (Americas)) in the Superior Court of the State of California, County of Alameda for alleged breach of settlement agreement, alleged breach of promissory notes and alleged trade secret misappropriation by the Company. TSMC seeks, among other things, damages, injunctive relief, attorneys’ fees, and the acceleration of the remaining payments outstanding under the settlement agreement.

In the present litigation, TSMC alleges that the Company has incorporated TSMC trade secrets in the manufacture of the Company’s 0.13-micron or smaller process products. TSMC further alleges that as a result of this claimed breach, TSMC’s patent license is terminated and the covenant not to sue is no longer in effect with respect to the Company’s larger process products.

The Company has vigorously denied all allegations of misappropriation. Moreover, TSMC has not yet proven any trade secret misappropriation by the Company. At present, the claims rest as unproven allegations, denied by the Company.

On September 13, 2006, the Company announced that in addition to filing a response strongly denying the allegations of TSMC in the United States lawsuit, SMIC filed on September 12, 2006 a cross-complaint against TSMC, seeking, among other things, damages for TSMC’s breach of contract and breach of implied covenant of good faith and fair dealing.

On November 16, 2006, the High Court in Beijing, the People’s Republic of China, accepted the filing of a complaint by the Company and its wholly owned subsidiaries, SMIC (Shanghai) and SMIC (Beijing), regarding the unfair competition arising from the breach of bona fide (i.e. integrity, good faith) principle and commercial defamation by TSMC (“PRC Complaint”). In the PRC Complaint, the Company is seeking, among other things, an injunction to stop TSMC’s infringing acts, public apology from TSMC to the Company and compensation from TSMC to the Company, including profits gained by TSMC from their infringing acts.

TSMC filed with the California court in January 2007 a motion seeking to enjoin the PRC action. In February 2007, TSMC filed with the Beijing High Court a jurisdictional objection, challenging the competency of the Beijing High Court’s jurisdiction over the PRC action.

In March 2007, the California Court denied TSMC’s motion to enjoin the PRC action. TSMC has appealed this ruling to California Court of Appeal.

In July 2007, the Beijing High Court denied TSMC’s jurisdictional objection and issued a court order holding that the Beijing High Court shall have proper jurisdiction to try the PRC action. TSMC has appealed this order to the Supreme Court of the People’s Republic of China. On January 7, 2008, the Supreme Court heard TSMC’s appeal. It has not yet issued a ruling.

On August 14, 2007, the Company filed an amended cross-complaint against TSMC seeking, among other things, damages for TSMC’s breach of contract and breach of patent license agreement. TSMC thereafter denied the allegations of the Company’s amended cross-complaint and attempted to file additional claims that the Company breached the Settlement Agreement by filing an action in the Beijing High Court. Upon the Company’s motion, the California Court struck TSMC’s new claims as procedurally improper, but granted TSMC leave to replead its claims.

On August 15-17, 2007, the California Court held a preliminary injunction hearing on TSMC’s motion to enjoin use of certain process recipes in certain of the Company’s 0.13 micron logic process flows. On September 7, the Court denied TSMC’s preliminary injunction motion, thereby leaving unaffected the Company’s development and sales. However, the court required the Company to provide 10 days’ advance notice to TSMC if the Company plans to disclose logic technology to non-SMIC entities under certain circumstances, to allow TSMC to object to the planned disclosure.

Under the provisions of SFAS 144, the Company is required to make a determination as to whether or not this pending litigation represents an event that requires a further analysis of whether the patent license portfolio has been impaired. We believe that the lawsuit is at a very early stage and we are still evaluating whether or not the litigation represents such an event. The Company expects further information to become available to us which will aid us in making a determination. The outcome of any impairment analysis performed under SFAS 144 might result in a material impact to our financial position and results of operations. Because the case is in its early stages, the Company is unable to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential loss.

Summary of Fourth Quarter 2007 Operating Results

Amounts in US$ thousands, except for EPS and operating data

4Q07 3Q07 QoQ 4Q06(3) YoY

Revenue 395,254 391,398 1.0% 383,813 3.0%

Cost of sales 360,207 349,148 3.2% 364,339 -1.1%

Gross profit 35,047 42,250 -17.0% 19,474 80.0%

Operating expenses 57,389 62,435 -8.1% 5,762 896.0%

(Loss) income from operations (22,342) (20,185) 10.7% 13,712 --

Other income (expenses), net (1,655) (4,342)-61.9% (16,468)-90.0%

Income tax (expenses) credit 2,557 (966) -- 3,002 --

Net (loss) income after

income taxes (21,440) (25,493)-15.9% 246 --

Minority interest 1,157 859 34.7% 941 23.0%

Share of loss of affiliate company (881) (919) -4.1% (1,044)-15.6%

(Loss) income attributable to

holders of ordinary shares (21,164) (25,553)-17.2% 143 --

Gross margin 8.9% 10.8% 5.1%

Operating margin -5.7% -5.2% 3.6%

Net (loss) income per ordinary

share - basic(1) (0.0011) (0.0014) 0.0000

Net (loss) income per ADS - basic (0.0570) (0.0690) 0.0000

Net (loss) income per ordinary

share - diluted(1) (0.0011) (0.0014) 0.0000

Net (loss) income per ADS

- diluted (0.0570) (0.0690) 0.0000

Wafers shipped (in 8” wafers)(2) 497,454 458,466 8.5% 424,395 17.2%

Capacity utilization 94.4% 94.1% -- 86.6% --

Note:

(1) Based on weighted average ordinary shares of 18,550 million (basic)

and 18,550 million (diluted) in 4Q07, 18,523 million (basic) and

18,523 million (diluted) in 3Q07 and 18,398 million (basic) and 18,609

million (diluted) in 4Q06

(2) Including copper interconnects

(3) As restated

-- Revenue increased to $395.3 million in 4Q07, up 1.0% QoQ from $391.4

million in 3Q07 and up 3.0% YoY from $383.8 million in 4Q06.

-- Cost of sales increased to $360.2 million in 4Q07, up 3.2% QoQ from

$349.1 million in 3Q07, primarily due to an increase in wafer shipments.

-- Gross profit decreased to $35.0 million in 4Q07, down 17.0% QoQ from

$42.3 million in 3Q07 and up 80.0% YoY from $19.5 million in 4Q06.

-- Gross margins decreased to 8.9% in 4Q07 from 10.8% in 3Q07 primarily

due to lower ASP resulting from DRAM price decline.

-- Total operating expenses decreased to $57.4 million in 4Q07 from $62.4

million, a decrease of 8.1% QoQ, primarily due to a decrease in G&A

expenses.

-- R&D expenses increased to $26.2 million in 4Q07, up 1.1% from $25.9

million.

-- G&A expenses decreased to $18.8 million in 4Q07 from $23.8 million in

3Q07 primarily due to a decrease in foreign exchange loss and a

decrease in legal fees. The foreign exchange loss from operating

activities in 4Q07 was $0.9 million compared to a loss of $5.7 million

in 3Q07. Combined with the foreign exchange gain from non-operating

activities, which was recorded in other income, a total gain of $3.6

million was recorded in 4Q07 compared to a gain of $2.0 million in 3Q07.

-- Selling & marketing expenses increased to $5.7 million in 4Q07, up

16.1% QoQ from $4.9 million in 3Q07 primarily due to an increase in

engineering material expenses associated with selling activities.

Analysis of Revenues

Sales Analysis

By Application 4Q07 3Q07 4Q06

Computer 22.9 % 22.7 % 36.3 %

Communications 47.4 % 50.0 % 40.1 %

Consumer 22.7 % 18.3 % 19.3 %

Others 7.0 % 9.0 % 4.3 %

By Service Type 4Q07 3Q07 4Q06

Logic(3) 67.4 % 66.8 % 57.4 %

DRAM 23.6 % 23.6 % 38.6 %

Management Services 1.5 % 3.1 % 0.5 %

Mask Making, testing, others 7.5 % 6.5 % 3.5 %

By Customer Type 4Q07 3Q07 4Q06

Fabless semiconductor companies 49.3 % 45.5 % 36.1 %

Integrated device manufacturers (IDM) 38.5 % 40.0 % 55.8 %

System companies and others 12.2 % 14.5 % 8.1 %

By Geography 4Q07 3Q07 4Q06

North America 44.6 % 44.7 % 36.3 %

Asia Pacific (ex. Japan) 26.4 % 26.4 % 20.0 %

Japan 10.4 % 10.1 % 11.3 %

Europe 18.6 % 18.8 % 32.4 %

Wafer Revenue Analysis

By Technology (logic, DRAM &

copper interconnect only) 4Q07 3Q07 4Q06

0.09mm 25.3 % 26.7 % 14.4 %

0.13mm 24.4 % 28.6 % 43.0 %

0.15mm 5.5 % 2.0 % 2.4 %

0.18mm 28.3 % 28.8 % 33.3 %

0.25mm 0.5 % 1.0 % 1.6 %

0.35mm 16.0 % 12.9 % 5.3 %

By Technology (Logic Only)(1) 4Q07 3Q07 4Q06

0.09mm 7.7 % 13.7 % 14.7 %

0.13mm(2) 21.0 % 22.7 % 14.0 %

0.15mm 7.7 % 2.7 % 4.2 %

0.18mm 40.3 % 41.0 % 54.8 %

0.25mm 0.6 % 1.4 % 2.8 %

0.35mm 22.7 % 18.5 % 9.5 %

Note:

(1) Excluding 0.13mm copper interconnects

(2) Represents revenues generated from manufacturing full flow wafers

(3) Including 0.13mm copper interconnects

Capacity*

Fab / (Wafer Size) 4Q07 3Q07

Shanghai Mega Fab (8”)(1) 98,000 98,000

Beijing Mega Fab (12")(2) 65,250 61,200

Tianjin Fab (8") 22,000 21,000

Total monthly wafer fabrication capacity 185,250 180,200

Note:

* Wafers per month at the end of the period in 8” wafers

(1) Shanghai Mega Fab is now comprised of Fab 1, Fab 2, and Fab 3

(2) Beijing Mega Fab is now comprised of Fab 4, Fab 5, and Fab 6

-- Total capacity increased to 185,250 8-inch wafer equivalent per month

at the end of 4Q07.

Shipment and Utilization

8” equivalent wafers 4Q07 3Q07 4Q06

Wafer shipments including copper

interconnects 497,454 458,466 424,395

Utilization rate(1) 94.4% 94.1% 86.6%

Note:

(1) Capacity utilization based on total wafer out divided by estimated

capacity

-- Wafer shipments increased 8.5% QoQ to 497,454 units of 8-inch

equivalent wafers in 4Q07 from 458,466 units of 8-inch equivalent

wafers in 3Q07, and up 17.2% YoY from 424,395 8-inch equivalent wafers

in 4Q06.

Detailed Financial Analysis

Gross Profit Analysis

Amounts in US$ thousands 4Q07 3Q07 QoQ 4Q06 YoY

Cost of sales 360,207 349,148 3.2% 364,339 -1.1%

Depreciation 161,232 151,720 6.3% 210,045 -23.2%

Other manufacturing costs 190,671 189,069 0.8% 145,673 30.9%

Deferred cost amortization 5,886 5,886 -- 5,886 --

Share-based compensation 2,418 2,473 -2.2% 2,735 -11.6%

Gross Profit 35,047 42,250 -17.0% 19,474 80.0%

Gross Margin 8.9% 10.8% -- 5.1% --

-- Cost of sales increased to $360.2 million in 4Q07, up 3.2% QoQ from

$349.1 million in 3Q07, primarily due to an increase in wafer shipments.

-- Gross profit decreased to $35.0 million in 4Q07, down 17.0% QoQ from

$42.3 million in 3Q07 and up 80.0% YoY from $19.5 million in 4Q06.

-- Gross margins decreased to 8.9% in 4Q07 from 10.8% in 3Q07 primarily

due to lower ASP resulting from DRAM price decline.

Operating Expense Analysis

Amounts in US$ thousands 4Q07 3Q07 QoQ 4Q06 YoY

Total operating expenses 57,389 62,435 -8.1% 5,762 896.0%

Research and development 26,201 25,906 1.1% 21,913 19.6%

General and administrative 18,820 23,836 -21.0% 14,563 29.2%

Selling and marketing 5,688 4,901 16.1% 4,729 20.3%

Amortization of intangible

assets 6,878 7,751 -11.3% 6,291 9.3%

Loss (Income) from disposal of

properties (198) 41 -- (41,734) -99.5%