Welcome, everyone to UMC's 2019 Second Quarter Earnings Conference Call. [Operator instructions] For your information, this conference call is now being broadcasted live over the Internet. A webcast replay will be available within one 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, UMC. Mr. Lin, please begin.

Thank you, and welcome to the UMC's conference call for the second quarter of 2019. I'm joined by Mr. Jason Wang, the President of UMC; and Mr. Chitung Liu, the CFO of UMC. In a moment, we will hear our CFO present the second quarter financial results, followed by our President's key message to address UMC's forecasts and the third quarter 2019 guidance. Once our President and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors Financials section. During this conference, we will make forward-looking statements based on the management's current expectation and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual result to differ materially, including the risks that may be beyond company's control. For these risks, please refer to UMC's filings with the SEC in the U.S. and the ROC security authorities. Now I would like to introduce UMC's CFO, Mr. Chitung Liu, to discuss our second quarter 2019 financial results.

Thank you, Michael. I would like to go through the 2Q '19 investor conference presentation material, which can be downloaded from our website. Starting on Page 3. I think the key message for second quarter of 2019 is we see a good rebound from the previous quarter. However, due to the current geopolitical uncertainties, we still see some kind of decline from the same period of last year. So on Page 3. Consolidated revenue was TWD 36.03 billion and gross margin pretty much stabled to 15.3% from the previous quarter. And the net income attributable to the stockholder of the parent was TWD 1.74 billion. And earnings per ordinary shares was TWD 0.15. On the Page 3, you can also see the trend of the utilization rate. Again, 88% in second quarter, a good recovery of 5% from 83% in first quarter, but significantly lower than the 97% of the same quarter in 2018. So on Page 4. Revenue growth 10.6% Q-o-Q to TWD 36 billion. Roughly 7% come from the shipment increase; another 3% coming from the ASP increase, which is mainly due to the product mix enhancement. Gross margin, as I mentioned, has more than doubled to TWD 5.65 billion or 15.7% gross margin. And operating expenses also slightly increased to TWD 5.5 billion. And as a result, the operating income is around TWD 1.76 billion or 4.9% operating profit margin. Net operating income didn't really see the similar revaluation gains in our stock holdings in the first quarter, so it's more reflect of our routine interest expenses and some of the ForEx losses due to the weakness in renminbi. So net nonoperating income is around net operating expenses is around TWD 617 million losses in the second quarter. And as a result, the net income attributable to…

Thank you, Chitung. Good evening, everyone. Here, I would like to update the second quarter operating result of UMC. In the second quarter, foundry revenue grew 10.6% quarter-over-quarter to TWD 36 billion, leading to a foundry operating margin of 5.3%. Utilization rate increased to 88%, bringing wafer shipment to 1.73 million 8-inch equivalent wafers. Second quarter '19 results reflected higher contribution from 12-inch technology node, which experienced strength on the wireless communication segment, including chips found in entry-level to mid-end smartphones, switch and routers During the quarter, we generated a free cash flow of TWD 8.17 billion. We remain committed to strengthening our financial metrics. And on June 19, 2019, UMC's Board of Directors approved the cancellation of 400 million ordinary treasury shares, which will reduce UMC ordinary shares by 3.3%. Despite U.S. and China trade tensions creating market uncertainty, we anticipate that specific area within the wireless communication centers will have a shorter upward adjustment in the supply chain, which should lead to a slight increase in wafer demand. However, we have observed that customers are continuing to managing their inventory carefully amid a weakened global economic environment, which may contribute to a lower visibility in business forecast during the second half of 2019. In the meantime, we will continue to actively implement measures intended to enhance our foundry competitiveness, such as focusing resources to capitalize on our existing strength in mainstream logic and specialty processes, while offering more diversified technology platform to customers. Now let's move on to the third quarter 2019 guidance. Our wafer shipment will show an increase of 2% to 4%. ASP in the U.S. dollar is expected to increase by 1%. Gross profit margin will be in the mid-teens percentage range and capacity utilization rate will be in the high 80% range. For foundry CapEx budget of 2019, it will be USD 1 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

[Operator Instructions] And the first question is coming from Randy Abrams, Crédit Suisse. Go ahead please.

Okay. I wanted to ask the first question just on the recent news on the China -- the [indiscernible] of the China listing. And if you could go through maybe a bit more on the rationale to withdraw the listing. And if you could also now discuss for that China operation, any -- like what your plan or strategy is now for both the 8-inch and 12-inch? If it changes any of your plans on the ramp up. So if you could just give an update on how your plans to ramp up Shaman and also the 8-inch, but yes, would appreciate if you could also address the pull of the listing.

I think the pull of the listing's really coming from that our underwriter or the guarantee Chang Jiang Securities after a few rounds of negotiation with the regulators, it doesn't seems we can reach a consensus about several key areas. And we've been -- we haven't been really told officially about what areas we can now reach the consensus. However, it's unlikely the regulator will change their current thinking. And instead of being rejected, we will be recommended by our underwriters to pull the application, which we did. And as for the implication, we think rather limited. Of course, we would love to catch the high P/E multiples in the new style board in China. However, from a longer transmitting UMC's listing, both from Taiwan and China, we do have ample experience for international financing. So we don't really think this termination or suspension of our application for listing will have any impact for our UMC in Taiwan or our operation in China in terms of financing for the growth in the future. So the impact is very limited. We don't expect to see any change for our China strategy regarding our range for 12-inch operations, both in Suzhou and Xiamen.

Okay. And maybe a third one on the China facility. If you go through Xiamen, the capacity now relative to I think the book says you can eventually get to 25,000. But if you could talk about where you're at now, how the fab utilization is? And if you have plans to kind of expand that closer to the 25,000. And then also for the 8-inch chip, where you're seeing for the utilization, if you're seeing more activity from the supply chain that you also need to have capacity on the 8-inch in China?

So 17,000 to 18,000 is roughly the current target -- yes, the goal is to reach to 25,000. However, this Xiamen strategy is very 28-nanometer high K-centric. So it's more tied to our high K momentum more than anything else. So we do see a recovery in our 28 nanometer activity in the second quarter as well as third quarter. But in order to further expand the Xiamen facility, especially 28,000, we do need stronger momentum than current status. So it will flow with the market demand. And in the near term, we will do only very mild expansion for our Xiamen capacity.

Okay. Great. Yes. And if I could ask actually it's more related to the mix. It rebounded well with the pickup like the 28 and 40 started to come back. If you could talk -- I'm putting a little bit of conservatism on second half. Maybe talk a little more. You mentioned 28 is still picking up. So you could give an outlook how you see the 28 and 40 nodes continuing and maybe carrying that further like over the next year with 5G? I guess TSMC kicked off with a lot of optimism on that. But if you could talk about how you see that coming through, if you're seeing kind of that similar early trend. And how you see that affecting it, whether it's a 28, 40 or more specialty that might be looking up the mature nodes?

Well, for the near term, the Q2, we actually see some of the rebound from a wireless communication sector. As we've seen though, it's more related to inventory replenishment than some selected customer in the communication market. And we anticipate this wireless communication replenishment will probably continue and showing in the Q3 '19. From the -- by no basis going forward, the 28, we see a improvement quarter-over-quarter from Q1 to Q2. And I will expect the 28 loading in the near term in the Q3 will be probably remain flat. Okay. However, the -- from the longer-term standpoint of the 28, we do believe that 2019 is the fastest of the 28 as we'd stop seeing some of the opportunity will improve our utilization going forward, mainly driving from a combination of the current 28 fragment product as well some of the projects that were currently under early engagement. So we do believe the 28 going forward will improve from 2019. If you break it down to the 40's nodes, I mean the 40 nodes in the -- in both Q2 and Q3, we see some good sign on that as well because the inventory reasons I mentioned earlier. But on a longer-term, and we do see that from the communication side and the consumer segment will continue driving some of the demand going forward. And so we are comfortable with how our business is progressing on 40 as well. And about the technology together, we expect our business along with technology development and the capacity point will be very much aligned with the market trend. Then now you also asked about other nodes. For the mature 12-inch, the 60 by 50 by 90, I mean, yes, we do see a strong demand coming from the many different segments. And we believe that mature 12-inch will sustain the high utilization rate driven by those growth area in the specialty area.

Okay. And the last question, probably two clarifications for it to go through. The CapEx first half was under spent a bit and it sounds like you're having a bit of a conservative view at least into second half further pick-up on utilization. So I'm curious if you see potential you could under spend the CapEx budget again. And the second clarification, on the margins. In the second quarter, it was a nice improvement, and I think some of that is mix of advanced nodes. It looks like though on higher sales, you brought down the non-depreciation costs. So if you could go through a bit more what drove the improvement. But then into second half, it looks like it's flattening out a bit even though sales is still picking up. So I'd be interested if you can give a little more color on what the drivers are in the margins.

For CapEx first, its current budget is TWD 1 billion, which is a small number. And the push out of payment or pulling of the payment could have some kind of impact for our cash-based budget in 2019. But for the time being, ballpark issue hasn't really changed much, and that's why we still keep our TWD 1 billion budget impact here. And this is a dynamic process. So we will update you if there's any change in terms of the real spending regards for 2019.

And for your question on the margin. Q2 margin -- the Q2 margin was better than guidance as a result of the, one, the NT dollars' depreciation. We see some improvement on that and as well as our ongoing staff cost reduction efforts in which that will continue. For Q3, we projected in the mid-teens range of -- even our overall utilization is expected to stay in the high 80% range. But we usually expense the higher utility costs during the fixed summer season. So at this point, we guide it as a mid-teens range.

And the next question is coming from Gokul Hariharan of JPMorgan.

Yes. I have a couple of questions. Could you talk a little bit about your outlook for the 8-inch demand in second half for this year, given that you mentioned that some of the segments are still seeing inventory correction? Also, last year, I think 8-inch we did see some ASP increases for -- at least for certain segments and mix also was getting better. Could you comment a little bit on what is the pricing trend in 8-inch right now, given some of your competitors have also talked about lower utilization since Q2, potentially extending into second half of the year? Lastly, any comment from management on how the settlement process with Micron is progressing? And what does the management expect -- kind of project in terms of any financial payments or anything like that, that just could be required for Micron in the capital plan?

Okay. As far as the 8-inch outlook, our Q2 was guided with the lower utilization in last quarter. And as we start seeing our 8-inches show a softened demand across from larger mix more discrete drivers, and -- but as a result, our Q2 8-inch utilization was actually higher than expected and reaching to a high 80% range. And we expect the 8-inch utilization will be in a high 80% range as well for the Q3 '19. Going forward, longer-term, the 8-inch business demand business, we still believe there's going to be many drivers that drives that demand, particularly from 5G and AKTV. For example, the -- we've seen some promising opportunity in the [Fit Me] for the 5G and diverse applications. And we're also seeing solid growth trend in LDDI as we see a higher resolution on TV such as AK4K or 4K2K start penetrating to the market. So we remain confident about the 8-inch in the longer term. But in the short term, we're probably going through some short-term volatility. Yes. The -- from an ASP standpoint, we see the ASP mainly driven by product mix as well the erosion. And we see a -- the product mix may change as -- when we're seeing a different mix of a product coming into an 8-inch mature technology. So on that front, I say our goal is try to maintain as flat as possible, but it may change due to the product mix changes going forward. And we have to look how fast those new application were migrating into the 8-inch mature technology. Example like the most fabs and the IGBT area which represent a different level of ASP, but we'll continue monitoring the trend of that. But if we resolve the mix change, we'll maintaining the ASP as flat as we can. The final question for the Micron case, the litigation at this point is still ongoing. And we stated before and we will vigorously defend any of the false charges amid some steep allegations. But since this is under the judicial process now, we do not have any updated information at this point. If there is any new development, we will disclose it in a timely measure. So I think that's probably as far as I can update you for that topic.

Okay. Just one quick follow-up on 8-inch fab. The -- Fujitsu is something that deal seems to be delayed and potentially, could you give an official update on what is happening there? And is there further need to actually seek out some 8-inch capacity given you're running at close to 90% utilization, and I think previously, the expectation was to kind of bring some capacity in.

Well, first of all, the Fujitsu Mia acquisition is a 12-inch. Yes. that's right. So for the -- for that transaction, we've currently been working with the relevant government agency to provide whatever material they need, and we're still in that stage in order to reach an informed decision. And we can't actually -- we are not in that position to speculate on any anticipated time line right now. But we are working with them closely to hopefully we can get to that. We are aiming for the next contractual date is October 1, 2019. So that's the current status. For the 8-inch capacity, we have a really relatively limited space for significant capacity increase. And the area that we focus on -- those capacity increase will primarily be in our China 8-inch fab [indiscernible] impact and the capacity increase right now, the plan is from 60 -- range of a 65,000 per month to 70,000. Yes. So overall, 3% increase. Yes.

And the next question is coming from Szeho Ng of China Renaissance.

I have two questions. The first one, regarding UMCi. You're adding more capacity as in that sector. What are the reasons behind the move for the capacity expansion there?

UMCi is our mature 12-inch wafer fab. And they are also carry more of our specialty technology development. So the capacity expansion is mainly aiming to have more variety in specialty technology out of our Singapore facility. So specialty is the main area of our expansion.

I see. All right. Okay. The second one, going back to the Fujitsu question. Let's say after October this year, you are not be able to close the deal, would you walk away from the deal or you will ask for extension?

It's hard to speculate, and we are not really reaching the point of deadline yet. I think both party are really hoping to close the deal, and we do expect to see a positive outcome. And if a extension is really necessary, then we'll, of course, we'll do our best to negotiate for such a revision for purchase agreement. However, for the time being, we are focusing on providing information for all the regulators.

Okay. All right. So the mix milestone, what should we be monitoring for that transaction?

So once we receive relevant approval, and we will, of course, make an announcement. And the closing day is aiming -- the next one available I mean at October 1.

And the next question is coming from Roland Shu of Citigroup.

So first question. Can you update your status for your 22-nanometer HPC+ qualification status?

For the 22-millimeter, there is a couple of phases, uLL and uLP. And the -- we will start taking out 22-nanometer products in second half '19 and followed by more 22 takeout in 2020 as well. And for the 22, we expect those product will enter volume production sometime in 2020.

Okay. Yes. So what kind of alternate applications are picking up on this 22-nanometer technology?

For the initial products are more related to the consumer area.

Consumer? Yes. And [probably that will be established but as you go] -- next year 2020?

Yes. Sometime in 2020. Yes.

Okay. So I know probably are still at the early stage. But what are your outlook for this 22-nanometer gross margin? Do you expect a steeper gross margin earning curve compared to 28-nanometer or you think it will be the same?

For the gross margin, I mean we look at this from a blended level, not in a position to guidance, but specific nodes. But in our projection today, we do think once the 22 start ramping, we're actually helping in our blended gross margin I believe.

Okay. So it will be a gross margin accretive once your next production is for 22-nanometer?

Yes.

Okay. Good. My second question is your [indiscernible] rationale you increased price spend and the price spend total compensation from 2% on the total net income in 2017 to 8% of the total net income in 2018.

We just try to tie the company's stock performance to the senior management's performance. So last year -- sorry, this year -- last year, we did the equity program to our senior management. And so all the senior management actually pay for the treasury shares at the cost of around TWD 11.5 at the market price of TWD 15.5. And as a result, we also have to be pay tax based upon TWD 15.5. And that's the main reason. So it's a more like a one-time equity-linked performance compensation for senior management.

Okay. So for 2019, I think the total compensation won't be as high as 8% this year or it still depends?

It will definitely decline.

And the next one is from Charlie Chan of Morgan Stanley.

So I have several questions. So first of all, on specialty semiconductors, can you give us more details of tempo for those high-voltage power semis? Can you supply your product to automotive and industrial or even telecom equipments? And you tend to mention that IGBT do have a IGBT process currently?

Well, I mean, okay. The -- from specialty technology, we are focused on a few areas. One, we are still bringing out some of the new larger process technology, mainly for the outdoor low powers. And those will be currently focused on 22 and the 40 for the ultra-low power. And so serving the low-power requirements. And for the other specialty, we also focus on the high-voltage for the display driver application. And across on 80-nanometer, 55, 40 and 28, we have embedded flash that go into 55 nanometers. And for the IoT MCU applications. And we have the RF SOI applications coming into 12-inch, and the -- and that's mainly on the 12-inch side. And the 48-inch, there's the BCDs, and for the PMIC. And so those are more on the -- under 8-inch. I mentioned earlier for the IGBT MOSFET is mainly for preparation of the migration to 8-inch mature technology. And for those, we are still in the planning stage. And since those are more coming from the IDM sort of customer, and we need to closely working with IDM customer for those product specifications, so at this point, and we have a plan, and -- but no specific on the IGBT yet.

Okay. Yes. So do you have a rough number how much is specialty semi account for your total revenue?

See, right now is the specialty representing about 30%. Right now, we're about logic and specialty split is about 50-50.

Okay. So around the 50% of total revenue coming from that. Okay. And I would also like to consult your thoughts because you mentioned in your opening remarks that customers are still carefully managing their inventory. So can you give us some sense about end-market demand? Which segments do you see a stronger recovery and which segment you still see that, that remains still weak?

So we see the -- in Q3, we continue -- expecting communication will be the strongest segment, but we see some inventory replenishment there. For the consumer and computer, actually it's weaker than the communications segment.

Okay. Okay. And next would be a quick question about your cellphone, the 5G demand on major infrastructure or 5G smartphone. I'm not sure. Do you have any exposure to 5G relative semiconductors? But recently, it seems like several semiconductor companies are saying 5G demand is accelerating. So can you share with your observation on the 5G demand?

We certainly have the similar expectation for 5G and we do also believe that 5G will come early than originally expected. And then 5G will address many different -- the spectrum of the technology nodes or the range from [indiscernible] to even the 8-inch. So no I -- we definitely -- we're certainly engaging with many customers. Hopefully, we can penetrate those 5G growth. And we have very similar expectation on 5G like others.

Okay. Yes. So that's actually the question I want to clarify a little bit, right? So I mean, year to date, we haven't seen operators revise outlook about their CapEx. And also, after the trade war, I think outside of China, I think those countries are very concerned about whether if actually infrastructure development will get delayed. So how do we reconcile from the headlines, I mean those trade war issue and also operators' CapEx versus what you and your industry peers are seeing that demand is happening earlier than expected? So what we missed from this dynamic?

Well, as a foundry company, we're engaging our customer as a [product] company. So they penetrate to the market. So the way we measure that is based on their product introduction. So when we're engaging with their product, they're accelerating their takeout plan and the product coverage. Then to us, that's a good sign. Now whether the infrastructure of the 5G is existing or coming was subject to the volume ramp. So on the ramp perspective, we still have to -- we have to still -- monitoring that. But from the product development standpoint, we start seeing quite good activities there.

Okay. So can we get some more color about what kind of 5G ready semiconductors you are working on? And maybe we know a customer base -- are those -- are customers more from the Asia-based or U.S., Europe-based?

Well, actually, it's across the board. From the events in our addressable -- 28, 22. And in those area, you see the millimeter wave coming in. And all the way to the 8-inch mature or the PMIC. And so in between, you have a display driver that's serving for the 8-K panels. So it is across the board variety different applications.

Okay. And lastly, you said kind of a industry crosscheck, right? So I think two quarters ago, you mentioned that you want to try to negotiate the raw wafer price. So what's your expectation about the raw wafer OTA or so-called the counterparty in second half? And what's your expectation about OTA price in 2020?

Well, we've been talking about this for a couple of quarters now. We mentioned that we have a long-term contract a couple of quarters ago. And although we have those long-term contracts, the outgoing process we're working with the suppliers becomes a new norm now. So our process now is to continue working with supplier to achieving a cost competitiveness. And this is [only defined] as an ongoing process. In the same time, and we are also seeking alternative supplier that will help us improve our wafer cost as well. So it is our plan to bring a additional supplier and -- to the existing long-term contract. So those activities are also ongoing at this point.

Okay. So how -- okay. Okay. Can you give us some guess about a raw wafer price next year? Do you think it will go down? And by how much?

Well, it's -- since it's an ongoing effort, and I mean we do believe it will go down, but no -- it's probably better not to quote percentage. Yes.

And next, we'll have Sebastian Hou of CLSA.

My first question, just a follow-up on the -- mentioned the communication strength, the inventory replenishment continue into third quarter. Can you be more specific about what exactly in this communication is [indiscernible] ready or like other networking products?

It is in the smartphone space and ...

Okay. So it is more on the mid to low-end smartphone area?

That's right.

Do you think it is more driven by inventory replenishment by certain customers or driven by your customers getting share?

I think more -- I mean in our view, it's more of a inventory replenishment on those customers because we haven't been seeing that across the board, but on some selected customer. And we do believe that's more inventory adjustments. It's hard to judge whether that's the market share gain or not of those customers, but [indiscernible] for inventory. Yes.

Okay. Okay. So you do see just only specific certain customers rather than across the board all the smartphone customers are doing that?

Yes.

Okay. Okay. And in terms of the -- a second question is that you talked about 65 nanometers and 90 nanometers, these mature 12-inch node, you are -- you expect it to continue to stay high. I'm just curious about what the specific applications here and why do you think that is sustainable?

Well, in the near term, we see a very -- a steady volume on the 8 -- 80-nanometer TDDI. So that's for the [spree] driver side, and it remains stable. And we also see some the 55 embedded flash on the consumer segment very stable in that particular nodes. And that's the near term. And we'll see -- and we do see the -- those high utilization just the growth of the follow-on technology. The -- on the display that we're migrating from 80 to 55, so they will stay as a mature. The consumer MCU will stay 35. And while the -- our SSOI will probably coming into the 130, 90 and 55 in starting from 2020. So we have certain expectation on this that those application will drive the sustainability of the utilization -- high utilizations.

Okay. Okay. And in terms of the -- the third question is on 28-nanometers. I think earlier, you mentioned that you are pretty confident that this year should be the bottom and -- because based on the products and visibility you have. My question is that I'm curious about what type of the applications would this be? And then will it be mainly driven by 22-nanometer consumer application, can you elaborate or also includes something else?

Well, the -- both communication and consumer segment will actually help to drive that, the potential growth in our 28.

Okay. And in terms of communication, we -- it is reasonable for us to assume that's like no smartphone-type of a network in such as WiFi?

Yes. In the smartphone area, WiFi, some of the RF device, yes.

Okay. When you say RF device, what are you referring to specifically? Is it like RF transceiver?

Yes. RF transceiver, yes, right.

Okay. Also, you expect those RF transceiver will -- are you gaining share from other foundries or you can see there is the customer migrating from 40 to 2080?

We can see actually a couple migrating to 2080, yes.

Okay. okay. And what could happen to your 40-nanometer if those churn migrated to 2080?

Those are not our current 40s customer.

Okay. So basically, you are taking share from other -- your competitors' 40 nanometers, but they are migrating to 2080, and you capture that?

Yes. We are currently engaged in those, yes.

Okay. Okay. Sounds good. Last one, just want to get some update on depreciation. And can you update -- can you just update us on the depreciation outlook for this year and next year again?

Well, this year, again, it's about 5%-plus decline compared to that of last year. And next year, not so much difference. Maybe we are talking about low single-digit decline.

Next year's only low single-digit decline?

Yes. The main decline probably will have to wait until 2021.

Okay. But if I -- I'm not sure you like remember this correctly, if you want to correct me. But I thought that the next year depreciation was guided to decline more than this year.

No. I think from the current status, we are talking about maybe more than 5% decline in 2019 and only low single-digit decline next year, but a lot more decline, maybe close to 10% decline or more in 2021.

Okay. And this is based on the assumption that this year, you spent TWD 1 billion CapEx and next year probably flat?

Yes. That's right.

[Operator instructions] And the next one is coming from [Kirsten Li] of Goldman Sachs

This is Bruce from Goldman. So I just want to go back to the R&D expenses. Okay? We start to see some R&D expenses decline to probably like TWD 2.7 billion, TWD 2.8 billion. I think is that a new norm in our modern purpose? Or for a longer-term perspective, what is the ideal R&D expenses as a percentage of revenue in the future? Because we -- I still have difficulty to understand that, after restoring all the R&D -- our investment for 14-nanometer and above, we still do not see a meaningful R&D expenses decline.

We see some R&D expense decline, but at the same time, we are reprioritize our R&D team for the -- allocate those resource to specialty technology, I also mentioned earlier. And those specialty technology will cut across on 8 and 12-inch technologies. And meanwhile, we also try to -- we're still bringing up some the new larger process technologies. I reported earlier for the ultra-low power in 28 and 40 as well. So there are still quite a bit of engineering activities ongoing. But for the longer term, idea is -- if the absolute dollar will stay flat in our revenue growth and the ratio will reduce. So we'll continue tracking that progress and we'll adjust accordingly. At this point, there is no -- we project those will probably stay [indiscernible]

I'm sorry. I'll try to dig a bit further. The reason is that -- we understand you are trying to prioritize or try to move the R&D spend to someone else -- to something else. But at the end of the day, the R&D expenses as a percentage of sales should be very different when you do the advanced geometry -- versus like a negative product or various different products. So the metrics should be very different, right?

I didn't quite -- what do you mean by the metric should be quite different?

So the index is, for example, TSMC is doing a lot of like -- advanced geometry development. At the end of the day, the R&D expenses as a percentage for sales is still at 8%, which is similar to UMC at this moment. And if the company is guiding for like a similar R&D percentage -- R&D expenses as a percentage of sales. But in terms of the costs for doing the R&D versus costs of a legacy product, I think it should be -- we should feel that we'll see some differences, right? Or that's why I'm asking for the longer-term perspective. Do we expect a very different R&D expenses?

Well, as I said, for the longer term, it will change, but not for the near term. In the longer.

Let's say in three years, what is the ideal R&D expenses though as a percentage of sales?

Well, it depends the -- our R&D project and the focus of the market. And it's too early to project that right now. But you are right. From a major standpoint, the longer term, will change, but giving what are foreseeable projects today, and we don't see that change in the near term.

Near term means about one to two years?

Yes. Within the two years. Yes.

I see. I understand that. The second thing is that I try to think a bit more about medium-term outlook. The management just mentioned that the longer term is still positive, but you do expect some short-term volatility. However, you are guiding for flat utilization in third quarter. Industry or for TSMC or they are guiding for some recovery from 8-inch in the fourth quarter. So what kind of volatility are you seeing in fourth quarter or early next year?

Well, first of all, we don't guide anything beyond Q3. Our view is -- as we start experiencing some improvement, demand from communication and computer segment, however, the visibility on automotive and industrial segment still remains low. So since the -- those will still be -- remains low, we won't rule out the near-term volatility at this point.

I see. I see. Understand. So that -- there is nothing that you see that fourth quarter or like anything in fourth quarter is below then the expectation or anything that way?

Well, when the visibility is low, it's hard to -- so it becomes higher uncertainties. Right now, the biggest concern we have is the recovery of our automotive and industrial. We haven't really seen that coming. And if the near term, the communication is really a short-term -- the upward -- uptick of the inventory adjustment or replenishment, and we don't know how sustainable that is. So the question is really about the visibility and that cause some of the uncertainty from our point, yes.

Okay. I see. Can you remind us that what is the revenue exposure to automotive and industrial in 8-inch?

Automotive in 8-inch.

Total is about 5% to 6% of our total revenue [PAT], so...

I see. That's for automotive. How about -- that's for automotive or automotive plus industrial?

Automotive plus industrial, right?

Yes. About 10%, close to 10%, right.

We thank you for your questions. That concludes today's Q&A session. 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 ir@umc.com. Have a good day. Thank you.

Thank you. And ladies and gentlemen, that concludes our conference for second quarter 2019. Thank you for your participation in UMC's conference. There will be a webcast replay within one hour. Please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.