Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from [Steven Colio – Unidentified Company].
Steven Colio – Unidentified Company
My first question is really relative to your gross margins, I understand in the earlier meeting you discussed the third quarter outlook for them to be greater than 24%, I guess with the components of the gross margins the cost of goods sold being so volatile with this SFAS 10.
Could you help with understand how you get to that greater than 24%, what your COGGS depreciation would likely be, and then we could back in to the other number.
Shiwei Sun
First of all, for depreciation in the third quarter will show roughly about 2%, quarter-over-quarter declines from second quarters. Secondly, we do have some impact from the Article 10, Accounting Principle 10 in second quarter, that’s a reversal again from Q1.
That’s roughly, I would say in between one third to half of our overall gross margin in second quarter. In the third quarter there won’t be any impact from this Article 10, so it will be moderately increased from the second quarter level in terms of gross margin third quarter.
Steven Colio – Unidentified Company
Okay, I want to ask that with a very slight increase in the depreciation components in cost of goods sold for the third quarter, I just want to make sure I understand that correctly.
Shiwei Sun
Yes, for third quarter you will also see some volume increase. So overall the raw material cost etc.. were still growing in-line with the wafer shipment numbers.
Operator
Your next question comes from CJ Mills – Barclays.
CJ Mills - Barclays
I had a quick follow up question for you on CapEx, you talked about raising the budget, and a partial focus on 28 nanometer R&D work, I guess can you talk about your early outlook for 2010, what you think your CapEx needs will be there and how we should think about the trend in CapEx?
Shiwei Sun
So our long term CapEx guideline is about 20% of our revenue, as I mentioned in the afternoon conference, in the past few years UMC has been below this guideline. So we are trying to catch up at this moment.
CJ Mills – Barclays
And you would expect that catch up would continue into 2010?
Shiwei Sun
To some extend at this moment.
Operator
Our next question comes from Donald Lu - Goldman Sachs.
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