SMIC 2025 Q3 Earnings Live Broadcast
[AI Key Takeaways]
Financial Performance
- Third-quarter revenue reached USD 2.382 billion, marking a 7.8% increase quarter-over-quarter, with a gross margin of 22%, up 1.6 percentage points quarter-over-quarter.
- Operating profit of US$351 million, EBITDA of US$1.43 billion, with an EBITDA margin of 60%
- Capacity utilization rate reached 95.8%, with wafer shipments increasing by 4.6% quarter-over-quarter to 2.499 million wafers
- Revenue for the first three quarters amounted to USD 6.838 billion, representing a year-over-year increase of 17.4%. Gross margin stood at 21.6%, up by 5.3 percentage points year-over-year.
Business Progress
- Monthly production capacity has reached the million-wafer level, totaling 1.023 million 8-inch equivalent standard logic wafers
- The 28nm ultra-low-power logic process has entered mass production, providing customers with lower power consumption solutions
- Launched multiple specialized process platforms including automotive-grade sensors, BCD, MCU, RF storage, and display
- Revenue from China increased by 11% quarter-over-quarter in absolute terms, driven by accelerated supply chain shifts and domestic market expansion
Guidance for the next quarter
- Sales revenue in Q4 is expected to remain flat or grow by up to 2% quarter-over-quarter
- Gross margin is projected to range between 18% and 20%
- Full-year revenue is projected to exceed USD 9 billion, marking a new level of growth in revenue scale.
- The production lines continue to operate at full capacity.
Opportunity
- The ongoing effect of industrial chain transitions and iterations has led to an increase in domestic clients' market share, creating more market opportunities within the supply chain.
- Mass production of 28nm ULP logic process technology, with specialty processes steadily advancing across multiple technical platforms.
- Establishing long-term strategic partnerships with clients to develop customized product platforms.
- Growth in the automotive chip market, with the launch of various automotive-grade specialized processes providing system-level solutions.
Risk
- Expansion of production capacity by competitors brings market competition, and seasonal competition in mobile product categories creates bidding pressure.
- The major cycle of memory products brings supply assurance and pricing pressures, impacting the production planning of end manufacturers.
- Customers hold relatively conservative expectations for next year's shipment volumes, with economic fluctuations affecting market demand.
- Geopolitical factors influence equipment procurement and delivery timelines, with some earlier equipment purchases being delayed due to licensing issues.
[AI Meeting Transcript]
Operator
Welcome to SMIC's third quarter 2025 earnings conference call. Today’s conference will be simultaneously broadcast live over the Internet and by telephone. Please note that if you join the meeting via telephone, your dial-in will be in listen-only mode. After the conclusion of the management presentation, we will proceed to a question-and-answer session, at which time you will receive instructions on how to participate.
欢迎参加半导体制造国际公司的2025年第三季度网络广播电话会议。今天的电话会议将通过互联网和电话同时进行。请注意，如果您通过电话加入会议，您的拨号保险处于仅听模式。然而，在管理层演示结束后，我们将进行问答环节。届时您将收到有关如何参与的说明。
Without further ado, I would like to introduce Miss Guo Guang Li, Senior Vice President and Board Secretary to host the webcast.
Guo Guang Li
Hello everyone, welcome to SMIC’s third quarter 2025 earnings conference call. Attending today’s earnings call are Dr. Zhao Haijun, Co-Chief Executive Officer, and Dr. Wu Junfeng, Senior Vice President and head of finance.
Greetings. Welcome to SMIC's third quarter 2025 Webcast conference call. Attending today's call are Doctor Zhao Hai Jun, Co-Chief Executive Officer, Doctor Wu Jun Feng, Senior Vice President and person in charge of Finance.
Let me remind you that our statements today may include forward-looking statements, which reflect the company’s expectations for future performance but do not constitute guarantees and are subject to inherent risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Unless otherwise noted, all figures presented during today’s earnings call are reported in accordance with International Financial Reporting Standards (IFRS) and expressed in U.S. dollars.
Let me remind you that today’s presentation may contain forward-looking statements, which do not guarantee future performance but reflect the company’s expectations and are subject to inherent risks and uncertainties. Please refer to the forward-looking statements in our Earnings Announcement. Please note that today’s earnings statement is presented in accordance with International Financial Reporting Standards, and all currency figures are in U.S. dollars unless otherwise stated.
Next, let us invite Dr. Wu Junfeng to introduce the company's financial situation.
I would now hand the call to Dr. Wu to introduce the company's financial status.
Wu Junfeng
Hello everyone. First, I will report our unaudited results for the third quarter of 2025, followed by our guidance for the fourth quarter.
I will report our unaudited results for the third quarter, followed by our guidance for the fourth quarter.
The third-quarter results are as follows: revenue was US$2.382 billion, representing a sequential increase of 7.8%. Gross margin was 22%, up 1.6 percentage points sequentially. Operating profit was US$351 million. EBITDA amounted to US$1.43 billion, with an EBITDA margin of 60%. Profit attributable to the company was US$192 million.
The third quarter results are as follows. Revenue was 2.382 billion, up 7.8% sequentially. Gross margin was 22%, up 1.6 percentage points sequentially. Profit from operations was 351 million. EBITDA was 1.43 billion. EBITDA margin was 60%. Profit attributable to the company was 192 million.
Regarding the balance sheet, at the end of the third quarter, the company had total assets of US$49.4 billion, including cash on hand of US$11.4 billion. Total liabilities amounted to US$16.4 billion, of which interest-bearing debt was US$11.5 billion. Total equity stood at US$33.1 billion. The interest-bearing debt-to-equity ratio was 34.8%, and the net debt-to-equity ratio was 0.4%.
Moving to the balance sheet. At the end of the third quarter, the company has total assets of 49.4 billion, of which total cash on hand was 11.4 billion, total liabilities was 16.4 billion, of which total debt was 11.5 billion, total equity was 33.1 billion. Debt to equity ratio was 34.8% and net debt to equity ratio was 0.4%.
Regarding cash flow, net cash generated from operating activities in the third quarter was US$941 million. Net cash used in investing activities amounted to US$2.062 billion, while net cash used in financing activities was US$490 million.
In terms of cash flow for the third quarter, net cash generated from operating activities amounted to 941 million. Net cash used in investing activities totaled 2.062 billion. Net cash used in financing activities was 490 million.
For the fourth quarter of 2025, our guidance is as follows: revenue is expected to remain flat or increase by up to 2% sequentially, with gross margin projected to be in the range of 18% to 20%.
For the fourth quarter of 2025, our guidance is as follows: revenue is expected to be flat to up 2% sequentially, and gross margin is expected to be in the range of 18% to 20%.
This concludes the financial update. Thank you.
This concludes the financial status. Thank you.
Guo Guang Li
Thank you, Dr. Wu. Next, I will hand over the call to Dr. Zhao Hai Jun, Co-CEO, to comment on operations.
Thank you, Dr. Wu. Next, I will hand the call to Dr. Zhao Hai Jun to comment on operations.
Zhao Hai Jun
Good morning, everyone. Thank you for attending SMIC's third-quarter 2025 earnings webcast conference call.
The company achieved total sales revenue of USD 2.382 billion, with a quarterly increase of 7.83%. By the end of the quarter, the company's monthly production capacity, in terms of eight-inch standard logic wafers, reached one million units, increasing to 1.023 million units. Revenue from 12-inch and eight-inch wafers accounted for 77% and 23%, respectively, with stable proportions. The capacity utilization rate reached 95.8%, and shipment volumes continued to rise.
For the quarter, the company's revenue was USD 2.382 billion, a sequential increase of 7.8%. By the end of the third quarter, the monthly capacity reached the million-wafer level, totaling 1.023 million standard logic eight-inch equivalent wafers. Wafer revenue from 12-inch and eight-inch wafers accounted for 77% and 23%, respectively, with stable proportions. The utilization rate was 95.8%, and wafer shipments continued to increase.
Wafer shipments grew by 4.6% sequentially to 2.499 million standard logic eight-inch equivalent wafers, mainly due to the accelerated reshuffling of the industrial chain and ongoing inventory stocking by distribution channels. The company actively cooperated with customers to ensure shipments. The blended average selling price of wafers increased by 3.8% sequentially, primarily driven by changes in product mix, with higher growth in shipments of complex-processed products.
Wafer shipment increased by 4.6% sequentially to 2.499 million standard logic eight-inch equivalent wafers, mainly because the industrial chain has been reshuffling at an accelerated pace and distributors continuously stocked up and replenished their inventory. The company actively collaborated with customers to ensure their shipments. Blended wafer price increased by 3.8% sequentially, mainly due to the product mix change with higher growth in shipments for complex processed products.
In terms of regional classification of sales revenue for the third quarter, China, the United States, and Eurasia accounted for 86%, 11%, and 3%, respectively. Among these, the absolute value of revenue from China increased by 11% sequentially, mainly due to the aforementioned accelerated reshuffling of the industrial chain, coupled with the expanding domestic market and customer demand for increased shipments. To support urgent needs, the company adjusted its capacity allocation, resulting in fluctuations in regional revenue share for the quarter.
In terms of revenue by region, China, America, and Eurasia accounted for 86%, 11%, and 3%, respectively. The absolute revenue from the China region increased by 11% sequentially, mainly due to the customers' demand for shipment pull-in driven by the accelerated industrial chain reshuffling as mentioned earlier, coupled with the continuous expansion of the domestic markets. To support urgent needs, the company adjusted its capacity allocation, leading to fluctuations in quarterly revenue portions by region.
Revenue contributions from smartphones, computers and tablets, consumer electronics, connectivity and wearables, and industrial and automotive segments accounted for 22%, 15%, 43%, 8%, and 12%, respectively. Among these, consumer electronics grew by 15% quarter-on-quarter, mainly due to the phase of accelerated domestic substitution of overseas market shares. Long-term partnership customers of the company have seized opportunities within the industrial chain, leading to robust supply chain demand across various electronic products, including diversified home appliances.
By application, wafer revenue from smartphone, computer and tablet, consumer electronics, connectivity and IoT, industrial and automotive accounted for 22%, 15%, 43%, 8%, and 12%, respectively. Among that, consumer electronics increased by 15% sequentially, primarily because during the phase when domestic companies have accelerated their replacement of overseas peers' market share. The company's customers with long-term oriented partnerships have seized opportunities in the industrial chain; therefore, supply chain demand remains robust for various electronic products such as diverse home appliances.
The company's gross margin in the third quarter was 22%, up 1.6 percentage points sequentially, mainly due to the increase in capacity utilization, which offset the impact of rising depreciation through increased output.
For the quarter, the company’s gross margin was 22%, increasing by 1.6 percentage points sequentially, mainly due to a higher utilization rate, which offset the impact of depreciation through increased output.
According to unaudited financial data, the company’s revenue for the first three quarters amounted to USD 6.838 billion, representing a year-on-year increase of 17.4%. The gross margin was 21.6%, up 5.3 percentage points year-on-year, with total capital expenditures reaching USD 5.7 billion.
According to the unaudited results for the first three quarters, the company's revenue reached USD 6.838 billion, up 17.4% compared to the same period last year. The gross margin was 21.6%, up 5.3 percentage points compared to the same period last year, and the capital expenditure totaled USD 5.7 billion.
Although the fourth quarter is traditionally a slack season with some slowdown in customer inventory preparation, the effect of industry transition and iteration persists, making the off-season less sluggish. Therefore, the company’s revenue guidance for the fourth quarter indicates a flat to 2% sequential growth. The production lines remain fully loaded overall, with the gross margin guidance set at 18% to 20%, consistent with the third-quarter guidance. Based on this, the company’s full-year revenue is projected to exceed $9 billion, reaching a new milestone in revenue scale.
Despite the traditional seasonal pattern, customers slow down their stock up, however the effect of industry reshuffling and iteration continues, leading to a better than expected season, thus the company's fourth quarter revenue is expected to be flat to up 2% sequentially and the overall production line continues to keep fully loaded. The gross margin is expected to be in the range of 18% to 20%, the same level as the guidance for the third quarter. According to this guidance, the company's full year revenue is expected to exceed 9 billion, marking a new milestone in its revenue scale.
The company has continued to strengthen its strategic layout this year, with steady progress in the development of specialty technologies across multiple platforms. The ultra-low-power 28-nanometer logic process has entered mass production, providing customers with lower power consumption and higher quality solutions. Image sensor (CIS) and image signal processing (ISP) technologies have seen continuous iterations, enhancing sensory capabilities, picture quality, and signal-to-noise ratio while developing an optical process platform covering more spectral bands.
In terms of product platforms, the company has continued to strengthen its layouts. So far this year, specialty technologies have demonstrated steady progress across multiple platforms. The 28-nanometer ULP logic process has entered production, providing customers with lower power consumption and higher quality solutions. Continuous technology iterations in CIS and ISP processes have enhanced light sensitivity capability, image quality, and signal-to-noise ratio, while optical process platforms have been developed to cover a broader range of wavebands.
The embedded memory platform has expanded from the consumer market into automotive-grade industrial MCU fields. Specialty storage solutions such as NOR flash and NAND flash provide high-reliability platforms with higher density, smaller size, and lower power consumption. In addition, the company has seized growth opportunities in the automotive chip market by launching various specialty processes including automotive-grade sensors, BCD, MCU, RF, memory, and display, offering customers system-level solutions.
The embedded memory platforms have been expanded from consumer to automotive-grade and industrial MCU fields. Specialty memories like NOR flash and NAND flash have delivered a high-reliability platform with higher density, smaller size, and lower power consumption. Additionally, the company has seized the growth opportunities in the automotive chip market by launching multiple specialty processes such as automotive-grade sensors, BCD, MCU, RF, memory, and display, providing customers with system-level solutions.
Apart from smart applications, other mainstream application markets have also experienced moderate growth or stabilization. During the domestic industry chain's transition and iteration process, the company and its customers have worked together to seize opportunities to become stable suppliers, ensuring sustainable order flow for the company both currently and in the foreseeable future. Overall, the company's production lines are still in a state of undersupply, with shipments unable to fully meet customer demands.
So far this year, excluding AI, other major application fields have achieved moderate growth or return to stability. During the reshuffling and iteration in the domestic industrial chain, the company has worked together with customers to seize opportunities and become reliable supplier, thus ensuring sustainable orders for the company both present and in the foreseeable future. Currently, the company's production lines are still in short supply overall and the shipment volume cannot meet customer needs.
That concludes my presentation today as we look forward to a successful conclusion in 2025. Lastly, we sincerely thank all our customers, suppliers, investors, and members of the community for their unwavering support. Thank you.
I will conclude my presentation here as we anticipate the successful completion of 2025. Finally, we sincerely thank all customers, suppliers, investors, and the community for your strong support. Thank you.
Guo Guang Li
Alright, thank you, Dr. Zhao. Next, we will move into the Q&A session, where Dr. Zhao and Dr. Wu will provide answers. Questions in Chinese will be answered in Chinese, and questions in English will be answered in English. Each participant is limited to asking two questions.
Thank you, Doctor Zhao. Next is our Q&A session. Questions will be answered by Doctor Zhao and Dr. Wu. Chinese questions will be answered in Chinese. English questions will be answered in English. Please limit your question to two per person.
I would now like to open up the call for Q&A. Operator, please assist.
Operator
Thank you. We will now begin the Q&A session. If you would like to ask a question, please press *11 on your phone. If you would like to cancel your question, please press *11 again.
We will now begin the question and answer session. To ask a question, please press *11 on your telephone. To withdraw your question, please press *11 again.
The first question comes from Le Ping Huang of Hua Tai Securities.
Your first question comes from Le Ping Huang of Hua Tai Securities.
Le Ping Huang
Congratulations on the very strong performance in Q3. I would first like to ask about the guidance for Q4, as the company has projected revenue growth of 0% to 2% quarter-on-quarter. I want to understand the situation regarding volume and pricing in Q4. I have noticed that over the past few quarters, the company’s capacity utilization rate has been continuously increasing. If the growth in volume this quarter is not rapid while capacity continues to be released, it seems from calculations that the capacity utilization rate might slightly decline in Q4. However, Mr. Zhao just mentioned that we are still in a supply-demand imbalance. Could you elaborate a bit on what exactly is happening? Thank you.
Zhao Hai Jun
Well, Le Ping, thank you for raising the first question. Our guidance for the fourth quarter indicates that revenue will remain flat or increase by 2%. This is mainly due to the fact that as we approach the year-end, there is some adjustment in shipment volumes based on next year's outlook. The supply-demand imbalance we previously mentioned primarily referred to order volumes from the third to the fourth quarter. However, by the end of this year, the focus will be on preparing for shipments in the coming year. We will not discuss in detail the situation of the first and second quarters of 2026 today. Therefore, our current production line utilization rate in the fourth quarter largely reflects the performance expected in the first and second quarters of next year.
Regarding your question about why we haven't projected a significant increase quarter-on-quarter: as we mentioned earlier, in Q3, our capacity utilization reached 95.8%, indicating that production lines are oversubscribed—orders exceed our production capacity. Yet, revenue in Q4 isn’t expected to jump significantly. This is mainly because, towards the end of the year, clients have other considerations regarding whether to push large quantities of products into the market.
Now, as we enter the fourth quarter, which is traditionally a slack season, the biggest consideration lies in the mobile phone market and its overall allocation dynamics. On one hand, we observe that the total mobile phone market remains flat or slightly growing. However, on the other hand, there are areas of undersupply, such as memory chips. There is concern that sufficient memory chip supply may not be available going forward. Even if other IC components are secured, it may still not be possible to produce a complete phone.
The second issue pertains to memory chips, which have seen significant price increases. If the same quantity of memory chips is procured, should the prices of other ICs decrease? Currently, everyone is in the midst of negotiations and forecasts. On one hand, companies want to secure more memory chips immediately to complete phone production. On the other hand, there is fear that even if other ICs are acquired, they might not be matched with memory chips. These are the two key issues we are observing, and they significantly impact the mobile phone sector.
Another area is the networking industry. As previously mentioned, the speed of industry transition or iteration in this sector is relatively fast. This has led to networking companies being more cautious about placing orders and procuring inventory in the fourth quarter. They worry that if they over-purchase, the market share might already have shifted to competitors. Therefore, companies in the networking industry are exercising caution, making it one of the sectors most affected by rapid transitions.
In terms of revenue, we did not project a particularly high growth rate for the fourth quarter. However, our capacity utilization and the volume of ongoing orders exceed the guidance provided.
Le Ping Huang
Thank you, Mr. Hao. Following up on your question, my second point relates to what you mentioned earlier about memory chips. Investors are quite concerned about the broader cycle of memory chips, especially the anticipated super cycle next year, which may put pressure on end-user demand for consumer electronics. I would like to ask Mr. Zhao for his perspective on the outlook for end-user demand in 2026, particularly for mobile phones and home appliances, which are currently performing well. From the perspective of foundry companies like SMIC, could you analyze the potential positive and negative impacts of this memory chip super cycle?
Zhao Hai Jun
The positive impact of the memory chip super cycle is on manufacturing, while the negative impact affects terminal OEM manufacturers—whether in automotive, mobile phones, or consumer electronics—that rely on memory chips. Terminal manufacturers face both pricing pressures and uncertainties in supply assurance for the coming year. Currently, no one can guarantee a stable supply commitment. Thus, there is concern that next year's supply may fall short of demand across mobile phones, consumer electronics, and internet-connected devices. Consequently, manufacturers are adopting a relatively conservative approach when planning next year’s production schedules.
There is uncertainty regarding overall market demand for next year, whether it be for mobile phones, home appliances, industrial recovery, or automotive growth—all of which appear promising. However, it is difficult to assert that shipment volumes will definitely increase next year. This is a consequence of the memory chip super cycle, as I briefly mentioned earlier. No one dares to place too many orders or ship excessively in the first quarter of next year due to uncertainty about how much memory chip supply will be available for mobile phones, automobiles, or other products.
The second point pertains to the impact on our OEM business. If the volume of memory used in mobile phones remains the same but the price increases, as I mentioned earlier, there is no expectation for a rise in mobile phone prices. Therefore, there is hope that the prices of other IC components will decrease to offset the increase in memory prices. This situation could intensify competition within the industry. Clients currently in production may risk losing their market share to newer suppliers offering lower prices if they do not reduce costs in the coming year.
Thus, the general outlook for the coming year is relatively conservative for at least the first two quarters, and we share this view. However, these issues are likely resolvable, making it possible that next year will mirror this year’s scenario: initial forecasts at the start of the year may be conservative, but predictions could gradually rise after six months, similar to what happened with SMIC. Our guidance at the beginning of the year was also much more conservative than the current results due to a similar situation, though back then, the issue was not related to memory shortages.
Le Ping Huang
Alright, thank you very much. Thank you.
Operator
The next question comes from Jian Kuai of Orient Securities.
Your next question comes from Jian Kuai of Orient Securities.
Jian Kuai
Hello, esteemed leaders. My first question relates to ASML, which also anticipates that the revenue contribution from Chinese customers will significantly decline by 2026. As Mr. Zhao mentioned earlier, the current situation reflects a supply-demand imbalance where capacity remains extremely tight. Given this context, how do we perceive the expansion plans of China’s wafer manufacturing industry in 2026? That is my first question. Thank you.
Zhao Hai Jun
Thank you for raising this question. This is something we have also observed by reading reports from others and studying their situations, combined with the planning formulated by SMIC itself. We see this expansion taking place. Newly announced projects are moving forward. As everyone knows, there is currently a major cycle of undersupply in memory products, with a significant gap and favorable pricing. Additionally, in logic circuits, especially analog MCU and consumer-standard logic, Chinese customers are rapidly substituting domestic alternatives. Moreover, these products are gradually being integrated into the supply chains of foreign sales and suppliers.
The demand is certainly present. Therefore, this expansion — not just based on our perception but also what I’ve heard from peers across the industry — reflects that everyone’s response is to pursue sustained and accelerated development. Hence, I believe that next year, the pace of capacity expansion, from the perspective of both our foundry industry and the memory industry, will only increase, not decrease.
To address your earlier point about ASML stating that forecasts for China show a decline, I believe there is an accumulation effect at play here. Many projects may not secure full funding in their early stages or finalize their scale, so they might not place orders for all equipment at once. Instead, they may prioritize ordering lithography machines first, which have a lead time. It’s possible that some of the lithography machine procurement required for the capacity expansion planned for next year was already ordered last year or the year before. Hence, forecasts for next year might reflect fewer new orders. However, from the perspective of other equipment, there should be a significant lag in orders following those for lithography machines.
Jian Kuai
Thank you, Mr. Zhao. My second question concerns our general and administrative expenses for Q3, which were relatively low. Could you share your outlook on the trend for this expense going forward?
Wu Junfeng
Hello, thank you for asking this question. Indeed, as seen in our financial report, our general administrative expenses in Q3 showed a significant decrease compared to Q2, falling below the usual levels. The primary reason is that our general administrative expenses include start-up costs, which are part of our operating expenses. In Q3, as new production lines were commissioned and exited the start-up phase, this resulted in a reduction in start-up costs after exiting the initial period, which led to the decrease in our operating expenses.
Additionally, there is a one-time factor contributing to this. During the start-up phase, some production-related costs are recorded as start-up expenses. Once the start-up phase ends, adjustments are made, and these costs are capitalized into inventory. Therefore, the impact of this one-time adjustment also contributed to the lower-than-usual general administrative expenses in Q3. Going forward, since this one-time factor will not recur, subsequent administrative expenses are expected to return to normal levels. Thank you.
Jian Kuai
Very clear. Thank you, Mr. Wu. I have no further questions.
Guo Guang Li
Okay, thank you, Kuai Jian. Thank you.
Operator
The next question comes from Wang Ziyuan of CITIC Securities.
Your next question comes from Zi Yuan Wang of CITIC Securities.
Zi Yuan Wang
Hello, esteemed leaders, and congratulations on the better-than-expected performance in the third quarter. My first question is about the application breakdown for Q3. The proportion of smartphones has decreased to 21.5%, while consumer electronics has increased to 43.3%. There were also some increases in industrial and automotive sectors. What are the reasons behind these changes? It appears that the smartphone segment has declined significantly, whereas consumer electronics has grown more substantially. I would like to ask for your insights on this.
Zhao Hai Jun
Alright, Ziyuan. Let me explain the issue of the decline in the proportion of mobile phones. As SMIC's overall revenue has experienced significant growth, the relative percentage of mobile phone contributions has decreased. There are two main reasons for this. Firstly, during periods when SMIC's capacity was in short supply or there were urgent orders, we made adjustments to mobile phone order fulfillment. For example, some orders were moved earlier or later, but the total volume and pricing had already been determined, so we postponed them. For instance, when SMIC faced a tight supply situation in areas such as analog circuits, we delayed the output of PMU (Power Management Unit) volumes. While the total quantity remained unchanged, we postponed their delivery to a time of lower urgency and expedited some urgent orders with the consent and understanding of our customers. That’s the first point.
The second reason relates to the industry competition. The pace of product and customer switching for products like CMOS image sensors (CIS) and LCD drivers is very fast, which is seasonal in nature. Therefore, regarding SMIC's production of LCD drivers, including AMOLED drivers, OLED drivers, DDIC, touch IC, and other related products, it isn't always the case that we receive the largest number of orders from all clients every quarter. In a particular quarter, other companies might release new phones twice a year, leading to an increase in orders for their clients who may not be SMIC’s customers. However, during the next phone release cycle, our current clients may secure a larger share.
Therefore, imaging in mobile phones is seasonal, with fluctuations due to the large number of suppliers. OEMs, or end-device smartphone manufacturers, essentially balance the market share and total volume of various suppliers. As a result, we see adjustments like these: for CIS and LCD drivers, one reason is delays, and the other is that customer demand fluctuates seasonally.
Zi Yuan Wang
What are the main reasons for the increase in consumer electronics?
Zhao Hai Jun
Oh, the improvement in consumer electronics is comprehensive. As I mentioned earlier, in China, the speed of iteration is very fast, with many new products being consumed domestically in large quantities, while exports continue to increase. Additionally, some new fields have emerged. For example, take processors used in smart speakers. Previously, foreign IC design companies held a certain market share, as did domestic firms, with Chinese ICs dominating the mid-to-low-end segment and foreign IC suppliers controlling the mid-to-high-end segment. However, it now appears there is a shift, with Chinese suppliers increasingly capturing shares across all segments, including high-end smart speakers. This is just one example.
The second point relates to NB-IoT and Cat 1 technologies, which use telecommunications networks for positioning. In particular, the demand for Cat 1 is currently high. For instance, regulations now require all electric bicycles to be equipped with Cat 1 devices, as well as car tripods, because this technology allows for precise location tracking—whether you’ve parked your vehicle or if there’s an issue ahead on the highway, for example. These are incremental advancements within the industry. Furthermore, sectors that were already performing well, such as TWS earphones, OWS earphones, and Wi-Fi innovations, continue to grow steadily, showing positive momentum across the board.
Let me also mention something related to MCUs, even though you didn’t ask. MCU usage remains substantial, albeit growing at a slower pace. We’ve observed that, domestically, whether in automotive, industrial, or consumer applications, the sales revenue of imported ICs in China is significant, exceeding USD 30 billion annually for analog ICs and over USD 30 billion for MCUs. The transition speed for analog ICs is quite rapid, whereas for MCUs, although growth persists, it is much slower. We believe that while MCUs won’t experience explosive growth—given their nature as low-volume, diversified products similar to analog ICs—they will not see the emergence of dominant players capable of rapidly transitioning, unlike in the analog space. Thus, we remain optimistic about this segment. To summarize, when asked which areas are driving growth in consumer electronics, I provided several examples where spending continues to rise.
Zi Yuan Wang
Alright, understood. Thank you. Mr. Zhao explained clearly. My second question is regarding the Q3 capital expenditure, which increased significantly quarter-on-quarter by 27%. Cumulatively, the capital expenditure for the first three quarters has reached USD 5.7 billion. I recall that at the beginning of the year, guidance indicated that this year’s capital expenditure would be roughly flat compared to last year, at around USD 7.3 billion. Based on current trends, will the full-year capital expenditure be revised upwards? Additionally, considering the progress of capacity deployment, which quarter, Q3 or Q4, will see more significant contributions? Thank you.
Zhao Hai Jun
Well, thank you Ziyuan. As everyone knows, due to geopolitical factors, SMIC faced delays in many procurement processes affected by geopolitical licensing issues, which were put on hold previously. Subsequently, the situation was largely resolved and stabilized, with policies remaining predictable at least until the end of next year. Hence, shipments have resumed. This is why we see a relatively low volume this quarter but expect a significant jump in the next one, as the equipment had been ready, awaiting shipment while the final export license was pending. Now it has been granted.
Based on our agreements and forecasts provided by suppliers, our capital expenditure (capex) for this year is expected to be similar to or slightly higher than last year. However, the arrival of equipment does not immediately translate into capacity release because the entire production chain needs to be assembled. Even if most components arrive, missing a few critical machines means the production line cannot yet function, thus no actual capacity increase occurs. Therefore, the true timing of capacity release depends on when those final key machines are in place.
As you can see, in the third quarter, we received machinery worth $57 billion. This indicates that once the complementary equipment arrives in the fourth quarter, our production capacity will gradually be unleashed.
Zi Yuan Wang
Can it be understood that the increase in production capacity in the fourth quarter may be greater than that in the third quarter?
Zhao Hai Jun
That’s about right. Our capacity did grow in Q3 as well. We’ve mentioned before that our annual total capacity would follow this pattern: slower growth in the first two quarters, followed by acceleration in the third and fourth quarters. This is certain, given the earlier delays.
Zi Yuan Wang
Thank you, Mr. Zhao. Thank you.
Operator
The next question comes from Tian Zi Fu of Everbright Securities.
Your next question comes from Steven Tian of Everbright Securities.
Steven Tian
Hello, Mr. Zhao, Dr. Wu, and Mr. Guo. Thank you for taking my question. I am Fu Tianzi from Everbright Overseas. I have two questions: the first is about gross margin, and the second pertains to the competitive landscape. We observed that the company’s gross margin performance in Q3 was quite remarkable, surpassing prior guidance and market expectations. I would like to ask management to share insights into the key factors driving this improvement, ranked by importance. Additionally, could you comment on the sustainability of these factors moving forward, particularly for Q4 and into the next fiscal year? Do you believe these factors will continue to drive results above expectations? Thank you.
Zhao Hai Jun
Alright, let me answer first, and Junfeng will help supplement later. First, I’ll talk about the non-financial factors. Our gross margin has significantly exceeded expectations and growth, mainly due to two reasons. The first is that the production fluctuations we experienced in the second quarter have now ended. Additionally, in response to customer requirements, we have substantially increased our capacity investments, which allows us to produce more going forward. This also led to a slightly longer production cycle. Lastly, we adjusted our product mix.
As you can see, production fluctuations are now gone, capacity utilization has improved, and the product mix has been adjusted. These factors have caused our performance to exceed the original forecast. However, there is one factor that has consistently been present: when discussing SMIC's gross margin, what everyone should focus on is how much depreciation increases per unit of revenue. That is the most significant factor. The remaining factors mentioned earlier are all results of management’s meticulous efforts to reduce costs and improve efficiency, thereby offsetting market volatility. Junfeng, please go ahead.
Wu Junfeng
Alright, hello Mr. Tian. Indeed, our third-quarter gross margin exceeded our forecast. As President Zhao just explained, regarding your question about ranking these contributing factors, I believe the most impactful factor is capacity utilization (UT). In the third quarter, as President Zhao mentioned earlier, our capacity utilization reached over 95%, which is three percentage points higher than our forecast.
This had a relatively significant positive impact on our gross margin. In fact, our depreciation in the third quarter increased considerably compared to the second quarter. However, the improvement in our capacity utilization offset the pressure this depreciation increase placed on our gross margin. Therefore, I believe the primary factor remains capacity utilization. Regarding the sustainability issue you raised, indeed, for Q4, given that new equipment will be gradually added into production, we will continue to face pressure on our gross margin from rising depreciation. To mitigate this impact, we need to maintain a relatively high level of capacity utilization in Q4. That’s all I wanted to add.
Tian Si Fu
Thank you, Mr. Zhao and Dr. Wu. I’d like to follow up on one point. Earlier in Q3, there was mention of potential gross margin pressures stemming from inventory valuation adjustments. Could you confirm whether such adjustments occurred in Q3 and, if so, assess their impact on gross margins?
Wu Junfeng
Uh, regarding the specific impact of impairment you just mentioned, in the third quarter, as seen in our announcements, we did make provisions for inventory impairment in work-in-progress. This is in accordance with our accounting standards and company accounting policies, which specifically put pressure on our gross margin. As mentioned earlier, internally, we have been mitigating these impacts through cost reduction and efficiency improvement, optimization of our product mix, and increased capacity utilization. In fact, the provision for impairment has partially affected our gross margin.
Tian Si Fu
Alright, understood. So essentially, while the provisions are made as scheduled, our better-than-expected operational performance has also helped our gross margin exceed expectations. Secondly, regarding capacity utilization and industry competition, based on some of our statements about orders and future demand, it’s evident that we remain in a relatively high state of undersupply. However, from a sensory perspective, there still appears to be some weakness in the demand for surrounding end-user electronics.
I would like to ask whether the company's maintenance of high capacity utilization is partly driven by the ongoing progress of domestic substitution. Simultaneously, with this trend of domestic substitution, we see that in the next one to two years, quite a few wafer fabs are continuing to expand production. We would like to ask if this high level of capacity utilization can be sustained until at least 2026. Thank you.
Zhao Hai Jun
To address Tian Zi's question, let me break it into two parts. First, SMIC has grown relatively fast this year, with utilization rates higher than the industry average. One of the reasons you mentioned is the factor of mutual substitution within the supply chain, meaning SMIC's clients are gaining more market share within the supply chain, resulting in more orders. These orders may have originally belonged to other clients or competitors. Therefore, for SMIC, this represents a shift rather than entirely new incremental growth, and this stickiness will persist once the industry undergoes such a transition. We predict that this percentage will continue to increase.
For example, for products such as analog chips, MCUs, memory, CMOS image sensors, and LCD drivers, we have clearly observed that SMIC’s clients have significantly increased their market share among OEM terminals this year, and this growth will continue, making it sustainable. This brings us to the first point: why SMIC has enjoyed higher utilization rates this year compared to others. There is indeed an element of supply chain transition involved. Over the past 25 years, SMIC has worked closely with its clients to enhance their technological quality, product competitiveness, delivery capabilities, and pricing competitiveness, reaching a competitive level within the industry. This has allowed SMIC to be chosen during industry transitions, thus seizing this opportunity. Of course, SMIC has benefited from this opportunity, and we will continue to build upon it going forward.
The second question you raised pertains to another aspect: the transition. SMIC has seized the opportunity, but we also see our competitors expanding their production capacities. Will this opportunity be shared by others? This is indeed a possibility as industry competition is ever-present. What we need to do is focus on three key areas. First, SMIC must provide technology and services that are high-performing and of good quality—this is essential, and the products must be excellent. Second, SMIC maintains long-term partnerships with clients; the product platforms we develop are customized and unique, not generic technologies. Third, SMIC must excel in cost efficiency, responsiveness, and iteration speed, staying ahead of the competition.
This approach ensures that the strategic partnerships we have established with clients and the market share we have secured are not significantly eroded. However, seasonal fluctuations will always exist, especially in products like smartphones, where every new model prompts competitive bidding, leading to shifts in market dynamics. This is because customers demand not only higher quality and better performance but also more affordable prices for mid-to-low-end products. SMIC is prepared to address these challenges. As we’ve mentioned before, SMIC will not proactively reduce prices, but when our clients lose market share, we will certainly stand with them and face price competition directly.
Tian Si Fu
Thank you, Mr. Zhao, and thank you to the management team for your detailed and highly valuable insights. That concludes my questions. Thank you.
Guo Guang Li
Thank you.
Operator
The last question for today comes from Jian Hu of Guosen Securities.
Last question for today comes from Jian Hu of Guosen Securities.
Jian Hu
Thank you, management. Dr. Zhao, I am quite curious about something you mentioned earlier. In your introductory remarks, you noted that channels are still replenishing and restocking inventory. However, the general perception is that the industry began to enter a recovery cycle in the second half of 2023, with consumer electronics restocking in 2023 and industrial and automotive sectors likely to see significant restocking in 2024. Given the current situation you mentioned where memory supply cannot be guaranteed, why is there still a clear demand for restocking? Additionally, if memory continues to face severe shortages, could this potentially suppress customers' actual willingness to take delivery, resulting in deviations from the company’s guidance? Also, regarding the rush orders you mentioned that delayed some mobile phone orders, could you clarify the main areas these rush orders are coming from? Thank you, Dr. Zhao.
Zhao Hai Jun
Alright, Hu Jian, thank you for your question. Let’s address this by first discussing the ongoing replenishment, then the memory issue, and finally the rush orders. Regarding replenishment, previously, concerns over geopolitical issues and tariffs led many products to be shipped directly to their destinations. Customers wanted to stock up before any potential tariff increases, ideally enough inventory to last two or three years. However, these customers tend to be smaller clients of SMIC. To gain a larger market share during the domestic substitution process, they need sufficient inventory to meet their clients’ demands.
If a client suddenly demands twenty million units but you can’t supply that within a short period, you miss the opportunity. Therefore, these clients, in their efforts to capture a larger market share, are now willing to take on some risk by stocking more inventory—particularly for analog, power-related, and high-current products. These items require stockpiling because the scale of these clients was relatively small in the past, and to secure a larger market share, they must stockpile more aggressively.
Secondly, for some time, sentiment among industrial and automotive suppliers has been very low, leading them to deplete their inventories rather than restock. Now, however, it appears that most of their inventory has been consumed, and they need to restore it to a safe level. The consensus is that both the industrial and automotive sectors will recover next year, so they are replenishing to a safe level. Even major European Tier 1 suppliers have started to rebuild their inventories in anticipation of future growth. This is why these two sectors are still restocking.
Regarding the memory issue you mentioned, currently, companies are securing more memory that can be assembled into smartphones while also hoping to pull in other IC components. However, for the first quarter of next year, no firm decisions are being made because there’s no guarantee of having enough memory to produce complete devices. Thus, we see a contradiction: while companies want to produce as much as possible now, they are cautious about production levels for next year. This pressure stemming from memory is indeed causing uncertainty. No one can guarantee that their needs will be fully met next year. As a result, companies are opting to stockpile completed devices where possible, while reducing stockpiles of incomplete sets, creating differing sentiments depending on seasonal factors.
Finally, regarding rush orders, at SMIC, we’re seeing rush orders primarily in the analog and memory categories. SMIC also manufactures memory products, and some of our NOR flash, NAND flash, and MCU products are receiving substantial rush orders. Some of these rush orders are related to exports and immediate smartphone component requirements, making them particularly urgent. Consequently, we’ve postponed less urgent orders, including those for PMUs, which has led to an overall decline in the percentage of mobile phone-related orders as we prioritize supporting these rush orders.
To summarize, rush orders occur for specific reasons. The impact of memory is twofold: it drives current orders but creates uncertainty for next year, leading to hesitancy in placing orders. That’s the current state of the industry, Hu Jian.
Jian Hu
Could I follow up with a supplementary question? Regarding the memory pricing you just mentioned, do we have an outlook or expectations from our perspective?
Zhao Hai Jun
Oh, regarding storage, we are currently seeing a situation where AI has absorbed the entire production capacity. Consequently, the fragmented market, characterized by small volumes and high diversity, is now being neglected by large suppliers. As you all know, this provides significant opportunities for smaller suppliers. Many of these smaller suppliers are clients of SMIC, which holds considerable influence in this area. Other foundries are not focusing on this segment either, so SMIC also needs to provide solutions related to memory components.
This trend will persist as long as artificial intelligence continues to develop. Memory prices will remain high for many years. I once conducted an analysis showing that if the memory market shrinks by 5%, prices will double; conversely, if there is an oversupply of 5%, prices will drop by half. Given the current situation, which involves at least a 5% shortfall, these high prices will endure. Moreover, the validation period for these niche, diverse products is relatively short, and they are not easily replaceable.
Therefore, even if new factories or companies emerge intending to design similar products, the replacement cycle is extremely long. The cycles for NOR flash, NAND flash, and MCU are all quite lengthy. From tape-out to mass production, it takes at least 16 months, as I have mentioned before. Hence, it can be said that no new products will be able to capture the existing market within the next 16 months.
Jian Hu
Thank you, Dr. Zhao. Your conclusion was very clear. Thank you.
Zhao Hai Jun
Thank you, Mr. Hu Jian. Thank you.
Guo Guang Li
Ms. Guo Guang Li will now give the closing remarks.
I'd now like to hand the call back to Miss Guo Guang Li for closing remarks.
We thank all participants for joining today’s conference call and for your continued trust and support.
Thank you for participation in today's conference call, thank you for your trust and support.
This concludes SMIC's third quarter earnings presentation. Thank you for your participation.
This concludes SMIC's third quarter webcast conference call. We thank you for joining us today.
For more details:SMIC IR
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