SMIC (Minutes): Storage price increase, terminal manufacturers are becoming more conservative in their plans for next year.
The following are the minutes of SMIC's Q3 2025 earnings call, compiled by Dolphin Research. For an interpretation of the earnings report, please refer to the article SMIC: Not Focusing on Short-term Results, Is AI 'Domestic Chips' the True Belief?
I. $SMIC(00981.HK) Key Financial Information Review
1. In Q3 2025, the company achieved sales revenue of $2.382 billion, a quarter-on-quarter increase of 7.8%, with a gross margin of 22%, up 1.6 percentage points from the previous quarter. Operating profit was $351 million, EBITDA was $1.43 billion, corresponding to an EBIT% of 60%, and net profit attributable to the parent company reached $192 million.
2. Wafer shipments continued to increase in the third quarter, with an overall capacity utilization rate of 95.8%. Quarterly sales volume increased by 4.6% QoQ to 2.499 million wafers, driven by accelerated industry chain switching and rising channel stocking demand. The average selling price increased by 3.8% QoQ, mainly due to changes in the product mix.
3. By region, revenue from China, the US, and EMEA accounted for 86%, 11%, and 3% respectively this quarter. Revenue in China grew by 11% QoQ, driven by domestic market expansion and customer pull-in demand. By application, smartphones, PCs and tablets, consumer electronics and wearables, industrial and automotive accounted for 2%, 15%, 43%, 8%, and 12% respectively. Consumer electronics revenue grew by 15% QoQ, supported by domestic replacement of overseas shares, strong demand in home appliances, and various electronic supply chains.
4. Capital expenditures for the first three quarters totaled $5.7 billion, continuing to support the company's capacity expansion and technology platform construction.
5. Outlook: The company's guidance for the fourth quarter indicates that despite entering the traditional off-season and slowing customer stocking, the trend of industry chain switching continues. Therefore, revenue is expected to be flat to up 2% QoQ (qoq+0 to 2%), with a gross margin maintained in the 18%-20% range. Management believes that the company's annual sales revenue is expected to exceed $9 billion, reaching a new milestone.
II. $SMIC(688981.SH) Detailed Earnings Call Content
2.1 Key Information from Executives
1) The company's overall operations were stable in the third quarter, with the capacity utilization rates of 12-inch and 8-inch wafers remaining stable and near full capacity, reflecting the accelerated industry chain switching and improved demand from channel restocking.
2) The company actively cooperated with customers to ensure shipments. Against the backdrop of accelerated industry chain replacement and domestic market expansion, shipment demand was strong. Revenue in China grew significantly QoQ, with major customers gaining new industry chain opportunities during the domestic replacement phase, and strong demand in home appliances, power supplies, and various consumer electronics supply chains.
3) From the application side, consumer electronics performed particularly well. During the phase of accelerated replacement of overseas supply chain shares in China, the results of the company's long-term cooperation and layout with customers became evident, driving continuous growth in related categories. Demand in industrial and automotive sectors also remained stable.
4) The company's specialty processes and technology platforms are steadily advancing in multiple directions. The ultra-low power 28nm logic process has entered mass production, providing customers with lower power consumption and higher quality solutions. The CIS and ISP processes continue to iterate, improving sensitivity, image quality, and cost-effectiveness, and expanding to more bands and scenarios.
5) The company continues to expand its embedded storage platform, penetrating from the consumer market to automotive and industrial MCU fields, focusing on developing high-density, smaller size, lower power consumption, and high-reliability storage solutions. At the same time, the company seized the opportunity of rising demand for automotive chips, launching several automotive-grade specialty processes such as sensors, MCUs, storage, and displays, providing customers with system-level solutions.
6) Since the beginning of this year, mainstream markets other than artificial intelligence have generally recovered moderately. Against the backdrop of domestic industry chain switching, the company and its customers have worked together to successfully seize market opportunities, becoming a stable supplier, ensuring sustained demand for current orders and future visible cycles.
7) Currently, the company's production lines are still in a state of supply shortage, and shipments cannot fully meet customer demand. Management stated that the company will continue to advance its product platform layout, looking forward to a successful conclusion to 2025.
2.2 Q&A
Q: The fourth-quarter guidance indicates a QoQ growth of 0-2%. How should we understand this in terms of volume and price? Will capacity utilization decline? Why is it still described as 'supply shortage'?
A: The company stated that the steady revenue guidance for the fourth quarter is because customers will adjust shipments based on next year's demand at the end of the year. The capacity utilization rate in the third quarter reached 95.8%, indicating that orders exceeded production line capacity. However, the lack of significant revenue growth in the fourth quarter is mainly due to the impact of customers' year-end deployment rhythm, especially in the mobile phone field, where some segments are in short supply and memory product prices are rising. Customers want to secure more memory products but are concerned about the inability to match other components. Meanwhile, in the network communication industry, due to rapid industry chain switching, some manufacturers are more cautious about going offline and stocking. Overall, despite the limited revenue guidance increase, production lines remain tight.
Q: How will the memory cycle affect terminal demand and foundry business?
A: The uncertainty of memory price increases and supply makes terminal manufacturers in mobile phones, home appliances, and automobiles more conservative in planning for next year. Although demand is recovering, they are not confident that shipments will increase. For the foundry side, memory price increases will raise the cost of the whole machine, and other ICs may be required to reduce prices to balance costs, intensifying competition. The company believes that next year may be similar to this year, with conservative judgments at the beginning of the year, followed by gradual upward adjustments in expectations.
Q: ASML expects the revenue share from Chinese customers to decline significantly in 2026. How does the company view the expansion of domestic wafer manufacturing in 2026, given the current supply shortage?
A: Various expansion projects announced externally are progressing. Memory is in short supply and prices are rising, while the domestic replacement speed of logic, power management, MCU, and consumer standard logic categories is very fast. At the same time, international competitors are also entering the main supply chain, so demand still exists. The company believes the industry will continue to develop and accelerate. The pace of capacity expansion next year will only increase, not decrease. As for some institutions predicting a decline in new equipment orders in China, the company believes this is related to the early effects of lithography machine orders. Lithography machines may have been ordered in the previous two years, so it appears that there are fewer new orders next year, but there will be many new orders for other equipment next year.
Q: General and administrative expenses were at a low level in the third quarter. How does the company view the subsequent trend?
A: The company stated that general and administrative expenses in the third quarter decreased significantly compared to the second quarter, mainly because general and administrative expenses included start-up costs. In the third quarter, due to the commissioning of new production lines and the exit from the start-up period, related development costs decreased, reducing operating expenses. At the same time, the company had some production-related expenses in the development zone that needed to be adjusted and transferred to costs in a one-time manner, also leading to lower expenses in the third quarter. These one-time factors will not occur in the future, so administrative expenses will return to normal levels.
Q: In the Q3 application breakdown, the share of smartphones decreased to 21.5%, while consumer electronics increased to 43.3%, and industrial and automotive also increased. What are the reasons for these changes?
A: The decline in the share of smartphones is mainly due to two reasons: first, the large volume of smartphone stocking, and the company, under the condition of supply shortage, postponed some smartphone orders with customer consent to prioritize urgent orders. Second, the smartphone industry is highly competitive, and customers switch quickly in categories such as GNS and LCD Driver. The shares obtained by different manufacturers vary seasonally. The increase in the share of consumer electronics comes from the fast iteration speed in China, export growth, and the increasing demand for new scenarios such as smart speakers and NB-IoT.
Q: Capital expenditures increased by 27% QoQ in the third quarter, reaching $5.7 billion in the first three quarters. The initial guidance was about $7.3 billion. Will it be revised upwards now? What is the pace of capacity deployment in the third and fourth quarters?
A: The increase in capital expenditures is mainly because some equipment deliveries previously affected by geopolitical factors were delayed, and recent approvals have resumed, leading to a significant increase in equipment arrivals this quarter. The company expects that this year's capital expenditures will still be comparable to last year. The arrival of equipment does not mean immediate capacity release, as it requires the completion of key equipment for the entire production line. Overall, the pace of capacity release in the third and fourth quarters will accelerate.
Q: The gross margin in the third quarter exceeded guidance and market expectations. What were the main drivers of gross margin improvement? Will these factors be sustainable in the fourth quarter and the next fiscal year?
A: The company stated that the gross margin exceeded expectations mainly due to the following factors: the production fluctuations in the second quarter had ended; capacity utilization increased significantly, and wafer input was increased according to customer requirements; the product mix was adjusted; in addition, the company emphasized that depreciation is the biggest factor affecting gross margin, and other improvements mainly came from management's efforts to reduce costs and increase efficiency to hedge market fluctuations. The company added that the primary reason for the significant improvement in gross margin in the third quarter was that capacity utilization exceeded 95%, significantly higher than expected, and the increase in capacity offset the pressure of rising depreciation.
Looking ahead to the fourth quarter, the company will still face the pressure of increased depreciation, so it needs to maintain a high capacity utilization rate to offset the impact. Regarding inventory impairment, the company confirmed that it had indeed made relevant provisions in the third quarter according to accounting standards, which put some pressure on the gross margin, but the company offset it through cost optimization and product mix adjustments.
Q: Is the high capacity utilization rate driven by domestic replacement? Can this high utilization rate be maintained until 2026 given the continuous expansion of peers?
A: The current high capacity utilization rate does include the industry share switching factor brought by domestic replacement. The share of the company's customers in the industry chain has increased, transferring orders from peers to the company. This share switching is sticky and is expected to continue to increase in the future. At the same time, the company emphasized that industry expansion continues, and competition always exists. To maintain market share, the company will adhere to three key points: providing high-performance, high-quality technology and services; maintaining long-term cooperation with customers and providing customized product platforms; maintaining advantages in cost and iteration speed. The mobile phone and other businesses still have seasonal fluctuations, but the company will actively respond to competition and price pressure.
Q: Given that the industry has already experienced multiple restocking cycles, why is there still restocking demand? If memory continues to be in short supply in the future, will it suppress customers' real willingness to take delivery and bring the risk of deviation in the company's guidance? Additionally, what categories are mainly involved in the postponed mobile phone orders this time?
A: There is still restocking demand mainly because some customers need to stock up to cope with large temporary orders under geopolitical and tariff uncertainties; at the same time, the industrial and automotive sectors have been destocking for a long time and now need to return to safe levels, so they are also restocking. For memory, customers will try to pull in as much as possible under the condition of "being able to assemble the whole machine," but there is still no clear signal on whether memory can be guaranteed in the first quarter of next year, so they will remain cautious about future orders. As for the postponed orders, they mainly involve non-urgent orders in the mobile phone field (such as PMIC, etc.), which are postponed to prioritize the production needs of urgent orders.
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