With utilization at 97.3%, SMIC's growth now depends on adding capacity, and its guidance pulls gross margin back to 26% to 28% in the fourth quarter even as revenue rises.
SMIC ran its chip factories at 97.3% of capacity in the third quarter and more than doubled its profit from a year earlier. Revenue rose 33.9% year on year and 6.1% from the second quarter to US$3.19 billion, and profit attributable to shareholders rose 123.4% to US$428.4 million, the Shanghai-based contract chipmaker said in its unaudited third-quarter results on November 12. Gross margin reached 29.9%, up from 25.3% in the second quarter and 22.0% a year earlier.
Both headline numbers beat forecasts. Analysts polled by LSEG had expected profit of US$418.4 million and revenue of US$3.09 billion, Reuters reported. SMIC also cleared its own August guidance, which called for revenue growth of 2% to 4% over the second quarter and a gross margin of 26% to 28%.
One measure moved the other way. Attributable profit fell 10.6% from the second quarter’s US$479.2 million, because a US$275.9 million non-operating gain in the second quarter, much of it from the fair value of investment funds SMIC holds stakes in, became a US$32.1 million loss. Profit from operations, which reflects the factories themselves, rose 32.9% to US$710.1 million. For the fourth quarter, SMIC expects revenue to grow another 4% to 6% while gross margin falls back to 26% to 28%.
Fuller factories carried the margin while smartphone orders shrank
Utilization, which SMIC measures as wafers produced divided by estimated capacity, rose from 93.7% in the second quarter and 95.8% a year earlier. Monthly capacity grew to 1,116,750 wafers in eight-inch equivalents from 1,096,500, and shipments rose 5.7% from the second quarter and 21.4% from a year earlier to 3.03 million. SMIC credited the margin gain to higher utilization and a change in product mix.
The mix moved away from phones. Smartphones accounted for 14.3% of SMIC’s wafer revenue, down from 16.9% in the second quarter and 21.5% a year earlier. Computers and tablets rose to 18.3% from 15.2% a year before, and industrial and automotive chips to 19.3% from 11.9%. Consumer electronics stayed the largest category at 40.6%. Customers in China supplied 90.8% of revenue, up from 86.2% a year earlier, while the American share fell to 7.8% from 10.8%. Twelve-inch wafers made up 78.9% of revenue, up from 77.0% a year earlier.
The release does not say how much of this demand comes from AI or from Chinese customers moving orders away from foreign foundries. Its management statement says only that SMIC expands capacity in response to customer demand and is building a portfolio of higher-value products. In August, management said AI-related demand would stay strong through the second half, as EastFrontier reported at the time.
Spending slowed as the cost of installed equipment kept climbing
Capital expenditure fell to US$1.09 billion from US$1.84 billion in the second quarter. Depreciation and amortization, the running cost of equipment already installed, rose 27.6% from a year earlier to US$1.27 billion. Research and development spending rose 23.9% from the second quarter to US$258.4 million. Net debt rose to US$1.5 billion from US$162 million, as SMIC put US$1.31 billion into associated companies during the quarter and took on US$2.31 billion in new borrowing. Total cash on hand, including bank deposits, was US$13.4 billion.
In renminbi, third-quarter revenue was RMB21.98 billion, up 28.1%, and net profit attributable to shareholders was RMB2.847 billion, up 87.6%, IT Home reported. For the first nine months, net profit reached RMB7.314 billion, up 91.6%, on revenue of RMB60.62 billion. The renminbi growth rates are lower than the dollar figures prepared under international accounting standards.
The November 13 call will have to explain the margin step-down
SMIC has a habit of beating its own forecasts. In the second quarter, revenue rose 20% from the first, against guidance of 14% to 16%, and gross margin reached 25.3% against a 20% to 22% range, Cailian Press reported in August. The fourth-quarter range implies revenue of about US$3.32 billion to US$3.38 billion, on EastFrontier’s calculation, which would be its highest quarter yet. The company has not said why it expects gross margin to drop by two to four percentage points while sales grow and factories are already close to full.
Executives hold an earnings call on the morning of November 13, with three questions open: the reason for the lower margin guide, any change to capital spending plans after the third quarter’s slowdown, and whether management puts a number on AI-related or domestic-substitution orders now that China supplies more than nine-tenths of revenue.