Good afternoon, everyone. Thank you for joining us. Welcome to GlobalWafers Q3 2026 earnings call. I'm Leah Peng, spokesperson for the company, and I'm pleased to be joined today by our Chairperson, Doris Hsu. Here's how today's event will unfold. Doris will begin with executive comments, providing insights into overall performance and strategic direction. We will then address investor questions received in advance, followed by an open Q&A session. This call will last for 60 minutes and conclude at 5:00 P.M. Before we begin, a quick reminder. To ensure everyone has the opportunity to participate, we kindly ask that each participant limit their questions to two. Please keep your audio on mute. To ensure a smooth and interactive session, we have established two methods for you to pose questions during the event, using the Slido feature for written questions and utilizing the Webex hand-raising function for live spoken inquiries.
The first, Slido, which is the text-based questions. Throughout the meeting, you can input your questions using the Slido feature in Webex. Simply access Slido and type in your question. Our presenters will monitor Slido regularly to address your written questions. To ensure the efficient use of time, we encourage you to type in your questions as the meeting starts. The second way is to use live voice questions. Towards the end of the meeting, we will open the floor for live voice questions. If you wish to speak directly, please use the Webex raise hand function to indicate your intention. Once you raise your hand, kindly be ready to accept the host invitation to unmute your microphone when prompted. This will allow you to verbally pose your question to the panel. Before we begin, I would like to remind you that today's discussion may contain forward-looking statements.
Please be aware that these statements are subject to various risks and uncertainties, which could cause actual results to differ materially from our expectations. Please refer to the safe harbor notice in our presentation. Now, without further delay, I would like to pass the floor to our Chairperson for the executive comments on GlobalWafers. Doris, please.
Thank you, Leah. Good afternoon, everyone. Thank you very much for joining GlobalWafers Q3 2026 earnings call. Leah Peng, our spokesperson, will walk you through the presentation and address some of the frequently asked questions we have received recently. I will also take questions during today's session. Let me begin with one message that capture GlobalWafers' position today. We invested ahead of the cycle, and we are ready for the next phase of growth. Semiconductor demand is broadening, but qualified capacity cannot be built overnight. It requires substantial capital, long equipment lead times, and lengthy customer qualification processes. With our global capacity already in place and customer engagement increasing, our early investments are becoming a very meaningful competitive advantage. Although the Novara fire created near-term challenges in the third quarter, other facilities across our global network continue to deliver solid operating and shipment performance. Our strategic direction remains unchanged.
With our global manufacturing footprint, continued progress in capacity ramp-up, and stronger financial position, we remain well-positioned to capture growth opportunities as semiconductor demand recovers. With that, let me walk you through our financial performance for the third quarter and first nine months of 2026. If you have our presentation materials, please kindly turn to page four. GlobalWafers reported third quarter's revenue of TWD 14.9 billion, representing a 2.26% decrease from the previous quarter, mainly due to the impact of the Novara fire, and gross margin stood at 20%. For the first nine months of 2026, revenue totaled TWD 44.1 billion, down 4.4% year-over-year, while gross profit reached TWD 9.0 billion with a gross margin of 20.5%. The sequential revenue decline was primarily due to the July fire at our Novara 8-inch facility. Without the fire, third quarter revenue would have achieved double-digit sequential growth.
Leah will provide further analysis, detail of the financial analysis later. Please turn to page five. In the third quarter of 2026, operating margin stood at 9.8%, while net profit margin was 10.1%. For the first nine months of 2026, operating margin was 9.9%, while net profit margin reached 16.3%, including the impact of Siltronic's valuation gains. Page six, please. Third quarter EPS came in at TWD 3.13 per share, down from Q2, mainly due to the high comparison base from Siltronic's valuation gains in Q2, and the impact of the Novara fire. Our investment in Siltronic is measured at fair value at each quarter end, with changes recognized in non-operating income or expenses. Siltronic share prices rose approximately 56% from the end of Q1 to the end of Q2, generating a significant valuation gain.
In Q3, the share price remains largely stable, resulting in no comparable valuation gain. As a result, Q3 earnings more closely reflected our underlying operating performance. Despite the impact of the Novara fire on production and shipments, our underlying operation remained relatively stable, with strong performance and notable achievements across multiple manufacturing sites. Looking ahead, we remain focused on the gradual recovery at Novara and maintaining stable operation across our global manufacturing network. For the first nine months of 2026, cumulative EPS reached TWD 15 per share, nearly matching the TWD 15.29 recorded for the full year 2025. Regarding prepayments, including guaranteed deposits, stood at TWD 21.2 billion, down 4.5% from TWD 22.2 billion in the previous quarter.
We continue to fulfill existing long-term supply agreements based on customer delivery schedule, while actively discussing additional agreements with multiple customers right now, particularly in the U.S., where demand for locally manufactured wafers remains super strong. The board also approved a cash dividend of TWD 6 per share for the first half of 2026, with a total distribution of approximately TWD 3.17 billion and a dividend payout ratio of 50.5%. The dividend record date is January 4, 2027, and the payment date is January 22, 2027. It was January 4, sorry. The dividend record date is January 4, 2027, and the payment date is January 22, 2027. This distribution provides a meaningful cash return to our shareholders, reflecting the board's commitments to shareholder returns while maintaining the financial flexibility to support the company's long-term growth. Please turn to page seven.
We believe semiconductor industry is entering a new super cycle, with industry research firms raising their forecasts and the market expected to exceed $1.6 trillion in 2026. AI, HBM, and advanced computing are driving structural growth, while demand is broadening into mature node power, connectivity, and industrial applications. Silicon wafer shipments continue to grow year-on-year, with recovery extending across wafer sizes and advanced packaging adding to demand. That means that the recovery is not only for 300 millimeter advanced product, but also for even smaller diameter, 200 millimeter or even 6-inch wafers. All wafer sizes are recovering right now. Rising construction costs, long equipment lead times, and lengthy qualification cycles limit how quickly new wafer capacity can come online. As the supply-demand balance tightens, qualified production-ready capacity becomes increasingly valuable. GlobalWafers' early expansion investments give us first-mover advantage.
With our existing capacity fully utilized across all wafer sizes and new capacity development underway globally, we are well-positioned to support growing customer demand. Please turn to page eight. The benefits of our early investments are already becoming visible. Our U.S. operations continue to improve, with a growing number of customers discussing long-term supply agreements for our U.S. capacity, reflecting their need for reliable local supply. Our manufacturing sites in the U.S. and Japan continue to achieve record operating milestones, while our 12-inch expansion in Italy steadily ramps up. Building on this operational momentum and growing customer demand, I'm pleased to announce another important milestone in our strategic partnership with Micron. Today, our board approved a proposal to issue up to $ 500 million in 10 years privately placed Convertible bonds with Micron as the sole subscriber, subject to GWC shareholders' approval.
Our longstanding wafer supply relationship, together with planned 10-year supply agreements, provides a solid foundation for stable supply and long-term capacity planning. The proposed convertible bond would further deepen our collaboration, extending beyond wafer supply to strategic capital cooperation and long-term supply chain development. By combining long-term customer commitments with financial support, this arrangement would support further future capacity planning, enhance supply stability, and strengthen our advanced semiconductor material manufacturing capability, particularly in the U.S., through technology transitions and industry cycles. With a 10-year term and a 0.5% coupon rate, the proposed convertible bond would provide long-term funding with relatively low cash interest costs while preserving flexibility in our capital structure. We believe Micron's willingness to participate in GlobalWafers' long-term development through this convertible bond reflects the trust built over many years and its confidence in future growth potential.
Our global growth strategy also received very strong support from international investors. In September, we completed a $ 1.4 billion GDR offering, with investor demand reaching approximately four times of the offering size. This response reflects confidence in our global manufacturing footprint and long-term growth potential. The offering also significantly strengthened our balance sheet, moving us from TWD 18.6 billion in net debt at the end of Q2 to TWD 26.3 billion net cash at the end of Q3. This stronger financial position provides us with greater flexibility and resources to support ongoing operation, navigate macroeconomic uncertainty and industry cycles, and invest in future growth. As semiconductor demand recovers, we are better positioned to capture emerging supply opportunities and advance our local for local manufacturing strategy.
Within this broader growth strategy, I would like to highlight one area where we are seeing particularly strong customer momentum, which is our 12-inch SOI business. 12-inch SOI is one of the product areas where we see very clear mid- to long-term growth potential. As the market continues to migrate from 8-inch to 12-inch, silicon photonics is emerging as an important new growth driver. On top of established applications such as RF SOI and Power SOI, in particular, customer demand has strengthened noticeably recently, and the demand we are seeing already far exceeds our existing 12-inch SOI expansion plan. We also have a unique strategic position in the U.S. Our Missouri facility is currently the only site in the U.S. with a 12-inch SOI manufacturing capability. Together with GlobalWafers' proprietary SOI layer transfer technology and vertically integrated in-house substrate supply, this provides us with a strong strategic position.
Our new 12-inch SOI capacity in Missouri is still ramping up as additional tools complete qualification and utilization improves. Our immediate priority is to accelerate the ramp of our existing capacity by debottlenecking to further increase our output and maximize the utilization of our existing assets. At the same time, given the additional demand from customers, we are evaluating opportunities to further expand our 12-inch SOI capacity. We are already in discussions with multiple customers, including LTAs and prepayments, that are planned to support more than 90% of the proposed incremental capacity of our SOI. Since the existing fab and the infrastructure are already in place, any further expansion could leverage these existing assets and would primarily require additional equipment, resulting in better capital efficiency than the first phase. That said, we will remain disciplined in our capital allocation.
The scale and timing of any next stage investment will depend on several factors, including long-term customer commitments, the profitability of our current capacity, and also government support, and the overall return on investment. Overall, we remain very positive about the mid -to long-term outlook for 12-inch SOI, particularly for silicon photonics. Looking ahead, we will focus on restoring operations at Novara, Italy, accelerating new capacity ramp-up, and pursuing future expansion with disciplined capital allocation. With our global manufacturing footprint, strong customer partnerships, and enhanced financial flexibility, we are well-positioned to capture growth opportunities and strengthen our long-term competitiveness. Next, I will hand over to Leah to walk you through demand trends across key applications, followed by our company's overview and some financial performance. Thank you very much. Leah, please.
Thank you, Doris. Let me begin with demand trends across key applications, our company overview, and financial performance. I will also address the frequently asked questions we have received recently. So in page 10, AI infrastructure remains the main growth driver, supported by rising data center investment and broader AI adoption. Memory fundamentals are particularly strong, with tight supply, robust HBM demand, and increasing long-term supply commitments improving demand visibility. Smartphone and PC shipments face pressure, but premium and AI-enabled devices continue to drive higher semiconductor content. Industrial demand is strengthening, while automotive recovery remains gradual. Power infrastructure, ADAS, and physical AI provide additional growth opportunities. Advanced packaging and HBM stacking are increasing manufacturing complexity and wafer requirements, while silicon photonics is driving demand for specialty substrate, such as SOI. Overall, increasingly complex manufacturing process and rising semiconductor content across applications are driving silicon wafer demand.
These structural trends reinforce our positive long-term outlook for the industry. Please turn to page 13. Leading research firms have raised their global semiconductor market outlook, with global revenue expected to nearly double year-over-year to approximately $ 1.6 trillion and approach $ 2 trillion in 2027. Memory and AI remain the key growth drivers, with strong HBM demand and supply bottlenecks accelerating capacity investment. Global fab equipment spending is expected to reach $ 118 billion in 2027. These trends support sustained growth in silicon wafer demand, driven by both capacity expansion and increasing wafer consumption. On page 14, to capture opportunities from strong semiconductor demand and tightening supply, GlobalWafers successfully completed a $ 1.4 billion GDR offering in September, with approximately four times oversubscription, reflecting strong international investor interest.
The proceeds will support foreign currency raw material procurement and future growth opportunities across our global manufacturing network, strengthening our local for local supply capabilities. The GDR also transformed our financial position from net debt of TWD 18.6 billion at the end of Q2 to net cash of TWD 26.3 billion at the end of Q3. Our debt ratio declined from 56% to 52%, while the current ratio improved from 128%- 163%, and the quick ratio increased from 108%- 150%. With a stronger balance sheet and improved liquidity, we are better positioned to fund future expansion, capture growth opportunities driven by AI and advanced semiconductor demand, and navigate industry cycles. The offering also broadens our global institutional investor base, enhancing market visibility and trading liquidity.
On page 15, you can see that GlobalWafers is entering the next growth phase with three key advantages: broader demand, operating readiness, and disciplined capital. Demand recovery is expanding beyond advanced nodes into mature node applications and specialty wafers, creating broader growth opportunities across all of our product portfolio. Although recovery varies by market, more importantly, our early investments are translating into measurable operating results. Let me now update you on our expansion projects in the U.S., Italy, and Japan. In the U.S., GWA's major phase I equipment installation is largely finished, and several tier one customers have completed qualification. Monthly shipments have reached new heights for four consecutive months. Demand for local supply and long-term customer commitments support further ramp-up, positioning GlobalWafers America to increase its revenue contribution as utilization improves.
At our Missouri facility, 12-inch SOI output reached a record high in Q3, with more than half of the newly installed equipment qualified for volume production. Several RF SOI and silicon photonics products have entered volume production, while major customers are discussing multi-year supply agreements to secure future capacity. In Italy, our new 12-inch facility was unaffected by the fire, and the expansion remains on schedule. Customer qualifications are progressing, volume shipments have begun, and monthly output continues to reach new highs. In Japan, the Utsunomiya expansion is fully complete. Utilization remains high, and shipments volume reached another record in Q3. Higher utilization and an improved product mix have helped the facility turn profitable, contributing positively to our revenue and earnings. These milestones demonstrate that our global manufacturing network is moving from capacity investment toward increasing production and customer supply.
Our established footprint across three continents also provides a competitive advantage that takes significant time and capital to replicate. Combined with our strengths and financial position, GlobalWafers has the demand opportunities, manufacturing capabilities, and financial foundation to turn the next semiconductor growth cycle into tangible business growth. Please turn to page 17 for this quarter's financial highlights. Third quarter revenue was TWD 14.9 billion, down 2.3% from Q2. Demand across our major wafer size and production lines remained very strong, and before the Novara fire, we had expected double-digit sequential revenue growth. However, the mid-July fire disrupted production and shipments at our Novara 8-inch line, resulting in a slight sequential revenue decline. The fire impact extended beyond 8-inch wafer sales, as Novara also supplies substrates for SOI products, affecting related SOI production and revenue.
We are reallocating capacity across sites to support supply, but other facilities are already operating at high utilization, and cross-site transfers require careful coordination due to differences in product specs, manufacturing capability, and customer qualification requirements. The revenue decline, therefore, mainly reflected the Novara incident rather than weaker end-market demand. Cross-site support and the gradual recovery at Novara remain our priorities for mitigating this impact. Our gross margin declined to 20%, reflecting new capacity ramp-up costs, depreciation, and the product mix resulting from the fire at the Novara facility. Operating margin remained stable at 9.8%, mainly due to reduced accruals for remunerations following the decline in Siltronic's share price. EPS was TWD 3.13 per share, compared with the TWD 7.9 per share in Q2. This mainly reflected the high comparison base from Siltronic's substantial valuation gain in Q2.
Despite the impact of the Novara fire, the underlying operating performance remained stable. Please turn to page 18 for our financial performance for the first nine months. Revenue was TWD 44.1 billion, down 4.4% year-over-year, partly reflecting the impact of the Novara fire. Gross margin was 20.5%, reflecting new capacity ramp-up costs and depreciation. Net profit increased to TWD 7.2 billion, and EPS reached TWD 15 per share, close to the 2025 full-year EPS at TWD 15.29 per share. Please turn to page 19 for a closer look at our income statement. The simulated figures on the right exclude the impact of major expansion projects in the U.S., Italy, and Japan, as well as the mark-to-market changes on Siltronic shares. On this basis, gross margin actually improved from around 31% in Q1 to around 34% in Q2 and Q3.
Simulated EPS also increased sequentially from around TWD 5 in Q1 to over TWD 6 in Q2 and over TWD 7 in Q3. For the first nine months of 2026, simulated gross margin is close to 33%, with simulated EPS of TWD 18.66 per share. This quarter-by-quarter improvement in both adjusted gross margin and EPS demonstrates the continued strength of our underlying operations. Please turn to page 20 for the balance sheet. Our GDR issuance in September strengthened our financial foundation. At the end of Q3, cash and cash equivalent totaled TWD 60.8 billion, while total cash and cash-related assets reached TWD 135.4 billion. Inventory slightly increased. It reflects the gradual arrival of supplies and polysilicon purchase to support our ongoing new expansion. The stronger financial foundation supports the working capital and the investment needed as our facility ramps up.
It puts us in a better position to meet customer demand and convert our installed capacity into future revenue and earnings. I would like to address both questions we have received from investors recently and those we anticipate will be raised. The first is the industry outlook. What is our outlook for the silicon wafer industry? We still remain very positive on the industry outlook. Advanced and mature node markets continue to exhibit a two-speed recovery. While the pace of recovery is uneven, the overall trajectory remains upward, and we expect supply-demand conditions to be tighter in 2027 than in 2026. The outlook for advanced nodes remains very positive. Demand continues to be driven by AI-related applications.
SEMI.org estimates that the number of fabs or production lines beginning operation or shipping first silicon will increase significantly from 13 in 2026 to 23 in 2027, providing clear support for wafer demand in 2027. Therefore, we expect advanced node demand to remain strong, while qualified 12-inch wafer supply should become progressively tighter. The mature node market has gradually recovered on inventory normalization, improving demand from power analog and automotive and the industry applications, with a clear strengthening in fundamentals. The next question is our own business outlook for Q4 2026 and the first half 2027. Demand improved significantly across all wafer diameters and all production lines in 2026. Overall capacity utilizations remained very high, and the market recovery became increasingly evident. Prior to the fire at Novara, we had been quite optimistic about the second half operations.
However, the fire at the Novara facility in mid-July affected a key portion of our 8-inch capacity, as well as the SOI productions. We continue to mitigate the impact through global capacity allocation and the higher utilization, and we are working intensively to increase shipments in the fourth quarter. Looking into the first half of 2027, the growth drivers are clearer. Demand continues to increase, and demand already exceeds supply for a number of products, including certain small-diameter wafers, creating room for pricing improvement. Demand growth, better pricing, the gradual recovery of Novara capacity, and the ramp-up of our new facilities, these will all support our operating performance in 2027. In conclusion, we remain very optimistic and promising about the outlook for 2027. Next question is our utilization rate. What are the current utilization rates across the company's wafer diameters? Demand has improved across all major wafer diameters.
If we exclude the newly expanded production lines, which are still ramping up, our existing 12-inch capacity are all fully loaded. Demand for 8-inch and 6-inch wafers is also very strong. The utilization are also close to full capacity. The demand recovery has also broadened from advanced to mature node and smaller diameter products. Utilization of our compound semiconductor business, such as gallium nitride and silicon carbide, is also very good. Their utilization rate is very high. This demonstrates that the continued increasing customer demand for high-quality compound semiconductor substrates. The next question is regarding our Novara fire recovery status. Our recovery efforts for the 8-inch production line in Novara, Italy, continue to advance. With the exception of certain backend process lines remain under reconstruction, all major manufacturing operations have resumed, and EPI products have also started to ship.
Processes have not yet been restored are currently supported by other sites. However, those supporting sites are themselves operating near full capacity. Therefore, the reallocation must accommodate the existing orders, and certain critical equipment has long lead times. As a result, near-term production and shipments remain affected. In addition, qualified capacity cannot be replaced on a one-for-one basis because product specs, process capability, and customer qualification requirements, these are all different, increasing the complexity of cross-site capacity allocation. Regarding the insurance, our insurance claim process for both property damage and business interruption losses has commenced. We continue to provide supporting documentation to determine the final amount of loss and insurance proceeds. As this final amount is not decided yet, we have not booked any related insurance income in our financial statements. The next question is regarding the subsidies in our expansion projects in U.S. and in Italy.
Government subsidies and incentive programs are progressing as planned. In the U.S., GWA continues to meet the milestone requirements for the CHIPS program on schedule and expects to receive a significant milestone payment from the U.S. Department of Commerce by the end of this year. We will also apply the AMIC, the Advanced Manufacturing Investment Tax Credit, in accordance with applicable requirements to pursue tax credit related to its U.S. expansion. In Italy, the second and third subsidy installments are currently under review and are expected to be received progressively in line with project milestone. Overall, GlobalWafers expects to receive about $ 100 million in government subsidies by the end of 2026. But the actual amount and timing of recognition will remain subject to the review progress, policy requirement, and the administrative procedures of the relevant authorities in each jurisdiction.
The next question is about silicon carbide outlook. Based on our recent customer engagement and correspondence and our current order activity, we believe that silicon carbide market is gradually entering its next growth cycle. Demand is expanding beyond EV into high-growth, high-voltage applications such as AI data centers, grid infrastructure, renewable energy, and the industrial market. Customers are also planning a transition from 1200 volt to 3300 volt and above, raising the requirements for material quality and reliability. Supported by broader demand and tightening supply, we have absorbed higher SiC wafer shipments and the gradual stabilization in ASP. Utilization of our SiC-related capacity remains at a high level. Based on the current customer demand, order visibility, and the emerging application trends, we remain quite optimistic about the future SiC market. The next is our CapEx outlook for 2027 and 2028.
Our previous global expansion cycle is gradually moving into the ramp-up stage, as major construction projects are completed. CapEx has already come down from its peak and expected to decline significantly in 2026 compared with 2025. Looking into 2027 and 2028, market demand continues to strengthen with a number of customers seeking additional supply and longer-term cooperation. To meet this demand, we will accelerate ramp-up of new capacity and maximize existing capacity through debottlenecking. If mid-to-long-term demand exceeds available capacity, we will carefully evaluate further expansion possibilities. For any new investment, key considerations include substantial customer demand and long-term commitment, government support. Also, due to the higher construction operating costs, the pricing and commercial terms must appropriately reflect these costs, while profitability, ROI, and payback will also be important factors.
Accordingly, actual CapEx figure for 2027 and 2028 will depend on customer demand, ramp-up, and debottlenecking progress, and the economies and timing of our potential new projects. For GWA, we will continue to ramp up and debottleneck phase I while advancing phase II planning. With the phase II building and certain infrastructure already in place, further expansion could be more capital efficient and faster than phase I. The next question is about the corporate bond that we just announced with Micron. How does this $ 500 million private placement of convertible bond relate to the strategic funding announced previously? Given that the parties already have a 10-year LTA, why use a CB structure instead of a prepayment?
The $ 500 million private placement of convertible bond approved in principle by the board today, this is exactly the strategic funding referenced when GlobalWafers and Micron announced the long-term collaboration. The parties have already established a stable foundation for cooperation through the 10-year LTA. The CB will further deepen its relationship. We believe that the key customer's willingness to support GlobalWafers' long-term development through CB also reflects its confidence in our prospects and future growth potential. A prepayment is typically linked more directly to future product purchase and delivery arrangements. The purpose of this strategic funding is broader. In addition to supporting the parties' supply relationship, it is intended to support GlobalWafers' strategic need, including the development of our U.S. operations and the enhancement of supply capabilities. We plan to use the CB structure to secure funding while preserving capital structure flexibility.
Under the current plan, the CB will have a 10-year tenure and a 0.5% coupon rate. This will allow GlobalWafers to obtain long-term funding with a relatively low cash interest burden. At issuance, the CB will remain a debt instrument, and unlike the right issuance of new shares, this will not immediately increase the number of common shares outstanding. Our goal is to strike an appropriate balance among long-term funding, capital structure flexibility, interest of existing shareholders, and a sustainable relationship with the key customers. The next question is regarding memory. Looking further, if memory prices decline in 2028 and the memory makers adjust wafer starts, while lower component costs support a recovery in consumer demand, do you expect the supply-demand gap for 12-inch and 8-inch wafers to widen or narrow? We believe that it is important to distinguish memory pricing from wafer starts.
A normalization in memory price does not necessarily imply lower wafer starts. It could also reflect additional supply coming online, while underlying demand from AI, HBM, server memory, and data center applications remain strong. At the same time, if lower component costs support a recovery in smartphones, PCs, and other consumer applications, wafer demand could broaden from today's AI and high-end-driven market into more mature node applications. Therefore, we do not currently view 2028 as a simple reversal of the current demand cycle, but rather as a potential broadening of the demand base. We expect 12-inch supply-demand conditions to remain relatively tight, supported by AI applications, while 8-inch should benefit from improving consumer power analog, automotive, and industrial demand, with conditions varying by products. Above is our response to the questions now. Now I would like to turn you over to Doris for the Q&A section.
Okay
Doris, please.
Yes. The first question is, does the company have any plans to raise product prices going forward? That is the first question. We received same question from several different audience today. Here is our answer. Market demand visibility continue to improve with the supply and demand conditions tightening in certain products. The overall pricing environment has become more favorable, and we are continuing to work with customers on price adjustment right now. Energy and raw material, labor, and operation costs have increased significantly. Freight also increased significantly, while the investment cost of new capacity is also much higher than in the past. We therefore believe that pricing needs to appropriately reflect current supply-demand condition, cost structures, and product value.
Price adjustments will be negotiated on a case-by-case basis, depending on product specification, supply-demand conditions, and contract renewal timing, and individual customers' circumstances, rather than being applied a certain percent price increase across all products. Of course, different views during pricing discussion are very natural, but with improving supply-demand conditions, we believe the current market environment is increasingly supportive of pricing return to a more reasonable and sustainable levels. This is the first question. The second question is, existing 300-millimeter capacity is operating at high utilization, while consolidated gross margin continues to reflect several factors. Is this greater pressure currently coming from existing contract pricing or from new capacity ramp-up costs looking into 2027? What are the key drivers for ASP and gross margin improvements?
I think both factors you are talking about have an impact, but the larger pressure currently comes from the ramp-up of our global expansion projects. Existing 300-millimeter capacity remains highly utilized right now, while new capacity in the U.S., Italy, and Japan continues to absorb depreciation, energy, labor, and initial operating costs during qualification and ramp-up. As a result, the benefit of high utilization in our existing capacity is not yet fully reflected in consolidated gross margin. Going forward, gross margin improvements should be driven by higher utilization as new capacity ramp-up, better pricing and product mix, and improved absorption of depreciation and fixed costs as volume increase. Our simulated profitability, excluding the major expansion projects, is already substantially higher than reported margin, demonstrating that the resilience of our underlying operation. That is my answer to the second question. Next is?
Okay, next will be the text questions we received. We will choose the ones and we will answer.
Okay. Previous one.
Okay.
Yes, this one. Regarding LTA repricing. The question is, regarding your long-term agreements, roughly what percentage of your LTA volume expires in 2027 and can be renegotiated at current market prices? I think every quarter, we always report the balance of our prepayment, and whenever you see the reduction of our prepayment, that means that reduction of the prepayment, that means that more and more LTAs are fulfilled, so we return our money back to customers. The smaller the remainder of the prepayment means that the smaller the LTAs are. We always honor our LTA, so when the current LTA expire, then when we have the new spot orders or new LTAs, of course, the price will be definitely adjusted based on the new cost conditions.
For some customers, some LTA customers, if they didn't take the volume committed in the LTA in the past several years, then we have more flexibility to discuss the new price with the customers as well. That's how we are managing LTA pricings. A very clear answer to you is that you will see more and more new LTAs. We have multiple LTAs under discussion. Many of them are very close to the conclusion. So you will see more new LTAs and more spot business with improved prices. Because of the strong demand, I believe that the total ASP will be improved starting from 2027. It's not only the new LTA, but also the product mix improvement. That is another factor as well. That's a quick answer for your question. Okay, next. The question is about real demand versus precautionary stocking.
A Japanese peer mentioned that customers have started building up wafer inventory because of concerns over supply chain disruption and rising prices. How does GlobalWafers distinguish between real demand and precautionary stocking by customers? We heard about this situation because the whole operation cost actually is increasing, including freight increase, raw material increase, inflation. A lot of material cost increase and COGS increase a lot. Of course, we are asking customers to raise the price. Many of our customers, they realize that the supply is so tight. It is getting tighter and tighter quarter over quarter. So they believe that wafer price will keep growing in 2027 and 2028. Therefore, there are some customers, they are really evaluating that how can they pre-stock more wafers to avoid from any too much impact from the wafer cost.
But as far as we learned, I think it is still very, very small because most of the peers have very, very high utilization of the capacity. Basically, all of the peers, including GlobalWafers, we work very closely with our customer because all of our customers are asking for more supply. So we definitely will check with customer how much inventory you have for this one, for that one, and then we will decide that which customer need the wafer badly, then we will supply the wafer to those customers first. So we, not only GlobalWafers, I think the peers also, all the industry people, they work very closely with every customer to try to supply to the real urgent demand customers first. Here is a question that why was our Q3 depreciation lower than Q2? I do not think so.
I think our Q3 depreciation is supposed to be higher than Q2, but let me double-check. If we find the details, we will email.
Because our Korean subsidiary has expanded a few years earlier than the U.S.A. fabs. Some of their depreciation are just graduated. Please note that in our U.S. expansions, their depreciation will gradually come online. In our GWA now, because we have reached a substantial completion in our construction, so now the construction depreciation already kicked in. But we expect that facility depreciation will come online.
Yes, yes. Thanks for Leah's answer. Our accounting head also mentioned about this, that our Korean subsidiary, we have several fab, and we follow our accounting policy. I know that this year, some make quite a lot of our equipments will be fully depreciated, which is Q3. So that was why Q3 is lower. But our new depreciation keep increasing from the new existing size, new expansion size. New depreciation keep increasing. This trend will not change in the next several quarters. Okay. Thank you. I think I will take one more question, then I will open the audio question. Yes. Okay.
This is Felix Lee from Morningstar. Your question is that you mentioned long-term customer commitment, government support, profitability of current capacity are key considerations of new expansions. Which of the three is closest to be negotiated or confirmed? Is there any details you can share?
I think these are not new factors. Actually, we started these criteria several years ago when we started the expansion, and we made the decision in 2022. Right now, we are talking about phase II or even further expansion, like what I said that SOI, we are about to have our phase II expansion for 12-inch SOI. We also use the same criteria to check. The answer to your question saying, which one is closer? This depends on what production lines, and also which country is this new expansion have. If, for example, if we are talking about U.S., I think we do have a lot of support from U.S. government, but at the same time, there are still some uncertainty for the future policy.
We are still working with government, try to figure out the future policy or how much support we can get if we make further expansion. So it was clear, but now we need to know a little bit about future expansion. Profitability, right now, there is some operation is performing better than the others. So, we internally, we govern, we know very well that how far the gap is, the current profitability status versus our goal, how big the gap is. So we know that how soon they can close the gap, our operation can close the gap of profitability. Customer commitment is the easiest part. We have a lot of customer commitment. Actually, for example, the 12-inch SOI, actually, the customer commitment, customer demand is way over the capacity we can build for phase II. So, customer commitment right now is the easy.
It's not only verbal commitment. Actually, all of our customers are willing to not only give you a commitment, sign a contract, but also pay prepayment. I think they are very positive. For those three items, the easiest one is customer commitment, and the second one is profitability. The third one, government policy, which one is there are still something we're still discussing with each country's government right now. Thank you very much.
Thank you. Ladies and gentlemen, the floor is now open for live questions. If you have any queries, simply using the Webex raise hand feature. Once acknowledged, please be ready to accept the host invitation to unmute your microphone and share your thoughts with us. To make sure everyone has the opportunity to participate, please limit yourself to two questions at a time. The first is Sunny from UBS. Hi, Sunny.
Hello, Sunny.
Hello. Could you hear me okay?
Yes.
Yes, yes. Perfect.
Thank you very much. My first question is to maybe see if you can provide a bit more color on how we should think about the pace of the recovery for the coming few quarters. Earlier, you talked about Q3 without the fire incident should achieve double-digit top-line growth. Now, if we look ahead, the Italy fab is under gradual resumption of operation, pricing start to improve, you are ramping up more supply. Therefore, I wonder how should we think about the top-line momentum maybe in Q4 and also into early 2027?
Yes, Sunny, you definitely have very good memory. You are correct. If there was no fire in Italy, actually Q3, we could have achieved over 10% growth, quarter-over-quarter growth. But actually, we did not make it. The reason was the fire, and we internally, we run a simulation, and it is very firm that without the fire, we could have achieved double digit. Actually, it is 12%, over 12% year-over-year growth. For Q4, this, the coming quarter, right now, the current quarter, Q4, I think the momentum is still very strong. Actually, it is even stronger than what we expected. Some of the customers, in order to get more capacity, they are even willing to pull ahead of their price, new price adjustment, pulling the price adjustment to Q4. Sam was talking about this. But the bottleneck is that we do not have enough capacity to supply.
The demand is stronger than our forecast a couple months ago. Q4 demand is very strong. But super majority of Q4 prices remain at the old LTA levels, or the price negotiated 2025. Q4 price were still the old price. Not too many price adjustment in Q4. But price is improved, and also, we do see some very, very strong demand from customers. That is current status. We believe that Q4, I think it will be a better quarter than Q3. Starting from Q1 2027, I think we will have not only more capacity from new expansion fabs, but also we will have better price than, better ASP than Q4 2026. That is our view. Thank you, Sunny.
Thank you, Doris. May I double-check, because it is quite important. For Q4, now based on your visibility and also the production situation of the Italy fab, could you achieve more than 12% year-over-year growth for your top line?
No, we cannot, because Novara is still We are recovering, but Novara recovering volume is still very small. So we are still suffering from the loss of Novara capacity and revenue. I am talking about that the growth will be better. Q4 will be better than Q3, but it is not 12%, that high. The 12% was that if there was no fire, our Q3 revenue should have been, could have been over 12% higher than Q2. Sorry for not making myself clear.
Sure, no problem. My second question is now as supply-demand tightens, especially going to maybe second half of 2027 and 2028, when you allocate the capacity by a market, let us say, if memory clients are more aggressive in negotiating new contract to support their more meaningful capacity expansion for that period, while maybe logic are less aggressive, from a high level, how would you think about the best way to allocate capacity by the end market, given very different dynamics for pricing?
Yes. Internally, we have our strategic internal policy that roughly how much percent of our revenue is allocated for memory, how much percent for non-memory. Internally, we have an allocation. Then for the memory part, we negotiate with customer. I hope that we can get a better price to cover our cost increase. So we talk with customer, different memory customer, and we decide how to allocate the memory capacity reserved to the customer who can at least get closer to our target price. That is how we work with our customer. For the non-memory, the analog part, or for the non-memory area, there are a lot of application like silicon photonics and Power SOI, RF SOI, and even for compound material. So we have a lot of revenue.
For those category, we just based on, same as what we did before, that we based on the customer, the partnership, how long we have been, because the demand is very tight, right? Demand is very strong, and supply is very tight. So we care about long-standing partnership. Our criteria is that customer partnership and LTA status. If they are the customer who are willing to sign LTA and pay prepayment, they will get the capacity first. So still, this is the priority. For the customers whose company's policy is not possible to permit any LTA, then we definitely will take care. We will make the decision based on their price condition and business terms.
Got it. Thank you very much.
Thank you.
Thank you. Next will be Lucas from Morgan Stanley. Hi, Lucas.
Hello. Can you hear me?
Yeah.
Yes. Hello.
Yeah. Good afternoon, Doris and Leah. Thanks for taking my questions. My first question is also about the pricing to next year. As you said that all diameters of your products are reaching nearly fully loaded, but somehow, we hope that we can assume that the pricing negotiation to next year could be extremely smooth. But somehow, we just keep hearing some customer pushback about the price hike to next year, especially from the largest foundry customers. We are just wondering that, how could we reconcile this difference? Is it because the inventory from the customers, or is there anything that we have missed here?
Yes.
Yes.
Okay. Yes, you are right. Some customers are more supportive for the price adjustment, some are not, which is true. I know that because each of them have different reason for that. But as a wafer supplier, we work very closely, and we very clearly express our pressure from cost. If some customer, they insist that no price improvement or very limit price improvement, then we have no choice but to allocate a little bit lower. I mean, there are still a lot of, in addition to price, I think, there are still a lot of value and partnership with each customer. So, it's not only like that.
Because, of course, we know that some of our customer, they do have more wafer inventory in-house, so they have less pressure than others to try to immediately to get a lot of spot wafers or even paying a little bit higher to get the wafers. So some inventory availability, that's one of the reason why they're stronger, they are tougher to accept our price adjustment request. So that's one of the key reason. That's very true.
Yeah. Thanks for the clarifications. Hopefully that we can have more price hike into 2028 as well. My second question is, I just also want to know about your 12-inch silicon carbide progress. Right now, how should we expect a meaningful revenue contribution from 12-inch silicon carbide into 2027 or 2028? Thank you.
12-inch silicon carbide is doing okay, but volume-wise, because it's a new project, so volume is still in the ramp-up mode. It's not only we're in the ramp-up mode, our customers also, they're in the ramp-up mode. So, we do have very healthy 12-inch silicon carbide right now, but volume is still not that high. According to the forecast, I think the 300-millimeter silicon carbide have very good potential in the future. Quite a lot of customers are asking for the same concept and similar material, maybe for different application. So we think 300-millimeter silicon carbide, 2027, the revenue will be still in the low single digit weight amount of our product, I mean, the revenue. But it will be ramping up quite smoothly in the next several years.
Okay. Fair. Thank you so much.
Thank you, Lucas.
Thank you. Ladies and gentlemen, we would like to express our sincere appreciation to all of you for your valuable participation today. The earnings call concludes now. Thank you, and have a wonderful evening. Thank you. Bye-bye.
Thank you. Bye-bye.