GlobalFoundries Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 13 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the Conference Call to review First Quarter Fiscal Year 2023 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sam Franklin, Head of Capital Market and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundry's Q1 2023 earnings call. On the call with me today are Doctor. Thomas Caulfield, CEO and David Reeder, CFO. A short while ago, we released GF's 1st quarter financial results, which are available on our website at investors.

Speaker 1

Gf.com, along with today's accompanying slide presentation. This call is being recorded and a replay will be made available on our Investor Relations webpage. During this call, we will present both IFRS and adjusted non IFRS financial measures. The most directly comparable IFRS measures and reconciliation for adjusted non IFRS measures are available in today's press release and accompanying slides. I would remind you that these financial results are unaudited and subject to change.

Speaker 1

Certain statements on today's call may be deemed to be forward looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate and may or by the use of the future tense. You should not place undue reliance on forward looking statements. Actual results may differ materially from these forward looking statements, We do not undertake any obligation to update any forward looking statements we make today. For more information about factors that may cause actual results to differ materially from forward looking statements, Please refer to the press release we issued today as well as the risks and uncertainties described in our SEC filings, including the sections under the caption Risk Factors in our annual report on Form 20 F filed with the SEC on April 14, 2023.

Speaker 1

We'll begin today's call with Tom providing a summary on the current business environment and technologies, following which Dave will provide details on our end markets and first quarter results and also provide Q2 2023 guidance. We will then open the call for questions. We request that you please limit your questions to 1 with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Speaker 2

Thank you, Sam, and welcome, everyone, to our Q1 earnings call. I'm pleased to report Q1 results that are in line with the guidance we provided in February as we continue to deliver resilient financial performance amidst a challenging macroeconomic and cyclical backdrop. Let me start by providing a brief update on the current business environment. Similar to others in the industry, we believe that semiconductor inventories are coming down more slowly than previously expected and that the rebalancing of demand will extend at least through the Q2, particularly in end markets such as smart mobile devices, communications infrastructure and data centers as well as the lower end of the consumer and home electronics markets in general. Based on discussions with our customers prior to our Q4 update, we previously anticipated that the first half of twenty twenty three and likely the Q1 of 2023 would mark the low point in revenue and the peak of the inventory cycle.

Speaker 2

Based on more recent conversations with customers and our own internal models, we continue to anticipate that the Q1 revenue represented the low point of our 2023 quarterly revenue and that will have quarter to quarter modest sequential growth throughout the year. Though we are expecting continued sequential revenue growth, the return to more normalized inventory and demand levels is forecast to happen more slowly than previously anticipated and will most likely occur later in the year well into the second half of twenty twenty three. Despite forecasting slight year over year improvements in ASP or our average selling price per wafer, We are now anticipating that revenue will decline year over year in the mid to high single digit percentage range. David will comment on this further in his section. Despite the headwinds in the aforementioned end markets, We continue to see healthy demand in faster growing segments such as industrial IoT, aerospace and defense and the automotive markets.

Speaker 2

Additionally, we are continuing to grow our single source design wins, add customers and sign new LTAs. Let me now touch on our results. In the Q1, GF revenue declined 5% year over year and 12% sequentially, with reduced wafer shipments being partially offset by year over year improvements in ASP and mix. Coupled with strong operational execution, This resulted in a resilient adjusted gross margin for the quarter as we continue to proactively manage our costs to help offset the broader industry headwinds. We reported adjusted gross margin of 28.5% in the quarter And we delivered adjusted earnings per share of $0.52 which were at the high end of our guidance range.

Speaker 2

Dave will give more color on our financials in a moment, but let me now provide a brief update on some of our recent customer partnership activities. Consistent with continuing to build our customer partnership strategy, we added an additional 5 long term agreements during the quarter, which added incremental prepayments and access fees of roughly $200,000,000 in revenues of approximately 1,400,000,000 under these LTAs. With respect to our differentiated product platforms, we continue to make progress in the Q1 with new GF product qualifications serving our customer needs across communications, infrastructure and data center, Automotive as well as smart mobile devices and IoT end markets. Starting with automotive, we continue to deliver new power management products with expanded voltage handling capabilities on our highly competitive 130 BCD light product line at automotive grade. This adds additional differentiated feature on our growing automotive product portfolio.

Speaker 2

In the communications, infrastructure and data center end market, At the most recent Optical Fiber Communications Conference in March, we were pleased to have no less than 5 of our customers, including Aehr Labs and Ranovis shared demos of their data center solutions using GF Photonics, specifically our 45 CLO technology. Air Labs also demonstrated the industry's first 4 terabytes per second optical solution for chip to chip connectivity. For smart mobile devices, we are accelerating the delivery of enhanced features on ADASW. That's our leading RF silicon on insulator based product line for front end module components, including an enhanced low noise amplifier. This technology will be making its way into the next releases of premium tier handsets.

Speaker 2

In IoT, We continue to innovate our differentiated technologies focused on enhanced power efficiency and embedded memory for secure intelligent solutions at the edge. One example of this is our customer, Nordic, the market share leader in Bluetooth low energy microcontrollers, Recently announced their next generation product series using GlobalFoundries 22FDX. This is an exciting application of 22FDX as it enables an integrated single chip solution delivering more RF range at industry leading low power efficiency and embedded nonvolatile memory for security Finally, continuing our research partnership efforts under GF Labs, we executed and announced a strategic university partnership agreement with Georgia Tech. This agreement spans a broad range of research activities, including their leadership capabilities in advanced packaging, Silicon Photonics and Workforce Development Initiatives. To summarize, I am pleased to report resilient financial performance in line with our guidance as our dedicated teams around the world continue to execute on the targets that we set and to deliver to our customers and our stakeholders.

Speaker 2

With that, over to you, Dave.

Speaker 3

Thank you, Tom, and welcome to our Q1 earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics, which excludes stock based compensation and restructuring charges. Our first quarter results were in line with the financial range we provided in our last quarterly update. 1st quarter revenue was approximately $1,840,000,000 and we shipped approximately 511,000 300 millimeter equivalent wafers in the quarter, an 18% decrease from the year prior period. Driven by reduced wafer shipments primarily related to mobile and consumer driven end markets.

Speaker 3

ASP increased approximately 12% year over year, driven by ramping long term customer agreements with better pricing as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 87% of total revenue. Non wafer revenue, which includes revenue from reticles, Non recurring engineering, expedite fees and other items accounted for approximately 13% of total revenue for the Q1, broadly consistent with our expectations. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 38% of the quarter's total revenue.

Speaker 3

1st quarter revenue declined 29% from the prior year period, principally driven by reduced volumes in the lowtomidtier smartphone segments and a continuation of the well publicized inventory correction within the broader smart mobile market. This decline was partially offset by higher ASPs, premium tier mix growth and continued content growth in our RF transceiver and audio products which recorded double digit growth from the prior year period. As you've heard from others, inventory levels have remained higher than expected in most of the smart mobile markets during the Q1 as the inventory correction continues to work through the supply chain. We believe that inventory levels will be largely normalized throughout the first half of twenty twenty three and that more historical inventory levels will be achieved by the second half of the year. We continue to focus on growth opportunities in our RF transceiver and Wi Fi SoC technologies as we seek greater value capture from the premium tier smartphone segment by supporting the transition towards more feature rich handsets.

Speaker 3

In the Q1, revenue for the home and industrial IoT market grew approximately 7% year over year, representing approximately 19% of the quarter's total revenue. Year over year growth in this end market was primarily driven by our Aerospace and Defense business, where we continue to ramp to volume our design wins and driven by our wireless technologies that enable the broadening use of digital payments as well as industrial and government connected devices. We expect increased customer demand for next generation analog and mixed signal particularly within the smart card and aerospace and defense end markets to largely offset the near term inventory correction and market softness and the more consumer centric portions of the IoT market. As Tom discussed, automotive continues to be a strong growth segment for us. 1st quarter revenue grew 122 percent year over year, representing approximately 10% of the quarter's total revenue.

Speaker 3

As discussed in our Q4 results, we expect to see a continued ramp across our processing, sensing, connectivity and vehicle infrastructures Technologies throughout 2023. We have and will continue to allocate more of our existing capacity as well as add additional capacity to support the continued growth of silicon content within the automotive market. Next, moving to our communications infrastructure and data center end market. 1st quarter revenue grew approximately 8% year over year and comprised approximately 19% of the quarter's total revenue, which was broadly in line with expectations. Due to the buildup of data center inventory in 2022 and demand softening for enterprise wired infrastructure, we Finally, our personal computing end market declined 12% year over year in the Q1 and comprised approximately 2% of the quarter's total revenue.

Speaker 3

PC and notebook demand continues to be soft and we expect this end market to continue to decline as a percentage of our overall revenue in 2023. Also in the Q1, we were awarded and received a tax refund of $152,000,000

Speaker 4

by the

Speaker 3

State of New York related to the significant manufacturing investments we've made in the state. We're proud to have partnered with the State of New York to create tremendous value for the local community. For the Q1, we delivered adjusted gross profit of $525,000,000 which was at the high end of our guided range and translates into approximately 28.5 percent adjusted gross margin. The roughly 320 basis point year over year improvement was driven by higher ASPs and a richer product mix. Operating expenses for the Q1 represented approximately 11% of total revenue.

Speaker 3

R and D for the quarter was approximately 105,000,000 and SG and A declined sequentially to $94,000,000 Total operating expenses were about $199,000,000 as we continue to prudently manage our costs. We delivered operating profit of $326,000,000 for the quarter, which translates into an Approximately 17.7 percent adjusted operating margin, roughly 330 basis points better than the year ago period and above the high end of our guided range. 1st quarter net interest and other expense was $13,000,000 and we incurred a tax expense of $23,000,000 in the quarter. We delivered 1st quarter adjusted net income of approximately $290,000,000 an increase of approximately $58,000,000 from the year ago period. As a result, we reported adjusted diluted earnings of $0.52 per share for the quarter.

Speaker 3

Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the Q1 was 479,000,000 CapEx for the quarter was $957,000,000 or roughly 52 percent of revenue. At the end of the Q1, our combined total of cash, Cash equivalents and marketable securities stood at approximately $3,200,000,000 We also have a $1,000,000,000 revolving credit facility, which remains undrawn. Before I transition to guidance for the Q2, I will comment briefly on the outlook for the year. As Tom articulated in his prepared commentary, we believe that the Q1 represents the low point for our revenue in 2023 and that we will grow slightly on a sequential basis quarter to quarter to quarter to quarter throughout the year.

Speaker 3

Although we only guide 1 quarter at a time, based on our internal models and our discussions with customers is that the second half of twenty twenty three will signal the normalization of inventory levels and that increased volumes are forecast to occur later in the second half than previously anticipated. Based on updated models, We expect that year over year shipment volumes for 2023 will decline in the high single digit percentage points range, partially offset by modest improvements in ASP and mix resulting in a 2023 year over year revenue decline in the mid to high single digits. Next, let me provide you with our outlook for the Q2. We expect total GF revenue to be between $1,810,000,000 $1,850,000,000 Of this, we $7,000,000 We expect adjusted operating profit to be between $288,000,000 $327,000,000 Excluding share based compensation for the quarter, we expect total OpEx to be between $200,000,000 $210,000,000 At the midpoint of our guidance, we expect share based compensation to be approximately $45,000,000 of which Roughly $16,000,000 is related to cost of goods sold and approximately $29,000,000 is related to OpEx. We expect net interest and other expense for the quarter to be between $4,000,000 $12,000,000 and tax expense to be between $20,000,000 $25,000,000 We expect adjusted net income to be between $256,000,000 299,000,000 On a fully diluted share count of approximately 558,000,000 shares, we expect adjusted earnings per share for the Q1 to be between 0.46 and $0.54 For the full year 2023, we continue to expect CapEx to be approximately 2,250,000,000 In summary, strong operational performance and proactive decision making across our business enabled us to deliver 1st quarter results broadly in line with the guidance ranges we provided in our Q4 earnings update.

Speaker 3

We are continuing to tackle the challenges presented by the cyclical headwinds in our industry and are implementing initiatives to mitigate their impacts on our business as we remain focused on delivering the strategic goals and financial targets set out in our long term model. With that, I'll turn the call back over to Tom.

Speaker 2

Thanks, Dave. We are proud of GF's 14 year history and specifically the strong progress we have made over the last several years. But the opportunity ahead is even more exciting for GF. In a world that depends on the supply of semiconductors for economic, national and supply chain security, we offer our customers a unique and differentiated We achieved this by focusing our innovation on application specific features our end markets require and deliver these via deep customer partnerships. You've heard this story play out as we've continued to achieve significant Growth in sectors such as automotive and IoT,

Speaker 5

2 of

Speaker 2

the most exciting growth engines for our industry. What's different about these markets is that innovation required to win is not based on Moore's Law scaling. GF wins in these end markets because we deliver industry leading power efficiency with our proprietary FDX technology. We win because we bring world class RF connectivity across all our technology platforms, allowing for optimized digital and analog content in customer designs. And we win because we add intelligence and security at the edge with a range of world class embedded memory technologies.

Speaker 2

The proof is in the numbers. As you heard early on during the call, we are continuing to grow are revenue in these markets and it's our differentiation that is driving that. We see secular acceleration of the role of semiconductors in the world. We believe in the criticality of Secure Manufacturing to deliver products to global markets, and we are committed to continuing to invest in our global talent so that GF can play an increasingly vital role in the future of this industry. It is in that context that I'm delighted to announce 2 accomplished leaders who are joining the GF leadership team to help drive our business and our technology leadership and accelerate our financial performance during the next exciting phase of our journey.

Speaker 2

Industry veteran, Niels Anderskoff will be joining us in June as our Chief Business Officer. Niels will own and deliver our product and technology roadmap, our commercial strategy and our go to market execution. Niels comes to us following a 20 plus year career at Texas Instruments, where his last role was as Senior Vice President and Executive Officer Responsible for the company's multibillion dollar analog power business. He brings deep expertise in power management, analog and mixed signal technologies and an impeccable track record of driving and delivering financial performance. Our existing product end markets, sales and technology teams will report to Neals.

Speaker 2

Additionally, Tim Stone will be joining GF in June as our Chief Financial Officer. Tim will build on the strong foundation laid by David Reeder And we'll focus on accelerating our financial performance, enhancing our investment discipline and continuing to bring transparent communication to all of our stakeholders. He brings a world class finance pedigree to GF, including 20 years at Amazon in Senior finance roles, including as CFO for the AWS and Devices Business. Tim is a seasoned Public company CFO with experience at Ford Motor Company, Snap and most recently as the CFO for a private AI software company. With his breadth of experience and track record of delivering business outcomes in fast moving technology enabled industries that GF serves today, Tim brings new and vital perspectives to help guide GF in its next chapter.

Speaker 2

David Reeder will be leaving GF after transitioning to Tim Stone over the coming months. Dave has been a true partner to me through our transition to the public markets and has left an indelible imprint on GF and on me personally. On behalf of the entire GF family, I wish Dave the best of success in his next chapter. Dave, I'll turn it back to you for your final thoughts before we head into Q and A.

Speaker 3

Thanks, Tom. 3 years ago, I joined GlobalFoundries with a singular mission, one that was shared across GF's talented and diverse workforce, to build the world's leading and only geographically diversified feature rich semiconductor foundry. We have made tremendous progress towards this goal and have never been better positioned to serve our customers' increasing demand across multiple markets as Pure geographically diverse partner with best in class technology. With all the progress GF has made, I'm ready to hand over the reins to Tim Stone. I look forward to welcoming him to GF and will continue to support the company as we complete the transition over the coming months.

Speaker 3

In closing, I wanted to extend my appreciation to our 13,000 employees around the globe who deliver every day for our customers. With that, let's open the call for Q and A. Operator?

Operator

Please limit your questions to one question and one follow-up only. Thank you. And our first question comes from the line of Harlan Sur with JPMorgan. Your line is now open.

Speaker 6

Good morning. Thanks for letting me ask a question. Dave, thanks for all the support and helping the team drive the strong execution profile and Best of luck on future endeavors.

Speaker 3

Thanks, Arlen.

Speaker 6

The team's pricing yes, thank you. The team's pricing is based on technology differentiation, right, which drives the very high mix of sole source engagements and Your partnerships are not arms length, right, but very strategic. On the flip side, I mean, the supply demand dynamics in the industry have weakened, competitors continue to add Capacity, you did say that the team is still on track to grow ASPs this year. What about on new business and LTAs that you're winning, LTAs that you're negotiating, what's the ASP trend on the new business?

Speaker 3

Thanks, Harlan. Look, when I think about our pricing, the first time we talked about pricing for 2023 was on our November call where we said we thought Pricing was going to increase on a year over year basis in 2023 versus 2022. We reiterated that again in February. We delivered it in Q1 and we're kind of reiterating it for the year here in 2023 that we believe that pricing will increase Slightly on a year over year basis, 23 versus 22. When we look out in time and we think about the D wins that we're winning and the LTAs We're signing 5 of them in the Q1, another $1,400,000,000 of LTAs.

Speaker 3

Those LTAs deliver the economic value that GF needs to deliver our long term financial model. And so I think customers are looking through this kind of near term perturbation with the inventory in their channel. They're looking out into time And they are seeing capacity constraints in the future, particularly in the geographies where they want that capacity And they're hungry for that geographic diversification as well as the technology that GF delivers. Tom, anything you'd add to that?

Speaker 2

Yes, I'd add, this is in the bottom of our slowdown and we signed these kinds of long term agreements. Our single source based business, if you look at the design win mix for the Q1, over 90% were single source business. And our discipline around design wins, we will make sure that all new design wins are accretive to our financial model. And that's the way we're driving our business. It's not about all business.

Speaker 2

It's about accretive business.

Speaker 6

Appreciate that. And then for my follow-up, given the weaker full year revenue outlook, you should Still grow your revenues on average like mid single digit sequentially in Q3 and Q4. You've got the strong ASP profile. So How should we think about the gross margin profile

Speaker 7

for the remainder of the year?

Speaker 6

Can the team exit this year at 30% or better gross margins?

Speaker 3

So Harlan, as you know, we'll guide 1 quarter at a time, but we did want to give you some of that color for the year. That stated, I would like to add a little bit more context. When you think about 2022 For the year of 2022, we ran utilization in the very high 90s percent for the entire year, almost 100% for the And so when you think about 2023, in the Q1, we We guided that we would run-in the mid-80s from a utilization perspective. As you know, every 5 points of utilization is roughly 2 points of gross margin, but yet when you look at what we delivered in Q1 from a gross margin perspective, It was actually very much in line with what we delivered for the year of 2022. And so we've been able through good operational performance, Improved mix, improved pricing to be able to reset the gross margin baseline for 2023.

Speaker 3

And so when you think about the full year, Q1 being the lowest quarter for our revenue, we stated that we believe we would guide on a Q to Q to Q basis sequentially Throughout the year, I would expect there to be a high correlation of gross margin and revenue.

Speaker 6

Perfect. Thank you very much.

Operator

One moment for your next question. And your next question comes from the line of Mark Lipacis with Jefferies. Your line is now open.

Speaker 4

Hi, thanks for taking my question. Dave, sorry you're leaving. Really appreciate all the great support That you've given us over here at Jefferies. So thank you for that.

Speaker 1

Thank you, Mark.

Speaker 8

Maybe a question

Speaker 4

On the topic of reshoring, which is interesting for many investors, it sounds like your engagement Customers is very high and I imagine that this is because you guys are providing great technology with good value. But I guess I'm wondering, is there a way to quantify or how the trend of How reassuring is impacting your engagements? Are customers telling you that part of your value proposition is The ability to bring the manufacturing back to local markets or if you can provide any Color on the conversations that you're having with your customers on that topic? Thank you.

Speaker 2

Thanks, Mark. It's an important I think the realization of how important it is to first to get a more balanced Supply chain. Concentration in very small pockets of the world are not good for geopolitical, geological reasons for a lot of So the realization is there and now it always comes down to execution implementation. I would tell you a lot more awareness and drive in more sensitive applications. Think of aerospace and defense, where supply chains out of China, for example, would be Very problematic for those types of applications.

Speaker 2

A lot of energy out of the fabless companies in China and Taiwan, their businesses could be shut down if they don't have a global supply chain. So I think what we're seeing There's a lot more conversations, companies trying to plan their next move. I don't think it's realistic for anybody to say, let me take an existing design And report it somewhere else. That's a lot of reuse of important engineering talent. But thinking about future designs and planning it not only on technology and application space, but who and where it can be built.

Speaker 2

So I would tell you in the net of all of that, This still remains an opportunity for us ahead, very little of it in the present P and L that you've heard today.

Speaker 3

Got you. That's helpful.

Speaker 4

And a follow-up on the auto business, which is more than doubled on a year over year basis. You continue you expect to see continued ramp here and you're adding capacity. How Like can you just remind us like how you think about the growth vector in auto is doubling annually? Is this kind of how we should think about this for you guys? Or could you just talk about how you see this business over the next several years?

Speaker 4

Thank you.

Speaker 2

So, I'll go in reverse order. It's all about what you believe. If you believe that the Transition from an internal combustion engine to what we call ACE, autonomous connected electrified vehicle, Drive significant content growth of semiconductors in the automotive industry, somewhere between 10% 15% compounded. Eventually, That's the rate at which we expect our growth, but because we're starting with new design wins on new models and off a relatively smaller base, you'll see a higher growth rate like you've seen from us. Think about if we go back in 2020, our automotive revenue was less than $100,000,000 Last year, it was Around the $375,000,000 mark.

Speaker 2

This year, we still feel that we're going to be bumping our head up on $1,000,000,000 Where earlier we were talking about a 4th quarter run rate. So we have a high visibility to the types of applications our technology is going into, With cars and the types of features, we feel very confident that we're not done growing in this space, but doubling On big base, it's a lot harder than doubling on small base, but I firmly believe that we will continue to grow revenue in this market and gain share more importantly.

Speaker 3

Great. Thank you. Very helpful.

Operator

One moment for your next question. And your next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Speaker 8

Thanks for the question and thanks and best wishes to Dave on his next So first, I wanted to ask, Tom, you mentioned second half See to mark a return to some kind of normal trends. Is that based on historical seasonality? Is that based on specific customer orders? Because your large smartphone customer was talking about the weakness in the smartphone market kind of persisting towards the end of the year. So that's why I'm just curious what is giving you the confidence that second half could market return to some level of seasonal trends?

Speaker 2

Well, I think your point was, we started to see normalization of inventories in the second half. And as a result, that's why our revenue will have very modest sequential growth. Inventories are coming down. If you look On aggregate, Q1, we saw from an industry range Modest decrease in inventories and that bodes well for the second half, especially with certain customers are telling us they want to let the inventories come down, More normalized how they're feeding the channels, they want to get this past us. And so the real change I think is when We came into this year with a belief that the second half would be a strong recovery and what we're seeing in the second half is a more muted recovery.

Speaker 2

That was the point we were trying to make.

Speaker 3

And if I could just build on that just a little bit in a couple of end markets. So with respect to smart mobile, obviously That market is a bit more challenged with some of the inventory there as well as some of the handset volumes. The bright spot for us is that we do Play in that premium segment of the market, where we actually not only play in that premium segment, but we also attach more silicon In that premium segment, and that's a segment of the market that's held up a little bit better. We talked a little bit about automotive earlier in the call, so I won't reiterate that point. But then the other end market or maybe sub end market that I would talk about is the aerospace and defense business as well as the industrial side and governmental side of the IoT business has also held up quite well.

Speaker 3

And so while we've seen Smartphone general weakness and we've also seen some of the lower end consumer centric weakness. We do have some other businesses that are helping to offset that weakness and we've been able to reallocate capacity in a very capital efficient way to those markets that are growing.

Speaker 8

And my second question is, what is the report card on LTAs that were supposed to be executed this year because if you go back, let's say a year, right, and think about the LTAs that were supposed to come through in 2023, What has been the actual realization of that? How much has been pushed out or canceled? What I'm trying to get a sense for is how Flexible are you guys with the LTAs and how much can we depend on them to deliver on a certain amount of revenue expectation for a given year?

Speaker 3

Great. Let me address that one and then Tom maybe you can build on it as well. So from an LTA perspective, the LTAs are actually performing to their stated purpose. And what was that stated purpose? Well, that stated purpose was that they would create a framework for discussion for GLOBALFOUNDRIES and our customers such that when there are inflection points And the market that we would sit down in a rational way and in an equal way and have a healthy conversation around the investments that we've made for maybe demand that perhaps isn't materializing the way we originally expected.

Speaker 3

And so we all recognize that we're in an environment where there's too much inventory in the channel. And so just continuing to ship more inventory in the channel actually Is it helpful? And so that framework has really come into play where we have sat down with our customers and we have looked at The entire economic life and value of that contract and we've worked across the 3 main elements That we had spoken about previously, I mean as early as even our roadshow. And that was we talked to our customers about price. We talked to them about volume, we talked to them about duration and we also talked to them about future design win opportunities such that we can capture more share of their wallet in the future to preserve, if not enhance the economic value of those LTAs.

Speaker 3

And so we've been able to deliver on that. And so as we mentioned last quarter, we had one customer where we had Where we had an under utilization fee settlement, that one was fairly well publicized. We do not have any other new settlements announce, but what we have been able to do with those contracts is work across that framework that I discussed to not only preserve, but also enhance the economic value to GF. Tom, anything you'd add to

Speaker 2

I think that was exactly the intent. It was to create partnerships to manage the upsides and the downsides together And the operative term is preserve the overall economic value of the agreement. And a lot of that has to do with New wins and new opportunities and extending the life of these. And again, back to a quarter that we were all Calling into the low point for industry, we still brought in $1,500,000,000 of new long term agreement

Operator

One moment for your next question. Your next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Speaker 9

Hi, guys. Thanks for letting me ask a question. David, best of luck. Okay. Sad to see you go.

Speaker 9

I want to go back to the pricing side of the equation. I know you guys don't guide by wafer units and pricing, but it looks like the first half of this year is On the pricing side, going to be up double digits and you said the full year was going to be slightly up year over year. That seems to imply the second half is going to go down. If that math is correct, is that something to do with mix? Are you having to price more aggressively as part of the negotiations with the LTAs that you just discussed in the last Question, is there any sort of metric that I'm missing in that analysis?

Speaker 3

Sure, Russ. Obviously, the compares in the first half are a little bit easier than the compares to the second half of last year. What we've always talked about is We've talked about the pricing would continue to improve as we ramp those LTAs, many of which started ramping in the middle to the last half of 2022. And so the way we think about pricing is we think pricing at the current levels is very stable, slightly up and then you're going to bump around a little bit depending on what the mix of your business is. And so when you think about a year over year basis that would lead you to the kind of double high single digit, double digit low teens type of growth That you mentioned and then as you get towards the back half of the year, you look at pricing that's relatively flat depending on exactly what the final mix is.

Speaker 9

Got it. Thanks for that. And then from an end market perspective, you said earlier that you reiterated the bumping up against $1,000,000,000 in the automotive side of things, so that's really impressive growth. It seems like that could get you that slight sequential growth in the back half Quarter is all by itself. Are there other segments that you expect to continue to go down in the back half?

Speaker 9

It seemed like You said that inventory should be pretty normalized, so I wouldn't expect them to go up that fast necessarily, but it didn't sound like anything was going to go down. So What's really the offset to the automotive growth?

Speaker 3

Sure. When you think about the sequential growth in the back half of the year, Really what you're looking at is you're hearing us say when we say slight, you're hearing us say we feel good about the industrial And the governmental portion of home and industrial IoT, so that's the A and D as well as the industrial business in IoT. We feel good about automotive. We've taken a more cautious outlook on the low end of consumer As well as the lower end of the handset market. And so that's what you've heard us communicate is just the fact that we feel good about those markets On the aforementioned comments and then the other markets, we've just taken a cautious outlook.

Speaker 3

And if the inventory normalizes the way we expected, Then perhaps we'll do slightly better. If the inventory and the macroeconomic kind of low end malaise continues, then we'll be in line with what we told So we feel like we've positioned ourselves conservative. Thank you.

Operator

One moment for your next question. Your next question comes from the line of Joseph Moore with Morgan Stanley. Your line is now open.

Speaker 7

Great. Thank you. And let me add my thanks David, and good luck. In terms of the CapEx, you guys maintained this $2,250,000,000 from last quarter. Your revenue outlook is

Speaker 3

a little lower

Speaker 7

for the year. So I wonder if you could just kind of walk us through the trade offs that you're making, is that confidence in 2024? And what are the just what are the trade offs between trying to drive more cash flow versus trying to invest in the business?

Speaker 3

Sure. So first, let me start with just by saying that the majority of that CapEx is really related to Fab 7H on our campus there In Singapore and really giving us the capability longer term to be able to satisfy some of these LTAs that we're signing today as well as some of those LTAs that we've signed in the past. Before I just immediately direct your question, I do I do want to provide a little bit of context. When we talked about our expansion plans, we talked about increasing Our wafer capacity from about 2,000,000 wafers in 2020 to about 2,400,000 wafers in 2021 to about 2,600,000 wafers last year So about 2,800,000 wafers this year to north of 3,000,000 wafers in 2024. And we're actually very much On track to deliver that capacity.

Speaker 3

In fact, we're on track to deliver that capacity with probably what will be something like $3,000,000,000 less CapEx than originally anticipated for that total expansion that I just mentioned. And so we feel like we have appropriately positioned ourselves For growth in the future, for the business that we're winning both through LTAs and design wins, we will continue to make trade offs With regards to free cash flow for the period, in fact, we stated last quarter that we thought we would be free cash flow positive for the year. I'll reiterate that on this call that we believe will be free cash flow positive for the year. And then as we look to the future, we are very well positioned with capacity for future growth. Tom, anything you'd add to that?

Speaker 2

Yes. Joe, let me do a little feed times queue here. Average price, 3,000, $3,000,000 wafers, we've essentially positioned the facilities, our factories to give $9,000,000,000 plus Of revenue for the future without any just on the wafer business, not even the non wafer revenue. So the capital we've planted is going to allow us to grow and actually respond to the market much more quickly than we were in 2021 when we had to build that capacity. So I think the capital that we've deployed has really positioned the company for the eventual growth and it will make us a lot more capital efficient as we think about 2023, 2024 and beyond.

Speaker 7

Great. Thank you for that. And then in terms of your overall utilization of your capacity, We continue to hear about from some of the automotive centric companies that there are some bottlenecks still in terms of Specifically non volatile memory oriented MCU processes for automotive things like that. I know you've talked about broad fungibility, but Are there still any areas where you guys would say, here's a hotspot where if we can add a little bit more of this type of capacity, we can grow more?

Speaker 2

Yes. There's never a perfect world. This idea that supply matches demand every day, every month for a year is not there. And There are segments and customers where we are scrambling to fund enough capacity in a corridor to make those very Specific platforms with the features. And so we see that too.

Speaker 2

We see that we're still in a game of trying to respond to the complete set of customer demand. Notwithstanding that, we still will deliver our full outlook on the

Speaker 10

automotive business for this year.

Speaker 7

Great. Thank you.

Operator

One moment for your next question. Your next question comes to the line of Rajeev Gill with Needham and Co. Your line is now open.

Speaker 5

Yes. Thank you for taking my questions and best of luck To you, Dave as well. So just a question on the smart mobile market, that's really one of the main drivers Of the weakness. I wonder if you could maybe break it down a little bit more specifically in terms of where you're seeing the softness in terms of technology. Is it more on the with the RF front end module customers?

Speaker 5

Is it with some of the NFC or is it just kind of across the board Given kind of the large inventory correction that's occurring in

Speaker 2

the smartphone industry, any color on the smart mobile will be helpful. Maybe David, I'll start on this one. So what's the industry outlook? Last year, Double digit decline in handsets this year at 3% with an inventory climate. So this is the broadest stroke and Most heavily weighted is just in unit sales.

Speaker 2

As David pointed out before, at least the premium handsets are impacted less than any other handset and that's where we have high content. In fact, I think our smart mobile smart devices smart mobile device business It's faring better because of some important design wins we had last year that are shipping this year that's offsetting some of this So it's declined. So it's not any particular element or feature in the handsets. It's just the deal world volume. That's A high, high fraction of the fact that our smart mobile revenue smart mobile device revenue It was only 38% in Q1

Speaker 10

of this year. David, anything to add to that?

Speaker 3

Well stated, Tom.

Speaker 5

Thanks. And just for my follow-up regarding pricing, you talked about some of the pricing in the near term. But if you kind of think about long term, There's been discussions around if wafers are made in the U. S. That domestic foundries could charge a premium in terms of pricing.

Speaker 5

So there's been chatter about that. Is that something that you are debating with customers? Is that a reality Premium pricing for kind of wafers made in the USA?

Speaker 2

I would say it this way. When you're hearing about its capacity being put on capacity drives investments and investments require competitive returns. And so you're seeing What's the reality of the right economics to go create new capacity on these nodes? And how do we do it in the most efficient and economic way? And the answer is we have a very disciplined industry environment.

Speaker 2

Capacity is being put on in partnership Investments that's being put on with long term agreements and what I think that does, it's really healthy for the industry and it creates a very constructive environment that through partnerships that the investments that companies make We'll get healthy and competitive returns.

Speaker 5

Appreciate it. Best of luck, Dave.

Speaker 10

Thank you.

Speaker 3

Thanks,

Operator

And your next question comes from the line of Chris Dan Ali with Citi. Your line is now open.

Speaker 11

Hey, thanks guys. Just to get a little more specific in terms of what's going on this year. Can you just talk about How much in aggregate of the LTAs have been pushed out? And then what's been the change or how much change in pricing have you had to renegotiate?

Speaker 3

Sure, Chris. Look, when we think of this year, If you go back to our Capital Markets Day, we thought we were going to essentially be fully utilized this year. No, not all of that was covered with LTAs. But that between LTAs and POs, I mean That was our expectation this year. And as we kind of rolled into the year and we looked at the inventory positions in the channel And we looked at how the sell through was going based upon the macroeconomic backdrop that we're in.

Speaker 3

We recognized with our customers That continuing to build inventory was the wrong decision. So we sat down with those customers and We started working on the framework of the LTAs to be able to preserve the economic value of those Contracts because of the dollars that we had invested in capacity. And so what I can say, I can't speak specifically contract by contract. I can tell you that we did close a contract that we disclosed or maybe they disclosed, but it was broadly talked about Where there was an underutilization fee, I do not believe that we're going to have significant underutilization fees That are required throughout the year and certainly that's not really factored in a meaningful way, I would say for our annual forecast for 2023. We've been working with those customers to take the economic value of those contracts, preserve them, as well as to ultimately enhance our value and deliver our long term model.

Speaker 3

And so I think that's probably the most that I would add there. Tom, anything You would add to that.

Speaker 2

Yes, a minor add to that. When you think of single source business, it's not If there's price elasticity, if I lower price, would I get more volume? The volume is the volume and the price is the price. And the question is how do you go Work through an inventory correction like this. It's not let's go win share by price elasticity.

Speaker 2

That's the value proposition we provide to our customers. We Single source business differentiate, they can differentiate their products that we can be a better supplier to them in the great times and in the inventory correction

Speaker 3

And if I could just add one point, I don't know of a contract that we've amended In which price went down in the LTA amendment. So when the volumes are being decommitted, The conversation isn't about how do you decrease price to try to stimulate demand when you have too much inventory. So it's usually going in the other direction. So hopefully that's a helpful clarification.

Speaker 11

Very helpful. Thanks. And for my follow-up, Great job on landing Neals. He's got a good reputation. I guess, Tom, can you talk about the genesis of the CBO job?

Speaker 11

I don't think you guys have had this before. Is this Just to sort of manage this downturn that seems a little more longer and serious than expected or just talk about Why he's coming over and what his specific duties are going to be?

Speaker 2

Yes, very good. It has nothing to do with downturn. It has everything to do about our future. The complexity of our business and the uniqueness of being a foundry requires a tight coupling between understanding the end markets and the specific requirements and end markets. So we need to be as much as an expert as our customers and understanding the future where end markets Going so that we can create product lines by definition to meet those end markets and then drive our technology development in an aggressive and And we need the 3 of those areas to come together with 1 executive who can Integrate that activity.

Speaker 2

And so our commercial team under Juan Codores With our business unit team under Mike Hogan and our technology development under Greg Bartlett, all together we'll report into Neil's to drive that integration to accelerate our financial and commercial success and performance.

Speaker 7

Thanks.

Operator

And one moment for your next question. Your next question comes from the line of Mehdi Hosseini with SIG. Your line is now open.

Speaker 10

Yes. Thanks for letting me ask the question. I have 2 follow ups. David, do you have any guide for EBITDA in Q2 and 2023? And I have a follow-up.

Speaker 7

Sure. I would

Speaker 3

hi, Mehdi. Hope you're doing well. EBITDA guide, I would think about EBITDA on a sequential basis as tracking with the marginal fall through that you'd see from slight revenue growth. So I think that statement holds true for Q2 as well as the subsequent quarters where we are expecting sequential growth throughout the year kind of Q2 to Q2 For the remainder of 2023.

Speaker 10

Got it. And best of luck in your next endeavor. And a question for Tom. I understand there's a lot of anxiety over the inventory correction, which is nothing new given cyclical Nature of the industry. But what I want to learn from you, maybe it's a good time for you to remind us In a smartphone and electric vehicle and outside of the SOI wafer, what are the some of the See product or drivers for increased content, especially as you look into Post inventory correction, it would be great if you could remind us of those key growth drivers outside of the core SOI resource.

Speaker 2

It starts with embedded memory for microcontrollers for automotive. It starts with our by CMOS device technology for higher voltage. You think of power management chips with embedded memory for both control and power management, it's a suite of applications and technologies beyond RFSOI, which features in the front end module of phones. And so I said it earlier in my remarks, we are the ultimate player in low power on our FDX platform. We bring a broad range of RF to all our platforms, not just for front end modules, but for all levels of connectivity, especially in the IoT space.

Speaker 2

And then the winning play is to create intelligent and secure Processing capability by having industry leading embedded memory in our solutions. And that's what plays to the strength of these end markets.

Speaker 10

Is there a key milestone or a threshold for increased adoption specifically in Electric vehicle, is this or is this just going to be a steady, eddy kind of adoption as Electric vehicles prototype then you will see increased content or is there a milestone that would accelerate the adoption?

Speaker 2

So I think if it was just an electrification of cars, you'd start to look for inflection points of how model years come where Units of ICE internal combustion cars go down and fleets change or brands change their fleet strategy. But because it's about autonomous and connectivity in the car, it's not just one driver and we play in a broad range of those applications. I don't think I could pick A particular car model year on year has less features in it. In fact, it becomes the standard each year. So think of this as a Transformation of the auto industry, not just to electrification, but to connected cars to autonomous cars.

Speaker 2

And that's the range of And suite of products and applications. Vala, we'll take one last question, please.

Operator

All right. And your last question comes from the line of Krish Sankar with Cowen and Company, your line is now open.

Speaker 12

Thanks for taking my question. And David, thanks for your help Good luck on the next endeavor. I have two questions, either Tom or David. Number 1, on ASCs, it's Nice to see ASPs holding up despite lower volumes, but next year as more double digit nanometer capacity comes online for the industry, How to think about ASPs into next year? And then I had a follow-up.

Speaker 3

So when we think about ASPs for 2024, again, I'll kind of point you back to that Capital Markets Day presentation. If you Stood back and kind of squinted at that chart, you would see that we had LTAs that covered about 3 quarters of the capacity For 2024. And so I would say that a lot of the pricing discussion has already happened. It's already been memorialized And it's already been signed in a contract. So then you look to the future and you say, well, what does pricing look like in the future?

Speaker 3

And When I look at the new design wins and the new LTAs that we're signing, pricing is holding up very, very well. In fact, I'd say pricing is actually delivering it's accretive to our long term financial model that we had put out as we became a public company. And So it remains a very constructive pricing environment in the future. I recognize that there's more Single digit nanometer capacity that's come online, and even in some regions of the world, more double digit nanometer capacity that has come online. But as we've always stated, our interest is in differentiated accretive business, where we Provide and attach a lot of GF Technologies.

Speaker 3

More than 90% of our design wins in Q1 were single source design wins. We remain kind of around that 2 thirds of revenue is single source revenue and over time those two numbers will converge. And so we feel quite good about pricing. Tom, anything you'd

Speaker 2

Yes. It's back to the economics for investment.

Speaker 10

We'll be forced for

Speaker 2

a much more constructive environment For how? We all fund the doubling of this industry over

Speaker 10

the next decade.

Speaker 12

Got it. Super helpful. And then just a quick follow-up. Obviously, the auto industry segment has held up pretty well for you folks and many, many other folks around the industry. Quite a few years, do you worry that there could be the next shoe to drop?

Speaker 12

Or it could moderate as smartphones start getting better and Dampen what could be a stronger recovery?

Speaker 2

For the horizon that we see and talking to our customers And the fact that this transition we've been talking about this morning, autonomous, connected and electrification of cars, see the next decade, Automotive is a key driver for our industry as we continue to add more and more content to these cars. The key for GF is to make sure that we are developing the technologies that best meet those needs and provide differentiation for our customers.

Speaker 12

All right. Thanks a lot, Tom, and congrats, Dave.

Speaker 3

Thank you.

Operator

And we don't have any further questions at this time. I will now turn the call back over to Sam Franklin.

Speaker 1

Thank you, Bella, and thank you everyone for joining us today. Appreciate the questions and as always look forward to seeing many of you on the upcoming conference circuit.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a good day.

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Earnings Conference Call
GlobalFoundries Q1 2023
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