GlobalFoundries Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to GlobalFoundry's Second Quarter 2023 Earnings Conference Call. 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, VP of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundry's Q2 2023 earnings call. On the call with me today are Doctor. Thomas Caulfield, CEO David Reeder, CFO and Neil Zanderscoff, Chief Business Officer. A short while ago, we released GF's 2nd 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 reconciliations for adjusted Non IFRS measures are available in today's press release and accompanying slides. I'd 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, and 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 risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our Annual Report Form 20 F filed with the SEC on April 14, 2023.

Speaker 1

We'll begin today's call with Tom providing a summary update on the current business environment and technologies. Following which Dave will provide details on our end market and second quarter results and also provide Q3 2023 guidance. We will then open the call for questions with Tom, Dave and Niels. We request that you please limit your questions to one 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 2nd quarter earnings call. I'm pleased to report 2nd quarter results that are at the high end of the guidance we provided in our Q1 update as we continue to deliver consistent financial performance against the backdrop of prolonged macroeconomic and cyclical uncertainty facing our industry. Let me start by providing a brief update on the current business environment. Similar to others in the industry, we believe that semiconductor inventory levels across several end markets are coming down more slowly than previously expected. Certain end markets that we service such as smart mobile devices, communications infrastructure and data center, as well as the lower end of the consumer and home electronics markets are being impacted by a combination of increased inventory levels and lower year over year demand.

Speaker 2

Consistent with the discussion in our first quarter update, we continue to believe that and based on our discussions with our customers will at best occur towards the end of 2023. Though we still expect sequential quarter on quarter revenue growth throughout 2023, we believe that the rebalancing The demand for these markets will also extend later into the year and will continue to be impacted while the global macroeconomic and consumer demand outlook remain challenged. Now despite these headwinds, we continue to see healthy demand in faster growing end markets such as automotive, Industrial IoT and Aerospace and Defense. We have announced some exciting partnerships, which I will comment on shortly, and we are working closely with our customers to support these critical important markets. Let me now touch briefly on our results, which Dave will discuss in more detail later in his commentary.

Speaker 2

Revenue in the 2nd quarter increased sequentially to $1,845,000,000 which was at the high end of our guidance range. We reported adjusted gross margin of 29.6 percent in the quarter, which exceeded our guidance range. This better than expected performance was primarily driven by the favorable timing of positive manufacturing variance, which is expected to moderate in the second half of twenty twenty three. I'm also pleased to report that we delivered adjusted earnings per share of $0.53 which as well was at the high end of our guidance range. Let me now provide you with a brief update on some of our recent customer and partnership activity.

Speaker 2

Starting with automotive, We remain highly committed to supporting the transition of the industry from internal combustion engine models to ACE, Autonomous Connected Electrified Vehicles. In addition, our product portfolio is well placed to support the faster pace of uptake from automotive manufacturers seeking to compete on differentiated driver experiences and features as well as on the electronics architecture to comply with evolving safety and security standards. In smart mobile devices, we continue to drive leadership products to remix our business towards the premium tier handset market where we've seen greater resilience in demand. We also delivered a comprehensive set of features on our 8 SW platform, our leading RF silicon on insulator based product line for front end module components. Finally, we delivered enhancements to our 28 nanometer high ks metal gate platform, which is purpose built for the image sensing and processing segment where we continue to see content growth associated with a trend towards more cameras in pixel processing and mobile devices.

Speaker 2

Meanwhile, in IoT, we continue to innovate our differentiated technologies focused on enhanced power efficiency and embedded memory for secure intelligent solutions at the edge. We are also proud to have collaborated with Cadence Design Systems to support the development of the industry's first binaural hearing aid systems on chip prototype to create the smart hearing aid processor, which will utilize GF's 22FDX platform. In Communications Infrastructure and Data Center, Our customers have indicated they are working through inventory levels more slowly than anticipated, which we expect will continue well into the second half of the year. As a result, we've been able to remix some of our capacity service demand in more durable and growing segments such as automotive. In June, we also announced a strategic collaboration with Lockheed Martin to advance U.

Speaker 2

S. Semiconductor manufacturing and innovation and to increase the security, Reliability and resiliency of domestic supply chains for national security systems. Collaborating with GF will enable Lockheed Martin to more quickly and affordably produce secure solutions that increase the capability and national security of the United States. We are proud to collaborate with Lockheed Martin to address the growing need for a reliable supply of trusted, feature rich semiconductors for Mission Critical Security Systems. Additionally, our 300 millimeter fab in Malta, New York was recently accredited As a Category 1A trusted supplier by the U.

Speaker 2

S. Government with the ability to manufacture secure semiconductors for a range of critical Aerospace and Defense Applications. This week also marks the 1 year anniversary of the signing of the CHIPS Act And our collaboration with Lockheed Martin directly supports the Act's objectives of increasing traceability, provenance and onshore production of critical semiconductor to strengthen national and economic security and domestic supply chains. To summarize, I am pleased to report financial performance at With that, over to you, Dave.

Speaker 3

Thank you, Tom, and welcome to our 2nd quarter earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics, which exclude stock based compensation and restructuring charges. As Tom noted, our 2nd quarter results were at the upper end of the guidance range we provided in our last quarterly update. 2nd quarter revenue grew sequentially to approximately $1,845,000,000 a decrease of 7% year over year. We shipped approximately 573,300 millimeter equivalent wafers in the quarter, a 9% decrease from the prior year period.

Speaker 3

ASP, where average selling price per wafer, declined approximately 1% year over year, mainly driven by the changes in the product mix shipped during the quarter. Our LTAs or long term customer agreements are helping to provide us with greater visibility on pricing dynamics And we believe that ASPs for the full year will be flat to slightly up compared to 2022. Wafer revenue from our end markets accounted for approximately 89% of total revenue. Non wafer revenue, which includes revenue from reticles, non recurring engineering, expedite fees and other items accounted for approximately 11% of total revenue for the Q2. Let me now provide an update on our revenues by end markets.

Speaker 3

Smart mobile devices represented approximately 42% of the quarter's total revenue. 2nd quarter revenue increased approximately 13% sequentially, but declined roughly 19% from the prior year period, principally driven by reduced volumes in the low to mid tier smartphone segments and a continuation of the well publicized inventory correction within the broader smart mobile market. Despite these reduced volumes, ASP and mix was flat year over year, which can be partially attributed to the framework and pricing certainty provided under our LTAs. During the Q2, shipment volumes increased sequentially, which was primarily due to increased demand for our RF transceiver standalone and SoC solutions into premium tier handsets. Based on the conversations with our customers, We believe that inventory levels across smart mobile devices will remain elevated going into the Q3 as the rate and pace of demand growth is slower than previously anticipated.

Speaker 3

In the 2nd quarter, revenue for the home and industrial IoT markets represented approximately 19% of the quarter's total revenue. 2nd quarter revenue increased approximately 4% sequentially and 3% from the year prior period. Year over year growth in this end market was primarily driven by improvements in ASP and mix, which helped to offset a modest decline in volumes stemming from the consumer centric portion of home IoT. The demand for our smart card technology has continued to grow as applications expand beyond digital payments and into areas such as transportation, government, health, security and access control. As Tom noted in his prepared remarks, Aerospace and Defense Is a segment of growing importance within IoT where we continue to grow design wins and establish new partnerships to deliver best in class semiconductor manufacturing security and traceability.

Speaker 3

As a result, we expect increasing customer demand for our next generation analog and mixed signal technologies into these end markets to largely offset the mid term inventory correction and market softness and the more consumer centric portions of the IoT market. Automotive continues to be a strong growth segment for us and represented approximately 13% of the quarter's total revenue. 2nd quarter revenue increased approximately 36% sequentially and roughly 199% from the year prior period, driven by healthy growth in volumes, ASP and mix as we have continued to ramp production across automotive processing, sensing, vehicle infrastructure and safety applications. The designs we won several years ago are now ramping into production and the success of these products across automotive applications, along with our customers' focus on supply chain assurance, has allowed us to invest in significant capacity. As we continue to allocate more capacity to support the continued growth of silicon content across the vehicle architecture, Our automotive business is on track to deliver approximately $1,000,000,000 of revenue in 2023, consistent with what we communicated at the start of this year.

Speaker 3

Next, moving on to our communications infrastructure and data center end market, which represented approximately 12% of the quarter's total revenue. 2nd quarter revenue declined approximately 40% sequentially and roughly 38% year over year as a result of declining volumes, principally driven by the prolonged levels of data center inventory and demand softening for enterprise wired infrastructure. We expect to see a decline in revenues for this end market through the second half of twenty twenty three and as mentioned by Tom, We will continue to allocate manufacturing capacity into more durable and accretive markets such as automotive. Finally, our personal computing end market represented approximately 3% of the quarter's total revenue. 2nd quarter revenue increased approximately 44% sequentially, but declined roughly 45% year over year, principally driven by declining volume in this segment.

Speaker 3

We expect this end market to remain at approximately 3% of total 2023 revenue. Moving next to gross profit. For the 2nd quarter, we delivered adjusted gross profit of $546,000,000 which was at the high end of our guided range and translates into approximately 29.6 percent adjusted gross margin. As Tom alluded to, the 160 basis points year over year improvement was slightly above the guidance range indicated, which can primarily be attributed to better than forecast manufacturing cost and utilization benefits within the 2nd quarter. We expect the benefit of these items to moderate in the second half of twenty twenty three and have guided our 3rd quarter accordingly.

Speaker 3

Operating expenses for the 2nd quarter represented approximately 11% of total revenue. R and D for the quarter declined sequentially to $100,000,000 and SG and A increased sequentially to $108,000,000 Total operating We delivered operating profit of $338,000,000 for the quarter, which translates into an approximately 18% adjusted operating margin, roughly 70 bps better than the year ago period and above the high end of our guided range. 2nd quarter net interest and other expense was $10,000,000 and we incurred a tax of $31,000,000 in the quarter. We delivered 2nd quarter adjusted net income of approximately $297,000,000 a decrease of approximately $20,000,000 from the year ago period. As a result, we reported adjusted diluted earnings of $0.53 per share for the Q2.

Speaker 3

Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the 2nd quarter was $546,000,000 CapEx for the quarter was $400,000,000 or roughly 22 percent of revenue. Free cash flow for the quarter, which we define as net cash provided by operating activities, less purchases of property, plant, Equipment and intangible assets, as set out on the statement of cash flows, was 146,000,000 At the end of the Q2, our combined total of cash, cash equivalents and marketable securities stood at approximately 3 point $303,000,000,000 We also have a $1,000,000,000 revolving credit facility, which remains undrawn. Next, let me provide you with our outlook for the Q3. We expect total GF revenue to be between 1 point $825,000,000,000 $1,870,000,000 Of this, we expect non wafer revenue to be approximately 11% of total revenue.

Speaker 3

We expect adjusted gross profit to be between $502,000,000 $542,000,000 We expect adjusted operating profit to be between $277,000,000 $327,000,000 Excluding share based compensation for the Q3, we expect total OpEx to be between $215,000,000 225,000,000 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 $7,000,000 $13,000,000 and tax expense to be between $10,000,000 $18,000,000 We expect adjusted net income to be between $254,000,000 $302,000,000 On a fully diluted share count of approximately 556,000,000 shares, we expect adjusted earnings per share for the 3rd quarter to be between $0.46 $0.54 As previously communicated during our May earnings call, We anticipated that utilization would run-in the mid-80s for 2023. Included in our Q3 guidance is the For the full year 2023, we now expect CapEx to be approximately $2,000,000,000 which is a reduction from the guidance of $2,250,000,000 provided in our first quarter update. We anticipate that this CapEx profile will step down sequentially through the second half of the year. In summary, consistent operational performance from our 13,000 employees and continued efforts to expand our differentiated product offerings in key growth segments enabled us to achieve 2nd quarter results at the high end of the guidance ranges we provided in our Q1 earnings update.

Speaker 3

Although we are not immune to the cyclical headwinds Currently impacting the broader semiconductor industry, we are implementing initiatives to mitigate the impacts on our business And we remain deeply focused on positioning GF for future growth opportunities. With that, let's open the call for Q and A. Operator?

Operator

Thank you. We'll now conduct a question and answer session. Our first question comes from Ross Seymore of Deutsche Bank. Please proceed.

Speaker 4

Hi guys, thanks for letting me ask a question. One near term question and one longer term question for my follow-up. On the near term side of things, Tom and David, you talked about in the last quarter about the total year revenues being down mid to high single digits. So I wondered Any update on that? And perhaps more importantly, how are the LTSAs holding in?

Speaker 4

And if the inventory has to be burnt, what are you guys getting in return For lowering the unit side of the equation per the LTSA agreements.

Speaker 3

Good morning, Ross. I think I'll start with that question and then maybe Tom, I'll pass it over to you to build on it with respect to the LTAs. Ross, in our prior earnings calls, we forecast that Q1 revenue in 2023, we believed would be our trough. And then that quarter to quarter to quarter that we expected to grow from there sequentially. So we still expect that sequential profile.

Speaker 3

And as you mentioned, for the full year, we forecast that we expected revenue to decline in the mid to high single digits. So we still expect to be in that range and with our first half results really now in the books and with our Q3 guidance, You can probably infer from that Q3 with the first half that we are expecting to be towards the high end of that year over year range. Tom, do you want to take the LTA question?

Speaker 2

Yes, very good. Look, the premise of the LTAs was to create Better balance through a down cycle. It wasn't just to have one side wins and the other side loses, it was to create balance and work through This is Praful. I think you see it in our performance quarter on quarter both in revenue and profitability that we've been able to Manage inventory and manage underutilization fees in a very pragmatic way With our customers to get through this in partnership. And I dare to imagine what our world would look like if we didn't have Those partnership agreements in place in the downturn Lucas.

Speaker 2

Ross, did

Speaker 5

you have a follow-up?

Speaker 4

Yes, I did. This morning, we also had an announcement on the competitive front, TSMC doing a JV with a handful of European, Either actual or potential customers for GF. Just wondered what your view on that. I can see the positive side is endorsed Geographic diversification of manufacturing and the strength of the end markets, etcetera. On the negative side, obviously, those are customers you guys would want, and so more Competition in those regions I could see lending some pressure to you guys.

Speaker 4

So how do you view that announcement from competing foundry?

Speaker 2

Well, we didn't wake up this morning and just see that happening. This has been in the press and the news for a long time. I think you hit on one of the points, but let me Comment on 3 elements of this. Building this capacity is consistent with the supply the world would need in the next decade. This is an initiative that's going to double.

Speaker 2

In fact, German Automotive Associations have talked about the need for 27 fabs alone in Europe to build capacity. TSMC is not GF is not going to go create this capacity on its own. TSMC needs to participate in a meaningful way as well. Yes, those are our customers, but they're also TSMC's customers. No one has a monopoly on any given customer, right.

Speaker 2

These customers source from many of us on different platforms for different needs. I'd also add to that that to your point is in the past this industry is built on driving huge economies of scale by concentrating supply in one region And it drove the ultimate in cost capability because it had economies of scale. But it created the unintended consequence The huge issues with supply chain resiliency. And so, GF in 2009 when we were launched, We were there to create to begin that thesis that the world needed a more diverse geographic manufacturing capacity for semiconductors. We could all argue Maybe that was a little bit ahead of its time, but today it looks like it was a pretty good thought back then.

Speaker 2

And so what you're seeing is not only our competitors adding Capacity that the world needs over the next decade, but they're putting it in a broader footprint to respond to the fact that we need Resiliency and supply chain to your point. But the third thing is greenfield and being able to build in high degree of concentration in one region And now taking that show on the road as it were to build another location doesn't come very easy. It's very difficult to get the economies of scale, to get the cost And we see this is putting pressure on cost structures for others that are trying to build a Geographically diverse footprint and that just creates for GF a better pricing environment going forward. That's how we feel about it. This is not something that this is the first and last of something like this.

Speaker 2

The world that we really believe needs that kind of capacity. TSMC will need to do their part, not just TF doing their part. I hope that helps, Ross.

Speaker 4

Thank you.

Operator

Thank you. One moment please for our next question. This question is from Mark Lipacis with Jefferies. Please proceed.

Speaker 6

Hi, thanks for taking my question. Coming back to the LTAs, I believe last quarter you noted That you had 5 new LTAs and some of your customers actually asking for increase in scope. And so I guess I'm wondering, are we can you give us an update on that pace? Are we kind of at the point where Your customers are kind of putting a pause on signing up for new TL, LPAs or are you still seeing that kind of extension of Longer term agreements from your customers.

Speaker 2

No, great question. There's no pause going on. We are in active discussions with a number of customers. Timing is everything And sometimes for more substantial ones takes a little bit more time for these things to come in place. Again, this comes back to my earlier commentary.

Speaker 2

It depends what you believe. If you think the industry is done and you have all the capacity you want, then you're not going to look forward and you stay pat. There are plenty Of our customers that see their growth opportunity in automotive, IoT and things of that nature where they want to make sure They're booking today that certainty of supply for when this industry begins to grow again. And we're working with them in very serious discussions that will eventually come to a close. So, LTAs are in our past and they are certainly in our future and I think this is the new norm for our industry.

Speaker 2

David, anything you can add to that?

Speaker 3

Yes, if I could just build on that briefly. You're right, Mark. We didn't announce that we had signed any new material LTAs this quarter, But we are quite pleased with some of the partnerships that we've announced and that we've developed Lockheed Martin being one of those, Aerospace and Defense being a key market, end market for us on a go forward basis and being in a market along with industrial And Home and Industrial IoT that's performing quite well. We're also very pleased with the progression of our LTA funnel, where we have ample opportunities, some of which are quite mature. So stay tuned for more LTAs in the future.

Speaker 5

Great. Did you have a

Speaker 7

great color?

Speaker 6

Yes, please. On the gross margin side, I don't think I fully Good. The timing of the variances and how they will moderate going forward, I guess I assume that if you get some progress on your gross margins, you kind of get to keep them. So if you could just Provide a little bit more color there. What kind of variances are we talking about?

Speaker 6

And from the standpoint of timing, were these Variances you were expecting to hit in the next quarter. If you just give a little more color

Speaker 3

on that, that would be helpful. Thanks. It can do, Mark. Let me give you some kind of specific second quarter commentary, Terry, and then maybe I'll broaden it out a bit as well. And as we mentioned in our prepared commentary, we did benefit a little in the Q2 from some better than expected quite frankly unforecasted manufacturing variance.

Speaker 3

So what is manufacturing variance? It could be anything from reduced input costs, it could be higher utilization, it could be better cost absorption, it could be Better pricing that you received from suppliers, those would all kind of broadly fall under the category of manufacturing variance and we have received some better than expected manufacturing variance in the Q2. So In the absence of that benefit, we would have been at the high end of our Q2 guidance range. So we don't really expect that manufacturing variance to Kind of continue throughout the second half of the year this year and so we reflected that in our guidance accordingly. But Purely from a guidance perspective, when we think about Q3 to give Q3 gross margin, to give you some context, Our midpoint guidance for Q3 and our upper range for the Q3 is actually higher than what we guided in Q2.

Speaker 3

So if you just think about it from a purely guidance perspective, 2nd quarter guidance versus Q3, we're actually guiding you up guidance to guidance In the Q3. And then if I could just touch briefly on our longer term gross margin roadmap, which I know you remember well from both pre IPO as well as Capital Markets Day. If you recall from those road shows and from that Capital Markets Day, we put together a pretty specific Model and a bridge to go from where we were at the time to our long term gross margin model of 40%. And from a gross margin perspective, barring the current utilization headwinds that we're seeing today, we're actually ahead of that model. We're at about mid-80s in terms of utilization, which as you know from a sensitivity perspective, 5 points of utilization is roughly 2 points of gross margin.

Speaker 3

And yet we've been able to actually not only sustain gross margin, but slightly grow it on a year over year basis. So with respect to our long term gross margin roadmap, Still on track, barring the underutilization actually ahead of schedule, but certainly on track to that long term gross margin commitment that we had made.

Speaker 6

Very helpful. Thank you.

Operator

This question comes from the line of Chris Danely with Citi. Please proceed.

Speaker 8

Hey, thanks guys. Just another couple of questions on the Gross margins going forward. Have your pricing assumptions changed at all in the last 3 months for 2023 2024. And if we keep the mid-50s utilization rate going forward, Is there any risk that your inventory becomes too high because it jumped up sequentially? So wouldn't we have to have some sort of lowering of utilization rate going forward?

Speaker 3

Sure. So let me address a couple of the points there. Let me start with the ASPs. First, let me reiterate that for the full year 2023, we still expect ASPs to be up slightly year over year. With respect to the Q2, obviously, year over year ASP was down very slightly.

Speaker 3

That was really driven by a shift in our product mix as our core pricing has remained mostly contractual and unchanged. The mix shift in our business, it has produced a more accretive adjusted gross margin Sure. As you saw with the number that we printed in the Q2, but on a period basis that mix shift did produce a slightly lower ASP And the other item I'd like to just talk about briefly before we talk about some of the inventory is that free cash flow. When you look at what we've been able to deliver both from a gross margin perspective, From cash from operations and from a capital efficiency perspective, we were able to deliver $146,000,000 of free cash flow in the quarter. The higher gross margin structure combined with that operational productivity and capital efficiency enabled us to produce that number Despite as you mentioned, some of the inventory growth that we saw on working capital.

Speaker 3

On the inventory growth, We have some agreements with some of our suppliers, and some of those agreements include The purchase of substrates, which we've been able to acquire at some favorable prices, those substrates are Good for many years. And as we look through this current inventory perturbation, we look through this cycle, Having the ability in the balance sheet to be able to support acquiring some of for what would be for us raw material substrates At some fairly attractive prices, it's a good long term decision.

Speaker 2

Did you have a follow-up, Chris?

Speaker 8

Yes. Just to talk about the 2024 expectations for pricing, have you guys changed any of the terms of the LTAs For 2024 over the last 3 months?

Speaker 3

Yes. So I won't delve too far deeply into 20 24, but with Back to ASPs, look, we still have very good LTA coverage in 2024. And as you know, those contracts are fixed price, fixed volume, fixed duration. About 90% of our design wins are single sourced and about 2 thirds of our revenue today is single source. So as we look through into 2023, 2024 and even into 2025, we continue to see it's a relatively constructive pricing environment right now, that's our current expectation.

Speaker 3

Thanks.

Operator

Thank you. One moment please. Our next question comes from the line of Joseph Moore of Morgan Stanley. Please proceed.

Speaker 7

Great. Thank you. I wonder if you could touch on some of the comments upfront about the pace of inventory reduction happening more slowly. I guess what's I'm not surprised that the characterization that there's still some correction going on, but the idea that's happening more slowly. Can you talk about what's driving that?

Speaker 7

Are the LTAs? Are there situations where people are taking inventory That they might not take if the LTAs weren't there. And then how much of that is just maybe there's a permanently higher level of inventory Given anxiety about supply chains, just kind of what's underlying that comment that you made?

Speaker 3

Sure. So when we think about inventory and we track it probably along similar lines as you do Joe, We look at everything from distributor inventory to customer inventory to OEM inventory and then of course to GF as well as our peer inventory. So we look at inventory across a broad spectrum. And so when we say that inventory is depleting more slowly than we are We're primarily referring to inventory broadly across our customer set as well as across the disty and the OEM channels. When we look at that inventory, I think the glass half full view is that that inventory is no longer growing.

Speaker 3

It looks like it has troughed and it looks like the inventory is continuing to deplete now from this point going forward. We did expect that to happen a little earlier in the year, quite frankly, and it looks like it's pushed out. And so now we're no longer growing inventory in those Channels that I just mentioned, but they haven't yet materially come down. And so that's pushed things to the right throughout 2020 So we expect that inventory to come down in the second half. Now in terms of why the inventory It's currently where it is and what was the driver of it.

Speaker 3

It really is dependent on end market. I think there are some end markets that Structurally, we'll just carry higher inventory levels on a go forward basis because the cost of that inventory is significantly less than their market opportunity loss. And so I think those markets and I think the electrification of the automobile being an area where they still are unable to get enough inventory and then I think when they do get enough inventory, they'll probably run a little bit heavier than perhaps just in time, which Was kind of the traditional route. I think in some other markets like handsets, handsets We're expecting to decline on a year over year basis total handsets kind of mid ish single digits. I think that's a market where perhaps there was a little bit more inventory Sold in 2022 than expected if carried into 2023.

Speaker 3

And while there's different areas within that market that are doing better or worse than others, I think that would be an example of the market uptake just taking a little bit longer. Did you have a follow on, Joe? Yes.

Speaker 7

Just on the specific point of the LTAs, Are there I mean, it seems like you're working with customers to ensure that they're not taking inventory that they don't want, but like is there any are there situations where That causes the inventory position to be a

Speaker 3

little stickier.

Speaker 2

I think that I'll take that, Dave. I think that's the point. The point is where do you trade off kind of settling up with an underutilization fee versus taking a little bit more inventory Getting that balance and that's all part of the muting the amplitude of a cycle like this. You don't want to go down as deep, you want to be more balanced And peak to trough, but that typically takes the frequency or the time horizon longer. And I don't think anybody's doing anything Reckless in taking a lot of inventory not to pay underutilization fees, but it's one of the levers they have and that collective we make those judgments together.

Speaker 2

And if I

Speaker 3

could build on that, Tom, let me just maybe talk to a proof point. And one of our customers that's in the smart mobile space, Actually, when they announced over the last week or so, they actually mentioned GF, they mentioned their LTA with GF. And one of the things that they mentioned was The flexibility that exists within that LTA such that they were able to migrate out of a technology node Or a product set that perhaps was not in as much demand to actually a product And at a technology node that was in much more demand where they needed incremental capacity. And so I think that's a great example of The framework, the LTA framework being incredibly productive because instead of fixating on one product or one particular variable of the engagement, we were able to sit down, have a discussion, identify areas where there were still market opportunity, shift Production and capacity to satisfy those for the customer, which ultimately helps them fulfill their LTA obligation in a much more comprehensive and collaborative way.

Speaker 7

Very helpful. Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Vivek Arya with BofA Securities. Please proceed.

Speaker 9

Thanks for the question. For my first one, I just wanted to clarify, could you give us a sense of which our end markets And Q3 could be up or down sequentially. And then as I look into Q4, I think your comments suggest sequential growth Into Q4 and again I'm curious what end markets would drive that given the inventory situation in some of your consumer and comms markets?

Speaker 3

Thanks for the question, Vivek. I think I'll pass this over to Neils to maybe provide some color on 2 of the end markets, In particular, that not only grew in the Q2, but that we expect to continue to support our enterprise revenue well into the second half, Both Automotive and Home and Industrial IoT. Neils, do you want to provide some commentary on those in mind? Yes.

Speaker 5

I can go a little bit deeper on maybe starting with automotive And maybe addressing it in 3 ways. 1st, the actuals this year, our expectations for 2023, but also maybe talk a little bit about Our long term expectations. So as of today, we're servicing demand from dewins that we had over the recent years. You can see from the numbers that we did approximately $425,000,000 in automotive in the first half, And we had a close to $250,000,000 run rate in the 2nd quarter. And we're expecting sequential growth in Q3.

Speaker 5

So We talked about in previous calls achieving $1,000,000,000 this year and we feel confident that Debbie will do that in 2023. So in terms of looking at the future and the long term growth, if you look at the silicon content in automotive, It's expected to grow about 6 times as you move from ICE to ACE, as Tom mentioned earlier. So probably NOI is about $300 in average to $2,000 to $3,000 in average, so a substantial growth in silicon content. And when you look at that silica content, what I think is really important to highlight is that essential chip technologies that we have at GlobalFoundries, they're great fit for this. And I'd like to talk just to mention a few of them because I think the diversity and the broadness that you have Our technologies really talks to this long term opportunity in a very good way.

Speaker 5

So some examples could be high performance millimeter wafer radars, Our high dynamic range processes for the imaging sensing, both of these two technologies are crucial To get good autonomous performance in the cars as we move forward. Low power, nonvolatile memories for the MCUs, domain controllers, aggregators, We have a very comprehensive power portfolio that supports both the body control, LED lighting, battery management system, onboard charging, Attraction inverters. Then lastly, strong CMOS for the networking, CAN LYN, video, audio and cluster segments of the cars. So really, for us, it looks like a very, very broad future here, and we feel good about where we're going with the technologies longer term. With regards to longer term, we also continue to strengthen our partnership.

Speaker 5

GM, Exclusive production capacity that we announced in February 2023 is a good example on that. And so really based on these partnerships and the deviance we have, We expect this business to more than double in the second half of this decade. So there will be a little bit of You know more content around our automotive position.

Speaker 3

Maybe just to round that out for you Vivek. I think what you heard was you heard automotive has grown sequentially for us nicely also year over year. We're expecting that to continue to get to that kind of $1,000,000,000 revenue estimate that we had forecasted for the year. Home and Industrial IoT, we're expecting it, obviously on a sequential basis, we're expecting it to continue to perform well. Smart mobile devices, we had some nice growth sequentially from Q1 to Q2, but we're kind of expecting to kind of bump around this level As we deplete inventory towards the end of the year and that's probably a true statement not only for the Q3 for smart mobile devices but throughout the year.

Speaker 3

And then both comms infrastructure and data center and PC, we expect them obviously to then Fill in the gap for to the revenue guidance that we provided for Q3 and the full year. So that's how we think about it.

Speaker 2

And then the one thing we Just I'll tie 1, if you don't mind, is aerospace and defense. We see that foundry portion of that market Growing by the end of the decade to about $2,500,000,000 And there's no reason we shouldn't get our fair share or disproportionate share in that market. And we intend to go do that and part of the announcement in 2Q with Lockheed Martin is about going after that. Lockheed Martin announced That they acquired a design team, so now they can make their own ASICs and they want a foundry partner. So who they select, GlobalFoundries.

Speaker 2

So A and D, a lot like automotive. If you win sockets, they take many years to ramp in production, but they stick around many years. So a strategic play in A and D feels a lot like our strategic play we kicked off 3, 4 years ago in automotive to get to a growth engine. So stay tuned on that.

Speaker 3

Vivek, did you have a follow-up?

Speaker 9

Yes, please. Thank you. On pricing, I think from what I heard, it Seems there is somewhat of a positive bias in the second half, and I'm curious what's driving that. And I think as we look forward, I know you're not giving specific 2024 or 2025 outlook, but do your LTA suggest The pricing trend to be up, down flat as we look over the next few years.

Speaker 3

Sure. So we've stated really for a long time That our expectation is that pricing in 2023, again, I'm talking about the full year 2023, we're expecting pricing to be up slightly From 2022, what you're hearing from us today is that we continue to expect that to occur And that's our current forecast and we feel quite good about that. And so kind of some product mix period by period aside, which will always make the decision to move to accretive product mix if it's accretive to gross margin versus purely focusing on ASP. But from a global statement with full year ASP in 2023, we expect to be up slightly from 2022. With respect to pricing longer term, I think what you've seen happen is 1, you've seen customers sign a lot of LTAs and As we've spoken about those have fixed price, fixed volume, fixed duration.

Speaker 3

The pricing is very solid. I also think more broadly speaking that you've seen the industry put on new capacity and the economic models To support putting on new capacity require the higher ASPs and the ASPs to be quite sticky at those levels. And so that's not only a GF statement, that's kind of an industry statement. And so based on both the LPAs as well as the incremental capacity that's been added, We're expecting ASPs to be quite stable and to be in a pretty conducive environment to have stable ASPs through 2024.

Speaker 7

Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Harlan Sur with JPMorgan. Please proceed.

Speaker 10

Yes, good morning guys. Thanks for taking my question. Maybe following up on Vivek, so on your outlook for Your wafer pricing, you mentioned blended average pricing wide flat to slightly up. But on a like for like, is pricing up better than that? Just want to make sure that the team is It's fairly strong pricing power profile.

Speaker 3

Sure. Let me perhaps be a little bit more specific. And it depends on the period that you're looking at when you look back into 2022. As we've spoken about before and I know you know Harlan, we put on a pretty fair amount of capacity in 2022 And with that incremental capacity came the ramp of specific LTAs and those LTAs ramped at higher prices. And so when you really look at the pricing for the second half of twenty twenty two versus the pricing in 2023, that pricing is relatively flat year over year.

Speaker 3

But when you look at the pricing in the first half of twenty twenty two versus 2023, That pricing particularly in Q1 was significantly lower. And so the ramp of pricing was really tied with the Capacity and the ramp of the LTAs. And so the short answer to your question is on a like for like basis As those LTAs kicked in, pricing is very flat. I think on a year over year basis from a full year blended effect, you're going to see a slight increase full year ASP In 2022 versus 2023. Hopefully that answered the question.

Speaker 3

Did you have a follow on?

Speaker 10

Yes, I did. So your large Secure Smart Card Access Business and RFID tagging business, right, that appears to be holding up relatively strong here through second half of the year. And I think you and your large customer are now able to sort of redirect their wafer starts to support the backlog of demand that I was unmet in this segment over the prior 3 years. So I assume other of your customers are able to redirect their wafer starts to product segments where capacity has been tight Until just recently, right. It's a good reflection, I think, of the product diversity of your customers that's helping to sustain Their business, your business, auto is another good example.

Speaker 10

Any other good examples of the product diversity helping to backfill some of the areas where There might be some excess customer inventories?

Speaker 2

Yes. So I think that's a really good point. I'll take this one, David. So two pieces. 1, You talked about a particular end market, Smartcards.

Speaker 2

Well, the thing about Smartcards, it's more than just your credit card when you waive it past Machine, Cat point of sales for transaction touchless. It's now health it's Healthcare, it's government security, it's credentials for your car. So it's a broadening market. But the bigger point you make is really important. You have to have 2 things.

Speaker 2

You have to have a diversity of technology platforms and you have to have capacity that you can fund So that you can move for, hey, I need more 40 nanometer embedded memory versus a 55 solution because this customer wants to buy here. We've worked hard and long On creating that fungibility within fabs and across our global network. And that allows us to respond So there's some of the lumpiness in these market segments to some customer moving of their products as they see opportunities. And so you need both the platforms That you can address these markets and you need the fungible capacity and that's something we'll continually invest in across our 3 100 millimeter and 200 millimeter fab networks.

Speaker 3

And Harlan, to give you some proof points that you're looking for, obviously, you mentioned smart card. On the automotive side, we've been able to move Some of the comms infrastructure and data center capacity to support more of the automotive business. On the smart mobile device side, We had a customer that actually provided that example for us. I won't mention their name, but you could go back to those notes and look at them mentioning the GFLTA TA and how they were able to migrate from one product to another. And we have multiple other examples where we've been able to Utilize that flexibility that Tom mentioned to be able to not only quickly move on customer demand, But also do it in a very capital efficient way, which is going to help us accelerate our path to free cash flow in the future.

Speaker 10

Great. Good insights. Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Mehdi Hosseini with SIG. Please proceed.

Speaker 11

Yes. Thanks for taking my question. The first one, Last earnings conference call, you talked about revenues for 23, flat to down high single digit. And I'm not asking for Q4 guide, but unless there is a significant improvement on a sequential basis in December, Your 2023 revenue would come at the low end. Is that a fair read through of what you reported on your guide for September in the context of the whole year?

Speaker 3

That is, Mehdi. So what we reiterated was we still believe we'll be down Mid to high single digits for the year and given that we've already kind of posted the first half and guided the 3rd quarter That would imply that for the Q4 and the full year that we would be at the high end of that year over year decline range.

Speaker 11

Sure. And then with the targeted gross margin of 40%, I just wanted to understand if this is Gross or net or in other words, to what extent it includes all the subsidies? I mean, that context, if there is any update on the Chips Act that would impact the gross margin looking into next year.

Speaker 2

Dave, you take the CapEx, I'll take the question.

Speaker 3

Sure. So when we originally contemplated our long term gross margin of 40%, What that contemplated was capital intensity of about on an ongoing basis, steady state basis, if you will, of 20%. And so that in other words, D and A would be about 20% of the P and L there. I think What you're hearing from us and potentially from others is that, the capital intensity should be slightly offset by Some of the various government support around the world. And so we haven't updated our long term gross margin model, But the assumptions that went into it were 20% capital intensive.

Speaker 3

Tom, did you want to Yes.

Speaker 2

And part of that And 20% is a net number. And so that's why these co investments or incentives by governments around the world, Including you guys are important. Remember, just for way of context, there's 2 ways you qualify for Incentives, it's the ITC, which is already in flight, which is $0.25 in the dollar for capital investment in semiconductor and then the chips The chips build in the beginning of 2022 is the year of creating the need in the program and 2023 is the year Of vetting applicants and beginning the allocation for execution. Look, for us, nothing's changed. But it's not about our capital allocation.

Speaker 2

It's all about how we approach the market with certainty, durability and profitability. We will never put capacity on independent of how many subsidies there to help us if we don't have certainty demand by our customers. We're not going to we're not this isn't a game of chasing dollars, it's a game about certainty of demand. And when we add that capacity, we want to do it in durable markets, markets that we talked about earlier today That have long view into the future instability and then of course profitability. We're not going to invest If we can't get competitive returns on investment.

Speaker 2

Now, the bills like the CHIPS Act and ITC help close that economic equation, Which helps, but it doesn't if there's no demand, there's no reason to leverage all that. So the key here is to get customers lined up to leverage that capacity we could put on for their products or their needs over the longer term and then use government incentives to create that capacity in our global footprint.

Speaker 3

And Mehdi, let me just provide you an additional contextual point related specifically to the CHIPS Act, specifically to the ITC. So in 2022, in the U. S, we believe that we've got about $450,000,000 of investment that qualifies for the ITC. That would imply at about 25% rate, that would imply something like about $120,000,000 of A potential benefit on that $450,000,000 of qualified investment. And so the way that would flow through the P and L, If you assumed a steady state 10 year depreciation, the $450,000,000 of investment Would be D and A of about $45,000,000 a year, but you would net out the $120,000,000 benefit.

Speaker 3

And so instead of being $45,000,000 a year hitting the P and L, you'd get something more like $33,000,000 a year that would hit the P and L. So that would be a real life proof point both of the benefit from ITC as well as how it would flow to the P and L.

Speaker 11

Okay, good. Thanks for the details.

Speaker 1

Kathy, we'll take one more question. Thank you.

Operator

This question comes from the line of Krish Sankar with TD Cohen. Please proceed.

Speaker 12

Yes. Hi. Thanks for taking my question. I have 2 of them. Dave, you mentioned about ASPs down 1% in June quarter year over year is mainly due to product mix.

Speaker 12

I'm just wondering how to think about ASP trends within a different verticals like smart mobile, IoT, auto, etcetera, given the fact that you do seem to have a positive bias in ASPs into next year, Should that mix shift change into next year? And then I had a follow-up.

Speaker 3

Sure. Sure. Look, I think broadly speaking, ASPs are primarily predicated on how much GF kind of differentiated technology and content is kind of included in the product sector or the solution. So you could go literally within any end market and you could find products That either average you up or average you down with respect to pure ASP. And what we really focus on is we really focus on the product mix That is most accretive to us from a profitability perspective.

Speaker 3

And while globally, I think you could probably make a statement like On average, comms infrastructure and data center on average probably has a slightly higher ASP than maybe an end market like automotive. Obviously, you've seen comm infrastructure and data center kind of decline for us given some of the inventory challenges In that particular end market and you've seen automotive grow in a really meaningful way globally probably a slightly lower ASP, but yet you've seen us accrete from a gross margin And so I think in general, ASP largely tied to how much total content is in the solution. Does it have nonvolatile memory? Does it have BCD? Is it on FDX or an SOI type of wafer?

Speaker 3

So I think obviously that plays an important role, but even more important role is the product accretiveness from a gross margin perspective.

Speaker 12

Got it. Thanks. Yes, I had a quick follow-up. How much of your 2024 capacity is covered by LTAs?

Speaker 3

Yes. So with respect to 2024 capacity, I'll just let me provide some brief context. Originally, we committed that we were going to increase our capacity from about 2,000,000 wafers In 2020 to about 2,400,000 wafers in 2021, about 2,600,000 wafers in 2022 to about 2,800,000 wafers this year to north of 3,000,000 wafers in 2024. We're very much on track to deliver on that plan, although obviously we've Slowed some of the installation of that capacity based on some of the well known challenges with respect to channel inventory in the market. If you go back to our Capital Markets Day presentation, you'll see how much of that capacity plan was reflected and covered by LTAs.

Speaker 3

And I would say that we're still largely consistent with what we showed at Capital Markets Day.

Speaker 11

Thanks, Dave.

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Key Takeaways

  • GlobalFoundries reported Q2 revenue of $1.845 billion (high end of guidance), 29.6% adjusted gross margin and $0.53 adjusted EPS, all exceeding prior guidance ranges.
  • Semiconductor inventory levels in smart mobile devices, communications infrastructure and data center are coming down more slowly than expected, pushing market rebalancing into late 2023 but still supporting sequential revenue growth each quarter.
  • Demand in automotive accelerated with Q2 revenue up 36% sequentially and 199% year-over-year, keeping GF on track for ~$1 billion automotive revenue in 2023 and backed by partnerships like its GM capacity agreement.
  • Growth in Industrial IoT and aerospace & defense was driven by collaborations such as the Lockheed Martin strategic alliance and the Category 1A accreditation of the Malta fab, supporting CHIPS Act supply-chain security objectives.
  • For Q3, GF expects revenue of $1.825–1.87 billion with flat to slightly up ASPs, and has cut full-year 2023 CapEx guidance to ~$2 billion (from $2.25 billion), with capital spending set to step down in H2.
A.I. generated. May contain errors.
Earnings Conference Call
GlobalFoundries Q2 2023
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