Q3 2021 Globalfoundries Inc Earnings Call

November 30, 2021

Thank you for standing by and welcome to global Foundries third quarter 2021 earnings conference call at this too.

All participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference may be recorded should you require any further assistance. Please press star zero I would now like to hand the.

<unk> over to your host head of Investor Relations Sookie Gosh. Please go ahead.

Thank you Latif and good afternoon, everyone and welcome to Globalfoundries third quarter 2021 earnings Conference call, our first as a public company.

On the call with me today are Tom coffee, our CEO and Dave <unk> our CFO.

While ago relief.

Relief, Yes third quarter financial results press release.

Which is available on our website at investors <unk> Dot com along with today's accompanying slide presentation.

This call is being recorded and a replay will be made available on our investor Relations Web page.

In this call we will present, both ISR S as well as non <unk> financial measures.

The most directly comparable <unk> measures and reconciliations for our non <unk> measures are available in today's press release.

And accompanying slides.

I'll remind you that our financial measures are unaudited 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 in may.

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 may 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 section under the caption risk factors in our financial prospectus filed with the SEC on October 29 2020.

One in connection with our IPO.

We will begin today's call with comparable a summary update on our end markets capacity expansion and technologies, following which Dave will provide details on our third quarter financial results and fourth quarter guidance. We will then open the call up for questions.

We request that you please limit your questions to one with one follow up.

With that I will now turn the call over to Tom for his prepared remarks.

Thank you Suki well welcome everyone to our first earnings conference call as a public company.

Our IPO on October 28 was an important milestone for Globalfoundries.

It was the culmination of over a decade of work to build an at scale global semiconductor foundry with strong technology differentiation.

In 2018, we drove a fundamental change in our strategy to become a more relevant and more importantly, a more vital contributors to this industry that becoming a profitable and sustainable business.

We strengthened the management team.

We refocused our investments and are in R&D and Capex to differentiated feature rich solutions with.

We forged stronger customer partnerships, and we streamlined our manufacturing footprint and cost structure.

Our strategic initiatives are now well in place and we anticipate driving profitable growth.

While we are seeing the initial results of this in 2021, we are really at the beginning of this journey.

We expect this will become a more this will become more apparent in 2022 and beyond as our revenue will continue to grow with the capacity investments we are making.

And as a result of this increasing scale, we expect even faster growth in our margins and earnings.

We have significant business still visibility uncertainty with customer of long term agreements.

This gives us confidence that the fundamentals of our business will continue to improve at a rapid pace over the next three to five years.

Now, while we are excited and proud of our IPO.

We recognize it is ultimately just the first step in a much longer journey with.

We take our responsibility and duty to create long term value for investors our customers our employees and our many other stakeholders with a heightened sense of urgency.

We will do this by continuing to focus on creating innovative solutions for our customers by partnering closely with them embracing the diversity of our team in delivering services and products that allow our customers to win in the market today Sir.

Now moving on to our third quarter. We are pleased to report a quarter of strong top line and profitability growth demonstrating.

The continued success of our strategy.

Third quarter group revenue grew 5% Q quarter on quarter.

Driven by higher wafer output.

The continued improvement in mix.

Our differentiated solutions become a larger portion of our total business.

Third quarter adjusted earnings per share came in at seven.

Now David will provide more details on the financials in just a moment, but first let me give a summary of third quarter revenue by our end markets.

First in our smart mobile end market, which comprises roughly 50% of our third quarter revenue, we saw strong year over year growth of roughly 45%.

Driven mostly by the continued ramp of our single source design wins in the growing markets such as five <unk> RF front end modules for mobile handsets for image sensors and Wi Fi six.

Our differentiated technologies continued to do well in the <unk> sub six gigahertz market.

We are still though in the early innings of the industry transition to <unk> with market segments.

Sorry with market estimates of doubling of <unk> handsets to nearly 500 million units this year.

Next our communications infrastructure and data center end market, which constituted approximately 17% of our third quarter revenue so over 30% year over year growth driven by a combination of share gains by our customers.

Continued strength in the enterprise data center.

Cellular infrastructure and RF transceiver markets.

Moving on to home and industrial Iot end market third quarter revenue was roughly 7% 13% of the.

Total and grew approximately 37% year over year.

The growth was driven by a combination of high higher asp's as well as the ramp of Iot products from some of our key customers for applications, such as digital Tvs, Wi Fi and secure contactless transactions.

In addition, we saw broad based growth for <unk> in the quarter.

Touching nexon automotive revenue in this end market was approximately 6% of our total total third quarter revenue and grew almost forex.

From the year.

Period.

The strong growth in our automotive end markets was driven by the ramp of new designs that are in development and qualification over the past years.

GFS automotive products and now going into a variety of automotive uses such as in vehicle comfort safety sensing and battery management solutions and <unk>.

The chip shortage in the auto industry has accelerated demand for many of our customers who have entered into long term agreements with <unk> to ensure supply continuity for their new products that ramp over the next three to five years.

We're very excited about our strong traction in the automotive market end market.

In our compute end market revenue was roughly 77% of total and declined year over year as expected as some of our customers' designs continue to transition to smaller nodes.

We continue to forecast a decline in this end market for the first half of 2022, and then see stabilization and improvement in the second half of 2022.

Ramps from newer high margin customer designed.

We expect however, the decline in revenue in this end market to be more than compensated with growth in other end markets.

Next I'd like to provide a brief update on arent filling capacity expansion plans.

Overall, our global installed capacity will increase approximately 4% from <unk> to <unk>.

Which is approximately 12% increase from the fourth quarter of last year.

Our installed our installed capacity in our fab one facility in Dresden, Germany is increasing output by approximately 16% from <unk> to <unk>. This year and this also represents about a 50% expansion at the facility from a year ago.

All of this expansion capacity in support of customer demand for our differentiated technologies such as <unk> 'twenty.

Eight nanometer ISP and our bikes Cmos technology.

Also construction on our phase one module expansion in Singapore remains on track with equipment slated to go in the facility in the second half of 2022 to support first production out in the first half of 2023.

In addition to our ongoing capacity expansion, we continue to make strong progress in enhancing our differentiated technologies.

For instance in <unk>, we completed automotive grade one qualification of R 22, Ftes RF and millimeter wave platform, including reference IP for complex analog and RF blocks, a complete ecosystem design services, including IP provided EDA vendors and turnkey services.

This feature rich platform is targeting automotive smart sensors and processes for.

For example bus is a lead customer for Adas radar Soc and Theyre, leveraging our <unk> platform for their next generation radar systems.

Our technology team also delivered the first functional resistive Ram <unk> and enhanced version of SPX, we referred to as 22, <unk> plus which is targeted for tier one customers seeking next generation wireless secured transaction capability in mobile Iot and automotive end markets.

These achievements are truly differentiated and are allowing our customers to win with ultra low power and analog RF and MCU designs.

And Silicon Photonics are 45, CLO platform delivered first customer prototypes that demonstrated an eight lander. There is two gigabit per second optical link with extremely low bit errors.

We are the technology leader in Silicon Photonics as we are the only provider of integrated Cmos RF Soi and optical devices and a monolithic solution. This.

This unique capability will drive a whole new upgrade of connectivity in data centers over the next decade.

So to summarize we are seeing strong growth from our customers and the end markets. We serve and we are prudently and in partnership expanding our capacity to serve their needs and making great progress in accelerating our differentiated technologies for the future.

With that let me turn the call over to David to provide the financial details for the third quarter and also provide you our guidance for the fourth quarter David.

Thank you Tom and let me also express my excitement for gas IPO, what an incredible milestone for the company and an important funding mechanism for our future capacity expansion now onto our third quarter.

Our third quarter results came in at or above the high end of our of the financial ranges. We provided last month in our prospectus. Our third quarter revenue was approximately $1 7 billion, which increased 5% sequentially driven by higher wafer shipments and mix, we shipped approximately 609 300.

They are equivalent wafers in the quarter, which was up about two 5% on a sequential basis wafer.

Wafer revenue from our end markets accounted for approximately 92% of total revenue non.

Non wafer revenue, which is typically between 5% and 10% of total revenue accounted for approximately 8% of revenue for the quarter.

As a reminder, non wafer revenue includes radicals nonrecurring engineering multi product wafers and other foundry services.

For the remainder of the call, including fourth quarter guidance I will reference adjusted metrics, our adjusted metrics exclude stock based compensation.

For the third quarter, we delivered adjusted gross profit of $306 million, which translates into approximately 18% adjusted gross margin.

The 155 basis points sequential improvement was primarily driven by better fixed cost absorption and modestly improved asps.

R&D expense, excluding stock based compensation was approximately $111 million about $10 million lower than the previous quarter.

The sequential decline was primarily due to lower fab technology startup cost and increased customer funded NRA.

Excluding stock based compensation the sequential decline in R&D was mostly offset by a $9 million increase in SG&A expense.

This increase was primarily due to higher employee costs and IPO related expenses.

Total operating expenses, excluding stock based compensation for the third quarter were approximately $225 million and roughly flat compared to the previous quarter.

We delivered adjusted operating profit of approximately $81 million for the quarter, which translates into 5% adjusted operating margin a sequential improvement of 224 basis points.

Third quarter net interest expense was approximately $27 million and we incurred a tax expense of approximately $22 million in the quarter.

We also had approximately $2 million of other income primarily related to a gain on asset sales the.

The combination of these results delivered third quarter adjusted net income of approximately $34 million, which is seven of adjusted earnings per share on a basic share count of about 500 million shares.

We delivered record third quarter, adjusted EBITDA of approximately $505 million.

EBITDA grew $39 million sequentially on $80 million of incremental revenue growth and almost 50% fall through.

Let me now provide some key balance sheet and cash flow metrics.

Cash flow from operations for the quarter was approximately $1 1 billion and included approximately $574 million of customer prepayments.

Gross capex for the quarter was about $392 million or roughly 23% of revenue we.

We ended the quarter with a little over $1 billion in cash and cash equivalents, an increase of more than $200 million from the previous quarter.

Now as you know we raised approximately $1 5 billion from our IPO at the end of October and as a result, we are very well capitalized we expect to use the majority of the proceeds from the IPO for our capacity expansion plans to meet robust customer demand.

Next let me provide you with our outlook for the fourth quarter.

We expect revenue to be between $1 8 billion and $1 83 billion.

We expect gross profit to be between $335 million and $350 million and.

<unk> gross profit is expected to be between $344 million and $359 million.

We expect operating profit to be between $55 million and $75 million and adjusted operating profit is expected to be between $92 million and $112 million.

Excluding share based compensation for the fourth quarter, we expect R&D to increase moderately on a sequential basis, primarily due to higher fab technology startup costs SG.

SG&A is also expected to increase moderately on a sequential basis, primarily due to expenses related to our IPO and becoming a public company.

We expect net income to be between 13, and $33 million and adjusted net income to be between $50 million and $70 million.

On a basic share count of approximately $525 million, we expect basic earnings per share for the fourth quarter to be between <unk> and <unk> and adjusted basic earnings per share to be between nine and 13.

For the fourth quarter, we expect adjusted EBITDA to be between $510 million and $530 million.

And finally, we expect share based compensation to be approximately $9 million and cost of revenue $2 million in R&D and $26 million in SG&A for total share based compensation of approximately $37 million.

With that we can open up the call for Q&A operator.

As a reminder to ask a question. Please press star one on your Touchtone telephone to withdraw your question. Please press the pound key please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Harlan sur of Jpmorgan. Your line is open.

Good afternoon, and congratulations on the strong results and guide on your first quarter as a public company.

At the time of your filing in your long term agreements cover about $20 billion of forward revenues, which when you combine that with current purchase orders the covered about 85% of your revenues over the next few years.

Since then obviously the supply demand gap in the industry has gotten more severe.

Furthermore, it is meeting your customers to lock in assurance of supply over multiple years can you guys just give us an update on the $20 billion of LTE and what does that number look like today does it extend beyond 2024 and is it balanced.

Balanced across all of your end market segments.

So first of all Hello, Harlan and thank you for joining us I'll, let David start with that and maybe I'll add some color at the end.

Hey, Harlan I hope Youre doing well.

Since our road show, we have made progress on our Lta's.

I think.

Roadshow, we were talking about roughly $2 $5 billion of customer prepayments and fund access fees.

Today that number's, a little bit north of $3 billion of commitments from customers with respect to prepayments and access fee. So some good progress there with respect to revenues. We've also continued to make progress on our LTA revenues.

We've made good progress we're north of $20 billion now we're pleased to report that we're north of $20 billion now, we're not going to provide more color than that at this time other than we're very excited about the trajectory of the business Tom anything you'd add I would just add this.

With long term agreements are very important for us because of the visibility gives to our business, but we always need to keep a certain amount of flexibility because some of our customers may need more than what they signed up for them. So we can have 100% of our business in any given year signed to a long term agreement, we want to leave some flexibility to be able to respond to our customers.

Alright, you have a follow up thanks for them.

Yes, so as your customers' customers figure out how to prevent a similar supply demand dislocation like the one that we're currently going through their thinking and rethinking their supply chain strategies I think your recent partnership with Ford sort of encompass is this right they talked about.

Securing supply for their chip suppliers, but you also talked about potentially doing some in house chip design as well you already have other end customers Cisco, Microsoft Amazon and some of our customers do you guys see this.

Trend continuing in other words more cloud Titans more auto OEM was more consumer device Oems coming to the table to talk to you and how many of these discussions are you having and how do you see this benefiting both globalfoundries and the industry longer term.

But let me start with a higher higher level view of this is.

Today product companies differentiating by integrating technology with firmware and software and now they are seeing that there is real leverage others have done this already very successful, but there's leverage owning some of the silicon design as they integrate the technology and I think thats. The trend you are starting to see.

Some of them.

More famous players in the mobility space.

Patent in that technique and others are following it.

Taking that down to I think you are seeing this in automotive as well.

Semiconductors going to become the defining line for differentiation in the automotive experience.

Believe youre seeing automotive companies wanted to become what I would call more silicon aware and Thats exactly with Ford is doing in their Mou. They <unk>. They want to first make sure that they understand the supply demand dynamics I want visibility to <unk>.

Clay.

Want to make sure they influence the technology Roadmaps for foundries so that.

The features that we create aligns with their needs and then also making sure just like our customers that whether they design the product or not making sure that they've reserved capacity to make sure. They can build the vehicles. They want and that's the essence of what I think youre going to see that.

The essence of that agreement and that Youll see more of that in the industry and more of that from here.

David anything you'd add.

Well first Tom we're excited about the opportunity.

Thank you. Thank you.

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is open.

Hi, guys. Thanks for letting me ask a question I'll Echo the congratulations on the first quarter out of the gate Tom I just wanted to ask a high level question to you about customer behavior investors are just a little concerned about the sustainability of demand. We know you have a green.

Batch of LTA is in prepayments great visibility for next year and those deals are set in stone so to speak.

But customer behavior on lead times Expedites those sorts of things at this point in the cycle can tend to get a little bit.

More volatile so I wanted to see if theres any update that you have seen or any changes you've seen and how your customers are acting on the demand side.

I think we first of all thanks for your training across in your question I think we sit in a very unique.

Position as a foundry, where we get to see what's going on and a lot of the end markets in particular, <unk>, we serve and I have to tell you not anything noticeable from our seat from what we talked about on the Roadshow, we are still.

Dealing with.

Shortages of what we can supply to our key customers in 2022 and figure out how we can produce more how do we do the right balance and allocations. So theres nothing that we see in the industry for 2022 that would suggest the.

The frothiness that you described is changing I have to tell you that I would welcome a little bit of a softening demand just a little bit to make some of the closure of that gap and so what we're doing more I think more importantly is the investments we're making.

Over 2021, and 2022 to close that that supply demand gap for the industry.

I hope that helps.

It definitely does but one then as a follow up for.

David was on the gross margin side of things I know you talked about mix and scale.

Our kind of good things, but relatively obvious as you grow how do we think about the growth gross margin trajectory going forward any more color on the one five points you got <unk> and then.

Going forward beyond that.

Yeah, absolutely Ross.

Before we move to that question, let me just add one comment and expand upon Tom's answer from the last one.

We've signed.

25 long term customer agreements, we signed even several since the roadshow, which as you know was only a month ago and we've added more than $500 million of customer prepayments and access fees that are committed.

Since the road show and so so we see we see some pretty strong demand in front of us.

We are capacity limited and we are working diligently every day to get new tooling in and get factories ramped and online. So that we can produce more wafers for our customers.

Which is a global leader in relates to the gross margin question that you just asked.

Gross margin going forward, we talked about 2021 really being a year in which depreciation moderates and we really start to take advantage of some of the fixed cost absorption as we tool out this manufacturing footprint that has been untoward since our pivot and so as we start to tool.

Cloud those those facilities the biggest one being Dresden as we pull those facilities out we're actually getting better cost absorption than we expected.

The positive news about the gross margin in the third quarter. It's also part of the reason why we're positive on the trajectory of gross margin in fourth quarter as well.

Thank you.

Okay.

Thank you. Our next question comes from Vivek Arya Bank of America Securities. Your line is open.

Thanks for taking my question and congratulations to the team on ongoing public.

Tom you described some of the customer prepayment that kind of stuff.

Very strong endorsement about the visibility I am wondering what kind of dialogue, you're having with the government.

Whether it's in the U S here with the chip sector, whether it's with the governments across Europe and in Singapore.

There is a lot of motivation to onshore and bring on more sovereign capacity and I'm wondering what kind of dialogue you are having when do you start to see the benefit of that.

Yes.

Well.

Let me, let me start with our first expansion, we're doing in Singapore as we spoke about in the Roadshow Thats a $4 billion phase.

Phase one expansion and it has significant.

Government support.

As we've talked about in the roadshow. So governments are already participating when I call. The new economic models to create the kind of capacity we need in this industry, where it's customers foundries like J F and governments that participate they create the right economics to add capacity.

The U S continued to make progress Theres now fabs fill that talks about 25% rebates on equipment.

It's working its way through.

Still very positive that the CEO will get funded I think the timing in the U S is theres a couple of things that need to get out of the way to clear the hurdle rate.

The debt limit in and getting the build back better.

Funded and clear the deck to get the.

The chip spill.

Funded and I think that is more targeted the best Crystal ball I have is Q1 of next year I'd be pleasantly surprised if it got pulled into this year, but we're getting down to the short strokes series.

First day of December to model and then Europe continues to have high goals and ambitions to go fund.

Capacity onshore and we're waiting for more movement in funding of which called <unk>.

<unk>.

Nothing new to report on that front from our Roadshow, just a month ago.

Alright.

Maybe I would add just add on that is that in all of those regions GFS is uniquely positioned to be part of that partnership to create the capacity.

You have a follow up.

Yes, thanks for the follow up one more on gross margins. So the pricing environment seems very strong bright it's clear to see.

Sales growth is outpacing your capacity.

Right and vapor shipment growth.

I am curious Dave as you look at the next several quarters, how should we think about that interplay between.

How pricing and mix and utilization will help to drive dealer gross margins and help to kind of close the gap between where you guys versus your peer group. This.

Sure look at it does it does remain.

I would say a robust pricing environment.

When we saw the demand that was in front of us vivek as we kind of talked about in the roadshow.

Earlier this year and in fact, even even late 2020, we really wanted to focus on three things as a company to get us to our long term model. We wanted to focus on certainty of demand. We wanted to focus on durability of the end markets and the customers that we serve and we wanted to focus on profitability in no particular order of those three.

And so as we made progress on our on our Lta's throughout the course of the year.

We started to see that 2021 for us as I mentioned was really a year of moderation of depreciation and fixed cost absorption and we had a large percentage of our business that single sourced with those customers and so as we sign and contemplated those LTA, we really baked in a lot of the pricing improvements.

Into 2022 and beyond and so so 2021 youre seeing that the margin expand in a methodical and predictable way really based on moderation of depreciation and fixed cost absorption and then when you look further out into time and you start to see those LTA is really start to pick up in the 2022.

That's when you really start to see the pricing impacts Tom anything you'd add to that yes, I would just say there was there was a real mess.

Methodology to that as well with our customer engagement was to give our customers the chance.

To understand where these pricings would come from and give them a chance to respond what they wanted to do in the marketplace.

Okay. Thank you vivek.

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your question. Please.

Great. Thank you and congratulations on your first quarter.

If you could talk about the smartphone business you guys seem to be showing quite a bit of strength. There is one area where at least from the RF customers. There was a little bit of a mixed Q4 outlook still a very good 2022 outlook. So maybe if you could just kind of talk to the prospects for growing that business over time.

Yes, So I think for me the smart mobile devices.

The poster child for feature Rich technology like we make.

Whether it's secured pay transaction audio functions power management Ics the chips that control the touch screen or because you are talking about for connectivity the front end modules.

I think youll see puts and takes amongst all the players, but we have a significant share.

The cost of our differentiated technology with all the players in that front and front end market. The front end module market with our ASW and RF Soi technologies. So what we're seeing is maybe some puts and takes across the customers, but the overall volumes were not seeing any change in fact, we're still trying to catch up to all the demands David anything you'd add to that no I think it's well said.

Tom.

We're positive on the trajectory of that business.

Great. Thank you and just as a follow up on that segment.

Is the visibility and the kind of the supply constraints.

In smartphone versus other markets or does it feel just just constrained to you as kind of the other end markets are.

A lot of the.

<unk> solutions, we provide to our customers play in multiple markets and so.

Its kind of squeezing of the balloon at one end of the Pops at the other end. So I think it's pretty broad based actually.

Great. Thank you.

Thank you. Our next question comes from Chris Danley with Citi. Please go ahead.

Thanks, guys and I'll add to the conga line of congratulations.

Just another question on end markets to follow up Joes questions that would be a little more specific on the sequential.

Why was mobile flat sequentially was that pretty much inline with expectations and then also why was the com business up so much sequentially and then any color you can give on guidance by end markets for Q4, it would be great.

<unk> take that one.

Sure.

Smart mobile.

As you know it represents about half of our of our total revenue and.

And we were expecting that business. After after good sequential growth from Q1 to Q2, we were actually expecting that business. It was up modestly we were expecting that business to be kind of relatively flat on a quarter to quarter basis on a sequential and so.

The rest of the businesses. However, when we look at automotive up in a meaningful way comps as you mentioned infrastructure data center up in a meaningful way.

And then of course home in industrial Iot are also up in a meaningful way you think about the macro trends across those markets. Those are all markets that we expected to grow in a pretty meaningful way for us sequentially and they did Tom anything that you do.

Yes.

There is some timing between when the cyclicality of the smart mobile market and when inventory start to build and there's a little bit of that in play there as well.

Great and for my follow up.

Do you think that.

The supply chain is starting to get a handle.

The shortages, especially in the automotive and the industrial space or do you think it's still getting a little bit worse out there.

Okay.

That's a great question.

The broad brush say better or worse at this pockets, where there is maybe a better planning and is better opportunity I would say that.

Net.

Over the course of this year, we've closed the gap.

It really started with a significant gap.

The supply and the demand and I think we've made as an industry as we have record shipments in <unk>.

All manufacturing.

Close that gap, but nowhere near where it needs to be close I think thats the.

The closest I can come to and given the broad based answer to that David would you add anything to that.

I think thats well said.

Very helpful guys, thanks, and enjoy the holidays.

Thanks, Chris.

Thank you. Our next question comes from Chris Caso of Raymond James. Please go ahead.

Yes. Thank you good evening.

The first question is a follow up on some of your earlier comments on pricing and what it sounds like from your comments.

Just to confirm my understanding that it sounds like there is a natural tailwind for pricing as we go into 2022 as the LTA is kick in that were signed at higher prices.

But as a follow on to that is just a question of what the trajectory of pricing in the industry.

As longer term.

I guess a question on.

How much of the improved pricing that we're seeing now is cyclical versus structural support for your part of the industry.

Yes, let me I'll give the industry perspective, <unk> always ask your thoughts on it I think it really comes back to the fundamentals. This is.

And the industry that's call it half a trillion dollar industry. It took 15 years to get to become a half a trillion dollar industry and pickier. Your analysts it's going to double in the next eight to 10 years kind of a five X acceleration to create.

The economic model that created this half a trillion dollar industry is not the economic model that will allow us to double in the next eight to 10 years and as a result.

There has to be better ways of funding this capacity in one of which is the higher asp's to be able to afford that type of investment. So I don't think this is a moment in time I think this is part of the growth trajectory of our industry to be able to afford the capacity and do it in a way where it makes economic sense for them.

Off takers of that capacity in foundries like <unk> that have to create that cassette.

David what would you add to that.

Yes, just.

A couple a couple of things really specific to <unk>.

Agree and Echo all of Tom's comments, but specific TGF <unk> seen some modest I would say modest price improvement from sequentially Q1 to Q2 Q2 to Q3 as Tom mentioned in his script.

<unk> sequentially Q3 to Q4 goes up about 4%, but if you look at our revenue guide at the midpoint, we are guiding up about 7% at the high end of about 8% at the low end of about 6% and so that implies that we're mixing up and Asps upping our business sequentially from Q2 Q3 to Q4.

And so I.

When I look out into time I look at these LTE as I look at the duration on the <unk>.

Probably centered up around four years for us I look at the pricing in those Lta's, which is really pretty flat so kind of step function up and then pretty flat as those lta's ramp kind of throughout 2022, and even parts of 2023.

This looks like a long term trend to me and that's speaking specific to the data that I see it yet.

Got it helpful. Thank you.

As a follow up if you can make some commentary on on Capex.

Whether it is now and where it has been going it looks like it's obviously up a lot year on year.

Well.

My numbers it looks like it was actually down a bit sequentially.

You talk about where capex needs to run over the next couple of quarters in order to hit your your customer shipment goals and maybe speak generally about the availability of equipment.

The available ones equipment adequate to be able to support the ramp that you that you need to execute.

Sure. So if you recall from the Roadshow, we were talking about our capex over 'twenty, one and 'twenty two roughly being about about $2 billion in 2021, roughly $4 5 billion in 2022 again, all supported by those LTA that we've talked a bit about on this phone call.

For 2021 will probably come in closer to about $1 9 billion, plus or minus $100 million or so depending on what comes in between now and the end of the month.

From an equipment perspective, and then we're still we're still looking good to roughly that $4 $5 billion number for 2022.

So from a Capex perspective, I would say, we're largely on plan to what we spoke about in the road show and so no no real meaningful changes there with respect to Capex.

No I'd add two things one.

Our long term model is after we get through this essentially.

Our expansion in our plan. It was late Q4 of 2020 early Q1 of 2021, a little bit ahead of the kind of the acceleration of all the equipment needs. So the combination of we were early into block our slots with our equipment suppliers.

<unk>.

And this rapid expansion the whole industry is doing.

As well as prudent planning of when those.

Those tools would come online.

Gives us the confidence that when we look forward and how we're managing our business, we won't be gated by equipment deliveries.

Thank you.

Thank you. Our next question comes from Tristan <unk>.

Baird Your line is open.

Hi, good afternoon and congratulations.

Going public a question about <unk>.

End market mix longer term I think you had mentioned in the past that.

Smartphones and Iot pretty much in line with corporate average gross margin in the west is higher margin.

You've talked about the contribution of depreciation in Asp's and gross margin.

Term when do mixed shift within year end markets, notably the higher margin infrastructure automotive.

I felt really contributing to your gross margin and also where could we see automotive as a percent of plugging in a few years now.

<unk>.

Posted today.

Thank you.

Yeah. So what we've what we've spoken about is that our end market mix longer term.

Our personal computing segment.

<unk> will become a smaller part of our business as a percentage of total revenue going forward I think youre starting to see some of that.

On a sequential basis, and you're certainly seeing some of that on a year over year basis. So thats a trend that we expect to continue.

Over time as we start to reach our longer term model, let's call. It 2025 ish timeframe automotive for us you've seen grow in a very meaningful way this year off a very small base granted.

But we have some very nice design wins, you've seen some of that was publicly announced in the marketplace you've seen some of the partnerships.

I have also been announced and so that's a segment for us.

That could that could get to a level of.

Call it 10% to 15% of business longer term, that's something that can grow for us in a really meaningful way.

Comms infrastructure and data center home and industrial Iot and smart mobile devices. Those are all areas, where we have real real franchises. So whether we're talking about our franchise and connectivity and soi, whether youre talking about some of the things that we're able to do uniquely and power management, whether youre talking about longer term silicon photonic.

Sir our silicon germanium those are some areas, where we have some real differentiation as a company in those market segments will start to grow as the design wins ramp volume, Tom anything you'd add I'd add a little bit about where it's really shifting in the industry maybe.

Maybe 10 years ago, the number one criteria for designer was digital performance.

Then power then maybe connectivity, it's kind of flipped around that power is the number one.

Element to solve for that connectivity and then hit this pretty plenty of digital compute and I think that plays to our strength across these end markets.

PC thats little bit different thats, all about digital computer and that's why that market kind of moves away from us, which is which is fine because the markets. We play in Iot and industrial business in automotive and the mobile handset. It's all about power management and so that's really where I think our differentiation our leadership as a company comes into play.

Not to mention next generation of connectivity in the data center and our leadership I called bleeding edge in Silicon Photonics is where we're positioned.

For all of their stuff.

And yes.

Follow up wanted to get a sense perhaps.

Growth.

The various nodes.

We're looking at 12 nanometer and the higher nodes.

Any areas that you see growing faster and how does that compare with the industry average just trying to get a sense of your mix by node in terms of growth prospects.

We don't we don't think about our business that way and we don't talk about a business that way when we pivoted. The company. It was about platforms that are enabled with markets and applications to the single device type in mind for US is what are the features we're creating a web platform that make the most sense and that's how we think about investments that we think about driving our business and thats what drives.

Our topline growth in these markets. So we really don't have a view of that.

Daniel are you looking for in a node basis, David anything you'd add to that no. That's absolutely right, Tom and when I look at our sequential performance.

As I see feature rich Cmos sequentially.

Let's call it flat, it's actually slightly down, but I see good growth in.

And <unk> good growth in RF soi growth in Siggi, even even.

I would say very small numbers, but even even a little bit of revenue in silicon photonics and so so I look at those areas all areas, where we have.

Some real meaningful differentiation in the market and I'm quite encouraged.

Great.

Thank you.

Thank you. Our next question comes from Krish Shankar of Cowen Your line is open.

Okay.

Calling on behalf of Krish.

First of all I'd like to congratulate you guys as well on the strong results.

The first question I had was related to your guidance and then I guess sort of the.

I guess the headroom there for for.

Driving much of the revenue growth from a couple of quarters.

Just curious like can you provide any color on.

What the roughly what the utilization rates might be joined me at Dresden and also for the new 22 MTX.

Possibly.

Slide four automotive platforms is that just a new process that is being offered at the fabulous there's like a new line that has been built housing.

We are driving a lot of near term revenues.

So David why don't you talk about the Dresden, Buildout and I'll talk about the year.

Footprint to FDA sure.

Youre right on on highlighting Dresden.

Important fab for us they are all important fabs for us.

But from a build out perspective.

Fab that has the ability and the capacity once fully tooled to be able to deliver about 850000 wafers a year and that's up from about 300000 tools wafers per year.

2020, and so so we are tooling Dresden is as you know from from the Roadshow conversations.

Not quite doubling capacity on a year over year basis, there, but but getting close.

And so that's a factory that is continuing to bring tools and get them installed ramped into production and ship product for our customers that are clamoring for it and so we're quite pleased with our Dresden is performing from a utilization perspective, I would say at the enterprise level.

We are above 100% utilization as an enterprise as a global foundries entity and I can say that's true for almost every factory over 100% utilization right now Tom anything that two things one I'd add is look it makes sense is trying to add capacity as fast as possible you added.

Do you have the brick and mortar in a building that's facilitated but needs the equipment and Thats why we are able to ramp very quickly there.

Noting.

With regards to 2002 <unk> that is one of the key technologies that we built in Dresden.

Seven one facility, but the real story about 2015, because that was a homegrown technology, which is a great example of how we think about technology, we don't say well here's a node what do we do with it we started with application in mind it could be one of the lowest power technology possible. So that's why it's built on Soi technology.

We first enabled it with backed by US. So we can make the power even lower than we embedded RF and embedded memory.

To make it the platform of choice for any efficacy that wanted to be connected when the ultimate leadership technology and power per device minimal mineralization of power per device that was a technology that was developed in Dresden and we are building out interest and we're winning a lot of our connectivity business and part of that expansion David talked about investing.

Is to enable that platform with capacity.

Perfect. Thanks for that color Tom.

Just one quick follow up Dave.

In terms of government incentives in Q3.

And maybe any change from Q4.

How much of it in terms of incentives and grants, but had been embedded in Cogs and opex.

Very very little and in Q3.

And so when we look out the single largest area for US with government partnership right now is actually the fab <unk> in Singapore, which Tom referenced earlier that is an area where right now we have an ongoing very strong partnership with the Singaporean government.

Bring that economic development, there to Singapore, but in terms of benefit from that relationship very very little.

Nothing nothing thats fairly material in Q3, but we do expect it to be more meaningful in the future.

Thank you so much.

Thank you. Our next question comes from Rajiv Gill of Needham <unk> Company. Please go ahead.

Yes, Thank you and congratulations on a strong quarter out of the gate.

That's great to see.

A couple of questions. If I may the first question on the <unk>.

$500 million increase in customer prepayments access fees since the road show about a 20% increase.

Can you maybe elaborate further on what Youre seeing there in terms of customers paying you upfront to get access to capacity what's been.

What has changed over the last.

Six weeks any any details there.

And just for my follow up.

The capacity.

Yeah.

Increases that you saw this quarter and Youre talking about another 4% in <unk>.

Going into Q4, coupled with a 3% increase in Asps.

How do we think about.

The split between capacity expansion versus ASP growth, where we're looking at calendar 'twenty two is any any kind of flavor there directionally.

Data would be would be helpful. Thank you.

Sure. So let me let me take that and then Tom I'll turn it over to you and see if you have anything to add.

So.

What's changed in the last six weeks.

Really we just continue to execute.

We've been engaged with customers.

Well, given the size and the scope of our single source business for a long time as you know.

And as we've continued to work those LTA is that COO of Lta's.

We have customers that.

That are willing to put their balance sheet to work and provide prepayments in access fees for us to bring online and commit capacity to them both today as well as on the future remember we are capacity constrained right now and so new agreements that were signing they are really signing up for new capacity that will come online in the.

Future. So that's the future capacity that we're adding specific for those for those customers. So in terms of what change I'd just say, we're continuing to execute we're working down the queue of engagements with customers working with them in close partnership to bring them the product that they need.

Yeah, and I would just add David that.

The timeframe from the time, you begin to carve out the <unk>.

Non binding Mou to creating a definitive agreement is roughly two to three months almost a quarter and so what youre seeing that took place since last quarter is the signing of <unk> that were already well well along in closing the final Ts and CS.

And then in terms of your question about about 2022.

I'll defer the question about the split between volume mix and ASP for 2022 until maybe a conversation in February, but but I think what youre seeing on a sequential basis.

Where I mentioned earlier that capacity is growing about 4% sequentially, but yet we're guiding at the midpoint up about 7% sequentially. I think if you were looking to model something you can you can maybe take some of those recent proof points and expand those out into the future. If you are looking for guidance.

Great I appreciate that thank you.

Thank you. Our next question comes from Mehdi Hosseini of S.

Your question please.

Yeah.

Okay.

Yes, Thanks for taking my question a couple of follow ups.

Does that mean you're correct.

All your facilities are currently running.

Additionally.

So let me, let me be very clear on that.

Our facilities for what its tools for today are running white hot or making any as many wafers as possible our customers are counting on us to do that.

The capacity.

Everyday changes as we had more tools.

To create more capacity and as soon as that a tool those tools will qualify enable to make more wafers, we will so.

The utilization for all intents and purposes is a 100% and if we see that remaining for quite some time.

Okay.

Then in terms of your.

Technology platforms comparing.

So I too few months in Finfet.

Is there a big margin difference should we think about it.

The mix also has an impact.

So your gross and operating margin profile.

Given once you start now.

Look I think you can look across any of our technology platforms and you could find products that have higher margins and lower margins. So whether you are looking at.

<unk> with RF Soi and FDA asks for the year is going to feature rich Cmos Finfet Siggi Silicon Photonics I think the real question is how differentiated is that the product that that customer is engaging with GF. How differentiated is that product in the margin structure tends to follow Tom would you could you add any yeah, and I'd add a little bit of it this way everyone.

These platforms have a number of different features.

Our solution only using one feature or is it is a different PSP assessing that then if they're kind of leverage the RF connectivity theyre going to put embedded memory. It adds complexity, but it adds value.

Customers need that they'd get rewarded for it and we get rewarded rewarded for it so I think of it more feature rich the solution, we sell independent of.

The platform is one the more differentiated it is the more we create value for our customers for them to Catherine.

I just want to bid on something.

I'm under assumption that.

So on the.

The wafer with raw material cost is much higher than center.

We're able to.

Good.

Premium on the wafer ASP.

That would make it competitive with other platform. That's what I was trying to understand that no. One is going to pay for an extra cost substrate. If it doesn't come with value that's required to do the application. So it gets factored into the differentiation and the value, we create using debt and specialty substrate.

Got it thank you.

You have a follow up.

Okay.

Yes, and then.

<unk> four proposals.

Modeling.

Okay.

I'm under assumption that with.

These long term agreements.

There is a visit.

<unk>.

A large proportion of those agreements that are coming in earlier during the two to four year period should I also assume that you.

Opex growth should be moderate so therefore, your operating margin expansion was pretty much driven by topline growth on them.

And the margin improvement that comes with that.

Sure.

Fixed cost absorption.

That's right if you recall, our long term financial model, we get a revenue growth about 8% to 12% gross margin at 40% operating income margin about 25%, which that implies then that that opex is about 15.

Percent and I think if you if you look at Opex today, Youll see its kind of rough and tough around that level and so that's something that we expect that to be relatively flat to scale, maybe modestly with revenue, but certainly less aggressive growth.

Got it. Thank you thanks for clarity.

Yeah.

Thank you at this time I would like to turn the call back over to CEO, Keith <unk> for closing remarks.

Alright, great. Thank you Latif thank.

Thank you everyone for joining us on our Q3 2021 earnings call. We look forward to meeting with many of you over the course of the quarter.

And if you have any follow ups, please feel free to reach out to us. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Sure.

[music].

Thank you for standing by and welcome to global Foundries third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.

Be advised that today's conference may be recorded she was you require any further assistance. Please press star zero I would now like to hand, the conference over to your host head of Investor Relations Sookie Gosh. Please go ahead.

Thank you Latif and good afternoon, everyone and welcome to Globalfoundries third quarter 2021 earnings Conference call, our first as a public company.

On the call with me today are Tom Coffeehouse, our CEO and Dave <unk>, our CFO Shaun.

A short while ago.

Relief, Yes third quarter financial results press release.

Which is available on our website at investors <unk> com along with today's accompanying slide presentation.

This call is being recorded and a replay will be made available on our investor Relations Web page.

In this call we will present, both ISR S as well as non <unk> financial measures.

The most directly comparable <unk> measures and reconciliations for our non <unk> measures are available in today's press release and accompanying slides.

I would remind you that our financial measures are unaudited.

Fitments 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 in may.

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 may make today.

One in connection with our IPO.

We will begin today's call with Tom providing summary update on our end markets.

The expansion and technologies.

All of our English Dave will provide details on our third quarter financial results and fourth quarter guidance. We will then open the call up for questions.

Yes that you please limit your questions to one with one follow up.

With that I will now turn the call over to Tom for his prepared remarks.

Thank you Susie.

Welcome everyone to our first earnings conference call as a public company.

Our IPO on October 28 was an important milestone for Globalfoundries.

It was the culmination of over a decade of work to build an at scale global semiconductor foundry with strong technology differentiation.

In 2018, we drove a fundamental change in our strategy to become a more relevant and more importantly, a more vital contributors to this industry that becoming a profitable and sustainable business.

We strengthened the management team.

We refocused our investments in our R&D and Capex to differentiated feature rich solutions.

We forged stronger customer partnerships, and we've streamlined our manufacturing footprint and cost structure.

Our strategic initiatives are now well in place and we anticipate driving profitable growth.

While we are seeing the initial results of this in 2021, we are really at the beginning of this journey.

We expect this will become a more this will become more apparent in 2022 and beyond as our revenue will continue to grow with the capacity investments we are making.

And as a result of this increased scale, we expect even faster growth in our margins and earnings.

We have significant business, Phil visibility uncertainty with customer long term agreements.

This gives us confidence that the fundamentals of our business will continue to improve at a rapid pace over the next three to five years.

Now, while we are excited and proud of our IPO.

We recognize it is ultimately just the first step in a much longer journey with.

We take our responsibility and duty to create long term value for our investors our customers our employees and our many other stakeholders with a heightened sense of urgency.

Now moving onto our third quarter. We are pleased to report a quarter of strong top line and profitability growth demonstrating.

The continued success of our strategy.

Third quarter gross revenue grew 5% acute quarter on quarter.

Driven by higher wafer output.

And the continued improvement in mix.

As our differentiated solutions become a larger portion of our total business.

Third quarter adjusted earnings per share came in at seven now.

Now David will provide more details on the financials in just a moment.

First let me give a summary of third quarter revenue by our end markets.

First in our smart mobile end market, which comprises roughly 50% of our third quarter revenue, we saw strong year over year growth of roughly 45%.

Mostly by the continued ramp of our single source design wins in the growing markets such as five <unk> RF front end modules for mobile handsets for image sensors and Wi Fi six.

Our differentiated technologies continued to do well in the <unk> sub six gigahertz market.

We are still though in the early innings of the industry transition to <unk> with market segments.

Sorry with market estimates of doubling of <unk> handsets to nearly 500 million units this year.

Continued strength in the enterprise data center cellular infrastructure and RF transceiver markets.

Moving on to home and industrial Iot end market third quarter revenue was roughly 7% 13% of the total and grew approximately 37% year over year.

The growth was driven by a combination of higher higher asp's as well as the ramp of Iot products from some of our key customers for applications, such as digital Tvs, Wi Fi and secure contactless transactions.

In addition, we saw broad based growth for <unk> in the quarter.

Touching nexon automotive revenue in this end market was approximately 6% of our total total third quarter revenue and grew almost forex.

For the year.

Period.

The strong growth in our automotive end markets was driven by the ramp of new designs that are in development and qualification over the past years.

GFS automotive products are now going into a variety of automotive uses such as in vehicle comfort safety sensing and battery management solutions in Evs.

We're very excited about our strong traction in the automotive market end market.

In our compute end market revenue was roughly 77% of total and declined year over year as expected as some of our customers' designs continue to transition to smaller nodes.

We continue to forecast a decline in this end market for the first half of 2022, and then see stabilization and improvement in the second half of 2022.

From ramps from newer high margin customer designs.

We expect however, the decline in revenue in this end market to be more than compensated with growth in other end markets.

Next I'd like to provide a brief update on arent drilling capacity expansion plans.

Overall, our global installed capacity will increase approximately 4% from <unk> to <unk>.

Which is approximately 12% increase from the fourth quarter of last year.

All of this expansion the capacity is in support of customer demand for our differentiated technologies, such as <unk> 20 to <unk> 20 nanometer ISP and our bikes Cmos technology.

In addition to our ongoing capacity expansion, we continued to make strong progress in enhancing our differentiated technologies.

For instance in <unk>, we completed automotive grade one qualification of R 22, <unk> RF and millimeter wave platform, including reference Ip's for complex analog and RF blocks, a complete ecosystem design services, including IP provided EDA vendors and turnkey service.

This feature rich platform is targeting automotive smart sensors and processes for.

For example bus is a lead customer for Adas radar Soc and Theyre, leveraging our <unk> platform for their next generation radar systems.

These achievements are truly differentiated and are allowing our customers to win with ultra low power and analog RF and MCU designs.

And silicon Photonics, or <unk> 45, CLO platform delivered first customer prototypes that demonstrated an eight lambda 32 gigabit per second optical link with extremely low bit errors.

We are the technology leader in Silicon Photonics as we are the only provider of integrated Cmos RF Soi and optical devices and a monolithic solution. This.

This unique capability will drive a whole new upgrade of connectivity in data centers over the next decade.

So to summarize we are seeing strong growth from our customers in the end markets. We serve and we are prudently and in partnership expanding our capacity to serve their needs and making great progress in accelerating our differentiated technologies for the future.

With that let me turn the call over to David to provide the financial details for the third quarter and also provide you our guidance for the fourth quarter David.

Equivalent wafers in the quarter, which was up about two 5% on a sequential basis wafer.