Q1 2022 Globalfoundries Inc Earnings Call

May 10, 2022

Okay.

Good day and thank you for standing by welcome to the Global Foundries Conference call to review first quarter of fiscal year 2022 financial results Conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session. So.

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I would now like to hand, the conference over to your speaker today.

Sue Keenan, Vice President of corporate development and head of Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone and welcome to global Foundries first quarter 2022 earnings call.

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

A short while ago, we released <unk> first quarter 2022 financial results press release, which is available on our website at investors that GF 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. During this call we will present both.

<unk> <unk> and adjusted non <unk> financial measures.

Most directly comparable <unk> measures in reconciliation for adjusted non <unk> measures are available in today's press release and accompanying slides.

I would remind you that these financial measures are unaudited and subject to change.

Statements on todays call maybe deemed to be forward looking statements such statements can be identified by terms such as believe expect intend anticipate and may.

You should not place undue reliance on forward looking statements actual results may differ materially from those 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 section under the caption risk factors in our annual report on form 20-F filed with the SEC on March 31 2022.

Sure.

We will begin today's call with Tom providing a summary update on our end markets capacity expansion and technologies.

<unk>, which Dave will provide details on our first quarter results and also provide second quarter guidance. We will then open the call for questions.

Request that you limit your questions to one with one follow up.

I'll now turn the call over to Tom for his prepared remarks.

Thank you Suki.

Welcome everyone to our first quarter 2022 earnings call.

We started the new year building on the strong momentum from last year and delivered record Q1 results that are well ahead of our outlook we provided in February .

Amidst the backdrop of sustained and robust demand.

Our global team 15000 strong continues to over deliver despite inflationary.

So youll political and pandemic related challenges.

This type of execution builds upon itself.

The foundation of confidence.

Confidence that we convey to our customers and partners.

As a result.

Builds their trust NGF.

So a huge shout out to the entire <unk> team all 15000 of your great Q1.

Together deliver another record quarter in Q2.

In addition to strong manufacturing and operation performance.

I am pleased to report that our commercial teams continue to win new accretive designs with both new and existing customers.

Customers that are winning in their markets with <unk> solutions.

We continue to see strong demand across all of our strategic and secular growing end markets with the majority of that demand built upon <unk> differentiated process technology.

In fact.

Q1 single source wafer shipments grew 48% year over year.

Also.

And as largely expected.

You see some areas of the market normalizing.

Notably low end handsets.

In Pcs.

As previously communicated neither of these markets are areas of strategic focus for GFS.

With the exception of a few applications in these end markets that require unique and differentiated technology.

In summary, the demand environment is largely as we expected and our revenue visibility remains strong it's backed by multi year long term customer agreements.

We remain fully sold out in 2022 and 2023.

We are increasingly confident that we can deliver the long term business model.

Outlined and articulated in our road show.

With that as context, let's move onto our first quarter results.

We are pleased to report another quarter of record results for the company.

First quarter revenue grew 37% year over year and was driven by year over year increases in both wafer shipment and ASP.

This coupled with strong operational execution across all our fabs.

Resulted in significant improvements to adjusted gross margin.

Which increased to 25%.

This is an 18% point improvement from a year ago quarter.

And as a result, we reported first quarter adjusted earnings per share of <unk> 42.

Which is 15 cents higher than the high end of our guidance and more than double the 18 adjusted earnings per.

Per share we reported last quarter.

I will discuss in more detail our financials later in his commentary for.

But first let me provide a summary of our first quarter revenue by end market, starting with smart mobile devices.

Smart mobile devices represented approximately 50%.

First quarter revenue.

And it grew 20% year over year.

This growth was primarily driven by the continued transition of the market for more feature rich handsets.

Which is happening concurrently with the transition to <unk> connectivity.

Our Adas W platform is a great example of our differentiated technology.

It is the industry's first.

Leading 300 millimeter RF Soi platform with best in class switch and the <unk> performance.

<unk> superior data rate range in battery power.

Additionally, we are also seeing strong double digit year over year growth for RF transceiver mobile image sensor and specialty power solutions are.

Our portfolio of technologies, which includes ASW 12, LPR F 'twenty two MTX.

And both 55% and 28 nanometer BCD light enable our customers' design products that win in their markets, which in terms helps us participate in the most attractive segments in this end market.

Next our communications infrastructure and data center end market.

Which comprised approximately 17% in the first quarter revenue.

Approximately 80% year over year.

Growth was driven by a combination of higher shipments higher asps.

And better mix.

Data center demand, especially for two chip product solutions.

Starting to ramp in GFS is well positioned to grow in this market.

We also saw strong demand from our communications infrastructure customers, who leverage Gf's IP rich and differentiated 12 nanometer RF and silicon germanium solutions.

The robust demand in cellular infrastructure is due to the transition from <unk> Mimo <unk> millimeter wave.

This transition increases available spectrum.

Bandwidth and capacity all of which culminates into improved user experience.

In the quarter, we also announced our second generation Silicon Photonics platform.

This is gardening strong and broad customer traction.

Our branded Photonics platform is the industry, leading monolithic solution for optical interconnects.

Certain switches Gpus accelerators and <unk> transceivers.

This platform also provides the next level of RF performance for 800 gigabit Transceivers.

The best proof of this leadership solution is in our customer set.

Industry leaders, such as Nvidia Broadcom, Marvell, and Cisco are designing high bandwidth low power optical interconnect for high performance computing networking and cloud data centers, using jets photonics and silicon germanium platform.

Further our differentiated photonics platform.

This has been extended to the quantum computing market and is gaining significant traction with some of the most innovative startups.

For example, <unk> quantum is designing and building the world's first usable scalable quantum computer on our photonics platform.

Our silicon Photonics business, which is already has a majority share position is on track to grow over 50% in 2022.

In summary, we believe the communications infrastructure and data center end markets remain on track to be one of our fastest growing end markets. This year.

Moving on to our home and industrial Iot end markets.

Revenue was approximately 17% of total first quarter revenue.

And it grew 55% year over year.

The strong growth in this end market was driven by higher demand there.

<unk> and richer mix.

<unk> strength and feature rich technologies that are focused on superior wireless connectivity performance.

At the lowest possible power consumption has enabled our strong growth in home and Iot end market.

This is an end market that continues to experience secular growth with the ongoing global proliferation of smart connected devices.

Now within this end market, our wireless connectivity solutions saw significant growth due to the accelerated adoption of <unk> technology for Wi Fi six applications.

We're also seeing strong traction for our Iot microcontrollers that feature non volatile memory for a number of smart card applications.

Such as digital payments access control and electronic Ids.

In addition growth in this end market is being driven by our differentiated power and analog and analog technologies for applications, such as building automation and security.

The trend of integrating wireless secure compute analogue and multiple sensors is squarely playing to our strength and is that that's part of the strong home and Iot growth for Jeff.

We are on track for this end market.

To be the fastest growing for <unk> this year.

Touching next on automotive revenue in this market was approximately 4% of our total first quarter revenue and grew approximately 170% year on year.

As we previously indicated our growth in this market will be lumpy as we are constrained by how quickly we can build capacity.

Now as new capacity comes online, we expect our revenue growth to accelerate in this end market.

In Q1, we also began to ramp some exciting new products.

Been developed over the last few years that enable automobile electrification safety.

We are also seeing continued ramp of our sole source business with a top tier.

Automotive radar IDM that will drive significant growth over the next several years.

Our pipeline of design wins in automotive remains robust.

This is driven by one the.

Acceleration of plans for EV production into.

Aldo makers desire to recover lost vehicle shipments during the pandemic.

These do together will pull forward demand for advanced automotive architectures and if these architectures that have higher semiconductor content per vehicle and the majority of which is serviced by feature rich technology across <unk> portfolio.

Examples range from our 130.

BCD technologies that enable advanced battery management systems.

To our best in class 22, SPX technologies. They are quickly becoming the market standard for millimeter wave solutions. They are at the foundation to enabling safety and the future autonomous driving.

Next and as expected our compute end market declined year over year and comprised approximately 2% of our total first quarter revenue.

And expect this market to be less than 5% of our total 2022 revenue.

As mentioned earlier in this call our investments in this market are focused upon areas, which we can provide differentiated technology.

Specifically, we have targeted mixed signal power management and companion chip solutions.

From a percent of total revenue perspective, we expect Q1 to be the trough for this end market and then it will steadily improved throughout the year.

I would now like to provide a brief update on our ongoing capacity expansion plans in.

In Q1.

Wafer shipments increased 14% year over year.

We are particularly pleased with the output from our Dresden, fab, where wafer shipments increased more than 50% year over year.

In short we are executing to plan and converting our capacity investments to the wafer wafer output required to satisfy our long term customer agreements.

We are on track to increase wafer output more than 10% year over year.

Also as committed and despite COVID-19 related challenges, our new fab construction, Singapore is largely progressing to plan and.

And we are on schedule to install tools at the beginning of Q3.

With production ramping in the first half of 2023.

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

For example, we completed six technology qualifications in the first quarter, including New features that we added to our industry, leading eight SW RF Soi platform for front end modules and mobile handsets.

In addition, we also released our enhanced Siggi hi.

High bandwidth technology in the quarter.

We are pleased to report we have nearly 20 product tape outs on our next generation Photonics technology platform in the first quarter alone of this year with more than 30 customer tape outs scheduled for this year.

This reflects the rapid and broad adoption of our differentiated photonics technology.

And finally, given the unprecedented demand on our <unk> platform. We have commenced a technology transfer from Dresden, Germany to a multi new York facility to establish our second 22 Ftes corridor.

To summarize I am pleased to report a quarter of solid execution as we continued to demonstrate strong momentum across our business.

We're making significant progress towards our long term business model.

With that let me turn the call over to Dave to provide the financial details for the first quarter and also provide you with our guidance for the second quarter.

Thank you Tom our first quarter results exceeded the high end of the financial range, we provided in our last financial update.

First quarter revenue was approximately 194 billion, an increase of 37% year over year.

We shipped approximately 625300 millimeter equivalent wafers in the quarter, a 14% increase from the year prior period.

Average selling price ASP.

Per wafer increased approximately 19% year over year, driven by ramping long term customer agreements with better pricing.

And overall very constructive transactional pricing environment as well as continued improvement in product mix.

Wafer revenue from our end markets accounted for approximately 90% of total revenue.

Non wafer revenue, which includes revenue from radicals nonrecurring engineering expedite fees and other items accounted for approximately 10% of total revenue for the first quarter consistent with our expectation.

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

For the first quarter, we delivered adjusted gross profit of $490 million, which translates into approximately 25, 3% adjusted gross margin.

The 18 percentage point year on year improvement was driven by better fixed cost absorption higher asps and improved mix approximately 70% of this improvement was attributable to asps and mix with the remaining 30% attributable to volume related fixed cost absorption.

Operating expenses for the first quarter were better than expected and represented approximately 9% of total revenue.

R&D for the quarter was flat sequentially at approximately $122 million, while SG&A came in at about $89 million.

Total operating expenses were $211 million.

Excluding $32 6 million of stock based compensation.

Q1, total operating expenses increased approximately $17 million from a year ago, largely due to investments in developing new features and IP as well as customer enablement for our technology platforms.

We have delivered operating profit of approximately $279 million for the quarter, which translates in to 14, 4% adjusted operating margin approximately 21 percentage points better than the year ago period, and $77 million higher than the high end of our guidance range.

First quarter net interest expense was approximately $28 million and we incurred a tax expense of approximately $29 million in the quarter.

We delivered first quarter adjusted net income of approximately $232 million on a diluted share count of 549 million shares resulting in adjusted earnings of 42 per share.

We delivered record first quarter adjusted EBITDA of approximately $698 million adjusted EBITDA grew $404 million year on year on $522 million of incremental revenue growth a 77% fall through rate.

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

Cash flow from operations for the quarter was $845 million and included approximately $475 million of.

<unk> prepayments and capacity access fees.

Gross capex for the quarter was $643 million or roughly 33% of revenue.

We ended first quarter with approximately $3 $3 billion in cash and cash equivalents, an increase of more than $2 6 billion.

From the prior year period.

Before I transition to Q2 guidance I want to briefly touch upon current market concerns regarding inflation and its impact to our business.

Like others, we are seeing some inflationary headwinds in our business, especially with respect to materials energy and labor costs. We estimate the impact of these inflationary costs to our full year results to be less than 2% of revenue.

Since 2021, our teams have worked diligently to build certainty into our business model you've seen the results of the commercial work and our revenue visibility driven by our long term agreements operationally. We've also worked to build certainty into the business.

With respect to materials, we have signed many long term multi year fixed cost supply agreements for the materials needed to deliver customer commitments.

With respect to energy costs, we have a rolling 24 month hedging program that helps us mitigate significant movements in the energy markets with.

With respect to labor, we have variable pay for performance programs that reward our employees for excellent performance like the performance delivered in the first quarter of 2022.

Additionally, we have monthly rolling FX hedging programs that help mitigate significant movements in currency pricing and finally, we have an active and robust pipeline of manufacturing cost savings initiatives that have historically delivered annual savings of more than $200 million.

We believe the aggregate impact of all of these programs were largely offset the forecasted inflationary headwinds in 2022 and that the net impact to the P&L will be minimal.

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

We expect total <unk> revenue to be between $1 $95, five and $1 95 billion.

Of this we expect non wafer revenue to be about eight 5% of total revenue.

We expect adjusted gross profit to be between 503 and $531 million.

We expect adjusted operating profit to be between 272 and $305 million.

Excluding share based compensation for the second quarter, we expect total opex to be between 226 and $231 million.

We expect this sequential increase in operating expenses to primarily be driven by higher labor expenses and certain enterprise it projects.

At the midpoint of our second quarter guidance, we expect share based compensation to be approximately $60 million of which roughly $30 million is related to cost of goods sold and approximately $30 million as related topics.

We expect net interest expense for the quarter to be approximately $25 million and tax and other expenses to be roughly $26 million we.

Specced adjusted net income to be between 235 and $265 million.

We expect depreciation and amortization for the quarter to be about $425 million of which 90% is related to cost of goods sold.

On a fully diluted basis of approximately 550 million shares we expect adjusted earnings per share for the second quarter to be between 43 and <unk> 48.

We expect adjusted EBITDA to be between 705 and $745 million.

For 2022, we expect total gross capex to be approximately $4 billion.

As we continue to invest in partnership with our customers to deliver the capacity necessary to support our contracts.

In summary, strong operational execution enabled us to deliver first quarter results that were significantly better than the high end of our guidance range. Our demand visibility remains strong supported by our long term customer agreements and we expect to deliver progressively better financials quarter to quarter throughout the year as we can.

Tenure to methodically execute our plan.

With that let's open the call for Q&A operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key.

We ask that you please limit yourself to one question and one follow up.

Our first question comes from Harlan sur with JP Morgan Your line is open.

Good afternoon, and congratulations on the solid results and strong execution by the team.

So there's a lot of cross currents in the end markets.

Covid supply chain disruptions as you mentioned, some pockets of weakness, but <unk>.

Paul It appears that demand continues to outstrip supply across most end markets. So as you guys look at your business up to customers, giving a backlog profile.

Are you guys seeing out there and then it looks like capacity growth target Tom was revised higher at a 10% plus for this year I'm. Just wondering does the team also still anticipate 10% ASP growth as well.

Yes, let me, let me start and David can add some commentary.

I think you said it right the demand environment is still strong, but I think we have to put this in perspective, we'll talk about the small pockets I'll reiterate some of the small pockets of.

A softness we're seeing when we started this year we had demand.

That was 25% higher than the capacity we can fulfill.

And so when an over demand situations. So I think holistically for the industry. This is not like you either in supply alignment of Youre not as ranges of that and we were really as an industry and in particular <unk>, having a lot more demand than we can satisfy.

So we don't have high exposure to the PC market, we don't have high exposure to the low end handset market.

The softening that we're seeing there we've taken as an opportunity to close some of that big gap that we started this year with to feed the customers that are more strategic end market for us.

Yes, let me just add on Harlan, we're expecting total wafer shipments to grow kind.

Kind of a high single digit 10 ish percent ish.

Throughout 2022.

And at the midpoint of our guidance specifically for second quarter, we guided up 22% year over year, and we're expecting every end market to participate in that growth year over year in second quarter with the exception of personal compute which we expect to really have dropped in the first quarter of 'twenty two and then we expect it to grow sequentially.

You guys still expect ASP.

Roughly eight teams to grow 10% this year.

Year over year, we expect asps to grow about 10% year over year correct for the entire year.

They grew a little faster rate.

Yes.

Great and then on my second question I appreciate the insights there.

More specifically on your mobile business your customers have been impacted by COVID-19, Lockdown disruption. This is impacting the premium end of the market.

<unk>, China domestic smartphone demand, which is impacting the low end of the segment.

So on the strong June quarter guidance.

Giving given the commentary around weakness in mobile.

Business sustaining sequentially given the supply demand gap by some other customers in those segments or is your mobile business weaker sequentially in the June quarter.

It's just the diversification in the business is just allowing you guys to reallocate capacity to your non auto segments, where we know that demand is still strong the outstripping supply.

Look I think we'd call it flat in sequentially in <unk>.

Kind of the high end handset and that space.

Again, the low end, where we didn't have a lot of exposure, we're reallocating I think.

Think about for us in the mobility space is one we have high concentration there and thats not as growing as fast because it's such a big basis. Some of the other important end markets to us.

And then the second element of this as we think about with the new features are the transition of <unk> and how our strong position. There we had actually get kind of more silicon per handset and so we have a strong position as high end handsets typically.

Handset manufacturers.

<unk>.

So that range will air whatever capacity.

Capacity have to the high end handset before the low end and so that's what we're seeing at least in the demand to us David anything you'd add to that yeah. I think we see a continuation of the first quarter heartland in and Thats in the RF front end module, that's our ASW RF Soi technology, we're really driving the.

<unk> from <unk> to <unk>, there. So we're continuing to see sustained growth in that segment and particularly in that technology.

Image sensor processor side of the smart mobile devices, that's a space where GFS product solution included the 22 Mdx platform roadmap that delivers optimized image sensing at an optimal power as well as some other technologies that are growing pretty significantly on a year over year basis, and then finally, we're seeing sustained.

Demand on our specialty power so that's our Pemex.

And Thats, where GFS envelope tracking solutions and 65 nanometer in 'twenty, two mdx provide real time tracking and increased battery life for <unk> sub six gigahertz solutions and really a roadmap dissemblance assemble tracking for the millimeter wave and the higher bandwidth solutions so within <unk>.

<unk> mobile devices.

Sub segments within that that are driving the transition from <unk> to <unk> and that's an area of the market that we specifically targeted that continues to perform for us.

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Hello, Thanks for taking my question.

There was almost a 100% fall through on incremental gross margins for March on a sequential basis and I am curious what specifically may help you.

And how should we think about gross margin progression for the rest of the year.

Sure.

We've talked a lot, especially in the roadshow about.

Our fixed cost footprint and cost absorption.

So when you have an environment, where you have very constructive pricing you have higher asps.

That our work, Dan and contractually obligated into our long term agreements and then you are taking that same fixed cost footprint and for just modest increases in cost producing more units on a year over year basis, and that's the fall through that you get so increased asps.

Reduced cost per unit, if you will from a fixed cost absorption perspective.

And you get this fall through that really is what we talked a lot about in our road shows for IPO, So where we're executing on that plan now what do we expect going forward from a <unk>.

Systemic perspective, our programmatic perspective, I think you can expect fall through that in the 60 ish percent range.

Kind of variable fall through of the business and so that's the type of fall through that you can expect going forward once we fully get our entitlement out of our fixed cost absorption.

Got it very helpful. David.

And my follow up.

I heard you say capex of $4 billion I taught it used to be four and a half of.

So wondering why the change what's the implication is it just.

The tight avail.

Availability of tools and just how does that impact your growth plans for this and next year.

Sure. So our growth plans for 'twenty, two and 'twenty three remain on track I think what we're seeing is a lot of what you are hearing in the industry and others are seeing across the industry is that.

Our tool suppliers are on average late by around 30 days or so and to put that into some real proof points for you. So to date, we have accepted receipt of about 150 tools and about 15% of those tools are slightly more than 30 days late and it's actually gotten a little.

Worse as the year has progressed so we expect that number to go from 15% to in that 20 ish percent range and so on a capex plan of roughly $4 5 billion you slip about 30 days on that plan on 28% of your tools and what Youll calculate is something around $4 billion.

And David on the other end of that is when we built our plans what we are.

<unk> orders in early in this process for this capacity. So we're kind of front line and Thats why were not as impacted to say others may be and we don't build plans without a certain level of contingency and we're still while we've eaten into some of that contingency.

Why we are confident we will maintain.

Our projected growth outlook.

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

Hi, guys. Thanks, a lot last question congratulations on the strong results just had a question on the gross margin again, maybe a separate way to ask it how do you guys. I guess what was the surprise versus your guide I know you've built in a healthy amount of conservatism when we all appreciate that but.

It gets you to the upside in this last quarter was just so significantly better than we thought.

So Dave I know you gave that 70 30 mix and the drivers before but to you guys what was the surprise.

I think to us what the surprise was Ross was the continued fixed cost absorptions.

As we produce more units on our existing footprint.

We continue to get more and more productive and the team across the world is just continuing to really execute from a productivity perspective, and we're seeing that in our fixed cost absorption that said asps came in a little bit better mix came in a little bit better. So I would say from from our guidance perspective.

Everything improved a little bit, but the area that we kind of consistently under call is really fixed cost absorption.

Got it and I guess, just the follow up sticking on the gross margin line does this do anything to either accelerate the timetable to your long term target of a 40% gross margin.

It gives you more confidence in it or potentially even raise where do you think that target can be and I know, it's a number of years down the road, but what does the performance you've delivered over the last couple of quarters now due to your confidence in that longer term target.

I think I'd reiterate what Tom said in his opening statement, which is really we have increased confidence in our ability to achieve our long term targets.

I think it would be prudent at this point to stick with those targets, but we are becoming more and more confident in our ability to deliver those those long term financial targets.

Thank you. Our next question comes from Kristine <unk> with Citi. Your line is open.

Hey, Thanks, guys.

Just on the end markets can you give us any sense of Q2 guidance.

The end market and I guess embedded in that.

You have been posting some pretty nice sequential revenue growth, but it's dropping markedly in Q2 is that just because of the weakness enhances Pcs or is there something else going on there.

Yes, I think obviously, we guided at the enterprise level.

But when we when we look sequentially from Q1 to Q2 as well as Q2 'twenty to Q2 'twenty one.

Areas that we've highlighted for growth this year continue to remain the areas.

That are driving outsized gains for us and specifically I'd point to home and industrial Iot I would point to comms infrastructure and data center and then on a year over year basis, and a little lumpy because it's a smaller number I would point to automotive and those segments of the market for US continued to perform those are the areas, where we feel like we have tremendous differentiation.

Asian that we really targeted in our strategic pivot and we expect those areas to continue to perform.

Got it and I think <unk>.

Earlier in the call you guys mentioned that a while ago demand was about 25% higher than what you what you could fill.

How would you rate that metric now in terms of demand versus your planned capacity.

Look I would tell you the following I would tell you that our book to Bill ratio.

Still north of one and by the way, it's a lot closer to one five and it is one <unk>.

I would tell you that.

Sequentially.

Our back.

Our backlog is.

<unk> increased.

<unk>, 5% and 10% year over year, so when I when I think of getting caught up here I'd like to believe we are but those statistics would say.

It came up.

Okay.

Thank you. Our next question comes from Joe Moore with Morgan Stanley . Your line is open.

Yes.

Great. Thank you looking at.

Talk to the non wafer revenue.

The strength, you're seeing there you mentioned expedite fees.

Is that something that is going to be repeated in the next few quarters and then is there any other element of those non wafer revenues that would be potentially lumpy going forward.

Yes.

When we look at it.

Non wafer revenue was about 10% of total revenue in Q1, it was about a similar percentage in the year ago period.

We guided it for second quarter of 2022 to be about eight 5% of total revenue and when I look at the non wafer revenue line as you know it includes radicals and NRT eason.

And expedite fees I would say expedite fees on a year over year basis as well as on a sequential basis I would characterize it as kind of flattish quite.

Quite frankly.

I would say radical line that's the that's the line with the most variability is that radical line and that's really that's really based upon when design wins ramp when customers can get their design wins to us when we can get in the queue to manufacture the radicals. So theres a lot of engineering that actually goes into that segment of the process as well as the NRI.

Line Thats the nonrecurring engineering line, so from that perspective, I would say.

No real surprises to us on the non wafer revenue line either either in Q1 performance or in the second quarter guidance.

Great. Thank you and then in terms of it sounds like you definitely have robust.

While coverage kind of through the year.

Small pockets if some of the more negative economic scenario start to play out.

And you see those small pockets of weakness in areas like phones get bigger.

How quickly I assume there is a lot more demand for wafers from other markets you talked about autos.

You're bringing up capacity how quickly can you kind of move those wafers over to other markets. If that indeed becomes something you need to contemplate I realize that's not where you are today.

Okay.

The biggest element of pivot of our company that we talked about in our road show in 2018.

Not just the markets we focused on.

But also to create fungibility in our capacity to how we invest how we think about our capacity and so it's fungibility.

Corridor is the capacity that we can build in more than one location within locations. We try to make that capacity, we put on fungible for a couple of different nodes and features and so the specific specificity of any given opportunity has to be really.

What's been taken down versus what is is going up there may be opportunities, where the fungibility is not as high as we'd like it to be but we plan. This into our business. It's part of some of how we manage supply chain both globally and locally is to create capacity that we can.

You can find it's not just a one for one substitution of a particular note with a particular feature.

Thank you. Our next question comes from Chris Caso with Raymond James Your line is open.

Yes. Thank you.

Question about some of the capacity additions in the context of what you said about the.

The auto market.

Yes.

That revenue being lumpy because.

Still in the process of adding capacity or could you give us some sense of.

And which end markets.

We expect capacity expansion to be the greatest over the next few quarters.

Imagine that the comments that you had about the end markets you expected to grow this year should be paired up with.

The areas on our processes and what youre going to begin to invest in capacity this year.

Sure.

As we've stated we've got a capex plan of about $4 billion. This year.

I'm going to use some rough and tough numbers here, but about half of that Capex is is really related to our module 700 H in Singapore.

450, K annual wafers that we're bringing online.

Towards the end of this year, but really starting to produce some real revenue next year.

That facility it will deliver 40 nanometer all the way up to 90 nanometer.

<unk> facility to the one right next to it and so it helps free up some bottleneck capacity and its sister facility.

So youre going to see investments in those specific corridors. We've got investments in R. 22, Mdx corridor, which is significantly oversubscribed and we're also increasing capacity in our Finfet corridor. So I would say if you looked at that $4 billion I would say, it's I would say skewed a little bit more heavily towards 'twenty two.

Through 65, and then of course, some capacity increases all the way down at <unk>.

12 nanometer in the Finfet corridor as.

As well as some some higher technologies that are specifically asked for from the market. Yes, Let me, let me a little bit color around that too.

It's worth noting.

<unk> doesn't put capacity on for Jeff do you have put capacity on for our customers. So when you think of.

Our marketing attention. These these growth markets that are attracted to us we lineup not only our capacity, but we line up our long term agreement to that capacity and so you're absolutely right. It's all self fulfilling where you hear us in these these end markets, where we have secular growth that we've concentrated on that's where I'd capacity, that's what we've signed up customers long.

Term agreement because that's the capacity our customers want it's not capacity put on Virginia Tom.

That's a great point and it's worth noting now.

Our customers have now signed up for more than $3 5 billion of customer funding thats prepayments in access fees, specifically to bring online that capacity that they desperately need.

That's helpful. Thank you.

As a follow up I'm wondering if you could address.

Some of these issues of what's been referred to as structural on your adjustment in the non leading edge nodes one of your.

Customers prefer.

Turning to that last night.

And I guess, we've been hearing it for a while you've been talking about that for a while about structural undue investments is there any way to put any numbers on that and I think in the context of people.

People being worried about macro conditions in end demand getting a sense of what the real gap is between supply and demand in the markets you serve would be helpful.

Yes, I think first let's talk about the capacity that's being put on in the segments. We play in just to make it simple to say 12 nanometer and above when.

When we look at how we see the market growing in the high single digits.

And when we look at capacity, that's not only been announced would you actually see kind of activity going on.

We think capacity is not as.

As maybe matching the kind of growth rates, we want in an industry.

But that doesn't account for the fact that there is still a big gap and I think that's why you hear about continued under investment and it's going to take a while to balance all of this I think that puts a little bit of resiliency in our business against any temporary softening in it from a global macro event, but we do not see in the areas we play a large.

Amount of capacity being put on relative to closing the gap to the demand and growing with the demand and Dave.

A little bit on the IDC report, we were just looking at that's right Tom.

It's not just us.

They see the data the same way I think IDC recently released a report maybe in the last couple of months.

That show kind of the long term utilization of the industry and I think depending on which year you look at and it goes from 'twenty. One all the way through 25, I think the lowest utilization rate was something like 96% and I think it went all the way to 105%.

Over over demand or not enough capacity and so on.

It's not just Jeff that sees it this way this kind of structural mismatch or matched at best I think theres others in the industry that are seeing a similar thing and some of the lumpiness at capacity in the past.

It was off a smaller base. So when you added increment of capacity.

Much more to capacity when we get to the industry to the size. We are today the incremental incremental capacity is not as significant until this idea of we have to build a certain increment. It makes it a little bit more than you need and has to get digested and demand the bigger we grow as an industry the less that youll see that phenomenon.

Thank you. Our next question comes from Mehdi Hosseini with SCE. Your line is open.

Yes, thanks for taking my question.

Just trying to better understand how the mix is impacting your topline and gross margin and to that extent.

If you add speeds were up by 28% year over year, and 5%, Cuba Q can you, perhaps qualitatively or quantitatively typically help me understand how these <unk> been impacted by the change in the mix.

David You go first and then I'll share.

Sure Let me let me just provide some some clarification.

Asps year over year were up 19%.

Volume was up 14% of that specifically first quarter 'twenty two to first quarter 'twenty one.

When we look at.

Our Asps I think really the underlying question that you're really getting at and I'm going to defer a little bit here is gross margin.

And really when you look at Asps and gross margin what Youre really asking is how differentiated is your solution because the more differentiated you are the more value that you create while the more value that you can capture and so I think there are we don't specifically guide by end.

Market segment profitability, but I do think that you can look at some milestones you can look at some proof points and you can point them directionally towards increased profitability I think one would be <unk>.

Single sourced.

Design wins in single source revenue so as Tom mentioned in his commentary single source revenue grew year over year. That's Q1 2020 to Q1 'twenty, 148%.

Single source revenue is about two thirds of our total GFS revenue single source design wins about 80% of our design wins are single sourced and so regardless of which technology platform Youre looking at for GF, whether it's <unk> or siggi, our RF soi and the other platforms that we have the more content to more <unk>.

<unk> brings the better the asps the better the gross margin Tom is there anything you'd add to that yes, that's exactly where I was going to go I think this idea of that.

Leading indicator is design wins and that's running at an 80% at least it was we.

We talked about in our Roadshow last year and now you're starting to see the revenue flow through to that higher bar.

Single source business, which.

This is typically our.

Bread and butter and are more accretive business.

Okay.

Actually you.

You explained my question better than I could have trimmed it.

Here is the value created and that's the some of the specialty substrate that you all for your customer and you are a single source.

As I look into next year.

Doug mix, probably would increase as Siggi would increase maybe some silicon photonics with the start materializing and I think that's when the concern or excess supply for bulk silicon at or above 12 nanometer would go away because it's just the mix shift that is going to accelerate.

Into next year is that the right way to think about the model.

The way that we think about our model is we want to bring differentiated solutions to the marketplace and we believe we have some real franchises that are differentiated and so as our single source business grows as our design wins grow in single source, we drive a higher penetration of single source through our business that becomes more accretive to that.

And then of course, we take those higher asps and that higher value creation, and we spread them over the same fixed cost footprint, which enables us to get fixed cost absorption, which creates the confidence that we have in our in our model and our confidence that we can deliver our long term financial model.

Thank you. Our next question comes from Matt <unk> with Wedbush Securities. Your line is open.

Hey, Thanks for taking my question I wanted touch upon I think something that he was asking about and also Chris.

And in terms of new technologies.

With Mdx was it always the plan to start a second corridor in Dresden or did you pull that forward.

It sounded like there's more demand there and potentially that's a greater portion of your mix moving forward than you might have planned.

You're right in assuming that at least have some positive implications for margins and then similarly, when youre talking about silicon photonics and revenue doubling this year.

Is there a point, where you see silicon photonics, becoming a meaningful portion of revenue.

And then again at that point am I correct in assuming that some positive implications on the gross margin side.

Thanks.

Yes, let me start David you can add.

Okay.

Let's start with the Silicon Photonics, we have a healthy market share in silicon photonics to about a $250 billion.

250 minutes.

Uh huh.

Segment, and we see that growing.

$1 billion or so over the next five years and if anything we see more market share in that and that that not less and so that is an opportunity for us for both growth and more differentiated.

Profitable growth.

You said about <unk> and moving the corridor is actually is from Dresden to New York, It's not the other way around and you say was that always the plan, but our strategy for our company is.

As for wherever it makes economic and capital expansion.

To have at least two sites to be able to build the same type of capability.

And so we've always had a plant somewhere we want to put 22 FD extra question. These at any given time, whereas the right place to put that in our today, our fab eight facility represents a great opportunity, but best use the lithography capability that defines the features of the of the technology. It's the next best place for us to put and build that second.

Corridor here and so when we think about it again, it's not just.

Hey, we need capacity, we think about it in a thoughtful way, where we can we can have our supply chain balance and leverage our assets around for fungibility and to give our customers second sourcing within a single source.

Yes, I think I'd just add that look.

RPX platform is an soi platform. That's also similar to kind of our RF Soi platform. Those are two platforms for us where we have real franchises, where we are increasing capacity pretty significantly.

In the future on Ft X to be able to satisfy the demand there and then as Tom mentioned on the Silicon Photonics side, we have the majority share in that market. We're the only one with a monolithic.

Integrated solution in that space and we have the majority share in roughly what's the $250 million market today and.

And we expect as that market grows to roughly a $1 billion by 2026, we expect our share to still be a majority share if not higher than where it is today. So with the customers that we're engaged in in that space, where we're optimistic not only for <unk>, but also for silicon photonics for the future.

Okay.

Our next question comes from Chris <unk> with Cowen <unk> Company. Your line is open.

Yes, hi, thanks for taking my question.

Tom.

Big Picture question for you have been in the semiconductor industry long enough youll seen many cycles.

So, let's just assume there is a macro correction of the question.

Im curious where would we see exports in your global business would it be watchful auto Iot.

Where would you see it both and then I had a follow up.

Yes, so look.

We've never getting the debate will it be it won't be a cycle I think we could talk about the cycles. If it is it is going to be a macroeconomic driven event.

It's probably going to be shorter in duration and less in depth given the.

Helen tied semicon dessert to the world economy.

I think where you're going to see.

First would be a consumer led it would be a consumer led event for a macroeconomic event and then it would be consumer led on the on the <unk>.

The semiconductor side and I think that touches a lot of the end markets we spoke about.

Got it got it okay.

And if I could just chime in.

When when I think about future visibility because there is an element of this question that that when I get it I think about future visibility right.

2022.

Tom mentioned that lead times extended sequentially, they've actually extended year over year and sequentially book to Bill closer to one five than it is to one and then of course, our LTA, which we continue to sign and renew and our customers continue to provide funding and their balance sheet access to their balance sheet to put capacity on some more than three five.

Now.

Their balance sheet at work to be able to deliver capacity increases.

That the market needs and so I look at this environment and I think our visibility is has never been stronger.

I look at the customers and their engagement with us on increasing capacity and I'm just I'm just really encouraged by the single source design wins and the partnerships that we have with our customers across all of our technology, which manifest itself.

We have to deal with.

A macro event.

Some salt softening in industry will be able to work in a partnership with our customers on how we get through it together.

Got it got it Super helpful, Tom and David just as a follow up.

Some of the foundries have spoken about raising prices for next year and given the project getting completed so lucky of LTE that we spoke about the pencil.

How should we think about pricing for global fundings in 2023.

David you start and I'll hand.

Sure.

Just mentioned as I mentioned, we had we have incredible visibility into 2023 really on the back of those lts that we've signed I think more recently, we've seen actions in the market by some of our peers to increase prices specifically related to inflation for example, that's something that.

We started speaking to our customers about in early Q2.

And we've been working with them on passing through inflationary costs. So that they have time really to prepare to pass them on to their end customers as well again all centered around this partnership they've bet on us with their single source design wins, and we are working in partnership with them to pass through some of these.

<unk> pricing.

Pricing in our contracts allow for that Tom anything you'd add remember how we got here, we talked about why was 2002, the year, where you'd see the higher asps.

And we see because we were striking those deals in 2021, and we wanted to give our customers a chance to balance their business to accept that and this is no different here as we're passing along these inflationary pressures were doing it in a way to give our customers the chance to to mitigate it in their own P&L. So I think thats. The way you should think about pricing, we had a step function increase in.

Pricing and then the passing along of inflationary increases and I think the market broadly has kind of communicated that those inflationary increases would be somewhere between five and 10%.

Thank you our last question comes from Rajiv Gill with Needham <unk> Company. Your line is open.

Yes, Thank you and congrats on the good results.

I appreciate your kind of providing some some commentary about the <unk>.

Inflation and what that impact would be on your revenue I think you said less than 2%.

I was just wondering.

What are the assumptions and how you're kind of getting to that number I would assume it's based on obviously your long term agreements and then some sort of analysis based on.

On those agreements, but just curious how you are kind of coming to the conclusion that if there is kind of a persistent inflation.

Less.

The 2% impact on revenue.

Sure Rajeev when I mentioned, 2% of total revenue is really the impact on the P&L itself. So.

So in other words, how much impact would that have it at the margins at the bottom and so really we were just communicating that as we had set up all these LTA and contemplated these contracts we were working in the background to lock in the materials that fixed volume.

Fixed prices, we were working on very variability and our labor pay and of course, we were hedging against some of the commodity exposure that you have on input prices and to enter your energy sources and so from all of those things we believe that the inflationary pressures in 2010.

Two we will have a very minimal impact on our net P&L by the time you get to the bottom line. So that was the that was what we were communicating with that statement in our prepared commentary is minimal impact from inflation inflationary pressure on our bottom line in 2022 and that doesn't take into account passing any of that that does not take into it.

Count passing any additional inflationary increases onto our customers.

Right.

I think it was an important point to make to to try to address some of those investor concerns and just for my follow up in terms of the gross profit fall through.

A question from a previous analysts that there was a 100% gross profit fall through from Q4 to Q1.

It looks like Theres going to be about 81% gross profit fall through into Q2 based on the guide and then kind of saying kind of moderating around 60 60 ish.

Just curious when you when youre looking at kind of a 60 60 number.

Does this kind of.

I guess factor in obviously your ASP agreements.

Certain level of fixed cost absorption or mix shift what would be kind of the upside drivers too.

That 60% gross profit fall through because you've been exceeding that the last couple of quarters.

Thanks, Greg.

The 60 ish percent number that I gave you is really a steady state number. So that's over time, you can expect essentially variable fall through which ranges between $68, 65% I think near term kind of quarter to quarter right. We've talked about this fixed cost absorption and where you can you can increase.

<unk> and output significantly at a facility I think Dresden, Germany would be a great example, you can increase output from our facility in a very meaningful way with a very minimal amount of input cost into that process and so that's what's leading to the more near term fall through and then of course over time the steady state.

Number that I was quoting kind of 60 to 68, 5%. That's the type of variable fall through that you expect once we hit steady state.

Thank you I would now like to turn the call back over to Susan <unk> for closing remarks.

Thank you Ken.

Thank you everyone for joining us. This afternoon, we look forward to meeting you on the conference circuit this quarter have a good evening.

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

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Good day and thank you for standing by welcome to the Global Foundries Conference call to review first quarter of fiscal year 2022 financial results conference call at this.

Time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your speaker today.

So again, I guess, vice president of corporate development and head of Investor Relations. Please go ahead.

Thank you operator, and good afternoon, everyone and welcome to global Foundries first quarter 2022 earnings call on.

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

A short while ago, we released GFS first quarter 2022 financial results press release, which is available on our website at investors that GF 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 webpage. During this call we will present.

<unk> <unk> and adjusted non <unk> financial measures.

Most directly comparable <unk> measures in reconciliation for adjusted non <unk> measures are available in today's press release and accompanying slides.

I would remind you that these financial measures are unaudited and subject to change.

Statements on todays call maybe deemed to be forward looking statements such.

Such statements can be identified by terms such as believe expect intend anticipate and may.

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 annual report on form 20-F filed with the SEC on March 31 2022.

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

<unk> expansion and technologies, falling, which Dave will provide details on our first quarter results and also provide second quarter guidance. We will then open the call for questions.

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

I'll now turn the call over to Tom for his prepared remarks.

Thank you Suki and welcome everyone to our first quarter 2022 earnings call.

We started the new year building on the strong momentum from last year and delivered record Q1 results that are well ahead of our outlook we provided in February .

Amidst the backdrop of sustained and robust demand.

Our global team 15000 strong continues to over deliver despite inflationary.

Geopolitical and pandemic related challenges.

This type of execution build upon itself and.

And creates a foundation of confidence.

Confidence that we convey to our customers and partners.

And as a result builds.

Builds their trust NGF.

So a huge shout out to the entire <unk> team all 15000 of your <unk>.

Q1 <unk>.

Together deliver another record quarter in Q2.

In addition to strong manufacturing and operation performance.

I am pleased to report that our commercial teams continue to win new accretive designs with both new and existing customers.

Customers that are winning in their markets with <unk> solutions.

We continue to see strong demand across all of our strategic and secular growing end markets with the majority of that demand built upon <unk> differentiated process technology.

In fact.

Q1 single source wafer shipments grew 48% year over year.

Also and as largely expected.

We see some areas of the market normalizing.

Notably low enhance it.

In Pcs.

As previously communicated neither of these markets are areas of strategic focus for <unk>.

With the exception of a few applications in these end markets that require unique and differentiated technology.

In summary, the demand environment is largely as we expected and our revenue visibility remains strong it's backed by multi year long term customer agreements.

We remain fully sold out in 2022 and 2023.

And we are increasingly confident that we can deliver the long term business model, we outlined an articulated in our roadshow.

With that as context, let's move onto our first quarter results.

We are pleased to report another quarter of record results for the company.

First quarter revenue grew 37% year over year and was driven by year over year increases in both wafer shipment and ASP.

This coupled with strong operational execution across all our fabs.

Resulted in significant improvements to adjusted gross margin.

Which increased to 25%.

This is an 18% point improvement from a year ago quarter and.

And as a result, we reported first quarter adjusted earnings per share of <unk> 42.

Which is 15 cents higher than the high end of our guidance and more than double the 18 adjusted earnings per.

<unk> per share we reported last quarter.

I will discuss in more detail our financials later in his commentary.

But first let me provide a summary of our first quarter revenue by end market, starting with smart mobile devices.

Smart mobile devices represented approximately 50%.

First quarter revenue.

And it grew 20% year over year.

This growth was primarily driven by the continued transition of the market for more feature rich handsets.

Which is happening concurrently with the transition to <unk> connectivity.

Our <unk> platform is a great example of our differentiated technology.

It is the industry's first and.

Leaving 300 millimeter RF Soi platform with best in class switch and the <unk> performance.

It delivered superior data rate range in battery power.

Additionally, we are also seeing strong double digit year over year growth for RF transceiver mobile image sensor and specialty power solutions.

Our portfolio of technologies, which includes ASW 12 LP RF 22 MTX.

And both 55% and 28 nanometer BCD late enable our customers' design products that win in their markets, which in terms helps us participate in the most attractive segments in this end market.

Next our communications infrastructure and data center end market.

Which comprised approximately 17% in the first quarter revenue.

<unk> grew approximately 80% year over year.

Growth was driven by a combination of higher shipments higher asps.

And better mix.

Data center demand, especially for two chip product solutions.

It's starting to ramp in <unk> is well positioned to grow in this market.

We also saw strong demand from our communications infrastructure customers, who leverage <unk> IP rich and differentiated 12 nanometer RF and silicon germanium solutions.

The robust demand in cellular infrastructure is due to the transition from <unk> Mimo <unk> millimeter wave.

This transition increases available spectrum bandwidth and capacity all of which culminates into improved user experience.

In the quarter, we also announced our second generation Silicon Photonics platform.

This is gardening strong and broad customer traction.

Our branded Photonics platform is the industry, leading monolithic solution for optical interconnects.

Certain switches Gpus accelerators and plug of Transceivers.

This platform also provides the next level of RF performance for 800 gigabit Transceivers.

The best proof of this leadership solution is in our customer set.

Further our differentiated photonics platform <unk>.

As has been extended to the quantum computing market and is gaining significant traction with some of the most innovative startups.

For example, <unk> quantum is designing and building the world's first usable scalable quantum computer honor photonics platform.

Our silicon Photonics business, which is already has a majority share position is on track to grow over 50% in 2022.

In summary, we believe the communications infrastructure and data center end markets remain on track to be one of our fastest growing end markets. This year.

Moving on to our home and industrial Iot end markets.

Revenue was approximately 17% of total first quarter revenue.

And it grew 55% year over year.

The strong growth in this end market was driven by higher demand.

Their asps and richer mix.

<unk> strength and feature rich technologies, they are focused on superior wireless connectivity performance.

At the lowest possible power consumption has enabled our strong growth in home and Iot end market.

This is an end market that continues to experience secular growth with the ongoing global proliferation of smart connected devices.

Now within this end market, our wireless connectivity solutions saw significant growth due to the accelerated adoption of <unk> technology for Wi Fi six applications.

We're also seeing strong traction for our Iot microcontrollers that feature non volatile memory for a number of smart card applications.

Such as digital payments access control and electronic Ids.

In addition growth in this end market is being driven by our differentiated power and analog and analog technologies for applications, such as building automation and security.

The trend of integrating wireless secure compute analogue and multiple senses is squarely playing to our strength and is at the heart of the strong home and Iot growth through <unk>.

We are on track for this end market.

To be the fastest growing for <unk> this year.

Touching next on automotive revenue in this market was approximately 4% of our total first quarter revenue and grew approximately 170% year on year.

As we previously indicated our growth in this market will be lumpy as we are constrained by how quickly we can build capacity.

Now as new capacity comes online, we expect our revenue growth to accelerate in this end market.

In Q1, we also began to ramp some exciting new products that have been developed over the last few years that enable automobile electrification safety.

We're also seeing continued ramp of our sole source business with a top tier.

Automotive radar IDM that will drive significant growth over the next several years.

Our pipeline of design wins in automotive remains robust.

This is driven by one the acceleration of plans for EV production.

And to <unk>.

Auto makers desire to recover lost vehicle shipments during the pandemic.

These do together will pull forward demand for advanced automotive architectures and it's these architectures that have higher semiconductor content per vehicle and the majority of which is serviced by feature rich technology across <unk> portfolio.

Examples range from 130.

BCD technologies that enable advanced battery management systems.

To our best in class 22, SPX technologies, they are quickly becoming the market standard for millimeter wave solutions at.

At the foundation to enabling safety and the future economy striving.

Next and as expected our compute end market declined year over year and comprised approximately 2% of our total first quarter revenue.

And expect this market to be less than 5% of our total 2022 revenue.

As mentioned earlier in this call our investments in this market are focused upon areas, which we can provide differentiated technology.

Specifically, we have targeted mixed signal power management and companion chip solutions.

From a percent of total revenue perspective, we expect Q1 to be the trough for this end market.

And then it will steadily improve throughout the year.

I would now like to provide a brief update on our ongoing capacity expansion plans.

In Q1.

Wafer shipments increased 14% year over year.

We are particularly pleased with the output from our Dresden, fab, where wafer shipments increased more than 50% year over year.

In short we are executing to plan and converting our capacity investments to the wafer output required to satisfy our long term customer agreements we have.

We're on track to increase wafer output more than 10% year over year.

Also as committed and despite COVID-19 related challenges, our new fab construction, Singapore is largely progressing to plan and.

And we are on schedule to install tools at the beginning of Q3.

With production ramping in the first half of 2023.

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

For example, we completed six technology qualifications in the first quarter, including New features that we added to our industry, leading ASW RF Soi platform for front end modules and mobile handset.

In addition, we also released our enhanced Siggi hi.

High bandwidth technology in the quarter.

This reflects the rapid and broad adoption of our differentiated photonics technology.

And finally, given the unprecedented demand on our <unk> platform.

We have commenced a technology transfer from Dresden, Germany to a multi new York facility to establish our second 22 Ftes corridor.

To summarize I am pleased to report a quarter of solid execution as we continued to demonstrate strong momentum across our business.

And we're making significant progress towards our long term business model.

With that let me turn the call over to Dave to provide the financial details for the first quarter and also provide you with our guidance for the second quarter.

Thank you Tom our first quarter results exceeded the high end of the financial range, we provided in our last financial update <unk>.

First quarter revenue was approximately $1 94 billion, an increase of 37% year over year.

We shipped approximately 625300 millimeter equivalent wafers in the quarter.

14% increase from the year prior period.

Average selling price ASP.

Per wafer increased approximately 19% year over year, driven by ramping long term customer agreements with better pricing.

And overall very constructive transactional pricing environment as well as continued improvement in product mix.

Wafer revenue from our end markets accounted for approximately 90% of total revenue.

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

For the first quarter, we delivered adjusted gross profit of $490 million, which translates into approximately 25, 3% adjusted gross margin.

Of the 18 percentage point year on year improvement was driven by better fixed cost absorption higher asps and improved mix approximately 70% of this improvement was attributable to asps and mix with the remaining 30% attributable to volume related fixed cost absorption.

Operating expenses for the first quarter were better than expected and represented approximately 9% of total revenue.

R&D for the quarter was flat sequentially at approximately $122 million, while SG&A came in at about $89 million.

Total operating expenses were $211 million.

Excluding $32 6 million of stock based compensation.

We have delivered operating profit of approximately $279 million for the quarter, which translates into a 14, 4% adjusted operating margin approximately 21 percentage points better than the year ago period, and $77 million higher than the high end of our guidance range.

First quarter net interest expense was approximately $28 million and we incurred a tax expense of approximately $29 million in the quarter.

We delivered first quarter adjusted net income of approximately $232 million.

On a diluted share count of 549 million shares.

<unk> and adjusted earnings of 42 cents per share.

We delivered record first quarter adjusted EBITDA of approximately $698 million.

Adjusted EBITDA grew $404 million year on year on $522 million of incremental revenue growth.

77% fall through rate.

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

<unk> flow from operations for the quarter was $845 million and included approximately $475 million of customer prepayments and capacity access fees.

Gross capex for the quarter was $643 million or roughly 33% of revenue.

We ended first quarter with approximately $3 3 billion in cash and cash equivalents, an increase of more than $2 6 billion.

The prior year period.

Before I transition to Q2 guidance I want to briefly touch upon current market concerns regarding inflation and its impact to our business.

Since 2021, our teams have worked diligently to build certainty into our business model you.

<unk> seen the results of the commercial work and our revenue visibility driven by our long term agreements operationally. We've also worked to build certainty into the business with respect to materials. We have signed many long term multi year fixed cost supply agreements for the materials needed to deliver customer commitments.

With respect to energy cost, we have a rolling 24 month hedging program that helps us mitigate significant movements in the energy markets with.

With respect to labor, we have variable pay for performance programs that reward our employees for excellent performance like the performance delivered in the first quarter of 2022.

Additionally, we have monthly rolling and FX hedging programs that help mitigate significant movements in currency pricing and finally, we have an active and robust pipeline of manufacturing cost savings initiatives that have historically delivered annual savings of more than $200 million.

We believe the aggregate impact of all of these programs were largely offset the forecasted inflationary headwinds in 2022 and that the net impact to the P&L will be minimal.

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

We expect total <unk> revenue to be between $1 $95, five and $1 95 billion.

Of this we expect non wafer revenue to be about eight 5% of total revenue.

We expect adjusted gross profit to be between 503 and $531 million.

We expect adjusted operating profit to be between 272 and $305 million.

Excluding share based compensation for the second quarter, we expect total opex to be between 226 and $231 million. We expect this sequential increase in operating expenses to primarily be driven by higher labor expenses and certain enterprise it projects.

We expect net interest expense for the quarter to be approximately $25 million and tax and other expenses to be roughly $26 million.

We expect adjusted net income to be between $235 and $265 million.

We expect depreciation and amortization for the quarter to be about $425 million of which 90% is related to cost of goods sold.

On a fully diluted basis of approximately 550 million shares we expect adjusted earnings per share for the second quarter to be between 43% and 48.

We expect adjusted EBITDA to be between 705 and $745 million.

For 2022, we expect total gross capex to be approximately $4 billion as we continue to invest in partnership with our customers to deliver the capacity necessary to support our contracts and.

In summary, strong operational execution enabled us to deliver first quarter results that were significantly better than the high end of our guidance range our.

Our demand visibility remains strong supported by our long term customer agreements and we expect to deliver progressively better financials quarter to quarter throughout the year as we continue to methodically execute our plans.

With that let's open the call for Q&A operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key.

We ask that you please limit yourself to one question and one follow up.

Our first question comes from Harlan sur with JP Morgan Your line is open.

Good afternoon, and congratulations on the solid results and strong execution by the team.

So there's a lot of cost currents in the end markets.

Corporate supply chain disruptions as you mentioned some pockets of weakness, but overall it appears that demand continues to outstrip supply across most end markets. So as you guys look at your business talk to customers given your backlog profile.

Are you guys seeing out there and then it looks like capacity growth target Tom was revised higher than 10% plus for this year I'm. Just wondering does the team also still anticipate 10% ASP growth as well.

Yes, let me, let me start and David you can add some commentary.

I think you said it right the demand environment is still strong, but I think we have to put this in perspective, we'll talk about this the small pockets I'll reiterate from the small pockets of.

A softness we're seeing when we started this year we had demand.

That was 25% higher than the capacity, we can fulfill and so when an over demand situations. So I think holistically for the industry. This is not like you either in supply alignment of Youre not theres ranges of that and we were really as an industry and in particular <unk>, having a lot more demand than we can satisfy.

We don't have high exposure to the PC market, we don't have high exposure to the low end handset market.

The softening that we're seeing there.

Taken as an opportunity to close some of that big gap that we started this year with to feed the customers that are more strategic and markets for us.

Yes, let me just add on Harlan.

We're expecting total wafer shipments to grow.

Kind of high single digit 10 ish percent ish.

In throughout 2022.

You guys still expect ASP up eight.

Roughly as teams to grow 10% this year.

Year over year, we expect asps to grow about 10% year over year correct for the entire year.

They grew a little faster rate.

Great and then my second question I appreciate the insights there.

More specifically on your mobile business your customers have been impacted by COVID-19, Lockdown disruption. This is impacting the premium end of the market.

China domestic smartphone demand, which is impacting the low end of the segment.

So on the strong June quarter guidance.

Given given the commentary around weakness in mobile.

Mobile business sustaining sequentially, given the supply demand gap by some other customers in those segments or is your mobile business weaker sequentially in the June quarter, and it's just the diversification in the business is just allowing you guys to reallocate capacity to our non auto segments, where we know.

All of that demand is still strong the outstripping supply.

Look I think we'd call it flat and sequentially in <unk>.

Kind of the high end handset and that space again, the low end, where we didn't have a lot of exposure. We're reallocating I think you have to think about for us in the mobility space is one we have high concentration there and thats not as growing as fast because it's such a big basis. Some of the other important end markets to us.

And then the second element of this as we think about with the new features are the transition of <unk> and how our strong position there.

It actually get kind of more silicon per handset and so we have a strong position as high end handsets typically.

Handset manufacturers or brands.

So that range.

Air whatever capacity they have to the high end handset before the low end and so that's what we're seeing at least in the demand to us David anything you'd add to that.

I think we see a continuation of the first quarter Heartland in and Thats in the RF front end module, that's our ASW RF Soi technology.

We're really driving the transition from <unk> to <unk> there. So we're continuing to see.

Sustained growth in that segment and particularly in that technology.

In the image sensor processor side of the smart mobile devices, that's a space where <unk> product solution includes the 22 mdx platform roadmap that delivers optimized image sensing at an optimal power as well as some other technologies.

That are growing pretty significantly on a year over year basis, and then finally, we're seeing sustained demand on our specialty power. So that's our pemex.

And Thats, where GFS envelope tracking solutions and 65 nanometer in 'twenty, two mdx provide real time tracking and increased battery life for <unk> sub six gigahertz solutions and really a roadmap December assembled tracking for the millimeter wave and the higher bandwidth solutions. So.

Within <unk>.

Smart mobile devices.

Sub segments within that that are driving the transition from <unk> to <unk> and that's an area of the market that we specifically targeted that continues to perform for us.

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Hello, Thanks for taking my question.

There was almost a 100% fall through on incremental gross margins for March on a sequential basis and I'm curious what specifically mix help you.

And how should we think about gross margin progression for the rest of the year.

Sure.

We've talked a lot, especially in the road show about.

Our fixed cost footprint and cost absorption.

And so when you have an environment, where you have very constructive pricing you have higher asps.

Reduced cost per unit, if you will from a fixed cost absorption perspective, and you get this fall through that really is what we talked a lot about in our road shows for IPO, So where we're executing on that plan now what do we expect going forward from a cyst.

Systemic perspective, our programmatic perspective, I think you can expect fall through that's in the 60 ish percent range.

Kind of variable fall through of the business and so that's the type of fall through that you can expect going forward once we fully get our entitlement out of our fixed cost absorption.

Got it very helpful. David but my follow up I thought I heard you say capex of $4 billion it used to be four and a half.

So wondering why the change what's the implication is it just.

The tight avail.

Availability of tools and just how does that impact your growth plans for this time next year.

Sure. So our growth plans for 'twenty, two and 'twenty three remain on track I think what we're seeing is a lot of what youre hearing in the industry and others are seeing across the industry is that.

It'll worse as the year has progressed. So we expect that number to go from 15% to in that 20 ish percent range and so on a capex plan of roughly $4 5 billion you slip about 30 days on that plan on 20% of your tools and what Youll calculate is something around $4 billion.

And David on the other end of that is when we built our plans once we get our.

Purchase orders in early in this process for this capacity. So we're kind of front line and Thats why were not as impacted to say others may be and we don't build plans without a certain level of contingency and we're still while we've eaten into some of that contingency.

This is why we are confident we will maintain our projected growth outlook.

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

Yeah.

Hi, guys. Thanks for letting me ask question congratulations on the strong results just had a question on the gross margin.

Maybe a separate way to ask it how do you guys I guess what was the surprise versus your guide I know you've built in a healthy amount of conservatism and we all appreciate that but the magnitude of the upside in this last quarter was just so significantly better than we thought.

So Dave I know you gave that 70 30 mix and the drivers before but to you guys what was the surprise.

I think to us what the surprise was Ross was the continued fixed cost absorptions.

As we produce more units on our existing footprint.

Everything improved a little bit, but the area that we kind of consistently under call is really fixed cost absorption.

Got it and I guess, just the follow up with sticking on the gross margin line does this do anything to either accelerate the timetable to your long term target of a 40% gross margin.

I think I'd reiterate what Tom said in his opening statement, which is really we have increased confidence in our ability to achieve our long term targets.

I think it would be prudent at this point to stick with those targets, but we are becoming more and more confident in our ability to deliver those those long term financial targets.

Thank you. Our next question comes from Chris Danley with Citi. Your line is open.

Hey, Thanks, guys.

Just on the end markets can you give us any sense of Q2 guidance.

The end market and I guess embedded in that.

You have been posting some pretty nice sequential revenue growth, but it's dropping markedly in Q2 is that just because of the weakness enhances the Pcs or is there something else going on there.

Yes, I think obviously re guide at the at the enterprise level.

But when we when we look sequentially from Q1 to Q2 as well as Q2 'twenty to Q2 'twenty one.

Areas that we've highlighted for growth this year continue to remain the areas.

That are driving outsized gains for us and specifically I'd point to home and industrial Iot I would point to comms infrastructure and data center and then on a year over year basis, and a little lumpy because it's a smaller number I would point to automotive and other segments of the market for US continued to perform those are the areas, where we feel like we have tremendous differentiation.

Asian that we really targeted in our strategic pivot and we expect those areas to continue to perform.

Got it and I think <unk>.

Earlier in the call you guys mentioned that a while ago demand was about 25% higher than what you what you could fill.

How would you rate that metric now in terms of demand versus your planned capacity.

Look I would tell you the following I would tell you that our book to Bill ratio is still north of one and by the way, it's a lot closer to one five and it is one <unk>.

I would tell you that.

Sequentially.

Our back.

Our backlog is.

<unk> increased.

5% and 10% year over year, so when I think of getting caught up here I'd like to believe we are but those statistics would say.

It came up.

Okay.

Thank you. Our next question comes from Joe Moore with Morgan Stanley . Your line is open.

Great. Thank you I Wonder if you can.

Talk to the non wafer revenue.

The strength, you're seeing there you mentioned expedite fees.

Is that something that is going to be repeated in the next few quarters and then is there any other element of those non wafer revenues that would be potentially lumpy going forward.

Yes.

When we look at it.

Non wafer revenue was about 10% of total revenue in Q1, it was about a similar percentage.

A year ago period.

We guided it for second quarter of 2022 to be about eight 5% of total revenue and when I look at the non wafer revenue line as you know it includes radicals and NRT eason.

And expedite fees I would say expedite fees on a year over year basis as well as on a sequential basis I would characterize it as kind of flattish quite.

Quite frankly.

Line Thats the nonrecurring engineering line, so from that perspective, I would say.

No real surprises to us on the non wafer revenue line either either in Q1 performance or in the second quarter guidance.

Yes.

Great. Thank you and then in terms of it sounds like you definitely have robust.

Backlog coverage kind of through the year.

These small pockets if some of the more negative economic scenario start to play out.

And you see the small pockets of weakness in areas like phones get bigger.

How quickly I assume there is a lot more demand for wafers from other markets you talked about autos.

We're bringing up capacity how quickly can you kind of move those wafers over to other markets. If that indeed becomes something you need to contemplate I realize that's not where you are today.

I think one of the biggest element of pivot of our company that we talked about in our road show in 2018.

Not just the markets we focused on.

But also to create fungibility in our capacity to how we invest how we think about our capacity and so it's fungibility.

We have corridor is the capacity that we could build in more than one location within locations. We try to make that capacity, we put on fungible for a couple of different nodes and features and so the specific specificity of any given opportunity has to be really.

We can fund its not just a one for one substitution of a particular note with a particular feature.

Thank you. Our next question comes from Chris Caso with Raymond James Your line is open.

Yes. Thank you.

Question about some of the capacity additions in the context of what you said about the.

The auto market.

<unk>.

That revenue being lumpy because.

Still in the process of adding capacity there could you give us some sense of.

And which end markets.

We expect capacity expansion to be the greatest over the next few quarters.

Imagine that the comments that you had about the end markets you expected to grow this year should be paired up with.

The areas on our processes and what youre going to begin investing capacity this year.

Sure.

As we've stated we've got a capex plan of about $4 billion. This year.

I'm going to use some rough and tough numbers, there, but about half of that Capex is is really related to our module 700 H in Singapore.

450, K annual wafers that we're bringing online.

Towards the end of this year, but really starting to produce some real revenue next year.

That facility it will deliver 40 nanometer all the way up to 90 nanometer.

<unk> facility to the one right next to it and so it helps free up some bottleneck capacity and its sister facility.

Through 65, and then of course, some capacity increases all the way down at <unk>.

12 nanometer in the Finfet corridor as.

As well as some some higher technologies that are specifically asked for from the market. Yes, Let me, let me a little bit color around that too.

It's worth noting.

<unk> doesn't put capacity on for Jeff do you have put capacity on for our customers. So when you think of.

Our marketing attention. These these growth markets that are attractive to us we lineup not only our capacity because we line up our long term agreement to that capacity and so you're absolutely right. It's all self fulfilling where you hear us in these these end markets, where we have secular growth that we've concentrated on that's where I'd capacity, that's what we've signed up customers long.

Term agreements because that's the capacity our customers want it's not capacity put on Virginia Tom.

That's a great point and it's worth noting now.

That our customers have now signed up for more than $3 $5 billion of customer funding thats prepayments in access fees, specifically to bring online that capacity that they desperately need.

That's helpful. Thank you.

As a follow up I'm wondering if you could address.

Some of these issues of what's been referred to a structural under adjustment in the non leading edge nodes one of your customers.

Referring to that last night.

And I guess, we've been hearing it for a while you've been talking about that for a while about structural under investments is there any way to put any numbers on that and I think in the context of.

People being worried about macro conditions in end demand getting a sense of what the real gap is between supply and demand in the markets you serve would be helpful.

Yes, I think first let's talk about the capacity that's being put on in the segments. We play in just to make it simple to say 12.

A meter and above.

When we look at how we see the market growing in the high single digits.

And when we look at capacity, that's not only been announced would you actually see kind of activity going on.

We think capacity is not as.

As maybe matching the kind of growth rates, we want in an industry.

But that doesn't account for the fact that there is still a big gap and I think Thats why you hear about continued under investment and it's going to take a while to balance all of this I think that puts a little bit of resiliency in our business against any temporary softening in it from a global macro event, but we do not see in the areas we play a large.

Amount of capacity being put on relative to closing the gap to the demand and growing with the demand and Dave.

A little bit on the IDC report, we were just looking at that's right Tom.

It's not just us.

See the data the same way I think IDC recently released a report maybe in the last couple of months.

Over over demand or not enough capacity and so on.

It was off a smaller base. So when you added increment of capacity.

Thank you. Our next question comes from Mehdi Hosseini with <unk>. Your line is open.

Yes, thanks for taking my question.

Just trying to better understand how the mix is impacting your topline and gross margin and to that extent.

If you add speeds were up by 28% year over year, and 5%, Cuba Q can you, perhaps qualitatively or quantitatively typically help me understand how these <unk> been impacted by the change in the mix.

If you go first and then I'll.

Sure Let me let me just provide some some clarification.

Asps year over year were up 19%.

And volume was up 14% and that specifically first quarter 'twenty two to first quarter 'twenty one.

When we look at our Asps I think really the underlying question that you're really getting at and I'm going to defer a little bit here.

Is gross margin.

And really when you look at Asps and gross margin.

Youre really asking is how differentiated is your solution because the more differentiated you are the more value that you create while the more value that you can capture.

So I think there are we don't specifically guide by end market segment profitability, but I do think that you can look at some milestones you can look at some proof points and you can point them directionally towards increased profitability I think one would be.

Single source.

Design wins in single source revenue so as Tom mentioned in his commentary single source revenue grew year over year. That's Q1 2022 to Q1 'twenty, 148%.

Single source revenue is about two thirds of our total GFS revenue single source design wins about 80% of our design wins are single sourced and so regardless of which technology platform Youre looking at for GF, whether it's SPX or siggi, our RF soi and the other platforms that we have the more content to more.

<unk> brings the better the asps the better the gross margin Tom is there anything you'd add to that yes, that's exactly where I was going to go I think this idea of that.

Leading indicator is design wins and that's running at an 80% at least it was we.

We talked about in our Roadshow last year and now Youre starting to see the revenue flow through to that higher bar.

Single source business, which.

<unk>.

These typically are our bread and butter and are more accretive business.

Okay.

Actually.

Hugh.

You're saying my question better than I could have trimmed it and the point here is the value created and Thats.

Some of the specialty substrate that you offer your customer and your single source.

As I look into next year.

That mix, probably would increase as Siggi would increase maybe some silicon photonics with the start materializing and I think that's when the concern or excess supply for bulk silicon at or above 12 nanometer would go away because it's just a mix shift that is going to accelerate it.

Into next year is that the right way to think about the model.

Yeah. The way that we think about our model is we want to bring differentiated solutions to the marketplace and we believe we have some real franchises that are differentiated and so as our single source business grows as our design wins grow in single source, we drive a higher penetration of single source through our business that becomes more accretive to that.

Thank you. Our next question comes from Matt <unk> with Wedbush Securities. Your line is open.

Hey, Thanks for taking my question I want to touch upon I think something that he was asking about and also Chris.

In terms of new technologies.

With Mdx was it always the plan to start a second corridor in Dresden or did you pull that forward.

It sounded like there's more demand there and potentially that's a greater portion of your mix moving forward than you might have planned.

You're right in assuming that at least have some positive implications for margins and then similarly, when youre talking about silicon photonics and revenue doubling this year.

Is there a point, where you see silicon photonics, becoming a meaningful portion of revenue.

And then again at that point am I correct in assuming that as some positive implications on the gross margin side.

Thanks.

Yes, let me start David and you can add.

Okay.

Let's start with the Silicon Photonics, we have a healthy market share in silicon photonics to about a $250 billion.

250 million sorry.

Yes.

Segment, and we see that growing.

$1 billion or so over the next five years and if anything we see more market share in that and that that not less and so that is an opportunity for us for both growth and more differentiated.

Profitable growth.

You said about <unk> and moving the corridor is actually is from Dresden to New York, It's not the other way around and you say was that always the plan, but our strategy for our company is.

As for wherever it makes economic and capital expansion.

To have at least two sites to be able to build the same type of capability.

And so we've always had a plant somewhere we want to put 22 FD extra question is at any given time, whereas the right place to put that in our today, our fab eight facility represents a great opportunity, but best use the <unk>.

Dorothy capability that defines the features of the of the technology. It's the next best place for us to put and build that second corridor here and so when we think about it again, it's not just.

Yes, I think I'd, just add that look at Rfps.

In the future on <unk> to be able to satisfy the demand there and then as Tom mentioned on the Silicon Photonics side, we have the majority share in that market. We're the only one with a monolithic.

Integrated solution in that space and we have the majority share in roughly what's the $250 million market today and.

Okay.

Our next question comes from Chris <unk> with Cowen <unk> Company. Your line is open.

Yes, hi, thanks for taking my question.

Tom.

Big Picture question for you have been in the semiconductor industry long enough youll seen many cycles.

So, let's just assume there is a macro correction of the question.

Im curious where would we see exports in your global business would it be what corn auto Iot.

Where would you see it both and then I had a follow up.

Yes.

We've never getting the debate will it be it won't be a cycle I think we could talk about the cycles. If it is it's going to be a macroeconomic driven event.

It's probably going to be shorter in duration and less in depth given the.

How tied semicon dessert to the world economy.

I think where you're going to see.

First would be a consumer led it would be a consumer led event for a macroeconomic event and then it would be consumer led on the on the <unk>.

The semiconductor side and I think that touches a lot of the end markets we spoke about.

Yeah got it got it okay, and if I could just chime in.

When when I think about future visibility because there is an element of this question that that when I get it I think about future visibility ray well.

2022.

Now.

Their balance sheet at work to be able to deliver capacity increases.

The market needs and so I look at this environment and I think our visibility is has never been stronger.

Look at the customers and their engagement with us on increasing capacity and I'm just I'm just really encouraged by the single source design wins and the partnerships that we have with our customers across all of our technology, which manifest itself. If we have to deal with.

A macro event.

Some soft softening in industry will be able to work in a partnership with our customers on how we get through it together.

Got it got it Super helpful, Tom and David just as a follow up.

Some of the foundries have spoken about raising prices for next year and given the project getting completed so lucky of LTE that we spoke about the pencil <unk>.

How should we think about pricing for global fundings in 2023.

David you start and I'll, let.

Sure.

I just mentioned as I mentioned, we had we have incredible visibility into 2023 really on the back of those lts that we've signed I think more recently, we've seen actions in the market by some of our peers to increase prices specifically related to inflation for example, that's something that.

We started speaking to our customers about in early Q2.

<unk>.

Pricing in our contracts allow for that Tom anything you'd add remember how we got here, we talked about why was 2022, the year, where you'd see the higher asps.

And we see because we're striking those deals in 2021, and we wanted to give our customers a chance to balance their business to accept that and this is no different here as we're passing along these inflationary pressures were doing it in a way to give our customers the chance to to mitigate it in their own P&L. So I think thats. The way you should think about pricing, we had a step function increase in.

Pricing and then the passing along of inflationary increases and I think the market broadly has kind of communicated that those inflationary increases would be somewhere between five and 10%.

Thank you our last question comes from Raj Gill with Needham <unk> Company. Your line is open.

Yes, Thank you and congrats on the good results.

I appreciate your kind of providing some some commentary about the inflation and what that impact will be on the revenue I think you said less than 2%.

I was just wondering.

What are the assumptions and how you're kind of getting to that number I would assume it's based on obviously your long term agreements and then some sort of analysis based on.

On those agreements, but just curious how you are kind of coming to the conclusion that if there is kind of Christmas and inflation.

Less around a 2% impact on revenue.

Sure Rajeev.

When I mentioned, 2% of total revenue is really the impact on the P&L itself. So.

<unk> and our labor pay and of course, we were hedging against some of the commodity exposure that you have on input prices and to enter your energy sources and so from all of those things. We believe that the inflationary pressures in 2022 will have a very minimal impact.

<unk> on our net P&L by the time you get to the bottom line. So that was the that was what we were communicating with that statement in our prepared commentary is minimal impact from inflation inflationary pressure on our bottom line in 2022 and that doesn't take into account passing any of that that does not take into account passing any additional inflationary increase.

Onto our customers.

Right.

Well I think it was an important point to make to to try to address some of those investor concerns and just for my follow up in terms of the gross profit fall through.

There was a question from a previous analysts that there was a 100% gross profit fall through from Q4 to Q1.

It looks like Theres going to be about 81% gross profit fall through into Q2 based on the guide and then kind of saying kind of moderating around 60 60 ish.

Just curious when you when youre looking at kind of a 60 60 number.

Does this kind of.

I guess factor in obviously your ASP agreements.

Certain level of fixed cost absorption or mix shift what would be kind of the upside drivers too.

That 60% gross profit fall through because you've been exceeding that the last couple of quarters.

Thanks, Greg.

The 60 ish percent number that I gave you is really a steady state number. So thats over time, you can expect essentially variable fall through which ranges between $68, 65% I think near term kind of quarter to quarter right. We've talked about this fixed cost absorption and where you can you can increase.

Number that I was quoting kind of 60 to 68, 5%. That's the type of variable fall through that you can expect once we hit steady state.

Thank you I would now like to turn the call back over to Susan <unk> for closing remarks.

Thank you Ken Great. Thank you everyone for joining us. This afternoon, we look forward to meeting you on the conference circuit this quarter have a good evening.

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

Q1 2022 Globalfoundries Inc Earnings Call

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