Q1 2022 Globalfoundries Inc Earnings Call
Thank you for standing by and welcome to global Foundries second quarter fiscal year 'twenty to 'twenty two earnings conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
I would now like to hand, the call over to head of Investor Relations Sookie. Yes. Please go ahead.
Thank you operator, and good morning, everyone and welcome to Globalfoundries second quarter of 2022 earnings call on the call with me today are Dr. Thomas Coffield, CEO and Dave Reeder CFO .
A short while ago, we released <unk> second quarter 2022 financial results, which is available on our website at investors <unk> com along with.
Today's accompanying slide presentation.
This call is being recorded and a replay will be made available on our investor Relations webpage.
On this call we will present, both ISR S and adjusted non Ifr as financial measures. The most directly comparable <unk> measures and reconciliations for adjusted non <unk> measures are available in today's press release and accompanying slides.
I would remind you that these financial results are unaudited and subject to change certain statements on today's call may be deemed to be forward looking statements such statements can be identified by terms such as believe expect intend anticipate and May you.
Should not place undue reliance on forward looking statements actual results may differ materially from these forward looking statements and we do not undertake any obligation to update any forward looking statements we make today.
For more information about factors that may cause actual results to differ materially from forward looking statements. Please refer to the press release, we issued today.
As well as risks and uncertainties described in our SEC filings, including in the 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 the current business environment, an update on our capacity expansion in technologies, following which Dave will provide details on our end markets and second quarter results and also provide third quarter guidance. It.
We will then open the call for questions.
We request that you please limit your questions to one with one follow up.
I'd also like to remind you that our first capital markets day, we will be taking place in New York City Tomorrow. If you would like to attend in person. Please email IR at <unk> Dot com in order to be registered for the event.
I'll now turn the call over to Tom for his prepared remarks.
Thank you Suki and welcome everyone to our second quarter earnings call.
I am pleased to report <unk> results that were once again ahead of guidance that we provided in may.
As we continue to make significant progress on our strategic and financial priorities.
Amidst a challenging macroeconomic environment the <unk> team.
<unk> thousand strong continues to execute each and every day.
So let me start with providing a brief update on the current business environment.
Similar to others in the industry, we are seeing some areas of the market beginning to rebalance supply and demand.
Including end markets, such as low end handset piece.
Pcs and in general the lower end of consumer electronics market.
Although we've experienced some decrease in some pockets of our unconstrained demand. The total demand for <unk> solutions remains robust and capacity continues to be oversubscribed.
Specifically, we continue to see healthy demand in fast growing end markets, such as home and industrial Iot.
Emotive communications infrastructure and data center.
If you recall, we previously mentioned that we started this year oversubscribed.
With demand that was 25% higher than available capacity.
Today demand continues to outpace our ability to supply by about 10%.
We remain oversubscribed for 2022, and 2023 and given the increasingly single source nature of our business we.
We expect to continue to grow revenue and profit through the remainder of this year and next.
In the second quarter.
<unk> revenue grew 23% year over year, driven by increases in both wafer shipments and ASP.
This coupled with strong operational excellence.
Resulted in significant improvement to adjusted gross margin.
We reported adjusted gross margin of 28% in the quarter, a 12 percentage point improvement from a year ago period.
As a result, we delivered earnings per share of 58.
Which was <unk> <unk> better than the high end of our guidance.
David will give more color on the financials in a moment, but let me now provide you with a brief update on some of our recent customer and partnership activity.
At the time of our IPO last year, we had signed long term agreements totaling approximately $20 billion of revenue now.
Now about one year later, we have 36 customers under long term agreement with revenue totaling approximately 27 billion.
And prepayments and access fees totaling about $3 6 billion.
Yesterday.
On the heels of the U S chips Bill being passed.
We announced the extension of our long term agreement with Qualcomm that adds more than $4 billion in incremental wafer purchases from our fab facility in upstate New York.
With this extension the long term agreement with Qualcomm now represents more than $7 billion in global revenue through 2028.
Since the beginning of the year, we've secured approximately $6 billion incremental new long term agreements with our customers.
All of these new agreements as well as extensions.
Two existing long term agreements are 100% single source business.
In fact single source revenue in the first half of 2022 outpaced overall revenue growing 37% year over year.
And 90% of the first half design wins were single sourced as well.
In the quarter, we also signed a definitive agreement with SD micro to create a new jointly operated 300 millimeter manufacturing facility adjacent to <unk> existing 300 millimeter facilities in <unk>, France.
With this agreement and combined with our capacity increase in Germany.
We'll be tripling capacity in Europe from 2020 through 2028.
This partnership with S. T enables <unk> to add capacity.
Hi, Lee capital efficient manner backed by grants from the French government as well as customer prepayments.
Finally <unk>.
Let me provide a brief update on some of the important technology milestones we achieved this quarter.
In the second quarter.
We completed nine technology qualifications.
We are extremely pleased to have released our 'twenty two MTX plus platform.
This platform offers greater than 25% power reduction.
Thereby enabling a technology roadmap to further improve power and performance optimization for many of our customers Iot applications.
Additionally, we have now fully qualified our highly differentiated 45, CLO photonics solution.
Which we just recently announced at the optical fiber Communications conference.
We have over a dozen customers currently developing prototypes in preparation for volume manufacturing in 2023.
We believe <unk> photonics solution is the only 300 millimeter monolithic integration of electro optical components in our industry, we're combining soi Cmos and photonics and a single chip solution.
Lastly, we released to production the industry's first 55 nanometer in <unk>.
Bedded nonvolatile memory solution for power management that will be adopted in new releases of premium tier handsets.
To summarize I am pleased to report another quarter of solid execution, as we deliver to our customers and all our stakeholders.
We continued to demonstrate steady momentum across our business.
We're making significant progress towards our long term business model.
Now before I hand, it over to David <unk> I.
I would like to let you know that normally I would be participating in the Q&A session. Following our prepared remarks.
But I'm currently in Washington D C.
Witness the signing of the chip spill at the White House.
This landmark legislation will have a profound positive impact on our nation, our industry and GF for years to come.
I am looking forward to seeing many of you at our capital markets Day in New York City Tomorrow.
With that over to you Dave.
Thank you Tom and welcome to our second quarter earnings call for the remainder of the call, including guidance I will reference adjusted metrics, which exclude stock based compensation.
Our second quarter results exceeded the high end of the financial range, we provided in our last quarterly update second.
Second quarter revenue was approximately $1 99, 3 billion, an increase of 23% year over year.
We shipped approximately 630300 millimeter equivalent wafers in the quarter, a 6% increase from the year prior period.
Average selling price ASP per wafer increased approximately 16% year over year, driven by ramping long term customer agreements with better pricing, a constructive transactional pricing environments as well as continued improvement in product mix.
Wafer revenue from our end markets accounted for approximately 92% of total revenue.
Non wafer revenue, which includes revenue from radicals nonrecurring engineering expedite fees and other items accounted for approximately 8% of total revenue for the second quarter consistent with our expectation.
Let me now provide an update on our revenue by end market.
Smart mobile devices represented approximately 49% of second quarter revenue growing 14% year over year.
Growth was driven by higher Asps and better mix as we continue to increase our silicon content in the premium tier handset market.
And the RF front end, which is the largest segment of our mobile business.
Growth was relatively flat year over year.
However, our industry, leading 300 millimeter RF Soi platform that is widely used in the premium tier handset market continues to increase as a percentage of the total front end mix, which is accretive to our business.
For 2022, we are on track to grow our premium tier five <unk> revenue by more than 35% year over year offsetting the modest decline we see in low end handsets.
Additionally, in this end market, we are growing our silicon content, mostly due to gains in RF transceivers.
Ex audio Ics and image sensor processors.
Growth in these submarkets are all trends, we expect to continue throughout the year.
Revenue for the home and industrial Iot market grew 72% year over year, representing 17% of total revenue stream.
Strong year over year growth in this end market was driven by wafer volume growth of almost 40% better asp's and improved mix Jeff.
<unk> strength and feature rich technologies that are focused on superior wireless connectivity performance at the lowest possible power consumption has enabled our growth in the home and industrial Iot end market.
Within this end market, our wireless connectivity solutions saw significant growth due to the accelerated adoption of R 22 Ft X technology for Wi Fi six applications.
We're also seeing strong traction for our Iot microcontrollers, so that feature embedded non volatile memory for a number of smart card applications, such as digital payments access control and electronic Ids driven by features such as connectivity speed security and a growing touchless transaction environment.
Additionally growth in our Iot end market is also being driven by our differentiated power and analog technologies for applications such as factory in building automation as well as test measurement and security.
We are on track for <unk> industrial Iot to be the fastest growing market for <unk> in 2022.
Betsy next on automotive revenue in this market was approximately 4% of our total second quarter revenue and grew approximately 34% year over year, driven by the ramp of new products in <unk> safety and infotainment.
As we have previously indicated our growth in this market will be lumpy as we are constrained by how quickly we can build capacity.
As capacity comes online, we will be ramping new products, enabling automotive electrification and safety as.
As a result, our automotive business is on track to grow more than 25% in the second half of the year versus the first half of the year.
Next our communications infrastructure and data center end market comprised approximately 17% of second quarter revenue and grew approximately 50% year over year.
Growth was driven by a combination of higher shipments higher asps and better mix, our strongest year over year growth is within the data center submarket or.
Our customers are continuing to grow in market share in this segment NGF as contributing by providing critical connectivity and Iot components.
We also grew revenue modestly in all of our other submarkets, including optical networking and wired wireless infrastructure.
And as expected our compute end market declined year over year and comprised approximately 5% of total second quarter revenue.
We expect this end market to be less than 5% of our total 2022 revenue.
After a trough in Q1, we are now seeing a modest uplift in revenues following the finalization of a design with a major PC customer.
Moving to gross profit.
For the second quarter, we delivered adjusted gross profit of $559 million, which translates into approximately 28% adjusted gross margin.
One 5% increase year over year was driven by better fixed cost absorption higher asps and improved mix approximately 80% of this improvement was attributable to asps and mix with the remaining 20% attributable to volume and fixed cost absorption.
Operating expenses for the second quarter were better than expected and represented approximately 10% of total revenue R&D.
R&D for the quarter was down sequentially at approximately $112 million, while SG&A came in at $97 million.
Total operating expenses were $209 million, excluding $32 million of stock based compensation.
Q2, total operating expenses decreased approximately $17 million from a year ago, largely due to lower startup costs associated with fab expansion projects as well as lower head count costs.
Jeff delivered operating profit of approximately $350 million for the quarter, which translates into an approximately 18% adjusted operating margin roughly 15 percentage points better than the year ago period, and $45 million higher than the high end of our guidance range.
Second quarter net interest expense was approximately $19 million and we incurred a tax expense of approximately $30 million in the quarter.
We delivered second quarter adjusted net income of approximately $317 million, an increase of approximately $350 million from the year ago period.
As a result, we reported adjusted earnings of 58 per share for the second quarter.
We delivered record second quarter, adjusted EBITDA of approximately $784 million.
Adjusted EBITDA grew $318 million year over year on $373 million of incremental revenue growth, representing approximately 85% fall through.
Let me now provide some key balance sheet and cash flow metrics.
Cash flow from operations for the second quarter was $609 million gross capex for the quarter was $812 million or roughly 40% of revenue.
At the end of the second quarter, our combined total of cash cash equivalents and marketable securities stood at approximately $3 3 billion, an increase of roughly $2 5 billion from the previous year.
Before I transition to Q3 guidance I briefly wanted to update you on the current inflationary environment and its impact on our business.
Last quarter, we provided you our view on inflation and the headwinds we are facing in our business, especially with respect to materials energy and labor costs.
While we have experienced a slight uptick in cost for materials and energy in Q2, we continue to estimate the impact of these inflationary costs to our full year results to be less than 2% of revenue.
Next let me provide you with our outlook for the third quarter. We expect total GF revenue to be between 2.0, $3 5 billion and 2.065 billion.
Of this we expect non wafer revenue to be approximately 11% to 12% of total revenue.
An increase in design wins and the corresponding customer tape outs should result in sequential third quarter radical revenue.
Growth of more than 25%.
We expect adjusted gross profit to be between $580 million and $609 million, we expect adjusted operating profit to be between $347 million and $381 million exclude.
Excluding share based compensation for the third quarter, we expect total opex to be between $228 million and $233 million.
We expect a sequential increase in operating expenses to primarily be driven by higher <unk> and <unk>.
Other administrative costs.
At the midpoint of our third quarter guidance, we expect share based compensation to be approximately $42 million of which roughly 21 million is related to cost of goods sold and approximately $21 million related to opex. We.
We expect net interest expense for the quarter to be approximately $15 million and tax and other expenses to be roughly $24 million.
We expect adjusted net income to be between 324 and $356 million.
And we expect DNA for the quarter to be about $405 million of which 90% is related to cost of goods sold.
On a fully diluted basis of approximately 551 million shares we expect adjusted earnings per share for the third quarter to be between 59 and <unk> 65.
We expect adjusted EBITDA to be between $775 million and $813 million.
As we mentioned on our earnings call last quarter for the full year 2022, we expect total gross capex to be less than 4 billion impacted by the well known delays in capital equipment.
Despite the slight delay we are on track to meet all of our customer commitments for the year.
In summary, strong operational execution enabled us to deliver second 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 continue to methodically execute our plan with that let's open the call for Q&A operator.
Thank you again to ask a question. Please press star one one on your telephone to ask a question or.
Our first question comes from the line of.
Harlan sur of Jpmorgan. Your line is open.
Good morning, congratulations on the team support I'm, hoping to get the chips build over the finish line and also the strong quarterly execution.
You guys came into this year as you mentioned with demand about 25% higher than your ability to supply I think last earnings call you guys talked about a one <unk> book to Bill ratio clearly as you mentioned the demand environment has weakened especially in the areas that are encompassed in your smart mobile then you compute segments, which is about half of your revenues.
But on the flip side you guys do have fungibility impressive technology and capacity by geography. So there is some slack for your business, particularly hit on demand.
With demand looking like it's normalizing a bit lower trending about 10% above supply.
You can just help us think about how much demand has dropped before you have to modulate your utilization or your forward capacity expansion plans.
Good morning, Ireland exciting exciting day here in New York City antibody, Dan and Washington, where Thomas.
Since he could be with us today, but given the choice of being on this phone and being in the White house for the signing of the chips fell I think he chose wisely.
Okay, let's start seeing you tomorrow at capital markets day with respect to demand, we're still over a course of meaning.
Meaning.
The demand outstripped, our supply and that is true for 2022 and 2023 as well.
We cover this in more detail tomorrow, but given that it's August already our order book for 2022 looks good and it's largely complete so our revenue visibility remains solid and to the extent, we see customers that want to rebalance.
Trading up rebalanced towards richer more accretive mix for global foundries.
So demand demand is still strong did you have a follow up.
Yes.
Selection of some of the weaker segments and I know you have fungibility, we know that we know that one of your RF customers has been impacted by the weak domestic smartphone market I think this customer actually took a charge against their cogs in the June quarter, and most of that charge was due to wafer shipments that were going to fall below the minimum threshold of wafers.
Under the long term agreements with you. So the good news is that the take or pay is clearly working for you. This customer is sole sourced with you they've made prepayments. So they clearly see the differentiation that you bring to their products now there and renegotiations on the LTA with you and if we assume that the demand environment will probably continue to weaken.
Maybe.
You may be have more customers that have to renegotiate the terms of their lta's.
Given the clear differentiation you bring to your customers is it fair to assume that pricing has not been negotiating negotiated but it's primarily around prepayments duration or volume of the LTE that is being renegotiated.
Yeah.
Right Harlan the pricing environment is still very constructive.
Given inflation and still the shortages that we see with respect to capacity.
Really expect pricing environment change in their future and then finally I think piece I would add is that if you were to look at a 5% drop in utilization. We've mentioned before that if you have a 5% drop in utilization than you typically see just a couple of points call. It two points or so impact to gross margin, but if you can.
A five point decrease in Asps.
That's five points that flows all the way through so I think given all things that I just mentioned strong end market demand.
Very instructive pricing environment still inflation.
It continues to hit the global economy, it's it's difficult to see and invite environment in the near future.
Where pricing becomes a concern.
Great. Thank you.
Thank you. Our next question comes from Vivek Arya of Bank of America Vivek. Your line is open.
Thanks for taking my questions for my first one just a clarification on the Q3 outlook.
If I exclude the increase in the non wafer revenue. It suggests wafer sales could be kind of flattish to somewhat down sequentially I imagine, that's probably because of the smartphone market, but I. Just wanted clarification on how you are thinking about the interplay of wafer shipment and ASP in Q3.
And if you could maybe give us a little bit of color on how you were thinking about it extending into Q4.
Versus what you thought for the year originally.
Sure as you know, we're currently constrained from a supply perspective.
We are expecting wafers to increase sequentially from Q2 to Q3.
So no change in our plans that we had talked about.
Our wafer shipments last year were about $2 4 million wafers wafers will grow to about $2 6 million wafers. This year and then it's about $2 8 million wafers and 2023 and so all of those plans remain on track, we expect to grow sequentially.
Sequentially.
From Q2 to Q3 and actually from Q3 to Q4 for that matter and well into 2023, so from that from that perspective, I still feel quite good about the trajectory there.
Missing.
So we don't talk a lot in detail about pricing if you were to look at.
How we performed this quarter.
23% year on year growth Q2, 'twenty to Q2 'twenty one.
That 23%.
6% was volume growth and about 16% with ESP as.
As we look from Q2 to Q3, and we look year over year from Q3 'twenty to 'twenty. Two we expect similar trends to continue did you have a follow up vivek, yes think of it.
I know, it's probably you'll talk more about.
Expectations for 2003 and in the longer term tomorrow at the capital markets day, but as you look at the.
The capacity announcements that you and several of your peers have been making.
Do you think Dave that from an industry perspective pricing will be a headwind or tailwind in calendar 'twenty three.
Yes, well actually let me break that into two parts.
Global foundries, we don't put past city on for ourselves when we add capacity, we are adding capacity in partnership with our customers. So we have customers that are signed <unk> with two 7 billion now as we mentioned more than 36% or 36 customers.
Roughly $3 $6 billion of customer funding Thats actually comped at Ges.
Be able to expand that capacity so the capacity that we're putting on we're putting on at the test of our customers and in partnership with our customers and as you've seen more recently.
With with governments.
In terms of are we concerned about.
Pricing.
They come into play as more capacity is added about two thirds of our ships are actually single source.
Wafer shipments and about about 90% of our design wins are actual single source design wins and so so we're not we're not putting on generic capacity for the market, we are putting on capacity and partnership.
With our customers. So we feel quite good about that we feel like pricing environment remains quite constructive.
See that as being disruptive not only today, but also 2023.
Thank you Dave.
Thank you. Our next question comes from the line of Ross Seymore of Deutsche Bank.
Your line is open.
Ross you there.
Perhaps can you maybe on mute.
Operator, why don't we go to sorry.
So sorry, Ross Seymore your line is open.
Can you guys hear me.
We can in our us.
Okay.
I'm not sure what happened.
So I want to go back to the LTA side of things. Obviously, you guys are doing a good job of enforcing them, but as we start to see more companies write down your customers or any fabless companies wiped down.
Their own part of that equation.
Wanted to have you walk us through the mechanics of how you handle a slowdown in demand I get that you are single sourced but at some point and demands on demand and if they don't need the volume.
You can force them to take it but they don't need that inventory, either and I would imagine that would hurt the relationships. So just talk a little bit about how the negotiations go and the demand weakens.
How you adjust the various levers whether its unit pricing et cetera. So I think thats, what investors really want to get confidence as they look forward to a potentially slowing macro economic environment.
Sure.
I think the first thing that we'd Ross when we have a customer I mean, as you know <unk> and.
And market and very customer focused here.
And so the first thing that we do is we recognize that the LTA creates a framework for us and the customer to have a Frank discussion.
And so because we have more demand than we add cap supply today, we've been able to have those discussions with customers that want to rebalance their.
Their commitments a little bit we've been able to negotiate with those customers be able by and large to be able to satisfy.
The reduction in some of their demand and then replace it with business Thats actually more accretive to us and so to the extent that we can do that we don't we don't charge our customers for.
For <unk>.
Capacity that was underutilized, if we're able to replace it with demand from another customer so having a broad base diverse base of business in automotive and Iot and data center comps structure in data center, that's really enabled us to be able to accommodate some of these rebalancing that you can.
See in the marketplace.
Practically how do we handle that we sit down with our customers. We talk about what their end market demand looked like we talk about the duration of the LTA is going be extensions of El <unk>, We talk about re bouncing of their portfolio. So if they have some pockets of demand that are doing better and they have some pockets that are we.
Or being able to rebalance those pockets to meet their end market demand and so really it's a framework for us to sit down and have a negotiation and your design wins.
And new design wins as well for their next generation of business.
Another element.
Yes.
Did you follow up Ross.
Yeah, I just wanted to ask about.
The gross margin side of things and more specifically some of the units versus the wafer units versus Asps side. I know you guys don't guide overtly by those metrics each quarter, but it seems like if the units are going up and your third quarter.
Fees are actually going to go down a little bit at the midpoint I think thats. The first time you implied asps.
Dropped sequentially.
Since you've been public so can you just walk us through maybe the third quarter in the second half what would be some of the puts and takes on that is that just an end market dynamic is it non wafer revenue dynamic any of the moving parts there would be helpful.
Sure.
First.
The correlation between Asps and gross margins.
They don't always hold through in all instances. So sometimes you can have a different product actually has a higher gross margin even if it has a lower ASP.
So from that perspective, it's really product byproduct related and probably more directly correlated to the amount of features from Globalfoundries. This is actually included in the product with respect to the health of the gross margin.
Sequentially from Q2 to Q3, I am looking at pricing and I would say ASP per wafer looks pretty flat I mean, it's a flattish profile, we've got a little bit more amp and volume from Q2 Q3 than we had from Q1 to Q2, but I would say pricing remains relatively.
Flat from quarter to Kurt and I expect to actually increase as we progress throughout the year. So that implies fourth quarter increase so so I think youre seeing from my perspective, again kind of a gross basis, if you will ASP per wafer.
Relative flat volumes growing we expect the profitability from a gross margin perspective to continue to grow so all in all of the progression from Q2 to Q3 looks it looks pretty good.
Thank you.
Thank you again to ask a question. Please press star One star one on your telephone again Thats Star one one on your telephone to ask a quick question. Our next question comes from the line of maybe Hudson side.
<unk> media has seen.
Line is open.
Thanks for taking my question I have a couple of them.
And I apologize I joined the call late but did you discuss as to what drove the Cogs in.
In the June quarter down on a sequential basis.
We didn't we didn't discuss in detail, but a lot of that is due to product mix.
And then of course, we get better absorption. So as we do ship more volume, especially on a year a year over year basis. What you did you start to see is fixed cost absorption that kicks in in a pretty meaningful way and.
And so from that perspective, that's something that we've been talking about for a long time and we continue to experience that in the second quarter and we expect that to continue in fact, all the way through 2023 as we continue to ramp our volumes from $2 4 million last year to $2 6 million wafers. This year to roughly $2 8 million wafers in 2000.
Did you have a follow up yes, and I'm not going to ask.
Actually on Opex, and I don't want to take anything from Tomorrow governors, there, but should we just work with the.
Modeling should we assume that opex into Q4 December .
It'd be kind of two four years.
On the Q over Q basis.
Yes, we tend to guide one quarter at a time, but what we've talked about.
For the entire year is that Opex in total Russell play around the 12% range to a percent of revenue roughly equally split between between R&D and SG&A.
That should give you some color on how we think about the whole year and I don't think Q3 or Q4 would be tremendously different than that.
Got it thank you.
Thank you. Our next question comes from the line of Krish Shankar.
Cohen.
Christian Carr your line is open.
Hi, there. Good morning, this is Steven calling on behalf of Krish.
Questions first I just wanted to.
So that was more on the customers that are currently.
Rebalancing inventories.
I guess from your perspective.
Any estimates on duration.
The rebalancing process is it.
Like a one or two quarter, perhaps a bit more extended.
Net tuition.
I think what we're seeing and I'm speaking broadly here, because we're really not seeing a lot of it.
But what we are seeing is.
Modest rebalancing I would probably characterize it as 10 ish percent, maybe 15 ish percent, but in that ballpark.
It tends to be a way for markets that are heavy consumer and that tends to be just kind of lower in nature and the business that it's being replaced with its being replaced with automotive business, it's being replaced with business associated with data center infrastructure and Comms and then of course home and industrial.
Iot those business.
Continue to perform quite well as you saw on our <unk> and our second quarter, we expect that to continue throughout the year.
Did you have a follow up.
Yes.
If all the headwinds that for Q3 revenues specifically the reference.
Around hydro reticle revenues within your.
Non wafer.
Business.
Is there any color on like the concentration of customers maybe.
The end market where.
The higher medical activity coming from them and win.
<unk> revenues.
Ramping for those.
As it relates to critical.
Sure.
From a design win perspective, you really to design wins in <unk>.
Youre seeing those both progress pretty nicely so to the extent that it's an LTA associated with new products. Then obviously you need you need the radical.
And the non wafer revenue to grow to be able to satisfy those LTE, a and then of course, the corresponding design wins.
So those are all kind of move in tandem. So it's no surprise really that youre going to get these quarters, where you have some heavy development activity to then be able to fuel that future revenue growth.
Specific areas that are growing typically don't talk too much about that from quarter to quarter. There is a segment in Q3 aerospace and defense. That's an area that is specifically growing in a meaningful way in third quarter, particularly for radical revenue.
So that would be one area, that's driving that increase sequentially from Q2 to Q3.
Great. Thank you so much.
Thank you. Our next question comes from Tristan.
Bear interesting Gary your line is open.
Great. Thanks. This is Tyler on for Tristan can you describe the important.
The SD soi process, notably in Evs, and maybe as it relates to that any additional color you can provide on the recently announced European investment and partnership with S. T micro.
Sure.
So from an FD Soi perspective.
So in general we believe that we're actually the leader in the Soi space, So whether youre, referring to RF soi or fully depleted Soi technologies. We believe that we are the leader.
To bring those technologies to market and certainly the foundry leader for those technologies.
The importance of fully depleted.
<unk> are many fold, but I'll just I'll try to touch upon the big ones for us we manufacture our fts technology on 20 nanometer. So you have very good digital can be power.
So your digital computations quite bad and then you also have the best in class Power management. So you have best in class power management with very good digital compute and then you layer on with that connectivity capability. Both the millimeter wave and then some of the RF characteristics and you really have platform.
It is ideally suited for anything that need power management, where advanced connectivity and those are the markets that are actually we're winning them with regards to our <unk> are as you say are fully depleted soi technologies.
So that an ounce meant that we made in France.
Seems like a long time ago, given how does the second quarter was for us and how good second quarter was for us, but it was only a couple of weeks ago that announcement was really about growing our capacity to be able to service design wins and the <unk> that we have on our <unk> technologies and those specifically related to.
Iot devices connectivity devices, and more and more frequently automotive devices. So those are all areas related to power management connectivity and then some millimeter wave Haven, an Ottoman driver assist and other things in the automotive segment.
The benefit in that technology.
Great for my follow up without jumping the gun on your capital markets Day Tomorrow, how should we think about the impact of the chip Sac on your capex into 2023 and beyond.
Yes, let me.
Let me answer that question a bit more broadly and then I'll come back to it but let me let me, let me be a bit more broad on the.
Globalfoundries.
As a trusted company.
We are wearing gauged in Singapore with the economic development Board Singaporean government.
Engage with them with our customers to grow past city in Singapore, we've been engaged with Germany for a decade and in the EU to grow our capacity in Germany for over a decade engaged with <unk>, there and we continue to expand our capacity in Germany effects. In fact, we're increasing it from 300 wafers per year to 850, K wafers per year.
And then of course, you mentioned in France, and France were engaged with the French government now trusted by the French government.
To engage with them as an extension of our Dresden facility to increase our capacity.
Lee from zero to about 300, and CK wafers per year, and then of course here in the U S. We're trusted foundry for the U S government and Thompson from Washington today, signing the chips.
So we're a trusted company both by our customers and by governments.
And by signing the chip what that enables us to do is in partnership with our customers we will.
Look at our investments at opportunities to grow also.
Within the four walls today extend our tooling.
And we've also done a lot of project work so that ultimately when our customers are happy with their commitments when the governments worked out the details for how the chips that we deployed.
And of course global fans will be there with approach already project. When all three of those criteria are met then we will sit down and we will figure out the next steps for our investment here.
Customers are happy with their commitments when the governments worked out the details for how the chips that we deployed.
First global fans will be there with approach already project when all three of those criteria are met then we will sit down and we will figure out the next steps for foreign investment here in the U S for a new greenfield capacity.
Great. Thanks for taking the questions.
Thank you. Our next question comes from Ross Ventura, Joe Joe of Needham.
Your line is open.
And congrats on the solid results good results.
I'll follow up on the <unk>.
I'm, just trying to get a sense.
Again, how you kind of navigate through that.
Potential slowdown, particularly in the smartphone market there's been many.
Forecast that had been revised down for the overall smartphone market, particularly <unk>.
<unk> foam is anywhere between 150 to 200 million units. This year have been revised down that's going to affect the forecast for 2023.
You obviously generate.
A large percentage of revenue from the mobile phone market through a variety of customers. So I am curious I know you haven't seen it yet but is there any indication that a lot of your smartphone RF front end module customers.
As they look to.
The overall forecast next year are starting to.
Rebalance down their volume.
And let me break that starting a couple of sections.
Are there some high level numbers from what we see in the market and how we feel it handsets.
We think that quarter to quarter.
<unk> look at total global handsets are going to be down something in the magnitude of about 200 million units.
But if you look at what's happening under the covers.
So total handsets that <unk> all the assets down about 100 million units. That's the forecast from Q1 going into the forecast from Q2, but if you actually look at the five <unk> segment.
That forecast units actually went up in fact units went up about 5% the forecast for <unk> handsets went up 5% from Q wants you to say.
Yes.
Look at the market in aggregate and then you have to look at the market in detail and specificity and when you see the <unk> portion of the market and not only doing well, but I would expect it to do better in the second half of the year than in the first half.
What that implies for Jeff is that you have higher content in the front end module.
Of <unk> handsets, we have higher content, it's more accretive for us as a business and so what we're seeing specifically in front end module is that our growth in <unk> is more than offsetting the decline that we see in the medium and lower end handset.
And of course, you look around the front end module and Globalfoundries is winning sites. So we're weighing sites in power management, where we sockets and connectivity and we're also winning sockets and audio as well as payment devices and so you add all those things together and that's the type of growth that you get is 14% year over year.
And the smart mobile market when the rest of the market looked flat to down.
It's also important that youre engaged with as well I would say that there are there.
There are Oems and the end market that are doing better than others. So so mixing up with <unk>.
I need more sockets are taking share and then engaged with the right Oems that are doing reasonably well in this market all of that leads to the growth that you saw in the second quarter.
Yes, I appreciate that.
Yes, I appreciate the detail. That's helpful. Just my follow up you talked about in general the pricing environment, you are still constructive on it.
It's really.
It mainly a function of the inflationary environment in the supply shortage.
Maybe you can elaborate a little bit further.
When you talked about the inflationary environment on the cost side could you could you talk about that.
Cost of the equipment or the raw materials.
Leading you to continue to kind of pass on those cost increases.
And then any any sense in terms of the supply shortage for your raw materials is there any indication that in some areas is easing up or in other areas.
Still constrained.
Sure. So let me kind of take those in.
And in order here.
With respect to inflation.
Look I expect expectation is to pass along inflationary costs.
And when I think about inflation I think about materials I think about labor and I think about energy those are kind of the three big drivers for Globalfoundries from an inflationary environment perspective.
From a materials perspective, when we were signing our LTA is we were actually end market securing our long term supply and so from that perspective, we feel.
Reasonably well hedged on the material side, so that we have the materials at the right prices to then be able to satisfy the LTA, which ultimately will deliver.
Profitability that we've committed to the market. So we feel pretty good about materials, but they are type materials.
The environment is tight theres not a lot of available capacity in the market. So the materials materials Mitchell's environment is tight.
From a labor perspective.
We continue to execute very very well on labor.
We have some variable cost structures in place us when were out we out performed like it did in Q1, we did in Q2, we expect to do again in Q3 than our employees get to participate in that.
So that variable.
Labor element for us is.
If I'd effective in terms of helping us from an inflationary perspective, and then from an energy perspective, we've got some some hedges and some forward buying is in place.
To be able to mitigate some of the increases that we've seen it in energy around the world and then of course finally from a pricing perspective in.
In April we actually pass along some energy prices many of our customers. We have energy surcharges that went out into the market.
Early April time period and Q2.
That would think of it in terms of kind of mid single digit price increases from surcharge perspective, so materials labor energy and then of course pricing Vms along.
All of those elements, we feel like we've addressed reasonably well for 2022.
Thank you appreciate it.
Thank you. Our next question comes from Chris Daly City, Christina Lee Your line is open.
Hey, Thanks, guys just to follow up on <unk>.
One of the early <unk>.
So Dave just to confirm you guys don't expect any material impact to us.
From the chipset and then while you're answering.
Do you guys expect to see your taxes go higher from this.
<unk> taxes on everything and everyone accurate looks like it's about in the past as well that takes that minimum taxes at 15%.
I from that with respect to Chip's Act.
Kind of two elements to the chipset.
Relative to really our P&L.
One is the investment tax credit and Thats, a 25% investment tax credit.
For equipment that is purchased and then.
And install and delivers increment capacity.
We'll continue to look at the details of that as the chips chips, they'll get signed and we have more details, but it looks like that ITC is pretty straightforward.
We do have investments going in to increase capacity and also we also have some to increase capacity in our Arlington facility, we expect to be able to start to.
To use that investment tax credit to be able to accelerate some of those investments.
And as we work through those details will update you in subsequent quarters to the benefit to our P&L, but our understanding as it sits today is that that would essentially create a net capex effect.
So it would be a one for one offset to depreciation and amortization for new equipment that we purchased here in the U S. So that's the that's the investment tax credit second element chips Act is really associated with doing more kind of greenfield or brick and mortar investment I should say.
And that is.
No details need to be worked out in some detail and specificity by the Commerce Department, but we expect as details to be worked out over the next call. It six to nine months and as those details become available we'll update the market. Our gross capex plans have not changed to the extent that we will get additional benefit from either the ITC.
We're the second permanent chips back related to new investments and Greenfield capacity I will update market accordingly.
A follow up.
Yes, and thanks for the clarification.
One more clarification so.
Given all of the.
The weakness that you guys are seeing in the low end. It has not changed your 2023 outlook versus let's call. It three or six months ago in terms of pricing or revenue or LTA or anything.
It hasn't.
Let me tell you why.
We had significantly more demand.
And <unk> and in 'twenty three than we could satisfy so so when we look at the current trend environment today, Yes, do we see some rebalancing in different end markets, Yes, we do like like ours in the market again, specifically.
Related to consumer specifically low end consumer and then youre seeing that manifest itself in handsets as well as a portion of that market that kind of low to medium in hand handset is under pressure.
But that said we had more demand than we can satisfy our capacity equation hasn't changed.
We're expecting to deliver about $2 6 million wafers tier 300 millimeter equivalents about $2 8 million wafers next year and so what we are able to do as we are able to take some of that demand look our oversubscription and for demand that we see rebalancing shoes.
Man, that's most accretive to Jeff and so that's created an opportunity for us.
To be able to take some of that unsatisfied demand in end markets that we really like and be able to bring that into our production schedule and youre seeing the benefits of that in our in our P&L results, we've been able to deliver a bit more accretion than we expected. We're a bit ahead of plan that we laid it out at IPO, we're executing well.
And in that rebalancing is actually benefiting us right now.
Perfect. Thanks again, Dave.
Thank you. Our next question comes from the line of Randy Abrams Credit Suisse. Randy Abrams Your line is open.
Great. Thanks for squeezing that clinical follow up on the Capex, you mentioned a bit of a timing toy per equipment.
He can give a view for 2023 with the incremental how it's looking for trusting you reaffirmed at 50.
If you could give an update on mako how that expansion.
And now with chips back whether that posted in the mall.
Hansen.
Sure.
The equipment.
WSI vendors continues to be challenged and so.
I think maybe it was two quarters ago, or maybe a quarter and a half ago, we talked about equipment being somewhere between call. It two to four weeks late.
I think if you look at equipment day, Youre, probably seeing more like.
Four to six weeks late and may even be as much as kind of six to eight weeks late on equipment deliveries and so.
So equipment continues to be very very tight they are short components with many others in the market, which is somewhat ironic given that we need more equipment to be able to predict more chips that are in shortage situations.
But that environment remains pretty challenging.
We appropriately hedged our commitments and so from that perspective, we still feel very good about the commitments that we've made.
But we are we are experiencing delays in receiving the equipment in terms of the impact originally we were hoping to spend capex. This year of somewhere in call. It the $4 to $5 billion range.
Now in <unk> that we're going to spend under $4 billion.
And probably a little closer to $3 5 billion and four and so that's the impact of the push outs that we're currently seeing particularly given that we had a very strong fourth quarter from a capex perspective, so any slip out from fourth quarter would flow directly into.
<unk> 2023, I think pushed in 2023 10 years. So I think 2023, when we were originally thinking something around $3 billion ish I think we have slippage from 'twenty to 'twenty three and then correspondingly have slippage from 2003 and to $20. So I think it is a bit of a snowplow effect with regard to <unk> and Capex spend.
With respect to the expansion in Dresden and Malta.
The German team continues to do very well.
And bring in new equipment as arrives getting on floor getting it installed getting it qualified and getting it producing units so hats off to that team in Dresden, Germany Undermanned for leadership at Theyre, just doing a great job in that.
Work that Theyre doing and there is flowing through to our P&L results in our fixed cost absorption in fact, I would say that's true for all of our manufacturing team.
So expansion of Malta.
We are slowly increasing.
That alpha in Malta, we are.
Our waiting on equipment, we didn't expect that equipment to arrive.
So I'll call. It the second half of 2023, obviously, if the delays continue then maybe is that a second half of 'twenty three that get pushed more towards the later half of 'twenty three or perhaps even into 2020 for it. We have we have ordered that equipment. We are waiting for it to arrive and when it does the multi team will work Allegiant.
To get it on the floor and do some units.
Okay, Great and good luck getting that in a follow up on the east Fishkill since that's coming up.
Could you remind us the impact of you sell the fab into.
Into early next year and given the tightness just one other question about timing when you have the annual maintenance for or would we continue to ride through it expecting the state for.
Both of those timeline as we get toward the end of year.
Yes, so if you recall.
Signed that agreement a couple of years ago.
On semi hasnt ramping up we have been slowly kind of ramping out of that facility.
East Fishkill is on track to transact at the end of this year, so $12 31 of this year.
The facility will transact will then enter into in fact, we've already entered into an agreement with on semi.
Such that they will continue to produce some wafers for us in kind of a make buy relationship over the course of 'twenty three 'twenty four.
We will continue to ramp slowly out of that facility in an orderly way and they'll continue to ramp in an orderly way, but at the end of this year that facility fully transact and moves over to on semi for full ownership and at that point in time, we're simply buying wafers from an order desk type perspective from on semi.
<unk> fully qualified waivers that are manufactured there.
In terms of impact, we're estimating that that will get roughly a $250 million impact or benefit on a year over year basis 23 versus <unk> 22 by train and vacuum that facility. It will lower our cost of goods by that amount on an ongoing basis.
Great. Thank you.
Thank you at this time I would like to turn the call back over to <unk> for closing remarks, Sir.
Thank you Latif and thank you all for Julien, we look forward to seeing many of you to seeing many of you tomorrow at our capital market day.
Have a nice day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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