Q3 2022 Globalfoundries Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to Globalfoundries Conference call to review third quarter of fiscal year 2022 financial results.
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 the session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your host today <unk> <unk> head of Investor Relations. Please go ahead.
Okay.
Thank you operator, and good morning, everyone and welcome to Globalfoundries third quarter 2022 earnings call.
On the call with me today are Dr. Thomas <unk>, CEO , and Dave Reeder CFO of.
A short while ago, we released yes third quarter 2022 financial results, which is available on our website at investors at <unk> Dot com along with today's accompany slide presentation.
This call is being recorded and a replay will be made available on our investor Relations webpage.
During this call we will present, both <unk> and adjusted non <unk> financial measures. The most directly comparable <unk> measures in reconciliation for adjusted non <unk> measures are available in today's press release and the accompanying slides.
I'll 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.
Really from these forward looking statements and we do not undertake any obligations 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.
And on our 6K filed with the SEC on August 19 2022.
Again todays call with Tom providing a summary update on the current business environment and technologies, following which Dave will provide details on our end market third quarter results and also provide fourth quarter guidance.
We will then open the call for questions. We request that you. Please refer to your questions to one with one follow up.
I'll now turn the call over to Tom for his prepared remarks.
Thank you <unk> and welcome everyone to our third quarter earnings call.
I am pleased to report third quarter results that were better than our August provided guidance as we continue to make solid progress on our strategic and financial priorities.
Amidst an increasingly challenging economic environment, our team across our entire enterprise continues to execute.
Let me begin by providing a brief update on the current business environment.
Given the increasing macroeconomic and geopolitical uncertainty.
We continue to work closely with our customers to monitor and market demand.
Since the beginning of the quarter.
Some of our customers have requested to modestly adjust some of their 2023 shipments downward, particularly.
Particularly with respect to the first half of 2023.
Based on the current macroeconomic environment and our customer discussions we are proactively taking actions to contain costs and to accelerate our previously planned productivity initiatives.
So it is difficult to take these actions during a year of record output.
We believe that taking these actions now enables us to continue to outperform the market regardless of the economic environment.
David will provide more details about these activities on his commentary.
Long term <unk> growth drivers remain intact, our aggregate lta's have increased from the prior quarter as the number of customers under long term agreements has grown from 36% to 38 with a total value of these long term agreements now slightly above $27 billion.
Additionally, the amount of committed Prepays has increased 6% from a quarter ago to approximately $3 8 billion.
Also and as expected our long term agreements are providing a strong framework for us and our customers to have balanced and constructive demand discussions.
As an example, a recent LTA amendment resulted in a modest underutilization cash payment and ASP increase and existing demand and an additional year added to the contract duration.
Great examples of benefit of the long term agreement structure.
Now, let me give you an overview of third quarter.
Globalfoundries revenue grew 22% year over year, driven by increases in both wafer shipments.
Richer mix and Asps.
This revenue growth.
Coupled with strong operational execution.
Resulted in continued improvement to adjusted gross margin.
We reported adjusted gross margin of 29, 9% in the quarter.
A 12 percentage point improvement from a year ago period.
As a result, we delivered earnings per share of <unk> 67.
Which is better than the high end of our guidance range.
Again, David will provide more color on our financials in a moment, but let me now provide a brief update on our recent technology achievements.
In the third quarter, we completed five technology qualifications.
Notably this included a 12 nanometer LP customer specific technology covered under a five year long term agreement.
Also among the qualifications is a customer's proprietary automotive 40 nanometer.
Embedded non volatile memory product for one of the largest automotive MCU suppliers in the industry.
This qualification and now allows us to ship this product from both our Dresden and Singapore facilities, establishing a high volume secured supply chain for the automotive industry.
Within the quarter, we also taped out five new customer products on our silicon Photonics platform.
This included a photo IC device.
Fully monolithic co packaged optics for GPU GPU two terabits optical interconnect. Finally, we have successfully produced a high performance RF Gan device with our through Silicon via technology.
We now have demonstrated performance that exceeds silicon HPT technologies.
And as I previously mentioned integrating novel through Silicon via solution to optimize power amplifier output and efficiency.
In addition, we have sampled Gan power devices to early engagement customers.
Both programs are being executed in our Burlington, Vermont facility, where.
Where we recently received a $30 million grant from the U S government as part of the commercialization funding for these Gan RF technology offering.
To summarize I am pleased to report another quarter of solid execution as we delivered to all our customers and to all our stakeholders.
We are on track to have a strong year of growth in 2022, and given the strength of our product portfolio.
The breadth of the markets, we serve and the single source nature of our business, we are well positioned to navigate the current challenging macroeconomic environment.
With that over to you David.
Thank you Tom and welcome to our third quarter earnings call for the remainder of the call, including guidance I will reference adjusted metrics, which exclude stock based compensation.
Our third quarter results exceeded the high end of the financial range. We provided in our last quarterly update third quarter revenue was approximately 2.074 billion, an increase of 22% year over year.
We shipped approximately 637300 millimeter equivalent wafers in the quarter, a 5% increase from the year prior period.
Average selling price ASP.
Per wafer increased approximately 14% year over year, driven by ramping long term customer agreements with better pricing as well as continued improvement in product mix.
Wafer revenue from our end markets accounted for approximately 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 quarter consistent with our expectation.
Let me now provide an update on our revenue by end markets.
Smart mobile devices represented approximately 46% of third quarter revenue growing approximately 12% year over year growth was driven by higher Asps and better mix as we continue to increase our silicon content in the premium tier handsets.
And our RF front end modules, despite the well known and ongoing inventory correction in handsets, we are executing well and expect mid teens full year growth in the premium segment offset by declines in the low and mid range segments.
Our long term customer agreements are helping us navigate the challenging demand environment by reducing volatility.
We continue to maintain market share in premium tier handsets and are currently developing next generation technologies that will improve performance through better switch M&A and digital integration.
Furthermore, in the <unk> sub six gigahertz, RF transceiver market, which is a new market for Ges, we expect to see robust growth in 2022, driven by the adoption of our products by a leading handset chip customer.
Another new market is Wi Fi RF Soc.
Where growth is driven by our solutions going into Premier handset models in support of Wi Fi six 6%.
<unk> Wi Fi mesh networks, our image sensor processor business also grew strongly in the quarter as we continue to partner with industry leaders and stacked logic technologies for low power solutions as they become increasingly important to support low light resolution applications, our smart mobile device audio business is also.
Growing strongly this year driven by our differentiated 55 BCD light solutions.
<unk> life solutions address specialty power applications, such as display wireless charging and battery management by providing higher efficiency lower leakage and improved noise performance.
Moving on to home and industrial Iot revenue for the home and industrial Iot market grew approximately 83% year over year.
Representing 19% of total revenue strong year over year growth in this end market was driven by wafer volume growth of almost 40% with the remainder of the result of better Asps and improved mix within this end market. We saw continued growth in smart card solutions and wireless connectivity driven by our differentiated.
28 nanometer and 22 Mdx technologies.
We also saw broad based growth in power management in the quarter, we remain on track for home and industrial Iot to be the fastest growing end market for <unk> in 2022.
Touching nexon automotive revenue in this market was approximately 5% of our total third quarter revenue the automotive.
End market has been one of the brighter spots in the market. We expect our growth to continue as we bring to market, new MCU and safety applications radar for sensing and power management for electrification.
Based on our current design wins, we anticipate continued growth in our automotive business in 2023, and we expect the business to exit 2023 at a $1 billion annualized run rate.
Next our communications infrastructure and data center end market comprised approximately 18% of third quarter revenue and grew approximately 29% year over year.
Growth was evenly split between higher shipments and better Asps and mix.
Our strongest year over year growth continues to be in the data center Submarket closely followed by wired infrastructure and storage.
Our customers are continuing to grow market share in this segment and GFS contributing by providing critical connectivity and Iot components.
Finally, and as expected our compute end market declined year over year and comprised approximately 2% of third quarter revenue we.
We expect this end market to be less than 5% of our total 2022 revenue.
Moving next to gross profit for the third quarter, we delivered adjusted gross profit of $621 million, which translates into approximately 29, 9% adjusted gross margin.
<unk> percentage point year over year improvement 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 third quarter were slightly better than expected and represented approximately 11% of total revenue.
R&D for the quarter was up sequentially at approximately $118 million, while SG&A came in at $114 million.
Total operating expenses were $232 million, excluding $21 million of stock based compensation.
Jeff delivered operating profit of $389 million for the quarter, which translates into an approximately 19% adjusted operating margin roughly 14 percentage points better than the year ago period, an $8 million higher than the high end of our guidance range.
Third quarter net interest expense was approximately $11 million and we incurred a tax expense of approximately $19 million in the quarter.
We delivered third quarter adjusted net income of approximately $368 million, an increase of approximately $334 million from the year ago period.
As a result, we reported adjusted diluted earnings of 67 per share for the third quarter.
We delivered record third quarter EBITDA.
Of approximately $793 million.
Adjusted EBITDA grew $288 million year on year on $374 million of incremental revenue growth, representing approximately 77% fall through.
Let me now provide some key balance sheet and cash flow metrics.
Cash flow from operations for the third quarter was $679 million gross capex for the quarter was $613 million or roughly 30% of revenue at the end of the third quarter are a combined total of cash cash equivalents and marketable securities stood at approximately $3 5 billion an increase of roughly 200.
From the previous quarter.
Next let me provide you with our outlook for the fourth quarter.
We expect total <unk> revenue to be between 2.05 and $2 1 billion.
Of this we expect non wafer revenue to be approximately 11% to 12% of total revenue we expect.
Adjusted gross profit to be between 595 and $630 million included in this guidance is a sequential reduction in capacity utilization, particularly with respect to our 200 millimeter fabs.
The expected reduction in the fourth quarter wafer starts which support first quarter revenue decreased our gross margin guidance range by approximately $50 million.
We expect adjusted operating profit to be between $365 million and $420 million.
Excluding share based compensation for the fourth quarter, we expect total opex to be between 210 and $230 million at.
At the midpoint of our fourth quarter guidance, we expect share based compensation to be approximately 36 million of which $13 million is related to cost of goods sold and approximately 23 million is related to opex.
We expect net interest and other expense for the quarter to be approximately $2 million and tax expense to be roughly $22 million.
We are also on track to close the sale of the East Fishkill facility at the end of the year.
As a result, we expect to record a gain on sale in the fourth quarter that will be in the range of $350 million to $400 million.
Excluding this one time gain on sale, we expect adjusted net income to be between $337 million and 400 million on.
On a fully diluted share count of $554 million, we expect adjusted earnings per share for the fourth quarter to be between 61% and 72.
Including the onetime gain on sale, we expect adjusted EPS to be between $1 24, and $1 44.
For the fourth quarter, we expect DNA to be about $405 million of which 90% is related to the cost of goods stalled.
We expect adjusted EBITDA to be between $770 million and $840 million.
For the full year 2022, we now expect total gross capex to be between 3 billion and $3 3 billion impacted primarily by the well known delays in capital equipment.
Despite the delay we are on track to meet all of our material customer commitments for the year.
As we look forward, we will be working closely with our customers and partnership and we will provide an update on our 2023 capex at the end of the year.
While we have tightly managed expenses over the past year, we are nevertheless, paying close attention to the uncertain macroeconomic conditions and to our customers' recent commentary regarding 2023 demand.
We are working closely with our customers to monitor demand and as Tom mentioned, we are proactively containing costs and accelerating previously planned productivity initiatives.
So we're still sizing these initiatives, we expect them to deliver annualized savings of approximately $200 million the majority of which will be in opex. Neither of these savings nor any related one time charges are incorporated in today's guidance. We will provide you updates on these initiatives as appropriate.
To summarize the quarter strong operational execution enabled us to deliver third quarter results that were significantly better than the high end of our guidance range.
We are continuing to execute the strategic plan, we outlined to our stakeholders at IPO and we are proactively taking action to position the company to outperform irrespective of macroeconomic conditions with that let's open the call for Q&A operator.
As a reminder to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Okay.
Okay.
Yes.
Our first question comes from the line of Harlan sur with Jpmorgan. Your line is now open.
Yes, good morning, and great job on the quarterly execution and strong profitability.
The industry softness would be I.
I think a good assessment of the teams technology and portfolio differentiation. So if I look at your total revenue pipeline Lta's, we negotiated an LTA standard book and ship and even current negotiations on new business. I know that you guys were previously anticipating overall pricing to be up next year, but obviously given the chat.
<unk> and changing demand dynamics, maybe you guys can just articulate what the overall pricing profile now looks like for 2023, and then I have a follow up.
Good morning, Harlan I'll start on that one and then maybe Tom you can add some color.
We believe that we're still in a relatively constructive pricing environment, particularly with regards to our Lps average selling price per wafer as you've seen has increased again this quarter that six consecutive quarters of sequential increase.
Really consistent with our previous commentary based upon what we see we continue to expect modest pricing increases into 2023, Tom anything you'd add yes, I tried to add a little bit more strategically.
When we look at the assessment I think to a company. We're all aligned that we're still going to double next but double this industry.
By the end of the decade, and when we look at the market opportunity and our Sam we see that market opportunity growing but more importantly, where differentiation matters, where we can continue to drive our single source business create differentiation to create value for our customers and capture for ourselves, we see that market in excess of $20 billion of really specialty type.
Applications that we could we can go out and win so as long as we.
To focus on our execution of our R&D roadmap understanding the end markets. We play in differentiating to support those end markets. I don't think this is the end of that ability for us to continue to capture value for our business.
As we work through this mismatch okay alright.
Yes, well. Thank you for that and then given the lower demand profile of your customers in the industry. It's clear obviously as you said as well next year it will be challenging.
I assume it's too early for the team to articulate a full year of 2023 view on wafer shipments and revenue. So maybe if you could just help us think about a framework for the gross margins next year right with utilization is most likely coming down but with many positive offsets like increasing wafer pricing as you just mentioned and then you've got the east Fishkill China.
As Shannon and continued depreciation of overlap. So it gives us a framework for how to think about gross margins.
Sure maybe as you know Harlan we guide one quarter at a time, but maybe I could broaden out.
The way, we think about what we need to focus on.
We head into perhaps times that are perhaps more challenging.
When times are more challenging you tend to focus on the variables that you can control.
And when we sit down as a management team and we think about those variables. The first one is the one that Tom mentioned differentiation. So we've realigned the company to be more focused with respect to product management.
Development of differentiated technology.
We believe we're making progress towards being more differentiated we had another quarter about 90% of our design wins were single sourced where about 90% for the year year to date on design wins being single source. So we feel like we're making good progress there.
With respect to pricing.
As Tom mentioned, we have seen pricing increase this year sequentially, we think what's going to modestly increase next year, we think that's directly correlated to our ability to differentiate.
Cost containment.
On the prepared commentary that we are aggressively controlling discretionary spending travel entertainment professional services, we're accelerating some of our previously planned productivity initiatives and then finally capex.
We can control the rate and pace of our growth.
We're moderating our capex to better match, our customers' demand forecast, while we're also considering our free cash flow profile. So.
Ultimately, we believe that that helps us control our utilization we believe that is directly correlated to gross margin and so we're focusing on the things that we can control.
We feel like we had a pretty good third quarter and we feel we feel still quite optimistic for the future.
Insightful. Thank you.
Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for asking a question.
Tom or Dave one for you on linear if demand obviously, we've seen what a lot of your fabless customers had to say third quarters were generally okay, but fourth quarter guidance were pretty darn weak I know you talked about utilization coming down, but any additional color on the linearity of demand that you've seen during the third quarter and thus far in the fourth quarter.
Sure I think with respect to linearity Russ you see that in our guide we've got it from 2.05 billion to about $2 1 billion at the midpoint that would be relatively flat on a quarter to quarter basis.
If you were to rewind a couple of quarters, we would've expected a little bit more growth sequentially from third quarter to fourth quarter. So I think youre seeing the impact of some of those customers.
That has reduced their future demand.
And with respect to linearity into 2023.
We guide one quarter at a time, but as you've heard from many customers as we are hearing from our customers.
<unk> take the first half of 2023 is probably the trough based on what we're hearing it's probably more likely than not the first quarter, but we continue to refine and assess that demand based upon our our collaboration with customers and I'll just add two points to that one is our underutilization is.
Predominantly predominantly our 200 millimeter.
Not our 300 millimeter facilities and even with all of that we still expect 2023 to be a modest up year for us.
Tom just a clarification there do you mean that on.
The revenue side or the wafer output side.
That's it.
I'm talking revenue.
Got it thanks.
And then I guess for my follow up the Big picture question people, obviously have is with the direction macros going and I. Appreciate the color of the bottoming in the first half of the year, but I wanted to dig deeper into the LTA is it's good to see that they are expanding in both the magnitude and the number of customers that you have but people still wonder about the value of those LTA, so talk a little bit about.
The framework, whether it's allowing you to do is as the value that youre holding customers to the exact amount. They at one point agreed to or is it more so that it allows a framework for negotiations on expanding longer term I'm just trying to figure out the value of the LTA is and what gives you comfort in that view for 2023, given the macro trends right now.
Yeah, really I had a tenant directed back to the question back to Tom's prepared commentary and really I'll use as an example.
Probably the most recent amendment that we've made to an LTA. So we had a customer that reached out to us about revising downward their demand.
A little bit in the fourth quarter and then subsequently in 2023 most of it kind of centered up on the on the first half.
When we sat down to talk to that customer and as we said previously.
<unk> provided a framework of tools.
That we can engage with each other in a pretty constructive way and as Tom mentioned in his commentary.
The ultimate outcome of that collaboration was that we had a capacity underutilization fee.
We also had increased pricing for the remainder of the demand in 2023, and then we had the appending of demand and the extension of the agreement by an incremental year that.
And that extended that contract I believe it was out into 2026 that extra year and so that would be an example of the LTA framework.
Enabling both parties to sit down in a constructive way to handle not only short term perturbations, but also to continue to handle what we see as long term growth in the industry handle that in a very constructive manner.
Thank you.
Yeah.
Our next question comes from the line of Joseph Moore with Morgan Stanley . Your line is now open.
Great. Thank you I Wonder if you could talk about the utilization shifts that you talked about.
And then did I hear you right Theres, a $50 million impact in Q4, I guess wouldn't the impact be closer matched to the revenue impact and.
I guess is there something specific that sort of driving you to take that action.
Sure Jeff.
Specifically, what we were trying to articulate with the prepared commentary was the gross margin range would have been $50 million higher.
We have continued to run at kind of full utilization like we were running at in prior quarters.
The reason you start to see an impact in the fourth quarter is because of the wafers that are started in the fourth quarter are essentially a lot of the wafer outs that are in the first quarter, but you start to accrue those underutilization charges in the fourth quarter. They start to impact that particular period and so that's why we commented that we.
We would have had a range that was essentially $50 million higher on the gross margin line.
If that Underutilization did not occur.
It was not occur.
Did you have a follow up Jeff.
Yes. Thank.
Thank you for that I think.
In terms of bigger picture can you talk about conversations that youre having.
With people that aren't under LTA to the extent that you.
You might have some capacity free up here I would assume that theres a lot of people with automotive and industrial type businesses that are really interesting to you.
Sure I would want to work with you.
Their opportunity around that and do you see opportunity to potentially sort of reposition some of the smart.
Our phone stuff over towards automotive industrial.
Yes, that's absolutely the case, there's still strong strength in auto you're hearing that across the board.
We are opportunistic many of our technologies that we.
To support Smart mobile devices, 40 nanometer with embedded memory, our BCD technologies using that as an opportunity to remix towards auto.
The key here is to is to make sure that we sell every way we can we sell wherever the most differentiated as we honor our lta's.
We're constantly looking to.
Optimize our business to match the demand across the different end markets and.
Okay.
Leveraging the ability to not only do a one for one replacement of 40 nanometer part with another but we call fungi capacities, we have more demand on 55 nanometer how can we fund our 40 nanometer corridor to make more 55. So that's a constant balancing act, we do with that with our team and being very proactive to the markets. We can sir.
Okay. Thank you.
Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open.
Hi, Thanks for taking my question in this scenario sales being say modestly up next year, how should we think about gross margins can they continue to increase.
What will be the benefit that you might see from the east Fishkill fab exit.
Yeah. So.
As we mentioned Vivek, we do believe that the pricing.
We'll be modestly up next year.
We believe that we have the opportunity based upon what we currently see to have revenue growth.
That's modest next year.
I'm not going to provide guidance.
On gross margin.
But clearly what you're seeing from us is youre seeing us proactively position the company.
Such that we can perform irrespective of the market environment. So so we are taking actions now to.
To contain cost both on the Opex side as well as on the Cogs side, and we believe that that that positions us regardless of the market that we entered.
Did you have a follow up with it yes.
Yes. Thank you Tom over the last few weeks, we have seen a lot more details about U S restrictions on China and I was hoping you could give us a flavor of your customer discussions have changed in any way looking out over the next several years do you see more customers wanting to engage with global.
Foundries given your unique footprint.
And then the second part of that is.
As you look at especially the automotive market do you see more customers wanting to engage with you with prepayments I think you mentioned that you expect your automotive revenue to be $1 billion annualized next.
Next year, how much of that is from existing customers how much of that is from newer customers.
So let me start with the first part about the geopolitical dynamics in.
And the restrictions.
Out of China, if you recall.
GFS exposure.
Direct business in China is under 10%.
And so that.
To that end of our businesses remains intact.
But more more more so than not customers are starting to think longer term, how do they get a better balance in there and their sourcing.
So.
You won't see them doing is saying I have a part that's already in existence, Let me go move it.
Two a better footprint because that's redundant engineering.
Starting to see them think about is that next product family.
The kind of the design wins that will get going forward that will turn into revenue 12 to.
18 months later, so I view 2023 to be the year, where we'll start to see.
More and more products come our way for that next generation product.
<unk> revenue, starting 2024 and beyond and then another dynamic that.
We're seeing taking place.
We talk about single source business, we still have.
Second source business, but in some cases, we're starting to see customers move us from being the second source to be in the prime source.
Giving us the preferential supply side of that again part of this rebalancing of their their supply chain to be a little bit more.
Geographic Ah.
Spread around the around the globe, which as you know as you stated.
Please well into GFS.
Our footprint.
The second part of your question.
With.
On automotive look.
Our design wins already in the pipeline.
Get us to that 2023 annualized run rate David cited in his prepared remarks.
Is that $1 billion run rate, but.
But I would tell you.
We are engaging it's the fastest growing market for us we're engaging each and every day and I think youre going to see coming out of this a different economic model.
In the industry.
When there is pass through charges to a very complicated supply chain that automakers will want to play.
A stronger relationship with foundries.
So that they don't have to bear the brunt of pass through of cost because of the supply is going to get marked up and I would just tell you to stay tuned on that and I think this is something we're seeing developing.
Real time in front of us.
Thank you.
Our next question comes from the line of Chris Danley with Citi. Your line is now open.
Hey, Thanks, guys.
Can you just provide a little more color on the push outs and cancellations youre getting for next year, maybe talk about which end markets.
What the total.
I guess amount.
It has been.
Sure I'll try to provide.
The amount of color that I can obviously need to steer clear of any particular customers.
Or any sensitive information, but when we when we sit down with our customers and let's let's characterize that as a handful of customers. So we've got about 38 LTA is now up two from last quarter.
We sat down and had discussions with a handful of our customers.
To really look at their forecasted demand for 2023, and I think the first thing that I would note is that these LTA as are all multi year in length. In fact, the duration is probably sitting closer to four or maybe slightly over four years right now and so we're not talking about the <unk>.
Tire LTA, we're talking about one period, one near term period, specifically seems to be specifically more related to the first half at this stage of 2023 and so those discussions.
And to be centered up around in markets such as smart mobile.
Where as you know there is an inventory correction underway.
The high end of that market still seems to be holding up fairly well.
The low and the mid tier of that market.
It tends to be undergoing some some inventory correction.
I would say that's the largest segment that we've had discussions on I think most of the customers that handful of customers have tended tended to be more centered up on that space.
The discussions have been quite constructive.
The Lta's continue to remain intact and that framework that we discussed earlier and those variables.
The net framework have all been <unk> been tremendously helpful towards that towards that collaboration did you have a follow up.
Yeah, what's the what's the total impact so how much revenue is getting pushed out or canceled and maybe talk about how many LCA has had been renegotiated so far and what the total amount of dollars has come out of them.
Well I would say that.
We characterize the total LTA dollar amount as as essentially being the same if not slightly more.
For next year.
No for the total length of the contract.
We look at these and how about next year and multi year in length.
I think.
What will comment on for next year is the commentary that we've already provided and that is that we expect 2023 based upon what we currently see we expect 2023 to continue to be a modest growth year for us.
Okay. Thanks.
Our next question comes from the line of Krish Shankar with Cowen. Your line is now open.
Hi, yes. Thanks, so much for taking my questions Hi, This is Steven calling on behalf of Krish.
Question for Tom maybe.
In terms of the.
Change in millimeter wafer demand.
Are you seeing in the near term so totally understand that a lot of that.
Might be driven by those smart local end market segments. I was wondering if you could also talk a bit more about how.
Communications and data center and also industrial demand for wafers, it's playing out in the near term here is that still holding up fairly well or do you also see some.
Demand indicators softening exiting this year as well.
Look I think the only.
And market.
<unk> continues to.
Outperform is auto.
Seeing that our customers are seeing that.
When you look at some of the growth we've had year over year industrial in home Iot.
Over 80% growth.
Yes.
A sustainable growth rate right through it probably aren't enough wafers in the world that group for a decade.
So even though that the growth will slow down it's still a growth opportunity for us. These are these are important end markets.
So I would tell you that those still.
Is strong I think there is.
As the potential for Autodesk.
B the.
The one that never really goes through a cycle and this cycle and it comes out even stronger and then the rest of them will will go in order.
I think this is a little bit of a lumpy.
Not everything went down at once certain end markets memory, and Pcs with kind of first and then others, followed and then they'll come back out in that order and for US it's more about making sure that we stay focused.
Leveraging our capacity in the end markets, where there was demand for Ya gonna have to funds the capacity do multiple qualifications like we announced in the prepared remarks, so that we.
We can use all our capacity.
Where the demand is and that's where we keep our focus.
Great. Thanks for that color and Tom one quick one for Dave.
The opex cost reductions.
You mentioned.
Sure the annualized cost savings run rate of about $200 million.
Wondering if the timeline to reach that.
Cost savings from the is sort of in the next couple of quarters or is there, possibly some flexibility on when you hit that run rate depending on how the macro ultimately plays out next year.
Sure, we're moving pretty aggressively on the cost containment activities and of the annualized $200 million I think our expectation would be to try to get at least half of that next year if.
If not three quarters. So that's the way we're currently thinking about it.
Okay. Thanks, a lot and congrats on the strong results.
Steve.
Our next question comes from the line of Mehdi Hosseini with <unk>. Your line is now open.
Yes, Thanks for taking my question a couple of follow ups.
Im wondering if theres any update on the chips.
If there is any update on the chips.
That you can share with us.
Yes, I guess I'll expand your question Anthony.
What is <unk> doing with it with a chip spill.
If you roll back to our our earnings call last quarter. It was on the actual day the <unk>.
Residents sign that chip spill and then the.
U S government is off to the races to figure out how to go deploy this money in a meaningful way to get the outcomes they're looking for.
From a <unk> perspective.
We will not put capacity on without customers committed to this.
To that demand.
So we're working in parallel putting our proposal together.
Rfps that will come and go into Washington in the early part of 2023 in parallel we're working with our customers to aggregate the type of demand, we would need to commit to that kind of build out.
For us we think of using the.
The chips built in kind of three buckets. The first is to fill up the expansion of our existing facility and fab in Malta New York.
The second one would be too.
Create some extra capability of technology in our Burlington, Vermont facility and then lastly, the longer range plan is to go at a modular expansion, new brick and mortar new clean room space in.
In fab eight in.
In the multi in New York and so that's the order, which we think about how we would go add this capacity the rate and pace at which we do it will be dictated by how quickly our customers are looking for us to create this capacity for them as they think about rebalancing their supply chains and bring some of that product.
To the state.
I call it the $52 billion question.
Because the $52 billion and the chips Bill is is solving one part of the equation.
That's going to help create the capacity the other part of the equation is making sure that demand find its way back to the U S and that's the part we're all working on that to make sure. We can go secure that demand that certainty of business. So that we make these investments with confidence and we make these investments with the right returns.
Then any business with one.
And the other follow ups to that.
Hum.
Yes, actually I do I think the bigger part of the chips.
The U S cost comparable to Italy is.
The tax credit and given the Nols I think will waiting to give more color on how.
GFS would benefit from.
The dollars of allocation outside of the Capex and rebate.
And I'm wondering if there's an update there.
Yes.
Investment tax credit as we read it is pretty straightforward and so those are investments to increase domestic capacity.
That tooling and those investments will be available.
To have a 25% rebate.
Essentially during the next tax filing season.
And that rebate is applicable regardless of your net tax paying status. So so our belief is that that we will be able to.
Leverage those investment tax credits to accelerate our investments in the U S.
So while we haven't incorporated any of that into our current numbers.
We do have a plan to leverage that that opportunity.
Okay, and then can you.
I actually have one other question follow up question.
I'd like to do.
And that has to do with your.
Days of inventory I think.
The increase in days of inventory is a reflection of.
So most of the wafers shipments may be pushed out because of some weakness in the first half is that the right way to think about the uptick in VOI.
No in total if you go back to the end of last year and I'm going back to the kind of end of last year balance sheet 12, 31, 21 total inventory has grown only about $200 million on a base of about $1 billion and if you go through and you look at that our total inventory about $1 one.
$1 billion of width.
That is all inventory that's in the line that we expect to ship to our customers on a timely basis.
We do not have some large buildup of finished goods inventory. This is work in process that you would expect to grow as you are continuing to increase capacity quarter to quarter to quarter and so I would characterize the increase in web to date as being very much associated in line with <unk>.
Expectation and associated with capacity increases quarter to quarter.
Got it thank you.
Our next question comes from the line of Watchman <unk> Gill with Needham. Your line is now open.
Yes, Thank you and congrats on solid results.
A very tumultuous environment.
Just wanted to follow up on the on the Capex commentary I think you might have touched upon it a little bit, but how do we think about.
How you manage capex in a potential down cycle during the IPO process.
This year and next year, there was a significant ramp in capex.
Due to some of the capacity expansion plans you have in place and then it would kind of tailor off in 2024.
How do you.
What are the drivers of the levers you can push to ratchet back down Capex, if you do see a down cycle or.
It's more of a reduction in orders that go beyond just smartphone customers I'm curious as to how youre thinking about that over the next year.
Sure. Let me, let me give you some high level thoughts on Capex and I'm going to I'm going to start with free cash flow and I'll end with Capex.
Year to date cash from operations about $2 1 billion year to date Capex, just slightly under $2 1 billion and so as we enter the third quarter from a free cash flow perspective cash from ops minus capex were slightly positive on a year in which we've already spent about 2 billion.
For Capex, So I would say just as a framework very good alignment.
Between our cash generation ability and our investment in capacity.
One thing that I would speak to is our customer demand. So we are actively.
Moving our capex to align with our customers' demand and so while we wanted more capex in the early part of this year and our Wi Fi suppliers. They are working hard.
We're unable to supply us with everything that we needed we were able to deliver productivity to continue to execute against the LTA commitments that we've made and so so we're banking those productivity gains and we're now working with the WSI vendors to make sure that we get the critical pieces of <unk> that are necessary to still grow the capacity for.
That that customer demand and as the demand changes then we'll move and shift the capacity such that we can keep that capacity.
As best as we're able and in alignment with that customer demand. So in our forecast has come down now for the for the year total capex for the year somewhere between call. It three to $3 3 billion.
As we think about next year, you should think about us considering our free cash flow generation ability.
In context, with our customer demand and trying to match up and align those variables.
Yes, that's really helpful and just for my follow up you mentioned.
Utilization rates kind of trending a little bit lower.
Particularly on the 200 millimeter.
<unk>.
Wondering if you could quantify what your current utilization rates are.
Going into Q4, and and how do we think about the utilization rate going into the first half of 2023. Some of these customers start to reduce orders.
On the smartphone side.
Let me provide some commentary I'll try to keep most of most of the guidance to one quarter.
The third quarter, we were essentially fully utilized very high ninety's.
As a blended utilization rate.
When we look at our guidance for fourth quarter, we're probably in the low to mid nineties typo.
Type of rate still very highly or fully utilized on the 300 millimeter side.
With the negative impact to utilization really being on the 200 millimeter side.
With respect to 2023, I'll, just kind of go back to our prior statements, which were we still expect 2023 to be a modest growth year for us.
Thank you.
Our next question comes from the line of Matt <unk> with Wedbush. Your line is now open.
Okay.
Your line is now open.
Sorry about that.
For taking my question.
It seems like your characterization of the demand environment very much mirrors, what your customers are saying with demand weakness and inventory adjustments predominantly impacting calendar Q4 in the first half of next year.
Good to hear that Youre shifting your capex plans to fit end market demand I guess my question is assuming that scenario indeed plays out.
Should we expect that the $50 million under utilization charge cost or calling out.
Is that a peak.
Utilization charge or can we expect.
There is greater.
Utilization in <unk>.
In calendar Q1 appears conditions will be at their worst.
Yeah, I think I'll.
I'll just stick with guiding one quarter at a time at this point, Matt I think.
What what Youre hearing us articulate is that we believe our long term growth prospects remain intact that we believe we can modestly grow through 2023, but.
But I think Youre also hearing us say that we are proactively managing the company.
For cost containment activities to be able to perform regardless of macroeconomic scenario. So I think we will stand Pat on that commentary do you have any follow up questions.
Yes, My follow up is when you talk to the expectation of pricing lifts in 2023.
Should I be thinking about that more.
Like for like commentary.
Or is that more of a statement around.
We're GFS pricing can go given either.
Mixed benefits.
Or some sort of premium being attached to the locality of supply.
Sure so our visibility on on pricing first and foremost is really grounded in our LTA visibility.
So we are continuing to ramp those LTE as not all of those LTA as went into effect January one of 2022, they've continued to ramp throughout this year. There is additional LTA that we're expecting to come online and ramp with volume.
In 2023, and those Lta's include better pricing and so it's hard to separate out some of the like for like pricing versus mix.
But I think what youre hearing us articulate is that if you took those two categories together.
We're going to continue to see some some very modest uplift in ASP per wafer from 2022 to 2023.
Thanks, Dave.
Yeah.
Our next question comes from the line of Tristan <unk> with Baird. Your line is now open.
Okay.
Hi, good morning.
Looking at your commentary about your expectation that mid next year could be a trough.
Is that based on the expectation that the inventory correction actually ends at that at that point is that.
Specific to smartphone and does that mean that you could recapture.
What's your philosophy in terms of lower utilization rates in Q4 and potentially in the first half next year with a rebound in utilization rates in the second half such a result understanding you only guide one quarter at a time.
Yes.
Our view on 2023 years has really been developed in conjunction with our customers and so when we think about.
Our future you think about how much business that we have single source, 90% of design wins about two thirds of our of our volume that we ship today is single source and continuing to grow and so we work with our customers on their demand profile and so when we provide.
Provide some some general color commentary on 2023 that sound similar to that customer base. It's it's not a surprise I'm going to I'm going to hold off providing additional.
Additional color on 2023 other than to kind of reiterate some of our prior comments, which which was really that based upon our discussions with customers. We think we think the first half is the trough.
We think that it's perhaps more likely than not the first quarter versus second quarter, but we will continue to assess that in collaboration with our customers.
Yes.
Great that was my only question. Thank you very much.
Our next question comes from the line of Randy Abrams with Credit Suisse. Your line is now open okay. Yes. Thank you.
Just a question just about the relative difference eight inch versus 12 inch.
Could you talk on the 12 inch the drivers for that strength holding resilient and then also do you think it's a timing difference or we should see.
That correction that come through a little bit later.
Sure.
I'll speak for.
Perhaps a bit to our lta's.
Our lta's.
Really have we have very very good coverage across our 300 millimeter manufacturing base with regards to LTA and so that tends to be where we have added the most differentiation certainly we have some differentiation on the 200 millimeter side with Siggi in Gan.
Some other products that are that are quite unique.
But really on the 300 millimeter side.
We've got a tremendous amount of coverage from LTA and so I think from that perspective, Thats why youre seeing the 300 millimeter utilization hold up significantly better.
Then the 200 millimeter, yes, let me add a couple of points here.
No.
We happen to also be playing in markets that are holding up better than others. So when we think about high end handsets that holds up better than the low end handset. When you think about the <unk> transition that's still going it's still a growth. This year in number of handsets that are <unk> enabled we play in that segment.
So so.
Think of data center.
We are a strong partner with someone who's gaining share and data center and were supplier to that so some of the damn thing. We're seeing is not only the breadth of the end markets. We play in but some of the sub parts of that that are still very strong and some of the customers in those segments that are doing well.
Okay. That's helpful and the second question I wanted to ask just wanted to follow up the $200 million Opex is quite sizable relative to the annual base.
Curious given the.
Plan to continue to grow the footprint grow into more specialty.
You could give a few buckets, where you are seeing.
Good room to make those type of reductions and then just one housekeeping with the Capex change how you see the depreciation change.
Change in year over year into next year.
Sure So let me.
Let me take those in order here.
With respect to Opex rough and tough numbers, it's about $1 billion in Opex, probably closer to $900 million. If you were to do the rounding and $1 billion.
So when you think about the split of the $200 million annualized Youre, probably talking a two thirds, one third opex versus Cogs.
And so when you think about that type of spend and you think about the opportunities that we have in those areas I think between professional services travel entertainment Labor of course, we're looking at at.
At all of the levers for for addressing our spending.
To be able to enter any environment and so I think we've got we've got opportunities in all those areas to become more productive and quite frankly.
We had a series of plans.
To drive productivity over a over a multiyear period and so I would characterize a lot of this is kind of the acceleration of some of those plans versus having to create or craft new ones. As we go so I think thats, where we stand with with respect to Opex, we're assessing that today.
As I mentioned, we will provide more details.
As we continue that assessment with regards to Capex and managing Capex with the with respect to gross margin as well as a percentage of revenue.
I think what we've been able to do this year is we've been able to drive more productivity this year than we previously expected.
And so while we were delayed in terms of receiving new equipment.
To be able to ultimately deliver more wafers, we were able to find a way and credit to 15000 hard working employees that we're able to find a way to drive that productivity to deliver those wafers without some of those tool shipments.
So that created the opportunity for us to push out some of the Capex and better match some of that capex with our customers' demand.
That's something that we've been able to do kind of through the latter half of this year, it's something that as we head into 2023, we expect to be able to continue to do drive productivity and match, our utilization as well as our capacity expansions up to customers' demands.
Hey, listen.
We'll take one last question please.
Our last question comes from the line of Melissa Fairbanks with Raymond James Melissa Your line is now open.
Great. Thanks, so much guys for squeezing me in I, just have a couple of quick ones.
Yeah.
No you're tired of talking about 2023 expectation that with the auto growth rate. It seems to imply a pretty steep ramp to get to that $1 billion run rate target is there any sort of linearity that we should be assuming and then is this tied to model year launches driving more of a step function increase kind of towards the back half of the year or should it be a smoother path through the year.
Sure.
No.
We expect it to be pretty linear.
We've been capacity constrained on some of our automotive business in fact, I'd say on the majority of our automotive business and what some of this rebalancing of demand has enabled us to do it's enabled us to prioritize a little bit more of the automotive demand you saw for example, smart mobile devices declined to 46% of total revenue versus.
50% a.
A year ago period, as we continued to grow automotive.
Youre going to see us have a much better product mix balance that goes out into the marketplace. So.
So we're able to rebalance that that capacity as well as add some new capacity in some strategic areas to be able to take take automotive up in what we expect to be a pretty linear way throughout next year until by the time, we exit fourth quarter next year, we're kind of at that $1 billion annualized run rate.
Okay perfect.
And maybe just a quick follow up on the chips Act excuse me to the extent that maybe more tightly controlling capex in the near term do you know if there are any restrictions to the incentives like once you submit an RFP do you expect to be bound to that or is it too early to know how this is going to kind of flow through.
Look I think that's too early to know I'd also say pragmatic approach as no one wants to see.
<unk> built and not being used that becomes a real waste for everybody. So I.
I think there'll be a very pragmatic approach and Jeff will lead the way and making sure that we have.
Not only do we have the right funding model to get the return, but we have the right durability and commitment that we know that capacity will be utilized.
And I think the.
Washington will want to see the program executed just that way.
Great. Thanks, very much guys Thats all.
Okay.
Okay.
That concludes today's question and answer session I would like to turn the call back to <unk> for closing remarks.
Thank you Liz Thank you everyone for joining us on the call today.
Please feel free to reach out if you have any additional information or questions you need answered from here. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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