Q4 2022 Globalfoundries Inc Earnings Call
Good day and thank you for standing by. Welcome to the conference call to review fourth 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sam Franklin, head of capital markets and investor relations. Please go ahead.
Thank you operator, good morning everyone and welcome to Global Foundry's fourth quarter and fiscal 2022 earnings call. On the call with me today, Dr Thomas Callfield CEO and David Reader's CFO .
A short while ago we released GFs, fourth quarter and full year 2022 financial results, which were available on our website at investors.gf.com. Along with today's accompanying slide presentation.
This call is being recorded and a replay will be made available on our Investurulations webpage.
During this call, we'll present both IFRS and adjusted non-IFRS financial measures.
The most comparable life-for-us measures and reconciliation for adjusted non-offer-us measures are available in today's press release and accompanying slides.
I'd remind you that these financial results are unordered 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 belief, expect, intent, anticipate, and may. All by the use of the future tense.
It 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 made today.
For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks and uncertainties described in our SEC filings, including in the sections under the caption, RISF Actors, in our annual report on form 20F file of the SEC on March 31.
in full year 2022 results and also provide first quarter 2023 guidance.
We'll then open the call for questions.
We request that you please limit your questions to one with one follow-up. I now turn the call over to Tom for his prepared remarks.
Thank you Sam and welcome everyone to our fourth quarter earnings call.
I would like to start by reflecting on our first full year as a public company.
October 28, 2022 marked the one-year anniversary of our listing on the NASDAQ, and by any measure, it's been a strong year for GF.
I'm immensely proud of our team across the globe for their commitment and dedication in helping Jeff take significant steps towards delivering our long-term strategic objectives that we set out prior to our IPO.
GF continues to position itself as a crucial enabler of the semiconductor supply chain.
And we remain deeply committed to working with our customers and providing feature rich.
differentiated and innovative technology solutions to meet the long-term demand trends across each of the end markets that we serve.
Simply put.
We built capacity for differentiated offerings our customers want.
where they want it and in partnership engagement that create this capacity with the best economics for both partners.
We've continued to implement a long-term partnership driven model with our industry, which is driving improved visibility for our business through this period of macroeconomic uncertainty.
In 2022, we added 10 additional customers under long-term agreement and secured more than 5 billion of incremental lifetime revenue.
Going forward, we continue to see strong alignment between our customers' needs for certainty and security supply and our capacity to provide long-term, dedicated Foundry services.
We are proud to have participated in a development of the passage of the Chips and Science Act of 2022.
This is the most important piece of legislation for our industry in recent times, and we expect to continue playing a key role in delivering targeted capacity.
critical to the reshuring of supply within the US semiconductor ecosystem.
Finally, we continue the expansion of our global footprint to align with our customers' committed demands. In 2022, we successfully delivered incremental capacity at our facilities in Singapore and Dresden, Germany.
As we looked at 2023 and beyond,
We remain steadfast with our principles and agile as an organization by focusing on incremental capacity to meet our customers needs.
Let me now touch on our results.
We exceeded the high end of our November provided guidance for both top-line and profitability as our teams continue to deliver our strategic and financial priorities.
helping us bring our first years of public company to a very successful close.
in the fourth quarter
GF revenue grew 14% year over year during by richer mix and average selling prices.
as well as higher non-wave revenue. This revenue growth coupled with strong operational execution resulted in an improvement to adjusted gross margin to 30.1% in the quarter, which is an 8.6 point improvement from the year ago period.
As a result, we delivered adjusted earnings per share of $1.44, which was the high end of our guidance range and includes the proceeds from the sale of our East Fiskeel FAB to on semi. Dave will provide more color on our financials in his section.
Let me now move to providing a brief update on the current business environment.
Despite our record output in 2022, we remain cautious regarding the macroeconomic headwinds facing our industry in the first half of 2023.
Our business is not immune from these headwinds. As we communicated in our third quarter update, we took the decision to proactively put in place a restructuring plan, including a number of cost containment initiatives which we began to implement during the fourth quarter.
These initiatives are aimed at all aspects of our business. And as we head into 2023, we will continue to focus in ways that we can improve our productivity, reduce input costs, and position GF to emerge even stronger from the current macroeconomic environment.
longer jam
GF's growth drivers remain firmly intact and we continue to see opportunities to gain share in our larger end markets.
such as premium tier smart mobile devices, as well as in critical growth segments such as automotive and industrial IOT.
In automotive, we are excited to be playing an important role on the development and expansion of the market for autonomous, connected, and electrified vehicles.
We continue to grow our differentiated offerings to our customers across automotive applications such as processing, sensing, safety, infotainment, and battery management.
As you may have seen last week, we are extremely pleased to report that General Motors has entered into a long-term agreement with G.F.
to secure a capacity corridor in our advanced fabric of state New York for GM's US supply chain. This first of its kind, multi-year agreement for GF brings a critical manufacturing process to the US and supports GM's strategy to reduce the number of unique chips.
needed to power increasingly complex and tech-laden vehicles through the end of the decade.
With this strategy, we expect to reduce chips in higher volumes with better quality, predictability, and the best economics.
In aggregate, our LTAs have increased from the prior quarter as the number of customers under LTA has grown from 38 to 40, and the total value of these LTAs now at approximately 27 and a half billion dollars.
Additionally, the amount of committed prepayments and capacity reservation fees have increased 34% from a quarter ago to approximately $5 billion.
Our LTAs continue to serve as a solid foundation for working with our customers during times of demand uncertainty.
Due to the widely reported inventory correction, in some cases, we have entered into negotiation with our customers to manage their short-term demand needs while working to preserve the intended economics and long-term value under these contracts.
As we reported in our third quarter earnings call, we expect this can be accomplished through adjustments to the contract, including duration, ASPs, MIX, delivery profiles, and in some cases under utilization payments.
They will now provide a brief update on our recent technology achievements.
In the fourth quarter, we completed six technology qualifications, bringing our total to the year to 27.
On our 45nm silicon photonics platform, we added 9 additional features in the quarter.
Additionally, we had five more customer tape-outs on 45 CLO, bringing our total for 2022 to 16. This clearly demonstrates the aggressive adoption of this differentiated technology solution.
And finally, in November , GF and Purdue University announced a strategic partnership to strengthen and expand collaboration on semiconductor research and education with a joint focus on R&D. This relationship with Purdue exemplifies our going network of R&D collaborations.
as part of our broader GF Labs initiative that we launched in 2022. To summarize, we successfully closed out Q4 with a delivery of record financial performance in 2022.
Our first full year as a public company.
Despite the current economic challenges, we are well positioned to achieve our long-term strategic model and continue to work with our customers to develop and manufacture innovative differentiated solutions.
With that, let me turn it over to Dave. Thank you, Tom, and welcome to our fourth quarter earnings call.
For the remainder of the call, including guidance, I will reference adjusted metrics which exclude stock-based compensation and restructuring charges.
Our fourth quarter results exceeded the guidance we provided in our last quarterly update.
Fourth quarter revenue was approximately 2.1 billion, an increase of 14% year over year.
We shipped approximately 580,300 millimeter equivalent wafers in the quarter.
and ASP, average selling price per wafer, increased approximately 20% 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 88% of total revenue.
Non-Wave for Revenue, which includes revenue from our Redicals, Non-Recurring Engineering, Expedite fees and other items accounted for approximately 12% of total revenue for the fourth quarter consistent with our expectations.
For the full year, I am pleased to report that 2022 was a record year for global Foundries.
Revenue came in at approximately $8.1 billion, up 23% year over year, and an increase of approximately $1.5 billion from the previous year.
We shipped approximately 2.5 million 300 millimeter equivalent wafers.
A 4% increase from 2021 and ASP per wafer increased 17% year-over-year.
Let me now provide an update on our revenue buy-in markets.
For the fourth quarter and as expected, smart mobile devices represented approximately 39% of the quarter's total revenue.
Smart mobile devices, fourth quarter revenue declined 7% from the prior year period. Principally driven by reduced volumes in the low to mid-tier smartphone segments.
This decline was partially offset by higher ASPs.
premium tier mixed growth and continued content growth in our RF transceiver, audio and specialty power products.
Full year 2022 revenue for smart mobile devices grew 11% year over year, driven by higher ASPs and better premium tier mix, as we continued to execute our strategy to grow content in the premium handset market.
Our long-term customer agreements helped us navigate the challenging demand environment by reducing volatility and improving certainty, a trend we expect to continue.
Our growth compared favorably to the broader 2022 handset market, which declined 8% year over year with respect to handset shipments.
Looking ahead to 2023, we expect the first quarter to represent the low point for smart mobile device demand, with the well-publicized inventory burn expected to conclude towards the end of the first half, followed by sequential growth in the second half of 2023.
Continue growth in the 5G handset market is expected to be a tailwind in 2023 and we expect to maintain our market leading positions in RF run and performance and premium tier smartphone features.
Moving on to home and industrial IoT. In the fourth quarter, revenue for the home and industrial IoT market grew approximately 64% year over year, representing approximately 20% of the quarter's total revenue.
Strong year-over-year growth in this end market was driven mainly by higher ASPs from our LTAs.
and meaningfully higher volumes from target growth and key applications such as smart cards for digital payments and wireless connectivity.
Full year home and industrial IOT revenues grew 68% year over year, which can be attributed to approximately 30% volume growth with remainder driven by ASP and mix.
Home and Industrial IoT was the fastest growing end market for GF in 2022.
Looking ahead to 2023, we expect growth to continue for smart card applications, along with rising customer demands for next generation analog and mixed signal technologies within our aerospace and defense end markets.
Moving now to Automotive, which is Tom Outline, has been a key growth segment for us.
Fourth quarter revenue grew about 24% year-over-year, representing approximately 5% of the quarter's total revenue.
Growth was driven by a strong ramp across our automotive processing, sensing, and vehicle infrastructure technologies.
Full-year automotive revenue grew about 30% year over year in 2022, and we expect continued growth in 2023.
Based on our current design lens and ramp profile, we now expect almost $1 billion of automotive revenue in 2023.
Next, our communications infrastructure and data center end market, where fourth quarter revenue grew approximately 27% year over year and comprised approximately 18% of the quarter's total revenue driven by a combination of better ASPs and MIX as well as higher volume.
Growth in the quarter was primarily driven by increased network infrastructure and data center processing demand.
For the full year 2022, revenue grew 43% year over year, driven by increased edge-to-data center communication traffic.
4G and 5G deployment, as well as overall increased demand for data center capacity.
Like most other end markets, we expect data center demand to decline in the first half of 2023.
Finally, our personal compute and market was flat year over year in the fourth quarter and comprised approximately 5% of the quarter's total revenue.
For fiscal year 2022, year-over-year revenue declined approximately 38 percent.
We expect this end market to continue to decline in 2023.
As communicated in our third quarter update, we recognize the need to undertake a pro-active assessment of our cost base in response to the industry's inventory correction, as well as macroeconomic and inflationary headwinds.
During the fourth quarter, we implemented several initiatives aimed at achieving greater efficiencies, productivity gains, and structural cost savings.
These initiatives are projected to deliver approximately $110 million of savings in 2023.
Additional savings initiatives are expected to be implemented throughout the year.
Also in the fourth quarter, approximately $94 million of restructuring charges were incurred as part of the implemented cost savings initiatives.
The financial results for the fourth quarter are presented on an adjusted basis which exclude these charges. For the fourth quarter, we delivered a just a gross profit of $633 million, which translates into approximately 30.1% adjusted gross margin. The 8.6 point year-over-year improvement.
was driven by higher ASPs and a richer mix, which more than offset the inflationary headwinds in 2022.
For the full year, we delivered a justi gross profit of 2.3 billion and gross margin of 28.4% equating to a 12.2 point uplift from 2021. Operating expenses for the fourth quarter represented approximately 10% of total revenue.
R&D for the quarter was down sequentially to approximately 103 million, and S-GNA also declined to approximately 105 million.
Total operating expenses were $208 million.
We delivered operating profit of 425 million for the quarter, which translates into an approximately 20.2% adjusted operating margin, roughly 12.5 points better than the year ago period.
and above the high end of our guided range.
For the full year, GF delivered operating profit of $1.4 billion, which translates into a 17.8% operating margin and improvement of roughly 15 points year over year.
Fourth quarter net interest and other expenses was $15 million and we incurred a tax expense of $13 million in the quarter.
We delivered fourth quarter adjusted net income of approximately $800 million and increase of approximately $702 million from the year ago period.
At the end of the fourth quarter, we closed the sale of our East Fish Kill facility to on-semiconductor and recorded a gain of sale of $403 million just above the upper end of the guided range.
As a result, we reported adjusted deluded earnings of a dollar and 44 cents per share for the fourth quarter.
On a full-year basis, you have delivered adjusted net income of approximately 1.72 billion and adjusted to loot an earnings per share of $3.11.
We delivered record fourth quarter, Adjusted EBITDA of approximately $821 million, with a margin of 39.1%.
Adjusted EBITDA grew $237 million year-over-year on $254 million of incremental revenue growth, representing approximately 93% fall-through.
Full year adjusted EBITDA was $3.1 billion with an EBITDA margin of 38.1%.
improvement of about 10 points over the previous year. Let me now provide some key balance sheet in cash flow metrics.
Cash flow from operations for the fourth quarter was 491 million.
For the full year, cash flow from operations was $2.6 billion.
Gross CapEx for the quarter was roughly $991 million or roughly 47% of revenue.
Full year capex for 2022 was approximately $3.1 billion or 38% of revenue. At the end of the fourth quarter are combined total of cash, cash equivalents, and marketable securities.
stood at approximately $3.3 billion. We also have a $1 billion revolving credit facility which remains undrawn.
Next, let me provide you with our outlook for the first quarter.
We expect total GF revenue to be between $1.81 and $1.85 billion.
Of this, we expect non-wave or revenue to be approximately 12% of total revenue.
We expect adjusted gross profit to be between $498,527 million.
We expect adjusted operating profit to be between $283,322 million.
Excluding share-based compensation for the quarter, we expect total op-EX to be between $205 million and $215 million.
At the midpoint of our first quarter guidance, we expect share-based compensation to be approximately $45 million of which roughly $16 million is related to cost of goods sold and approximately $29 million is related to OPEX.
We expect the tax expense, net interest, and other expense for the quarter to be between $25 million and $30 million.
We expect adjusted net income to be between $252,297 million.
On a fully diluted share count of approximately 555 million shares, we expected just an estimated earnings per share for the first quarter to be between 45 and 53 cents.
For the first quarter, we expect depreciation and amortization to be roughly $400 million of which approximately 90% is related to the cost of goods sold.
We expect adjusted EBITDA to be between $667 million and $722 million.
For the full year 2023, we expect CAPEX to be approximately $2.25 billion, which aligns with our disciplined and demand-driven philosophy.
We expect the CAPEX profile to be more heavily weighted towards the first half of the year, and on a full-year basis, we expect to be free cash flow positive. To summarize the quarter and the year, strong operational execution enables us to not only deliver fourth quarter results that were better than our guidance.
but also deliver a record year of financial performance for the company. We are continuing to execute the strategic plan we outlined to our stakeholders at our IPO and remain well positioned to achieve our long-term model. With that, let's open the call for Q&A. Operator? Thank you.
As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Please stand by while we compile the Q&A roster. Our first question comes from Mark, lip assist with Jeffery, your line is now open.
Hi, thanks for taking my question and congrats on the nice results. First question, maybe for Tom, can you talk qualitatively about activity around your long-term agreements? It seems on the one hand some of your customers are...
getting negatively impacted by the cycle. But on the other hand, secular trends on capacity and consolidation, the geopolitical environment might be driving more customers to you. So I'm wondering if you could describe how those two are netting out as you engage with your customers in the medium term. And I guess what I'm getting at, it seems like the LTA.
we think of them as contracts that were signed in 2021 and that's where their life began. Actually, this is a five year journey. When we pivoted the company in 2018, decided to become a single source differentiated type of semiconductor manufacturer.
We had to do a couple of things with our customers. We had to convince them on our execution. We had to convince them that we had the financial wherewithal to be around for them for the long term and develop those partnerships.
And so as they started to get more confidence in G.F. and rely on us for single-sourcing key products for them, that created a balanced relationship where we needed each other.
Our customers needed security supply. We wanted security of knowing that if we're going to invest for capacity, that we would have the ability to use that capacity service our customers.
And so what you're seeing now is the natural consequences, this journey we've been on, as customers signing out and looking longer term securing their future with GF. Now you can imagine in a moment that we're in now where there's the softening that you hear about the inventory correction, the customers are going to be a little bit more more cautious as they go forward to plan exactly when they want.
You know new capacity extending LTAs those discussions going all the time and as you could see in the fourth quarter We signed additional long-term agreements. We just announced a really important with GF in segments that
It was clearly seen that there's strength in the near term and the long term.
So I think the LTAs are doing exactly exactly what we talked about in a road show over a year ago in 2020 to the creating the security for both businesses to have long-term supply and to work through you know cycles like this in partnership that's a very helpful thank you.
you are dealing with that scenario as your customers who have signed up with the LTAs are coming to you and asking you for help on that. Thank you. Thank you.
Yeah, I think the classic is.
You're protecting the names of the innocent here is that one of the customers who was like the complete range of levers we have.
One, there was some remixing going on. Softness on one particular technology node and features we provided where they had more opportunity and others. So we were able to shift some of their volumes from one platform to another. They remixed a little bit later in time and created a duration. And then there was a part of that was.
Hey, we have some near-term underutilization. Let's just give you an underutilization fee for that. The key is that the economic intent of these contracts are always getting fulfilled, and we use these levers to go create that opportunity to work in partnership with our customers.
Very helpful. Thank you.
Please stand by for our next question.
Our next question comes from Joseph Moore with Morgan Stanley . Your line is now open.
Great. Thank you.
I wonder if you could talk a little bit more about the GM deal. And just in general, what those conversations are like, I know you've had other OEM deals with Autos as well. I feel like two or three years ago they probably didn't know who the Foundry Suppliers were. So, you know, how directly do you think they're driving their semi-genote for suppliers to use Western Foundries? And just...
you know, maybe some insight into what how those conversations came about and how pervasive they could be.
Yeah, good morning, Joe. I wouldn't put it as just driving the Westin foundry. I think if you take a step back, the auto industry is looking forward and looking at the capacity that's been put in place over the last two decades in the areas where we play and clearly see that investment needs to be made. There isn't enough of this capacity.
Again, we play for 12 nanometer and above and getting ahead of that curve. Okay, how do we go create that capacity because new investment is going to be needed?
And as they start to understand more and more about the economics.
of this. It's better to create that capacity and partnership with the Foundry and then direct their supply chain to use that capacity.
So for the auto maker, let's first decide what are the important platforms to create this capacity on that have legs over the next decade. Decide how much you want, where you want it, and then create this partnership mode to make sure it happens at the best economics. Now that's the model. We called it a first of a kind with general motors.
It's not last but kind. I think this is a winning model because it creates the opportunity to minimize inefficiencies of the economics of a very steep or a broad ecosystem where costs get passed through and marked up without value being added. Investment cost that is. So we think this is a winning model. We'll see more of this coming along.
I think this is a winning model because it creates the opportunity to minimize inefficiencies of the economics of a very steep or a broad ecosystem where costs get passed through and marked up without value being added. Investment cost that is. So we think this is a winning model. We'll see more of this coming along. Hope that helps you.
Yeah, that does thank you. And then I guess as you look at your capacity in the next couple of quarters, you're obviously seeing some capacity free up from smartphone-oriented technologies. Would you still say you're sold out on the specialty process technologies that supply the auto industry? Are you limited in your ability to serve that near term?
Specifically to auto, you know, all of our capacity is now we call fungible, able to address all the demand we have on auto. So for every way we can make to our auto business, we can sell. And that's where we were. The constant looking and.
putting pressure on our manufacturing teams to figure out how they can make more of them. And Joe, I think I would add on to that is if you listen to the prepared commentary, you would have heard us say that instead of saying that we would exit 2022 or 2023, excuse me, at an automotive revenue run rate of a billion dollars, we actually said in this quarter's prepared commentary, we would option to exit the new calendar year.
that we would be about a billion dollars of automotive revenue in 2023. So that remixing that Tom just highlighted and that you kind of alluded to in your question, that is ongoing as we speak.
Great thank you Mr. Pylehant just to pile on that Joe and that revenue year on year 23 to be greater than 2x growth.
Okay, thank you.
Please stand by for our next question.
Now, our next question comes from Harlan Sir with JP Morgan. Your line is now open. Yeah, good morning and congratulations on the solid execution.
Your manufacturing needs terms are quite long, right? You guys have to start waiting for us about a quarter ahead of target shipments. So I believe the team has pretty good visibility already into Q2. You gave us the puts and takes in the various segments, which is consistent, right? With your customers demand profile. But if you put it all together.
Does the team still think a trough in total revenues, this quarter or first half of the year is the most likely scenario? And does the team still believe that they can go revenues at this calendar year?
Yeah, good morning, Harlan. Maybe I'll start that one Tom and then if you have anything to add on you can you can build at the end and look we do believe that first half is the trough from a revenue perspective. We think it's most likely first quarter but certainly from a first half perspective we believe that that is the bottom.
Based upon what our customers are telling us, based upon our LTAs, and based upon, I think what you all are seeing broadly in the industry. Most of the industry is currently forecasting a recovery in the second half of this year. We've mentioned previously, and we still stick with that guidance that we believe ASPs.
will be up modestly on a year over your basis. So really, if you're looking at growth for the year, it's really predicated upon that volume and it's predicated upon a second half recovery, which right now is what we're currently expecting. Tom, is there anything you'd add to that?
So I would just reinforce that we're we're we're no smarter than everybody else If it's with our customers for telling us what we're seeing in the industry and that's what we're planning
Great, thank you for that. And you know, it's obviously it's a top sentence in uncertain environment, but for the things that the team can control right-possess development, innovation, stronger customer engagement, manufacturing optimization, if there are strategy in place to try and emerge from this downturn in a much stronger position and try to... true.
you know, accelerate the move to or exceed your 40% gross margin target? There is Harlan, you know, we outlined, I would like to think a pretty comprehensive bridge both during the IPO roadshow as well as, you know, capital markets day, that bridge to how we get to our long term.
financial model, which includes 40% gross margin. I would actually say that kind of like to date, we've been ahead of that model, slightly ahead of that model, where we expected to be. We feel like we've made great progress and strides against it.
We feel like we still have line-up site to achieve that model.
To be able to achieve that model, you know, we've been adding capacity, right? So in in 2020 in 2020 We said we had about two million wafers of capacity 2021 We built that up to about 2.4 million wafers in 2022 about 2.6 million wafers of capacity on the CapEx that we're deploying this year We'll have about 2.8 million wafers of capacity and still on track even with reduced
towards those gross margin numbers that we've outlined in some pretty clear detail.
No, perfect. Thank you. Please stand by for our next question. Our next question comes from Vidic Aria with Bank of America. Your line is now open.
Thanks for taking my question. First one on gross margins. So the Q1 outlook 28%, about 150 basis points above their expectations were. I was wondering, David, if you could give us some of the puts and takes. And from what you're describing, seems Q2, Q2, Q1,
you know, revenue could be, you know, kind of at least a flatish and if that is a scenario, then can gross margins continue to go up or is there anything on the utilization side or anything else that we should keep in mind to think of a gross margin trajectory for this year? Sure, good morning to that, Ken.
I think when you think about gross margin, you obviously think about two big elements. One is ASP, which as we mentioned, we believe 23 will have modest ASP growth over 2022. Then the second element is really what you touched upon, which is utilization.
So in the fourth quarter utilization was in the mid 90s. For first quarter, we believe utilization is going to be call it the mid-ish 80s to perhaps the high 80s from a utilization perspective. And we've previously talked about how every, about every five points utilization was about two points of gross margin from a mathematical perspective.
progress towards that gross margin bridge, but obviously it's being offset a little bit based upon the utilization. So as utilization has improved throughout the year and as we mentioned, we think first half is the bottom, then we believe that that will be the driver for increased gross margin.
will be that utilization figure and that absorption. Did you have a follow-up? Yes, thanks. Second question is, just in the premium smartphone segment, what's your view of how much of your customer's component inventory is...
Do you think Q1 is where it kind of clears out or do you think there could be a little bit that persists into Q2 and then there is a seasonal back-half assumption? Just curious, specifically in the premium smartphone segment, do you think we get to a supply-demand balance exiting Q1 or it could take until Q2 for that to happen?
I think if you were to maybe be a little bit more granular and look at it perhaps a bit on a monthly basis, we think some of that inventory starts to get cleared out towards the end of first quarter. So call it in the Marchist period.
And maybe it rolls over a little bit into the second quarter, maybe April perhaps even may, specifically for the high end of smartphones. So ultimately it depends on what's the sell out or the sell through demand. But we do believe that that inventory starts to clear out of the channel in a more meaningful way.
towards the end of the first quarter and perhaps rolling over into the second quarter.
and perhaps rolling over into the second quarter. Thank you.
Please stand by for our next question.
standby for our next question.
Now our next question comes from Ralph Seymour with DB. Your line is now open.
Hi guys, congrats on the solve results and thanks for letting me ask a question. I just wanted to go back to something Tom used said earlier about the prepayments rose I think 34% sequentially. How do I reconcile those with the end demand caution? Is this something where people are just having to pay upfront for pushing out the duration?
Because I otherwise would have expected kind of the urge to prepay or the need to to kind of wane as Some of the caution from your customers enters the equation. So any color there would be helpful Yeah, look for me It's pretty simple. This is single source business by and large. Customers are looking to secure their
their supply. In some cases it requires investment. The only way the investment can be made and make economic sense for both parties is we both put our balance sheets in there. So the rated pace of some of these LTAs, where they're talking about adding capacity, we'll always get a little bit softer in it.
the period we're in now just because of the uncertainty of when customers will want that growth.
But that's what we're going through right now. And you can see even the fourth quarter of last year, we were able to ink some long-term agreements where customers had visibility, especially in the auto-side of things of what they wanted longer term.
And if I could build on that, I think when you think about that increase in the fourth quarter-ross, you know, call it 1.2, maybe it rounds to 1.3 billion dollars, 34% as you mentioned, to $5 billion of customer-committed funding. The LTAs that are being signed today are not for really capacity in kind of 23 and 24. It's really for capacity that's being added for ramps and...
really 25, 26 and 27. And so those committed customer funds, those are being deployed in the areas of capacity increases as well as process technology qualifications for the design winds associated with those LTAs. And, as a result, was workforce in the tool industry. And, as a result, was workforce in the tool industry.
The customers are looking through this kind of near-term demand perturbation. They're looking through this near-term period. They're looking out into time. And they're saying we believe that the industry will still be structurally short of capacity, especially in the technologies and the geographies where we would like to have it.
they're making the investments now to ensure that that supply chain is there in the future. Thanks for that, Colin.
Yeah, if I can, I just wanted to go into the chipset and the investment tax credit side of things. I think the CAPEX numbers you gave are all on the gross side of things. I know you guys have been very committed to those programs and in time you highlighted that earlier, but mechanically, how should we think about that starting to flow through and kind of timing and magnitude?
But let me tell you how we're going to put that funding to good use and then I'll let David talk about how it flows through. Most importantly, the capital investment free cash flow and then maybe on top of the P&L. We are in the process of bringing in a three-part proposal.
to leverage the tips funding for capacity expansion. One phase is in our 300 millimeter facility in Vermont, where we're remixing that technology more towards wide band gap technology.
types of devices and also to do some modernization that facility to keep it strong going forward.
We have a Phase I expansion plan in our FAAD 8 facility where we'll use the investment to fill out the existing floor space with additional tools for capacity.
That's more or less where the GM capacity will be solutions from.
And then the last part of our proposal will be a new brick and mortar investment, modular expansion in that very same Fab 8 facility.
in Maltany, York, to edge somewhere between 350 to 500,000 wafers of...
capacity to meet much longer term needs. That's the play for GF in this first phase of chips funding. Dave, I'll hand over to you to talk about the implications on free cash flow and PNM. Yeah, so touching on the two elements, I think Tom covered chips in some detail there.
where we think for any funding or any capex and investment in the U.S. where we can get kind of 30 to 40 percent, we think, of a project refunded via the CHIPS Act. There's also the ITC.
So the investment tax credit enables companies that deploy CapEx in the U.S. to claim back essentially 25% of the value of that CapEx. The way that it would flow through the P&L is that you would essentially, and call it late first quarter, early second quarter.
of the subsequent year, you would file that ITC, you would get that credit back from the government, that would then go on the balance sheet, and it would net against that gross cap X number. So the end of you would have a net cap X number that then depreciates over whatever your depreciable period is.
So that's how it would flow through the P&L as we make additional investments in the US for some of those projects that Tom mentioned. We will be able to claim not only the CHIPS Act funding, but also the ITC as well. One thing that I would touch on just briefly, because
It is a similar type of program that we actually are just seeing the benefit of. So we want a case recently, you may have seen a few details about it, but we're essentially getting a $152 million tax refund here in the first quarter.
That $152 million will essentially be offset against the purchase of the equipment that we made in kind of that 2014-2015 period. As it's netted against that equipment, some of it will flow through as a gain, some of it will just flow through.
as a net to that equipment through the depreciation and I think the treatment of that refund will look very similar to the ITC.
and I think the treatment of that refund will look very similar to the ITC. Thank you.
Please stand by for our next question.
Our next question comes from Chris Queso with Credit Suisse. Your line is now open.
Chris.
Are you there?
Hi, sorry, long week. Good morning. So, the first question, the first question here is on CAPEX for the year and you've given some indications of what you expected for this year. It seems like it's responding to some of the industry conditions and it slows it in the second half of the year. So, the first question here is on CAPEX.
Again, talk about, is that more of a pushout into 2024? You know, it sounds like the customer still need the capacity. So what you're not spending from the original plan in 2023, does that start to accelerate as you get to 2024?
Yes, so think about the rate and pace of our CapEx as really being aligned with, you know, the rate and pace of our of our customers needs, as well as the productivity that we're actually able to drive. So we're actually becoming more CapEx efficient. And so the way I would think about it is I would think about some of this CapEx is indeed a push out from 23 to 24.
the call, we are still very much on track to delivering the capacity that we've been speaking about for some time. And that's 2.8 million wafers of capacity this year and then more than 3 million wafers of capacity in 2024. We are still very much on track even with some reduced capex.
and some timing of capex being slightly delayed, we are very much on track towards those numbers. Did you have a follow-up, Chris? I do, and so with the answer there, I mean it sounds like it's a similar way for capacity at lower capex, which is obviously good. As you go forward, could you give us some word of granularity on where you're spending that capex?
And there's a lot of different businesses and a lot of these processes are not fungible. So give us a sense of where that capacity is being targeted to. Sure. The single biggest portion of that CAPEX is actually still going towards Singapore and the ramp in Singapore. Singapore.
That's our new fab there on our existing campus. So that's the lion's share of the CAPEX that said, we are continuing to invest in all the regions with additional CAPEX. So we still have some additional CAPEX going into Germany.
to kind of complete that footprint. We still have some capex coming here into the U.S. as Tom mentioned. We do have some customers that are desiring some capacity on U.S. soil and so we'll be making some of those investments as well.
Let me just add to that, you said some of this capacity is not fungible. Some of the capital efficiency David is talking about is to make sure there is more fungibility.
between our technology platforms and quarters so that we can respond to the demand where it is at any given time.
Thank you.
Please stand by for our next question.
Now, our next question comes from Maddie Housene with SIG. Your line is now open.
Yes, thanks for taking my question. Going back to the ASB, can you help me understand how the mix is impacting and how is that compared to ASB life for it like that I have it for the lot?
Sure. So from an ASP perspective, you know, we've been not only mixing up our business amongst and markets or between and markets, but we're also mixing up our business even within those specific end markets. And so...
you know when I look across our N market landscape and I see our ASP you know is getting north of $3,000 away for end of fourth quarter.
You know, there's within the segments.
that the single biggest differentiator with regards to ASP is how much GF technology do they use?
And as well as is it single source revenue business. And so when you look at those two factors, you know, about two thirds of our revenue in 2022 with single source revenue, in fact, fourth quarter was our highest quarter of single source revenue in 2022 and about 90% of our design wins.
in 2022, our single source. And so, as we have customers increasingly being single source that GF on GF technology, that deep customer partnership where they're using more of our technology in their products to help them win in their market, then that obviously helps us with value capture.
Did you ever follow up, Manny? Yes. If I hear you correctly, I'll do a account for a bot.
I'm sorry, $1 billion of revenue this year, right? Did I hear you correctly? That's correct. It'll be approaching $1 billion of revenue in fiscal year 2023.
Okay, so that's what you're almost two to three times higher compared to 22.
Is that majority of that is that driven by single source?
be in simple source primary partner or that the technology makes that is also impacting the two to three times increase.
The majority of that business is single-source at GF.
Okay, thank you.
Michelle will probably take one more question.
Please stand by for our last question.
Our last question comes from Raj, Ben Brook, Gil with Needham. Your line is now open.
Yes, thank you and congratulations on great results. Just a big picture question, Tom, you mentioned obviously that the trend towards reassuring of supply, you guys are instrumental in the chips act. When you're discussing contracts with customers and trying to win share, are you seeing kind of an overarching trend among?
Fabulous, semi-cadaptor companies start to kind of reassure here in the US with you versus other foundries in Taiwan or elsewhere. Are you actually seeing that kind of tangible trend as we kind of look out for the next several years?
I think we're starting to see the beginning of that and I'll put a context around it. Maybe because it was the end of the year and it was holidays.
The NDA National Defense Authorization Act was passed, I think it was the last week in December , if not, is the second to the last week in December .
And specifically in there, it highlighted that the US government over the next five years will want to not have any supply in anything they buy that has chips from SMEQ. And so that's a relatively new event that...
our customers are starting to comprehend what does that mean. What I see is it's very difficult for them to want to go and pick an existing part number.
and re-qualified and resource it, but rather looking forward to saying how do they take their new product lines or their new spins of designs and then create a different footprint for that type of...
And I think this is the year 2324. We'll start to see some of that business come our way in response to these types of legislation moved and just in general, we get a more balanced buy chain across the globe and leveraging on our footprint.
It will never be a look back and do when we work over again in a design that already exists. It takes about the future designs.
So whenever we look back and do we work over again in a design that already exists, it looks about the future designs.
Yeah, that's super helpful. And just my follow up, Dave, if you look at the free cash flow projections potentially for this year.
Given kind of the reduction of the CapEx and you know the cash flow from operations growing this year depending on kind of assumptions, it looks like you know free cash flow is going to move up significantly into positive territory. So how are you thinking about usage of cash going from 2023 and beyond?
as you get more scale the model and you generate significant more free cash flow. Thank you. Sure, no, you're right. Based on our cash from operations and our ability to generate cash as well as our reduced capex and really kind of an envelope of capex going forward.
where we're essentially at our long-term model or close to our long-term model of roughly 20% of revenue being in CAPEX. Obviously, you have the ability to generate, you know, increasing and significant free cash flow over time with that model. So as we look at it right now, we're very pleased with our cash position.
We're in a net cash position, minus our debt. We're in a position where we can be free cash flow positive this year, which I stated in my prepared commentary. And then as we look to the future, as we go through the first half of this year, look at the demand in the second half and then the subsequent demand.
in 2024. We'll start to formulate those CAPEX decisions for the future and as we do that, I think you'll see us come out with some type of capital structure and perhaps some type of capital program that we would release to shareholders. At this time, you know, I'm not willing to go out publicly at this.
flow and stay tuned for a capital deployment strategy.
Stay tuned for a capital deployment strategy. Thank you, Dave.
I would now like to turn the conference back to Sam Franklin for closing remarks.
Thank you, Michelle. And thank you very much, everyone, for joining us today. Appreciate the questions. And we look forward to seeing many of you on the upcoming conference circuit. Thanks again.
This concludes today's conference call. Thank you for participating. You may now disconnect.
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