Q1 2023 Globalfoundries Inc Earnings Call
Good day and thank you for standing by welcome to the conference call to review first quarter fiscal year 2023 financial results. At this time all participants are in a listen only mode.
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Now I'd like to hand, the conference over to your Speaker today, Sam Franklin head of capital market and Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to global Foundries first quarter 2023 earnings call on.
On the call with me today, a doctor Thomas Caufield, CEO and David Reader CFO .
A short while ago, we released yes first quarter financial results, which are available on our website at investors <unk> com along with today's accompanying slide presentation.
Call is being recorded and a replay will be made available on our investor Relations webpage.
During this call we will present break oil progress on adjusted non <unk> financial measures.
Most directly comparable <unk> measures in reconciliation for adjusted non <unk> measures are available in today's press release and accompanying slides.
I would remind you that these financial 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 <unk>.
By the use of the future tense.
You should not place undue reliance on forward looking statements actual results may differ materially from these forward looking statements and we do not undertake any obligation to update any forward looking statements, we make today for more information.
<unk> about factors that may cause actual results to differ materially from forward looking statements. Please refer to the press release, we issued today as.
As well as the risks and uncertainties described in our SEC filings.
Including the sections under the caption risk factors in our annual report on form 20-F filed with the SEC on April 14 2023.
We will begin today's call with Tom providing a summary update on the current business environment and technologies.
Following which Dave will provide details on our end markets and first quarter results and also provide second quarter 2023 guidance. We will then open the call for questions. We request that you. Please limit your questions to one with one follow up.
I'll now turn the call over to Tom for his prepared remarks.
Thank you Sam and welcome everyone to our first quarter earnings call.
I'm pleased to report Q1 results that are in line with the guidance we provided in February .
As we continue to deliver a resilient financial performance.
It's a challenging macroeconomic and cyclical backdrop.
Let me start by providing a brief update on the current business environment.
Similar to others in the industry, we believe that semiconductor inventories are coming down more slowly than previously expected and that the rebalancing of demand will extend at least through the second quarter.
Particularly in end markets, such as smart mobile devices communications infrastructure and data centers as well as the lower end of the consumer and home electronics markets in general.
Based on discussions with our customers prior to that our fourth quarter update.
We previously anticipated that the first half of 2023 and likely the first quarter of 2023 with Mark the low point in revenue in the peak of the inventory cycle.
Just on more recent conversations with customers and our own internal models.
We continue to anticipate that the first quarter revenue will represent the low point of our 2023 quarterly revenue and that will have quarter to quarter modest sequential growth throughout the year.
Though we are expecting continued sequential revenue growth the return to more normalized inventory and demand levels is forecast to happen more slowly than previously anticipated.
And will most likely occur later in the year well into the second half of 2023.
Despite forecasting slight year over year improvements in E. S P, where our average selling price per wafer. We are now anticipating that revenue will decline year over year in the mid to high single digit percentage range.
David will comment on this further in his section.
Despite the headwinds in the aforementioned end markets, we continue to see healthy demand in faster growing segments.
Such as industrial Iot Aerospace and defense and the automotive markets. Additionally.
Additionally, we are continuing to grow our single source design wins at.
At customers and signed new L. T. A's, let me now touch on our results.
In the first quarter G F revenue declined 5% year over year and 12% sequentially.
With reduced wafer shipments being partially offset by year over year improvements in E. S. P N mix coupled.
Coupled with strong operational execution. This resulted in a resilient at your adjusted gross margin for the quarter as we continue to proactively manage our costs to help offset the broader industry headwinds.
We reported adjusted gross margin of 28, 5% in the quarter and we delivered adjusted earnings per share of 52.
Which were at the high end of our guidance range.
Dave will give more color on our financials in a moment, but let me now provide a brief update on some of our recent customer and partnership activities.
Consistent with continuing to build our customer partnership strategy, we have.
Added an additional five long term agreements during the quarter, which added incremental prepayments and access fees of roughly $200 million and revenues of approximately $1 4 billion under these L. T A's.
With respect to our differentiated product platforms, we continue to make progress in the first quarter with new GF product qualifications, serving our customer needs across communications infrastructure and data center automotive as well as smart mobile devices and Iot end markets, starting with automotive we continued to deliver.
<unk>, new power management products with expanded voltage handling capabilities on our highly competitive <unk> 30, BCD light product line at automotive grade. This adds additional differentiated feature on our growing automotive product portfolio in the communications infrastructure and data center end market.
At the most recent optical fiber Communications conference in March we were pleased to have no less than five of our customers, including air Labs and ran a us sure demos of their datacenter solutions using G F photonics specifically.
Specifically, our 45 CLO technology Air Labs also demonstrated the industry's first four terabytes per second optical solution for chip to chip connectivity.
The smart mobile devices, we are accelerating the delivery of enhanced features on eight SW, that's our leading RF silicon on insulator based product line for front end module components, including an enhanced low noise amplifier.
This technology will be making its way into the next releases of premium tier handset.
In Iot, we continue to innovate our differentiated technologies focused on enhanced power efficiency and embedded memory for secure intelligent solutions at the edge.
One example of this is our customer Nordic the market share leader in Bluetooth low energy Microcontrollers recently announced their next generation product series using Globalfoundries twenty-two MTX.
This is an exciting application of 20-F T X as it enables an integrated single chip solution delivering more RF range at industry, leading low power efficiency and embedded non volatile memory for security.
Finally, continuing our research partnership efforts under Jeff Labs, we executed and announced a strategic University partnership agreement with Georgia Tech. This agreement spans a broad range of research activities, including their leadership capabilities in advanced packaging Silicon photonics and workforce development initiatives.
To summarize I am pleased to report resilient financial performance in line with our guidance.
As our dedicated teams around the world continue to execute on the targets that we set.
And to deliver to our customers and our stakeholders with that over to you David.
Thank you Tom and welcome to our first 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 first quarter results were in line with the financial range, we provided in our last quarterly update <unk>.
First quarter revenue was approximately 1.84 billion and we shipped approximately 511300 millimeter equivalent wafers in the quarter, an 18% decrease from the year prior period.
Driven by reduced wafer shipments primarily related to mobile and consumer driven end markets.
Asps increased approximately 12% 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 87% of total revenue.
Non wafer revenue, which includes revenue from radicals nonrecurring engineering expedite fees and other items accounted for approximately 13% of total revenue for the first quarter broadly consistent with our expectations.
Let me now provide an update on our revenues by end markets.
Smart mobile devices represented approximately 38% of the quarter's total revenue first.
First quarter revenue declined 29% from the prior year period, principally driven by reduced volumes in the low to mid tier smartphone segments and a continuation of the well publicized inventory correction within the broader smart mobile market.
This decline was partially offset by higher asp's.
Premium tier mix growth and continued content growth and our RF transceiver and audio products, which recorded double digit growth from the prior year period.
As you've heard from others inventory levels have remained higher than expected and most of the smart mobile markets. During the first quarter as the inventory correction continues to work through the supply chain.
We believe that inventory levels will be largely normalized throughout the first half of 2023 and at more historical inventory levels will be achieved by the second half of the year.
We continue to focus on growth opportunities in our RF transceiver, and Wi Fi SSE technologies, as we see greater value capture from the premium tier smartphone segment by supporting the transition towards more feature rich handsets.
And the first quarter revenue for the home and industrial Iot market grew approximately 7% year over year, representing approximately 19% of the quarter's total revenue.
Year over year growth in this end market was primarily driven by our aerospace and defense business, where we continue to ramp to volume our design wins and driven by our wireless technologies that enable the broadening use of digital payments as well as industrial and government connected devices.
We expect increased customer demand for next generation analog and mixed signal technologies, particularly within the smartcard and aerospace and defense end markets to largely offset the near term inventory correction and market softness and the more consumer centric portions of the Iot market.
As Tom discussed automotive continues to be a strong growth segment for us.
First quarter revenue grew 122% year over year, representing approximately 10% of the quarter's total revenue.
As discussed on our fourth quarter results, we expect to see a continued ramp across our processing sensing connectivity and vehicle infrastructure technologies throughout 2023.
We have and will continue to allocate more of our existing capacity as well as add additional capacity to support the continued growth of silicon content within the automotive market.
Next moving to our communications infrastructure and data data center end market.
First quarter revenue grew approximately 8% year over year and comprised approximately 19% of the quarter's total revenue, which was broadly in line with expectations.
Due to the buildup of data center inventory in 2022 and demand softening for enterprise Wired infrastructure, we expect to see a decline in revenues for this end market through the first half of 2023 with volumes expected to improve later in the second half of 2023.
Finally, our personal computing end market declined 12% year over year in the first quarter and comprised approximately 2% of the quarter's total revenue.
PC and notebook demand continues to be soft and we expect this end market to continue to decline as a percentage of our overall revenue in 2023.
Also in the first quarter, we were awarded and received a tax refund of $152 million by the state of New York related to the significant manufacturing investments we've made in the state.
We're proud to have partnered with the state of New York to create tremendous value for the local community.
For the first quarter, we delivered adjusted gross profit of $525 million, which was at the high end of our guided range and translates into approximately 28, 5% adjusted gross margin.
The roughly 320 basis point year over year improvement was driven by higher Asp's.
And a richer product mix.
Operating expenses for the first quarter represented approximately 11% of total revenue R&D.
R&D for the quarter was approximately $105 million and SG&A declined sequentially to $94 million.
Total operating expenses were about $199 million as we continue to prudently manage our costs.
We delivered operating profit of 326 million for the quarter, which translates into an approximately 17.7% adjusted operating margin.
Roughly 330 basis points better than the year ago period and above the high end of our guided range.
First quarter net interest and other expense was $13 million and we incurred a tax expense of $23 million in the quarter.
We delivered first quarter adjusted net income of approximately $290 million, an increase of approximately $58 million from the year ago period.
As a result, we reported adjusted diluted earnings of 52 per share for the quarter.
Let me now provide some key balance sheet and cash flow metrics.
Cash flow from operations for the first quarter was $479 million.
Capex for the quarter was $957 million or roughly 52% of revenue.
At the end of the first quarter, our combined total of cash cash equivalents and marketable securities stood at approximately $3 2 billion. We also have a 1 billion revolving credit facility, which remains undrawn.
Before I transition to guidance for the second quarter I will comment briefly on the outlook for the year as Tom articulated in his prepared commentary, we believe that the first quarter represents the low point for our revenue in 2023 and that we will grow slightly on a sequential basis quarter to quarter to quarter to quarter three.
Out the year.
Although we only guide one quarter at a time, our expectation based on our internal models and our discussions with customers is that the second half of 2023, well signaled the normalization of inventory levels and that increased volumes are forecast to occur later in the second half than previously anticipated.
Based on updated models, we expect that year over year shipment volumes for 2023 will decline in the high single digit percentage points range, partially offset by modest improvements in E. S. P N mix, resulting in a 2023 year over year revenue decline in the mid to high single digits.
Next let me provide you with our outlook for the second quarter.
We expect total <unk> revenue to be between 1.81 billion and 1.85 billion.
Of this we expect non wafer revenue to be approximately 10% of total revenue.
We expect adjusted gross profit to be between $498 million and $527 million, we expect adjusted operating profit to be between $288 million and $327 million.
Excluding share based compensation for the quarter, we expect total opex to be between $200 million and $210 million.
At the midpoint of our 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 net interest and other expense for the quarter to be between 4 million and $12 million and tax expense to be between 20 million and $25 million.
We expect adjusted net income to be between $256 million and $299 million on.
On a fully diluted share count of approximately 558 million shares we expect adjusted earnings per share for the first quarter to be between 46 and 54 cents.
For the full year 2023, we continue to expect Capex to be approximately 2.25 billion.
In summary, strong operational performance and proactive decision, making across our business enabled us to deliver first quarter results broadly in line with the guidance ranges, we provided in our fourth quarter earnings update we.
We are continuing to tackle the challenges presented by the cyclical headwinds impacting our industry and are implementing initiatives to mitigate their impacts on our business as we remain focused on delivering the strategic goals and financial targets set out in our long term model.
With that I'll turn the call back over to Tom.
Thanks, Dave.
We are proud of <unk> 14 year history, and specifically the strong progress we've made over the last several years.
But the opportunity ahead is even more exciting for Jeff.
In a world that depends on the supplier for semiconductors for economic National and supply chain security, we offer our customers a unique and differentiated value proposition.
We achieved this by focusing on innovation and application specific features or end markets require and deliver these via deep customer partnerships.
You've heard the story play out as we've continued to achieve significant growth in sectors, such as automotive and Iot to.
Two of the most exciting growth engines for industry.
What's different about these markets is that innovation required to win is not based on Moore's law scaling.
Jeff wins in these end markets, because we deliver industry, leading power efficiency with our proprietary <unk> technology.
We win because we bring world class RF connectivity across all our technology platforms, allowing for optimized digital and analog content and customer designs and we win because we add intelligence and security at the edge with a range of world class embedded memory technologies.
The proof is in the numbers as you heard early on during the call. We are continuing to grow our revenue in these markets and it is our differentiation that is driving that.
We see secular acceleration to the role of semiconductors in the World, We believe and the criticality of secure manufacturing to deliver products to global markets.
And we are committed to continuing to invest in our global talent. So the G. F can play an increasingly vital role in the future of this industry. It isn't that context that I'm delighted to announce two accomplished leaders who are joining the G. F leadership team to help drive our business and our technology leadership and accelerate our financial performance during the next exciting.
Getting phase of our journey.
Industry veteran Niels and risk off will be joining us in June as our chief business Officer.
Neil's will own and deliver our product and technology roadmap, our commercial strategy and our go to market execution.
Neil's comes to US following a 20 plus year career at Texas instruments.
Whereas last role was as senior Vice President and Executive Officer responsible for the company's multibillion dollar analog power business.
He brings deep expertise in power management analog and mixed signal technologies, and an impeccable track record of driving and delivering financial performance.
Our existing product and markets sales and technology teams will report to Niels.
Additionally, Tim stone will be joining G F in June as our Chief Financial Officer.
Tim will build on the strong foundation laid by David Reader and will focus on accelerating our financial performance.
Enhancing our investment discipline and continuing to bring transparent communication to all of our stakeholders.
He brings a world class finance pedigree D. G S, including 20 years at Amazon in senior finance roles, including as CFO for the AWS and devices business.
Tim is a seasoned public company CFO with experience at Ford Motor Company Snap and most recently as the CFO for a private AI software company.
With his breadth of experience and track record of delivering business outcomes in fast moving technology enabled industries that GF serves today.
Tim brings new and vital perspectives to help guide G F. In its next chapter.
David Reader will be leaving G F. After transitioning to Tim stone over the coming months.
Dave has been a true partner to me through our transition to the public markets.
And has left an indelible imprint on G F and on me personally.
On behalf of the entire <unk> family.
I wish Dave the best of success in his next chapter.
Dave I'll turn it back to you for your final thoughts before we head into Q&A.
Thanks, Tom three years ago, I joined global foundries with the singular mission.
One that was shared across GFS talented and diverse workforce to build the world's leading and only geographically diversified feature rich semiconductor foundry.
We have made tremendous progress towards this goal and have never been better positioned to serve our customers increasing demand across multiple markets as a secure geographically diverse partner with best in class technology with.
With all the progress <unk> has made I'm ready to hand over the reins to Tim Stone.
I look forward to welcoming him to Jeff and we will continue to support the company as we complete the transition over the coming months in closing I wanted to extend my appreciation to our 13000 employees around the globe, who deliver every day for our customers with that let's open the call for Q&A operator.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Your question. Please press Star one again, please limit your questions to one question and one follow up thank you.
Please standby will compile the Q&A roster.
And our first question comes from the line of Harlan sur with Jpmorgan. Your line is now open.
Good morning, Thanks for letting me ask a question Dave Thanks for all the support and helping to drive this strong execution profile in them.
Of luck on future endeavors.
The team's pricing yeah. Thank you <unk>.
Pricing is based on technology differentiation, which drives the great high mix of sole source for engagement.
Partnerships are not arm's length, right, but very strategic on.
On the flip side I mean, the supply demand dynamics in the industry have we can competitors continuing to add capacity.
You did say that the team is still on track to grow this year, but what about on new business and LTA that youre, winning LTE is different negotiating whats the ASP trend on the new business.
Thanks Harlan.
When I think about our pricing you know the first time, we had we talked about pricing for 2023, which was on our November call, where we said we thought pricing was going to increase on a year over year basis, and 23 versus <unk> 22, we we reiterated that again in February we delivered it in Q1 and were kind of reiterating it for the year.
Here in here in 2023 that we believe that pricing will increase slightly on a year over year basis 23 versus 22.
When we look out in time, and we think about the D wins that we're winning in the LTA is that we are signing five of them in the first quarter, another $1 $4 billion of Lta's.
That is L. T A's deliver the economic value that GF needs to deliver our long term financial model and so I think customers are looking through this kind of near term preservation with with the inventory in the channel there looking out into time and they are seeing.
Capacity constraints and the future, particularly in the geographies, where they want that capacity.
And they are hungry for that geographic diversification as well as the technology that you have delivers Tom anything you'd add to that.
Yeah.
This is in the.
The bottom of our slowdown and we signed these kinds of long term agreement.
Our single source base business, if you look at the design win mix.
For the first quarter over 90% were single source business and our discipline around design wins, we will make sure that all new design wins are accretive to our financial model.
That's the way, we're driving our business, it's not about all business, it's about accretive business.
Appreciate that and then for my follow up given the weaker full year revenue outlook.
You should still grow your revenues on average like mid single digits sequentially in Q3 and Q4.
<unk> got the strong ASP profile. So how should we think about the gross margin profile for the remainder of the year kind of exit this year at 30% or better.
Better gross margins.
So Harlan as you know well, we'll guide one quarter at a time, but we did want to give you some of that color for the year.
That stated I would like to add a little bit more context.
When you think about 2022 for the year of 2022, we ran utilization.
And the very high 90% for the entire year, almost almost 100% for the entire year.
And so when you think about 2023.
In the first quarter we.
<unk> that we would run in the mid eighties from a utilization perspective as you know every five points of utilization is roughly two points of gross margin, but yet when you look at what we delivered in Q1 from a gross margin perspective. It was actually very much in line with what we delivered for the year of.
2022, and so we've been able through good operational performance improved mix improved pricing to be able to reset the gross margin baseline for 2023, and so when you think about the full year Q1, being the lowest quarter for our revenue.
We stated that we believe we would guide on acute acute acute basis sequentially throughout the year.
Would expect there to be a high correlation of our gross margin and revenue.
Perfect. Thank you very much.
One moment for your next question.
And your next question comes from the line of Mark with buses with Jefferies. Your line is now open.
Hi, Thanks for taking my question.
Dave sorry to leave in really appreciate all the great support.
That you've given us over here at Jefferies. So thank you for that.
Maybe a question.
<unk>.
On the topic of re shoring, which is interesting for many investors. It sounds like your engagement with customers is very high.
I imagine that this is because you guys are providing great technology with a good value.
But I guess I'm wondering is there.
Way to quantify or.
Or how the trend of re shoring is impacting your engagements are our customers telling you that.
Part of your value proposition is there.
The ability to bring.
The manufacturing back to local markets or.
If you can provide any color on the conversations that youre, having with your customers on that topic. Thank you.
Thanks Mark.
It's an important I think the realization of how important is the first to get a more balanced supply.
Supply chain.
Concentration in.
Very small pockets of the world and that good for geopolitical geographic geological reasons for a lot of reasons. So the realization is there and now it always comes down to execution and implementation.
I would tell you.
A lot more awareness and drive in more sensitive applications think of aerospace and defense where supply chains out of China. For example would be very problematic for those types of applications.
A lot of energy out of the Fabless companies in.
<unk>.
China and Taiwan.
Businesses can be shut down if they don't have a global supply chain.
We are seeing is a lot more conversations companies trying to plan. Their next move I don't think it's realistic for anybody to say, let me take an existing design and reported somewhere else that's a lot of.
Reuse of important engineering talent, but thinking about future designs and planning it not only on technology.
And application space, but who and where it's going to be built so I would tell you. The net net of all of that this still remains an opportunity for US ahead very little of it in the present P&L that you've heard today.
Gotcha, that's helpful. A follow up on the on the auto business, which is.
More than doubled on a year over year basis.
You continue.
You expect to see continued ramp here and you're adding capacity how.
Can you just remind us like how you think about the growth vector and auto is.
Dublin annually is this kind of how we should think about this for you guys or.
Could you just talk about how you see this business.
Over the next several years thank you.
So I'll go in reverse order, it's all about what you believe if you believe that the transition from internal combustion engine.
Call eight economists connected electrified vehicle.
Drive significant content growth of semiconductors in the automotive industry somewhere between 10 and 15% compounded.
<unk>.
The rate at which we expect our growth, but because we're starting with new design wins on new models and off a relatively smaller base youll see a higher growth rate like you've seen from us think about if we go back in 2020, our automotive revenue was less than $100 million last year. It was.
Around the 375, Mark this year, we still feel that we're going to be bumping our head up on $1 billion were earlier, we were talking about a fourth quarter run rate. So we have high visibility to the types of applications or technologies going into that.
With cars and the types of features to feel very confident that we're not done growing in this space, but doubling on big base is a lot harder than doubling on small base.
I firmly believe that we will continue to grow revenue in this market and gaining share and more importantly.
Great. Thank you very helpful.
Okay.
Yes.
One moment for your next question.
And your next question comes from the line of Zack.
Are you with Banc of America Securities. Your line is now open.
Thanks for the question and thanks, and best wishes to Dave on his next adventure really missed.
So first I wanted to ask Tom you mentioned in second half 'twenty two market return to some kind of.
Normal trends is that based on historical seasonality is that based on specific customer orders.
Because your large smartphone customers was talking about.
The weakness in the smartphone market and kind of persisting towards the end of the year.
So I'm just curious what is giving you the confidence that second half good market return to some level of seasonal trends.
Well I.
I think our point was.
We're starting to start to see normalization of inventories in the second half and as a result, that's why our revenue will have very modest sequential growth.
Inventories are coming down if you look.
On aggregate.
First quarter, we saw from an industry range.
Modest decrease in inventories that bodes well for the second half, especially with certain customers are telling us they want to let the inventories come down there.
More normalized how they're feeding the channels they want to get this past us.
So.
The real change I think as we came into this year. There was a belief that the second half would be a strong recovery.
What we're seeing in the second half is a more muted recovery that was the point, where we're trying to make and.
And if I could if I could just build on that just just a little bit in a couple of end markets.
So with respect to smart mobile obviously.
That market is a bit more challenged with some of the inventory there as well as some of the handset volumes.
Bright spot for US is that we do play in that premium segment of the market where.
Where we actually not only play in that premium segment, but we also attach more silicon and that premium segment and that is a segment of the market Thats holdup held up a little bit better we talked a little bit about automotive earlier in the call. So I won't reiterate that point.
But then the other the other end market or maybe sub end market, but I would talk about is that.
The aerospace and defense business as well as the industrial side and governmental side of the Iot business has also held up quite well and so while we've seen smartphone general weakness and we've also seen some of the lower end consumer centric weakness, we do have some other businesses that are healthy.
To offset that weakness and we've been able to reallocate capacity in a very capital efficient way to those markets that are growing.
Okay.
And.
My second question is.
What is the report card on LTE is that we're supposed to be executed this year because if you go back, let's say a year right.
And think about the FDA that were supposed to come through in 'twenty. Three what has been the actual realization of that how much has been pushed out or canceled.
What I'm trying to get a sense for is how flexible are you guys with the FDA is and how much can we depend on them too.
I delivered on a certain amount of revenue expectation for a given year.
Great. Let me, let me address that one and then Tom maybe you can you can build on it as well.
So from an LTA perspective, the LTA is or actually are.
Forming to their stated purpose and what was stated purpose. While that stated purpose was that they would create a framework for discussion for global foundries and our customers such that when there are inflection points in the market that we would sit down.
In a rational way and in an equal way and have a healthy conversation around the investments that we've made for maybe demand that perhaps isn't materializing. The way. We originally expected and so we all recognize that we're in an environment, where there is too much inventory in the channel and so just continuing.
To ship more inventory in the channel actually isn't isn't helpful.
And so that framework has really come into play where we have sat down with our customers and we have looked at the entire economic life and value of that contract and we've worked across the three main elements that we had spoken about previously I mean as early as even our road show and that was that was.
We talk to our customers about price, we talked to them about volume, we talked to them about duration and we also talk to them about future design win opportunities such that we can capture more share of their wallet in the future to preserve if not enhance the economic value of those lta's.
So we've been able to deliver on that and so as we mentioned last quarter. We had one customer where we had we had an under utilization fee settlement on.
And that one was a fairly well publicized we do not have any other new settlements to announce but what we have been able to do with those contracts is work across that framework that I discussed to not only preserve but also enhance the economic value to EGF, Tom anything you'd add to that I think that.
That was exactly the intent was to create partnership.
To go to manage the upsides and downsides together.
And the operative term is preserve the overall economic value.
The agreement.
And a lot of that has to do with.
New wins and new opportunities in extending the life of these and again back to <unk>.
Quarter that we were all calling in at a low point for our industry.
Still Brian and $1 5 billion of new <unk>.
Long term agreement and $200 million of prepay as part of that.
Thank you.
One moment for your next question.
Okay.
Your next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting me ask a question David Best of luck Sad to see you go I wanted to go back to the pricing side of the equation. I know you guys don't guide by wafer units and pricing, but it looks like the first half of this year is on the pricing side going to be up double digits and you said the full year was going to be slightly up year over year that seems to imply the second half.
Going to go down if that math is correct is that something to do with mix are you having to price more aggressively as part of the negotiations with the LTA is that you just discussed and the last question is there any sort of metric that I'm missing in that analysis.
Sure.
Obviously, the compares in the first half or a little bit easier than the compares to the second half of last year, what we've always talked about as we've talked about the pricing would continue to improve as we ramp those LTA as many of which started ramping in the middle to the last half of 2022 and so the way we.
We think about pricing is.
We think pricing at the current levels.
It's very stable.
Slightly up and then youre going to bump around a little bit depending on what the mix of your businesses and so so when you think about our year over year basis that would lead you to that kind of double that high single digit double digit low teens type of growth.
You mentioned and then as you get towards the back half of the year you look at pricing that's relatively flat depending on exactly what the final mixes.
Okay.
Got it thanks for that and then.
From an end market perspective, you said earlier that you reiterated the bumping up against the $1 billion in the automotive side of things, So thats really impressive growth.
And it seems like that could get you that slight sequential growth in the back half quarters all by itself.
Are there other segments that you expect to continue to go down in the back half. It seemed like you said that inventory should be pretty normalized so I wouldn't expect them to go up that fast necessarily but it didn't sound like anything was going to go down so what's really the offset to the automotive growth.
Yes.
Sure when you think about the sequential growth in the back half of the year.
Really what you are looking at is yours youre hearing us say, when we say slight youre hearing us say, we feel we feel good about the industrial.
And the governmental portion of home and industrial Iot. So that's the A&D as well as the industrial business in Iot, we feel good about automotive we've taken a more cautious outlook on the low end of consumer as well as the lower end of the handset market and so that's why you've heard us.
Communicate is just the fact that we feel good about those markets.
And then on the aforementioned comments and then the other markets. We've just taken a cautious outlook and if the inventory normalizes the way we expected.
Then perhaps will do slightly better if the inventory and the macroeconomic kind of low end malaise continues then we will be in line with what we told you. So we feel like we've positioned ourselves.
<unk>.
Thank you.
One moment for your next question.
Your next question comes from the line of Joseph Moore with Morgan Stanley . Your line is now open.
Great. Thank you.
Thanks, David and good luck.
In terms of the Capex you guys.
<unk> maintained its $2 billion to $5 billion from last quarter.
Alex a little lower.
For the year, So I wonder if you could just kind of walk us through the tradeoffs that youre, making is that confidence in 2024.
And.
Just what are the tradeoffs between trying to drive more cash flow versus trying to invest in the business.
Sure. So first let me start with just by saying that the majority of that Capex is really related to fab seven age on our campus there.
In Singapore, and really giving us the capability longer term to be able to satisfy some of these LTA that we're signing today as well as some of those lta's that we've that we've signed in the past.
Before I just immediately direct your question I'll address your question I do want to provide a little bit of context. When we we talked about our expansion plans, we talked about increasing our wafer capacity from about 2 million wafers in 2020, so about $2 4 million wafers in 'twenty, one to about $2 6 million wafers last year to about $2 8 million.
For us this year to north of 3 million wafers in 2024 and were actually very much on track to deliver that capacity. In fact, we're on track to deliver that capacity with probably what will be something like $3 billion less capex than originally anticipated for that total expansion that I just am.
Mentioned and so we feel like we have appropriately positioned ourself for for growth in the future for the business that we're winning both through Lta's and design wins.
We will continue to make trade offs with regards to free cash flow.
For the period in fact, we stated last quarter that we thought we would be free cash flow positive for the year.
I reiterate that on this call that we believe will be free cash flow positive for the year and then as we as we look to the future. We are very well positioned with capacity for future growth, Tom anything you'd add to that.
So let me do a little P times Q here.
Average price three 3 million wafers, we've essentially position.
The facilities are factories to give 9 billion plus of.
Revenue for the future without any just on the wafer business not even the non wafer revenue. So the capital we've planted is going to allow us to grow and actually respond to the market.
Much more quickly than we were in 2021, when we had to build that capacity.
I think the capital that we've deployed is really positioned the company.
For the eventual growth and it will make us a lot more capital efficient as we as we think about.
2023, and 2024 and beyond.
Great. Thank you for that and then in terms of your overall.
Utilization of your capacity.
We continue to hear about from some of the automotive centric companies.
There are some bottleneck still in terms of specifically non volatile memory oriented MCU processes for for automotive things like that I know you've talked about fungibility, but are there still any areas, where you guys would say.
There is a hotspot, where if we can add a little bit more of this type of capacity, we can grow more.
Yes, there is never a perfect world. This this idea that supply matched.
Matches demand every day every month for years is not there and there are there are segments and customers where we are.
Scrambling to two <unk>.
<unk> enough capacity in a corridor to make those very specific platforms with the features and so we see that too we see that we're still in the game.
Trying to respond to the complete set of customer demand.
Withstanding that we still will deliver our full outlook on the automotive business for this year.
Great. Thank you.
Okay.
One moment for your next question.
Your next question comes from the line of Rajiv Gill with Needham <unk> Co. Your line is now open.
Yes. Thank you for taking my questions and best of luck.
Dave as well so just a question on the smart mobile.
Market Thats really one of the main drivers of the weakness I'm wondering if you could maybe.
Break it down a little bit more specifically in terms of where you are seeing.
Softness in terms of technology is it more on the with the RF front end module customers as with some of the NFC or is it just kind of across the board.
Given kind of the large inventory correction that is occurring in the smartphone industry and any color on the smart mobile will be helpful.
Maybe David I'll start on this one.
So.
What's the industry outlook last year.
Double digit decline in handsets this year at 3% with an inventory climbing. So this is the broadest stroke.
Most heavily weighted as just in unit sales.
As David pointed out before.
At least the premium handsets are impacted less than any other handset and that's where we have high content.
In fact, I think <unk>.
Mobile smart.
Smart devices smartphone device business is faring better.
Because some important design wins, we had last year that is shipping this year, that's offsetting some of this.
The clients so it's not any particular.
Element of a feature in the handsets, it's the overall volume.
Yes.
A high high fraction of that.
In fact that our smart mobile revenue smart mobile device revenue was only 38% in Q1 this year.
David anything to add to that.
Well stated.
Okay.
Thanks, and just for my follow up regarding pricing you talked about some of the pricing in the near term, but if you kind of think about long term theres been discussions around.
If wafers are made in the U S that the.
Domestic foundries could charge a premium in terms of pricing.
So theres been chatter about that and is that something that you are.
Debating with customers is that a reality.
Premium pricing for kind of wafers made in the USA.
I would say it this way.
Well, you're hearing about is capacity being put on capacity drives investment and investments require competitive returns.
And so youre seeing as it is with the reality of the right economics to go create new capacity on these nodes and how do we do it in the most efficient and economic way.
And the answer is we have a very disciplined.
Industry environment.
These being put on in partnership.
Investments that are being put on with long term agreements.
But I think that does it's really healthy for the industry.
And it creates a very constructive environment.
Through partnerships that the investments that companies make will get healthy and competitive returns.
I appreciate it best of luck. Thank you thanks, Brian .
Yeah.
Your next question.
And your next question comes from the line of Chris Danley with Citi. Your line is now open.
Hey, Thanks, guys.
A little more specific in terms of what's going on this year can you just talk about.
How much.
In aggregate of the LTA is have been pushed out and then what's been the change or how much change in pricing have you had to renegotiate.
Okay.
Sure Chris.
Look when we think of this year.
If you go back to our capital markets day.
We thought we were going to essentially be fully utilized this year.
Now not all of that was covered with LTE.
But but that between LTA as Npls I mean that was that was our expectation this year.
And as we kind of rolled into the year and we looked at the inventory positions in the channel and we looked at how the sell through was going based upon the macroeconomic backdrop that we're in.
We recognized with our customers.
Continuing to build inventory was the wrong decision. So we sat down with those customers.
We started working on on the framework of the <unk> to be able to.
Preserve the economic value of those contracts because of the dollars that we had invested in capacity and so what I can say I can't speak specifically contract by contract.
I can tell you that we did close a contract that we disclosed our or maybe they just closed but it was broadly talked about.
Weather was that Underutilization fee.
Do not believe that we're going to have significant underutilization fees that are required throughout the year and certainly that's not really factored in a meaningful way I would say for our annual forecast for 2023.
We've been working with those customers to <unk>.
Take the economic value of those contracts preserve them.
As well as to ultimately enhance our value and deliver our long term model and so I think that's probably the.
Most of that I would add there Tom anything that you would add.
Minor add to that when you think of single source business.
No.
If there is price elasticity, if I look at places where they get more volume the volume is the volume and the prices the price and the question is how do you go work through an inventory correction like this it's not let's go win share by price elasticity. That's the value proposition, we provide our customers. We are single source business differentiate they can <unk>.
<unk>, they're products that we can be a better supplier to them.
Great Times, and then the inventory correction.
And if I could just add one point.
I don't know of a contract that we've amended.
In which price went down.
And the LTA amendment. So so when the volumes are being de committed the conversation isn't about how do you decrease price to try to stimulate demand when you have too much inventory. So it's usually the going in the other direction. So hopefully thats helpful clarification.
Very helpful. Thanks, and for my follow up.
Great job on lending Neil's He's got a good reputation I guess, Tom can you talk about the Genesis of the CBO job I don't think you guys have had this before or is this just to sort of manage this this.
This downturn that seems a little more longer and serious unexpected or just talk about.
Why he's coming over what is specific duties are going to be.
Yeah very good it has nothing to do this downturn it has everything to do about our future.
We do.
The complexity of our business.
And the uniqueness of being a foundry.
<unk> a tight coupling between understanding the end markets and the specific requirements in end markets. So we need to be as much as an expert as our customers and understanding the future where end markets are growing so that we can.
Right.
Product lines.
By definition to meet those end markets and then drive our technology development in an aggressive and accelerated away and we need the three of those areas to come together with one executive who can who can.
Integrate that activity and so our commercial team.
With under one <unk>.
With our.
Business unit team under Mike Hogan, and our technology development under Greg Bartlett altogether will report into meals to drive that integration to accelerate our financial.
And commercial success and performance.
Thanks.
Yeah.
And one woman prayer next question.
Your next question comes from the line of Mehdi Hosseini with <unk>. Your line is now open.
Yes. Thanks for letting me ask the question two follow ups, David do you have any guidance for EBITDA in Q2 and.
2023.
Sure.
Okay doing well EBIT EBITDA guide I would think about EBITDA on a sequential basis.
As you know tracking with the marginal fall through that you would see from slight revenue growth.
So I think that statement holds true for for second quarter as well as the subsequent quarters, where we're expecting sequential growth throughout the year kind of Q to Q to Q for the remainder of 2023.
Got it and best of luck in your next endeavor and a question for Tom.
I understand there's a lot up for and excited the over inventory correction.
Which is nothing new given the cyclical nature of the industry, but we're not running them from you maybe a little bit.
Good time.
For you to remind us.
Smartphone and electric vehicle.
Outside the Soi wafer what are the some of the key.
Product or.
Drivers for increased content, especially as you look into post inventory correction.
It will be great. If you could remind us of those key growth drivers outside of the core Soi wafers.
It starts with embedded memory for Microcontrollers for automotive and it starts with our.
By Cmos device technology for higher voltage power management chips with embedded memory for both control and power management.
<unk> of.
Of.
<unk> and technologies beyond RF, Soi RF Soi, which features in the front end module a phone.
And so I said it earlier Raymond market, we are the ultimate player in low power on our <unk> platform.
We bring a broad range of RF to all of our platforms not just for front end module modules, but for all levels of connectivity, especially in the Iot space and then the winning play is to create.
Intelligent.
And secure.
Processing capability.
Having industry, leading embedded memory and our solutions and that's what plays to the strength in Denmark.
Is that the key milestone or or thresholds.
<unk> adoption is specific to <unk>.
So the vehicle is this or is this just going to be.
Steady Eddie kind of adoption.
Adoption.
Electric vehicles Pro replicate then you will see increased content.
Milestone that would accelerate the adoption.
So I think if it was just on electrification of cars.
You start to look for inflection points of help model years come where.
Units of internal combustion cars go down and fleets change or brands changed their fleet strategy, but.
Because it's about economists and connectivity in the car, it's not just one driver and we play in a broad range of those applications I don't think I could pick a particular car model year on year has less features and it effect it becomes the standard each year. So think of this is about it.
Transformation of the auto industry niches to electrification, but to connected cars to autonomous cars and Thats.
The Ranger and suite of products and applications in cloud.
Got it.
One last question please.
Yeah.
Alright.
Your last question comes from the line of.
Krish <unk> with Cowen <unk> Company. Your line is now open.
Yes, Thanks for taking my question and David Thanks for your help and.
Good luck on the next endeavor.
Two questions, either Tom or David number one on Afg's, it's nice to see Asp's holding up despite lower volumes.
But next year is more double digit nanometer capacity comes online for the industry how to think about asp's into next year, and then I had a follow up.
Sure when we think about Asps for 2024.
Again, I would kind of point you back to that that capital markets day presentation. If you stood back and Kenneth pointed at that chart you would see that we had lta's.
That covered about three quarters of the capacity for.
2024, and so I would say that a lot of that pricing discussion.
Is already has already happened it's already been memorialized.
And it's already been signed and a contract. So then then you look to the future and you say well what does pricing pricing looked like in the future and when I look at the new design wins and the new LTA is that we're signing.
Pricing is holding up very very well in fact, I would say pricing is actually delivering it's accretive to our long term financial model that we had put out as we became a public company and so so it remains a very constructive pricing environment in the future I recognize that there's more <unk>.
<unk> digit nanometer capacity that's come online.
And even in some regions of the world.
Double digit nanometer capacity that has come online, but as we've always stated our interest is in differentiated accretive business.
Where we provide an attach a lot of GF technologies.
More than 90% of our design wins in Q1 were single source design wins, we remain kind of around that two thirds of revenue is single source revenue and over time those two numbers.
Will converge.
And so we feel quite good about pricing Tom anything yet it's back to the economics of our investment.
We will be forced for much more constructive environment for how we will fund the doubling of this industry over the next decade.
Got it Super helpful. And then just a quick follow up.
Honestly the auto industrial segment has held up pretty well for you folks in many many of those ports slow the industry kind of curious do you worry that there could be the next shoe to drop or it could moderate as smartphone start getting better than dampen what could be a stronger recovery.
For the horizon that we see in talking to our customers.
This transition we've been talking about this morning.
The autonomous connected and electrification of cars.
See the next decade Automd.
Automotive is a key driver for our industry as we continue to add more and more content to these cars.
Key for <unk> is to make sure that we are developing the technologies that best.
Meet those needs and provide differentiation for our customers.
Well, thanks, a lot and congrats it.
Thank you.
Okay.
And we don't have any further questions at this time I will now turn the call back over to Brad Cohen.
Thank you Bella and thank you everyone for joining us today, we appreciate the questions.
As always look forward to seeing many of you on the upcoming conference circuit.
This concludes today's conference call. Thank you for your participation you may now disconnect have a good day.
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