Q2 2023 GlobalFoundries Inc Earnings Call
Yeah.
Good day and thank you for standing by welcome to Global Foundries second quarter 2023 earnings Conference call. 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 right, Glenn VP of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to Globalfoundries second quarter 2023 earnings call.
On the call with me today, a doctor Thomas Coalfields C. R. David Reid, our CFO , Neil <unk>, Chief business Officer, a short while ago, We released second quarter financial results, which are available on our website at investors <unk> com.
Today's accompanying slide presentation is.
This call is being recorded and a replay will be made available on our investor Relations webpage.
During this call we will present, our F or S unadjusted non financial measures.
Most directly comparable wife arrest measures and reconciliations for adjusted non <unk> measures are available in today's press release and accompanying slides.
I'd 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 or by the use of the future tense you.
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 tomorrow.
For more information about factors that may cause actual results could differ materially from forward looking statements. Please refer to the press release, we issued today.
Those risks and uncertainties described in our SEC filings, including in the section under the caption risk factors in our annual report on form 20-F filed with the SEC on April 14th 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 in the second quarter results and also provide third quarter 2023 guidance.
On the call for questions with Tom David Meals, 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 second quarter earnings call.
I'm pleased to report second quarter results that are at the high end of the guidance, we provided in our first quarter update.
As we continue to deliver consistent financial performance.
Against the backdrop of prolonged macroeconomic and cyclical uncertainty facing our industry.
Let me start by providing a brief update on the current business environment.
Similar to others in the industry, we believe that semiconductor inventory levels across several end markets are coming down more slowly than previously expected.
Certain end markets that we service such as smart mobile devices.
Communications infrastructure and data center.
As well as the lower end of the consumer and home electronics markets are being impacted by a combination of increased inventory levels and lower year over year demand.
Consistent with the discussion in our first quarter update we continue to believe that the return to more normalized inventory levels in the consumer centric and market is forecast to happen.
Slowly than previously anticipated and based on our discussions with our customers with a best occurred towards the end of 2023.
So we still expect sequential quarter on quarter revenue growth throughout 2023.
We believe that the rebalancing of demand for these markets will also extend later into the year and will continue to be impacted by the global macroeconomic and consumer demand outlook remained challenged.
Now despite these headwinds we continue to see healthy demand in faster growing end markets, such as automotive industrial Iot and aerospace and defense.
We've announced some exciting partnerships, which I will comment on shortly and we are working closely with our customers to support these critical important markets.
Let me now touch briefly on our results, which Dave will discuss in more detail later in his commentary.
Revenue in the second quarter increased sequentially to $1.845 billion, which was at the high end of our guidance range.
We reported adjusted gross margin of 29, 6% in the quarter, which exceeded our guidance range.
This better than expected performance was primarily driven by the favorable timing.
Positive manufacturing variance, which is expected to moderate in the second half of 2023.
I'm also pleased to report that we delivered adjusted earnings per share of <unk> 53.
Which is well it was at the high end of our guidance range.
Let me now provide you with a brief update on some of our recent customer and partnership activity.
Starting with automotive we remain highly committed to supporting the transition of the industry from internal combustion engine models to Ace autonomous connected electric vehicles.
In addition, our product portfolio is well placed to support the faster pace of uptake from automotive manufacturers seeking to compete on differentiated driver experiences and features as well as on the electronics architecture to comply with evolving safety and security standards.
In smart mobile devices, we continue to drive leadership products to remix our business towards the premium tier handset market, where we've seen greater resilience in demand.
We also delivered a comprehensive set of features on our eight SW platform or a leading RF silicon on insulator based product line for front end module component.
Finally, we delivered enhancements to our 28 nanometer high K metal gate platform, which is purpose built for the image sensing and processing segment, where we continue to see content growth associated with a trend towards more cameras and pixel processing and mobile devices.
Meanwhile, in Iot, we continue to innovate our differentiated technologies.
Focused on enhanced power efficiency and embedded memory for security intelligence solutions at the edge.
We're also proud to have collaborated with cadence design systems.
To support the development of the industry's first.
Binaural hearing aid systems on chip prototype.
To create the smart hearing aid processor, which will utilize G. F 22 ft X platform.
In communications infrastructure and data center, our customers have indicated they're working through inventory levels more slowly than anticipated, which we expect will continue well into the second half of the year. As a result, we've been able to remix some of our capacity service demand and more durable growing segments such as automotive.
In June we also announced a strategic collaboration with Lockheed Martin to advance U S semiconductor manufacturing and innovation and to increase the security reliability and resiliency of domestic supply chains for National Security systems.
Collaborating with T F will enable Lockheed Martin to more quickly and affordably produced secure solutions that increase their capability and national security of the United States We.
We are proud to collaborate with Lockheed Martin to address the growing need for.
For a reliable supply of trusted feature rich semiconductors for mission critical security systems.
Additionally, our 300 millimeter fab in Malta, New York was recently accredited as a category one a trusted supplier by the U S government with the ability to manufacture secure semiconductors for a range of critical aerospace and defense applications.
This week also marks the one year anniversary of.
The signing of the chipset and our collaboration with Lockheed Martin directly supports the ax objectives of increasing traceability provenance and onshore production of critical semiconductor technologies to strength in national and economic security and domestic supply chains.
To summarize I am pleased to report financial performance at the upper end of our guidance range as our dedicated teams around the world continue to execute on the targets that we set out to deliver for our customers and all our stakeholders with that over to you Dave.
Thank you, Tom and welcome to our second quarter earnings call for.
For the remainder of the call, including guidance I will reference adjusted metrics, which exclude stock based compensation and restructuring charges.
As Tom noted our second quarter results were at the upper end of the guidance range. We provided in our last quarterly update <unk>.
Quarter revenue grew sequentially to approximately 1.845 billion a.
A decrease of 7% year over year, we shipped approximately 573300 millimeter equivalent wafers in the quarter, a 9% decrease from the prior year period.
S P where average selling price per wafer declined approximately 1% year over year, mainly driven by the changes in the product mix shift during the quarter.
Our L T A's or a long term customer agreements are helping to provide us with greater visibility on pricing dynamics and we believe that asps for the full year will be flat to slightly up compared to 2022.
Wafer revenue from our end markets accounted for approximately 89% of total revenue non wafer revenue, which includes revenue from radicals nonrecurring engineering expedite fees and other items accounted for approximately 11% of total revenue for the second quarter.
Let me now provide an update on our revenues by end markets Smart mobile devices represented approximately 42% of the quarter's total revenue second quarter revenue increased approximately 13% sequentially, but declined roughly 19% from the prior year period, principally driven by reduced volume.
In the low to mid tier smartphone segments, and a continuation of the well publicized inventory correction within the broader smart mobile market.
Fight these reduced volumes E. S. P. N mix was flat year over year, which can be partially attributed to the framework and pricing certainty provided under our L. T A's.
During the second quarter shipment volumes increased sequentially, which was primarily due to increased demand for our RF transceiver, standalone and Src solutions into premium tier handsets.
Based on the conversations with our customers, we believe that inventory levels across smart mobile devices will remain elevated going into the third quarter as the rate and pace of demand growth is slower than previously anticipated.
And the second quarter revenue for the home and industrial Iot markets represented approximately 19% of the quarter's total revenue.
Quarter revenue increased approximately 4% sequentially and 3% from the year prior period year over year growth. In this end market was primarily driven by improvements in E. S. P N mix, which helped to offset a modest decline in volumes stemming from the consumer centric portion of home Iot the.
Demand for our smartcard technology has continued to grow as application to expand beyond digital payments and into areas such as transportation government health security and access control.
As Tom noted in his prepared remarks aerospace and defense is a segment of growing importance within Iot, where we continue to grow design wins and establish new partnerships to deliver best in class semiconductor manufacturing security and traceability.
As a result, we expect increasing customer demand for our next generation analog and mixed signal technologies into these end markets to largely offset the mid term inventory correction and market softness and the more consumer centric portions of the Iot market.
Automotive continues to be a strong growth segment for us and represented approximately 13% of the quarter's total revenue.
Quarter revenue increased approximately 36% sequentially and roughly 199% from the year prior period, driven by healthy growth in volumes a S. P and mix as we have continued to ramp production across automotive processing sensing vehicle infrastructure and safety applications.
The designs. We won several years ago are now ramping into production and the success of these products across automotive applications, along with our customers focus on supply chain assurance has allowed us to invest in significant capacity.
As we continue to allocate more capacity to support the continued growth of silicon content across the vehicle architecture. Our automotive business is on track to deliver approximately 1 billion of revenue in 2023, consistent with what we communicated at the start of this year.
Next moving on to our communications infrastructure and data center end market, which represented approximately 12% of the quarter's total revenue.
Second quarter revenue declined approximately 40% sequentially and roughly 38% year over year as a result of declining volumes, principally driven by the prolonged levels of data center inventory and demand softening for enterprise wired infrastructure.
We expect to see a decline in revenues for this end market that a second half of 2023 and as mentioned by Tom We will continue to allocate manufacturing capacity and to more durable and accretive markets such as automotive.
Finally, our personal computing end market represented approximately 3% of the quarter's total revenue second quarter revenue increased approximately 44% sequentially, but declined roughly 45% year over year, principally driven by declining volume in this segment.
We expect this end market to remain at approximately 3% of total 2023 revenue.
Moving next to gross profit for.
For the second quarter, we delivered adjusted gross profit of $546 million, which was at the high end of our guided range and translates into approximately 29, 6% adjusted gross margin.
As Tom alluded to the 160 basis points year over year improvement was slightly above the guidance range indicated, which can primarily be attributed to better than forecast manufacturing cost and utilization benefits within the second quarter. We expect the benefit of these items to moderate in the second half of 'twenty 23 and <unk>.
Guided our third quarter accordingly.
Operating expenses for the second quarter represented approximately 11% of total revenue.
R&D for the quarter declined sequentially to 100 million and SG&A increased sequentially to $108 million total operating expenses were $208 million and we continue to prudently manage our costs.
We delivered operating profit of $338 million for the quarter, which translates into an approximately 18% adjusted operating margin roughly 70 bps better than a year ago period and above the high end of our guided range.
Second quarter net interest and other expense was $10 million and we incurred a tax expense of $31 million in the quarter.
We delivered second quarter adjusted net income of approximately 297 million a decrease of approximately $20 million from the year ago period.
As a result, we reported adjusted diluted earnings of 53 cents per share for the second quarter.
Let me now provide some key balance sheet and cash flow metrics cash flow from operations for the second quarter was 546 million Capex for the quarter was 400 million or roughly 22% of revenue free.
Free cash flow for the quarter, which we define as net cash provided by operating activities less purchases of property plant equipment and intend to tangible assets as set out on the statement of cash flows was $146 million.
At the end of the second quarter, our combined total of cash cash equivalents and marketable securities stood at approximately 3.303 billion. We also have a 1 billion revolving credit facility, which remains undrawn.
Next let me provide you with our outlook for the third quarter, we expect total G F revenue to be between 1.8 to five and 1.87 billion.
All of this we expect non wafer revenue to be approximately 11% of total revenue.
We expect adjusted gross profit to be between $502 million and $542 million, we expect adjusted operating profit to be between $277 million and $327 million.
Excluding share based compensation for the third quarter, we expect total opex to be between $215 million and $225 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 7 million and $13 million and tax expense to be between $10 million and $18 million.
We expect adjusted net income to be between 254 million and $302 million on a fully diluted share count of approximately 556 million shares. We expect adjusted earnings per share for the third quarter to be between 46 and 54 cents.
As previously communicated during our May earnings call, we anticipated that utilization would run in the mid eighties for 'twenty twenty-three.
Included in our third quarter guidance is the expectation that utilization will be in the low to mid eighties for the full year 2023, as the well publicized inventory correction flows through the supply chain.
For the full year 2023 we now expect capex to be approximately $2 billion, which is a reduction from the guidance of 2.25 billion provided in our first quarter update.
We anticipate that this capex profile will step down sequentially through the second half of the year.
In summary, consistent operational performance from our 13000 employees and continued efforts to expand our differentiated product offerings in key growth segments enabled us to achieve second quarter results at the high end of the guidance ranges. We provided in our first quarter earnings update although we are not immune to this.
Cyclical headwinds currently impacting the broader semiconductor industry, we are implementing initiatives to mitigate the impacts on our business and we remain deeply focused on positioning G F for future growth opportunities.
With that let's open the call for Q&A operator.
Yeah.
Thank you we will now conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby lovely compile our Q&A roster.
Great.
Our first question comes from Ross Seymore of Deutsche Bank. Please proceed.
Hi, guys. Thanks for let me ask a question one near term question and one longer term question for my follow up on the near term side of things, Tom and David you talked about on the last quarter about the total year revenues being down mid to high single digits. So I wondered if there's any update on that and perhaps more importantly, how are the L. TSA is holding in.
The inventory has to be burnt what are you guys getting in return for lowering the unit side of the equation per the TSA agreements.
Good morning, Ross I think I'll start with the with that question and then maybe maybe Tom I'll pass it over to you to build on it with respect to the Lta's.
In our prior earnings calls, we forecast that first quarter revenue.
In 2023, we believed would be or it would be our trough and then that quarter to quarter to quarter that we expected to grow from there sequentially. So we still expect that that sequential profile and as you mentioned for the full year, we forecast that we expected revenue to decline in the mid to high single digits.
We still expect to be in that range and with our first half results and are really now in the books and with our third quarter guidance, you can probably infer from that third quarter with the first half that we are expecting to be towards the high end of that year over year range.
Tom do you want to take the LTA question, yes.
Very good.
The premise of the LTA is was to create better balanced through a down cycle. It wasn't as if they have one side wins and the other side loses it was to create balance and worked through.
And I think you said in our in our performance quarter on quarter, both in revenue and profitability that we've been able to manage it.
Inventory and manage.
Underutilization fees in a very pragmatic way with our customers to get through this partnership.
Hi.
Dare to imagine what our world would look like if we didn't have.
Those partnership agreements in place in the downturn.
Ross Thanks for the follow ups.
Yes, I did.
This morning, we also had an announcement on the competitive front TSMC doing a JV with a handful of European.
Either actual or potential customers for Jeff just wondered what's your view on that I can see the positive side as endorsed geographic diversification of our manufacturing and the strength of the end markets et cetera, and the negative side. Obviously those are customers you guys would want and some more competition in those regions I could see.
Lending some pressure to you guys. So how do you view that announcement from competing foundry.
Well, we didn't wake up this morning, and just see that happening. This had been in the press in the news for a long time I.
I think you you hit on one of the points, but let me let me comment on three elements to this.
Building this capacity is consistent with the.
To supply the world would need in the next decade. This is an industry that's going to double in fact chairman.
Automotive Association to talk about the need for twenty-seven fabs loan in Europe to build capacity.
TSMC is not <unk> not going to go create this capacity on its own at TSMC needs to participate in a meaningful way as well, yes. Those are our customers, but they're also tsmc's customers no one has a.
Yes.
Monopoly on any given customer right. These customers sourced from for many of us.
Different platforms for different needs.
I'd also add to that that to your point is.
In the past.
This industry is built on driving huge economies of scale by concentrating supply in one region and it drove the ultimate in.
And cost capability, because it had economies of scale.
Create the unintended consequence of huge issues with supply chain resiliency.
And so Jeff in 2009, when we were.
Launched we were there to create to begin that thesis of the world needed a more diverse geographic manufacturing capacity for semiconductors, we could all argue maybe that's a little bit ahead of its time, but today. It looks like it was a pretty good thought back then and so what youre seeing is not only.
Our competitors, adding capacity that the world needs over the next decade, but theyre, putting it in a in a broader footprint to respond to the fact that we need resiliency and supply chain to your point.
But the third thing is greenfield and being able to build and high degree of concentration in one region and now taking that show on the road as it works to build another locations doesn't come very easy it is.
Very difficult to get the economies of scale to get the cost and we see this is putting pressure on cost structures.
Others that are trying to build.
Geographically diverse footprint and that just creates for Jeff you know a better pricing environment.
Going forward. So that's how we feel about it this is not something that.
This is the first and last if something like this the world. If we really believe needs that kind of capacity testing.
Well need to do their part not just you have to in our plan.
That helps us.
Thank you.
Thank you one moment please for our next question.
This question is from Mark with paces with Jefferies. Please proceed.
Hi, Thanks for taking my question.
Coming back to the L T A's.
Last quarter, you noted that you had five new LTA is in some of your customers actually asking for increase in scope.
And so I guess I'm wondering are we.
Can you give us an update on that pace.
Are we kind of at the point, where your customers are kind of putting a pause on signing up for new T. L. L T A's or are.
Are you still seeing that kind of.
Extension of.
Longer term agreements from your customers.
Yes.
No great question.
There is no pause going on where we are in active discussions with a number of customers timing is everything and sometimes.
More substantial ones it takes a little bit more time for these things to come in place again. This comes back to my earlier commentary it depends which you believe if you think the industry has done and you have all the capacity you want then you're not going to look forward.
You stay Pat there are plenty of.
Of our customers that see their growth opportunity in automotive Iot and things of that nature, where they want to make sure. They are booking today that certainty of supply for when this industry begins to grow again, and we're working with them in.
Serious discussions that will eventually come to a close so L. T. A's are in our past and they are certainly in our future and I think this is the new norm for our industry, David anything you'd add to that.
Build on that briefly.
Mark we didn't announce that we had signed any any new material lta's. This quarter, but we are quite pleased with some of the partnerships that we've announced and that we've developed.
Lockheed Martin being one of those areas.
Aerospace and defense being key.
Key market end market for us on a go forward basis and being in market, along with industrial and home in industrial Iot that that's performing quite well.
Also very pleased with the progression of our LTA funnel.
We have ample opportunities some of which are quite mature. So so stay tuned for more more LTA is in the future.
Great. Thanks, a lot.
Alright.
Yes, please on the gross margin side.
<unk>.
I don't think I fully understood the.
The timing of that.
And how they.
Will moderate going forward.
Yes.
I guess I assume that.
If you get some progress on your gross margins you kind of get to keep them. So if you could just.
Provide a little bit more color there.
What kind of various things that are we talking about and from the standpoint of timing where these.
<unk> as you were expecting to hit in the next quarter.
If you just give a little more color on that that'd be helpful. Thanks.
Ken do Mark let me give you some kind of specific second quarter commentary, Terry and then maybe I'll, maybe I'll broaden it out a bit as well.
And as we've mentioned in our prepared commentary.
Did benefit a little in the second quarter from some better than expected quite frankly on forecasted manufacturing variance. So so what is manufacturing variance it it could be anything from reduced input cost it could be higher utilization it could be better cost absorption it could be.
Better better pricing that you've received from suppliers. So that's what all kind of broadly fall under the category of.
Of manufacturing variance and we received some better than expected manufacturing variance in the second quarter. So in the absence of that benefit we would've been at the high end of our second quarter guidance range.
So we don't really expect that manufacturing variance to kind of continue throughout the second half of the year. This year and so we've reflected that in our guidance accordingly.
But purely from a guidance perspective, when we think about.
Third quarter to get third quarter gross margin to give you some context.
Our midpoint guidance for third quarter, and our upper range for the third quarter is actually higher than what we guided in second quarter. So if you just think about it from a purely guidance perspective second quarter guidance versus third quarter, we're actually guiding you up guidance to guidance in the third quarter and then if I.
I could just touch briefly on our longer term gross margin roadmap, which I know you remember well from the pre IPO as well as capital markets day.
If you recall from those Roadshows and from that capital markets day, we put together a pretty specific model and a bridge to go from where we were at the time to our long term growth model gross margin model of 40%.
And from a gross margin perspective.
Barring the current utilization headwinds that we're seeing today.
Ahead of that model.
We're at about mid <unk> in terms of utilization, which as you know from a sensitivity perspective five points of utilization is roughly two points of gross margin.
And yet we've been able to actually not only sustained gross margin, but slightly grow it on a year over year basis. So with respect to our long term gross margin roadmap still on track barring the under utilization actually ahead of schedule.
But certainly on track to that long term gross margin commitment that we've made.
Very helpful. Thank you.
Okay.
Thank you.
Next question.
This question comes from the line of Chris Danley with Citi. Please proceed.
Hey, Thanks, guys just another couple questions on the gross margins going forward.
Of your price.
Pricing assumptions changed at all.
Last three months for 2023.
Slash 2024, and if we keep the mid fifties utilization rate going forward.
Is there any risk that your inventory becomes too high because it jumped up sequentially. So what we have to have some sort of lowering of utilization rate going forward.
Sure. So let me let me address a couple of other points there.
Let me start with with the Asps.
First let me reiterate that for the full year 2023, we still expect asps to be up slightly year over year with respect to the second quarter, obviously year over year ASP was down very slightly and that was really driven by a shift in our product mix as.
As our core pricing has remained mostly contractual and unchanged.
The mix shift in our business. It has produced a more accretive adjustment gross margin structure as you saw with the number that we printed in the second quarter.
But on a period basis that makes chip did produce a slightly lower asps year over year.
<unk>.
The other item I'd like to just talk about briefly before.
Before we talk about some of the inventory.
Is that free cash flow.
When you look at what we've been able to deliver both from a gross margin perspective.
Cash from operations and from a capital efficiency perspective.
We're able to deliver $146 million of free cash flow in the quarter.
Higher gross margin structure, combined with that operational productivity and capital efficiency enabled us to produce that number. Despite as you mentioned some of the inventory growth that we saw on working capital.
On the inventory growth most of that is related to substrates.
We have some agreements with some of our suppliers.
And some of those agreements include.
The purchase of substrates, which we've been able to acquire some favorable prices.
The substrates are good good for many years and as we look through this current inventory purchase ration.
Look through this cycle, having the ability and the balance sheet to be able to support acquiring some of for what us what would be for us raw material substrates.
Some fairly attractive prices.
It's a good long term decision.
Did you have a follow up Chris.
Yes, just.
Talk about the 2020 for expectations for pricing have you guys changed any of the terms of the LTA is for 2024 over the last three months.
Yes so.
Don't delve too far deeply into enter 2024, but with respect to Asps look we still have very good LTE coverage in 2024, and as you know those contracts are fixed price fixed volume fixed duration.
About 90% of our design wins are single sourced and about two thirds of our revenue. Today is also single source. So as we look through into 'twenty three 'twenty four.
And even into 'twenty five we continue to see it as a relatively constructive pricing environment right now that's our current expectation.
Thanks.
Okay.
Thank you.
Please.
Our next question comes from the line of Joseph Moore with Morgan Stanley . Please proceed.
Great. Thank you.
I Wonder if you could touch on some of the comments upfront about the pace of inventory reduction.
More slowly.
I guess whats.
I'm not surprised at the characterization that theres still some correction going on but the idea that is happening more slowly can you talk about what's what's driving that are there.
<unk> are there situations where people are taking inventory.
That they that they may not take up the Lta's went there and then how much of that is just maybe theres a permanently higher level of inventory given anxiety about supply chain is just kind of correct.
Underlying that comment that you made.
Sure. So when we think about inventory and we track it probably along similar lines as you do Joe we look at everything from distributor inventory to customer inventory to OEM. The inventory and then of course to <unk> app as well as our peer inventory.
So we look at inventory across a broad spectrum and so when we when we say that inventory is depleting more slowly than we were expecting were primarily referring to inventory.
Broadly across our customer set as well as across the <unk> and the OEM channels.
When we when we look at that inventory I think the glass half full view is that that inventory is no longer growing.
It looks like it is it has trough and it looks like the inventory is continuing to deplete now from this point going forward.
We did expect that to happen a little earlier in the year quite frankly.
And it looks like it's pushed out and so now we're no longer growing inventory in those those channels that I just mentioned.
But they haven't yet materially come down and so that's pushed things to the right throughout 2023, So we expect that inventory to come down in the second half now in terms of of why the inventory is currently where it is and what was the driver of it.
It really is dependent on end market I think there are some end markets that structurally will just carry higher inventory levels on a go forward basis, because the cost of that inventory is significantly less than their market opportunity loss and.
So I think those markets and I think the electrification of the automobile.
An area, where they still are unable to get enough inventory and then I think when they do get enough inventory, they will probably run a little bit heavier than.
And then perhaps just in time, which was kind of the traditional traditional route I think in some other markets like handsets.
Handsets, we're expecting to decline on a year over year basis, total handsets kind of mid ish single digits.
I think thats, a market, where perhaps there was a little bit more inventory.
Hold in 2022 than expected, it's carried into 2023, and while theres different areas within that market that are doing better or worse than others. I think that would be an example of the market uptake just just taking a little bit longer did you have a follow on Joe.
Yeah just.
Just just.
On that specific point of the Lta's.
Are there I mean, it seems like youre working with customers to ensure that they're not taking inventory. They don't want but like is there any are there situations where that causes the inventory position to be a little stickier.
But I think that I'll take that Dave.
That's the point.
<unk> is where do you trade off.
Kind of settling up with and then the utilization fee versus taking a little bit more inventory and getting that balance and that's all part of the.
Muting the amplitude of a cycle like this.
You don't want to go down as deep you want to be more balanced in the peak to trough, but that typically takes the frequency at the time horizon and longer and I don't think anybody is doing anything reckless and taking a lot of inventory not to pay under utilization fees, but it's one of the leverage they have and the collective we make those judgments together.
And if I could build on that Tom Let me just maybe maybe talk to a proof point.
One of our customers and the smart mobile space actually when they announced over the last week or so they actually mentioned GF. They mentioned their LTA with with GF and one of the things that they mentioned was the flexibility that exists within that LTA such that they were able to migrate out of a technology.
Node or a product a product set that perhaps was not in as much demand to actually a product and added technology node that we've been much more demand where they needed incremental capacity and so I think that's a great example of the framework the LTA framework being incredibly productive because instead of instead of.
Fixating on one particular product or one particular variable of the engagement, we were able to sit down have a discussion identify areas, where there is still market opportunity shift production and capacity to satisfy those for the customer, which ultimately helps them fulfill their LTA obligation in a much more much more.
Our comprehensive and collaborative way.
Very helpful. Thank you.
Yeah.
Thank you.
One moment please.
Our next question comes from the line of Physic ARIA with Bofa Securities. Please proceed.
Alright, thanks for the question.
First one I just wanted to clarify.
Could you give us a sense of which our end markets in Q3 could be up or down sequentially and then as I look into Q4, I think your comments suggest a sequential growth.
Into Q4, and again Im curious what end markets would drive that given the inventory situation in some of your consumer markets.
Okay.
Thanks for the question Vivek I think I think I'll pass this over to Neil to maybe provide some color on two of the end markets.
Particular that not only grew in the second quarter.
But that we expect to continue to support our enterprise revenue well into the second half, both automotive and home and industrial Iot Neil do you want to provide some commentary on those.
I could go a little bit deeper on that maybe starting with automotive.
And maybe addressing it in three ways first actuals this year, our expectations Catania free, but also maybe talk a little bit about our long term expectation. So so as of today the servicing demand from D wins that we had over the recent years you.
You can see from the numbers.
That we did approximately $425 million in automotive in the first half.
And we had a close to $250 million run rate in second quarter.
And we are expecting sequential growth in first quarter. So we talked about in previous calls.
Achieving $1 billion this year and we feel we feel confident that.
Maybe we'll do that in 2023.
So in terms of looking at the future and the long term growth.
If you look at the silicon content in automotive.
To grow about six times.
As you move from ice to Ace as Tom mentioned earlier, so probably <unk>.
It's about $300 and averaged 282.
Two to $3000 in average so a substantial growth in silicon content.
And when you look at that silicon content.
It's really important to highlight is that essentially chip technologies that we have a global foundries. They are great fit for this.
And I like to talk just to mention a few of them because I think.
The diversity and the broadness that youre half of our technologies really talks to today's long term opportunity in a very good way. So some examples could be high performance millimeter wafer raiders or high dynamic range processes for the imaging sensing both of these two technologies.
Crucial to get to get good autonomous performance and the costs as we move forward low power non volatile memories for AMC used domain controllers aggregate us we have a very comprehensive portfolio.
Supports both the body control led lighting battery management system onboard charging traction Inverters, then lastly, strong Cmos for the networking Kan Lin video audio and cluster.
Segments of the costs.
<unk>.
For us it looks it looks like a very very broad future here and we feel good about where we go in with the technologies longer term.
With regards to longer term.
Also continued to strengthen our partnership.
Jim.
Exclusion exclusive production capacity that we announced in February of 'twenty. Three is a good example on debt and so really based on these partnerships in the divisions. We have we expect this business to two more than double in the second half of this decade, so that'll be a little bit off.
More content around our automotive position.
Maybe just to round that out.
For you Vivek I think I think what you heard was.
You heard the automotive has grown sequentially for us nicely also year over year we're.
We're expecting that to continue to get to that kind of $1 billion.
Revenue estimate that we had forecasted for the year <unk> industrial Iot, we're expecting it obviously on a sequential basis.
<unk> continued to perform well as smart mobile devices, we had some nice growth sequentially from first quarter to second quarter, but we're kind of expecting to kind of bump around this level as we deplete inventory towards the end of the year and that's probably a true statement not only for the third quarter for smart mobile devices, but throughout the year and then both <unk>.
As infrastructure and data center.
PC, we expect them, obviously to then fill in the gap to.
The revenue guidance that we provided for the third quarter and the full year. So that's how we think about it and then the one thing we.
Just out of Taiwan, If you don't mind is aerospace and defense.
We see that.
Foundry portion of that market.
Growing by the end of the decade to about $2 5 billion.
And Theres no reason, we shouldnt get.
My quote unquote, our fair share of disproportionate share in that market and we intend to go do that and part of the announcement and <unk> with Lockheed Martin is about going after them.
Lockheed Martin announced.
They acquired.
Design teams and how they can make their own asics and they want a foundry partner, so who deselect globalfoundries, so A&D a lot like automotive.
It's you win sockets, they take many years to ramp in production, but they stick around many years, so a strategic play.
In A&D feels a lot like our strategic play we kicked off a three or four years ago in automotive to get to.
Both engine for us so stay tuned on that.
Vivek did you have a follow up.
Yes at least.
Thank you.
On the pricing I think from what I heard it seems there is somewhat of a positive bias in the second half and I am curious whats.
Driving back and I think as we look forward I know youre, not giving specific 'twenty four 'twenty five outlook, but.
Do you suggest that the pricing trend to be up down flat as we look over the next few years.
Sure.
So we've stated.
Really for a long time that our expectation is that pricing in 'twenty three again I'm talking about the full year 2023, we're expecting pricing to be up slightly from 2022.
What youre hearing from US today is that we continue to expect that that to occur and thats. Our current forecast and we feel that we feel quite good about that and so kind of some product mix period by period aside.
Which will always make the decision to move to accretive product mix. If it if it's accretive to gross margin versus purely <unk> focusing on asps.
But from a global statement with full year Asps in 'twenty, three we expect to be up slightly from.
From 2022.
With respect to pricing longer term.
I think what you've seen happen is one you've seen customers sign a lot of LTA is in as well.
<unk> spoken about those have fixed price fixed volume fixed duration.
That pricing is is very solid.
I also think more broadly speaking that you've seen the industry put on new capacity and the economic models to support putting on new capacity require the higher asps and the asps to be quite sticky it at those levels and so that's not only a GF statement, that's kind of an industry statement and so.
Based on both the <unk> as well as the incremental capacity that's been added.
We're expecting asps to be to be quite stable and to be in a pretty pretty conducive environment to have stable asps.
Through 2024.
Thank you.
Thank you.
One moment please.
Our next question comes from the line of Harlan sur with J P. Morgan.
Please proceed.
Yes. Good morning, guys. Thanks for taking my question.
Maybe following up on <unk> on your outlook for full year wafer pricing you mentioned blended average price slight flat to slightly up.
Like for like is pricing up better than that just want to make sure that the team is maintaining its fairly strong pricing power profile.
Sure Let me, let me, perhaps be a little bit more specific.
It depends on the period that that Youre looking at when you look back into 2022.
And as we've spoken about before and I know you know Harlan we put on a pretty fair amount of capacity in 2022.
And with that incremental capacity came to ramp up specific LTA and those lta's ramped at higher prices.
And so when you really look at the pricing for the second half of 'twenty two versus the pricing in 'twenty three that pricing is relatively flat year over year, but when you look at the pricing in the first half of 2022 versus 2023 that pricing, particularly in fourth and first quarter were.
Gently lower and so.
The ramp of pricing was really tied with the capacity and the ramp of the LTA is and so the short answer to your question is.
On a like for like basis as those LTA has kicked in and pricing is very flat.
On a year over year basis from a full year blended effect youre going to see a slight increase full year A&P in 'twenty two versus 23, hopefully that answered. The question did you have a follow on.
Yes. It is so large.
Large secure smart card access business and RFID tagging business right.
Here's to be holding up relatively strong here through second half of the year and I think you and your large customer are now able to sort of redirect their wafer starts to support the backlog of equipment that I think was a net in this segment over the prior three years.
I assume other of your customers are able to redirect their wafer starts two products segments, where capacity has been tight until just recently right. It's a good reflection I think of the.
Product diversity of your customers thats, helping to sustain their business Europe business Auto is another good example, and the other good examples of the product diversity, helping to backfill some of the areas, where there might be some excess customer inventories.
Yes, so I think thats, a really good point I'll take this one David.
Two pieces one.
You talked about a particular end market smartcards.
Think about smart cards, it's more than just your credit card when you waive it passed.
Our machine.
Point of sales.
For transaction Touchless.
Health.
Its healthcare.
Government security.
Credentials for your car so it's broadening market.
But the bigger point you make is really important.
You have to have two things.
They have a diversity of technology platforms and you have to have capacity that you can fund.
You can you can move four hey, I need more 40 nanometer embedded memory versus 55 solution because this customer wants to buy here, we've worked hard and long on creating that fungibility with in Fabs and across our global network and that allows us to respond to the some of the lumpiness in these market segments as some customers.
Moving of their products as they see opportunities and so you need both the platforms that you can address these markets and you need the fungible capacity and that's something we will continue to invest in across our 300 200 millimeter fab networks and Heartland to give you some proof points that youre looking for.
You mentioned smart card on the automotive side, we've been able to move some of the comms infrastructure and data center capacity to support more of the automotive business on the smart mobile device side.
Had a customer that actually provided that example for us I won't mention their name.
But you could go back go back to those notes and look at them mentioning the GFS LTA and how they were able to migrate from one product to another.
And we have multiple other examples where we've been able to utilize that flexibility that Tom mentioned to be able to not only quickly move on customer demand.
But also do it in a very capital efficient way, which is going to help us accelerate our path to free cash flow in the future.
Great. Good insights thank you.
Thank you one moment please.
Okay.
Our next question comes from the line of Matt.
Hosseini with Sig. Please proceed.
Yes, thanks for taking my question.
The first one.
Last last earning conference call you talked about.
Revenues were 23.
Flat to down high single digits.
I'm not asking for Q4 guide, but unless there is a significant improvement on a sequential basis in December .
Your 23 revenue would come at the low end is that a fair read through of what you reported in your guide for September in the context of the whole year.
That is <unk>. So what what we reiterated was we still believe we will be down mid to high single digits for the year and given that we've already kind of posted the first half and guided the third quarter.
That would imply that for the fourth quarter.
And the full year that we would be at the at the high end of that year over year decline range.
Sure.
Then.
The targeted gross margin of 40%.
I just wanted to understand if this is a gross or net or in other words to what extent.
<unk> older subsidies.
And in that context, if theres any update on the chipset.
That would.
Impact of gross margins looking into next year.
If you take the Capex I'll take that.
Sure. So when we originally contemplated our long term gross margin of 40%.
What that contemplated was capital intensity of about on an ongoing basis steady state basis, if you will of 20%.
And so so that in other words DNA would be about 20% of the P&L there.
I think what.
What youre hearing from us and potentially from others is that.
On the capital intensity should be slightly offset by some of the.
Various government support around the world and so we haven't updated our long term gross margin model.
But the assumptions that went into it we're 20% capital intensity.
Tom did you want to and part of that is at.
20% is a net number and so that's why these co investments or incentives by governments around the world, including the U S are important.
Remember.
Just for way of context, there's two ways you qualified for.
<unk> is the ITC, which is already in flight, which is at 25 cents on the dollar for capital investment in semiconductor and then there's the chips the chips.
Bill.
Beginning of 2022 is a year of of creating the need in the program in 2020 threes a year of.
Vetting applicants and beginning the allocation for execution.
For us it nothing has changed.
It's not about our capital allocation and it's all about.
How we approach the market with certainty durability and profitability.
We will never put capacity on independent of how many subsidies. They are there to help us if we don't have certainty of demand by our customers.
This isn't a game of chasing dollar since it came about certainty of demand and when we add that capacity, we want to do it and durable markets markets that we talked about earlier today that have that have long view into the future instability and of course profitability, we're not going to invest if we can't get competitive returns on investment.
It feels like the chips Act and ITC help close that economic equation, which helps but it doesn't if there's no demand. There is no reason to leverage all of that so the key here is to get customers lined up to leverage that capacity, we could put on for their products for their needs over the longer term and then us government.
Incentives to create that capacity in our global footprint.
And Mehdi let me, let me just provide us an additional contextual point.
Related specifically to chipset, specifically to the ITC.
In 2022 in the U S. We believe that we've got about $450 million of investment that qualifies for the ITC.
That would imply at about 25% rate that would imply something like about $120 million.
Potential benefit on that $450 million of qualified investment and so.
The way that would flow through the P&L. If you assumed a steady state 10 year depreciation the $450 million of investment.
Would be DNA of about $45 million a year, but you would net out the $120 million benefit.
And so instead of being a $45 million year, hitting the P&L you'd get something more like $33 million a year that would hit the P&L. So that would be a real real life proof point, both of the benefit from ITC as well as how it would flow through the P&L.
Okay, great. Thanks for the details.
Kathy we'll take one more question. Thank you.
Alright, Thank you one moment.
Our last question.
Next question comes from the line of Krish <unk> with TD Colin.
Proceed.
Yeah, Hi, Thanks for taking my question I have two of them. Dave you mentioned about ESP is down 1% in.
June quarter year over year, mainly due to product mix I'm, just wondering how to think about if the trends that many different verticals like smart mobile.
Iot also et cetera, and given the fact that you do seem to have a positive biotech <unk> into next year should that mix shift change into next year, and then I had a follow up.
Sure sure.
I think broadly speaking asps are primarily predicated.
On how much <unk> kind of differentiated technology and content is kind of included in the product sector or that or the solution.
So you could you could go literally within any in market and you could find products that either average you up our average you down.
With respect to pure ASP.
And what we really focus on as we really focus on the product mix that is most accretive to us from a profitability perspective.
And while globally I think you could probably make a statement like on average comms infrastructure and data center on average probably has a slightly higher asps.
And maybe an end market like automotive, obviously, you've seen comms infrastructure and data center kind of decline for us given some of the inventory challenges in that particular end market and you've seen automotive growing a really meaningful way at globally, probably a slightly lower ASP, but yet you've seen us accrete from a gross margin.
Active and so I think in general ASP, largely tied to how much total content and the solution does it have nonvolatile memory does it have BCD is it on a <unk> or an soi type of wafer.
I think obviously that plays an important role, but even more important role is.
The product the creativeness from a from a gross margin perspective.
Got it.
I had a quick follow up how much of your 2020 full capacity is covered by Lts.
Yeah, so with respect to 2024 capacity.
Just.
Let me provide some brief context.
Originally we committed that we were going to increase our capacity from about 2 million wafers in 2020 to about $2 4 million wafers in 'twenty, one about $2 6 million wafers in 'twenty two to about $2 8 million wafers. This year to north of 3 million wafers in 2024.
We're very much on track to deliver on that plan, although obviously, we've slowed some of the installation of that capacity.
Based on some of the well known challenges with respect to channel inventory in the market.
If you go back to our capital markets day presentation.
Youll see how much of that capacity plan was reflected in covered by <unk> and I would say that we're still largely consistent with what we showed at capital markets day.
Thanks, Steve.
Yeah.
Alright, Thanks, Cathy I appreciate it and thank you everyone for joining the call today.
This concludes today's conference call. Thanks for participating you may now disconnect.
Yeah.
Okay.
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Thanks.
Thank you.