Q3 2023 GlobalFoundries Inc Earnings Call

November 7, 2023

Good day, and thank you for standing by.

Welcome to global foundries third quarter of fiscal year 2023 financial results conference call at.

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I would now like to hand, the conference over to Sam frankly.

Head of Investor Relations. Please go ahead.

Thank you operator, good morning, everyone and welcome to Globalfoundries third quarter of 2023 earnings call.

On the call with me today adult Dethomas Coalfields.

David <unk> CFO and he will then discuss chief business Officer, Sean.

A short while ago, we released <unk> third quarter financial results, which are available on our website at investors <unk> Dot com along with today's accompanying slide presentation.

This call is being recorded and a replay will be made available on our investor Relations webpage.

During this call we will present, both RFS and adjusted non <unk> financial measures. The most directly comparable <unk> measures and 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 or 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 about factors that may cause actual results to differ materially from forward looking statements. Please refer to the press release, we issued today as well as risks and uncertainties described in our SEC filings, including in the section under the caption risk factors in our annual report on form 20-F filed with the SEC on 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 and third quarter results and also provide fourth quarter 2023 guidance.

We will then open the call for questions with Tom Dave and Neil's, we request that you. Please limit your questions to one with one follow up.

Now I'll turn the call over to Tom for his prepared remarks.

Thank you Sam and welcome to everyone, joining our third quarter earnings call.

Against the backdrop of ongoing global economic and geopolitical uncertainties.

Our dedicated teams worldwide have achieved third quarter results.

At the upper end of the guidance ranges, we outlined in our second quarter update.

I'm very proud of the execution and resilience.

Let me start by providing a brief update on the current business landscape.

Similar to others in the industry, we anticipate that semiconductor inventories will persist at heightened levels across multiple end markets through the end of 2023.

And in many cases into 2024 specific.

Specific end markets that we serve such as smart mobile devices communications infrastructure datacenter and the lower end of the consumer and home electronics segments continued to grapple with increased inventory compounded by decreased year over year demand.

To manage elevated inventory some customers have requested shipment adjustments and alterations to their long term agreement.

We are collaborating closely with these customers to support their short term inventory reductions and avoid prolonging the duration of the inventory correction.

In addition to working collaboratively with our customers.

Our primary objective throughout all of these negotiations is to safeguard the long term value of these agreements in some cases. These discussions have led to underutilization charges related to these adjustments David will elaborate on this in his remarks, we expect these productive conversations to continue during the fourth quarter as well.

Work collaboratively to address ongoing market challenges.

Expanding on our second quarter update we believe a return to year over year growth in 2024.

Will be contingent upon inventory significantly declining for near current levels and a concurrent market recovery in global demand.

<unk> across consumer centric end markets.

Based on discussions with our customers, we believe that the required catalyst for growth will at a minimum remain uncertain at least through the remainder of the year.

Now despite these industry headwinds, we're still witnessing resilient demand in key end markets like automotive industrial Iot and aerospace and defense.

Semiconductors play an increasingly vital role in these critical sectors.

Unveiled exciting partnerships and product development, which I will discuss shortly.

Let me now touch briefly on our third quarter results, which Dave will discuss in more detail later in his commentary.

Revenue in the quarter increased sequentially to $1 $85 2 billion.

Which was above the midpoint of our guidance range, we reported adjusted gross margin of 29, 2% in the quarter, which exceeded our guidance range. This better than expected performance was driven by the continued efforts of our teams around the world to optimize our manufacturing spending as well as the successful.

<unk> of adjustments to customers near term volume requirements and the associated.

<unk> Underutilization payments, which Dave will discuss in his commentary we delivered a consecutive quarter of positive free cash flow, which continues our disciplined approach to capital management and deployment.

Preserving our strategic capacity expansion objectives and.

Im also pleased to report that we delivered adjusted earnings per share of 55.

Which exceeded the high end of our guidance range. Let me now provide you a brief update on some of our recent customer partnership activity.

Starting with automotive we delivered another quarter of solid revenue growth.

Our auto grade technology platforms.

To serve crucial applications across vehicle infrastructure smart sensing.

So processing and safety, we remain focused on providing best in class solutions to our customers, while supporting the transition of the industry from internal combustion engine models.

Two autonomous connected electric vehicles. This remains an exciting growth vector for us and one where we continue to grow our customer partnerships with the development of automotive grade semiconductor solutions.

I am pleased to report that we remain on track to deliver $1 billion of automotive end market revenue in 2023.

And smart mobile devices, we continue to remix our business towards the premium tier handset market, where we have seen greater resilience in demand and opportunities to build upon our feature rich solutions.

At our annual Technology Summit in August.

<unk> nine SW RF Soi technology platform, which is our most advanced RF solution and will offer significant improvements in switching performance lower power consumption and area advantages and front end modules for today's <unk> operating frequencies as well as future <unk> mobile and wireless communication applications.

Meanwhile, in Iot, we recently announced advancements to our industry, leading 22 <unk> platform.

Introducing a suite of innovative features such as ultra low power memory and temperature resistant capabilities to deliver top tier performance intelligent power consumption.

With a rapidly expanding network of globally connected Iot devices, we continue to see opportunities for innovation across our differentiated technologies focused on enhanced power efficiency and embedded memory for secure intelligent solutions at the edge.

We are already designed into several products that utilize domain specific architectures to support various AI at the edge applications, such as our 55 LPX platform supporting <unk> embedded intelligence sensors, and our 20 <unk> manufacturing process being designed into Nordics latest generation of low power.

Our wireless Soc.

With workload optimized processes that support complex machine learning and sensor fusion at the edge.

<unk> defense is another important growth area within Iot is.

As our focus on National and International Security takes an increasingly prominent role on the global stage. We are proud to have extended our partnership with the U S Department of defense with the award of a 10 year contract for the supply of secure semiconductors for use across a wide range of critical applications.

Communications infrastructure and data center remains a challenged end market within our portfolio <unk>.

Consistent with previous downturns, we believe that this is due to a combination of elevated inventory levels and the acceleration of node migration from data center and digital centric customers the single digit nanometers.

As discussed during our second quarter earnings update we expect that elevated inventories will continue at least until the end of the year due to the prolonged channel digestion of both wireless and wired infrastructure inventory levels across our customers. As a result, we continue to focus on opportunities to remix some of our excess capacity to service.

Demand and more durable and growing segments such as automotive.

Turning briefly to our capacity additions, we continue to develop our global footprint in a measured and capital efficient manner in geographies that align with our customer supply chain requirements.

In September I was proud to attend the opening ceremony for our $4 billion fab.

Fab <unk> expansion in Singapore, which will have the capacity to produce approximately 450300 millimeter waivers annually.

And I am pleased to report that the incremental capacity is already helping to meet customer demand.

When it comes to considering the timing of incremental capacity additions.

We will remain highly disciplined in assessing the brighter market conditions and committed customer demand.

Summarize I am pleased to report financial performance, which exceeded several of the guidance metrics identified in our second quarter update.

Notwithstanding the deeper and longer than expected downturn impacting our industry.

Our dedicated teams around the world continue to execute on the targets that we set out to deliver for our customers and our stakeholders.

Although we remain cautious on the near term outlook over the longer term, we continue to see a secular acceleration of the role of semiconductors in the world and we are committed to developing deep customer partnerships and investing in innovative feature rich solutions. So that <unk> can play an increasingly vital role in the future of our industry.

With that already are Dave.

Thank you Tom and welcome to our third quarter earnings call for the remainder of the call including guidance other than revenue cash flow Capex and net interest and other expense.

We will reference adjusted metrics, which exclude stock based compensation and restructuring charges.

As Tom noted our third quarter results were at the upper end of the guidance ranges. We provided on our last quarterly update third quarter revenue grew sequentially to approximately $1 852 billion, a decrease of 11% year over year.

These results included approximately $23 million of revenue related to customers' adjustments to their near term volume requirements.

We shipped approximately 575300 millimeter wafers in the quarter, a 10% decrease from the prior year period.

ASP or average selling price per wafer declined approximately 2% year over year, mainly driven by changes in the product mix shift during the quarter.

Despite the modest decline in Asps during the quarter, we expect that the pricing environment will remain stable through the end of 2023.

And we believe that Asps for the full year will be roughly flat to slightly up compared to 2022.

Wafer revenue from our end markets accounted for approximately 89% of total revenue.

Non wafer revenue, which excludes revenue from radicals nonrecurring engineering expedite fees and other items.

For approximately 11% of total revenue for the third quarter.

Let me now provide an update on our revenues by end markets.

Mobile devices represented approximately 42% of the quarter's total revenue.

Third quarter revenue decreased approximately 1% sequentially and decreased roughly 18% from the prior year period.

<unk> driven by ongoing weakness in the demand environment and a continuation of the well publicized inventory correction within the broader smart mobile market.

Despite these reduced volumes asps and mix improved year over year as we continue to remix to the premium and the smartphone market.

We expect the pricing benefits associated with these mix improvements to be higher for the full year as compared to 2022.

During the third quarter shipment volumes decreased sequentially, which was primarily due to the excess channel inventory. However, we continued to see healthy demand during the quarter for our RF transceiver solutions and to premium tier handsets.

As Tom noted in his prepared remarks, we believe that inventory levels across smart mobile devices will remain elevated going into the year and.

As the rate and pace of demand growth is slower than previously anticipated.

In the third quarter revenue for the home and industrial Iot markets represented approximately 20% of the quarter's total revenue.

Third quarter revenue increased approximately 4% sequentially and declined 7% from the year prior period that consumer centric portion of our Iot end market, primarily contributed to the year over year declines as well as modest declines in asps and mix within the quarter.

For the full year, we expect that Asps within home and industrial Iot will be roughly flat compared to the prior year.

We continue to see stable demand within our home and industrial Iot segment, which is helping to offset some of the weakness in the consumer centric portions of the portfolio.

The demand for our smartcard technology grew again in the third quarter as the confluence of speed convenience and transaction integrity are enabling applications 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 segment, a growing importance within Iot, where we continues to grow design wins and established new partnerships to deliver best in class semiconductor manufacturing security and traceability.

As a result, we expect increasing near term customer demand for our next generation analog and mixed signal technologies entities end markets to largely offset the current inventory correction and market softness in the more consumer centric portions of the Iot market.

Automotive continues to be a stable growth segment for us and represented approximately 17% of the quarter's total revenue.

Third quarter revenue increased approximately 24% sequentially and roughly 219% from the year prior period.

Given by healthy growth in volumes Asps and mix as we have continued to ramp production across automotive processing sensing vehicle infrastructure and safety applications.

The pricing environment within automotive remains highly constructive as the silicon content functionality and applications across ice and Ace vehicle architecture continue to grow year over year.

As part of our discussions with customers supply chain certainty continues to be a key consideration for existing and future designs NGF is uniquely positioned to meet these needs by investing in capacity across our globally diverse manufacturing footprint.

As Tom noted our automotive business is on track to deliver approximately $1 billion of revenue in 2023, consistent with what we communicated at the start of the year.

Next moving.

Two our communications infrastructure and data center end market, which represented approximately 8% of the quarter's total revenue.

Third quarter revenue declined approximately 26% sequentially and roughly 58% year over year as.

As a result of declining volumes and the key drivers outlined by Tom in his prepared remarks.

As noted during our second quarter update we expect to see a decline in revenues for this end market through the end of 2023.

And as mentioned by Tom We will continue to allocate manufacturing capacity and to more durable and accretive markets, such as automotive and premium smart mobile applications.

Finally, our personal computing end market represented approximately 2%.

The quarter's total revenue.

Third quarter revenue declined approximately 29% sequentially and 23% year over year, principally driven by declining volume in this segment.

Although we intend anticipate a sequential increase in PC end market revenue in the fourth quarter. We still expect this end market to remain at approximately 3% of total 2023 revenue.

Moving next to gross profit for the third quarter, we delivered gross profit of $541 million, which was at the high end of our guided range and translates into approximately 29, 2% gross margin.

Gross margin exceeded the guidance range indicated and as Tom alluded to in his prepared remarks includes manufacturing cost efficiencies and revenue associated with the successful resolution of customer volume adjustments.

Looking ahead to the fourth quarter, we expect some of these benefits to subside and this has been reflected in our fourth quarter guidance.

Operating expenses for the third quarter represented approximately 12% of total revenue.

R&D for the quarter was roughly flat at $101 million in SG&A increased sequentially to $118 million total operating expenses increased sequentially to $219 million in the quarter.

We expect total operating expenses to decline in the fourth quarter and included in our guidance is the expectation that we will receive approximately $30 million of benefit related to the advanced manufacturing investment tax credit.

As we continue to spend on qualifying U S expenses and capitalized assets in 2024 and beyond we expect to continue to receive these benefits through the life of the program.

We delivered operating profit of $322 million for the quarter, which translates into an approximately 17, 4% operating margin.

Which was above the high end of our guided range and 140 bps below the prior year period.

Third quarter net interest and other expense was $18 million and we incurred a tax benefit at $4 million in the quarter.

Our third quarter net income increased sequentially to approximately $308 million, but represented a decrease of approximately $60 million from the year ago period.

As a result, we reported a sequential increase in diluted earnings of 55 per share for the third quarter.

Let me now provide some key balance sheet and cash flow metrics.

Cash flow from operations for the third quarter was $416 million.

Capex for the quarter was $323 million or roughly 17% of revenue.

Free cash flow for the quarter, which we define as net cash provided by operating activities less purchases of property plant equipment and intangible assets as set out on the statement of cash flows was $93 million.

At the end of the third quarter, our combined total of cash cash equivalents and marketable securities stood at approximately 336 billion.

We also have a $1 billion revolving credit facility, which remains undrawn.

Next let me provide you with our outlook for the fourth quarter, we expect total <unk> revenue to be between 185, and one $8 75 billion.

Of this we expect non wafer revenue to be approximately 11% of total revenue.

We expect gross profit to be between $502 million and $544 million.

We expect operating profit to be between $327 million and $389 million.

Excluding share based compensation, but included including the benefit related to the advanced manufacturing investment tax credit for the fourth quarter, we expect total opex to be between $155 million and $175 million.

At the midpoint of our guidance, we expect share based compensation to be approximately $45 million of which roughly $14 million is related to cost of goods sold and approximately $31 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 18 million and $24 million.

We expect net income to be between $296 million and $358 million on a fully diluted share count of approximately 557 million shares. We expect adjusted earnings per share for the fourth quarter to be between 53 and <unk> 64.

Consistent with our commentary in August.

Our fourth quarter guidance reflects the expectation that utilization will be in the low to mid <unk> for the full year of 2023 due to prevailing demand environment and elevated inventory levels that Tom outlined earlier.

As we discussed in our second quarter update for the full year of 2023, we now expect capex to be approximately $2 billion.

Tom noted in his prepared remarks, we remain on track to meet the capacity footprint aspirations that we set out in our strategic objectives and based upon our capex commitments.

It's part of our fourth quarter results, we will provide more specific guidance on our capex. Our capex targets for 2024, However, we anticipate a material year over year reduction in Capex as we focus on delivering significant year over year free cash flow generation.

In summary, consistent operational performance from our dedicated employees across the world and continued efforts to expand our differentiated product offerings in key growth segments.

Enabled us to achieve third quarter results at the high end of the guidance ranges, we provided in our second quarter earnings update.

We remain acutely focused on the fourth quarter and year over year demand outlook heading into 2024 as well as positioning <unk> for long term growth opportunities with that let's open the call for Q&A operator.

Thank you.

We will now conduct a question and answer session to.

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.

While <unk>, while a compile the Q&A roster.

Our first question comes from Mark <unk> from Jefferies. Please go ahead.

Hi, Thanks for taking my question.

Tom You had mentioned.

When you were talking about customers asking for relief or working collaboratively with you.

To try to adjust the Lts say.

I'm wondering what are the what are the mechanisms that you are using.

Two tier to safeguard the value of those Lcs based to what extent is that your customers are covering the fixed costs associated with what they originally expected to get versus.

Spending in <unk> TSA for a longer period of time are getting more strategic sockets are higher volume on the backend.

If you could help us understand how that that collaboration manifest I think that'd be very helpful. Thank you.

Thank you and good morning, Mark you actually answered the question yourself there.

We started this year, let's just take a step back as an industry that we were going to be down in the first half an income earn back in the second half.

So in the first half customers.

St.

Some of that inventory, because we have to get ready for a second half and clearly that didn't happen and we're just starting to see now.

Actually what these long term agreements equipment.

To provide a balanced framework by which we as partners with all of our customers go through these cycles together.

The contracts are.

So the spoke that you can't take one went off rate. They are all they're all unique but I will tell you the ones that one thing that is common to all of them and you saw in the last quarter, we had an under utilization.

Resolution.

The $23 million.

First and foremost, let's not prolong.

An over inventory situation, let's figure out what.

It makes sense to build and then how do you repurpose that capacity.

For other corridors that maybe there was better demand how do we go win new design sockets to extend the long term agreement because this is not about one sided long term agreement there was supposed to be balanced in partnership driven.

Last thing I would tell you about these is they are calendar based.

That means a lot of the true up takes place at the end of the year. So I think you can expect to see some more of these types of.

Resolutions.

In alignment as we get through the rest of this quarter, but youre right. It takes the form of many different elements, new design wins repurposing capacity extending the life of these.

Contracts and in some cases.

A payment for an under utilization is part of that reason I hope that helps.

Do you have a follow up mark.

Yes, I do thank you.

Sure.

I think when we talk about.

Lower.

Great that youre, not giving the guidance on the Capex for next year, but.

Sounds like it is going to be a reduction in 'twenty, 'twenty, four which should translate to better free cash flow is that is that.

At lower.

Is what youre thinking about for Capex next year is that is that lower than what you had originally.

Vision over the last couple of years is that going to be kind of a lower bogey than what you were thinking thank you.

It is mark and let me just maybe maybe preface that statement with just kind of reiterating.

What we're trying to achieve we are trying to achieve about $3 million total wafers capacity. When you look at the funds that we've spent over the last three years, we are essentially at that Mark some of that capacity still to come online but.

But we are essentially in line with with that target and so when you think about Capex for 2024, while we're not guiding it right now and we'll guide that in February with our fourth quarter update as well as our first quarter guidance, we're thinking about something materially lower so think in terms of kind of <unk>.

Half if not less than half of what we're spending in 2023.

Very helpful. Thank you.

Thank you.

One moment for our next question.

Our next question comes from Ross Seymore from Deutsche Bank. Please go ahead.

Hi, guys. Thanks for let me ask the question Tom I wanted to talk a little bit about the linearity of demand you talked about the correction taken a little bit longer I think that's no surprise to anybody but you guys are holding in quite well. Despite that just wanted to talk about.

When do you think some of those corrections will be done we've heard data points of green shoots from some other foundry folks on the smart mobile device side of things are you seeing that and is there kind of a rolling basis as to when youre going to see that normalization by end market any color on that would be helpful.

Yes, let me start and then maybe I'll pass it to my colleague.

Youre right you can't think about semi demand has a monolithic number it's really about end market.

And for me.

Let me take a step back with the end markets that were hit the hardest with the highest inventory the Wednesday.

More obvious to see green shoots because you're kind of bumping along the bottom and that includes.

Smart mobile devices.

And a lot of things that are more consumer centric and so.

We do see that there may be opportunities for some of that to start growing and it's not about just growing off a low basis. It will be a significant growth in the night.

It's nice to see that by and large inventories are at the peak.

Close to peak in some cases that come down some of those markets and that's the beginning.

Yes.

No.

Getting a recovery where demand will now be able to do to drive further growth.

I would say that automotive.

You hear some noise in the industry.

It could soften maybe such.

Such a strong year for automotive, but it remains strong and as we said in our prepared comments that we're feeling really good about reducing the billion.

Our revenue this year and automotive market, that's up from about $375 million last year.

Really think its about all of us watching inventory by end market and then how do we build get this consumer led.

Pending industry.

Supercharged with consumers again and that will be the.

Yeah.

Touches many of the end markets that takes place.

David anything you'd add to that.

Maybe I can add a little bit on the.

The momentum we're seeing on the design win side. So automotive you know obviously very pleased with the results as Tom said.

And we talked about in previous calls that a lot of what we are enjoying this year. It was two years ago, we made those design wins.

But I'd like to say to also be continue to be very pleased with the design win momentum.

They are in that space.

Similar comments for.

So Iot, it's a little bit about SMB in the opening.

Getting more and more focused on the high end tier.

So was there a.

A little bit of.

Okay.

Right.

What are you going Green Green shoots are green shoots, especially in the area there.

Cause A&D.

<unk> be pleased with the momentum we are building on that front as well.

If you have a follow up for us.

Yes, I just wanted to pivot to you David over on the gross margin side of things you guys have held up well despite utilization coming down in all the gyrations on the mix side I'm sure. It's more challenging than we can appreciate but as we think about the.

The fourth quarter sequentially, and then more importantly, the puts and takes for 2024 I. Appreciate demand is uncertain, but you talked about your wafer output capacity being normalized now to your target rate and some of the Capex youre doing et cetera, what are the puts and takes as we think about gross margin going into 2000.

24.

Thanks, Ross, Let me, let me speak generally first and then maybe I'll speak specifically about some of the puts and takes look we are quite pleased with how we re baseline our cost structure such that we can largely absorb headwinds.

Six to eight points associated with call. It roughly 20 points of decrease in demand utilization and that doesn't happen by accident. So there is a lot of great work from roughly 13000 employees around the world.

That would be able to accomplish that result, and so we're very pleased with how we've re baseline things from a cost structure perspective on the manufacturing side.

Still plenty of work to do.

But we've come a long way.

With respect to the third quarter, some puts and takes with we received about one point of benefit from the successful resolution of some of those LTA underutilization.

That we mentioned in the prepared commentary and then when you think about guidance for fourth quarter. It does incorporate that range incorporates the expectation that we will have some more additional underutilization resolution. So you put all of that together and I think.

The Big picture takeaway is just really when you have when you have five points of utilization drives two points of gross margin either down or up based on where your utilization is we've done a very nice job of offsetting the utilization headwinds and to the extent that utilization can come back in the opposite direction.

Start to improve.

And then I think we have we have some some opportunity to the upside.

Thank you.

We'll move on next question.

Our next question comes from Chris Caso from Wolfe Research. Please go ahead.

Yes. Thank you good morning.

First question is on the pricing environment and I recognize that most of the way you ship. The customers now is based on agreements that were signed previously, but perhaps you could talk to the pricing environment for new business is your expectation that that new business that you signed on some of the new Tls LTA has remained flat going forward.

Okay.

Yeah, I'll start look we.

We speak about this all the time and you've touched on it about our design our design win pipeline. Our goal is to make sure all new business.

Accretive to our long term model.

90%.

Of the design wins that we booked this quarter.

On a single source business, where we have differentiation that provides value to our customers and allows us to capture that value for ourselves.

Pricing for us on all future business.

Base about how the solutions, we're bringing to the marketplace and we bring differentiation.

I'm happy to report that our design wins in aggregate are accretive to our long term model and that hasn't changed from Q1 to Q2 and how he did great.

Maybe I could reiterate a few points as well.

We still believe as we've commented for a long time of day pricing for the year year over year of 23 versus 22 will.

It will be flat to slightly up for the year.

We've mentioned that on any given quarter youre going to have some mix impact with respect to asps.

But we do think that the pricing environment is still quite constructive, particularly on the 300 millimeter side.

You do see a little bit of pricing action, taking place on spot deals in 200 millimeter.

But for 300 millimeter I'd say the pricing environment is quite constructive.

If you have a follow up.

I do thank you.

And perhaps you could talk about.

Your expectations.

By market segment into the fourth quarter kind of what's up what's down.

Recognizing that this.

Demand change has been pretty asymmetric if you could also speak to <unk> when you say that about.

Whats the area whats the market segment, where youre seeing.

Some of these payments for LTA true ups, which segment is that or is it concentrated in a particular segment.

Maybe I'll, maybe I'll start on this one and Nielsen that you will have anything to add feel free to chime in.

I think when you think about fourth quarter. The sequential performance of the individual end markets I think youre going to see a little bit of more of the same of what you've seen throughout the course of this year automotive has been strong for us this year.

Our expectation is youre going to continue to see that on a sequential basis.

Within the home and industrial Iot business.

A tale of two stories, there you've got industrial as well as aerospace and defense remained quite stable.

And then you've got.

By and large everything consumer being a little bit more challenged and so I think what you've seen out of home and industrial Iot is a business that's on pace.

Largely kind of performing pretty consistently quarter to quarter to quarter throughout throughout this year.

Smart mobile devices, I would characterize as kind of bumping along the bottom there is still some inventory that needs to be depleted out of that channel and so on any given quarter. You can have a little bit of movement, there, but I would say by and large kind of bumping along the bottom.

And then you've got comms infrastructure and data center, and I would characterize that kind of on a sequential basis.

Being relatively stable third quarter to fourth quarter, Niels <unk> anything you guys would add to that maybe only on smart mobile devices. We did seek all clients areas in Colo.

Our reporting.

Debbie.

Results and starting to.

To see a little bit of signs that the inventory is bottomed out right.

Next question. Thank you.

One moment for our next question.

Our next question comes from Vivek Arya from Bank of America Securities. Please go ahead.

Alright. Thank you for taking the question. This is Doug can chime on behalf of Iraq.

I just wanted to go back to the end market question.

And autos, obviously youre seeing great strengths.

Likely a quarter over quarter strength into next quarter.

Our sustainable do you think this is just given some of your customers.

Core trade some weakness there.

Obviously, you've had a strong year this year, but it's likely going to be a tougher compare next year. So any color here would be helpful.

Thank you.

Good for setup for that.

Remember 2020, we were under $100 million of revenue, we grew to $3 75 last year, a $1 billion.

<unk> small numbers looks like high growth rates when you start from a small base now youre at $1 billion to continue those kind of growth rates.

Not in the cards the cards because units growth of automobile I think the one thing that it plays to our advantage is.

It really speaks about the transformation or transition in the industry of auto being just the electrification.

Theres, a whole a bit about the autonomous nature.

The connected part of that trend that translates.

Vincent electrification piece.

Whether it's an internal combustion car electrified vehicles, they're going to need all these other.

Semiconductor devices for.

For navigation for managing all the signals in the car for radar devices and things of that nature, but I think maybe because we played a little bit broader base, we can capture.

On new new models, because the lot of this business that we're building through today.

Sockets, we won the three to five years ago now, it's the industry. The automotive industry takes a pause units coming down no one's immune from that so far as we can see in Q4, we saw it about what our shipments will be then as we get closer to next year, we'll take a look at the auto industry and decided that it has with you yet but it will be.

<unk> for us.

A big part of our revenue as we go forward as a company because of the alignment of the two.

Assuming that the needs and requirements for automotive.

Any capability to deliver to them.

Yes.

ILUVIEN is re emphasizing the point that internal combustion engine, whether it's electrical vehicles.

We are well positioned to build balanced across both of those areas and the growth. We've had this year goes across both and we expect that to be the St. Louis colon.

Yes, I think what you're hearing is a little bit of a bifurcation long term, we feel like the secular trends with the products that we provide in the market.

Be a tailwind for us I think short term like many in the industry. We're looking at what's happening with interest rates. We're looking at what potentially that can create from a drag perspective on total unit. So that just car units into the market. So obviously thats something something that we're watching but long term we're still the plan.

Bullish on this sector longer term did you have a follow up vivek.

Alright, yes.

So.

Going back to smart mobile devices.

No you said were approaching the bottom.

Probably the next quarter I too, we're going to see an inflection.

I know you guys don't guide 24, now, but any color qualitatively.

Assumptions next year would be great as well thank you.

Yes, maybe I'll take that one.

We'll guide one quarter at a time as you know.

But with respect to catalysts what are what are we looking for.

Obviously, there is a little bit of macro economic uncertainty in the market just in general that's across all end markets. There is theres two wars that are ongoing and so I think just broadly speaking.

And a general business environment is one of a little caution.

With respect to smart mobile devices specifically.

I think the positive takeaway from from the industry in general as well as from our customers is that it does not look like inventory growing any longer it looks like pretty consistently inventory is coming down I think we sit around the table and we think about the fact that we wish the rate and pace of that decline of inventory was a little bit.

Faster, but I do think there is kind of broad acknowledgement that that inventory is finally, starting to decrease and so that's that's quite positive.

When we when we think about longer term.

We think about things like what our handset is going to do on a year over year basis, you've seen a couple of years in a row now where <unk> been challenged on just talking global units.

We will next year be a year in which Kansas or flat antecessor off our handsets are down again, I think that will inform us.

Pretty meaningful way the rate and pace of that inventory reduction, which is what we're all watching in particular for this segment.

The only thing I would add is that we're pleased with our exposure to the premium handsets and we believe that's a good position to be in this as we move forward.

And last thing just to pile on and as part of this.

Global economy is seen.

Ireland, and China, where.

The spend in.

The world will be proportional to that how fast China could come back in.

To have.

And sits in other consumer devices.

Meanwhile.

Next question operator.

Thank you.

One moment for our next question.

Okay.

Our next question comes from Joe Moore from Morgan Stanley. Please go ahead.

Great. Thank you.

I Wonder if you could address we see very significant spending in China.

On the trailing edge nodes.

What do you think is the impact of that on your business, if any and how do you kind of think about recurring prospects.

In China and from the U S kind of looking at that.

Incremental capacity coming online.

Look I think for <unk>.

Yes.

We were never going to be the kind of the meat to supplier, we need to innovate and provide solutions to end markets that are very unique and specific and that customers value for their solutions.

Having a checkbook.

Adding capacity and even knowing how to run the capacity is the table stakes to be a good salary, but a lot of it is about the innovation you put in whether it's a different device types. The PDK sustain it fills a library of unique features.

You build around that and as long as GF continues to innovate as warranty is continues to create new solutions.

Capacity, that's built for more generic type of applications doesn't conflict.

Doing.

So for us.

Our goal and our game is to continue to innovate, making sure we start very crisp understanding.

End markets in particular applications and device types and markets understand where differentiation matters and make sure we accelerate our time to market for our customers and make sure the capacity we're putting on.

And the capacity, we have is going to be fully utilized because we've created value for our customers.

Did you have a follow up Jeff.

Yes sure. Thank you for that that's very very helpful.

How are you.

Seeing the prospects.

The sort of smartphone oriented customers I feel like.

You won a lot of that business.

Four or five years ago. When you were more of a price leader, obviously, you've differentiated a lot on the process technology and there's a lot of focus on kind of strategic.

Developments in autos and industrial end markets like that but those smartphone customers are you able to kind of build this partnership culture with them and kind of potentially build.

More durable pricing and business models around that part of your business going forward as well.

Yes, I would say we run the business with customer price leaders back in the day I think there was a differentiation there maybe.

We could've done a better job.

I'll give you a perfect example, Joe we announced in our GTS early this year, our <unk> solution, which is the follow on later.

Studying.

This is a natural extension for front end module technology, it gives 20% better.

Switching performance lower power and smaller area.

That same list of customers that leverage our technology in the front end modules.

Sinus lining up behind this technology to lead them through the next generation of <unk> wireless solutions.

You'll start to see a shift into GFS.

Millimeter wave solution as well into these handsets.

By way of example.

Some of our 55, BCD technology, finding new applications and new smartphones. So I would say that the smart mobile device market very important Virginia.

It has high volumes differentiation matters, there because of size and power performance and they continue to pick and choose the application again, where we have differentiation and our customers choosing us to go win in the marketplace with that.

I'll just add nine Ssw that you announced like Tom said, it's Etfs.

Pleased with the introduction of that's ignoring the performance we're getting the performance of our customers are gaining in the way they're ramping.

<unk> continues to be.

A really really strong process for audio smartphones six into phones is also very very pleased on that front. So.

We see 20% more more performance lower power levels and also smaller die area online SW.

We are pleased with how that's rolling out.

Yes, I think the last thing I would add.

The final piece on there as you have seen us shift where we play in that market.

Very clearly shifted from playing across kind of the lower tier of that market and even the low end of the medium tier of that market and you've seen us focus over the last let's call. It four years 2020 through 2023.

<unk> really seen us focus much much more on that premium tier and a correspondingly seen the asp's go up or increase in a pretty significant way.

<unk> across four across that timeline, along those years. So so much more of a focus towards the Permian.

Next question.

Thank you.

Well remember foreign and there's a question.

Our next question comes from Chris Danley from Citigroup. Please.

Please go ahead.

Hey, Thanks, Ken.

Just another question on the renegotiation of all these lts's et cetera for next year has anyone tried.

To renegotiate on price or has it just been pure volume and is it more a.

Pushed out from like the first half of 'twenty four into the second half of 'twenty four as anybody pushing anything out into 2025, and then as a result of this.

Yes, your inventories has gone up this year.

What can we think about the implications to utilization rates and how will your inventory plans coming into next year.

Sure. Let me, let me think about when you say inventory I think youre, referring to GFS inventory. So, let's maybe address that one first come back around.

And provide some additional color on the LTA.

Our inventory has increased this year.

And the vast majority of all of that increase is actually not in work in process nor has it in finished goods, it's actually in the raw materials, the majority of which is in substrates.

And those substrates typically their lives could be up to five years, if not even longer than five years with some of those substrates. So the inventory increase specifically at global foundries is by and large associated with kind of raw.

All materials, if you will that feed into the manufacturing process.

It is not in with us not in finished goods.

We billed to our customers.

So.

Taking that aside and then talking about the LTA.

All of the LTA is as Tom mentioned, our bespoke there's over 40 lta's.

Work with our customers on a daily basis with respect to what their volumes and their demand needs are.

And so without being too generic but to talk about some of the elements in those and those otas.

Tom described it very well earlier in this call which was at the beginning of this year the expectation was that the first half.

Be a little bit softer in the market and then there would be a relatively healthy recovery in the second half of this year and so during the first half of this year. What you saw customers doing is I'd say by and large across the semiconductor industry customers were looking at their demand needs. They were looking at some of their longer the products and they were.

Saying, well, let's build a little bit of inventory to be able to accommodate a second half recovery such that we're not less branded unable to satisfy demand.

As we made it through the first and second quarter and we got into the second half of this year I think what everyone recognized was that second half ramp that maybe we were expecting was not happening at the rate and pace that we expected and so then you saw customers and I would say customers as well as the general industry. You saw customers say, okay. We don't want to build any more.

Inventory, we actually now need to start start reducing our demand on globalfoundries analysts and others and then you start working through this LTA is I would say so.

Some pretty good rigor.

Detail around those <unk>.

So the end result, what are you seeing.

You're seeing us.

Get great visibility to customers' Roadmaps, which is giving us greater opportunity for design wins.

Youre seeing us working with customers on.

If you don't want to take the inventory demand.

Then how can we work together maybe for either increasing the duration, maybe a modest underutilization. So youre seeing those start to flow through the resolution of some of those agreements again into the third quarter was about $23 million included in our guidance range for the fourth quarter is the expectation that we will have some additional resolutions in the.

Fourth quarter, and so I don't think what Youre seeing is some push out into first half of 'twenty four or the second half of 'twenty four I think what youre seeing is call. It the true up of 2023, right now and I think is as we exit 'twenty three and as we start to get into 24, our expectations are that the.

It demands that are loaded in the <unk> for 2024 that those demands will largely be realized and to the extent that they are not then we will sit down again in 2024 period with our customers on all the elements and variables.

Got it.

Yes, So I guess a question for Tom I think Tom you integrated that in the automotive side.

Youre seeing some some customers start to ask for a second source outside of Taiwan or this is just something that we're starting to hear more and more not just in the in the automotive end market. So can you just expand on that I mean is this happening.

Like across end markets were.

SME customers are starting to get more and more fearful of a potential Chinese invasion of Taiwan.

Hey, within two or three years, you need to give us another manufacturing source outside of Taiwan, and the potential benefits to globalfoundries.

Yes, I think it is more macro than that I think it's about single points of failure and resiliency.

How can you have something as critical.

The conductor industry have such a high level of concentration in any part of the world.

I mean, there's geopolitical this geological risks and where you're really seeing is that.

Anything too much of a good thing becomes a bit.

We just put too much concentration in and customers are looking for a more resilient.

Pricing a little bit more balance I think the leaders in that right now are.

Customers in China, who want to be international players and they worry about their ability to ship worldwide.

There are more issues that prevent them from shipping something manufactured in China. So yes interested in China for China, but also the things did for worldwide supply for the rest of the world and their customers and we're seeing some of that take place with customers and gaining design wins, where they want us to be an alternative.

Manufacturing for footprint to supply there.

They are global customers. So I think this is more of a macro event of independence.

Geopolitical things going on right now which is good.

Prudent managing debt limiting single points of failure and concentration of supply chain and make it a little bit broader and resilient and GFS I mean that was the premise Chris did.

<unk> story, when we were created in 2000 and I'm going to be the.

World's first truly global semiconductor foundry.

In the beginning didn't have much value for people, but more and more as we see how important semiconductors are.

<unk>.

Great value for customers gave us a bit of a head start because we have that global footprint and easier for us to create additional capacity in the regions, we operate on rather than greenfield.

And I think this is the trend for the future independent of with the temperatures in the geopolitical landscape.

Maybe if I could just add one thing because I'm not sure it's clear to everybody outside of the year, but a big part of our strategy is to have.

Manufacturer.

Our technologies and multiple locations so what.

You didn't get a matter of fact in Singapore, which was it is the same interest in advisor and mentor that way all customers. We can provide them dose dose dual capacity footprint anything thats, a big and important part of our strategy moving forward. So a single part number can be sourced across our global peers.

Got it thanks, guys. Thanks Mohan.

Thanks, Rob. Thank you, we'll take one more.

Okay, one more question.

Thank you.

One moment for our next question.

My next question.

Our next question comes from Harlan sur from Jpmorgan. Please go ahead.

Good morning, Thanks for taking my question. Many of your customers are still working to clear excess inventory March quarter is the seasonally.

Weaker quarter from any of your consumer focused segments.

Our wafer Fabs cycle times are typically a full quarter. So youre already executing wafer starts for the first quarter can you just give us a sense directionally on how to think of your revenue and utilization trajectory into Q1 should we expect a sequential dip.

Down in Q1 more in line with seasonal trends or maybe a more flattish profile. As you guys are already kind of shipping below consumption.

Sure maybe ABL.

Maybe I'll start with that one and let me let me just take a more macro view first and then maybe come back and address specifically some of the questions.

Yes, I think we mentioned earlier in the call that we are taking just in general.

Cautious approach given the fact that.

We still have persistently high inflation and we've got some inventory in the channel a couple of wars going on.

But that aside.

The specific guidance that we've kind of kind of given for the year is that we've given that we expect to be in the low to mid eighties from a utilization perspective.

For all of 2023 for the first half we were kind of mid to high <unk>, obviously that implies a lower utilization heading into the second half of this year, which is very much I think consistent with the fact that we're starting to see inventories right now and so that you are seeing the utilization rates come down as that inventory is.

As being drained.

So I think so.

<unk> from fourth quarter to first quarter I think the industry has historically.

A decline with just seasonality perspective.

Weighing in and so when we think about about this year I would say higher utilizations in the first half lower utilizations in the second half consistent with that inventory decrease and then when you think about rolling into next year, you typically have some some seasonality which is pretty well documented in the industry. So I think with that we would probably leave the guidance there.

With respect to anything 2024.

Yeah, No I appreciate that and then last call. The team had anticipated based on your <unk> and <unk>.

New customer engagements, but overall like for like wafer pricing would be relatively stable ish next year versus this year is that still the case.

Sure with with respect to our to our LTA is like for like pricing is pretty flat.

No.

<unk> been pretty consistent on that point remember those LTA that fixed price fixed volume fixed duration, obviously as we've gone through the year and we've had some inventory that had to be worked out obviously, we've had to renegotiate.

Some of those elements, but I would say by and large.

From a pricing perspective like for like is really pretty stable and somewhat constructive.

Perfect. Thank you.

At this time the Q&A session has now ended.

I will now turn the conference over to Sam frankly for closing remarks.

Thank you Antoine and thanks, everyone for joining the call today, sorry, we couldnt get to everyone in the call list, but we look forward to speaking to you bilaterally and touching a broker to come on line.

This concludes today's conference. Thank you for participating you may now disconnect.

Yes.

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Sure.

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Yes.

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Okay.

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Good day, and thank you for standing by.

Welcome to global foundries third quarter of fiscal year 2023 financial results Conference call.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone.

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To withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to Sam Franklin.

Head of Investor Relations. Please go ahead.

Thank you operator, good morning, everyone and welcome to Globalfoundries third quarter of 2023 earnings call.

On the call with me today adult Dethomas Coalfields.

David <unk> CFO and Neil then discuss chief business Officer.

A short while ago, we released <unk> third quarter financial results, which are available on our website at investors <unk> Dot com along with today's accompanying slide presentation.

This call is being recorded and a replay will be made available on our investor Relations webpage.

During this call we will present, both <unk> and adjusted non <unk> financial measures. The most directly comparable <unk> measures and reconciliation for adjusted non <unk> measures are available in today's press release and accompanying slides.

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.

We will then open the call for questions with Tom Dave and Neil's, 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 to everyone, joining our third quarter earnings call.

Against the backdrop of ongoing global economic and geopolitical uncertainties.

Our dedicated teams worldwide have achieved third quarter results.

At the upper end of the guidance range as we outlined in our second quarter update.

I'm very proud of the execution and resilience.

Let me start by providing a brief update on the current business landscape.

Similar to others in the industry, we anticipate that semiconductor inventories will persist at high levels across multiple end markets through the end of 2023.

And in many cases into 2024 specific.

Specific end markets that we serve such as smart mobile devices Communications infrastructure data center and the lower end of the consumer and home electronics segments continued to grapple with increased inventory compounded by decreased year over year demand.

To manage elevated inventory some customers have requested shipment adjustments and alterations to their long term agreement.

We are collaborating closely with these customers to support their short term inventory reductions and avoid prolonging the duration of the inventory correction.

In addition to working collaboratively with our customers.

Work collaboratively to address ongoing market challenges.

Expanding on our second quarter update we believe a return to year over year growth in 2024.

Be contingent upon inventory significantly declining for near current levels any concurrent market recovery in global demand.

Equally across consumer centric end markets.

Based on discussions with our customers, we believe that the required a catalyst for growth will at a minimum remain uncertain at least through the remainder of the year.

Despite these industry headwinds, we're still witnessing resilient demand in key end markets like automotive industrial Iot and aerospace and defense.

<unk> makes us play an increasingly vital role in these critical sectors.

Unveiled exciting partnerships and product development, which I will discuss shortly.

Let me now touch briefly on our third quarter results, which Dave will discuss in more detail later in his commentary.

Revenue in the quarter increased sequentially to $1 $85 2 billion.

Adjustments to customers near term volume requirements and the associated Underutilization payments, which Dave will discuss in his commentary we delivered a consecutive quarter of positive free cash flow, which continues our disciplined approach to capital management and deployment.

While preserving our strategic capacity expansion objectives.

Im also pleased to report that we delivered adjusted earnings per share of 55.

Which exceeded the high end of our guidance range. Let me now provide you a brief update on some of our recent customer partnership activity.

Starting with automotive we delivered another quarter of solid revenue growth.

Our auto grade technology platforms continue to serve crucial applications across vehicle infrastructure smart sensing.

So processing and safety, we remain focused on providing best in class solutions to our customers, while supporting the transition of the industry from internal combustion engine models.

I am pleased to report that we remain on track to deliver $1 billion of automotive end market revenue in 2023.

At our annual Technology Summit in August.

<unk> nine SW RF Soi technology platform, which is our most advanced RF solution and will offer significant improvements in switching performance lower power consumption and area advantages in front end modules for today's <unk> operating frequencies as well as future <unk> mobile and wireless communication applications.

Meanwhile, in Iot, we recently announced advancements to our industry, leading 22 ft X platform.

Introducing a suite of innovative features such as ultra low power memory and temperature resistant capabilities to deliver top tier performance intelligent power consumption.

Our wireless association with workload optimized processes that support complex machine learning and sensor fusion at the edge.

Aerospace and defense is another important growth area within Iot.

Focus on National and International Security takes an increasingly prominent role on the global stage. We are proud to have extended our partnership with the U S Department of defense.

With the award of a 10 year contract for the supply of secure semiconductors for use across a wide range of critical applications. Finally communications infrastructure and data center remains a challenged end market within our portfolio.

Digit nanometers.

Demand and more durable and growing segments such as automotive.

In September I was proud to attend the opening ceremony for our $4 billion fab <unk> expansion in Singapore, which will have the capacity to produce approximately 450300 millimeter waivers annually and.

And I am pleased to report that the incremental capacity is already helping to meet customer demand.

When it comes to considering the timing of incremental capacity additions.

We will remain highly disciplined in assessing the brighter market conditions and committed customer demand.

Summarize I am pleased to report financial performance, which exceeded several of the guidance metrics identified in our second quarter update.

Notwithstanding the deeper and longer than expected downturn impacting our industry.

Our dedicated teams around the world continue to execute on the targets that we set out to deliver for our customers and our stakeholders.

With that already are Dave.

Thank you Tom and welcome to our third quarter earnings call for the remainder of the call including guidance other than revenue cash flow Capex and net interest and other expense.

We'll reference adjusted metrics, which exclude stock based compensation and restructuring charges.

These results included approximately $23 million revenue related to customers' adjustments to their near term volume requirements.

We shipped approximately 575300 millimeter wafers in the quarter, a 10% decrease from the prior year period.

ASP or average selling price per wafer declined approximately 2% year over year, mainly driven by changes in the product mix shift during the quarter.

Despite the modest decline in Asps during the quarter, we expect that the pricing environment will remain stable through the end of 2023.

And we believe that Asps for the full year will be roughly flat to slightly up compared to 2022.

Wafer revenue from our end markets accounted for approximately 89% of total revenue.

Non wafer revenue, which excludes revenue from radicals nonrecurring engineering expedite fees and other items.

Counted for approximately 11% of total revenue for the third 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.

Third quarter revenue decreased approximately 1% sequentially and decreased roughly 18% from the prior year period.

Principally driven by ongoing weakness in the demand environment and a continuation of the well publicized inventory correction within the broader smart mobile market.

Despite these reduced volumes ASP and mix improved year over year as we continue to remix to the premium and the smartphone market.

We expect the pricing benefits associated with these mix improvements to be higher for the full year as compared to 2022.

As Tom noted in his prepared remarks, we believe that inventory levels across smart mobile devices will remain elevated going into the year and.

As the rate and pace of demand growth is slower than previously anticipated.

In the third quarter revenue for the home and industrial Iot markets represented approximately 20% of the quarter's total revenue.

For the full year, we expect the Asp's with Ed Holman industrial Iot will be roughly flat compared to the prior year.

We continue to see stable demand within our home and industrial Iot segment, which is helping to offset some of the weakness in the consumer centric portions of the portfolio.

As Tom noted in his prepared remarks, aerospace and defense in our segment of growing importance within Iot, where we continues to grow design wins and established new partnerships to deliver best in class semiconductor manufacturing security and traceability.

Automotive continues to be a stable growth segment for us and represented approximately 17% of the quarter's total revenue.

Third quarter revenue increased approximately 24% sequentially and roughly 219% from the year prior period.

Given by healthy growth in volumes Asps and mix as we have continued to ramp production across automotive processing sensing vehicle infrastructure and safety applications.

The pricing environment within automotive remains highly constructive as the silicon content functionality and applications across ice and Ace vehicle architecture continue to grow year over year.

As Tom noted our automotive business is on track to deliver approximately $1 billion of revenue in 2023, consistent with what we communicated at the start of the year.

Next moving.

Two our communications infrastructure and data center end market, which represented approximately 8% of the quarter's total revenue.

Third quarter revenue declined approximately 26% sequentially and roughly 58% year over year as.

As a result of declining volumes and the key drivers outlined by Tom in his prepared remarks.

As noted during our second quarter update we expect to see a decline in revenues for this end market through the end of 2023 and as mentioned by Tom We will continue to allocate manufacturing capacity and to more durable and accretive markets, such as automotive and premium smart mobile applications.