Q1 2024 GlobalFoundries Inc Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the Global Foundries conference call to review the first quarter of fiscal year 2024 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. You will then hear an automated message advising that your hand is raised.

Good day and thank you for standing by welcome to the Globalfoundries Conference call to review the first quarter of fiscal year 'twenty 'twenty four financial results.

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

After the Speakers' presentation, there'll be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your.

Operator: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sam Franklin, VP of Business, Finance, and Investor Relations. Please go ahead.

Your question. Please press star one one again.

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

I'd now like to hand, the conference over to your first speaker today, Sam Franklin VP of business Finance and Investor Relations. Please go ahead.

Sam Franklin: Thank you, operator. Good morning, everyone.

Sam Franklin: Thank you operator, good morning, everyone and welcome to global Foundries first quarter 2024 earnings call.

Sam Franklin: And welcome to Global Foundry's first quarter 2024 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, John Hollister, CFO, and Niels Anderskouv, Chief Business Officer. A short while ago, we released GF's first quarter financial results, which are available on our website at investors.gf.com, along with today's accompanying slide presentation. This call is being recorded, and a replay will be made available on our Investor Relations webpage. During this call, we will present both IFRS and non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for non-IFRS measures are available in today's press release and accompanying slides.

Sam Franklin: With me today are Dr. Thomas Caufield, CEO, John Hollister, CFO of Nielsen discourse, Chief business Officer.

Sam Franklin: A while ago, we released yes first quarter financial results, which are available on our website at investors <unk> com along with today's accompanying slide presentation.

Sam Franklin: This call is being recorded and a replay will be made available on our investor Relations webpage. During this call. We will present, both ferrous and non ferrous financial measures. The most directly comparable <unk> measures and reconciliations for non resi rest measures are available in today's press release and accompanying slides I would remind you that.

Sam Franklin: I would remind you that these financial results are unaudited and subject to change. Furthermore, 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.

Sam Franklin: 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.

Sam Franklin: 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.

Sam Franklin: 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 the risks and uncertainties described in our SEC filings, including in the sections under the caption, Risk Factors, in our annual report on Form 20-F filed with the SEC on April 29, 2024.

Sam Franklin: In our annual report on form 20-F filed with the SEC on April 29 2024.

Sam Franklin: We will begin today's call with Tom providing a summary update on the current business environment and technologies, following which John will provide details on our end markets and first quarter results and also provide second quarter 2024 guidance. We will then open up the call for questions with Tom, John, and Niels. 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.

Sam Franklin: We will begin today's call with Tom providing a summary update on the current business environment and technologies, following which John will provide details on our end markets and first quarter results and also provide second quarter 2020 for guidance.

Sam Franklin: We'll then open up the call for questions with Tom Jon Niels 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.

Thomas Caulfield: Thank you, Sam. And welcome everyone to our first quarter earnings call. We believe our industry is beginning to emerge from a challenging period of inventory correction, albeit in a very cautious manner. For GF, I'm pleased to report first quarter results that exceeded the guidance ranges we indicated in our fourth quarter earnings. The continued efforts of our employees are positioning GF to support our customers over the long term, in the markets where they excel on the technology platforms they want, and across the regions where they need us, both globally and locally. So, before I move on to the business updates, let me give a shout out and a thank you to all our teams across the world.

Tom: Thank you Sam and welcome everyone to our first quarter earnings call.

Tom: We believe our industry is beginning to emerge from a challenging period of inventory correction, albeit in a very cautious manner for <unk> I'm pleased to report first quarter results.

Tom: We exceeded the guidance range as we indicated in our fourth quarter earnings call.

Tom: The continued efforts of our employees have positioned <unk> to support our customers over the long term in the markets, where they excel on the technology.

Tom: RG platforms, they want and across the regions, where they need us most.

Tom: And locally.

Tom: So before I move onto the business updates, let me give a shout out and thank you to all of our teams across the world I'm proud of how well they are partnering with our customers and executing to our plans, particularly as we begin to see signs of channel inventory in absolute dollars decline in some of the key end markets that we serve.

Thomas Caulfield: I'm proud of how well they are partnering with our customers and executing to our plans, particularly as we begin to see signs of channel inventory in absolute dollars declining in some of the key end markets that we serve. Having said this, certain end markets remain challenged, mostly related to macroeconomic conditions, and the rate of inventory reduction is much slower than anticipated as we began 2024. With this in mind, I'm confident in the resilience and commitment of our teams to keep winning new opportunities and innovating our technology offerings as we continue to build our future together.

Tom: Having said this certain end markets remain challenged mostly related to macroeconomic conditions and the rate of inventory reduction is much slower than anticipated as we began 2024.

Tom: I'm confident in the resilience and commitment of our teams to keep winning new opportunities and integrating our technology offerings as we continue to build our future together.

Thomas Caulfield: Let me start by providing a brief update on the current business landscape. Like many others across the industry, we expect macroeconomic and geopolitical uncertainties to persist through 2024. Although we've seen signs of inventory levels trending down among some of our customers in core end markets, such as smart mobile devices, other customers have indicated to us that inventory levels have remained higher in end markets such as IoT and automotive. The combination of elevated inventory levels and the uncertain demand environment has led to some of our customers seeking to adjust their near-term volume requirements under their agreements.

Tom: With this in mind.

Speaker Change: Let me start with providing a brief update on the current business landscape.

Tom: Like many others across the industry, we expect macroeconomic and geopolitical uncertainties to persist through 2024.

Tom: We've seen signs of inventory levels trending down amongst some of our customers in core end markets such as smart mobile devices.

Tom: Other customers have indicated to us that inventory levels have remained higher in end markets, such as Iot and automotive.

Tom: The combination of elevated inventory levels and the uncertain demand environment.

Tom: It's led to some of our customers seeking to adjust their near term volume requirements under their agreements with us.

Thomas Caulfield: We have continued to collaborate closely with these customers to find mutually beneficial outcomes while seeking to safeguard the long-term economic value of our relationship. In some instances, the conclusion of these discussions has resulted in underutilization or restructuring payments, which John will comment on further.

Tom: We have continued to collaborate closely with these customers to find mutually beneficial outcomes.

Tom: Seeking to safeguard the long term economic value of our relationships.

Tom: In some instances.

Tom: Inclusion of these discussions has resulted in an under utilization or restructuring payments, which John will comment on further.

Thomas Caulfield: Importantly, the dialogue with our customers has been very constructive as we work together to accelerate the channel inventory depletion and continue to find new ways to partner together going forward. Based on the progress of these discussions, and as we set out during our last earnings call, we still anticipate that our first quarter revenue will represent the low point for 2024 with quarter-to-quarter sequential growth through the year. Let me now touch briefly on our first quarter results, which John will discuss in more detail later in his commentary. Revenue in the quarter decreased sequentially to $1.549 billion, which was above the high point of our guidance range.

Tom: Importantly, the dialogue with our customers has been very constructive as we work together to accelerate the channel inventory depletion and continue to find new ways to partner together going forward.

Tom: Based on the progress of these discussions and as we set out during our last earnings call. We still anticipate that our first quarter revenue will represent the low point for 2024 with quarter to quarter sequential growth through the year.

Tom: Let me now touch briefly on our first quarter results, which John will discuss in more detail later in his commentary.

Tom: Revenue in the quarter decreased sequentially to $1 $549 billion.

Tom: Which was above the high point of our guidance range.

Thomas Caulfield: We reported a non-IFRS gross margin of 26.1% in the quarter, which again exceeded our guidance range. We delivered a fourth consecutive quarter of positive non-IFRS free cash, which continues our disciplined approach to capital deployment while preserving our strategic capacity expansion objectives. I am also pleased to report that we delivered non-IFRS diluted earnings per share of $0.31, which exceeded the high end of our guidance.

Tom: We reported non <unk> gross margin of 26, 1% in the quarter, which again exceeded our guidance range.

Tom: We delivered a fourth consecutive quarter of positive non ifr S free cash flow, which continues our disciplined approach to capital deployment, while preserving our strategic capacity expansion objectives.

Tom: I'm also pleased to report that we delivered non I FRS diluted earnings per share of 31 cents, which exceeded the high end of our guidance range.

Thomas Caulfield: Let me now provide you with a brief update on some of our recent customer and partnership activities. After a milestone year for our automotive end market in 2023, in which we delivered over a billion dollars of revenue, we are continuing to partner with our customers to identify long-term opportunities to expand share and content in the vehicles of today and the future. GF technologies are key enablers to the silicon content growth in vehicles, including 12 LP+, our FinFET platform widely used in infotainment and navigation systems, to 40 nanometer microcontrollers with and without embedded non-volatile memory for safety, powertrain, and comfort applications, and all the way through our power technologies at 130 and 180 nanometer technologies.

Tom: Let me now provide you a brief update on some of our recent customer and partnership activity.

Tom: After a milestone year for our automotive end market in 2023.

Tom: In which we delivered over $1 billion of revenue, we are continuing to partner with our customers to identify long term opportunities to expand share in content in the vehicles are today in the future.

Tom: <unk> technologies are key enablers to the silicon content growth in vehicles, including 12 L. P plus our finfet platform widely used in infotainment and navigation systems to 40 nanometer microcontrollers with and without embedded non volatile memory for safety powertrain and comfort applications and all that.

Tom: Through our power technologies at 130, and 180 nanometer technologies.

Thomas Caulfield: Continuing this trend through the first quarter, our teams closed key design wins on our 40 ISP technology, which is for image sensor processing, and 130 BCD power platforms delivering critical ADAS, motor controllers, and sensor applications at automotive grade standards.

Tom: Turning this trend through the first quarter. Our teams closed key design wins on our 40 ISP technology. This is for image sensor processor.

Tom: And 130, BCD power platforms, delivering critical Adas motor controllers and sensor applications at automotive grade standards.

Thomas Caulfield: The semiconductor content of automobiles continues to expand, and although we expect a period of automotive demand moderation in 2024, we still expect full-year revenue in this end market to grow meaningfully on a year over year basis. Turning now to smart mobile devices. As I alluded to in my introduction, we are beginning to see positive indicators across the smart mobile device ecosystem, as excess inventories are drawing down on an absolute dollar basis across several of our customers. Although inventories remain above normal levels, we expect the rate and pace of the drawdown to progress throughout 2024.

Tom: The semiconductor content of automobiles continues to expand and although we expect a period of automotive demand moderation in 2024.

Tom: We still expect full year revenue in this end market to grow meaningfully on a year over year basis.

Tom: Turning now to smart mobile devices as.

Tom: As I alluded to in my introduction.

Tom: We are beginning to see positive indicators across the smart mobile device ecosystem.

Tom: As excess inventories are drawing down on an absolute dollar basis across several of our customers.

Tom: Although inventories remain above normal levels, we expect the rate and pace of the dropdown to progress throughout 2024.

Thomas Caulfield: We have excellent traction with our RF front end offerings, especially our 9SW RFSOI platform, which features low standby currents for longer battery life. Our 22 FTX millimeter wave technology for smartphone connectivity has ramped to volume production, and we're also engaged with key OLED display driver makers with design wins ramping in 2024. These features drive increased silicon content, which in turn drives a need for higher performance connectivity and low-power technologies, which GF is well-placed to serve. In IoT, we continue to see long-term opportunities as the number and complexity of smart connected devices continues to grow. This is driven by the need to sense, acquire, process, and communicate data.

Tom: We have excellent traction with our RF front end offerings, especially our <unk> RF Soi platform, which features low standby current for longer battery life.

Tom: Our 22 F T X millimeter wave technology for smartphone connectivity has ramped to volume production and we're also engaged with key OLED display driver makers with design wins ramping in 2024.

Tom: These features drive increase silicon content, which in turn drives the need for higher performance connectivity and low power technologies, which <unk> is well placed to serve.

Tom: In Iot, we continue to see long term opportunities as the number and complexity of smart connected devices continues to grow this is driven by the need to sense acquire process and communicate data.

Thomas Caulfield: This also translates into new requirements for more efficient power management, connectivity, and AI at the edge functionalities, as the number of wirelessly connected and battery-operated products continues to broaden. In the first quarter, we closed a key design win on our 22 FDX Plus platform, which will be used to enable high-speed wireless interfaces for IoT applications. Our 22FDX ecosystem supports design enablement, IP, and design services for a wide range of our customers to develop wireless IoT products with improved efficiency at the lowest possible price.

Tom: This also translates into new requirements for more efficient power management.

Tom: Activity and AI at the edge functionality as the number of wirelessly connected and battery operated products continues to broaden.

Tom: In the first quarter, we closed a key design win on R 22, Ft X plus platform.

Tom: Which will be used to enable high speed wireless interfaces for Iot applications.

Tom: 22, <unk> ecosystem supports design enablement, IP and design services to a wide range of our customers to develop wireless Iot products with improved efficiency at the lowest possible power.

Thomas Caulfield: We expect inventories to remain elevated across IoT during at least the first half of 2024. However, requirements for speed, security, and inference at the edge are all long-term drivers for our next generation analog and mixed signal technology. Furthermore, we continue to see traction in aerospace and defense, where we are addressing key needs across harsh environments, such as satellite and space, avionics, and terrestrial applications with our resilient, secure, and performance-optimized products. Finally, our communications infrastructure and data center segment continued to show weakness in the first quarter amidst the sustained node migration of data center and digital centric customers to single-digit nanometer platforms, which we discussed in our previous earnings We expect this end market to remain challenged in 2024, with quarterly revenue expected to be roughly in line with what we have reported in the first quarter.

Tom: We expect inventories to remain elevated across Iot during at least the first half of 2024, however, the requirements for speed security and inference at the edge are all long term drivers for our next generation analog and mixed signal technologies.

Tom: Furthermore, we continue to see traction in aerospace and defense, where we are addressing key needs across harsh environments, such as satellite and space avionics and terrestrial applications with our resilient secure and performance optimized products.

Tom: Finally.

Tom: Our communications infrastructure datacenter segment continued to show weakness in the first quarter amidst the sustained node migration of data center and digital centric customers to single digit nanometer platforms.

Tom: Which we discussed in our prior earnings call. We expect this end market to remain challenged in 2024.

Tom: Quarterly revenue expected to be roughly in line with what we have reported for in the first quarter.

Thomas Caulfield: However, over the long term, we expect the transition to generative AI will increase the demand for high bandwidth communication and efficient power conversions, a trend that GF is well positioned to address through our silicon photonics and power delivery solutions. To that end, I am pleased to report an important Q1 design win using our 130 NSX platform, which will support ground terminal infrastructure for satellite communication. As we ramp these programs, we continue to look for opportunities to remix some of our excess capacity to service FinFET demand in more durable segments, such as automotive and smart mobile devices.

Tom: However over the long term, we expect the transition degenerative AI will increase the demand for high bandwidth communication and efficient power conversion a trend that Jeff is well positioned to address through our silicon photonics and power delivery solutions to that end I am pleased to report an important Q1 design win using our <unk>.

Tom: 30, NSX platform, which will support ground terminal infrastructure for satellite communications.

Tom: As we ramp these programs, we continue to execute opportunities to remix some of our excess capacity to serve as finfet demand and more durable segments, such as automotive and smart mobile devices.

Thomas Caulfield: We are also diversifying our manufacturing footprint by accelerating the transfer of technologies such as 22FDX, 28 nanometer high voltage, and 40 nanometer ESF3 into our Fab8 facility in Malta, New York. This diversification will offer even more choice to our customers across multiple end markets here in the US and enable broader end market participation. To that end, we are delighted with the announcement from the Department of Commerce to award $1.5 billion in proposed funding for GF as part of the U.S. CHIPS and Science Act, in addition to the over $600 million proposed by New York State under its Green CHIPS program.

Tom: We are also diversifying our manufacturing footprint by accelerating the transfer of technology, such as 22 Ft X 28 nanometer high voltage and 40 nanometer ESF three into our fab eight facility in Marlton, New York. This diversification will offer even more choice to our customers across multiple end markets here in the U S and.

Tom: A broader end market participation to.

Tom: To that end, we are delighted with the announcement from the Department of Commerce to award $1 $5 billion in proposed funding for Jeff as part of the U S chips and Science day. In addition to the over $600 million proposed by New York State under its Green chips program.

Thomas Caulfield: We're very excited to be working closely with the federal and state governments on these grants, which will enable us to add critical semiconductor manufacturing capacity and construction jobs in our U.S. locations, while supporting our customers where they need us. To summarize, I am proud of our teams around the world as they executed the plan, and we delivered first quarter revenue, gross profit, and EPS, which all exceeded the high end of our guidance ranges. With that, over to you, John. Thank you.

Tom: We're very excited to be working closely with the federal and state governments and these grants, which will enable us to add critical semiconductor manufacturing capacity in construction jobs in our U S locations, while supporting our customers where they need us.

Tom: To summarize.

Tom: I am proud of our teams around the world as they executed the plan and we delivered first quarter revenue.

Tom: Gross profit and EPS, which all exceeded the high end of our guidance ranges with that over to you John.

John C. Hollister: Thank you, Tom, and welcome everyone to our first quarter earnings call. For the remainder of the call, including guidance, other than revenue, cash flow, capex, tax expense, and net interest and other expense, I will reference non-IFRS metrics, which exclude stock-based compensation and restructuring charges.

John C. Hollister: Thank you Todd and welcome everyone to our first quarter earnings call.

John C. Hollister: For the remainder of the call, including guidance other than revenue cash flow Capex tax expense and net interest and other expense I will reference non <unk> metrics, which exclude stock based compensation and restructuring charges.

John C. Hollister: As Tom noted, our first quarter results exceeded the upper end of the guidance ranges we provided in our last quarterly update. We delivered first quarter revenue of $1.549 billion, a decrease of 16% year over year, principally due to lower shipments and utilization levels in the low to mid 70s, consistent with the commentary on our last earnings call. We shipped approximately 463,300 mm equivalent wafers in the quarter, a 9% decrease from the prior year period.

John C. Hollister: As Tom noted our first quarter results exceeded the upper end of the guidance ranges, we provided in our last quarterly update.

John C. Hollister: We delivered first quarter revenue of 1.549 billion, a decrease of 16% year over year, principally due to lower shipments and utilization levels in the low to mid seventies.

John C. Hollister: With the commentary on our last earnings call.

John C. Hollister: We shipped approximately 463300 millimeter equivalent wafers in the quarter, a 9% decrease from the prior year period.

John C. Hollister: ASP, or average selling price per wafer, declined approximately 6% year-over-year, mainly driven by changes in the product mix shipped during the quarter. We expect that the pricing environment will remain constructive through 2024, and we believe that ISPs for the full year will be roughly flat compared to 2023.

John C. Hollister: Asps or average selling price per wafer declined approximately 6% year over year, mainly driven by changes in the product mix shifts during the quarter.

John C. Hollister: We expect that the pricing environment will remain constructive through 2024, and we believe that asps for the full year will be roughly flat compared to 2023.

John C. Hollister: Waiver revenue from our end markets accounted for approximately 89% of total revenue. Non-waiver revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 11% of total revenue for the first quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 44% of the quarter's total revenue. First quarter revenue decreased approximately 2% from the prior year period, principally driven by reduced shipments as customers continue to draw down inventory.

John C. Hollister: Wafer revenue from our <unk> markets accounted for approximately 89% total revenue.

John C. Hollister: Non wafer revenue, which includes revenue from radicals nonrecurring engineering expedite fees and other items accounted for approximately 11% of total revenue for the first quarter.

John C. Hollister: Let me now provide an update on our revenues by end markets.

John C. Hollister: Mobile devices represented approximately 44% of the quarter's total revenue.

John C. Hollister: First quarter revenue decreased approximately 2% from the prior year period.

John C. Hollister: Driven by reduced shipments as customers continue to draw down inventory.

John C. Hollister: This decline was partially offset by slightly higher ASPs, premium tier mix growth, and continued content growth and value capture in 5G RF front-end content, as well as imaging and display applications. As Tom discussed, we believe that inventory levels in this end market will begin to normalize through the first half of 2024, with some of our customers signaling demand growth in the second half of the year.

John C. Hollister: This decline was partially offset by slightly higher asps.

John C. Hollister: Premium share mix growth and continued growth and value capture and <unk> RF front end charge as well as imaging and display applications.

John C. Hollister: As Tom discussed, we believe that inventory levels. In this end market will begin to normalize through the first half of 2024.

John C. Hollister: Some of our customers signaling demand growth in the second half of the year.

John C. Hollister: In the first quarter, revenue for the home and industrial IoT markets, which now includes revenue from our legacy PC end market, represented approximately 20% of the quarter's total revenue. First quarter revenue decreased approximately 19% from the year-prior period as our customers in the consumer and industrial IoT segments continue to focus on bringing down channel inventory, which remains elevated compared to recent years. However, reduced shipments in the consumer-centric and industrial portions of IOT were partially offset by year-over-year improvements in ASP and mix, as well as increased volumes in our aerospace and defense cycle.

John C. Hollister: In the first quarter revenue for the home and industrial Iot markets, which now includes revenue from our legacy PC end market represented approximately 20% of the quarter's total revenue.

John C. Hollister: First quarter revenue decreased approximately 19% from the year prior period as our customers in the consumer and industrial Iot segments continue to focus on bringing down channel inventory, which remains elevated compared to recent years.

John C. Hollister: Reduced shipments in the consumer centric and industrial portions of Iot, partially offset by year over year improvements in ASD and besse as well as increased volumes in our aerospace and defense segment.

John C. Hollister: Automotive continued to be a key growth segment for us and represented approximately 17% of the quarter's total revenue. First quarter revenue grew approximately 48% from the year-ago period, principally due to higher volumes as semiconductor content and features increased across the vehicle architecture, and our designs continue to ramp at key customers, which were partially offset by reductions in ASP and VEX. As Tom noted, we expect automotive revenue growth to continue in 2024 as we support our customers across a diverse range of automotive applications in both internal combustion engine and autonomous connected electrified vehicles.

John C. Hollister: Automotive continues to be a key growth segment for us and represented approximately 17% of the quarter's total revenue.

John C. Hollister: First quarter revenue grew approximately 48% from the year prior period, principally due to higher volumes of semiconductor cards features increase across the vehicle architecture and our desire to continue to ramp at key customers, which were partially offset by reductions in ASP index.

John C. Hollister: As Tom noted, we expect automotive revenue growth to continue in 2024, as we support our customers across a diverse range of automotive applications in both internal combustion engine and autonomous connected electrified vehicles.

John C. Hollister: Finally, moving on to our communications infrastructure and data center end market, which represented approximately 8% of the quarter's total revenue, first quarter revenue declined approximately 66% year-over-year as a result of declining volumes and the key drivers outlined by Tom in his prepared remarks, while ASP and mix remained roughly flat in this end market. As Tom noted, we will continue to allocate manufacturing capacity in order to diversify our footprint, with additional allocation targeted to markets such as automotive and premium smart mobile applications.

John C. Hollister: Finally, moving on to our communications infrastructure and data center end market, which represented approximately 8% of the quarter's total revenue first quarter revenue declined approximately 66% year over year as a result of declining volumes and the key drivers outlined by Tom in his prepared remarks, while ASP mix remains roughly flat.

John C. Hollister: In this end market.

John C. Hollister: As Tom noted, we will continue to allocate manufacturing capacity in order to diversify our footprint with the additional allocation targeted some markets such as automotive and premium smart mobile applications.

John C. Hollister: Moving next to gross profit, for the first quarter, we delivered a gross profit of $405 million, which was above the high end of our guided range and translates into approximately 26.1% gross margin. Gross margin exceeded the guidance range indicated, and as Tom alluded to in his prepared remarks, included $82 million in revenue associated with the execution of customer volume adjustments. Looking ahead to the second quarter of 2024, we expect additional customer volume adjustments, which have been reflected in our second quarter guidance ranges.

John C. Hollister: Moving next to gross profit for the first quarter, we delivered gross profit of $405 million, which was above the high end of our guided range that translates into approximately 26, 1% gross margin.

John C. Hollister: Gross margin exceeded the guidance range indicated and as Tom alluded to in his prepared remarks includes $82 million in revenue associated with the execution of customer volume adjustments looking.

John C. Hollister: Looking ahead to the second quarter of 2024, we expect additional customer volume adjustments, which have been reflected in our second quarter guidance ranges.

John C. Hollister: Operating expenses for the first quarter represented approximately 14% of total revenue. R&D for the quarter increased sequentially to $117 million, and SG&A increased sequentially to $101 million. Total operating expenses increased sequentially to $218 million in the quarter and incorporated an advanced manufacturing investment tax credit of $10 million. As we discussed on our last earnings call, 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.

John C. Hollister: Operating expenses for the first quarter represented approximately 14% of total revenue.

John C. Hollister: R&D for the quarter increased sequentially to $117 million in SG&A increased sequentially to $101 million.

John C. Hollister: Total operating expenses increased sequentially to $218 million in the quarter and incorporated and advanced manufacturing investment tax credit of $10 million.

John C. Hollister: As we discussed on our last earnings call 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.

John C. Hollister: We delivered operating profit of $187 million for the quarter, which translates into approximately 12.1% operating margin, above the high end of our guided range and 560 basis points below the prior year period. First quarter net interest income and other income and expense was $8 million, and we incurred a tax expense of $21 million in the quarter. We reported first quarter net income of $174 million, a decrease of approximately $116 million from the year-ago period.

John C. Hollister: We delivered operating profit of $187 million for the quarter, which translates into approximately 12, 1% operating margin above the high end of our guided range and 560 basis points below the prior year period.

John C. Hollister: First quarter net interest income and other income and expense was $8 million and we incurred a tax expense of $21 million in the quarter.

John C. Hollister: We reported first quarter net income of $174 million a.

John C. Hollister: A decrease of approximately $116 million from the year ago period.

John C. Hollister: As a result, we reported diluted earnings of $0.31 per share for the first quarter, which was above the high end of our guidance range. Now, I will now provide some key balance sheet and cash flow metrics. Cash flow from operations for the first quarter was $488 million, and CapEx for the quarter was $227 million, or roughly 15% of revenue. Free cash flow for the quarter, which we define as net cash provided by operating activity.

John C. Hollister: As a result, we reported diluted earnings of 31 per share for the first quarter, which was above the high end of our guidance range.

John C. Hollister: Let me now provide some key balance sheet cash flow metrics cash flow from operations for the first quarter was $488 million.

John C. Hollister: Capex for the quarter was $227 million or roughly 15% of revenue.

John C. Hollister: Free cash flow for the quarter, which we define as net cash provided by operating activities plus the proceeds from government grants related to capital expenditure less purchases of property plant and equipment and intangible assets as set out on the statement of cash flows with $261 million.

John C. Hollister: Plus the proceeds from government grants related to capital expenditure, less purchases of property, plant equipment, and tangible assets, as set out on the statement of cash flows, was $261 million. At the end of the first quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $4.164 billion. We also have a $1 billion revolving credit facility which remains undrawn.

John C. Hollister: At the end of the first quarter, our combined total of cash cash equivalents and marketable securities stood at approximately $4 $1 $64 billion.

John C. Hollister: We also have a $1 billion revolving credit facility, which remains undrawn.

John C. Hollister: Next, let me provide you with our outlook for the second quarter of 2024. We expect total GF revenue to be between $1.59 billion and $1.64 billion. Of this, we expect non-waifer revenue to be approximately 10% of total revenue.

Speaker Change: Next let me provide you with our outlook for the second quarter of 2024.

Speaker Change: We expect total <unk> revenue to be between $1 $5 9 billion and $1 six 4 billion.

Speaker Change: This we expect non wafer revenue to be approximately 10% of total revenue.

John C. Hollister: We expect gross profit to be between $382 million and $426 million, excluding share-based compensation but including the benefit related to the advanced manufacturing investment tax credit. For the second quarter, we expect total OPEX to be between $213 million and $233 million. We expect operating profit to be between $149 million and $213 million. At the midpoint of our guidance, we expect share-based compensation to be approximately $50 million, of which roughly $14 million is related to cost of goods sold, and approximately $36 million is related to OPEX.

Speaker Change: We expect gross profit to be between $382 million and $426 million.

John C. Hollister: Excluding share based compensation, but including the benefit related to the advanced manufacturing investment tax credit for the second quarter, we expect total opex to be between $213 million at $233 million.

John C. Hollister: We expect operating profit to be between $149 million at $213 billion at the midpoint of our guidance, we expect share based compensation to be approximately $50 million of which roughly $14 million is related to cost of goods sold and approximately $36 million is related to opex.

John C. Hollister: We expect net interest and other income and expense for the quarter to be between negative $4 million and positive $4 million, and tax expense to be between $12 million and $26 million. We expect net income to be between $133 million and $191 million. On a fully diluted share count of approximately 561 million shares, we expect earnings per share for the second quarter to be between 24 and 34 cents. Consistent with our commentary on our last earnings call, our second quarter guidance reflects the expectation that utilization will be in the low to mid 70s as some of our core end markets start to emerge from the ongoing inventory correction during the first half of 2024. For the full year 2024, we continue to expect CapEx to be approximately $700 million.

John C. Hollister: We expect net interest and other income and expense for the quarter to be between negative $4 million and positive $4 million.

John C. Hollister: And tax expense to be between $12 million and $26 million.

John C. Hollister: We expect net income to be between $133 million and $191 million.

John C. Hollister: On a fully diluted share count of approximately 561 million shares we expect earnings per share for the second quarter to be between 24% and 34.

John C. Hollister: Consistent with our commentary on our last earnings call. Our second quarter guidance reflects the expectation that utilization will be in the low to mid seventies as some of our core end markets start to emerge from the ongoing inventory correction during the first half of 'twenty 'twenty four.

John C. Hollister: For the full year of 2024, we continue to expect capex to be approximately $700 million and as Tom commented during our last earnings call. We expect this to provide Jeff an opportunity to focus on delivering free cash flow generation two to three times higher than 2023.

Operator: And as Tom commented during our last earnings call, we expect this to provide GF an opportunity to focus on delivering free cash flow generation two to three times higher than 2023. In summary, the dedication from our 12,000 employees across the world and their continued efforts to expand our differentiated product offerings in key growth segments, while navigating a challenging cyclical backdrop, enabled us to achieve first quarter results above the high end of the guidance ranges we provided in our fourth quarter earnings update. We remain focused on winning opportunities and critical end markets and partnering with our customers to position them and GF for long-term growth opportunities. With that, let's open the call for Q&A. Operator.

John C. Hollister: In summary, the dedication from our 12000 employees across the world and their continued efforts to expand our differentiated product offerings in key growth segments, while navigating a challenging cyclical backdrop enabled us to achieve first quarter results above the high end of the guidance ranges, we provided in our fourth quarter earnings update.

John C. Hollister: We remain focused on winning opportunities in critical end markets and partnering with our customers to position them for larger growth opportunities.

Speaker Change: With that let's open the call for Q&A operator.

Vivek Arya: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Vivek Arya of Bank of America Securities. Your line is now open.

Speaker Change: Thank you.

Speaker Change: At this time, we will conduct a question and answer session.

Speaker Change: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Speaker Change: Please stand by while we compile the Q&A roster.

Speaker Change: Our first question comes from the line of Vivek Arya of Bank of America Securities. Your line is now open.

Thomas Caulfield: Thank you for taking my question. Tom, it seems your trends at GF are kind of bottoming out about a quarter before some of the downstream customers and industrial and RF markets. I was hoping you could talk more about that contrast. What is helping you kind of emerge from this roughly a quarter before? And then you mentioned Q1 could be the bottom, and I was hoping you could give us a sense for how you are looking at sequential growth through the rest of the year. Should we assume that Q3, Q4 can kind of grow the way you grow from Q1 to Q2, or are there other seasonal or mixed factors we should be aware of?

Vivek Arya: Thank you for taking my question Tom It seems your trends at GFR kind of bottoming of about a quarter before some of the downstream customers that industrial and auto markets.

Vivek Arya: Was hoping you could talk more to that contrast, what is helping you kind of emerge from this roughly a quarter before and then you mentioned Q1 could be the bottom and I was hoping you could give us a sense for how you are looking at sequential growth through the rest of the year.

Vivek Arya: Should we assume that you would take you four can kind of grow the way you're growing from Q1 to Q2 or are there other seasonal mix factors, we should keep in mind.

Thomas Caulfield: Good morning, Vivek. The answer is yes, we're going to continue to grow quarter-on-quarter. Let me give you some context around that. So let's first start with the overall inventory. We look at inventory in two dimensions, days of inventory and then absolute dollars of inventory. Well, in some cases, days of inventory has gotten worse. The actual dollar amounts have come down, and that's an important indicator. And so, clearly, as this year rolls on.

Speaker Change: Good morning Vivek.

Speaker Change: Break the.

Thomas Caulfield: More and more of this inventory will come down, especially in the dollar amount, and we'll get closer to natural demand. So from a macro level, as long as inventory continues to come down in the dollar amount, we're going to get to a point somewhere where we get closer to natural demand. Macro topic. Now let's think about GF and talk about 4N markets.

Vivek Arya: The answer is yes, we're going to continue to grow quarter on quarter.

Vivek Arya: Just some context around that so let's first start with the overall inventory.

Vivek Arya: Inventory, we look at it in two dimensions days of inventory and then absolute dollars of inventory.

Vivek Arya: While in some cases days of inventory as it's gotten worse.

Vivek Arya: Actual dollar amounts have come down and Thats an important indicator.

Vivek Arya: So clearly as the year rolls on.

Vivek Arya: More and more of this inventory will come down, especially in dollar amount and we will get closer to the natural demand. So from a macro level as long as inventory continues to come down on a dollar amount, we're going to get to a point somewhere where we get closer to an actual demand macro topic now, let's think about Jeff and talk about for end market.

Thomas Caulfield: What that looks like for the balance of the year. We'll start with our comms infrastructure data center. In our prepared remarks, we talked about that level of revenue is roughly going to be flat as we look forward over the coming quarters. So we have CID flat.

Vivek Arya: And what that looks like for the balance of the year, we will start with our comms infrastructure and data center.

Vivek Arya: In our prepared remarks, we talked about that level of revenue that is roughly.

Vivek Arya: Are going to be flat as we look forward over the coming quarters. So we have six eight flat we.

Thomas Caulfield: We go next to our home and industrial IoT. The levels we had in Q1 represent more or less flat for at least one to two quarters, with the opportunity back tied to that macro inventory situation for it to become growth for us in the back end of this year. And then we have cars and smart mobile devices. There's a lot of talk about inventory in the automotive growing. If you think about GF.

Vivek Arya: We go next to our home and industrial Iot.

Vivek Arya: The levels, we had in Q1 represent more or less flat for at least one to two quarters, but the opportunity that tie to that macro inventory situations for it that become growth for us in the back end of this year.

Vivek Arya: And then we have auto and smart mobile devices.

Vivek Arya: There's a lot of.

Vivek Arya: Talk about inventory and automotive growing if you think about ges.

Thomas Caulfield: Last year was a really big ramp year for us, where some of our design wins that were years in the making really started to ramp, so we didn't have a lot of time for those key products to build inventory in the channel. And as we said in the first quarter, on our previous call, we talked about how automotive is going to have meaningful growth this year for us, and we still see that. So there's automotive growth as we go sequentially quarter after quarter, and then the last are the smart mobile devices that we see.

Vivek Arya: Last year was a really big ramp year for us where some of our design wins that were years in the making really starting to ramp. So we didn't have a lot of time for those key products to build inventory in the channel.

Vivek Arya: And as we said in the first.

Vivek Arya: On our first quarter.

Vivek Arya: Yes.

Vivek Arya: <unk> call.

Vivek Arya: We've talked about automotive is going to have meaningful growth. This year for us and we still see that there is automotive is growth as we go sequentially quarter on quarter, and then lastly for smart mobile devices.

Thomas Caulfield: A bunch of our customers have seen, and you've heard during earnings seasons that this is a handsets up, low single-digit issue, with a disproportionate amount of that growth coming in premium tier smartphones will replay. So there's the opportunity for growth again on a sequential basis for our company. And if you think about it, Automotive, and smart mobile devices, 60 plus percent of our revenue in Q1, that's where our growth is coming from.

Vivek Arya: We see.

Vivek Arya: But if our customers have seen you've heard during earnings season.

Vivek Arya: This is our handsets up low low single digits this year.

Vivek Arya: With a disproportionate amount of that growth coming in premium tier smartphones, where we play.

Vivek Arya: So there is the opportunity for growth again on a sequential basis for our company and if you think about it.

Vivek Arya: Automotive smart mobile devices 60, plus percent of our revenue in Q1, that's where our growth is coming from and so this gives us the confidence to really feel solid about Q1 being the low point of revenue and then growth coming from there. The real question is back to the macro economy, how much growth will there be will it be.

Thomas Caulfield: And so this gives us the confidence to really feel solid about Q1 being the low point for revenue, and then growth coming from there. The real question is, back to the macroeconomies, how much growth will there be? Will it be the kind of growth we will all want to write home about, or is it going to be muted growth? But again, Q1 is the low point for us. Any follow-up questions?

Vivek Arya: The kind of growth, we all want to.

Vivek Arya: Right home about or is it going to be muted growth, but again Q1 slow point Chris.

Thomas Caulfield: Yes, thank you, Tom. So for my follow-up, maybe one on gross margins. How much did Q1 gross margins benefit from some of the restructuring and underutilization payments? How much does that affect your Q2 outlook? And then how are you feeling about the shape of gross margins from here given all the pricing and mixed trends? So let's say if, you know, GF conceptually grows roughly in this range in Q3 and Q4, how should we think about the shape of gross margins for the rest of the year?

Speaker Change: Any follow up questions. Yes. Thank you Bob So for my follow up maybe one on gross margins.

Chris: How much did Q1 gross margins benefit from some of the restructuring and under utilization.

Chris: Payments, how much does that affect in.

Chris: In Q2 outlook.

Chris: And then how are you feeling about the shape of our gross margins from here given all the pricing and mix trends. So let's say if that's conceptually grow roughly in this range in Q3 and Q4, how should we think about the shape of gross margins for the rest of the year. Thank you.

Thomas Caulfield: Yeah, I'm going to pass this to John, but I think you're on an important point about sometimes there's timing in some of these events, and so the precision around, tight precision around gross margin has something, you know, a lot to do with timing, but John, I want to let you pick it up. Yeah. Good luck with this, John.

Speaker Change: Yes, I'm going to pass it to John but I think you are on an important point about sometimes there is timing and some of these events until the precision around tight precision around gross margin is something likely at that timing, but John I wanted to achieve.

John C. Hollister: You know, we had a business plan at the beginning of the year, of course, which formed the foundation of our first quarter guidance. And, you know, as Tom was just indicating, timing can vary for business outcomes. And we saw some favorability in Q1 that helped our gross margin, so we're pleased with that. The customer volume adjustment factor was also at play there, but we did understand that in our guidance. The outcomes there were a bit better than we had anticipated.

Chris: Vivek. This is John So you know.

John C. Hollister: We had a business plan at the beginning of the year of course, which formed the foundation of our first quarter guidance.

John C. Hollister: Tom was just indicating timing can vary on business outcomes and we saw some favorability in Q1 that helped our gross margin. So we're pleased with that the.

John C. Hollister: The customer volume adjustment factor was also at play there we did comprehend that in our guidance. The outcomes there were a bit better than we had anticipated. So it's really a result of those two factors vivek with driving the gross margin outcome for first quarter as we look ahead into the second quarter similar.

John C. Hollister: So it's really a result of those two factors, Vivek, driving the gross margin outcome for the first quarter. As we look ahead into the second quarter, similar dynamics are at work. There are some customer volume adjustments planned in Q2, albeit not at the level of Q1. And that's, you know, starting to come in as we're settling through various customer volume discussions that we're having constructively with our customers to address business conditions and move ahead.

John C. Hollister: Makes it work there are some customer volume adjustments planned in Q2, albeit not not at the level of Q1 and Thats starting to come in as we are settling through various customer volume discussions that we're having constructively with our customers.

John C. Hollister: I will note that the guidance for Q2 is 100 basis points above the guidance for Q1. And, just a reminder, the single biggest factor affecting our gross margin is factor utilization. And a good rule of thumb is that every five points of utilization influences gross margin by roughly 200 basis points. So as one would expect, as loadings can pick up through the course of growth onward, we would expect improvement in gross margin over time here. Thank you.

John C. Hollister: Two to address.

John C. Hollister: Ms conditions and move ahead.

John C. Hollister: I will note that the guidance for Q2 is 100 basis points above the guidance for Q1 and just a reminder, the single biggest factor affecting our gross margin. This factory utilization and a good rule of thumb is that every five points of utilization influences gross margin by roughly 200 basis points. So as one would expect.

John C. Hollister: As loadings can pick up through the course of growth onward, we would expect improvement in gross margin over time here.

Speaker Change: Thank you.

Operator: One moment for our next question. Thank you. Our next question comes from the line of Chris Caso of Wolf Research. Your line is now open.

Speaker Change: One moment for our next question.

Speaker Change: Thank you. Our next question comes from the line of Chris Caso of Wolfe Research. Your line is now open.

Christopher Caso: Yes, thank you. Good morning. I guess the first question is regarding pricing, and you prepared marks. You gave some indication of where you thought pricing would be for the year. But I guess if you could expand on that a little bit, because we have heard of some of the Tier 2 foundries being a little more aggressive on pricing as the utilization comes down, and specifically for new business that you're signing outside of the existing LTAs that have been kind of helping your pricing, you know, where's the pricing been for new contracts that you're signing?

Christopher Caso: Yes. Thank you good morning, I guess first question is regarding pricing.

Christopher Caso: In your prepared remarks.

Christopher Caso: You gave some indication of where you thought pricing would be for the year, but I guess.

Christopher Caso: If you could expand on that a little bit because we have heard of some of the tier two foundries.

Christopher Caso: Being a little more aggressive on pricing as the utilization comes down and specifically for new business that you are signing outside of the existing LTA is that had been kind of helping your pricing, whereas the pricing been for four new contracts that you're signing today.

Thomas Caulfield: Yeah, so consistent with our prepared remarks. A lot of what you'll see in our ASP is dominated by what the particular mix is for that quarter.

Christopher Caso: Yes.

Christopher Caso: Consistent with our prepared remarks.

Christopher Caso: A lot of what Youll see in our ESP.

Christopher Caso: Is dominated by the particular mixes for that quarter, so year on year, we talked about being down 6%.

Thomas Caulfield: So year on year, we talked about being down 6%, but for all of 2024, we see normalizing pricing flat year-on-year, 24 to 23. What that means is, one, the pricing environment remains constructive, and I don't think we're saying anything new here. You heard that from our peer foundries, our competitors, and their earnings calls that they see the same environment.

Christopher Caso: All of 2024.

Christopher Caso: We see a normalizing pricing flat year on year 'twenty four to 'twenty three.

Christopher Caso: That means this.

Christopher Caso: One the <unk>.

Christopher Caso: Pricing environment remains constructive and I don't think its anything new here you've heard that from our peer foundries are competitors in their earnings call that they see the same environment.

Thomas Caulfield: The second thing is... A big fraction of our revenue is single-source business, and so what you really can do is service true demand. There's no elasticity in pricing, so more price doesn't give more opportunity. And so a constructive environment, differentiated business, keeps the pricing, we believe, flat year-on-year, 2024 to 2023, changes quarter-to-quarter, mostly mixed-related. John, would you add anything to that?

Christopher Caso: The second thing is.

Christopher Caso: A big fraction of our revenue is single source business.

Christopher Caso: So you really can do is service true demand theres, no less testing and pricing so more price doesn't give give more more more opportunity and so constructive environment differentiated business.

Christopher Caso: The pricing, we believe flat year on year 2024 to 2023 changes quarter to quarter, mostly mix related Tim would you add anything.

John C. Hollister: Chris, I think it's important to not conflate absolute ASP with profitability as well. In other words, just because a product may have a higher ASP doesn't necessarily mean it would have higher gross profit. Obviously, it affects wafer count and top line. Just wanted to make that point.

Christopher Caso: Chris.

Christopher Caso: I think it's important to not conflate absolute ASP with profitability as well in other words, just because our products may have a higher ASP doesn't necessarily mean that would have higher gross profit.

Speaker Change: Obviously, it effects wafer account topline just wanted to make that point.

Christopher Caso: Sure.

Christopher Caso: I do, thanks. But I would like to come back to your earlier comments on gross margins as well. And just more specifically, you know, presumably, you know, if revenue continues to grow during the year, some of these volume adjustments will continue to come down. What does that mean for the pace of gross margins as you go into the second half and into 25? You know, just the improvement in utilization, will that be enough to offset, you know, some of the reduced volume adjustments, presumably, as that happens and, you know, give you an increase in gross margin profile as we go through the year?

Speaker Change: Did you have a follow up Chris.

Christopher Caso: I do think if I could come back to your earlier comments on gross margins as well.

Christopher Caso: And just more specifically presumably.

Christopher Caso: If revenue continues to grow during the year.

Christopher Caso: Some of these volume adjustments will continue to come down what does that mean for the pace of gross margins.

Christopher Caso: As you go into the second half and into 'twenty five.

Christopher Caso: Just.

Christopher Caso: The improvement in utilization will that be enough to offset some of the <unk>.

Christopher Caso: Reduced volumes adjustments presume number as that happens and gives you an increase in gross margin profile as we go through the year.

John C. Hollister: Yeah, Chris, this is John again. So I would call it modest, you know, and stable, and a stable environment for gross margin in light of those dynamics. You know, yes, there is a put and a take on how that's all playing out. The flip side to the customer volume adjustment economics is that, you know, that's really in lieu of what would otherwise be there as far as wafer shipments and better utilization.

Christopher Caso: Yes, Chris This is John again, so I would I would call it modest.

John C. Hollister: And stable at a stable environment for gross margin in light of those dynamics.

John C. Hollister: Yes, those are those are putting to take around how that's all playing out.

John C. Hollister: <unk> to the customer volume adjustments economics is that that's really in lieu of what would've otherwise been there as far as wafer shipments and better utilization. So I mean thats. The purpose of those economics. So they are kind of offsetting one another you can think of it that way.

John C. Hollister: So I mean, that's the purpose of those economics. So they are kind of offsetting one another. You can think of it that way. But, you know, the long and short of it: as we can get to higher levels of utilization, that will be the large driver over time. And look, and we've also, Chris, taken...

John C. Hollister: The long and short of it is we can get to higher levels of utilization that will be the largest driver over time.

Thomas Caulfield: And look, and we've also, Kris, taken a lot of structural costs out. We've leveraged this downturn to hold the line and become more and more efficient. And we see the opportunity for every dollar of revenue as we start to get back into growth to have a higher degree of flow through than any dollar we have today. And so a lot of the things we've been able to do as a business, weathering this prolonged downturn, are positioning us structurally to be a better company as growth returns.

John C. Hollister: And we've also Chris taken a lot of structural cost out.

John C. Hollister: Leverage this downturn.

John C. Hollister: Hold the line to become more and more efficient.

John C. Hollister: We see the opportunity for every dollar of revenue as we start to get back into growth, having a higher degree of flow through than any dollar we have today.

John C. Hollister: One of the things we've been able to do as a business weathering. This prolonged downturn and positioning are structurally to be a better company as growth returns.

Speaker Change: Thank you.

Speaker Change: One moment our next question.

Operator: One moment for our next question. Thank you. Our next question comes from the line of Harlan Sur of J.P. Morgan. Your line is now open.

Harlan Sur: Thank you. Our next question comes from the line of Harlan sur of Jpmorgan. Your line is now open.

Harlan Sur: Good morning. Thanks for taking my question and nice job to the team on the quarterly execution. You know, in the December quarter, you guys had 79 million in this high gross margin sort of customer utilization and restructuring fees. It was 82 million in the March quarter. So it looks like core product gross margins were about 22 percent. Is that fair?

Harlan Sur: Good morning, Thanks for taking my question and nice job to the team on the quarterly execution.

Harlan Sur: December quarter.

Harlan Sur: You guys said $79 million of this high gross margin sort of customer utilization and restructuring fees. It was $82 million in the March quarter.

Harlan Sur: So it looks like core product gross margins were about 22% is that fair and you said on the utilization seems to be lower in Q2 can you just quantify John is that 50, 60 70 million and then given your fab cycle times. Your wafer starts this quarter our shipments in the second half.

John C. Hollister: And you said that utilization fees would be lower in Q2. Can you just quantify that, John? Is that 50, 60, 70 million? And then given your fab cycle times, your wafer starts this quarter are shipments in the second half, right? Which is typically seasonally stronger, especially for your smart mobile customers. So I would have assumed utilization would have been up in the June quarter, but it sounds like they're staying flattish. Why is that, and how do you see utilization trending for the remainder?

Harlan Sur: Half right, which typically is seasonally stronger, especially.

Harlan Sur: Mobile customers.

Harlan Sur: What are the assumed utilization would have been up in the June quarter, but sounds like theyre staying flattish. So why is that and how do you see utilization trending for the remainder of the year.

John C. Hollister: Yeah, Harlan. So, yeah, we didn't specify the level of customer volume adjustment in Q2. We'll have to see how it plays out. There are a few open items that we're continuing to address in that regard. As we work through the balance of the year, you know, we'll see how the second half ramps. You know, clearly, if we can see a more robust second half ramp, and there is some seasonality, as Tom indicated, a lot of that is just around the rate and pace of the recovery of the global economy and inventory drawdown and improvement with our customers.

Speaker Change: Yes, Harlan so yes.

Speaker Change: Yes, we didn't we didn't specify the level of customer volume adjustment in Q2, we'll have to see how it plays out there's a few open items that we're continuing to address in that in that regard.

Speaker Change: As we work through the balance of the year, we will see how the second half ramps clearly if we can see a more robust second half ramp and there is some seasonality.

Speaker Change: As Tom indicated a lot of that is just around the rate and pace of the recovery of the global economy, and inventory drawdown and improvement with our customers, but those are those are the signs we're looking for to see our loadings come up to the utilization come up and again it's.

John C. Hollister: But those are the signs we're looking for to see our loadings come up, see the utilization come up. And again, it's It's, you know, you can look at it that one is an offset, or it's an additional gross profit from customer volume adjustments, or really, the way we think about it, it's really in lieu of what would otherwise have been higher utilization. So as one goes down, the revenue will be going up in a natural way.

Speaker Change: It's.

Speaker Change: You can look at it that one as an offset.

Speaker Change: Additional gross profit from customer volume adjustments, where really the way we think about it it's really in lieu of what would've otherwise been higher utilization.

Speaker Change: Yes.

Speaker Change: Yeah, because the revenue will be going up in a natural way.

Thomas Caulfield: Tom, you took us through some of the dynamics around sort of diversifying the technology mix for Multifab 8. It's a very smart strategy, right?

Speaker Change: Hey, Tom you take us through some of the.

Tom: That makes around sort of diversifying the technology mix for multifamily.

Tom: A very smart strategy right you talked about 40 nanometer embedded MCU RF soi fully depleted soi capabilities and even on the mainstream 12 nanometer finfet capacity right mixing of new customers and applications as older programs phase out maybe you can just expand on this a little bit maybe.

Niels Anderskouv: You talked about 40 nanometer embedded MCU, RF SLI, fully depleted SLI capabilities, and even the mainstream 12 nanometer FinTech capacity, right? Mixing in new customers and applications as older programs phase out. Maybe you can just expand on this a little bit, maybe timelines for phasing in new technologies and success in backfilling the FinFET technology.

Tom: Time lines on phasing in new technologies and success in filling the Finfet technology.

Thomas Caulfield: Yeah, Harlan, first of all, thanks for this question, because I think we've not done this topic justice. I used to watch the show with my son growing up, Mythbusters, and I think there are a lot of myths around what we do and don't do in Fab 8 and what diversification looks like. So let's take Fab 8 and think about it in two dimensions of diversification, the first being end markets we serve with our 12 nanometer platform, and then we'll talk about diversification for the fab and the technology portfolio we'll bring there and the customers, what that means for GF and also for our global footprint.

Speaker Change: Yes part of that.

Speaker Change: First of all thanks for this question because I think we've not done this topic justice here.

Speaker Change: I used to watch the show up my son growing up myth Busters, and I think theres a lot of midst around.

Speaker Change: What we do and don't do and fab Beijing, and with diversification looks like so let's take fabby.

Speaker Change: And think about it in two dimensions of diversification the first being end markets. We serve with our 12 nanometer platform and then we'll talk about diversification.

Speaker Change: For the fab in the technology portfolio will bring their customers with them into <unk> and also to our global footprint. So.

Thomas Caulfield: Think about foreign markets, our comms infrastructure data center, auto IOT, and smart mobile devices. The baseload, the baseload, right, is the data center. And that is almost equivalent to what we have in automotive load in the fast.

Speaker Change: Think about for end markets.

Speaker Change: Comms infrastructure data center auto Iot and smart mobile devices.

Speaker Change: The base load the Baseload right.

Speaker Change: Data center.

Speaker Change: And that is almost equivalent to what we have in automotive load.

Thomas Caulfield: Next up is IoT, which is one and a half times more load than either the automotive, I'm sorry, either the automotive or data center. And then smart mobile devices are one and a half times more than the other three end markets combined. So there's broad diversification. So when we think of, you know, data center clients moving to single-digit nanometers, that represents a fraction of what we do in Fab 8 on 12nm. So we need to dispel the fact that Fab 8 means data center. Data center business goes down. We're going to struggle.

Speaker Change: In the fab.

Speaker Change: Next step is Iot, which is one five times more load than either of the.

Speaker Change: The automotive I am sorry.

Speaker Change: Automotive or data center, and then smart mobile devices is one five times more than the other three end markets combined.

Speaker Change: So theres a broad diversification so when we think of.

Speaker Change: Data center clients moving to single digit nanometer that represents a fraction of what we do in fab on 12 nanometer.

Speaker Change: So need to dispel the fact that fab means data center data center business goes down we're going to we're going to struggle.

Thomas Caulfield: Now, diversification, you pointed out, you said it better than I did. We have 12 nanometer technology, plus the features we're adding on that serve, like I said, smart mobile devices one and a half times more than any other combination of all our other markets. We have 22 FDX that's being currently qualified and brought up, 28 nanometer high voltage, 40 nanometer embedded memory for automotive, 45 RFSY, silicon photonics.

Speaker Change: Now diversification you've pointed out you said it better than I think we have 12 nanometer technology plus the features we're adding on that like I said smart mobile devices, one five times more than any other it's a combination of all of our other markets.

Speaker Change: 22, <unk>, that's being currently qualified and brought up 28 nanometer high voltage 40 nanometer embedded memory for automotive 45, RF Soi Silicon Photonics. This diversification will play out for us in qualification this year customer starting to tape out towards the end of this year into next year.

Thomas Caulfield: This diversification will play out for us in qualification this year, with customers starting to taper off towards the end of this year, into next year, and then ramping up in 2026 to bring this full diversification. Now, why is diversification important? And this is a point that I think we all need to understand. Having a global footprint means more than just having a location where you can produce one thing. I call it a mailing address.

Speaker Change: And then ramping in 2026 to bring this full diversification now why is diversification important.

Speaker Change: And this is a point that I think we all need to understand.

Speaker Change: Having a global footprint means more than just having a location. We can produce one thing I'd call. It a mailing address.

Thomas Caulfield: A fab in any location that can make one technology is a mailing address because, by and large, most of your customers' demand can't be served. What GF has done, and we've done over the last decade and accelerated in the last five to six years, is made sure every one of our global sites has diversification, so our customers can source globally and locally. It's great to have a global footprint, you know, but it has to have a broad range of technologies.

Speaker Change: <unk> in any location that can make one technology is a mailing address because by and large most of your customers demand can't be certain there.

Speaker Change: <unk> has done and we've done over the last decade and accelerated in the last five years to six years was making sure every one of our global sites has diversification so our customers can source globally and locally.

Speaker Change: Great to have a global footprint.

Speaker Change: It has to have a broad range of technologies. When we complete this journey with fab and its diversification will have Singapore.

Thomas Caulfield: When we complete this journey with Fab 8 and its diversification, we'll have Singapore, the European Union, and GF with a lot of overlap in technology platforms. So it's important for us as a strategic value of our global footprint to diversify Fab 8, and clearly it's important for us to diversify to make sure our Fab 8 facilities stay strong.

Speaker Change: European Union NGF with a lot of overlap and technology platforms. So it is important for US is the strategic value of our global footprint diversified fabby and clearly it's important for diversification make sure our fab facilities tasteful.

Harlan Sur: Thanks for the clarification, Tom.

Speaker Change: Thanks for the clarification Tom.

Operator: One moment for our next question. Thank you. Our next question comes from the line of Joe Moore of Morgan Stanley. Your line is now open.

Speaker Change: One moment for our next question.

Speaker Change: Thank you. Our next question comes from the line of Joe Moore of Morgan Stanley. Your line is now open.

Joseph Lawrence Moore: Great, thank you. So a little over a year ago, you guys had a partnership with an automotive OEM, General Motors. Before that, you had some discussions with Ford. That was really interesting. We haven't really seen OEMs work with Foundries more directly like that. But those automotive shortages are behind us. So I wonder if you could kind of talk about the commitment, the focus that those guys have on geographic diversification of their foundry and how that might help you.

Joseph Lawrence Moore: Great. Thank you.

Joseph Lawrence Moore: So a little over a year ago you guys.

Joseph Lawrence Moore: <unk> had a partnership with an automotive OEM and general Motors before that you had some some discussions with Ford.

Joseph Lawrence Moore: But that is really interesting, we havent really seen Oems work with foundries more directly like that.

Joseph Lawrence Moore: Those automotive shortages are behind us so I wonder if you could kind of talk to the commitment to <unk>.

Joseph Lawrence Moore: That those guys have on geographic diversification of their foundry and how that might help you.

Niels Anderskouv: So maybe, maybe I can take that one. This is this is Niels Anderskouv. You know, I like to take a little bit of a background on the LTH in general, and you know, remember that the LTH is still a relatively new feature within the founding model. But I want to emphasize that they've been a key feature of our business since 2021 and really have enabled us to invest more than $7 billion into new capacity to support our customers.

Speaker Change: So maybe yes, maybe I can take that one this is <unk>.

Speaker Change: I'd like to take a little bit of a background on <unk> in general.

Speaker Change: Remember that <unk> is still a relatively new feature within.

Speaker Change: Within the foundry model, but I want to emphasize that have been key feature of our business since 2021.

Speaker Change: And really have enabled us to invest more than $7 billion into new capacity to support our customers. So you'll recollect from prior earnings calls earnings calls that we've entered into more than 40 of these lta's, including the ones you just mentioned.

Niels Anderskouv: So you'll recall from prior earnings calls that we've entered into more than 40 of these LTAs, including the ones you just mentioned, and with over $30 billion of lifetime revenue coming out of those 40 LTAs. Fast forward to the end of 2023, and you may recall we had approximately two-thirds of that lifetime revenue remaining.

Speaker Change: With over $30 billion of lifetime revenue coming out of those 440 Lta's.

Speaker Change: Fast forward to the end of 2023 and you May recall, we had approximately two third of that lifetime revenue remaining.

Niels Anderskouv: And then, you know, again, with the announcement of a significant LTA extension in January this year with Infineon, that continues to be a very, very important part of our future business model. So the main point here is that the LTAs have benefited both GF and our customers through a number of lenses. Number one, they provide a level of certainty for both supply and demand. Two, they demonstrate doability in the application to all end markets we serve.

Speaker Change: And then again.

Speaker Change: The announcement of a significant LTA extension in January of this year with Infineon.

Speaker Change: It continues to be.

Speaker Change: A very very important part of <unk>.

Speaker Change: Our future business model. So the main upon here is that the LTA is a benefit of both of your ethanol customers through a number of lenses number one they provided that level of certainty for both supply and demand to the demonstrated ability.

Speaker Change: In the application to all end markets we serve.

Niels Anderskouv: And three, you know; they provide greater visibility and profitability to our business against a challenging market backdrop. So clearly, you know, our customers are central to this, and so is the longevity of our relationships with our customers. So, notwithstanding some of the recent discussions with our customers on their near-term volume adjustments, it's fair to say that LTAs remain, you know, a very important feature of our business model. So if I take those and come a little bit, you know, to the current quarter, take Q1 here, for example, clearly given the inventory levels across certain end markets, the rate and pace of entering new LTAs has slowed as our customers are working through the inventory in the channel.

Speaker Change: And free people.

Speaker Change: Provided greater visibility and profitability to our business through a challenging market backdrop. So clearly our customers are central to this and so is the longevity of our relationships with our customers.

Speaker Change: So notwithstanding some of the recent discussions with our customers on their near term volume adjustments. It's fair to say that LCA has remained very important feature of our business model, so, but take those and comment a little bit to the current quarter.

Speaker Change: I'll take Q1 here for example.

Speaker Change: Clearly given the inventory levels across certain end markets the rate and pace of entering new Otas has slowed as our customers are working through the inventory in the channel, but by no means our LTA is less important to us or our customers.

Niels Anderskouv: But by no means are LTAs less important to us or our customers, as evidenced by the fact that we, in Q1 again, announced the extension of one of our largest LTAs with Infineon. And that one was to support the long-term supply requirements of automotive, you know, great 40 nanometer mic controllers.

Speaker Change: As evident by the fact that in Q1 again announced the extension of one of our largest lta's with Infineon.

Speaker Change: And that one was to support the long term supply requirements of automotive grade 40 nanometer.

Niels Anderskouv: So, as you heard on the call today, there have been a couple of instances where we work with our customers on adjusting their near-term volume requirements. And I will highlight that these have been highly constructive conversations, and we work together on finding a balanced outcome based on the common features of our LTAs, namely Fixed Price, Fixed Volume, and Fixed Duration. So these are all the key features that we've been able to flex in order to preserve this relationship and strike the right long-term balance with our customers. So what's the outlook?

Speaker Change: My controllers.

Speaker Change: So as you heard on the call today to have been a couple of instances whereby we work with our customers on adjusting to near term volume requirements and I would highlight that these have been highly constructive conversations and we've worked together on finding.

Speaker Change: Balanced outcome based on the common features of.

Speaker Change: Our lta's, namely fixed price fixed volume and fixed duration. So these all the key features that we've been able to flex in order to preserve these relationship and strike the right long term balance with our customers. So what's the outlook well, what's most encouraging is actually how well our customers have responded to these discussions for example in one instance.

Niels Anderskouv: Well, what's most encouraging is actually how our customers will respond to these discussions. For example, in one instance, we mutually agreed on terminating an agreement, but that was primarily to align with our customers' long-term supply requirements. And just to demonstrate the resilience of the relationship, you know, the very next week, that same customer tried out a new design with us. So, what you're hearing from us today is that we continue to believe the LTA framework offers a mutually beneficial arrangement for both us and our customers to partner together over the long term.

Speaker Change: They agreed on servicing agreement, but that was primarily to align with our customers' long term so private equity requirements and just to demonstrate the resilience of the relationship.

Speaker Change: Next week that same customer tape out a new design with us so what youre hearing from US today is that we continue to believe the LTA framework offers a mutual mutually beneficial arrangement for both us and our customers to partner together over the long term and looking forward I would expect to see the LTA is remaining very key to sale of our customer.

Niels Anderskouv: And looking forward, I would expect to see the LTAs remaining, you know, very key to selling to our customers across various markets, automotive included, and also including the OEMs. So, I think you should expect to see more on that front. But, however, it is reasonable to assume that the terms and durations of the agreements will vary according to the end markets and what we are supporting.

Speaker Change: Across various end markets automotive included and also including the Oems. So I think you should expect to see more on that front, but however, it is reasonable to assume that the terms of the ratios of the agreements vary according to the end markets and what we are supporting.

Joseph Lawrence Moore: Great, that's helpful. And I guess I will follow up on that. You know, there's obviously one reason to do LTAs and those types of relationships because of tactical supply concerns. But there's also this sort of bigger picture OEM concern that maybe we're too reliant on certain geographies. So it's like, how strategic do you think those relationships can be? And I guess I'm just trying to make sure, you know, people don't, with the shortage phase, people sort of forget about some of the reasons that it came to you guys in the first place. You know, are you still having those strategic discussions in terms of, you know, bigger picture geographic diversification?

Speaker Change: Okay. That's helpful and I guess to follow up on that.

Speaker Change: There's obviously one reason to do LTA is in those types of relationships is because of tactical supply concerns, but there is also the sort of bigger picture.

Speaker Change: OEM concern that maybe were too reliant on certain geographies. So it's like how strategic you think those relationships can be and I guess I'm just trying to make sure.

Speaker Change: People don't with the shortage phase people sort of forget about some of the reasons that I came to you guys in the first place.

Speaker Change: Are you still having those strategic discussions in terms of bigger picture of geographic diversification.

Thomas Caulfield: Now, Joe, I think you're hitting on a really important point. One of the things that we learned is that it's not all about markets. This is back to the—there's no such thing as macro in our world anymore. There's no such thing as just a semiconductor industry. There's a lot of different components to it that have different behaviors, and I want to go back to the kinds of discussions that we're having with auto players, why that's different with some of the others. So what's unique about the auto?

Speaker Change: I think you're hitting on a really important point.

Speaker Change: One of the things we learned is that all end markets and this is back to the business.

Speaker Change: This thing is macro in a world anymore, there's no such thing as the semiconductor industry. There is a lot of different components to it that have different behaviors and I wanted to go back to the kinds of discussions that we're having with auto players whether it's different with some of the other end market.

Thomas Caulfield: These are long-term supply agreements. When they qualify a part, they're going to use it for five to ten years. So having long-term visibility and long-term certainty on supply pricing is really important for automotive makers because they're making commitments for a long time. The discussions we started with them continue, but they continue in a different fashion.

Speaker Change: So what's unique about auto these are long term.

Speaker Change: Supply agreements when they pay qualified part they are going to use it for five to 10 years.

Speaker Change: So having long term visibility and long term certainty.

Speaker Change: On supply pricing is really important for automotive makers, because they are making commitments for a long time.

Speaker Change: The discussions we started with them continue but they continue in a different fashion.

Thomas Caulfield: Since we don't design, and they don't design, there's a third party, one of our customers, in the middle, and we sit down and collectively talk about what we're going to do to make sure they have the level of certainty, durability, and supply for their future. In more markets that have much shorter product life cycles, what we're finding is LTA durations don't need to be as long. It doesn't mean customers don't want LTAs; they just want them for a much shorter duration. They still need, like all of us, certainty that when they need their product, they can have it.

Speaker Change: We don't design and data on design win is a third party one of our customers in the middle and we sit down collectively talk about what we're going to do to make sure. They have the level of certainty and durability and.

Speaker Change: Supply for their for their future and more.

Speaker Change: Markets that have much quicker product lifecycle, where we're finding as LTA durations don't need to be as long. It doesn't mean customers don't want lta's. They just want them.

Speaker Change: On a much shorter duration, so they can be nimble and flexible they still need like all of us certain.

Speaker Change: Certainly that when they need their product.

Thomas Caulfield: And so what we're all learning as an industry is to make sure that the terms and conditions of these LTAs reflect the uniqueness of each market. You know, long-term markets, segments that last a long time, want long-term certainty. In markets that have fast product transitions, they want near-term certainty. But recognizing commitments for the longer term will have to be renegotiated every year, and I think that's the one lesson we're all getting out of this.

Speaker Change: They can have it and so we're all learning as an industry is to make sure that.

Speaker Change: Terms and conditions of these lta's reflect the uniqueness of each market.

Speaker Change: Long long term.

Speaker Change: Markets or.

Speaker Change: Segments that that last a long time, what long term certainty and markets that have fast product transitions, they want near term certainty, but recognizing.

Speaker Change: Commitments for the longer term, we will have to be renegotiated every year and I think thats. The one learning we are getting out of this and are at the end of all of this for you you started the question with how are discussions going with the auto.

Thomas Caulfield: And, Ark, at the end of all of this for you, you started the question with how are the discussions going with the auto... The Automotive OEMs. We continually sit down and make sure we're aligning technology roadmaps, first and foremost, that we are brought into conversations with our customers so that we can make sure we're all serving the same purposes. And I think there's another entrant into this marketplace; the Tier 1s are also starting to think about doing their own designs, and we need to continue to partner with them as well. Yeah, maybe I can just comment on the long lifespan.

Speaker Change: The automotive Oems.

Speaker Change: We continually sit down and make sure we're aligning technology Roadmaps first and foremost that were brought into conversations with our customers. So that we can make sure. We're all serving the same purposes and I think theres. Another entrant into this marketplace. The tier ones are also starting to think about doing their own designs and we need to and continuing to part with them.

Niels Anderskouv: Yeah, maybe I can just comment on the long life cycle. This is an essential part of our strategy from a technological standpoint. Essential chip technology is all about supporting long life cycles, and we are seeing, you know, continued momentum building, you know, across the automotive space. You just heard us talk about 17% of our revenue here in Q1 came from the automotive industry, and it continues to be a strong growth area for us.

Speaker Change: Partner with them as well, yes, maybe I can just comment on the long lifecycle. This is an essential part of our of our strategy from a technology standpoint, essentially chip technology is all about supporting long life cycles.

Speaker Change: And we are seeing continued momentum building across the automotive space.

Speaker Change: You just heard US talk about 17% of our revenue here in Q1 came from automotive and it continues to be a strong growth ifr's. So strong fit to the strategy also what I mentioned, Tom Tom alluded, a little bit to it earlier that.

Niels Anderskouv: So, strong fit to the strategy. Also, what I mentioned, you know, Tom alluded a little bit to it earlier that the strategy is that we will qualify all our process nodes for automotive. And when you get back to what Tom just discussed about Fab 8, the automotive industry is going to become a very, very integral factory for the automotive strategy, and that's something that's been very well perceived by the OEMs as well, having a U.S. supply within that space.

Speaker Change: Australia is that we will have we will qualify all of our process nodes for automotive and when you get back to what Tom just discussed about fab eight automotive is going to become very very integral factory for automotive strategy and thats something thats been very well received by by the Oems as well, having a U S supplier, but in that space.

Speaker Change: Okay. Thank you.

Operator: One moment for our next question. Thank you. Our next question comes from the line of Chris Danely of Citi. Your line is now open.

Speaker Change: Yeah.

Speaker Change: One moment for our next question.

Speaker Change: Thank you. Our next question comes from the line of Chris Donnelly of Citi. Your line is now open.

Christopher Brett Danely: Hey, thanks guys. I guess just a question about the ChIPS Act and the money there. So $1.5 billion, that's great. But that's, I think that's over a year's worth of CapEx. So, you know, you're getting all this money, but utilization rates are in the 70s, and you have plenty of inventory. And we're sitting here coming out of a downturn. So I guess how do we allocate all of that capacity and not have, you know, like some sort of overcapacity or some sort of pricing problem? How's that going to work?

Christopher Brett Danely: Hey, Thanks, guys.

Christopher Brett Danely: I guess just a question on on chips Act in the money there so.

Speaker Change: <unk> that's great.

Christopher Brett Danely: But thats I think thats over a year's worth of Capex, So you're getting all this money.

Christopher Brett Danely: But utilization rates are in the Seventy's and you have plenty of inventory.

Christopher Brett Danely: Tori.

Christopher Brett Danely: Sitting here coming out of a downturn, so I guess, how do we.

Speaker Change: Allocate all of that.

Speaker Change: Capacity.

Speaker Change: And not have.

Speaker Change: Like some sort of overcapacity or some sort of pricing problem, how is that going to work.

Thomas Caulfield: Yeah, Chris. We don't build capacity ahead of its time; there's nothing worse than that, to overshoot the target. And there's nothing worse than, you know, government programs with the right intention to get diversification and resiliency in the supply chain to have companies get ahead of themselves and build empty factories. And so when I think about our global footprint, our investments going forward. You know, we talked about at the end of this year, we'll have capacity for roughly three million wafers a year of output. That's the 300 millimeter equipment.

Speaker Change: Yes, Chris.

Chris: We don't build capacity ahead of its need.

Chris: There's nothing worse than that.

Chris: To overshoot the target.

Chris: And there's nothing worse than government programs with the right intention to get diversification and resiliency and supply chain to have companies get ahead of themselves and build empty factories.

Chris: And so when I think about our global footprint, our investments going forward.

Chris: We talked about at the end of this year, we will have capacity roughly 3 million wafers a year.

Chris: Output. That's the 300 millimeter equivalent you can do the math on our on our Asps and you can see between wafers and non wafer revenue that gets us to accompany that.

Thomas Caulfield: You could do the math on our ASPs, and you can see, between wafers and non-wafer revenue, that gets us to a company that's... $9 to $10 billion in revenue. And you see where we are this year, at $6,8, 7, 7, 7 billion. So plenty of growth ahead within our current footprint. Now, securing your future and the optionality to build capacity is what we're doing with the CHIPS Act in the European Union and with the CHIPS Act in the United States.

Chris: 9% to $10 billion in revenue.

Chris: And you see where we are this year.

Chris: The 687 7 billion so plenty of growth ahead within our current footprint.

Chris: Securing your future and the Optionality to build capacities, what we're doing with the chips Act in the European Union with the chipset in there.

Thomas Caulfield: It's to make sure that we have proper funding so that when we need to invest again, we can, and we can do it in the most capital efficient way. And it really comes back to your belief. If you think the industry is done, there's no growth, and you wouldn't need any of it. We happen to believe, like many others, that this industry will double, and it's a question if it does in six years, eight years, but we need to be ready for that growth so that we can answer that for our customers, and we need to do it in the most economically efficient way, and that's where these government initiatives come in, funding partnerships come into play.

Chris: In the U S.

Chris: It's to make sure that we have proper funding so that when we need to invest again.

Chris: We can and we can do it in the most capital efficient way and it really comes back to you believe if you think the industry has done and there's no growth then you wouldn't need any of that we.

Chris: We happen to believe like many others in this industry will double and it's a question of if it doesn't six years eight years, but we need to be ready for that growth. So that we can answer that for our customers and we need to do it in the.

Chris: Economic.

Chris: Our efficient way and that's where these government.

Chris: Uh huh.

Chris: Funding partnerships come into play and we talk about the chips Bill at one $5 billion. The chips Bill will only fund up to roughly 15% of our project.

Thomas Caulfield: And we talk about the CHIPS bill at $1.5 billion. The CHIPS bill will only fund up to roughly 15% of a project. The ITC covers another 25%. So in combination, you're seeing a high mix of government participation in these investments. Sure, the lion's share comes due. Soundbeats like jazz.

Chris: The ITC covers another 25%.

Chris: So the combination youre seeing a high mix of government participation in these investments sure the lion's share comes to.

Thomas Caulfield: But I'm not worried about GF putting more capacity on than we need to serve our customers, but I'm not worried about the rest of the EU and US manufacturers overshooting because they'll plan their capacity edges with the true demand for our industry.

Chris: Foundries like Jeff.

Chris: I'm not worried about but I'm certainly not worried about GFS, putting more capacity than we need to serve our customers, but I'm not worried about the rest of that.

Chris: The EU and U S manufacturers overshooting, because they'll plan their capacity ads with true demand for our industry.

Christopher Brett Danely: Thanks for that clarification, Tom. And then my follow-up is on the LTAs and the contracts. Can you let us know what percentage of, say, 24 and 25 are covered by LTAs? And, you know, in terms of these customer revenue adjustments, is it that they come to you and say, hey, we need to renegotiate? And so you say, you know, if you want to renegotiate, you just have to pay us this money? And is it all 100% gross margin? Just any, you know, insight into the machinations of all this?

Speaker Change: Thank you thanks for that clarification, Tom and then my follow up is on the Otas and the contracts can you, let us know what.

Chris: Percentages stay 'twenty, four and 'twenty five.

Chris: Our covered by <unk>.

Chris: <unk>.

Chris: And.

Chris: In terms of these customer revenue adjustments is it that they come to you and say hey, we need to renegotiate and so you say.

Chris: If you want to renegotiate you just have to.

Chris: This money and is it all 100% gross margin just any insight into the machinations of all this.

John C. Hollister: Yeah, Chris, this is John. We have identified how much LTA total value we have, which is approximately $20 billion. That's as close as our 20F that we recently filed. The specific time domain of that is not called out, you know, that's lifetime revenue; you've got time, product life cycles that vary by the end market. But that gives you a sense of the coverage level, if you will. I mean, look, the economics may flow in with, with customer volume adjustments, but the fundamental purpose of these LTAs is, as Niels just spelled out, to provide that surety to customers and to give them the confidence that they'll have the supply in a resilient manner when they need it. So that's, that's really the purpose.

Chris: Yes, Chris this is John.

John C. Hollister: We have.

John C. Hollister: I have identified how much LTA total value, we have which is.

John C. Hollister: Approximately $20 billion.

Speaker Change: As disclosed in our 20-F that we recently filed the specific time domain about has not called out that's a lifetime revenue you've got.

John C. Hollister: Time.

John C. Hollister: Product lifecycle that vary by the end market, but that gives you a sense of.

John C. Hollister: The coverage level, if you will I mean look.

John C. Hollister: The economics may.

John C. Hollister: May flow and customer volume adjustments, but the fundamental purpose of of this LTA is Nils just.

John C. Hollister: Spelled out to provide that surety to customers and to give.

John C. Hollister: Give the confidence that they will have a supply and a resilient manner when they when they need it. So that's really the purpose.

John C. Hollister: Thanks.

Speaker Change: One moment for our next question.

Operator: One moment for our next question. Thank you. Our next question comes from the line of Ross Seymour of Duchess Bank. Your line is now open. Hi, guys. Thanks for letting me ask a couple questions. The first one's on the node transition risk. I know, Tom, you talked about that.

Speaker Change: Thank you. Our next question comes from the line of Ross Seymore at <unk> Bank. Your line is now open.

Ross Clark Seymore: Hi, guys. Thanks for let me ask a couple of questions. The first one is on the node transition risk.

Ross Clark Seymore: Tom you talked about what's happening in the comm infrastructure and data center segment, but how would you characterize that node transition risks.

Ross Clark Seymore: Entering this year versus exiting this year, how do we think about that as a headwind over time and I know you are diversifying away from it as well.

Ross Clark Seymore: Yeah, I think, as I said before, how we serve that market, we're pretty much at the low end of that revenue, and the real question is, how do we build this back to the business we want it to be through our technology platforms for power delivery and solving the bandwidth challenge? And so that's the growth opportunity for us back into this end market. We can hold the line on where we are today at that level of revenue that we spoke about. But, I guess, as a quick follow-up, is there something beyond that?

Tom: Yes, I think.

Ross Clark Seymore: As I said before.

Ross Clark Seymore: How we serve that market.

Ross Clark Seymore: We're pretty much at the low end of that revenue and the real question is how do we build this back to the business, we want it to be through our technology platforms for power delivery.

Ross Clark Seymore: And solving bandwidth talented and so that's the growth opportunity for us back into this end market.

Ross Clark Seymore: Can hold the line of where we are today at that level of revenue that we spoke about.

Thomas Caulfield: Do you have a similar problem with smart mobile devices, not just limiting the original question to the common infrastructure side of things? I think there's a fundamental element to what single-digit nanometer does and what it doesn't do. If you're able to have an application where it doesn't make a difference that the cost per transistor goes higher, but the power used per transistor is at a premium, then those applications... We'll pay for

Speaker Change: Well I guess as a quick follow up is there something beyond that do you have a similar problem in smart mobile devices not just limiting made original question to the comm infrastructure side of things.

Ross Clark Seymore: I think there is a fundamental.

Ross Clark Seymore: Element to its single digit nanometer does and when it does India.

Ross Clark Seymore: If you are able to have an application where it doesn't make a difference at the cost per transistor goes higher that the power used per transitioning transistor.

Ross Clark Seymore: <unk> history is it premium than.

Ross Clark Seymore: And those applications.

Thomas Caulfield: And so that creates a real moat around not wanting to go single-digit nanometer unless the application actually requires it. So you're seeing it in data centers, you're seeing it in where power is the key metric, and Minimizing Power Use. So we think the mode is, if this was the old days of Moore's Law, where you got a lower cost per transistor, right? We'd all have to move. Now we sit in an area where customers are working with us with the expressed intent to save us from having to go to single-digit nanometers and pay more per transistor.

Ross Clark Seymore: We'll pay that for that transistor and so that creates a real.

Ross Clark Seymore: Note around not wanting to go to single digit nanometer unless the application actually requires that.

Ross Clark Seymore: And so you're seeing it in data center Youre seeing it in.

Ross Clark Seymore: Yeah.

Ross Clark Seymore: Power is.

Ross Clark Seymore: The key metric.

Ross Clark Seymore: Minimizing power.

Ross Clark Seymore: Yes.

Ross Clark Seymore: So we think the moat is if this was the old days of Moore's law, where you've got a lower cost per transistor, we'd all have to move now we sit in an area, where our customers are working with us with the expressed intent save us from having to go to single digit nanometer and pay more per transistor.

Thomas Caulfield: And that's what the barrier is, and that's why we need to continue to innovate and drive features on our platform to prevent our customers needing to pay more for the products to service the markets they want.

Ross Clark Seymore: And Thats what.

Ross Clark Seymore: The barrier and that's why we need to continue to innovate.

Ross Clark Seymore: And drive features on our platforms to prevent our customers need to have to pay more for the product to service the market today.

Niels Anderskouv: If I may add to that, we are seeing it today on 22FDX; we are seeing several of our customers asking for us to continue to innovate on the process nodes so they can stay on them longer. And we are seeing the early same trend happening on 12 nanometer. In our roadmaps, we have newer versions of 12 nanometer that give you a much better power performance ratio in time. So if you think about the essential chip technology strategy put in place across the four product lines, it really is about extending the life cycles of these process nodes and continuing to make sure that they stay competitive, so we continue to win new businesses.

Speaker Change: If I may add to that.

Speaker Change: We're seeing it today on 22 Ft X.

Speaker Change: Seeing several of our customers.

Speaker Change: Asking for us to continue to innovate on the process notes they can stay on longer and we've seen the early still early same trend happening on 12 nanometer Roadmaps. We have newer versions of 12 nanometer that gives you.

Speaker Change: And much better Paul performance ratio out in time. So if you think about the central chip technology strategy, we put in place across the fall product lines. It really is about extending the life cycles of these these process notes and continue to make sure that they stay competitive. So we continue to win new businesses and I think the example of smart mobile devices being the biggest and mark.

Niels Anderskouv: And I think the example of smart mobile devices being the biggest in the market in 12 nanometers today exactly illustrates that. It's a great fit to that segment, and we'll continue to optimize for it and make it even better.

Speaker Change: In 12 nanometer today.

Speaker Change: Could just illustrates that is a great fit to that segment and we will continue to optimize it and make it even better.

Speaker Change: Thank you.

Operator: One moment for our next question. Thank you. Our next question comes from the line of CJ Muse of Cantor Fitzgerald.

Speaker Change: One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of C. J Muse of Cantor Fitzgerald. Your line is now open.

Thomas Caulfield: Yeah, good morning. Thank you for taking the time to answer the question. I guess the first question on auto, down 16% sequentially. I think it came in a little bit worse than what we were thinking when you initially guided. Curious, maybe, what changed in the quarter in terms of product or subsegment? And then, I guess, as you think about the recovery into June and beyond, you know, what are the key drivers that we should be focused on there?

Christopher Muse: Your line is now open. Yeah, good morning. Thank you.

Speaker Change: Yes. Good morning. Thank you for taking my question I guess first question on auto down 16% sequentially I think it came in a little bit worse than what we are.

Speaker Change: Thinking when you initially guided curious maybe what changed in the quarter in terms of product or sub segment and then I guess as you think about the recovery into June and beyond.

Speaker Change: What are the key drivers that we should be focused on there.

Thomas Caulfield: Okay, I think... this quarterly. Seasonality, those things we don't pay a lot of attention to in this segment given the fact that it's a very long duration.

Speaker Change: Okay.

Speaker Change: I think this quarterly.

Speaker Change: Yes.

Speaker Change: Seasonality those things, we don't pay a lot of attention to.

Speaker Change: In this segment given the fact that it's a very long duration.

Thomas Caulfield: Well, we're highly confident that this is a business that will continue to grow. Not only in the coming years, but this year, and meaningful growth in the mid to high single digits for us in 2024. So we see it; we see it in the order book, and we see it in our business plans. So I wouldn't read too much into a quarter and a quarter down in the automotive industry, especially given last year was a year of over a billion dollars, growing from $375 million the year before.

Speaker Change: But we're highly confident that this is a business that will continue to grow.

Speaker Change: Not only in the out years, but this year and meaningful growth.

Speaker Change: In the mid to high single digits for us in 2024.

Speaker Change: So we see it we see it in the order book and we see it in our in our business plans, so I wouldn't read too much into a quarter.

Speaker Change: Down in automotive, especially given last year was a year of over $1 billion growing from 375 million the year before.

Christopher Muse: Do you have a follow-up question, CJ?

Thomas Caulfield: Yeah, I guess maybe a question on smart mobile, maybe a similar type of question. You know, you talked about makingshift to premium phones, which benefits you. I think you talked about our front end and display drivers as incremental drivers for you in 24. So is that a business that you think can grow for all of calendar 24? Or, you know, is there sufficient inventory challenge that that might be difficult?

Speaker Change: Do you have a follow up if you don't get.

Speaker Change: Yes.

Speaker Change: I guess, maybe a question on smart mobile.

Speaker Change: Maybe kind of similar.

Speaker Change: Type of question.

Speaker Change: You talked about.

Speaker Change: Mix shift to premium phones, which benefits you you're talking about RF front end and display drivers as incremental drivers for you in 2000, and so is that a business that you think can grow in all of calendar 'twenty four or is there sufficient inventory challenge that that might be difficult. Thank you.

Thomas Caulfield: Thank you.

Thomas Caulfield: No, we believe that's an area that we will grow this year. With content growth, with handset growth, we can have growth. Remember, coming off a Q1, that was already challenged with inventories in the channel. So as inventories bleed out, and handset growth happens, we see growth in smart mobile devices for GF this year.

Speaker Change: We believe that's an area that we will grow this year.

Speaker Change: With content growth with handset growth means we can have growth.

Speaker Change: Remember, we're coming off of Q1 that was already.

Speaker Change: Talent with inventories in the channel so there's inventories bleed out handset growth happens.

Speaker Change: Growth in smart mobile devices for <unk> this year.

Niels Anderskouv: Yeah, I think that's a good growth story we have there, you know, handsets growing, us growing, us having a larger share in premium handsets that we believe will grow faster, and then on top of that, you're starting to see, you know, inventory dollar-wise draining in the space, so yeah, we do believe that's going to be a growth market for us this year.

Speaker Change: Yes, I think thats, a good growth story behalf handsets growing us growing us having a largest share in premium handsets.

Speaker Change: We believe that to grow faster and then I'll talk to that Youre starting to see.

Speaker Change: <unk>.

Speaker Change: Dollar wise training into space.

Speaker Change: <unk>.

Speaker Change: We do believe that's going to be a growth market for us this year.

Operator: Julia, we'll take one last one. One moment.

Speaker Change: Thank you.

Speaker Change: Julia will take one last question. Thank you.

Mehdi Hosseini: One moment for our last question. Thank you. Our final question comes from Mehdi Hosseini of Saskana International Group. Your line is now open.

Julia: One moment for our last question.

Speaker Change: Thank you.

Julia: Final question comes from Mehdi Hosseini of Susquehanna International Group. Your line is now open.

John C. Hollister: Yes, thanks for taking the question. There are a couple of follow-ups. Tom, just double-clicking on communication. I believe your comment suggests that revenues there are expected to go flattish throughout the year, especially with the migration to nanometer. What I want to better understand is when do you expect new opportunities like silicon photonics that have been talked about in the downstream are going to be material to you? And then, one follow-up question for John: how should we think about DNA and opex in 24 versus 25?

Mehdi Hosseini: Yes, thanks for taking the question a couple of follow ups, Tom just double clicking on communication I believe your comments suggest that revenues do.

Mehdi Hosseini: Are expected to grow flattish.

Mehdi Hosseini: Throughout the year, especially with the migration to nanometer what I wanted to better understand.

Mehdi Hosseini: <unk> when do you expect new opportunities.

Mehdi Hosseini: Silicon Photonics.

Mehdi Hosseini: <unk> had been talked about in the downstream are going to be material to you and then one follow up question for John How should we think about DNA and Opex in 24 versus 23.

Niels Anderskouv: John, go in reverse order, hands down. Yeah, yeah, no problem, Mehdi. So DNA, roughly consistent, is how we see that. You know, we've drawn down our CapEx a fair amount, as we said in our prepared remarks, see about 700 million as our estimate for the year, which is enabling tremendous growth in free cash flow. And we're holding the view that that can increase to two to three times the free cash flow that we generate in 2023.

Speaker Change: So just go in reverse order, yes, yes, no problem.

Speaker Change: <unk>.

Speaker Change: DNA roughly consistent.

Speaker Change: So we see that.

Speaker Change: We've drawn down our Capex a fair amount as we've said in our prepared remarks see about $700 million is our estimate for the year, which is enabling tremendous growth in free cash flow and we're holding the view that that can increase to two to three times the free cash flow that we generated in 2023. So that's that's positive as far as Opex.

Niels Anderskouv: So that's positive. As far as OpEx, just a quick reminder that we had a large credit in the fourth quarter related to the advanced investment tax credit that was coming into SG&A. That was about $50 million of credit in Q4. We've got that more normalized now in the first quarter, but you do see an uptick in OpEx for Q1 related to that, as that was a one-time benefit in the fourth quarter of 2023. So, so let me try, maybe.

Speaker Change: As a quick reminder, that we had a large credit in the fourth quarter related to the advanced investment tax credit.

Speaker Change: That was coming into SG&A that was about $50 million of credit in Q4, we've got that more normalized now in the first quarter, but you do see an uptick in Opex for Q1 related to that is that was that was a onetime benefit in the fourth quarter of 2023.

Niels Anderskouv: So let me maybe address the data center part of the question. So in data center, you know, the two major growth vectors that we're seeing is, as you pointed out, silicon photonics and power delivery. So maybe if I start with silicon photonics, where the market is at today is that you're starting to see adoption and products being released in what we term as the pluggable space. So these are the pluggable type of silicon photonics devices that you're seeing out there today, where we're seeing a lot of activity, you know, for future growth, and maybe more substantial growth is in the co-packaged silicon photonics, where basically you're starting to see silicon photonics becoming a real design consideration, you know, for GPUs, NPUs, and CPUs, simply to be able to enable the bandwidth you need to have not just within the rack and between the racks, but also within and between the processors that sits on the main board.

Speaker Change: So let me maybe address the data center part of the question. So so in data center. The two the two major growth vectors that we are seeing is as you pointed out silicon photonics and power delivery. So maybe if I start with silicon photonics, where the market is that today is that you're starting to see adoption in products.

Speaker Change: Is being released in what we term as applicable space. So these are the plug a hole type of silicon photonics devices that youre seeing out there today, where we're seeing a lot of activity.

Speaker Change: For future growth.

Speaker Change: And maybe more substantial growth is in the co packaged silicon photonics, where basically you're starting to see silicon photonics, becoming a real design consideration for Gpus and to use.

Speaker Change: Cpus simply to be able to enable the bandwidth you need to have not just within the racket between the ranks, but also within and between.

Speaker Change: The processes that sits sits on the main board. So that's a big growth rates are obviously not something that happens overnight. So these.

Niels Anderskouv: So that's a big growth vector, obviously not something that happens overnight. These are big infrastructure changes. So you should expect that they'll probably take a couple of years before they really materialize, but we are starting to see some early momentum on that front. So those are some of the future growth areas for us in data centers, you know, out in time.

Speaker Change: These are big infrastructure changes. So you should expect that that will probably take a couple of years before it really materialize, but starting to see some early momentum on that front power delivery very.

Speaker Change: Very exciting.

Speaker Change: Very good progress of that power delivery for data centers in Italy. It is with our BCD technology in our 12 nanometer technology.

Speaker Change: You're seeing seeing the first the first tape outs and.

Speaker Change: And as you know from previous calls we've been investing in Gan technology, as well and we believe that Gan, both the 650 volt as well as to <unk>. We will have we will have a major play also within within the data centers. So those are some of the the future grow various wireless and data center.

Speaker Change: Out in time.

Sam Franklin: Studio, I think we're coming up on the hour now.

Speaker Change: Thanks Neil.

Speaker Change: Judy or at the clearer come up on the Avenue.

Sam Franklin: This concludes the question and answer session. I would now like to turn it back to Sam Franklin, Vice President of Business, Finance, and Investor Relations, for closing remarks.

Speaker Change: This concludes the question and answer session I would now like to turn it back to Sam Franklin Vice President of business Finance and Investor Relations for closing remarks.

Sam Franklin: Thank you, Julia. Thank you, everyone, for joining us on the call today. I appreciate the questions and look forward to seeing and speaking to many of you over the next couple of months.

Sam Franklin: Thank you Julia Thank you everyone for joining us on the call today appreciate the questions and looking forward to seeing and speaking to many of you over the next couple of months.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: Sure.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: Thank you.