Q2 2024 GlobalFoundries Inc Earnings Call
Good day and thank you for standing by.
Operator: conference call to review the second quarter of fiscal year 2024 financial results. At this time, all participants are in the 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. We suggest that you... 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.
Speaker Change: Welcome to the GlobalFoundries conference call to review second quarter of fiscal year 2024 financial results. At this time, all participants are in a listen-only mode.
Speaker Change: 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 11 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 11 again. We suggest that you...
Speaker Change: Oh.
Speaker Change: 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.
Sam Franklin: Thank you, Operator. Good morning, everyone, and welcome to GlobalFoundries' second 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 second 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.
Speaker Change: Please go ahead.
Sam Franklin: Thank you, Operator. Good morning, everyone, and welcome to Global Foundry's second quarter 2024 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO , John Hollister, CFO , and Niels Anderskouv, Chief Business Officer.
Sam Franklin: A short while ago we released GF's second quarter financial results.
Sam Franklin: which are available on our website at investors.gf.com.
Sam Franklin: along with today's accompanying slide presentation. This call is being recorded and a replay will be made available on our Investor Relations webpage.
Sam Franklin: 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: 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: I would remind you that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate, and may, or by the use of the future tense.
Sam Franklin: 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: 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 29th, 2024. We will begin today's call with Tom providing a summary update on the current business environment and technologies.
Tom: For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks and uncertainties described in our SEC filings, including in the sections under the caption, Risk Factors in our Annual Report on Form 20-F, filed with the SEC on April 29, 2024. We will begin today's call with Tom providing a summary update on the current business environment and technologies.
Tom: Niels will then discuss some recent strategic activities.
Sam Franklin: Following which John will provide details on our end market and second quarter results and also provide third quarter 2024 guidance.
Speaker Change: We will then open 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: Niels will then discuss some recent strategic activities, following which John will provide details on our end markets and second quarter results and also provide third quarter 2024 guidance. We will then open 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.
Tom: Thank you, Sam, and welcome everyone to our second quarter earnings call. I'm pleased to report second quarter results that exceeded the midpoint of our guidance ranges as our 13,000 employees around the world continue to focus on delivering best-in-class technologies and meeting the needs of our customers both globally and locally. I am proud of how well our teams are partnering with our customers on exciting new design wins as we execute on our long-term plans.
Tom: Thank you, Sam, and welcome everyone to our second quarter earnings call.
Tom: I'm pleased to report second quarter results which exceeded the midpoint of our guidance ranges as our 13,000 employees around the world continue to focus on delivering best-in-class technologies and meeting the needs of our customers both globally and locally.
Speaker Change: I am proud of how well our teams are partnering with our customers on exciting new design wins as we execute to our long-term plans.
Tom: Against this backdrop, we believe that we're beginning to see the demand outlook improve across certain end markets as the number of applications for analog and mixed signal products increases, and channel inventory levels for some of our customers are showing signs of normalizing. As outlined on prior earnings calls, we still believe that the first quarter represents the low point for revenue in 2024, and the sequential revenue growth we reported for the second quarter, along with our guidance for the third quarter, are consistent with this expectation.
Speaker Change: Against this backdrop, we believe that we are beginning to see the demand outlook improve across certain end markets as the number of applications for analog and mixed signal products increases and channel inventory levels for some of our customers are showing signs of normalizing.
Tom: Notwithstanding the short-term cyclical dynamics impacting our industry, we remain focused on positioning GF for long-term growth opportunities. I am pleased to provide several updates today demonstrating how we are investing in our future growth plans and winning with our customers. To that end, we completed the acquisition of Tagore Technologies' gallium nitride power business, which included its extensive IP portfolio and its team of GAN engineers, which closed at the beginning of July. This is an important addition to our power technology platform, and with that, I'd like to turn the call over to Niels to provide some additional commentary.
Speaker Change: To that end, we completed the acquisition of Tagore Technologies.
Niels: Thank you, Tom, and welcome to everyone on the call. I'd like to share a few details on the acquisition and set out why it's important for GF and for our customers and how this will support our ambitions to become a leading foundry in the rapidly expanding gallium nitride power device sector. At its core, the integration of Tagore's technology IP is expected to enable GlobalFoundries to grow its capabilities in pursuit of two key objectives.
Speaker Change: Thank you Tom and welcome to everyone on the call. I'd like to share a few details on the acquisition and set out why it's important for GF and to our customers and how this will support our ambitions to become a leading foundry in the rapidly expanding gallium nitride power device sector.
Niels: Firstly, expanding our product portfolio by providing additional power handling features for our customers, and secondly, growing our serviceable, addressable market. From a technical perspective, GaN offers several advantages over traditional silicon-based semiconductors, particularly in power applications. This is due to its ability to operate at higher voltages, with faster switching speeds, at smaller diode sizes, and with better thermal performance. With Tagore's technology, we can now target better power efficiency in an integrated solution.
Niels: Perhaps the best way to think about this is to compare our integrated GAN offering to BCDE technology. With Tegor's capability, we plan to offer our customers the analog and digital content of BCD technology integrated with the superior power performance of GaN. These performance characteristics have been identified by our customers as key features for supporting applications across sectors such as automotive, aerospace, and defense, renewable energy, fast charging infrastructure, and power management for data centers. As a result, we expect our SAM business to grow by approximately $1.6 billion by 2030.
Speaker Change: With Tagore's capability, we plan to offer our customers the analog and digital content of BCD technology integrated with the superior power performance of GaN.
Speaker Change: As a result, we expect our SAM to grow by approximately 1.6 billion dollars by 2030, and additionally, we are supporting our customers to target a substantial share of this SAM.
Niels: Additionally, we are supporting our customers to target a substantial share of this SAM. By investing in GaN solutions designed to push the boundaries of efficiency and performance in a wide range of power applications, we are targeting opportunities to win with our customers across all of the eight markets we serve. And we are already sampling our first-generation 650-volt GaN products, with 100- to 200-volt sampling expected to follow shortly. To achieve this goal, we'll be modernizing our manufacturing capabilities at our site in Burlington over the coming years.
Speaker Change: And we are already sampling our first generation 650V GaN products with 100-200V sampling expected to follow shortly.
Speaker Change: To achieve this goal, we'll be modernizing our manufacturing capabilities at our site in Burlington over the coming years.
Niels: This modernization will be enabled with the expected support from the previously discussed grant award from the U.S. Chips and Science Act, along with continued investment in R&D to support a gradual ramp-up of our game manufacturing capacity over the next two to three years. Moreover, this acquisition aligns with Global Foundries' broader strategy to enable high-volume manufacturing of critical technologies in power applications and to serve as a trusted manufacturing partner for our customers seeking to build the next generation of power management solutions here in the United States.
Speaker Change: This modernization will be enabled with the expected support from the previously discussed grant award from the U.S. Chips and Science Act, along with continued investment in R&D to support a gradual ramp of our game manufacturing capacity over the next two to three years.
Speaker Change: Moreover, this acquisition aligns with Global Foundries' broader strategy to enable high-volume manufacturing of critical technologies in power applications and to serve as a trusted manufacturing partner for our customers seeking to build the next generation of power management solutions here in the United States.
Niels: I would like to welcome our new GEF employees joining us as part of this acquisition, and we look forward to taking the next step in this important growth opportunity for the company. With that, back to you, Tom. Thank you, Niels.
Speaker Change: I would like to welcome our new GEF employees joining us as part of this acquisition and we look forward to taking the next step in this important growth opportunity for the company. With that, back to you Tom.
Tom: Thank you, Niels. Before I comment on the current business landscape and our recent customer partnerships, let me now touch briefly on our second quarter results, which John will discuss in more detail in his commentary. Revenue in the quarter increased sequentially to $1.632 billion, which was above the midpoint of our guidance range. We reported a non-IFRS gross margin of 25.2% in the quarter, which again exceeded the midpoint of our guidance range. We delivered non-IFRS diluted earnings per share of 38 cents, which exceeded the high end of our guidance range.
Utah: Thank you, Niels. Before I comment on the current business landscape and our recent customer partnerships, let me now touch briefly on our second quarter results, which John will discuss in more detail in his commentary.
John: Revenue in the quarter increased sequentially.
John: to $1.632 billion, which was above the midpoint of our guidance range.
John: We reported non-IFRS gross margin of 25.2% in the quarter, which again exceeded the midpoint of our guidance range.
John: We delivered non-IFRS diluted earnings per share of $0.38, which exceeded the high end of our guidance range. I am also pleased to report another quarter of strong cash flow, which reflects our disciplined approach to capital deployment while preserving our capacity expansion objectives.
Tom: I am also pleased to report another quarter of strong cash flow, which reflects our disciplined approach to capital deployment while preserving our capacity expansion objectives. Cash flow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model. We are on track to deliver approximately three times the amount of 2023 non-IFRS adjusted free cash flow by the end of 2024. We are well on our way to this goal as we achieve more than $500 million of non-IFRS adjusted free cash flow in the first half of the year.
John: Cash flow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model. We are on track to deliver approximately three times the amount of 2023 non-IFRS adjusted free cash flow by the end of 2024.
John: We are well on our way to this goal as we achieve more than 500 million dollars of non-IFRS adjusted free cash flow in the first half of the year.
Tom: Moving now to some of our recent partnership activity and how we are positioning GF to keep winning with our customers over the long term. Automotive remains a bright spot across our end market portfolio, and we delivered another quarter of revenue growth. 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. As the semiconductor content in vehicles continues to expand, GF is well positioned to support our customers with a full range of our technology portfolio.
John: Moving now to some of our recent partnership activity and how we are positioning GF to keep winning with our customers over the long term.
John: Automotive remains a bright spot across our end market portfolio and we delivered another quarter of revenue growth. 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.
John: As the semiconductor content in vehicles continues to expand, GF is well positioned to support our customers with a full range of our technology portfolio mix.
Tom: The performance features embedded across our key product platforms support critical applications in the automotive sector. In the second quarter, we closed important design wins for automotive power management on our 130 BCD platform and next generation tire pressure monitoring systems on our 55 nanometer platform. Across the broader portfolio, our technologies are key enablers of the increasing semiconductor content in vehicles, including 12 LP+ used in infotainment and navigation systems, 22FDX for radar and safety applications, and through our 130 and 180 nanometer technologies for automotive power management applications.
John: The performance features embedded across our key product platforms support critical applications in the automotive sector.
John: 22FDX for radar and safety applications, and through our 130 and 180 nanometer technologies for automotive power management applications.
Tom: Our 40 nanometer microcontrollers for safety, powertrain, and comfort applications have seen consistent demand from our customers, one of which has the number one position in automotive microcontrollers, where we are the sole source supplier. From a revenue base of approximately $1 billion in 2023, we remain on track to grow our revenue meaningfully on a year-over-year basis for the full year of 2024.
John: from a revenue base of approximately $1 billion in 2023.
Tom: Turning now to smart mobile devices, where our technology portfolio delivered quarter-over-quarter revenue growth and key design wins in the second quarter across RF front-end, Wi-Fi, and wireless connectivity applications. Notwithstanding the ongoing inventory correction, our customers are continuing to engage with us for long-term opportunities to deliver the next generation of smart mobile devices. Thanks to our recent design wins, we expect to grow share with our RF front-end offerings, specifically on our 8SW and 9SW RF SOI platforms. 9SW features lower standby currents for longer battery life, up to 10% improvement in noise failure, and up to 25% reduction in customer die size loss.
John: Turning now to smart mobile devices, where our technology portfolio delivered quarter-over-quarter revenue growth and key design wins in the second quarter across RF front-end, Wi-Fi, and wireless connectivity applications.
John: Notwithstanding the ongoing inventory correction, our customers are continuing to engage with us for long-term opportunities to deliver the next generation of smart mobile devices.
John: Thanks to our recent design wins, we expect to grow share with our RF front-end offerings specifically on our 8SW and 9SW RF SOI platforms.
Tom: Our 22 FDX platform continues to be an important growth vector for wireless connectivity applications in smart mobile devices, and we closed a key design win in the second quarter for wireless video applications in premium smartphones. Our 28 high-voltage, low-power solutions for OLED display driver applications began to ramp in the second quarter. We continue to target new opportunities across other display driver integrated circuit customers, serving premium-tier hands-free applications. These features all drive increased silicon content, which in turn increases the need for high-performance connectivity and low-power technologies, which GF is well-placed to serve. In IOT, ongoing excess inventories at our customers contributed to a decline in revenue for the second quarter.
John: Our 28 high-voltage, low-power solutions for OLED display driver applications began to ramp in the second quarter. We continue to target new opportunities across other display driver integrated circuit customers, serving premium-tier handsets.
John: These features all drive increased silicon content, which in turn increase the need for high-performance connectivity and low-power technologies, which GF is well-placed to serve.
John: In IOT, ongoing excess inventories at our customers contributed to a decline in revenue for the second quarter.
Tom: Although our customers' inventories are expected to remain high through 2024, we continue to see long-term opportunities as the number and complexity of smart connected and battery operated devices continue to grow. The need to sense, acquire, process, and communicate data also translates into new requirements for more efficient power management, connectivity, and AI-to-edge functionalities. For example, our 22 FDX Plus platform for high-speed wireless IoT devices picked up new design wins in the second quarter, as did our 28 ESF3 platform to support the next generation of smart card applications.
John: The need to sense, acquire, process, and communicate data also translates into new requirements for more efficient power management, connectivity, and AI at the edge functionalities.
John: For example, our 22 FDX Plus platform for high-speed wireless IoT devices picked up new design wins in the second quarter, as did our 28 ESF3 platform to support next generation of smart card applications.
Tom: Highlighting the breadth of our IoT markets, we are now working with medical device providers in applications such as continuous glucose monitors using our 130 BCD light platform as a key enabler of the front-end function of these devices. In aerospace and defense, we continue to partner with a variety of customers where our power and performance-optimized solutions are well-suited to applications geared for harsh environments. To that end, we recently announced a new collaboration with BAE Systems to strengthen the supply of critical semiconductors for national security programs. Together, our companies will collaborate on R&D programs across a range of applications, including advanced packaging. Gallium Nitride, Silicon Photonics, and Advanced Technology Process Development
John: In aerospace and defense, we continue to partner with a variety of customers.
Speaker Change: Together, our companies will collaborate on R&D programs across a range of applications including advanced packaging, gallium nitride, silicon photonics, and advanced technology process development.
Tom: Finally, revenue for our communications infrastructure and data center segment grew sequentially in the second quarter as the near-term node migration of our data center and digital-centric customers tapered off. As discussed on our last earnings call, we believe that quarterly revenue for the remainder of 2024 in this end market will be roughly in line with what we have reported for the first and second quarters of 2024. Over the long term, power management for communications, infrastructure, and data centers represents an important opportunity for GF in applications ranging from servers for generative AI to high-performance network switches and storage, a trend that GF is well-positioned to address through our silicon photonics and power delivery solutions.
Speaker Change: As discussed on our last earnings call, we believe that quarterly revenue for the remainder of 2024 in this end market will be roughly in line with what we have reported for the first and second quarters of 2024.
Speaker Change: in applications ranging from servers for generative AI.
Speaker Change: High-Performance Network Switches and Storage.
Tom: As we discussed in our first quarter earnings call, satellite communications is also an important growth opportunity within this end market, and I am pleased to report another design win in the second quarter, this time on our 22FDX platform to enhance beamforming for SATCOM applications, which follows the base station design win we announced last quarter using our 130NSX platform. I'm also pleased to report that Grok, a leading developer of fast AI inference technology, recently announced that it is ramping up its language processing units with GF, manufactured on our 14 nanometer platform at our Malta facility in upstate New York.
Speaker Change: As we discussed in our first quarter earnings call, satellite communications is also an important growth opportunity within this end market, and I am pleased to report another design win in the second quarter, this time on our 22FDX platform to enhance beamforming for SATCOM applications.
Speaker Change: I'm also pleased to report that Grok, a leading developer of fast AI inference technology, has recently announced that it is ramping its language processing units with GF, manufactured on our 14 nanometer platform at our Malta facility in upstate New York.
Tom: This is an important development in supporting the next wave of AI-inferenced technologies and continues the diversification of end markets serviced by our Fab8 facility. Moving briefly to our capacity, I would like to take a moment to talk about how we are optimizing our manufacturing footprint over the coming years. We remain deeply focused on providing our customers with a diversified technology offering across our entire manufacturing footprint, and to that end, we are continuing with the transfers of technologies across 22, 28, and 40 nanometer platforms at our Fab8 facility in Malta, New York, which adds to the 12 nanometer FinFET, RFSOI, and silicon photonics platforms that are already manufactured there.
Speaker Change: This is an important development in supporting the next wave of AI inference technologies and continues the diversification of end markets serviced by our Fab 8 facility. Moving briefly to our capacity, I would like to take a moment to talk about how we are optimizing our manufacturing footprint over the coming years.
Speaker Change: We remain deeply focused on providing our customers with a diversified technology offering across our entire manufacturing footprint, and to that end, we are continuing with the transfers of technologies across 22, 28, and 40 nanometer platforms in our Fab 8 facility in Malta, New York.
Speaker Change: which add to the 12 nanometer FinFET, RFSOI, and silicon photonics platforms that are already manufactured there. Long term, our mission remains to support our customers with differentiated technologies and performance features that they need in the markets and geographies where they excel.
Tom: Long term, our mission remains to support our customers with differentiated technologies and performance features that they need in the markets and geographies where they excel. To summarize, I'm proud of our teams around the world as they executed the plan, and we delivered second quarter revenue, gross profit, and EPS above the midpoint of our guidance ranges, while continuing to close important design wins to support a long-term growth objective. With that, over to you, John.
Speaker Change: To summarize, I'm proud of our teams around the world as they executed the plan and we delivered second quarter revenue, gross profit, and EPS above the midpoint of our guidance ranges while continuing to close important design wins to support our long-term growth objectives.
Speaker Change: With that, over to you, John .
John: Thank you, Tom, and welcome everyone to our second quarter earnings call for the remainder of the call, including guidance. Other than revenue, cash flow, CapEx, and net interest and other expense, I will reference non-IFRS metrics which exclude share-based compensation and other restructuring charges.
John: Thank you, Tom, and welcome everyone to our second quarter earnings call.
Speaker Change: For the remainder of the call, including guidance, other than revenue, cash flow, CapEx, and net interest and other expense, I will reference non-IFRS metrics which exclude share-based compensation and or other restructuring charges.
John: As Tom noted, our second quarter results exceeded the midpoint of the guidance ranges we provided in our last quarterly update. We delivered second quarter revenue of $1.632 billion, which represented a 5% increase over the prior quarter, but a decrease of 12% 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 517,000 300 millimeter equivalent wafers in the quarter, up 12% sequentially and down 10% from the prior year period.
Speaker Change: As Tom noted, our second quarter results exceeded the midpoint of the guidance ranges we provided in our last quarterly update.
Speaker Change: We delivered second quarter revenue of $1.632 billion.
Speaker Change: which represented a 5% increase over the prior quarter, but a decrease of 12% 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.
Speaker Change: We shipped approximately 517,000 300mm equivalent wafers in the quarter, up 12% sequentially and down 10% from the prior year period.
John: ASP, or average selling price per wafer, was flat year over year. Non-waifer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 9% of total revenue for the second quarter. This decline was partially offset by an improvement in ASP and MIX, driven by continued content growth in premium tier smart mobile devices.
Speaker Change: ASP, or average selling price per wafer, was flat year over year.
Speaker Change: Waiver revenue from our end markets accounted for approximately 91% of total revenue. Non-waiver revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 9% of total revenue for the second quarter.
Speaker Change: Let me now provide an update on our revenues by end markets.
Speaker Change: Smart mobile devices represented approximately 47% of the quarter's total revenue. Second quarter revenue increased approximately 12% sequentially and decreased approximately 3% from the prior year period, principally due to modestly lower shipments.
Speaker Change: This decline was partially offset by an improvement in ASP and MIX, driven by continued content growth in premium tier smart mobile devices.
John: As Tom discussed, we believe that inventory levels in this end market have begun to normalize in the first half of 2024, and we are well positioned to support our customers when this end market recovers, as the silicon content and features in smart mobile devices continue to grow. Automotive remained a key growth segment for us and represented approximately 17% of the quarter's total revenue. Second quarter revenue grew approximately 2% sequentially and 10% from the prior year period due to higher volumes as the 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 ASPN mix. Gross margin exceeded the midpoint we had indicated and included $66 million in revenue associated with the execution of customer volume adjustments. Total operating expenses declined sequentially to $199 million in the quarter and incorporated an advanced manufacturing investment tax credit of $20 million.
Speaker Change: Unknown Speaker
Speaker Change: As Tom discussed, we believe that inventory levels in this end market have begun to normalize during the first half of 2024 and we are well positioned to support our customers when this end market rebounds as the silicon content and features in smart mobile devices continues to grow.
Speaker Change: In the second quarter, revenue for the home and industrial IOT markets represented approximately 18% of the quarter's total revenue.
Speaker Change: Second quarter revenue decreased approximately 5% sequentially and 28% from the year prior period as our customers in the consumer and industrial IoT segments continue to focus on bringing down their elevated channel inventories.
Speaker Change: 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 segment.
Speaker Change: Automotive remained a key growth segment for us and represented approximately 17% of the quarter's total revenue.
Speaker Change: Second quarter revenue grew approximately 2% sequentially and 10% from the prior year period.
Speaker Change: due to higher volumes as the semiconductor content and features increase across the vehicle architecture and our designs continue to ramp at key customers, which were partially offset by reductions in ASP and mix.
Speaker Change: As Tom noted, we expect meaningful year-over-year automotive revenue growth for 2024 as we support our customers across a diverse range of automotive applications in both industrial internal combustion engine and autonomous connected electrified vehicles.
Speaker Change: Finally, moving on to our Communications, Infrastructure, and Data Center and Market, which represented approximately 9% of the quarter's total revenue.
Speaker Change: Second quarter revenue increased 28% sequentially and declined approximately 27% year-over-year as a result of declining volumes. However, this was partially offset by an improvement in ASPs and mix during the quarter.
Speaker Change: As Tom noted, we will continue to focus on new opportunities in CID in the areas of power and connectivity while diversifying our manufacturing footprint.
Tom: Moving next to Gross Profit.
Tom: For the second quarter, we delivered gross profit of $411 million, which was above the midpoint of our guided range and translates into approximately 25.2% gross margin.
Tom: Gross margin exceeded the midpoint we had indicated and includes $66 million in revenue associated with the execution of customer volume adjustments.
Tom: Looking ahead to the third quarter of 2024, we expect additional customer volume adjustments, albeit at lower levels than we saw in the first half of 2024, as our customers' demand and inventory levels begin to correct. This has been reflected in our third quarter guidance.
Tom: On operating expenses and operating profit, operating expenses for the second quarter represented approximately 12% of total revenue. R&D for the quarter declined to $113 million, and SG&A also declined sequentially to $86 million.
Tom: Total operating expenses declined sequentially to $199 million in the quarter and incorporated an advanced manufacturing investment tax credit of $20 million.
John: As 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. As a result, we've reported diluted earnings of $0.38 per share for the second quarter, which was above the high end of our guidance range. At the end of the second quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $4.145 billion.
Tom: As 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.
Speaker Change: Transcribed by https://otter.ai
Tom: We delivered operating profit of $212 million for the quarter, which translates into approximately 13% operating margin at the high end of our guided range and 530 basis points below the prior year period.
Tom: Second quarter net interest income and other income and expense was $12 million and we incurred income tax expense of $13 million in the quarter.
Tom: We reported second quarter net income of $211 million, a decrease of approximately $86 million from the year ago period.
Tom: As a result, we reported diluted earnings of $0.38 per share for the second quarter, which was above the high end of our guidance range.
Tom: Let me now provide some key ballot sheet and cash flow metrics.
Tom: Cash flow from operations for the second quarter was $402 million.
Tom: CapEx for the quarter was $101 million, or roughly 6% of revenue.
Tom: Adjusted 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.
Tom: Less purchases of property, plant equipment, and tangible assets, as set out on the Statement of Cash Flows, was $302 million.
Tom: At the end of the second quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $4.145 billion. We also have a $1 billion revolving credit facility, which remains undrawn.
John: We also have a $1 billion revolving credit facility, which remains undrawn. Next, let me provide you with our outlook for the third quarter of 2024. Of this, we expect non-waifer revenue to be approximately 11% of total revenue, excluding share-based compensation but including the benefit related to advanced manufacturing. Investment Tax Credit For the third quarter, we expect total OPEX to be between $200 million and $220 million. We expect net interest income and other income and expense for the quarter to be between zero and positive $7 million, and income tax expense to be between $16 million and $31 million.
Tom: Next, let me provide you with our outlook for the third quarter of 2024.
Tom: We expect total GF revenue to be between $1.7 and $1.75 billion.
Tom: Of this, we expect non-waifer revenue to be approximately 11% of total revenue.
Tom: We expect gross profit to be between $391 million and $438 million.
Tom: excluding share based compensation, but including the benefit related to the advanced manufacturing
Tom: Investment Tax Credit for the third quarter, we expect total OPEX to be between 200 million and 220 million dollars.
Tom: We expect operating profit to be between $171 million and $238 million.
Tom: 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.
Tom: We expect interest income and other income and expense for the quarter to be between $0 and positive $7 million, and income tax expense to be between $16 million and $31 million.
Tom: We expect net income to be between $155 and $214 million. On a fully diluted share count of approximately 558 million shares, we expect earnings per share for the third quarter to be between $0.28 and $0.38.
Tom: Consistent with our commentary on our last earnings call, our third quarter guidance reflects the expectation that utilization will continue 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.
John: For the full year 2024, we maintain our CapEx guidance of approximately $700 million. And, as Tom commented, we expect this to provide GF an opportunity to focus on delivering adjusted free cash flow generation in 2024, approximately three times greater than in 2023. In summary, the dedication from our 13,000 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 second quarter results above the midpoint of the guidance ranges we provided in our first quarter earnings update. With that, I'll open the call to questions. Operator.
Tom: For the full year 2024, we maintain our CapEx guidance of approximately $700 million, and as Tom commented, we expect this to provide GF an opportunity to focus on delivering adjusted free cash flow generation in 2024, approximately three times greater than 2023.
Speaker Change: In summary, the dedication from our 13,000 employees across the world and their continued efforts to expand our differentiated product offerings in key growth segments
Speaker Change: while navigating a challenging cyclical backdrop.
Speaker Change: enabled us to achieve second quarter results above the midpoint of the guidance ranges we provided in our first quarter earnings update. With that, let's open the call for Q&A. Operator?
Operator: Thank you. At this time, we will conduct a question and answer session. Please remember, as a reminder, to ask a question, you will need to press star 1 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, Ross. Our first question comes from the line of Mark Lipacis with Evercore ISI. Your line is now open.
Speaker Change: Thank you. At this time, we will conduct the question and answer session.
Speaker Change: Please remember, 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.
Speaker Change: Our first question comes from the line of Mark Lipacis with Evercore ISI. Your line is now open.
Mark Lipacis: Hi, thanks for taking my question. One for Tom, and maybe one for John.
Mark Lipaseth: Hi, thanks for taking my question.
Mark Lipaseth: One for Tom, maybe one for John . Tom, it sounds like you're of the view that the industry is starting to emerge from the inventory correction. A lot of times...
Speaker Change: Coming out of the inventory correction, it can kind of
Mark Lipacis: Tom, it sounds like you're of the view that the industry is starting to emerge from the inventory correction. A lot of times, coming out of the inventory correction, it can kind of start with a material or at some point have a material uptick in orders. And I'm wondering if you could just provide us any color that you are having in your conversations with your customers. Are they expressing the view to you that they're shipping, you know, materially below consumption, and when that gap between their shipments and demand for their products might close, and how you prepare Global Foundries for that possibility of a material uptick in orders? Thanks. But then I had a follow-up question.
Mark Lipaseth: start with a material or some point have a material uptick in orders.
Speaker Change: And I'm wondering if you could just provide us any color that you are having with your conversations with your customers.
Speaker Change: Are they expressing the view to you that they're they're shipping?
Speaker Change: materially below consumption, and when that gap between their shipments and demand consumption might close, and how you prep global foundries for that possibility of a material uptick in orders. Thanks. And then I had a follow-up.
Tom: Thanks, Mark. Good morning.
Tom: Look, I think there are couple of comments I'd make... First, it's clear we're at the bottom of the cycle. I think the real question is when will we come up in a meaningful way from the bottom of the cycle? And this isn't a monolithic answer because we play in many end markets. And so I would tell you while home and industrial IoT did a really good job of bleeding down inventory in the quarter, they still have not really seen the demand that they need to start growing again.
Speaker Change: Thanks, Mark. Good morning. Look, I think a couple of comments I'd make.
Speaker Change: First, it's clear we're at the bottom of the cycle.
Speaker Change: And I think the real question is...
Speaker Change: When do we come up in a meaningful way?
Speaker Change: from the bottom of the cycle. And this is, it's not a monolithic.
Speaker Change: because we play in many end markets.
Speaker Change: And so I would tell you, while home and industrial IOT did a really good job on bleeding down inventory in the quarter, they still have not really seen the demand that they need to start growing again.
Tom: Same, I would say, with comms infrastructure, an end market that investments have slowed down in. Now, on the other hand, at least for GF, automotive is a bright spot for us. This is year-on-year meaningful growth for GF.
Speaker Change: Same, I would say, with comms infrastructure, an end market that investments have slowed down in.
Speaker Change: Now, on the other end, at least for GF...
Speaker Change: Automotive is a bright spot for us. This is a year-on-year meaningful growth for GF.
Tom: And, of course, we're seeing, as everybody else is seeing in smart mobile devices, after two years of depressed mobile device sales, this is the year where most people are calling for low single-digit growth. And that's an opportunity for us to continue to grow our revenue, so I would say.
Speaker Change: And, of course, we're seeing, as everybody else is seeing, in smart mobile devices, after two years of depressed mobile device sales, this is the year where most people are calling for a low single-digit growth, and that's an opportunity for us to continue to grow our revenue. So I would say...
Tom: When I think of what's going to be that catalyst to get real growth, we're going to have to see if AI-enabled devices drive a refresh cycle. And this is something we'll see over the coming quarters and maybe in the fourth quarter of this year when there's a refresh of a particular product line and how that does with the promise of new feature capability in AI. Lastly, a lot of what we're going to see in our industry is going to be tied to macroeconomics.
Speaker Change: When I think of what's going to be that catalyst to get real growth, we're going to have to see if AI-enabled devices drive a refresh cycle, and this is something we'll see over the coming quarters, and starting maybe in fourth quarter this year when there's a refresh of...
Speaker Change: and how that does with the promise of new feature capability in AI.
Tom: This is a consumer-led industry. If you think about the two largest economies, China and the U.S., have different macroeconomic conditions they're dealing with. In China, there is a real estate overhang that has consumers maybe saving a little bit more than they ordinarily would and being a little gun-shy. In the U.S., we're still dealing with high interest rates as a result of high inflation.
Speaker Change: A lot of what we're going to see in our industry is going to be tied to macroeconomics. This is a consumer-led industry.
Speaker Change: And if you think about the two largest economies, China and the U.S., have different macroeconomic conditions they're dealing with. In China, it's real estate overhang that has consumers maybe saving a little bit more than the ordinary will and being a little gun-shy.
Tom: And once those two economies get a little bit more normalized, and consumers start to spend and redirect that spending back into electronics, I think that's when we're going to see our businesses as an industry pick up. But the real catalyst, if we're going to do anything in the nearer term, other than this macro environment, is really going to be AI-enabled devices. Will they spark the interest in devices that will have new functionality that consumers will want?
Speaker Change: In the U.S., we're still dealing with high interest rates as a result of high inflation. And once those two economies get a little bit more normalized and consumers start to spend and redirect that spending back into electronics, I think that's when we're going to see.
Speaker Change: See our businesses as an industry pick up.
Speaker Change: But the real catalyst, if we're going to do anything in the nearer term...
Speaker Change: Other than its macro environment, is really going to be AI-enabled devices. Will they spark the interest in devices that will have new functionality that consumers will want?
Mark Lipacis: Very helpful. Thank you, Tom.
John: Very, very helpful. Thank you, Tom. And I don't know, maybe for John , the free cash flow is well above the net income, so the quality of earnings is...
John: is quite high and it looks like the main mechanism is CAPEX.
Speaker Change: Underfunding Depreciation Expense, and if so, would you expect that to persist, and maybe if you could give us a framework for thinking about those line items.
Mark Lipacis: And I don't know, maybe for John, the free cash flow is well above the net income, so the quality of earnings is quite high. And it looks like the main mechanism is CAPEX underfunding depreciation expense. And if so, would you expect that to persist? And maybe you could give us a framework for thinking about those line items in the cash flow statement, depreciation, and CAPEX over the medium term, maybe into next year, if you could. Thank you.
John: In the cash flow statement depreciation and capex over the over the medium term and maybe maybe into next year if you could thank you Yeah, certainly Marcus John . Yeah, so
John: Yeah, certainly, Mark. This is John.
Speaker Change: You know, the company had invested in its capacity footprint over the past several years, and given the industry dynamics, we have the ability to leverage that and operate within that capacity footprint without a heavy amount of capex. That said, we are still investing.
Speaker Change: In future growth, for example, our technology transfers into our multi-fab are continuing.
Speaker Change: And we continue to make investments around GAN and other items to drive forward growth. So we're excited about that.
Speaker Change: Yeah, we also had some benefit in the first half from some of our customers.
Speaker Change: Pre-payments and accelerated AR collections that benefited the first half free cash flow. So, all things considered, good performance. You know, we generated more than $500 million of free cash flow in the first half.
Speaker Change: and are on track to meet our goal for 3x improvement. That's actually up.
Speaker Change: If you recall, the prior indication was 2.5 to 3. We have upgraded that to 3 times 2023 free cash flow performance, so we're pleased to report that this morning.
John: Yeah, so, you know, the company invested in its capacity footprint over the past several years, and given the industry dynamics, we have the ability to leverage that and operate within that capacity footprint without a heavy amount of capital expenditure. That said, we are still investing in future growth. For example, our technology transfers into our Multifab are continuing, and we continue to make investments in GAN and other items to drive forward growth.
Speaker Change: Yeah, Mark, let me put a little bit of finer point on this long term.
John: So, we're excited about that. But, yeah, we also had some benefit in the first half from some of our customer prepayments and accelerated AR collections that benefited first half free cash flow. So, all things considered, good performance. You know, we generated more than $500 million of free cash flow in the first half and are on track to meet our goal for 3x improvement. That's actually up. If you recall, the prior indication was 2.5 to 3.
John: We have upgraded that to 3x 2023 free cash flow performance. So, we're pleased to report that this morning. And we see these trends persisting into 2025, to your other question, where, as we have factory utilization in the low to mid-70s, we have some room now to pull that back up to 80, 90-plus percent utilization as the industry recovers and continue to maintain healthy cash flow generation, Mark. Yeah, Mark.
Mark Lipaseth: capacity. As John pointed out,
Tom: Mark, let me put a little bit of a finer point on this long-term capacity. As John pointed out, we were in a couple of years of a heavy investment cycle getting ready for our customers' demand, and, of course, this cycle came along. We've said it before and we'll say it again, and I think it's worth repeating, that the investments we've made can drive our company to $9.5-$10 billion in revenue, and the capacity back to 95% utilization and then beyond.
Speaker Change: We were in a couple of years of heavy investment cycle, getting ready for our customers' demand. And, of course, this cycle came along. We've said it before, and we'll say it again, and I think it's worth repeating, is the investments we've made can drive our company to, you know, $9.5 to $10 billion worth of revenue. So, first, we get to fill...
Tom: So we've put ourselves in a position where we have healthy growth opportunities once demand returns to the footprint we have. And by the time we start investing again, we're going to be investing off a much bigger base where free cash flow and investment can both happen simultaneously.
Speaker Change: You know the capacity back to 95% utilization and then beyond so we've put ourselves in a position where We have healthy growth opportunities once the demand returns in the footprint We have and by the time we start investing again. We're going to be investing off a much bigger base
Speaker Change: where free cash flow and investment can both happen simultaneously.
Mark Lipacis: Very helpful. Thank you.
Speaker Change: Very helpful. Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Ross Seymour with Doja Bank. Your line is now open.
Speaker Change: Our next question comes from the line of Ross Seymour with Doja Bank. Your line is now open.
Ross Seymour: Hi guys, thanks for asking the question. I guess for the first of my two questions, I want to focus on the revenue side. For the third quarter and then potentially the fourth quarter, could you give us a little idea of what you're seeing in the end markets? For the third quarter, it looks like your non-wafer revenue is, I don't know, 45% of the sequential growth. And in previous quarterly calls, you've talked about being able to grow for the rest of the year. Is that still true for the December quarter as well?
Ross Seymour: Hi guys, thanks for asking the question. I guess for my first of my two questions, I want to focus on the revenue side. For the third quarter and then potentially the fourth quarter, could you give us a little idea of what you're seeing in the end markets? In the third quarter, it looks like your non-wafer revenue is, I don't know, 45% of the sequential growth.
Speaker Change: And in the past quarterly calls, you've talked about being able to grow for the rest of the year. Is that still true for the December quarter as well?
John: Yeah, Ross, this is John . Yeah, we are holding that view. You know, back in the February call, we indicated that we felt the first quarter
Ross Seymour: revenue point was our low for fiscal 2024 and that we would be able to sequentially grow revenue each quarter in 2024.
Speaker Change: Our results for second quarter and our guidance for third quarter are consistent with that view, and we maintain that view as we look forward to the fourth quarter. As we indicated in the prepared commentary, we're seeing recovery in the smart mobile devices and market, which is encouraging.
Speaker Change: Our CID end market is stabilized now with the single node migration for some of our more data center and digitally centric customers beginning to taper off. So we see that at a relatively stable point at this point.
Speaker Change: And IOT has had a fairly high level of inventory that continues to get worked off, and we're looking for longer term recovery in the IOT market.
Speaker Change: And finally, of course, the, you know, very bright spot for us in terms of growth this year is automotive, where we're seeing meaningful growth opportunity.
John: And that's on the back of a billion dollars in automotive revenue in 2023, which was a 3x increase over what we generated in 2022. So clearly the share gain story in automotive continues to persist and we're quite encouraged by that.
Speaker Change: Thanks for that color, John . I guess as my follow-up question, moving over to the gross margin side of things, can you just help us on two factors? How should we think about the LTSA resolution benefits?
Speaker Change: I know you said it was less in the second quarter than the first, and it sounds like that trajectory will continue into your third quarter guide.
Speaker Change: But the bigger picture question is, how do we reconcile the revenues rising and the gross margin falling? When do those start to move directionally similar? And what sort of incremental gross margin should we think about going forward when that kind of more normal relationship emerges?
Speaker Change: Sure, Ross. Yeah, John again here. And, you know, as we indicated a couple times, we have factory utilization in the low to mid-70s, and given the relatively high level of fixed costs in our cost structure, that has a meaningful effect on our all-in gross margin that we report. All that said, we've done a couple of things to help our gross margins this year. We've worked very hard to improve our cash output costs. I want to give the team a lot of credit for the work they've done there. And second thing is that, you know, our long-term agreement frameworks with our customers.
Speaker Change: have had provisions to allow for such a scenario. And this has resulted in underutilization economics coming into the company, which has helped. As you've indicated, we realized about $66 million of underutilization revenue in the second quarter, we do expect that
Speaker Change: to tick down to roughly half that level in the second half of this year. And that is contributing to the gross profit margin guidance that we've given this morning.
Speaker Change: And to your other point, as we begin to see utilization come up, we should see that direct relationship reemerge and see revenue and gross property margin moving in lockstep with one another over time as utilization can come up. But just as a quick reminder, you know, the rough rule of thumb here is that every five points of factory utilization...
Speaker Change: drives about 200 basis points of variance in gross profit margin.
Speaker Change: And just finally, as I just...
Speaker Change: Zoom out and think about profitability in general, and the company is performing well with 13% operating margin in the second quarter and around 37% EBITDA margin, I think we touched on pre-cash flow a moment ago, so hopefully that helps on the gross profit margins for it. Thank you.
Speaker Change: I'll jump in a little bit on the longer range John said it right, as utilization comes up that's our biggest snob.
Speaker Change: We've taken a lot of structural cost out of our business. This is the opportunity for us to...
Speaker Change: Redefine and enhance our efficiency. It's a never-ending journey. And so when we come back up, it's not when will gross margins come up. It's when we pass our high-water mark again in the future of $8.1 billion or $8.2 billion, whatever we did in 2022, we will be a company that produces much better bottom-line results as a result of this work.
Speaker Change: Yeah, this is Niels. Maybe just one more point to add on where we're going moving forward. You know, we've also, in the last few years, built a lot of fungibility.
Speaker Change: Alright, thank you so much for that. One moment for our next question, please.
Operator: Our next question comes from the line of CJ Muse with Cancer Fitzgerald. Your line is now open.
Speaker Change: Our next question comes from the line of CJ Muse with Cancer Fitzgerald. Your line is now open.
CJ Muse: Yeah, good morning. Thank you. I was hoping to just follow up on Ross's question on gross margins. So is the right framework to think about lower customer adjustments impacting gross margins in the quarter, or is there a mixed impact there as well?
CJ Muse: Yeah, good morning. Thank you. I was hoping to just follow up on Ross's question on gross margins. So is the right framework to think about lower customer adjustments impacting gross margins in the quarter, or is there a mixed impact there as well?
Speaker Change: Yeah, CJ, it's primarily the result of continued utilization in the low to mid-70s, as well as the factor you mentioned.
Speaker Change: As we've indicated, anticipation of continued sequential growth through the second half
Speaker Change: can afford us the opportunity for modest improvement in gross profit margin in the fourth quarter. So we would be looking for that as utilization can hopefully begin to increase a bit.
Speaker Change: Very helpful, and then I guess...
Speaker Change: maybe a combination question. So, you know, in
Speaker Change: And an earlier response, he talked about
Speaker Change: potential for excitement related to edge AI. And just curious, as you think about your conversations with your customers, what are they signaling to you, and when do you see that impacting the timing of raising your utilization rates?
CJ: So CJ, your question is, when can edge AI increase production and utilization?
CJ: I'm curious more about the conversations you're having today, build plans.
Speaker Change: and then how you're thinking about the timing of, you know, being proactive and turning on your lines. I mean, do you have visibility to that in 24, more of a 25 story, would love to hear how you're thinking about it.
Speaker Change: Yeah, I think, look, the best way to talk about this is how we're building our pipeline for future business.
Nils: Timing is always going to be what it's going to be, but have you loaded your funnel, your pipeline, your design window? For that, I want to hand it over to Niels. Yeah, let me, CJ, this is Niels, so maybe let me talk a little bit about it, you know. So HAI obviously ties very, very closely to our IoT.
CJ: eidolon market segment.
Speaker Change: You know, design momentum is quite strong, especially on our 22 FTX node, which really is a very, very good fit. You know, 22 FTX offers, you know, the best NBM.
Speaker Change: Performance, you know, very low power, and better connectivity. You've heard us talk about examples previously of...
Speaker Change: You know, 30% improvement on the connectivity side, at half the power, and then with the right NVM and the right integration for the MCU side.
Speaker Change: So the design momentum is quite high. We're starting to see some very interesting AI accelerators.
Speaker Change: Some of these are domain-specific architectures that are within our customers' own IP, and some of them are coming from IP providers.
Speaker Change: But definitely starting to see that momentum build. Hard to say exactly when this is going to ramp, but I would personally speculate it's going to be as you start seeing the refresh cycle, you know, coming in on these end equipment applications, adding the AI functionality.
Speaker Change: in those products. So I hope that helps.
Speaker Change: Thanks so much.
Speaker Change: Our next question comes from the line of Chris Caso with Wolf Research. Your line is now open.
Chris Castle: Yes, thank you. Good morning. First question is on pricing.
Chris Castle: and if you have some color on where you expect ASPs for the year.
Chris Castle: And then as a follow-on to that, if you can give some commentary, and I think you did in some of the prepared remarks on some of the ASP trends by segment and recognizing ASP isn't necessarily a measure of profitability, but
Speaker Change: You know, just some sense of as you're signing new agreements, new engagements with customers, you know, how that pricing is trended as compared to the last cycle.
Unknown Speaker: Unknown Speaker
Chris: Very good, Chris.
Speaker Change: So let's let's start with what we're seeing. You know we're seeing stable pricing environment.
Chris: We're not alone. Our two biggest competitors have also reported stable pricing.
Speaker Change: And I think there's a lot of good reasons for that. You see these very same competitors investing in capacity, and this capacity doesn't come for free. They'll need to have pricing that reflects getting reasonable returns, or they won't want to make these investments.
Speaker Change: So I think this positions the industry.
Speaker Change: them and all foundries, including GF, to be in a constructive pricing environment going forward. Look, if this industry is going to double by the end of the decade, it's going to need capacity and capacity is going to need returns.
Speaker Change: I'd also like to, I think you touched on it, let me embellish it a little bit. We drive, you're right, to gross margins and not on ASP. In fact, given the range of technologies, our ASPs are not always reflective of our gross margin.
Speaker Change: So what you'll see from GF is on any given quarter, you can see ASPs move around in the low single digits, and that's no reflection on profitability, but more about the mix.
Chris: And then John talked about how important utilization is in getting our business, our factories loaded and what it will do for the profitability of those very same ASPs.
John: Thank you.
Speaker Change: Yeah, I do. Just follow up is with regard to CapEx and, you know, understanding
Speaker Change: Right now, you're managing for cash flow. Obviously, utilization is low, and you're going to want to bring that up.
Speaker Change: You know, what's sort of the thought process going forward on, you know, when CapEx, you know, needs to start coming back?
Speaker Change: Is that going to be driven at some point by technology needs, that you're going to have new engagements and new processes?
John: The customers require that's going to drive some CapEx or, you know, is this going to be, you know, sort of, you know,
Speaker Change: Low levels of CAPEX until we get utilization to a certain point.
Speaker Change: You know, I do, maybe it's because of the capital intensity of this industry, somehow we've convinced ourselves that $700 million is, you know, modest CapEx. This is a capital intensive industry, we're spending $700 this year. I think the difference is where we are investing.
John: So, there's three areas I think about, innovation, enablement of these new features, and then just adding more of what we can do, base capacity.
John: So we've said we have enough capacity on our base.
Speaker Change: to grow our revenues to $9.5-$10 billion, and I'm going to get back to that in a moment.
John: Where we are investing now and in the future until we get to that level of Utilization is in differentiation when we bring a new feature to the marketplace. It may require new process techniques
Speaker Change: And we'll have to invest in the capacity to do that, not in the overall capacity to create more waivers, but to bring that feature to the marketplace. And that's a big part of that $700 million we would spend.
John: Now, back to this nine and a half to $10 billion, I'll go all the way back to the investment thesis of our roadshow in 2021.
John: We said there was something really important about reaching a $9.5-10 billion mark in revenue.
Speaker Change: We wouldn't have to trade off free cash flow for investment and growth.
Speaker Change: that we get to a point of scale where we can have both. We can invest in meaningful growth and at the same time produce free cash flows. And so that's how I would think about what our investment profile is going to be over the coming years when we do invest CapEx.
Speaker Change: It's going to be for differentiation and bringing new, better features to the marketplace. We start getting close to $9.5, $10 billion, we're going to start investing in new capacity, but with a different financial model for the company.
Speaker Change: So if I may add to that, and again, you know, I mentioned fungibility early on, it's a very important part of our manufacturing strategy. You know, examples here would be between our Singapore...
Speaker Change: FAB, and our Dresden FAB, we have a very high degree of fungibility across technologies. Now we're adding the same thing, you know, with our Malta FAB.
Speaker Change: and our Dresden fab. And lastly, you know, you have a Singapore fab and a Burlington fab having good fungibility. And a lot of this comes from a manufacturing strategy and a development technology strategy of really trying to utilize as many of the same tools as possible.
Speaker Change: So as we add new features, we try to do it within, you know, the set of standard tools that we have. And that's a big part of the reason for how we can get more lean on the CapEx for the next few years until we hit that $9.5 to $10 billion that Tom mentioned.
Operator: Thank you so much. Please take a moment for our next question.
Speaker Change: Helpful, thank you.
Speaker Change: Thank you so much. One moment for our next question.
Speaker Change: Transcription by Trans-Expert at Fiverr.com
Speaker Change: Our next question comes from the line of Joseph Moore with Moore against Stanley. Your line is now open.
Joseph Moore: Great, thank you. I wonder if you could talk about how customer conversations are with regards to future long-term agreements. Obviously, you know, wafers are pretty available right now, but how much are people thinking about what this might look like a couple of years from now, and how are you doing with sort of securing longer-term agreements from now?
Speaker Change: Yeah, Joe, I think the heading for that is, are LTAs still fashionable? And maybe we need to just look back at how this all came together. You know, in 2021, it wasn't GF that was instigating long-term agreements. It was our customers.
Speaker Change: Our customers are in a world where certainty is important for them. Certainty, durability, and of course their profitability.
Speaker Change: And what they were looking to do was to develop where they knew they had supply and knew they had certainty of pricing so they could plan their business. So I don't think these are, these long-term agreements are something of the past, it's how do they get modified going forward. So I see two things.
Speaker Change: For GF, a lot of the LTAs we wanted to sign were tied to...
Speaker Change: So if you think of refresh and smart home devices that's every year, maybe those customers are not as interested in the long-term agreements because the dynamics of did they win a socket, did they not win a socket.
Tom: Yeah, that's roughly two-thirds of what we started with on this journey.
Speaker Change: which then again returns in that you can make much more reliable.
Speaker Change: And what that in turn enables our customers to do is to...
Speaker Change: Specifications and requirements for FR3 are going to be, we believe, a strong play for at least for the power amplification, power amps for that solution, that GAN will be an important part of that.
Speaker Change: Thank you so much. One moment for our next question, please.
Speaker Change: Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.
Vivek Arya: Thanks for taking my question. Tom, you mentioned meaningful growth in automotive for 2024. I was hoping you would contrast that with just the environment in the automotive semiconductor industry, lower auto production and somewhat more muted trends.
Speaker Change: among some of your automotive semi-customers. So what's giving you the optimism relative to the industry and what kind of checks do you have in place to make sure that your shipments are aligned with the automotive sell-through?
Speaker Change: Yeah, I think there's a real...
Speaker Change: important difference between what you have seen and maybe you're seeing more broad-based.
Speaker Change: So first of all, let's just talk about 2024. I think that's where your question started. Look, we're more than halfway through the year.
Speaker Change: We have wafers in the line, we have POs, we're confident we're going to deliver against what we've said all along, that automotive is going to have meaningful growth year in year.
Speaker Change: Your question is a little bit more of a why. Why are we seeing it? And I think the best way to explain this is we started this journey five to seven years ago where we were winning that next generation of technology platforms.
Speaker Change: And what you're really seeing for GS is we're ramping these new applications, whether they're microcontrollers or sensors or radar devices. These are replacing.
Speaker Change: Older devices in cars. So you don't need to see more cars being sold for this replacement to take place. You don't need to see even more content going into cars, although those two things are happening.
Speaker Change: This is just the next refresh for us, and that's unique to GF because it's all new devices for GF. Remember, in 2020, this business was under $100 million for us.
Speaker Change: Hazarders, I would say, and it's more, think about when we tell you, we give you an idea year-over-year basis, it takes some of that lumpiness out.
Speaker Change: Yeah, and Tommy, if I may add, you know, I, you know, just one of them.
Speaker Change: You know, within the RADAR space, it really is becoming the technology platform of choice for RADAR. And we've had several very meaningful assignments in the last few months across 22FDX, and there'll be more about that later.
Sam Franklin: Yes, thank you, Sam. So on the topic of gross margins,
Sam Franklin: So, how does your balance sheet inventory kind of figure in the path of improving?
Speaker Change: to enter into contracts with suppliers to take advantage of the current market conditions.
Speaker Change: So, you know, we're being, you know, smart about this and also in light of our free cash flow objectives, but also where we can see some opportunities to utilize some working capital to improve our performance. We will look at that.
Speaker Change: Brittany, we'll take one last question. Thank you.
Brittany: Alright, thank you so much. Our last question comes from the line.
Harlan Sir: of Harlan Sur.
Speaker Change: With J.P. Morgan, your line is now open.
Harlan Sir: Good afternoon. Thanks for taking my question.
Speaker Change: If I exclude the high margin underutilization volume adjustment fees in the June quarter, it looks like core product gross margins.
Speaker Change: We're about 22% right in June , so flat sequentially, which implies utilization state flat, which is consistent.
Speaker Change: with what you've said. Given the gross margin guidance for September and on the utilization fees, it looks like your gross margins are stepping up a bit to about 23%.
Speaker Change: which means either utilizations are stepping up a bit or.
Speaker Change: Maybe it's higher volumes or mix maybe can give us a little bit of color there, but more unfortunately given what appears to be
Speaker Change: Gradually improving in-market environment across your segments. How should we think about gross margins directionally heading into the December quarter since it's really tough to kind of model the underutilization fees?
Speaker Change: Yeah, I have a follow-up.
Speaker Change: Yeah, you bet. So, you know, big picture, we set out the year viewing our non-IFRS gross margin outlook as being in the mid-twenties. And we've been delivering on that, and that's where we expect to be for fiscal 2024. I did note previously in this call the possibility for some modest improvement in fourth quarter gross margin. As we can see, utilization tick-up would be the ideal case there. And then as we look ahead, of course, seeing utilization come up further into 2025 would be the next opportunity for us to see more improvement in gross margin.
Unknown Speaker: Yeah, Tom, you know, the team obviously has been a big beneficiary as your customers think about the diversity of their supply chains and also your differentiated technology. I think the extension of the Insulium partnership earlier this year was a great example of that, right? A lot of it built on your differentiated MCU technology, but there have been some partnerships which I feel the GS team was set up well for.
Speaker Change: Do you have a follow-up? I'm okay.
Speaker Change: Yeah.
Speaker Change: Tom, you know, the team, obviously, has been a big beneficiary as your customers think about the diversity of their supply chains, also your differentiated technology. I think the extension of the Insinium partnership earlier this year was a great example of that, right? A lot of it built on your differentiated MCU technology. But there have been some partnerships which I feel
Speaker Change: The GF team was set up well for, but...
Speaker Change: may be overlooked. And that's, you know, one of your customers, NXP, considered one of your larger MCU customers. I mean, they recently announced a partnership with Vanguard, right, to sort of jointly build up the Singapore fab for next generation MCUs.
Speaker Change: I think targeting technologies, which they were doing externally, presumably some of that.
Speaker Change: with GF. And so your Singapore, your, your Singapore fabs, your new 7H module combined with the Malta expansion, I felt that that could have supported that customer.
Speaker Change: and its MCU requirements. So maybe compare and contrast the very different moves by two of your large auto MCU customers.
Speaker Change: Well, let's talk right to this NXP Vanguard. Look, that didn't come to a surprise to us. We worked very closely with NXP.
Speaker Change: You need to understand what that capacity is that's being put on. I'll describe it as legacy, bulk, undifferentiated, low-margin CMOS business.
Speaker Change: We weren't interested in it, and neither was our customer wanting to redesign onto a platform for us. Why would they invest and we invest?
Speaker Change: By the way, we weren't alone in that decision. TSMC, whose platform this technology is built on, didn't want to invest in it either. It was not good business for them and for what they tried to deliver. Remember, GF wanted to deliver differentiated technology, not second source business.
Speaker Change: So given this,
Speaker Change: We chose not to make the investment. Vanguard, who wants to get into 300mm, is making that investment. But there's no overlap to business that we've lost or could have won with this relationship. And by the way, speaking of NXP...
Speaker Change: Our business continues to grow year-over-year with them in our deep partnership with them. I appreciate that. Thanks, Tom.
Speaker Change: This concludes the question and answer session. I would now like to turn it back to Sam Franklin for closing remarks.
Sam Franklin: Thank you Brittany, thank you everyone for joining us on the call today. Appreciate all the questions and apologies we couldn't get through the whole list but I know that we'll be talking to a lot of you over the next coming weeks. So thanks again, look forward to speaking again soon.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.