Q3 2024 GlobalFoundries Inc Earnings Call
The End
Speaker Change: Good day and thank you for standing by. Welcome to the Global Soundreed Conference Call to Review 3rd 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: 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, Business Finance, and Investor Relations. Please go ahead.
Sam Franklin: Thank you all for 8x, good morning everyone and welcome to Global Foundries 3rd Quarter 2021 earnings call.
Sam Franklin: On the call with me today, I talk to Thomas Caulfield CEO John Hollister, CFO and Niels Anderskouv, Chief Business Officer.
Sam Franklin: A short while ago we released GF's third quarter financial results, which are available on our website at investors.gf.com, along with today's accompanying slide presentation.
Sam Franklin: His 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.
Sam Franklin: Please note 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.
Speaker Change: 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.
Speaker Change: 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 reports on form 20 F filed with the SEC on April 29th 2024
Speaker Change: We begin today's call with Tom providing a summary update on the current business environment and technologies. Niels will then discuss our recent design wins and highlights across the end markets, following which John will provide details on our third quarter results and also provide fourth 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.
Tom: Thank you, Sam, and welcome everyone to our third quarter earnings call.
Tom: Our 3Q results reflect another consistent quarter of execution towards our strategic objectives as we continue to partner with our customers to deliver feature-rich products in the geographies where they need us using our essential chip technologies.
Tom: In the third quarter, we delivered revenue at the high end of the guidance range, meaningful year-over-year free cash flow generation, and gross margins consistent with our commentary from the start of the year in an environment of lower factory utilization levels.
Tom: Although we remain mindful of the near-term demand and utilization dynamics impacting the end markets we serve.
Tom: These results reinforce our prior commentary that the first quarter was a low point for our revenue in 2024.
Tom: and that we would deliver sequential quarter-over-quarter top-line growth throughout the year.
Tom: To this end, we are reporting revenue of $1.739 billion for the quarter, which is roughly 7% sequential quarterly revenue growth.
Tom: As we focus on diversifying and differentiating our product portfolio and broadening our customer base,
Tom: I am also encouraged by the rate and pace and the size of the business opportunity of new design wins we closed in 3Q, as well as the funnel of opportunities we have built in partnership with our customers across all the end markets that we serve.
Tom: Here to date, approximately 90% of our design wins are sole source opportunities.
Tom: These things are important proof points of our relentless focus on innovation and meeting the needs of our customers.
Tom: Just recently, we announced a key design win with NXP on our 22 FDX platform.
Tom: We developed our 22FDX platform for a broad set of applications serving a range of end markets, including AI and intelligence at the edge applications.
Tom: The performance benefits are purpose-built by optimizing energy management to deliver up to 50% higher performance and 70% lower power versus other planar CMOS technologies.
Speaker Change: Niels will comment further in his prepared remarks that this partnership is a testament to what matters most to our customers, power and performance solutions.
Speaker Change: Delivered with the Resiliency of GF's Manufacturing, Execution, and Global Footprint.
Tom: Our global manufacturing footprint uniquely positions GF to support our customers' desire to source from the U.S., Europe, and Asia across all the critical end markets we serve.
Tom: These design wins are consistent with our strategy to diversify our technology footprint.
Tom: and MarketServed and breadth of customer service in our Malta, New York fab.
Tom: We remain on track to transfer capacity across 22, 28, and 40 nanometer offerings into the Malta facility over the coming years. Upon completion of these transfers,
Tom: Walter will offer our customers one of the most diversified foundry solutions here in the U.S. to complement the 12 nanometer FinFET.
Tom: RFSOI, and Philip Plutonic platforms that are already manufactured there.
Tom: Our Silicon Photonics product line positions Fab 8 beyond diversification. As data center bandwidth and connectivity requirements continue to rapidly increase, GF's monolithic solution is well positioned to win next generation applications.
Tom: with Hyperscalers, leading fabless companies and startups in this space.
Tom: Before I pass it over to Niels to discuss our end markets and design-win activity, let me now review our third quarter results, which John will discuss in more detail in his commentary. As mentioned earlier, revenue in the third quarter increased sequentially.
Tom: We delivered non-IFRS diluted earnings per share of 41 cents, which exceeded the high end of our guidance range.
Tom: I'm also pleased to report another quarter of strong year-over-year free cash flow generation.
Tom: Cash flow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model and creating long-term value for our shareholders.
Tom: $779 million of non-IFRS adjusted free cash flow in the year to date. For the full year of 2024, we still anticipate approximately three times growth of this metric compared to 2023.
Tom: Free cash flow is an important metric for our business, and as our cash balance continues to grow and our total leverage reduces, we intend to consider a range of capital allocation strategies.
Tom: In conclusion, our third quarter results reflect good progress towards our long-term strategic goals.
Tom: I am tremendously proud of our teams around the world as they executed the plan and partnered closely with our customers on critical design wins to support our growth objectives.
Tom: So a big thank you to the entire GF team for their hard work and to our customers for their continued trust in us. With that, over to you, Niels.
Niels Anderskouv: Thank you, Tom, and welcome to everyone on the call.
Niels Anderskouv: I'd like to provide a brief update on some of our key customer partnership and in-market performance. As Tom said, we are pleased with our ongoing design momentum. Our recent announcement with NXP using our 22FDX platform is a key example of what we set out to achieve with our design lens.
Niels Anderskouv: This collaboration will focus on next-generation solutions for automotive, IoT, and smart mobile devices.
Niels Anderskouv: More importantly, this will enable NXP to provide more compact and power-efficient solutions, increasing the overall performance of their system solution by leveraging the best manufacturing proximity via GEF's global footprint, including our facility in Malta, New York.
Niels Anderskouv: Partnerships like this underscore our capability to deliver cutting-edge solutions that meet the stringent requirements of the end-market reserve such as automotive grade standards.
Niels Anderskouv: On that note, automotive remains a key growth driver across our end market portfolio, and despite higher levels of channel inventory over the last quarter at some of our customers, we are continuing to support the expanding semiconductor content for vehicles.
Niels Anderskouv: We let this focus on diversifying our product portfolio and gaining market share in this critical market continue to offset some of the short-term demand dynamics facing the automotive industry.
Niels Anderskouv: Notwithstanding the sequential revenue decline in the quarter, we expect to remain on track to deliver high single-digit revenue growth in 2024 in our automotive end market.
Niels Anderskouv: Longer term, we expect to target share gains with our customers across automotive applications such as radar, safety, power management, and connectivity.
Niels Anderskouv: Turning now to smart mobile devices.
Niels Anderskouv: This end market returns to year-over-year revenue growth in the third quarter. Based on our conversations with our customers, demand for smart mobile devices appears to be returning to modest volume growth in 2024 as customers' inventory begins to normalize.
Niels Anderskouv: Given these inventory dynamics, we believe that our full year revenue in this end market will be roughly flat.
Niels Anderskouv: We are encouraged by our ongoing design wins, which are a proof point of both the technology leadership we established and our growing content gains in this market.
Niels Anderskouv: As RF penetration continues to grow, we are reinforcing our position as a leading provider of RF front-end content with key assignments in the quarter on our 8SW and 9SW RF SOI platforms.
Niels Anderskouv: We also picked up key design wins on our 22FDX platform for 5G mmWave applications, as well as micro-display backplanes for smart glasses and AR applications.
Niels Anderskouv: We expect continued interest from these applications, both in mobile and wearables, using our 22FDX platform, thanks to its enhanced performance and power efficiency capabilities.
Niels Anderskouv: In IoT, our customers are continuing to carefully manage their inventories. And although we report a sequential revenue growth of 4% in the quarter, business and market is down on a full year basis, due principally to the ongoing inventory levels across both industrial and consumer applications.
Niels Anderskouv: During the third quarter, we secured over 20 new design wins across our IoT and market.
Niels Anderskouv: These include Edge applications on our 12 nanometer platforms, next generation smart cards on 28 nanometer, and connectivity products across both Wi-Fi and Bluetooth on our 22 FDX platform.
Niels Anderskouv: Longer term, we expect the IoT end market to grow as the number of smart and connected devices continue to expand over the next decade, driven by the need to sense, acquire, process, and communicate data.
Niels Anderskouv: Finally, revenue for our communication infrastructure and data center segment declined sequentially in the third quarter.
Niels Anderskouv: The transition of compute to sub-12 nanometer load is increasing the new and growing opportunities for high-bandwidth communication and efficient power conversion and storage applications in the data center.
Niels Anderskouv: DF Technology Portfolio is ideally suited to service this important thread.
Niels Anderskouv: Optical networking and power management are key battlegrounds for future growth as we remix our product offerings in this end market towards our high-speed silicon-germanium and silicon-platonic products.
Niels Anderskouv: Commercial satellite communication is also emerging as a growth vector in this market as large phased array antennas used in satellite ground terminals require significant eye of front-end silicon content.
Niels Anderskouv: expanding the market opportunity for GEF's silicon-germanium and SLI products.
Niels Anderskouv: As we discussed in our previous earning calls, we believe that the second half 2024 revenue in this end model would be roughly in line with what we have reported for the first half of 2024.
Speaker Change: I'll now pass the call over to John for a deeper dive on the third quarter financials.
John Hollister: Thank you, Niels.
John Hollister: For the remainder of the call, including guidance, other than revenue, cash flow, CapEx, and net interest and other income and expenses, I will reference non-IFRS metrics which exclude share-based compensation and or restructuring charges.
John Hollister: We delivered third quarter revenue of $1.739 billion.
John Hollister: ASP, or Average Selling Price per Wafer, was roughly flat year-over-year.
John Hollister: Non-waiver revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 10% of total revenue for the third quarter.
John Hollister: Let me now provide an update on our revenues by end markets.
John Hollister: Third quarter revenue increased approximately 14% sequentially and approximately 11% from the prior year period, principally due to higher seasonal shipments.
John Hollister: We believe that our customers' inventory levels have begun to normalize, and for the full year, we still expect revenue in our largest end market by revenue to be roughly flat on a year-over-year basis.
Speaker Change: As outlined by Niels, we are well-positioned to support our customers when demand rebounds, with our DesignWin momentum supporting the content and feature expansion in smart mobile devices.
Speaker Change: In the third quarter, revenue for the home and industrial IoT markets represented approximately 18% of the quarter's total revenue.
Speaker Change: Third quarter revenue increased approximately 4% sequentially and decreased 25% from the year prior period as our customers in the consumer and industrial IOT segments continue to tackle elevated channel inventories.
Speaker Change: As discussed by Niels, our design-win momentum with customers for home and industrial wireless-connected devices is expected to drive long-term growth opportunities.
Speaker Change: In the short term, we expect that revenue for this end market will continue on a similar path to our third quarter run rate until there is a meaningful reduction in channel inventory across our customers.
Speaker Change: Third quarter revenue decreased approximately 5% sequentially and 16% from the year prior period due to the timing of customer inventory management.
Speaker Change: Finally, moving on to our communications, infrastructure, and data center end market, which represented approximately 7% of the quarter's total revenue, third quarter revenue decreased 14% sequentially and approximately 15% year-over-year as a result of declining volumes.
Speaker Change: However, this was partially offset by a year-over-year improvement in ASPs.
Speaker Change: As Tom and Niels noted, we are gaining new design wins in this end market in the areas of power, connectivity, and optical networking, as the range of data center and communications infrastructure applications continues to grow.
Speaker Change: Moving next to gross profit.
Speaker Change: For the third quarter, we delivered gross profit of $429 million, which was above the midpoint of our guided range and translates into approximately 24.7% gross margin.
Speaker Change: We expect that these adjustments will be similar in the fourth quarter.
Speaker Change: Operating expenses for the third quarter represented approximately 11% of total revenue.
Speaker Change: As discussed on our last earnings call, as we continue to spend on qualifying U.S. expenses and capital assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program.
Speaker Change: We delivered operating profit of $236 million for the quarter, which translates into an operating margin of 13.6%, which is the high end of our guided range and 380 basis points below the prior year period.
Speaker Change: Third quarter net interest income and other income and expense was $10 million and we incurred income tax expense of $17 million in the quarter.
Speaker Change: As a result, we reported diluted earnings of $0.41 per share for the third quarter, which was above the high end of our guidance range.
Speaker Change: Let me now provide some key balance sheet and cash flow metrics.
Speaker Change: Cash flow from operations for the third quarter was $375 million.
Speaker Change: CapEx for the quarter was $162 million or roughly 9% of revenue.
Speaker Change: Plus the proceeds from government grants related to capital expenditure, less purchases of property, plant equipment, and intangible assets, as set out on the Statement of Cash Flows, was $216 million.
Speaker Change: We also have a $1 billion revolving credit facility which remains undrawn.
Speaker Change: Next, let me provide you with our outlook for the fourth quarter of 2024.
Speaker Change: We expect total GF revenue to be between $1.8 and $1.85 billion.
Speaker Change: Of this, we expect non-waiver revenue to be approximately 10% of total revenue.
Speaker Change: We expect gross profit to be between $432 million and $481 million, which at the midpoint is 25%.
Speaker Change: We expect operating profit to be between $232 million and $301 million.
Speaker Change: 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 net interest income and other income for the quarter to be between $7 and $15 million, and income tax expense to be between $23 and $35 million.
Speaker Change: We expect net income to be between $216 and $281 million.
Speaker Change: On a fully diluted share count of approximately 555 million shares, we expect earnings per share for the fourth quarter to be between $0.39 and $0.51.
Speaker Change: For the full year 2024, we maintain our CapEx guidance of approximately $700 million, and as Tom indicated, we expect this to provide GF an opportunity to focus on delivering adjusted free cash flow generation in 2024, approaching $1 billion.
Speaker Change: In summary, the dedication from our employees across the world and their continued efforts to expand our differentiated product offerings in key growth markets enabled us to achieve third quarter results at the high end of the guidance ranges we provided in our second quarter earnings update. With that, let's open the call for Q&A. Operator?
Speaker Change: Thank you. At this time, we will conduct the 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.
Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Ross Seymour of Deutsche Bank. Your line is now open.
Ross Seymour: Hi, guys. Thanks for asking the question and congrats on the solid execution. Tom, I guess my first question is for you. And what I'm really trying to do is reconcile the strength you're exhibiting in the second half of this year.
Speaker Change: to the weakness of a number of your customers? And then perhaps more importantly, how does that set you up for 2025? What are the puts and takes that are kind of the idiosyncratic benefits that you're enjoying relative to the macro market, which doesn't seem to be so strong?
Speaker Change: Good morning, Ross. Really good question. So let's start with the first part of this, which is, you know, why is GF maybe the best way to say bucking the trend a little bit? I think it really comes down to two factors.
Speaker Change: The breadth of the end markets we play in and pretty well distributed.
Speaker Change: But we have a high concentration in smart mobile devices, third quarter, you know, 50 handle percent of revenue, and in our automotive business.
Speaker Change: And even in a year where you hear a lot about sluggishness in the auto and market, we're growing high single digits.
Speaker Change: And so, smart mobile devices, remember, they had their down period two years ago.
Speaker Change: And so they've become a steady, a steady opportunity for growth for us and the auto has been growing and a lot of that is the design wins over the last five or six years.
Speaker Change: It's not just that more content in cars are growing, we've won more sockets in cars. And we expect that to continue. Auto is a growth engine for global foundries. So I think it's really the combination of those two elements.
Speaker Change: breadth of our end markets, and in particular, the concentration of smart mobile devices and auto in our revenue. Now, 2025.
Speaker Change: So let me first start by putting a little context in this by talking about 2024.
Speaker Change: We began the year and we said Q1 would be the low point in revenue.
Speaker Change: and that we would sequentially grow every quarter. And so, you know, that's exactly what we did in Q2 over Q1 was 7% growth. Results today of Q3 over Q2 is another 5% and then we just got it in Q4 for further growth.
Speaker Change: On top of that, we're also, you know, let's not lose sight of the fact that we're going to, on track to deliver a billion dollars of free cash flow, and that's with utilizations in the mid-70s. I think that's pretty impressive, shows the power of the cash generation of our business.
Speaker Change: So we think,
Speaker Change: 2025 for GF, as we stand here today, and this is in the phase that we don't like to guide more than one quarter at a time, but it's fair to talk a little bit about 2025. It's going to be an up year for global founders. The magnitude of that really is going to be tied to how the industry performs.
Speaker Change: and probably how it performs relative to the macroeconomy. And given that, we are.
Speaker Change: Almost halfway through Q1 and most of the wafers that we will ship, the WIP is in the line for Q1. I can tell you one thing about Q1 for 2025. Year over year, Q1 2025 compared to Q1 2024, we'll have some growth.
Speaker Change: On the other end of that, the sequential 4Q this year to Q1 will be in the high end of the decline in cyclicality.
Speaker Change: And so while it will be growing year on year, it will be on the high end of the cyclicality, the normal range of cyclicality we see on a Q4 to Q1. And I'll just leave it at that, Ross. Do you have any follow-on?
Ross Seymour: I just wanted to pivot over to the gross margin side. So one quickly for John on that. I guess a little clarification when you talked about the benefits that you got cutting in half into the third quarter on the LPSA side of things. You meant that that stays at about the same absolute level in the fourth quarter, not getting cut in half again. And then my bigger picture question is how do we think of the puts and takes on gross margin as we think of 2025?
John Hollister: Yeah, Ross, thanks for the question. First point is you did understand me right, roughly the same in terms of the absolute number in fourth quarter as what we saw in the third quarter. And let me just talk more broadly about profitability if I can. I know we're pleased with our results through the course of this year. We've seen a steady, uh, uh,
John Hollister: Delivery of Net and Income and EPS through the course of this year in 2024.
Speaker Change: On the gross profit margin, if you look at the underutilization charges that we've generated, which have had a very positive effect and partially offset the lack of loadings in the factories.
Speaker Change: We can quantify that as roughly about four points of benefit in Q1, roughly three in Q2, about a point and a half in the third quarter, and a little less than that in the fourth quarter.
Speaker Change: So, the point is, Ross, net of that, we've actually seen an improvement in gross profit margin as our utilization has stabilized on the back of operating leverage with revenue coming up sequentially every quarter in the year, just as Tom had indicated.
Speaker Change: And as we look into 2025, it's really that, as we see recovery in the industry, ongoing recovery and continued improvement utilization, we would expect a similar positive effect on our gross profit margins.
Speaker Change: Thank you.
Speaker Change: Unknown Speaker
Speaker Change: Our next question comes from the line of Krish Sankar of TD Cowens. Your line is now open.
Krish Sankar: Hi, thanks for taking my question and congrats on the strong results. Tom, I had two of them. First one is a question on the overall AFP environment.
Speaker Change: You know, your pricing has been surprisingly resilient this year, but one of your peers has spoken about some pricing adjustment in March quarter, while another peer seems to be okay. So it kind of feels like there's a lot of mixed messages on pricing out there.
Speaker Change: So, Tom, can you just help us out with some color on pricing trends and how to think about it in calendar 25, and then add a quick follow-up.
Speaker Change: Yes, so let's start with.
Speaker Change: The big foundry player in the industry. They represent 70% of all the wafers that are shipped to TSMC. They've been very clear.
Speaker Change: that they see a lot of pressure on cost.
Speaker Change: most recent articles about how energy prices in Taiwan are highest anywhere in the world. They're expanding capacity, so they're deploying capital, need to get a return on that, deploying capital in regions where the cost structures are going to be challenged. And so they've talked repeatedly.
Speaker Change: about this being a constructive environment for pricing. And so when the big rational player understands that inflation is part of our industry and recognizes that needs to be shared, that sets the tone for pricing.
Speaker Change: Now, what does GF have seen and what do we see going into 2025?
Speaker Change: You can look at our results. We've been roughly flat on pricing this year. Look, remember, our LTAs give us a lot of certainty. They give us certainty to give our customers certainty. Remember, they're based on fixed volume, fixed duration, and fixed pricing.
Speaker Change: And so that's the rules of the game we play under, and so you've seen it in our results. But as we think about 2025...
Speaker Change: More of our revenue is going to come outside of these long-term agreements. It's going to come on a, you know, kind of a non-committed PO basis.
Speaker Change: And we see the opportunity after two years of inflation that we've had to offset our costs against, the opportunity to have these discussions to actually get better pricing for our technology. And that's what we see in 2025.
Speaker Change: You'll hear anecdotal, one-time events of people giving some pricing for a
Speaker Change: for Tactical Load. I don't think I would confuse that with the general.
Speaker Change: trend we see. And remember, a lot of GF's business is sole-source, single-source type business, which means we have a special engagement with our customers on setting the value of capture and creation for both of us.
Speaker Change: I'll just leave it at that. Do you have a following?
Speaker Change: Yes, Tom, and thanks for that very helpful feedback. My quick follow-up is, you know, on smart mobile, obviously it's a very important part of your revenue stack. Can you talk a bit about the demand and seasonality trends in this segment, especially as we head into 2025? And also, is this trend here coming from the RF components or power devices? What process nodes is smart mobile focused on? Thank you very much.
Speaker Change: Well, this is right in Niels' wheelhouse, so I'm going to let him take this. Yes.
Speaker Change: Good morning, this is Niels. So yeah, on smart mobile devices, you know, we talked a little bit about it, you know, when we opened up the call today, basically getting back to a year of growth. I think, you know, we are very well known for our position in the premier, you know, tier phones. But maybe I can also add that
Speaker Change: for my
Speaker Change: From a design standpoint, we have seen really good growth.
Speaker Change: Unknown Speaker in China.
Speaker Change: you know, business coming in with the three of the major players in China in addition to, you know, the usual premier phones that we're well known for today. We've got the technologies, this is on 8SW, 9SW, SOI, it's on our Ziggy as well as starting to have, you know, some early traction on the IFGAN portfolio as well by SMD.
Speaker Change: Thanks, Niels. Thanks, Tom.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Chris Caso of Wolf Research. Your line is now open.
Chris Caso: Yes, thank you. I guess the first question is just getting some more detail on the impact of the customer underutilization payments.
Speaker Change: As we go into next year, you gave some commentary.
Speaker Change: about how that would go is right that that kind of gets down to de minimis levels as we get into the first half of next year.
Speaker Change: And then, you know, just following on with that, Tom, you provided, you know, some commentary on the March quarter. And I think what I heard you say is, you know, still up year on year, but on the higher end of seasonality.
Speaker Change: It seems like if that's the case, it sort of implies sort of a down high single digits in Q1 basis. If you could confirm our math is right on that.
John Hollister: Yeah Chris, this is John. I'll take the first part. You are interpreting that correctly. We've been through a number of customer discussions with the LTAs.
Speaker Change: In the course of 2033 and 2024, we're seeing less of those now.
Speaker Change: And we're seeing the effect of that less material to our overall gross profit outlook, including, you know, in the fourth quarter of just roughly just over a point of effect on the first quarter, I mean, fourth quarter. And as we look up into next year, first half of next year, we see a similar dynamic, you know, less material to the overall gross profit margin story here.
Speaker Change: Yeah, Chris, you've done the math right on how you're sizing this.
Speaker Change: Do you have a follow-up, Chris?
Chris Caso: I do.
Chris Caso: Another question is a little bit the bigger picture, but you know, there's two competing dynamics what's going on in your foundry segment one is
Speaker Change: You know, what I think you benefit from a while, which is, you know, your customers want to diversify their supply geographically.
Speaker Change: But, you know, there's another in that, you know, we're seeing starting to see is bifurcation where, you know, for, again, for geopolitical reasons, customers attending.
Speaker Change: to, you know, want to produce locally within China for that product that's within China. As you look at your business going forward, how do you kind of balance those two things in terms of, you know, the opportunity for business coming your way because of where you're geographically located as compared to, you know, some of the customers, you know,
Speaker Change: having some incentive to produce in China.
Speaker Change: It's a really good question, Chris, because it's like, what's your tailwind, what's your headwind? Yeah, there's China for China, and I'll come to that second, but let's talk about China for the rest of the world.
Speaker Change: Just a month ago, over the summer, we had three global technology summits, GF hosted events for customers and ecosystem partners. We had
Speaker Change: three times as many.
Speaker Change: partners and customers at our Shanghai event than we had in the U.S. and in Europe. Now, by the way, the U.S. and Europe events were well attended, but this gives you an idea of how the fabulous companies of China have a strategy, you know, N plus one.
Speaker Change: They need yes
Speaker Change: Local for local, but they also need a geographically diverse foundry like GF, and there's very few who can give them this, to support their worldwide business. In fact, they taught us of an expression they use.
Speaker Change: NCNT. No China, No Taiwan in their N plus one strategy.
Speaker Change: And so they're building their business around being a global supplier, recognizing they need two supply sources.
Speaker Change: And GF's the most logical choice for them. And the representation at RGTS, the kind of design wins.
Speaker Change: Niels alluded to three out of the four major players in the front-end modules, content, RF content for smart mobile devices, are all engaged with GF.
Speaker Change: So that's the big part of the tailwind. Now, there is a headwind of local for local, and it's GF's job to figure out how we partner and take advantage of some of that opportunity there.
Speaker Change: I believe very strongly that our tailwind
Speaker Change: Offsets by more than some of the headwinds we face in localization. Because first of all, it's going to take a long time for the types of differentiated technology our customers need from us in China. And I think there's an opportunity for partnerships for us to even improve on that.
Speaker Change: I hope that helps.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Unknown Executive, Sam Franklin, Unknown Executive, Sam Franklin, Unknown Executive, Sam Franklin,
Speaker Change: Unknown Speaker 0. . . . . . . . . .
Speaker Change: Unknown Speaker
Speaker Change: Our next question comes from the line of Mehdi Hosseini of Susquehanna International Group. Your line is now open.
Mehdi Hosseini: Yes, thanks for taking my questions.
Mehdi Hosseini: First one is for Tom. I want to go back to what you said earlier, discussing the design wins across platform.
Mehdi Hosseini: Can you give us a sense of
Mehdi Hosseini: what specific segments of the market these design wins are happening, and when should we expect any material contribution? And I do have a follow-up.
Speaker Change: So I'll talk a little bit high level about design wins in our funnel, but for GF,
Mehdi Hosseini: to outgrow the industry when this thing turns around. It's all predicated on converting our funnel of opportunities.
Speaker Change: clarity around what does our funnel need to be in total size.
Speaker Change: to be able to outgrow the industry and a very disciplined process of identifying, qualifying, driving those leads into actions on design winning tape out.
Speaker Change: Global for Local Manufacturing in all three major regions, and then a balanced customer support model. So, let me walk you through, you know, what we mean with these, with these four pillars or how we approach these four pillars. So starting out with essential chip technology, you know, just to...
Speaker Change: Maybe ensure that everybody knows what essential chip technology is.
Speaker Change: analog and power. And if you think about companies out there that are, you know, in these spaces today that are well known, it will be companies like TI, ADI, and ASP. So that's really the technologies that we are focused on. It's 10 nanometer and above.
Speaker Change: Within Essential Tip Technology, you then get down to three major areas of technology. CMOS,
Speaker Change: and we didn't see much. You have Bok.
Speaker Change: This is a typical commodity second source type of CMOS. You've got FETA-rich CMOS and you've got ultra-low power CMOS. Within RF...
Speaker Change: and GAN and within power it's really the BCD technologies, the MOSFETs, the silicon carbide and the GAN. So that's what essential chip technology, what the market is and what the technologies are that people are focused on there. Now if I take
Speaker Change: DF Strategic Overlay and put it on these three technology areas.
Speaker Change: We basically can talk about it in the following technology product vectors. First, ultra-low power CMOS. This is where we have our 12LP and our 22FDX.
Speaker Change: Technologies.
Speaker Change: Our focus here is the 22FDX is to offer 30-50% higher performance.
Speaker Change: and or, you know, 30 to 50% lower power, you know, at the same kind of performance levels.
Speaker Change: Next to Ultra-Low Power Siemens you've got feature-rich Siemens.
Speaker Change: which really is focused on sensing.
Speaker Change: Computing and Display. This is 28 nanometers and above.
Speaker Change: You know, a good example here of the technologies we have and the differentiation we have is our 40 nanometer NVM technology that now is, you know, powering the number one automotive MCU portfolio in the world. But other areas like display and imaging are also very prominent in that space.
Speaker Change: 650 volt and 200 volt and 100 volt GaN, you know, the latest acquisition we announced there with Tagore on the GaN side, really focusing in on higher integration of GaN devices. And then lastly, silicon photonics, you know, which where we offer the highest bandwidth.
Speaker Change: at the lowest power, and we mentioned earlier three major players in optical transceivers are engaged with us on that. So that's really the essential chip technology pillar, that's the first one, differentiated technology, single sourced.
Speaker Change: and highly tailored to what our customers need in the segments they're playing in. The second pillar of the strategy is really the high growth market segments and battlegrounds.
Speaker Change: And as an example here, you know, we are growing our service addressable market from $60 billion. We're expecting that to go to about $120 billion, you know, by 2031.
Speaker Change: Key Markets for Automotive, Smart Mobile Devices, Industrial and Home IoT, and of course Communication, Infrastructure and Data Centers.
Speaker Change: You know, powertrain, body electronics, and automotive. Of course, you know, in SMDs, they are affronted.
Speaker Change: Wi-Fi, audio haptics, display and imaging.
Speaker Change: and IoT, it's home and industrial, AI at the edge, you know, MCU, Bluetooth, Wi-Fi, aerospace and defense.
Speaker Change: in the commercial satellite communication space, and we mentioned that earlier, you know, the large-phase array antennas, we have a major win there that we believe is going to drive some meaningful growth for global foundries moving forward.
Speaker Change: We have automotive and dual qualification on all our major technologies, so we can support almost any technology needs out there from an automotive standpoint, and we give the security of the dual qualification across factories.
Speaker Change: And we have a very capex-efficient capacity expansion model, you know, for the next few years as we move forward.
Speaker Change: And then the last pillar really is, you know, a balanced customer support model.
Speaker Change: And that really consists of three different components here. The first one we talked more about in the past, and it's the LTAs, you know, as Tom mentioned, fixed price, fixed volume, fixed duration. That was about $20 billion, we announced that in the 20th.
Speaker Change: and last time we had a major announcement around LTAs, was the Infineon announcement we did early in the year, which was also very meaningful. Outside of LTAs we got...
Speaker Change: Oh, It saves force!
Speaker Change: deployed on the top 100 major accounts across the world. So we have sales coverage and support across those 100 accounts.
Speaker Change: These accounts, the assignments we've seen there, and the momentum we've built there in the last 18 months.
Speaker Change: You know, 90% single source and margin accretive to our long-term model. Again, you know, the latest announcement there with NXP is a good example of one of these design wins.
Speaker Change: and you will see more of these announcements coming, you know, in the future. And then thirdly, within the balanced customer support model is really the channel.
Speaker Change: and this is where we get to the next 100s of customers.
Speaker Change: We built the ecosystem around that. We have a set of channel partners from a worldwide basis.
Speaker Change: And we believe, based on the assignments we've seen, that the margin will be further accretive to a long-term model. And like Tom mentioned earlier on, just the latest GTS summons that we did with our customers, we had more than 1,000 customers and partners.
Speaker Change: and attending that mid-spot as well for, you know, the growth into the channel. So, if I should summarize, you know, why we believe we are well-positioned to deliver superior revenue growth.
Speaker Change: at margins that I created to our long-term model. It really comes down to, you know, expanding and strengthening the portfolio of differentiated essential tip technologies.
Speaker Change: You know focused on fast-growing markets and segments with the same doubling from sixty billion dollars to two hundred twenty billion dollars by 2030
Speaker Change: The global and local manufacturing footprint with a very efficient capex expansion and then the balanced customer engagement model with a very meaningful growth of pipeline and design wins, again, at margins that are creative to our long-term model.
Speaker Change: Thanks for all the details. Just quickly for John, how should we think about OPACs, especially in the context of some of these credits that you're receiving? Is it 70 to 75 million SG&A?
Speaker Change: should be like a baseline, any color would be great.
Speaker Change: On your specific question, the
Speaker Change: The Advanced Investment Manufacturing Tax Credit.
Speaker Change: that we generated in year to date in 2024 thus far has been slightly ahead of our expectations. We expect that to continue through the life of this program at roughly $10 million a quarter would be a normal rate, if you will. It's been a bit ahead of that this year, but $10 million a quarter would be a good estimate going forward.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Our next question comes from the line of Mark LaPazes of Evercore ISI. Your line is now open.
Mark LaPazes: Hi, thanks for taking my question.
Mark LaPazes: It looks like you're set up to throw off some really healthy cash flow for the next several years and under
Speaker Change: What I would consider reasonable.
Speaker Change: expectations for industry growth, with free cash flow being higher than earnings. Tom, I believe in your prepared remarks, you used the expression
Speaker Change: you'd consider capital allocation programs.
Speaker Change: buying back stock or even issuing a dividend. So I'm wondering if you could give us a, you know, help us out with a little bit more color on that. You know, what you meaning there is capital return part of the conversation. And maybe, John, as part of that, if you could remind us the cash you'd like to have on your balance sheet to run the company and the capital structure, so we can figure out what would qualify as excess cash. Thank you.
Speaker Change: So Mark you're looking for a secret Dakota ring. I'm going to pass that over to John
John Hollister: Thanks for the question. Yeah, so we, you know, we have entered a phase in the corporate history of of GF where we're, you know, we've gone from
John Hollister: from where we were formed to now generating solid free cash flow results for the company. It's really good. It's exciting to see this happen. And approaching our goal of near $1 billion in free cash flow this year is quite a milestone for this company.
John Hollister: And, you know, it's not lost on us that we now see a cash balance that is accumulating. We ended the quarter with about $4.3 billion.
John Hollister: You all, as...
John Hollister: David Reeder, Thomas Caulfield, John Hollister, Sam Franklin, Unknown Executive, Sam Franklin,
John Hollister: that wants to accelerate their growth is always going to be a look out for.
John Hollister: David Reeder, Thomas Caulfield, John Hollister, Sam Franklin, Unknown Executive, Sam Franklin,
John Hollister: And, you know, we have the capacity, and we've said this before.
John Hollister: already in our factories to get us between $9 and $10 billion in revenue. And that's a really important number because with that, not only is the free cash flow generation there.
John Hollister: It's allowing us to invest in growth without having to trade off, do we deliver free cash flow or not in our business for growth, and we'll be able to do both.
John Hollister: And so this idea of free cash flow is going to exceed getting to where we need to invest again in the capital allocation into growth, into factories, because we'll have enough scale to be able to do both, generate free cash flow and grow our business.
Speaker Change: Fair enough. Thank you very much.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Harlan Sir of J.P. Morgan. Your line is now open.
Harlan Sir: data center networking connectivity products. So I think that's your 45 nanometer CLO technology. I think NVIDIA, Marvell, and Broadcom are all your customers here. The team is also doing some pretty good work on compound semiconductors like silicon germanium for high-speed optical TIAs, drivers, and the like. So as many of these customers move to a cycle-based
John Hollister: architecture for their optical transceivers next year. Does SIFL become a meaningful part of CID next year anyway to quantify?
Niels Anderskouv: I think, okay, this is Niels, maybe I can start. So, we haven't really announced, you know, the cost of my names, but I did say earlier, you know, we have...
Speaker Change: We are three of the major players in the industry on our platform and you are right, we've been working on this for ten years and are finally seeing it coming to fruition now through the design wins.
Speaker Change: You know, I've actually, personally, you mentioned both Silicon Vatanis and Ziggy, you know, and I think of those two as...
John Hollister: you know, the future of true high-performance analog. So the type of performances we're trying to get to here in the future is going to require these types of technologies.
John Hollister: And we are very well positioned, you know, in global boundaries to take advantage of that. So when you think about it in that context, yeah, I do think that this will be a meaningful...
John Hollister: you know, remedy generator for us out in time. Of course, you know, you're, you're, you're still needing to see some ecosystem changes. And you know, they're going to have to be, you're going to have to get to some levels of data speeds, as well as
John Hollister: Power limitations, but the minute you hit those I think you're going to see a pretty rapid ramp of these technologies
Speaker Change: Yeah, look, I think it's a success for us.
John Hollister: It's great to have done this monolithic integration of RF CMOS and photonics in a single chip. We have to do more to enable our customers in some of the other pieces of the puzzle. And look for us to invest one way or the other to continue to help our customers integrate.
John Hollister: Don't underestimate power delivery, where we're focused here as well. Power is becoming the biggest challenge, and it's neck and neck with connectivity. We think some of the things we're doing with our technology, in particular GAN for the future, is going to help solve that problem as well.
Speaker Change: Right, and I appreciate that and also great to see the partnership with NXP
Speaker Change: Did you guys announce last month for 22 FDX and also as you mentioned in your prepared remarks, much of it?
John Hollister: is going to be used for automotive smart mobile IOT continuation right of the strong partnership that you guys had with them.
John Hollister: at the 40 nanometer embedded MCU process node.
John Hollister: did the
John Hollister: GF Team, Simon Associated
John Hollister: Long-term agreement with NXP, especially given the strategic nature of their
Speaker Change: Leadership and Automotive, kind of similar to the partnership and LTA you signed with Infineon at the beginning of this year. I'm just trying to figure out the difference in some of these strategic partnerships, right? Why some have an LTA associated with them while maybe others might not.
Speaker Change: Yeah, you know, I without getting into specifics on the NXP deal, what you typically see is that, you know, markets like automotive, you know, aerospace and defense.
John Hollister: Some industrial spaces
John Hollister: the customers would like to have LTAs in place and it's back to, you know, getting certainty around volume, pricing, and duration, right? So in some cases, we see that, in other cases, we basically...
John Hollister: with dynamic pricing, dynamic volume commitments, right? And renegotiation on a 12-month basis. So we do a mix of it.
John Hollister: Really depending on what suits the customer and the market the customer is going after the best Right, it's really the complexion of the market if it's a product design that last 10 years. This is where customers want certainty
John Hollister: If it's a refresh cycle every year, it's less important to them because it's changing all the time. And so, you could almost think a customer who plays in different end markets may want an LTA for one product and not on another. Look, just on that point, to give you an idea.
John Hollister: When we hit peak LTA revenue, or...
John Hollister: under LTA, it was about $30 billion, and we ended last year, we still had $20 billion of LTA revenue, and as we sit here today,
John Hollister: We have 17 billion
John Hollister: long tail businesses that want to get that type of certainty locked in. And so I think it's becoming an important part.
John Hollister: of our industry, and it's never about one thing or another thing, it's always a little bit about the nuance underneath what's the problem that's trying to be solved, and LTA solves some of that certainty for long, long product line use.
Speaker Change: Do you have a follow-on?
Speaker Change: That's it for me. Thank you, Niels. Thank you, Tom. Thank you. Rifka, we'll take one last question.
Rifka: One moment for our last question.
Rifka: Our last question comes from a line of Vivek Arya of Bank of America Securities. Your line is now open.
Tak-San: Hi, thank you for squeezing us in. This is Tak-San on behalf of FEDAG.
Tak-San: One follow-up, or I guess clarification, you've guided auto to be up high single digit, smart mobile device to be flattish for the year, and I'm not sure how you can get to the Q4 guidance of 1825 at the midpoint with those numbers. And then the real question is,
John Hollister: The smartphone trends have remained pretty weak to date, so how should we think about your smart mobile device demand going forward, particularly given that Q1 tends to be seasonally down?
John Hollister: Yeah, Vivek, this is John. I'll take the first part. I mean, really, it's an IoT and comms infrastructure where you see year-on-year declines for 24 compared to 23. We'll round out the Q4 guide, and I'll let Niels comment on the smart mobile trends. Yeah, smart mobile, you know,
Niels Anderskouv: You could say the Global Foundry may be bogging the trend a little bit here, you know, we are doing well in smart mobile devices, we are particularly doing well on our iOS portfolio and, you know, from a design standpoint we have very meaningful design momentum in that space as well moving forward.
Speaker Change: 100 basis point-ish impact in Q4. So, excluding those, you should be up, say, 40 basis points in Q4. So, how should we think about gross margin going forward now that you've pretty much run out of those impacts?
Speaker Change: Yeah, you'll, you'll see a, you know, the natural progression of gross margin performance, along with the various factors that lead to that, namely, improvement in factory utilization as the industry recovers and our loadings increase along with our ongoing cost recovery initiatives, mixing of the business growth in the channel.
Thank you.
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: Thanks, Rika. Thanks, everyone, for joining us today. We'll appreciate the questions and we'll continue some of the other questions in the callbacks later this afternoon. Thanks very much.