Q4 2024 GlobalFoundries Inc Earnings Call
Good day and thank you for standing by. Welcome to the conference call to review fourth quarter and full 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 this session, you will need to press star 11 on your telephone.
You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sam Franklin. Please go ahead.
Sam Franklin: Thank you, operator. Good morning, everyone, and welcome to Global Foundry's fourth quarter and full year 2024 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, John Hollister, CFO, Niels Anderskouv, Chief Business Officer, and Tim Breen, Chief Operating Officer.
Sam Franklin: A short while ago, we released GF's fourth quarter and full year 2024 financial results, which are available on our website at investors.gf.com, along with today's accompanying slide presentation.
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.
Sam Franklin: Please refer to the press release we issued today, as well as risks and uncertainties described in our SEC filings, including in sections under the caption, Risk Factors, in our annual report and on Form 20-F, and current reports on Form 6-K filed with the SEC.
Sam Franklin: We'll 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 fourth quarter and full year results and also provide first quarter 2025 guidance.
Speaker Change: We will then open the call for questions with Tom, John, Tim 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.
Speaker Change: Thank you, Sam, and welcome everyone to our fourth quarter and full year 2024 earnings call. In the fourth quarter, we delivered results that exceeded the midpoints of our guidance ranges across revenue, gross margin, and EPS.
We also continue to generate progressively higher free cash flow.
Speaker Change: As we set out at the start of 2024, our goal was to generate approximately three times the adjusted free cash flow over 2023.
Speaker Change: With over a billion of adjusted free cash flow in 2024, we significantly exceeded that target. Our free cash flow generation is a testament to our strong execution, multi-year investments in our capacity footprint, and our ability to react quickly to market conditions.
Speaker Change: This will be an important metric for our company on a go-forward basis, and we expect to grow adjusted free cash flow in 2025 above the $1 billion target that we set out to achieve in 2024.
Speaker Change: Our full year results are consistent with what we indicated at the beginning of 2024. As the macroeconomic environment began to stabilize through the second half of 2024, and our customers cautiously managed down their inventory levels.
Speaker Change: This time last year we indicated that GF's first quarter of 2024 would signal the revenue bottom for the year with an expectation for consistent sequential growth throughout 2024.
I am pleased to report
Speaker Change: that not only did we deliver on those expectations, we continue to build the foundations for longer-term growth.
Speaker Change: with a record level of design wins across all end markets we serve, as well as new opportunities that support the expansion of critical applications such as autonomous vehicles, satellite communications, optical networking, and power delivery in the data center.
Speaker Change: With almost 90% of these design wins secured on a sole-source basis, we continue to focus on deep customer partnerships, coupled with our strategic global footprint, to reinforce GS's position as a critical enabler of essential chip technologies.
Speaker Change: Entering 2025, we expect continued design wind momentum and an improving demand outlook across several end markets.
Speaker Change: Our guidance for the first quarter of 2025 indicates a modest return to year-over-year revenue growth, and we expect the full year of 2025 to mark a return to growth across key revenue and profitability metrics.
Speaker Change: Although it's too soon to comment on the rate and pace of this growth, we expect continued moderation of the macroeconomic headwinds that impacted some of the end markets we operate in, and our customers are indicating a return to normalized inventory levels.
Speaker Change: Meanwhile, our strategic initiatives in Malta remain on track as we actively transfer a range of essential chip technologies into our Fab8 facility in Malta, New York.
Speaker Change: This will diversify the existing technology portfolio in Malta by supporting our customers with access to our 22 FDX platform 40 nanometer auto grade offerings
Speaker Change: This will complement the existing 12 nanometer FinFET, RFSOI, and silicon photonic technologies in production today.
Speaker Change: These transfers are part of our long-term capacity investments, which include partnering closely with governments and securing incentive packages.
to offer our customers differentiated technologies in geographically strategic regions.
Speaker Change: To that end, we recently announced a first-of-a-kind center for advanced packaging and test capabilities
to be housed at our Malta facility.
Speaker Change: Supported by grants from New York State and the U.S. Department of Commerce, GF's Advanced Packaging and Photonics Center will help meet the growing demand for U.S.-made essential chips used in AI, automotive, aerospace and defense, and communication applications.
Speaker Change: Our customers continue to seek more geographic resilience in their supply chains, and GF's unique footprint is well-placed to meet them both globally and locally.
Speaker Change: In conclusion, I'm extremely proud of our achievements in 2024. The focus and determination from our 13,000 employees around the globe give me confidence GF can accelerate its performance as we return to growth in 2025. With that, over to you Niels.
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 partnerships and in-market performance.
Niels Anderskouv: 2024 has been a pivotal year for the design momentum that we have seen across all of the end markets we serve.
Niels Anderskouv: These design wins set the stage for increasing the content growth and penetration of our essential tip technology portfolio.
Now let me walk you through the buy-in market.
Niels Anderskouv: In automotive, despite soft market demand and inventory builds at OEMs, GF continues to grow. We continue to capture share in auto, expand our content per vehicle, and build on our strong momentum with customers.
Niels Anderskouv: During our prior earnings calls, we indicated that we expected full year 2024 revenue from our automotive end market to grow meaningfully year on year.
Niels Anderskouv: I'm very pleased to report that in 2024, we delivered revenue growth of 15% at the high end of these expectations.
Niels Anderskouv: reaching a new annual record for automotive revenue, an accomplishment we have achieved every year in our history as a public company.
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Niels Anderskouv: We intend to continue this momentum in 2025, and over the last year we secured several key assignments to deliver critically important ADAS, microcontrollers, and sensor applications, all manufactured to the highest automotive-grade standards.
Niels Anderskouv: In October 2024, we announced a key collaboration with NXP to deliver low-power, high-performance chips using our leading 22FDX platform.
Niels Anderskouv: Qualified for Automotive Grade 1 and 2 applications, 22FDX not only ensures excellent reliability, but also optimizes energy management to deliver up to 50% higher performance and 70% less power compared with other planar CMOS technologies.
Niels Anderskouv: In 2025, supported by our robust design pipeline, we expect a similar growth rate to 2024 as we focus on content gains across automotive processing, camera, LiDAR, haptics, and battery management systems.
Niels Anderskouv: Longer term, as vehicles become increasingly autonomous, connected and electrified, we remain deeply focused on capturing new content and growing our share of the market for our diverse product portfolio and global footprint.
Turning now to smart mobile devices.
Niels Anderskouv: Revenue grew slightly year-over-year in 2024, despite a market challenged by an environment of elevated inventory and soft consumer demand for premium-tier handsets.
Niels Anderskouv: Against this backdrop, we continue to focus on opportunities for content growth and secured several key design wins throughout 2024.
Niels Anderskouv: Customer interest for 9SW, our latest generation RFS-OI platform that enables low standby current for longer battery life, has continued to drive momentum in this ad market.
Niels Anderskouv: Offering up to 25% reduction in die size along with greater than 20% power efficiency improvement compared to prior generations, this is well suited to offset the increased power consumptions of premium handsets.
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Niels Anderskouv: In 2024, we not only reinforce GF's leading position in eye front-ends, but also deliver design with momentum in display, imaging, and power.
Niels Anderskouv: with key soccer wins across applications ranging from 5G millimeter wave to micro displays in AR, smart glasses, and wireless video applications in premium smartphones.
Niels Anderskouv: Looking ahead to 2025 and based on discussions with our customers, the expectation is for consumer in-demand and unit shipments in premium smart mobile devices to show modest year-over-year growth.
Niels Anderskouv: To that end, our strategy remains to continue growing our content in the premium-tier handset market and supporting our customers as they continue to add new features, including AI-enabled capabilities.
Niels Anderskouv: 2024 was a challenging year for IoT as customers were working down the elevated inventory levels for both industrial and consumer applications.
Niels Anderskouv: Although 2024 revenue was down on a year-on-year basis, we saw strong design and momentum on our 12nm, 28nm, and 22FDX platforms across a variety of applications such as edge devices,
next-generation smart cards and connectivity products across Wi-Fi and Bluetooth.
Niels Anderskouv: In Q4, GEF also delivered wins on our 55 BCD light platform for portable ultrasound and imaging.
Niels Anderskouv: By partnering with our customers to enable low-power SoCs, GF is well-positioned to capture share in the growing medical imaging market.
Niels Anderskouv: As another example of our diverse portfolio with growing medical applications, in 2024 we also secured key design wins our 130 BCD-like platforms for continuous glucose monitoring systems.
Niels Anderskouv: We also announced our collaboration with Idemia to deliver next generation smart car technology with improved data retention, low read latency, and enhanced power efficiency.
Niels Anderskouv: This multi-year partnership will be 100% manufactured and tested in Europe on our 28 years of free platform, ensuring trusted providence.
Niels Anderskouv: Lastly, through our leadership in RFSOI, DF continues to benefit from this transition to Wi-Fi 6, 6E, and Wi-Fi 7 standards.
Thank you very much.
Niels Anderskouv: Looking ahead, we expect customer inventory adjustment to start to stabilize throughout 2025, and longer term, we expect to be well-positioned to support the tectonic shifts in IoT applications as the number of smart and connected devices continues to expand over the next decade.
Niels Anderskouv: Finally, in our communication infrastructure and data center end market, the expected headwinds of platform transition in 2023 and 2024 have largely concluded.
Niels Anderskouv: In 2024, we start to see our accumulated assignments deliver revenue in three new and exciting areas.
First, we see growing demand in optical transceivers.
Niels Anderskouv: We are working with three of the largest optical transceiver customers to address a range of data center requirements from Gen-AI servers to high-performance network switches and storage solutions.
Niels Anderskouv: As ever larger data centers move, ever larger amount of data across ever greater spans, we believe this is an exciting, long-term, secular growth opportunity that will benefit both our silicon photonics and silicon germanium technologies.
Niels Anderskouv: Second, we see satellite communication as another high growth opportunity area getting significant attraction and GFX partnering with the world's foremost companies in this space.
Niels Anderskouv: In 2024, we secured design wins on our 22FDX platform to enhance satellite beamforming, our 12LP platform for modem, and our 130NSX platform to support the growth of ground terminals.
Niels Anderskouv: Industry estimates indicate an acceleration of satellite deployments and as the industry grows, we expect to benefit from the significant RF front-end content in large phased array antennas.
Niels Anderskouv: Third, we see positive momentum in partnerships with rapidly growing disruptors such as Grok, a leading developer of fast AI inference technology using our 14 nanometer platform.
Niels Anderskouv: We believe this momentum will continue as influence applications accelerate further at the edge and endpoint.
Niels Anderskouv: We are encouraged by both the breadth and the depth of our expanding opportunities in communication infrastructure and data center, which we expect to grow revenue meaningfully in 2025 from the bombing that we saw in 2014.
Niels Anderskouv: All in all, I'm very pleased to report the progress that we're seeing across our design wins in all of the end markets that we support. We continue to position GA for long-term growth opportunities and our direct product portfolio is well positioned to capitalize on the secular trends of our time.
Niels Anderskouv: I'll now pass the call over to John for a deeper dive on fourth quarter and full year 2024 financials.
John Hollister: Thank you, Niels. 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.
John Hollister: Our fourth quarter results exceeded the midpoints of the guidance ranges we provided in our last quarterly update.
John Hollister: Fourth quarter revenue grew 5% sequentially to approximately $1.83 billion, which was above the midpoint of our guidance range.
John Hollister: and consistent with the commentary on our last earnings call and equated to a 1% decline in revenue compared to the prior year period.
John Hollister: ASP, or average selling price per wafer, decreased approximately 5% year-over-year.
John Hollister: Mainly driven by changes in the product mix shifts during the quarter and the reduction in underutilization payments from our customers, which we indicated on our last earnings call.
Waiver revenue accounted for approximately 92% of total revenue.
John Hollister: Non-waiver revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 8% of total revenue for the fourth quarter.
John Hollister: For the full year, revenue came in at approximately $6.75 billion, down 9% year-over-year, principally due to the prolonged industry downturn and weak economic conditions.
John Hollister: We shipped approximately 2.1 million 300 millimeter equivalent wafers, a 4% decrease from 2023, and ASP per wafer was slightly down year-over-year.
John Hollister: relating to the legacy investments in our production capacity at our Fab 8 facility in Malta, New York.
John Hollister: We undertook this action related to the diversification of our long-term manufacturing technology platform roadmap in Malta.
John Hollister: which is consistent with the technology transfer strategy mentioned earlier by Tom and as discussed on our prior earnings calls.
Unknown Speaker
Speaker Change: Our decision was based on an evaluation of the current technology capabilities and our go-forward business strategy to position our Malta facility with a broader range of technology platforms.
consistent with the expected demand from our customers.
With this better alignment of our multi-manufacturing capabilities,
Speaker Change: The company is now better positioned to generate long-term sustainable growth and profitability moving forward.
Speaker Change: Since we do not expect such impairment to be a recurring event, we believe this additional adjustment to our non-IFRS metrics
Speaker Change: better enables management and investors to make more meaningful comparisons of our fourth quarter 2024 results against prior periods and peer results.
Speaker Change: Let me now provide an update on our revenue by end markets.
Speaker Change: For the fourth quarter, smart mobile devices represented approximately 40% of the quarter's total revenue.
Speaker Change: Fourth quarter revenue declined approximately 15% sequentially and roughly 4% from the prior year period, principally driven by ASP declines and mix, partially offset by volume growth.
Speaker Change: Full year 2024 revenue for smart mobile devices represented approximately 45% of the year's total revenue.
Speaker Change: Full-year revenue increased 1% year-over-year, driven by similar dynamics as the fourth quarter.
including RF run-ins, power, display, and imaging.
Speaker Change: In the fourth quarter, revenue for the home and industrial IOT market represented approximately 19% of the quarter's total revenue.
Speaker Change: Fourth quarter revenue marked a second consecutive quarter of sequential growth and grew approximately 15% sequentially.
Speaker Change: Full-year revenue declined 21% year-over-year as inventory management across both industrial and consumer applications remained a top priority for our customers.
Speaker Change: While in the short term, customers are carefully managing inventories, we continue to capture long-term growth opportunities driven by the increased number and complexity of smart connected devices.
Speaker Change: Full year automotive revenue represented approximately 18% of the year's total revenue, which is up from just 2% in 2020.
Speaker Change: Looking ahead to 2025 we expect to see another year of meaningful revenue growth in our automotive end market.
Speaker Change: Revenue increased approximately 28% sequentially and 18% year-over-year primarily due to growth in volume and ASP on a year-over-year basis.
Speaker Change: For the full year 2024, communications infrastructure and data center revenue represented approximately 9% of total revenue.
Speaker Change: 2024 revenue declined 33% year-over-year as a result of the continued and expected platform transitions for compute applications.
Speaker Change: Looking ahead to 2025 we expect meaningful revenue growth driven by upside and AI accelerators, optical networking for data centers, and satellite communication.
Speaker Change: Moving next to gross profit. For the fourth quarter, we delivered gross profit of $464 million, which translates into approximately 25.4% gross margin.
Gross margin was above the midpoint of the guidance range.
Speaker Change: For the full year, we delivered gross profit of $1.709 billion and gross margin of 25.3%, equating to a 380 basis point decline from 2023.
Speaker Change: Operating expenses for the fourth quarter represented approximately 10% of total revenue.
Speaker Change: R&D for the quarter decreased sequentially to approximately $110 million and SG&A also declined to $69 million.
Total operating expenses were $179 million.
Speaker Change: Included in our total operating expenses is the benefit of approximately $17 million related to the Advanced Manufacturing Investment Tax Credit for 2024 qualifying expenses.
Speaker Change: As we continue to spend on qualifying expenses and capitalized assets in 2025 and beyond, we expect to continue to receive these benefits through the life of the program.
Speaker Change: We delivered operating profit of $285 million for the quarter, which translates into an approximately 15.6% operating margin, roughly 510 basis points lower than the year-ago period, and above the midpoint of our guided range.
Speaker Change: For the full year, GEOV delivered operating profit of $920 million, which translates into 13.6% operating margin, a decrease of roughly 490 basis points year-over-year.
Speaker Change: Fourth quarter net interest income, net of other expenses, was $14 million and we incurred tax expense of $43 million in the quarter.
Speaker Change: On a full year basis, GF delivered net income of approximately $870 million and diluted earnings per share of $1.56.
Speaker Change: Let me now provide some key cash flow and balance sheet metrics.
Speaker Change: For the full year, cash flow from operations was $1.722 billion.
Speaker Change: CapEx for the quarter was $135 million or roughly 7% of revenue.
Speaker Change: Full year capex for 2024 was approximately $625 million, or 9% of revenue.
plus the proceeds from government grants related to capital expenditure.
Less purchases of property, plant and equipment and intangible assets.
Speaker Change: As set out on the Statement of Cash Flows, it was $328 million.
Speaker Change: With that, I am very pleased to report that adjusted free cash flow for the full year 2024 was $1.1 billion.
Speaker Change: As Tom noted, this is an important milestone for GF, and we will look to continue this flywheel of free cash flow generation in 2025 while maintaining our capacity growth objectives.
Speaker Change: At the end of the fourth quarter, our combined total of cash, cash equivalents, and marketable securities stood at a healthy $4.2 billion, which is net of an approximately $350 million term loan maturity payment in Q4.
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 first quarter of 2025.
Speaker Change: We expect total GF revenue to be between $1.55 and $1.6 billion.
Speaker Change: Of this, we expect non-waiver revenue to be approximately 10% total revenue.
Speaker Change: We expect gross profit to be between $341 and $384 million, which at the midpoint is 23% of revenue.
Speaker Change: Excluding share-based compensation, but including the benefit related to the Advanced Manufacturing Investment Tax Credit, for the first quarter, we expect total OPEX to be between $170 million and $190 million.
Speaker Change: We expect operating profit to be between $151 and $214 million.
Thank you for watching.
Speaker Change: We expect net interest income and other income for the quarter to be between $0 and $8 million and income tax expense to be between $16 and $33 million.
Speaker Change: We expect net income to be between $135 and $189 million.
Speaker Change: For the full year, we expect 2025 non-IFRX net capex to be approximately $700 million.
Speaker Change: Our disciplined approach to cost and expense management also extends to SG&A and R&D, which, in 2025, we expect will be roughly in line with 2024, while continuing to invest in our people and long-term growth objectives.
Speaker Change: As Tom noted, WeSPEC 2025 will be a growth year for GEOF.
Speaker Change: And although we only guide one quarter at a time, as customer demand and utilization levels improve, coupled with the benefits associated with our continuing cost and productivity initiatives,
Speaker Change: We believe we can exit the fourth quarter of 2025 with adjusted gross margins of approximately 30%.
Speaker Change: In summary, the dedication of our employees across the world and their continued efforts to expand our differentiated product offerings in key growth markets enabled us to achieve forthcoming results at the higher end of the guidance ranges.
Speaker Change: I'll now pass back to Tom and Tim before we move to Q&A.
Speaker Change: Thanks, John. In conclusion, GF not only navigated the cycle well in 2024, it achieved new milestones that highlight the strength of our customer partnerships and the resilience of our business.
Speaker Change: We remain focused on execution and advancing our strategic goals. I deeply appreciate our team members around the globe for their tenacity, dedication, and teamwork in securing key design wins, and our customers have my sincere gratitude for their support and trust in us.
Speaker Change: Lastly, as announced last week and effective April 28th, I want to congratulate Tim as GF's incoming CEO and Niels as GF's new President and COO.
Sam Franklin: I am proud of what we've accomplished together, and I'm looking forward to our continued partnership as I take on the role of Executive Chairman.
Speaker Change: It has been the honor of my career to lead GF these last seven years, and as I hand over the reins to Tim as CEO, I am confident the company is in exceptional hands with a bright and exciting future. With that, over to you, Tim, to say a few words. Tim?
Tim Breen: Thanks, Tom, and congratulations to you as our next Executive Chairman of the Board.
Tim Breen: GF will undoubtedly continue to benefit from your knowledge, experience and support.
Niels Anderskouv: It's a privilege to take on this new role, to partner with Niels and to lead our 13,000 strong team into a new chapter of growth and opportunity.
GF is uniquely positioned with our exceptionally talented employees.
Niels Anderskouv: Essential Chip Technologies and a diverse global manufacturing footprint to meet our customers where they need us.
Niels Anderskouv: I'm incredibly excited for the next phase of GF's growth trajectory, and I'm looking forward to executing on our strategic vision.
With that, let's open the call for Q&A. Operator?
Speaker Change: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. And please stand by while we compile the Q&A roster.
Speaker Change: And our first question will come from Chris Caso of Wolf Research. Your line is open, Chris.
Chris Caso: Thank you. Good morning. And congrats, Tim, and all the best to you, Tom, on your next endeavor.
Chris Caso: I'll start with a commentary on the end markets and if you could provide some explanation of what your expectation is.
Chris Caso: buy-in market for Q1, and particularly in auto, that was stronger than what we would have expected. You know, is this something that you expect to continue as you go into next year?
Chris Caso: Yeah, let me let me give a little context first and talk a little bit about the year and what we're seeing
So let's go back a year ago.
Chris Caso: 1Q2024 we said would be the low point of of GF revenue and over 2024 we grew revenue sequentially all through the year.
Chris Caso: At our last earnings call in November, we stated that Q1 of 2025 would show year-on-year growth, and we're seeing approximately 2% growth.
Chris Caso: By the way, if we normalize this Q1'24 to Q1'25, eliminating or normalizing out the LTA revenue, our growth would be actually 7%.
Chris Caso: And then while we only guide one quarter at a time, as we said in our prepared remarks, we do see 2025 being a growth year over 2024. Now here's the thing. The range of that growth will be in large part
Chris Caso: Determined by the secular industry growth in the diversified space that we play in in the end markets that we we serve
Chris Caso: But, you know, if you compare our Q1 revenue year-over-year to other companies in this diversified space,
Chris Caso: We're showing growth, as we said, whether it's roughly 2% or the normalization is 7%
Chris Caso: Many others, the vast majority, were showing decreasing year-over-year mid-single digits, some of them as high as 25%.
Chris Caso: So where's the upside for GF? Why are we seeing it different? Well, it's certainly auto, which by the way, this will be a fifth year in a row of achieving revenue growth. Remember, we started in 2020 with
Chris Caso: you know, somewhere under $100 million in revenue. And last year, as you see, we reported 1.2 billion, and we say, there's no reason we shouldn't continue to grow in 2025. You know, why is auto strong for us, say, versus what you're hearing from others? It's not just the content.
Chris Caso: It's the number of sockets we've won over the last number of years, and they are starting to ramp. So even in the face of
Sluggish auto sales
Chris Caso: out of the dealerships that you're seeing. Even with that, we're going to grow again this year. And then the other upside for us in 2025.
is in our comms infrastructure and data center and market.
Chris Caso: That was a transitional market for us. We've been bumping along the bottom at about a half a billion of revenue on an annual basis, but given the strength and some of the key design wins in satellite communications and our photonics platform in the data center, this is the year that CID is going to start growing for us.
Chris Caso: So, as the industry comes back, we will come back. The theme for us is, you know, we should outperform because we've positioned the company with these key design wins in these end markets for growth.
Do you have a follow-up, Chris?
Chris Caso: how you intend to get there. And I presume that there'd be some revenue expectation attached to that. Do you speak about what sort of revenue growth you would need to get to that 30% exit?
Chris Caso: Yeah, Chris, this is John, let me let me first talk about the first quarter, you know, in overall, we see an improving gross margin story here. And let me do the year on year comparison.
Chris Caso: You know, if you look at the first quarter of 24, that included, as Tom indicated, the roughly $80 million
Chris Caso: underutilization benefit, that's roughly counts for about four points of the gross margin result in the first quarter of 2024. So if I normalize that and compare it to the guide that we just put out, you actually can see that our gross margins are improving by roughly 100 basis points year over year on a normalized basis.
Chris Caso: And as we look to the balance of this year and expect continued sequential growth as we experienced in 2024, yes, you will see the benefit coming in the form of improved factory utilization.
Chris Caso: ongoing structural cost improvement and that's comprised of both our optimization of our cash input costs
Chris Caso: as well as the roll-off of our depreciation and amortization costs, we indicated in the prepared commentary an expectation of a roughly 15% improvement in depreciation and amortization costs.
Chris Caso: as well as ever-enriching product mix in the overall portfolio. So that's what gives us the view that through the balance of this year, we have the opportunity to improve our gross margins and, according to those expectations, exit the year at roughly 30% gross profit margin.
Thank you.
Speaker Change: And our next question will be coming from Mark Lipasys of Evercore ISI. Mark, your line is open.
Mark Lipasys: Great. Thanks for taking my question. A question for John, I think. So in 2024, it looks like the free cash flow was about 25% higher.
Speaker Change: Unknown Speaker Then your net income and, you know, it looks like capex is lower and
Speaker Change: But you actually had, looks like you had a headwind from working capital. So I'm wondering, you gave us some of the pieces here, the depreciation and it looks like you're underfunding depreciation expense again. So that's a tailwind.
Speaker Change: What happens with working capital, do you expect that to still be a...
Speaker Change: a headwind again this year, or does that become a source of cash? Do you expect to maintain this kind of high level of free cash flow in 2025? And I had a follow-up. Thank you.
Speaker Change: And that's driven by, you know, strong performance in the business coupled with a capital efficient.
Speaker Change: for, and indicated in our prepared comments, roughly $700 million in 2025. Working capital should be fairly normalized.
Speaker Change: For the year, we did experience a nice benefit and inventory of roughly $200 million in the fourth quarter that helped our result for the year. And yes, we expect to generate similar amounts of free cash flow in 2025 as what we just posted for 2024.
Speaker Change: Okay, thank you. That's very helpful. And then a follow up on John also for you. I think the impairment charge.
Speaker Change: Can you describe what was written down? I understand that this is part of what you're doing at Malta.
Speaker Change: but if you could just give a little bit more color on that and then does this, does that write down, does that also help your depreciation expense as you look into this year? Thank you.
Mark Lipasys: Yeah, Mark, certainly. Yeah, this fundamentally relates to the diversification of the multifab and the essential technologies that we're offering there. You know, we've indicated this in the prepared comments, but if you really look at the 22 FDX, 40 nanometer, what we're doing in advanced packaging and photonics,
Mark Lipasys: These are new essential technologies that we're adding onshore here in the Malta fab
Mark Lipasys: And that speaks very much to our global manufacturing footprint and how critical it is, particularly in today's environment, that we're able to have fungible
Mark Lipasys: consistent essential technologies globally at each of our locations in the world. So that's really what's behind that and as part of that diversification strategy we felt it appropriate to analyze the legacy investments in the Malta fab.
Gotcha. Very helpful. Thank you very much.
One moment for our next question.
Speaker Change: Our next question will be coming from Krish Sankar of TD Cohen. Your line is open, Krish.
Krish Sankar: Hi, thanks for taking my question and congrats, Tim and Tom, I had two questions. First one, you said you expect revenue growth in calendar 25. Within that, how to think about ASP versus wafer volumes this year and then add a follow-up.
In a phrase, we have a constructive pricing environment. Why?
Speaker Change: You know, when in the marketplace, our customers need differentiated solutions, that's when they come to us. When we talk to them in our engagements, it's centered around what features we can add, what kind of unique customization and enablement that they could bring to maximize the performance in the marketplace.
So our first priority when we think about
The range of complexity of our technologies
Speaker Change: is somewhere in the order of 2x in process steps, depending on
Speaker Change: what platform we're talking about. So when we think about ASP, it's not really a good indicator of value capture, which is the whole ASP is about. It's really about us maximizing the leverage of the breadth of our portfolio to win business that our customers need our solutions for.
Speaker Change: I think this is evident by the fact that we continue to have 90% of our design wins on single-source opportunities because we bring these different...
Speaker Change: Differentiation across a broad range of platforms and end markets. Niels, maybe a couple of examples on some of that differentiation. Yeah, no, you answered it very well, Tom. I mean, for GEF, you know, pricing continues to be very constructive, and it really is due to...
Speaker Change: Australia and focus on essential chip technologies, you know, I mentioned on the last earning calls
Speaker Change: or whether that's any of our 40nm, 20nm ESF-3 type of technologies for automotive.
Speaker Change: That allows us to have a very constructive pricing environment where we continue to be able to differentiate and help our customers develop superior products. And when they develop superior products, they're also able to pay us a better price and thereby a better margin for GF.
Speaker Change: Got it. Got it. That's very helpful. And then, Tom, I had a follow-up for you.
Speaker Change: I'm curious about the impact of China. There are some concerns in terms of the incremental capacity coming from there. On the flip side, there are also some restrictions that could curtail their expansion.
Speaker Change: So I'm kind of curious how to think about opportunities and threat from the region for global foundries.
Speaker Change: Yeah, look, the best defense we have against the capacity build...
Speaker Change: But for China, I think it also gives us great opportunity besides the headwinds you point out about overcapacity. First, let's talk about what fabulous companies in China are telling us.
Speaker Change: They need diversification. In fact, they've coined the phrase NC&T no China, no Taiwan in there and and plus one sourcing strategy
Speaker Change: to serve the markets outside of China, and the natural choice for them is GF.
Great engagement.
Speaker Change: with the fabulous companies of China who want to become international players. On the other end of that, China for China, while we don't have any
Speaker Change: Niels Anderskouv, Unknown Executive, John Hollister, Sam Franklin, Thomas Caulfield, Thomas Caulfield, Sam Franklin, Thomas Caulfield, Sam Franklin, Sam Franklin, Thomas Caulfield,
Speaker Change: to build our own factory. That doesn't mean we don't have plays and opportunities working first with our customers.
and then with partners in China to bring very specific...
Speaker Change: Technology platform very specific to products so that they can have a
Speaker Change: You know our IP, our differentiation, but we need to do this in partnership with customers first and foremost, and then people who are building factories in China.
Thanks Tom, very helpful.
One moment for our next question.
Speaker Change: Our next question will be coming from Ross Seymour of Deutsche Bank. Ross, your line is open.
Ross Seymour: Thanks for asking a couple questions and Tim, Tom and Niels, congratulations on all your new roles. I guess following up the last question, one for you, I guess, probably Tom.
Ross Seymour: Your U.S. customers, any sort of change in behavior, new administration, maybe some other questions on the CHIPS Act, maybe the flip side of it is even greater importance on kind of U.S.-based manufacturing. Have you noticed anything from the Design One perspective or just general behaviors that has changed due to this change in the administration?
Ross Seymour: Yeah, look, I think in the world of uncertainty, especially how are tariffs going to impact customers.
Ross Seymour: The dialogues we're having with them is a little bit like, we're not going to necessarily wait and see. We need to start becoming more diversified. We need to have the ability to source from different regions. And I think it's just...
Ross Seymour: raising the height of importance of diversification of supply chain with customers. Now they don't run out the next day and say here's seven design wins.
Ross Seymour: But the conversations we're having with customers, some with existing products, saying, hey, I'd like to start to multisource that in other regions. Others saying, hey, I need a new supply for these types of applications, GF.
Let's start to talk about how you can
We can leverage your footprint.
Ross Seymour: The short answer to your question is it's becoming real for customers now and while it's in early days and starting with discussions, I can see this materially starting to change.
Niels Anderskouv: We have the footprint the rest of the world is going to try to get and so we're ahead of the curve on that. Niels, is there anything you want to add to that? I just want to confirm a couple of examples. So you look at aerospace and defense, that's probably the most obvious one.
Speaker Change: You know, very strong traction with our two U.S. factories in Malton and Burlington. But you then move into COM Infrastructure and Data Center.
Speaker Change: You know, very critical that silicon that is well understood where it's coming from, so also very focused on.
Speaker Change: on Malta and Burlington from that front. And then, of course, you're seeing automotive and you're seeing automotive players having a lot more focus on, especially the American automotive players, have more focus on where the silicon is coming from. So all of these trends are clearly building in the market space. I think the uncertainty that Tom is talking about and and some of the news you read in the past few years.
Speaker Change: I really build momentum on that front. So what we're doing from a strategic standpoint is we're positioning some of our most differentiated and advanced technologies into Malta and Burlington for that reason.
Speaker Change: This is John, you touched on the CHIPS angle and just to add on, you know, all of these trends and themes that Tom and Niels are referencing with respect to Malt and Bernicke are supported with our strong partnership with the CHIPS office.
Speaker Change: Perfect. Thanks for that, John. I guess as my follow-up, the first quarter I know is seasonally volatile at times, and you did give some directional color for the full year for the whole company and even a little bit by segment, but versus the kind of down 14% at the midpoint sequentially, are there any large puts and takes by various end markets? And if so, what's the cause of that, if it's something more than seasonality? Thank you.
Speaker Change: Yeah, Ross, this is John. It really is seasonality. There's not really any one single item there, and the trend was not unexpected by us. It was a little more than we anticipated a quarter ago, but it's diversified across our various end markets based on seasonality.
Thank you.
And one moment for our next question.
Speaker Change: Our next question will be coming from Harlan Sir of J.P. Morgan. Your line is open.
Speaker Change: Good morning. Congratulations to Tom on your appointment to executive chair and Tim to CEO. Appreciate all of the support over the past few years guys.
Speaker Change: My first question, the impairment charge on the long-lived asset, which I assume is
Speaker Change: What took down your net PP&E by about 13% in Q4?
Speaker Change: The depreciation dropped by about $18 million, quote-unquote, which is about a 1% positive impact here of gross margins in Q4. Is that the right math? Some of that impairment could have been below the COGS line, just trying to figure out the impact to depreciation on the takedown of PT&E in Q4.
Speaker Change: Yeah, Harlan, the impairment charge was implemented during the quarter, so there was some end-quarter effect, and of course that is continuing into the first quarter, and that will build some through the course of the year. Some of those benefits are inventory and then flow through later through the course. But you're generally thinking about it correctly.
Speaker Change: I appreciate that. And then as a part of the impairment charge on PP&E relating to Malta, I assume it's because the team is rolling in year 22, 28.
Speaker Change: 40 nanometer technologies and capacity into Fabi. Can you guys just give us an update here? Are you already qualified in shipping these technologies out of Malta? If not, like what's the timeline for starting to ship production wafers of these technologies?
Speaker Change: and have early customer engagement in Malta as well. So the project is continuing at pace here at GF.
Great, thank you.
And one moment for our next question.
Speaker Change: Our next question will be coming from Vivek Arya of Bank of America Securities. Your line is open, Vivek.
Thanks for taking my questions. For the first one,
If I were to use the...
Speaker Change: sort of the sequential growth rate that we saw last year. I get to a full year sales growth of, you know, roughly 2%, right, or so sort of what you're seeing in Q1. Is that a reasonable way to think about growth? Or do you see any scenarios which can help you grow above seasonally in quarters this year?
Speaker Change: Yeah, let me start out, Vivek, you know, we're really only giving the guidance one quarter at a time. The general trend of growth for the year and sequential growth from here is what we expect. The rate and pace of it, as we indicated, is going to depend on the recovery in the market as customers work through inventory, and we get more clarity on the demand signal for the year. But that's the general trend that we see.
All right, I think that's close to it, yeah.
Speaker Change: the year. So is that supported if you are a growing top line in this range? And then in that 30%, how much is the benefit, not just for that Q4, but also in Q1, of the lower depreciation expenses, the assumptions around wafer pricing?
Factor Utilization, Any Impact of Cancellation Fees.
Speaker Change: this year, right? What would be different this year, in terms of those gross margin drivers, when it comes to depreciation, when it comes to wafer pricing, factory utilization and impact of any cancellation fees? Thank you. Yeah, sure. Sure. Thanks, John, again here. So, yeah, we indicated roughly 30%.
Speaker Change: exit rate for the year based on the, you know, assumption of continued revenue growth sequentially through the course of this year at, you know, at some level.
Speaker Change: and really it is different drivers this year than what we had. The expectation for underutilization payments is really not as relevant now. You know, there's really not a material amount of that and incomprehensible in the first quarter guidance.
Speaker Change: It's driven by other factors, and as you indicated, it's really around the utilization improving.
Speaker Change: Good work to continue to assess and negotiate and push on.
Speaker Change: Unknown Speaker, Sam Franklin, Thomas Caulfield, Unknown Speaker, Sam Franklin, Thomas Caulfield,
Speaker Change: You know, we indicated roughly 15% improvement in DNA cost. That's on a base of roughly $1.6 billion in 2024. So, you know, framing that in dollars, it's about $250 million of improvement in the DNA cost profile for the company in 2025. So those are some of the key drivers.
Speaker Change: for us as we expect, you know, continuous improvement in gross profit margin in 2025.
Please. Okay.
Speaker Change: Now, look, I want to build a list on this. It's really about.
Speaker Change: The three key themes or takeaways for GF, where we sit today, it's about taking share, it's about growing profitability, and it's about growing free cash flow.
Speaker Change: because of the design wins we've been able to fill in our pipeline during this downturn. We're going to grow profitability because with the top line comes higher utilization rates, we're going to leverage the structural costs that we've taken over the last two years, including the productivity improvements.
Speaker Change: and we're going to leverage the fact that these design wins we have on single-source business are rich for mixed costs.
And then the last part is, look, we've invested.
Speaker Change: already ahead for the long term. We have the footprint in place, call it nine billion plus of revenue. So we could be very capital efficient going forward to grow. And so this allows us to leverage that footprint to grow free cash flow.
Speaker Change: So taking share, growing profitability, and growing free cash flow. That's the story of GS as we look forward.
And one moment for our next question.
Speaker Change: Our next question will be coming from Quinn Bolton of Needham & Company, LLC. Your line is open.
Quinn Bolton: Hey, congrats, Tom, Tim and Niels. Niels, I might have missed it, but you went through the growth outlook for each of the end markets. I may have missed it, but did you give us a sort of sense of what you thought the home and IoT business would do in 2025?
Quinn Bolton: I didn't mention it earlier, but we do think that it bottomed out in 2024. We're starting to see green shoots, you know, across the customer base. You've seen the same, read the same news and releases that came out this month.
Quinn Bolton: and you see some of the companies that are almost 100% focused on IOT, you're starting to see the revenue coming back, you're starting to see the inventory being drained, so I have a similar take on that, that IOT brought it up last year and we're going to get back to growth this year.
Speaker Change: Perfect. And then just, John, on the gross margin walk to...
Speaker Change: 30% by the fourth quarter. Is there any sort of lift in in ASP assumed in that it looks like ASPs were sort of down sequentially in each of Q2, Q3, Q4 of 24. I'm wondering if you get a little bit of price and recovery just driven by mix.
you know, in 2025. Thank you.
Speaker Change: Yeah, so we see a generally constructive pricing environment for the essential chip technology that we that we offer as Niels indicated, you know, we're not we're not operating in bulk CMOS per se. It's very specialized and differentiated.
for the markets we serve.
Speaker Change: Generally stable pricing. We have we have been selectively Taking some price back in a few cases, but you know in general There is a mix of price dynamics depending on the technology and application, but generally a stable stable environmental price
Thank you.
Sonja, we'll make this the last question.
Sam Franklin: Certainly, I would now like to hand the conference back to Sam Franklin for closing remarks.
Speaker Change: Very good. All right. Thank you, Tonya. Thank you, everyone, for joining us on the call today. Just as a reminder, we will be at the Wolf Research Semiconductor Conference tomorrow, and we'll also be participating in the Morgan Stanley TNT Conference on the 4th of March. Look forward to seeing you there. Thank you very much for joining today.
Speaker Change: And this concludes today's conference call. Thank you for participating. You may now disconnect.