Q3 2025 GlobalFoundries Inc Earnings Call
Speaker #1: Thank you for by standing the and GLOBALFOUNDRIES Inc. of fiscal 2025 financial Results conference call . At this time , all participants are in a listen only mode .
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Speaker #1: And now, I would like to introduce your host for today's program, Eric Chow, Investor Relations. Please go ahead, sir.
Speaker #2: Thank you . Operator . Good morning , everyone , and welcome to third GlobalFoundries quarter Call 2025 Earnings . On the call with me today are Tim Breen , CEO , Niels Anderskouv President and chief Operating Officer .
Speaker #2: And Sam Franklin interim CFO . A short while ago , we released GF's third quarter financial results , which are available on our website at investors , along with today's accompanying slide presentation .
Speaker #2: call is being recorded and This a replay will be made available on our Investor Relations webpage . During this call , we will present both IFRS and non IFRS financial measures .
Speaker #2: The most directly comparable IFRS measures and reconciliations for non IFRS measures are available in today's press release and slides . Please accompanying financial results are these unaudited and subject to change .
Speaker #2: 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 future tense .
Speaker #2: You should not place undue reliance on forward looking . Actual statements results may differ materially from these forward looking statements , and we do not undertake any obligation to update any forward looking statements we today .
Speaker #2: You should not place undue reliance on forward looking . Actual statements results may differ materially from these forward looking statements , and we do not undertake any obligation to update any forward looking statements we today make For more information about factors that may cause results to differ materially from forward looking actual statements , please refer to the press release issued today we , as well as risks and described uncertainties SEC filings , including in sections in our the caption under Risk in our Report on annual Form 20 F in any and reports on Form 8-K with the furnished SEC .
Speaker #2: In current upcoming be events , terms of participating in a we will chat at the Global UBS and AI Technology conference in on Scottsdale December 2nd .
Speaker #2: In addition , we are looking forward to hosting a public webcast investor webinar at 10 a.m. Eastern Time on December 3rd . At this event , we will provide a business strategy technical and update on the opportunities for GF across the rapidly evolving physical AI market .
Speaker #2: We will begin today's call with Tim providing a summary update on the current business environment and technologies . will then Niels discuss our recent design wins , highlights and traction across the end markets .
Speaker #2: After which, Sam will provide details on our third quarter results and fourth quarter 2025 guidance. We will then open the call for questions with Tim.
Speaker #2: Niels and Sam . We request that you please limit your questions to one with one follow up . I'll now call over to Tim turn the .
Speaker #3: Thank you . Eric and welcome everyone to our third quarter 2025 earnings call . Before I begin , I wanted to express my sincere gratitude to John for his and contributions to GF .
Speaker #3: We wish him the best . GF service delivered a strong third quarter revenue , gross with margin , operating margin and earnings per share at end of the guidance the high ranges for the fourth quarter , we saw consecutive strong double digit percentage year over year revenue growth , both in our automotive and communications infrastructure and data center end markets , which together represented 28% of our total third quarter revenue .
Speaker #3: We expanded third quarter gross margin , both sequentially and year over year , which is our relentless drive to growing profitability with the strength of our differentiated product portfolio , which is highly suited to secular representative of growth markets .
Speaker #3: The richer mix of high businesses growth and the clear value proposition of our global footprint , GF is laying a strong foundation for a future robust , profitable of growth .
Speaker #3: GF is truly a global company . I recently had the privilege of visiting customers and employees across the and Asia Europe , including at our Marquee Global Technology Summits .
Speaker #3: three continents . In all Having met with over prospective 100 current and US , . GF brings a unique combination of differentiated technologies that meet the needs of today's secular trends , including the scaling of AI in the data center and the proliferation of AI into the physical world .
Speaker #3: As well as the need to deliver those technologies from a resilient global footprint . Let me address each of these exciting areas . Firstly AI in the , scaling data center with optical networking .
Speaker #3: After years of R&D capacity investments and innovation with deep customers , GF is carving out a strong position in the optical market at exactly the right time .
Speaker #3: Recent commentary hyperscalers , GPU by makers and other the data center ecosystem have players in emphasized for silicon photonics in up , scale scale out , and across networking .
Speaker #3: The OCP Global Summit highlighted a last growing month towards pluggable silicon shift photonics co-packaged optics as alternatives to traditional copper interconnects. Over the next several years, where legacy semiconductor technology meets the increasing demands in data transmission, it will be unable to satisfy the needs for speed, bandwidth density, and power efficiency.
Speaker #3: Propelled by expected this transition , we estimate our serviceable addressable market for optical networking will grow by kegger of a approximately 40% through 2030 .
Speaker #3: We expect GF to be a key participant in this substantial growth and are encouraged by our track record of highly success in many applications that support optical networking , including our silicon photonics platform as well as our high silicon performance germanium and FDX technologies .
Speaker #3: In alone , won three optical we networking designs with new customers worth over Q3 $150 million of projected lifetime revenue . With the first tapeout for one of these designs already completed in the quarter .
Speaker #3: Silicon photonics alone is on track to reach over 200 million of revenue in 2025 , close to doubling year over year continues to as the market require higher and higher performing pluggable optical transceivers and is co-packaged optics adoption meaningfully Ramps .
Speaker #3: from 2027 , we envision silicon photonics become to $1 billion plus run rate business for GF before the end of the decade . To support this growth , we will continue to partner with our customers and make the investments to grow necessary our scale , as well as organically adding or inorganically new complementary capabilities with gross margins significantly above our target model , we expect long term growth in silicon photonics to provide a tailwind to GF for years to come .
Speaker #3: The second significant and rapidly evolving secular trend is the advent of capabilities deployed AI of broad range applications in the physical world being discussions with our customers , we believe ongoing the center AI buildout is merely a prelude to the next step of the AI revolution .
Speaker #3: Real world applications in the physical space from autonomous vehicles and drones to next generation medical devices and ultimately robots . humanoid We expect the marriage of artificial with real time sensing , control and compute capabilities to unlock new , previously unthinkable and accelerate applications demand for GF's essential technologies .
Speaker #3: technical The demands of this next phase of AI technical strength in developing feature rich technologies that play a critical role align which is across complemented with our recent investment in MIPs , which will accelerate the development of real time processor IP in the physical world of AI , the need vast market will amounts of feature power rich , low chips that connected are secure with GF's effective .
Speaker #3: We everything that believe moves will become autonomous . Everything that senses will be intelligent , and many devices that think will also actuate in the world real .
Speaker #3: GF's product portfolio enables us to play a critical role in this coming revolution . For efficient power management . Our Ft FinFET and platforms are specifically designed to always support on ultra low leakage , so edge devices can run longer and more reliably for robotics and real world object Our manipulation .
Speaker #3: B.c.d and BCD platforms a power offer efficient architecture that is ideal motor and for joint control , as well as battery management . Lastly , for intelligence , sensing and detection , our recently launched UX as well as our established FFT and capabilities FinFET , enable accurate multi-mode sensors with capabilities across radar , ultra wideband audio platform , by coupling all of these technologies with imaging and embedded non-volatile memory solutions , SF , Sram , MrAm , and we can go enable further to of secure smart processing in a range of physical applications across all of these , GF served applications .
Speaker #3: We believe emerging the physical AI opportunity will than become more an $18 billion Sam for GF by 2030 . Our momentum with customers is accelerating in including edge and physical AI applications .
Speaker #3: points The proof are already in motion , and in the third quarter we additional several design secured wins across applications such as AI enabled glasses , AI enabled hearables , AI enabled home appliances , and AI enabled software defined vehicles .
Speaker #3: The last theme that remains top for our of mind customers is the critical importance of geographically diversified semiconductor supply . Recent geopolitical conflicts , tariffs and export controls are a consequence of an increasingly fractured and globalizing world .
Speaker #3: As a governments remedy , have sought to encourage industry players to reshore or onshore their sourcing of essential chips . It is now customers to common require not for request non-china non Taiwan supply chains , and is now also becoming increasingly require US specifically manufacturing as many of our customers have now publicly stated , partnering with GF in Reshoring technologies to the US has become core to their supply strategy by aligning our investments to our customers requirements .
Speaker #3: We are positioning GF to gain share from this secular trend our . Given unique and advantaged global across footprint the US , Europe and Asia June , with support from half a dozen leading .
Speaker #3: , SpaceX NXP , Qualcomm , and leading several other technology companies , we announced that we broadened the envelope of our investments to 16 billion in order to expand us In manufacturing and advanced packaging capabilities facilities in New York and Vermont , with support from state and federal , local governments .
Speaker #3: We have established a world class semiconductor ecosystem in the US in our , rich with employee talent as well as diverse suppliers , customers and OEMs the ongoing section .
Speaker #3: US , in the structural reshaping global supply chains is of well underway , and that GF is at we believe forefront supporting this transformation customers increasingly seek to Notwithstanding of mitigate as our geopolitical risks and enhance their supply chain resilience , GF is helping them navigate trade and optimize their sourcing decisions .
Speaker #3: An excellent recent example of the progress we are making is our announcement with Silicon Labs to its wireless complexities SoCs on GF's new ultra low power platform out of our Malta , New York fab .
Speaker #3: Beyond the US , we have also announced plans to invest an additional €1.1 billion in our Dresden fab , supported by incentives Federal German government and the State of Saxony .
Speaker #3: Under the framework of the European Chips Act , the investment will allow us to increase production capacity to more than 1 million wafers a year .
Speaker #3: In from the the end Dresden by of 2028 , making it the largest site of its Europe . Approaching giga fab scale . Driven by the needs of key customers such as European , Infineon or and Bosch .
Speaker #3: We are well placed to meet customers our requirements kind in of EU based manufacturing from our world class site . We we are believe only in the early stages opportunity and see strong our decade long validation of strategy to build and flexible manufacturing capabilities scale across our fabs .
Speaker #3: An area where always leader for the been a of this industry intends to do so continue to well into the future and . In conclusion , GF , are trusted committed to being a customers partner to our , utilizing our differentiated chip GF has technologies and global manufacturing capacity .
Speaker #3: We are well positioned we the long driving our industry years of work and preparation have established a solid for us to foundation capture these inflection point opportunities , all made possible by the dedication of our global team .
Speaker #3: With that , over to you , Niels .
Speaker #4: Thank you , and Tim , welcome to everyone on the . GF's portfolio of diverse and differentiated solutions are enabling us to win more with our call serve the defining trends of our secular .
Speaker #4: In the third quarter , we nearly 150 new design across our end wins markets , more than secured 50% growth from the same quarter year ago .
Speaker #4: a last four quarters , over wins were awarded 90% of our design sole source on a basis to a consistent point of the depth our of partnerships and the of our chip value technologies GF , .
Speaker #4: our One example of strong and solutions includes our recent technology agreement with TSMC 650 volt and 80 volt gallium nitride This strategic will proof to serve and expand its set of customers across a broader range of power applications in markets such as center for , industrial and technology . automotive .
Speaker #4: our One example of strong and solutions includes our recent technology agreement with TSMC 650 volt and 80 volt gallium nitride This strategic will proof to serve and expand its set of customers across a broader range of power applications in markets such as center for , industrial and technology .
Speaker #4: To capitalize on this opportunity to serve the US market, given our existing $200 million GaN capabilities in Burlington, we plan to license GaN technology at our Fab Vermont with full ramp-up beginning in the second half of 2026.
Speaker #4: We made significant strides in our diversify the business and accelerate the growth of highest our product margin platforms . I'm encouraged about the number expansion in of applications serve the , including exciting an areas such as strategy to , quantum computing , software defined vehicles , and smart glasses .
Speaker #4: Given the importance of technology , enhanced features performance requirements from our customers and the , these fast growing markets support accelerating growth and improvements to our product mix .
Speaker #4: Supporting margin expansion while we grow and have more diversify room to progress is , our evident in our already results have organically grown our automotive end market more than .
Speaker #4: in the last five years . It now comprises around a We quarter of our wafer revenue , and we expect automotive to approach revenue in 2025 .
Speaker #4: We have line of sight for automotive to become a multibillion dollar for us through the end of the decade , the very business encouraged by the strength of our leading silicon photonics products and see strong double digit growth as it nearly doubles in revenue in 2025 compared to 2024 .
Speaker #4: Application of our silicon photonics portfolio within communications infrastructure and data center in market is not only margin today , but accretive to our accretive long term gross margin objectives our as we expand our capacity to meet demand and as the for demand photonics grows , we to expect benefit from additional mix tailwinds .
Speaker #4: Lastly , we've seen strong for fast growing communications which we expect to applications , contribute approximately $100 million of revenue in infrastructure and satellite data center up from de minimis market , momentum The 2024 .
Speaker #4: A portion of Satcom served on our platform is a margin-accretive product, thanks to its differentiated features, cost profile, and efficient scale.
Speaker #4: Despite having an ASP wafer lower corporate average index , the satellite launch is expected per grow to 150% and Satcom subscribers set to double in the next five years .
Speaker #4: We expect the same for semiconductor this opportunity to be than our 1 billion through the end of the decade , with an GF as anchor supplier within the end markets we serve , GF is well positioned to capitalize on several key secular inflections , and we are making continued progress towards transforming the mix of our business towards the fastest growing at most profitable product platforms .
Speaker #4: With that , let walk you through the key highlights for the quarter by end market automotive represented approximately 18% of the quarter's total revenue in the third quarter .
Speaker #4: We are strong in automotive, winning new design wins for 12 unique customers, highlighting the breadth and depth of our diverse product portfolio.
Speaker #4: Third quarter design wins and new tape outs advanced included momentum image sensors , body and chassis , incus , high performance audio amplifiers , advanced tire monitoring sensors , Ethernet switches and controllers .
Commentation infrastructure and data center represent approximately 10% of the quality total revenue.
I would like to highlight three new obstacle networking designs in the third quarter. These include a significant assignment with coherent and new engagement with a top three U.S. TIA driver supplier, and a win with a leading China-based venture to serve that fast-growing market.
Collectively, these programs deepen opposition in next-generation optical interconnects that are critical to AI data center growth.
Japan-based satellite program, as well as an additional ground terminal and low noise amplifier.
All the progress, we're making across Optical networking, satellite communication, and Quantum Computing. If like the strength of our product portfolio and the trust, our customers place in us with these Partnerships and our expanding pipeline, I'm confident, they are well, positioned to capture the long-term growth opportunities ahead.
I now pass the call over to Sam for debe, dive on our financial results and guidance.
Thank you Niels for the remainder of the call, including guidance other than Revenue cash flow, net interest income and third quarter capex. I will reference non-ifrs metrics which are included in today's press release and accompanying slides.
As Tim noted, our third quarter results came in, at the high end of the guidance ranges, we provided in our last quarterly update.
We delivered third quarter revenue of 1.688 billion dollars flat over the prior quarter and a 3%. Decrease year-over-year.
We ship the approximately 602,300. Mm, equivalent wafers in the quarter up 4%, sequentially and up 10% from the prior year period.
Wait, for revenue from our end markets accounted for approximately 88% of total revenue.
Non-weight for Revenue, which includes revenue from reticles non-recurring engineering, expedite, fees, and other items accounted for approximately 12% of the total revenue for the third quarter.
Let me now provide an update on our Revenue by end markets.
Smart, mobile devices Revenue, increased approximately, 10% sequentially, and decreased approximately 13% from the prior year, period.
The year-over-year change was principally driven by 1 Time, pricing adjustments made in the prior quarter with a limited number of dual Source. Customers going forward, we expect to gain a larger share of wallet with these customers.
Automotive Revenue decreased the approximately 17% sequentially and increased 20% from the prior year period.
The sequential change was the result of customer shipment timings consistent with the prior year period.
Year-over-year, Revenue gains in our automotive and Market were driven by Cher and content expansion.
and we remain on track to grow Automotive Revenue in the mid-, teens percentage range for 2025,
Home and industrial IoT revenue decreased approximately 14% sequentially and 16% from the prior year period. This was principally driven by a year-over-year reduction in wafer revenue associated with aerospace and defense applications, as certain products reached end of life. With new applications now taping out, we expect to move into production in 2026.
Finally Communications infrastructure and data center Revenue increased approximately 2% sequentially and 32% over the prior year period.
With improved visibility into our fast, ramping Optical networking and satcom businesses. We now expect full year, 2025 Revenue in this end Market to grow in the low 20s percentage range.
Up from The High, Teens Outlook, indicated on prior earnings calls.
For the third quarter, we deliver growth profit of 439 million.
Which was at the high end of our guided range and translates into approximately 26%. Gross margin.
Notwithstanding flat sequential Revenue, gross margin, expanded sequentially and year-over-year, approximately 80 and 130 basis points respectively.
Gross margin expansion. Remains a key focal area for GF. And we believe we're beginning to see the benefits associated with a shift towards a more accretive product mix and increased revenue from non- wafer, technology services.
R&D, for the quarter was 111 million and sgna was 68 million.
Total operating expenses of 179, million were up marginally quarter over quarter and represented approximately 11% of total revenue.
We delivered operating profit of 260 million for the quarter and an operating margin of 15.4%, which is at the high end of our guided range and 180 basis points above the prior year period.
Third quarter, net, interest income was 18 million and we incurred income tax expense of 46 million in the quarter.
We reported third quarter, net income of 232 million, and increase of approximately 1% from the prior year period.
As a result based on a fully diluted share count of approximately 559 million shares. We reported diluted earnings of 41 cents per share for the third quarter.
Which was at the high end of our guided range.
Let me now provide some key balance sheet and cash flow metrics.
595 million.
Capex for the quarter, was 189 million or roughly 11% of Revenue.
Adjusted free cash flow for the quarter was 451 million which represented an adjusted free. Cash flow margin of approximately 27% in the quarter.
At the end of the third quarter, our balance sheet remains strong, with our combined, total Cash, Cash, equivalents and marketable, securities at approximately 4.2 billion.
Our total debt was 1.2 billion and we also have a 1 billion revolving credit facility which remains undone.
Next, let me provide you with our outlook for the fourth quarter of 2025.
We expect total GF Revenue to be 1.8 billion plus or minus 25 million.
Excluding share-based compensation. We expect total operating expenses to be 210 million plus or minus 10 million.
We expect operating margin to be in the range of 16.8% plus or minus 170 basis points.
At the midpoint of our guidance, we expect share-based compensation to be approximately 63 million of, which roughly 16 million is related to cost of goods sold.
We expect net interest and other income for the quarter to be between 4 million, and 12 million, and income tax expense to be between 40 million and 62 million, which translates to an effective tax rate of approximately mid to high teens percentage for the full year 2025.
Based on a fully diluted share count of approximately 559 million shares. We expect diluted earnings per share for the fourth quarter to be 47 cents, plus or minus 5 cents.
Finally, a brief update on our Capital allocation activities.
GF continues to generate strong consistent. Adjusted free cash flow while retaining healthy balance sheet fundamentals in 2025 alone. We have significantly reduced our outstanding debt. Continue to optimize our capacity, footprint by technology transfers and completed critical Acquisitions to enable future growth, such as the recently closed MIP transaction.
Looking ahead to 2026. We expect to continue with our objectives to reinvest in the business, as well as planning for a systematic approach to returning, an appropriate portion of free cash flow to shareholders.
In closing, I want to express my appreciation to our employees worldwide for their dedication and execution. That helped deliver this quarter's strong financial performance.
Over the last few years, I've had the privilege of leading our business finance and operations functions working with exceptional team members from around the world. And I remain focused on executing a smooth transition for our finance and operations functions and partnering with Tim and kneels to advance our long-term strategic objectives.
With that, let's open the call for Q&A operator.
Certainly. And our first question for today comes from the line of Ross Seymour from Deutsche Bank. Your question, please?
Hi guys, thanks for letting me ask a question. I want to ask 1 long-term 1 and then a shorter term 1 uh on the long term 1. You went into great details, about your silicon photonics business but I just wanted to ask 2 follow-ups on that first. What do you believe to be the core differentiation of what? GF offers versus any other Foundry peers and second what sort of capital and capex needs to be applied. If you're going to a quintuple that business over the next 5 years,
Very good. Thank you. Uh, Ross. So, maybe I'll start with the first 1, I mean, just to recap, right? This is gf's, you know, call play in the data center. We've talked about 2 sets of data center priorities. 1, of course, being power that we spoke in a bit about in our Gan announcements, but then networking Optical networking specifically being the secular Trend that we see the industry. Now, fully adopting both the plugable optical transceivers, and the transition to core package, uh, Optics. Uh, in many ways GF was early, uh, in developing, silicon photonics. We've been doing this for now, more than a decade, as a result, you know, we believe we have best-in-class device performance, you know, really focusing around the electrical to Optical the optical to electrical, excuse me. Um, signal conversion, uh, we do that through Innovation around device structure around material and increasingly around packaging, and especially as we make the transition to co packaged Optics. Some of the Innovation we've been driving around how those packages get put together. We'll play I think a critical role in that role and that adoption. Um, I think the other aspect of differentiation is the ecosystem, we have been building around it to enable the
And also to enable, you know, critical components. For example, our announcement with Corning around the detachable fiber connector a very important part of how can you make these devices? Both High performing, but also serviceable maintainable in those data center uh context. So I think we're very uh, we're very bullish about the adoption story. We're very bullish. Also about GS uh differentiation. I'm going to let Sam comment about the capex uh or autonomic
Yeah. Hey Ross, just a a quick follow on there. As far as the, the capex is concerned. Look, we've been on a bit of a journey as you know, from a capacity and a capex point of view for really The Last 5 Years, you know, we we began that Journey at roughly 2 million Wafers and capacity a year and and we served in New York and Target to get to 3 million Wafers of capacity. Now, as we've gone through that, obviously the demand environment has changed slightly. And so over the course of the last couple of years, you've seen us moderate some of that capex, you know in and around the 10% of Revenue versus that sort of broader model, Target of roughly 20%. So looking out to 2026. Obviously it's a little bit too soon to guide capex specifically but you can infer from what's been saying around the opportunity that we see within silicon photonics that we'd expect to see a pickup in capex, going into next year. Call it you know the midpoint of that range that we've trended in over the course of the last few years.
Is as well. So hopefully that helps, you know, as we think about it Beyond 2026, obviously the foundational principle of why we invest in our capacity is tied to customer demand. And so, if it's to be seen around the the ramp in demand for silicon photonics and the continuation of the customer Partnerships that we've certainly seen. During the course of this year, it would justify, you know, incremental capex, which is a highly value accretive and market for us and and maybe Ross if I could just add a little bit more color on the nature of that capex for photonics wafer production, you know, these are highly valuable Wafers. So from a wafer volume point of view, It's relatively small from wafer Value Point of View, relatively high and so, very capex efficient when it comes to adding wafer capacity. Some of the capex that Sam alluded to will also be around packaging, uh, capacity. Because that goes alongside especially the core package Optics, transitions. So that will be both. Both of those will be featured in 2026.
Great. Thank you for those guys. I guess as my follow-up in the shorter term, question is just in the fourth quarter, just want to talk about the end markets. Uh and what you're assuming sequentially in your Revenue guide, you gave the full year guidance to automotive and come data center. So those ones seem to be quite obvious. But I guess what I'm getting at is the smart mobile device side of things. How are you seeing that in the fourth quarter? How did the ASP Cuts, lead to any unit, share gains? And and when do you think that segment could return to year-over-year growth?
Sure Russell kick off there and then you know, let Tim and Neil's had any other commentary in terms of the long-term opportunities that we're seeing in smart mobile more specifically. But, you know, you you hit the nail on the head as it relates to some of those dynamics that we saw in the third quarter. And and the way we think about our business for us, it's really on a year-over-year basis. And look, we've continued to see very strong year-over-year growth from an automotive point of view in the third quarter Compton, construction and data center was up 32%. And we've also had a high contribution associated with wafer from non wafer Revenue Services. So you know all said and done, we're seeing the right momentum in growth as it relates to uh the end markets where we see most of that accelerated opportunity. Now, look, the the balance on that and again I'll talk more specifically around the fourth quarter, but in the context of the full year is that you can infer that from a mid-teens expected full year growth in autumn.
That's sequentially. We'd expect quite a strong ramp going into 2024. Uh excuse me. Going into Q4 which is quite consistent with the 2024. Sequential ramp that we saw last year as well. Uh, similarly as it relates to coms infrastructure and data center. You know, we provided that update to updated guidance. Now in the low 20s range so you can infer what sequentially that looks like. Now the the if you like the offset as it relates to smart mobile devices,
Yeah, thank you Sam. I think on the longer term, Ross for a smart mobile, you know, we very focused on where we can be the most differentiated. And so I'd say, you know what, we see great Traction in areas like audio, haptics Advanced display, Advanced Imaging areas, where GF Technologies, play a key role both by the way, in the handsets of today. But also engagements like we mentioned in areas like smart glasses that form factor becoming increasingly viable. I think from a high volume, uh perspective and so we see longer term, good traction um in in smart mobile, in those differentiated uh areas and I think that's true. Also in the iot space, obviously you've got a broad set of end, markets contained with iot, but you see contraction in medical you you could Traction in in industrial. Um, and even in consumer, some of the announcements we've made including companies like Silicon Labs again indicating good. Long-term growth in those uh those markets as well.
Thank you.
Thank you. And our next question comes from the line of David o'conor from BMP paribus. Your question, please.
Great. Good morning, and thanks for taking my question. Uh, maybe a question on the onshoring side of things, um, so forth. You can congrats on the, uh, expanded partnership there with silicon Labs. You know, after the Apple D last quarter seems to be increasing demand and traction for the US. Um onshore manufacturing that's starting to come true now. Maybe could you just talk about what that pipeline actually looks like, and then related to that? Just your ability to support, additional really high volume women out of the
Yeah. Multifab thanks.
No, thank you for that question. Obviously, it's a trend that we have been, you know, quite public about the engagement from customers over the last, you know, couple of quarters now, um, we, you know, just for those keeping score. We've had, you know, 8 specific customer announcements regarding us, on-shoring, if you just do a rough cut of how much that customer set spends in terms of silicon in our address for Market, you're talking about, you know, between 15 and 20 billion dollars of of total spend. And so these are, you know, large representative customers that have you know, significant opportunity, um, to reshore capacity to the US. And from that point of view, we see a very strong, you know, share gain opportunity for GF, and they're coming for the footprint, but they're also coming for the differentiated, uh, technology. So we see that, it's very, uh, very strong. There's a significant Pipeline on top of that, to, to your question, a lot of other customers saying, look, what can we do, when can we do it? Uh, and that again, that that match of capacity and footprint, uh, being very important? I think, from a timing point of view we're talking about ramps in 2027, uh, largely and and Beyond, uh, and this is a secular shift that's durable. And so,
obviously, we're going through those product, you know, design wins product, qualification cycles, that that are necessary. Um, us is a large part of this and obviously very visible. Um but actually the story is also replicating in areas. Outside the US, I think our announcements in dressed in a couple of weeks ago for our, you know, relatively smaller expansion Investments. We're making, there are still backed by significant Europe for Europe. Let's say customer demand. Um, key players like Infineon like nxp, like omo, like Bosch, all kind of public.
Supporting the Investments, we're making there to build that Fab to even further scale. And obviously, with that comes, you know, very accretive economics for, uh, for that Fab. Um and we're even seeing examples outside that in Singapore. And I think 1 that we mentioned in the prepared remarks, you know even Chinese fabulous companies looking to have their own version of a diversified supply chain. Uh the north flash wind that we had, we mentioned for Q3 uh is a good example of that moving to uh to Singapore. So I think the story of Supply diversification is just, you know, extraordinarily clear globally and only picking up in Pace.
Did you have a follow-up David?
Uh, yes, I do. Uh, thanks for that caller. Tim, uh, maybe one on the technology side, um, on the gallium nitride, on the GaN side of things. So, um, you know, TSMC recently exited that GaN business. Um, at the time, they cited kind of low profitability and just the competition; there was quite intense. Um, can you maybe talk about your GaN strategy? How that is kind of different, um, and how are you addressing these concerns? Thanks, guys. Yeah.
No, thank you for the question. Or maybe I'll start and then kneels can add a little bit of color as well. Um, look, we're very excited about, uh, Gan. You know, from a simple technology point of view, this is a way of achieving, you know, significant Improvement in power density significantly, reduce losses in switching and power conversion. Um, if you think about where that matters, of course, 1 of the areas that matters, most, uh, is in the data center, right? When you're talking about enormous amounts of power consumption, based on the buildout Gan plays, a critical role in that.
A fact that is, you know, well tracked, you know, could track record in various complex Technologies, uh, and 1 that customers trust to to deliver in the future. So I think our strategy is quite different than tsmc. And it's a case of us focusing on where we're a natural athlete, uh, and they're focusing on where they are. And I think this is a good win-win uh, for both of us Niels. Yeah. Maybe just to add to that. Um, and you, you may recall from 1 of the previous earnings calls, our strategy. And again, um, is is very focused around highly reliable. Um, you know, save high quality, uh, devices. And obviously, in data centers that is that is crucial, you know, to ensure there's no no downtime in addition to that, um, we are actually, uh, focused on the technology in a very similar fashion to the BCD Technologies. Meaning we are not just going for the discrete, uh, device implementation, but we're adding Technologies around the discrete, uh, devices that enable us to get more differentiated and higher performing, and more reliable solutions to the
Market. So, um, very, very, very, very focused strategy from our side. A lot of cost of interest, like, uh, like Tim said, in the U.S. footprint is, uh, is really just the cherry on the top.
Thank you. And our next question comes from the line of Chris Castle. From Wolfe research. Your question, please.
Yes, thank you. Good morning. Uh, the first question would be on, uh, gross margins and and utilization. Um, and uh, you know, obviously you have to step up here in, in the fourth quarter. But how should we think about that as we go into uh, the new year that typically you see some seasonality as you go into the March quarter and you know, ultimately um, you know, I think what drives the gross margins is going to be uh getting utilization rate up. Could you give some commentary on where you see that going as you go into next year?
Yeah. Hey Chris I'm here happy to to give that. I'll probably start with the third quarter Dynamics and and then I think that's a good layup into how we're thinking about the 4
Quarter as well. So look taking a step back. Third quarter, gross margin up, 80 basis points, quarter over quarter up about 130 basis points year over year. Now, that's on a declining Revenue profile on a year-over-year basis. Flat revenue on a quarter quarter basis. So you know we set out with a very clear Mission at the start of this year, which was notwithstanding some of the consumer driven Department focusing on improving profitability. Consistent free cash flow generation and that's really what you're seeing come through in the third quarter actually all the more notable
Is well, Chris given the fact in the third quarter of 2024 you know we still had about 40 to 50 million dollars of underutilization payments falling through at that point. So call that roughly 2 to 3 points of margin benefit in the third quarter of last year that that we didn't get in the third quarter of this year. So it's very much a case of where we've been focusing on, on opportunities to improve the profitability structure within the business and also continuing to mix into a creative and markets. And what you're seeing is is really a reflection of that starting to come through. Obviously we've we've increased and and had some incremental benefit come through from our non wafer technology services that also a a strong leading indicator in terms of, you know, where we see future production ramp as well as as we kind of develop those projects from a mask, a reticle non-recurring engineering perspective as well and and really kind of embarking on those new projects with customers a little bit of of benefit came through.
Obviously from DNA, which we talked about at the start of this year. And and utilization has has been probably the, the lowest of the contributors towards that margin Dynamic. You know, we started out this year in in roughly the the low 80s. We've been trending around the kind of mid 80s for the last couple of quarters, you know, possibly a minor pickup in the fourth quarter but again just switching to the fourth quarter. You know what you're seeing is roughly 3 points of incremental.
Benefit on a on a year-over-year basis at the midpoint of that guide. And actually from a, a guide to guide perspective, about 3 points as well. And and again, that's really a Confluence of those initiatives that we focused on from continuing to improve the mix Dynamics, focusing on productivity, improving the cost structure of the business and and obviously taking a modest benefit from a utilization and DNA perspective.
So do you have a follow-up? Chris?
Something that consolidation would affect some of your customers. Uh, you know, what your thoughts on that going forward of, you know, the potential effect of of consolidation on among your customers and their mobile business
Yeah, thank you Chris. And, you know, I I presume you're largely referring to the announcements by skyworks and and corvo. Um, obviously, you know, we're not to comment on that merger itself. But look, I'd say for both companies, we have a very long, uh, track record of serving, both of them, um, and those Partnerships go back even before GF, with GF, um, in some parts of our business, and it's partly because of Technology leadership, um, they're obviously, you know, leaders in the RF field and have been, you know, key Partners For Us in building and, and deploying our road maps. And so that's been a very tight collaboration in the case of both those, uh, companies. I think both of them also increasingly focused on Supply security, uh, us manufacturing and so on. So I think all the ingredients for strong relationships, strong, uh, future business are there with both companies. I don't think that will change whether they are 1 company or 2 companies going forward.
Thank you.
Thank you. And our next question comes from the line of Harland sir from JP Morgan your question, please.
Hey, good morning. Thanks for taking my question. You know many of your
Customers are coming off the bottom of the nearly 2 year, long down cycle, right? But not seeing that sort of early cycle, kind of strong recovery trajectory profile. But instead seeing a return to a more normal kind of seasonal profile in their businesses. You guys are already starting Wafers for the March quarter. Giving you a manufacturing lead times. I think normal seasonality is for the team is for revenues to be down about 10. 12% sequentially. Is that how you are seeing the shipment profile early next year? Or maybe could it be down? Slightly more sequentially? Just given non-weight for revenues, potentially kind of normalizing back to that, sort of 1011 of the mix.
Yeah, I hate Holland. Sam here. I just happy to take the the first part of that question and and look I think 1 of the Dynamics that you need to keep in mind particularly when you look it up business is the diversification that we have across the portfolio today and and actually increasing diversification, you know, you take Automotive content for a data center, you know, that continues to contribute a larger piece of the overall Revenue stack. And so, the point there being that, there's no single cyclical Trend that actually is the determining factor in terms of where we see the revenue profile in the business. Now, it it's a little bit too soon to go into guiding the first quarter of 2026. At this point, I think you've heard from our customers that, you know, they're expecting, as you say that that kind of tip.
Range, which, which you outlined on the call and, and maybe just to cover off a little piece of your second part of your question which is around the non wafer revenues look. This has been, you know, a healthy Tailwind as we've gone through this year, we signaled it on prior calls. Some of that, really is a function of where we see customer dialogue and the timing of new products for our customers, the timing of new engagements on Engineering Services as well. And so, that's what you're seeing starting to come through really in the third quarter, and, and obviously, we guide it 13% expectation of Revenue in the fourth quarter as well. So really a function of those activities but, you know, more broadly, you know, this plays very much to the increased Suite of services. That as GF, uh, we're able to offer our customers and clearly as we think about 26 and Beyond and continuing to integrate mips into the business and the offering that they have in terms of expanding Suite of services for customers, you know, those non
Wait, for technology Services, become an increasingly important component of the business.
Did you have a follow-up? Thanks for that.
Yeah, I did. So, um, thanks for giving us an update on the diversification efforts. Obviously, geographical diversification and supply chain diversification are extremely important for your customers. With that in mind, can you guys just give us an update on your return for China strategy? I think you guys announced a partnership with...
Presented Semiconductor, in China. Last quarter, the GF team, I think has had very strong success within the domestic China Automotive markets. For example, with your differentiated technology and for your non-china customers, obviously, they want local Supply to ship to their China customers. Right. So what's the timeline for transferring qualifying ramping production of your manufacturing processes at then semi and is the business model royalty based? Or are you splitting profits? Any, any insights here would be very helpful.
Uh manufacturing design from from our customers um to make those available locally. Uh in in in guano as you as you mentioned. Um that Technologies typically in the microcontroller space are automotive Imaging. Uh increasing the also Technologies in the power uh space all relevant for that local automotive uh build out and and and Beyond. Um, I'd say customer traction has been very, very strong. Uh, we spoke briefly in the prepared remarks about our global technology Summits, we do 3. Um, the third of which was in Shanghai, uh uh with you know, very, very strong customer attractions. Interestingly not just from those multinational companies serving the China Market, um, which perhaps was where we started this engagement, but more and more from also our local Chinese players who are looking for both, you know, Manufacturing in China. But also that diversification for their Global exports uh, outside China. So if anything incrementally, more bullish, uh, on on the China story for us, in terms of demand and just at the level set, remember our direct China business today is probably low in the nearly lowest amongst peers of a larger semiconductor companies, and so
Net, net. We see China as a actually quite a good upside for us. Uh, over time, uh, obviously led by saying these are automotive technology, so they go through a product development cycle, a qualification cycle. Um, but customers are excited about that. And obviously, with supplying them already out of our Global footprint. In the meantime, while that ramp is still taking place.
Perfect, thank you.
Thank you. And our next question comes from the line of CJ mutes from Cantor, Fitzgerald. Your question, please.
Yeah, good morning. Thank you for taking the question, I guess. First question on non wafer, revenues, you know, based on your guidance that business is going to grow 20%. Uh in 2025 curious, if you can give a little uh more color on what's driving that incremental growth. Uh and if you could kind of help us understand whether we should uh assume similar type of growth indicator 26.
Yeah, thank you, uh, CJ know. It's a great question in some sort of touch briefly on this. And let's let's talk what is in non wafer Revenue. So we're clear on on what goes in there. That consists of, you know, reticles for masks, uh, for PayPal and non-recurring, Engineering, increasing the other technology Services licensing. It's starting to also be, uh, where you're seeing the IP, uh, Revenue starting to layer in Sam mentioned myths as a driver of that. So look, I think there are some good uh, Tailwind leading to that generally growing, um, part of that is, you know, higher number of design wins, we spoke about that leads to high number of tape outs, which tends to positively improve our non way for revenue and then of course the acquisition of myths now. Uh, starting I'd say starting um, to impact uh, that as well. So I think that is a good Trend and you know, we'll we'll we'll broaden that category going forward. Uh in years to come.
Great, thank you. And then I guess, maybe the follow up on Ross's. Question around smartphones or smart Mobility. Sorry. Um, as you think about calendar 26 and and you reflect kind of the reset to pricing. Um, but the hopeful, um, games and unit volumes, you know, is that a business that, you know, can turn, uh, uh, and grow, uh, now in in calendar. 26, or are there still kind of headwinds that we should be thinking about?
Yeah, no, no, it's a great question. I think, let's let's let's break it down into those 2 pieces, uh, as we said on the pricing side, uh, this is dual Source business that we took, you know, proactive steps to reset, uh, pricing with customers in order to gain, you know, more share. And and you know, the calculus there is that's more profitability for, uh, GF. And it's a win-win for us and our customers. So, that resets is done. And that reset is now in place for the duration of some of those contracts and those contracts now, you know, still extend out, uh, several years. So, we don't expect another kind of step down on the pricing side. And as you said, we do expect increased volumes relative to Baseline, uh, for that. So I think on that dual Source component, which is a limited part of that business, that Dynamic is there. Um, but then I think what you're seeing on the rest of mobile is, you know, 2 factors, write 1 is the ramp of more, differentiated Solutions what we're doing in the RF front end, you know, Neil's talked about, uh, Civic, right? This is an incredibly interesting and exciting, silicon geranium technology, strong customer traction, right? How do you improve performance of low noise? Amplifiers power amplifiers in the future. These are the technologies that that
Diversifying their supply and building a more global sourcing strategy for them. So that'll also be a longer-term tailwind for our mobile business.
Thank you.
And our next question comes from the line of Kush Sanker from TD Cowen. Your question, please?
Yeah. Hi. Thanks for taking my question. Uh, and congrats on the Silicon Photonics win. I have two questions. First, wafer shipments were up 4% quarter-over-quarter, just like flat revenues. And let's say for the full year, they're still tracking around 13% shipment on flat dish revenues. So I'm just trying to figure out what that implies for ASPs both.
Blended, ASPs, and ASPX mobile, and then a follow-up.
Yeah, so that's maybe, you know, Chris, a good, a good build on what I just talked about in terms of the pricing, uh, Dynamics. And so, it is very much, that story of, you know, very specific, customers where we proactively, chose to make price, uh, changes from a share of wallet perspective, and increase overall profit dollars, um, to GF. And obviously, in a way our customers are supportive. That is the vast majority of the dynamic on on pricing affecting both the quarter and the full year uh trajectory even within mobile outside. Uh, those customers actually we see mix being a Tailwind as we ramp additional you know high high high, high margin or higher margin differentiated Technologies and across all of the other end markets. That's where we are very much. You know, sole source business. And so pricing has been, uh, largely stable and maybe also worth adding that this is the in-ear pricing, but even the pricing that we're winning new designs on, uh, and as Neil
Was mentioned year, on year winning significantly more designs, uh, pricing is very stable, uh, you know, customers are happy to pay for the value of what they're really looking for. They're looking for differentiated technology, they're looking for time to Market, they're looking for Supply security. They're looking for capacity uh and they're willing to put, you know, put put the right price on that and so we feel the overall price environment remains actually very constructive
and Chris maybe just to add 1 point to that. I think, you know, critical Dynamic, you need to continue to focus on, is the margin structure within the business, you know, actually, you know, the, the correlation I think between where some of the pricing movements versus where the margin is, we, we sort of dispelled some of that Focus around pure ASP. And so, from our point of view, you know, the fact that we've incurred, some of those ASP Trends associated with a limited number of customers in smart mobile, and still grown margin in year-over-year, quarter over quarter. I think is a good proof point there to focus on
So, it's very helpful for them. The quick follow-up on the Silicon lab expanded partnership, is this a share game thing where slab is moving more bases to Global boundaries, from another Foundry. Or is it more YouTube designs? How to think about that?
Yeah, it's it's it's absolutely a share gain. Uh, you know a silicon Labs, you know, you should ask them about their sourcing strategy. But what they've been clear about with us is that they are very keen to have, you know, strong us sourcing, uh, footprint for their for their business. Uh, today they do Source from other foundries, I think over time you would expect that to diminish um and given what we're offering them and again it's not just the US sourcing.
It's also a very strong focus on their technology platforms. Literally, everything they make is our technologies that we support and invest in. And I think it's not just a capacity partnership. It's also a technology partnership.
Thank you very much.
Thank you. And our next question comes from the line of Joseph Moore from Morgan Stanley. Your question, please?
Great. Thank you. Um, you've addressed a lot, the opportunities geopolitically. Um, and I know you have a lot of capacity, Headroom overall, can you give us a sense for, for that by region? And, and to the extent that you get silicon lab type deals in the US or in Europe, you know, do you have capacity to continue to grow those businesses? Do you have space if you need to spend more money to, to grow. I, I think Malta was space constrained at 1 Point. Can you just give us an update on on how that utilization is by region?
Yeah, maybe I'll talk about, you know, how we think about capacity, and then maybe Sam could talk a little bit more tactically about utilization. Um, Joe, you know, our our footprint utilization, meaning our floor space utilization. We still have significant, uh, you know, upside or Room to Grow within our current, uh, 4 worlds, in some of our sites. Obviously, we're running up against the Headroom there, like, in dress them, where we start to make small, uh, Investments to expand the footprint, uh, converting in that case that, you know, our former test facility using that space. And so on Malta has significant floor space, um, to grow. And so, I think we, we have very, I'd say short time to market, for that growth because we're again, we're not building, uh, new Fabs to get all of that growth, uh, started. And we also have to bear in mind is
Mental capex heavily is it based on real demand that we have line of sight of and is in those areas that are highly kind of differentiated from a technology point of view. So, silicon photonics will definitely prioritize those kind of areas when it comes to the Investments. Um, and but but we overall we we very disciplined and how we think about having capacity
Do you have a follow-up, Chair?
Uh, yeah, I do. Um, thank you for that. I I think um, you mentioned uh the sort of categories of non way for Revenue. You talked about expedite fees, you know, I'm curious are, are, are you seeing a lot of that at this point? Are there any, you know, any of the data center markets giving you expedites or just, you know, any anything new that you see on that front?
Yeah, so no expertise is a is a portion of non way for Revenue. Uh, I'd say, if anything, we do see a little bit more, uh, desire for expedites across different markets. I think we also see
You know, specific capacity corridors um you know closer to you know full full full utilization which is a great sign of demand for those differentiated uh areas. Are we in a in an extraordinary kind of scarcity situation across every part of the business. Not not yet. Um but I think you are seeing increasing piping across those, those very differentiated corridors.
Just on the design side, we talked about, uh, in this quarter and in the previous quarter, you know, up 100% from the previous quarter of 50. The number of designs means that directly translates into tables. So you continue to see the number of tables coming up, meaning the radical revenue, you know, going into non-Wafer Revenue as well. Uh, we expect to continue to grow. This is obviously a good sign for future growth of revenue.
Great, thank you very much.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Eric Chou for any further remarks.
Thank you, Jonathan. Thank you for joining.
We look forward to seeing you at the UBS conference on December 2nd and please do tune in to our investor webinar on December 3rd, focusing on, physical AI.
Thank you.
Thank you, ladies and gentlemen, for your participation. In today's conference, this does conclude the program. You may now disconnect. Good day.