GLOBALFOUNDRIES Inc. (NASDAQ:GFS) Q1 2024 Earnings Call Transcript

GLOBALFOUNDRIES Inc. (NASDAQ:GFS) Q1 2024 Earnings Call Transcript May 7, 2024

GLOBALFOUNDRIES Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $0.2314. GLOBALFOUNDRIES Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the GLOBALFOUNDRIES Conference Call to review the First Quarter of Fiscal Year 2024 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Sam Franklin, VP of Business Finance and Investor Relations. Please go ahead.

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

I would remind you that these financial results are unaudited and subject to change. Certain statements on today’s call may be deemed to be forward-looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate and may or by the use of the future tense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our annual report on Form 20-F filed with the SEC on April 29, 2024.

We will begin today’s call with Tom providing a summary update on the current business environment and technologies, following which John will provide details on our end markets and first quarter results, and also provide second quarter 2024 guidance. We will then open the call for questions with Tom, John and Niels. We request that you please limit your questions to one with one follow-up. I’ll now turn the call over to Tom for his prepared remarks.

Thomas Caulfield : Thank you, Sam, and welcome everyone to our first quarter earnings call. We believe our industry is beginning to emerge from a challenging period of inventory correction, albeit in a very cautious manner. For GF, I’m pleased to report first quarter results that exceeded the guidance ranges we indicated in our fourth quarter earnings call. The continued efforts of our employees are positioning GF to support our customers over the long-term. In the markets where they excel on the technology platforms they want and across the regions where they need us both globally and locally. So before I move onto the business updates, let me give a shout out and a thank you to all our teams across the world. I’m proud of how well they are partnering with our customers and executing to our plans, particularly as we begin to see signs of channel inventory in absolute dollars decline in some of the key end markets that we serve.

Having said this, certain end markets remain challenged, mostly related to macroeconomic conditions and the rate of inventory reduction is much slower than anticipated as we began 2024. I’m confident in the resilience and commitment of our teams to keep winning new opportunities and innovating our technology offerings, as we continue to build our future together. With this in mind, let me start with providing a brief update on the current business landscape. Like many others across the industry, we expect macroeconomic and geopolitical uncertainties to persist through 2024. Although we’ve seen signs of inventory levels trending down among some of our customers in core end markets such as smart mobile devices, other customers have indicated to us that inventory levels have remained higher in end markets such as IOT and automotive.

The combination of elevated inventory levels in the uncertain demand environment has led to some of our customers seeking to adjust their near-term volume requirements under their agreements with us. We have continued to collaborate closely with these customers to find mutually beneficial outcomes, while seeking to safeguard, the long-term economic value of our relationships. In some instances, the conclusion of these discussions has resulted in underutilization or restructuring payments, which John will comment on further. Importantly, the dialogue with our customers has been very constructive as we work together to accelerate the channel inventory depletion and continue to find new ways to partner together going forward. Based on the progress of these discussions and as we set out during our last earnings call, we still anticipate that our first quarter revenue will represent the low point for 2024 with quarter to quarter sequential growth through the year.

Let me now touch briefly on our first quarter results, which John will discuss in more detail later in his commentary. Revenue in the quarter decreased sequentially to $1.549 billion, which was above the high point of our guidance range. We reported non IFRS gross margin of 26.1% in the quarter, which again exceeded our guidance range. We delivered a fourth consecutive quarter of positive non-IFRS free cash flow, which continues our disciplined approach to capital deployment, while preserving our strategic capacity expansion objectives. I’m also pleased to report that we delivered non-IFRS diluted earnings per share of $0.31, which exceeded the high end of our guidance range. Let me now provide you a brief update on some of our recent customer and partnership activity.

After a milestone year for our automotive end market in 2023 in which we delivered over $1 billion of revenue, we are continuing to partner with our customers to identify long-term opportunities to expand share and content in the vehicles of today in the future. GF technologies are key enablers to the silicon content growth in vehicles, including 12 LP plus our FinFET platform widely used in infotainment and navigation systems to 40 nanometer microcontrollers with and without embedded non-volatile memory for safety, powertrain and comfort applications, and all the way through our power technologies at 130 and 180 nanometer technologies. Continuing this trend through the first quarter, our teams closed key design wind on our 40 ISP technology.

This is for image sensor processor and 130 BCD power platforms delivering critical ADAS, motor controllers and sensor applications at automotive grade standards. The semiconductor content of automobiles continues to expand and although we expect a period of automotive demand moderation in 2024, we still expect full year revenue in this end market to grow meaningfully on a year-over-year basis. Turning now to smart mobile devices. As I alluded to in my introduction, we are beginning to see positive indicators across the smart mobile device ecosystem as excess inventories are drawing down on an absolute dollar basis across several of our customers. Although inventories remain above normal levels, we expect the rate and pace of the drawdown to progress throughout 2024.

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

As the number of wirelessly connected and battery-operated products continues to broaden. In the first quarter, we closed a key design win on our 22 FDX plus platform, which will be used to enable high speed wireless interfaces for IoT applications. Our 22 FDX ecosystems supports design enablement IP and design services to a wide range of our customers to develop wireless IoT products with improved efficiency at the lowest possible power. We expect inventories to remain elevated across IoT during at least the first half of 2024. However, the requirements for speed, security and inference at the edge are all long-term drivers for our next generation analog and mixed signal technologies. Furthermore, we continue to see traction in aerospace and defense, where we are addressing key needs across harsh environments such as satellite and space, avionics and terrestrial applications with our resilient, secure and performance optimized products.

Finally, our communications infrastructure and data center segment continued to show weakness in the first quarter amidst the sustained node migration of data center and digital centric customers to single-digit nanometer platforms, which we discussed in our prior earnings call. We expect this end market to remain challenged in 2024, with quarterly revenue expected to be roughly in line with what we have reported for in the first quarter. However, over the long-term, we expect to transition degenerative AI will increase the demand for high bandwidth communication and efficient power conversions, a trend that GF is well positioned to address through our silicon photonics and power delivery solutions. To that end, I am pleased to report an important Q1 design win using our 130 NSX platform, which will support ground terminal infrastructure for satellite communications.

As we ramp these programs, we continue to execute opportunities to remix some of our excess capacity to service FinTech demand in more durable segments such as automotive and smart mobile devices. We’re also diversifying our manufacturing footprint by accelerating the transfer of technologies such as 22 FDX, 28 nanometer high voltage and 40 nanometer ESF 3 into our FAB eight facility in Malta, New York. This diversification will offer even more choice to our customers across multiple end markets here in the U.S. and enable a broader end market participation. To that end, we are delighted with the announcement from the Department of Commerce to award $1.5 billion in proposed funding for GF as part of the U.S. CHIPS and Science Act. In addition to the over $600 million proposed by New York State under its Green CHIPS program.

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

John Hollister: Thank you, Tom, and welcome everyone to our first quarter earnings call. For the remainder of the call, including guidance other than revenue, cashflow, CapEx, tax expense and net interest and other expense I will reference non-IFRS metrics, which exclude stock-based compensation and restructuring charges. As Tom noted, our first quarter results exceeded the upper end of the guidance ranges we provided in our last quarterly update. We delivered first quarter revenue of $1.549 billion, a decrease of 16% year over year, principally due to lower shipments and utilization levels in the low to mid seventies consistent with the commentary on our last earnings call. We shipped approximately 463,300 millimeter equivalent wafers in the quarter, a 9% decrease from the prior year period.

ASP or average selling price per wafer declined approximately 6% year-over-year, mainly driven by changes in the product mix shipped during the quarter. We expect that the pricing environment will remain constructive through 2024, and we believe that ASPs for the full year will be roughly flat compared to 2023. Wafer revenue from our end markets accounted for approximately 89% of total revenue. Non-wafer revenue, which includes revenue from vertical, non-recurring engineering, expedite fees and other items accounted for approximately 11% of total revenue for the first quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 44% of the quarter’s total revenue. First quarter revenue decreased approximately 2% from the prior year period, principally driven by reduced shipments as customers continue to draw down inventory.

This decline was partially offset by slightly higher ASPs premium tier mix growth and continued content growth and value capture in 5G RF front end content, as well as imaging and display applications. As Tom discussed, we believe that inventory levels in this end market will begin to normalize to end market will begin to normalize through the first half of 2024, with some of our customers signaling demand growth in the second half of the year. In the first quarter, revenue for the home and industrial IoT markets, which now includes revenue from our legacy PC end market, represented approximately 20% of the quarter’s total revenue. First quarter revenue decreased approximately 19% from the year prior period, as our customers in the consumer and industrial IoT segments continue to focus on bringing down channel inventory, which remains elevated compared to recent years.

Reduced shipments in the consumer centric and industrial portions of IoT were partially offset by year-over-year improvements at ASP and mix, as well as increased volumes in our aerospace and defense segment. Automotive continued to be a key growth segment for us and represented approximately 17% of the quarter’s total revenue. First quarter revenue grew approximately 48% from the year prior period, principally due to higher volumes, as semiconductor content and features increased across the vehicle architecture and our designs continue to ramp at key customers, which were partially offset by reductions in ASP and mix. As Tom noted, we expect automotive revenue growth to continue in 2024 as we support our customers across a diverse range of automotive applications in both internal combustion engine and autonomous connected electrified vehicles.

Finally, moving on to our communications infrastructure and data center end market, which represented approximately 8% of the quarter’s total revenue. First quarter revenue declined approximately 66% year-over-year, as a result of declining volumes and the key drivers outlined by Tom in his prepared remarks, while ASP and mix remained roughly flat in this end market. As Tom noted, we will continue to allocate manufacturing capacity in order to diversify our footprint with the additional allocation targeted to markets such as automotive and premium smart mobile applications. Moving next to gross profit. For the first quarter, we delivered gross profit of $405 million, which was above the high end of our guided range and translates into approximately 26.1% gross margin.

Gross margin exceeded the guidance range indicated, and as Tom alluded to in his prepared remarks, includes $82 million in revenue associated with the execution of customer volume adjustments. Looking ahead to the second quarter of 2024, we expect additional customer volume adjustments, which have been reflected in our second quarter guidance ranges. Operating expenses for the first quarter represented approximately 14% of total revenue. R&D for the quarter increased sequentially to $117 million and SG&A increased sequentially to 101 million. Total operating expenses increased sequentially to $218 million in the quarter and incorporated an advanced manufacturing investment tax credit of $10 million. As we discussed on our last earnings call, as we continue to spend on qualifying U.S. expenses and capitalized assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program.

We delivered operating profit of $187 million for the quarter, which translates into approximately 12.1% operating margin above the high end of our guided range in 560 basis points below the prior year period. First quarter net interest income and other income and expense was $8 million and we incurred a tax expense of $21 million in the quarter. We reported first quarter net income of $174 million, a decrease of approximately 116 million from the year ago period. As a result, we reported diluted earnings of $0.31 per share for the first quarter, which was above the high end of our guidance range. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the first quarter was $488 million. CapEx for the quarter was $227 million or roughly 15% of revenue.

Free cash flow for the quarter, which we define as net cash provided by operating activities, plus the proceeds from government grants related to capital expenditure, less purchases of property, plant and equipment and intangible assets as set out on the statement of cash flows was $261 million. At the end of the first quarter our combined total of cash, cash equivalents and marketable securities stood at approximately $4.164 billion. We also have a $1 billion revolving credit facility, which remains undrawn. Next, let me provide you with our outlook for the second quarter of 2024. We expect total GF revenue to be between $1.59 billion and $1.64 billion. Of this, we expect non-wafer revenue to be approximately 10% of total revenue. We expect gross profit to be between $382 million to $426 million, excluding share-based compensation but including the benefit related to the advanced manufacturing investment tax credit.

For the second quarter, we expect total OpEx to be between $213 million and $233 million. We expect operating profit to be between $149 million and $213 million. At the midpoint of our guidance, we expect share-based compensation to be approximately $50 million of which roughly $14 million is related to cost of goods sold and approximately $36 million is related to OpEx. We expect net interest and other income and expense for the quarter to be between negative $4 million and positive $4 million and tax expense to be between $12 million and $26 million. We expect net income to be between $133 million and $191 million on a fully diluted share count of approximately 561 million shares, we expect earnings per share for the second quarter to be between $0.24 and $0.34.

Consistent with our commentary on our last earnings call, our second quarter guidance reflects the expectation that utilization will be in the low to mid seventies as some of our core end markets start to emerge from the ongoing inventory correction during the first half of 2024. For the full year 2024, we continue to expect CapEx to be approximately $700 million and as Tom commented during our last earnings call, we expect this to provide GF an opportunity to focus on delivering free cash flow generation two to three times higher than 2023. In summary, a dedication from our 12,000 employees across the world and their continued efforts to expand our differentiated product offerings in key growth segments, while navigating a challenging cyclical backdrop enabled us to achieve first quarter results above the high end of the guidance ranges we provided in our fourth quarter earnings update.

We remain focused on winning opportunities and critical end markets and partnering with our customers to position them and GF for long-term growth opportunities. With that, let’s open the call for Q&A. Operator?

See also 15 Least Urbanized Countries in Europe and 15 Largest Metro Networks in the World.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Vivek Arya of Bank of America Securities.

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

Thomas Caulfield : Good morning, Vivek. Let me break, the answer is yes, we’re going to continue to grow quarter-on-quarter. Let me give some context around that. So let’s first start with overall inventory. Inventory, we look at it in two dimensions, days of inventory and then absolute dollars of inventory. Well, in some cases, days of inventory has got into worse. The actual dollar amounts have come down and that’s an important indicator. And so clearly, as this year rolls on more and more of this inventory will come down, especially in dollar amount and we’ll get closer to the natural demand. So from a macro level, as long as inventory continues to come down in a dollar amount, we’re going to get to a point somewhere where we get closer to natural demand macro topic.

Now, let’s think about GF and we’ll talk about four end markets and what that looks like for the balance of the year. We’ll start with our comms infrastructure data center. In our prepared remarks, we talked about that level of revenue is roughly going to be flat as we look forward over the coming quarters. So we have CID flat, we go next to our home and industrial IoT. The levels we had in Q1 represent more or less flat for at least one to two quarters with the opportunity back tied to that macro inventory situation for it to become growth force in the back end of this year. And then we have auto and smart mobile devices. There’s a lot of talk about inventory in automotive growing. If you think about GF, last year was a really big ramp year for us where some of our design wins that were years in the making really started to ramp.

So we didn’t have a lot of time for those key products to build inventory in the channel and as we said in the first, in our first quarter, our previous call we talked about automotive is going to have a meaningful growth this year for us. And we still see that. So there’s automotive is growth as we go sequentially quarter-and-quarter. And then the last is smart mobile devices. But we see a bunch of our customers have seen and you’ve heard during the earning seasons that this is a handsets up low-single-digits this year with a disproportionate amount of that growth coming in premium tier smartphones where we play. So there’s the opportunity for growth again on a sequential basis for our company. And if you think about it, automotive, smart mobile devices, 60% plus of our revenue in Q1 that’s where our growth is coming from.

And so, this gives us the confidence to really feel solid about Q1 being the low point of revenue and then growth coming from there. The real question is back to the macro economies, how much growth will there be? Will it be the kind of growth we will all want to write home about or is it going to be muted for? But again, Q1s low point for us. Any follow up questions?

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

Thomas Caulfield : Yes. I’m going to pass it to John, but I think you’re on an important point about sometimes there’s timing in some of these events, and so the precision around — tight precision around gross margin has something, a lot to do about timing. But John, I wanted to let you.

John Hollister: So, we had a business plan at the beginning of the year, of course, which formed the foundation of our first quarter guidance. And as Tom was just indicating timing can vary on business outcomes. And we saw some favorability in Q1 that helped our gross margin. So we’re pleased with that. The customer volume adjustment factor was also at play there. We did comprehend that in our guidance, the outcomes there were a bit better than we had anticipated. So it’s really a result of those two factors, Vivek, with driving the gross margin outcome for first quarter. As we look ahead into second quarter, similar dynamics at work there are some customer volume adjustments planned in Q2, albeit not at the level of Q1. And that’s starting to come in as we are settling through various customer volume discussions that we’re having constructively with our customers to address business conditions and move ahead.

I will note that the guidance for Q2 is 100 basis points above the guidance for Q1. And just a reminder, the single biggest factor affecting our gross margin is factor utilization. And a good rule of thumb is that every 5 points of utilization influences gross margin by roughly 200 basis points. So as one would expect, as loadings can pick up through the course of growth onward, we would expect improvement in gross margin over time here.

Operator: Our next question comes from the line of Chris Caso of Wolfe Research. Your line is now open.

Chris Caso: I guess first question is regarding pricing and you prepared more, you gave some indication of what you thought pricing would be for the year, but I guess, if you could expand on that a little bit cause we have heard of some of the Tier 2 foundries being a little more aggressive on pricing as the utilization comes down. And specifically for new business that you’re signing outside of the existing LTAs that have been kind of helping your pricing, where’s the pricing been for new contracts that you’re signing today?

Thomas Caulfield : Yes, so consistent with our prepared remarks, a lot of what you’ll see in our ASP is dominated by the particular mixes for that quarter. So year-on-year we talked about being down 6%, but all of 2024, we see a normalizing pricing flat year on year ‘24 to ‘23. What that means is, one, the pricing environment remains constructive. And I don’t think we’re telling, saying anything new here. You heard that from our peer foundries, our competitors and their earnings call it, they see the same environment. The second thing is a big fraction of our revenue is single source business. And so you really can do is service true demand. There’s no elasticity in pricing to — so more price doesn’t give more opportunity. And so constructive environment, differentiated business, keeps the pricing we believe flat year-on-year 2024 to 2023 changes, quarter-to-quarter mostly mix related. John, would you add anything to that?

John Hollister: Yes, I would. Chris, I think it’s important to not conflate absolute ASP with profitability as well. In other words, just because our product may have a higher ASP doesn’t necessarily mean it would have higher gross profit. Obviously it affects wafer account and top of line. Just wanted to make that point. Did you have a follow-up, Chris?

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

John Hollister : Yes. Chris, this is John again. I would call it modest and a stable environment for gross margin in light of those dynamics. Yes, those are a put and a take around how that’s all playing out. The flip side to the customer volume adjustment economics is that’s really in lieu of what would have otherwise been there as far as wafer shipments and better utilization. So, I mean, that’s the purpose of those economics. So they are kind of offsetting one another. You can think of it that way. But the long and short of it as we can get to higher levels of utilization that will be the large driver over time. And look, we’ve also Chris taken a lot of structural cost out. We’ve used leveraged this downturn to hold the line to become more and more efficient.

And we see the opportunity for every dollar of revenue as we start to get back into growth having a higher degree of flow through than any dollar we have today. And so, a lot of the things we’ve been able to do as a business weathering this prolonged downturn is positioning us structurally to be a better company as growth returns.

Operator: Our next question comes from the line of Harlan Sur of JP Morgan.

Harlan Sur: Nice job to the team on the quarterly execution. December quarter, you guys had $79 million of this high gross margin sort of customer utilization and restructuring fees. It was $82 million in the March quarter, so it looks like core product gross margins were about 22%. Is that fair? And you said on the utilization fees would be lower in Q2. Can you just quantify, John, is that $50 million, $60 million, $70 million? And then given your fab cycle times, your wafer starts this quarter are shipments in the second half, right? Which typically is seasonally stronger especially for your smart mobile customers? So I would’ve assumed utilizations would’ve been up in the June quarter, but sounds like they’re staying flattish. So why is that and how do you see utilizations trending for the remainder of the year?