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?

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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?

John Hollister : Yes, Harlan. So, yes, we didn’t specify the level of customer volume adjustment in Q2. We’ll have to see how it plays out. There is a few open items that we’re continuing to address in that regard. As we work through the balance of the year, we’ll see how the second half ramps. Clearly, if we can see a more robust second half ramp and there is some seasonality, as Tom indicated, a lot of that is just around the rate and pace of the recovery of the global economy and inventory draw down and improvement with our customers. But those are the signs we’re looking for to see our loadings come up. So the utilization come up and again, it’s you can look at it that one is an offset or it’s an additional gross profit from customer volume or really the way we think about it, it’s really in lieu of what would’ve otherwise been higher utilization.

Thomas Caulfield : So as one goes down, because the revenue will be going up in a natural way.

Harlan Sur : Tom, you took us through some of the dynamics around sort of diversifying the technology mix for Malta 58. It’s a very smart strategy, right? You talked about 40 nanometer embedded MCU-RFSOI fully depleted SLI capabilities and even on the mainstream 12 nanometer FinFET capacity, right? Mixing in new customers and applications as older programs phase out. Maybe you can just expand on this a little bit. Maybe timelines on phasing in new technologies and success in backfilling the FinFET technology.

Thomas Caulfield : Yes. Harlan first of all, thanks for this question because I think we’ve not done this topic justice. I used to watch this show with my son growing up MythBusters, and I think there’s a lot of myths around what we do and don’t do in fab 8 and what diversification looks like. So let’s take fab 8 and think about it in two dimensions of diversification. The first being end markets we serve with our 12 nanometer platform, and then we’ll talk about diversification, for the fab and the technology portfolio. We will bring there in the customers what that means to GF and also to our global footprint. So think about four end markets, our comms infrastructure, data center, auto, IoT and smart mobile devices. The base load — the base load right is data center.

And that is almost equivalent to what we have in automotive load in the fab. Next up is IoT, which is one and a half times more load than either the automotive, I’m sorry, either the automotive or data center. And then smart mobile devices is one and a half times more than the other three end markets combined. So there’s a broad diversification. So when we think of data center clients moving to single-digit nanometer that represents a fraction of what we do in fab 8 on 12 nanometer. And so we need to dispel the fact that fab 8 means data center, data center business goes down, we’re going to struggle. Yes. Now, diversification, you pointed out, you said it better than I did. We have 12 nanometer technology plus the features we’re adding on that serves, like I said, smart mobile devices 1.5x more than any other combination of all our other markets.

We have 22 FDX that’s being currently qualified and brought up 20 nanometer high voltage, 40 nanometer embedded memory for automotive, 45 RFSOI silicon photonics. This diversification will play out for us in qualification this year. Customers starting to tape out towards the end of this year, into next year and then ramping in 2026 to bring this full diversification. Now, why is diversification important? And this is a point that I think we all need to understand. Having a global footprint means more than just having a location where you can produce one thing. I call it a mailing address. A fab in any location that can make one technology is a mailing address because the by and large, most of your customers demand can’t be served there. What GF has done and we’ve done over the last decade and accelerated in the last five to six years was making sure every one of our global sites has a diversification so our customers can source globally and locally.

It’s great to have a global footprint but it has to have a broad range of technologies. When we complete this journey with fab 8 and its diversification, we’ll have Singapore, European Union and GF with a lot of overlap in the technology platforms. So it’s important for us as a strategic value of our global footprint to diversify fab 8. And clearly it’s important for diversification. Make sure our fab 8 facility stays full.

Operator: Our next question comes from the line of Joe Moore of Morgan Stanley.

Joseph Moore : A little over a year ago, you guys had a partnership with an automotive OEM, with General Motors. Before that you had had some discussions with Ford, which is really interesting. We haven’t really seen OEMs work with foundries more directly like that. Those automotive shortages are behind us. So I wonder if you could kind of talk to the commitment the focus that those guys have on geographic diversification of their foundry and how that might help you?

Niels Anderskouv : So maybe I can take that one. This is Niels Anderskouv. I like to take a little bit of a background on the LTA in general. And remember that the LTAs is still a relatively new feature within the foundry model, but I want to emphasize that there have been key feature of our business since 2021, and really have enabled us to invest more than $7 billion into new capacities to support our customers. So you recollect from prior earnings calls that we’ve entered into more than 40 of these LTAs, including the ones you just mentioned. And we over $30 billion of life-time revenue coming out of those 40 LTAs. Fast forward to the end of 2023, and you may recall we had approximately 2/3 of that life-time revenue remaining.

And then, again, with the announcement of a significant LTA extension in January this year with Infineon, that continues to be a very, very important part of our future business model. So the made point here is that the LTAs have benefited both GF and our customers through a number of lenses. Number one, they provided a level of certainty for both supply and demand. Two, to demonstrate durability in the application to all end markets we serve. And three, they provided a greater visibility and profitability to our business through a challenging market backdrop. So clearly, our customers are essential to this and so is the longevity of our relationships with our customers. So notwithstanding some of the recent discussions with our customers on their near-term volume adjustments, it’s fair to say that LTAs remain a very important feature of our business model.

So, but take those and common a little bit to the current quarter. Take Q1 here, for example. Clearly, given the inventory levels across certain end markets, the rate and pace of entering new LTAs has slowed as our customers are working through the inventory in the channel. But by no means are LTAs less important to us, our customers. As evident by the fact that we in Q1 again announced the extension of one of our largest LTAs within Infineon. And that one was to support the long-term supply requirements of automotive grade 40 nanometer, my controllers. So, as you heard on the call today, there have been a couple instances where we work with our customers on adjusting the near-term volume requirements. And I would highlight that these have been highly constructed conversations and we work together on finding a balanced outcome based on the common features of our LTAs namely fixed price, fixed volume and fixed duration.

So these are all the key features that we’ve been able to flex in order to preserve this relationship and strike the right long-term balance with our customers. So what’s the outlook? What’s most encouraging is actually how well our customers have responded to these discussions. For example, in one instance we mutually agreed on terminating agreement but that was primarily to align with our customers long terms of private requirements, and just to demonstrate the resilience of the relationship. The very next week, that same customer taped out a new design with us. So what you’re hearing from us today is that we continue to believe the LTA framework offers a mutual — mutually beneficial arrangement for both us and our customers to partner together over the long-term.

And looking forward, I would expect to see the LTAs remaining very key to sell our customers across very end markets, automotive included and also including the OEMs. So I think you should expect to see more on that front. But however, it is reasonable to assume that the terms and duration of the agreements will vary according to the end markets and what we are supporting.

Joseph Moore : And I guess to follow-up on that, there’s obviously one reason to do LTAs and those types of relationships is because of tactical supply concerns but there’s also the sort of bigger picture, OEM concern that maybe were too reliant on certain geographies. So just like how strategic do you think those relationships can be? And I guess, I’m just trying to make sure people don’t with the shortage space, people sort of forget about some of the reasons that became to you guys in the first place. Are you still having those strategic discussions in terms of bigger picture geographic diversification?

Thomas Caulfield : Joe, I think you’re hitting on a really important point. One of the things that we learned is not all end markets. This is back to the — there’s no such thing as macro in a world anymore. There’s no such thing semiconductor industry. There’s a lot of different components to it that have different behaviors. And I want to go back to the kind of discussions that we’re having with auto players, why that’s different with some of the other end markets. So what’s unique about auto. These are long-term supply agreements. When they qualify a part, they’re going to use it for 5 to 10 years. So having long-term visibility and long-term certainty on supply pricing is really important for automotive makers because they’re making commitments for a long time.

The discussions we started with them continue, but they continue in a different fashion. Since we don’t design and they don’t design, there’s a third party of one of our customers in the middle and we sit down collectively talk about what we’re going to do to make sure they have the level of certainty and durability and supply for their future. In more markets that have much quicker product life cycles, what we’re finding is the LTA durations don’t need to be as long. It doesn’t mean customers don’t want LTAs, they just want them on a much shorter duration so they can be nimble and flexible. They still need like all of us, certainty that when they need their product, they can have it. And so what we’re all learning as an industry is to make sure that the terms and conditions of these LTAs reflect the uniqueness of each market.

Long-term markets segments that last a long time, want long-term certainty. In markets that have fast product transitions, they want near-term certainty. But recognizing commitments for the longer term will have to be renegotiated every year. And I think that’s the one learning we’re all getting out of this. And at the end of all of this for you, you started the question how are discussions going with the auto — the automotive OEMs. We continually sit down and make sure we’re aligning technology road maps, first and foremost that were brought into conversations with our customers so that we can make sure we’re all serving the same purposes. And I think there’s another entrant into this marketplace, the Tier 1s are also starting to think about doing their own designs.

And we need to and continue to partner with them.

Niels Anderskouv : Yes, maybe I can just comment on the long life cycle. This is an essential part of our strategy from a technology standpoint. Essential CHIP technology is all about supporting long life cycles. And we are seeing continued momentum building across the automotive space. You just heard us talk about 17% of our revenue here in Q1 came from automotive and it continues to be a strong growth for us. So strong fit to the strategy. I also want to mention Tom alluded a little bit to it earlier that our strategy is that we will have — we will qualify all our process nodes for automotive. And when you get back to what Tom just discussed about fab 8, automotive is going to become a very, very integral factory for our automotive strategy, and that’s something that’s been very well perceived by the OEMs as well, having a U.S. supply within that space.

Operator: Our next question comes from the line of Chris Danely of Citi.

Christopher Danely: I guess just a question on CHIPS Act and the money there. So $1.5 billion, that’s great. But that’s — I think that’s over a year’s worth of CapEx. So you’re getting all this money but utilization rates are in the 70s and you have plenty of inventory and we’re sitting here coming out of a downturn. So I guess how do we allocate all of that capacity and not have like some sort of overcapacity or some sort of pricing problem? How is that going to work?

Thomas Caulfield : Yes, Chris, we don’t build capacity ahead of its need. There’s nothing worse than that to overshoot the target. And there’s nothing worse than government programs with the right intention to get diversification and resiliency and supply chain to have companies get ahead of themselves and build empty factories. And so when I think about our global footprint, our investments going forward, we talked about at the end of this year, we’ll have capacity roughly 3 million wafers a year of output. That’s the 300 millimeter equipment. You could do the math on our ASPs. And you can see between wafers and non-wafer revenue that gets us to a company that’s $9 billion to $10 billion in revenue. And you see where we are this year the $6 billion, $8 billion, $7 billion.

So plenty of growth ahead within our current footprint. Now securing your future and the optionality to build capacity is what we’re doing with the CHIPS Act in the European Union, with the CHIPS Act in the U.S. It’s to make sure that we have proper funding so that when we need to invest again, we can and we can do it in the most capital efficient way. And it really comes back to your belief, if you think the industry is done, there’s no growth, then you wouldn’t need any of this. We happen to believe like many others that this industry will double. And it’s a question, if it does it six years, eight years but we need to be ready for that growth. So that we can answer that for our customers. And we need to do it in most economic efficient way and that’s where these government funding partnerships come into play.

And we talk about the CHIPS bill at $1.5 billion. The CHIPS bill will only fund up to roughly 15% of a project. The ITC covers another 25%. So in combination, you’re seeing a high mix of government participation in these investments. Sure, the lion’s share comes to sounds like yes. But I’m not worried about. I’m certainly not worried about GF putting more capacity on than we need to serve our customers. But I’m not worried about the rest of the EU and U.S. manufacturers. Overshooting because they’ll plan their capacity adds with the true demand for our industry.

Christopher Danely : And then my follow-up is on the LTAs and the contracts. Can you let us know what percentage is, say, ’24 and ’25 are covered by LTAs? And in terms of these customer revenue adjustments, is it that they come to you and say, hey, we need to renegotiate and so if you want to renegotiate, you just have to pay us this money and is it all 100% gross margin? Just any insight into the machinations of all those.

John Hollister : Yes, Chris, this is John. We have identified how much LTA total value we have, which is approximately $20 billion. That’s disclosed in our 20-F that we recently filed. The specific time name of that is not called out, that lifetime revenue. You’ve got time product life cycles that vary by the end market. But that gives you a sense of the coverage level, if you will. I mean, look, the economics may flow in with customer volume adjustments, but the fundamental purpose of these LTAs as Neils just spelled out to provide that surety to customers and to give the confidence that they’ll have the supply in a resilient manner when they need it. So that’s really the purpose.

Operator: Our next question comes from the line of Ross Seymore of Deutsche Bank.

Ross Seymore : Couple questions. The first one is on the node transition risk. I know, Tom, you talked about what’s happening in the comm infrastructure and data center segment. But how would you characterize that node transition risk entering this year versus exiting this year? How do we think about that as a headwind over time? And I know you’re diversifying away from it as well.

Thomas Caulfield : Yes, I think, as I said before, how we serve that market. We’re pretty much at the low end of that revenue. And the real question is how we build this back to the business we want it to be through our technology platforms for power delivery and solving the bandwidth challenges. And so that’s the growth opportunity for us back into this end market. While we can hold the line of where we are today at that love revenue that we focus on.

Ross Seymore : I guess as a quick follow-up, is there something beyond that? Do you have a similar problem in smart mobile devices, not just limiting the original questions to the comm infrastructure side of things?

Thomas Caulfield : I think there’s a fundamental element to which single-digit nanometer does and what it doesn’t do. If you’re able to have an application where it doesn’t make a difference that the cost per transistor goes higher but the power used for transition transistor is a premium, then those applications will pay that for that transistor. And so that creates a real moat around not wanting to go to single-digit nanometer the application actually requires that. And so you’re seeing it in data center you’re seeing it in power is the key metric, minimizing power use. So we think the moat is if this was the old days of Moore’s Law, where you’ve got a lower cost per transistor, right, we’d all have to move. Now we sit in an area where customers are working with us with the expressed intent save us from having to go to single-digit nanometer and pay more per transistor.

And that’s what the vary and that’s why we need to continue to innovate and drive features on our platforms to prevent our customers need and have to pay more for the products to service the markets day.

Niels Anderskouv : If I may add to that, we actually — we’re seeing it today on 22 FDX. We’re seeing several of our customers asking for us to continue to innovate on the process nodes they can stay longer. And we’ve seen the early same trend happening on 12-nanometer. In our road maps, we have new versions of 12-nanometer that gives you a much better performance ratio in time. So if you think about the essential chip technology strategy put in place across the four product lines, it really is about extending the life cycle of these process nodes and continue to make sure that they stay competitive, so we continue to win new businesses. And I think the example of smart mobile devices being the biggest end market in 12-nanometer today, exactly just illustrates that. It’s a great fit to that segment, and we’ll continue to optimize ROI and make it even better.

Operator: Our next question comes from the line of CJ Muse of Cantor Fitzgerald.

CJ Muse : I guess first question on auto, down 16% sequentially. I think it came in a little bit worse than what we were thinking when you initially guided. Curious maybe what changed in the quarter in terms of product or subsegment? And then, I guess, as you think about the recovery into June and beyond, what are the key drivers that we should be focused on there?

Thomas Caulfield : I think this quarterly seasonality those things, we don’t pay a lot of attention to in this segment given the fact that it’s a very long duration. What we’re highly confident is that this is a business that will continue to grow not only in the out years, but this year and meaningful growth in the mid- to high single-digits for us in 2024. So we see the order book, and we see it in our business plans. So I wouldn’t read too much into a quarter and quarter down in automotive, especially given last year was a year of over $1 billion growing from $375 million the year before.

John Hollister : Do you have a follow-up, CJ?

CJ Muse : Yes. I guess maybe a question on smart mobile. Maybe kind of similar type of question. You talked about mix shift to premium phones, which benefit you. I think you talked about RF front end and display drivers as incremental drivers for you in ’24. So is that a business that you think can grow in all of calendar ’24? Or is there sufficient inventory challenge that might be difficult.

Thomas Caulfield : Now we believe that’s an area that we will grow this year with content growth, with handset growth means we can have growth — we’re coming off of a Q1 that was already challenged with inventories in the channel. So as inventories bleed out, handset growth happens, we see growth in smart mobile devices for GF this year.

Niels Anderskouv : Yes, I think that’s a good growth story we have there. Handsets growing, us growing us having a larger share in premium handsets that we believe that to grow faster. And then on all of that, you’re starting to see inventory dollar-wise training in the space. So yes, we do believe that’s going to be a growth market for us this year.

Sam Franklin: Julia, we’ll take one last question.

Operator: Our final question comes from Mehdi Hosseini of Susquehanna International Group.

Mehdi Hosseini : Yes. A couple of follow-ups. Tom, just double-clicking on communication. I believe that your comments suggest that the revenues there are expected to grow flattish throughout the year, especially with the migration to nanometer. What I want to better understand is, when do you expect new opportunities like silicon photonics that have been talked about in the downstream are going to be material to you? And then, one follow-up question for John. How should we think about D&A and OpEx in ‘24 versus ’23?

Thomas Caulfield : John, go on reverse order handset.

John Hollister : Yes. No problem, Mehdi. So D&A, roughly consistent. It’s how we see that. We’ve drawn down our CapEx a fair amount. As we presented in our prepared remarks, we see about $700 million is our estimate for the year, which is enabling tremendous growth in free cash flow and we’re holding the view that can increase to 2x to 3x the free cash flow that we generated in 2023. So that’s positive. As far as OpEx, just a quick reminder that we had a large credit in the fourth quarter related to the advanced investment tax credit that was coming into SG&A, that was about $50 million coming into SG&A. That was about $50 million of credit in Q4. We’ve got normalized now in the first quarter, but you do see an uptick in OpEx for Q1 related to that as that was a one-time benefit in the fourth quarter.

Niels Anderskouv : So let me maybe address the data center part of the question. So in data center, the two major growth pictures that we’re seeing is, as you pointed out, silicon photonics and power delivery. So maybe if I start with silicon photonics, where the market is at today is that you’re starting to see adoption and products being released in what we term as the pluggable space. So these are the pluggable type of silicon photonic devices that you’re seeing out there today, where we’re seeing a lot of activity for future growth and maybe more substantial growth is in the co-packaged silicon photonics, where basically you’re starting to see silicon photonics becoming a real design consideration for GPUs, NPUs and CPU simply to be able to enable the BAM if you need to have not just within the rack, between the ranks but also within and between the processors that sits on the main board.

So that’s a big growth rate. Obviously, not something that happens on night. These are big infrastructure changes. So you should expect that will probably take a couple of years before it really materialize, but starting to see some early momentum on that front. Power delivery, very exciting. We’re making very good progress on that power delivery for data centers. Initially, it is with our BCD technology and our 12 nanometer technology that we’re seeing the first tape-out. And as you know from previous calls, we are investing in GaN technology as well and we believe GaN both the 650-volt as well as the [Honda Volt GaN], we’ll have a major play also within the data center. So those are some of the future growth areas wells in data center out in time.

Sam Franklin: Julie, I think we’re coming up on the hour now.

Operator: This concludes the session. I would now like to turn it back to Sam Franklin, Vice President of Business Finance and Investor Relations for closing remarks.

Sam Franklin: Thank you, Julia. Thank you, everyone, for joining us on the call today. I appreciate the questions and looking forward to seeing and speaking to many of you over the next couple of months.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.