Dave Pahl: Sure. Yes. And I think we all know as being students of studying the cycles over the years. They’re all the same and they’re all different at the same time and they’re unique. The one thing that is unique, of course, with the cycle is how the markets have behaved differently. We’ve seen bifurcation and really lined up very well with when markets recovered. So PE was the first to recover and was very strong early on. The other markets followed very shortly after that and Automotive was last. As you remember, many automotive manufacturers struggle to restart their factories and people weren’t going to showrooms when we are in the midst of the pandemic. So really, as we’ve seen things begin to roll over, Personal Electronics was first.
It was then followed by the other markets, and yet we still have automotive that’s hanging in there. So I think that’s the one thing that’s unique. And I think as we’ve learned and studied the cycles, our product portfolio has changed as well over time. But the best time to be preparing for the upturn is before it shows up. So that’s what we’ve been busy doing and we think we’re in a great position to support the next upturn and to continue to gain share. So, thank you, Ambrish. We’ll go to the next caller, please.
Operator: Our next question comes from the line of the Vivek Arya with Bank of America Securities. Please proceed with your question.
Vivek Arya: Thanks for taking my question. I wanted to go back to automotive just to make sure that I understood what you said. Do your comments imply that you’re seeing a largely seasonal environment in Q4 with no changes in terms of orders to traditional or EV customers? And if that is the case, if I understood it correctly, isn’t that surprising given the macro headwinds that sector is facing?
Dave Pahl: Vivek, your question was on third quarter or on fourth quarter?
Vivek Arya: So what is being — I think when you were asked before, you said that if there was anything abnormal, you would have mentioned it. So I assume that because you didn’t mention it, that it is normal.
Dave Pahl: Yes. So yes, what I said is that, if there was something that we needed to explain the outlook or unusual or however you want to describe it, we would do that. So I’m stopping at that point intentionally. And we’ll finish up the quarter and report out what happens in the fourth quarter. Do you have a follow-up?
Vivek Arya: Yes. On depreciation, what is driving the revision? Because your CapEx doesn’t seem to be changing. And then kind of part B of that is, if I take that year-on-year delta, Rafael, I think it’s about $400 million, $500 million or so incremental in 2024. So at the current revenue run rate, that’s a 2 point to 3 point headwind to gross margin. I just wanted to make sure that I got those two points right.
Rafael Lizardi: Yes. So the — for 2024, I said $1.5 billion to $1.8 billion, and that is down from what you probably had before $2 billion. And for 2025, I said $2 billion to $2.5 billion, so that is down from $2.5 which we had said before. And the reason, as you pointed out, CapEx is not changing, so that’s not the reason. It’s just as time has said, we have more clarity on what to expect. So for example, depreciation on tools that doesn’t start until the tool. It’s not only received but installed and then qualified and that’s when depreciation starts. So that doesn’t happen immediately. So as we have learned more as to how that process works with all the number of tools that we’re receiving for the various factories, then we’re providing an update on depreciation. Thank you.
Vivek Arya: And the gross margin headwind, is that — did I have the calculation right? It’s a 2 point to 3 point headwind on gross margins.
Rafael Lizardi: Well, so we’ve given you the tools to calculate gross margin. So let me remind everybody what that is. First is revenue. So you pick the revenue that you believe is going to happen for the next several years. And it’s working on a quarterly basis, but of course in any quarter there are a lot of puts and takes, but better to do it over longer horizons. So you start with revenue, then you fold that through at 70% to 75%, which by the way, that is reflective of the great, not only geopolitically dependable capacity that we’re putting in place, but it is all that new fab capacity is 300 millimeters. So it has a structural cost advantage, not to mention that we’re getting ITC and grants benefits that is installed in the United States.
But — so then you fold that through at 70% to 75%. Then you need to account for the added depreciation. So this year it’s probably going to be close to $1.2 billion, and then next year it just gave you $1.5 billion to $1.8 billion. So if you want to pick a point between that, then you get your added depreciation for 2024. And then at a high level, that’s it. But of course, in any given quarter, even in any given year, but especially in any given quarter, you have to put some takes. And one of them that we’re seeing right now is the underutilization. But that right now is headwind, but that can also be a tailwind when we’re on the other side and we’re increasing loadings and that — what does that is that, then it comes back the other way, right?
So — but that’s more of a tactical comment that happens in some quarters. Hopefully that answers your question.
Vivek Arya: Yeah. Thank you.
Dave Pahl: Thank you, Vivek. We’ll go to the next caller, please.
Operator: Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.
Joe Moore: Yes, thank you. I wonder if you could walk us through the calculation on the underutilization charge. I mean, I think it seems like with over [indiscernible] of inventory, you would see the cost impact of that in six months, but you’re pulling it forward. Can you just talk about how you determine how much to pull forward?
Rafael Lizardi: Yes. Well, so it’s an accounting process and it’s essentially when you’re below what’s considered normal utilization, that percent that you’re below that — and that is generally determined by wafer and the fab is wafer starts and out in the assembly test operation as your — the number of units that you’re producing and you divide that by the capacity that you can get, the maximum capacity. You establish a normal, which is where you normally expect to be. That could be 85%, 90%, 95%, depending on the situation. And whenever you’re below that, then you take that percent that you’re below and then you take those fixed costs and go straight to the P&L instead of going into inventory. So some of those costs that will come in fixed costs, some of them are depreciation, but it’s not only depreciation.
You have electricity, for example, is largely fixed. You use [indiscernible] whether that tool is running production or not as long as it’s plugged in. So you take that into account. And then at the end of the day, you’re not creating money when you do that, you just essentially put it on the balance sheet or the P&L. And in this case, it’s going directly into the P&L as a linked quarter charge because that portion of the capacity is not producing. Now one more comment, that gives us tremendous operating leverage on the other side of that, right? Because think about fixed costs on the way down, they heard of it. But on the way up, they’re fixed, right? So from a cash standpoint, on the way up, you don’t spend any more and then you get just tremendous cash fall-throughs on the revenue, particularly when it’s 300-millimeter capacity at very low cost.
Dave Pahl: Do you have a follow-on, Joe?
Joe Moore : Great. Thank you. Separately, on the comm infrastructure business seemed quite soft, both quarter-on-quarter and year-on-year. I know that business isn’t a focus for you guys, but can you talk about what’s driving that weakness?
Dave Pahl: Yes. And it — last year was about 7% of our revenue, Joe. So we can find great opportunities in Comms Equipment. We continue to invest, we just don’t think it has the secular growth that other markets like industrial, automotive fab. So we continue to make investments there. And as we’ve talked about that market over the years, it’s one that just tends to be choppy. We believe that they’re continuing to adjust their inventory levels as we work our way through this quarter. And as I mentioned earlier, it’s down 50%. So that’s a pretty significant drop. So yes — so again, long term, we think it’s a great market and we’re positioned well there, but it will have these types of moves overall. Okay. thanks Joe. We will go to the next caller, please.
