GlobalFoundries Inc.

Thank you for standing by and welcome to Global Foundry's second quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the call over to Head of Investor Relations, Suki Nagesh. Please go ahead.

Thank you, operator, and good morning, everyone, and welcome to Global Foundry's second quarter 2022 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, and Dave Reeder, CFO. A short while ago, we released GF's second quarter 2022 financial results, which is 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 webpage. During this call, we will present both IFRS and adjusted non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for adjusted 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. You should not place undue reliance on forward-looking statements. Actual results may differ maturely 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 maturely 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 20F filed with the SEC on March 31st, 2022. We will begin today's call with Tom providing a summary update on the current business environment and update on our capacity expansion technologies, following which Dave will provide details on our end markets and second quarter results and also provide third quarter guidance. We will then open the call for questions. Request that you please limit your questions to one with one follow-up. I would also like to remind you that our first Capital Markets Day will be taking place in New York City tomorrow. If you would like to attend in person, please email ir at gf.com in order to be registered for the event. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Suki, and welcome, everyone, to our second quarter earnings call. I'm pleased to report two key results that were once again ahead of guidance that we provided in May as we continue to make significant progress on our strategic and financial priorities. Amidst a challenging macroeconomic environment, the GF team, 15,000 strong, continues to execute each and every day. So let me start with providing a brief update on the current business environment. Similar to others in the industry, we are seeing some areas of the market beginning to rebalance supply and demand, including end markets such as low-end handsets, PCs, and in general, the lower end of consumer electronics market. Although we've experienced some decrease in some pockets of our unconstrained demand, the total demand for GF solutions remains robust and capacity continues to be oversubscribed. Specifically, we continue to see healthy demand in fast-growing end markets such as home and industrial IoT, automotive, communications infrastructure, and data center. If you recall, we previously mentioned that we started this year oversubscribed with demand that was 25% higher than available capacity. Today, demand continues to outpace our ability to supply by about 10%. We remain oversubscribed for 2022, and 2023, and given the increasingly single-source nature of our business, we expect to continue to grow revenue and profit through the remainder of this year and next. In the second quarter, GF revenue grew 23% year over year, driven by increases in both wafer shipments and ASPs. This, coupled with strong operational excellence, resulted in significant improvement to adjusted gross margin. We reported adjusted gross margin of 28% in the quarter, a 12 percentage point improvement from a year ago period. As a result, we delivered earnings per share of 58 cents, which was 10 cents better than the high end of our guidance. David will give more color on the financials in a moment, but let me now provide you with a brief update on some of our recent customer and partnership activity. At the time of our IPO last year, we had signed long-term agreements totaling approximately $20 billion in revenue. Now, about one year later, we have 36 customers under long-term agreement with revenue totaling approximately $27 billion and prepayments and access fees totaling about $3.6 billion. Yesterday, On the heels of the U.S. CHIPS bill being passed, we announced an extension of our long-term agreement with Qualcomm that adds more than $4 billion in incremental waiver purchases from our Fab 8 facility in upstate New York. With this extension, the long-term agreement with Qualcomm now represents more than $7 billion in global revenue through 2028. Since the beginning of the year, we've secured approximately $6 billion in incremental new long-term agreements with our customers. All these new agreements, as well as extensions to existing long-term agreements, are 100% single-source business. In fact, single-source revenue in the first half of 2022 outpaced overall revenue, growing 37% year-over-year, and 90% of the first-half design wins were single-sourced as well. In the quarter, we also signed a definitive agreement with SD Micro to create a new jointly operated 300 millimeter manufacturing facility adjacent to SD's existing 300 millimeter facilities in Kroll, France. With this agreement and combined with our capacity increase in Germany, GF will be tripling capacity in Europe from 2020 through 2028. This partnership with ST enables GF to add capacity in a highly capital-efficient manner backed by grants from the French government as well as customer prepayments. Finally, let me provide a brief update on some of the important technology milestones we achieved this quarter. In the second quarter, we completed nine technology qualifications. We're extremely pleased to have released our 22 FDX Plus platform. This platform offers greater than 25% power reduction, thereby enabling a technology roadmap to further improve power and performance optimization for many of our customers' IoT applications. Additionally, we have now fully qualified our highly differentiated 45 CLO photonic solution, which we just recently announced at the Optical Fiber Communications Conference. We have over a dozen customers currently developing prototypes in preparation for volume manufacturing in 2023. We believe GS Photonics' solution is the only 300 millimeter monolithic integration of electro-optical components in our industry. We're combining SOI, CMOS, and photonics in a single chip solution. Lastly, we released to production the industry's first 55 nanometer embedded non-volatile memory solution for power management that will be adopted in new releases of premium tier handsets. To summarize, I'm pleased to report another quarter of solid execution as we deliver to our customers and all our stakeholders. We continue to demonstrate steady momentum across our business, that are making significant progress towards our long-term business model. Now, before I hand it over to Dave and Suki, I would like to let you know that normally I would be participating in the Q&A session following our prepared remarks, but I'm currently in Washington, D.C. to witness the signing of the CHIPS bill at the White House. This landmark legislation will have a profound positive impact on our nation, our industry, and GF for years to come. I am looking forward to seeing many of you at our Capital Markets Day in New York City tomorrow. With that, over to you, Dave.

Thank you, Tom, and welcome to our second quarter earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics which exclude stock-based compensation. Our second quarter results exceeded the high end of the financial range we provided in our last quarterly update. Second quarter revenue was approximately $1.993 billion, an increase of 23% year-over-year. We shipped approximately 630,300 millimeter equivalent wafers in the quarter, a 6% increase from the year prior period. Average selling price, ASP, per wafer increased approximately 16% year-over-year, driven by ramping long-term customer agreements with better pricing, a constructive transactional pricing environment, as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 92% of total revenue. Non-wafer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 8% of total revenue for the second quarter, consistent with our expectation. Let me now provide an update on our revenue by end markets. Smart mobile devices represented approximately 49% of second quarter revenue, growing 14% year over year. Growth was driven by higher ASPs and better mix as we continued to increase our silicon content in the premium tier handset market. In the RF front end, which is the largest segment of our mobile business, growth was relatively flat year over year. However, our industry leading 300 millimeter RF SOI platform that is widely used in the premium tier handset market continues to increase as a percentage of the total front-end mix, which is accretive to our business. For 2022, we are on track to grow our premium tier 5G revenue by more than 35% year over year, offsetting the modest decline we see in low-end handsets. Additionally, in this end market, we are growing our silicon content, mostly due to gains in RF transceivers PIMX, audio ICs, and image sensor processors. Growth in these submarkets are all trends we expect to continue throughout the year. Revenue for the home and industrial IoT market grew 72% year-over-year, representing 17% of total revenue. Strong year-over-year growth in this end market was driven by wafer volume growth of almost 40%, better ASPs, and improved mix. GF's strength in feature-rich technologies that are focused on superior wireless connectivity performance at the lowest possible power consumption has enabled our growth in the home and industrial IoT end market. Within this end market, our wireless connectivity solution saw significant growth due to the accelerated adoption of our 22FDX technology for Wi-Fi 6 applications. We are also seeing strong traction for our IoT microcontrollers that feature embedded non-volatile memory for a number of smart card applications, such as digital payments, access control, and electronic IDs, driven by features such as connectivity speed, security, and a growing touchless transaction environment. Additionally, growth in our IoT and market is also being driven by our differentiated power and analog technologies for applications such as factory and building automation, as well as test, measurement, and security. We are on track for home and industrial IoT to be the fastest growing market for GF in 2022. Touching next on automotive, revenue in this market was approximately 4% of our total second quarter revenue and grew approximately 34% year over year, driven by the ramp of new products in ADAS, safety, and infotainment. As we have previously indicated, our growth in this market will be lumpy as we are constrained by how quickly we can build capacity. As capacity comes online, we will be ramping new products enabling automotive electrification and safety. As a result, our automotive business is on track to grow more than 25% in the second half of the year versus the first half of the year. Next, our communications, infrastructure, and data center end market comprise approximately 17% of second quarter revenue and grew approximately 50% year-over-year. Growth was driven by a combination of higher shipments, higher ASPs, and better mix. Our strongest year-over-year growth is within the data center submarket. Our customers are continuing to grow in market share in this segment, and GF is contributing by providing critical connectivity and IOD components. We also grew revenue modestly and all of our other sub markets, including optical networking and wired wireless infrastructure. Next, and as expected, our compute in market declined year over year and comprised approximately 5% of total second quarter revenue. We expect this end market to be less than 5% of our total 2022 revenue. After a trough in Q1, we are now seeing a modest uplift in revenues following the finalization of a design with a major PC customer. Moving to gross profit. For the second quarter, we delivered adjusted gross profit of $559 million, which translates into approximately 28% adjusted gross margin. The 12% increase year-over-year was driven by better fixed cost absorption, higher ASPs, and improved mix. Approximately 80% of this improvement was attributable to ASP and mix, with the remaining 20% attributable to volume and fixed cost absorption. Operating expenses for the second quarter were better than expected and represented approximately 10% of total revenue. R&D for the quarter was down sequentially at approximately $112 million, while SG&A came in at $97 million. Total operating expenses were $209 million, excluding $32 million of stock-based compensation. Q2 total operating expenses decreased approximately $17 million from a year ago, largely due to lower startup costs associated with FAB expansion projects, as well as lower headcount costs. GF delivered operating profit of approximately $350 million for the quarter, which translates into an approximately 18% adjusted operating margin. roughly 15 percentage points better than the year-ago period and $45 million higher than the high end of our guidance range. Second quarter net interest expense was approximately $19 million, and we incurred a tax expense of approximately $30 million in the quarter. We delivered second quarter adjusted net income of approximately $317 million and increase of approximately $350 million from the year-ago period. As a result, we reported adjusted earnings of 58 cents per share for the second quarter. We delivered record second quarter adjusted EBITDA of approximately $784 million. Adjusted EBITDA grew $318 million year over year on $373 million of incremental revenue growth, representing approximately 85% fall through. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the second quarter was $609 million. Gross capex for the quarter was $812 million, or roughly 40% of revenue. At the end of the second quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $3.3 billion, an increase of roughly $2.5 billion from the previous year. Before I transition to Q3 guidance, I briefly wanted to update you on the current inflationary environment and its impact on our business. Last quarter, we provided you our view on inflation and the headwinds we are facing in our business, especially with respect to materials, energy, and labor costs. While we have experienced a slight uptick in costs for materials and energy in Q2, we continue to estimate the impact of these inflationary costs to our full-year results to be less than 2% of revenue. Next, let me provide you with our outlook for the third quarter. We expect total GF revenue to be between $2.035 billion and $2.065 billion. Of this, we expect non-waiver revenue to be approximately 11% to 12% of total revenue. An increase in design wins and the corresponding customer tapeouts should result in sequential third quarter reticle revenue growth of more than 25%. We expect adjusted gross profit to be between $580 million and $609 million. We expect adjusted operating profit to be between $347 million and $381 million. Excluding share-based compensation for the third quarter, we expect total OPEX to be between $228 million and $233 million. We expect a sequential increase in operating expenses to primarily be driven by higher IT and other administrative costs. At the midpoint of our third quarter guidance, we expect share-based compensation to be approximately $42 million, of which roughly $21 million is related to cost of goods sold and approximately $21 million related to OPEX. We expect net interest expense for the quarter to be approximately $15 million and tax and other expenses to be roughly $24 million. We expect adjusted net income to be between $324 and $356 million. and we expect DNA for the quarter to be about $405 million, of which 90% is related to cost of goods sold. On a fully diluted basis of approximately 551 million shares, we expect adjusted earnings per share for the third quarter to be between 59 and 65 cents. We expect adjusted EBITDA to be between $775 million and $813 million. As we mentioned on our earnings call last quarter, for the full year 2022, we expect total gross CapEx to be less than $4 billion, impacted by the well-known delays in capital equipment. Despite the slight delay, we are on track to meet all of our customer commitments for the year. In summary, strong operational execution enabled us to deliver second quarter results that were significantly better than the high end of our guidance range. Our demand visibility remains strong, supported by our long-term customer agreements, and we expect to deliver progressively better financials quarter to quarter throughout the year as we continue to methodically execute our plan. With that, let's open the call for Q&A. Operator?

Thank you. Again, to ask a question, please press star 1-1 on your telephone to ask a question. Our first question comes from the line of Harlan Sirk. I'm JP Morgan. Your line is open.

Good morning. Congratulations on the team support on helping to get the chips built over the finish line and also the strong quarterly execution. You guys came into this year, as you mentioned, with demand about 25% higher than your ability to supply. I think last earnings call, you guys talked about a one and a half X book to bill ratio. Clearly, As you mentioned, the demand environment has weakened, especially in the areas that are encompassed in your smart mobile and your compute segments, which is about half of your revenues. But on the flip side, you guys do have fungibility and positive technology and capacity by geography. So there is some slack for your business to take a hit on demand. So with demand looking like it's normalizing a bit lower, trending about 10% above supply, maybe you can just help us think about how much demand has to drop before you have to modulate your utilizations or your forward capacity expansion plans.

Good morning, Harlan. Exciting day here in New York City and exciting day in Washington where Tom is. He certainly wishes he could be with us today, but given the choice of being on this phone and being in the White House for the signing of the CHIPS bill, I think he chose wisely. I look forward to seeing you tomorrow at Capital Markets Day. With respect to demand, we're still over supply, meaning that demand outstrips our supply, and that's true for 2022 and 2023 as well. We'll obviously cover this in more detail tomorrow, but given that it's obvious already, our order book for 2022 looks good, and it's largely complete. So our revenue visibility remains solid, and to the extent that we see customers that want to rebalance, we're usually trading up that rebalance towards a richer, more accretive mix for global founders. So demand is still strong. Did you have a follow-up, Harlan?

Yeah, maybe as a reflection of some of the weaker segments, and I know you have fungibility, we know that one of your RF customers is being impacted by the weak China domestic smartphone market. I think this customer actually took a charge against their calls in the June quarter, and most of that charge was due to wafer shipments that were going to fall below the minimum threshold of wafers under the long-term agreements with you. So the good news is that the take or pay is clearly working for you. This customer is sole sourced with you. They've made prepayments. So they clearly see the differentiation that you bring to their products. Now they're in renegotiations on their LTA with you. And if we assume that the demand environment will probably continue to weaken maybe and you maybe have more customers that have to renegotiate the terms of their LTAs, given the clear differentiation you bring to your customers, is it fair to assume that pricing is not being negotiated, but it's primarily around prepayments, duration, or volume of the LTAs that is being renegotiated?

You get it right, Harlan. The pricing environment is still very constructive. Given inflation and still the shortages that we see with respect to capacity, I don't really expect that pricey environment to change in the near future. And then finally, I think the piece I would add is that if you were to look at a 5% drop in utilization, we've mentioned before that if you have a 5% drop in utilization, then you typically see just a couple of points, call it two points or so impact to gross margin. But if you took a five-point decrease in ASP, That's five points that flows all the way through. So I think given all the things that I just mentioned, strong in-market demand, very constructive pricing environment still, inflation that continues to hit the global economy, it's difficult to see an environment in the near future where pricing becomes a concern.

Great. Thank you.

Thank you. Our next question comes from Vivek Arya of Bank of America. Vivek Arya, your line is open.

Thanks for taking my questions. Dave, for my first one, just a clarification on the Q3 outlook. If I exclude the increase in the non-wafer revenue, it suggests wafer sales could be kind of, you know, flattish to somewhat down sequentially. I imagine that's probably because of the smartphone market, but I just wanted clarification on how you were thinking about the interplay of wafer shipment and ASPs in Q3, and if you could maybe give us a little bit of color on how you are thinking about it extending into Q4 versus what you thought for the year originally.

Sure. As you know, we're currently constrained from a supply perspective, but we are expecting waivers to increase sequentially from Q2 to Q3. So, no change in our plans there. In fact, we had talked about our wafer shipments last year were about 2.4 million wafers. Those wafers were going to grow to about 2.6 million wafers this year, and then about 2.8 million wafers in 2023. And so, all those plans remain on track. We expect to grow wafers sequentially from Q2 to Q3, and actually from Q3 to Q4 for that matter, and well into 2023. So from that perspective, I still feel quite good about the trajectory there. Pricing, you know, we don't talk a lot in detail about pricing. If you were to look at how we performed this quarter, 23% year-over-year growth, Q2 22 to Q2 21. Of that 23%, about 6% was volume growth and about 16% was ASP growth. As we look from Q2 to Q3 and we look year over year from Q3 22 to Q3 22, we expect those similar trends to continue. Did you have a follow-up, Vivek?

Yes. Thank you, Dave. You know, I know it's probably, you know, you'll talk more about, you know, expectations for 23 and the longer term tomorrow at the capital markets day. But as you look at the capacity announcements that, you know, you and several of your peers have been making, Do you think, Dave, that from an industry perspective, pricing will be a headwind or a tailwind in Calendar 23?

Actually, let me break that into parts. At Global Foundries, we don't put capacity on for ourselves. When we add capacity, we are adding capacity in partnership with our customers. So we have customers that are Signed LTAs with us, $27 billion now is, as we mentioned, more than 36 or 36 customers, roughly $3.6 billion of customer funding that's actually come to GF to be able to expand that capacity. So the capacity that we're putting on, we're putting on at the test of our customers and in partnership with our customers and, as you saw more recently, with governments. In terms of are we concerned about pricing coming into play as more capacity is added, about two-thirds of our shipments are actually single-source wafer shipments. And about 90% of our design wins are actual single-source design wins. And so we're not putting on generic capacity for the market. We are putting on capacity in partnerships with our customers. So we feel quite good about that. We feel like the pricing environment remains quite constructive. We see that as being constructive not only today, but also 2023. Thank you, Dave.

Thank you. Our next question comes from the line of Ross Seymour of Deutsche Bank. Ross Seymour, your line is open.

Ross, you there? Ross, you may be unmuted.

Operator, why don't we go to the... Sorry, Ross Seymour, your line is open.

Can you guys hear me?

We can hear you now, Ross.

Okay. Sorry about that. Not sure what happened. So I want to go back to the LTA side of things. Obviously, you guys are doing a good job of enforcing them. But as we start to see more companies write down your customers or any fabulous companies write down their own side of that equation, I just want to have you walk us through the mechanics of how you handle a slowdown in demand. I get that you're single sourced, but at some point, end demand's end demand. And if they don't need the volume, you can force them to take it, but they don't need that inventory either. And I would imagine that would hurt the relationship. So just talk a little bit about how the negotiations go when the demand weakens, how you adjust the various levers, whether it's units, pricing, et cetera. So I think that's what investors really want to get confidence in as they look forward to a potentially slowing macro economic environment.

Sure. I think the first thing that we do, Ross, when we have a customer, I mean, as you know, we're very in market and very customer focused here at GDF. And so the first thing that we do is we recognize that The LTA creates a framework for us and the customer to have a frank discussion. And so because we have more demand than we actually have supply today, we've been able to have those discussions with customers that want to rebalance their commitments a little bit. We've been able to negotiate with those customers, be able, by and large, to be able to satisfy their their reductions and some of their demand, and then replace it with business that's actually more accretive to us. And so to the extent that we can do that, we don't charge our customers for capacity that was underutilized if we're able to replace it with demand from another customer. So having a broad base, diverse base of business in automotive and IoT and data center comms infrastructure and data center services That's really enabled us to be able to accommodate some of these rebalancings that you see in the marketplace. Practically, how do we handle it? We sit down with our customers. We talk about what their in-market demand looks like. We talk about the duration of their LTAs, maybe extensions of LTAs. We talk about the rebalancing of their portfolios so that they have some pockets of demand that are doing better and they have some pockets that are weaker, being able to rebalance those pockets to better meet their in-market demand. So really it's a framework for us to sit down and have a negotiation. And new design wins. And new design wins as well for their next generation of business. That's another element that Asuki just mentioned. Did you follow up, Ross?

Yeah, I just want to ask about the gross margin side of things and more specifically some of the units versus the wafer units versus the ASP side. I know you guys don't guide overtly by those metrics each quarter, but it seems like if the units are going up in your third quarter, I mean, the ASPs are actually going to go down a little bit at the midpoint. I think that's the first time your implied ASPs will have dropped sequentially since you've been public. So can you just walk us through maybe the third quarter and then the second half? What would be some of the puts and takes on that? Is that just an end market dynamic? Is it a non-wait for revenue dynamic? Any of the moving parts there would be helpful. Thanks.

Sure. Well, first, You know, the correlation between ASPs and gross margins don't always hold true in all instances. So sometimes you can have a different product that actually has a higher gross margin even if it has a lower ASP. So from that perspective, it's really product by product related and probably more directly correlated actually to the amount of features from global foundries that's actually included in the product with respect to the health of the gross margin. Sequentially from Q2 to Q3, I'm looking at pricing, and I would say ASP per wafer looks pretty flat. I mean, it's a flattish profile. We've got a little bit more ramp in volume from Q2 to Q3 than we had from Q1 to Q2, but I would say pricing remains relatively flat from quarter to quarter, and I expect to actually increase as we progress throughout the year, so that implies we're quarter to quarter. So I think pricing, from my perspective, again, kind of a gross price, if you will, ASP per wafer, relative flat volumes growing. We expect profitability from a gross margin perspective to continue to grow. So all in all, the progression from Q2 to Q3 looks pretty good from where I sit.

Thank you.

Thank you. Again, to ask a question, please press star 1, star 1-1 on your telephone. Again, that's star 1-1. on your telephone to ask a question. Our next question comes from the line of Midi Hassini of SIG. Midi Hassini, your line is open.

Yes, thanks for taking my question. I have a couple of, and I apologize I joined the call late, but did you discuss as to what drove the COGS in the June quarter down on a sequential basis?

We didn't discuss it in detail, but a lot of that's due to product mix. And then, of course, we get better absorption. So as we do ship more volume, especially on a year-over-year basis, what you do start to see is fixed cost absorption that kicks in in a pretty meaningful way. And so from that perspective, that's something that we've been talking about for a long time, and we continue to experience that in the second quarter. And we expect that to continue. In fact, all the way through 2023 as we continue to ramp our volumes from 2.4 million wafers last year to 2.6 million wafers this year to roughly 2.8 million wafers in 2023. Did you have a follow-up?

Yes, and I'm not going to ask you about LTA. It's actually on OPEX, and I don't want to take anything from your tomorrow's analyst day, but should we, just for purposes of modeling, should we assume the OPEX into Q4, December, would be kind of a 240-ish, flat-ish on it? on a Q-by-Q basis?

Yeah, we tend to guide one quarter at a time. But what we've talked about for the entire year is that OPEX in total, roughly around the 12% range, 12% of revenue, roughly equally split between R&D and SG&A. So that should give you some color on how we think about the whole year. And I don't think Q3 or Q4 would be tremendously different than that.

Got it.

Thank you.

Thank you. Our next question comes from the line of Chris Shankar of Cohen. Chris Shankar, your line is open.

Hi, Eric. Good morning. This is Stephen calling on behalf of Chris. I have a couple of questions. First, I just wanted to drill down a little more on the customers that are currently rebalancing inventories. I guess from your perspective, any estimates on the duration of the rebalancing process? Is it like a one or two quarter, or perhaps is it more extended into that duration?

I think what we're seeing, and I'm speaking broadly here because we're really not seeing a lot of it, but what we are seeing is modest rebalancing. I would probably characterize it as 10-ish percent, maybe 15-ish percent, but in that type of ballpark, It tends to be away from markets that are heavy consumer and that tend to be, you know, just kind of lower in nature. And the business that it's being replaced with, it's being replaced with automotive business. It's being replaced with business associated with data center infrastructure and comms. And then, of course, home and industrial IoT. Those businesses continue to perform quite well, as you saw in our second quarter. We expect that to continue throughout the year. Did you have a follow-up?

Yes, the thought I had was for Q3 revenues, specifically the reference around higher reticle revenues within your non-waiver business. Is there any color on the concentration of customers or maybe the end market where the higher reticle activity is coming from? And when would production revenues be ramping for those related reticles?

Sure. Look, from a design wind perspective, you really – design winds and LTAs, you're seeing those both progress pretty nicely. So to the extent it's an LTA associated with new products, then obviously you need the reticles. and the non-way for revenue to grow to be able to satisfy those LTAs. And then of course the corresponding design wins. So those are all kind of move in tandem. And so it's no surprise really that you're gonna get these quarters where you have some heavy development activity to then be able to fuel that future revenue growth. Specific areas that are growing, typically don't talk too much about that quarter to quarter. There is a segment in Q3 aerospace and defense That's an area that is specifically growing in a meaningful way in third quarter, particularly for radical revenue. So that would be one area that's driving that increase sequentially from Q2 to Q3. Great.

Thank you so much.

Thank you. Our next question comes from Tristan Guerra of Baird. Tristan Guerra, your line is open.

Great. Thanks. This is Tyler for Tristan. Can you describe the importance of the SD SOI process, notably in EVs, and maybe as it relates to that, any additional color you can provide on the recently announced European investment and partnership with ST Micro?

So from an FSOI perspective, so on SOI in general, we believe that we're actually the leader in the SOI space. So whether you're referring to RF SOI, or fully depleted SOI technologies, we believe that we are the leader in delivering those technologies to market and certainly the founder leader for those technologies. The importance of fully depleted SOI are manifold, but I'll try to touch upon the big ones. For us, we manufacture our FDS technology on 22 nanometers. So you have very good digital compute power. So your digital computation is quite good. And then you also have the best-in-class power management. So you have best-in-class power management with very good digital compute. And then you layer on with that the connectivity capability, both the millimeter wave and then some of the RF characteristics. And you really have a platform that is ideally suited for anything that needs power management or advanced connectivity. And those are the markets that actually we're winning in. with regards to our FDX or, as you said, our fully depleted SOI technologies. So that announcement that we made in France, which seems like a long time ago, given how busy second quarter was for us and how good second quarter was for us, but it was only a couple of weeks ago, that announcement was really about growing our capacity to be able to service the design lens and the LTAs that we have on our FDX technologies. And those specifically related to, you know, IOT devices, connectivity devices, and more and more frequently automotive devices. So those are all areas related to power management, connectivity, and then some millimeter wave and automated driverless and other things in the automotive segment that really benefit from that technology.

Great. For my follow-up, without jumping the gun on your capital market state tomorrow, how should we think about the impact of the Chipsac on your CapEx into 2023 and beyond?

Let me answer that question a bit more broadly, and then I'll come back to it. But let me be a bit more broad on this. Global Foundries is a trusted company. We are engaged in Singapore. with the Economic Development Board of Singaporean government. So we're engaged with them with our customers to grow capacity in Singapore. We've been engaged with Germany for a decade and the EU to grow our capacity in Germany for over a decade, engaged with IPCAI there. And we continue to expand our capacity in Germany. In fact, we're increasing it from 300K wafers per year to 850K wafers per year. And then, of course, you mentioned France. In France, we're engaged with the French government, now trusted by the French government, to engage with them as an extension of our Dresden facility to increase our capacity ultimately from zero to about 360K wafers per year. And then, of course, here in the U.S., we're a trusted foundry for the U.S. government. And Tom's in Washington today signing the CHIPS bill. And so we're a trusted company, both by our customers and by governments. And by signing the CHIP bill, what that enables us to do is, in partnership with our customers, we will look at our investments, our opportunities to grow Malta that's within the four walls today, expand our tooling, and we've also done a lot of project work so that ultimately when our customers are ready with their commitments, when the government's worked out the details for how the CHIPS Act will be deployed, and then, of course, Global Foundries will be there with a project. When all three of those criteria are met, then we'll sit down and we'll figure out the next steps for investment here. When customers are ready with their commitments, when the government's worked out the details for how the chips that will be deployed, and then, of course, Global Foundries will be there with a project. When all three of those criteria are met, then we'll sit down and we'll figure out the next steps for investment here in the U.S. for new greenfield capacity.

Great.

Thanks for taking the questions.

Thank you. Our next question comes from Rajvendra Gill of Needham. Rajvendra Gill, your line is open.

And congrats on the solid results, good results. Just a follow-up on the LTSAs. I'm just trying to get a sense of, again, how you'll kind of navigate through that potential slowdown, particularly in the smartphone market. There's been many forecasts that have been revised down for the overall smartphone market, particularly 5G smartphones, anywhere between 150 to 200 million units this year have been revised down. That's going to affect the forecast for 2023. You obviously generate a large percentage of revenue from the mobile phone market through a variety of customers. So I'm curious, I know you haven't seen it yet, but is there any indication that a lot of your smartphone RF front-end module customers, as they look to the overall forecast next year, are starting to rebalance down their volume?

Let me break that apart in a couple of sections, and I'll share some high-level numbers from what we see in the market and how we feel about handsets. We think that quarter-to-quarter forecast, look at total global handsets, are going to be down something in the magnitude of about 200 million units. But if you look at what's happening under the covers, so total handsets, that's 5G, 4G, 3G, 2G, all the handsets down about 200 million units. That's the forecast from Q1 going to the forecast from Q2. But if you actually look at the 5G segment, of that forecast, units actually went up. In fact, units went up about 5%. The forecast for 5G handsets went up 5% from Q1 to Q2. So you have to look at the market in aggregate, and then you have to look at the market in detail and specificity. And when you see that 5G portion of the market not only doing well, but expected to do better in the second half of the year than in the first half, What that implies for GF is that we have higher content in the front end module of 5G handsets. We have higher content. It's more creative for us as a business. And so what we're seeing specifically in front end module is that our growth in 5G is more than offsetting the decline that we see in the medium and lower end handsets. And, of course, you look around the front end module, and Google Foundries is winning sockets. So we're winning sockets in power management, we're winning sockets in connectivity, and we're also winning sockets in audio as well as payment devices. And so you add all those things together, and that's the type of growth that you get is 14% year over year in the smart mobile market when the rest of the market looks flat to down. It's also important who you're engaged with as well. I would say that there are OEMs in the end market that are doing better than others, so So, you know, mixing up with 5G, winning more sockets or taking share, and then engaged with the right OEMs that are doing, you know, reasonably well in this market, all of that leads to the growth that you saw in the second quarter.

Yeah, I appreciate that detail. Yes, I appreciate that detail. It's helpful. Just for my follow-up, you talked about, you know, in general, the pricing environment, you're still constructive on it. And it's really mainly a function of the inflationary environment and the supply shortage. Maybe you could elaborate a little bit further. When you talked about the inflationary environment on the cost side, could you talk about, you know, the cost of the equipment or the raw materials that's leading you to continue to kind of pass on those cost increases? And then any sense in terms of the supply shortage For your raw materials, is there any indication that in some areas that's easing up or in other areas that you're still constrained?

Let me kind of take this in order here. With respect to inflation, look, our expectation is to pass along inflationary costs. And when I think about inflation, I think about materials. I think about labor and I think about energy. Those are kind of the three big drivers for global foundries from an inflationary environment perspective. So from a materials perspective, when we were signing our LTAs, we were actually in the market securing our long-term supply. And so from that perspective, we feel reasonably well hedged on the material side so that we have the materials at the right prices to then be able to satisfy the LTAs, which ultimately will deliver profitability that we've committed to the market. So, we feel pretty good about materials, but they are tight. Materials are tight. The environment's tight. There's not a lot of available capacity in the market. So, the materials environment is tight. From a labor perspective, we continue to execute very, very well on labor. We have some variable structures in place. When we outperform, like we did in Q1, we did in Q2, we expect to do again in Q3, then our employees get to participate in that. And so that variable labor element for us is quite effective in terms of helping us from an inflationary perspective. And then from an energy perspective, we've got some hedges and some forward buys in place to be able to mitigate some of the increases that we've seen in energy around the world. And then, of course, finally, from a pricing perspective, In April, we actually passed along some energy prices to many of our customers. We had energy surcharge that went out into the market in the early April time period in Q2. That would think of it in terms of kind of mid-single-digit price increases from a surcharge perspective. So materials, labor, energy, and then, of course, pricing being passed along, all those elements we feel like we've addressed reasonably well for 2022. Thank you. Appreciate it.

Thank you. Our next question comes from Chris Dainley of Citi. Chris Dainley, your line is open.

Open? Hey, thanks, guys. Just to follow up on one of the earlier questions. So, Dave, just to confirm, you guys don't expect any material impact from the CHIPS Act? And then while you're answering that, Do you guys expect to see your taxes go higher from this, you know, raise taxes on everything and everyone act that looks like it's about to pass as well that takes the minimum tax to 15%?

With respect to the CHIPS Act, there are kind of two elements to the CHIPS Act relative to really our P&L. One is the investment tax credit, and that's a 25% investment tax credit. for equipment that is purchased and then into the U.S. and installed and delivers incremental capacity. We'll continue to look at the details of that as the CHPS bill gets signed and we get more details, but it looks like that ITC is pretty straightforward. We do have investments going in to increase capacity in Malta. We also have some to increase capacity in our Burlington facility. We expect to be able to to use that investment tax credit to be able to accelerate some of those investments. And as we work through those details, we'll update you in subsequent quarters to the benefits to RP&L. But our understanding as it sits today is that that would essentially create a net capex effect. So it would be a one-for-one offset to depreciation amortization for new equipment that would be purchased here in the U.S. So that's the investment tax credit. Second element of the CHIPS Act, is really associated with doing more kind of greenfield or brick-and-mortar investment, I should say. And those details need to be worked out in some detail and specificity by the Commerce Department. We expect those details to be worked out over the next, I call it, six to nine months. And as those details become available, we'll update the market. Our gross capex plans have not changed to the extent that we'll get additional benefits from either the ITC or the second element of the CHIPS Act related to new investments in greenfield capacity will update the market accordingly. Did you have a follow-up?

Yeah, and thanks for the clarification. One more clarification. So given all of the, I guess, the weakness that you guys are seeing on the low end, it has not changed

your uh 2023 outlook versus let's call it three or six months ago uh in terms of you know pricing or revenue or ltas or anything it has been and let me let me tell you why um we had significantly more demand in 22 and in 23 than we could satisfy and so so when we look at the current environment today Yes, do we see some rebalancing in different markets? Yes, we do. Like others in the market, again, specifically related to consumer, specifically low-end consumer. And then you're seeing that manifest itself in handsets as well. As a portion of that market, that kind of low to medium in handset is under pressure. But that said, we had more demand than we could satisfy. Our capacity equation hasn't changed. We're expecting to deliver about 2.6 million wafers this year, 300 millimeter equivalent, about 2.8 million wafers next year. And so what we are able to do is we are able to take some of that demand, look at our oversubscription, and for demand that we see rebalancing, choose the demand that's most accretive to GF. And so that's created an opportunity for us to be able to take some of that unsatisfied demand in markets that we really like, and be able to bring that into our production schedule. And you're seeing the benefits of that in our P&L results. We've been able to deliver a bit more accretion than we expected. We're a bit ahead of plan that we laid out at IPO. We're executing well, and that rebalancing is actually benefiting us right now.

Perfect. Thanks again, Dave.

Thank you. Our next question comes from the line of Randy Abrams of Credit Suisse. Randy Abrams, your line is open.

Great. Thanks for squeezing in. I wanted to follow up on the CapEx. You mentioned a bit of the timing delay for equipment. Could you then give the view for 2023 with the incremental, how it's looking? And then for Dresden, you reaffirmed the 850K. If you could give an update on Malta, how that expansion is, And now with Chipshack, whether that pulls in the Malta expansion.

Sure. Equipment, you know, the WFE vendors continue to be challenged. And so, you know, I think maybe it was two quarters ago or maybe a quarter and a half ago, we talked about equipment being somewhere between, you know, call it two to four weeks late. I think if you look at equipment today, you're probably seeing more like four to six weeks late. It may even be as much as six to eight weeks late on equipment deliveries. And so equipment continues to be very, very tight. They are short components like many others in the market, which is somewhat ironic given that we need more equipment to be able to produce more chips that are in shortage situations. But that environment remains pretty challenging. We appropriately kind of hedged our commitments And so from that perspective, we still feel very good about the commitments that we've made, but we are experiencing delays in receiving that equipment. In terms of the impact, you know, originally we were hoping to spend capex this year of somewhere and call it the $4.25 billion range. We're now indicating that we're going to spend under $4 billion and probably a little closer to $3.5 billion than $4 billion. And so that's the impact of the push-outs that we're currently seeing, particularly given that we had a very strong fourth quarter from a CapEx perspective. So any slip-out from fourth quarter would flow directly into 2023. I think push in 2023 continues. So I think 2023, when we were originally thinking something around $3 billion-ish, I think we have slippage from $22 billion into $23 billion, and then correspondingly have slippage from $23 billion into $25 billion. and to 24. So I think it's a bit of a snowplow effect with regards to WFE and capex spend. With respect to the expansion in Dresden and Malta, the German team continues to do very well in bringing in new equipment as it arrives, getting on floor, getting it installed, getting it qualified, and getting it producing units. So hats off to that team in Dresden, Germany. under Manfred's leadership that they're just doing a great job and the work that they're doing there is flowing through to our P&L results and our fixed cost absorption. In fact, I'd say that's a true statement for all of our manufacturing teams. With regards to expansion in Malta, we are slowly increasing that output in Malta. We are waiting on equipment. We actually didn't expect that equipment to arrive until the second half of 2023. Obviously, if the delays continue, then maybe instead of second half of 23, that gets pushed more towards the later half of 23 or perhaps even into 2024. But we have ordered that equipment. We are waiting for it to arrive. And when it does, the multi-team will work diligently to get it on the floor and produce some units.

Great, and good luck getting that in. And a follow-up on the East Fishkill, since that's coming up, could you remind us the impact as you sell the FAB into early next year. And given the tightness, just one other question about timing, would you have the annual maintenance or would we continue to ride through it expecting to stay full? But just those because there's timeline as we get toward end of year.

Yeah, so if you recall, we signed that agreement a couple of years ago. We've on semi has been ramping up. We've been slowly kind of ramping out of that facility. So East Fishkill is on track to transact at the end of this year. So 1231 of this year. that facility will transact. We'll then enter into, in fact, we've already entered into an agreement with OnSemi such that they'll continue to produce some wafers for us and kind of a make-buy relationship over the course of 23 and 24. We'll continue to ramp slowly out of that facility in an orderly way. They'll continue to ramp up in an orderly way. But at the end of this year, that facility fully transacts and moves over to OnSemi for full ownership. And at that point in time, we're simply buying wafers from an order desk type perspective from OnSemi, fully qualified wafers that are manufactured there today. In terms of impact, we're estimating that we'll get roughly a $250 million impact or benefit on a year-over-year basis, 23 versus 22, by transacting that facility. It will lower our cost of goods by that amount on an ongoing basis.

Great. Thank you.

Thank you. At this time, I'd like to turn the call back over to Suki Nagesh for closing remarks. Sir?

Thank you, Lateef, and thank you all for joining. We look forward to seeing many of you tomorrow at our Capital Mars Day. Have a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect.