GlobalFoundries Inc.

Good day and thank you for standing by. Welcome to Global Foundry's conference call to review third quarter of fiscal year 2022 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Suki Nagesh, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone, and welcome to Global Foundry's third 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 third 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 the accompanying slides. I would remind you that these financial results are unaudited and subject to change. Certain statements on today's calls 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 play under your reliance on forward-looking statements. Actual results may differ maturely from these forward-looking statements, and we do not undertake any obligations 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 20-F, filed with the SEC on March 31, 2022, and on our 6-K, filed with the SEC on August 19, 2022. We will begin today's call with Tom providing a summary update on the current business environment and technologies, following which Dave will provide details on our end market, third quarter results, and also provide fourth quarter guidance. We will then open the call for questions. We request that you please remit your questions to one with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Suki, and welcome everyone to our third quarter earnings call. I'm pleased to report third quarter results that were better than our August provided guidance as we continue to make solid progress on our strategic and financial priorities. Amidst an increasingly challenging economic environment, our team across our entire enterprise continues to execute. Let me begin by providing a brief update on the current business environment. Given the increasing macroeconomic and geopolitical uncertainty, we continue to work closely with our customers to monitor end market demand. Since the beginning of the quarter, some of our customers have requested to modestly adjust some of their 2023 shipments downward. particularly with respect to the first half of 2023. Based on the current macroeconomic environment and our customer discussions, we are proactively taking actions to contain costs and to accelerate our previously planned productivity initiatives. Though it is difficult to take these actions during a year of record output, we believe that taking these actions now enables us to continue to outperform the market regardless of the economic environment. David will provide more details about these activities on his commentary. Long-term, GF's growth drivers remain intact. Our aggregate LTAs have increased from the prior quarter as the number of customers under long-term agreements has grown from 36 to 38, with the total value of these long-term agreements now slightly above $27 billion. Additionally, the amount of committee prepays has increased 6% from a quarter ago to approximately $3.8 billion. Also, and as expected, our long-term agreements are providing a strong framework for us and our customers to have balanced and constructive demand discussions. As an example, a recent LTA amendment resulted in a modest underutilization cash payment, an ASP increase on existing demand, and an additional year added to the contract's duration. A great example of the benefit of the long-term agreement structure. Now, let me give you an overview of third quarter. Global Foundry's revenue grew 22% year-over-year, driven by increases in both wafer shipments, richer mix, and ASPs. This revenue growth, coupled with strong operational execution, resulted in continued improvement to adjusted gross margin. We reported adjusted gross margin of 29.9% in the quarter, a 12 percentage point improvement from a year-ago period. As a result, we delivered earnings per share of 67 cents, which is better than the high end of our guidance range. Again, Dave will provide more color on our financials in a moment, but let me now provide a brief update on our recent technology achievements. In the third quarter, we completed five technology qualifications. Notably, this included a 12-nanometer LP customer-specific technology covered under a five-year long-term agreement. Also among the qualifications is a customer's proprietary automotive 40 nanometer embedded non-volatile memory product for one of the largest automotive MCU suppliers in the industry. This qualification now allows us to ship this product from both our Dresden and Singapore facilities, establishing a high volume secure supply chain for the automotive industry. Within the quarter, we also taped out five new customer products on our silicon photonics platform. This included a photo IC device, fully monolithic co-packaged optics for a GPU-to-GPU 2 terabit optical interconnect. Finally, we have successfully produced a high-performance RFGAN device with our through silicon via technology. We now have demonstrated performance that exceeds silicon HBT technologies, and as I previously mentioned, integrates a novel through silicon via solution to optimize power amplifier output and efficiency. In addition, we have sampled GAN power devices to early engagement customers. Both programs are being executed in our Burlington, Vermont facility, where we recently received a $30 million grant from the US government as part of the commercialization funding for this GAN RF technology offering. To summarize, I'm pleased to report another quarter of solid execution as we deliver to all our customers and to all our stakeholders. We are on track to have a strong year of growth in 2022, And given the strength of our product portfolio, the breadth of the markets we serve, and the single-source nature of our business, we are well-positioned to navigate the current challenging macroeconomic environment.

With that, over to you, Dave. Thank you, Tom, and welcome to our third quarter earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics which exclude stock-based compensation. Our third quarter results exceeded the high end of the financial range we provided in our last quarterly update. Third quarter revenue was approximately $2.074 billion, an increase of 22% year over year. We shipped approximately 637,300 millimeter equivalent wafers in the quarter, a 5% increase from the year prior period. Average selling price, ASP, per wafer increased approximately 14% year over year, driven by ramping long-term customer agreements with better pricing as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 90% of total revenue. Non-wafer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 10% of total revenue for the quarter, consistent with our expectation. Let me now provide an update on our revenue by in-markets. Smart mobile devices represented approximately 46% of third quarter revenue, growing approximately 12% year-over-year. Growth was driven by higher ASPs and better mix as we continued to increase our silicon content and the premium tier handsets. In our RF front-end modules, despite the well-known and ongoing inventory correction and handsets, we are executing well and expect mid-teens full-year growth in the premium segment, offset by declines in the low and mid-range segments. Our long-term customer agreements are helping us navigate the challenging demand environment by reducing volatility. We continue to maintain market share in premium-tier handsets and are currently developing next-generation technologies, that will improve performance through better switch, LNA, and digital integration. Furthermore, in the 5G sub-6 gigahertz RF transceiver market, which is a new market for GF, we expect to see robust growth in 2022, driven by the adoption of our products by a leading handset chip customer. Another new market is Wi-Fi RF SoC, where growth is driven by our solutions going into premier handset models in support of Wi-Fi 6 6E, and Wi-Fi mesh networks. Our image sensor processor business also grew strongly in the quarter as we continue to partner with industry leaders in stacked logic technologies for low power solutions as they become increasingly important to support low light resolution applications. Our smart mobile device audio business is also growing strongly this year, driven by our differentiated 55 BCD light solutions. GF's BCD light solutions address specialty power applications such as display, wireless charging, and battery management by providing higher efficiency, lower leakage, and improved noise performance. Moving on to home and industrial IoT, revenue for the home and industrial IoT market grew approximately 83% year-over-year, representing 19% of total revenue. Strong year-over-year growth in this end market was driven by wafer volume growth of almost 40%, with the remainder the result of better ASPs and improved mix. Within this end market, we saw continued growth in smart card solutions and wireless connectivity, driven by our differentiated 28-nanometer and 22-FDX technologies. We also saw broad-based growth in power management in the quarter. We remain on track for home and industrial IoT to be the fastest growing end market for GF in 2022. Touching next on automotive, revenue in this market was approximately 5% of our total third quarter revenue. The automotive end market has been one of the brighter spots in the market. We expect our growth to continue as we bring to market new MCUs and safety applications, radar for sensing, and power management for electrification. Based on our current design wins, we anticipate continued growth in our automotive business in 2023, and we expect the business to exit 2023 at a billion-dollar annualized run rate. Next, our communications infrastructure and data center end market comprised approximately 18% of third-quarter revenue and grew approximately 29% year-over-year. Growth was evenly split between higher shipments and better ASPs and mix. Our strongest year-over-year growth continues to be in the data center submarket, closely followed by wired infrastructure and storage. Our customers are continuing to grow market share in this segment, and GF is contributing by providing critical connectivity and IOD components. Finally, and as expected, our compute end market declined year-over-year and comprised approximately 2% of third quarter revenue. We expect this end market to be less than 5% of our total 2022 revenue. Moving next to gross profit. For the third quarter, we delivered adjusted gross profit of $621 million, which translates into approximately 29.9% adjusted gross margin. The 12 percentage point year-over-year improvement 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 third quarter were slightly better than expected and represented approximately 11% of total revenue. R&D for the quarter was up sequentially at approximately 118 million, while SG&A came in at 114 million. Total operating expenses were 232 million, excluding 21 million of stock-based compensation. GF delivered operating profit of 389 million for the quarter, which translates into an approximately 19% adjusted operating margin, roughly 14 percentage points better than the year-ago period, and 8 million higher than the high end of our guidance range. Third quarter net interest expense was approximately 11 million, and we incurred a tax expense of approximately 19 million in the quarter. We delivered third quarter adjusted net income of approximately 368 million, an increase of approximately $334 million from the year-ago period. As a result, we reported adjusted diluted earnings of $0.67 per share for the third quarter. We delivered record third-quarter EBITDA of approximately $793 million. Adjusted EBITDA grew $288 million year-on-year on $374 million of incremental revenue growth, representing approximately 77 percent fall-through. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the third quarter was $679 million. Gross capex for the quarter was $613 million, or roughly 30% of revenue. At the end of the third quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $3.5 billion, an increase of roughly $200 million from the previous quarter. Next, let me provide you with our outlook for the fourth quarter. We expect total GF revenue to be between 2.05 and 2.1 billion. Of this, we expect non-wafer revenue to be approximately 11 to 12 percent of total revenue. We expect adjusted gross profit to be between 595 and 630 million. Included in this guidance is a sequential reduction in capacity utilization, particularly with respect to our 200-millimeter FABs. The expected reduction in the fourth quarter wafer starts, which support first quarter revenue, decreased our gross margin guidance range by approximately $50 million. We expect adjusted operating profit to be between $365 million and $420 million. Excluding share-based compensation for the fourth quarter, we expect total OPEX to be between $210 and $230 million. At the midpoint of our fourth quarter guidance, we expect share-based compensation to be approximately $36 million, of which $13 million is related to cost of goods sold and approximately $23 million is related to OPEX. We expect net interest and other expense for the quarter to be approximately $2 million and tax expense to be roughly $22 million. We are also on track to close the sale of the East Fishkill facility at the end of the year. As a result, we expect to record a gain on sale in the fourth quarter that will be in the range of 350 to 400 million. Excluding this one-time gain on sale, we expect adjusted net income to be between 337 million and 400 million. On a fully diluted share count of 554 million, we expect adjusted earnings per share for the fourth quarter to be between 61 and 72 cents. Including the one-time gain on sale, we expect adjusted EPS to be between $1.24 and $1.44. For the fourth quarter, we expect DNA to be about $405 million, of which 90% is related to the cost of goods stole. We expect adjusted EBITDA to be between $770 million and $840 million. For the full year 2022, we now expect total gross CapEx to be between $3 billion and $3.3 billion, impacted primarily by the well-known delays in capital equipment. Despite the delay, we are on track to meet all of our material customer commitments for the year. As we look forward, we will be working closely with our customers and partnership and will provide an update on our 2023 CapEx at the end of the year. While we have tightly managed expenses over the past year, we are nevertheless paying close attention to the uncertain macroeconomic conditions and to our customers' recent commentary regarding 2023 demand. We are working closely with our customers to monitor demand and, as Tom mentioned, we are proactively containing cost and accelerating previously planned productivity initiatives. Though we are still sizing these initiatives, we expect them to deliver annualized savings of approximately $200 million, the majority of which will be in OPEX. Neither these savings nor any related one-time charges are incorporated in today's guidance. We will provide you updates on these initiatives as appropriate. To summarize the quarter, strong operational execution enabled us to deliver third quarter results that were significantly better than the high end of our guidance range. We are continuing to execute the strategic plan we outlined to our stakeholders at IPO, and we are proactively taking action to position the company to outperform irrespective of macroeconomic conditions. With that, let's open the call for Q&A. Operator?

As a reminder, to ask a question, you'll need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Harlan Sur with J.P. Morgan. Your line is now open.

Yes, good morning and great job on the quarterly execution and strong profitability. You know, the industry is thought to be a I think a good assessment, right, of the team's technology and portfolio differentiation. So if I look at your total revenue pipeline, LTAs, renegotiated LTAs, standard book and shift, and even current negotiations on new business, I know that you guys were previously anticipating overall pricing to be up next year, but obviously given the challenging and changing demand dynamics, maybe you guys can just articulate what the overall pricing profile is. now looks like for 2023, and then I will follow up.

Good morning, Harlan. I'll start on that one, and then maybe, Tom, you can add some color. We believe that we're still in a relatively constructive pricing environment, particularly with regards to our LTAs. Average selling price per wafer, as you've seen, has increased again this quarter. That's six consecutive quarters of sequential increase. really consistent with our previous commentary based upon what we see, we continue to expect modest pricing increases into 2023. Tom, anything you'd add?

Yeah, then I'd try to add a little bit more strategically. When we look at the assessment, I think to a company, we're all aligned that we're still going to double this industry by the end of the decade. When we look at the market opportunity in our SAM, we see that market opportunity growing, but more importantly, where differentiation matters, where we can continue to drive our single source business, create differentiation to create value for our customers and capture for ourselves, we see that market in excess of $20 billion of really specialty type of applications that we can go out and win. So as long as we continue to focus on our execution of our R&D roadmap, understanding the end markets we play in, differentiating to support those end markets, I don't think this is the end of that ability for us to continue to capture value for our business as we work through this macro.

Well, thank you for that. And then given the lower demand profile of your customers in the industry, it's clear, you know, obviously, as you said as well, next year will be challenging. I assume it's too early for the team to articulate a full year 2023 view on wafer shipments or revenue. So maybe if you could just help us think about a framework for the gross margins next year, right, with Utilization is most likely coming down, but with many positive offsets, like increasing wafer pricing, as you just mentioned. We've got the East Fishkill transition and continued depreciation rollout. So give us a framework for how to think about gross margins.

Sure. Maybe, as you know, Harlan, we guide one quarter at a time, but maybe I could broaden out the way we think about what we need to focus on. as we head into perhaps times that are perhaps more challenging. When times are more challenging, you tend to focus on the variables that you can control. And when we sit down as a management team and we think about those variables, the first one is the one that Tom mentioned, differentiation. So we've realigned the company to be more focused with respect to product management, development of differentiated technology. We believe we're making progress towards being more differentiated. We had another quarter About 90% of our design wins were single sourced. We're about 90% for the year, year to date, on design wins being single sourced. So we feel like we're making good progress there. With respect to pricing, you know, as Tom mentioned, we have seen pricing increase this year sequentially. We think it's going to modestly increase next year. We think that's directly correlated to our ability to differentiate cost containment. You heard on the prepared commentary that we're aggressively controlling discretionary spending, travel, entertainment, professional services. We're accelerating some of our previously planned productivity initiatives. And then finally, CapEx, you know, we can control the rate and pace of our growth. We're moderating our CapEx to better match our customers' demand forecast while we're also considering our free cash flow profile. So, you know, ultimately we believe that that helps us control our utilization. We believe that's directly correlated to gross margin. And so we're focusing on the things that we can control. We feel like we had a pretty good third quarter, and we feel still quite optimistic for the future.

Insightful. Thank you.

Our next question comes from the line of Ross Seymour with Deutsche Bank. Your line is now open.

Hi, guys. Thanks for asking a question. Tom or Dave, one for you on linearity of demand. Obviously, we've seen what a lot of your fabulous customers had to say. Third quarters were generally okay, but fourth quarter guides were pretty darn weak. I know you talked about utilization coming down, but any additional color on the linearity of demand that you've seen during the third quarter and thus far in the fourth quarter?

Sure. I think with respect to linearity, Ross, you see that in our guide, we've got it from $2.05 billion to about $2.1 billion. At the midpoint, that would be relatively flat on a quarter-to-quarter basis. I think if you were to rewind a couple of quarters, we would have expected a little bit more growth sequentially from third quarter to fourth quarter. So I think you're seeing the impact of some of those customers that have reduced their future demand. With respect to linearity into 2023, as you know, we guide one quarter at a time, but as you've heard from many customers, as we're hearing from our customers, we think the first half of 2023 is probably the trough based on what we're hearing. It's probably more likely than not the first quarter, but we continue to refine and assess that demand based upon our collaboration with customers.

And I'll just add two points to that. One is You know, our underutilization is predominantly, and I mean predominantly, our 200-millimeter, not our 300-millimeter facilities. And even with all of that, we still expect 2023 to be a modest up year for us.

Tom, just a clarification there. Do you mean that on the revenue side or the waiver output side or both?

I'm talking revenue. Got it. Thanks.

And then I guess for my follow-up, the big picture question people obviously have is with the direction macros going, and I appreciate the color of the bottoming in the first half of the year, but I wanted to dig deeper into the LTAs. It's good to see that they're expanding in both their magnitude and the number of customers that you have, but people still wonder about the value of those LTAs. So talk a little bit about the framework, what it's allowing you to do. Is the value that you're holding customers to the exact amount they at one point agreed to? Or is it more so that it allows a framework for negotiations on, you know, expanding longer term, just trying to figure out the value of the LTAs and what gives you comfort in that view for 2023, given the macro trends right now?

Yeah, you know, really, I'd kind of direct it back to the question back to Tom's prepared commentary. And really, I'll use as an example, probably the most recent amendment that we've made to an LTA agreement. So we had a customer that reached out to us about revising downward their demand a little bit in the fourth quarter, and then subsequently in 2023, most of it kind of centered up on the first half. When we sat down to talk to that customer, and as we had said previously, the LTA provided a framework of tools such that we can engage with each other in a pretty constructive way. And as Tom mentioned in his commentary, the ultimate outcome of that collaboration was that we had a capacity under utilization fee. We also had increased pricing for the remainder of the demand in 2023. And then we had the appending of demand and the extension of the agreement by an incremental year that extended that contract. I believe it was out into 2026, that extra year. And so that would be an example of the LTA framework enabling both parties to sit down in a constructive way to handle not only short-term perturbations, but also to continue to handle what we see as long-term growth in the industry, handle that in a very constructive manner. Thank you.

Our next question comes from the line of Joseph Moore with Morgan Stanley. Your line is now open.

Great. Thank you. I wonder if you could talk about the utilization shift that you talked about. And did I hear you right? There's a $50 million impact in Q4. I guess, wouldn't the impact be closer matched to the revenue impact? And I guess, is there something specific that's sort of driving you to take that action?

Sure, Joe. Specifically, what we were trying to articulate with the prepared commentary was the gross margin range would have been $50 million higher. if we had continued to run at kind of full utilization like we were running at in prior quarters. The reason you start to see an impact in the fourth quarter is because the wafers that are started in the fourth quarter are essentially a lot of the wafer outs that are in the first quarter. But you start to accrue those underutilization charges in the fourth quarter. They start to impact that particular period. And so that's why we commented that we would have had a range that was essentially $50 million higher on the gross margin line. if that underutilization did not occur or was not occurring. Did you have a follow-up, Joe?

Yeah. Thank you for that. I think in terms of bigger picture, can you talk about conversations that you're having with people that aren't under LTA? To the extent that you might have some capacity free up here, I would assume that there's a lot of people with automotive and industrial-type businesses that are really interesting to you that sort of would want to work with you. Is there opportunity around that? And do you see opportunity to potentially sort of reposition some of the smartphone stuff over towards automotive industrial?

That's absolutely the case. There's still strong strength in auto. You're hearing that across the board. And we're opportunistic. Many of our technologies that we support, smart mobile devices, 40 nanometer with embedded memory, our BCD technologies, using it as an opportunity to remix towards auto. The key here is to make sure that we sell every wafer we can. We sell where we're the most differentiated as we honor our LTAs. And so we're constantly looking to optimize our business to match the demand across the different end markets and leveraging the ability to not only do a one-for-one replacement, a 40-nanometer part with another, But we call funds our capacity. If we have more demand on 55 nanometer, how can we fund our 40 nanometer corridor to make more 55? So that's a constant balancing act we do with our team and being very proactive to the markets we can serve. Thank you.

Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open.

Thanks for taking my question. In the scenario of sales being, say, modestly up next year, how should we think about gross margins? Can they continue to increase? And what will be the benefit that you might see from the East Fishkill FAB exit?

Yeah, so as we mentioned, Vivek, we do believe that the pricing will be modestly up next year. We believe that we have the opportunity, based upon what we currently see, to have revenue growth that's modest next year. I'm not going to provide guidance on gross margin, but clearly what you're seeing from us is you're seeing us proactively position the company such that we can perform irrespective of the market environment. So we are taking actions now. to contain costs both on the OPEC side as well as on the COG side, and we believe that that positions us regardless of the market that we enter into. Did you have a follow-up, Yvette?

Yes, thank you. So, Tom, over the last few weeks, we have seen a lot more details about U.S. restrictions on China, and I was hoping you could give us a flavor of if your customer discussions have changed in any way. looking out over the next several years, do you see more customers wanting to engage with global foundries given your unique footprint? And then, you know, the second part of that is as you look at especially the automotive market, you know, do you see more customers wanting to engage with you with prepayments? I think you mentioned that you expect your automotive revenue to be a billion-dollar annualized. you know, next year, how much of that is from existing customers? How much of that is from newer customers?

So, yeah, let me start with the first part about the geopolitical dynamics and the restrictions out of China. If you recall, you know, GF's exposure to what we call direct business in China is under 10%. And so that end of our business remains intact. But more so than not, customers are starting to think longer term. How do they get a better balance in their sourcing? And so what you won't see them doing is saying, I have a part that's already in existence. Let me go move it to a better footprint because that's redundant engineering. What you're really starting to see them think about is that next product family. The kind of design wins that we'll get going forward that will turn into revenue 12 to to 18 months later. So I view 2023 to be the year where we'll start to see more and more products come our way for that next generation product that then will come revenue starting in 2024 and beyond. And then another dynamic that we're seeing taking place, we talk about single source business. We still have a second source business, but in some cases we're starting to see customers move us from being the second source to being the prime source. you know, giving us the preferential supply side of that. Again, part of this rebalancing of their supply chain to be a little bit more geographic spread around the globe, which, as you know, as you stated, plays well into GF's footprint. The second part of your question was on automotive. Our design wins already in the pipeline get us to that 2023 annualized run rate. David cited in his prepared remarks and you just quoted that billion dollar run rate. But I would tell you, we are engaging, it's the fastest growing market for us. We're engaging each and every day. And I think you're gonna see coming out of this a different economic model in the industry. where when there's pass-through charges through a very complicated supply chain, that automakers will want to have a stronger relationship with foundries so that they don't have to bear the brunt of pass-through of costs that go through the supply chain to get marked up. And I would just tell you to stay tuned on that. I think this is something we're seeing developing real-time in front of us. Thank you.

Our next question comes from a line of Chris Dainley with Citi. Your line is now open.

Hey, thanks, guys. So can you just provide a little more color on the push-outs and cancellations you're getting for next year? Maybe talk about which end markets and what the total, I guess, amount has been?

Sure. I'll try to provide the amount of color that I can. Obviously, I need to steer clear of any particular customer's or any sense of information. But when we sit down with our customers, and let's characterize it as a handful of customers, so we've got about 38 LTAs now, up two from last quarter, we've sat down and had discussions with a handful of our customers to really look at their forecasted demand for 2023. And, you know, I think the first thing that I would note is that These LTAs are all multi-year in length. In fact, the duration is probably sitting closer to four, maybe slightly over four years right now. And so we're not talking about the entire LTA. We're talking about one period, one near-term period, specifically, seems to be specifically more related to the first half at this stage of 2023. And so those discussions tend to be centered up around in markets such as smart mobiles. where, as you know, there's an inventory correction underway. The high end of that market still seems to be holding up fairly well. The low and the mid-tier of that market tends to be undergoing some inventory correction. I would say that's the largest segment that we've had discussions on. I think most of the customers, that handful of customers, have tended to be more centered up on that space. The discussions have been quite constructive. The LTAs continue to remain intact in that framework that we discussed earlier, and those variables involved in that framework have all been tremendously helpful towards that collaboration. Did you have a follow-up?

Yeah, what's the total impact? So how much revenue is getting pushed out or canceled? And maybe talk about how many LTAs have been renegotiated so far and what the total amount of dollars has come out of them.

Well, I would say that, you know, I would characterize the total LTA dollar amount as essentially being the same, if not slightly more. For next year? No, for the total length of the contract. So, we look at these engagements as multi-year in length. You know, I think what we'll comment on for next year is the commentary that we've already provided. and that is that we expect 2023, based upon what we currently see, we expect 2023 to continue to be a modest growth year for us. Okay, thanks.

Our next question comes from the line of Krish Sankar with Cowan. Your line is now open.

Hi, thanks so much for taking my questions. This is Stephen calling on behalf of Krish. First question for Tom, maybe just in terms of the the 200-millimeter wafer demand that you're seeing in the near term. So I totally understand that a lot of that weakness might be driven by the smart mobile market segment. I was wondering if you could also talk a bit more about how communications as well as data center and also industrial demand for wafers is playing out in the near term here. Is that still holding up fairly well, or do you also see some demand indicators of softening exiting this year as well?

I think the only end market that continues to outperform is auto. I think we're seeing that. Our customers are seeing that. When you look at some of the growth we've had year over year, like industrial and home IoT, over 80% growth, that's not a sustainable growth rate. There probably aren't enough wafers in the world to do that for a decade. But so even though that growth will slow down, it's still a growth opportunity for us. These are important end markets. So I would tell you that auto still is strong. I think there's a potential for auto to be the one that never really goes through a cycle in this cycle and comes out even stronger. And then the rest of them will go in order. I think this is a little bit of a lumpy. Not everything went down at once. Certain end markets, memory and PCs went kind of first and then others followed. And they'll come back out in that order. And for us, it's more about making sure that we stay focused on leveraging our capacity in the end markets where there's demand, figuring out how to fund the capacity, do multiple qualifications like we announced in the preparable remarks so that we can use all our capacity to where the demand is. And that's where we keep our focus. Great.

Thanks for that, Collin and Tom. One quick one for Dave on the optics or cost reductions. I think you mentioned sort of an annualized cost savings run rate of about $200 million. I was wondering if the timeline to reach that cost savings run rate is sort of in the next couple quarters, or is there possibly some flexibility on when you hit that run rate depending on how the macro ultimately plays out next year?

Sure. We're moving pretty aggressively on the cost containment activities. And of the annualized $200 million, I think our expectation would be to try to get at least half of that next year, if not three quarters. So that's the way we're currently thinking about it.

Thanks a lot. And then congrats on the strong results.

Thanks, Steve.

Our next question comes from the line of Mehdi Hosseini with SIG. Your line is now open.

Yes, thanks for taking my question. A couple of follow-ups. I'm wondering if there is any update on the CHIPS Act that you can share with us?

Yeah, I guess I'll expand your question. What is GF doing with the CHIPS bill? You know, if you roll back to our earnings call last quarter, it was on the actual day the president signed the CHIPS bill, and then the The U.S. government is off to the races to figure out how to go deploy this money in a meaningful way to get the outcomes they were looking for. From a GF perspective, we will not put capacity on without customers committed to that demand. And so we're working in parallel, putting our proposal together, the RFPs that will go into Washington in the early part of 2023, in parallel working with our customers to aggregate the type of demand we would need to commit to that kind of build out. For us, we think of using the chip spill in kind of three buckets. The first is to fill out the expansion of our existing facility in Fab 8 in Malta, New York. The second one would be to create some extra capability of technology in our Burlington, Vermont facility. And then lastly, the longer range play is to go add a modular expansion, new brick and mortar, new clean room space in Fab 8 in Malta, New York. And so that's the order in which we think about how we would go add this capacity. The rate and pace at which we do it will be dictated by how quickly our customers are looking for us to create this capacity for them as they think about rebalancing their supply chains and bringing some of that product to the states. I call it the $52 billion question because the $52 billion in the CHIPS bill is solving one part of the equation that's going to help create the capacity. The other part of the equation is making sure that demand finds its way back to the U.S., and that's the part we're all working on now to make sure we can go secure that demand, that certainty of business so that we make these investments with confidence and we make these investments with the right returns that any business would want. Any other follow-ups to that?

Actually, I do. I think the bigger part of the CHIPS Act that would make the U.S. cost comparable to Italy is the tax credit. And given the NOLs, I think we're all waiting to get more coverage how GF would benefit from the dollars of allocation outside of the CapEx rebate. And I'm wondering if there's an update there.

Yeah, the investment tax credit, as we read it, is pretty straightforward. And so, those are any investments to increase domestic capacity. That tooling and those investments will be available to have a 25% rebate essentially during the next tax filing season. And that rebate is applicable regardless of your net tax paying status. So our belief is that we will be able to leverage those investment tax credits to accelerate our investments in the U.S. And so while we haven't incorporated any of that into our current numbers, we do have a plan to leverage that opportunity. I see.

And then can I actually have one? Other follow-up question? Go ahead, Manny. Thank you. And that has to do with your days of inventory. I think that increase in days of inventory is a reflection of some of the wafers, the shipment that may be pushed out because of some weakness in the first half. Is that the right way to think about that uptick in DOI?

No, you know, in total, if you go back to the end of last year, and I'm going back to the, you know, kind of end of last year balance sheet, 12-31-21, total inventory has grown only about $200 million on a base of about a billion. And if you go through and you look at that, our total inventory, about $1.1 billion of WIP, that is all inventory that's in the line that we expect to ship to our customers on a timely basis. We do not have, you know, some large buildup of finished goods inventory. This is work in process that you would expect to grow as you're continuing to increase capacity quarter to quarter to quarter. And so I would characterize the increase in WIP to date as being very much associated in line with expectation and associated with capacity increases quarter to quarter. Got it. Thank you.

Our next question comes from the line of Rajminder Gill with Needham. Your line is now open.

Yes, thank you, and congrats on solid results in a very tumultuous environment. Dave, just wanted to follow up on the CapEx commentary. I think you might have touched upon it a little bit, but how do we think about how you manage CapEx in a potential down cycle? During the IPO process this year and next year, There was a significant ramp in CapEx due to some of the capacity expansion plans you have in place, and then it would kind of tailor off in 2024. How do you, you know, what are the drivers or the levers you can push to ratchet back down CapEx if you do see a down cycle or more of a reduction in orders that go beyond just smartphone customers? I'm curious how you're thinking about that over the next year.

Let me give you some high-level thoughts on CapEx. I'm going to start with free cash flow, and I'll end with CapEx. Year-to-date cash from operations, about $2.1 billion. Year-to-date CapEx, just slightly under $2.1 billion. As we enter the third quarter from a free cash flow perspective, cash from ops minus CapEx, we're slightly positive on a year in which we've already spent about $2 billion for CapEx. I would say just as a framework, you know, very good alignment between our cash generation ability and our investment in capacity. The second thing that I would speak to is, you know, our customer demand. So we are actively moving our CapEx to align with our customers' demand. And so while we wanted more CapEx in the early part of this year and our WFE suppliers, they're working hard, were unable to supply us with everything that we needed, we were able to deliver productivity to continue to execute against the LTA commitments that we've made. And so we are banking those productivity gains, and we're now working with the WFE vendors to make sure that we get the critical pieces of tooling that are necessary to still grow the capacity for that customer demand. And as the demand changes, then we'll move and shift the capacity such that we can keep that capacity, you know, as best as we're able in alignment with that customer demand. So, you know, our forecast has come down now for the year, total capex for the year, somewhere between call it 3 to 3.3 billion. As we think about next year, you should think about us considering our free cash flow generation ability in context with our customer demand and trying to match up and align those variables.

Yes, that's really helpful. And just for my follow-up, you know, you mentioned utilization rates kind of trending a little bit lower, particularly on the 200 millimeter. I'm wondering if you could quantify what your current utilization rates are, you know, going into Q4, and how do we think about the utilization rates going into the first half of 2023 as some of these customers start to reduce orders on the smartphone side?

Let me provide some commentary. I'll try to keep most of the guidance to one quarter. Third quarter, we were essentially fully utilized of very high 90s as a blended utilization rate. When we look at our guidance for fourth quarter, we're probably in the low to mid-90s type of rate, still very highly or fully utilized on the 300-millimeter side. with the negative impact utilization really being on the 200-millimeter side. With respect to 2023, I'll just kind of go back to our prior statements, which were we still expect 2023 to be a modest growth year for us. Thank you.

Our next question comes from the line of Matt Bryson with Wedbush. Your line is now open. Matt, your line is now open.

Sorry about that. Thanks for taking my question. It seems like your characterization of the demand environment very much mirrors what your customers are saying. With demand weakness and inventory adjustments predominantly impacting calendar Q4 and the first half of next year, it's good to hear that you're shifting your CapEx plans to fit and market demand. My question is, assuming this scenario indeed plays out, Should we expect that the $50 million underutilization costs are calling out? Is that a peak underutilization charge, or can we expect there's greater underutilization in, say, calendar Q1 when it appears conditions will be at their worst?

Yeah, I think I'll just stick with guiding one quarter at a time at this point, Matt. You know, I think What you're hearing us articulate is that we believe our long-term growth prospects remain intact, that we believe we can modestly grow through 2023, but I think you're also hearing us say that we are proactively managing the company for cost containment activities to be able to perform regardless of macroeconomic scenarios. So I think we'll stand pat on that commentary. Do you have any follow-up questions?

Yeah, my follow-up is when you talk to the expectation of pricing lifts in 2023, should I be thinking about that more as a like-for-like commentary, or is that more of a statement around where GF's pricing can go given either mixed benefits or some sort of premium being attached to locality of supply?

Sure. So, our visibility on pricing, first and foremost, is really grounded in our LTA visibility. So, we are continuing to ramp those LTAs. Not all those LTAs went into effect January 1st of 2022. They've continued to ramp throughout this year. There's additional LTAs that we're expecting to come online and ramp with volume in 2023, and those LTAs include better pricing. And so it's hard to separate out some of the like-for-like pricing versus mix, but I think what you're hearing us articulate is that if you took those two categories together, you're going to continue to see some very modest uplift in ASP per wafer from 2022 to 2023.

Our next question comes from the line of Tristan Guerra with Baird. Your line is now open.

Hi, good morning. Just looking at your commentary about your expectation that mid next year could be a trough, you know, is that based on the expectation that the inventory correction actually ends at that point? Is that specific to smartphone and does that mean that you could recapture what you've lost in terms of lower utilization rates, you know, in Q4 and potentially in the first half of next year with a rebound in utilization rates in the second half as a result of understanding you only guide one quarter of the time.

Yeah, look, our view on 2023 has really been developed in conjunction with our customers. And so when we think about Our future, you think about how much business that we have single source, 90% of design wins, about two-thirds of our volume that we ship today is single source and continuing to grow. And so we work with our customers on their demand profile. And so when we provide some general color commentary on 2023 that sounds similar to that customer base, it's not a surprise. I'm going to hold off providing additional color on 2023 other than to kind of reiterate some of our prior comments, which was really that based upon our discussions with customers, we think the first half is the trough. We think that it's perhaps more likely than not first quarter versus second quarter, but we'll continue to assess that in collaboration with our customers.

Great. That was my only question. Thank you very much.

Our next question comes from the line of Randy Abrams with Credit Suisse. Your line is now open.

Okay, yes. Thank you. I wanted to ask a question just about the relative difference, 8-inch versus 12-inch. Could you talk on the 12-inch, the drivers for that strength, holding, resilient, and then also, do you think it's a timing difference, or we should see that correction to come through a little bit later?

Sure. You know, again, I'll speak personally perhaps a bit to our LTAs. Our LTAs really have, we have very, very good coverage across our 300 millimeter manufacturing base with regards to LTAs. And so that tends to be where we have added the most differentiation. Certainly we have some differentiation on the 200 millimeter side with CIGIE and GAN and some other products that are quite unique. But really on the 300 millimeter side, we've got a tremendous amount of coverage from LTAs. And so I think from that perspective, that's why you're seeing the 300-millimeter utilization hold up significantly better than the 200-millimeter.

Yeah, let me add a couple points here. You know, we happen to also be playing in markets that are holding up better than others. So when we think about high-end handsets, that holds up better than the low-end handsets. We think about the 5G transitions. That's still a growth this year in number of handsets that are 5G-enabled. We play in that segment. So we think of data center. We're a strong partner with someone who's gaining share in data center, and we're a supplier to that. So some of the damping we're seeing is not only the breadth of the end markets we play in, but some of the sub-parts of that that are still very strong and some of the customers in those segments that are doing well.

That's helpful. And the second question I wanted to ask, just wanted to follow up the 200 million OPEXs. It's quite sizable relative to the annual base. Just curious, given the plans to continue to grow the footprint, grow into more specialty, if you could give a few buckets where you're seeing good room to make those type of reductions. And then just one housekeeping, with the cap exchange, how you see the depreciation changing year over year into next year?

Sure. So let me take those in order here. With respect to OPEX, you know, we've rough and tough numbers. It's about a billion dollars in OPEX, probably closer to $900 million if you were to do the rounding than a billion. So when you think about, you know, the split of the $200 million annualized, you're probably talking, you know, two-thirds, one-third OPEX versus COGS. And so when you think about that type of spend and you think about the opportunities that we have in those areas, I think between professional services, travel, entertainment, labor, of course, we're looking at all of the levers for addressing our spending to be able to enter any environment. And so I think we've got opportunities in all those areas to become more productive. And quite frankly, we had a series of plans to drive productivity over a multi-year period. And so I would characterize a lot of this as kind of the acceleration of some of those plans versus having to, you know, create or craft new ones as we go. So I think that's where we stand with respect to OPEX. We're assessing that today. As I mentioned, we'll provide more details as we continue that assessment. With regards to CapEx and managing CapEx with respect to gross margin as well as a percentage of revenue, I think what we've been able to do this year is we've been able to drive more productivity this year than we previously expected. And so while we were delayed in terms of receiving new equipment to be able to ultimately deliver more wafers, we were able to find a way and credit to 15,000 hardworking employees that we're able to find a way to drive that productivity to deliver those wafers without some of those tool shipments. So that created the opportunity for us to push out some of the CapEx and better match some of that CapEx with our customer's demand. That's something that we've been able to do kind of through the latter half of this year. It's something that as we head into 2023, we expect to be able to continue to do, drive productivity and match our utilization as well as our capacity expansions up to customer's demand.

We'll take one last question, please.

Our last question comes from the line of Melissa Fairbanks with Raymond James. Melissa, your line is now open.

Great. Thanks so much, guys, for squeezing me in. I just have a couple quick ones. I know you're tired of talking about 2023 expectations, but with the auto growth rate, it seems to imply a pretty steep ramp to get to that $1 billion run rate target. Is there any sort of linearity that we should be assuming? Is this tied to model year launches, driving more of a step function increase kind of toward the back half of the year, or should it be a smoother path through the year?

No, we expect it to be pretty linear. We've been capacity constrained on some of our automotive business. In fact, I'd say on the majority of our automotive business, what some of this rebalancing of demand has enabled us to do. It's enabled us to prioritize a little bit more of the automotive demand. You saw, for example, smart mobile devices declined to 46% of total revenue versus 50% a year ago period. As we continue to grow automotive, you're going to see us have a much better product mix balance that goes out into the marketplace. So we're able to rebalance that capacity as well as add some new capacity in some strategic areas. to be able to take automotive up in what we expect to be a pretty linear way throughout next year until by the time we exit fourth quarter next year, we're kind of at that billion-dollar annualized fund rate.

Okay, perfect. And maybe just a quick follow-up on the CHIPS Act. Excuse me. To the extent that you may be more tightly controlling CapEx in the near term, do you know if there are any restrictions to the incentives? Like once you submit an RFP, Do you expect to be bound to that, or is it too early to know how this is going to kind of flow through?

Look, I think that's too early to know. I also think a pragmatic approach is no one wants to see capacity built and not being used. That becomes a real waste for everybody. So I think there will be a very pragmatic approach, and GF will lead the way in making sure that we have not only do we have the right funding model to get the return, but we have the right durability and commitment that we know that capacity will be utilized. And I think Washington will want to see the program executed just that way.

Great. Thanks very much, guys. That's all.

That concludes today's question and answer session. I'd like to turn the call back to Suki Nagesh for closing remarks.

Thank you, Liz. Thank you, everyone, for joining us on the call today. Please feel free to reach out if you have any additional information or questions you need answered from TF. Thank you.

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