GlobalFoundries Inc.

Q1 2023 Earnings Conference Call

5/9/2023

spk02: relatively flat depending on exactly what the final mix is.
spk01: Got it. Thanks for that. And then from an end market perspective, you said earlier that you reiterated the bumping up against the billion dollars in the automotive side of things. So that's really impressive growth. And it seems like that could get you that slight sequential growth in the back half quarters all by itself. Are there other segments that you expect to continue to go down in the back half? It seemed like you said that inventory should be pretty normalized, so I wouldn't expect them to go up that fast necessarily, but it didn't sound like anything was going to go down. So what's really the offset to the automotive growth?
spk02: Sure. When you think about the sequential growth in the back half of the year, really what you're looking at is you're hearing us say, when we say slight, hearing us say we feel we feel good about the industrial and the governmental portion of home and industrial iot so that's the and as well as the industrial business and iot we feel good about automotive we've taken a more cautious outlook on the low end of consumer as well as the lower end of the handset market and so that's what you've heard us communicate is just the fact that we We feel good about those markets on the aforementioned comments. And then the other markets, we've just taken a cautious outlook. And if the inventory normalizes the way we expected, then perhaps we'll do slightly better. If the inventory and the macroeconomic kind of low-end malaise continues, then we'll be in line with what we told you. So we feel like we've positioned ourselves conservatively. Thank you.
spk09: one moment for your next question. Your next question comes from the line of Joseph Moore with Morgan Stanley. Your line is now open.
spk03: Great. Thank you. And let me add my thanks to David and good luck. In terms of the CapEx, you guys maintained this $2.25 billion from last quarter. Your revenue outlook is a little lower for the year. So I wonder if you could just kind of Walk us through the tradeoffs that you're making. Is that confidence in 2024? And, you know, just what are the tradeoffs between trying to drive more cash flow versus trying to invest in the business?
spk02: Sure. So first, let me start with just by saying that the majority of that CapEx is really related to FAB7H on our campus there in Singapore and really giving us the capability longer term to be able to satisfy some of these LTAs that we're signing today. as well as some of those LTAs that we've signed in the past. Before I just immediately direct your question, address your question, I do want to provide a little bit of context. You know, when we talked about our expansion plans, we talked about increasing our wafer capacity from about 2 million wafers in 2020 to about 2.4 million wafers in 21 to about 2.6 million wafers last year to about 2.8 million wafers this year to north of 3 million wafers in 2024. And we're actually very much on track to deliver that capacity. In fact, we're on track to deliver that capacity with probably what will be something like 3 billion less capex than originally anticipated for that total expansion that I just mentioned. And so we feel like we have appropriately positioned ourselves for growth in the future, for the business that we're winning both through LTAs and design wins. We will continue to make tradeoffs with regards to free cash flow for the period. In fact, we stated last quarter that we thought we would be free cash flow positive for the year. I'll reiterate that on this call that we believe we'll be free cash flow positive for the year. And then as we look to the future, we are very well positioned with capacity for future growth. Tom, anything you'd add to that?
spk08: Yeah, Joe, let me do a little P times Q here. Average price, $3,000. 3 million wafers. We've essentially positioned the facilities, our factories, to give 9 billion plus of revenue for the future without any, you know, just on the wafer business, not even the non-wafer revenue. So the capital we've planted is going to allow us to grow and actually respond to the market much more quickly than we were in 2021 when we had to build that capacity. So I think the capital that we've deployed is really positioned the company for the eventual growth, and it'll make us a lot more capital efficient as we think about 2023 and 2024 and beyond.
spk03: Great. Thank you for that. And then in terms of your overall utilization of your capacity, we continue to hear about from some of the automotive-centric companies that there are some bottlenecks still in terms of specifically, you know, non-volatile memory-oriented MCU processes for automotive, things like that. I know you've talked about broad fungibility, but are there still any areas where you guys would say, you know, here's a hot spot where if we can add a little bit more of this type of capacity, we can grow more?
spk08: Yeah, you know, there's never a perfect world. This idea that supply matches demand every day, every month for years is not there. And There are segments and customers where we are scrambling to fund you enough capacity in a corridor to make those very specific platforms with the features. And so we see that, too. We see that we're still in a game of trying to respond to the complete set of customer demand. Notwithstanding that, we still will deliver our full outlook on the automotive business for this year. Great. Thank you.
spk09: One moment for your next question. Your next question comes from the line of Raji Gill with Needleman Co. Your line is now open.
spk07: Yes, thank you for taking my questions and best of luck to you, Dave, as well. So just a question on the smart mobile market. That's really one of the main drivers of the weakness. I wonder if you could maybe break it down a little bit more specifically in terms of where you're seeing the softness in terms of technology. Is it more with the RF front-end module customers with some of the NFC, or is it just kind of across the board, given kind of the large inventory correction that's occurring in the smartphone industry? Any color on the smart mobile will be helpful.
spk08: Maybe, David, I'll start on this one. So, what's the industry outlook? Last year, double digit decline in handsets this year at 3% with an inventory climate. So this is the broadest stroke and most heavily weighted is just in unit sales. As David pointed out before, at least the premium handsets are impacted less than any other handset. And that's where we have high content. In fact, I think our smart mobile, smart devices, smart mobile device business is faring better Because some important design wins we had last year that are shipping this year that's offsetting some of this decline. So it's not any particular element or feature in the handsets. It's just the overall volume. That's a high, high fraction of the fact that our smart mobile device revenue was only 38% in Q1 of this year. David, anything else on that?
spk02: Well stated, Tom.
spk07: Thanks. And just for my follow-up, you know, regarding pricing, you talked about some of the pricing in the near term. But if you kind of think about long term, there's been, you know, discussions around if wafers are made in the U.S. that domestic foundries could charge a premium in terms of pricing. So there's been chatter about that. Is that something that you are, you know, debating with customers? Is that a reality? premium pricing for kind of wafers made in the USA? I would say it this way.
spk08: What you're hearing about is capacity being put on. Capacity drives investment. And investments require competitive return. And so you're seeing is what's the reality of the right economics to go create new capacity on these nodes? And how do we do it in the most efficient and economic way? And the answer is we have a very disciplined industry environment. Capacity is being put on in partnership investments. It's being put on with long-term agreements. And what I think that does, it's really healthy for the industry, and it creates a very constructive environment through partnerships that the investments that companies make will get healthy and competitive returns. Appreciate it. Best of luck, Dave.
spk09: Thank you. Thanks, Ryan. One moment for your next question. And your next question comes from the line of Chris Danley with Citi. Your line is now open.
spk04: Hey, thanks, guys. Just to get a little more specific in terms of what's going on this year, can you just talk about how much an aggregate of the LTAs have been pushed out and then what's been the change or how much change in pricing have you had to renegotiate?
spk02: Sure, Chris. Look, when we think of this year, if you go back to our capital markets day, we thought we were going to essentially be fully utilized this year. Now, not all of that was covered with LTAs, but between LTAs and POs, I mean, that was our expectation this year. And as we kind of rolled into the year and we looked at the inventory positions and the channel, and we looked at how the sell-through was going based upon the macroeconomic backdrop that we're in, we recognized with our customers that continuing to build inventory was the wrong decision. So we sat down with those customers and we started working on the framework of the LTAs to be able to... preserve the economic value of those contracts because of the dollars that we had invested in capacity. And so what I can say, I can't speak specifically contract by contract. I can tell you that we did close a contract that we disclosed, or maybe they disclosed, but it was broadly talked about, where there was an underutilization fee. I do not believe that we're going to have significant underutilization fees that are required throughout the year, and certainly that's not really factored in a meaningful way, I would say, for our annual forecast for 2023. We've been working with those customers to take the economic value of those contracts, preserve them, as well as to ultimately enhance our value and deliver our long-term model. I think that's probably the most that I would add there. Tom, anything that you would add?
spk08: Yeah, a minor add to that. When you think of single source business, it's not, if there's price elasticity, if I lower price, would I get more volume? The volume is the volume and the price is the price. And the question is, how do you go work through an inventory correction like this? It's not, let's go win share by price elasticity. That's the value proposition we provide to our customers. We have single source businesses. differentiate, they can differentiate their products, and we can be a better supplier to them in the great times and in the inventory correction times.
spk02: And if I could just add one point, I don't know of a contract that we've amended in which price went down in the LTA amendment. So when the volumes are being decommitted, you know, the conversation isn't about How do you decrease price to try to stimulate demand when you have too much inventory? So it's usually going in the other direction. So hopefully that's a helpful clarification.
spk04: Very helpful. Thanks. And for my follow-up, great job on landing Niels. He's got a good reputation. I guess, Tom, can you talk about the genesis of the CBO job? I don't think you guys have had this before. Is this just to sort of manage this – this downturn that seems a little more longer and serious than expected, or just talk about why he's coming over and what his specific duties are going to be?
spk08: Yeah, very good. It has nothing to do with downturn. It has everything to do about our future. The complexity of our business and the uniqueness of being a foundry requires a tight coupling between understanding the end markets and the specific requirements in the end markets. So we need to be as much as an expert, as our customers, and understanding the future where end markets are going so that we can create product lines by definition to meet those end markets and then drive our technology development in an aggressive and accelerated way. And we need the three of those areas to come together with one executive who can integrate that activity. And so our commercial team, under Juan Cadorvez, with our business unit team under Mike Hogan and our technology development under Greg Bartlett. All together, we'll report into Niels to drive that integration to accelerate our financial and commercial success and performance.
spk09: Thanks. And one moment for your next question. Your next question comes from the line of Mehdi Hosseini with SIG. Your line is now open.
spk05: Yes, thanks for letting me ask the question. Two follow-ups. David, do you have any guides for EBITDA in Q2 and 2023 and other follow-ups?
spk02: Sure. Hi, Mehdi. I hope you're doing well. EBITDA guide, I would think about EBITDA on a sequential basis as something you know, tracking with the marginal fall through that you'd see from slight revenue growth. So I think that statement holds true for second quarter as well as the subsequent quarters where we are expecting sequential growth throughout the year, kind of queue to queue to queue for the remainder of 2023. Got it.
spk05: And best of luck in your next endeavor. And a question for Tom. I understand there's a lot of anxiety over the inventory correction. which is nothing new given cyclical nature of the industry. But what I want to learn from you, maybe it's a good time for you to remind us, in a smartphone and electric vehicle, and outside of the SOI wafer, what are some of the key products or drivers for increased content, especially as you look into post-inventory corrections? It would be great if you could remind us of those key growth drivers outside of the core SOI resources.
spk08: It starts with embedded memory for microcontrollers for automotive. It starts with our device technology for higher voltage. You think of power management chips with embedded memory for both control and power management. It's a suite of applications and technologies beyond RFSOI. RF SOI, which features in the front-end module of phones. And so I said it earlier in my remarks, we are the ultimate player in low power on our FDX platform. We bring a broad range of RF to all our platforms, not just for front-end modules, but for all levels of connectivity, especially in the IoT space. And then the winning play is to create intelligent and secure processing capability by having industry-leading embedded memory in our solutions. And that's what plays to the strength of these end markets.
spk05: Is there a key milestone or a threshold for increased adoption, specifically in electric vehicle? Or is this just going to be a steady, heavy kind of adoption as electric vehicles prolificate, then you will see increased content? Or is there a a milestone that would accelerate the adoption.
spk08: So I think if it was just an electrification of cars, you'd start to look for inflection points of how model years come where units of internal combustion cars go down and fleets change or brands change their fleet strategy. But because it's about autonomous and connectivity in the car, it's not just one driver. And we play in a broad range of those applications. I don't think I could pick a particular car model year on year has less features in it. In fact, it becomes the standard each year. So think of this as a transformation of the auto industry, not just to electrification, but to connected cars, to autonomous cars. And that's the range and suite of products and applications.
spk00: We'll take one last question, please.
spk09: All right, and your last question comes from the line of Krish Sankar with Cohen & Company. Your line is now open.
spk06: Yeah, thanks for taking my question, and David, thanks for your help, and good luck on the next endeavor. I have two questions, either Tom or David. Number one, on ASCs, it's nice to see ASCs holding up despite low volumes. but next year has more double digit nanometer capacity comes online for the industry. How to think about ASPs into next year and then add a follow up.
spk02: When we think about ASPs for 2024, again, I'll kind of point you back to that Capital Markets Day presentation. If you stood back and kind of squinted at that chart, you would see that we had LTAs that covered about three quarters of the capacity for 2024. And so I would say that a lot of the pricing discussion has already happened. It's already been memorialized and it's already been signed in a contract. So then you look to the future and you say, well, what does pricing look like in the future? And when I look at the new design wins and the new LTAs that we're signing, pricing is holding up very, very well. In fact, I'd say pricing is actually delivering, it's accretive to our long-term financial model that we had put out as we became a public company. And so it remains a very constructive pricing environment in the future. I recognize that there's more single-digit nanometer capacity that's come online, and even in some regions of the world, more double-digit nanometer capacity that has come online. But as we've always stated, our interest is in differentiated, accretive business where we provide and attach a lot of GF technologies. More than 90% of our design wins in Q1 were single-source design wins. We remain kind of around that two-thirds of revenue is single-source revenue. And over time, those two numbers will converge. And so we feel quite good about pricing. Tom, anything you'd add?
spk08: It's back to the economics for investment. We'll be forced for a much more constructive environment for how we all fund it. the doubling of this industry over the next decade.
spk06: Got it. Super helpful. And then just a quick follow-up, you know, obviously the auto industry segment has held up pretty well for you folks and many, many other folks in the industry. I'm kind of curious, do you worry that there could be the next year to drop or it could moderate as smartphones start getting better and dampen what could be a stronger recovery?
spk08: For the horizon that we see, and talking to our customers, and the fact that this transition we've been talking about this morning, autonomous, connected, and electrification of cars, see the next decade, automotive is a key driver for our industry as we continue to add more and more content to these cars. The key for GF is to make sure that we are developing the technologies that best meet those needs and provide differentiation for our customers.
spk06: Thanks a lot, Tom, and congrats. Thank you.
spk09: We don't have any further questions yet this time. I will now turn the call back over to Sam Franklin.
spk00: Thank you, Bella, and thank you, everyone, for joining us today. We appreciate the questions, and as always, look forward to seeing many of you on the upcoming conference circuit.
spk09: This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a good day.
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