GlobalFoundries Inc.

Good day and thank you for standing by. Welcome to the Global Foundries Conference call to review the fourth quarter and fiscal year 2023 financial results. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question and please press star 1-1 again, please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today. Sam Franklin, please go ahead.

Thank you, Operator.

Good morning, everyone, and welcome to Global Foundry's fourth quarter and full year 2023 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, Niels Anderskoff, Chief Business Officer, along with David Reeder for his final earnings call. And I'm very pleased to welcome to the call John Hollister, who has taken over from Dave as CFO, as announced on December 11th, 2023. A short while ago, we released GF's fourth quarter financial results, which are available on our website at investors.gf.com. along with today's accompanying slide presentation. This call is being recorded and a replay will be made available on our investor relations 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, or by the use of the future tense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our annual report on Form 20F filed with the SEC on April 14th, 2023. 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 markets and fourth quarter results, while John will provide first quarter 2024 guidance. We will then open the call for questions with Tom, Dave, John and Niels. We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Sam, and welcome, everyone, to our fourth quarter earnings call. 2023 presented a unique set of challenges for the global economy and the broader semiconductor industry. Our customers grappled with elevated inventory levels, weaker demand, and a backdrop of tighter monetary policies. Although we are starting to see the inflationary headwinds moderate, the ongoing high interest rate environment has undoubtedly led to a prolonged and deeper cyclical downturn than was first anticipated by many in our industry. Despite these ongoing challenges, I am pleased to report fourth quarter results, which exceeded the midpoint of our guidance ranges, thanks to the dedication of our teams around the world. Following a highly successful 2022, I am proud of the resilience grit and commitment that GF's employees showed in 2023 against a very challenging and prolonged market backdrop. We diligently managed elevated costs and lower utilization levels to deliver gross margin expansion and revenue, which aligned with the guidance we set out in our first quarter 2023 earnings update. As we discussed during our last earnings call, we have observed elevated inventory levels across our customers in end markets such as smart mobile devices, comms infrastructure and data center, and the lower end of consumer electronics. We're continuing to collaborate closely with these customers to support the acceleration of their inventory depletion while seeking to preserve the economic value of our long-term agreements. We have invested heavily over several years to grow our manufacturing capacity in support of these partnerships, and our customers have responded positively and proactively to achieve mutually beneficial outcomes when making adjustments to their long-term agreements. In some cases, these discussions have resulted in underutilization or restructuring payments, which Dave will comment on further as part of his prepared remarks. Entering 2024, we are beginning to see the rate and pace of inventory levels improving across certain end markets and customers versus 2023. However, These levels remain elevated across most of the end markets we serve as the macroeconomic weakness and geopolitical uncertainties persist. Based on discussions with a broad range of our customers, we expect that inventory reductions will be driven by channel sell-down during the first half of 2024, with a return to improve demand dynamics once the macroeconomic landscape has stabilized. More on that to come, but let me first discuss the highlights from our fourth quarter 2023 results, which Dave will comment on further. Revenue in the fourth quarter increased sequentially to $1.854 billion, which was above the midpoint of our November provided guidance range. We reported adjusted gross margin of 29% for the quarter, which was at the upper end of our guidance range. Included in these results are amounts associated with the successful resolution of adjustments to customers' near-term volume requirements and associated underutilization payments. We delivered adjusted diluted earnings per share of 64 cents, which is also the high end of our guidance range. I'm also pleased to report that we delivered a third consecutive quarter of positive free cashflow, generating 456 million in the fourth quarter. This highlights the overall progress we have made investing in our capacity over recent years and the resulting reduction of our CapEx profile as we progress through 2023. Let me now provide a brief update on some of our customer and partnership activity in 2023. 2023 was a milestone year for our automotive end market as we successfully delivered over $1 billion of revenue, surpassing the expectations we set out on our prior earnings call and growing from $373 million we delivered in 2022. Building from this milestone, we continue to expand our automotive product offerings, and our customers are ramping multiple design wins in key applications for internal combustion engine models and autonomous, connected, and electrified vehicles. GF is supporting the development of critical sensing, processing, and safety features to the automotive industry across our most competitive technology platforms at auto grade one standards. These products span the breadth of our portfolio from 12 LP+, our FinFET platform, all the way through our expanded voltage handling capabilities at 130 and 180 nanometer technologies. Through these offerings, we believe that GF will play a key role in the long-term transition of the automotive industry, and our customer partnerships are central to that. To that end, we recently extended our long-term agreement with Infineon with a focus on 40 nanometer automotive microcontrollers and power management and connectivity solutions through 2030. Looking ahead to 2024, we remain confident in the opportunities to grow our automotive and market revenue and share, even as the industry goes through a period of demand moderation. Turning now to smart mobile devices, 2023 saw excess build and elevated inventory in the channel. as macroeconomic uncertainties impacted global consumer demand and reduced handset shipments from the year before. To partially offset these dynamics, we continue to remix our business towards the premier tier of the handset market, where demand levels and average selling prices per wafer have remained resilient. GF's high-performance RF technologies continue to drive user connectivity in the industry. The market shows an increasing reliance on 5G and smart mobile devices, which combined with explosion of data necessitates more connectivity and improved efficiency. GF's newest generation RF-SOI platform, we call it 9SW, that we announced last quarter features significant reductions in standby currents for longer battery life, creating products over 10% smaller than the previous generations with more than 20% power efficiency. This is specifically designed to enable our customers to build higher-quality, longer-range connectivity products for the premium-tier front-end module segment. We are also providing outstanding connectivity and low-power performance on GF's 22FDX RF millimeter wave technology, which went into volume production and will enable industry-leading 5G millimeter wave capability in premier-tier Android phones. In IoT, we continue to innovate our differentiated technologies, focused on ultra-low power efficiency and embedded memory for AI at the edge applications. Although we expect a period of short-term inventory correction in this end market, consistent with what others have reported, the requirements for speed, security, and inference at the edge are all key long-term drivers for our next-generation analog and mixed signal technologies. Additionally, our U.S. manufacturing capacity was a critical factor within the aerospace and defense segment of our IoT end market. In 2023, we announced key partnerships with both the Department of Defense and Lockheed Martin to provide secure chip manufacturing in the United States across a number of critical applications. Finally, our communications infrastructure and data center segment continued to show weakness through 2023. partly due to the prolonged channel digestion of wireless and wired infrastructure inventory levels across our customers, as well as the accelerated node migration of data center and digital-centric customers to single-digit nanometers. We are actively managing these industry trends and executing opportunities to remake some of our excess capacity to service demand in more durable and growing segments, such as automotive and smart mobile devices. We are also diversifying our manufacturing footprint via accelerated technology transfers into our Fab 8 facility in Malta, New York, which will offer even more choice to our customers across multiple end markets and increased utilization opportunities here in the US. Customer partnerships remain the core of our business, and I am pleased to report that approximately two thirds of our revenue in 2023 came from single source agreements with our customers. In closing, we have successfully delivered our fourth quarter gross profit in EPS at the high end of our guidance ranges and rounded out 2023 with results consistent with the commentary we provided in our first quarter 2023 earnings update. At this point in the year, we remain cautious on the outlook for 2024 and are closely monitoring for signs of improved demand and macroeconomic indicators while our customers actively manage down their inventory levels. Given these dynamics, there are several potential outcomes for 2024. However, at this point, we do believe that our quarterly revenue profile will grow sequentially from the guidance we have provided for the first quarter. Over the longer term, we continue to see a secular acceleration of the role of semiconductors in the world, and GF is uniquely positioned as one of the world's only pure play foundries with capacity to support our customers across Asia, Europe, and the U.S. Lastly, as we look ahead into 2024 and the aforementioned uncertainties that will certainly influence the outcome of the year for GF, we are confident in our ability to deliver in the range of two to three times incremental free cash flow versus 2023. Before I turn the call over to Dave, I'd like to thank him again for the tremendous job he's done in his time at GF and extend a warm welcome to John. I am excited by the opportunities ahead and look forward to partnering closely with John as our new CFO as we focus on our financial objectives in 2024 and beyond.

Thank you, Tom, and welcome everyone to our fourth quarter earnings call. For the remainder of the call, including guidance other than revenue, cash flow, capex, and net interest and other expense, John and I will reference adjusted metrics which exclude stock-based compensation and restructuring charges. Our fourth quarter results exceeded the midpoint of the guidance ranges we provided in our last quarterly update. Fourth quarter revenue grew sequentially to approximately $1.854 billion, a decline of 12% year over year. These results included approximately $79 million of revenue related to customers' adjustments of their near-term contracted volume requirements. We shipped approximately 552,300 millimeter equivalent wafers in the quarter, a 5% decline from the prior year period. ASP, or average selling price per wafer, decreased approximately 7% year over year, mainly driven by changes in the product mix shipped during the quarter. Despite this decline, ASPs for the full year were flat compared to 2022, which aligns with our commentary from prior quarters. Wafer revenue from our end markets accounted for approximately 88% of total revenue. Non-wafer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 12% of total revenue for the fourth quarter, consistent with our expectations. For the full year, revenue came in at approximately $7.4 billion, down 9% year over year, which is consistent with the outlook we provided in our first quarter earnings update. We shipped approximately 2.2 million 300-millimeter equivalent wafers, an 11% decrease from 2022, and ASP per wafer remained flat year over year. Let me now provide an update on our revenue buy-in markets. For the fourth quarter, smart mobile devices represented approximately 41% of the quarter's total revenue. Fourth quarter revenue declines approximately 2% sequentially and roughly 7% from the prior year period, principally driven by reduced shipments and elevated customer inventory in the channel. This decline was partially offset by higher ASPs, premium tier mix growth, and continued content growth, for our 5G RF transceiver and Wi-Fi applications. Full year 2023 revenue for smart mobile devices represented approximately 41% of the year's total revenue. Full year revenue declined 19% year over year and reflected similar dynamics to the fourth quarter, namely reduced shipments in the mid to low tier handset market, partially offset by mix and ASP improvements. As Tom noted in his prepared remarks, we are continuing to execute our strategy to grow content in the premium handset market and have announced several recent additions to our technology platforms to meet this objective. In the fourth quarter, revenue for the home and industrial IoT market represented approximately 17% of the quarter's total revenue. Fourth quarter revenue declined approximately 13% sequentially and 23% year over year. principally driven by lower volumes, ASP, and mix during the quarter. Full-year home and industrial IoT revenue represented approximately 19% of the year's total revenue. Full-year revenue declined 6% year-over-year, as reduced demand in the consumer-centric portion of IoT was only partially offset by stable demand across industrial and aerospace and defense applications. ASPs within home and industrial IoT were roughly flat on a year-over-year basis, which aligns with the commentary provided on our prior earnings calls. Looking ahead to 2024, we expect some of our customers in the industrial IoT segment to focus on channel inventory depletion, which remained elevated in the second half of 2023. Moving now to automotive, which, as Tom outlined, has been a key growth segment for us throughout 2023. Fourth quarter revenue represented approximately 17% of the quarter's total revenue. Revenue for the quarter increased approximately 5% sequentially and roughly 177% year over year, principally due to higher ASP and mixed dynamics as semiconductor content and features increase across the vehicle architecture. Full year automotive revenue represented approximately 14% of the year's total revenue, which is up from just 2% in 2020. Full year revenue exceeded $1 billion and grew approximately 180% year over year in 2023. As Tom noted, we expect automotive revenue growth to continue in 2024 as we support our customers across a diverse range of automotive applications in both ICE and ACE vehicles. Next are communications, infrastructure, and data center and market, where fourth quarter revenue represented approximately 8% of the quarter's total revenue. Revenue declined approximately 8% sequentially and 63% year over year, primarily due to volume reductions, while ASP and MIX were slightly down on a year over year basis. For the full year 2023, communications infrastructure and data center revenue represented approximately 12% of total revenue. 2023 revenue declined 39% year over year as a result of reduced volumes as our customers accelerated transition to single digit nanometer technology platforms that Tom outlined in his prepared remarks. Looking ahead to 2024, we are proactively focusing on opportunities to remix our capacity to other durable end markets, as well as accelerating technology transfers and customer qualifications. Finally, our personal computing end market represented 5% of total revenue in the fourth quarter. Revenue in the quarter increased 127% sequentially, but was down 27% year over year. Full year PC revenues were approximately 3% of the year's total, and revenue declined approximately 30% year over year, driven principally by volumes as ASP and MIX were flat to slightly up. Given the expected decline in PC revenue as a percentage of total revenue, starting in Q1 of 2024, we will no longer report PC as a separate in-market and will incorporate associated PC revenues into our home and industrial IoT in-market. Moving next to gross profit, For the fourth quarter, we delivered gross profit of $537 million, which translates into approximately 29% gross margin. Gross margin was at the high end of the guidance range indicated, and as Tom mentioned in his prepared remarks, includes revenue associated with the successful resolution of customer volume adjustments. Looking ahead to the first quarter, we expect discussions on customer volume adjustments to continue, and this has been reflected in our first quarter guidance. For the full year, we delivered gross profit of $2.1 billion and gross margin of 29.1%, equating to a 70 basis point uplift from 2022. Operating expenses for the fourth quarter represented approximately 8% of total revenue. R&D for the quarter decreased sequentially to approximately $97 million and SG&A also declined to $57 million. Total operating expenses were $154 million. Included in our total operating expenses is the benefit of approximately $46 million related to the advanced manufacturing investment tax credit for 2023 qualifying expenses. As we continue to spend on qualifying expenses and capitalize assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program. We delivered operating profit of $383 million for the quarter, which translates into an approximately 20.7% operating margin, roughly 50 basis points higher than the year-ago period and above the midpoint of our guided range. For the full year, GF delivered operating profit of $1.4 billion, which translates into an 18.5% operating margin, an improvement of roughly 70 basis points year over year. Fourth quarter net interest and other expense was $4 million, and we incurred a tax expense of $23 million in the quarter. We delivered fourth quarter net income of approximately $356 million, a decrease of approximately $444 million from the year-ago period, principally due to the gain on the sale of our East Fishkill facility to Onsemi in the fourth quarter of 2022. As a result, We reported diluted earnings of $0.64 per share for the fourth quarter. On a full year basis, GF delivered net income of approximately $1.3 billion and diluted earnings per share of $2.24. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the fourth quarter was $684 million. For the full year, cash flow from operations was $2.1 billion. CAPEX for the quarter was $228 million, or roughly 12% of revenue. Full year CAPEX for 2023 was approximately $1.8 billion, or 24% of revenue. Free cash flow for the quarter, which we define as net cash provided by operating activities, less purchases of property, plant, equipment, and intangible assets as set out on the statement of cash flows, was $456 million. With that, I am very pleased to report that free cash flow for the full year 2023 was $321 million. As Tom noted, this is an important milestone for GF and we will look to build on this in 2024 while maintaining our capacity growth objectives. At the end of the fourth quarter, our combined total of cash, cash equivalents and marketable securities stood at a healthy $3.9 billion. We also have a $1 billion revolving credit facility, which remains undrawn. To summarize the quarter and the year, strong operational execution enabled us to perform well in the face of a challenging cyclical and macroeconomic environment, and I would like to personally thank all of GF's employees for their dedication and commitment to our vision. With that, I'm pleased to turn the call over to John to provide our guidance for the first quarter as I welcome him to the GF team.

Thank you, Dave, and good morning to everyone on the call. It gives me great pleasure to be taking over as GF's new CFO, and I would like to echo Tom's comments in thanking Dave for all he has done for the company. Manufacturing is at the heart of today's dynamic semiconductor industry, and notwithstanding the ongoing inventory dynamics impacting the semiconductor industry, I am truly excited about the opportunities ahead for GF as we deliver innovation and essential chips for our global customers. Now, let me provide you with our outlook for the first quarter of 2024. We expect total GF revenue to be between $1.5 to $1.54 billion. Of this, we expect non-waiver revenue to be approximately 11% of total revenue. We expect gross profit to be between $345 million and $385 million. we expect operating profit to be between $120 and $180 million. Excluding share-based compensation for the first quarter, we expect total OPEX to be between $205 million and $225 million. At the midpoint of our first quarter guidance, we expect share-based compensation to be approximately $55 million, of which roughly $15 million is related to cost of goods sold and approximately $40 million is related to OPEX. We expect net interest and other expense for the quarter to be between $4 million and $12 million, and tax expense to be between $8 and $20 million. We expect net income to be between $100 and $156 million. On a fully diluted share count of approximately 561 million shares, we expect earnings per share for the first quarter to be between 18 and 28 cents. For the full year 2024, we expect CapEx to be approximately $700 million, which aligns with our disciplined and demand-driven philosophy. As Tom and Dave have both commented, We expect this to provide GF an opportunity to focus on continued free cash flow generation in 2024. With that, let's open the call for Q&A.

Operator? Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Harlan Sir with JP Morgan. Your line is open.

Good morning. Thanks for taking my questions. Thank you, Dave, for the support over the past few years. And, you know, welcome, John, to the team. The weaker March quarter guide does reflect your customer trends, right? These customers, though, are also saying that even with an improvement in their revenues over the next one to two quarters, that their internal utilizations and foundry refer starts may lag revenues due to their high inventory levels. So how do you see the profile of the business through 2024 and maybe an important consideration in a potential recovery, you know, maybe the move of some of your FinSec customers away from GF to single-digit nanometer competitors and, you know, backfilling, remixing some of this lost customer business may be a bit challenging in this environment, you know, putting more pressure on multi-utilizations, maybe the overall magnitude of the potential revenue recovery. Just help us understand how all of this shapes the 2024 profile for the team.

Good morning, Harlan. This is Tom. I'll start. Very good. You actually got two questions in your first one. So let me start on, I guess the overarching question you're asking is, how does 2024 shape up? What do we see happening? You can't look at one quarter of this year without first looking back. Let's consider 2023. GF's performance in what I would call like-for-like, and I would call like-for-like semiconductor companies playing in the comparable end markets we play in, serving with the same technology. I would rank GF in the high end of performance there. We were down only 9% year-on-year compared to others. We think a little bit about what we talked about in our fourth quarter earnings call, that while we were finally seeing inventory peaking, which is the beginning of a good trend, but not anywhere near where you need it to be, we fast forward into 2024. And so we look back now what happened in Q4 of 2023 with our customers, we started to see meaningful decrease in inventory, especially in areas like smart mobile devices, which is a significant part of our revenues, as David just talked about, like 40%. And so what you're seeing now is Good that inventory is coming down, we're still at the high end of absolute inventory and we need that to be worked out. When we talk to our customers, I think universally they see the first half of 2024 being the period of inventory correction finally working down so that true demand starts to surface where the second half is covered. Now look, that's got to be predicated on strong consumer demand. and better work on inflationary pressures that are driving interest rates high. So we need to see that start to come into play this year as this inventory works down. And look, I think for GF, another testimony to our single source business, long-term agreements we set, this was a pretty deep and long cycle for the industry. The fact that we managed through it with leveraging our LTAs and our customer relationships, we dampen some of that amplitude. And so you trade off and dampening that amplitude is maybe a little bit long in the time horizon to come back. So the end part for me is we believe this is the low point in top line for us in 2.4, and we will continue to grow revenue throughout the year. And then that second question you type it through in there on the sunset moving out, we reported earlier that, yep, In these downturns, this is when customers move more quickly and that some of our technology in our FinFET 12 nanometer was getting displaced by going to single-digit nanometer. But that's not the whole story of our play. First of all, on our FinFET technology, we're going to be continuing to develop this platform and building it out like we've done others, adding better RF capability, adding embedded memory like resistive RAM. This is a technology that will serve us well. What we've learned in the past about our success at GF in leveraging our assets is to make sure that our facilities have a range of technologies deployed in them. Because different end markets react at different times, and one can be up, one can be down. If you recall, we announced last year that we're bringing 40 nanometer embedded memory to our FabE facility as part of our GM deal. We're actively ramping up 22 FDX technology in Fab 8 to get that diversification. So while single-digit nanometer may be accelerating in some of the FinFET business we have, at the same time, we're accelerating the deployment of bringing new technologies to our Fab 8 facility so we can remix that capability.

Oh, perfect.

And then from a follow-up, yeah, you know, Tina's done a really good job of working with customers against their LTAs and in return getting payments or fees for resolutions on these agreements. But back in October of last year, one of your large RF customers actually decided to terminate their supplier agreement with Global Foundries, pay a $65 million fee, which I assume you're recognizing here in the March quarter, right? So where would the gross margins be in the March quarter without the $65 million fee and other one-time resolution agreements? But I guess more importantly, Tom, why would an important... customer pay $65 million to terminate their supplier agreement with you, just given all of the technology differentiation that Global Foundry brings to the table?

Yeah, let me answer that in reverse. I'll do the first part on the customer dynamic, and then I'll let David or John comment on those margins. Look, you have to think of the termination of an agreement like this is how do we settle the fact that we put capacity on made investments to a customer demand that didn't materialize and how we work with them. I think of the termination as more of the technicality of how we move forward. It doesn't mean that customer's not doing business with us going forward. And I think case in point, we just announced this last quarter, or recently rather, an extension of a long-term agreement with an automotive customer, Infini. And so I wouldn't necessarily read too much into a termination. That's a mechanism by which we work with our customers to make sure we get balance in the supply-demand data. It's not forcing our customer to take more wafers than they need. And part of that reconciliation is some underutilization fees that offset the costly effort for creating . With that, let me hand it over to Dave to talk about the fourth quarter impact of that. Sure.

Thanks, Tom. And let me build on a point that you made. You know, the one that you're referencing, Harlan, was from the smart mobile space. And as you know, the inventory in smart mobile devices, at least the inventory drawdown, has really been a moving target for the industry in general. And so I would characterize the termination of that LTA as really being a mechanism such that we don't have to continuously renegotiate that LTA as the volumes are moving around. I would really characterize that as kind of a cleanup activity. In terms of the benefit for the fourth quarter, as I mentioned, total LTA's termination fees were about $79 million, give or take a little bit. So that's about four points of impact to the quarter. As Tom mentioned, I would reiterate that for our guidance for Q1, you know, sequentially we are expecting to grow revenue from here And then just from a utilization perspective, we're expecting from fourth quarter to first quarter to be down a little bit, but then kind of bouncing along the bottom from there. John, anything you'd add?

Yeah, David, I just want to double click on the point you just made on utilization and how strongly that is correlated to our gross margin performance. As we pointed out in the past, every five points of utilization is roughly two points of gross margin. And going back to Tom's comments on the journey, if you look back to Early 23, late 22, we had utilization rates in the high 80s to low 90s. And now, through the first quarter horizon, seeing that down into the low to mid 70s. So, you can see about a 15 to 20 point split there, which accounts for land share impact on gross margin.

Great. Thank you.

One moment for our next question.

Our next question comes from Vivek Arya with Bank of America.

Your line is open.

Thank you for taking my questions and best wishes to both Dave and John. For my first one, you're guiding Q1 sales down, I think, about 18% or sequentially. I was hoping you could give us some color by end market or segment as to how you expect those trends. And then, Tom, you suggested that, you know, possibly Q1 at the bottom and Q2, you know, start a process of recovery. Which end markets do you think can start recovering into Q2 in that scenario?

Let me start the second part of that question. I think you've seen it from others that given how long and prolong the downturn in smart mobile devices, this could be a year where that business starts to pick up. And given, again, how much of that revenue is in market, that's important for GM. We also believe that this year, even after we factor in some of the industry signals we're seeing, we will have meaningful growth in our automotive business. And this has to do a lot with the broad perspective and broad parts of that market we serve, from sensing to microcontrollers to in-cabin lighting to entertainment, and independent of it being an internal combustion engine car or electrified vehicle, that content is comparable. But I would tell you, those are the two end markets that we see as part of the ability to take Q1 as a low point in our top line of the revenue and go

Yeah, I'll take the second part of that question, Vivek. When you think about first quarter, as you know, we don't guide buy-in market, but I'll give you a little bit of color. We're expecting automotive to be better than that average. You referenced about 18% down from Q2Q sequentially, Q4 to Q1. Automotive will average us up. In other words, it'll be better than that average decline. We're expecting smart mobile devices to be better than that average decline. I referenced that we expect both of those to actually grow on a year-over-year basis and certainly be better than that average decline sequentially. Obviously, that implies that the other segments will be down a little bit more than that average, which will ultimately get you to that down Q2Q about 18%. Did you have a follow-up question, Vivek?

Yes. Thank you, Dave. So, my follow-up question is just the industry competitive landscape. and what it means for the pricing power that GF can have over the longer term. Because we are starting to see more capacity, at least more capex in China. We recently saw Intel and UMC announce some kind of partnership. And obviously, there is no immediate impact, I would imagine. But over the long term, Tom, what does that imply in terms of the industry competitive dynamics at these trailing edge and what does that really imply for GF's pricing power over the next few years?

So there's a lot of different elements to this. Let me start first with the build-up in China. Look, buying a bunch of equipment is the beginning of a very long journey. Even to be competitive on kind of base capability of a technology node, you need standard cells, libraries, PDKs, complex IP, foundational IP, having a tool is not the beginning of a business, right? It's the beginning of a dream of having a business. And it's going to take a long time for new companies to take that capacity, the ability to buy tools and convert it into even a basic technology. In the meantime, GF is not sitting still. We're taking our already well-established feature-rich platforms and continually adding new features to them off of a base that we've had for a long time to continually differentiate But the GF play, we've said it over and over again, is we want to be single-source differentiated business. Serving a very simple technology is not where we play and we don't provide much value to our customers. So for us, that capacity is in some ways not even playing the segmental replay. The second thing about all that capacity is it's concentrated in China. We're seeing more and more the need for a more resilient global footprint. And so putting work concentration in that capacity in China doesn't do anything to solve that. And that's what our customers are looking for. They're looking for us to be differentiated in the features we add to our technology. They're looking for us to be differentiated in serving them on our global footprint. They have the technologies that we can build for them the same product in Singapore and Dresden and now in the U.S. And then the third part of this that I think is the most interesting And it feeds back to this resiliency requirement. Some of our biggest fabulous Chinese customers coming to GS because they want to tap into that resilience supply line because they believe they need a worldwide source to serve the markets so that they can be taken seriously on the world stage, that they will not have supply chain issues being concentrated. I think that's the envelope around That investment going in China. Then I think you pointed out the Intel UMC announcement. I think once again, it demonstrates that what GF has, the rest of the world wants to get to. And that's a geographically diverse footprint. Certainly we have in the Western world, in the US, and in Germany. And so that partnership, as I understand it, is off to go create a 12 nanometer platform that'll be ready in 2027. GF's sitting here in 2024, and we're not done innovating on the platform we already have to continue to make it relevant and dynamic for our customers in these various end markets. The other thing about that, I don't understand how an industry that already has a lot of stacked margins, two foundries serving the same market on the same technology node will work economically, but that's not for you to understand. We think about our technology as making sure we work closely with our customers, understand the end market requirements, and develop technologies that they're looking for us to build.

Yeah, this is John. I'll just quickly add, you know, in light of all the factors Tom mentioned, we see a relatively stable and constructive pricing environment taking into account companies' differentiation features, the high percentage of sole source. We talked about two-thirds of the business in the prepared commentary, as well as the support principles be a stressful pricing environment.

Yeah, John, and just not to pile on in it, but if you think about it, when you're sole sourced, you can only service true demand. You can't use pricing to create more demand. The bad news is you can't create more demand. The good news is it's your demand for whatever it is, and the key is to continue to create winning solutions so you can create more demand.

And just to remind everybody, 90% of all design vendors are sole sourced.

Thank you. One moment for our next question. Our next question comes from Ross Seymour with Deutsche Bank.

Your line is open.

Hi, guys. So I'm going to ask a question, and congrats to both David and John. David, you'll be missed. My first question is on the node transition dynamic that you talked about. Can you give us an idea of the percentage of your business that you believe is exposed to that? Is it localized to the common infrastructure and data center segment where you said you're reallocating, or is that a dynamic we should consider in other areas of your business as well?

Yeah, look, I think, again, we're talking over a long period of time. As you know, these transitions don't happen rapidly. You know, I would characterize the portion of the business, and I think the question specifically around FinFET, it's probably about 20, 25-ish percent of the total business that over the full life cycle will migrate out from what is currently manufactured today. That stated, you constantly always have business that's migrating into that node as well. And so really what you're looking at is you're not looking at, you know, of the portion of the business today that will migrate. You're looking at what's the rate and pace of transition for migration out versus the rate and pace of transition for migration in. So while, you know, 20-ish to 25-ish percent of the business that we have today on that node will migrate out, just like it has historically, We expect over time for about the same amount to migrate in, and so what you're managing is the in versus the out, if that makes sense. Did you have a follow-up question, Ross?

Yeah, I just wanted to get a little bit of an update on the CHPSAC side of things. You guys have been very clear about the ITC side, especially kind of the OPEX benefits from it, but any clarity on how that OPEX side progresses through the year, and perhaps more importantly, any updates on the grant side of the equation?

David, why don't you take the ITC part of that, and I'll talk to Jessica for that.

Sure. Well, a couple of things on ITC is, as you know, we do have the tax benefit where you get back 25% essentially of every qualified dollar of capacity that you're spending money on to add capacity to the United States. So that's a benefit that we've been taking advantage of. That's kind of above and beyond these projects that you're submitting into the CHPS office for longer-term approval. We have been taking advantage or benefit of that for 2020-2023. In fact, in the fourth quarter, what you saw in our prepared commentary was that we had $46 million of benefit that impacted us in a positive way in the fourth quarter. And specifically, it was spread through some of the operating expenses line as those expenses or those benefits were flowing back to the lines in which those charges were accrued. And there's also additional benefit in the CapEx line that ultimately will be accrued there as well. And so, we expect those benefits to remain through the life of the program. and essentially be a like-for-like benefit based upon how much money that we are deploying in the U.S. So it's about a 25% benefit.

And then the first part, or the second part, a little bit about the status of the CHIPS bill. Look, those discussions are confidential. You can imagine that GS will play an important role in the U.S. ambitions to create more semiconductor manufacturing in the U.S. I would ask you on the timing of these things to be patient. I know the White House wants to start getting those dollars deployed post-haste, so just be patient on that. But I think the bigger point for us is to remember it's not about just having dollars to build fast. It's about creating the right business model. If you look at what we shipped for revenue in 2022, sorry, 2023, we shipped about 2.2 million waivers. By the end of this year, we will have through all the investments we've made and will make this year, the ability to ship 3 million waivers. That's a fair amount of revenue growth that we already have in hand. Now that capacity was put on ahead of demand because that's part of what our customers had asked us to do in 2022 is they looked ahead and none of us saw the fact that we were going to hit a business . And so we're in really good shape to think about in the near term of having the capacity to grow our business waiting for that demand. When we think about what CHIPS funding and the ITC means for our future, we come back to how do we invest? We invest with certainty, reliability, profitability. The certainty is we see clarity in demand, that our customers are betting on our capacity. They're betting that we're going to be an arm of their business, their manufacturing arm. So we look for them in partnership to go create that capacity. We want to do it in durable end markets where differentiation matters. We talked a lot about automotive. We talked about how much of our smart mobile devices and connectivity really plays to our strength. And then the profitability is really where the economics come in of these government subsidies or government co-investments, I'd rather call them. That closes the economic equation to make sure that we're competitive, not only in the capital deployment to create these facilities, but to run. So I think of these government programs is lining nicely with our long-term strategy to grow this business for the medium to longer term.

Thank you. One moment for our next question.

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

Great. Thank you. I want to ask about the smartphone business. your biggest four customers all kind of guided pretty well and all reduced inventory by about 20 days in the fourth quarter collectively. It sounds like they need to do at least that much inventory reduction in Q1, but it seems like there should be a pretty big snapback from that as we return to consumption, unless there's some factor I'm missing in sourcing, anything like that. So maybe if you could just talk to that demand environment.

I can go first, Tommy, if you want. Okay. Yeah, so you're correct. I mean, you saw the announcements, you know, from Qualcomm and Qualcomm earlier. And, you know, we're starting to see the inventory, you know, burning off and getting to, you know, more normalized levels. So we do expect, you know, S&D for us to have a return, you know, this year as we move forward. So, yeah, you're exactly right.

Yeah, okay, you pointed that. early commentary here, the real key is Q1 inventory burn. If it continues at that level and we start to get to normalized levels, we have a really good position there, maybe even a stronger position than we ever had in the premier tier handsets. And now that the tier two handsets now want 5G capability, I think it positions us well for, we hope, the inevitable return of the smart mobile device segment.

Yeah, we're very pleased with our design wins in both the Premier and the Tier 2. Great, thank you for that.

And then, yeah, with regards to the follow-up, on the CapEx, I realize $700 million is a relatively low number, but can you talk about where that money is going? I assume utilization is low enough. What is it that you need to spend money on from here?

Yeah, I think when you look at the CapEx, uh for 2024 specifically and as you know we've we've been on a journey to grow our total capacity from about 2 million wafers uh at the beginning of 21 to about 3 million wafers uh what will be essentially at the end of this year and the 700 really 700 million really represents kind of the final completion in terms of tooling that needs to be purchased as well as facilities that need to be added to satisfy some of those longer-term agreements that you've seen us continue to add to the portfolio. So by spending this amount, you know, it'll get us to that 3 million wafers. It'll also give us some incremental flexibility as we think about migrating some additional capabilities into our U.S. manufacturing center, some of the 40 nanometer capability with embedded memory, some of the fully depleted SOI capability and bringing that here to the U.S. So it'll not only, 700 million represents not only the kind of the final bill to the completion of 3 million wafers, but it's also the flexibility that's being added and the capacity that's being added for customers that want domestic manufacturing capacity.

Yeah, we call it capability tooling. It comes in creating the features so that we can give that fungibility of capacity across our FAB network, as well as some R&D investments that we need to create new features. So there is a certain level of CapEx in our business. That's about sustainability of our business.

Yeah, Joe, this is John. I'll just add, as far as the shape of the CapEx in 24, we do expect that to be similar to what companies saw in 2023, a bit stronger in the first half versus the second half on CapEx.

Great, thank you.

One moment for our next question. Our next question comes from Chris Casa with Wolf Research.

Your line is open.

Yeah, thank you. Good morning. I guess the first question is on gross margins. And, you know, obviously a lot of moving parts as we go through the year and dependent, it'll be dependent on the pace of that recovery. But if you give us some color on, you know, what the puts and takes are as we look at gross margins as we go through the year. And you did mention that you believe that Q1 would be the revenue bottom. Do you believe that holds for gross margin as well?

Yeah, Chris, this is John. You know, similar to the prior comments, you know, gross margin is very much influenced by factory utilization. There are other factors that work clearly with MEGS as well as some of the customer agreements. payments and so on, but as the business can recover and begin to post stronger sequential growth numbers, we would expect some improvement in gross margin. Along with that, the rate and pace of that we'll have to see as we're, you know, clearly the demand environment and the inventory drawdown rate are important variables to that as well.

Do you have a follow-up? Thank you. Sure.

And then with regard to kind of where things go from here as the recovery progresses, I mean, you talked about you'll have capacity of 3 million wafers by the end of this year. That's up, you know, kind of 35% or so from what you shipped last year. You know, can you speak to what you expect in terms of cash flow and, you know, the investment that's been made, you know, how you monetize that going forward? And, you know, with some of the new agreements that you're going to sign to make use of that capacity, do you expect the terms and the pricing, you know, of those new agreements that load up that other, you know, load up the rest of the capacity? Is the impact on that and Global Foundry is going to be the same as what we've seen during the last cycle?

Yeah, Chris, this is John again. You know, I'm very encouraged by the progress the company has made in its free cash flow performance. You know, we had the third consecutive quarter of growth in free cash flow in the fourth quarter with a strong number, 450 million plus generated in the fourth quarter. And as we continue to progress through 2024, we see the opportunity to build upon that and generate free cash flow in the neighborhood of two to three times the annual total for 2023? So, short answer is yes. We think we're very well positioned to positively influence the company with a strong free cash flow generation.

Yeah, and let me take a longer-term view by going back to what we talked about in our road show a couple years ago. We talked about getting our business to a scale roughly $10 billion, where we could then spend 20% of revenue on CapEx grow our business with capacity at the same time have sustainable free cash flow. When we start to think about this 3 million waivers, we are converging quickly on our long-term model where we can do both, invest for growth and drive free cash flow. Now it becomes not a question of if, it's a rate and pace for demand to fill in and take advantage of it.

And one final comment to kind of build on that. to address two points that you raised. One, like-for-like pricing we continue to see is very stable. We see everyone in the market as being very rational, number one. And then two, from a monetization perspective, we look at the investments that we've made, we look at the flexibility that we are building into all of our manufacturing facilities and resiliency that we're building into those manufacturing facilities. and we're quite encouraged by what the outlook could look like for us in the future when demand normalizes.

Kevin, we'll take one more question.

Sure thing.

Our last question comes from Chris Sankar with TD Cowan. Your line is open.

Yeah, hi. Thanks for taking my question, and thanks a lot, Dave, and welcome, John. First question I had was, I don't know, Tom or Dave, did you think about how to think about calendar 24 volume and ASP relative to calendar 23?

Yeah, so, you know, we didn't specifically talk about pricing for calendar year 2024 versus 23, but I think you can probably infer from our commentary that on a like-for-like basis that we expect pricing to be very similar, essentially the same. And so movements that you'll see in ASPs will primarily be driven by the product mix shifting, either from one in-market to another or from one customer to another. In terms of volume, obviously on a sequential basis as well as year-over-year basis, we're guiding down for the first quarter. And so when you think about total volume for 2024, it's really the rate and pace of the recovery as we continue to draw down inventory. And again, we did mention, and I think you've seen it from our customers, the reporting that's been done there is that they have made some progress on inventory reduction. We're anticipating that they will continue to make progress to reduce some of that inventory here in the first quarter. And so really the volume will be dependent upon the rate and pace of the return to growth as that inventory comes down.

Got it. Got it. Very helpful, David. And then a big picture question for Tom. You know, when you look at during the pandemic, the global electronics demand was above long-term trend. You're talking about a cyclical recovery now, but There's also been some macro weakness in channel destocking. Customers going to just-in-time manufacturing. So I'm kind of curious, do you think the cyclical recovery could be below trend, or do you think you're going to have cyclical recovery that you've seen in the past where you see a sharp snapback?

Look, I've been around this industry for a long time. What I see is it's a little bit of a black box, and black box is a response equally to the stimulation. So if you go really down, this industry over-corrects. So what happened? We found ourselves with excess inventory and then everybody brought inventory down to nothing. So I think what you're going to see now is the recovery is going to be proportional to how quickly things went down in our industry because in certain end markets, we've seen people, the end customers, the OEMs, take inventory quite low. And so everybody who predicts the future has a great chance of being wrong. I could just look back and see our industry has always been predictable in that if it's a steep decline, it becomes equal and opposite reactions when it comes back. So let's see. You can hold me to that at the next call.

Thanks a lot, Tom.

Ladies and gentlemen, that's concluded the Q&A portion of today's conference. I'd like to turn the call back over to Sam for any closing remarks.

Thanks, Kevin. Thanks, everyone, for joining today. And apologies we couldn't get to everyone in the call list. We look forward to seeing many of you at the upcoming conference circuit. Thank you.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.