GlobalFoundries Inc.

Good day and thank you for standing by. Welcome to the Global Foundry Conference Call to review third quarter of fiscal year 2024 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 the session, you will 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, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sam Franklin, VP Business Finance and Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Global Foundry's third quarter 2024 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, John Hollister, CFO, and Neil Zanderskoff, Chief Business Officer. A short while ago, we released GF's third quarter financial results, which are available on our website at .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 non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for non-IFRS measures are available in today's press release and accompanying slides. Please note that these financial results are unordered 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 reports on Form 20F, filed with the SEC on April 29th, 2024. We'll begin today's call with Tom providing a summary update on the current business environment and technologies. Niels will then discuss our recent design wins and highlights across the end markets, following which John will provide details on our third quarter results, and also provide fourth quarter 2024 guidance. We will then open the call for questions with Tom, 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 third quarter earnings call. Our three-queue results reflect another consistent quarter of execution towards our strategic objectives as we continue to partner with our customers to deliver feature-rich products in the geographies where they need us using our essential chip technologies. In the third quarter, we delivered revenue at the high end of the guidance range, meaningful -over-year free cash flow generation, and gross margins consistent with our commentary from the start of the year in an environment of lower factory utilization levels. Although we remain mindful of the near-term demand and utilization dynamics impacting the end markets we serve, these results reinforce our prior commentary that the first quarter was a low point for our revenue in 2024, and that we would deliver a sequential -over-quarter top-line growth throughout the year. To this end, we are reporting revenue of 1.739 billion for the quarter, which is roughly 7% sequential quarterly revenue growth. John will later cover that we are guiding the continuation of sequential growth in the fourth quarter. As we focus on diversifying and differentiating our product portfolio and broadening our customer base, I am also encouraged by the rate and pace and the size of the business opportunity of new design wins we closed in 3Q, as well as the funnel of opportunities we have built in partnership with our customers across all the end markets that we serve. -to-date, approximately 90% of our design wins are sole source opportunities. These are important proof points of our relentless focus on innovation and meeting the needs of our customers. Just recently, we announced a key design win with NXP on our 22-FDX platform. We developed our 22-FDX platform for a wide set of applications serving a range of end markets, including AI and intelligence at the edge applications. The performance benefits are purpose-built by optimizing energy management to deliver up to 50% higher performance and 70% lower power versus other planar CMOS technologies. Niels will comment further in his prepared remarks that this partnership is a testament to what matters most to our customers, power and performance solutions delivered with the resiliency of GF's manufacturing, execution, and global footprint. Our global manufacturing footprint uniquely positions GF to support our customers' desire to source from the US, Europe, and Asia across all the critical end markets we serve. These design wins are consistent with our strategy to diversify our technology footprint, end market served, and breadth of customer service in our Malta, New York fab. We remain on track to transfer capacity across 22, 28, and 40 nanometer offerings into the Malta facility over the coming years. Upon completion of these transfers, Malta will offer our customers one of the most diversified foundry solutions here in the US to complement the 12 nanometer FinFET, RFSOI, and silicon-flatonic platforms that are already manufactured there. Our silicon-flatonic product line positions Fab 8 beyond diversification as data center bandwidth and connectivity requirements continue to rapidly increase. GF's monolithic solution is well positioned to win next generation applications with hyperscalers, leading fabless companies, and startups in this space. Before I pass it over to Niels to discuss our end markets and design win activity, let me now review our third quarter results, which John will discuss in more detail in his commentary. As mentioned earlier, revenue in the third quarter increased sequentially to 1.739 billion, which was at the high end of our guidance range. We reported non-IFRS gross margin of .7% in the quarter, which exceeded the midpoint of our guidance range. We delivered non-IFRS diluted earnings per share of 41 cents, which exceeded the high end of our guidance range. I'm also pleased to report another quarter of strong year over year free cashflow generation. Cashflow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model and creating long-term value for our shareholders. We are well on our way to this goal, and we have delivered $779 million of non-IFRS adjusted free cashflow in the year to date. For the full year of 2024, we still anticipate approximately three times growth of this metric compared to 2023. Free cashflow is important metric for our business, and as our cash balance continues to grow and our total leverage reduces, we intend to consider a range of capital allocation strategies. In conclusion, our third quarter results reflect good progress towards our long-term strategic goals. I am tremendously proud of our teams around the world as they executed the plan and partnered closely with our customers on critical design wins to support our growth objectives. So a big thank you to the entire GF team for their hard work and to our customers for the continued trust in us. With that, over to you, Niels.

Thank you, Tom, and welcome to everyone on the call. I'd like to provide a brief update on some of our key customer partnership and in market performance. As Tom said, we are pleased with our ongoing design and momentum. Our recent announcement with NXP using our 22 FDX platform is a key example of what we set out to achieve at our design wins. This collaboration will focus on next generation solutions for automotive, IoT, and smart mobile devices. More importantly, this will enable NXP to provide more compact and power efficient solutions, increasing the overall performance of their system solution by leveraging the best manufacturing proximity via GF's global footprint, including our facility in Malta, New York. Partnerships like this underscore our capability to deliver cutting edge solutions that meet the stringent requirements of the end markets we serve, such as automotive-grade standards. On that note, automotive remains a key growth driver across our end market portfolio. And despite higher levels of channel inventory over the last quarter at some of our customers, we are continuing to support the expanding semiconductor content for vehicles. Our relentless focus on diversifying our product portfolio and gaining market share in this critical end market continue to offset some of the short-term demand dynamics facing the automotive industry. Notwithstanding the sequential revenue decline in the quarter, we expect to remain on track to deliver a high single-digit revenue growth in 2024 in our automotive end market. Longer term, we expect to target share gains with our customers across automotive applications such as radar, safety, power management, and connectivity. We therefore believe that the automotive end market will be an important revenue growth engine for us as the range of automotive semiconductor content and applications continue to grow. Turning now to smart mobile devices. This end market returned to year over year revenue growth in the third quarter. Based on our conversations with our customers, demand for smart mobile devices appears to be returning to modest volume growth in 2024 as customers inventory begin to normalize. Given these inventory dynamics, we believe that our full year revenue in this end market will be roughly flat. We are encouraged by our ongoing design wins, which are a proof point of both the technology leadership we established and our growing content gains in this market. As our penetration continues to grow, we are reinforcing our position as a leading provider of our front-end content with key design wins in the quarter on our 8SW and 9SW IF SOI platforms. We also picked up key design wins on our 22FGX platform for 5G millimeter wave applications, as well as micro display back planes for smart glasses and AR applications. We expect continued interest from these applications both in mobile and wearables using our 22FGX platform thanks to its enhanced performance and power efficiency capabilities. In IoT, our customers are continuing to carefully manage their inventories. And although we reported sequential revenue growth of 4% in the quarter, this end market is down on a full year basis, due principally to the ongoing inventory levels across both industrial and consumer applications. During the third quarter, we secured over 20 new design wins across our IoT end market. These include edge applications on our 12-nanometer platforms, next-generation smart cards on 28-nanometer, and connectivity products across both Wi-Fi and Bluetooth on our 22FGX platform. Longer term, we expect our IoT end market to grow as the number of smart and connected devices continue to expand over the next decade, driven by the need to sense, acquire, process, and communicate data. Finally, revenue for our communication infrastructure and data center segment declined sequentially in the third quarter. Although the node migration of our data center and digital-centric customers has largely tapered off, the transition of compute to -12-nanometer node is increasing the new and growing opportunities for high bandwidth communication and efficient power conversion and storage applications in the data center. DF Technology portfolio is ideally suited to service this important threat. Optical networking and power management are key battlegrounds for future growth as we remix our product offerings in this end market towards our high-speed silicon germanium and silicon photonics product. To that end, I'm pleased to report that we're working with three of the largest optical transceiver customers in this space as we focus on silicon photonics and power solutions to address data center requirements ranging from JNAI servers and high-performance network switches to storage solutions. Commercial satellite communication is also emerging as a growth vector in this market as large phased array antennas used in satellite ground terminals require significant high front-end silicon content, expanding the market opportunity for DF's silicon germanium and SLI products. As we discussed in our previous earning calls, we believe that the second half, 2024, revenue in this end market will be roughly in line with what we have reported for the first half of 2024. Overall, I'm very pleased to report the positive progress that we're seeing across our designments in all of the end markets that we support. Although short-term demand dynamics remain a focus, we continue to position DF for long-term growth opportunities by tailoring product features to support the key secular trends and performance requirements our customers need in each of these end markets. I now pass the call over to John for a deeper dive on the third quarter financials.

Thank you, Niels. For the remainder of the call, including guidance, other than revenue, cashflow, CAPEX, and net interest and other income and expenses, I will reference non-IFRS metrics, which exclude share-based compensation and or restructuring charges. As Tom noted, our third quarter results exceeded the midpoint of the guidance ranges we provided in our last quarterly update. We delivered third quarter revenue of $1.739 billion, which represented a 7% increase over the prior quarter, but a decrease of 6% year over year, principally due to lower shipments and utilization levels in the mid-70s, consistent with the commentary on our last earnings call. We shipped approximately 549,300 millimeter equivalent wafers in the quarter, up 6% sequentially, and down 5% from the prior year period. ASP, or average selling price per wafer, was roughly flat year over year. 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 third quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 50% of the quarter's total revenue. Third quarter revenue increased approximately 14% sequentially and approximately 11% from the prior year period, principally due to higher seasonal shipments. We believe that our customers' inventory levels have begun to normalize, and for the full year, we still expect revenue in our largest market by revenue to be roughly flat on a year over year basis. As outlined by Niels, we are well positioned to support our customers when demand rebounds with our design win momentum supporting the content and feature expansion in smart mobile devices. In the third quarter, revenue for the home and industrial IoT markets represented approximately 18% of the quarter's total revenue. Third quarter revenue increased approximately 4% sequentially and decreased 25% from the year prior period, as our customers in the consumer and industrial IoT segments continue to tackle elevated channel inventories. As discussed by Niels, our design win momentum with customers for home and industrial wireless connected devices is expected to drive long-term growth opportunities. In the short term, we expect that revenue for this end market will continue on a similar path to our third quarter run rate until there is a meaningful reduction in channel inventory across our customers. Automotive remained a key growth segment for us and represented approximately 15% of the quarter's total revenue. Third quarter revenue decreased approximately 5% sequentially and 16% from the year prior period due to the timing of customer inventory management. As Niels noted, we expect year over year automotive revenue growth to be in the high single digits for 2024 as we continue to gain share and support our customers across a diverse range of applications. Finally, moving on to our communications infrastructure and data center end market, which represented approximately 7% of the quarter's total revenue. Third quarter revenue decreased 14% sequentially and approximately 15% year over year as a result of declining volumes. However, this was partially offset by a year over year improvement in ASPs. As Tom and Niels noted, we are gaining new design wins in this end market in the areas of power, connectivity, and optical networking as the range of data center and communications infrastructure applications continues to grow. Moving next to gross profit, for the third quarter, we delivered gross profit of $429 million, which was above the midpoint of our guided range and translates into approximately .7% gross margin. Gross margin also exceeded the midpoint we had indicated and as discussed in our second quarter earnings call, revenue from customer volume adjustments in the third quarter reduced by roughly half from the prior quarter. We expect that these adjustments will be similar in the fourth quarter. Operating expenses for the third quarter represented approximately 11% of total revenue. R&D for the quarter increased to $122 million and SG&A declined sequentially to $71 million. Total operating expenses declined sequentially to $193 million in the quarter and incorporated an advanced manufacturing investment tax credit of $16 million. As discussed on our last earnings call, as we continue to spend on qualifying US expenses and capital assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program. We delivered operating profit of $236 million for the quarter, which translates into an operating margin of 13.6%, which is the high end of our guided range in 380 basis points below the prior year period. Third quarter net interest income and other income and expense was $10 million and we incurred an income tax expense of $17 million in the quarter. We reported third quarter net income of $229 million, a decrease of approximately $79 million from the year ago period. As a result, we reported diluted earnings of 41 cents per share for the third quarter, which was above the high end of our guidance range. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the third quarter was $375 million. CapEx for the quarter was $162 million, or roughly 9% of revenue. Adjusted free cash flow for the quarter, which we define as net cash provided by operating activities, plus the proceeds from government grants related to capital expenditure, less purchases of property, plant equipment, and intangible assets as set out on the statement of cash flows was $216 million. At the end of the third quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $4.3 billion. We also have a $1 billion revolving credit facility, which remains undrawn. Next, let me provide you with our outlook for the fourth quarter of 2024. We expect total GF revenue to be between $1.8 and $1.85 billion. Of this, we expect non-waiver revenue to be approximately 10% of total revenue. We expect gross profit to be between $432 million and $481 million, which at the midpoint is 25%. Excluding share-based compensation, but including the benefit related to the advanced manufacturing investment tax credit, for the fourth quarter, we expect total OPEX to be between $180 million and $200 million. We expect operating profit to be between $232 million and $301 million. At the midpoint of our guidance, we expect share-based compensation to be approximately $50 million, of which roughly $14 million is related to cost of goods sold, and approximately $36 million is related to OPEX. We expect net interest income and other income for the quarter to be between $7 and $15 million, and income tax expense to be between $23 and $35 million. We expect net income to be between $216 and $281 million. On a fully diluted share count of approximately 555 million shares, we expect earnings per share for the fourth quarter to be between 39 and 51 cents. For the full year 2024, we maintain our CAPEX guidance of approximately 700 million, and as Tom indicated, we expect this to provide GF an opportunity to focus on delivering adjusted free cash flow generation in 2024, approaching $1 billion. In summary, the dedication from our employees across the world and their continued efforts to expand our differentiated product offerings in key growth markets enabled us to achieve third quarter results at the high end of the guidance ranges we provided in our second quarter earnings update. With that, let's open the call for Q&A. Operator?

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ross Seymour of Deutsche Bank. Your line is now open.

Hi, guys. Thanks for asking the question and congrats on the solid execution. Tom, I guess my first question is for you. And I'm really, what I'm really trying to do is reconcile the strength you're exhibiting in the second half of this year to the weakness of a number of your customers. And then perhaps more importantly, how does that set you up for 2025? What are the puts and takes that are kind of the idiosyncratic benefits that you're enjoying relative to the macro market, which doesn't seem to be so strong?

Good morning, Ross. Really good question. So let's start with the first part of this, which is why is GF maybe the best way to say bucking the trend a little bit. I think it really comes down to two factors. The breadth of the end markets we play and pretty well distributed. But we have a high concentration in smart mobile devices, third quarter was 50 handle, a percent of revenue, and in our automotive business. And even in a year where you hear a lot about sluggishness in the auto end market, we're growing high single digits. And so smart mobile devices, remember they had their down period two years ago. And so they've become a steady opportunity for growth for us and the auto has been growing. And a lot of that is the design wins over the last five or six years. It's not just that more content in cars are growing, we've won more sockets in cars. And we expect that to continue. Auto is a growth engine for global families. So I think it's really the combination of those two elements, the breadth of our end markets, and in particular, the concentration of our smart mobile devices in auto in our revenue. Now, 2025. So let me first start by putting a little context in this by talking about 2024. We began the year and we said Q1 would be the low point in revenue and that we would sequentially grow every quarter. And so that's exactly what we did. In Q2 over Q1 was 7% growth. Results today of Q3 over Q2 was another 5%. And then we just got it in Q4 for further growth. On top of that, we're also, let's not lose sight of the fact that we're gonna on track to deliver a billion dollars of free cashflow. And that's with utilizations in the mid 70s. I think that's pretty impressive. Shows the power of the cash generation of our business. So we think that 2025 for GF as we stand here today, and this is in the phase that we don't like to guide more than one quarter at a time, but it's fair to talk a little bit 2025. It's gonna be an up year for global founders. The magnitude of that really is gonna be tied to how the industry performs and probably how it performs relative to the macro economy. And given that we are almost halfway through Q1 and most of our, the wafers that we will shift, the whip is in the line for Q1. I could tell you one thing about Q1 for 2025. Year over year, Q1 2025 compared to Q1 2024, we'll have some growth. On the other end of that, the sequential for Q this year to Q1 will be in the high end of the decline in cyclicality. And so while it'll be growing year on year, it will be on the high end of the cyclicality, the normal range of cyclicality we see on a Q4 to Q1. And I'll just leave it at that, Ross. You have any follow on?

Yeah, I just wanted to pivot over to the gross margin side. So one quickly for John on that. I guess a little clarification when you talked about the benefits that you got cutting in half into the third quarter on the LPSA side of things, you meant that that stays at about the same absolute level in the fourth quarter, not getting cut in half again. And then my bigger picture question is, how do we think of the puts and takes on gross margin as we think of 2025?

Yeah, Ross, thanks for the question. First point is you did understand me right. Roughly the same in terms of the absolute number in fourth quarter is what we saw in the third quarter. And let me just talk more broadly about profitability if I can. I know we're pleased with our results through the course of this year. We've seen a steady delivery of net income and EPS through the course of this year in 2024. On the gross profit margin, if you look at the other utilization charges that we've generated, which has had a very positive effect and partially offset the lack of loadings in the factories, we can quantify that as roughly about four points of benefit in Q1, roughly three in Q2, about a point and a half in the third quarter and a little less than that in the fourth quarter. So the point is, Ross, net of that, we've actually seen an improvement in gross profit margin as our utilization has stabilized on the back of operating leverage with revenue coming up sequentially every quarter in the year, just as Tom had indicated. And as we look into 2025, it's really that. As we see recovery in the industry, ongoing recovery and continued improvement utilization, we would expect a similar positive effect on our gross profit margins. Thank

you. One moment for our next question. Our next question comes from the line of Krish Sankar of TD Cowan. Your line is now open.

Hi, thanks for answering my question and congrats on the strong results. Tom, I had two of them. First one is question on the overall ASP environment. Your pricing has been surprisingly resilient this year, but one of your peers has spoken about some pricing adjustment in March quarter. Well, another peer seems to be okay. So I'm glad it feels like there's a lot of mixed messages on pricing out there. So Tom, can you just help us out with some color on pricing trends and how to think about it in calendar 25 and then add a quick follow-up?

Yeah, so let's start with the big foundry player in the industry. They represent 70% of all the wafers that are shipped, TSMC. They've been very clear that they see a lot of pressure on cost. Most recent articles about how energy prices in Taiwan are highest anywhere in the world. They're expanding capacity, so they're deploying capital, need to get a return on that, deploying capital in regions where the cost structures are gonna be challenged. And so they've talked repeatedly about this being a constructive environment for pricing. And so when the big rational player understands that inflation is part of our industry and recognizes that needs to be shared, that sets the tone for pricing. Now, what is GF's team and what do we see going into 2025? You can look at our results. We've been roughly flat on pricing this year. But remember, our LTAs give us a lot of certainty. They give us certainty, they give our customers certainty. Remember, it's based on fixed volume, fixed duration, and fixed pricing. And so that's the rules of the game we play under. And so you've seen it in our results. But as we think about 2025, more of our revenue is gonna come outside of these long-term agreements. It's gonna come on a kind of a non-committed PO basis. And we see the opportunity after two years of inflation that we've had to offset our costs against, the opportunity to have these discussions to actually get better pricing for our technology. And that's what we see in 2025. You'll hear anecdotal one-time events of people giving some pricing for tactical load. I don't think I would confuse that with the general trend we see. And remember, a lot of GF's business is sole source, single source type business, which means we have a special engagement with our customers on setting the value of capture and creation for both of us. I'll just leave it at that. You have a follow-on?

Yes, Tom, and thanks for that very helpful feedback. Look, my quick follow-up is on smart mobile, obviously it's a very important part of your revenue stack. Can you talk a bit about the demand and seasonality trends in the segment, especially as we head into 2025, and also is the strength here coming from the RF components of power devices? What process nodes are smart mobile focused on? Thank you very much.

Well, this is right in Neil's wheelhouse, so I'm gonna let him take this.

Yeah, good morning, this is Neil. So yeah, on smart mobile devices, we talked a little bit about it when we opened up the call today, basically getting back to a year of growth. I think we are very well known for our position in the premier tier phones, but maybe I can also add that from a design-win standpoint, we have seen really good growth in China, where we have expanded into 5G, both low and mid tier phones. So it's time to see business coming in with the three of the major players in China, in addition to the usual premier phones that we're well known for today. We've got the technologies, this is on 8SW, 9SW SOI, it's on our CIGI, as well as we're starting to have early traction on the IFGAM portfolio as well, by SMD.

Thanks, Neil, thanks Tom.

One moment for our next question. Our next question comes from the line of Chris Caso of Wolff Research. Your line is now open.

Yes, thank you. I guess the first question is just getting some more detail on the impact of the customer underutilization payments as we go into next year. You gave some commentary about how that would go, is right that that kind of gets down to de minimis levels as we get into the first half of next year. And then, just following all of that, Tom, you provided some commentary on the March quarter, and I think what I heard you say is still up year on year, but on the higher end, the seasonality. And it seems like if that's the case, it sort of implies sort of a down high single digits in Q1-based CSE, if you could confirm our math, which was right on that.

Yeah, Chris, this is John. I'll take the first part. You are interpreting that correctly. We've been through a number of customer discussions with the LTAs in the course of 2023 and 2024. We're seeing less of those now, and we're seeing the effect of that, less material to our overall gross profit outlook, including in the fourth quarter of just roughly, just over a point of effect on the fourth quarter. I mean, fourth quarter. And as we look up into next year, first half of next year, we see a similar dynamic, less material to the overall gross profit margin story here. And even I'll let Tom take the next part of that question.

Yeah, Chris, you've done the math right on how you side in this. Okay. Do you have a photo up, Chris?

I do. Another question is a little bit the bigger picture, but there's two competing dynamics what's going on in your foundry segment. One is what I think you benefit from a while, which is your customers want to diversify their supply geographically. But there's another in that we're seeing, starting to see is bifurcation where, again, for geopolitical reasons, customers are tending to want to produce locally within China for that product that's within China. As you look at your business going forward, how do you kind of balance those two things in terms of the opportunity for business coming your way because of where your geographic is located as compared to some of the customers having some incentive to produce in China?

Yeah, it's a really good question, Chris, because it's like, what's your tailwind, what's your headwind? Yeah. There's China for China, and I'll come to that second, but let's talk about China for the rest of the world. Just a month ago, over the summer, we had three global technology summits. These are GF-hosted events for customers and ecosystem partners. We had three times as many partners and customers at our Shanghai event than we had in the US and in Europe. Now, by the way, the US and Europe events were well attended, but this gives you an idea of how the fabulous companies of China have a strategy, N plus one. They need, yes, local for local, but they also need a geographically diverse foundry like GF, and there's very few who can give them this, to support their worldwide business. In fact, they taught us of an expression they use, NCNT, no China, no Taiwan in their N plus one strategy. And so they're building their business around being a global supplier, recognizing they need two supply sources. And GF's the most logical choice for them, and the representation at ART GTS, the kind of design wins. Neal's alluded to three out of the four major players in the front end modules, content, ART content for smart mobile devices, are all engaged with GF. So that's the big part of the tailwind. Now, there is a headwind of local for local, and it's GF's job to figure out how we partner and take advantage of some of that opportunity there. I could believe very strongly that our tailwind offsets by more than some of the headwinds we face in the localization. Because first of all, it's gonna take a long time for the types of differentiated technology our customers get or need from us in China. And I think there's an opportunity for partnerships for us to even improve on that. I hope that helps. Does, thank you.

One moment for our next question. Our next question comes from the line of Mehdi Hosseini of Susquehanna International Group. Your line is now open.

Yes, thanks for taking my question. First one is for Tom. I wanna go back to what you said earlier, discussing the design wins across platform. Can you give us a sense of what specific segments of the market, these design wins are happening, and when should we expect any material contribution? And I do have a follow-up.

So I'll talk a little bit high level about design wins in our funnel. But for GF to outgrow the industry when this thing turns around, it's all predicated on converting our funnel of opportunities into design wins and to tape-outs in business. And we've really accelerated our commercial engine on that point. And feel confident that we have this clarity around what does our funnel need to be in total size to be able to outgrow the industry in a very disciplined process of identifying, qualifying, driving those leads into actions on design win and tape-out. For the specifics around some of the ones you're really excited about, I'm gonna hand that over to Niels.

Yeah, thanks Tom. Yeah, let me, maybe the best way to talk about our confidence in delivering superior revenue growth and the creative margins moving forward. Really, I think the best way to do it is for me to talk about Global Foundry's growth strategy and specifically the four pillars that we base that strategy on. So the four pillars we base it on are basically the essential chip technology, focus on high growth market segments and battlegrounds, global for local manufacturing in all three major regions, and then a balanced customer support model. So let me walk you through what we mean with these four pillars or how we approach these four pillars. So starting out with essential chip technology, just to maybe ensure that everybody knows what essential chip technology is, the best way to talk about it is really it is the technology, the major technologies behind embedded processing, analog, and power. And if you think about companies out there that have, in these spaces today that are well known, these will be companies like TI, ADI, and AXP. So that's really the technologies that we are focused on. It's 10 nanometer and above. Within essential chip technology, you then get down to three major areas of technology, CMOS, and within CMOS you have bulk, which is typically commodity second source type of CMOS. You've got feature-rich CMOS, and you've got ultra low power CMOS. Within RF, you have SOIs, silicon germanium, and GAN, and within power it's really the BCD technologies, the MOSFETs, the silicon carbide, and the GAN. So that's what essential chip technology, what the market is and what the technologies are that people are focused on there. Now, if I take the strategic overlay and put it on these three technology areas, we basically can talk about it in the following technology product vectors. First, ultra low power CMOS. This is where we have our 12 LP and our 22 FDX technologies. Our focus here is the 22 FDX is to offer 30 to 50% high performance, and all 30 to 50% lower power at the same kind of performance levels. The latest NXP announcement that we just did a few weeks back, we're exactly on 22 FDX, and we're exactly for the reasons of providing the higher power, the higher performance, and the lower power, and those wins were across multiple applications like we mentioned earlier, automotive, IoT, SMD. Next to ultra low power CMOS, you've got feature-rich CMOS, which really is focused on sensing, computing, and display. This is 28 nanometer and above. A good example here of the technologies we have and the differentiation we have is our 40 nanometer NVM technology that now is powering the number one automotive MCU portfolio in the world. But other areas like display and imaging are also very prominent in that space. Next to that, we have IF, basically the 8SW, the 9SW, the silicon germanium, and now IF GAN with the recent Finway announcement, very differentiated technology, single source across the gamut there. Power being the fourth one, 130 BCD, 55 BCD, 650 volt and 200 volt and 100 volt GAN. The latest acquisition we announced there with Tagore on the GAN side, really focusing in on higher integration of GAN devices. And then lastly, silicon photonics, where we offer the highest bandwidth at the lowest power. And we mentioned earlier, three major players in optical transceivers are engaged with us on that. So that's really the essential chip technology pillar. That's the first one, differentiated technology, single sourced, and highly tailored to what our customers need in the segments they're playing in. The second pillar of the strategy is really the high growth market segments and battlegrounds. And as an example here, we are growing our service addressable market from $60 billion. We're expecting that to go to about $120 billion by 2031. Key markets there are automotive, smart mobile devices, industrial and home IoT, and of course, communication infrastructure and data centers. And as you look into those markets, we focus in on the key battlegrounds that drive superior growth. There will be automotive safety, power train, body electronics and automotive. Of course, in SMDs, they are front end, Wi-Fi, audio haptics, display and imaging. And in IoT, it's home and industrial, AI at the edge, MCU, Bluetooth, Wi-Fi, aerospace and defense. And lastly, in communication infrastructure and data center, besides silicon photonics that we mentioned earlier and power delivery, we're also seeing quite interesting growth of design wins in the commercial satellite communication space. And we mentioned that earlier, the large face, the ray antennas, we have a major win there that we believe is gonna drive some meaningful growth for global families moving forward. So the third pillar is really the global for local manufacturing. We are in all three key regions, Singapore, Germany and the US. We are at scale with our manufacturing. We have three millimeter factories in all three regions. We have automotive and dual qualification on all our major technologies. So we can support almost any technology needs out there from an automotive standpoint. And we give the security of the dual qualification across factories. And we have a very CAPEX efficient capacity expansion model for the next few years as we move forward. And then the last pillar really is a balanced customer support model. And that really consists of three different components here. The first one we talked more about in the past and is the LTAs, as Tom mentioned, fixed price, fixed volume, fixed duration. That was about $20 billion. We announced that in the 20th. And last time we had a major announcement around LTAs was the InfiniI announcement we did early in the year, which was also very meaningful. Outside of LTAs, we got our Salesforce deployed on the top 100 major accounts across the world. So we have sales coverage and support across those 100 accounts. These accounts, the design means we're seeing there and the momentum that we have built in in the last 18 months, 90% single source and a creative to margin and creative to our long-term model. Again, the latest announcement there with NXP is a good example of one of these design wins and you will see more of these announcements coming in the future. And then thirdly, within the balanced customer support model is really the channel. And this is where we get to the next 100s of customers. We build the ecosystem around that. We have a set of channel partners from a worldwide basis. And we believe based on the design means we're seeing that the margin will further be creative to our long-term model. And like Tom mentioned earlier on, just the latest DTS summons that we did with our customers, we had more than a thousand customers and partners attending that which bodes well for the growth into the channel. So if I should summarize why we believe we're well positioned to deliver superior revenue growth at margins that are creative to our long-term model, it really comes down to expanding and strengthening the portfolio of differentiated essential tip technologies, focused on fast growing markets and segments with the same doubling from $60 billion to $120 billion by 2030, the global and local manufacturing footprint with a very efficient CapEx expansion, and then the balanced customer engagement model with a very meaningful growth of a pipeline and design wins, again, at margins that are creative to our long-term model. That is great. Thanks

for all. Yes, I do. Thanks for all the details. Just quickly for John, how should we think about OPEX, especially in the context of some of these credits that you're receiving, is the 70 to 75 million HGNA should be like a baseline? Any color would be great.

Yeah, Matty. So we've been managing OPEX carefully this year. We expect to continue to do that as we head into next year. And as we form our kind of ongoing views of the 2025 revenue recovery, we'll adjust our OPEX accordingly. On your specific question, the advanced investment manufacturing tax credit that we generated in year to date in 2024 thus far has been slightly ahead of our expectations. We expect that to continue through the life of this program at roughly 10 million a quarter would be a normal rate, if you will. It's been a bit ahead of that this year, but 10 million a quarter would be a good estimate going forward, Matty.

Thank you. One moment for our next question. Our next question comes from the line of Mark Lapassis of Evercore ISI. Your line is now open.

Hi, thanks for taking my question. It looks like you're set up to throw off some really healthy cashflow for the next several years under what I would consider reasonable expectations for industry growth with free cashflow being higher than earnings. And Tom, I believe in your prepared remarks, you used the expression, you'd consider capital allocation programs, which I think is a pretty broad expression because I think you could allocate capital to new fabs or increasing R&D or buying back stock or even issuing a dividend. So I'm wondering if you could give us, help us out with a little bit more color on that, what you meaning there. Is capital return part of the conversation? And maybe John is part of that if you could remind us the cash you'd like to have on your balance sheet to run the company and the capital structure so we can figure out what would qualify as excess cash. Thank you.

So Mark, you're looking for a secret decoder ring. I'm gonna pass that over to John.

Hey Mark, thanks for the question. Yeah, so we have entered a phase in the corporate history of GF where we've gone from where we were formed to now generating solid free cash flow results for the company. It's really good, it's exciting to see this happen and approaching our goal of near $1 billion in free cash flow this year. It's quite a milestone for this company. And it's not lost on us that we're now seeing a cash balance that is accumulating. We ended the quarter with about $4.3 billion in total cash and investments and about $2.3 billion in total debt. So roughly $2 billion net cash. As we continue to progress in this manner, we will talk more about capital deployment. And it can take the form of everything you would expect from share repurchases, dividends potentially in the future and reducing our overall leverage amount is in the cards as well. So we'll continue to look at all that. We'll update you all as things progress and our thoughts form more fully in this area. We need to see some more consistent results in history in this domain. But yeah, again, it's just it's not lost on us that we're starting to build a cash balance here and we'll need to think about deployment at some point.

Yeah, look, and every good business that wants to accelerate their growth is always gonna need to look at for creative M&A opportunities. Now that becomes a door that's open for us given our cash balance. There's nothing we see as we sit here today, but that's another deployment of capital allocation. And look, Russ, I also commented, I'm sorry, Mark, on unsustainable foundry growth. And we have the capacity and we've said this before already in our factories to get us between nine and $10 billion in revenue. And that's a really important number because with that, not only is the free cash flow generation there, it's allowing us to invest in growth without having to trade off, do we deliver free cash flow or not in our business for growth? And we'll be able to do both. And so this idea of free cash flow is gonna exceed getting to where we need to invest again in the capital allocation into growth. And we'll be able to do that in the factories because we'll have enough scale to be able to do both, generate free cash flow and grow our business.

Fair enough, thank you very much.

One moment for our next question. Our next question comes from the line of Harlan Sir of JP Morgan, your line is now open.

Good afternoon, thanks for taking my question. You know, the team was first to market in terms of developing a manufacturing silicon photonic solution, a lot of these sort of next generation data center networking connectivity products. So I think that's your 45 nanometer PLO technology. I think NVIDIA, Marvell and Broadcom are all your customers here. Team is also doing some pretty good work on compound semiconductors like silicon germanium for high speed optical TIAs, drivers and the like. So as many of these customers move to a CIFL based architecture for their optical transceivers next year, does CIFL become a meaningful part of CID next year anyway to quantify?

I think I get this as Nels, maybe I can start. So we haven't really announced the customer names, but I did say earlier, we have three of the major players in the industry on our platform and you are right, we were early, we've been working on this for 10 years and are finally seeing it coming to fruition now through the design events. You know, I've actually personally, you mentioned both silicon photonics and SIGI, and I think of those two as the future of true high performance analog. So I mean, the type of performances we're trying to get to here in the future is gonna require these types of technologies and be very well positioned in global boundaries to take advantage of that. So when you think about it in that context, yeah, I do think that this will be a meaningful remedy to generate a force out in time. Of course, you're still needing to see some ecosystem changes and you're gonna have to be, you're gonna have to get to some levels of data speeds as well as power limitations, but the minute you hit those, I think you're gonna see a pretty rapid ramp of these technologies.

Yeah, look, and I think success for us, it's great to have done this monolithic integration of RFC, MOS and photonics in a single chip. We have to do more to enable our customers in some of the other pieces of the puzzle. And look for us to invest one way or the other to continue to help our customers integrate what we call kind of the best ingredient at the core of this into opportunities. And look, I'll just add one other thing. That's the big play for us in data centers, signal photonics, but don't underestimate power delivery, where we're focused here as well. Power is becoming the biggest challenge and it's neck and neck with connectivity. And we think some of the things we're doing with our technology in particular, GAN for the future is gonna help solve that problem as well.

Great, and I appreciate that. And also great to see the partnership with NXP that you guys announced last month for 22FDX. And also, as you mentioned in your prepared remarks, much of it is gonna be used for automotive, smart mobile, IoT, continuation of the strong partnership that you guys had with them at the 40 nanometer embedded MCU, process node. Did the GF team sign an associated long-term agreement with NXP, especially given the strategic nature of their leadership in automotive, kind of similar to the partnership in LTA you signed with Infineon at the beginning of this year? I'm just trying to figure out the difference between some of these strategic partnerships, right? Why some have an LTA associated with them while maybe others might not.

Yeah, without getting into specifics on the NXP deal, what you typically see is that markets like automotive, aerospace and defense, some industrial spaces, the customers would like to have LTAs in place and it's back to getting certainty around volume, pricing and duration, right? So in some cases we see that, in other cases, we basically, you can almost call it standard T's and C's with dynamic pricing, dynamic volume commitments, right? And renegotiation on a 12-month basis. So we do a mix of it, really depending on what suits the customer and the market and the cost of what's going off the best.

Right, it's really the complexion of the market. If it's a product design that lasts 10 years, this is where customers want certainty. If it's a refresh cycle every year, it's less important to them because it's changing all the time. And so you could almost think a customer who plays in different end markets may want an LTA for one product and not on another. Look, just on that point, to give you an idea, when we hit peak LTA revenue or total revenue under LTA, it was above $30 billion. We ended last year, we still had $20 billion of LTA revenue and as we sit here today, we have $17 billion. And so there's still a fair amount of our business that's under LTAs and it's not because it's just bleeding out slow, it's because we still get customers in some of these long-tail businesses that want to get that type of certainty locked in. And so I think it's becoming an important part of our industry and it's never about one thing or another thing, it's always a little bit about the nuance underneath, what's the problem that's trying to be solved and LTA solves some of that certainty for long product line use. You have a follow on?

Nope, that's it for me. Thank you, Niels, thank you, Tom.

Thank you. Riffca, we'll take one last question.

One moment for our last question. Our last question comes from a line of Vivek Arya of Bank of America Securities. Your line is now open.

Hi, thank you for squeezing us in. This is Tuck San on behalf of the bank. One follow up or clarification, you've guided auto to be a pie single digit, smart mobile device to be flattish for the year and I'm not sure how you can get to the Q4 guidance of 1825 at the midpoint with those numbers. And then the real question is, the smartphone trends have remained pretty weak to date. So how should we think about your smart mobile device demand going forward, particularly given that Q1 tends to be seasonally

down? Yeah, Vivek, this is John. I'll take the first part. I mean, really it's an IoT and comms infrastructure where you see year on year declines for 24 compared to 23 will round out the Q4 guide. And I'll let Niels comments on the smart mobile trends.

Smart mobile, you could say the global foundry may be blocking the trend a little bit here. We are doing well in smart mobile devices. We are particularly doing well on our portfolio. And from a design bin standpoint, we have very meaningful design bin momentum and in that space as well moving forward.

Got it. And then a quick follow up on the gross margin front. You mentioned that without the prepayment impacts, you expect say 100 basis point ish impacting Q4. So excluding those, you should be up say 40 basis points in Q4. So how should we think about gross margin going forward now that you've pretty much run out of those impacts?

Yeah, you'll see the natural progression of gross margin performance along with the various factors that lead to that, namely improvement in factory utilization as the industry recovers and our loadings increase along with our ongoing cost recovery initiatives, mixing of the business, growth in the channel, the various factors that Niels touched on earlier of growing the business in a manner that is margin accretive. Thank you.

This concludes the question and answer session. I would now like to turn it back to Sam Franklin for closing remarks.

Thanks, Rivka. Thanks everyone for joining us today. We'll appreciate the questions and we'll continue some of the other questions in the callbacks later this afternoon. Thanks very much.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.