GlobalFoundries Inc.

Thank you for standing by and welcome to the Global Boundaries Conference call to review Second Quarter of Fiscal 2025 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 today's session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Sam Franklin, Vice President Business, Finance, and Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Global Boundaries Second Quarter 2025 Earnings call. On the call with me today are Tim Breen, CEO, Neil Zanderskopf, President and Chief Operating Officer, and John Hollister, CFO. A short while ago, we released GF's Second 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 issue today, as well as risks and uncertainties described in our SEC filings, including in sections under the caption risk factors in our annual report on Form 20F and in any current reports on Form 6K filed with the SEC. In terms of upcoming events, please note that we will be participating in fireside chats at the KeyBank Capital Markets Technology Leadership Forum in Deer Valley on August 11th, the Deutsche Bank Technology Conference in Dana Point on August 27th, and at the Goldman Sachs Communicopia and Technology Conference in San Francisco on September 8th. We will begin today's call with Tim providing a summary update on the current business environment and technologies. Niels will then discuss our recent design wins, highlights, and traction across the markets, following which John will provide details on our second quarter results and third quarter 2025 guidance. We will then open the call for questions with Tim, Niels, and John. We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tim.

Thank you, Sam, and welcome everyone to our second quarter 2025 earnings call. I'm pleased to announce that GS delivered strong financial results in the second quarter that exceeded the guidance midpoints for revenue, gross margin, and operating margin. Earnings per share exceeded the high end of our guidance range, and these results reflect our continued focus on driving profitability through the cycle. We also made notable progress on other key financial metrics in the quarter, generating $277 million of adjusted free cash flow. Having recently implemented several capacity expansions in capital-efficient manners, GS is poised to capture growth opportunities across our footprint as demand accelerates in critical end markets while continuing to deliver robust adjusted free cash flow. Thanks to the team's excellent execution, we remain on track to generate over $1 billion of adjusted free cash flow in 2025. In the second quarter, we continue to demonstrate excellent progress in high-growth markets where both the edge and cloud AI transitions are driving the need for secure, high-performance GS technologies. Both our automotive and communications infrastructure and data center end markets demonstrated double-digit percentage -over-year revenue growth for the third consecutive quarter. As the demand for our differentiated product portfolio aligns with the increasing requirements for high-performance chip solutions in these growth markets, GS is delivering strong design and momentum with existing and new customers. For our automotive and communications infrastructure and data center end markets in 2025, we expect -over-year growth in the mid-teens and high-teens percentage ranges respectively. Meanwhile, the smart mobile devices and home and industrial IoT end markets have continued to experience a slower recovery, as uncertainties brought about by the broader geopolitical environment and global trade tensions have impacted consumer demand and inventory dynamics in these two end markets. To that end, we have been partnering closely with certain customers to support their inventory management and preserve GS market share, predominantly where we are a dual-sourced foundry supplier. In our smart mobile devices end market, achieving these objectives has involved some one-time adjustments to the average selling price per wafer, or ASP. For one particular customer, we partnered to replace the fixed wafer volume component of their long-term agreement with a shift to a long-term 50% share of wallet, which is expected to result in meaningfully higher wafer revenues over the remaining life of the contract. These type of adjustments for specific customers are leading to improved utilization levels across our footprint in the second half of 2025, but will result in -over-year ASP in the second half of the year for this end market, and to a lesser degree for GF overall. We continue to observe a constructive pricing environment across automotive and communications infrastructure and data center as the demand for silicon content continues to grow in these end markets, and GF solutions and footprint bring unique differentiation. Notwithstanding these market dynamics, GF remains the diversified and differentiated foundry of choice for a growing number of our customers. With our broad product portfolio and our focus on critical performance, connectivity, and power capabilities, GF is gaining share and winning key designs across a range of applications and end markets. I would like to provide some important business highlights from the second quarter. We secured design wins for applications across automotive processing, data center power delivery, and connected home automation on GF's 22FDX MRAM, 55BCD Lite, and 12LP Plus platforms, respectively. Niels will cover these in more detail. Moving briefly to the macroeconomic landscape. Like others in our industry, we believe that some customers took on additional inventory in the second quarter, particularly in consumer-facing markets, in anticipation of increased tariff-related impacts, which will impact demand in the second half of the year as these inventories normalize. More strategically, it is increasingly clear that the changes and uncertainties brought about by global trade negotiations and tariffs underscore the importance of being a geographically diversified foundry partner to our customers, which GF is uniquely positioned to provide with our footprint across the U.S., Europe, and Asia. Diverse, dependable supply of semiconductors is not a luxury, but a necessity for national and economic security. For over a decade, GF has made investments to build and scale flexible manufacturing capacity across our sites. Our diversification strategy is gaining traction with more and more customers who have recognized the value of partnership with GF, resilience, flexibility, and dependability. In the U.S., we fulfilled our first CHIPS milestone in diversifying our Fab8 facility with our CHIPS 8.0 project. Our 22-FDX technology is on track with qualification, bringing supply chain resiliency and security onshore. This is intended to provide our customers with critical supply as anticipated tariffs on semiconductor imports take effect. In Europe, we intend to convert our former Bob Test facility to expand our wafer fabrication capacity and are working to get EU CHIPS approval to support the investment, which would deliver even more efficient scale in Germany and support our European customers like Continental and Bosch with domestic supply. We are enhancing our global reach with our China for China strategy, particularly targeted at the growing automotive sector. I am pleased to announce that we have entered into a definitive agreement with a China-based foundry that will enable our customers to access GF production, performance, and quality to serve their domestic Chinese demand. Initially, this agreement will apply to our automotive-grade feature-rich CMOS technologies, and based on early dialogue with our customers, we expect that this will extend to our automotive-grade BCD technologies. This is a unique opportunity for GF to expand our multi-fab customer offering on our successful automotive-grade platforms, while maintaining control over both the IP and quality standards that our customers require. We believe an increasingly decentralized world is a net opportunity for GF, and the strength of our opportunity funnel and design-win momentum is a compelling validation of our long-term growth strategy. Furthering our efforts to support our customers where and how they need us, and to align our business with the secular growth trend accelerated by the deployment of AI, last month we announced a definitive agreement to acquire MIPS, a leading supplier of AI and processor IP. Expected to close later this year, MIPS will be an exciting addition to the GF suite of offerings that will add more value to our customers in completely new ways. MIPS brings a highly complementary IP portfolio and decades of design and IP innovation that will be accelerated when combined with GF's world-class manufacturing and global ecosystem. As a leader in RISC-V capabilities, MIPS enables efficient processor cores that are tailored to edge AI applications, and ideal for the high-performance edge solutions that GF is well positioned to serve. This acquisition is a win for GF and a win for our customers, who will be able to more closely collaborate with GF earlier in the design cycle, with more direct access to process IP and with greater potential for customization. Early customer feedback on the acquisition has been very favorable, as our customers look to an increasingly differentiated GF as their partner in edge AI applications. In conclusion, I want to thank our 13,000 strong employees around the world for their focus on technology differentiation, manufacturing excellence, and driving the momentum with our customers, as we continue to execute to our long-term strategy and lay the foundations for a strong future. With that, over to you, Niels.

Thank you, Tim, and welcome to everyone on the call. As Tim mentioned, we are continuously advancing our commercial partnerships and security design wins with our customers, of which over 90% were awarded on a sole-sourced basis during the last four quarters. Our unique and varied technology portfolio continues to fuel strong design momentum across each of the end markets we serve. In the second quarter, we secured nearly 200 design wins across our end markets, a new quality record and almost double the number from a year ago. With that, let me walk you through the key highlights for the quarter by end market. In automotive, we continued to outgrow the market and kept a share as we expand our breadth of offerings, gain content per vehicle, and enable our customers to win with GF's differentiated features and performance. A testament to this strength, in the second quarter, our automotive end market grew over 36% -over-year and comprised nearly a quarter of total wafer revenue. We on track for mid-teens percentage automotive revenue growth in 2025. Our leadership in automotive micro-trollers has driven our strong partnerships with customers around the world. We have gained significant design win traction with China domestic fat-based customers, having secured design wins across battery management systems, radar, micro-trollers, and power management ICs with a dozen customers over the last four quarters. GF automotive products are already shipping to Chinese customers, which will help expand our automotive market share in China. More broadly, we're seeing accelerated design win traction across our portfolio of diversified applications within Out of Both. In the second quarter alone, we won designs with 25 unique customers. These include wins across automated driver assist processors, zone controllers, display controllers, radar sensors, battery management systems, and interior lighting on our 12 LP 22 FDX and 130 BCD AutoPro platforms respectively. Among these, GF won its first automotive design win with the 12 LP Plus AutoPro platform for a next generation radar processor. These processors interpret high resolution imaging radar data and are critical for initial object classification, meaning the speed and accuracy that GF provides will make our roads safer. In addition, as Tim mentioned, we secured a significant design win for a fifth generation micro-troller with four megabytes of magnetic RAM on our 22 FDX platform. With this win, GF not only demonstrates strong customer momentum in the era of software-defined vehicles, it highlights the value of integrated non-volatile memory that our platforms can provide. Lastly, in June, Continental announced that GF was strategically brought on as the exclusive manufacturing partner for its newly formed Advanced Electronics and Semiconductor Solutions Organization. We are proud to support Continental in this endeavor. This is a powerful testament to the trust in GF's auto-qualified process technologies, quality, and reliability. Through this partnership, GF will enable Continental to deliver innovative solutions for the next generation of safe, connected, and autonomous vehicles. Turning now to smart mobile devices, revenue in the second quarter grew off of a seasonally low first quarter but declined year over year due to a reduction in customer audio-visualization payment from the prior year period as well as certain ESP adjustments that Tim mentioned. Notwithstanding this, our long-term outlook for content gains in the smart mobile ink market is positive. As we see strong commercial traction with new design wins and partnerships across a broad range of applications in the smart phone and beyond. We also see a tailwind in this market driven by the need for more US sourcing. GF Market Share continues to grow in IF Frontend where we lead the market with our 8SW and 9SW platforms. In the second quarter alone, we secured 36 design wins in IF Frontend with nine of the top 10 industry players, further expanding our customer base and GF share of wallet. Beyond our marketing position in the IF Frontend, we build momentum in 5G transceivers on our FinFET platform by securing committed revenue over the next four years with a key customer. In addition to the smart phone, we engage with leaders in the nation for emerging smart glasses studies. Leveraging our leading technology elsewhere in our portfolio, smart glasses are a new form factor utilizing many of the same essential chips of connectivity, processing, power, imaging and display. In the second quarter, we secured a new design win for the AI processors used in smart glasses which built on our design win for micro LED displays in the first quarter to support years growth in this exciting application. In IoT, revenue grew year over year for the second consecutive quarter and we secured several design wins with leading IoT connectivity players for Wi-Fi 7 and Wi-Fi 8 as well as next generation Bluetooth, demonstrating our continued leadership in IoT connectivity products. These included wins on our 12 LP Plus and 22 FDX platforms for Wi-Fi and Bluetooth system and we also saw the increase in use cases for Bluetooth technology and Bluetooth for our smart phone and chip solutions that enable connected home automation applications. The increase in use cases for keyless entry system and Bluetooth tags, these applications benefit from GF strength and low power consumption and high security. Beyond connectivity, we also see broad adoption of GF technologies to enable physical AI. These design wins enable important device capabilities such as time of flight sensors for home robotics to image and audio processors that brings AI enabled vision and language functionality to home and industrial applications. Lastly, we see continued traction in medtech and health applications where the need to acquire, process and communicate data securely and at low power is paramount. In Q2, we want an audit design for ultra low power AI enabled hearing aids on 22 FDX. Looking ahead to the second half of 2025, we expect full year revenue in this end market to decline mid single digit percent year over year driven by residual consumer facing IoT inventories. Going into 2026 and beyond, we remain bullish on GF strength and growth potential for home and industrial IoT. As AI increasingly migrates to edge devices, we believe the need for ultra low power and ubiquitous connectivity will only grow stronger. Finally, our communication infrastructure and data center end market grew double digit percentage year over year in the second quarter and we continue to expect high teams percentage revenue growth in 2025. Thanks to our focus on differentiated and high growth opportunities within communication infrastructure and data center, we expect to see multi-year secular growth opportunities for GF. These include high growth, high margin areas such as silicon photonics, which we expect to nearly double in revenue from 2024 to 2025 to over $200 million. Given the strength of our photonics products, we have expanded capacity to meet robust customer demand. We are ramping our silicon photonics capabilities to address the need for high performance solutions to support both blockable and co-packed solutions for scale out and scale up networks. As the need for optical driven speed, bandwidth and power efficiency continues to grow, we believe GF is only in the early stages of this opportunity. GF is engaged with leading industry players in the CPO ecosystem across networking and electronic innovators to support the development of integrated solutions as the demand for data grows exponentially. Satellite communications is another area of significant growth potential for GF as we design into the world's foremost satellite communication companies. GF content can be found in both the rapidly launching satellites as well as user terminals, which are projected to reach millions of units. With RF front-ends on our CIGI and RF CMOS, digital beam formers on our 22FGX, and modems on our 12VP platforms, GF is playing a critical role in enabling this new growth market. Starting from the minimum revenue in 2024, we expect SATCOM to contribute approximately $100 million of revenue in 2025. We continue to make progress in our design with momentum across a wide breadth of applications enabled by our portfolio. Thanks to the trust and partnership with our customers, I'm excited for us to capitalize on these long-term growth opportunities. I'll now pass the call over to John for a deeper dive on our financial results and guidance.

Thank you, Nils, for the remainder of the call, including guidance, other than revenue, cash flow, net interest income, and second quarter capex. I will reference non-IFRS metrics, which are included in today's press release and accompanying slides. As Tim noted, our second quarter results exceeded the midpoints of the guidance ranges we provided in our last quarterly update. We delivered second quarter revenue of $1.688 billion, which represented a 6% increase over the prior quarter and an increase of 3% year over year. We shipped approximately ,300-millimeter equivalent wafers in the quarter, up 7% sequentially and up 12% from the prior year period. ASP, or average selling price per wafer, was down high single-digit percentage year over year due to product mix, pricing adjustments, and a reduction in customer underutilization payments from the prior year period. 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 second quarter. Let me now provide an update on our revenues by end markets. In line with our strategy, we continue to align our business to secular growth drivers and diversify our end market position. Smart mobile devices represented approximately 40% of the quarter's total revenue. Second quarter revenue increased approximately 17% sequentially and decreased approximately 10% from the prior year period. In the second quarter, revenue for the home and industrial IoT markets represented approximately 18% of the quarter's total revenue. Second quarter revenue decreased approximately 9% sequentially and increased approximately 22% from the prior year period. Automotive remained a strong growth driver for us and represented approximately 22% of the quarter's total revenue. Second quarter revenue increased approximately 19% sequentially and 36% from the prior year period. Finally, our communications, infrastructure, and data center end market represented approximately 10% of the quarter's total revenue. Second quarter revenue decreased approximately 2% sequentially and increased approximately 11% over the prior year period. For the second quarter, we delivered gross profits of $425 million, which was above the midpoint of our guided range and translates into approximately .2% gross margin. Operating expenses for the second quarter represented approximately 10% of total revenue. R&D for the quarter was $125 million and SG&A was $42 million. Total operating expenses were approximately flat quarter over quarter at $167 million. We delivered operating profit of $258 million for the quarter at an operating margin of 15.3%, which is at the high end of our guided range and 230 basis points above the prior year period. Second quarter net interest income was $17 million, other expense was $7 million, and we incurred income tax expense of $34 million in the quarter. We reported second quarter net income of $234 million, an increase of approximately $23 million from the year ago period. As a result, based on a fully diluted share count of approximately 557 million shares, we reported diluting earnings of $0.42 per share for the second quarter, which exceeded 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 second quarter was $431 million. CapEx for the quarter was $159 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 $277 million, which represented an adjusted free cash flow margin of over 16% in the quarter. We view this as strong performance, especially considering market conditions. At the end of the second quarter, our balance sheet remained strong, with our combined total of cash, cash equivalents, and marketable securities stood at approximately $3.9 billion. Our total debt was $1.2 billion, and we also have a $1 billion revolving credit facility, which remains undrawn. Next, let me provide you with our outlook for the third quarter of 2025. We expect total GF revenue to be $1.675 billion, plus or minus $25 million. Of this, we expect non-waiver revenue to be approximately 12% of total revenue. We expect gross margins to be approximately 25.5%, plus or minus 100 basis points, which reflects a sequential and -over-year growth in gross margin. Lastly, our teams are diligently managing the potential supply chain cost impacts associated with tariff uncertainties. Thanks to GF's global footprint and diversified sourcing strategy, we expect the cost impacts to be limited to roughly $20 million in the second half of 2025. Our third quarter revenue guidance reflects a -than-expected market recovery, as well as volume adjustments requested by certain customers, which we expect to be fulfilled in the fourth quarter. Provided that we see continued growth in our high-margin end markets and the demand for consumer-centric goods stabilizes, we expect gross margin expansion in the fourth quarter. Excluding share-based compensation, we expect total operating expenses to be $190 million, plus or minus $10 million. We expect operating margin to be in the range of .2% plus or minus 180 basis points. At the midpoint of our guidance, we expect share-based compensation to be approximately $56 million, of which roughly $18 million is related to cost of goods sold. We expect net interest and other income for the quarter to be between $4 and $12 million, and income tax expense to be between $26 and $40 million. For 2025, we expect GF's effective tax rate for the year to be in the mid-teens percentage range. Based on the multiple jurisdictions where we do business and the dynamic tax policy environment, we expect this indication to be consistent with our normalized -per-un rate for the remainder of 2025. Based on a fully diluted share count of approximately 560 million shares, we expect diluted earnings per share for the third quarter to be $0.38, plus or minus $0.05. We expect CapEx net of proceeds from government grants to be approximately $700 million for the full year 2025. As our FABs meet expansion milestones around the world, we expect to increasingly benefit from government incentives in the second half of the year. As noted by Tim and Niels, free cash flow and profitability metrics are at the core of GF's long-term growth objectives, and we remain on track to achieve these. Our results today point to another quarter of strong cash flow generation, and for the full year, we still expect to generate over a billion dollars of adjusted free cash flow. In summary, I want to thank our teams across the world for their efforts that drove the strong financial results this quarter. I'll now pass it back to Tim for closing remarks before we move to Q&A.

Thanks, John. At GF, our unwavering commitment is to serve as a trusted partner to our customers with our broad suite of differentiated and essential chip technologies. And I'm encouraged by the ramp in our design wins, including many in exciting new applications that support the megatrends that will pull our industry into the future, including the permeation of AI, the criticality of power, and the transition to next-generation connectivity, all areas perfectly aligned with GF's strengths. In addition, our unique and flexible global capacity not only ensures supply resilience and flexibility, it allows us to be wherever our customers need us. Our targeted China manufacturing strategy completes this picture and enables us to participate in growth across the industry. Overall, we are confident in our rock-solid foundation and long-term growth prospects of our core business. But we don't plan on stopping there. As our customers look for more technology solutions to enable their own success, we will expand our portfolio with acquisitions such as MIPS that bring critical capabilities to accelerate our business in the AI transition. None of this would be possible without the dedication and hard work of our employees. I'm looking forward to what we can achieve together. With that, let's open the call for Q&A. Operator?

Certainly. And our first question for today comes from the line of Joseph Moore from Morgan Stanley. Your question,

please. Great. Thank you. With regards to Q3, I understand the headwinds you guys are talking about, but it looks like some of your Foundry peers are guiding a little bit more optimistically. Can you just talk about what types of headwinds you're seeing and how much follow through there may be beyond the third quarter?

Yeah, sure, Joe. This is John. I'll take that one for a start. So our base case for the year remains growth in fiscal 2025. Tim O'Neill has touched on it some in the prepared commentary, but just kind of breaking that down by end market, we expect solid growth in both automotive and communications infrastructure and data center end markets for the year at mid-teens and high-teens respectively for both of those end markets. We do expect Smart Mobile to be down for the year and IoT to be modestly down for the year as our consumer-facing end markets in those areas are managing inventories as we work through the year. On the third quarter in particular, on the automotive end market, we expect -on-year growth in automotive for the third quarter. We do have a certain customer who is managing inventory toward the end of year for final deliveries in 2025. So that will have our automotive down slightly in the third quarter. We do expect Smart Mobile to be up again sequentially in the third quarter. So that is some overall commentary on the trends for the year on top-line growth.

That's helpful. Thank you. And then for my follow-up, I wanted to explore the China for China strategy a little bit. Can you talk about who are the sort of partners that you're working with there? It seems like that's interesting to a lot of people. Is it the sort of Western auto OEMs? Is it Western semi-nuclear companies? Is it Chinese companies? Who is kind of going to be your lead customer as you start to manufacture in China through this partnership?

Yeah, thank you, Joe. This is Tim. It's a great question. I mean, our customers have been telling us loud and clear what they need. Take for an hour, our non-China customers as one group. For their non-China demand, very clearly they're not sourcing in China. Their strategy is to remain sourcing globally, and the GF footprint is well suited for that. But for them, and especially for those who focus on the automotive and market, they get significant interest from their customers in China to localize a portion of that manufacturing. And so those have been the driver customers for us to work with, and why we've been focusing on those specific customers and the specific technologies, microcontrollers, BCD for power management and those kind of applications, very focused on automotive. So that will be the first wave of these transfers. What's interesting is once we announced that, we actually started to get a significant amount of interest from Chinese customers. And what they're looking for is the reverse, but also the flexibility that this optionality provides. So sourcing locally with us in China with our manufacturing partner, but then also serving their non-China, non-Taiwan demand outside China. We actually have design wins in flight right now with Chinese customers for global sourcing, given many of these companies have strong export ambitions. When you net it out, this is why we've been quite clear that for us, China is more of an opportunity than anything else, given the differentiation that we have of this unique ability to offer that flexibility.

Maybe if I can just add to that, Tim, really the advantage here both for the international customers as well as the Chinese customers, is they can do one development, one tape out, and take care of both the China market as well as the non-China market.

Thank you.

Thank you. And our next question comes from the line of Harlan Serr from JPMorgan. Your question, please.

Good morning. Thanks for taking my question. Utilizations were around 80% in Q1 and with the growth view, and that was with a growth view for the full year 90 days ago. I believe the team was anticipating taking utilization up through the year. What were utilization in Q2? And with just a slightly more muted second half outlook, how is the team thinking about utilization as you move through the second half of this year?

Hi, Harlan. This is John. I'll take that one. So you're right. Utilization was around 80% in the first quarter. We did progress into the low 80s in the second quarter with an uptick in wafer volume to 581,300 millimeter wafers. And we do see that progressing a bit further as we move our way through the second half of this year into the low to mid 80s. And that is part of where we see the opportunity to expand our gross margins as we move into the end of the year. I

appreciate that comment. So with utilization looking like they'll be up slightly in the second half of the year. I know you guys are working with your customers, maybe taking down some ASPs for some extensions on sort of lifetime volume. So kind of prudent moves with some of your consumer focused products. I think the prior view by the team that you were pretty confident in driving for your growth and exiting the year with 30% gross margins, but given all of these dynamics, including suddenly weaker second half profile, how should we think about the gross margins now exiting this

year? Any way

to kind of quantify that?

Yeah, Harlan, John again. So, you know, first we delivered on our second quarter gross margin at 25.2%. That was above the midpoint of our guidance range. And for the third quarter, well, I'll also point out that the second quarter year on year compare, if you take into account the fact that we had significant underutilization payments in the second quarter of 2024 was up significantly on a comparative basis in the second quarter of 2025. As we look ahead, per our guidance, we do see gross margins expanding to 25.5%. That's up sequentially and year on year. So we're making progress on our gross margin improvement. The outlook for the rest of this year would be driven by several factors. One is richer mix in terms of our products as we move into the fourth quarter, a bit of improvement and utilization, as you indicated, as well as some further roll off of our depreciation in the fourth quarter. And finally, we anticipate strong non-waiver revenue performance in the fourth quarter. Those factors together should deliver significant improvement in gross margin as we move through the fourth quarter.

And maybe Harlan, since you brought up pricing, I'd like to kind of make a few comments about that. So, you know, overall, for the whole enterprise taking 2025 as a whole on a like for like basis, we'll see ASPs down mid single digits. But if you look at where that's happening, that's very much confined to that smart mobile device segment and within that segment very much confined to those customers with whom we have a dual sourcing arrangement. And we've been very deliberate in thinking through both for the short term but also for the long term. What's the right strategy for GF in terms of supporting that customer and maximizing our share? Again, not just for revenue today, but also for the longevity of those sockets. We've been very deliberate. By the way, if you exclude those impacts, then like for like pricing for the year for GF will be less than 1% down. So I think it's very fair to conclude the pricing environment overall is very stable, except for these areas where we're making these decisions deliberately in partnership with our customers.

Yeah,

very insightful. Thank you.

Thank you. And our next question comes in the line of Jim Schneider from Goldman Sachs. Your question, please.

Good morning. Thanks for taking my question. I was wondering if you maybe sort of comment on sort of the inventory levels at your customers that you highlight in the prepared remarks and especially in IoT and smartphones. You know, would you expect those to be at normal levels in Q4 or could it take a little bit longer than that?

Yeah, thank you, Jim. I'll take a stab at that. If you take a big step back, right, if you look at the last three years, really 23, 25, we've been closely monitoring inventory as a kind of long term predictor of health, of where we are in the cycle. And obviously that's been a long duration, but inventories have in all sectors come down materially. It hasn't always been smooth. And if you look at some of our customers reporting in Q2, there are some others still to report. But you saw actually some small, I think modest optics in inventory that tells you something about kind of demand dynamic. Again, I'd say particularly in the consumer focus segments where there has been more demand uncertainty as we commented. I think overall we continue to see the trajectory of inventories normalizing. And actually we hear from customers that downstream of them, inventories could even be too low, right? And they see some pockets where there could be some tightness that could lead to some demand spikes in the future. So we continue to monitor this closely. It's difficult to call, but we see we're coming to the end of that inventory digestion long period over the last couple of years.

That's helpful. And then as a follow up, can we just kind of expand on the MIPS acquisition? What is the strategic importance of that acquisition for you? What customers did you kind of consult with in terms of before you announced that acquisition and maybe talk about are there any different revenue models you expect to recognize as a result of that? Thank you.

Yeah, I'll take a first crack and then I'll ask John to add a little bit on the financial model of MIPS and MIPS type businesses. Obviously, we're very excited about this acquisition. It's a great fit for the portfolio. And there's a couple of reasons for that. MIPS has a long track record, a fantastic leadership team, really cutting edge IP in processes. There are really some strong advantages around multithreaded cores, software and subsystems, particularly targeted that physical space. And if you listen to industry pundits, people talk about things like everything that moves will be autonomous in the future. We strongly believe that. And MIPS is extraordinarily well positioned to capitalize on that from an IP perspective. So we love the business. We love what it can do. And it's a strong fit for customer base. And actually, the overlap of customers is very, very strong. In fact, many of GS leading customers are already engaged with MIPS or in some cases have reached out post the acquisition to say, listen, let's explore. Let's do more together. So we think of this as a way to accelerate our customer engagement, to deepen it in new ways and to also increase our differentiation. And it has the added benefit of with an in-house team like MIPS, we'll get an in-house customer, if you like, for our technologies that's giving us real time feedback on performance so we can continue to tune our technology platforms for those edge AI applications in order to be the best we can be for those platforms. Maybe I'll ask John to comment on the financial model. Yeah,

sure, Jim. So we see this as a on a full year run rate basis in the neighborhood of a 50 to 100 million dollar addition of top line for GF. That's very exciting. Really happy to see us get this acquisition completed. This will be IP based high margin revenue stream for us, which over time can lead to greater hardware sales as well. And we see the revenue opportunity over the coming years getting into hundreds of millions of dollars of incremental revenue for global foundries again, which would be accretive to our gross margin.

Thank you. And our next question comes from the line Ross Seymour from Deutsche Bank. Your question, please.

Hi, guys. I just wanted to pivot back to answer. I think it was John that gave to an earlier question about a couple things. Specifically, you said the base case remains for growth and revenue this year. And then you also mentioned non-waiver revenue as part of another question is being strong this year. Could you clarify a little bit on those? And I guess what I'm really getting at is it seems like given your second quarter guidance is a little bit more cautious for a number of reasons. It seems to imply a big fourth quarter and wondered if that's the incorrect read. And if it is, why is the optimism kind of changing versus the third quarter?

Yeah, Ross, this is John. You are understanding us and you got it right at the base cases for growth this year. And we do see a strong fourth quarter outlook for our non-waiver revenue. And that's really driven by NRE programs as well as tapeouts. You know, strong tape out quarter is anticipated in the fourth quarter, which is a great precursor or leading indicator for hardware sales going forward. So that's what we see for the fourth quarter. And as we indicated, you know, particularly in the automotive end market, see year on year growth in the third quarter, but we do see it modestly down sequentially in the third quarter as certain customers are managing their inventory to the end of the year.

Got it. And then I guess on the tariff side of things, and I know this is nobody's crystal ball is particularly that good in this, but you guys talked about a little bit of caution. You have your China for China strategy. To the extent you saw the pull ins was that something I would have thought the pull ins would have potentially led to upside in your business in the second quarter. And you had a fine quarter, but it didn't seem to upside that much. Is the worry that there was some pull ins inherent in your original guide and that's where the conservatism comes going forward? I just want to get a little more color on where you saw pull ins and the duration of that headwind.

Yeah, thank you, Ross. So I'll comment on this. And I think we haven't seen very significant direct pull ins at our level, right? And we haven't seen those orders change in a material way in Q2. Obviously, our customers have talked about some of their own dynamics and each one has had a bit of a different story of how they've seen it depending on the market. We think the overall overlay of tariffs impact is consumer confidence and perhaps, if anything, a slight dent in short term consumer confidence around ordering patents. And we saw that particularly, like we said, in the smart mobile device and IoT market. And I think that's consistent with what others are seeing. I think the bigger question for us on tariffs is really the longer term opportunity. And I think what has definitely changed, I'd say dramatically in 2025 and it has been accelerating, is really the inbound interest from customers to say, I need to now diversify my sourcing. I need U.S. manufacturing. We were very clear when we announced our long term strategic investment plans, not just that we have those plans, but that a lot of major customers were very seriously backing those plans with projects and so on. And all the customers we announced have active projects with us today. And I think as those move forward from the initial conversations to the design wins to the ramps, we'll be able to update on all of those. But I think that's how we think of the tariff story more broadly is the strategic implications for GF from a long term growth and market share gain perspective. Thank you.

Thank you. And our next question comes from the line of Chris Case of Wolf Research. Your question, please.

Yes, thanks. Good morning. I guess the first question I wanted to talk about about, you know, some of the ASP declines you were seeing in mobile. And, you know, some of the actions that you were taking there, could you go into a little more detail of the reason for the actions that you've taken there and how that affects global foundries as you go into calendar 26? How much additional volume do you expect to get from those actions and what impact is that going to have on revenue and margins as you go into next year?

Yeah, thank you. Thank you, Chris. I mean, maybe to just go a little bit deeper into it. As we said, you know, this has been very much focused on the mobile space and there are reasons for that in terms of the dynamics of the market. And it's actually very much with, you know, a few customers where we are operating on a dual source basis, where, you know, we have decisions to make around what share we would like to have, how those customers growth in different applications is transitioning. And we make deliberate calls in partnership with them around what's the right way to maximize our revenue opportunity. And that's not just a tactical step for this year. That's also a long term step for securing longevity and a number of those those sockets. So we're not ready yet to quantify kind of 26. We're obviously not going to guide 26 at this stage. But, you know, we see this as a strong upside around maintaining GF relevance in those technologies at higher share levels. And our customers are obviously pleased with that outcome as well.

And just to follow up on maybe maybe I can just add to, you know, the share gains that we're targeting here, both short and long term. And I think that's an important detail to add. So some of these are long term agreement oriented.

Right. OK. And just as you look into next year, you know, looks like you're going to exit the year with utilization, I guess, in the 80s or so. Also contemplating, you know, some of some of what you're doing in mobile, where do you stand on a capacity standpoint right now? And, you know, for how long is global foundries going to be able to keep the capex at relatively low levels and presumably drive some cash flow as you go into next year? Yeah,

I mean, macro picture, obviously, without getting too specific about 2026, you know, financially at this stage. You know, we definitely see the mega trends we've been underwriting to be continuing going into the year. You look across the markets that we are serving. We see the data center market, the CID market for us continue to deliver strong growth. Neal's mentioned a couple of those ramps that are really from a standing start moving into the hundreds of millions of dollars, you know, growth rates of sort of 2x year on year. And we see really at the early innings of that. So there are some secular drivers there that are compelling. We see a continued really strong story in automotive, you know, as we grow into new applications. You know, again, we more than doubled automotive sensing in 2025 over 2024. And that's a new category. A lot of people think of us as an MCU player, but actually our car content is growing and diversifying into new areas like sensing, including radar, including imaging, but also areas like battery management and other applications. So there's a lot of content growth. There's a lot of diversification within those end markets. And then even within IoT, within smart mobile, again, we're seeing content growth. We're seeing areas where we're taking share of new applications. And those are also beneficiaries of that U.S. sourcing dynamic that we talked about earlier. All of this to say, you know, we see a pretty strong, you know, secular demand growth going into the next couple of years. We do that at a time where we have a very advantaged footprint, right? We finished some significant expansions in the last couple of years. So we're sitting with available capacity, able to ramp quickly globally. And then for the areas we will invest, we benefit from significant level of support. And in the U.S. alone, you know, in the big, beautiful bill, you know, increasing the ITC from 25 percent to 35 percent on top of our chips support, which, as we mentioned, we're already engaging with and receiving at state level incentives. We're talking that more than 50 percent of our capex to be supported by those government programs, which gives us a very good confidence driving scale in a very capital efficient way. And so it's a bit early to talk about the actual capex numbers for next year. There are pockets we see really good demand. We will definitely invest behind those. But I think the macro story is great footprint, well positioned for that growth. And when the investments do come, they're going to come with a lot of support for for efficiency given those government programs. And

maybe if we can just add a couple of things from a tactical standpoint, we spent the last few years on on building, you know, a very capital efficient strategy around tools, sameness across the factories, which enable us to be to be capital efficient as we move out and expand on that from a technical standpoint. So I think, you know, as we look at some of these initiatives we put in place over the last few years, we expect to continue to be very capital efficient and we expect to stay to stay within the model that we laid out earlier.

Thank you. Thank you. And our next question comes from the line. I see James from cancer Fitzgerald. Your question, please.

Yeah, good morning. Good afternoon. Thank you for taking the question. I guess first question implicitly with the vision for growth in twenty five. You know, you call it for revenues up eight percent or more into the December quarter. So curious with the benefit of greater non waiver revenues there. Can you kind of quantify what the uplift to gross margins looks like, you know, particularly when we reflect the lower ASP kind of impact from from smart mobile?

Yes, he just John, you know, the the ASP dynamic plays with utilization as well. So those can somewhat offset each other really in terms of the actual gross margin outcome of some of those decisions. And as Timmany-Nils indicated, it's important from a share gain perspective to to maintain to maintain our momentum in those in that opportunity. As far as the fourth quarter and where the gross margin can have, you know, we'll see how the quarter progresses here. But I do anticipate a significant improvement from third quarter to fourth quarter in gross margin driven by the factors I talked about earlier with stronger product mix. We've got some of the non waiver revenue coming through as well as some additional improvement in both depreciation and utilization.

Perfect. And then, you know, maybe just to follow on to that, you know, I think a quarter ago you talked about hopefully hope for exiting the year with a 30 percent gross margin. So curious, you know, what what are your what are the moving parts in your mind today for how we should be thinking about 2026 gross margins and as part of that, you know, based on kind of the design wins you have today? How are you thinking about growth rate for smart mobile next year? Thanks so much.

Yeah, I'll take the first part, CJ. So, you know, all the drivers that we just talked about are remain intact. You know, we've got growth in high margin businesses like our comms infrastructure and data center with silicon photonics and satellite communications. These are robust opportunities for us showing strong growth as well as improved factory utilization. We've seen our ongoing cost improvements and relatively efficient, you know, capital profile that's allowing us to leverage the installed base of of wafer fabrication and the capacity that we have with relatively light capbacks.

Maybe maybe CJ just on the mobile trajectory again, a bit a bit early to call, you know, very specifically. But again, all those growth drivers we've talked about for mobile, both that are for the market, but also idiosyncrasically to GF, I think are very, very much intact. And so, you know, we continue to see reasons for the market to grow overall, especially the premium handset, new form factors, new devices. There definitely are some refresh cycle dynamics that at some point will play through. And so we're bullish on that. You know, Neal's also talked about things like smart glasses as long term drivers, new form factors, hard to call how quickly. I think that's still a when, not an if, though, in terms of penetration. So we're quite bullish on overall market growth, especially taking a multi-year view. But I think we're even more bullish on our own execution in that space with taking more share. We talked about areas like haptics, display, imaging, power management, you know, all critical features in the in the smart mobile device sector, including our strong base and connectivity, which still is a challenge, right? You know, getting more and more bands in less and less space isn't easy. And that's an area we've historically had strength and continue to innovate. So I think we're actually bullish longer term on the on the category as an end market.

Thank you.

Thank you. And our next question comes from the line of Vivek Arya from Bank of America Securities. Your question, please.

Thank you for taking my question. For my first one, just a few Q4 clarifications. What is the percentage of sales contribution from non-waffer revenue? How much is the tailwind from lower depreciation? And I thought I heard you endorse the 30 percent gross margin exit rate from Q4, but I just wanted to double check that. So basically non-waffer revenue contribution, tailwind from lower depreciation. And are you comfortable with the 30 percent gross margin exit rate from Q4?

Yeah, I think it's John. So on the non-waffer revenue, typically that's running roughly 10 percent of our revenue. We expect it to be up from that in the fourth quarter. A couple of points, you know, call it 12, 13 percent of the mix in fourth quarter. And if you look at the three factors I described of product mix, the non-waffer revenue, as well as the combined effect of depreciation and utilization, you can roughly think of more or less a point each there of contribution. So whether we get all the way to 30 percent, we'll see. But I think we can get we can make a lot of progress toward that goal in the fourth quarter.

And for my follow-up automotive, it has been a very strong area for you, but auto production has not been that great. I understand the content aspect of it. But what is the risk that we find that your auto customers have taken on excess inventory? Like what is your visibility, Tim, into the deployment of all these wafers into a product just because, you know, this big gap between your growth versus auto production? Thank

you. Yeah, it's a great question, Vivek. I'll comment on that a little bit of color. You know, we obviously spend a lot of time, and as you can see from our announcements, not just with the father semiconductor companies, IDM serving the automotive sector, but also the tier ones, you know, our partnerships with Continental, with Bosch. We've talked about those in the past. We spent a lot of time with them. We even spent a lot of time with the OEM. So I think we have a pretty good, you know, handle. I think it endorses a few key trends, and you named them. The content growth really is extraordinarily important and secular and continuing because the nature of the product is changing, right? A car is no longer a mechanical device. A car is a super complex electronic engine with a lot of the features being dependent on semiconductors in many different domains. So I think, again, first step is are the secular trends fully intact? I think the answer is absolutely. And then you try to understand the inventory dynamics across the chain. And that's where it's a bit more complex. And actually what we hear, as I mentioned, that the inventory is further down the chain of semiconductors, not in general of cars, but of semiconductors are actually pretty low at the tier one level in particular. And again, it may move through the system in different lumps, but I think the overall chain is actually lighter than it could be. And that actually could lead you to believe there could be upsides on demand as those inventories get restocked. Obviously, rates and pace of restocking are always a difficult thing to call. But we continue to be very strongly supportive of the sector.

So maybe just add a little bit to that. So since we're in public, we have consistently outgrown the automotive market and gained share. And a lot of that has been done based on a very strong automotive micro-truble solution that has enabled us to outgrow the market. On top of that, if you look at the design we've had over the last few years, there's been a lot more in automotive power, battery management systems, smart sensors, and of course, driver assist overall. So that momentum building on top, we're starting to see what I would call substantial growth specifically in smart sensors already happening here in 2025. And we expect that to continue as we move forward. So these are technologies like, of course, 22FDX. You've seen several announcements from the radar suppliers in the industry. It's almost become the de facto standard for radars. But we're also seeing 12LP flying its way into display controllers. We're even seeing 12LP Plus AutoPro getting into next generation radars. And then, of course, the 130 BCD battery management systems is also a new leg of growth. So if you look at it from a trajectory standpoint, while we have been outgrowing the market for the last several years, we actually expect based on the solid design pipeline we've had in the last few years to be able to continue to do that for the coming years in automotive.

Jonathan, we'll just

take one last question. Certainly. And our final question then for today comes from the line of Krish Sankar from TD Cowan. Your question, please.

Yeah, thanks for taking my question. I have two of them. One of them is Midski. Can you talk a little bit about how you're seeing the risk side demand between Asia and Western companies? I'm going to add a big follow up.

Yeah, so I think it's interesting. Obviously, the ecosystem is evolving. And if you look at it, there aren't a huge number of very skilled players in risk five. And that's one of the things that we get from the ecosystem that they actually want to see serious companies that they trust like GF backing the ecosystem. And so I think that's a trend that's going to increase demand because people can rely on risk five solutions when they're backed by larger companies. I've been around the world talking to customers about MIPS and testing their reactions. As I said, they're very positive. I'd say it's global, Krish, in terms of good reputation in Asia. Markets like Korea are very strong, very strong interest in MIPS just to give you an anecdote. But we see it globally. We see it in Europe, given, again, the appetite to embrace open source ecosystem for this cause. And of course, in the US, where MIPS has historically been very strong, engaged with a number of customers. So I think it's a global phenomenon. Obviously, a bit too early to call long term trajectory of that mix. But there's strong demand across the board.

Gotcha. Very helpful. And then a quick question on your China for China. Have you disclosed who the Chinese foundry are working with this and how to think about the margin profile of the business and any concerns on tech transfer or export controls? Thank you.

Yeah, you know, the way we think about this is GF China, right? This is our commitment to support our customers from the China footprint in terms of quality, in terms of delivery. So, you know, our promise to them is everything you'd expect from GF you will get from our manufacturing in China will manage our partner. And as a result, we're not talking about identity as much as the offerings that we're going to be making available to our customers that we're now seeing all of that interest on from a margin point of view. It's it's it's in line with corporate now and in the future. We don't see this as as a concern there at all. And, you know, obviously, everyone talks about IP protection in China. Part of that went into selecting the right partner, but also putting the right controls in place with how we manage our customers designs. Our customers are part of that story as well. You know, auditing the end to end setup and they're comfortable. And these are automotive grade companies who take their IP very seriously. So I think, you know, we're going into this very eyes open, but also with clear plans in place to manage our partnership. Very helpful. Thank you.

Thank you. This concludes the question and answer session. I'd like to turn the program back to management for any further remarks.

Thank you, Jonathan. Thank you, everyone, for joining us on the call today. We look forward to seeing many of you at the upcoming event that we announced at the beginning of the call. And we'll stay in touch and take many calls as we go through that. Thank you, everyone. Thank you, ladies

and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.