GLOBALFOUNDRIES - Q3 2023

Transcript

Operator (participant)

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

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries' third quarter 2023 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, David Reeder, CFO, and Niels Anderskouv, Chief Business Officer. A short while ago, we released GF's third quarter financial results, which are available on our website at investors.gf.com, along with today's accompanying slide presentation. This call is being recorded, and a replay will be made available on our investor relations webpage. During this call, we will present both IFRS and adjusted non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for adjusted non-IFRS measures are available in today's press release and accompanying slides. I remind you that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements.

Such statements can be identified by terms such as believe, expect, intend, anticipate, and may, or by the use of the future tense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our annual report on Form 20-F, filed with the SEC on April 14th, 2023.

We will begin today's call with Tom providing a summary update on the current business environment and technologies, following which Dave will provide details on our end markets and third quarter results, and also provide fourth quarter 2023 guidance. We will then open the call for questions with Tom, Dave, 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.

Thomas Caulfield (President and CEO)

Thank you, Sam, and welcome to everyone joining our third quarter earnings call. Against a backdrop of ongoing global, economic, and geopolitical uncertainties, our dedicated teams worldwide have achieved third quarter results that are at the upper end of the guidance ranges we outlined in our second quarter update. I'm very proud of their execution and resilience. Let me start by providing a brief update on the current business landscape. Similar to others in the industry, we anticipate that semiconductor inventories will persist at high levels across multiple end markets through the end of 2023, and in many cases, into 2024. Specific end markets that we serve, such as smart mobile devices, communications infrastructure, data center, and the lower end of the consumer and home electronic segments, continue to grapple with increased inventory, compounded by decreased year-over-year demand.

To manage elevated inventory, some customers have requested shipment adjustments and alterations to their long-term agreements. We are collaborating closely with these customers to support their short-term inventory reductions and avoid prolonging the duration of the inventory correction. In addition to working collaboratively with our customers, our primary objective throughout all of these negotiations is to safeguard the long-term value of these agreements. In some cases, these discussions have led to underutilization charges related to these adjustments. Dave will elaborate on this in his remarks, but we expect these productive conversations to continue during the fourth quarter as we work collaboratively to address ongoing market challenges. Expanding on our second quarter update, we believe a return to year-over-year growth in 2024 will be contingent upon inventories significantly declining from their current levels and a concurrent marked recovery in global demand, particularly across consumer-centric end markets.

Based on discussions with our customers, we believe that the required catalyst for growth will, at a minimum, remain uncertain, at least through the remainder of the year. Now, despite these industry headwinds, we're still witnessing resilient demand in key end markets like Automotive, Industrial IoT, and Aerospace and Defense. As semiconductors play an increasingly vital role in these critical sectors, we've unveiled exciting partnerships and product developments, which I will discuss shortly. Let me now touch briefly on our third quarter results, which Dave will discuss in more detail later in his commentary. Revenue in the quarter increased sequentially to $1.852 billion, which was above the midpoint of our guidance range. We reported adjusted gross margin of 29.2% in the quarter, which exceeded our guidance range.

This better-than-expected performance was driven by the continued efforts of our teams around the world to optimize our manufacturing spending, as well as the successful resolution of adjustments to customers' near-term volume requirements and the associated underutilization payments, which Dave will discuss in his commentary. We delivered a consecutive quarter of positive free cash flow, which continues our disciplined approach to capital management and deployment, while preserving our strategic capacity expansion objectives. I am also pleased to report that we delivered adjusted earnings per share of $0.55, which exceeded the high end of our guidance range. Let me now provide you a brief update on some of our recent customer partnership activity. Starting with Automotive, we delivered another quarter of solid revenue growth. Our auto-grade technology platforms continue to serve crucial applications across vehicle infrastructure, smart sensing, auto processing, and safety.

We remain focused on providing best-in-class solutions to our customers, while supporting the transition of the industry from internal combustion engine models to autonomous, connected, electrified vehicles. This remains an exciting growth vector for us, and one where we continue to grow our customer partnerships with the development of automotive-grade semiconductor solutions. I'm pleased to report that we remain on track to deliver $1 billion of automotive end market revenue in 2023. In smart mobile devices, we continue to remix our business towards the premium-tier handset market, where we have seen greater resilience in demand and opportunities to build upon our feature-rich solutions.

At our annual technology summit in August, we launched 9SW RF SOI technology platform, which is our most advanced RF solution and will offer significant improvements in switching performance, lower power consumption, and area advantages in front-end modules for today's 5G operating frequencies, as well as future 5G mobile and wireless communication applications. Meanwhile, in IoT, we recently announced advancements to our industry-leading 22FDX platform, introducing a suite of innovative features such as ultra-low power memory and temperature-resistant capabilities to deliver top-tier performance and intelligent power consumption. With a rapidly expanding network of globally connected IoT devices, we continue to see opportunities for innovation across our differentiated technologies, focused on enhanced power efficiency and embedded memory for secure, intelligent solutions at the edge.

We are already designed into several products that utilize domain-specific architectures to support various AI at the edge applications, such as our 55LPx platform supporting Oculii embedded intelligence sensors and our 22FDX manufacturing process being designed into Nordic's latest generation of low-power wireless SoCs, with workload-optimized processes that support complex machine learning and sensor fusion at the edge. Aerospace and Defense is another important growth area within IoT, as the focus on national and international security takes an increasingly prominent role on the global stage. We are proud to have extended our partnership with the U.S. Department of Defense with the award of a 10-year contract for the supply of secure semiconductors for use across a wide range of critical applications. Finally, communications infrastructure and data center remains a challenged end market within our portfolio.

Consistent with previous downturns, we believe that this is due to a combination of elevated inventory levels and the acceleration of node migration from data center and digital-centric customers to single-digit nanometers. As discussed during our second quarter earnings update, we expect that elevated inventories will continue at least until the end of the year, due to the prolonged channel digestion of both wireless and wired infrastructure inventory levels across our customers. As a result, we continue to focus on opportunities to remix some of our excess capacity to service demand in more durable and growing segments, such as automotive. Turning briefly to our capacity additions, we continue to develop our global footprint in a measured and capital-efficient manner in geographies that align with our customer supply chain requirements.

In September, I was proud to attend the opening ceremony for our $4 billion Fab 7H expansion in Singapore, which will have the capacity to produce approximately 450,000 300 millimeter wafers annually. I'm pleased to report that the incremental capacity is already helping to meet customer demand. When it comes to considering the timing of incremental capacity additions, we will remain highly disciplined in assessing the broader market conditions and committed customer demand. To summarize, I'm pleased to report financial performance, which exceeded several of the guidance metrics identified in our second quarter update. Notwithstanding the deeper and longer than expected downturn impacting our industry, our dedicated teams around the world continue to execute on the targets that we set out to deliver for our customers and our stakeholders.

Although we remain cautious on the near term outlook, over the longer term, we continue to see a secular acceleration of the role of semiconductors in the world, and we are committed to developing deep customer partnerships and investing in innovative, feature-rich solutions, so that GF can play an increasingly vital role in the future of our industry. With that, over to you, Dave.

David Reeder (CFO)

Thank you, Tom, and welcome to our third quarter earnings call. For the remainder of the call, including guidance other than revenue, cash flow, CapEx, and net interest and other expense, I will reference adjusted metrics, which exclude stock-based compensation and restructuring charges. As Tom noted, our third quarter results were at the upper end of the guidance ranges we provided in our last quarterly update. Third quarter revenue grew sequentially to approximately $1.852 billion, a decrease of 11% year-over-year. These results included approximately $23 million of revenue related to customers' adjustments to their near-term volume requirements.

We shipped approximately 575,000 300-millimeter equivalent wafers in the quarter, a 10% decrease from the prior year period. ASP, or average selling price per wafer, declined approximately 2% year-over-year, mainly driven by changes in the product mix shift during the quarter. Despite the modest decline in ASPs during the quarter, we expect that the pricing environment will remain stable through the end of 2023, and we believe that ASPs for the full year will be roughly flat to slightly up compared to 2022. Wafer revenue from our end markets accounted for approximately 89% of total revenue. Non-wafer revenue, which excludes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 11% of total revenue for the third quarter. Let me now provide an update on our revenues by end markets.

Smart mobile devices represented approximately 42% of the quarter's total revenue. Third quarter revenue decreased approximately 1% sequentially and decreased roughly 18% from the prior year period, principally driven by ongoing weakness in the demand environment and a continuation of the well-publicized inventory correction within the broader smart mobile market. Despite these reduced volumes, ASP and mix improved year-over-year as we continued to remix to the premium end of the smartphone market. We expect the pricing benefits associated with these mix improvements to be higher for the full year as compared to 2022. During the third quarter, shipment volumes decreased sequentially, which was primarily due to the excess channel inventory. However, we continued to see healthy demand during the quarter for our RF transceiver solutions into premium-tier handsets.

Tom noted in his prepared remarks, we believe that inventory levels across smart mobile devices will remain elevated going into the year-end, as the rate and pace of demand growth is slower than previously anticipated. In the third quarter, revenue for the home and industrial IoT markets represented approximately 20% of the quarter's total revenue. Third quarter revenue increased approximately 4% sequentially and declined 7% from the year prior period. The consumer-centric portion of our IoT end market primarily contributed to the year-over-year declines, as well as modest declines in ASP and mix within the quarter. For the full year, we expect that ASPs within home and industrial IoT will be roughly flat compared to the prior year. We continue to see stable demand within our home and industrial IoT segment, which is helping to offset some of the weakness in the consumer-centric portions of the portfolio.

The demand for our smart card technology grew again in the third quarter, as the confluence of speed, convenience, and transaction integrity are enabling applications to expand beyond digital payments and into areas such as transportation, government, health, security, and access control. As Tom noted in his prepared remarks, aerospace and defense is a segment of growing importance within IoT, where we continue to grow design wins and establish new partnerships to deliver best-in-class semiconductor manufacturing security and traceability. As a result, we expect increasing near-term customer demand for our next generation analog and mixed signal technologies into these end markets to largely offset the current inventory correction and market softness in the more consumer-centric portions of the IoT market. Automotive continues to be a stable growth segment for us and represented approximately 17% of the quarter's total revenue.

Third quarter revenue increased approximately 24% sequentially and roughly 219% from the year prior period, driven by healthy growth in volumes, ASP, and mix, as we have continued to ramp production across automotive processing, sensing, vehicle infrastructure, and safety applications. The pricing environment within Automotive remains highly constructive as the silicon content, functionality, and applications across ICE and ACE vehicle architecture continue to grow year-over-year. As part of our discussions with customers, supply chain certainty continues to be a key consideration for existing and future designs, and GF is uniquely positioned to meet these needs by investing in capacity across our globally diverse manufacturing footprint. As Tom noted, our automotive business is on track to deliver approximately $1 billion of revenue in 2023, consistent with what we communicated at the start of the year.

Next, moving to our communications, infrastructure, and data center end market, which represented approximately 8% of the quarter's total revenue. Third quarter revenue declined approximately 26% sequentially and roughly 58% year-over-year as a result of declining volumes and the key drivers outlined by Tom in his prepared remarks. As noted during our second quarter update, we expect to see a decline in revenues for this end market through the end of 2023, and as mentioned by Tom, we will continue to allocate manufacturing capacity into more durable and accretive markets, such as automotive and premium smart mobile applications. Finally, our personal computing end market represented approximately 2% of the quarter's total revenue. Third quarter revenue declined approximately 29% sequentially and 23% year-over-year, principally driven by declining volume in this segment.

Although we anticipate a sequential increase in PC end market revenue in the fourth quarter, we still expect this end market to remain at approximately 3% of total 2023 revenue. Moving next to gross profit. For the third quarter, we delivered gross profit of $541 million, which was at the high end of our guided range and translates into approximately 29.2% gross margin. Gross margin exceeded the guidance range indicated, and as Tom alluded to in his pre-prepared remarks, includes manufacturing cost efficiencies and revenue associated with the successful resolution of customer volume adjustments. Looking ahead to the fourth quarter, we expect some of these benefits to subside, and this has been reflected in our fourth quarter guidance. Operating expenses for the third quarter represented approximately 12% of total revenue.

R&D for the quarter was roughly flat at $101 million, and SG&A increased sequentially to $118 million. Total operating expenses increased sequentially to $219 million in the quarter. We expect total operating expenses to decline in the fourth quarter, and included in our guidance is the expectation that we will receive approximately $30 million of benefit related to the Advanced Manufacturing Investment Tax Credit. As we continue to spend on qualifying U.S. expenses and capitalize assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program. We delivered operating profit of $322 million for the quarter, which translates into an approximately 17.4% operating margin, which was above the high end of our guided range and 140 BPS below the prior year period.

Third quarter net interest and other expense was $18 million, and we incurred a tax benefit of $4 million in the quarter. Our third quarter net income increased sequentially to approximately $308 million, but represented a decrease of approximately $60 million from the year ago period. As a result, we reported a sequential increase in diluted earnings of $0.55 per share for the third quarter. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the third quarter was $416 million. CapEx for the quarter was $323 million, or roughly 17% of revenue. Free cash flow for the quarter, which we define as net cash provided by operating activities, less purchases of property, plant, equipment, and intangible assets, as set out on the statement of cash flows, was $93 million.

At the end of the third quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $3.36 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. We expect total GF revenue to be between $1.825 billion and $1.875 billion. Of this, we expect non-wafer revenue to be approximately 11% of total revenue. We expect gross profit to be between $502 million and $544 million. We expect operating profit to be between $327 million and $389 million.

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 $155 million and $175 million. At the midpoint of our guidance, we expect share-based compensation to be approximately $45 million, of which roughly $14 million is related to cost of goods sold and approximately $31 million is related to OpEx. We expect net interest and other expense for the quarter to be between $7 million and $13 million, and tax expense to be between $18 million and $24 million. We expect net income to be between $296 million and $358 million on a fully diluted share count of approximately 557 million shares.

We expect adjusted earnings per share for the fourth quarter to be between $0.53 and $0.64. Consistent with our commentary in August, our fourth quarter guidance reflects the expectation that utilization will be in the low to mid-80s for the full year of 2023, due to prevailing demand environment and elevated inventory levels that Tom outlined earlier. As we discussed in our second quarter update, for the full year of 2023, we now expect CapEx to be approximately $2 billion. As Tom noted in his prepared remarks, we remain on track to meet the capacity footprint aspirations that we set out in our strategic objectives and based upon our CapEx commitments. As part of our fourth quarter results, we will provide more specific guidance on our CapEx targets for 2024.

However, we anticipate a material year-over-year reduction in CapEx as we focus on delivering significant year-over-year free cash flow generation. In summary, consistent operational performance from our dedicated employees across the world and continued efforts to expand our differentiated product offerings in key growth segments, enabled us to achieve third quarter results at the high end of the guidance ranges we provided in our second quarter earnings update. We remain acutely focused on the fourth quarter and year-over-year demand outlook heading into 2024, as well as positioning GF for long-term growth opportunities. With that, let's open the call for Q and A. Operator?

Operator (participant)

Thank you. We will now conduct a question-and-answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while I compile the Q and A roster. Our first question comes from Mark Lipacis, from Jefferies. Please go ahead.

Mark Lipacis (Managing Director)

Hi, thanks for taking my question. Tom, you had mentioned that, you know, when you're talking about customers asking for relief or working collaboratively with you, to try to adjust the LTSAs, I'm wondering, like, what are the mechanisms that you are using to safeguard the value of those LTSAs? To what extent is it your customers are covering the fixed costs associated with what they originally expected to get versus, you know, extending an LTSA for a longer period of time or getting more strategic sockets or higher volume on the back end? If you could help us understand how that collaboration manifests, I think that would be very helpful. Thank you.

Thomas Caulfield (President and CEO)

Thank you, and good morning, Mark. Yeah, you actually answered the question yourself there. Look, we started this year, let's just take a step back, as an industry, that we were going to be down in the first half and come roaring back in the second half. So in the first half, customers were saying, "Look, let's build some of that inventory because we have to get ready for a second half." And clearly, that didn't happen. And what you're starting to see now is exactly what these long-term agreements were meant to do, was to provide a balanced framework by which we, as partners with all our customers, go through these cycles together. The contracts are so bespoke that it's, you know, you can't take one as a one-off, right?

They're all, they're all unique. But I will tell you the one, the one thing that is common to all of them, and you saw in the last quarter, we had an underutilization resolution to $23 million, is first and foremost, let's not prolong an over-inventory situation, right? Let's figure out what, what makes sense to build, and then how do you repurpose that capacity for other corridors that maybe you—there's better demand. How do we go win new design sockets to extend the long-term agreement? Because this is not about, you know, one-sided long-term agreement. They were supposed to be balanced and partnership-driven. Now, the last thing I would tell you about these is they're calendar-based, and that means that a lot of the true upticks place at the end of the year.

I think you could expect to see some more of these types of resolutions and alignments as we, you know, get through the rest of this quarter. But you're right, it takes the form of many different elements: new design wins, repurposing capacity, extending the life of these contracts, and in some cases, you know, a payment for an underutilization is part of that resolution. I hope that helps.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

You have a follow-up, Mark?

Mark Lipacis (Managing Director)

Yeah, I do. Thank you. And yeah, I think when we talk about a lower, appreciate that you're not giving the guidance on the CapEx for next year, but it sounds like it is gonna be a reduction in 2024, which should translate to a better free cash flow. Is that lower? Like, is what you're thinking about for CapEx next year, is that lower than what you had originally, you know, envisioned over the last couple of years? Is that gonna be kind of a lower bogey than what you were thinking? Thank you.

David Reeder (CFO)

It is, Mark, and let me just preface that statement with just kind of reiterating, you know, what we're trying to achieve. We're trying to achieve about 3 million total wafers of capacity. When you look at the funds that we've spent over the last three years, we are essentially at that mark. Some of that capacity is still to come online, but we are essentially in line with that target. And so when you think about CapEx for 2024, while we're not guiding it right now, we'll guide that in February with our fourth quarter update, as well as our first quarter guidance. We're thinking about something materially lower. So think in terms of kind of half, if not less than half of what we're spending in 2023.

Mark Lipacis (Managing Director)

Very helpful. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Ross Seymore from Deutsche Bank. Please go ahead.

Ross Seymore (Managing Director and Senior Equity Analyst)

Hi, guys. Thanks for letting me ask a question. Tom, I wanted to talk a little bit about the linearity of demand. You've, you've talked about the correction taking a little bit longer. I think that's no surprise to anybody, but you guys are holding in quite well despite that. Just wanted to talk about when do you think some of those corrections will be done? We've heard data points of green shoots from some other foundry folks on the smart mobile device side of things. Are you seeing that, and is there kind of a rolling basis as to when you're gonna see that normalization by end market? Any color on that would be helpful.

Thomas Caulfield (President and CEO)

Yeah, let me start, and maybe I'll pass it to my colleagues. You know, you're right. You can't think about semi demand as a monolithic number. It's really about end markets. And for me, when I take a step back, it's the end markets that were hit the hardest with the highest inventory, are the ones that it's more obvious to see green shoots because you're kind of bumping along the bottom, and, you know, that includes, you know, smart mobile devices and a lot of things that are more consumer-centric. And so, you know, we too see that there may be opportunities for some of that to start growing, and it's not about just growing off a low base, is it will be a significant growth or not.

It's nice to see that, by and large, inventories have either peaked or came close to peak, and in some cases, have come down in some of those markets, and that's the beginning of getting a recovery where demand will now be able to drive further growth. I'd say that automotive, while you hear some noise in the industry, it could soften. Maybe that's because it's been such a strong year for automotive, but it remains strong, and as we said in our prepared comments, that we're feeling really good about producing, you know, $1 billion of revenue this year in automotive market. That's up from about $375 million last year.

So I really think it's about all of us watching inventory by end market, and then how do we go get this consumer-led, you know, spending industry supercharged with consumers again? And that will be the it touches many of the end markets when that takes place. Niels, David, anything you'd add to that?

Niels Anderskouv (Chief Business Officer)

Maybe I can add a little bit on the, you know, the momentum we're seeing on the design win side. So, automotive, you know, obviously very pleased with the, with the results, as Tom said. And we talked about in previous calls that a lot of what we, we're enjoying this year, 2-3 years ago, we made those design wins. But, but I'd like to, to say that also, we continue to be very pleased with, with the design win momentum that, that we have in that space. And, and it's similar comments, you know, for, for IoT. We talked a little bit about SMD in the, in the opening, you know, how we are getting more and more focused on the high-end tier, phones there.

Starting to see a little bit of green shoots, what do you call them? Green shoots. Green shoots, sorry, green shoots, you know, especially in the RF area there. And then, of course, A&D, you know, we continue to be pleased with the momentum we're building on that front as well.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Did you have a follow-up, Ross?

Ross Seymore (Managing Director and Senior Equity Analyst)

Yeah, I just wanted to pivot to you, David, over on the gross margin side of things. You guys have held that in well despite utilization coming down and all the gyrations on the mix side. I'm sure it's more challenging than we can appreciate. But as we think about the fourth quarter sequentially, and then more importantly, the puts and takes for 2024, I appreciate demand's uncertain, but you talked about your wafer output capacity being normalized now to your target rate and some of the CapEx you're doing, et cetera. What are the puts and takes as we think about gross margin going into 2024?

David Reeder (CFO)

Thanks, Ross, and let me speak generally first, and then maybe I'll speak specifically about some of the puts and takes. Look, we're quite pleased with how we re-baselined our cost structure, such that, you know, we can largely absorb headwinds of about 6-8 points associated with, you know, call it roughly 20 points of decrease in demand utilization. And that doesn't happen by accident. So there's a lot of great work from, you know, roughly 13,000 employees around the world at GF to be able to accomplish that result. And so we're very pleased with how we've re-baselined things from a cost structure perspective on the manufacturing side. Still plenty of work to do, but we've come a long way.

With respect to the third quarter, some puts and takes, look, we received about 1 point of benefit from the successful resolution of some of those LTA underutilizations that we mentioned in the prepared commentary. And then when you think about guidance for fourth quarter, you know, it does incorporate, that range incorporates the expectation that we will have some more additional underutilization resolutions. So, you know, you put all of that together, and I think the, you know, the big picture takeaway is just really when you have 5 points of utilization, drives 2 points of gross margin, either down or up, based on where your utilization is.

We've done a very nice job offsetting the utilization headwinds, and to the extent that utilization can come back in the opposite direction and start to improve, then I think we have some opportunity to the upside.

Ross Seymore (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Chris Caso from Wolfe Research. Please go ahead.

Chris Caso (Managing Director and Senior Semiconductor Equity Research Analyst)

Yes, thank you. Good morning. The first question is on the pricing environment, and I recognize that most of what you ship to customers now is based on agreements that were signed previously, but perhaps you could talk to the pricing environment for new business. Is your expectation that new business that you sign on some of the new LTAs remain flat going forward?

Thomas Caulfield (President and CEO)

Yeah, I'll start. Look, we speak about this all the time, and Niels touched on it about our design, our design win pipeline. You know, our goal is to make sure all new business is accretive to our long-term model. 90% of the design wins that we booked this quarter were on our single-source business, where we have differentiation that provides value to our customers and allows us to capture that value for ourselves. So, you know, pricing for us on all future business is always based about how the solutions we're bringing to the marketplace, and we're bringing differentiation. You know, I'm happy to report that, you know, our design wins in aggregate are accretive to our long-term model, and that hasn't changed from Q1 to Q2 and how we did in Q3.

David Reeder (CFO)

Maybe I could reiterate a few points as well. We still believe, as we've commented for a long time, that pricing for the year, year-over-year, 2023 versus 2022, will be flat to slightly up for the year. We've mentioned that on any given quarter, you're gonna have some mix impact with respect to ASPs, but we do think that the pricing environment is still quite constructive, particularly on the 300 millimeter side. You do see a little bit of pricing action taking place on spot deals in 200 millimeter, but for 300 millimeter, I'd say the pricing environment is quite constructive.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Did you have a follow-up?

Chris Caso (Managing Director and Senior Semiconductor Equity Research Analyst)

I do. Thank you. And perhaps you could talk about your expectations by market segment into the fourth quarter, kind of what's up, what's down, recognizing that this demand change has been pretty asymmetric. If you could also speak to, while you say that, about what's the area, what's the market segment where you're seeing some of these payments for LTA true-ups? Which segment is that? Or is it concentrated in a particular segment?

David Reeder (CFO)

Maybe I'll, maybe I'll start on this one, and, Niels, Tom, if you, you all have anything to add, feel free to chime in. Look, I, I think when you think about fourth quarter, the sequential performance of the individual end markets, I think you're gonna see a little bit of, of more of the same, of what you've seen throughout the course of this year. You know, automotive has been strong for us this year. Our expectation is you're gonna continue to see that on a sequential basis. Within the Home and Industrial IoT business, you know, there's kind of a, a tale of, of two, two stories there. You've got Industrial as well as Aerospace and, and Defense, remaining quite stable. And then you've got, you know, by and large, everything consumer being a little bit more challenged.

And so I think what you've seen out of Home and Industrial IoT is a business, some puts, some takes, but largely kind of performing pretty consistently quarter to quarter to quarter throughout this year. Smart mobile devices, I would characterize as kind of bumping along the bottom. There's still some inventory that needs to be depleted out of that channel. And so, you know, on any given quarter, you could have a little bit of movement there, but I would say by and large, kind of, you know, bumping along the bottom. And then you've got comms infrastructure and data center, and I would characterize that kind of on a sequential basis as being relatively stable, third quarter to fourth quarter. Niels or Tom, anything you guys would add to that?

Niels Anderskouv (Chief Business Officer)

No, maybe only on smart mobile devices. You know, we did see Qualcomm, and Cirrus, and Qualcomm, you know, reporting their results and starting to see a little bit of signs that the inventory has bottomed out, right.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Next question.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Vivek Arya from Bank of America Securities. Please go ahead.

Jack Sandeen (Analyst)

Hi, thank you for taking the question. This is Jack Sandeen on behalf of Vivek. I just wanna go back to the end market question. In autos, obviously, you're seeing great strengths. You said likely a quarter-over-quarter strength into next quarter. How sustainable do you think this is, just given some of your customers have portrayed some weaknesses? Obviously, you've had a strong year this year, but it's likely gonna be a tougher compare next year. Any color here would be helpful.

David Reeder (CFO)

Yeah, I think you have a good foreshadow to that. Remember, 2020, we were under $100 million of revenue. We grew to $375 million last year, a billion. You know, tiering in small numbers looks like high growth rates when you start from a small base. Now, you're at a billion, to continue those kind of growth rates are, you know, just not in the cards, because, you know, the units growth of automobiles. I think the one thing that plays to our advantage is, you know, everybody thinks about the transformation or transition in the industry of auto being just the electrification. But there's a, you know, there's a whole bit about the autonomous nature and the connected part of that trend that transcends the electrification piece.

So whether it's an, you know, internal combustion car or electrified vehicle, they're going to need all these other semiconductor devices for, you know, for navigation, for managing all the signals in the car, for radar devices and things of that nature. So I think maybe because we play in a little bit broader base, we can capture on new models, because a lot of this business that we're building to today for sockets we won, you know, 3-5 years ago. Now, if the industry, if the Automotive Industry takes a pause and units coming down, no one's immune from that.

But so far, as we can see in Q4, we're solid about what our shipments will be then, and as we get closer to next year, we'll take a look at the auto industry and decide what it has for GF. But it will be, for us, a big part of our revenue as we go forward as a company because of the alignment of the needs, the semiconductor needs and requirements for Automotive and our unique capability to deliver to that. Niels, have you anything?

Niels Anderskouv (Chief Business Officer)

Only thing is just reemphasizing the point that whether it's internal combustion engine or whether it's electric vehicles, you know, we are, we are well positioned and well balanced across both of those areas. And the growth we've had this year goes across both, and we expect that to be the same moving forward.

David Reeder (CFO)

Yeah, Vivek, I think what you're hearing is a little bit of a bifurcation. Long term, we feel like the secular trends with the products that we provide into the market will be a tailwind for us. I think short term, look, we're like many in the industry, we're looking at what's happening with interest rates. We're looking at what potentially that could create from a drag perspective on total units sold, or just car units into the market. So obviously, that's something that we're watching. But long term, we're still quite bullish on the sector longer term.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Did you have a follow-up, Vivek?

Jack Sandeen (Analyst)

Hi. Yeah. So, going back to smart mobile devices, I know you said we're approaching the bottom, probably the next quarter or two, we're gonna see an inflection. I know you guys don't guide 2024 now, but any color qualitatively, for your assumptions next year would be great as well. Thank you.

David Reeder (CFO)

Yeah, maybe I'll take that one. Look, we'll guide one quarter at a time, as you know. But, you know, with respect to catalysts, what are we looking for? Obviously, there's a little bit of macroeconomic uncertainty in the market, just in general, that's across all end markets. There's two wars that are ongoing. And so, you know, I think just broadly speaking, you know, kind of general business environment is one of a little caution. With respect to smart mobile devices, specifically, I think the positive takeaway from the industry, in general, as well as from our customers, is that it does not look like inventory is growing any longer. It looks like pretty consistently inventory is coming down.

I think we sit around the table, and we think about the fact that we wish the rate and pace of that decline of inventory was a little bit faster. But I do think there's kind of broad acknowledgement that that inventory is finally starting to decrease, and so that's quite positive. I think when we think about, you know, longer term, we think about things like what are handsets gonna do on a year-over-year basis? You know, you've seen a couple of years in a row now where handsets have been challenged. I'm just talking global units. And so, you know, will next year be a year in which handsets are flat, handsets are up, or handsets are down again?

I think that will inform us, in a pretty meaningful way, the rate and pace of that inventory reduction, which is what we're all watching in particular for this segment.

Niels Anderskouv (Chief Business Officer)

Maybe the only thing I'll, I will add is that we're pleased with our exposure to the premium handsets. We believe that's a good position to be in as we move forward in the market.

Thomas Caulfield (President and CEO)

Yeah, and the last thing, just to pile on, is part of this global economy seeing a, you know, revival in China, where, you know, the spend in the world will be proportional to how fast China could come back and start to have handsets and other consumer devices be involved.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Next question, operator.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Joe Moore, from Morgan Stanley. Please go ahead.

Joe Moore (Semiconductor Industry Analyst)

Great. Thank you. I wonder if you could address, you know, we see very significant spending in China on these trailing edge nodes. You know, what do you think is the impact of that on your business, if any, and how do you kind of think about, you know, reshoring prospects, both in China and from the U.S., kind of looking at that, incremental capacity coming online?

Thomas Caulfield (President and CEO)

Look, I think, for GF, we were never going to be the kind of the me-too supplier. We needed to innovate and provide solutions to end markets that are very unique and specific, and that customers value it for their solutions. You know, having a checkbook and adding capacity, and even knowing how to run the capacity is the table stakes to be a good foundry. But a lot of it is about the innovation you put in, whether it's the different device types, the PDKs, the standard cells, the libraries, the unique features, and IP you build around that. And as long as GF continues to innovate, as long as GF continues to create these solutions, you know, capacity that's built for more generic type of applications doesn't conflict with what we're doing.

And so for us, you know, our goal and our game is to continue to innovate, making sure we start with a very crisp understanding of end markets and particular applications and device types in these end markets. Understand where differentiation really matters, and make sure we accelerate our time to market for our customers, and make sure the capacity we're putting on and the capacity we have is gonna be fully utilized because we've created value for our customers.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Did you have a follow-up, Joe?

Joe Moore (Semiconductor Industry Analyst)

Yeah, sure. Thank you for that. That's very, it's very helpful. You know, how are you seeing the prospects with the sort of smartphone-oriented customers? I feel like, you know, you, you won a lot of that business four or five years ago when you were more of a price leader. You know, obviously, you've differentiated a lot on the process technology, and there's a lot of focus on kind of strategic developments in autos and industrial and markets like that. But for those smartphone customers, are you able to kind of build this partnership culture with them and kind of potentially build more durable pricing and business models around that part of your business going forward as well?

Thomas Caulfield (President and CEO)

Yeah, I wouldn't say we won the business because we're, you know, price leaders back in the day. I think there was differentiation there, and maybe, you know, we could have done a better job capturing that value. I'll give you a perfect example, Joe. We announced at our GTS early this year our 9SW solution, which is the follow-on to 8SW. This is the natural extension for front-end module technology. It gives 20% better fixed switching performance, lower power, and smaller area. And that same list of customers that leverage our technology in the front-end modules are, you know, lining up behind this technology to lead them to the next generation of 5G wireless solutions.

I think you'll start to see a shift into GF's millimeter wave solution as well into these handsets, just as, you know, by way of example. Some of our 55BCD technology, finding new applications in these smartphones. So I would say that the smart mobile device market, very important for GF. You know, it has high volumes. Differentiation matters there because of size and power performance, and we'll continue to pick and choose the application, again, where we have differentiation and our customers, you know, choosing us to go win in the marketplace with that. Niels, anything you'd add?

Niels Anderskouv (Chief Business Officer)

Yeah, I'll just add, you know, with 9SW that we announced, like Tom said, at GTS, you know, we're very pleased with the introduction of that technology, the performance we're getting, the performance our customers are getting, and, and the way they're ramping at it. And 55BCD continues to be, you know, a really, really strong process for audio, you know, smart power haptics into phones, so also very, very pleased on that front. So, you know, as you see, you know, 20% more, more performance, you know, lower power levels and also smaller die area on 9SW, you know, we, we're pleased with how that's rolling out.

David Reeder (CFO)

Yeah, I think the last thing I would add, just to build a final piece on there, is you have seen us shift where we play in that market. We have very clearly shifted from playing across kind of the lower tier of that market and even the low end of the medium tier of that market. And you've seen us focus over the last, you know, let's call it four years, 2020 through 2023, you've really seen us focus much, much more on that premium tier. And you've correspondingly seen the ASPs go up or increase in a pretty significant way across that timeline, along those years. So, much more of a focus towards the premium.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Next question operator?

Joe Moore (Semiconductor Industry Analyst)

Thanks, Tom.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Chris Danely from Citigroup. Please go ahead.

Chris Danely (Managing Director and Semiconductors and Semiconductor Capital Equipment Analyst)

Hey, thanks, gang. Just another question on the renegotiation of all these LTSAs, et cetera, for next year. Has anyone tried to renegotiate on price, or has it just been pure volume? And is it more a pushout from, like, the first half of 2024 into the second half of 2024, or is anybody pushing anything out into 2025? And then as a result of this, you know, your inventories has gone up this year. What can we think about the implications to utilization rates, and how would be your inventory plans coming into next year?

David Reeder (CFO)

Sure. Let me speak about, when you say inventory, I think you're referring to GF's inventory.

Chris Danely (Managing Director and Semiconductors and Semiconductor Capital Equipment Analyst)

Yep.

David Reeder (CFO)

So let maybe I'll address that one first, come back around and provide some additional color on the LTAs. Our inventory has increased this year, and the vast majority of all of that increase is actually not in work in process, nor is it in finished goods. It's actually in the raw materials, majority of which is in substrates. And those substrates, typically, their lives could be up to five years, if not even longer than five years, with some of those substrates. So the inventory increase, specifically at GlobalFoundries, is by and large associated with kind of raw materials, if you will, that feed into the manufacturing process. It is not in WIP, it is not in finished goods. We build to our customers' demand.

And so taking that aside and then talking about the LTAs, you know, all of the LTAs, as Tom mentioned, are bespoke. There's over 40 LTAs that we work with our customers on a daily basis with respect to what their volumes and their demand needs are. And so without being too generic, but to talk about some of the elements in those LTAs, Tom described it very well earlier in this call, which was, at the beginning of this year, the expectation was that the first half would be a little bit softer in the market, and then that there would be a relatively healthy recovery in the second half of this year.

So during the first half of this year, what you saw customers doing is, I'd say by and large, across the semiconductor industry, customers were looking at their demand needs. They were looking at some of their longer-lived products, and they were saying, "Well, let's build a little bit of inventory to be able to accommodate a second half recovery, such that we're not left stranded and unable to satisfy demand." As we made it through the first and second quarter, and we got into the second half of this year, I think what everyone recognized was that, that second half ramp that maybe we were expecting, was not happening at the rate and pace that we expected.

And so then you saw customers, and I would say GF customers as well as the general industry, you saw customers say: "Okay, we don't wanna build any more inventory. We actually now need to, you know, start reducing our demand on GlobalFoundries and on some others." And then you start working through those LTAs, I would say, in some pretty good rigor and detail around those LTAs. And so the end result, what are you seeing? You're seeing us, you know, get great visibility to customers' roadmaps, which is giving us, you know, greater opportunity for design wins. You're seeing us working with customers on, you know, if you don't wanna take the inventory demand, then how can we work together maybe for either increasing the duration, maybe a modest underutilization fee?

So you're seeing those start to flow through, the resolution of some of those agreements, again, for the third quarter was about $23 million, included in our guidance range for fourth quarter, is the expectation that we'll have some additional resolutions in the fourth quarter. And so, you know, I don't think what you're seeing is some pushout into, you know, first half of 2024 or the second half of 2024. I think what you're seeing is call it the true-up of 2023 right now. And I think it's, as we exit 2023 and as we start to get into 2024, you know, our expectations are that the demands that are loaded in the LTAs for 2024, that those demands will largely be realized. To the extent that they're not, then we'll sit down again in the 2024 period with our customers on all the elements and variables.

Chris Danely (Managing Director and Semiconductors and Semiconductor Capital Equipment Analyst)

Got it. Thanks.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

Did you have a follow-up, Chris?

Chris Danely (Managing Director and Semiconductors and Semiconductor Capital Equipment Analyst)

Yeah. So I guess a question for Tom. I think, Tom, you intimated that in the automotive side, you're seeing some customers start to ask for a second source outside of Taiwan. This is just something that we're starting to hear more and more, not just in the automotive end market. So can you just expand on that? I mean, is this happening, you know, like, across end markets where you know, semi customers are starting to get more and more fearful of a potential, you know, Chinese invasion of Taiwan, and saying, "Hey, within, you know, two, three years, you need to give us another manufacturing source outside of Taiwan," the potential benefits to GlobalFoundries?

Thomas Caulfield (President and CEO)

Yeah, I think it's more macro than that. I think it's about single points of failure and resiliency. How can you have something as critical as the semiconductor industry have such a high level of concentration in any part of the world? You know, I mean, there's geopolitical, there's geological risk. What you're really seeing is that, you know, like anything, too much of a good thing becomes a bad thing. That we just put too much concentration, and customers are looking for a more resilient supply chain, a little bit more balanced. I think the leaders in that right now are customers in China who want to be international players, and they worry about their ability to ship worldwide if there are more issues that prevent them from shipping from things manufactured in China.

So, yeah, interested in China for China, but also they're interested for worldwide supply to the rest of the world and their customers. And we're seeing some of that take place with customers and getting design wins, where they want us to be an alternative manufacturing for a footprint to supply their global customers. So I think this is more of a macro event independent of, you know, geopolitical things going on right now. It's just good and prudent managing that you eliminate single points of failure and concentration of supply chain and make it a little bit broader and resilient. And GF, I mean, that was the premise, you know, Chris, of the GF story when we were created in 2009. We were gonna be the first world's first truly global semiconductor foundry.

In the beginning, it didn't have much value for people, but more and more as, as we see how important semiconductors are, it creates, you know, great value for customers. It gave us a bit of a head start because we have that global footprint, and it's easier for us to create additional capacity in the regions we operate on rather than go greenfield. And so, and I think this is a trend for the future, independent of what the temperature is in the geopolitical landscape.

Niels Anderskouv (Chief Business Officer)

Maybe if I could just add one thing, because I'm not sure it's clear to everybody outside of GF, but a big part of our strategy is to have and manufacture all our technologies in multiple locations. So you know, what you can get manufactured in Singapore, we try to do the same in Dresden and vice versa, in Malta. And that way, you know, our customers, we can provide them those dual capacity footprints, and we think that's a big and important part of the strategy moving forward.

Thomas Caulfield (President and CEO)

A single part number can be sourced across our global system.

Niels Anderskouv (Chief Business Officer)

Yes.

Chris Danely (Managing Director and Semiconductors and Semiconductor Capital Equipment Analyst)

Got it. Thanks, guys.

David Reeder (CFO)

Thanks, Antoine.

Thomas Caulfield (President and CEO)

Thanks, Antoine.

Operator (participant)

Thank you.

Sam Franklin (VP of Capital Markets, Treasury and Investor Relations)

We'll take one more question.

Operator (participant)

Okay, one more question.

Niels Anderskouv (Chief Business Officer)

Thank you.

Operator (participant)

One moment for our next question or the last question. Our next question comes from Harlan Sur, from JPMorgan. Please go ahead.

Harlan Sur (Executive Director and Equity Research)

Morning. Thanks for taking my question. You know, many of your customers are still working to clear excess inventories. March quarter is a seasonally weaker quarter for many of your consumer-focused segments. Your wafer fab cycle times are typically a full quarter, so you're already executing wafer starts for the first quarter. Can you just give us a sense directionally on how to think of your revenue and utilization trajectory into Q1? Should we expect a sequential step down in Q1, more in line with seasonal trends, or maybe a more flattish profile as you guys are already kind of shipping below consumption?

David Reeder (CFO)

Sure. Maybe I'll start with that one, and let me just take a more macro view first and then maybe come back and address specifically some of the questions. You know, I think we mentioned earlier in the call that we are taking, just in general, a cautious approach, given the fact that, you know, we still have persistently high inflation, we've got some inventory in the channel, a couple of wars going on. But that aside, the specific guidance that we've kind of kind of given for the year is that we've given that we expect to be in the low to mid-80s from a utilization perspective for all of 2023. For the first half, we were kind of mid to high 80s.

Obviously, that implies a lower utilization heading into the second half of this year, which is very much, I think, consistent with the fact that we're starting to see inventories drain now. And so, you're seeing the utilization-

Harlan Sur (Executive Director and Equity Research)

Mm-hmm.

David Reeder (CFO)

Rates come down as the inventory is being drained. So I think sequentially from fourth quarter to first quarter, I think the industry has historically seen a decline with just seasonality perspective weighing in. And so when we think about this year, I would say higher utilizations in the first half, lower utilizations in the second half, consistent with that inventory decrease. And then when you think about rolling into next year, you typically have some seasonality, which is pretty well documented in the industry. So I think with that, we'd probably leave the guidance there with respect to anything 2024.

Harlan Sur (Executive Director and Equity Research)

Yep. No, I appreciate that. And then last call, the team had anticipated, based on your LTAs and new customer engagements, that overall like for like wafer pricing would be relatively stable-ish next year versus this year. Is that still the case?

David Reeder (CFO)

Sure. With, with respect to our, to our LTAs, like for like pricing is pretty flat. So you know, been pretty consistent on that point. Remember, those LTAs had, you know, fixed price, fixed volume, fixed duration. Obviously, as we've gone through the year and we've had some inventory that's had to be worked out, obviously, we've had to renegotiate, you know, some of those elements. But I would say by and large, you know, from a pricing perspective, like for like is really pretty stable and somewhat constructive.

Harlan Sur (Executive Director and Equity Research)

Oh, perfect. Thank you.

Operator (participant)

At this time, the Q and A session has now ended. I will now turn the conference over to Sam Franklin for closing remarks.

Niels Anderskouv (Chief Business Officer)

Thanks, Antoine, and, thanks, everyone, for joining the call today. Sorry we couldn't get to everyone in the call list, but, we look forward to speaking to you bilaterally and, and catching up over the coming months. Thank you.

Operator (participant)

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