GLOBALFOUNDRIES Inc. (GFS) Earnings Call Transcript & Summary

[Technical Difficulty] on this conference. We appreciate it.

Your question about the business conditions. Business conditions have been very good, right? I think you're seeing it across the board. This year is going to be a pretty strong year for us in terms of both revenue and profit growth across all of our end markets -- most of our end markets, in fact. So I think we're just starting the year, and things are looking good.

Okay. Now how do you look at the foundry market? There seems to be various different cuts of the market, foundry market. And in that context, it will be great if you can give us your view of the market and the TAM and the various subsegment within the foundry.

Yes, sure. Look, I think the way we look at the foundry market is we play in a SAM that's, let's see, I would say, 12-nanometer about. And if you look at what we had talked about last year and even this year, in 2020, that was probably about $55 billion, that's growing nicely, right? It was about 2/3 of the market, 2/3 of the foundry market is what we target and -- as our SAM. And so we have a lot of, what we call blue ocean left for us to grab at about -- we did [ $66.5 ] billion in revenue. So out of $55 billion or $60 billion, there's a lot of opportunity for us. We have pivoted the company to serve that SAM. And as we look forward, we feel very, very good about our growth prospects in the SAM that we play.

Okay. And if we were to look at the 12-nanometer and above, how would you describe the competitive landscape?

I mean, from our -- we have a lot of differentiated technologies, and we've spoken about this at length, be it in feature-rich CMOS, where we have a lot of embedded memories or specialty memories technology that's added to it for our customers, be it in FinFET, be it in RF SOI, be it in a certain germanium or even certain photonics. So we have what we know, what we call the 6 platforms that we target our customers for highly specialized, very targeted applications. And they are pretty well received by our customers because it serves their need for a certain application. One of the things that are different that we do is we are very market-focused and customer-focused. That's been part of our pivot since 2018. So when we go -- when our business teams go and win business, they are extremely tied with our customer to make sure that the solution that they get is the best-in-class for them, right? So that's where you want to think about our markets.

Okay. But who are -- like if we were to look at different segments you're competing, is there 1 or 2 competitors that you can highlight per segment?

Yes. So look, I mean TSMC is still the biggest player in this place, right? They are our biggest competitor. The other players really are UMC; SMIC, to a lesser extent, mainly because they are based predominantly in China. They are now on the entity list. So we don't hear a lot of new designs going to SMIC. So for the most part, I think our biggest competitor you should think about is the TSMC.

Okay. So let me dive in a little bit more, and it will be great if you can provide an update on your growth expectation and especially if we want to focus on technology platforms, how do you see the growth driver for each specific part segment of the platform or various parts of the platforms?

Yes. Look, I mean, I think we should see pretty solid growth in our feature-rich CMOS business this year will see good growth for our FinFET business this year; our SOI business, which is a combination of our FDX and RF SOI business should grow double digit this year. We have certain very small but faster growing silicon germanium and silicon photonics business that's going to grow extremely fast this year. So I think when you look at all these components, because of the differentiation that we have to offer to our customers, they are going to grow pretty quickly this year and next year.

I actually think that some of these platforms offer a longer-term growth opportunity like silicon germanium silicon photonics that hasn't even materialized to a large extent. But I want to use that to move on to the next question. And there are secular trends impacting growth for various segment or various platforms like silicon germanium, silicon photonics. But in that context, maybe the downside risk to pricing pressure is limited to like 12-, 14-nanometer FinFET straight-logic CMOS. Other platforms benefit from secular trend and GlobalFoundries is the leader in those segments or platforms?

Well, we don't see any kind of downside pressure on pricing, for sure. I mean we could think about what we've said is prices have gone up since last year. A big portion of our growth this year is coming from those price increases. And we're working in partnership with our customers on this. We have since the middle of last year. We've actually worked with our customers to -- on pricing. So that's going to help us across the board, not just in 1 particular technology area. In fact, if you were to look back in the middle of last year and you compare it to where we are today, if you were to try and negotiate some of our LTAs this -- today compared to what we had signed last year, we could easily ask for a price increase again of -- to the tune of 10%, which we're not doing, by the way, right? We're not doing that. We don't want to do that for our customers. Unlike some of our competitors, where we hear they're rising -- raising prices again. So we're not doing that. We want to have long-term commitments, long-term contracts with our customers, a lot of visibility and durability of our revenue. And so we're working in conjunction with our customers. And I think we don't really see any kind of issue there currently.

Sure. Perhaps in the longer term, if there is a downside risk is from like a 12-, 14-nanometer FinFET. I'm under assumption that GlobalFoundry (sic) [ GlobalFoundries ] dominates SOI, silicon germanium and other platforms that require substrate. Was that really a fair assumption?

Look, I mean, look, from -- there is going to be a transition of technologies from 22 to 12, right? I'll give you an example. At some point of time, maybe 5 years from now, it's hard for me to predict. It's really dependent on customers. 22 FDX could move to 12 FDX or 22 RF could move to 12 RF, right? So there's -- we're already working on making sure that we cover all of that. So from our standpoint, at least the technology platforms we have right now and the footprint we have right now is pretty well understood by our customers, and we're working with them very closely for their future design wins. We're fully sold out for this year. We're almost really sold out for this year, we're almost fully sold out for next year. Right now, the discussions we're having with customers for capacity expansion in '24 and beyond for partnerships, again, right? And so that's the way you want to think about it.

Okay. Great. That's actually very helpful to understand segmentation of 12, 14. In that context, how does the revenue mix by end market, smartphone, communication and so forth, map with revenue mix by technology platform? And I'm asking this question because you do provide the revenue mix by end market in your quarterly earnings, but is mapping that to technology platform is where I think investors are struggling. And I think any insight would be very helpful here.

Yes. Look, it's very hard to do, and our advice would be to just think about it this way, right? It's a matrix. We have a lot of these technology platforms serving all end markets. So there's no real correlation of 1 technology, nor a platform servicing particular end market. We have these 6 platforms that service these 5 end markets, and they all are matrixed. So the best way possible for us to talk about our business really is by end markets. And we'll provide some color, like in CMOS, it's roughly about 40% of our overall business. It's probably going to grow. We have our FinFET business, which is about 1/4 of our business. Our SOI technology is about 1/3 of our business, and the rest are things like growing businesses like silicon photonics. But to the large part, I think the way you want to think about our business is really by the end markets that we disclosed.

Okay. Great. And then you also made significant improvement in gross margin, especially recently becoming profitable. I remember when I launched coverage, there were a lot of skeptics as to GlobalFoundries would ever become profitable. But looking forward, how should we think about gross margin progression? And what are the key variables impacting that margin expansion?

Yes, and it's a really a good question, Mehdi. So we understand why the skepticism was for GlobalFoundries before the pivot, right? I mean, people had not been -- hadn't heard much about GlobalFoundries prior to the pivot. And we -- since 2018, when we actually made the pivot, the strategic pivot to focus on being a more relevant, a profitable, growing company and not really chasing something that we knew wouldn't really provide the profits we wanted, we focus on certain markets that are going to be profitable and growing. We focused on a SAM that's about 2/3 of the overall foundry market. We focused on building customer relationships that really matter. We focused on these long-term agreements, partnerships that really matter, having skin in the game with customers so that we work hand-in-hand with them to win with them, right? And so those were the key things that we focused on. And we also wanted to make sure that we are profitable for our shareholders. So if you want to think about our gross margin expansion, I think the way you really -- simplistic way of thinking about this would be this year, our gross margin expansion is going to be helped by ASPs, right? That we talked about, increases, next year as we bring on more volume. Our gross margin will be helped by the volume increase. And the year after, in 2024, we're going to see a mix up in our business, mainly because certain end markets that we focused on in the past are going to decline and certain new end markets that we've started focus post-pivot are going to grow rapidly, and they're accretive to our overall business. For example, automotive, right? And so this year, ASP; next year, volume; the year after that would be mix is the way you want to think about our gross margin expansion.

And When you referred to the mix is the reference to these platforms like silicon germanium, silicon photonics, right?

Well, I mean, automotive would be SOI, too, right? I mean so there's a lot of SOI in automotive. So it's -- I think, again, what I would advise, what I'd really say is like focus on the end markets and not necessarily the technology platform because the technology platforms service all of these end markets.

Okay. Great. And then just a quick follow-up to that. Can you talk a little bit about margin profile and margin improvement by various fab locations?

Yes. We've talked about this as well. I think maybe on our earnings call, we did mention this, like our Singapore facility is already at our target gross margin. We're going to get -- as we get Dresden and Malta to their full 4-wall capacity, they'll get there as well. That's probably more late half of 2023, 2024 time frame when we really fully ramped Dresden and we ramp Malta. Now keep in mind, this is capacity plans that we've talked about, right? $4.5 billion spend for this year, $3 billion spend next year. We are also bringing online our new facility in Singapore. That adds about 450,000 wafers. We'll probably see about 200,000 wafers of that come online next year. We'll have to ship about 200,000 wafers from the new Singapore facility next year, and then about the remaining 250,000 wafers in 2024. So I think from a facility standpoint, Singapore is already there. Dresden will get there. Malta will get there. And then by 2024 or so, we should be in good shape.

Sure. And then one question on your customer mix. One of the things that was very intriguing to me reading the prospectus before IPO was the fact that more than 50% of customers use GF as a single source. And I think that's going to be really a big factor looking forward, especially as new material, new platforms ramp. Why is it so? Why is it that your -- some of your customers cannot leverage UMC or Chinese fabs to diversify? Why is GF is a single source?

Yes. That's a good question, Mehdi. The big part of that is because of our differentiated technologies, right? And it's just not CMOS that we offer, right? It's differentiated -- feature -- we call it featured CMOS, but it has a lot of embedded technologies in it that our customers like for their specific application. RF SOI or FD SOI or silicon germanium, silicon photonics, right? I mean, let's give an example, silicon photonics, right? We have a monolithic solution that nobody else has to offer. It's very important, a monolithic solution because the type of performance and requirements it need, you can deliver because of that is significant. So when we focus our R&D dollars in creating these differentiated technology platforms, it's done mostly in conjunction with the technology requirements or the market requirements of our customers, and they know it's unique for them. And that's why we have this single-source business, right? 2/3 of our business is single sourced. About 80% of our design wins that we get is about single sourced. And so that's why I think it's a very sticky business.

So although it's very difficult to break the revenues by different platforms, we can map end market to platform. But this -- the platform helps to be the single source.

Right. Right.

2/3 or 80% of new designs. Okay.

That's right.

Now moving on from the front to the back end, like with assembly, especially looking in the future, 2024, when these substrates are at scale, what are the prospects of GF providing back-end services? And you've got -- if GF stays focused on the front-end, who are the OSAT partners that you tap on to provide back-end services?

We already have customers that we do back end processing for. We do advanced packaging and test for certain customers. I think you can look at on the RF side of the business, we do some highly specialized testing for some of our customers. But we also have partnerships, many of the -- those are our players out there, Amkor, ASE come to mind, right? So where we ship our wafers directly to those houses, where we ship our customers wafers directly and they do the advanced packaging or bonding and stuff for that. So we also offer turn-key solutions to some customers. And it really is dependent on customers' needs and what they are looking for and what we can offer in -- that actually also makes sense for us. We want to make sure that we can generate a good profit margin. So we're not going to just take back-end business just because somebody wants it, it needs to fit our criteria of profits margin. And so we do both. We have customer relationships today for advanced packaging and testing. We have relationship partnerships with the key players like ASE and Amkor and we also do turnkey. So we're already doing all of those activities.

Just a quick follow-up to it -- to this. As new substrates are at scale and kind of a module approach to back-end is required or specialized interconnect under package, is this -- how should I think about incremental revenue? Yes, you're not going to sacrifice your margin, but some of these are specialized services, especially as it relates to back end, as it relates to like the auto industry down the road. Is that also sort of incremental revenue or not?

In some instances, there are. Again, it depends on customers, right? What the requirements are? And if we can have differentiated offerings on the back end, RF testing, for example, comes to mind. For some of this high-end RF business, it's highly specialized test programs that need to be written. And we can charge a premium for that because nobody else can do it, right? And so it's tough for that. That actually makes sense for us, we'll engage in.

Okay. All right. Now moving on to CapEx. Obviously, this year's CapEx, in my opinion, is an [ abnormally ]. And then it would normalize. You have talked about this in the 2 earnings conference calls you've had since IPO. So maybe we can start from, if you could provide details behind the 2022 CapEx budget of $4.5 billion? And why -- and how will capital intensity normalized going forward?

Yes, good question, Mehdi. So I think what we've publicly said is we're expecting -- we're on track to spend maybe about $4.5 billion of -- in CapEx this year and about $3 billion in CapEx next year. And where is it going? Roughly about $4 billion of that is our new Singapore facility spread over 2 years. And the remainder really is filling out the four-wall capability at our Malta, New York facility as well as our Dresden, Germany facility, right? So that's the way you want to think about it. I think from a capital intensity standpoint, I think what we've publicly said is our normalized view should be about a 20% of revenue. And this year and next year, we were higher than that, but it should normalize over a longer period of time. So the way you want to think about our CapEx intensity is about a 20% of revenue longer term.

Okay. And the $4.5 billion and 20% intensity, that's gross. It doesn't include the impact from the CHIPS Act, if you were to, right?

Right. Yes, we have not -- we will always provide gross CapEx numbers, right? I mean even the CHIPS Act. Look, I mean the CHIPS Act hasn't been passed yet. So it's kind of premature for people to assume anything when it hasn't been passed. We can make assumptions. Everybody can make assumptions, right? But I mean, I think it would be premature for us to talk about where it is. We will definitely get our fair share of the CHIPS Act when it's passed, and we're hopeful that will happen pretty soon. But what we'll provide to you is gross CapEx numbers.

Got it. Okay. Let me just quickly check my e-mails for any incoming questions. We have a few more minutes. Okay, I have 2 questions. What do you think is the biggest misconception about GlobalFoundries story?

Well, I think we've been private for a while, and we just came to the public markets. And a lot of it is also educating public investors about the transformation that's occurred in the company since 2018. And it's been a very methodical transformation. And I think we want to -- we are at a point where we are more relevant to our customers and to the industry than we were in the past, because we're focusing on markets that are growing -- with customers that are growing, and that's going to be profitable for us as well. So that's what we were doing before to what we're doing now, it's quite a bit different. And that's an education process that we have to continue to do. So that's more than anything else. The misconception is like people -- some folks still who haven't heard from us in a while think of us in the past, right? And that's changed.

Sure. And the second question is actually a follow-up to it. With Intel announcing the intention to acquire Tower, how will that -- how would that change the competitive landscape? And from my end, just to add my own two cents, it's interesting the premium paid, never mind GlobalFoundries has a much better margin profile than Tower. So one question with my own follow-up added to it.

So look, the Intel's acquisition of Tower actually just validates the importance of foundry, right? And Mehdi, you've been covering [ cap ] equipment and the manufacturing side business for a long time. So you should be happy to see the validation of what you've been covering for a long time, right? So it really validates the foundry space. As far as our focus really, I mean our focus is we have a really strong business plan that we've communicated to all of our stakeholders, to our employees, to our customers, to our shareholders to our partners, and we're just going to execute towards it, right? I mean it's just -- we know there's a validation. This is a good growing business. Foundry market is a growing business. We have a strong foothold in that, and we're growing. We're growing our revenue. We're going to profitability. And we're just going to focus on that.

Great. Thank you. And any other closing remarks before we wrap it up?

I think, thank you, Mehdi. I mean, you know, you're starting to hear a lot more about our story, right? Our platforms, our customer traction, our LTAs. We are very appreciative and grateful for you and all of our shareholders to participate in this right with us. And we're just focused on execution.

Sure. Great. Well, let me thank you and Ada for taking the time and doing this fireside chat. For people on the webcast, please feel free to shoot me an e-mail if you have any follow-up. With that, I wish everyone a great and healthy day. Thank you.

Thanks, Mehdi.