GLOBALFOUNDRIES Inc. (GFS) Earnings Call Transcript & Summary

Good morning. Welcome, everyone, to this session. Really delighted and honored to have Tom Caulfield, President and CEO of GlobalFoundries joining us this morning. I'm Vivek Arya from BofA's semiconductor research team. And what I'll do is, I'll start with a few of my questions, but please feel free to raise your hand. If you would like to raise anything and we'll get a mic over to you. But with that, a very warm welcome to you, Tom, very delighted that you could join us.

Well, thank you for having me. And always, Vivek, you've been big supporter for GF since our IPO. So thank you for that.

Thank you. So maybe let's start at the top, 2.5 years since the IPO, and I don't think anyone would have been able to predict at that time that they would go through a demand boom and then like a big inventory correction. So the industry has been through a roller coaster. And I would love to get your perspective on -- after coming through this cycle, right? So early in GF's life cycle, how are you feeling now following Q1 results?

So I'll give a state of the industry, state at GF, and that's an interesting twist to the question because it kind of relates back to our road show investment thesis. And everybody at the road show said, you'll be tested in the down cycle. It looks great now. So I think we went through that test. So what's the state of the industry. If you are a CEO or a C-suite executive in the semi industry a year ago, today, I don't think anybody would predict that we would still be in the burning down inventory. You remember, 2023 started with the sense of it was going to be a first half down, second half back and it was just a typical correction. We're 6 quarters into a correction, put aside certain pockets of strength, like NVIDIA AI, but the more larger markets have been pretty muted. And while memory looks really strong now, it's coming off a really low base. And so I don't think anybody would have predicted this. So what are we seeing state of the industry. The good news is inventory is being worked down, not at the rate anybody thought. First look at dollars of inventory, especially for some of our key customers, the dollars have been coming down. A little bit of noise around the days of inventory because of the revenue top line. And we think 2024 will certainly clear whether it's 3Q or Q4 that this industry will get to more normalized inventory levels, therefore, more normalized natural demand coming through. What have we done in the context of that? We called Q1 our bottom, others need a little bit more time. And I think part of us being able to be confident in that is the breadth of our customer base and the breadth of the end markets we served. We had a beat on EPS, beat on gross margins. We gave a guidance that was again ahead of what was projected by the Street. So I think we've done a decent job as a company managing through this down cycle. And back to this, how does it feel 2.5 years post an IPO, it feels like in dog years, it was like 30 years. But I'd tell you, the test was always going to be. Yes, it always works in an up cycle. Let's see how you guys will do in the down cycle. And are you living too with the investment thesis was in the IPO. And I have to tell you, I think it would be hard to argue against that case that we've been resilient in our financial performance. Look, this is a year -- 2 years in a row of declining revenue, and we're going to have year-on-year 2x to 3x more free cash flow generation. First quarter alone was $261 million. Yes, this is lumpiness, not every quarter is going to be that. But this is a business now that positions itself to be ready for the upturn and to have both the capacity and the differentiation products ready to go.

So Tom, as you suggested, the Q1 kind of the bottom recovery from an industry perspective is uneven. So as you look at the next several quarters, which end markets are you feeling more confident that they are emerging from that downturn, which markets are still kind of soft. And importantly, as a manufacturing company, how do you get to that magic number of 80-plus percent utilization? Is this something we can see this year?

Yes, that's the magic number for sure. So let's talk about why GF can call Q1 the bottom and where do we see kind of holding the line on revenue and where we see growth. So we think of our business in 4 end markets. Let's talk about the ones that we hold the line. Our data center business has been down since the IPO, but more or less what we predicted. And as we believe at the bottom, the level we were in Q1 is going to be roughly -- and then we'll over -- with the design wins we have coming in, we'll build that business back up over time. The second end market for us is home and industrial IoT, that is a consumer-led segment that has been really hard. You see some of our customers and some of their results, especially Q4 of last year, how hard that industry was hit. Now the good news about that is, for us, we think it's at the bottom for us that we don't need it to grow for us to grow quarter-on-quarter. But that is the opportunity when consumer spending comes back, maybe even some refresh cycle driven by AI, that, that could be a good upside for us. But we don't need that to grow quarter-on-quarter for us to grow. So where is the growth coming from if it's not those 2 end markets. Let's start with automotive. Automotive is going to be meaningful growth for GF this year. Yes, in the phase of all the noise you hear about automotive slowing down in unit sales. GF in 2022 did $375 million of revenue; in 2023, it grew to $1 billion. These are all new sockets, new design wins and a breadth of applications from BCD, for precision battery management, microcontrollers, infotainment. And so a lot of those sockets were just ramping in 2023. And we didn't have a lot of time to have our customers build inventory. And so even in the phase of that and look, we're almost halfway through the year, we still see the growth in our automotive business meaningful, what is meaningful mean? Mid-single digits growth. And then smart mobile devices. We're not -- the industry truth sayer in that, but pretty much everybody thinks that's a 3% to 4% growth this year, especially in the premium end, where we participate. And so the opportunity for us to grow with the positions we already have we see quarter-on-quarter growth in smart mobile devices. So when you combine Q1 alone, smart mobile devices and automotive was mid-60s revenue for us. And so the 2 areas where we have the most amount of revenue concentration, 2 areas we see quarter-on-quarter growth for our company. So that's why we think Q1 is the bottom for us.

On the pricing side, there's been a lot of concern that had the industry built up a lot of capacity right now. There's still more capacity that some Tier 2 foundries are building. But I think you are sort of holding the line that this year, you expect pricing to be flat. So how is looking at competition kind of shaping your views on just the confidence around maintaining this flat pricing this year?

Our strategy is back to the IPO to where it is today. We want to be building on single source differentiated technologies. Now what gives us the ability to do that kind of the luxury is, we play in a pretty big SAM already, right? It's $50 billion SAM, growing to $100 billion over the next, you call it, 6 to 10 years, right, midpoint 8 years. So it's a really big SAM given a company that did $7.4 billion of revenue last year. So what does that mean? We can be somewhat selective and grow our company nicely by not having to chase every piece of business. So the way we do, we make sure we understand the details of end markets by the actual application and device type, drive our technology road map in partnership with our customers so that we can create that edge for them in differentiation and we can drive to single source business. We've been reporting for a number of quarters now and percentage of design wins every quarter is in the north of 90% on single-source business because that's the pipeline of the future. So when you're in a single-source business, a couple of things happen to you. One, you can't use pricing to drive more demand because you're not second source, it's the [indiscernible] demand. And the second is customers already made that decision to invest the high degree of R&D they need to spend to create that part number or to build out their portfolio around the technology platform that they're in it to win with you. And so we work together to make sure that we're both creating the value and capturing the value. So for us to maintain the pricing in the face of a lot of capacity coming on is to maintain our strategy, be differentiated, continue investment differentiation, be very selective in the battlegrounds and end markets you want to win business in and make sure you win that business.

Got it. And one thing, Tom, where we have been very impressed with GF is kind of building to demand and the long-term agreements like the LTAs that you have been signing with customers, like since very early in the process, and more recently, as the industry has gone through a downturn, right, having those kind of underpayment, right, we saw that $23 million in Q3 of last year, $79 million in Q4, and I think it's like $80-some million in Q1 with some more expected in Q2. So 2 parts to the question. First of all, how do those kind of underutilization things roll off for the rest of the year? And then just broadly speaking, how are you engaging now with customers, right, in long-term agreements? Like are they still a little bit shell-shocked from the downturn? Are they not engaging in as much in LTAs? Like how are you managing the business now, given the state of the industry?

So I'll use my catch phrase, there's no such thing as macro anymore, meaning there's no such thing as how does a customer do something. The range of customers, the different end markets, how they feel about things. It varies by all the different circumstances. So let's talk a little bit about how we got into the LTAs, what they provided the benefit to our customers and to us and what's the future of LTAs. So how did LTAs come to be? In early 2021, customers needed us to make big investments to create capacity for them. We said more than happy to do it, but we need to make sure that you're committed to that capacity, we need certainty, durability and profitability. We can't just invest. And if you really need that capacity, sign up for it with us. And it was gladly do that. And you could see we -- we'll talk a little bit about what that investment has positioned GF for its growth in the future in a moment. As the 2021 rolled on, we were no longer the instigators of wanting long-term agreements because typically, we want a long-term agreement, just from when we had to invest. Our customers wanted long-term agreements because what they were finding there was so much demand that they had that there wasn't enough capacity every time. They were coming to different suppliers, not just GF, they couldn't get as much as they wanted, and they were at the risk that the new market price was something different. So their mindset was, look, if you give me certainty of supply and certainty of pricing, I'll manage my business. And we were, I would say, forced, but we were at the table creating LTAs everywhere. I think to date, over 40 LTAs we've signed. By the way, with $30 billion of committed revenue, which has 2/3 of that is still available to us. So we go into a downturn and customers need to reset capacity we want to invest and put on, they don't need all of that at once. And so in some cases, customers say, look, the end market I'm in, it's not that predictable. It was a good idea at the time but I'm maybe better off without an LTA, how do we go reposition this LTA where it becomes more how we used to do business, and I'll true up whatever investments you made for me, and you'll see some of that in our financials. Now look, you've got the right numbers, but if you think about that fraction of the top line compared to our total, it's small. And sometimes, the renegotiation of the LTA means that underutilization payments either onetime or it's going to be a continuous. It's blended all depending on the circumstances. But here's what everyone of those conversations in with. We went in them as partnerships. We're exiting them with partnerships. Some will sound never do one again. Others, the biggest one we did ever was January of this year, right in the middle of this, right, a huge end market that you can guess like automotive would want a long-term commitment to supply. So what I think we've all learned as an industry in these long-term agreements. One, there was a bit of a feeding frenzy. We should have all been a little bit less ambitious about where we think the industry is going, how fast because it led everybody to wanting a lot more capacity than they needed. And by the way, I could tell you, I had more disappointment, not -- when customers had to renegotiate an LTA when we couldn't commit to how much they wanted back in the day, I'm willing to sign up for anything you won't give it to me, and the answer I just don't have it. Imagine, if we're able to sign to those, how much. And so every negotiation or every partnership says, "Hey, I want -- I'll take the same volume. I need more time. Here's more sockets." There's always a win-win attribute in this. And the least amount of all of that is about what's the underutilization charge, which is a financial obligation for the investments we've made, and it's a fraction, a fraction of the long term, the spirit of the agreement and the value of the long-term agreement. And so again, I think the industry will learn from that where they really make a lot of sense, where maybe if they do, do them in the future, there'll be a lot less ambitious in how much they're signing up to. But they served, I think, our customers as well as they served with GF in this process.

On CapEx and capacity. So kind of disciplined response to market conditions. I think CapEx was $3 billion in '22, $2 billion last year. This year, it's only $700 million. Going forward, is there a reasonable way to think about how you're managing CapEx? Is it -- I think at the time of the Analyst Day, it was supposed to be closer to 20%, now you're able to run it closer to 10%. What is the right way to think about CapEx intensity going forward?

So again, I'm glad you started with since the IPO because I'm going to get back to one of the other elements of the investment thesis about GF, about its investments. So a lot of the investments we made starting in -- you talked '22 and '23, where an opportunity of the LTAs we signed where we're committed to go create that capacity. So we didn't have an option to say you're customer here's a prepayment or an access fee and not create that capacity. So what it has done for us? We've actually put in capacity that we had capacity to do about 2.1 million wafers in the 2020 time frame. At the end of this year, when the rest of this capacity is kind of put on and qualified, we can do 3 million wafers. You guys can do the math on an ASP of $3,000. There is $9 billion plus 10% of non-wafer revenue. You can argue that we've put in place an engine that can do roughly $10 billion of revenue. Last year, we were $7.4 billion, you guys know what consensus is for this year. So we have built in already the ability to use what we've already invested to grow our business. And that's why you see this year, [ $700 million ]. And so what does it mean in the years looking forward, a couple of things. One, we won't have to invest very much for new capacity that's different than investing to create new features and new technology within our factories versus just new wafer starts for a while until we get to that $10 billion. And then when we get to the $10 billion, what's magical about that number. What's magical about that number, you go back to the IPO, we said when we get to $10 billion as a company. Not only will we have free cash flow, that's significant. We'll also be able to invest in our growth concurrently. That's the scale we needed as a business to do both. And that was before we factor in the capital efficiency we'll have when we start growing again through co-investments that governments are making around the world with us, like the CHIPS Act and ITC in the U.S. and other things. So the positioning of growth for our industry, for GF is if you believe this industry doubles over some strategic horizon, GF is going to have to make at least a [ 1.5 ] in addition to its capacity, given that we can get to [ 10 ] without much and then grow from there, and then we start growing again, more capital efficient and will still be a business that not only can invest in its growth but produce free cash flow like we're doing this year.

You mentioned CHIPS Act. So we heard GF one of the beneficiaries, right, of the fact $1.5 billion from the federal government and then another $600 million from New York State. How do you plan to take advantage of those facilities? And by the way, the CapEx for this year, is that reflecting some of those? Like is it net of some of those benefits? What is the right way to think about it?

So there's 3 components, you just mentioned 2 CHIPS and New York State. There's also the ITC, that's been in effect. And by the way, of all of those, the ITC is the winner at 25% covered. CHIPS bill is capped kind of at 15%, and we got kind of our fair share of that at the $1.5 billion. So how are we going to deploy that capital efficiency of the CHIPS bill that works in conjunction with the ITC, there's 3 phases of our build-out. First of all, to have a true global footprint, it's not just having a factory that does one thing when you have a broad range of technologies. It's having factories that service customers across a broad range of technology platforms. That's what we have in Dresden, that's what we have in Singapore, and it allows our customers to dual source globally and locally. Putting one technology node, I don't know, say, Arizona, right, that does one thing that represents 5% to 10% of your technology platforms isn't a global footprint. It's more like a global mailing address. I can't help myself. Sam's giving me stink eye over here. [ CHIPS bill ] is to use that funding to diversify our Fab 8 facility upstate New York, we call it [ 8.auto ] to bring in a broad range of diversification of technologies. So some of the things we do in Singapore can be build in the U.S. Some of the things we do in Dresden can build in the U.S. and then some of the unique stuff we do there. The second element or phase of our CHIPS bill is to we call the modernization of our 200-millimeter facility in Burlington. It's something like $130 million, which is to convert that capacity from CMOS-based technology to wide-band gap material, in particular, GaN. And that reconfiguring in some automation and some of the technology enablement comes from that bill. And then the last part of it is, when the time is right, when we need to invest in new capacity, we'll have the lion's share of that CHIPS bill comes in the form of creating an expansion, a doubling of the size of the output of that Fab 8 facility, but it will be built with that diversification of technology. So that's how we were using those funds over the rest of this decade. But do not lose sight of the ITC and how important that is because it's 25%. It's the biggest contributor, and we've already had offsets from ITC on our financials over the previous quarters.

On competitive positioning, there's a perception from the outside that there is just a lot of capacity, right, that is being built in the so-called mature node. So one, I was hoping you could help us kind of differentiate that all mature nodes are not created equal, right? There's a lot of specialization even in the so-called mature node. But you still have new capacity, right, coming out from the IDMs as well, you have Intel, wanting to partner with UMC. And then I think this morning, I saw that NXP and Vanguard are planning to add -- you're going to build a new fab in Singapore. So how are you looking at the competitive landscape?

Yes. I think so one is there a lot of capacity coming online, yes. But do you believe the industry doubles in 5 to 10-year period, then maybe that's the capacity we need to go do. And how do you go make sure you win, where you want to win. And I think it goes back to where I started this conversation with you. We play in a $50 billion SAM that's going to grow to $100 billion. Last year, $7.4 billion. We want to grow with the industry, maybe better than the industry, but more importantly, we want to grow where we create the differentiation from our customers. So when you play in a big space, you can allow a lot of the more commoditized parts of that business are less interesting to us. A lot of what that announcement that came out this morning was that's TSMC licensed technology that Vanguard is going to do some of it in partnership with NXP because they are looking to consolidate some of their own footprint. Quite honestly, that might not be a business that's very interesting to us anyhow. Is it necessary? Is it part of the $100 billion SAM? Sure it is, but it's not business we'd be interested in. And then the other end of this is all this capacity that's coming on in China. To have capacity that does more of the commodity part of this market is one thing. It takes a lot of investment, not just in tools and shells but in the enablement that creates that true differentiation and for customers to invest their IP onto a platform to be able to use it and leverage it. And so as long as GF stays true to its mission, we are going to be differentiated. We're going to drive our technology road map, really specific end markets where there's great durability, profitability and where differentiation matters for our customers. We'll be able to grow the levels we need to be is a very successful business and not get caught up into the oversupply commoditization of certain elements of our industry. That's our strategy.

All right. So as you can guess, AI is on top of mind for many investors right now. What does GF's play in AI? I imagine more at the edge, but I was hoping you could talk about how you are looking at the proliferation of AI at the edge and how GF can participate?

I'm going to give you 3 ways I look at AI. First is how does GF participate in the secular trend, what it means is straight up in the tactical horizon. I'll talk a little bit about how AI can impact how we run our factories as a manufacturer. And then I'm going to talk about the most important thing, I think that's how AI is going to reshape our industry. So my words, the feeding frenzy that's going on in data center build-out right now, and you'll hear a lot of the dialogue that look, I don't know how I'm going to use it, but I better build it because if I don't, I won't have it and everybody else will, and these are large companies doing that. And I think at some point, that's going to kind of run its course because what's going to happen is all this capacity for AI is there and there's not enough data to run all these models anyhow. And what's clearly is going to drive to the equilibrium where AI at the edge has to be where the sensing, the data is created and the inferences run. It's too expensive to do every query to build, spend the cost to transmit the data to the cloud, get an answer and come back. And so this will be the true driver of the edge. It's all this capacity in the cloud wanting data to do something with it. We have cameras everywhere, voice detection everywhere, sensing and what will happen at the edge. Signal will come in at sensing voice, image, whatever, right? Movement. It will take this data and run an inference engine, which I do about it, right? It will take that data and then parse it for what's important, compress it, send it to the cloud where a lot of that training will take place. I think the greatest example of that is what a Tesla car is done from day one. [indiscernible] around the car, collecting data. That data runs models for ADAS, whatever level you want to run it at. That data gets sent to the cloud where a large language model gets refined. And every Thursday night, you get a new program on your car. Maybe it didn't change much. It just had a bug in it that new version. But it's been the ultimate edge device for the longest period of time and now think of that being every device at the edge. I think that's the opportunity for GF, especially untethered devices where power is everything, not lowest power per transistor when it's running like a data center, lowest power of a transistor when it's in the off-state. There's surveillance cameras we do today that are battery-operated are very famous companies, they want that [ camera ] the last 3 years, [ untethered ] on 2 AA batteries. So what do they do? They take our 22 FDX technology, which is the lowest power used in the off-state and how does the camera work? The device works. It is an SoC, system on chip. 2 micro controllers, a very tiny one, wakes up only 10 milliseconds every second. And it has an algorithm depending on what it sees, it either goes back to sleep or it wakes up the big SoC to tell it to do something, get that data. If someone's at the door, notify whatever the -- and it's an amazing demonstration that the future of our industry is not just the lowest power per transistor in the data center, where you're doing all this computation all the time, it's the lowest power for a sensor when it's off, which goes right to the IoT at the edge. And we positioned for a long period of time, our investments to be that solution. Now how does AI changed our factories? Look, I would tell you that as strong as AI is when you live in the physical world and you have to have a technician wrenching on a tool to put a new PVD target or a new shower head that large language model is not going to help you do that with less labor, right? The energy to run our fab is the energy to run our fab. And so I think we'll be able to use AI to maybe make a 10% to 20% improvement of how we run our factories because not everything we do is in the digital realm. It's in the physical realm and those models don't help you there. Yes, maybe do better real-time dispatching, maybe we do better management of reticles and patching of jobs. We get OE. Maybe we can use with a little less of engineering support where the models help engineers make decisions on the positioning. I don't see it more than 10% to 20% advantage of what we do today. Where AI has big input is when it does, orders of magnitude change and this is what I think happens to our industry. Our industry has been driven by 2 things: technology and economics and the interrelationships. The whole Moore's Law was a technology that drove economics. And that's why people invested in the next generation of technology because the cost per transistor went down every generation. Well, the economics of Moore's Law gone now, right? It's mostly now you do it for performance and power. But when the foundry was created, it was created because if you were a manufacturer of products or a product company. You had no choice but to build your own factories and then scale became a problem for you. And then one can [indiscernible] and said, "Guess what, I'm the scale aggregator. I'll take all your volumes and I'll create the scale you can't do then was born the fabless foundry model." And then the fabless model grew as aggregators yet again, designs cost so much an individual consumer of a microcontroller could not have their own device because the design cost was too much. So I'll become the aggregator of a fabless as a fabless company to aggregate all these demands to make these standard products that new system companies can use to take advantage of that. Along comes AI. Just imagine AI can take the cost of doing design an order of magnitude or -- now the whole economic model of aggregating demands don't matter. Now almost any system company can start with a product notion, who's the software I want to run and then lead that right to a design. So there'll be massive customization of designs. I call it a super cycle of SoCs, right, that everybody will have a unique combination of capability to drive their product because they don't have to take a bunch of off-the-shelf parts to create a product because they don't have to scale to do one. If the cost to do the design is brought down that much, I think this is what's going to be a profound impact. It's going to change the nature of the number of part numbers that companies can run and how system companies will become more and more end-to-end and how the role of fabless companies maybe go less about standard products and more custom products for everyone and their customers. What it's going to drive is a whole new class of customer sets for companies like you have to deal with in a much higher, higher number of SKUs to go run in our factories. And I think that's the most profound impact to the semi industry besides driving growth is what are the business models that will be success.

Very insightful. I think even [ Jensen ] said next phase, more physical AI, right, rather than just in the cloud. So maybe just in closing, Tom, just kind of have to wrap this up.

We weren't very good to the audience, feeding...

I think you have laid out a target of like 8% to 12% growth, 40% gross margin. Any kind of the top 2 or 3 things that get you excited product drivers that kind of help you achieve those objectives.

So look, we are a company when we have top line -- we know each and every day make it better and better at the bottom line. That's just the maturity of our business. So I love the fact that we've made the investments to get to $10 billion. I love the fact when we get to $10 billion, we now are in that scaled model where we have both capital efficiencies or the ability to drive free cash flow and growth and get even more efficiency with government support in some of these investments. I love the fact that we continue to win 90% of our design wins are in areas where we are single source that we, in aggregate, are accretive to our long-term model. And so for us, it's the growth phase of our industry, the upside, we can't come soon enough. We spent the better part of 2 years getting ready for that, both in capacity and differentiation. And we're ready to rock them all when this industry wants to come back.

Excellent. Thank you so much, Tom. Really appreciate thank you for your insights.

Thank you. Appreciated.