GLOBALFOUNDRIES Inc. (GFS) Earnings Call Transcript & Summary

All right. Good morning, and welcome to JPMorgan's 53rd Annual Technology Media and Communications Conference. Again, my name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have John Hollister, Chief Financial Officer of GlobalFoundries. For those of you that don't know, GlobalFoundries, third or fourth largest semiconductor foundry in the world, leader in specialty and mature manufacturing technologies targeted at segments such as analog, power management, RF, wireless, wired networking connectivity solutions, silicon photonics, targeting the comms infrastructure, data center, mobile, IoT, automotive and industrial markets. So a very, very diverse business. Team reported solid results and constructive guidance recently in a tough macro demand and geopolitical environment. So John, thank you for joining us.

Thanks, Harlan. Appreciate you.

Yes. So GlobalFoundries started to see a recovery trend in calendar '24. I mean, obviously, the industry is emerging from a pretty bad cyclical downturn, which started kind of second half of 2022. But GlobalFoundries started to see the recovery trend in calendar '24 with sequential growth through the last 3 quarters of the year. You drove year-over-year growth in the most recent March quarter for the first time in 8 quarters. Can you just share your thoughts on the current state of our industry and the impacts on GlobalFoundries' recent earnings update?

Sure, Harlan. Again, thanks for having us out. So we saw a return to year-on-year growth in the first quarter. We grew top line about 2% and also, I will note that we had realized roughly $80 million of underutilization revenues in the first quarter of 2024. So year-on-year, the increase in wafer shipments was even more notable than that. And we saw -- and we also guided for sequential growth in the second quarter. So for the year, our base case view is that we will grow this year. The rate and pace of continued growth from here in the second half will be determined. And certainly, there are some cautionary notes out there around tariffs and what that may do to consumer demand, but our base case is for continued growth this year. Looking at the revenue mix by end market, we think the first quarter was the bottom for smart mobile in our business and that we'll see a good recovery there in the second quarter. We see IoT up in the second quarter as well and comms infrastructure and automotive also growing some in the second quarter. We see an opportunity this year to repeat the strong growth we had in automotive around mid-teens with a meaningful revenue growth for the year. And for the CID, comms infrastructure business, in particular, performed well this year. We see high teens opportunity as we see strength in silicon photonics and satellite communications building upon our traditional comms infrastructure business. I think smartphone will be flattish for the year, Harlan, as we see a relatively stable market. Over time, we see an opportunity to continue to gain share through increasing our content in areas like haptics, audio, display technologies and imaging. So overall, we see a fairly stable business with an opportunity to grow this year in light of, as you mentioned, a challenging macro environment in some cases.

Yes. Just before we got on stage, John, you and I were talking about some of your customers, right? How do they decipher between demand pull-in because of tariff-related concerns versus sort of cyclical recovery, right? But for the GlobalFoundries team, it's a little bit of a different dynamic, right? You've got a long lead time business, right? And your customers are a little bit more -- when they think about their supply dynamics, they think a little bit longer term. So from a tariff and trade perspective, maybe the better question for you is pre-Liberation Day relative to now, and I know we're not talking about orders, but you get 6-, 9-, 12-month rolling forecast. But have you seen any major changes like pre-Liberation Day versus now from your customers kind of mid- to longer-term forecast?

Yes. I'll note that Liberation Day was around 6 weeks ago. So it wasn't that long ago. And we haven't really seen a lot of dramatic change. I will say, Harlan, the thing that's notable about that, that we have seen is an uptick in interest in the company's offerings. I mean, clearly, we've been at this for 15 years now, and our strategy has been to be a global provider of essential chip technologies that you articulated quite well at the beginning and able to serve our customers locally as well and meet them where they are. So our primary manufacturing footprint is here in the United States in upstate New York and Vermont. We're in Singapore, and we're in Dresden, Germany. We do not have a manufacturing presence in China or Taiwan. And in light of the tariff landscape, this is very conducive to customers working with us to source products within the countries where they're manufacturing their end products or otherwise in light of the tariff situation. So we're not reacting to that. That's something that's been underway for a long time at GlobalFoundries, but the tariff situation is very much conducive to the global footprint that we have, and we're well positioned to continue to be a leader in that regard.

The team has done a really great job at navigating through the current industry downturn. Your peak to trough declines this down cycle is looking to be about 25%, right? How has the team been able to better weather this down cycle significantly better than your customers, right? I mean if I look at your customers, right, the embedded microcontroller, automotive, industrial, analog-focused guys, I mean, those guys are down, I don't know, 40%, 50% peak to trough, right? Your smart mobile customers are down 40%, 50% sort of peak to trough, right? GlobalFoundries is only down 25%. So how was the team able to better navigate this down cycle?

I put it on 2 things, Harlan. First, if you look at the strength we've had in automotive, it's quite remarkable. We have come from a very low base 5 or 6 years ago around 2019, 2020 to more than $1 billion in revenue last year in 2024. That's quite strong for the automotive market. And that has certainly helped in what you're describing. To be fair, we've also had the capacity reservation agreements and long-term frameworks with our customers that have had the result of mitigating the high amplitudes of business, and that was by design as we had customers working with us to secure capacity and along with that came a level of commitment around their consumption of our products. So putting it all together, we have a very strong platform of essential technologies that are highly differentiated and offer a compelling advantage to our customers across our end markets. That's built on the strength of our product lines and what they offer in our essential market and positive commercial frameworks around which we build the business, and that has helped sustain us through the downturn dynamic.

Let's talk a little bit about your end markets, technology differentiation and your customer mix, right, in smart mobile, relative to your customers in the smartphone space, you did relatively well, as you mentioned, in 2024 with smartphone mobile -- with smart mobile growing 1% year-over-year and a lot of your customers driving significantly declines. How should we think about the growth CAGR in this business over the next several years? What are going to be the big drivers of smart mobile?

Yes. I think an AI-driven upgrade situation could definitely benefit us in smart mobile. I would point to that. I would also point to our growing content gains. And what I really mean by that is additional silicon content in the areas I described a few minutes ago around audio, haptics, display, imaging. This can allow our customers to sell more chips into smartphones. Our business today is primarily around the RF front end and the wireless transceiver. Looking forward, we have the ability to gain share through content acceleration in the areas I described. So all that said, Harlan, I think the other 3 end markets for GlobalFoundries are going to be more pronounced in terms of their growth contribution than smart mobile. And I think the smart mobile market in general is going to be relatively flattish, absent an AI-driven type of up cycle or some other dynamic in that nature.

So let's move over to some of the faster-growing segments, right, comm infrastructure and data center, you call your CID business, right? Team is targeting to grow this business high teens percentage this year. What is your confidence in driving the strong growth in CID? What are going to be some of the end market dynamics versus GlobalFoundries-specific dynamics that enable such a robust growth outlook?

Yes. The 2 main areas where we're seeing particular strength this year are in communications, particularly with silicon photonics. And this is allowing advancing the state-of-the-art in communication for high-performance computing platforms, such as data centers for AI applications. The traditional approach of communicating over copper is going to reach its natural limitation for bandwidth and power consumption and heat and that's where optical communication is going to become more relevant. We're seeing that initially in pluggables, which are between racks. Over time, the concept of co-packaged optics is going to become more relevant, we believe. But that's a little further out in time more in the 2027 type of time frame. We have strength in both areas around our level of integration and the fact that we've been at this for a while with our photonics technology. So that's definitely one area where we're seeing strength. We saw 45% year-on-year growth in CID. This was a key contributor to that strength. The other area is in satellite communication, and this is using the strong RF technology that we have in the company, and this includes not only silicon in satellites, but now increasingly in ground terminals, base stations, which are receiving satellite signals for Internet access on the ground. That's another exciting growth area. Every one of those ground terminals has quite a number of chips inside of them to facilitate that communication, and we're well suited and well positioned with the customer base, multiple customers in satellite communications. So those are the 2 key drivers, Harlan, and we see -- I'd say we're incrementally more positive there for the growth rate that we're estimating coming off the first quarter results.

Yes. As you mentioned, on the silicon photonics side, I remember back when we took the team public in 2021, you already had a pretty strong silicon photonics business, right? But as the industry has moved from 100 gigabit per second speeds to 200 to 400 to 800, not surprisingly, we've seen more focus on integrating, right, integrating more components onto that optical sort of substrate, right, which is right in your wheelhouse of providing the silicon photonics capabilities. In addition to that, you guys do have, I would say, a nice mixture of compound semiconductor technologies, like silicon germanium, you guys have silicon germanium. That's a key component -- or one of the components for our strong silicon photonics portfolio. But what are the technologies that you support currently at GlobalFoundries that customers can take advantage of your silicon photonics? And maybe some of the -- I don't know if you can list off some of your customer engagements in silicon photonics.

We have the -- our PIC, the photonics IC that has a high level of integration with -- as you mentioned, that's the key technology aspect of what we're doing. In terms of our customer engagement, we have a range of customers who we're engaged with from the largest semiconductor companies out there to some very well-funded emerging companies that are looking at advancing the state-of-the-art on next generation, for example, in CPO. So quite encouraged by the level of customer engagement around the technology that we offer.

In automotive, what applications and content gains -- automotive has been a franchise for the GlobalFoundries team where you've been growing strongly, it feels like for the last 3 or 4 years. Granted, it was -- initially it was off of a small base, but last year, you grew 15%, right? The largest automotive semiconductor supplier in the world, NXP, their automotive revenues were down 4%, right? And automotive production was relatively flattish, but you guys grew 15%. So what applications, content gains drove the strong growth in auto last year, right? You grew 15%. And what is going to drive the growth again this year for the GF team?

Yes. So we see the opportunity to have a similar growth rate this year in the mid-teens, meaningful growth in automotive. We're seeing very good success with our 40-nanometer platform for automotive microcontrollers first. That's key to the success of our automotive story. Moving forward, we see growing diversity as well in our technologies and applications. For example, our 22FDX technology is being widely adopted and viewed as a go-to technology of choice for radar applications to help with ADAS for vehicles. And that cuts across all forms of the drivetrain, whether it's electric vehicles or ICE platforms. We also have some of our BCD technologies being adopted for power in vehicles as well. So we see -- we're encouraged to see the growing diversity in what we're offering in the automotive space and encouraged by the ability to have a comparable rate of growth this year.

On home and industrial IoT, your segment, can you give us an overview of the type of application solutions you're enabling across? I mean, the nice thing about home and industrial IoT, it's a very diverse business, right? Industrial applications, wearables, medical, IoT connectivity applications. How do we think about the growth of this business over the next several years? And within all of those sub end markets, like where are the biggest opportunities?

Yes, you mentioned it. I think you've got a good mix of consumer and industrial applications, whether it's in industrial automation, home automation, medical devices for monitoring health, smart city applications. We see a very diverse set of opportunities in IoT. Aerospace and defense is also an important element of that. It's relatively in the minority of the revenue mix, but a good demonstration of the resilient supply chain that we have and can offer. And 22FDX, for example, again, looking at the technical differentiation around power consumption and RF performance positions that technology well for these applications for obvious reasons. Many of these applications are battery operated and therefore, benefit from lower power consumption. And clearly, with the wireless communication, RF is key. So I think this is an end market that can really be a strong growth driver for the company going forward, particularly in terms of unit consumption. Clearly, we've had a high level of inventory in this market, across the end markets, I would say one of the highest in terms of that overhang. We're seeing progress in the customer base through the consumption of that inventory, which can ideally position us well to continue to grow here.

Before I move -- I want to spend some time on manufacturing footprint and the operational strategy. But before we move there, does anybody have any questions on the product side or kind of near to midterm sort of business trajectory and trends? If you do, raise your hand, and we'll be able to get a mic over to you. Any questions? No questions. Okay. Let's talk about the manufacturing footprint and operational strategy. Where are the areas in your supply chain? The tariff and trade situation continues to change on a daily basis, right? But where are the areas in your supply chain that are most exposed to potential tariffs, especially as it relates to your U.S.-based Malta, your Burlington Fabs? And what is the team doing to potentially mitigate some of these negative effects?

Definitely, Harlan. So when the tariff announcements came through, you have to look at something called the harmonized tariff codes. And there was an exemption for semiconductor products. As we analyze that, that is applicable to many of the elements of manufacturing that are present in our manufacturing flow, but not all of them. And so some of the more general chemicals and other ingredients are not necessarily on the exemption list per the harmonized tariff code. So that's really where we have the exposure. We've analyzed that. Our procurement team is constantly looking at mitigating and optimizing supply chain risks for us. As they analyze that, they determine that we could have upwards of an annualized rate of roughly $20 million of tariff exposure from an input cost perspective on our U.S. operations across both the Burlington and Malta fab. We're working with the various players to understand and emphasize the importance of exempting as much of that material and product as possible as the mitigation strategy there. But in the grand scheme of things, fairly limited in terms of the impact.

I think one of the technology transitions that the GlobalFoundries team has transition through relatively unscathed was back when we took you guys public, your Malta Fab 8, right, was primarily 12-nanometer FinFET, right? And as customers -- customers of your FinFET technology, obviously, they have a road map to move below 12 nanometers, right? And some of your customers obviously were executing to that. But the team was quite smart, right? I think you guys have already seen the writing on the wall there and started to move some of your specialty technologies into Malta Fab 8, right? And so I think you've been qualifying your FDX technology. You're in development. As you mentioned, 40, 45 CMOS feature-rich technology. When do you expect customers to start to call and ramp production wafer starts on some of the non-FinFET-based technologies out of your Malta fab?

Yes. Thanks, Harlan. You have that exactly right. This has been a multiyear effort that's been underway for the Malta fab exactly around, as you described it. And we're reaching the final stages of production readiness in some of those technologies and expect to have customers in production next year in some of those technologies. And now with the tariff announcements, this is very, very conducive to that trend as well, and we see some additional interest that has emerged in the weeks that have followed that. It will take time for customers to design and tape out and qualify, et cetera. But the good news is that this -- as you said, this is a result of a multiyear effort that's already been underway and is supported by the CHIPS Act for the diversification of the technology offerings in Malta. So we look forward to growing that business over time here.

Going back to the beginning part of our conversation talking about, again, sort of tariff and trade. And actually, I think you mentioned that given all of this, I think the team has seen sort of an uptick in engagements from existing and potential customers as they continue to evaluate their resiliency plans, right, their supply chain plans, right? And so GlobalFoundries has a really nice mix of technology capabilities sort of globally. So can you kind of just true us up? You've got your big manufacturing operations in Dresden. You've got your big manufacturing operations in Singapore. And then you've got your U.S. Malta and Burlington fabs. Can you just give us a rough sense in terms of 300-millimeter wafer equivalent capacity, like how that total capacity is spread across those 3 regions?

Yes, sure. So it's the largest in Singapore, second in Dresden and third in Malta, it's the rough order of magnitude. And we have growth opportunities from a production and capacity perspective in all 3 regions and plans to do that in all 3 regions. So really doubling down on where we are and increasing our scale where we are is going to be the path forward here. And we won't get ahead of demand. We'll continue to execute, work our opportunity pipeline, win designs, qualify customers into production readiness. And as that demand firms up, we'll continue to add capacity. So that we're able to effectively serve the market.

And I think part of the -- thanks for the -- giving us a rough qualitative sense on the diversification. I think the strategy by the GlobalFoundries team also is you have such a plethora of different technologies, but I think the strategy has also been you want to be able to support at least 2 -- at least for a given technology, you want to be able to support it in at least 2 of your fabs, right? Has the team fully completed that initiative?

It's underway. And I'm glad to report significant progress made there, particularly in production readiness in both Singapore and Dresden and fungible cross-site qualifications and production in Singapore and Dresden. That is the next wave that will come to Malta is being exactly fungible and production-ready in Malta as well. So -- and that can just enhance the resilience for our customers of where we can serve their needs.

Can you just help us understand where the $700 million of CapEx that is being deployed this year, my sense is that it's not capacity expansion, right? The team continues to be extremely disciplined on capacity expansion, but you're still spending $700 million of CapEx. Maybe it's for the Malta 8 expansion, fab shell for your second fab program in Malta or maybe the upgrade of Burlington, but maybe any help that you can provide us on where the $700 million of CapEx is being deployed?

Sure. So a significant portion of that is really maintenance CapEx to keep the equipment up to date and maintained. We do have capability investments. You're right, Harlan. It's really not so much on large-scale capacity increase as we're roughly at 80% utilization. So we're okay from that perspective, but we do need to enhance our capabilities and the diversification of the Malta fab is one example of that. And some of the things we're doing in Burlington are also relevant, for example, with our GaN power initiatives in the Burlington fab as we're making good progress in that project as well.

Before I move on to the financial profile, anybody have any questions on products or manufacturing operations footprint? So let's talk about financials and capital deployment. Team has seen strong gross margin trajectory this year, right? You're entering this year 24% gross margins in Q1. You took up your utilizations to 80%. You've got a target to exit this year at 30% gross margin. So help us bridge the gross margin gap Q1 to Q4 of this year. And then what broad drivers do you expect to get gross margin percentage to your 40% long-term target over time?

Yes, Harlan, the company invested roughly $7 billion in its fabs over the past few years. And that gives us a very strong platform to now leverage as we move forward with a relatively lighter CapEx footprint. And so one aspect of that or one result of that is that we are starting to see the depreciation roll off from that large investment. In fact, the estimated depreciation delta in 2025 as compared to 2024 is around $250 million or roughly 15% of the 2024 depreciation number. Vast majority of that, call it, 90% is going to cost of goods sold. So as you think about that as a function of our gross profit margin, that's roughly 3 to 3.5 points of gross profit margin. The second item, as you indicated, is improving our utilization. And that's depending on the base case of continued growth in the year. But given that, as we can ramp utilization, the rough rule of thumb is every 5 points of improvement in utilization equates to approximately 200 basis points of gross margin improvement. That's the second item. Third, you have product mix as we're seeing strong growth in some of our markets that have higher than corporate average gross profit margin outcomes, CID in particular. And fourth is our ongoing work in the area of cost improvement, where we look at our input costs, our maintenance contracts, the cost of raw wafers. We have deployed our working capital to secure pricing on some of our raw wafer material over a longer-term period of time. And looking back in hindsight, look at that this was done ahead of the tariffs, that was probably a wise move. So that's really the primary components on the bridge. And really, Harlan, it's those factors that will also work for us in the future as we work our way up to 40% gross profit margin in our long-term model.

Yes. And the interesting dynamic about all of that is you didn't bring up pricing, right? And so it's interesting for a lot of your customers, right, the partial offset to gross margin improvements is normalization of pricing within the industry, right? You didn't mention pricing. And post the last earnings call, a lot of investors did get a little bit concerned about the team's view of 5% -- mid-single digits type pricing declines this year. But my sense is that it's not, if I look -- your technology portfolio is so broad, right? And so it's probably more a function of mix that your pricing is going down mid-single digits on a like-for-like basis, my sense is that you're still holding it relatively stable. Is that kind of the right way to think about it?

That is. That is, Harlan. That is the right way to think about it. And you've got -- different products can require different layers of masks to produce them. And when you have a higher mask count, you're going to have inherently a higher cost and a higher price. So that can create some diversity and divergence on the pricing. So simply looking at average selling price is not necessarily a good indicator on gross margin. I'll encourage you to measure us on the gross margin. It's up to us. That's the driver, and we're working hard to do that.

Strong free cash flow generation in 2024, $1.1 billion. You're targeting $1 billion or greater free cash flow this year. How should we think about your free cash flow margin trajectory beyond this year, right? As you drive towards that 40% gross margin target, how do we think about the free cash flow potential for the team?

Yes. Looking at this dimension as well, Harlan, I would point to the strong level of investment that we have -- we find ourselves with and the ability to leverage that for future growth. So simply put, we see the opportunity to continue to grow free cash flow margin over the years here as we move forward with continued growth on the top line. And I am encouraged by the -- what we did in 2024 and see the opportunity to have a strong cash flow year again in 2025.

Oftentimes, we get a little bit of pushback from investors from the perspective of at the time that we took you guys public, the thesis was GlobalFoundries was going to be the U.S. leader in specialty technology and mature technology, growing their book of business with companies that want secure supply in the U.S. But over that period of time, right, we've seen some of your international competitors, whether that's TSMC, whether that's Samsung, whether that's UMC, actually bring their manufacturing capabilities to the U.S., right? But the interesting thing is over that period of time, your design win pipeline, again, like again, from the time that we took you public till now, 90% of your design wins are still sole source. So is it still that technology differentiation that is creating this stickiness in the business?

Yes. In a nutshell, it definitely is. And I would also point out that clearly, I understand other companies, peer companies are also going to want to look to diversify their global footprint. We've been at this for a while, and it does take a while. We are 15 years in the making of having the footprint that we have, and we leverage that as well to maintain that design win pipeline. But the first thing you pointed to is very relevant. It really is the specialty and technology differentiation angle that is a major differentiator for us.

As we close here, you've hit on several of the key factors influencing the growth opportunities for the team, particularly in the face of some of the near-term headwinds we have and are seeing across the industry. Against that backdrop, I mean, are there any other remarks that you'd like to leave us with today?

Just really appreciate your time and support, and thank you all for attending. I think GlobalFoundries represents a unique opportunity in the world for our industry with our global footprint and our differentiated technology. Thank you for your time.

Yes. Thanks, John. I look forward to monitoring the progress of the team this year.

Thank you.