GlobalFoundries Inc. (GFS) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets, and we're pleased to have GlobalFoundries with us today. We've got John Hollister, CFO; and Sam Franklin, SVP of Business Finance and Operations. Welcome, guys.

Thanks, John.

Thanks, John.

Thanks for having us out.

Obviously, the foundry landscape is something that is of great interest to a lot of investors these days. I think it's probably worth spending a few minutes just to understand how Global is positioned in that landscape versus TSMC, China, Samsung. Where are you positioned and how do you guys differentiate yourself?

Yes. Yes, John. So GlobalFoundries has a unique position in the semiconductor industry in the world. We are a top 5 foundry in the world, the only major foundry with the kind of geographical footprint that we have. But let's first talk about the technology. We made the decision a number of years ago to focus on the areas of core expertise in the company, really more around analog mixed-signal content in process technologies, ranging from 12-, 14-nanometer FinFET up to 180-nanometer and all points in between. And that really is at the core of our strategy is to apply our unique design capabilities to differentiate in those technologies. 130NSX is a great example. The 22FDX platform is another one where we have the benefits of very low-power operation, outstanding RF performance and high levels of CMOS integration. Silicon photonics is another area. That's in 45-nanometer technology and also in 180-nanometer technology. So that kind of starts -- our strategy begins with that. We will focus on those areas of differentiating technologies where we operate. Then you can come to the footprint, where we have three 300-millimeter fabs in Singapore, in Dresden, Germany, and in upstate New York in Malta. We have recently announced a China-for-China strategy. We may get into that. But that's not an organic foundry operation. We will partner with a supplier partner to serve that market. In terms of our organic footprint, it is in those 3 regions and we are quite unique in having that footprint. And then finally, John, we've got the end market coverage that we enjoy where we have a robust position in smart mobile devices that comprises about 40% of our revenue mix. And also, we have a very strong growing automotive franchise. We have a strong IoT business built around a lot of the technology differentiation I was mentioning, and then finally, the comms infrastructure and data center end market where we have some really exciting, fast-growing product line activity happening in silicon photonics and in satellite communications. So it's really -- think about these 3 elements of what we're doing, the technology, the footprint and attractive end markets with growth opportunity that can take us into the double digits in terms of top line CAGR over a multiyear period of time.

Great. I know cross-fab fungibility is something that you guys are investing in. Maybe just talk about the importance of cross-fab fungibility and how far are you in achieving cross-fab fungibility. What percentage of your capacity today is supported by that?

Sure. So this really began first in us supplying fungibility between the Singapore and Germany 300-millimeter fab locations. We've now expanded that to begin that same initiative in Malta with our 22-, 28- and 40-nanometer technologies becoming qualified in Malta, and that is going to add greatly to the technology diversity of what we offer in Malta, which began life as a 12-, 14-nanometer FinFET corridor. So this is really exciting. It allows customers to qualify multiple sources of GF foundry capacity. That allows them to optimize their own capacity needs within our footprint and allows us to do the same thing. So this can allow us all to grow more effectively and efficiently and provide diversity for our customers in terms of where they're sourcing even within our own footprint.

Great, great. If we think about just the geopolitical tensions right now, there's a lot of cross currents out there with just the tariffs and things like that. How are you reacting to this? And what are you doing in this environment to kind of best position Global?

Yes, it's an interesting time. There's definitely news around the geopolitical arena and the associated tariff policies that are coming out. And John, it's interesting. It really speaks right to the heart of what is special about our company, where we have a global operation, we have global capabilities but we are also localized in the major regions of the world. And that suits this current landscape quite well and we're seeing a lot of customer interest in what we're doing. Some of that's been more public recently from major companies who have either joined us in certain press or put out their own press. So it's important. Semiconductors are an essential component of national and economic security these days. And to the extent we can help facilitate that with our global footprint, it's playing into it as well.

Yes. And I think it very much ties to your last question as well, John, in terms of how we think about the fungibility across the footprint because never more so as we see today is surety of supply and the ability to ensure diversity of supply chain. And so really, as we think about how we invest in our technology corridors and create more of that fungibility, it's actually serving 2 purposes. It's helping us achieve mix and scale objectives within the foundry business, which clearly, given the fixed cost nature and the very high fixed cost nature of our business matters. And it's giving selection opportunities to our customers. So historically, we have, to John's point, some fungibility between Dresden and Singapore. We're now creating that fungibility between Malta and Dresden and Singapore. So it's almost never been more important as it is right now to our customers in terms of shoring up that supply.

Great. Maybe just a follow-up to that. What sort of interest are you seeing in your U.S. manufacturing footprint, right? Obviously, there's been some concerns related to Section 232. More recently, administration came out and said that 100% tariffs on chips if it's not built in the U.S. How are you seeing that play out in terms of just interest and demand out there?

Yes, for sure. I mean, we are seeing lots of interest from customers, including existing customers and prospective customers and deepening their relationship with us, talking to us about this and seeing where we can go with that.

I would say also the other unique dynamic we're seeing now is greater silicon awareness through supply chains and ecosystems from customers that didn't necessarily have as much focus on who their foundry partners were in the past. And look, we've had a couple of announcements over the last week and particularly over the last 6 weeks where you've seen that evolution in the customer and the focus around surety of silicon supply. And that's applicable to all of the end markets that we serve. So I think in a world of greater decentralization, actually the relevance of GF and specifically, our diversified footprint is mattering more and more.

Great. I think you guys recently reported your Q2 results and provided your outlook. I'm just wondering if you could spend a minute and just talk about the key drivers in the quarter, what you're seeing right now.

Yes, definitely. We continue to see strength in the automotive end market that we're serving. We expect a growth opportunity in automotive in the mid-teens in 2025. Smart mobile had a strong Q2. We expect it to also have a strong third quarter. And that's more of a stable market, generally speaking, and for us as well. On the IoT front, we've seen some consumer patterns that may take some time to fully come through in the IoT space as well as relatively high inventory levels in that particular end market that continue to get worked down. And then finally, a really bright spot for us this year is in our comms infrastructure data center. We see very strong growth in silicon photonics as advanced data centers are increasingly needing optical communication to handle the large amounts of data that are being processed. And also in satellite, satellite communications, where we are working with the top providers of that globally both in the satellites themselves and, also interesting, in the user terminals that are in the receivers basically, and that represents a great opportunity for us. So in that particular market, John, we see a high teens percentage growth opportunity for 2025.

Yes. And I think notwithstanding some of the shorter-term dynamics that have been impacting the analog space of the broader semis market, what's very encouraging for us is the rate and pace of design win momentum that we're seeing across all of those end markets and, as importantly, all of those product platforms that serve those end markets. And so in the second quarter, we had close to 200 design wins, which was a new record for us on a quarterly basis. And really, the way we think about that is the lifeblood, the future growth of the business as we look at the long term. And it's encouraging in those battlegrounds within the end markets where we're really winning. On a nameplate growth CAGR perspective, take something like smart mobile maybe in the low single digits. But as we think about how we grow within smart mobile, it's capturing more content of high value within the handsets. And so that's really an opportunity for us to outgrow some of those nameplate CAGRs at an end market level. I think the same -- I won't repeat what John said on comms infra, but the same is certainly true on the automotive end market as well. It's been a very strong story for GlobalFoundries over multiple years now. If you go back to, call it, 2020, we had roughly $100 million of revenue in the automotive end market. Last year, that was about $1.2 billion of revenue. And to John's point, we expect kind of mid-teens growth this year. And really, what's exciting is that design win momentum is growing on additional platforms. So it's seeing our 22FDX platform gain real momentum in sensing, safety, ADAS applications. It's power management on our kind of 130 and ultimately, a 55BCD platform as well. So we're seeing strong growth from a design win point of view, which is a good lay-up for the long term.

That's great. John mentioned -- you mentioned earlier that you've got a China-for-China strategy. What is your China-for-China strategy? Can you just walk us through that?

Sure, yes. We will work with a local supplier who we've identified to be our partner on a specific opportunity or set of opportunities for the China market. We will be the front end. We will manage the technology transfer and operation and control the operation from the typical standard way that GF operates. And this is -- allows us to serve the local market similarly to how you see other regions of the world being served with a localized solution, leveraging a global platform. So we're encouraged by that. Looking forward to it. It's early days. We're just getting started with that and we'll look forward to adding to our growth opportunity by doing it.

Great. You had quantified kind of the impact of the tariff cost on your business at about $20 million. How are you mitigating these costs or are you going to be able to pass these costs through to your customers?

Yes. I mean, if you think about -- that's for the second half, so you think about that as less than 1% of our COGS. It's a fairly limited impact. We'll continue to look at the pricing opportunities that we have around that, John. And we'll look at ways to mitigate that through alternative sources of supply. One thing that we could do that's just pretty straightforward is working with the right officials to ensure that relevant semiconductor input materials are included on appropriate exemptions from some of those and that we've just kind of doing everything we can to help ensure that everyone is getting it right on understanding of the administrative aspects of that as well.

Great. Maybe we can talk about some of your key end segments in a little bit more detail. Comms and data center, obviously, has been a really strong driver for you guys. You kind of mentioned optical. Can you just talk about all the other drivers of that business right now? And like what percentage of that business is tied to AI infrastructure?

Definitely. So we did call this out on the earnings call. The silicon photonics opportunity this year will be approximately $200 million of top line. For SATCOM, that's around $100 million. So you can see between these 2 elements, it's near half of the CID total end market mix and growing, clearly the fastest-growing aspects of that. So that will continue to be the case over the next year plus. And on silicon photonics, what we're talking about right now is more the pluggables form factor where this is more rack-to-rack optical communication. In the future, we will also be seeing co-packaged optics in the more scale-up network topology, which would be within a rack, adding a lot of density to the optical communications that are happening there. So yes, this is a tremendous opportunity very much tied to AI in terms of allowing all the processing that's happening to be communicated in a way that is power efficient and effective for the amount of bandwidth that's needed.

What's the timing and when you're expecting to see kind of meaningful volumes on CPO? And are there margin and ASP implications for you?

Yes. I think the -- I would expect this to be accretive from a profitability perspective, John. And as far as the timing, different companies are looking at their solutions and determining what's the best way forward. I think this is really more of a 2027 and beyond story from a revenue perspective. And it's also worth mentioning or reminding that this does not displace pluggables. These architectures will coexist as the data centers continue to get built out.

Got it. Maybe a follow-up question for you, Sam. You talked about automotive growing 15%. Most of the semiconductor peers out there are really struggling with automotive. You're either seeing still some industry -- inventory digestion or maybe a more shallow recovery. Given the broader challenges out there, how are you guys able to buck these trends? It sounds like you're gaining some market share. Maybe talk about where are the areas that you're seeing the greatest amount of traction.

Absolutely. And look, if you were to rewind the clock 5 to 10 years, that's really where the beginning of our automotive opportunity began. These were multiyear design wins with some very core customers on core applications and platforms that have really contributed to that roughly 12x growth that we've seen over a 5-year period. I'd say it's fair to say over the last few years, in particular, that's been predominantly focused in the microcontroller space. We have a leading platform on 40-nanometer NVM automotive grade standard, and we work with some of the core players within the MCU ecosystem. What's really interesting for us, as I say, is the growth opportunities beyond just MCUs. Clearly, MCUs have a fundamental role to play within the automotive architecture on a go-forward basis. But it's power management, it's sensing and safety where we see a real growth opportunity there. And they are the design wins that we've sort of been gradually building momentum on over the course of the last couple of years and have really helped to diversify that revenue within the automotive end market for the years to come. So taking a bit of a step back, what's helping to drive that, it's a content story. You look at the silicon content within an automotive vehicle a few years ago, that was in the neighborhood of $500 a vehicle, that's grown to, call it, $750. It will be in the neighborhood of $1,000 next year, continuing to rise up to, call it, $1,500. So there is a real content growth offset, which is helping to combat some of those shorter-term SAAR dynamics, which I think others have spoken to. And GF has had a very strong position supporting those MCU platforms. But it's the growth and diversification that excites us as we look at it on a go-forward basis. And look, you've seen the growth that we've delivered over the last 5 years there. We think through the end of the decade, there's ample opportunity to continue doing that.

Great. Questions?

Just curious on, obviously, a big competitor, TSM. They are focused more on some of the mature nodes that you guys excel in. Any kind of risk like the way you guys think about maybe the strategy around risk connected with that in your area?

Sure. The question was on TSMC and how we think about risk relative to their position in the industry. Look, TSMC is a strong competitor, a very capable company. A lot of respect for them. This is a large market, and we have a unique advantage in terms of how we've been addressing our technology as well as our global footprint that give us advantages in that regard. So we will continue and we continue to invest as part of the mitigation as well. We need to continue to invest in R&D. And we need to continue to invest ultimately in our footprint as the demand picks up and our utilization levels continue to improve.

And I think just to build on that as well, looking at the overall foundry TAM today and specifically the SAM that we play in, we operate in, call it, $70 billion to $80 billion SAM today. And through the end of the decade, expectation is that, that grows north of $120 billion. So if you look at the proliferation of semiconductor content within those end markets that we're focused on and, in particular, some of those higher-growth applications as well particularly within auto, within comms infra, within silicon photonics, satellite communications, that's really the opportunity for us to continue growing, capturing some of that outsized CAGR as well. And the answer to your question is that with SAM growth of, call it, $70 billion to $80 billion to $120 billion, there's plenty of room for both participants to not only survive but thrive within this ecosystem as well. So TSMC is going to be just as important participant within the greater than 10-nanometer space as we are as well.

Smart mobile's kind of a saturated end market, a big percentage of your overall mix. What do you see as the growth drivers of that business going forward?

Yes. So I think it's 2 things. One is we have -- I think we are enjoying content diversification here as well. We have a very strong position in the RF front end. We're also in wireless transceivers. Increasingly here, we're seeing wins in haptics, in audio, in imaging with display and cameras. So that's a catalyst for us in smart mobile. And I think the industry response to your question is going to be more if there is an edge AI-driven major refresh cycle for smartphones that may happen, that would be very good for us. So it's really those 2 concepts. I think, John, to be fair, this end market is one that is more stable for us. And I think the exciting thing is the other 3 end markets are going to be really more where you're seeing the very strong growth and in all 3 of them: in automotive, in IoT, and in CID.

On margin expansion, what's the bridge to get you to 30% gross margins from 25% currently? What's the mix of kind of the depreciation roll-off versus utilization gains and mix?

Yes. Yes, all contributing. And it's really those factors where we will see -- we'll expect to see our product mix and end market mix providing some tailwind where we bring in higher-margin product sales. That's point number one. Point number two is looking at the utilization improving. We have a high fixed cost business so the factory utilization is a super important part of our gross margin outcome as we can absorb that cost over an ever greater number of units. We completed the first half in the low 80s, roughly, of utilization. So we have room to expand that within our current capacity footprint without having to expend a lot of CapEx to enable that. We've been -- along the same lines, we invested $7 billion in our fab capacity over the prior years and now have the ability to leverage that in more of a CapEx-light mode that we're in right now and drive gross margin expansion there as well. And then finally, we have a maniacal focus on our input costs and looking at what we can do in negotiations and sourcing and positioning ourselves for success in that regard.

Great. Just on CapEx, you're looking at a flat CapEx outlook this year. When we start to think about next year, what are the puts and takes that we should be thinking about your CapEx outlook next year?

I think the big picture answer to the question is, I would expect us to be in this mode for the next year or so. I think as we start to get into the tail end of 2026, we could start to see an uptick in CapEx. It depends on the exact corridors and how our utilizations are trending. But we will continue to be disciplined and mindful that we don't invest ahead of demand. And so the first thing we're looking for is the utilization to pick up. We can't wait too long. We need to start getting things in place to not be short. And so this just -- this has a lot of focus internally as we look at our demand signals. But short answer is we're going to follow the demand.

I was just going to build on that by saying one of the other ways to think about our CapEx and our capacity is really in the context of 2 time horizons as well. We have within our existing footprint today some very efficient opportunities to grow within the existing 4 walls. And as you can imagine from a D&A point of view, a margin point of view, building out your existing 4 walls is a lot less impactful than going down a greenfield development route. So whether that's building our Malta within the 4 walls, getting that to scale, which, by the way, is a long-term tailwind to margin as well, we have opportunities in Dresden as well with some unutilized BTF capacity before we move that out. And then we have opportunities in Singapore as well. So first and foremost, to John's point, get the utilization back up to where it should be in the context of the existing capacity; secondly, go and build out within the 4 walls that we have on the options today, one of those being supported by the CHIPS Act, that's 8.2 in Malta; and then thirdly is when we then go and look at really expanding the 4 walls, and to John's point, making sure that we've got the commensurate demand there to be able to support that.

Great. Thanks, guys. Looks like we're out of time. Thank you very much.

Okay, thank you. Very good.

Thanks.