GlobalFoundries Inc. (GFS) Earnings Call Transcript & Summary

Okay. Let's get started. Good afternoon, everybody. Welcome to the Goldman Sachs Communacopia Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome GlobalFoundries and CFO, John Hollister, at the stage today. Thank you, John.

It's great to be here. Appreciate it.

Thank you for being here. Maybe, John, I just want to start off and level set with a couple of higher-level questions about GlobalFoundries in your business. Company stands as the foundry providing specialized CMOS processes, focus on nodes sort of above 10 nanometers, with sites spanning U.S. Asia and Europe. At the highest level, tell us a little bit about some of the capabilities that you bring to the table, why customers come to you and why you win?

Yes, certainly. So Jim, I want to start out with an overview of our strategy. So really, we have 3 pillars to the strategy for GlobalFoundries. First, it starts with our differentiated technology. We have the ability with the analogic signal to, as you mentioned, pursue opportunities in the manufacturing space that's above 10 nanometers from 12 and 14-nanometer FinFET up to 180-nanometer and many points in between there. And within that, we can provide highly differentiated technology where we can address our customer needs. That takes me to the second pillar, which is that we have deep, strong, long-standing relationships with our customers. And part of our approach here is to really understand what the customer is trying to accomplish from a performance perspective, power and overall performance, and we can differentiate the technology to address what the customer is trying to accomplish. And this is clearly a virtuous cycle of understanding what they need and having the ability to differentiate in that regard. And because this is all we do, this is our complete corporate focus is on this segment of the semiconductor industry. And then finally, the third element of this or the third pillar is our unique geographical footprint. Our 300-millimeter fabs are located in Malta, New York, in Singapore and in Dresden, Germany. We have 200-millimeter fabs in Singapore and in Burlington, Vermont. As you can see, the fundamental footprint that we have is not in China or Taiwan, and that gives us a very compelling, unique geographical footprint in the world. And so by combining these 3 pillars and understanding the virtuous cycle between the 3 of them, this allows us to win business. And we see a lot of design win momentum in the company right now.

Very good. Maybe touching on the last piece of the geographical focus. There has been a new framework introduced by the administration tied to tariffs for semiconductors. Obviously, you have a U.S. presence. What's your understanding in terms of your presence in terms of your global shipments? And are they exempt from tariffs worldwide because you're positioned in Malta or maybe help clarify what your understanding of the current situation is?

Certainly, Jim. So there are a lot of details here yet to come out and yet to be determined. My understanding is that the -- that concept is relevant and could be possible, that there may be an allowance or a credit or understanding that because we do have domestic manufacturing and the plan to expand our domestic manufacturing that, that may deliver some tariff benefits even to global footprint. But there's a lot to that, that is unknown, and we are awaiting more details as the industry watches what may happen in this regard. That's obviously tremendously potentially beneficial to the company and to the third pillar of the strategy. And because of that, we are seeing customer interest coming in, in working with GlobalFoundries more as this concept is emerging.

Yes. And then from a strategy perspective, where are you as a management team most concentrated today or focused on? What are the -- what would you say are the one or two most critical objectives you feel like you really need to execute on over the next 6 to 12 months?

Yes. The core of what will make us continue to be successful over the long term here is to keep our opportunity pipeline full, keep winning new designs, gaining more mind share and market share with our customers across our 4 end markets. And we see a lot of opportunities to do that. If I take them in turn on the smart mobile devices end market, which is our largest end market today, that's about 40% of our revenue mix. We have a really strong position in the RF front ends for smartphones. We're a leader there. We also have additional opportunities in wireless transceivers, audio, haptics, display, imaging we are doing a lot of work to diversify the application footprint we have even within the smart mobile device landscape. We also have new initiatives in areas like smart glasses that are part of smart mobile devices to expand and diversify even more within that end market. On the automotive side, we've had a tremendous run of market share gain in automotive. Our 40-nanometer platform is a leader in the industry. and has allowed us to grow this business from roughly $100 million several years ago to more than $1 billion last year, and we expect mid-single digit or mid-teens growth were for automotive this year in fiscal '25, with, again, growing diversity in the technologies that are being deployed. Our 22FDX platform is becoming a highly sought-after solution for RADAR, for ADAS applications. We also see power delivery over time here as well. And then on IoT with our 22FDX and even 12-nanometer footprint, we see RF, low-power, ultra-low leakage. Again, these differentiated technology features that make our products attractive for our customers and what they're trying to accomplish. And then finally, on the comms infrastructure and data center end market, we see a lot of growth ahead in areas like silicon photonics and satellite communications where we're seeing some of the strongest growth in the company right now, fiscal '25, are in those 2 domains. So there's a lot to be excited about in GlobalFoundries. We'll see how the market develops over the next 12 months as far as demand recovery and overall economic conditions. But fundamentally, we have a good strategy, highly differentiated footprint and see a good traction in our end markets.

Very good. You've talked a little bit about what you call your China-for-China strategy. Can you maybe walk through what that opportunity is? Why is now the time to kind of capture it? And what end markets are you prioritizing when it comes to China?

Yes, Jim. So we've seen an opportunity to expand our business in China, particularly in the automotive space, where sourcing locally is an important strategic objective for some of the customers in China. And we have an opportunity to partner with the supplier in China who will work within our framework and deliver the technology that is not available in China to the domestic market in China. This is not a joint venture. This is a supplier relationship, not unlike what we do in the back end, sometimes when we work with the outsourced assembly and test houses. So very excited about it. It will be controlled by GlobalFoundries and staffed at the management level by GlobalFoundries as well. So we see this as a good opportunity to expand our business in China. And I think the market opportunity is related to the strength that some of the Chinese automotive OEMs are showing out of the market globally.

Got it. Have you identified those partners?

At this point, no, we haven't.

Yes. Okay. In terms of capital allocation, you made a rather interesting move recently with the acquisition of MIPS. Can you maybe contextualize what that deal is about? What's the objective in terms of new sources of revenue, what it means strategically for your products? And what does it mean for your customer relationships in MCU and IoT over time?

Definitely, Jim. So yes, MIPS has been a leader in RISC-V technology for many years. We saw an opportunity here to combine forces and both continue the good work that they've done on a stand-alone basis to deliver RISC-V technology from a licensing perspective. We will continue to develop IP in that regard and continue that business as it has been operating. In addition to that, we see really the longer-term strategic objective here is to combine RISC-V technology with our wafer fabrication capabilities and offer again under the first pillar of our strategy, even more technically differentiated solutions for our customers. The customer response has been quite strong and quite positive. And I think this will bode well for creating additional wafer cells by leveraging the RISC-V technology that MIPS has brought to us here.

Got it. And over what time do you expect that to be kind of meaningfully synergistic to you?

Yes. I think we expect to see revenue contribution from next year on the IP licensing front. And from a wafer sales perspective, it will take a few years to get that fully implemented. So you can think of that as a, call it, 3- to 5-year time horizon.

Maybe switching to the gear CRM markets for a minute. Maybe just kind of give us a sense about coming out of your last earnings call, a bit of an update on the animal market momentum you're seeing across the different markets that you serve and what you're seeing into the next quarter and through the end of the year?

Yes. So we see, again, the opportunity with both the automotive end market and the comms infrastructure data center end market to see mid-teens to high teens growth on CID for the IoT and smart mobile devices market, those are more flattish, down slightly for the year. We have seen some impact on consumer sentiment, with the tariff and some of the some of the forces that are at work and we'll see how the recovery goes. I think on the inventory front, we're seeing signs of improving inventory at customers, particularly IoT customers, and we'll look forward to that leading into hopefully a stronger demand pull in 2026 as we can get closer to shipping to end demand as the inventory could continue to normalize.

Got it. And as you mentioned, 40% of your business roughly tied to smart mobile devices, the end market demand from a year perspective, seems to be doing relatively well. From a demand standpoint, maybe share with you your perspective between what you just said and what we see in the end market in terms of what is happening from a customer inventory perspective? Was there any pull forward impact from tariffs from a consumer sell-through perspective and when do we think the kind of the inventory situation in or might be across the industry?

We did see some inventory increase at certain smart mobile device customers midyear, although we ourselves did not see any particular pull forward on our particular wafer shipments, but we did observe some increases in inventory for certain customers.

Got it. Okay. then related to smart mobile devices, so staying on that for a second. You communicated a negotiated agreement with a few of your key customers on that market for lower wafer prices in exchange for capturing a bigger part of their business over the longer term. That's impacting your revenue and outlook in the near term. But can you maybe quantify for us the level of price concession you made to those customers and give us a sense for how much more share you can get with them now they've committed to GlobalFoundries?

Yes. We saw an opportunity this year to work with one of our larger smartphone customers to offer some price concession in exchange for a meaningful uptick in their share of wallet committed to us. And that's over a multiyear period of time. It's a win for GlobalFoundries. That brings in more top line, more fixed cost absorption in our manufacturing and something that we undertook this year. So yes, I see there's a positive.

Okay. Yes. And when do you see that being a deal being kind of net revenue accretive for you?

Yes, it will kick in next year.

Got it. So you'll get that crossover of like volume increases up overshadowing the price declines?

Yes.

Okay. Great. In recent quarters, you gave a little bit of color on your revenue contribution from SATCOM and silicon photonics to -- as part of your comm infrastructure and data center segment. Maybe kind of let us know what opportunity you see for GlobalFoundries over the shorter and longer term? And where specifically you're winning with those particular solutions?

Sure. So let me take them one by one. So for silicon photonics, we're seeing that business near double this year and estimate it to be roughly $200 million in top line for 2025. We're seeing a lot of success in the pluggables space and believe that will be true as we head into next year as well. Over time, we see an even larger opportunity in co-package optics as data center operators will seek to add even more density up and down racks within the scale-up architectures that they're developing. This will take some more time roughly 2027 and beyond for the CPO to come to full fruition. We see this as a tremendous opportunity over time for GlobalFoundries and speaks to our -- both our history in silicon photonics as well as our analog mixed signal differentiation again, back to that point. So very bullish about this opportunity over time. In the satellite communications realm, this is part of our RF product family. We have very much differentiated technology in RF for this application and see success with multiple satellite operators, both in the satellites themselves and in the user terminals, which would now be -- and over the next wave of growth as satellites are deployed, receivers are needed on the ground to receive those signals, and that's where you're seeing more opportunities with multiple chips per receiver, for example, in those applications. So yes, we see both of these trends is very favorable for our CID business going forward.

Interesting. I mean, if we look 5 years out, how big could they be within that segment or just as an overall number?

Yes. I mean I think this has an opportunity to continue to grow at a very high rate. And so as we're talking about this now approaching half of our CID end market, which is roughly $700 million in that neighborhood at least can see this growing to multiple hundreds of millions of dollars, if not approaching $1 billion over time. So this is a very exciting business for us and allows us the ability to expand our margins and leverage our manufacturing footprint.

Fair enough. Maybe I want to touch on this idea of long-term supply agreements that you have with some of your customers. Clearly, the importance here and the nature of them is slightly different than it was during the pandemic. But as we go forward, you maybe think about on the go-forward piece, what purpose of the agreement serve? What kind of customers actually find the most attractive? And what portion of your revenue do you think steady state is going to be covered by that long term?

Yes. So we had an interesting time in the industry a few years ago where capacity was short, the need to expand capacity was very strong and the strategic relevance of semiconductor manufacturing became, I would say, more clearer to global operators around. And so this led to requests really from customers to enter into long-term supply agreements and capacity commitments, and that led to some of these agreements that became reinforcing where customers were requesting capacity commitment and we, in turn, requested commitments on volume to support that capacity commitment. I think that's probably something that you will continue to see, particularly in areas that are longer life cycle in terms of the product life cycle itself. You can think of automotive, aerospace and defense being some clear examples that. I think in some of the more faster-moving consumer markets, we may see less of this going forward, but we'll have to see how it plays out as the industry can recover, and we can come off of this downturn and the need to add capacity may again emerge perhaps sooner than later, this could lead to some of these conversations renewing on capacity commitments being exchanged for volume commitments. But we learn along the way. It may not look precisely the same as it did a few years ago. But I think the net effect of that has been very positive for the company to plan its capital execution. And also at a time when we saw demand suppressed more, we had the ability to soften the impact of that. on the company's financial execution by having those agreements. And so I think this will continue to be a part of our story, but the exact fine-tuning of it, let us get down the road a little bit and see how that develops.

And what kind of end markets or what products or end markets those customers find most interesting?

Yes. I would say for the automotive industry and the aerospace and defense industry is likely where you're going to see the most interest in that.

Okay. Maybe just kind of pivoting to some of the financial questions for a second. We touched on it a bit earlier, but can you maybe share with us your view on sort of longer-term pricing trends, setting aside the concessions you made for those 2 larger customers? When you think about the trajectory of pricing off a lower base this year, is there kind of some more stability? Or do you expect, given your kind of 90% sole-sourced position on most of your design wins or still pressure from a broader market perspective, a competitive perspective over the next several quarters?

There's always pressure, Jim. It's -- we have a lot of factors that add to our overall price stability. Overall, our like-for-like pricing is quite stable. I expect that to continue to be the case. And the industry has -- as we've seen the progression into Moore's Law begin to slow down across a broader application set, the industry is kind of institutionally becoming more stable from a pricing perspective as there's less of the migration taking place. So overall, I see stable pricing environment and when you look at the strategic advantages that we talked about at the beginning of the conversation, that adds more to that. So you're right, our general design win sole-source statistic is running at about 90%. You've got about 2/3 of the business running in a sole-source mode. So that's also conducive to price stability.

Surprisingly, one thing that investors ask me a lot about is your non-wafer revenue sometimes. Just kind of give us a little bit of a sense about just remind us what is in that bucket of revenue, and the key drivers? And longer term is about 10% sort of the right level to think about for that non-wafer revenue?

Sure. So 10% is the right general average to think about. It can float up and down at times. But what is inside that category is tape out revenue, revenue from new tapeouts. We also have engineering service charges that show up in that category, IP and licensing to the extent that we do that, it will show up in that category. And if you think about the first 2 elements that I discussed, you can think about that as a leading indicator of customer activity. in wafer cells by seeing more tape-out activity, more engineering services being provided. That's showing a positive momentum on customer traction, which leads to more design wins, which leads to more revenue.

On the gross margin front, sort of heading into next year, where do you sort of see the points of leverage being for the company to sort of expand profitability? And is the long-term objective still at kind of 40% target?

It is. And what we see driving that are several factors. Our capital discipline has been strong over the past couple of years. We've been running at about 10% of revenue in terms of our new CapEx. We've been leveraging the installed base of capital in the company and driving that forward. We also see the opportunity to expand production utilization and drive fixed cost absorption stronger going forward as the volumes pick up. Third is product mix. We see the opportunity for the mix of product and the mix of end market contributions to be favorable. We're constantly working on cost and looking at all factors of cost and what we can do to optimize that. And finally, you mentioned non-wafer revenue. We want to continue to push tapeout activity and serve our customers with what they need to be successful in their programs to drive incremental revenue and contributions as well. And finally, it won't be a huge factor, but the MIPS acquisition and the licensing and IP that's associated with that is incrementally positive as well.

Okay. OpEx, kind of as you think about getting to a better part of the cycle, what pace of OpEx growth do you expect to manage the business to? And when we think about the kind of the relative growth in R&D versus SG&A, can you give us a bit of a framework for what kind of operating lever do you might drive the model?

Yes, sure. So if we think about -- we have some interesting dynamics in year -- this year with sub tool sales, which are a credit to OpEx in the first half that were a bit higher and so -- and then the third quarter guide as being more of a normalized level of OpEx to expect for us going forward. The leverage points here are to continue to drive top line, drive gross margin expansion and grow our OpEx at a lesser rate than the revenue and gross profit margin, obviously. And where we would put incremental OpEx is more on the R&D side and go-to market, less on the G&A side, where we can look to new tools and think about digital capabilities to leverage our G&A spend overall. So it's really going to be primarily on the R&D side as well as our go-to-market spending.

Fair enough. And from a model perspective, I think your long-term model still calls for a 20% CapEx level technically. But obviously, you've been running below that. So how comfortable are you with running below that for longer? And is kind of 10% or 10% to 15% more of an accurate range over the next couple of years?

I think when you're looking at 2025, and I'll say most of 2026, that's right in the 10% to 15% range is a good way to think about it. And we'll have to see, Jim. As we see the production pick up, see demand, stabilize inventories continue to improve, and our factory utilization move up from the low 80s into the low 90s. This can then get us into probably more of an intensive CapEx cycle. But I think it can happen in a way that was progressive and we'll definitely -- that will happen in concert with improvements in the demand profile.

And from a D&A perspective, you've got that coming down roughly 15% in 2025. Is now kind of like exiting this year, the right baseline to think about in terms of D&A? And maybe go forward, what are some of the puts and takes any more kind of large pieces of D&A rolling off because of factory maturity or write-down or NPLs?

Sure. I think we're kind of getting to the asymptote at this point. I would expect another $5 million to $10 million improvement in D&A for third quarter and fourth quarter of this year. and roughly half that rate of improvement through the course of next year. The good news there is with recovery in demand and the top line growing, we're seeing D&A overall as a mix of revenue coming down as we can hold D&A stable. Obviously, CapEx out in the future could add some increases to it, but really kind of reaching a point of stabilization on D&A.

And on inventory, from a balance sheet perspective, your inventory levels have kind of like been this $1.7 billion mark or so over the last year or so. How do you think about that going forward? Is that something that actually stays constant or even could it go down as you sort of get to a better point in the cycle? And do you feel like you've got kind of broadly speaking, the right amount of product on hand even if we do some recovery?

Yes, I do. I do think we have the right amount of product on hand. We look at this carefully. I think we can see how things progress over the next 6 to 12 months. I think as we look further out into 2026, we could see that come down, see the days come down even if the absolute amount of inventory remains relatively constant. But we're pretty comfortable with where that stands.

Okay. One thing that I was going to touch on before, but I thought it was interesting to talk about here is just the chips Act. And maybe give us a bit of an update on sort of when you expect that to see a bigger benefit to GlobalFoundries, do you expect to still see a bigger financial step up in terms of the benefit to you? And any kind of changes that the administration or others have kind of communicated to you in terms of the complexion of that program?

Yes. No changes in the complexion of the program. We are receiving benefits from it at a modest level right now. Let me talk about it more broadly. Really, the framework overall calls for roughly $16 billion of investment in our factories in the United States. And that's across diversifying the multi-fab, expanding the multi-fab, doing incremental work on the Burlington fab, including some modernization work there as well as our advanced packaging initiatives that are happening in New York. So it's quite comprehensive. And the concept is that this would take place over a decade plus period of time. So it is more of a long-term framework. As I mentioned, we are beginning to see benefits of it in fiscal '25 here. We expect that to continue as we progress up the investment curve. So that's on the grant side. In addition, the investment tax credit has been expanded from 25% to 35%. So between these 2 elements of U.S. support, it's quite strong and even compared globally with what's out there. It's a robust support from the government and speaks to the U.S. government seeing semiconductor manufacturing as very important for strategic economic security, national security and the view that it is strategically important to have a robust, resilient supply chain here in the country for semiconductors, and we are a great part of that story.

And then maybe as we close out, 2 questions for you. One is, what do you think investors should really focus on in terms of the opportunity the investment case for GlobalFoundries over the next 3 to 5 years? What are the things that are both may be obvious to people that are people focused on already and things that people may be missing about the story going forward?

Yes. I think we have a tremendous opportunity in an $80 billion market that's growing to expand our market share. We offer compelling advantages in terms of our technology differentiation our relationships with our customers and our unique geographic footprint to drive that business forward. And as we progress, we have the ability to ramp our profits and earnings in a way that investors will find very compelling. We've been disciplined in our capital execution. We generated more than $1 billion of free cash flow last year, so the ability to do that this year. So strong profit and cash generator over time here with the growth in the industry and our ability to maintain a differentiated profile.

Great. Anything else that you think is important to get across?

I think we summarized it there.

Okay. Very good. John, thank you very much for being with us. We really appreciate it.

You bet, Jim. Thank you. Thanks, everybody.