GLOBALFOUNDRIES Inc. ($GFS)

All right. Good morning, everyone. Thanks for joining. I'm Krish Sankar with T.D. Cowen. I'm the analyst covering GLOBALFOUNDRIES. Very fortunate to have Sam Franklin, the CFO of Global. We also have Sean from the IR team over there. Sam, thank you very much for your time. Really appreciate it. And I do have a bunch of questions, so I'm just going to go over it, but I do want to say congratulations. Ever since you took over, the stock has been on a tear. And a few weeks ago, you had like a very interesting Analyst Day where you spoke about long-term targets. Now clearly, I want to get to the exciting silicon photonics part of it, but I just want to start from the gross margin front. You laid out some pretty compelling gross margin targets getting to like 40% in a couple of years, 45% by 2030. What are the barriers to get there? Like is there anything we need to worry from a supply chain standpoint or in levers that need to be pulled -- or is it, do you think, more driven by demand and you have a clear path to a 40-plus percent gross margin?

Well, Kris, it's great to see you. Thanks for having us here today. Look, as we think about the gross margin trajectory and the profitability capability of GF over the next, call it, 5 years, we actually split our thesis into kind of 2 time horizons. And really, the first of those time horizons is exiting 2028 where we're targeting to be a 3% gross margin business. And then longer term, our target is to get to 45% based on the business model and the investments we have today and really a function of investments we've made over the last couple of years. Strong customer design win momentum, which creates that foundation for future expectations on not just margin but also wafer revenue as well. And then really, it's enhancing our service capability to customers. So we said, if I bridge the audience here, we said that we expect to exit 2026 about a 30% gross margin. So if you think about that sort of 10-point walk to that first time horizon I outlined, there's really kind of 4 key dynamics that we think about there. The first is mix right? We've been actively remixing our business for several years now. Mix matters in a business like ours just in the same way that fixed cost of matters as well, but we're starting to see that momentum pull through now in terms of the revenue trajectory we're having within certain end markets, communications infrastructure and data center is a great example of that. We grew a little under 30% last year, first quarter this year, about 32%. Our expectation for the full year is high 30s percent. -- that pulls through at a meaningful margin contribution as we think about the overall corporate target. So I would say that concept of mix really mattering, that drives probably 5 points of margin over the next few years. And I only touched on comes in for a data center, but automotive and a critical growth engine has been for many years now. Again, we're continuing to diversify our revenue within automotive, falls through at an attractive gross margin structure as well. And IoT, we're in the relatively early stages of new ramps for new opportunities there. So Think of that as a strong driver from a margin perspective. The second piece is really a function of some of the investment decisions we've made over the last year as it relates to our offerings to customers. And in particular, our technology service offerings. That has historically been referred to as non-wafer revenue. As we've made decisions to acquire more of a risk 5 capability, we completed the acquisition of MIPS in the second half of last year. we're shortly going to be completing the acquisition of the Synopsys archive P business as well. We're building a strong risk capability. That creates an additional revenue opportunity both short term and long short term, it's really centered around the IP licensing software revenue. It's partnering with customers earlier to design risk 5 solutions. Longer term, that drives custom silicon opportunities as well. So historically, that has been in the neighborhood of, call it, 8% to 10% of revenue, roughly 10% at the midpoint. First quarter this year is upwards of 13%. We expect longer term, it's in that sort of 12% to 14%. That falls through at an attractive gross margin as well. So think of that as a couple of points of margin. And then you get into the very core of our business, which is as a manufacturer and really kind of driving efficiencies from a manufacturing point of view, cost and productivity rate we've been investing heavily in digital manufacturing AI capabilities for manufacturing, making sure you can drive more productivity within your existing tool set really matters. And then the fourth piece is scale. We operate at the highest end of the fixed cost scale of our business and our industry more broadly. Getting that scale efficiency within your footprint matters. Again, we've been investing in technology diversification to fill our 4 walls. So long answer for you, but I wanted to give you the full puts and takes over that near-term horizon. Then when we go to the long-term horizon, it's advanced packaging, it's custom second, the ramp of co-packaged optics. That's how we think about incremental margin for through long term.

Maybe 1 question on capacity before you go into the technology side of things. I think your CapEx is around $1.3 billion, $1.4 billion this year. If I do the math, I come up with like $600 million to $700 million is maintenance CapEx. So your CapEx is almost double. Is that mainly because of silicon photonics you're investing in? Or are there other things that's driving this CapEx growth this year?

It's actually a few technologies and several technology corridors where we see strong demand pull silicon photonics clearly being 1 of them. But maybe just taking a little bit of a step back, I provided guidance at the start of this year that our expected CapEx to be in the range of 15% to 20% net CapEx that is, that is a step up from the last couple of years where we've been in the 7% to 10% range, but it really plays to the core principles of why we deploy CapEx, why we invest in our capacity. And the first of those principles is demand visibility. We have been in the fortunate position of investing in some of these technologies for many, many years now. We're at this important intersection of where the investments in those technologies is also now being serving that demand we're seeing pull through. So demand is the core principle. Look, the second of those is how do we invest efficiently within our existing walls. We're doing that already today. We are one of the only foundries capable of really expanding within the 4 walls. We have built a model over the next 3 years, which is not reliant on a modular expansion so we can do that very efficiently from a CapEx point of view. And thirdly, is how we think about the funding arrangements, the government support, the customer partnerships as well. So you put all of that together, why has CapEx increase to sort of the 15% to 20% this year. It's because we're seeing the confluence of those core principles come together. From a technology point of view, yes, silicon photonics will be a beneficiary of a large amount of this year, but it's not the only technology corridor. We're seeing strong demand on our FDX solutions, which are applicable to all of the end markets that we serve, silicon germanium capability as well, which goes into the TAI drivers within the data center, again, strong pull-through on there. So that demand visibility while being able to grow very efficiently within our 4 walls, has been the key driver of year-over-year CapEx. And look, I will say that, that's still within the target, call it, net CapEx of 20% of revenue that we set up not just 5 years ago, but also reaffirmed as part of today a couple of weeks ago.

Got you. And on the last quarter, last earnings call, your comm infrastructure division where silicon photonics is a part of it. I think you raised the growth rate from 30% to mid-30s year-over-year. What is really driving that? And how to think about the data center power networking business, growth profile longer term?

Yes. Maybe just to unpack a little bit for the benefit of the audience, what comprises our communications infrastructure and data center revenue today. Within communications infrastructure, there's traditional wired, wireless infrastructure, but there's a growing component of that coming from satellite communications, so strong growth than that in 2025. And then as you rightly say that the balance of that is coming through from data center which comprises our technology solutions for both silicon photonics point of view as well as a silicon germanium point of view as well. So when you think about this over the next few years, call it, and the opportunities we see within data center, yes, optical networking is going to be a key component of that. But power applications for data center as well as another opportunity where we're seeing good customer traction as well. Think about the optical connect side of the business, there's 2 layers to this. First is where we are today, which is really around the pluggable optical transits. We have a strong position in that and a growing customer base, particularly after we finished the acquisition of last year. We think that as we drive towards that $1 billion run rate exiting 2028, pluggable optics is a key component of that revenue growth. Longer term, we've set ourselves a target of driving $2 billion of silicon photonics revenue. And that second phase of growth is when you get through that inflection point of, call it, late 2028 into 2029 where we see the growth of co-packaged optics. We're encouraged by the progress we're already seeing there, and we've had some tapeouts even in the first quarter on CPI. So good momentum there, but think of it as those 2 time horizons. And then again, I mentioned data center power, as you think about the importance of efficient power conversion reduction of losses associated with power. We've been developing quite a strong GaN technology solution to support data center customers as well. So that's how we think about the data center power both on and BCD capability of which we have today.

Got you. On your CPO platform, the scale CPO platform, I think you've spoken about how you can do the pig, but you can also integrate with a third-party IC. Do they do EIC a single nanometer node. Is that a differentiator? Because I keep hearing sometimes TSM scoop is more you do the pick and the in the same foundry, but you're kind of agnostic to that. So you're willing to partner with third-party ecosystem. Is that part of the differentiation? Or how do think about your scale CP platform and it's differentiation from competition like Coop and Tower?

Sure. So look, we've been investing in photonics and CPO for the best part of a decade. This is not something that GF just decided it was going to do recently we've deployed upwards of $1 billion of R&D and CapEx dollars to really grow our silicon photonics capabilities. And so we feel that even with some of the recent announcements around scale, which is our silicon photonic packaged advanced light engine solution that this is a capability we've been building for years. What's really changed in the market over the last, call it, 2 years, is that we've moved from this notion of sort of if rather than when to when rather than if, as it relates to the migration to optics and specifically co-packaged optics for scale-up infrastructure within the data center. So we've been building this capability for years. You're right. We have an ecosystem solution. We have a very strong PICC offering today. We've been partnering with ecosystem partners like Corning, like Cenko. The fiber detach is going to be an important part of the design infrastructure. So yes, as we've said previously, we have the capability to manufacture an EIC within our technology nodes today to the extent that an EIC has been developed on a single-digit net then clearly, a consignment within our CPO solution would be how that would come together amongst those ecosystem partners. So look, I think the other dynamic, which has really changed even in the last couple of months, is the establishment of the OCI MSA principles. Just look at the founding members behind those OCI MSA principles, and you see a real strength in terms of the future of CPO and some of the key, I think, potential customers for GF as it relates to that. GF has built a solution, which exceeds the rigorous demand requirements for those OCI MSA principles. So we feel that we have a very strong technical solution to support that more broadly. And as I say, we're seeing that come through with customer momentum. We're working with several of those OCI MSA founding members. We had 2 tape-outs on our CPO solution in the first quarter. So the momentum is there. You touch briefly on competition. What I will say is that it's really only GF and TSMC that have fully fledged CPO solutions taping out in the market today. So we feel that we have quite a good position there to work with customers and longer-term expectations towards the end of the decade is that this becomes a $25 billion market opportunity from a module perspective. My punchline here is that there isn't going to be 1 winner as it relates to CPO. We think that we've not only built a technology solution, which is very well catered towards the market demands, but we've also been reasonable in terms of how we think about our growth assumptions there, driving towards that GBP 2 billion of revenue towards the end of the decade. So proof points to their technical solution is there and customer momentum is there.

Are you getting requests from customers to start doing single-digit nanometer logic dies or -- are you going to still stick with like the 12-nanometer boundary condition today.

The way we've thought about this in the past is what is the market that we're servicing, and what is the technical and feature requirement within that market. From a total SAM perspective, we think our SAM has the ability to sort of closely double towards the end of the decade into the 2030s, and that is on greater than 10-nanometer technologies. Why is that the case? Because you look at the use cases and the applications and the feature requirements that are pulling through in all the end markets we serve, and they are very well suited to GF's technology portfolio, take physical AI as an example. You're talking about highly bespoke and customizable devices that need to have the capability of sensing, thinking, acting, communicating or guess what all of those applications sit on GF's technology portfolio. What we've done over the course of the last couple of months, last couple of quarters is we've expanded that capability through the acquisition of MIPS. So now we've got the capabilities to support our customers at the design end of the ecosystem as well as supporting them through the custom silicon and manufacturing side of the business as well. So all set and done, we feel that with the relative CAGR of broader end market opportunities that we see across those end markets we serve. We have no strong needs to go and chase a single-digit nanometer solution. And that's really a function of those broader performance requirements across automotive, IoT, comms infrastructure, data center and even smart mobile as well.

And Sam, we touched upon this earlier on, the LEO, the space opportunity. Is most of the demand today coming from government/defense -- or is it actually coming from commercial. And how -- what percentage of revenue is that today?

So I think just an important point of clarification is that we actually categorize our aerospace and defense revenue within our end market. And then we have satellite communications that sits within our communications infrastructure and data center market. But it doesn't change the thrust of your question because the demand drivers have actually been very strong across both. If you think specifically around low earth orbit satellite launches, that plays very much into our satellite communications end market submarket, I should say. That was call it roughly a standing start of revenue in 2024 to $100 million of revenue in 2025. So we are supporting customers in that commercial satellite communications space. Really with 2 areas of content opportunity. One is the RF front end, of which if you were to do a comparison to, say, a smart mobile device, you take a base station in SATCOM, you're talking about 5x the amount of RF front-end content going into that. We also have our 22 FDX solution going into the beamforming applications as well. So we will -- and our expectation is that we will track pretty closely to how you see the broader growth opportunity from a lower orbit satellite perspective. We're working with a number of customers in that respect. From an aerospace and defense point of view, as I say, within IoT, but the advantage here is that we're a trusted foundry. We have good relationship with DoD. We've been supporting aerospace and defense applications for a number of years. Some of those applications reached end of life towards the end of 2025, but they tend to be long-dated durable applications. What was encouraging for us in the first quarter is that we did a little over $200 million of revenue and technology services, where you saw a healthier pull of mask and reticle-related revenue associated with A&D applications. So when you think about that mask and radical tape-related revenue, a good leading indicator of the expectations for the future wafer reduction revenue as well. And again, this plays very sweetly into our technology portfolio. the importance of secure edge AI capability is very well serviced by our FDX technologies solutions. So again, we feel that we've got a strong match between the market demand that you see and the technology solutions. And aerospace and defense clearly is coming more under the spotlight as it relates to both international and domestic agendas to build out that capability.

So we went from silicon photonics to space, aerospace, defense and talking about national agenda. I think the next question actually is on quantum. And congrats last week is a the $325 million chips. The R&D grant, it looks like the government is seeing a 1% equity stake. So it's very exciting. So I'm kind of curious like what does it symbolized from GLOBALFOUNDRIES importance both in the quantum ecosystem as well as from a national asset standpoint.

Absolutely. And look, I think it's another strong endorsement as you say, of the role that GF plays not just within the broader semiconductor ecosystem, but also the capability requirements that the growth and acceleration of quantum compute will require. Again, we have not just woken up and started investing in quantum compute. We've had strong relationships with key players within the quantum compute space for several years now. The real way we think about our platform offering is a modality agnostic technology platform. Why? Because we want to be the quantum foundry of choice to support all customers based on the modalities that they're developing at the moment. We think our FDX capability really services the cryogenic requirements that Quantum will need, but at the same time, we're going to look to harness our capabilities in advanced packaging, design enablement through quantum PDKs, really to offer this complete quantum hardware solution. So you see that come through in some of those partnership announcements that we announced last week as well as the likes of Si Quantum and Quantum Motion, Quantinium, like we are an important foundry of choice from quantum perspective. Now that because I think it was partly in recognition of that role we've been playing that led to the $375 million grant that was announced last week. This is going to be a really important grant to accelerate the objectives that the U.S. government's laid out, not just in terms of quantum technology capability, but also quantum technology capability in the United States. And GF is very well placed to be the provider of that. So we're going to be accelerating our investments from an R&D point of view, from a CapEx point of view. And that will largely come through as a direct offset to that GBP 375 million grant that was announced last week. As you rightly said, the 1% equity stake at the government -- approximately 1% equity stake that the government is going to be taking from our perspective is a strong validation of the role that GF plays in this. It's, I think, a strong endorsement of the view that the government has around GF and more importantly, it offers the government an opportunity to participate in strategic value creation that we believe GF will not only create through quantum, but through the other initiatives we are working on.

Are there any covenants on the equity stake, like no buybacks, any such thing? Or is it basically like it's all about technology, so it doesn't matter?

It is principally about technology. I think the thrust of your question is somewhat linked to the legacy framework prior chips applications. The expectation is that we don't have those types of restrictions. It's viewed very differently. It's viewed as a separate equity arrangement from the grant funding. .

Are interesting. Another 1 I also want to touch upon, historically, Global was always U.S. like more mobile-centric company, but it seems like when I look at your long-term forecast mobile is going to get smaller and smaller as a percentage of revenue. Is that by design? Or is it more a function that the other aspects of your business are going to grow faster? And then just on a shorter-term basis, how to think about all the smartphone units getting still downtick because of memory capacity issues? And does it have any near-term implications on your business?

Sure. Maybe starting with the longer-term lens here. Look, I think 1 of the messages that really resonated with our investors and the sell-side community at our Investor Day is that we've built a plan over the next 5 years, which is not premised on growth within smart mobile devices. Now that doesn't detract from the importance of smart mobile devices as a component of our overall revenue, but it's the investments we've made over the last few years and the customer momentum that we're seeing across the other end markets. And frankly, the strong demand cases within those end markets, which is causing, call it, a relative flat versus others growing across those end markets. Now what I will say is that there's also form factor evolution that we expect to come through from a smart mobile perspective. And that form factor evolution will take a few years to come through, but we're seeing design win momentum now come through in hearables and wearables and smart glass applications. short-term low volumes. But I think what's an important read across as you think about our historic smart mobile business, is that you still need the RF capability, the Bluetooth connectivity, the power management capability within those devices, all of which plays very well to the same technologies you have in a handset today. Now as I said, that plan of roughly flat with others growing from an end market point of view over the cycle, we're already seeing that relative compare come through today. As a percentage of revenue, our smart mobile devices were about 34% in the first quarter. That's the lowest it's ever been in our company history. And it's really driven by the growth that we're seeing across the other end markets as we touched on earlier, full year this year, expectation for comps in for data centers high 30s. We've grown our automotive revenue over the last 5 years 14x, we're continuing to see the pull-through on IoT. So I paint that picture from a longer-term point of view because, as I say, I don't want to detract from the importance of mobile and the read across from a technology point of view. But where we've really remixed our businesses towards the fast growth end markets elsewhere. From a shorter-term point of view because you touched on that as well. Look, the expectations for this year from a market perspective in mobile sort of down 12% low double digits. We think we slightly outperformed that in 2026. And it's really a function of the divergence you're seeing right now between premium handsets in the mid- to low tier handsets, where actually, the consumer has remained pretty resilient in premium, notwithstanding the increase. I think they've shown to be pretty inelastic from a demand point of view. So call that with single digit growth for the year. The EM versus true on mid to low, which I think is reasonable to assume in the sort of 20% range. So you take our business, which is about 2/3 skewed towards the premium end of Smart mobile. That's why we sort of expect that we'll perform slightly better than that.

And the other thing on your Investor Day a few weeks ago is obviously you initiated a dividend, so congrats on that. So I just want to talk a little bit about what your capital return strategy is. And the reason I'm asking is because 1 of the pushbacks always get from investors is that overhang -- I shouldn't say overhang, but the high concentration of Mubadala ownership. So how to think about their ownership from a longer-term perspective? And does the dividend initiation change your view on holding the stock longer term?

Maybe if I begin with those sort of capital allocation principles and the framework, that we outlined at our Investor Day a couple of weeks ago. Look, we've been on a maturity path as a public company for the last 5 years since our through some relative headwinds from a consumer cyclical point of view during that time frame, we are emerging as a more profitable, more robust company. . You take our performance in the first quarter, 3% year-over-year revenue growth over 500 basis points of margin growth. So we are doing what we said we would do from a profitability point of view. We've also had healthy cash generation over the last few years as well. And it's really around that kind of maturity profile, resilience of our business, healthy continued free cash generation, which we're targeting in the neighborhood of 10% year-over-year through our cycle, that really led us to driving a more systematic rather than reactive framework for how we think about capital allocation. That capital allocation set of principles is really driven around first, making sure we're reinvesting in the business in margin-accretive corridors and technology services. Secondly, looking at opportunities from an inorganic perspective if it accelerates the strategy that we've put in place. And then thirdly, looking to be thoughtful around how we deploy some of that capital back to shareholders. We put in place the framework of looking to distribute about 50% of that free cash after investments back to shareholders. And part of that will be through the dividend that we announced as well. We've also taken some actions during the course of this year as well. We've actually had an approval from the Board at the start of the year to buy back about $500 million of shares. We bought back about $400 million of that. We feel that, that was a very good use of capital, particularly given the momentum that we've seen within the business. So -- all said and done, what you're seeing is really a more structured systematic capital allocation framework, which not only aligns with the maturity that we're seeing come through from a business point of view, but also the conviction we have in the strategy over the next 5 years. Maybe switching a little bit to the Movado question as well, and I'm sure some of those in the room will have seen that Movada did offer some shares to the market last night. Look, I'll say from a management review, we're very supportive of that. If you look over the last 5 years, there's really only been 3 monetization activities, 2 marketed follow-ons and 1 block last night. We have, as a company, I think, really been somewhat held back by the overhang that we've seen over the last few years. It's a very consistent theme that we've had from shareholders as well. I am fully supportive as is the rest of the management team around seeing more of this float come into our stock. And frankly, the relative appetite that we've seen, both in the marketed follow-on back in March as well as the activity last night, again, adds weight to the belief that there's strong appetite for GLOBALFOUNDRIES investment strategy over the years ahead. Now as it relates to Mubadala in terms of their view on GF, I actually think it's really encouraging what the Nevada team came out and said accompanying their announcement last night, strong conviction in the importance of GLOBALFOUNDRIES to their investment portfolio, the importance of GLOBALFOUNDRIES within the semiconductor ecosystem as well. And so our majority shareholder has been a very thoughtful and patient partner many, many years now. I expect them to be that in the years ahead as well. The benefit of having an investor profile and shareholder like Mubadala is that they are very disciplined and patient from an investment and a capital perspective. You could argue that there are some very different types of investor and shareholder profile out there. So look, I would say that this is a good thing from our perspective for the company. And I think we continue to have a very disciplined and patient majority shareholders.

SP1 Excellent. It's so great to hear. They'll be out of time. So Sam, thank you very much, as always, very insightful talking to you, and nice to see the stock and the company poviting to like higher growth markets.

Thanks, Krish. Really appreciate the support.

Thanks a lot, Sam.