All right, let's go ahead and get started. Good afternoon, and welcome to the first day of J.P. Morgan's 52nd Annual Technology, Media, and Communications Conference. 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 at GlobalFoundries, 3rd-largest semiconductor foundry in the world, leader in specialty, mature manufacturing technologies, targeted at segments like analog, power management, RF, wireless, wired networking connectivity, targeting the comm infrastructure, mobile, IoT, automotive, and industrial markets. Team reported solid results, constructive guidance in a tough macro demand environment just about a little bit over 2 weeks ago. So John, thanks for joining us today.
Thank you, Harlan. It's great to be here.
You know, you've been with GlobalFoundries now for about four months. You came to the team with a great track record, 20 years of both finance and operations expertise, Chief Financial Officer at Silicon Labs for over 10 years. Wanted to get your thoughts of what you've observed so far, right? The team, the execution, the growth opportunities in front of GlobalFoundries.
Yeah, Harlan, you bet. So I've been really struck by the quality of the team at GlobalFoundries. I mean, that's part of what attracted me to the opportunity in the first place. But it just really has been interesting to observe the culture that the company's created and how it really permeates throughout the organization of very hands-on problem-solving culture that's you know just also rooted in the deep experience of the folks that we have on board, and also from a diverse set of backgrounds, both in terms of corporate backgrounds as well as geographical perspective. So it's really been interesting to get to know the team, and it's been a real pleasure. I'm very excited about the growth opportunities ahead for the company.
If you look at our position in the smart mobile devices arena, what we're doing in automotive which has been a tremendous growth driver for the company the last couple of years, the opportunity we have in IoT, which is really remarkable over time here, and in comms, infrastructure and data center, where we've seen some amount of drop in the business, but I think we've reached a point of stability in the business and see growth ahead in the area of high-speed communications and power delivery. So very excited about the growth ahead, and, you know, look forward to continuing to progress here.
Perfect. Well, again, thanks for joining us today. The semiconductor industry downcycle started in second half of 2022. Total industry revenues were down about 8% last year. The good news is that your customers are pulling out of the current downcycle. Many of them saw their businesses bottoming second half of last year. More of them are seeing their businesses bottom first half of this year. Second half of this year is looking more constructive across the board, including for the GlobalFoundries team. Could you just share your thoughts on the current state of the industry and impacts on GlobalFoundries' recent earnings update?
Sure. Yeah, you know, we had a tremendous, you know, spike in business in 2021, 2022 time horizon, and that led to an accumulation of inventory actually, across end markets and customers. And then, of course, the, you know, the Fed hiked rates 10 x or so in a, you know, unprecedented move to try to curb inflation, and that's had some impact on the demand environment and has, you know, led to an accumulation of inventory out in the channel and at our customers, and that's led to, you know, business being down as throughout the industry.
I think the good news here is, we're starting to see rationalization between demand and inventory levels, and we're starting to see inventory come in. In smart mobile devices, for example, you know, we're seeing some pockets of improvement in inventory levels. It's been a bit slower than one might have anticipated and hoped for from the beginning of this year, but it is starting to happen. And we think that, the end market demand is stronger than...
Yeah
... what the shipments would indicate due to the inventory levels, and that's even more true in IoT, where we see significantly high levels of inventory. And again, companies are under shipping the end market..
Yeah
... demand as the inventory draws down. And the good news there is that the demand signal is actually stronger than what the underlying shipments would indicate as the inventory comes in. In the automotive space, you know, you've seen some inventory there as well, but the good news for GlobalFoundries is we have secular drivers in automotive that have kind of bucked the trend on that and allowed us to grow that business, even in light of a more challenging inventory environment. So that speaks to our market share gains, which speaks to our differentiation and the work that we've done over the past few years to gain design win momentum.
You know, the team has done a really good job of navigating through the current industry downturn, right? Your peak-to-trough revenue declines this downcycle, revenue-wise, was about 25%. Your mobile RF customers were down 35%-40% peak to trough. Your industrial customers, down about the same. IoT and comm infrastructure, data center customers, down about 50%-60%, right? Revenues, peak to trough. So when we think about the foundry industry, we always tend to think about the foundry being sort of at the back of the value chain, right? So, you know, it's the weakness tends to percolate sort of slowly all the way down and then slowly sort of all the way back. And your historically, foundry revenues tend to...
Be magnified in terms of peak to trough relative to your customers, but again, you guys have done significantly better relative to your customer base. So how has the team been able to better weather this down cycle significantly better than the shipment profile of your customers?
Yeah, I think it's two things I would point to. You know, one is, again, the secular growth in some of these end markets that have allowed us to power through the downturn dynamics, and I'm thinking of automotive in particular. I mean, if you really think about automotive, we did over $1 billion. In the automotive end market in 2023. We did around $300 million in 2022. So just as you, as you mentioned at the top, this downturn for the industry overall began in late 2022, and for the year of 2023, we added $700 million of new revenue in automotive.
Right.
So that's, an example. I think our, you know, our long-term agreement frameworks have also helped us in this regard by providing for more stability in the supply-demand equation, and also, you know, contractual terms that have allowed us to somewhat offset some of the capacity shortfalls that otherwise arose through the downturn cycle. And that's gonna remain an important part of how we operate moving forward in terms of having long-term agreements with customers. We, as of the end of 2023, we continue to have around $20 billion of lifetime revenue captured in our LTA frameworks, which will help us going forward. And as we, as we move ahead, we're entering into new long-term agreements with customers, as evidenced with a major, a major customer earlier this year.
You know, with the - on that note, with the long-term agreements or LTAs in place, it does seem like customers are more responsive, enabling you guys to reallocate capacity and wafer starts more efficiently, which was key to effectively, as you mentioned, managing your business during this downturn. Now, as the business improves, LTAs provide your customers in key end markets like auto, industrial, aerospace, and defense with confidence on assurance of supply, especially as 90% of your design wins continue to be sole- source business, right? And this was the rationale, I believe, for the LTA extension agreement you signed, for example, with the Infineon team right at the beginning of this year, primarily to support their leadership and growth outlook in the auto semiconductor market.
On the flip side, you did have one of your RF smartphone customers terminate their LTA agreement with you at the end of last year. They're still a very strong customer for you. So is the team seeing a more, call it, diversified profile of business engagements now, more balanced between LTA commitments and sort of normal sort of book and ship type arrangements?
Yeah, somewhat, Harlan. That, that's a fair assessment, and I think you have it right on the fundamental drivers of the LTA framework. You know, it's really about providing surety to both ourselves and our customers around the supply-demand equation, and that, you know, when we're investing in capacity, we're getting support for that f rom our customer base, and that likewise, when they're entering into long-term arrangements with us, they have confidence that our supply will be there for them. And, you know, during the, you know, the shortages that we saw a couple of years ago, it really spoke to how important that is.
If you think about automotive customers unable to ship a $70,000 vehicle because they can't get their hands on a $5 semiconductor, you know, this is very important that they have assurance of supply around that. You know, we're getting learning along the way. As we proceed through the course of time here, I think you'll see, LTAs not necessarily be as homogeneous...
Yes
... as they were before and oriented more around commitments that are more closely track the life cycle of the underlying products. And just as you say, just as a customer may decide to hold on an LTA, doesn't mean that the relationship is over. You know, we continue...
Right
... to have robust relationships with customers, even where they may have decided to exit the LTA framework altogether.
You know, we cover, I cover over 20 semiconductor companies, many of them who are your customers, and we always hear quite constructive things about the technology portfolio, right? Whether it's RF SOI, fully depleted SOI, your non-volatile microcontroller products, which is targeted for IoT, for automotive, for a number of different applications, and some new emerging technologies, like, for example, some of your silicon photonics work and compound semiconductor work that you guys are doing. It's always been, I think, the big differentiator as it relates to... And we haven't gotten an update on this recently, so I'd like to get your thoughts on it.
But I think if I rewind back 12, 18 months ago, I think the percentage of your shipments that were sole-sourced were in that sort of 2/3 % of your total shipments were sole- source business to GlobalFoundries, but your design win capture was more like 90% sole- source.
That's right.
Is that still the right metric?
Yes. Yeah, that's roughly right. Yes.
Okay. In terms of, your capacity ramp, Tom is on track to increase capacity to about 3 million annual wafers per year exiting this year. Assuming that the industry is back on a growth trajectory next year, driving mid-single- digits type of growth CAGR, mid to longer term, right? Walk us through the capacity expansion across your fab networks, timelines to get you to your targets, and has the recent end demand weakness, pushed out your CapEx or capacity expansion plans?
Yes, certainly. So that's right. So our, our current footprint is roughly 2.8 million wafers per year. As we exit this year, that will grow to roughly 3 million wafers per year. And if you think about our rough ASP, that's about $9 billion in wafer revenue potential. You add in the non-wafer revenue portion of our revenue mix, we're, you know, by the end of this year, we are built out to be roughly a $10 billion top-line company. So we've got, you know, ample capacity to grow into.
Yep.
As we can increase the utilization rates in production accordingly, that will strongly benefit our gross margin outcome as well as we move forward. Now, as we continue to grow the business, and we are strong believers in the growth of the industry, obviously, you know, we think that the forecasts of this becoming a trillion-dollar industry in the next decade or so is right. As that demand comes back, you know, there's gonna be the need for more capacity over time. The good news there is we've got the ability to grow our capacity throughout our jurisdictions of operation. In the United States, in Germany, in Singapore, potentially even in Crolles, in France.
And, you know, the thing to keep in mind is we will navigate that and build out that capacity expansion in line with demand. You know, we're not gonna get ahead of ourselves. We're gonna follow the demand signal, work with our customers, work with our government partners, to activate that capacity as it's needed over time. And again, the good news is the - a lot of the frameworks that are necessary for all of that to happen are already in place or well on their way to being finalized.
Actually, you brought up a good point, which is the geographical diversity, right, of your manufacturing footprints. If you take your 2.83 million total capacity exiting this year, how does that break out roughly by geography? Asia, Europe, and North America, roughly.
Yeah, it's roughly equivalent across our geographies.
Got it.
Yeah.
And then you did mention something. You know, you've got a strong government relations team, right? And we saw that the EU and French government recently approved the grant funding in relation to your partnership with STMicroelectronics in Crolles, right? And then when you couple that with the $1.5 billion of grant funding from the U.S. CHIPS Act, you know, how is the team gonna deploy these dollars, and roughly over a sort of what period of time?
Yeah. We're really talking about a decade kind of time horizon, Harlan, as you look at the full activation of our capacity expansion opportunities. And, you know, precisely how we go about that, TBD, we'll have to, you know, monitor the demand signal and see exactly how that activates over time. But, you know, suffice to say, we have good opportunities to build our capacity as demand recovers.
The one question, it's sort of a more tactical question, but, and I might, and we might have talked about this before, but, you know, on the CHIPS Act dollars, right, Biden signed that into law, into a bill, I think it was middle of 2022, right? Obviously, dollars haven't even been appropriated yet, but you guys know at least what you're gonna get. But Biden signed it in middle of 2022. You guys obviously spent CapEx in 2023 and part of it in 2024, and some of it, I would assume, is on some of your U.S. manufacturing capabilities. So can some of the grant dollars be appropriated, like, right away?
Yeah. Not necessarily. I mean, the CHIPS framework that we have in place is really oriented around three programs. You've got what we refer to as 8.0 auto, which is diversifying the Malta fab and the capabilities that we have there beyond FinFET technology...
Okay
... into 22 nanometer, 28, 40, 45, et cetera. It's also around expanding the Malta fab ...
Yeah
...over time. That's referred to as 8.2. And then it's also around modernizing and enhancing the Burlington fab. Those are really the three programs, and it's really prospective...
Yes
... Harlan, looking ahead, as demand recovers, and we can activate dollars to service forward demand.
Got it. Any questions from the audience before I carry on? If you do, please feel free to raise your hand, and we'll get a mic over to you. Oh, we've got one up here.
Oh, great. Sorry for the short-term question, but you talked about this sort of recovery panning out and inventory getting burned down. I mean, how quickly could that ramp accelerate? I mean, if demand comes back, it could happen pretty quickly, and what would you have to see to kind of get that sense of, "Hey, you know, stuff's really, really back, and we're fine?" I t's gonna come. I'm just kind of curious, like, you know, how quickly could that happen for you?
Yeah, you know, I think if you break it down by end market, we see smart mobile actually having the opportunity to grow modestly this year already, call it low- single- digit. In automotive, we see the ability to grow that business mid to high single digit in 2024. And we think in comms infrastructure and IoT, we're at a stable point of revenue with Q1 as a base, and we'll see how the demand can recover. In IoT, in particular, it's really gonna be around the inventory drawdown, and that really is the key across the across the industry, across the markets that we serve, is seeing the rate and pace of inventory stabilization, and seeing what can happen on the demand front.
Any other questions? So one of the things that investors have been concerned around has been some of your compute and data center customers moving away from your 12 nm FinFET technology in Fab 8 in Malta, right, to single-digit nm technologies, which GlobalFoundries obviously does not do. Tom has been articulating some of the dynamics around diversifying the technology mix for the Malta Fab 8. It's a smart strategy, right? You talked about 40 nm embedded memory, MCU, RFSOI, FDX, and on the mainstream, 12 nm FinFET capacity, mixing in new customers and applications as older programs phase out. So John, maybe you can expand on these timelines, on phasing in new technologies, and the success that the team has been in just backfilling the plain vanilla 12 nm FinFET programs.
Sure. You know, I think first it's important to understand and acknowledge that the FinFET corridor that we have is already more diverse than I think folks may realize. So yes, some of that technology is serving the compute infrastructure and data center market, but we also have FinFET servicing automotive applications as well as IoT applications. And actually, by far, the largest end market that is served by our FinFET technology is in smart mobile devices, actually, by far. So first point is that FinFET is already more diversified than just serving data centers is the first point. Next is actually enhancing and diversifying the FinFET offering itself to add new features to FinFET, to address even more market opportunities.
And then finally, as you said, is looking at the Malta site, the Malta infrastructure that we have, and diversifying the full range of GlobalFoundries technologies into the Malta site. And that's, that's underway. You know, we have actually begun those technology transfers, and they're well underway, as we progress through fiscal 2024.
You know, on the rewinding back to sort of navigating through the environment, capturing new opportunities, especially in automotive, right? And I keep thinking about how your automotive business went in 2022, went from, like, $300 million to over $1 billion last year, right? And you said it's gonna grow another mid- to high-single digits. Is that, is that also 12-nanometer FinFET-based technology on automotive, or is that BCD, or what is that?
There's some FinFET, Harlan, addressing that market, but the bulk of it is 40 nanometer in microcontrollers, in vehicles. There's also some RF...
Yeah
...addressing vehicle applications. So it's diversified, but the microcontroller portfolio is the largest piece of that.
I see. You know, there's been a lot of investor concerns also as the Tier 2 foundries price aggressively on mature and specialty manufacturing processes, right? UMC, SMIC, Samsung, those are the names that we always hear. Additionally, you have UMC and Intel coming to the market in a couple of years with their 12nm FinFET capability. Most of your business this year, volumes, pricing, I assume, is locked in by LTAs, but as you renegotiate new LTAs or LTA extensions, or just on the normal book and ship business, what is the team seeing from a pricing perspective?
Yeah, generally a constructive environment on pricing. You know, thinking about the differentiated nature of what we offer, both in terms of the geographies where we operate, the differentiated technologies that we provide as well, we generally see a constructive pricing. You know, just to put a fine point on it, we see ASPs for the year is roughly flat year- on- year, 2024 compared to 2023. And looking ahead, again, if you think about, you know, growth in the industry as forecasts indicate, there's gonna be a need for more capacity. Folks are investing in more capacity and they need to earn a return on that investment. So that's further constructive to the pricing environment going forward.
And the final point I'll make is, you know, I know there's thoughts or concerns about, you know, large amounts of Bulk CMOS capacity coming online. That's not necessarily relevant to exactly what we do. We're offering, you know, more differentiated technologies that have more of a unique place in the ecosystem overall.
From an end market perspective, we've talked a little bit about automotive. Why is the IoT market seeing continued weakness and the potential for a slower recovery, right? We just had Synaptics presenting here today, and they did talk about recovery in the second half, but slower than expected, right? It was one of the first segments to see the weakness in second half of 2022, first part of 2023. Connectivity, more compute intelligence at the endpoints, I feel like has always been a strong tailwind for the sector. So why the slower recovery, and what are the long-term drivers for next-gen analog connectivity and MCUs in this end market?
Certainly. You know, I think more than anything, what we've experienced with IoT is a relatively new market. It's not brand new, but compared to the smart mobile market or the automotive market, IoT is still fairly...
Right
... fairly new, recent phenomenon, and companies are still trying to figure it out. You know, exactly what is the demand profile? What's gonna be the consumption rate for consumers and businesses adopting IoT technologies? I think the long term for IoT is very promising, but it's a question of understanding that demand signal and seeing that back in 2022, in early 2023, the build was very robust and has, you know, resulted in high levels of inventory. That's gonna take some time to work down. And, you know, the question everyone's trying to figure out is: What's the true end market demand signal? Certainly higher than what we're seeing right now.
And we'll see that settle down and manifest itself. But long term, you know, IoT has a lot of room to grow. And the value drivers to the second part of your question, what's driving it going forward? You know, it's adding intelligence and connectivity to a wide range of applications, whether it's in industrial automation, retail automation, healthcare, you know, different portable medical devices. So it's you know, and we offer differentiated technology to serve this market...
Right
...with low power operation and battery-operated applications. So, you know, we have a great position in this market, and long term, see this as a very promising market.
You know, the team has been able to maintain strong gross margin profile through this downturn. Right back in 2022, you were driving 100% utilizations, 30% gross margins. Last year, 80%. Entering this year, low-to-mid 70%. You've been able to sustain 25% gross margins here at the trough, right? Sounds like even though volumes are rising in the second half, and it feels like your customers are doing the same thing, but even though volumes are rising in the second half, feels like the team is prudently keeping utilizations in the 70%-75% range. So with that kind of profile, like, how should we think about the gross margin profile as the second half sort of unfolds?
Yeah, Harley, you know, first point is I think the company has done a really good job navigating the downturn on the gross margin story. And we've been able to work with our customers to, you know, offset lower factory utilization as was initially intended per the frameworks that we have in place, and it's a, you know, positive...
Yes
...outcome, all things considered, for sure. Looking ahead, you know, as we can ramp the demand profile back up, we have a lot of room to increase utilization and increase gross margin. And a reminder, the simple rule of thumb, roughly...
Right
...is that 5 points of utilization roughly equates about 200 basis points of gross margin. So if you can think about, you know, increasing utilization another 20 points...
Yes
... you know, that's roughly 8 points of gross margin, accretion, which is great. There's also, longer term, some depreciation roll-off that we can look forward to by the end of 2025, heading into 2026. So we have, you know, a couple of sizable levers to improve gross margin going forward, and, you know, feel constructive about that.
Yeah, so that brings me to my next question, which is longer term, and I think you answered some of it, but maybe in a bit more detail, because if I assume that you get back to 90%+ utilizations in 2025 on a better industry shipment and demand environment, combined with... You know, you're gonna, you're gonna get a drop in the customer underutilization payments, but you should get that back, your gross margins back to the 30% gross margin level, right? Using the equation that you just gave us. So we get back to 90%+ utilizations, 30% gross margin level. Help us bridge how to get there to the team's mid to long-term gross margin target of 40%.
Yeah.
Yeah.
Yeah. First, I’d put the utilization recovery as more low- 30s, and then, you know, looking ahead to depreciation rolling off, we’ll add a few more points to that story. And then from there, it’s around, you know, us executing and reducing our input costs, improving our efficiency, improving our cycle time and yield, et cetera. You know, the standard operating...
Yes
...drivers in the business that I've seen this company already do a good job at. So that's really the answer, and even looking at more value-added enhancements to what we offer to the market.
I apologize, but I forgot this, but I think at the last Analyst Day, you guys did lay out some specific timelines for the depreciation fall-off. So when does the next, I'd say, meaningful drop-off in depreciation occur for the team?
Look ahead to 2026.
2026?
That's right. Yeah.
Okay. Any questions from the audience? We've got a couple up here. Oh.
Okay, just wanted to ask you, you probably sort of touched on it a little bit, but I'm just curious if you could talk about the... I was hoping you could talk about the foundry industry overall. It just really seems to be evolving here. Intel is obviously splitting out their stuff very different from what you do, but you also see Intel partnering with UMC. You've seen countries around the world deciding they need to be in the semiconductor business, and it just doesn't have to be about you guys, but how do you see this whole foundry business evolving over the next 10 years?
Yeah. Well, thanks for the question. I think, if anything, the last five years have demonstrated just how critical semiconductors are to the global economy, fundamentally critical to the global economy. And you've seen governments and major corporations around the world begin to view it in that true light of how essential it is that we have a robust semiconductor industry. So there's a lot of support from customers, from companies, from governments to ensure that we have a robust industry, including the foundry portion of the industry. So I think there's a lot of good there, a lot of things to be positive about in that regard.
And also, just thinking about how long it takes to build a truly successful foundry operation, I mean, you know, we've been operating for decades across ourselves and our predecessor companies and, you know, that gives us a unique place in the world, too. That's kind of rarefied air. There's not that many companies who can say that in the industry right now of being a major foundry operation.
There's a similar question I was gonna have about competitive landscape and how that's evolving, but maybe instead, if I could ask, if you look out to the key end markets of your key customer groups, and you anticipate potential technology change over the next 3 to 5 years, could you, how do you think about your competitive position and what you can offer your customers in how you anticipate that things are going to change on a 3 to 5 year view?
Certainly. So, you know, we have the four, you know, we have four lenses upon which we look at our, look at our business, and one of those is our product lines. That's a critical lens upon which we view the business, and we have, you know, product line teams and leaders who manage the technology development around our product lines, and they also work closely with our end market people. And that's another lens that we look at. They work closely in concert with each other. So if you think about the complexion of end markets and product lines, that really is fundamentally the key. You know, market requirements can surface from both actually, but also, you know, with the lens of end markets being a bit of an overlay.
Fundamentally, you know, we're a technology company, and our technology is driven by our product lines, and that's how we maintain our differentiation.
John, can you just provide us with some insights into the team's expected CapEx for this year, next year, and how it aligns with the goal of generating strong free cash flow?
Sure. So our view on CapEx in 2024 is roughly $700 million. That's down significantly from what we were running, you know, the last few years. And ample capacity, CapEx...
Right
...to fulfill our strategic goals for this year, including some of the work we talked about earlier. Looking ahead to 2025, we haven't made a specific call, but suffice to say that given the overall capacity that we have to fill up to reach the $10 billion revenue level, you know, we've got, you know, some time ahead before we need to really lean into CapEx again, looking forward. So I think that's a fair assessment for 2025, as well.
Great. Well, you've hit on several of the key factors influencing the growth opportunities for GlobalFoundries, particularly in the face of some of the near-term headwinds where we were seeing across the industry. Against this backdrop, I mean, any other remarks that you'd like to leave us with today?
Not at this time, Harlan. I just want to really thank you for your attention and your time, and thank you for welcoming us to participate in the conference. Really appreciate it.
I appreciate you participating, and look forward to continuing to monitor the progress and execution of the team this year.
Thank you very much.
Thank you, John.
All righty.