Thank you for standing by, and welcome to GlobalFoundries Q2 fiscal year 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star one one on your telephone. I would now like to hand the call over to Head of Investor Relations, Sukhi Nagesh. Please go ahead.
Thank you, operator, and good morning, everyone, and welcome to GlobalFoundries Q2 2022 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO, and Dave Reeder, CFO. A short while ago, we released GF's Q2 2022 financial results, which is available on our website at investors.gf.com, along with today's accompanying slide presentation. This call is being recorded and a replay will be made available on our investor relations webpage. During this call, we will present both IFRS and adjusted non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for adjusted non-IFRS measures are available in today's press release and accompanying slides. I would remind you that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements.
Such statements can be identified by terms such as believe, expect, intend, anticipate, and may. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our annual report on Form 20-F, filed with the SEC on March 31, 2022.
We will begin today's call with Tom providing a summary update on the current business environment and update on our capacity expansion and technologies, following which Dave will provide details on our end markets and Q2 results, and also provide Q3 guidance. We will then open the call for questions. Request that you please limit your questions to one with one follow-up. I would also like to remind you that our first Capital Markets Day will be taking place in New York City tomorrow. If you would like to attend in person, please email ir@gf.com in order to be registered for the event. I'll now turn the call over to Tom for his prepared remarks.
Thank you, Sukhi, and welcome everyone to our Q2 earnings call. I'm pleased to report Q2 results that were once again ahead of guidance that we provided in May as we continue to make significant progress on our strategic and financial priorities. Amidst the challenging macroeconomic environment, the GF team, 15,000 strong, continues to execute each and every day. Let me start with providing a brief update on the current business environment. Similar to others in the industry, we are seeing some areas of the market beginning to rebalance supply and demand, including end markets such as low-end handsets, PCs, and in general, the lower end of consumer electronics market. Although we've experienced some decrease in some pockets of our unconstrained demand, the total demand for GF solutions remains robust and capacity continues to be oversubscribed.
Specifically, we continue to see healthy demand in fast-growing end markets such as home and industrial IoT, automotive, communications infrastructure, and data center. If you recall, we previously mentioned that we started this year oversubscribed, with demand that was 25% higher than available capacity. Today, demand continues to outpace our ability to supply by about 10%. We remain oversubscribed for 2022 and 2023, and given the increasingly single-sourced nature of our business, we expect to continue to grow revenue and profit through the remainder of this year and next. In the Q2, GF revenue grew 23% year- over- year, driven by increases in both wafer shipments and ASPs. This, coupled with strong operational excellence, resulted in significant improvement to adjusted gross margin. We reported adjusted gross margin of 28% in the quarter, a 12-percentage point improvement from a year-ago period.
As a result, we delivered earnings per share of $0.58, which was $0.10 better than the high end of our guidance. Dave will give more color on the financials in a moment, but let me now provide you with a brief update on some of our recent customer and partnership activity. At the time of our IPO last year, we had signed long-term agreements totaling approximately $20 billion in revenue. Now, about one year later, we have 36 customers under long-term agreement, with revenue totaling approximately $27 billion and prepayments and access fees totaling about $3.6 billion.
Yesterday, on the heels of the CHIPS Act being passed, we announced an extension of our long-term agreement with Qualcomm that adds more than $4 billion in incremental wafer purchases from our Fab 8 facility in Upstate New York. With this extension, the long-term agreement with Qualcomm now represents more than $7 billion in global revenue through 2028. Since the beginning of the year, we've secured approximately $6 billion in incremental new long-term agreements with our customers. All these new agreements, as well as extensions to existing long-term agreements, are 100% single source business. In fact, single source revenue in the H1 of 2022 outpaced overall revenue, growing 37% year-over-year, and 90% of the H1 design wins were single sourced as well.
In the quarter, we also signed a definitive agreement with STMicroelectronics to create a new jointly operated 300 ml manufacturing facility adjacent to STMicroelectronics' existing 300 ml facilities in Crolles, France. With this agreement, and combined with our capacity increase in Germany, GF will be tripling capacity in Europe from 2020 through 2028. This partnership with ST enables GF to add capacity in a highly capital efficient manner, backed by grants from the French government as well as customer prepayments. Finally, let me provide a brief update on some of the important technology milestones we achieved this quarter. In the Q2, we completed nine technology qualifications. We're extremely pleased to have released our 22FDX+ platform. This platform offers greater than 25% power reduction, thereby enabling a technology roadmap to further improve power and performance optimization for many of our customers' IoT applications.
Additionally, we have now fully qualified our highly differentiated 45CLO photonic solution, which we just recently announced at the Optical Fiber Communication Conference. We have over a dozen customers currently developing prototypes in preparation for volume manufacturing in 2023. We believe GF's photonic solution is the only 300-mm monolithic integration of electro optical components in our industry. We're combining SOI, CMOS, and photonics in a single chip solution. Lastly, we released to production the industry's first 55-nm embedded non-volatile memory solution for power management that will be adopted in new releases of premium tier handsets. To summarize, I'm pleased to report another quarter of solid execution as we deliver to our customers and all our stakeholders. We continue to demonstrate steady momentum across our business and are making significant progress towards our long-term business model.
Now, before I hand it over to Dave and Sukhi, I would like to let you know that normally I would be participating in the Q&A session following our prepared remarks. I'm currently in Washington, D.C. to witness the signing of the CHIPS Act at the White House. This landmark legislation will have a profound positive impact on our nation, our industry, and GF for years to come. I am looking forward to seeing many of you at our Capital Markets Day in New York City tomorrow. With that, over to you, Dave.
Thank you, Tom, and welcome to our Q2 earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics, which exclude stock-based compensation. Our Q2 results exceeded the high end of the financial range we provided in our last quarterly update. Q2 revenue was approximately $1.993 billion, an increase of 23% year-over-year. We shipped approximately 630,3 00 mm equivalent wafers in the quarter, a 6% increase from the year-prior period. Average selling price, ASP, per wafer increased approximately 16% year-over-year, driven by ramping long-term customer agreements with better pricing, a constructive transactional pricing environment, as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 92% of total revenue.
Non-wafer revenue, which includes revenue from reticles, non-recurrent engineering, expedite fees, and other items, accounted for approximately 8% of total revenue for the Q2, consistent with our expectation. Let me now provide an update on our revenue by end market. Smart mobile devices represented approximately 49% of Q2 revenue, growing 14% year-over-year. Growth was driven by higher ASPs and better mix as we continued to increase our silicon content in the premium tier handset market. In the RF front end, which is the largest segment of our mobile business, growth was relatively flat year-over-year. However, our industry-leading 300 ml RF SOI platform that is widely used in the premium tier handset market continues to increase as a percentage of the total front-end mix, which is accretive to our business.
For 2022, we are on track to grow our premium tier 5G revenue by more than 35% year-over-year, offsetting the modest decline we see in low-end handsets. Additionally, in this end market, we are growing our silicon content, mostly due to gains in RF transceivers, PMICs, audio ICs, and image sensor processors. Growth in these submarkets are all trends we expect to continue throughout the year. Revenue for the home and industrial IoT market grew 72% year-over-year, representing 17% of total revenue. Strong year-over-year growth in this end market was driven by wafer volume growth of almost 40%, better ASPs and improved mix. GF's strength and feature-rich technologies that are focused on superior wireless connectivity performance at the lowest possible power consumption has enabled our growth in the home and industrial IoT end market.
Within this end market, our wireless connectivity solution saw significant growth due to the accelerated adoption of our 22FDX technology for Wi-Fi 6 applications. We are also seeing strong traction for our IoT microcontrollers that feature embedded non-volatile memory for a number of smart card applications such as digital payments, access control, and electronic IDs driven by features such as connectivity, speed, security, and a growing touchless transaction environment. Additionally, growth in our IoT end market is also being driven by our differentiated power and analog technologies for applications such as factory and building automation, as well as test measurement and security. We are on track for home and industrial IoT to be the fastest-growing market for GF in 2022. Touching next on automotive.
Revenue in this market was approximately 4% of our total Q2 revenue and grew approximately 34% year-over-year, driven by the ramp of new products in ADAS, safety and infotainment. As we have previously indicated, our growth in this market will be lumpy as we are constrained by how quickly we can build capacity. As capacity comes online, we will be ramping new products, enabling automotive electrification and safety. As a result, our automotive business is on track to grow more than 25% in the H2 of the year versus the H1 of the year. Next, our communication infrastructure and data center end market comprised approximately 17% of Q2 revenue and grew approximately 50% year-over-year. Growth was driven by a combination of higher shipments, higher ASPs, and better mix.
Our strongest year-over-year growth is within the data center sub-market. Our customers are continuing to grow in market share in this segment, and GF is contributing by providing critical connectivity and IoT components. We also grew revenue modestly in all of our other sub-markets, including optical networking and wired and wireless infrastructure. Next, and as expected, our compute end market declined year-over-year and comprised approximately 5% of total Q2 revenue. We expect this end market to be less than 5% of our total 2022 revenue. After a trough in Q1, we are now seeing a modest uplift in revenues following the finalization of a design with a major PC customer. Moving to gross profit. For the Q2, we delivered Adjusted Gross Profit of $559 million, which translates into approximately 28% adjusted gross margin.
The 12% increase year-over-year was driven by better fixed cost absorption, higher ASPs and improved mix. Approximately 80% of this improvement was attributable to ASP and mix, with the remaining 20% attributable to volume and fixed cost absorption. Operating expenses for the Q2 were better than expected and represented approximately 10% of total revenue. R&D for the quarter was down sequentially at approximately $112 million, while SG&A came in at $97 million. Total operating expenses were $209 million, excluding $32 million of stock-based compensation. Q2 total operating expenses decreased approximately $17 million from a year ago, largely due to lower start-up costs associated with fab expansion projects as well as lower headcount costs.
GF delivered operating profit of approximately $350 million for the quarter, which translates into an approximately 18% adjusted operating margin, roughly 15 percentage points better than the year ago period, and $45 million higher than the high end of our guidance range. Q2 net interest expense was approximately $19 million, and we incurred a tax expense of approximately $30 million in the quarter. We delivered Q2 adjusted net income of approximately $317 million, an increase of approximately $350 million from the year ago period. As a result, we reported adjusted earnings of $0.58 per share for the Q2. We delivered record Q2 adjusted EBITDA of approximately $784 million.
Adjusted EBITDA grew $318 million year- over- year on $373 million of incremental revenue growth, representing approximately 85% flow-through. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the Q2 was $609 million. Gross CapEx for the quarter was $812 million, or roughly 40% of revenue. At the end of the Q2, our combined total of cash equivalents and marketable securities stood at approximately $3.3 billion, an increase of roughly $2.5 billion from the previous year. Before I transition to Q3 guidance, I briefly wanted to update you on the current inflationary environment and its impact on our business.
Last quarter, we provided you our view on inflation and the headwinds we are facing in our business, especially with respect to materials, energy and labor costs. While we have experienced a slight uptick in costs for materials and energy in Q2, we continue to estimate the impact of these inflationary costs to our full year results to be less than 2% of revenue. Next, let me provide you with our outlook for the Q3. We expect total GF revenue to be between $2.035 billion and $2.065 billion. Of this, we expect non-wafer revenue to be approximately 11%-12% of total revenue. An increase in design wins and the corresponding customer tape-outs should result in sequential Q3 reticle revenue growth of more than 25%.
We expect Adjusted Gross Profit to be between $580 million and $609 million. We expect adjusted operating profit to be between $347 million and $381 million. Excluding share-based compensation for the Q3, we expect total OpEx to be between $228 million and $233 million. We expect a sequential increase in operating expenses to primarily be driven by higher IT and other administrative costs. At the midpoint of our Q3 guidance, we expect share-based compensation to be approximately $42 million, of which roughly $21 million is related to cost of goods sold and approximately $21 million related to OpEx. We expect net interest expense for the quarter to be approximately $15 million and tax and other expenses to be roughly $24 million.
We expect adjusted net income to be between $324 million and $356 million, and we expect D&A for the quarter to be about $405 million, of which 90% is related to cost of goods sold. On a fully diluted basis of approximately 551 million shares, we expect adjusted earnings per share for the Q3 to be between $0.59 and $0.65. We expect adjusted EBITDA to be between $775 million and $813 million. As we mentioned on our earnings call last quarter, for the full year 2022, we expect total gross CapEx to be less than $4 billion, impacted by the well-known delays in capital equipment. Despite the slight delay, we are on track to meet all of our customer commitments for the year.
In summary, strong operational execution enabled us to deliver Q2 results that were significantly better than the high end of our guidance range. Our demand visibility remains strong, supported by our long-term customer agreements, and we expect to deliver progressively better financials quarter to quarter throughout the year as we continue to methodically execute our plan. With that, let's open the call for Q&A. Operator?
Thank you. Again, to ask a question, please press Star one one on your telephone to ask a question. Our first question comes from the line of Harlan Sur of JP Morgan. Your line is open.
Good morning. Congratulations on the team's support on helping to get the chips bill over the finish line and also the strong quarterly execution. You guys came into this year, as you mentioned, with demand about 25% higher than your ability to supply. I think last earnings call, you guys talked about a 1.5x book-to-bill ratio. Clearly, as you mentioned, the demand environment has weakened, especially in the areas that are encompassed in your smart mobile and your compute segments, which is about half of your revenues. On the flip side, you guys do have fungibility in parts of technology and capacity by geography. There is some slack for your business to take a hit on demand.
With demand looking like it's normalizing a bit lower, trending about 10% above supply, maybe you can just help us think about how much demand has to drop before you have to modulate your utilizations or your forward capacity expansion plans?
Good morning, Harlan. Exciting day here in New York City and exciting day in Washington, where Tom is. He certainly wishes he could be with us today. Given the choice of being on this phone and being in the White House for the signing of the CHIPS Act, I think he chose wisely. Look, I look forward to seeing you tomorrow at Capital Markets Day. With respect to demand, we're still oversupplied, meaning, you know, the demand outstrips our supply, and that's true for 2022 and 2023 as well. We'll obviously cover this in more detail tomorrow. Given that it's August already, our order book for 2022 looks good and it's largely complete. So our revenue visibility remains solid.
To the extent that we see customers that want to rebalance, we're usually trading up that rebalance towards a richer, more accretive mix, for GlobalFoundries. Demand is still strong. Did you have a follow-up, Harlan?
Yeah, maybe as a reflection of some of the weaker segments, and I know you have fungibility. We know that one of your RF customers is being impacted by the weak China domestic smartphone market. I think this customer actually took a charge against their COGS in the June quarter, and most of that charge was due to wafer shipments that were gonna fall below the minimum threshold of wafers under the long-term agreements with you. The good news is that the take or pay is clearly working for you. This customer is sole sourced with you. They've made prepayments, so they clearly see the differentiation that you bring to their products. Now they're in renegotiations on their LTA with you.
If we assume that the demand environment will probably continue to weaken maybe, and you maybe have more customers that have to renegotiate the terms of their LTAs, given the clear differentiation you bring to your customers, is it fair to assume that pricing is not being negotiated, but it's primarily around prepayments, duration, or volume of the LTAs that is being renegotiated?
You've got it right, Harlan. The pricing environment is still very constructive, given inflation and still the shortages that we see with respect to capacity, you know. I don't really expect that pricing environment to change in the near future. Finally, I think the piece I would add is that if you were to look at a 5% drop in utilization, we've mentioned before that if you have a 5% drop in utilization, then you typically see just a couple of points, call it two points or so impact to gross margin. If you took a five-point decrease in ASP, that's five points that flows all the way through.
I think given all things that I just mentioned, strong end market demand, very constructive pricing environment still, inflation that continues to hit, the global economy, it's difficult to see an environment in the near future, where pricing becomes the concern.
Great. Thank you.
Thank you. Our next question comes from Vivek Arya of Bank of America. Vivek Arya, your line is open.
Thanks for taking my questions. Dave, for my first one, just a clarification on the Q3 outlook. If I exclude the increase in the non-wafer revenue, it suggests wafer sales could be kind of, you know, flattish to somewhat down sequentially. I imagine that's probably because of the smartphone market. I just wanted clarification on how you are thinking about the interplay of wafer shipments and ASPs in Q3, and if you could maybe give us a little bit of color on how you are thinking about it extending into Q4 versus what you thought for the year originally.
Sure. As you know, we're currently constrained from a supply perspective, but we are expecting wafers to increase sequentially from Q2 to Q3. So no change in our plans there. In fact, we had talked about how wafer shipments last year were about 2.4 million wafers. Those wafers were to grow to about 2.6 million wafers this year, and then about 2.8 million wafers in 2023. All those plans remain on track. We expect to grow wafers sequentially from Q2 to Q3, and actually from Q3 to Q4 for that matter, and well into 2023. So from that perspective, still feel quite good about the trajectory there. Pricing, you know, we don't talk a lot in detail about pricing.
If you were to look at how we performed this quarter, 23% year-over-year growth, Q2 2022 to Q2 2021. Of that 23%, about 6% was volume growth and about 16% was ASP. As we look from Q2 to Q3, and we look year-over-year from Q3 2022 to Q3 2022, we expect those similar trends to continue. Did you have a follow-up, Vivek?
Yes. Thank you, Dave. You know, I know it's probably, you know, you'll talk more about, you know, expectations for 2023 and the longer term tomorrow at the Capital Markets Day. As you look at the capacity announcements that, you know, you and several of your peers have been making, do you think, Dave, that from an industry perspective, pricing will be a headwind or a tailwind in calendar 2023?
Yeah. Actually, let me break that in two parts. Look, at GlobalFoundries, we don't put capacity on for ourselves. You know, when we add capacity, we are adding capacity in partnership with our customers. We have customers that are signed LTAs with us. $27 billion now is, as we mentioned, more than 36 customers, through roughly $3.6 billion of customer funding that's actually come to GF to be able to expand that capacity. The capacity that we're putting on, we're putting on at the behest of our customers and in partnership with our customers, and as you know more recently, with governments. In terms of, you know, are we concerned about, you know, pricing coming into play as more capacity is added, about 2/3 of our shipments are actually single-sourced wafer shipments.
About 90% of our design wins are actual single-source design wins. We're not putting on generic capacity for the market. We are putting on capacity in partnership with our customers. We feel quite good about that. We feel like the pricing environment remains quite constructive. We see that as being constructive, not only today, but also 2023.
Makes sense. Thank you, Dave.
Thank you. Our next question comes from the line of Ross Seymore of Deutsche Bank. Ross Seymore, your line is open.
Ross, you there? Ross, you may be on mute. Operator, why don't we go to the next.
Sorry, Ross Seymore, your line is open.
Can you guys hear me?
We can hear now, Ross.
Okay. Sorry about that. Not sure what happened. I wanna go back to the LTA side of things. Obviously, you guys are doing a good job of enforcing them. As we start to see more companies write down your customers or any fabless companies write down their own side of that equation, I just wanted have you walk us through the mechanics of how you handle a slowdown in demand. I get that you're single sourced, but at some point end demand's end demand, and if they don't need the volume, you can force them to take it, but they don't need that inventory either, and I would imagine that would hurt the relationship. Just talk a little bit about how the negotiations go when the demand weakens, how you adjust the various levers, whether it's units, pricing, et cetera.
Because I think that's what investors really wanna get confidence in as they look forward to a potentially slowing macroeconomic environment.
Sure. I think the first thing that we do, Ross, when we have a customer, I mean, as you know, we're very in market and very customer-focused here at GF. The first thing that we do is we recognize that the LTA creates a framework for us and the customer to have a frank discussion. Because we have more demand than we actually have supply today, we've been able to have those discussions with customers that want to rebalance their commitments a little bit. We've been able to negotiate with those customers, by and large, to satisfy their reductions and some of their demand, and then replace it with business that's actually more accretive to us.
To the extent that we can do that, we don't charge our customers for, you know, capacity that was underutilized if we're able to replace it with demand from another customer. Having a broad base, diverse base of business in automotive and IoT and data center comms, infrastructure, and data center, that's really enabled us to be able to accommodate some of these rebalancings that you see in the marketplace. Practically, how do we handle it? We sit down with our customers. We talk about what their end market demand look like. We talk about, you know, the duration of their LTAs, maybe extensions of LTAs.
We talk about the rebalancing of their portfolios, so if they have some pockets of demand that are doing better and they have some pockets that are weaker, being able to rebalance those pockets to better meet their end market demand. Really it's a framework for us to sit down and have a negotiation.
New design wins.
New design wins as well, for their next generation of business. That's another element, as Sukie just mentioned. Did you have a follow-up, Ross?
Yeah. I just wanted to ask about the gross margin side of things, and more specifically, some of the units versus the wafer units versus the ASP side. I know you guys don't guide overtly by those metrics each quarter, but it seems like if the units are going up in your Q3, that means the ASPs are actually gonna go down a little bit at the midpoint. I think that's the first time your implied ASPs will have dropped sequentially since you've been public. Can you just walk us through maybe the Q3 and then the H2, what would be some of the puts and takes on that? Is that just an end market dynamic? Is it a non-wafer revenue dynamic? Any of the moving parts there would be helpful. Thanks.
Sure. Well, first, you know, the correlation between ASPs and gross margins don't always hold true in all instances. Sometimes you can have a different product that actually has a higher gross margin, even if it has a lower ASP. From that perspective, it's really product by product, related and probably more directly correlated actually to the amount of features from GlobalFoundries that are actually included in the product, with respect to the health of the gross margin. Sequentially from Q2 to Q3, I'm looking at pricing, and I would say ASP per wafer looks pretty flat. I mean, it's a flattish profile. We've had a little bit more ramp in volume from Q2 to Q3 than we had from Q1 to Q2.
I would say pricing remains relatively flat from quarter- to- quarter. I expect to actually increase as we progress throughout the year, so that implies Q4 increase. I think pricing from my perspective again kind of a gross price, if you will, ASP per wafer relatively flat, volumes growing. We expect profitability from a gross margin perspective to continue to grow. All in all, the progression from Q2 to Q3 looks pretty good from where I sit.
Thank you.
Thank you. Again, to ask a question, please press Star one, Star one one on your telephone. Again, that's star one one on your telephone to ask a question. Our next question comes from the line of Mehdi Hosseini of SIG. Mehdi Hosseini, your line is open.
Yes, sir. Thanks for taking my question. I have a couple of, and I apologize, I joined the call late, but did you discuss as to what drove the COGS in the June quarter down on a sequential basis?
We didn't discuss that in detail. I mean, but a lot of that's due to product mix. Of course, we get better absorption. As we do ship more volume, especially on a year-over-year basis, what you do start to see is fixed cost absorption that kicks in in a pretty meaningful way. From that perspective, that's something that we've been talking about for a long time, and we continue to experience that in the Q2. We expect that to continue, in fact, all the way through 2023 as we continue to ramp our volumes from 2.4 million wafers last year to 2.6 million wafers this year to roughly 2.8 million wafers in 2023. Did you have a follow-up?
Yes. I'm not gonna ask you about LTAs, actually on OpEx. I don't wanna take anything from your tomorrow guidance day, but should we, just for purpose of modeling, assume the OpEx into Q4, December, would be kind of a 24-ish flattish on a Q-over-Q basis?
Yeah. We tend to guide one quarter at a time. What we've talked about for the entire year is that OpEx in total, roughly around the 12% range, 12% of revenue, roughly equally split between R&D and SG&A. That should give you some color on how we think about the whole year, and I don't think Q3 or Q4 will be tremendously different than that.
Got it. Thank you.
Thank you. Our next question comes from the line of Krish Sankar of Cowen. Krish Sankar, your line is open.
Hi there. Good morning. This is Steven calling on behalf of Krish. Had a couple questions. First, I just wanted to drill down a little more on the customers that are currently rebalancing inventories. I guess from your perspective, any estimates on the duration of the rebalancing process? Is it like a one or two quarter, perhaps, is it more extended in that duration?
I think what we're seeing, I'm speaking broadly here because we're really not seeing a lot of it, but what we are seeing is, you know, modest rebalancing. I would probably characterize it as, you know, 10%-ish , maybe 15%-ish , but in that type of ballpark. It tends to be away from markets that are heavy consumer, and that tend to be, you know, just kind of lower in nature. The business that it's being replaced with, it's being replaced with automotive business, it's being replaced with business associated with data center infrastructure and comms, and then of course, home and industrial IoT. Those businesses continue to perform quite well, as you saw in our Q2. We expect that to continue throughout the year. Did you have a follow-up?
Yes. The follow-up I had was for Q3 revenues, specifically the reference around higher reticle revenues within your non-wafer business. Is there any color on the concentration of, like, customers or maybe the end market where the higher reticle activity is coming from? And when would production revenues be ramping for those related reticles?
Sure. Look, from a design win perspective, design wins and LTAs, you're seeing those both progress pretty nicely. To the extent it's an LTA associated with new products, then obviously you need the reticles and the non-wafer revenue to grow to be able to satisfy those LTAs, and then of course the corresponding design wins. Those are all kind of moving in tandem, and so it's, you know, no surprise really that you're gonna get these quarters where you know, have some heavy development activity to then be able to fuel that future revenue growth. Specific areas that are growing, you know, we typically don't talk too much about that quarter- to- quarter.
There is a segment in Q3, aerospace and defense, that's an area that is specifically growing in a meaningful way in Q3, particularly for reticle revenue. That would be one area that's driving that increase sequentially from Q2 to Q3.
Great. Thank you so much.
Thank you. Our next question comes from Tristan Gerra of Baird. Tristan Gerra, your line is open.
Great. Thanks. This is Tyler on for Tristan. Can you describe the importance of the FD-SOI process, notably in EVs? Maybe as it relates to that, any additional color you can provide on the recently announced European investment in partnership with STMicroelectronics?
Sure. Look, so from an FD-SOI perspective, so on SOI in general, we believe that we're actually the leader in the SOI space. So whether you're referring to RF-SOI or fully depleted SOI technologies, we believe that we are the leader in delivering those technologies to market and certainly the foundry-free leader for those technologies. The importance of fully depleted SOI are manifold, but I'll just try to touch upon the big ones. For us, we manufacture our FDS technology on 20 nm, so you have very good digital compute power. So your digital computation's quite good. You also have the best in class power management.
You have best in class power management with very good digital compute, and then you layer on with that the connectivity capability, both in millimeter wave and in some of the RF characteristics. You really have a platform that is ideally suited for anything that needs power management or advanced connectivity. Those are the markets that actually we're winning in with regards to our FDX or as you say, our fully depleted SOI technologies. That announcement that we made in France, which seems like a long time ago, given how busy Q2 was for us and how good Q2 was for us, but it was only a couple of weeks ago.
That announcement was really about growing our capacity to be able to service the design wins and the LTAs that we have on our FDX technologies, and those specifically related to, you know, IoT devices, connectivity devices, and more and more frequently, automotive devices. Those are all areas related to power management, connectivity, and then some millimeter wave and automated driver assist and other things in the automotive segment that that really benefit from that technology.
Great. For my follow-up, without jumping the gun on your Capital Markets Day tomorrow, how should we think about the impact of the CHIPS Act on your CapEx into 2023 and beyond?
Yeah. Let me answer that question a bit more broadly, and then I'll come back to it. Let me be a bit more broad on this. You know, GlobalFoundries is a trusted company. We're engaged in Singapore with the Economic Development Board, the Singaporean government, so we're engaged with them with our customers to grow capacity in Singapore. We've been engaged in Germany for a decade and the EU to grow our capacity in Germany for over a decade, engaged with IPCEI there. We continue to expand our capacity in Germany. In fact, we're increasing it from 300K wafers per year to 850K wafers per year. Then, of course, you mentioned France.
In France, we're engaged with the French government, now trusted by the French government, to engage with them as an extension of our Dresden facility to increase our capacity, ultimately from 0 to about 360,000 wafers per year. Of course, here in the U.S., we're a trusted foundry for the U.S. government, and Tom's in Washington today signing the CHIPS Act. We're a trusted company both by our customers and by governments. By signing the CHIPS Act, what that enables us to do is in partnership with our customers, we will look at our investments and opportunities to grow Malta that's within the four walls today, expand our tooling.
We've also done a lot of project work so that ultimately, when our customers agree with their commitments, when the governments work out the details for how the CHIPS Act will be deployed, and of course, GlobalFoundries will be there with a project-ready project. When all three of those criteria are met, then we'll sit down, and we'll figure out the next steps for investment here. Customers agree with their commitments. When the governments work out the details for how the CHIPS Act will be deployed, and of course, Global Foundries w ith a project-ready project. When all three of those criteria are met, then we'll sit down, and we'll figure out the next steps for investment here in the U.S. for new greenfield capacity.
Great. Thanks for taking the questions.
Thank you. Our next question comes from Rajvindra Gill of Needham. Rajvindra Gill, your line is open.
Congrats on the solid results, good results. Just a follow-up on the LTAs. I'm just trying to get a sense of again, how you'll kind of navigate through that potential slowdown, particularly in the smartphone market. There's been many, you know, forecasts that have been revised down for the overall smartphone market, particularly 5G smartphones, anywhere between 150 million-200 million units this year have been revised down. That's gonna affect the forecast for 2023. You obviously generate a large percentage of revenue from the mobile phone market through a variety of customers.
I'm curious, I know you haven't seen it yet, but is there any indication that a lot of your smartphone RF front-end module customers, as they look to the overall forecast next year, are starting to rebalance down their volume?
Let me break that apart in a couple of sections, and I'll share some high-level numbers from what we see in the market and how we feel with handsets. We think that quarter-over-quarter forecast look at total global handsets are gonna be down something in the magnitude of about 200 million units. If you look at what's happening under the covers, so total handsets, that's 5G, 4G, 3G, 2G, all the handsets down about 200 million units. That's the forecast from Q1 going to the forecast from Q2. If you actually look at the 5G segment of that forecast, units actually went up. In fact, units went up about 5%. The forecast for 5G handsets went up 5% from Q1 to Q2.
You have to look at the market in aggregate, and then you have to look at the market in detail and specificity. When you see that 5G portion of the market not only doing well but expected to do better in the H2 of the year than in the H1, what that implies for GF is that we have higher content in the front-end module of 5G handsets. We have higher content. It's more accretive for us as a business. What we're seeing specifically in front-end module is that our growth in 5G is more than offsetting the decline that we see in the medium and lower-end handsets. Of course, you look around the front-end module, and GlobalFoundries is winning sockets.
We're winning sockets in power management, we're winning sockets in connectivity, and we're also winning sockets in audio as well as payment devices. You add all those things together, and that's the type of growth that you get is 14% year-over-year in the smart mobile market when the rest of the market looks flat to down. It's also important who you're engaged with as well. I would say that there are OEMs in the end market that are doing better than others.
You know, ramping up with 5G, winning more sockets or taking share, and then engaged with the right OEMs that are doing, you know, reasonably well in this market, all of that leads to the growth that you saw in the Q2.
Yeah, I appreciate that detail.
You want to follow up, Reggie?
Yes, I appreciate that detail. It's helpful. Just my follow-up. You talked about, you know, in general, the pricing environment. You're still constructive on it. It's really mainly a function of the inflationary environment and the supply shortage. Maybe you can elaborate a little bit further. When you talk about the inflationary environment on the cost side, could you talk about, you know, the cost of the equipment or the raw materials that's leading you to continue to kind of pass on those cost increases? Then any sense in terms of the supply shortage for your raw materials, is there any indication that in some areas that's easing up or in other areas that you're still constrained?
Sure. Let me kind of take those in in order here. With respect to inflation, look, our expectation is to pass along inflationary costs. When I think about inflation, I think about materials, I think about labor, and I think about energy. Those are kind of the three big drivers for GlobalFoundries from an inflationary environment perspective. From a materials perspective, when we were signing our LTAs, we were actually in the market securing our long-term supply. From that perspective, we feel reasonably well hedged on the material side so that we have the materials at the right prices to then be able to satisfy the LTAs, which ultimately will deliver profitability that we've committed to the market. We feel pretty good about materials. They are tight.
Materials are tight, the environment's tight. There's not a lot of available capacity in the market, so the materials environment is tight. From a labor perspective, we continue to execute very well on labor. We have some variable pay structures in place so we outperform, like did in Q1, we did in Q2, we expect to do again in Q3, then our employees get to participate in that. That's that variable labor element for us is quite effective in terms of helping us from an inflationary perspective. Then from an energy perspective, we've got some hedges and some forward buys in place to be able to mitigate some of the increases that we've seen in energy around the world.
Of course, finally, from a pricing perspective, in April, we actually passed along some energy prices. To many of our customers, we had energy surcharges that went out into the market, in the early April time period in Q2, that we think of it in terms of, kind of mid-single digit, price increases from a surcharge perspective. Materials, labor, energy, and then of course, pricing being passed along, all those elements we feel like, we've addressed reasonably well for 2022.
Thank you. Appreciate it.
Thank you. Our next question comes from Christopher Danely of Citi. Christopher Danely, your line is open.
Hey, thanks guys. Just to follow up on one of the early questions. Dave, just to confirm, you guys don't expect any material impact to your people from the CHIPS Act? Then while you're answering, do you guys expect to see your taxes go higher from this, you know, raise taxes on everything and everyone act that looks like it's about to pass as well, that takes the minimum tax to 15%?
With respect to the CHIPS Act, there are kind of two elements to the CHIPS Act, relative to really our P&L. One is the investment tax credit, and that's a 25% investment tax credit, for equipment that is purchased and then in the U.S. and installed and delivers incremental capacity. We'll continue to look at the details of that as the CHIPS bill gets signed, and we get more details. It looks like that ITC is pretty straightforward. We do have investments going in to increase capacity in Malta. We also have some to increase capacity in our Burlington facility. We expect to be able to use that investment tax credit to be able to accelerate some of those investments.
As we work through those details, we'll update you in subsequent quarters to the benefit to our P&L. Our understanding as it sits today is that that would essentially create a net CapEx effect, so it would be a one-for-one offset to depreciation and amortization for new equipment that we purchased here in the U.S. That's the investment tax credit. Second element of the CHIPS Act is really associated with doing more kind of greenfield or brick-and-mortar investment, I should say. That is, those details need to be worked out in some detail and specificity by the Commerce Department. We expect those details to be worked out over the next, call it, 6 months-9 months. As those details become available, we'll update the market. Our gross CapEx plans have not changed.
To the extent that we'll get additional benefit from either the ITC or the second element of the CHIPS Act related to new investments in greenfield capacity, we'll update the market accordingly. Did you have a follow-up?
Yeah, thanks for the clarification. One more clarification. Given all of the, I guess, the weakness that you guys are seeing on the low end, it has not changed your 2023 outlook versus, let's call it 3 months or 6 months ago, in terms of, you know, pricing or revenue or LTAs or anything like that?
It hasn't. Let me tell you why. We had significantly more demand in 2022 and in 2023 than we could satisfy. When we look at the current environment today, yes, do we see some rebalancing in different end markets? Yes, we do. Like others in the market, again, specifically related to, you know, consumer, specifically low-end consumer, and then you're seeing that manifest itself in handsets as well as a portion of that market, that kind of low to medium in handset is under pressure. That said, we had more demand than we could satisfy. Our capacity equation hasn't changed. You know, we're expecting to deliver about 2.6 million wafers this year, 300 mm equivalent, about 2.8 million wafers next year.
What we are able to do is we are able to take some of that demand, look at our oversubscription, and for demand that we see rebalancing, choose the demand that's most accretive to GF. That's created an opportunity for us to be able to take some of that unsatisfied demand in markets that we really like and be able to bring that into our production schedule. You're seeing the benefits to that in our P&L results. We've been able to deliver a bit more accretion than we expected. We're a bit ahead of plan that we laid out at IPO. We're executing well, and that rebalancing is actually benefiting us right now.
Perfect. Thanks again, Dave.
Thank you. Our next question comes from the line of Randy Abrams of Credit Suisse. Randy Abrams, your line is open.
Great. Thanks for squeezing me in. I wanted to follow up on the CapEx. You mentioned a bit of the timing delay for equipment. Could you then give the view for 2023 with the incremental, how it's looking? For Dresden, you reaffirmed the $850,000 . If you could give an update on Malta, how that expansion is, and now with CHIPS Act, whether that pulls in the Malta expansion.
Sure. Equipment, you know, the WFE vendors continue to be challenged. You know, I think maybe it was two quarters ago or maybe a quarter and a half ago, we talked about equipment being somewhere between, you know, call it 2 weeks-4 weeks late. I think if you look at equipment today, you're probably seeing more like 4 weeks-6 weeks late. It may even be as much as kind of 6 weeks-8 weeks late on equipment deliveries. Equipment continues to be very, very tight. They are short components like many others in the market, which is somewhat ironic given that we need more equipment to be able to produce more chips that are in shortage situations. That environment remains pretty challenging. We appropriately kind of hedged our commitments.
From that perspective, we still feel very good about the commitments that we've made. We are experiencing delays in receiving that equipment. In terms of the impact, you know, originally we were hoping to spend CapEx this year of somewhere in, call it the $4.25 billion range. We're now indicating that we're gonna spend under $4 billion, and probably a little closer to $3.5 billion than $4 billion. That's the impact of the pushouts that we're currently seeing, particularly given that we had a very strong Q4 from a CapEx perspective. Any slip out from Q4 would flow directly into 2023. I think the push in 2023 continues.
I think 2023, when we were originally thinking something around $3 billion-ish, I think we have slippage from 2022 into 2023, and then correspondingly, we have slippage from 2023 into 2024. I think it's a bit of a snowplow effect with regards to WFE and CapEx spend. With respect to the expansion in Dresden and Malta, the German team continues to do very well in bringing in new equipment as it arrives, getting it on floor, getting it installed, getting it qualified, and getting it producing units. Hats off to that team in Dresden, Germany, under Manfred's leadership that they're just doing a great job and, you know, the work that they're doing there is flowing through to our P&L results and our fixed cost absorption.
In fact, I'd say that's a true statement for all of our manufacturing teams. In regard to expansion in Malta, we are slowly increasing that output in Malta. The Malta team will work diligently to get it on the floor and producing units.
Great, good luck getting that in. A follow-up on the East Fishkill, since that's coming up. Could you remind us the impact, as you sell the fab, into early next year? Given the tightness, just one other question about timing. Would you have the annual maintenance or would we continue to ride through it expecting to stay full? Just those, 'cause those timelining as we get toward end of year.
Yeah. If you recall, we signed that agreement a couple years ago. onsemi has been ramping up. We've been slowly kind of ramping out of that facility. East Fishkill is on track to transact at the end of this year, so December 31, of this year. That facility will transact. We'll then enter into, in fact, we've already entered into an agreement with onsemi, such that they'll continue to produce some wafers for us in kind of a make-buy relationship over the course of 2023 and 2024. We'll continue to ramp slowly out of that facility in an orderly way. They'll continue to ramp up in an orderly way. But at the end of this year, that facility fully transacts and moves over to onsemi for full ownership.
At that point in time, we're simply buying wafers from an order desk type perspective from onsemi, fully qualified wafers that are manufactured there today. In terms of impact, we're estimating that we'll get roughly a $250 million impact or benefit on a year-over-year basis, 2023 versus 2022. By transacting that facility, it will lower our cost of goods by that amount on an ongoing basis.
Great. Thank you.
Thank you. At this time, I'd like to turn the call back over to Sukhi Nagesh for closing remarks. Sir?
Thank you, Latif, and thank you all for joining. We look forward to seeing many of you tomorrow at our Capital Markets Day. Have a nice day.
This concludes today's conference call. Thank you for participating. You may now disconnect.