GLOBALFOUNDRIES Inc. (NASDAQ:GFS) Q4 2022 Earnings Call Transcript

GLOBALFOUNDRIES Inc. (NASDAQ:GFS) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Good day and thank you for standing by. Welcome to the Conference Call to review Fourth Quarter of Fiscal Year 2022 Financial Results. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sam Franklin, Head of Capital Markets and Investor Relations. Please go ahead.

Sam Franklin: Thank you, operator. Good morning, everyone and welcome to GlobalFoundries fourth quarter and fiscal 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 fourth quarter and full-year 2022 financial results, which are 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 web page. During this call, we will present both IFRS and adjusted non-IFRS financial measures. The most comparable IFRS measures and reconciliations for adjusted non-IFRS measures are available in today’s press release and the 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 or by the use of the future tense. 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 section under the caption Risk Factors in our annual report on Form 20-F filed with the SEC on March 31, 2022 and on our current reports on Form 6-K filed with the SEC.

We will begin today’s call with Tom providing a summary update on the current business environment and technologies, following which Dave will provide details on our end markets and fourth quarter and full-year 2022 results and also provide first quarter 2023 guidance. We will then open the call for questions. I’ll now turn the call over to Tom for his prepared remarks.

Tom Caulfield: Thank you, Sam, and welcome everyone to our fourth quarter earnings call. I would like to start by reflecting on our first full-year as a public company. October 28, 2022 marked the one-year anniversary of our listing on the NASDAQ and by any measure it’s been a strong year for GF. I’m immensely proud of our team across the globe for their commitment and dedication in helping GF take significant steps towards delivering our long-term strategic objectives that we set out prior to our IPO. GF continues to position itself as a crucial enabler of the semiconductor supply chain and we remain deeply committed to working with our customers in providing feature rich, differentiated and innovative technology solutions to meet the long-term demand trends across each of the end markets that we serve.

Simply put, we build capacity for our differentiated offerings our customers want, where they want it and in partnership engagements that create this capacity with the best economics for both partners. We’ve continued to implement a long-term partnership driven model with our industry, which is driving improved visibility for our business through this period of macroeconomic uncertainty. In 2022, we added 10 additional customers under long-term agreement and secured more than $5 billion of incremental lifetime revenue. Going forward, we continue to see strong alignment between our customers’ needs for certainty and security of supply and our capacity to provide long-term dedicated foundry services. We are proud to have participated in the development and passage of the CHIPS and Science Act of 2022.

This is the most important piece of legislation for industry in recent times and we expect to continue playing a key role in delivering targeted capacity critical to the re-issuring of supply within the U.S. semiconductor ecosystem. Finally, we continued the expansion of our global footprint to align with our customers committed demands. And in 2022, we successfully delivered incremental capacity at our facilities in Singapore and Dresden, Germany. As we look to 2023 and beyond, we remain steadfast with our principles and agile as an organization by focusing on incremental capacity to meet our customers’ needs. Let me now touch on our results. We exceeded the high-end of our November provided guidance for both top line and profitability as our teams continue to deliver our strategic and financial priorities, helping us bring our first year as a public company to a very successful close.

In the fourth quarter GF revenue grew 14% year-over-year, driven by richer mix and average selling prices, as well as higher non-waiver revenue. This revenue growth coupled with strong operational execution resulted in improvement to adjusted gross margin to 30.1% in the quarter, which is an 8.6-point improvement from the year ago period. As a result, we delivered adjusted earnings per share of $1.44, which was the high-end of our guidance range and includes the proceeds from the sale of our East Fishkill fab to onsemi. Dave will provide more color on our financials in his section. Let me now move to providing a brief update on the current business environment. Despite our record output in 2022, we remain cautious regarding the macroeconomic headwinds facing our industry in the first half of 2023.

Our business is not immune from these headwinds, as we communicated in our third quarter update, we took the decision to proactively put in place a restructuring plan, including a number of cost containment initiatives, which we began to implement during the fourth quarter. These initiatives are aimed at all aspects of our business and as we head into 2023, we will continue to focus on ways that we can improve our productivity, reduced input costs and position GF to emerge even stronger from the current macroeconomic environment. Longer term, GF’s growth drivers remain firmly intact and we continue to see opportunities to gain share in our larger end markets, such as premium care smart mobile devices, as well as in critical growth segments such as Automotive and Industrial IoT.

In Automotive, we are excited to be playing an important role on the development and expansion of the market for autonomous, connected and electrified vehicles. We continue to grow our differentiated offerings to our customers across automotive applications such as processing, sensing, safety, infotainment and battery management. As you may have seen last week, we are extremely pleased to report that General Motors has entered into a long-term agreement with GF to secure a capacity corridor in our advanced fab in upstate New York for GM’s U.S. supply chain. This first of its kind multi-year agreement for GF brings a critical manufacturing process to the U.S. and supports GM’s strategy to reduce the number of unique chips needed to power increasingly complex and tech laden vehicles through the end of the decade.

With this strategy, we expect to reduce chips in higher volumes with better quality, predictability and the best economics. In aggregate, our LTAs have increased from the prior quarter as the number of customers under LTA has grown from 38 to 40 in the total value of these LTAs now at approximately $27.5 billion. Additionally, the amount of committed prepayments and capacity reservation fees have increased 34% from a quarter ago to approximately $5 billion. Our LTAs continue to serve as a solid foundation for working with our customers during times of demand uncertainty. Due to the widely reported inventory correction, in some cases, we have entered into negotiation with our customers to manage their short-term demand needs, while working to preserve the intended economics and long-term value under these contracts.

As we reported in our third quarter earnings call, we expect this to be accomplished through adjustments to the contract, including duration, ASPs, mix, delivery profiles, and in some cases underutilization payments. I will now provide a brief update on our recent technology achievements. In the fourth quarter, we completed six technology qualifications bringing our total for the year to 27. On our 45-nanometer silicon photonics platform, we added nine additional features in the quarter. Additionally, we had five more customer tape outs on 45 CLO bringing our total for 2022 to 16. This clearly demonstrates the aggressive adoption of this differentiated technology solution. And finally, in November, GF and Purdue University announced a strategic partnership to strengthen and expand collaboration on semiconductor research and education with a joint focus on R&D.

This relationship with Purdue exemplifies our growing network of R&D collaborations as part of our broader GF Labs initiative that we launched in 2022. To summarize, we successfully closed out Q4 with a delivery of record financial performance in 2022 our first full-year as a public company. Despite the current economic challenges, we are well positioned to achieve our long-term strategic model and continue to work with our customers to develop and manufacture innovative differentiated solutions. With that, let me turn it over to Dave.

Dave Reeder: Thank you, Tom, and welcome to our fourth quarter earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics, which exclude stock-based compensation and restructuring charges. Our fourth quarter results exceeded the guidance we provided in our last quarterly update. Fourth quarter revenue was approximately $2.1 billion, an increase of 14% year-over-year. We shipped approximately 580,300-millimeter equivalent wafers in the quarter and ASP average selling price per wafer increased approximately 20% year-over-year, driven by ramping long-term customer agreements with better pricing, as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 88% of total revenue.

Non-wafer revenue, which includes revenue from our radicals, non-recurring engineering, expedite fees and other items accounted for approximately 12% of total revenue for the fourth quarter consistent with our expectations. For the full-year, I am pleased to report that 2022 was a record year for GlobalFoundries. Revenue came in at approximately $8.1 billion, up 23% year-over-year, and an increase of approximately $1.5 billion from the previous year. We shipped approximately $2.5 million 300-millimeter equivalent wafers, a 4% increase from 2021 and ASP per wafer increased 17% year-over-year. Let me now provide an update on our revenue by end markets. For the fourth quarter and as expected, smart mobile devices represented approximately 39% of the quarter’s total revenue.

Smart mobile devices fourth quarter revenue declined 7% from the prior year period, principally driven by reduced volumes in the low to mid-tier smartphone segments. This decline was partially offset by higher ASPs, premium tier mix growth and continued content growth in our RF transceiver, audio and specialty power products. Full-year 2022 revenue for smart mobile devices grew 11% year-over-year, driven by higher ASPs and better premium tier mix as we continued to execute our strategy to grow content in the premium handset market. Our long-term customer agreements helped us navigate the challenging demand environment by reducing volatility and improving certainty, a trend we expect to continue. Our growth compared favorably to the broader 2022 handset market, which declined 8% year-over-year with respect to handset shipments.

Looking ahead to 2023, we expect the first quarter to represent the low point for smart mobile device demand. With the well-publicized inventory burn expected to conclude towards the end of the first-half followed by sequential growth in the second half of 2023. Continued growth in the 5G handset market is expected to be a tailwind in 2023 and we expect to maintain our market leading positions in RF front-end performance and premium tier smartphone features. Moving on to home and industrial IoT. In the fourth quarter, revenue for the home and industrial IoT market grew approximately 64% year-over-year, representing approximately 20% of the quarter’s total revenue. Strong year-over-year growth in this end market was driven mainly by higher ASPs from our LTAs and meaningfully higher volumes from target growth in key applications, such as smart cards for digital payments and wireless connectivity.

Full-year home and industrial IoT revenues grew 68% year-over-year, which can be attributed to approximately 30% volume growth with remainder driven by ASP and mix. Home and industrial IoT was the fastest growing end market for GF in 2022. Looking ahead to 2023, we expect growth to continue for smart card applications along with rising customer demands for next generation analog and mixed signal technologies within our aerospace and defense end markets. Moving now to automotive, which as Tom outlined, has been a key growth segment for us. Fourth quarter revenue grew about 24% year-over-year, representing approximately 5% of the quarter’s total revenue. Growth was driven by a strong ramp across our automotive processing, sensing and vehicle infrastructure technologies.

Full-year automotive revenue grew about 30% year-over-year in 2022 and we expect continued growth in 2023. Based on our current design wins and ramp profile, we now expect almost $1 billion of automotive revenue in 2023. Next, our communications infrastructure and data center end market, where fourth quarter revenue grew approximately 27% year-over-year and comprised approximately 18% of the quarter’s total revenue driven by a combination of better ASPs and mix as well as higher volume. Growth in the quarter was primarily driven by increased network infrastructure and data center processing demand. For the full-year 2022, revenue grew 43% year-over-year, driven by increased edge to data center communication traffic 4G and 5G deployment, as well as overall increased demand for data center capacity.

Like most other end markets, we expect data center demand to decline in the first half of 2023. Finally, our personal compute end market was flat year-over-year in the fourth quarter and comprised approximately 5% of the quarter’s total revenue. For fiscal year 2022, year-over-year revenue declined approximately 38%. We expect this end market to continue to decline in 2023. As communicated in our third quarter update, we recognize the need to undertake a proactive assessment of our cost base in response to the industry’s inventory correction, as well as macroeconomic and inflationary headwinds. During the fourth quarter, we implemented several initiatives aimed at achieving greater efficiencies, productivity gains and structural cost savings.

These initiatives are projected to deliver approximately $110 million of savings in 2023. Additional savings initiatives are expected to be implemented throughout the year. Also in the fourth quarter, approximately $94 million of restructuring charges were incurred as part of the implemented cost savings initiatives. The financial results for the fourth quarter are presented on an adjusted basis, which exclude these charges. For the fourth quarter, we delivered adjusted gross profit of $633 million, which translates into approximately 30.1% adjusted gross margin. The 8.6-point year-over-year improvement was driven by higher ASPs and a richer mix, which more than offset the inflationary headwinds in 2022. For the full-year, we delivered adjusted gross profit of $2.3 billion and gross margin of 28.4% equating to a 12.2-point uplift from 2021.

Operating expenses for the fourth quarter represented approximately 10% of total revenue. R&D for the quarter was down sequentially to approximately $103 million and SG&A also declined to — we delivered operating profit of $425 million for the quarter, which translates into an approximately 20.2% adjusted operating margin, roughly 12.5-points better than the year ago period and above the high-end of our guided range. For the full-year, GF delivered operating profit of $1.4 billion, which translates into a 17.8% operating margin an improvement of roughly 15 points year-over-year. Fourth quarter net interest and other expenses was $15 million and we incurred a tax expense of $13 million in the quarter. We delivered fourth quarter adjusted net income of approximately $800 million, an increase of approximately $702 million from the year ago period.

At the end of the fourth quarter, we closed the sale of our East Fishkill facility to ON Semiconductor and recorded a gain of sale of $403 million just above the upper end of the guided range. As a result, we reported adjusted diluted earnings of $1.44 per share for the fourth quarter. On a full-year basis, GF delivered adjusted net income of approximately $1.72 billion, and adjusted diluted earnings per share of $3.11. We delivered record fourth quarter adjusted EBITDA of approximately $821 million, with a margin of 39.1%. Adjusted EBITDA grew $237 million year-over-year on $254 million of incremental revenue growth, representing approximately 93% fall through. Full-year adjusted EBITDA was $3.1 billion with an EBITDA margin of 38.1%, an improvement of about 10 points over the previous year.

Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the fourth quarter was $491 million. For the full-year, cash flow from operations was $2.6 billion. Gross CapEx for the quarter was roughly $991 million or roughly 47% of revenue. Full-year CapEx for 2022 was approximately $3.1 billion or 38% of revenue. At the end of the fourth quarter, our combined total of cash, cash equivalents and marketable securities stood at approximately $3.3 billion, we also have a $1 billion revolving credit facility, which remains undrawn. Next, let me provide you with our outlook for the first quarter. We expect total GF revenue to be between $1.81 billion and $1.85 billion. Of this, we expect non-wafer revenue to be approximately 12% of total revenue.

We expect adjusted gross profit to be between $498 million and $527 million. We expect adjusted operating profit to be between $283 million and $322 million. Excluding share-based compensation for the quarter, we expect total OpEx to be between $205 million and $215 million. At the midpoint of our first quarter guidance, we expect share-based compensation to be approximately $45 million of which roughly $16 million is related to cost of goods sold and approximately $29 million is related to OpEx. We expect the tax expense, net interest and other expense for the quarter to be between $25 million and $30 million. We expect adjusted net income to be between $252 million and $297 million. On a fully diluted share count of approximately 555 million shares, we expect adjusted earnings per share for the first quarter to be between $45.53.

For the first quarter, we expect depreciation and amortization to be roughly $400 million of which approximately 90% is related to the cost of goods sold. We expect adjusted EBITDA to be between $667 million and $722 million. For the full-year 2023, we expect CapEx to be approximately $2.25 billion, which aligns with our disciplined and demand driven philosophy. We expect the CapEx profile to be more heavily weighted towards the first half of the year and on a full-year basis, we expect to be free cash flow positive. To summarize the quarter and the year, strong operational execution enabled us to not only deliver fourth quarter results that were better than our guidance, but also deliver a record year of financial performance for the company.

We are continuing to execute the strategic plan we outlined to our stakeholders at our IPO and remain well positioned to achieve our long-term model. With that, let’s open the call for Q&A. Operator?

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Q&A Session

Operator: Our first question comes from Mark Lipacis with Jefferies. Your line is now open.

Mark Lipacis: Hi. Thanks for taking my question and congrats on the nice results. First question, maybe for Tom. Can you talk qualitatively about activity around your long-term agreements? It seems on the one-hand some of your customers are getting negatively impacted by the cycle. But on the other hand, secular trends on capacity and consolidation, the geopolitical environment might be driving more customers to you. So I’m wondering if you could describe how those who are netting out as you engage with your customers in the medium-term? And I guess what I’m getting at, it seems like the LTAs pick up every quarter. Do you expect that to continue through the year? And is there a type of customer, either by vertical market or geography that seems to have a higher motivation to sign up for the LTAs?

Tom Caulfield: Well, let’s unpack there, Mark. Good morning. So let me first start with a little context around these LTAs. We think of them as contracts that were signed in 2021 and that’s where their life began. Actually, this is a five-year journey. When we pivoted the company in 2018, decided to become single source, differentiated type of semiconductor manufacturer. We had to do a couple of things with our customers, we had to convince them on our execution, we had to convince them that we had the financial wherewithal to be around for them for the long-term and develop those partnerships. And so as they started to get more confidence in GF and relied on us for single sourcing key products for them. That created a balanced relationship where we needed each other.

Our customers needed security supply; we wanted security of knowing that if we’re going to invest for capacity that we would have the ability to use that capacity to service our customers. And so what you’re seeing now is the natural consequence this journey we’ve been on as customers signing out and looking longer term, securing their future with GF. Now you can imagine in a moment that we’re in now where there’s the softening that you hear about the inventory correction that customers are going to be a little bit more cautious as they go forward to plan exactly when they want new capacity extending LTAs, those discussions going on all the time, and as you could see in the fourth quarter, we signed additional long-term agreements, we just announced a really important one with GF in segments that clearly see their strength in the near-term and the long-term.

So I think the LTAs are doing exactly what we talked about in our roadshow over a year ago and through 2022. That creating security for both businesses to have long-term supply and the work through, you know, cycles like this in partnership mode.

Mark Lipacis: That’s a very helpful. Thank you for that. And Tom, you also had described about some of the dynamics around customers asking for relief or some modifications on these. Is there a case study that you can describe that characterize as a classic way you are dealing with that scenario as your customers, who have signed up with the LTAs or are coming to you and asking you for help on that? Thank you.

Tom Caulfield: Yes, I think the classic is protecting the names of the innocent here is that one of the customers, it was like the complete range of levers we have. One, there was some remixing going on, softness on one particular technology node and features we provided. Where they had more opportunity in another. So we were able to shift some of their volumes from one platform to another. They remixed a little bit later in time and created a duration. And then there is a part of that was, hey, we have some near-term underutilization, let’s just give you an underutilization fleet for that. The key is that the economic intent of these contracts are always getting fulfilled and we use these levers to go create that opportunity to work in partnership with our customers.

Mark Lipacis: Very helpful. Thank you.

Operator: Please standby for our next question. Our next question comes from Joseph Moore with Morgan Stanley. Your line is now open.

Joseph Moore: Great. Thank you. I wonder if you could talk a little bit more about the GM deal. And just in general, what those conversations are like? I know you’ve had other OEM deals with autos as well. I feel like two or three years ago they probably didn’t know who the foundry suppliers were. So how directly do you think they’re driving their semiconductor suppliers to use Western foundries? And just maybe some insight into what — how those conversations came about and how pervasive it could be?

Tom Caulfield: Yes. Good morning, Joe. I wouldn’t put it as just driving the Western foundry, I think if you take a step back, the auto industry is looking forward and looking at the capacity that’s been put in place over the last two decades in the areas where we play and clearly see that investment needs be made. There isn’t enough of this capacity. Again, we play for 12 nanometer and above and getting ahead of that curve. And saying, okay, how do we go create that capacity, because new investment is going to be needed. And as they start to understand more and more about the economics, of this, it’s better to direct — to create that capacity in partnership with the foundry and then direct their supply chain to use that capacity.

So for the automakers it’s — let’s first decide what are the important platforms to create this capacity on that have legs over the next decade. Decide how much you want, where you want it? And then create this partnership mode to make sure it happens with the best economics. That’s the model, we called it a first of a kind with General Motors. It’s not last of a kind, I think this is a winning model, because it creates the opportunity to minimize inefficiencies of the economics of a very steep or broad ecosystem. Where costs get passed through and marked up without value being added, investment costs that is. So we think this is a winning model. We’ll see more of this coming along. I hope that helps, Joe.

Joseph Moore: Yes, that does. Thank you. And then I guess as you look at your capacity in the next couple of quarters, you’re obviously seeing some capacity free up from smartphone-oriented technologies. Would you still say you’re sold out on the specialty process technologies that supply the auto industry? And are you limited in your ability to serve that near-term?

Tom Caulfield: Specifically to auto. All of our capacity is now we call fungible able to address all the demand we have in auto. So for every way we can make into our auto business, we can sell. And that’s where we would. We’re constantly looking and putting pressure on our manufacturing teams to figure out how they can make more of that.

Dave Reeder: And Joe, I think I would add on to that is if you listen to the prepared commentary, you would have heard us say that instead of saying that we would exit 2022 or 2023, excuse me, at an automotive revenue run rate of $1 billion we actually said in this quarter’s prepared commentary that we would be about $1 billion of automotive revenue in 2023. So that remixing that Tom just highlighted that and you kind of alluded to in your question, that is ongoing as we speak.

Joseph Moore: Great. Thank you very much.

Tom Caulfield: I want just to pile on that, Joe. In that revenue year-on-year €˜23 to €˜22 will be greater than 2 times growth.

Joseph Moore: Great. Thank you.