Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries' First Quarter 2024 Earnings Call.

On the call with me today are Dr. Thomas Caulfield, CEO; John Hollister, CFO; and Niels Anderskouv, Chief Business Officer.

A short while ago, we released GF's first quarter 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 non-IFRS financial measures.

The most directly comparable IFRS measures and reconciliations for 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 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 sections under the caption Risk Factors in our annual report on Form 20-F filed with the SEC on April 29, 2024.

We will begin today's call with Tom providing a summary update on the current business environment and technologies, following which John will provide details on our end markets and first quarter results and also provide second quarter 2024 guidance. We will then open up the call for questions with Tom, John and Niels.

We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Sam, and welcome, everyone, to our first quarter earnings call. We believe our industry is beginning to emerge from a challenging period of inventory correction, albeit in a very cautious manner.

For GF, I'm pleased to report first quarter results that exceeded the guidance ranges we indicated in our fourth quarter earnings call. The continued efforts of our employees are positioning GF to support our customers over the long term in the markets where they excel, on the technology platforms they want and across the regions where they need us, both globally and locally.

So before I move on to the business update, let me give a shout out and thank you to all our teams across the world. I'm proud of how well they are partnering with our customers and executing to our plans, particularly as we begin to see signs of channel inventory in absolute dollars decline in some of the key end markets that we serve.

Having said this, certain end markets remain challenged, mostly related to macroeconomic conditions, and the rate of inventory reduction is much slower than anticipated as we began 2024.

I'm confident in the resilience and commitment of our teams to keep winning new opportunities and innovating our technology offerings as we continue to build our future together. With this in mind, let me start with providing a brief update on the current business landscape.

Like many others across the industry, we expect macroeconomic and geopolitical uncertainties to persist through 2024.

Although we're seeing signs of inventory levels trending down among some of our customers in core end markets such as smart mobile devices, other customers have indicated to us that inventory levels have remained higher in end markets such as IoT and automotive. The combination of elevated inventory levels and the uncertain demand environment has led to some of our customers seeking to adjust their near-term volume requirements under their agreements with us.

We have continued to collaborate closely with these customers to find mutually beneficial outcomes while seeking to safeguard the long-term economic value of our relationships. In some instances, the conclusion of these discussions has resulted in underutilization or restructuring payments, which John will comment on further.

Importantly, the dialogue with our customers has been very constructive as we work together to accelerate the channel inventory depletion and continue to find new ways to partner together going forward. Based on the progress of these discussions and as we set out during our last earnings call, we still anticipate that our first quarter revenue will represent the low point for 2024 with quarter-to-quarter sequential growth through the year.

Let me now touch briefly on our first quarter results, which John will discuss in more detail later in his commentary. Revenue in the quarter decreased sequentially to $1.549 billion, which was above the high point of our guidance range.

We reported non-IFRS gross margin of 26.1% in the quarter, which again exceeded our guidance range.

We delivered a fourth consecutive quarter of positive non-IFRS free cash flow, which continues our disciplined approach to capital deployment while preserving our strategic capacity expansion objectives. I am also pleased to report that we delivered non-IFRS diluted earnings per share of $0.31, which exceeded the high end of our guidance range.

Let me now provide you a brief update on some of our recent customer and partnership activity. After a milestone year for our automotive end market in 2023, in which we delivered over $1 billion of revenue, we are continuing to partner with our customers to identify long-term opportunities to expand share and content in the vehicles of today and the future.

GF technologies are key enablers to the silicon content growth in vehicles, including 12LP+, our FinFET platform widely used in infotainment and navigation systems, to 40-nanometer microcontrollers with and without embedded nonvolatile memory for safety, powertrain and comfort applications, and all the way through our power technologies at 130- and 180-nanometer technologies.

Continuing this trend through the first quarter, our teams closed key design wins on our 40 ISP technology, this is for image sensor processor, and 130 BCD power platforms, delivering critical ADAS, motor controllers and sensor applications at automotive-grade standards. The semiconductor content of automobiles continues to expand.

And although we expect a period of automotive demand moderation in 2024, we still expect full year revenue in this end market to grow meaningfully on a year-over-year basis.

Turning now to smart mobile devices. As I alluded to in my introduction, we are beginning to see positive indicators across the smart mobile device ecosystem as excess inventories are drawing down on an absolute dollar basis across several of our customers.

Although inventories remain above normal levels, we expect the rate and pace of the drawdown to progress throughout 2024.

We have excellent traction with our RF front-end offerings, especially our 9SW RF SOI platform, which features low standby currents for longer battery life. Our 22FDX millimeter wave technology for smartphone connectivity has ramped to volume production and we're also engaged with key OLED display driver makers with design wins ramping in 2024.

These features drive increased silicon content, which in turn drives the need for higher-performance connectivity and low-power technologies, which GF is well placed to serve. In IoT, we continue to see long-term opportunities as the number and complexity of smart connected devices continues to grow.

This is driven by the need to sense, acquire, process and communicate data.

This also translates into new requirements for more efficient power management, connectivity and AI at the edge functionalities, as the number of wirelessly connected and battery-operated products continues to broaden. In the first quarter, we closed a key design win on our 22FDX+ platform, which will be used to enable high-speed wireless interfaces for IoT applications.

Our 22FDX ecosystem supports design enablement, IP and design services to a wide range of our customers to develop wireless IoT products with improved efficiency at the lowest possible power.

We expect inventories to remain elevated across IoT during at least the first half of 2024. However, the requirements for speed, security and inference at the edge are all long-term drivers for our next-generation analog and mixed-signal technologies.

Furthermore, we continue to see traction in aerospace and defense, where we are addressing key needs across harsh environments, such as satellite and space avionics and terrestrial applications with our resilient, secure and performance-optimized products.

Finally, our communications infrastructure and data center segment continued to show weakness in the first quarter amidst the sustained node migration of data center and digital-centric customers to single-digit nanometer platforms, which we discussed in our prior earnings call. We expect this end market to remain challenged in 2024, with quarterly revenue expected to be roughly in line with what we have reported for in the first quarter.

However, over the long term, we expect the transition to generative AI will increase the demand for high bandwidth communication and efficient power conversions, a trend that GF is well positioned to address through our silicon photonics and power delivery solutions. To that end, I am pleased to report an important Q1 design win using our 130 [ NSX ] platform, which will support ground terminal infrastructure for satellite communications.

As we ramp these programs, we continue to execute opportunities to [ remix ] some of our excess capacity to service FinFET demand in more durable segments, such as automotive and smart mobile devices.

We are also diversifying our manufacturing footprint by accelerating the transfer of technologies such as 22FDX, 28-nanometer high voltage and 40-nanometer ESF3 into our Fab 8 facility in Malta, New York. This diversification will offer even more choice to our customers across multiple end markets here in the U.S.

and enable a broader end market participation.

To that end, we are delighted with the announcement from the Department of Commerce to award $1.5 billion in proposed funding for GF as part of the U.S. CHIPS and Science Act, in addition to the over $600 million proposed by New York State under its Green CHIPS Program.

We're very excited to be working closely with the federal and state governments on these grants, which will enable us to add critical semiconductor manufacturing capacity and construction jobs in our U.S. locations while supporting our customers where they need us.

To summarize, I am proud of our teams around the world as they executed to plan, and we delivered first quarter revenue, gross profit and EPS which all exceeded the high end of our guidance ranges. With that, over to you, John.

Thank you, Tom, and welcome, everyone, to our first quarter earnings call. For the remainder of the call, including guidance, other than revenue, cash flow, CapEx, tax expense and net interest and other expense, I will reference non-IFRS metrics, which exclude stock-based compensation and restructuring charges.

As Tom noted, our first quarter results exceeded the upper end of the guidance ranges we provided in our last quarterly update. We delivered first quarter revenue of $1.549 billion, a decrease of 16% year-over-year, principally due to lower shipments and utilization levels in the low to mid-70s, consistent with the commentary on our last earnings call.

We shipped approximately 463,000 300-millimeter equivalent wafers in the quarter, a 9% decrease from the prior year period.

ASP or average selling price per wafer declined approximately 6% year-over-year, mainly driven by changes in the product mix shipped during the quarter. We expect that the pricing environment will remain constructive through 2024, and we believe that ASPs for the full year will be roughly flat compared to 2023.

Wafer revenue from our end markets accounted for approximately 89% of total revenue. Non-wafer revenue, which includes revenue from reticles, nonrecurring engineering, expedite fees and other items accounted for approximately 11% of total revenue for the first quarter.

Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 44% of the quarter's total revenue.

First quarter revenue decreased approximately 2% from the prior year period, principally driven by reduced shipments as customers continue to draw down inventory. This decline was partially offset by slightly higher ASPs, premium tier mix growth and continued content growth and value capture in 5G RF front-end content as well as imaging and display applications.

As Tom discussed, we believe that inventory levels in this end market will begin to normalize through the first half of 2024, with some of our customers signaling demand growth in the second half of the year.

In the first quarter, revenue for the home and industrial IoT markets, which now includes revenue from our legacy PC end market, represented approximately 20% of the quarter's total revenue. First quarter revenue decreased approximately 19% from the year prior period as our customers in the consumer and industrial IoT segments continue to focus on bringing down channel inventory, which remains elevated compared to recent years.

Reduced shipments in the consumer-centric and industrial portions of IoT were partially offset by year-over-year improvements in ASP and mix as well as increased volumes in our aerospace and defense segment.

Automotive continues to be a key growth segment for us and represented approximately 17% of the quarter's total revenue. First quarter revenue grew approximately 48% from the year prior period principally due to higher volumes as semiconductor content and features increased across the vehicle architecture and our designs continue to ramp at key customers, which were partially offset by reductions in ASP and mix.

As Tom noted, we expect automotive revenue growth to continue in 2024 as we support our customers across a diverse range of automotive applications in both internal combustion engine and autonomous connected electrified vehicles.

Finally, moving on to our communications infrastructure and data center end market, which represented approximately 8% of the quarter's total revenue, first quarter revenue declined approximately 66% year-over-year as a result of declining volumes and the key drivers outlined by Tom in his prepared remarks, while ASP and mix remained roughly flat in this end market. As Tom noted, we will continue to allocate manufacturing capacity in order to diversify our footprint with the additional allocation targeted to markets such as automotive and premium smart mobile applications.

Moving next to gross profit. For the first quarter, we delivered gross profit of $405 million, which was above the high end of our guidance range and translates into approximately 26.1% gross margin.

Gross margin exceeded the guidance range indicated, and as Tom alluded to in his prepared remarks, includes $82 million in revenue associated with the execution of customer volume adjustments. Looking ahead to the second quarter of 2024, we expect additional customer volume adjustments, which have been reflected in our second quarter guidance ranges.

Operating expenses for the first quarter represented approximately 14% of total revenue. R&D for the quarter increased sequentially to $117 million and SG&A increased sequentially to $101 million.

Total operating expenses increased sequentially to $218 million in the quarter and incorporated an advanced manufacturing investment tax credit of $10 million. As we discussed on our last earnings call, as we continue to spend on qualifying U.S.

expenses and capitalized assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program.

We delivered operating profit of $187 million for the quarter, which translates into approximately 12.1% operating margin, above the high end of our guidance range and 560 basis points below the prior year period. First quarter net interest income and other income and expense was $8 million and we incurred a tax expense of $21 million in the quarter.

We reported first quarter net income of $174 million, a decrease of approximately $116 million from the year ago period. As a result, we reported diluted earnings of $0.31 per share for the first quarter, which was above the high end of our guidance range.

Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the first quarter was $488 million.

CapEx for the quarter was $227 million or roughly 15% of revenue. Free cash flow for the quarter, which we define as net cash provided by operating activities, plus the proceeds from government grants related to capital expenditure, less purchases of property, plant and equipment and intangible assets, as set out on the statement of cash flows, was $261 million.

At the end of the first quarter, our combined total of cash, cash equivalents and marketable securities stood at approximately $4.164 billion. We also have a $1 billion revolving credit facility, which remains undrawn.

Next, let me provide you with our outlook for the second quarter of 2024. We expect total GF revenue to be between $1.59 billion and $1.64 billion.

Of this, we expect non-wafer revenue to be approximately 10% of total revenue. We expect gross profit to be between $382 million and $426 million.

Excluding share-based compensation, but including the benefit related to the advanced manufacturing investment tax credit, for the second quarter, we expect total OpEx to be between $213 million and $233 million. We expect operating profit to be between $149 million and $213 million.

At the midpoint of our guidance, we expect share-based compensation to be approximately $50 million, of which roughly $14 million is related to cost of goods sold and approximately $36 million is related to OpEx.

We expect net interest and other income and expense for the quarter to be between negative $4 million and positive $4 million and tax expense to be between $12 million and $26 million. We expect net income to be between $133 million and $191 million.

On a fully diluted share count of approximately 561 million shares, we expect earnings per share for the second quarter to be between $0.24 and $0.34.

Consistent with our commentary on our last earnings call, our second quarter guidance reflects the expectation that utilization will be in the low to mid-70s, as some of our core end markets start to emerge from the ongoing inventory correction during the first half of 2024. For the full year 2024, we continue to expect CapEx to be approximately $700 million, and as Tom commented during our last earnings call, we expect this to provide GF an opportunity to focus on delivering free cash flow generation 2 to 3x higher than 2023.

In summary, the dedication from our 12,000 employees across the world and their continued efforts to expand our differentiated product offerings in key growth segments while navigating a challenging cyclical backdrop enabled us to achieve first quarter results above the high end of the guidance ranges we provided in our fourth quarter earnings update.

We remain focused on winning opportunities in critical end markets and partnering with our customers to position them and GF for long-term growth opportunities. With that, let's open the call for Q&A.

Operator?

Tom, it seems your trends at GF are kind of bottoming about a quarter before some of the downstream customers in industrial and RF markets. I was hoping you could talk more to that contrast.

What is helping you kind of emerge from this roughly a quarter before?

And then you mentioned Q1 could be the bottom and I was hoping you could give us a sense for how you're looking at sequential growth through the rest of the year. Should we assume that Q3, Q4 can kind of grow the way you're growing from Q1 to Q2?

Or are there other seasonal or mix factors we should keep in mind?

Good morning, Vivek. Let me break the -- so the answer is yes, we're going to continue to grow quarter-on-quarter.

Let me give you some context around that. So let's first start with overall inventory.

Inventory, we look at it in 2 dimensions: Days of inventory and then absolute dollars of inventory. While in some cases, days of inventory has gotten worse, the actual dollar amounts have come down, and that's an important indicator.

And so clearly, as this year rolls on, more and more of this inventory will come down, especially in dollar amount, and we'll get closer to the natural demand. So from a macro level, as long as inventory continues to, to come down in the dollar amount, we're going to get to a point somewhere where we get closer to natural demand, a macro quick topic.

Now let's think about GF and we'll about 4 end markets and what that looks like for the balance of the year. We'll start with our comms infrastructure and data center.

In our prepared remarks, we talked about that level of revenue is roughly going to be flat as we look forward over the coming quarters. So we have CID, flat.

We go next to our home and industrial IoT. The levels we had in Q1 represent more or less flat for at least 1 to 2 quarters with the opportunity back-tied to that macro inventory situation for it to become growth for us in the back end of this year.

And then we have auto and smart mobile devices. There's a lot of talk about inventory in automotive growing.

If you think about GF, last year was a really big ramp year for us, where some of our design wins that were years in the making really started to ramp. So we didn't have a lot of time for those key products to build inventory in the channel, right?

And as we said in the first -- in our first quarter, our previous call, we talked about automotive is going to have meaningful growth this year for us and we still see that. So there's automotive is growth as we go sequentially quarter-on-quarter.

And then the last is smart mobile devices. Look, we see -- a bunch of our customers have seen and you've heard during earnings seasons, that this is a -- handsets up low, low single digits this year, with a disproportionate amount of that growth coming in premium-tier smartphones, where we play.

So there's the opportunity for growth again on a sequential basis for our company. And if you think about it, automotive, smart model devices, 60-plus percent of our revenue in Q1, that's where our growth is coming from.

And so this gives us the confidence to really feel solid about Q1 being the low point of revenue and then growth coming from there. The real question is back to the macro economy, how much growth will there be?

Will it be the kind of growth we all want to write home about? Or is it going to be muted growth?

But again, Q1 is the low point for us. Any follow-up questions?

Yes. Thank you, Tom.

So for my follow-up, maybe one on gross margins. How much did Q1 gross margins benefit from some of the restructuring and underutilization payments?

How much is that effect in your Q2 outlook? And then how are you feeling about the shape of gross margins from here, given all the pricing and mix trends?

So let's say if GF does conceptually grow roughly in this range, in Q3 and Q4, how should we think about the shape of gross margins for the rest of the year?

Yes, I'm going to pass it to John, but I think you're on an important point about sometimes there's timing in some of these events. And so the precision around -- tight precision around gross margin has something -- a lot to do about timing.

But John, I want to let you do that.

Yes. This is John.

So we had a business plan at the beginning of the year, of course, which formed the foundation of our first quarter guidance. And as Tom was just indicating, timing can vary on business outcomes.

And we saw some favorability in Q1 that helped our gross margins. So we're pleased with that.

The customer volume adjustment factor was also at play there. We did comprehend that in our guidance.

The outcomes there were a bit better than we had anticipated.

So it's really a result of those 2 factors, Vivek, with driving the gross margin outcome for first quarter. As we look ahead into second quarter, similar dynamics at work.

There are some customer payment adjustments planned in Q2, albeit not at the level of Q1. And that's starting to come in as we're settling through various customer volume discussions that we're having constructively with our customers to address business conditions and move ahead.

I will note that the guidance for Q2 is 100 basis points above the guidance for Q1. And just a reminder, the single biggest factor affecting our gross margin is factory utilization.

And a good rule of thumb is that every 5 points of utilization influences gross margin by roughly 200 basis points. So as one would expect, as loadings can pick up through the course of growth onward, we would expect improvement in gross margin over time here.

Good morning. I guess first question is regarding pricing.

In your prepared remarks, you gave some indication of where you thought pricing would be for the year. But I guess if you could expand on that a little bit, because we have heard of some of the Tier 2 foundries being a little more aggressive on pricing as the utilization comes down.

And specifically for new business that you're signing outside of the existing LTAs that have been kind of helping your pricing, where has the pricing been for new contracts that you're signing today?

Yes. So consistent with our prepared remarks, a lot of what you'll see in our ASP is dominated by what the particular mix is for that quarter.

So year-on-year, we talked about being down 6%, but all of 2024, we see a normalizing pricing flat year-on-year, '24 to '23. What that means is, one, the pricing environment remains constructive, and I don't think we're telling -- saying anything new here.

You heard that from our peer foundries or competitors on their earnings call, that they see the same environment.

The second thing is a big fraction of our revenue is single source business. And so you really can do is service true demand.

There's no elasticity in pricing. So more price doesn't give more opportunity.

And so constructive environment, differentiated business, keeps the pricing, we believe, flat year-on-year 2024 to 2023. Changes quarter-to-quarter mostly mix related.

John, would you add anything to add?

Yes, I would. Chris, I think it's important to not conflate absolute ASP with profitability as well.

In other words, just because our products may have a higher ASP doesn't necessarily mean it would have higher gross profit. Obviously, it affects wafer account and top line.

I just wanted to make that point.

Did you have a follow-up, Chris?

I do. If I could come back to your earlier comments on gross margins as well.

And just more specifically, presumably, if revenue continues to grow during the year, some of these volume adjustments will continue to come down. What does that mean for the pace of gross margins as you go into the second half and into '25?

Just the improvement in utilization, will that be enough to offset some of the reduced volume adjustments, presumably as that happens and gives you an increase in gross margin profile as we go through the year?

Yes, Chris, this is John again. So I would call it modest and stable, in a stable environment for gross margin in light of those dynamics.

Yes, those are -- those are a put and a take around how that's all playing out. The flip side to the customer volume adjustment economics is that that's really in lieu of what would have otherwise been there as far as wafer shipments and better utilization.

So I mean that's the purpose of those economics. So they are kind of offsetting one another.

You can think of it that way. But the long and short of it, as we can get to higher levels of utilization, that will be the large driver over time.

Look, and we've also, Chris, taken a lot of structural cost out. We've used -- leveraged this downturn to hold the line to become more and more efficient.

And we see the opportunity for every dollar of revenue, as we start to get back into growth, having a higher degree of flow-through than any dollar we have today. And so a lot of the things we've been able to do as a business weathering this prolonged downturn is positioning us structurally to be a better company as growth returns.

Good morning. Nice job to the team on the quarterly execution.

December quarter, you guys had $79 million of this high gross margin sort of customer utilization and restructuring fees. It was $82 million in the March quarter.

So it looks like core product gross margins were about 22%. Is that fair?

And you said on the utilization fees would be lower in Q2. Can you just quantify, John, is that $50 million, $60 million, $70 million?

And then given your fab cycle times, your wafer starts this quarter are shipments in the second half, right, which typically is seasonally stronger, especially for your smart mobile customers. So I would have assumed utilizations would have been up in the June quarter, but it sounds like they're staying flattish.

So why is that and how do you see utilizations trending for the remainder of the year?

Yes, Harlan. So yes, we didn't specify the level of customer volume adjustment in Q2.

We'll have to see how it plays out. There's a few open items that we're continuing to address in that -- in that regard.

As we work through the balance of the year, we'll see how the second half ramps.

Clearly, if we can see a more robust second half ramp, and there is some seasonality. As Tom indicated, a lot of that is just around the rate and pace of the recovery of the global economy and inventory drawdown and improvement with our customers.

But those are -- those are the signs we're looking for to see our loadings come up, see the utilization come up. And again, it's -- you can look at it that one is an offset or it's additional gross profit from customer volume adjustments or really, the way we think about it, it's really in lieu of what would have otherwise been higher utilization.

Yes, so as one goes down, because the revenue will be going up in the natural way.

Tom, you took us through some of the dynamics around sort of diversifying the technology mix for Malta, Fab 8. It's a very smart strategy, right, you talk about 40-nanometer embedded MCU, RF SOI, fully depleted SOI capabilities.

And even on the mainstream 12-nanometer FinFET capacity, right, mixing in new customers and applications as older programs phase out. Maybe you can just expand on this a little bit, maybe time lines on phasing in new technologies and success in backfilling the FinFET technology.

Yes, Harlan, first of all, thanks for this question, because I think we've not done this topic justice. I used to watch this show with my son growing up, MythBusters, and I think there's a lot of myths around what we do and don't do in Fab 8 and what diversification looks like.

So let's take Fab 8 and think about it in 2 dimensions of diversification, the first being end markets we serve with our 12-nanometer platform. And then we'll talk about diversification for the fab and the technology portfolio we will bring there in the customers, what that means to GF and also to our global footprint.

So think about 4 end markets, our comms infrastructure data center, auto, IoT and smart mobile devices. The baseload, right, is data center.

And that is almost equivalent to what we have as automotive load in the fab.

Next up is IoT, which is 1.5x more load than either the automotive -- I'm sorry, either the automotive or data center. And then smart mobile devices is 1.5x more than the other 3 end markets combined.

So there's a broad diversification. So when we think of data center clients moving to single-digit nanometer, that represents a fraction of what we do in Fab 8 on 12-nanometer.

So we need to dispel the fact that Fab 8 means data center, data center business goes down, we're going to struggle.

Now diversification, you pointed out, you said it better than I did. We have 12-nanometer technology plus the features we're adding on that, serves like we said, smart mobile devices, 1.5x more than any other combination of all our other markets.

We have 22FDX that's being currently qualified and brought up, 28-nanometer high-voltage, 40-nanometer embedded memory for automotive, 45 RF SOI, silicon photonics.

This diversification will play out for us in qualification this year, customers starting to tape out towards the end of this year into next year and then ramping in 2026 to bring this full diversification. Now why is diversification important?

And this is a point that I think we all need to understand. Having a global footprint means more than just having a location where you can produce one thing.

I call it a mailing address, a fab in any location that can make one technology is a mailing address. Because the by and large, most of your customers' demand can't be served there.

What GF has done and we've done over the last decade and accelerated in the last 5 to 6 years, was making sure every one of our global sites had diversification, so our customers can source globally and locally. It's great to have a global footprint, but it has to have a broad range of technologies.

When we complete this journey with Fab 8 and its diversification, we'll have Singapore, European Union in GF, with a lot of overlap in the technology platforms. So it's important for us as a strategic value of our global footprint, to diversify Fab 8.

And clearly, it's important for diversification to make sure our Fab 8 facility stays full.

Great, thank you. So a little over a year ago, you guys had a partnership with an automotive OEM with General Motors.

Before that, you had some discussions with Ford. We found this really interesting.

We haven't really seen OEMs work with foundries more directly like that.

Those automotive shortages are behind us. So I wonder if you could kind of talk to the commitment, the focus that those guys have on geographic diversification of their foundry and how that might help you.

So maybe I can take that one. This is Niels Anderskouv.

I'd like to take a little bit of a background on the LTA in general. And remember that the LTA is still a relatively new feature within the foundry model, but I want to emphasize that they have been a key feature of our business since 2021 and really have enabled us to invest more than $7 billion into new capacity to support our customers.

So you'll recollect from prior earning calls, earnings calls, that we've entered into more than 40 of these LTAs, including the ones you just mentioned, and with over $30 billion of lifetime revenue coming out of those for the LTAs. Fast forward to the end of 2023, and you may recall, we had approximately 2/3 of that lifetime revenue remaining.

Number one, they provided a level of certainty for both supply and demand; two, they demonstrate durability in the application to all end markets we serve; and three, they provide greater visibility and profitability to our business through a challenging market backdrop.

So clearly, our customers are essential to this and so is the longevity of our relationships with our customers. So notwithstanding some of the recent discussions with our customers on their near-term volume adjustments, it's fair to say that LTAs remain a very important feature of our business model.

So if I take those and comment a little bit to the current quarter, take Q1 here, for example. Clearly, given the inventory levels across certain end markets, the rate and pace of entering new LTAs has slowed as our customers are working through the inventory in the channel.

But by no means are LTAs less important to us or our customers, as evident by the fact that we in Q1 again announced the extension of one of our largest LTAs with Infineon. And that one was to support the long-term supply requirements of automotive-grade 40-nanometer microcontrollers.

So as you heard on the call today, there have been a couple instances where we work with our customers on adjusting their near-term volume requirements. And I would highlight that these have been highly constructive conversations and we work together on finding a balanced outcome based on the common features of our LTAs, namely fixed price, fixed volume and fixed duration.

So these are the key features that we've been able to flex in order to preserve these relationships and strike the right long-term balance with our customers. So what's the outlook?

Well, what's most encouraging is actually how well our customers have responded to these discussions.

For example, in one instance, we mutually agreed on terminating an agreement, but that was primarily to align with our customer's long-term supplier requirements. And just to demonstrate the resilience of the relationship, the very next week, that same customer taped out a new design with us.

So what you're hearing from us today is that we continue to believe the LTA framework offers a mutual -- mutually beneficial arrangement for both us and our customers to partner together over the long term.

And looking forward, I would expect to see the LTAs remaining very key to serve our customers across various end markets, automotive included, and also including the OEMs. So I think you should expect to see more on that front.

But however, it is reasonable to assume that the terms and duration of the agreements will vary according to the end markets and what we are supporting.

Great. That's helpful.

And I guess to follow up on that, there's obviously one reason to do LTAs and those types of relationships is because of tactical supply concerns, but there's also the sort of bigger picture OEM concern that maybe we're too reliant on certain geographies. So just like how strategic do you think those relationships can be?

And I guess I'm just trying to make sure people don't, with the [ shortage space ], people sort of forget about some of the reasons that they came to you guys in the first place. Are you still having those strategic discussions in terms of bigger picture geographic diversification?

Joe, I think you're hitting on a really important point. One of the things that we learned is not all end markets -- this is back to the -- there's no such thing as macro in our world anymore.

There's no such thing as just a semiconductor industry. There's a lot of different components to it that have different behaviors.

And I want to go back to the kind of discussions that we're having with auto players, why that's different with some of the other end markets.

So what's unique about auto, these are long-term supply agreements. When they qualify a part, they're going to use it for 5 to 10 years.

So having long-term visibility and long-term certainty on supply pricing is really important for automotive makers because they're making commitments for a long time. The discussions we started with them continue, but they continue in a different fashion.

Since we don't design and they don't design, there's a third party of one of our customers in the middle, and we sit down, collectively talk about what we're going to do to make sure they have the level of certainty and durability and supply for their future. In more markets that have much quicker product life cycles, what we're finding is the LTA durations don't need to be as long.

It doesn't mean customers don't want LTAs, they just want them on a much shorter duration so they can be nimble and flexible.

They still need, like all of us, certainty that when they need their product, they can have it. And so what we're all learning as an industry is to make sure that the terms and conditions of these LTAs reflect the uniqueness of each market.

Long-term markets or segments that last a long time, want long-term certainty.

In markets that have fast product transitions, they want near-term certainty, but recognizing commitments for the longer term will have to be renegotiated every year. And I think that's the one learning we're all getting out of this.

And at the end of all of this for you, you started the question with how are discussions going with the auto -- the automotive OEMs?

We continually sit down and make sure we're aligning technology road maps, first and foremost, that we're brought into conversations with our customers so that we can make sure we're all serving the same purposes. And I think there's another entrant into this marketplace, the Tier 1s are also starting to think about doing their own designs.

And we need to and continue to partner with them as well.

Yes, maybe I can just comment on the long life cycle. This is an essential part of our strategy from a technology standpoint.

Essential chip technology is all about supporting long life cycles. And we are seeing continued momentum building across the automotive space.

You just heard us talk about 17% of our revenue here in Q1 came from automotive and it continues to be a strong growth driver for us.

So strong fit to the strategy. I also want to mention, Tom alluded a little bit to it earlier, that our strategy is that we will have -- we will qualify all our process nodes for automotive.

And when you get back to what Tom just discussed about Fab 8, automotive is going to become a very, very integral factory for our automotive strategy, and that's something that's been very well perceived by the OEMs as well, having a U.S. supply within that space.

I guess just a question on CHIPS Act and the money there. So $1.5 billion, that's great, but that's -- I think that's over a year's worth of CapEx.

So you're getting all this money, but utilization rates are in the 70s and you have plenty of inventory and we're sitting here coming out of a downturn. So I guess how do we allocate all of that capacity and not have like some sort of overcapacity or some sort of pricing problem?

How is that going to work?

Yes, Chris, we don't build capacity ahead of its need. There's nothing worse than that, to overshoot the target.

And there's nothing worse than government programs with the right intention to get diversification and resiliency in supply chain, to have companies get ahead of themselves and build empty factories.

And so when I think about our global footprint, our investments going forward, we talked about at the end of this year, we'll have capacity, roughly 3 million wafers a year of output. That's the 300-millimeter equivalent.

You could do the math on our ASPs and you can see between wafers and non-wafer revenue, that gets us to a company that's $9 billion to $10 billion in revenue. And you see where we are this year, the $6 billion, $8 billion, $7 billion.

So plenty of growth ahead within our current footprint. Now securing your future and the optionality to build capacity is what we're doing with the CHIPS Act in the European Union with the CHIPS Act in the U.S.

It's to make sure that we have proper funding so that when we need to invest again, we can and we can do it in the most capital efficient way.

And it really comes back to your belief if you think the industry is done, there's no growth, then you wouldn't need any of this. We happen to believe, like many others, that this industry will double.

And it's a question if it does it 6 years, 8 years, but we need to be ready for that growth so that we can answer that for our customers. And we need to do it in the most economic, efficient way, and that's where these government funding partnerships come into play.

And we talk about the CHIPS bill at $1.5 billion. The CHIPS bill will only fund up to roughly 15% of a project.

The ITC covers another 25%. So in combination, you're seeing a high mix of government participation in these investments.

Sure, the lion's share comes to foundries like GF. But I'm not worried about -- well, I'm certainly not worried about GF putting more capacity on than we need to serve our customers.

But I'm not worried about the rest of the EU and U.S. manufacturers overshooting because they'll plan their capacity adds with the true demand for our industry.

Thanks for that clarification, Tom. And then my follow-up is on the LTAs and the contracts.

Can you let us know what percentage of say, '24 and '25 are covered by LTAs? And in terms of these customer revenue adjustments, is it that they come to you and say, "Hey, we need to renegotiate."

And so you say, "If you want to renegotiate, you just have to pay us this money," and is it all 100% gross margin? Just any insight into the machinations of all this.

Yes, Chris, this is John. We have identified how much LTA total value we have, which is approximately $20 billion.

And that's disclosed in our 20-F that we recently filed. The specific time domain of that is not called out.

That's lifetime revenue, you've got time -- product life cycles that vary by the end market. But that gives you a sense of the coverage level, if you will.

I mean look, the economics may flow in with customer volume adjustments, but the fundamental purpose of these LTAs, as Niels just spelled out, to provide that surety to customers and to give, give the confidence that they'll have the supply in a resilient manner when they need it. So that's really the purpose.

Couple questions. The first one is on the node transition risk.

I know, Tom, you talked about what's happening in the comm infrastructure and data center segment, but how would you characterize that node transition risk entering this year versus exiting this year? How do we think about that as a headwind over time?

And I know you're diversifying away from it as well.

Yes, I think, as I said before, how we serve that market, we're pretty much at the low end of that revenue. And the real question is how do we build this back to the business we want it to be, through our technology platforms for power delivery and solving the bandwidth challenges.

And so that's the growth opportunity for us back into this end market. We can hold the line of where we are today at that level of revenue that we spoke about.

Well, I guess as a quick follow-up, is there something beyond that? Do you have a similar problem in smart mobile devices, not just limiting the original question to the comm infrastructure side of things.

I think there's a fundamental element to which single-digit nanometer does and what it doesn't do. If you're able to have an application where it doesn't make a difference that the cost per transistor goes higher, but the power used per transition -- transistor is a premium, then those applications will pay that for that transistor.

And so that creates a real moat around not wanting to go to single-digit nanometer unless the application actually requires that. And so you're seeing it in data center.

You're seeing it in where power is the key metric and minimizing power use. So we think the moat is if this was the old days of Moore's Law, where you've got a lower cost per transistor, right, we'd all have to move.

Now we sit in an area where customers are, are working with us with the expressed intent, save us from having to go to single-digit nanometer and pay more per transistor. And that's what is the barrier and that's why we need to continue to innovate and drive features on our platforms to prevent our customers needing to have to pay more for the products to service the markets they want.

If I may add to that, we actually -- we're seeing it today on 22FDX. We're seeing several of our customers asking for us to continue to innovate on the process nodes so they can stay on it longer.

And we're seeing the early same trend happening on 12-nanometer. In our road maps, we have newer versions of 12-nanometer that gives you a much better power performance ratio out in time.

So if you think about the essential chip technology strategy we put in place across the 4 product lines, it really is about extending the life cycles of these process nodes and continue to make sure that they stay competitive so we continue to win new businesses.

And I think the example of smart mobile devices being the biggest end market in 12-nanometer today exactly just illustrates that. It's a great fit to that segment and we'll continue to optimize for it and make it even better.

Good morning. I guess first question on auto, down 16% sequentially.

I think it came in a little bit worse than what we were thinking when you initially guided. Curious, maybe what changed in the quarter in terms of product or subsegment?

And then I guess as you think about the recovery into June and beyond, what are the key drivers that we should be focused on there?

Look, I think this quarterly seasonality, those things, we don't pay a lot of attention to in this segment given the fact that it's a very long duration. What we're highly confident in is that this is a business that will continue to grow, not only in the out years, but this year, and meaningful growth in the mid- to high-single digits for us in 2024.

So we see it. We see it in the order book and we see it in our business plans.

So I wouldn't read too much into a quarter and quarter down in automotive, especially given last year was a year of over $1 billion, growing from $375 million the year before.

Do you have a follow-up, C.J.?

Yes. I guess maybe a question on smart mobile.

Maybe kind of similar type of question. You talked about mix shift to premium phones, which benefits you.

think you talked about RF front end and display drivers as incremental drivers for you in '24. So is that a business that you think can grow in all of calendar '24?

Or is there sufficient inventory challenge that that might be difficult?

No, we'll -- we believe that's an area that we will grow this year. With content growth, with handset growth, means we can have growth.

We're coming off of a Q1 that was already challenged with inventories in the channel. So as inventories bleed out, handset growth happens, we see growth in smart mobile devices for GF this year.

Yes. I think that's a good growth story we have there.

Handsets growing, us growing, us having a larger share in premium handsets that we believe that to grow faster. And then on top of that, you're starting to see inventory dollar-wise draining in the space.

So yes, we do believe that's going to be a growth market for us this year.

Julia, we'll take one last question, thank you.

Yes. A couple of follow-ups.

Tom, just double-clicking on communication. I believe that your comments suggest that the revenues there are expected to grow flattish throughout the year, especially with the migration to nanometer.

What I want to better understand is, when do you expect new opportunities like silicon photonics that have been talked about in the downstream, are going to be material to you?

And then one follow-up question for John. How should we think about D&A and OpEx in '24 versus '23?

John, go in reverse order [indiscernible].

Yes. Yes.

No problem, Mehdi. So D&A, roughly consistent.

It's how we see that. We've drawn down our CapEx a fair amount.

As we said in our prepared remarks, we see about $700 million as our estimate for the year, which is enabling tremendous growth in free cash flow and we're holding the view that, that can increase to 2x to 3x the free cash flow that we generated in 2023. So that's, that's positive.

As far as OpEx, just a quick reminder that we had a large credit in the fourth quarter related to the advanced investment tax credit. That was coming into SG&A.

That was about $50 million of credit in Q4. We've got that more normalized now in the first quarter, but you do see an uptick in OpEx for Q1 related to that as that was a onetime benefit in the fourth quarter of 2023.

So let me maybe address the data center part of the question. So in data center, the 2 major growth vectors that we're seeing is, as you pointed out, silicon photonics and power delivery.

So maybe if I start with silicon photonics, where the market is at today is that you're starting to see adoption and products being released in what we term as the pluggable space.

So these are the pluggable type of silicon photonic devices that you're seeing out there today. Where we're seeing a lot of activity for future growth and maybe more substantial growth is in the co-packaged silicon photonics, where basically you're starting to see silicon photonics becoming a real design consideration for GPUs, NPUs and CPUs, simply to be able to enable the [ BaM if ] you need to have, not just within the rack, between the racks, but also within and between the processors that sits on the main board.

So that's a big growth vector.

Obviously, not something that happens overnight. These are big infrastructure changes.

So you should expect that, that will probably take a couple of years before it really materialize, but starting to see some early momentum on that front.

Power delivery, very exciting. We're making very good progress on that, power delivery for data centers.

initially, it is with our BCD technology and our 12-nanometer technology that we're seeing the first tape-outs. And as you know from previous calls, we are investing in GaN technology as well, and we believe that GaN, both the 650-volt as well as the 100-volt GaN, will have a major play also within the data center.

So those are some of the future growth areas for us in data center out in time.

Thanks, Niels. Julia, I think we're coming up on the O&O.

Thank you, Julia. Thank you everyone for joining us on the call today.

I appreciate the questions and looking forward to seeing and speaking to many of you over the next couple of months.