Thank you for standing by, and welcome to GlobalFoundries’ Third Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your host, Head of Investor Relations, Sukhi Nagesh. Please go ahead..

Thank you, Latif, and good afternoon everyone, and welcome to GlobalFoundries’ third quarter 2021 earnings conference call, our first as a public company. On the call with me today are Tom Caulfield, our CEO; and Dave Reeder, our CFO.

A short while ago, we released GF’s third quarter financial results press release, 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 as well as non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for our non-IFRS measures are available in today’s press release and accompanying slides. I would remind you that our financial measures are unaudited.

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 may 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 financial prospectus filed with the SEC on October 29, 2021, in connection with our IPO.

We will begin today’s call with Tom providing a summary update on our end markets, capacity expansion and technologies. Following which, Dave will provide details on our third quarter financial results and fourth quarter guidance. We will then open the call up for questions. We request that you please limit your questions to one with one follow-up.

With that, I will now turn the call over to Tom for his prepared remarks..

Thank you, Sukhi. Well, welcome everyone, to our first earnings conference call as a public company. Our IPO on October 28 was an important milestone for GlobalFoundries. It was a culmination of over a decade of work to build an at-scale global semiconductor foundry with strong technology differentiation.

In 2018, we drove a fundamental change in our strategy to become a more relevant, and more importantly, a more vital contributor to this industry by becoming a profitable and sustainable business. We strengthened the management team. We refocused our investments in R&D and CapEx to differentiated feature-rich solutions.

We forged stronger customer partnerships, and we streamlined our manufacturing footprint and cost structure. Our strategic initiatives are now well in place, and we anticipate driving profitable growth. While we are seeing the initial results of this in 2021, we are really at the beginning of this journey.

We expect this will become more apparent in 2022 and beyond as our revenue will continue to grow with the capacity investments we are making. And as a result of this increasing scale, we expect even faster growth in our margins and earnings. We have significant business visibility and certainty with customer long-term agreements.

This gives us confidence that the fundamentals of our business will continue to improve at a rapid pace over the next three to five years. Now while we are excited and proud of our IPO, we recognize it is ultimately just the first step in a much longer journey.

We take our responsibility and duty to create long-term value for investors, our customers, our employees and our many other stakeholders with a heightened sense of urgency.

We’ll do this by continuing to focus on creating innovative solutions for our customers by partnering closely with them, embracing the diversity of our team and delivering services and products that allow our customers to win in the markets they serve. Now moving on to our third quarter.

We are pleased to report a quarter of strong top-line and profitability growth, demonstrating the continued success of our strategy. Third quarter revenue grew 5% quarter-on-quarter, driven by higher wafer output than the – and the continued improvement in mix as our differentiated solutions become a larger portion of our total business.

Third quarter adjusted earnings per share came in at $0.07. Now, David will provide more details on the financials in just a moment. But first, let me give a summary of third quarter revenue by our end markets.

First, in our smart mobile end market, which comprise roughly 50% of our third quarter revenue, we saw strong year-over-year growth of roughly 45%, driven mostly by the continued ramp of our single-source design wins in the growing markets such as 5G RF front-end modules for mobile handsets, for image sensors and WiFi 6.

Our differentiated technologies continue to do well in the 5G sub-6 gigahertz market. We are still, though, in the early innings of the industry transition to 5G with market segments – I’m sorry, with market estimates of doubling of 5G handsets to nearly 500 million units this year.

Next, our communications infrastructure and data center end market, which constituted approximately 17% of our third quarter revenue, saw over 30% year-over-year growth, driven by a combination of share gains by our customers, continued strength in the enterprise data center study infrastructure in RF transceiver markets.

Moving on to Home and Industrial IoT end market, third quarter revenue was roughly 13% of the total and grew approximately 37% year-over-year. The growth was driven by a combination of higher ASPs as well as the ramp of IoT products from some of our key customers for applications such as digital TVs, WiFi and secure contactless transactions.

In addition, we saw broad-based growth for MCUs in the quarter. Touching next on automotive. Revenue in this end market was approximately 6% of our total third quarter revenue and grew almost 4x from the year prior period.

The strong growth in our automotive end markets was driven by the ramp of new designs that have been in development and qualification over the past years. GF’s automotive products are now going into a variety of automotive uses, such as in-vehicle comfort, safety, sensing and battery management solutions and EVs.

The chip shortage in the auto industry has accelerated demand for many of our customers who have entered into long-term agreements with GF to ensure supply continuity for their new products that ramp over the next three to five years. We are very excited about our strong traction in the automotive end market.

In our compute end market, revenue was roughly 7% of total and declined year-over-year as expected, as some of our customers designed to continue to transition to smaller nodes.

We continue to forecast a decline in this end market for the first half of 2022 and then see stabilization as an improvement in the second half of 2022 from ramps from newer high-margin customer designs. We expect, however, the decline in revenue in this end market to be more than compensated with growth in other end markets.

Next, I’d like to provide a brief update on our ongoing capacity expansion plans. Overall, our global installed capacity will increase approximately 4% from 3Q to 4Q, which is approximately 12% increase from the fourth quarter of last year.

Our installed capacity in our Fab 1 facility in Dresden, Germany, is increasing output by approximately 16% from 3Q to 4Q this year, and this also represents about a 15% expansion at the facility from a year ago.

All of this expansion in capacity is in support of customer demand for our differentiated technologies such as 22FDX, 20nm ISP and our BiCMOS technology.

Also, construction on our Phase 1 module expansion in Singapore remains on track with equipment slated to go in the facility in the second half of 2022 to support first production out in the first half of 2023. In addition to our ongoing capacity expansion, we continue to make strong progress in enhancing our differentiated technologies.

For instance, in 3Q, we completed Automotive Grade 1 Qualification of our 22FDX RF and millimeter wave platform, including reference IPs for complex, analog and RF blocks, a complete ecosystem design services, including IP providers, EDA vendors and turnkey services. This feature-rich platform is targeting automotive smart sensors and processors.

For example, Bosch is a lead customer for ADAS radar SoCs and they’re leveraging our 22FDX platform for their next-generation radar systems.

Our technology team also delivered the first functional resistive RAM bit cell, an enhanced version of FDX we referred to as 22FDX+, which is targeted for Tier 1 customers seeking next-generation wireless secure transaction capability in mobile, IoT and automotive end markets.

These achievements are truly differentiated and are allowing our customers to win with ultra-low power in analog, RF and MCU designs. In silicon photonics, our 45CLO platform delivered first customer prototypes that demonstrated in 8 lambda 32-gigabit per second optical link with extremely low bid errors.

We are the technology leader in silicon photonics as we are the only provider of integrated CMOS RF SOI and optical devices in a monolithic solution. This unique capability will drive a whole new upgrade of connectivity in data centers over the next decade.

So to summarize, we are seeing strong growth from our customers in the end markets we serve, and we are prudently and in partnership expanding our capacity to serve their needs and making great progress in accelerating our differentiated technologies for the future.

With that, let me turn the call over to David to provide the financial details for the third quarter and also provide you our guidance for the fourth quarter.

David?.

Thank you, Tom. And let me also express my excitement for GF’s IPO. What an incredible milestone for the company and an important funding mechanism for our future capacity expansion. Now on to our third quarter. Our third quarter results came in at or above the high end of our – of the financial ranges we provided last month in our prospectus.

Our third quarter revenue was approximately $1.7 billion, which increased 5% sequentially driven by higher wafer shipments and mix. We shipped approximately 609,000 300mm equivalent wafers in the quarter, which was up about 2.5% on a sequential basis. Wafer revenue from our end markets accounted for approximately 92% of total revenue.

Non-wafer revenue, which is typically between 5% and 10% of total revenue, accounted for approximately 8% of revenue for the quarter. As a reminder, non-wafer revenue includes reticles, nonrecurring engineering multiproduct wafers and other foundry services.

For the remainder of the call, including fourth quarter guidance, I will reference adjusted metrics. Our adjusted metrics exclude stock-based compensation. For the third quarter, we delivered adjusted gross profit of $306 million, which translates into approximately 18% adjusted gross margin.

The 155 basis point sequential improvement was primarily driven by better fixed cost absorption and modestly improved ASPs. R&D expense, excluding stock-based compensation, was approximately $111 million, about $10 million lower than the previous quarter.

The sequential decline was primarily due to lower fab technology start-up costs and increased customer-funded NRE. Excluding stock-based compensation, the sequential decline in R&D was mostly offset by a $9 million increase in SG&A expense. This increase was primarily due to higher employee costs and IPO-related expenses.

Total operating expenses, excluding stock-based compensation for the third quarter, were approximately $225 million and roughly flat compared to the previous quarter. We delivered adjusted operating profit of approximately $81 million for the quarter, which translates into 5% adjusted operating margin, a sequential improvement of 224 basis points.

Third quarter net interest expense was approximately $27 million, and we incurred a tax expense of approximately $22 million in the quarter. We also had approximately $2 million of other income primarily related to a gain on asset sales.

The combination of these results delivered third quarter adjusted net income of approximately $34 million, which is $0.07 of adjusted earnings per share on a basic share count of about 500 million shares. We delivered record third quarter adjusted EBITDA of approximately $505 million.

EBITDA grew $39 million sequentially on $80 million of incremental revenue growth and almost 50% fall through. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the quarter was approximately $1.1 billion and included approximately $574 million of customer prepayments.

Gross CapEx for the quarter was about $392 million or roughly 23% of revenue. We ended the quarter with a little over $1 billion in cash and cash equivalents, an increase of more than $200 million from the previous quarter. Now as you know, we raised approximately $1.5 billion from our IPO at the end of October.

And as a result, we are very well capitalized. We expect to use the majority of the proceeds from the IPO for our capacity expansion plans to meet robust customer demand. Next, let me provide you with our outlook for the fourth quarter. We expect revenue to be between $1.8 billion and $1.83 billion.

We expect gross profit to be between $335 million and $350 million. And adjusted gross profit is expected to be between $344 million and $359 million. We expect operating profit to be between $55 million and $75 million. And adjusted operating profit is expected to be between $92 million and $112 million.

Excluding share-based compensation, for the fourth quarter, we expect R&D to increase moderately on a sequential basis, primarily due to higher fab technology start-up costs; SG&A is also expected to increase moderately on a sequential basis, primarily due to expenses related to our IPO and becoming a public company.

We expect net income to be between $13 million and $33 million; and adjusted net income to be between $50 million and $70 million. On a basic share count of approximately 525 million. We expect basic earnings per share for the fourth quarter to be between $0.02 and $0.06. And adjusted basic earnings per share to be between $0.09 and $0.13.

For the fourth quarter, we expect adjusted EBITDA to be between $510 million and $530 million. And finally, we expect share-based compensation to be approximately $9 million in cost of revenue; $2 million in R&D; and $26 million in SG&A for a total share-based compensation of approximately $37 million. With that, we can open up the call for Q&A.

Operator?.

[Operator Instructions] Our first question comes from the line of Harlan Sur of JPMorgan. Your line is open..

Good afternoon and congratulations on the strong results and guide on your first quarter as a public company. At the time of your filing, your long-term agreements covered about $20 billion of forward revenues, which when you combine that with current purchase orders, it covered about 85% of your revenues over the next three years.

Since then, obviously, the supply-demand gap in the industry has gotten more severe, and I think further motivating your customers to lock-in assurance of supply over multiple years.

Can you guys just give us an update on the $20 billion of LTA, what does that number look like today? Does it extend beyond 2024? And is it balanced across all of your end market segments?.

So first, hello, Harlan, thank you for joining us. I’ll let David start with that, and maybe I’ll add some color at the end..

Hey Harlan, hope you’re doing well. Since our roadshow, we have made progress on our LTAs. I think at the time of roadshow, we were talking about roughly $2.5 billion of customer prepayments and fund access fees. And today, that number’s a little bit north of $3 billion of commitments from customers with respect to prepayments and access fees.

So some good progress there. With respect to revenues, we’ve also continued to make progress on our LTA revenues where we’ve made good progress. We’re north of $20 billion now. We’re pleased to report that we’re north of $20 billion now.

We’re not going to provide more color than that at this time other than we’re very excited about the trajectory of the business.

Tom, anything you’d add?.

Yes, I would just add these long-term agreements are very important for us because of the visibility gets to our business, but we always need to keep a certain amount of flexibility because some of our customers may need more than what they’ve signed up for. And so we can’t have 100% of our business in any given year signed to a long-term agreement.

We want to leave some flexibility to be able to respond to our customers. Thanks for the follow up. Thanks Harlan..

So as your customers’ customers figure out how to prevent a similar supply-demand dislocation, like the one that we’re currently going through.

Their thinking and rethinking their supply chain strategies, I think your recent partnership with Ford sort of encompasses this, right? They talked about potentially securing supply for their chip suppliers, but they also talked about potentially doing some in-house chip design as well.

You already have other end customers, Cisco, Microsoft, Amazon as direct customers.

Do you guys see this trend continuing? In other words, more cloud titans, more auto OEMs, more consumer device OEMs coming to the table to talk to you? And how many of these discussions are you having? And how do you see this benefiting both GlobalFoundries and the industry longer term?.

Well, let me start with the high-level view of this is today, product companies differentiated by integrating technology with firmware and software. And now they’re seeing that there’s real leverage others have done this already very successfully. But there’s leverage owning some of the silicon design as they integrate the technology.

And I think that’s the trend you’re starting to see. Some of the more famous players in the mobility space kind of patented that technique and others are following it.

Taking that down to, I think you’re seeing this in automotive as semiconductor is going to become the defining line for differentiation in the automotive experience, I believe you’re seeing automotive companies want to become what I would call more silicon aware. And that’s exactly what Ford is doing in their MOU they signed with GF.

They want to first make sure that they understand the supply-demand dynamics. They want visibility to supply. They want to make sure they influence the technology road maps for foundries so that the features that we create align with their needs.

And then also making sure just like our customers, that whether they design the product or not, making sure that they reserve capacity to make sure they can build the vehicles they want.

And that’s the essence of what I think you’re going to see – that’s the essence of that agreement and that you’ll see more of that in the industry and more of that from GF.

David, anything you’d add to that?.

Yes, thank you..

Well said, Tom. We’re excited about the opportunity. Thank you, Harlan..

Thank you..

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is open..

Hi guys. Thanks for let me ask few question. I’ll echo the congratulations on the first quarter out of the gate. Tom, I just want to ask a high-level question to you about customer behavior. Investors are just a little concerned about the sustainability demand.

We know you have a great batch of LTAs and prepayments, great visibility for next year and those deals are set in stone, so to speak. But customer behavior and lead times expedites, those sorts of things at this point in the cycle can tend to get a little bit more volatile.

So I want to see if there’s any update that you’ve seen or any changes you’ve seen in how your customers are acting on the demand side?.

I think we – first of all, thanks for – Ross, your question. I think we sit in a very unique position as a foundry where we get to see what’s going on in a lot of the end markets, in particular, the five we serve. And I have to tell you, not – anything noticeable from our seat from what we talked about in the roads show.

We are still dealing with shortages of what we can supply to our key customers in 2022 and figuring out how we could produce more, how do we do the right balance and allocations. So there’s nothing that we see in the industry for 2022 that would suggest the frothiness that you described is changing.

I have to tell you though I would welcome a little bit of the softening of demand just a little bit to make some of the closure of that gap. And so what we’re doing, I think, more importantly, is the investments we’re making over 2021 and 2022 to close that supply-demand gap for the industry. I hope that helps..

It definitely does. One then as a follow-up, for David was on the gross margin side of things. I know you talked about mix and scale, which are kind of good things, but relatively obvious as you grow.

How do we think about the gross margin trajectory going forward? Any more color on the 1.5 points you got 3Q to 4Q and then going forward beyond that?.

Absolutely, Ross. And before we move to that question, let me just add one comment and expand upon Tom’s answer from the last one. Look, we’ve signed about 25 long-term customer agreements. We signed even several since the roadshow, which, as you know, was only a month ago.

And we’ve added more than $500 million of customer prepayments and access fees that are committed since the roadshow. And so we see some pretty strong demand in front of us.

We are capacity limited, and we are working diligently every day to get new tooling in and get factories ramped and online so that we can produce more wafers for our customers, which is a good lead-in related to the gross margin question that you just asked.

Gross margin going forward, we talked about 2021 really being a year in which depreciation moderates and we really start to take advantage of some of the fixed cost absorption as we tool out this manufacturing footprint that has been untooled since our pivot.

And so as we start to tool out those facilities, the biggest one being Dresden, as we tool those facilities out, we’re actually getting better cost absorption than we expected. That’s the positive news about the gross margin in third quarter. It’s also part of the reason why we’re positive on the trajectory of gross margin in fourth quarter as well..

Thank you..

Thank you. Our next question comes from Vivek Arya of Bank of America Securities. Your line is open..

Thanks for taking my question and congratulations to the team on going public. Tom, you described some of the customer prepayments that’s kind of very strong endorsement about the visibility. I’m wondering what kind of dialogue you’re having with the governments right, whether it’s in the U.S.

here with the chip side or whether it’s with the governments across Europe and in Singapore, because there is a lot of motivation to onshore and bring on more sovereign capacity.

And I’m wondering what kind of dialogue you’re having, when do you start to see the benefit of that?.

Well, let me start with our first expansion we’re doing in Singapore. As we spoke about in the roadshow, that’s a $4 billion Phase 1 expansion. And it has significant government support, as we’ve talked about in the roadshow.

So governments are already participating when I call the new economic models to create the kind of capacity we need in this industry, where it’s customers foundries like GF and governments that participate to create the right economics to add capacity. The U.S. continues to make progress.

There’s now a fabs bill that talks about 25% rebates on equipment. That’s working its way through. Still very positive that the – will get funded. I think the timing in the U.S.

is – there’s a couple of things that need to get out of the way to clear the hurdle like the debt limit and getting the build back better kind of funded and clear the deck to get the chips bill funded. And I think that is more targeted – the best crystal ball I have is Q1 of next year.

I’d be pleasantly surprised if it got pulled into this year, but we’re getting down to the short strokes series, as we – first day of December’s tomorrow. And then Europe continues to have high goals and ambitions to go fund capacity onshore, and we’re waiting for more movement in funding of what’s called IPCAI 2.

Nothing new to report on that front from our roadshow just a month ago. Maybe I would add – I’d add on that, just that – in all of those regions, GF is uniquely positioned to be part of that partnership to create the capacity.

Do you have a follow-up to that?.

Yes, thanks. So for the follow-up, one more on gross margins. So the pricing environment seems very strong, right? It’s clear to see your sales growth is outpacing your capacity right, and wafer shipment growth.

I’m curious, Dave, as you look at the next several quarters, how should we think about that interplay between how pricing and mix and utilization will help to drive your gross margins and help to kind of close the gap between where you guys are and versus where your peer group is?.

Sure. Look, it does remain, I would say, a robust pricing environment. When we saw the demand that was in front of us, Vivek as we kind of talked about in the roadshow, earlier this year and, in fact, even late 2020, we really wanted to focus on three things as a company to get us to our long-term model. We wanted to focus on certainty of demand.

We wanted to focus on durability of the end markets and the customers that we serve, and we wanted to focus on profitability, in no particular order of those three.

And so as we made progress on our LTAs throughout the course of the year, we started to see that 2021 for us, as I mentioned, was really a year of moderation of depreciation and fixed cost absorption. And we had a large percentage of our business that’s single-sourced with those customers.

And so as we signed and contemplated those LTAs, we really baked in a lot of the pricing improvements into 2022 and beyond. And so 2021, you’re seeing the margin expand in a methodical and predictable way really based on moderation of depreciation and fixed cost absorption.

And then when you look further out into time and you start to see those LTAs really start to pick up in the 2022 time frame, that’s when you really start to see the pricing impacts.

Tom, anything you’d add to that?.

Yes, I’d just say there was a methodology to that as well with our customer engagement was to give our customers the chance to understand where these pricings will come from and give them a chance to respond to what they want to do in the marketplace..

Thank you..

Thank you, Vivek..

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your question please..

Great. Thank you and congratulations on your first quarter. I wonder if you could talk about the Smartphone business. You guys seem to be showing quite a bit of strength there. It’s one area where, at least from the RF customers, there was a little bit of a mixed Q4 outlook is still a very good 2022 outlook.

So maybe if you could just kind of talk to the prospects for growing that business over time..

Yes. So I think for me, the smart mobile device is the poster child for feature-rich technology like we make, whether it’s secure pay transaction, audio functions, the power management ICs, the chips that control the touch screen or as you’re talking about for connectivity to front-end modules.

I think you’ll see puts and takes amongst all the players, but we have a significant share because of our differentiated technology with all the players in that front end market, the front-end module market with our ASW and RF SOI technologies.

So what we’re seeing is maybe some puts and takes across the customers, but the overall volumes, we’re not seeing any change. In fact, we’re still trying to catch up to all the demand.

David, anything you’d add to that?.

No, I think it’s well said, Tom, we’re positive on the trajectory of that business..

Great.

And just as a follow-up on that segment, is the visibility and the kind of supply constraint different in Smartphone versus other markets? Or does it feel just as constrained to you as kind of the other end markets are?.

A lot of the solutions we provide to our customers play in multiple markets. And so it’s kind of squeezing the balloon one end and it pops at the other end. So I think it’s pretty broad-based actually..

Great. Thank you..

Thank you. Our next question comes from Chris Danely of Citi. Please go ahead..

Yes. Thanks guys. And I’ll add to the line of congratulations. Just another question on end markets to follow-up to Joe’s question.

So to be a little more specific on the sequentials, why was mobile flat sequentially? Was that pretty much in line with expectations? And then also why was the comm business up so much sequentially? And then any color you can give on guidance by end markets for Q4 would be great..

Dave, why don’t you take that one? I’ll add some comments..

Sure. Look, smart mobile is, as you know, it represents about half of our total revenue. And we were expecting that business after good sequential growth from Q1 to Q2, we were actually expecting that business – it was up modestly. We’re expecting that business to be kind of relatively flat on a quarter-to-quarter basis on a sequential.

And so the rest of the businesses, however, when we look at automotive up in a meaningful way, comms, as you mentioned, infrastructure data center up in a meaningful way and then, of course, home and industrial IoT also up in a meaningful way. If you think about the macro trends across those markets.

Those are all markets that we expected to grow in a pretty meaningful way for us sequentially, and they did.

Tom, anything that you’d add?.

Yes. I’d add yes, I’d like – there is some timing between when the cyclicality of the smart mobile market and when inventory start to build, and there’s a little bit of that in play there as well..

Great. And for my follow-up, do you think that the supply chain is starting to get a handle on the shortages, especially in the automotive and the industrial space? Or do you think it’s still getting a little bit worse out there..

That’s a great question. I think, broad brush, say better or worse that there’s pockets where there’s maybe better planning and there’s a better opportunity. I would say that over the course of this year, we’ve closed the gap but it really started with a significant gap between the supply and the demand.

And I think we’ve made as an industry as we have record shipments in all manufacturing, we’ve closed that gap, but nowhere near where it needs to be closed. I think that’s the closest I could come to give a broad-based answer to that.

David, would you add anything to that?.

No. I think that’s well said..

Very helpful guys. Thanks and enjoy the holidays..

Thanks Chris..

Thank you. Our next question comes from Chris Caso of Raymond James. Please go ahead..

Yes. Thank you. Good evening. The first question is a follow-up on some of your earlier comments on pricing. And what it sounds like from your comments and just to confirm my understanding that it sounds like there’s a natural tailwind for pricing as we go into 2022 as the LTAs kick in that were signed at higher prices.

But as a follow-on to that, is just a question of what the trajectory of pricing in the industry, do you believe is longer term? I guess a question on how much of the improved pricing that we’re seeing now is cyclical versus structural for your part of the industry?.

Yes, let me – I’ll give the industry perspective, Dave, always ask you your thoughts on it. I think it really comes back to the fundamentals. This is an industry that’s, call it, $0.5 trillion industry. It took 50 years to get to become $0.5 trillion industry.

And you pick your analyst, it’s going to double in the next eight to 10 years kind of a 5x acceleration it creates. The economic model that created this $0.5 trillion industry is not the economic model that will allow us to double in the next eight to 10 years. And as a result, there has to be better ways of funding this capacity.

And one of which is higher ASPs to be able to afford that type of investment. So I don’t think this is a moment in time.

I think this is part of the growth trajectory of our industry to be able to afford the capacity and do it in a way where it makes economic sense for the offtakers of that capacity and foundries like yes, that have to create that capacity.

David, what would you add to that?.

Yes. Just a couple of things really specific to GF. I agree and echo all of Tom’s comments. But specific to GF, you’ve seen some modest, I would say, modest price improvement from sequentially Q1 to Q2, Q2 to Q3. As Tom mentioned in his script, capacity sequentially Q3 to Q4 goes up about 4%.

But if you look at our revenue guide at the midpoint, we’re guiding up about 7%; at the high end, about 8%; at the low end, about 6%. And so that implies that we’re mixing up and ASP up in our business sequentially from Q3 to Q4.

And so I think when I look out into time, I look at these LTAs, I look at the duration on the LTAs probably centered up around four years for us. I look at the pricing in those LTAs, which is really pretty flat. So kind of step function up and then pretty flat as those LTAs ramp kind of throughout 2022 and even parts of 2023.

This looks like a long-term trend to me, and that’s speaking specific to the data that I gave you..

Got it. Helpful. Thank you. As a follow-up, if you can make some commentary on CapEx where it is now and where it’s been going. It looks like it’s obviously up a lot year-on-year. From my numbers, it looks like it’s actually down a bit sequentially.

You talk about where CapEx needs to run over the next couple of quarters in order to hit your customer shipment goals and maybe speak generally about the availability of equipment, is the availability of equipment adequate to be able to support the ramp that you need to execute on?.

Sure. So if you recall from the roadshow, we were talking about our CapEx over 2021 and 2022 roughly being about $2 billion in 2021, roughly $4.5 billion in 2022, again, all supported by those LTAs that we’ve talked a bit about on this phone call.

For 2021, we’ll probably come in closer to about $1.9 billion, plus or minus $100 million or so depending on what comes in between now and the end of the month from an equipment perspective. And then we’re still looking good to roughly that $4.5 billion number for 2022.

So from a CapEx perspective, I would say we’re largely on plan to what we spoke about in the roadshow. And so no real meaningful changes there with respect to CapEx..

No, I’d add two things. One, our long-term model is after we get through this essentially acceleration of capacity to meet our customers’ needs in their partnership. We’ll get to that 20% of revenue in time.

And then there was a little bit of a question on do we have the access to the equipment, when we started the – our expansion in our plans, it was late Q4 of 2020, early Q1 of 2021. A little bit ahead of the kind of the acceleration of all the equipment needs.

So the combination of we were early into block our slots with our equipment suppliers in this rapid expansion the whole industry is doing as well as prudent planning of when those tools would come online. It gives us the confidence that when we look forward in how we’re managing our business, we won’t be gated by equipment deliveries..

Thank you..

Thank you. Our next question comes from Tristan Gerra of Baird. Your line is open..

Hi good afternoon and congratulations on going public. A question about your end market mix longer term. I think you’ve mentioned in the past that smartphones and IoT are pretty much in-line with corporate average gross margin, and the rest is higher margin. You’ve talked about the contribution of depreciation and ASPs and gross margin.

Longer term, when do mix shift within your end markets and notably the higher-margin in infrastructure, automotive start really contributing to your gross margin? And also, where could we see automotive as a percent of revenue in a few years from now from the 6% that you’re exposed to today?.

David?.

Yes. So what we’ve spoken about is that our end market mix longer term, our personal computing segment will become a smaller part of our business as a percentage of total revenue going forward. I think you’re starting to see some of that on a sequential basis, and you’re certainly seeing some of that on a year-over-year basis.

So that’s a trend that we expect to continue over time as we start to reach our longer-term model, let’s call it the 2025-ish time frame. Automotive for us, you’ve seen grow in a very meaningful way this year off a very small base, granted, but we have some very nice design wins. You’ve seen some of those publicly announced in the marketplace.

You’ve seen some of the partnerships that have also been announced. And so that’s a segment for us. That could get to a level of, call it, 10% to 15% of business longer-term, that’s something that could grow for us in a really meaningful way.

Comms, infrastructure and data center, home and industrial IoT and smart mobile devices, those are all areas where we have real franchises.

So whether – we’re talking about our franchise in connectivity and SOI, whether you’re talking about some of the things that we’re able to do uniquely in power management, whether you’re talking about longer-term silicon photonics or silicon germanium, those are some areas where we have some real differentiation of the company, and those market segments will start to grow as those design wins are employed.

Tom, anything you’d add?.

Yes. I’d add a little bit about what we’re really shifting in the industry. Maybe 10 years ago, the number one criteria for a designer was digital performance, then power, then maybe connectivity, it’s kind of flipped around now. Power is the number one element to solve for. Then connectivity and then take this plenty of digital compute.

And I think that plays to our strength across these end markets. Now on PC, that’s a little bit different. That’s all about digital compute, and that’s why that market kind of moves away from us, which is fine because the markets we play in, in IoT and industrial business and automotive and the mobile handset, it’s all about power management.

And so that’s really where I think our differentiation, our leadership as a company comes into play. Not to mention next generation of connectivity in the data center and our leadership, I call bleeding edge in silicon photonics is where we’re positioned..

Yes, for my follow-up, I wanted to get a sense perhaps of your growth for the various nodes, whether we’re looking at 12-nanometer and higher nodes or any areas that you see growing faster? And how does that compare with the industry average? Just trying to get a sense of your mix by nodes in terms of growth prospects?.

We don’t think about our business that way and we don’t talk about the business that way. When we pivoted the company, it was about platforms that are enabled with markets and applications. There’s a single device type in mind.

For us, it’s what are the features we’re creating and what platform that make the most sense and that’s how we think about investments, that’s what we think about driving our business, and that’s what drives our top line growth in these markets. So we really don’t have a view of that granularity or looking for in a node basis.

David, anything you’d add to that?.

No, that’s absolutely right, Tom. And when I look at our sequential performance, what I see is, I see feature-rich CMOS sequentially let’s call it flat. It’s actually slightly down, but I see good growth in FDX, good growth in RF SOI, good growth in [indiscernible].

Even I would say, very small numbers, but even a little bit of revenue in silicon photonics. And so I look at those areas, all areas where we have some real meaningful differentiation in the market, and I’m quite encouraged..

Great. Very useful. Thank you..

Thank you. Our next question comes from Krish Sankar of Cowen. Your line is open..

Steven calling on behalf of Krish. First off, I’d like to congratulate you guys as well on the strong results you have. Yes. The first question I had was related to your resin fab. And I guess for the – I guess, the headroom there for driving much of the revenue growth in the coming quarters.

So just curious like, can you provide any color on roughly what the utilization rates might be currently at Dresden? And also for the new 22FDX process that was qualified for automotive platforms, is that just a new process that’s being offered at that fab? Or is it like a new line that’s been built out and hence might be driving a lot of near-term revenues?.

So David, why don’t you talk about the Dresden build-out? And I’ll talk about the 22FDX..

Sure. Look, you’re right on highlighting Dresden, it’s an important fab for us. They’re all important fabs for us. But from a build-out perspective, it’s a fab that has the ability and the capacity once fully tooled to be able to deliver about 850,000 wafers a year, and that’s up from about 300,000 tooled wafers per year in 2020.

And so we are tooling Dresden, as you know, from the roadshow conversations. We’re not quite doubling capacity on a year-over-year basis there but getting close. And so that’s a factory that is continuing to bring tools in, get them installed, ramp them to production and ship product for our customers that are clamoring for it.

And so we’re quite pleased with how Dresden is performing. From a utilization perspective, I would say, at the enterprise level, we are above 100% utilization as an enterprise, as a GlobalFoundries entity. And I can say that’s true for almost every factory over 100% utilization right now.

Tom, anything that you want to add?.

Yes, I’d add two things. One I’d add is, look, it makes sense as you’re trying to add capacity as fast as possible. You add it where you already have the brick-and-mortar and a building that’s facilitated but needs the equipment. And that’s why we’re able to ramp very quickly there as you noted.

With regards to 22FDX, that is one of the key technologies that we’ve built in Dresden or our Fab 1 facility. But that’s the real story about 22FDX as that was a homegrown technology, which is a great example of how we think about technology. We don’t say, well, here’s a node, what do we do with it? We started with application in mind.

We said we wanted the lowest power technology possible. So that’s why it’s built on SOI technology. We first enabled it with back bides so we can make the power even lower.

Then we embedded RF and embedded memory to make it the platform of choice for any SoC that wanted to be connected one of the ultimate leadership technology in power per device, minimalization of power per device. That was a technology that was developed in Dresden and we’re building out in Dresden and we’re winning a lot of our connectivity business.

And part of that expansion David talked about in Dresden is to enable that platform with capacity..

Okay, thanks for that colors and just a real quick follow-up, Dave, on – in terms of government incentives in Q3 and maybe any expectations for Q4.

Like how much in terms of incentives and grants might have been embedded in COGS and OpEx?.

Very, very little in Q3. And so when we look out, the single largest area for us with government partnership right now is actually the Fab 7H in Singapore, which Tom referenced earlier.

That is an area where, right now, we have an ongoing, very strong partnership with the Singaporean government to bring that economic development there to Singapore, but in terms of benefit from that relationship, very, very little. Nothing that’s really material in Q3, but we do expect it to be more meaningful in the future..

Okay. Thank you so much..

Thank you. Our next question comes from Raji Gill of Needham & Company. Please go ahead..

Yes. Thank you and congratulations on a strong quarter out of the gate, that’s great to see. A couple of questions, if I may. The first question on the $500 million increase in customer prepayments access fees since the roadshow, it’s about a 20% increase.

Can you maybe elaborate further on what you’re seeing there in terms of customers paying you upfront to get access to capacity? What’s been – what has changed over the last six weeks any details there? And just for my follow-up, the capacity increases that you saw this quarter and you’re talking about another 4% in going into Q4, coupled with a 3% increase in ASPs.

How do we think about the split between capacity expansion versus ASP growth when we’re looking at calendar 2022, any kind of flavor there directionally, data would be helpful? Thank you..

Sure. So let me take those and then Tom, I’ll throw it over to you and see if you have anything to add. So look, what’s changed in the last six weeks, really, we just continue to execute. We’ve been engaged with customers, well, given the size and the scope of our single-source business for a long time, as you know.

And as we’ve continued to work those LTAs that queue of LTAs, we have customers that are willing to put their balance sheet to work and provide prepayments and access fees for us to bring online and commit capacity to them, both today as well as in the future. Remember, we are capacity constrained right now.

And so new agreements that we’re signing, they’re really signing up for new capacity that will come online in the future. So that’s the future capacity that we’re adding specific for those customers. So in terms of what changed, I’d just say we’re continuing to execute.

We’re working down the queue of engagements with customers, working with them in close partnership to bring them the product that they need..

Yes. And I would just add, David. The time frame from the time you begin to carve out the nonbinding MoU to creating a definitive agreement is roughly two to three months, almost a quarter. And so what you’re seeing that took place since the last quarter is the signing of LTAs that are already well along in closing the final Ts and Ts..

And then look, in terms of your question about 2022, I’ll defer the question about the split between volume, mix and ASP for 2022 until maybe a conversation in February. But I think what you’re seeing on a sequential basis, where I mentioned earlier that capacity is growing about 4% sequentially.

But yet, we’re guiding at the midpoint up about 7% sequentially. I think if you’re looking to model something, you can maybe take some of those recent proof points and expand those out into the future if you’re looking for guidance..

Great. Appreciate that. Thank you..

Thank you. Our next question comes from Mehdi Hosseini of SIG. Your question please..

Yes thanks for taking my question. A couple of follow-ups.

Did I hear you correct that all your facilities are currently running at full utilization rate?.

So let me be very clear on that. Our facilities for what its tooled for today are running white hot. They’re making as many wafers as possible. Our customers are counting on us to do that. The capacity, every day changes as we add more tools, right, to create more capacity. And as soon as those tools are qualified and able to make more wafers, we well.

So utilization, for all intents and purposes, is 100-plus percent, and we see that remaining for quite some time..

Okay.

And then in terms of your technology platforms comparing like SOI to CMOS and FinFET, is there a big margin difference? Should we think about the mix also has an impact to your gross and operating margin profile?.

David, why don’t you start on I’ll add a little color..

Yes. Look, I think you could look across any of our technology platforms and you could find products that have higher margins and lower margins.

So whether you’re looking at SOI with RF SOI and FDX, whether you’re in a feature-rich CMOS, FinFET, SGI, silicon photonics, I think the real question is how differentiated is that the product that, that customer is engaging with GF, how differentiated is that product and the margin structure tends to follow.

Tom, would you add anything?.

Yes, again, a little bit, think of it this way. Every one of these platforms have a number of different features. If a solution only using one feature, there’s a different ASP associated with that than if they’re kind of leverage the RF connectivity, they’re going to put embedded memory.

It adds complexity, but they have value that our customers need that they get rewarded for and we get rewarded for. So I think of it more feature-rich, the solution we sell independent of the platform at time. The more differentiated it is, the more we create value for our customers for them to capture – for us..

I just want to better understand because I’m under assumption that like with SOI, the wafer or raw material cost is much higher, but you’re able to get the premium on wafer ASP that would make it competitive with other platforms. That’s what I was trend that I understand..

Yes. Look, no one is going to pay for an extra cost substrate if it doesn’t come with value that’s required to do the application. So it gets factored into the differentiation and the value we create using that specialty substrate..

Got it, thank you..

Do you have a follow-up Mehdi?.

Yes. And then just for purpose of modeling, as I’m under the assumption that with these long-term agreements, there’s a large proportion of those agreements that are coming in earlier during that two to four year period.

Should I also assume that your OpEx growth should be moderate, so therefore your operating margin expansion’s pretty much driven by top line growth and the margin improvement that comes with better fixed cost absorption?.

That’s right. If you recall, our long-term financial model, we’ve got revenue growth about 8% to 12% gross margin at 40%, operating income margin about 25%, which that implies then that OpEx is about 15%. And I think if you look at OpEx today, you’ll see it’s kind of rough and top around that level.

And so that’s something that we expect that to be relatively flat and to scale maybe modestly with revenue, but certainly less than the rest of what we’ve got..

Got it. Thank you. Thanks for clarity.

Thank you. At this time, I’d like to turn the call back over to Sukhi Nagesh for closing remarks..

All right. Great. Thank you, Latif. Well, thank you, everyone, for joining us on our Q3 2021 earnings call. We look forward to meeting with many of you over the course of the quarter. And if you have any follow-ups, please feel free to reach out to us. Thank you..

And this concludes today’s conference call. Thank you for participating. You may now disconnect..