GLOBALFOUNDRIES Inc. Q2 FY2025 earnings call

Business Environment and Technologies

• GF delivered strong financial results in Q2, exceeding guidance midpoints for revenue, gross margin, and operating margin. Generated $277 million of adjusted free cash flow in Q2 and on track to generate over $1 billion of adjusted free cash flow in 2025.

Design Wins and End Markets

• Secured design wins across automotive processing, data center power delivery, and connected home automation. Automotive end market grew over 36% YOY, smart mobile had ASP adjustments, IoT had revenue growth but residual inventories, communications infrastructure/data center grew double-digit YOY.

Macro Landscape and Strategies

• Geopolitical uncertainties impact consumer markets. GF's diversification strategy gaining traction with investments in U.S., Europe, and China. Acquired MIPS for AI and processor IP to add value to customers.

Smart mobile devices represented approximately 40% of the quarter's total revenue. Second quarter revenue increased approximately 17% sequentially and decreased approximately 10% from the prior year period. Home and industrial IoT markets represented approximately 18% of the quarter's total revenue. Second quarter revenue decreased approximately 9% sequentially and increased approximately 2% from the prior year period. Automotive represented approximately 22% of the quarter's total revenue. Second quarter revenue increased approximately 19% sequentially and 36% from the prior year period. Communications infrastructure and data center end market represented approximately 10% of the quarter's total revenue. Second quarter revenue decreased approximately 2% sequentially and increased approximately 11% over the prior year period.

Q3 2025

• Expected total GF revenue to be $1.675 billion, plus or minus $25 million.
• Gross margin expected to be approximately 25.5%, plus or minus 100 basis points.
• Operating expenses expected to be $190 million, plus or minus $10 million.
• Operating margin expected to be in the range of 14.2%, plus or minus 180 basis points.

Full-Year 2025

• On track to generate over $1 billion of adjusted free cash flow.

• Geopolitical and trade tensions impacting consumer markets and inventory dynamics.
• Tariff uncertainties affecting supply chain costs.

Q: With regards to Q3 I understand the headwinds you guys are talking about, but it looks like some of your foundry peers are guiding a little bit more optimistically. Can you just talk about what types of headwinds you're seeing? And how much follow through there may be beyond the third quarter?

A: Yes. Sure, Joe. This is John. I'll take that one for a start. So our base case for the year remains growth in fiscal 2025. Tim and Niels touched on it some in the prepared commentary, but just kind of breaking that down by end market, we expect solid growth in both automotive and communications infrastructure and data center end markets for the year at mid-teens and high teens, respectively, for both of those end markets. We do expect smart mobile to be down for the year and IoT to be modestly down for the year as our consumer-facing end markets in those areas are managing inventories as we work through the year. On the third quarter, in particular, on the automotive end market, we expect year-on-year growth in automotive for the third quarter. We do have a certain customer who is managing inventory toward the end of year for final deliveries in 2025. So that is -- we'll have our automotive down slightly in the third quarter. We do expect smart mobile to be up again sequentially in the third quarter. So that -- there's some overall commentary on the trends for the year on top line growth.

Q: With regards to the China-for-China strategy a little bit. Can you talk about who are the sort of partners that you're working with there? Is that -- it seems like that's interesting to a lot of people. Is it the sort of Western auto OEMs? Is it Western semiconductor companies? Is it Chinese companies? Just who is kind of going to be your lead customer as you start to manufacture in China through this partnership?

A: Yes. Thank you, Joe. This is Tim. It's a great question. I mean our customers have been telling us loud and clear what they need and take for now our non-China customers as one group. For their non-China demand, very clearly, they're not sourcing. In China, their strategy is to remain sourcing globally, and the GF footprint is well suited for that. But for them and especially for those who focus on the automotive end market, they get significant interest from their customers in China to localize a portion of that manufacturing. And so those have been the driver customers for us to work with them why we've been focusing on those specific customers and the specific technologies, microcontrollers, BCD for power management and those kind of applications, very focused on automotive. So that will be the first wave of these transfers. What's interesting is once we announced that, we actually started to get a significant amount of interest from Chinese customers. And what they're looking for is the reverse, but also the flexibility that this optionality provides. So sourcing locally with us in China with our manufacturing partner, but then also serving their non-China, non-Taiwan demand outside China. We actually have design wins in flight right now with Chinese customers for global sourcing, given many of these companies have strong export ambitions. When you net it out, this is why we've been quite clear that for us, China is more of an opportunity than anything else given the differentiation that we have and this unique ability to offer that flexibility.

Q: Utilizations were around 80% in Q1 and with the growth view -- and that was with a growth view for the full year 90 days ago, I believe team was anticipating taking utilizations up through the year. What were utilizations in Q2? And with just a slightly more muted second half outlook, how is the team thinking about utilizations as you move to the second half of this year?

A: Harlan, this is John. I'll take that one. So you're right, utilization was around 80% in the first quarter. We did progress into the low 80s in the second quarter with an uptick in wafer volume to 581,000 300-millimeter wafers. And we do see that progressing a bit further as we move our way through the second half of this year into the low- to mid-80s, and that is part of where we see the opportunity to expand our gross margins as we move into the end of the year.

Q: I was wondering if you can maybe sort of comment on sort of the inventory levels at your customers that you highlighted in prepared remarks, and especially in IoT and smartphones, would you expect those to be at normal levels in Q4? Or could it take a little bit longer than that?

A: Yes. Thank you, Jim. I'll take a stab at that. I mean, if you take a big step back, right, if you look at the last 3 years, really '23, '24, '25, we've been closely monitoring inventory as a kind of long-term predictor of health of where we are in the cycle. And obviously, that's been a long duration, but inventories have, in all sectors come down materially. It hasn't always been smooth. And if you look at some of our customers reporting in Q2, there are some others still to report. But you saw actually some small, I'd say, modest upticks in inventory. That tells you something about kind of demand dynamic. And again, I'd say, particularly in the consumer-focused segments where there has been more demand uncertainty as we commented. I think overall, we continue to see the trajectory of inventories normalizing, and actually, we hear from customers that downstream of them, inventories could even be too low, right? And they see some pockets where there could be some tightness that could lead to some demand spikes in the future. So we continue to monitor this closely. It's difficult to call, but we see we're coming to the end of that inventory digestion long period over the last couple of years.

Q: I guess the first question I want to talk about some of the ASP declines you were seeing in auto -- in mobile rather and some of the actions that you've taken there. Could you go into a little more detail of the reason for the actions that you've taken there? And how that affects GlobalFoundries as you go into calendar '26? How much additional volume do you expect to get from those actions? And what impact is that going to have on revenue and margins as you go into next year?

A: Thank you, Chris. I mean maybe to just go a little bit deeper into it, as we said, this has been very much focused on the mobile space and there are reasons for that in terms of the dynamics of the market. And it's actually very much with a few customers where we are operating on a dual source basis, where we have decisions to make around what share we would like to have, how those customers grow in different applications is transitioning. And we make deliberate calls in partnership with them around what's the right way to maximize our revenue opportunity. And that's not just a tactical step for this year. That's also a long-term step for securing longevity in a number of those sockets. So we're not ready yet to quantify kind of '26, obviously not going to guide at this stage. But we see this as a strong upside around maintaining GF relevance in those technologies at higher share levels, and our customers are obviously pleased with that outcome as well.

Q: My first one, just a few Q4 clarifications. What is the percentage of sales contribution from non-wafer revenue? How much is the tailwind from lower depreciation, and I thought I heard you endorse the 30% gross margin exit rate from Q4, but I just wanted to double check that. So basically, non-wafer revenue contribution , tailwind from lower depreciation, and are you comfortable with the 30% gross margin exit rate from Q4?

A: Yes, Vivek, this is John. So on the non-wafer revenue, typically, that's running roughly 10% of our revenue. We expect it to be up from that in the fourth quarter, a couple of points, call it, 12%, 13% of the mix in the fourth quarter. And if you look at the three factors I described of, product mix, the non-wafer revenue as well as the combined effect of depreciation and utilization, you can roughly think of more or less 1 point each there of contribution. So whether we get all the way to 30%, we'll see, but I think we can get -- we can make a lot of progress towards that goal in the fourth quarter.

Q: I had two of them. One of them, MIPS deal. Can you talk a little bit about how you're seeing the RISC-V demand between Asia and Western companies? And then I had a quick follow-up.

A: Yes. So I think it's interesting. Obviously, the ecosystem is evolving. And if you look at it, there aren't a huge number of very scaled players in RISC-V and that's one of the feedback we get from the ecosystem that they actually want to see serious companies that they trust, like GF backing the ecosystem. And so I think that's a trend that's going to increase demand because people can rely on RISC-V solutions when they're backed by larger companies. I've been around the world talking to customers about MIPS and testing their reactions. As I said, they're very positive. I'd say it's global, Krish, in terms of good reputation in Asia. Markets like Korea, very strong, very strong interest in MIPS, to give you an anecdote. But we see it globally. We see it in Europe, given again the appetite to embrace open-source ecosystem for this cause. And of course, in the U.S. where MIPS has historically been very strong, engaged with a number of customers. So I think it's a global phenomenon, obviously, but too early to call long-term trajectory of that mix, but there's strong demand across the board.

Q: Have we disclosed who the Chinese foundry you're working with is? And how to think about the margin profile of the business? And any concerns on tech transfer or export controls?

A: Yes. The way we think about this is GF China, right? This is our commitment to support our customers from the China footprint in terms of quality, in terms of delivery. So our promise to them is, everything you'd expect from GF you will get from our manufacturing in China. We'll manage our partner. And as a result, we're not talking about identity as much as the offerings that we're going to be making available to our customers that we're now seeing all of that interest on -- from a margin point of view, it's in line with corporate. Now and in the future, we don't see this as a concern there at all. And obviously, everyone talks about IP protection in China. Part of that went into us selecting the right partner but also putting the right controls in place with how we manage our customers' designs. Our customers are part of that story as well, auditing the end-to-end setup, and they're comfortable. And these are automotive-grade companies who take their IP very seriously. So I think we're going into this very eyes-open but obviously with clear plans in place to manage our partnership.