GLOBALFOUNDRIES Inc. Q1 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the GlobalFoundries' Conference Call to review First Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sukhi Nagesh, Vice President of Corporate Development and Head of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon everyone. And welcome to the GlobalFoundries' first quarter 2022 earnings call. On the call with me today are Dr. Tom Caulfield, CEO; and Dave Reeder, CFO. A short while ago, we released GF's first quarter 2022 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' web page. During this call, we will present both IFRS and adjusted non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for adjusted non-IFRS measures are available in today's press release and accompanying slides. I will remind you that these financial measures are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate, and may. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements and we undertake no 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 the sections under the caption Risk Factors in our annual report on Form 20-F filed with the SEC on March 31, 2022. We will begin today's call with Tom providing a summary update on our end markets, capacity expansion, and technologies, following which Dave will provide details on our first quarter results and also provide second quarter guidance. We will then open the call for questions. We request that you limit your questions to one with one follow-up. I will now turn the call over to Tom for his prepared remarks.

Thank you, Sukhi, and welcome everyone to our first quarter 2022 earnings call. We started the new year building on the strong momentum from last year and delivered record Q1 results that are well ahead of our outlook we provided in February. Amidst the backdrop of sustained and robust demand, our global team of 15,000 strong continues to over-deliver despite inflationary, geopolitical, and pandemic-related challenges. This execution builds upon itself and creates a foundation of confidence, confidence that we convey to our customers and partners and, as a result, builds their trust in GF. So a huge shout out to the entire GF team, all 15,000 of you; great Q1. Let's deliver another record quarter in Q2 together. In addition to strong manufacturing and operational performance, I am pleased to report that our commercial teams continue to win new, accretive designs with both new and existing customers—customers that are winning in their markets with GF's solutions. We continue to see strong demand across all of our strategic and secular growing end markets, with a majority of that demand built upon GF's differentiated process technology. In fact, Q1 single-source wafer shipments grew 48% year-over-year, and as largely expected, we see some areas of the market normalizing, notably low-end handsets and PCs. As previously communicated, neither of these markets are areas of strategic focus for GF, with the exception of a few applications in these end markets that require unique and differentiated technology. In summary, the demand environment is largely as we expected, and our revenue visibility remains strong. It's backed by multiyear long-term customer agreements. We remain fully sold out in 2022 and 2023, and we are increasingly confident that we can deliver the long-term business model we outlined and articulated in our roadshow. With that context, let's move on to our first quarter results. We are pleased to report another quarter of record results for the company. First-quarter revenue grew 37% year-over-year and was driven by year-over-year increases in both wafer shipments and average selling price (ASP). This, coupled with strong operational execution across all our fabs, resulted in significant improvements to adjusted gross margin, which increased to 25%. This is an 18 percentage-point improvement from the year-ago quarter. And as a result, we reported first-quarter adjusted earnings per share of $0.42, which is $0.15 higher than the high end of our guidance and more than double the $0.18 adjusted earnings per share we reported last quarter. Dave will discuss in more detail our financials later in his commentary. But first, let me provide a summary of our first-quarter revenue by end markets, starting with smart mobile devices. Smart mobile devices represented approximately 50% of first-quarter revenue and grew 28% year-over-year. This growth was primarily driven by the continued transition of the market for more feature-rich handsets, which is happening concurrently with the transition to 5G connectivity. Our 8SW platform is a great example of our differentiated technology. It is the industry's first and leading 300 mm RF SOI platform with best-in-class switch and LNA performance. It delivers superior data rate, range, and battery power. Additionally, we are also seeing strong double-digit year-over-year growth for RF transceiver, mobile image sensor, and specialty power solutions. Our portfolio of technologies, which includes 8SW, 12LP RF, 22FDX, and both 55 and 28 nm BCD light, enables our customers to design products that win in their markets, which in turn helps us participate in the most attractive segments in this end market. Next, our communications infrastructure and data center end market, which comprised approximately 17% of first quarter revenue, grew approximately 80% year-over-year. Growth was driven by a combination of higher shipments, higher ASPs, and better mix. Data center demand, especially for two chip product solutions, is starting to ramp, and GF is well-positioned to grow in this market. We also saw strong demand from our communications infrastructure customers who leveraged GF's IP-rich and differentiated 12 nm RF and silicon germanium solutions. The robust demand in cellular infrastructure is due to the transition from 5G MIMO to 5G millimeter wave. This transition increases available spectrum, bandwidth, and capacity, all of which culminate in improved user experience. In the quarter, we also announced our second-generation silicon photonics platform. This is garnering strong and broad customer attraction. Our branded photonics platform is the industry-leading monolithic solution for optical interconnects, serving switches, GPUs, accelerators, and pluggable transceivers. This platform also provides the next level of RF performance for 800-gigabit transceivers. The best proof of this leadership solution is in our customer set. Industry leaders such as NVIDIA, Broadcom, Marvell, and Cisco are designing high bandwidth, low-power optical interconnects for high-performance computing, networking, and cloud data centers, using GF's photonics and silicon germanium platforms. Furthermore, our differentiated photonics platform has been extended to the quantum computing market and is gaining significant traction with some of the most innovative startups. For example, PsiQuantum is designing and building the world's first usable, scalable quantum computer on our photonics platform. Our silicon photonics business, which already has a majority share position, is on track to grow over 50% in 2022. In summary, we believe the communications infrastructure and data center end markets remain on track to be one of our fastest-growing end markets this year. Moving on to our home and industrial IoT end market, revenue was approximately 17% of GF's total first-quarter revenue, and it grew 55% year-over-year. The strong growth in this end market was driven by higher demand, better ASPs, and richer mix. GF's strength in feature-rich technologies focused on superior wireless connectivity performance at the lowest possible power consumption has enabled our strong growth in the home and IoT end market. This is an end market that continues to experience secular growth with the ongoing global proliferation of smart connected devices. Now, within this end market, our wireless connectivity solutions saw significant growth due to the accelerated adoption of 22FDX technology for WiFi 6 applications. We are also seeing strong traction for our IoT microcontrollers that feature non-volatile memory for a number of smart card applications, such as digital payments, access control, and electronic IDs. In addition, growth in this end market is being driven by our differentiated power and analog technologies for applications such as building automation and security. The trend of integrating wireless, secure compute, analog, and multiple sensors is squarely playing to our strengths and is at the heart of this strong home and IoT growth for GF. We are on track for this end market to be the fastest growing for GF this year. Touching next on automotive, revenue in this market was approximately 4% of our total first quarter revenue and grew approximately 170% year-on-year. As we previously indicated, our growth in this market will be lumpy as we are constrained by how quickly we can build capacity. Now, as new capacity comes online, we expect our revenue growth to accelerate in this end market. In Q1, we also began to ramp some exciting new products that have been developed over the last few years that enable automobile electrification safety. We are also seeing continued ramp of our sole source business with a top-tier automotive radar IDM that will drive significant growth over the next several years. Our pipeline of design wins in automotive remains robust. This is driven by one, the acceleration of plans for EV production, and two, automakers' desire to recover lost vehicle shipments during the pandemic. These two elements together will pull forward demand for advanced automotive architectures. And it's these architectures that have higher semiconductor content per vehicle, the majority of which is serviced by feature-rich technology across GF's portfolio. Examples range from our 130 BCD technologies that enable advanced battery management systems to our best-in-class 22FDX technologies that are quickly becoming the market standard for millimeter wave solutions. They're at the foundation for enabling safety in future autonomous driving. Next, as expected, our compute end market declined year-over-year and comprised approximately 2% of our total first quarter revenue, and we expect this market to be less than 5% of our total 2022 revenue. As mentioned earlier in this call, our investments in this market are focused on areas where we can provide differentiated technology. Specifically, we have targeted mixed signal, power management, and companionship solutions. From a percent of total revenue perspective, we expect Q1 to be the trough of this end market and that it will steadily improve throughout the year. I would now like to provide a brief update on our ongoing capacity expansion plans. In Q1, wafer shipments increased 14% year-over-year. We are particularly pleased with the output from our Dresden fab, where wafer shipments increased more than 50% year-over-year. In short, we are executing to plan and converting our capacity investments to the wafer output required to satisfy our long-term customer agreements. We are on track to increase wafer output more than 10% year-over-year. Also, as committed and despite COVID-related challenges, our new fab construction in Singapore is largely progressing to plan, and we are on schedule to install tools at the beginning of Q3 with production ramping in the first half of 2023. In addition to our ongoing capacity expansion, we continue to make solid progress towards enhancing our differentiated technologies. For example, we completed six technology qualifications in the first quarter, including new features that we added to our industry-leading 8SW RF SOI platform for front-end modules in mobile handsets. In addition, we also released our enhanced SiGe high bandwidth technology in the quarter. We are pleased to report we have nearly 20 product tape outs on our next-generation photonics technology platform in the first quarter alone of this year, with more than 30 customer tape outs scheduled for this year. This reflects the rapid and broad adoption of our differentiated photonics technology. Finally, given the unprecedented demand for our 22FDX platform, we have commenced a technology transfer from Dresden, Germany to our Malta, New York facility to establish our second 22FDX corridor. To summarize, I'm pleased to report a quarter of solid execution as we continue to demonstrate strong momentum across our business and are making significant progress towards our long-term business model. With that, let me turn the call over to Dave to provide the financial details for the first quarter and also provide you with our guidance for the second quarter.

Thank you, Tom. Our first-quarter results exceeded the high end of the financial range we provided in our last financial update. First-quarter revenue was approximately $1.94 billion, an increase of 37% year-over-year. We shipped approximately 625,000 300 mm equivalent wafers in the quarter, a 14% increase from the year prior period. Average selling price per wafer increased approximately 19% year-over-year, driven by ramping long-term customer agreements with better pricing and an overall very constructive transactional pricing environment, as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 90% of total revenue. Non-wafer revenue, which includes revenue from radicals, non-recurring engineering, expedite fees, and other items accounted for approximately 10% of total revenue for the first quarter, consistent with our expectation. For the remainder of the call, including second quarter guidance, I will reference adjusted metrics which exclude stock-based compensation. For the first quarter, we delivered adjusted gross profit of $490 million, which translates into approximately 25.3% adjusted gross margin. The 18 percentage-point year-on-year improvement was driven by better fixed cost absorption, higher ASPs, and improved mix. Approximately 70% of this improvement was attributable to ASP and mix, with the remaining 30% attributable to volume-related fixed cost absorption. Operating expenses for the first quarter were better than expected and represented approximately 9% of total revenue. R&D for the quarter was flat sequentially at approximately $122 million, while SG&A came in at about $89 million. Total operating expenses were $211 million, excluding $32.6 million of stock-based compensation. Q1 total operating expenses increased approximately $17 million from a year ago, largely due to investments in developing new features and IP, as well as customer enablement for our technology platforms. GF delivered operating profit of approximately $279 million for the quarter, which translates into a 14.4% adjusted operating margin, approximately 21 percentage points better than the year-ago period, and $77 million higher than the high end of our guidance range. First-quarter net interest expense was approximately $28 million, and we incurred a tax expense of approximately $29 million in the quarter. We delivered first quarter adjusted net income of approximately $232 million on a diluted share count of 549 million shares, resulting in adjusted earnings of $0.42 per share. We delivered record first-quarter adjusted EBITDA of approximately $698 million. Adjusted EBITDA grew $404 million year-on-year on $522 million of incremental revenue growth, a 77% fall-through rate. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the quarter was $845 million and included approximately $475 million of customer prepayments and capacity access fees. Gross CapEx for the quarter was $643 million, or roughly 33% of revenue. We ended the first quarter with approximately $3.3 billion in cash and cash equivalents, an increase of more than $2.6 billion from the prior year period. Before I transition to Q2 guidance, I want to briefly touch upon current market concerns regarding inflation and its impact on our business. Like others, we are seeing some inflationary headwinds in our business, especially with respect to materials, energy, and labor costs. We estimate the impact of these inflationary costs on our full-year results to be less than 2% of revenue. Since 2021, our teams have worked diligently to build certainty into our business model. You've seen the results of the commercial work and our revenue visibility, driven by our long-term agreements. Operationally, we've also worked to build certainty into the business. Regarding materials, we have signed many long-term multiyear fixed-cost supply agreements for the materials needed to deliver customer commitments. Regarding energy costs, we have a rolling 24-month hedging program that helps us mitigate significant movements in the energy markets. Regarding labor, we have variable pay-for-performance programs that reward our employees for excellent performance, like the performance delivered in the first quarter of 2022. Additionally, we have monthly rolling FX hedging programs that help mitigate significant movements in currency pricing. Finally, we have an active and robust pipeline of manufacturing cost savings initiatives that have historically delivered annual savings of more than $200 million. We believe the aggregate impact of all these programs will largely offset the forecasted inflationary headwinds in 2022 and that the net impact on the P&L will be minimal. Next, let me provide you with our outlook for the second quarter. We expect total GF revenue to be between $1.955 and $1.985 billion. Of this, we expect non-wafer revenue to be about 8.5% of total revenue. We expect adjusted gross profit to be between $503 million and $531 million. We expect adjusted operating profit to be between $272 million and $305 million. Excluding share-based compensation for the second quarter, we expect total OpEx to be between $226 million and $231 million. We anticipate that the sequential increase in operating expenses will primarily be driven by higher labor expenses in certain enterprise IT projects. At the midpoint of our second quarter guidance, we expect share-based compensation to be approximately $60 million, of which roughly $30 million is related to cost of goods sold, and approximately $30 million is related to OpEx. We expect net interest expense for the quarter to be approximately $25 million and tax and other expenses to be roughly $26 million. We expect adjusted net income to be between $235 million and $265 million. We expect depreciation and amortization for the quarter to be about $425 million, of which 90% is related to cost of goods sold. On a fully diluted basis of approximately 550 million shares, we expect adjusted earnings per share for the second quarter to be between $0.43 and $0.48. We expect adjusted EBITDA to be between $705 million and $745 million. For 2022, we expect total gross CapEx to be approximately $4 billion as we continue to invest in partnership with our customers to deliver the capacity necessary to support our contracts. In summary, strong operational execution enabled us to deliver first-quarter results that were significantly better than the high-end of our guidance range. Our demand visibility remains strong, supported by our long-term customer agreements, and we expect to deliver progressively better financials quarter-to-quarter throughout the year as we continue to methodically execute our plan.

Thank you. Our first question comes from Harlan Sur with JPMorgan. Your line is open.

Good afternoon and congratulations on the solid results and strong execution by the team. There's a lot of cross currents in the end markets with the COVID supply chain disruptions, as you mentioned some pockets of weakness, but overall it appears that demand continues to outstrip supply across most end markets. So as you guys look at your business and talk to customers, given your backlog profile, what are you guys seeing out there? And then it looks like capacity growth target Tom was revised higher to 10% plus for this year? I'm just wondering, does the team also still anticipate 10% ASP growth as well?

Yes, let me start. David, you could add some commentary. Look, I think you said it right. The demand environment is still strong, but I think we have to put this in perspective. We'll talk about the small pockets, I'll reiterate some of the small pockets of softness we're seeing. When we started this year, we had demand that was 25% higher than the capacity we could fulfill. So we're weighing an over-demand situation. So I think holistically for the industry, there's not like you're either in supply alignment or you're not; there's ranges of that, and we were really, as an industry, and particularly GF, having a lot more demand than we can satisfy. We don't have high exposure to the PC market, and we don't have higher exposure to the low-end handset market, so there is a little bit of softening that we are seeing there. We're taking it as an opportunity to close some of that big gap that we started this year with, to feed the customers in a more strategic end market for us.

Yes, let me just add on Harlan. We're expecting total wafer shipments to grow kind of high single digits, 10%-ish throughout 2022. At the midpoint of our guidance specifically for the second quarter, we guided up 22% year-over-year. We're expecting every end market to participate in that growth year-over-year in the second quarter with the exception of personal compute, which we expect to really drop in the first quarter of 2022 and then we expect it to grow sequentially.

Do you guys still expect roughly ASPs to grow 10% this year?

Year-over-year, we expect ASPs to grow about 10% year-over-year, correct for the entire year. Obviously, they grew a little faster in the first quarter.

Great, and then on my second question, I appreciate the insights there. You know, more specifically on your mobile business, your customers have been impacted by COVID-19 lockdown disruptions. This is impacting the premium end of the market. You've got weak China domestic smartphone demand which is impacting the low end of the segment. So on the strong June quarter guidance, Tom, given the commentary around weakness in mobile, is your mobile business sustaining sequentially, given the supply demand gap by some of the customers in those segments, or is your mobile business weaker sequentially in the June quarter, and is just the diversification in the business allowing you guys to reallocate capacity to your non-auto segments where we know that demand is still strongly outstripping supply?

I think we've got flat in sequentially in the kind of the high-end handset in that space. Again, the low-end where we didn't have a lot of exposure, we're reallocating. I think you have to think about for us in the mobility space is, one we have high concentration there, and that's not as growing as fast because it's such a big base is some of the other important end markets to us. And then the second element of this is, we think about what the new features are, the transition of 5G, and how our strong position there. We'd actually get kind of more silicon per handset, and so we have a strong position in these high-end handsets. Typically, manufacturers or brands that sell that range will air whatever capacity they have to the high-end handset before the low-end. So that's what we're seeing, at least in the demand to us. David, anything you'd add to that?

Yes, I think we see a continuation of the first quarter, Harlan, and that's in the RF front-end module; that's our 8SW RF SOI technology. We're really driving the transition from 4G to 5G there. So we're continuing to see sustained growth in that segment, and particularly in that technology. In the image sensor processor side of the smart mobile devices, that's a space where GF's product solution includes the 22FDX platform roadmap that delivers optimized image sensing at optimal power, as well as some other technologies that are growing pretty significantly on a year-over-year basis. Finally, we're seeing sustained demand for our specialty power solutions. So that's our Penex, and that's where GF's envelope tracking solutions and 65 nm and 22FDX provide real-time tracking and increased battery life for 5G sub-6 GHz solutions and really a roadmap to symbol tracking for the millimeter wave in the higher bandwidth solutions. So, within smart mobile devices, there are sub-segments within that that are driving the transition from 4G to 5G, and that's an area of the market that we specifically targeted that continues to perform for us.

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question. There was almost 100% follow-through on incremental gross margins for March on a sequential basis, and I'm curious what specifically in the mix helped you? And how should we think about gross margin progression for the rest of the year?

Sure. We've talked a lot, especially in the roadshow about our fixed costs footprint and cost absorption. When you have an environment where you have very constructive pricing, you have higher ASPs that are worked in and contractually obligated into our long-term agreements, and then you're taking that same fixed cost footprint, and for just modest increases in cost, producing more units on a year-over-year basis, and that's the fall-through that you get. Increased ASPs, reduced cost per unit if you will from a fixed cost absorption perspective. You get this fall-through that really is what we talked a lot about in our roadshows for IPOs. So we're executing on that plan. Now, what do we expect going forward from a systemic perspective or programmatic perspective? I think you can expect fall-through in the 60-ish percent range, that's the kind of variable fall-through of the business. And so that's the type of fall-through that you can expect going forward, once we fully get our entitlement out of our fixed costs absorption.

Got it, very helpful, David. For my follow-up, I thought I heard you say CapEx of $4 billion; I thought it used to be $4.5 billion. So wondering why the change? What's the implication? Is it just the tight availability of tools? And just how does it impact your growth plans for this and next year?

Sure. Our growth plans for 2022 and 2023 remain on track. What we're seeing is a lot of what you're hearing in the industry, and others are seeing across the industry, is that our tool suppliers are on average late by around 30 days or so. To put that into some real proof points, we have accepted receipt of about 150 tools, and about 15% of those tools are slightly more than 30 days late. It's actually gotten a little worse as the year has progressed. So we expect that number to go from 15% to in that 20-ish percent range, and so on a CapEx plan of roughly $4.5 billion, you slip about 30 days on that plan on 20-ish percent of your tools, and what you'll calculate is something around $4 billion.

Yes, and David, on the other end of that, when we built our plans, we had our purchase orders in early in this process for this capacity so we're kind of front line. That's why we're not as impacted as others may be. We don't build plans without a certain level of contingency. We are still confident we'll maintain our projected growth outlook.

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

Hi guys, thanks for allowing me to ask a question. Congratulations on the strong results. I just had a question on the gross margin again; maybe a separate way to ask it. How do you guys or I guess, what was the surprise versus your guide? I know you build in a healthy amount of conservatism and we all appreciate that. But the magnitude of the upside in this last quarter was just so significantly better than we thought. So Dave, I know you gave that 70/30 mix in the drivers before, but to you guys, what was the surprise?

I think to us what the surprise was, Ross, was the continued fixed cost absorption. As we produce more units on our existing footprint, we continue to get more productive. The team across the world is just continuing to really execute from a productivity perspective, and we're seeing that in our fixed cost absorption. That said, ASPs came in a little bit better; mix came in a little better. So I would say from our guidance perspective, everything improved a little bit, but the area that we consistently under call is really fixed cost absorption.

Got it. And I guess just the follow-up with sticking to the gross margin line, does this do anything to either accelerate the timetable to your long-term target of a 40% gross margin, give you more confidence in it, or potentially even raise where you think that target can be? I know it's a number of years down the road, but what does the performance you've delivered over the last couple quarters now do to your confidence in that longer-term target?

Yes, I think I'd reiterate what Tom said in his opening statement, which is really, we have increased confidence in our ability to achieve our long-term targets. I think it'd be prudent at this point to stick with those targets, but we are becoming more and more confident in our ability to deliver those long-term financial targets.

Thank you. Our next question comes from Chris Danely with Citi. Your line is open.

Hey, thanks, guys. I guess just on the end markets, can you give us any sense of Q2 guidance by end market? You've been posting some pretty nice sequential revenue growth, but it's dropping markedly in Q2. Is that just because of the weakness in handsets and PCs or is there something else going on there?

Yes, I think obviously, we guide at the enterprise level, but when we look sequentially from Q1 to Q2 as well as Q2 2022 to Q2 2021, the areas that we've highlighted for growth this year continue to remain the areas that are driving outsized gains for us. Specifically, I'd point to home and industrial IoT, I would point to comms infrastructure and data center, and on a year-over-year basis—though little lumpy, because it's a smaller number—I’d point to automotive. Those segments of the market for us continue to perform. Those are the areas where we feel like we have tremendous differentiation that we really targeted in our strategic pivot, and we expect those areas to continue to perform.

Got it. And I think earlier in the call you guys mentioned that a while ago, demand was about 25% higher than what you could fill; how would you rate that metric now in terms of demand versus your planned capacity?

Look, I would tell you that our book-to-bill ratio is still north of 1. By the way, it's a lot closer to 1.5 than it is to 1. I would tell you that sequentially our backlog has increased 5% and 10% year-over-year. So when I think of getting caught up here, I'd like to believe we are, but those statistics would say not.

Thank you. Our next question comes from Joe Moore with Morgan Stanley. Your line is open.

Great, thank you. I wonder if you could talk to the non-wafer revenue. The strength you're seeing there, you mentioned expedite fees. I mean is that something that is going to be repeated in the next few quarters? And then is there any other element of those non-wafer revenues that would be potentially lumpy going forward?

When we look at it, non-wafer revenue was about 10% of total revenue in Q1. It was about a similar percentage in the year-ago period. We guided it for the second quarter of 2022 to be about 8.5% of total revenue. When I look at the non-wafer revenue line, as you know, it includes radicals and NREs and expedite fees. I would say expedite fees on a year-over-year basis, as well as on a sequential basis, I would characterize as kind of flattish quite frankly. The radical line is the line with the most variability, based upon when design wins ramp, when customers can get their design wins to us, when we can get in the queue to manufacture the radicals. There's a lot of engineering that actually goes into that segment of the process, as well as the NRE line, which is the non-recurring engineering line. There are no real surprises to us on the non-wafer revenue line, either in Q1 performance or in the second quarter guide.

Great, thank you. And then, in terms of it sounds like you definitely have robust backlog coverage through the year. But a few small pockets, if some of the more negative economic scenarios start to play out and you see those small pockets of weakness in areas like phones get bigger, how quickly, I assume there's a lot more demand for wafers from other markets, you talked about autos. How quickly can you kind of move those wafers over to other markets if that indeed becomes something you need to contemplate? I realize that's not where you are today.

I think one of the biggest elements of our pivot of our company that we talked about in the roadshow in 2018 was not just the markets we focused on, but also to create fungibility in our capacity. It's how we invest and how we think about our capacity. It's fungibility; we have corridors of capacity that we could build in more than one location. Within locations, we try to make that capacity fungible for a couple of different nodes and features. The specificity of any given opportunity has to be really what's being taken down versus what is going up, and there may be opportunities where the fungibility is not as high as we'd like it to be. But we planned this into our business. It's part of how we manage the supply chain, both globally and locally, to create capacity that we can find; it's not just a one-for-one substitution of a specific node with a particular feature.

Thank you. Our next question comes from Chris Caso with Raymond James. Your line is open.

Yes, thank you for the question. A question about some of the capacity additions in the context of what you said about the auto market and that revenue being lumpy because you're still in the process of adding capacity. Can you give us some sense of which end markets we expect capacity expansion to be the greatest over the next few quarters, and to imagine that the comments that you have about the end markets you expect it to grow this year should be paired up with the areas and the processes in which you're going to begin some investment capacity this year?

Well, as we've stated, we've got a CapEx plan of about $4 billion this year. I'm going to use some rough and tough numbers there, but about half of that CapEx is really related to our module 7 and 8 in Singapore—the 450,000 annual wafers that we're bringing online towards the end of this year, but really starting to produce some real revenue next year. That facility will deliver 40 nm all the way up to 90 nm. It's a sister facility to the one right next to it, so it helps free up some bottleneck capacity in its sister facility. You're going to see investments in those specific corridors. We've also got investments in the 22FDX corridor, which is significantly oversubscribed. I would say if you looked at that $4 billion, I'd say it's skewed a little bit more heavily towards 22 through 65, and then of course, some capacity increases all the way down to 12 nm in the FinTech corridor, as well as some higher technologies that are specifically asked for from the market.

Yes, let me make a little bit color around that, too. I think it's worth noting that GF does not put capacity on for GF; GF puts capacity on for our customers. So when you think of our market intention, these growth markets that are attracted to us, we lined up not only our capacity, but we aligned our long-term agreements to that capacity. You're absolutely right; it's all self-fulfilling. Where you hear us in these end markets, where we have secular growth or that we've concentrated on, that's where we have capacity. That's where we've signed up customers for long-term agreements, because that's the capacity our customers want. It's not capacity we put on for GF.

Tom, that's a great point, and it's worth noting now that our customers have now signed up for more than $3.5 billion of customer funding—that's pre-payments and access fees—specifically to bring online that capacity that they desperately need.

Thank you. Our next question comes from Mehdi Hosseini with SIG. Your line is open.

Yes, thanks for taking my question. I'm just trying to better understand how the mix is impacting your top line and gross margin. And to that extent, if your ASPs were up by 28% year-over-year and 5% quarter-over-quarter, can you perhaps qualitatively or quantitatively help me understand how these ASPs have been impacted by the change in the mix?

Dave, you go first and then I'll add a little.

Sure. One, let me just provide some clarification. ASPs year-over-year were up 19%, and volume was up 14%, and that's specifically Q1 2022 to Q1 2021. When we look at our ASPs, I think really the underlying question that you're getting at, and I'm going to infer a little bit here, is gross margin. When you look at ASPs and gross margin, what you're really asking is how differentiated is your solution? Because the more differentiated you are, the more value you create, then the more value you can capture. We don't specifically guide by end market segment profitability, but you can look at some proof points; you can point them directionally towards increased profitability. One would be single source design wins and single source revenues. As Tom mentioned in his commentary, single source revenue grew year-over-year—that's Q1 2022 to Q1 2021—48%. Single source revenue is about two-thirds of our total GF revenue, and 80% of our design wins are single source.

Yes, that's exactly where I was going to go. I think this idea that the leading indicator is design wins, and that's running at an 80%. At least it was when we talked about it in the roadshow last year. Now you're starting to see the revenue flow through to that higher bar of single-source business, which is typically our bread and butter in our more accretive business.

Okay, actually, you framed my question better than I could have framed it. The point here is the value created, and that's some of the specialty substrate that you offer your customer. You're a single source. So as I look into next year, that mix probably would increase; SiGe would increase, maybe some silicon photonics would start materializing. I think that's when the concern over excess supply for box silicone at or above 12 nm would go away, because it's just a mix shift that is going to accelerate into next year. Is that the right way to think about the model?

Yes, the way that we think about our model is we want to bring differentiated solutions to the marketplace, and we believe we have some real franchises that are differentiated. As our single source business grows, as our design wins grow in single source, we drive a higher penetration of single source through our business that becomes more accretive to that. We take those higher ASPs and that higher value creation, and we spread them over the same fixed cost footprint, which enables us to get fixed cost absorption, which creates the confidence that we have in our model and our confidence that we can deliver our long-term financials.

Thank you. Our next question comes from Matt Bryson with Wedbush Securities. Your line is open.

Hey, thanks for taking my question. I want to touch upon, I think something Mehdi was asking about and also Chris. In terms of new technologies with FDX, was it always the plan to start the second corridor in Dresden, or did you pull that forward? It sounded like there's more demand there and potentially that's a greater portion of your mix moving forward than you might have planned. And am I right in assuming that it at least has some positive implications for margins? And then similarly, when you're talking about silicon photonics and revenue doubling this year, is there a point where you see silicon photonics becoming a meaningful portion of revenue? And then again at that point, am I correct in assuming that it has some positive implications on the gross margin side? Thanks.

Yes, let me start, Dave, and you can add. Let's start with the silicon photonics. We have a healthy market share in silicon photonics to about a $250 million segment, and we see that growing to about $2 billion or so over the next five years. If anything, we see more market share in that; that's not less. That is an opportunity for us for both growth and more differentiated, profitable growth. You said about FDX and moving the corridor; that's actually from Dresden to New York—it's not the other way around. You see that was always the plan, but our strategy for the company is to have at least two sites to build the same type of capability, wherever it makes sense economically and for capital expansion. We always had a plan somewhere to put 22FDX. The question is, at any given time, where's the right place to put that? Today, our Fab 8 facility represents a great opportunity to use the lithography capability that defines the features of the technology; it's the next best place for us to put and build that second corridor here. When we think about it again, it's not just about needing capacity; we think about it in a thoughtful way where we can have our supply chain balanced and leverage our assets for fungibility and give our customers second sourcing within a single source.

Yes, I think I'd just add that our FDX platform is an SOI platform that's also similar to our RF SOI platform. Those are two platforms for us where we have real franchises. We are increasing capacity pretty significantly in the future on FDX to be able to satisfy the demand there, and then as Tom mentioned, on the silicon photonics side, we have the majority share in that market. We're the only one with a monolithic, integrated solution in that space and we have the majority share in roughly what's a $250 million market today. We expect as that market grows to roughly $1 billion by 2026; we expect our share to still be a majority share, if not higher than where it is today. So with the customers that we're engaged in in that space, we're optimistic not only for FDX but also for silicon photonics for the future.

Thank you. Our next question comes from Krish Sankar with Cowen and Company. Your line is open.

Yes, hi. Thanks for taking my question. Tom, I just had a big picture question first. You have been in the semiconductor industry long enough and you've seen many cycles. So let's just assume there is a macro correction or recession. I'm kind of curious where we will see it first in GlobalFoundries' business. Would it be smartphones, auto, IoT—where would you see it first? And then I had a follow-up.

Yes, we never get into debate about whether it will be or won't be a cycle. I think we could talk about cycles, and if it is, it’s probably going to be a macroeconomic driven event. It’s likely going to be shorter in duration and less in depth, given how it's tied semiconductor to the world economy. I think what you'll see first would be consumer-led; it would be a consumer-led event for a macroeconomic event. That touches a lot of the end markets we spoke about.

If I could just chime in. When I think about future visibility—as there's an element of this question that I did—I think about future visibility. For 2022, Tom mentioned that lead times extended sequentially—they've actually extended year-over-year and sequentially. Book-to-bill is closer to 1.5 than it is to 1. Our long-term agreements, which we continue to sign and renew, and our customers continue to provide funding with their balance sheets to put capacity on—over $3.5 billion now of their balance sheet at work to deliver capacity increases the market needs. I look at this environment, and I think our visibility has never been stronger; I look at our customers and their engagement with us on increasing capacity, and I'm just really encouraged by the single-source design wins and partnerships we have with our customers across all our technology.

Got it, got it. Super helpful, Tom and David. This is a follow-up. Some of the foundries have spoken about raising prices for next year, and given the size of your completely sold out long-term agreements, and you spoke about the pencils and he who brought the peers, how should we think about pricing for GlobalFoundries in 2023?

Sure. As I just mentioned, we have incredible visibility into 2023, really on the back of the long-term agreements that we've signed. We have seen actions in the market by some of our peers to increase prices, specifically related to inflation. That's something that we've started speaking to our customers about in early Q2, and we've been working with them on passing through inflationary costs, giving them time really to prepare to pass them on to their end customers as well. Again, all centered around this partnership, they've bet on us with their single-source design wins. We're working in partnership with them to pass through some of these inflationary pressures and our contracts allow for that. Tom, anything you'd add?

Yes, I remember how we got here. We talked about why was 2022 the year where you'd see the higher ASPs? It was because we were striking those deals in 2021, and we wanted to give our customers a chance to balance their business to accept that. This is no different because we're passing along these inflationary pressures; we're doing it in a way to give our customers the chance to mitigate it in their own P&L. That's the way you should think about pricing. We had a step function increase in pricing, and then the passing along of inflationary increases—market broadly has kind of communicated that those inflationary increases would be somewhere between 5% and 10%.

Thank you. Our last question comes from Raji Gill with Needham & Company. Your line is open.

Yes, thank you, and congrats on the good results. I appreciate you kind of providing some commentary about the inflation and what that impact will be on your revenue. I think you said less than 2%. I'm just wondering if, what are the assumptions and how you are kind of getting to that number? I would assume it's based on, obviously, your long-term agreements and then some sort of analysis based on those agreements. But just curious how you're kind of concluding that if there is kind of persistent inflation, you have like, less than—around a 2% impact on revenue?

Sure, Raji. When I mentioned 2% of total revenue, it is really the impact on the P&L itself. In other words, how much impact would that have at the margins at the bottom? We were communicating that, as we set up all these LTAs and contemplated these contracts, we were working in the background to lock in the materials at fixed volumes and fixed prices. We worked on variability in our labor pay, and of course, we were hedging against some commodity exposure we have on input prices and energy sources. We believe that inflationary pressures in 2022 will have a very minimal impact on our net P&L by the time you get to the bottom line. So that's what we were communicating with that statement in our prepared commentary is minimal impact from inflation on our bottom line in 2022.

And that doesn't take into account passing any of that.

That does not take into account passing any additional inflationary increases on to our customers.

Right. I think it was an important point to make to try to address some of those investor concerns. And just my follow-up in terms of the gross profit fall-through; there was a question from a previous analyst that there was a 100% gross profit fall-through from Q4 to Q1. It looks like there's going to be about an 81% gross profit fall-through into Q2 based on the guide, and you are kind of saying moderating around 60. Just curious when you're looking at the 60s number—does this factor in obviously your ASP agreements? You have a certain level of fixed cost absorption or mix shift; what would be the upside drivers to that 60% gross profit fall-through because you've been exceeding that the last couple quarters?

Thanks, Raji.

The 60-ish percent number I shared is really a steady-state number. Over time, you can expect essentially variable fall-through which ranges between 60 and 65%. I think near-term, kind of quarter-over-quarter, we've talked about this fixed cost absorption and where you can increase capacity and output significantly at a facility. I think Dresden, Germany would be a great example; you can increase output from a facility in a very meaningful way with a very minimal amount of input cost into that process. That will lead to more near-term fall-through. Over time, the steady-state number I was quoting—kind of 60-ish, 65%—that's the type of variable fall-through you can expect once we hit steady state.

Thank you. I would now like to turn the call back over to Sukhi Nagesh for closing remarks.

Thank you, everyone, for joining us this afternoon. We look forward to meeting you on the conference circuit this quarter. Have a good evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.