GLOBALFOUNDRIES Inc. Q3 FY2024 Earnings Call

Thank you, Operator. Good morning, everyone, and welcome to GlobalFoundries third quarter 2024 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO; John Hollister, CFO; and Niels Anderskouv, Chief Business Officer. A short while ago, we released GF's third quarter financial results, which are available on our website at investors.gf.com, along with today's accompanying slide presentation. This call is being recorded and a replay will be made available on our Investor Relations web page. During this call, we will present both IFRS and non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for non-IFRS measures are available in today's press release and accompanying slides. Please note that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate and may or by the use of the future tense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our Annual Report on Form 20-F filed with the SEC on April 29, 2024. We will begin today's call with Tom providing a summary update on the current business environment and technologies. Niels will then discuss our recent design wins and highlights across the end markets, following which John will provide details on our third quarter results and also provide fourth quarter 2024 guidance. We will then open the call for questions with Tom, John and Niels. We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Sam, and welcome, everyone to our third quarter earnings call. Our 3Q results reflect another consistent quarter of execution towards our strategic objectives as we continue to partner with our customers to deliver feature-rich products in the geographies where they need us using our essential chip technologies. In the third quarter, we delivered revenue at the high end of the guidance range, meaningful year-over-year free cash flow generation and gross margins consistent with our commentary from the start of the year in an environment of lower factory utilization levels. Although we remain mindful of the near-term demand and utilization dynamics impacting the end markets we serve, these results reinforce our prior commentary that the first quarter was a low point for our revenue in 2024, and that we would deliver sequential quarter-over-quarter top-line growth throughout the year. To this end, we are reporting revenue of $1.739 billion for the quarter, which is roughly 7% sequential quarterly revenue growth. John will later cover that we are guiding the continuation of sequential growth in the fourth quarter. As we focus on diversifying and differentiating our product portfolio and broadening our customer base, I am also encouraged by the rate and pace of the business opportunity of new design wins we closed in 3Q, as well as the funnel of opportunities we have built in partnership with our customers across all the end markets that we serve. Year-to-date, approximately 90% of our design wins are sole source opportunities. These wins are important proof points of our relentless focus on innovation and meeting the needs of our customers. Just recently, we announced a key design win with NXP on our 22FDX platform. We developed our 22FDX platform for a broad set of applications serving a range of end markets including AI and intelligence at the Edge applications. The performance benefits are purpose-built by optimizing energy management to deliver up to 50% higher performance and 70% lower power versus other planar CMOS technologies. Niels will comment further in his prepared remarks that this partnership is a testament to what matters most to our customers: power and performance solutions delivered with the resiliency of GF's manufacturing execution and global footprint. Our global manufacturing footprint uniquely positions GF to support our customers’ desire to source from the U.S., Europe and Asia across all the critical end markets we serve. These design wins are consistent with our strategy to diversify our technology footprint, end markets served, and breadth of customer service in our Malta, New York Fab. We remain on track to transfer capacity across 22, 28 and 40 nanometer offerings into the Malta facility over the coming years. Upon completion of these transfers, Malta will offer our customers one of the most diversified foundry solutions here in the U.S. to complement the 12 nanometer FinFET, RF SOI, and silicon photonics that are already manufactured there. Our silicon photonics product line positions Fab 8 beyond diversification as data center bandwidth and connectivity requirements continue to rapidly increase. GF's monolithic solution is well-positioned to win next-generation applications with hyperscalers leading fabless companies and startups in this space. Before I pass it over to Niels to discuss our end markets and design win activity, let me now review our third quarter results, which John will discuss in more detail in his commentary. As mentioned earlier, revenue in the third quarter increased sequentially to $1.739 billion, which was at the high end of our guidance range. We reported non-IFRS gross margin of 24.7% in the quarter, which exceeded the mid-point of our guidance range. We delivered non-IFRS diluted earnings per share of $0.41, which exceeded the high end of our guidance range. I am also pleased to report another quarter of strong year-over-year free cash flow generation. Cash flow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model and creating long-term value for our shareholders. We are well on our way to this goal and we have delivered $779 million of non-IFRS adjusted free cash flow in the year-to-date. For the full year 2024, we still anticipate approximately 3x growth of this metric compared to 2023. Free cash flow is an important metric for our business and as our cash balance continues to grow and our total leverage reduces, we intend to consider a range of capital allocation strategies. In conclusion, our third quarter results reflect good progress towards our long-term strategic goals. I am tremendously proud of our teams around the world as they executed the plan and partnered closely with our customers on critical design wins to support our growth objectives. So a big thank you to the entire GF team for their hard work and to our customers for their continued trust in us. With that, over to you, Niels.

Thank you, Tom, and welcome to everyone on the call. I'd like to provide a brief update on some of our key customer partnerships and end market performance. As Tom said, we are pleased with our ongoing design win momentum. Our recent announcement with NXP using our 22FDX platform is a key example of what we set out to achieve with our design wins. This collaboration will focus on next-generation solutions for automotive, IoT, and smart mobile devices. More importantly, this will enable NXP to provide more compact and power-efficient solutions, increasing the overall performance of their system solution by leveraging the best manufacturing proximity via GF's global footprint, including our facility in Malta, New York. Partnerships like this underscore our capability to deliver cutting-edge solutions that meet the stringent requirements of the end markets we serve such as automotive grade standards. On that note, automotive remains a key growth driver across our end market portfolio and despite higher levels of channel inventory over the last quarter at some of our customers, we are continuing to support the expanding semiconductor content per vehicle. Our relentless focus on diversifying our product portfolio and gaining market share in this critical end market continue to offset some of the short-term demand dynamics facing the automotive industry. Notwithstanding the sequential revenue decline in the quarter, we expect to remain on track to deliver high-single-digit revenue growth in 2024 in our automotive end market. Longer-term, we expect to target share gains with our customers across automotive applications such as radar, safety, power management, and connectivity. We therefore believe that the automotive end market will be an important revenue growth engine for us as the range of automotive semiconductor content and applications continue to grow. Turning now to smart mobile devices. This end market returned to year-over-year revenue growth in the third quarter. Based on our conversations with our customers, demand for smart mobile devices appears to be returning to modest volume growth in 2024, as customer inventory begins to normalize. Given these inventory dynamics, we believe that our full year revenue in this end market will be roughly flat. We are encouraged by our ongoing design wins which are proof points of both the technology leadership we established and our growing content gains in this market. As RF penetration continues to grow, we are reinforcing our position as a leading provider of RF front end content with key design wins in the quarter on our 8SW and 9SW RF SOI platforms. We also picked up key design wins on our 22FDX platform for 5G millimeter-wave applications as well as micro-display backplanes for smart glasses and AR applications. We expect continued interest from these applications both in mobile and wearables using our 22FDX platform, thanks to its enhanced performance and power efficiency capabilities. In IoT, our customers are continuing to carefully manage their inventories and although we reported sequential revenue growth of 4% in the quarter, this end market is down on a full year basis, due principally to the ongoing inventory levels across both industrial and consumer applications. During the third quarter, we secured over 20 new design wins across our IoT end market. These include edge applications on our 12-nanometer platforms, next-generation smart cards on 28-nanometer, and connectivity products across both Wi-Fi and Bluetooth on our 22FDX platform. Longer-term, we expect our IoT end market to grow as the number of smart and connected devices continue to expand over the next decade driven by the need to sense, acquire, process, and communicate data. Finally, revenue for our communication infrastructure and data center segment declined sequentially in the third quarter. Although the node migration of our data center and digital-centric customers has largely tapered off, the transition of compute to sub-12-nanometer node is increasing the new and growing opportunities for high bandwidth communication and efficient power conversion and storage applications in the data center. GF technology portfolio is ideally suited to service this important trend. Optical networking and power management are key battlegrounds for future growth as we remix our product offerings in this end market towards our high-speed silicon germanium and silicon photonics product. To that end, I'm pleased to report that we're working with three of the largest optical transceiver customers in this space as we focus on silicon photonics and power solutions to address data center requirements ranging from GenAI servers and high-performance network switches to storage solutions. Commercial satellite communication is also emerging as a growth vector in this market as large phased array antennas used in satellite ground terminals require significant RF front end silicon content, expanding the market opportunity for GF's silicon germanium and SOI products. As we discussed in our previous earnings calls, we believe that the second half of 2024 revenue in this end market will be roughly in line with what we have reported for the first half of 2024. Overall, I'm very pleased to report the positive progress that we're seeing across our design wins in all of the end markets that we support. Although short-term demand dynamics remain a focus, we continue to position GF for long-term growth opportunities by tailoring product features to support the key secular trends and performance requirements our customers need in each of these end markets. I'll now pass the call over to John for a deeper dive on the third quarter financials.

Thank you, Niels. For the remainder of the call including guidance other than revenue, cash flow, CapEx and net interest and other income and expenses, I will reference non-IFRS metrics, which exclude share-based compensation and/or restructuring charges. As Tom noted, our third quarter results exceeded the mid-point of the guidance ranges we provided in our last quarterly update. We delivered third quarter revenue of $1.739 billion, which represented a 7% increase over the prior quarter, but a decrease of 6% year-over-year principally due to lower shipments and utilization levels in the mid-70s, consistent with the commentary on our last earnings call. We shipped approximately 549,300 millimeter equivalent wafers in the quarter, up 6% sequentially and down 5% from the prior year period. ASP or average selling price per wafer was roughly flat year-over-year. Wafer revenue from our end markets accounted for approximately 90% of total revenue. Non-wafer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 10% of total revenue for the third quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 50% of the quarter's total revenue. Third quarter revenue increased approximately 14% sequentially and approximately 11% from the prior year period principally due to higher seasonal shipments. We believe that our customers' inventory levels have begun to normalize and for the full year we still expect revenue in our largest end market by revenue to be roughly flat on a year-over-year basis. As outlined by Niels, we are well-positioned to support our customers when demand rebounds with our design win momentum supporting the content and feature expansion in smart mobile devices. In the third quarter, revenue for the home and industrial IoT markets represented approximately 18% of the quarter's total revenue. Third quarter revenue increased approximately 4% sequentially and decreased 25% from the year prior period as our customers in the consumer and industrial IoT segments continue to tackle elevated channel inventories. As discussed by Niels, our design win momentum with customers for home and industrial wireless connected devices is expected to drive long-term growth opportunities. In the short-term, we expect that revenue for this end market will continue on a similar path to our third quarter run rate until there is a meaningful reduction in channel inventory across our customers. Automotive remained a key growth segment for us and represented approximately 15% of the quarter's total revenue. Third quarter revenue decreased approximately 5% sequentially and 16% from the year prior period due to the timing of customer inventory management. As Niels noted, we expect year-over-year automotive revenue growth to be in the high-single-digits for 2024, as we continue to gain share and support our customers across a diverse range of applications. Finally moving on to our communications infrastructure and data center end market, which represented approximately 7% of the quarter's total revenue, third quarter revenue decreased 14% sequentially and approximately 15% year-over-year as a result of declining volumes. However, this was partially offset by a year-over-year improvement in ASPs. As Tom and Niels noted, we are gaining new design wins in this end market in the areas of power, connectivity, and optical networking, as the range of data center and communications infrastructure applications continues to grow. Moving next to gross profit. For the third quarter, we delivered gross profit of $429 million, which was above the mid-point of our guided range and translates into approximately 24.7% gross margin. Gross margin also exceeded the mid-point we had indicated and as discussed in our second quarter earnings call, revenue from customer volume adjustments in the third quarter reduced by roughly half from the prior quarter. We expect that these adjustments will be similar in the fourth quarter. Operating expenses for the third quarter represented approximately 11% of total revenue. R&D for the quarter increased to $122 million and SG&A declined sequentially to $71 million. Total operating expenses declined sequentially to $193 million in the quarter and incorporated an advanced manufacturing investment tax credit of $16 million. As discussed on our last earnings call, as we continue to spend on qualifying U.S. expenses and capital assets in 2024 and beyond, we expect to continue to receive these benefits through the life of the program. We delivered operating profit of $236 million for the quarter, which translates into an operating margin of 13.6%, which is the high end of our guided range in 380 basis points below the prior year period. Third quarter net interest income and other income and expense was $10 million and we incurred income tax expense of $17 million in the quarter. We reported third quarter net income of $229 million, a decrease of approximately $79 million from the year-ago period. As a result, we reported diluted earnings of $0.41 per share for the third quarter, which was above the high end of our guidance range. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the third quarter was $375 million. CapEx for the quarter was $162 million or roughly 9% of revenue. Adjusted free cash flow for the quarter, which we define as net cash provided by operating activities plus the proceeds from government grants related to capital expenditure, less purchases of property, plant equipment and intangible assets as set out on the statement of cash flows, was $216 million. At the end of the third quarter, our combined total of cash, cash equivalents and marketable securities stood at approximately $4.3 billion. We also have a $1 billion revolving credit facility which remains undrawn. Next, let me provide you with our outlook for the fourth quarter of 2024. We expect total GF revenue to be between $1.8 billion and $1.85 billion. Of this, we expect non-wafer revenue to be approximately 10% of total revenue. We expect gross profit to be between $432 million and $481 million, which at the mid-point is 25%. Excluding share-based compensation but including the benefit related to the advanced manufacturing investment tax credit for the fourth quarter, we expect total OpEx to be between $180 million and $200 million. We expect operating profit to be between $232 million and $301 million. At the mid-point of our guidance, we expect share-based compensation to be approximately $50 million, of which roughly $14 million is related to the cost of goods sold and approximately $36 million is related to OpEx. We expect net interest income and other income for the quarter to be between $7 million and $15 million and income tax expense to be between $23 million and $35 million. We expect net income to be between $216 million and $281 million. On a fully diluted share count of approximately 555 million shares, we expect earnings per share for the fourth quarter to be between $0.39 and $0.51. For the full year 2024, we maintain our CapEx guidance of approximately $700 million and as Tom indicated, we expect this to provide GF an opportunity to focus on delivering adjusted free cash flow generation in 2024 approaching $1 billion. In summary, the dedication from our employees across the world and their continued efforts to expand our differentiated product offerings in key growth markets enabled us to achieve third quarter results at the high end of the guidance ranges we provided in our second quarter earnings update. With that, let's open the call for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question is from Ross Seymore of Deutsche Bank. Your line is now open.

Hi everyone, thank you for the question and congratulations on the strong performance. Tom, my first question is for you. I'm trying to understand how the strong performance in the second half of this year aligns with the struggles faced by several of your customers. More importantly, how does this position you for 2025? What are the specific advantages you're experiencing compared to the broader market, which appears to be underperforming?

Good morning, Ross. That’s a really good question. To address the first part, GF seems to be standing out a bit against the trend due to two key factors. First, we serve a wide range of end markets, though we have a significant focus on smart mobile devices, which accounted for 50% of our revenue in the third quarter. Additionally, despite the overall sluggishness in the automotive end market this year, we're actually seeing high-single-digit growth in our automotive business. It's important to remember that smart mobile devices experienced a downturn two years ago, and they've since become a consistent growth opportunity for us. Our automotive segment has also been expanding, largely due to the design wins we achieved over the past five or six years. Not only is there increased content in vehicles, but we've also secured more sockets within them, and we anticipate that trend continuing. The combination of our diverse end markets, especially the emphasis on smart mobile devices and automotive revenue, is what drives this performance. Now regarding 2025, let me contextualize it by discussing 2024 first. At the start of the year, we indicated that Q1 would be the lowest revenue point, followed by sequential growth each quarter. We achieved a 7% increase in Q2 compared to Q1 and another 5% increase in Q3 compared to Q2, and we have guided for further growth in Q4. Additionally, we are on track to generate a billion dollars in free cash flow, even with utilization rates in the mid-70s. That’s quite impressive and demonstrates the cash generation capabilities of our business. As for 2025, while we typically refrain from guiding further than one quarter at a time, it’s reasonable to say that it’s shaping up to be a positive year for GlobalFoundries. The extent of that growth will largely depend on industry performance and its relation to the macroeconomic landscape. As we approach Q1, most of our wafers are already lined up for that period. I can confidently say that compared to Q1 2024, we will see some year-over-year growth in Q1 2025. However, in terms of sequential performance from Q4 this year to Q1 next year, we will experience a notable decline consistent with cyclical patterns. So while there will be year-over-year growth, it will be at the upper end of typical cyclical changes from Q4 to Q1. I’ll leave it at that, Ross. Do you have any follow-up questions?

Yes. Just wanted to pivot over to the gross margin side. So one quickly for John on that. I guess, a little clarification, when you talk about the benefits that you got cutting in half into the third quarter on the LTSA side of things, you meant that that stays at about the same absolute level in the fourth quarter, not getting cut in half again. And then my bigger picture question is how do we think of the puts and takes on gross margin as we think of 2025?

Yes, Ross, thanks for the question. First point is you did understand me, right? Roughly, the same in terms of the absolute number in fourth quarter as what we saw in the third quarter. And let me just talk more broadly about profitability if I can. We're pleased with our results through the course of this year. We've seen a steady delivery of net income and EPS through the course of this year in 2024. On the gross profit margin, if you look at the underutilization charges that we've generated, which have had a very positive effect and partially offset the lack of loadings in the factories, we can quantify that as roughly about 4 points of benefit in Q1, roughly 3 points in Q2, about 1.5 points in the third quarter and a little less than that in the fourth quarter. So the point is, Ross, net of that we've actually seen an improvement in gross profit margin as our utilization has stabilized on the back of operating leverage with revenue coming up sequentially every quarter in the year, just as Tom had indicated. And as we look into 2025, it's really that as we see recovery in the industry, ongoing recovery, and continued improvement utilization, we would expect a similar positive effect on our gross profit margins.

One moment, for our next question. Our next question comes from the line of Krish Sankar of TD Cowen. Your line is now open.

Hi, thanks for taking my question and congrats on the strong results. Tom, I had two of them. First one is a question on the overall ASP environment. Your pricing has been surprisingly resilient this year, but one of your peers has spoken about some pricing adjustment in March quarter while another peer seems to be okay. So it kind of feels like there's a lot of mixed messages on pricing out there. So Tom, can you just help us out with some color on pricing trends and how to think about it in calendar 2025 and then I had a quick follow-up?

Yes. So let's start with kind of the big foundry player in the industry. They represent 70% of all the wafers that are shipped, TSMC. They've been very clear that they see a lot of pressure on costs. Most recent articles about how energy prices in Taiwan are the highest anywhere in the world. They're expanding capacity, so they're deploying capital, need to get a return on that, deploying capital in regions where the cost structures are going to be challenged. And so they've talked repeatedly about this being a constructive environment for pricing. And so when the big rational player understands that inflation is part of our industry and recognizes that needs to be shared, that sets the tone for pricing. Now, what does GF have seen and what do we see going into 2025? You can look at our results. We've been roughly flat on pricing this year. But remember, our LTAs give us a lot of certainty. They give us certainty. They give our customers certainty. Remember, they're based on fixed volume, fixed duration and fixed pricing. And so that's the rules of the game we play under. And so you've seen it in our results. But as we think about 2025, more of our revenue is going to come outside of these long-term agreements. It's going to come on kind of a non-committed purchase order basis. And we see the opportunity after two years of inflation that we've had to offset our costs against the opportunity to have these discussions to actually get better pricing for our technology. And that's what we see in 2025. You'll hear anecdotal one-time events of people giving some pricing for tactical load. I don't think I would confuse that with the general trend we see. And remember, a lot of GF's business is sole source single source type business, which means we have a special engagement with our customers on setting the value of capture and creation for both of us. I'll just leave it at that. You have a follow-on?

Yes, Tom, and thanks for that, very helpful feedback. My quick follow-up is on smart mobile. Obviously, it's a very important part of your revenue stack. Can you talk a bit about the demand and seasonality trends in the segment, especially as we head into 2025 and also is the strength here coming from the RF components or power devices, what process nodes is smart mobile focused on? Thank you very much.

Well, this is right in Niels' wheelhouse, so I'm going to let him take this.

Yes, good morning. This is Niels. Regarding smart mobile devices, we briefly touched on it at the start of the call, emphasizing our return to growth this year. We have a strong reputation in the premium phone market, but I’d like to highlight the impressive growth we are seeing in China, particularly as we venture into 5G for both low and mid-tier phones. We're starting to see business from three major players in China, alongside our usual premium offerings. In terms of technologies, we are focusing on 8SW, 9SW SOI, and we are also beginning to gain traction with our RF GaN portfolio for smart mobile devices.

One moment for our next question. Our next question comes from the line of Chris Caso of Wolfe Research. Your line is now open.

Yes. Thank you. I guess the first question is just getting some more detail on the impact of the customer underutilization payments as we go into next year. You gave some commentary about how that would go is right that that kind of gets down to de minimis levels as we get into the first half of next year. And then just following on with that, Tom, you provided some commentary on the March quarter and I think what I heard you say is still up year-on-year but on the higher end of seasonality. And it seems like if that's the case, it sort of implies sort of a down high-single-digits in Q1 base Q3 if you could confirm our math is right on that.

Yes. Chris, this is John. I'll take the first part. You are interpreting that correctly. We've been through a number of customer discussions with the LTAs through the course of 2023 and 2024, we're seeing less of those now and we're seeing the effect of that less material to our overall gross profit outlook, including in the fourth quarter of just roughly just over a point of effect on the first quarter, I mean, the fourth quarter. And as we look up into next year, first half of next year, we see a similar dynamic less material to the overall gross profit margin story here and even, I'll let Tom take the next part of that question.

Yes, Chris, you've done the math right on how you size in this.

Yes. You'll see the natural progression of gross margin performance along with the various factors that lead to that, namely improvement in factory utilization as the industry recovers and our loadings increase, along with our ongoing cost recovery initiatives, mixing of the business, growth in the channel, the various factors that Niels has touched on earlier, growing the business in a manner that is margin accretive.

One moment for our next question. Our next question comes from the line of Mehdi Hosseini of Susquehanna International Group. Your line is now open.

Yes. Thanks for taking my question. First one is for Tom. I want to go back to what you said earlier discussing the design wins across platform. Can you give us a sense of what specific segments of the market these design wins are happening and when should we expect any material contribution? And I do have a follow-up.

So I'll talk a little bit high-level about design wins in our funnel. For GF to outgrow the industry when this thing turns around, it's all predicated on converting our funnel of opportunities into design wins and tape-outs in business. And we've really accelerated our commercial engine on that point and feel confident that we have this clarity around what does our funnel need to be in total size to be able to outgrow the industry and a very disciplined process of identifying, qualifying, driving those leads into actions on design win and tape-out. For the specifics around some of the ones we're really excited about, I'm going to hand it over to Niels.

Thank you, Tom. I want to highlight our confidence in achieving strong revenue growth and improving margins moving forward. The best way to illustrate this is by discussing GlobalFoundries' growth strategy, which is founded on four key pillars. These pillars include essential chip technology, a focus on high-growth market segments, global for local manufacturing in three major regions, and a balanced customer support model. Starting with essential chip technology, it encompasses the main technologies behind embedded processing, analog, and power. Well-known companies in these areas include TI, ADI, and ASP. Our focus is on technologies at 10-nanometer and above, specifically in three main categories: CMOS, RF, and power. Within CMOS, we have bulk, feature-rich, and ultra-low power options. For RF, we cover SOI, silicon germanium, and GaN technologies. Power technology includes BCD, MOSFET, silicon carbide, and GaN. Moving forward to the first technology product vector, ultra-low power CMOS includes our 12LP and 22FDX technologies, aimed at providing 30% to 50% higher performance or lower power consumption. Our recent NXP announcement reflects this commitment, with applications spanning automotive, IoT, and SMD. The next category, feature-rich CMOS, targets sensing, computing, and display technologies, including our notable 40-nanometer NVM technology that powers the leading global automotive MCU portfolio, as well as advancements in display and imaging. In RF, we are advancing with our 8SW, 9SW, silicon germanium, and GaN technologies, bolstered by our recent Finwave announcement. Our power technologies include various BCD options and a new acquisition focused on integrating GaN devices. Finally, our silicon photonics technology offers high bandwidth with low power consumption, with engagement from three major players in the optical transceiver market. The second pillar concerns high-growth market segments. We anticipate our serviceable market will grow from $60 billion to around $120 billion by 2031, with key markets such as automotive, smart mobile devices, industrial and home IoT, and communication infrastructure. We are strategically focused on automotive safety, body electronics, front-end technologies in SMDs, IoT advancements, and recent successes in commercial satellite communication. The third pillar emphasizes global for local manufacturing, as we operate in Singapore, Germany, and the U.S. with scale manufacturing facilities. Our automotive qualifications across major technologies ensure we can meet various needs, backed by an efficient CapEx expansion model. Lastly, our balanced customer support model comprises LTAs, strong sales coverage across our top accounts, and a solid ecosystem of channel partners. Our design wins demonstrate momentum, with the latest NXP announcement highlighting our potential for future success. In summary, we believe we are well-positioned to achieve superior revenue growth and margin improvements through an expanded portfolio of differentiated essential chip technologies, a focus on fast-growing markets, an efficient global manufacturing footprint, and a balanced customer engagement model.

Mehdi, you have a follow-up?

Great. Thanks, both. Yes, I do. Thanks for all the details. Just quickly for John, how should we think about the OpEx, especially in the context of some of these credits that you're receiving? Is the $70 million to $75 million SG&A should be like a baseline? Any color would be great.

Yes, Mehdi. So we've been managing OpEx carefully this year. We expect to continue to do that as we head into next year. And as we form our kind of ongoing views of the 2025 revenue recovery we'll adjust our OpEx accordingly. On your specific question, the advanced investment manufacturing tax credit that we generated in year-to-date in 2024 thus far has been slightly ahead of our expectations. We expect that to continue through the life of this program at roughly $10 million a quarter would be a normal rate, if you will. It's been a bit ahead of that this year, but $10 million a quarter would be a good estimate going forward, Mehdi.

One moment for our next question. Our next question comes from the line of Mark Lipacis of Evercore ISI. Your line is now open.

Hi, thank you for taking my question. It appears that you are in a position to generate strong cash flow over the next several years, and I believe this aligns with reasonable expectations for industry growth, especially with free cash flow exceeding earnings. Tom, in your prepared remarks, you mentioned capital allocation programs, which seems quite broad since capital could be directed towards new fabs, increasing R&D, stock buybacks, or even issuing dividends. Could you provide us with more details on what you mean by that in terms of capital return? Additionally, John, could you remind us of the cash you prefer to keep on your balance sheet for company operations and the capital structure so we can identify what would be considered excess cash? Thank you.

So Mark, you're looking for a Secret Dakota Ring. I'm going to pass it over to John.

Hey Mark, thanks for the question. We have entered a phase in the history of GF where we have transitioned from our formation to now generating solid free cash flow for the company. It's exciting to see this progress, and nearing our goal of almost $1 billion in free cash flow this year is a significant achievement. We are also aware that our cash balance is increasing. We finished the quarter with about $4.3 billion in total cash and investments and roughly $2.3 billion in total debt, giving us around $2 billion in net cash. As we move forward, we will discuss capital deployment, which could include share repurchases and possibly dividends in the future, as well as reducing our overall debt. We will continue to explore these options and keep you updated as we progress. We need to observe more consistent results in this area, but we recognize that we are starting to build a cash balance, and we will need to consider deployment at some point.

Yes. In any good business aiming to accelerate growth, exploring mergers and acquisitions that are accretive is always a priority. Given our cash reserves, this option is available to us. Currently, we don’t see any specific opportunities, but it remains a potential avenue for capital allocation. I also mentioned earlier about the unsustainable growth in foundry services. Our factories have the capacity to generate between $9 billion and $10 billion in revenue, which is significant because it enables strong free cash flow generation. This allows us to invest in growth without having to choose between delivering free cash flow and driving business growth. We are confident that our free cash flow will support our investments in capital allocation for growth in our factories, enabling us to achieve both objectives of generating free cash flow and expanding our business.

One moment for our next question. Our next question comes from the line of Harlan Sur of J.P. Morgan. Your line is now open.

Good afternoon. Thanks for taking my questions. The team was first to market in terms of developing a manufacturing silicon photonic solution, a lot of these sort of next-generation data center networking connectivity products. So I think that's your 45-nanometer PLO technology. I think NVIDIA, Marvell, and Broadcom, are all your customers here. Team is also doing some pretty good work on compound semiconductors like silicon germanium for high-speed optical TIAs drivers and the like. So as many of these customers move to a cycle-based architecture for their optical transceivers next year, does cycle become a meaningful part of CID next year, any way to quantify?

I think this is Niels. Maybe I can start. We haven't announced the customer names yet, but as I mentioned earlier, we have three of the major players in the industry on our platform. You're correct that we were early in this space. We've been working on it for a decade and are finally starting to see the results now through design wins. You mentioned both silicon photonics and SiGe, and I view these two as the future of high-performance analog. The performance levels we aim to achieve in the future will require these technologies, and we are well-positioned with GlobalFoundries to capitalize on that. In that context, I believe this will become a significant revenue generator for us over time. However, we still need ecosystem changes and must reach certain data speeds and power limitations. Once we achieve those, I expect to see a rapid increase in these technologies.

Yes. Look, Harlan, I think success for us, it's great to have done this monolithic integration of RF CMOS and photonics in a single chip. We have to do more to enable our customers and some of the other pieces of the puzzle. And look, I'll just add one other thing. That's the big play for us in data center silicon photonics. But don't underestimate power delivery, where we're focused here as well. Power is becoming the biggest challenge, and it's neck and neck with connectivity. And we think some of the things we're doing with our technology; in particular, GaN for the future is going to help solve that problem as well.

Great. And I appreciate that. And also great to see the partnership with NXP that you guys announced last month for 22FDX and also, as you mentioned in your prepared remarks, much of it is going to be used for automotive, smart mobile IoT continuation right of the strong partnership that you guys had with them at the 40-nanometer embedded MCU pluses node. Did the GF team sign an associated long-term agreement with NXP, especially given the strategic nature of their leadership in automotive kind of similar to the partnership and LTA you signed with Infineon at the beginning of this year? I'm just trying to figure out the difference in some of these strategic partnerships, right? Why some have an LTA associated with them, maybe others might not?

Yes. Without getting into specifics about the NXP deal, what you typically observe is that in markets such as automotive, aerospace, defense, and some industrial sectors, customers prefer to have long-term agreements in place to ensure certainty around volume, pricing, and duration. In some instances, we do see this. In other situations, it resembles standard TSMC practices with dynamic pricing and volume commitments, which are renegotiated on a 12-month basis. We utilize a mix of these approaches, depending on what best fits the customer and their target market.

Right. It's really the complexity of the end market. If it's a product design that lasts 10 years, this is where customers want certainty. If it's a refresh cycle every year, it's less important to them because it's changing all the time. And so you could almost think a customer who plays in different end markets may want an LTA for one product and not another. Look, just on that point, to give you an idea, when we hit peak LTA revenue or total revenue under LTA, it was above $30 billion. We ended last year; we still had $20 billion of LTA revenue. And as we sit here today, we have $17 billion. And so there's still a fair amount of our business that's under LTAs. And it's not because it's just bleeding out slow, it's because we still get customers in some of these long-tail businesses that want to get that type of certainty locked in. And so I think it's becoming an important part of our industry, and it's never about one thing or another thing. It's always a little bit about the nuance underneath. What's the problem is trying to be solved and LTA solve some of that certainty for long product line use. Do you have a follow-on?

No. That's it for me. Thank you, Niels. Thank you, Tom.

Operator, we'll take one last question.

One moment for our last question. Our last question comes from the line of Vivek Arya of Bank of America Securities. Your line is now open.

Hi, thank you for squeezing us in. This is Saad Khan on behalf of Vivek. One follow-up or I guess, clarification. You've guided auto to be up high-single-digit smart mobile device to be flattish for the year. I'm not sure how you can get to the Q4 guidance of 18%, 25% at the mid-point with those numbers. And then the real question is the smartphone trends have remained pretty weak to-date. So how should we think about your smart mobile device demand going forward, particularly given that Q1 tends to be seasonally down?

Yes, Vivek, this is John. I'll take the first part. I mean, really, it's an IoT income infrastructure where you see year-on-year declines for 2024 compared to 2023 will round out the Q4 guide. And I'll let Niels comment on the smart mobile trends.

Yes. Smart mobile, you could say the GlobalFoundries may be boggling the trend a little bit here. We're doing well in smart mobile devices. We are particularly doing well on our RF portfolio. And from a design win standpoint, we have very meaningful design and momentum in that space as well moving forward.

Yes. You'll see the natural progression of gross margin performance along with the various factors that lead to that, namely improvement in factory utilization as the industry recovers and our loadings increase, along with our ongoing cost recovery initiatives, mixing of the business, growth in the channel, the various factors that Niels has touched on earlier, growing the business in a manner that is margin accretive.

This concludes the question-and-answer session. I would now like to turn it back to Sam Franklin for closing remarks.

Thanks, everyone, for joining us today. We appreciate the questions, and we'll continue some of the other questions in the call back later this afternoon. Thanks very much.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.