Earnings Call Transcript
GLOBALFOUNDRIES Inc. (GFS)
Earnings Call Transcript - GFS Q2 2022
Operator, Operator
Thank you for standing by, and welcome to GlobalFoundries Second Quarter Fiscal Year 2022 Earnings Conference Call. I would now like to hand the call over to Head of Investor Relations, Sukhi Nagesh. Please go ahead.
Sukhi Nagesh, Head of Investor Relations
Thank you, operator, and good morning, everyone. Welcome to GlobalFoundries' Second Quarter 2022 Earnings Call. On the call with me today are Dr. Thomas Caulfield, CEO, and Dave Reeder, CFO. A short while ago, we released GF's second quarter 2022 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 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 would remind you that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate, and may. 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 March 31, 2022. We will begin today's call with Tom providing a summary update on the current business environment and an update on our capacity expansion in technologies, following which, Dave will provide details on our end markets and second quarter results and also provide third quarter guidance. We will then open the call for questions. I request that you please limit your questions to one with one follow-up. I would also like to remind you that our first Capital Markets Day will be taking place in New York City tomorrow. If you would like to attend in person, please e-mail ir@gf.com in order to be registered for the event. I'll now turn the call over to Tom for his prepared remarks.
Thomas Caulfield, CEO
Thank you, Sukhi, and welcome, everyone, to our second quarter earnings call. I'm pleased to report that our second quarter results were once again ahead of the guidance that we provided in May as we continue to make significant progress on our strategic and financial priorities. Amidst the challenging macroeconomic environment, the GlobalFoundries team, 15,000 strong, continues to execute each and every day. Let me start by providing a brief update on the current business environment. Similar to others in the industry, we are seeing some areas of the market beginning to rebalance supply and demand, including end markets such as low-end handsets, PCs, and in general, the lower end of the consumer electronics market. Although we've experienced a decrease in some pockets of our unconstrained demand, the total demand for GlobalFoundries solutions remains robust and capacity continues to be oversubscribed. Specifically, we continue to see healthy demand in fast-growing end markets, such as home and industrial IoT, automotive, communications infrastructure, and data centers. If you recall, we previously mentioned that we started this year oversubscribed with demand that was 25% higher than available capacity. Today, demand continues to outpace our ability to supply by about 10%. We remain oversubscribed for 2022 and 2023. Given the increasingly single-sourced nature of our business, we expect to continue to grow revenue and profit through the remainder of this year and next. In the second quarter, GlobalFoundries revenue grew 23% year-over-year, driven by increases in both wafer shipments and average selling price (ASP). This, coupled with strong operational excellence, resulted in significant improvement to adjusted gross margin. We reported adjusted gross margin of 28% in the quarter, a 12 percentage point improvement from the year-ago period. As a result, we delivered earnings per share of $0.58, which was $0.10 better than the high end of our guidance. David will give more details on the financials in a moment, but let me now provide you with a brief update on some of our recent customer and partnership activity. At the time of our IPO last year, we had signed long-term agreements totaling approximately $20 billion in revenue. Now, about one year later, we have 36 customers under long-term agreement with revenue totaling approximately $27 billion and prepayments and access fees totaling about $3.6 billion. Yesterday, on the heels of the U.S. CHIPS bill being passed, we announced an extension of our long-term agreement with Qualcomm that adds more than $4 billion in incremental wafer purchases from our Fab A facility in Upstate New York. With this extension, the long-term agreement with Qualcomm now represents more than $7 billion in global revenue through 2028. Since the beginning of the year, we've secured approximately $6 billion in incremental new long-term agreements with our customers. All these new agreements, as well as extensions to existing long-term agreements, are 100% single-sourced business. In fact, single-source revenue in the first half of 2022 outpaced overall revenue, growing 37% year-over-year, and 90% of the first half design wins were single-sourced as well. In the quarter, we also signed a definitive agreement with ST Micro to create a new jointly operated 300-millimeter manufacturing facility, adjacent to ST's existing 300-millimeter facilities in Crolles, France. With this agreement and combined with our capacity increase in Germany, GlobalFoundries will be tripling capacity in Europe from 2020 through 2028. This partnership with ST enables GlobalFoundries to add capacity in a highly capital-efficient manner, backed by grants from the French government as well as customer prepayments. Finally, let me provide a brief update on some of the important technology milestones we achieved this quarter. In the second quarter, we completed nine technology qualifications. We are extremely pleased to have released our 22FDX+ platform. This platform offers greater than 25% power reduction, thereby enabling a technology road map to further improve power and performance optimization for many of our customers' IoT applications. Additionally, we have now fully qualified our highly differentiated 45CLO photonic solution, which we just recently announced at the Optical Fiber Communications Conference. We have over a dozen customers currently developing prototypes in preparation for volume manufacturing in 2023. We believe GlobalFoundries’ photonics solution is the only 300-millimeter monolithic integration of electro-optical components in our industry, where we're combining SOI, CMOS, and photonics in a single-chip solution. Lastly, we released to production the industry's first 55-nanometer embedded nonvolatile memory solutions for power management that will be adopted in new releases of premium-tier handsets. To summarize, I'm pleased to report another quarter of solid execution as we deliver to our customers and all our stakeholders. We continue to demonstrate steady momentum across our business and are making significant progress towards our long-term business model. Now before I hand it over to Dave and Sukhi, I would like to let you know that normally, I would be participating in the Q&A session following our prepared remarks. However, I'm currently in Washington, D.C. to witness the signing of the CHIPS bill at the White House. This landmark legislation will have a profound positive impact on our nation, our industry, and GlobalFoundries for years to come. I look forward to seeing many of you at our Capital Markets Day in New York City tomorrow. With that, over to you, Dave.
Dave Reeder, CFO
Thank you, Tom, and welcome to our second quarter earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics, which exclude stock-based compensation. Our second quarter results exceeded the high end of the financial range we provided in our last quarterly update. Second quarter revenue was approximately $1.993 billion, an increase of 23% year-over-year. We shipped approximately 630,300-millimeter equivalent wafers in the quarter, a 6% increase from the prior-year period. Average selling price, ASP, per wafer increased approximately 16% year-over-year, driven by ramping long-term customer agreements with better pricing, a constructive transactional pricing environment, as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 92% of total revenue. Non-wafer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees, and other items, accounted for approximately 8% of total revenue for the second quarter, consistent with our expectations. Let me now provide an update on our revenue by end market. Smart mobile devices represented approximately 49% of second quarter revenue, growing 14% year-over-year. Growth was driven by higher ASPs and better mix as we continue to increase our silicon content in the premium-tier handset market. In the RF front end, which is the largest segment of our mobile business, growth was relatively flat year-over-year. However, our industry-leading 300-millimeter RF SOI platform, that is widely used in the premium-tier handset market, continues to increase as a percentage of the total front end mix, which is accretive to our business. For 2022, we are on track to grow our premium-tier 5G revenue by more than 35% year-over-year, offsetting the modest decline we see in low-end handsets. Additionally, in this end market, we are growing our silicon content, mostly due to gains in RF transceivers, PEMEX, audio ICs, and image sensor processors. Growth in these submarkets are all trends we expect to continue throughout the year. Revenue for the home and industrial IoT market grew 72% year-over-year, representing 17% of total revenue. Strong year-over-year growth in this end market was driven by wafer volume growth of almost 40%, better ASPs, and improved mix. GlobalFoundries' strength and feature-rich technologies that are focused on superior wireless connectivity performance at the lowest possible power consumption has enabled our growth in the home and industrial IoT end market. Within this end market, our wireless connectivity solutions saw significant growth due to the accelerated adoption of our 22FDX technology for WiFi 6 applications. We are also seeing strong traction for our IoT microcontrollers that feature embedded nonvolatile memory for a number of smart card applications, such as digital payments, access control, and electronic IDs, driven by features such as connectivity speed, security, and a growing touchless transaction environment. Additionally, growth in our IoT end market is also being driven by our differentiated power and analog technologies for applications such as factory and building automation as well as test, measurement, and security. We are on track for home and industrial IoT to be the fastest-growing market for GlobalFoundries in 2022. Touching next on automotive, revenue in this market was approximately 4% of our total second quarter revenue and grew approximately 34% year-over-year, driven by the ramp of new products in ADAS, safety, and infotainment. As we have previously indicated, our growth in this market will be lumpy as we are constrained by how quickly we can build capacity. As capacity comes online, we will be ramping new products enabling automotive electrification and safety. As a result, our automotive business is on track to grow more than 25% in the second half of the year versus the first half of the year. Next, our communications, infrastructure, and data center end market comprised approximately 17% of second quarter revenue and grew approximately 50% year-over-year. Growth was driven by a combination of higher shipments, higher ASPs, and better mix. Our strongest year-over-year growth is within the data center submarket. Our customers are continuing to grow end market share in this segment, and GlobalFoundries is contributing by providing critical connectivity and IoT components. We also grew revenue modestly in all of our other submarkets, including optical networking and wired wireless infrastructure. Next, and as expected, our compute end market declined year-over-year and comprised approximately 5% of total second quarter revenue. We expect this end market to be less than 5% of our total 2022 revenue. After a trough in Q1, we are now seeing a modest uplift in revenues following the finalization of a design with a major PC customer. Moving to gross profit, for the second quarter, we delivered adjusted gross profit of $559 million, which translates into approximately 28% adjusted gross margin. The 12% increase year-over-year was driven by better fixed cost absorption, higher ASPs, and improved mix. Approximately 80% of this improvement was attributable to ASP and mix with the remaining 20% attributable to volume and fixed cost absorption. Operating expenses for the second quarter were better than expected and represented approximately 10% of total revenue. R&D for the quarter was down sequentially at approximately $112 million, while SG&A came in at $97 million. Total operating expenses were $209 million, excluding $32 million of stock-based compensation. Q2 total operating expenses decreased approximately $17 million from a year ago, largely due to lower start-up costs associated with fab expansion projects as well as lower headcount costs. GlobalFoundries delivered operating profit of approximately $350 million for the quarter, which translates into an approximately 18% adjusted operating margin, roughly 15 percentage points better than the year-ago period and $45 million higher than the high end of our guidance range. Second quarter net interest expense was approximately $19 million and we incurred a tax expense of approximately $30 million in the quarter. We delivered second quarter adjusted net income of approximately $317 million, an increase of approximately $350 million from the year-ago period. As a result, we reported adjusted earnings of $0.58 per share for the second quarter. We delivered record second quarter adjusted EBITDA of approximately $784 million. Adjusted EBITDA grew $318 million year-over-year on $373 million of incremental revenue growth, representing approximately 85% fall-through. Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the second quarter was $609 million. Gross CapEx for the quarter was $812 million or roughly 40% of revenue. At the end of the second quarter, our combined total of cash, cash equivalents, and marketable securities stood at approximately $3.3 billion, an increase of roughly $2.5 billion from the previous year. Before I transition to Q3 guidance, I briefly wanted to update you on the current inflationary environment and its impact on our business. Last quarter, we provided you our view on inflation and the headwinds we are facing in our business, especially with respect to materials, energy, and labor costs. While we have experienced a slight uptick in cost for materials and energy in Q2, we continue to estimate the impact of these inflationary costs to our full-year results to be less than 2% of revenue. Next, let me provide you with our outlook for the third quarter. We expect total GlobalFoundries revenue to be between $2.035 billion and $2.065 billion. Of this, we expect non-wafer revenue to be approximately 11% to 12% of total revenue. An increase in design wins and the corresponding customer tape-outs should result in sequential third quarter reticle revenue growth of more than 25%. We expect adjusted gross profit to be between $580 million and $609 million. We expect adjusted operating profit to be between $347 million and $381 million. Excluding share-based compensation for the third quarter, we expect total operating expenses to be between $228 million and $233 million. We expect a sequential increase in operating expenses to primarily be driven by higher IT and other administrative costs. At the midpoint of our third quarter guidance, we expect share-based compensation to be approximately $42 million, of which roughly $21 million is related to cost of goods sold and approximately $21 million related to operating expenses. We expect net interest expense for the quarter to be approximately $15 million and tax and other expenses to be roughly $24 million. We expect adjusted net income to be between $324 million and $356 million. And we expect D&A for the quarter to be about $405 million, of which 90% is related to cost of goods sold. On a fully diluted basis of approximately 551 million shares, we expect adjusted earnings per share for the third quarter to be between $0.59 and $0.65. We expect adjusted EBITDA to be between $775 million and $813 million. As we mentioned on our earnings call last quarter, for the full year 2022, we expect total gross CapEx to be less than $4 billion, impacted by the known delays in capital equipment. Despite the slight delay, we are on track to meet all of our customer commitments for the year. In summary, strong operational execution enabled us to deliver second 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. We expect to deliver progressively better financials quarter-to-quarter throughout the year as we continue to methodically execute our plan. With that, let's open the call for Q&A. Operator?
Operator, Operator
Our first question comes from Harlan Sur of JP Morgan.
Harlan Sur, Analyst
Congratulations on the team's support and helping to get the CHIPS bill over the finish line and also the strong quarterly execution. You guys came into this year, as you mentioned, with demand about 25% higher than your ability to supply. I think last earnings call, you guys talked about a 1.5 times book-to-bill ratio. Clearly, as you mentioned, the demand environment has weakened, especially in the areas that are encompassed in your smart mobile and your compute segment, which is about half of your revenues. But on the flip side, you guys do have fungibility in parts of technology and capacity by geography. So there is some slack for your business to take a hit on demand. So with demand looking like it's normalizing a bit lower, trending about 10% above supply, maybe you can just help us think about how much demand has to drop before you have to modulate your utilizations or your forward capacity expansion plans.
Dave Reeder, CFO
Harlan, exciting day here in New York City and exciting day in Washington where Tom is; he certainly wishes he could be with us today. But given the choice of being on his phone and being in the White House for the signing of the CHIPS bill, I think he chose wisely. I look forward to seeing you tomorrow at Capital Markets Day. With respect to demand, we're still oversupplied, meaning the demand outstrips our supply, and that's true for 2022 and 2023 as well. We'll obviously cover that in more detail tomorrow. But given that it's obvious already, our order book for 2022 looks good and it's largely complete. So our revenue ability remains solid. To the extent that we see customers wanting to rebalance, we're usually trading up a rebalance towards richer, more accretive mix for GlobalFoundries. So demand is still strong. Did you have a follow-up, Harlan?
Harlan Sur, Analyst
Maybe as a reflection of some of the weaker segments, and I know you have fungibility. We know that one of your RF customers has been impacted by the weak China domestic smartphone market. I think this customer actually took a charge against their COGS in the June quarter. Most of that charge was due to wafer shipments that were going to fall below the minimum threshold under the long-term agreements with you. The good news is that the take-or-pay is clearly working for you. This customer is sole-sourced with you. They've made prepayments. So they clearly see the differentiation that you bring to their products. Now they're in renegotiations on their LTA with you. If we assume that the demand environment will probably continue to weaken and you may have more customers that have to renegotiate the terms of their LTAs, given the clear differentiation you bring to your customers. Is it fair to assume that pricing has not been negotiated, but it's primarily around prepayments, duration, or volume of the LTAs that is being renegotiated?
Dave Reeder, CFO
You get it right, Harlan. The pricing environment is still very constructive. Given inflation and also the shortages that we see concerning capacity, I don't really expect that pricing environment to change in the near future. I think the piece I would add is that if you were to look at a 5% drop in utilization, we've mentioned before that if you have a 5% drop in utilization, you typically see just a couple of points, call it 2 points or so impact on gross margin. But if you took a point decrease in ASP, that's 5 points that flows all the way through. So I think given all the things that I just mentioned: strong end-market demand, instructive price environment, continued inflation hitting the global economy, it's challenging to see an environment in the near future where pricing becomes a concern.
Operator, Operator
Our next question comes from Vivek Arya of Bank of America.
Vivek Arya, Analyst
Dave, for my first one, just a clarification on the Q3 outlook. If I exclude the increase in the non-wafer revenue, it suggests wafer sales could be kind of flattish to somewhat down sequentially. I imagine that's probably because of the smartphone market. But I just wanted a clarification on how you were thinking about the interplay of wafer shipments and ASPs in Q3. And if you could maybe give us a little bit of color on how you are thinking about it extending into Q4 versus what you thought for the year originally.
Dave Reeder, CFO
As you know, we're currently constrained from a supply perspective, but we are expecting wafers to increase sequentially from Q2 to Q3. So no change in our plans there like we had talked about. Our wafer shipments last year were about 2.4 million wafers. Those wafers grow to about 2.6 million this year and then about 2.8 million in 2023. All those plans remain on track. We expect to grow wafers sequentially from Q2 to Q3 and actually from Q3 to Q4 for that matter and well into 2023. From that perspective, I feel quite good about the trajectory there. Pricing, we don't talk a lot in detail about pricing. If you were to look at how we performed this quarter, 23% year-over-year growth, Q2 '22 to Q2 '21. Of that 23%, 6% was volume growth and about 16% was ASP. As we look from Q2 to Q3 and we look year-over-year from Q3 '22 to Q3 '22, we expect those trends to continue. Did you have a follow-up, Vivek?
Vivek Arya, Analyst
I know you'll discuss expectations for '23 and the longer term tomorrow at the Capital Markets Day. However, regarding the capacity announcements you and several of your peers have been making, do you think, Dave, that pricing will be a headwind or a tailwind for the industry in calendar '23?
Dave Reeder, CFO
Let me break that into two parts. Look, at GlobalFoundries, we don't put capacity on for ourselves. When we add capacity, we are adding capacity in partnership with our customers. So we have customers that are signed LTAs with us. $27 billion now is, as we mentioned, more than 36 customers. Roughly $3.6 billion of customer funding that's actually come to GlobalFoundries to be able to expand that capacity. The capacity that we're putting on, we're putting on at the behest of our customers and in partnership with our customers, and increasingly with government partnerships as well. In terms of whether we're concerned about pricing coming into play as more capacity is added, about two-thirds of our shipments are actually single-sourced wafer shipments, and about 90% of our design wins are actually single-sourced design wins. So we're not putting on more non-generic capacity for the market. We're putting on capacity in partnership with our customers. We feel quite good about that. We feel like the pricing environment remains constructive, and we see that as being constructive not only today but also in 2023.
Operator, Operator
Our next question comes from the line of Ross Seymore of Deutsche Bank.
Ross Seymore, Analyst
I want to go back to the LTA side of things. Obviously, you guys are doing a good job of enforcing them. But as we start to see more companies write down your customers, or any fabless companies write down their own side of that equation, I want to have you walk us through the mechanics of how you handle the slowdown in demand. I get that you're single sourced, but at some point, end demand is end demand. If they don't need the volume, you can force them to take it, but they don't need that inventory either. I would imagine that would hurt the relationship. Could you just talk a bit about how negotiations go when the demand weakens, how you adjust to the various levers, whether it's units, pricing, etc.? I think that's what investors really want to get confidence in as they look forward to a potentially slowing macroeconomic environment.
Dave Reeder, CFO
When we engage with a customer, we start by understanding that the Long-Term Agreement (LTA) allows us to have open conversations. Given the current higher demand compared to supply, we can negotiate with customers who are looking to adjust their commitments. We generally manage to satisfy their reduced demand and supplement it with more beneficial business. If we can replace underutilized capacity with new customer demand, we don’t charge them for the unused capacity. Our diverse portfolio in sectors like automotive, IoT, and data center infrastructure supports these rebalancing efforts. In practice, we collaborate closely with our customers to evaluate their market demand, discuss the duration and extensions of their LTAs, and rebalance their demand portfolio, focusing on areas performing well and those that are weaker. This negotiation framework helps us adapt effectively to their needs.
Sukhi Nagesh, Head of Investor Relations
And new design wins…
Dave Reeder, CFO
And new design wins as well for their next generation of business, that's another element that Sukhi just mentioned. Did you have a follow-up, Ross?
Ross Seymore, Analyst
I just want to ask about the gross margin side of things and more specifically, some of the units versus the wafer units versus the ASP side. I know you guys don't guide overtly by those metrics each quarter. But it seems like if the units are going up in your third quarter, I mean the ASPs are actually going to go down a little bit at the midpoint. I think that's the first time your implied ASPs will have dropped sequentially since you've been public. So can you just walk us through maybe the third quarter and then the second half of the year? What would be some of the puts and takes on that? Is that just an end market dynamic? Is it a non-wafer revenue dynamic? Any of the moving parts there would be helpful.
Dave Reeder, CFO
Well, first, the correlation between ASPs and gross margins doesn't always hold true in all instances. Sometimes you can have a different product that actually has a higher gross margin even if it has a lower ASP. From that perspective, it's really product-by-product related, and it's probably more directly correlated to the amount of features from GlobalFoundries that are actually included in the product with respect to the health of the gross margin. Sequentially, from Q2 to Q3, I'm looking at pricing, and I would say ASP per wafer looks pretty flat. I mean, it's a flattish profile. We've had a little more ramp in volume from Q2 to Q3 than we had from Q1 to Q2. But I would say pricing remains relatively flat from quarter to quarter, and I expect to actually increase as we progress throughout the year. That so implies fourth-quarter increase. So I think pricing, from my perspective, again, kind of a growth price, if you will, ASP for wafer, relative flat volumes grow, and we expect profitability from a gross margin perspective to continue to grow. So all in all, the progression from Q2 to Q3 looks pretty good from where I sit.
Operator, Operator
Our next question comes from Mehdi Hosseini of SIG.
Mehdi Hosseini, Analyst
I joined the call late, and I apologize. Did you discuss what led to the decrease in COGS in the June quarter on a sequential basis?
Dave Reeder, CFO
We didn't discuss it in detail. A lot of that's due to product mix. Of course, we get better absorption. As we do ship more volume, especially on a year-over-year basis, what you do start to see is fixed cost absorption that kicks in in a meaningful way. From that perspective, that's something that we've been talking about for a long time, and we continue to experience that in the second quarter. We expect that to continue, in fact, all the way through 2023 as we continue to ramp our volumes from 2.4 million wafers last year to 2.6 million this year to roughly 2.8 million wafers in 2023. Did you have a follow-up?
Mehdi Hosseini, Analyst
Yes, I won't ask about LTA since it's related to OpEx, and I want to save that for your Analyst Day tomorrow. However, for modeling purposes, should we expect the OpEx for Q4 December to be relatively flat compared to the previous quarter?
Dave Reeder, CFO
We tend to guide one quarter at a time. But what we've talked about for the entire year is that OpEx in total is roughly around the 12% range, 12% of revenue, roughly equally split between R&D and SG&A. So that should give you some color on how we think about the whole year. I don't think Q3 or Q4 will be tremendously different than that.
Operator, Operator
Our next question comes from the line of Krish Sankar of Cowen.
Unidentified Analyst, Analyst
This is Steven calling on behalf of Krish. I have a couple of questions. First, I just wanted to drill down a little bit more on the customers that are currently rebalancing inventories. From your perspective, any estimates on the duration of the rebalancing process? Is it like a one or two quarter and perhaps is it more extended into the duration?
Dave Reeder, CFO
I think what we're seeing, and I'm speaking broadly here because we're really not seeing a lot of it, but what we are seeing is modest rebalancing. I would probably characterize it as in the 10-ish percent, maybe 15-ish percent range, but in that ballpark. It tends to be in markets that are heavily consumer-oriented and that kind of downturn nature. The business that it's being replaced with is being replaced with automotive business, it's being replaced with business associated with data center infrastructure and communications, and of course home and industrial IoT. Those businesses continue to perform quite well as you saw in our second quarter, and we expect that to continue throughout the year. Did you have a follow-up?
Unidentified Analyst, Analyst
The follow-up I had was for Q3 revenues, specifically the reference around higher reticle revenues within your non-wafer business? Is there any color on the concentration of customers or maybe the end market where the higher reticle activity is coming from, and when would production revenues be ramping for those related reticles?
Dave Reeder, CFO
Look, from a design win perspective, you're seeing those both progress pretty nicely. So to the extent it's an LTA associated with new products, you need the reticles and the non-wafer revenue to grow to be able to satisfy those LTAs and then, of course, the corresponding design wins. So those all move in tandem. It’s no surprise that you’re going to get these quarters where you have some heavy development activity to fuel that future revenue growth. Specific areas that are growing, we typically don't talk too much about that quarter to quarter. There is a segment in aerospace and defense, that's an area that is specifically growing in a meaningful way in the third quarter, particularly for reticle revenue. So that would be one area that's driving that increase sequentially from Q2 to Q3.
Operator, Operator
Our next question comes from Tristan Gerra of Baird.
Unidentified Analyst, Analyst
This is Tyler on for Tristan. Can you describe the importance of the FD SOI process, notably in EVs? Also, any additional color you can provide on the recently announced European investment and partnership with ST Micro?
Dave Reeder, CFO
From an FD-SOI perspective, so on SOI in general, we believe that we're actually the leader in the SOI space. Whether you're referring to RF SOI or fully depleted SOI technologies, we believe that we are the leader in delivering those analogies to market and certainly the foundry leader for those technologies. The importance of fully depleted SOI are many-fold, but I'll try to touch upon the big ones. For us, we manufacture our FD SOI technology on 22 nanometer. You have very good digital compute power. So your digital computations are quite big. You also have the best-in-class power management. So you have best-in-class power management with very good digital compute. You layer on that the connectivity capability, both in millimeter wave and in some RF characteristics. You really have a platform that's ideally suited for anything that needs power management or advanced connectivity. Those are the markets where we're winning with our FD-SOI technologies. The announcement that we made in France was really about growing our capacity to service the design wins and LTAs that we have on our FD-SOI technologies, and those relate specifically to IoT devices, connectivity devices, and more frequently automotive devices. Those areas relate to power management, connectivity, and some millimeter wave in automated driver assistance systems and other things in the automotive segment that benefit from that technology.
Unidentified Analyst, Analyst
For my follow-up, without jumping the gun on your Capital Markets Day tomorrow, how should we think about the impact of the CHIPS Act on your CapEx into 2023 and beyond?
Dave Reeder, CFO
Let me hit that question a bit more broadly. GlobalFoundries is a trusted company. We are engaged in Singapore with the Economic Development Board of Singaporean government. We're engaged with them and our customers to grow capacity in Singapore. We've been engaged with Germany for a decade and the EU to grow our capacity in Germany, and we continue to expand our capacity in Germany. In fact, we're increasing it from 300k wafers per year to 850k wafers per year. You mentioned France, where we're engaged with the French government now, trusted by the French government, to engage with them as an extension of our Dresden facility to increase our capacity ultimately from zero to about 300k wafers per year. Here in the U.S., we're a trusted foundry for the U.S. government. Tom's in Washington today signing the CHIPS bill. We're a trusted company, both by our customers and by governments. Signing the CHIPS bill enables us, in partnership with our customers, to look at our investments and opportunities to grow within the four walls today, expand our tooling. We've also done a lot of project work. Ultimately, when our customers agree with their commitments, when the government works out the details for how the CHIPS Act will be deployed, GlobalFoundries will be there with a project ready to go. When that happens, then we'll sit down and we'll figure out the next steps for investment here.
Operator, Operator
Our next question comes from Rajvindra Gill of Needham.
Rajvindra Gill, Analyst
Just a follow-up on the LTAs. I'm trying to get a sense of how you'll navigate through that potential slowdown, particularly in the smartphone market. There have been many forecasts revised down for the overall smartphone market, particularly 5G smartphones. Units have been revised down, affecting the forecast for 2023. You generate a large percentage of revenue from the mobile phone market through a variety of customers. So I'm curious, I know you haven't seen it yet. But is there any indication that a lot of your smartphone RF front end module customers are starting to rebalance down their volume?
Dave Reeder, CFO
Let me break that into a couple of sections, and I'll share some high-level numbers from what we see in the market and how we feel it connects to handsets. We think that quarter-to-quarter, the total global handsets are going to be down around 200 million units. But if you look at what's happening under the covers, the total handsets, the 5G, 4G, 3G, 2G, all the handsets are down about 200 million units. That’s the forecast from Q1 to the forecast from Q2. But if you look specifically at the 5G segment of that forecast, units actually went up, in fact, units went up about 5%. The forecast for 5G handsets went up 5% from Q1 to Q2. You have to look at the market in aggregate and then you need to look at the market in detail and specificity. When you see the 5G portion of the market not only doing well but expected to do better in the second half of the year than in the first half, what that implies for GlobalFoundries is that we have higher content in the front end module of 5G handsets. We have higher content, it's more accretive for us as a business. Our growth in 5G is more than offsetting the decline we see in medium and lower-end handsets. And of course, we're winning sockets in power management, connectivity, and audio, as well as payment devices. You add all those things together, and that's the type of growth that you get is 14% year-over-year in the smart mobile market when the rest of the market looks flat to down. It's also important that you're engaged with OEMs in end markets that are doing better than others. Mixing up with 5G, many more sockets are taking share, and engaging with the right OEMs that are doing reasonably well in this market leads to the growth you saw in the second quarter.
Rajvindra Gill, Analyst
Just my follow-up. You talked about, in general, the pricing environment; you're still constructive on it. It's mainly a function of the inflationary environment and the supply shortage. Could you elaborate a bit further? When you talk about the inflationary environment on the cost side, can you talk about the cost of the equipment or the raw materials that's leading you to continue to pass on those cost increases? Any sense in terms of the supply shortage for your raw materials? Is there any indication that in some areas, that's easing up or in other areas that you're still constrained?
Dave Reeder, CFO
Let me kind of take those in order here. With respect to inflation, our expectation is to pass along inflationary costs. When I think about inflation, I think about materials, I think about labor, and I think about energy, those are the three big drivers for GlobalFoundries from an inflationary perspective. From a materials perspective, when we were signing our LTAs, we were securing our long-term supply. We feel reasonably well hedged on the material side, so that we have the materials at the right prices to satisfy the LTAs, delivering the profitability we've committed to the market. We feel pretty good about materials, but they are tight; materials and environment are tight. There isn't a lot of available capacity in the market. So the materials environment is tight. From a labor perspective, we continue to execute very, very well on labor. We have some variable infrastructures in place that allow us to outperform like we did in Q1 and Q2. We expect to do it again in Q3, such that our employees get to participate in that. From an energy perspective, we've got some hedges and some forward buys in place to mitigate some of the increases that we’ve seen in energy around the world. We had also passed along some energy prices to many of our customers in April, with energy surcharges that went out in early April in Q2. We think of it in terms of kind of mid-single-digit price increases from a surcharge perspective. So materials, labor, energy, and then pricing along all those elements; we feel like we’ve addressed them reasonably well for 2022.
Operator, Operator
Our next question comes from Chris Danely of Citi.
Chris Danely, Analyst
Just a follow-up on one of the earlier questions. So Dave, just to confirm, you guys don't expect any material impact to result from the CHIPS Act? Do you guys expect to see your taxes go higher from this raise taxes on everything in the new act that looks like it's about to pass, which takes the minimum tax to 15%?
Dave Reeder, CFO
With respect to the CHIPS Act, there are two elements to the CHIPS Act relative to our P&L. One is the investment tax credit, a 25% investment tax credit for equipment purchased and then, in the U.S., installed which delivers incremental capacity. We'll continue to look at the details of that as the CHIPS bill is signed and we get more information. The ITC appears pretty straightforward. We have investments going in to increase capacity in Malta and Burlington. We expect to use that investment tax credit to accelerate some of those investments. As we work through those details, we will update you in subsequent quarters regarding the benefit to our P&L, but our understanding is that it will create a net CapEx effect. So it would be a one-for-one offset to depreciation and amortization for new equipment we purchase in the U.S. The second element of the CHIPS Act relates more to doing more greenfield or brick-and-mortar investment. Those details need to be worked out in detail by the commerce department, but we expect those details to be worked out over the next, call it, six to nine months. As those details become available, we'll update the market. Our gross CapEx plans have not changed. To the extent we get additional benefits from the ITC or the second element of the CHIPS Act related to new investments in greenfield capacity, we will update the market accordingly.
Chris Danely, Analyst
One more clarification. Given all the weakness you're seeing in the low end, it has not changed your 2023 outlook versus, let's call it, three or six months ago in terms of pricing, revenue, LTAs, or anything like that?
Dave Reeder, CFO
It has been, and let me tell you why. We had significantly more demand in '22 and '23 than we could satisfy. When we look at the current environment, yes, we see some rebalancing in different end markets, specifically related to consumer segments, including low-end consumer. That said, we had more demand than we could satisfy. Our capacity equation hasn't changed. We're expecting to deliver about 2.6 million wafers this year, 300-millimeter equivalent, about 2.8 million wafers next year. We can take some of that demand and, for demand that we see rebalancing, choose the demand that's most accretive to GlobalFoundries. That's created an opportunity for us to take some unsatisfied demand in end markets we really like and bring that into the production schedule. You've seen the benefits of that in our P&L results. We've been able to deliver a bit more accretion than we expected. We're a bit ahead of the plan laid out at IPO. We're executing well, and that rebalancing is actually benefiting us right now.
Operator, Operator
Our next question comes from the line of Randy Abrams of Credit Suisse.
Randy Abrams, Analyst
I wanted to follow up on the CapEx. You mentioned a bit of the timing delay for equipment. Could you then give the view for 2023 with the incremental, how it's looking? Then for Dresden, you reaffirmed the 850k. If you could give an update on Malta, how that expansion is and now with the CHIPS Act, whether that pulls in the Malta expansion?
Dave Reeder, CFO
Equipment vendors continue to face challenges. A while back, we noted that equipment deliveries were delayed by about two to four weeks. Currently, it seems those delays have increased to four to six weeks, and potentially even six to eight weeks for some deliveries. The environment remains quite tough. We have effectively managed our commitments and feel confident about them, but we are facing delays in receiving the equipment. Initially, we targeted a capital expenditure of around $4.25 billion this year. Now, we anticipate spending under $4 billion, likely closer to $3.5 billion. This change is due to the delays we are experiencing, especially after a strong fourth quarter for capital expenditures. Any delays from the fourth quarter will carry over into 2023. While 2023 looks promising, we initially projected around $3 billion, but with delays spilling from 2022 into 2023 and then into 2024, there is a cascading effect on capital expenditures. The team in Germany is doing well, successfully bringing in new equipment, installing it, qualifying it, and producing units. They deserve recognition for their efforts in Dresden, which contribute positively to our financial results and fixed cost absorption. The expansion in Malta is gradually progressing, and we expect the necessary equipment to arrive in the latter half of 2023. However, if delays persist, we may need to push this further into late 2023 or even into 2024. We have placed orders for that equipment and are awaiting its arrival. Once it arrives, the Malta team will work hard to get it operational and start producing units.
Randy Abrams, Analyst
And a follow-up on the East Fishkill since that's coming up. Could you remind us of the impact as you sell the fab into early next year? Given the tightness, just one other question about timing. Would you have the annual maintenance, or would we continue to ride through it, expecting to stay full? So just those timelines as we get toward the end of the year.
Dave Reeder, CFO
If you recall, we signed that agreement a couple of years ago. ON Semi has been ramping up, and we've been slowly ramping out of that facility, so East Fishkill is on track to transact at the end of this year. December 31st of this year, that facility will transact. We'll then enter into and in fact, we've already entered into an agreement with ON Semi, such that they'll continue to produce some wafers for us and kind of a make-to-order relationship over the course of '23 and '24. We'll continue to ramp slowly out of that facility in an orderly way. They'll continue to ramp up in an orderly way. But at the end of this year, that facility fully transacts and moves over to ON Semi for full ownership. At that point, we're simply buying wafers from an order desk type perspective from ON Semi, fully qualified wafers that are manufactured there. In terms of impact, we're estimating that we'll get roughly a $250 million impact benefit on a year-over-year basis, '23 versus '22 by transacting that facility. It will lower our cost of goods by that amount on an ongoing basis.
Operator, Operator
Thank you. At this time, I'd like to turn the call back over to Sukhi Nagesh for closing remarks. Sir?
Sukhi Nagesh, Head of Investor Relations
Thank you. Thank you all for joining. We look forward to seeing many of you tomorrow at our Capital Markets Day. Have a nice day.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.