Globalfoundries Inc

NASDAQ:GFS

Earnings Call Analysis

Strong Quarterly Performance and Positive Future Outlook

GlobalFoundries reported a sequential revenue increase to $1.632 billion in Q2, despite a year-over-year decline of 12%. The company exceeded guidance with a non-IFRS gross margin of 25.2% and earned $0.38 per share. Automotive remained a strong segment with a 10% annual growth and smart mobile devices revenue rose 12% sequentially. IoT and consumer segments faced inventory challenges. Looking ahead, Q3 revenue is projected between $1.7 billion and $1.75 billion with gross profit ranging from $391 million to $438 million.

Quarterly Financial Performance

In the second quarter, GlobalFoundries reported revenues of $1.632 billion, which represented a 5% increase over the prior quarter but a 12% decrease year-over-year. The company's non-IFRS gross margin stood at 25.2%, and they delivered non-IFRS diluted earnings per share of $0.38, which surpassed the high end of their guidance range. Operating cash flow was strong at $402 million, while CapEx was $101 million, about 6% of revenue. The company ended the quarter with $4.145 billion in combined cash, cash equivalents, and marketable securities【4:0†source】.

Sectoral Insights and Growth Opportunities

The automotive sector remains a key growth area for GlobalFoundries, contributing approximately 17% of total revenue. The company anticipates meaningful year-over-year growth in automotive revenue for 2024. Design wins in automotive power management on their 130 BCD platform and next-generation tire pressure monitoring systems on their 55-nanometer platform underscore the company's strategic positioning. Increased semiconductor content in vehicles is fueling demand for GlobalFoundries' broad technology portfolio, which also includes 40-nanometer microcontrollers for safety, powertrain, and comfort applications【4:0†source】【4:1†source】.

Market Dynamics and Revenue Streams

Revenue from smart mobile devices represented about 47% of the company's total revenue for the quarter. Despite a sequential increase of approximately 12%, there was a year-over-year decline of 3%, influenced by lower shipments which were partially mitigated by improvements in average selling prices (ASP) and product mix. The IoT market, covering home and industrial segments, accounted for 18% of revenue but showed a decrease of 5% sequentially and 28% year-over-year due to elevated channel inventories. The communications infrastructure and data center end market represented about 9% of revenue, experiencing a significant 28% sequential increase but a 27% decrease year-over-year【4:1†source】【4:3†source】.

Strategic Moves and Technological Investments

GlobalFoundries continues to innovate and invest in advanced technologies. The acquisition of Tigor Technologies' gallium nitride (GaN) power business added an extensive IP portfolio and engineering talent to the company's capabilities. This acquisition is expected to bolster the company’s position in the GaN power device sector, leveraging the unique advantages of GaN over traditional silicon-based semiconductors, such as higher voltage operation, faster switching speeds, and better thermal performance. Additionally, the company is sampling its first-generation 650-volt GaN products and plans to gradually ramp up GaN manufacturing capacity over the next 2 to 3 years【4:5†source】【4:16†source】.

Financial Outlook and Long-term Objectives

For the third quarter of 2024, GlobalFoundries expects revenue to be between $1.7 billion and $1.75 billion, with non-wafer revenue accounting for about 11% of the total. Gross profit is anticipated to be between $391 million and $438 million, while operating profit is expected to range from $171 million to $238 million. The company maintains its CapEx guidance at approximately $700 million for the full year, aiming for adjusted free cash flow generation in 2024 to be roughly three times that of 2023. This reflects the company’s disciplined approach to capital deployment and its focus on sustainable growth【4:0†source】【4:6†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the GlobalFoundries Conference Call to Review Second Quarter of Fiscal Year 2024 Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sam Franklin, VP of Business Finance and Investor Relations. Please go ahead.

[Sam Franklin, executive]

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries Second 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 second 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. 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 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 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. Neils will then discuss some recent strategic activities. Following which, John will provide details on our end markets and second quarter results and also provide third quarter 2021 guidance. We will then open the call for questions with Tom, John and Niels. [Operator Instructions] I'll now turn the call over to Tom for his prepared remarks.

[Thomas Caulfield, executive]

Thank you, Sam, and welcome, everyone, to our second quarter earnings call. I'm pleased to report second quarter results, which exceeded the midpoint of our guidance ranges as our 13,000 employees around the world continue to focus on delivering best-in-class technologies and meeting needs of our customers both globally and locally. I am proud of how well our teams are partnering with our customers on exciting new design wins as we execute to our long-term plans.

Against this backdrop, we believe that we're beginning to see the demand outlook improve across certain end markets as the number of applications for analog and mixed signal products increases and channel inventory levels for some of our customers are showing signs of normalizing.

As outlined on prior earnings calls, we still believe that the first quarter represents the low point for revenue in 2024 and the sequential revenue growth we reported for the second quarter along with our guidance for the third quarter are consistent with this expectation. Notwithstanding the short-term cyclical dynamics impacting our industry, we remain focused on positioning GF for long-term growth opportunities. I am pleased to provide several updates today, demonstrating how we are investing in our future growth plans and winning with our customers.

To that end, we completed the acquisition of Tigor Technologies gallium nitride power business, which includes its extensive IP portfolio and its team of GaN engineers, which closed at the beginning of July. This is an important addition to our power technology platform. And with that, I'd like to turn the call over to Niels to provide some additional commentary.

[Niels Anderskouv, executive]

Thank you, Tom, and welcome to everyone on the call. I'd like to share a few details on the acquisition and set out why it's important for GF and to our customers and how this will support our ambitions to become a leading foundry in the rapidly expanding gallium nitride power device sector.

At its core, the integration of [indiscernible] Technology IP is expected to enable GlobalFoundries to grow our capabilities in pursuit of 2 key objectives: firstly, expanding our product portfolio by providing additional power handling features for our customers; and secondly, growing our serviceable addressable market.

From a technical perspective, GaN offers several advantages over traditional silicon-based semiconductors, particularly in power applications. This is due to its ability to operate at higher voltages, with faster switching speeds at smaller die sizes and with better thermal performance. With Tagore Technology's, we can now target better power efficiency capability in an integrated solution. Perhaps the best way to think about this is to compare our integrated GaN offering to BCD technology.

With Tagore's capability, we plan to offer our customers the analog and digital content of BCD technology integrated with the superior power performance of GaN. These performance characteristics have been identified by our customers as key features for supporting applications across sectors such as automotive, aerospace and defense, renewable energy, fast-charging infrastructure and power management for data centers.

As a result, we expect our SAM to grow by approximately $1.6 billion by 2030 and additionally, we're supporting our customers to target a substantial share of this SAM. By investing in GaN solutions designed to push the boundaries of efficiency and performance in a right range of power applications, we are targeting opportunities to win with our customers across all of the markets we serve. And we're already sampling our first-generation 650-volt GaN products with 100 to 200 volts sampling expected to follow shortly.

To achieve this goal, we'll be modernizing our manufacturing capabilities at our site in Burlington over the coming years. This modernization will be enabled with the expected support from the previously discussed Grand Award from the U.S. Chips and Science Act, along with continued investment in R&D to support a gradual ramp of our GaN manufacturing capacity over the next 2 to 3 years.

Moreover, this acquisition aligns with GLOBALFOUNDRIES broader strategy to enable high-volume manufacturing of critical technologies in power applications and to serve as a trusted manufacturing partner for our customers seeking to build the next generation of power management solutions here in the United States.

I would like to welcome our new GF employees joining us as part of this acquisition, and we look forward to taking the next step in this important growth opportunity for the company. With that, back to you, Tom.

[Thomas Caulfield, executive]

Thank you, Neils. Before I comment on the current business landscape and our recent customer partnerships, let me now touch briefly on our second quarter results, which John will discuss in more detail in his commentary. Revenue in the quarter increased sequentially to $1.632 billion, which was above the midpoint of our guidance range. We reported non-IFRS gross margin of 25.2% in the quarter, which again exceeded the midpoint of our guidance range.

We delivered non-IFRS diluted earnings per share of $0.38, which exceeded the high end of our guidance range. I am also pleased to report another quarter of strong cash flow, which reflects our disciplined approach to capital deployment while preserving our capacity expansion objectives.

Cash flow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model. We are on track to deliver approximately 3x the amount of 2023 non-IFRS adjusted free cash flow by the end of 2024. We are well on our way to this goal as we achieve more than $500 million of non-IFRS adjusted free cash flow in the first half of the year.

Moving now to some of our recent partnership activity and how we are positioning GF to keep winning with our customers over the long term. Automotive remains a bright spot across our end market portfolio, and we delivered another quarter of revenue growth. We are continuing to partner with our customers to identify long-term opportunities to expand, share and content in the vehicles of today and the future.

As the semiconductor content in vehicles continues to expand, GF is well positioned to support our customers with a full range of our technology portfolio mix. The performance features embedded across our key product platforms support critical applications in the automotive sector. In the second quarter, we closed important design wins for automotive power management on our 130 BCD platform and next-generation tire pressure monitoring systems on our 55-nanometer platform.

Across the broader portfolio, our technologies are key enablers of the increasing semiconductor content in vehicles, including 12 LP plus used in infotainment and navigation systems, 22FDX for RADAR and safety applications and through our 130 and 180-nanometer technologies for automotive power management applications. Our 40-nanometer microcontrollers for safety, powertrain and comfort applications has seen consistent demand from our customers, one of which has the #1 position in automotive microcontrollers, where we are the sole source supplier.

From a revenue base of approximately $1 billion in 2023, we remain on track to grow our revenue meaningfully on a year-over-year basis for the full year of 2024. Turning now to smart mobile devices where our technology portfolio delivered quarter-over-quarter revenue growth and key design wins in the second quarter across RF front end, WiFi and wireless connectivity applications.

Notwithstanding the ongoing inventory correction, our customers are continuing to engage with us for long-term opportunities to deliver the next generation of smart mobile devices. Thanks to our recent design wins, we expect to grow share with our RF front-end offerings, specifically on our ASW and 9SW RFSOI platforms. 9SW features lower standby currents for longer battery life, up to 10% improvement in noise figure and up to 25% reduction in customer dine sizes.

Our 22FDX platform continues to be an important growth vector for wireless connectivity applications in smart mobile devices, and we closed a key design win in the second quarter for wireless video applications in premium smartphones. Our 28 high-voltage low-power solutions for OLED display driver applications began to ramp in the second quarter.

We continue to target new opportunities across other display driver, integrated circuit customers, serving premium tier handsets. These features all drive increased silicon content, which in turn increase the need for high-performance connectivity and low-power technologies, which GF is well placed to serve.

In IoT, ongoing excess inventories at our customers contributed to a decline in revenue for the second quarter, although our customers' inventories are expected to remain high through 2024, and we continue to see long-term opportunities as the number and complexity of smart connected and battery-operated devices continue to grow.

The need to sense, acquire, process and communicate data also translates into new requirements for more efficient power management, connectivity and AI, the edge functionalities. For example, our 22FDX platform for high-speed wireless IoT devices picked up new design wins in the second quarter, as did our 28 ESF 3 platform to support next-generation of smart card applications.

Highlighting the breadth of our IoT markets, we are now working with medical device providers in applications such as continuous glucose monitors using our 130BCD light platform as a key enabler of the front-end function of these devices. In aerospace and defense, we continue to partner with a variety of customers where our power and performance optimized solutions are well suited to applications geared for harsh environments.

To that end, we recently announced a new collaboration with BAE Systems to strengthen the supply of critical semiconductors for national security programs. Together, our companies will collaborate on R&D programs across a range of applications including advanced packaging, gallium nitride, silicon photonics and advanced technology process development.

Finally, revenue for our communications infrastructure and data center segment grew sequentially in the second quarter as the near-term node migration of our data center and digital-centric customers tapered off. As discussed on our last earnings call, we believe that quarterly revenue for the remainder of 2024 in this end market will be roughly in line with what we have reported for the first and second quarters of 2024.

Over the long term, power management for communications infrastructure and data center represents an important opportunity for GF in applications ranging from service for generative AI, high-performance network switches and storage, a trend that GF is well positioned to address through our silicon photonics and power delivery solutions.

As we discussed in our first quarter earnings call, satellite communications is also an important growth opportunity within this end market, and I am pleased to report another design win in the second quarter this time on our 22FDX platform to enhance been forming for SATCOM applications, which follows the base station design win we announced last quarter using our 130 NSX platform.

I'm also pleased to report that Rock, a leading developer of Fast AI inference technology has recently announced that it is ramping its language processing units with GF, manufactured on our 14-nanometer platform at our multi facility in Upstate New York. This is an important development in supporting the next wave of AI inference technologies and continues the diversification of end markets serviced by our Fab 8 facility.

Moving briefly to our capacity. I would like to take a moment to talk about how we are optimizing our manufacturing footprint over the coming years. We remain deeply focused on providing our customers with a diversified technology offering across our entire manufacturing footprint. And to that end, we are continuing with the transfers of technologies across 22, 28 and 40-nanometer platforms in our Fab 8 facility in Multi New York, which add to the 12-nanometer FinFET RFSOI in silicon photonics platforms that are already manufactured there.

Long term, our mission remains to support our customers with differentiated technologies and performance features that they need in the markets and geographies where they excel. To summarize, I'm proud of our teams around the world as they executed to plan, and we delivered second quarter revenue, gross profit and EPS above the midpoint of our guidance ranges while continuing to close important design wins to support our long-term growth objectives. With that, over to you, John.

[John Hollister, executive]

Thank you, Tom, and welcome, everyone, to our second quarter earnings call. For the remainder of the call, including guidance, other than revenue, cash flow, CapEx and net interest and other expense I will reference non-IFRS metrics, which exclude share-based compensation and/or other restructuring charges.

As Tom noted, our second quarter results exceeded the midpoint of the guidance ranges we provided in our last quarterly update. We delivered second quarter revenue of $1.632 billion, which represented a 5% increase over the prior quarter, but a decrease of 12% year-over-year, principally due to lower shipments and utilization levels in the low to mid-70s, consistent with the commentary on our last earnings call.

We shipped approximately 517,300-millimeter equivalent wafers in the quarter, up 12% sequentially and down 10% from the prior year period. ASP or average selling price per wafer was flat year-over-year. Wafer revenue from our end markets accounted for approximately 91% of total revenue. non-wafer revenue, which includes revenue from reticles, nonrecurring engineering, expedite fees and other items, accounted for approximately 9% of total revenue for the second quarter.

Let me now provide an update on our revenues by end markets. Smart Mobile devices represented approximately 47% of the quarter's total revenue. Second quarter revenue increased approximately 12% sequentially and decreased approximately 3% from the prior year period, principally due to modestly lower shipments.

This decline was partially offset by an improvement in ASP and mix, driven by continued content growth in premium tier smart mobile devices. As Tom discussed, we believe that inventory levels in this end market have begun to normalize during the first half of 2024, and we are well positioned to support our customers when this end market rebounds as the silicon content and features in smart mobile devices continues to grow.

In the second quarter, revenue for the home and industrial IoT markets represented approximately 18% of the quarter's total revenue. Second quarter revenue decreased approximately 5% sequentially and 28% from the year prior period as our customers in the consumer and industrial IoT segments continue to focus on bringing down their elevated channel inventories. Shipments in the consumer-centric and industrial portions of were partially offset by year-over-year improvements in ASP and mix as well as increased volumes in our Aerospace and Defense segment.

Automotive remains a key growth segment for us and represented approximately 17% of the quarter's total revenue. Second quarter revenue grew approximately 2% sequentially and 10% from the prior year period due to higher volumes as the semiconductor content and features increase across the vehicle architecture and our designs continue to ramp at key customers, which were partially offset by reductions in ASP and mix.

As Tom noted, we expect meaningful year-over-year automotive revenue growth for 2024 as we support our customers across a diverse range of automotive applications, in both industrial -- internal combustion engine and autonomous connected electrified vehicles. Finally, moving on to our communications infrastructure and data center end market, which represented approximately 9% of the quarter's total revenue.

Second quarter revenue increased 28% sequentially and and declined approximately 27% year-over-year as a result of declining volumes. However, this was partially offset by an improvement in ASPs and mix during the quarter. As Tom noted, we will continue to focus on new opportunities in CID in the areas of power and connectivity while diversifying our manufacturing footprint.

Moving next to gross profit. For the second quarter, we delivered gross profit of $411 million, which was above the midpoint of our guided range at translates into approximately 25.2% gross margin. Gross margin exceeded the midpoint we had indicated and includes $66 million in revenue associated with the execution of customer volume adjustments.

Looking ahead to the third quarter of 2024, we expect additional customer volume adjustments, albeit at lower levels than we saw in the first half of 2024 as our customers' demand and inventory levels begin to correct. This has been reflected in our third quarter guidance.

On operating expenses and operating profit, operating expenses for the second quarter represented approximately 12% of total revenue. R&D for the quarter declined to $113 million and SG&A also declined sequentially to $86 million.

Total operating expenses declined sequentially to $199 million in the quarter and incorporated an advanced manufacturing investment tax credit of $20 million [Audio Gap]

for the quarter, which translates into approximately 13% operating margin at the high end of our guided range and 530 basis points below the prior year period. Second quarter net interest income and other income and expense was $12 million, and we incurred income tax expense of $13 million in the quarter.

We reported second quarter net income of $211 million, a decrease of approximately $86 million from the year ago period. As a result, we reported diluted earnings of $0.38 per share for the second 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 second quarter was $402 million. CapEx for the quarter was $101 million or roughly 6% of revenue. Adjusted 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 tangible assets, as set out on the statement of cash flows, was $302 million.

At the end of the second quarter, our combined total of cash, cash equivalents and marketable securities, stood at approximately $4.145 billion. We also have a $1 billion revolving credit facility, which remains undrawn.

Next, let me provide you with our outlook for the third quarter of 2024. We expect total GF revenue to be between $1.7 billion and $1.75 billion. Of this, we expect non-wafer revenue to be approximately 11% of total revenue. We expect gross profit to be between $391 million and $438 million. Excluding share-based compensation but including the benefit related to the advanced manufacturing investment tax credit for the third quarter, we expect total OpEx to be between $200 million and $220 million. We expect operating profit to be between $171 million and $238 million.

At the midpoint of our guidance, we expect share-based compensation to be approximately $50 million, of which, roughly $14 million is related to cost of goods sold and approximately $36 million is related to OpEx. We expect net interest income and other income and expense for the quarter to be between $0 and positive $7 million and income tax expense to be between $16 million and $31 million.

We expect net income to be between $155 million and $214 million. On a fully diluted share count of approximately 558 million shares, we expect earnings per share for the third quarter to be between $0.28 and $0.38. Consistent with our commentary on our last earnings call, our third quarter guidance reflects the expectation that utilization will continue in the low to mid-70s as some of our core end markets start to emerge from the ongoing inventory direction during the first half of 2024.

For the full year 2024, we maintain our CapEx guidance of approximately $700 million. And as Tom commented, we expect us to provide GF an opportunity to focus on delivering adjusted free cash flow generation in 2024, approximately 3x greater than 2023.

In summary, the dedication from our 13,000 employees across the world and their continued efforts to expand our differentiated product offerings in key growth segments while navigating a challenging cyclical backdrop enabled us to achieve second quarter results above the midpoint of the guidance ranges we provided in our first quarter earnings update. With that, let's open the call for Q&A. Operator?

[Operator]

[Operator Instructions] [Operator Instructions] Our first question comes from the line of Mark Lipacis with Evercore ISI.

[Unknown Analyst]

One for Tom, maybe one for John. Tom, it sounds like you're of the view that the industry is starting to emerge from the inventory correction a lot of times coming out of the inventory correction, it can kind of start with a material or at some point have a material uptick in orders. And I'm wondering if you could just provide us any color that you are having with your conversations with your customers? Are they expressing the view to you that they're shipping materially below consumption and when that gap between their shipments and demand consumption might close and how you prep GlobalFoundries for that possibility of a material uptick in orders. And then I have a follow-up.

[Thomas Caulfield, executive]

Thanks, Mark. Look, I think a couple of comments I'd make first. It's clear we're at the bottom of the cycle. I think the real question is, when do we come up in a meaningful way from the bottom of the cycle. And this is -- it's not a monolithic answer because we play in many end markets. And so I would tell you, while home and industrial IoT did a really good job on not bleeding down inventory in the quarter, they still have not really seen the demand that they need to start growing again. Same, I would say, with comms infrastructure and end market that investments have slowed down. Now on the other end, for -- at least for GF. Automotive is a bright spot for us. This is a year-on-year meaningful growth for GF. And of course, we're seeing, as everybody else is seeing in smart mobile devices, the after 2 years of depressed mobile device sales. This is a year where most people are calling for low single-digit growth. And that's an opportunity for us to continue to grow our revenue. So I would say, when I think of of what's going to be that catalyst to get real growth, we're going to have to see if AI-enabled devices drive a refresh cycle. And this is something we'll see over the coming quarters. And starting maybe in the fourth quarter this year when there's a refresh of particular product line and how that does with the promise of new feature capability in AI. Lastly, a lot of what we're going to see in our industry is going to be tied to macroeconomics. This is a consumer-led industry. And if you think about the 2 largest economies, China and the U.S. have different macroeconomic conditions you're dealing with in China, it's real estate overhang that has consumers maybe saving a little bit more than the ordinary will and being a little gun shy. In the U.S., we're still dealing with high interest rates as a result of high inflation. And once those 2 economies get a little bit more normalized and consumers start to spend and redirect that spending back into electronics, I think that's when we're going to see see our businesses as an industry pick up. But the real catalyst, if we're going to do anything in the near term other than this macro environment is really going to be AI-enabled devices. Will they spark the interest in devices that will have new functionality that consumers will want.

[Unknown Analyst]

Very, very helpful. And I don't know maybe for John, the free cash flow is well above the net income. So the quality of earnings is quite high. And it looks like the main mechanism is CapEx under funding depreciation expense. And if so, would you expect that to persist? And maybe if you could give us a framework for thinking about those line items in the cash flow statement, depreciation and CapEx over the medium term and maybe into next year, if you could.

[John Hollister, executive]

Yes. Certainly, Mark, it's John. Yes. So the company had invested in its capacity footprint over the past several years. And given the industry dynamics, we have the ability to leverage that and operate within that capacity without a heavy amount of CapEx. That said, we are still investing in the future growth. For example, our technology transfers into our multi-fab or continuing. And we continue to make investments around GaN and other items to drive forward growth. So we're excited about that. But yes, we also had some benefit in the first half of some of our customer prepayments and accelerated AR collections that benefited the first half free cash flow. So all things considered good performance. We generated more than $500 million of free cash flow in the first half and are on track to meet our goal for 3x improvement. That's actually up -- if you recall, the prior indication was 2.5% to 3%, we have upgraded that to 3x 2023 free cash flow performance. So we're pleased to report that this morning. And we see these trends persisting into 2025 to your other question, where as we have factory utilization in the low to mid-70s, we have some room now to pull that back up to 80%, 90-plus percent utilization as the industry recovers and continue to maintain healthy cash flow generation market.

[Thomas Caulfield, executive]

Yes, Mark, let me put a little bit of finer point on this long-term capacity. As John pointed out, we were in a couple of years of heavy investment cycle, getting ready for our customers' demand. And of course, the cycle came along. We've said it before and we'll say it again, and I think it's worth repeating, is the investments we've made can drive our company to $9.5 billion to $10 billion worth of revenue. So first, we get to fill the capacity back to 95% utilization and then beyond. So we've put ourselves in a position where we have healthy growth opportunities once the demand returns in the footprint we have. And by the time we start investing again, we're going to be investing off a much bigger phase where free cash flow and investment can both happen simultaneously.

[Operator]

Our next question comes from the line of Ross Seymore with Deutsche Bank.

[Ross Seymore, analyst]

I guess for my first of my 2 questions, I want to focus on the revenue side. For the third quarter and then potentially the fourth quarter, could you give us a little idea of what you're seeing in the end markets. In the third quarter, it looks like your non-wafer revenue is, I don't know, 45% of the sequential growth. And in the past quarterly calls, you've talked about being able to grow for the rest of the year. Is that still true for the December quarter as well?

[John Hollister, executive]

Yes, Ross, this is John. Yes, we are holding that view back in the February call, we indicated that we felt the first quarter revenue point was our low for fiscal 2024 and that we would be able to sequentially grow revenue each quarter in 2024. Our results for second quarter and our guidance for third quarter are consistent with that view, and we hope we maintain that view as we would look forward to the fourth quarter. As we indicated in the prepared commentary, we're seeing recovery in the smart mobile devices end market, which is encouraging. Our CID end market is stabilized now with the single node migration for some of our more data center and digitally centric customers beginning to taper off. So we see that at a relatively stable point at this point. And IoT has had a fairly high level of inventory that continues to get worked off and we're looking for longer-term recovery in the IoT market. And finally, of course, a very bright spot for us in terms of growth this year is automotive, where we're seeing meaningful growth opportunity. And that's on the back of $1 billion in automotive revenue in 2023, which was a 3x entries over what we generated in 2022. So clearly, the share gain story in automotive continues to persist, and we're quite encouraged by that.

[Ross Seymore, analyst]

I guess as my follow-up question, moving over to the gross margin side of things. Can you just help us on 2 factors. How should we think about the LTSA resolution benefits. I know you said it will be less than the -- well, it was less in the second quarter than the first, and it sounds like that trajectory will continue in to your third quarter guide. But the bigger picture question is, how do we the revenues rising and the gross margin falling, when do those start to move directionally similar? And what sort of incremental gross margin should we think about going forward when that kind of more normal relationship emerges?

[John Hollister, executive]

Sure, Ross. Yes, John, again, here. And as we indicated a couple of times, we have factory utilization in the low to mid-70s. And given the relatively high level of fixed costs and our cost structure, that has a meaningful effect on our all-in gross margin that we report. All that said, we've done a couple of things to help our gross margins this year. We've worked very hard to improve our cash output costs. I want to give the team a lot of credit for the work they've done there. And second thing is that our long-term agreement frameworks with our customers have had provisions to allow for such a scenario, and this has resulted in underutilization economics coming into the company, which have helped. As you've indicated, we realized about $66 million of underutilization revenue in the second quarter. We do expect that to tick down to roughly half that level in the second half of this year, and that is contributing to the gross profit margin guidance that we've given this morning. And to your other point, as we begin to see utilization come up, we should see that direct relationship reemerge and see revenue and gross profit margin moving in lock with one another over time as utilization can come out. But just as a quick reminder, the rough rule of thumb here is that every 5 points of factory utilization drives about 200 basis points of variance in gross profit margin. And just finally, as I just zoom out and think about profitability in general and company is performing well with 13% operating margin in the second quarter and around 37% EBITDA margin. I mean we also touched on free cash flow a moment ago. So that -- hopefully, that helps on the gross profit margin story.

[Thomas Caulfield, executive]

Yes. And look, I'll jump in a little bit on the longer range John said it right, as utilization comes up, that's our biggest snob. But if you think about what we've done in almost 2 years now, the down cycle in our industry is 1 we're focused on winning new business in the future, and we'll probably get into that a little bit later. And two, we've taken a lot of structural costs out of our business, right? This is the opportunity for us to redefine and enhance our efficiency. It's a never-ending journey. And so when we come back up, it's not when will gross margins come up is when we pass our high watermark again in the future of $8.1 billion or $8.2 billion, whatever we did in 2022. We will be a company that produces much better bottom line results as a result of this one.

[Niels Anderskouv, executive]

Yes. This is Niels. Maybe just one more point to add on where we're going moving forward. We've also, in the last few years, built a lot of fungibility into our factories, meaning we can run the processors in multiple factories and thereby really optimize that utilization as we move forward over the next few years and get to that $9 billion to $10 billion that Tom is talking about from a footprint standpoint.

[Operator]

Our next question comes from the line of C.J. Muse with Cantor Fitzgerald.

[Christopher Muse, analyst]

I was hoping to just follow up on Ross's question on gross margin. So is the right framework to think about lower customer adjustments impacting gross margins in the quarter? Or is there a mix impact there as well?

[John Hollister, executive]

Yes, C.J, it's primarily the result of continued utilization in the low to mid-70s as well as the factor you mentioned. I will note that, as we've indicated, anticipation of continued sequential growth through the second half can afford us the opportunity for modest improvement in gross profit margin in the fourth quarter. So we would be looking for that as utilization can hopefully begin to increase a bit.

[Christopher Muse, analyst]

Very helpful. And then I guess maybe a combination question. So in an earlier response, you talked about potential for excitement related to Edge AI. And just curious, as you think about your conversations with your customers, what are they signaling to you? And when do you see that impacting the timing of raising your utilization rates? So C.J., your question is when can edge AI increase production and utilization.

Curious more about the conversations you're having today, build plans and then how you're thinking about SP29085833 The timing of being proactive and turning on your lines? I mean, do you have visibility to that in '24, more of a '25 story? Would love to hear how you're thinking about it.

[Thomas Caulfield, executive]

Yes. I think, look, the best way to talk about this is how we're building our pipeline for future business. Timing is always going to be what it's going to be. But have you loaded your funnel, your pipeline of design wins. Is that, I want to hand it over to Niels.

[Niels Anderskouv, executive]

Yes, let me -- C.J., this is Niels. So maybe let me talk a little bit about it. So Edge AI obviously ties very, very closely to market segment. Design win momentum is quite strong, especially on our 22FDX node, which really is a very, very good fit. 22FDX offers the best performance, very low power and beta connectivity. You've heard us stop out examples previously of 30% improvement on the connectivity side at half the power and then with the right NBM the right integration for the MCUs less control MPU side. So the same momentum is quite high. We're starting to see some very interesting AI accelerators being implemented. Some of these are main specific architectures that are within our customers own IP and some of them are coming from IP providers, but definitely starting to see that momentum build. Hard to say exactly when this is going to ramp. But I would personally stable it's going to be, as you start seeing a refresh cycle coming in on these end equipment applications, adding the AI functionality in those products. So I hope that helps.

[Operator]

Our next question comes from the line of Chris Caso with Wolfe Research.

[Christopher Caso, analyst]

First question is on pricing. And if you give some color on where you expect ASPs for the year. And then as a follow-on to that, if you can give some commentary, and I think you did in some of the prepared remarks on some of the ASP trends by segment and recognizing an ASP isn't necessarily a measure of profitability, but just some sense of as you're signing new agreements, new engagements with customers, how that pricing has trended as compared to the last cycle.

[Thomas Caulfield, executive]

Very good, Chris. So let's start with what we're seeing. We're seeing a stable pricing environment. And we're not alone. Our 2 biggest competitors have also reported stable pricing. And I think there's a lot of good reasons for that. You see these very same competitors investing in capacity. This capacity doesn't come for free. They don't need to have pricing that reflects getting reasonable returns or they won't want to make these investments. So this positions the industry them and all foundries, including GF, to be in a constructive pricing environment going forward. Look, if this industry is going to double in the next -- by the end of the decade, it's going to need capacity and capacity is going to need returns. I'd also like to -- I think you touched on it, let me embellish a little bit. We drive you're right to gross margins and not on ASP. In fact, given the range of technologies, our ASPs are not always reflective of our gross margin. So what you see from is on any given quarter, you could see ASPs move around in the low single digits, and that's no reflection on profitability but more about the mix. And then John talked about how important utilization is and getting our business, our factories loaded and what it will do for the profitability of those very same ASPs.

[Christopher Caso, analyst]

Yes, I do. Just a follow-up is with regard to CapEx and understanding right now, you're managing for cash flow, obviously, utilization is low and you're going to want to bring that up. What's sort of the thought process going forward on when CapEx needs to start coming back. Is that going to be driven at some point by technology needs that you're going to have new engagements and new processes that customers require that's going to drive some CapEx? Or is this going to be sort of low levels of CapEx until we get utilization to a certain point?

[Thomas Caulfield, executive]

Maybe it's because of the capital intensity of the industry. Somehow, we've convinced ourselves that $700 million is modest CapEx. This is a capital-intensive industry. We're spending $700 million this year. I think the difference is where we are investing. So there's 3 areas I think about innovation, enablement of these new features and then just adding more of what we can do base capacity. So we've said we have enough capacity on our base to grow our revenues to $9.5 billion, $10 billion. And I'm going to get back to that in a moment. Where we are investing now and in the future until we get to that level of utilization is in differentiation. When we bring a new feature to the marketplace. It may require new process techniques, and we'll have to invest in the capacity to do that, not in the overall capacity to create more wafers, but to bring that feature to the marketplace. And that's a big part of that $700 million we spent.

Now back to this $9.5 billion to $10 billion. I'll go all the way back to the investment thesis of our roadshow in 2021. We said there was something really important about reaching a $9.5 billion, $10 billion market revenue. We wouldn't have to trade off free cash flow for investment in growth that we get to a point of scale where we can have both. We can invest in meaningful growth and at the same time, produce free cash flow. And so that's how I would think about what our investment profile is going to be over the coming years. When we do invest CapEx, it's going to be for differentiation and bringing new better features to the marketplace. We start getting close to $9.5 million, $10 million. We're going to start investing in new capacity, but with a different financial model for the company.

[John Hollister, executive]

So if I may add to that, and again, I mentioned fungibility early on. It's a very important part of our manufacturing strategy. Examples here would be between our Singapore fab and our Dresden fab. We have a very high degree of fungibility across technologies. Now we're adding the same thing with our multi fab and our address in fact. And lastly, you have a Singapore fab and the Burlington fab having good fungibility. And a lot of this comes from a manufacturing strategy and a development technology strategy of really trying to utilize as many of the same tools as possible. So as we add new features, we try to do it within the set of standard tools that we have. And that's a big part of the reason for how we can get more lean on the CapEx for the next few years until we hit that $9.5 billion to $10 billion that Tom mentioned.

[Operator]

Our next question comes from the line of Joseph Moore with Morgan Stanley.

[Joseph Moore, analyst]

I wonder if you could talk about how customer conversations are with regards to future long-term agreements. Obviously, wafers are pretty available right now. But how much are people thinking about what this might look like a couple of years from now? And how are you doing with sort of securing longer-term gains from here?

[Thomas Caulfield, executive]

Yes, Joe, I think the heading for that is our LTA is still fashionable. And maybe we just look back at how this all came together. In 2021, it was at GF that was instigating long-term agreements. It was our customers. Our customers in a world where certainty is important for them, certainty, durability and of course, their profitability. And what they were looking to do was to develop where they knew they had supply and knew they had certainty on pricing so they could plan their business. So I don't think these long-term agreements or something of the past, it's how do they get modified going forward. So I see 2 things. For GF, a lot of the LTAs we wanted to sign were tied to investments we were going to make to create new capacity. And for that, we really wanted more certainty and durability. And now that we've put that capacity online and we've talked about a couple of questions today about the level of capacity and the revenue it can support, we're less inclined to require an LTA to do business with our customers. But if I go back to this theme of certainty and durability, it really what we're learning is certain end markets that have long product cycles are the ones that want to be locked in longer term. So if you think of refresh and smart devices that's every year, maybe those customers are not as interested in the long-term agreements because the dynamics of data win a socket and outline socket. But when customers sign up in, say, industrial or more importantly, in automotive, these are long cycles, and they're much more interested in planning a strategic business or a longer life cycle business. And I'd tell you the proof point for me is the largest LTA we've signed at the end of last year, beginning this year, I'm somewhere in there was directly exactly at the automotive market for our next 10-year play for that particular product. So that's why I think about LCA. .

[John Hollister, executive]

Yes, Jon, this is John. Just a quick update for you. We've talked about some of our underutilization restructurings and so on. But I just want to flag it. We continue to have about $18 billion of lifetime revenue attached to existing long-term agreements. So this is something that continues to be a very important part of our go-to-market strategy.

[Thomas Caulfield, executive]

Yes. That's roughly 2/3 of what we started with in this journey.

[Sam Franklin, executive]

Do you have a follow-up, Joe?

[Joseph Moore, analyst]

In terms of the acquisition of the gallium nitride capability, you guys already have kind of some nice RF capabilities with SOI. Can you just talk about your aspirations there? And how broad-based could you be a new kind of unique substrate capabilities?

[Niels Anderskouv, executive]

Yes, this is Niels. Let me take a first shot at that one. So the acquisition of Tagore was really focused on the power segment of GaN. We also have efforts going on in the RF side of GaN, but that is not related to this acquisition. So the reason we went ahead and acquired and is really because they had a very strong set of skills and IP around how to do a higher level of integration of the GaN devices, meaning you can integrate the safety function, the level shift as drivers, et cetera, with the gain device, which then again, returns in that you can make much more reliable and much more compact devices out the time. So with additional our strategy is a little bit different than most of the rest of the industry. When you see the rest of the industry, they're focused in on building more traditional devices like you can compare them to like standard BT, standard MOSFET simple switches. Our strategy is an integrated device strategy, more like a BCD play where we enable this higher level of analog and digital integration with a very, very highly efficient GaN power switch. And what that, in turn, enables our customers to do is to build more differentiated devices, higher type of margin devices. You could think of this as an analogy to the early days when the MOSFETs came out. And then you got the integration happening on the BCD and you started seeing the margin from the IDMs on the integrated device is probably in the 65%, 70% range versus the stand-alone devices in probably closer to a 30% asymptotic value, right? So this is a more differentiated play we are targeting in addition to the switch itself. Of course, we also shipping -- developing and shipping the switch by itself, but it's integrated plays where we think there is a substantial differentiated business and revenue for GF to have.

[Thomas Caulfield, executive]

Yes. And look, on the RF side, Joe, as you mentioned, we're not -- we're focused on GaN for RF as well. We're doing with a different set of partnerships. And look, when we start to look ahead with specifications and requirements for FR3 are going to be. We believe a strong play for -- at least for the power amplification power amps for that solution, that GaN will be an important part of that.

[Operator]

Our next question comes from the line of Vivek Arya with Bank of America Securities.

[Vivek Arya, analyst]

Tom, you mentioned a meaningful growth in automotive for '24. I was hoping you could contrast that with just the environment in the automotive semiconductor industry, lower auto production and somewhat more muted trends among some of your automotive semi customers. So what's giving you the optimism relative to the industry? And what kind of checks do you have in place to make sure that your shipments are aligned with the automotive sell-through?

[Thomas Caulfield, executive]

Yes. I think there's a real important difference between what GFC and maybe you're seeing more broad based. So first of all, let's just talk about 2024. I think that's where your question started. Look, we're more than halfway through the year. We wafers in the line, we have POs. We're confident we're going to deliver against what we've said all along that automotive is going to have meaningful growth year-on-year. Your question is a little bit more of why why are we seeing it? And I think the best way to explain this is we started this journey 5 to 7 years ago, where we were winning that next generation of technology platforms. And what you're really seeing for GF is we're ramping these new applications, whether microcontrollers or sensors or radar devices, these are replacing older devices in cars. So you don't need to see cars -- more cars being sold for this replacement to take place. You don't need to see even more content going into cars, although those 2 things are happening, right? This is just the next refresh for us. And that's unique to GF because it's all new devices for GF. Remember, in 2020, this business was under $100 million for us. So we're part of a generation of refresh of technology based on our differentiated technology. And so given that and given the fact of the kind of design wins we won last year and continue to win this year, we believe automotive is going to continue to be a growth engine for GF for the years to come. And then the last thing I would just tell everybody a little bit of a cautionary tale is there is no linearity in all end markets. So looking at any given quarter and multiply it by 4 and say that's what the full year looks like, is a little bit hazardous, I would say. And it's more to think about when we -- we give you on a year-over-year basis, you take some of that lumpiness out.

[Niels Anderskouv, executive]

Yes. And then Tom, if I may add just want to emphasize that our momentum is high both across A and ICE. So really, we're not that dependent as maybe some of our competitors on the EV consumption. In addition, I just want to highlight the design momentum we have on 22FDX within the radar space, it really is becoming the technology platform of choice for RADAR. And we've had several very meaningful design wins in the last few months across 22FDX, and there'll be more about that later.

[Sam Franklin, executive]

Do you have a follow-up, Vivek?

[Vivek Arya, analyst]

So on the topic of gross margins, so how does your balance sheet inventory kind of figure in the path of improving utilization? I understand some of the inventory might be for some strategic buys from the past. But just how should we think about the shape of your balance sheet inventory and how that aligns with the target to improving gross margins? .

[John Hollister, executive]

Yes, Vivek, this is John. So 2 quick points there. One is we'll continue to prepare ourselves for a recovery in the market and follow our demand signal in terms of how we're accumulating inventory and managing inventory. And second point, we have taken some opportunistic steps in terms of raw materials to enter into contracts with suppliers to take advantage of the current market conditions. So we're being smart about this and also in light of our free cash flow objectives, but also where we can see some opportunities to utilize some working capital to improve our performance. We will look at that.

[Sam Franklin, executive]

Whitney, we'll take one last question.

[Operator]

Our last question comes from the line of Harlan Sur with JPMorgan.

[Harlan Sur, analyst]

If I exclude the high margin on the utilization volume adjustment fees in the June quarter, it looks like core product gross margins were about 22%, right, in June. So flat sequentially, which implies utilization stayed flat, which is consistent with what you've said given the gross margin guidance for September and on the utilization piece, it looks like your gross margins are stepping up a bit to about 23%, which means either utilizations are stepping up a bit or maybe it's higher volumes or mix, maybe you can give us a little bit of color there. But more importantly, given what appears to be gradually improving in market environment across your segments, how should we think about gross margins directionally heading into the December quarter since it's really tough to kind of model the underutilization piece. And I have a follow-up.

[Thomas Caulfield, executive]

Yes, you bet. So big picture, we set out the year viewing our non-IFRS gross margin outlook is being in the mid-20s. And we've been delivering on that, and that's where we expect to to be for fiscal 2024. I did note previously on this call, the possibility for some modest improvement in fourth quarter gross margin. As we can see utilization tick up would be the ideal case there. And then as we look ahead, of course, seeing utilization come up further into 2025 would be the next opportunity for us to see more improvement in gross margin.

[Sam Franklin, executive]

You have a follow-up, Harlan?

[Harlan Sur, analyst]

Yes. Tom, the team obviously has been a big beneficiary as your customers think about the diversity of their supply chains, also your differentiated technology. I think the extension of the Infineon partnership earlier this was a great example of that, right, a lot of it built on your differentiated MCU technology. But there have been some partnerships which I feel the GF team was set up well for, but maybe overlooked, and that's 1 of your customers considered 1 of your larger MCU customers. I mean, they recently announced a partnership with Vanguard, right, to sort of jointly build out the single poor fab for next-generation MCUs, I think targeting technologies, which they were doing externally, presumably some of that with GF. And so your Singapore -- you're Singapore fabs, your new 7H module, combined with the Malta expansion, I thought that, that could have supported that customer and its MCU requirement. So maybe compare and contrast to very different moves by 2 of your large auto MCU customers.

[Thomas Caulfield, executive]

Well, let's talk right to this NXP Vanguard. But that didn't come to a surprise with us. We worked very closely with NXP. You need to understand what that capacity is being put on. I'll describe it as legacy bulk undifferentiated low-margin CMOS business. We weren't interested in it. And neither was our customer wanting to redesign onto a platform for us, why would they invest and we invest. By the way, we were at alone in that decision. TSMC, whose platform this technology is built on didn't want to invest in it either. It was not good business for them and for what they try to deliver. Remember, GF wants to deliver differentiated technology, not a second source business. So given this, we made -- we chose not to make the investment. Vanguard who wants to get into 300-millimeter is making that investment. But there's no overlap to business that we've launched or could have won with this relationship. And by the way, speaking of NXP, our business continues to grow year-over-year with them and our deep partnership with us.

[Operator]

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

[Sam Franklin, executive]

Thank you, Britney. Thank you, everyone, for joining us on the call today. I appreciate all the questions, and apologies we couldn't get through the whole list, but I know that we'll be talking to a lot of you over the next coming weeks. So thanks again, and look forward to speaking agains soon.

[Operator]

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