GLOBALFOUNDRIES Inc. Price & Performance (GFS)

Please note that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward looking statements Such statements can be identified by terms such as believe, expect, intend, anticipate, and may or by the use of the future tense. You should not place undue reliance on forward looking statements. Actual results may differ materially from these forward looking statements and we do not undertake any obligation to update any forward looking statements we make today. For more information about factors that may cause actual results to differ materially from forward looking statements, please refer to the press release we issued today as well as risk and uncertainties described in our SEC filings including in sections under the caption Risk Factors in our annual report on Form 20 F and in any current reports on Form six ks filed with the SEC. Terms of upcoming events, please note that we will be participating in fireside chats at the JPMorgan Global Technology Media and Communications Conference in Boston on May 13 and at the Bank of America Global Technology Conference in San Francisco on June 3. We will begin today's call with Tim providing a summary update on the current business environment and technologies Niels will then discuss our recent design wins, highlights and expectations across the end markets following which John will provide details on our first quarter results and also provide second quarter twenty twenty five guidance.

We will then open the call for questions with Tim, John and Niels, We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tim for his prepared remarks.

Thank you, Sam. And welcome, everyone, to our first quarter twenty twenty five earnings call.

As our industry seeks to navigate the backdrop of geopolitical tension and trade uncertainties, impacting the global economy I'm proud to announce that in the first quarter, our 13,000 dedicated employees helped to deliver solid financial results at the high end of our guidance ranges. Across revenue, gross margin and EPS. First quarter revenue in our Automotive CID and IoT end markets grew on a year over year basis, as we executed towards our long term plan and partnered with our customers to maintain healthy design win momentum from recent quarters. Furthermore, GS track record of generating meaningful free cash flow continued in the first quarter, with consistent operational excellence across our global footprint, delivering 165,000,000 of non IFRS adjusted free cash flow. This represents a free cash margin of approximately 10%. With investments in place to grow revenue in a very capital efficient manner, we will continue to focus free cash flow generation an important objective. In the meantime, our industry is not immune from the ongoing trade and tariff disputes dominating the headlines. And although GF is uniquely positioned to support our customers, across our geographically diversified footprint, in The U. S, Europe and Asia we do expect uncertainties associated with the global supply chain and end market demand dynamics to continue into the second half of twenty twenty five.

Although it is too soon to quantify the precise impacts to the demand and the supply chain dynamics, we are monitoring the changing landscape closely and where possible, we have diversified our sourcing strategies to mitigate potential impacts on our cost base. As you have heard from some of our customers, it is likely that certain costs across the semiconductor supply chain will rise as a result of the tariff related activities. Where this is the case, we will continue to work closely with our customers towards a mutually agreeable outcome. What is clear at this stage is the geographic resilience in wafer manufacturing supply chains is an increasing priority for GS customers and given GF's unique global footprint, we are able to support our customers both globally and locally further validating GF's strategy and differentiated market position. Achieving manufacturing scale and technology across our footprint has been a multi year strategy to invest in capacity with differentiated features. To that end, we have deployed over $7,000,000,000 into our U. S, Germany, and Singapore facilities since 2021. Customers have been at the core of this strategy, and this will continue to be the case as we consider how best to meet their increasing demand while navigating the growing needs for security of supply.

Despite these uncertainties, the secular tailwinds supporting long term demand for essential chip technologies remain firmly intact. And we anticipate that our serviceable addressable market will grow at approximately 10% per annum through the end of the decade. In key end markets, we believe that GF is well placed to grow at or faster than the overall market growth rates given our differentiated technologies and geographically advanced footprint. As the foundry of choice to many of our customers, evidenced by nearly 90% sole source design wins over the last four quarters, We continue to gain share in critical end markets such as automotive, and communications infrastructure and data center. As the range of applications features and performance drives the need for increased semiconductor content. To that end, we have seen exciting traction with customers in applications aligned to the long term secular growth trends in the end markets we serve. In optical networking, GF is not only at forefront of innovation, with co packaged optics, but we're also serving the large and growing pluggables market with our 45 SPCLO solution. In STATCOM, GF content in both the base station and in Orbit is enabling the rapid deployment of commercial satellites, on our 22 FTX, 12 LP, one thirty NSX, and 45 RF SOI platforms.

In generative AI, GIA's proven 14 nanometer technology playing an important role especially in inference workloads large language models. And finally, automotive continued to deliver year on year growth as we ramp opportunities and close new design wins, on our one thirty BCD and 40 ESF3 Autopro platforms, to support the increasing value of semiconductor content in this end market. Putting aside the short term uncertainty impacting our industry, GF's financial profile remains robust With strong balance sheet and cash flow fundamentals, declining leverage, dollars 4,700,000,000.0 of liquidity, and continued strong free cash flow generation. John will cover these metrics in more detail and they leave GF well positioned to grow towards our long term financial objectives both organically or inorganically, should the right opportunities fit with our long term strategic goals. In conclusion, thanks to the effort of our teams around the world, we believe GF's long term future remains as bright as ever As we partner with our customers with our differentiated technology, drive strong operational execution and ensure disciplined cost management. With that, over to you, Niels. Thank you, Tim. And welcome to everyone on the call. As Tim mentioned, we continue to make good progress across commercial partnership and design wins with our customers.

Of which almost 90% were sole sourced last four quarters. Our differentiated and diversified technology portfolio continues to drive design win momentum across all the end markets we serve. With that, let me walk you through the key highlights for the quarter by end market. In automotive, we built upon our strong momentum with customers kept at market share and won new designs, all of which supports our expectations for meaningful year over year revenue growth in 2025. Despite soft end market demand, [indiscernible] end market continued to deliver meaningful year over year revenue growth in Q1 as the increasing silicon content in vehicles helped to offset short term unit sales.

Our broad and growing portfolio of differentiated solutions positions us to benefit from the proliferation of ADAS, safety and sensing applications electrical vehicles, and software defined vehicles. GLOBALFOUNDRIES' additional strength has been in automotive processing where we a sole source foundry to the supplier of the number one auto micro platform. On top of that, we are winning in new applications across all of geographies we serve. In Q1, we achieved design wins across MTUs, battery management systems, motor control devices, laser drivers for LIDAR, and our 130 BCD and 40 ESF free HoloPro platforms. EF and NG semiconductor also announced a strategic partnership introduce high performance RADAR systems on chip solution using DF's automotive qualified 22 FDX platform. These solutions will target 77 gigahertz and 120 gigahertz radar applications to enable safety critical advanced driver assistance systems with low cost smaller footprint and efficient power consumption.

Similarly, in March, DreamChip and Cadence announced stable use DF's ultra low power 22 FDX platform for ADAS and processing applications. Citing the reliability and performance benefits of our integrated IF and analog technology solution. Looking further ahead, we expect GF to benefit from long term growth in smart centers for RADAR vehicle access, camera, and networking, as well as general purpose analog for automotive. Turning now to smart mobile devices. Revenue in Q1 declined year over year due to reduction in underutilization payments from our customers consistent with our expectations. While certain customers continue their inventory burn down, we see good commercial [indiscernible] And continue to win new designs across a broad range of applications as we seek to capture content opportunities within the handsets such as audio, haptics, display and imaging. With our latest generation iFSOI platforms, not only maintaining our leadership position in RF front end, but growing market share. In Q1 we secured multiple new design wins in RF front end with several top industry players Our RF solutions allow GF to expand share including strong checks traction with customers in The U. S, Europe, and Asia.

Beyond our traditional strength in our front end, we continue to broaden our portfolio and make designs an important display and imaging applications. Notwithstanding the broader tariff uncertainties, we're seeing design and momentum with customers to expand GF's offering in OLED Android smartphones. We also continue to penetrate the growing market smart glasses with a Q1 design win for micro LED display backplanes using our 22 FDX platform. This win was the result of our partnership with one of the largest players in the microdisplay industry that has solutions in most commercial smart glasses today.

Lastly, we saw continued adoption of our 55 BCD Lite platform for audio and HAP6 in premier tier smartphones. Our second generation 55 BCD Lite is under development to further strengthen our differentiated offerings this new technology will enable customers' audio solutions to be smaller and more efficient which is critical for the latest designs.

In IoT, Q1 revenue returned to year over year growth However, we remain somewhat cautious on the outlook for the second half of the year. As the uncertainty brought about by tariffs likely to impact the demand levels for consumer centric and industrial applications. Longer term, we're seeing adoption of GF technology in AI enabled edge devices especially in our ultra low power and RF optimized platforms that are well positioned for these applications. We're excited about the long term opportunities in general purpose microcontrollers image signal processors, and audio signal processors that serve home, industrial and medical applications. In Q1, we also secured design wins across WiFi seven connectivity, cellular IoT, medical consumer devices, as well as consumer power management applications. Our FinFET platform is increasingly optimized for low leakage and high performance is also enabling the exciting new features of next generation Wi Fi seven namely increased data speed, lower latency, [indiscernible] and enhanced security for stronger encryption. This solution being adopted by the market will ramp in production in the second half of this year. We also secured first revenue from a design win for broad market wireless MCU used for IoT connectivity across consumer smart home and industrial applications.

Built on our 22 FDX platform this product includes embedded non volatile memory, a key differentiator for GF. Lastly, we see continued traction in low power connected medical applications such as continuous glucose monitors and hearing aids And in Q1, we want to design for an AI enabled audio on 22 FDX. TF Technology is well positioned for this segment and we're seeing a solid pipeline of connected consumer medical device opportunities from multiple vendors. Finally, our communication infrastructure and data center end market grew year over year in the first quarter and we continue to expect meaningful revenue growth in 2025. With our diversified portfolio of differentiated offerings, we are developing a path for long term growth from communication infrastructure and data center tied multiple secular drivers. First, commercial satellite operations continue to expand rapidly as subscriptions increase and launches ramp. GFS design the world's foremost satellite communication companies And in Q1, we secured an additional design win for SATCOM ground terminals on our 45IFSOI platform.

Second, optical communication technologies in the data center are now seeing meaningful near term revenue growth. And our technology platforms are focused on enabling the data centers to get to the level of performance to support the rising bandwidth and power requirements. Accordingly, we expect growing demand for optical transceivers that connect GPUs and AI accelerators to train next generation AI models. Not only is GEF currently serving the pluggable market, momentum is building for co packaged optics. At the optical fiber communication conference in April, multiple companies demonstrated viable co packaged optic solutions built on GF Silica. GF's unique silicon photonic platforms offer seamless integration of photonic components with high performance CMOS logic. Into a single die. Allowing for production ready design that can support both scale out and scale up applications for AI workloads. Overall, we are encouraged with the progress the team is making commercial engagement and design wins in this space as we begin to capitalize on the exciting multi year growth opportunities. I'll now pass the call over to John for a deeper dive on first quarter twenty twenty five financials.

Thank you, Niels.

For the remainder of the call, including guidance, other than revenue, cash flow, CapEx and net interest income, I will reference non IFRS metrics, which are included in today's press release and accompanying slides. As Tim noted, our first quarter results came in at the high end of the guidance ranges we provided in our last quarterly update We delivered first quarter revenue of $1,585,000,000 which represented a 13% decrease over the prior quarter but an increase of 2% year over year. We shipped approximately 543,000 millimeter equivalent wafers in the quarter, down 9% sequentially and up 17% from the prior year period. ASP or average selling price per wafer was down year over year due in part to the product mix shipped as well as a significant year over year reduction in underutilization payments. Wafer revenue from our end markets accounted for approximately 88% of total revenue. Non wafer revenue, which includes revenue from reticles, non recurring engineering, expedite fees, and other items, accounted for approximately 12% of total revenue for the first quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 37% of the quarter's total revenue. First quarter revenue decreased approximately 21% sequentially and approximately 14% from the prior year period.

In the first quarter, revenue for the home and industrial IoT market represented approximately 21% of the quarter's total revenue. First quarter revenue decreased approximately 8% sequentially and increased approximately 6% from the prior year period. Automotive remained a key growth segment for us and represented approximately 19% of the quarter's total revenue. 1Q revenue decreased approximately 25% sequentially and increased approximately 16% from the prior year period. And finally, our communications infrastructure and data center end market represented approximately 11% of the quarter's total revenue. First quarter revenue increased approximately 2% sequentially and increased approximately 45% over the prior year period as we see new opportunities ramp in this end market. For the first quarter, we delivered gross profit of $379,000,000 which was at the high end of our guided range and translates into approximately 23.9% gross margin. Operating expenses for the quarter represented approximately 10% of total revenue. R and D for the quarter was 114,000,000 and SG and A expenses were $52,000,000 Total operating expenses declined sequentially to $166,000,000 in the We delivered operating profit of $213,000,000 for the quarter at an operating margin of 13.4%. Which is at the high end of our guided range 130 basis points above the prior year period.

First quarter net interest income was $14,000,000 other expense was $7,000,000 and we incurred income tax expense of $31,000,000 for the We reported first quarter net income of $189,000,000 an increase of $15,000,000 from the year ago period. As a result, based on a fully diluted share count approximately $557,000,000 shares, we reported diluted earnings of $0.34 per share for the first quarter. Which was at 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 first quarter was $331,000,000 CapEx for the quarter was $166,000,000 or roughly 10% of revenue. Adjusted free cash flow for the quarter, which we define as net cash provided by operating activities, plus the proceeds from government grants related to capital expenditure less purchases of property, plant and equipment and intangible assets, as set out on the statement of cash flows, was $165,000,000 At the end of the first quarter, our combined total of cash, cash equivalents and marketable securities stood at approximately 3,700,000,000.0 We prepaid $664,000,000 on our extending Term Loan A facility balance lowering our total debt to $1,100,000,000 We also have a $1,000,000,000 revolving credit facility, which remains undrawn.

Next, me provide you with our outlook for the second quarter of twenty twenty five. We expect total GF revenue to be $1,675,000,000 plus or minus $25,000,000 Of this, we expect non wafer revenue to be approximately 10% of total revenue. We expect gross margin to be in the range of 25% plus or minus 100 basis points. Excluding share based compensation, expect total operating expenses to be $185,000,000 plus or minus $10,000,000 We expect operating margin to be in the range of fourteen percent one hundred and eighty basis points. At the midpoint of our guidance, we expect share based compensation to be approximately $2,000,000 of which roughly $15,000,000 is related to cost of goods sold. We expect net interest and other income for the quarter to be between $3,000,000 and $11,000,000 and income tax expense to be between $33,000,000 and $47,000,000 For 2025, we expect GF's non IFRS effective tax rate for the year to be in the high teens percentage range. Based on the multiple jurisdictions where we do business, and the dynamic tax policy environment we expect this indication to be consistent with our normalized tax run rate for the remainder of 2025. Based on a fully diluted share count of approximately five sixty million shares, we expect diluted earnings per share for the second quarter to be $0.36 plus or minus $05 GF has a consistent track record of prudent financial management which continues to be critically important in an uncertain macro environment.

We retain flexibility in our capital expenditure plans, and will nimbly adapt to changes in the outlook trajectory. We remain highly focused on controlling costs while balancing the investments needed for our exciting long term growth opportunities as highlighted by Tim and Niels. For the full year 2025, continue to expect OpEx be roughly in line with that of 2024, Similarly, our CapEx expectations for the full year 2025 have not changed since our last earnings call. In summary, the hard work and dedication of our employees around the world drove solid financial performance in the quarter and we made good progress on our key strategic priorities From our strong design win pipeline to our diversified product portfolio to our cost discipline, and adjusted free cash generation GF is well positioned to capitalize on the opportunities ahead. I'll now pass it back to Tim for closing remarks before we move to Q and A. Thanks, John. To recap, I would like to reiterate how strongly GF is committed and how uniquely GF is positioned to being a trusted partner for our customers. Our differentiated essential chip technologies offer customers a diverse portfolio of solutions to win in the end markets that they compete in.

Our global footprint offers customers supply flexibility and security where they need us both globally and locally. Our responsible manufacturing helps customers achieve best sustainability priorities as indicated by recent announcements featuring our collaboration with Infineon and Apple. In conclusion, the direct and indirect impacts of trade policy and the broader economic climate that this results in still remain to be seen. However, our first quarter results demonstrate consistent execution and financial resilience. We will monitor the situation closely and take actions within our control to navigate the uncertain macro environment. However, our long term growth opportunities and financial foundations remain strong. We will continue to leverage our unique and diversified global footprint to support customers and meet them where they need us. From ADAS to AI, to SATCOM, to optical networking, we continue to build design win momentum across end markets that will be critical enablers to the long term megatrends in our industry. For that, want to thank our employees for their hard work and dedication to our long term objectives. With that, let's open the call for Q and A. Operator?

Certainly.

And wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from the line of Mark Lipacus with Evercore ISI.

Hi, thanks for taking my question. Tim, I believe you touched on the tariff issue on the cost side. I was wondering if you could give us a framework for thinking about tariffs on revenue side and perhaps maybe remind us what percentage of your revenues can you manufacture in multiple geographies?

And to what extent does the current tariff discussions out there give you better visibility into demand or enable you to take share from either your direct foundry competitors or from internal manufacturing groups at your own customers? It'd be great if you could provide any color on this side of the tariff dynamics. Yes. Thank you, Mark, and obviously a very timely question. Just to be consistent with what we said already and what you're hearing from others in the [indiscernible] We haven't seen in the short term significant impacts from tariffs neither pushing out or pulling in of orders for sure for Q1. And Q2, that's the situation that we've been in. Important to reiterate that for the second half and into 2026, it remains to be seen what the broader environment impact is from tariffs based on consumer demand and industrial demand. So that we remain obviously watching very closely and remain focused on. However, I think you're touching on something very important for us, which is how our manufacturing footprint provides optionality for customers in this difficult time. And I think what is interesting and has been picking up significantly is the inbound interest in specific sourcing choices.

And let me zoom on The U. S. As obviously the most relevant case in point here, where a number of our customers have been talking about further increasing U. S. Content, either for existing roadmap of products or for porting existing designs from either our competitors or from other geographies into The U. S. And that's been actually across sector. We've seen that in areas like automotive, aerospace and defense, those that think were traditionally very focused on domestic supply here in The U. S. But what's been interesting is how that has now grown into sectors like the data center, like communications infrastructure. And then even on the more consumer facing sectors like mobile devices and the IoT, we also see what was previously, let's say, a balance preference to becoming much more of a strong preference for US sourcing. You touched on something else, I think very relevant. We've been investing over the past period in making our manufacturing footprint as flexible as we can with the majority of technologies qualified in at least two fabs, in some cases even three fabs, which allows us to also address different requirements of that customer base. So net net, while the situation in the medium is a little bit difficult to predict, I think long term, we definitely see this as a tailwind for GF.

That's very helpful. And a follow-up, if I may, maybe for John.

The ASPs looks like they came down How should we think about ASPs for the rest of the year and what levers are you pulling to offset the declines to maintain the gross margins? Thank you.

Yeah, Mark, certainly. So looking back at the kind of the framework for our ASP calculation, underutilization payments are components of wafer revenue. And as you can see from year to year, as we mentioned in our prepared comments, that amount is down year over year from twenty twenty four twenty twenty five. So that's contributing significantly to the decline and average selling prices. That's one point. Second, putting that aside and looking for the year, we do expect ASPs to decline roughly mid single digits broadly speaking for the company for the year. And what's comprising that is primarily mix That's the main factor at work there. And let me explain that where we can have a product that has many more mask layers versus another product that change in the mask count, if you will, can drive a differential on the ASP calculation. From a mix perspective. So that's that's really the primary effects, Mark, that you're seeing. And parts gross margin, as you indicated, that is really the ultimate measure of how we're addressing And we see continue to have levers around gross profit margin to drive our performance. Including better utilization, the roll off of our depreciation costs, structural cost improvements and as I mentioned product mix can also be positive from a gross margin perspective.

Even if you may see ASP impacts from the mix dynamic.

Maybe, Mark, if I can just add a comment from my side there. We've said before, the overall pricing environment for our technologies is constructive. And the reason we still believe that to be the case is when we compete on these technologies, we're competing on features, the ability for us to add value to our customers for them to win in their markets and actually also on time to market, which is a critical factor. And so those are difficult to do. And therefore scarce in terms of availability and we remain price is always a factor, but it's definitely not the primary or even secondary factor in those awards. And I think as we mentioned in the prepared remarks, 90% approximately of our design wins over the last four quarters have been on that sole source basis. There will always be a portion of our business, a smaller portion that is dual sourced. And there'll be times in the market where we seek to increase our share of that dual source part for certain parts of our capacity. And that might mean an ASP trade off where we get more revenue at lower pricing but we'll do that very deliberately to optimize our utilization.

And improve our profitability. So that dynamic also plays out. But as John said, ASP is not necessarily a good indicator for future profitability. A number of other factors that we mentioned are at work there.

Very helpful. Thank you.

Thank you. And our next question comes from the line of C. J. Muse with Cantor Fitzgerald.

J. Good morning. Thank you for taking the question.

I was hoping to focus on your comms infra and data center business.

Obviously 2024 was a correction year but your commentary in the call definitely sounds much more upbeat, both in terms of design wins and the growth trajectory for 2025. I know you've always been very strong in silicon photonics, but your commentary on transceivers you've got GROC, kind of newer players like Eyer Labs and Lightmatter and you also talked about Satcom. So I believe you were thinking growth kind of in the high single digits before. How should we think about that now for 2025? And then perhaps more importantly, how should we be thinking about the growth within that segment beyond 2025?

Yes. Thank you, CJ. I'll give an overview and then ask Nils to add a bit more color our photonics in particular since I know that's of interest. So as you note, we had significant year on year growth in infrastructure and data center in the first quarter. And we're looking at to a high teens growth for the full year for that market, which obviously is strong growth for that segment. And the reasons are very clear. Number one, obviously, we're seeing substantial investments more broadly in the data center. And the work that we've been doing over the past, now multiple years, to position GF Technologies for those data center requirements is starting to really pay off. And that's for a very clear reason. Today's data center uses a lot more data, more storage, more transmission of data, for the applications and workloads in question. And it does so with a significant increase power. So we've been very much focused on positioning GS technologies to serve those requirements and that underpins that growth. And as you also note, we don't just have one solution in space. We have solutions on our silicon germanium platform in things like TAA and drivers.

But also pluggable silicon photonics. And now as you start to note, the transition to co packaged optics. So again, think not just the short term story, but a long term story for growth.

As well. Neil's anything to add?

Yes. I can go a little bit deeper on the silicon photonic, but maybe also just highlight strong growth on the satellite communication side. Where we're winning across the board in satellite communication, large space arrays and tenants. Strong design momentum there. SATCOM satellite wins from our 45 high SOI play [indiscernible] In addition to that. And of course, 22FDX and 12LP and 130 NSX in the previously announced SATCOM platform. So strong growth there as well that plays into the CID. But maybe going a little bit deeper silicon photonics It is our fastest growing battleground. It's an area we've been investing in for a long time. And we built a very strong technology versus competition where we actually have the silicon photonics, optical integrated with the high performance CMOS as, I believe, the only supplier in the industry. So this is allowing us to have very strong performance in the Pluggable segment that is is taking off and is being used within data centers between the servers, between data centers. And then now good momentum building on the co package designs. Which really is targeting the communication between the GPUs and CPUs in the data centers. So we just came from the Optical Fiber Conference.

Were several customers, both larger and smaller ones. Demonstrating co packed technology solutions based on GF technologies And as we speak here, in deep execution with multiple of the major players on co packaged silicon photonics here under actually having tape outs happening both within this quarter and the next few quarters. So feeling quite confident about the growth in silicon photonics very excited about the co package optic solutions.

Very helpful color. As a follow-up, I was hoping perhaps you could drill down into some of the other end markets. Our auto kind of took a pause here in March. How are you thinking about the rate of recovery through the year? And do you see all kind of segments growing in calendar 2025 or perhaps should we be perhaps more conservative on the smart mobile side? Any any color there would be very helpful. Thanks so much.

Yeah, of course. Let me maybe start with smart mobile devices I think the base case remains largely consistent. So we're expecting flattish market in 2025. IoT, specifically, last time I mentioned that inventory was starting to come down and expecting to see growth from some of the core IoT players. And that's exactly what you saw in the latest announcements from some of those players. We grew, TF grew IoT year on year in Q1. However, due to the uncertainty on the consumer spend, we expect the year to be more of flattish kind on IoT. Longer term, though, very well positioned with our RF power and CMOS portfolio And we have solid design momentum in areas like vertical audio, industrial power, connectivity, tracking, identification and security, so pretty much across all the segments. Solid design win growth. And proof points from Q1 in IoT design wins in Wi Fi seven with our FinFET portfolio, And I want to remind people our FinFET portfolio is getting more and more optimized for low power and thereby and RF performance and thereby have a great fit for Wi Fi seven.

MCU and audio DSPs or connected MCUs and AI enabled DSPs and 22FDX And then medical power and cellular IoT on a broader base on one hundred thirty and fifty five BCD Lite. So pretty good design momentum in IoT and expecting after 2025 to drive some growth. And then let me wrap it up on Automotive. We continue to be be bullish in automotive. Remember that we have consistently delivered share gains since since our IPO. And you probably also remember that last year, delivered about 15% year on year automotive growth in 2024. So revenue today, really a result of design wins over the last several years. But what I'm excited about is we have stepped it up in terms of automotive qualifications. We mentioned in this earlier that all our fabs are now automotive qualified. But in addition to that, all our major technologies are automotive qualified and several of them are automotive pro qualified.

Couple of HERO technologies I'd like to call out is 40 ESF-three, Obviously, big momentum there with the leading MTU automotive MTU provider in the industry. 130 BCD, very strong in battery management systems. And then now 22FDX being seeing very, very strong traction across all sensor applications and specifically in RADAR. So the future looking as strong as what we have in the past, and we really feel we are positioned to continue to take share in the automotive space.

Hey, CJ, this is John. Just want to add one point of clarification. So our view on smart mobile devices for the year on being flattish is net of the underutilization payment delta from year to year which is about 100,000,000 just Thanks, John. I should have mentioned that. Thank you.

Thank you. And our next question comes from the line of Vivek Arya with Bank of America.

Thanks for taking my question. For the first one, is exiting 2025 at 30% gross margin still the target? And if yes, you know, is that consistent with growing Q3 and Q4 kind of at this, you know, mid single digit rate? Sequentially, or has anything changed in that framework versus how you thought about it on the last earnings call?

Yeah, thank you, Vivek. And so maybe I'll give a bit of color of our overall trajectory to margin expansion, and then John give some color on 2025 itself. And so there are really three factors that give us a lot of confidence in our ability to grow margins in line with our long term target of 40%. And we talked about some of them on the call already. The first one is the ramp of differentiated technologies. And so all these design wins we've mentioned where we're competing on performance, where we're competing on ability to add value to our customers, The vast majority come in significantly above our corporate averages and our corporate goals in terms of those price outcomes. And that gives us confidence in the ability to ramp as those grow. As part of our business. I think the second factor is the depth we have with customers, but also the opportunity to do more As you can imagine, I've been on the road in the last couple of months spending a lot of time with customers and I would say, with no exceptions, the appetite to do more existing areas, but also in new areas is very strong.

Even for some customers where we have relatively low share today, the opportunity to do more is very much there. And some of that is the differentiated technologies, but also some of it is back to the footprint discussion that we had earlier. So there's appetite to significantly increase. But the third factor that's really structural is that we have a significant manufacturing footprint. As you heard in the prepared remarks, we've invested over $7,000,000,000 since 2021 to build that footprint both scale and diversification. And that allows us to serve anywhere between 19,000,000,000 billion dollars of revenue depending on the mix without significant CapEx spending and definitely without significant increase in fixed cost. And that allows us to basically have a lot of accretive flow through from top line growth both as those design wins and customer depth ramps. But also as the broader market comes back. And so it gives me long term confidence in our model. John, you can comment about 2025 itself.

Yes, sure, Vivek. So clearly, the tariff concern is lingering out there. As as Tim and Niels have both indicated. And potentially impacting the more consumer oriented end markets that we have in SMD in some portions of our IoT market. So we just have to acknowledge that. Putting that aside, under the base case, of growth this year, we do expect utilization to increase Our utilization level in Q1 was around 80% in our factories. So it starts with that. That's a key element to absorbing our fixed costs and improving our gross profit margin. The second factor is the improvement in our depreciation cost as we been able to operate in a more CapEx light manner for the last couple of years here at around 10%, even less as a function of our revenue on CapEx. Leveraging the substantial amount of investment in our factories that have been made over the years. And Tim indicated in his prepared commentary. And we remain confident that that improvement would be on the order of about $250,000,000 in fiscal twenty twenty five, vast majority of which does affect gross profit margin. So that's another key factor at work here. Third is an improving product mix where some of the exciting new highly differentiated product lines that Niels was talking about that are ramping are actually coming in at above corporate average gross profit margin.

So that helps us as well. And finally, have ongoing efforts in terms of structural cost improvement to help improve our efficiency. So putting that all together, Vivek, we do continue to have the view that with the base case assumptions, we have the possibility to 2025 at 30% gross margin.

Helpful. And for my follow-up, you know, maybe I'm kind of nitpicking here, but you mentioned that the wafer ASPs could come down sort of in the mid single digit range. When we look at commentary from a lot of the diversified automotive and industrial, IoT customers. Know, they are indicating their pricing will only go down know, kind of low single digit. And I don't know whether I'm reading too much into this, but conceptually, you know, should your pricing, you know, come down at the same pace why would it be different? And then I also had a point of clarification that What was the apples to apples wafer price decline? Because on a reported basis, it is down 13%. If I remove the 82,000,000, I think you had in termination fees in Q1 last year, it's down 8%. So I just wanted to kind of clarify that numerically. And then why should there be a difference between how your customers are planning their pricing versus how you are thinking about your wafer pricing?

Thank you.

Yeah, Vivek. So certainly the kind of three factors at work here are the underutilization payment dynamic. I think I think you understand that. And then looking beyond that it's really a combination of primarily mix changes So I mentioned that earlier in the earlier responses. Where different different types of products can carry different ASPs and some products with lower ASPs actually have higher gross profit margin. That's not really a great indicator on profitability from that dynamic. And then finally, it's the point that Tim was mentioning, where in some some few cases we have chosen to take market share with modest price allowance. In some markets where there's a dual source dynamic, but that's not the major driver The major driver of the first two factors that I mentioned.

Yeah, if I may, maybe just explaining why lower ASPs is not necessarily equivalent to lower margin. You look at the process nodes that we are positioning into the market space and where we have very good differentiation and good margin on Some of those process nodes have only what we call 25 mask layers versus other process nodes that are already in production are sitting maybe at 50, 60 mask layers. So you can can very quickly understand that the cost difference between two technologies like that is quite big. And thereby you can at a lower wafer ASP, you can end up with much better margins.

Thank you.

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

Hi, guys. Thanks for letting me ask the question. Lots of good stuff on the year as a whole. I wanted to just get a little shorter term with my first question. For the second quarter guide by end markets versus the roughly up 6% overall? Which markets are growing above that or below that? Or if you want to talk kind of in absolute terms and what's the reasons behind those drivers by end market, please?

John, you want to comment and then I'll add some color.

Yes, sure. I mean, we generally see fairly consistent pattern there, Ross, of improvement in the second quarter And we mentioned the first quarter being the low point in the smart mobile device [indiscernible] But it's fairly well distributed. [indiscernible] For that. And then I guess a bigger picture question. Tim, in your preamble, you talked about confidence in the company's ability to grow over time for a number of different organic reasons, but you also mentioned inorganic. I don't expect you to comment on any specific deals or opportunities, but just wondered what is the general strategy around you would look for in those inorganic opportunities?

Yeah, thank you, Ross. So, for us, the way we think about M and A as a growth lever is really very much aligned with our strategy. And so as we've laid out in the past, going deeper on our differentiated essential chip portfolio, meeting our customers where they need us and adding capabilities that meet their requirements. And then, our footprint itself. And I'd say, if you'd have to think about where we'd focused in inorganic, it's really on the first of those pillars and potentially slightly on the second. And so we'll look for areas where we can add value to our existing offerings And that could be on the technology side, like the acquisition we made last year with Tagore Technologies, but similar areas where we can bring value to the platform. There's nothing critical needed to execute our strategy. We'll definitely be opportunistic about opportunities that can help us accelerate based on that differentiation.

Thank you. Ross, if I could just quickly add, in terms of our [indiscernible] in terms of inorganic activity, we're very well positioned We ended the quarter with $3,700,000,000 in cash and investments and another $1,000,000,000 in capacity on our revolver that's undrawn. So that puts us in a good position. And I also want to emphasize that we continue to view free cash flow generation as a major goal for this year and have the goal of exceeding $1,000,000,000 in free cash flow again in 2025 as we did in 2024.

Great.

Thank you, John.

Thank you. And our question comes from the line of Chris Caso with Wolfe Research.

Yes, thank you. The first question, it's just a clarification of the underutilization charge payments. Do you expect with the elimination of the payments that happened last quarter, are we pretty much done with that headwind? Is there any potential future headwind? Anything left to roll off? And can you quantify in getting to this target goal of 30% gross margins for the year, what's the headwind from the absence of underutilization payments on a year on year basis?

Yeah, Chris, this is John. Yeah, first part of your question is yes, we do expect that to be large behind us if you will You may have some modest amount of this from time to time, but largely behind us. And it's several points of gross profit margin that we are overcoming here. And related to that, you wish to think of it that way, mean really the way to the way I think of it more is that this has allowed us the ability to absorb a downturn in the industry and we had the framework in place to allow us to be partially compensated for that. So I actually think it was positive, very positive from that aspect, but as you understand the angle of how you're asking.

Okay, thank you.

Also, in your prepared remarks, you talked a bit about the tariff impact, guess I'm focused here on direct impact such as additional costs that you may have to encounter on that. I guess one is, you know, have you done any work with being able to identify what the magnitude of that may be? And then secondly, what's your ability to pass it on to customers?

Yeah, Chris, this is John again. So we have analyzed that and clearly a good portion of the semiconductor input landscape is exempt from tariff. But not 100% of it. So looking at the balance of input costs that is not exempt from tariff, we have roughly estimated that at about $20,000,000 annualized impact on us with a very minimal portion of that affecting second quarter that is comprehended in our guidance by the way. So that's the rough framing We definitely need to keep an eye on this and monitor it, which we are doing. And yes, as we continue to assess the materiality of tariffs overall, we will look at how we can pass this through in terms of our ASPs and commercially.

Yeah, and I think Chris, just to add from my side, I mean the reason that impact is so low is based on the fact that we've got very diversified supply chain on a global basis and all of our fabs have broad sets of suppliers that we can tap into if we see dynamics like this. And so we're able to keep that to a bare minimum relative to some other companies. [indiscernible] bear in mind, also our global footprint, we're a good portion of our manufacturing is outside The United States. Two of our three three hundred millimeter fabs are not in The United States as well.

Thank you.

Thank you. And our next question comes from the line of Quinn Bolton with Needham and Company.

Hey, John, just wanted to ask on second quarter gross margin. Looks like the guidance for 25% implies a a fairly low or maybe on the low side incremental fall through on the second quarter. Just wondering if there are any specific puts or takes on second quarter gross margin at 25%.

Quinn, it's really mix. From that perspective and but, yeah, it's really looking at mix primarily driving that.

Great. And then maybe a longer term question, you guys talked about several design wins and tape outs imminent on the CPO side. But based on your discussions with customers, what do you see the volume ramp? Is that something you think ramps in 2026? Is it take longer to get, especially on the scale up network side?

I think maybe I'll just give a bit of color on that trajectory and then ask Niels for what we're hearing in the industry more broadly. The industry has gone through an evolution of its view about the ramp of photonics. And I think it's very clear that this has moved from an if to a when statement, both on use of photonics more broadly but definitely on CPO and there were announcements at Neil has mentioned, but even before OFC, including industry leaders like NVIDIA that talked about co packaged optics for scale out applications in their case. So I think there's no more debate about whether or not CPO obviously, rate and pace of always a little bit uncertain. Maybe Neil's? Share a bit your perspective on that.

Yes. Maybe the best way to think about it is what co packaged optics does within the data center between the GPUs is it enables a pretty substantial performance improvement. As well as a pretty substantial power reduction And so when you think about the next generation data centers, this is just becoming even more urgent now that you can see what you can actually achieve. And that is what really have heightened the urgency from the major players in getting this to market as fast as they can. So we're excited about it. We got the technology well positioned and ready. We have our teams maniacally focused on flawless execution as we work through it. And we will we expect to be be ramping with these players among the earliest of the optical silicon photonics players.

Thank you.

Thank you. And our next question comes from the line of Chris Sankar with TD Cowen.

Yes. Hi, thanks for taking my question. I have two of them. The first one on the smart mobile side, I think John you mentioned there was some inventory reduction. Was it concentrated at one customer Was it more broad based? And also within mobile, you seem like you're getting more traction in RF front end products. How to think about those gross margin versus the 22, 55 nanometer mobile products? And then I have a quick follow-up.

So maybe, Neil, you can comment on the market.

Yes. I would say maybe less of an inventory but more of an underutilization charge over the that happened year on year and thereby the change. When you take that out of the picture, or exclude that out of the picture, basically flattish. But I think what's really exciting for us in the smart mobile device space is that not only do we have strength and solid design wins on the eye front lens, like you mentioned, but we actually also are starting to see very good solid momentum on display imaging as well as haptic and audio in the S and D space and not to mention smart glasses. Where we got our first major design win here in first quarter for micro LED displays. So there's a lot more going on to adjust the RF front end. And in general, I would say the margins accretive to our business. The margins we are winning at are accretive to our business. To answer your specific question.

Got it. Got it. Very helpful. And then just a quick follow-up on autos. And thanks for all the color that you gave on tariffs. I understand it's a there's so many moving parts there. Given that on the end market for autos, like obviously tariff has an impact, China versus U. S. Auto, the difference in their growth. But acute is factoring all of that. So you still expect double digit growth in [indiscernible] for your order segment this year?

Yes. And I think maybe general view and please add to it, Niels, as well. This is very much a story of GF share gain relative to others versus increase in sales at the forecourt increasing, obviously, that environment is relatively weak. But GF share gain story is relatively strong, and that's based on number one, us winning with our customers, but also our customers and Neil's case in specific examples, winning in their markets and taking share. So we remain very confident based on those share dynamics.

And the share gains comes from, of course, the original play in automotive MCU where where we have the design wins with the fastest growing players. But But it's also very exciting what we're seeing. I mentioned earlier what we're seeing on our Power Technologies for battery management system as well as the body the body power controls within the car And then, of course, all the sensors and specifically radar were 22 FDX has really become an industry standard. So the share gains come from our original position and then in addition adding new market areas where we are growing from almost nothing to to more meaningful revenue. [indiscernible] Thanks, Chris. Andrew, we'll take one last question.

And our final question comes from the line of Mehdi Hosseini with SIG. Hi.

Thanks, John.

So my question is on home and IoT. I'm filling in for Mehdi. It's Bastian. You saw two quarters of year on year growth was wondering if you could give us some color on how much of that 6% is being driven by volume versus pricing? And is it improving your visibility relating to the add of inventory digestion that has been a little bit hard to to call? And I have a follow-up.

Yes. Neil, do you want to comment on the market?

Yes, can comment on that. As mentioned earlier on, the inventory has certainly come down and are now at more more, what we say, net normal levels. Also mentioned earlier on, see the players that are strictly IoT players, you actually see them having very strong growth here in Q1. I'm sure you saw some of those announcements. And that's really what we believe that we're seeing as well. Again, as I mentioned earlier on, we are cautious here because of of consumer sentiment. But I can mention maybe a couple of major wins that we had in Q1. We have Wi Fi seven on our FinFET technology. Connected MCUs, AI enabled audio DSPs, medical, block and coast monitoring. Power in general and then cell IoT. So these are all design wins we had in the first quarter that that bodes well for where IoT is going for TF in the future.

Sebastian, did you have a quick follow-up? Follow-up?

Yeah, I have one. In terms of Smartphone, I think the revenue was a little bit lower than we expected. Any particular category on the high end mid end smartphone that you saw driving that decline in revenue? And really to consumer demand, is that decline more of a building building more inventory than expected? Or is that more of a consumer demand? Or if you could just share a little bit of light? On this particular dynamic in this market Sure.

Sure. Is John.

You bet. This is John. Really it really points to two factors. One, as Neil has mentioned several times, it's the roll off of the underutilization payments from one year ago to first quarter twenty twenty five and then secondly is just the seasonality of this being a seasonally low period. We expect SMD to to continue to ramp throughout the year.

Thanks, Batya, and thank you, Andrew, for answering the call. Appreciate everyone and the questions raised today. Look forward to seeing and speaking to many of you over the next quarter. Thank you.

Ladies and gentlemen, thank you for participating. This does conclude today's program. And you may now disconnect.