Good day and thank you for standing by. Welcome to GlobalFoundries Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sam Franklin, VP of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries second quarter 2023 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO; David Reeder, 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 adjusted non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for adjusted non-IFRS measures are available in today's press release and accompanying slides. I'd 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 some due reliance on forward-looking statements. Actual results can 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 section under the caption Risk Factors in our annual report on Form 20-F filed with the SEC on April 14, 2023. We'll begin today's call with Tom providing a summary update on the current business environment and technologies, following which Dave will provide details on our end markets and second quarter results and also provide third quarter 2023 guidance. We will then open the call for questions with Tom, Dave and Neils. We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Sam, and welcome, everyone, to our second quarter earnings call. I'm pleased to report second quarter results that are at the high end of the guidance we provided in our first quarter update. We continue to deliver consistent financial performance against the backdrop of macroeconomic and cyclical uncertainty facing our industry. Let me start by providing a brief update on the current business environment. Similar to others in the industry, we believe that semiconductor inventory levels across several end markets are coming down more slowly than previously expected. Certain end markets that we service such as smart mobile devices, communications infrastructure and data center as well as the lower end of the consumer and home electronics markets are being impacted by a combination of increased inventory levels and lower year-over-year demand. Consistent with the discussion in our first quarter update, we continue to believe that the return to more normalized inventory levels in the consumer-centric end markets is forecast to happen more slowly than previously anticipated and based on our discussions with our customers, will best occur towards the end of 2023. So we still expect sequential quarter-on-quarter revenue growth throughout 2023. We believe that the rebalancing of demand for these markets will also extend later into the year and will continue to be impacted by the global macroeconomic and consumer demand outlook remain challenged. Now despite these headwinds, we continue to see healthy demand in faster growing end markets such as automotive, industrial IoT and aerospace and defense. We have announced some exciting partnerships, which I will comment on shortly, and we are working closely with our customers to support these critical important markets. Let me now touch briefly on our results, which Dave will discuss in more detail later in his commentary. Revenue in the second…

Thank you, Tom, and welcome to our second quarter earnings call. For the remainder of the call, including guidance, I will reference adjusted metrics, which exclude stock-based compensation and restructuring charges. As Tom noted, our second quarter results were at the upper end of the guidance range we provided in our last quarterly update. Second quarter revenue grew sequentially to approximately $1.845 billion, a decrease of 7% year-over-year. We shipped approximately 573,000 300-millimeter equivalent wafers in the quarter, a 9% decrease from the prior year period. ASP, where average selling price per wafer declined approximately 1% year-over-year, mainly driven by the changes in the product mix shipped during the quarter. Our LTAs or long-term customer agreements are helping to provide us with greater visibility on pricing dynamics, and we believe that ASPs for the full year will be flat to slightly up compared to 2022. Wafer revenue from our end markets accounted for approximately 89% of total revenue. Non-wafer revenue, which includes revenue from reticles, nonrecurring engineering, expedite fees and other items accounted for approximately 11% of total revenue for the second quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 42% of the quarter's total revenue. Second quarter revenue increased approximately 13% sequentially but declined roughly 19% from the prior year period principally driven by reduced volumes in the low to mid-tier smartphone segments and a continuation of the well-publicized inventory correction within the broader smart mobile market. Despite these reduced volumes, ASP and mix was flat year-over-year, which can be partially attributed to the framework and pricing certainty provided under our LTAs. During the second quarter, shipment volumes increased sequentially, which was primarily due to increased demand for our RF transceiver standalone and SoC solutions into premium tier handsets.…

[Operator Instructions] Our first question comes from Ross Seymore of Deutsche Bank.

One near-term question and one longer-term question for my follow-up. On the near-term side of things, Tom and David, you talked about in the last quarter about the total year revenues being down mid to high single digits. So I wondered if there's any update on that. And perhaps more importantly, how are the LTSAs holding in? And if the inventory has to be burned, what are you guys getting in return for lowering the unit side of the equation per the LTSA agreements?

Ross, I think I'll start with that question and then maybe, Tom, I'll pass it over to you to build on it with respect to the LTSAs. Ross, in our prior earnings calls, we forecast that first quarter revenue in 2023, we believe would be our trough and then that quarter-to-quarter-to-quarter that we expected to grow from there sequentially. So we still expect that sequential profile. And as you mentioned, for the full year, we forecast that we expected revenue to decline in the in the mid- to high single digits. We still expect to be in that range. And with our first half results really now in the books and with our third quarter guidance, you can probably infer from that third quarter with the first half that we are expecting to be towards the high end of that year-over-year range. Tom, do you want to take the LTA question?

Yes, very good. Look, the premise of the LTAs was to create better balance through a down cycle. It wasn't to have one side wins on the other side, loss, it was to create balance and work through this trough. And I think you see it in our performance quarter-on-quarter, both in revenue and profitability that we've been able to manage inventory and manage underutilization fees in a very pragmatic way with our customers to get through this in partnership. And I dare to imagine what our world would look like if we didn't have those partnership agreements in place in the downturn.

Ross, did you have a follow-up?

Yes, I did. This morning, we also had an announcement on the competitive front, TSMC doing a JV with a handful of European either actual or potential customers for GF. Just wondered what your view on that. I can see the positive side is endorsed geographic diversification of manufacturing and the strength the end markets, et cetera. On the negative side, obviously, those are customers you guys would want. And so more competition in those regions, I could see lending some pressure to you guys. So how do you view that announcement from competing foundry?

Well, we didn't wake up this morning and just see that happening. This has been in the press in the news for a long time. I think you hit on one of the points, but let me comment on three elements of this. Building this capacity is consistent with the supply of the world we need in the next decade. This is an industry that's going to double. In fact, German automotive associations have talked about the need for 27 fabs alone in Europe to build capacity. TSMC is not -- GF is not going to go create this capacity, on its own TSMC needs to participate in a meaningful way as well. Yes, those are our customers, but they're also TSMC's customers. No one has a monopoly on any given customer, right? We -- these customers source for many of us on different platforms for different needs. I'd also add to that, that, to your point, is in the past, this industry is built on driving huge economies of scale by concentrating supply in one region, and it drove the ultimate in cost capability because of that economies of scale. But it created an unintended consequence of huge issues with supply chain resiliency. And so GF in 2009, when we were launched, we were there to create -- to begin that thesis of the world needed a more diverse geographic manufacturing capacity for semiconductors. We could all argue maybe that was a little bit ahead of its time. But today, it looks like it was a pretty good thought back then. And so what you're seeing is not only our competitors adding capacity that the world needs over the next decade, but they're putting it in a broader footprint to respond to the fact that we need resiliency and supply chain to your point. But the third thing is greenfield and being able to build in a high degree of concentration in one region and now taking that show on the road as it were to build another location doesn't come very easy. It's very difficult to get the economies of scale to get the cost. And we see this is putting pressure on cost structures for others that are trying to build a geographically diverse footprint. And that just creates for GF, a better pricing environment going forward. So that's how we feel about it. This is not something that -- this is the first and last of something like this in the world if we really believe needs that kind of capacity. TSMC will need to do their part. I just do you have to do on our plan. I hope that helps, Ross.

[Operator Instructions] This question is from Mark Lipacis with Jefferies.

Coming back to the LTAs, I believe last quarter, you noted that you had 5 new LTAs and some of your customers are actually asking for increase in scope. And so I guess I'm wondering, are we -- can you give us an update on that pace? Are we kind of at the point where your customers are kind of putting a pause on signing up for new LTAs or are you still seeing that kind of extension of longer-term agreements from your customers?

No, great question. there's no pause going on. We are in active discussions with a number of customers. Timing is everything. And sometimes for more substantial ones takes a little bit more time for these things that come in place. Again, this comes back to my earlier commentary. It depends what you believe, if you think the industry is done and you have all the capacity you want, then you're not going to look forward, and you stay pat. There are plenty of our customers that see their growth opportunity in automotive, IoT and things of that nature, where they want to make sure they're booking today that certainty of supply for when this industry begins to grow again. And we're working with them in very serious discussions that will eventually come to a close. So LTAs are in our past, and they are certainly in our future. And I think this is the new norm for our industry. David, anything you'd add to that?

Yes, I can just build on that briefly. You're right, Mark, we didn't announce that we had signed any new material LTAs this quarter but we are quite pleased with some of the partnerships that we've announced and that we've developed Lockheed Martin being one of those aerospace and defense being a key market in market for us on a go-forward basis and being a market along with industrial and home and industrial IoT that's performing quite well. We're also very pleased with the progression of our LTA funnel where we have ample opportunities, some of which are quite mature. So stay tuned for more LTAs in the future.

Great. Did you have a follow-up?

Yes, please. On the gross margin side, I don't think I fully understood the timing of the variances and how they will moderate going forward. I guess I assume that if you get some progress on your gross margins, you kind of get to keep them. So if you could just provide a little bit more color there, what kind of variances are we talking about? And from the standpoint of timing, where these variances you were expecting to hit in the next quarter, if you just give a little more color on that, that would be helpful.

Can do, Mark. Let me give you some kind of specific second quarter commentary, and then maybe I'll broaden it out a bit as well. And as we mentioned in our prepared commentary, we did benefit a little in the second quarter from some better than expected, quite frankly, unforecasted manufacturing variance. So what is manufacturing variance -- it could be anything from reduced input cost. It could be higher utilization. It could be better cost absorption. It could be better pricing that you receive from suppliers. Those would all kind of broadly fall under the category of manufacturing variance, and we received some better-than-expected manufacturing variance in the second quarter. So in the absence of that benefit, we would have been at the high end of our second quarter guidance range. So we don't really expect that manufacturing variance to kind of continue throughout the second half of this year, and so we reflected that in our guidance accordingly. But purely from a guidance perspective, when we think about third quarter to give third quarter gross margin. To give you some context, our midpoint guidance for third quarter and our upper range for the third quarter is actually higher than what we guided in second quarter. So if you just think about it from a purely guidance perspective, second quarter guidance versus third quarter, we're actually guiding you up guidance to guidance in the third quarter. And then if I could just touch briefly on our longer-term gross margin roadmap, which I know you remember well from both pre-IPO as well as Capital Markets Day. If you recall from those roadshows and from that Capital Markets Day, we put together a pretty specific model and a bridge to go from where we were at the time to our long-term gross margin model of 40%. And from a gross margin perspective, barring the current utilization headwinds that we're seeing today, we're actually ahead of that model. We're at about mid-80s in terms of utilization, which, as you know, from a sensitivity perspective, 5 points of utilization is roughly 2 points of gross margin. And yet we've been able to actually not only sustain gross margin but slightly grow it on a year-over-year basis. So with respect to our long-term gross margin road map still on track, barring the underutilization actually ahead of schedule but certainly on track to that long-term gross margin commitment that we had made.

One moment for our next question. This question comes from the line of Chris Danely with Citi.

Just another couple of questions on the gross margins going forward. Have your pricing assumptions changed at all in the last three months for 2023/2024? And if we keep the mid-50s utilization rate going forward, is there any risk that your inventory becomes too high because it jumped up sequentially? So wouldn't we have to have some sort of lowering of utilization rate going forward?

Sure. So let me address a couple of the points there. Let me start with the ASPs. First, let me reiterate that for the full year 2023, we still expect ASPs to be up slightly year-over-year. With respect to the second quarter, obviously, year-over-year ASP was down very slightly. That was really driven by a shift in our product mix as our core pricing has remained contractual and unchanged. The mix shift in our business, it has produced a more accretive adjusted gross margin structure, as you saw with the number that we printed in the second quarter. But on a period basis, that mix shift did produce a slightly lower ASP year-over-year. And the other item I'd like to just talk about briefly before we talk about some of the inventory is that free cash flow. When you look at what we've been able to deliver, both from a gross margin perspective from cash from operations and from a capital efficiency perspective, we were able to deliver $146 million of free cash flow in the quarter. The higher gross margin structure, combined with that operational productivity and capital efficiency enabled us to produce that number, despite, as you mentioned, some of the inventory growth that we saw in working capital. On the inventory growth, most of that is related to substrates. We have some agreements with some of our suppliers. And some of those agreements include the purchase of substrates, which we've been able to acquire at some favorable prices. those substrates are good for many years. And as we look through this current inventory perturbation, we look through this cycle, having the ability in the balance sheet to be able to support acquiring some of -- for what -- what would be for us, raw material substrates at some fairly attractive prices, it's a good long-term decision. Did you have a follow-up, Chris?

Yes. Just talk about the 2024 expectations for pricing. Have you guys changed any of the terms of the LTAs for 2024 over the last three months?

Yes. So I won't delve too far deeply into 2024. But with respect to ASPs, look, we still have very good LTA coverage in 2024. And as you know, those contracts are fixed price, fixed volume, fixed duration. About 90% of our design wins are single sourced, and about 2/3 of our revenue today is also single source. So as we look through into '23, '24 and even into '25, we continue to see it’s a relatively constructive pricing environment right now. That’s our current expectation.

One moment please. Our next question comes from the line of Joseph Moore of Morgan Stanley.

I wonder if you could touch on some of the comments upfront about the pace of inventory reduction happening more slowly. I guess what's -- I'm not surprised that the characterization that there's still some correction going on, but the idea that's happening more slowly. Can you talk about what's driving that? Are the LTAs, are there situations where people are taking inventory that they might not take if the LTAs weren't there? And then how much of that is just maybe there's a permanently higher level of inventory, given anxiety about supply chain. Just kind of curious what's underlying that comment that you made.

Sure. So when we think about inventory, and we track it probably along similar lines as you do, Joe, we look at everything from distributor inventory to customer inventory to OEM inventory and then, of course, to GF as well as our peer inventory. So we look at inventory across a broad spectrum. And so when we say that inventory is depleting more slowly than we are expecting, we're primarily referring to inventory broadly across our customer set as well as across the [dist EME] and the OEM channels. When we look at that inventory, I think the glass half full view is that, that inventory is no longer growing. It looks like it has troughed, and it looks like the inventory is continuing to deplete now from this point going forward. We did expect that to happen a little earlier in the year, quite frankly, and it looks like it's pushed out. And so now we're no longer growing inventory in those channels that I just mentioned, but they haven't yet materially come down. And so that's pushed things to the right throughout 2023. So we expect that inventory to come down in the second half. Now in terms of why the inventory is currently where it is and what was the driver of it, it really is dependent on end market. I think there are some end markets that structurally will just carry higher inventory levels on a go-forward basis because the cost of that inventory is significantly less than their market opportunity loss. And so I think those markets, and I think the electrification of the automobile being an area where they still are unable to get enough inventory. And then I think when they do get enough inventory, they'll probably run a little bit heavier than perhaps just in time, which was kind of the traditional route. I think in some other markets like handsets, handsets we're expecting to decline on a year-over-year basis, total handsets kind of mid-ish single digits, I think that's a market where perhaps there was a little bit more inventory sold in 2022 than expected. It's carried into 2023. And while there's different areas within that market that are doing better or worse than others, I think that would be an example of the market uptick just taking a little bit longer. Did you have a follow-on, Joe?

Yes, just on the specific point of the LTAs. Are there -- I mean, it seems like you're working with customers to ensure that they're not taking inventory that they don't want, but like is there any -- are there situations where that causes the inventory position to be a little stickier?

I think that -- I'll take that, Dave. I think that's the point. The point is, where do you trade off kind of settling up with an underutilization fee versus taking a little bit more inventory and getting that balance. And that's all part of the muting the amplitude of a cycle like this. You don't want to go down as deep you want to be more balanced in the peak to trough, but that typically takes the frequency of the time horizon longer. And I don't think anybody is doing anything reckless in taking a lot of inventory not to pay underutilization fees, but it's one of the levers they have and that collective we make those judgments together.

And if I could build on that, Tom, let me just maybe talk to a proof point. One of our customers that's in the smart mobile space, actually, when they announced over the last week or so, they actually mentioned GF, they mentioned their LTA with GF. And one of the things that they mentioned was the flexibility that exists within that LTA such that they were able to migrate out of a technology node or a product set that perhaps was not in as much demand to actually a product and add a technology node that was in much more demand where they needed incremental capacity. And so I think that's a great example of the framework, the LTA framework being incredibly productive because instead of fixating on one particular product or one particular variable of the engagement, we were able to sit down, have a discussion, identify areas where there are still market opportunities, shift production and capacity to satisfy those for the customer, which ultimately helps them fulfill their LTA obligation in a much more comprehensive and collaborative way.

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

For my first one, I just wanted to clarify, could you give us a sense of which our end markets in Q3 could be up or down sequentially? And then as I look into Q4, I think your comments suggest sequential growth into Q4. And again, I'm curious what end markets would drive that given the inventory situation in some of your consumer and comms markets?

Thanks for the question, Vivek. I think I'll pass this over to Neils to maybe provide some color on two of the end markets, in particular, that not only grew in the second quarter but that we expect to continue to support our enterprise revenue well into the second half automotive and home and industrial IoT. Neils, do you want to provide some commentary on those end markets?

Yes. I could drill a little bit deeper on it. Maybe starting with automotive and maybe addressing it in three ways: First, actual this year, our expectations for '23, but also maybe talk a little bit about our long-term expectations. So as of today, we're servicing demand from dealings that we had over the recent years. You can see from the numbers that we did approximately $425 million in automotive in the first half, and we had a close to $250 million run rate in the second quarter and we're expecting sequential growth in third quarter. So we talked about in previous calls achieving $1 billion this year, and we feel confident that we will do that in 2023. So in terms of looking at the future and the long-term growth, if you look at the silicon content in automotive, it’s expected to grow about 6x as you move from ICE to ACE, as Tom mentioned earlier. So probably ICE about $300 on average to ACE $2,000 to $3,000 in average. So a substantial growth in silicon content. And when you look at that silicon content, what I think is really important to highlight is that the essential chip technologies that we have at GlobalFoundries they're a great fit for this. And I'd like to talk just to mention a few of them because I think the diversity and the broadness that you have of our technologies really talks to this long-term opportunity in a very good way. So some examples could be high-performance millimeter wafer radars, or high dynamic range processes for the imaging sensing, both of these two technologies are crucial to get good autonomous performance in the cars as we move forward. Low-power, nonvolatile memories for the MCUs, domain controllers, aggregators. We have a very comprehensive power portfolio that supports both the body control, LED lighting, battery management system, onboard charging, traction inverters. And then lastly, strong CMOS for the networking, CAN, LIN video audio and cluster segments of the cars. So really, for us, it looks like a very, very broad future here, and we feel good about where we're going with the technologies longer term. With regards to longer term, we also continue to strengthen our partnership. GM exclusive production capacity that we announced in February '23 is a good example on that. And so really based on these partnerships and the dealings we have, we expect this business to more than double in the second half of this decade. So that will be a little bit of more content around our automotive position.

Maybe just to round that out for you, Vivek. I think what you heard was you heard automotive has grown sequentially for us nicely also year-over-year. We're expecting that to continue to get to that kind of $1 billion revenue estimate that we had forecasted for the year. Home and industrial IoT, we're expecting it obviously, on a sequential basis, we're expecting it to continue to perform well. Smart mobile devices, we had some nice growth sequentially from first quarter to second quarter, but we're kind of expecting to kind of bump around this level. As we deplete inventory towards the end of the year, and that's probably a true statement, not only for the third quarter for smart mobile devices but throughout the year. And then both comms infrastructure and data center and PC we expect them, obviously, to then fill in the gap or to the revenue guidance that we provided for third quarter and the full year. So that's how we think about it.

And then the one thing we said just I'll pile on. if you don't mind, is aerospace and defense. We see that foundry portion of that market growing by the end of the decade to about $2.5 billion. And there's no reason we shouldn't get our "fair share or disproportionate" share in that market. And we intend to go do that. And part of the announcement in 2Q with Lockheed Martin is about going after that. Lockheed Martin announced that they acquired a design team. So now they can make their own ASICs, and they want a foundry partner, so who they select, GlobalFoundries. So A&D, a lot like automotive, it's you win sockets. They take many years to ramp in production, but they stick around many years. So a strategic play in A&D a lot like our strategic play, we kicked off three, four years ago in automotive to get to a growth engine for us. So stay tuned on that one.

Vivek, did you have a follow-up?

Yes, please. On pricing, I think from what I heard, it seems there is somewhat of a positive bias in the second half, and I'm Curious what's driving that. And I think as we look forward, I know you're not giving specific '24 or '25 outlook, but do your LTA suggest the pricing trend to be up, down, flat as we look over the next few years?

Sure. So we've stated really for a long time that our expectation is that pricing in '23 -- again, I'm talking about the full year 2023, we're expecting pricing to be up slightly from 2022. What you're hearing from us today is that we continue to expect that to occur, and that's our current forecast, and we feel quite good about that. And so kind of some product mix period by period aside, which will always make the decision to move to accretive product mix if it's accretive to gross margin versus purely focusing on ASP. But from a global statement with full year ASP in '23, we expect to be up slightly from 2022. With respect to pricing longer term, I think what you've seen happen is, one, you've seen customers sign a lot of LTAs. And as we've spoken about, those have fixed price, fixed volume, fixed duration. The pricing is very solid. I also think more broadly speaking, that you've seen the industry put on new capacity. And the economic models to support putting on new capacity require the higher ASPs and the ASPs to be quite sticky at those levels. And so that's not only a GF statement, that's kind of an industry statement. And so based on both the LTAs as well as the incremental capacity that's been added, we're expecting ASPs to be quite stable and to be in a pretty conducive environment to have stable ASPs. So through 2024.

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

Maybe following up on digits on your outlook for full year wafer pricing, you mentioned blended average pricing with flat to slightly up. But on a like-for-like, is pricing up better than that? I just want to make sure that the team is maintaining its fairly strong pricing power profile.

Sure. Let me perhaps be a little bit more specific. And it depends on the period that you're looking at when you look back into 2022. And as we've spoken about before, and I know you know, Harlan, we put on a pretty fair amount of capacity in 2022. And with that incremental capacity came the ramp of specific LTAs and those LTAs ramped at higher prices. And so when you really look at the pricing for the second half of versus the pricing in '23, that pricing is relatively flat year-over-year. But when you look at the pricing in the first half of 2022 versus 2023, that pricing, particularly in the first quarter, was significantly lower. And so the ramp of pricing was really tied with the capacity and the ramp of the LTAs. And so the short answer to your question is, on a like-for-like basis, as those LTAs kicked in, pricing is very flat. I think on a year-over-year basis, from a full year blended effect, you're going to see a slight increase full year ASP in '22 versus '23. Hopefully, that answered the question. Did you have a follow-on?

Yes, it did. So your large secure smart card access business and RFID tagging business, right, that appears to be holding up relatively strong here through second half of the year. And I think you and your large customer are now able to sort of redirect their wafer starts to support the backlog of demand that I think was unmet in this segment over the prior three years. I assume other of your customers are able to redirect their wafer starts to product segments where capacity has been tight until just recently, right? It's a good reflection, I think, of the product diversity of your customers that's helping to sustain their business, your business, auto is another good example. Any other good examples of the product diversity helping to backfill some of the areas where there might be some excess customer inventories?

Yes. So I think that's a really good point. I'll take this one, David. So two pieces. One, you talked about a particular end market, smart cards. When you think about smart cards, it's more than just your credit card when you wave it past a machine -- point of sales for transaction, touchless, it's now health -- it's healthcare, it's government security, it's credentials for your car. So it's a broadening market. But the bigger point you make is really important. It's -- you have to have two things. You have to have a diversity of technology platforms, and you have to have capacity that you can fund so that you can move for, hey, I need more 40-nanometer embedded memory versus a 55 solution because this customer wants to buy here. We've worked hard and long on creating that fungibility within fabs and across our global network. And that allows us to respond to the some of the lumpiness in these market segments to some customer moving of their products as they see opportunities. And so you need both the platforms that you can address these markets, and you need the fungible capacity. And that's something we'll continue to invest in across our 300- and 200-millimeter fab network.

And Harlan, to give you some proof points that you're looking for. Obviously, you mentioned smart card. On the automotive side, we've been able to move some of the comms infrastructure and data center capacity to support more of the automotive business. On the smart mobile device side, we had a customer that actually provided that example for us. I won't mention their name, but you could go back to those notes and look at them mentioning the GF LTA and how they were able to migrate from one product to another. And we have multiple other examples where we've been able to utilize that flexibility that Tom mentioned to be able to not only quickly move on customer demand, but also do it in a very capital efficient way, which is going to help us accelerate our path to free cash flow in the future.

Our next question comes from the line of Mehdi Hosseini with SIG.

Yes. The first one, last earning conference call, you talked about revenues for '23 flat to down high single digit. And I'm not asking for Q4 guide, but unless there is a significant improvement on a sequential basis in December, your '23 revenue would come at the low end. Is that a fair read through of what you reported on your guide for September in the context of the whole year?

That is, Mehdi. So what we reiterated was we still believe we'll be down mid- to high single digits for the year. And given that we've already kind of posted the first half and guided the third quarter that would imply that for the fourth quarter and the full year that we would be at the high end of that year-over-year decline range.

Sure. And then with their targeted gross margin of 40%, I just want to better understand if this is a gross or net or in other words, to what extent, it includes all the subsidies. And in that context, if there is any update on the CHIPS Act that would impact to gross margin looking into next year?

You take the CapEx, I'll take the CHIPS Act.

Sure. So when we originally contemplated our long-term gross margin of 40%, what that contemplated was capital intensity of about -- on an ongoing basis, steady-state basis, if you will, of 20%. And so that in other words, D&A would be about 20% of the P&L there. I think what you're hearing from us and potentially from others is that the capital intensity should be slightly offset by some of the various government support around the world. And so we haven't updated our long-term gross margin model but the assumptions that went into it were 20% capital intensity -- Tom, did you want to...

And part of that -- and 20% is a net number. And so that's why these co-investments or incentives by governments around the world, including the U.S., are important. Remember, just for way of context, there's two ways you qualify for incentives is the ITC, which is already in flight, which is $0.25 on the dollar for capital investment in semiconductor. And then the chips build and beginning of 2022 is the year of creating the need and the program in 2023 is the year of vetting applicants and beginning the allocation for execution. But look, for us, nothing has changed. It's not about our capital allocation. It's all about how we approach the market with certainly durability and profitability. We will never put capacity on independent of how many subsidies they are there to help us if we don't have certainty to demand by our customers. And we're not -- this isn't a game of chasing dollars, is a game about certainty of demand. And when we add that capacity, we want to do it in durable markets, markets that we talked about earlier today that have that have long view into the future in stability and then of course, profitability. We're not going to invest if we can't get competitive returns on investment. Now bills like the CHIPS Act and ITC help close that economic equation, which helps. But it doesn't -- if there's no demand, there's no reason to leverage all that. So the key here is to get customers lined up to leverage that capacity we could put on for their products with their needs over the longer term and then use government incentives to create that capacity in our global footprint.

And Mehdi, let me just provide you an additional contextual point related specifically to CHIPS Act, specifically the ITC. So in 2022, in the U.S., we believe that we've got about $450 million of investment that qualifies for the ITC that would imply at about 25% rate, that would imply something like about $120 million of potential benefit on that $450 million of qualified investment. And so the way that would flow through the P&L, if you assumed a steady state 10-year depreciation, the $450 million of investment would be D&A of about $45 million a year but you would net out the $120 million benefit. And so instead of being $45 million a year hitting the P&L, you'd get something more like $33 million a year that would hit the P&L. So that would be a real life proof point, both of the benefit from ITC as well as how it would flow through the P&L.

Kathy, we'll take one more question.

This question comes from the line of Krish Sankar with TD Cowen.

I have two of them. Dave, you mentioned about ASPs down 1% in June quarter year-over-year, mainly due to product mix. I'm just wondering how to think about ASP trends within different verticals like smart mobile, IoT, auto, et cetera. And given the fact that we do seem to have a positive bias and ASCs into next year, should the mix shift change into next year? And then I have a follow-up.

Sure, sure. Look, I think, broadly speaking, ASPs are primarily predicated on how much GF kind of differentiated technology and content is kind of included in the product or the solution. So you could go literally within any end market, and you could find products that either average you up or average you down with respect to pure ASP. What we really focus on is we really focus on the product mix that is most accretive to us from a profitability perspective. And while globally, I think you could probably make a statement like on average comms infrastructure and data center, on average, probably has a slightly higher ASP than maybe an end market like automotive. Obviously, you've seen com infrastructure and data center kind of decline for us given some of the inventory challenges in that particular end market, and you've seen automotive grow in a really meaningful way globally, probably a slightly lower ASP, but yet you've seen us accrete from a gross margin perspective. And so I think, in general, ASP largely tied to how much total content is in the solution, does it have nonvolatile memory. Does it have BCD? Is it on an FDX or an SOI-type of wafer? So I think, obviously, that plays an important role, but an even more important role is the product accretiveness from a gross margin perspective.

You had a follow-up.

Yes. I had a quick follow up. How much of your 2024 capacity is covered by LTAs?

Yes. So with respect to 2024 capacity, I'll just -- let me provide some brief context. Originally, we committed that we were going to increase our capacity from about 2 million wafers in 2020 to about 2.4 million wafers in '21, to about 2.6 million wafers in '22 to about 2.8 million wafers this year to north of 3 million wafers in 2024. We're very much on track to deliver on that plan, although obviously, we've slowed some of the installation of that capacity based on some of the well-known challenges with respect to channel inventory in the market. If you go back to our Capital Markets Day presentation, you'll see how much of that capacity plan was reflected and covered by LTAs. And I would say that we're still largely consistent with what we shared at Capital Markets Day.

All right. Thanks, Kathy. Appreciate it, and thank you, everyone, for joining the call today.

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