Good day and thank you for standing by. Welcome to the GlobalFoundries Conference Call to review Second Quarter of Fiscal Year 2024 Financial Results. 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 first speaker today, Sam Franklin, VP of Business Finance and Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries second quarter 2024 earnings call. On the call with me today are Dr. Thomas Caulfield, CEO; John Hollister, CFO; and Niels Anderskouv, Chief Business Officer. A short while ago, we released GF's first 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 non-IFRS measures are available in today's press release and accompanying slides. I would remind you that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements. Such statements can be identified by terms such as believe, expect, intend, anticipate and may or by the use of the future tense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our SEC filings, including in the sections under the caption Risk Factors in our annual report on Form 20-F filed with the SEC on April 29, 2024. We will begin today's call with Tom providing a summary update on the current business environment and technologies. Niels will then discuss some recent strategic activities, following which John will provide details on our end markets and second quarter results, and also provide third quarter 2024 guidance. We will then open the call for questions with Tom, John and Niels. We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tom for his prepared remarks.

Thank you, Sam. And welcome, everyone, to our second quarter earnings call. I'm pleased to report the second quarter results, which exceeded the midpoint of our guidance ranges as our 13,000 employees around the world continue to focus on delivering best-in-class technologies and meeting the needs of our customers, both globally and locally. I am proud of how well our teams are partnering with our customers on exciting new design wins as we execute to our long-term plans. Against this backdrop, we believe that we're beginning to see the demand outlook improve across certain end markets as the number of applications for analog and mixed signal products increases and channel inventory levels for several of our customers are showing signs of normalizing. As outlined on prior earnings calls, we still believe that the first quarter represents the low point for revenue in 2024 and the sequential revenue growth we reported for the second quarter, along with our guidance for the third quarter, are consistent with this expectation. Notwithstanding the short-term cyclical dynamics impacting our industry, we remain focused on positioning GF for long-term growth opportunities. I am pleased to provide several updates today, demonstrating how we are investing in our future growth plans and winning with our customers. To that end, we completed the acquisition of Tagore Technologies' gallium nitride power business, which includes its extensive IP portfolio and its team of GaN engineers, which closed at the beginning of July. This is an important addition to our power technology platform. And with that, I'd like to turn the call over to Niels to provide some additional commentary.

Thank you, Tom. And welcome to everyone on the call. I'd like to share a few details on the acquisition and set out why it's important for GF and to our customers and how this will support our ambitions to become a leading foundry in the rapidly expanding gallium nitride power device sector. At its core, the integration of Tagore's technology IP is expected to enable GlobalFoundries to grow our capabilities in pursuit of two key objectives. Firstly, expanding our product portfolio by providing additional power handling features for our customers, and secondly, growing our serviceable, addressable market. From a technical perspective, GaN offers several advantages over traditional silicon-based semiconductors, particularly in power applications. This is due to its ability to operate at higher voltages, with faster switching speeds, at smaller die sizes, and with better thermal performance. With Tagore Technology, we can now target better power efficiency capability in an integrated solution. Perhaps the best way to think about this is to compare our integrated GaN offering to BCD technology. With the Tagore's capability, we plan to offer our customers the analog and digital content of BCD technology integrated with the superior power performance of GaN. These performance characteristics have been identified by our customers as key features for supporting applications across sectors such as automotive, aerospace and defense, renewable energy, fast charging infrastructure, and power management for data centers. As a result, we expect our SAM to grow by approximately $1.6 billion by 2030, and additionally, we're supporting our customers to target a substantial share of this SAM. By investing in GaN solutions, designed to push the boundaries of efficiency and performance in a right range of power applications, we are targeting opportunities to win with our customers across all of the end markets we serve. And we are already sampling our first generation 650 volt GaN products with 100 to 200 volt sampling expected to follow shortly. To achieve this goal, we'll be modernizing our manufacturing capabilities at our site in Burlington over the coming years. This modernization will be enabled with the expected support from the previously discussed grant award from the US Chips and Science Act along with continued investment in R&D to support a gradual ramp of our GaN manufacturing capacity over the next two to three years. Moreover, this acquisition aligns with GlobalFoundries' broader strategy to enable high volume manufacturing of critical technologies in power applications and to serve as a trusted manufacturing partner for our customers seeking to build the next generation of power management solutions here in the United States. I would like to welcome our new GF employees joining us as part of this acquisition and we look forward to taking the next step in this important growth opportunity for the company. With that, back to you, Tom.

Thank you, Niels. Before I comment on the current business landscape and our recent customer partnerships, let me now touch briefly on our second quarter results, which John will discuss in more detail in his commentary. Revenue in the quarter increased sequentially to $1.632 billion, which was above the midpoint of our guidance range. We reported non-IFRS gross margin of 25.2% in the quarter, which again exceeded the midpoint of our guidance range. We delivered non-IFRS diluted earnings per share of $0.38, which exceeded the high end of our guidance range. I am also pleased to report another quarter of strong cashflow, which reflects our disciplined approach to capital deployment while preserving our capacity expansion objectives. Cash flow generation remains a long-term objective for driving the company towards a sustainable foundry expansion model. We are on track to deliver approximately three times the amount of 2023 non IFRS adjusted free cash flow by the end of 2024. We are well on our way to this goal as we achieved more than $500 million of non-IFRS adjusted free cash flow in the first half of the year. Moving now to some of our recent partnership activity and how we are positioning GF to keep winning with our customers over the long term. Automotive remains a bright spot across our end market portfolio, and we delivered another quarter of revenue growth. We are continuing to partner with our customers to identify long-term opportunities to expand share and content in the vehicles of today and the future. As the semiconductor content in vehicles continues to expand, GF is well positioned to support our customers with a full range of our technology portfolio mix. The performance features embedded across our key product platforms support critical applications in the automotive sector. In the second quarter,…

Thank you, Tom. And welcome everyone to our second quarter earnings call. For the remainder of the call, including guidance, other than revenue, cash flow, CapEx, and net interest and other expense, I will reference non-IFRS metrics, which exclude share-based compensation and/or other restructuring charges. As Tom noted, our second quarter results exceeded the midpoint of the guidance ranges we provided in our last quarterly update. We delivered second quarter revenue of $1.632 billion, which represented a 5% increase over the prior quarter, but a decrease of 12% year-over-year, principally due to lower shipments and utilization levels in the low to mid-70s, consistent with the commentary on our last earnings call. We shipped approximately 517,300-millimeter equivalent wafers in the quarter, up 12% sequentially, and down 10% from the prior-year period. ASP, or average selling price, per wafer was flat year-over-year. Wafer revenue from our end markets accounted for approximately 91% of total revenue. Non-wafer revenue, which includes revenue from reticles, non-recurring engineering, expedite fees and other items, accounted for approximately 9% of total revenue for the second quarter. Let me now provide an update on our revenues by end markets. Smart mobile devices represented approximately 47% of the quarter's total revenue. Second quarter revenue increased approximately 12% sequentially and decreased approximately 3% from the prior-year period, principally due to modestly lower shipments. This decline was partially offset by an improvement in ASP and mix, driven by continued content growth in premium tier smart mobile devices. As Tom discussed, we believe that inventory levels in this end market have begun to normalize during the first half of 2024, and we are well positioned to support our customers when this end market rebounds as the silicon content and features and smart mobile devices continues to grow. In the second quarter, revenue from…

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

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

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

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

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

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

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

I guess for my first of my two questions, I want to focus on the revenue side. For the third quarter and then potentially the fourth quarter, could you give us a little idea of what you're seeing in the end markets? In the third quarter, it looks like your non-wafer revenue is 45% of the sequential growth. And in the past quarterly calls, you've talked about being able to grow for the rest of the year. Is that still true for the December quarter as well?

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

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

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

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

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

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

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

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

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

CJ, your question is when can Edge AI increase production and utilization?

Well, curious more about the conversations you're having today, build plans, and then how you're thinking about the timing of being proactive and turning on your lines. I mean, do you have visibility to that in 2024, more of a 2025 story? Would love to hear how you're thinking about it.

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

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

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

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

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

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

I do. Maybe it's because of the capital intensity of this industry. Somehow we've convinced ourselves that $700 million is modest CapEx. This is a capital intensive industry. We're spending $700 million this year. I think the difference is where we are invested. There's three areas I think about. Innovation, enablement of these new features, and then just adding more of what we can do, base capacity. So we've said we have enough capacity on our base to grow our revenues to $9.5 billion, $10 billion. And I'm going to get back to that in a moment. Where we are investing now and in the future until we get to that level of utilization is in differentiation. When we bring a new feature to the marketplace, it may require new process techniques. And we'll have to invest in the capacity to do that, not in the overall capacity to create more wafers, but to bring that feature to the marketplace. And that's a big part of that $700 million we've spent. Now, back to this $9.5 billion to $10 billion, I'll go all the way back to the investment thesis of our road show in 2021. We said there was something really important about reaching a $9.5 billion to $10 billion mark in revenue. We wouldn't have to trade off free cash flow for investment and growth that we get to a point of scale where we can have both. We can invest in meaningful growth and at the same time produce free cash flow. That's how we think about what our investment profile is going to be over the coming years. When we do invest CapEx, it's going to be for differentiation and bringing new better features to the marketplace. We start getting close to $9.5 billion, $10 billion and then start investing in new capacity, but with a different financial model for the coming.

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

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

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

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

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

Yeah, that's roughly two-thirds of what we started with in this journey.

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

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

Look, on the RF side, Joe, as you mentioned, we're focused on GaN for RF as well. We're doing it with a different set of partnerships. And look, when we start to look ahead with the specifications and requirements for FR3 are going to be, we believe a strong play at least for the power amplification, power amps for that solution, that GaN will be an important part of that.

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

Tom, you mentioned a meaningful growth in automotive for 2024. I was hoping you would contrast that with just the environment in the automotive semiconductor industry, lower auto production and somewhat more muted trends among some of your automotive semi customers. So what's giving you the optimism relative to the industry and what kind of checks do you have in place to make sure that your shipments are aligned with the automotive sell through?

I think there's a real important difference between what you have seen and maybe you're seeing more broad based. So first of all, let's just talk about 2024. I think that's where your question started. Look, we're more than halfway through the year. We have wafers in the line. We have POs. We're confident we're going to deliver against what we've said all along, that automotive is going to have meaningful growth year-on-year. Your question is a little bit more about why. Why are we seeing it? I think the best way to explain this is we started this journey five to seven years ago where we were winning that next generation of technology platforms. And what you're really seeing for GF is we're ramping these new applications, whether they're microcontrollers or sensors or radar devices. These are replacing older devices in cars. So you don't need to see more cars being sold for this replacement to take place. You don't need to see even more content going into cars, although those two things are happening. This is just the next refresh for us. And that's unique to GF because it's all new devices for GF. Remember, in 2020, this business was under $100 million for us. So we're part of a generation of refresh of technology based on our differentiated technology. And so, given that and given the fact of the kind of design wins we won last year and continue to win this year, we believe automotive is going to continue to be a growth engine for GF for the years to come. The last thing I would just tell everybody, a little bit of a cautionary tale, is there is non-linearity in all end markets. So looking at any given quarter and multiplying by four and saying that's what the full year looks like is a little bit hazardous, I would say. And it's more – think about when we give you on a year-over-year basis, it takes some of that lumpiness out.

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

Do you have a follow-up to that?

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

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

Our last question comes from the line of Harlan Sur with J.P. Morgan.

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

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

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

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

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

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

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