Hello, and welcome to the conference call to review GlobalFoundries First Quarter of Fiscal 2025 Financial Results. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Senior Vice President, Finance and Operations, Sam Franklin.

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries First Quarter 2025 Earnings Call. On the call with me today are Tim Breen, CEO; Niels Anderskouv, President and Chief Operating Officer; and John Hollister, CFO. 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 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. 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 risks 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 6-K filed with the SEC. In 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. Neils 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 2025 guidance. We will then open the call for questions with Tim, John and Neils. 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 2025 earnings call. As our industry seeks to navigate the backdrop of geopolitical tension and trade uncertainties and 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, GF's track record of generating meaningful free cash flow continued in the first quarter with consistent operational excellence across our global footprint, delivering $165 million 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 on free cash flow generation as 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 2025. 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…

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% was 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 captured market share in one new designs all of which supports our expectations for meaningful year-over-year revenue growth in 2025. Despite soft end market demand, our automotive and continuing 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. The best additional strength has been in automotive processing where we a sole source foundry to the supplier of the number one auto microcontroller platform. On top of that, we are winning in new applications across all the geographies we serve. In Q1, we achieved design wins across MCUs, battery management systems, motor control devices and laser drivers for LiDAR and our 130BCD and 40 years at free Autopro platforms. GF and end semiconductor also announced a strategic partnership to introduce high-performance radar sites on chip solution using GF's automotive qualified 22FDX platform. These solutions will target 77 gigahertz and 120 gigahertz greater applications to enable safety-critical advanced driver assistance systems with low-cost, smaller footprint and efficient power consumption. Similarly, in March, Dream Chip and Cadence announced they will use GF's ultra-low stable use Deer's ultra-low-power 22FDX platform for ADAS and…

Thank you, Neils. 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 billion, which represented a 13% decrease over the prior quarter but an increase of 2% year-over-year. We shipped approximately 543,000 300-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 modestly year-over-year due in part to the product mix shift 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, nonrecurring 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 markets 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. First quarter 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…

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 their 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 remains 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, I 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&A. Operator?

[Operator Instructions] And our first question comes from the line of Mark Lipacis 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 the 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. So it would 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 industry, 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 road map 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. And we've seen that in areas like automotive, aerospace and defense, those that you 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 balanced preference to becoming much more of a strong preference for U.S. 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 term is a little bit difficult to predict, I think long term, we definitely see this as a tailwind for GF.

Got it. Very helpful. And a follow-up, if I may, maybe for John. The ASPs, it 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 ASP declines to maintain the gross margins?

Yes, Mark, certainly. So looking back at the kind of the framework for our ASP calculation, underutilization payments are component 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 2024 to 2025. 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 you can have a product that has many more mask layers versus on other products that change in the mask count, if you will, can drive a differential on the ASP calculation from a mix perspective. So that's really the primary effect Mark, that you're seeing. And parts gross margin, as you indicated, that is really the ultimate measure of how we're addressing that. 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.

And maybe, Mark, if I can just add a comment from my side there. We've said before, the overall pricing environment for our differentiated 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-sourced 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.

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

Dan, 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 on 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 Graco kind of newer players like Ayar Labs and Light Matter, 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 perhaps ask Neil to add a bit more color on our photonics in particular, since I know that's of interest. So as you note, we had significant year-on-year growth in communications infrastructure and data center in the first quarter. And we're looking to a high-teens growth for the full year for that market, which obviously is a 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 increased power. And so we've been very much focused on positioning GF Technologies to serve those requirements, and that underpins that growth. And as you also note, we don't just have one solution in that space. We have solutions on our silicon germanium platform in things like TIA and drivers, but also pluggable silicon photonics. And now as you start to note the transition to co-packaged optics. So again, I think not just a short-term story, but a long-term story for growth as well. Neils, anything to add?

Yes, I can go a little bit deeper on the silicon photonics, but maybe also just highlight strong growth in the satellite communications side, where we were winning across the board and satellite communications, large space arrays, antennas, strong design momentum there. SatCom, satellite win from our 45 IB SOI platform in addition to that, and of course, 22FDX and 12LP and 130NSX in the previously announced SATCOM platform. So strong growth there as well that plays into the CID. But maybe going a little bit deeper on 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 supply in the industry. So this is allowing us to have very strong performance in the pluggable segment that has taken 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, there 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 and very excited about the co-packaged optics 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 '25 or perhaps should we be perhaps more conservative on the smart mobile side? Any color there would be very helpful.

Yes, of course. Let me maybe start with smart mobile devices. I think the base case remains largely consistent, so we're expecting a flattish market in 2025. IoT, specifically, last time, I mentioned that inventory was starting to come down, and we're 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 -- GF grew IoT year-on-year in Q1. However, due to the uncertainty on the consumer spend, we expect the year to be more of a flattish kind of IoT. Longer term though, very well positioned with our IF Power and CMOS portfolio. And we have solid design momentum in areas like medical, 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 WiFi 7 with our FinFET portfolio. And I want to remind people our FinFET portfolio is getting more and more optimized for low power and thereby NII performance, and therefore, have a great fit for WiFi 7. MCU and audio DSPs or connected MCUs and AI-enabled audio DSPs and 22FDX. And then medical, power and seller IoT on a broader base on 130 and 55BCD light. So pretty really good design momentum in IoT and expecting after '25 to drive some growth. And then let me wrap it up on Automotive, we continue to be bullish on Automotive. You remember that we have consistently delivered share gains since our IPO. And you probably also remember that last year, we delivered about 15% year-on-year Automotive growth in '24. So Ravi 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. You mentioned 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. A couple of year technologies I'd like to call out is 40 years at free obviously, big momentum there with the leading MCU automotive MCU provider in the industry. 130BCD, 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.

CJ, this is John. I 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 million.

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, is that consistent with growing Q3 and Q4 kind of at this mid-single-digit rate sequentially? Or has anything changed in that framework versus how you thought about it on the last earnings call.

Yes. Thank you, Vivek. And so maybe I'll give a bit of color on our overall trajectory to margin expansion, and then John gives 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, we were 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 in existing areas but also in new areas is very strong. And 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 billion since 2021 to build that footprint, both scale and diversification, and that allows us to serve anywhere between $9 billion and $10 billion 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 of those design wins and customer depth ramps, but also as the broader market comes back. And that gives me long-term confidence in our model. Perhaps, John, you can comment about 2025 itself.

Yes, sure, Vivek. So clearly, the tariff concern is lingering out there, as Tim and Neils have both indicated and potentially impacting the more consumer-oriented end markets that we have in SMB in some portions of our IoT market, so we just talked a knowledge 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 costs as we've 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 and leveraging the substantial amount of investment in our factories that have been made over the years, as Tim indicated in his prepared commentary, and we remain confident that, that improvement would be on the order of about $250 million in fiscal 2025, a 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 Neils 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, we 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 exit 2025 at 30% gross margin.

Very helpful. And for my follow-up, maybe I'm kind of nitpicking here, but you mentioned that 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, industrial IoT customers, they're indicating their pricing will only go down kind of low-single digits. And I don't know whether I'm reading too much into this, but conceptually, should your pricing come down at the same pace, why would it be different? And then I also had a point of clarification there. What was the apples-to-apples wafer price decline? Because on a reported basis, it is down 13%. But if I remove the $82 million, 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?

Yes, Vivek. So certainly, the kind of three factors that work here are the underutilization payment dynamic. 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 types of products to carry different ASPs. And some products with lower ASPs actually have higher gross profit margin. So 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 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.

Yes, 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 maybe have very good differentiation and good margin on. Some of those process nodes have only what we call 25 mask layers versus other processor notes that already in production are sitting maybe at 50, 60 mask layers. So you 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.

And our next question comes from the line of Ross Seymore with Deutsche Bank

Lots of good stuff on the year as a whole. I want 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, do you want to comment and then I'll add some color?

Yes, sure. I mean we generally see a fairly consist pattern there, Ross, of the improvement in the second quarter. And we mentioned the first quarter being below point to more mobile device category, but it's fairly well distributed.

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 what you would look for in those inorganic opportunities?

Yes. Thank you, Ross. So for us, the way we think about M&A as a growth lever is really very much in line with our strategy. And so as we've laid out in the past, going deeper on a differentiated essential chip portfolio, meeting our customers where they need us and adding capabilities that meet their requirements. And then obviously, our footprint itself. And I'd say if you'd have to think about where we'd be most focused in inorganic, it's really on the first of those pillars and potentially are slightly on the second. And so we'll look for areas where we can add value to our existing offering 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, but we'll definitely be opportunistic about opportunities that can help us accelerate based on that differentiation.

Ross, if I could just quickly add. In terms of our firepower in terms of inorganic activity, we're very well positioned. We ended the quarter with $3.7 billion in cash and investments and another $1 billion 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 billion in free cash flow again in 2025 as we did in 2024.

And our next 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 headwinds, anything left to roll off? And can you quantify in getting to this goal of 30% gross margins for the year? What's the headwind from the absence of unutilization payments on a year-on-year basis?

Yes, Chris, this is John. It's -- yes, the first part of your question is yes, we do expect that to be largely 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, if you wish to think of it that way. I mean, really, 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. Also in your prepared remarks, you talked a bit about the tariff impact. And I guess I'm focused here on the direct impact, such as additional costs that you may have to encounter on that. I guess, one is, 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?

Yes, Chris, this is John again. So we have analyzed that. And clearly, good portion of the semiconductor input landscape is exempt from tariff, but not 100% of it. So looking at the balance of input cost that is not exempt from tariff. We have roughly estimated that at about a $20 million 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'll 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 ASP and commercially.

Yes. 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 a very diversified supply chain on a global basis and all of our fabs have a broad set 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.

Yes. Just -- John -- a final point. I mean, bear in mind, our solar global footprint, where a good portion of our manufacturing is outside the United States. So two of our three 300-millimeter fabs are not in the United States as well.

And our next question comes from the line of Quinn Bolton with Needham & Company.

Hey John, just wanted to ask on the second quarter gross margin. It looks like the guidance for 25% implies 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 -- Yes, so really looking at the mix primarily driving that.

Great. And then maybe a longer-term question. You guys talked about several design wins and tape-out imminent on the CPO side. Based on your discussions with the customers, when do you see the volume ramp? Is that something you think ramps in '26? Does 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 Neils for what we're hearing in the industry more broadly. The industry has gone through an evolution of its view about the ramp-up 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 I know Neils as mentioned, but even before OC including industry dates 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 transition is 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-packers upticks 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 urgency from the major players in getting this to market as fast as they can. So we're excited about it. We've 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 ramping with these players among the earliest of the optical silicon photonics players.

And our next question comes from the line of Krish Sankar with TD Cowen.

Yes, hi, thanks for taking my question. I told 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 that happened earner 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 front lines, like you mentioned, but we actually also are starting to see very good solid momentum on display imaging as well as haptics and audio in the S&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 than just a front end. And in general, I would say the margins are accretive to our business, the margin we are winning at 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 there's so many moving parts there. But 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 curious, factoring all of that, so you still expect double-digit growth in autos for your auto segment this year?

Yes. And I think maybe a general view and please add to it Neils 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 cases and 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 we have the design wins with the fastest-growing players. 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 power controls within the car. And then, of course, all the sensors and specifically RADAR, where 22FDX 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 more meaningful revenue.

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 I 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 call. And I have a follow-up. .

Yes, Neils, do you want to comment on the market?

Yes, I can comment that. As mentioned earlier on, the inventory has certainly come down and are now at more what do we say, net normal levels. Also I mentioned earlier on, you see the players that are strictly IoT players, you actually see them having a very strong growth 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 consumer sentiment. But I can mention maybe a couple of major wins that we had in Q1. We have WiFi 7 on our FinFET technology, connected MCUs, AI-enabled audio DSPs, medical, block cost monitoring, power in general and then sell IoT. So these are all design wins we had in the first quarter that bodes well for where IoT is going for GF in the future.

And did you have a quick follow-up?

Yes. In terms of smart mobile, I think the revenue was a little bit lower than we expected. Any particular category on the high end or mid-end smartphone that you saw driving that decline in revenue? And related to the consumer demand, is that decline more of a building customers 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 part.

Sure. This is John. SP58765061 You bet. This is John. I really point to two factors. One, as Neils has mentioned several times, it's the roll-off of the underutilization payments from one year ago to first quarter '25. Secondly is just the seasonality of this being a seasonally low period. We expect SMD to continue to ramp throughout the year.

Thanks, Martin, and thank you, Andrew, for in appreciate everyone and the questions raised today. We look forward to seeing and speaking to you 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.