Conference Call to Review Third Quarter of Fiscal Year 2026 Financial Results - GLOBALFOUNDRIES INC

Financial Performance:

• Q3 2026 revenue reached $1.899 billion, up 6% sequentially and 13% year-over-year (YoY).
• Record non-IFRS gross margin achieved at 31.4% (up 540 bps YoY), with Q4 guidance set at ~31.5%.
• Operating margin stood at 17.9%, with operating profit of $340 million.
• Diluted EPS was $0.53, beating expectations; Q4 EPS guidance is $0.59 ± $0.05.
• Free cash flow was $136 million, driven by $150 million in customer prepayments and grants; adjusted free cash flow margin targeted at ~10% for FY 2026.
• Cash and equivalents totaled $3.2 billion with $1.1 billion in debt and a $1.5 billion undrawn revolving credit facility.
• Blended ASPs showed year-over-year growth (first such improvement since 2023), up ~5% YoY.
• Non-IFRS effective tax rate expected to remain in the mid-teens for full-year 2026.

Guidance and Future Outlook:

• Q4 2026 revenue guidance is $2.0 billion ± $25 million.
• Full-year 2026 net CapEx expected to be 15-20% of revenue; FY 2027 net CapEx raised to ~$4 billion to support capacity expansion.
• 2027 CapEx strategy: ~1/3 supported by customer prepayments, rest by ITCs and government grants.
• Communications infrastructure and data center revenue projected to grow 60-70% in 2026.
• Silicon Photonics revenue expected to reach $1B annualized run rate by end of 2027 (one year ahead of prior expectations).
• Long-term gross margin target remains at 35% exiting 2027 and 40% exiting 2028.
• 2027 fully diluted share count anticipated to reach ~600 million following equity issuances to the US government.

Business Segments and Product Lines:

• Communications Infrastructure & Data Center: Revenue up 81% YoY; driven by optical networking (Silicon Photonics and SiGe). Accounted for 17% of total revenue.
• Automotive: Revenue up 20% YoY, representing 19% of total revenue; expected low double-digit growth in 2026.
• Smart Mobile Devices: Revenue down 19% YoY, representing the lowest historical share (32%); expected to decline further in 2026.
• Home & Industrial IoT: Revenue up 49% YoY, representing 20% of total revenue; expected 10-15% growth in 2026.
• Technology Services: Contributed 12% of revenue; expected to drive future margin accretion.
• New Partnerships: Agreements with Marvell (SiGe capacity), Monolithic Power (power management), and TSMC (US-based silicon interposers for COO ecosystem).
• Custom Silicon: Secured nearly $1B in design wins in Q3, including RISC-V processors and aerospace engine control chips via the MIPS acquisition.

Market and Competitive Landscape:

• Revenue from outside smart mobile devices hit a record high, enhancing portfolio diversification and resilience.
• Demand for optical networking is accelerating due to the shift from copper to optical links; GF engaged with 50+ SiPh customers, including 7 of top 10 transceiver suppliers.
• Capacity for Silicon Photonics and SiGe is "sold out" through 2027 and increasingly booked into 2028; customers offering balance sheet support for future capacity (up to 2029).
• Advanced packaging via the TSMC agreement aims to ramp volume production at Malta in H1 2028, targeting margins above long-term targets.
• GF is the first US-based source for silicon interposers, positioning the company as critical for secure, domestic AI infrastructure supply.

Risks and Challenges:

• Smart mobile device market remains weak with low-end inventory constraints impacting unit demand.
• CapEx requirements for 2027 ($4B) are significantly higher than recent years, though partially offset by external funding.
• Execution risk regarding rapid capacity ramp-up for SiPh and advanced packaging within existing footprint.
• Dependency on government grant timing and customer prepayment closures to realize favorable economics on new capacity.

Management Commentary and Tone:

• Management expressed high confidence, describing Q3 as a "significant milestone" and 2026 as a "pivotal year" ahead of plan.
• Tone emphasized structural improvement in mix and margins, noting that current performance validates the Investor Day strategy.
• Tim Breen highlighted the "early innings" of the AI data center opportunity and the strategic value of US-based manufacturing.
• CFO Sam Franklin stressed that mix shifts and utilization improvements are primary drivers for margin expansion beyond pricing.
• Leadership noted that the company is "ahead of plans" for strategic and financial targets set earlier in the year.

Analyst Questions and Answers:

• Margins & Mix: Analysts asked if pricing adds to the 40% margin target; Management confirmed pricing is a constructive tailwind but mix remains the primary driver; no change to long-term targets.
• Capacity & Utilization: Questions on whether utilization can rise further; Management noted utilization remains in high 80s with headroom, though new CapEx will increase the denominator, requiring careful scaling.
• Optical Transition: Discussion on NPO/CPO integration; GF expects increased content per application as transceivers move closer to XPU, driving SiGe and SiPh demand.
• CapEx Funding: Clarification on the $4B 2027 CapEx; ~1/3 supported by customer prepayments, with remaining offsets from ITCs and CHIPS repurposing, minimizing impact on free cash flow.
• Automotive: Concerns about capacity crunch in auto due to AI focus; Management assured automotive will continue receiving investment and sees OEMs focusing on geographic supply diversification.
• Satcom: Satcom is a growing vector within Comm Infra, leveraging SiGe and RF capabilities for low-earth orbit launches.

Other Key Points:

• Government Partnerships: US Commerce Dept. reallocated $955M of existing CHIPS funds to accelerate Malta, NY, and VT investments; US Govt. to receive 4% equity, totaling ~7% ownership upon completion.
• U.S.-Japan Initiative: A new model to expand Malta/New York capacity with accretive economics, potentially bringing US operations to mega-fab scale.
• Dividends & Buybacks: Quarterly dividend of $0.12 approved; $100 million in share repurchases completed in Q3.
• R&D: R&D expenses were $164 million; continued investment in IP, software, and custom silicon platforms.
• MIPS Acquisition: Over one year post-acquisition, MIPS is driving platform-level wins with customers designing physical AI-native systems.