GLOBALFOUNDRIES Inc. (NASDAQ:GFS) Q2 2022 Earnings Conference Call August 9, 2022 8:30 AM ET
Company Participants
Sukhi Nagesh – IR
Thomas Caulfield – CEO
Dave Reeder – CFO
Conference Call Participants
Harlan Sur – JP Morgan
Vivek Arya – Bank of America
Ross Seymore – Deutsche Bank
Mehdi Hosseini – SIG
Rajvindra Gill – Needham
Chris Danely – Citi
Randy Abrams – Credit Suisse
Operator
Thank you for standing by, and welcome to GlobalFoundries Second Quarter Fiscal Year 2022 Earnings Conference Call [Operator Instructions].
I would now like to hand the call over to Head of Investor Relations, Sukhi Nagesh. Please go ahead.
Sukhi Nagesh
Thank you, operator, and good morning, everyone. And welcome to GlobalFoundries’ Second Quarter 2022 Earnings Call. On the call with me today are Dr. Thomas Caulfield, CEO; and Dave Reeder, CFO. A short while ago, we released GF’s second quarter 2022 financial results, which is available on our Web site 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 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. 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 March 31, 2022. We will begin today’s call with Tom providing a summary update on the current business environment and update on our capacity expansion in technologies, following which, Dave will provide details on our end markets and second quarter results and also provide third quarter guidance. We will then open the call for questions. Request that you please limit your questions to one with one follow up. I would also like to remind you that our first Capital Markets Day will be taking place in New York City tomorrow. If you would like to attend in person, please e-mail ir@gf.com in order to be registered for the event.
I’ll now turn the call over to Tom for his prepared remarks.
Thomas Caulfield
Thank you, Sukhi, and welcome, everyone, to our second quarter earnings call. I’m pleased to report 2Q results that were once again ahead of guidance that we provided in May as we continue to make significant progress on our strategic and financial priorities. Amidst the challenging macroeconomic environment, the GS team 15,000 strong, continues to execute each and every day. So let me start with providing a brief update on the current business environment. Similar to others in the industry, we are seeing some areas of the market beginning to rebalance supply and demand, including end markets such as low end handsets, PCs and in general, the lower end of consumer electronics market. Although we’ve experienced some decrease in some pockets of our unconstrained demand, the total demand for GF solutions remains robust and capacity continues to be oversubscribed. Specifically, we continue to see healthy demand in fast growing end markets, such as home and industrial IoT, automotive, communications infrastructure and data center. If you recall, we previously mentioned that we started this year oversubscribed with demand that was 25% higher than available capacity. Today, demand continues to outpace our ability to supply by about 10%. We remain oversubscribed for 2022 and 2023. And given the increasingly single sourced nature of our business, we expect to continue to grow revenue and profit through the remainder of this year and next.
In the second quarter, GF revenue grew 23% year-over-year, driven by increases in both wafer shipments and ASP. This, coupled with strong operational excellence, resulted in significant improvement to adjusted gross margin. We reported adjusted gross margin of 28% in the quarter, a 12 percentage point improvement from a year ago period. As a result, we delivered earnings per share of $0.58, which was $0.10 better than the high end of our guidance. David will give more color on the financials in a moment but let me now provide you with a brief update on some of our recent customer and partnership activity. At the time of our IPO last year, we had signed long term agreements totaling approximately $20 billion in revenue. Now about one year later, we have 36 customers under long term agreement with revenue totaling approximately $27 billion and prepayments and access fees totaling about $3.6 billion. Yesterday, on the heels of the U.S. CHIPS bill being passed, we announced an extension of our long term agreement with Qualcomm that adds more than $4 billion in incremental wafer purchases from our Fab A facility in Upstate New York. With this extension, the long term agreement with Qualcomm now represents more than $7 billion in global revenue through 2028.
Since the beginning of the year, we’ve secured approximately $6 billion in incremental new long term agreements with our customers. All these new agreements, as well as extensions to existing long term agreements, are 100% single source business. In fact, single source revenue in the first half of 2022 outpaced overall revenue, growing 37% year-over-year, and 90% of the first half design wins were single sourced as well. In the quarter, we also signed a definitive agreement with ST Micro to create a new jointly operated 300 millimeter manufacturing facility, adjacent to ST’s existing 300 millimeter facilities in Crolles, France. With this agreement and combined with our capacity increase in Germany, GF will be tripling capacity in Europe from 2020 through 2028. This partnership with ST enables GF to add capacity in a highly capital efficient manner, backed by grants from the French government as well as customer prepayments. Finally, let me provide a brief update on some of the important technology milestones we achieved this quarter. In the second quarter, we completed nine technology qualifications. We are extremely pleased to have released our 22FDX+ platform. This platform offers greater-than-25% power reduction, thereby enabling a technology road map to further improve power and performance optimization for many of our customers’ IoT applications.
Additionally, we have now fully qualified our highly differentiated 45CLO photonic solution, which we just recently announced at the Optical Fiber Communications Conference. We have over a dozen customers currently developing prototypes in preparation for volume manufacturing in 2023. We believe GF’s photonics solution is the only 300 millimeter monolithic integration of electro optical components in our industry [Technical Difficulty] we’re combining SOI, CMOS and photonics in a single chip solution. Lastly, we released to production the industry’s first 55 nanometer embedded nonvolatile memory solutions for power management that will be adopted in new releases of premium tier handsets. To summarize, I’m pleased to report another quarter of solid execution as we deliver to our customers and all our stakeholders. We continue to demonstrate steady momentum across our business and are making significant progress towards our long term business model. Now before I hand it over to Dave and Sukhi, I would like to let you know that normally, I would be participating in the Q&A session following our prepared remarks. But I’m currently in Washington, D.C. to witness the signing of the CHIPS bill at the White House. This landmark legislation will have a profound positive impact on our nation, our industry and GF for years to come. I am looking forward to seeing many of you at our Capital Markets Day in New York City tomorrow.
With that, over to you, Dave.
Dave Reeder
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. Our second quarter results exceeded the high end of the financial range we provided in our last quarterly update. Second quarter revenue was approximately $1.993 billion, an increase of 23% year-over-year. We shipped approximately 630,300 millimeter equivalent wafers in the quarter, a 6% increase from the year prior period. Average selling price, ASP, per wafer increased approximately 16% year-over-year, driven by ramping long term customer agreements with better pricing, a constructive transactional pricing environment, as well as continued improvement in product mix. Wafer revenue from our end markets accounted for approximately 92% of total revenue. Non-wafer revenue, which includes revenue from reticles, nonrecurring engineering, expedite fees and other items, accounted for approximately 8% of total revenue for the second quarter, consistent with our expectations.
Let me now provide an update on our revenue by end market. Smart Mobile devices represented approximately 49% of second quarter revenue, growing 14% year-over-year. Growth was driven by higher ASPs and better mix as we continue to increase our silicon content in the premium-tier handset market. In the RF front end, which is the largest segment of our mobile business, growth was relatively flat year-over-year. However, our industry leading 300-millimeter RF SOI platform, that is widely used in the premium-tier handset market, continues to increase as a percentage of the total front end mix, which is accretive to our business. For 2022, we are on track to grow our premium tier 5G revenue by more than 35% year-over-year, offsetting the modest decline we see in low end handsets. Additionally, in this end market, we are growing our silicon content, mostly due to gains in RF transceivers, PEMEX, audio ICs and image sensor processors. Growth in these submarkets are all trends we expect to continue throughout the year.
Revenue for the home and industrial IoT market grew 72% year-over-year, representing 17% of total revenue. Strong year-over-year growth in this end market was driven by wafer volume growth of almost 40%, better ASPs and improved mix. GF strength and feature rich technologies that are focused on superior wireless connectivity performance at the lowest possible power consumption has enabled our growth in the home and industrial IoT end market. Within this end market, our wireless connectivity solutions saw a significant growth due to the accelerated adoption of our 22FDX technology for WiFi 6 applications. We are also seeing strong traction for our IoT microcontrollers that feature embedded nonvolatile memory for a number of smart card applications, such as digital payments, access control and electronic IDs, driven by features such as connectivity speed, security and a growing touchless transaction environment. Additionally, growth in our IoT end market is also being driven by our differentiated power and analog technologies for applications such as factory and building automation as well as test, measurement and security. We are on track for home and industrial IoT to be the fastest growing market for GF in 2022.
Touching next on automotive. Revenue in this market was approximately 4% of our total second quarter revenue and grew approximately 34% year-over-year, driven by the ramp of new products in ADAS, safety and infotainment. As we have previously indicated, our growth in this market will be lumpy as we are constrained by how quickly we can build capacity. As capacity comes online, we will be ramping new products enabling automotive, electrification and safety. As a result, our automotive business is on track to grow more than 25% in the second half of the year versus the first half of the year. Next, our communications, infrastructure and data center end market comprised approximately 17% of second quarter revenue and grew approximately 50% year-over-year. Growth was driven by a combination of higher shipments, higher ASPs and better mix. Our strongest year-over-year growth is within the data center submarket. Our customers are continuing to grow end market share in this segment, and GF is contributing by providing critical connectivity and IoT components. We also grew revenue modestly in all of our other submarkets, including optical networking and wired wireless infrastructure. Next, and as expected, our compute end market declined year-over-year and comprised approximately 5% of total second quarter revenue. We expect this end market to be less than 5% of our total 2022 revenue. After a trough in Q1, we are now seeing a modest uplift in revenues following the finalization of a design with a major PC customer.
Moving to gross profit. For the second quarter, we delivered adjusted gross profit of $559 million, which translates into approximately 28% adjusted gross margin. The 12% increase year-over-year was driven by better fixed cost absorption, higher ASPs and improved mix. Approximately 80% of this improvement was attributable to ASP and mix with the remaining 20% attributable to volume and fixed cost absorption. Operating expenses for the second quarter were better than expected and represented approximately 10% of total revenue. R&D for the quarter was down sequentially at approximately $112 million, while SG&A came in at $97 million. Total operating expenses were $209 million, excluding $32 million of stock based compensation. Q2 total operating expenses decreased approximately $17 million from a year ago, largely due to lower start-up costs associated with fab expansion projects as well as lower headcount costs.
GF delivered operating profit of approximately $350 million for the quarter, which translates into an approximately 18% adjusted operating margin, roughly 15 percentage points better than the year ago period and $45 million higher than the high end of our guidance range. Second quarter net interest expense was approximately $19 million and we incurred a tax expense of approximately $30 million in the quarter. We delivered second quarter adjusted net income of approximately $317 million, an increase of approximately $350 million from the year ago period. As a result, we reported adjusted earnings of $0.58 per share for the second quarter. We delivered record second quarter adjusted EBITDA of approximately $784 million. Adjusted EBITDA grew $318 million year-over-year on $373 million of incremental revenue growth, representing approximately 85% fall through.
Let me now provide some key balance sheet and cash flow metrics. Cash flow from operations for the second quarter was $609 million. Gross CapEx for the quarter was $812 million or roughly 40% of revenue. At the end of the second quarter, our combined total of cash, cash equivalents and marketable securities stood at approximately $3.3 billion, an increase of roughly $2. 5 billion from the previous year. Before I transition to Q3 guidance, I briefly wanted to update you on the current inflationary environment and its impact on our business. Last quarter, we provided you our view on inflation and the headwinds we are facing in our business, especially with respect to materials, energy and labor costs. While we have experienced a slight uptick in cost for materials and energy in Q2, we continue to estimate the impact of these inflationary costs to our full year results to be less than 2% of revenue.
Next, let me provide you with our outlook for the third quarter. We expect total GF revenue to be between $2.035 billion and $2.065 billion. Of this, we expect non-wafer revenue to be approximately 11% to 12% of total revenue. An increase in design wins and the corresponding customer tape-outs should result in sequential third quarter reticle revenue growth of more than 25%. We expect adjusted gross profit to be between $580 million and $609 million. We expect adjusted operating profit to be between $347 million and $381 million. Excluding share based compensation for the third quarter, we expect total OpEx to be between $228 million and $233 million. We expect a sequential increase in operating expenses to primarily be driven by higher IT and other administrative costs. At the midpoint of our third quarter guidance, we expect share based compensation to be approximately $42 million, of which roughly $21 million is related to cost of goods sold and approximately $21 million related to OpEx. We expect net interest expense for the quarter to be approximately $15 million and tax and other expenses to be roughly $24 million. We expect adjusted net income to be between $324 million and $356 million. And we expect D&A for the quarter to be about $405 million, of which 90% is related to cost of goods sold.
On a fully diluted basis of approximately 551 million shares, we expect adjusted earnings per share for the third quarter to be between $0.59 and $0.65. We expect adjusted EBITDA to be between $775 million and $813 million. As we mentioned on our earnings call last quarter, for the full year 2022, we expect total gross CapEx to be less than $4 billion, impacted by the well known delays in capital equipment. Despite the slight delay, we are on track to meet all of our customer commitments for the year. In summary, strong operational execution enabled us to deliver second quarter results that were significantly better than the high end of our guidance range. Our demand visibility remains strong, supported by our long term customer agreements. And we expect to deliver progressively better financials quarter-to-quarter throughout the year as we continue to methodically execute our plan.
With that, let’s open the call for Q&A. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Harlan Sur of JP Morgan.
Harlan Sur
Congratulations on the team’s support and helping to get the CHIPS bill over the finish line and also the strong quarterly execution. You guys came into this year, as you mentioned, with demand about 25% higher than your ability to supply. I think last earnings call, you guys talked about a 1.5 times book-to-bill ratio. Clearly, as you mentioned, the demand environment has weakened, especially in the areas that are encompassed in your smart mobile and your compute segment, which is about half of your revenues. But on the flip side, you guys do have fungibility in parts of technology and capacity by geography. So there is some slack for your business to take a hit on demand. So with demand looking like it’s normalizing a bit lower, trending about 10% above supply, maybe you can just help us think about how much demand has to drop before you have to modulate your utilizations or your forward capacity expansion plans.
Dave Reeder
Harlan, exciting day here in New York City and exciting day in Washington where Tom is, he certainly wishes he could be with us today. But given the choice of being on his phone and being in the White House for the signing of the CHIPS bill, I think he chose wisely. I look forward to seeing you tomorrow at Capital Markets Day. With respect to demand, we’re still [oversupply], meaning the demand outstrips our supply, and that’s true for 2022 and 2023 as well. We’ll obviously cover that in more detail tomorrow. But given that it’s obvious already, our order book for 2022 looks good and it’s largely complete. So our revenue ability remains solid. And to the extent that we see customers that want to rebalance, we’re usually trading up a rebalance towards richer, more accretive mix for GlobalFoundries. So demand is still strong. Did you have a follow-up, Harlan?
Harlan Sur
Maybe as a reflection of some of the weaker segments, and I know you have fungibility. We know that one of your RF customers has been impacted by the weak China domestic smartphone market. I think this customer actually took a charge against their COGS in the June quarter. And most of that charge was due to wafer shipments that were going to fall below the minimum threshold, the wafers under the long term agreements with you. So the good news is that the take-or-pay is clearly working for you. This customer is sole sourced with you. They’ve made prepayments. So they clearly see the differentiation that you bring to their products. Now they’re in renegotiations on their LTA with you. And if we assume that the demand environment will probably continue to weaken maybe, and you maybe have more customers that have to renegotiate the terms of their LTAs, given the clear differentiation you bring to your customers. Is it fair to assume that pricing has not been negotiated, but it’s primarily around prepayments, duration or volume of the LTAs that is being renegotiated?
Dave Reeder
You get it right, Harlan. The pricing environment is still very constructive. Given inflation and also the shortages that we see with respect to [Technical Difficulty] capacity, I don’t really expect that pricing environment to change in their future. And then finally, I think the piece I would add is that if you were to look at a 5% drop in utilization, we’ve mentioned before that if you have a 5% drop in utilization then you typically see just a couple of points, call it, 2-points or so impact to gross margin. But if you took a [0.5] point decrease in ASP, that’s 5 points that flows all the way through. So I think given all things that I just mentioned, the strong end market demand, very instructive price environment, still inflation that continues to hit the global economy, it’s difficult to see an environment in the near future where pricing becomes a concern.
Operator
Our next question comes from Vivek Arya of Bank of America.
Vivek Arya
Dave, for my first one, just a clarification on the Q3 outlook. If I exclude the increase in the non-wafer revenue, it suggest wafer sales could be kind of flattish to somewhat down sequentially. I imagine that’s probably because of the smartphone market. But I just wanted a clarification on how you were thinking about the interplay of wafer shipments and ASPs in Q3. And if you could maybe give us a little bit of color on how you are thinking about it extending into Q4 versus what you thought for the year originally.
Dave Reeder
As you know, we’re currently constrained from a [supply] perspective, but we are expecting wafers to increase sequentially from Q2 to Q3. So no change in our plans there like we had talked about. Our wafer shipments last year were about 2.4 million wafers. Those wafers grow to about 2.6 million wafers this year and then about 2.8 million wafers in 2023. And so all those plans remain on track. We expect to grow water sequentially from Q2 to Q3 and actually from Q3 to Q4 for that matter and well into 2023. So from that perspective, I feel quite good about the trajectory there. Pricing, we don’t talk a lot in detail about pricing. If you were to look at how we performed this quarter, 23% year-over-year growth, Q2 ’22 to Q2 ’21. Of that 23%, 6% was volume growth and about 16% was ASP. As we look from Q2 to Q3 and we look year-over-year from Q3 ’22] to Q3 ’22 , we expect those some trends to continue. Did you have a follow-up, Vivek?
Vivek Arya
I know it’s probably — you’ll talk more about expectations for ’23 and the longer term tomorrow at the Capital Markets Day. But as you look at the capacity announcements that you and several of your peers have been making. Do you think, Dave, that from an industry perspective, pricing will be a headwind or a tailwind in calendar ’23?
Dave Reeder
Let me break that in two parts. Look, at GlobalFoundries, we don’t put capacity on for ourselves. When we add capacity, we are adding capacity in partnership with our customers. So we have customers that are signed LTAs with us. $27 billion now is, as we mentioned, more than 36 or 36 customers. Roughly $3.6 billion of customer funding that’s actually come to GF to be able to expand that capacity. So the capacity that we’re putting on, we’re putting on at the [test] of our customers and in partnership with our customers and as you [Technical Difficulty] more recently with [governments]. In terms of are we concerned about pricing come into play as more capacity is added, about two thirds of our shipments are actually single sourced wafer shipments and about 90% of our design wins are actually single sourced design wins. And so we’re not clearly non-generic capacity for the market. We are putting on capacity in partnership with our customers. So we feel quite good about that. We feel like the pricing environment remains quite constructive. We see that as being constructive, not only today but also 2023.
Operator
Our next question comes from the line of Ross Seymore of Deutsche Bank.
Ross Seymore
So I want to go back to the LTA side of things. Obviously, you guys are doing a good job of enforcing them. But as we start to see more companies write down your customers, or any [fabless] companies write down their own side of that equation, I just want to have you walk us through the mechanics of how you handle the slowdown in demand. I get that you’re single sourced but at some point, end demand is end demand. And if they don’t need the volume, you can force them to take it, but they don’t need that inventory either. And I would imagine that would hurt the relationship. So just talk a little bit about how the negotiations go when the demand weakens, how you adjust to the various levers, whether it’s units, pricing, et cetera. So I think that’s what investors really want to get confidence in as they look forward to a potentially slowing macroeconomic environment.
Dave Reeder
I think the first thing that we do, Ross, when we have a customer — I mean, as you know, we’re in market and very customer focused here at GF. And so the first thing that we do is we recognize that the LTA creates a first time work for us and the customer to have a frank discussion. And so because we have more demand than we actually have supply today, we’ve been able to have those discussions with customers that want to rebalance their commitments a little bit. We’ve been able to negotiate with those customers, be able — by and large, to be able to satisfy their reductions and some of their demand and then replace it with business that’s actually more accretive to us. And so to the extent that we can do that, we don’t charge our customers for capacity that was underutilized if we’re able to replace it with demand from another customer. So having a broad-based, diverse base of business in automotive and IoT and data center comps structure and data center, that’s really enabled us to be able to accommodate some of these rebalancings that you see in the marketplace. Practically, how do we handle it? We sit down with our customers. We talk about what their end-market demand look like. We talk about the duration of their LTAs, the extensions of LTAs. We talk about rebalancing of their portfolio, so if they have some pockets of demand that are doing better and they have some pocket that are weaker being able to rebalance those pockets to meet their end-market demand. And so really, it’s a framework for us to sit down and have a negotiation…
Sukhi Nagesh
And new design wins…
Dave Reeder
And new design wins as well for their next generation of business, that’s another element that Sukhi just mentioned. Did you have a follow-up, Ross?
Ross Seymore
I just want to ask about the gross margin side of things and more specifically, some of the units versus — the wafer units versus the ASP side. I know you guys don’t guide overtly by those metrics each quarter. But it seems like if the units are going up in your third quarter, I mean the ASPs are actually going to go down a little bit at the midpoint. I think that’s the first time your implied ASPs will have dropped sequentially since you’ve been public. So can you just walk us through maybe the third quarter and then the second half, what would be some of the puts and takes on that? Is that just an end market dynamic? Is it a nonwafer revenue dynamic? Any of the moving parts there would be helpful.
Dave Reeder
Well, first, the correlation between ASPs and gross margins don’t always hold true in all instance. So sometimes you can have a different product that actually has a higher gross margin even if it has a lower ASP. So from that perspective, it’s really [product] by product related, and it’s probably more directly correlated actually to the amount of features from GlobalFoundries that is actually included in the product with respect to the health of the gross margin. Sequentially, from Q2 to Q3, I’m looking at pricing, and I would say ASP per wafer looks pretty flat. I mean it’s a flattish profile. We’ve had a little bit more ramp in volume from Q2, Q3 than we had from Q1 to Q2. But I would say, pricing remains relatively flat from quarter to [quarter], and I expect to actually increase as we progress throughout the year. So that implies fourth quarter increase. So I think pricing, from my perspective, again, kind of a growth price, if you will, ASP for wafer, relative flat volumes grow, and we expect profitability from a gross margin perspective to continue to grow. So all in all, the progression from Q2 to Q3 looks pretty good from where I sit.
Operator
[Operator Instructions] Our next question comes from the line of Mehdi Hosseini of SIG.
Mehdi Hosseini
I have a couple of — and I apologize, I joined the call late. But did you discuss as to what drove the COGS in the June quarter down on a sequential basis?
Dave Reeder
We didn’t discuss it in detail. I mean — but a lot of that’s due to product mix. And then, of course, we get better absorption. So as we do ship more volume, especially on a year-over-year basis, what you do start to see is fixed cost option that kicks in, in a pretty meaningful way. And so from that perspective, that’s something that we’ve been talking about for a long time and we continue to experience that in the second quarter. And we expect that to continue, in fact, all the way through 2023 as we continue to ramp our volumes from 2.4 million wafers last year to 2.6 million wafers this year to roughly 2.8 million wafers in 2023. Did you have a follow-up?
Mehdi Hosseini
Yes, and I’m not going to ask you about LTA. It’s actually on OpEx, and I don’t want to take anything from your tomorrow’s Analyst Day. But should we — just for a purpose of modeling, should we assume the OpEx into Q4 December would be kind of a [2.4-ish] flattish on a Q-over-Q basis?
Dave Reeder
We tend to guide one quarter at a time. But what we’ve talked about for the entire year is that OpEx in total, roughly around the 12% range, 12% of revenue, roughly equally split between R&D and SG&A. So that should give you some color on how we think about the whole year. And I don’t think Q3 or Q4 will be tremendously different than that.
Operator
Our next question comes from the line of Krish Sankar of Cowen.
Unidentified Analyst
This is Steven calling on behalf of Krish. I have a couple of questions. First, I just wanted to drill down a little bit more on the customers that are currently rebalancing inventories. I guess, from your perspective, any estimates on the duration of the rebalancing process? Is it like a one or two quarter and perhaps is it more extended into the duration?
Dave Reeder
I think what we’re seeing, and I’m speaking broadly here because we’re really not seeing a lot of it, but what we are seeing is modest rebalancing. I would probably characterize it as 10-ish percent, maybe 15-ish percent, but in that type of ballpark. It tends to be a way for markets that are heavy consumer and that tend to be just kind of lower in nature. And the business that it’s being replaced with, it’s being replaced with automotive business, it’s being replaced with business associated with data center infrastructure and comms and then, of course, home and industrial IoT. Those businesses continue to perform quite well as you saw in our second quarter and we expect that to continue throughout the year. Did you have a follow-up?
Unidentified Analyst
The [follow up] I had was for Q3 revenues, specifically the reference around higher reticle revenues within your non-wafer business? Is there any color on the concentration of customers or maybe the end market where the higher reticle activity is coming from, and when would production revenues be ramping for those related reticles?
Dave Reeder
Look, from a deisgn win perspective, you really — the design wins in LTAs, you’re seeing those both progressed pretty nicely. So to the extent it’s an LTA associated with new products, then obviously, you need the reticles and the non-wafer revenue to grow to be able to satisfy those LTAs and then, of course, the corresponding design wins. So those are all kind of move in tandem. And so it’s no surprise [Technical Difficulty] that you’re going to get these quarters where you have some heavy development activity to then be able to fuel that future revenue growth. Specific areas that are growing, we typically don’t talk too much about that quarter-to-quarter. There is a segment in [Technical Difficulty] [Aerospace] and defense, that’s an area that is specifically growing in a meaningful way in third quarter, particularly for reticle revenue. So that would be one area that’s driving that increase sequentially from Q2 to Q3.
Operator
Our next question comes from Tristan Gerra of Baird.
Unidentified Analyst
This is Tyler on for Tristan. Can you describe the importance of the FD SOI process, notably in EVs? And maybe as it relates to that, any additional color you can provide on the recently announced European investment and partnership with ST Micro?
Dave Reeder
So from an FD-SOI perspective, so on SOI in general, we believe that we’re actually the leader in the SOI space. So whether you’re referring to RF SOI or fully depleted SOI technologies, we believe that we are the leader and delivering those analogies to market and certainly the foundry leader for those technologies. The importance of fully depleted SOI are manyfold, but I’ll just — I’ll try to touch upon the big ones. For us, we manufacture our FDS technology on 22 nanometer. So you have very good digital compute power. So your digital computation’s quite big. And then you also have the best-in-class power management. So you have best-in-class power management with very good digital compute. And then you layer on with that the connectivity capability, both in millimeter wave and in some of the RF characteristics. And you really have a platform that’s ideally suited for anything that need power management or advanced connectivity. And those are the markets that actually we’re winning in with regards to our FDX or as you said, our fully depleted SOI technologies. So that announcement that we made in France, seems like a long time ago given how busy second quarter was for us and how good second quarter was for us, but it was only a couple of weeks ago. That announcement was really about growing our capacity to be able to service the design wins and the LTAs that we have on our FDX technologies, and those specifically related to IOT devices, connectivity devices and more and more frequently automotive devices. So those are all areas related to power management, connectivity and then some millimeter wave in automated driver [Technical Difficulty] and other things in the automotive segment that really benefit from that technology.
Unidentified Analyst
For my follow-up, without jumping the gun on your Capital Markets Day tomorrow. How should we think about the impact of the CHIPS Act on your CapEx into 2023 and beyond?
Dave Reeder
Let me hit that question a bit more broadly, and then I’ll come back to it. But let me be a bit more broad on it. GlobalFoundries is a trusted company. We are engaged in Singapore with the Economic Development Board of Singaporean government. So we’re engaged with them with our customers to grow capacity in Singapore. We’ve been engaged with Germany for a decade and the EU to grow our capacity in Germany, for over a decade engaged with [Technical Difficulty] there. And we continue to expand our capacity in Germany. In fact, we’re increasing it from [300k wafers] per year to 850k wafers per year. And then of course, you mentioned France. In France, we’re engaged with the French government now, trusted by the French government, to engage with them as an extension of our Dresden facility to increase our capacity ultimately from zero to about [300k] wafers per year. And then, of course, here in the US, we’re a trusted foundry for the US government. And Tom’s in Washington today signing the CHIPS bill.
And so we’re a trusted company, both by our customers and by governments. And by signing the CHIPS bill, what that enables us to is in partnership with our customers, we will look at our investments and opportunities to grow also, that’s within the four walls today, expand our tooling [Technical Difficulty] and we’ve also done a lot of project work. So that ultimately, when our customers agree with their commitments, when the governments worked out the details for how the CHIPS Act will be deployed and, of course, GlobalFoundries will be there with a [Technical Difficulty] ready project, when all three of those criteria are met, then we’ll sit down and we’ll figure out the next steps for investment here. Customers are ready with their commitments. When the governments worked out the details for how the CHIPS Act will be deployed and of course GlobalFoundries will be there with [Technical Difficulty] ready project, when all three of those criteria are met then we’ll sit down and we’ll figure out the next steps for investment here in the US for new greenfield capacity.
Operator
Our next question comes from Rajvindra Gill of Needham.
Rajvindra Gill
Just a follow-up on the LTSAs. I’m just trying to get a sense of, again, how you’ll kind of navigate through that potential slowdown, particularly in the smartphone market. There’s been many forecasts that have been revised down for the overall smartphone market, particularly 5G smartphones, anywhere between 150 million to 200 million units this year have been revised down, that’s going to affect the forecast for 2023. You obviously generate a large percentage of revenue from the mobile phone market through a variety of customers. So I’m curious, I know you haven’t seen it yet. But is there any indication that a lot of your smartphone RF front end module customers, as they look to the overall forecast next year starting to rebalance down their volume.
Dave Reeder
Let me break that [part] in a couple of sections, and I’ll share some high level numbers from what we see in the market and how we feel it [in] handsets. We think that quarter-to-quarter [Technical Difficulty] forecast look at total global handsets are going to be down something in the magnitude of about 200 million units. But if you look at what’s happening under the covers. So total handsets, the 5G, 4G, 3G, 2G, all the handsets down about 200 million units, that’s the forecast from Q1 going to the forecast from Q2. But if you actually look at the 5G segment of that forecast, units actually went up. In fact, units went up about 5%, the forecast for 5G handsets went up 5% from Q1, Q2. So you have to look at the market in aggregate and then you have to look at the market in detail and specificity. And when you see the 5G portion of the market, not only doing well but expected to do better in the second half of the year than in the first half. What that implies for GF is that we have higher content in the front end module of 5G handsets. We have higher content. It’s more accretive for us as a business. And so what we’re seeing specifically in front end module is that our growth in 5G is more than offsetting the decline that we see in the medium and lower end handsets.
And of course, you look around the front end module and GlobalFoundries is winning sockets. So we’re winning sockets in power management, we’re winning sockets and connectivity and we’re also winning sockets and in audio as well as payment devices. And so you add all those things together, and that’s the type of growth that you get is 14% year-over-year in the smart mobile market, when the rest of the market looks flat to down. It’s also important that you’re engaged with as well. I would say that there are OEMs in end markets that are doing better than others. So mixing up with 5G, many more sockets are taking share and then engage with the right OEMs that are doing reasonably well in this market, all of that leads to the growth that you saw in the second quarter.
Rajvindra Gill
Just my follow-up. You talked about, in general, the pricing environment, you’re still constructive on it. And it’s really mainly a function of the inflationary environment and the supply shortage. Maybe you could elaborate a little bit further. When you talk about the inflationary environment on the cost side, could you talk about the cost of the equipment or the raw materials that’s leading you to continue to kind of pass on those cost increases? And then any sense in terms of the supply shortage for your raw materials? Is there any indication that in some areas, that’s easing up or in other areas that you’re still constrained?
Dave Reeder
So let me kind of take those in order here. With respect to inflation, look, our expectation is to pass along inflationary costs. And when I think about inflation, I think about materials, I think about [labor] and I think about energy, those are kind of the three big drivers for GlobalFoundries from an inflationary environment perspective. So from a materials perspective, when we were signing our LTAs, we were actually in market securing our long term supply. And so from that perspective, we feel reasonably well hedged on the material side, so that we have the materials at the right prices to then be able to satisfy the LTAs, which ultimately will deliver profitability that we’ve committed to the market. So we feel pretty good about materials. But they are tight, materials are tight, the environment is tight. There’s not a lot of available capacity in the market. So the materials environment is tight.
From a labor perspective, we continue to execute very, very well on labor. We have some variable infrastructures in place, such that we outperform like we did in Q1, we did in Q2. We expect to do again in Q3, that our employees get to participate in that. And so that variable labor element for us is quite effective in terms of helping us from an inflationary perspective. And then from an energy perspective, we’ve got some hedges and some forward buys in place to be able to mitigate some of the increases that we’ve seen in energy around the world. And then, of course, finally, from a pricing perspective, in April, we actually passed along some energy prices to many of our customers. We have energy surcharges that went out in the market in the early April time period in Q2, that we think of it in terms of kind of mid single digit price increases from a surcharge perspective. So materials, labor, energy and then, of course, pricing along all those elements, we feel like we’ve addressed reasonably well for 2022.
Operator
Our next question comes from Chris Danely of Citi.
Chris Danely
Just a follow-up on one of the earlier questions. So Dave, just to confirm, you guys don’t expect any material impact to result from the CHIPS Act? And then while you’re answering, do you guys expect to see your taxes go higher from this raise taxes on everything in every one act that looks like it’s about to pass as well, that takes the minimum tax to 15%?
Dave Reeder
With respect to the CHIPS Act, the kind of two elements to the chipset relative to really our P&L. One is the investment tax credit and that’s a 25% investment tax credit for equipment that is purchased and then — in the US and installed and delivers incremental capacity. We’ll continue to look at the details of that as the CHIPS bill get signed and we get more details. But it looks like that ITC is pretty straight forward. We do have investments going in to increase capacity in [Malta]. We also have some to increase capacity in our Burlington facility. We expect to be able to use that investment tax credit to be able to accelerate some of those investments. And as we work through those details, we’ll update you in subsequent quarters to the benefit to our P&L, but our understanding as it sits today is that, that would essentially create a net CapEx effect. So it would be a one-for-one offset to depreciation and amortization for new equipment that we purchased here in the US. So that’s the investment tax credit. Second element of the CHIPS Act is really associated with doing more kind of greenfield or brick-and-mortar investment, I should say. And that is — those details need to be worked out in some detail and specificity by the commerce department, but we expect those details to be worked out over the next, call it, six to ine months. And as those details become available, we’ll update the market. Our gross CapEx plans have not changed. To the extent that we’ll get additional benefit from either the ITC or the second element of the CHIPS Act related to new investments in greenfield capacity, we’ll update market accordingly. Did you have a follow-up?
Chris Danely
One more clarification. So given all of the, I guess, the weakness that you guys are seeing in the low end, it has not changed your 2023 outlook versus, let’s call it, three or six months ago in terms of pricing or revenue or LTAs or anything like that?
Dave Reeder
It has been, and let me tell you why. We had significantly more demand in ’22 and in ’23 than we could satisfy. And so when we look at the current environment today, yes, do we see some rebalancing in different end markets? Yes, we do like others in the market, again, specifically related to consumer [Technical Difficulty] specifically [low end] consumer. And then you’re seeing that manifest itself in handsets as well. As a portion of that market, that kind of low to medium and handset is under pressure. But that said, we had more demand than we could satisfy. Our capacity equation hasn’t changed. We’re expecting to deliver about 2.6 million wafers this year, 300 millimeter equivalent, about 2.8 million wafers next year. And so what we are able to do is we are able to take some of that demand, look at our over subscription, and for demand that we see rebalancing, choose the demand that’s most accretive to GF. And so that’s created an opportunity for us to be able to take some of that unsatisfied demand in end markets that we really like and be able to bring that into a production schedule. And you’re seeing the benefits of that in our P&L results. We’ve been able to deliver a bit more accretion than we expected. We’re a bit ahead of plan that we laid out at IPO. We’re executing well and that rebalancing is actually benefiting us right now.
Operator
Our next question comes from the line of Randy Abrams of Credit Suisse.
Randy Abrams
I wanted to follow up on the CapEx. You mentioned a bit of the timing delay for equipment. Could you then give the view for 2023 with the incremental, how it’s looking? And then for Dresden, you reaffirmed the [850k]. If you could give an update on Malta, how that expansion is and now with CHIPS Act, whether that pulls in the Malta expansion?
Dave Reeder
Equipment, the [WFE] vendors continue to be challenged. And so I think maybe it was two quarters ago or maybe a quarter and half ago, we talked about equipment being somewhere between, call it, two to four weeks [late]. I think if you look at equipment day, you’re probably seeing more like four to six weeks late, and it may even be as much as kind of six to eight weeks late on equipment deliveries. And so equipment continues to be very, very tight. They are short components [with] many others in the market, which is somewhat ironic given that we need more equipment to be able to produce more chips that are in shortage situations. But that environment remains pretty challenging. We appropriately kind of hedged our commitments. And so from that perspective, we still feel very good about the commitments that we’ve made but we are experiencing delays in receiving that equipment.
In terms of the impact, originally, we were hoping to spend CapEx this year of somewhere in, call it, the $4.25 billion range. We’re now indicating that we’re going to spend under $4 billion and probably a little closer to $3.5 billion than $4 billion. And so that’s the impact of the pushouts that we’re currently seeing, particularly given that we had a very strong fourth quarter from a CapEx perspective. So any slip out from fourth quarter would flow directly into 2023. I think push in 2023, [continues], so I think 2023, when we were originally saying something around $3 billion-ish, I think we have slippage from ’22 into ’23 and then correspondingly have slippage from ’23 into ’24. So I think it’s a bit of a snowplow effect with regards to WFE and CapEx spend. With respect to the expansion in Dresden and Malta, the German team continues to do very well and bring in new equipment as it arrives, getting on floor, getting it installed, getting it qualified and getting it produced in units. So hats off to that team in Dresden, Germany, under the management for leadership at they’re just doing a great job.
And the work that they’re doing there is flowing through to our P&L results and our fixed cost absorption. In fact, I’d say that’s a true statement for all of our manufacturing team. With regards to expansion in Malta, we are slowly increasing that [alpha] in Malta. We are waiting on equipment, we actually didn’t expect that equipment to arrive and so call it the second half of 2023. Obviously, if the delays continue then maybe instead of second half of ‘23 that get pushed more towards the latter half of ‘23 or perhaps even into 2024. But we have ordered that equipment, we are waiting for it to arrive and when it does, he Malta team will work diligently to get it on the floor and do some units.
Randy Abrams
And a follow-up on the East Fishkill since that’s coming up. Could you remind us the impact as you sell the fab into early next year? And given the tightness, just one other question about timing. Would you have the annual maintenance or would we continue to ride through it, expecting to stay full? So just those time lines as we get towards end of the year.
Dave Reeder
So if you recall, we signed that agreement a couple of years ago. We’ve — ON Semi has been ramping up. We’ve been slowly kind of ramping out of that facility. So East Fishkill is on track to transact at the end of this year. So 12/31 of this year, that facility will transact. We’ll then enter into and in fact, we’ve already entered into an agreement with ON Semi, such that they’ll continue to produce some wafers for us and kind of a make [Technical Difficulty] relationship over the course of ’23 and ’24, we’ll continue to ramp slowly out of that facility in an orderly way. They’ll continue to ramp up in an orderly way. But at the end of this year that facility fully transacts and moves over to ON Semi for full ownership. And at that point in time, we’re simply buying wafers from an order desk type perspective from ON Semi, fully qualified wafers that are manufactured there today. In terms of impact, we’re estimating that we’ll get roughly a $250 million impact benefit on a year-over-year basis, 23 versus 22 by transacting that facility. It will lower our cost of goods by that amount, so on an ongoing basis.
Operator
Thank you. At this time, I’d like to turn the call back over to Sukhi Nagesh for closing remarks. Sir?
Sukhi Nagesh
Thank you. And thank you all for [joining]. We look forward to seeing many of you tomorrow at our Capital Markets Day. Have a nice day.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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