Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue for the second quarter increased sequentially to $1.632 billion, exceeding the midpoint of guidance.
- Non-IFRS gross margin of 25.2% in the quarter, surpassing the midpoint of guidance.
- Non-IFRS diluted earnings per share of $0.38, exceeding the high end of guidance.
- Strong cash flow generation with over $500 million of non-IFRS adjusted free cash flow in the first half of the year.
- Completion of the acquisition of Tagore Technology's gallium nitride power business, enhancing future growth opportunities.
Negative Points
- Year-over-year revenue decreased by 12%, primarily due to lower shipments and utilization levels.
- Utilization levels remained in the low to mid-70s, impacting overall profitability.
- Revenue from the home and industrial IoT markets decreased by 28% year-over-year due to elevated channel inventories.
- Gross margin guidance for the third quarter reflects continued low utilization levels.
- Ongoing inventory corrections in key markets like IoT and communications infrastructure are expected to persist through 2024.
Q & A Highlights
Q: Tom, it sounds like you're of the view that the industry is starting to emerge from the inventory correction. Can you provide any color on your conversations with customers regarding their shipping and demand consumption?
A: Thomas Caulfield, CEO: We're at the bottom of the cycle, but the real question is when we will see meaningful growth. Different end markets are at different stages. Automotive is a bright spot for us, and smart mobile devices are showing low single-digit growth. The catalyst for growth could be AI-enabled devices driving a refresh cycle. Macro-economic conditions in China and the U.S. also play a significant role.
Q: John, the free cash flow is well above net income. Can you give us a framework for thinking about depreciation and CapEx over the medium term?
A: John Hollister, CFO: The company has invested heavily in capacity over the past years, allowing us to operate without heavy CapEx. We generated more than $500 million of free cash flow in the first half and are on track to meet our goal of three times 2023 free cash flow performance. We expect these trends to persist into 2025.
Q: Could you give us an idea of what you're seeing in the end markets for the third quarter and potentially the fourth quarter?
A: John Hollister, CFO: We expect sequential revenue growth each quarter in 2024. Smart mobile devices are recovering, and our communications infrastructure and data center end market has stabilized. IoT is still working off high inventory levels, and automotive remains a key growth segment.
Q: How should we think about the LTSA resolution benefits and the relationship between revenue and gross margin?
A: John Hollister, CFO: We realized about $66 million in underutilization revenue in Q2 and expect this to tick down to roughly half in the second half of the year. As utilization comes up, we should see revenue and gross profit margins moving in lockstep. Every five points of factory utilization drives about 200 basis points of variance in gross profit margin.
Q: Is the right framework to think about lower customer adjustments impacting gross margins in the quarter, or is there a mix impact as well?
A: John Hollister, CFO: It's primarily due to continued utilization in the low to mid-70s and lower customer adjustments. We expect modest improvement in gross profit margin in Q4 as utilization begins to increase.
Q: What are your aspirations with the acquisition of Tagore Technology's gallium nitride power business?
A: Niels Anderskouv, Chief Business Officer: The acquisition focuses on the power segment of GaN, enabling higher levels of integration for more reliable and compact devices. This integrated device strategy is more differentiated and offers higher margins compared to traditional devices.
Q: How are customer conversations regarding future long-term agreements (LTAs)?
A: Thomas Caulfield, CEO: LTAs are still important for customers seeking certainty and durability. While we may not require LTAs for all business, they remain crucial for long product cycles, especially in automotive and industrial markets. We continue to have about $18 billion of lifetime revenue attached to existing LTAs.
Q: Can you provide some color on pricing trends and how they impact your business?
A: Thomas Caulfield, CEO: We are seeing a stable pricing environment. Our ASPs can move around in the low single digits due to mix, but this does not necessarily reflect profitability. Utilization is the biggest factor affecting our gross margins.
Q: How does your balance sheet inventory figure into the path of improving utilization and gross margins?
A: John Hollister, CFO: We are preparing for a market recovery and have taken opportunistic steps in raw materials to improve performance. We are managing inventory to align with demand signals and our free cash flow objectives.
Q: Can you contrast your optimism in automotive growth with the broader industry trends?
A: Thomas Caulfield, CEO: Our growth in automotive is driven by new technology platforms and design wins, not just increased car sales. We are ramping new applications and replacing older devices, which is unique to GF. We expect automotive to continue being a growth engine for us.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
