GLOBALFOUNDRIES Inc. (GFS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GlobalFoundries, Inc. Second Quarter Fiscal Year 2026 Financial Results. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Eric Chow, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries Second Quarter 2026 Earnings Call. On the call with me today are Tim Breen, CEO; and Sam Franklin, CFO. A short while ago, we released GF Second Quarter 2026 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 made 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 tenants. 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 caption Risk Factors in our annual report on Form 20-F and in any current reports on Form 6-K furnished with the SEC. In terms of upcoming events, we will be participating in a fireside chat at the Goldman Sachs Communacopia and Technology Conference in San Francisco on September 8. We will begin today's call with Tim providing a summary update on the business environment and technologies, followed by Sam, who will provide details on our second quarter results and third quarter guidance. We will then open the call for questions with Tim and Sam. We request that you please limit your questions to 1 with 1 follow-up. I'll now turn the call over to Tim.

Thank you, Eric, and welcome, everyone, to our second quarter 2026 earnings call. GF delivered strong results in the second quarter with revenue and non-IFRS profitability metrics at or above the high end of our guidance ranges. The team continued its rigorous execution ramping critical technology corridors where we see accelerating customer demand and the opportunity to create and capture value. . In particular, our comms infrastructure and data center end market delivered over 60% year-over-year growth in Q2, driven by continued demand for optical networking applications across our silicon photonics and silicon germanium platforms. This marked one of the fastest quarters of year-over-year revenue growth for an end market in our company history. We believe our value proposition has never been more in demand. Our differentiated technology portfolio and resilient global manufacturing footprint continue to strengthen our position with customers. We are seeing meaningful momentum as we execute our strategy and drive towards the long-term targets we shared at this year's Investor Day. Let me now update you on 3 key developments in the quarter that are accelerating our strategic path. One, Quantum Technology Solutions; two, optical networking and power opportunities in the AI data center; and three, IP, software and custom silicon. Starting with Quantum. A paradigm shift that will define the next chapter of high-performance computing over the coming decade and beyond. In May, we launched Quantum Technology Solutions, a new dedicated team and set of capabilities within GF that will enable the quantum industry to move from prototypes to high-volume production. Just the CPUs, GPUs and AI ASICs define today's compute paradigm, we believe quantum processor units or QPUs will be an essential part of tomorrow's. Advanced semiconductor manufacturing built securely here in the U.S. will be essential for the scaling of this technology. Establishing the right production capability is now the critical enabler the ability to manufacture and integrate complex quantum devices with consistency, yield and scale. This is precisely where GF wins. Our Quantum strategy is cubit agnostic, meaning our manufacturing platforms are expected to support a broad range of leading modalities, including superconducting, trapped ion, photonic, topological and spin. Our proven platforms like FDX provides a cryogenic CMOS foundation, and we are extending our advanced packaging capabilities into the cryogenic regime to enable the 3D heterogeneous integration that these systems require. As highlighted in our recent announcements, we are working closely with 8 of the world's leading quantum computing players, including partnerships with SI Quantum Quantinuum and Quantum Motion as well as new endorsements from the quantum arms of large hyperscalers. Since launching just 3 months ago, we have already embarked on 4 new customer-specific quantum engagements with accelerating commercial momentum ahead. Advancing our quantum capabilities is anchored by an expected $375 million grant from the U.S. Department of Commerce to accelerate the research development and build-out of quantum manufacturing capacity in the U.S. This critical partnership with the U.S. government underscores why Quantum is not only a business opportunity, but also a national priority. We are only in the early stages of the nascent quantum opportunity. Over the next 1 to 3 years, we expect to generate quantum related revenue largely through engineering engagements with customers reported within our technology services revenue. As customer platforms qualify and move into volume production, we expect quantum related revenue from manufacturing services to ramp towards the end of the decade. Ultimately, our early momentum and customer proof points in this emerging area perfectly encapsulate the outsized value GF provides, a strongly differentiated technology deep customer partnerships and a global secure manufacturing footprint. Let me turn to AI data center, where we continue to build momentum through new customer design wins and increasing engagement across the ecosystem. In the second quarter alone, we secured 7 new optical networking design wins with customers across both pluggable transceiver suppliers as well as major hyperscaler and networking players. -- silicon photonics and silicon germanium each play critical roles in optical networking systems and combined with data center power represents 3 high-quality, long-term secular growth drivers which underscore our conviction in the ability to grow in the data center for years to come. I will walk through an update on each of these. For silicon photonics, let's start with pluggables, which contributes the vast majority of our silicon photonics revenue today. Thanks to our differentiated technology and advanced 300-millimeter photonics manufacturing footprint, we are actively engaged with 4 of the top 5 optical transceiver players. Given our strong capabilities and robust capacity ramp, we now expect our silicon photonics revenue as reported within the comms infrastructure and data center end market to more than double in 2026 compared with the year prior. Beyond just this year, we are progressing well on our multiyear road map to advance the enablement of modules delivering [ 1.6t, 3.2t ] and beyond. High-volume manufacturing of our 200 gig per lane technology is underway. We have already demonstrated 400-gig capability and solutions for even greater bandwidth are in development. In addition to our robust pluggable offerings today, we see significant customer interest in our scale platform, the industry's first OCI MSA compatible solution for near and co-packaged optics. We currently have 7 active engagements with leading companies on our scale platform. and customer feedback on the merits of our technology and manufacturing capabilities has been very positive. We are already delivering tangible results for our customers today, having taped out a scale-related design win in Q2, and we expect to take out another in Q3. Specifically for near package optics, we see NPL as an important application and exciting opportunity ahead of the broader adoption of co-package solutions. Because Neo and co-packaged optics are built on a common photonic IC and because many components of GF scale solution support both near and co-packaged optics. Our customers benefit from the same underlying platform. As a result, we expect GF to benefit from the silicon photonics opportunity regardless of the rate and pace of various form factor adoptions by our customers. As we increase investments into our silicon photonics capabilities, the importance of government partnerships continues to grow. Last week, GF entered into a letter of intent with the U.S. Department of Commerce for a $300 million award to accelerate the development of next-generation silicon photonics technologies in the U.S. The funding will support advanced optical materials, modulated technologies and packaging innovations that will enable next-generation near and co-packaged optics architectures, building directly on GF scale platform. The endorsement from our partners across the industry has reinforced our strategic conviction, including the world's top XPU providers, hyperscalers, AI connectivity leaders and ecosystem partners. We are pleased to take a central role in advancing optical innovation and development in the U.S. and believe this recognition validates the strategic importance of silicon photonics, the excellent relationship we enjoy with our partners and GF leadership in these technologies. Another driver of data center momentum is high-performance silicon germanium, which powers the analog and mixed signal electronics at the heart of optical interconnects for AI and cloud infrastructure. Our differentiated SiGe platform delivers the bandwidth, signal integrity and power efficiency required for increasingly demanding optical networking applications, making it strongly complementary or silicon photonics portfolio. During the quarter, we secured multiple new SGI TIA and driver design wins across networking customers. Demand for SiGe remains strong, and we are oversubscribed throughout 2027. We are actively expanding capacity in our Vivant facility to support this demand. We believe Sig represents another key growth opportunity for GF. Combined with our leadership in silicon photonics, GF offers a uniquely differentiated set of technologies that help address the power efficiency and signal integrity requirements of next-generation AI systems. The momentum we are seeing today reinforces our belief that we will be a key leader in optical networking for years to come. The third strong opportunity we see in the AI data center relates to power. In July, we closed the strategic acquihire of the custom power team from Potion Technologies in Europe, bringing an experienced design team focused on integrated voltage regulators or IVR. Together with our BCD GaN and integrated inductor capabilities, IVR further strengthens our road map depth in Power Technologies and expands our serviceable market in one of the fastest-growing opportunities within AI data centers. Our goal is to help enable a new power architecture for AI infrastructure, one that brings power conversion closer to the processor and addresses the increasing efficiency, power density bandwidth high current and transient response requirements of next-generation XPUs. As AI workloads continue to scale, XPUs are consuming more power than ever before, increasing the need for solutions that can reduce power losses and deliver higher performance with an increasingly constrained thermal and physical footprint. Closed in Q2, this transaction brings new differentiated IVR technology, specialized engineering talent and additional R&D capabilities that strongly complement of our portfolio, allowing us to capture a larger share of the growing power opportunity in AI data centers. Finally, moving to another key element of our long-term strategy, our IP, software and custom silicon capabilities. In June, we completed our previously announced acquisition of Synopsys ARC processor IP Solutions business, an important milestone in advancing our strategy in physical AI and a notable step change in expanding GF serviceable addressable market. As a recap, the strategic rationale is multifold. As AI increasingly moves beyond the data center into the physical world around us, it is transforming automotive, industrial automation robotics and intelligent edge devices. In that context, customers are looking for partners that can help them navigate the growing complexity of software, compute architectures and semiconductor design. Together with MIPS, this acquisition bolsters GS capabilities across risk 5 processor IP, software development tools and custom silicon design, enabling us to support customers from architecture and software through high-volume silicon production. We acquired a broad set of CPU, DSP, NPU and broader risk 5 technologies as well as a proven software development toolkit and application-specific processor design capabilities. With over 150 patents, 300 existing customers and 400 R&D engineers around the world, this acquisition meaningfully expands our ecosystem reach and depth. Importantly, we are already seeing significant strategic benefits from our acquisition by combining MIPS and Synopsis arc under one roof we are engaging with more customers earlier in the design cycle, shaping application-specific compute architectures and creating deeper, longer-lasting customer partnerships. To accelerate customer enablement, we are increasing investment in a number of R&D initiatives. These are focused, high-return programs that position us to capitalize on expanding opportunities while helping our customers innovate faster. Over time, we believe this creates a pathway to create custom silicon opportunities and enabling physical AI customers to run their AI inference workloads on GF and based processing platforms. In summary, we made meaningful progress across several strategic growth areas this quarter. We delivered a record quarter for design wins across both communications infrastructure and data center and smart mobile devices. In differentiated areas such as display back planes for AI glasses, PMIC for premium smartphones and smart power stage gate drivers for data center power. Our differentiated capabilities are helping customers solve increasingly complex challenges while positioning GF as a trusted technology partner. We are making critical investments and integrating strategic acquisitions that strengthen our competitive position, diversify our growth drivers and provide a durable foundation for long-term profitable growth. I am proud of the team's diligent execution this quarter and excited about the opportunities ahead. I'll now pass the call over to Sam for a deeper dive on second quarter 2026 financials.

Thank you, Tim. For the remainder of the call, including guidance other than revenue, cash flow and net interest income, I will reference non-IFRS metrics. GF delivered strong results in the second quarter, with revenue and non-IFRS gross margin exceeding the high end of our guidance ranges. Thanks to the efforts from our teams around the world to improve structural costs, raise manufacturing productivity and accelerate growth in value-accretive secular end markets, we grew our gross margin by nearly 500 basis points year-over-year. Not only did this represent a second quarter record, we delivered on our expectation to reach approximately 30% gross margin. well before the end of 2026. Driven by a richer mix of revenue, this quarter's results demonstrated a meaningful step forward towards our long-term objectives to achieve structurally higher margins and profitability. Now on to the results. We delivered second quarter revenue of $1.786 billion, up 9% sequentially and 6% year-over-year. We shipped approximately $625,000, a 300-millimeter equivalent wafers in the quarter, up 8% sequentially and 8% from the prior year period. Revenue from manufacturing services accounted for approximately 89% of total revenue. Revenue from Technology Services, which includes revenue from IP, licensing software, reticles, nonrecurring engineering, expedite fees and other items accounted for approximately 11% of total revenue for the second quarter. Following the acquisitions of MIPS and the Synopsys Archive P business, we expect revenue contribution of approximately $100 million to $120 million towards our full year 2026 Technology Services revenue. up from our prior expectation of $60 million to $100 million as these acquisitions continue to drive new opportunities with our customers. In addition, driven by strong conversion of our design win pipeline, and an expanding scope of partnerships with customers, we expect sustained momentum in our revenue contribution from Technology Services. As a result, we expect Technology Services revenue towards the high end of the 10% to 12% range of total revenue in 2026, with a gross margin profile significantly higher than our corporate targets. Let me now provide an update on our revenue and outlook by end market. Communications infrastructure and data center represented approximately 16% of second quarter total revenue. Revenue increased 20% sequentially and 62% year-over-year. This marked the seventh consecutive quarter of double-digit percentage year-over-year growth for communications infrastructure and data center, and the fastest quarterly year-on-year growth since 2022. Within this end market, we saw strong customer demand for our silicon photonics and silicon germanium offerings. In both of these high-margin technologies we're ramping capacity and making the necessary investments to unlock increases in demand indicated by our customers. Beyond optical networking, we saw strong double-digit year-over-year growth in applications across both wireless infrastructure storage. Given the accelerating demand outlook from our customers, we now expect to achieve full year 2026 revenue growth in the range of 50% to 60% for our communications infrastructure and data center end market, up from our prior expectations of high 30s percentage year-over-year growth, which we believe is an early indication of the long-term growth opportunities ahead for GF in this end market. Beyond growth opportunities across silicon photonics and SiGe outlined by Tim, we also closed a first-of-a-kind design win of smart power stage gate drivers on our BCD platform. We see this as just one notable step forward in the rapidly evolving market for data center power applications. Automotive represented approximately 19% of second quarter total revenue. Automotive revenue decreased 13% sequentially and 10% year-over-year, principally driven by customer-led shipment timings. However, for the full year, we continue to expect low double-digit percentage revenue growth for our automotive end market with a higher weighting towards the fourth quarter. As automotive semiconductor content continues to grow, we're encouraged by our design win momentum with customers and the long-term growth opportunities these present. In the second quarter, we secured a significant automotive power design win for 5-volt and 10-volt power management integrated circuits built on our BCD platform. In addition, we also taped out an ADAS radar built on our FDX platform for Bosch, a notable milestone and the combination of years of close partnership. These highlights reflect the strong momentum we continue to see across automotive power, processing, sensing and safety applications. Smart Mobile devices represented approximately 36% of second quarter total revenue. Revenue increased 15% sequentially and decreased 6% from the prior year period. As noted by peers and customers across the industry, 2026 smart mobile handset forecasts have reduced meaningfully over the last quarter, principally due to the continued impact from memory pricing and associated shortages. As a result, we currently expect smart mobile devices to decline by a low teens percentage year-over-year in 2026. Customer design win momentum for new generations of smart mobile devices continues to be positive. In the second quarter, we secured a notable design win on GF BCD platform with MediaTek further validating our expanding power platform. This marked GF first-ever power management integrated circuit design win with our long-standing customer. In addition, we continue to strengthen our position with next-generation augmented reality wearables at a leading hyperscaler, winning a new design for micro LED display back plans. Finally, Home industrial IoT represented approximately 19% of second quarter total revenue. Revenue increased 30% sequentially and 10% year-over-year. In the second quarter, IoT revenue growth marked the fastest year-over-year growth since 2022, driven by a breadth of demand for applications across AI-enabled image processing, health care wearables and next-generation MCUs for edge AI compute. As inventory normalizes, customer demand signals improve and the next generation of production ramps commenced in the second half of the year, we expect our revenue for the home and industrial IoT end market to grow in the range of 10% to 15% in 2026, up notably from our prior expectations for mid-single-digit percentage growth. In the second quarter, we secured 3 strategic chiplet design wins with Lockheed Martin on our FinFET and FDX platforms, creating a foundational aerospace and defense chiplet ecosystem that further extends GF leadership as a trusted U.S. foundry. We also expanded our relationship with Microchip with a meaningful design win on our FinFET platform another notable proof point for the growth of our embedded compute and edge AI offerings. Moving now to other key financial performance metrics in the quarter. In the second quarter, we delivered gross profit of $534 million, which translates into approximately 29.9% gross margin above the high end of the guidance range and up 470 basis points year-over-year. A richer mix of manufacturing and technology services revenue, structural improvements in manufacturing costs and improved utilization all contributed to favorable year-over-year margin expansion. R&D for the quarter was $144 million and SG&A was $92 million. Total operating expenses of $236 million were up 16% quarter-over-quarter and represented approximately 13% of total revenue. We delivered operating profit of $298 million for the quarter at an operating margin of 16.7%, above the midpoint of our guided range and up 140 basis points from the prior year period. Second quarter net interest income was $9 million. Other expense was $12 million, and we incurred tax expense of $39 million in the quarter. We delivered second quarter net income of approximately $256 million, an increase of approximately $22 million from the prior year period. Diluted earnings of $0.46 per share was at the high end of the guidance range based on a fully diluted share count of approximately 556 million shares. Let me now provide some key cash flow and balance sheet metrics. Cash from operations in the second quarter was $405 million. Second quarter CapEx net of proceeds from government grants was $408 million or roughly 23% of revenue. Adjusted free cash flow for the quarter was negative $3 million, as indicated in our prior quarter's guidance. At the end of the second quarter, our combined total of cash, cash equivalents and marketable securities stood at approximately $3.3 billion. Our total debt was $1.1 billion, and we also have a $1 billion revolving credit facility which remains undrawn. On July 14, we paid GF first-ever quarterly cash dividend of $0.12 per share, an important milestone that reflects both the progress we have made in strengthening the business and our confidence in its future cash-generating capacity. Supported by a strong balance sheet and disciplined capital allocation framework, we remain committed to investing in profitable growth while returning excess cash to shareholders. As outlined at our Investor Day, our objective is to return up to 50% of trailing 12-month non-IFRS adjusted free cash flow after investments through a combination of dividends and share repurchases over time. Pursuant to this strategic objective, I'm pleased to announce that our Board of Directors approved a quarterly cash dividend of $0.12 per share payable on October 9, 2026, and to shareholders of record as of September 23, 2026. In addition, approximately $100 million remains under the share repurchase authorization approved by our Board of Directors and we expect to be flexible with the deployment of the remaining authorized amount. Next, let me provide you with our outlook for the third quarter of 2026. We expect total GF revenue to be $1.85 billion, plus or minus $25 million. We expect gross margin to be approximately 30.5%, plus or minus 100 basis points. which at the midpoint reflects approximately 450 basis points of year-over-year expansion. Excluding share-based compensation, we expect total operating expenses to be $260 million, plus or minus $10 million. We expect operating margin in the range of 16.7% plus or minus 170 basis points. At the midpoint of our guidance, we expect share-based compensation to be approximately $76 million of which roughly $18 million is related to cost of goods sold. We expect net interest and other income for the quarter to be between $3 million and $11 million, and income tax expense to be between $28 million and $52 million. Based on a fully diluted share count of approximately 556 million shares, we expect diluted earnings per share for the third quarter to be $0.51 and plus or minus $0.05. Now let me provide an update on some broader financial drivers as we evolve the mix of our business and aim to deliver the growth model set out at our recent Investor Day. With respect to pricing, we're encouraged by the improving industry dynamics as well as the evolving mix of our business towards highly accretive technologies. In addition to these positive mix shifts in the second quarter, we implemented pricing increases in partnership with our customers across several technology corridors. Following the satisfactory conclusion of these customer conversations, we expect the pricing adjustments to be reflected in revenue commencing in 2027. The magnitude of these pricing increases varies by end market and technology and contemplates the differentiated value we provide the ongoing supply and demand dynamics and the inflationary absorption across our industry in recent years. Conversations with our customers have been very constructive, and we'll continue to assess pricing for 2027 and through the second half of 2026. With respect to operating expenses, consistent with the strategic updates we set out at our Investor Day in May, we believe that R&D will rise as a percentage of revenue. as we integrate recent acquisitions and accelerate our R&D capabilities to support key growth opportunities. We've strengthened our portfolio of capabilities through the acquisitions of the Synopsys archive P business in June as well as the IVR business from Potion Technologies in early July, adding critical R&D, IP and engineering resources. Following these acquisitions, we now expect quarterly operating expenses in the second half of 2026 to be consistent with our third quarter guidance as we accelerate critical R&D investments while ramping talent and capabilities intended to support key growth opportunities across the AI data center, physical AI, quantum computing and advanced packaging. These timely and necessary investments are targeted to accelerate our technology road map deepen our customer engagements and expand future growth opportunities in the years ahead. Moving now to tax where we expect an effective tax rate in the mid-teens percentage range for the full year of 2026. And principally due to the expected geographical mix of wafers shipped in the second half of this year. Finally, for the full year 2026, we continue to expect an adjusted free cash flow margin of approximately 10%. In conclusion, I'd like to thank our global teams for their continued commitment and diligent execution towards our strategic goals. GF drove another quarter of meaningful year-over-year margin expansion and achieved new second quarter records across a range of growth and profitability metrics. Our strategic initiatives and investments executed over the last year are demonstrating good momentum across the end markets that we serve. And the continued mix shift in our business is driving improved diversification across our end market portfolio. Looking ahead, we intend to continue executing towards a richer mix of business targeting continued structural cost improvements and improved manufacturing productivity, all of which we believe are forming a strong foundation for increasing shareholder value in the years ahead. With that, let's open the call to Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Chris Caso from Wolfe Research.

I guess the first question is about the common data center growth and some of the capacity expansion that's occurring in that segment. And I know while it's growing strongly, you're capacity constrained. Can you help us with to the extent you can, timing and magnitude of that capacity expansion. When does additional capacity come online? And I did also notice that you received, I think it was a 300 million chips at grant for the silicon photonics expansion. Can you speak to how that helps to defray some of the net CapEx for that.

Yes. Thank you, Chris. So I'll kick us off on that. So in terms of capacity, as you say, demand has been strengthening across basically all data center applications. We're feeling that very strongly in the optical networking space that particularly pulls on silicon photonics and silicon germanium. But we're also seeing it in other parts of the business starting to pick up, including areas like power. So our strategy will be to add capacity in those areas. One advantage for us is we're building that capacity out within our existing fab footprint, and we have, let's say, ample fab footprint today to ramp capacity relatively quickly. By day one of the contributors to us upping our full year view about our CID end market is actually our confidence about bringing that pacto and driving factory-level productivity improvements to be able to get basically wafers out through the back half of this year and even further into 2027. So we feel good about the ability to meet that growth with additional capacity expansion. Maybe I'll turn to the 300 million partnership with the U.S. government. We couldn't be more excited about this. I think it's really important to bear in mind that the shift to optical networking is very much a secular shift, and we see this only at the very early innings of penetrating the data center. We've spoken in the past about 70% of data center links being optical by 2030, I think every piece of evidence today points to that being perhaps even conservative relative to what's happening, including the penetration, not just to scale out but also scale up networking. And so look, we're very excited about the prospects of optical networking and within that silicon photonics. But a lot of what that will require is higher performance technologies in the future. And so what we announced really has 3 components continuous innovation at the PIC level, right? So improved modulated technology so we can go to 400 gig per lane and beyond. New materials. At some point, we will introduce new materials into the system, think about barium titan a thin film, lithium niobate, think about indium phosphide, all areas of technological innovation to produce higher performing systems and more integrated systems going forward. And then the last piece was extraordinarily important, particularly for near and co-packaged optics is packaging. And so being able to build those integrated optic engines for both those applications using our scale solution also requires continued capability and capacity. So that partnership allows us to accelerate that. And we're very grateful to have the U.S. government as a strong, let's say, partner in our corner supporting that innovation happen right here in the U.S.

Do you have a follow-up question?

I do. A follow-up. I'll ask on gross margins. And can you speak to what's the driver of the gross margin expansion as you go into the third quarter in terms of utilization mix and pricing and perhaps give us some color on the trajectory of gross margins into next year, particularly in light of some of your comments with regard to pricing?

Yes. Very happy to you, Chris. And look, I will start by saying that we're very encouraged by the continued progression and expansion in our gross margins. And I think it's a continued reflection of the progress that we've seen during the course of this year, we had almost 500 basis points of more expansion in the second quarter. We had over basis points of margin expansion in the first quarter. And as I said in my prepared remarks, if you take the midpoint of our inferred guide, that implies about another 450 basis points of margin expansion. So this is really playing to the thesis and the levers that we discussed at our Investor Day just a couple of months ago now. And frankly, it's falling through on a relatively healthy basis when you look at the revenue take revenue a year ago and compare it to the same period this year, about $100 million of revenue growth look at that adjusted gross profit and you see about $100 million of gross falling through as well. So we're very encouraged by that relative fall through to the underlying gross margin as it relates to our revenue growth. And you sort of touched on it a little bit in your question, Chris. Mix has been a big and continues to be a big driver of that. And the way to think about mix is twofold. It's mix from a manufacturing services point of view, and its mix from a technology services point of view as well. Both of those have been encouraging tailwinds for us, particularly when you look at the relative strength and growth within some of those end markets, which I touched on around it comes in for in data center being highly accretive to those targets. Utica Technology Services revenue up a little under $40 million year-over-year. That's about one point of benefit that comes through there. So the combination of the mix across manufacturing and technology services has been encouraging. We expect that to continue. As I said previously, productivity within our manufacturing sites and driving structural cost improvements has been a big driver as well. utilization, we were in the second quarter sort of high 80s from a utilization point of view. So we still feel we've got a good amount of our existing capacity to be able to grow into and see positive margin movements over time. And frankly, all of that is against some of the benefits we had in the year ago period. We had things like liquidated damages in early 2025, which have fallen out. So again, it sort of reflects the strong growth we've seen from a margin point of view. We bumped up on that 30% target margin that we said we were looking to solve for at the exit of 2026. In our second quarter, we're above that in the third quarter guidance. So expectation now for the full year is that we should be at about 30 points of gross margin for the full year rather than just that exit target that we had at the beginning of the year. I hope that helps, Chris.

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

I just wanted to first follow up on the silicon photonic CID year-over-year growth, almost doubling from your prior outlook. I'm just kind of curious what changed in the last 3 months that the outlook has been revised almost materially higher. And any color you can give on your PIC solutions compared to your 2 competing foundries. Then I had a quick follow-up on Quantum too.

Yes. Great. Thank you very much, Krish. Look, Photonics remains a very strong driver for us. I think every customer meeting is all about what more can we do, how much faster can we go? There is clearly strong demand today. And by the way, in a market like this, we don't just validate that demand with our direct customers. We spend time throughout the ecosystem, including with the big hyperscalers, and you've seen many of them are supporting a lot of what we're doing here in the U.S. and around the world. So we're validating the demand, and we believe it's very real today and durable going forward. That's giving us confidence to continue to invest. We'll increase our investments in Photonics capacity. And as I mentioned earlier, there's nothing our factories love more than being challenged to get more output literally every single week. We're calling in from [indiscernible] New York right now, and the factory is hard at work producing more wafers every day for these oversold corridor. So I think very conviction about continuing to grow silicon photonics. But yet, we're still at the very beginning of this, and that those growth targets we set for kind of end of 2018 and through 2030, I'd say today, we are very much on track and potentially ahead of those targets in terms of our silicon photonics growth.

Got it. Very helpful, Tim. And then a quick follow-up on Quantum. You recently got the $375 million grant. Can you talk a little bit about the opportunity set there and whether being the quantum commercialization curve. And have you seen more interest or share gains given Ion just recently closed acquisition of Sky water?

Yes. So thank you for that question. I mean, quantum is extremely exciting, and there's a few reasons behind that. I think one is talking to now basically all the players in the sector, everyone is facing the same kind of transition. But this is not a -- can I prove it in a lab discussion. This is can I scale to high-volume manufacturing. And so the conversations we have. And in our announcement, we had both dedicated quantum players, but also hyperscalers and others comments and support that. initiative, the conversations are similar because it's all about transitioning to that high-volume scale and cracking different problems that they've proven at lab scale that need to prove now as they transition to high volume. Since that announcement, we've launched 4 significant new engagements with some -- a subsidy of the players that are supporting us in that announcement. And we see that ramp continuing. Those engagements have some common features. For example, some of the stuff we're doing around cryogenic CMOS for readout, ICs for different modalities. That's very exciting because it builds on existing platforms that we have. But also there are those who have very specific requirements. And that's where also I'm quite excited about the technology benefits of us investing in quantum. And so I'll give you an example. A couple of -- actually more than 2, 3 or 4 players are doing things linked to the photonic side in that quantum solution that has excellent read-across for us in our long-term silicon photonics road map. So think of that as a very synergetic with what we're doing in that space. And so Quantum is actually reinvigorating a number of our long-term technology road maps even further and faster than otherwise it would be happening. So that's very positive. As Sam mentioned in the prepared remarks, we'll see the financial profile of Quantum in our technology services revenue this year and definitely into next year. Think of it more medium term as a kind of call option on the scale to high-volume module manufacturing. Too early to call exactly when those ramps will happen. But clearly, that is the objective of these players that are engaging with us is develop and crack the solutions and then scale them to high volume together.

And our next question comes from the line of Karl Ackerman from BNP Paribas.

Two, if I may. Tim, you spoke about the 3/4 of growth, including photonics, lantem, IP and custom silicon. But could you speak to the revenue and OpEx contribution of the ARC and Foton Technologies IVRT, the September outlook? And also, if you zoom out, could you double click on the rationale for these deals and maybe any early customer design engagements you've seen to date?

Yes. So let's -- I'll talk about rationale, and then I'll let Sam comment on how we're thinking about revenue for this year. So we've been very focused in our acquisition strategy on identifying capabilities that our customers value and that links to our manufacturing road map but also linked to what they tell us around gaps that the industry today is not meeting. So let me take kind of the MIPS and Synopsys story first, and I'll come back to Foton both very exciting in their own ways. Customer feedback on MIPS and then ARC has been excellent. I spent a lot of time personally with customers, especially since we've closed the ARC deal. And by the way, with that came 300 customers. Some of those were not GF customers before. So it gives us also new customers to engage with on those road maps. And these are very strategic discussions because these are about future architectures for their processor solutions. How can they add AI at the edge, how can they do on device inference in the automotive space, the industrial space, the robotics space. And so it's bringing some really interesting discussions to bear, and it allows us as GF to engage much earlier in that design conversation than we would if it was just a conversation about manufacturing capacity and manufacturing process technology. It has another benefit, which is that it's also giving us very, very early input into our manufacturing road map. And so now you have this let's say, symbiosis internally that we have an internal customer for what we're doing that is actually challenging us to push performance of next-generation technologies, particularly in CMOS business to the next level. So you're thinking about how do you do lower power inference at the edge and so on. So I'd say early, of course, for both of these, but very encouraging. We've talked about some of the early wins and partnerships in spaces like defense with Lockheed Martin, automotive players like Infineon, but there are very many more in the pipeline. So very encouraging for our IP software and custom silicon strategy. To talk briefly about IDR and Foton, we've had the chance to work with the Potion team for many years now as the IVR category has started to become more and more important. The way you should think about that is IVR is to power what CPO is to photonics, right? Think about how do you build a much more wafer-level integrated to min to deliver power closer to chip and to be able to do things that today exist in much more kind of traditional power modules, much more like the industrial and automotive power modules of today. This is moving to a much more kind of, let's say, wafer-level solution that is higher and higher performance. that is essential for next-generation data center power, given how hungry these XPUs PPUCPUs are all for power. Portion team, very engaged with a number of our existing customers. So it's a very natural transition to bring that team on board, accelerate those engagements and again, early back from the likes of existing kind of fabless and IDMs, but also hyperscalers who are engaged there are very, very positive, bringing that capability into GF.

And Karl, maybe if I just jump on the second part of your question as it relates to some of the financial profile. And for all the reasons that Tim outlined, these investments are incremental, they're strategic. And actually, in the case of the MIPS acquisition as well as the archive P business from Synopsys, they are revenue generative from day 1. At the outside of this year, we expected that we'd be seeing about $60 million to $100 million of incremental revenue through from that MIPS acquisition during the course of 2026. That remains the expectation. But what's changed over the course of the last quarter is that we closed the acquisition of the Synopsys or IP business. So the midpoint of that range, as you can kind of infer from my prepared remarks has moved up from the $60 to $100 million to $100 million to $120 million, $30 million of revenue growth our expectation in terms of the skew of that incremental revenue from that recent acquisition is sort of 1/3, 2/3 skewed from third quarter and fourth quarter perspective. As it relates to the R&D and the fall-through ultimately through to EPS. Look, these are R&D intensive businesses. They're also highly accretive from a gross margin point of view. Overall, we expect that the increased pain particularly the acceleration from an R&D point of view to largely be covered by that incremental revenue we see coming through both of those acquisitions. So we feel quite good about it from that perspective.

Very clear. For my follow-up, if I may, could you discuss what portion of those 7 customers on your scale platform are working on NPL or your packoptics? And I guess how should we think about the timing of your NPL opportunity?

Yes. Maybe just to take a step back, and I think there's obviously a year ago, the industry wasn't talking a lot about NPL now it's talking a lot about it. I think the reason is that you see a comfort level for a number of players moving from, let's say, traditional pluggable infrastructure to NPL, and that's because they have synergies in terms of things like the SerDes. So the system is, let's say, a smaller transition versus moving to the full co-packaged optics. We think both those form factors as well as pluggables will continue to exist in the data center. Obviously, as you get more into scale up networking, that's where you need to move to smaller form factors like NPO and CPO and to really address all of those linkages within a scale-up network. So we think all of those will continue to exist. Scale supports NPO and CPO. So a lot of the dimensions that go into bringing our scale solution together and EIC bonded to a pick with a micro-optic with a fiber attached unit and necessary for both NPO and for CPO. Fundamentally, the mechanical difference is that the NPO is bonded to the Board, whereas the CPO sits within the package, right? And there are differences, therefore, to let's say, more of the things like the [indiscernible] architecture, as I mentioned, but left to the mechanics of how things are done. So look, we see very good momentum on NPO. I'd say the scale engagements we have cut across both. And actually, I'd say even many of the customers are doing both because they have both an NPL that they're ramping sooner and a CPO that they're ramping a little bit later. We still maintain the view that 27, we'll see the beginning of NPO ramp in 28. We'll see the beginning of CPO ramp, and that's been quite consistent over the last few quarters.