Operator

Thank you for standing by, and welcome to the GlobalFoundries Inc.'s second quarter fiscal year 2026 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Eric Chow, Head of Investor Relations. Please go ahead, sir.

Eric Chow

Head of Investor Relations, GlobalFoundries

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's 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 replay will be made available on our Investor Relations webpage. 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 tense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements. We do not undertake any obligation to update any forward-looking statements we make today.

In terms of upcoming events, we will be participating in a fireside chat at the Goldman Sachs Communacopia + Technology Conference in San Francisco on September 8th. 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 open the call for questions with Tim and Sam. We request that you please limit your questions to one with one follow-up. I'll now turn the call over to Tim.

Tim Breen

CEO, GlobalFoundries

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 three 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 as CPUs, GPUs, and AI ASICs define today's compute paradigm, we believe quantum processing 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 qubit 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 provide the 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 eight of the world's leading quantum computing players, including partnerships with PsiQuantum, Quantinuum, and Quantum Motion, as well as new endorsements from the quantum arms of large hyperscalers. Since launching just three months ago, we have already embarked on four 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 one to three 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.

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 seven 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, represent three high-quality, long-term secular growth drivers which underscore our conviction in the ability to grow in the data center for years to come.

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 mm photonics manufacturing footprint, we are actively engaged with four of the top five 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 multi-year roadmap to advance the enablement of modules delivering 1.6 Tb, 3.2 Tb, and beyond. High volume manufacturing of our 200 Gb per lane technology is underway. We have already demonstrated 400 Gb 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-packaged and co-packaged optics. We currently have seven 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 tape out another in Q3. Specifically for near-packaged optics, we see NPO as an important application and exciting opportunity ahead of the broader adoption of co-packaged solutions. Because near-packaged and co-packaged optics are built on a common photonic IC, and because many components of our SCALE solution support both near-packaged 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 US 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, modulator technologies, and packaging innovations that will enable next-generation near-packaged and co-packaged optics architectures, building directly on GF's SCALE platform.

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 to our silicon photonics portfolio. During the quarter, we secured multiple new SiGe 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 Vermont facility to support this demand. We believe SiGe represents another key growth opportunity for GF.

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 Photeon Technologies in Europe, bringing an experienced design team focused on integrated voltage regulators, or IVRs. Together with our BCD, GaN, and integrated inductor capabilities, IVR further strengthens our roadmap 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.

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's serviceable addressable market. Together with MIPS, this acquisition bolsters GF's capabilities across RISC-V 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 RISC-V 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 this acquisition. By combining MIPS and Synopsys 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.

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 backplanes for AI glasses, PMICs 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. 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.

Sam Franklin

CFO, GlobalFoundries

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.

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 625,000 300 mm 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, non-recurring 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 ARC IP business, we expect revenue contribution of approximately $100 million-$120 million towards our full-year 2026 technology services revenue, up from our prior expectation of $60 million-$100 million. As a result, we expect technology services revenue towards the high-end of the 10%-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. Given the accelerating demand outlook from our customers, we now expect to achieve full-year 2026 revenue growth in the range of 50%-60% for our communications infrastructure and data center end-market, up from our prior expectations of high 30s percentage year-over-year growth. Beyond the growth opportunities across silicon photonics and SiGe outlined by Tim, we also closed a first-of-a-kind design win for smart power stage gate drivers on our BCD platform.

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. In the second quarter, we secured a significant automotive power design win for 5 V and 10 V power management integrated circuits built on our BCD platform. We also taped out an ADAS radar built on our FDX platform for Bosch.

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. In the second quarter, we secured a notable design win on GF's BCD platform with MediaTek — our first ever power management IC design win with our long-standing customer. We continued to strengthen our position with next-generation augmented reality wearables at a leading hyperscaler, winning a new design for microLED display backplanes.

Home and 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, healthcare wearables, and next-generation MCUs for edge AI compute. We expect our revenue for the home and industrial IoT end-market to grow in the range of 10%-15% in 2026, up notably from our prior expectations for mid-single-digit percentage growth. In the second quarter, we secured three strategic chiplet design wins with Lockheed Martin on our FinFET and FDX platforms, creating a foundational aerospace and defense chiplet ecosystem. We expanded our relationship with Microchip with a meaningful design win on our FinFET platform.

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. We delivered second quarter net income of approximately $256 million. Diluted earnings of $0.46 per share was at the high-end of the guidance range.

Let me now provide some key cash flow and balance sheet metrics. Cash flow 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 -$3 million, as indicated in our prior quarter's guidance. At the end of the second quarter, our combined total of 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 14th, we paid GF's 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. As outlined at our Investor Day, our objective is to return up to 50% of trailing 12 months 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 9th, 2026, to shareholders of record as of September 23rd, 2026. In addition, approximately $100 million remains under the share repurchase authorization, 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 $1.885 billion, ±$25 million. We expect gross margin to be approximately 30.5%, ±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, ±$10 million. We expect operating margin in the range of 16.7%, ±170 basis points. 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, ±$0.05.

Let me provide an update on some broader financial drivers. 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 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.

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 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. Moving now to tax, where we expect an effective tax rate in the mid-teens percentage range for the full-year of 2026. 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. 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

Our first question comes from the line of Chris Caso from Wolfe Research. Your question please.

Chris Caso (Wolfe Research)

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

Tim Breen

Yeah. Thank you, Chris. I'll kick us off on that. 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. We're also seeing it in other parts of the business starting to pick up, including areas like power. 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 the way, one of the contributors to us upping our full year view about our CID end-market is actually our confidence about bringing that capacity on 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. 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 US 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. What we announced really has three components. Continuous innovation at the PIC level, right? Improved modulator technology, so we can go to 400 Gb per lane and beyond. New materials. At some point, we will introduce new materials into the system — think about barium titanate, thin film, lithium niobate, think about indium phosphide. The last piece, which is extraordinarily important, particularly for near and co-package optics, is packaging. Being able to build those integrated optical engines for both those applications using our SCALE solution also requires continued capability and capacity. That partnership allows us to accelerate that.

Chris Caso (Wolfe Research)

I do. Thanks. A follow-up I will ask on gross margins. 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.

Sam Franklin

Very happy to, Chris. Look, I will start by saying that we are very encouraged by the continued progression and expansion in our gross margins. I think it's a continued reflection of the progress that we have seen during the course of this year. We had almost 500 basis points of margin expansion in the second quarter. We had over 500 basis points of margin expansion in the first quarter. If you take the midpoint of our inferred guide, that implies about another 450 basis points of margin expansion. This is really playing to the thesis and the levers that we discussed at our Investor Day just a couple of months ago now. 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 profit falling through as well. Mix has been a big and continues to be a big driver of that. The way to think about mix is twofold. It's mix from a manufacturing services point of view, and it's mix from a technology services point of view as well. Both of those have been encouraging tailwinds for us. Utilization, we were in the second quarter, sort of high 80s from a utilization point of view. 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. 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. 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.

Operator

Our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.

Krish Sankar (TD Cowen)

Yeah. Hi, thanks for taking my question, congrats on the nice results. I just wanted to first follow up on the silicon photonics CID year-over-year growth almost doubling from your prior outlook. I'm just kind of curious what changed in the last three months that the outlook has been revised almost materially higher? Any color you can give on your PIC solutions compared to your two competing foundries? I had a quick follow-up on Quantum too.

Tim Breen

Yeah, 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. 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. 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. I think very strong conviction about continuing to grow silicon photonics, yet we're still at the very beginning of this and those growth targets we set for end of 2028 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.

Krish Sankar (TD Cowen)

Got it. Very helpful, Tim. A quick follow-up on quantum. You recently got a $375 million grant. Can you talk a little bit about the opportunity set there and where are we in the quantum commercialization curve? Have you seen more interest or share gains given IonQ just recently closed acquisition of SkyWater? Thank you.

Tim Breen

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. This is not a can I prove it in a lab discussion, this is can I scale to high volume manufacturing? The conversations we have — in our announcement we had both dedicated quantum players, also hyperscalers and others comment and support that initiative. Since that announcement, we've launched four significant new engagements with a subset 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. A couple of, actually more than two, probably three or four players are doing things linked to the photonic side in their quantum solution. That has excellent read-across for us in our long-term silicon photonics roadmap. Think of that as very synergetic with what we're doing in that space. Quantum is actually reinvigorating a number of our long-term technology roadmaps even farther and faster than otherwise it would be happening. 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.

Operator

Our next question comes from the line of Karl Ackerman from BNP Paribas. Your question, please.

Karl Ackerman (BNP Paribas)

Yes, good morning, Tim and Sam. Thank you for having me on the call. Two, if I may. Tim, you spoke about the three pillars of growth, including photonics, quantum, IP, and custom silicon. Could you speak to the revenue and OpEx contribution of the ARC and Photeon Technologies IVR team in the September outlook? 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?

Tim Breen

Yeah. I will talk about rationale, and then I will let Sam comment on how we are thinking about revenue for this year. We have been very focused in our acquisition strategy on identifying capabilities that our customers value and that links to our manufacturing roadmap, but also links to what they tell us around gaps that the industry today is not meeting. Let me take kind of the MIPS and Synopsys story first, then I will come back to Photeon. Customer feedback on MIPS and then ARC has been excellent. With ARC came 300 customers. Some of those were not GF customers before, it gives us also new customers to engage with on those roadmaps. 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 robotic space? It is 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.

To talk briefly about IVR and Photeon, we have had the chance to work with the Photeon 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 solution to deliver power closer to the chip. That is essential for next-generation data center power, given how hungry these XPUs, TPUs, CPUs are all for power. Photeon team, very engaged with a number of our existing customers, it is a very natural transition to bring that team on board, accelerate those engagements.

Sam Franklin

Karl, maybe if I just jump on the second part of your question as it relates to some of the financial profile. These investments are incremental, they're strategic, and actually in the case of the MIPS acquisition as well as the ARC IP business from Synopsys, they are revenue generative from day one. At the outset of this year, we expected that we'd be seeing about $60 million-$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 ARC IP business. The midpoint of that range has moved up from the $60 million-$100 million to $100 million-$120 million, call it $30 million of revenue growth. Our expectation in terms of the skew of that incremental revenue from that recent acquisition is 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 — these are R&D intensive businesses. They're also highly accretive from a gross margin point of view. Overall, we expect that the increase in OpEx and particularly the acceleration from an R&D point of view, to largely be covered by that incremental revenue we see coming through from both of those acquisitions.

Karl Ackerman (BNP Paribas)

For my follow-up, if I may, could you discuss what portion of those seven customers on your SCALE platform are working on NPO or near package optics? I guess how should we think about the timing of your NPO opportunity? Thank you.

Tim Breen

Maybe just to take a step back, I think there's obviously, a year ago, the industry wasn't talking a lot about NPO, 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 NPO, and that's because they have synergies in terms of things like the SerDes. 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. SCALE supports NPO and CPO. 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 NPO that they're ramping sooner and a CPO that they're ramping a little bit later. We still maintain the view that 2027 will see the beginning of NPO ramp and 2028 will see the beginning of CPO ramp, that's been quite consistent over the last few quarters.

Operator

Our next question comes from the line, Mehdi Hosseini from Susquehanna International Group. Your question please.

Mehdi Hosseini (Susquehanna)

Yes, thanks for taking my question. I also have a couple of follow-ups on comm infrastructure. Tim, can you help me understand what is the contribution of SiGe into your overall optical revenue mix? As we migrate to NPO, I'm assuming the PIC itself becomes a catalyst. To what extent should I expect some synergy between SiPho and SiGe? I do have a follow-up.

Tim Breen

Yeah, it's a great question. Let me talk about SiGe just for a little bit since you picked it out. Just to wind the clock back, how do we have such an important position in SiGe? IBM Microelectronics, I think, is on record for inventing SiGe. IBM Microelectronics is part of GF today, we've had team members building SiGe solutions for a long time now. What you're seeing in SiGe is that the acceleration is driven by, let's say, two trends happening at the same time. One is the shift to optical networking means you are moving more data through a different kind of link. As you push to higher and higher bandwidth, what you could do previously in CMOS at, say, 50 Gb per lane, 100 Gb per lane, at 200 Gb per lane, definitely at 400 Gb per lane, you cannot do. What we're seeing is people are breaking out those TIAs, those transimpedance amplifiers, incrementally also breaking out the drivers and doing them in high performance analog solutions like SiGe. In a way, what we're seeing in our SiGe business is actually growth driven by both the switch to optical, but also the increased bandwidth requirements within those optical solutions. Just to give you a dimension, our SiGe business is actually larger than our silicon photonic business today. It's actually a meaningful part of our data center business overall. Our SiGe solutions, we build them today in Burlington, Vermont. We're expanding capacity there. We're also qualifying 300 mm SiGe in Singapore, which will bring additional capacity, the economics of 300 mm, which obviously is very good, but also higher performance.

[Q&A continued with CJ Muse (Cantor Fitzgerald) on gross margin drivers — mix is the single biggest margin driver; ~10 points of utilization to grow into with in-store capacity; structural cost improvements (cash cost per mask layer); path toward ~40% GM exit run rate in the 2028 timeframe, supported by custom silicon ramps and co-packaged optics; CapEx expected at the higher end of the 15%-20% range.]

Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Eric Chow for any further remarks.

Eric Chow

Thank you. Thank you everyone for joining today. We're very glad to see you, and we will see you at the Goldman Sachs conference on September 8th. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Source: Quartr/Yahoo Finance earnings call transcript (call held August 5, 2026). Light editing for readability of an automated transcript; final Q&A summarized.