Wolfspeed Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 13 speakers on the call.

Operator

I will now hand over to your host, Tyler Grondbach, Vice President, External Affairs to begin. Tyler, please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's 1st Quarter Fiscal 20 24 Conference Call. Today, Wolfspeed's CEO, Greg Loane And Wolfspeed's CFO, Neil Reynolds, will report on the results for the Q1 of fiscal year 2024. Please note that we will be presenting non GAAP financial results during today's call, which we believe provides useful information to our investors. Non GAAP results are not in accordance with GAAP and may not be comparable to non GAAP information provided by other companies.

Speaker 1

Non GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of other key metrics. Today's discussion includes forward looking statements about our business outlook, And we may make other forward looking statements during the call. Such forward looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual results to differ materially.

Speaker 1

Lastly, I would also like to note that during the quarter, we announced our intent to sell our RF business to MACOM. The results of our RF business We'll now be classified as discontinuing operations, and all discussions today will be on a continuing operations basis. During the Q and A, we would ask that you limit yourself to one question so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now I'd like to turn the call over to Greg.

Speaker 2

Thanks, Tyler, and good afternoon, everyone. It is an exciting time at Wolfspeed. With the pending sale of the RF business, We are now the world's only pure play vertically integrated silicon carbide company. We are uniquely positioned to drive the industry transition from silicon to silicon carbide from both a materials and a device perspective. As we continue to scale our operations, We have overcome our fair share of challenges along the way, and I remain very confident around our long term trajectory for three reasons.

Speaker 2

First, we've demonstrated the capability to consistently produce enough high quality, high yielding 200 millimeter wafers in Building 10 ahead of the needs of the Mohawk Valley fab. 2nd, we've assembled a team comprised of internal silicon carbide experts, including one of our co founders and external advisors from our tool manufacturers to ensure that we will achieve 20% utilization at Mohawk Valley in the June quarter of 2024, and we've seen notable progress this quarter. And finally, customers continue to partner with Wolfspeed as we secured our 3rd highest quarterly total of device design ins $2,200,000,000 And we converted more than $1,000,000,000 of design wins this past quarter as well. In addition, we've also posted record revenue for our 150 millimeter substrates in the Q1, which is an indication that demand remains robust for our high quality substrates. Our first quarter results to demonstrate the initial returns on our capacity expansion investments that will pave the way for the rest of the fiscal year and beyond.

Speaker 2

Revenue, non GAAP gross margin and non GAAP EPS all came in at the high end of our guidance range. Turning to Mohawk Valley, where we continued to ramp production. This quarter, we generated $4,000,000 in revenue from the fab, which compares to $1,000,000 that was delivered in the previous quarter. In the coming quarter, we expect to more than double the output from the fab as we continue to ramp device production. Because of the complex nature of silicon carbide technology, as we ramp the fab further, We are collaborating even more closely with our tool vendors to ensure maximum uptime, the best yields and the most efficient use of all of our tools.

Speaker 2

We've worked closely with them to develop optimal operating protocols and as a result, we're seeing good improvement in the fab. I was just up in the fad last week meeting with the leadership team, walking the floor to talk with our technicians and seeing the progress firsthand that we're making in some of our bottleneck areas. We've now doubled the number of products qualified in the last 90 days And all of those MOSFETs achieve qualification on the first pass through the fab, which is a strong indication on the underlying capability of the fab. Finally, those products we have already qualified Have sufficient demand to more than satisfy our short term 20% utilization target. I am especially proud of this incredible effort by our team.

Speaker 2

It speaks to the advanced silicon carbide technical device capability we have assembled And the focused and detailed execution of our engineering and quality teams to ensure that we are more than ready to produce high quality automotive devices at 200 millimeter, something nobody else in the world is currently doing. As I mentioned, we are ahead of plan in our ramp of Building 10 crystal growth for 200 millimeter substrates. By the end of this quarter, we will be producing enough material to support 15% utilization at Mohawk Valley, putting us nicely on track for our goal of 20% utilization by June of 2024. Turning to the JP, construction continues and is on schedule. We expect to be producing material in the first half of fiscal 2025.

Speaker 2

And we've already hired and began training more than 100 people that will work at that facility. On the demand side, as I said, we recorded $2,200,000,000 of design ins, the 3rd largest amount of any quarter in our history It had a record design wins of $1,400,000,000 illustrating our customers' willingness to move into volume production on projects that we won over the past few years. Our design win record for the Q1 Represents more than 230 projects, many of which are converting sooner than our original expectations. Most of these projects serve the automotive end market, and we are steadily ramping our design ends to design wins with major OEMs and Tier 1s. We remain confident that the demand from automotive customers will remain strong, while we are seeing some softness in the industrial and energy space, primarily in China and Asia.

Speaker 2

Additionally, we had a record quarter for 150 millimeter wafer revenue, A strong signal that the demand for materials remains solid. Wolfspeed is the 1st mover to 200 millimeter wafer volume production, which will be the silicon carbide industry's most advanced technology. As a result, We are well positioned to be the only company producing 200 millimeter at scale for the next few years and believe this competitive advantage We'll further extend our leadership position well into the future. Wolfspeed, as the undisputed leader in silicon carbide, We'll continue to play an industry critical role in the coming years as a supplier of merchant materials to leading power device makers. Demands for our materials remain strong, and we have extended some of our agreements with existing wafer customers And added new agreements like the one with Renasis.

Speaker 2

That being said, we're not content with being the leading material supplier to the market. We also expect to be one of the top silicon carbide device suppliers in the years to come. In 2018, the silicon carbide device market was estimated to be about $400,000,000 5 years later, the market size is pegged at $6,000,000,000 and the projected TAM for the end of the decade Is north of $20,000,000,000 and continues to grow. This is part of the reason we announced and are now in the process of completing The sale of our RF business to MACON, which we expect to close by the end of the calendar year. We've always said that the growth of Wolfspeed Will come from our leadership in Silicon Carbide and Power Devices, and this marks a definitive milestone and allocating all of our investments, research and development and technology into these business areas.

Speaker 2

There is a long road ahead of us here, which is why we invested the time and capital to develop the world's only purpose built Silicon Carbide Device Fab. We're keenly focused on execution and firmly believe we're doing this right. Doing this at scale at 200 millimeter from the outset will result in gaining and sustaining significant market share in the coming decades. It is rewarding to see the pieces of our long term strategy become a reality, albeit on a longer time line than we originally anticipated. The remainder of this fiscal year and particularly the second half We'll prove the conviction that we've always had in our strategy, in our products and in our team.

Speaker 2

It is extremely exciting to see what's on the horizon. I'll now turn it over to Neil, who will provide an overview of our financial results and outlook. Neil?

Speaker 3

Thanks, Greg, and good afternoon, everyone. During the Q1, we achieved revenue, gross margin and EPS results, all at the high end of our guidance range. In addition, we expect continued revenue growth and gross margin expansion as we transition into 2Q 2024. The outperformance in our financial results was underpinned by $4,000,000 of revenue from Mohawk Valley during the quarter, Up from $1,000,000 in the prior quarter and we expect to grow that to between $10,000,000 to $15,000,000 of revenue as we transition into 2Q 2024. While we expect some variability in the production ramp at Mohawk Valley, we remain on pace for the larger step up in revenue as we transition into 3Q 2024.

Speaker 3

With that, let me review the financial results in more detail. I'll start by providing an overview of the Q1. Revenue from continuing operations for the quarter was $197,000,000 compared to our updated guidance range of $185,000,000 to $205,000,000 and growth of 4.2% year over year. Power device revenue was impacted by Lower industrial and energy demand, primarily in China and the broader Asia market, partially offset by the revenue ramp in Mohawk Valley. Materials 150 millimeter substrate revenue achieved a record quarter above our expectations, driven by continued strong demand And record manufacturing performance by our Durham Materials Operations team.

Speaker 3

As Greg mentioned earlier, our historical design and portfolio supported the 1st quarter revenue growth and we secured $2,200,000,000 of new design wins for power devices. Our design end to design win conversion rate Is ahead of our original expectations. And based on the design wins we've already secured, we have the next few years of expected revenue covered by our Non GAAP gross margin from continuing operations in the Q1 was 15.6%. Underutilization costs for the quarter were $34,400,000 representing 17.4 percent for 1740 basis points of gross margin. Outperformance was driven largely by improved materials manufacturing performance resulting in better than expected 150 millimeter materials costs and yields.

Speaker 3

In addition, we saw lower than expected underutilization costs as we ramp Mohawk Valley. We generated adjusted loss per share of $0.53 from continuing operations in the fiscal Q1 Compared to a loss of $0.36 last quarter and a loss of $0.24 in the same period last year. Adjusted loss per share was a significantly lower loss In the high end of our guidance range as higher revenue, higher gross margin and lower operating expenses all fell through to the bottom line. Before moving to the outlook, I'll touch on our balance sheet. We ended the quarter with over $3,300,000,000 of cash and liquidity on hand to support our ramp and growth plans.

Speaker 3

DSO was 55 days, while inventory days on hand was 162 days. Free cash flow during the quarter was negative $517,000,000 comprised of $113,000,000 of operating cash flow And $404,000,000 of capital expenditures. Regarding our financing initiatives, we are pursuing funding from the CHIPS Act I should have more clarity on this by early next calendar year. We are constantly evaluating ways to optimize our balance sheet and capital structure, And we'll continue to be opportunistic and flexible in our capital strategy. In the last year, we have raised $5,000,000,000 of low dilution capital across a number of vectors, including customers, governments, private financing and capital markets.

Speaker 3

In conjunction with federal funding, we are in good position to execute our capacity expansion plans, but we will remain nimble to optimize our capital structure for the long term. Turning to the 2nd quarter outlook, we are targeting revenue from continuing operations in the range of 192,000,000 to $222,000,000 driven largely by the incremental revenue contribution we expect from Mohawk Valley in this quarter. We now anticipate roughly $10,000,000 to $15,000,000 of revenue to come from Mohawk Valley in Q2. This increase in Mohawk Valley revenue will be partially continued softer demand for the industrial and energy products, primarily in the China and broader Asia markets. However, we will look to repurpose the supply to where end demand remains strong.

Speaker 3

We are also expecting non GAAP gross margin in the range of 12% to 20% with a midpoint of 16%. At the midpoint, this includes approximately 35,000,000 For negative 1700 basis points of underutilization costs as we ramp up revenue at the Mohawk Valley fab. We are also targeting non GAAP operating expenses of approximately $109,000,000 for the Q2 of fiscal year 2024, Which is inclusive of $11,000,000 of start up costs, primarily related to the JP Materials facility in Siler City, North Carolina. We expect Q2 net non operating expense of approximately $27,000,000 As I have mentioned previously, we expect non operating expense to increase As the year progresses, as we earn less interest income on our short term investments in connection with our continued investment in our facilities expansions. We expect Q2 non GAAP net loss to be between $88,000,000 $71,000,000 Our Q2 targets are based on several factors that could affect them significantly, including supply chain dynamics, overall demand, product mix, factory productivity and the competitive environment.

Speaker 3

As Greg mentioned earlier, we are moving ever closer to the significant uptick in our ramp of the Mohawk Valley fab, And we expect a larger ramp in the back half of the fiscal year. We are still extremely confident in our ability to achieve 20% utilization in the fab by June. As we indicated on our last call, there will be a lag between 20% utilization and 100,000,000 to sell our RF business to MACOM, a path we have been pursuing for quite some time. When the sale is finalized, We will have completed the path towards portfolio optimization that we have been on since 2018 and we're predominantly a lighting company. We are happy to say that Wolfspeed is now the only pure play silicon carbide business in the marketplace and we can focus all our collective efforts on the Silicon Carbide Materials and Power Device Businesses.

Speaker 3

With that, I'll pass it back to Greg.

Speaker 2

As we close out the Q1, I want to reiterate that fiscal 2024 is a pivotal year for Wolfspeed. We remain confident in our long term vision And are seeing promising results. While I gave some color earlier on design ins, I think it's worth repeating that we had a record design wins for this past quarter as customers ramp their programs. Demand has certainly attracted new entrants. And from our viewpoint and checks in the market, There is not a single player who can match our quality and our scale at 150 millimeter.

Speaker 2

And as I said earlier, No one is close to our position at 200 millimeter. This gap will only widen as we bring the JP online in the first half of fiscal twenty twenty five. Secondly, while there have been several new entrants to the materials market, Chinese and others, the significant ramp Required to create high quality materials is still in front of them. It's taken us 35 years to master this technology, Which we know firsthand can be incredibly difficult to work with, let alone scale and produce at the highest quality possible. While I've always said we are taking our competitors at their word regarding their stated capability to produce silicon carbide materials internally.

Speaker 2

It is highly unlikely that every competitor will be successful, And this will create an opportunity for those with additional materials capacity to secure long term agreements with device producers or capture an even larger share of the device market, and we are well positioned to do both. Demand remains strong across the business outside of the industrial and energy markets, particularly in China and Asia. Overall, what we have said time and time again about the transition to the use of silicon carbide rings true. The EV transition remains the largest change in the history of the automobile. And with that comes winners And losers and potentially a bumpy path.

Speaker 2

However, there's no reverting to the internal combustion engine. That is the way of the past. Silicon carbide has shown that EVs can be pushed further with extended range, Faster charge times and competitive prices. Despite the current softness in China and Asia, demand remains high for our products And customers' needs are higher than our current output levels. And this is why we are keenly focused on ramping Mohawk Valley to 20% utilization.

Speaker 2

To close, we're excited about this year. Fiscal 2023 was not without its challenges, but those challenges come with being the 1st to pursue Next generation 200 millimeter technology in silicon carbide. However, the opportunity to be the leader This transformative technology keeps us moving forward as quickly and purposely as possible to execute And generate value for our stakeholders. Thank you, operator, and we're now ready for Q and A. Thank

Operator

you. When preparing to ask your question, please ensure your phone is unmuted locally. We ask you please limit yourself to one question per person. Our first question goes to Samik Chatterjee of JPMorgan. Samik, please go ahead.

Operator

Your line is open.

Speaker 3

Hey, thanks guys. This is actually Joe Cardoso on for Samik. Yes, so for my one question, it Sounds like qualifications in the Building 10 ramp are tracking well. So as we think about what is keeping you on the sidelines relative To Mohawk reaching 20% utilization earlier than the June quarter itself, can you just walk us through what the key drivers are at this point in the ramp? Just curious to hear your thoughts on that front.

Speaker 3

Thanks for the question guys.

Speaker 2

Yes, thank you for thanks for the question. First off, you're right, Building 10 is in great shape right now. We'll be producing material in this quarter that will be able to support 15% utilization. And obviously, we have 2 quarters after that to get to 20% utilization in Mohawk Valley. So that's in really great shape.

Speaker 2

We've qualified a bunch of different MOSFETs already in that fab. All of those MOSFETs are qualified on first half success And we've actually qualified 2 modules as well that have come through around 200 millimeter, which I think is a really good sign for The quality of our back end operation. The fab itself is the world's first 200 millimeter fab and as such a lot of the machines that are in fab are seeing Volume ramp of 200 millimeter silicon carbide for the first time. And so we're working very closely with our tool vendor To ensure we have better uptime with the machine one particular machine is seeing Downtime more than we would than it should. We have a team that is completely focused on resolving that.

Speaker 2

As I mentioned, I was in the fab last week. I met with the engineers from our team as well as the engineer from the vendors team. They are all supremely confident that this is a normal process that's going through as you ramp and we will resolve this and we are on track 20% utilization in the June quarter.

Operator

Thank you. And our next question goes Harsh Kumar of Piper Sandler. Harsh, please go ahead. Your line is open.

Speaker 4

Yes. Hey, Guys, I had a quick timing question. So, Monarch Valley did $4,000,000 of revenues in the March quarter. That implies that given the timing, the lead time difference, conversion, packaging, etcetera, that means that Mohawk Valley wafer runs In the March April timeframe, we're about that $4,000,000 So my question really is, could you give us a glimpse into what Mohawk While the wafer runs are looking like on a dollar basis today, and that would be the

Speaker 3

color that I'm looking for. Thanks. Hey, Harsh. Thanks for the question. This is Neel.

Speaker 3

So first of all, let me just when you start thinking about utilization of fab and how that relates to wafer starts, That's really what we're talking about here. So utilization in the fab is really a function more of wafer starts. So when we talked about that into 15% Out of building attendance for that means we're running wafers out of North Carolina, flowing carbide 200 millimeter substrate out of North Carolina That could potentially support the bad at 15% utilization even by the end of this year. As you look out to the end of the year, we're still on target Yes, the 20% utilization. So what that means is we're seeing solid performance from a substrate perspective to meet that goal.

Speaker 3

After that, what that means is, again, it starts utilization. So what that means is you have to put the wafers in the fab, you've got to run those through the fab, you've got that cycle time, You got to send it to the back end and be either sold as devices or as packaged parts that may have throughout the packages. So there are various cycle times on that as well. So Once we get to the 20 percent utilization, there'll be a bit of lag as we work through those cycle times, other than we see, the revenue that corresponds to that. So in this case, once we get to 20% In that June timeframe, we anticipate that being from a revenue trend line from a revenue perspective to about $100,000,000 in revenue at the end of December quarter next year.

Speaker 2

I would just maybe add one comment to it. As material goes through these tools in the factory, We're seeing great results as they go through the tool. What we're seeing though is that the downtime or the maintenance required It's higher than it should be right now. And again, I was in the fab last week. I met with the engineers on both the tool side as well as our side.

Speaker 2

And there's a very good line of sight for what we need to do to get the tool uptime where it needs to be. And As soon as that happens, our ability to transition from relatively low utilization towards this 20% Should be a very, very good snap as we fix that. As I mentioned, I was in the fab last Sweet. I will be in the fab two more times in November, including on Thanksgiving Day to continue

Operator

Thank you. And our next question go to George Gianarakis of Canaccord Genuity. George, please go ahead. Your line

Speaker 5

is open. Good afternoon, and thank you for taking my question. I just wanted to get your thoughts on some of the turbulence, to say the least, in recent discussions around EV plans at some of the The 3 European OEMs, what are your thoughts there? And I know you talked about your backlog being so robust that it didn't Kind of matter for the next couple of few quarters, but what are you seeing in your own business that may or may not reflect what we're hearing in the marketplace? Thank you.

Speaker 2

Well, obviously, we would like our Mohawk Valley to re ramp it faster and so would our customers. And as such, I've been on pretty much weekly calls with CEOs and executives from major OEMs and Tier 1s And basically their consistent message back to me is we need more and we need it simpler. So the demand that we're seeing Both near term and long term is very, very solid. I'll remind folks that many of the cars That are being sold today were designed electric carves that are being sold today were designed 5, 6, 7 years ago and are With silicon based MOSFETs or IGBTs. And what silicon carbide does is 3 important things.

Speaker 2

1, is it extends the range of the car 2, it allows the car to be charged faster from a and then 3, At the vehicle level, using silicon carbide allows the vehicle to be less expensive Because there are lots of you know, you use less battery, less cooling and different things. In fact, there was a report a few years ago That said for every incremental dollar of silicon that you spend on silicon carbide over silicon, you get $3.5 to $7 back. So basically silicon carbide is enabling longer range, it's enabling faster charging And it's enabling lower systems costs and that's kind of a trifecta for EVs. So any of the noise that you see Today, it certainly has no impact on our demand both near term and long term. And by the way, that's OEMs and Tier 1s in the U.

Speaker 2

S, in China And in

Operator

Europe. Thank you. And the next question goes to Brian Lee of Goldman Sachs. Brian, please go ahead. Your line is open.

Speaker 6

Thank you. Hey, guys. Good afternoon. Thanks for taking the question. I guess you mentioned, I think, Neil, during your prepared remarks that kind of implying a stronger step up in Mohawk in 3Q.

Speaker 6

Does that imply that the tool downtime issue that you guys have been referencing here is sort of Done by that point. And then if I just look at the numbers to the midpoint, 4 Mohawk is up like 3x sequentially in revenue terms. So is 3Q expected to be up at that level or above? Or are you talking more in absolute dollar? Yes.

Speaker 6

To be up at that level or above, are you talking more in absolute dollars when you're talking about this bigger step up? Thanks, guys. Well,

Speaker 3

I think thanks Brian for the question. So I think as Greg mentioned, there's obviously a lot of attention now that we're seeing the storage and millimeter substrates Supporting the fab ramp in a very good way at this point. So a lot of the attention is on the fab itself. We're working very closely with the fab team, with external vendor teams and whatnot to try and solve what we think are very solvable challenges in the fab right now that we're trying to get Through the system, through the up times and the cycle times and chart betting material on the bat. So our anticipation is that we see Right.

Speaker 3

The uptick in revenues, you kind of get to the back half of the year. If you take a step back and look at the pieces, maybe just unpack those a bit. Normally, when we think about revenue Guidance, we've got $100,000,000 a quarter out of Durham, dollars 90,000,000 $95,000,000 sorry, dollars 100,000,000 a quarter out of Durham for Power Devices, 90,000,000 or 95,000,000 material capacity that we've got. So the step up to the back half would be from revenue from Longmont Valley. We have $10,000,000 to $15,000,000 this quarter.

Speaker 3

You could see us doubling that again next quarter as well in Q3. So it really will just depend on how things play out from Uptime perspective and throughput perspective in the fab, but we feel that we've got good confidence right now based on the way the teams are working through the fab and throughput.

Operator

Thank you. Our next question goes to Joshua Percolta of Cowen. Joshua, please go ahead. Your line is open.

Speaker 3

Hey, guys. Thanks for taking my question. Congrats on the progress. I wanted to ask about the timeline It's the JP actually. So you mentioned it's on schedule ramping in the fiscal first half of twenty twenty five.

Speaker 3

What should we how should we expect the cadence of that ramp to look Compared to Building 10, and the reason I ask is, it sounds like there's roughly a 2 quarter lag between when you get utilizations in Building 10 to when you generate revenue. And is that sort of indicative of what we should expect at the JP when that starts up? And any initial indications But how much that could contribute in fiscal 2025? Thank you.

Speaker 2

Well, I would say, let me Maybe kick

Speaker 7

it off, Neil, if you want

Speaker 2

to add a little bit of color to it. The JMP is a substantially Larger facility than Building 10. And as such, as we turn it on, it'll turn on Pretty decent capability kind of right from the start. It's on schedule at this point and obviously we want to keep it on schedule. So that's all looking pretty good.

Speaker 2

But basically, I would anticipate that as we ramp up the JP is, I think The amount of capabilities that will be coming online will actually be quite substantial. Do you want to talk about the Hi. Yes. So on the timing, we said

Speaker 3

kind of back half of calendar next year, 2024 in terms of personal growth out of the JP, which I I think we have a good shape for right now the timeline, but our expansions are all on track from the timeline and budget perspective. So we feel good about right there. However, I'd also add to that, we're looking for ways to expand our current capacity beyond 20% just to buffer that a bit over that timeframe. We've invested in some satellite sites to help with back end wafering operations and back end operations to help with that. In addition, there's going to be opportunity I think in time, we've seen really good performance out of our operations manufacturing team.

Speaker 3

So Yield opportunity, operations productivity improvements and throughput capabilities that could bring us down that 20% or so capability at the Durham. So We're working through all of those things now, putting in extra capacity where we can, looking for yield optimization and other opportunities from a productivity perspective to bring more So we're trying to take it on from a number of angles, and we'll be happy on that as we make more progress as we get into the next year.

Speaker 2

So just to reiterate, JP is currently on schedule. We're working with our existing facilities in Durham to increase productivity to give us more than 20% utilization of the Mohawk Valley fab And we're also utilizing satellite sites for back end operations to support the JP As well. So we're trying to create a little bit of belt and suspenders on JV.

Operator

Thank you. And our next question go to Jed Dorsheimer of William Blair. Jed, please go ahead. Your line is open.

Speaker 8

Hi. Thanks for taking my question. I guess 2 part or really 2 questions. I'll break the rules, I guess. I guess, first is, You're it sounds like things are going better at Mohawk Valley, and your underutilization costs of 37,000,000 We're actually better than what you guided for, we're $34,000,000 better than what you guided in terms of $37,000,000 So I Wondering if you can maybe just talk about the revenue implications in terms of is it a direct one for 1 or is there a lagging In fact, in terms of is Mohawk scales?

Speaker 8

And then I have a follow-up here.

Speaker 7

Maybe I'll kick it off

Speaker 2

and then Neil can talk a little bit about that. It's Without a doubt, we wanted to be ramping Mohawk Valley faster than we currently are and our customers wanted that as well. So we're not satisfied with the situation. We're intensely trying to work it so forth. I think we've made a lot of really good progress on it.

Speaker 2

Obviously, Building 10 has been very, very successful. We are also extremely confident that we'll be able to get these tools to operate in the way that they are supposed to, and we'll be able to ramp that fab to 20% utilization in the June quarter.

Speaker 3

Yes. And then just from a numbers perspective, Jed, yes, we did see some benefit on the margin just because of the lower utilization level. Although I did mention, we're going to be based on what we're seeing from the substrate performance on 200 millimeter, We're going to move as quickly as we can create put more capacity online, maybe even faster than we thought initially, both in the fab and then at the material satellite sites I mentioned earlier. So You could see that underutilization number tick up throughout the year, you start to see it come down back in fiscal 2025. And that's just really related to adding more capacity given the outlook we're seeing from an industry performance perspective, just to give us as many Opportunities to supply our customers as we look out in time.

Speaker 3

As Greg said, very heavy demand, particularly on the automotive side right now, Very intense discussions with customers. So we're looking for all the ways we can to satisfy their demand with putting

Speaker 8

Great. And then just as my follow-up. If I look at the last quarter, you saw a bump up in inventory, and raw materials, I think, the greatest Increased quarter over quarter. This quarter, you saw a slight increase, I think, a 13,000,000 In inventory, I don't know the composition because the Q hasn't been filed. I'm assuming that most of that is work in process.

Speaker 8

Could you just give us some Color on that and where I'm going with this is just trying to back into the buildup of inventory from a wafer perspective? Thanks.

Speaker 2

Well, let me yes, thanks, Chad. And let me give kind of a high level on that and Neil can work through the details on this. We began working with our Raw material suppliers in May of 2019, getting ready for what is this big and transformative Ramp in silicon carbide. We knew that we were going to need to have them investing in their capacity to support this ramp and obviously I think we've done a really good job of doing that. So some of this is all just about getting material in place and capacity in place so that we're not following that Kind of upstream, if you will.

Speaker 3

Yes. And then from a numbers standpoint, Jed, that's right. I don't think there's any big pickup in finished goods, Primarily related to raw materials and WIP. So raw about ensuring we have enough raw material capacity to support the substrate ramp As Greg indicated, in addition, we're supplying a lot of wafers out of the Durham Building 10 from a 200 millimeter substrate capacity and sending those up to At the Malhar Valley, that's the other kind of tick up in inventory as well. From an finished goods perspective, we're not seeing much growth there.

Speaker 3

We're still continuing to ship to customers, but in our most satisfying business.

Operator

And our next question goes to Colin Rusch of Oppenheimer. Colin, please go ahead. Your line is open.

Speaker 9

Thanks so much. Kathy, you mentioned the potential for folks to end up exiting the market. Can you talk a little bit about how discerning the customers are at this point around assessing that risk and How impactful that is in terms of your design wins and design wins and EBITDA?

Speaker 2

Can I ask you to repeat that? It was really hard to hear you.

Speaker 3

Okay. No problem. You talked about some folks Exiting the market, or failing in

Speaker 9

the market. And then I'm curious about, your customers' ability to assess the risk of folks not being able to deliver on some of their commitments. I'm wondering how impactful that is around your design and design win performance?

Speaker 2

Yes. Well, I would say that We are clearly the leader in silicon carbide technology, supply substrates to nearly all of the Device folks out there and obviously feed those to ourselves. So having that strength really underpins Their belief in our ability to ramp this technology, like I said, I've been on weekly calls with Executives and CEOs from our Tier 1 partners, our OEM customers, etcetera, and their consistent message is they need more and they need it And then they see that we're ramping Mohawk Valley. They'd like us to ramp Mohawk Valley faster. But the one thing they see is that we have something called Mohawk Valley.

Speaker 2

We have the world's largest 200 millimeter wafer fab. They've seen that we've been able to solve the crystal growth challenge for 200 millimeter and get building 10 Operating. That's probably that's not probably, that is the hardest thing to do and Getting a solid carbide mastide is getting the wafer and the substrate right. So I think it's a matter of time For us demonstrating the 20% utilization out of Mohawk Valley, I think we're pretty close on that. As Neil said, The Building 10 is feeding Mohawk Valley now obviously at a higher rate than we're utilizing out of Mohawk Valley.

Speaker 2

We've got plenty of inventory stage stuff there. So as we knock out these last couple of bottlenecks, I think we're going to see a pretty nice tick up in Mohawk Valley. And then finally, I think it's worth mentioning or mentioning again, The fact that we've had first pass qualification on these MOSFETs coming in a new wafer fab, a new wafer diameter And so forth. It really points to the fundamental capability of this It is not normal that you would have a 100% first half success rate on all the MOSFETs that you qualified including a couple of modules. And I think that really, again, underpins the fundamental capability.

Operator

Thank you. Our next question goes to Vivek Arya of Bank of America. Vivek, please go ahead. Your line is open.

Speaker 10

Thanks for taking my question. Greg, I just wanted to get your perspective on the next 1 to 2 years. There is Just a lot of concern about more capacity coming online. I understand maybe it's not exactly the same quality as yours and maybe might not even The same cost structure, but the fact of the matter is there is a significant amount of whether it's 150 millimeter or 200 millimeter capacity. So how do you look at that?

Speaker 10

Are you assuming that the market stays undersupplied for the next 1 or 2 years? Is it just rightly supplied? What are your assumptions about industry capacity for the next 1 to 2 years?

Speaker 2

I think from my viewpoint, There is going to be a supply demand mismatch. There will be more demand than there will be supply certainly over the next couple of years and probably A lot longer than that. I would repeat something that I said in my prepared remarks. This quarter, this past quarter, We recorded a record materials revenue. So there's a lot of noise about different folks coming online, but The demand for our materials is very, very strong and we're obviously constant communication with our materials customers.

Speaker 2

Many of them are looking for extensions and expansions and things like that. And then obviously, we just reported the largest capacity reservation deposit Administrative semiconductor with our deal with Renesis. The feedback we're getting from folks is that China is doing a lot of investing in silicon carbide. They're doing that in silicon as well. But feedback we're also getting is that they're not Automotive ready at 150, let alone 200.

Speaker 2

So I really don't anticipate a Demand being below supply for any time in the future really next couple of years for sure and probably the next half a decade.

Operator

Thank you. Our next question goes to Christopher Rolland of Susquehanna. Christopher, please go ahead. Your line is open.

Speaker 11

Thanks for the question. I guess, today a competitor talked about a fairly large downtick in sick For them, I guess my question for you is, and you may have just addressed it, Greg, but Is your backlog covering all through 2024 and into 2025? Do you have any problems with customers that are looking for push outs, etcetera? And would those push outs, if you experience them, would they be fungible or transferable to someone else?

Speaker 2

Yes, let me start with an answer and then I'll kick

Speaker 7

it over to Neil for a little bit

Speaker 2

more detail. The only area of softness that we see is industrial and energy basic and primarily that's China and Asia. Everything else is pretty strong. In fact, Luneel, why don't you just kind

Speaker 3

of give some of the numbers? Yes. So if you look at the revenue outlook as you go into Second half of the year, in fact, from an auto perspective, as Greg said, very, very heavy demand. And I think that's across the U. S, that's in Europe, that's in Asia.

Speaker 3

We're seeing no heavy demand there. That's really a bunch of how fast we can ramp along that ramp ramp ramp capacity. We are seeing some softness in industrial in energy areas particularly in China and Asia. Right now China represents about 20% of our total revenue, Again, primarily in industrial and energy space. But in conversations with customer, that's really just kind of a I mean, inventory timing, we're still seeing growth there.

Speaker 3

And still very Heavy demand from automotive customers from China as well. So we're really just working through the revenue, sorry, the inventory timing if you look out into the industrial side. The third piece of that is on material side, as Greg mentioned, we're still seeing very strong demand for 150 millimeter wafers as well. We're seeing I think demand heavy in automotive devices, demand heavy in 150 millimeter substrates, A little bit of softness in industrial energy perspective, but we're just looking to match up supply and demand there right now. So there are pockets where We can take that supply and match it up to where the demand is still remain strong in industrial energy and that's really what we're looking at right now in terms of the outlook.

Operator

Thank you. The next question goes to Natalia Winkler Claire of Jefferies, Natalia, please go ahead. Your line is open.

Speaker 7

Hi. Thank you. I wanted to ask about the new design wins this quarter that you guys have seen. Could you possibly kind of Hope I figure out where the most of them are. Is there a way to think about maybe kind of an increase in industrial activity or automotive?

Speaker 7

And just broadly any additional color would be really helpful.

Speaker 2

Okay. So just from a clarification perspective, We call out design ends and that's when a customer awards us the business and then we say design win And that's when a customer transitions into production. Specifically, they have to give us purchase orders for 20% for the 1st year's anticipated Volume that they declared during the design end date. So we had $1,000,000,000 worth of design wins, which means customers were transitioning from They awarded us the program to their beginning to ramp into production. That's an incredible number by the way, and it's happening faster than we anticipated.

Speaker 2

I believe that was 230 different projects. Many of those were automotive projects and the other is sprinkled around Industrial Opportunities, but I would say the majority of those were kind of listed.

Operator

Thank you. The next question goes to Matthew Prisco of Evercore. Matthew, please go ahead. Your line is open.

Speaker 3

Thanks for taking the question guys. How should we be thinking about the gross margin path from here, Particularly given the commentary on underutilization potentially picking higher, is low to mid-twenty percent still the right range exiting the year? And What would be the primary risk drivers to that figure at this point either upside or downside? Thanks. Thanks Matt.

Speaker 3

Let me just Maybe I should unpack the gross margin a little bit as we look here. So obviously in 1Q, we had a good quarter from a gross margin perspective At the high end of the guidance range, this is really driven by strong performance from the materials operations team and just a very, very good cost And how's the performance both on 150 millimeter and 200 millimeter substrates. So that was solid. And if you go back to 4Q 2024, we reported gross margin of approximately 29%. And when we divested of RF, We picked up about 200 basis points of improvement excluding the RF business.

Speaker 3

So the baseline back in 4Q was about 31%. And we just saw about 200 basis points of improvement in gross margin quarter over quarter when you exclude that under utilization. So I'd say overall, good quarter from a gross margin perspective. And with that, a little bit of the lower impact from underutilization, although as I said earlier, Might see that tick up a bit more towards the end of the year as we bring out more capacity. So with that, as we look out beyond that, we will see an uptick in gross margin as Kind of get into 2Q, we'll see continued solid performance, offset a little bit by some of the auto mix that we'll see come into the business We continue to support that demand.

Speaker 3

We talked about underutilization being $35,000,000 at the midpoint, might tick up again as you

Speaker 10

get out to the end

Speaker 3

of the year. But as we get out towards the end of the year, 20% or so gross margin target for the end of the year still makes sense. I think you can put that in there. It's really going to be a comment following if we can drive through Mohawk Valley. We said many times, all roads lead to Mohawk Valley and I think from a market perspective, that's

Operator

Thank you. The next question goes to Edward Snyder of Charter Equity Research. Edward, please go ahead. Your line is open.

Speaker 12

Thanks a lot. Maybe first a housekeeping just to check, Neil. The quarter, if you back out, obviously, you've gotten Pro form a without the RF business and giving our utilization charges. I'm getting around 30% gross margin if you get all that out of it. And then it looks like The RF business last quarter give you I'm sorry, last year because your pro form a that was running around 24% gross margin.

Speaker 12

Just want to check on that. And then, I had a question about the materials.

Speaker 3

Yes. So in 4Q 2024, we recorded 29% gross margin. The RF business was about a 200 basis point drag, so you can think about the ex RF number mainly about 31%. So it's about 200 basis points of pickup there. If Excluding underutilization, we saw about 200 basis points pickup 4Q into 1Q.

Speaker 3

So, we reported 15.6% It's at 17.4 percent of our utilization in the quarter. As you move into Q3 and beyond, we'll see a little bit of an uptick in

Speaker 12

Great. And then in kind of the detailed survey we did of all the new competitors in China and talking to folks on the ground there. It seemed and the feedback we got from the conference in Italy, the feedback seems to be pretty consistent that on a DAI basis, Wolfspeed Reed is still the preferred vendor, even some of your competitors saw us at 2. And module, you need there's work that needs to be done because It's kind of early in modules to begin with. But the vast majority of everything you're going to be shipping provided by Wolf's by Mohawk Valley is going to be Die Anywhere, right?

Speaker 12

And so as that ramps up, some of these deals Greg, you just want to be hearing some of these deals where some of your vendors are cutting deals to get any kind of die they can get now because the demand is Far exceeds supply, could revert back to higher demand once they see the Mohawk's up and has the capacity to supply it. Isn't that a fair assessment?

Speaker 2

I think the ramp of Mohawk Valley will largely be a die story for the near term. We won some good Module business as well, but many of our customers are basically building their own Inverters in our own module, so certainly it's going to be a ramp mostly on the die side of things I would say for the near term.

Speaker 12

Great. Thanks.

Speaker 2

Thank you, Ed.

Operator

Thank you. That's all the questions that we have time for today. I'll now hand back the I'll hand the call back over to Greg Lowe, CEO, for any closing comments.

Speaker 2

Just two thoughts before we end the call. 1, demand remains very strong for silicon carbide and 2, I am personally laser focused And the Mohawk Valley ramp to 20% utilization in the June quarter. Thanks a lot for joining us today and look forward to updating you in our next quarter's results.

Operator

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.

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Key Takeaways

  • With the pending sale of its RF business to MACOM, Wolfspeed is now the world’s only pure-play vertically integrated silicon carbide company focused solely on SiC materials and power devices.
  • The Mohawk Valley 200 mm device fab ramp is ahead of plan, generating $4 M in Q1 revenue with a target of 20% utilization by June 2024 and anticipated >2× volume growth in Q2.
  • Customers remain highly engaged: Q1 saw a record $2.2 B in device design-ins (the 3rd largest ever) and $1 B converted to design wins, driven mainly by automotive programs.
  • 150 mm substrate revenue hit a record high in Q1, reflecting strong materials demand, and Wolfspeed’s Building 10 is producing enough 200 mm wafers to support 15% fab utilization this quarter.
  • Fiscal Q1 results outperformed guidance—$197 M in revenue (+4.2% YoY), a 15.6% non-GAAP gross margin, and a non-GAAP EPS loss of $0.53—while cash and liquidity stood at $3.3 B.
A.I. generated. May contain errors.
Earnings Conference Call
Wolfspeed Q1 2024
00:00 / 00:00