Q2 2020 Earnings Call
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I would now like to hand, the conference over your speaker today, Mr. taller Grampa VP of Investor Relations. Thank you. Please go ahead Sir.
Thank you Daniel and good afternoon, everyone. Welcome decreased second quarter fiscal 2020 conference call today crease CEO , Greg low increase CFO Neal rentals, we'll report on the results for the second quarter fiscal year 2020.
Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures crease results internally.
non-GAAP results are not in accordance with gap and may not be comparable to non-GAAP information provided by other companies non-GAAP information should be considered to supplement to and now the substance substitute for financial statements prepared in accordance with gap a.
A reconciliation to the most directly comparable GAAP measures in our press release the 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 during the Q and a session. We would ask that you limit yourself to one question and one follow up so that we can accommodate as many questions is.
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 Thanks, Tyler and good afternoon, everyone.
In the fiscal second quarter, we delivered revenue at the upper end of our guidance range.
We were recently notified by the department of Commerce that our license to ship to follow a would not be granted as such we have taken in inventory reserve on highway related products. If you adjust for the impact of the reserve we exceeded the midpoint of the guidance for revenue gross margin percentage Andy.
Neil will provide some additional context on inventory reserve in a couple of minutes.
We continued our transformation to position Creed for the tremendous growth opportunities ahead of us.
We are investing to support numerous growth opportunities across multiple industries underscoring our confidence in our business and its prospects.
Those of you joined us at our November Investor Day, we're able to hear about some of these opportunities and in the short time. Since then we've continued to see growing momentum for silicon carbide adoption.
Despite the follow a license denial and the short term headwinds related to the geopolitical and macroeconomic environment. The long term outlet that we on the long term outlook that we outlined at our November Investor Day remains unchanged. We continue to receive strong validation for our technology by many.
The significant customers who are leaders in their respective industries.
Crease expertise and silicon carbide is unmatched and we're building on this leadership to accelerate the transition from silicon to silicon carbide.
Ill now turn it over to Neal to provide some additional color on our second quarter financial results and the outlook for next quarter.
Thank you Greg for the second quarter of fiscal 2020 revenue decreased 14% year over year to 240, Million% to 18% lower led the segment revenue amid ongoing soft market conditions and Chinese trade in tariff issues.
Hosting revenue declined 11% year over year due to ongoing weakness in power and RF device sales.
Consolidated basis non-GAAP gross margin was 26.8%, which includes the walk away inventory reserve of approximately 8.3 million or 350 basis points of gross margin impact.
Let me take a moment to explain why we decided to take the reserve in the quarter.
Recently, we received notice from the US Department of Commerce that our license application to resume shipment of product to walk away would not be granted.
Considering this development and the fact that it has been eight months since with and has gone into effect, we don't see any opportunity at this time, where we will resume shipping any product. We currently have on hand to the customer.
As such we felt it was best to record the write down.
There will continue to comply with the ban as it relates to walk away and do not currently expect to record any RF revenue for this customer during fiscal 2020.
Our non-GAAP net loss was 10.4 million or negative 10 cents per diluted share below the midpoint of our target range due to inventory reserve, which had a negative impact of approximately five cents per diluted share.
Excluding the impact of the reserve or EPS was above the midpoint at minus five cents per diluted share.
Our second quarter non-GAAP earnings include 42.4 million of expense net of tax.
Were 39 cents per diluted share for noncash stock based compensation acquired intangibles amortization accretion on our convertible notes transformation and transaction related costs.
Factory optimization restructuring costs and other items outlined in today's earnings release.
By segment, our resorts our results were as follows.
Wolfspeed quarterly revenue declined year over year and sequentially to 121 million slightly below the midpoint of our target.
Lays in purchasing activity as it relates to the roll out of five G. networks.
Full speed gross margin was 34.6%, which includes an 8.3 million dollar impact due to the previously discussed the inventory reserve related to while away.
Excluding the law way reserve or Wolfspeed gross margin was approximately 41% within our targeted range. In addition bowl speed second quarter gross margin was also impacted by lower lower materials factory utilization and lower yields related to the wrath of R. 150 millimeters mosque that product.
L.E.D. product revenue was above our target range at 190 million.
And grew 4% sequentially.
L.E.D. gross margin was 22.2% up 300 basis points sequentially.
Early due to improve factor utilization lower impact from tariffs improve product mix and ongoing cost measures.
On allocated cost several 3.9 million for the second quarter of fiscal 2020 and are included in our overall costs to reconcile to our 64 million dollar non gap gross profit and 26.8% total gross margin for the company.
Non gap operating expenses for cute you were 85 million consistent with our target and or non gap operating loss was 21 million, which includes the impact of the inventory reserve or non gap tax rate was 43%.
During the second quarter cast generated from operations was 8 million and capital expenditures were 61 million, resulting resulting in a negative free cash flow 53 million as we continue to invest for grow to expand capacity in our will speed business.
We ended the quarter with 952 million and cash and short term investments zero balance on her line of credit.
Myrtle debt with a face value a 575 million.
For the quarter pays sales outstanding came in at 39 days.
Inventory days on hand improved to 84 days driven by the inventory right off compared to 98 days last quarter.
For fiscal 2020, we are now targeting capital investments.
Box and L.E. 230 million up from 200 million.
Howard device customers have recently indicated that their production schedules, maybe earlier than originally anticipated, which will require more manufacturing camp capacity than we have in our current plans.
Given the time required to install unqualified these tools it decided to invest now to ensure we have maximum flexibility in the event our customers need us to ramp up production sooner.
These were tools, we were planning to purchase and fiscal 2021, but I've decided to invest now so we have some additional buffer for our plan ramp or.
Capital allocation priorities remain focused on expanding capacity animals speed business.
Turning to the outlook for the third quarter of 2020, we are now targeting revenue in a range of 221 million 229 million based on the following segment trends.
Full speed revenue is expected to be flat to slightly down any sequential basis, approximately 116 million to 120 million as we continue to face external headwins softness in five G. network spending and lower electric vehicle sales in China.
In L.E.D.
<unk> basis, we expect revenue at the lower end of a typical Q3 seasonality between 105 million and 109 million. This rain range reflects the January 27th announcement by the Chinese government to extend the lunar new year holiday due to the.
Corona virus outbreak.
Outlook does not account for any future measures taken by the Chinese government in response to the health crisis that could further delay business from returning between normal operating schedule.
We target crease Q3, non gap gross margins at approximately 30% based on the following segment trends, we target will stay gross margin to be between 39% to 42% as previously communicated we are working through temporarily lower than expected yields and R. 150 millimeter must that product line.
While we saw improvements during the previous quarter yields have not yet fully returned to expected levels.
In addition, given lower five g. demand, we have lowered our utilization in our R.F. business further impacting gross margin. Therefore, we expect our gross margin percentage to remain roughly flat versus the prior period as we've said previously we see these issues as temporary nature.
To return to higher levels of gross margin once the yield improvements are implemented in the volumes increase.
It may however, take a full manufacturing cycle to <unk> results in our financial statements on C. improvements say cold.
You're targeting L.E.D. gross margin to be approximately 20% to 21% down modestly quarter over quarter to lower licensing revenue and lower volumes, partially offset by improve cost execution.
You're targeting non gap operating expenses to grow to 88 million from 85 million as we continue to invest in our will speed business, including an increase investment to prepare products for production and our Mohawk Valley Fab, which we plan to ramp in 2022.
If stated previously that changes and operating expenses can vary from quarter to quarter for a variety of reasons, putting the timing of r. and d. projects.
Marketing spend around trade shows and when I P cases go to trial.
It's hard to Q3 non gap operating lots of he between 25 million to 17 million and we target non operating income to be approximately 2 million expect are non gab effective tax rate to be approximately 30%.
You're targeting Q3 non gap net loss to be between 16 million to 10 million or lost between minus 15 cents to minus nine cents per diluted share.
<unk> E.P.S. target is lower by approximately two cents to to the ongoing impact of the terrorists.
Or non get E.P.S. target excludes acquired intangibles amortization noncash stock based compensation accretion on our convertible notes transformation and transaction related costs factory optimization restructuring costs and other items are gap and non gap targets do not include the impact of any changes to the fair value of our Lex Star investment.
R. Q3 targets are based on several factors that could Barry.
Overall demand product mix factory execution, and the competitive environment I will now turn the discussion back to Greg.
You know I want to touch on some of the comments that Neil is made before I provide enough date on our strategic transformation.
First the Opry operating environment remains challenging in the near term.
Our customers are cautious and awaiting further clarity with respect to future trade policy.
The recent trade deal, while a positive development didn't really do much for our sector.
This lack of visibility coupled with delays in on five g. side and soft or D.V. sales in China continue continues to impact us in the short term.
Now the cap X. acceleration that Neil mentioned earlier as a result of some of our power device customers, indicating their production ramp schedules.
<unk> earlier than they originally anticipated, which would require more manufacturing than we currently have in the in the more manufacturing capacity and we currently have an appliance.
In the last 60 days, we've met with several important customers and discuss their production time lines, which is let us to make to make these additional investments now.
This is a positive development speaks to the growing demand for silicon carbide.
The transformation of Krai remains firmly on track we have a strong team in place to drive our company forward as we position ourselves for the multi decade growth opportunities before us.
We are investing for future growth in seeing early returns on these investments as demonstrated by the critical design wins, we recently announced with industry leaders.
Are 9 billion dollar device <unk> <unk> pipeline is large and robust and we are working hard to convert these opportunities into wins.
Last quarter, we were watered new design ends for will speed products totally hundreds of millions of dollars further demonstrating our ability to compete and went into marketplace.
As we've mentioned previously customers tell us that they expect to make decisions on about half of our 9 billion dollar device pipeline over the next six to 18 months.
This is a tremendous opportunity and we're making the necessary investments to expand our capacity with our Mohawk Valley Fab.
We selected the construction company work is underway at the site and we expect the initial production ramp to begin and calendar year 2022.
This highly automated facility will allow us to meet the growing demand for silicon carbide technologies within improved efficiency and scale.
In automotive.
Industry is transforming driven by the transition from internal combustion engines to electric vehicles and from silicon to Silicon <unk> carbide.
In the beginning of January I spent a few days after consumer electronics show meeting with several of our <unk> and tear one automotive customers.
The benefits of Silicon carbide are clear and create significant value for automakers and customers alike.
Our leadership and expertise in silicon carbide, coupled with our commitment to x. expanding capacity position as well to capitalize on this opportunity.
Additionally, while we've seen some near term delays and the five g. rollout.
The growth in mobile data is substantial and the speed set are required for this for these applications are increasing everyday underscoring the market need for five g.
Beyond these markets the application for silicon carbide abroad across solar aerospace and defense and industrials and we look forward to expanding our market leading position as we drive the world's transition from silicon to silicon carbide.
There was a high level optimism at crazy that we have the right product set a strong engagement with our and strong engagement with our customers to continue to drive this transition.
What's that alternative back over to the operator, and we'll begin R.Q. and a section.
As a reminder to ask a question you will need Crestar one on your telephone to withdraw your question press the pound key in the interest of time, we have such Cleveland yourself to one question and won't follow up please stand by and while we compiled a q. and a roster.
Our first question comes from Brian lead with Goldman Sachs Airlines Nope.
Hey, guys. Thanks for taking the questions, maybe just a simple and to start off for the guidance for fiscal case, three you know Neil you're mentioning the lunar new year holiday <unk> extended by three days I believe so fair to assume the guide would've been something more like 230 to 37 or so to reflect about the three days.
Revenues, that's the way to think about it.
Yeah, Let me, let me just kind of hit on that but I think you're hitting on the on the kind of the way point there. So the L.E.D. rather than the midpoint of the guide for three Q. is down approximately 10% quarter of a quarter. If you look in our L.E.D. business historically seasonality runs down about 5% to 10% due to the Chinese new year holiday.
So what we're seeing here is we got notification from the Chinese government that you ever going to extend the holiday and our fat or L.E.D. factory in China is not going to reopen until February 10th. So what we've done there is we've taken the guidance down kind of the low end up normal seasonality and that's kind of where we've ended up so the situation.
There remains fluid Ah, it's hard to say what would happen if the additional actions were taken but will continue to monitor the situation and in respond accordingly.
Okay Fair enough. That's helpful. And then the wool speech side I know this the manufacturing cycle that you talked about can you give us some sense sort of quantify that timeline to any degree I mean, the most people would would take the that's headquarters to mean that you know about you know just to see quarters.
Into this and so we do in for gross margins are are in this high thirties to low forties range in most paid for the remainder of fiscal 2020, if if this is.
No one year manufacturing cycle or how should we be thinking about I guess the timeline here before we start to see some real improvement on the margins side. It really depends on how you know how the yields improve on the on the on 150 millimeter Hamas that product line. So I think we go back to last quarter. We mentioned, we had a scrap and then there on that same product line and we've we've since reason.
All that issues with additive that has that we've we fix that we're heading in the right direction now what we're talking about his driving those yields back up and we have seen improvement in the yield so throughout the quarter of the yields improved and a number of the fixes that we put in place you know be sought we saw the result of that but it didn't get all the way back up to the to the level. We had expected so it's lower than we had.
<unk>, we do have a number of fixes in place right now and we're working through that and I think as we mentioned before takes a manufacturing cycle or two before you put the fix in and then it gets you know you kind of see it in a in a financial results. So it'll be a function of the timing of when those fixes get applied and then when that you know manufacturing cycle.
To begin to hit the kind of financials as we move forward. So I kind of expect us to bump around for a little bit you know as we move forward or the second thing on that is you know we also talked about some utilization challenges you know if you look at you know the hallway situation as well the lower while on the side you networks and we'd taken.
Some of the R.F. utilization down as well to to manage that so as a yields improving the volumes come back up we expect to get to the you know improve the margins and there's no way reflects our view on what the longer term you know gross margin opportunities for both speed that we laid out in the best Your day, which was in the the low kind of 50% range.
Thank you in our next question custom jet Dorsheimer.
<unk>.
Hi, Thanks, I guess first question is one that you know is probably open ended but given the fluid and dynamic situation over in China.
You know could you help us think through overall exposure not just in terms of Chinese customers, but in terms of you know an extension of the of Chinese new year or I'm from a supply chain perspective if.
You know U.S. base customers, you know managing a procurement aren't able to go over there how should we think of.
The the implications beyond what's been announced in terms of the September .
Yeah, just so let me give you a little bit of a a scope on this and then maybe we can lay down with a little bit of color. If you think about the amount of revenue we have in China. The L.E.D. business. He kind of think of it more like in the 40% range, it's been a little bit higher than that but we've taken that down obviously in the in the in the latest forecast the most he business as a as a small amount less than 10% of the revenue.
Roughly 10% of the revenue is is trying to base. So today, what we're seeing is what was late in here is the impact of what we know today.
And that's largely with the L.E.D. business and the factory for L.E.D. that we have in China.
Do have you know some suppliers in China related to both speed.
But right now as things stand today that you know that seems to be you know working working okay. It's just hard given as you mentioned the fluid easy to situation and say how that wouldn't have that would get manage going forward.
Sure I really appreciate that that's helpful. I guess, just moving over in terms of the device side of the Silicon carbide I was wondering Greg if you could just helped me in terms of.
Framing out.
Once you get a oh or once you have a wind or your customer is ramping with one of your wins what is the lead time that we should expect to see the ramp in in your business is that a a if it's a new product for example that are coming into the market <unk> are we going to see that one quarter.
Her or a little bit longer than that in terms of.
Their ability to build some inventory to wants their product. Thanks, well, it's it's definitely dependent on the industry, where we've won but as an example, we announced design wins with with Delphi and with that out and those announcements were.
Quarter, or so ago and both of those companies and their announcements talked about a ramp and 2022. So you can kind of think of it as a little over two years to begin initial ramp and as we as we talked about earlier well as we talked about in the prepared remarks.
We're now getting indications said the the ramp and 22 is going to be possibly a little bit steeper than we originally anticipated and so therefore, we're adding this capacity onboard so.
So that's I think that's a very good example of you know that's a little bit over a two year type a window from you know being awarded the program to ramping some customers are faster than at some are quite frankly, there some of the more traditional auto industry can be a little bit longer than that depending on what.
Qualification procedures are.
Thank you in our next question custom cracked Irwin with Ross Capital Partners Airlines now.
Good evening and pay should take my questions <unk>. Another big Big Picture question. We've all heard heard you say a few times show the over the last couple of years.
The the temple of activity that you're seeing with automotive Custer's is customers just really does the highest that you've seen you know throughout your career and that the visibility into this cheat sweet.
Some of these big Automotives, Oh, <unk> and their prime cheer one suppliers is never been better.
Can you maybe describe for us if anything it's changing their their level of commitment it that you're seeing on the part of customers.
The level of interest in the attention and and what they seem to be learning about silicon carbide, it's going to shape the future of adoption.
I I <unk> tempo remained super high right now at C.E.S., It with C. Sweet.
Hi, folks that Ah N.C.E.O.s, you know big cure ones and and that was that I met and in fact, just yesterday and today, we had I'm gonna guests based on the the room that I was in we'd probably had a little over half a dozen.
Folks from one of our big customers in town, having this kind of a strategic alignment.
Meeting so that the tempo it is still very very high and basically what the car manufacturers c. and what they cheer ones C.
Is they're facing a tremendous transition something that many of them haven't had.
Throughout their career in in the internal combustion moving to electric vehicle and range is the number one thing that end customers care about and silicon carbide improves the range and effectively lowest cost by requiring less battery. So.
I think that's real it's a very simple equation you know they see that silicon carbide will allow them to extend the range for the same amount of battery or.
[noise] lower the battery for the same amount of range lower the battery costs for the same one arrange and you know with batteries being the most expensive thing and electric vehicle. This is a pretty key thing. So I would say the the the tempo remains Super high and we're still you know highly engaged you know to have a little bit over half a dolphin.
Folks from from procurement engineering, R., and D. and so forth come visit us for a couple of day workshop I think is another. Good example of a of that kind of high tempo of of engagement.
Great and then my second question is is really again sort of a a longer term related question.
So.
Cars aren't near term application and we're seeing a lot of evidence of adoption. You know anything you know north of 600 vaults, we know it it's <unk>.
But there are some applications that are just starting to emerge around the edges. These days I had the the opportunity to spend the the day with the <unk> <unk> the electrics like division and some keep people from boeing's from their electric plane side.
And they're telling me basically they need very very high voltage systems, you know they they estimate to kill a lot motors, but that means three kilovolt systems.
History, providing some of the some of the military.
Work that you've done some of the <unk> <unk> developed for the military and your experience producing 6500.
Well in higher volt <unk> kind of positions you uniquely to work with these these potential huge longer term partners.
Can you maybe describes for us the emerging applications outside of E. These you know I know these are these are probably a minimum of five years away.
But do you see credibility to some of these applications actually come in and driving driving the model over the next 10 20 years.
Oh for sure.
Absolutely correct you know.
Say a couple of things one is we had.
The at our Investor Day, and November they talked about a number of different you know applications, including grid.
Type connection we have customers that are developing sort of solid state circuit breakers utilizing you know the high voltage capability that we're able to have you're exactly right and that we've demonstrated and have delivered to the market you know.
Product with multi thousand volt type capability and so as we drive.
The scale of our silicon carbide activities up it's helping us drive the overall costs down.
You know as we'd drive the cost down into enabling more and more of these opportunities you know I mentioned that we had a couple of hundred million dollars worth of design ends that happened this quarter.
Many of those designs were in industrial type applications, where there were relatively small in size, but high in number which is really good and you know so I think it's another good sign of Ah you know <unk> certainly paving the way for the adoption of Silicon carbide, but it's also enabling a lot more.
Industries. The final thing that I would say is.
We've now got.
Gotten feedback from a number of of our automotive customers that have now firmly moved away from a 400, both us to an 800 boltbus. There's still deciding on you know what technology to put in it but you know as customers move to an 800 pulled bus any automotive world.
It's certainly gives a lot more viability to the to the Silicon carbide story.
Thank you and our next question comes from.
<unk> well Sarka Securities. Your line is now.
They got six we take my question, which go back to an earlier question about you know some of the.
Bringing in some of the capital spending to support the tuition of some of your power device when pipeline presented with <unk>.
And so you know I isn't that stick in your your cat backs that you're intending for for this fiscal year is what roughly 60% over the prior year, obviously above your prior expectation. So I'm curious to know what sort of revenue you have in mind to support with this additional capacity specific to the <unk>.
<unk>.
Hey, Gary Thanks for the question, let me just let me just kind of frame up the <unk> here for a second them in kind of talk about revenue and and timing on those things. So it'd be clear, there's really there's no change to our overall capacity expansion plans. What we're doing here is we're pulling cap eggs in adjust to ensure we have enough buffer and you know kind of.
Flexibility to meet our customers knees give based on the feedback they have they've given us. So we're going to take the cat back spend of this year and if you go back to invest or day, what we said as we'd we'd spend 200 million this year, but for the next couple of years out with US we spend north of 200 million and overtime as we build out the Mohawk Valley tab and we get.
The benefits of the incentives from that program actually going to see the cap X. go down as that as that factory starts to ramp based on the you know the partnership we have with the with the state of New York and during that period, you know the 20, and 21 time frame or very much kind of investments years and that will drive some negative free cash flow in advance of those Ram.
From a cat back standpoint same capacity plan, we're just going to move somewhere that into support some of these buffers now the other thing when you think about revenue for.
The way, we talked about the business you know 2021 kind of investment years.
Start to see the you know the business ramp up more substantially in 22, and then get to kind of full I think we talked about a 1.5 billion dollar opportunity and most beat out in the you know 2024 time frame I think what we're talking about here is you know being ready for that kind of ramping 22, and potentially that ramp might be a little steeper than we had initially anticipated.
Okay, what's the switch over to the other business doesn't get much tension, but let's talk a little bit about the L.E.D. business I'm I'm, hoping you can give us an update on where you stand with moving the L.E.D. business to to a fab like model and sort of decoupling it from from the little speak business.
Yeah, we're making a I think we're making good progress there. So look I think the L.E.D. businesses, obviously being impacted right now in China, but the plan. We have at the same are going to focus on areas, where we think our customers can drive value in terms of the outsourcing a model or you know we're on track and that that plan is that really happens in two stages. The first is to move from silicon carbide.
The Sapphire type waivers and we we expect to be largely done by you know toward the end of this fiscal year and probably more.
More so even in towards the beginning of Ah you know fiscal 21, and then we'll have the fab outsourcing process that what kind of being worked you know after that but partially in line and you know partially part of that would be you know in in line with the with a substrate outsourcing. So we're making good progress the teams are working at it and.
You know in line with what we just talked about in the capacity expansion and that plays a big role to create more capacity for Wolfspeed. So we're working on it were making we're making good progress.
Thank you and our next question comes from Edward Snyder with charter equity your line is now.
Hi, This is jackie going on for Ed Snider. Thanks for taking my question. So back in November when you doubled the silicon carbide way for supply agreement with you might grow how does it affect the time frame of the agreement that it's significantly send to the existing contracts or.
Near term demand require S.T. to purchase more wafers and I'm open to the extension include another upfront cash payment like the original contract. Thanks.
Yeah, So what I would describe this as when we when we announced US we described it it it expand an extension and so part of it was an increase in the amount that they would take on a on an annual basis and part of it was extending out a little bit I would describe it more the former than the ladder.
You know in terms of the two so don't think of it as you know a doubling of the time frame or anything like that I don't want to get into any further details beyond that.
Okay no problem, thanks for that and also between the Wally band and the subsidy cuts in China last you're causing had ones in your device businesses in your comments in the last quarterly call about that'd be wafers being capacity constraints I guess why shouldn't we assume wafers, whether bear Abby account for the majority of will.
Thanks.
Yeah. So in most speed I think if you think if you go back several years ago, we kind of had talked about the business being kind of in kind of three pieces <unk> order of magnitude a third of third third for the for the revenue for both speed obviously, the materials business has grown faster than that over the period. So if I think about you know the materials business.
Being a bigger portion of all speed right now considerably considering that we have you know some challenges with the five d. roll up for for the R.F. business and easy subsidies in in in power. So.
That's probably the way to think about you know the business right now and you know as we see some of these you know longer term opportunities that we've talked about some of these pipeline winds that we've had as those start to ramp you know we should see over the longer term if the vice businesses, having Ah you know a a you know pretty substantial opportunity to grow you know out beyond the the current period as it relates to the capacity.
Question on on materials unhappy we've we've continued to invest in F.B. and we've made good progress on productivity, Italy times, there are still kind of extended but we're making good progress there you know on the capacity side.
Q in our next question cousin, Joseph Osha with Jane P. Securities Your line smelled.
[noise] Hello, everybody.
Hey, Joe Joe Hi.
Two longer term questions first oh listening to S.T. The other day I was kinda struck by how much time they spent.
Talking about developing you know alternative sources of a of materials supply and if I were you I'd be able to put off so I'm I'm kind of wondering listening to that is there are perhaps in in your business plan you know the intention in the device business at some point to start competing with with S.T. in a in.
In the the problem I'll start business and then I have a follow up.
Well, we absolutely compete into power mindset business and you know when we talk about device wins.
Were you know that that we've that we've been awarded if we've been awarded those device wins against a number of different you know companies that also happen to be our customers from a materials perspective.
So absolutely Joe that's a part of the equation you know our our vision is to convert the power electronics industry from silicon to Silicon carbide, I think there's a tremendous amount of tailwind right now and that with the bees and and the.
The industrial markets that we've talked about as well as <unk> activity. So you know I think our our view is we've got a tremendous opportunity in front of us and that you know our our materials customers who are device competitors, you know are going to see the opportunity.
We see as well and I think that the growth that we're anticipating it's kind of <unk> is going to be so strong that we basically couldn't you know handled ourselves from a device perspective.
Okay. Thanks, and and then the second question at C.E.S. I have to stay was pretty impressed by some of the non Oh large oh U.M. offerings in particular, Ruby N. and bite and then I'm. Just wondering if you can comment on what you're seeing in terms of inquiry your your point ramps or anything.
From some of these other start ups preparing tempt tend to the market this year and next.
Well I'll declined to talk about anybody specifically, but at what I would tell you is we've met you know dozens and dozens of customers.
Tier ones as well if he Oh, yeah, you know car manufacturers and as a company's dive deeper into the ramifications of the electrification of their of their drive trains and they see that they're really going to need to move to Ohio.
Voltage and they see the silicon carbide advantages over silicon dramatically improved as they go from a 400 800 revolt those customers are highly engaged with us and you know obviously, we've developed a nine little over 9 billion dollar.
<unk> pipeline of opportunity about half of that is automotive related and you know that.
Pipeline was generated over a relatively short period of time so.
What I would say Joe is so the the opportunity is relatively huge and I think the the excitement around it is very very strong companies that the.
Start up companies and pestilent, not too long ago, where the startup company are seeing you know the opportunity and and traditional car manufacturers are seeing those you know opportunities as well. So we're engaged pretty much across the board there and as I mentioned in I prepared remarks, and I've talked about you know several times.
Our customers are anticipating that they're going to be making final decisions on who they are going to go with from a MOSFET perspective.
Over the next 618 months and you know, there's a lot of intensity around that right now.
Thank you as a reminder, ladies and gentlemen that Star then once asked a question.
Our next question comes from Paul Auster with J.P. Morgan airline is now.
Yeah.
<unk> Oh, you've brought forth the cafe, so little but in response to some customer demand, but you anticipate oh, there any incentive so penalties tatsch to those customers and the business in the <unk> the <unk> you'd come through in the time.
<unk> you anticipate.
<unk> I don't think we have anything like that in there, but you know typically in the device business, that's not something where you know we would have something along those lines, but we do work very closely with these customers.
You know we've been in close contact with them very recently and the indications we're getting from them and the requests were getting from them as to be prepared for you know ramping some of these products you know earlier than we had anticipated so working very closely with them to manage that.
Okay, and then much <unk> pretty decent buzzi into Lonesome revenue shouldn't use in the space now can you characterize the split between the regions.
I guess, what I'm trying to get to use it primarily Europe or is it fairly violent <unk> any any members, but you can be helpful.
There is.
I would say there is very very good activity right now from most of the European car manufacturers you know a Volkswagen has been very very public about attend visions and electric vehicles.
Being a a pretty significant change across all of the various different brands inside a Volkswagen you know on that you know B.M.W.S. recently made some announcements and so forth and so I I Europeans are clearly moving very very rapidly and I think that's primarily driven by the.
I I incoming.
Requirements for them in terms of emission standards and those are pretty daunting. The U.S. you know obviously led by by Tesla really you know, taking the electric vehicle and making it a very real in viable story and so now you're seeing other start up.
<unk> as as was mentioned earlier, you know jumping into this business as well as the U.S.
Traditional automakers, you know getting more in line with with the electrification or the power train China has been pushing E.D.'s now for quite some time I think the the change in incentives that have happened in China has caused.
Pause in that in in the adoption of electric vehicles, but the change that's been put in place incentivizes longer range vehicles, and so as to Chinese car manufacturers begin to develop and then released to the market longer range vehicles, I think it's actually going to be.
You know a good opportunity for us because that's what we do we allow the car to go longer I with the same amount of battery so.
I'd say.
<unk>, they're not necessarily all balanced I would say, there's a lot of there's probably the most amount of intensity around electrification or the power train in Europe .
There's a tremendous amount of of activity in the U.S. in China as well.
Think you are next question comes from calling roof with Oppenheimer Your line snow.
Thanks, so much so obviously delphi to an important customer for you guys from the technology standpoint, and we understand at least part of the the merger with board Warner's being driven by customer dissatisfaction with the current solutions on the market. So you can talk a little bit about the dynamics of you know customer like Delphi going into a pretty substantial merger, which is kind of.
A lot of time and energy along with the dynamics with customers really pressing hard for not getting what they want from their suppliers at this point in terms of preparedness for production level just initial comments on that.
Well I you know that's probably a better question for Delphi, what I would say is we're really early in the US any initial feedback that we've got from from talking to to customers is actually quite positive. The the view of the Delphi Viper module is actually you know very very good we've seen.
You know.
With a lot of different customers to talk about when it great partnership with them. So you know I I would say that you know we view this as as as a borgwarner, saying you know they they believe that capability inside of Delphi of strong.
Okay, and then and just talking about the the <unk> mentioned on the hundred and 50 millimeters. You know as you get into automotive upgrades qualification you know what sort of benchmarks are you going to be looking for and can you talk about in terms of yields the that we can point to as you know meaningful progress along the way in terms of progressing towards that.
Full unmotivated qualification for power trends, maybe I'll take a a first stab at it and they don't can can talk a little bit about it as well. So you know so.
Automotive customers care about a lot of different things in quality is super important aspect of that and so.
You know in terms of getting product to them that is status of high quality and doesn't fail in their systems, that's a really important aspect.
No at this point in terms of delivering products to our our initial customers the products that they're receiving are doing well in there testing and and things are progressing along along the plan the yield it's really impacting our internal.
Supply if you will and so we've got we've got actions in place to improve those healed and we have pretty good line of sight is too you know how that's going to transition we feel pretty good about the analysis that we've done on that.
Then the additional thing that I would say is one of the important aspects of improving yield is automation and as we.
Transition to the Mohawk Valley Fab, which is opening and 2022 as the initial production ramps begin as well with most of these automotive customers. We're gonna have a highly automated factory that's going to eliminate you know the traditional you know human error type things that are entering introduce anytime humans intervene.
Act with stuff.
So we we we've got really good line of sight on that we've had many of our automotive customers have come in and done audits and so forth. They understand what we're doing we've hired folks that have come in to to help us along this journey as well the head of our quality organization ran automotive quality.
At at another semiconductor company and she's doing a a bang up job of putting things in place to be able to meet those expectations.
Thank you and our next question custom David O'connor with <unk>, the M.T. parables your lines no.
Great. Thanks for taking my question, maybe too well my side. Many for C.N., just going back to I think was Joe's or your question honesty and <unk>. So they can hardly wait to supply agreement, but site Crystal which comes on top of their acquisition of North So that was much smaller deal then.
Display. That's you guys have I'm just wondering how you see the suiting probably wait for supply landscape develop in the in the longer term.
Is there a pulled from what we ends to bring on more weight for suppliers or or could trade tensions behind the scenes tend to be pushing chip makers to rethink their wafer supplier base from a geographical perspective <unk> wouldn't follow up is going on <unk>.
Well I I think the the former is really probably the more prevalent you know theme, which is you know as c. as the industry begins to transition to silicon carbide everybody's looking at.
It's going to be my supply security.
How am I going to ensure that I'm going to be able to get what I need and so things like longterm agreements that we've done with S.T. or helpful. In that regard things like expanding capacity like we've we've announced or Super helpful. You know in that regard, we know that and that an industry that's expand.
Eating at the speed that that we currently see silicon carbide, expanding it's going to attract new entrance and there's going to be a lot of folks that are going to try to get into the silicon carbide business, including some of our silicon carbide way for customers.
What the <unk> industry is not an easy industry to to get into in fact.
You know, it's there are tremendous amounts of barriers to entry and then some of that is just intellectual property related some of it. It's trade secretly related you know to to grow a crystal is very very difficult.
The machines that you used to to grow crystals tend to be hand, built and so forth <unk>. It's not like you can just run down the street and and buy a machine is set up operation and habit producing quality crystals in any kind of short amount of time frame to to cut the wafers into slice it's difficult because the material is extremely hard.
Epee on it is difficult so you have.
Various degrees of difficulty associated with just a material side of the business.
Now, we know that I think the industry knows that but we are not resting and so what we're doing is we're driving improvements in our materials business, which are increasing yield decreasing costs increasing scale.
And being able to do more and so you know as as folks try to enter the material side of this business, they're going to be chasing us the down a relatively steep ah costs curve and so you know that's I I would say, it's very natural in an industry that that's growing like this that you would want to have.
Have you know assurance of supply in one way to do that is to get you know some alternative sources.
Our our objective is to be faster running down that cost curve than than folks who are trying to get into it can can ramp as well and you know so far it's kind of playing out very well that way.
Afraid <unk>, Greg and maybe as a follow up on Broadway.
Understand you removed from the going forward, but just wondering about the design engagements for for future <unk> projects, our product switch <unk> is there any discussion, which well we on future will not or has all engagements with <unk> for no. Thanks, No. We we we have discussions obviously with them in fact, I've I've met with.
Them in a in late December So you know if they if they are very interested in our technology and the capability. We have we've got you know products that meet their requirements are again solutions that meet the requirements were just prohibited from selling from them and the you know the the.
Nine granting of the license if you will too.
<unk>.
<unk> said for the for the near term you know, they're they're out of the equation, we'll that change in the future maybe.
I think that if trade relations between the two countries, you know normalize again and and things get into a better situation.
We have technology that that they're very interested in putting into their systems, but for all intents and purposes right now we're not counting on that and let me just limit is out of that so if you think about I think you stated it correctly you know while ways out of our short term plan as you mentioned, but I'd also consider them out of our our long term plan as well and the reason for that is to go back to Investor day.
You know we said you know we would grow most need revenue to 1.5 billion in China represented you know roughly 10% or a little bit below 10% of that revenue. So you can just read that as China was you know really not included in that business plan. So both from a short term perspective, and a longer term perspective, it's not in the plan if something changes I think that's great, but right now we're not planning on operating.
Adding while we as a customer and yeah. We believe it can still achieve the you know the goals that we laid out as Investor day, you know under that scenario.
Thing Q. and our next question cousin, Jeff Osborne was telling your line is now.
Good afternoon actually I had a follow up on me and materials on questioning great guys. When you hear any parameters you can put on you know as you double capacity anything doubles again and materials over the past few years any historical frame of reference around past reduction you're away and quantify that and see what you've seen or maybe.
Some future targets over the next year's once you think you can take cost out.
You know, we don't give that detail in primarily because we sell materials to customers and you know, there's a high sensitivity around pricing and so forth.
What I would tell you is it's a relatively steep curved.
And we've executed already you know a relatively steep curve and we've got pretty good line of sight to continued.
Improvement on that curve at a relatively steep ram.
And you know what this is driving then is the delta between silicon in Silicon carbide from a cost perspective is decreasing we don't anticipate that we'll ever get to the point, where the cost of a silicon carbide way for is going to be the same cost of a silicon wafer.
I could definitely see line of sight to the to the cost of the amount of power that you get out of a silicon carbide.
Way for getting pretty close to what you'd get out of silicon and that's primarily because you you know you get a lot more power for you'll get out that way higher power density and so you know a smaller chip can actually generate more power. So this is all really good news I would just describe it as a relatively steep curve and and I think that's what gender.
It's a lot of excitement from our materials customers because you know they see the adoption of silicon carbide, increasing based on that as well.
It's good to hear and then the last question I had was just around the the hundred and 50 millimeters manufacturing challenges and just you know reconciling that with the timing and I think you said, having to 9 billion dollar origins in the next six to 18 months I didn't know if if these challenges that are lingering are putting you in the penalty box you know that.
Coupled with not having the New York City up and running I'm, just trying to get a sense of your comfort level or have you missed out on some opportunities over the past few months because of this challenge.
Gives your potential customers the the sense that you'll be able to overcome this in a timely manner.
Oh, I I think they they know we're going to be able to overcome this and what I would say is <unk>, we're needing to new now as throw more material.
So at the wafer fab, so that we can get our customers, what they need and and a timely fashion and as I said you know before you know so far what we've gotten you know and they've put into their systems, they're saying pretty good results. So we're feeling pretty good about that and then finally you know the the real revenue ramp you know beginning and <unk>.
22, and accelerating through 2024 lines up pretty nicely with with the ramp of our factory in in Mohawk Valley. So I think the the issue is more you know our issue where we have to throw more material that stuff and you know that that stresses things you know obviously internally but.
You know, we'll get through the yield issues were pretty transparent with our customers on out.
What the challenges are but we'll get through those healed issues, we're already seeing some improvement in the factory. The scrap issue that we talked about last quarter's now fixed and now it's just a matter of increasing yields and getting them back up to where we want them to be.
Thank you ladies and gentlemen, this includes a question and answer session.
Oh now like trying to call Dakota, Grech low for any further remarks.
Thanks, everybody for your interest in your participation in today's call and we look forward to updating you it or next call. Thank you.
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