Q3 2020 Earnings Call
[music].
At this time all lines are in listen only mode. At this week. His presentation. There will be a question answer session. So lots of questions and especially you need a press star one of your telephone please be advised to today's conference is being recorded.
Fuel corny focus if its please press star zero.
I'll now like turn the conference over to your Speaker today, Holic Lombok, Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you and good afternoon, everyone woken decreased third quarter fiscal 2020 conference call today, Crees CEO, Greg low increase CFO Neal rentals, we'll report on the result.
For the third quarter fiscal year, 2020, and discuss current circumstances related to the covert 19 outbreak.
Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures trees results internally now.
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 not a substitute for financial statements prepared in accordance with GAAP a reconciliation to the most directly comparable GAAP measures.
It's in our press release and posted in the Investor Relations section of our website along with the 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.
Press release today, and the SEC filings noted in the release mentioned important factors that could cause actual results could differ materially including risks related to the spread and impact of the coded 19 pandemic.
During the Q in a session. We would ask that you limit yourself to one question and one follow up 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 call over to Greg.
Thank you Tyler and good afternoon, everyone and thank you for joining us today.
Before we get started our thoughts go out to those affected by Colgate 19.
For those working on the front line to keep the same during this pandemic.
I'd also like to give a heartfelt. Thank you to all Cree employees for their extraordinary efforts.
I've been working at our headquarters here in North Carolina since the beginning of the outbreak.
To do my day job and also help out in the mornings me afternoons with our health screening process as people arrive on campus further shifts.
I cannot I cannot expressing our how proud I am of our people.
For their dedication to keeping our business running and serving our customers during this difficult time.
Our manufacturing facilities in the U.S. continued to operate as essential businesses.
And we're closely monitoring the guidelines local state and federal officials.
While the coded 19 situation is rapidly evolving.
We remain steadfast in our commitment to the following key priorities.
First the health and safety of our employees customers and partners remains our highest priority.
We have instituted stringent safety measures, including robot screening, social distancing and cleaning protocols and all of our facilities.
We also have deferred all business travel and instituted work from home policies whenever feasible to protect our people as well as the partners we interact with.
Second we are focused on maintaining business continuity across our global operations to that end, we have implemented plans to ensure we can continue to deliver for our customers, while managing our diverse supply chain.
Our sales teams have embraced the use of digital platforms and remain in constant contact with our customers and partners along with our dedicated engineering and support staff.
Lastly, we are working hard to ensure that when this crisis subsides, we will be ready to emerge even as an even stronger business and well position to capitalize on the long term opportunities for silicon carbide.
We continue to believe that we stand before and multi decade growth opportunity for silicon carbide adoption and remain committed to investing in our capacity to meet this long term demand.
Importantly, many of our customers have indicated that their long term plans remain in place, including our long term wafer supply agreements the delivery of electric vehicles to the market and the rollout of Fiveg.
We are recognized as a valued partner in these endeavors and continue to receive strong validation for our technology from our diverse customer base.
I'll now turn it over to meal, who will provide an overview of our results for the third quarter in fiscal 2020, and an outlook for Q4 Neil.
Thank you Greg overall, our third quarter performance was negatively impacted.
Softening global demand and some disruptions to our manufacturing operations arising from the cobot 19 pandemic.
In line with our Preannouncement issued earlier this month revenues for the third quarter of fiscal 2020.
For 216 million, a decrease of 21% year over year.
Or Ltd segment revenue decreased 23% year over year, largely driven by the slowdown of the Chinese economy in light of the cobot 19 outbreak and associated disruption to our manufacturing facilities.
While wolfspeed revenue declined 19% year over year due to ongoing weakness in power and RF device sales and a temporary shutdown of our Morgan help facility.
Our non-GAAP net loss was 16 million or 14 cents per diluted share.
Our third quarter non-GAAP earnings exclude 46 million of expense at a packs.
For 43 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.
Lets review, our third quarter performance by segment.
Well speak quarterly revenue declined year over year end sequentially to 114 million.
This is primarily due to ongoing softness in our power and RF businesses that have been negatively impacted by the lower China easy demand and slower than anticipated Fiveg base station appointments outside of China.
In our power business in the near term, we expect totaled 19 to impact our customers operations as overall auto sales will be weaker in calendar 2020, but our customers tell us they remain committed to their ERP investments and are planning to maintain their original ramp schedules.
In addition, despite the uncertainty we're currently seeing a strengthening in our backlog related to both power and RF customers. However, we remain cautious and our outlook that is as it has not yet clear how the pandemic will impact and customer demand in the coming quarters.
And our RF business, our third quarter performance was negatively impacted by a temporary shutdown of our Morgan held facility.
The facility was closed for approximately two weeks in March to comply with county guidelines prior to receiving an essential business designation from the state of California.
The Morgan help facility resumed its operations on March Thirtyth. Following the implementation of several measures prior to reopening to ensure employee safety.
In Fiveg, we continue to be impacted by ongoing delays and peak in infrastructure Rollouts.
Are there continues to be significant uncertainty in this market customers, who want to leverage the higher frequencies and higher efficiency output possible from Gan on silicon carbide solutions for their fiveg infrastructure products I mean very interested in our technology.
Overall, the situation remains very fluid and as I mentioned earlier, we are encouraged to see early indications of improving demand for our products. Despite overall near term headwinds.
Our materials business continues to be fortify, our strategic long term agreements and the business performed as expected in the quarter.
Looking ahead, but we are seeing some normal variation within the confines of these agreements.
We will see a decline in revenue in the short term as one non semiconductor customer was not designated as an essential business and is not operating at this time.
Stop shipping to them, which will cause revenue to decline in Q4.
We'll see gross margin was 40%.
The year over year and sequential decline were primarily driven by lower utilization caused by the factory shutdown in Morgan Hill and by lower than expected yields related to the ramp of our 150 millimeter MOSFET product.
LCD product revenue was 102 million and decreased 15% sequentially.
While the third quarter is usually seasonally weak. This was further amplified that extended lunar new year holiday in China and subsequent global developments in response to covert 19.
Positively we have started to see a recovery led demand and we are encouraged by the improving improving order flow in the first few weeks of the fourth quarter, even though we expect to covert 19 crisis to have a lingering effect on some customers.
LT gross margin was 20% primarily due to lower factory utilization, given the extended shutdown or Chinese operations.
And allocated costs totaled 2 million for the third quarter of fiscal 2020 and are included in our overall costs to reconcile the 64 million non-GAAP gross profit and 29.8% gross margin for the company.
Non-GAAP operating expenses for Q3 were 86 million and our non-GAAP tax rate was 19%.
In light of the on going Cobot 19, situated cobot 19 situation, we are managing our operating expenses prudently.
Optimizing what needs to be done now to support future growth, while deferring nonessential costs.
Now I'd like to take a moment to discuss our balance sheet strength and ample liquidity, which we believe provides us the necessary flexibility to navigate the current environment support our business operations and maintain our capital expenditure plans to support future growth.
We ended the quarter with 853 million in cash and short term investments zero balance on our line of credit and convertible debt for the total face value of 575 million.
The third quarter days sales outstanding came in at 53 days and inventory days on hand was 99 days.
Cash used in operations was 28 million and capital expenditures were $70 million in the third quarter, resulting in a negative free cash flow of 98 million.
For fiscal 2020, we are now and are now targeting capex of approximately $240 million a slight increase from what we have communicated previously which reflects the purchase of some tools.
At favorable pricing that will be used as part of our capacity expansion.
While near term market conditions are fluid, we haven't seen any changes in the long term outlook at this time, which is why our long term strategy to increase our silicon carbide capacity and related capital expenditure expenditure plans remain intact.
Having our new New York, Mohawk Valley that up and running by 2022 and expanding our materials factory in Durham, North Carolina is critically important to deliver on our customer commitments and win additional business currently in the pipeline.
And considering the uncertainty surrounding the covert 19 pandemic, we elected to maximize our financial flexibility with our successful convertible notes offering completed earlier this month.
We decided to take advantage of favorable market conditions to de risk all possible scenarios budgetary extra capital to ensure we can meet our commitments regardless of the timing pace and duration of recovery post covert 19.
Importantly, our new convertible debt structure lowers and extends our maturities after a period of heavy capex investments that are Mohawk Valley Fab and Durham materials factory.
Now turning to our outlook.
While we expect the covert 19 crisis will continue to adversely affect our performance this quarter it remains difficult to fully evaluated to impact on the overall demand environment and our manufacturing operations.
To account for this heightened level of uncertainty we are providing a wider than usual guidance range for the fourth quarter fiscal 2020 based on what we know today.
We are targeting revenue in a range of 185 million to 215 million based on the following segment trends.
Wolfspeed revenue is expected to be between 100 million to 115 million.
While the underlying demand for our power and RF devices is improving we continue to navigate near term headwinds, including the impact of cold 19 related to more stringent safety measures that we implemented to protect our employees, which will lower factory utilization and productivity.
Led revenue is expected to be between $85 million to 100 million, mainly due to supply constraints.
We target carries Q4, non-GAAP gross margin to be between 25% to 28% based on the following segment trends.
We target Wolfspeed gross margin to be approximately 33% to 35%.
Mainly reflecting lower factory utilization and productivity you Didnt safety measures that I just mentioned.
As previously discussed we are also still experiencing lower than expected yields on a 150 millimeter MOSFET product line, which have not yet fully returned to expected levels.
We target led gross margin to be approximately 19% to 21% due to lower volumes.
We are targeting GAAP operating expenses.
To range between 83 million and 84 million as we continued to prudently manage our costs, while executing our plan investments are mostly business repair products for production or Mohawk Valley Fab, which we plan to ramp in 2022.
We target Q4, non-GAAP operating loss to be between 23 million to 38 million.
And we target non operating income to be approximately 1 million.
We expect our non-GAAP effective tax rate to be approximately 30%.
You are targeting Q4, non-GAAP net loss to be between 25 million to 60 million or a loss between 23 cents to 15 cents per diluted share.
Our non-GAAP EPS target excludes acquired intangibles amortization.
Noncash stock based compensation gain on debt extinguishment accretion on our convertible notes transformation and transaction related costs factory optimization restructuring costs and other items.
Q4 targets are based on several factors that could vary greatly including the situation with cobot 19, overall demand product mix factory productivity and the competitive environment.
With that I'll now turn the discussion back to Greg.
Thanks, Neil picking up on what Neil was just talking about I'd like to provide additional color on the latest trends, we're seeing as we navigate the near term environment.
While we cannot predict when cobot 19 will start to subside.
We expect to maintain the health measures that we have put in place for the next several months.
We're also planning to stagger the return of those employees working from home and don't expect to be back to a more normal operating environment.
Until sometime late this summer.
This measured cautious approach is being done to help protect the safety of our people.
Our more stringent safety theres, coupled with the overall operating environment will present, some tough challenges for us in the near term, but we believe the long term demand remains robust.
As we previously mentioned we are expecting decisions on a significant portion of our roughly $9 billion pipeline in the coming 12 months.
As we remain closely engaged with our customers. We're very encouraged by the positive sentiment we're hearing from them with many of them reconfirming the need for Silicon carbide technology.
We've also been extremely pleased with how our teams have quickly adapted to the current environment embracing the use of digital platforms to pursue and wind business.
The level of engagement is impressive with meetings on our digital collaboration hub totaling more than 1000 a day.
Conference calls up four fold.
Sales pitches per week up seven times in the last five weeks.
This has led to increased sales productivity as our sales team has secured more than 500 design in awards totaling approximately $400 million in the quarter.
We also continue to identify attractive design opportunities and projects at a similar pace as in the prior quarters.
Disconnects nicely with the work, we're also doing with Arrow electronics to build a silicon carbide pipeline leveraging their massive digital sales footprint.
Arrows digital media operations are the world's largest.
Connected to 80% of the global Engineering community through 30, plus media sites that attract 15 million monthly users and generate more than 50 million page views per per month.
Additionally, we recently announced with Arrow the release of our new 650, Volte Silicon carbide MOSFET.
That will deliver higher efficiency for a wide range of industrial applications and help foster the next generation of onboard EDI charging datacenters energy storage solutions.
Just reshape our cloud and renewable energy infrastructure.
This partnership is helping drive the transition from traditional silicon to silicon carbide in the power electronics market and the initial feedback on this new product launch is very encouraging.
We also remain encouraged by the tremendous opportunity in recent developments in the electric vehicle market, which makes up about half of our pipeline.
The most recent report from Goldman Sachs suggest a four X increase in the total number of BD sold in 2025 versus 2019, and Thats silicon carbide can be a crucial enabling technology, given the cost and range benefits after system level.
Aside from these considerations Theres also been considerable discussion about how to stay at home orders around the world have significantly reduce pollution in many major urban markets.
This could be another catalyst for easy adoption as countries and look to reduce automotive seo to emissions.
For example, several environmental ministers from each new countries.
Have circulated an open lighter recommending that any coded 19 stimulus package must have a green component specifically referencing sustainable mobility.
Such a measure is enacted it could accelerate or increase to demand to be these in that region.
Further we have been maintaining an eye on an ongoing dialogue with our customers to support them through this crisis, while our automotive customers are addressing near term challenges, including some temporary shutdowns of their operations due to the outbreak.
Most of indicated they remain committed to delivering electric vehicles to the market.
The silicon carbide on their original timelines.
Additionally design in activity for the longer term programs remains very robust.
In Fiveg Rollouts continued to be delayed but the current crisis has underscored the critical need for strong communications infrastructure and expanded bandwidth.
While some countries have delayed five fiveg frequency auctions in the near term, we firmly believe that global implementation of Fiveg capabilities is forthcoming and are well positioned to support this transition.
Importantly, our pipeline is extremely diversified across automotive communications.
Aerospace and defense energy and many other end markets.
We are continuously growing our product our product portfolio as we release new products. We are further expanding the possibilities for us across industries end markets.
Lastly, we have a number of long term material supply agreements in place and are well positioned to continue winning new device business.
While we are currently navigating a difficult short term operating environment like all other businesses are our long term strategy remains intact.
Maintaining our capital expenditure plan underscores our confidence in our vision.
And ability to emerge is even stronger business well position to capitalize on the long term opportunities for silicon carbide.
We have an experienced leadership team that has implemented.
Rigorous business continuity plans, allowing us to effectively balance employee safety.
With meeting the needs of our customers our financial position remained strong with a healthy balance sheet and ample liquidity to fund our current operations and invest for future growth.
Our market leading position is grounded in more than 30 years of IP and experience.
And we firmly believe we're best positioned to lead the market as we drive the transition to silicon carbide and build long term shareholder value.
With that I'll turn it back over to the operator, and we'll begin our QNX session.
Okay.
As a reminder to ask the question is depressed style line when your telephone.
To try a question pressed accounting.
Yes. Thank you please limit yourself to one question and one follow up please symbolic composite can you roster.
Our first question comes from Jed Dorsheimer with Canaccord Genuity.
[music].
Hi, Thanks for taking my questions.
Just one and a follow up I guess in.
I guess first one I know this is always hard but.
If you if you analyze the business to see.
To better quantified the impact of co bid on Wolfspeed in other words, if you didnt have that.
How should we be thinking about fab load.
In that business, if thats, a fair way too to assess.
Maybe I'll kick it off and then Neil can give you a little bit more detail I think Jed certainly.
Theres been an impact you heard we've had our Morgan Morgan Hill facility was shut down for two weeks, we've got new protocols in place that.
With that are taking.
The productivity basically out of our manufacturing plant.
Some of those protocols as an example, caveat give you one example.
We're bringing people into our wafer fab and staggered shift.
So what would normally be a 10 minute shift change now takes an hour and we have we up to 12 hour shift today, So twice a day, where we're spending and our each time for two hours out of 24.
Changing shifts if you will this is this is substantially helping us from a protocol prospective.
Inside of our North Carolina, we've had a just a couple of cases of Covance from our employees, but we've had no further transmission.
Across the rest of the employee base here and so obviously these protocols are working well Neil talked about to strengthen the bookings that were seeing both in power and.
NRF and so.
I think it goes without saying that.
This is this is definitely having an impact on on Arthur has had an impact on it so I'll turn it over the Neal for little bit more color on them.
Yes, Thats right, Greg I mean, if you look at three key with the Wolfspeed I think the quarter, while the revenue was down it largely played out as we kind of had expected. When we gave the guidance last quarter apples, Greg had mentioned that the we got the shutdown of Morgan Hill.
Approximately two weeks at the end of the quarter. So if you look at the change versus our original guidance in Threeq here. It was it was over related it was really related to the Morgan held facility everything else I would say turned out.
I have plant.
As you look forward and Greg talked about at the order book actually picked up and we're seeing it strengthened so.
The lower revenue in Fourq, you isn't really a function of the order book as much. It is as it is the factories in the safety protocols that we put in place that are driving lower productivity. So we have been designated and essential business for all of our us factories. So they are open but the protocols are putting some some stress on the system in terms the output.
And we'll just have to manage through that as we look forward.
Got it thats helpful. Thanks.
And then as my follow up.
I was wondering.
If you could talk strategically Greg if we think if we think about the Gan on silicon.
Business for Fiveg.
It's unlikely that we're going to see I mean, hopefully we see some trade resolution, but it seems somewhat unlikely at this point.
The stress test from Covidien would suggest is you had alluded to in the prepared remarks is a.
As is potentially a catalyst for infrastructure buildout.
What was wondering if you could just elaborate on how you're thinking whether or not you think.
How you're thinking about the again business for.
We're not again I felt like it but again on Silicon Carbide, then began business for next year, how should we be thinking about that is expectations have largely been.
Taken down to pretty low levels as a function of the walkaway trade issues.
And we don't anticipate that particular item resolving anytime soon so recall in our Investor day.
We've said that we have a nice opportunity across China, but in terms of.
The the long term plan, we have less than 10% of our of our revenue. In 2025 is is overall, China related and none of it is highway related.
As we just don't see any kind of path towards closure on that.
I think the.
Most of the rest of the world has slowed down the deployments there been.
They've delayed the licensing of the various different frequency spectrum to so forth.
Primarily because a lot of these companies are either shut down or in some kind of constrained environment. So forth, but I think as we said the this work from home situation of kind of run across the board here is certainly showing a pay need for an increase in bandwidth and we feel real good about the long term prospects here.
And obviously that would be without.
That would be without power.
Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking the questions hope everyone has done well.
Add two questions on gross margins.
Just the first one is maybe a bit more near term focused on the.
33% to 35% guidance for will stay for key for.
I know you talked about some of the new protocols in place, but if you could quantify a bit more for us.
Breaching from the 40% you reported in Q3, it sounded like that already had some covidien packs embedded there, but theres a five percentage decline in revenues.
At the midpoint for we'll see but then a 600 basis point decline in margins.
Doesn't seem like it's all volume I don't know if that's all the new protocols and maybe like a productivity.
But if you could just kind of walk us through a couple of the pieces here, that's a pretty meaningful.
You on Q decline in margins and I know you had talked about.
Scrap issues and utilization, but just.
With all that's going on maybe you can kind of help bridge a little bit between the 40% in the and the new guidance here for Q4, and then I had a follow up.
Yes. Thanks, Brian This is Nick I'll take a shot at that one and and first of all I think it is.
Similarly volume related.
I think Greg approach to give you.
A number of things we're doing in the factories accountable will explain that later kind of walk you through the pieces here. So first of all as you mentioned are Wolfspeed gross margin will decline.
The lower gross margin I think like revenue is driven by the lower factory productivity.
And the utilization so again, while we've been designated as essential businesses, we put a number of safety measures in place for.
For our employees these are going to lower the utilization levels up and drive down the gross margin.
The second thing is we continue to make progress on 150 millimeter masbate yields.
However, you know as it relates to the volumes going through the factory accept the lab and those types of things I think the progress I'm added the muted a little bit swap to think through that so as we move forward I think there's a couple of factors to consider here in the first relates to how we manage the safety procedures.
That we've gotten place right now and regardless of what the government outcome as Greg mentioned it in the prepared remarks.
We to kind of expected those gross margins will be somewhat muted for a period of time hopefully get back to normal normal levels, and then I talk again about 150 millimeter kind of offset challenges that we've got as time moves forward I would expect though as volumes come back as we.
Eventually when we get back to more kind of a normal operating rhythm you would see them come back up to that kind of that kind of normalized basis. We've been talking about previously, but those are going to have a pretty substantial impact on the on the business in the near term.
And just add maybe a little bit of color to that and I know you have a follow up.
On iPad based.
Basically a daily basis.
Our factories will see somewhere between 45, and 65% of the normal workforce coming in and so obviously with that lowers the output that we get further for that.
We've been very strong and create a strongly encouraging people who are sick to stay home and so you have people who wouldn't normally sort of.
Just kind of deal with a cold or staying home and but Thats, obviously, a positive thing because it continues to limit the spread of of the disease any further and we do have some people that are staying at home.
Because they are higher risk of the diabetes or some other.
Respiratory condition, we have some folks that are staying at home because their primary care take or the elderly folks of their elderly parents and so forth. So we've got some of that kind of stuff. We are bringing in we are hiring some people as a replacement there, but we're being very very.
Okay.
Slower we're being very very measured in terms of doing that because.
You know with 45% to 65% of the workforce and we don't want I just swap it with a whole bunch of people that don't know how to utilize the machines and and the equipment in there. We're taking the people that do know how to do that put them on and as trainers and so forth. So we're bringing them in a very very measured pace fact, I was in one.
At a fast the other day I met a new employee that.
Kind of.
Kicked off and moving forward on one of the machine and so forth but.
So it's there's a number of different things that are impacting if bottom line is that all the things are having a positive impact on us stopping the spread of the disease, but there certainly having an impact on utilization.
Okay Fair enough that's all very helpful.
It may be moving.
To more of a longer term question because hopefully all of this does normalize.
Sooner rather than later, but as we think about the longer term margin targets I would assume they're not changed here.
But how should we think about.
Some of the mix implication so as the the 9 billion dollar device pipeline as you start to see more the mix of power devices in sales, whether the margins or the I guess, the implication to margins from from that increasing mix.
Can I ask being.
Look at other power semi is categories.
The those peers tend to have margins that are more in the thirtys and fortys.
And you guys are obviously targeting a much higher margin profile.
In the long term timeframe. So just wondering how.
The increasing mix of silicon carbide power devices should impact that will speak gross margins and why they'd be higher than traditional power semi is if that's your view thanks guys.
Maybe I'll kick it off and then turn it over to nail for some additional color and so forth.
I guess, what I would say of number one our long term view and the goal that we have of running this business north of 50%.
Hasn't changed at all I think we've got.
Pretty good line of sight to get there and we've got a pretty good.
I think we've had a pretty solid plan in place that is.
I would say mix independent, but all three of the businesses are our.
Targeting got app that or higher margins so.
The mix over a longer period of time should be an issue obviously in the near term. We've got all of these issues that we're dealing with but it really hasn't changed a longer term target, maybe I'll turn it over to Neal for a little bit more color.
Yes, I think the other thing as we've talked about before.
We've got to a nice.
Ill opportunity the materials business, I think which quarter buys us from a margin standpoint, I think the second pieces. We're we've got relatively inefficient factors going on kind of a normal operating.
Cadence and down in North Carolina, So it doesn't come on balance that starts to come back together as I've said before you know we've got pretty good line affected that we've got some long term agreements, we understand that pricing it pretty good line of sight to what the Mohawk Valley costs are going to be easily put those things together I think I think the long term margin profile, both from a pricing standpoint for what wins in the market and.
And for what we think that cost bases is going to be it pretty pretty well understood.
And then the final thing maybe I'd just add in there is that everybody knows silicon carbide substrates and more expensive than silicon.
Substrates, and we're obviously driving pretty substantial cost reductions on both the substrate and the epitaxial.
Layer on top of that.
But.
The the substrate as a percentage of Cogs for a power.
Semiconductor chip that silicon carbide is going to be more weighted towards the substrate. So as the.
We have our own internal operations on that I think we can see some upside there.
Thank you. Our next question comes from Craig Hettenbach, Let's Morgan Stanley. Your line is open.
Yes. Thanks, a question for Greg just on the design in activity that you talked about and especially with the focus on the next 12 months can you maybe just talk about in instances, where you're seeing success in winning let's kind of leading to that and also in business were competing that do not winning it what are the kind of the hurdles at this point.
Yes, I could highlight some of that we just reviewed some of that the other day. So obviously you know this past quarter, we had several hundred.
Customers went from opportunity to design in where they've kind of committed to using us and.
Super excited about that and totaling around $400 million now obviously all of those won't eventually go into production there is always kind of a.
Some percentage of that that goes away, but it's a great indication of success and.
Basically when customers do evaluations of this technology.
They look at a number of different things. They look at the device performance, we always come out very very much on top when it comes to device performance they look at.
The supply capability and obviously with the expansion that we have in silicon carbide manufacturing capacity, we come out pretty good there to promote automotive perspective, they look at your ability and automotive appear were.
We're we're coming up the learning curve I would say on that we've had we've added a substantial amount of capability inside of our team in terms of folks at understand automotive that has been a big help in terms of securing things like Delphi and set up so as an example, the woman that runs our our quality organization used to run automotive qual.
I'd for a very large.
Semiconductor company focused on automotive, so we're bringing that skill set in.
So thats than on the positive side, obviously, we're not going to win everything and I don't anticipate that we're going to win everything in our 9 billion dollar pipeline in fact.
Yes.
Probably lose a sizable amount of that at the device level.
What I would say is.
In terms of losses, sometimes it's not having exactly the right part at the right time.
There are times, where where customers are looking for a ramp that faster than we are able to handle because of because of our capacity situation, where it is today and so it goes to somebody else at the device level, what I would tell you is at.
All of that device losses that I've seen.
Have basically gone to folks that we have very good.
Relationships with in terms of material. So if we don't want at at the device we tend to when it at the material side of things I don't know at Neal you have any additional color you want to put in there.
The only thing I would add there Greg is that that's why it's so critical that we get the the Mohawk Valley Fab up in New York Delta between now and 2022 I think that really.
Changes are.
Device business from a competitive standpoint, and quality capability you know, there's other things kind of just talked about so.
And that's why we've got to absolutely stay focused on making sure that's kind of a longer term playing on board.
Got it and then just as a follow up Neil on you mentioned kind of the Opex and kind of measured spending in this environment. How does this play through kind of maybe the next couple of quarters in a visibility isn't great, but just what are some things you're able to kind of curtail and then when did things kind of get back to normal.
Yes, thanks, Mike So look we're going to be managing think prudently and what that means is we'll look at all the variable type curve opportunities in the portfolio.
It is in those types of things.
And any of discretionary expenses, obviously, we're going to pull back on and manage and I think you can see that any outlook. We just provided however, similar to driving our capex expenditure over the next.
A couple of years, we're gonna have to invest in most seat and that means in R&D resources.
To ensure we got the capability to design and get parts out. It also means sales and marketing resources to be out there and get beat on the street to be selling our parts. So I think for the for the near term I think we'll have a bit of a pullback, but I would expect that opex as time goes onto regardless of the scenario and start to tick back up again as we start to get into 2021.
Thank you. Our next question comes from Edward Snyder with charter Equities. Your line is open.
Thanks, a lot.
Couple of questions. It could on RF to begin with five you rollout outside of China, as they've been really particularly stellar, especially in the products that would use Gan. If you look at millimeter wave et cetera. So they don't use any of it.
Now that you don't have always.
Has the mix move back towards defense, which you've always been begin in is it fair to assume that.
Especially given that you are essential business that most of the business to running two will be on the auto side of it is for the defense business.
This point and.
If you could maybe as a prospect for a full you see fiveg going without wall weight in the next year or so and I will follow.
Yes, no problem. So first off we do still see pretty good excitement for Gan on silicon carbide in the Fiveg space outside of Wawa. So we're engaged with most of all of the players that you would think you'd want to engage with outside of hallway and.
Thats been going well and they like what they see in terms of a technology and were in various different phases of designing affect some of the design wins that we got last quarter were indeed in the aerospace for Gan on Silicon carbide, but you're right Ed. We also have a good.
Aerospace and defense business, we've got.
Customers in that area still.
Page with us as well and we see good long term outlook, but I wouldn't.
I wouldn't characterize the Gan on silicon carbide outside of our areas.
I would characterize it as a great as great opportunity, we've got a lot of customers evaluating the technology and I think they see the benefit of that technology, especially as it relates to massive mimo.
If I could sounds like the 130 millimeter mascoma yields fell below expectations again. This period. This this promise persisted I believe number three quarters I was hoping maybe for some color on the causes given and quickly if I'm wrong here, but aren't you in production with that same part and the RTP campus before you duplicating in Durham is.
Is it a crystal wafer and it.
Sounds like it's a device problem, but.
I'm just curious are you sourcing the crystal in the be from the same line that was supplying RTP where is it an entirely new line. So the problems could show up in any one of the three steps and that's why it's taking so long to correct any color. It's definitely yeah, it's a wafer diameter move as well so the RTP factory of 100.
Let me 100 millimeter and the the Durham factor is 150. So there is that there is a change in diameter, but I think it's really fab related than not.
The underlying technology related as Neal mentioned, we have made progress on that and so yields are improving they're just not improving at the rate that we'd like them to where the rate we'd like to get it back up to part of that over the last quarter and through this quarter is just simply the output that we're getting through the factory we're getting.
Let's turn through factory, which is.
No.
Not allowing us to get enough learning and in terms of the yield input improvement.
I did just sit through our yield.
Review just earlier today, there's lots of good things that are going on we are making improvements we have we have.
We have improvements baked in for this quarter, but it's sort of one step at a time versus a giant.
A giant leap or or bigger steps at a time.
It just recall. These are these are relatively older factories, and so there's not a whole lot automation, so turning to knobs and making the improvements requires a lot of handholding as we move to the Mohawk Valley Fab. This is going to be a highly automated sophisticated modern.
Yeah.
Wafer fab and so when you have issues like this there will be all sorts of process automation that it's going to help you big theres going to be data that's going to help you.
And.
Ill get through these things in a much faster and a much quicker manner.
Thank you. Our next question comes from Craig Irwin with Roth Capital Partners Your line.
Hi, good evening and thanks for taking my questions.
So Greg the design and metric I wouldn't 500 design check point of million revenues are really important and useful metric to share. So thank you for that.
Can you maybe comment how this compares to the preceding couple of quarters and with Cobot 19 out there have you seen any any change in this new business for a lot velocity that you're seeing on the design insight and duration right or any of these likely to contribute to short term revenue are these things that.
You know are likely to contribute over the next two years.
As we as we look at debt the bigger revenue ramp.
Thanks for the crushing Craig and what I would say is.
They design in activity and they the addition of new programs to the pipeline and so forth is continuing at the same pace that we saw before which is really good.
The fact that we got 500 design ends are up roughly $400 million. This past quarter. I think is amazing to me. Despite the fact that people have been and locked down and so forth and just as as.
Just a little factoid about 66 zero percent of those wins were automotive related and about 60% where power related and that obviously goes together because its automotive in power but.
So we're we're pretty excited about that.
In terms of in near term versus longer term I would say there's no change on that nothing has turned into its a nearer term opportunity versus a longer term opportunity most of the things that we work on especially in the automotive space are sort of 2020 to 2023.
Related as we as we've talked about before with the production ramps for Delphi and does that out and thats kind of timeframe as well.
The only near term impact that we've seen from any of our customers is their ability to get into labs can sometimes be.
Hindered.
Because there there are shut down and so maybe the evaluate the the pace of evaluation might be a little bit longer, but I'd tell you I've been on calls with many different customers and engage with many different customers and they have asked him about do you think this is going to cause a delay in your ramp up production.
And almost to a person they've said no not only will not cause a delay, but it's probably going to steepen the ramp because their focus more on the end their customers our focus more on the electrification of the powertrain, there's nobody going back and doubling down on internal combustion engine or anything.
Like that and in fact.
Automotive customers that I've talked to have said when they look at prioritizing their R&D. They obviously have to make some decisions on that because of what's happening there prioritizing electric vehicles and de prioritizing things like autonomous vehicles at least for the near term because that's sort of.
Autonomous vehicles are further out in time than that NVS.
And then the final thing I would say is.
The comments I've heard from customers.
It it's really not lost on people that cities like Los Angeles have blue Sky for no solution for the first time in a long time.
People living in different parts of the world.
That are sort of teenagers are seeing blue skies for the first time in their lives.
And when you push of trying to make any kind of stimulus package associated with.
The greenie.
Green sort of recovery and stimulus for.
Electric charging stations and so forth I. Thank all of our automotive customers are hearing all that saying all that and thinking this is going to be an opportunity for us.
Great. Thank you for that's my follow ups on eight inch.
As you're thinking about eight inch.
You can ship date or evolved over the last number of months given the issues encountered on the scale up on the MOSFET line.
And lessons that you can take on future scale up from a 150 millimeters.
What's your current thinking on eight inch.
Yes, it hasn't changed at all by the way. So we're still kind of whole systems ahead on that as it relates to the 150 to one to 100 to 150. It really has nothing to do it with the diameter itself or the materials or the underlying EFI or any of that kind of stuff. All of that is rock solid we're talking about a a chain.
In a fab that kind of a dated fab.
Its ability to our ability to fine tune it is.
Hindered by the lack of automation and so forth and then it just happened to come at a time when there is a pandemic where we have.
45% to 65% of the people coming in were prior we're prioritizing material to get the customers and so forth. So I'd say, Craig there's no change at all in the eight inch the intensity at which were driving eight inch as well.
Thank you. Our next question comes from Joseph Osha with JMP. Your line is open.
Hello, everybody. Thanks for taking my my questions I have to.
The first just relates to the way the semiconductor business, where it's one of the things you can do with.
Demand is so often you're still trying to to ramp is just kind of absorbed cost to inventory, while so I'm wondering if we might see you perhaps choose to.
Good to what the inventory go up here for a couple of quarters, while we wait for the post corporate world to catch up and then I've a follow up.
Maybe I'll kick it off and just just to make sure you understand it our demand book is actually pretty decent it's really trying to get the buyout is more the challenge for us. So you know and Thats covert related and.
Somewhat these deals that were talking about but also 45% to 65% of the folks coming in.
If we were able to build a.
You know in inventory buffer I think our customers would be pretty excited about that I'll talk let Neil talk a little bit about inventory strategy in general.
Yeah, I think I think thats right Greg. The overall this is obviously an unusual situation.
Got it our hands here with the way that the the safety protocols were impacting the factories, Joe. So I think that if we get more out and get more inventory through I think that's exactly what we do in fact, one of the areas we're focused on isn't.
Assurances apply making sure the full supply chain is supporting the factory. So while the utilization is coming down I wouldn't see that's necessarily by choice.
But I think we'll have to manage through this and it should be inventories come down a little bit in that case.
So be it what is going to have to try manage.
Yes, we can through through what we've got in front of us right now.
Okay. Thanks, that's clear and then the second question, we spent lots and lots of time talking about RF.
And while we I'm just kind of curious about how the given all of the trade and political considerations that we're thinking about what the picture looks like for your TV Uribe power MOSFET business in the into Chinese Oems in what the what the sort of trajectory of bookings as has been there.
Yes, we've got we've got good engagement with customers and the Chinese are shifting their incentive for longer range cars. So I'd say most of their most of even in China are relatively short range vehicle. So they're shifting those to log arranged vehicles and we've got good engagement with a number of different customer.
Yes over there.
In fact, I was I was over visiting them late December and.
That's a really good meetings with the with the customers over there. So I think it's just a matter of.
Them turning their cars from something on paper to something that be producing I think the interest in silicon carbide is really high because of the the fact that it helps you know with range all that being said.
I'll kind of repeat what I said earlier, Joe which is we don't we don't we don't see a clear line of sight to trade resolution anytime soon.
It seems like it seemed like over the last year every other month. There was a there was kind of an indication that right around the corner, there's going to be something resolved and then it wasn't so we've kind of just we've kind of been into mode. Now of it's just going to be an issue for quite some time and as it relates to our longer term.
Outlook.
2025 plan that we talked about at our Investor day, while we have a substantial opportunity for China.
The amount of the amount of revenue that we're going to get in 2024 actually it was.
Is.
Less than 10% dependent on China base revenue. So we've just sort of muted that assuming that there's going to be a longer term.
That this trade resolution won't well the trade issue won't resolve itself anytime soon.
Thank you. Our next question comes from Sidney Ho with Deutsche Bank. Your line is open.
Great. Thanks for taking my question I have to the first one is more relate to near term.
You talk about the seen some strengthening demand in power and RF customers can you maybe some color around what you're seeing there any particular end market geography that you will 0.20 is it just a function of factories reopening in people coming back to work and are you, suggesting that the wolfspeed revenue would have been up quarter over quarter, if when for the supply issue.
Use impacting the factories utilization throughput.
Yes, a couple of things so near term.
Things like our servers and power supplies for servers and some of the industrial markets that we plan, we're definitely seeing some amount of.
I have come back from that primarily because of what's happening with everyone working from home, we got customers definitely interested in that I'll I'll, let Neil kind of give a little bit more Colorado.
Yeah, I think we're seeing Sydney that across you know a couple of different areas. So both between industrial energy. There is some automotive applications actually the picking up although those remain relatively small in terms of the book of business. We have right now, but we're seeing so relatively broad based pickup in the business at this time, which is.
But it's good to see how would that have given us a higher revenue number and again the following quarter. You know, it's hard to say based on the backlog nothing about thats, probably probably true.
But if we're in we're happy about the backlog, obviously, but the challenge continues to be getting getting up to the factors.
Okay. That's helpful. My follow up question is staying with the Wolfspeed business can you help us understand how much appeal wolfspeed revenue today.
Maybe take a quarter is tied to automotive and within that how much is tied to current production volume versus maybe some R&D program. So future production just trying to understand what we hear globally Sars estimates are coming down a little when one of the key customers talk about low expectations for to filling call by revenue how does that impact Q.
Yes, and Neil correct me, if I'm wrong, but I think in terms of power.
Sort of high single digit percentage of the revenue low double digit percentage of revenue is going to be automotive related.
Today, it's pretty heavily well, it's pretty diverse across you know a bunch of different customer basis.
As we as we go through the through the coming years and.
Grow our book of business and automotive it obviously growing substantially faster than anything else and becomes a very large percentage of our business out in 2024, but today.
Call it.
Call It tenish percent of the of the revenue in power and so relatively small.
In terms of.
How much is production and how much is kind of ramping and so forth obviously.
Most of what we shipped in the previous couple of quarters would be more I would say production.
But as we as we move forward, we're seeing an increased demand for somebody pre production runs and and prototype builds and things like that and that we talked about that earlier.
Call a couple of quarters, I guess with last quarter, where customers are indicating that they believe the ramp up there and equipment is actually going to be steeper and so they are therefore looking for more prototypes earlier. So Neal I know if you want to add any color on that yes. The only thing is you know look we're talking a lot about the order book.
And I think what are the things that we don't know is as it relates to the covert 19 is how is that going to impact and customer demand you know court three months from now six months from now and that's the one thing we don't know so I think we're just being a little bit cautious in our outlook. Despite strong order book, we're happy to have the strong order book, but again, it's it's a very fluid dynamics situation.
Dealing with ample southern continue to monitor that I think we're seeing what the right levers article I kind of managed through the situation that we're in right now, but it's going to have to wait and see in terms of how this kind of panned out and see how the the new order or backlog kind of fills and probably move between this quarter next quarter.
Thank you. Our next question comes from David Oconnor with Deutsche Bank.
Okay.
Great. Good afternoon, guys. Thanks for taking my question.
And I lived on others would be another question the orders, but maybe I'm just one more so so just to be carrying the as you are seeing them that you have already seen a trough in orders on the things are going to improve from here and maybe until someone asked earlier, but I didnt hear the answer a little geographically can you give us any kind of color there.
And on what you're seeing from an order perspective geographically. Thanks.
Yeah. Thanks, Dave I think I think if you go back to last quarter, and then even through the University because this quarter, we have seen some strengthening of the backlog in the and the device businesses. However, I think as I. Just had mentioned I think that's been a bit cautious about that because I don't know, how that's going to play out and start deconstructing the backlog.
To this kind of really ordering or whatever that might be so we're just saying that a little bit cautious as they start to understand what end markets going to look like.
As China's coming back and age is coming back a baby is a little bit of a pick up there I would call a big but we are seeing it from from the other regions from a.
From a wolfspeed perspective, so like I said earlier, it's broad based assays, both from an industrial energy standpoint, as well as automotive we are seeing a little bit of a pickup.
But again, it's a it's a dynamic situation, we'll see how well just continue to monitor and mcl plays out.
Okay. That's quite helpful. Thanks for that and then maybe just as a follow up going back to the kind of Cleveland the wins and totaled $400 million that you mentioned earlier, Greg and where any these attributed to ARPU or how would you it's the.
When does the Aro parts of the equation coming on terms of sales. Thanks.
Yeah, I don't have the specific breakout what I would tell you is arrow is doing a fantastic job for us and when we launched a 650 Volte MOSFET program. We did that I believe we kicked it off April 1st or second.
And we are way above linearity in terms of where what our goal is together in terms of by new opportunities and design ins and so forth. It has just taken off like a rocket they're doing a great job and this is obviously a really key thing for us because.
We have a relatively small sales footprint, we're certainly sub scale when it comes to sales and application engineering footprint and they are they are definitely not pay up at massive scale and and also a great digital footprint as well. So we're really pleased with that I'm sure the.
I'd love to breakout specifically I don't habit I do know that.
Inside of our distribution channel they had a substantial percentage of our design wins.
Our design ins for the quarter, so really good progress there.
Thank you. Our next question comes from Paul costumes JP Morgan Your line is open.
Thanks for taking my question just following up on that last one I assume that the the 400.
Men in the 500 design wins this is not.
Part of the milling business go lives.
Puntland. This is more commitments taunt business is not correct statement or is this how we should see the plant loan being.
Kind of down over the course and mix coupled with his yes. The pipeline I. We have a pipeline that goes are basically a methodology that most companies view is where you have.
Opportunity, where there is just an opportunity out there and when you look at our total pipeline, that's where it starts and then you have a design in where the customer has chosen to use you and then we flip it to design win when they give us your first production order for an automotive company design is probably the most.
Important.
Metric.
You, obviously want to flip it to production, but it flips to production three or four years. Later, so you really need we getting those design ins early I wouldn't describe any of the design is we've got as kind of turns business. They are all part of that pipeline. So some of them are going to be.
Shorter term.
Power supply for a server is going to happen faster than an industrial motor which is going to happen faster than in automotive chip, which is going to happen faster than something in aerospace. So.
It's all part of the pipeline, we have things that come in and out of the pipeline all the time and like I said.
Not 100% other things that we that we get a design and we'll go into production, but increasing the number of design ins is a really positive thing.
Right.
And then maybe this is picking up from a nuance there wasn't much see the boot. The one point you said the so all of the conversations you cut.
So industry confirming their intentions to proceed as planned.
The number can you just mentioned that most of the industries.
I'm just wondering if there are any of the.
Since from customers out the door bulking up the prospects have been cubic capex plunge and these given.
We experienced the current you having.
Those are going to ensure is there any do you want to kind of differentiated tool those conversations and yeah sure.
Yes, good good catch fall and it's very very simple in terms of production. There's nobody is changing their plans in terms of it's going to push out a year or what have you. What's happening is some of the customers have labs that are shut down so they're affiliate their ability to take our part put it in an adverse.
I waited and give us feedback.
Has had been diminished because they can't get into the lab.
That doesn't mean, they're changing their their production data it's just.
You know to their decision is going to happen a little bit later because of because of that so thats. The nuance on that and that some you know that hasn't hit everybody, but it has hit a couple of different customers and I would view that as kind of.
One month to month kind of thing for the evaluation some customers actually have their labs are open.
And which is great, but nowadays I would say that all the customers that I've talked to.
I have said that their plans haven't changed and some of the customers that we've talked to just simply can't get into their labs.
Does it make sense.
Thank you. Our next question comes from Ambrish Srivastava with BMO capital. Your line is okay.
Yes.
Neil I just wanted to come back to the gross margin kind of.
Competing to move here from the first question, they're many factors that we were and obviously the cold it related.
Stuff is very hard to plan for and.
Account for but if you think about utilization, which is the biggest factory what is the fall through to.
To the margin from incremental revenue that was my question, then I was little bit confused about the.
Or the comment on these trends in the order book it doesn't seem that bad.
It doesn't seem is near term that would give you the confidence to say that yes too.
Got into Twoq, you would be.
And the utilization.
Thanks, Ambrish I'm not I'm not sure exactly what the you know the answer on the ball through is only because they have a pretty dynamic portfolio going on right now with a lot of moving pieces look with what's in there.
What I would say is though that the if you looked at the margins, where we weren't threeq you in moving the Fourq you that the difference between at 40% and kind of mid point guide. We had is really cobot related and theres different elements to that whether it be how important the employee show up to work like that kind of mentioned the kind of 45% to 65% are showing up.
In any given day.
We've changed some of the compensation for different people too.
Yes, sure we're paying people are doing different types of work and we're managing the in the staggering of the employees coming in is kind of challenging as well. So I would think of the gross margins as being very much colder related and once we're able to get back to a more stable operating situation over the kind of come back up to the normal normal bases.
Where we're at now.
As it relates to the order book I mean look we've got pretty good line of sight. So what the backlog look like and certainly the backlog, particularly in the device businesses have strengthened now as you point out with where the cobot situation and the uncertainty around recovery.
How are those order is going to play out how does end customer going to demand going to look two or three months from now that's very difficult to call, but clearly that visibility to seeing the backlog improved.
And we saw that prior to the situation getting more dire here over the last couple of months. So I think I think overall look we've got some improvement in the backlog, but again, but it's going to have to.
Played by year here until we get out to be able to mccarver is a bit over the next couple of months.
Okay. That's helpful and from my quick follow up could you just you.
You said in the prepared remarks could that be capacity plant expansion plans on track what is the capital outlay for expansion for the next year. Thank you.
Yes Neil.
Yes, let me just about every week, we normally get off the annual annual Capex I think at our next call and versus the get into our next fiscal year.
But if you go back to the Investor day, but we had said is that 2020 will be like we just said will be roughly 240 million in our highest investment in here from a capex standpoint, that's part of our longer term plan will be 2021.
I think that's why it's really important for us.
I have the ample liquidity to kind of drive that plan, regardless of kind of what the outcome is in terms of the recovery over 19, you can think of a significantly higher capex investment coming in 21, and then beyond that it starts coming down as we start seeing the.
Start seeing benefits from the deal we have partnership we have with the with state and Youre.
And just a follow up on that.
Obviously I'm in contact with a lot of customers we've had great.
Customer meetings. During this time, despite the fact that we can't fly anywhere and there is a strong desire from our customers to understand what's happening with our plans from a capex and not a capex from a capital expansion perspective, and so one of the things we do as we show and pictures of Earth being moved.
Around concrete being forward I think this past week. It was if I recall correctly with 3000 tons of concrete was port on the site.
So you're showing that picture and you say hey, we just met with our board and everyone is committed to this plan so.
The capacity that you were banking on us having when you when you chose us as your supplier is continuing and then we talk about as well that.
Not only as it is our board just not just saying that but we also have the liquidity to make it happen in almost any scenario that we can kind of contemplate in terms of what this crisis recovery could look like there is a very bizarre situation in terms of what's happening.
In the World you've got a 180 countries are impacted by Ed you've got a consensus.
GDP forecast for Q2 at a contraction that three to four times.
Stronger than any in modern history.
In all of the downturns that I've been in the semiconductor industry.
My career I've been able to watch a sports event go onto a restaurant get a haircut have my kids go to school, none of that's happening and so I think it's.
When it really translates to US is the near term is going to be super uncertain and so what we're trying to do with our customers is give them certainty that when they chose us as a supplier to ramp up in 2022 and 2023, we're going to be there and that message has really been well received.
By our customer base.
Thank you I'm showing no further questions at this time I turn call back over to Greg flow for closing remarks.
Well thanks, everyone for your interest in Cree, we wish to all the good health during this covert crisis and look forward to updating you on our next earnings call. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now.
[noise] [noise].
[noise] [noise].
[noise].
[music].
[music].
[music].