Q4 2020 Cree Inc Earnings Call

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Good day, ladies and gentlemen, and welcome to degrees fourth quarter fiscal 2020 earnings conference call. At this time all participant lines are in listen only mode. After the speakers presentation, there will be a question and answer session.

You asked a question during the session you will need to press Star then one on your telephone keypad.

Please be advised the today's conference maybe recorded.

If you acquire operator assistance. Please press Star then zero.

I'd now like to end the conference over to your host today Mr. Tyler ground bug head of Investor Relations. Please go ahead Sir.

Thank you and good afternoon, everyone. Welcome decrease fourth quarter fiscal 2020 conference call.

Today Creed CEO, Greg low.

Increase CFO Neal rentals, we'll report on the results for the fourth quarter fiscal year 2020, as well as how the company is navigating the ongoing covert 19 pandemic. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures crees 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 a supplement to and not a substitute for financial statements prepared in accordance with gap.

Reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website along with the historical summary of other key metrics.

Today's discussion includes forward looking statements about our business outlook, 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 including risks related to the spread and impact of the cobot 19 pandemic during the Q and a session we.

Would ask 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 the call over to Greg.

Thank you Tyler good afternoon, everyone and thank you for joining us today.

Before I begin I'd like to take a moment to thank all of our employees around the world I'm extremely proud of their efforts and solid execution. During this unprecedented time.

As we continue to address the impact of the pandemic on our operations the health and safety of our employees customers and partners remains our top priority and we are committed to operating safely.

As a designated essential business our facilities remained open throughout the quarter.

And we are routinely executing stringent testing cleaning and safety protocols that all of our locations.

We continue to closely monitor federal state and local guidelines and adjust our business continuity plan as appropriate.

Attendance in our factories has improved since the start of the pandemic.

But it's still below our normal operating level as we continue to operate with an abundance of caution requiring employees that had been possibly exposed to the virus to observe a mandatory quarantine period. In addition, we are also offering employees the flexibility to support the needs of their families at this time, which.

And also impact attendance.

Turning to our performance, we delivered fourth quarter results in line with our targets on revenue gross margin EPS and are encouraged by the strengthening demand in the quarter to date. Despite the continued headwinds presented by Cobot 19.

In addition, we're pleased to see silicon carbide, gaining traction in the market as evidenced by the recent announcement of Delphi win for a new battery electric vehicle and our partnership with Star power and the Yutong group for an electric bus that will use silicon carbide in the powertrain.

Our opportunity pipeline is growing driven by the outstanding work of our sales team working seamlessly on our digital selling platforms to drive new business and remain in constant contact with our customers and distribution partners.

Fiscal 2020 was a transition year for us and we made good progress on becoming a global semiconductor powerhouse while at the same time addressing the unexpected challenges associated with a pandemic and ongoing geopolitical concerns.

While the operating environment remains fluid.

We're confident in the long term growth opportunity ahead of us and firmly believe that Cree is uniquely position to capitalize on the industry's transition from silicon to silicon carbide.

Despite the market uncertainty the excitement of our customers about the next generation of semiconductor technology remains high and we are committed to our capacity expansion plan to meet this growing demand.

I'll now turn it over that Neil who'll provide an overview of our financial results and outlook for the first quarter of fiscal 2020 line Neil.

Thank you, Greg and good afternoon, everyone.

Overall as expected our fourth quarter performance.

It was impacted by softening global demand and some disruptions to our operations, resulting from the pandemic.

Revenues for the fourth quarter fiscal 2020 were 206 million a decrease of 18% year over year.

All right, let segment revenue decreased 17% year over year loss from by global trade events at events related to the pandemic.

Wolfspeed revenue declined 19% year over year.

Due to continued softness for China, DVD sales and supply and demand challenges tied to the pandemic.

Our non-GAAP net loss was 20 million or 18 cents per diluted share.

Our fourth quarter non-GAAP earnings exclude 19, and a half million of expense net of tax were 18 cents per diluted share for noncash stock based compensation acquired intangibles amortization accretion on our convertible notes project transformation and transaction related costs.

Factory optimization restructuring costs gain on partial debt extinguishment changes in our Lextar investment and other items outlined in today's earnings release.

Moving onto our fourth quarter performance by segment Wolfspeed quarterly revenue declined 5% sequentially to 108 million.

This was primarily due to lower demand from the non semiconductor customer materials business as a result of the pandemic and some push out of product by several LT customers, which more than offset improved performance in power and RF during the quarter.

And power, we continued to see strong demand for products that has been tempered by factory output related to cope with 19 safety measures.

Performance was softened by some supply constraints, we expect this improved to improve as we execute our previously announced capacity expansion plan.

Positively our automotive customers remain committed to their long term plans.

And the need for our technology and while the pandemic may impact the timing of some customer decisions the industry shift from silicon to silicon carbide continues to build momentum.

Further in the industrial space there has been broader awareness as a result of our partnership with Arrow electronics as our sales team have done a great job of showcasing the benefits of silicon carbide and new applications for their customers.

In RF, we're seeing some improved performance and we continued to grow RF backlog. While this is encouraging there are still certain markets that have delayed their fiveg rollouts.

And the pandemic has also delayed auctions in key markets.

Overall, we are encouraged by the early signs of strengthening demand at our power and RF based businesses. Despite continued near term headwinds and limited visibility we have into the full impact of the pandemic.

Moving on to materials inline with our expectations revenue declined sequentially as we were not able to ship to one non semiconductor customer that was not designated as essential as an essential business during the quarter.

We also had a few of our wafer supply customers to first shipment of some product during the quarter, which is permitted under their agreement with us.

Well, Steve gross margin was 35.3% in sequential decline was primarily driven by decrease factory efficiency due to the safety measures, we put in place to protect our employees during the pandemic.

In addition, lower yields a factory transitions also present, some short term challenges on gross margin performance and we'll continue to be a headwind will be shipped production to our new Mohawk Valley fab.

Led product revenue was 97 million and decreased approximately 4% sequentially, reflecting supply constraints. Nonetheless, our business executed well despite challenges related to increased volatility in our markets.

Let gross margin was 22.8% primarily due to favorable product and customer mix.

Unallocated non-GAAP cost totaled $6.1 million for the fourth quarter fiscal 2020 and are included in our overall costs to reconcile with $54 million non-GAAP gross profit and 26.4% gross margin for the company.

This includes some incremental costs that we incurred as a result of our cobot 19 response efforts.

Non-GAAP operating expenses for Q4 were 83 million in our non-GAAP tax rate was 30%.

This reflects our efforts to continue to execute disciplined cost control by prudently balancing our operating expenses with the necessary investments for our long term growth and the decision not to pay management bonuses and some other incentives for fiscal 2020.

For fiscal 2020 revenue was 904 million, representing a 16% decline when compared to fiscal 2019 non-GAAP net loss in fiscal 2020 was 49.1 billion or 45 cents per diluted share.

The non-GAAP loss excludes $142.6 million adjustments net of tax or $1.32 cents per diluted share.

Fiscal 2020 revenue non-GAAP gross profit for our reportable segments were as follows.

Wolfspeed revenue was 471 million and gross profit was 185 million point, 39% gross margin.

Revenue declined 13% from fiscal 2019, as a result of saw softness and customer demand as well as a cobot 19, pandemic and associated disruptions, which which significantly impacted results.

Led revenue was 433 million and gross profit was 91 billion or 21% gross margin.

Revenues declined 20% from fiscal 2019 with ongoing market softness trade and tear concerns with China and lower utilization, primarily due to colder 19.

Unallocated costs totaled $16 million for fiscal 2020 on it our and our included to reconcile to our 259 million non-GAAP gross profit for a company gross margin of 28.7%.

Now in light of the ongoing uncertainty related to covert 19, I'd like to provide an update on our strong balance sheet and healthy cash position, which gives us the financial flexibility to navigate the current environment support our business operations and maintain our capital expenditure planned to support future growth.

We ended the quarter with approximately 1.3 billion in cash and short term investments zero balance on a line of credit and convertible debt with a total face value of 1 billion.

For the fourth quarters days sales outstanding improved to 37 days and inventory days on hand was 104 days.

Cash generated from operations was 10 million and capital expenditures were 70 million in the fourth quarter, resulting in negative free cash flow of $60 million.

We reported total capital investments of 244 million in fiscal 2020, as our capital allocation for our priorities remain focused on expanding capacity in our Wolfspeed business.

Moving onto our Capex outlook for fiscal 2021.

As we discussed at our Investor Day last year fiscal 2021 will be the peak investment year to fund our long term growth ambitions.

This time, we anticipate capex of approximately 400 million to support our capacity investments.

Most notably the construction of our Mohawk Valley Fab and expansion of our Durham, and Durham Fab materials factory.

This level of investment reflects the slightly fee per customer ramp that we have discussed previously and keeps us on track to begin ramping production in the new fab beginning in calendar year 2022.

It's also important to remember that there will be some variability in our capex and cash flow during fiscal 2021.

As it is tied to the percentage of completion of Mohawk Valley and the timing of reimbursements from the state of New York.

Now turning to our outlook. The cobot 19 situation remains very fluid, making it difficult to assess its impact on our near term operations and overall demand environment.

To account for this we are again, providing a wider than usual guidance range for the first quarter fiscal 2021, along with our underlying assumptions based on what we know today.

We are targeting revenue in a range of 203 million to 217 million based on the following segment trends.

I'll speed revenue is expected to be between 107 million and $117 million.

Encouraged by the early signs of strengthening demand of the device business and our ability to improve fulfillment out of our factories, while maintaining additional coated 19 safety protocols, we have in place.

Now let revenue is expected to be between 96 million to 100 million, mainly due to improving supply dynamics.

Q1, non-GAAP gross margin is expected to be between 25% to 27%, which includes the impact of $4 million of unallocated costs relating to transitioning led factory operations to full speed.

We target most be gross margin to be approximately 35.5% to 37.5% due to better factory efficiency driven by higher attendance, but still below normal expectations. As we continued to maintain safety procedures related to covert 19.

In addition, while we continued to make progress at a 150 millimeter MOSFET yields they are still below expected levels.

We target LCD gross margin to be approximately 19.5% to 21%.

We are targeting non-GAAP operating expenses between 88 million and 89 million for the first quarter, while we maintain tight cost controls during fiscal Q4 and did not pay management bonuses were into two merit increases we will increase opex in fiscal Q1 2021.

This reflects higher spending on R&D projects, including our Mohawk Valley Fat process development and resumption of accruing for management incentives.

We expected our operating expenses will gradually increase throughout the year as our revenue normalizes.

We target Q1, non-GAAP operating loss will be between 37 million to 29 million and we target a non operating net loss to be approximately 1 million.

We expect our non-GAAP effective tax rate to be approximately 30%.

We are targeting Q1, non-GAAP net loss to be between 26 million to 22 million or loss between 24 cents to 20 cents per diluted share our non-GAAP EPS target excludes acquired intangibles amortization noncash stock based compensation.

Accretion on our convertible notes project transformation and transaction related costs factory optimization restructuring costs and other items. Our Q1 targets are based on several factors that could vary greatly including the situation, but cobot 19 overall demand product mix factory productivity and the competitive environment with that I will now.

Turn the discussion back to Greg.

Thanks, Neil and building off of what Neil just shared I'd like to discuss our recent performance in the current environment as well as provide an update on our strategic plans.

The operating environment remains challenging as dependent because ongoing while it remains difficult to predict the full impact it will have on our operations. We are focused on maintaining business continuity to continue to deliver for our customers while executing on our business plans.

Continue to be impressed with how our sales team has adapted to a virtual environment.

Successfully pursuing and winning new business.

We continue to connect with customers with approximately 4000 leads generated during the quarter.

And I'm impressed with the teams results in terms of winning new business in the fourth quarter, we secured approximately $600 million and design awards, a nice improvement from the already excellent results the team delivered in Q3.

Our partnership with Arrow electronics continues to grow and we have identified approximately $1.6 billion of silicon carbide opportunities for our wolfspeed business with arrows large and extensive sales footprint.

Our coordinated efforts to support the launch of our new 650 evil product has been very well received and the opportunity pipeline is building nicely.

As our sales team continues to deliver we're very encouraged by the growth we've seen in our pipeline over the past few months as new opportunities to continue to light up across key end segments, including automotive energy communications infrastructure, industrial and aerospace and defense.

The moment the opportunity device pipeline is well above $10 billion.

We are well positioned to win opportunities as our diversified and growing product portfolio remains a key competitive advantage in the marketplace.

We released more than 60, new wolfspeed products during fiscal 2020.

And looking ahead to next year, we're rapidly explaining expanding our product portfolio with an emphasis on critical automotive applications.

We look forward to building upon this momentum as many design awards are expected to be made in coming months.

Despite the Covance pandemic, many of our customers and prospects remain engaged and committed to their future plans, which includes silicon carbide as a critical component.

The strength of our long term plan has been underscored by recent developments, including Delphi recent win for a new battery electric vehicle, which is expected to ramp sometime between 20 to 22 and 2023.

In addition, we're also pleased to be working with star power semiconductor and the Yutong grew on an industry, leading high efficiency powertrain system for electric buses using Wolfspeed 1200, Volte silicon carbide devices.

These wins, our tangible examples of the multiyear opportunity ahead of us in the automotive space.

The benefits of Silicon carbide are clear and recognized by Oems and tier one for like and we continue to have many productive conversations with market leaders regarding how Cree can partner with them to bring forth next generation technologies.

In addition, we're following many new encouraging updates in the macro environment.

In late July the European Commission reached an agreement regarding the EU is 1.8 trillion Euro Covance 19 recovery fund.

The EU has committed 30% of their total expenditures from this fund to address climate concerns with a goal of being climate neutral by 2050.

This includes 20 billion euros designated to transport and 5 billion euros dedicated to energy, which we expect will be a positive catalyst for clean transportation and electric vehicle demand in Europe.

In Fiveg, we continue to believe this is a multi year expansion with major traction coming.

There have been a number of recent announcements coming out of Asia, pointing towards growing fiveg momentum in that region.

While the global pandemic has further delayed some rollouts in other regions, we continue to be well positioned to support this global expansion.

As we begin fiscal 2021, we're firmly committed to our long term strategy. While we expect to continue to work through cobot 19 related headwinds in the near term. We are encouraged by the growing demand, we're seeing and expect more opportunities to materialize in our device business.

Throughout fiscal 2021.

To ensure we can capitalize on this opportunity we are reiterating our capacity expansion plans.

Which are well supported by our strong balance sheet and ample liquidity.

Our capacity expansion plans are key differentiator when we go to market.

Which coupled with our superior technology and Silicon carbide demonstrated advantages is encouraging our customer to accelerate their adoption of silicon carbide.

The investments we are making today are absolutely critical to us achieving our long term goals and maintaining our leadership position.

In conclusion, while the pandemic continues to create uncertainty in the near term.

Our confidence in the long term growth opportunity for Silicon carbide remains strong.

I'm proud of how everyone Acree rose to the challenges presented in fiscal 2020.

The tremendous effort across the company is helping us win new business and driving into few transition towards silicon carbide.

Our strong balance sheet and financial position enables us to fund our operations and future growth.

I'm very confident in our path forward and believe in the underlying trends we are seeing underscore the opportunity we have ahead of us.

With that I'll turn it back over to the operator, and we'll begin our Q and a session.

Okay.

Ladies and gentlemen, if you'd like to ask a question at this time. Please press the star and the number one key on your Touchtone telephone.

If your question and answer really with stream of yourself from the Q you may do so by pressing the pound.

In the interest of time, we ask that you limit yourself to one question and one follow.

Our first question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Hi, Thanks for taking my question.

I guess side, Greg Gordon Neil.

The first question is around.

One of your largest.

Or.

If not the largest.

Material customers.

Scott a significant impact in their business due to co bid.

Last quarter I.

Particularly in in the French facility. So I'm, just wondering how that flows through the business and whether or not the vast majority of that hit occurred last quarter or is actually trickling into.

This quarter in terms of your business and then I have a follow up.

I guess I'll I'll start maybe Neil can add a little bit of.

Color to it.

Yes, I don't want to get into specifics about any particular individual customer I understand that yes phase. The obviously the dynamics of our and that contracts that we have in place our are working kind of according to the according to the plants that we had for them. So we feel pretty good about that maybe Neil.

You want to give a little bit more color on it.

Yes, I think so Jed as you looked at the last quarter I think things kind of played out as we expected.

The device side, we saw some strong demand, particularly for our power products.

We were obviously impacted the fab in terms of some of the safety procedures and then on a material side, we anticipated some slower ordering both from I would say lpa customers and some of the non lpa customers as people managed to the pandemic manage inventory levels and those types of things, but I'd say that largely played out as expected as you look into next.

Quarter I think it's.

From a device standpoint, overseeing is continued demand for the power products and what we're seeing strong backlog there.

The material side, I guess, what I'd say as we're kind of holding ground, we're seeing some push and pull within the portfolio as you move into.

Into into the next kind of period here. So I think and then as you think longer term.

As these lpa contracts are structured maybe expect to see some pickup.

You start to move into outside of December maybe into the margin quarter. So I think we've largely hit the bottom as it relates to materials, but.

I think what is going to see modest improvement from here, obviously, some potential pickup I think you the next calendar year.

That's helpful.

Just as it relates to.

The capacity expansion I was wondering if you could give maybe some further color.

In terms of the timing is well is.

Cost expectation the moved from fixed bench.

As to eight inches is a pretty significant cost down at not to mention the impact on that.

Automation associated with that equipment.

And I know you did a good job at the analyst day of kind of framing that opportunity, but is your moving closer.

To the in 21 is kind of the year for that Buildout is wondering if you could just give an update in terms of timing of both fab as well as.

Mohawk.

And then what the expectations are should we think of that is just as a linear cost down in terms of just doing that the area or how should we be thinking about that I would assume there's additional benefits, but I was wondering if you could frame that a bit more for me. Thanks, Yes, maybe I'll kick it off and then Neil can kind of unpack that a little bit.

More a lotta upgrade activity going on up and Mohawk Valley.

The fab is now going quote vertical so there are still steel girders header bidding installed and while they are being installed and so forth. We're really excited about that there has been excellent work at the prototype line.

In Albany, with some really good progress.

On that the materials.

Expansion that is part of our overall capacity expansion is going well yields and costs and so forth our are improving as well.

In terms of the broader expansion, though I'll turn it over to Neal talk a little bit about the various different pieces that we have going on.

Yes, so again, it's probably worth while kind of breaking this down a little bit so as I mentioned in the prepared remarks. The capex is going to go to roughly 400 million in fiscal 2021, and we expect that to be the peak year of spending during the long term plan that we previously announced so.

Let me just break that down into a couple of pieces first as Greg said the first.

And foremost the biggest piece of that is the Mohawk Valley Fab and again I would reiterate that lead to date, we've made excellent progress we poured concrete Greg mentioned the vertical construction is underway, we expect that add to begin ramping sometime in the 2022 going to calendar timeframe and I think what that does is it supports the wolfspeed growth and 22.

And that and beyond.

However, this is an area that could have some variability in terms of spent it's going to be a function of the timing of the build schedule and the timing of roughly $500 million of reimbursements, we expect to receive in conjunction with our partnership Understated York So.

A big project underway, and we're going to see some big moving pieces here over the next four to six quarters as we start sharing make what we think is going to be significant progress. There. The second piece is I don't want to overlook doses that we also have an expansion going on down in Durham, right now and at the fab expansion outsourcing to LNG Silicon carbide fab operations, we are going to upgrade.

Net replacing it with Wolfspeed capacity, there is going to support some of the capacity ramp at end of this year and as we as we see some opportunity in the fiscal year 22, So we expect that expansion to be complete.

Towards the end of this fiscal year, so thats kind of the second piece in the last piece of the materials expansion and you can kind of think it at war in terms of a linear basis in terms of growth.

So those are kind of that that's kind of the plan because theres a lot of moving pieces as you look here in fiscal 2021, but I really believe that that's what gives us a great basis for our capacity and our costs in our margins as you move out into the business that metric that inflection point in 22 and get the 22 plus now as it relates to.

150, and 200 look I think we've talked about building a 200 millimeter fab from Ohio Valley are still planning to do that obviously is easier to downgrade that down to two to 150 as we've talked about previously enroll will still managed through that but again overall on track a little up the capex this year and.

There could be some moving pieces as we look into the next following quarters.

Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey, guys and thanks for taking the questions.

Maybe just first off to follow up on Jets question I wanted to dig into the Capex budget here a little bit more.

Neil at that 2019 Analyst day, you guys had talked about $720 million of Capex from 2020 to 2024.

With the $400 million here targeted for 21, and what you've already spent today can you kind of update us on how much capex remains in the plan I guess for the 2022 to 2024 timeframe and then does this $720 million Capex budget is this increasing.

Based on the 21 outlook here or are you just simply.

Pulling it all forward and then kind of with what do you see out there to drive that acceleration if thats. The case and then I had a follow up.

Sure and thanks, Brian first of all let me say that Theres really no change to the for the expansion plan, we talked about the 720 billion and as we've discussed before there's also other capex in the company. Besides just the capacity expansion. So.

What are the things to recognize here as I said, there's a number of moving pieces now a lot of Mohawk Valley happens as you start to get into the end of fiscal 2000 lawn and between two and at this crossing fiscal year. So what you'll see here is just timing is more or less of a zero sum game of the spend more in 21, you spent less than 22. So if you think about that profile we've talked about before.

Peak year kind of hearing 2021, and if we start seeing the capex start to come down at 22.

Beyond.

As we've talked about also before we expect the free cash flow to be negative in those periods. As we have those significant investments and then in 22 plus as good as opposed to business starts to ramp be start to reap the benefits of that so let's go kind of the same same plan I think it just seemed the timing of the Capex Mcgrath little bit.

Okay Fair enough. That's helpful. And then just the second question on the power and RF site, Greg you made some.

Positive comments around kind of what you're seeing in Fiveg could you also maybe provide us an update on year engagement with walk away.

Theres, obviously been some more restrictions put in place there. So wondering what if any exposure you have and then what's embedded.

Into both your near and long term outlook, there with respect to that customer as well as in general around the China Fiveg base station opportunity if you get thanks guys.

Sure Brian So.

In terms of qual weight, we have not been shipping to walk away for the better part of a year and we have no.

While way revenue plan in any of our future.

Injections or forecast or what have you. So thats been out since the the ban went in place and then.

They're not in and.

In terms of.

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Possibly there there might be some small impact to the materials customers associated with far away, but we think the large.

Any large impacted we've basically taking it out of the picture so.

We have.

You know developed a good relationships with other players around the world and our repurchasing the technology that we had developed proprietary for those customers.

Last quarter, we announced that we had some communications infrastructure design wins this quarter, we talked about our total design ins at 600 million. We had a portion of that also were communications infrastructure.

Customers I guess the last the last part that I would say is that.

When you think about that $600 million of design and that we just got this quarter. That's on top of 400 million a roughly $400 million of design in that we got in the in the quarter before that so in the last two quarters.

We have racked up a 1 billion dollars' worth of design in.

And I would just remind everybody that was all during cobot, so pretty phenomenal results from from our team there.

Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.

Yes. Thank you question for Greg just some of the Dell site partnership and design win in China can you, maybe just give a sense of the breadth of activity you're seeing it as a result of that partnership and he mentioned tiny 2020 to 2023, but any other color I see as we think about that.

Business ramping in the coming years.

Well.

I want to be a little bit cautious about talking about specific customers I will say that they had the Delphi announcement.

Is incremental to the our original announcement that we had.

Now it's in September of last year. So this is an additional win which is great to see.

The traction for Silicon carbide and I think.

We're seeing that across many different space as to where one customer wins.

With us and some particular area or with some particular customer and that opens up broader opportunity I think thats why you saw our pipeline.

Now over 9 billion over $10 billion.

Got it in and then on the Arrow distribution.

Kind of product launching just given your long background in this industry and working with distribution anything you'd call out that unique in terms of clearly silicon carbide, there's a lot of interest and adoption, but it seems like that's gotten off to a very strong start even just trying to kind of contextualize.

What's happening there versus what you typically see tradition.

Well you know, we've got a very strong relationship with and partnership with Arrow and they're doing a fantastic job of this.

Promoting the 650 fold silicon carbide MOSFET, it's thousands of customers have expressed interest we're seeing everything from air conditioning motor drives plasma generators Electrosurgical unit.

Airplane galley power, even index induction Cook tops and so we're just seeing lots of different opportunities and I don't have the exact stat.

On me, but.

If you take a look at that number of countries, where they've identified opportunity, it's something greater than half I think.

Our our generate in countries, where we don't have any salespeople. So this is really the strength of arrows footprint and combined with the strength of our product portfolio is really a great. When we're really excited about it.

The fact that take out 1.6 billion dollars' worth of.

Pipeline for total Wolfspeed and are accelerating the 650 vote. We're super excited about that so I think it's.

It's really doing something that we couldn't do on our own just simply because the scale we have from a sales perspective.

Just isn't there and quite frankly number will be there we couldn't do that internally I don't think.

So leveraging their their vast sales footprint has been a great win win for both of Us and I think.

I've had plenty of time to sit down with the management team at Arrow to and I think we both feel real good about where we're going.

The results that we've gotten so far and there is no letting up.

Letting off the.

The so called gas pedal if you will.

Our next question comes from Edward Snyder with Charter equity Research. Your line is now open each thanks, a lot great couple of questions first off you say that Wolf's views of third Ghana search sequester and materials, but given other events last year, so with law way et cetera.

Sealing off and then your pricing of EFI to make it much more aggressive I think it was.

Good strained last quarter.

It seems to be the case it correctly were wrong that materials should deal at least 50% of all screw this point and Youre. Your RF business sounds like it's down hard I mean, most of all ways closer Sumitomo now, which is the two six customer and I think over half a corvels wafers for RF goes too good to see.

So is it a case that you're kind of transitioning to overpowered customer given you've got that margin almost yourself at this point billing real wafer supply are out there or is it just it.

In the RF again, RF business and you've got a plan to bring that back into still maybe you could articulate that and I have a follow up.

Yes, so first off over the last several years, our materials business has grown faster than the device business and you are in the right ZIP code in terms of.

The materials business roughly half of will speed and that's primarily been growing faster because of.

The long term agreements, we have and be the channel reach that those customers have they obviously done a good job of getting.

Getting reach into their customer base I think as we exit as it relates to those longer term out outlook, we would anticipate that our power business would be our fastest growing business.

Through the 2024 long range.

Outlook, what we shared at our Investor day, and Thats simply because of the adoption of electric vehicles come to the power device business and so we would see that ramping up pretty strong through that period as it relates to the fiveg in the communications infrastructure.

Obviously, the way situation was a pretty significant setback for us, but we've adjusted our plans we've adjusted our focus to go after non while way customers and as I mentioned as we secured some design wins last quarter, we entered.

Previous quarter, and then last quarter as well and we remain in pretty close contact with with our with that customer base.

Okay, and then maybe we could talk of raw materials business I know that since you've taken over the DLP businesses, particularly strong.

I think you with the supply constraint last quarter off on that.

We took a bigger picture view of the whole competitive dynamic you are really the only major supplier of opinion and crystal wafers.

So for sick power I know you notes to six has talked about selling any of it won't get one and we see Michael outside of that we don't see anybody out there really offering all the scale of this.

Is it fair to assume that the margin why should we assume that the margins on the wafer business for the better the device business Theres less competition and and it's a much more difficult piece of the puzzle and if thats the case.

Wouldnt wouldn't creamy better positioned as is the the fact for wafer supplier to the industry given the likelihood of.

New competition and growth this pretty much nil.

Well I think I think we kind of our position that way in terms of a supplier of wafers to the industry. We've got.

Significant.

Number of very large long term agreements with.

With people in.

The folks in the industry, we've announced a most of those and.

And we're also expanding our capacity pretty substantially.

We however believed that having vertical integration is another key factor and that certainly helping us from a design win perspective, the design ins that we've talked about this past quarter or that we mentioned in our script. This past quarter of $600 million and then the previous quarter $400 million just.

To remind everybody those are all device design ends and so I think customers that.

Look at things like continuity of supply and quality of product and so forth. They they look to us as a.

As a very confident player in silicon carbide, and the fact that we have both device and.

And materials.

Capability.

Play off on each other and I think give our customers strong amount of confidence in that area.

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks, So much can you just speak a little bit in a little bit more detail about the supply chain issues that you're seeing in mentioned in the script for both I understand that.

Hi expense those are and how.

How much duration or expecting them to.

How long are expected to lance.

Yes. So I think you think about the supply chain issues that we've talked about before is we have these.

Safety procedures, we put into the factories and what that essentially means is.

As you bring people in and out of the factory, we take more time in space people out in People's temperatures and do all those things in terms of.

Ensuring employee safety as you think about our kind of near term challenges in health and safety of employees is certainly number one so what that's doing it is putting pressure on.

Efficiency within the factories.

And it's limiting some of the upside potential I think we have clearly must be power business right now, but it's also pressuring gross margins because youre not getting the same efficiency because we get monthly. So it is it is pressuring us, but maybe maybe the best way to answer that is kind of trouble context as to kind of how we think about metric implication on supply, but also on the margins.

At this quarter, we talked about Borden being down.

Under 40% at 35% as you move to next quarter.

We're talking about 36.5% the midpoint.

I would say normalized margins for Cree is just north of 40% around 40%. It yet if you exclude cold it and over the long term, we think about 50% once we get the Mohawk Valley backup. So there are several things that we need to do to get the margins back up and the safety kind of procedures and questions. You can ask about a one of them. So the first one is.

You need to get kind of get back to that normal factory efficiency and that's what's going to be a function of how long. These procedures are in place.

Right now I don't see that changing anytime soon certainly for the ended the year likely into next year.

Second thing.

And I'm just follow back up on that is on a 150 million amongst that you also talked about those before.

We will need to get some improvement there and then lastly will have to get some visibility into volume, which was a question earlier on the materials business. While it was down the last quarter kind of holding ground as we move forward. We're making good are good improvement on the cost initiatives, there, but we're going to have to take down to utilization. So.

In that we'll have to get good visibility to volume and take goes up so.

Look I think that'll have an implication on margins identification capacity.

But I think has continued to work through this.

We'll see where we end up but I think over the long term the 50% plan as we get out to Mohawk is kind of made event here at both diminished.

Actually the questions about supply chain bottlenecks, but I'll take it offline with you guys. So.

The other thing we'd love an update on is with the manufacturing excursions that you guys. It talks about a couple of quarters ago, you talked about going through a number of cycles to get those things results can you talk a little bit about the.

That goes on those improvements you kind of where your engines will result in those issues.

Well clearly, we're making we're working extremely hard on these things and we're not making the progress that we had anticipated I think what you're talking about is the yield challenges 150 millimeter MOSFET yield.

And I guess, what I would say is booked we're kind of making two or three steps forward and then we've got let's step back as we're working through these things. The pandemic certainly has not help maybe think about access to labs volumes in the factory these types of things.

These have been a challenge for us in terms of driving driving got improvement. So look we're going to continue to work through this.

And can you continue to try and drive those yields that will be key function to getting our capacity and our delivery up as well as our margins up but basically to work through these auto customers on different capabilities that are required at a ship. These products I see some progress as we move forward, but again, it's going to be one of these kind of Houston for one set back so it's not going to be modest improve.

And as we move out for the rest of this year and we kind of just see that slow modest improvement as a as time goes on here again, the big change for us will be when we get the Mohawk Valley I think we'll have a much different.

Structure and capability set there as we transition to the bigger bigger factor.

Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Hi, there thanks for taking my questions or get to first if we go back and look at your Investor Day deck you got.

The business getting almost to free cash flow breakeven enough for a 22, and obviously things have changed a bit but but as you look at your pipeline and the timing and so forth does does that for 22 still look quite good the year, you kind of turning the corner from a from a free cash flow standpoint.

Well I think Joe it's going to depend on the timing of when we see the ramps happen, but we've talked about before is seeing the inflection point in the business happening in 2022, no large capex bill really happened this year and depending on what we spend this year that'll come into next year. So just going to be a timing a function of those things. It's a lot of moving pieces again, the more valley babbitt's.

It was roughly $1 billion project there were five plus years was $500 million of reimbursements.

Some of those to come back into 22 would help us on the free cash flow line. So I think it's just hard it's just hard to say exactly what that would be but I would expect at 22 at some point, we see that inflection point and then we start to turn the corner.

Okay. Thanks, and an unrelated question following on some of the year or your thoughts you.

You are doing so well and in this happy business I look at Mohawk Bally and I asked myself why go to 200 millimeter, obviously bigger wafers with better but bigger wafers can be harder on is there perhaps you business case year to just take that babs operational attributes and just put 150 millimeter in there.

We obviously have the capability of doing that and that'll be a decision that we make later on in.

Building, a 200 millimeter fab and.

Downsizing the handling equipment to 150 is a way better idea than building 150 millimeter fab and trying to up.

Hi said, if you will so it's really just think about it that way Joe and then we obviously can make that decision as we as we move forward.

Our next question comes from Craig Irwin with Roth Capital Partners. Your line is that will be.

Hi, Greg on mute.

Hi, Thank you thanks for taking my questions.

Great I wanted to ask for your your general thoughts around the puts and takes for moving to eight inch wafers.

You know can you maybe update us on where you might be which seems if you have seeds for commercial production.

Where are you on the the updated wafering technology that needs to be used and what are your general thoughts about around the sicker wafers and the probable yield losses on eight inch I mean, how do these all factored into your your longer term timeline and can you maybe.

Share with us anything about that timeline that there might be pertinent to the ramp over the next couple of years.

Thanks, Craig or the question I don't want to get into a lot of those kind of details I will tell you that I have a.

Finally review on our 200 millimeter activity and in fact I had that review just yesterday, so I feel real good about the progress the team is making some of the items that you have talked about we're tackling we're in really good shape on.

And.

Some of the once you specifically called out and we obviously still have some work to do there too so.

I apologize I don't want to get into a lot a detail on that but I can tell you have those items are very well front and center in terms of our thinking.

And then I feel good about where we're at in terms of making progress on those.

Great. Thank you for that my follow up question is the Cemig semiconductor customers that was not designated as essential can you clarify for us was that impact mostly or entirely in the June quarter have they started up production again.

Anything you can do to help us quantify the.

The the impact of them restarting thank you.

Hey, Craig it's now together as actually within non semiconductor customer and.

And we have not.

We have not really disclose it terms of a backup let me that but I can't tell you is how we're managing that is built into kind of the forecast in the guidance. We've given you think about the materials business like I said, maybe modest improvement holding ground as it kind of go into next quarter and then at the Lps are structured you should see some some some benefit out beyond there that timeframe.

That concludes today's question and answer session I'd like to turn the call back to Green glow for closing remarks.

Well. Thank you everybody for your interest in Korea, we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

[noise].

[music].

Good day, ladies and gentlemen, and welcome to the creep fourth quarter fiscal 2020, <unk> earnings Conference call.

At this time all participant lines are in listen only mode.

After the speakers presentation, there will be a question and answer session.

To ask the question during the session you'll need to press Star then one on your telephone keypad.

Please be advised today's conference maybe recorded.

If you acquire operator assistance. Please press Star then zero.

I'd now like to end the conference over to your house today Mr. Tyler brought about head of Investor Relations. Please go ahead Sir.

Thank you and good afternoon, everyone welcome decreased fourth quarter fiscal 2020 conference call.

Today creep CEO, Greg low.

Increase CFO Neal rentals, we'll report on the results for the fourth quarter fiscal year 2020, as well as how the company has navigating the ongoing cobot 19 pandemic. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures craze 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 a supplement to and not a substitute for financial statements prepared in accordance with gap.

A reconciliation to the most directly comparable GAAP measures in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics.

Today's discussion includes forward looking statements about our business outlook, 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 FCC 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 cobot 19 pandemic during the QNX session.

We would ask 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 the call over to Greg.

Thank you Tyler good afternoon, everyone and thank you for joining us today.

Before I began I'd like to take a moment to thank all of our employees around the world.

I'm extremely proud of their efforts and solid execution during this unprecedented time.

As we continue to address the impact of the pandemic on our operations the health and safety of our employees customers and partners remains our top priority and we are committed to operating safely.

As a designated essential business our facilities remained open throughout the quarter.

And we are routinely executing stringent testing cleaning and safety protocols that all of our locations.

We continue to closely monitor federal state and local guidelines and adjust our business continuity plan as appropriate.

Attendance in our factories has improved since the start of the pandemic.

But it's still below our normal operating level as we continue to operate with an abundance of caution requiring employees that had been possibly exposed to the virus to observe a mandatory quarantine period. In addition, we're also offering employees the flexibility to support the needs of their families at this time, which.

And also impact attendance.

Turning to our performance, we delivered fourth quarter results in line with our targets on revenue gross margin F and are encouraged private strengthening demand in the quarter to date. Despite the continued headwinds presented by cobot 19.

In addition, we're pleased to see silicon carbide, gaining traction in the market as evidenced by the recent announcement Delphi win for a new battery electric vehicle and our partnership with Star power and the Yutong Group current electric bus that will use silicon carbide in the powertrain.

Our opportunity pipeline is growing driven by the outstanding work of our sales team working seamlessly on our digital selling platforms to drive new business and remain in constant contact with our customers and distribution partners.

Fiscal 2020, with a transition year for us and we made good progress on becoming a global semiconductor powerhouse while at the same time addressing the unexpected challenges associated with a pandemic and ongoing geopolitical concerns.

While the operating environment remains fluid.

We are confident in the long term growth opportunity ahead of us and firmly believe that Cree is uniquely position to capitalize on the industry's transition from silicon to silicon carbide.

Despite the market uncertainty the excitement of our customers about the next generation of semiconductor technology remains high and we are committed to our capacity expansion plan to meet this growing demand.

Now I'll turn it over to feel who'll provide an overview of our financial results and an outlook for the first quarter fiscal 2021 meal.

Thank you, Greg and good afternoon, everyone.

Overall as expected our fourth quarter performance.

Was impacted by softening global demand and some disruptions to our operations, resulting from the pandemic.

Revenues for the fourth quarter fiscal 2020 were 206 million a decrease of 18% year over year.

All right, let segment revenue decreased 17% year over year large and by global trade events at events related to the pandemic.

Wolfspeed revenue declined 19% year over year.

Due to continued softness for China, maybe be sales and supply and demand challenges tied to the pandemic.

Our non-GAAP net loss was 20 million or 18 cents per diluted share.

Fourth quarter non-GAAP earnings exclude likely going to half million of expense net of tax were 18 cents per diluted share for noncash stock based compensation acquired intangibles amortization accretion on our convertible notes project transformation and transaction related costs.

Factory optimization restructuring costs.

On partial debt extinguishment changes in our Lextar investment and other items outlined in today's earnings release.

Moving onto our fourth quarter performance by segment.

The quarterly revenue declined 5% sequentially to 108 million.

This was primarily due to lower demand from a non semiconductor customers materials business as a result of the pandemic and some push out of product by several LT customers, which more than offset improve performance and power and RF during the quarter.

And power, we continued to see strong demand for products that has been tempered by factory output related to cope with 19 safety measures.

Performance was softened by some supply constraints, we expect this improved to improve as we execute our previously announced capacity expansion plan.

Positively our automotive customers remain committed to their long term plans.

And the need for our technology and while the pandemic may impact the timing of some customer decisions the industry shift from silicon to silicon carbide continues to build momentum.

Further in the industrial space there has been broader awareness as a result of our partnership with Arrow electronics as our sales team has done a great job of showcasing the benefits of silicon carbide and new applications to their customers.

In RF, we're seeing some improved performance and we continued to grow our RF backlog. While this is encouraging there are still certain markets that have delayed their fiveg rollouts.

And the pandemic has also delayed auctions in key markets.

Overall, we are encouraged by the early signs of strengthening demand at our power and RF based businesses. Despite continued near term headwinds and limited visibility we have into the full impact on the pandemic.

Moving on to materials inline with our expectations revenue declined sequentially as we were not able to ship to one non semiconductor customer that was not designated as essential has an essential business during the quarter.

We also had a few of our wafer supply customers to first shipment of some product during the quarter permitted under their agreement with us.

Well, Steve gross margin was 35.3% sequential decline was primarily driven by decrease factory efficiency due to the safety measures, we put in place to protect our employees during the pandemic.

In addition, lower yield to factory transitions also present, some short term challenges on gross margin performance and we'll continue to be a headwind will be shipped production to our new Mohawk Valley fab.

Led product revenue was 97 million and decreased approximately 4% sequentially, reflecting supply constraints. Nonetheless, our business executed well despite challenges related to increased volatility in our markets.

Let gross margin was 22.8% primarily due to favorable product and customer mix.

Unallocated non-GAAP cost totaled $6.1 million for the fourth quarter fiscal 2020 and are included in our overall costs to reconcile with $54 million non-GAAP gross profit and 26.4% gross margin for the company.

This includes some incremental cost that we incurred as a result of our cobot 19 response efforts.

Non-GAAP operating expenses for Q4 were 83 million in our non-GAAP tax rate was 30%.

This reflects our efforts to continue to execute disciplined cost control by prudently balancing our operating expenses with the necessary investments for our long term growth and the decision not to pay management bonuses and some other incentives for fiscal 2020.

For fiscal 2020 revenue was 904 million, representing a 16% declined when compared to fiscal 2019 non-GAAP net loss in fiscal 2020 was 49.1 billion or 45 cents per diluted share. The non-GAAP loss excludes $142.6 million adjustments net of tax a $1.32 cents per day.

Alluded share.

Fiscal 2020 revenue non-GAAP gross profit for our portable segments were as follows.

Well, Steve revenue was 471 billion and gross profit was 185 million point, 39% gross margin.

Revenue declined 13% from fiscal 2019, as a result of saw softness in customer demand as well as the cobot 19, pandemic and associated disruptions, which which significantly impacted results.

Led revenue was $433 million and gross profit was 91 billion or 21% gross margin.

Revenues declined 20% from fiscal 2019 with ongoing market softness trade and tariff concerns of China, and lower utilization, primarily due to call the 19.

Unallocated cost totaled $16 million for fiscal 2020 are that our and our included to reconcile to our 259 million non-GAAP gross profit for a company gross margin of 28.7%.

Now in light of the ongoing uncertainty related to covert 19, I'd like to provide an update on our strong balance sheet and healthy cash position, which gives us the financial flexibility to navigate the current environment support our business operations and maintain our capital expenditure planned to support future growth.

We ended the quarter with approximately 1.3 billion in cash and short term investments zero balance on a line of credit and convertible debt with a total face value of 1 billion.

For the fourth quarters days sales outstanding improved to 37 days and inventory days on hand was 104 days.

Cash generated from operations was 10 million and capital expenditures were 70 million in the fourth quarter, resulting in negative free cash flow of 60 million.

We reported total capital investments of 244 million in fiscal 2020, as our capital allocation for our priorities remain focused on expanding capacity at our Wolfspeed business.

Moving onto our Capex outlook for fiscal 2021.

As we discussed at our Investor Day last year fiscal 2021 will be the peak investment year to fund our long term growth ambitions.

This time, we anticipate capex of approximately 400 million to support our capacity investments.

Most notably the construction of our Mohawk Valley Fab and expansion of our Durham, and Durham Fab materials factory.

This level of investment reflects the slightly deeper customer ramp that we have discussed previously and keeps us on track to begin ramping production on the new fab beginning in calendar year 2022.

It's also important to remember that there will be some variability in our capex and cash flow during fiscal 2021.

As it is tied to the percentage of completion of Mohawk Valley and the timing of reimbursements from the state of New York.

Now turning to our outlook the cobot 19 situation remains very fluid.

It's difficult to assess its impact on our near term operations and overall demand environment.

So account for this we are again, providing a wider than usual guidance range for the first quarter fiscal 2021, along with our underlying assumptions based on what we know today.

We are targeting revenue in a range of 203 million to 217 million based on the following segment trends.

While speed revenue is expected to be between 107 million and 117 million.

Encouraged by the early signs of strengthening demand of the device business and our ability to improve fulfillment out of our factories, while maintaining additional coated 19 safety protocols, we have in place.

Now let revenue is expected to be between 96 million to 100 million, mainly due to improving supply dynamics.

Q1, non-GAAP gross margin is expected to be between 25% to 27%, which includes the impact of 4 million of unallocated costs relating to transitioning led factory operations to Wolfspeed.

We target most be gross margin to be approximately 35.5% for 37.5% due to better factory efficiency driven by higher attendance, but still below normal expectations. As we continued to maintain safety procedures related to call that 19.

In addition, while we continued to make progress at our 150 millimeter boss that yields they are still below expected levels.

We target Ltd gross margin to be approximately 19.

Percent to 21%.

We are targeting non-GAAP operating expenses between 88 million and 89 million for the first quarter, while we maintain tight cost controls during fiscal Q4 and did not pay management bonuses or into two merit increases we will increase opex in fiscal Q1 2021.

This reflects higher spending on R&D projects, including our Mohawk valves that process development and resumption of accruing for management incentives.

We expect our operating expenses will gradually increase throughout the year as our revenue normalizes.

We target Q1, non-GAAP operating loss will be between 37 million to 29 million and we target a non operating net loss.

Ultimately 1 million.

We expect our non-GAAP effective tax rate to be approximately 30%.

We are targeting Q1, non-GAAP net loss to be between 26 million to 22 million or loss between 24 cents to 20 cents per diluted share our non-GAAP EPS target excludes acquired intangibles amortization noncash stock based compensation.

Accretion on our convertible notes project transformation and transaction related costs factory optimization restructuring costs and other items.

Q1 targets are based on several factors that could vary greatly including the situation to cope with 19 overall demand product mix factory productivity and the competitive environment with that I'll now turn the discussion back to Greg.

Thanks, Neil and building off of what Neil just shared I'd like to discuss our recent performance in the current environment as well as provide an update on our strategic plan.

The operating environment remains challenging as the pandemic is ongoing while it remains difficult to predict the full impact it will have on our operations. We are focused on maintaining business continuity to continue to deliver for our customers while executing on our business plants.

Continue to be impressed with how our sales team has adapted to a virtual environment.

Successfully pursuing and winning new business, we continue to connect with customers with approximately 4000 leave generated during the quarter.

And I'm impressed with the teams results in terms of winning new business in the fourth quarter, we secured approximately $600 million and design awards, a nice improvement from the already excellent results the team delivered in Q3.

Our partnership with Arrow electronics continues to grow and we have identified approximately $1.6 billion of silicon carbide opportunities for our Wolfspeed business with Arrow is large and extensive sales footprint.

Our coordinated efforts to support the launch of our new 650 evil product has been very well received and the opportunity pipeline is building nicely.

As our sales team continues to deliver we're very encouraged by the growth we've seen in our pipeline over the past few months as new opportunities to continue to light up across key end segments, including automotive energy communications infrastructure, industrial and aerospace and defense.

The moment the opportunity device pipeline is well above $10 billion.

We are well positioned to win opportunities, our diversified and growing product portfolio remains a key competitive advantage in the marketplace.

We released more than 60, new wolfspeed products during fiscal 2020.

And looking ahead to next year, we're rapidly exclaiming, expanding our product portfolio with an emphasis on critical automotive applications.

We look forward to building upon this momentum as many design awards are expected to be made in coming months.

Despite the cobot pandemic, many of our customers and prospects remain engaged and committed to their future plans, which includes silicon carbide as a critical component.

The strength of our long term plan has been underscored by recent developments, including Delphi recent win for a new battery electric vehicle, which is expected to ramp sometime between 20 to 22 and 2023.

In addition, we're also pleased to be working with star power semiconductor and the Yutong group on an industry, leading high efficiency powertrain system for electric buses using Wolfspeed 12 wonderful silicon carbide devices.

These wins, our tangible examples of the multiyear opportunity ahead of us in the automotive space.

The benefits of Silicon carbide are clear and recognized by Oems and tier one for like and we continue to have many productive conversations with market leaders regarding how creek and partner with them to bring forth next generation technologies.

In addition, we're following many new encouraging updates in the macro environment.

In late July the European Commission reached an agreement regarding the EU is 1.8 trillion Euro Covance 19 recovery fund.

The EU has committed 30% of their total expenditures from this fine to address climate concerns with a goal of being climate neutral by 2050.

This includes 20 billion euros designated to transport and 5 billion euros dedicated to energy, which we expect will be a positive catalyst for clean transportation and electric vehicle demand in Europe.

In Fiveg, we continue to believe this it's a multiyear expansion with major traction coming.

There have been a number of recent announcements coming out of Asia, pointing towards growing fiveg momentum in that region.

While the global pandemic has further delayed some rollouts in other regions, we continue to be well positioned to support this global expansion.

As we began fiscal 2021, we're firmly committed to our long term strategy. While we expect to continue to work through Covance 19 related headwinds in the near term. We are encouraged by the growing demand, we're seeing and expect more opportunities to materialize in our device business.

Throughout fiscal 2021.

To ensure we can capitalize on this opportunity we are reiterating our capacity expansion plan.

Which are well supported by our strong balance sheet and ample liquidity.

Our capacity expansion plans are key differentiator when we go to market.

Which coupled with our superior technology and Silicon carbide demonstrated advantages is encouraging our customer to accelerate their adoption of silicon carbide.

The investments, we're making today are absolutely critical to us achieving our long term goals and maintaining our leadership position.

In conclusion, while the pandemic continues to create uncertainty in the near term.

Our confidence in the long term growth opportunity for Silicon carbide remained strong.

I'm proud of how everyone Acree rose to the challenges presented in fiscal 2020.

The tremendous effort across the company is helping us win new business and driving into few transition towards silicon carbide.

Our strong balance sheet and financial position enables us to fund our operations and future growth.

I'm very confident in our path forward and believe in the underlying trends, we're seeing underscore the opportunity we have ahead of us.

With that I'll turn it back over to the operator, and we'll begin our Q and a session.

Okay.

Ladies and gentlemen, if you'd like to ask a question at this time. Please press Star then the number one key on your Touchtone telephone.

If your question and answer really with stream of yourself from the Q you may do so by pressing the pound.

In the interest of time, we ask that you limit yourself to one question and one follow.

Our first question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Hi, Thanks for taking my question.

I guess side, Greg Gordon Neil.

The first question is around.

One of your largest.

Or.

If not the largest.

Material customers.

Scott a significant impact in their business due to co bid.

Last quarter I.

Particularly in in the French facility. So I'm, just wondering how that flows through the business and whether or not the vast majority of that hit occurred last quarter or is actually trickling into.

This quarter in terms of your business and then I have a follow up.

I guess I'll I'll start maybe Neil can add a little bit of.

Color to it.

Yes, I don't want to get into specifics about any particular individual customer I understand that yes. They they obviously the dynamics of our and the contract that we havent place our are working kind of according to the according to the plant that we had for them. So we feel pretty good about that maybe Neil.

You want to get a little bit more color on it.

Yes, I think so Jed as you looked at the last quarter I think things kind of played out as we expected.

The device side, we saw some strong demand, particularly for our power products.

Obviously impacted fab in terms of some of the safety procedures and then on a material side, we anticipated some slower ordering both from I would say lpa customers and some of the non lpa customers as people managed to the pandemic manage inventory levels and those types of things, but I'd say that largely played out as expected as you look into next year.

Quarter I think it's.

From a device standpoint, overseeing is continued demand for the power products and what we're seeing strong backlog there.

The material side, I guess, what I'd say as we're kind of holding ground, we're seeing some push and pull within the portfolio as you move into.

To into the next kind of period here. So I think and then as you think longer term.

As these lpa contracts are structured maybe expect to see some pickup as you start to move into outside of December maybe into the March quarter. So I think we've largely hit the bottom as it relates to materials, but.

I think what is going to see modest improvement from here, obviously, some potential pick up I think you the next calendar year.

That's helpful.

Just as it relates to.

The capacity expansion I was wondering if you could give maybe some further color.

In terms of the timing is well is.

Cost expectation the moved from fixed bench.

To eight inches is a pretty significant cost down but not to mention the impact on that.

Automation associated with that equipment.

And I know you did a good job at the analyst day of kind of framing that opportunity, but is your moving closer.

To the in 21 is kind of the year for that Buildout I was wondering if you could just give an update in terms of timing of both fab as well as.

Mohawk.

And then what the expectations are should we think of that is just that a linear costs down in terms of just doing that the area or how should we be thinking about that I would assume there's additional benefits, but I was wondering if you could frame that a bit more for me. Thanks, Yes, maybe I'll kick it off and then Neil can kind of unpack that a little bit.

More a lot upgrade activity going on up and Mohawk Valley.

The fab is now going quote vertical so there are still steel girders header bidding.

Called and while they are being installed and so forth. We're really excited about that there has been excellent work at the prototype line in Albany.

Some really good progress.

And that the materials.

Expansion that is part of our overall capacity expansion is going well yields and costs and so forth our are improving as well.

In terms of the broader expansion, though I'll turn it over the neo talk a little bit about the various different pieces that we have going on.

Yes, so probably worthwhile kind of breaking this down a little bit so as I mentioned in his prepared remarks. The capex is going to go to roughly 400 million in fiscal 2021, and we expect that to be the peak year spending during the long term plan that we previously announced so.

We're going to break that down into a couple of pieces first as Greg said the first.

And foremost the biggest piece of that is the Mohawk Valley Fab and again I would reiterate having to date. We've made excellent progress report concrete as Greg mentioned the vertical construction is underway.

Expect that add to begin ramping sometime in the 2022 going to calendar timeframe and I think what that does is it supports the wolfspeed growth and 22 and and beyond.

However, this is an area that could have some variability in terms of spent it's going to be a function of the timing of the build schedule and the timing of roughly $500 million of reimbursements, we expect to receive in conjunction with our partnership in the state in New York So.

A big project underway, and we're going to see some big moving pieces here over the next four to six quarters as we start Cherry make what we think is going to be significant progress. There. The second piece is I don't want over look. This is have you also have an expansion going on down in Durham, right now and at the Fab expansion outsourcing, we do silicon carbide fab operations.

Upgrading that replacing it with wolfspeed capacity, there's going to support some of the capacity ramp into this year and as we as we see some opportunity in the fiscal year 22, So we expect that expansion to be complete.

Towards the end of this fiscal year, so thats kind of the second piece in the last piece of the materials expansion and you can kind of think it at war in terms of a linear basis in terms of growth.

So those are kind of that that's kind of the plan because there's a lot of moving pieces. As you will look here in fiscal 2021, but I really believe that that's what gives us a great basis for our capacity and our costs in our margins as you move out into the business that you mentioned that inflection point in 22 and get the 22 plus now as it relates to.

150, and 200 look I think we've talked about building a 200 millimeter fab from Ohio Valley are still planning to do that obviously, it's easier to downgrade that down to.

150, as we've talked about previously enroll will still managed through that but again overall on track.

We'll have to Capex this year and there could be some moving pieces as we looked at the next following quarters.

Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey, guys. Thanks for taking the questions.

Maybe just first off the follow up on Jets question I wanted to dig into the Capex budget here a little bit more.

Neil at that 2019 Analyst day, you guys talked about $720 million of Capex from 2020 to 2024.

With the $400 million here targeted for 21, and what you've already spent today can you kind of update us on how much capex remains in the plan I guess for the 2022 to 2024 timeframe and then does this $720 million Capex budget is this increasing.

Based on that 21 outlook here or are you just simply.

Pulling it all forward and then kind of what what do you see out there to drive that acceleration if thats. The case and then I had a follow up.

Sure and thanks, Brian first of all let me say that Theres really no change to the expansion plan, we talked about the 720 billion and as we've discussed before there's also other capex in the company. Besides just the capacity expansion. So.

What are the things to recognize here as I said, there's a number of moving pieces now a lot of Mohawk Valley happens as you start to get into the end of fiscal 2000 lawn and between two and at this crossing fiscal year. So what you'll see here is just timing is more or less of a zero sum game of the spend more in 21, you've spent less than 22. So maybe think about that profile we've talked about before.

Peak year kind of hearing 2021, and if we start seeing the capex start to come down at 22.

Beyond yes, as we talked about also before we expect the free cash flow to be negative in those periods. As we have those significant investments and then in 22 plus as good as the mostly business starts to ramp we start to reap the benefits of that so that's kind of the same same plan I think your to see the timing of the capex move around a little bit.

Okay Fair enough. That's helpful. And then just the second question on the power and RF side, Greg you made some.

Positive comments around kind of what you're seeing in Fiveg could you also maybe provide us an update on your engagement with walk away.

Theres, obviously been some more restrictions put in place there. So wondering what if any exposure you have and then what's embedded.

Into both near and long term outlook, there with respect to that customer as well as in general around the China Fiveg base station opportunity if you get thanks guys.

Sure Ryan so.

In terms of quality, we have not been shipping to walk away for the better part of a year and we have no.

While way revenue plan in any of our future.

Injections or forecast or what have you. So thats been out since the the ban went in place and then.

They're not in and.

In terms of.

Possibly there there might be some small impact to materials customers associated with far away, but we think the large.

Any large impacted we basically taking it out of the picture so.

We have.

Developed a good relationships with other players around the world and our repurchasing the technology that we had developed profile wave for those customers.

Last quarter, we announced that we had some communications infrastructure design wins this quarter, we've talked about our total design ins at 600 million. We had a portion of that also were communications infrastructure.

Customers I.

I guess the last the last part that I would say is that when you think about that $600 million of design and that we just got this quarter. That's on top of 400 million, a roughly $400 million design and that we got in the in the quarter before that so in the last two quarters.

We have racked up a 1 billion dollars' worth of design and.

And I would just remind everybody that was all during cobot, so pretty phenomenal results from from our team there.

Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.

Yes. Thank you question for Greg just some of the Delphi partnership and design win in China can you, maybe just give a sense of the breadth of activity you're seeing it as a result of that partnership and he mentioned tiny 2020 to 2023, but any other color as we think about that.

Business ramping in the coming years.

Well.

I want to be a little bit cautious about talking about specific customer is I will say that they had the Delphi announcement.

Is incremental to the our original announcement that we had.

Now extend in September of last year. So this is an additional win which is great to see.

The traction for Silicon carbide and I think.

We're seeing that across many different spaces to where one customer wins.

With us and some particular area or with some particular customer and that opens up broader opportunity I think thats why you saw our pipeline.

Now over 9 billion over $10 billion.

Got it and then on the Arrow distribution.

Kind of product launch and just given your long background in this industry and working with distribution anything you'd call out that unique in terms of clearly silicon carbide, there's a lot of interest in adoption, but it seems like that's gotten off to a very strong start and just trying to kind of contextualize.

What's happening there versus what you typically see through distribution.

Well you know, we've got a very strong relationship with and partnership with Arrow and they're doing a fantastic job of this.

Promoting the 650 called Silicon carbide MOSFET, it's thousands of customers have expressed interest we're seeing everything from air conditioning motor drives plasma generators Electrosurgical unit.

Airplane galley power, even index induction Cook tops and so we're just seeing lots of different opportunities and I don't have the exact stat on.

On me, but.

If you take a look at that number of countries, where they've identified opportunity, it's something greater than half I think.

Our our generated in countries, where we don't have any salespeople.

So this is really the strength of arrows footprint and combined with the strength of our product portfolio.

Really a great when we're really excited about it.

The fact that they've got 1.6 billion dollars' worth of.

Pipeline for total Wolfspeed are accelerating the 650 vote, we're super excited about that so I think it's.

It's really doing something that we couldn't do on our own just simply because the scale we have from a sales perspective.

Just isn't there and quite frankly number will be there we couldn't do that internally I don't think.

So leveraging their their vast sales footprint has been a great win win for both of Us and I think.

I've had plenty of time to sit down with the management team at Arrow to and I think we both feel real good about where we're going.

The results that we've gotten so far and there is no letting up.

Letting off the.

The so called gas pedal if you will.

Our next question comes from Edward Snyder with Charter equity Research. Your line is now open.

Thanks, a lot Greg couple of questions first off you say that Wolf's views, a third Ghana search sequester and materials, but given the events last year, so with walkaway et cetera.

Sealing off and then your pricing of EFI to make it much more aggressive I think it was stood strained last quarter.

Is it seems to be the case it correctly of of raw materials should deal at least 50% of also to this point and your RF business sounds like it's down hard I mean, most of all ways closer Sumitomo now, which is the two six customer and I think over half a core holes wafers for RF goes too good to see.

So is it a case that kind of transitioning to more of a power customers given you've got that market almost yourself at this point going real wafer supply are out there or is it just.

But.

In the RF again, RF business and you've got a plan to bring that back into still maybe you could articulate that and I have a follow up.

Yes, so first off over the last several years, our materials business has grown faster than the device business and you're in the right ZIP code in terms of.

Materials business roughly half of will speed and that's primarily been growing fast because of.

The long term agreements, we have and be the channel reach that those customers have they obviously done a good job of getting.

Getting reach into their customer base I think as it as it relates to those longer term out outlook, we would anticipate that our power business would be our fastest growing business.

Through the 2024 long range.

Outlook, what we shared at our Investor day, and Thats simply because of the adoption of electric vehicles. So the power device business and so we would see that ramping up pretty strong through that period as it relates to the fiveg in the communications infrastructure.

Obviously, the way situation with a pretty significant setback for us, but we've adjusted our plans. We've adjusted our focus is to go after non while way customers and as I mentioned, Ed we secured some design wins last quarter, we start.

Previous quarter, and then last quarter as well and we remain in pretty close contact with with with that customer base.

Okay, and then maybe we could talk raw materials business I know that since you've taken over the DLP businesses, particularly strong.

I think you want to supply constraint last quarter on that.

We took a bigger picture view of the whole competitive dynamic you are really the only major supplier.

And Crystal wafers.

So we're sick power I know.

Yes, just talked about selling any of it won't get wanting us to Michael outside of that we don't see anybody out there really offering all the scale of of this.

Is it fair to assume that the margin why should we assume that the margins on the wafer business for the better from the device business, there's less competition and and it's a much more difficult piece of the puzzle and if thats the case.

Wouldnt Wouldnt creamy better positioned as is the the facts wafer supplier in the industry given the likelihood of new competition and growth this pretty much nil.

I think I think we kind of our position that way in terms of a supplier of wafer shipping industry. We've got.

Significant.

Number of very large long term agreements with.

With people in.

No that folks in the industry, we've announced a most of those and.

And we're also expanding our capacity pretty substantially.

However, I believe that having vertical integration is another key factor and that certainly helping us from a design win perspective, the design ins that we've talked about this past quarter or that we mentioned that in our script. This past quarter of $600 million and then the previous quarter $400 million just.

I'll remind everybody those are all device design ends and so I think customers that.

Look at things like continuity of supply and quality of product and so forth. They they look to us as a.

As a very confident player in silicon carbide, and the fact that we have both device and.

And materials.

Capability.

Play off on each other and I think give our customers strong amount of confidence in that area.

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks, So much can you speak a little bit and a little bit more detail about the supply chain issues that you're seeing in mentioned in the script looks I understand that.

Hi expense those are and how.

How much duration expert.

How long are expected to labs.

Yes. So I think you think about the supply chain issues that we've talked about before is we have these.

Safety procedures, we put into the factories and what that essentially means is.

As you bring people in and out of the factory you take more time and space people out People's temperatures and do all those things in terms of.

Ensuring employee safety as you think about our kind of near term challenges the health and safety of employees is certainly number one so what that's doing is putting pressure on.

Efficiency within the factories.

And it's limiting some of the upside potential I think we have clearly must be power business right now, but it's also pressuring gross margins because youre not getting the same efficiency. The get monthly. So it is it is pressuring us, but maybe maybe the best way to answer that is kind of give a little context as to kind of how we think about metric implication on supply, but also on the margins.

At this quarter, we talked about barden being down.

Under 40% at 35% as you move the next quarter.

We're talking about 36.5% the midpoint.

I would say normalized margin for Cree is just north of 40% around 40%. It yet if you exclude cobot and over the long term, we think about 50%.

So we get the Mohawk Valley Fab. So there are several things that we need to do to get the margins back up and the safety kind of procedures and questions. You can ask about a one of them. So the first one is you need to get kind of get back to that normal factory efficiency and that's just going to be a function of how long. These procedures are in place.

Right now I don't see that changing anytime soon certainly to the end of the year likely into next year.

The second thing.

And I'm just follow back up on that is on a 150 million amongst that you also talked about those before.

We will need to get some improvement there and then lastly will help get some visibility into volume.

It was a question earlier on the materials business, while it was down to the last quarter kind of holding ground as we move forward. We're making good are good improvement on the cost initiatives, there, but we're going to have to take down to utilization. So.

In that we'll have to get good visibility to volume and take goes up so.

Look I think that will have an implication on margins identification of capacity.

But I think as it continues to work through this.

We'll see where we end up but I think over the long term the 50% plan as you get out to Mohawk is that kind of made event here at full speed administer it.

Actually the question was about supply chain bottlenecks, but I'll take it offline with you guys. So.

The other thing we'd love an update on his with.

Manufacturing excursions that you guys. It talks about a couple of quarters ago talked about going through a number of cycles to get does things results can you talk a little bit about the.

Cycles on those improvements you kind of where you're on track to result in associates.

Well clearly, we're making we're working extremely hard on these things and we're not making the progress that we can anticipated I think what you're talking about is the.

Challenges 150 millimeter MOSFET yield and I guess, what I would say is both were kind of make in two or three steps forward and then we've got let's step back as we're working through these thing the pandemic certainly has not help maybe think about access the lab volumes in the factory these types of things.

These have been a challenge for us in terms of driving driving got improvement. So look we're going to continue to work through this we're going to can you continue to try and drive those deals that will be a key function to getting our in our capacity and our delivery up as well as our margins up but down basically due to work through these auto customers on different capabilities that are required at the ship these products.

I see some progress as we move forward, but again, it's going to be one of these kind of two step forward one step back so despite going to be modest improvement as we move out for the rest of this year and we can just do that slow modest improvement as time goes on here again, the big change for us will be when we get to Mohawk Valley I think we'll have a much different.

Structure and capability set there as we transition to the for the bigger bigger factor.

Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Hi, there. Thanks for taking my question I get to first if we go back and look at your Investor Day deck you got.

The business getting almost to free cash flow breakeven enough for a 22, and obviously things have changed a bit but but as you look at your pipeline and the timing and so forth does does that for 22 still look quite God. The year, you kind of turned the corner from a from a free cash flow standpoint.

Well I think Joe it's going to depend on the timing of what we see the ramps that what we've talked about before is seeing the inflection point in the business happening in 2022.

A large capex bill really happened this year and depending on what we spend this year that will come out of next year. So it's just going to be a timing at a function of those thanks. It's a lot of moving pieces again, the Mt Valley Fab itself is roughly $1 billion project over five plus years was $500 million of reimbursements.

All of those to come back in 2002 would help us on the free cash flow line. So I think it's just hard it's just hard to say exactly what that would be but I would expect at 22 at some point, we see that inflection point and then we start to turn the corner.

Okay. Thanks, and an unrelated question following on some of the year or your thoughts you.

You are doing so well and in this business.

Look at Mohawk Bally and I asked myself why go to 200 millimeter, obviously bigger wafers, you better but bigger wafers can be harder.

Is there perhaps you business case year to just take that Babs operational attributes and just put 150 millimeter in there.

We obviously had the capability of doing that and that will be a decision that we make.

Ron is building, a 200 millimeter fab and.

Downsizing the handling equipment to 150 is a way better idea than building 150 millimeter fab and trying to up.

Size. It if you will so it's really just think about it that way Joe and then we obviously can make that decision as we as we move forward.

Our next question comes from Craig Irwin with Roth Capital Partners. Your line is that will be.

Craig Your line Greg on mute.

Hi, Thank you thanks for taking my questions.

Great I wanted to ask for your your general thoughts around the puts and takes for moving to eight inch wafers.

So can you maybe update us on where you might be which seems if you have scenes for commercial production.

Where are you on the the updated wafering technology that needs to be used and what are your general thoughts about around the sick or wafers and that the probable yield losses on eight inch I mean, how do these all factored into your your longer term timeline and can you maybe.

Share with us anything about that timeline that there might be pertinent to the ramp over the next couple of years.

Thanks, Thanks, Craig credit question, I don't want to get into a lot of those kind of details I will tell you that I have a.

Monthly review on our 200 millimeter activity and in fact I had that review just yesterday, so I feel real good about the progress the team is making some of the items that you talked about we're tackling we're in really good shape on.

Some of the one should specifically called out and we obviously still have some work to do there too so.

I apologize I don't want to get into a lot of detail on that but I can tell you. Those items are very well front and center in terms of our thinking and and I feel good about where we're at in terms of making progress on those.

Great. Thank you for that my follow up question is the Cemig semiconductor customers that was not designated as essential can you clarify for us was that impact mostly or entirely in the June quarter have they started up production again.

Anything you can do to help us quantify the.

The at the impact of them restarting. Thank you.

Hey, Craig if there was actually within non semiconductor customer and.

And we have not.

We have not really disclose it terms of a backup let me, but I can tell you is how we're managing that is built into kind of forecast in the guidance. We've given you think about the materials business like I said, maybe modest improvement holding ground as you kind of go into next quarter and then at the Lps are structured we should see some some some benefit out beyond that timeframe.

That concludes today's question and answer session I'd like to turn the call back to Greg low for closing remarks.

Well. Thank you everybody for your interest in Korea, we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.