Q2 2021 Cree Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Cree, Inc. Second quarter fiscal year 'twenty One earnings conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need the cash star one on your telephone if you acquired any further assistance. Please press star zero.

I would now like to hand, the conference to your speaker today, Tyler groundwork Vice President of Investor Relations. Please go ahead Sir.

Thank you and good afternoon, everyone welcome to Cree second quarter fiscal 2021 conference call today, Cree CEO Gregg Lowe, Inc.

Kris CFO Neill Reynolds will report on the results for the second quarter of fiscal year 2021.

Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures <unk> results internally.

Non-GAAP results are not in accordance with GAAP 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 GAAP a reconciliation to the most directly comparable GAAP measures.

As in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics. Today's discussion includes forward looking statements about our business outlook and we may make other forward looking statements during the call such forward looking statements are subject to numerous risks and uncertain.

Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual results to differ materially Inc.

<unk> risks related to the spread and impact of the COVID-19 pandemic.

During the Q&A session, we would ask that you limit yourself to one question and one follow up so that we can accommodate as many questions as possible. During today's call. If you have any additional questions. Please feel free to contact us after the call and now I'd like to turn the call over to Gregg.

Thanks, Tyler and good afternoon, everyone. Thank you for joining US today I Hope you and your families are staying healthy and safe as we begin the new year on.

Our team continues to do an exceptional job of building relationships with customers and winning new business and.

In the second quarter, we achieved revenue from continuing operations above the high end guidance range.

Fueled by strong demand for our Silicon carbide solutions.

Momentum, we're seeing in silicon carbide reinforces our confidence in our growth strategy as we execute on our long term plan.

In addition, we are making solid progress on the divestiture of our lead assets and expect to close this transaction during our fiscal third quarter.

Once the divestiture of trees led is complete.

We will have achieved a major milestone in our transformational journey to establish our company as a pure play global semiconductor powerhouse well positioned to lead the industry transition from silicon to silicon carbide.

To further amplify this transition.

We are changing the name of our company to Wolf speed.

We believe this is a natural progression that builds on our strong reputation of developing silicon carbide solutions over the last 30 years, while at the same time capitalizing on our competitive positioning that day.

We'll speed brand has in the market.

We have more to share on these efforts over the next several months and expect the name change to pick to be complete.

Sometime in the next few quarters.

Our 200 millimeter team has made solid progress and in fact has made substantial breakthroughs in 2020.

As a result.

We have decided to forgo our original plan to initially open up the Mohawk Valley Fab at 150 millimeters and instead, we'll begin ramping Mohawk valley directly with 200 millimeter silicon carbide substrates and the first half of calendar 'twenty two.

<unk> the world's first 200 millimeter silicon carbide fab and further differentiating us from the competition.

Based on these important developments, we are raising our fiscal 2021 capex spend to approximately $550 million, which reflects a greater percentage of completion of Mohawk valley versus our previous Capex plan as well as.

Investments in 200 millimeter wafer NLP capacity.

The higher completion rate of the fab construction and fit out this year on the increased investment in 200 millimeter capacity well.

We will give us the ability to ramp the fab solely at 200 millimeters and the first half of the calendar year 2012.

We see this as better positioning the company to address what many are now expecting there'd be a steepening demand curve for silicon carbide beyond 2024.

I'll now turn it over to Neil who will provide an overview of our financial results and an outlook for the third quarter of fiscal 2021 Neill.

Thank you Gregg and good afternoon, everyone.

With solid results during the second quarter on demand for devices on materials continued to improve despite the ongoing uncertainty on the macroeconomic environment.

Revenue from continuing operations for the second quarter of fiscal 2021 on $127 million.

Above the high end of our guidance, representing an increase of 10% sequentially on an increase of 5% year over year.

Our non-GAAP net loss was $26 6 million on 24 cents per diluted share on.

Second quarter non-GAAP earnings exclude $27 7 million of expense net of cash.

On 25 cents per diluted share for noncash stock based compensation acquired intangibles amortization accretion on our convertible notes.

<unk> transformation on transaction call factory optimization cost changes in the value of our lepton investments and other items outlined on today's earnings release.

Turning to our performance by product line.

<unk> momentum continues to build.

All of our customers had a demonstrated need for our solutions in particular, we're pleased with our 650 volt MOSFET platform, which continues to gain strong traction across a number of industry sectors.

While our supply levels remain below normal due to COVID-19 safety measures, we made progress on the quarter and expect to continue to improve as we execute on capacity expansion plan.

Turning to RF performance was better due to increased <unk> activity during the quarter.

Medications infrastructure providers.

Our backlog continues to grow underscoring the growing opportunity, we have as <unk> rolls out across the globe.

Moving to materials, we saw a modest uptick in order flow on the quarter, which we expect to continue throughout the remainder of fiscal 2021.

We will see gross margin was 38 five per cent compared to 36, 6% last quarter.

The sequential increase was driven by yield on cost improvements on our device product lines.

Gross margin performance also continued to be dampened by a continued COVID-19 safety measures.

Q2, non-GAAP gross margin from continuing operations was 35, 4%.

<unk> to 34, 5% last quarter on it.

The impact of $4 million on corporate items.

Non-GAAP operating expenses for Q2 was 78 million on a non-GAAP tax rate was 23%.

While we remain prudent in our cost control, we continue to expect heightened operating cost, while we invest to expand our leadership position.

For the second quarter day sales outstanding was 49 days and inventory days on hand was 134 days.

Inventory days on hand, excluding inventory related to the future wafer supply agreement in connection with the LCB divestiture.

Cash generated from operations was negative 29 million on capital expenditures were $145 million, resulting in negative free cash flow of 174 million.

We have a strong and healthy balance sheet with $970 million on liquidity to support our growth strategy zero withdrawn on a line of credit and convertible debt with a total face value of $1 billion.

Continue to expect fiscal 2021 to be our peak investment year and as Gregg mentioned earlier, we now anticipate capital expenditures of approximately $550 million versus the $400 million previously communicated.

With higher Capex spend reflects a greater percentage of completion on the fit out of our Mohawk Valley Fab on assumed in the $400 million Capex plan as well as higher investment in 200 millimeter capacity to support the badlands.

This is important because as many of you know our current operations or non optimized to support our ambitious long term growth plans.

The necessary operating scale to support the Steepening demand curve on the automotive <unk> and other critical industrial sectors out beyond 2024.

On the needs of our customers need determined it's better for us to invest now.

It's also important to remember what will now be running 150 millimeter to support our current book of business. While at the same time global net our 200 millimeter assets sooner than your original plan, which calls for additional 200 millimeter equipment.

While we currently have ample liquidity to fuel our investment plans, we will continue to monitor the capital markets and evaluate ways. We may continue to maximize our financial flexibility as we expand our leadership position.

It is important to note that our capex and cash flow during 2021 continue to be subject to variability depending on our Mohawk Valley construction progress.

Well as reimbursement timing from the state of New York.

Now turning to our outlook for the third quarter of fiscal 2021.

We're targeting revenue from continuing operations to be in the range of $127 million to $133 million.

The momentum we're seeing in our power product line to continue our RF product line to ramp as we enter the back half of the year.

On materials product line is expected to post modest improvements supported by a better order flow through.

Q3, non-GAAP gross margin from continuing operations is expected to be between 34, 5% on 36, 5%.

We're targeting non-GAAP operating expenses from continuing operations.

On the $80 million and 81 million for the third quarter.

The gradual ramp at our operating expenses is fueled by our investments in R&D, including development projects on our Mohawk Valley Fab and supporting 200 millimeter wafer development as well as increased sales and marketing expenses as we pursue new business opportunities, we target Q3, non-GAAP operating loss from continuing operations with EBITDA.

Free and 37 million to $31 million and we target non operating net loss from continuing operations to be approximately $1 million.

We expect our non-GAAP effective tax rate to be approximately 25% on.

Non-GAAP effective tax rate decreased due to the jurisdictional mix of our forecasted earnings on a continuing operations basis.

We're targeting Q3, non-GAAP net loss from continuing operations to be between 28 million to $23 million or a loss between 25 to 21 per diluted share.

Our non-GAAP EPS target excludes acquired intangibles amortization noncash stock based compensation.

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

Our Q3 targets are based on several factors that could vary greatly including the situation with COVID-19, overall demand product mix factory productivity and the competitive environment with that I will now turn the discussion back to Gregg.

Thanks Neil.

We're pleased with our results for this quarter, which demonstrate the strength of our business and reinforces our confidence in our strategic priorities.

Customers continue to give us feedback that the interest in and demand for silicon carbide.

Revenues to grow.

The strength of our device opportunity pipeline, which currently stands at more than $10 billion.

Underscoring the demand, we're seeing not only for automotive power, but also on RF industrial and energy solutions.

Cadence at which our sales team is converting these opportunities continues to be impressive with approximately $600 million of design ins awarded during the previous quarter.

A significant portion of these were for automotive products and the rest spread across industrial communications infrastructure.

Energy and aerospace and defense.

Further our engineering team is constantly innovating to bring new products to market earlier this month.

We amount we announced the launch of the will speed Wolf pack family of power modules.

Which supports a wide range of solutions for power markets, including EV fast charging renewable energy and energy storage and industrial power applications.

This 200 volt.

We will speed MOSFET module technology delivers maximum efficiency and packages that allow customers to significantly increase efficiency and performance with smaller more scalable power systems.

Once again, we're working closely with the team at Arrow electronics to successfully launch this new offering.

While the automotive industry continues to anchor our business the merits of silicon carbide are being recognized across other industries and we are well prepared to serve the different needs in applications of these businesses.

In materials, we are pleased to announce that we signed an extension and expansion of an existing long term wafer supply agreement with a major semiconductor provider during this past quarter.

The extended agreement now represents approximately $250 million in materials and provides the customer with Wolfe speeds of 150 millimeters silicon carbide bear in epitaxial wafers over the next several years.

The extension is yet another example of how the industry at large is shifting towards silicon carbide and how we are best positioned to lead this transition.

Looking towards the macro economic environment, while it remains volatile in the near term.

We are pleased with the number of recent developments that signal long term growth in the markets we serve.

Globally more than 20 countries have communicated their intention to invest in renewable energy and limit the sale of new internal combustion engine cars over the next few decades as they look towards rebuilding the economy post COVID-19.

COVID-19.

Massachusetts, California, and New Jersey have taken steps to restrict or ban sales of new internal combustion engine vehicles by 2035.

Turning to <unk>, while China continues to lead the world in infrastructure and mobile rollout. We aren't we are encouraged by signs of progress in other regions.

And although we're still in the early stages, we expect five G and Gan on silicon carbide to be a multi year growth opportunity as momentum continues to build.

Overall, we are successfully capitalizing on the opportunities in front of us today as well as ensuring we expand our leadership position in the years ahead.

By divesting our lead assets, we have established ourselves as a global pure play semiconductor powerhouse with a sharpened focus.

Carbide and Gan solutions.

We are changing our name to Wolf, which capitalizes on our 30 year heritage of working with Silicon carbide and speaks to our ambitious plans to compete and win in the rapidly expanding marketplace.

We are moving the industry forward with the shift from 150 millimeter to 200 millimeter.

We will begin production of the Mohawk Valley 200 millimeter fab in early 'twenty two.

Supporting greater adoption across a wide range of industry sectors.

We're pulling in our Capex plans on increasing our spend in 2000 $21 million to $550 million.

Because we believe it is in the best interest of our customers to have the Mohawk Valley Fab and the Durham Crystal growth facilities up and running at 200 millimeter.

Saving your qualification cycle, and allowing for a quicker adoption in the industry.

We believe we have a strong future ahead of us and we look forward to continuing to deliver long term value for our shareholders.

And with that I'll turn it back over to the operator, and we can begin our Q&A session.

Thank you Ashwin reminder, to ask a question you will need to press star one on your telephone.

Let's turn on your question press the pound key and then just a time with that we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Our first question comes from Craig Irwin with Roth Capital Partners. Your line is now open.

Good evening and thanks for taking my questions. So Gregg congratulations on the success with eight inch it's going to be really exciting too.

To see production launch at eight inch in Niagara I I always had a hunch.

Can you maybe update us as far as where you stand on the technology development necessary to actually execute that in early 2022.

Do you feel that the reactor technology that Cree has in hand is ready for prime time there.

Do you have.

MOSFET.

Production processes that you think will be more transferable than when we made the move from four inch to six inch.

Are there any other potential areas of risk, while we look at this potentially match shifts.

Breakpoint down in cost.

That you will probably execute on.

Well, thanks, a lot for the thanks for that question Craig a couple of things that I would I would note one is I've been pretty extensively involved and the updates we've been having on 200 millimeter over the last couple of years have been very engaged with the team. Our team has made numerous breakthroughs and continuous progress.

On it.

And we felt collectively as a team that we were ready to go with with Mohawk Valley at 200 millimeter now Craig.

Going to be ramping that early 'twenty. Two so we are 11 months away. So you can bet the team did a pretty thorough.

A review of where were at on on the reactors, where we're at on the technology on where we're at with the quality of crystals and so forth.

We've got a thumbs up and we're moving forward. So we feel real good about that.

Obviously some of the incremental capex spending is actually associated with building.

More 200 millimeter Crystal growers. So that's obviously in the plan as well and then finally on silicon carbide on.

On a material side of it.

We build our own.

Crystal growers that.

At all of our wafer diameter.

So we feel real good about where we're at on 200 millimeter as it relates to MOSFET recall that part of the deal with with New York When we built this fab was a.

With a pilot line in New York on that.

It was actually at SUNY Albany site.

We a while ago converted that pilot line to 200 millimeter to begin running prototype pilot line type activities at 200 millimeter, we feel real good about it.

Where we're at in terms of that process as well.

<unk>.

So we feel real good about that now that doesn't mean, there is zero risk, but what I would tell you Craig is that.

It's now a complete and total focus on one thing and Thats ramping 200 millimeter versus ramping 150, and then converting to 200 and having customers go through those cycles et cetera, So the feedback that.

We will be getting from customers. Obviously from this announcement, we are anticipating to be very positive because it's a significant say.

Savings for them in terms of.

Of the amount of work they would need to do to qualify this factory so.

Gregg crushing Craig we've spent an enormous amount of energy on this and we're feeling really good about this about this move.

Excellent excellent and then my follow up question.

It's been actually more than a year since I've seen the.

The lead semi cap engineers of your major customers and maybe maybe we can call on competitors.

On the chip side.

And as far as I understand even two day <unk>.

None of them have had the major budgets released nessus.

Necessary to do eight inch that they were all waiting for the availability of wafers do you anticipate that you could have commercial sales of eight inch wafers make a material contribution in 'twenty, two I mean external commercial sales rather than internal consumption.

I think for 'twenty two.

No I think the focus is really going to be on ramping that up inside of our factory and in getting all of that moving.

We've got.

On quite a number of long term agreements that we have with a variety of different semiconductor players we've announced many of those I think we've said previously that's something like three quarters of our materials business is subject to these long term agreements.

We've extended and expanded extended one of them a while ago with ft.

And then more recently, we've expanded expanded and extended another one of these as well so what I would say is the <unk>.

<unk> customers are really in a variety of different stages in terms of where they're at from an R&D perspective, where theyre at from a ramp perspective so.

And.

And so I think at this point.

There is sort of absorbing the ramp at $1 50.

Well congratulations thats the big announcement, thanks for taking my questions. Thank you Craig.

Thank you. Our next question comes from Jed <unk> with Canaccord Genuity. Your line is now open.

Hi, Thanks, and I'll Echo Craig's congratulations it's big news on the 200 millimeter.

I guess first question Gregg.

Just with respect to yields and kind of thinking of the business in.

Two separate components between Crystal and then Mohawk.

It seems pretty straightforward in terms of.

Area benefit, particularly up in Mohawk and what yields could do there on the crystal side that was always.

It seemed like that was a greater risk in terms of.

MPD.

For that wafer.

Clearly you've seen something that caused you to kind of go with debt should we assume then from a cost perspective.

Kind of a faster ramp back on the on the margin side in terms of long term targets.

No I wouldn't I wouldn't do that I'll, let neill kind of go through a little bit more detail on that we feel very good about where we're at in terms of the quality of the crystal quality on materials and so forth, we got a little work to do on <unk>.

Getting the costs down on 200 millimeter, but we feel like at this point it to the right.

It's the right move for us.

But I'll, let neill, maybe elaborate a little bit more on that.

Yes, Jed so if you think about it is if you look at the long term model, we laid out a plan for one $5 billion of revenue on 2024 with 50% gross margin is our target I think the timeline that we've talked about previously in terms of both the revenue will transition in the margin transition are going to be kind of the same.

And the reason for that is kind of exactly what Gregg said, so I think in the earlier periods. You can think about the 200 being a little bit of other higher cost that's going on.

Offset some of the diameter benefits you would see and interestingly, there's a lot of puts and takes on there, but you end up kind of back where we were before so over time, we'll end up with a model out in 'twenty 415 billion of revenue, 50% gross margin on the 25% Opex on a 25% EBIT.

But we'll get there a little bit differently and then secondly, what I'll say is when you get out to 'twenty forward our view.

You're much better positioned but one of the 200 for a.

Couple of several more years in advance of what we expect to be a steep ramp.

2024, and on top of that as Gregg said remove that one qualification cycle for your automotive customers, which I think is going to be well received by the customer base.

Got it.

It's just my follow up I guess going back to going back to Gregg.

As.

You pointed out there's a lot of benefit go on rate to 200 in particular not average debt.

Ramp $1 50 recall.

But there is sort of that.

How are you thinking about transitioning over sort of the existing 150, and because I would assume all your customers are going to want 200.

In terms of that benefit so so how.

On practically.

Are you thinking about sort of the pragmatic approach too.

To this process.

Ed.

Recall, we are expanding right now our wafer fab in Europe as we move led out we're ramping up to $1 50 in Durham.

I would anticipate that we would be.

Selling and producing out of Durham, then for some time.

Then there is no intention to.

Shift the Durham factory from $1 50 to 200, it will remain a 150 millimeter factory and.

And really as we begin to ramp Mohawk Valley, It will become a greater and greater percentage of the total output by 2024, it will be greater than 50% of the output and then as we ramp it beyond 'twenty four.

It'll be substantially greater than 50% of the output and the Durham factory.

It remains at 150 will be smaller and smaller as a percentage obviously so the go forward plan would be continue expanding.

Spanned the Durham factory as we move led out at 150 have no intention to try to move that to 200.

On the fab.

It's a relatively small fab and we'd be way better off just simply expanding our capability and what is an enormously larger space in New York versus what we have here.

And in Europe, and then finally, what I would say is we call. This is going to be a modern factory is going to be highly automated theres going to be.

Substantial increase in terms of its raw capability.

And so that's why we're putting all the emphasis on 200 and Mohawk Valley.

Great. Thank you.

Thank you.

Thank you our next question comes from.

Mark with Morgan Stanley. Your line is now open.

Yes, Thanks, Gregg, maybe just to shift gears, a little bit into the industrial market and specifically I know you've had a lot of momentum with the arrow partnership.

To get an update on your sense of just timing because I know it takes time for kind of industrial products to get designed into ramp how should we think about that in terms of revenue related to that partnership in the coming quarters.

No.

So first off thanks for the question Craig It's typically industrial is a little light on earlier than in automotive type cycles. So automotive is typically a four year type.

You get designed into when you start ramping revenue industrial is sort of two to four.

Kind of depends a little bit on on the industry, but it's quite fragmented. So I think you can kind of bacon sort of that two to four.

Type range.

And then the other point that I would make on that Craig is if you look at the $600 million.

Design and we were awarded this past quarter about a little over half of it with automotive, but about a quarter of it was industrial and energy. So we feel real good about the momentum that we have.

And that broader space and again, that's one where we just don't have the sales footprint to really go after that arrow has been just a.

Fantastic partner to work with.

They've got a substantial capability there that we've been able to leverage.

And it's why when we when we introduced this newest family of 1200 volt modules, we looked right arrow and they're already off to the races on promoting that one as well.

Got it and then just as a follow up.

As it relates to kind of the partnerships you have with a number of tier one suppliers just kind of interest and just how those are progressing and any kind of insights in terms of some of the traction that those partnerships are having from a design perspective on the automotive side.

Well a couple of things I would point to I mentioned, it last quarter, but I think it.

It's worth repeating.

Our customers the tier one customers that are giving us feedback on.

On a.

Pretty consistent across debt tier one customer base along several different factors one is that the appetite and the.

<unk>.

The percentage of cars that are going to become electric or the adoption rate of electric vehicles.

Definitely increasing and pulling in.

Most pundits we're looking at possibly by the end of this decade by 2030, maybe 20% other cards would get to EV.

That is now well past, 30% I've seen some customers.

Thinking about a 40% adoption rate by the end of the decade, so they point to their end.

Our customer base is substantially increasing the adoption rate of electric vehicles net for the number of reasons that include governmental sort of incentives, but also consumer kind of push as well. So that's number one number two is the the success.

Right and the interest rate, they're getting on their silicon carbide solutions is on.

Also increasing and that cuts across.

A different car platforms, the number of different car types, whether it's higher end cars or more.

Every day vehicles.

The ability to get a a.

A greater.

Distance per charge.

And or decrease the amount of debt cost of battery.

It really cuts across all.

On all the segments of vehicles, so they're seeing a lot of really strong interest there. So.

Just recently just last week.

We had a presentation from one of our customers that kind of showed and layered the interest that they have done from their customers on silicon carbide, and that's really encouraging for us and thats, especially as they see the market beyond 2024.

Alright, thank you.

Thanks Gregg.

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

Hey, guys. Thanks for taking the questions I had a couple here.

Just on the pull forward in Capex in 200 millimeter Admiral hop Valley I'll.

Echo the sentiment of others, congratulations on that but can you.

Maybe give us a sense of what breakthrough as youre seeing to have.

Made the move here to pull that forward and make Mohawk go 200 from the very get go and if it's something you can give us any sense of quantification around I would imagine it has to do with yields.

That would be helpful. And then just related to that I know you said there is no real impact to the fiscal 'twenty four targets in terms of revenue and margins, but can you talk about.

Maybe the timing of funding from New York State given the accelerated capex sort of what we should expect on timing.

And then also.

It sounded like you are leaving.

The window open for potentially some additional capital given the accelerated capex, maybe just your thoughts around that as well.

Yes, Brian So let me take the first part of that and then Neill can address the back half of it so.

So first off I have been pretty actively involved with the 200 millimeter program or basically since I've been at the company.

And what I would say there has been a continuous.

Progression of success and breakthroughs and so forth that we've had so this wasn't.

Tuesday last week somebody came in with a result, and all of a sudden we flipped it it's been a it's been a gradual move towards building confidence in.

And this and we've we've gotten to the point, where our confidence is obviously quite high.

Were making this announcement today and we're talking about ramping it in 11 months. So we're feeling very good about debt in terms of the quality of materials coming out it's exceptional at this point.

And that includes.

The normal sort of.

Defect density that customers really care about.

Is exceptional at this point so.

We feel quite good about that.

There is still work to do obviously there is always work to do on semiconductors, but we feel real good about where we've been and again I would describe it as.

And it's a consistent drumbeat of positive progress that we've made over the last.

Couple of years that has just really culminated into into a decision that we've made that this is this is the right move for us.

Going forward, so with that I'll turn in terms of the timing with New York and so forth I'll, let neill address that.

Yes, Thanks, Brian.

Let me I think maybe the best thing to do is maybe just unpack the capex a little bit first and then we can kind of get into the timing of the funding on those types of things so.

The higher Capex now $5 50.

You talked about it's really a result of first of all a higher completion rate in the mall.

What's wrong with that but we have.

Dissipated in the 400 balance. So this is what gives us confidence that we're going to ramp that's kind of in the first half of 2022. So there is a large chunk of debt satisfying but.

There is also an incremental spend on the 200 millimeter for handling tools for materials expansion of Durham.

So you just have to remember will be supporting both business at 150 millimeter, while building out 200 millimeter at the same time. So overall well. This is some timing in there. There is 200 millimeter investment that's coming a bit earlier. So 2021 will continue to be our peak investment year 'twenty, two you'll still you'll still see a drop in the Capex I think it will be.

It may be at higher levels than what we anticipated before and then drop off again on the $23 24 timeframe. So the slope is more or less the same but that trade with higher requirements in 'twenty, one and 2000 net from a New York standpoint.

We should start seeing some of those benefits come in.

Relatively soon although I'd say the majority of that out into next year at some point.

And then from a capital markets perspective, what kind of mentioned on the script, but I think the point is we're in a great shape from a liquidity standpoint, right now we've got $970 million.

Cash and liquidity. So we feel good about that however, with the Steepening ramp.

Beyond 2024, we're going to continue to make sure we can invest to meet that opportunity. So we'll continue to be opportunistic as we look forward here and look at those opportunities given kind of what we're seeing on the marketplace, particularly beyond that 24 time frame.

Alright, great. That's Super helpful. And then maybe if I could just squeeze in a second one here and I'll pass it on.

Just kind of shifting of the business.

Speed.

Revenue you guys really have seen some improvement modest improvement off the kind of June loans. When you did $108 million in the quarter Youre sort of closing in on 130, plus based on the guidance here, So and I think it peaked at $140 million in that segment in fiscal 19, so youre not really on.

Even even that level.

In the current environment. So just kind of wondering can you maybe also unpack how much of the recent improvement.

In topline trends is just a normalization of COVID-19 impacts on the business go look going away and then maybe how much is just organic growth and then on the organic side.

Is it all EV end market is it coming from the materials volume is picking up again as it RF, maybe just any sense of the drivers and where they're coming from thank you guys.

I think we have some audio trouble with deal. Okay. So maybe I'll take a crack at that as Neill theyre trying to get the audio back on again I would say, we're pretty enthused about the demand that we're seeing in the power business on the RF.

The device business really picking up pretty nicely from from where we were.

Obviously, if we had.

The factories humming the way, we wanted we would be able to.

To be able to service that.

Even to a greater extent, but the teams are working really hard on that but what I would say is the.

The progress is really based on design ins and design win activity that we've had and things beginning to ramp and things going from.

Idea to two.

Real fruition in terms of turning into revenue.

That we're going to be on a so we're going to be on a trajectory for that for the next couple of years, that's really associated with initial ramps in early production for some of these design wins that we have.

One over the last couple of years debt will really.

Start to click in post 'twenty two into 'twenty, two and then post 'twenty two and then really start to ramp as we hit the 'twenty four time frame. So.

Actually we're feeling quite good about it.

Brian I think.

It's mostly new stuff coming our way versus old things, returning I would say.

And I don't know if neill.

Yes.

Gregg I was just going to hey, Brian It's Tyler the other thing on it's just going to add we saw some modest improvement in RF to Brian.

That's just a function of the.

The rollout continues throughout Asia and around the globe. So there's still good opportunity, but we are in the early stages of that so that.

Theres, a multi growth period and as people work from home and start to experience greater productivity by leveraging technology that creates great opportunity for <unk>, So as Gregg said.

And I added here, just a little bit of color on what's going on so.

Alright, Thanks, guys I appreciate that I'll I'll pass it on.

Thanks, Brian.

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

Thanks, a lot Gregg congratulations on 200 millimeter brilliant idea, but historically will speed the device business.

<unk> been kind of the premium power and module market as we've discussed in the past and your biggest customer slash competitors' devices SD on addressing more diversified power markets, but once you get assuming once 200 millimeter is up and running and get the cost down.

<unk> shook out.

That should make the New York Fab, where the largest if not the largest sic device power fab.

Anywhere and given your capacity, which if you can maybe help us mark to market on what that would be with 200 millimeter, but given your capacity doesn't that pull you into the same diversified power markets that some of you.

Biggest customers are addressing or how should we think about that and I have a follow up.

Yes, Thanks a lot.

The question So first off that fab in New York is going to be.

A real big benefit from for Us because obviously is substantially larger than what we have here in North Carolina, but equally important it's a modern fab highly automated with pretty significant.

Expansion capability. So we're super excited about debt in terms of addressing the broader more diversified market. Our challenge on that has been really more sales footprint related than than technology related and that's where this partnership with arrow has been a huge positive for us.

Very tightly coupled together with them.

And it worked out really well for us.

In terms of the factory itself.

I believe it's going to be the worlds.

<unk> only 200 millimeter silicon carbide fab and will be the world's first.

200 millimeters silicon carbide fab in.

We just believe that that's fundamentally going to give us a really good opportunity as we ramp that fab and start cranking.

Production in it.

Great and then for my follow up if I could maybe I don't know if meals on a drug you could speak to it but just comments about the modest increase in orders and material business driving growth in the next quarter. It may be up for the next couple of quarters kind of suggests that your mature business at least every business is no longer a capacity limited so much as now you're just looking to fill orders. So first of all if we get mark to Mark.

On that are you up to up to them.

Up to capacity on on Etsy, and shipping to orders and.

Now that you are and if you look at some of the plans of some of your larger customers. For example, like X fab is almost done with their ERP process will be shifting probably increasingly for their own internal source for that.

What is how do we look at the balance between what has been one of your fastest material growth areas.

And what is coming in the next year or so as native demand.

Every wafer still.

Far enough large enough to offset anything that people can take internally like X fab or will it help us get an idea of the balance of the good things.

Yes, maybe I'll kick it off.

And then turn it over to Neil just for a little bit more color.

I guess, what I would say it is.

Typically what's been happening with our customer base.

And materials is a desire to take a certain percentage of the materials is there and a higher percentage and abbvie and I think as they get into it there tends to be a trend of.

Aligning more simply because we do pretty well.

Are pretty competitive and the quality is actually quite high and actually we haven't seen that really change much at all so I haven't seen much of a transition and no debt at all.

Neil I'll, let you give a little bit more color.

Yes, I think we're caught up on the just on the demand side.

I think as we've talked about the modest materials kind of pick up I think that's just more of a supply and demand situation. We are seeing some pretty good strength in Las Vegas, we're seeing a little bit more pickup on RF side on the device side. So I think it's just kind of ebb and flow of how supply and demand works within the materials market and I think over time on the Skus will see that come back.

Stronger right now on a little bit more modest and is also on balance out we'll manage through but as Gregg said I think theres still.

Solid.

Understanding from customer standpoint on the quality of the IP that we got and do you expect that to continue as we go forward.

On.

If I could maybe squeeze on real quick one and I apologize, but can you remind us too on one Leds will start moving out of Germany.

I remember, it's going to be there for a little while so before you can expand significantly the wafer crystal wafer growth facility there when when when will we see lead you start to move out.

So yes.

On the led side I think we've seen a big chunk of it.

The crystal growth side already know that we're really focused on the fab outsourcing at this point, that's underway and I think the other real positives on the deal that we have done with smartphone debt will continue that will continue on the same timeline that we had planned previously so there's really no changes to the model I think we've got.

I think we've got great progress on across the sales side and we're working through the fab side right now thank.

Thank you.

Thank you. Our next question comes from Paul Coster with Jpmorgan. Your line is now open.

Yes, thanks for taking my question.

It sounds like you can get to the same kind of margin structure in 'twenty four.

With 200 millimeter as you might have done with the hybrid model can you explain that a little bit why is it not a better outcome.

Or maybe on how would your room.

That's right Paul and I think I think we have to think about it when you're starting a new technologies expanded diameter to the period of time, where that's at a higher cost. So you don't get all the debt.

On the full benefit of the bigger day hamburgers you run it for a while you improve yields improved cycle times.

As you look to the battery and then eventually there's kind of an intersection points and it'll take a couple of years for us to kind of work through that ramp with bringing on utilization et cetera. So I don't think its a crossover point right now there's a lot of puts and takes for adding some capex on depreciation we're also adding in a new diameter.

Like I said Theres, a lot of moving pieces in there, but at the end of it all of them to get out to 'twenty. Four you end up kind of backup on spot.

Got you and then the other question is some.

But greg's prepared remarks at the beginning of 2020 force the euros ramp. So what is 'twenty two 'twenty three but is it kind of step function is it smooth and accelerating adoption and how the margins do you think how do you think that will evolve over that two year period.

I think it'll be similar to what we've talked about previously.

Paul So I think as you think about next year kind of modest improvement I think theres still an investment year as we think about that transition.

And then it's really going to be function from a margin standpoint about how we look.

As you transition to more of our balance so it really isn't until the 'twenty three 'twenty four time frame, but you're well north of 50% on the capacity coming out of Mohawk Valley. So the longer on Durham below on the margins are and the capacity to move up the Mohawk Valley. The higher the margins will be so I think the trajectory of the business as we've talked about it before 'twenty, one 'twenty, two and that kind of inflection point in 'twenty three are kind of.

The same as what we've talked about before the key differences. The Capex plan will be a bit different and will be much better positioned and argued with having one 200 millimeter for several years.

Okay got it thank you very much.

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

Thanks, so much guys.

As you look at ramping in the 200 millimeter is there a particular voltage that you're going to be focusing on is this all going to be 800 volt bolt on.

So you're asking initially or you don't all of them.

It'll be it'll be the range of our of our product technology. We've got driver products already understood. It turns on what's going to go first and but it'll be the.

I don't know if it will be the higher spectrum of our products, but it will be the vast majority of what we do since we're targeting calling to have greater than 50% of the output coming from Mohawk Valley.

In that 2024 time frame.

Okay.

Helpful and then in terms of the equipment suppliers.

On the deposition side.

Are you working with multiple suppliers.

And are there any risks around.

Most have been delivered on time with what Youre seeing so far with what you got there.

So far things have gone, okay on net and in that regard so and recall.

I'll add back.

We do have the pilot line and Sony So theres been some amount of.

Delivery there.

Handing the capability here in Durham, So theres been some of that so I don't I don't anticipate huge problem. There Neill I don't know if you have any additional color you want to add on to that.

No I think that's right and again, we've been working on this for quite a while these are long lead time type of item. So we think pretty good visibility as to what's going on so any disruption there.

Okay. Thanks, guys.

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

Oh Hi, Thank you first just a very simple question and I think all of US had been sort of tap dancing around now now that will speed is.

Our pure business do you all have any plans to exports that would disclose the materials per seats are up versus <unk>.

<unk> power breakdown.

I have a follow up.

Hey, Joe Yeah, So I think right now.

I'd have to go with.

One segment moving forward I think that's kind of how we run the business internally and as you know right now we're kind of a $500 million run rate type business. So we think that makes makes sense for the time being.

Okay. Thanks.

And then to follow up on a couple of the other questions in particular Collins.

Are you seeing a lot of designs out there, especially for more performance vehicle platforms that 800 volts.

But then again, you've got some lower performance platforms out there still using <unk>.

Lower power levels I'm wondering if the economics.

Youre products improve what's going to happen do you think those platforms sort of move up to 800 volts or do we see you trying to drive the power MOSFET to some of those lower voltage white city car platforms or whatnot.

Joe So a couple of things and let me start by reiterating what I've been saying basically for the last three years, which is we have been on a mission to to transition the high voltage power.

Power electronics market from silicon to Silicon carbide and part of the part of the challenge to do that is to drive the cost of the fundamental silicon carbide technology the substrates in the IP down and so we've been marching on that and driving that.

With an intensity like you wouldn't even imagine over the last three years, we've made tremendous amount of progress there and we still see further.

Opportunity for us to continue to make pretty decent progress.

Hi.

Ahead of us and so what we've been doing over the last three years is decreasing the GAAP between silicon and silicon carbide substrate.

Substrate level.

Obviously, it never gets to be parity or anything like that but we've been having we've been having some pretty good success that down.

Fact that we're moving to 200 millimeter substrates effective or moving to.

<unk>.

Our modern fab is going to give us continued opportunity there as well so fundamentally we've been on this.

We've been on this mantra driving the.

Transition from silicon to Silicon carbide via pretty substantial cost reductions on the fundamental technology now.

The other thing we're seeing and this is part of the feedback we're getting from our customers is an increased.

Look at <unk>.

Silicon carbide across all of the auto platforms, including 400 volts. So we're seeing customers had 400 volt see the advantage of silicon carbide and taken advantage of that and obviously the higher voltage as well so.

I think it's still to play out there, but we haven't been just sort of.

Sitting around on.

On the cost side of things, we've been really driving it.

Pretty hard.

It's not it's.

If not for the faint heart, but I think we've done a real good job of driving those costs down and we still see pretty good line of sight for some pretty amazing cost reductions in the future I think our customers are seeing that too they see that obviously vis vis what we quote.

Our our economics that we offer to them so I see it.

Pretty big opportunity ahead of Us Jim.

Thank you and I just wanted to speak.

A quick one on.

Can you, obviously, you've got existing existing obligations, but let's imagine at the end of 2022 are you going to start on any more contracts to sell their wafers or would you rather just become a pure ERP supplier on the in the materials market and that's it for me. Thank you yes.

Yes no.

Moving to.

We work with customers. We obviously just signed an extension and expansion of a long term agreement with a customer and that included bear in F&B and we work with customers, we all understand that.

They have their own strategy some of them want to do more <unk>. So they ask for a higher percentage of bear on a lower percentage of that would be.

Some of them do.

Don't want to do that for mostly Abbvie.

Some of them want to do <unk> and then find it difficult. So then come back and ask for higher percentages. So we're pretty flexible there and we don't have a.

We don't we don't find ourselves on one particular model in that regard.

Thank you.

Thank you our last question comes from David O'connor with Exane BNP Paribas. Your line is now open.

Great. Thanks for squeezing me in guys.

<unk>, maybe on the M 200 millimeters, so Gregg DM. The design wins, you've won in 2020, just to carefully and around $2 $3 billion with all of US know b on the automotive part D. If at all that nobody on 200 millimeters.

And then on the on the MOSFET yields the issues that you've had on six inch or they know solved and how should we reconcile the kind of move to 200 millimeter with a yield issue that you had on six does that mean that they're solved on eight inch already our geological team that learning cycle down the road on the.

On the <unk> as well and I have a follow up on the material sales.

Yeah. Thanks, David So first off and you know in terms of ramping with customers. Obviously, we have an existing facility in Durham. So we're shipping product at 150 millimeters will begin.

Production of 200 millimeter and Mohawk Valley in early next year, and then we will have to qualify that and work with customers. So theres going to be a blend of theirs. It's initially going to be $1 50, and then it'll be a blend of the two and then on a move towards mostly 200 over a period of time that is the design in <unk>.

Michael and again, what's really important on that is the transition the Mohawk Valley now will be a single transition and that is just simply the 200 millimeter versus the double transition of $1 50, and Mohawk Valley, and then 200 millimeter and then as it relates to the yield issues I would really qualify those or characterize those yield issues, it's really a day.

As we ramp up our Durham factory with MOSFET it happened to be in a transition to a 150 millimeter, but the issues associated with that yield are really independent of the substrate and are really associated with the factory.

Itself, it's a relatively.

Small factory.

Relatively dated factory.

Theres lack of automation and things like that we are making progress on the yields if we talk about.

As an example, this past quarter our team.

Achieved and actually exceeded a little bit.

The yield goals that we had for the quarter and we've got obviously improvement goal for this quarter as well.

But I think it's going to we're going to continue grinding on that.

<unk> are working on the best they can.

But they're.

They're relatively dated factories with.

Yeah.

Not a lot of automation as we move to Mohawk Valley.

We're actually working through some of those issues right now because we have at our disposal a pilot line and SUNY Albany.

And again, David as I mentioned earlier, we've actually converted that pilot line to 200 millimeter. So we're already beginning.

Some preproduction running we've had.

Number of learning cycles that we have.

Run through there in a pilot line.

Team was part of the overall organization that gave the go no go on let's move forward with 200 millimeter out of the right onto the chute.

I'll hop Valley, and we got a thumbs up there too so I feel like that transition will be.

Yeah.

Nothing is easy, but that transition is going to be better because we're going to be a highly automated factory there is going to be very little.

Human error.

Intervention that we have.

Typically out of our.

Our non automated factories.

So hopefully that helps with your question and I think youre on a follow up.

Yes, that's great color. Thank you Gregg and maybe quickly on the follow up on the material side of things. So you've extended the long term agreement with them one of your customers at the same time, we see someone like Infineon struck a deal with GT advanced for Silicon Carbide <unk> does this change anything in the model. When you look out a few years on the mature insight on.

Should we kind of think about those type of deals for the materials perspective going forward. Thank you.

Yeah, a couple of things so first off.

It's.

I think it's pretty well known in the industry that there is this big transition from silicon to Silicon carbide and many of our materials customers are have internal plans to try to have their own capability in terms of the materials and that's very you know they've been very.

Transparent about that with us and with the industry at large.

There are tremendous barriers to entry that we've talked about.

But I think that's that's a strategy that.

They are pursuing and to be honest with you kind of make sense from my perspective, I think they will find that the <unk>.

Difficulties on the barriers are pretty challenging we've got 30 years of work in this area.

We've got our we've got a set of battle scars and.

All of those things have gone into putting us in a position that we're in today, which is.

We are now leading the industry transition to 200 millimeter. So we feel pretty good about debt. So I don't think any of these announcements change anything from that perspective to the to the extent that customers want to sign up with us.

We're very excited about that.

The agreements that we have are not sort of.

How much for this year and this year only there.

Give a lot of detail, but can kind of think of them kind of half a decade type timeframe and so these are long term agreements that.

Assure them of a supply of material and product and assure us.

Our revenue stream.

On a.

Our scale that helps us from a learning cycle perspective.

Very helpful. Thank you. Thank.

Thank you.

Thank you. This concludes the question and answer session I would now like to turn the call back over to Gregg Lowe for closing remarks.

Well, thanks, everybody for your interest and we'll speed and we look forward to catching up with you on our next earnings call. Thank you.

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

Yes.

[music].

Net income.

Yes.

[music].

[music].

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Cree, Inc. Second quarter fiscal year 'twenty One earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session cash.

Good question during the session you will need to press star one on your telephone if you acquire any further assistance. Please press star Zero I would now like to hand the conference. Your speaker today Tyler go on block Vice President of Investor Relations. Please go ahead Sir.

Thank you and good afternoon, everyone.

Welcome to Cree second quarter fiscal 2021 conference call today, Cree CEO Gregg Lowe increase CFO Neill Reynolds will report on the results for the second quarter of fiscal year 2021.

Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures <unk> results internally non.

Non-GAAP results are not in accordance with GAAP 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 GAAP a reconciliation to the most directly comparable GAAP measures.

<unk> is in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics.

Today's discussion includes forward looking statements about our business outlook and we may make other forward looking statements during the call such forward looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual.

<unk> results to differ materially, including risks related to the spread and impact of the COVID-19 pandemic.

During the Q&A session, we would ask that you limit yourself to one question and one follow up so that we can accommodate as many questions as possible. During today's call. If you have any additional questions. Please feel free to contact us after the call and now I'd like to turn the call over to Gregg.

Thanks, Tyler and good afternoon, everyone. Thank you for joining US today I Hope you and your families are staying healthy and safe as we begin the new year.

Our team continues to do an exceptional job of building relationships with customers and winning new business.

In the second quarter, we achieved revenue from continuing operations above the high end guidance range.

By strong demand for our Silicon carbide solutions.

The momentum we're seeing in silicon carbide reinforces our confidence in our growth strategy as we execute on our long term plan.

In addition, we are making solid progress on the divestiture of our lead assets and expect to close this transaction during our fiscal third quarter.

Once the divestiture of Kris led is complete.

We will have achieved a major milestone in our transformational journey to establish our company as a pure play global semiconductor powerhouse well positioned to lead the industry transition from silicon to silicon carbide.

To further amplify this transition.

We are changing the name of our company to <unk>.

We believe this is a natural progression that builds on our strong reputation of developing silicon carbide solutions over the last 30 years, while at the same time capitalizing on our competitive positioning at the Wolf speed brand has in the market.

We'll have more to share on these efforts over the next several months and expect the name changed to be complete.

On time in the next few quarters.

Our 200 millimeter team has made solid progress and in fact has made substantial breakthroughs in 2020.

As a result.

We have decided to forgo our original plan to initially open up the Mohawk Valley Fab at 150 millimeters and instead, we'll begin ramping Mohawk valley directly with 200 millimeter silicon carbide substrates and the first half of calendar 'twenty to <unk>.

I will share the world's first 200 millimeter silicon carbide fab and further differentiating us from the competition.

Based on these important developments, we are raising our fiscal 2021 capex spend to approximately $550 million, which reflects a greater percentage of completion of Mohawk valley versus our previous Capex plan as well as investments in 200 millimeter wafer and.

<unk> capacity.

The higher completion rate of the fab construction and fit out this year on the increased investment in 200 millimeter capacity.

Will give us the ability to ramp the fab solely at 200 millimeters and the first half of the calendar year 2020.

We see those sales better positioning the company to address what many are now expecting there'd be a steepening demand curve for silicon carbide beyond 2024.

I'll now turn it over to Neil who will provide an overview of our financial results and an outlook for the third quarter of fiscal 2021 Neill.

Thank you Gregg and good afternoon, everyone.

We delivered solid results during the second quarter on demand for devices on materials continue to improve.

Ongoing uncertainty on the macroeconomic environment.

Revenues from continuing operations for the second quarter of fiscal 2021 on $127 million.

Above the high end of our guidance, representing an increase of 10% sequentially on an increase of 5% year over year.

Our non-GAAP net loss was $26 6 million on 24 per diluted share of.

Second quarter non-GAAP earnings exclude 27 7 million other expense net of tax on 25 cents per diluted share for non cash stock based compensation acquired intangibles amortization accretion on our convertible notes.

The transformation on transaction costs.

The optimization cost changes on the value of our lepton investments and other.

Other items outlined on today's earnings release.

Turning to our performance by product line.

<unk> momentum continued scale of our customers having demonstrated the need for our solutions in particular, we're pleased with our 650 volt MOSFET platform, which continues to gain strong traction across a number of industry sectors.

While our supply levels remain below normal due to COVID-19 safety measures, we made progress on the quarter and expect to continue to improve as we execute on capacity expansion.

Turning to RF performance with better did you increase by G activity during the quarter.

Medications infrastructure providers.

Backlog continues to grow underscoring the growing opportunity, we have as <unk> rolls out across the globe.

Moving to materials, we saw a modest uptick in order flow on the quarter, which we expect to continue throughout the remainder of fiscal 2024.

<unk> gross margin was 38, 5% compared to 36, 6% last quarter.

The sequential increase was driven by yield on cost improvements on our device product lines of.

Gross margin performance also continued to be dampened by continued COVID-19 safety measures.

Q2, non-GAAP gross margin from continuing operations was 35, 4%.

<unk> to 34, 5% last quarter and income.

The impact of $4 million on corporate items.

Non-GAAP operating expenses for Q2 was 78 level on a non-GAAP tax rate was 23%.

While we remain prudent in our cost control, we continue to expect heightened operating cost, while we invest to expand our leadership position.

For the second quarter day sales outstanding was 49 days and inventory days on hand was 134 days inventory days on hand, excluding inventory related to the future wafer supply agreement in connection with the <unk> divestiture.

Cash generated from operations was negative 29 million on capital expenditures were $145 million, resulting in negative free cash flow of $174 million.

We had a strong and healthy balance sheet with 970 million on liquidity and support our growth strategy zero drawn on our line of credit and convertible debt with a total face value of $1 billion.

We continue to expect fiscal 2021 to be our peak investment year and as Gregg mentioned earlier, we now anticipate capital expenditures of approximately 515 element versus the $400 million previously communicated.

With higher Capex spend reflects a greater percentage of completion of the fit out of our Mohawk Valley Fab and assumed in our $400 million Capex plan as well as the higher investment in 200 millimeter capacity to support the average.

This is important because as many of you know our current operations on non optimized to support our ambitious long term growth plans.

The necessary operating scale to support the Steepening demand curve on the automotive <unk> and other critical industrial sectors out beyond 2024.

On the needs of our customers need determined it's better for us to invest now.

It's also important to remember that will be running 150 millimeter to support our current book of business. While at the same time, given that our 200 millimeter assets sooner than the original plan, which calls for additional 200 millimeter equipment.

While we currently have ample liquidity to fuel our investment plans, we will continue to monitor the capital markets and evaluate ways may continue to maximize our financial flexibility as we expand our leadership position.

It is important to note that our capex and cash flow during 2021 continue to be subject to variability depending on our Mohawk Valley construction progress on.

As well as reimbursement timing from the state of New York.

Now turning to our outlook for the third quarter of fiscal 2021.

We're targeting revenue from continuing operations will be on a range of $127 million to $133 million.

The momentum we're seeing it on power product line to continue our RF product line to ramp as we enter the back half of the year.

On materials product line is expected to post modest improvements supported by a better order flow.

Q3, non-GAAP gross margin from continuing operations is expected to be between 34, 5% on 36, 5%.

We're targeting non-GAAP operating expenses from continuing operations.

On the $80 million and $81 million for the third quarter.

The gradual ramp at our operating expenses is fueled by our investments in R&D, including development projects on our Mohawk Valley Fab and supporting 200 millimeter wafer development as well as increased sales and marketing expenses as we pursue new business opportunities, we target Q3, non-GAAP operating loss from continuing operations EBITDA.

337 million to $31 million and we target non operating net loss from continuing operations the approximately $1 million.

We expect our non-GAAP effective tax rate to be approximately 25 per cent.

Non-GAAP effective tax rate decreased due to the jurisdictional mix of our forecasted earnings on a continuing operations basis.

Reported in Q3, non-GAAP net loss from continuing operations to be between 28 million to $23 million or a loss between 25 to 21 per diluted share.

Our non-GAAP EPS target excludes acquired intangibles amortization non cash stock based compensation.

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

Q3 targets are based on several factors I think very greatly including the situation with COVID-19, overall demand product mix factory productivity and the competitive environment with that I will now turn the discussion back to Gregg.

Thanks Neil.

We're pleased with our results for this quarter, which demonstrates the strength of our business and reinforces our confidence in our strategic priorities.

Customers continue to give us feedback that the interest in and demand for silicon carbide.

Revenue to grow.

The strength of our device opportunity pipeline, which currently stands at more than $10 billion.

I underscore is the demand we're seeing not only for automotive power, but also in RF industrial and energy solutions.

Cadence at which our sales team is converting these opportunities continues to be impressive with approximately $600 million of design ins awarded during the previous quarter.

So a significant portion of these were for automotive products and the rest spread across industrial communications infrastructure energy and aerospace and defense.

Further our engineering team is constantly innovating to bring new products to market earlier this month.

The amount we announced the launch of the will speed Wolf pack family of power modules.

Which supports a wide range of solutions for power markets, including EV fast charging renewable energy and energy storage and industrial power applications. This.

This 1200 volt.

We will speed MOSFET module technology.

Delivers maximum efficiency and packages that allow customers to significantly increase efficiency and performance with smaller more scalable power systems.

Once again, we're working closely with the team at Arrow electronics to successfully launch this new offering.

While the automotive industry continues to anchor our business merits of Silicon carbide are being recognized across other industries and we are well prepared to serve the different needs in applications of these businesses.

In materials, we are pleased to announce that we signed an extension and expansion of an existing long term wafer supply agreement with a major semiconductor provider during this past quarter.

The extended agreement now represents approximately $250 million in materials and provides the customer with Wolfe speeds of 150 millimeter silicon carbide bear in epitaxial wafers over the next several years.

The extension is yet another example of how the industry at large is shifting towards silicon carbide and how we are best positioned to lead this transition.

Looking towards the macro economic environment, while it remains volatile in the near term.

We are pleased with the number of recent developments that signal long term growth in the markets we serve.

Globally more than 20 countries have communicated their intention to invest in renewable energy and limit the sale of new internal combustion engine cars over the next few decades as they look towards rebuilding the economy post COVID-19.

COVID-19.

Massachusetts, California, and New Jersey has taken steps to restrict or bad sales, a new internal combustion engine vehicles by 2035.

Turning to <unk>, while China continues to lead the world in infrastructure and mobile rollout. We aren't we are encouraged by signs of progress in other regions.

And although we're still in the early stages, we expect five G and Gan on silicon carbide to be a multi year growth opportunity as momentum continues to build.

Overall, we are successfully capitalizing on the opportunities in front of us today as well as ensuring we expand our leadership position in the years ahead.

By divesting our lead assets, we have established ourselves as a global pure play semiconductor powerhouse with a sharpened focus.

Carbide and Gan solutions.

We are changing our name to Wall Street, which capitalizes on our 30 year heritage of working with Silicon carbide and speaks to our ambitious plans to compete and win in the rapidly expanding marketplace.

We are moving the industry forward with the shift from 150 millimeter to 200 millimeter.

We will begin production the Mohawk Valley 200 millimeter fab in early 'twenty two.

Supporting greater adoption across a wide range of industry sectors.

We're pulling in our Capex plans on increasing our spend in 2000 $21 million to $550 million.

Because we believe it is in the best interest of our customers to have the Mohawk Valley Fab and the Durham, our crystal growth facilities up and running at 200 millimeter.

Saving your qualification cycle, and allowing for a quicker adoption in the industry.

We believe we have a strong future ahead of us and we look forward to continuing to deliver long term value for our shareholders and with that I'll turn it back over to the operator, and we can begin our Q&A session.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Let's turn on to your question press the pound key and then just a time with that we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Our first question comes from Craig Irwin with Roth Capital Partners. Your line is now open.

Good evening and thanks for taking my questions. So Gregg congratulations on the success with eight inch it's going to be really exciting to us.

To see production launch at eight inch in Niagara I I always had a hunch.

Can you maybe update us as far as where you stand on the technology.

Element necessary to actually execute that in early 2022.

Do you feel that the reactor technology that Cree has in hand is ready for prime time there.

Do you have.

MOSFET production processes that you think will be more transferable than when we made the move from four inch to six inch.

Are there any other potential areas of risk, while we look at this potentially match shifts.

<unk> point down in cost.

That you will probably execute on.

Well, thanks, a lot for the thanks for that question Craig a couple of things that I would I would note one is I've been pretty extensively involved and the updates we've been having on 200 millimeter over the last couple of years and have been very engaged with the team. Our team has made numerous breakthroughs and continuous progress on.

On it.

And we felt collectively as a team that we were ready to go with with Mohawk Valley at 200 millimeter now Craig.

We're going to be ramping that early 'twenty. Two so we are 11 months away. So you can bet the team did a pretty thorough.

On a review of where were at on on the reactors, where we're at on the technology and where we're at with the quality of crystals and so forth.

We've got a thumbs up and we're moving forward. So we feel real good about that.

Obviously some of the incremental capex spending is actually associated with building.

On more 200 millimeter crystal growers.

That's obviously in the plan as well and then finally on silicon carbide on them.

Material side of it.

We build our own.

Crystal growers.

At all of our wafer diameter.

So we feel real good about where we're at on 200 millimeter as it relates to MOSFET recall that part of the deal with with New York. When we built this fab was a one.

While the pilot line in New York.

It's actually at the SUNY Albany site.

We awhile ago converted that pilot line to 200 millimeter to begin running prototype pilot line type activities at 200 millimeter, we feel real good about it.

Where we're at in terms of that process as well and.

So we feel real good about that now that doesn't mean, there is zero risk, but what I would tell you Craig is that.

It's now a complete and total focus on one thing and Thats ramping 200 millimeter versus ramping 150, and then converting to 200 and having customers go through those cycles et cetera, So the feedback that.

We will be getting from customers. Obviously from this announcement, we're anticipating to be very positive because it's a significant say.

Savings for them in terms of.

Of the amount of work they would need to do to qualify this factory so.

Great question, Craig we've spent an enormous amount of energy on this and we're feeling really good about this about this move.

Excellent excellent.

My follow up question.

It's been actually more than a year since I've seen the.

The lead semi cap engineers of your major customers and maybe maybe we can call them competitors on.

On the chip side.

And as far as I understand even today, none of them have had the major budgets released.

Necessary to do eight inch that they were all waiting for the availability of wafers do you anticipate that you could have commercial sales of eight inch wafers make a material contribution in 'twenty, two I mean external commercial sales rather than internal consumption.

I think for 'twenty two.

No I think the focus is really going to be on ramping that up inside of our factory and in getting all of that moving.

We've got.

On quite a number of long term agreements that we have with a variety of different semiconductor players we've announced many of those I think we've said previously that's something like three quarters of our materials business is subject to these long term agreements.

We've extended and expanded extended one of them a while ago with ft.

And then more recently, we've expanded expanded and extended.

Either one of these as well so what I would say is the <unk>.

<unk> customers are really in a variety of different stages in terms of where they're at from an R&D perspective, where theyre at from a ramp perspective so.

And so I think at this point.

There are sort of absorbing the ramp at 150.

Well congratulations thats a big announcement, thanks for taking my questions. Thank you Craig.

Thank you. Our next question comes from Jed <unk> with Canaccord Genuity. Your line is now open.

Hi, Thanks, and I'll Echo Craig's congratulations it's big news on the 200 millimeter.

I guess first question Gregg.

Just with respect to yields and kind of thinking of the business in.

Two separate components between Crystal and then Mohawk.

It seems pretty straightforward in terms of.

Area benefit, particularly up in Mohawk and what yields could do there on the crystal side that was always.

It seemed like that was a greater risk in terms of.

MPD.

For that wafer.

Clearly you've seen something that caused you to kind of go with debt should we assume then from a cost perspective, there's kind of a faster ramp back on the on the margin side in terms of long term targets.

No I wouldn't do I wouldn't do that I'll, let neill kind of go through a little bit more detail on that we feel very good about where we're at in terms of the quality of the critical quality and on materials and so forth. We got a little work to do on <unk>.

The cost down on 200 millimeter, but we feel like at this point, it's the right.

It's the right move for us.

But I'll, let neill, maybe elaborate a little bit more on that.

Yeah, Jeff So if you think about it if.

If you look at the long term model, we laid out a plan for one $5 billion of revenue on 2024, which 50% gross margin is our target I think the timeline that we've talked about previously in terms of both the revenue will transition in the margin transition are going to be kind of the same and the reason for that is kind of exactly what Gregg said, so I think in the earlier periods.

Think about the 200 being a little bit of other higher cost that's going on.

Offset some of the diameter benefits you would see and interestingly, there's a lot of puts and takes on there, but you end up kind of back where we were before so over time, we'll end up with a model out in 'twenty 415 billion of revenue a 50% gross margin.

5% Opex on a 25% EBIT.

But we'll get there a little bit differently and then secondly, what I'll say is when you get out to 'twenty forward.

Have you a much better position, but we're on the 200 for you know a.

Couple of several more years in advance of what we expect to be a steeper ramp.

1024, and on top of that as Gregg said, we removed that one qualification cycle for your automotive customers, which I think is going to be well received by the customer base.

Got it.

It's just my follow up I guess going back to going back to Gregg.

As.

You pointed out there's a lot of benefits go on rate to 200 in particular not average debt.

Ramp $1 50 recall.

But there is sort of debt.

How are you thinking about transitioning over sort of the existing 150 and cause I would assume all your customers are going to want 200.

In terms of that benefit so how.

On practically.

Are you thinking about sort of the pragmatic approach too.

To this process well.

Ed.

Recall, we are expanding right now our wafer fab in Europe as we move led out we're ramping up to $1 50 in Durham.

So I would anticipate that we would be.

Selling and producing out of term than for some time.

Then there is no intention to.

Shift the Durham factory from $1 50 to 200, it will remain a 150 millimeter factory.

And really as we begin to ramp Mohawk Valley, It will become a greater and greater percentage of the total output by 2020 forward will be greater than 50% of the output and then as we ramp it beyond 'twenty four.

It'll be substantially greater than 50% of the output and the Durham factory, while it remains at 150 will be smaller and smaller as a percentage. Obviously so the go forward plan would be continue expanding.

Spanned the Durham factory as we move led out at 150 have no intention to try to move that to 200.

On the tablet.

It's a relatively small fab and we'd be way better off just simply expanding our capability and what is an enormously larger space in New York versus what we have here.

And in Europe, and then finally, what I would say is recall this is going to be a modern factory is going to be highly automated theres going to be.

Substantial increase in terms of its raw capability.

And so that's why we're putting all the emphasis on 200 and Mohawk Valley.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Craig.

Mark with Morgan Stanley. Your line is now open.

Yes, Thanks, Gregg, maybe just to shift gears, a little bit into the industrial market and specifically I know you've had a lot of momentum with the arrow partnership.

To get an update on your sense of just timing because I know it takes time for kind of industrial products to get designed into ramp how should we think about that in terms of revenue related to that partnership in the coming quarters.

No.

So first off thanks for the question Craig It's typically industrial is a little like earlier than on automotive type cycles. So automotive is typically a four year type.

You get designed into when you start ramping revenue industrial is sort of two to four.

Kind of depends a little bit on on the industry, but it's quite fragmented. So I think you can kind of bake in sort of that two to four.

Type range.

And then the other point that I would make on Craig is if you look at the $600 million of.

Design and we were awarded this past quarter about a little over half of it with automotive, but about a quarter of it was industrial and energy. So we feel real good about the momentum that we have.

In that broader space and again, that's one where we just don't have the sales footprint to really go after that arrow has been just a.

Fantastic partner to work with.

They've got a substantial capability there that we've been able to leverage.

And it's why when we when we introduced this newest family of 200 volt modules, we look trying to arrow and they're already off to the races on promoting that one as well.

Got it and then just as a follow up.

As it relates to kind of the partnerships you have with a number of tier one suppliers just kind of interest and just how those are progressing and any kind of insights in terms of some of the traction that those partnerships are having from a design perspective on the automotive side.

Well a couple of things I would point to I mentioned, it last quarter, but I think it.

It's worth repeating.

Our customers the tier one customers that are giving us feedback on.

On a.

It's pretty consistent across debt tier one customer base along several different factors one is that the appetite and the.

The.

The percentage of cars that are going to become electric or the adoption rate of electric vehicles is definitely increasing and pulling in.

No.

Most pundits we're looking at possibly by the end of this decade by 2030, maybe 20% other cards would get to EV.

Because that is now well past, 30% I've seen some customers.

Thinking about a 40% adoption rate by the end of the decade, so they point to their end.

Our customer base is substantially increasing the adoption rate of electric vehicles. That's for number of reasons that include governmental sort of incentives, but also consumer kind of push as well. So that's number one number two is the the success.

Right and the interest rate, they're getting on their silicon carbide solutions is on.

Also increasing and that cuts across.

A different car platforms on a number of different car types, whether it's higher end cars or more.

Every day vehicles.

The ability to get a a.

A greater.

Distance per charge.

And or decrease the amount of debt cost of battery.

It really cuts across all.

On all the segments of the vehicle so they're seeing a lot of really strong interest there. So.

Just recently just last week.

We had a presentation from one of our customers had kind of showed and layered the interest that they have on from their customers on silicon carbide, and that's really encouraging for us and thats, especially as they see the market beyond 2024.

Got it thank you.

Thanks Gregg.

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

Hey, guys. Thanks for taking the questions I had a couple here.

Just on the pull forward on Capex and 200 millimeter at Mohawk Valley.

Echo the sentiment of others, congratulations on that but can you.

Maybe give us a sense of what breakthroughs youre seeing to have.

Made the move here to pull that forward and make Mohawk go 200 from the very get go and if it's something you can give us any sense of quantification around I would imagine it has to do with yields.

That would be helpful. And then just related to that I know you said there is no real impact to the fiscal 'twenty four targets in terms of revenue and margins, but can you talk about.

Maybe the timing of funding from New York State given the accelerated capex sort of what we should expect on timing.

And then also.

It sounded like you're leaving.

The window open for potentially some additional capital given the accelerated Capex day, just your thoughts around that as well.

Yes, Brian So let me take the first part of that and then Neill can address the back half of it so.

So first off I have been pretty actively involved with the 200 millimeter program or basically since I've been at the company.

And what I would say there has been a continuous.

Progression of success and breakthroughs and so forth that we've had so this wasn't Tuesday last week somebody came in with a result, and all of a sudden we flipped it it's been a it's been a gradual move towards building confidence in.

In this and we've we've gotten to the point, where our confidence is obviously quite high.

Were making this announcement today and we're talking about ramping it in 11 months. So we're feeling very good about debt in terms of the quality of materials coming out it's exceptional at this point.

And that includes.

The normal sort of.

Defect density that customers really care about.

Is exceptional at this point so.

We feel quite good about that.

There is still work to do obviously there is always work to do on semiconductors, but we feel real good about where we've been and again I would describe it as.

It's a consistent drumbeat of positive progress that we've made over the last.

Couple of years that has just really culminated into into a decision that we've made that this is this is the right move for us.

Going forward, so with that I'll turn in terms of the timing with New York and so forth I'll, let neill address that.

Yes, Thanks, Brian.

Let me I think maybe the best thing to do is maybe just unpack the capex a little bit first and then we can kind of get into the timing of the funding on those types of things so.

The higher Capex now $5 50.

Talked about it's really a result of first of all a higher completion rate.

That was that we had.

We anticipated in the 400 balance. So this is what gives us confidence that we're going to ramp that's kind of on the first half of 2022. So there is a large chunk of debt satisfying right.

It was also an incremental spend on the 200 millimeter for handling tools for materials expansion of Durham.

Thanks, So I just have to remember will be supporting both business at 150 millimeter, while building out $200 million either at the same time. So overall well. This is some timing in there. There is 200 millimeter investment that's coming a bit earlier. So 2021 will continue to be our peak investment year 'twenty, two you'll still you'll still see a drop in the Capex I think it will be.

And maybe at higher levels on what we anticipated before and then drop off again on the $23 24 timeframe. So the slope is more or less the same but I'd say with higher requirements on 'twenty, one 'twenty two per month.

Short standpoint.

We should start seeing some of those benefits come in.

Ultimately soon although I'd say the majority of that's out into next year at some point.

From a capital markets perspective, what kind of mentioned on the script, but I think the point is we're in a great shape from a liquidity standpoint, right now we've got $970 million of.

Net cash and liquidity. So we feel good about that however, with the steepening ramp.

Beyond 2024, we're going to continue to make sure we can invest to meet that opportunity. So we will continue to be opportunistic as we look forward here and look at those opportunities.

Given kind of what we're seeing on the marketplace, particularly beyond that point.

What time frame.

Alright, great debt, that's Super helpful. And then maybe if I could just squeeze in a second one and I'll pass it on.

Just kind of shifting of the business.

Speed.

Revenue you guys really have seen some improvement modest improvement off the kind of June loans. When you did $108 million in the quarter your sort of closing in on 130, plus based on the guidance here, So and I think it peaked at $140 million in that segment in fiscal 19, so youre not really off.

Even even that level.

In the current environment. So just kind of wondering can you maybe also unpack how much of the recent improvement in.

On top line trends is just a normalization of COVID-19 impacts on the business go up going away and then maybe how much is just organic growth and then on the organic side is it all EV end market is it coming from the materials volume is picking up again as it RF, maybe just any sense of the drivers and where they're coming from thank you guys.

I think we have some audio trouble with Neill, okay. So maybe I'll take a crack at that as Neill theyre trying to get the audio back on again, yes, I would say we're pretty.

First about the demand that we're seeing in the power business in the RF business the device business really picking up pretty nicely from from where we were.

Obviously, if we had.

The factories humming the way, we wanted we would be able to.

To be able to service that.

Even to a greater extent, but the teams are working really hard on that but what I would say is the.

The progress is really based on design ins and design win activity that we've had and things beginning to ramp and things going from.

Idea to two.

Real fruition in terms of turning into revenue.

That we're going to be on a so we're going to be on a trajectory for that for the next couple of years, that's really associated with initial ramps in early production for some of these design wins that we have.

One over the last couple of years debt will really.

Start to click in post 'twenty, two well into 'twenty, two and then post 'twenty two and then really start to ramp as we had 2004 timeframe. So.

Actually we're feeling quite good about it.

Brian I think.

It's mostly new stuff coming our way versus old things, returning I would say.

And I don't know if neill.

Yes.

Gregg I was just going to hey, Brian It's Tyler the other thing on it's just going to add we saw some modest improvement in RF to Brian.

That's just a function of the.

The rollout continues throughout Asia and around the globe. So there's still good opportunity, but we are in the early stages of that so that.

There is there is a multi growth period and as people work from home and start to experience greater productivity by leveraging technology that creates great opportunity for <unk>, So as Gregg said.

And I added here, just a little bit of color on what's going on so.

Okay.

Alright, Thanks, guys I appreciate that I'll I'll pass it on.

Thanks, Brian.

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

Thanks, a lot Gregg congratulations on the 200 millimeter brilliant idea, but historically, we will speed the device business has been kind of the premium power module market as we've discussed in the past and your biggest customer slash competitors and devices SD on addressing more diversified power markets, but once you get it.

Assuming on once 200 millimeter is up and running and get the cost down.

All shook out.

That should make the New York Fab, where the largest if not the largest sic device power fab.

Anywhere and given your capacity, which if you can maybe help us mark to market on what that would be with 200 millimeter, but given your capacity doesn't that pull you into the same diversified power markets that some of you.

Biggest customers are addressing or how should we think about that and I have a follow up please.

Yes, Thanks, a lot I appreciate the.

Question, So first off that fab in New York is going to be a.

On a real big benefit from for US because obviously is substantially larger than what we have here in North Carolina, but equally important it's a modern fab highly automated with pretty significant.

Expansion capability. So we're super excited about debt in terms of addressing the broader more diversified market. Our challenge on that has been really more sales footprint related than than technology related and Thats, where this partnership with arrow has been a huge positive for us.

Very tightly coupled together with them.

And it's worked out really well for us.

In terms of the factory itself.

I believe it's going to be the.

The world's only 200 millimeter silicon carbide fab it'll be the world's first.

200 millimeters silicon carbide fab in.

We just believe that that's fundamentally going to give us a really good opportunity as we ramp that fab and start cranking.

Production in it.

Great and then for my follow up if I could maybe I don't know if meals on Gregg you could speak to it but just comments about the modest increase in orders and material business driving growth in the next quarter and maybe out for the next couple of quarters kind of suggests that your mature business at least every business is no longer a capacity limited so much as now you're just looking to fill orders. So first of all if we get mark to Mark.

On that are you up to up to them.

Up to capacity on an FTE and shipping to orders and.

Now that you are and if you look at some of the plans of some of your larger customers. For example, like X fab is almost done with the ERP process will be shifting probably increasingly to their own.

Internal source for that.

What is how do we look at the balance between what has been one of your fastest material growth areas.

And what is coming in the next year or so as native demand.

For every wafer still.

Far enough large enough to offset anything that people can take internally like X fab or.

US get an idea of the balance of the good things.

Yes, maybe I'll kick it off.

And then turn it over to Neil just for a little bit more color.

I guess, what I would say it is.

Typically what's been happening with our customer base.

And materials is a desire to take a certain percentage of the materials is there and a higher percentage and abbvie and I think as they get into it there tends to be true.

<unk>.

On a wining more FTE simply because we do pretty.

Pretty well.

Are pretty competitive and the quality is actually quite high and actually we haven't seen that really change much at all so I haven't seen much of a transition and no debt at all.

Neil I'll, let you give a little bit more color.

Yes, I think we're caught up on the just on the demand side, but I think as we talk about the modest materials kind of pick up I think that's just more of a supply and demand situation. We are seeing some pretty good strength in MOSFET, so I'm seeing a little bit more pickup on RF side on the device side. So I think it's just kind of ebb and flow of how supply and demand works within the materials market and I think over time.

You will see that come back.

Stronger right now I think a little bit more modest and is also on balance out we'll manage through but as Gregg said I think theres still.

Solid.

Understanding from customer standpoint on the quality of the IP that we got in and when you expect that to continue.

If I could maybe squeeze on real quick one and I apologize, but can you remind us too on one Leds will start moving out of Durham from if I remember, it's going to be there for a little while so before you can expand significantly the wafer crystal wafer growth facility there.

When will we see <unk> start to move out.

So yes.

On the led side I think we've seen a big chunk of it.

The Crystal growth Saturday no doubt, we're really focused on the fab outsourcing at this point, that's underway and I think b or the real positives on the deal that we have done.

With smart debt, we'll continue that and we'll continue on the same timeline that we had planned previously so there's really no changes to the model I think we've got.

I think we've got great progress on that plus the growth side and we're working through the fab side right now.

Thank you.

Thank you. Our next question comes from Paul Coster with Jpmorgan. Your line is now open.

Yes. Thanks for taking my question if I heard you correct. It sounds like you can get to the same kind of margin structure in 'twenty four.

With 200 millimeter as you might have done with the hybrid model can.

Can you explain that a little bit why is it not a better outcome.

Or maybe I heard you wrong.

That's right Paul and I think I think we try to think about it when you're starting on new technologies expanded diameter to the period of time, where that's at a higher cost. So you don't get all of it you don't get the full benefit of the bigger day Hambro can you run it for a while you improve yields improved cycle times.

As you look through the factory and then eventually there's kind of an intersection point and it will take a couple of years for us to kind of work through that ramp with bringing on utilization et cetera. So I don't think its a crossover point and right now there's a lot of puts and takes were adding some capex and depreciation were also adding a new diameter.

As I said Theres a lot of moving pieces in there, but at the end of it all of them get out to 'twenty four you end up kind of backup on spot.

Got you and then the other question is.

Judging, but greg's prepared remarks at the beginning of 2024 as the euros ramp.

So what is 'twenty two 'twenty three.

Is it kind of step function as it smoothed and accelerating adoption and how the margins do you think how do you think they'll evolve over that two year period.

I think it'll be similar to what we've talked about previously.

Paul So I think as you think about next year kind of modest improvement I think there is still an investment year as we think about that transition.

And then it's really going to be a function from a margin standpoint about how we'd look at.

As you transition to more horizontally. So it really isn't until the 'twenty three 'twenty four time frame, but you're well north of 50% on the capacity coming out of Mohawk Valley. So the longer on Durham below on the margins are on the more capacity being left the Mohawk Valley the higher the margins on me. So I think the trajectory of the business as we've talked about it before 'twenty, one 'twenty, two and that kind of inflection point in 'twenty three are kind of.

The same as what we've talked about before the key difference is the Capex plan will be a bit different and will be much better positioned and argue with having one 200 millimeter for several years.

Got it thank you very much.

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

Thanks, so much guys.

If you look at ramping in the 200 millimeter.

Particular voltage they're going to be focusing on is this all going to be 800 volt.

Bolt on.

So youre asking initially or your style.

It'll be it'll be the range of our of our product technology. We've got driver products already understood. It turns on what's going to go first and but it'll be the.

I don't know if it will be the higher spectrum of our products, but it will be the vast majority of what we do since we're.

We're targeting calling to have greater than 50% of the output coming from Mohawk Valley.

And that 2024 timeframe.

Okay. That's helpful and then in terms of the equipment suppliers.

On the deposition side.

Are you working with multiple suppliers.

Are there any risks around.

Those tools can be delivered on time with what youre seeing so far with what you have out there.

So far things have gone, okay on net and in that regard so and recall.

I'll add back.

We do have the pilot line and Sony So theres been some amount of.

Delivery there, we're expanding our capability here in Durham, So theres been some of that so I don't I don't anticipate a huge problem. There Neill I don't know if you have any.

Additional color you want to add onto that.

No I think Thats right again, we've been working on this for quite a while these are long lead time type of item. So it's a pretty good visibility into what's going on so any disruption there.

Okay. Thanks, guys.

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

Oh Hi, Thank you first just a very simple question I think all of US had been sort of tap dancing around now now that will speed is.

Our pure business do you all have any plans to exports that we disclosed the materials per seats are up versus.

Versus current breakdown.

I have a follow up.

Hey, Joe Yeah, So I think right now.

I'd have to go with.

One segment moving forward I think that's kind of how we run the business internally and as you know right now we're kind of a $500 million run rate type business. So I think that makes it makes sense for the time being.

Okay. Thanks.

And then to follow up on a couple of the other questions in particular colleagues.

Are you seeing a lot of designs out there, especially for more performance vehicle platforms with 800 volts.

But then again, you've got some lower performance platforms out there still using <unk>.

<unk> power levels I'm wondering if the economics of your products improve whats going to happen do you think those platforms sort of move up to 800 volts or do we see you tried to drive your equity power MOSFET to some of those lower voltage white city car platforms or whatnot.

Joe So a couple of things, let me start by reiterating what I've been saying basically for the last three years, which is we have been on a mission to to transition the high voltage.

Power electronics market from silicon to Silicon carbide and part of the part of the challenge to do that is to drive the cost on the fundamental silicon carbide technology, the substrates in AFP down and so we've been marching on that and driving that.

With an intensity like you wouldn't even imagine over the last three years, we've made tremendous amount of progress there and we still see further opportunity.

Opportunity for us to continue to make pretty decent progress.

Ahead of us and so what we've been doing over the last three years is decreasing the GAAP between silicon and silicon carbide substrate.

Substrate level, obviously, it never gets to be parity or anything like that but we've been having we've been having some pretty good success that debt.

We're moving to 200 millimeter substrates effective or moving to.

<unk>.

Our modern fab is going to give us continued opportunity there as well so fundamentally we've been on this.

We've been on this mantra driving the the <unk>.

Transition from silicon to Silicon carbide.

<unk>.

On a pretty substantial cost reductions on the fundamental technology.

Now.

The other thing we're seeing and this is part of the feedback we're getting from our customers is an increased.

Look at <unk>.

<unk> carbide across all of the auto platforms, including 400 volts. So we're seeing customers had 400 volt see the advantage of silicon carbide and taken advantage of that and obviously the higher voltage as well so.

I think it's still to play out there, but we haven't been just sort of.

Sitting around on.

On the cost side of things, we've been really driving it.

Pretty hard.

It's not it's.

It's not for the faint heart, but I think we've done a real good job of driving those costs down and we still see pretty good line of sight for some pretty amazing cost reductions in the future I think our customers are seeing that too they see that obviously vis vis what we quote.

Our our economics that we offer to them so I see it as a pretty big opportunity ahead of us Jim.

Thank you.

I just wanted to speak.

On the quick one on.

Can you, obviously, you've got existing existing obligations, but let's imagine that at the end of 2022 are you going to start on any more contracts to sell their wafers or would you rather just become a pure ERP supplier on the in the materials market and that's it for me. Thank you.

Yes no.

Moving to <unk>.

We work with customers. We obviously just signed an extension and expansion of a long term agreement with a customer and that included bear in F&B and we work with customers, we all understand that.

They have their own strategy some of them want to do more FTE. So they ask for a higher percentage of fair and a lower percentage of that would be.

Some of them don't.

Don't want to do that and ask for mostly B.

Some of them want to do <unk> and then find it difficult. So then come back and ask for higher percentages. So we're pretty flexible there and we don't have a.

We don't we don't find ourselves on one particular model in that regard.

Thank you.

Thank you our last question comes from David O'connor with Exane BNP Paribas. Your line is now open.

Great. Thanks for squeezing me in guys.

<unk>, maybe on the M 200 millimeters, so Gregg DM. The design wins, you've won in 2020, just to carefully and around $2 $3 billion will hold us know b on the automotive part piece, but all that nobody on 200 millimeters and then on the on the MOSFET yields the issues that you've had on six inch.

Are they know solves and how should we reconcile the kind of move to 200 millimeter with a yield issue that you had on six does that mean that their sales on eight inch already our geological team that learning cycle down the road on the.

On the <unk> as well and I have a follow up on the material side.

Yeah. Thanks, David So first off in terms of ramping with customers. Obviously, we have an existing facility in Durham. So we're shipping product at 150 millimeters will begin.

Production of 200 millimeter and Mohawk Valley in early next year, and then we will have to qualify that and work with customers. So theres going to be a blend of theirs. It's initially going to be $1 50, and then it'll be a blend of the two and then on a move towards mostly 200 over a period of time that is the design in cycle.

And again, what's really important on that is the transition the Mohawk Valley now will be a single transition and that is just simply the 200 millimeter versus the double transition of $1 50, and Mohawk Valley, and then 200 millimeter and then as it relates to the yield issues I would really qualify those or characterize those yield issues, it's really a yield debt.

We ramp up our Durham factory with MOSFET it happened to be in a transition to a 150 millimeter.

The issues associated with that yield are really independent of the substrate and are really associated with the factory.

<unk>, it's a relatively small factory realm.

Relatively dated factory.

And.

There is a lack of automation and things like that we are making progress on the yield because we talk about.

On.

As an example, this past quarter our team achieved.

Achieved and actually exceeded a little bit.

The yield goals that we had for the quarter and we've got obviously improvement goal for this quarter as well.

But I think it's going to we're going to continue grinding on that the factories are working on the best they can.

But they are.

They're relatively dated factories with.

Yeah.

Not a lot of automation as we move to Mohawk Valley.

We're actually working through some of those issues right now because we have at our disposal a pilot line and SUNY Albany.

And again, David as I mentioned earlier, we've actually converted that pilot line to 200 millimeter. So we're already beginning.

Some preproduction running we've had.

Number of learning cycles.

Run through there and that pilot line.

Team was part of the overall organization that gave the go no go on let's move forward with 200 millimeter out of the right out of the chute and Mohawk Valley, and we got a thumbs up there too so I feel like that transition will be.

Nothing is easy, but that transition is going to be better because we're going to be a highly automated factory there is going to be very little.

Human error in intervention that we have.

Typically out of our out.

Our non automated factories.

So hopefully that helps with your question and I think he on a follow up.

Yes, that's great color. Thank you Gregg and maybe quickly on the follow up on the material side of things. So you've extended the long term agreement with one of your customers. While at the same time, we see someone like Infineon struck a deal with GT advanced for Silicon Carbide <unk> does this change anything in the model. When you look out a few years on mature insight on.

Should we kind of think about those type of deals for the materials perspective going forward. Thank you.

Yeah, a couple of things so first off.

It's.

I think it's pretty well known in the industry that there is this big transition from silicon to Silicon carbide and many of our materials customers are have internal plans to try to have their own capability in terms of the materials and thats very <unk> been very.

Transparent about that with us and with the industry at large.

There are tremendous barriers to entry that we've talked about.

But I think that's that's a strategy that.

They are pursuing and.

To be honest with you kind of make sense from my perspective, I think they will find that the.

The difficulties on the barriers are pretty challenging we've got 30 years of work in this area.

We've got our we've got a set of battle scars.

And all of those things have gone into putting us into the position that we're in today, which is.

We are now leading the industry transition to 200 millimeter. So we feel pretty good about debt. So I don't think any of these announcements change anything from that perspective to the to the extent that customers want to sign up with us.

We're very excited about that.

Agreements that we have are not sort of how.

How much for this year and this year only there we don't give a lot of detail, but can kind of think of them as kind of a half a decade type timeframe and so these are long term agreements that.

Assure them of a supplier of material and products on assure us.

Our revenue stream.

On a scale.

Scale that helps us from a learning cycle perspective.

Very helpful. Thank you. Thank.

Thank you.

Thank you. This concludes the question and answer session I would now like to turn the call back over to Gregg Lowe for closing remarks.

Well, thanks, everybody for your interest and we'll speed and we look forward to catching up with you on our next earnings call. Thank you.

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