Q4 2019 Earnings Call
This time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require operator assistance during the conference. Please press Star then zero on your telephone as a reminder, this conference call may be recorded Oh now like to introduce your host for today's conference Mr. taller Grumble, Vice President of Investor Relations. Sir you may begin.
Thank you Danielle and good afternoon, everyone welcome to Crees fourth quarter fiscal 2019 conference call.
Today, Cree CEO , Greg low increase CFO , Neil Reynolds will report on the results for the fourth quarter of fiscal year 2019.
Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures crees results internally.
non-GAAP results are not in accordance with 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 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 mention important factors that could cause actual results to differ materially during the Q and a session. We would ask that you limit yourself to one question and one follow up so that we can accommodate as many questions as possible. During today's call. If you have any additional questions. Please feel free to contact us after the call now I'd like to turn the call over to Greg.
Thanks, Tyler and good afternoon, everyone.
We delivered a solid performance in Q4 with non-GAAP earnings per share at the top end of our updated target range.
Our wolfspeed business posted quarterly revenue at the top end of the range, while our LCD business continues to confront a very tough environment, partially due to the continued trade and tariff concerns.
And while I'm pleased with our execution the current operating environment is very challenging.
Geopolitical and macroeconomic issues impacted our financial results in the fourth quarter, and we expect them to be sad some additional headwinds in Q1 of 2020 and perhaps beyond.
And while there may be some near term Bumpiness, we are more bullish today on the mid and long term potential of our silicon carbide Gan technologies.
As customer interest.
And engagement is as strong as I've ever seen it.
I'll now turn it over to Neil to provide some more color on the financial results and the outlook for next quarter. Thank you Greg for the fourth quarter of fiscal 2019 revenue decreased 5% year over year 251 million, but non-GAAP net income from continuing operations of 11.5 million or 11 cents per diluted share.
The non-GAAP earnings per share from continuing operations exceeded the midpoint of our updated target range due to better than expected gross margin in our Wolfspeed business.
Our fourth quarter non-GAAP earnings from continuing operations excludes 46.1 million up expense net of tax or 44 cents per diluted share from non cash stock based compensation acquired intangibles amortization accretion on convertible notes transaction related costs factory optimization restructuring costs and other items outlined in today's earnings release.
2019 fourth quarter revenue and non-GAAP gross profit for our reportable segments were as follows.
Wolfspeed quarterly revenue grew 22% year over year to 134 million.
Which was at the high end of our range, but was down 5% sequentially due to the two today, while we impact and softness in power products for industrial and automotive applications Wolfspeed gross margin was better than our targets at 50.2% an increase of 150 basis points sequentially.
Led products revenue was in line with our targeted at $117 million, but declined during the quarter due to continued global trade uncertainties.
Ltd. Gross margin was 24.1% down 370 basis points sequentially, primarily due to lower factory utilization.
On allocated costs totaled 7 million for the quarter of fiscal 2019 and are included in our overall cost to reconcile to our 91.9 million non-GAAP gross profit from continuing operations for 36.6% total gross margin for the company non-GAAP operating expenses from continuing operations for Q4 were 82 million slightly above our target of 81 million.
Our non-GAAP operating income from continuing operations was at the midpoint of our target at 9.9 million our non-GAAP tax rate was in line with our targets at 18%.
During the fourth quarter cash from operations was 3 million and capital expenditures were 37 million, resulting in negative free cash flow of 34 million as we continue to invest for growth to expand capacity and our wolfspeed business.
We ended the quarter with 1.05 billion in cash and short term investments, which includes the proceeds from the sale of our lighting business.
Zero balance on our line of credit and convertible debt with a face value of 575 million.
Our capital allocation priorities remain focused on expanding capacity and our wolfspeed business to fuel future growth.
For fiscal 2019, we reported capital investments of 153 million for fiscal 2020, we are targeting capital investments of approximately 200 million.
For the quarter day sales outstanding from continuing operations came in at 34 days and inventory days on hand for continuing operations was 104 days.
For fiscal 2019 revenue was 1.1 billion, representing a 17% increase when compared to fiscal 2018.
non-GAAP net income from continuing operations was 76.9 million or 74 cents per diluted share, which was in line with our targets.
non-GAAP earnings exclude $134.8 million of adjustments net of tax or $1.30 cents per diluted share.
Fiscal 2019 revenue and non-GAAP gross profit for our reportable segments were as follows.
Wolfspeed revenue grew 64% year over year to 538 million and gross profit was 259 million from 48% gross margin, which was flat year over year due to cost reduction efforts, which were offset by product mix shifts within the business.
Now I'd products revenue declined 9% year over year to 542 million and gross profit was 150 million for 27.7% gross margin, which is 120 basis point improvement year over year.
The decrease in revenue was due to softer LCD market conditions, and trade and tariff concerns with China.
The overall margin improvement in fiscal year 2019 was a direct result of higher factory utilization in the first half of the year.
Cost reductions and continued focus on target markets, where we believe our customers value our technology.
On allocated costs totaled 18 million for fiscal 2019 and are included to reconcile to our 403 million non-GAAP gross profit for a company gross margin of 37.3%, representing a 340 basis point improvement from fiscal 2018.
Turning to the outlook for the first quarter of 2020, we are targeting revenue in a range of 237 million to 243 million based on the following segment trends.
Wolfspeed revenue is expected to be down slightly approximately 5% to 7% due to the full quarter impact of the wall way ban and softer selling conditions in China as it appears the Chinese government's reduction in incentives is impacting electric vehicle sales regarding walk away, we're not shipping product at this time and we will continue to comply with the U.S. Federal law, we have applied for licenses from the government to potentially resume certain shipments to our customer but have not yet received a response.
Led revenue is expected to be down approximately 2% to 4% sequentially due to continued market softness and tariff concerns that Greg discussed earlier.
We target Crees Q1, non-GAAP gross margins from continuing operations at approximately 30.8% based on the following segment trends.
Wolfspeed gross margin is targeted at approximately 46.3% down from 50.2% as a result of product mix shifts, resulting from the walkway bad.
Ltd margin is targeted at approximately 17.5% down from Q4, primarily driven by lower factory utilization and lower sales volume.
We are proactively managing the situation and taking a more conservative approach by lowering our factory utilization as well as lowering our inventory levels, both internally and in the channel. We believe this will better align us with current market conditions.
We are targeting Q1, non-GAAP operating expenses from continuing operations to be slightly up sequentially at approximately $83 million to support continued growth in our wolfspeed business.
As we have discussed previously changes and operating expenses can vary from quarter to quarter for a variety of reasons, including the timing of R&D projects marketing spend around trade shows and what IP cases go to trial.
We target Q1, non-GAAP operating loss from continuing operations to be between 12 million to 7 million and we target non-GAAP non operating income to be approximately 3 million.
We are targeting a non-GAAP effective tax rate of 14% for Q1, and Q1 non-GAAP net loss from continuing operations to be between 7 million to 3 million or a loss between seven cents to three cents per diluted share.
non-GAAP EPS from continuing operations target is lowered by approximately three cents due to the ongoing impact of the tariffs.
Our non-GAAP EPS from continuing operations target excludes acquired intangibles amortization non cash stock based compensation accretion on our convertible notes transaction related costs factory optimization restructuring costs and other items, our GAAP and non-GAAP targets do not include the impact of any changes to the fair value of our Lextar investment.
Our Q1 targets are based on several factors that could vary including overall demand product mix factory execution and the competitive environment.
I will now turn the discussion back to Greg.
Thanks Neil.
I'm pleased to share that we continue making progress on the strategic transformation accrete.
As evidenced by the key milestones we achieved during the quarter.
We announced plans to expand our silicon carbide Gan capacity significantly with the development of a state of the art automated silicon carbide Gan wafer fabrication facility.
And a mega factory for materials.
We believe this represents the largest capital investment in the history of Silicon Carbide Gan technologies and will support the growing demand, we expect from automotive communications infrastructure and industrial segments.
Second we were selected as the exclusive silicon carbide partner for the Volkswagen group's future automotive supply tracks initiative or fast initiative.
The goal of the fast program is to foster even greater collaboration among VW is key partners and accelerate the delivery of new electric vehicles to the marketplace.
Volkswagen has committed to launch almost 70, new electric vehicles in the next decade.
Which by itself presents a great opportunity for Cree.
We announced a multi year $85 million supply agreement with on semiconductor.
Making this the fourth long term agreement, we have announced in the past year and a half these for wafer supply agreement, which now total close to $600 million.
Demonstrate how our technology is helping to drive the transition in the power semiconductor industry from silicon to Silicon carbide.
Lastly, we closed the sale of pre lighting to ideal industries.
Which will allow us to channel more of our energy and expertise and to growing our wolfspeed business.
These developments are just a few of the many important steps we've taken in the last several quarters.
To position the company for long term growth and to create a semiconductor powerhouse.
Recent estimates from Canaccord Genuity are calling for the demand for silicon carbide to grow to more than $20 billion by 2030, mainly driven by a major expansion in electric vehicles and the need for charging stations.
These vehicles, along with a host of wireless broadband dependent devices.
We will be connected to ultrafast fiveg networks that can transfer massive amounts of data and support levels of interconnectivity that have never been possible before.
At the core.
Helping to power these solutions will be silicon carbide and Ghana.
Technologies that we have pioneered over the last 30 years and we continue to refine each and every day.
Our robust pipeline of opportunities reinforces our confidence increase long term growth prospects.
Over the last few months I've met with some of our top customers and prospects and they continue to tell me, how our silicon carbide Gan solutions are key to their future growth plans.
Our leadership position in this space is helping to build the opportunity pipeline, which now stands at more than $9 billion. This covers automotive.
Solar telecommunications industrial and Mil Aero sectors.
In closing there is a significant opportunity.
To help customers make the shift from silicon the silicon carbide Gan solutions for their next generation applications with that I will turn it back to the operator.
To start to kick in a section.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchstone telephone.
If your question has been answered or you wish certainly result from the queue. Please press the pound key again, that's star then one to ask a question in the interest of time, we ask that you. Please limit yourselves to one question and one follow up and our first question comes from Greg Craig Irwin Roth Capital Partners. Your line is now open.
Hi, good evening and thanks for taking my questions.
Greg The first thing I wanted to ask about is the outlook for repeat orders on the wafer side. When we do have some of the back of the envelope math.
You know the SG micro order.
Several months back.
Turning 50 million that looks like it could be close to half of what their needs are over the next.
Four or five years.
And if we look at your more recent order from on semi.
It looks like it could be somewhere closer to a quarter or two cents of their total needs over the next you know give or take five years.
What do you think we need to see to see to have these customers come back and placed additional orders or how would you describe the potential for.
Additional wafer orders from existing large power semiconductor companies that are well known to us.
The investment community well, thanks, a lot Craig for the question and I would say a couple of different things. One is we've announced four of these long term supply agreements, we have another or other.
Supply agreements that we have inked as well that that don't have the same kind of length of time. So we've chosen not to announce them. What I would say is we're in discussions with a number of other companies as well around these long term agreements and recall the long term agreements give our customers. In this regard a couple of really key advantages one is access to capacity and a guarantee of capacity and the second is access to a pretty decent cost reduction curve that we are driving internally and on the flip side of that.
We get a couple of really our key things as well one is a guaranteed demand that has pretty significant teeth in it and then a relatively sizable upfront.
Payment would that.
As associated with us helping to build out that that.
That capacity.
I would say the interest in continuing always dialogue remains very very strong I think our customers are beginning to see more and more of their customers.
Express.
Interest and excitement around silicon carbide, I think especially in the electric vehicle I think we passed the tipping point of the value the incremental cost of using silicon carbide.
Being way surpassed by the value that you get so.
I think you'll see continued.
I work with us in this regard and I think we'll continue seeing these types of deals being worked on and announced.
Great. Thank you for that my second question is about the device updates can you maybe share with us where you where you stand on that.
The update cycle for both Silicon carbide Gan, what we can look for as far as potential product.
Portfolio adjustments over the next handful of quarters.
Sure Craig.
Well, what I would tell you that I mentioned in the prepared remarks that we've got a $9 billion pipeline and just to be very clear about that thats, a $9 billion device pipeline.
So it's a sizable pipeline for our our device business and you know these are dozens of different opportunities on multiple dozens of opportunities that are that are.
In various different save phases of gestation some are.
Relatively early phase, but I would also say that some are in quite late innings in terms of decision time.
I think over the next 12 months.
Maybe plus or minus a few you're going to see a lot of decisions that are coming down and thats primarily because.
These decisions have to be made because car platforms, and and and base station platforms are going to be.
We're going to be ramping in times, where they the customers have to make these decisions.
I feel real good about where we're at on that front and.
Like I said, we've got.
A variety of different.
Our customers in a number of different stages.
Some of them as I said in quite the late innings.
Thank you and our next question comes from Brian Lee with Goldman Sachs. Your line is now open.
Hey, guys. Thanks for taking the questions.
I had two I guess first on Wolfspeed.
Neil if you exclude the law way impact could you help us with.
How to think about Wolfspeed revenue outlook, what that would've been here sequentially.
What the organic growth rate that would have been flat year on year and then what's the visibility I guess, Greg do you have on trying to ease in when the subsidy timing out there is behind you in terms of being a headwind I know this is probably the second quarter here you called this out so just trying to get a sense for how.
How much visibility you have there on the near term from that kind of subsided.
Hey, Brian Yes, So let me, let me try and give you an idea of how we're thinking about the the wawa impact on the topline. So if you recall we provided the updated outlook on June 11, we said, we'd stop shipping to walk away and that the revenue.
From product and materials associated with their build out.
Was about $15 million per quarter, and that's what we would have expected in Q4.
We had already shipped some product prior to the bad but most of that most of that most will ship. It didnt happen and that was that that would represent a kind of revenue number in the quarter of say $10 million impact okay.
As you look forward.
The impact of the band is kind of hard to predict we sold to walk away, which were no longer dealing through three channels essentially direct.
Through RF component suppliers as well as through our materials business. So the latter two channels.
I guess along with the overall, while way supply chain is still kind of adjusting to the ban so.
I'd say in addition, while we're still looking for alternative supply options. So you put all that together and it's kind of difficult to say how much revenue would be pointed to us at the bandwidth lifted.
The supply chain, we need to adjust again and of course that will take time to play out in some kind of three months into the plan and to the ban and things are things are shifting in a steady state at states still kind of about $15 million a quarter, but given some of those supply chain dynamics that has kind of talked about.
Hard to predict what will happen. So in the meantime, we don't plan on shipping to while away unless something else changes with U.S. government on this one but in terms of the go forward. So it's kind of hard to say exactly what that would be.
And then on China, JV, where in the <unk>. We're in the early phase of the implementation of the reduction in subsidies and I've talked to a number of different Oems in China about this and I think they're trying to anticipate what's going to happen with consumer demand. They don't know exactly.
What's going to happen.
So I would say, it's kind of a near its kind of a short term or near term kind of perturbation. If you will and trying to adjust to what those new subsidies will are going to do what I would tell you is the remaining subsidies are on vehicles that have longer range longer range cars tend to have bigger batteries and and more powerful inverters, which tends to increase the potential for for a silicon carbide so longer term it could be.
Benefit for us.
And then finally I would say I think the.
China in general continues to two.
Really try to drive.
Their auto industry in the direction of VB, So I think thats going to be something that.
Once we get through this kind of short term how do you adjust to the to the ban it probably continues kind of.
A positive momentum.
Okay. Thanks fair enough.
And then just a second question if I could squeeze it in on them.
The LCD segment here I know given the recent challenges it sounds like.
Maybe the strategic thought process on that business is.
You are open to considering more alternatives anything you can maybe outline at a high level on on how you're thinking about the EVD segment, and if you're thinking about other options to turn it around here or is there may be other strategic alternatives that are entering into the.
Victor Thank you, yes, I'll take that Brian so to us so thanks for that question.
What I would tell you is.
When we when we redefined the strategy of the company. We said we were going to focus the LNG market in areas, where we're going to get.
Better value for for the technology that we drive and we're doing that right now we've got some good traction right now in the automotive space and high Brite and so forth.
On the overall industry is down and what we said we were going to do is to the extent that there was going to be an impact negative impact on.
On the.
The led business, we were going to transition the fungible capacity of LCD over to Wolfspeed and just recall that capacity is in two kinds of buckets, it's silicon carbide materials.
Where the Fungibility is 100% and the transition of that material.
Capacity from creating something for an LCD and creating something for.
Wolfspeed.
That transition is a matter of a week or two so we've already done that we're already doing that transition as the led market.
Slows down.
And then the second issue is it or the second amount of Fungibility isn't wafer fabrication and we've got we're taking loadings down pretty significantly that is that is the major impact.
Led gross margin and so wafer fab utilization coming down and we are also in the process of transitioning that capacity over to Wolfspeed as well now that transition takes a lot longer and thats more of a nine to 12 to maybe 15 months kind of timeframe. So in the meantime, we're going to have some under utilization, but I think as we come out of this and we see the ability to move LCD to more of a fab light type process, where we outsource wherever we can on that.
I think we'll see.
And we transition that internal capacity over to Wolfspeed I think we'll see a benefit from that.
Thank you and our next question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.
Hi.
John Your line is now open please check your mute button.
<unk>.
And our next question comes from harsh Kumar with Piper Jaffray. Your line is now open.
Hey, Greg So listening to couple of the other earnings call I mean, the the the Senate appears to be from the big guys that supply the automotive is that things like radar eight as.
Silicon carbide charging things of that nature I still reasonably strong do you think it's end demand in China due to subsidies or do you think it's just gestation on maybe inventory that was built up and then in sort of seem sort of Wayne.
If the trade situation doesn't change is this a steady base of revenues that we should think about for wolfspeed.
Yes, so what I would say is couple of things first off from my discussions with China Oems.
There is a sentiment that the consumers were aware of the eventual decline of some of the subsidies. So they're worth perhaps some buying of electric vehicles that was kind of pulled in if you will and I think they are really just trying to absorb what does it mean more long term. So I think that's the understanding that I'm getting from the Chinese Oems on that and I guess kind of makes sense to me.
From that perspective.
From a from a.
Silicon carbide demand in automotive I think that remains very very strong in general and I think what's going to happen over the coming.
Decade to be.
Just be really long term is you're going to see car companies introduced new platforms to the market those platforms will take off that certain speed. They will they will plateau and then a new.
Car platform will come on and as an example, all 70 Volkswagen car platforms are going to come to the market at the same time they'll really some those those.
Products will get into the market they will achieve a certain amount of volume and then probably hit a steady state the release new market new cars those products will ramp and so forth. So you'll see a series of increasing demands followed by maybe some amount of plateau, followed by increasing demand and new new entrants and so forth and I think we're going to see that across multiple different car companies over the coming decade.
Got it thanks for the color, Greg and then one on other ones on my second one I know you don't like to break materials versus the chips business, but I was curious if.
You would when you wouldn't mind, giving us some color on RFS just.
Without numbers qualitatively RF horses.
The automotive business in the power and industrial business any kind of color on what they may be as a as a part of Wolfspeed, yes. So maybe just a couple of different.
Vector is on that.
So first off the opportunity in power is really fueled by a lot of different things, but primarily the biggest growth engine is going to be the electrification of the powertrain up a car.
And we've seen reports from anywhere from 6 billion to 20 billion that I talked about by 2030 in terms of what that market size is for four.
Just the electric car platform and silicon carbide and that would be the power business, whereas the market for RF is primarily the growth is primarily going to be driven by fiveg, which most people estimate to be a couple of billion dollar type opportunities. So over the longer period of time power is going to is going to be a bigger opportunity I think and silicon carbide versus silicon carbide on Gan, so both nice growth opportunities, but power probably the bigger upside underpinning all of that is in materials and so thats from the device perspective from a material perspective, we sell to both into the power and ended the RF space as Neil mentioned earlier and what I would say is we believe that our device our two device businesses and our material business, we'll all be growing over the time period of long range plan, which is over the next five years or so.
But certainly over than the more near term aspect of that we're likely going to see the growth in materials being faster and that's simply because our materials customers channel to market is sizably bigger than ours.
A lot more feet on the street in terms of selling assets.
Applications engineers designers and so forth just with the four supply agreements that we have so.
I think it's a conversion of the industry from silicon to Silicon carbide. We're excited about that we're excited about the partnership we have with the four companies that Weve announced long term agreements with and I think we'll all see.
Real nice growth in the coming.
Decade.
Thank you and our next question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now.
Hi, Thanks, hopefully my call won't drop again.
So.
I guess real quick my first question is on.
Hi, it's actually on Ltd.
Business and.
How much of that.
Auditing process into the auto supply chain.
Are you able to pull over to Wolfspeed, particularly on.
All right because that would be one of the greatest Scott.
Challenges between wafer supply and moving this model.
Like I said more.
The FCC micro all model and the leverage associated with that so I was wondering if you could just address Greg.
So hey, Jed this Neal so I think you said on the device side you drop there, but it was that was that we had said, yes. So specifically the auditing process for order too much more intense and logic.
Hi, I'm wondering.
On.
Business how much of.
How much of the learning curve are you.
Able to benefit from our to accelerate that for the Wolfspeed device side of the business.
Yes so.
Couple of things on that so if you think about the type of the led business first and kind of our plans there and then related back to kind of mostly here in a second.
When you when we talked about the capacity expansion. Originally what we had said is that I think I kind of alluded to it.
That we would outsource.
Pieces of the led business and that would free up capacity for most.
And as we outsource.
Some of those pieces.
You will have more opportunity in the <unk> and the wafer fab.
No no two things there.
One is that you kind of mentioned the automotive kind of side of it certainly there are learning there, but as we free up capacity remember the capacity expansion kind of has two pieces on the device side. One is we're going to convert the current factory, we've got and the second one is we announced capacity expansion we're going to.
Build out the north fab and in that we will have more via the building out more of that kind of quality automotive quality capability as we're moving forward and we're investing in that so.
As we move to the capacity expansion sure we'll leverage the pieces from the from the led business and learnings we have but we're going to set up the fab as we move forward and build out the half that quality capability.
And then the second.
The second thing that I would add to that yet is we've also been very very successful.
Bringing in automotive experience people into some very very key position. So as an example, we're talking about building a new fab. The person that is going to run that fab has over 20 plus years.
Of semiconductor manufacturing experience.
At a world class highly regarded automotive semiconductor company and also spent a number of years at a automotive tier one supplier the head of our autumn.
Of our quality organization.
Joined us.
About a year ago or so.
She has as well over two decades of automotive quality experience working for a large world class.
Semiconductor company focused on automotive and I can I can name.
A number of other folks that have kind of come into that organization that bring.
Very specific knowledge of automotive requirements and we think this is going to be a really great benefit to augment the 30 plus years of experience that we have internally accrete on silicon carbide and gallium nitride.
Got it and just as a follow up.
The first question that I was trying to ask was.
You spent the value proposition on the.
On the auto side.
On the vehicle side, its certainly more compelling than that of the charging or the infrastructure side.
But just as we heard at our conference.
Last week.
You know from National grid.
There seems to be a compelling story around the infrastructure build outs and also the use of silicon carbide associated with that particularly around fast charge.
I was wondering if you might be able to update and articulate sort of what the plans are on the infrastructure side.
And.
How do you see that opportunity as well.
We see it as a great opportunity Jed and.
That's part of that $9 billion.
The pipeline that we're we've been talking about we've got a number of different.
Customers that are associated with charging in the grid in rapid charging and so forth and as you.
Properly point out.
Rapid charging is going to be a really important aspect to the build out of the.
Of the electrification of the powertrain and we've got customers that are developing technologies to add significant amount of mile mileage capability in sort of five minutes type timeframe and to do that you need high voltage and silicon carbide, the higher the voltage to the better it is for silicon carbide. So we think that.
This trend of higher bus voltages inside the inverter. They are they more rapid charging and higher voltages associated with rapid charging is just going to continue to to help fuel the demand for silicon carbide. So we're pretty excited about that as well.
Thank you and our next question comes from Paul Coster with JP Morgan. Your line is now open.
Yes. Thank you for taking my questions a quick one really Greg I just wanted to check see if there's any sort of take home pay all of the sort of time based elements to the large contracts that you have with the sort of temporary slump in demand.
You sort of full fit some of the economics of those deals so the customer has to pay up regardless of the.
The consumption.
Yes, the deals are generally.
We have that kind of element associated with it I'm going to get into a lot of details, but but they have pretty strong commitment to to take a.
Volume that with committed now there is there is some upside to pay capability on that and there is some downside and it's it's sort of a symmetric if you will.
And so these deals are really meant to kind of guarantee that we would be able to supply a certain capacity to our customers and guarantee that they would supply a demand. So we're both kind of equally committed into that and it does have that kind of element Paul.
All right. So the obvious follow on question is is there any risk a tool that some inventory building up in that channel.
I don't I don't see it right now.
I would say in every supply demand mismatch kind of capability situation or theres always a risk of that but you know even in our even our business today, our silicon carbide epee capability as is.
Capacity constrained.
Our our power capability, especially a 150 millimeters as capacity constrained.
And even despite the situation with far away our offline is capacity constraints. So we remain with pockets of constraint and I think as we expand the capacity will see areas that C.
No that see the constrain go away and others areas that pop up and then in those areas where the capacity constraint goes away, we are going to see customers ramp up their next generation thing and it will come back. So I think we're going to have.
So at the very least through the next five years as we continue ramping this capability.
We're going to have sort of a leap frogging of the demand and supply over the next.
Over the next five years.
Where we catch up and then it all of a sudden takes off again and we're behind.
Thank you and our next question comes from Colin Rusch with Oppenheimer. Your line is now open.
Thanks, So much just regarding Capex I mean, how should we think about the cadence of that and the contractual terms. It for you guys in terms of.
If a customer slows down in terms of some of the purchasing given some twists and turns that we're seeing on the TV side is there a point at which you guys would slow things down or speed things up and how should we think about the curve on that.
Yes, so first of all let me say so overall for I think I said it in the prepared remarks went to do we're going to spend roughly $200 million in capex in 2020.
As it relates to those things yeah, I mean, we can always move things around but our view is the longer term opportunity in the in the silicon carbide spaces, such that we're going to continue forward with that.
There's always opportunity to modulator things go on.
But I would think about that as kind of longer term modulations in the near term, we're going to continue with the investment in the Wolfspeed business and continue to extend the capacity.
Expansion and continue and continue to manage through that our view is we get we really need to focus on that right now to be ready for the opportunity and.
So it's really the modulation, yes, I think if you if you take a look at our materials business Thats something that we could obviously manage a little bit easier as it as you add capacity grow by grower.
In the fab, that's a little bit harder as you add a kind of line by line.
And we would manage that again over the long term, but but right now our view is we're going to invest in the in the capacity expansion and we'll speak.
Okay. Thanks, so much and then just in terms of where you're targeting designs. Obviously, the TEP onboard karger from all three is an important.
It kind of validates in terms of some of those high voltage.
Charging.
But as the as the target some of the other applications within the powertrain can you talk a little bit about how you break out the pipeline of opportunity and the competitive dynamics around each of those opportunities.
Well basically as as customers start looking at their products, what we're seeing.
A couple of different trends one is.
Moving towards higher bus voltages, which enables them to.
Take really stronger advantage of silicon carbide and Silicon carbide basically then enables their car manufacturers data smaller battery and the battery.
The most expensive part to a.
To an electric vehicle. So I think it's a really pretty straightforward equation and we were in conversations with dozens of different car companies around the world right now and of course, the associated with Oems and inverter manufacturers.
And I think the.
The debate of whether silicon carbide is going to play a role or not I think that I feel pretty comfortable that that debate is.
Is.
Has been is now over and it's very very clear that silicon carbide is going to play a role and I think it's going to play a pretty significant role. So we're working with all of our customers on that we've got as I mentioned, we've got dozens of different.
Design opportunities that were working in our design in pipeline.
Some of them are in more early phases. Some of them are in the late innings and so we're hoping to get a couple of those.
Cost of goods line as soon as possible and I really think over the next as I mentioned 12 to.
Plus or minus six months type timeframe, we're going to see a lot of those decision is going to have to come down.
Because the car platform is going to be it's going to launch it in a certain timeframe and they are going to have to make those decisions.
Thanks, a lot there it looks like a real cellphone.
Thank you.
Thank you and our next question comes from Jeff Osborne with Cowen and company. Your line is now open.
Okay great.
Couple of questions on my end are you guys doing a wonderful job in explaining kind of the long term value and where things are at it and seeing the 9 billion pipeline.
It's terrific to see I think it was 5 billion last quarter, but I was wondering if you could just help us better understand what the complexion of Wolfspeed is today.
In particular with the guidance being down about 400 basis points in margins with the I think you highlighted mix being the issue. There I didn't know can you. If you don't give specifics always rank order between RF power and materials. What the biggest pieces are and then what the margin differentials are broadly between the three.
Yeah. Let me this is Neil let me take a shot at that so.
The predominant driver of the changes in the Wolfspeed gross margin are related to the to the wall wave and so in Fourq. You. We saw an increase of 150 basis points. So when the wall way ban went into effect, we stop shipping lower margin products and that was really the main driver of the kind of 150 basis point improvement and getting the ball speed gross margin in Fourq you up over 50% as just swing back to one key we're seeing kind of the opposite effect and the margin is moving down almost 400 basis points. So customers in our kind of RF component and immaterial channels are kind of reacting to that as I said earlier in different ways or either you're not shipping or we're looking for alternative customers. So as these two channels kind of adjust to the ban we're seeing a lot of variability in the mix and kind of new order patterns are developing so think about the supply overall supply chain is just starting to kind of settle in and understand how to kind of react to the to the while we situation I will say, we see this kind of variability in them in the mix. This is kind of a temporary phenomenon.
It really does not change our view on the Wolfspeed kind of gross margin as we've talked about before getting to the low to mid 50 percents type level, our cost and our gross margin programs are on track.
And then in the meantime, we'll just be able to variability in the mix as customers continue to adjust to the ban just kind of causing some of that short term variability.
Got it and then my second question.
It was just a follow up on the auto qualification process auto experience with the company as a whole, which you touched on before certainly highlighted the 30 plus years of experience and making sick in a bunch of new people and the head of the fab, which sounds great. But I was just curious if you are quoting business today in that 9 billion pipeline do you need one of these auto grade fabs to be up and running two to win the business today, we're having the right staff and sort of the historical.
Expertise is that enough.
Well I wasn't sure if there is a gap of time and unfortunately, we can't hit the window is maybe more of the wins with Paul in your pocket in 2020 2021 as these fabs open up.
No I think the decisions that are being made today for the automotive.
The automotive related decisions that are being made today are for cars that are going to go into production and sort of 2022 through 2024 type timeframe that would be kind of the normal gestation period. If you will for for design win pipelines that are that are in discussions right now and recall that we intend to open up our new factory in 2022, so the timing of that actually fits pretty nicely.
With that I would I be.
It would obviously if that if that factory were opened today it would be nicer, but I think there is no issue with the timing of that opening up in 2022, I don't see that as a.
As an impediment to ice engaging with customers on these design wins.
They're real question is around.
Our ability to sustain.
The manufacturing capacity.
And that has been the major question that I've had in the year and a half or almost two years that I've been here and I think this capacity expansion of increasing our capacity by 30 ex compared to where we were when we initially began the the.
The capacity ramp in fiscal 17.
Has basically answered that bell and I think our customers see that they see that as a real commitment and they know that.
If they agreed to move this Kurt certain car platform or this inver platform from some kind of silicon based system to a silicon carbide based system, we're putting real money behind it the capacity that will allow them to feel good that that capacity to be there as they ramp their products and customers get excited about their products.
Thank you and our next question comes from Joseph Osha with JMP Securities. Your line is now open.
Hi, there I apologize for the bad audio I'm in a car.
No problem, we can hear you just fine Joe.
Okay great.
Seems like all the good questions on the Chinese market sort of have to.
Return to this status quo antique built into them I guess I'd like to turn that question Autocad and ask you.
What happens yes.
The disengagement from from China is much broader and a year from now or youre, not selling anything to any Chinese automotive OEM score our communications OEM maybe ever again.
And I guess the flip side of that also would be competitively understanding of course that you're not seeing much now how would you feel if you could say gosh, we don't really think we're ever going to face any competitive pressure from a heavily subsidized wild way effort silicon carbide or whoever.
Because they are not found any of our customers either I, just I'm trying to understand broad way yes.
Cree and Chinese market completely disengaged, what your business.
Well, Joe I think Thats, a great question and it's one that we certainly are addressing internally as well and what I would say is any semiconductor company has to ask that same question because a substantial portion of the semiconductor market is in China and substantial percentage of the growth is there as well so obviously.
I think.
Nobody would be fair to say well it wouldn't matter. If we just China never came back of course, it would matter to us it's a big percentage of the.
The semiconductor market a growing percentage of it. So it's you know it certainly would have an impact I think there's no question about that.
What I would say from a competitive position standpoint is there is really.
This this.
Technology.
As we've mentioned several times is a difficult technology to replicate it's it's a technology that has industry know how requirements and the industry know how is measured in hundreds of people versus.
Tens of thousands of people so.
It's.
While we worry every single day about competitors from all different walks of life, whether theyre international competitors or or U.S. based competitors, we worry about them.
And the best thing we can do is just running as quickly as we can to increase our the quality of our products decreased the cost of our product and increase the scale and the capacity that we have so thats, what we attack on a daily basis.
From an automotive perspective, specifically I'd say, we've got a ton of interest across the globe.
Including a ton of interest outside of China, and Silicon carbide and I think there is a tremendous amount of growth opportunity for us there we'd like to have the entire world Tam as part of what we're going after so we're very hopeful that the.
Worlds two largest trading economies will figure out a good solution.
But I think we've got a lot of opportunity outside of that as well.
Okay, and just as a follow on would you care to maybe talk about China exposure in that $9 billion.
Our pipeline that you discussed.
I don't have that broken out.
Just from a fuel perspective, I'd say, it's not as high as you would anticipate.
But let's just to follow up on that but.
What I can clearly say, it's not like half or some dramatic portion of it.
We've got a lot opportunity over there, but we've got a substantial amount of opportunity outside that.
But I don't Joe I don't have that number specifically, but I'm pretty comfortable saying, it's going to be well less than half.
Thank you and our next question comes from Ambrish Srivastava with BMO. Your line is now open.
Hi, guys. This is jamison, calling in for Ambrish. Thanks for taking the question.
So in your prepared remarks, you guys had mentioned so lowering starter factory utilization as well as reducing inventory in the channel as well as your own on that looks like in the quarter ticked up a little bit but I guess my question is as it relates to gross margin and assuming demand remains somewhat muted on what is your target for inventory days and I guess, how long do you think it will take their or take to get there before you feel comfortable ramping up utilization.
And.
I guess as well do you expect gross margin to remain depressed through then or do you think you can return to maybe mid thirtys to high Thirtys run rate.
Yes, So let me I think if you look at both the inventory of the gross margin is it's important to unpack that a little bit because the wolfspeed business and the and the LNG business have very different dynamics.
On the.
Leidy side, obviously the market situation.
And thats been impacted by China and the tariffs.
Has muted the business from a topline.
Standpoint, as you suggest so what we're doing is we're taking the conservative approach there and we're taking down our.
But our utilization were taken down our inventory to kind of go manage that and I think thats going to set us up for any kind of any mccain any medium term either demand declines and kind of position us and the event.
Favorably should upside happen our view outside of this quarter.
On LPD, it's difficult to call, we kind of just think at this point, we don't see any kind of recovery in the near term and we're kind of managing ourselves in a way to kind of handle that.
On the Wolfspeed side separately utilization impact on the Wolfspeed side, we have a little bit of elevated inventory, obviously with a little bit of the effect of the wall way Dan were carrying some additional inventory. We're also matching up supply and demand in different areas in the business.
Great kind of talked about some of those pockets earlier as those things start to kind of resolve themselves and we get to growth again, and what we would expect to burn that off our goal would be to get down closer to 90 days. So the current the current days inventory we have on hand, that's somewhere where we want to be but I think we've got a handle in both businesses on how to manage that going forward.
Okay. That's helpful. Thank you.
Thank you and our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.
Great. Thanks for taking my questions. My first one is a dampening. Some concern said, while we have been building a lot of inventory prior to the to the band taking sacked especially on the infrastructure side.
First do you have any visibility about that and two do you have any mechanism in place to monitor that and then of course, even when you get the license approved do you think you can get back to that $15 million run rate pretty quickly.
Yes, so on the wall waste side I think the way to think about that one is and I kind of mentioned it earlier, we sell through our way through a number of channels I would say as it relates to and let me just step back as part of the band we have limited interaction with them at this point. So it's really hard for us to say, whether or not they are building inventory or not or in terms of how they are managing it.
What we are seeing though is in the in the channels that we are selling through there are certainly some some changes and some variability.
The order and the mix and the pattern. So as that starts to kind of play its way out thats kind of change what we see but we're kind of seeing in the in the mostly business as we move forward.
Let's say the van was lifted I think it could take some time before that snap back so the supply chain would have to readjust again.
And certainly.
We're always very likely looking for alternative suppliers were difficult to say how much of that would be pointed to us at the ban lifted so the visibility in terms of what that would mean to us it's kind of difficult to call at this time.
Okay, great. Thanks, and a follow up is on the.
Shorter term question, Andy to China EDI site.
Clearly there has been a near term headwind. That's two questions. Here. One is how should we think about the lead time of the Lee for device sales relative to the final season went south of the vehicles and.
Secondly, I am also curious why the slowdown in the subsidy guys have had a meaningful negative impacts and wolfspeed given the adoption of silicon carbide in China is probably quite limited even for longer range vehicles. Thanks.
I guess I'll take a crack at that.
I don't know exactly how to answer it I guess, what I would say is.
From a lead time perspective.
I think there has been a couple of things that have been happening I think the the Oems are trying to figure out what the consumer response is going to be to the lowering of the tariffs and so they've been cautious in terms of building up inventories and so forth. They are also trying to figure out how much of their previous several quarters of demand on electric vehicles was pulling ahead from the consumers attempting to get cars with those.
Incentives.
Baked in so I think it's I would say if it's at it's a time of trying to figure it out and then adjust from a from an OEM perspective.
And then from a silicon carbide in cars, we do sell silicon carbide technology to a Chinese.
Auto manufacturers.
They.
A number of different of their applications.
And we see it obviously has a good potential in the future as well.
Thank you ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Greg Salchow for any closing remarks.
Well, thanks, a lot operator, and thanks, everybody for your interest in Crete, and while we continue to address the softness in the LNG sector and the macroeconomic and geopolitical issues in the short term we remain very bullish on the mid and long term outlook for our business.
Our opportunity pipeline is very robust and we believe that our silicon carbide and Gan technologies offer competitive advantages versus traditional silicon.
We look forward to speaking to you at the end of October for our fiscal first quarter 2020 results call and hope to see you at our Investor Day in New York on Wednesday November Twentyth at the Grand Hyatt Hotel. Thank you all and have a nice day.
Ladies and gentlemen.
Thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.