Q1 2022 Wolfspeed Inc Earnings Call
This call is being recorded.
Now I'll.
Hand, the conference over to your first speaker today, Telegraphing Bock Vice President of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to Wolf speeds first quarter fiscal 2022 conference call today will speed CEO, Gregg Lowe and will speed CFO Neill Reynolds will report on the results for the first quarter of fiscal year 2022.
Note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures will speeds 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 in our press release and <unk>.
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 course of the call such forward looking statements are subject to numerous risks and uncertainties. Our news release today and the SEC filings noted in the release mentioned important factors that could cause actual results to differ.
Materially, including risks related to the 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 Greg.
Thanks, Tyler and good afternoon, everyone. Thank you for joining us today and I Hope you and your families are staying healthy and safe I am pleased to report that during the first quarter, we continued to execute and drive our business delivering strong revenue above our guidance and non-GAAP diluted earnings per share at the high end of our guidance range.
Now this has been momentous period for US we changed our named and we will speak capitalizing on our 30 year plus heritage of working with Silicon carbide.
Our next generation and power semiconductors will be driven by silicon carbide technology with superior performance that unleashes, new possibilities and positive changes to the way we live as.
As the original champion of this technology, we couldnt be more excited to compete and win in the rapidly expanding marketplace as part of our move towards feed. We also are pleased to have joined the New York stock Exchange earlier. This month as we continue on our transformational journey as a pure play global semiconductor.
Powerhouse, leading the industry transition from silicon to Silicon carbide.
We look forward to discussing the strong progress we've made on our transformational journey and strategy and share more detail about this exciting long term outlook during our Investor Day in New York City next month.
If you haven't received a registration link please reach out to Tyler I'll now turn it over to Neil who will provide an overview of our financial results for the first quarter and our outlook for the second quarter of fiscal 2020 to Neil.
Thank you Greg.
And good afternoon, everyone.
We delivered solid results during the first quarter as we continued to see increased demand for devices and materials revenues for the first quarter of fiscal 2022 were $156 6 million above the high end of our guidance range, representing an increase of seven 4% sequentially from 35, 6% year over year.
Our non-GAAP net loss was $23 8 million or <unk> 21 per diluted share at the top end of our guidance range.
First quarter non-GAAP earnings exclude $46 3 million of expense net of tax or <unk> 40 per diluted share for noncash stock based compensation acquired intangibles amortization accretion on our convertible notes.
Our transformation and transaction costs factory optimization startup costs and other items outlined in today's earnings release.
Moving on to the first quarter performance, we delivered our fifth consecutive quarter of sequential growth.
Empower momentum continued to build as our customers have a demonstrated need for our products, resulting in revenue growth of 57% over the prior year.
For our App, we continue to see good activity on the <unk> front, but performance was slightly muted due to output challenges.
As we discussed on our last call, we did see some supply constraints and some lower productivity during the quarter as our Malaysian contract manufacturer continued to ramp activity back up following the recent COVID-19 outbreak.
At this time, we do not expect any additional impact from the Malaysia shutdown at the factory continues to ramp towards a normal production schedule.
Materials, we saw better order flow during the quarter, which we expect will continue for the remainder of the fiscal year first quarter non-GAAP gross margin was 33, 5% compared to 32, 3% last quarter. The sequential increase was driven by solid performance of materials and improving MOSFET cost and yields.
As previously discussed we view the gross margin impact of short term in nature due to sub optimal device production footprint, we have in North Carolina and expect it to modestly improve going forward as we work through factory transitions and improve yields.
Looking at our consolidated results non-GAAP operating expense for Q1 were $86 million and our non-GAAP tax rate was 27% increase in our operating expenses was largely due to R&D, including investment in our 200 millimeter pilot lines in support of the Mohawk Valley ramp for the first quarter days sales outstanding was 53 days and.
Inventory days on hand was 154 days cash generated from operations was negative $63 million and capital expenditures were $209 million, resulting in negative free cash flow of $272 million.
We believe we are in solid position with approximately $850 million of cash and liquidity on hand to support our growth.
However, we will be opportunistic from a capital market standpoint to ensure we can have the flexibility to invest as we see fit.
To underpin our position in the market and fuel future growth.
First we incurred startup costs, primarily related to the ramp at Mohawk Valley.
Approximately $8 6 million was incurred in Q1, and we expect this to ramp throughout the remainder of the fiscal year as.
As noted previously we expect a total of approximately $80 million of startup costs in fiscal 2022 with the majority of these costs incurred in the second half of the fiscal year as we qualify and ramp up that.
We have provided a non-GAAP adjustment for the startup cost as well as a reconciliation table in our earnings release.
Second as noted in the news release and as Youll see when we file the 10-Q tomorrow now that we have successfully transitioned the company that will speed are solely focused on our plans to be a leading global semiconductor provider. We've adjusted the expected useful lives of certain assets to better reflect the estimated economic lives our silicon carbide based semiconductor business.
Where is the company that was primarily focused on lighting and led products. The changes resulted in a decrease in depreciation expense of $8 4 million for the first quarter.
Impact on first quarter gross margin is relatively small and we expect that to phase into the margins over the next few quarters. As we previously mentioned we are continuing to experience a significantly steeper demand curve from our customers for silicon carbide products than we had initially expected.
Led to supply constraints for some customer orders for <unk> will not be fulfilled in fiscal year 2022, and channel inventory levels will remain low until we were.
Our production in our Mohawk Valley Fab.
We are confident that we will be able to meet this high demand, but in the meantime, we are continuing to accelerate capex capacity investments and our team is working hard to improve output in our dorm facilities we.
We are anticipating net capital expenditures of approximately $475 million for the year with Q1, representing the peak investment period, you will start to see a modest step down beginning in Q2 and continuing throughout the second half of the year as we receive more reimbursements for the Mohawk Valley construction.
We continue to pulling capacity expenditures, where we can as of fiscal year 2022 to better support the steepening demand curves.
We remain on track to operationalize, the world's largest silicon carbide fab in the first half of calendar year 2022.
Many of our customers are focused on assurance of supply with silicon carbide and we are committed to meeting that demand given the steeper ramps that we are now expecting.
Looking to the second quarter, we are encouraged by the positive momentum and as a reminder, progress may not be linear over the next few quarters as we ramp production at Mohawk Valley.
In the second quarter of fiscal 2022, we are targeting revenue in a range of $165 million to $175 million we.
We expect revenue to be driven by strength across all of our product line led by power devices are.
Q2, non-GAAP gross margin is expected to be in the range of 33, 7% to 35, 7%, which is an increase versus one Q.
As we have stated previously the key.
Key to our gross margin transition from the low 30% to 50% plus relied heavily on our fab cost per print transition from North Carolina to I'll hop out.
As we transition to that new footprint and qualify the factory in 2022 and drive revenue growth into 2023 and beyond.
We will see the benefits of increasing production from our advanced 200 millimeter fab.
Wafer processing cost of Mohawk Valley are expected to be more than 50% lower than Europe.
Fully including the benefit from the diameter changed from 150 millimeter for 200 millimeter.
In addition, we expect cycle times of Mohawk valley to be more than 50% better than in Europe, and yields and Mohawk Valley will be 20% to 30 points higher than where we are in Durham today.
We are already seeing good evidence from our Mohawk Valley pilot lines and support these projections anticipated heavy margin improvement as we move to our new fab.
We're targeting non-GAAP operating expense of $88 million for the second quarter, we expect operating expenses to continue to accrete modestly each quarter as we continue our investment in R&D and sales and marketing resources.
We target Q2, non-GAAP operating loss to be between 32 million to 26 million and non operating net loss to be immaterial.
We expect our non-GAAP effective tax rate to be approximately 27%.
We're targeting Q2, non-GAAP net loss to be between 19 million to $23 million or a loss of 16 to <unk> 20 per diluted share.
The EPS outlook for <unk> includes approximately <unk> <unk> benefit from the previously mentioned change in estimate of useful lives.
Our non-GAAP EPS target excludes acquired intangibles amortization non cash stock based compensation accretion on our convertible notes project transformation and transaction costs factory optimization restructuring and startup costs and other items.
Our Q2 targets are based on several factors that could vary greatly with 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 made remarkable progress on our transformational journey during our fiscal first quarter.
Our power business continues to see strong demand from the automotive markets and we are also encouraged by the increasing demand across a number of industrial and energy customers.
The strength of our device opportunity pipeline, which now is about $18 billion underscores the significant demand, we're seeing not only for automotive power, but also in RF industrial and energy solutions.
Now if you recall at our 2019 Investor Day, we showed a $9 billion device opportunity pipeline.
So we've doubled the pipeline in the last two years and now have more than 8200 potential projects and the team continues to identify additional opportunities at a rapid pace.
While the sales team is converting these opportunities that are impressive rate with approximately $560 million of design wins awarded during last quarter.
A significant portion of these were for automotive and burgers. While we also continued to secure other interesting applications, including a wall Chargers for electric vehicles and elevator energy storage products.
And then induction cooktop.
Our massive device pipeline and continued success securing design.
Continues to give us confidence in our ability to achieve our target revenue for fiscal 'twenty four of $1 $5 billion with current demand trends offering some potential upside based on the steepening demand for silicon carbide through 2024 and beyond.
As we focus on executing across our business. We are pleased to see our strategy is further supported by developments in the broader market.
Global electric vehicle sales are expected to be over $6 million. This year. According to consulting firm Wood Mackenzie.
Electric vehicle sales in the first half of 2021, nearly tripled worldwide compared to the first half of last year.
Share of electric vehicle sales in the global passenger car sales doubled compared to the same period last year.
This performance provides another proof point of the end of the ice age as consumers transition from internal combustion engine and embrace electric vehicles.
And as more Oems and tier one leverage silicon carbide based solutions for powertrain onboard Chargers and onboard fast Chargers, which increase the vehicles range and reduce charge time.
We expect the adoption rates to continue to increase.
President Biden and his address last month to the UN General Assembly reiterated his intent to work with Congress to make critical investments in green infrastructure and electric vehicles.
In mid September U S. Lawmakers proposed an expansion of tax credits for electric vehicles that includes significantly higher subsidies for Union made zero emission models assembled in the United States. We are continuing to see U S automakers make big commitments to ramp up their electric vehicle effort for instance in late September.
Ford announced that we spend billions of dollars to build three battery factories.
And an electric truck plant in the United States significantly increasing its commitment to electric cars and trucks.
We remain well positioned to capitalize on these opportunities as we are in the midst of an increasing manufacturing capacity, including bringing online the worlds largest silicon carbide path in a matter of months.
In fact, we believe our capacity expansion efforts were critical factor that led general motors for choosing us to provide power device solutions for its future electric vehicle program.
Our silicon carbide devices will enable GM to install more efficient EV propulsion systems and several different models that will extend the range of its rapidly expanding evs portfolio.
The combination of <unk> global leadership in Silicon carbide, and Gm's commitment to an all electric future, including our plan to launch 30 electric vehicles globally by the end of 'twenty five establishes a powerful partnership pushing the boundaries of electric vehicle innovation together, our Mohawk Valley 200 millimeter fab remains on track.
<unk> to start qualification runs in the first half of 2022, we now have more than 50 of the primary ballroom tools placed in the clean room, we've had an opportunity to host several global automotive executives at the site and they were impressed with the level of automation and the overall scale of the operation interim we have major.
Hansen underway right now to continue the growth of our materials capacity.
Space conversion and refit up is actively being converted from an old lighting and office space into industrial space for significant growth of our crystal growth and <unk> capability.
Our expansion enables us to increase the number of growers and take advantage of our continued crystal growth technology improvements, which increased production yield.
To avoid supply constraints, we've already ordered the majority of the long lead time items, including electrical Substations and steel infrastructure.
In terms of timing, we will start ramping phase one of this space in June of 'twenty. Two in particular, it is being built out in three phases and gives us adequate growth capability through $2025 2026, depending on realized demand.
As we move forward and our new capacity as we will see we will continue to execute our strategy to create a global semiconductor powerhouse.
We continue to win business had a very good pace, while we're making necessary investments to deliver next generation technology to our customers. We are excited about the opportunities ahead and are confident in our strategy and our path forward.
We look forward to discussing the progress we've made on our transformational strategy and share more details about our long term outlook during our Investor Day in New York next month, and with that I'll turn it back over to the operator, and we can begin the Q&A session.
Yes.
And would like to ask a question. Please press star one can.
As a reminder, we are there any questions.
Questions to one question one follow up.
Be mindful.
The first question.
Tom.
I think we are ready with bank of America you May proceed.
Hi, This is Blake Friedman on for Vivek I was just curious for my first question at the beginning of the month I believe you announced a strategic supplier agreement with GM can you provide further details on the agreement or an overview of <unk> assurance of supply program and then relative to 90 days ago can you kind of.
I mentioned, how customer engagements with auto Oems have changed or progressed.
Sure on October 4th we announced.
Jointly together with general Motors.
A partnership with them as we are providing solid carbide devices for their <unk>.
E platforms.
The program is.
Slated to go into several different vehicles.
And we'll be starting ramping after 2024.
Can't get into a lot of other detail about that other than to say, it's a really great partnership that we have together with GM and I think.
In terms of the assurance of supply.
Program.
This is a really I think this is a really key item for GM and its become a hot button for all of our customers.
That are currently experiencing a lot of supply issues in the silicon World.
And as a <unk>.
Integrated.
Device manufacturer that has its own capabilities in materials.
We're kind of in a unique position to be able to offer this kind of assurance of supply.
That's good to hear and then just quickly for my follow up just with regards to the increasingly useful life of certain assets.
Just to make sure our math is correct the kind of the net impacted Gms. This quarter was it about 20 to 30 basis points. If you can maybe clarify the impact moving forward over the next few quarters that'd be great. Thanks.
Yes about 30 basis points I think in <unk>, and then you could see it kind of bleeding into kind of the guidance and the <unk> between one to two points.
You can think about maybe 150 basis points or so for <unk> and then another one to two points kind of bleeding in to the back half of the year and you've got to think about that in terms of kind of a revenue exit rate for the year of around $200 million or so which I think we have very good line of sight too.
Very helpful. Thank you.
Yeah.
Thank you.
Next question please.
Thank you Christine.
Hi, Thanks for taking my question can you hear me fine.
Yes, we can thank you.
Okay great.
I have a question about <unk>.
200 millimeter wafers.
And I was wondering you know.
How you are approaching the question of making these wafers available.
To your substrate clients.
So how youre thinking about that and then you know how far you are into <unk>. So are you are you sharing have you already shipped some of these wafers to your clients. So that they can start playing with that.
Look at where we'd like to two to adopt the new.
The new site. Thanks.
Yeah. So thanks for the question. So we're obviously focused on an internal ramp at this point with with our new 200 millimeter factory coming online so thats really where the focus is.
The results that Neil has talked about running these wafers through our pilot line, it's actually very encouraging at this point. So we feel real good about about being able to ramp that but it's really with the new factory coming online we're really focused on.
Getting that factory up and running.
Okay.
Do you have a sense for what.
Yes your competitors.
On the device side could have it figured out like 200 millimeter fab, what kind of lead time that it would get based on AUM.
What you see from Nike substrate substrate.
Sure.
Yes, it's hard to tell you know obviously, we began construction of our 200 millimeter factory.
Almost two years ago, so year, and a half year and three quarters ago. So it does take a while to actually get a silicon carbide factory up and running there are there are some differences between silicon and silicon carbide in terms of the equipment that you need in the fab and so you have to kind of be thinking through that so I don't know exactly when that would be.
<unk> for everybody, but.
I know that for us.
Going from not having a factory to having a 200 millimeter factory.
Beginning to run qualification.
Material.
A two year process and that was started of course 18 months ago or so.
Before there were all these supply issues. So I would imagine if youre trying to build a factory today at 200 millimeters. It probably would be a lot longer than two years would be my guess.
Yes.
Thanks, Greg.
Youre welcome.
Thank you.
Yes.
With Wells Fargo you May proceed.
Hey, guys, Hey, everybody. Thanks for taking the question.
To ask about some of the supply constraints and the impact. This has had on your unbilled backlog.
Mistaken last quarter, you identified roughly $100 million in.
Revenue you are not able to fill and I presume that was mostly on the upside related to some of the bottlenecks out of Malaysia, but now that we are.
Sitting here.
Late October where does that unbilled backlog fit and.
And how would you characterize.
The trends.
Or the gap between demand and supply overall.
Thanks, Thanks, Gary for the question I think if you think about the amount that we've got and just took the revenue numbers up.
Obviously in <unk> and the outlook for the rest of the year as I said earlier I think we've got pretty good line of sight to kind of exiting the year kind of that 200, maybe a little bit north of revenue. There. So I think we're making progress on driving more capacity through the system, whether that be in Malaysia or here in Durham, but.
But the challenge we've got is that the demand keeps steepening. So I think if you look into this year as you get into next year, we always talked about that transition point being 'twenty three or 'twenty four.
That demand curve continues to steepen in its rate right upon us right now so.
Still think that even with that revenue increase we still have north of $100 million of unfulfilled demand and we're really just pushing as hard as we can whether it be capex or driving organic throughput or bringing as much capacity online as we can to kind of close those gaps.
No the big transition for us is getting the Mohawk Valley. So.
The faster, we can make that transition and move into Mohawk Valley, we can but we're looking at kind of any and all solutions to try and close that gap.
As we can and then Gary maybe just just a couple of other additional points. We've made some some changes here in North Carolina in terms of brought in some leadership further.
<unk>.
The wafer Fabs here, we're seeing some early signs of good progress there customers are super excited about that and then the additional thing that Neil mentioned.
With Mohawk Valley coming online customers are obviously super excited about that in fact last quarter.
We received our first.
Initial purchase order for products coming out of Mohawk Valley.
200 millimeter wafers so.
There they are seeing that light at the end of the tunnel and.
It was great to get that first purchase order in.
Great I appreciate that my follow up I wanted to ask you, Greg about China not mistaken your expectations.
Terms of revenue contribution from China as part of your 2024 plan.
Is only about 10% of that $1 5 billion revenue forecast, but.
And as you know Rome, and somehow seem to have a strong hold on some of the Chinese EV Oems.
Wondering if you have.
Any change in in your outlook as it relates to China for better for worse.
Contribution to decree.
Yeah, we.
Haven't changed that.
At this point and what I would say is the.
The pension.
Global attention between especially between the U S and China remains pretty high.
I would say in.
It doesn't seem to be assigned.
From my viewpoint anything abating.
We just think it's just prudent to kind of dial that back a little bit.
That being said, we've got a lot of activity in China in <unk>.
Customers are evaluating products and design wins, and so forth, but I think it's just prudent to dial that back just in light of.
The increased tensions.
Thank you guys the Ford senior couple of weeks.
Thanks, Gary.
Thank you.
The next question.
Jared Division concrete concrete genuity.
Thanks, its a tough one so hey, guys congratulations on a great quarter outlook.
I guess first question Greg.
Maybe just shifting the conversation away from.
Evs is it seems like that's been most of the lines of questioning.
But.
There's many more applications.
Beyond EV solar inverters grid, forming grid following inverters wind turbines.
Just to name a few I was wondering if you might be able to give an update and.
And in the context of that how has the assurance of supply.
Specifically in some of the non automotive.
James the conversation of how some of your partners are looking at and then I do have a follow up.
Sure Jeff Thanks for the question.
As I mentioned in the prepared remarks, we've got the pipeline now.
Over $18 billion has over 8200 projects in there.
Of course, a lot of the value is automotive, but a lot of number of projects or are these other applications I talked about in industrial Cooktop that we won in wall charger and the elevator. So you're exactly right, we're seeing a lot of momentum.
And the broader industrial markets.
Customers are switching from silicon to silicon carbide across a number of different end equipments are partnership obviously with arrow helps us reach those customers that continues to be a very strong relationship and strong partnership.
Momentum there is actually quite solid so I feel real good about that and what I would tell you Chad in terms of.
The capacity coming online.
Those industrial customers are also paying attention to the fact that.
With nearly two year, while it was two years ago, we made the decision to invest in a new fab and then we broke ground in March of <unk>.
2020.
They see that we've made those investments well ahead of demand coming on online and.
They are really appreciating that and so as they start looking into designing in silicon carbide. They are definitely paying attention to who made those investments.
Almost two years ago is now bringing on capacity.
We're looking pretty pretty good from that perspective.
Awesome just.
Just as my follow up I'll, just turn to Neal for a second.
Just going back to previous question.
Just by my math if I.
Kind of pull out some of the one times from the margin adjustment it looks like yields in the.
Wafer facility picked up a few points then.
<unk> mentioned.
Not by name, but Rex felting coming on sort of some of the management changes and I'm, just wondering whether or not.
Well one is is that in line with.
With what you saw and and so I am assuming.
Assuming then that we've just kind of seen the bottom end margin is.
<unk>.
Seem like they're they're moving up or down.
<unk>.
That's right I think we've I think we've seen the bottom and we're starting to turn up the other way.
On margin and I think there are several components to that one is we did have a bit of a drag with this kind of Malaysia subcontractor issue. The COVID-19 outbreak and we've been recovering from that so I think that we've put that behind us and the second thing is and Greg mentioned it earlier that we've seen some benefits just from some of the.
The new staff and the management changes that we made we are seeing good early returns on that but it will take a little bit of time for that to work itself through inventory and C itself kind of into the results.
So as we move forward I think we're going to see margin expansion both in the device and the materials businesses, but the one thing to be aware of is that the the power device business is just going to grow faster and we're seeing that order flow right now it's off that regardless of the improvement there that's going to be kind of a negative mix for US right just based on the North Carolina footprint. So I think what you will.
See as margin expansion in terms of the fundamentals of the business and we will see a little bit of that kind of maybe held back a little bit just by the overall mix on device and then as we've talked about many times once we shift that over to Mohawk Valley.
That's really the solution, but I do think we'll see.
Some strong margin improvement here as we move forward.
Great. Thanks, guys.
Thanks, Ed.
Thank you.
The next call is from.
Brian Lee with Goldman Sachs.
Thank you Steve.
Hey, guys. Thanks for taking the questions.
I guess first one just talking about the scale and the capacity given.
It sounds like the demand environment is getting better.
And there is potentially upside.
Can you give us some thoughts around adding more raw materials capacity, whether it be on timing location, maybe anything on potential scale versus what you have today in Durham.
And then also.
Maybe related to that how much it would cost and Neil you alluded to being open about.
Accessing capital markets sort of how that would all.
Fit into the strategy going forward and then I had a follow up.
Yeah. Thanks, Brian So we are.
Doing that capacity expansion for the materials business kind of as we speak it's been something that we've actually been doing now for the last year and a half or so inside of our current.
Materials building, we've now gone across the street to a different building.
And our expanding that if you if you happen to.
Come on our campus east as Youll see a lot of construction and fences up and things like that and that's all that's all that transitioning of that old lighting facility.
Actually what used to be a basketball court.
Two of materials production operation that is going very well, we're super excited about that and does that expand our capacity here on campus, but to a different facility. So that's something that's been ongoing for the last couple of years in the existing building and now it's going on.
And a building across the street from Us.
And then Brian just to your second point there obviously, we've been working on this capital expansion for a couple of years now two or three years and we put a substantial amount of capex to work for us to essentially triple the business over the next from last year out to 2024, so ramping beyond what we've had what we've done already.
As already kind of a challenge so I think as I've talked about many times is really becomes a supply side challenge and we're trying to manage that.
And push it as fast and as hard as we can as it relates to funding. It I mean, there are several different funding ways that we've been managing this one of them that we haven't.
<unk> seen a lot of yet, but it's really starting to kick in as the reimbursements from New York for Mohawk Valley. So from a capex standpoint, we're going to spend $475 million or so this year and thats going to step down in the back half of the year as we see more of those reimbursements coming in so as you look out into that over that timeframe, obviously will be opportunistic.
Just around can we look for opportunities to increase the revenue between now and at that time, but still I would say, it's a supply side challenge thing and we're somewhat limited in the options that we have although we are looking for solutions always within the four walls that we have right now to kind of go manage that and again that required being opportunistic and not something I would look at but right now I think we are in.
Pretty good shape from a cash and liquidity standpoint to kind of manage where we're at but again, we'll be opportunistic looking forward and just a real quick addition on that.
Anything from a supply perspective near term before we get Mohawk Valley would be out of our Durham wafer Fabs and that's where we brought in some new leadership you mentioned Rex, but also a missy cingal.
Come in last quarter, and it's already making an impact are pretty strong and positive impact in terms of how the fab operation. We still have we still have a ways to go but we're seeing really good early indications of some good progress that she is going to make.
Okay I appreciate that context, the second one for me.
On the VW framework agreement I mean, I think this is.
One of your original sort of.
Points on the board if you will a couple of years back I know you've talked about.
Customer developments accelerating of late especially on the automotive side and then you've had some nice tier one wins like GM here recently, so just wondering can you update us a bit on kind of what's the latest VW, where you are in terms of reaching any stage of <unk>.
Commercialization and revenue opportunity there thanks guys.
Nothing specifically to announce on any additional customers.
Obviously.
We're able to announce the GM deal through a joint press release so.
We win business and sometimes were able to announce specifics about it and sometimes we're not so at this point, we don't have anything to announce on that what I would tell you is we've had a number of automotive Oems in a number of tier ones that have come visited us.
Over the last.
We visit with them a lot, but over the last quarter, we had a number come visit with US here in North Carolina and also go visit the.
Wafer fab in Mohawk Valley, and they leave quite impressed.
Quite satisfied with what we're doing.
As many of you know I've been in Europe multiple times, even during COVID-19.
Sitting with customers doing my five DC quarantine.
Start that off but then visiting with customers and Thats kept the level of engagement are quite high both Neil and I were in Europe.
A months ago, and we're actually going back in the first week of first two weeks of December for more customer visits and of course.
The week before October 4th I was in Detroit, visiting with folks, including General Motors and preparing for that announcement. So we've stayed high on the engagement lift in terms of engaging with customers both virtually and.
Live with them and we're feeling really good about the development of the relationships we have.
We see the fact that two years ago, we made the decision to increase output in March of 2020, we started to move.
Moving dirt and Mohawk Valley and they see that.
In a matter of.
A couple of months here, we're going to be running production qualification runs in the first half of 2000 to 2022 calendar 2022.
And then.
Getting our first customer purchase order for specifically for Mohawk Valley 200 millimeter equipment.
Is really encouraging so all of that is tied up pretty nicely I think that has helped us win the business at the.
$560 million that we discussed this last quarter the $2 9 billion that we've got in fiscal 'twenty one.
That's all really positive and it's also helped us increase the pipeline.
And that device pipeline doubling in the last two years technically it's more than doubled because the $9 billion that we referenced.
At our last Investor Day had led in it and obviously it doesn't anymore. So.
Just feeling like there's a really nice transition happening with with silicon carbide in the industry and the fact that we were pretty far ahead of.
Anybody in terms of expanding capacity is proving to be a very positive thing for us.
Alright, Thanks, guys I'll pass it on.
Thanks, Brian.
Thank you.
Question is from Matthew.
Charter equity research you May proceed.
Thank you very much.
First off if I could.
Greg.
Looking at all of them as you go through all the details of where you are in both the device fab in North Carolina in the materials business and your plans for Mohawk Valley charges scape, the reality that no more hug won't be up and running and material revenue really until probably early 2023, I know you're going to ramp I know the plans for ramping but in terms of really starting to impact the top line. It doesn't show up until probably <unk>.
Three and that gives you about maybe 18 months to hit your financial targets.
I just wanted to check some reality.
Need to be growing revenue at least at least 50% year on year every quarter and maybe even as high as 100% in the early stages in order to get there and at the same time isn't it also the case that.
The device business the device fab in North Carolina is going to have to get their margins.
<unk> leased in the high 30, percents, probably even.
<unk>.
In the fiscal year two.
<unk> 2004 to hit the.
The targets you've laid out here is that ballpark it makes sense to you.
Well, our target remains $1 $5 billion in 2024, and as we mentioned in the prepared remarks, we're feeling pretty good about that the steepening of the demand curve is certainly there.
The demand is and I would say an issue at all relative to that target. We're feeling very very good about that we have.
Obviously a lot of.
A lot of effort in terms of getting Mohawk valley going and just recall.
As part of the deal in New York, We got a pilot line that pilot line with converted 200 millimeter silicon carbide.
Long time ago, but maybe a year ago or something like that so we've been we've been running.
200 millimeter wafers through that pilot line for quite some time.
Seeing the.
The initial MOSFET to chocolate is out there the yields are looking pretty good. So we feel like when we get the pad up and running it's going to be in.
Kind of have a running start so to speak I think from a North Carolina perspective, we've made the change with Missy joining the team. She has made a tremendous amount of progress in a very very short amount of time in terms of changing how the factory operates the metrics that they're looking at and so forth.
Initial indications are really positive and.
So we've got good hope for some continued.
Very strong progress out of that factory as we were as were ramping Mohawk Valley. Let me just add to that I think if you look at.
The North Carolina Fab.
While the cost footprint is higher we've also transition to fab and I've talked about before we stabilize that we put over 100 tools into it over the last years last year or so and we haven't really seen all the benefits of that so I think we will get more improvement at our North Carolina as you move through the remainder of the year. The differences is that just.
Talking about a different diameter in in a bigger scale factory in Mohawk Valley, but I think that there are still plays a very important role for us.
Movement that we can see out of it between now and that timeframe youre talking about.
Great. Thanks, if I could follow up with you Neil.
You mentioned again this quarter that could be 50% little wafer cost and Mohawk Valley then in Durham.
That didn't include the full benefit of 200 millimeter, but you also said, 50% low recycled payment, 20% to 30 points better yield.
The 50% lower wafer cost has caused quite a bit of confusion not just us but some of your larger investors. We spent quite a bit of time in the quarter come through it.
And with IR and <unk>.
Really.
We've been trying to get a hold of in order to explain the specifics of that so if I could just the stage one debate that's been raging all quarter is.
If the 50% faster cycle time already captures amateur edition of fixed cost across the wafer. So you kind of capture that in the <unk> cycle time, and it's up 20%, 30% <unk> yield improvement captures the lower breakage and better process control that you're going to get in this automated fab, where does the 50% lower wafer cost come from.
You're talking to Tyler through the quarter.
He was maintained that didn't include any of the 150 millimeter versus 150 millimeter, but your comments seem to suggest there's something with 200 millimeter. So maybe you could explain for us finally.
What goes into that 50% is at 200 millimeter is it is it is something we are missing or is it captured some of the other metrics. Thanks.
The cycle time, obviously as part of the wafer processing cost, but theres a lot more caution.
And the model, obviously than just the wafer processing cost. Okay. So if you think about it going from 150 to 200 normally wafer processing cost would go up just by the nature of it in this case, we're saying just on a nominal basis is going down and if you take into account the 200 millimeter benefits.
Well above 50% significantly above 50%, so I think more than 50% is a fair way to talk about it in that sense and then of course, then you have to add yield benefit on top of that right. So the number of good dye that we're getting off of every every wafer.
30 points higher so just from a pure cost benefit standpoint, if you go down at the die level Thats well over 50% when you start putting those two things together, so I think 50% greater than 50% I think is a reasonable way to talk about at this point and I think we've got line of sight.
Obviously too.
Even better numbers than that in terms of the die level.
So the 50% or lower wafer cost does capture to a large extent.
The large amount of breakage that you have 150 millimeter Jerome and how that won't occur in Mohawk Valley, that's where a lot of it comes from so even with a bigger wafer youre still getting better better wafer cost on it.
That's right.
<unk> costs of 200 is better than 150, which which that doesn't take into account. The change right. So there is an improvement right. There then you get the benefit of going to 150 to 200 and on top of that not only do we get the bigger wafer with more die on it you get the yield the yield off that day is better so you get a better cost.
Great. Thank you.
Okay.
Yes.
Well sure.
Our next question is from Craig Irwin Roth capital markets.
Good evening and thanks for taking my questions.
Greg I was hoping you could help us understand the composition of its $560 million in awards in the quarter can you maybe talk a little bit about how much of that is automotive versus distribution.
And how much of that is likely to turn as revenue within the next.
Let's say, maybe 12 months.
Versus being a contribution to demand in the 24 or 24 plus timeframe.
Thanks, Craig So let me hit the second question first so a very small percentage of any of that 560. It will turn into revenue in the next 12 months and Thats.
Industrial applications are definitely have a longer.
Gestation period from design into two revenue ramp and so it will be maybe some but it will be relatively small.
And so.
Not much is what im, saying theres not a whole lot of.
Sort of consumer applications industrial is definitely a couple of years automotive typically is four to five years.
So.
A little bit longer period, and then in terms of the design and I don't have the exact numbers, but I recall it to be about half as automotive for the 560.
And then of the rest we've got some nice RF.
Design wins that we've gotten our designers that we've gotten and then.
A very strong industrial play and I've mentioned, a couple of these industrial cooktop in.
Induction cooktop at wall Charger elevator and elevator application things.
We wouldn't normally be able to cover but with the with the.
Partnership we've had with Arrow now for a couple of years, we're able to reach those customers as well.
Great that actually bridges very well to my my second question.
Yes, <unk> had an excellent relationship with Arrow and your distribution partners over the last many many years and it has helped your cost effectively.
Sure.
Emerging customers emerging applications.
The EV charging application I would not call that emerging Thursday super customer out there and charging.
A real pioneer that you've served from day one.
And most of the hardware guys. We talk to either has silicon carbide in their designs are coming into their next generation designs, but when we talk to them.
None of them really arent buying through distribution.
Do you expect.
This to play a major role in her.
How the.
The maturation of these relationships occurs it has there been sort of a process of companies getting to a certain size and then may be being shared with distribution or.
Moving over to direct purchases.
How does this possibly evolve for you.
I think we have a.
We have a distribution strategy.
Playing very well for us and I don't see any change that strategy I think we've got a really strong partnership.
And I think that plays very well for the strengths that <unk> brings to the party in terms of the channel and the strengths that we bring in terms of product breadth and so forth.
So I don't see that changing some some companies have changed their model to more of a.
They do their own demand creation across these thousands of customers but.
Craig where our footprint is just so small it wouldn't be viable for us we had a.
And an opportunity to have one of our sales folks in Europe.
Present to our board of directors about an opportunity that she won with a customer in.
In Spain.
And they did that through arrow and.
Arrow had.
Aero its footprint in Spain, I believe was larger than our footprint in Europe.
We have we have zero employees in Spain. So it just.
In fact, we don't have anybody to the left of France. So I think there's only one person in France. So our footprint is really really quite small so we're.
I think we've got a great strategy, we're sticking with it and and I think we're going to have this partnership for quite some time.
Well congratulations on the strong quarter. Thank you.
Thank you Craig.
Okay.
Next question.
Challenges with J P. Morgan.
Hi, Thanks for taking my question I guess just to start off with one on competition that I've been getting from a few investors that's a.
In relation with on semiconductor and then push those pulse TBD.
On Silicon carbide provider and just wanted to get your thoughts of how that changes the competitive landscape.
Where do you really see them as well.
In terms of capability then.
If you can just share your thoughts on that would be helpful. And then I have a follow up thank you.
Sure. So silicon carbide is obviously, a super attractive space right now and Theres a lot of companies that are getting into this.
Into this space, we are the largest provider of silicon carbide wafer materials too to the customer base.
And we have long term agreements with many different customers in this space and basically all of our long term agreements.
Well the vast majority of the long term agreements that we have are with customers that are also have some kind of internal.
Capability or an internal desire or capability desire to have an internal capability.
And that's true with the vast majority of our long term suppliers or customers.
Strategically it probably makes sense for them to try to do that I think what.
This business.
Silicon carbide materials.
<unk> tends to be a lot harder than a lot of people think and so.
What we're finding typically happens as we've.
We've had a couple of instances already where we have a long term agreement.
With a with a customer and then they extended and expanded and extended and expanded again.
And as they see their internal effort just really is difficult.
I don't think that changes at all I think.
If I were them I would do the same thing and I think their strategy. It makes sense, but I think it's.
This growing of Silicon carbide is not for the faint of heart Theres lots of tricky things associated with the technology. We spent 30 years doing only this and I think.
We've grown to scale pretty nicely.
Okay.
A quick follow up with Neil Neil You mentioned, some revenue push out on the RF side because of the similar ramp on the contract manufacturing.
Sure.
I didn't hear anything.
I don't know if you mentioned it but can you quantify the amount of revenue that's getting pushed out.
And you have an estimate because of that store ramp.
It was it was in <unk>, we saw you think of it as well.
Just like a few million bucks not not not a huge amount. However, I think we've caught that back up and I think in the estimate that we're looking at we're seeing some forward progress on RF kind of in line. What we thought previously so that kind of gets caught back up I think in the in the new estimate we get them.
Okay. Thank you.
Sure.
Thank you.
The next question comes from.
You May proceed.
<unk>.
Okay.
Sure.
Okay.
Actually no it sounds very scramble this or maybe something with your Bluetooth.
Uh huh.
<unk>.
Is this better.
Yes, that's the way better thank you.
Okay.
Great.
Two questions. Please the first one going back to the GM contract.
You mentioned some of them.
Yes.
Most of the E cars that it will be quick.
Yes.
Could you provide.
More comment on the number of platforms or product design, and then as a follow up to that given the increasing amount of designing that you've been awarded including GM would you expect to more rapidly build out and capacity Mohawk.
Thank you for the question and we can't give any more detail on the GM announcement other than what was out in the press. So I apologize for that we're excited about it it is across a number of different vehicles.
<unk>.
It's a really solid announcement for us.
In terms of the ramp up of capacity.
Capacity, maybe I'll, let neel talk to a little bit more obviously, we're seeing a steepening of the demand right now than we are.
Working really hard to satisfy that demand is basically a pull in and a steeper ramp than we originally had anticipated and quite frankly, I think that originally than anyone anticipated.
We anticipated with the.
Demand growing very very rapidly for not only electric vehicles, but for silicon carbide solutions in evs and across the industrial markets, but maybe Neil if you want to give a little bit more color on that yes. Then in terms of like what we think we can do in terms of bringing on capacity faster. One thing we got to remember and I said it earlier, we're going to triple the business here just over.
A few year period, and as you think about bringing up new factories purely like Mohawk Valley, which is a brand new fab is going to be really careful in terms of the timeframe in which you bring those tools up and start to expand capacity. So between now and 2024, we feel like the plan. We've got is the right one.
And balances the risks in terms of bringing up a new fab, obviously at a new diameter, but clearly as we as we look out beyond that there is space and Mohawk Valley, just a little bit over 50% of the clean room kind of is utilized on that two.
2024 time frame.
And obviously, we would look to fill in the rest of that capacity up dominant in the meantime, I think as we talked about earlier, we've really got to look for ways to solution the capacity constraints within the four walls that we already have and that's really where we're focused right now.
Alright, Thank you and my second question can you discuss the off.
You bet.
Pass along pricing.
Third quarter freight cost increases that we've seen across the industry if necessary.
And that relationship with <unk>.
Yes, so I would say there is there is minimal impact here and we're in the very early phase of a pretty massive ramp most of our.
Most of our design wins, we have either even with the LTA agreements that we have in place and so forth are longer term pricing agreement, so I'd say minimal impact there.
Great. Thank you and congrats again.
Thank you.
The next question.
English is that.
Schumer cargo.
Yeah.
Sure.
Hi, Thank you.
Neither had a clarification on the depreciation impact.
The positive impact from.
Longer depreciation is that going to flow through for.
For the next two quarters and beyond as well and then I had a patient case.
Yes, So let me just reiterate so that we can be clear as we can on that so Q1, roughly 30 basis points.
And an incremental one to two points as you get into <unk>. So think about 150 basis points and then an additional one to two points.
Bleed in in the back half of the year.
Got it got it.
And then.
Just wanted to come back to the Capex and the capacity just wanted to make sure I understood.
In the bedroom that youre, adding capacity is about rates, but the $475 million capex primarily for Mohawk.
And there is additional production.
Total debt you will be spending it wasn't clear to me.
So it's $4 75 in total.
Big piece of that is the final kind of I'll call them outlays for Mohawk Valley, because remember we outlay and then we've got reimbursements.
We've seen about $60 million or so of reimbursement of the $500 million so far in.
In Durham, just remember there are two pieces to this there is the materials factory expansion and then Theres, the Durham fab and the Durham Fab, we've largely completed that execution in terms of bringing up the factory from a from our MOSFET standpoint.
And the investment we're making now that's showing up for the remainder of the year is really around the materials expansion for 200 millimeter and the facility that Greg mentioned earlier.
Got it got it so by clinically for Durham.
What percent of capacity would be Mohawk valley versus getting them and did I hear you say correctly that you would have 50% there.
Clean room space by then to hit the $1 5 billion you feel you have sufficient capacity, but then beyond that you have 50% additional capacity correct. Yes, I think it's a little more than 50% I think we have we will have filled out and we'll have a little less than that.
For the remainder of the Mohawk Valley. So there was a period beyond them, we could fill in more tools into the clean room, and Mohawk Valley and then.
In Durham, Youll, just continue to try and drive as much capacity as we can through we would expect.
Little north of 70% of the device revenue the total device revenue.
Come out of Mohawk Valley, as you get out to that 2024.
Timeframe.
Got it got it and materials.
All materials will be fully out of Durham, So we have.
Materials capacity that we have today and then we are building a new.
Sitting on a new facility here on campus.
As you talked about the prepared remarks that we will.
Support essentially 200 millimeter. So when we're done we'll have is a 150 millimeter small amount of that fab work will be done here in Durham, our materials will be driven through.
150 millimeter that we've got today, but a much larger expansion on 200 millimeter. So we have a pretty significantly sized 200 millimeter supply chain through materials and Durham, and then staffing through valley.
Got it. Thank you very much appreciate the color.
Got it.
Thank you Mr.
Sure Scott.
The next question comes from the line of Colin Rusch with Oppenheimer You May proceed.
Thanks, so much for something Thats in your guidance can you just give us.
A sense of the mix.
Device opportunity number of how much of that is 400 volt devices.
And how much of that is 800 plus.
That 2 million number.
Don't forget we're talking about.
Yes, so from a.
From a automotive perspective, what you're really talking about there I believe it's the <unk>.
<unk> for the car manufacturers bus, it's either a 400 volt bus tour at 800 volt bus and that our devices are actually higher than that to support.
Those kinds of levels of devices. So it can be 750 volt or 200 volt.
Or.
Thereof.
What I would say aside we are winning business. Both at 408 hundred volts, and I would say that a lot of our customers are moving and transitioning from a 400 volt bus to an 800 volt thoughts for automotive applications and thats, primarily because they get better efficiency.
And as.
Do they get way better charging capability as well so.
It's kind of a transition going on.
But we've got wins in both those areas.
Great and then just in terms of the qualification process you guys give us some detail on just.
Starting to.
And to work with the tools, but in terms of full automotive grade.
Obligation on the faster how far along are you guys with that.
And how is that progressing.
Can you talk about your guys' relationship any material ethanol.
That's been selling all sorts of customers.
Yes, so we will begin qualification our internal qualification will be in the first half of the year and when we do that internal qualification that that will pass the automotive qualification requirements that will be doing that those internal qualifications to the automotive.
Customer's requirements and then in the back half of the year the customers will do their own qualification and Thats, where they take.
Qualified devices and put them in there and to their inverters or their equipment.
Run whatever tests, if they need to do on that so thats kind of the process that we'll go through.
Perfect. Thanks, so much guys.
Yeah.
Thank you.
Our Coca Cola.
One quick.
Quick closing remarks.
Uh huh.
Well, thanks, a lot everybody for taking the time to visit with US today, and we look forward to.
Continuing to work with you on November 17th at our Investor Day in New York. Thank you very much and have a good evening.
Okay.
First quarter fiscal year 2020 earnings call.
Okay.
Thank you Paul.
Okay.