Q2 2022 Wolfspeed Inc Earnings Call
A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics.
Today's discussion includes forward looking statements about our business outlook and we may make other forward looking statements during the call such forward looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual.
<unk> results to differ materially, including risks related to the 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 safe and healthy.
I am pleased to report that during the second quarter, we continued to execute and drive our business delivering strong revenue and non-GAAP diluted earnings per share at the high end of our guidance now.
Last November we held an Investor day at the New York Stock Exchange, where we outlined how the team is focused on driving the industry transition from silicon to silicon carbide by expanding our leading our leading market position with innovative new solutions building additional capacity in New York and North Carolina.
Lineup to support what we see as a steepening demand for Silicon carbide solutions.
Growing our opportunity pipeline and converting two design ins at a very robust pace.
And finally building out our bench of semiconductor leadership expertise to help us optimize operations and achieve our long term growth objectives.
Our strong results this quarter clearly demonstrate the progress, we're making and the momentum we are building to support the multi decade growth opportunity ahead of us I'll now turn it over to Neil who will provide an overview of our financial results for the second quarter and an outlook for the third quarter of fiscal 2000.
22 Neal.
Thank you, Greg and good afternoon, everyone.
We delivered solid results during the second quarter as we continued to see strong demand for our silicon carbide solutions revenue for the second quarter of fiscal 2022 was $173 $1 million at the high end of our guidance range, representing an increase of 11% sequentially and 36% year over year.
Our non-GAAP net loss was $18 6 million or <unk> 16 per diluted share also at the top end of our range.
Our second quarter non-GAAP earnings excludes $78 1 million of expense net of tax or <unk> 67 per diluted share for noncash stock based compensation acquired intangibles amortization accretion on our convertible notes project transformation and transaction costs.
Three optimization startup costs.
On debt extinguishment and other items outlined in today's earnings release.
Looking at second quarter performance, we delivered our sixth consecutive quarter of sequential growth.
Continued to see strong demand for our power device solutions, resulting in revenue growth of approximately 37% over the prior quarter and growth of more than 100% over the prior year as we saw significant growth in both direct and distribution channel customers.
On the RF device front, we continue to see solid demand from our <unk> and aerospace and defense perspective, which.
Which increased over the prior year, but was relatively flat over the prior quarter as we continued to increase capacity from a materials perspective demand for 150 millimeter silicon carbide substrates remains very strong. This resulted in year over year growth, but roughly flat versus prior quarter as we continued to increase capacity and better match supply with demand.
Second quarter non-GAAP gross margin was 35, 4% compared to 33, 5% last quarter.
190 basis point improvement was driven by improved output cost and yields from our Durham, fab and Malaysia, subcontractor and lower depreciation expense, resulting from the previously announced change in useful lives of certain assets.
Offset by the higher device product revenue mix at lower profitability.
As Greg mentioned earlier, adding to our management team with proven semiconductor leadership with <unk>.
Critical factor to our future success and the term fab team now led by Mr. GUL has made solid progress in a relatively short amount of time already contributing to positive results.
In addition, we recently added Joe <unk>, who has more than 20 years of semiconductor manufacturing experience to lead our global backend operations, including oversight of our subcontractor in Malaysia.
Looking ahead, we expect continued operational improvements in our Durham fab.
Laser subcontractor will have a positive impact on gross margin and capacity for the remainder of the year.
Looking at our consolidated results non-GAAP operating expenses for Q2 were $86 6 million.
Our non-GAAP tax rate was 27% to.
The increase in our operating expenses was largely due to R&D, including investment in our 200 millimeter efforts and hiring to support our sales and marketing activities.
For the second quarter days sales outstanding was 48 days and inventory days on hand was 154 days cash generated from operations was negative $32 million and capital expenditures were $144 million, resulting in free cash flow of negative $176 million.
We currently have approximately $700 million of cash and liquidity on hand to support our current plans. Additionally in December we completed the redemption of our 2023 notes, leaving.
Leaving us with convertible debt with a face value of $575 million we.
We believe this transaction better positions us to capitalize on increasing demand by strengthening the balance sheet, increasing optionality and preserving cash during our peak investment period.
We will continue to be opportunistic from a capital market standpoint to ensure we have the flexibility to invest as we see fit to capitalize on our market leading position.
And support continued growth.
During the quarter, we incurred startup costs, primarily related to Mohawk Valley.
Approximately $11 million.
As we've discussed previously we expect a total of $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 of fab.
It provided a non-GAAP adjustment for the startup costs as well as a reconciliation table in our earnings release.
We are continuing to experience a much steeper demand curve from our customers for silicon carbide products than we had initially anticipated.
This has led to supply constraints for some customer orders will not be fulfilled this fiscal year and channel inventory levels will remain low until we ramp production in our Mohawk Valley Fab.
We are confident that we will be able to meet this demand once Mohawk valley is up and running but in the meantime, we continue to accelerate capex capacity investments improve and improve output and our Durham facilities.
We are anticipating net capital expenditures of approximately $475 million this year stepping down in the back half of 'twenty two as you receive more reimbursements for the Mohawk Valley construction.
Mohawk Valley, we have more than 60 tools in place are currently testing equipment and we expect to begin running wafers later this quarter.
While we are encouraged with our progress to date. It is important to remember we don't expect to realize any meaningful revenue from the facility until the second half of fiscal 2023.
And the third quarter of fiscal 2022, we are targeting revenue in a range of $185 million to $195 million.
We expect revenue to be driven by growth across all areas of the business led by power and improved output from RF and materials.
Our Q3 non-GAAP gross margin is expected to be in the range of 35% to 37%.
As a reminder, the key to our gross margin transition for the mid 30% to 50% in 2024 is largely based on three elements.
<unk> optimizing Durham transitioning from 150 millimeter for 200 millimeter wafers and driving revenue through Mohawk Valley.
We're on track with all three elements and anticipate modest continued improvement in gross margin over time.
We're targeting non-GAAP operating expenses of 88% to 89 million for the third quarter.
We anticipate operating expenses will continue to slowly increase over time as we continue to invest in R&D and sales and marketing resources, but expect that it will become a smaller percentage of revenue as we enter the middle of the decade.
That being said you're also continuing to identify areas across the business to reduce costs and improve productivity as we scale, our global operations to better support our customers. For example, you'll be opening global capability Center in Belfast, Northern Ireland and partnership with the Northern Ireland government.
This facility will operate as a shared services hub for both speeds it organization, helping drive critical innovation and expansion of global digital capabilities.
We target Q3, non-GAAP operating loss to be between $23 million to $18 billion and non operating net loss to be approximately $1 million.
Expect our non-GAAP tax amount to a benefit of approximately $4 million.
We're targeting Q3, non-GAAP net loss to be between $20 million to $50 million or a loss of <unk> 16 to <unk> 12 per diluted share.
Our non-GAAP EPS target excludes acquired intangibles amortization non cash stock based compensation prior transformation and transaction costs factory optimization restructuring and startup costs and other items our.
Our Q3 targets are based on several factors that could vary greatly including the situation with COVID-19, overall demand product mix back.
<unk> productivity and the competitive environment with that I will now turn the discussion back to Gregg.
Thanks, Neil we are continuing our journey to transition in the industry from silicon to Silicon carbide.
And I'm very excited for what's to come as we begin to ramp the Mohawk Valley Fab.
Our power business continues to see increasingly robust demand from the automotive market and we're also encouraged by rising demand across a number of industrial and energy customers.
Our device opportunity pipeline continues to grow and is now well above 20 billion underscoring the enormous demand we're seeing across all end markets.
The pipeline also reflects more than 8700 projects and our team continues to identify new opportunities at a rapid pace.
More importantly, the sales team continues to convert design ends at a high rate across a wide range of applications and this includes things like personal watercraft and snowmobiles.
Defense applications trains EV charging.
<unk> generator, and then electric vertical takeoff and landing aircraft.
As a result, we secured a record one $6 billion of design ins last quarter, which is an amazing accomplishment from the hard work of our sales team product groups and our channel partners.
Our design in total for the first half of fiscal 'twenty one is.
$2 $1 billion a.
A 70% increase from the same period, a year ago and well above our original plan for the first half of this year.
At this pace, we are on a trajectory to significantly exceed our design in total from fiscal 2021.
This positive momentum is a direct result of customers adopting silicon carbide at a faster rate than we had originally anticipated and is creating a stronger tailwind for our long term revenue outlook than we showed at our Investor day back in November .
To support our rapid growth. It is critical that we continue to invest in people.
We have attracted senior talent from a variety of exceptional companies and have demonstrated a tremendous ability to bring in people from the outside with substantial amounts of automotive experience or semiconductor wafer fab experience.
The opportunity to join will speed as we drive the industry transition to silicon carbide is exciting and we're taking advantage of this excitement to attract some of the industry's finest leaders and innovators earlier.
Earlier, Neil highlighted the impact of Missy Cingal is having on our Durham operations and that show a royal has joined <unk> to oversee our backend operations. Joe has 20 years of global semiconductor operations and leadership experience is already making a big impact here, we'll see.
As we focus on executing across our business. Our strategy is further supported by developments in the broader market.
In early December the Biden administration released an ambitious federal strategy to build a 5 million charging stations for electric vehicles across the country.
The $1 trillion infrastructure law authorizes a nationwide network of charging stations and set aside $5 billion for states to build them.
We are continuing to see automakers to make big commitments to ramp their electric vehicle efforts.
For example, Jim made several announcements.
Yes regarding new evs, including the Silverado and the equinox and that they have thousands of orders for its bright dropped electric work vans.
In addition, Toyota announced it would make $3 5 million Evs a year by 2030, citing the November climate summit in Glasgow, Scotland, and the Bidens administrative executive quarter aiming to increase EV sales.
There is tremendous momentum in the marketplace and we are well positioned to create a global semiconductor powerhouse here it will be focused on silicon carbide.
We will speed as a pure play for silicon carbide. The game changing technology that is beginning to transform the semiconductor industry.
We have invested heavily not only in our products, but in expanding our capacity and the talent needed to run it.
The expected return on these investments is compelling and we will continue to invest in both capacity and talent to it.
Sure we meet the Steepening demand from our customers.
We're winning business at a very good pace and I remain excited about the opportunities ahead, and I am confident in our strategy and our path forward and with that we'll turn it back over to the operator, and we can begin our Q&A session.
Thank you.
If you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Please ensure your devices, Amit likely and we ask that you limit yourself to one question and one follow up.
Our first question today comes from Guy might be of Wells Fargo.
Gary Your line is open.
Hey, guys. Thanks for taking my question.
Congratulations on the progress being made.
One or two.
Really about what has changed since the analyst day, a little over two months ago, and specifically with respect to.
The $2 billion increase in the pipeline and which seems to be a pretty good design in figure for the quarter I'm curious specifically on that design and metric how diverse the.
The revenue pipeline or the revenue build.
Does there.
The.
Pipeline increase in the.
Design ins that we got.
Represent while the pipeline increase with thousands of different customers. So it's quite.
Quite diverse in fact, I think we said 8700, so quite diverse there and basically the design in number that we just nailed for this past quarter.
The fact that the first half of this year is 70% up from where we were.
Just a year ago.
Is what's really creating those those tailwind that we talked about and really if you go back to the.
The analyst day, we were projecting a $2 $1 billion of total.
Revenue at the company level, and one point roughly $1 $4 billion of device revenue.
Device revenue, where we're seeing the momentum.
And what I would say is there are three things that are that are really kind of driving all of this.
The <unk>.
Adoption rate of electric vehicles is well ahead of plan in many people are seeing that the adoption of silicon carbide.
Inside both Evs and the industrial markets.
Well above any expectation we had.
And then finally our win rate.
And.
And this business is actually ahead of our plan as well and so I think we combine these three things.
Maybe I would describe it.
And <unk> been slightly different not really just tailwind but real.
Pretty significant upward pressure on those 26 numbers so.
Obviously, a good thing we've got pretty substantial growth in the opportunity pipeline and as I've mentioned.
In the prepared remarks, our team is doing a fantastic job of winning in this market. So overall market size.
It's definitely heading in the right direction.
I appreciate that color Greg.
So up I want to ask about.
Sort of the trajectory of the revenue before Mohawk volume ramp in the second half of fiscal year 'twenty three.
Paraphrasing that correctly.
You are growing your revenue are expected to grow double digit percent for the second consecutive quarter.
And I'm wondering just based on the manufacturing efficiencies youre getting out of the Durham, North Carolina and additional capacity being brought on there can you continue to make those sales.
<unk> <unk>.
Double digit percent sequential revenue strides and as well how should we think about the margin gains.
To be.
To be gained from just more efficiencies out of Durham.
Thanks, Gary This is Neil so look as Greg said overall, we're seeing very strong demand across the business as it kind of indicate.
Our revenue here in the shorter term is really more of a function of supply than it is demand.
Still even with taking the revenue numbers up we're still going to have north of $100 million of unfulfilled demand. This year. So as you kind of point out the revenue is going to be just a function of the.
Well, we can drive productivity through kind of the current footprint that we have and with that if you look at just in the last quarter. The power numbers grew 37% power devices grew 37% quarter over quarter, and we're up over 100% year over year and I think you can think of this kind of growth in capacity that we're seeing now really as a direct result of the.
The new operations leadership, just making an impact.
Since we converted the Durham fab over to primarily a power device factory.
Saw record output.
And that factory and we're also seeing some benefits from the output in Malaysia, and we're continuing to see that kind of pay off. So as you look forward into <unk> I would say, it's going to be a lot of the same as <unk>.
We're going to see more productivity and more power device kind of ramp up as we.
Welcome to <unk>, even if you look at the midpoint guide in <unk> I think.
The power device revenue will be up somewhere around 100% again year over year as you move to <unk>. So I think the team is making a lot a lot of progress in terms of what we can do in the fab and I think that we're kind of well in line to kind of meet the trajectory in terms of revenue growth.
Mohawk Valley kind of fully comes online.
The next question in the queue today comes from Jed <unk> of Canaccord Genuity. Your line is open.
Hey, Thanks for taking my questions and.
Great job and nice to see that.
$2 $1 billion design and number.
So.
Greg I guess first question.
With that level I'm guessing you're sort of bumping up.
Again.
Capacity.
Limitations as you look out so I'm just wondering how.
How do you assess ways concerns.
With potential customers that.
But youll have that.
Capacity and does this change at all.
The phased ramp of Mohawk Valley.
We're in there I think it was like 20%.
Our 25% phase over a period of time are you able to pull that forward at all I do have a follow up.
Yes, thanks, Thanks Jed.
What I would tell you is we are.
As you know we are building the worlds largest silicon carbide wafer fab.
<unk> first and only 200 millimeter wafer fab so.
It's not lost on the customers that we have an enormous amount of capacity coming online and what's also not lost on us that we began a construction year or two years ago, and we will be running wafers.
And that factory doing initial runs in.
Eight or nine weeks or so so just weeks away from.
Running product in that facility, we've had a number of customers actually visit the facility.
So I think they see a pretty tremendous light at the end of the tunnel in terms of.
As we as we ramp this factory.
And just as a little bit of a backdrop so.
No.
The design wins, we win right now or even last quarter those are going to ramp in three or four years.
Like that so by that time, we will be in very full and very high production out of that Mohawk Valley Fab.
With all the pressure right now this upward pressure on the demand for through 2006, we're obviously thinking through and I'll have Neil to talk a little bit more about the detail, but thinking through.
Accelerating the phased ramp of that facility.
So as you think about the 2020 for kind of one 5 billion $1 billion revenue plan.
We've talked about leveraging.
50% or a little bit more of the four wall of capacity and Mohawk valley kind of over that timeframe. So the demand curve as that continues to steepen I'm just going to see a lot of opportunity to move that up but we just want to be very careful with that number I don't think were ready to change that right now Jed.
Jed just as we want to bring that factory up methodically and I'm, bringing up in a way that ensures we've got the capability and quality that we all expect out of that factory. So I'd say, there's potential will be capacity constrained as we move through that period I think as you look out beyond that into like 2026, and even beyond that we will start to lever.
That second half of the four wall capacity in Mohawk Valley now, we won't be fully utilized from a four wall perspective in that timeframe. When we laid out kind of that $2 1 billion.
Revenue target plan.
But that is something that is clearly the factory has opportunity to to move above that and we could we could take the volume beyond that expand faster between 2426, and that's certainly something that we're looking at.
And continue to manage as we see the demand curve continue to steepen.
Got it.
For my for my follow up I wanted to shift gears a little bit.
In the non auto related and.
So.
A lot of the products are optimized around 650 volt and 1200 volts.
For auto but.
And while a lot of the benefits in terms of.
Reducing the impedance.
<unk> are applicable to other markets like solar.
You name it.
Trains et cetera, any high voltage.
Optimization from the best of my knowledge Hasnt necessarily been developed so for example, a solar inverter.
Youre not seeing a lot of off the shelf 'twenty 200.
Bolt type products. So I guess my question to you Greg is if I look at your eight inch platform.
Being the only one on 200 millimeters.
Larger area di should be.
<unk> your lead over the competition and quite frankly changed a lot of these market. So my question to you is how are you.
Without giving away sort of whats coming from.
Product perspective, how are you thinking about optimization for some of these other markets.
But don't get as much attention as is auto.
Which ed.
Several different vectors here first off we obviously have a product group that has a whole.
Our strategy in <unk>.
The product portfolio that they currently have new products in the pipeline new generations of products.
<unk>.
Flavors and so forth. So it is a tremendous amount of.
Effort going on there and a tremendous amount of R&D. We also have <unk>.
<unk> efforts as Youre, well aware going on in terms of.
The material side of things as well and then finally, what I would tell you it has been.
Just eye opening to me.
<unk>.
The adoption rate of our current portfolio.
<unk> non automotive type applications.
Is really really solid.
And we are able to do that through the partnership we have with arrow, because they're able to take these products and get them into customers' hands.
They've got a quite an extensive application engineering team and help customers.
Develop these products.
If you would've asked me a year ago, or we're going to wind up personal watercraft or something like that.
It wouldn't be on my list, but here we are.
Today with those kinds of design ins and so I think the the.
Our partnership with Arrow and the access to the channel that they bring are the access that their channel brings.
Has.
As shown all of these industrial customers. There is applicable 80 of our current portfolio to what they would like to do and of course theyre getting glimpses of.
Some of the things that Jay and his team are working on from a power.
New product portfolio as well so I'm super encouraged by that I think the as I mentioned earlier, the adoption of silicon carbide in bolt Evs and the industrial market is just happening at a substantially higher pace than we would have.
We would have predicted and thats.
That's positive news for us.
Our next question today comes from Amit <unk> of Jpmorgan. Please go ahead.
Great. Thank you Hi, Greg Hi, Thanks for taking my question so.
Real quick one just wanted to see if you can.
Sure a bit more color about the.
One 1 billion of design wins, particularly the acceleration that you saw this quarter and the design wins.
If you can break that down by you build applications or use cases like I'm. Just wondering is it like you had a certain obligations and you've found.
The design in with more customers in the same vertical or is it more about new applications really driving those exploration design wins, if you can shed some color on that.
The lion's share of that is going to be.
The inverters in electric vehicles, it is going to be something around 75% of that number.
Which crosses a lot of different customers. So a lot of.
Oems tier ones et cetera, so there's pretty good diversification of that but it is in the vertical of the electric.
Vehicle outside of that pretty good traction as well with RF and with the industrial markets and I mentioned some of those different.
Those different end uses.
Across that though like I said its 8700 different projects. So there is there is lots of small ones associated with that but.
For the first half of this year at two one.
$1 billion of designer in pretty heavily.
Automotive related.
<unk>.
And then like I said, industrial and RF wins as well.
Okay got it and just a quick follow up and maybe this is more for Neil.
If you can just help me to the gross margin bridge that at 35 four.
Believe based on what you've disclosed the depreciation itself change there should be helping you by about 100 basis points or so but maybe if you can correct me if I'm wrong. So I am just trying to think about the gross margin bridge given that you should have some organic EBITDA margins on the higher revenue as well so the puts and takes if you can please.
Sure, Yes, so as you look at the <unk> results. We saw about 190 basis point improvement in gross margin, which was as you pointed out is at the high end of the.
Our guidance range and that was driven by a couple of things and first and foremost underlying this we're seeing a better performance and better execution.
In our Durham, fab and as well as at our Malaysia subcontractor.
Similar to the revenue, it's really a direct result, not only of the investments that we're making.
But of the leadership that we've put in there what's offsetting that a bit as we grow is that the device business.
Of a higher cost base is providing kind of a negative product mix. So you saw the power device business growing extremely fast 37% quarter over quarter, 100% year over year, So is that bleeds and faster.
Some margin headwind as you look at that now the good news is that the profitability of the device business also.
Improved significantly versus last quarter.
With the better factory performance. So over time, we would expect that that kind of mix impact to dissipate, but right now as we have that kind of cost footprint differential will see that kind of plan as we go. So those are kind of the two I'd say operational factors that are in there and then from a.
Depreciation benefit standpoint, and.
<unk> I think we gave our guidance last quarter.
One to two points. It was at the higher end of that range on a higher revenue and then as you look out into Q3, you can think about it about a half a point to point and a half range and then I think of it being largely behind us after that and then again as you look out into <unk>.
We should see some additional benefit but largely the same dynamics playing out we anticipate seeing better performance of the fab.
Backend offset by some of that some of that product mix and then even as you move out into Q4, we should see the.
The margins flattish, maybe even moving up from 36%.
Get into that Q4 timeframe.
From that right now.
Our next question comes from harsh Kumar of Piper Sandler.
Your line is open.
Yeah, Hey, guys first of all congratulations on strong results guide.
Greg I had a question for you you mentioned something interesting you said that youll starting wafers herein.
And I think the March quarter, I, just wanted to understand mechanically.
Timing dynamics.
Can you start as you look to start.
In the March quarter, the running the wafer is how long does it take do you think for you to be quantified is the the main question is just a commercial first few wafers out still looking at June July kind of timeframe. If you can just provide some color around that and we do have a follow up.
Yes, so maybe I'll hit the beginning and Neil can give a little bit more additional color. So just to remind everybody.
This wafer fab, where the field of <unk> two years ago.
And we're going to be running wafers here pretty soon we've done a really good job of.
Running the pilot line.
And the SUNY Albany.
Facility.
And Neil will give a little bit more color on how we've transitioned that so we're feeling pretty confident about what we're able to do out of the.
Out of the Mohawk Valley Fab.
We have material staged in that fab today.
And.
As I've mentioned, we will be running that and really I think it was eight weeks nine weeks something like that so sometime this quarter.
You can give us a little bit more color on how the process that goes from yes, yes, so harsh no real change from what we've talked about.
Greg mentioned, we'll start the qualification lines this quarter and then we will quickly transition to.
From internal to customer qualifications and shortly after that and I thought it might be good is that I break that down a little bit in terms of how we're how we're thinking about that so right. Now for instance, we're testing equipment and in many cases that has wafers loaded into the tools. So we expect to be running those full qualification lots as we mentioned later this quarter.
And if that goes well transition that right the customers very quickly.
As we speak with customers.
There is a very strong demand to get products coming out of this factory and getting them out very quickly. So we've set up a line in a way where.
We've leveraged that pilot line, Greg talked about the stage inventory at various stages. So when we start the line we can actually started very full.
And then shortly after that we anticipate.
Putting our product in the hands of our customers.
And then we will just continue that process with more and more customers throughout the year. So.
Right now our anticipation is that that will happen throughout the year, we will see some commercial revenue, but the larger amount of revenue that was kind of move that move the needle so to speak what happened in the second half of the fiscal year.
You get into second half 'twenty three so that's kind of the plan as it works out right now.
Understood very helpful guys.
You touched on my next question a little bit in one of the previous questions.
Thank you I was wanting to understand.
Given the steepening of the demand curve.
Frame to get to an acceptable utilization of the fab or even full utilization of the fab and you mentioned something interesting you talked about the four wall capacity, but that's different from the installed tool capacity I wanted to understand how long would it take for you given the demand dynamics youre seeing to be able to get.
Utilization that youll consider acceptable.
Breakeven cash breakeven profitability whatever metrics you use.
And then when you talk about firewall capacity and what I understand.
They must be room for additional lines to go in and Thats. What you are implying by four wall capacity I suspect.
Yes.
Harsha I think one of the thing about the factory, though is when you think about what's acceptable utilization in my mind, it's getting towards that first 50%. If we can bring that up I think we're as we bring that up and probably not even at full utilization of the first 50% I think we're in pretty good shape in terms of the.
In terms of the profitability and the capability is going to be bringing to us.
Given the Steepening demand I don't really see that as being really being an issue at this point.
You get to manage towards that so I think it's really more about your second piece of your second question about how much capacity, we bring on and how quickly can we do that and looking at it now as I said earlier, we just got to be very careful with how we bring up the factory and that first set of that first kind of four wall capacity at the brand new.
First silicon carbide 200 millimeter silicon carbide automated factory. So we're in a new factory and a new technology. So we want to be careful with that however, you get from 2426 I think there is some optionality there and if you think about in terms of bringing the revenue up and bring the capacity up in terms of timeline to think about it Romney youre thinking about a year or so to bring up a new a new line in our fab might.
Be a little bit longer than that right now just because of supply chain considerations, but I will tell you. We've been very disciplined about how we have ordered capacity for this factory out ahead of the Covid display issues now, but we continue to monitor monitor this very closely and make orders as we bring up the bring up the factory. So I think we've left ourselves some flexibility in terms of.
We demanded this from a timing standpoint.
The next question today comes from Craig Irwin of Roth Capital Partners. Your line is open.
Hi, good evening and thank you for taking my questions.
So I guess it does touch on questions that have been asked before but if you keep.
Putting up.
Bookings like you have this quarter design ins.
Youre going to need a second facility pretty quickly.
Can you maybe talk a little bit about what the considerations would be.
About.
Plans for future capital investment and would you be more likely to.
Expanded at an existing site, maybe in North Carolina, or New York.
Or.
Would you potentially consider other locations for expansion over the next couple of years.
Craig This is Neil first of all thanks for the question and I think we're talking about a steepening demand curve here.
Clearly.
At the levels of what we're talking about that's certainly something we're considering so if you go even out beyond that you're going to bring up capacity.
Capacity in Mohawk Valley faster, you've got to think about looking out beyond 'twenty, six which we do regularly and we believe that the demand for silicon carbide will continue out into the well into the second half of the decade, and I think the entire industry is going to require capacity out in that timeframe.
And for Us that would mean, we yes, we would need a second path.
In addition to Mohawk Valley, and that's something that we are continuing to evaluate from a geography standpoint.
I think those things are things that we just continue to think about and evaluate over time, but we would be open to looking at various.
Options there as it relates to ensuring that we are.
Close to our customers and working with them on ensuring a surety of supply on those types of things. So these are things that we're evaluating and monitoring but certainly want to have the best options to create the best opportunity for serving our customers.
Okay and then the next question I guess.
Arent vacation right.
You talked about having the tools in place for production.
Mohawk Valley.
Sure.
There's not a lot of it.
B reactors out there with eight inch capacity for silicon carbide deposition.
Can you maybe talk about.
You know broadly is this something similar to what you did years ago and the LCD industry.
Or are these potentially commercially sourced units.
And then would you expect this to maybe be a competitive advantage for you over the next number of years.
Sure similar to what it wasn't the early days of Leds, but.
Given that you already have a huge advantage in wafers.
Reactors would be would be an exciting and exciting addition to the technology moat.
Well <unk> as part of the one of the key.
Advantages, we have we're pretty good at it.
And what we're focused on now is really building the.
The entire supply chain for 200 millimeter.
That's a lot of heavy lifting that's including the furnaces to grow their crystals, we've got really good.
<unk> got a really good jump there.
Reactors.
And working through that whole supply chain and so I'd say, Craig we are pretty focused on getting all of those bits and pieces.
Nail down because the steepening demand curve is going to require.
A pretty sizeable.
Uptick in terms of.
In terms of how we have that entire supply chain going and I think it's really that combination that's going to give us a pretty unique advantage and.
One of my customers set.
I really like the fact that we are on 200 millimeter because obviously there is a good cost advantage on that but they really loved it because the.
<unk> per unit of time.
Is substantially higher.
Because it basically takes the same amount of time to run a 200 millimeter wafer than it does the 150 millimeter wafer and so what that translates to them is if they see demand for their product take off.
And you are hearing about.
Electric vehicles, selling out and I think I heard one of them filled out and top down like 25 minutes.
To put it online and filled out in 25 minutes.
I see that the supply chain that we're building out at 200 millimeters.
It's going to be able to react a lot stronger than a lot faster because it'll be roughly 70% more output.
For the same amount of time in the wafer fab. So lot of those things are going to be a good competitive advantage and we're working really hard to keep it that way.
The next question in the queue comes from Karl Ackerman of Cowen <unk> Company.
Your line is open.
Yes. Thank you.
Two questions from me as well please.
Neil or Greg I guess of the automotive design wins that you won this quarter is there a way to distinguish the number of designs, where you are the primary supplier rather than secondary that may augur, well for seeing those Pos turn into design wins.
And as you address that question May you also discuss whether there is a growing mix of 800 volt inverter designs in these automotive design wins.
Follow up.
Yes, I can't give you the exact number but I would say the vast majority of the things that are design ins for us where.
Were the primary source.
I don't know exactly what that means but in fact.
I would say off the top of my head I couldn't name too many.
Where we werent.
The primary source, so it's going to be the vast majority of that is going to be where the primary source. So I feel very very good about that and then give me in terms of.
800 volt, so I think we're seeing two things happen.
One is we're seeing a broader adoption of 800 volts.
As people are seeing the advantages of 800 volt both from a.
A.
Charging time hang on one SEC.
Thank you sorry about that.
Charging time perspective, as well as efficiency at the at the converter level. So we're seeing.
<unk> adoption of 800 volts, but we're also seeing.
Excuse me.
We're just seeing so let me just yes.
And here Carl So we are seeing a pretty broad adoption at the 800 volt level I think a lot of customers are telling us they are seeing.
The transition from 400, maybe some 400 training some of the earlier models that they are in the design and previously but anything really new that's coming out is predominantly 800 volts.
Understood I appreciate that for my follow up.
Does inventory moderate over the next quarter or two.
Presumably 150 millimeter wafer sales.
Improve as your customer service this step function higher in silicon carbide demand, how should we think about that.
Yes in terms of image thanks, Carl in terms of inventory levels.
I would see the days of inventory coming down, but the growth rates are pretty high. So I would expect working cap total working capital including inventory to increase.
As time goes on just naturally service a bigger business, but.
But I think we will get more efficient as we execute that and I think by the way.
We will see there is.
Better execution in the fab that we talked about earlier.
And that we're seeing improved cycle times and yields on all of those things that will drop.
The whip in the factories, and we should see some better efficiency, but I think overall over time.
Working capital pick up you can see some drain on inventory between quarters, but I think we're going to continue to need pretty significant inventory balances to service the growth in our customers as we continue to ramp up the business.
Our next question comes from Pierre <unk> of New Street Research. Your line is open.
Thanks for taking my questions has been how it's stunning them. So.
So.
I had a question on China and the competition that you're seeing that so of course on one hand, the manufacturing process. The citizens carbide is extremely difficult to perfect.
But then on the other hand, the Chinese competitors are announcing billions of dollars in and invest into silicon carbide so lumpy.
Sitting from a competitive standpoint, and there are Chinese companies coming in.
Coming up for bids in either the substrate or the device market.
And then just secondly related to that.
Specced in your 2426 guidance for revenues from China.
Yes. Thanks for the question I think I got my voice back is that the team and their own here through about 10 bottles of water at me so.
What I would say is first off we see.
This is an enormous growth that's happening in the industry right now.
And.
Whenever that happens it attracts people who want to get into the market. So it is not lost on us that.
There's going to be a lot of folks who want to get into the silicon carbide business. There are some.
That includes a number of different companies in China.
We pay attention to all the announcements that are happening right now.
And all the investments and so forth and we don't sit back and relax about that we are.
Intensively improving our own operations lowering cost driving productivity and all of that kind of stuff now that being said.
This business has some pretty substantial barriers to entry.
That.
That don't bode well for the normal.
<unk>.
Runoff play if you will of.
How China gets into.
Market first.
First off there is not a.
<unk>.
A whole supply or even an industry that supplies the silicon carbide growth furnaces.
And the industry so.
You have to build your furnaces yourself and to do that you need to know how so.
Typically.
Capex would be thrown out something like this from a China perspective, and there is really no capex.
Well there might be a lot of capex to throw at it but there's nothing to buy so you have to build your own furnaces and so forth to do that the second thing is is that.
Sometimes they throw a lot of opex at it and go after hiring.
Tons of people to go put together a plan.
Ply of humans that understand in.
In detail.
How to do Silicon carbide is relatively small and so.
There are lots of barriers to entry in this technology and the typical play is just.
It's just difficult.
For that to happen.
And so we don't take it lightly that we're going to have a lot of competition we.
Act very paranoid about everything and the best thing. We can do is continue running faster than anybody else.
Yes.
And then I think your second question there was on like percent of revenue and.
Revenue in China.
About that there is a lot of in the shorter term there is a lot of industrial revenue.
Industrial opportunities come out of Asia.
As we've looked out into the plan over 24 and 26. There is a lot of that automotive revenue comes on while we do see a lot of opportunity both in automotive industrial and the region.
Judge that backup excuse me judge that back in the plan and we have about 15% of revenue in that kind of a $1 5 billion out in 'twenty, four and roughly 10% of revenue out in 'twenty six so we've kind of pulled that back a little bit of I think if you look at that.
A bit larger than that.
Our next question comes from Edward Snyder of Charter equity Research. Your line is now open.
Thanks, Thank you very much Greg I'd like to about eight inch for a little bit I know youre launching on that you guys guided to the fact that eight inch is going to have already has higher yields than six inch but given how much think of those wafers have to be eight inch over six inch is the per millimeter.
Cost of eight inch today lower than six inch and if not give up.
What.
Will you launch production with it as it is and what kind of.
Efforts are what kind of progress you think you can make in getting it down or is it just a throughput play because you're going to have like you said, 70% greater capacity for the same.
At the same machines is it just the throughput.
Yes on cost and then I have a follow up.
Thanks, Thanks, Ed Yes, the cost per millimeter square it is not at the same level as.
As 150 millimeter, but we obviously are attacking that.
Pretty much daily here, so we feel real good about where it is and where it can go to.
And obviously, that's something we're going to be working on.
But even with that.
Throughput at the factor as you mentioned the yields and so forth, we're going to we're going to see an enormous advantage maybe Neil you can kind of cover a little bit more of the detail. There, yes, so I think simply speaking.
It normally.
And when you move to 200 millimeter the benefits and the bad and not so much in the substrate substrate costs more but so even while us at a higher cost per millimeter square right now.
In may it may stay that way for some time, well see pretty pretty nice benefits in the fab just from the improved yields cycle times that we've talked about previously and that more than offsets the cost per millimeter square. So in that sense. We are in a very unique position because we do have a fab to feed this into and get those cost benefits and then I think over time it takes several.
But over time, we'll see that crossover point come in then.
It's all built into the plans and I think we'll be in good shape to continue to drive that cost out as we as we have done on 150 millimeter.
Great and then.
Excellent you guidance is excellent.
But the client kind of calls into question your guidance for fiscal year 'twenty four because if we look at any kind of reasonable breakdown I think you've got it before it's about an even split between devices and materials.
Little bit more one way or the other but if you if you put any kind of real.
Numbers on that it looks like.
North Carolina Fab is already running this you will run this year in fiscal 'twenty, two close to $350 million in revenue and I think at one point you had said that maybe the maximum capacity that is closer to 375, I know with Missy there maybe that goes up but given that we're only in fiscal 'twenty two now but fiscal 'twenty four.
If it holds.
1 billion guidance and $1 billion of that being devices.
Mohawk doesn't ramp nearly as quickly.
Anywhere close to what's happening or your guidance is very low relative to where.
Your performance is already especially given the given where devices. So maybe you could maybe walk you through does North Carolina flatten out.
Or.
Given the demand you're seeing now if it keeps growing at this rate and I know youre not going to change guidance at this point, but isn't there a lot of upward pressure on your fiscal 'twenty four targets at this point and then maybe maybe a second question for Greg If I could.
The performance, you're putting up now is really impressive, but most of that especially the upside revenue was industrial and or at this point am I correct.
And given the industrial markets are harder to get their arms around so diversified I mean, Ti said last night that the industrial business was booming.
It sounds like maybe this is growing faster than you anticipated. It may tick up a lot of the capacity you have planned for Mohawk by the time, you get it up into production.
Yeah I'll hit the second part of that and then Neill can go back at the first we definitely are seeing.
A strong growth of our industrial business very nice wins in the industrial business tends to ramp faster than automotive, it's not dramatically faster, but it's definitely faster and so over the next couple of years, we'll be ramping that that very broad base of industrial customers that you referenced the automotive guys that we.
One.
That's typically a four year.
From when you went into when you really start hitting the.
The higher volume production and as you might have a little bit of <unk>.
Introductory volumes before that but yes, no and I feel real good about.
About the traction we've gotten with the industrial business.
Our ability to go after that is largely.
Tied to our great relationship we have with Aero in terms of going after it yes, then in terms of.
The revenue outlook Ed.
I think youre right I think first of all I think our.
Aspirations and what we can do in the <unk>, probably higher now as we're seeing some of the performance.
Over the last several months since we've put new leadership into the factory.
We also expect to see some benefit in the back and in fact at the.
End of the year, we thought maybe a good line of sight to $200 million of revenue in Q4, I would say that as hires by between 200 to 10, just running because we're running the Durham fab better and we're seeing Malaysia, better as you translate that out into.
2024, and you talked about $1 five billions and billions of devices. It certainly does put upward pressure on that I think I think that's what we're seeing not just $22 24 in <unk> and 'twenty six.
That fashion. So we are looking at all those different things, but I will say in terms of the 24 plan and we just wanted to really careful in terms of how we think about bringing up capacity in Mohawk Valley and I think that's one of the gating items. We have certainly if we if things go better than we anticipate there will be some opportunity there clearly from a demand standpoint that demand is going to be there I think it out in that timeframe.
And we will continue to manage the capacity as best we can but we are seeing improved performance in Durham, Thats, correct, and and I think there's certainly more capacity.
Mohawk Valley than what we've got built in that timeframe, but again, we just want to be really careful in terms of how we ramp up that brand new fab.
Et cetera.
Our next question comes from Colin Rusch of Oppenheimer.
Your line is open.
Yes.
Hey, guys. This is Brendan on for Colin first one for me given the strong demand environment can you just speak to maybe how you're adjusting your pricing strategy for silicon carbide.
Sure I'll take that basically are.
Our journey in this whole business over the last four years, it's really been about converting the industry from silicon to silicon carbide.
That's been through new technology.
New product offerings, lower costs, and so forth and the second thing that I would say is the business that we're winning us business.
We commit to long term pricing agreements and things like that so there is really there really has not been any influence at all.
<unk>.
<unk> in terms of what you might be hearing in the silicon industry.
We're just we're keeping we're sticking to our strategy of converting the industry. We obviously tried to sell.
But in terms of the supply demand mismatch.
The impact on pricing.
That's not an area that we're playing around with.
Our last question today comes from Brian Lee of Goldman Sachs. Please go ahead.
Hey, guys. Thanks for squeezing me in I just had one.
I know the power device mix year is growing really fast.
But you've consistently kind of called it out as a margin headwind devices are drilling it sounds like perennial his comments another 100% year on year again into <unk>. So on.
On the margins when does that narrative change where device is at or maybe even above corporate average maybe give us a sense of timeline. There and then ultimately does it get you above corporate average just any any color there would be helpful. I don't have any follow ups. Thanks.
Speaker 1: timeline there and then ultimately does it get to above corporate average? Just any color there would be helpful. I don't have any thoughts. Thanks.
Speaker 2: Thanks, Brian . And I think it's pretty consistent with what we've said before, and I think the big differentiator is going to be running device products, power device products in Mohawk Valley.
Thanks, Brian and I think it's pretty consistent with what we've said before and I think the big differentiator is going to be running running device products power device products and Mohawk Valley and I think when you start changing the footprint that dramatically now clearly we've seen some benefit out of Jerome I think we'll continue to see benefits out of the fab I think the team is making really good progress. So I think some of it may dissipate over.
Speaker 2: And I think when you start changing the footprint that dramatically now clearly we've seen some benefit out of Durham I think we'll continue to see benefits out of the fab
Speaker 2: I think the team's making really good progress, so I think some of it may dissipate over time, but they're really the game changer is going to be moving to mohawk valley where you get the automated factory, you get the 200 millimeter wafer and you get pretty substantial cost advantage. So, I think it'll take it'll take some time before you see that benefit. And then, if you look out over the longer term period, I don't see there from from a device products versus material products type of mix. I don't see that all that much different as you get out into kind of 24 and 26.
Time, but they're really the game changer is going to be moving to Mohawk Valley, where you get the automated factory to get the 200 millimeter wafer and you get pretty substantial cost advantage. So I think it'll take it'll take some time before you see that benefit and then as you look out over the longer term period.
See there from a device products versus material products type of.
Mix I don't see that being all that much different as you get out into kind of 'twenty four and 'twenty six.
Speaker 3: Thank you. I'll now turn back to the management team for closing remarks.
Thank you.
I'll come back to the management team for closing remarks.
Speaker 4: Well, thanks everybody for participating in the call today and your interest in Wolfspeed. And we look forward to updating you in our next earnings call. Thank you.
Well, thanks, everybody for participating in the call today and your interest and we will speed and we look forward to updating you in our next earnings call. Thank you.
Speaker 3: This concludes today's call. Thank you for joining. You may now disconnect your line.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yes.