Q4 2022 Wolfspeed Inc Earnings Call
We're leading to the construction and operations of this wafer fab.
Since the opening we've continued to run initial lots through the fab and remain on track to complete initial qualifications and ship products by the end of this fiscal year.
We've also had several large customers visit the site prior to signing agreements with us.
Which is translating into stronger demand than we originally anticipated.
As a result, we now have initiated work to realize the remaining portion of the fab.
We are also expanding the materials capacity to support the increased production planned in Mohawk Valley.
We believe this is the best course of action to stay ahead of what we see as a steepening demand for silicon carbide.
Second our hard work that continues in devices and materials led to a strong full year 2022 result.
Annual revenues grew 42% year over year to $746 million, a significant acceleration of our growth compared to 2021.
We also made progress in improving our gross margin with full year non-GAAP gross margin coming in at 35, 6%, a 140 basis point improvement over the previous year.
Lastly, we continue to see a clear path for will speak to play an even bigger role as the world moves to greener energy sources and more efficient use of that energy.
High voltage applications continue to migrate from traditional silicon to silicon carbide.
Our device opportunity pipeline is evidence of this transition.
The opportunity pipeline for Silicon carbide has more than doubled to <unk> $35 billion in a single year.
Our fiscal 'twenty, two design ins totaled $6 4 billion.
Representing a three <unk> increase from our fiscal 2020 design in total and a 119% increase compared to the prior year.
We had another record setting design and performance of $2 $6 billion in fiscal Q4.
This included design ins across automotive Oems tier.
Tier one suppliers.
And the industrial and energy customers and we are looking forward to working with our new and existing customers in these markets.
We now have secured approximately $11 billion of design ends in just the last 12 quarters.
The market leader in Silicon Carbide technology, we are encouraged and excited by the growth in this market.
I'll now turn it over to Neil who will provide an overview of our financial results and our outlook for the first quarter of fiscal 2023 Neil.
Thanks, Greg and good afternoon, everyone.
I'll start by providing an overview of the fourth quarter.
We closed the year on a strong note having generated revenue of $229 million in the fiscal fourth quarter of 2022.
Which represented 22% sequential improvement.
<unk> to the $188 million in the third quarter of this year and growth of 57% from the prior year period.
This is well above our midpoint guidance for the quarter and was driven by continued improvement in the Durham device that backend operations.
The expected multimillion dollar impact of the COVID-19, shutdowns in China ease of or more than offset by the improvements in the fab and backend operations.
We expect this improved operating execution from a device perspective to continue moving forward.
Moving through the P&L non-GAAP gross margin in the fourth quarter was 36, 5% compared to 36, 3% last quarter and 32, 2% in the prior year period, representing a 430 basis point improvement year over year.
This performance improvement was driven by progress on the Durham fab yields and cycle times.
While there is still more work to be done our operations team is encouraged by the progress we've seen so far.
This also resulted in better revenue output in profitability in power devices, which was partially offset by some product mix shifts between devices and materials.
We expect to continue to ramp our gross margin overtime as a shift in device production from Durham for Mohawk Valley accelerates and we start to realize the benefits of our automated 200 millimeter wafer fab.
From a revenue perspective, we continued to see strong demand across the business and the opportunity to grow revenue going forward is directly linked to available capacity.
We exited fiscal year 2022, with more than $100 million of unfulfilled demand for power devices and expect this number to increase moving forward as we anticipate being capacity constrained for the foreseeable future.
Similarly from a materials perspective, we remain capacity constrained as demand for our 150 millimeter silicon carbide substrates continues to be very strong, resulting in meaningful year over year and quarter over quarter growth in.
In addition, our EFT resolve the year over year in line with our expectations.
All of these dynamics led to much improved profitability and as a result, we generated adjusted earnings per share of negative <unk> <unk> in the fiscal fourth quarter compared to a negative 12, a quarter ago and negative 23 and.
In the same period last year.
Notably adjusted EPS. This quarter was favorably impacted by approximately <unk> of non repeatable events on the other income and tax lines.
<unk> these non repeatable items from our earnings our earnings per share would have been at an approximately six loss per share during the quarter.
For fiscal 2022 revenue was $746 million, representing a 42% increase when compared to fiscal 2021 due to strong growth in our device businesses.
non-GAAP net loss was $59 6 million or <unk> 50 per diluted share.
non-GAAP loss excludes $58 9 million of adjustments net of tax or <unk> 48 per diluted share.
Now before I discuss our guidance, let me provide a quick overview of our balance sheet position.
We ended the quarter with approximately $1 2 billion of cash and liquidity on our balance sheet.
Port our growth plans.
<unk> was 50 days, while inventory days on hand was 137 days, which is 22 days lower than Q3, a direct result of less with the fab. Thanks at better yields and improved cycle times.
Free cash flow during the quarter was negative $86 million comprised of negative $31 million of operating cash flow and $55 million of capital expenditures.
During the quarter, we incurred startup costs, primarily related to Mohawk valley totaling approximately $30 million.
In line with expectations communicated last quarter.
We expect $35 million of startup costs in the first quarter of fiscal 2023, as we continued to ramp of fab.
We expect startup costs to modulate and the subsequent quarters as we shift to commercial production in the second half of fiscal 2023.
The non-GAAP adjustment for these start up costs in the reconciliation table in our earnings release.
Now moving onto our fiscal first quarter outlook, we are targeting revenue in a range of $232 5 million to $247 5 billion.
We expect revenue growth to be driven by continued improvement in our power device execution and strong demand in our materials business for a 150 millimeter silicon carbide substrates, where we also remain capacity constrained.
Our Q1 non-GAAP gross margin is expected to be in the range of 35, 5% to 37, 5% as we expect continued improvements in power device execution to be offset by product mix.
We are also targeting non-GAAP operating expenses of between 93 million to $95 million for the first quarter of fiscal year 2023.
We expect Q1, non-GAAP operating loss to be between $10 million and $2 million and nonoperating net loss to be approximately $1 million.
We also expect approximately a half a million dollars of non-GAAP tax benefit.
Targeting Q1, non-GAAP net loss to be between $10 million and $3 million or a loss of <unk> <unk> per diluted share.
Our non-GAAP EPS target excludes acquired intangibles amortization noncash stock based compensation project transformation and transaction costs factory startup costs gain from arbitration proceedings and other items as outlined in our press release today.
Our Q1 targets are based on several factors that could vary greatly including the situation with COVID-19 overall demand.
Mix factory productivity and the competitive environment.
Given the positive momentum, we're seeing and the progress we've made from all of the accomplishments Greg spoke about earlier, we expect to exit this calendar year on a $1 billion revenue run rate and expect to generate more than $1 billion in revenue in fiscal 2023.
This is a direct result of the upward pressure on revenue, which we're continuing to see in the market and the current pace of design and we've secured in the last several quarters.
As a result, we now believe that the long term revenue outlook for 2026 was between 30% to 40% higher than the $2 1 billion. We shared with you at our Investor day back in November of 2021.
Primarily due to the increased demand for power devices.
To meet this growing demand from a capacity standpoint, we are planning to tool out the rest of Mohawk valley earlier than expected and continue to expand our materials footprint on the Durham campus.
This expansion will require approximately $550 million of net capital expenditures in fiscal 2023.
In addition, we are also planning further expansion of our materials and device capacity.
We're evaluating multiple avenues to finance these capital investments, including through upfront customer payments capital markets debt government project funding subsidies and others, all while keeping a keen eye on our cost of capital and dilution for our current stockholders.
The $550 million of net Capex in 2023 is not inclusive of these additional items and we will give further updates on both our capex investment and financing plans when we have more visibility to the nature and timing of these expansions.
With that I'll pass it back to Greg.
Well, thanks, Neil when I reflect on all we've accomplished will speed this year.
Not only am I are extremely proud of what our team has accomplished I'm also very excited about how well positioned we are to capture a larger portion of the growing silicon carbide marketplace.
We will speed is leading the change in the high power semiconductor market from silicon to Silicon carbide as the world continues to push towards electrification.
Electric vehicles opened up the doors to broad adoption of silicon carbide and this will be our anchor market for decades to come.
That being said, it's an important reminder, that evs are only a portion of the total applications and end users for silicon carbide.
Silicon carbide is a game changing technology for renewable energy.
Rail appliances, and heavy duty equipment, among many other industrial users and as a matter of fact in the last three years, we've generated more than 2300 power device design ins across a diverse non automotive set of end equipments, including.
Design and for medical imaging device.
And air Taxi, and then electric static filtering device.
Additionally, we have more than 6100, non automotive power device projects and our opportunity pipeline.
And we're only scratching the surface in the diverse range of these applications and our team continues to find ways in which silicon carbide can help the world conserve more energy.
While there has been some discussion across the industry of a semiconductor slowdown we see some strong secular trends that will directly benefit will speed.
These include the movement to Green energy sources and increased urgency on using those energy sources more efficiently.
The rapid growth of electric vehicles, the build out and expansion into corresponding grid and charging support infrastructure for those vehicles.
And finally, the growing customer viewpoint that silicon carbide is the right technology to drive all of these initiatives forward.
Collectively all of this provides a strong tailwind for silicon carbide through this decade.
And presents a great opportunity for <unk>.
A recent low report supports this trend.
Do you expect silicon carbide to reach 20% of the power market by 2027.
Up from now of only 5% to put that in perspective, that's a <unk> increase in just five years.
The growth opportunity is immense and we have great confidence that as more customers realize the benefits of silicon carbide over legacy Silicon Chip Phillip.
Silicon carbide share of the power market will only grow larger.
We continue to see the sentiment echoed and amplified not only by businesses, but also on the world stage.
Just last week I was at the White house with other semiconductor leaders to see the president signed into law.
Chip tact.
And believe that this could provide some possible funding for the next phase of our expansion plans.
We are working closely with local officials in multiple states on site selection and finalizing plans for a new materials factory and hope to have more details to share very soon.
We're also seeing some strong support from current and prospective customers outside the U S.
We have recently spent a great deal of time talking to our European customers and they are extremely bullish on our offerings and all potential applications.
The opportunities available for will speed at new emerging geographies.
Our exciting and we are planning to be ready to capitalize on these in the coming year.
All of these dynamics make us very confident in <unk> future prospects.
We are building a powerful model with an excellent return on invested capital.
And are well positioned to capture a greater share of the $35 billion opportunity pipeline.
For the last five years, we've been committed to transforming the company into a global semiconductor powerhouse.
We are still in the early stages of a robust and growing opportunity as customers the industry and the world continue to embrace more energy efficient technologies.
We have a special opportunity to drive consistent growth and compelling investor returns for many years to come.
In closing I'd like to thank all of our stakeholders for your continued support.
Before turning it back over to the operator for questions I'd also like to announce that we will be hosting an investor day later this year.
I hope to see many of you there and with that operator, we'd be happy to take any questions.
Certainly.
If you would like to ask the question.
<unk> on your telephone keypad tournament that question. Please press star followed by two.
If youre using a speakerphone please pick up your handset before asking your question.
The first question is from the line of harsh Kumar with Piper Sandler. Please proceed.
Yeah, Hey, guys special are all strong congratulations on that kind of numbers you guys are putting up on the guidance.
Greg I apologize if I missed this I missed about 10 minutes of your call earlier, but I was just curious if you can tell US there Mark Valley is up and running and if you are actually producing anything there or maybe you could just remind us enlighten us on the timeline for when we can expect commercial product to come out of there and then I had a quick follow up.
Yes, thanks, a lot higher as well.
Our running material in the fab.
We are progressing through each of the various different stages of manufacturing right now we're not quite entirely through the fab, but we're pretty close at this point, we anticipate that full flow material will be coming out of the fab by the end of this calendar or this quarter that we're in right now and as I know you missed it in the beginning but as we mentioned in <unk>.
Some of our earlier stated.
Statements. We are still planning to we are still on track to be qualifying material out of that out of that factory in this fiscal year at the end of this fiscal year and shipping product initial product out of the factory this fiscal year as well.
Fantastic Greg. Thank you for that clarification, and then I wanted to ask about something you mentioned on the on the commentary about your plans for Capex in the kind of money that you have on cash sitting on the balance sheet.
It looks like you've got $1 2 billion, maybe a question for you on a $1 $2 billion on the books and cash, but the way I understand you guys. When I build in the future is one government funding. My understanding is anything you do will be or application of Mohawk in terms of financing options. So I'd be curious.
Why would the need for maybe additional financing come up and then if so.
Maybe some color around that topic.
Yes, sure harsh, but happy to kind of give an update on that so as we've talked about in the prepared remarks, we see demand for the products set in the 2026 period being 30% to 40% higher.
Versus the $2 $1 billion of projected just at Investor day last year. So obviously, that's going to require a pretty significant capacity increase to match that if you look across the market for silicon carbide.
See that you see that market expanding and you also see the industry overall means more capacity, then certainly we're going to need to participate in that.
So when you look at that increase in capacity, including we've talked about potentially an additional fab after Mohawk Valley, we talked about more materials.
The second materials facility that we might need as well and you think about all of those things that will be required and I think I've talked about this before at roughly a kind of a two to one kind of capex to revenue ratio and that would include all types of capex for.
Materials.
Our fab and also in terms of the.
So and if you look at that kind of two to one ratio with throughput as that's a pretty good combination for growing the company, but also creating strong strong returns. So it's a transition that to more of a kind of funding and financing and in order to support that increased investment. Obviously, we'll have to do that in a number of ways that we talked about that.
Just during the prepared remarks, we'll obviously apply for.
The funding we're looking at various options in terms of how we can fund that and even from a government perspective, we have quite a bit to go in terms of the Mohawk Valley in terms of receiving.
Reimbursement from the state of New York and as it relates to our partnership with them I think we have a little bit more than $350 million remaining so we're looking at a lot of different factors and financing and we'll give you guys an update on that as we get out into the fall.
But I think but I think one thing I do want to say harsh step back on that if you just give me a second here is from a financing perspective I just wanted to make sure. We're all clear on that as I said, we've got $1 $2 billion of cash on the balance sheet.
You've seen the Capex kind of stepped down the last couple of quarters in line with our initial plan as we were going to ramp the company.
So as you think about that any new facility, our fab wouldn't really require additional capex until the back half of the fiscal year. So I think we're well ahead of us we're going to be very thoughtful in terms of how we think about financing the remainder of this solution right on top of our mind as it's related to.
Investors in returns and.
We'll put that into our plans as we move forward and again, Paul will give you an update on this as we move forward and we have an investor update later in the fall.
Yeah, Hey, guys, congratulations and thank you so much for that color Congrats again.
Thanks, Josh.
Thank you.
Our next question is from the line of Tony <unk> with Jpmorgan. Please proceed.
Hi, Thanks for the question guys. This is Joe Cardoso on for Sonic My personal here you raised your expectations for fiscal 2006 revenue from roughly two point and one to a range of $2 70 to $2 nine and I was just curious to understand is that a function of demand trends over the past 90 to 180 days or did you already have a line of sight on that.
Demand and is more about solidifying capex plans over the past 90 days and then just to clarify the two 7% to nine doesn't embed the new fabric correct.
Yes, So let me take the first part of that so thanks, a lot for the question.
Since the last since our Investor day, we basically had three quarters in a row of record design ends.
One $6 billion, followed by a little bit higher than one six but.
Another $1 6 billion.
One 6 billion.
Record design and at that time represented a 60% increase over the previous record. So there was a whole lot of Guinea up going on with that $1 $6 billion worth of design. It. So we have two quarters of $1 6 billion.
Followed by this quarter of $2 6 billion.
Almost double the previous record so nearly $6 billion of design ins have happened since our last Investor day.
<unk> been talking about upward pressure and just at this point, it's just gone to the point of.
Yes.
Just need to let everybody know what thats looking like so 30%, 40% increase in that fiscal 'twenty six number largely driven by that tremendous growth of design ins and what I would say is happening and then I'll turn it over to Neil.
Fab side of it what I think is happening is number one.
<unk>.
<unk>.
The electrification of the automobile is happening at an earlier and steeper.
Pace than we originally anticipated.
To the usage of Silicon carbide bolt in the auto and in the non auto space is increasing and the adoption of silicon carbide is happening at a pace that is significantly more rapid than we originally anticipated as well and then number three our.
Design win.
Right.
Higher than we originally anticipated as well so all of that combined is driving an increase in.
And.
And our revenue outlook for fiscal 'twenty, six and that has us looking at expanding capacity as you had mentioned and I'll turn it over to Neil for a little bit of additional color.
Yes, as it relates to capacity one of the things to think about here.
Pretty much entirely the change in the revenue out in 2006 that upward change in revenue is related to power devices. So we are seeing that just a lot higher. So so that would really be revenue that would flow through the fab and if you think about Mohawk Valley.
We've talked about and I will hop valley being able to provide revenue between one five and.
$2 billion roughly so even at the higher end of that range with this type of revenue profile for power devices, they're starting to get pretty heavy utilization, but that maybe not the whole thing depending on how much revenue, we can parse through it in that range.
But what it says is heavier levels of utilization.
Timeframe, you really need to be thinking at that point I'm, bringing something in behind it.
With the design and numbers that we've seen we're making a lot of commitments to our customers and I think having a capacity for both the fab and then of course materials and substrate to support that fab is important and I think that's really what's driving the not only the revenue growth, but the but also the requirement for the additional capacity to come online with that.
Got it.
And then just a quick follow up.
On the design that you've mentioned in the $2 6 billion in this quarter I was just curious.
If you could provide any more color around those numbers.
How much of that was auto versus not.
Non auto markets in the fourth quarter, and then was curious if you could provide any color between like what are you guys seeing between average deal sizes versus the volume of deals that are coming through now is there a particular trend there thats driving the larger numbers in each and every quarter just curious to see if you could provide any color on that.
Yes, Thanks, a lot so I'll take I'll take that one to $2 $6 billion is obviously a huge number we're super excited about it.
It's somewhere on the order of around 70%, 75% of that was automotive across a wide variety of different customers. The one thing that I would note, though is on the non automotive side of it.
The design end number that we just printed for the quarter is actually a record for non automotive designers and its actually two X where we were just in the first quarter of this year for non automotive design ins in our power business as an example, so pretty good from that perspective.
On the on the design ins that we've had over the last couple of years I mentioned that over the last three years, we've had 2300 design ends.
Our non automotive so quite a few design and what's actually quite astounding to me is of those design ins about 47% of those design ins have transitioned from design and design win.
And just kind of put things in perspective, we bucket things into three or we categorize things into three different buckets, you start with the opportunity pipeline and Thats. When we have an opportunity where customers say, hey, here's something do you want to bid on it.
Transition to into a design and when the customer says we've made a decision and we're selecting you will speed that typically comes in the form of a.
Of a letter of.
Award, an award letter or an Mou or something like that.
Then when we transition from design in to design win.
That's when the official spec is.
We book as revenue.
20% of the first year is estimated volume so it's kind of a it's a <unk>.
Good indication that you've transitioned from.
The R&D area at the customer into initial production. So the fact that 47% of those 2300 design and have transitioned into production is actually really good.
And then by the way I would just add one last piece the opportunity pipeline as we mentioned in our prepared remarks is now $35 billion.
I believe when we started looking at the opportunity pipeline a number of years ago I believe it within the $5 billion range something like that so we're talking about a seven X increase in the opportunity pipeline and then you heard a substantial increase in the amount of design ins. We've got 2300 non automotive design ends.
We're feeling like.
This storyline there is an.
Increasing adoption of with electrification and increasing.
Adoption of Silicon carbide in an increasing.
Design in percent for us in terms of share of market.
It seems to be.
Supported by the numbers, we're talking about.
Thank you. The next question is from the line of Brian Lee with Goldman Sachs. Please proceed.
Hey, guys. Good afternoon kudos on the nice execution here.
A couple a couple of questions from my end I guess.
It seems pretty evident but I'll ask the question anyway with the design in activity over the past year and now the.
The increase in fiscal 'twenty six targets does this imply.
Mohawk Valley is fully sold out including the additional capacity for fitting out the entire factory and then are there any implications for the fiscal 'twenty four targets any upside exist to those as well.
Well I'll take a first crack at that and then turn it over to Neil for a little bit more detail. Obviously, we made the decision to build this factory over two and a half years ago actually we made a decision about three years ago. When we put a shovel in the ground in March of 2020, and I would say thank goodness.
We stuck to our knitting on that thing and continued to process. Despite the fact that we had a global pandemic happening because we are able to open that fab in April of this year and now we've got material flowing will have full flow material.
Going through that by the end of this calendar quarter and then ramping initial production by the end of this fiscal year. So that all looks pretty good I would say the fact that we're talking about additional wafer fab capacity being required.
Obviously assign the Mohawk valley isn't going to be big enough in the out years I think we have time now still today to begin construction of a new fab.
Go through the normal cycle of building and ramping it and so forth and bringing it on before we get sold out of that factory, but I think the time to be making those decisions is kind of right upon us with that maybe I'll hand.
I'll hand, it over to Neil for a little bit more color.
Yes, I think thats, absolutely I think that's absolutely right, Greg I think if you look at the.
The capacity required with the with the change of the 2026 revenue again Thats all power device.
Part increase that's going to have to run through the fab and if you look at the the capacity in the factory and like I said before we're talking about wanting to have a $2 billion of revenue potential out of Mohawk Valley, even at the high end of that range.
We'd be running up against some pretty heavy utilization numbers at that point.
In addition, we have seen some improvement in the Durham Fab I think that can help.
From an execution standpoint yield and cycle times are improving so I think that can play a role in helping us manage through that I think to Greg's point I mean is there.
Looking out in time, but we think the growth rate out to the end of the decade is going to continue to out beyond 2026.
You have to have something out beyond 2026, I think they come online or in that timeframe and thats really what were looking at so I think Mohawk Valley.
Clearly, we're seeing towards the whole factory out we kind of push it push it to the edges in terms of.
<unk> tools into the factory, we'll leverage that as much as we can but I think what that tells us we're going to need additional fab capacity, even beyond Mohawk Valley in Durham, and then secondly, we're going to need additional materials factory and likely some some somewhere outside of our current <unk> right now, but I need additional capacity for a second material site, so putting all that together.
That's really what we need to start coming online outlet timeframe.
Yes, Okay. That's great and then just my second question as you think about rolling out some new capacity expansion.
The materials side, obviously, it's going to be involved here can you speak to.
The LTA is on the materials here just how they are performing and then.
I know you don't have the capacity outlined here today to speak to but do you anticipate seeing growth on long term targets there.
As you rollout new capacity plans in some point.
Or is this all going to be kind of vertically integrated just trying to get a sense for I know on the fiscal 'twenty six target increase here its mostly device, but do you anticipate kind of seeing continued demand on the upgrades for the wafers and could that also drive some upside in the out years I think as you get new capacity online. Thanks, guys.
Thanks, a lot Bryan I'll take a crack at that and the Neal if you have any additional color feel free to jump in.
Basically we've got very good long term relationships and agreements with a number of different suppliers.
Customers, we've announced those.
Previously.
What I would say.
Terms of the LTA is where about 50% drew in terms of.
But delivering to those LTA. So we've got another 50%.
Bill to go in terms of volume commitments in rough value of the a b agreements. So there's still quite a ways to go the way. These agreements have kind of gone as customers come in and they put a capacity request and we make an agreement with them and what I think what's happened in Nir.
All of them is that the.
The eventual demand for what Theyre looking for it tends to be nicely higher than what they originally go in reps and so we've been kind of subsequently extending and expanding these agreements and adding to them and on a quarterly basis looking at various different things and we work with all of them very carefully to do.
So.
We stay very close with them in terms of there.
<unk> requirements, and so forth and so I think.
I think thats kind of the way that we like working these are materials business, we're not really in the spot market side of things, we really like to have long term agreements with them and I think to the extent that silicon carbide continues to eat into the silicon space and the power electronics market and as he always says go.
From 5% to 20% of the power market. The demand is probably going to continue to increase.
<unk>.
To the extent that that provides an upside for us I think that would be that would be fantastic.
Tastic Neil I don't know if you have any additional comments or do you think we are pretty good there.
Nothing else that's great Greg.
Thank you. The next question comes from the line of Matt Ramsey with Cowen. Please proceed.
Thank you very much good afternoon everybody.
Neal I wanted to start with.
The raise of the 2026 revenue targets.
Maybe you could give us a little bit of color on how you see fiscal 'twenty four 'twenty five on that ramp is it what's the shape of the curve. There as you guys see it and you had laid out at the analyst day, some gross and operating margin targets around that to one how do you think about leverage into that higher number. Thanks.
Thanks, Yes, so I think if you look at the model as we look out in time, one of the things you have to be aware of us.
Obviously, we're seeing upward pressure.
Currently have over $100 million of unfulfilled demand, we're seeing improved execution, but their own.
We're seeing better execution in our back end you can see that in the Q1 results.
All of that gives us good confidence between the demand and the supply improvement as well as what we're seeing that will ship out of Mohawk Valley and some of the confidence in terms of executing gravitate to the kind of one 5 billion 2024 target.
The one thing that we've got to remember here is that we're still ramping that revenue and Mohawk Valley. So I think we just wanted a little cautious on changing any of those kind of earlier period outlooks at this point, but clearly we're seeing the upswing in demand there and as we bring on more capacity outside of 24, I think we can start to see some potential upside there as we get into 'twenty five so I'm excited even 'twenty.
And beyond so I think that's more or less the trajectory that we're looking at secondly, if you look at the and again, we will give you more detail around this at the Investor update that we do if you look at the gross margins out in time, you know I think we talked about 50% gross margin out in that 2026 timeframe are north of 50% Mark and I think that looks pretty solid I think the the blueprint we have.
<unk> four is a combination of a 200 millimeter silicon carbide wafer running through our highly automated modern Mohawk Valley fab.
As a really great combination for us and I think it could.
And as we're starting to see Mohawk Valley come together, we're starting to see the cost profile of execution on 200 millimeter I think that looks pretty solid and we feel good about the cost capability for the business out in time and after that it's just really about managing opex trajectory to two.
Basically meet our run rate, so I think that kind of mid twenty's.
Kind of Opex rate, maybe a little bit better than out in time is still pretty solid. So I think overall from a profitability standpoint, you start to see this model comment that the shape and certainly getting.
Solid leverage out in time.
As you look at the model. So I think we've got the blueprint for how all this comes together in terms of not just the trajectory of the revenue, but how it needs to come together in terms of the top line and the margins, but in the meantime, we got a lot of wood to chop. There. We've got a lot of work to do to bring him onboard capacity online and he goes we've got steeper run rate, we're seeing and kind of meet the moment in terms of the.
The demand so to speak.
Got it thank you for the color there.
As my follow up Greg I wanted to ask.
About sort of the industry Youre seeing a lot of your peers in silicon carbide.
Raised their outlook and revenue forecasts and whatnot.
Along the lines of what you guys are doing.
You may be if it's deeper than some of the races out there but.
Everyone's kind of do it in the one question that I get from investors as you look and you raised the 2026 revenue target today.
How firm are the programs how firm are the commitments are there sort of LTE assays in place with customers that give you firm backing on that revenue I'm just trying to get an idea from just some perspective on sort of the hard visibility on order commitments from the customers that backup those numbers because that's the question that I get.
From from sort of investors on your shareholders pretty often thank you.
Yes, well, let me, let me kind of.
Strain at first just from a from an industry perspective, I think the adoption of silicon carbide is happening in a substantially steeper rate than anyone would have anticipated.
So one of the questions. We get a lot is what is your share in it and it's almost impossible to calculate because the denominator or the Tam keeps changing.
Thirdly, because more and more customers are moving from silicon based systems to silicon carbide based systems predominantly driven by this need to to conserve energy to use energy more efficiently and so forth across a wide range of range of applications.
We're just seeing customers.
Say I got to make my product more efficient. This has been amplified by the fact that theres been a silicon shortage for the last two years. So we have a lot of customers have said.
I can't get Silicon, So why don't I take the opportunity to have our designers redesign a system to move to a more efficient silicon carbide based system, where you've got a company out there that has stuck a shovel in the ground two and a half years ago and is now bringing our capacity today. So I think all of that is kind of the backdrop to that.
The second thing that I would say as I've been in this industry for a long time and it works kind of the same way.
Across the industry over these years, you start with opportunity pipeline as customers are looking at doing various different things and they put out bids and so forth then they make a decision as to who they're going to use.
In our vernacular turns into a design in and the customer says we.
We've awarded will speed of design in and Youre going to be the customer.
Supplier of choice.
For this application and then it moved from design and design win the fact that we've had 2300.
Design and convert to design win gives me a lot of confidence.
<unk>.
Of that order book, so to speak now we've layered on top of that some assurance of supply programs that we've announced with a number of different companies. This is where customers put some upfront money.
That.
And kind of simple terms kind of guarantees and the capacity for it or.
For that upfront payment.
<unk>.
We've got a number of those.
We've signed as well with with customers. So I feel pretty good about it I think the.
All of those things combined whether its the opportunity pipeline going up seven X over the last number of years to 35 billion. The 'twenty 300, non automotive design ins that we've had that 47% of those going from design and a design win.
We will speed assurance of supply program, which adds upfront money kind of put your money, where your mouth is from a customer perspective.
Give us me very good confidence.
That we feel very good about our ability to to increase this number and I just wanted to amplify one last thing. The fact that a number of different companies are increasing their outlook for silicon carbide.
It's kind of a repeat of what I, just said, but I think I would want to amplify it.
Really a sign of the adoption of silicon carbide and the increasing Tam.
Versus a share take or what have you I think we are so early in the conversion from silicon to silicon carbide.
The denominator is growing at such a rapid rate that it's almost impossible for anybody to do a calculation of what their share of market is.
That help.
Thank you.
Our next question.
Line of Colin Rusch Oppenheimer. Please proceed.
Thanks, So much guys given the landscape that you are talking about can you talk a little bit about the optimal customer base and composition of that customer base as well as your pricing strategy as you think about.
Addressing some more diverse needs to potentially.
Carrying a little bit higher ASP.
Yes. So we've had obviously the fact that we had record design ends last quarter in the non automotive more diversified customer base is really good those those tend to be smaller.
Individual projects.
Price elasticity being what it is smaller projects tend to have higher asps.
Here I'll just give another nod to arrow, who has been a super partner of ours over the last five years or so where they have done a phenomenal job.
It's annualizing the market for silicon carbide and to a large extent those 'twenty 300 design ends we have are largely at the best of the partnership that we have with Aero. So thanks again.
Arrow team for doing a fantastic job there I think that partnership is here to stay and is going to last a long time, so I would say that thats.
That's pretty strong.
One.
The thing that I would say is we've we have been pretty direct with with our customers, especially on.
On large opportunities.
If they've made a choice to go with somebody else as a primary source.
No.
We'd love to be that primary source.
That's that's an area that.
We're obviously focused on but we basically don't have the bandwidth right now to be an alternative source for <unk>.
Any of these opportunities so basically what we're what we're telling our customers is we really want to focus on being the primary source. We've got capacity that's in limited supply and we want to focus our capacity where customers have kind of gone and put a lot of the chips on the table on our side of things.
And.
Chasing something down as an alternate source, whether that's through pricing or what have you is something that's not really in our.
Sure.
In our quiver right now.
Okay, and then just around the equipment ordering.
Lead time deposits and things like that can you just give us a sense of the cadence of that through the balance of this year as you build out the incremental capacity.
Yes, so we've been.
We started the fab in New York, a couple of years ago over two years ago.
You have to get orders in very early long lead time equipment and things like that.
And we've been continuing to get ahead of as I talked about it earlier, but thinking about additional capacity and they continue to stay as far ahead of us as we can and manage lead times I think.
Yes, clearly equipment lead times continue to be extended.
But that's all kind of baked into the kind of plans that we have and we've been managing that pretty effectively.
Okay. Thanks, so much guys.
Okay.
Thank you.
The next question is from the line of Ashwin <unk> with Wells Fargo. Please proceed.
<unk>.
Hi, its adoption of Carryon Gary Mobley.
But the pricing environment has been like premium materials business, given the shortage of supply and are any of the long term supply agreements with customers.
Again with that pre negotiated pricing terms or is there additional pricing power.
Hi, Chad.
Well, we've had we've had a very consistent strategy and our long term agreements, where we we don't really want to plan in the spot market. So to speak so we sit down with customers on those long term agreements, we look at what their demand is going to be over the next.
Call it half a decade or so we look at what kind of.
What kind of capacity they would like to secure from US there is kind of an upfront.
Capacity reservation fee associated with that.
And then we have negotiated pricing with them over the volume that they have.
We stick with that pricing, we've stuck with that pricing through the entire period here. So.
We committed to something and we've stuck with it and thats been our policy through this entire.
Through this entire time that I've been at the company so.
So in terms of.
Pricing power per se, we stick with the long term agreement pricing that we've got in place and to the extent that the customers continue buying and doing more long term agreements. We would have again, new long term agreements that we put in place that would have pricing associated with it and we'd stick with that price.
<unk> as well.
Thank you.
Yeah.
The next question is from the line of Ben Hartford Street Research. Please proceed.
Thank you for the question. So you mentioned that you're capacity constrained on your materials business today, what gives you the confidence that you can ramp the supply of your substrate.
240% incremental demand just given the inherent complexities with ramping up substrate capacity.
And then do you think you'll still be constrained on the 2026 timeframe just given how much demand is accelerating.
You bet.
Thanks, a lot it's a great question, because ramping capacity and materials is not for the faint heart.
As a.
Silicon carbide is a very tricky material.
Something that.
<unk> is very finicky so.
So to speak.
But the good news is we've got 35 years of experience in doing just that and we've also got five years of substantial expansion that we've just delivered on so we feel very good about it we don't look at it and say Hey. This is a this is a short.
Don't worry everything is easy because it's not.
But what I would tell you Ben is that.
The scientists we have in place the engineering teams that we've got place to manufacturing folks.
So forth when we run into the normal.
Sets of challenges that you have when you when you ramp capacity, we've got a team that knows how to blow through those challenges and deliver a good result, so with that we've got a lot of high confidence that.
Capacity ramp will be something that we can handle like I said, it's definitely not through the pain of heart it comes with a.
A lot of.
A lot of challenges I think I asked one of our manufacturing guys in materials, what keeps them up at night.
The answer was yes.
Just there is just a lot of challenges when you're ramping materials, but the team has 35 years of experience. We've got a ton of people that that we can call on when when we meet those different challenges and I think the team has done a pretty good job of doing that to date, so I guess longer term.
Know that we need to expand our materials business.
We've already been doing that here on campus and the Durham facility. We're looking at a new facility that we hope we can make some decision on kind of <unk>.
Host Hayes here, we've got a lot of discussions going on with them with a number of different states.
Local authorities in terms of.
What that could look like from an incentive perspective, we're super excited that the chips Act was passed.
The last week or so because.
Materials is definitely in that.
And that act as well so all of those things put together.
What I would say is the combination of 35 years of experience. The fact that we've demonstrated.
<unk> substantial capacity ramp already to date and the fact that there looks to be some pretty good governor incentives to help us do that gives us confidence in that.
Yeah.
That's great. Thanks, Greg.
Yeah.
Thank you.
Next question comes from the line of Edward Snyder with charter equity research.
Yes.
Thanks very much.
So then maybe Neil you could provide some color on how the shakedown the Mohawk Valley is proceeding as it at below or in line with your expectations for this point.
No.
Youre running eight inch through there which is a first.
No, it's not a high volume yet but.
Any issues with handling those wafers given how brittle they are off the much larger diameter is much more sensitive I'm sure in all the trouble you had with breakage in Durham I was just wondering what your first experience with eight inch and Mohawk and then I have a follow up.
Okay.
Automated factory, we're seeing better result in handling and those types of things, we're still working through a lot of I think what you'd call that kind of early kind of setup phases in the factory.
Ammonia processes as we kind of manage through that right now, but I would say things are kind of moving along more or less as you would expect with a new fab I mean, we're running our first lots of the fab right now we're learning we're tweaking the process is we take it through each step and as it worked through those steps will continue to manage through that until we get kind of the capacity up and running fully and guess.
Through qualification, but I think it's kind of the normal.
Two steps forward one step back as you kind of work through the factory I would expect some ups and downs here between now and kind of when we ramp the factory at the end of the year, but kind of in line with what I. Just said I don't think we have any expectations as Greg said, we wont hit a bump in rockier, there, but I do think we're still on track for ramping revenue and having that revenue ramp in the back half of the fiscal year.
Okay, and then what quarter can we expect the material for Mohawk.
Our revenue for Mohawk to be material and then also you mentioned material fact, we would've ground up a new ground up material factory Jerome has.
Significantly different margin profile than your existing facility and if I could squeeze one more in for Greg.
You put out a good revenue number today, maybe you can give us a glimpse I know you said 70, 75% of design ins or automotive generally what's the breakdown.
Current revenue and between automotive and non automotive if you could thanks.
Okay.
I'll hit the first part maybe there and Greg if you want to maybe.
Follow up on the other piece of it so in terms of the revenue ramp timing I think it's consistent with what we said kind of back half of the year, we'll start to see the revenue ramp obviously it kind of goes on from <unk> into 'twenty, four we will see that kind of ramp more.
More rapidly as we bring the fab up but kind of in line with what we've been expecting and in line with kind of some of the numbers we've talked about.
Recently as it relates to new materials side, it's probably too early to be talking in detail about that we'd be able to give you some more update in November .
Clearly with the scale advantage that we get off potentially a facility and really primarily being used for 200 millimeter wafers for valley and for potentially a new fab, we feel good about what that what that would translate into from a from a cost perspective.
Yes, and then Ed from a revenue perspective, Neil catch me, if I got that wrong definitely from a device perspective greater than half of our revenue is non automotive and it's probably more like 75%.
Area, Neil is that about right.
That's about right.
Yes, so thats about so we have a substantial non automotive business right now and if you look at Neal talked about.
We've got $100 million worth of unfulfilled demand a lot of that is that non automotive based so.
It's kind of it's kind of a typical nature of the non automotive folks tend to define you and go from.
<unk> pipeline to design in design win at a pretty fast pace and as I mentioned at.
The 'twenty 300, non automotive design and 47% of them are already gone into initial volume production. So that's kind of normal I think over the next couple of years Youll see automotive step up as various different customers start ramping and so we'll obviously go higher than that from a trauma automotive.
Perspective over the next couple of years, but right now it's.
More like 75% if I got the number right as non automotive.
Thank you.
Our next question comes from the line of Vivek.
<unk> with Bank of America. Please proceed.
Alright, Thanks for taking my question, Greg you mentioned.
Some industry analysts projecting demand to grow four times or so over the next several years.
Curious, what's your sense of industry capacity growth in the same timeframe, because we hit a for vote of incremental capacity coming online from several of the U S and Korean and Japanese and Chinese competitors, how do you think that supply demand.
Balance looks out not this year or next year, but in the outer failures.
I can I can my viewpoint is that the growth of this market for silicon carbide is probably going to outstrip the demand for sometime to come.
I've actually seen that echoed in the market and some analysts.
Reports as well and Thats, just simply because the ability to bring up bring on capacity and ramp <unk>.
And so as I was talking about the materials capacity units are touching the ramp.
I will tell you that when we talk to customers. It's one of the things.
Definitely on their mind.
And.
What they look at when they come and see us they see a brand new factory that we made a decision almost three years ago to build and we started building a two and a half years ago and it is coming online now if you drive on our campus right now Youll see construction.
Re.
Repurposing of office space in various different other spaces on campus to materials.
Factories in crystal growth in <unk>, and <unk> and all of that kind of stuff.
They see that and they go Okay. You guys are putting in kind of your money, where your mouth is and as.
I mentioned in the prepared remarks, a lot of times, that's the last thing that happens prior to our customer.
Shining.
Contract with us or doing a deal with us they come and visit and they go okay. I want to make sure you guys are actually doing what.
You say youre doing in terms of capacity expansion and as we as we get Olympic closer to announcing.
New materials factory.
And we start nailing that down I think that will also give.
Customers sort of a breath of fresh air as well.
And again I'd just emphasize this materials factory capacity expansion not for the faint heart I think customers see that we kind of know what we're doing in terms of solving those problems and I think they feel pretty good about that.
And so my follow up on gross margins. So as you start.
Selling product from Mohawk Valley I believe you said in the first half of next calendar year, what happens to gross margins do they continue to move up.
Or do you think that they could perhaps take a step down for us given that maybe depreciation on other things just wanted to kind of the puts and takes of gross margins.
As you head into the first half of.
Up next year.
Yes, I think that's pretty consistent with what kind of how we've laid it out the back I think as you look into the back half of this year that we have.
Revenue coming out of Mohawk Valley, well see kind of modest improvement in the margins maybe.
Maybe in the back half.
Back half of this calendar year going into next year, and we start writing revenue term I'll hop Valley would see the margins start to pick up.
And you kind of see that in the back half of the year. We've obviously.
We have some startup costs that we've pulled out of the non-GAAP numbers, you'll see that start to decline overtime as we start to ramp the fast I think it was those are the dynamics of the fab to have more wafer starts to lift more capacity, but also the margins go up and we'll still see those startup costs start to shrink over time.
Thank you. Our next question is from the line of Amanda <unk> with Citi. Please proceed.
Yeah.
Hi, Thanks for taking the question.
Quickly on <unk>.
Customers for that.
At year 10.
10% customers any shifts and how your customers have been ordering or equity to meet our customer demand.
Yeah.
Maybe kick it off and then Neil if you want to give a little bit more color.
Basically customer.
Shipments right now are really dependent on improvement out of our Durham manufacturing facilities and our team has done a really good job of kind of.
Really looking at Durham in a completely different way in terms of our manufacturing facility.
Missy and racks and the team have done a fantastic job there and we've now seen kind of a turning of the corner in terms of yield starting to move in the right direction cycle time is coming into the right.
Starting to come down pretty nicely I might add.
We still have a long ways to go and there is still a pretty huge opportunity there, but I would say that.
Things are starting to feel a little bit better from a near term perspective that doesn't mean, we still have long lead times, we still have customers that want more than we can we can deliver as Neil mentioned about the $100 million of unfulfilled demand.
Definitely our ability to.
Be more predictable in terms of shipping product to customers improves when cycle times come down.
Our ability to ship.
Better on time improves when our yields are are starting to improve and we've seen some.
Some nice turn in that activity and I really give a lot of credit to the manufacturing organization racks, Michigan. The whole team that are associated with that.
I add to that our backend activity and what's been happening with our assembly test.
Our partners and so forth we've got some.
New folks in there, Joe and Jeff and the team doing a really nice job of it.
Right.
Improving that whole execution as well so I think for the near term, it's really going to be a story of improving that I think we have.
Fabs that are that are not perfect, but the teams are doing a good job of getting more out of them still a lot to lot to do here and a lot more to come but nice to see some improvement there and then Neil in terms of 10% customers and maybe I can turn it over to you on that.
Yes, not so much of the 10% customers, but I think one thing to be aware of we're still seeing I think pretty strong demand across the business. When you look at the channel inventory.
Numbers remain low the terms remain higher than the model that we'd like to see we're managing through that and I think overtime.
As more and more automotive customers come online, but to start as I mentioned earlier the season, you'll start to see that transition. So I don't think theres really a let up and the discipline that kind of.
Demand and supply does come up we're going to see over time some of that could shift a little bit more automotive customers, obviously come on overtime as we manage through that but.
Yes, I think the demand continues to be relatively broad based.
It relates to some of the supply challenges RASM.
And then just a quick follow up on that.
When you look at that.
Imaging corner in the guidance for September versus where the street was looking.
Could you talk about where that came from was it just a matter of being able to squeeze more out of that.
We had greater demand profile that you saw.
It's really about.
Our revenue is really a function of supply with demand and power devices.
We talked about materials when capacity is drawn but primarily power devices that was really driving that and I think directly related to better execution on the Durham fab and better execution.
And the back end of that backend operations with the team.
We've got there and that'll be kind of how it kind of plays out going forward.
Sure.
Thanks.
Thank you.
That concludes the question and answer session I will now hand, the call over to Gregg Lowe for closing remarks.
Well, thanks, a lot everybody for participating today and being with us.
We look forward to visiting you in next quarter.
Our next earnings release, and then later on in the year at our next Investor day. Thank you very much and have a great evening.
That concludes today's call. Thank you for your participation you may now disconnect your line.
Okay.
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