Q1 2023 Wolfspeed Inc Earnings Call
We'll speed was well positioned to capitalize on the increasing demand for evs industrial and <unk>.
We describe 2022 and 2023 as an inflection point in the adoption of silicon carbide with accelerated growth beginning in 2024.
Clearly adoption is well ahead of schedule, creating an even greater demand supply mismatch than we had discussed previously fiscal Q1 revenue grew 54% year over year, our second straight quarter of greater than 50% top line growth when compared to the prior year period, our device opportunity.
Pipeline has increased to more than $40 billion more than double the $18 billion that we talked about at our last investor day.
And our sales team continues to convert this pipeline at an impressive clip and posted another record quarter in Q1 with $3 $5 billion of design ins are.
Our last four consecutive quarters of design in each of which was a record at the time.
<unk> totaled approximately $9 $3 billion, which is three five times higher than the prior period.
We continue to see strong demand for our power devices with Q1 revenue up more than 120% year on year.
The team in Durham has done an absolute best to ramp production and expand capacity.
But running Emanuel fab has its limitations and we are seeing lead times extend for tools and replacement parts for fab equipment, which is impacting our ability to align with customer needs.
And lastly, as part of an ongoing efforts to expand supply of Silicon carbide. The team was successful in increasing the length of pools through our continuous improvement efforts.
Which will help drive more wafers going forward to meet the immense demand for silicon carbide substrates.
While this will help to alleviate some supply constraints.
Still refining some of our back end processes for the longer pools, and this will impact yields for the next couple of quarters.
We're entering a period of significant expansion.
And are experiencing the associated growing pains.
Do you think about where we've come from in the last five years from a $200 million semiconductor business back in 2017.
To a global semiconductor powerhouse that is expected to generate over $1 billion of revenue in fiscal 2023 on the way to approximately $2 $8 billion in fiscal 2026.
Thanks to the massive amount of change we are driving across the business in a relatively short period of time now.
Now I'd like to turn it over to Neil to go over the quarterly financials, the second quarter outlook and provide more details about our updated expectations.
Yes.
Thanks, Greg and good afternoon, everyone I'll start by providing an overview of the first quarter, we generated revenue of $241 3 million in the first fiscal quarter of 2023, which represents a 6% sequential improvement when compared to the $228 million in the fiscal fourth quarter of 2022.
Growth of 54% year over year, driven largely by growth in all product lines.
The market tailwind as Greg referenced earlier.
Underpinning the revenue growth as our design and portfolio, which along with the additional $3 5 billion. This quarter now sits at $14 5 billion cumulatively approximately 43% of our designers have converted into design wins, representing more than 1600 projects.
non-GAAP gross margin in the first quarter was 35, 6% compared to 36, 5% last quarter and 33, 5% in the prior year period, representing a 210 basis point improvement year over year.
Our gross margin in the quarter was impacted by issues related to our wafer manufacturing process to accommodate longer ball sizes.
Related to the Durham Fabs that we believe we can continue to improve productivity and performance, but we are reaching our capacity and capability limit and future significant step ups in revenue and gross margin will come primarily from the Mohawk Valley Fab.
The <unk> wafer fabs will likely remain fully utilized for the foreseeable future as customer demand remains strong.
In addition, as it relates to RF.
Due to the overwhelming demand for our product, which has kept our factories full leaving us essentially no factory downtime to make the transition.
Given the strong demand for our products, we don't anticipate making this transition for at least several years as such RF device products. Currently represent an approximately 300 basis point drag to our overall company gross margins and.
It's important to note that although RF products represent approximately 20% of our business today. It will represent only approximately 10% of our business over the long range plan period.
Therefore, we expect this impacted dissipate over time, but it will dampen gross margins in earlier periods of our long range plan.
As a result of these impacts of our gross margins, we generated adjusted earnings per share of negative <unk> in the.
Our fiscal first quarter compared to negative <unk> <unk>, a quarter ago and negative 21 in the same period last year.
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 to support our growth plans.
So it was 50 days, while inventory days on hand was 135 days, which is two days lower than the Q4.
Free cash flow during the quarter was negative $79 million comprised of negative $13 million of operating cash flow at $66 million of capital expenditures.
During the quarter, we incurred startup costs, primarily related to Mohawk valley totaling approximately $38 million, which is in line with our expectations, we outlined on last quarter.
We expect an additional $34 million of startup and underutilization costs in the second quarter.
Included in non-GAAP adjustment for these startup costs in a reconciliation table in our earnings release.
Now moving onto our fiscal second quarter outlook, we are targeting revenue in the range of $215 million to $235 million, we continue to see increasing demand for our products. Both in the short and long term, but our revenue outlook continues to be supply and capacity driven.
From a supply perspective, we expect our revenue to be impacted by lower yields in our materials business. As previously mentioned and we are also seeing longer lead times on spare parts, reducing tool availability and output in our Durham fab.
We believe we are making steady progress on improving our materials yields and based on current lead times, we expect to see power output recover by early fiscal Q3.
Our Q2 non-GAAP gross margin is expected to be in the range of 33% to 35%.
<unk> gross margin will be similarly impacted by the materials substrate yields previously mentioned driving performance down approximately 160 basis points quarter over quarter.
Therefore, we believe our revenue and gross margin growth trajectory to be delayed one to two quarters as we resolve the yield and supply challenges. We are currently experiencing.
We do however, expect revenue and gross margin expansion to resume in the back half of the fiscal year and anticipate achieving the $1 billion revenue quarterly run rates early in the back half of the fiscal year.
We expect non-GAAP operating expenses of approximately 97 million for the second quarter of fiscal year 2023.
And we expect Q2, non-GAAP operating loss to be between $26 million and $15 million.
We believe that we will realize approximately $5 million a non-GAAP tax benefits as a result expect Q2, non-GAAP net loss to be between $20 million and $10 million or a loss of <unk> 16 to <unk> per diluted share our.
Our non-GAAP EPS target excludes acquired intangibles amortization noncash stock based compensation project transformation and transaction costs factory startup and Underutilization cost and other items outlined in our press release today.
As always our Q2 targets are based on several factors that could vary greatly including the situation with COVID-19, overall demand product mix factory productivity and the competitive environment.
During the quarter, we also announced plans to construct the world's largest materials factory Siler City, North Carolina, and we are also evaluating further expansion of our device capacity.
The construction of this new North Carolina facility will require significant investment from RF we.
We believe that it's prudent at this time to increase our capex guidance from $550 million last quarter to approximately $1 billion for the fiscal year 2023 to reflect the increased investment and support the higher revenue growth, we outlined on last quarter's earnings call.
We continue to explore multiple avenues to finance these capital investments and are extremely encouraged by the conversations we have had to date.
Our shareholders are top of mind to pursuing this funding. So we will explore all options with the goal of minimizing our cost of capital and dilution.
As a reminder, we have many funding path at our disposal, most of which have little or no dilution impact.
This includes government incentives customer capacity upfront payments and private our project debt based financing as well as going to the public markets as they have done previously.
We are currently focused on a less dilutive financing options and we will continue to remain flexible as we manage through variation in the capital markets.
What is clear is that demand for our products continues to be strong both in the short and long term and we will continue to invest in capacity to address this multi decade growth opportunity with that I'll pass it back to Greg.
Thanks, Neil we are very encouraged with the market trends and with our progress to capture sizable share of the opportunities in our pipeline.
One of the things underpinning our confidence is the breadth of our total design and portfolio.
The electric vehicle has been and will continue to be the driving force behind the broad adoption of silicon carbide.
As industry supply scales and cost decline.
This is also opening up the door for other applications in the industrial and energy sectors.
Just to get a sense of our Q1 design and profile approximately 90% was tied to automotive, whereas the remaining 10% with towards industrial and energy and RF applications.
Q1 design and total is a nine X increase for automotive year over year in.
In industrial and energy and RF increased more than 95% from a year ago.
This quarter as design ins include an interesting range of applications, including weather radar wireless EV bus charging a welding machine and our motor drive applications.
To service this rapid growth in demand for silicon carbide during the quarter, we announced our siler city materials factory, which will be the world's largest silicon carbide factory when it opens up in 2024.
The substrates produced there.
Will help drive down the cost of devices and expand silicon carbide adoption across even more markets.
Our new materials factory in combination with our plan to build out both the remainder of our Mohawk Valley factory and yet to be announced second fab will support this goal and should help us achieve significant scale.
And speaking of Mohawk Valley Fab continues to make great strides in its ramp during the quarter. We successfully ran full flow with blocks in the fab and.
And not only have we been able to run. These lots were very encouraged by the yields we're seeing at such an early stage. We are still on track to deliver devices for Mohawk Valley in the second half of fiscal 2023 and plan to share an update on our progress at our Investor day on Monday.
The multi decade opportunity in power devices require as far greater capacity investment and as soon as possible.
We will continue to address near term puts and takes in Durham and RF as we continue to bolster our leadership position in silicon carbide.
We will need to raise a significant amount of capital, which will go towards investments in the necessary infrastructure to support growth.
As a result free cash flow generation will be pushed out a few years.
Margin progression will likely be muted in the near term due to the Durham and RF dynamics mentioned earlier. However, we continue to believe Mohawk Valley will help improve margin trajectory as it comes online.
This fiscal year demand for our products continues to outstrip supply and our revenue will be gated by the speed at which we can increase output that.
That being said, we still expect topline year over year growth north of 30% when.
When I started it will speed five years ago, a key theme of ours with refocusing the business.
I am proud of the progress the team has made in that regard, but there's more work to be done.
There will be challenges driven by the unprecedented demand in silicon carbide, but overall, we are extremely encouraged by the dynamics that underpin. These challenges I look forward to discussing these topics in more detail during our Investor day on October 31 at the New York Stock Exchange.
Give further update on our strategic initiatives and long term financial model.
If you have not registered for the Investor Day. Please do so by this Friday by contacting our Investor Relations game.
And now I'll turn it over to the operator for questions.
Thank you to ask a question. Please press star followed by one on your telephone keypad now.
And in the interest of time, please limit yourself to one initial question and one follow up.
Our first question of the day will.
It will come from harsh Kumar Piper Sandler.
Your line is now open. Please proceed.
Hey, Thanks, guys. So question.
On the near term, Greg when I look at your business all the design in design win trends are pointing upwards.
But im looking at the December quarter guidance, which is sequentially down I know you mentioned a handful of things such as spare parts availability also the long a bull's.
I was curious is this what is impacting.
Your ability to be able to grow in the December quarter, and then just.
Something else that's going on that's worth, noting and then I had a follow up.
Thanks for the question.
That is exactly that basically is tolerable.
Some new initiatives, we have processing them in the backend and the lead time on our older equipment.
Basically.
Those two issues that are limiting our output.
Our near term demand from customers.
As is our longer term demand in fact are unfilled demand.
Is increasing this quarter due to this limitation that payout. So that's exactly what it is that Mike mentioned.
So tolerant rules are really good.
And as we've done a really good job of.
Defining the back end of our process here we come.
Out of that and we have yield back to where we believe we can get them to be.
We're going to are going to be.
B.
Substantially for us.
Got it Greg and then for my follow up Greg I wanted to ask about the gross margin similar sort of question I was curious if you could.
Shuttle flights.
Margin difference on the downtick.
Between Hey is this a bigger problem that is coming from the longer Bulls or is this a spare part tissue and also maybe help us think about some color on when these issues might get resolved Greg as possible.
Hey, harsh as Neil I'll take a shot at that I think if you look both revenue and gross margin.
The issues are really the same the same few things that we're seeing.
The output related to the <unk>.
All of them Woodman challenges based on the yields.
We will see that impact both revenue and gross margin, although I'll say that I think we've hit the bottom there on the yield issue will start to work our way up for kind of flushing through some of that higher cost inventory as we start to manage through this.
I'd say the same thing in terms of the term debt reduction.
And we have some tool availability challenges related to shortage of spare parts on older equipment.
Been impacted supply challenges clearly that's something we really avoided largely in the last couple of years.
By that a little bit here.
I will drop our device revenue down quarter over quarter in the margins as well, but again once we concurrently tons come in we'll start seeing production kind of pick up again in the past so I think on both cases.
Net revenue margin.
By the same tube issues.
See these as being temporary in nature as kind of a one quarter yet.
Revenue and gross margin and gross margin.
See ourselves as return to stronger revenue and margin growth improve beyond possibly even being at that kind of a $1 billion.
Annualized revenue run rate by Q really back on projected by working so you can think of these kind of manufacturing and supply issues just drive.
In quarter impact on that.
Mark.
I appreciate the color guys. Thank you.
Alright.
Thank you and our next question is from the line of Brian Lee of Goldman Sachs. Brian . Your line is now open.
Hey, guys. Good afternoon. Thanks for taking the questions and then maybe just to follow up on <unk> question do you sort of alluded to it a little bit I think Neil but.
If we were trying to quantify the impact on the revenue outlook here for December obviously, Greg you're saying your demand.
Demand.
It's higher.
But how much if you could quantify I know, it's a tough question is coming from yield and how much is coming from the supply challenges and if I take your comments that youre going to be at quarter $1 billion run rate by fiscal Q3.
Does that infer you're like $25 million off of the level you would have guided to had you not had these two issues just trying to unpack what the moving pieces on how much they were.
And then I had a follow up.
Yes, it's hard to say exactly Brian , but I think you are heading.
In the right direction so to speak.
From a yield perspective on the taller Gould as I've said, we've hit bottom there we're starting to recover we'll actually see substrate revenue start to increase going into.
Going into this quarter just not at the trajectory. We had previously anticipated and then from that perspective, it's really a function of getting the tools up and running and the lead times, we have a spare part in getting them running we have the capacity we have the tools needed to run our revenues from them and then push it to the back end, where we've got capacity as well so it really is.
Both on a revenue and margin perspective. These two issues with Venezuelan went down and I think will come back up to that.
Our revenue trajectory kind of referenced.
As we get to the back half of the year.
Okay. That's helpful and then not to focus too much on the short term, but I think this does.
Calling into question.
And kind of some of the cadence is what our modeling year to do the next year to two when we think about gross margins you made a comment youre going to see some recovery into fiscal Q3 back to where I think you were trending before the yield issue. So.
Five maybe 36% non-GAAP that that's where you were before this.
Temporary downtick is that where we're headed back to in the back half or because I think the original trajectory.
Have called for something in the higher 30, maybe even reaching close to 40% exiting this fiscal year, but what what.
Trajectory are we kind of getting back to if that's.
That's the way we should be thinking about this being a one or two quarter phenomenon before you get to higher margins in the back half.
Yes, obviously, we're going to be lower this quarter, but I do see us starting to expand margin again and get back into Q3, it's a one to two quarter impact Brian you kind of think of last quarter. We had some good start we're seeing more of a cluster during Q2, you'll probably see some impact maybe less impact in Q3, as we start to expand again, and then kind of back on track.
Q4 period.
Alright, I will take the rest offline. Thank you guys.
Sure.
Thank you and our next question is from the line of Jetblue Shlomo William Blair Jed you line is now open.
Hey, Thanks, Thanks for taking my question and good to be back so.
I guess first question.
In.
When you talk about <unk>.
<unk> the.
Or lengthening the height of the pool I'm not sure if ever.
Well understood.
But if you are.
Going through a process change and have higher confidence in your recipe.
And elongate the duration of growth.
While near term youre going to see a yield hit that.
That should result in.
Less operating and maintenance, because youre not going to be cleaning out that oven.
Furnace.
To be more precise.
As many times during the year. So I'm just wondering in the near term as you see the hit on materials.
I guess would you mind unpacking sorted that benefit that you see too.
As to whats, prompting you to make this move.
Yes.
For the.
At the materials level, and then I have a follow up.
Okay.
We obviously had a continuous improvement process improvement.
Our program across all of our different businesses and this is part of that we are very excited about the quality of the pool.
The goals that we're not getting out of that.
Process so that.
We feel very very good about that.
Talking about.
Handling pools in the backend.
That are slightly larger.
Larger than we.
Historically.
So.
As Neil said.
Made already have already bottomed out we've got really good improvement.
And we will get back to where we need to be within a couple of quarters.
Moving online right correct.
Exactly.
<unk> alluded basically youre going to get more wafers or silicon carbide Crystal run after that will increase the output and decrease the cost.
Our.
We.
<unk>.
The back end of the full year this is going to be a room.
Got it.
Thank you that's helpful and what I thought so I.
I guess just as my follow up question.
With respect to Mohawk Valley.
I was wondering if you would update if you don't mind.
Youre right I think the milestone was sort of running customers silicon and.
Where are you at with Mohawk Valley to maybe help with confidence in terms of.
Getting back to that we're getting to the.
That run rate that you that you talked about.
Yes, so Jeff we've had.
A number of.
Total wafer Roscoe.
All right.
Not from us.
That have yielded good electrical to iron ore.
And we're very pleased with the yield numbers that we're seeing right now that's all looking I would say.
No.
If you've got sort of things so it's really looking pretty good.
In fact.
We have so much confidence.
We're actually running material right now.
To qualify the fab.
That is well ahead of schedule that you.
You might imagine so we're really excited about that.
One for Bob on that customer's we arent typically that's something.
Great.
Graphic customers and kind of pulled along with you on that I think with the supply demand mismatch. We have a lot more customers that are voluntary interview sort of in the person of that.
Followed by first et cetera. So.
I would anticipate the customer.
<unk> process to be different than normal that would be probably a lot more of them jumping in.
Bottom line faster than normal and all of that says that.
Should be should be.
Restaurant.
By the end of this fiscal.
Fiscal year.
Great. Thank you and our next question is from the line of semi <unk> of JP Morgan.
<unk>. Your line is now open. Please proceed.
Yes. Thank you thanks for taking my questions I guess.
Certification on the commensurate to Mohawk.
But no.
The supply issues or the issues.
Box et cetera that youre referencing today just wanted to.
Confirm here that is that impacting your ram on Mohawk as well or is that issue with sort of a cold box.
All equipment and not really something that carries over to how youre ramping Mohawk and Richard you'll see them issue Neil.
Sort of giving some guidance about when you see gross margin expense again does that include your thinking in terms of revenue and gross margin impact from Mohan.
In the back half of this year the impact is more outcomes into the non-GAAP number yes that we would follow up thank you.
Thank you I'll take the I'll take the beginning part of that and Neil can handle that.
The back end of it.
The spare parts issue is really related to older equipment in our in our firm.
North Carolina.
Thats not anything to do with Mohawk Valley recall, we began building Mohawk Valley.
March of 2020, we started installing equipment.
In 2021, when we did a lot of preordering of long lead time type of equipment and a lot of it.
Before.
Other semiconductor companies.
Im going to start building wafer fab.
Actually done a pretty good job of getting out ahead of the long lead time item and Mohawk Valley and then finally I would just add that.
Those obviously are brand new machines modern equipment, we're not looking for spare parts for those machines.
And the availability of those in any case, it would be likely a lot better.
So machine factory for five years or so.
Bottomline has no impact on that at all.
And then Neal.
The back end of that op margin.
Market perspective, actually I think is a great kind of laid out but I think we're in good shape from a supply perspective and Mohawk Valley.
And the yields that we've seen on these initial loss that was really positive.
Enthused about so I think this just gives us more confidence about rent.
And as I've said, many times the margin trajectory to kind of get in the back half of this year and eventually into 'twenty and beyond.
Largely based on Mohawk Valley and the initial signs of what's coming up that are very good. So.
It'll be a little bit of a timing issue and we'll see what happens in terms of qualifications as Greg talked about already starting material for that.
What the timing looks like there, but I think we are.
What kind of all systems go in and things look very positive.
For example, a lockdown in the back half of the year.
Perspective and Alastair.
And just the margin expansion as well.
And a quick follow up on the auto issue that you're highlighting creative to not being able to change it with the 150 <unk> just because of high demand that you're seeing I'm. Just wondering was that something that was sort of known for.
You had more sort of insight into a few quarters ago and sort of decided that this was the quarter, where you will just switch over like what was the exact sort of.
Timing timelines laid out and because I would have is the only special you would've sort of Buffalo, both in terms of margins and revenue in the quarter. It says it does that change over time, but maybe I'm missing something there.
I think I think that's largely correct I think that a year ago. We were at our Investor Day. This is something that within our plan and I think as the demand has continued to strengthen and strengthen it lives in our back very very full and from that perspective.
The increase in demand is just really left us no option, but kind of delay that transition from 100 millimeter too.
150 millimeter and the RF product because there really hasnt been any downtime the way I would think about it over the last six.
Eight months has been kind of incrementally looking for opportunities to kind of make the transition, but the demand has gotten to such a point that we haven't really been able to take the downtime.
Go ahead and make that transition so what that means.
From a Martin transition standpoint, as I mentioned on the prepared remarks is up about 300 basis point drag.
On margins as you think about getting to that country are increasingly more timeframe.
And we will just kind of open the gap now is all again, it's really just driven by.
The demand that we're seeing so as you look out into the longer term goals in 2016 beyond that I mentioned.
200 millimeter substrate and the right cost structure still look very good but just don't have the downtime and a transition on the RF side.
So sitting here today.
Great. Thank you. Our next question is from the line of Colin Rusch of Oppenheimer. Colin Your line is now.
Thanks, So much so can you talk a little bit about the composition of these design and.
How much of this is coming from medium and heavy duty and some of the higher voltage applications to that maybe out there.
So this past quarter.
90% of their design and came from automotive.
We're seeing a tremendous.
Positive adoption of Silicon carbide, an electric vehicle.
Significantly.
Adoption.
Michael in the overall automotive market and those two things are driving it.
And to the right I think the current manufacturers are well.
However that range is a really big deal for our customers.
The rate at which you can refuel fever recharge your car is a big deal both of those drive higher voltages, which bank fee.
The impact of using silicon carbide over silicon much more pronounced.
That way.
All of those things are driving that adoption.
Outside of that we had really a whole smattering of different design ins across the industrial in the RF space.
Applications.
We talk a little bit about what the.
Those ranges are.
Finally, as Neil had mentioned north of 40% of our design and converted to design win.
That means customers are beginning to ramp into production.
Then.
That combined with the amount of design and we have is really unprecedented at least.
I've never seen anything like it we've done.
Three $5 billion.
This quarter $2 six last quarter 6162 quarters before this $9 $3 billion of design.
It's unprecedented.
Is this driving an enormous increase in our <unk>.
And our.
Near term.
And certainly on the revenue outlook.
Okay, and then just thinking about the cadence of potential debt financing is that something how mature is that process for you guys now from a project level in terms of bringing some of that capital in to support the capex build out for the balance of the year because it is a pretty healthy number that you guys are looking at spending.
And so from a just from a financing for.
<unk>, let me just remind me.
Brenda.
And we got $1 $2 billion of cash on the balance sheet.
And in addition to my mind with the capacity plan that we laid out a year ago at Investor day kind of Capex step down.
It was 56 million this quarter and just $55 million.
I do think going forward, we'll start to see a step up in the capital expenditures that are in line with what we're talking about I think about that sort of a pickup in the back half of the year. So we got a little bit of time to go work. So certainly we do need to go out and do some funding to support that dilution as it relates to the financing absolutely on top of our mind.
And there's really four buckets that we're looking at in terms of executing that.
Most of which are not of the FERC did government incentives.
<unk> been very close to both.
Got it.
The U S and we will be in a position to benefit significantly from incentives.
Both of our wafer fab expansion as well as the materials factory in North Carolina. We've also got $300 million of incentives remaining with our partnership with <unk>. We're also working closely with customers and upfront payments for capacity is obviously non dilutive.
And then we've also got private financing project financing.
And movement to public markets like we've done before so the lower dilution of options on that list is where we are currently focused.
Just given that step up in capex in the back half of the year. So we will want to get something done in advance of some of those bigger spend that we're talking about investments that we're making and that's what we're focused on right now. So we'll lay this out in more detail as we get into.
In New York, New York next week.
Thank you. Our next question is from the line of Vivek Arya.
Bank of America. Please proceed.
Hi, This is Blake agreement on terms of that thanks for taking my question.
Just wanted to focus on the materials business quickly I know you've mentioned historically about holding 60% market share.
And that business and not to get ahead of the analyst day, but I was just curious how feasible will be to maintain this level of share as we see new market entrants and also an increasing number of vendors internally source capacity moving forward.
Yes.
Yes.
Basically the silicon carbide market is growing very very rapidly and I think the supply is going to be chasing demand.
Through the end of this decade.
It's just going to be tough.
Keep up with it.
That obviously attract people to the market and.
Certainly all of our.
Our.
Silicon carbide materials customers.
I don't know if all of them, but most of them have plans to.
We're trying to develop their own.
Great and so forth.
I think that's a smart idea a good plan and it's something that I've.
It's in their shoes.
So probably find it a little bit more challenging.
I would expect.
Alright.
But I think that's basically how we're thinking about it and we're thinking that.
So they're going to.
Invest and deliver on what they are.
Okay.
So that being said we've got a modest.
Thought process in terms of.
We're going to do from a market share standpoint, basically hold share of that external market.
Ben.
The internal demand would be.
Satisfied by their internal capabilities.
These companies.
Helpful. Thank you and then just just as a follow up as well I know you mentioned the rapidly growing.
Demand in Silicon carbide.
But also I know one of your competitors out there is also seeing about $1 billion in committed silicon carbide revenue in 2023. So just on the feasibility of the silicon carbide market, even next year, having multiple $1 billion vendors just your thoughts on that would be helpful. Thanks.
I think the demand is clearly outstripping supply and I think to the extent that we can bring on collectively the industry can bring on more.
Supply is going to help things.
Silicon semiconductor industry is clearly.
Looking like it's going to.
Cyclical downturn here.
Carmine.
Some secular trends that are just going to overpower.
And that's the transition to ease the transition to silicon carbide and clean energy electric vehicles.
So I think the demand for the industry.
Supply.
Through the end of this decade, and Thats inclusive of us.
Putting them putting into action in the world's largest silicon carbide factory with only 200 millimeter silicon carbide factory.
And installing a significant expansion in syler city with that capacity coming on.
2024, even with all of those.
Multibillion dollar investments.
The supply is going to be chasing demand through the end of the day.
Thank you. Our next question is from the line of Gary Mobley of Wells Fargo.
Carey over to you.
Hey, guys. Thanks for taking my question.
On this issue relating to some challenges on the backend.
A handling some of these longer bowls.
I'm curious to know if.
This may foreshadow, maybe some transitional issues as you moved 200 millimeter and related to this issue. This for the supply of the captive or merchant materials.
No I don't see it related to that at all in fact.
Some effects.
Any any process improvements that we make on 150, we typically.
<unk> shipped 291 I.
I think it's a good thing.
Having a taller christos.
Lower cost.
And it's just a matter of how to handle it in the backend.
As Neil mentioned.
Our a bunch of improvements in place.
On the yield issue that we talked about and we're heading back up North America. I think this is the proverbial good problem.
We're super excited about the quality of these pretzels.
Okay.
We can do up to <unk>.
Deliver all of them and so forth. It's just a matter of fine tuning the backend of the process.
And related to captive versus merchant the impact.
We have always said that.
There is going to be.
The suppliers that are developing their own silicon carbide capability and we are in.
And when theyre going to be successful at doing that so that is part of our plan.
Okay.
Yes.
Thank you very much and our next question is from the line of Edward Snyder with charter equity.
Edward Your line is open.
Thank you very much where to start here Greg.
So you said you're looking for revenue for Mohawk Valley by the end of this year.
First of all is that production or are you talking about revenue for sample parts because if we go back to a year ago. When we were in.
In this <unk> last year, and we went through a very detailed discussion of what well look.
It sounds like Youre behind by about six months, our model suggests that the things. We've talked about you guys was that you'd start internal fab call.
Probably.
Last year and customer qualifications.
In.
And.
March or June and then we'd start seeing initial production now and then volume production second half or the beginning of 'twenty three.
And we've talked about last after the last quarter to about it sounds like you guys were a little bit delayed then but now it sounds like that may have been a little bit more acute. So first of all can you mark to market put a flag in the ground now until specifically what do you expect for Mohawk Valley in terms of.
Not just revenue, but when do you start expecting to reach volume ramp to volume production. When do you expect to be done with customer qualifications I know you get some revenue for that so maybe we can reset the expectations for the ramp of Mohawk Valley and understood.
Complicated endeavor, so that things.
Shook out and then if I could maybe Neil you're saying this is 300 bps hit to gross margins due to RF, which is curious to me.
Is this.
I apologize I missed it but what are you raising gross margins overall because of the improvements.
And wafer diameter in the.
RTP or.
Has something occurred.
Reduce the margins you are already producing in there because it seems like a real curious deviation from what we had and then believe it or not I have a follow up thanks.
Yes in terms of Mohawk Valley, we've got a much more a lot has gone through.
All of them.
Although mossad lots that have gone through are performing very well.
Pretty pretty excited about where we're at and as we now have material and the fact that.
We intend to run through.
And so that material has come out with new qualification et cetera.
Theres going to be a lot of time sort of simultaneous activity that happens with customers in terms of getting there.
We had a lot of outreach from a number of different customers in terms of as I mentioned I've been wanting to be first in line because.
There's only so much we can get out of.
In the near term and so we're anticipating not only kind of.
Preproduction sample.
We're expecting to have.
Initial production out of that path.
At the end of this fiscal year.
Which is the June quarter so.
We're expecting to get.
Revenue out of that in terms of the ramp we would begin ramping into the economy is going beyond that and we see some increase.
Increasing.
You can just kind of kind of a bit of a ramp schedule.
So far from a rent perspective.
Right now we're going to be.
Obviously, we've got folks coming out of there right now.
Do you use for reliability and qualification testing.
To the back half of the year, we'll start the qualification schedule looks like we'll handle it starts off pretty much in parallel with customers.
Strong demand for those types of parts and then we will start selling selling volume production in that timeframe. So it's going to be a little bit variable because it depends on the timing and how the call.
And in line, what we said previously so I think thats whats going to be a matter of timing with customers in one qualification schedules.
Well right now the yields we're seeing.
The initial launch.
We appreciate it.
On the RF margins.
Yes.
Second question is on <unk>.
If you go back.
The last year and additionally, we've been running that business and those products are.
That product 100 millimeter substrates.
So our plan was during fiscal year 2023 with to make the transition for large parts of the business to $150 million of subjects.
And then obviously, we're going to help us on the margin.
For 2423, so if you look at it today, you know that <unk> talked about many times at a higher cost footprint and we're running 100 millimeter wafers and the higher cost of the product and RF are some market challenge right now and this is going to be a solution to help us kind of drive up the margin curve.
But given the high level of demand that we're seeing but it's not going to be able to make that transition. This year, it's not going to have a downtime in the past given the amount of kind of heavy demand that we're seeing so the way to think about as we move into 'twenty four.
Within our forecast for Q3 as it relates to margin expansion, but if you look at the 24, we did anticipate seeing benefit from 150 millimeter wafers in RF.
So that's what's driving us.
300, or 300 basis point or so impact to get tonnage.
Or if you are to look at that cost today or a margin of those products today versus the rest of the business, obviously, causing a drag as well so that's.
That's really what the plan was to kind of incrementally pushing at the output.
Just don't have visibility right now.
On the capacity.
The transition.
Okay and then my follow up if I could is the Capex increased from $5 50 to 1 billion is that entirely due to the new materials fiber as part of that acceleration of Mohawk.
Then.
We're running into obviously a recession you have seen the reports guys things have turned out pretty quick.
Are you seeing any change in customer behavior with regards to orders or forecasts.
Industrial I'll take that.
Yes, Doug.
Let me take the second one.
The only change we're seeing.
Welcome to the right.
Clothing.
Increasing.
And asking for more earlier in terms of demand.
Yes, I think that the I think that the Capex outlook has increased.
Almost entirely related to the new materials facilities.
A lot of the expansion for Milwaukee tool up the additional amount that was already included in the Capex bucket that previous previously.
If you didn't.
The materials facility or in the wafer fab.
Sure the new materials.
Thank you and our next question is from the line of Matt Ramsay of Cowen. Your line is now open. Please proceed.
Thank you very much good afternoon, guys I appreciate you taking my question.
Greg.
I understand the benefits of going to a tolerable levels, both on $1 50, and 200 and what that can mean in the long term I guess, what I'm <unk>.
Struggling with in the near term.
You would have thought that the rest of your supply chain would have been making the transition in anticipation of those taller pools at.
At the same time and that you wouldn't have made the decision to transition to the tolerable without the back and be ready for it.
The impact of revenue. So I'm just trying to understand everything seems like it should have transitioned to anticipate those tolerable sort of in concert with each other and now it seems like parts of the infrastructure aren't quite ready to handle it and its causing delays. So if you could just kind of walk through the different pieces of handling the tolerable and which ones.
Might have tripped up or not been ready for that transition as you anticipated.
Thanks for the question Matt So.
We aren't going to get into a lot of detail or our.
Crystal growth and material operation.
A lot of that intellectual property.
And transit etcetera.
What I would say is that.
Solar pools.
Caused some challenges in the back and the back end processing of these of these pretzels.
The team jumped all over it.
Bob.
What the challenges were and what we.
We need to fix and are already on the recovery plan to get back to where we need to be so we're pretty we're pretty satisfied with that kind of thing.
We went through this.
Of course, it would have been great. If we didn't have that.
But silicon carbide.
<unk> been ramping these things is not perfect.
The good news is we've got substantial amount of experienced people around.
No problem.
All of them altogether.
And that problem and fix it relatively quickly we're talking about a couple of quarter bump here.
And we already see ourselves on the upward tick so I think.
This is part of the way it is with silicon carbide.
Turkey technology.
Manage into and certainly to scale it.
Also 92.
I think having a substantial.
I've experienced people.
Yes.
And through all the different trials and tribulations of Silicon carbide help us.
Thanks, Greg.
Appreciate the perspective, there I guess.
As my follow up Neil I know Theres, a lot of folks and maybe this is front running Monday, a bit but there's a lot of folks are asking questions and you adjusted here a couple of times about raising funds versus the increased capex and your focus on minimizing dilution but.
It's hard to really know what youre going to get from different governments, both Europe U S Chips Act, North Carolina, New York et cetera.
And it sounds like Youre going to fund the remainder.
With equity potentially.
I'd be interested in is any line of sight visibility too.
Customer co funding our customer investments alongside of you guys. What the magnitude of that look like how many engagements you might have.
If we're trying to get to the remainder there might be funded with equity that piece that might be done with customers that might also.
<unk> insight to their commitments to you to your programs.
Might be helpful. If you have any color there thanks very much guys.
I think I think it's basically what I'm talking about the quarter.
The big kind of our partners and we don't know exactly what the government incentives are going to look like.
I can tell you the majority of what we're looking at right now I'd say the significant majority of that looking right now and all of what we're focused on I would think you are in the shorter term.
As lower non dilutive in terms of what we're focusing on.
In terms of what we wanted to do and what we want to target and Thats really where our efforts are focused right now we've got the four buckets I talked about the government incentives.
From payments from customers.
Private or private financing and then finally last one go to the public markets and I would think of it in that order in terms of how we're going to go think about million process.
So I think we've got a lot of lever initial discussions that we've been very very positive.
But there is some variability in there related to several of the items because not all the regulations are government incentives.
An issue so it's.
It's hard to give an exact amount of what we're going to do it but I can tell you is we are focused on you.
Lower non dilutive elements of that plan right now and certainly as we think about around the funding and advance some of these higher step ups in capex and to support this expansion.
Four.
Were pretty significant.
Both pickup that we've seen you.
In light of the design pipeline expansion that we've seen in this quarter.
Great. Thank you. Our next question comes from the line of <unk> Srivastava.
BMO markets.
Over to you.
Hi, Thank you.
I'm sure I'm not the only ones based on question that I'm getting to an investor.
A little bit confused with the.
The commentary that you provided in the last earnings call, where you were very confident about the improvement in the execution of the Bakken.
And you specifically said Hey look we expect this to continue.
And we all appreciate the challenges.
Ramping the business, Greg from where you were versus where youre going it seems like theres a lot of volatility.
What happened within a quarter that you went from calling out improvement continuing to be missed.
And on the execution front and that was my first question.
Yes, I think from an execution standpoint average and I appreciate your color on that but obviously, we've got a big ramp in terms of what we're talking about we just took our long term revenue of 30% to 40% so and the footprint that we're working on today is not the future footprint working off in the future. So we have a lot of confidence we've made a lot a lot of progress.
On the back end execution last quarter, we still see the benefits from that.
<unk> kind of growing pains as issues, one is related to longer but ultimately like I said I think it is.
Is going to be a nice tailwind for us going forward in terms of the great technology for US and then secondly from a fab perspective, we got hit by supply chain.
Only because we haven't really had any issues with this over the last several years as we ramp the business. This is kind of a new item has kind of helped us from a.
That device perspective, but again I think this is a one or two quarter type issue.
I would say, it's a bit of a dip.
Longer term backdrop.
There is significant demand and a lot of revenue growth I would just maybe just add something from a terminology standpoint.
In the semiconductor industry front and backend backend typically refers to packaging Assembly test etcetera, what Neil referred to last quarter and the back end improvements.
So.
Today, we're talking about tolerance levels and a challenge on the back into the processing of that.
A completely different thing than the backend processing.
Microchip suggest.
Make sure you understood.
It's the same terminology for two different banks.
Got it got it no. Thanks for the clarification then a question for you you're obviously youre seeing a demand then and you were very confident about the.
As your guide for or what you expect for fiscal 'twenty six, but if you think about free cash flow and you said it will be pushed out.
Or were you thinking about that.
The puts and takes if you are so confident on the demand and on the ramp of Mohawk in the second half.
Should investors.
Who care about free cash flow when somebody like definitely kind of a free cash flow what should we be thinking about when do you start to generate free cash flow great. Thank you.
But maybe let me just hit that one and we're shipping I think we are going to take the free cash flow numbers out, but that free cash flow in advance of building what I think is a.
I think manufacturing footprint for <unk>.
A high growth industry with out there some of the most discerning customers in the world and we're going to built state of the art.
Capacity and capability, that's going to underpin us.
For the long term, so I think about having to invest in the business in advance of that so I've talked about a two to one capex ratio as we think about the investment.
So we'll just talk about as you get out beyond that long range plan period without beyond.
The cash flow generation capability of the footprint, we're bringing online to match the demand that we're seeing in the business is going to be terrific and we'll give you a kind of an update on how that all works on a Monday.
Thank you and our final question today comes from David O'connor with BNP Paribas.
David Your line is now open.
Great. Good afternoon, Thanks for taking my question.
Maybe in the same vein, Greg as the previous question.
Questions.
Does the kind of newer issues no thats, what youre seeing on the.
In terms of does that change your view of the terms that long term.
Does this kind of.
Any of the plans you may have for desktop longer term.
Is there anything new there that's my first question and just a clarification for Neil on the.
The three points of gross margin headwind on that side.
As far as I understand it doesn't change the FY 'twenty four targets on the margin side correct. It's still in line with what <unk> indicated previously thank you.
Yeah, I'll take the first part and then Nielsen and on a second.
Mark.
The team led by Mr. <unk> done a really good job staying.
Stabilizing and then improving the Durham wafer fab, what we have right now.
Dealing with the spare part issue.
Older equipment inside of the fab itself and I think.
We resolve that.
The term fab is never going to be more value. These are completely different generations of one.
One is highly automated and brand new in the otherwise not automated at all and.
30 years ago so it.
Never going to be equivalent b, so to speak but we're.
And we've made good improvement.
More improvement to make and when.
We're just dealing with a little bit of supply chain initiatives.
Yeah, and then on the RF margin impact as you look out into 2004, and I think like we said earlier were 15.
Really a tremendous pull on the demand side.
Over the over both the.
Short term and the long term and it's just not leaving us enough opportunities got downtime to go.
Bring that down and make that transition. So it will have an impact on a 24 margin trajectory on a 300 basis points I think.
It's kind of a number that you want to think about there in terms of.
You've got 44.
But again, it's really a choice of certain customers or taking downtime to make a transition like that in order to make choices for customers.
Now if we go out and without beyond 24, I think thats the.
The blueprint, we have our coffee capacity over that timeframe, even with the very significant growth plans that we have a very very solid.
Very helpful. Thank you.
Thank you well. Thank you very much everybody for participating the call and we look forward to seeing you next Monday October 31 in New York.
Sure.
Thank you to everyone who has joined the call today. This concludes and you may now disconnect your lines.