Q2 2023 Transphorm Technology Inc Earnings Call

November 9, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day and thank you for standing by welcome to the transformed <unk> second quarter 2023 earnings call. At this time, all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session.

Ask a question during the session related press Star one one on your telephone please.

Be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Jack Perkins our call moderator. Please go ahead.

Thank you operator, good afternoon, and welcome to transforms second quarter fiscal 2023 earnings conference call joining us today from transform our Mario Ramos Chief Executive Officer permit Perique co founder President and Chief operating Officer.

And Cameron Mccauley, Chief Financial Officer.

Before we begin I'd like to point out that there is a slide presentation associated with today's prepared remarks, which management will be referencing during the conference call.

These slides can be assessed through the live webcast link in the investors section.

<unk> transformed website, where they will also be posted and available as a link to a PDF subsequent to today's conference call.

Additionally, during the course of this call the company May make forward looking statements regarding the company's financial position strategy and plans future operations specific end markets in other areas of discussion.

It is not possible for the company or management to predict all risks nor can the company assess the potential impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements.

In light of these risks uncertainties and assumptions the forward looking statements discussed during the call may or may not occur and actual results could differ materially and adversely from those anticipated or implied.

Any projections as to the company's future performance represent managements estimates as of today November nine 2022.

Neither the company, nor any person assumes responsibility for the accuracy or completeness of the forward looking statements.

The company also undertakes no obligation to publicly update forward looking statements for any reason after the date of this call to conform such statements to actual results or to the changes in the company's expectations.

For more detailed information on risks associated with the company's business. We refer you to the risk factors described in transforms most recent quarterly report on Form 10-Q, and other subsequent filings with the SEC.

With that said its now my pleasure to turn the call over to transform CEO Mario revise please go ahead Mario.

Thanks Jack.

Welcome to everyone on today's call. Thank you for joining us.

This quarter revenue was $3 7 million.

Hope, 11% on a year over year basis.

When excluding one time licensing revenue in the prior year.

Product revenue was up 38% compared to the same period a year ago.

We improved supply from Japan that you'd reactors and completing the acquisition of additional CVD reactors.

Increased shipments from previously announced Fortune 100 Lotto product.

The top three worldwide Latrobe manufacturer.

Try and secure a new fortune 100, lotto productivity sounding weird.

We strengthened operations sales and marketing teams, we see some industry leaders.

The cure ARPA E program to innovate and transform unique bi directional Gan technology.

Places to two four silicon devices, we can single use applications like micro Inverters and motor drives.

The <unk> approval for the wholly foreign owned enterprise insurance in China.

Enhance the local customer support sales tool applications market.

We expanded package offerings by adding industry standard <unk> home products, which enable team to team with multiple sources.

This complements our existing high performance <unk> products, both value added to deliver superior results versus competing products.

With that it is now my pleasure to turn the call over to <unk> for.

For a more detailed overview of the quarter.

Thank you Mario and good afternoon, everyone.

We're pleased to report <unk> second quarter revenue of $3 $7 million that is slightly higher than the current consensus estimates.

Wireless revenue was lower sequentially over fiscal Q1 due to the supply constraints, we had previously alluded to.

In August the protection product revenue in fiscal Q2 represented a 38% increase over the prior year FY 'twenty to Q2.

Product revenue continues to be well over 80% of the total revenue in line with our long term growth and high power portion of the product revenue was over 65% of the product revenue.

All of this our mix what is still quite a challenging environment with multiple macroeconomic headwinds.

We have continued our leadership in high power again.

Continuing shipments of products for our multi kilowatt system.

Serving the gaming energy server computing and blockchain as well as industrial power market segment.

And Carlos more and more customers are recognizing the simple strength of our easy to use higher efficiency gain factor versus.

Versus competing emailed gallium nitrate solutions, which is exemplified by US now shipping to a worldwide top three laptop manufacturer and securing another laptop Dr design win at a fortune 100 customer.

These successes have been a direct result of our targeted investments in this area and we plan to continue investing in these areas in the future both internally and with our external design partners.

We are in the midst of addressing some of our supply chain challenges, notably, bringing more of our existing reactor capability in Japan online and we are now seeing a nice progress there, especially with the Covid related travel restrictions now no longer a hindrance.

The increased wafer output will allow us to address growth in product revenue for fiscal Q3.

Moreover, we are also providing additional reactors are expected to be delivered in calendar Q1, 'twenty three that will facilitate further expansion later in calendar 2023 as previously discussed.

Transform has continued to lead on the innovation front and are now executing on an ARPA E program to develop bi directional gallium nitride switches.

This is a very unique attribute of our natural gas technology and IP that allows us to do for traditional silicon based devices to be replaced by single bidirectional gap in.

Applications like solar micro Inverters and motor drives.

We have expanded our package offering.

He is one of the most comprehensive in the gaming industry.

Include industry standard surface Mount <unk> packages.

That allows them to print compatibility with multiple again sources.

This complements our existing high performance <unk> packages.

And both are validated for superior results versus competing yet.

The key challenge for us.

In front of us over the next two quarters and FY 'twenty three is both continuing the vector to increase of our wafer capacity and increased demand across multiple applications.

As reported by many companies.

Laptop and mobile market softness is continuing and our goal in this area is to win new accounts for gallium nitride, increasing our market share.

Blockchain traditionally one of our stronger areas.

Is experiencing weakness presently.

Taylor.

Our customers expect to recovery over the next six months or so.

Meanwhile, with our proven leadership in high power again, we are addressing growth in the server renewable and gaming segments, while building design in momentum in the electric vehicle to be the two Wheeler three Wheeler area.

While it is too early to comment on <unk> Q4, 2003 independent environment. We believe these efforts will help keep us on track and address our targeted revenue growth.

In the third quarter.

To continue our momentum we have now expanded our Asia presence added new partners and bolster our senior team.

We are pleased to report the establishment of our chins entity, focusing on sales field application and local marketing activities.

We also continue to add partners and deepen relationships with controller and IC companies.

As well as independent design houses our idea.

This key part of our ecosystem is enabled by easy to use gallium nitride.

That can be driven by standard discrete or integrated drivers seamlessly.

We are very pleased to have recently announced six new leadership appointments, comprising both internal champions and new industry veterans hired from well known published semiconductor leaders like on semi SD micro and Alpha Omega.

To the best of our knowledge <unk> is the only began company to be shipping anything in high volume in multiple programs in the kilowatt range today, making us a true one stop shop for again from low power to high power kilowatt class.

With our high power strength and strong IP, including application based IP for high powered we remain poised to expand into new segments.

For example, the.

And to convert the EV two Wheeler three wheeler opportunity into a multimillion dollar revenue base for us in FY 'twenty four.

While systematically penetrating the four Wheeler segment after that with onboard Chargers DCC auxiliary converters and ultimately drivetrain Inverters are there to talk about our progress in this area later.

Overall with a proven performance and design benefits of TVN over competing solutions and leadership and high power backed by a strong application based patent portfolio medium and well positioned to address the $3 billion again, Tim in diversity of yes, like servers and communications blockchain computing gain.

Energy and electric vehicles, two leaders <unk> four meters, but also allowing for growing our share in the lower power fast charger and adapter segments.

With that outline I will next review some of the salient point of <unk> value proposition as a recap then review the results of our cost execution in September 2022, ending quarter and other key challenges over the next two quarters as well as our expansion strategy for beyond FY 2023.

Moving onto slide three now gallium.

Gallium nitride is a wide bandgap semiconductor materials, but public relation that it uses electrical energy based enables compact and cost effective power systems across a variety of electrical power conversion applications.

Low power laptop or mobile Chargers fast Chargers high power computing automotive and motors.

And by virtue of its inherent properties does this much better than traditional silicon and also better than newest semiconductors like silicon carbide.

T J, a pioneer and leading manufacturer is a supplier of these high voltage Gan power semiconductor products over the widest range of applications from 30 watts low power to over four kilowatts, Hi, Paula.

The success in this application for transform has been a result of our continued core strengths investments and strategy.

Our fundamental IP platform with over 1000 patents worldwide as well as our high performance high quality products that now have more have more than 80 billion hours in the field have been validated by Blue Chip partners customers investors, including financial partners IC design partners manufacturing partners automotive in that.

We are market leaders and the U S Department of defense.

Our core and differentiated product offering is enabled by our high quality different manufacturing base that we essentially own.

Although all again is addressing a large and growing multibillion dollar market, including electric vehicles and <unk> smart charging among other things that are passionate team members are helping us to penetrate.

Moving to slide four now.

Transform is in a unique and differentiated position amongst again suppliers with our one core platform strategy that spans a wide range of our spectrum.

With products in the market today that address a tremendous multi billion dollar market opportunity for Gan power conversion again from low power adapters and charges to high power server blockchain Datacom power to industrial energy and PV in waters renewables that.

<unk> already ramped in all of these areas and then in the mid to long term large growth opportunities with automotive electric vehicles, both <unk>, two and three wheelers forest in calendar year 2023, followed by EBIT formulas further continuing Gan and transforms growth beyond 2024 and 2025.

Transform gun solution in production today deliver high efficiency complex systems with easy to use and easy to interface products for the customer with proven performance benefits, which are a combination of efficiency smaller size lower rate faster charging against silicon silicon carve.

And other Gan solutions like E mail.

In slide five we talk about one of our key attributes since that is the ownership of our Gan wafer production supply chain and advantage that is becoming even more important in today's changing geopolitical climate.

This vertically integrated strength stops from the design of our safe robust easy to interface normally of gallium nitride.

We directly own and control our gallium nitride MPV for manufacturing with multiple and more CVD reactors. These are tools used for making our growing again materially onset silicon wafers.

In two geographical locations, California in Japan today.

Our wafer fab factory is a joint venture with our financial strategic partner and as a recap is of high quality manufacturing site with the only publicly reported data that shows yields for Gan can match those of Silicon Cmos running in the same factory a feature that has contributed to our high power game products.

Yield and quality.

While packaging is done with our high quality wholesale partners.

<unk> PTH transform IP in this design.

For example, allowing the again to be efficiently used in robust deal packages desired by high power customers.

Last but not the least is our application and design effort, both with customers and our solution partners.

Per foot now do we work with our again, because our seamless integration with the controller and driver products.

Now on slide six as one looks at the competitive landscape. The transform <unk> performs as a leader in various verticals from low powered two hypotheses delivering the broadest range of power.

As silicon is falling short of <unk>.

Meeting rising demand in form factor or size.

Speed and efficiency gallium nitride is penetrating the power market.

Many companies are in the market with gallium nitride, notably at lower power adapters and charges.

While Samsung addresses both.

Hi, Tyler and low public together.

A few key inherent factors that outline transforms differentiated benefits.

Versus competing yet.

First of all superior efficiency superior performance due to lower losses from the gallium nitride.

Especially at operating temperature due to the design of our again thanks.

Secondly, due to our integrated silicon effect gallium nitride high voltage device combo.

Our robust architecture and easy to use platform is enabled capable of both totally robust high power packages and use of standard drivers and controllers and often integrate integrated drivers that are already existing literally for free.

In existing controllers.

What we're also seeing now is some of the so-called Ics.

That are attempting to go to high powered the IC component is actually remote and a discrete factors used basically a regular again.

Another important attribute is it other integrated architectures robust silicon like interface and strong high voltage gallium negative device Campbell has resulted in proven operational operational reliability in both low power and high power applications.

Versus.

Most of the field data and competing again, so far at least coming from only lower Paula.

For our gallium nitride.

Also aim to deliver a higher voltages for example, so it did 900 wood products are already in the market today and 1200 volt is in R&D that will certainly challenge silicon carbide and the higher voltage higher power mode, where silicon carbide is.

Gaining traction today.

This is especially because again, it's proven to be a much lower loss as much as 25% to 35% as we have previously discussed versus silicon carbide and does not have the high cost substrate in the complex supply chain associated with it.

Next in slide seven we talk about these advantages that is increasingly being validated with proven wins with customer systems in production at <unk> is adopted in many more markets verticals today with higher range higher velocity and higher performance.

As you can see applications like server power, deeming blockchain and variety of industrial and renewable and also higher end applications are delivering more than 10 times the power levels that some of the other gander openings enabled today and customer systems.

Again, why do we win this is due to the inherent game platform with features like use of a single device instead of two.

In higher powered applications.

More than 30% effectively lower resistance or loss benefit for similarly specified competing gan devices like certain email again.

And scalability to high powered.

And finally higher power higher energy and higher the impact on carbon footprint.

We had gallium nitride can deliver a very meaningful gain of 1% efficiency advantage in system is very significant because it can save several 100 kilowatt hour for a tier three kilowatt system and well over 100 pounds of carbon footprint just from a single device depending on your source of energy.

As we show on slide eight with these benefits a variety of customers have selected to yen in adapter than Chargers.

Although the 70 odd design ins that we have ongoing <unk> 31 to $2 50 was in this lower power range. We are now shipping to one of the top three worldwide laptop manufacturers.

Some examples of new wins this quarter.

<unk> added 65 Watt and 100 watt nodes and we show them here.

Moving on to high power.

On slide nine as we emphasize the high power space is a very large market for games and very importantly, again higher energy impact higher savings for our customers and four transform higher semiconductor content.

Our Gen four and Gen. Five offerings are now gaining momentum and.

And we are working with about 45 designing many predictions some examples of which are shown below.

In diverse applications like gaming.

Data Center server Pollard, let's transfer them by the way was first to show titanium related gain efficiency with its patented totem pole architecture now being used by many.

UBS.

Gallium nitride enabled a 50% form factor reduction from two you do venue and other industrial medical and blockchain powered applications.

As customers endorse and also featured in certain third party teardown. All of this is enabled on the foundation of efficiency performance ease of use and reliability.

While this is a very significant high power and low power growth that I talked about now on slide 10 here.

We show that <unk> applications continue to present, a massive long term opportunity.

As the performance of Gan enables continued performance of <unk>.

<unk> fundamental issues of power loss heat generation and anxiety of range with the high power density delivered by again transform gang, enabling things like faster charging with reduced size and lower losses that ultimately results in higher range.

Transform is AUC, our automotive qualified products to date with our Gen. Four high power solution already ramped in the market in various commercial and industrial applications with proven field reliability.

Our <unk> hundred <unk> gallium nitride platform today in RMB has delivered early results already showing efficiency similar or even higher to silicon carbide in the multi kilowatt range and built on a simple architecture not requiring any fancy designs like vertical gate structures for example.

Let me first stopped in August we are working to accelerate the EV adoption with two wheelers and three either electric vehicle charging segment that fall into the sweet spot of our today's high power solution.

The specific gan opportunities in the EV today remain in the areas that we are focused on onboard Chargers DC DC auxiliary power converters and off grid DC to AC inverters.

With the main drivetrain and Victor opportunity opening up after 2020 526 that can its unit tripled accessible game content to $200 per vehicle conservatively.

We aim to be the full market with 650 volt devices today, and higher voltage to 100 watts and future, including addressing future 800 volt battery vehicles.

To enable transform to address all key EV slots.

Our 201 gallium nitride demo results like I showed before.

Has better performance than Silicon carbide, and this has started to generate attention now from EV customers.

But <unk>, we are directly addressing a variety of charging opportunities, including the onboard charger.

This is also a very attractive market more near term with a tam that approaches $1 billion.

To unlock opportunities for transform to address by end of calendar year 2023.

Looking at the holistic picture on Slide 12, we wanted to point out one of the key ESG impact of gallium nitride and transforms offering a tremendous amount of energy that can be saved over the next several decades.

This is not just one transform but the ecosystem together in gallium nitride based policy.

Our bottoms up internal analysis shows that multi hundred terawatt hours of savings potential is achievable with gallium nitride power and computing and communication industrial and renewable E mobility segments.

Next in Slide 13, now we move to where we are today, our September quarter performance and execution on key vectors that drive over growth.

With our continued leadership in high powered.

At 65% of product revenue this quarter and continued penetration in low power. We have modestly exited consensus consensus estimates delivering $3 7 million of revenues, including $3 2 million of product revenues, while also dealing with some of the supply chain.

And capacity challenges that we faced.

We added both new design wins 10, plus in the low power adapter segment, bringing bringing our total design ins to over 70% driven by our <unk> ease of use high performance.

And facilitating a lower total bom bill of materials for the customer.

Out of this around 25 are now in production with three new transitioning to production this quarter.

We also won a design at a tier one laptop manufacturer and we are also now shipping to a worldwide.

Top III laptop manufacturer.

In the high power segment.

Added 10, plus design ins this quarter, bringing the total to over 45, plus with 20, <unk> production, including five moving to production this quarter.

Here, our evaluation and reference gifts for high power the availability of <unk> robust packages, we cannot easily available or available at all with other gallium nitride has helped us to continue our attraction.

We plan to continue to leverage this and expand into more segments, notably accelerating EV adoption by addressing the tubular market with revenue potential in CDI 2023.

We are making progress with reference evolution solutions in this segment.

In discussions early designing with several target customers now.

We started sampling our pin to pin compatible <unk> and packages that enable customers to use high performing TN product, while allowing them. The comfort of multiple data sources as is required and some of these events.

<unk> complement our performance speak you opened packages that have already been in production with our Super game platform and both packages delivering higher performance than other gallium nitride.

We have made some progress and getting more of our internal wafer existing capacity online and acquiring new etsy wafer capacity.

To this end our Japan pediatric capacity is significantly improved now enabled in part by seamless Charlie's between California, and Japan and.

And procurement of some of the pending reactor Hollywood items.

We are also evaluating incremental investments in our JV factory for FY 'twenty for growth and beyond.

For packaging as we previously mentioned, we have sufficient capacity in place for a doctor charge of ETF and products as well as our high powered products at this time and emphasis there we'll be adding skus spec it skews to broadened our application space and offering more flexibility to our customers.

Our near term business focus remains squarely on supply chain management and capacity expansion with equal emphasis on demand generation and diversification to remain ahead of the challenging macroeconomic issue issues in semiconductor and some of our end target application areas as well.

As we move to slide 14.

<unk> partnership and government initiatives are key for our business.

We are now adding two more NPV actors that we aim to be fully online.

In the second half of <unk> by 2023, bringing the recently acquired newly extra capacity to four.

And part of our targeted plan on track for doubling <unk> capacity by end of sea by 2022.

We are making these investments ahead of time, especially due to the long lead times for securing equipment as well as quantifying it is released to production.

The global wafers cooperation partnership in MP expansion is well on track and allows us in the future to be even more aggressive on the capacity side.

For our long term demand scenarios and growth model.

On the wafer fab, we continued to align plants with our JV partner and are investing in incremental capacity for next year FY 'twenty 'twenty four.

With respect to our customer partners.

Firstly with the cover that we focused on robotics applications. The focus is now on the next development and funding milestone for end of the year.

Then expedia partnerships remain strong with continued focus on epic and wafer supply.

In the electric vehicles, we are executing on our strategy to accelerate revenues here by addressing the two Wheeler segments in Asia for near term penetration and see by 2023 and are developing our own reference design solutions for the same.

This segment comparisons address Cleveland billion dollars Tam for our automotive qualified high powered Gan products in the multi kilowatt range.

The full bill or opportunities for the mid to long term focus on onboard charger auxiliary converters, DC DC converters and investigative efforts at small drivetrain in water started in the 50 kilowatt range.

On the government side, our fiscal Q2 building on the Navy program was around $5 million.

We are now targeting a follow on program in fiscal Q4 as the current program wraps up in fiscal Q3.

We are also continuing RMB on new nodes like the 200 woods and the innovative bi directional switch a unique technology enabled by our lateral again like I talked about under a small pilot program.

With a significant portion of our core Athena for manufacturing in the United States. We are also aiming to position for the chipset funding and submissions for that are expected to be in calendar year Q1 'twenty three.

All in all <unk> and the broader semiconductor industry has been a challenging spot these past few quarters.

Them in position to tackle near term headwinds and progress towards our long term model aided by both capacity expansion and aggressively increasing our worldwide sales outreach.

<unk> focus remains in three key areas.

First capacity expansion and supply chain management, keeping up with and then next year staying ahead of demand.

Generating as well as diversifying demand both expanding our leadership in high power again, and winning marquee lower power adapter in charter opportunities.

And by the end of July 23, starting to bring in even in the two Wheeler three Wheeler segment.

And third continued execution on our product roadmap and key partnerships.

The strategy and initiatives that we have outlined here are expected to allow us to resume sequential revenue growth in the third quarter, and then emerged stronger going forward into FY 2024.

With that over to Cameron to walk will walk you through our financials in detail. Thank you.

Thank you Bryan and Hello to everyone joining us today.

Let me start with a brief recap of our financial results for our most recently completed quarter for my remarks, I will refer both to GAAP and non-GAAP results, which are reconciled to GAAP in our press release.

non-GAAP results exclude stock based compensation, depreciation and amortization and adjustments to fair value of our previously held convertible notes.

Starting with the income statement totaled.

Total non-GAAP revenue to placing product in government was $2 $7 million in the quarter. This represents an 11% quarterly growth when compared to Q3 product the government revenue for the same quarter in the prior year excluding license.

Product revenue as with the prior quarter no forms the majority of our total revenue number over 85% in the quarter just completed much of this revenue and generated in the higher power applications.

Continuing to focus on product sales solid execution allowed us to meet our targets and generate sales of $2 million.

Despite the reduction relative to the prior quarter. This still represents a 38% increase from the same quarter in the prior year, we expect to see further growth in a couple of quarters.

This revenue is being driven across a broad range of power conversion applications, including fast Chargers and adapters gaming data center UBS and blockchain.

The gross margin in the quarter was 12%.

So 10% from the prior quarter.

This decrease was driven by the quarterly revenue reduction with enzymatic manufacturing costs constituting a larger drag on margins. This drive will reduce as we resume revenue growth a direct margins remained consistent and we continue to progress towards our long term model of gross margins in excess of 40%.

A number of options, including new product introductions discrete ongoing cost efficiency activities and benefits that we will receive as we continued to grow and scale will contribute to this.

Operating expenses on a non-GAAP basis were $5 $1 million in the current quarter compared to $5 $4 million in the prior quarter.

This 5% reduction being driven largely by reductions in G&A costs associated with our year end procedures and comes in the prior quarter together with ongoing tight spend discipline across the company.

Enabled by our strong balance sheet. The company continues to increase our team to support our operations across all aspects of the company, including leadership G&A sales applications and R&D.

When containing non-GAAP opex to the same quarter of the prior year, we saw a 50% increase primarily due to personnel increases across the company is just reference.

Turning to EPS I will focus my remarks here on the non-GAAP results. Despite the reduced revenue in the quarter are tight opex controls enabled us to execute to non-GAAP EPS loss of 90.

<unk> <unk> lower than the prior quarter and flat from the same quarter in the past fiscal year.

From an operational perspective, we continue to see solid traction in our targeted markets. The company is fully booked for the current quarter, our short term focus being a perfect execution on enabling capacity expansion to support medium to long term growth.

We also continue to invest in the long term growth engine of the company, including New reactors, we anticipate bringing these records online in the second half of calendar 2022.

Turning now to the balance sheet Q2, so the company maintains a strong healthy balance sheet, our operational excluding capital investments in the quarter was reduced to $5 8 million driven by continued focus on cash and working capital management together with solid business.

Performance affords the company a stable runway to resume its growth trajectory and invest in growth.

And the Citigroup as we look to support our backlog position.

Asset and liability remained largely stable.

The activities of improved the shareholders' equity position $65 million when compared to the same quarter in the practical use.

Looking ahead, we will remain open to opportunities to public strengthen our balance sheet to ensure that we're able to continue to invest in the company growth.

Turning now to a target operating model on the next slide.

Asphalt is in the process of building a hydro cash generative business from a revenue perspective, there are three streams of revenue.

Licensing government.

In the fiscal year product revenue has accounted for over 80% of our total revenues as we look forward to expecting that trend to continue.

The company anticipates rapid top line growth and Gan adoption across multiple end markets with a five year CAGR in excess of 50%.

We are confident that the company can achieve overall gross margins of over 40%.

All segments will be able to benefit from improved cost structure and our current gen. Four gen. Five products. Additionally, gross margins will include a number of specific actions, including new product introductions and discrete ongoing cost efficiency activities as well as economies of scale.

With respect to operating margin the company will continue to invest to support all aspects of our core operations. We have a very stable opex structure, which will ultimately lead us to translate our gross margins and to an operating margin model that will deliver over 20% to the bottom line.

From a cash generation perspective, capex will be required to increase scale in the medium to long term, but with a strong manufacturing system already in place, we will be able to generate free cash flow in excess of 10%.

Finally, I wanted to touch on are positioning.

The company is well positioned to grow across multiple segments, including consumer data centers blockchain industrial and in the medium to long term the EV market.

We are now at the stage, where we have seen and continue to see strong adoption as evidenced in the prior quarter and the higher power space and over 500 key production order for three kilowatt class power supply.

In the consumer segment, we increased shipments on previously announced Formula Fortune 100 laptop adapt to win a top three worldwide manufacturer and secured a new fortune 100 laptop adaptive design win.

Revenue traction exists today in several segments, including consumer data centers blockchain and industrial applications, we have seen strong traction and expect to grow revenues from our solid base.

Looking ahead, our solid balance sheet will allow us to continue to invest in our growth engine across all aspects of the company both from a staffing and a capacity perspective.

With this strong foundation in place our focus turns to execution.

<unk> that we can support the growing demand and what we believe will be a broad market inflection point in the medium term.

In addition to our existing revenue streams, we expect to see initial wins in the automotive segment in this timeframe.

From there the company will drive towards our long term target model enabled by continued momentum across multiple segments.

Concluding on the final slate with a few key highlights.

Transform publicly listed on the NASDAQ exchange is a pioneer and leading provider of Gan power conversion devices. We.

We have disruptive technology that pervades solutions today across a number of significant growing markets. We.

We have established a strong network of Blue chip partners, including Kicky, all Morelli, Ses scour and others.

We have a comprehensive product offering today that meets the customers' needs across a wide range of power levels in the segments.

All of which is underpinned by a strong balance sheet, the industry's strongest IP position and a deep and talented team.

That completes our prepared <unk> remarks, we would now like to open the call to any questions. Operator. Please proceed with the Q&A portion of the call.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone. Please sandbox, we compile the Q&A roster.

Our first question comes from the line of David Williams from Benchmark Company. Your line is open.

Hey, good afternoon. Thanks for letting me ask the question and congrats on the continued progress here.

Thank you.

Yes.

I guess, maybe maybe for Scott you talked about the guidance you noted, 20% growth Q to Q with an opportunity for for 25%.

Wonder if maybe you could walk us through the puts and takes there to achieving the 25 and if theres an opportunity maybe to outgrow that as well it is more of a demand or a supply side challenge for you.

Sure so like.

Also note that we.

They've made definitive improvements on the supply side since last time, but it could.

Continues to be very dynamic mix today of both.

Demand and supply so we are executing on both fronts. So.

We definitely feel good about 20% sequential growth.

In today's environment.

Beyond the current quarter or two that we just announced but yes, we are.

It's hard it's not easy to say today, how much more we can do but we do need to execute on both supply side and demand side simultaneously.

That's the range, we're feeling reasonably good amount at this point.

Okay fantastic. Thank you.

Wanted to ask a little bit about on the technology front.

<unk> got a new four quadrant dance, which with <unk> current flow and operational control. There just kind of wondering what youre seeing in terms of that market. It seems like that could be a very large market for the circuit breakers and kind of the matrix switching applications just kind of curious if you could give us some color on your thoughts there, where we are and what your expectations would be.

Yes.

Sure. So firstly, it's definitely a very unique application offer natural again in which transform has been.

Working on for a long time, now and one devices, replacing money and those are the two markets early I want to just be also.

Clearly, it's early R&D stages right now we know a lot about that device from previous experience, but those are that there is a large market and micro in waters architectures TV micro inverters for bi directional <unk> and then as you rightly pointed out matrix converter, which is a unique topology for motor drives and then circuit breakers, yes.

It opens up all of those.

Notably micro inverters in the in the midterm.

Okay, Okay very good.

And then maybe maybe Cameron.

Last quarter, you had thought that maybe you had mentioned any ways that first quarter in the second quarter of fiscal year or fiscal quarters would be relatively flat.

Excluding the COVID-19 kind of reactor issues it looks like you've cleared some of those reactor is using some of the COVID-19.

But your guidance it looks like it's not quite where we would've expected that <unk> transitioned to me. So I'm just kind of curious is it just a demand side issue that you're facing going into the third quarter in terms of not recovering that whatever was about $1 $1 million. The decline. There is there is it.

Is it more of a I guess the.

The manufacturing side youre dealing with more of the demand side I guess as you can see some of the slowing market conditions.

I think it's a combination of both quite honestly I think that.

The market conditions are well understood in the winter there were some challenges there and we're also trying to ramp our manufacturing footprint.

You've got to execute on both components.

The permits come in earlier, and that's where we feel comfortable with a 20% sequential increase quarter on quarter and dependent on those dynamics, we hope to do slightly better than that.

Great. Thanks, so much for the time and color guys. Certainly appreciate it I'll jump back in the queue.

Thank you one moment for next question.

Our next question comes from the line of Craig Ellis from B Riley Your line is open.

Yes, it's Craig Ellis, Hey, guys nice to speak again, so I just wanted to follow up on.

The demand environment and drill down on what Youre seeing in the laptop market because you.

EBIT start to shift to a new program and it looks like you are having follow on success with another opportunity. The question is this permit but when you look at that market how much of the laptop market are you targeting are you targeting just the high end behind in mid range can you give us a sense for where you.

You are trying to position the business.

Sure.

In the current kind of current planning scenarios, it's a very very low percent of <unk>.

Laptop market and we are now in a position to target sort of the high volume aftermarket <unk> aftermarket also that is lower volume Marty designs, but now now with some of the wins, we talked about a fortune 100, and then the top three worldwide customer we are now targeting the higher volume.

Of the aftermarket and then working on inbox.

A laptop or doctors those are several ongoing design ins now, but even overall, even counting all of that it's still the percentage of the laptop market is still quite small.

Yeah got it got it and then on the margin structure of the business Kamran.

We expect gross margins to go down in the quarter, but I think there were about 600 basis points below what I expected in the low teens versus high teens.

Beyond volume were there any items that are notable in and can you frame for us what your expectation is in the fiscal third quarter end and just outline the combination of factors to get the business back to 20% and then towards 30% if your workplace.

Sure.

The first thing is that there weren't any other particular factors creek in the quarter the direct product margins are stable.

We expect that stability to continue you know I think the the.

The gross margin decline in the quarter it was really squarely.

Looking at sales volume and looking at absorption of indirect costs of manufacturing that the business has and as we grew our revenues the drag that that has on the margins will reduce.

It really is just a function of volume.

Maintaining our execution on on our new products in a cost effective bringing our costs then those covenant combination of factors that will bring us to 20% yield.

Got it.

So as we look out to a period.

Ken.

In the second half of next year fiscal 'twenty for when we expect to get.

Some significant capacity benefit because as you get more reactors online would it be fair to think that gross margins can get back up towards 20% at that time, Cameron or or do you really need more capacity than you would be bringing on them to get that 20% level.

I think we can get there with the capacity that we have Greg and we will look to get would be in excess of that as we continue to bring additional capacity online and towards the tail end of calendar 'twenty.

Yep got it that's helpful and then just two more.

Opex you mentioned it was tied it certainly was about $1 million lower than I expected.

Is there anything from a timing standpoint that benefited opex in are those.

Or is that lower opex structural or should we expect it to bounce back up and then on cash can you just been announced.

Three or four factors that contributed to the quarter on quarter cash cash decline. Thank you.

Thanks, Craig So core Opex.

One or two cycles, but they were mainly in the prior quarter.

Do you view the embassy chosen there's lots of G&A activity associated with that.

There wasn't anything there.

So this quarter if I look ahead to next quarter, sorry, I think we will see opex increase kind of low single digits and that's mainly a factor of head count additions. We added senior members of our team. We've continued to add across the board and you start to see the two quarters impact of that as we look at Opex in subsequent quarters.

Cash, yes, we did bring opex cash burn down in the quarter to $5 eight.

I think that the overall burn was higher because of the investments that we made in the capital equipment I think that BARDA comes down next quarter, mainly due to the function of the capital expense.

This would be slightly smaller in the quarter Loren and I think the cash burn of $5 eight we hope to land pretty close to that there are obviously puts and takes involved in each individual quarter, but as a trend we don't see anything changing significantly.

Okay. So so we could expect inventory levels, which have been moving up through the year to start to come down Cameron do you feel like you can start turning that faster and convert that to revenue.

We would certainly look to do that yes, I mean, managing inventory is managing working capital and managing cash base, that's something we're keeping a very close eye on.

And just to add to Greg if we have to pay even more right to visit some of the lead times and the supply side.

We want to do that.

Yeah, Okay. Yeah, I know you want to make sure you meet customer demand alright, Cameron. Thank you very much I'll hop back in the queue.

Thank you.

One moment for next question.

Our next question comes from the line and then.

<unk> from loop capital.

Your line is open.

Hey, good afternoon, guys and thanks for thanks for taking the questions here just a couple if I could.

On the demand side.

I recall accurately you guys last quarter also thought.

That you could.

Sort of.

We begin to see 'twenty I think 20% was what you talked about kind of like 20% growth increase.

In <unk> Q and so I guess I guess the point is is even with macro is that accurate because it sounds like you're even with macro youre actually holding the demand cadence that that you thought you could and let me just ask for clarification on that first.

So yes, so that's a yes.

Second point very important for us even with the macros.

The growth trend here.

Now have you had said last time just.

To be accurate and Bolivia said around around 30% from that point and right now what we said it's still it's still growing.

It's again mix of demand supply constantly now head to head, but still we are seeing too many too.

Can almost 20% with an opportunity for around 25%. So just.

So your first statement is slightly different and then but your second statement is spot on that even in this challenging environment, we are still growing.

And disposition.

Perfect. Thanks for that.

Vacation, okay, great and.

Are you on the on the qualification side are you seeing sort of what's going on with the macro impact the qualification process.

Yes in any contacts or are things still sort of full bore.

So our our internal product qualification that is unequivocally no I mean, that's in our control more or less.

Customer site qualification.

Sometimes I would say, 80% to 90% no under qualification thats going on find once in a while we do encounter some shipments other components like some specialized Ics our DSP lead times in fact pilot run getting delayed and things like that so those are precisely the uncertainty.

We face right now.

On the on the demand side.

That's super helpful.

Yes.

Thank you.

Cameron I think last quarter actually the same inflection point question, but I'm going to ask it again here.

Yes.

The inflection point towards the upcoming can you just give us context remind us of the context around.

Yes.

To any degree you're able sort of timing and breadth.

And maybe specifically the applications, you see coming sort of sooner rather than later.

A lot.

Sure. Thanks Amanda.

He is a very dynamic environment, but I think if I look at the design and progress that we've made.

As broader inflection points and lately in the lower power and for US certainly in this higher power applications.

Maintaining hasnt changed.

Last name Rosen undergo late 'twenty three in that regard.

See a continuation of our momentum and Thats whats in 'twenty four will enable us to achieve our target model.

Okay Awesome Awesome, let me sneak one more in here actually.

Are you seeing sort of the.

Demand areas.

<unk> been impacted by macro have you seen those broaden.

Over the last 90 days or are they fairly consistent.

With what Youre seeing 90 days ago, just the areas and the applications.

I think it's fairly consistent I would not say that for us to have broadened its.

The laptop and mobile data yet candidly starting from a lower base relatively speaking so it's offset a blockchain continues to be we have large win instead, which are all intact, but that continues to be a little soft like I said our customers appear.

They tell us the recovery in about six months is what they are predicting at this time. So those are the two they haven't broadened in some other areas like renewable and actually we are seeing increased.

Increased demand and interest spiked as exemplified by the we added about 10, new design ins and five new production.

Production this quarter on the high power side so.

Those will start to bear fruit in a couple of quarters, so oral dose to areas not any mix shift.

Okay, great to hear thanks.

Guys I appreciate it.

Thanks.

Thank you.

Once again Thats star one questions a moment for our next question.

Our next question comes from the line of Sam Peterman from Craig Hallum. Your line is open.

Hi, guys. This is Sam on for Richard here.

I wanted to ask just two quick ones first one on the reactors that you guys are adding I know you're trying to double capacity by the end of next calendar year can you remind us how many more reactors you need after you got two more of this.

This quarter to reach that goal and kind of what the capex might look like.

To do that.

So the capex to do doubling total.

To get to that double that effort to that Capex is already done. So that's the good news now beyond that if we continue to evaluate what.

Triggers off again demand and supply dynamic considerations that will be additional but the capex to acquire the reactors to double the capacity that hasn't been done we will have incremental capex.

To install some of those reactors right. So we are working on those both ourselves here in California, and some with our partners. So we will have incremental installation facilities capex, but not the main reactor capex that's done.

Got it okay. Thanks for clarifying.

And then secondly.

You talked about I think last quarter, having pretty strong.

Our backlog coverage of kind of what youre expecting for revenue growth are you thinking of that backlog.

Persisting.

Or are you seeing any cancellations or push outs, just because the environment.

Kind of softens broadly.

I think generally speaking I mean, the Bible remains solid I mean, there's always puts and takes and we are seeing some softness there and we are exploring.

<unk> solutions, but.

Overall, it remains solid and we remain confident in the traction that we're seeing.

Okay. Thanks, Kevin that's it for me.

No.

Thank you one moment for our next question.

Our next question comes from the line of Orin Hirschman from AIG H partners. Your line is open.

Hi, how are you.

Just a quick question again, thank you.

Just a quick question I know you alluded to it and discussed it a little bit but can you get any more granular just in terms of the bi directional views.

Two Wheeler three wheelers, what's obviously getting popular very quickly in other parts of the world.

Can you talk about actual design win slash when do you think youll actually have something in production.

Indeed, indeed, so the two leaders in seniors.

I think those specific point that two wheelers and three meters Evs.

We are targeting and this is a target at this time.

Design win and some early revenue by end of calendar year 2023, So that to me is still marching towards that goal.

The bi directional there are actually two aspects of the bi directional one is simply by directional means charging in both directions Rachel.

For example, if you have a two wheeler youre charging the battery and that's one direction and then that battery you can take with you and then do a DC to AC and use that battery for off grid power dense the second direction. So that's a bidirectional in an application now what we talked also in the press release about the bi directional device that is a true gallium.

Nitride bi directional switch when a single device does allow us to do that job in both directions, which is a very unique attribute of gallium nitride and in particular in lateral again the architecture, we have spin.

Specifically.

Okay, great. Thank you so much.

Two of them.

Thank you and I'm not showing any further questions in the queue.

Ill turn the call back over to permit Patrick for any closing remarks.

Thank you everyone for.

Listening to our call and their interest in <unk>.

We look forward to continuing the solid progress with the demand we.

We have the supply considerations and capacity initiatives that we've undertaken and look forward to meeting the needs of our customers and gallium nitride power. Thank you all.

Sure.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Good day and thank you for standing by welcome to the transformed second quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your tongue.

Awesome.

Please be advised that today's conference is being recorded I would now.

Now I'd like to hand, the conference over to your Speaker today, Jack Perkins our call moderator. Please go ahead.

And Cameron Mccauley, Chief Financial Officer.

Before we begin I'd like to point out that there is a slide presentation associated with today's prepared remarks, which management will be referencing during the conference call.

Slides can be accessed through the live webcast link in the investors section.

<unk> web site, where they will also be posted and available as a link to our Pvs subsequent to today's conference call.

Any projections as to the Companys future performance represent managements estimates as of today November nine 2022.

Neither the company, nor any person assumes responsibility for the accuracy or completeness of the forward looking statements.

For more detailed information on risks associated with the company's business. We refer you to the risk factors described and transforms most recent quarterly report on Form 10-Q, and other subsequent filings with the SEC.

With that said it is now my pleasure to turn the call over to transform CEO Mario <unk>. Please go ahead Mario.

Thanks Chuck.

Welcome to everyone on today's call. Thank you for joining us.

This quarter revenue was $3 7 million.

Hope, 11% on a year over year basis.

When excluding onetime licensing revenue in the prior year.

Product revenue was up 38% compared to the same period a year ago.

We improved supply from Japanese reactors and completing the acquisition of additional CVD reactors.

Increased shipments from previously announced Fortune 100 Lotto productively.

Top three worldwide Latrobe manufacturer.

And secure a new fortune 100, Lotto productivity side.

We strengthened operations sales and marketing teams with seasoned industry leaders.

The cure all part D program to innovate and transform unique bi directional Gan technology that replaces two to four silicon devices, we can single eschew waste.

Applications like micro Inverters and motor drives.

Security approval toward a wholly foreign owned enterprise in Shenzhen, China.

Enhance the local customer support sales to applications marketing.

We expanded package offerings.

Standard <unk> products, which enable keane to team with multiple sources.

Complementing our existing high performance <unk> products portfolio to deliver superior results versus competing products.

With that it is now my pleasure to turn the call over to premium.

For a more detailed overview of the quarter.

Thank you Mario and good afternoon, everyone.

We are pleased to report <unk> second quarter revenue of $3 $7 million that is slightly higher than the current consensus estimates.

Wireless revenue was lower sequentially over fiscal Q1 due to the supply constraints, we had previously alluded to.

In August the project.

Product revenue in fiscal Q2 represented a 38% increase over the prior year FY 'twenty to Q2.

Product revenue continues to be well over 80% of the total revenue in line with our long term growth and high powered portion of the product revenue was over 65% of the product revenue.

All of this our mix what is still quite a challenging environment with multiple macroeconomic headwinds.

We have continued our leadership in high power again.

Continued continuing shipments of products for our multi kilowatt systems.

Serving the gaming energy server computing and blockchain as well as industrial power market segment.

In parallel.

More customers are recognizing the simple strength of our easy to use higher efficiency PGN fed versus competing EMR gallium nitrate solutions, which is exemplified by US now shipping to a worldwide top three laptop manufacturer and securing another laptop adapter design win at a fortune 100 customer.

These successes have been a direct result of our targeted investments in these areas.

And we plan to continue investing in these areas in the future both internally and with our external design partners.

The increased wafer output will allow us to address growth in product revenue for fiscal Q3.

Moreover, we are also providing additional reactors are expected to be delivered in calendar Q1, 'twenty three that will facilitate further expansion later in calendar 2023 as previously discussed.

Transform has continued to lead on the innovation front and are now executing on an ARPA E program to develop bi directional gallium nitride switches.

This is a very unique attribute of our natural gas technology and IP that allow us to do for traditional silicon based devices to be replaced by a single bidirectional again in applications like solar micro Inverters and motor drives.

We have expanded our packaged offering which is one of the most comprehensive and again industry to include industry standard surface Mount <unk> packages that allow pin to pin compatibility with multiple again sources.

This complements our existing high performance <unk> and packages.

And both are validated for superior results versus competing yet.

The key challenge for us.

In front of us over the next two quarters and FY 'twenty three is both continuing the vector to increase our wafer capacity and increased demand across multiple applications.

As reported by many companies laptop and mobile market softness is continuing and our board and this is to win new accounts for gallium nitride, increasing our market share.

Blockchain traditionally one of our stronger areas.

Is experiencing weakness present however.

However, our customers expect to recovery over the next six months or so.

Meanwhile, with our proven leadership in high power again.

Dressing growth into server renewable and gaming segments, while building design in momentum in the electric vehicle to two Wheeler three Wheeler area.

While it is too early to comment on <unk> Q4, 2003 in the current environment.

We believe these efforts will help keep us on track and address our targeted revenue growth in the third quarter.

To continue our momentum.

I have now expanded our <unk> presence added new partners and bolster our senior team.

We are pleased to report the establishment of our Shenzhen entity, focusing on sales field application and local marketing activities.

We also continue to add partners and deepen relationships with controller and IC companies.

As well as independent design houses our ideas.

This key part of our ecosystem is enabled by easy to use gallium nitride.

That can be driven by standard discrete or integrated drivers seamlessly.

We are very pleased to have recently announced six new leadership appointments, comprising both internal champions and new industry veterans hired from well known public semiconductor leaders like on semi SD micro and Alpha Omega.

With our high power strength and strong IP, including application based IP for high powered we remain poised to expand into new segments.

For example, the <unk>.

And to convert the EV tubular treating their opportunity into a multimillion dollar revenue base for us in FY 'twenty four.

While systematically penetrating the four Wheeler segment after that with onboard Chargers DC DC auxiliary converters, and ultimately drivetrain inverters either to talk about our progress in this area later.

Overall with the proven performance and design benefits of TVN over competing solutions and leadership and high power backed by a strong application based patent portfolio.

<unk> is well positioned to address the $3 billion again, Tim in diverse avs like servers, and communications blockchain computing gaming energy and electric vehicles, two leaders <unk> four leaders, but also allowing for growing our share in the lower power fast charger and adapter segments.

With that outline I will next review some of the salient point of <unk> value proposition as a recap then review the results of our planned execution in September 2022, ending quarter and other key challenges over the next two quarters as well as our expansion strategy for beyond FY 2023.

Moving on to slide three now gallium.

Gallium nitride is a wide band gap semiconductor materials for public relation that it uses electrical energy based enables compact and cost effective power systems across a variety of electrical power conversion applications.

Low power laptop or mobile Chargers fast Chargers high public computing automotive and workers.

And by virtue of its inherent properties does this much better than traditional silicon and also better the newest semiconductors like silicon carbide.

TVN, a pioneer and leading manufacturer is a supplier of these high voltage Gan power semiconductor products or the widest range of applications from 30 watts low power to over four kilowatts, Hi, Paula.

The success in this applications for transform has been a result of our continued core strengths investments and strategy.

We are market leaders and the U S Department of defense.

Our core and differentiated product offering is enabled by our high quality different manufacturing base that we essentially own.

Although all again is addressing a large growing multibillion dollar market, including electric vehicles and <unk> smart charging among other things that are passionate team members are helping us to penetrate.

Moving to slide four now.

Transform is in a unique and differentiated position amongst against suppliers with our one core platform strategy that spans a wide range of power spectrum.

With products in the market today that address a tremendous multi billion dollar market opportunity for Gan power conversion again from low power adapters and charges to high power silver blockchain Datacom power to industrial energy and PV in waters renewables that.

And other Gan solutions like Ebola.

This vertically integrated strength stops from the design of our safe robust easy to interface normally of gallium nitride.

We directly own and control our gallium nitride MPV for manufacturing with multiple and more CVD reactors. These are tools used for making our growing again material onset silicon wafers.

In two geographical locations, California in Japan today.

Our wafer fab factories is a joint venture with our financial strategic partner and as a recap is of high quality manufacturing site with the only publicly reported data that show yields for Gan can match those of Silicon Cmos running in the same factory a feature that has contributed to our high powered game products.

Yield and quality.

While packaging is done with our high quality wholesale partners.

<unk> PTH transform IP in this designed for example, allowing the again to be efficiently used in robust steel packages desired by high power customers.

Last but not the least is our application and design effort, both with customers and our solution partners, who prefer now do we work with our again because of seamless integration with the controller and driver products.

Now on slide six as one looks at the competitive landscape the transformed <unk> performs as a leader in various verticals from low power to high powered delivering the broadest range of power.

As silicon is falling short of.

Meeting the rising demand in form factor our site speed.

Speed and efficiency gallium nitride is penetrating the power market.

Many companies are in the market with gallium nitride, notably at lower power adapters and charges.

While Samsung address this book.

High power and low public together.

A few key inherent factors that outline transforms differentiated benefits.

Versus competing yet.

First of all superior efficiency superior performance due to lower losses from the gallium nitride, especially at operating temperature due to the design of our again thanks.

Secondly, due to our integrated silicon effect gallium nitride high voltage device combo.

Our robust architecture and easy to use platform is enabling capable of both clearly robust high power packages and use of standard drivers and controllers and often integrate integrated drivers that are already existing literally for free.

In existing controllers.

What we're also seeing now is some of the so-called Ics.

That are attempting to go to high powered the IC component is actually remote and a discrete factors used basically a regular again.

Versus.

Most of the field data and compete against so far at least coming from only lower power.

For our gallium nitride.

So aim to deliver a higher double digits. For example, so it did 900 volt products are already in the market today and 1200 volt is in R&D that will certainly challenge silicon carbide at the higher voltage higher power node, where silicon carbide is.

Gaining traction today.

This is especially because gan is proven to be a much lower loss as much as 25% to 35% as we have previously discussed versus silicon carbide and does not have the high cost substrate in the complex supply chain associated with it.

Next in slide seven we talk about these advantages that are increasingly being validated with proven Vince with customer systems in production <unk>. In fact is adopted in many more markets verticals today with higher range higher reliability and higher performance.

Again, why do leave it this is due to the inherent Gan platform with features like use of a single device instead of two.

In higher powered applications.

More than 30% effectively lower resistance or loss benefit for similarly specified competing gan devices like certain email again.

And scalability to high powered.

And finally hydropower higher energy and higher the impact on carbon footprint.

As we show on slide eight with these benefits a variety of customers have selected to yen in adapters and Chargers.

Although the 70 odd design ins that we have ongoing next Japan 30 watts to $2 50 was in this lower power range. We are now shipping to one of the top three worldwide laptop manufacturers.

Some examples of new wins this quarter.

Added 65 Watt and 100 watt node and we show them here.

Moving on to high power.

Our Gen four and Gen. Five offerings are now gaining momentum and.

And we are working with about 45 designing many predictions some examples of which are shown below.

In diverse applications like gaming.

Data Center server Pollard, let's transform by the way was forced to show titanium related gain efficiency with its patented totem pole architecture now being used by many.

UBS.

Gallium nitride enabled a 50% form factor reduction from <unk>, <unk> and other industrial medical and blockchain powered applications.

As customers endorse and also featured in certain third party teardown. All of this is enabled on the foundation of efficiency performance ease of use and reliability.

While this is a very significant high power and low power growth that I talked about now in slide 10 here.

We show that EV applications continue to present, a massive long term opportunity.

As the performance of Gan enables continued performance of <unk> and <unk>.

<unk> fundamental issues of power loss heat generation and anxiety of range with the high power density delivered by again transform gang, enabling things like faster charging reduced size and lower losses that ultimately results in higher range.

Our <unk> hundred would gallium nitride platform today in RMB has delivered early results already showing efficiency similar or even higher to silicon carbide in the multi kilowatt range and built on a simple architecture not requiring any fancy designs like vertical gate structures for example.

Let me first start in August we are working to accelerate the EV adoption with tubular and <unk> electric vehicle charging segment that fall into the sweet spot of our two based high power solution.

The specific gain opportunities in the EV today remain in the areas that we're focused on onboard Chargers DC DC auxiliary power converters and off grid DC to AC inverters.

With domain drivetrain investor opportunity opening up after 2020, 526 that can actually tripled accessible game content to $200 per vehicle conservatively.

We aim to bring the full market with 650 volt devices today, and higher voltage to a 100 watts and future, including addressing future 800 volt battery vehicles.

To enable transform to address all key EV slots.

Our <unk> hundred one gallium nitride demo results like I showed before.

Has better performance than Silicon carbide, and this has started to generate attention now from EDI customers.

But <unk>, we are directly addressing a variety of charging opportunities, including the onboard charger.

This is also a very attractive market more near term with a tam that approaches $1 billion.

To unlock opportunities for transform to address by end of calendar year 2023.

Looking at the holistic picture on Slide 12, we wanted to point out one of the key ESG impact of gallium nitride and transformed offering a tremendous amount of energy that can be saved over the next several decades.

This is not just one transform but the ecosystem together in gallium nitride based Apollo.

Next in Slide 13, now we move to where we are today, our September quarter performance and execution on key vectors that drive our growth.

With our continued leadership in high power.

At 65% of product revenue this quarter and continued penetration in low power. We have modestly exited consensus consensus estimates delivering $3 $7 million of revenue, including $3 2 million of product revenues, while also dealing with some of the supply chain.

And capacity challenges that we faced.

We added both new design wins 10, plus in the low power adapter segment, bringing bringing our total design ins to over 70% driven by our <unk> ease of use high performance.

And facilitating a lower total bom bill of materials for the customer.

Out of this around 25 are now in production.

Three new transitioning to production this quarter.

We also won a design at a tier one laptop manufacturers and we are also now shipping to a worldwide.

Top III laptop manufacturer.

In the high power segment.

We added 10, plus design ins this quarter, bringing the total to over 45, plus with 20 plus in production, including five moving to production this quarter.

We plan to continue to leverage this and expand into more segments, notably accelerating <unk> adoption by addressing the 82 Wheeler market with revenue potential in CDI 2023.

We are making progress with reference evolution solutions in this segment.

In discussions early designing with several target customers now.

We started sampling our pin to pin compatible <unk> and packages that enable customers to use high performing <unk> and product, while allowing them. The comfort of multiple game sources as is required in some of these events.

These complement our performance speak you opened packages that have already been in production with our Super game platform and both packages delivering high performance than other gallium nitride.

We have made some progress and getting more of our internal wafer existing capacity online and acquiring new epi wafer capacity.

To this end our Japan pediatric capacity is significantly improved now enabled in part by seamless travel between California, and Japan and.

And procurement of some of the pending reactor highlight items.

We are also evaluating incremental investment in our JV factory for FY 'twenty for growth and beyond.

For packaging as we previously mentioned, we have sufficient capacity in place for a doctor charge of DPF and products as well as our high power products at this time and emphasis there we'll be adding skus spec it skews to broadened our application space and offering more flexibility to our customers.

As we move to slide 14.

<unk> partnership and government initiatives are key for our business.

We are now adding two more NPV actors that we aim to be fully online.

In the second half of <unk> by 2023, bringing the recently acquired new reactor capacity to four.

And part of our targeted plan on track for doubling EPPY wafer capacity by end of sea by 2022.

We are making these investments ahead of time, especially due to the long lead times for securing equipment as well as quantifying it is released to production.

The global wafers cooperation partnership and epic expansion is well on track and allows us in the future to be even more aggressive on the capacity side.

Part of our long term demand scenarios and growth model.

On the wafer fab, we continue to align plants with our JV partner and are investing in incremental capacity for next year FY 'twenty 'twenty four.

With respect to our customer partners.

Firstly with the cover that we focused on robotics applications. The focus is now on the next development and funding milestone for end of the year.

Then expedia partnerships remain strong with continued focus on epic and wafer supply.

This segment for persons at roughly $1 billion Tam for our automotive qualified high powered Gan products in the multi kilowatt range.

On the government site, our fiscal Q2 building on the Navy program was around $5 million.

We are now targeting a follow on program in fiscal Q4 as the current program wraps up in fiscal Q3.

We are also continuing RMB on new nodes like the 200 woods and the innovative bi directional switch a unique topology enabled by our lateral again like I talked about under a small pilot program.

All in all <unk> and the broader semiconductor industry has been a challenging spot. These past few quarters, we remain positioned to tackle near term headwinds and progress towards our long term model.

Hey, good by both capacity expansion and aggressively increasing our worldwide sales outreach.

<unk> focus remains in three key areas.

First capacity expansion and supply chain management, keeping up with and then next year staying ahead of demand.

Generating as well as diversifying demand both expanding our leadership in high power again, and winning marquee lower power adapter in charter opportunities.

And by the end of July 23, starting to opinion, even in the two liter tubular segment.

And third continued execution on our product roadmap and key partnerships.

The strategy and initiatives that we have outlined here are expected to allow us to resume sequential revenue growth in the third quarter, and then emerged stronger going forward into FY 2024.

With that over to Cameron to walk.

Youll walk through our financials in detail. Thank you.

Thank you Bryan and Hello to everyone joining us today, let.

non-GAAP results exclude stock based compensation, depreciation and amortization and adjustments to fair value of our previously held convertible notes.

Starting with the income statement.

Total non-GAAP revenue comprising product and government was $2 $7 million in the quarter.

This represents an 11% quarterly growth when compared to $2 three product the government revenue for the same quarter in the prior year excluding license.

Product revenue as with the prior quarter low forms the majority of our total revenue number over 85% in the quarter just completed much of this revenue being generated in the higher power applications.

Continuing to focus on product sales solid execution allowed us to meet our targets and generate sales of $2 million. Despite the reduction relative to the prior quarter. This still represents a 38% increase from the same quarter in the prior year, we expect to see further growth in the quarter.

This revenue is being driven across a broad range of power conversion applications, including fast Chargers and adapters gaming data center EPS and blockchain.

The gross margin in the quarter was 12%.

So 10% from the prior quarter.

This decrease was driven by the quarterly revenue reduction with indirect manufacturing costs constituting a larger drag on margins.

Dry guava juice as we resume revenue growth a direct margins remained consistent and we continue to progress towards our long term model of gross margins in excess of 40%.

A number of options, including new product introductions discrete ongoing cost efficiency activities and benefits that we will receive as we continued to grow and scale will contribute to this.

Operating expenses on a non-GAAP basis were $5 $1 million in the current quarter compared to <unk>.

$4 million in the prior quarter.

This 5% reduction being driven largely by reductions in G&A costs associated with our year end procedures and comes in the prior quarter together with ongoing spending discipline across the company.

Enabled by our strong balance sheet. The company continues to increase our team to support our operations across all aspects of the company, including leadership G&A sales applications and R&D.

When comparing non-GAAP opex to the same quarter in the prior year, we saw a 50% increase primarily due to personnel increases across the company is just reference.

Turning to EPS I will focus my remarks here on the non-GAAP results. Despite the reduced revenue in the quarter are tight opex controls enabled us to execute our non-GAAP EPS loss of 91.

<unk> <unk> lower than the prior quarter and flat from the same quarter in the past fiscal year.

From an operational perspective, we continue to see solid traction in our targeted markets. The company is fully booked for the current quarter, our short term focus being a product execution and enabling capacity expansion to support medium to long term growth.

We also continue to invest in the long term growth engine of the company, including New reactors, we anticipate bringing these records online in the second half of calendar 2020.

Turning now to the balance sheet Q2, so the company maintains a strong healthy balance sheet operational excluding capital investments in the quarter was reduced to $5 $8 million driven by continued focus on cash and working capital management again the solid.

Performance of course, the company is stable runway to resume its growth trajectory and invest in growth.

And the Citigroup as we look to support our backlog position.

Asset and liability remained largely stable.

The activities of improved the shareholders' equity position $65 million when compared to the same quarter in the process of the year.

Looking ahead, we will remain open to opportunities to public strengthen our balance sheet to ensure that we're able to continue to invest in the company growth.

Turning now to a target operating model on the next slide.

<unk> is in the process of building a hydro cash generative business from a revenue perspective, there are three streams of living <unk>.

Licensing government and the fiscal.

Fiscal year product revenue has accounted for over 80% of our total revenues as we look forward to expecting that trend to continue.

The company anticipates rapid top line growth and Gan adoption across multiple end markets with a five year CAGR in excess of 50%.

We are confident that the company can achieve overall gross margins of over 40% all segments will be able to benefit from the improved cost structure and our current gen. Four gen. Five products. Additionally, gross margins will include a number of specific actions, including new product introductions and discrete ongoing cost efficiency activities as well as <unk>.

<unk> scale.

With respect to operating margin the company will continue to invest to support all aspects of our core operations. We have a very stable opex structure, which will ultimately lead us to translate our gross losses and to an operating margin model that will deliver over 20% to the bottom line.

From a cash generation perspective, capex will be required to increase scale in the medium to long term, but with a strong manufacturing footprint already in place, we will be able to generate free cash flow in excess of 10%.

Finally, I wanted to touch on our position.

<unk> is well positioned to grow across multiple segments, including consumer data centers blockchain industrial and in the medium to long term the EV market.

We are now at the stage, where we have seen and continue to see strong adoption as evidenced in the prior quarter and the higher power space by over 500 key production order for three kilowatt class power supply and.

In the consumer segment, we increased shipments on previously announced Formula Fortune 100 laptop adapt to win a top three worldwide laptop manufacturer and secured a new fortune 100 laptop adaptive design win.

Revenue traction exists today in several segments, including consumer data centers blockchain and industrial applications.

We have seen strong traction and expect to grow revenues from our solid base.

Looking ahead, our solid balance sheet will allow us to continue to invest in our growth engine across all aspects of the company both from a staffing and a capacity perspective.

With this strong foundation in place our focus tons to execution.

<unk> that we can support the growing demand and what we believe will be a broad market inflection point in the medium term.

In addition to our existing revenue streams, we expect to see initial wins in the automotive segment in this timeframe.

From there the company will drive towards our long term target model enabled by continued momentum across multiple segments.

Concluding on the final slate with a few key highlights.

Transform publicly listed on the NASDAQ exchange is a pioneer and leading provider of Gan power conversion devices. We.

We have disruptive technology that pervades solutions today across a number of significant growing markets. We.

We have established a strong network of Blue chip partners, including Kicky, all Morelli, Ses scour and others.

We have a comprehensive product offering today that meets our customers needs across a wide range of power levels in the segments.

All of which is underpinned by a strong balance sheet, the industry's strongest IP position and a deep and talented team.

That completes our prepared remarks, we would now like to open the call to any questions. Operator. Please proceed with the Q&A portion of the call.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone. Please sandbox, we compile the Q&A roster.

Our first question comes from the line of David Williams from Benchmark Company. Your line is open.

Hey, good afternoon. Thanks for letting me ask the question and congrats on the continued progress here.

Thank you.

Yes.

I guess, maybe maybe first permit that you had talked about the guidance of 20% growth Q O Q with an opportunity for for 25%.

Wonder if maybe you could walk us through the puts and takes there to achieving the 25 and if theres an opportunity maybe to outgrow that as well as its more of a demand or a supply side challenge for you.

Sure so like.

Also note that we.

They've made definitive improvements on the supply side since last time, but it.

It continues to be very dynamic mix today of both.

Demand and supply so we are executing on both fronts. So.

We definitely feel good about 20% sequential growth.

In today's environment.

Beyond the current quarter or two that we just announced but yes.

It's easy.

It's not easy to say today, how much more we can do but we do need to execute on both supply side and demand side simultaneously.

But that's the range, we're feeling reasonably good about at this point.

Okay fantastic. Thank you.

And then I wanted to ask a little bit about on the.

Technology front.

Got a new four quadrant dance, which with <unk> current flow and operational control. There just kind of wondering what youre seeing in terms of that market. It seems like that could be a very large market for the circuit breakers and kind of the matrix switching applications just kind of curious if you could give us some color on your thoughts there, where we are and what your expectations would be.

Yeah.

Sure. So firstly, it's definitely a very unique application offer natural again in which transform has been.

Working on for a long time now San Juan devices, replacing money and those are the two markets early I want to just be also.

Clearly, it's early R&D stages right now we know a lot about the device from previous experience, but those are that there is a large market and micro in waters architectures PV micro inverters for bidirectional again, and then as you rightly pointed out matrix converter, which is a unique topology for motor drives and then circuit breakers, yes.

It opens up all of those.

Notably micro inverters in the in the midterm.

Okay, Okay very good.

And then maybe maybe Cameron.

Last quarter, you thought that maybe you had mentioned any ways that first quarter in the second quarter of fiscal <unk> or fiscal quarters would be relatively flat.

Excluding the COVID-19 kind of reactor issues it looks like you've cleared some of those reactor issues in some of the COVID-19.

But your guidance it looks like it's not quite where we would've expected that <unk> transitioned to be so I'm just kind of curious is it just a demand side issue that you're facing going into the third quarter in terms of not recovering that was about $1 $1 million. The decline. There is there is it is.

Is it more of a I guess the the.

Manufacturing side Youre dealing with more of the demand side I guess as you can see some of the slowing market conditions.

I think it's a combination of both quite honestly I think that.

The market conditions are well understood that there were some challenges there and we're also trying to ramp our manufacturing footprint.

You've got to execute on both components.

<unk> comment earlier on that's where we feel comfortable with a 20% sequential increase quarter on quarter and dependent on those dynamics, we hope to do slightly better than that.

Great. Thanks, so much for the time and a colleague I certainly appreciate it I'll jump back in the queue.

Thank you one moment for next question.

Our next question comes from the line of Craig Ellis from B Riley Your line is open.

Yes, it's Craig Ellis, Hey, guys nice to speak again, so I just wanted to follow up on.

The demand environment and drill down on what Youre seeing in the laptop market because you.

EBIT start to shift to a new program and it looks like you're having Paul launch success with another opportunity. The question is this permit but when you look at that market.

Much of the laptop market are you targeting are you targeting just the high end behind in mid range can you give us a sense for where you are trying to position the business.

Sure.

In the current kind of current planning scenarios, it's a very very low percent of overall laptop market.

We are now in a position to target sort of the high volume aftermarket <unk> aftermarket also that is lower volume Marty designs, but now now with this some of the wins, we talked about the Fortune 100, and then the top three worldwide customer. We are now targeting the higher volume of the aftermarket and then working on in <unk>.

<unk>.

With a laptop or doctors those are several ongoing design ins now, but even overall, even counting all of that.

The percentage of the laptop market is still quite small.

Yep got it got it and then on the margin structure of the business Cameron we expected gross margins to go down in the quarter, but I think there were about 600 basis points below what I expected in the low teens versus high teens beyond volume.

There any items that are notable.

And can you frame for us what your expectation is in the fiscal third quarter end.

Just outline the combination of factors to get the business back to 20% and then towards 30%. If you would please.

Sure I think the first thing is that there werent any other particular factors fee in the quarter. The direct product margins are stable as we.

Expect that stability to continue I think the the gross margin decline in the quarter. It was really squarely.

Looking at sales volume and looking at absorption of indirect costs of manufacturing that the business has and as we grew our revenue the drag that has and the margins will reduce.

It really is just a function of volume.

Maintaining our execution on all.

On our new products in a cost effective bringing our cost down in those covenant Kim combination of factors that will bring us to 20% and beyond.

Got it.

So as we look out to a period.

In the second half of next year fiscal 'twenty for when we expect to get.

I think we can get there with the capacity that we have Greg and we will look to get would be in excess of that as we continue to bring additional capacity online toward the tail end of calendar 2003.

Yeah got it that's helpful and then just two more.

Opex you mentioned it was tied to it certainly was about $1 million lower than I expected was there anything from a timing standpoint that benefited opex in are those.

Lower opex structural or should we expect it to bounce back up and then on cash can you just been out of the three or four factors that contributed to that quarter on quarter cash cash decline. Thank you.

Thanks, Craig So core Opex, there were one or two cycles, but they were mainly in the prior quarter equals three of your MPC chosen those lots of G&A activity associated with that so there wasn't anything there.

Cash, yes, we did bring opex cash burn down in the quarter to $5 eight.

I think that the overall barn was higher because of the investments that we made in the capital equipment I think that Barack comes down next quarter, mainly due to the function of the capital.

This will be slightly smaller in the quarter Loren and I think the cash burn of $5 eight we hope to land pretty close to that there are obviously puts and takes involved in each individual quarter, but as a trend we don't see anything changing significantly.

Okay. So so we could expect inventory levels, which have been moving up through the year to start to come down Cameron do you feel like you can start turning that faster and convert that to revenue.

We would certainly look to do that yes, I mean, managing inventory is managing working capital and managing cash Creek, that's something we're keeping a very close eye on.

And just to add to Greg if we have to pay the more light to visit some of the lead times and the supply side.

We want to do that.

Yes, Okay, Yes, I know you want to make sure you meet customer demand alright, Cameron. Thank you very much I'll hop back in the queue.

Thank you.

One moment for next question.

Our next question comes from the line and then.

<unk> from loop capital your.

Your line is open.

Hey, good afternoon, guys and thanks for thanks for taking the questions here just a couple if I could.

On the demand side.

I recall accurately you guys last quarter also thought.

That you could.

Sort of.

We begin to see 'twenty I think 20% was what you talked about kind of like 20% growth increase.

So yes, so that's yeah, we have.

Second point very important for us even with the macros.

Showing the growth trend here.

Now have you had said last time just.

To be accurate I believe you said around around 30% from that point and right now what we said it's still it's still growing.

It's again mix of demand supply constantly in our head to head, but still we are saying 22, we can almost 20% with an opportunity for around 25%. So just.

So your first statement is slightly different and then but your second statement is spot on that even in this challenging environment, we are still growing.

Got it.

And disposition.

Perfect. Thanks for that.

Their vacation, okay, great and.

Are you on the on the qualification side are you seeing sort of what's going on with the macro impact the qualification process.

And any context, there are things still sort of full bore.

So our our internal startup qualification that's unequivocally no I mean, thats in our control more or less.

Customized site qualification.

Sometimes I would say, 80% to 90% no under qualification thats going on find once in a while we do encounter some shipments other components like some specialized Ics our DSP lead times effect pilot run getting delayed and things like that so those are precisely the uncertainty.

We face right now.

On the on the demand side.

That's super helpful.

I think.

Cameron I think last quarter actually the same inflection point question, but I'm going to ask it again here.

Yes.

The inflection point toward the upcoming can you just give us context remind us of the context around.

Yes.

To any degree you're able sort of timing and breadth.

And maybe specifically the applications, you see coming sort of sooner rather than later.

A lot.

Sure. Thanks Amanda.

These are very dynamic environment, but I think if I look at the design and progress that we've made.

As broader inflection points and lately in the lower power and for US certainly in this higher power applications.

Maintaining hasnt changed.

Last name Rosen undergo late 'twenty three in that regard.

See a continuation of our momentum and Thats what in 'twenty four will enable us to achieve our target model.

Okay Awesome Awesome, Amit, let me sneak one more in here actually.

Are you seeing sort of the.

Demand areas.

<unk> been impacted by macro have you seen those brought in.

Over the last 90 days or are they fairly consistent.

With what Youre seeing 90 days ago, just the areas and the application.

I think it's fairly consistent I would not say that for us to have broadened its.

The laptop and mobile data yet candidly starting from a much lower base relatively speaking so it's offset a blockchain continues to be we have large win instead, which had all all intact, but that continues to be a little soft like I said our customers appear.

Increased demand and interest typed as exemplified by the we added about 10, new design ins and five new production.

Production this quarter on the high power sites so.

Those will start to bear fruit in a couple of quarters, so oral dose to areas not any mix shift.

Okay, great to hear thanks.

Guys I appreciate it.

Thanks.

Thank you.

Once again Thats star one for questions a moment for next question.

Our next question comes from the line of Sam Peterman from Craig Hallum. Your line is open.

Hi, guys. This is Sam on for Richard here.

This quarter to reach that goal and kind of what the capex might look like.

To do that.

So the capex to do doubling total.

To get to that double late effort to that Capex is already done. So that's the good news now beyond that if we continue to evaluate it.

Triggers off again demand and supply dynamic considerations that will be additional but the capex to acquire the reactors to double the capacity that hasn't been done we will have incremental capex.

Got it okay. Thanks for clarifying.

And then secondly.

You talked about I think last quarter, having pretty strong.

Backlog coverage of kind of what youre expecting for revenue growth are you thinking of that backlog.

Persisting.

Or are you seeing any cancellations or push outs just.

The environment kind of softens broadly.

I think generally speaking of in the Bible remains remains solid I mean, there's always puts and takes and we are seeing some softness we are experiencing some institutions, but.

Overall, it remains solid and we remain confident in the traction that we're seeing.

Okay. Thanks, Kevin that's it for me.

No.

Thank you one moment our next question.

Our next question comes from the line of Orin Hirschman from AIG H partners. Your line is open.

Hi, how are you.

Just a quick question again, thank you.

And just a quick question I know you alluded to it and discussed it a little bit but can you get any more granular just in terms of the bi directional views.

Two Wheeler three wheelers, what's obviously getting popular very quickly in other parts of the world.

Can you talk about actual design wins slash when do you think youll actually have something in production.

Indeed, indeed, so the two leaders in seniors.

I think those two separate point the tubular than three meters Evs.

We are targeting and this is a target at this time.

Design win and some early revenue by end of calendar year 2023, So that to me is still marching towards that goal.

The bi directional there are actually two aspects of the bi directional one is simply by directional means charging in both directions Rachel.

For example, if you have a two wheeler youre charging the battery and that's one direction and then that battery you can take with you and then do a DC to AC and use their battery for off grid power dense a second connection. So that's a bidirectional in an application now what we talked also in the press release about the bi directional device that is a true gallium.

Nitride bidirectional switch when a single device does allow us to do that job in both directions, which is a very unique attribute of gallium nitride and in particular in lateral again, the architecture of rehab spin.

Specifically.

Okay, great. Thank you so much.

Two of them.

Thank you and I'm not showing any further questions in the queue.

Ill turn the call back over to permit Patrick for any closing remarks.

Thank you everyone for.

Listening to our call and the interest.

We look forward to continuing the solid progress with the demand.

We have the supply considerations and capacity initiatives that we have undertaken and look forward to meeting the needs of our customers and gallium nitride power. Thank you all.

Sure.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Q2 2023 Transphorm Technology Inc Earnings Call

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