Q2 2023 Navitas Semiconductor Corporation Earnings Call
Speaker 1: battery automation, robotics and HVAC systems.
Speaker 1: In solar, despite some market softness, we are experiencing a rapid increase in both began and so-and-corbite planned adoption into the solar and various themselves, as well as a dramatic increase in the energy storage at tax rates, which have more than doubled in recent years. One in solar is reporting over 60% at tax rates, adding battery backup to the solar panel installations for residential Californian customers, and we anticipate such a tax rates will approach 90% in coming years. Given these favorable dynamics, the revenue potential for each customer project has increased over 100% in our pipeline for the solar and energy storage segment. The end adoption from performance models to mainstream models, translating into a significant increase in both the number of customer projects in our pipeline and the total revenue potential of those projects. Putting it all together, we're happy to announce a total customer pipeline increase from $760 million in Q1 to over $1 billion in Q2, with important growth in both customer projects and revenue potential across all of our target markets. As previously announced, we are in the midst of ramping our solar and energy storage capacity by 5X throughout this year and next, as we continue to ship all the solar and carbon devices we can produce.
Speaker 1: In addition to a million-dollar follow-on offering in May, we continue to have a very strong balance sheet that can enable additional new global headquarters in Torrance, California, on November 30th. Investors and analysts are invited to participate in a comprehensive agenda that will include our new Electrify Experience Center that will detail the past, the present, and an exciting vision for the future in the world of electrified power applications. This agenda will also include the announcement of four major new GaN or silicon carbonate technology platforms, which we believe will transform many of our target markets. We will also provide a detailed review of our customer pipeline, showcase some exciting surprise guest speakers, and provide a high-level view on our 2024 outlook. In summary, I'm very pleased with our accelerating progress across financial results, customer pipeline, market adoption, technology development, and manufacturing capacity expansion. We're excited about the significant opportunities in front of us, which are reflected in our results. Navitas is the only pure-plate, next-generation power semiconductor company.
Speaker 1: And with our vision and our capability to electrify our world, we believe will continue to be one of the fastest growing semi-conductor companies in the industry. Now, let me turn it over to our CFO Ron Shelton to update on those financial results as well as our guidance. Thank you, Jean. In my comments today, I'll first take you through our second quarter result, and then I'll walk you through our outlook for the third quarter.
Speaker 2: and some of the market dynamics we're seeing. Revenue in the second quarter of 2023 was well above our guidance, growing 110% year over year and 35% sequentially to $18.1 million.
Speaker 2: The beat was driven primarily by strong growth in the mobile market tempered somewhat by slower growth in the high-end consumer market attributable to macroeconomic factors.
Speaker 2: Nevertheless, we had record book in starting quarter and exited the quarter with record levels of backlog, increasing by more than 50% compared to the first quarter.
Speaker 2: That's on top of a 50% increase that we experienced in Q1, so we continue to see strong momentum across the business.
Speaker 2: Before addressing expenses, I'd like to refer you to the gap, the non-gap reconciliations in our press release earlier today.
Speaker 2: In the rest of my commentary, I'll be referring to the non- GAAP measures .
Speaker 2: Don Gap Gross margin in the second quarter increased to 41.5% from 41.1% in the first quarter of 2023 and compared to 41.6% in the second quarter of 2022.
Speaker 2: Non-GAP gross margins in the second quarter were at the higher end of our guide. Total non-GAP operating expenses were $17.0 million for the second quarter of 2023, which is slightly lower than the first quarter. Below our guidance, as we experienced lower audit-related fees.
Speaker 2: consumed fewer materials for research and development. As we've mentioned in the past, we continue to invest in our business in a disciplined manner, the results of which you have seen in the second quarter.
Speaker 2: Our non-GAAP SG&A expense was $7.2 million and non-GAAP R&D was $9.8 million.
Speaker 2: Putting all of this together, the non-GaF loss from operations was $9.6 million compared to a loss from operations of $8.9 million in the second quarter of 2022.
Speaker 2: As we continue to invest simultaneously across new markets and focus on growth opportunities.
Speaker 2: Our weighted average basic share count for the second quarter was 165.6 million shares.
Turning to the balance sheet, it remains very strong with high levels of liquidity and continued improvements in working capital.
Cash and cash equivalents at quarter end were $177.7 million, and we continue to carry no debt.
turns are better than three times.
Moving on to guidance, for the third quarter we currently expect revenues of 21 million dollars plus or minus 2 percent.
At the midpoint, this represents substantial year-over-year growth.
of approximately 105% over the $10.2 million we'd reported in the third quarter of 2022.
and then expected 16% sequential increase over the second quarter of 2023.
Our guidance is based on an increasing supply of silken carbide products and the expected continued recovery in the mobile market.
Throughout the year, we've indicated that our goal was to double revenue this year. Our recent performance adds to our confidence and we remain comfortable with that guidance.
Growth margins for the third quarter are expected to be relatively flat compared to the second quarter, given the upside in the mobile business, which will also translate into a moderation in our growth margin expansion in the short term.
In total, our non-GAP operating expenses in the third quarter are expected to be approximately 18.5 to 19.5 million dollars.
And this excludes stock-based compensation and amortization of intense blast sets.
We will continue investing in growth, but expenses will generally decline as a percentage of revenues we continue to scale.
For the third quarter of 2023, we expect our weighted average basic share count to be approximately 175 million shares.
In closing, we're extremely pleased with the results for the quarter and our near-term and long-term outlook.
We saw strength in the mobile market, where we are the leading supplier of GANICs. We ended the quarter with record backlog. Our customer pipeline has grown to an unprecedented level, and we ended the quarter with nearly $180 million of cash and no debt.
Operator, let's begin the Q&A session.
Let's begin the Q&A session.
Thank you.
At this time, I'd like to remind everyone that in order to ask a question, press star, then the number one on your telephone keypad.
Please limit yourselves to one question and one follow up. Thank you.
The first question comes from the line of Quinn Bolton from Needham & Company.
Your line is open.
Hey guys, congratulations on the very strong revenue growth. I hate to focus on a negative, but gross margin sounds mostly due to mix, but coming in perhaps a little bit lower than you thought previously. Can you just spend a minute just sort of talking about how you see the mix between mobile, consumer, data center.
in some of the higher margin silicon carbide markets as you look into the second half. Ron, when do you think you might be able to get margins in the mid 40 range, which I think was your prior target by year end of 23?
Yeah, I hate Quinn. Thanks for the question. Yeah, so fundamentally the business is very strong right now and we talked about pipeline. It's over a billion dollars and backlog was up more than 50%. And the good news is I think mobile markets.
strong. It seems to be recovering. We have a great position in it. And the other end markets in terms of pipeline, revenue, and backlog continue to grow. So what we've indicated in our comments is just based on mix. We see a little bit of a moderation in the growth of gross margins.
But we seem to be, not seem to be, we are executing in all areas to drive margins. So when we talked earlier this year about what would drive margins, talked about a transition to Gen 4, that's happening right now. We talked about diversifying end markets, if you look at our pipeline, it's not only growing, but that's happening. And those generally have higher margins. And then costs, we're driving costs, we talked about strategic manufacturing and we're putting in place.
The first step is the FB facility. So we're executing in all those areas. I think it's just a bit of a, not even a pause. I think it's just a moderation in terms of how quickly margins would grow. And we'll be back on track. I would look at it and I think we look at it as maybe a couple of quarter.
Flow down in terms of the rate of growth and margins, but there's no fundamental shift here in terms of our margin profile.
Hey, Ron, maybe I have a sort of a follow up on my question is, is the sort of gross margin sort of paused really just driven by stronger than expected growth or stronger than expected recovery in the mobile charger market, which I know is the lower
margin port of your game business or have and and I guess a perhaps slowdown in the higher end consumer appliance market which I think you referenced on the call or is the the Grishmorgen pause you know are you I guess are you seeing any you know pause or or not slow down but maybe just the delay in the silicon carbide side of the business that that's accounting for the mixer
Yeah, it's nothing more than that, right? So this is really a product mix issue. It says nothing about the strength in silicon carbide. Again, I think it's, you know, silicon carbide is the kind of business where supply is catching up, but we're still having, you know, we're a little bit supply challenged, and we ship everything we can make right now.
So it's a bit of a mixed issue. And again, I suppose I wouldn't characterize it as a pause. I mean, I think it's just a slow down in the rate of growth in gross margins and the expansion of margins. And like I said, I think it's a couple quarters slow down and or moderation.
But there's nothing we're doing from an execution standpoint. I think we're doing everything we should be doing to drive margin expansion going forward.
Yeah, and maybe if I could just sleep in one quick one just on the data center business, you'd have to three, the new 3.2 kilowatt platform. Is that data center business now starting to ramp to production here in the second half of 23? Are you starting to see revenues from the data center power?
supply market this year? Yeah, we actually the revenues start in Q4. Most of that ramp is next year. We're just releasing the high power GAN ICs targeted for data centers to production later this quarter And then the customer revenues start next quarter.
Perfect. Okay. Thank you very much.
Thank you. Your next question comes from the line of Ross Seymour from Deutsche Bank.
Thank you. Your next question comes from the line of Ross, see more from Deutsche Bank. The line is open.
Hi guys, this is Melissa Wathers on For Ross. Thanks for letting us have a question. Could you give us a high level summary on where you believe industry inventory levels are today by end market and maybe particularly in the appliances and industrial end market? And how do you guys see that?
inventory situation impacting your pace of market share gains and penetration of new markets and the midterm and like the medium term.
Sure, thanks Melissa. Yeah, the industry
Levels from our view are pretty much in line with what we would expect in the channel. We don't report specific channel inventory, but we did see certainly a build up in the mobile and consumer space last year.
As reported in Q1, we saw an unexpected upside in mobile we couldn't actually deliver, which reflected a lot of those inventory levels being depleted, and now we're shipping in part from inventory and apart from brand new builds. So I just highlight that particular market where we've seen a nice reduction in channel inventory, a nice pickup in demand.
But I think from the broader markets we see things pretty balanced and reasonable. If anything, as Ron highlighted, Selden Carbide we're shipping everything we can build. So we have pretty limited inventory, both at Navitas and in the channel.
Okay, great. And then kind of building off of that for your September quarter guide, you guided to mid teens sequential revenue growth. You talk about what you're expecting by end market and how much of that should be driven by the mobile kind of refill or recovery there versus your other end markets.
Yeah, it's pretty broad-based actually. Mobile, certainly the mobile growth continues into Q3. That's seasonally a pretty strong quarter. We see that even in the Q4. But we really see good stability and growth in the other markets. The one exception being data center, where we're not shipping yet.
If you can give us an idea of the average dollar content you have. Yeah, great questions. Kevin, thanks for that. It's pretty broad based. I listed a number of the applications from the home appliances, washers, dryers, refrigerators, air conditioners, HVAC. We're particularly excited about fuel pumps, which are fundamentally moving from fossil fuels to more electrified electricity and clean energy semiconductors like gallon nitrid or solar and carbide. But as you look at the industrial segments that tends to be more about automation, HVAC using solar and carbide technology. So very broad based across both
across Asia and across US. We highlighted the fact that the number of customer projects has more than doubled just in a quarter. Most of those are ramping, some are ramping in 24, many more are ramping in 25, so it's not the fastest growing segment, but brings great stability and certainly a lot of growth in conversion from silicon to gallium nitrate ore.
Can you say is that tracking as expected and which end market do you think will adapt it to the fastest?
Yeah, no great question. Generations for is our next major platform. We launched it late last year. This year is expected to be a big transition from generation three to gen four. And that's exactly what's happening. It's actually being adopted by all of our GALM nitride markets, even customers in production are switching over from gen three to gen four, getting performance advantages, cost reductions.
in Gen, will have transitioned to Gen 4 by the end of the year or Q1 at the latest.
Thank you, Kevin.
Thank you.
Your next question comes from the line of Blake Friedman from Bank of America.
Your next question comes from the line of Lake Friedman from Bank of America. Your line is open.
Hi, thanks for taking my question. I just want to focus on the mobile market. You've highlighted, you know, strong traction with LAMs in Korea and China. I was just hoping anything you can comment on, developments or relationships with North American LAMs would be helpful.
Yeah, you bet. Thanks Blake. We're seeing pretty broad-based adoption. We highlighted the fact that this year, we predicted this for the last couple of years, this is a big year for gallium nitride to achieve system cost parity with silicon-based power systems. And that's true for many of the charger markets and it's true of many of the others.
In particular, what we're seeing is a transition from the high end flagship or performance-based mobile charger models to more mainstream models. In particular, we highlighted trying in Korea with companies like Xiaomi, Oppo, and Samsung, because these are a few that we can publicly talk about. That's not to say we aren't seeing similar transitions and successes.
in North American around the world, but in some cases some customers are more sensitive to disclosing those public names, so we tend to shy away from them. So it is broader based than we spoke about an announced for the read inside described, and we're also looking for a lot more details on the customer profile, the specific products.
And the major product launches at our investor day in late November . So more details will be coming.
Great, so that, and then just as a quick follow up, I'll just open the capital raise that occurred.
that
You broke up a bit. Can you repeat the last part? Capital raise. Oh, yeah, I was just curious about thoughts on your cast visits and following the capital raise and thoughts about raising capital in the future. I'm sure your cast visits and following the capital raise and thoughts about raising capital in the future.
Yeah, yeah, hey Blake, this is Ron. In a nutshell, we feel really good about the balance sheet in our cash position. Like the equity raises we've indicated were for targeted reasons, strategic manufacturing being won.
I think going forward when you think about us and our capital needs and planning, what I would say right now is to the extent we raised capital going forward, it would be for strategic reasons. We've been active in M&A in the past.
or additional strategic manufacturing, but it would be strategic and accretive. But in terms of the business and ongoing operations, we don't see a need right now to raise more capital.
Lovelake Pawik
That's correct. That's a sorry. Yeah, thanks.
Yep. Yup.
Thank you. Your next question comes from the line of Jack Eden from the Charger Equity Research.
Your line is open.
Hey guys, thanks for taking the questions. I had a few on Silicon Carbide. So recently there's been a bit of talk about falling prices for Silicon Carbide wafers and just more suppliers entering the market. So I was curious, what are you guys seeing just in terms of wafer pricing or the broader supply landscape right now?
So, thanks, Jack, I think in general, silicon carbide supply chains are still reasonably tight as we mentioned and highlighted we're shipping everything we can. We're in the midst of a pretty significant ramp up with X-Fab. We signed a 500% increase in capacity.
With XFAB that includes materials, so substrates or bare wafer as you alluded to as well as the FB.
Wafers and we're going to be adding our own in house at the wafers next year as Ron described in the call with all of that said, I do think it's improving. I think we're seeing pockets of improved material availability. I think that's true with the bare wafers. Or substrates as we call them.
As you said, and I think we're seeing prices start to come down. I wouldn't call it very dramatic at this point. And there are new suppliers coming on board, but quality, yield, the ability to use those for higher performance MOSFETs all has to be evaluated. So I think these things take time, but I think the trends are favorable in terms of getting a more balanced demand and supply for the industry over the next year or two.
Sure. Okay, that's helpful. And then on the device side, so your devices can be above 50% gross margin, which is a bit higher than what some of the large device manufacturers are at right now. And so how much of that is due to Navitas just being fabulous and having a lower fixed cost base versus other factors.
different FV vendors. So I think that gives us more flexibility, especially as prices come down, as we talked about on the substrates, and maybe on the FV and using our own in-house FV. So I think all of that gives us a pretty good cost structure, but actually I think the main reason we might be doing better on margins than others is because of the performance of this technology. We have the best high performance in circuit test results of anybody. We did heavy benchmark testing a year ago before we bought. Genesick, we also have the most robust avalanche rated, 100% avalanche tested to the highest values in the industry. And we also offer the widest voltage range from 650 volts to 6,500 volts.
In that upper voltage range, there's very, very few competitors that can technically do that, and it allows our customers to use fewer high-voltage chips in place of multiple stacked lower-voltage chips, making their systems more cost-effective, but also giving us higher gross margins. So I think it's more about the performance and capability of that technology.
That's translating into maybe above average gross margins in the industry. Got it. That makes sense. Thanks so much. Thank you, Jack.
Thank you.
Your next question comes from the line of Natalia, Ninkler from Jeffreus.
Your line is open.
Hi, thank you so much for taking my question. Jean, I wanted to ask about the appy, the in-house appy capability, as you guys are gonna be investing in. Could you please speak a bit more about, you know, how you view them, is that going to be a cost improvement and to extend, you know, you have a time horizon that we should think about that project going forward. Yeah, definitely thanks Natalia. So it's a $20 million investment over a three year period.
The first phase is the first epi reactor. It's on order to be received late this year, early next year, and we expect it to be fully operational and contributing to revenue by middle of next year. I said that first half of next year. It will both give us incremental capacity. That's very important as the market's still tight.
But it also will give us incremental cost reduction, which can allow us to be more aggressive on price and drive even more top lines, but also puts some of that cost reduction into enhanced gross margin throughout next year, which Ron alluded to earlier. I did say three years, so we expected additional reactors to be involved in years two and years three.
We'll be placing those orders as we see the demand and time it to fit that demand profile. And we'll continue, even once it's online, to use a blend of outsourced epi as well as insourced epi to maximize the cost and capacity profile.
Thank you, this is helpful. And then the second question ahead was on the data center. Jean, could you please explain how should we think about the GAN and Silicon Carbide applications in data center? It sounds like I think historically, we always thought about GAN kind of being the first Gino to be.
Yeah, that's a great question. Obviously it's a very, very dynamic one with generative AI, fundamentally changing the processors that will be used in the future, the power profile, the efficiency demands. So it's pretty exciting. It's also the newest, because we're not shipping into it yet. But our data centers already bring out system-level design centers, as we highlighted one of them, the 3.2 kilowatt, just announced. That particular one uses all GAN ICs inside. But we do continue to do advanced system R&D work looking at the combination, actually, of silicon carbide, compared to GAN or in combination with GAN.
So I don't want to pre-announce something, but that's one of the benefits of Navatoss is the only pure play Next gen power semiconductor guy. We have the world's leading gain, world's leading cell and carbide in a very objective way We can evaluate what's going to be best for the system depending upon customer priorities around efficiency density power delivery
And when you look further out with the addition of the app equipment, if your target margin changing there, and when should we expect that to be incremental? So I guess the margin versus if you didn't have that equipment at all. Yeah, good question. Thanks, Sean. So getting back to the near term as we indicated in the comments, we talked about a short term moderation in the growth of margins. So I think that gives you some indication that we expect them to grow off Q3.
just not the rate of our previous guidance, which was mid-40s. I think over time, you know, again, it looks to us like a couple of quarter push out effectively from what we had previously indicated on margin growth. So we feel very good about the margin growth. We felt very good about the margin profile.
It's just that in the very short term here, we had this plows or moderation in our margin growth.
With respect to the EPI, as Gene said, I'll just echo Gene's comments, part of the benefit of EPI is lower cost. But again, I think we don't want to get that granular. I think the way to look at our margin or our margin profile is a little bit of a pause right now, a little bit of moderation in the growth. But again, I think we don't want to get that granular. I think we don't want to get that granular.
nothing's changed in our longer term thesis. We have an investor day again at the end of November and I'm sure we'll touch on it and at that point we'll give you know indications of a longer term model and where you should expect to see margins go longer term.
Okay, great. And then Jean, just wondering on the pipeline, where are the areas that you're seeing that the click is conversion from pipeline to orders to being able to deliver, whether it's by end market, by customer type, could you just give us a little more color on? Where you see the most immediate strength in that pipeline you're developing.
Yeah, I mean, if you look at the development cycles, those are pretty predictable by market. Of course, mobile consumer converts the fast from an opportunity to a revenue ramp that could be 12 months or less. Data center is the second quickest 18-month development cycles are common from opportunity creation to shipping and revenue.
Renewables tends to be about 3 years and EV is 4 trending back down to 3. So you're in that sort of range 2 to 3 years I should say on renewables. With that said, many of the opportunities in our billion dollar pipeline are well along in terms of development stage. They're obviously not all at the early stage. So...
We'll see them kicking in throughout this year next year. Even ED, some of those programs are late-stage development programs contributing to short-term growth. Same thing with solar. So it's a little hard to characterize when you've got a billion dollar pipeline that's expanding so quickly across so many different markets and so many different customers. That gives you a little bit of flavor about the rough timelines of converting from pipeline to pipeline.
Q1 to Q2 in the pipeline opportunity was pretty sizable. Was that mostly from existing customers changing their forecasts and maybe adding some new applications or did you actually add a lot of new customers or applications in there?
Yeah, we actually added in the solar space, let me specifically highlight, appliance and dust rail are more than double the customer projects within that pipeline. Data centers are more than double the number of customer projects within that pipeline.
Solar actually saw nearly a doubling of revenue per project, which is an interesting dynamic. While it didn't diversify as fast, we see more people looking to sort of double down or go bigger as they convert from silicon to either GaN or silicon carbide. So it varies a little bit by market, but those are a couple of facts and figures to give you a sense of the dynamic. It's certainly broadening.
Great, thank you so much. Thanks, John .
Thank you.
Again, if you'd like to ask a question, please press star 1 on your telephone keypad.
The last question comes from the line of Shadimit Bali from Quaid Harlem.
the blue sign loft at exist.
Any question there from Craig Helen?
Hey, can you hear me?
Can you hear me? Yeah, we can. Thank you.
Hey, hey, can grab some of the solid quarter. I just got a question on how far from prior highs are gangroest margins? And do you have any visibility into them? Are returning near those levels, either through mix or cost of clients?
Yeah, we don't break out our gross margins by technology or in further granularity, but it's fair to say that gross margins took some hit with the TSMC price increases that we spoke about over the last year, year and a half. First one was 20% almost a year and a half ago, another 6%.
At the start of this year, we made the strategic choice to continue to drive towards system cost reduction and revenue growth. With that said, we don't anticipate further price increases. We have a lot of cost reductions coming. We highlighted a number of them. And our pipeline that Ron went through, including the in-house, Epi, on the solid carbide side. But we're also completing a major transition from Gen 3 to Gen 4.
which is very important to driving incremental gross margins to that business, bringing it much closer to the average corporate and ultimately driving towards our long-term models. So I think some of that gross margin adjustment or negative impact is certainly behind us and we see a pretty attractive path of incremental gross margin improvements on the again business going forward.
Thanks, Bella. That was very helpful.
Thanks, that was very helpful. Thank you.
Thank you. Seeing that there are no more questions from the queue, this concludes today's conference. And thank you for joining Navitas Civic inducted second quarter, 2023 earnings call. You may now disconnect.???????????MR, direito????????????????? parameter.