Wolfspeed, Inc. (NYSE:WOLF) Q1 2024 Earnings Call Transcript

Wolfspeed, Inc. (NYSE:WOLF) Q1 2024 Earnings Call Transcript October 30, 2023

Wolfspeed, Inc. beats earnings expectations. Reported EPS is $-0.53, expectations were $-0.68.

Operator: Hello, everyone, and welcome to the Wolfspeed First Quarter Fiscal 2024 Conference Call. My name is Nadia and I’ll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Tyler Gronbach, Vice President, External Affairs to begin. Tyler, please go ahead.

Tyler Gronbach: Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed’s first quarter fiscal 2024 conference call. Today Wolfspeed’s CEO, Gregg Lowe; and Wolfspeed’s, CFO, Neill Reynolds, will report on the results for the first quarter of fiscal year 2024. Please note that we will be presenting non-GAAP financial results during today’s call, which we believe provides useful information to our investors. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of other key metrics.

A technician overlooking a circuit board being built and tested for a semiconductor device.

Today’s discussion includes forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mentioned important factors that could cause actual results to differ materially. Lastly, I would also like to note that during the quarter, we announced our intent to sell our RF business to MACOM. The results of our RF business will now be classified as discontinuing operations and all discussions today will be on a continuing operations basis. During the Q&A, we would ask that you limit yourself to one question so that we can accommodate as many questions as possible during today’s call.

If you have any additional questions, please feel free to contact us after the call. And now, I’d like to turn the call over to Gregg.

Gregg Lowe: Thanks, Tyler, and good afternoon, everyone. It is an exciting time at Wolfspeed. With the pending sale of the RF business, we are now the world’s only pure-play vertically integrated silicon carbide company. We are uniquely positioned to drive the industry transition from silicon to silicon carbide from both a materials and a device perspective. As we continue to scale our operations, we have overcome our fair share of challenges along the way and I remain very confident around our long-term trajectory for three reasons. First, we’ve demonstrated the capability to consistently produce enough high-quality, high-yielding 200-millimeter wafers in Building 10, ahead of the needs of the Mohawk Valley fab. Second, we’ve assembled a team comprised of internal silicon carbide experts, including one of our co-founders and external advisors from our tool manufacturers to ensure that we will achieve 20% utilization at Mohawk Valley in the June quarter of 2024 and we’ve seen notable progress this quarter.

And finally, customers continue to partner with Wolfspeed, as we secured our third highest quarterly total of device design-ins at $2.2 billion and we converted more than $1 billion of device design-wins this past quarter as well. In addition, we’ve also posted record revenue for our 150-millimeter substrates in the first quarter, which is an indication that demand remains robust for our high-quality substrates. Our first quarter results demonstrate the initial returns on our capacity expansion investments that will pave the way for the rest of the fiscal year and beyond. Revenue, non-GAAP gross margin and non-GAAP EPS all came in at the high-end of our guidance range. Turning to Mohawk Valley where we continue to ramp production. This quarter, we generated $4 million in revenue from the fab, which compares to $1 million that was delivered in the previous quarter.

In the coming quarter, we expect to more than double the output from the fab, as we continue to ramp device production. Because of the complex nature of silicon carbide technology as we ramp the fab further, we are collaborating even more closely with our tool vendors to ensure maximum uptime, the best yields and the most efficient use of all about our tools. We’ve worked closely with them to develop optimal operating protocols and as a result, we’re seeing good improvement in the fab. I was just up in the fab last week, meeting with the leadership team, walking in the floor to talk with our technicians and seeing the progress first-hand that we’re making in some of our bottleneck areas. We’ve now doubled the number of products qualified in the last 90 days and all of those MOSFETs achieve qualifications on the first pass through the fab, which is a strong indication of the underlying capability of the fab.

Finally, those products we have already qualified have sufficient demand to more than satisfy our short-term 20% utilization target. I am especially proud of this incredible effort by our team. It speaks to the advanced silicon carbide technical device capability we have assembled and the focused and detailed execution of our engineering and quality teams to ensure that we are more than ready to produce high-quality automotive devices at 200-millimeter, something nobody else in the world is currently doing. As I mentioned, we are ahead of plan in our ramp of Building 10 crystal growth for 200-millimeter substrates. By the end of this quarter, we will be producing enough material to support 15% utilization at Mohawk Valley, putting us nicely on track for our goal of 20% utilization by June of 2024.

Turning to the JP, construction continues and design schedule. We expect to be producing material in the first half of fiscal 2025 and we’ve already hired and began training more than 100 people that will work at that facility. On the demand side, as I said, we recorded $2.2 billion of design-ins, the third largest amount of any quarter in our history, ahead a record design wins of $1.4 billion illustrating our customers’ willingness to move into volume production and projects that we’ve won over the past few years. Our design win record for the first quarter represents more than 230 projects, many of which are converting sooner than our original expectations. Most of these projects are the automotive end market and we are steadily ramping our design-ins to design-win with major OEMs and Tier 1s.

We remain confident that the demand from automotive customers will remain strong. While we are seeing some softness in the industrial and energy space, primarily in China and Asia. Additionally, we had a record quarter for 150-millimeter wafer revenue, a strong signal that the demand for materials remains solid. Wolfspeed is the first mover to 200-millimeter wafer volume production, which will be the silicon carbide industry’s most advanced technology. As a result, we are well positioned to be the only company producing 200-millimeter at scale for the next few years and believe this competitive advantage will further extend our leadership position well into the future. Wolfspeed as the undisputed leader in silicon carbide will continue to play an industry-critical role in the coming years, as a supplier of merchant materials to leading power device makers.

Demand for our materials remained strong and we have extended some of our agreements with existing wafer customers and added new agreements, like the one with Renesas. That being said, we’re not content with being the leading material supplier to the market. We also expect to be one of the top silicon carbide device suppliers in the years to come. In 2018, the silicon carbide device market was estimated to be about $400 million. Five years later the market size is pegged at $6 billion and the projected TAM for the end of the decade is north of $20 billion and continues to grow. This is part of the reason we announced and are now in the process of completing the sale of our RF business to MACOM, which we expect to close by the end of the calendar year.

We’ve always said that the growth of Wolfspeed will come from our leadership in silicon carbide and power devices and this marks a definitive milestone in allocating all of our investments, research and development and technology into these business areas. There’s a long road ahead of us here, which is why we invested the time and capital to develop the world’s only purpose-built silicon carbide device fab. We’re keenly focused on execution and firmly believe we are doing this right. Doing this at scale at 200-millimeter from the outset will result in gaining and sustaining significant market share in the coming decades. It is rewarding to see the pieces of our long-term strategy become a reality, albeit on a longer timeline than we originally anticipated.

The remainder of this fiscal year and particularly the second half will prove the conviction that we’d always had in our strategy, in our products, and in our team, it is extremely exciting to see what’s on the horizon. I’ll now turn it over to Neill, who will provide an overview of our financial results and outlook. Neill?

Neill Reynolds: Thanks, Gregg, and good afternoon, everyone. During the first quarter, we achieved revenue, gross margin, and EPS results all at the high end of our guidance range. In addition, we expect continued revenue growth and gross margin expansion as we transition into 2Q’24. The outperformance in our financial results was underpinned by $4 million of revenue from Mohawk Valley during the quarter, up from $1 million in the prior quarter, and we expect to grow that to between $10 million to $15 million of revenue, as we transition into 2Q’24. While we expect some variability in the production ramp at Mohawk Valley, we remain on pace for the larger step-up in revenue as we transition into 3Q’24. With that, let me review the financial results in more detail.

I’ll start by providing an overview of the first quarter. Revenue from continuing operations for the quarter was $197 million compared to our updated guidance range of $185 million to $205 million and growth of 4.2% year-over-year. Power device revenue was impacted by slower industrial and energy demand, primarily in China and the broader Asian market, partially offset by the revenue ramp in Mohawk Valley. Materials 150-millimeter substrate revenue achieved a record quarter, above our expectations driven by continued strong demand and record manufacturing performance by our Durham materials operations team. As Gregg mentioned earlier, our historical design-in portfolio supported the first quarter revenue growth and we secured $2.2 billion of new design-ins for power devices.

Our design-in to design-win conversion rate is ahead of our original expectations. And based on the design-ins we’ve already secured, we have the next few years of expected revenue covered by our existing book of business. Non-GAAP gross margin from continuing operations in the first quarter was 15.6%. Underutilization costs for the quarter were $34.4 million, representing 17.4% or 1,740 basis points of gross margin. Outperformance was driven largely by improved materials manufacturing performance, resulting in better-than-expected 150-millimeter materials costs and yields. In addition, we saw lower-than-expected underutilization costs as we ramp Mohawk Valley. We generated adjusted loss per share of $0.53 from continuing operations in the fiscal first quarter compared to a loss of $0.36 last quarter and a loss of $0.24 in the same period last year.

Adjusted loss per share was a significantly lower loss in the high-end of our guidance range as higher revenue, higher gross margin and lower operating expenses, all fell through to the bottom line. Before moving to the outlook, I’ll touch on our balance sheet. We ended the quarter with over $3.3 billion of cash and liquidity on hand to support our ramp and growth plans. DSO was 55 days, while inventory days on hand was 162 days. Free cash flow during the quarter was negative $517 million comprised of $113 million of operating cash flow and $404 million of capital expenditures. Regarding our financing initiatives, we are pursuing funding from the chipset and should have more clarity on this by early next calendar year. We are constantly evaluating ways to optimize our balance sheet and capital structure and will continue to be opportunistic and flexible in our capital strategy.

In the last year, we have raised approximately $5 billion of low-dilution capital across a number of vectors, including customers, governments, private financing and capital markets. In conjunction with federal funding, we are in good position to execute our capacity expansion plans, but we will remain nimble to optimize our capital structure for the long-term. Turning to the second quarter outlook, we are targeting revenue from continuing operations in the range of $192 million to $222 million, driven largely by the incremental revenue contribution, we expect from Mohawk Valley in this quarter. We now anticipate roughly $10 million to $15 million of revenue to come from Mohawk Valley in Q2. This increase in Mohawk Valley revenue will be partially offset by continued softer demand for the industrial and energy products, primarily in the China and broader Asia markets.

However, we will look to purpose the supply to where end demand remains strong. We are also expecting non-GAAP gross margin in the range of 12% to 20% with the midpoint of 16%. At the midpoint, this includes approximately $35 million or negative 1,700 basis points of underutilization costs as we ramp up revenue at the Mohawk Valley fab. We are also targeting non-GAAP operating expenses of approximately $109 million for the second quarter of fiscal year 2024, which is inclusive of $11 million of start-up costs, primarily related to the JP materials facility in Siler City, North Carolina. We expect Q2 net non-operating expense of approximately $27 million. As I have mentioned previously, we expect non-operating expense to increase as the year progresses as we earn less interest income on our short-term investments in connection with our continued investment in our facilities expansion.

We expect Q2 non-GAAP net loss to be between $88 million and $71 million. Our Q2 targets are based on several factors that could affect them significantly, including supply chain dynamics, overall demand, product mix, factory productivity and the competitive environment. As Gregg mentioned earlier, we are moving ever closer to the significant uptick in our ramp of the Mohawk Valley fab and we expect a larger ramp in the back half of the fiscal year. We are still extremely confident in our ability to achieve 20% utilization in the fab by June. As we indicated on our last call, there will be a lag between 20% utilization and $100 million of quarterly revenue due to the time between fab starts and shipments to our customers. Lastly, during the quarter, we announced the intent to sell our RF business to MACOM, a path we have been pursuing for quite some time.

When the sale is finalized, we will have completed the path towards portfolio optimization that we’ve been on since 2018, when we were predominantly a lighting company. We are happy to say that Wolfspeed is now the only pure-play silicon carbide business in the marketplace and we can focus all our collective efforts on the silicon carbide materials and power device businesses. With that, I’ll pass it back to Gregg.

Gregg Lowe: As we close out the first quarter, I want to reiterate that fiscal 2024 is a pivotal year for Wolfspeed. We remain confident in our long-term vision and are seeing promising results. While I gave some color early on, on design-ins, I think it’s worth repeating that we had a record design wins for this past quarter as customers ramp their programs. Demand has certainly attracted new entrants and from our viewpoint and checks in the market, there is not a single player who can match our quality and our scale at 150-millimeter. And as I said earlier, no one is close to our position at 200-millimeter. This gap will only widen as we bring the JP online in the first half of fiscal 2025. Secondly, while there have been several new entrants to the materials market Chinese and others, the significant ramp required to create high-quality materials it’s still in front of them.

It’s taken us 35 years to master this technology, which we know first-hand can be incredibly difficult to work with, let alone scale and produce at the highest quality possible. While I’ve always said, we are taking our competitors at their word regarding their stated capability to produce silicon carbide materials internally, it is highly unlikely that every competitor will be successful. And this will create an opportunity for those with additional materials capacity to secure long-term agreements with device producers or capture an even larger share of the device market. And we are well-positioned to do both. Demand remained strong across the business outside of the industrial and energy markets, particularly in China and Asia. Overall what we have said time and time again about the transition to the use of silicon carbide rings true.

The EV transition remains the largest change in the history of the automobile. And with that comes winners and losers and potentially a bumpy path. However, there is no reverting to the internal combustion engine, that is the way the past silicon carbide has shown that EVs can be pushed further with extended range, faster charge times and competitive prices. Despite the current softness in China and Asia, demand remains high for our products and customers’ needs are higher than our current output levels and this is why we are keenly focused on ramping Mohawk Valley to 20% utilization. To close, we are excited about this year. Fiscal 2023 was not without its challenges, but those challenges come with being the first pursue next-generation 200-millimeter technology in silicon carbide.

However, the opportunity to be the leader of this transformative technology keeps us moving forward as quickly and purposely as possible to execute and generate value for our stakeholders. Thank you, operator. And we’re now ready for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question goes to Samik Chatterjee of JPMorgan. Samik, please go ahead. Your line is open.

Joseph Cardoso: Hey. Thanks, guys. This is absolutely Joe Cardoso on for Samik. So for my one question, it sounds like qualifications in the Building 10 ramp are tracking well. So as we think about what is keeping you on the sidelines relative to Mohawk reaching 20% utilization earlier than the June quarter itself. Can you just walk us through what the key drivers are at this point in the ramp? Just curious to hear your thoughts on that front. Thanks for the question, guys.

Gregg Lowe: Yes, thank you for — thanks for the question. First off, you’re right Building 10 is in great shape right now, we’ll be producing material in this quarter that will be able to support 15% utilization, and obviously, we have two quarters after that to get to 20% utilization in Mohawk Valley. So that’s in really great shape. We qualified a bunch of different MOSFETs already in that fab. All of those MOSFETs have qualified our first half success and we’ve actually qualified two modules as well that have come through on 200-millimeter, which I think is a really good sign for the quality of our backend operations. The fab itself is the world’s first 200-millimeter fab and as such, a lot of the machines that are in the fab are seeing volume ramp up of 200-millimeter silicon carbide for the first time.

And so, we’re working very closely with our tool vendor to ensure we have better uptime where their machine — one particular machine is seeing downtime more than we would — than it should. We have a team that is completely focused on resolving that. As I mentioned, I was in the fab last week. I met with the engineers from our team as well as the engineering from the vendors team. They are also extremely confident that this is a normal process that’s going through as you ramp and we will resolve this and we are on track to 20% utilization in the June quarter.

Operator: Thank you. And our next question comes from Harsh Kumar of Piper Sandler, Harsh, please go ahead. Your line is open.

Harsh Kumar: Yeah, hey, guys. Had a quick timing question. So Mark Valley did $4 million of revenues in the March quarter. That implies that given the timing, the lead time difference, conversion, packaging et cetera. That means that Mohawk Valley wafer runs in the March/April timeframe were about that $4 million. So my question really is, could you give us a glimpse into what Mohawk Valley wafer runs are looking like on a dollar basis today? That would be the color that I’m looking forward. Thanks.

Neill Reynolds: Hey, Harsh. Thanks for the question. This is Neil. So first of all, let me just, first thinking about utilization of the fab and how that relates to wafer starts. That’s really what we’re talking about here. So utilization in the fab is really a function more of wafer start. So we’ve talked about getting to 15% out of Building 10, I think, we are running wafers out of North Carolina silicon carbide 200-millimeter substrate out of North Carolina that could potentially support the fab at 15% utilization even by the end of this year. As you look out to the end of the year, we’re still on target to get the 20% utilization. So what that means is we’re seeing solid performance from a substrate perspective to meet that goal.

After that, what that means is, it’s — again it starts utilization. So what that means is, you have to put the wafers in the fab. You’ve got to run those through the fab, you got that cycle time, you got to send it to the back end to be either sold at devices or as package parts that may have the packages with the various cycle times on that as well. So once we get to the 20% utilization, there’ll be a bit of lag, work through those cycle times, other than you see the revenue that corresponds to that. In this case, once we get to 20% in that June timeframe we anticipate that being from a revenue – translating from a revenue perspective to about $100 million in revenue at the end of December quarter next year.

Gregg Lowe: I would just maybe add one comment to it. As material goes through these tools in the factory, we’re seeing great results as they go through the tool. What we’re seeing though is that the downtime or the maintenance required is higher than it should be right now. And again, I was in the fab last week. I met with the engineers on both the tool side as well as our side. And there is a very good line of sight for what we need to do to get to tool uptime where it needs to be. And as soon as that happens, our ability to transition from relatively low utilization to towards this 20% should be a very, very good snap as we fix that. As I mentioned, I was in the fab last week. I will be in the fab two more times in November, including on Thanksgiving Day to continue the focus of Mohawk Valley brand to 20% utilization.

Operator: Thank you. And our next question go to George Gianarikas of Canaccord Genuity. George, please go ahead, your line is open.

George Gianarikas: Good afternoon and thank you for taking my question. I just wanted to get your thoughts on some of the turbulence, to say the least, in recent discussions around EV plans at some of the big three European OEMs. What are your thoughts there? And I know you talked about your backlog being so robust that it didn’t kind of matter for the next couple of few quarters, but what are you seeing in your own business that may or may not reflect what we’re hearing in the marketplace? Thank you.

Gregg Lowe: Well, obviously, we would like our Mohawk Valley fab to remarket faster and so would our customers. And as such, I’ve been on pretty much weekly calls with CEOs and executives from major OEMs and Tier 1s. And basically, their consistent message back to me was we need more and need it soon. So the demand that we’re seeing both near term and long term is very, very solid. I’ll remind folks that many of the cars that are being sold today were just not the electric cars that are being sold today were designed five, six, seven years ago and are with silicon-based MOSFETs or IGBTs. And what silicon carbide does is three important things. One is it extends the range of the car. Two, it allows the car to be charged faster from a — and then three at the vehicle level, using silicon carbide allows the vehicle to be less expensive because there are lots — you use less battery, with express cooling and different things.

In fact, there was a report a few years ago that said for every incremental dollar of silicon — that to be spend on silicon carbide over silicon, you get $3.5 to $7 back. So basically, silicon carbide is enabling longer range, it’s enabling faster charging, and it’s enabling lower system costs. And that’s kind of trifecta for EVs. So any of the noise that you see today, it certainly has no impact on our demand, both near term and long term. And by the way, there’s OEMs and Tier 1s in the US, in China and in Europe.

Operator: Thank you. And the next question go to Brian Lee of Goldman Sachs. Brian, please go ahead, your line is open.

Brian Lee: Thank you. Hey, guys. Good afternoon. Thanks for taking the question. I guess you mentioned I think Neill during your prepared remarks that you’re kind of implying a stronger step up in Mohawk in 3Q, does that imply that the total downtime issue that you guys have been referencing here is sort of done by that point? And then if I just look at the numbers, 2Q midpoint for Mohawk is up like three times sequentially in revenue terms. So is 3Q expected to be up at that level or above? Or are you talking more in absolute dollars when you’re talking about this bigger step-up? Thanks, guys.