Wolfspeed, Inc. (NYSE:WOLF) Q2 2024 Earnings Call Transcript

Wolfspeed, Inc. (NYSE:WOLF) Q2 2024 Earnings Call Transcript January 31, 2024

Wolfspeed, Inc. beats earnings expectations. Reported EPS is $-0.00115, expectations were $-0.63. WOLF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Thank you for attending today’s Wolfspeed Inc. Q2 Fiscal Year 2024 Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to Tyler Gronbach, VP of External Affairs. You may proceed.

Tyler Gronbach: Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed’s Second Quarter Fiscal 2024 Conference call. Today Wolfspeed’s CEO, Gregg Lowe; and Wolfspeed’s, CFO, Neill Reynolds, will report on the results for the second 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.

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 this quarter, we completed the sale of our RF Business to MACOM. The results of our RF Business are classified as discontinued operations and all discussions today will be on a continuing operations basis. During the Q&A session, 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. As the world’s only pure-play vertically integrated silicon carbide company, Wolfspeed is leading the industry shift from silicon to silicon carbide across both materials and devices. Our focus remains on scaling operations effectively and executing on the long-term investment plan that we have in place. While there are still challenges ahead of us, we are proud of the strong progress we’ve made on our strategic initiatives over the past couple of quarters. Importantly, we are encouraged by the developments across key internal metrics. The Mohawk Valley Fab delivered improved performance and is on track to achieve 20% utilization in the June quarter. From a 200 millimeter substrate perspective, there is now ample runway to not only meet, but exceed our original utilization target from Building 10 on the Durham campus as we’re consistently producing high-quality, high-yielding 200 millimeter wafers out of this facility.

The additional flexibility will be important as we begin producing substrates in the latter half of this year at the JP. Overall, I’m confident about our execution of our near-term operational goals and optimistic around our long-term financial prospects. Showing our unwavering focus on execution, the second quarter continued the solid momentum from the first quarter. We’ve said time-and-time again that all roads lead to Mohawk Valley and this past quarter was no exception. The Fab contributed approximately $12 million to our quarterly revenue, roughly triple last quarter’s levels and at the midpoint of our guidance. I spent a lot of time at Mohawk Valley this past quarter and witnessed the dedication of our team first hand who along with our incredible tool suppliers are working around the clock on tool optimization activities related to this first-of-its-kind ramp.

Wolfspeed at its core is an innovative company full of problem solvers and I’m very grateful to the entire team that we are heads down and focused on execution at this Fab. To give you a sense for the progress at Mohawk Valley, so far we’ve qualified over a dozen customer parts, including two of our most complicated automotive devices as well as the largest device we are currently producing at the facility. This gives us more than enough qualified parts to achieve our 20% utilization goal and we expect to continue to qualify more parts between now and the end of June, further supporting the Mohawk Valley revenue ramp. Additionally, we received our IATF automotive certification at Mohawk Valley, which is an industry standard to ship to OEMs and Tier 1s.

This is an important milestone, and we are pleased to have achieved it on our first attempt. On the material side of our operations at Building 10, we’ve now installed all crystal growers necessary to achieve 20% utilization at the Mohawk Valley Fab by June of 2024. Wafers out of Building 10 are yielding very well, and we now have plenty of 200 millimeter capacity to achieve our 20% utilization target. In fact, the quality of the material and the current yield give us confidence that Building 10 will be able to support approximately 25% wafer start utilization at Mohawk Valley by the end of calendar 2024, well above our original expectations. However, we still like to remind everyone that the ramp cadence at Mohawk Valley has not changed based on this development and to be clear, the normal challenges of ramping a brand new 200 millimeter Fab remain and we are well aware that this ramp will not be linear.

While we’re pleased with the Fab performance, our Mohawk Valley team continues to work on optimizing factory tool utilization and availability. It’s important to remember that this is the first time these tools have processed 200 millimeter silicon carbide wafers and tool integration is a critical step as we ramp production. Lastly, as it relates to our materials facility at the JP in Siler City, we will begin installing crystal growers in early February and would expect to begin qualifying furnaces in the September quarter of this year. All the learnings with 200 millimeter crystal growth at Building 10 will better position us to hit the ground running in Siler City and we anticipate boule production starting by the end of calendar 2024. And finally, before I hand the call over to Neill, I’d like to share a few observations about the internal combustion engine to electric vehicle transition.

The shift of course is well underway, but it’s happening at a more modest pace than some had previously anticipated. This really has no impact on RF Business outlook as we were still very early in the adoption phase of our silicon carbide devices across numerous car models that are being introduced to the market in the next few years. Underscoring this is our strong design-ins and design-win performance this quarter. As a reminder, a design-in represents business we’ve been awarded and the conversion to design-win happens when the customer places production orders for 20% of the first year production volumes. In other words, the design-win indicates that the customer is beginning to ramp their production with our devices. We achieved $2.1 billion in design-ins this quarter, marking our third highest quarter on record, which clearly indicates continuing and growing robust demand for silicon carbide.

More importantly, we posted a record of $2.9 billion of design-wins, which were heavily weighted towards EVs and included 28 different electric vehicle model. This diverse customer base across the global electric vehicle industry with multiple OEMs and Tier 1s gives us confidence to continue with our expansion plans and further illustrates why we believe our supply will be continuing to work to catch up with demand over the next few years. And these design-wins are just the beginning. Over the next five years based on our current design-ins, the number of EVs leveraging Wolfspeed devices will increase to nearly 120 different models across 30 different OEMs. This represents a significant growth from the small number of vehicles on the road using our silicon carbide devices today and demonstrates the opportunity ahead for us.

As we continue to pioneer 200 millimeter silicon carbide and embark on our unprecedented greenfield capacity expansion plans, we maintain conviction in our strategy. It is exciting to see what is on the horizon and we look forward to continuing this promising momentum, particularly at Mohawk Valley throughout the second half of this fiscal year and beyond. I’ll now turn it over to Neill who will provide an overview of our financial results and our outlook. Neill?

Neill Reynolds: Thanks, Gregg. Before I jump into the financial results for the quarter, I’d like to remind you all that during the second quarter, we completed the sale of our RF Business to MACOM. As such, all results reported below will be on a continuing operations basis and exclude the impact of RF in our results. We’re very pleased that during the second quarter, revenue, gross margins and EPS all came in at the high end of our stated guidance ranges for the second straight quarter. We generated revenue of $208 million for the quarter, a 5.6% increase sequentially and a nearly 20% increase year-over-year. During the quarter, we generated record power revenue of $108 million, driven largely by the $12 million of contribution from Mohawk Valley and strong demand we see for our products.

Looking at the power device revenue performance in more depth, we saw a sharp increase in EV revenue quarter-over-quarter fueled by the additional EV device products shipping out of Mohawk Valley. However, this was partially offset by lower demand and persistent weakness in our industrial and energy markets, particularly in China and across Asia. We had yet another solid revenue performance for materials above our guidance expectations. Materials benefited from an additional week of product shipments compared to the prior quarter and prior year, but also from continued strong manufacturing execution resulting in approximately 29% growth versus prior year. Non-GAAP gross margin in the second quarter was 16.4%, representing an 80 basis point improvement from the prior quarter, driven by increased revenues from Mohawk Valley and solid execution in our materials business.

Our gross margin includes $35.6 million or approximately 1,700 basis points of underutilization costs related to the ramp of Mohawk Valley in the second quarter. As a result of the gross margin improvements as well as tighter cost controls and higher interest income, our non-GAAP EPS of negative $0.55 surpassed our guidance. Our EPS in addition to the underutilization cost mentioned above also includes the impact of $10.5 million of factory start-up costs related to the construction of the JP and our materials expansion efforts. Before I get into guidance, a quick update on our balance sheet. We ended the quarter with over $2.6 billion of cash and liquidity on hand to support our ramp and growth plans. Expected draw-down the remaining $1 billion related to our Renesas supply agreement in the first half of this year, which will build our cash position.

DSO was 43 days, while inventory days on-hand was 199 days. Free cash flow during the quarter was negative $755 million, comprised of $183 million of negative operating cash flow and $572 million of capital expenditures. As it relates to funding plan, given our strong cash and liquidity position, our current focus is on government funding to further support our capacity expansion plans. We continue to have constructive discussions and correspondence with government authorities, including US CHIPs Act officials. We are on track with all necessary incentive considerations and are targeting to have our full applications complete within this quarter. As always, we will continue to seek out ways to manage and optimize our balance sheet and capital structure.

Moving onto our guidance for the third quarter. We target revenue from continuing operations of $185 million to $215 million, with a midpoint of $200 million. I think it would be helpful to break down the $200 million revenue midpoint guidance for modeling purposes. Revenue for power devices at the midpoint of our guidance will be relatively flat, as increases in EV revenue supported by additional output from Mohawk Valley will largely be offset by lower industrial and energy revenue. Revenue from materials will be at our previously-stated capacity range of $90 million to $95 million, down from $101 million in the prior quarter. As stated earlier, in Q2, materials revenue benefited from an additional week of shipment in combination with strong operating execution.

Our production line is now balanced in that capacity, therefore we anticipate this being our materials capacity capabilities for the immediate future. This data guidance would result in revenue growth in both power devices and materials year-over-year. We are targeting $20 million to $30 million of revenue to come from Mohawk Valley next quarter, approximately doubling revenue at the midpoint. This will largely offset the decrease in revenue coming from the Durham Fab, which generates approximately $90 million to $100 million of quarterly revenue, but will be below that range this quarter due to the continued softness and uncertainty in the industrial energy markets in China and across Asia. The impact from the industrial and energy softness is expected to be persistence at least until the second half of the calendar year.

But as we said last quarter, much of the product we slated to ship there has a match elsewhere in our pipeline and we continue to work through that inventory now. Continuing with our Q3 guidance, we target non-GAAP gross margins of 13% to 20%, with a midpoint of 16.5%, driven by greater contribution from Mohawk Valley. At the midpoint, this includes $36 million or 1,800 basis points of underutilization related to the Mohawk Valley Fab. We target non-GAAP operating expenses of approximately $109 million inclusive of $13 million of start-up costs, primarily related to the JP. We target Q3 net non-operating expense of approximately $27 million. As I have mentioned previously, we expect non-operating expenses to increase as the year progresses, as we earn less interest income on our short-term investments in connection with our US capacity expansion plans.

We target Q3 non-GAAP net loss to be between $87 million and $71 million. Our Q3 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. Before I hand the call back to Gregg for closing remarks, I would like to remind you a few data points pertaining to our facility ramp that may help with your modeling. First, while we are on track for 20% utilization at Mohawk Valley by the end of the June quarter, the full revenue benefit of $100 million per quarter from that 20% utilization level would be realized in the December quarter. As we have said, there is roughly a two-quarter lag between wafer starts and revenue contribution.

In addition, as Mohawk Valley Fab utilization increases, we’ll start to see incrementally less underutilization. However, as the JP moves towards being ready for production, we will see incrementally more start-up costs which hit different lines in our P&L. Once the JP Phase 1 construction is complete, those start-up costs will come down and we will start to incur underutilization costs at the JP, similar to what has occurred at Mohawk Valley. Now, I’ll turn it back over to Gregg.

Gregg Lowe: Thanks, Neill. While we remain confident, there is a significant and long-term demand for our products. We also understand that the silicon carbide market place will continue to evolve for the next several years. During transformative industry shifts, there will always be many twists and turns, but we believe we are uniquely positioned to leverage the deep domain expertise we have compiled over the last several decades into a clear advantage. Today, we are the world’s largest producer of silicon carbide material. We have long-term supply agreement with a major power device producers from around the globe. Four of those customers, signed an initial agreement with us several years ago then expanded those agreements a few years ago and expanded once again more recently.

Two of which happened in the last 90 days and this demonstrated ability to service and grow the silicon carbide materials market for the last couple of years didn’t go unnoticed as we secured what I believe to be is the largest capacity reservation deposits in the history of semiconductors. The $2 billion agreement with Renesas to supply 150 millimeter and 200 millimeter substrates beginning in 2025. We know from the more than 30 years of experience of working with this material that the significant ramp required to create high-quality materials consistently at scale gives us a competitive advantage today and for the foreseeable future, especially as we begin producing 200 millimeter at the JP. The demand for silicon carbide remains significant, underscored by the two recent announced expansion from long-term supply agreements with existing customers.

We expect to remain an important partner to other silicon carbide device manufacturers through the end of this decade. And we believe our leadership in materials provides a strong foundation for us to continue to grow our device business. We are working closely across a diverse set of customers, which gives us good visibility into how the markets are evolving and where we can capitalize on the opportunity. Being the leader in silicon carbide, a truly transformative technology, is no easy task. And we are executing on this opportunity with efficiency, purposefulness and thoughtfulness. We look forward to bringing this vision into reality and generating long-term value for all stakeholders. I’ll now turn it back to the operator for Q&A.

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Q&A Session

Operator: Absolutely. We will now begin the Q&A session. [Operator Instructions] The first question is from the line of Brian Lee with Goldman Sachs. You may proceed.

Brian Lee: Hey, guys. Good afternoon. Thanks for taking the questions. I know you get asked this every quarter, but it sounds like the tone, the confidence, some of the data points you’re throwing out there, Gregg, are as positive sounding as we heard about the internal operationals. So given Building 10, it seems like you’re ahead of plan. What is the potential for Mohawk to maybe pull ahead in the ramp to 20%? I know you’re super confident in being able to hit it. But how do you potentially see upside to any of these medium-term targets. I think you’ve talked about $100 million of revenue from that facility by the December quarter. So are there still internal bottlenecks operationally keeping you from accelerating? Is it a customer eval issue? Just wondering, as you think about the upstream sort of not being as much of a limiting factor, how you could potentially maybe translate that to moving Mohawk Valley a little bit faster? Thanks, guys.

Gregg Lowe: Yeah, thanks a lot, Brian. So first off, the team has done — the team up in Mohawk Valley combined with several the teams from Durham that have gone up to Mohawk Valley, has done an incredible job of relieving bottlenecks and fine-tuning the processes, et cetera. So very pleased with the progress we’re making, still have a lot to do. But obviously, tripling the revenue and then doubling it again next quarter is fantastic. We feel great about where we’re at with Building 10, obviously, now having an ability to support a greater ramp of 25% is fantastic as well. But as I said in the prepared remarks, we’re going to keep the pace of the fab itself at the pace of 20% utilization in the June quarter, $100 million of revenue in the December quarter.

We feel real good about that. But again, from a longer-term perspective, the ability to get more out of the facilities on the Durham campus in terms of supplying Mohawk Valley, it gives us really good confidence in being able to take that number up higher out in time.

Operator: Thank you. The next question is from the line of Samik Chatterjee with JPMorgan. You may proceed.

Samik Chatterjee: Hi. Thanks for taking my question. I guess, Gregg, you did mention the design-in pipeline, which continues to remain quite robust on the EV front. I was just wondering, I mean, what are you seeing change in terms of conversion of design-ins to design-wins, obviously, with the design-ins picking up in pace and potentially the launch of these sort of vehicles also coming more closer. Are you seeing a bit of any changes in the conversion rates of these design-ins to design-wins eventually? And just any color there that you can share will be helpful. And I have a quick follow-up to that. Thank you.

Gregg Lowe: Sure. Good question. So this past quarter, we had a record conversion of $2.9 billion to design-win that represented, as I mentioned, there’s 28 different unique electric vehicle models that are in there and a whole bunch of other products as well, including a number of industrial and energy applications. So we’re really happy have been very, quite frankly, the design-win conversion we just had is quite a stunning number of $2.9 billion. So I feel real good about that conversion. And then the $2.1 billion at design-in gives us confidence that customers are still very excited about our technology and our capability.

Operator: Thank you. The next question is from the line of Jed Dorsheimer with William Blair. You may proceed.

Jonathan Dorsheimer: Hi. Thanks for taking my question. I have one question and a follow-up. I guess for my question, Gregg, if I look at today’s announcement on the material agreement, it’s identical to your December announcement that turned out to be grown. So I’m wondering if you might be able to comment because I know that, that customer wasn’t named in the previous, but you’ve since been able to comment on that. And assuming the terms are still the same. And then I have a follow-up question, too.

Tyler Gronbach: Hey, Jed. This is Tyler. Yes, we can confirm that today’s announcement, the customer is Rome. And your follow-up?

Gregg Lowe: And I just might add, sorry, just to add a couple of things. We have had a great long-term relationship with them. And we’re very excited about this partnership with them going forward, helping us convert the market to silicon carbide. In the prepared remarks, I did have one typo in there. We had three long-term agreements that had original agreements extensions and then further extensions, and this was one of those. Go ahead, Jed.

Jonathan Dorsheimer: Well, congratulations. My follow-up question. So is similar to what Brian asked you, but with a slight nuance. So if I look at what Building 10 is outputting in terms of wafer starts and what you’re pulling down on that in Mohawk Valley. My calculation would be that you will have an inventory of wafers over $200 million by June, assuming that the $25 million at midpoint and maybe a $50 million to $60 million or $55 million in June, my estimates on that. So my question is, as you look through the rest of the year, clearly, that gives you some glide in terms of Siler City ramp from a buffer perspective. But what are the — is it missy kind of getting the second of kind tools? What are the gating factors as you think about moving around that utilization to debottleneck and capture either more or less in the back half of this year and next?