Wolfspeed, Inc. (NYSE:WOLF) Q3 2023 Earnings Call Transcript

Wolfspeed, Inc. (NYSE:WOLF) Q3 2023 Earnings Call Transcript April 26, 2023

Wolfspeed, Inc. beats earnings expectations. Reported EPS is $-0.13, expectations were $-0.15.

Operator: Good evening, and thank you for standing by, and welcome to the Wolfspeed, Inc. Third Quarter Fiscal Year 2023 Earnings Call. Please note, today’s call is being recorded. I would now like to hand the conference over to your first speaker today, Tyler Gronbach, Vice President of External Affairs. Sir, please go ahead.

Tyler Gronbach: Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed’s Third Quarter Fiscal 2023 Conference Call. Today, Wolfspeed’s CEO, Gregg Lowe; and Wolfspeed CFO, Neill Reynolds, will report on the results for the third quarter of fiscal year 2023. Please note that we will be presenting non-GAAP financial results during today’s call, which is consistent with how management measures Wolfspeed’s results internally. 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 mention important factors that could cause actual results to differ materially. And now I’d like to turn the call over to Gregg.

Gregg Lowe: Thanks, Tyler, and good afternoon, everyone. Thank you for joining us today to discuss our latest financial results. Now before we dive into the details, I want to take a moment to express our gratitude to President Biden, Secretary Raimondo, Governor Cooper and all of those who joined us at our Durham headquarters last month. As an American company, we share the administration’s goal of driving U.S. innovation and manufacturing. At Wolfspeed, we are a testament to the power of long-range investments in complex technology with silicon carbide being rapidly adopted across various industries. Our company’s mission aligns with the energy efficiency goals of governments across the world, and we are proud to be making a significant impact.

In the last several years, we’ve gone from being a global leader in silicon carbide materials production to building a vertically integrated semiconductor powerhouse that started with the expansion of our power devices capacity in the Durham fab and then turning a field of mud, in Upstate New York into the world’s first 200-millimeter silicon carbide device factory. I’m proud to share that we shipped our first product from the Mohawk Valley fab in the third quarter. While it’s a relatively small number of devices shipped to an industrial off-board charging customer, it’s an important proof point that we are now producing product on 200-millimeter substrates. We have a meaningful head start in executing our strategy, and the learnings from ramping the new fab will be important as we continue to expand capacity to better support the industry transition from silicon to silicon carbide.

Our focus on vertical integration positions Wolfspeed for a multi-decade growth opportunity. Customer demand is robust as we secured $1.7 billion of design-ins in Q3. This total reflects a new quarterly record for nonautomotive designs, which included a heat pump application and an EV off-board charger. Our cumulative total for design-in secured since fiscal 2020 now totals approximately $18 billion. Demand is there, and we are continuing to lead the expansion of the silicon carbide market. My primary focus is on expanding our capacity, especially ramping materials production as it relates to wafer supply to feed Mohawk Valley. For most of our history, our growth was driven by supplying the market with silicon carbide wafers. Now we have a best-in-class fab and we need more materials to feed it.

Producing more silicon carbide epi wafers out of our Durham facility will be the governor of our — on our Mohawk Valley ramp in the short term, and our longer-term outlook is supported by the ramp of the JP. Neill and I are leaning in directly to support capacity expansion efforts. We’ve realigned the team with operations leaders now reporting directly to myself and Neill. Missy Stigall is overseeing devices and our wafer fabs, while Adam Milton will lead the materials production for the company. We believe this will provide greater visibility into the ramp of substrates as well as our device footprint expansion. Our strategic vision and expectations for silicon carbide expansion have not changed. Wolfspeed has a deep moat in the industry with a decades-long runway.

But the journey requires focus persistence and patience. We’ll continue to make long-range investments in this complex technology, expanding our capacity footprint with purpose-built facilities for both materials and devices. We believe this is validated by customer demand and increasing investments in silicon carbide across the industry. The world needs more silicon carbide, and Wolfspeed will continue to lead the pack. Now I’ll turn it over to Neill who will provide an overview of our financial results and an outlook for the fourth quarter of fiscal 2023 and fiscal 2024. Neill?

Neill Reynolds: Thank you, Gregg, and good afternoon, everyone. During the fiscal third quarter of 2023, we generated revenue of $229 million at the high end of our guidance range which represents a 6% sequential increase when compared to the $216 million in the fiscal second quarter of 2023 and growth of approximately 22% year-over-year with power device products growing more than 50% year-over-year. We recognized our initial revenue from our Mohawk Valley fab in the third quarter and continue to expect low single-digit millions of revenue in the fourth quarter with a greater ramp in fiscal 2024. I’ll go into more specifics in a few moments, but going forward, we will continue to explore ways to show the underlying economics coming out of Mohawk Valley and its relative margin impacts.

As a reminder, Mohawk Valley will dramatically change the dynamics of the business as its scale, automation and wafer size advantages will lower our overall die cost by greater than 50%. We also saw strong revenue growth from our merchant 150-millimeter silicon carbide substrates as we solved many of the production challenges we had on the taller holes, albeit at higher-than-expected costs. This results in a onetime inventory drain, and we expect revenue levels to return to more steady state-run rate levels in fiscal Q4 and beyond. Additionally, from a power device perspective, as I mentioned last quarter, we now believe that we have achieved full capacity in our Durham wafer fab and almost all future top line growth in power devices will come directly from the Mohawk Valley fab.

Looking at RF products, we continue to see weaker demand but within range of our prior estimates. Moving down the income statement. Non-GAAP gross margin in the third quarter was 32.3% compared to 33.6% last quarter and 36.3% in the prior year period, representing a 400-basis point decline year-over-year. Consistent with our outlook, gross margin was impacted by lower yields and higher costs on our taller 150-millimeter goals. In addition, gross margin was impacted by a heavier mix of high-volume automotive customers running on the smaller 150-millimeter wafers in our Durham fab. As a result of these items, we generated adjusted loss per share of $0.13 in the fiscal third quarter compared to a loss of $0.11 a quarter ago and a loss of $0.12 in the same period last year as revenue growth was offset by lower gross margins and higher investments in OpEx. Before I discuss our guidance, I will provide a quick overview of our balance sheet position.

We ended the quarter with approximately $2.25 billion of cash and liquidity on our balance sheet to support our growth plans. DSO was 53 days, while inventory days on hand was 162 days. Free cash flow during the quarter was negative $245 million, comprised of negative $11 million of operating cash flow and $234 million of net capital expenditures. We now anticipate net CapEx for fiscal 2023 to be approximately $775 million, down from our previously announced $1 billion primarily due to the timing of facility spend related to the 200-millimeter substrate expansion. During the quarter, we incurred start-up costs primarily related to the Mohawk Valley fab brand, totaling approximately $45 million. Moving forward, we expect overall start-up and underutilization costs for Mohawk Valley to start winding down as we ramp the fab.

This included a non-GAAP adjustment for these start-up costs in the reconciliation table in our earnings release. In terms of our capital needs, we continue to evaluate multiple avenues of additional funding, including upfront customer payments or investments debt instruments and government funding in the United States and Europe. While we cannot comment on the timing or certainty of any government funding, we believe we have made great progress in this regard. In addition, we believe we need to secure approximately $1 billion of additional nongovernment financing between now and the end of the calendar year to support an approximate $2 billion of CapEx in fiscal 2024. The majority of this investment will be for 200-millimeter substrate facility construction and tool capacity both at JP and Tyler City and our Durham campus in North Carolina, with the intention of leveraging this investment to ramp the Mohawk Valley fab as fast as possible.

While we are currently investing a modest amount of design work for the German Saarland fab, we don’t expect to see significant facility construction-related CapEx until calendar year 2024 while we await final incentive notification from European authorities. However, we have made good progress on this front and, as of now, expect final notification later this calendar year. We also remind you that our CapEx investments can be highly variable depending on the timing of facility construction, tool lead times, supply chain challenges and other items. As we look forward to the fourth quarter of fiscal 2023 and beyond, we recognize that, especially recently, there has been variability in our financial performance compared to our forecasted growth trajectory.

While predominantly related to the challenges of the timing of the ramp of Mohawk Valley and our 200-millimeter materials production, we recognize the need to help you all assess near-term expectations. As a result, in addition to giving our fourth quarter outlook, I will take a moment to help frame our thinking about fiscal year 2024. Starting with the fourth quarter of 2023, we are targeting revenue in the range of $212 million to $232 million. Our revenue guidance reflects low single-digit revenue from Mohawk Valley, as previously communicated. As I mentioned before, we are essentially capped in Durham from a power device capacity perspective. And going forward, much of the incremental revenue we will generate will be from Mohawk Valley.

In addition, as previously mentioned, we will see lower materials revenue related to the onetime inventory drain in 3Q as we improved output on our taller 150-millimeter pools that will not repeat in 4Q. Our Q4 non-GAAP gross margin is expected to be in the range of 29% to 31% as we continue to work through the cost recovery on the taller 150-millimeter pools, and we shipped our Durham fab mix to higher-volume automotive customers that were initially slated to be produced in Mohawk Valley. We expect non-GAAP operating expenses to be between $105 million and $106 million for the fourth quarter of fiscal 2023. We expect Q4 non-GAAP operating loss to be between $34 million and $43 million and nonoperating net gain to be approximately $5 million.

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We believe we will realize approximately $8 million to $10 million of non-GAAP tax management as a result and expect Q4 non-GAAP net loss to be between $21 million and $29 million or a loss of $0.17 for diluted share to $0.23 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, noncash stock-based compensation, project transformation and transaction costs, factory start-up and utilization costs and other items as outlined in our press release today. As always, our Q4 targets are based on several factors that affect them very greatly, including supply chain dynamics, overall demand, product mix, factory productivity and the competitive environment. Turning to fiscal 2024. Given that our growth will be governed by how quickly we ramp 200-millimeter substrate capacity and, in turn, the Mohawk Valley fab, we will target fiscal 2024 revenue between $1 billion to $1.1 billion.

This outlook assumes we achieve 20% capacity utilization at Mohawk Valley by the fourth quarter of fiscal 2024, while our epi materials product line revenues remain closer to current levels as we focus our efforts and resources on ramping 200-millimeter substrates in Mohawk Valley. Additionally, as a result of the ramp time line and continued focus on customer time lines, as I mentioned earlier, we plan to run more auto-related products at a smaller 150-millimeter diameter in the Durham fab for the foreseeable future. to support our customers, which will flatten the gross margin trajectory for the next several quarters until Mohawk Valley reaches critical mass. As we are in the early stages of these critical EV ramps, it is important to support our customer ramp schedules, but it will likely keep gross margin in your current levels as the Mohawk Valley ramps to higher output levels.

That said, as we reached 20% utilization at Mohawk Valley, we would expect the trajectory for gross margin to improve because the unit economics are significantly more favorable than Durham. With that, let me pass it back to Gregg for his closing remarks.

Gregg Lowe: Thanks, Neill. We recognize there is work to be done against executing on our strategic vision and capacity expansion plans. That said, we are confident that we are on the right path. As Neill discussed, we are adjusting our fiscal 2024 revenue forecast to better reflect the current trajectory for the ramp of the Mohawk Valley fab. We continue to win business at a solid rate. And a large part of that is due to our investments in capacity and our device quality. As we further our capabilities in vertical integration and continue to innovate, we expect to continue to capture share in our power device product line for automotive as well as industrial and energy applications as the supply of silicon carbide devices continues to expand.

At Wolfspeed, we have an extremely wide moat in an unbelievably attractive industry with decades-long opportunity. We believe we have the best talent a technology advantage based on our 30-plus years of silicon carbide expertise and cost advantages as we ramp our 200-millimeter production and design-ins with premier automotive OEMs, Tier 1s and industrial customers. We are the leader in silicon carbide technology and are hyper-focused on expanding our footprint to maintain that lead and are focused on executing our strategy as I know we can. And now I’d like to turn it over to the operator for any questions you might have.

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Q&A Session

Operator: We have our first question from Jed Dorsheimer from William Blair. You may proceed your question.

Jed Dorsheimer : Thanks. Thanks for taking my question guys. So, first question, Gregg and/or Neill, I was wondering, a couple of quarters ago, you sort of flagged the yield issue within 6-inch in terms of the taller bulls and now you’re kind of calling out the 200-millimeter capacity, so I was wondering if you could help us better understand some of the limitations. Can you clarify if this is a furnace issue, if this is a sort of a bull height or wafer thickness? Or sort of maybe give a little bit more color of what’s going on. And then as part of this question, when you were CREE, I think if memory serves, you went through a similar type of transition with 4-inch to 6-inch. And I’m wondering if you could maybe update on the time lines that you saw sort of thickness, bull height, et cetera, because that would seem like that’s an important lever here as a function of — until you get Siler City up and running. And then I have a follow-up.

Gregg Lowe: Okay, Jed. Thanks a lot for the question, Jed. Let me frame it this way, first off, we’re running wafers right now, 200-millimeter wafers, in the Mohawk Valley. As I mentioned in the prepared remarks, we shipped our first product to an industrial customer, and we’re going to ship a couple of million dollars’ worth of product this quarter. Our cycle times, our yield, our throughput, initial reliability, all of that out of Mohawk Valley, is looking really good. The quality of our crystals and the quality of our substrates as well as the yield in producing those substrates in our materials factory in Durham is also at or above where we have targeted at this point. What we’re really talking about here is a challenge of scaling and scaling the materials operation to feed Mohawk Valley.

And basically, there are two things that are basically slowing that down, so to speak. One is some infrastructure delays that we had things like switchgear and things like that as we expanded in our Building 10 facility in Durham, so basically, supply chain issues with electrical infrastructure here. That’s been resolved, and we’re now expanding inside a Building 10. And the second is a more methodical approach to growing the capacity, I think that’s a prudent point for us to take at this point. So, basically, quality of bulls, quality of crystals, crystal height, number of wafers per bull, all of that kind of stuff in line, material flowing through the factory, doing really well, just simply a delay from an infrastructure perspective and a more methodical ramp.

Jed Dorsheimer : Got it. That’s helpful. And then on my second question, it begs the — I know that when you looked at Mohawk Valley, you made a strategic decision to kind of go to eight versus six for all the benefits that you cited in terms of moving to eight. But there were certain customers targeted for Mohawk Valley, and now I know you’re talking about moving those to Durham. Could you maybe elaborate on what that means in terms of customer qualification time lines and what this means for that business? Or any of those — do those customers now think differently in terms of — obviously, it’s a different capacity or are you able to port that over? I would doubt that you can qualify in Durham and then that becomes qualified in Mohawk Valley. Thanks.

Gregg Lowe: Jed, what I would say is there is a very leaning forward/aggressive type approach from our customers in terms of trying to hurry up the qualification of product out of the Mohawk Valley. They see it very, very clearly. The substantial amount of increased capacity out of Mohawk Valley is very much worth leaning forward in terms of taking material from Mohawk Valley. We have customers that have signed up for risk starts in Mohawk Valley ahead of qualification and so forth. And I think typically, when a — you’re right, when you go through a wafer fab transition. There’s typically a sort of dragging the customer along, if you will, as you bring them to the new facility. That is not the case here because the demand for the product is so substantially high that they’re really — look, everyone is kind of lining up and raising their hand to try to get into Mohawk Valley fast here. So, no change on that at all, Jed.

Jed Dorsheimer: Thank you.

Operator: Next question comes from Brian Lee of Goldman Sachs. Your line is open Brian.