Wolfspeed, Inc. (NYSE:WOLF) Q4 2023 Earnings Call Transcript

Wolfspeed, Inc. (NYSE:WOLF) Q4 2023 Earnings Call Transcript August 16, 2023

Wolfspeed, Inc. misses on earnings expectations. Reported EPS is $-0.42 EPS, expectations were $0.2.

Operator: Thank you for joining the Wolfspeed Q4 Fiscal 2023 Results Call. I’d now like to turn the call over to Tyler Gronbach, VP of External Affairs with Wolfspeed.

Tyler Gronbach: Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed’s fourth quarter fiscal 2023 conference call. Today, Wolfspeed’s CEO, Gregg Lowe, and Wolfspeed’s CFO, Neill Reynolds, will report on the results for the fourth quarter and full year of fiscal year 2023. 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 as 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 import factors that could cause actual results to differ materially. During the Q&A session, we would ask that you limit yourself to one question and one follow-up 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’ll turn the call over to Gregg.

Gregg Lowe: Thanks, Tyler, and good afternoon, everyone. As we close out fiscal 2023, we look back having made significant strides across all areas of our business. Our Mohawk Valley fab, which is the world’s largest fully automated 200-millimeter silicon carbide fab, began shipping product and contributing revenue. Last October, we outlined our plans to construct the world’s largest state-of-the-art greenfield silicon carbide footprint. Since then, we’ve secured $5 billion of the capital necessary to achieve these goals, allowing us to finish out the fit out of Mohawk Valley, expand our materials capacity at Durham and break ground on the world’s largest 200-millimeter silicon carbide materials facility at JP in Siler City, North Carolina.

Finally, we have made great strides in diversifying our device customer base across the automotive, industrial, and energy sectors, with flagship agreements with key OEMs and Tier 1s, including Jaguar Land Rover, Mercedes, BorgWarner, and ZF. We are also continuing to see growth in the traditional industrial and energy segments as customers make the transition to silicon carbide. We are seeing many opportunities in solar and energy systems, motor drives, UPS, heat pumps, air conditioning, and many more. The growth in these segments is primarily driven by the need for higher energy efficiency. In addition, emergent industrial applications such as e-mobility, electric vertical take-off and landing aircraft, are also integrating Wolfspeed silicon carbide within their initial designs to reduce system weight and improve range.

From a materials perspective, we were very pleased to secure a long-term wafer supply agreement with Renesas Electronics Corporation. Widely recognized as a leader in automotive semiconductor devices, Renesas also understands the importance of having access to silicon carbide technology and have signed a 10-year wafer supply agreement with Wolfspeed. The agreement includes a $2 billion customer deposit, which is one of the largest deposits I have ever seen in my 30-plus years in semiconductors. This will secure a capacity corridor as they began to ramp silicon carbide device production beginning in 2025. While this agreement is also expected to provide a significant revenue stream over the next decade, it has an even greater significance for the power semiconductor landscape.

Securing this key customer was possible because of our forward-thinking investments in material capacity at the Durham campus and with the construction of the JP. We will be uniquely positioned to drive the industry transition from 150-millimeter to 200-millimeter silicon carbide wafers, which will help address some of the supply-demand mismatch, which currently exists today and potentially open up new markets for silicon carbide applications in the industrial and energy sectors. From a materials perspective, construction at the JP is well underway. Fully built out, the JP will add 10 times more capacity compared to our current operations in Durham, significantly increasing the world’s total supply of silicon carbide materials. The building foundation is in place, and we’ve now started construction on the shell of the building.

We remain on track to begin producing wafers at the site in the second half of calendar 2024. As far as our more immediate strategy to increase 200-millimeter materials production at Building 10 on our Durham campus, we have now installed more than 75% of the crystal growers in that facility. They are currently growing crystals, and we’ve been very pleased with the yields thus far. As it relates to Mohawk Valley and our device business, we have continued our ramp up efforts and recorded approximately $1 million in device revenue out of the fab in fiscal Q4. Silicon carbide is a complex technology that’s very difficult to master, and I’m proud of how our team has worked tirelessly to get us ramping device production in a brand new, highly automated fab.

We still have some work to do at Mohawk Valley as we scale device production, and expect a modest increase in device revenues in the first half of fiscal 2024, with a steeper increase in revenue beginning in the second half of 2024. From a device perspective, we are seeing continued strength across our end markets and we secured approximately $1.6 billion in design-ins for fiscal Q4. For fiscal 2023, design-ins totaled approximately $8.3 billion. And the cumulative total now stands in excess of $19 billion secured in the last four years. Our customer wins to date give us the confidence in the growth of our addressable market and our ability to capture meaningful share of the device market between now and the end of the decade. More than anything, we’re proud of our role in building greater awareness for silicon carbide, at the same time, the world is realizing the importance of the global semiconductor industry.

The secular trends that are driving the adoption of silicon carbide have started to receive widespread public recognition as a truly game-changing technology in the power semiconductor space. I’ll now turn it over to Neill, who’ll provide an overview of our financial results and outlook. Neill?

Neill Reynolds: Thank you, Gregg, and good afternoon, everyone. Before I discuss the details of our fourth quarter results and outlook for fiscal Q1, I would like to take a moment to outline a couple of changes we are making to the presentation of our financial results. Over the last several years, we have presented pre-production costs, primarily at Mohawk Valley as factory start-up costs, which totaled $160.2 million in fiscal year 2023, and we have reported these costs as part of other operating expense on the income statement. At each earnings call, we have given an update and outlook for these costs and excluded start-up costs from our non-GAAP results. Going forward, we will not exclude these costs from our non-GAAP results and forecast but will identify them in our commentary and in the footnotes to our financial statements and filings.

As we transition Mohawk Valley from pre-production to an active production facility in the first quarter of fiscal 2024, these costs will be categorized as underutilization costs and will be part of cost of goods sold. We will no longer exclude start-up or underutilization costs from our non-GAAP results. This does not change our long-term outlook for free cash flow generation and corporate non-GAAP gross margins greater than 50%, as we believe that our 200-millimeter silicon carbide technology at scale will provide capacity and cost competitiveness to achieve these profitability levels. As you recall, for the fourth quarter, we were targeting revenue in the range of $212 million to $232 million; non-GAAP gross margin in the range of 29% to 31%; and a non-GAAP net loss between $21 million and $29 million or a loss of $0.17 per diluted share to $0.23 per diluted share.

Against that guidance, our fourth quarter revenue was $235.8 million; non-GAAP gross margins of 29%; and a loss of $0.42 per diluted share, which included $39.5 million of start-up costs or $0.26 per share, primarily related to Mohawk Valley and includes early phase start-up costs related to our materials expansion primarily for the JP materials facility in Siler City, North Carolina. In our fiscal Q1 2024 outlook, issued in our press release earlier today, we estimate OpEx to be approximately $120 million, which includes about $8 million of start-up costs related to our materials expansion efforts. Going forward and in our earnings release today and the Form 10-K we will file later this week, start-up costs will now be shown as a separate line item on our quarterly income statement.

Photo by Christian Wiediger on Unsplash

I will go further into the quarter-over-quarter operating expense changes in a moment. In fiscal Q1, as Mohawk Valley continues to ramp production, we expect gross margin at the midpoint of the range to be approximately 14%, which includes about $37 million of underutilization costs, representing approximately negative 16% or 1,600 basis points of gross margin. We are making these changes in our presentation to align with the Securities and Exchange Commission, which has clarified its guidance related to non-GAAP measures for public companies. I also want to mention one last change moving forward. As you will see in our 10-K, when we file it later this week, we have included a breakout of our revenue by each of our three product lines: power products, RF products, and materials products.

In future quarters, you will see this breakout in our earnings release and Form 10-Qs as well. Now, let me provide more details of the fourth quarter results. As I mentioned above, we closed the year on a strong note, generating revenue of $235.8 million in the fiscal fourth quarter of 2023, which represents a 3% sequential increase when compared to the previous quarter and growth of approximately 3% year-over-year. This outperformance compared to our guidance is primarily due to favorable timing related to product shipments out of our Durham production facilities. While we will see some variation in our production out of Durham, as I said last quarter, incremental contribution from Mohawk Valley is the primary governor of future revenue growth.

As Gregg mentioned, we recognized $1 million in revenue from Mohawk Valley. While we are still aligned on previous expectations that we will reach 20% utilization out of Mohawk Valley by the end of fiscal 2024, it is important to note that it will be the second half of the calendar year 2024 before we see $100 million of quarterly revenue from the fab that the 20% utilization would represent. This is — this accounts for the time between fab starts and shipments to our customers. Moving down the income statement. Non-GAAP gross margin in the fourth quarter was 29%, compared to 32.3% last quarter and 36.5% in the prior-year period, representing a 330 basis point decrease compared to last quarter. Gross margin was impacted by higher costs and heavier automotive mix for customers that were initially slated to be produced out of Mohawk Valley.

As we shift to higher levels of production out of Mohawk Valley, we anticipate future improvements in gross margin. We generated adjusted loss per share of $0.42 in the last — in the fiscal fourth quarter compared to a loss of $0.40 last quarter and a loss of $0.21 in the same period last year. As I mentioned above, loss per share in the current period was impacted by $39.5 million of start-up costs related primarily to Mohawk Valley, or $0.26 per share. Before moving to the full year results, I will provide a quick update on our financing initiatives. Less than a year ago, we laid out a $6.5 billion capital expansion plan and associated financing strategy. We said we would execute a flexible, low dilution financing plan that would be balanced across four pillars, including public, private, customer, and government funding.

Since that update, we have raised low dilution capital across all four of those pillars, securing approximately $5 billion in the last nine months and have now fortified our balance sheet to build out the leading silicon carbide manufacturing footprint in the industry. Moving forward, we will continue to evaluate all avenues as it relates to our capital structure and remain nimble on future financing, as opportunities present themselves. However, securing financing is not our primary objective at this time. Moving on to full year results. For fiscal 2023, revenue was $922 million, representing a 24% increase when compared to fiscal 2022 due to the strength in both materials and power product lines. Non-GAAP net loss was negative $180.7 million or negative $1.45 per diluted share.

Non-GAAP net loss excludes $149.2 million of adjustments, net of tax, or $1.20 per diluted share. Touching on our balance sheet. We ended the quarter with approximately $3 billion of cash and liquidity on hand to support our growth plans. DSO was 47 days, while inventory days on hand was 172 days. Free cash flow during the quarter was negative $455 million, comprised of negative $52 million of operating cash flow and $403 million of capital expenditures. Moving to our first quarter outlook. We are targeting revenue in the range of $220 million to $240 million. As we said last quarter, power device revenue capacity from our Durham fab is forecasted to be approximately $100 million per quarter and that it’s subject to some variability, positive or negative, which we benefited from positively in the fourth quarter.

This does not change our view on the factory’s revenue generating capability, and in fiscal Q1 and beyond, we will continue to forecast power device revenue capacity out of Durham at approximately $100 million per quarter. While this will be a modest headwind as we transition from fiscal Q4 2023 to fiscal Q1 2024, it continues to be in line with our forecast. As we’ve said in the past, the main driver of future revenue growth for power devices will be the incremental revenue contribution from Mohawk Valley. We are also expecting gross margin in the range of 10% to 18%, with a midpoint of 14%. At the midpoint, this includes approximately $37 million or negative 1,600 basis points of the underutilization costs, as we ramp up revenue at Mohawk Valley.

We expect underlying gross margin performance, excluding underutilization, to improve modestly in the quarter as we continue to serve more automotive customer mix out of the Durham fab. We are also targeting non-GAAP operating expenses of approximately $120 million for the first quarter of fiscal 2024, which is inclusive of $8 million of start-up costs related to our materials expansion, primarily related to the JP materials facility in Siler City, North Carolina. Excluding start-up costs, OpEx increases quarter-over-quarter are driven by higher employee-related expenses as we move into the new fiscal year. We expect Q1 net non-operating expense of approximately $22 million, which includes the impacts from $55 million of interest expense, inclusive of the recently completed Apollo term loan and interest charges in connection with our Renesas customer reservation deposit.

We expect non-operating expense to increase as the year progresses as we earn less interest income on our short-term investments as we use that cash to invest in our facilities expansion. We expect Q1 non-GAAP net loss to be between $94 million and $75 million. As always, our Q1 targets are based on several factors that affect them significantly, including supply chain dynamics, overall demand, product mix, factory productivity, and the competitive environment. Lastly, we expect capital expenditures to be approximately $2 billion for fiscal 2024 and continue to expect fiscal year 2024 revenue to be in the range of $1 billion to $1.1 billion. With that, I’ll pass it back to Gregg.

Gregg Lowe: Thanks, Neill. The adoption of silicon carbide is driving the need for more capacity, and we are seeing continuous upward pressure on the demand for both devices and materials. The EV revolution continues to be the driving force of adoption, with recent developments further bolstering the EV landscape. Just recently, a consortium of OEMs, including BMW, General Motors, Honda, Hyundai, and Mercedes, announced their intention to create a new high-power charging network with at least 30,000 chargers in North America to meet the growing demand to charge electric vehicles. The explosive growth in EV production is just the start as the world continues to embrace more energy-efficient technology. As we close out this year and turn to fiscal 2024, we are better positioned strategically, financially and operationally.

Wolfspeed wins this generational opportunity because we are vertically integrated, investing in purpose-built facilities and focused on doing so with 200-millimeter silicon carbide substrates. This is validated by Apollo, a global investment firm, that saw an opportunity to assist us with our capital requirements, and Renesas, who made a decisive commitment to next-generation silicon carbide technology and intends to do so at 200-millimeter. In closing, I’d like to thank all of our stakeholders for your continued support, and I’m excited for what’s ahead. I’ll now turn it over to the operator, and we’ll take any questions you may have.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Harsh Kumar with Piper Sandler. Your line is now open.

Harsh Kumar: Yeah. Hey, Gregg. Thank you for letting me ask the question. Gregg, I’ve got one for you. It’s pretty clear that your future growth of the company lies with Mohawk Valley. So maybe you could talk about what you want to see happen in that fab to ramp that facility? You did a $1 million. I think you were pretty clear in the call. You did $1 million last quarter, but you’re talking about $100 million achievement in the second half of 2024. Would that be towards the beginning of second half or towards the end of — in other words, are we talking March or are we talking the June quarter for you to get to $100 million? And then, what — more importantly, what do you need to see at the fab to get to that kind of a number? Thank you.

Gregg Lowe: Yeah. Thanks a lot, Harsh. Couple of things. So, first off, in ramping that fab, we obviously have to ramp the materials flowing into that fab. I’ll give you a brief update on that. The 200-millimeter crystal growth operation in Building 10 is well on its way and producing excellent quality material, which is translating into very nice and very excellent defect density wafers. Epi at 200 millimeter is also excellent, and we are ramping that as we speak. And now we’re obviously shipping products from the Mohawk Valley fab. We have three products that are currently fully qualified in 200 millimeter for — at the Mohawk Valley fab, and we have eight additional products that now pass all reliability testing and are working through the final end of qualification for that.

So, that’s all in really great shape. Now as we ramp the fab, obviously, the $1 million of revenue in the fab that’s capable of $2 billion, it’s kind of early innings of ramping. As we ramp the fab, we’ll be dialing in the processes and dialing in the equipment, which will take our yields up to entitlement yield. And as we ramp the fab, that will absolutely be happening. So, what I would say is, the fact that we’re ramping a new 200-millimeter crystal, the fact that the crystal quality is excellent and the quality of defectivity on the wafers is excellent. Combine that with epis and really good shape from a process standpoint, and we’ve got a fab that has three qualified devices that’s early and eight that have passed reliability gives me great confidence that we’re going to be — that this fab is going to deliver, the entire supply chain is going to deliver everything that we expected out of this.

In terms of the ramp of the production and the expectation for the amount of revenue, our expectation is that we’ll be at 20% utilization by the June quarter. And I’ll let Neill translate that into what you can expect out of a revenue.

Neill Reynolds: Yeah. Just remember, Harsh, as you think about utilization, the timeframe from the time you actually load the fab — wafers into the fab from the utilization perspective until you produce the wafers, put them to the [back end] (ph), and then the final shipment to the customer. So, somewhat of a delay you’d expect from the time to reach the utilization level. So, as we get the 20% towards the end of the year, you wouldn’t expect to see the revenue translation of that — we get a 20% utilization. Say, by the June quarter, we wouldn’t expect the revenue translation of — equivalent of a $100 million to be sometime after that sometime in the second half of calendar ’24. So first half of calendar — sorry, fiscal ’25, as you think about that timeframe.