Transphorm, Inc.

Good day, everyone. Welcome to today's Transform Incorporated Fiscal First Quarter 2023 Financial Results and Business Update Call. Today's program is being recorded. All lines have been placed on mute to prevent any background noise. After our speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. At this time for opening remarks, I'd like to turn things over to Mr. Jack Perkins. Please go ahead, sir.

Thank you, operator. Good afternoon. My name is Jack Perkins, and I will be your conference operator. I would like to welcome everyone today to Transform's Business Update conference call. Please be advised that today's conference call is being recorded. Joining today's call from Transform are Pramit Parekh, co-founder, president, and chief operating officer, and Cameron McCauley, chief financial officer. Before we begin, I would like to point out that there is a slide for notations associated with today's call in which management will be referencing during the conference call. These slides can be accessed through the live webcast link in the investor relations section of Transform's website, and they will also be posted on the linked PDF subsequent to today's conference call. During the course of this call, the company may make forward-looking statements regarding the company's financial position, strategies, plans, and future operations with specific end market and other areas of discussion. It is not possible for the company or management to predict all the risks, nor for the company to assess the total potential impact of all factors on its business or to the extent which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of all these risks, uncertainties, and assumptions, the forward-looking statements discussed during this call may or may not occur, and the actual results could differ materially and adversely from those anticipated or implied. Any projections as to the company's future performance represent management views as of today, August 15, 2022. Neither the company nor any person assumes responsibility for the accuracy or the completeness of the forward-looking statements. The company undertakes no obligation to publicly update the forward-looking statements for any reason after the date of this call. Should conform such statements to actual results or to change in the company's expectations, For detailed information on risks associated with the company's business, we refer you to the risk factors described on Transforms S1, 10KT, and other subsequent filings with the SEC. With that, I will turn the call over to Transforms President and Chief Operating Officer, Pramit Parikh.

Pramit, please go ahead. Thank you, Jack, and thank you to our listeners, and good afternoon, everyone. We are pleased to report TGAN's 10th successive quarter of product revenue increase, with product revenues well over $4 million, 100% plus year-to-year increase, and a total revenue of $5.2 million in the quarter, a 60% year-to-year increase. And in line with consensus analyst estimates, amidst what is continuing to be a challenging supply chain environment, and COVID-related shutdown slowdown in Asia still lingering on. This growth was made possible by our execution and leadership in high power GAN, which was more than 60% of our revenue mix. Executing towards the 500K plus units purchase order we announced last quarter, as well as continued traction in low power GAN. This was further enabled by the easy to use, higher efficiency TGAN FET versus competing e-mode GAN solutions, and is exemplified by wins such as the Feihong 65 watt adapter and the release of seven reference designs for the 65 watt to the 140 watt adapter range. These results have been a direct impact of our targeted investments in these areas, and we plan to continue investing in these areas in the future. An additional example of our high power leadership include the release of our surface mount high-powered D2PAC industry standard package, and continued adoption in high-rel applications like the Japanese Nyuta medical power supply, where TGAN enables 73% loss reduction in a fanless design. Another example, in a recent third-party teardown that revealed TGAN inside ASUS's leading 1.6-watt gaming power supply, the first gaming PSU within ASUS, to the best of our knowledge, to implement gallium nitride. TGAN, we believe, is still the only GAN company to be shipping in high volume in multiple programs in the kilowatt range today, making us a one-stop shop for GAN from low power to high power. We continue to see robust demand and our current backlog is at record levels. While we do see intermediate softness in certain market segments like blockchain computing, this is presently being absorbed by other demand, but we will be watchful in the coming quarters. There is also clear Asia-China mobile handset softness. However, it has not been a significant factor for us since we are gaining design-ins and market share from a relatively modest pace, even in gallium nitride, which itself is a smaller portion of the total adapter power device market. For example, although still in early growth mode, we secured follow-on orders for Fortune 165-watt laptop adapter design win that we talked last time and the worldwide e-retailer 140-watt win, as well as a new pilot win for a leading brand TV manufacturer's 100-inch TV power supply. The key challenge in front of us in the next two quarters is continuing to expand our capacity. In the May to July timeframe, we've had some delays in bringing more of our existing reactor capability in Japan online due to COVID-related travel restrictions and downstream supply chain issues in securing hardware and associated equipment. As a result, despite the record backlog, we do anticipate up to 30% lower product revenues in FQ2-23 versus FQ1-23, but recovering to resume growth back in FQ3 and FQ4 at about 30% sequential quarterly product revenue growth. For our government programs, we are finishing up our existing Navy manufacturing program for GAN epi materials, which is an important second vertical for Transform. A new program has just been announced that we will target to win using the same platform, which has enabled us to win the previous contract. The timing of this fall on program is likely the beginning of calendar year 2023 now. On a separate domestic front, TGAN has much of its core GAN epi way for manufacturing in the United States, and we will be thinking funding under the CHIPS Act to further support and scale this core US manufacturing competence. Even with these challenges, we are still targeting a 40 to 45% increase in product revenues from FY22 to FY23. As I will walk through in the short presentation, we are aggressively taking steps to increase installed reactor capacity by acquiring additional reactors and having them in production around mid to second half of calendar 2023. With our high power strength and strong intellectual property, we are also targeting additional new market segments. An example of this is the electric two-wheeler and three-wheeler segment, especially in Asia. We expect this market to grow rapidly to a multimillion dollar base for us in FY 2024. This provides us with an early entry point into the key electric vehicle market with the four-wheeler segment expected to follow in 24-25. Overall, with the proven performance and design benefits of TGAN over competing solutions and the leadership in high-power GAN with strong application-based patent portfolio, we remain very strongly positioned to address the $3 billion GAN TAM in diverse areas like servers and communications, blockchain computing, gaming, energy, inverters, and electric vehicles, two-wheelers, three-wheelers, four-wheelers, while growing our share in the lower-powered fast charger adapter segment. With that outline, I will next review some of the salient points of TN's value proposition as a recap, and then outline our strong execution in the April to June ending quarter and our key challenges over the next two quarters, including the focus on our expansion strategy for FY 2023 and beyond. So first off, as a recap for new listeners, gallium nitride is a wide bandgap semiconductor material for power conversion that reduces electrical energy waste, enables compact power conversion footprint, and lowers power system cost across a variety of electrical power conversion applications, laptop or mobile chargers, computing power, or automotive inverters. and does this much better than traditional silicon and also better than other new semiconductors like silicon carbide. TGAN is an established innovator and design pioneer, leading manufacturer, supplier of high voltage GAN power semiconductor products over the widest range of applications, from 30 watts low power to over 4 kilowatts high power, and in applications ranging from adapters and fast chargers to high power data centers, mining, communication infrastructure, broad industrial renewables, and design-ins for automotive, a result of our solid core investment strategy and focus. Our fundamental intellectual property, with over 1,000 patent-strong portfolio, as well as our high-performance, high-quality products, have been validated by Blue Chip customers and partners, financial partners, IC design partners, manufacturing partners, and automotive industrial market leaders, as well as the U.S. Department of Defense. Our comprehensive and differentiated product offering, backed by high-quality manufacturing base that we essentially own, has ramped in the market with over 60 billion field hours now in our customers' product, including both high-power and low-power GAN again, and resulted in over 24 million in revenues in FY 2022, in spite of a challenging supply chain environment. Above all, GAN is addressing large, multi-billion-dollar growing market segment, including electric vehicles 5G and smart charging amongst other things. Our focus is building a strong product driven business, fast ramping, profitable growth, and we are already off to the races doing that. In FY 2024, we target more than 90% of our revenue base to be product revenues. And as you see today, we are already more than 80% in that regard. We are committed to making the required operating and capital investment for increased scale to meet higher demand, higher performance products, and solutions for our customers, and fostering and adoption across multiple end markets that I talked about to achieve our targets, long-term targets of well over 50% CAGR, gross margins of over 40%, and operating margins exceeding 20%. TGAN is in a unique and differentiated position among the GAN suppliers today to have products in the market that address a multi-billion dollar market opportunity for GAN, the GANTEM for power conversion from low power to high power. Adapters and chargers, power server, data servers, blockchain, datacom, that we are already ramped in to industrial energy and PV inverters, renewables, now also in production with TGAN parts with our customers. And in the mid to long term, large growth opportunities with automotive electric vehicles, both EV two and three wheelers in the mid term and four wheelers in the long term. Further bolstering our long term growth beyond 2024, 2025. Transform provides GAN solutions across this platform, delivering higher efficiency, compact systems with easy to use and easy to interface products with proven performance benefits against silicon, silicon carbide and other GAN solutions. One of our key attributes from early on, and one of the key reasons of our success as well, is the ownership of our GAN wafer production supply chain. This is an advantage that is becoming even more important in today's geopolitical climate. This starts with the design of our safe, robust, and easy to interface, normally off GANFET. We directly own and control our GAN epi wafer manufacturing with multiple MOCVD reactors. These are the tools used for making or growing GAN material on silicon wafer, say, for example, in two geographical locations, our California headquarters and Japan. Our wafer factory, the Fab, Wafer Fab, is a joint venture with our financial strategic partner. And to remind, it is a high-quality manufacturing site with the only formally reported yields for GAN matching that of silicon CMOS running in the same factory. a feature that has contributed to our high-power GaN products' yield and quality. While packaging is done with some of our valued OSET partners, we bring TPH, a transform IP, in this design. For example, allowing GaN to be efficiently used in robust PO packages designed by high-power customers, something that is not easy for other Gallium Nitride providers to do. Last but not the least is our application and design efforts both with customers and solution partners who work preferentially with our GaN for their controller and driver products because transformed GaN is easy to interface and use like silicon. Next, I will discuss why T-GaN wins in various verticals from lower power to higher power. So as the GaN adoption is happening fast, many good companies are in the market with gallium nitride, notably at lower power adapters and chargers. while TGAN is addressing today both low power and high power together. Silicon obviously has been working great in the past, but now falls short in efficiency, speed, and the small size required for new products. GAN takes off from here. A few factors that outline TGAN's differentiated benefits from competing GAN. First, we excel in ease of use and flexibility, compatibility with standard drivers and controllers. No extra BOM components or shrubbery is needed to interface our GaN, which is designed for the performance of GaN and look and feel of silicon to the users. This makes it very cost effective, especially in lower power chargers and adapters for smartphone and laptop, where the total BOM cost is very important. The intrinsic gallium nitride performance is fully exploited by Transform to achieve the highest efficiency or lower losses among many other gallium nitride devices. And above all, bringing reliability and robustness across the whole power range. This is clearly evidenced by our proven wins with customer systems in production, as TGAN is adopted in many more market verticals today, with higher range, reliability, and performance. As you can see, applications like server power, gaming, blockchain, a variety of industrials, and also high reliability aerospace. TGAN products addressing more than 10 times the power levels that some of the other GAN offerings enable today. Along with the benefits of ease of use, reduced BOM and intrinsic GAN performance, underlying the results for our high power dominance is that one other reason is that the typical e-mode gallium nitride interface is weaker and hard to operate in many common package types. the fundamental design innovations and directly controlled manufacturing also enable us superior dynamic performance from our GaN FETs, allowing smaller GaN die to be used for the same power level, doing more with less, or sometimes even two packages versus one from competing GaN. And this, again, industry standard robust TO packages, which customers are very used to, and compact surface mount packages for applications such as adapters and chargers. And finally, higher the power, higher the energy and carbon footprint impact that Gallium Nitride can deliver. For example, in blockchain computing, one of the most power-hungry applications, our GAN has enabled 1% efficiency improvement and can save hundreds of kilowatts per year in one system and well over 100 pounds of carbon footprint, depending on your source of energy, with more than 50,000 metric ton reduction possible just from our 2022 outlook in these areas. The overall energy impact with more than the 120 terawatt energy consumed by blockchain worldwide with a 1% efficiency gain is staggering. With these type of benefits, a variety of customers have selected TransformGAN in adapters and chargers with around 60 design-ins that we have secured. Our latest one we released recently, among others, is a design win with Feehong, A large and very reputable ODM supplying to a number of top-tier mobile and laptop brands along with other wins across the range of power levels in the adapters. The higher power space is a large market for gallium nitride and very important. Again, higher the power, higher the impact in energy savings, electricity savings, and carbon footprint at the holistic level. Here, our generation 4 and generation 5 SuperGAN offerings are compared to leading silicon carbide offerings as other type of GAN are not quite ready today for this type of high power, especially in thermally robust packages like the TO247 due to their inherent device weakness. So we had showed this previously with our highest power 15 million product to the best we can tell this is still the lowest RON qualified and ramped in production in gallium nitride. in a discrete TO247 package, outperforming nicely silicon carbide MOSFETs and JFETs, both good products by strong companies, in a standard package, in a standard bridge circuit, with 25 to 38% lower loss and able to deliver 10 kilowatt class power from a single part. Now, there are also third-party validations confirming the same thing. For example, recent technical paper at the PCIM, a Europe conference where superiority of TGAN high-power GaN over silicon carbide in a 5-kilowatt application was published. Customers have selected our higher-power products across the spectrum, and some of our wins were built on the foundation of efficiency, performance, ease of use, reliability, and strong support. We've shared some of this in the past, and some interesting recent wins include high-power gallium nitride now entering the medical space and another win that I talked about with ASUS, a leading brand name in gaining power supplies. While there's a very significant high power growth for TGAN in the various segments I outlined, and we are already ramped in some of them, electric vehicle applications continue to present a massive long-term opportunity as the performance of GAN enables continued performance of electric vehicles addressing fundamental issues of power loss, heat generation, and range anxiety with high power density enabled fast charging, reduced size, and lower losses possible with GaN that ultimately results in faster charging and higher range. T-GaN has AEC Q101, which is the automotive qualification standard parts qualified today with our Gen 4 higher power solutions that have already ramped in various commercial and industrial markets with proven field reliability. We also announced our preliminary 1200-volt gallium nitride R&D results at a premier IEEE conference in May, including 800-volt operation for which a 1200-volt device is needed and with higher efficiency over silicon carbide products. To accelerate in the electric vehicle segment, we have added a new vertical, namely the two-wheeler and the three-wheeler electric vehicle charging that fall right into the sweet spot of our today's high-power solutions. The specific GAN opportunities in EV today are in the areas of OBCs, on-board charger, DC-DC converter, and off-grid DC to AC auxiliary inverters in cars with the main drivetrain powertrain opportunity after 2025-2026. That drivetrain powertrain opportunity can in fact triple the accessible GAN content to $200s conservatively. We aim to be in the full market with 650V today and higher voltage, including addressing the 800 volt battery vehicle slot with 1200 volt GAN in the future, all key to electric vehicles. For the two and three wheeler, we are directly addressing a variety of charging opportunities, including the onboard charger. This is an attractive market with a TAM that approaches a billion dollars, and more importantly, near-term revenue opportunities for T-GAN. Next, we move to our fiscal Q123 quarter performance and key vectors driving our growth. With our continued leadership in high power, more than 60% revenue this quarter in this segment, and increasing share in low power, we have successfully grown product revenue for a 10th quarter in a row, even with supply challenges facing us, as well as some other softness emerging in some of the specific end markets like China handset market. We did this by satisfying existing demand and creating new wins like a fray of high-voltage GAN products in the medical field with the NIUTA fanless power supply and revenue from the gaming power market evidenced in one way by the third-party teardown ASUS 1.6 kilowatt GAN gaming power supply. And of course, continuing to ship in design wins that we have already secured and ramped in past. We gained solid designs in the adapter charger area