Wolfspeed, Inc. Common Stock New

Ladies and gentlemen, thank you for standing by and welcome to the CREE third quarter fiscal year 2020 earnings conference call. At this time, all lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Tyler Grombach, Vice President, Investor Relations. Thank you. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to Cree's third quarter fiscal 2020 conference call. Today, Cree's CEO, Greg Lowe, and Cree's CFO, Neil Reynolds, will report on the results for the third quarter of fiscal year 2020 and discuss current circumstances related to the COVID-19 outbreak. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Cree'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, including risks related to the spread and impact of the COVID-19 pandemic. 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'd like to turn the call over to Greg.

Thank you, Tyler, and good afternoon, everyone, and thank you for joining us today. Before we get started, our thoughts go out to those affected by COVID-19 and and to those working on the front lines to keep us safe during this pandemic. I'd also like to give a heartfelt thank you to all CREE employees for their extraordinary efforts. I've been working at our headquarters here in North Carolina since the beginning of the outbreak to do my day job and also help out in the mornings and the afternoons with our health screening process as people arrive on campus for their shifts. I cannot express enough how proud I am of our people for their dedication to keeping our business running and serving our customers during this difficult time. Our manufacturing facilities in the U.S. continue to operate as essential businesses, and we are closely monitoring the guidelines from local, state, and federal officials. While the COVID-19 situation is rapidly evolving, we remain steadfast in our commitment to the following key priorities. First, the health and safety of our employees, customers, and partners remains our highest priority. We have instituted stringent safety measures, including robust screening, social distancing, and cleaning protocols in all of our facilities. We also have deferred all business travel and instituted work-from-home policies whenever feasible to protect our people as well as the partners we interact with. Second, we are focused on maintaining business continuity across our global operations. To that end, we have implemented plans to ensure we can continue to deliver for our customers while managing our diverse supply chain. Our sales teams have embraced the use of digital platforms and remain in constant contact with our customers and partners, along with our dedicated engineering and support staff. Lastly, we are working hard to ensure that when this crisis subsides, we will be ready to emerge as an even stronger business and well-positioned to capitalize on the long-term opportunities for silicon carbide. We continue to believe that we stand before a multi-decade growth opportunity for silicon carbide adoption and remain committed to investing in our capacity to meet this long-term demand. Importantly, Many of our customers have indicated that their long-term plans remain in place, including our long-term wafer supply agreements, the delivery of electric vehicles to the market, and the rollout of 5G. We are recognized as a valued partner in these endeavors and continue to receive strong validation for our technology from our diverse customer base. I'll now turn it over to Neal. who will provide an overview of our results from the third quarter of fiscal 2020 and an outlook for Q4. Neal.

Thank you, Greg. Overall, our third quarter performance was negatively impacted by softening global demand and some disruptions to our manufacturing operations arising from the COVID-19 pandemic. In line with our pre-announcement issued earlier this month, revenues for the third quarter of fiscal 2020 or $216 million, a decrease of 21% year-over-year. Our LED segment revenue decreased 23% year-over-year, largely driven by the slowdown of the Chinese economy in light of the COVID-19 outbreak and associated disruption to our manufacturing facilities. While Wolfspeed revenue declined 19% year-over-year due to ongoing weakness in power and RF device sales and a temporary shutdown of our Morgan Health facilities, Our non-GAAP net loss was $16 million, or $0.14 per diluted share. Our third quarter non-GAAP earnings exclude $46 million of expense, net of tax, or $0.43 per diluted share for non-cash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, transformation and transaction-related costs, factory optimization restructuring costs, and other items outlined in today's earnings release. Let's review our third quarter performance by segment. Wall Street quarterly revenue declined year over year and sequentially to $114 million. This is primarily due to ongoing softness in our power and RF businesses that have been negatively impacted by the lower China EV demand and slower than anticipated 5G base station appointments outside of China. In our power business in the near term, we expect COVID-19 to impact our customers' operations as overall auto sales will be weaker in calendar 2020, but our customers tell us they remain committed to their EV investments and are planning to maintain their original ramp schedules. In addition, despite the uncertainty, we are currently seeing a strengthening in our backlog related to both power and RF customers. However, we remain cautious in our outlook, as it is not yet clear how the pandemic will impact end customer demand in the coming quarters. In our RF business, our third quarter performance was negatively impacted by a temporary shutdown of our Morgan Hill facility. The facility was closed for approximately two weeks in March to comply with county guidelines prior to receiving an essential business designation from the state of California. The Morgan Hill facility resumed its operations on March 30th, following the implementation of several measures prior to reopening to ensure employee safety. In 5G, we continue to be impacted by ongoing delays in infrastructure rollouts, While there continues to be significant uncertainty in this market, customers who want to leverage the higher frequencies and higher efficiency output possible from GaN on silicon carbide solutions for their 5G infrastructure products can be very interested in our technology. Overall, the situation remains very fluid, and as I mentioned earlier, we are encouraged to see early indications of improving demand for our products despite overall near-term headwinds. Our materials business continues to be fortified by our strategic long-term agreements, and the business performed as expected in the quarter. Looking ahead, while we are seeing some normal variation within the confines of these agreements, we will see a decline in revenue in the short term as one non-semiconductor customer was not designated as an essential business and is not operating at this time. We have stopped shipping to them, which will cause revenue to decline in Q4. Full-speed gross margin was 40%. The year-over-year and sequential decline were primarily driven by lower utilization caused by the factory shutdown in Morgan Hill and by lower than expected yields related to the ramp of our 150-millimeter MOSFET product. LED product revenue was $102 million and decreased 15% sequentially. While the third quarter is usually seasonally weak, this was further amplified by the extended Lunar New Year holiday in China and subsequent global developments in response to COVID-19. Positively, we have started to see a recovery in LED demand, and we are encouraged by the improving order flow in the first few weeks of the fourth quarter, even though we expect the COVID-19 crisis to have a lingering effect on some customers. LED gross margin was 20%, primarily due to lower factory utilization given the extended shutdown of our Chinese operations. Unallocated costs totaled $2 million for the third quarter of fiscal 2020 and are included in our overall cost to reconcile the $64 million non-GAAP close profit, and 29.8% gross margin for the company. Non-GAAP operating expenses for Q3 were $86 million, and our non-GAAP tax rate was 19%. In light of the ongoing COVID-19 situation, we are managing our operating expenses prudently, optimizing what needs to be done now to support future growth while deferring non-essential costs. Now, I'd like to take a moment to discuss our balance sheet strength and ample liquidity which we believe provides us the necessary flexibility to navigate the current environment, support our business operations, and maintain our capital expenditure plans to support future growth. We ended the quarter with $853 million in cash and short-term investments, zero balance on our line of credit, and convertible debt with a total face value of $575 million. For the third quarter, day sales outstanding came in at 53 days, and inventory days on hand was 99 days. Cash used in operations was 28 million, and capital expenditures were 70 million in the third quarter, resulting in a negative free cash flow of 98 million. For fiscal 2020, we are now targeting CapEx of approximately 240 million, a slight increase from what we have communicated previously, which reflects the purchase of some tools at favorable pricing that will be used as part of our capacity expansion. While near-term market conditions are fluid, We haven't seen any changes in the long-term outlook at this time, which is why our long-term strategy to increase our silicon carbide capacity and related capital expenditure plans remain intact. Having our new New York Mohawk Valley fab up and running by 2022 and expanding our materials factory in Durham, North Carolina, is critically important to deliver on our customer commitments and win additional business currently in the pipelines. Considering the uncertainty surrounding the COVID-19 pandemic, we elected to maximize our financial flexibility with our successful convertible notes offering completed earlier this month. We decided to take advantage of favorable market conditions to de-risk all possible scenarios by securing extra capital to ensure we can meet our commitments regardless of the timing, pace, and duration of recovery post-COVID-19. Importantly, our new convertible debt structure lowers and extends our maturities significantly past our period of heavy CapEx investments at our Mohawk Valley fab and Durham materials factory. Now turning to our outlook. While we expect the COVID-19 crisis will continue to adversely affect our performance this quarter, it remains difficult to fully evaluate its impact on the overall demand environment and our manufacturing operations. To account for this heightened level of uncertainty, we are providing a wider than usual guidance range for the fourth quarter of fiscal 2020 based on what we know today. We are targeting revenue in a range of $185 million to $215 million based on the following segment trends. Full-speed revenue is expected to be between $100 million to $115 million. While the underlying demand for our power and RF devices is improving, we continue to navigate near-term headwinds, including the impact of COVID-19 related to more stringent safety measures that we implemented to protect our employees which will lower factory utilization and productivity. LED revenue is expected to be between 85 million to 100 million, mainly due to supply constraints. We target Q4 non-gap gross margin to be between 25 to 28 percent, based on the following segment trends. We target bull speed gross margin to be approximately 33 to 35 percent, mainly reflecting lower factory utilization and productivity due to the safety measures that I just mentioned. As previously discussed, we are also still experiencing lower-than-expected yields on a 150-millimeter MOSFET product line, which have not yet fully returned to expected levels. We target LED gross margin to be approximately 19 to 21 percent due to lower volumes. We are targeting gap operating expenses to range between 83 million and 84 million as we continue to prudently manage our costs while executing our planned investments in our full-speed business Repair Products for Production, or Mohawk Valley FAB, which we plan to ramp in 2022. We target Q4 non-GAAP operating loss to be between $23 million to $38 million, and we target non-operating income to be approximately $1 million. We expect our non-GAAP effective tax rate to be approximately 30%. We are targeting Q4 non-GAAP net loss to be between $25 million to $16 million, or a loss between 23 cents to 15 cents per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cast stock-based compensation, gain on debt extinguishment, accretion on our convertible notes, transformation and transaction-related costs, factory optimization restructuring costs, and other items. Our Q4 targets are based on several factors that could vary greatly, including the situation with COVID-19, overall demand, product mix, factory productivity, and the competitive environment. With that, I will now turn the discussion back to Greg.

Thank you, Neil. Picking up on what Neil was just talking about, I'd like to provide additional color on the latest trends we're seeing as we navigate the near-term environment. While we cannot predict when COVID-19 will start to subside, we expect to maintain the health measures that we have put in place for the next several months. We are also planning to stagger the return of those employees working from home and don't expect to be back to a more normal operating environment until sometime late this summer. This measured, cautious approach is being done to help protect the safety of our people. Our more stringent safety measures coupled with the overall operating environment will present some challenges for us in the near term, but we believe the long-term demand remains robust. As we previously mentioned, we are expecting decisions on a significant portion of our roughly $9 billion pipeline in the coming 12 months. As we remain closely engaged with our customers, we are very encouraged by the positive sentiment we're hearing from them, with many of them reconfirming the need for silicon carbide technologies. We've also been extremely pleased with how our teams have quickly adapted to the current environment, embracing the use of digital platforms to pursue and win business. The level of engagement is impressive, with meetings on our digital collaboration hub totaling more than 1,000 a day, conference calls up fourfold, and sales pitches per week up seven times in the last five weeks. This has led to increased sales productivity as our sales team has secured more than 500 design-in awards, totaling approximately $400 million in the quarter. We also continue to identify attractive design opportunities and projects at a similar pace as in the prior quarters. This connects nicely with the work we're also doing with Arrow Electronics to build a silicon carbide pipeline. leveraging their massive digital sales footprint. Arrow's digital media operations are the world's largest, connected to 80% of the global engineering community through 30-plus media sites that attract 15 million monthly users and generate more than 50 million page views per month. Additionally, we recently announced with Arrow the release of our new 650-volt silicon carbide MOSFET that will deliver higher efficiency for a wide range of industrial applications and help foster the next generation of onboard EV charging, data centers, energy storage solutions to reshape our cloud and renewable energy infrastructures. This partnership is helping drive the transition from traditional silicon to silicon carbide in the power electronics market and the initial feedback on this new product launch is very encouraging. We also remain encouraged by the tremendous opportunity and recent developments in the electric vehicle market, which makes up about half of our pipeline. The most recent report from Goldman Sachs suggests a 4x increase in the total number of EVs sold in 2025 versus 2019, and that silicon carbide can be a crucial enabling technology given the cost and range benefits at the system level. Aside from these considerations, there's also been considerable discussion about how the stay-at-home orders around the world have significantly reduced pollution in many major urban markets. This could be another catalyst for EV adoption as countries look to reduce automotive CO2 emissions. For example, several environmental ministers from EU countries have circulated an open letter recommending that any COVID-19 stimulus package must have a green component, specifically referencing sustainable mobility. If such a measure is enacted, it could accelerate or increase the demand of EVs in that region. Further, we've been maintaining an ongoing dialogue with our customers to support them through this crisis. While our automotive customers are addressing near-term challenges, including some temporary shutdowns of their operations due to the outbreak, most have indicated they remain committed to delivering electric vehicles to the market with silicon carbide on their original timelines. Additionally, design and activity for the longer-term programs remains very robust. In 5G, rollouts continue to be delayed. But the current crisis has underscored the critical need for strong communications infrastructure and expanded bandwidth. While some countries have delayed 5G frequency auctions in the near term, we firmly believe the global implementation of 5G capabilities is forthcoming and are well positioned to support this transition. Importantly, our pipeline is extremely diversified across automotive, communications, aerospace and defense, energy, and many other end markets. We are continuously growing our product portfolio. As we release new products, we are further expanding the possibilities for us across industries and markets. Lastly, we have a number of long-term material supply agreements in place and are well positioned to continue winning new device business. While we are currently navigating a difficult short-term operating environment, like all other businesses, our long-term strategy remains intact. Maintaining our capital expenditure plan underscores our confidence in our vision and ability to emerge as an even stronger business, well positioned to capitalize on the long-term opportunities for Silicon Carbide. We have an experienced leadership team that has implemented rigorous business continuity plans, allowing us to effectively balance employee safety, with meeting the needs of our customers. Our financial position remains strong with a healthy balance sheet and ample liquidity to fund our current operations and invest for future growth. Our market-leading position is grounded in more than 30 years of IP and experience, and we firmly believe we are best positioned to lead the market as we drive the transition to silicon carbide and build long-term shareholder value. With that, I'll turn it back over to the operator, and we'll begin our Q&A session.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Jed Dorsheimer with Canaccord Genuity. Your line is open.

Hi, thanks for taking my questions. Just one and a follow-up, I guess. I guess first one, I know this is always hard, but have you analyzed the business to better quantify the impact of COVID on Wolfspeed? In other words, if you didn't have that, how should we be thinking about fab load in that business, if that's a fair way to assess?

Yeah, maybe I'll kick it off, and then Neil can give you a little bit more detail. I think, Jed, certainly there's been an impact. You know, you heard we've had our Morgan Hill facility was shut down for two weeks. We've got new protocols in place that are taking productivity basically out of our manufacturing plants. Some of those protocols, as an example, I'll give you one example. We're bringing people into our wafer fabs in staggered shifts. So what would normally be a 10 minute shift change, now it takes an hour. And we have two 12 hour shifts a day, so twice a day we're spending an hour each time. So two hours out of 24 changing shifts, if you will. This is substantially helping us from a protocol perspective. Inside of North Carolina, We've had just a couple of cases of COVID from our employees, but we've had no further transmission across the rest of the employee base here. And so, you know, obviously these protocols are working well. Neil talked about the strength in the bookings that we're seeing, both in power and in RF. And so, you know, so I think it goes without standing that, you know, this is definitely, you know, having an impact on us or has had an impact on us. So I'll turn it over to Neil for a little bit more color on that.

Yeah, I think that's right, Greg. I mean, if you look at 3Q for Wolfspeed, I think the quarter, while the revenue was down, it largely played out as we kind of had expected when we gave the guidance last quarter. As Greg had mentioned, we got the shutdown in Morgan Hill for approximately two weeks at the end of the quarter. So if you look at the change versus our original guidance in 3Q, it was COVID-related, and it was really related to the Morgan Hill facility. Everything else, I would say, turned out as planned. As you look forward, and Greg talked about it, the order book actually picked up, and we're seeing it strengthen. So the lower revenue in 4Q isn't really a function of the order book as much as it is the factories and the safety protocols that we put in place that are driving lower productivity. So we have designated an essential business for all of our U.S. factories, so they are open, but the protocols are putting some stress on the system in terms of output. and we'll just have to manage through that as we work forward.

Got it. That's helpful. Thanks. And then as my follow-up, I was wondering if you could talk strategically, Greg, if we think about the Gannon Silicon business for 5Gs, It's unlikely that we're going to see, I mean, hopefully we see some trade resolution, but it seems somewhat unlikely at this point. The stress test from COVID would suggest, as you had alluded to in the prepared remarks, is potentially a catalyst for infrastructure build-out. You know, I was wondering if you could just elaborate on how you're thinking, whether or not you think, you know, how you're thinking about the GAN business for, or not GAN on silicon, but the GAN on silicon carbide and the GAN business for next year. How should we be thinking about that is, you know, expectations have largely been taken down to pretty low levels as a function of the Huawei trade issues.

Yeah, and we don't anticipate that particular item resolving anytime soon. So recall in our investor day, we've said that we have a nice opportunity across China, but in terms of the long-term plan, we have less than 10% of our revenue in 2025 is overall China-related. and none of it is Huawei-related, as we just don't see any kind of path towards closure on that. You know, I think most of the rest of the world has slowed down the deployments. They've delayed the licensing of the various different frequency spectrums and so forth, primarily because a lot of these companies are either shut down or in some kind of constrained environment and so forth. But I think, as we said, this work-from-home situation that's kind of run across the board here is certainly showing a need for an increase in bandwidth, and we feel real good about the long-term prospects here. And obviously, that would be without Huawei.

Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open.

Hey, guys. Thanks for taking the questions. I hope everyone is doing well. I had two questions on gross margins. Just the first one is maybe a bit more near-term focused on the 33% to 35% guidance for wolf speed for Q4. I know you talked about some of the new protocols in place, but if you could quantify a bit more for us, just bridging from the 40% you reported in Q3, it sounded like That already had some COVID impacts embedded there, but there's a 5% decline in revenues at the midpoint for Wolf Speed, but then a 600 basis point decline in margins. It doesn't seem like it's all volume. I don't know if it's all the new protocols and maybe lack of productivity. But if you could just kind of walk us through a couple of pieces here, that's a pretty meaningful Q on Q decline in margins. And I know you had talked about – scrap issues and utilization, but just, you know, with all that's going on, maybe if you can kind of help bridge a little bit between the 40% and the new guidance here for Key4. And then I had a follow-up.

Yeah, thanks, Brian. This is Neil. I'll take a shot at that one. And first of all, I think it is primarily volume-related. I think Greg could probably give you, you know, a number of things we're doing in the factory that kind of will explain that. But let me just kind of walk you through the pieces here. So, First of all, as you mentioned, the wool speed gross margin will decline. You know, the lower gross margin, I think, like revenue, is driven by the lower factory productivity and the utilization. So, again, while we've been designated as essential businesses and we put a number of safety measures in place for our employees, you know, these are going to, you know, lower the utilization levels, and that's going to drive down the gross margin. The second thing is, you know, we continue to make progress on 150-millimeter MOSFET yields. However, you know, as it relates to the volumes going through the factory, access to labs and those types of things, I think the progress on that has been muted a little bit, so we'll have to think through that. So as we move forward, I think there's a couple of factors to consider here. And the first relates to how we manage the safety procedures that we've got in place right now. And regardless of what the government outcome is, and Greg mentioned it in the prepared remarks, we kind of expect those gross margins to be somewhat muted for a period of time until we get back to normal levels. And then I talked again about the 150-millimeter kind of MOSFET challenges that we've got as time moves forward. I would expect, though, as volumes come back, eventually when we get back to more kind of a normal operating rhythm, we'd see them come back up to that kind of normalized basis we had been talking about previously. But those are going to have a pretty substantial impact on the business in the near term.

And just to add maybe a little bit of color to that, and I know you have a follow-up question, You know, on basically a daily basis, you know, our factories will see somewhere between 45% and 65% of the normal workforce, you know, coming in. And so obviously with that, it lowers the output that we get for that. We've been very strongly encouraging people who are sick to stay home. And so you have people who would normally sort of, you know, just kind of deal with a cold are staying home. And that's obviously a positive thing because it continues to limit the spread of the disease any further. We do have some people that are staying at home because they are at higher risk, diabetes or some other respiratory condition. We have some folks that are staying at home because they're primary caretaker of the elderly folks, of their elderly parents and so forth. So we've got some of that kind of stuff. We are bringing in – we are hiring some people as a replacement there, but we're being very, very – not slow. We're being very, very measured in terms of doing that because, you know, with 45 to 65 percent of the workforce in, we don't want to, you know, just swamp it with a whole bunch of people that don't know how to utilize the machines and, and the equipment, and we're taking the people that do know how to do that and put them on as trainers and so forth. So we're bringing them in at a very, very measured pace. In fact, I was in one of the fabs just the other day, and I met a new employee that's kind of kicked off and moving forward on one of the machines and so forth. So there's a number of different things that are impacting this. Bottom line is that all the things are having a positive impact on us stopping the spread of the disease. but they're certainly having an impact on utilization.

Okay. Yeah, fair enough. That's all very helpful. It may be moving to more of a longer-term question because hopefully all of this does normalize sooner rather than later. But as we think about the longer-term margin targets, I would assume they're not changed here. But how should we think about some of the mixed implications? So as the – The $9 billion device pipeline, as you start to see more of the mix of power devices in sales, what are the margins or I guess the implications of margins from that increasing mix? The reason I ask being if you look at other power semis categories, those peers tend to have margins that are more in the 30s and 40s, and you guys are obviously targeting a much higher margin profile. in the long-term time frame. So just wondering how, you know, the increasing mix of silicon carbide power devices should impact the wolf speed gross margins and why they'd be higher than traditional power semis, if that's your view. Thanks, guys.

Yeah, maybe I'll kick it off and then turn it over to Neil for some additional color and so forth. You know, I guess what I would say is, number one, our long-term view and the goal that we have of running this business north of 50% hasn't changed at all. I think we've got a pretty good line of sight to get there, and I think we've got a pretty solid plan in place that is, I don't want to say mix-independent, but all three of the businesses are targeting at that or higher margins. So the mix over a longer period of time shouldn't be an issue. Obviously, in the near term, You know, we've got all of these issues that we're dealing with, but it really hasn't changed the longer-term target. Maybe I'll hand it over to Neil for a little bit more color.

Yeah, and I think the other thing is we've talked about it before. You know, we've got a nice scale opportunity in the materials business, I think, which fortifies us from a margin standpoint. I think the second piece is we've got, you know, relatively inefficient factories, even on kind of a normal operating cadence down in North Carolina. So when we get to the Mohawk Valley FAB, that starts to come back together. And as I've said before, you know, we've got a pretty good line of sight to that. We've got some long-term agreements. We understand that pricing. We have a pretty good line of sight to what the Mohawk Valley costs are going to be. So when you put those things together, I think a long-term, you know, margin profile from a pricing standpoint for what wins in the market and for what we think that cost basis is going to be pretty well understood.

And then the final thing I may just add in there is that, you know, everybody knows silicon carbide substrates are more expensive than silicon substrates. and we're obviously driving pretty substantial cost reductions on both the substrate and the epitaxial layer on top of that. But the substrate as a percentage of COGS for a power semiconductor chip that's silicon carbide is going to be more weighted towards the substrate. So as we have our own internal operations on that, I think we can see some upside there.

Thank you. Our next question comes from Craig Heidenbach with Morgan Stanley. Your line is open.

Yes, thanks. Question for Greg just on the design and activity that you talked about, and especially with the focus on the next 12 months. Can you maybe just talk about in instances where you're seeing success and winning, what's kind of leading to that, and then also in business where you're competing that you're not winning it, you know, what are kind of the hurdles at this point?

Yeah, I could – highlight some of that. We just reviewed some of that the other day. So obviously, you know, this past quarter, we had several hundred customers went from opportunity to design in where they're, you know, kind of committed to using us. And, you know, super excited about that. And, you know, it's totaling around $400 million. Now, obviously, all of those won't eventually go into production. There's always kind of a, you know, some percentage of that that goes away. But it's a great indication of success. And, Basically, when customers do evaluations of this technology, they look at a number of different things. They look at the device performance. We always come out very much on top when it comes to device performance. They look at the supply capability. Obviously, with the expansion that we have in silicon carbide manufacturing capacity, we come out pretty good there, too. From an automotive perspective, they look at your ability in automotive. Here, we're coming up the learning curve, I would say, on that. We've added a substantial amount of capability inside of our team in terms of folks that understand automotive. That has been a big help in terms of securing things like Delphi and ZF. So as an example, the woman that runs our quality organization used to run automotive quality for a very large semiconductor company focused on automotive. So, you know, we're bringing that skill set in. You know, so that's been on the positive side. You know, obviously we're not going to win everything, and I don't anticipate that we're going to win everything in our $9 billion pipeline. In fact, you know, we'll probably lose a sizable amount of that at the device level. What I would say is, you know, in terms of losses, sometimes it's not having exactly the right part at the right time. You know, there are times where customers are looking for a ramp that's faster than we're able to handle because of our capacity situation where it is today. And, you know, so it goes to somebody else at the device level. What I would tell you is that all of the device losses that I've seen, you know, have basically gone to folks that we have very good – relationships with in terms of materials. So, if we don't want it at the device, we tend to want it at the material side of things. I don't know if, Neil, you have any additional color you want to put in there.

No, the only thing I would add there, Greg, is that that's why it's so critical that we get the Mohawk Valley fab up in New York built, you know, between now and 2022. I think that really, you know, changes our device business from a competitive standpoint and for quality capability and all those other things we kind of just talked about. So, And that's why we've got to, you know, absolutely stay focused on making sure that's kind of our longer-term plan going forward.

Got it. And then just as a follow-up, Neil, you mentioned kind of the OPEX and kind of measured spending in this environment. How does this play through kind of maybe the next couple of quarters? I know visibility isn't great, but just, you know, what are some things you're able to kind of curtail? And then when do things kind of get back to normal?

Yeah, thanks, Greg. So, look, we're going to be managing things prudently. And, you know, what that means is we'll look at all the variable type of opportunities in the portfolio, incentives and those types of things, and any discretionary expenses, obviously, we're going to pull back on and manage. And I think you can see that in the outlook we just provided. However, similar to driving our CapEx expenditure over the next, you know, couple of years, We're going to have to invest in bull speed, and that means in R&D resources to ensure we've got the capability to design and get parts out. That also means sales and marketing resources to be out there and get feet on the street to be selling our parts. So I think, you know, for the near term, I think we'll have a bit of a pullback, but I would expect that OpEx, as time goes on, to, you know, regardless of the scenario, to start to pick back up again as we start to get into 2021. Thank you.

Thank you. Our next question is from Edward Snyder with Charter Equity. Your line is open.

Thanks a lot. A couple questions we could on RF to begin with. 5G rollout outside of China has never been really particularly stellar, especially in the products that would use GAN. If you look at millimeter wave, et cetera, and Verizon, they don't use any of it. And now that you don't have Huawei, has the mix moved back towards defense, which you've always been big in, And is it fair to assume that, especially given that you're an essential business, that most of the business that you're running through Wolfspeed on the RF side of it is for the defense business at this point? And if you could, maybe a prospect for where you see 5G going without Huawei in the next year or so, and then I have a follow-up.

Yeah, no problem. So first off, we do still see pretty good excitement for GAN on silicon carbide. in the 5G space outside of Huawei. So we're engaged with most, you know, all of the players that you would think you'd want to engage with outside of Huawei. And, you know, that's been going well, and they like what they see in terms of technology, and we're in various different phases of designing. In fact, some of the design-ins that we got last quarter were indeed in the RF space for GAN on silicon carbide. But you're right, Ed. We also have a good aerospace and defense business. We've got, you know, Customers in that area still engaged with us as well, and we see good long-term outlook. But I wouldn't characterize the GAN on silicon carbide outside of Huawei as – I would characterize it as a great opportunity. We've got a lot of customers evaluating the technology, and I think they see the benefit of that technology, especially as it relates to massive MIMO.

If I could, it sounds like the 150-millimeter MOSFET yields fell below expectations again this period. And this problem has persisted, I believe, now for three quarters. And I was hoping maybe for some color on the causes given, and correct me if I'm wrong here, but aren't you in production with that same part in the RTP campus before you're duplicating it in Durham? Is it a crystal wave for an epiure? It sounds like it's a device problem, but... I'm just curious, are you sourcing the crystal and the epi from the same line that was supplying RTP, or is it an entirely new line so the problems could show up in any one of the three steps, and that's why it's taking so long to correct? Any colors at all?

It's definitely, yeah, it's a wafer diameter move as well. So the RTP factory is 100 millimeter, and the Durham factory is 150. So there is a change in diameter there. But I think it's really fab related and not the underlying technology related. As Neil mentioned, we have made progress on that, and so yields are improving. They're just not improving at the rate that we'd like them to or the rate we'd like to get it back up to. Part of that over the last quarter and through this quarter is just simply the output that we're getting through the factory. We're getting less turns through the factory, which is, you know, not allowing us to get enough learning in terms of the yield improvement. I did just sit through a yield review just earlier today. There's lots of good things that are going on. We are making improvements. We have improvements baked in for this quarter, but it's sort of one step at a time versus a giant, you know, a giant leap or bigger steps at a time. You know, just recall these are relatively older factories, and so, you know, there's not a whole lot of automation. So turning the knobs and making the improvements requires a lot of hand-holding. As we move to the Mohawk Valley fab, this is going to be a highly automated, sophisticated, modern wafer fab. And so when you have issues like this, There'll be all sorts of process automation, you know, that is going to help you. There's going to be data that's going to help you and, you know, get through these things in a much faster, in a much quicker manner.

Thank you. Our next question comes from Craig Irwin with Roth Capital Partners. Your line is open.

Good evening, and thanks for taking my question. So, Greg, the design and metric, 500 designs, 400 million in revenue is a really important and useful metric to share, so thank you for that. Can you maybe comment how this compares to the preceding couple quarters? And with COVID-19 out there, have you seen any change in this new business velocity that you're seeing on the design inside and duration, right? Are any of these likely to contribute to short-term revenue or are these things that – you know, are likely to contribute over the next few years as we look at the bigger revenue ramp.

Thanks for the question, Craig. And, you know, what I would say is, you know, the design-in activity and the addition of new programs to the pipeline and so forth is continuing at the same pace that we saw before, which is really good. You know, the fact that we got, you know, 500 design-ins, we're up roughly $400 million this past quarter, I think is amazing, you know, to me, despite the fact that, you know, people have been in lockdown and so forth. And just as a little factoid, about 66% of those wins were automotive related and about 60% were power related. And that obviously goes together because it's automotive and power. But, you know, so we're pretty excited about that. In terms of In near-term versus longer-term, I would say there's no change on that. Nothing has turned into it's a nearer-term opportunity versus a longer-term opportunity. Most of the things that we work on, especially in the automotive space, are sort of 2022, 2023, you know, related as we've talked about before with the production ramps for Delphi and ZF and that kind of timeframe as well. The only near-term impact that we've seen from any of our customers is their ability to get into labs can sometimes be hindered because they're shut down. And so maybe the pace of evaluation might be a little bit longer. But I tell you, I've been on calls with many different customers and engaged with many different customers, And, you know, I've asked them about, you know, do you think this is going to cause a delay in your ramp of production? And almost to a person, they've said, no, not only will it not cause a delay, but it's probably going to steepen the ramp because they're focused more on – and their customers are focused more on the electrification of the powertrain. There's nobody going back and doubling down on internal combustion engine or anything like that. And, in fact – The automotive customers that I've talked to have said when they look at prioritizing their R&D, they obviously have to make some decisions on that because of what's happening. They're prioritizing electric vehicles and deprioritizing things like autonomous vehicles, at least for the near term, because that's sort of a – you know, autonomous vehicles are further out in time than EVs. And then the final thing I would say is – The comments I've heard from customers, it's really not lost on people that cities like Los Angeles have blue skies and no pollution for the first time in a long time. People living in different parts of the world that are sort of teenagers are seeing blue skies for the first time in their lives. And with the EU push of trying to make any kind of stimulus package associated with the a green sort of recovery and stimulus for electric charging stations and so forth, I think all of our automotive customers are hearing all that, seeing all that, and thinking this is going to be an opportunity for them.

Great. Thank you for that. My follow-up is on 8-inch. Has your thinking about 8-inch maybe shifted or evolved over the last number of months? Given the issues encountered on the scale-up on the MOSFET line, are there lessons that you can take on future scale-up from 150 millimeters? What's your current thinking on 8-inch?

Yeah, it hasn't changed at all, by the way, so we're still kind of full systems ahead on that. You know, as it relates to this 150 to 100 to 150, it really has nothing to do with the diameter itself or the materials or the underlying epi or any of that kind of stuff. All of that is rock solid. We're talking about a change in a fab that's kind of a dated fab. Our ability to fine-tune it is hindered by the lack of automation and so forth, and then it just happened to come at a time when there's a pandemic where we have 45 to 65 percent of the people coming in. We're prioritizing material to get to customers and so forth. So I'd say, Craig, there's no change at all in the intensity at which we're driving 8-inch as well.

Thank you. Our next question comes from Joseph Osha with JMP Group. Your line is open.

Hello, everybody. Thanks for taking my questions. I have two. The first just relates to the way the semiconductor business works, one of the things you can do if demand is soft and you're still trying to ramp is just kind of absorb cost to inventory a while. So I'm wondering if we might see you perhaps choose to, you know, to let the inventory go up here for a couple of quarters while we wait for the post-COVID world to catch up. And then I have the follow-up.

Yeah, maybe I'll kick it off. And just to make sure you understand, our demand, you know, book is actually – pretty decent. It's really trying to get the supply out is more the challenge for us. So, you know, and that's COVID related and, you know, somewhat these yields that we're talking about, but also, you know, 45 to 65% of the folks coming in. You know, if we were able to build a, you know, an inventory buffer, I think our customers would be pretty excited about that. I'll let Neil talk a little bit about inventory strategy in general.

Yeah, I think that's right, Greg. So overall, this is obviously an unusual situation that we've got in our hands here with the way that the safety protocols are impacting the factories, Joe. So I think that if we can get more out and get more inventory through, I think that's exactly what we can do. In fact, one of the areas we're focused on is assurance of supply, making sure the full supply chain is supporting the factory. So while the utilization is coming down, I wouldn't say that's necessarily by choice. but I think we'll just have to manage through this. And should the inventories come down a little bit in that case, you know, so be it. We're just going to have to try and manage as best we can through what we've got in front of us right now.

Okay, thanks. That's clear. And then the second question, we spent lots and lots of time talking about RF. And Huawei, I'm just kind of curious about how, given all of the trade and political considerations that we're thinking about, what the picture looks like for your EV power MOSFET business into Chinese OEMs and what the sort of trajectory of bookings has been there.

Yeah, we've got good, you know, engagements with customers. And, you know, the Chinese are shifting their incentives to more longer-range cars. So, I'd say most of the EVs in China are relatively short-range vehicles, so they're shifting those to longer-range vehicles, and we've got good engagement with a number of different customers over there. In fact, I was over visiting them late December and had some really good meetings with the customers over there. I think it's just a matter of them turning their cars from something on paper to something they'd be producing. I think the interest in silicon carbide is really high because of the fact that it helps with range. All that being said, I'll kind of repeat what I said earlier, Joe, which is we don't see a clear line of sight to trade resolution anytime soon. It seems like over the last year, every other month, there was kind of an indication that right around the corner there's going to be something resolved, and then it wasn't. So we've kind of been in the mode now of it's just going to be an issue for quite some time. And as it relates to our longer-term outlook, you know, the 2025 plan that we talked about at our investor day, while we have a substantial opportunity for China to the amount of revenue that we're going to get in 2024, actually it was, is less than 10% dependent on China-based revenue. So we've just sort of muted that, assuming that there's going to be a longer term, you know, that this trade resolution won't, well, the trade issue won't resolve itself anytime soon.

Thank you. Our next question comes from Sydney Ho with Deutsche Bank. Your line is open.

Great. Thanks for taking my questions. I have two. The first one is more related to near-term. You talk about seeing some strengthening demand and power in RF customers. Can you maybe add some color around what you're seeing there, any particular in-market geography that you will point to, or is it just a function of factories reopening and people coming back to work? And are you suggesting that the wool speed revenue would have been up quarter over quarter if it weren't for the supply issues impacting the factory's utilization and throughput?

Yeah, a couple of things. So, you know, near-term, you know, things like servers and power supplies for servers and some of the industrial, you know, markets that we play in, we're definitely seeing, you know, some amount of growth. I've come back from that primarily because of what's happening with everyone working from home. We've got customers definitely interested in that. I'll let Neil kind of give a little bit more color on that.

Yeah, I think we're seeing, Sydney, that across a couple of different areas. So both between industrial energy, there's some automotive applications actually that are picking up, although those remain relatively small in terms of the book of business we have right now. But we're seeing, you know, I'd say relatively broad-based pickup in the business at this time, which is but it's good to see. You know, would that have given us a higher, you know, revenue number in the following quarter? You know, it's hard to say. Based on the backlog, I think that's probably true. But we're happy about the, you know, the backlog, obviously, but, you know, the challenge continues to be getting output to the factories.

Okay, that's helpful. My follow-up question is, staying with the Wolfspeed business, can you help us understand how much of your Wolfspeed revenue today is maybe pick a quarter, is tied to automotive. And within that, how much is tied to current production volume versus maybe some R&D programs for future production? Just trying to understand what we hear global SARS estimates are coming down, or when one of your key customers talked about lower expectations for the fueling carbide revenue, how does that impact you?

Yeah, you know, and Neil, correct me if I'm wrong, but I think in terms of power, you know, sort of high single-digit percentage of the revenue revenue low double-digit percentage of your revenue is going to be automotive-related. You know, today it's pretty heavily, well, it's pretty diverse across, you know, a whole bunch of different customer bases. You know, as we go through the coming years and, you know, grow our book of business in automotive, it obviously grows substantially faster than anything else and becomes a very large percentage of our business out in 2024. But today, you know, call it call it 10-ish percent of the revenue in power. And so, you know, relatively small. In terms of how much is production and how much is kind of ramping and so forth, obviously, most of what we shipped in the previous couple of quarters would be more, I would say, production. But as we move forward, we're seeing an increased demand for some of these pre-production runs and and prototype builds and things like that. And, you know, we talked about that in an earlier call a couple of quarters, I guess it was last quarter, where, you know, customers are indicating that they believe the ramp of their end equipment is actually going to be steeper, and so they're therefore looking for more prototypes earlier. So, Neil, I don't know if you want to add any color on that.

The only thing is, you know, look, we're talking a lot about the order book, and I think one of the things that we don't know is, as it relates to the COVID-19, is how is that going to impact end customer demand, you know, three months from now, six months from now? And that's the one thing we don't know. So I think we're just being a little bit cautious in our outlook despite the strong order book. We're happy to have the strong order book, but, again, it's a very fluid and dynamic situation that we're dealing with, and we'll just have to continue to monitor that. I think we're seeing what the right levers are to pull, how to kind of manage through this situation that we're in right now, but we're just going to have to wait and see, in terms of how this kind of pans out and see how the, you know, the new order backlog kind of fills in as we move, you know, between this quarter and next quarter.

Thank you. Our next question comes from David O'Connor with Exane. Your line is open.

Great. Good afternoon, guys. Thanks for taking my question. I know there's been a lot of questions on the orders, but maybe just one more. So just to be clear, Neil, you're saying that you have already seen a trough in orders and that things are going to improve from here. And maybe, I know someone asked it earlier, but I didn't hear the answer. Geographically, can you give us any kind of color there on what you're seeing from an order perspective geographically? Thanks.

Yeah, thanks, David. I think if you go back to last quarter and then, you know, even through the, you know, first few weeks of this quarter, we have seen some strengthening of the backlog in the device businesses. However, you know, I think, as I just had mentioned, I think we're just being a bit cautious about that because we just don't know how that's going to play out and start deconstructing the backlog into this kind of early ordering or whatever that might be. So we're just playing that a little bit cautious as we start to understand what end market is going to look like. As China's coming back and Asia's coming back a bit, we've seen a little bit of a pickup there. I wouldn't call it big, but we are seeing it from the other regions from a world speed perspective. So like I said earlier, it's broad-based. I'd say it's both from an industrial energy standpoint as well as automotive. We are seeing a little bit of a pickup. But again, it's a dynamic situation. We'll just continue to monitor it and see how it plays out.

Okay, that's quite helpful. Thanks for that. And then maybe just as a follow-up, going back to the kind of 500 wins, total $400 million that you mentioned earlier, Greg, were any of these attributed to Arrow, or when does the Arrow part of the equation come in on terms of sales? Thanks.

Yeah, I don't have the specific breakout. What I would tell you is Arrow is doing a fantastic job for us. And when we launched a 650-volt MOSFET program, we did that, I believe we kicked it off April 1st or 2nd. And we are way above linearity in terms of what our goal is together in terms of new opportunities and design-ins and so forth. It has just taken off like a rocket. They're doing a great job. And this is obviously a really key thing for us because we have a relatively small sales footprint. we're certainly subscale when it comes to sales and application engineering footprint. And they are definitely not. They have a massive scale and, you know, and also a great digital footprint as well. So we're really pleased with that. I'm sure the, you know, I'd love to break out, you know, specifically, I don't have it. I do know that inside of our distribution channel, they had a substantial, you know, percentage of our design wins or design ends for the quarter. So, Really good progress there.

Thank you. Our next question comes from Paul Koster with J.P. Morgan. Your line is open.

Yeah, thanks for taking my question. Just following up on that last one. I assume that the 400 million, the 500 design wins, this is not part of the $9 billion of of pipeline. This is more a kind of turns type business. Is that a correct statement or is this how we should see the pipeline being kind of whittled down over the course of the next couple of years?

Yeah, the pipeline, we have a pipeline that goes basically a methodology that most companies use where you have, you know, an opportunity where there's just an opportunity out there and when you look at our total pipeline, that's where it starts. and then you have a design-in where the customer has chosen to use you, and then we flip it to design-win when they give us their first production order. For an automotive company, design-in is probably the most important metric. You obviously want to flip it to production, but it flips to production three or four years later, so you really need to be getting those design-ins early. I wouldn't describe any of the design-ins we've got as kind of turns business. They're all part of that pipeline. Some of them are going to be shorter term. A power supply for a server is going to happen faster than an industrial motor, which is going to happen faster than an automotive chip, which is going to happen faster than something in aerospace. It's all part of the pipeline. We have things that come in and out of the pipeline all the time. Like I said, Not 100% of the things that we get a design in will go into production, but increasing the number of design ins is a really positive thing.

Right. Got it. I mean, maybe this is picking up on a nuance that wasn't actually there, but at one point you said that all of the conversations you've had with the auto industry are confirming their intentions to proceed as planned. But at another point you just mentioned that most of the EV industry is I'm just wondering if there are any of your potential customers out there that are balking at the prospects of making the big CapEx plunge into EVs, given the experience they're currently having with COVID-19. In short, do you want to kind of differentiate all those conversations? Yeah, sure.

Yeah, good catch, Paul. And it's very, very simple. In terms of production requirements, nobody is changing their plans in terms of it's going to push out a year or what have you. What's happening is some of the customers have labs that are shut down. So their ability to take our part, put it in an inverter, evaluate it, and give us feedback has been diminished because they can't get into the lab. That doesn't mean they're changing their production date. It's just their decision is going to happen a little bit later because of that. So that's the nuance in that. And that hasn't hit everybody, but it has hit a couple of different customers. And I would view that as kind of a one-month, two-month kind of thing for the evaluation. Some customers actually have their labs are open, which is great. But no, I would say that All the customers that I've talked to have said that their plans haven't changed, and some of the customers that we've talked to just simply can't get into their labs. Does that make sense?

Thank you. Our next question comes from Amber Srivastava with BMO Capital. Your line is open.

Hi, Neil. I just wanted to come back to the gross margin, kind of completing the loop here from the first question. There are many factors, but if we were, and obviously the COVID-related stuff is very hard to plan for and account for, but if you think about utilization, which is the biggest factor, what is the fall through to the margin from incremental revenues? That was my question. And then I was a little bit confused about the question or the comment on the strengthening in the order book. It doesn't seem that that's It doesn't seem it's near term that would give you the confidence to say that, yes, calendar 2Q would be the bottom in the utilization.

Thanks, Amber. I'm not sure exactly what the answer on the fall through is, only because we have a pretty dynamic portfolio going on right now with a lot of moving pieces with what's in there. What I would say is, though, that if you look at the – margins where we were in 3Q and moving to 4Q, that the difference between that 40% and the kind of midpoint dive we had is really COVID-related. And there's different elements to that, whether it be how, you know, the employees show up to work. Like I kind of mentioned, kind of 45% to 65% are showing up on any given day. We've changed some of the compensation for different people to, you know, ensure we're paying people for doing, you know, different types of work. and we're managing the staggering of the employees coming in is kind of challenging as well. So I would think of the gross margins as being very much COVID-related, and once we're able to get back to a more stable operating situation, those will kind of come back up to the normal basis of where we're at now. As it relates to the order book, I mean, look, we've got a pretty good line of sight as to what the backlog looks like, and certainly the backlog, particularly in the device businesses, has strengthened significantly. Now, as you point out, with the COVID situation and the uncertainty around recovery, how are those orders going to play out? How is end customer demand going to look two or three months from now? That's very difficult to call. But clearly we have visibility to seeing the backlog improve, and we saw that prior to the situation getting more dire here over the last couple of months. So I think overall, look, we've got some improvement in the backlog, but, again, we're just going to have to – you know, play it by ear here until we get out and see how this thing recovers a bit over the next couple of months.

Okay, that's helpful. And for my quick follow-up, could you just – you said in the prepared remarks, Greg, that the capacity plans, expansion plans are on track. What is the capital outlay for expansion for the next fiscal year, please? Thank you.

Yeah, Neil, why don't you go ahead.

Yeah, let me just say that, Ambrose. We normally give out the annual CapEx, I think, at our next call, Ambrose, as we get into our next fiscal year. But if you go back to the investor day, what we had said is that, you know, 2020, you know, will be, you know, like we just said, will be roughly $240 million. And our highest investment year from a CapEx standpoint as part of our longer-term plan will be 2021. I think that's why it's really important for us, you know, to have the ample liquidity to kind of drive that plan, regardless of kind of what the outcome is in terms of the recovery from COVID-19. So you can think of a, you know, significantly higher CapEx investment investment coming in 21. And then beyond that, it starts coming down as we start seeing the benefits from the deal we have, the partnership we have with the state of New York.

Yeah, and just to follow up on that, obviously I'm in contact with a lot of customers. We've had great customer meetings during this time, despite the fact that we can't fly anywhere. And there is a strong desire from our customers to understand what's happening with our plans from a capital expansion perspective. And so one of the things we do is we show them pictures of earth being moved around, concrete being poured. I think this past week it was, if I recall correctly, it was 3,000 tons of concrete was poured on the site. So you show them that picture and you say, hey, we just met with our board and everyone's committed to this plan. So the capacity that you were banking on us having when you chose us as your supplier is continuing. And then we talk about as well that not only is our board not just saying that, but we also have the liquidity to make it happen in almost any scenario that we can kind of contemplate in terms of what this crisis recovery could look like. There's a very bizarre situation in terms of what's happening in the world. You've got 180 countries are impacted by it. You've got a consensus GDP forecast for Q2 at a contraction that's three to four times stronger than any in modern history. In all of the downturns that I've been in, in the semiconductor industry, in my career, I've been able to watch a sports event, go out to a restaurant, get a haircut, have my kids go to school. None of that's happening. And so I think what it really translates to us is the near term is going to be super uncertain. And so what we're trying to do with our customers is give them certainty that, that when they chose us as a supplier to ramp up in 2022 and 2023, we're going to be there. And that message has really been well received by our customer base.

Thank you. I'm sure no further questions at this time. I'm going to turn the call back over to Greg Lowe for closing remarks.

Well, thanks, everyone, for your interest in Cree. You know, we wish you all the good health during this COVID crisis and look forward to updating you on our next earnings call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.