Wolfspeed, Inc. Common Stock New

Ladies and gentlemen, thank you for standing by, and welcome to the Cree, Inc. Second Quarter Fiscal Year 21 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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. If you require any further assistance, please press star 0. I will now attend the conference. Your speaker today, Tyler Gronbach, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to Cree's second quarter fiscal 2021 conference call. Today, Cree CEO Greg Lowe and Cree CFO Neil Reynolds will report on the results for the second quarter of fiscal year 2021. 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. The 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 FCC 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.

Thanks, Tyler, and good afternoon, everyone. Thank you for joining us today. I hope you and your families are staying healthy and safe as we begin the new year. Our team continues to do an exceptional job of building relationships with customers and winning new business. In the second quarter, we achieved revenue from continuing operations above the high-end guidance range, fueled by strong demand for our silicon carbide solutions. The momentum we're seeing in silicon carbide reinforces our competence and our growth strategy as we execute on our long term plan. In addition, we are making solid progress on the divestiture of our LED assets and expect to close this transaction during our fiscal third quarter. Once the divestiture of Cree's LED is complete, we will have achieved a major milestone in our transformational journey to establish our company as a pure play global semiconductor powerhouse, well positioned to lead the industry transition from silicon to silicon carbide. Now, to further amplify this transition, we are changing the name of our company to Wolfspeed. We believe this is a natural progression that builds on our strong reputation of developing silicon carbide solutions over the last 30 years, while at the same time, capitalizing on the competitive positioning that the Wolfspeed brand has in the market. We'll have more to share on these efforts over the next several months and expect the name change to be complete sometime in the next few quarters. Our 200 millimeter team has made solid progress and in fact, has made substantial breakthroughs in 2020. As a result, we have decided to forego our original plan to initially open up the Mohawk Valley Fab at 150 millimeters. And instead, we'll begin ramping Mohawk Valley directly with 200 millimeter silicon carbide substrates in the first half of calendar 22, establishing the world's first 200 millimeter silicon carbide fab and further differentiating us from the competition. Based on these important developments, we are raising our fiscal 2021 CapEx spend to approximately $550 million, which reflects a greater percentage of completion of Mohawk Valley versus our previous CapEx plan, as well as increased investments in 200-millimeter wafer and epi capacity. The higher completion rate of the fab construction and fit-out this year and the increased investment in 200-millimeter capacity will give us the ability to ramp the fab solely at 200 millimeters in the first half of the calendar year 2022. We see this as better positioning the company to address what many are now expecting to be a steepening demand curve for silicon carbide beyond 2024. I'll turn it over to Neil, who will provide an overview of our financial results and an outlook for the third quarter of fiscal 2021. Neil?

Thank you, Greg, and good afternoon, everyone. We delivered solid results during the second quarter as demand for devices and materials continued to improve despite the ongoing uncertainty in the macroeconomic environment. Revenues from continuing operations for the second quarter of fiscal 2021 were $127 million, above the high end of our guidance, representing an increase of 10% sequentially and an increase of 5% year over year. Our non-GAAP net loss was $26.6 million, or $0.24 per diluted share. Our second quarter non-GAAP earnings exclude $27.7 million of expense, net of tax, or $0.25 per diluted share, or non-cash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, project transformation and transaction costs, factory optimization costs, changes in the value of our Lexstar investments, and other items outlined in today's earnings release. Turning to our performance by product line, in power, momentum continues to build as our customers have a demonstrated need for our solutions. In particular, we're pleased with our 650-volt MOSFET platform, which continues to gain strong traction across a number of industry sectors. While our supply levels remain below normal due to COVID-19 safety measures, we made progress in the quarter and expect to continue to improve as we execute our capacity expansion plans. Turning to RF, our performance was better due to increased 5G activity during the quarter with communications infrastructure providers. Our backlog continues to grow, underscoring the growing opportunity we have as the 5G rolls out across the globe. Moving to materials, we saw a modest uptick in order flow in the quarter, which we expect to continue throughout the remainder of fiscal 2021. Full-speed gross margin was 38.5% compared to 36.6% last quarter. The sequential increase was driven by yield and cost improvements in our device product lines. Gross market performance also continues to be dampened by our continued COVID-19 safety measures. CREED's Q2 non-GAAP gross margin for continuing operations was 35.4%, compared to 34.5% last quarter, and includes the impact of $4 million of corporate items. Non-GAAP operating expenses for Q2 was $78 million, and our non-GAAP tax rate was 23%. While we remain prudent in our cost control, we continue to expect heightened operating costs while the investors expand our leadership position. For the second quarter, day sales outstanding was 49 days, and inventory days on hand was 134 days. Inventory days on hand exclude inventory related to the future wafer supply agreements in connection with the LED divestiture. Cash generated from operations was negative $29 million. and capital expenditures were $145 million, resulting in negative free cash flow of $174 million. We have a strong and healthy balance sheet with $970 million in liquidity to support our growth strategy, zero withdrawal on our line of credit, and convertible debt with a total face value of $1 billion. We continue to expect fiscal 2021 to be our peak investment year, and as Greg mentioned earlier, we now anticipate capital expenditures of approximately $550 million versus the $400 million previously communicated. This higher CapEx spend reflects a greater percentage of completion of a sit-out of a Mohawk Valley FAB than assumed in the $400 million CapEx plan, as well as a higher investment in 200-millimeter capacity to support the FAB ramp. This is important because, as many of you know, our current operations are not optimized to support our ambitious long-term growth plans. To achieve the necessary operating scale to support the steepening demand curve and the automotive, 5G, and other critical industrial sectors out beyond 2024 and meet the needs of our customers, we've determined it's better for us to invest now. It's also important to remember that we'll now be running 150 millimeter to support our current book of business, while at the same time building out our 200 millimeter assets sooner than we originally planned, which calls for additional 200 millimeter equipment. While we currently have ample liquidity to fuel our investment plans, We will continue to monitor the capital markets and evaluate ways we may continue to maximize our financial flexibility as we expand our leadership position. It is important to note that our capex and cash flow during 2021 continue to be subject to variability depending on our Mohawk Valley construction progress, as well as reimbursement timing from the state of New York. Now, turning to our outlook for the third quarter of fiscal 2021. We are targeting revenue from continuing operations to be in the range of $127 million to $133 million. We expect the momentum we're seeing in our power product line to continue, and our RF product line to ramp as we enter the batch half of the year. Our materials product line is expected to post modest improvements supported by F&R order flow. Pre-Q3 land gap gross margin from continuing operations is expected to be between 34.5% and 36.5%. We're targeting non-GAAP operating expenses from continuing operations between $80 million and $81 million for the third quarter. The gradual ramp in our operating expenses is fueled by our investments in R&D, including development projects at our Mohawk Valley staff and supporting 200-millimeter wafer development, as well as increased sales and marketing expenses as we pursue new business opportunities. We target Q3 non-GAAP operating loss from continuing operations to be between $37 million to $31 million, and we target non-operating net loss for continuing operations to be approximately $1 million. We expect our non-GAAP effective tax rate to be approximately 25%. The non-GAAP effective tax rate decreased due to the jurisdictional mix of our forecasted earnings on a continuing operations basis. We're targeting Q3 non-GAAP net loss from continuing operations to be between $28 million to $23 million, or a loss between $0.25 to $0.21 per diluted share. Our non-GAAP UPS target includes required intangible amortization, non-cash stock-based compensation, accretion of convertible notes, project transformation and LED transaction-related costs, factory optimization restructuring costs, and other items. Our CO3 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.

Thanks, Neal. We are pleased with our results for this quarter, which demonstrate the strength of our business and reinforces our confidence in our strategic priorities. Customers continue to give us feedback that the interest in and demand for silicon carbide continues to grow. The strength of our device opportunity pipeline, which currently stands at more than $10 billion, underscores the demand we're seeing not only for automotive power, but also in RF, industrial and energy solutions. The cadence at which our sales team is converting these opportunities continues to be impressive, with approximately $600 million of design-ins awarded during the previous quarter. A significant portion of these were for automotive products, and the rest spread across industrial, communications infrastructure, energy, and aerospace and defense. Further, our engineering team is constantly innovating to bring new products to market. Earlier this month, we announced the launch of the Wolfspeed Wolfpack family of power modules, which supports a wide range of solutions for power markets. including EV fast charging, renewable energy and energy storage, and industrial power applications. This 1,200-volt Wolfspeed MOSFET module technology delivers maximum efficiency in packages that allow customers to significantly increase efficiency and performance with smaller, more scalable power systems. Once again, we're working closely with team at Arrow Electronics to successfully launch this new offering. While the automotive industry continues to anchor our business, merits of silicon carbide are being recognized across other industries, and we are well prepared to serve the different needs and applications of these businesses. In materials, we are pleased to announce that we signed an extension and expansion of an existing long-term wafer supply agreement with a major semiconductor provider during this past quarter. The extended agreement now represents approximately $250 million in materials and provides the customer with wool speeds 150 millimeters silicon carbide bare and epitaxial wafers over the next several years. The extension is yet another example of how the industry at large is shifting towards silicon carbide and how we are best positioned to lead this transition. Looking towards the macroeconomic environment, while it remains volatile in the near term, we are pleased with the number of recent developments that signal long-term growth in the markets we serve. Globally, more than 20 countries have communicated their intentions to invest in renewable energy and limit the sale of new internal combustion engine cars over the next few decades as they look towards rebuilding the economy post COVID-19. Massachusetts, California, and New Jersey have taken steps to restrict or ban sales of new internal combustion engine vehicles by 2035. Turning to 5G, while China continues to lead the world in infrastructure and mobile rollout, we are encouraged by signs of progress in other regions. And although we're still in the early stages, we expect 5G and GAN on silicon carbide to be a multi-year growth opportunity as momentum continues to build. Overall, we are successfully capitalizing on the opportunities in front of us today as well as ensuring we expand our leadership position in the years ahead. By divesting our LED assets, we have established ourselves as a global pure-play semiconductor powerhouse with a sharpened focus on carbide and GaN solutions. We are changing our name to Wolfspeed, which capitalizes on our 30-year heritage of working with silicon carbide and speaks to our ambitious plans to compete and win in the rapidly expanding marketplace. We are moving the industry forward with the shift from 150 millimeter to 200 millimeter, and will begin production of the Mohawk Valley 200 millimeter fab in early 22, supporting greater adoption across a wide range of industry sectors. We're pulling in our CapEx plans and increasing our spend in 2021 to $550 million because we believe it is in the best interest of our customers to have the Mohawk Valley Fab and the Durham Crystal Grove facilities up and running at 200 millimeter, saving a qualification cycle and allowing for a quicker adoption in the industry. We believe we have a strong future ahead of us, and we look forward to continuing to deliver long-term value for our shareholders. And with that, I'll turn it back over to the operator, and we can begin our Q&A session.

Thank you. 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. In the interest of time, 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 Craig Irwin with Roth Capital Partners. Your line is now open.

Good evening, and thanks for taking my questions. So, Greg, congratulations on the success with 8-inch. It's going to be really exciting to see production launch at 8-inch in Niagara. I always had a hunch. Can you maybe update us as far as where you stand on the technology development necessary to actually execute that in early 2022. Do you feel that the reactor technologies that Cree has in hand is ready for prime time there? Do you have MOSFET production processes that you think will be more transferable than when we made the move from four inch to six inch You know, are there any other potential areas of risk while we look at this potentially massive breakpoint down in cost that you will probably execute on?

Well, thanks a lot for the question, Craig. You know, a couple of things that I would note. One is, you know, I've been pretty extensively involved in the updates we've been having on 200 millimeter over the last, you know, couple of years and have been very engaged with the team. Our team has made numerous breakthroughs and continuous progress on it, and we felt collectively as a team that we were ready to go with Mohawk Valley at 200 millimeters. Now, Craig, we're going to be ramping that early 22, so we are 11 months away. So, you know, you can bet the team did a pretty thorough, you know – review of where we're at on the reactors, where we're at on the technology, where we're at with the quality of crystals and so forth. And we've got a thumbs up and we're moving forward. So we feel real good about that. You know, obviously some of the incremental CapEx spending is actually associated with building more 200 millimeter crystal growers. So, you know, that's obviously in the plan as well. And then finally, on silicon carbide, on the material side of it, you know, we build our own crystal growers at all of our wafer diameter sizes, so we feel real good about where we're at on 200 millimeter. As it relates to mock set, recall that part of the deal with New York when we built this fab was a – was a pilot line in New York. And that was actually at the SUNY Albany site. We, a while ago, converted that pilot line to 200 millimeter to begin running, you know, prototype pilot line, you know, type activities at 200 millimeter. We feel real good about, you know, where we're at in terms of that process as well. And so we feel real good about that. Now, that doesn't mean there's zero risk. But what I would tell you, Craig, is that it's now a complete and total focus on one thing, and that's ramping 200 millimeter versus ramping 150 and then converting to 200 and having customers go through those cycles, et cetera. So the feedback that we'll be getting from customers, obviously, from this announcement, we're anticipating to be very positive. because it's a significant savings for them in terms of the amount of work they would need to do to qualify this factory. So great question, Craig. We've spent an enormous amount of energy on this, and we're feeling really good about this move.

Excellent, excellent. Then my follow-up question. It's been actually more than a year since I've seen the – the lead semi-cap engineers of your major customers, and maybe we can call them competitors on the chip side. And, you know, as far as I understand, even to today, none of them have had the major budgets released necessary to do 8-inch, that they were all waiting for the availability of wafers to Do you anticipate that you could have commercial sales of 8-inch wafers make a material contribution in 22? I mean, external commercial sales rather than internal consumption.

I think for 22, you know, no. I think the focus is really going to be on ramping that up inside of our factory and getting all of that moving. You know, and we've got, you know, a... quite a number of long-term agreements that we have with a variety of different semiconductor players. We've announced many of those. I think we said previously that something like three-quarters of our materials business is subject to these long-term agreements. We've expanded and extended one of them a while ago with ST, and then more recently we've expanded and extended another one of these as well. What I would say is the materials customers are really in a variety of different stages in terms of where they're at from an R&D perspective, where they're at from a ramp perspective. And so I think at this point, they're sort of absorbing the ramp at 150.

Well, congratulations. That's a big announcement. Thanks for taking my questions. Thank you, Craig. Thank you.

Thank you. Our next question comes from Jeff Dorsheimer with Kinecore Genuity. Your line is now open.

Hi, thanks, and I'll echo Craig's congratulations. It's big news on the 200 millimeter. I guess first question, Greg, you know, just with respect to yields and kind of thinking of the business in, you know, two separate components between Crystal and then Mohawk, You know, it seems pretty straightforward in terms of area benefit, particularly up in Mohawk and what yields could do there. On the crystal side, that was always – it seemed like that was a greater risk in terms of, you know, MPD for that wafer. Clearly, you've seen something that's caused you to kind of go with this. Should we assume then from a cost perspective – there's kind of a faster ramp back on the margin side in terms of long-term targets?

No, I wouldn't do that. I'll let Neil go through a little bit more detail on that. We feel very good about where we're at in terms of the quality of the crystal, quality of the materials, and so forth. We've got a little work to do, you know, on getting the cost down on 200 millimeter, but we feel like at this point it's the right move for us. But I'll let Neil maybe elaborate a little bit more on that.

Yeah, Jed, so if you think about it, if you look at the long-term model, we laid out a plan for $1.5 billion of revenue out in 2024 with 50% gross margin as our target. I think the timeline that we've talked about previously in terms of both the revenue transition and the margin transition are going to be kind of the same. And the reason for that is kind of exactly what Greg said. So I think in the earlier periods, you can think about the 200 being a little bit of a higher cost. That's going to offset some of the diameter benefits you would see. And interestingly, you know, there's a lot of puts and takes from there, but you end up kind of back where we were before. So over time, we'll end up with a model out in 24, one and a half billion of revenue, you know, 50% gross margin, you know, the 25% OpEx and the 25% EBIT, but we'll get there a little bit differently. And then secondly, what I'll say is when you get out to 24, we'll argue a much better position. We'll run the 200 for you know, a couple, you know, several more years in advance of what we expect to be a steeper ramp, you know, out beyond, you know, 2024. On top of that, as Greg said, you know, remove that one qualification cycle for the automotive customers, which I think is going to be, you know, well received by the customer base.

Got it. And just as my follow-up, I guess going back, thanks, Neil, going back to Greg, you know, you pointed out there's a lot of benefits going right to 200, in particular not having to ramp 150, recall. But there is sort of the, you know, how are you thinking about transitioning over sort of the existing 150? Because I would assume all your customers are going to want 200 in terms of that benefit. So how practically are you thinking about sort of the pragmatic approach to this process?

Well, Jed, you know, recall we're expanding right now our wafer fab in Durham. As we move LED out, we're ramping up to 150 in Durham. So I would anticipate that we would be selling and producing out of Durham then for some time. And then there is no intention to shift the Durham factory from 150 to 200. It will remain a 150-millimeter factory. And really, as we begin to ramp Mohawk Valley, it will become a greater and greater percentage of the total output. By 2024, it will be greater than 50% of the output. And then as we ramp it beyond 2024, it'll be substantially greater than 50% of the output. And the Durham factory, while it remains at 150, will be smaller and smaller as a percentage, you know, obviously. So the go-forward plan would be continue expanding, expand the Durham factory as we move LED out at 150. Have no intention to try to move that to 200. The fab is just, it's a relatively small fab and we'd be way better off just simply expanding our capability in what is an enormously larger space in New York versus what we have here in Durham. And then finally, what I would say is, you know, recall this is going to be a modern factory. It's going to be highly automated. There's going to be a substantial increase in terms of its raw capability And so that's why we're putting all the emphasis on 200 in Mohawk Valley. Great. Thank you. Thank you.

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

Oh, yes, thanks. Greg, maybe just to shift gears a little bit into the industrial market, and specifically I know you've had a lot of momentum with the Arrow Partnership project, I just want to get an update on your sense of just timing, because I know it takes time for kind of industrial products to get designed in to ramp. How should we think about that in terms of revenue related to that partnership in the coming quarters?

You know, so first off, thanks for the question, Craig. You know, it's typically industrial is a little earlier than an automotive-type cycle. So automotive is typically a four-year type cycle. You get designed in so when you start ramping revenue, industrial is sort of two to four. It kind of depends a little bit on the industry, but, you know, it's quite fragmented. So I think you can kind of bake in sort of that two to four type range. And then the other point that I would make on that, Craig, is if you look at the $600 million of design-ins we were awarded this past quarter, about a little over half of it was automotive. But about a quarter of it was industrial and energy. So we feel real good about the momentum that we have in that broader space. And again, that's one where we just don't have the sales footprint to really go after that. Arrow is just a fantastic partner to work with. They've got a substantial capability there that we've been able to leverage. And it's why when we introduced this newest family of 1,200-volt modules, You know, we looked right there, and they're already off to the races on promoting that one as well.

Got it. And then just as a follow-up, as it relates to kind of the partnerships you have with a number of Q1 suppliers, just kind of interested in just how those are progressing and any kind of insights in terms of some of the traction that those partnerships are having from a design perspective on the automotive side.

Well, a couple of things I would point to. I mentioned it last quarter, but I think it's worth repeating. You know, our customers, the Tier 1 customers that are giving us feedback, pretty consistent across that Tier 1 customer base along several different factors. One is that the appetite and the – the percentage of cars that are gonna become electric or the adoption rate of electric vehicles is definitely increasing and pulling in. You know, most pundits were looking at, you know, possibly by the end of this decade, so by 2030, you know, maybe 20% of the cars would get to EV. That is now, you know, well past 30%. I've seen some customers, you know, thinking about a 40% adoption rate by the end of the decade. So they point to their end customer base as, substantially increasing the adoption rate of electric vehicles. That's for the number of reasons that include governmental sort of incentives, but also consumer kind of push as well. So that's number one. Number two is the success rate and the interest rate they're getting on their silicon carbide solutions is also increasing. And that cuts across a number of different car platforms, a number of different car types, you know, whether it's higher-end cars or more everyday vehicles, you know, the ability to get a greater distance per charge and or decrease the amount of the cost of battery, you know, really cuts across all the segments of vehicles. So they're seeing a lot of really strong interest there. So just recently, just last week, we had a presentation from one of our customers that kind of showed and layered the interest that they have from their customers on silicon carbide, and it's really encouraging for us. And that's especially as they see the market beyond 2024. Thank you.

Thanks, Craig.

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

Hey, guys. Thanks for taking the questions. I had a couple here. Just on the pull forward in CapEx and 200 millimeter at Mohawk Valley, I'll echo the sentiment of others. Congratulations on that. But can you... maybe give us a sense of what breakthroughs you're seeing to have made the move here to pull that forward and make Mohawk go 200 from the very get-go. And if it's something you can give us any sense of quantification around, I would imagine it has to do with yields. That would be helpful. And then just related to that, I know you said there's no real impact to the fiscal 24 targets in terms of revenue and margins, but can you talk about – maybe the timing of funding from New York State given the accelerated cap back, sort of what we should expect on timing. And then also it sounded, Neil, like you're leaving the window open for potentially some additional capital given the accelerated cap back. So just your thoughts around that as well.

Yeah, Brian, so let me take the first part of that and then Neil can address the backup of it. So first off, you know, I've been pretty actively involved with the 200 millimeter program basically since I've been at the company. And what I would say, there's been a continuous, you know, progression of success and breakthroughs and so forth that we've had. So this wasn't, you know, Tuesday last week, somebody came in with, you know, a result and all of a sudden we flipped it. It's been a gradual move toward building confidence in technology. in this, and we've gotten to the point where, you know, our confidence is obviously quite high. We're making this announcement today, and we're talking about ramping it in 11 months, so we're feeling very good about that. In terms of the quality of materials coming out, it's exceptional at this point, and that includes, you know, the normal sort of a defect density that customers really care about is exceptional at this point. So we feel quite good about that. There's still work to do, obviously, there's always work to do in semiconductors, but we feel real good about where we've been. And again, I would describe it as a consistent drumbeat of positive progress that we've made over the last couple of years that has just really culminated into a decision that we've made that said, you know, this is the right move for us, you know, going forward. So with that, in terms of the timing with New York and so forth, I'll let Neil address that.

Yeah, thanks, Brian. I think maybe the best thing to do is maybe just unpack the CapEx a little bit first and then kind of get into the timing and the funding and those types of things. The higher CapEx now is 550 that we talked about. It's really a result of, first of all, a higher completion rate in the Mohawk Valley Fab that we had anticipated in the 400-millimeter. So this is what gives us confidence that we're going to ramp this kind of in the first half of 2022. So there is a large chunk of this that is timing. There's also an incremental spend on the 200-millimeter for handling tools, for materials expansion in Durham, that sort of thing. you just have to remember we'll be supporting both business at 150 millimeter while building out the 200 millimeter at the same time. So overall, while this is some timing in there, there is 200 millimeter investment that's coming a bit earlier. So 2021 will continue to be our peak investment year. 22, you'll still see a drop in the CapEx. I think it'll be maybe at higher levels than what we anticipated before and then drop off again in the 23, 24 timeframe. So the slope is more or less the same but I'd say the higher requirements in, you know, 21 and 22. Now, from a New York standpoint, we should start seeing, you know, some of those benefits come in relatively soon, although I would say the majority of that's out into next year at some point. And then from a capital markets perspective, you know, we kind of mentioned in the script, but, you know, I think the point is we're in great shape from a liquidity standpoint right now. You know, we've got $970 million of, you know, cash and liquidity, so we feel good about that. However, with the steepening ramp, you know, out beyond 2024, you know, we're going to continue to make sure we can invest, you know, to meet that opportunity. So, you know, we'll continue to be opportunistic as we look forward here and look at those opportunities, you know, given kind of what we're seeing in the marketplace, particularly beyond that, you know, 2024 timeframe.

All right, great. That's super helpful. And maybe if I could just squeeze in a second one here and I'll pass it on. Just kind of shifting to the business, you know, Wolf Speed revenue, you guys really have seen some improvement, modest improvement off the kind of June lows when you did 108 million in the quarter. You're sort of, you know, closing in on 130 plus based on the guidance here. So, and I think you peaked at 140 million in that segment in fiscal 19, so you're not really off even that level in the current environment. So, Just kind of wondering, can you maybe also unpack how much of the recent improvement in top-line trends is just a normalization of COVID impacts on the business going away, and then maybe how much is just organic growth? And then on the organic side, is it all EVN market? Is it coming from the materials volumes picking up again? Is it RF? Maybe just any sense of the drivers and where they're coming from. Thank you, guys.

I think we had some audio trouble with Neil.

Okay. So maybe I'll take a crack at that as Neil is trying to get the audio back on again. I would say we're pretty enthused about the demand that we're seeing in the power business and the RF business, the device business really picking up pretty nicely from where we were. You know, obviously, if we had the factories humming the way we wanted, we'd be able to service that even to a greater extent, but the teams are working really hard on that. But what I would say is the, you know, the progress is really based on design-ins and design-win, you know, activity that we've had and things beginning to ramp and things going from, you you know, real fruition in terms of turning into revenue. We're going to be on a trajectory for that for the next couple of years that's really associated with initial ramps and early production for some of these designs that we have. One, over the last couple of years, that will really, you know, start to click in post-22, well, into 22 and then post-22 and then really start to ramp up as we hit the 24 timeframe. So actually we're feeling quite good about it, Brian. I think it's mostly new stuff coming our way versus old things returning, I would say. And I don't know if Neil can.

Yeah, or Greg, I was just going to, hey, Brian, it's Tyler. The other thing I was just going to add, you know, we saw some modest improvement in RF too, Brian. And, you know, that's just a function of, you know, there's, The rollout continues throughout Asia and around the globe. So there's still good opportunity, but we're in the early stages of that. So that's, you know, there's a multi-growth period. And as people work from home and start to, you know, experience greater productivity by leveraging technology, that creates great opportunity for 5G. So as Greg said, you know, and I added here just a little bit of color of what's going on.

All right. Thanks, guys. Appreciate that. I'll pass it on. Nice, Brian.

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

Thanks a lot. Greg, congratulations on the 200 millimeter. Brilliant idea. But historically, Wolfspeed's device business has been kind of the premium power and module market, as we've discussed in the past, and you're biggest customer slash competitors in devices SD on addressing more diversified power markets today. But once you get – assuming it wants 200 millimeters up and running, get the cost down, the fab all shook out, that should make the New York fab one of the largest, if not the largest, sick device power fab anywhere. And given your capacity, which if you can, maybe help us mark the market on what that would be with 200 millimeter. But given your capacity, doesn't that pull you into the same diversified power markets that some of your – your biggest customers are addressing, or how should we think about that? And I have a follow-up, please.

Yeah, thanks a lot. I appreciate the question. So, you know, first off, that FAB in New York is going to be a real big benefit for us because, obviously, it's substantially larger than what we have here in North Carolina. But equally important, it's a modern FAB, highly automated, with pretty significant expansion capabilities, so we're super excited about that. In terms of addressing the broader, more diversified market, our challenge on that has been really more sales footprint related than technology related, and that's where this partnership with Arrow has been a huge positive for us, and we're very tightly coupled together with them, and it's worked out really well for us. In terms of the factory itself, Ed, I believe it's going to be the world's only 200-millimeter silicon carbide fab. It'll be the world's first 200-millimeter silicon carbide fab. And, you know, we just believe that that's fundamentally going to give us a really good opportunity as we ramp that fab and start cranking the production in it.

Great. And then if I follow, if I could, maybe, I don't know if Neil's on or Greg, you can speak to it. But his comments about the modest increase in orders in the material business driving growth the next quarter and maybe out for the next couple quarters kind of suggest that your material business, at least your epi business, is no longer capacity limited so much as now you're just looking to fill orders. So, first of all, if we get market to market on that, are you up to capacity on epi and shipping to orders? And... Now that you are, and if you look at some of the plans of some of your larger customers, for example, like ExFab, is almost done with their epi process and will be shifting probably increasingly to their own internal source for that. How do we look at the balance between what has been one of your fastest material growth areas, epi, and what is coming in the next year or so? Is native demand for your epi wafers still far enough, large enough to offset anything that people can take internally like ExFab or ExFab? Help us get an idea of the balance of the good. Thanks.

Yeah, maybe I'll pick it up and then turn it over to Neil just for a little bit more color. You know, I guess what I would say, you know, Ed, is typically what's been happening with our customer base in materials is a desire to take a certain percentage of the materials as bare and a higher percentage in epi. And I think as they get into it, there tends to be a trend of wanting more epi simply because we do epi pretty well and are pretty competitive and the quality is actually quite high. And actually, we haven't seen that really change, you know, much at all. So I haven't seen much of a transition of that at all. Neil, I'll let you give a little bit more color.

Yeah, I think we're caught up on the, you know, just on the demand side. But I think as you talk about the modest materials kind of pickup, I think this is more of a supply and demand situation. We are seeing some pretty good strength in MOSFETs. We're seeing a little bit more pickup on RF side, on the device side. So I think it's just kind of ebb and flow of how supply and demand works within the materials market. And I think over time, we'll see that come back, you know, stronger. You know, right now I think it's a little bit more modest. And as those things balance out, we'll manage through. But as Greg said, I think there's still – you know, solid, you know, understanding from a customer standpoint of the quality of the epi that we've got. And, you know, we expect that to continue, you know, as we go forward.

If I could maybe squeeze one real quick one in, I apologize. But can you remind us, too, on when LEDs will start moving out of Durham? If I remember, it's going to be there for a little while. So before you can expand significantly the wafer, crystal wafer growth facility there, when will we see LEDs start to move out? Thanks.

So, yeah, on the LED side, I think we've seen a big chunk of the Crystal Gold side already moved out. We're really focused on the FAB outsourcing at this point. That's underway. And I think one of the real positives of the deal that we had done with SMART was that they'll continue that and they'll continue on the same timeline that we had planned previously. So there's really no changes to the model. I think we've got great progress on the Crystal Gold side, and we're working through the FAB side right now.

Thank you.

Thank you. Our next question comes from Paul Costa with JPMorgan. Your line is now open.

Yeah, thanks for taking my question, Neil. If I heard you correct, it sounds like you're going to get to the same kind of margin structure in 24 with 200 millimeters as you might have done with the hybrid model. Can you explain that a little bit? Why is it not a better outcome? Or maybe I heard you wrong.

No, that's right, Paul. And I think what you have to think about is when you're starting a new technology and you're expanding the diameter, there's a period of time where that's at a higher cost. So you don't get the full benefit of the bigger diameter until you've run it for a while, you improve yields, you improve cycle times, you know, as you've worked at the factory. And then eventually there's kind of an intersection point. and it'll take, you know, a couple of years for us to kind of work through that, ramp up that, bring on utilization, et cetera. So I just think it's a crossover point, and right now there's a lot of puts and takes. We're adding some CapEx and appreciation. We're also adding in a new diameter. Like I said, there's a lot of moving pieces in there, but at the end of it all, when you get out to 24, you end up kind of back at the same spot.

Gotcha. And then the other question is, it sounds like, judging by Greg's prepared remarks at the beginning, that 2024 is the year of the ramp. So what does 22 and 23 look like? Is it a kind of step function? Is it smooth and accelerating adoption? And how do margins, do you think, how do you think they'll evolve over that two-year period?

I think it'll be similar to what we talked about previously, you know, Paul. So I think if you think about next year, kind of modest improvement, I think there's still an investment year, you know, as we think about that transition. And then it's really going to be a function from a margin standpoint about how we look as you transition to Mohawk Valley. So it really isn't until the 23, 24 timeframe where you're more than 50% of the capacity coming out of Mohawk Valley. So the longer you're in Durham, the lower the margins are and the more capacity we move up to Mohawk Valley, the higher the margins will be. So I think the trajectory of the business, as we talked about it before, 21, 22, and that kind of inflection point in 23 are kind of the same as what we talked about before. The key difference is the CapEx plan will be a bit different and we'll be much better positioned you know, in our view with having one 200 millimeter for, you know, several years.

Got it. Thank you very much.

Thank you. Our next question comes from Colin Rush with Oppenheimer. Your line is now open.

Thanks so much, guys. You know, as you look at ramping the 200 millimeter, you know, is there a particular voltage that you're going to be focusing on? Is this all going to be 800 volts? Is it both MOSFETs that you're ramping initially, or are you going all for the MOSFETs?

It'll be the range of our product technology. We've got, you know, driver products already, you know, understood in terms of what's going to go first. But it'll be the – I don't know if it'll be the entire spectrum of products, but it'll be the vast majority of what we do since we're targeting, Colin, to have greater than 50% of the output coming from Mohawk Valley in that 2024 timeframe. Okay.

Okay, that's helpful. And then in terms of the equipment suppliers on the deposition side, are you working with multiple suppliers, and are there any risks around those tools getting delivered on time with what you're seeing so far with your vendor?

So far, things have gone okay in that regard. So, you know, and recall, you know, I'll add back, we do have the pilot line in SUNY, so there's been some amount of delivery there. We're expanding the capability here in Durham, so there's been some of that. So I don't anticipate a huge problem there. Neil, I don't know if you have any additional color you want to add on to that.

No, I think that's right. Again, we've been working on this for quite a while. These are long lead time type items, so we've got pretty good visibility as to what's going on. So I don't see any disruption there.

Okay. Thanks, guys.

Thank you. Our next question comes from Joseph Osher with J&P Securities. Your line is now open.

Hi. Thank you. First, just a very simple question. I think all of us have been sort of tap dancing around. Now that Wolfspeed is a pure business, do you all have any plans to explicitly disclose the materials versus RF versus power breakdown? Thank you. I have a follow-up.

Hey, Joe, yeah, so I think right now we've decided to go with, you know, with one segment moving forward. I think that's kind of how we run the business internally. And as you know, right now we're kind of a $500 million runway type business, so I think that makes, you know, makes sense for the time being.

Okay, thanks. And then to follow up on a couple of the other questions, in particular, Collins, you're seeing a lot of designs out there, especially, you know, for more performance vehicle platforms at 800 volts, and But then again, you've got some lower performance platforms out there still using, you know, IGBTs at lower power levels. I'm wondering if the economics of your products improve. What's going to happen? Do you think those platforms sort of move up to 600 or 800 volts, or do we see you trying to drive, you know, SSD power MOSFETs into some of those lower voltage, you know, like city car platforms and whatnot? Yeah.

Yeah, Joe, so a couple of things, and let me start by reiterating what I've been saying, you know, basically for the last three years, which is we have been on a mission to transition the high-voltage power electronics market from silicon to silicon carbide. And part of the challenge to do that is to drive the cost of the fundamental technology silicon carbide technology, the substrates and the epi, down. And so we've been marching on that and driving that with an intensity like you wouldn't even imagine. Over the last three years, we've made tremendous amount of progress there, and we still see further, you know, opportunity for us to continue to make pretty decent progress, you know, ahead of us. And so what we've been doing over the last three years is decreasing the gap between silicon and silicon carbide at that substrate level. Obviously, it never gets to be parity or anything like that, but we've been having some pretty good success at that. The fact that we're moving to 200 millimeter substrates, the fact that we're moving to a modern fab is gonna give us continued opportunity there as well. So fundamentally, we've been on this mantra of driving the transition from silicon to silicon carbide via pretty substantial cost reductions of the fundamental technology. Now, the other thing we're seeing, and this is part of the feedback we're getting from our customers, is an increased look at silicon carbide across all the auto platforms, including 400 volts. We're seeing customers at 400 volts see the advantage of silicon carbide and taking advantage of that, and obviously the higher voltage as well. You know, I think it's still to play out there, but we haven't been just sort of sitting around, you know, on the cost side of things. We've been really driving it pretty hard. It's not for the faint of heart, but I think we've done a real good job of driving those costs out, and we still see pretty good line of sight for some pretty amazing, you know, cost reductions in the future. I think our customers are seeing that, too. They see that, obviously. vis-a-vis, you know, what we quote and, you know, our economics that we offer to them. So, you know, I see it as a pretty big opportunity ahead of us, Joe.

Thank you. And I just want to speak one more quick one. Can you – obviously, you've got existing obligations, but let's imagine it's the end of 2022. Are you going to sign any more contracts to sell Bear Wapers, or would you rather just become a pure F.E. supplier in the materials market? And that's it for me. Thank you.

Yeah. No, we, you know, we work with customers. We obviously just signed an extension and expansion of a long-term agreement with a customer, and that included Bear and F.E. And, you know, we work with customers. We all understand that – They have their own strategies. Some of them want to do more epi, so they ask for a higher percentage of bear and a lower percentage of epi. Some of them don't want to do that and ask for mostly epi. Some of them want to do epi and then find it difficult, so then come back and ask for higher percentages. So we're pretty flexible there, and we don't bind ourselves to one particular model in that regard.

Thank you.

Thank you. Our last question comes from David O'Connor with Exane BNP Paribas. Your line is now open.

Great. Thanks for squeezing me in, guys. Firstly, maybe on the 200 millimetres. So, Greg, the design wins you won in 2020, just to clarify, in around $2.3 billion. Will all that now be on 200 millimetres? And then on the MOSFET yield, you know, the issues that you've had on 6-inch, are they now solved? And, you know, how should we reconcile the kind of move to 200-millimeter with the yield issues you had on 6? Does that mean that they're solved on 8-inch already, or do you need to go through that learning cycle down the road on the 8-inch as well? And I have a follow-up on the material side.

Yeah, thanks a lot, David. So first off, you know, in terms of ramping with customers, you know, obviously we have an existing system. Facility in Durham, so we're shipping product at 150 millimeters will begin production of 200 millimeter in Mohawk Valley in early next year, and then we'll have to qualify that and work with customers. So there's going to be a blend of – it's initially going to be 150, and then it'll be a blend of the two, and then it'll move towards mostly 200 over a period of time that is a design-in cycle. And, again, what's really important on that is the transition to Mohawk Valley now will be a single transition, and that is just simply a 200-millimeter versus a double transition of – 150 in Mohawk Valley and then 200 millimeter. And then as it relates to the yield issues, I would really qualify those or characterize those yield issues as really a yield as we ramp up our Durham factory with MOSFETs. It happened to be in a transition to 150 millimeter, but the issues associated with that yield are really independent of the substrate and are really associated with the factory You know, itself, it's a relatively small factory. It's a relatively dated factory. And, you know, there's lack of automation, you know, and things like that. We are making progress on the yields, as we talk about. And, you know, as an example, this past quarter, our team, you know, achieved and actually exceeded a little bit. the yield goals that we had for the quarter, and we've got, obviously, improvement goals for this quarter as well. But I think we're going to continue grinding on that. The factories are working the best they can, but they're relatively dated factories with, you know, with not a lot of automation. As we move to Mohawk Valley, we're actually – working through some of those issues right now because we have at our disposal a pilot line in SUNY Albany and again you know David as I mentioned earlier we've actually converted that pilot line to 200 millimeters so we're already beginning you know some pre-production running we've had you know a number of learning cycles that we've you know run through there and that pilot line team was part of the overall organization that gave the go-no-go on let's move forward with 200 millimeter right out of the chute in Mohawk Valley. We got a thumbs up there, too. I feel like that transition will be nothing is easy, but that transition is going to be better because we're going to be a highly automated factory. There is going to be very little you know, human error intervention that we have, you know, typically out of our non-automated factories. So hopefully that helps with your question. And I think you had a follow-up.

Yeah, that's great, Carter. Thank you, Greg. And maybe quickly on the follow-up on the material side of things. So you've extended a long-term agreement with one of your customers. At the same time, we see someone like Infineon struck a deal with GT Advance for silicon carbide bulls. Does this change anything in the model when you look out a few years on the material side, or how should we kind of think about those type of deals for the materials perspective going forward? Thank you.

Well, yeah, a couple of things. So first off, you know, it's... I think it's pretty well known in the industry that there is this big transition from silicon to silicon carbide. Many of our materials customers have internal plans to try to have their own capability in terms of the materials. They've been very transparent about that with us and with the industry at large. There are tremendous barriers to entry that we've talked about. But I think that's a strategy that, you know, they're pursuing and, you know, to be honest with you, it kind of makes sense from my perspective. I think they'll find that, you know, the difficulties and the barriers are pretty challenging. You know, we've got 30 years of work in this area and, you know, we've got our set of battle scars and all of those things have gone into putting us in the position that we're in today, which is... You know, we're now leading the industry transition to 200 millimeters, so we feel pretty good about that. So I don't think any of these announcements change anything from that perspective, you know, to the extent that customers want to sign up with us. We're very excited about that. You know, the agreements that we have are not sort of, you know, how much for this year and this year only. You know, we don't give a lot of detail, but you can kind of think of them as kind of half a decade type timeframe agreements. And so these are long-term agreements that, you know, assure them of a supply of material and products and assure us a, you know, a revenue stream and a scale that helps us from a learning cycle perspective.

Very helpful. Thank you.

Thank you.

Thank you. This concludes the question and answer session. I would now like to turn the call back over to Greg Lowe for closing remarks.

Well, thanks, everybody, for your interest in Will Speed, and we look forward to catching up with 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.