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 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'll need to press star 1 on your telephone. Please be advised that today's conference may be 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 Gronbach, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Cree's third quarter fiscal 2021 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 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. 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 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 connect with us after the call. And now I'd like to turn the call over to Greg.

Thank you, Tyler, and good afternoon, everyone. Thank you for joining us today, and I hope you and your families are staying healthy and safe. I am pleased to report that during the third quarter, we continued to execute and drive our business, delivering strong revenue ahead of our guidance range and non-gap diluted earnings per share at the high end of our guidance range. Additionally, during the quarter, we completed the divestiture of the LED business, accomplishing a critical milestone in our journey to become a pure play semiconductor powerhouse. Now, innovation has defined our company since it was founded 30 years ago, and we are once again leading a significant shift in technology. Our Wolfspeed solutions are driving change across the semiconductor market, enabling greater efficiency and performance, smaller systems, and lower costs. As the world moves to efficiently power its vehicles, cities, and communications infrastructure, and the adoption of silicon carbide continues to build across a broad range of applications, we are well positioned to lead this industry transition and capitalize on tremendous long-term growth opportunities. Already, we are seeing a strong adoption in automotive and industrials, which have recognized the impressive value proposition that silicon carbide has to offer. Across other industries, we are seeing demand build as we transition from silicon-based to silicon carbide-based high-power electronics. This is reinforcing our conviction in our long-term prospects and the investments we are making now to ensure we capitalize on this transition. I'll now turn it over to Neil, who will provide an overview of our financial results and an outlook for the fourth quarter of fiscal 2021. Neil?

Thank you, Greg, and good afternoon, everyone. We delivered solid results during the third quarter as demand for devices and materials continued to build amid an evolving and dynamic market backdrop. Revenues for the third quarter of fiscal 2021 were $137 million, above the high end of our guidance range, representing an increase of 8% sequentially, and an increase of 21% year-over-year. Our non-GAAP net loss was $24.7 million, or $0.22 per diluted share. Our third quarter non-GAAP earnings exclude $41.8 million of expense, net of tax, or $0.37 per diluted share for non-cash stock-based compensation, acquired intangible zambitization, accretion under convertible notes, project transformation and transaction costs, factory optimization costs, changes in the value of our previously held AnnoStar investment, and other items outlined in today's earnings release. Turning to our performance by product line. In power, we delivered a solid performance driven by continued momentum of our solutions across a number of sectors. Looking at RF, we are encouraged to see improving trends driven by increased 5G activity as communications infrastructure providers expand their activities, and our backlog underscores the growing opportunity we have as 5G rolls out across the globe. It's important to note that the strong demand across our device portfolio fueled a notable year-over-year revenue increase of more than 50%. In materials, we saw a modest uptick in order flow in the quarter, consistent with our expectations for the back half of fiscal 2021. Third quarter non-GAAP gross margin was 35.0%. compared to 35.4% last quarter. The sequential decrease in gross margin was due to temporarily higher factory costs as to rent capacity in our Durham fab, as well as ongoing COVID-19 safety measures. Non-GAAP operating expense for Q3 was $80 million, and our non-GAAP tax rate was 25%. As we invest in our operations to capitalize on the tremendous growth opportunity ahead, we will remain disciplined in our cost control across the business. For the third quarter, sales outstanding was 47 days, and inventory days on hand was 142 days. Cash generated from operations was negative 27 million, and capital expenditures were 138 million, resulting in a negative free cash flow of 165 million. We have a strong and healthy balance sheet with approximately 1.3 billion in liquidity to support our growth strategy. Zero withdrawn on our line of credit, and convertible debt with a total face value of $1 billion. Importantly, we further bolstered our financial position this quarter with the successful completion of an at-the-market equity offering with gross proceeds of approximately $500 million. This equity offering provides us with additional liquidity as we grow the Wolfspeed business, particularly our capacity expansion efforts. We continue to expect fiscal 2021 to be our peak investment year with capital expenditures of approximately 550 million to support our capacity expansion plan, including the launch of our Mohawk Valley Fab at 200 millimeter. We are making great and steady progress in this development, which will be critical to ensure we are able to support our long-term strategy, particularly given the steepening demand curve for silicon carbide that we are seeing in 2024 and beyond. It is important to note that our CapEx and cash flow during 2021 will 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 fourth quarter of fiscal 2021. We're targeting revenue to be in the range of $142 million to $148 million. We expect the momentum we're seeing in our power and RF device product lines to continue as we enter the final quarter of the fiscal year. A materials product line is expected to post modest improvements supported by a better order flow. Increased Q4 non-GAAP gross margin is expected to be between 32% and 34%. The sequential decline is primarily due to some short-term impacts related to unfavorable product mix. We view the gross margin impact as short-term in nature due to the suboptimal production footprint we have in North Carolina and expect it to modestly improve going forward as we work through factory transitions and eventually shift production to our new Mohawk Valley fab in calendar year 2022. We're targeting non-GAAP operating expenses between 82 million to 83 million for the fourth quarter. The increase in our operating expenses is fueled by our investments in R&D, including development projects that are well underway at our Mohawk Valley pilot line in order to support our 200 millimeter wafer launch as well as an increased sales and marketing expense as we pursue new business opportunities. We target Q4 non-GAAP operating loss to be between $38 million to $32 million, and we target non-operating net loss to be approximately $1 million. We expect our non-GAAP effective tax rate to be approximately 24%. The non-GAAP effective tax rate is expected to decrease due to the jurisdictional mix of our forecasted earnings. We're targeting Q4 non-GAAP net loss between $30 million to $25 million, or loss between $0.26 to $0.22 per diluted share. Our non-GAAP EPS target excludes acquired intangible amortization, non-cash stock-based compensation, accretion on our convertible notes, project transformation and LED 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.

Thanks, Neil. Our business continues to build momentum, which is evidenced by our results this quarter. Our device opportunity pipeline remains strong, and we are seeing more demand in our core automotive and RF markets as well as additional interest in new areas across energy, industrials, and aerospace and defense. Our device pipeline stands at more than $10 billion, and our team is identifying more opportunities at a rapid pace. Additionally, our sales team continues to generate new business, securing more than $580 million in design ends during the quarter. A significant portion of these were for automotive products, and the rest were spread across industrial, communications infrastructure, energy, and aerospace and defense. Now, this represents an impressive total of approximately $2.5 billion in design ends that we've secured over the last five quarter, including applications such as air conditioners, compressors, motor drives, and a robotic arm. A year ago, we launched our portfolio of 650-volt silicon carbide MOSFETs products exclusively with Arrow Electronics. We are extremely pleased with the success of this partnership, which has since generated an opportunity pipeline of more than $800 million, with dozens already in the design end stage and some even transitioning to design wind. Our sales team continues to partner closely with Arrow to execute on these opportunities, including the introduction of our 1,200-volt Wolfpack module portfolio. And we remain well-positioned to continue to sell our superior solutions to customers across industrials and geographies through this partnership. At the end of March – we launched four new multi-stage, high-efficiency X-band GAN on silicon carbide devices, which are used in a diverse array of applications, including marine, weather surveillance, and unmanned aerial system radars. As we focus on executing across our business, we are pleased to see our strategy is further supported by developments in the broader market. Now, just a few months ago, the European Commission unveiled its mobility strategy as part of its $2 trillion Green Deal, aiming to have at least 30 million zero-emission cars in operations on European roads by 2030. At the same time, European automakers are pushing for new taxes on gasoline and diesel vehicles to promote the competitiveness of and the adoption of electric vehicles. Finally, new European regulations could also lead to the potential phasing out of plug-in hybrid vehicles, further benefiting full electric vehicles. In the US, the administration recently unveiled a proposed $2 trillion infrastructure plan, of which a significant portion has been directed towards electric vehicles, including sales rebates, tax credits and charging stations. We anticipate this will have a significant impact on the adoption of electric vehicles. We are now seeing U.S. automakers make big commitments to ramp their EV efforts. For instance, General Motors and LG Chem recently announced plans to invest $2.3 billion to build a battery cell plant to support the automakers' efforts to expand its electric vehicle portfolio. Now, we've had a number of conversations with our customers regarding these developments, and the enthusiasm reinforces the long-term opportunity here, as well as the necessity of our capacity expansion investments to ensure we can deliver on the increased demand that we are seeing. Additionally, in the U.S., the proposed infrastructure plan also includes $100 billion dedicated to increasing broadband access, with a special emphasis on 5G infrastructure. This development, combined with strong sales of 5G smartphones during the pandemic, underscores how 5G is continuing to gain momentum and offers a global opportunity in the years ahead. We remain well positioned to capitalize on these opportunities. And importantly, we're on track with our investment plans to begin production in Mohawk Valley's 200 millimeter fab in early 2022, which will support increased adoption across a wide range of industry sectors. We're very pleased with the strong progress we've made in our R&D projects that are fueling our 200 millimeter development as well. Additionally, with the equity raise we completed earlier in the quarter, we are further bolstering our financial position through this period of increased investment. By making these investments in our operations now, we are securing our long-term leadership position in silicon carbide. Overall, as we move forward as a pure play semiconductor company, we will continue to execute our strategy to create a global powerhouse. The need for our technology continues to be supported by developments in the macro environment. We are winning business at a very good pace while making the necessary investments to deliver this next generation technology to our customers. We remain very excited about the opportunities ahead and are confident in our strategy and our path forward. And with that, I'll turn it back over to the operator so we can begin our Q&A.

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. 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 Dorzheimer with Kennecourt Annuity. You may proceed with your question.

Hi. Thanks for taking my question, and congrats on a strong revenue this quarter. I guess first question, Greg, you know, if we look at the comparison to a silicon IGBT, you know, many – including in the industry, not just on the financial side, look at the cost disparity between the silicon carbide versus the IGBT. And yet with Tesla, and I know you can't talk specifically on customers, but if you look at what Tesla has done from a systems perspective, it really kind of changed the game from – seeing the net benefit of 6% to 7% from this component. So I'm just curious, in your conversations, if you could provide some of the context of how the discussions have changed over the past year from sort of that procurement manager that's looking at hammering the price on one component versus maybe a C-level that's looking at the systems design architecture from what we've seen out of Tesla in the industry for BEB. And then I have a follow-up.

Thanks a lot, Jed, for the question. And what I would tell you is that the discussions two years ago were certainly very focused on the cost of a silicon carbide MOSFET versus a silicon MOSFET. that has completely transitioned kind of as you indicated to more at the system level. And I would say that car makers and the tier ones across the board have recognized that at the system level, the benefits of silicon carbide pay for themselves. You know, Jed, just last month I spent about three weeks in Europe visiting with – Tier 1s and OEMs, the first five days, by the way, were stuck in a hotel doing COVID, you know, sort of quarantine. But I visited with them, you know, after getting out of that. And, you know, the decisions that they're making are really pointing towards moving in a direction of silicon carbide. I had one OEM tell me that they're moving their entire platform there. I've had another tier one mention to me that the OEMs are telling them to not even quote silicon anymore because they're convinced that across their platforms, high-end cars, entry cars, 800 volts, 400 volts, they want to go with silicon carbide because of the cost savings they see at the at the system level. You combine that with the tremendous amount of intensity that we're driving the cost reductions on silicon carbide, it's a big win-win. So I would say, Jed, that your kind of thesis that you have, I guess I'm reading through the thesis in your question, of are folks really looking at this more at the system level is absolutely happening. And the thing that I would add, Jed, is it's it's permeated the organization. Maybe it started in the C-suite, but the rest of the organization is really starting to see it as well. There's a tremendous amount of value and a tremendous amount of savings that these car companies see at the system level for silicon carbide, and they're starting to design their cars from the grounds up with silicon carbide in mind.

That's great. Just as my next question, I guess, and thank you, I guess for Neil, you know, one on the margin side. So if I look at the margin, I guess my question is, are you adjusting or changing sort of that 50%? And if not, how should we think about, and I know in the near term here you've got a bunch of different variables, but it might be helpful if you could sort of walk us through the cadence that we might be able to expect in terms of that margin ramp from the low 30s up to that 50%? What are the give and takes on the expectation there?

Yeah, thanks, Jed. Yeah, I'll take that one. So you can see the margins now in Q3 kind of came into the 35% zone or so. And, you know, it's a little bit lower than the guidance or maybe slightly below the midpoint of the guidance. And I guess you can call it more or less in line with what we expected. Let me just kind of break down a little bit what's going on here in the short term, and then I'll kind of bridge it back to kind of the long-term, you know, kind of margins. As you start to think through this, you know, not just 4Q, but the second half of the year, there's a couple things. One is, as you alluded to, you know, the margins are going to drop roughly 200 basis points at the midpoint going into the next quarter. And that's really a function of a couple things. One is there's some product mix. We talked about it in the prepared remarks. You know, the device businesses are seeing a lot of demand generation, a lot of growth right now. And they are, you know, based on a higher cost footprint down in Durham. So that higher cost is kind of causing some mixed challenges. So those product lines are lower profitability. So there's a little kind of surge ahead. You know, we see some margin degradation here in the short term. You can call that about 150 basis points. The second piece of this is we're bringing capacity onto that footprint for the device businesses as we move forward. And as we bring that on, we're hiring people, we're training people, and there's just some lower productivity there. in the early stages of bringing on that capacity. So as we start to get people on board, you know, as we get that capacity card up and running, you know, and it gets to normalized levels in terms of velocity for the factory, you know, I'd expect to see the margins pick up. And I think you'd start to see that pick back up maybe to the mid-30s as you get to the second half of the year. So capacity expands. We start to see some more device pick up in the second half of the year. And I think, you know, you start to see that probably in the mid-30s as you get, you know, the second half of the calendar year. And then from there, you know, that's really what you see in Durham. And I think the next thing to really look at is more of like what's that structural change to kind of get to that mid-30s, out to that 50% target. And that's really all about Mohawk Valley. You know, getting to a cost footprint in a modern automated factory is going to have a dramatic impact on our costs. We talked about it a little bit earlier. We expect to start ramping that, you know, in the early part of calendar year 2022. And as more and more capacity starts coming out of Mohawk Valley, you start to see that structural change in our margins and our costs. So we'll start to march towards that 50%. And there is no change. We still see, you know, 50% as the goal and the target out in 2024. And what I'd say also is that in Mohawk Valley, we are seeing, you know, some initial results. You know, we've got a pilot line up there. The initial results there are very good. And I think we continue to feel strong about, you know, where that footprint is landing. and achieving that 50% gross margin goal out in the 2024 timeframe.

Thank you. Our next question comes from Craig Heddenbach with Morgan Stanley. You may proceed with your question.

Yes, just following up on gross margin with the RF side of things picking up, I would think that helps a bit. Can you maybe just talk about that element of some of the mix on a near-term basis?

It does help a little bit, Craig, but I think if you look overall, you've got to think about the device businesses going through pretty substantial factory transitions. If you recall, we actually have two factories in Durham. There's a lot of movement between those factories. What we call our former kind of LED factory is being outsourced, and we're bringing up new products in that factory, including some of our RF products. So as it's moving through those transitions, there's still some productivity challenges as you start to bring up new capacity corridors. I'd say that would go for both power and RF. You know, we're managing through that. I think over time you'll see, you know, see better benefits as kind of you allude to. But I think in the shorter term, you can kind of think of the vice businesses kind of being on more of a suboptimal footprint as things move forward.

Okay. And then just to follow up with Greg and maybe dovetailing off of some of the meetings that you've had recently, Can we just touch on, you have a number of interesting kind of tier one partnerships that you're driving to, and you're also having these direct OEM engagements. Just how are you viewing the opportunity set through both of those kind of channels in terms of growing the power device business?

You know, it's really interesting. The OEMs have a very, very strong amount of attention and interest in in the supply chain for electric vehicles for a number of different reasons. One is that there's a tremendous amount of change, obviously, in the powertrain of the car, and they want to get their fingerprints on that because, quite frankly, the engine, the internal combustion engine was sort of the personality of the car, and the OEMs want to make sure that they put their, quote, personality into the electrified platform as well. So there's been a lot of attention there. And then the second thing is that's been amplified by all of what's going on in the silicon-based industry in the auto industry with all the supply shortages I'm sure you've read about, you've written about, you know, and so forth. It seems like every car company has announced at some point that some vehicle manufacturing plant has been shut down. I will tell you I've been in the industry for over 30 years, and I can't recall a single time that anything I ever built shut down a plant, a car plant. So this is – we're sort of in unprecedented territory today. And so when I was meeting with those OEMs back in March, the discussion was all about, you know, the silicon carbide capability, the performance that we're seeing, et cetera. but also a substantial amount of time on how are we doing with the Mohawk Valley capacity ramp and is that capacity coming on per schedule because they wanted assurance that we were going to be there for them as we ramp up production for them. Obviously, I gave them an update on that. Things are going very well with Mohawk Valley. We are on schedule to be in production in early 2022. Neil alluded to the fact that we're seeing very promising results out of the pilot line. I would describe those results in terms of yield as on the very, very positive end of any expectation that we would expect out of those yields. They're very promising, and that's looking really good. And that's That's yield on a percentage basis on a wafer that's going to output 70% more chips per wafer. So it really bodes well for us, both from a capacity standpoint and then obviously a margin standpoint when you start yielding nicely higher than you do and it's off of a 200-millimeter wafer. It's really good news. So a lot of discussion about that. And then finally... The OEMs, the partnerships we have with the Tier 1s are very, very solid. Had a lot of really good discussions while I was over there for those three weeks. And the OEMs are also very interested in what's called directed by or direct engagement with them. They may not actually build the inverters themselves, but they want to have sort of – the decision for who is silicon carbide to put in there at their discretion. That's called kind of directed by. And we're seeing a significant increase in the interest from the OEMs to engage in that level.

Thank you. Our next question comes from Edward Snyder with Charter Equity. You may proceed with your question.

Hi, this is Jack Egan on for Ed Snyder. Thanks for taking the question. I have one and a follow-up, if that's okay. So the Chinese 5G build-out since 2019 has been primarily focused on deploying MIMO-based stations, but towards the end of last year, it seemed their plans changed a bit, and now China's gonna start deploying more macro 5G-based stations. which use fewer GaN power amplifiers just since there are fewer antennas. And so how would you expect a greater proportion of macro base stations might impact your GaN RF device business? I mean, I know you're ramping your GaN devices soon, but could the shift to macro base stations be a bit of a headwind to growth over the next year or so? And then I have a follow-up.

Yeah, maybe I'll kick it off. And Neil, if you want to add any additional color. I guess what I would say is whether it's massive MIMO, macro, et cetera, our engagement in the base station area in China is substantially limited. And that's primarily because we can't engage with the biggest player over there, which is Huawei. And even other players over there have sort of a bias towards local companies. efforts just simply because of the geopolitical situation. So our really activity is driven primarily outside of that. We do obviously have some amount of business in China, but I think it's mostly driven outside of that. We're actually seeing some pretty nice wins with customers outside of China. Neil, is there any additional color you want to put on that?

Yeah, I would say that if you go back in time and think about when we stopped shipping to Huawei, there was a lot of uncertainty out there. We kind of laid out our expectations for that business, and I think we sized it appropriately for what the opportunity was. I would say versus then, things have gotten incrementally better, I would say, outside of China, and whether that be macro or massive MIMO. So better than we'd expected, I think, in terms of what the opportunity is. And as Greg said, we're seeing – you know, our fair share of wins in that area as well. But, you know, I think, again, better than expectations.

Okay. Thanks for that. So for my follow-up, you know, there have been supply shortages affecting the semiconductor space and other sectors pretty broadly since last year. And now this hasn't really had a direct impact on silicon carbide since the shortages are concentrated in other areas. But Do you think some of your customers might be a bit hesitant to purchase devices right now just because they're having difficulty finding the other necessary components for their product? I know that can happen in normal supply environments as well, but I was just curious if it had become a bit more acute for you guys recently. Thanks.

You know, Jack, I don't see that. You know, a lot of what we're doing right now is initial production ramps and prototype ramps and getting ready for a pretty big growth over the next couple of years. So I think there's not a whole lot of that. I would say that the supply issues that you're talking about are primarily focused around silicon-based chips for production vehicles today. And most of our activity is in pre-production vehicles. you know, devices, cars that are going into production in 22, 23, 24, 25, you know, et cetera. So there is not a direct impact there. What I would tell you, though, is the attention that car manufacturers and the tier ones have to our supply chain is very, very high and very, very acute. And so, you know, we announced in May of 2019 that we were gonna substantially increase our capacity by building new materials factories and expanding our materials factories and building a new wafer fab. We didn't anticipate in May of 2019 that we'd be in this situation, that the car makers would be in this situation that they're in today where they just can't get products with car lines going down it seems like every week. What I would tell you is when I visited with those customers for those three weeks in Germany, and I show them a picture of a factory that a year ago was basically mud and earth, and today is a building, and that we're going to be going into production in really about eight months from now, nine months from now, something like that. They're really enthusiastic about that, quite frankly. We look really smart because we're going into production with the world's largest silicon carbide fab right in the middle of all this supply issue. Quite frankly, it just happened to be luck, I think, because we made this decision in May of 2019. We weren't predicting this. But the capacity coming online in a relatively short period is certainly a very nice light at the end of the tunnel for some of these guys. as they start placing bets on silicon carbide.

Thank you. Our next question comes from Craig Irwin with Roth Capital Partners. Let me proceed with your question. Hi. Good evening, and thanks for taking my questions.

Greg, I'm really interested to hear a little bit more detail about the four new GAN on silicon carbide products you just recently released. Have you sampled these already to key customers? Are they maybe in sampling now or low-rate production? What's the timing on full-rate commercial production, and would you expect them to be margin accretive before the end of the year?

Craig, I believe we are sampling those products. When we announce new products, we typically have done qualification and so forth, so I believe we are sampling those. to customers. I won't talk specifically about those particular devices, but I would tell you just in general as we announce new products, they tend to be margin accretive, you know, just simply because they're the more newer products that we have. I can't specifically – I don't want to specifically talk about those, but the – you know, what I would tell you is that we're seeing a lot of interest in our RF products across a number of different areas. And, you know, the team is, I think, doing a pretty good job of bringing new products to bear in the market. The same is happening, and by the way, Craig, in our power business, remember the exact number, you might have that, Tyler, but the number of new products we're introducing this year in our power business is certainly an all-time high since I've been here. And it seems like every year we're doubling the number of new products that we're introducing.

Thank you. As my follow-up question, I wanted to ask a little bit about the device pipeline, your $10 billion device pipeline. You mentioned the prepared remarks. Of the portion that is automotive or transportation-related, Can you maybe characterize for us approximately what the share is that's coming from emerging EV producers? And maybe we could lump Tesla in that group. I guess they're not emerging. They're wildly successful, right? Versus conventional legacy combustion engine automotive OEMs that are now spending money and ramping. I mean, how does the mix work differently? sort of legacy versus new economy players here?

You know, Craig, I don't have the specific data in front of me, but I can tell you that kind of just thinking through, you know, we review the list of big opportunities, you know, and so forth. And I would say a substantial portion of that are car manufacturers that you would know the name of, and they historically have been internal combustion engine manufacturers. I can't give you the exact numbers because I don't have them, but it's a pretty nice portion as internal combustion engine companies that are shifting to electric vehicles and investing substantial amounts in electric vehicles or have made declarations that they're going to be all electric by 2035 and so forth. So it's a It's a big portion of that, Craig. And, again, I apologize. I just don't have the number in front of me. But I think a big portion of that is going to be from existing car companies that are transitioning from, you know, the internal combustion engine to electric vehicles.

Thank you. Our next question comes from Vivek Arya with Bank of America. You may proceed with your question.

Thanks for taking my question. I have actually one for Neil and one for Greg. Please, one more on gross margins. What will need to happen in the second half for you to get back to trend line on the gross margin side? Do you already have those plans in place? Is it a mixed issue? What changes in the second half of this calendar year to bring gross margins back on track?

Yeah, I don't think it's something there's always some mix, you know, as you look quarter to quarter, as you look out to the back half of the year. I think this is really about bringing on new capacity and getting productivity off the new line. So as we bring on new capacity corridors in Durham, and we've talked about it many times, you know, the Durham footprint can be, you know, challenging to work with. But it's an interim step between getting from, you know, where we are today and the second half of this year, and into Mohawk Valley next year. So I think it's really just about you know, driving the productivity on the new capacity corridors, which is a function of a lot of things, you know, just getting people online, bringing in resources, and getting them trained up and getting a better velocity through the factory. So I don't think it's so much mixed, you know, it's hard to call sometimes, we'll see how things play out. But I think it's really just about that. And yeah, we have plans in place. We've been seeing improved yields, we saw them last quarter. So the underlying elements, I think, are in place. And like I said, I think we'll kind of get back to that kind of mid 30s, we could be a little bit more or less depending on what happens. But we're not that far away from transitioning to Mohawk Valley. So, you know, I think that's a reasonable level to kind of target here, you know, during the second half until we start really, you know, focusing our efforts on bringing up Mohawk Valley where, you know, as we've said, we'll see a lot more structural change in the cost footprint and that should, you know, flow through the margins, you know, over time.

I see. And, Greg, what's your sense of the competitive landscape that is developing? Obviously, EVs is a very, very large market Opportunity, how do you view GaN as a competing material to silicon carbide? And separately, are you seeing any new competition from, you know, other materials or device companies that might be looking to build their own silicon carbide capability? I mean, how many competitors can this market really support given the heavy CapEx investment and IP that is required to be successful?

Well, first off, it's a huge growth market. So, you know, as a substantial growth opportunity, and even if you just kind of pin it down to electric vehicles, you're talking about, you know, a very, very substantial growth opportunity that probably, by all accounts, is going to last at least a decade. So, you know, anytime you see a growth like that, it's going to attract attention and investment and new competitors and so forth. So we fully... anticipate that and expect that. From a GAN perspective, I think what we're seeing with GAN is it seems to be playing more in the space of onboard charging and substantially less in the space of inverters. In fact, several of The customers that I've met with have actually discontinued any evaluation of GAN for the inverter itself. They are looking at GAN for onboard charging. So, you know, so we're seeing GAN mostly in that area. And really the battle on the inverter is really whose silicon carbide they're going to go with. And in that respect, it's really the main players that you've seen in silicon carbide before. We don't see substantially new players coming in at the device level. From a materials perspective, we see, you know, obviously there's a number of different companies that are out there doing materials, and we fully expect them to, you know, try to work real hard to get a footing here. And our job as the leader is to really continue driving that business and to not be satisfied with where we're at. And so we continue driving cost, efficiency. Obviously, the transition to 200 millimeters is a big deal for us. So we are not blind to the fact that there's going to be other folks coming into this market. And we are just intensively driving our business to make it harder and make it easier for customers to choose to go with us. And then the final thing that I would say is anytime a car manufacturer makes a decision on who to go with, they look at a myriad of different things. They look at the device performance and we always come out kind of in the top category there, sometimes tied with somebody, sometimes by ourselves, but we always come out very good from a device performance perspective. They look at the knowledge and the capability you have in silicon carbide. And there at the device level, we really stand alone. We have substantially more knowledge of silicon carbide than anybody else. And so we always end up the top player there. They look at knowledge and capability in the auto industry. And here we don't fare so well. We have other competitors that at the device level that have been in the auto industry for 34 years and have more knowledge of the auto industry. And so that's an area that we need to beef up. And we do that by hiring folks from the industry and joining us. And we've got dozens and dozens of people that we brought in with that background. And that gives our customers a great deal of satisfaction seeing that we're able to attract folks. And then the final thing they look at is from a supply, you know, obviously they look at competitiveness, too, from a cost perspective. But the other thing they look at is supply continuity and supply assurance and what are you doing from an investment perspective to ensure that you're able to support them as their production ramps. And, boy, I'll tell you, you know, they look at the world's largest silicon carbide fab going into production in eight or nine months, and, you know, we get a big check the box on that one as well.

Thank you. Our next question comes from Pierre Paragu with Newstree Research. You may proceed with your question.

Hi. Thanks for taking my question. Craig, I would have, like, a follow-up question on the evolution of your competitive landscape on a more specific topic in the in your substrate position. So you know there are a couple of companies in Europe who are working on innovative ways to split wafers, to split bulls. And there is, of course, some way to go before we see any of that becoming something tangible and industrial. But my question really is, if one of these technologies becomes like mainstream and easy to run from an industrial standpoint, I'm kind of wondering if it's a positive or a negative for you guys. Because on one hand, of course, it's going to compete with your sewing business. But on the other hand, it would accelerate the market, like brings more supply of wafers. It would increase the value per bool. It would drive growth in the device business. So I was wondering if you ever thought about it and if you have a sense whether on a net basis it would be a positive or a negative.

I think it's a great question, Pierre, and I think I'm kind of extrapolating your viewpoint on it. It's probably pretty good. The more interest there is in the market, the more excitement and investment there is in the market, the more it's going to drive the market adoption and growth and so forth, and that is a typical reaction to a market with more investment coming in, and then conversely, it's it's a typical reaction to the investment with the market, you know, growing the way it is. So they're kind of mutually, they mutually kind of build on themselves. I will tell you that we obviously keep up with all of these various different developments. And, you know, I think you used the word easy or straightforward or something in there. And there's not a whole lot about silicon carbide that's either easy or straightforward. So there's a lot of There's a lot of hard work that goes into some of this kind of stuff, but we are not blind to any of it. We keep an eye on all of it, and again, as a leader in the industry, driving scale and driving costs down is something we're continuing to do. Any of these new entrants coming into the market are chasing 30 years of experience, and they're chasing a cost curve that's moving pretty quickly. So I think your thesis is actually very solid, though. I think that the more investment, the more interest, the more excitement there is about silicon carbide, yeah, it does create the potential for more competition for us, but it also drives more adoption of the industry. So I think that's actually a pretty good thesis.

Thanks, Greg.

Thank you. Our next question comes from Colin Russ with Oppenheimer. You may proceed with your question.

Thanks so much. Guys, as you're talking to the customers, what can you say about system design trends, you know, in the mix of 400-volt, 600-volt, or 800-volt architectures? And how is that impacting customer comfort with the move to 200 millimeters, where we understand as you've got higher voltages, it's a little bit harder to get the thickness on some of the deposition?

We don't anticipate any problems at all at 200 volts on, excuse me, on 200 millimeter with higher voltage. So we're feeling pretty good about that and don't anticipate any problems at all in that regard. I think we've got you know, things pretty well understood. So I feel very, very good about that. You know, I think that the most important trend, at least that I see in the industry, is the realization from the car manufacturers and the tier ones that there is a substantial advantage with silicon carbide And they obtained that substantial advantage by designing the inverter from the start as a silicon carbide-based inverter. You know, a year ago, two years ago, we talked to customers, and there was a little bit of a, well, you know, I'll design the inverter and then decide later whether I'm going to put silicon carbide in or silicon in. And you only get, I mean, you definitely get an advantage, but it's only so much. When they start with an attitude of, this is going to be a silicon carbide-based inverter platform, there are so many other things that they can do that get substantial cost improvements, weight improvements, size, et cetera. And I think that's a trend that I've definitely seen you know, transition over the last couple of years. So I'd say that's probably the most substantial trend.

Okay, great. And then just a more practical one around Mohawk Valley and some material costs. You know, obviously inflation is impacting a lot of basic materials, and we're also seeing a fair amount of labor tightness around the construction space. What can you say, you know, what sort of impact have you seen so far in terms of your expectations around CapEx? on the facility and how that may flow through some of their cash flow.

Yeah, maybe, Neil, if you want to cover the CapEx, that would be great.

Yeah, on the CapEx front, we really haven't seen any change. So we talked about the 550 for this year. I think everything that we have, you know, seen to date is in line with that and really haven't seen any, you know, issues on that front. You know, next year it will come down a bit. It's still higher than what we had, you know, projected previously just because, you know, we're going to be doing 200 millimeters. There's also some timing on the bat and construction. But I would say from a CapEx standpoint, we're, you know, we're in good shape in terms of the plans that we've, you know, previously talked about.

Thank you. And our next question comes from Gary Moby with Wells Fargo. You may proceed with your question.

Hey, guys. Thanks for sticking my question in. I want to ask about your silicon carbide materials business. It sounds like it's showing very modest sequential gains. And maybe I'm reading this wrong, but perhaps, you know, not living up to expectations in terms of growth. But I'm wondering if you can give us some clarity on, you know, maybe what some of the impediments are to growth, whether it be competition, capacity constraints, general demand, pricing, or whether or not it's a conscious decision to sort of pare back in the materials market.

Yeah, maybe I'll kick it off and see if Neil wants to add any additional color to it. So thanks for the question, Gary. And just recall, most of our materials business is really done through long-term agreements. I think it's somewhere north of 70%, around 75% of the materials business is long-term agreements. And they're basically behaving as we expect it. And quite frankly, we prefer to have long-term agreements. We're not really into the spot market kind of thing so much. And so the pricing and the capacity and the demand and so forth is all kind of laid out with these long-term agreement customers. You know, we try to treat them very well. I think if you talk to any of our long-term agreement partners, they probably substantiate that as well. And, you know, they're basically working, you know, as they go. We're not really big into the spot market, so we don't play what's happening today with the cost of silicon carbide per wafer and what could we get, you know, tomorrow on the open market. It's We'd much rather have long-term agreements and have a good understanding of what our capacity needs to be to supply those guys out in time. We're about 60% market share in materials right now in the merchant market. And through our LRP timeframe, our anticipation is that we hold that market share. So I don't know, Neil, if you want to add any additional color to that or not.

Yeah, and I think when you think about the materials business, you know, it's still early days in terms of silicon carbide. We originally signed up a lot of these LTDAs a couple of years ago. Different customers are going to have different inventory positions in terms of, you know, ordering. But if you look at silicon carbide over the long term, adoption of ledger vehicles, I anticipate that will pick up at some point as well. It's just ebb and flow in between, you know, these different periods. So I think as, you know, as adoption rates pick up for silicon carbide, you know, I expect the materials business to grow and I think right now in line with the expectations that we've had both short-term and I don't think our long-term plan has changed at all.

I appreciate that, Culler. As a follow-up, I just had a housekeeping question. Neil, with the recent equity offering, can you confirm that shares will go up to what, roughly slightly more than $115 million? That's correct, right around $116 million. Yep. Gotcha. Thanks, guys.

Thank you. Our next question comes from Carl Ackerman with Callen. You may proceed with your questions.

Hi, good afternoon, gentlemen. Two questions from myself. Neil, the first one for you. I was hoping you could walk through what sort of milestones your team has in front of you until Mohawk begins to manufacture waivers. I ask because lead times on most semi-cap equipment appears to have extended to nine months or more, so I'm curious if that has been a challenge for you as you seek to ramp Mohawk nine to 12 months from today. I have a follow-up.

Yeah, thanks, Paul. I don't think we're seeing a big impact there. We've had these plans in place for quite a while now in terms of building the factory. Obviously, we're watching the cap equipment space closely, and we've placed lead time orders, I think, appropriately given the timeframe we knew we were going to be needing the equipment in. So right now, so far, so good. As you think about milestones, as Greg talked about earlier, we're seeing some positive signs of the yields off our pilot line. And then as you get out into next year, you know, we'll be able to kind of ramp up our qualifying parts. So I think right now everything is kind of working to plan and, you know, don't see any of those types of issues affecting us at this point.

Got it. Thank you for that. And then, Greg, you know, during your prepared remarks, you did indicate, I think, 580 million of incremental design-ins. It sounded like a large amount of them are now coming from non-EV and non-5G applications. I was hoping you could discuss... I guess, why you're seeing this broadening of use cases, and are these new designs entirely on 200 millimeter? And then perhaps, if I could, you know, maybe the timing of when these go into production. I ask because, as some investors I think have argued, silicon carbide will remain a niche application and that it won't, you know, scale perhaps outside of automotive or high-power industrial markets, but it sounds to be perhaps not the case with your recent design hints.

Thanks. Yeah, so thank you. And if you take a look at our total opportunity pipeline, about half of it's automotive, and then a pretty substantial portion of the rest of it is the broader industrial aerospace and defense, you know, kind of business. The $580 million worth of design in is part of the $2.5 billion of design ins that we've had in the last five quarters. Obviously, automotive is a big portion of that. But we're seeing a lot of adoption across a number of different end equipments. I mentioned an air conditioning system that we were designed into. We got designed into a forklift, a 3D laser printer, a wind tunnel application, and then probably my two favorites are we're now in a beer truck and a flying vehicle. So, you know, it's... If you look at just the applications and the opportunities that we got with Arrow, it's across a wide variety of different applications as well. So I guess what it's coming down to is we're starting to see a very nice adoption of silicon carbide, obviously in the auto industry, but outside auto as well. And the beauty there is that this is a market that we normally wouldn't be able to go after. But because of our partnership with Arrow, you know, they have, you know, we have a very small sales force. They have a very substantial sales force. And their footprint out in the field and their enthusiasm for going after this market is very, very solid. It's a fantastic partnership. And it's driving the adoption process. into all these different kinds of end equipment. So quite frankly, we just wouldn't have the bandwidth to go cover. So great opportunity inside of automotive and a very nicely growing opportunity outside of automotive in this broader industrial base. And I'll tell you, you know, growing that broader industrial base is a key priority for me. You know, I obviously visit with a lot of the automotive customers directly and But I'm on a very frequent call with the AERO team, you know, talking about that broader, you know, phase as well. And very happy with the results there.

Thank you. That concludes our Q&A session. I would now like to turn the call back over to Greg Lowe for any closing remarks.

Well, thanks a lot, everybody, for your participation and interest in CREE. We've got a lot of exciting stuff going on here. And we look forward to chatting with you next quarter. Thank you.

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