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spk09: Good afternoon. Thank you for standing by and welcome to the Wolfspeed Inc second quarter fiscal year 2022 earnings call. At this time, all participants are in a listen only mode and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the number two. We ask that you limit yourself to one question and one follow-up. Please note today's call is being recorded. I would now like to hand the conference over to your first speaker today, Tyler Grombach, Vice President of Investor Relations. Please go ahead.
spk11: Thank you, and good afternoon, everyone. Welcome to Wolfspeed's second quarter fiscal 2022 conference call. Today, Wolfspeed CEO Greg Lowe and Wolfspeed CFO Neil Reynolds We'll report on the results for the second quarter of fiscal year 2022. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Wolfspeed'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 contact us after the call. And now I'd like to turn the call over to Greg.
spk03: Thanks, Tyler, and good afternoon, everyone. Thank you for joining us today, and I hope you and your families are safe and healthy. I'm pleased to report that during the second quarter, we continued to execute and drive our business, delivering strong revenue and non-GAAP diluted earnings per share at the high end of our guidance. Now, last November, we held an investor day at the New York Stock Exchange where we outlined how the team is focused on driving the industry transition from silicon to silicon carbide by expanding our leading market position with innovative new solutions, building additional capacity in New York and North Carolina to support what we see as a steepening demand for silicon carbide solutions. growing our opportunity pipeline and converting to design-ins at a very robust pace, and finally building out our bench of semiconductor leadership expertise to help us optimize operations and achieve our long-term growth objectives. Our strong results this quarter clearly demonstrate the progress we're making and the momentum we're building to support the multi-decade growth opportunity ahead of us. I'll now turn it over to Neil, who will provide an overview of our financial results for the second quarter and an outlook for the third quarter of fiscal 2022. Neil?
spk04: Thank you, Greg, and good afternoon, everyone. We delivered solid results during the second quarter as we continue to see strong demand for our silicon carbide solutions. Revenue for the second quarter of fiscal 2022 was $173.1 million at the high end of our guidance range. representing an increase of 11% sequentially and 36% year-over-year. Our non-GAAP net loss was $18.6 million, or $0.16 per diluted share, also at the top end of our range. Our second quarter non-GAAP earnings exclude $78.1 million of expense net of tax, or $0.67 per diluted share, for non-cash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, project transformation and transaction costs, factory optimization startup costs, loss on debt extinguishment, and other items outlined in today's earnings release. Looking at second quarter performance, we delivered our sixth consecutive quarter of sequential growth. We continued to see strong demand for our power device solutions, resulting in revenue growth of approximately 37% over the prior quarter and growth of more than 100% over the prior year, as we saw significant growth in both direct and distribution channel customers. On the RF device front, we continue to see solid demand from a 5G and aerospace and defense perspective, which increased over the prior year, but was relatively flat over the prior quarter as we continue to increase capacity. From a materials perspective, demand for 150-millimeter silicon carbide substrates remains very strong. This resulted in year-over-year growth, but roughly flat versus prior quarter as we continue to increase capacity and better match supply with demand. Second quarter non-GAAP gross margin was 35.4% compared to 33.5% last quarter. The 190 basis point improvement was driven by improved output, cost, and yields from our Durham FAB and Malaysia subcontractor, and lower depreciation expense resulting from the previously announced change in useful lives of certain assets, partially offset by the higher device product revenue mix at lower profitability. As Greg mentioned earlier, adding to our management team with proven semiconductor leadership is a critical factor to our future success. And the Durham FAB team, now led by Missy Stegall, has made solid progress in a relatively short amount of time, already contributing to positive results. In addition, we recently added Joe Roybal, who has more than 20 years of semiconductor manufacturing experience to lead our global backend operations, including oversight of our subcontractor in Malaysia. Looking ahead, we expect continued operational improvements in our Durham FAB and our Malaysia subcontractor will have a positive impact on gross margin and capacity for the remainder of the year. Looking at our consolidated results, non-GAAP operating expenses for Q2 were $86.6 million and our non-GAAP tax rate was 27%. The increase in our operating expenses was largely due to R&D, including investment in our 200 millimeter efforts and hiring to support our sales and marketing activities. For the second quarter, day sales outstanding was 48 days, and inventory days on hand was 154 days. Cash generated from operations was negative 32 million, and capital expenditures were 144 million, resulting in free cash flow of negative 176 million. We currently have approximately $700 million of cash and liquidity on hand to support our current plans. Additionally, in December, we completed the redemption of our 2023 notes. leaving us with convertible debt with a face value of $575 million. We believe this transaction better positions us to capitalize on increasing demand by strengthening the balance sheet, increasing optionality, and preserving cash during our peak investment period. We will continue to be opportunistic from a capital market standpoint to ensure we have the flexibility to invest as we see fit to capitalize on the market leading position and support continued growth. During the quarter, We incurred startup costs primarily related to Mohawk Valley, totaling approximately $11 million. As we've discussed previously, we expect a total of $80 million of startup costs in fiscal 2022, with the majority of these costs incurred in the second half of the fiscal year as we qualify and ramp the FAB. It provided a non-gap adjustment for the startup costs, as well as a reconciliation table in our earnings release. We are continuing to experience a much steeper demand curve from our customers for silicon carbide products than we had initially anticipated. This has led to supply constraints where some customer orders will not be fulfilled this fiscal year, and channel inventory levels will remain low until we ramp production in our Mohawk Valley fab. We are confident that we will be able to meet this demand once Mohawk Valley is up and running, but in the meantime, we continue to accelerate CapEx capacity investments and improve output in our Durham facilities. We are anticipating net capital expenditures of approximately $475 million this year, stepping down in the back half of 22 as we receive more reimbursements for the Mohawk Valley construction. In Mohawk Valley, we have more than 60 tools in place, are currently testing equipment, and we expect to begin running wafers later this quarter. While we are encouraged with our progress to date, it's important to remember we don't expect to realize any meaningful revenue from the facility until the second half of fiscal 2023. In the third quarter of fiscal 2022, we are targeting revenue in the range of $185 million to $195 million. We expect revenue to be driven by growth across all areas of the business, led by power and improved output from RF and materials. Our Q3 non-GAAP gross margin is expected to be in the range of 35% to 37%. As a reminder, the key to our gross margin transition for the mid-30s to 50% in 2024 is largely based on three elements. including optimizing Durham, transitioning from 150 millimeter to 200 millimeter wafers, and driving revenue through Mohawk Valley. We are on track with all three elements and anticipate modest continued improvement in gross margin over time. We're targeting non-GAAP operating expenses of 88 to 89 million for the third quarter. We anticipate operating expenses will continue to slowly increase over time as we continue to invest in R&D and sales and marketing resources but expect that it will become a smaller percentage of revenue as we enter the middle of the decade. That being said, we are also continuing to identify areas across the business to reduce costs and improve productivity as we scale our global operation to better support our customers. For example, we will be opening a global capability center in Belfast, Northern Ireland, in partnership with the Northern Ireland government. This facility will operate as a shared services hub for Volsby's IT organization, helping drive critical IT innovation and expansion of global digital capabilities. We target Q3 non-GAAP operating loss to be between $23 million to $18 million, and non-operating net loss to be approximately $1 million. We expect our non-GAAP tax amount to be a benefit of approximately $4 million. We're targeting Q3 non-GAAP net loss to be between $20 million to $15 million, or a loss of $0.16 to $0.12 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, project transformation and transaction costs, factory optimization, restructuring, and startup costs, and other items. Our Q3 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.
spk03: Thanks, Neil. We are continuing our journey to transition the industry from silicon to silicon carbide, and I'm very excited for what's to come as we begin to ramp the Mohawk Valley Fab. Our power business continues to see increasingly robust demand from the automotive markets, and we're also encouraged by rising demand across a number of industrial and energy customers. Our device opportunity pipeline continues to grow, and is now well above $20 billion, underscoring the enormous demand we're seeing across all end markets. The pipeline also reflects more than 8,700 projects, and our team continues to identify new opportunities at a rapid pace. More importantly, the sales team continues to convert design ends at a high rate across a wide range of applications. This includes things like personal watercraft and snowmobiles, defense applications, trains, EV charging, a plasma generator, and an electric vertical takeoff and landing aircraft. As a result, we secured a record $1.6 billion of design-ins last quarter, which is an amazing accomplishment from the hard work of our sales team, product groups, and our channel partners. Our design in total for the first half of fiscal 21 is $2.1 billion, a 70% increase from the same period a year ago and well above our original plan for the first half of this year. At this pace, we're on a trajectory to significantly exceed our design in total from fiscal 2021. This positive momentum is a direct result of customers adopting silicon carbide at a faster rate than we originally anticipated and is creating a stronger tailwind for our long-term revenue outlook than we showed at our investor day back in November. To support our rapid growth, it's critical that we continue to invest in people. We have attracted senior talent from a variety of exceptional companies and have demonstrated a tremendous ability to bring in people from the outside with substantial amounts of automotive experience or semiconductor wafer fab experience. The opportunity to join Wolfspeed as we drive the industry transition to silicon carbide is exciting, and we're taking advantage of this excitement to attract some of the industry's finest leaders and innovators. Earlier, Neil highlighted the impact that MIS-East de Gaulle is having on our Durham operations, and that Joe Roybal has joined Wolfspeed to oversee our backend operations. Joe's 20 years of global semiconductor operations and leadership experience is already making a big impact here at Wolfspeed. As we focus on executing across our business, our strategy is further supported by developments in the broader market. In early December, the Biden administration released an ambitious federal strategy to build a half million charging stations for electric vehicles across the country. The $1 trillion infrastructure law authorizes a nationwide network of charging stations and sets aside $5 billion for states to build them. We are continuing to see automakers make big commitments to ramp their electric vehicle efforts. For example, GM made several announcements at CES regarding new EVs, including the Silverado and the Equinox, and that they have thousands of orders for its BrightDrop electric work vans. In addition, Toyota announced it would make 3.5 million EVs a year by 2030, citing the November climate summit in Glasgow, Scotland, and the Biden's administrative executive order aiming to increase EV sales. There is tremendous momentum in the marketplace, and we are well positioned to create a global semiconductor powerhouse here at Wolfspeed focused on silicon carbide. Wolfspeed is a pure play for silicon carbide, a game-changing technology that is beginning to transform the semiconductor industry. We have invested heavily not only in our products, but in expanding our capacity and the talent needed to run it. The expected return on these investments is compelling, and we will continue to invest in both capacity and talent to ensure we meet the steepening demand from our customers. We're winning business at a very good pace, and I remain excited about the opportunities ahead, and I'm confident in our strategy and our path forward. And with that, we'll turn it back over to the operator, and we can begin our Q&A session.
spk09: Thank you. if you'd like to ask a question please press star followed by one on your telephone keypad now please ensure your device is unmuted locally and we ask that you limit yourself to one question and one follow-up our first question today comes from gary mobley of wells fargo gary your line is open hey guys thanks for taking my question uh congratulations on the progress being made i wanted to uh ask really
spk12: about what has changed since the Annals Day a little over two months ago, and specifically with respect to the $2 billion increase in the pipeline and what seems to be a pretty good design and figure for the quarter. I'm curious specifically on that design and metric, how diverse the revenue pipeline or the revenue build was there.
spk03: The pipeline increase and the design-ins that we got represent, well, the pipeline increase is thousands of different customers, so it's quite diverse. In fact, I think we said 8,700, so quite diverse there. And basically, the design-in number that we just nailed for this past quarter and the fact that the first half of this year is 70% up, from where we were just a year ago is what's really creating those tailwinds that we talked about. And really, if you go back to the analyst day, we were projecting $2.1 billion of total revenue at the company level and roughly $1.4 billion of device revenue. It's that device revenue where we're seeing the momentum. And what I would say is there's three things that are that are really kind of driving all of this. The adoption rate of electric vehicles is well ahead of plan, and many people are seeing that. The adoption of silicon carbide inside both EVs and the industrial markets is well above any expectation we had. And then finally, our win rate in this business is actually ahead of our plan as well. And so I think we combine these three things and maybe I would describe it even slightly differently. It's not really just tailwinds, but really pretty significant upward pressure on those 26 numbers. So it's obviously a good thing. We've got pretty substantial growth in the opportunity pipeline. And as I mentioned, In the prepared remarks, you know, our team is doing a fantastic job of winning in this market. So overall market size, you know, is definitely heading in the right direction.
spk12: Appreciate that, Collin Gregg. To follow up, I want to ask about sort of the trajectory of the revenue before Mohawk Valley ramps in the second half of fiscal year 23, if I'm paraphrasing that correctly. You know, you're growing your revenue, are expected to grow double-digit percent for the second consecutive quarter. And I'm wondering, just based on the manufacturing efficiencies you're getting out of Durham, North Carolina, and additional capacity that's being brought on there, can you continue to make those same, you know, double-digit percent sequential revenue strides? And as well, you know, how should we think about the margin gains to be, you know, to be gained from just more efficiencies out of Durham.
spk04: Thanks, Gary. This is Neil. So, you know, look, as Greg said, overall, we're seeing, you know, very strong demand across the business. As you kind of indicate, you know, our revenue here in the shorter term is really more of a function of supply than it is demand. You know, we still, even with taking the revenue numbers up, we're still going to have north of $100 million of unfulfilled demand this year. So, as you kind of point out, our revenue is going to be just a function of the you know, how well we can drive, you know, productivity through kind of the current footprint that we have. And with that, you know, if you look at just the last quarter, you know, the power numbers grew 37, power devices grew 37% quarter over quarter and were up over 100% year over year. And I think you can think of this kind of growth and capacity that we're seeing now really as a direct result of new operations leadership just, you know, making an impact. You know, since we converted the Durham fab over to primarily a power, you know, device factory, You know, we just saw, you know, record output in that factory, and we're also seeing some benefits from the output in Malaysia. We're continuing to see that, you know, kind of pay off. So, as you look forward into 3Q, I'd say it's going to be a lot of the same as 2Q. We're going to see, you know, more productivity, more power device kind of ramp up as we work into 3Q. Even if you look at the midpoint guide in 3Q, I think that the power device revenue will be up somewhere around 100% again year over year as we move to 3Q. So I think the team's making a lot of progress in terms of what we can do in the fab. And I think that we're kind of well in line to kind of meet the trajectory in terms of revenue growth until Mohawk Valley kind of fully comes online.
spk09: The next question in the queue today comes from Jed Dorsheimer of Canaccord Genuity. Your line is open.
spk13: Hey, thanks for taking my questions, and great job, and nice to see that 2.1 billion design in number. So, Greg, I guess first question, you know, with that level, I'm guessing you're sort of bumping up, you know, against capacity, you know, limitations as you look out. So I'm just wondering how do you assuage concerns with potential customers that you'll have that capacity. And does this change at all the phased ramp of Mohawk Valley? When we were in there, I think it was like a 20% or 25% phase over a period of time. Are you able to pull that forward at all? I do have a follow-up.
spk03: Yeah, thanks, Jed. And what I would tell you is we are As you know, we are building the world's largest silicon carbide wafer fab, the world's first and only 200 millimeter wafer fab. So it's not lost on the customers that we have an enormous amount of capacity coming online. What's also not lost on them is that we began the construction two years ago, and we'll be running wafers in that factory doing initial runs in eight or nine weeks or so. So we're weeks away from running product in that facility. We've had a number of customers actually visit the facility. And so I think they see a pretty tremendous light at the end of the tunnel in terms of as we ramp this factory. And just as a little bit of a backdrop, so the design wins we win right now or even last quarter, those are going to ramp in three, four years. you know, something like that. So by that time, we will be in very full and very high production out of that Mohawk Valley Fab. With all the pressure right now, this upward pressure on the demand for through 26, we're obviously thinking through, and I'll have Neil talk a little bit more about the detail, but thinking through, you know, accelerating the phased ramp of that facility.
spk04: Yeah, so if you think about the 2024 kind of $1.5 billion revenue plan, we've talked about leveraging roughly 50% or a little bit more of the four-wall capacity in Mohawk Valley kind of over that timeframe. So the demand curve, as that continues to steepen, we're obviously going to see a lot of opportunity to move that up. But we just want to be very careful with that number. I don't think we're ready to change that right now. Jed, just as we want to bring that factory up methodically, you know, bring it up in a way that, you know, ensures we've got the capability and quality that we all expect out of that factory. So, you know, I'd say, you know, there's potential we'll be capacity constrained as we move through that period. I think if you look out beyond that into like, you know, 2026 and even beyond, we'll start to leverage that second half of the, you know, the four wall capacity in Mohawk Valley. Now, we won't be fully utilized from a four wall perspective in that timeframe. And we laid out kind of that $2.1 billion kind of revenue target plan. But that is something that's clearly the, you know, the factory has opportunity to, to move above that. And we could, we could take the volume up beyond that, you know, expand faster between 24 and 26. And that's certainly something that we're looking at, you know, and continue to manage as we see the demand curve, you know, continue to steepen.
spk13: Got it. For my, for my followup, I want to shift gears a little bit. in the non-auto related. And so a lot of the products are optimized around 650 volts and 1,200 volts for auto. And while a lot of the benefits in terms of reducing the impedance are applicable to other markets like solar, you name it, trains, et cetera, any high voltage, optimization from the best of, or from my knowledge, hasn't necessarily been developed. So for example, a solar inverter, you're not seeing a lot of off-the-shelf 2200 volt type products. So I guess my question to you, Greg, is if I look at your 8-inch platform and being the only one on 200 millimeters, A larger area die should be a, you know, extend your lead over the competition and quite frankly, change a lot of these markets. So my question to you is, how are you, you know, without giving away sort of what's coming from a, you know, product perspective, how are you thinking about optimization for some of these other markets that don't get as much attention as auto?
spk03: Well, Jed, there's several different vectors here. First off, we obviously have a product group that has a whole strategy and product portfolio that they currently have, new products in the pipeline, new generations of products, different flavors, and so forth. So there's a tremendous amount of effort going on there and a tremendous amount of R&D. We also have significant efforts, as you're well aware, going on in terms of the material side of things as well. And then finally, what I would tell you has been just eye-opening to me is the adoption rate of our current portfolio across non-automotive type applications is really, really solid. we are able to do that through the partnership we have with Arrow because they're able to take these products and get them into customers' hands. And, you know, they've got quite an extensive applications engineering team and help customers, you know, develop these products. And, you know, if you would have asked me a year ago, are we going to win a personal watercraft or, you know, something like that, it wouldn't be on my list. But, you know, here we are, you know, today with those kinds of design-ins. And so I think the The partnership with Arrow and the access to the channel that they bring or the access that their channel brings has shown all of these industrial customers that there is applicability of our current portfolio to what they would like to do. And of course, they're getting glimpses of some of the things that Jay and his team are working on from a power new product portfolio as well. I'm super encouraged by that. I think, as I mentioned earlier, the adoption of silicon carbide in both EVs and the industrial markets is just happening at a substantially higher pace than we would have predicted. And that's positive news for us.
spk09: Our next question in the queue today comes from Simic Chatterjee of JP Morgan. Please go ahead.
spk08: Thank you. Hi, Craig. Hi, Neil. Thanks for taking the question. So a couple of quick ones. Just wanted to see if you can share a bit more color about the 2.1 billion of design wins, or particularly the acceleration that you saw this quarter in the design wins. If you can break that down by either application or use cases. I'm just wondering, is it like you had a certain application and you found you were able to design in with more customers in the same vertical, or is it more about new applications really driving those acceleration design wins? If you can share some color on that.
spk03: You know, the lion's share of that is going to be the inverters in electric vehicles. It's going to be something around 75% of that number, which crosses a lot of different customers, a lot of OEMs, Tier 1s, et cetera. So there's pretty good diversification of that, but it is in the vertical of the electric vehicle. Outside of that, pretty good traction as well with RF and with the industrial markets. And I mentioned some of those different end uses. Across that, though, Like I said, it's 8700 different projects. So there's, you know, there's lots of small ones associated with that. But this for the first half of this year that $2.1 billion of design and pretty heavily automotive related and and then like I said, industrial and RF wins as well.
spk08: And just a quick follow-up, and maybe this is more for Neil. If you can just help me through the gross margin bridge, you did 35.4. I believe, based on what you've discussed, the depreciation itself change there should be helping you by about 100 basis points or so. But maybe if you can correct me if I'm wrong there. So I'm just trying to think about the gross margin bridge, given you should have some organically better margins on the higher revenue as well. So the puts and takes, if you can, please.
spk04: Sure, yeah. So if you look at the 2Q results, you know, we saw about, you know, 190 basis point improvement in gross margin, which is, you know, as you point out, is at the high end of the, you know, the guidance range. And that was driven by a couple of things. And first and foremost, underlying this, we're seeing better performance and better execution, you know, in our Durham FAB, as well as at our Malaysia subcontractor. And I, you know, similar to the revenue, you know, it's really a direct result, not only of the investments that we're making, but of the leadership that we've put in there. What's offsetting that a bit as we grow is that the device business of a higher cost base is providing kind of a negative product mix. So you saw the power device business growing extremely fast, 37% quarter over quarter, 100% year over year. So as that bleeds in faster, we're seeing some margin headwind as you look at that. Now, the good news is that the profitability of the device business also improved significantly versus last quarter with the better factory performance. So over time, we would expect that kind of mixed impact to dissipate. But right now, as we have that kind of cost footprint differential, we'll see that kind of playing as we go. So those are kind of the two, I'd say, operational factors that are in there. And then from a depreciation benefit standpoint, in 2Q, I think we gave a guidance last quarter of about one to two points. It was at the higher end of that range and a higher revenue. And then as you look out into Q3, you can think about about a half a point to a point and a half range. And then think of it being largely behind us after that. And then again, as you look out into 3Q, we should see some additional benefit, but largely the same dynamics playing out. We anticipate seeing better performance in the FAB and the back end offset by some of that product mix. And then even as you move out into Q4, we should see the, you know, the margins, you know, flattish, maybe even moving up from 36%, you know, as you kind of get into that, you know, Q4 timeframe. But we're way down from that right now.
spk09: Our next question comes from Harsh Kumar of Piper Sandler. Your line is open.
spk01: Yeah. Hey, guys. First of all, congratulations. Strong results. Good guide. Greg, I had a question for you. You mentioned something interesting. You said that you'll start your wafers here in, I think, the March quarter. I just wanted to understand mechanically the timing dynamics. As you look to start in the March quarter, the run of the wafers, how long does it take, do you think, for you to be qualified? The main question is, is the commercial first few wafers out still looking at June, July kind of timeframe? If you can just provide some color around that and do have a follow up.
spk03: Yeah, so maybe I'll hit the beginning and Neil can give a little bit more additional color. So I'll just remind everybody, you know, this wafer fab was a field of mud two years ago and we're going to be running wafers here pretty soon. We've done a really good job of running the pilot line in the SUNY Albany facility. And Neil will give a little bit more color on how we've transitioned that. So we're feeling pretty confident about what we're able to do out of the Mohawk Valley FAB. We have material staged in that FAB today. And as I mentioned, we'll be running that in really, I think it's eight weeks, nine weeks, something like that. So sometime this quarter. Neil, maybe you can give just a little bit more color on how the process then goes from there.
spk04: Yeah, yeah. So, Harsh, no real change from what we've talked about. As Greg mentioned, we'll start the qualification line at this border, and then we'll quickly transition from internal to customer qualifications shortly after that. And I thought it might be good that I break that down a little bit in terms of how we're thinking about that. So, right now, for instance, we're testing equipment, and in many cases, that has wafers loaded into the tools. So we expect to be running those full qualification lots, as we mentioned, later this quarter. And if that goes well, you know, transition that, you know, right to customers very quickly. As we speak with customers, you know, there's a very strong demand to get products coming out of this factory and getting them out very quickly. So we've set up the line in a way where we've leveraged that pilot line Greg talked about to stage inventory at various stages. So when we start the line, we can actually start it very full. And then shortly after that, we anticipate putting a product in the hands of our customers. And then we'll just continue that process with more and more customers throughout the year. And right now, our anticipation is that that will happen throughout the year. We'll see some commercial revenue, but the larger amount of revenue that will kind of move the needle, so to speak, would happen in the second half of the fiscal year. as you get into the second half of 2023. So that's kind of the plan as it works out right now.
spk01: Understood. Very helpful, guys. And you touched upon my next question a little bit in one of the previous questions. I think you, I was wanting to understand, given the steepening of the demand curve, the timeframe to get to an acceptable utilization of the FAB or even full utilization of the FAB. And you mentioned something interesting. You talked about the four-wall capacity. But that's different from the installed tool capacity. I wanted to understand how long would it take for you, given the demand dynamics you're seeing, to be able to get to a utilization that you consider acceptable, let's say break-even cash, break-even profitability, whatever metrics you use. And then when you talk about four-wall capacity, I want to understand there must be room, I suppose, for additional lines to go in, and that's what you're implying by four-wall capacity, I suspect.
spk04: Yeah, that's right, Hark. So I think the way you want to think about the factory, though, is when you think about what's acceptable utilization, you know, in my mind, it's getting towards that first 50%. If we could bring that up, I think we're, you know, as we bring that up, and probably not even at full utilization, the first 50%, I think we're in pretty good shape in terms of the fab and in terms of the, you know, the profitability and the capability it's going to be bringing to us. And You know, given the steepening demand, I don't really see that as being, you know, really being an issue at this point. And we'll continue to manage towards that. So I think it's really more about your second question, how much capacity can we bring on and how quickly can we do that? And looking at it now, as I said earlier, we've just got to be very careful with how we bring up the factory in that first kind of four-wall capacity. It's a brand-new, you know, world's first silicon carbide, 200-millimeter silicon carbide, you know, automated factory. So we're in a new factory and a new technology, so we want to be careful with that. However, as you get from 24 to 26, I think there is some optionality there. And if you think about in terms of bringing the revenue up and bringing the capacity up, in terms of timeline to think about it, normally you're thinking about a year or so to bring up a new line in a fab. It might be a little bit longer than that right now just because of supply chain considerations. But I'll tell you, we've been very disciplined about how we've ordered capacity for this factory out ahead of the COVID and the supply issues now. But we continue to monitor this very closely and make orders as we bring up the factory. So I think we've left ourselves some flexibility in terms of how we manage this from a timing standpoint.
spk09: The next question today comes from Craig Irwin of Roth Capital Partners. Your line is open.
spk14: Good evening, and thank you for taking my questions. So I guess this does touch on questions that have been asked before. If you keep putting up bookings like you have this quarter, design-ins, you're going to need a second facility pretty quickly. Can you maybe talk a little bit about what the considerations would be about plans for future capital investment? And would you be more likely to expand at an existing site, maybe in North Carolina or New York? Or would you potentially consider other locations for expansion? over the next couple of years?
spk04: Craig, this is Neil. First of all, thanks for the question. And I think, look, we're talking about a steepening demand curve here. And, you know, clearly, you know, at the levels of what we're talking about, that's certainly something we're considering. So if you go even out beyond, if we're going to bring up, you know, capacity in Mohawk Valley faster, you've got to think about looking out beyond 26, which we do, you know, regularly. And, you know, we believe, you know, that the demand for silicon carbide will continue out into the, well into the second half of the decade. And I think the entire industry is going to require capacity out in that timeframe. And for us, that would mean, yes, we would need a second FAP in addition to Mohawk Valley. And that's something that we are continuing to evaluate. From a geography standpoint, I think those things are things that we just continue to think about and evaluate over time. But we would be open to looking at various options there as it relates to ensuring that we're you know, close to our customers and working with them on ensuring a surety of supply and those types of things. So these are things that we're just, you know, evaluating and monitoring, but certainly want to have the best options to create the best opportunity for serving our customers.
spk14: Okay. And then the next question, I guess, is a clarification, right? You talked about having the tools in place for production at Mohawk Valley. not a lot of uh every reactors out there with eight inch capacity for silicon carbide deposition um can can you maybe talk about um you know broadly is this something similar to what you did years ago in the led industry um or are these potentially commercially sourced units um and then would you expect this to maybe be a competitive advantage for you over the next number of years um Similar to what it was in the early days of LEDs, but given that you already have a huge advantage in wafers and reactors would be an exciting addition to the technology moat.
spk03: Well, EPI is one of the key advantages we have. We're pretty good at it. And what we're focused on now is really building the entire supply chain for 200 millimeter. And that's a lot of heavy lifting. That's including the furnaces to grow the crystals. We've got a really good jump there. The epi reactors and working through that whole supply chain. And so I'd say, Craig, we're pretty focused on getting all of those bits and pieces nail down because this steepening demand curve is going to require, you know, a pretty sizable uptick in terms of how we have that entire supply chain going. And I think it's really that combination that's going to give us a pretty unique advantage. And, you know, as one of my customers said, they really like the fact that we're on 200 millimeter because obviously there's a good cost advantage on that. but they really loved it because the output per unit of time is substantially higher because it basically takes the same amount of time to run a 200 millimeter wafer than it does a 150 millimeter wafer. And so what that translates to them is if they see demand for their product take off and you're hearing about electric vehicles selling out in I think I heard one of them sold out in something like 25 minutes. They put it online and it sold out in 25 minutes. And they see that this supply chain that we're building out at 200 millimeters is going to be able to react a lot stronger and a lot faster because it'll be roughly 70% more output for the same amount of time in the way for fab. A lot of those things are going to be a good competitive advantage, and we're working really hard to keep it that way.
spk09: The next question in the queue comes from Carl Ackerman of Cowan & Company. Your line is open.
spk02: Yes, thank you. Two questions for me as well, please. Neil or Greg, I guess of the automotive design-ins that you won this quarter, is there a way to distinguish the number of of designs where you are the primary supplier rather than secondary. That may augur well for seeing those POs turn into design wins. And as you address that question, may you also discuss whether there is a growing mix of 800-volt inverter designs in these automotive design wins? And I have a follow-up.
spk03: Yeah, I can't give you the exact number, but I would say the vast majority of the things that are design ends for us we're the primary source. And I don't know exactly what that means, but in fact, I would say off the top of my head I couldn't name too many where we weren't the primary source. So it's going to be the vast majority of that is going to be we're the primary source. So I feel very, very good about that. And then in terms of 800 volts, I think we're seeing two things happen. One is we're seeing a broader adoption of 800 volts as people are seeing the advantages of 800 volts both from a charging time. Hang on one sec. Thank you. Sorry about that. Charging time perspective as well as efficiency at the inverter level. So we're seeing a broader adoption of 800 volts, but we're also seeing, excuse me,
spk04: Yeah, we're just seeing, so let me just jump in here, Carl. So we are seeing a pretty broad adoption at the 800-volt level. You know, I think a lot of customers are telling us they're seeing, you know, a transition from 400, maybe some 400 transition to some of the earlier models that they maybe designed in previously. But anything really new that's coming online is predominantly, you know, 800 volts. Understood.
spk02: I appreciate that. For my follow-up, Does inventory moderate over the next quarter or two as presumably 150-millimeter wafer sales improve as your customers service this step function higher in steel and carbide demand? How should we think about that? Thank you.
spk04: Thanks, Carl. In terms of inventory levels, I would see the days of inventory coming down, but the growth rates are pretty high. So I would expect total working capital, including inventory, to increase. you know, as time goes on, just naturally service a bigger business. But I think we'll get more efficient as we execute that. And I think, by the way, what we'll see there is, you know, the better execution in the FAB that we talked about earlier that we're seeing, improved cycle times and yields and all those things, you know, they'll drop the whip in the factories and we should see some better efficiency. But I think overall, over time, we'll see, you know, working capital pickup. You know, we could see some drain on inventory, you know, between quarters, but I think we're going to continue to need pretty significant inventory balances to service the growth and our customers as we continue to ramp up the business.
spk09: Our next question today comes from Pierre Faragu of New Street Research. Your line is open, Pierre.
spk07: Thanks for taking the question. This is Ben Howard standing in for Pierre. I had a question on China and the competition that you're seeing there. Of course, on one hand, the manufacturing process for silicon carbide is extremely difficult to perfect. But then on the other hand, these Chinese competitors are announcing billions of dollars in investing into silicon carbide. So what I want to ask is what you're seeing from a competitive standpoint, there are Chinese companies coming up for the bids in either the substrate or the device market. And then just secondly, related to that, what do you expect in your 24-26 guidance for revenues from China? Thanks.
spk03: Yeah, thanks for the question. I think I got my voice back as the team in the room here threw about 10 bottles of water at me. But what I would say is, first off, we see this is an enormous growth that's happening in the industry right now. And whenever that happens, it attracts people who want to get into the market. So it is not lost on us that there's going to be a lot of folks who want to get into the silicon carbide business. There are some, and that includes a number of different companies in China. We pay attention to all the announcements that are happening right now and all the investments and so forth, and we don't sit back and relax about that. We are, you know, intensively improving our own operations, lowering costs, driving productivity, and all of that kind of stuff. Now, that being said, this business has some pretty substantial barriers to entry that don't bode well for the normal run of play, if you will, of how China gets into a market. First off, there's not a whole supply or even an industry that supplies silicon carbide growth furnaces in the industry. So you have to build your furnaces yourself. And to do that, you need to know how. So typically, CapEx would be thrown at something like this from a China perspective. And there's really no CapEx to, well, there might be a lot of CapEx to throw at, but there's nothing to buy. So you have to build your own furnaces and so forth to do that. The second thing is that sometimes they throw a lot of op-ex at it and go after hiring tons of people to go put together a plan. The supply of humans that understand in detail how to do silicon carbide is relatively small. There are lots of barriers to entry in this technology. The typical play is just difficult for that to happen. And so we don't take it lightly that we're going to have a lot of competition. We act very paranoid about everything. And the best thing that we can do is continue running faster than anybody else.
spk04: And I think your your second question there was on like percent of revenue and revenue in China. When we think about that, you know, there's a lot of in the shorter term, there's a lot of industrial revenue. A lot of industrial opportunities, you know, come out of Asia. But as we've looked out into the plan over, you know, 24 and 26, there's a lot of that automotive revenue comes on. While we do see a lot of opportunities of both an automotive industrial in the region, we've judged that back a bit, excuse me, judged that back in the plan. And we have about 15% of revenue in that kind of $1.5 billion out in 24, and roughly 10% of revenue out in 26. So we've kind of, you know, pulled that back a little bit, although I think if you looked at the 5.5, it would be a bit larger than that.
spk09: Our next question comes from Edward Snyder of Charter Equity Research. Your line is now open.
spk05: Thanks. Thank you very much. Greg, I'd like to talk about 8-inch for a little bit. I know you're launching on that, and you guys have guided the fact that 8-inch already has higher yields than 6-inch. But given how much thicker those wafers have to be, 8-inch over 6-inch, is the per-millimeter cost of 8-inch today lower than 6-inch? And if not, will you launch production with it as it is, and what kind of – Ed Puckett, efforts or what kind of progress, you think you can make and getting it down or is it just a throughput play because you're going to have like you said 70% greater capacity for the same for the same machines is just a throughput and not that.
spk03: Ed Puckett, Yes, on cost and I have a follow up thanks thanks yeah the cost per millimeter squared is is not at the same level as as 150 millimeter but we obviously are attacking that. you know, pretty much daily here. So we feel real good about where it is and where it can go to. And, you know, obviously that's something we're going to be working on. But even with that, the throughput of the factory, as you mentioned, the yields and so forth, we're going to see an enormous advantage. Maybe, Neil, you can kind of cover a little bit more of the detail there.
spk04: Yeah. So I think, you know, simply speaking, Ed, you know, Normally, when you move to 200 millimeter, the benefits in the FAB, not so much in the substrate. The substrate will cost more. So even while it's at a higher cost per millimeter squared right now and may stay that way for some time, we'll see pretty nice benefits in the FAB just from the improved yield, the cycle times that we've talked about previously, and that more than offsets the cost per millimeter squared. So in that sense, we're in a very unique position because know we do have a fab to feed this into and get those cost benefits and then i think over time it might take several years but over time we'll see that that crossover point come and then um you know that's all built into plans and i think we'll be in good shape to uh continue to drive that cost out as we as we have done on 150 millimeter great and then i mean your performance is excellent your guidance is excellent um but it kind of kind of calls into question your guidance for fiscal year 24 because if we look at you know any kind of reasonable breakdown i think you've got it before
spk05: There's about an even split between devices and materials, a little bit more one way or the other. But if you put any kind of real numbers on that, it looks like North Carolina FAB is already running this. It will run this year in fiscal 22, close to $350 million in revenue. And I think at one point you'd said that maybe the maximum capacity of that is closer to 375. I don't know with MISI there, maybe that goes up. But given that, and we're only in fiscal 22 now, By fiscal 24, if it holds your $1.5 billion guidance and $1 billion of that being devices, either Mohawk doesn't ramp nearly as quick or doesn't sound anywhere close to what's happening, or your guidance is very low relative to where your performances are ready, especially given more devices. So maybe I could walk you through, does North Carolina flatten out? or given the demand you're seeing now, if it keeps growing at this rate, and I know you're not going to change guides at this point, but isn't there a lot of upward pressure on your fiscal 24 targets at this point? And then maybe a second question for Greg, if I could. The performance you're putting up now is really impressive, but most of that, and especially the upside in revenue, is industrial and RF at this point. Am I correct? And given the industrial markets are harder to get their arms around because it's so diversified, I mean, TI said last night that their industrial business was booming last It sounds like maybe this is growing faster than you anticipated. It may take up a lot of the capacity you have planned for Mohawk by the time you get it up into production.
spk03: Yeah, I'll hit the second part of that, and then Neil can go back at the first. We definitely are seeing a strong growth of our industrial business, very nice winds. And the industrial business tends to ramp faster than automotive. It's not dramatically faster, but it's definitely faster. And so over the next couple of years, we'll be ramping that that very broad base of industrial customers that you referenced. The automotive guys that we've won, you know, that's typically a four-year from when you win to when you really start hitting, you know, the higher volume productions. You might have a little bit of, you know, introductory volumes, you know, before that. But, yeah, no, and I feel real good about the traction we've gotten with the industrial business and, you know, the – Our ability to go after that is largely tied to a great relationship we have with Arrow in terms of going after it.
spk04: In terms of the revenue outlook, Ed, I think you're right. First of all, I think our aspirations and what we can do in the Durham VAL are probably higher now as we're seeing some of the performance over the last several months since we put your leadership into the factory. We also expect to see some benefit in the back end. In fact, at the end of the year, we thought a good line of sight to 200 million of revenue in Q4. Now I'd say that's higher, it's probably between 200 and 210, just running because we're running the Durham FAB better and we're seeing Malaysia better. As you translate that out into 2024, you talk about 1.5 billion, a billion of devices, it certainly does put upward pressure on that. I think that's what we're seeing, not just 22, 24, and even 26 in that fashion. So we are looking at all those different things. But I will say in terms of the 24 plan, And we just want to be really careful in terms of how we think about bringing up capacity in Mohawk Valley. And I think that's one of the gating items we have. Certainly, if things go better than we anticipate, there'll be some opportunity there. Clearly, from a demand standpoint, demand's going to be there as you get out in that time frame. And we'll continue to manage the capacity as best we can. But we are seeing improved performance in Durham. That's correct. And I think there's certainly more capacity in Mohawk Valley than what we've got built in in that time frame. But again, we just want to be really careful in terms of how we ramp up that. Our next question comes from Colin Rush of Oppenheimer.
spk09: Colin, your line is open.
spk10: Hey guys, this is Brendan on for Colin. First one for me, given the strong demand environment, can you just speak to maybe how you're adjusting your pricing strategy for silicon carbide?
spk03: Sure, I'll take that. Basically, our journey in this whole business over the last four years has really been about converting the industry from silicon to silicon carbide. That's been through new technology, new product offerings, lower costs, and so forth. The second thing that I would say is the business that we're winning is business that we commit to long-term pricing agreements and things like that. There really has not been any influence at all on pricing in terms of what you might be hearing in the silicon industry. We're sticking to our strategy of converting the industry. We obviously try to sell on value. But in terms of the supply-demand mismatch impact on pricing, that's not an area that we're playing around with.
spk09: Our last question today comes from Brian Lee of Goldman Sachs. Please go ahead.
spk00: Hey, guys. Thanks for squeezing me in. I just had one. I know the power device mix here is growing really fast, but you've consistently kind of called it out as a margin headwind. Devices are growing, it sounds like per Neil's comments, another 100% year on year again into 3Q. So on the margins, when does that narrative change where device, is at or maybe even above corporate average. Maybe give us a sense of timeline there, and then ultimately does it get to above corporate average? Just any color there would be helpful. I don't have any follow-ups. Thanks.
spk04: Thanks, Brian. And I think it's pretty consistent with what we've said before, and I think the big differentiator is going to be running device products, power device products in Mohawk Valley. And I think when you start changing the footprint that dramatically. Now, clearly, we've seen some benefit out of Durham. I think we'll continue to see benefits out of the FAB. I think the team's making really good progress. So I think some of it may dissipate over time. But really, the game changer is going to be moving to Mohawk Valley, where you get the automated factory, you get the 200 millimeter wafer, and you get a pretty substantial cost advantage. So I think it'll take some time before you see that benefit. And then as you look out over the longer term period, I don't see there from a device products versus material products type of mix. I don't see that being all that much different as you get out into kind of 24 and 26.
spk09: Thank you. I'll now turn back to the management team for closing remarks.
spk03: Well, thanks, everybody, for participating in the call today and your interest in Wolfspeed. And we look forward to updating you in our next earnings call. Thank you.
spk09: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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