Wolfspeed, Inc.

Hello and welcome to the Wolf Speed Incorporated first quarter fiscal year 2023 earnings call. My name is Harry and I'll be your coordinator today. To ask a question during the Q&A, please press star 501 on your telephone keypad. It is now my pleasure to hand you over to Greg Lowe, CEO, to begin. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to Wolf Speed's first quarter fiscal 2023 conference call. Today, Wolfspeed CEO Greg Lowe and Wolfspeed CFO Neil Reynolds will report on the results for the first quarter of fiscal year 2023. 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. 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.

Thanks, Tyler, and good afternoon, everyone. The growth and demand for our power device product line is greatly outpacing anything we would have anticipated only a year ago. At our last Investor Day, we said Wolfspeed was well-positioned to capitalize on the increasing demand for EVs, industrial, and 5G. We described 2022 and 2023 as an inflection point in the adoption of silicon carbide with accelerated growth beginning in 2024. Clearly, adoption is well ahead of schedule, creating an even greater demand supply mismatch than we had discussed previously. Fiscal Q1 revenue grew 54% year over year, our second straight quarter of greater than 50% top line growth when compared to the prior year period. Our device opportunity pipeline has increased to more than $40 billion, more than double the $18 billion that we talked about at our last investor day. And our sales team continues to convert this pipeline at an impressive clip and posted another record quarter in Q1 with $3.5 billion of design-ins. Our last four consecutive quarters of design-in, each of which was a record at the time, total approximately $9.3 billion, which is 3.5 times higher than the prior period. We continue to see strong demand for power devices, with Q1 revenue up more than 120% year on year. The team in Durham has done an absolute best to ramp production and expand capacity, but running a manual fab has its limitations, and we are seeing lead times extend for tools and replacement parts for fab equipment. which is impacting our ability to align with customer needs. And lastly, as part of an ongoing efforts to expand supply of silicon carbide, the team was successful in increasing the length of bulls through our continuous improvement efforts, which will help drive more wafers going forward to meet the immense demand for silicon carbide substrates. While this will help alleviate some supply constraints, we're still refining some of our backend processes for the longer bulls, And this will impact yield for the next couple of quarters. We're entering a period of significant expansion and are experiencing the associated growing pains. If you think about where we've come from in the last five years, from a $200 million semiconductor business back in 2017 to a global semiconductor powerhouse that is expected to generate over a billion dollars of revenue in fiscal 2023, on the way to approximately $2.8 billion in fiscal 2026. It speaks to the massive amount of change we are driving across the business in a relatively short period of time. Now I'd like to turn it over to Neil to go over the quarterly financials, the second quarter outlook, and provide more details about our updated expectations.

Thanks, Greg, and good afternoon, everyone. I'll start by providing an overview of the first quarter. We generated revenue of $241.3 million in the first fiscal quarter of 2023, which represents a 6% sequential improvement compared to the $228 million in the fiscal fourth quarter of 2022, and growth of 54% year-over-year, driven largely by growth in all product lines and the market tailwinds Greg referenced earlier. Underpinning the revenue growth is our design and portfolio. which along with the additional $3.5 billion this quarter now sits at $14.5 billion cumulatively. Approximately 43% of our design-ins have converted into design-wins, representing more than 1,600 projects. Non-GAAP gross margin in the first quarter was 35.6% compared to 36.5% last quarter and 33.5% in the prior year period, representing a 210 basis point improvement year over year. Our gross margin in the quarter was impacted by issues related to our wafer manufacturing process to accommodate longer bull sizes. Related to the Durham fabs, we believe we can continue to improve productivity and performance, but we are reaching our capacity and capability limits, and future significant step-ups in revenue and gross margin will come primarily from the Mohawk Valley fab. However, the Durham wafer fabs will likely remain fully utilized for the foreseeable future as customer demand remains strong. In addition, as relates to RF, we were unable to transition from 100 millimeter to 150 millimeter wafer sizes due to the overwhelming demand for our product, which has kept our factories full, leaving us essentially no factory downtime to make the transition. Given the strong demand for our products, we don't anticipate making this transition for at least several years. As such, RF device products currently represent an approximately 300 basis point drag to our overall company gross margins. It's important to note that although RF products represent approximately 20% of our business today, they will represent only approximately 10% of our business over the long-range plan period. Therefore, we expect this impact to dissipate over time, but it will dampen gross margins in earlier periods of our long-range plan. As a result of these impacts to our gross margins, we generated adjusted earnings per share of negative 4 cents in the fiscal first quarter compared to negative 2 cents a quarter ago and negative 21 cents in the same period last year. Now, before I discuss our guidance, let me provide a quick overview of our balance sheet position. We ended the quarter with approximately $1.2 billion of cash and liquidity on our balance sheet to support our growth plans. DSO was 50 days, while inventory days on hand was 135 days, which is two days lower than Q4. Free cash flow during the quarter was negative 79 million, comprised of negative 13 million of operating cash flow and 66 million of capital expenditures. During the quarter, we incurred startup costs, primarily related to Mohawk Valley, totaling approximately 38 million, which is in line with our expectations we outlined from last quarter. We expect an additional 34 million of startup and underutilization costs in the second quarter. We included a non-GAAP adjustment for these startup costs in the reconciliation table and our earnings release. Now, moving on to our fiscal second quarter outlook, we are targeting revenue in the range of 215 million to 235 million. We continue to see increasing demand for our products, both in the short and long term, but our revenue outlook continues to be supply and capacity driven. From a supply perspective, we expect our revenue to be impacted by lower yields in our materials business, as previously mentioned, and we're also seeing longer lead times on spare parts reducing tool availability and output in our Durham fab. We believe we are making steady progress in improving the materials yields, and based on current lead times, we expect to see output recover by early fiscal Q3. Our Q2 non-GAAP gross margin is expected to be in the range of 33% to 35%. We expect gross margin will be similarly impacted by the materials substrate yields previously mentioned. driving performance down approximately 160 basis points quarter over quarter. Therefore, we believe our revenue and gross margin growth trajectory to be delayed one to two quarters as we resolve the yield and supply challenges we are currently experiencing. We do, however, expect revenue and gross margin expansion to resume in the back half of the fiscal year and anticipate achieving the $1 billion revenue quarterly run rate early in the back half of the fiscal year. We expect non-GAAP operating expenses of approximately $97 million for the second quarter of fiscal year 2023, and we expect Q2 non-GAAP operating loss to be between $26 million and $15 million. We believe that we will realize approximately $5 million of non-GAAP tax benefits as a result, expect Q2 non-GAAP net loss to be between $20 million and $10 million, or a loss of $0.16 to $0.08 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, product transformation and transaction costs, factory startup and underutilization costs, and other items outlined in a press release today. As always, our Q2 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. During the quarter, we also announced plans to construct the world's largest materials factory, Siler City, North Carolina. And we are also evaluating further expansion of our device capacity. The construction of this new North Carolina facility will require significant investment from our end. We believe that it's proven at this time to increase our CapEx guidance from 550 million last quarter to approximately 1 billion for the fiscal year 2023 to reflect the increased investment and support the higher revenue growth we outlined on last quarter's earnings call. We continue to explore multiple avenues to finance these capital investments and are extremely encouraged by the conversations we have had to date. Our shareholders are top of mind in pursuing this funding, so we will explore all options with a goal of minimizing both our cost of capital and dilution. As a reminder, we have many funding paths at our disposal, most of which have little or no dilution impact. This includes government incentives, customer capacity upfront payments, and private or project debt-based financing, as well as going to the public markets as we have done previously. We are currently focused on the less diluted financing options, and we will continue to remain flexible as we manage through variation in the capital markets. What is clear is that demand for our product continues to be strong both in the short and long term, and we will continue to invest in capacity to address this multi-decade growth opportunity. With that, I'll pass it back to Greg.

Thanks, Neil. We are very encouraged with the market trends and with our progress to capture a sizable share of the opportunities in our pipeline. One of the things underpinning our competence is the breadth of our total design and portfolio. The electric vehicle has been and will continue to be the driving force behind the broad adoption of silicon carbide. As industry supply scales and costs decline, this is also opening up the door for other applications in the industrial and energy sectors. Just to get a sense of our Q1 design and profile, approximately 90% was tied to automotive, whereas the remaining 10% was for industrial and energy and RF applications. The Q1 design end total is a 9x increase for automotive year over year, and industrial and energy and RF increased more than 95% from a year ago. This quarter's design ends include an interesting range of applications, including weather radar, wireless EV bus charging, a welding machine, and a motor drive application. To service this rapid growth in demand for silicon carbide, During the quarter, we announced our Schuyler City materials factory, which will be the world's largest silicon carbide factory when it opens up in 2024. The substates produced there will help drive down the cost of devices and expand silicon carbide adoption across even more markets. Our new materials factory, in combination with our plan to build out both the remainder of our Mohawk Valley factory and yet to be announced second FAB will support this goal and should help us achieve significant scale. And speaking of Mohawk Valley, the FAB continues to make great strides in its ramp. During the quarter, we successfully ran full flow with lots in the FAB. And not only have we been able to run these lots, but we are very encouraged by the yields we're seeing at such an early stage. We are still on track to deliver devices for Mohawk Valley in the second half of fiscal 2023 and plan to share an update on our progress at our investor day on Monday. The multi-decade opportunity in power devices requires far greater capacity investment and as soon as possible. We will continue to address near-term puts and takes in Durham and RF as we continue to bolster our leadership position in Silicon Carbide. We will need to raise a significant amount of capital, which will go towards investments in the necessary infrastructure to support growth. As a result, free cash flow generation will be pushed out a few years. Margin progression will likely be muted in the near term due to the Durham and RF dynamics mentioned earlier. However, we continue to believe Mohawk Valley will help improve margin trajectory as it comes online. This fiscal year, demand for our products continues to outstrip supply, and our revenue will be gated by the speed at which we can increase output. That being said, we still expect top-line year-over-year growth north of 30%. When I started at Wolfspeed five years ago, a key theme of ours was refocusing the business. I am proud of the progress the team has made in that regard, but there is more work to be done. There will be challenges driven by the unprecedented demand in silicon carbide, But overall, we are extremely encouraged by the dynamics that underpin these challenges. I look forward to discussing these topics in more detail during our Investor Day on October 31st at the New York Stock Exchange. We'll give further update on our strategic initiatives and long-term financial model. If you have not registered for the Investor Day, please do so by this Friday by contacting our investor relations team. And now I'll turn it over to the operator for questions.

thank you to ask a question please press star followed by one on your telephone keypad now and in the interest of time please limit yourself to one initial question and one follow-up our first question of the day will come from harsh kumar piper sandler harsh your line is now open please proceed yeah hey thanks guys um so question um on on the near term you know greg when i look at your business all the design and design when trends are pointing upward

But I'm looking at the December quarter guidance, which is sequentially down. I know you mentioned a handful of things such as spare parts availability, also the longer booths. I was curious, is this what is impacting your ability to be able to grow in the December quarter? And then just, or is there something else that's going on that's worth noting and then how to follow up?

Thanks for the question, Harv. Yeah, it is exactly that. Basically, it's taller bulls and some yield issues we have processing them at the back end and the lead time on spare parts of older fat equipment inside the factory. Basically, it's those two issues that are limiting our output. Our near-term demand from customers is up, as is our longer-term demand. In fact, our unfulfilled demand I might mention, though, that taller pools are a really good thing. And we've done a really good job of refining the back end of our process here. So as we come out of that and we have yields back to where we believe we can get them to be, these taller pools are going to be a substantially good thing for us.

Got it, Greg. And then for my follow-up, Greg, I wanted to ask about the gross margin, a similar sort of question. Curious if you could sort of like split the gross margin difference on the downtick between, hey, is this a bigger problem that's coming from the longer bulls or is this a spare parts issue? And also maybe help us think about some color on when these issues might get resolved, Greg, if possible.

Hey, Harsh, it's Neil. I'll take a shot at that. I think if you look both at revenue and gross margin, the issues are really the same, the same two things that we're seeing. Um, you know, the output, uh, related to the, uh, the policy rules and challenges based on the yields. Um, we'll see that impact both revenue and gross margin. Although I'll say that I think we've hit the bottom there on the yield, the yield issue. We're starting to work our way up. So we're kind of flushing through some of that higher cost inventory as we start to manage through this. I'd say the same thing in terms of the, uh, the Durham cap reduction. Um, we have some, you know, tool availability challenges related to, you know, shortage of spare parts and older equipment. We've been impacted, you know, by some supply challenges, clearly. And that's something we've really avoided, you know, largely in the last couple of years. So we've been bit by bit a little bit here. That'll drive our device revenue down quarter over quarter in the margins as well. But again, once we see these current times come in, we'll start seeing production kind of pick up again in the fab. So I think on both cases, both revenue and margin are being impacted by the same two issues. I see these as being temporary in nature. It's kind of a one-quarter gift. in both revenue and gross margin. I mean, see ourselves as returning to stronger revenue margin growth in 3Q and beyond, possibly even being at that kind of $1 billion annualized kind of revenue run rate by 3Q and really back on trajectory by 4Q. So you can think of these kind of manufacturing and supply issues just driving a one to two quarter impact on the revenue and margin trajectory.

Appreciate the color, guys. Thank you.

Thank you.

Thank you. And our next question is from the line of Brian Lee of Goldman Sachs. Brian, your line is now open.

Hey, guys. Good afternoon. Thanks for taking the questions. And maybe just to follow up on Harsh's question, you sort of alluded to it a little bit, I think, Neil. If we were trying to quantify the impact on the revenue outlook here for December, obviously, Greg is saying your demand and unmet demand is higher. But how much, if you could quantify, I know it's a tough question, is coming from yield and how much is coming from the supply challenges? And if I take your comments that you're going to be at a quarter billion dollar run rate by fiscal Q3, does that infer you're like $25 million off of the level you would have

guided to had you not had these two issues just trying to you know unpack what what the moving pieces are and how much they're worth and then i had a follow-up yeah it's hard to say exactly brian but i think you're heading kind of in the you know in the right direction you know so to speak you know i think from a uh yield perspective on the taller bulls like i said we hit bottom there we're starting to recover we'll actually see substrate revenue start to increase going into um you know going into the into this quarter just not at the trajectory we had previously anticipated And then from a FAB perspective, it's really a function of getting these tools up and running and the lead times we have on spare apartment getting them running. We have the capacity, we have the tools, we need to run the revenue through them and then push it through the back end where we've got capacity as well. So it really is, you know, I think both on the revenue and margin perspective, you know, these two issues are kind of slowing us down. And I think we'll come back up to that higher revenue trajectory kind of reference as we get to the back half of the year.

Okay, that's helpful. And then, you know, not to focus too much on the short term, but I think this does, you know, call into question kind of some of the cadences we're all modeling here through the next year to two. When we think about gross margins, you made a comment, you know, you're going to see some recovery into fiscal Q3 back to where I think you were trending before the yield issue. So, you know, 35, maybe 36% non-gap, that's where you were before this, you know, temporary downtick. Is that where we're headed back to in the back half? Because I think the original trajectory was might have called for something in the higher 30s, maybe even reaching close to 40% exiting this fiscal year. But what trajectory are we kind of getting back to if that's the way we should be thinking about this being a one or two quarter phenomenon before you get to higher margins in the back half?

Yeah, obviously we're going to be lower this quarter, but I do see us starting to expand margin again as we get back into Q3. It's a one to two quarter impact, Brian. So you kind of think of last quarter we had some of that impact start. We're seeing more of it flush through. you're in Q2, you'll probably see some impact or maybe less impact in Q3 as we start to expand again and then kind of back on track, you know, as you get to kind of that Q4 period.

All right. I'll take the rest offline. Thank you guys.

Sure. Thank you. And our next question is from the line of Jed Dorsheimer of William Blair. Jed, your line is now open.

Hey, thanks. Uh, thanks for taking my question. Good to be back. So, uh, I guess first question, when you talk about elongating or lengthening the height of the pool, I'm not sure how well understood, but if you are going through a process change and have higher confidence in your recipe and elongate the duration of growth, while near term you're going to see a yield hit, that should result in less operating and maintenance because you're not going to be cleaning out that oven or furnace, to be more precise, as many times during the year. So I'm just wondering, you know, in the near term, as you see the hit on materials, I guess, would you mind unpacking sort of the benefit that you see, too, as to what's prompting you to make this move at the materials level, and then I have a follow-up.

Okay, I'll take that. We obviously have a continuous process improvement program across all of our different businesses, and this is part of that. We are very excited about the quality of the bulls and the heights of the bulls that we're now getting out of this process. So we feel very, very good about that. And what we're really talking about is handling bulls in the back end of the flow that are sizably larger than we historically have. So as Neil said, we've already bottomed out, we've got really good improvements in place, and we'll get back to where we need to be within a couple of quarters here. So I think that's moving all in the right direction.

by crystal run and that will increase the output and decrease the cost so these are you know as we as we um you know improve the back end of the flow here uh this is going to be a real good thing got it uh thank you that that's helpful and what i thought so um i guess just uh is my follow-up question um with respect to mohawk valley um I was wondering if you would update, if you don't mind, where you're at. I think the milestone was sort of running customer silicon. And, you know, where are you at with Mohawk Valley to maybe help with confidence in terms of, you know, getting back to that or getting to that run rate that you talked about?

Yeah, so, Jed, we've had a number of full-flow wafer lots go through the fab all year. that have been through the FAB have yielded good electrical dye or good chips. And we're very pleased with the yield numbers that we're seeing right now. That's all looking, I would say, as good as it can get, so to speak. So it's really looking pretty good. And in fact, we have so much confidence that we're actually running material right now that is meant to qualify the FAB. ahead of any schedule that that you would might imagine so we're really you know excited about that um you know once we qualify that customers we need to qualify the parts typically that's something that most semiconductor companies have to kind of you know grab the customers and kind of pull them along with you on that i think with the supply demand mismatch we have a lot more customers that are volunteering to be sort of the first in the back different than normal. There would be probably a lot more of them jumping in and qualifying faster than normal. All that says is that we should be shipping revenue out of that FAB by the end of this fiscal year.

Great. Thank you. And our next question is from the line of Samik Chatterjee of J.P. Morgan. Samik, your line is now open. Please proceed.

Yeah, thank you. Thanks for taking my questions. I guess if I could just ask a clarification on the comments relative to Mohawk ramp, the supply issues or the issues around parts, et cetera, that you're referencing today. Just wanted to confirm here that is that impacting your ramp on Mohawk as well, or is that an issue with sort of old parts, old equipment, and not really something that carries over to how you're ramping Mohawk And related to the same issue, Neil, you are sort of giving some guidance about when you see gross margin expand again. Does that then include your thinking in terms of revenue and gross margin impact from Mohawk in the back half of this year, the impact as Mohawk comes into the non-GAAP number? And then I have a quick follow-up. Thank you.

Thank you. I'll take the beginning part of that, and Neil can handle the back end of it. The spare parts issue is really related to older fab equipment in our Durham and our North Carolina, which that's not anything to do with Mohawk Valley. Recall, we began building Mohawk Valley in March of 2020. We started installing equipment in 2021. We did a lot of pre-ordering of long lead time type equipment. And a lot of this was done before other semiconductor companies decided to start building wafers out. So we've actually done a pretty good job of getting out ahead of the long lead time items in Mohawk Valley. And then finally, I would just add that those obviously are brand new machines, modern equipment. We're not looking for spare parts for those machines. And the availability of those in any case would be likely a lot better than some machine that we've had in our factory for 20 years. So bottom line is no impact on that at all in Mohawk Valley. And then, Neil, if you can get the back end of that on margin.

Yeah, just from a margin perspective, actually, I think, as Greg kind of laid out, I think we're in good shape from a supply perspective in Mohawk Valley. And the yields that we've seen off these initial lives are really positive. It's something we're really enthused about. So I think that just gives us more confidence about the rent. TAB, Mark McIntyre:" And, as I said, many times, the margin trajectory to kind of get back out of this year and then eventually into their 24 beyond can be largely based on mohawk valley. TAB, Mark McIntyre:" And the initial signs of what's coming out of that are very, very positive so. TAB, Mark McIntyre:" it'll be a little bit of a timing issue we'll see what happens in terms of qualifications as Greg talked about already starting material for that. TAB, Mark McIntyre:" So let's see what the timing looks like there, but I think we're kind of all systems go and. And things look very positive from, you know, bringing up Mohawk Valley in the back half of the year from a revenue perspective, and that will certainly help underpin some market expansion as well.

Got it. And a quick follow-up on the RF issue that you're highlighting, creative to not being able to change over to 150 mm just because of high demand that you're seeing. I'm just wondering, like, was that something that was sort of known for, like you had more sort of insight into a few quarters ago and sort of, decided that this was the quarter where you were going to switch over? Like, what was the exact sort of timing, timelines that it played out in? Because I would have assumed if you were going to switch over, you would have sort of buffered both in terms of margins and revenue in the quarter itself in terms of that change over time. But maybe I'm missing something there.

I think that's largely correct. I think that a year ago we were, you know, our investor day, this is something that was in our plans, and I think that the demand just continues to strengthen and strengthen. It's leaving our factories, you know, very, very full. And from that perspective, kind of with this increasing demand, it just really left us no option but to kind of delay that transition from 100 millimeter to 150 millimeter in the RF product because there really hasn't been any downtime. So the way I would think about it over the last six to eight months is we've been kind of incrementally looking for opportunities to kind of make the transition, but the demand has gotten to such a point that we haven't really been able to take the downtime to kind of go ahead and make that transition. What that means, you know, from a margin transition standpoint, as I mentioned on the prepared remarks, is that's about a 300, you know, basis point drag on margins, kind of if you think about getting to that kind of 23, 24 timeframe. And we'll just kind of work with that as we go. Now, this is all, again, really just driven by, you know, the demand that we're seeing. So as you look out into the longer-term goals in 26 and beyond, as I mentioned Mohawk Valley, I think it's got a 200-millimeter substrate The power device cost structure still looks very good, but we just don't have the downtime to make a transition on the RF side as we're sitting here today.

Great. Thank you. Our next question is from the line of Colin Roush of Oppenheimer. Colin, your line is now open.

Thanks so much. Can you talk a little bit about the composition of these design-ins? How much of this is coming from medium and heavy duty and some of the higher voltage applications that may be out there?

So this past quarter, 90% of the design-ins came from automotive. And we're seeing a tremendous positive adoption of silicon carbide in electric vehicles and a significantly steepening adoption of electric vehicles in the overall automotive market. And those two things are driving it up and to the right. I think the car manufacturers are well aware that range is a really big deal for customers. And the rate at which you can refuel, so to speak, or recharge your car is a big deal. Both of those drive higher voltages, which make the impact of using silicon carbide over silicon much more pronounced in a positive way. So I think all of those things are driving that adoption. Outside of that, we have really you know, a whole smattering of different designings across, you know, the industrial and the RF base applications. And, you know, we talked a little bit about what those ranges are. And then finally, as Neil had mentioned, you know, more of a 40% of our design ends have converted to a design win. And that means customers are beginning to ramp in production. That is in, you know, That combined with the amount of design ends we've had is really kind of unprecedented, at least I've never seen anything like it. You know, we've done, you know, $3.5 billion of designs this quarter, 2.6 last quarter, 1.6 and 1.6 of two quarters before. This $9.3 billion of designs we have is unprecedented and it's just driving an enormous increase in our revenue near term and certainly at the revenue outlook.

Okay. And then just thinking about the cadence of potential debt financing, how mature is that process for you guys now from a project level in terms of bringing some of that capital in to support this CapEx build up for the balance of the year? Because it's a pretty healthy number that you guys are looking at spending.

So just from a financing perspective, just let me just remind you that we've been far ahead of this. We've got $1.2 billion of cash on the balance sheet. And in addition, in line with the capacity plan that we laid out a year ago at Investor Day, we've seen our kind of capex step down over the last couple of quarters. We saw it was $56 million this quarter and just $55 million a quarter before. Now, I do think going forward, we'll start to see a step up in the capital expenditures, kind of in line with what we're talking about. I think about that circuit pickup in the back half of the year, so we have a little bit of time to go over this. So I feel that we do need to go out and do some funding to support that. Dilution as it relates to that financing is absolutely on top of our mind. And there's really four buckets that we're looking at in terms of executing that financing, most of which are non-dilutive. The first is government incentives. We've been very close to both the government of the United States and outside of the US, and we will be in a position to benefit significantly from incentives both in our wafer cap expansions as well as the investment in the materials factory in North Carolina. We've also got $300 million of incentives remaining with our partnership with the state of New York. We're also working closely with customers on upfront payments for capacity, which is obviously non-diluted. And then we've also got private financing or project financing. And lastly, moving on to public markets like we've done before. The lower dilution options on that list is where we are currently focused, just given that step up in CapEx in the back half of the year. So we will want to get something done in advance of some of those bigger spends that we're talking about and the investments that we're making. And that's what we're focused on right now. So we'll lay this out in more detail as we get into our update in New York next week.

Thank you. Our next question is from the line of Vivek Iyer of Bank of America. Vivek, please proceed.

Hi, this is Blake Freeman. I'm from Vivek. Thanks for taking my question. Just want to focus on the materials business quickly. I know you've mentioned historically about holding 60% market share in that business and not to get ahead of the analyst day, but I was just curious how feasible it will be to maintain this level of share as we see new market entrance and also an increasing number of vendors internally source capacity moving forward.

Yeah, I think that, you know, basically the silicon carbide market is growing very, very, very rapidly. And I think the supply is going to be chasing demand probably through the end of this decade. We're just going to be tough to keep up with it. That obviously attracts people to the market. And certainly all of our silicon carbide materials customers I don't know all of them, but most of them have plans to try to develop their own substrates and so forth. And I think that's a smart idea, a good plan, and something that I would do if I was in their shoes. I think they'll probably find it a little bit more challenging than I would expect. I think they expect. But I think that's basically how we're thinking about it. And we're thinking that they're going to invest in they set out to do. So that being said, we've got a modest thought process in terms of what we're going to do from a market share standpoint, basically hold share of that external market. And then some of the internal demand would be

Helpful. Thank you. And then just as a follow up as well, I know you mentioned that the rapidly growing demand in silicon carbide. But also, I know one of your competitors out there is also seeing about a billion dollars in committed silicon carbide revenue in 2023. So just on the feasibility of the silicon carbide market, you know, even next year, having multiple one billion dollar vendors. Just your thoughts on that would be helpful. Thanks.

I think the demand is clearly outstripping supply, and I think to the extent that we can bring on, collectively, the industry can bring on more supply, it's going to help things. The silicon semiconductor industry is clearly looking like it's going to see a cyclical downturn here. Silicon carbide has some secular trends that are just going to overpower that, I think, And that's the transition to EVs, the transition to silicon carbide and clean energy, electric vehicles, you know, and so forth. So I think the demand for the industry is going to out-supply through the end of this decade. And that's inclusive of us, you know, putting into action the world's largest silicon carbide factory with only 200 millimeters of silicon carbide factory and installing a expansion in Siler City with that capacity coming on in 2024. So even with all of those multi-billion dollar investments, I think the supply is going to be chasing demand through the end of the day.

Thank you. Our next question is from the line of Gary Mobley of Wells Fargo. Gary, over to you.

Hey, Guy. Thanks for taking my question. On this issue relating to some challenges on the back end of handling some of these longer bowls. I'm curious to know if this may foreshadow maybe some transitional issues as you move to 200 millimeter and related to this issue, is this for the supply of captive or immersion materials?

No, I don't see it related to that at all. In fact, in some respects, any process improvements that we make on one So I think it's a good thing. Having taller crystals means we're going to have a lower cost. And it's just a matter of how you handle it in the back end. And as Neil mentioned, we've gotten already a bunch of improvements in place. We're finding out on the yield issue that we talked about. And we're heading back up north on there. So I think this is the proverbial good problem. We're super excited about the quality of these crystals and the way that we can deliver them and so forth. It's just a matter of fine-tuning the back end of the process.

In relating to captive versus merchant, the impact?

We have always said that there is going to be captive suppliers that are developing their and we assume they're going to be successful at doing that. So that is part of our plan. Okay.

Thank you very much. And our next question is from the line of Edward Snyder of Charter Equity. Edward, your line is open.

Thank you very much. Where to start here? Greg, so you said you're looking for revenue from Mohawk Valley by the end of this year. First of all, is that production or are you talking about revenue for sample parts? Because if we go back to a year ago when we were in this 2Q last year and we went through a very detailed discussion of what Mohawk. It sounds like you're behind by about six months. Our model suggests and the things we've talked about with you guys was that, you know, you'd start internal fab qual probably last year and then customer qualifications, you know, in – in March or June, and then we'd start seeing initial production now, and then volume production second half of, or the beginning of 23. And we've talked, like, after last quarter, too, about, it sounds like you guys were a little bit delayed then, but now it sounds like the delays may have been a little bit more acute. So, first of all, can you mark the market, put a flag on the ground now and tell us specifically What do you expect for Mohawk Valley in terms of, not just revenue, but when do you start expecting to reach volume, ramp to volume production? When do you expect to be done with customer qualifications? I know you get some revenue for that. So maybe we can reset the expectations for the ramp of Mohawk Valley. And I understand it's a complicated endeavor, so things, you know, these areas shook out. And then if I could, maybe, Neil, you're saying does this re-interview hit the gross margins due to RF, which is curious to me. Is this... I apologize if I missed it, but were you raising gross margins overall because of the improvements in wafer diameter in RTP? Or is something occurred to reduce the margins you were already producing in there? Because it seems like a real curious deviation from what we had. And believe it or not, I have a follow-up. Thanks.

Yeah, in terms of Mohawk Valley, we've got, you know, a whole bunch of lots that have gone through. All the Mossad lots that have gone through are performing very well. We're pretty excited about where we're at. And we now have material in the fab that we intend to run through our qualification. And so that material is in the fab. It'll come out. We'll do qualification, et cetera. There's going to be a lot of kind of sort of simultaneous activity that happens with customers in terms of doing their quality. We've had a lot of outreach from a number of different customers in terms of, as I mentioned, kind of them wanting to be first in line because there's only so much we can get out of Durham in the near term. And so we're anticipating not only kind of pre-production sample kind of stuff, we're expecting to have initial production out of that path um by the end of this fiscal uh year which is uh the june quarter so you know we're expecting to get um you know revenue out of that in terms of the ramp we would begin you know ramping into the obviously beyond that we'd see some you know increasing revenue maybe you know you can just kind of cover a bit of the ramp schedule yeah so from a ramp perspective um you know right now we're going to be obviously we've got parks coming out of there right now

that we're going to use for you know reliability and qualification testing and to get to the back half of the year we'll start seeing what the qualification schedule looks like we'll hand those parts off pretty much in parallel with customers there's such strong demand for those types of parts and then we'll start selling selling volume you know production in that time frame so it's going to be a little bit um variable because it will depend on the timing and how the qualifications go kind of in line with what we said previously. So I think that's just going to be a matter of, you know, timing with customers and running qualification lines and schedules and having customers do their thing as well. But right now, the yields we're seeing, the initial loss of the cap, I think we're in pretty shape.

Any RF margins?

Yeah, so on RF, I have a second question there. So on RF, if you go back even to last year and to this year, we've been running that business and those products, the RF product, 100 millimeter substrates. So our plan was during fiscal year 2023 was to make the transition for a large part of the business to 150 millimeter substrates. And that obviously was going to help us with the margin, not just the more in 24 than 23. So if you look at it today, you know, the DERM fabs, we've talked about it many times, have a higher cost footprint. And we're running 100 millimeter wafers on a higher cost footprint. So the products in RF are, you know, somewhat more in challenge right now. And this was going to be a solution to help us kind of drive up the margin curve on RF. But given the high level of demand that we're seeing, we're just not going to be able to make that transition this year. It's not going to have a downtime in the fabs given the amount of kind of heavy demand that So the way to think about it is we moved into 24, really wasn't in our forecast for 23 as it relates to kind of margin expansion. But as you look into 24, we did anticipate seeing benefit from 150 millimeter wafers in RF, but we're no longer going to see that. So that's what's driving us, you know, say, you know, a 300 basis point or so impact as you get kind of into 24. And if you're to look at that cost today or the margin of those products today versus the rest of the business, it's obviously causing a drag as well. So that's really what the plan was. We've been kind of incrementally pushing this out, but we really still have visibility right now to having the capacity to make the transition.

Okay, and then my follow-up, if I could, is the CapEx increased from $5.50 to $1 billion. Is that entirely due to the new materials, Fab, or is part of that the acceleration of Mohawk? And then, you know, we're running into, obviously, a recession. You've seen the reports, guys. Things are turning down pretty quick. Are you seeing any change in customer behavior with regards to orders or forecasts, especially industrial?

Yeah, I can definitely take the second one. The only change we're seeing is up and to the right. It's pulling in and increasing.

Yeah, and I think that the CAPEX outlook has increased almost entirely related to the new materials facility that we announced. A lot of the expansion for Mohawk Valley to allow the additional amount was already included when we took the CAPEX to 515. As I said previously, the 550 did not include either the materials facility or a new wafer bath, and the change here is the new materials facility.

Thank you. Our next question is from the line of Matt Ramsey of Cowen. Matt, your line is now open. Please proceed.

Thank you very much. Good afternoon, guys. I appreciate you taking my question. Greg, I understand the benefits of going to taller bulls, both on 150 and 200, and what that can mean in the long term. I guess what I'm struggling with in the near term is you would have thought that the rest of your supply chain would have been making the transition in anticipation of those taller bulls. at the same time and that you wouldn't have made the decision to transition to the taller bulls without the back end being ready for it to impact the revenue. So I'm just trying to understand everything seems like it should have transitioned to anticipate those taller bulls sort of in concert with each other. And now it seems like parts of the infrastructure aren't quite ready to handle it and it's causing delays. So if you could just kind of walk through the different pieces of handling the taller bulls and which ones might have tripped up or not been ready for that transition as you anticipated. Thanks.

Thanks for the question, Matt. So we obviously aren't going to get into a lot of detail on our crystal growth and materials operation. You know, a lot of that is intellectual property and trade secret, you know, et cetera. What I would say is that taller pools, you know, cause some challenges in the back end. in the back end processing of these of these crystals and the team jumped all over it got to the bottom of what the challenges were and what we needed to fix and are already on the recovery plan to get back to where we need to be so we're pretty we're pretty satisfied with that as a um you know it's kind of a we went through this dip and came out of it of course it would have been great if we didn't have this step But silicon carbide, it's a tough piece. And ramping these things is not for the faint of heart. And I think the good news is that we've got a substantial amount of experienced people around. When we have problems, we can haul them all together and look at that problem and fix it relatively quickly. We're talking about a couple of quarter bump here. And we already see ourselves on the upward tick. So I think this is part of the way it is with silicon carbide. It's a tricky technology to manage and certainly to scale is also not easy to do. But I think having a substantial amount of experienced people in our company that have been through all the different trials and tribulations of silicon carbide help us handle this.

no no thanks greg i i appreciate the perspective there i i guess um as my follow-up neil i know there's a lot of folks and maybe this is in front running monday a bit but there's a lot of folks asking questions and and you adjusted here a couple of times about raising funds versus the increased capex and and your focus on on minimizing dilution but uh it's hard to really know what you're going to get from different governments both europe u.s chips act north carolina new york etc and it sounds like you're going to fund the remainder with equity potentially. What I'd be interested in is any line of sight visibility to customer co-funding or customer investments alongside of you guys, what the magnitudes of that look like, how many engagements you might have. If we're trying to get to the remainder that might be funded with equity, that piece that might be done with customers that might Also, I give insight to their commitments to your programs might be helpful if you have any color there. Thanks very much, guys.

I like that. I think it's basically what I've talked about before. The big kind of wild card here is that we don't know exactly what the government incentives are going to look like. But I can tell you the majority of what we're looking at right now, I'd say the significant majority we're looking at right now, and all of what we're focused on, I would say here in the shorter term, is lower or not eluded in terms of what we're focusing on, in terms of what we want to do and what we want to go target. And that's really where our efforts are focused right now. We've got the four buckets I've talked about, the government incentives, the upfront payments from customers, going to go for private financing, and then finally, lastly, go to the public markets. And I would think of it in that order in terms of how we're going to go think about and approach this. So I think we've got a lot of leverage. The initial discussions that we've had have been very, very positive. But there is some variability in there related to several of the items because not all the regulations on government incentives, for instance, have been an issue. So it's hard to give an exact amount of what we're going to do. What I can tell you is we are focused on the lower or non-dilutive elements of that plan right now, certainly as we think about a round of funding in advance of some of these higher step-ups in CapEx to support this expansion for a pretty significant growth pickup that we've seen here particularly in light of the design and pipeline expansion that we've seen this quarter.

Great. Thank you. Our next question comes from the line of Ambrish Srivastava of BMO Markets. Ambrish, over to you.

Hi. Thank you. Neil, I'm sure I'm not the only one based on questions I'm getting from investors. I'm a little bit confused with the with the commentary that you provided in the last earnings call where you were very confident about the improvement in the execution on the back end. And you specifically said that, hey, look, we expect this to continue. And we all appreciate the challenges in ramping the business track and from where you were versus where you're going. But it seems like there's a lot of volatility. And what happened within a quarter that you went from calling out improvement continuing to the myths that you've had on the execution front? That was my first question.

Yeah, so I think from an execution standpoint, I appreciate your color on that, but obviously we've got a big ramp in terms of what we're talking about. We just took our long-term revenue up 30 to 40%. And the footprint that we're working off today is not the future footprint that we've been working off in the future. So we have a lot of confidence. We made a lot of progress in our back-end execution last year. and i think what we've been caught on are two kind of growing pain type issues one is related to longer rules which like we said i think is a it's going to be a nice tailwind for us going forward in terms of a great technology for us and then secondly from a fab perspective you know we've gotten bit by a supply chain issue that we didn't see coming only because we haven't really had any issues with this over the last several years as we've ramped the business so this is kind of a new item that's kind of popped up from a from a bad device for But again, I see this as a one to two quarter type of issue. I would say it's a bit of a dip in a longer term backdrop of very significant demand and a lot of revenue growth.

I would just maybe just add something from a terminology standpoint. In the semiconductor industry, you have front end and back end. Back end typically refers to packaging, assembly tests, et cetera. What Neil referred to last quarter in the back end improvement was that kind of stuff. Today, we're talking about taller pools and a challenge on the back end of processing of that. So it's a completely different thing than the back end processing of a semiconductor chip. So just to make sure you understood it, we kind of use the same terminology for two different things.

Got it. Got it. No, thanks for the clarification. Then, Greg, question for you. Obviously, you're seeing a demand ramp, and you're very confident about you raised your guide for what you expect for fiscal 26. But if you think about free cash flow and you said it will be pushed out, well, how are you thinking about with all the puts and takes, if you're so confident on the demand and on the ramp of Mohawk and the second FAB, what should investors who care about free cash flow and somebody like I definitely care about free cash flow, what should we be thinking about when do you start to generate free cash flow, Greg? Thank you.

Maybe let me just hit that one, Ambrish, a bit. I think we are going to take the free cash flow numbers out, but that free cash flow is in advance of building what I think is a manufacturing footprint for a high-growth industry with out there some of the most discerning customers in the world. We're going to build state-of-the-art capacity and capability that's going to underpin us for the long term. I think about having to invest in the business in advance of that. So I've talked about a two to one to half X ratio as you think about the investment and the kind of facilities we've talked about. But as you get out beyond, as you get into that long range plan period and look out beyond, the cash flow generation capability of the footprint we're bringing online to match the demand that we're seeing in the business is going to be terrific. And we'll give you kind of an update on how that all works on Monday.

Thank you, and our final question today comes from David O'Connor of BNB Paribas. David, your line is now open.

Great, good afternoon. Thanks for taking my question. Maybe in the same vein, Greg, as the previous question or questions, does these kind of newer issues now that you're seeing in the Durham FAB, does that change your view of the Durham FAB long-term? This is kind of any of the plans you may have for that FAB longer term. Is there anything new there? That's my first question. And just a clarification for Neil on the three points of gross margin headwind on the ORS side. As far as I understand, it doesn't change the FY24 target on the margin side, correct? It's still in line with what you indicated previously. Thank you.

Yeah, I'll take the first part and then Neil can handle the second part. You know, the team led by Missy Stegall and Rex Felton have done a really good job of stabilizing and then improving the Durham wafer fabs. What we have right now that we're dealing with is a spare part issue on older equipment inside of the fab itself. And I think, you know, if we resolve that, You know, the DERM FAB is never going to be Mohawk Valley. You know, these are completely different generations of FAB, and one's highly automated and brand new, and the other one is not automated at all, and, you know, 20 or 30 years old. So, you know, they're never going to be equivalent of these, so to speak. But we're, you know, that FAB has made, you know, good improvements, still has more improvements to make. And we're just dealing with a little bit of this supply chain issue that Neil alluded to.

Yeah, then on the RF margin impact. And if you look out into 24, and I think like we said earlier, we're just seeing really a tremendous pull from the demand side. And you can see that over both the short term and the long term. And it's just not leaving us enough opportunity on downtime to go and bring that down and make that transition. will have an impact you know on a 24 margin trajectory 300 basis points i think is uh is kind of the number that you want to think about there in terms of uh you think about 24. um but again it's really a choice of serving customers or taking down time to kind of make a transition like that and we're going to make a choice to serve our customers in that period now if you go out and look out beyond 24 i think that the uh you know the blueprint we have for cost and capacity over that time frame even with the very significant growth plan that we have, looks very, very solid.

Very helpful. Thank you.

Thank you. Well, thank you very much, everybody, for participating in the call, and we look forward to seeing you next Monday after the 31st in New York. Thank you.

Thank you to everyone who has joined the call today. This concludes, and you may now disconnect your lines.