Wolfspeed, Inc.

Good afternoon. Thank you for attending today's Wolf Speed Inc. Q2 fiscal year 2024 earnings call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to Tyler Groenbach, VP of External Affairs. You may proceed.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's second quarter fiscal 2024 conference call. Today, Wolfspeed CEO Greg Lowe and Wolfspeed CFO Neil Reynolds will report on the results for the second quarter of fiscal year 2024. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provides useful information to our investors. 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. Lastly, I would also like to note that this quarter we completed the sale of our RF business to MACOM. The results of our RF business are classified as discontinued operations, and all discussions today will be on a continuing operations basis. During the Q&A session, we would ask that you limit yourself to one question 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. As the world's only pure play vertically integrated silicon carbide company, Wolfspeed is leading the industry shift from silicon to silicon carbide across both materials and devices. Our focus remains on scaling operations effectively and executing on the long-term investment plan that we have in place. While there are still challenges ahead of us, We are proud of the strong progress we've made on our strategic initiatives over the past couple of quarters. Importantly, we're encouraged by the developments across key internal metrics. The Mohawk Valley FAB delivered improved performance and is on track to achieve 20% utilization in the June quarter. From a 200-millimeter substrate perspective, there is now ample runway to not only meet but exceed our original utilization target from building 10 on the Durham campus as we're consistently producing high quality, high yielding 200 millimeter wafers out of this facility. The additional flexibility will be important as we begin producing substrates in the latter half of this year at the JP. Overall, I'm confident about our execution of our near term operational goals and optimistic around our long-term financial prospects. Showing our unwavering focus on execution, the second quarter continued the solid momentum from the first quarter. We've said time and time again that all roads lead to Mohawk Valley, and this past quarter was no exception. The FAB contributed approximately $12 million to our quarterly revenue, roughly triple last quarter's levels and at the midpoint of our guidance. I spent a lot of time at Mohawk Valley this past quarter and witnessed the dedication of our team firsthand, who along with our incredible tool suppliers are working around the clock on tool optimization activities related to this first of its kind grant. Wolfspeed at its core is an innovative company full of problem solvers. And I'm very grateful to the entire team that we are heads down and focused on execution at the staff. To give you a sense for the progress at Mohawk Valley, so far we've qualified over a dozen customer parts, including two of our most complicated automotive devices, as well as the largest device we are currently producing at the facility. This gives us more than enough qualified parts to achieve our 20% utilization goal and we expect to continue to qualify more parts between now and the end of June, further supporting the Mohawk Valley revenue ramp. Additionally, we received our IATF automotive certification at Mohawk Valley, which is an industry standard to ship to OEMs and Tier 1s. This is an important milestone, and we are pleased to have achieved it on our first attempt. On the materials side of our operations, At Building 10, we've now installed all crystal growers necessary to achieve 20% utilization at the Mohawk Valley Fab by June of 2024. Wafers out of Building 10 are yielding very well, and we now have plenty of 200-millimeter capacity to achieve our 20% utilization target. In fact, the quality of the material and the current yields give us confidence that Building 10 will be able to support approximately 25% wafer start utilization at Mohawk Valley by the end of calendar 2024, well above our original expectations. However, we'd still like to remind everyone that the ramp cadence at Mohawk Valley has not changed based on this development. And to be clear, the normal challenges of ramping a brand new 200 millimeter fab remain, and we are well aware that this ramp will not be linear. While we're pleased with the fab performance, our Mohawk Valley team continues to work on optimizing factory tool utilization and availability. It's important to remember that this is the first time these tools have processed 200-millimeter silicon carbide wafers, and tool integration is a critical step as we ramp production. Lastly, as it relates to our materials facility, At the JP in Schuyler City, we will begin installing crystal growers in early February and would expect to begin qualifying furnaces in the September quarter of this year. All the learnings with 200 millimeter crystal growth at Building 10 will better position us to hit the ground running in Schuyler City, and we anticipate bull production starting by the end of calendar 2024. And finally, before I hand the call over to Neil, I'd like to share a few observations about the internal combustion engine to electric vehicle transition. The shift, of course, is well underway, but it's happening at a more modest pace than some had previously anticipated. This really has no impact on our business outlook, as we were still very early in the adoption phase of our silicon carbide devices across numerous car models that are being introduced to the market in the next few years. Underscoring this is our strong design-ins and design-win performance this quarter. As a reminder, a design-in represents business we've been awarded. And the conversion to design-win happens when the customer places production orders for 20% of the first year production volume. In other words, the design-win indicates that the customer is beginning to ramp their production with our devices. We achieved $2.1 billion in design ends this quarter, marking our third highest quarter on record, which clearly indicates continuing and growing robust demand for silicon carbides. More importantly, we posted a record of $2.9 billion of design wins, which were heavily weighted towards EVs, and included 28 different electric vehicle models. This diverse customer base across the global electric vehicle industry with multiple OEMs and Tier 1s gives us confidence to continue with our expansion plans and further illustrates why we believe our supply will be continuing to work to catch up with demand over the next few years. And these design wins are just the beginning. Over the next five years, based on our current design ends, the number of EVs leveraging wool speed devices will increase to nearly 120 different models across 30 different OEMs. This represents a significant growth from the small number of vehicles on the road using our silicon carbide devices today and demonstrates the opportunity ahead for us. As we continue to pioneer 200 millimeter silicon carbide and embark on our unprecedented greenfield capacity expansion plans. We maintain conviction in our strategy. It is exciting to see what is on the horizon, and we look forward to continuing this promising momentum, particularly at Mohawk Valley, throughout the second half of this fiscal year and beyond. I'll now turn it over to Neil, who will provide an overview of our financial results and our outlook.

Neil? Thanks, Craig. Before I jump into the financial results for the quarter, I'd like to remind you all that during the second quarter, we completed the sale of our RF business to NACOM. As such, all results reported below will be on a continuing operations basis and exclude the impact of RF in our results. We're very pleased that during the second quarter, revenue, gross margins, and EPS all came in at the high end of our stated guidance ranges for the second straight quarter. We generated revenue of $208 million for the quarter, a 5.6% increase sequentially, and a nearly 20% increase year over year. During the quarter, we generated record power revenue of $108 million, driven largely by the $12 million of contribution for Mohawk Valley and strong demand we see for our products. Looking at the power device revenue performance in more depth, we saw a sharp increase in EV revenue quarter over quarter fueled by the additional EV device products shipping out of Mohawk Valley. However, this was partially offset by lower demand and persistent weakness in our industrial and energy markets, particularly in China and across Asia. We had yet another solid revenue performance for materials above our guidance expectations. Materials benefited from an additional week of product shipments compared to the prior quarter and prior year, but also from continued strong manufacturing execution, resulting in approximately 29% growth versus prior year. Non-GAAP gross margin in the second quarter was 16.4%, representing an 80 basis point improvement from the prior quarter, driven by increased revenues for Mohawk Valley and solid execution in our materials business. Our gross margin includes $35.6 million or approximately 1,700 basis points of underutilization costs related to the ramp of Mohawk Valley in the second quarter. As a result of the gross margin improvement, as well as tighter cost controls and higher interest income, our non-GAAP EPS of negative 55 cents surpassed our guidance. Our EPS, in addition to the underutilization costs mentioned above, also includes the impact of $10.5 million of factory startup costs related to the construction of the JP and our materials expansion efforts. Before I get into guidance, a quick update on our balance sheet. We ended the quarter with over $2.6 billion of cash and liquidity on hand to support our ramp and growth plans. We expect to draw down the remaining $1 billion related to our Renesas supply agreement in the first half of this year, which will build our cash position. DSO was 43 days, while inventory days on hand was 199 days. Free cash flow during the quarter was negative $755 million, comprised of $183 million of negative operating cash flow and $572 million of capital expenditures. As it relates to funding plans, given our strong cash and liquidity position, our current focus is on government funding to further support our capacity expansion plan. We continue to have constructive discussions and correspondence with government authorities, including U.S. CHIPS Act officials. We are on track with all necessary incentive considerations and are targeting to have our full applications complete within this quarter. As always, we will continue to seek out ways to manage and optimize our balance sheet and capital structure. Moving on to our guidance for the third quarter, we target revenue from continuing operations of $185 million to $215 million with a midpoint of $200 million. I think it would be helpful to break down the $200 million revenue midpoint guidance for modeling purposes. Revenue for power devices at the midpoint of our guidance will be relatively flat as increases in EV revenue supported by additional output for Mohawk Valley will largely be offset by lower industrial and energy revenue. Revenue for materials will be at our previously stated capacity range of 90 to 95 million, down from 101 million in the prior quarter. As stated earlier, in Q2, materials revenue benefited from an additional week of shipment in combination with strong operating execution. Our production line is now balanced and at capacity. Therefore, we anticipate this being our materials capacity capabilities for the immediate future. This data guidance would result in revenue growth in both power devices and materials year over year. We are targeting $20 million to $30 million of revenue to come from Mohawk Valley next quarter, approximately doubling revenue at the midpoint. This will largely offset the decrease in revenue coming from the Durham Fab, which generates approximately $90 to $100 million of quarterly revenue, but will be below that range this quarter due to the continued softness and uncertainty in the industrial energy markets in China and across Asia. The impact from the industrial and energy softens is expected to be persistent, at least until the second half of this calendar year. But as we said last quarter, much of the product we slated to ship there has a match elsewhere in our pipeline, and we continue to work through that inventory now. Continuing with our Q3 guidance, we target non-GAAP gross margins of 13% to 20%, with a midpoint of 16.5%, driven by greater contribution from Mohawk Valley. At the midpoint, This includes 36 million or 1,800 basis points of underutilization related to the Mohawk Valley FAS. We target non-GAAP operating expenses of approximately 109 million, inclusive of 13 million of startup costs primarily related to the JP. We target Q3 net non-operating expense of approximately 27 million. As I have mentioned previously, we expect non-operating expenses to increase as the year progresses. as we earn less interest income on our short-term investments in connection with our U.S. capacity expansion plans. We target Q3 non-GAAP net loss to be between $87 million and $71 million. Our Q3 targets are based on several factors that could affect them significantly, including supply chain dynamics, overall demand, product mix, factory productivity, and the competitive environment. Before I hand the call back to Greg for closing remarks, I would like to remind you of a few data points pertaining to our facility ramps that may help with your modeling. First, while we are on track for 20% utilization of Mohawk Valley by the end of the June quarter, the full revenue benefit of $100 million per quarter from that 20% utilization level would be realized in the December quarter. As we have said, there is roughly a two-quarter lag between wafer starts and revenue contribution. In addition, as Mohawk Valley staff utilization increases, we will start to see incrementally less underutilization. However, as the JP moves towards being ready for production, we will see incrementally more startup costs, which hit different lines on our P&L. Once the JP phase one construction is complete, those startup costs will come down, and we will start to incur underutilization costs at the JP, similar to what has occurred at Mohawk Valley. Now, I'll turn it back over to Greg.

Thanks, Neil. While we remain confident there is a significant and long-term demand for our products, we also understand that the silicon carbide marketplace will continue to evolve for the next several years. During transformative industry shifts, there will always be many twists and turns. But we believe we are uniquely positioned to leverage the deep domain expertise we have compiled over the last several decades into a clear advantage. Today, we are the world's largest producer of silicon carbide material. We have long-term supply agreements with the major power device producers from around the globe. Four of those customers signed an initial agreement with us several years ago, then expanded those agreements a few years ago, and expanded once again more recently, two of which happened in the last 90 days. And this demonstrated ability to service and grow the silicon carbide materials market for the last couple years didn't go unnoticed. As we secured what I believe to be is the largest capacity reservation deposit in the history of semiconductors. The $2 billion agreement with Renesas to supply 150 millimeter and 200 millimeter substrates beginning in 2025. We know from the more than 30 years of experience of working with this material that the significant ramp required to create high quality materials consistently at scale gives us a competitive advantage today and for the foreseeable future, especially as we begin producing 200 millimeter at the JP. The demand for silicon carbide remains significant, underscored by the two recent announced expansions of long-term supply agreements with existing customers. We expect to remain an important partner to other silicon carbide device manufacturers through the end of this decade. And we believe our leadership in materials provides a strong foundation for us to continue to grow our device business. We're working closely across a diverse set of customers, which gives us good visibility into how the markets are evolving and where we can capitalize on the opportunity. Being the leader in silicon carbide, a truly transformative technology, is no easy task, and we are executing on this opportunity with efficiency, purposefulness, and thoughtfulness. We look forward to bringing this vision into reality and generating long-term value for all stakeholders. I'll turn it back to the operator for Q&A.

Absolutely. We will now begin the Q&A session. If you would like to ask a question, please press star followed by 1 on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly to allow questions to generate in the queue. The first question is from the line of Brian Lee with Goldman Sachs. You may proceed.

Hey, guys. Good afternoon. Thanks for taking the questions. I know you get asked this every quarter, but it sounds like, you know, the tone, the confidence, you know, some of the data points you're throwing out there, Greg. are as positive sounding as we heard about, you know, the internal operationals. So, you know, given building 10, it seems like you're ahead of plan. What is the potential for Mohawk to maybe pull ahead in the ramp to 20%? I know you're super confident in being able to hit it, but how do you potentially see upside to any of these medium term targets? You know, I think you've talked about 100 million of revenue. from that facility, you know, by the December quarter. So are there still, you know, internal bottlenecks operationally keeping you from accelerating? Or are there, you know, is it a customer eval issue? Just wondering, you know, as you think about the upstream sort of not being as much of a limiting factor, how you could potentially maybe translate that to moving, you know, Mohawk Valley a little bit faster. Thanks, guys.

Yeah, thanks a lot, Brian. So, you know, first off, the team has done – the team up in Mohawk Valley combined with, you know, several – The teams from Durham that have gone up to Mohawk Valley have done an incredible job of relieving bottlenecks and fine-tuning the processes, et cetera. So very pleased with the progress we're making. Still have a lot to do. But obviously, tripling the revenue and then doubling it again next quarter is fantastic. We feel great about where we're at with Building 10. Obviously, now having an ability to support a greater ramp of 25% is fantastic as well. But as I said in prepared remarks, we're going to keep the pace of the FAB itself at the pace of 20% utilization in the June quarter, $100 million of revenue in the December quarter. We feel real good about that. But again, from a longer term perspective, the ability to get more out of the facilities on the Durham campus in terms of supplying Mohawk Valley, you know, it gives us really good confidence in being able to take that number up higher out in time.

Thank you. The next question is from the line of Samic Chatterjee with JPMorgan. You may proceed. Hi.

Thanks for taking my question. I guess, Greg, you did mention the design in pipeline, which continues to remain quite robust on the EV front. I was just wondering, I mean, what are you seeing change in terms of conversion of design-ins to design-wins? Obviously, with the design-ins picking up in pace and potentially the launch of these sort of vehicles also coming more closer, are you seeing a bit of any changes in the conversion rates of these design-ins to design-wins eventually? And just any color that you can share will be helpful. I have a quick follow-up to that. Thank you.

Sure. Good question. We had a record conversion of $2.9 billion to DesignWin. That represented, as I mentioned, there's 28 different unique electric vehicle models that are in there and a whole bunch of other product as well, including a number of industrial and energy applications. So we're really happy. Quite frankly, the DesignWin conversion we just had is quite a stunning number of $2.9 billion. I feel real good about that conversion. And then the $2.1 billion of design in gives us confidence that customers are still very excited about our technology and our capability.

Thank you. The next question is from the line of Jed Dorsheimer with William Blair. You may proceed.

Hi. Thanks for taking my question. I have one question and a follow-up. I guess for my question, Greg, you know, if I look at today's announcement on the material agreement, it's identical to your December announcement that turned out to be Rome. So I'm wondering if you might be able to comment, as I know that that customer wasn't named in the previous, but you've since been able to comment on that and assuming that terms are

are still the same and then i have a follow-up question too hey jed this is tyler yeah yes we can confirm that today's announcement the customer is rome and your follow-up and i just might yeah sorry let's just add a couple of things we have a had a great uh long-term relationship with them and um you know we're very excited about this partnership with them going forward, helping us convert the market to silicon carbide. In the prepared remarks, I did have one typo in there. We had three long-term agreements that had original agreements, extensions, and then further extensions, and this was one of those. Great.

Well, congratulations. My follow-up question. So it is similar to what Brian asked you, but with a slight nuance. So if I look at what building 10 is, is outputting in terms of wafer starts and what you're pulling down on that in Mohawk Valley, my calculation would be, you know, that you will have an inventory of wafers over 200 million. by June, assuming that $25 million in midpoint and maybe a $50 to $60 or $55 million in June, my estimates on that. So my question is, as you look through the rest of the year, clearly that gives you some glide in terms of Tyler City ramp from a buffer perspective. But what are the, is it MISI kind of getting the second, you know, second of kind tools? What are the gating factors as you think about moving around that utilization to de-bottleneck and capture either more or less in backup of this year and next.

Thanks for the question, Jed. I'll talk first about my perspective on this and then hand it over to Neil. You're exactly right that we are shipping out of the Durham facilities up to Mohawk Valley and obviously we have inventory building up there in anticipation of the ramp. So no question about that as we're trying to get ahead of things. So that's actually good news. And the way that we have the overhead track system and the storage up there, it makes it perfect for that situation, number one. Probably the more important aspect as it relates to buffering for the JP is the ability to ship up to 25% right now, or right now we have very high confidence to 25% utilization out of the Durham campus. So that obviously gives us really good confidence. At this point in the FAB itself, about 75% of the tools have second of a kind tools. And we anticipate that the vast majority of the tools will have second of a kind tools. by the June quarter of this year. So, you know, that will help de-bottleneck things because, you know, if a tool goes down, you know, it basically stops production if there's not a second-of-a-kind tool. So that's kind of what's happening there. Maybe I'll hand it over to Neil if you want to add any additional color.

Yeah, so I think, Jed, what that means then is no real change to the, you know, to the outlook right now. You know, the key driver here, as we just talked about, is just ramping the revenue to $100 million. by December quarter coming out of Mohawk Valley. And clearly the inventory that we see coming out of Durham and Building 10, you know, gives us, you know, good strength and good confidence that we'll have, you know, an available number of substrates to go, you know, drive that revenue through. So it'll really be about, you know, how quickly can we, you know, get that throughput through the FAB and out to customers, you know, over that period. Now one other thing I'll mention is we also mentioned it on the call here is we should be able to see Durham go from 20% to 25% equivalent utilization by December or towards the end of the year. So what that means is we'll be able to go above the $100 million a quarter as you get out into that March, June 2025 timeframe. And then when the JEP starts making meaningful substrate deliveries to Mohawk Valley, probably in the back half of calendar 25, we should have a nice glide path of substrates to support us out through that period. We feel like, obviously, the demand continues to remain strong based on the customers that we have in front of us, and it would really just be about ramping, delivering substrate to the fab, and continuing to drive productivity and output there.

Thank you. The next question is from the line of Gary Mobley with Wells Fargo. You may proceed.

Hey, guys. Thanks for taking my question. I had just one multi-part question, and I know most of the KPIs that you guys provide is on the device side, but in light of the three, well, the two year-to-date announcements on the weight and materials, you know, LTSAs, and then as well with the Renesas deal signed last year, maybe if you can give us a sense of the backlog or maybe the cumulative value of live LTSAs for the material side of the business. And the reason I'm asking is I'm just trying to get a sense of whether, you know, $95 million a quarter on the material side of the business, you know, continues in perpetuity. And related to all this, maybe if you can give us a sense of what the gross margins are like, you know, for these recent LTSAs versus previous ones in light of maybe a more competitive environment out there. Thank you.

Okay, thanks a lot. So a couple of things, and thanks for the question. You know, a couple of things. We do have three customers under long-term agreements that did original agreements, extended, and then extended again. And I don't know exactly what percentage of the number has been – what the total number of those expansions are. I don't have that on me. but we most recently extended those agreements with all three of them, so you can kind of think of it, we have quite a bit of runway in front of us. We don't get into details on that, but you can kind of think about a half a decade is kind of the zip code when we would do these kind of extensions, if you will. With regards to $95 million, that's certainly going to be the near-term target that you should keep in mind. Where that will change is when we start ramping the deliveries of 200 millimeter substrates to Renesas out of the JP. That's when the capacity expansion hits in pretty full steam. In terms of demand for the product and you know i would say gross margin proxy for pricing the demand for high quality wafers remains very very high we've had we constantly have customers saying they would like to get more for us this quarter next quarter you know etc so that's kind of a normal type thing and i would say the pricing environment for quality substrates is very favorable for us

Yeah, let me just add to that. I think that from a margin perspective, I think what we've always said is from the materials side, you know, if you look at a long-term goal of 50% margin for the overall business, you know, the materials products are already in there in that kind of that zip code, so to speak. So, as you look out in time, you know, these new agreements that we're signing, you know, certainly support that or even more as you look out into the future. Thank you.

The next question is a follow-up from Samick Chatterjee with JPMorgan. You may proceed.

Hey, guys. Thanks for taking the follow-up. I guess my follow-up was more on the industrial weakness that you're seeing and just trying to think about how to sort of extrapolate that to thinking about the June quarter as well. You're indicating you take a step down on power devices revenue relative to that industrial weakness that you're seeing, but how are you thinking about how long that continues in terms of weakness. Is there an incremental step down in relation to that weakness you're seeing based on your current visibility? Just trying to get a sense of, as Mohawk Rams, how do we think about sort of the offsets to that? Thank you.

Yeah. So, you know, first off, industrial is definitely weak, as we mentioned last quarter as well. And it is mainly driven by Asia and China, but it's weak across Europe and U.S. as well. And it's hard to tell when things are going to get better, but from a planning perspective, we're not anticipating it getting better this year, this calendar year. So we're just assuming it's going to be where it's at. Now, the industrial business is a really good business for us, and it will come back. And what we're doing in the meantime is we're ramping Mohawk Valley, which is almost 100% targeted right now at automotive customers, so we will be ramping Mohawk Valley and driving that up. We're converting as much as practical out of Durham to supply for the automotive customers as well, but we are limited on the Durham footprint from that perspective. But the good news is eventually, and we've all seen the movie, the industrial business will pick back up, and when it does pick back up, We will largely be an automotive outfit out of Mohawk Valley and giving us room then in the Durham facility to continue ramping when the industrial business picks back up. And again, we've gotten a lot of design ins and a lot of design wins there. It will come back up. That's great business for us. We love the customers in that space, and we'll have ability out of the Durham facilities to handle that.

Yeah, and Simic, let me just try and help out here from a modeling perspective a little bit. If you go look at just the 2Q revenue, we saw about a 30% increase in the EV-related device kind of revenue. We'll see that again in 3Q, but that'll be offset by weaker industrial energy revenue. You can think about 15% decline, 2Q going into 3Q, kind of at the midpoint. So from a modeling perspective, when we think about the Durham revenue, which is primarily industrial and energy revenue, the capacity we've talked about is about 90 to 100 million a quarter. That's going to be lower than that kind of moving forward. You can think about 80 to 85 million of Durham-based power device revenue coming out over the next several quarters. So if you put all of those pieces together, we talked about for modeling purposes, materials being in that kind of 90 to 95 million range per quarter. The Durham FAB, as I just said, in that kind of 80 to 85 million range, as long as the industrial and energy revenue continues to remain down at those levels. Again, as Greg said, it could come back at some point and likely will. But all of the growth essentially in the immediate term is really going to be from Mohawk Valley. So what you can think of is kind of flattish on materials, flattish on the Durham output from a device perspective and growth from the 25 million or so midpoint we just saw and the guidance we gave for 3Q growing above that point as you move out into the future and towards 100 million in the December quarter. So that's kind of the way I think about it over the next few quarters.

Thank you. The next question is from the line of Harsh Kumar with Piper Sandler. You may proceed.

Yeah. Hey, guys. Thanks for letting me ask the question. I actually had two, one for Neil and one for Greg. Greg, the first one for you. We get this from a lot of customers where people say, okay, you know, Mohawk is just getting going and it's going to be really good. But then you are also sort of tied to a German fab, and that would be another project that you would take on. So I wanted to understand your level of commitment to getting into the German facility while you're still ramping Mohawk. And then, Neil, I'll just go ahead and ask you my question as well. I wanted to understand the difference in cost, the underutilization costs from Mohawk Valley relative to the JP Siler City costs for startups. And so is it not fair for me to think that you would come out a little bit ahead as you get closer to the September-December timeframe because the underutilization costs are significantly more than perhaps the startup costs at Silo City JP?

Yeah, Harsh, thanks for the question. We have received initial notification of funding for the IPSE process in Europe for the FAB in Germany. There's still a considerable amount of work to be done before we begin construction, and that includes our European ships application approval. There's regulatory filings around the world permitting a whole bunch of different things that need to happen. So I wouldn't anticipate that we would begin construction of that fab until calendar 2025. So in between now and then, our full focus is on Mohawk Valley, ramping that fab. You know, I was up at the fab several times last quarter. I'll be up there again next week. And we certainly have my full attention, but the whole organization's attention on doing everything we can to ensure we have a great ramp of that fab. I would note a couple other things just really quickly before I turn it over to Neil. We have talked about a dozen or so parts that have qualified out of Mohawk Valley, including our biggest parts, our most complicated parts, and so forth. The other thing to realize is all of these MOSFETs that I just talked about qualifying they qualified first pass and that is not normal. You know, there's, you normally find something, some problem or you qualify with an asterisk saying you're going to put some kind of, um, uh, you know, something in place to kind of make sure that the, the quality that we only ship quality products to customers, we qualified first pass on all those parts. And I think that gives us a huge boost of confidence in the underlying capability of this factory.

Yeah, so Harsh, maybe it's important for me just to break down the gross margin a little bit and some of the markers that we've had out there and kind of just give you a little bit of my view in terms of what that means from an underutilization perspective. So we had a good quarter from a gross margin perspective above the midpoint of our guidance range. We've also seen strong underlying gross margin improvement, excluding the underutilization over the last couple of quarters. In fact, if you go back to the June quarter until the guidance we just gave here in Q3, we've seen approximately 400 basis points of improvement of margin in just three quarters on an underlying basis. In addition to that, I think we've seen the cost on the 200-millimeter substrate, the yields on those, as well as the initial cost in Mohawk Valley on a unit basis be very much in line with what we had anticipated. So as I've always said, the more revenue we push through Mohawk Valley, the better we'll see or the faster we'll see some of that gross margin execution. As you said, you know, previously there on the underutilization, that will be a little bit of a drag for us. We talked about $36 million last quarter at Mohawk Valley. It'd be flattish and get up to a peak of about $38 million as you get into Q4. So what that'll mean is we kind of put a marker out there of about a 20% gross margin or approaching that in kind of the Q4 timeframe. You can think about that in the kind of mid to high teens probably exiting the year and then, you know, back, you know, maybe pushing that 20% or so out a quarter or so as we look out in time. So what that means is, yes, we will start to see the underutilization kind of peak out there in the Q4 period, start to come down a bit. But just a reminder, those startup costs you mentioned in Siler City, those are currently on the OpEx line, about $10 million last quarter. That'll probably grow to about $15 million as we exit the year. As Siler City goes into production, probably in the second half of fiscal 25, that kind of first half of calendar 25, We'll see those transition from underutilization up to the gross margin line. So a few moving pieces there to think about, as I mentioned, that are prepared remarks. But the key here is underlying. We are seeing very strong performance and anticipate seeing that strong performance continue as we drive more volume through the scale facilities that we're building.

Thank you. The next question is from the line of Jack Egan with Charter Equity Research. You may proceed.

Hey, guys. Thanks for taking the question. I just had one. I was curious, why didn't either of the recent LTAs signed with Infineon in Rome include 200mm? Because we've seen some other companies sign some wafer deals that have included 200mm, even if it's just a general long-term aspiration to eventually move to 200. So, I mean, wouldn't the JP at least eventually give you some capacity that you could turn around and sell to... you know, device or materials customers by, I guess, 2026?

Thanks a lot, Jack, for the question. And I would start off by saying, you know, all of our long-term supply agreement customers are asking about 200 millimeter. It's obviously front and center in their mind and something that they're very interested in engaging with us on. We've engaged so far, we've announced the engagement so far of one. which is the deal we did with Renesas last year. And just to recall, that begins shipping 200 millimeter in 2027. In between now and then, we've got all of our focus on getting the JP up and running to feed the Mohawk Valley Fab. Getting the 20% utilization in the June quarter, got really good line of sight. but we're also going to have to ramp the JP to get the other 80% utilization. Now, the one thing that I would tell you is we have a high degree of confidence in our ability to do that, and I'll tell you why. In March of this past year, we turned on the Building 10 operation. We got certificates of operancy and began producing wafers and bulls and wafers out of that facility. And, you know, less than a year later, we're feeling very confident of taking what was, you know, a basketball court, a squash court, a bunch of offices and converting it into a 200 millimeter Silicon carbide crystal growth operation and being able to feed 20, 25% of the world's largest 200 millimeter wafer fat. Well, all of that experience is going to be applied to the JP. which we purposely kept less than an hour's drive from our campus and the reason we did that is we wanted the same people who ramped building 10 to ramp the jp and so and now you're talking about a purpose-built facility we're not trying to work around what used to be an office and all the you know you can imagine all the challenges we've had converting that space to uh to uh a crystal growth operation we'll have none of that problem in in the JP because it's built as a silicon carbide crystal growth operation. So, very, very confident about that.

Thank you. The next question is from the line of Joshua Buchalter with T.D. Cowan. You may proceed.

Hey, guys. Thanks for taking my question and actually a nice segue from your response to the previous question. I wanted to ask about sort of the timeline and slope of the JP's ramp. I guess any incremental color you can give us. I know you mentioned SOP by the end of the year, and then it sounds like back half of calendar 25 is a reasonable timeline for first power devices built on JP wafers. But any incremental color, should the slope look similar directionally as what went on in Building 10? Thank you.

Yeah, I think you have roughly the right kind of numbers there. And the only additional color I would add is what we said in our prepared remarks, which is we're going to be installing crystal growers in there next month. So the facility is ready for installation of crystal growers. We're not going to energize them and produce wafers until the back half of this year. calendar year, but I think all of the timing that you just talked about feels pretty reasonable. And I would say at this point, you know, the team's done a great job. You know, that was a forest not too long ago, and now it's a giant crystal growth factory. And, you know, at this point, we're on schedule.

Thank you. The next question is from the line of Vivek Arya with Bank of America. You may proceed.

Thank you. I actually have two questions. First, Neil, could you just repeat the gross margin outlook you gave for December? I think you gave the different moving parts, but if you could help kind of quantify what you see as gross margins heading into December. And then, Greg, my question is, how do you handle situations where you are bidding for the same EV business that your materials customers are also bidding for?

Yeah, so first on the gross margin front, just if you think about number one, in the current quarter, we're going to be about flattish, right around the 16.5%, and that's really based off of two things. One is we'll have a drag of about 100 basis points just off the leverage of the underutilization just on the lower revenue, but underlying performance offsetting that by about 100 basis points. So continuing to see good execution as you think about the underlying ability to generate better costs and better margin profiles. As we move out to the June quarter, I think previously we had talked kind of about a 20% marker. I think that moves out about a quarter. So June quarter, you're probably talking about, you know, kind of mid to high teams, you know, based on what we're looking at now as we start to push more product through Mohawk Valley. So really Mohawk Valley will start to generate not just more volume, but as we push more product through there, we really like the cost structure. And, of course, you get the benefit of the volume over that underutilization. The remainder of the year, as you get out to December, you should see kind of a linear, you know, improvement with that in terms of margin. Beyond that, like I said, out beyond June into September, pushing that 20% marker out of quarter to the September quarter. However, when the JP comes online from a production perspective, and think about that in that kind of March-June timeframe of 2025, those underutilization costs will then come out of OpEx and we'll need to put those into gross margin. We should be exiting the year about 15 million. You could see it grow up to even 25 million or so before it makes that move. So that's just something to consider from a modeling perspective. as you get out beyond December and into the March, June quarters of 2025 as we start to bring the JP online.

And then Vivek, in terms of the other question, I would say, number one, our materials customers are exactly that. They are customers of ours. We treat them as such. We have quality meetings with them. We have typical quarterly program reviews and things like that. So we treat them as customers, as they are definitely helping us convert the power electronics market from silicon to silicon carbide. I can tell you that when I joined the company six years ago or so, I believe there was one OEM that was committed to using silicon carbide in an inverter, and of course that was Tesla. I don't know every single OEM, but I actually can't name an OEM that isn't using silicon carbide. Maybe not across their entire platform, but they're using silicon carbide in some of their models. I can't name one that's not. There probably is, I'm not aware of, but I can't tell you who that is. What that shows is a pretty dramatic increase in the appetite for silicon carbide across all of our materials customers and ourselves. Maybe one thing that I'll note is on the 28 models that I had mentioned that are transitioning from design in to design when, we can confirm that we are the prime source on 27 of those 28. I think we're the prime source on the 28th, but I can't confirm that one. So I think it's an exciting opportunity for us. It's an amazing amount of things that are going on. I think there's going to be a lot of puts and takes in the EV industry over the coming you know, a couple of years. This is the biggest, this is the biggest transformation in the history of the automobile industry. It's going to be the most disruptive in the history of the automobile. And we feel like we're at the early stage of that transition.

Thank you. There are no further questions in queue. With that, I'd like to turn the call over to Greg Lokes, CEO, for concluding remarks.

Well, thanks everybody for, for, being a part of this call today and we look forward to chatting with you in our next earnings call thank you very much that concludes today's conference call thank you for your participation you may now disconnect your lines chatting with you in our next earnings call thank you very much