Wolfspeed, Inc.

conference call. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A, you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Tal Grombach, Vice President, External Affairs, to begin. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's third quarter fiscal 2024 conference call. Today, Wolfspeed CEO Greg Lowe and Wolfspeed CFO Neil Reynolds will report on the results for the third 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. Last note, that all discussions today will be on a continuing operation 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. Wolfspeed is the world's only pure play vertically integrated silicon carbide company. 100% of our team's focus is to capitalize on the industry transition from traditional silicon to next generation silicon carbide. helping customers deliver energy efficient products to market and pursuing outsized returns for our investors. We have an unmatched manufacturing ecosystem with first of a kind tools and automation that will allow us to scale our efforts as the electrification of key industry segments gains velocity. With that as a backdrop, I'd like to spend a few minutes covering four points. First, we believe the market is not fairly valuing the company consistent with the technologies and the business we have built or the strategic potential of the business. The management team and the board of directors are focused on this disconnect and routinely consider alternatives to enhance value for shareholders. Second, driving better financial performance and value for shareholders by delivering on our near-term operational commitments for fiscal 2024 and 2025 is at the core of every decision we make. We are laser focused on increasing the utilization at Mohawk Valley, and as I'll talk about in a few minutes, we are making solid progress there. We are also focused on bringing the JP online, where we are likewise making solid progress on that project. Third, Our operational roadmap provides sufficient time to focus all of our efforts on making sure Mohawk Valley and the JP are on track before we move on to new projects, which is not only good for investors, but for our customers who are also counting on us to meet our commitments. At this time, there are not any additional greenfield projects scheduled to launch until we demonstrate further progress on our existing projects. and we expect to significantly reduce capex for fiscal 2025 ahead of receiving any grants or funding from the U.S. government. Finally, we are deliberately and effectively allocating capital. And let me be clear, our current operational performance and development roadmap does not currently contemplate raising dilutive capital that would lock us into a disadvantageous capital structure at this time, especially considering the disconnect between our current valuation and the leadership position we have built in the silicon carbide market. As stated previously, we are working closely with the Commerce Department and other government entities to secure CHIPS Act and related funding to support our U.S.-based projects. Having laid out those points, let's move on to the specifics of Woolspeed's performance over the past quarter. which we believe demonstrates the positive results of our operational focus and discipline, despite the near-term headwinds in the industrial and energy demand. We made strong progress at Mohawk Valley in the third quarter, more than doubling our revenue and delivering $28 million of product to customers from this fab. We are on track to achieve 20% wafer start utilization in Mohawk Valley by June of this year. And to give you a sense of the progress we're making, as of April, We are already at more than 16% utilization based on wafer starts per week, making us extremely competent on our ability to achieve our target in June of 2024. We've made great progress on optimizing factory tool integration, and the operating flow is continuing to improve. Our die costs out of Mohawk Valley are better than the equivalent dies being produced in Durham, which is another sign of the progress we've made in the past year. proud of our team for its strong focus on the Mohawk Valley ramp and its ability to hit each of the milestones we put in place a year ago. From a materials perspective, we are the largest producer of silicon carbide substrates in the world, driven by our Durham facility, which is consistently producing high-quality and high-yielding 200-millimeter wafers out of Building 10. We are continuing to build inventory to support the ramp of the FAB in New York. We already are at a high yield for automotive-grade MOSFET substrates on our 200-millimeter silicon carbide wafers and are now confident that our Building 10 factory will be able to support at least 25% wafer starts in Mohawk Valley. Our leadership position in 200-millimeter materials will continue to expand with the construction of the JP. a game-changing facility that will significantly grow our materials capacity and support Mohawk Valley's annual $2 billion-plus revenue target. Recently, we had the honor of hosting state and local officials, community partners, and employees at a ceremony to celebrate the topping out of the construction at the JP. In attendance that day was U.S. Senator Tom Tillis, another ardent supporter and vocal advocate for Wolfspeed. We have enjoyed significant support for our silicon carbide expansion from all levels of government since we announced our expansion plans in New York and in North Carolina, with visits from President Biden, Senator Schumer, Commerce Secretary Raimondo, Governor Cooper, and Governor Hochul in the last two years. We appreciate their continued partnership and support as we build the world's largest silicon carbide ecosystem. here in the United States. The JP will be instrumental in supplying high-quality 200-millimeter silicon carbide materials to our Mohawk Valley fab. During the quarter, we started installing crystal growth furnaces and connected the facility to the power grid, two major accomplishments made possible by the diligence of our global expansion team and our general contractor, Whiting-Turner. Our teams have struck great partnership by applying the many lessons we learned from the ramp of our Durham materials facility in Building 10. Looking ahead, we expect to begin powering up initial furnaces by the end of June, which will allow us to start qualifying furnaces in the September quarter, leading to initial bull production by the end of this calendar year. Construction has progressed incredibly well, and we are confident in our ability to meet these targets. As we mentioned last quarter, we continue to be a key supplier of silicon carbide substrates to the broader market as evidenced by the two supply extensions that we announced in January. Our LTAs underscore the importance of our role as the leading provider of high quality 150 millimeter substrates to the market. And we will continue to be an important partner to our customers in the years to come. We believe these agreements are an indicator of where the market for alternative sources of silicon carbide wafers currently stands. On 200 millimeter, we're focused on our internal needs around supplying Mohawk Valley, but remain in close contact with our customers to discuss potential 200 millimeter agreements. We've said it before and we'll say it again, silicon carbide is an incredibly complex technology that cannot be rushed or taken lightly. We know this from our 35 plus years of experience and leadership in the industry. Our high quality substrates allow us to produce the highest quality MOSFET devices out of our Mohawk Valley fab, where the ramp is progressing well. As I mentioned, Mohawk Valley generated $28 million of revenues this quarter, ahead of midpoint of our forecast, and more than double last quarter's total of $12 million. Neil will give you more specific guidance on Mohawk Valley in a few minutes, but in general, We expect to continue our strong growth trajectory at the facility. As I said earlier, Mohawk Valley is anticipated to achieve 20% utilization this quarter. We also continue to make progress with Mohawk Valley product qualifications in the quarter, completing five more product transfers, including two MOSFET dye and three discrete MOSFETs. While Mohawk Valley, which currently services almost entirely EV customers, is humming, The I&E market, or industrial energy market, remains challenged and remains weaker than our original expectations, primarily due to inventory buildups across many end market channels, predominantly in the Asian markets. We are responding by shifting I&E capacity, both in Durham and Mohawk Valley, towards EV. Our ability to shift our production from I&E to EV speaks to the flexibility that our business model provides us. However, this end market shift and change in product mix will have a short-term headwind on gross margins, but it will position us well for fiscal 2025, as we could see the start of a recovery for the I&E demand at some point during this period. Unlike I&E, we continue to see a ramp of EVs that have adopted our silicon carbide devices. While this is a disruptive time in industry and we continue to see OEMs adjusting and modifying their near-term EV production plans, we remain substantially supply constrained for our silicon carbide devices. As demand remains well above our current supply, we can be nimble and shift much of our supply to other customers to accommodate for these near-term changes. Underscoring this continued EV demand is our strong design end and design win performance this quarter. As a reminder, a design end represents business we've been awarded, which converts to a design win once we begin ramping into initial production. This quarter, we achieved approximately $2.8 billion of design ends, about 80% of which was for EV applications. marking our second highest total on record, totaling over $7 billion of design ends for fiscal 2024. We're proud to announce that we had approximately $870 million of design wins in the third quarter. These design wins typically mature over the next five to seven years, which provides ample revenue visibility for the foreseeable future. Our backlog of design wins now support more than 125 car models across more than 30 OEMs over the next three to five years. As we continue to execute on our unprecedented greenfield expansion plans and serve the highest quality silk carbide materials and devices to a largely untapped market, we maintain our conviction in our strategy. Our strong design-in and design-win trajectories this year notwithstanding the current gyrations of the EV market. It gives us confidence in the future and the longevity of silicon carbide, and we look forward to continuing our momentum, particularly at Mohawk Valley through the close of fiscal 2024 and beyond. Now, I'd like to pass the call over to Neil to discuss our quarterly guidance.

Thanks, Greg. Before I go into the detailed financials and following up on Greg's comments, I would like to frame up our current performance and how it aligns with our longer-term outlook. First, the company's long-term demand remains strong. We achieved another $2.8 billion of design-ins, our second highest quarter ever. Customers who have visited our new state-of-the-art manufacturing facilities and tested and used our products and compared them to rival products continue to choose Wolfspeed as their key supplier across both EV and industrial and energy device applications. In recent months, in materials, key customers such as Infineon and Rome have come back to Wolfspeed for expansion of multi-year 150 millimeter wafer supply agreements. In addition, last year after surveying the materials landscape, Renesas selected Wolfspeed for a 10-year supply agreement, including 200 millimeter substrates that included a $2 billion capacity reservation deposit, what we believe is the largest CRD in the history of semiconductors. Secondly, our operating execution has significantly improved during the last 12 months. One year ago, we delivered a revised ramp schedule for 200 millimeter wafer production out of our Durham campus and Mohawk Valley. Since then, we have achieved every one of those announced milestones. which will culminate in 20% utilization in June 2024. We've also had best in class performance from our materials operation, generating revenue at or above our guidance in that timeframe, including $99 million this past quarter, our second highest quarter ever. Let me walk through a few facts related to our 200 millimeter ramp. Die cost from our 200 millimeter substrates at Mohawk Valley even including the full burden of Mohawk Valley fab under utilization, which was $30.4 million in Q3, is now lower than that of the same product produced out of our Durham fab at 150 millimeter. We expect this cost reduction to accelerate as we continue to ramp the fab. The Mohawk Valley device unit cost performance has been driven by breakthroughs in both yields and cycle times that we are continuing to see improve as we transition into the current quarter. Next, MOSFETs continue to have very strong qualification success in Mohawk Valley, and our back-end testing and packaging operation has performed very well with no substantial issues and continues to perform well at higher levels of utilization. Please keep in mind, these results are on a new material substrate in a new fab at a new diameter with tools seeing this technology for the very first time. In addition, this was achieved as we completed the sale of our RF business last year, the third carve-out divestiture in the last five years that has transformed our business and will allow us to remain focused on executing on our capacity ramps in both power devices and materials. Our team is executing very well. Next, we remain sharply focused on optimizing our funding and capital allocation strategy. And with our current financing facilities and finance partners, we expect to maintain a cash position greater than $1 billion for the foreseeable future. From a financing perspective, we have delivered on our plan. In November 2022, we told you we wanted to raise between $4 billion and $5 billion over the next few years. Eight months later, we had executed on $5 billion of low dilution funding from a combination of public markets, private markets, customers, and governments. This allowed us to end March quarter with over $2.5 billion of cash and liquidity on the balance sheet. Including the final draw of our Renesas customer deposit, we now anticipate ending fiscal 2024 with approximately $2.2 to $2.4 billion of cash and liquidity. Looking at CapEx, we expect to spend approximately $2 billion in fiscal 2024, our peak year, consistent with the guidance we communicated last year. This includes $2.2 billion of gross capex offset by approximately $200 million of government incentives in fiscal 2024. In fiscal 2025, we expect a substantial reduction in gross capex of about $600 million to $800 million. resulting in approximately $1.4 billion to $1.6 billion of gross CapEx. This CapEx is primarily focused on the JP and Mohawk Valley and does not include any CapEx for a new greenfield facility. We will not begin another greenfield facility expansion until we have achieved our cash flow objectives from our facilities in the U.S. Government funding meets our minimum requirements and liquidity and financing plans are clearly in place. The $1.4 to $1.6 billion of fiscal 2025 CapEx also does not include potential government incentives, grants, and subsidies that would further lower this CapEx number and potentially be received within fiscal 2025. We continue to work with the CHIPS program office, and this remains a key focus. To date, our interactions with the CHIPS office have been very constructive. and we look forward to completing our work with them in the near future. Depending on the timing of when these incentive payments are approved and then funded, it will be very important for the company to maintain flexibility on the financing front. This may include some interim financing under current financing facilities or otherwise that would allow us to enhance our balance sheet and cash position as we proceed with the Siler City construction and add more tools in the Mohawk Valley FAB. To be clear, as Greg stated earlier, we do not anticipate that interim financing, should we decide to execute it, could be diluted or lock us into a disadvantageous capital structure. In addition, we expect the initial phase of the JP facility to be largely complete by the end of calendar 2024, closing out the vast majority of our fixed facility spend. At that point, our CapEx will be much more flexible and variable. as we will be able to modulate how we invest in tools capacity to match our demand outlook. From a business performance standpoint, we are targeting to achieve positive EBITDA exiting fiscal year 2025 and operating cash flow brief even shortly after that. Given that outlook and the number of liquidity options at our disposal, we expect to maintain a minimum cash balance greater than $1 billion for the foreseeable future, and we will continue to evaluate that need as we complete our U.S. facility expansion plan and transition to positive EBITDA and operating cash flow. Looking ahead, we believe the current U.S. capacity expansions can generate approximately $3 billion in annual revenue with greater than 40% EBITDA margins. We remain confident in our long-range financial targets, as the underlying economics we are seeing so far for Mohawk Valley and Building 10 demonstrate that our purpose-built, vertically integrated, greenfield approach to capacity expansion will generate strong revenue and profitability. In combination with the JP, Mohawk Valley will be able to produce more than $2 billion of device revenue, in addition to the $400 million of device capacity currently installed in our Durham device fab. In addition, with the JP online, we have the potential to grow the material substrate business to greater than $600 million. Lastly, short-term revenue and gross margins are being impacted by slower industrial and energy markets. In the short term, we are pivoting our available capacity to EV products, where EV product demand continues to outstrip our available capacity to serve that demand. The outcome of this will be more muted revenue growth and low gross margin for the next few quarters. But as Greg mentioned earlier, it positions us for any potential recovery in I&E, most importantly, It does not impact our longer-term plans to achieve our revenue and EBITDA targets. We believe that it will be at least the second half of this calendar year before we see inventory levels return to normal, but as we said last quarter, much of the product we had already produced and slated to ship has a match elsewhere in our pipeline, and we are continuing to work to find the best match for that inventory now. I would now like to shift to our quarterly performance. As a reminder, before we discuss Q3 performance, all results reported today will be in a continuing operations basis and exclude the impact of our divested RF business in our results. We generated $201 million of revenue for the quarter, a decline of 4% sequentially, an increase of 4% year over year. We generated power revenue of $102 million. These results were largely driven by the $28 million of revenue contribution from Mohawk Valley and offset by persistent weakness in our industrial and energy markets, particularly across Asia. We continue to see growth from our EV customers as EV device revenue increased approximately 48% year over year. As I mentioned earlier, we posted materials revenue of $99 million, our second highest quarter ever. His strong performance was driven by better-than-expected yields and output on 150-millimeter wafers. Non-gap gross margin in the third quarter was 15%. As I mentioned previously, unit costs at Mohawk Valley continued to improve, driven by increasing yields and lower cycle times as we ramped the fab. However, in the short term, as demand shifts away from I&E, we will see an impact on revenue and gross margins. We will shift as much production capacity as possible to EV products in the near term, but the same underlying production will not generate the equivalent revenue or gross margin results. We anticipate this to be the case until we start to see a recovery in I&E markets in the first half of calendar year 2025. This does not, however, change our view that I&E products will be a substantial and important part of our product portfolio and capacity investment over the longer term. Our adjusted EPS of negative 62 cents was just above the midpoint of our guidance. Our EPS, in addition to the underutilization costs mentioned above, also included the impact of 14.4 million of factory startup costs related to the construction of the JP and our materials expansion efforts. Now on to our balance sheet. The end of the quarter with over $2.5 billion of cash and liquidity on hand to support our facility ramps and growth plans. DSO was 36 days. while inventory on hand was 213 days. Free cash flow during the quarter was negative $616 million, comprised of negative $136 million of operating cash flow and $480 million of capital expenditures. Moving on to our guidance in the fourth quarter of fiscal 2024, we expect revenue from continuing operations of $185 million to $215 million. To give a bit more of a specific breakdown on our revenue expectations for the fourth quarter, we expect materials to be approximately $90 million to $95 million, consistent with our prior outlook. Mohawk Valley to contribute $40 million to $50 million of revenue in the quarter, up more than 60% from prior quarter at the midpoint. And revenue contribution from power devices in our Durham FAB to be down to approximately $55 million to $70 million, down from $106 million in the prior year period. Also embedded in our guidance is a significant shift of our product mix in Durham from I&E to EV, as I mentioned earlier. As Greg mentioned earlier, we had a strong quarter in Mohawk Valley, and we have a clear trajectory towards 20% utilization at Mohawk Valley by the fiscal year end. However, as we stated previously, that does not entail a 20% revenue contribution in the June quarter due to the time needed to run through our full production cycle. We expect non-GAAP gross margins of 8% to 16% with a midpoint of 12%. At the midpoint, this includes 29 million or 1,450 basis points of underutilization. We expect non-GAAP operating expenses of approximately 119 million, inclusive of 20 million of startup costs related to the JP. As a reminder, as Mohawk Valley FAB utilization increases and the JP starts to come online, we will start to see incrementally less underutilization. but incrementally more startup costs, which hit different lines of our P&L. The net non-operating expenses will be roughly $34 million for the fourth quarter, and as a result, we expect non-GAAP net loss between $109 million and $91 million. Before I turn it back to Greg for closing comments, I'd like to highlight again that our plan to be a leading provider of silicon carbide solutions to the market is on track and gaining velocity. We believe this, because long-term demand remains robust. Operating execution is improving. Our balance sheet remains strong, supported by a multifaceted financing plan, and we expect to maintain a cash position of greater than $1 billion. The U.S. capacity expansion can generate strong financial returns, and pivoting to more EV device production now positions the company for future I&E recovery. Greg, I'll hand it back over to you.

Thanks, Neil. As we continue to pioneer 200-millimeter silicon carbide and embark on our capacity expansion plan, we maintain conviction in our strategy. Progress is never a straight line. We've said that there will be peaks and valleys, sometimes at the same time, in different areas of our business, exactly like we are seeing today. That said, the numbers demonstrate progress on execution, but of course, there is more work to be done. I'm proud that our team has continued to execute well in an environment where many of our analog peers are seeing substantial sequential and year-over-year declines in revenue. Forward-looking indicators point to continued outperformance, as corroborated by our strong design-ins, which reaffirms our market-leading position and the strong demand for Wolfspeed's silicon carbide products. Mohawk Valley will be the flywheel of growth for Wolfspeed, and that ramp is underway. The continued progress of the Mohawk Valley and JP ramps will position us ahead of our competition by further enhancing our lead as the world's only pure play, fully vertically integrated 200 millimeter silicon carbide company at scale. From a macro standpoint, our view of long-term demand is unwavering despite short-term noise. The transition from the internal combustion engine to EVs is the most disruptive change in the history of the automobile. And it will be a bumpy and turbulent transition for the traditional OEMs, as well as the new EV entrance. But the transition from internal combustion to EV will continue. Nowhere is this more apparent than in China. I recently visited some of our customers in China, as well as many new car showrooms. And it is very clear to me that the Chinese OEMs are using this transition to try to become the dominant player in the EV market. Based on my personal observation of the quality of the vehicles and the innovative approaches they are using with their new models, this is a legitimate threat that the traditional OEMs need to navigate. The EV sector has recognized the profound impact silicon carbide can have in making cars more energy efficient. It helps reduce the system size, reduce energy consumption, and drive an overall system savings when compared to traditional silicon. Using silicon carbide increases the range and decreases the charge time for EVs. It is now the standard for new EV models coming to the market. As the world electrifies on the existing power grid, other industries are starting to recognize the need for greater energy efficiency as well. This trend is reflected in many of the design-ins we have secured in the last few years for applications including wireless EV charging, energy storage, cryptocurrency mining, AI servers, and heavy-duty mining equipment. Despite the short-term correction in the I&E market, the future holds a vast potential. We currently have more than $4.7 billion of design-ins for the industrial and energy applications representing more than 6,000 opportunities ramping in the next several years. We see even further potential coming from industrial segments as the electrification of all things continues across a broad set of applications, and as such, are undeterred by the short-term fluctuations in demand. I understand that our story has many moving pieces as we continue to ramp our capacity and fund our future. We believe our current stock price does not reflect the true value of the company and we are working very hard to change that. And I believe this is possible for the following reasons. First, Mohawk Valley is producing high quality devices and building 10 is producing high volume of 200 millimeter automotive grade wafers. And we are on track to hit the 20% wafer start utilization goal by June. Our die costs out of Mohawk Valley are better than the equivalent dies being produced out of Durham. And we are at a very high yield for automotive grade MOSFET substrates on our 200 millimeter silicon carbide wafers. Next, we are almost past the peak capital investment period for the business. At the same time, we expect to secure government funding and tax incentives that will allow us to complete the construction of the world's largest 200-millimeter sodium carbide capacity footprint. We continue to optimize our capital structure going forward with a keen focus on delivering outsized returns for our investors. Finally, our value proposition is the strongest it's ever been since I joined the company seven years ago. We are the first company in the world to produce 200-millimeter silicon carbide wafers and devices from those substrates. We have more than $25 billion of design-ins, and we are the world's largest supplier of silicon carbide materials to the market. Leading the silicon carbide revolution is a formidable task, but at Wolfspeed, we tackle it with focus and intent. We are executing making good progress, and are well on our way to achieving the targets that we previously communicated. Thank you for your continued support of Wolfspeed. Operator, we're now ready to open up for Q&A.

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. Our first question comes from George Gianarikas of Tannicle Genuity. Your line is open. Please go ahead.

Hi. Good afternoon, and thank you for taking my question. Just sort of a higher level one, you know, there's significant concern in the marketplace about the Chinese, you know, both from a materials and device perspective, particularly as they appear to be aggressively ramping capacity. You know, can you help us put that into context? You know, how concerned are you about their material and about their devices? Have you seen any impact yet? And how can we get comfortable that there won't be a significant P&L impact over the next few years? Thank you.

Yeah, thanks, George. A couple of things. Let's start off on the substrate side of things. You know, I would say the news on this is kind of all over the place. You hear that they're far behind in terms of high quality, high automotive grade, substrates. They're definitely investing. And, you know, I would say from a 150 perspective, probably making the word is that they're making some progress. And then a 200 millimeter seems to be much further off. It's hard for us to totally judge because it's a lot of speculation out there. I did visit China, as I mentioned a couple of weeks ago, and I would say the conviction that there's going to be a pretty good supply of high-quality, high-volume substrates was not strong. And I guess the best fact that I can say is we've just renewed two supply or extended two supply agreements with two of our long-term customers for wafers and substrates at 150 millimeter. those were half a decade extension. So I guess that points to the fact that maybe there's not some conviction along that lines as well. I'm not trying to say we're not worried about that. We obviously understand that there's a lot of investment going on there, but it seems like from a fact perspective, there's still some ways to go for the Chinese to catch up with both the quality and the quantity automotive grade substrates.

From a device perspective, I think they're further off than that as well.

Thank you. Our next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. I guess maybe as a bit of a follow-up to George's question, uh you know more focused you know on the on the device side um greg can you give us a sense of what you're seeing on market share trends you know it seems like there has been some movement and commentary amongst some of your peers uh in the device market um are you are you seeing any market share impact as you're unable to meet you know shorter term supply needs maybe if you could address that just what you're seeing and hearing from customers and then On the, you know, separately on the outlook for Durham device revenue, I mean, this has been a little bit of a thorn in your side for the past several quarters. How much of your outlook here for Durham is still levered to I&E? And do you believe that's now fully troughing here? Could we continue to see headwinds from that end market? And then if so, you know, kind of what's sort of the timeframe for seeing some of that pick back up? Thanks, guys.

Thanks for the question, Brian. I'll take the first one. Maybe Neil can tackle the second one. You know, we just posted our second highest design in our history of $2.8 billion, 80% of which are for EVs. So I think that's obviously a pretty good sign of continued progress. At the midpoint of our guidance for our automotive or EV business, we're going to be up I think on the order of 48% year on year. And also at the midpoint of the guidance for EVs, our EV business will have doubled since the beginning of this year. So it's grown a hundred percent. So I think if I'm unaware of anybody that's growing a hundred percent through the year. So I don't see how there's a commentary of losing share. And then you, you put that on top of having the second highest design in our history, it doesn't quite square the circle.

Yeah, and Brian, secondly, from an I&E perspective and Durham VAT perspective, I think that's exactly right. We have seen some further weakness there. I think we talked about going down to, you know, call it $65 million in revenue. from Durham, which is primarily IAE. You should see that for the next couple of quarters down at that level. It does feel like the bottom, I would say. There's another thing to consider here. This isn't just really just kind of a normal margin mix type of trade-off. If you think about what we're doing when we shift from IAE to auto, you're also talking about more complex die, bigger die in the factory, and to go through more steps from an automotive perspective. So that trade-off really is not kind of one-to-one from that perspective. So we're going and that continues to be on EVs, we'll swap out and push more of our volume and leverage our capacity for EV applications. But that'll be the Durham FAB. I think it's a $65 million range. For the next couple of quarters, after that December quarter, and then as I&E starts to come back, March, June next year, we anticipate that coming back, most likely in that timeframe, that we'll start to be ready to respond.

Our next question comes from Sumik Chatterjee of JP Morgan. Your line is open.

Hi, good afternoon. Thank you for the question. This is Joe Cordoza on for Sumik. Maybe just a quick follow-up in terms of the response there around the design-in and wins. Can you just, and maybe this is for Greg, can you just spend some time talking about the conversion rate you're seeing from design-in to win, particularly with the step-down in design wins this quarter, despite design-ins tracking relatively in line with your recent trends? Like, how should the investors be interpreting the moderation here relative to trends over the past two quarters, particularly as it relates to design wins? Thank you.

We feel very good about the conversion. The one thing that I would tell you is design ends and design wins aren't necessarily synchronized. Let me explain that a little bit more clearly. Depending on, let's say it's an ED application, depending on the company, some companies are design you in, you know, four years before they go into production. And then we then convert that into a win when we get 20% purchase orders for 20% of the first year's volume. So, you know, it can take four years to go from design into design win. Other more nimble EV manufacturers, some of the startups, for instance, you know, they would go in production, you know, two years after giving you a design. And so it isn't necessarily synchronized between the two, so I wouldn't read into it. We're very pleased with both our design end number for the quarter and our design win number for the quarter as well.

Our next question comes from Jed Dorsheimer of William Blair. Please go ahead. Your line is open.

Hi. Thanks. I guess, so a couple questions here. I guess the first one is just if you can help me with squaring a circle on the unit economic. If I look at the materials business of 90 to 95 million, I'm going to use a 40% margin on that business. I'm getting to, and I look at the 12% on the 200, your midpoint, which would be 24 million. plus the $29 million is under utilization, I get $53 million, which would then imply that even if Durham is zero, Mohawk Valley would only be $13 million, which would be a 29% gross margin. Can you help me where my math might be wrong? Is Durham a negative contributor to gross profit dollars, or what am I doing wrong here?

Yeah, Jen, I think you're kind of breaking this down in a way that is a little more nuanced than that. As I talked about before, when you move to the bigger guy and transition things over to automotive, it becomes a bit more challenging from a manufacturing standpoint. So we're kind of going through a manufacturing transition right now to go from handy products to automotive products. It'll smooth itself out, I think, as we work through the next couple of orders. But clearly, we are seeing that for the same product running out of Mohawk Valley, we are seeing better cost performance. and clearly that would transition to the same same part same customer uh that transit trans translates into better profitability obviously if you think about that transition okay so it's it's uh uh non-optimized then i guess would be the the not yeah i think in durham I think over the longer term, it doesn't really change our view on how things look over the longer term. This is really just a couple of quarters type of issue. Over time, you have strong conviction and the ability to try to drive the business up over 50% gross margin. Think about the 70-30 mix EV to IA products. It could be heavy IA in this period. That'll be sub-optimizing the factory for a while to serve customers. And then when we're ready to shift back, we'll be able to respond to that very quickly, I think. So there is, you know, I think the circle lining from that perspective is, you know, we have the ability to transition to business and move product around to where we see the end market demand. But I think over the longer term, as you're looking for the markets are growing, and we've got a lot of designs across a lot of customers for IA applications that will clearly come back over time, not just in the short term, but very significantly as you think about it over the long run, and we'll be ready to respond and leverage the Durham footprint for that as well. But I think, again, the unit cost economics in Mohawk Valley are just very, very positive for us right now, even at early stages. We just expect that to accelerate over time.

Our next question comes from Joshua Buschalter of TD Cowan. Your line is open.

Hi, guys. Thank you for taking my question. I was hoping you could maybe expand a little bit more on the change in tone around expansion and the Starland facility. You know, is this primarily into a reaction to, you know, what you think is better for the stock right now, or was there a change in sort of the long-term outlook? It doesn't seem like the latter, given you mentioned sort of perpetual supply constraints and confidence in EV demand, but it would be helpful to hear some more input on what's driving the change in CAPEX.

Thank you. Yeah, I'll let Neil cover a little bit of this after I give an introduction here. I think what we're trying to do today is be very, very clear and add clarification to what we're focused on right now. For the last couple of quarters, you've heard me say we are laser focused on the ramp of Mohawk Valley. That included getting Building 10 up and running, including getting JP constructed. So those three projects are laser-focused, what we're on right now. Mohawk Valley has hit all of the milestones we've talked about. We'll hit 20% utilization this quarter. Building 10 has been a great success. We're very confident in our ability to be able to service 25% utilization in Mohawk Valley. Out of that, Building 10 and our Durham campus infrastructure as well. And the JP is on schedule. And the furnaces are being installed. As we mentioned, the campus is being energized and connected to the grid. We'll start qualifying those furnaces later this year. And we have super high confidence in that because the JP site is about 40, 45 minutes away from where we're at right now. And the same team that brought up building 10, which I'll remind you was a basketball court, racquetball courts, and things like that. It was not a manufacturing facility, and it's now humming on 200-millimeter silicon carbide. That same team will be bringing up the JP, so we're very confident in that. What we're trying to give clarification on is that that's what our focus is, and we're not taking our focus off of that, until we can get, until we demonstrate the success that we know that we can get out of those facilities.

And then from a CapEx perspective, I think there's really no change what we've been saying, I think, for quite some time. You know, we always kind of thought, you know, 2024 would be our peak CapEx period. We're going to see CapEx come down in 2025. you know, pretty substantially. We talked about bringing that down to $6,800 million, and that's before including any potential government incentives that could come in at that timeframe. And the reason for that is the JP will be largely complete from a facilities perspective, or 25. It's very much a tools-based fence. We're installing tools in both JP and Mohawk Valley, and we'll just continue to modulate our CapEx to match that with that market demand. So that's really where we're focused right now. As it relates to another facility after that, and I said it very clearly on the prepared remarks, we'll wait until we see that performance Greg talked about, in addition to having good cash flow and operating performance support and what we would do next.

That's really the plan that we've laid out, and that's what we're

Our next question comes from Colin Rush of Oppenheimer. Your line is open. Please go ahead.

Thanks so much. Given the design activity and a lot of the cost reduction activity that we're seeing with the EV makers, can you talk about what you're seeing from a voltage perspective on powertrain designs? a city migration towards 800 volt? Are you seeing kind of a retrace back to 400 volt or some sort of middle ground or any activity around even higher voltages than 800?

No, there's certainly not a retrenching back to 400. I think folks have realized that you get much better efficiency, better charging, and so forth at the 800 and even higher voltage bus than the EVs. That requires an even higher voltage, call it 1,200 volt loss. So no retrenching back to that. I'm not the expert on what's next beyond 800 volts, but I would say they're really switching from 400 to 800. It's not going backwards.

Okay, that's super helpful. And then on the supply chain side, obviously there's been a lot of rebalancing around inputs into various processes. Can you talk a little bit but the opportunity for, you know, kind of fundamental cost reduction on the manufacturing side from a supply chain perspective.

Yeah, I would – let me hit that, and then maybe Neil can give a little bit more color. You know, we're at the early phase of ramping, you know, a new wafer diameter and a new wafer fab, you know, and so forth, and I think we're seeing already excellent progress on the quality of 200 millimeter pools in terms of the percentage of the wafers that we get out that are automotive grade, you know, substantially all of them are in that kind of category. And so we're really pleased with that. We're obviously we'll continue working on getting more wafer cuts per pool. We'll look at getting better, you know, yield in the fab, you know, and so forth. So I think there's, there's a lot of, um, you know, despite the fact that we're already below the diet costs in Mohawk Valley compared to Durham, I think we're in the early innings of cost reductions on 200 milliliters.

Yeah, and let me just add on to that as well. I think, and I fully agree, I think we're at the very early stages of the opportunity we have to drive costs down. And I think the early returns on yield and cycle times that we're seeing in the fab really only reinforce that even further. I think there's also a structural component to the business that we're building here. If you look at the cash margins, or you look at that target of about 40% over time, but look at our business today. We'll do about $185 million of depreciation this year. That represents about 20% to 25% of our revenue. Once we bring the JP online next year, that will push upwards towards 30%, even in these early stages of building the business. So that means a very substantial part, 20% to 25% of our cost today is in our cash. So we see a very, very nice cash opportunity from a margin perspective and a fall-through perspective over time as we build up the business. So as we improve yield and cycle times and build scale for these facilities, this business is going to generate a lot of cash. I think it's just continuing to execute on the basis of cycle times to supply our customers. I think structurally that will translate into a business that just generates a lot of cash flow.

Our next question today comes from Jack Egan of Charter Equity Research. Please go ahead.

Hey, guys. Thanks for taking my question. So, Greg, I just had a quick clarification for you on one of your earlier comments. I think you mentioned that Chinese devices are probably further off than materials. But as we generally understand it, from a science and an R&D point of view, materials are generally a lot harder to develop and ramp than devices. So why would China be further behind in devices, even if they're relatively easier to ramp than the material side?

Yeah, so thanks for the question, Jack.

You know, this is just the input that I got from the customers out of China. I know there is a lot of effort going into trying to develop a silicon carbide crystal growth capability. As I mentioned, it's hard to get through all the noise on this thing, but likely they're making progress on 150. What we hear is they're pretty far behind on 200. And then from a device perspective, you know, some carbide MOSFET is also not, you know, a super easy thing to do as well.

And I think there's, to be honest with you, it feels like there's less focus on that at this point.

The next question is a follow-up from Jed Dorsimer of William Blair. Your line is open.

Hi. Thanks. I just want to dig into, Greg, your comments on demand, which seem strong for you in EV. Just in the materials business, with that business coming down so much, so if I kind of take your guide on a quarterly basis, it's come down about $40 million per quarter. Why aren't materials ramping? you know, consummate to that. Because I would assume that that opens up the 150 millimeter wafers to sell to other customers.

Sorry, Jed.

So in terms of the, you know, how we think about that, right now the end market demand for automotive in terms of EV customers, there's a lot of changes that's Greg talked about in terms of the OEM landscape. The amount of demand still outstrips our supply. So it's really important for us to continue to take as much capacity as we can to serve those customers. In the meantime, you know, we'll continue to, you know, drive our materials business. As you know, we've got a lot of long-term agreements there that underpin our revenue for a long time. And I think that the, you know, that $99 to $95 million per quarter, you know, we'll continue to service that market, you know, I think in terms of how it's kind of laid out today. But I think it's very important that we continue to service our automotive customers at this time. And we're going to continue to operate.

Well, I understand that. Neil, maybe I didn't ask the question as clearly, but if $40 million is coming out of Durham on the devices side, where you're supplying 150 millimeter wafers internally, why wouldn't you be able to see a $12 million increase in the materials business?

Yeah. So maybe I'll take a crack at that. I don't think I understood that to be your question. A couple of things. Obviously, we have automotive demand that is higher than our current supply, so transitioning that capability from I&E to automotive is a very important customer satisfaction item that we're focused on. Automotive devices are larger than the industrial products, and substantially most of the industrial products are sold in package or module form and the exact opposite for automotive for automotive substantially most of the the product that we sell is in die form so you know we're not adding value or adding incremental revenue potential for the same amount of i'll call it silicon carbide millimeters squared so it's not a one-to-one trade-off when you move from an industrial

part to an automotive part in the FAB itself. Is that clear, Jed?

Thank you. We have no further questions in the queue, so I'll turn the call back over to Greg Lowe for any closing comments.

Well, thanks, everybody, for participating in the call with us, and we look forward to catching up at the end of next quarter.

Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your line.