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spk07: 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.
spk08: 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 mentioned 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.
spk02: 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 -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 by 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 project and we expect to significantly reduce capex for fiscal 2025 ahead of receiving any grants or funding from the US 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 a Chips Act and related funding to support our US based projects. Having laid out those points let's move on to the specifics of Woolspeeds 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 dollars 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 and 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. I'm 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 competent that our building 10 factory will be able to support at least 25 percent 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 two billion dollar 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 with US 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 Hockel 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 last 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.
spk08: We believe these
spk02: 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 MOSET devices out of our Mohawk Valley fab where the ramp is progressing well. As I mentioned Mohawk Valley generated 28 million dollars of revenues this quarter ahead of midpoint of our forecast and more than double last quarter's total of 12 million dollars. 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 MOSET die and three discrete MOSETs. 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 dollars of design ends about 80% of which was for EV applications marking our second highest total on record totaling over 7 billion dollars of design ends for fiscal 2024. We're proud to announce that we had approximately 870 million dollars 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 or five years. As we continue to execute on our unprecedented greenfield expansion plans and serve the highest quality silica carbide materials and devices to a largely untapped market we maintain our conviction in our strategy. Our strong design end and design win projectories this year notwithstanding the current gyrations of the EV market gives us confidence in the future and the longevity of silica 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.
spk11: 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 dollars of design and our second highest quarter ever. Customers who have visited our new -the-art manufacturing facilities and tested and used our products and compared them to rival products continue to choose Wolfspeed as our key supplier across both EV and industrial and energy device applications. In recent months in back to Wolfspeed for expansion of multi-year 150 millimeter wafer supply agreements. In addition last year after serving the materials landscape, Renesas selected Wolfspeed for a 10-year supply agreement including 200 millimeter substrates that included a 2 billion dollar 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 percent 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 dollars 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 underutilization which was 30.4 million dollars 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 carveout divestiture in the last five years that has transformed our business and will allow us to remain focused on executing in 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 dollars 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 dollars over the next few years. Eight months later we had executed on 5 billion dollars of low dilution funding from a combination of public markets, private markets, customers and governments. This allowed us to end March quarter with over two and a half billion dollars of cash and liquidity on the balance sheet. Including the final draw of Renesas customer deposit we now anticipate ending fiscal 2024 with approximately 2.2 to 2.4 billion dollars of cash and liquidity. Looking at CapEx we expect to spend approximately 2 billion dollars in fiscal 2024, our peak year, consistent with the guidance we communicated last year. This includes 2.2 billion dollars of gross CapEx offset by approximately 200 million dollars of government incentives in fiscal 2024. In fiscal 2025 we expect a substantial reduction in gross CapEx of about 600 million to 800 million dollars 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 US. 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 and a Mohawk Valley FAP. To be clear as Greg stated earlier we do not anticipate that interim financing should we decide to execute it to be dilutive 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 given 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 dollars for the foreseeable future and we will continue to evaluate that need as we complete our US facility expansion plan and transition to positive EBITDA and operating cash flow. Looking ahead we believe the current US capacity expansions can generate approximately 3 billion dollars 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 dollars of device revenue in addition to the 400 million dollars of device capacity currently installed in our Durham device fab. In addition with the JT 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 dollars of revenue for the quarter a decline of 4% sequentially and increase of 4% year over year. We generated power revenue of 102 million. These results were largely driven by the 28 million dollars 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 a 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 FAP. However in the short term as the man shifts away from I&E we will see an impact on revenue and gross margin. We will shift as much production capacity as possible to EV products in the near term. 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 cost mentioned above also included the impact of 14.4 million a factory startup cost 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 dollars of cash and liquidity on hand to support our facility ramps and growth plans.
spk02: DSO
spk11: 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 for 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 INE 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 a 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 people start to see incrementally less underutilization but incrementally more startup costs which hit different lines of our P&L. The 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 multi-faceted financing plan and we expect to maintain a cash position of greater than 1 billion dollars. The US 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.
spk02: 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 -over-year declines in revenue. Forward-looking indicators point to continued out performance as corroborated by our strong design ends which reaffirms our market leading position and the strong demand for Wolfspeeds 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 entrants 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 ends 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 dollars of design ends 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. 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% reverse 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 silicon 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 dollars of sign-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 Wool Speed, 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 Wool Speed. Operator, we're now ready to open up for Q&A.
spk07: 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 Gianarikis of Tana Codinuity. Your line is open, please go ahead.
spk05: Hi, good afternoon and thank you for taking my question. Just sort of a higher level one, there's significant concern in the marketplace about the Chinese, both from a materials and device perspective, particularly as they appear to be aggressively ramping capacity. Can you help us put that into context? 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.
spk02: Yeah, thanks, George. A couple of things. I'll 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, or the word is that they're making some progress. And then at 200 millimeter, it 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 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, extended two supply agreements with two of our long-term customers for wakers 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 FAC perspective, there's still some ways to go for the Chinese to catch up with both the quality and the quantity of automotive grade substrates.
spk03: From
spk02: a device perspective,
spk03: I think they're further off than that as well.
spk07: Thank you. Our next question comes from Brian Lee of Goldman Sachs. Please go ahead.
spk01: Hey guys, good afternoon. Thanks for taking the questions. I guess maybe as a bit of a follow-up to George's question, more focused on the device side, Greg, can you give us a sense of what you're seeing on market share trends? It seems like there has been some movement and commentary amongst some of your peers in the device market. Are you seeing any market share impact as you're unable to meet shorter-term supply needs? Maybe if you could address that, just what you're seeing and hearing from customers. Separately on the outlook for Durham device revenue, 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? Do you believe that's now fully troughing here? Could we continue to see headwinds from that end market? If so, what's the timeframe for seeing some of that pick back up? Thanks, guys.
spk02: Thanks for the questions, Brian. I'll take the first one. Maybe Neil can tackle the second one. We just posted our second highest design end in our history at $2.8 billion, 80% of which is a significant increase in the number of users for EVs. 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. Also, at the midpoint of the guidance for EVs, our EV business will have doubled since the beginning of this year. It's grown 100%. I think if I'm unaware of anybody that's growing 100% through the year, so I don't see how there's a kind of terrier of losing share. Then you put that on top of having the second highest design end in our history, it doesn't quite square the circles.
spk11: Yeah, and Brian, secondly, from an IAEA perspective and Durham MAP perspective, I think that's exactly right. We have seen some further weakness there. I think we talked about going down to, call it $65 million of revenue from Durham, which is primarily IAEA. 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 a normal margin mix type of tradeoff. If you think about what we're doing when we shift from IAEA to auto, we're also talking about more complex, bigger die in the factory, and go through more steps from an automotive perspective. That tradeoff really is not one to one from that perspective. We're going to manage through this and supply customers where you have the demand, and market demand continues to be on EVs. We'll swap out and push more of our volume and leverage our capacity for EV applications. That will be the Durham MAP, I think, at a -$65 million range for the next couple of quarters after that December quarter. Then as IAEA starts to come back, March, June next year, we anticipate that coming back, most likely in that time frame, we'll be ready to respond.
spk07: Our next question comes from Samick Chatterjee of JP Morgan. Your line is open.
spk06: Hi, good afternoon. Thank you for the question. This is Joe Cradoso on for Samick. Maybe just a quick follow-up on terms of the response there around the design-in and wins. Can you just,
spk00: and maybe
spk06: 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? 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.
spk02: We feel very good about the conversion. The one thing that I would tell you is design-ins and design wins aren't necessarily synchronized. Let me explain that a little bit more clearly. Depending on, let's say it's an EV application, depending on the company, some companies design you in 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 it can take, excuse me, four years to go from design-in to design win. Other more nimble EV manufacturers, some of startups, for instance, they would go in production two years after giving you a design-in. So it isn't necessarily synchronized between the two. So I wouldn't read into it. We're very pleased with both our design-in number for the quarter and our design-win number for the quarter
spk03: as well.
spk07: Our next question comes from Jed Dorseimer of William Blair. Please go ahead. Your line is open.
spk12: 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 economics. 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 will 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?
spk11: Yeah, I think you're kind of breaking this down in a way that's a little more nuanced than that. As I talked about before, when you move to the bigger die 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 high-end products to automotive products. It'll smooth itself out, I think, as we work through the next couple of quarters. But clearly, we are seeing that for the same product running out of Mohawk Valley, we are seeing better cost performance. And clearly, the average transition to the same part, same customer, that translates into better profitability, obviously, if you think about that transition over to Mohawk Valley.
spk12: Okay, so it's non-optimized, then, I guess would be the- Not, yeah, I think in
spk11: Durham. I think over the longer term, I think it doesn't really change our view on how things look over the longer term. It's really just, I think, a couple of quarters type of issue. Over time, you have strong conviction and the ability to drive the business up over 50% gross margin. Think about 70-30 mix EV to I&A products. It could be heavy I&A in this period. That'll be 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, I think the circle line from that perspective is 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, we've got a lot of designs across a lot of customers for I&E 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 able to, ready to respond and leverage a durable footprint, I think, 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.
spk07: Our next question comes from Joshua Buschelta of TD Cowan. Your line is open.
spk09: 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 Starlin facility. Is this primarily into a reaction to what you think is better for the stock right now? Or was there a change in the long term outlook? It doesn't seem like the latter, given you mentioned perpetual supply constraints and EV demand, but it would be helpful to hear some more input on what's driving the change in CAPEX.
spk02: Thank you.
spk09: Yeah,
spk02: I'll
spk09: let
spk02: 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 later focused on the ramp of Mohawk Valley. That included getting Building 10 up and running. It included getting JP constructed. 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 service 25% utilization in Mohawk Valley out of that Building 10 and our Durham campus infrastructure as well. The JP is on schedule. The furnaces are being installed. As we mentioned, the campus is being energized and connected to the grid. We'll start qualifying those later this year. We have super high confidence in that because the JP's site is about 40, 45 minutes away from where we're at right now. 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 is now humming on 200 millimeter silicon carbide. That same team we're bringing up the JP. We're very confident in that. What we're trying to give clarification on is that that's what our focus is. 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.
spk11: From a catback perspective, I think there's really no change what we've been saying. I think for catbacks come down in 2025. Pretty substantially, we talked about bringing that down to $800 million and that's before including any potential government incentives that could come in at that time frame. The reason for that is the JP will be largely complete from a facility's perspective as it finishes this calendar year. That's been the majority of our catbacks spent in 2024. As you get out of this calendar year and start looking into calendar 25, it's very much a tool to both JP and Mohawk Valley. We'll just continue to modulate our catbacks to match that with that market demand. That's really where we're focused right now. As we relate to another facility after that, I said it very clearly on the prepared remarks, we'll wait until we see that performance track talked about in addition to having good cash flow and operating performance like the support and what we would do next. That's really the plan that we've laid out and that's
spk03: what we're looking
spk11: to
spk03: keep the focus on.
spk07: Our next question comes from Colin Rush of Oppenheimer. Your line is open. Please go ahead.
spk04: 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 power train designs? Are you seeing a steady migration towards 800 volt? Are you seeing a retrace back to 400 volt or some sort of middle ground or any activity around even higher voltages than 800?
spk02: 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, an even higher voltage bus on the EVs, that requires an even higher voltage, call it 1200 volt MOSFET. So no retrenching back to that. I'm not the expert on what's next beyond the 800 volt, but I would say that they're really switching from 400 to 800. It's not going backwards.
spk04: Okay, that's super helpful. Then on the supply chain side, obviously there's been a lot of improvements into various processes. Can you talk a little bit about the opportunity for fundamental cost reduction on the manufacturing side from a supply chain perspective?
spk02: Yeah, let me hit that and maybe Neil can give a little bit more color. We're at the early phase of ramping a new wafer diameter and a new wafer fab and so forth. I think we're seeing already excellent progress on the quality of 200 millimeter bulls in terms of the percentage of the wafers that we get out that are automotive grade. Substantially all of them are in that kind of category. We're really pleased with that. We're obviously will continue working on getting more wafer cuts per bull. We'll look at getting better yield in the fab and so forth. I think there's a lot of despite the fact that we're already below the diet cost in Mohawk Valley compared to Durham, I think we're in the early innings of cost reductions on 200 millimeter.
spk11: Yeah, and let me just add on to that as well. I think I fully agree. I think we're at the very early stages of the opportunity we have to drive off and I think the early returns on the old cycle times that we're seeing 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 over 40 percent over time, if you look at our business today, we'll do about 185 million dollars of depreciation this year. That represents about 20 to 25 percent of our revenue. Once we bring the JP online next year, that'll push up upwards towards 30 percent, even these early stages of building the business. So that means like a very substantial part, 20 to 25 percent of our cost today is in our cash. So we see a very, very nice cash opportunity from a margin perspective and a falter perspective over time as we build up the business. So as we improve yields and cycle times and build the scale for these facilities, this business is going to generate a lot of cash flow. I think it's just continuing to execute on the basis of yields and cycle times by our customers. I think structurally that'll translate into a business that just generates a lot of
spk03: cash flow.
spk07: Our next question today comes from Jack Egan of Charter Equity Research. Please go ahead.
spk10: Hey guys, thanks for taking my question. So Greg, I just had a quick clarification for you on one of your earlier comments. So I think you mentioned that Chinese devices are probably further off than materials, but as we generally understand it from a, I guess, 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?
spk02: Yeah, so thanks for the question, Jack. 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 sodium 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 200. So, and then from a device perspective, sodium carbide is also not a super easy thing to do as well. And I think there's,
spk03: to
spk02: be honest, it feels like
spk03: there's less focus on that at this point.
spk07: The next question is a follow-up from Jed Dorsheimer of William Blair. The line is open.
spk12: Hi, thanks. I just want to dig into, Greg, your comments on demand, which seem strong for you in in EV. Just in the materials business, you know, with that business coming down so much, so if I kind of take, you know, 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.
spk11: 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 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 $99-95 million per quarter, you know, will continue to service that market, you know, I think in terms of how it's kind of laid out today. 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.
spk12: Neil, maybe I didn't ask the question is clearly, but if 40 million is coming out of Durham on the devices side where you're supplying the 150 millimeter wafers internally, why wouldn't you be able to see a $12 million increase in the sales of your products?
spk02: Yeah, so maybe I'll take a crack at that. I don't think I understood that to be your question. So a couple of things, you know, 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. The onboarded devices are larger than the industrial products, and substantially most of the industrial products are sold in packaged or module form, and they get the exact opposite for automotive. For automotive, substantially most of 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 -to-one trade-off when you move from an industrial part to an automotive part
spk03: in
spk02: the
spk03: fab itself. Is that clear, Jed?
spk07: 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.
spk02: 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.
spk07: This concludes today's call. Thank you for joining. You may now disconnect your line.
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