Earnings Call Transcript - NVTS Q3 2021

Stephen Oliver, Vice President of Corporate Marketing and Investor Relations

Thank you. Good afternoon. I'm Stephen Oliver, Navitas Vice President of Corporate Marketing and Investor Relations. Thank you for joining Navitas Semiconductor's Third Quarter 2021 Results Conference Call, our first as NVTS, a public company. I'm joined today by Gene Sheridan, our Chairman, President and CEO; and Todd Glickman, our CFO. This call is being webcast on the Investor Relations section of our website. A replay of this webcast, along with our 2021 third quarter earnings release, will be available on our website approximately 1 hour following this call, and the recorded webcast will be available for approximately 30 days following this call. Additional information related to our business is also posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is included in our earnings release, which is posted separately on our website in the Investor Relations section. In this conference call, we will also make forward-looking statements about future events or about the future financial performance of Navitas. You can identify those statements by words like we expect or we believe or similar terms. We wish to caution you that such forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from expectations expressed in our forward-looking statements. Important factors that can affect Navitas' business, including factors that could cause actual results to differ from our forward-looking statements, are described in our earnings release. Please also refer to the risk factors affecting Navitas discussed in SEC filings that were made in connection with our recently completed business combination with Live Oak Acquisition Corp. II, including the proxy statement or prospectus filed with the SEC. Our estimates or other forward-looking statements may change, and Navitas assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now I would like to welcome Gene Sheridan, Navitas Co-Founder and CEO, to begin the main section.

Gene Sheridan, Chairman, President and CEO

Thank you, Steve. After our IPO celebration and ringing the Nasdaq opening bell, this is our first earnings call as a public company. We'll share our third quarter and year-to-date 2021 results as well as describe the fundamental opportunity and unique differentiation Navitas possesses with our GaN power IC technology. In Q3, our total revenue grew 61% year-over-year to $5.6 million and 128% on a year-to-date basis. Demand was solid in the mobile charging market with continued and growing business from Dell, LG, Amazon, OPPO, Xiaomi, Lenovo and dozens of other customers, and received over 90% of the top smartphone and laptop customers designing their next-generation fast chargers with our GaN power IC. We are pleased with our growth trajectory and believe we will continue to double our revenues annually. Our customers were targeting even faster growth in GaN chargers but were limited in Q3 by industry-wide silicon supply constraints. In Q3, we saw our customers launch 24 new GaN chargers, which includes major launches from the top mobile and aftermarket players. Last week, we announced our third-generation GaN power ICs, which integrates new GaNSense technology and is already being adopted in major customer launches. And we are making good progress on our plans to expand into data center, solar and EV markets. Leading customers like Enphase Energy, Brusa and Compuware provided strong endorsements of our GaN power ICs and our excellent early adopter partners to Navitas. We are on track to sample these new higher-power GaN ICs this quarter to these and other top-tier customers in each of those target markets, which represent multibillion-dollar market additions to the $4 billion opportunity we've already identified in mobile and consumer. Before I go into further details on the significant Q3 business highlights, I want to share a brief introduction on the opportunity and strategy for our GaN power IC technology. GaN is comprised of both gallium and nitrogen, which combined to form an incredibly powerful bond that is 10 times stronger than silicon with 2 times higher electron mobility. In power electronics, this translates to semiconductor devices that run up to 20 times faster than legacy silicon and enables up to 3 times more power and 3 times faster charging with greater energy savings and in half the size and weight. Navitas GaNFast power ICs integrate GaN, power and drive plus protection and control to deliver simple, small, fast and efficient performance. Our GaN ICs enable speed and efficiencies that are far greater than silicon but also far greater than other suppliers' discrete GaN implementations. Navitas has created this leading technology and number one market position in GaN power ICs in just 7 years based upon a unique and proven founding management team that has worked together for decades. We've also developed a systems-driven approach to create application-specific GaN ICs, which offer more differentiation and value compared to other GaN suppliers that offer only a standard discrete with a multi-market approach. Let's take a detailed look at our progress and plans in each of our target markets. In mobile chargers for smartphones, tablets and laptops, we're pleased to announce an additional new 24 fast chargers using Navitas GaN ICs released to the market in Q3, taking the total to 164. We believe this to be more than all other GaN companies combined. These include 5 new chargers from Baseus, one of the fastest-growing aftermarket suppliers in the mobile charger space and include the world's smallest 100-watt charger that supports Qualcomm Quick Charge 5.0. Q3 launches also included significant new products from major mobile brands such as Xiaomi's Civi phone charger and Lenovo's YOGA laptop chargers. With Lenovo, we created an impressive co-op marketing campaign with GaNFast branding and Lenovo online and live stream video collateral. Today, we are very proud to announce a new strategic partnership with Anker, a global leader in fast-charging technology. Anker is both a long-time customer and an investor in Navitas. This new agreement dedicates engineering teams at both Navitas and Anker to be co-located at Anker offices to develop and launch leading-edge GaNFast chargers with very short development times. The focus will be on next-generation mobile chargers but will also include expansion into high-growth energy storage markets. In fact, the partnership is already paying off quickly with 2 new GaN chargers launched in Q3, including a 30-watt smartphone charger, which is similar in size to the original 5-watt so-called sugar cube charger and 70% smaller than the standard silicon 30-watt. Last week, we announced our third-generation GaN power ICs, which integrates GaNSense technology. GaNSense enables up to an additional 10% of energy savings as well as all-new autonomous protection circuits, which we expect to set a new standard in the industry for reliability and robustness not just for GaN but also compared to all power semis across silicon, GaN and silicon carbide. This new technology builds on our already impressive track record with now over 30 million units shipped without a single reported GaN-related field failure. Of greatest importance this morning, we are very pleased to announce a new category of mobile chargers defined as ultrafast chargers that have been developed and launched with our new GaNSense technology. This new category of chargers delivers over 100 watts efficiently to enable smartphones to achieve 0 to 100% charging in just 20 minutes or less. This is an incredible new industry development that will redefine the charging experience for consumers globally. The first such product was just announced by Xiaomi for the Note 11 Pro+. It's 120 watts packed in the size of a typical silicon 45-watt charger, 3 times smaller than typical silicon-based 120-watt laptop chargers, yet achieves 0 to 100% in only 17 minutes. In addition, these ultrafast chargers require double the GaN content per charger, which, of course, doubles the revenue opportunity for Navitas. By our estimates, we project this ultrafast charger category will represent up to half of the GaN potential in mobile chargers over the next few years. This translates to up to $1 billion per year out of the broader $2 billion per year mobile GaN charger potential. More ultrafast chargers are in development now with our GaNSense technology and will be launched by a number of major brands in the coming months. With worldwide GaN shipments currently representing an adoption rate of only about 2% to 3% of this estimated $2 billion market, we have an incredible opportunity ahead of us in this segment. From mobile applications, we believe there is a relatively easy transition and expansion to broader consumer applications, including TV, all-in-one PC, smart home devices and game consoles. Here, we access another $2 billion market, starting with designs like all-in-one PCs and TVs, where efficient slimline power supplies can enable the sleek design demanded by these applications. We anticipate first shipments of our GaN ICs into this broader nonmobile consumer market starting this quarter and ramping throughout next year. In particular, the change in TV screen technology from Ultra HD to 8K means a 4 times increase in power needs. And GaN power ICs deliver that power in small, low-profile form factors. Moving on to higher-power applications like data centers. Our high-speed GaN ICs translate into shrinking the size of server power supplies, which creates more space for data processing with CPUs, GPUs and memory chips. However, the additional major value for GaN is driven by energy savings. Data center operators pay more in electricity per year than they do for the hardware itself. Each efficiency point can be translated directly into significant running cost savings. And with GaN, typical efficiency can be increased by almost 10 points. In other words, about a 40% energy savings compared to silicon-based data centers. Worldwide, we expect to transition from silicon to GaN could save up to $1.9 billion per year with an extremely fast payback estimated to be around 2 months. The leader in high-efficiency server power is Compuware based in Taipei with number one share in designs that can achieve the highly efficient platinum and titanium classes of power supplies. Compuware declared that GaN is a breakthrough new technology that is enabling dramatic improvements in size, energy savings and power density and that Navitas is an excellent partner to Compuware with our industry-leading GaN ICs. With over 13 million units of servers shipped each year, each with over $75 of GaN content, data centers represent another $1 billion a year opportunity for our GaN ICs. Given data center development times of 12 to 18 months, we anticipate our first data center designs using our GaN power ICs will start mass production ramps in early 2023. Now let's turn to solar and energy storage. Renewable energy is critical for us all to reduce our dependence on fossil fuels. Enphase Energy, the world's leading supplier of microinverter-based solar plus storage systems, recently announced their plans to adopt GaN technology and their cooperation with Navitas. And they stated that it's the end of the road for silicon MOSFETs and that gallium nitride offers a tenfold switching frequency advantage at a significant system cost advantage. Navitas estimates that GaN power ICs can reduce inverter cost by 25%, accelerating solar installation payback by about a year, and that the total residential solar GaN IC opportunity is over $1 billion per year. Given solar development times of about 2 years, we anticipate our first solar designs using our GaN power ICs will start mass production ramps in the second half of 2023. Acceleration is also the focus in EVs or eMobility as we cover all opportunities from electric scooters and electric bikes to full passenger EVs. There are 3 opportunities for GaN power ICs in EV: the onboard charger or OBC, which charges the battery; the DC-to-DC converters, which convert from the battery to lower voltage to power in-car electronics; and the traction drive, which is the electric motor to move the car. Our initial focus is on the OBC and DC-to-DC. One important power electronic supplier to EV customers worldwide is Brusa. Brusa publicly announced their intentions to move to GaN to meet future cost and performance needs beyond what is possible with silicon or silicon carbide. They also announced their strong validation of the benefits of our GaN power ICs for simplicity, reliability, speed, form factor and cost. With a conservative estimate of $50 of GaN content per OBC, another $15 for the DC-to-DC converter and $200 for traction drive, we believe each EV represents over $250 potential GaN content and a market opportunity over $2.5 billion per year. Given EV development times typically of 4 years, we expect our first EV designs using our GaN power ICs to start their production ramp in 2025. Let's now turn to Navitas' team expansion and regional news. As the mobile market increases rapidly and the higher-power expansion markets of EV, solar and data center begin, Navitas' design, applications and sales support footprint are being strengthened and expanded. With confidence in the Navitas business model, we recruited these teams in advance of our IPO's capital raise. Since the start of 2021, we have increased the team by over 50%, reaching over 150 highly skilled and experienced staff with an approximate 50-50 split between U.S. and Asia. This includes many with deep domain and system expertise in our expansion markets of data center, solar and EV. In China, we have tripled our Shenzhen facilities to support the significant growth we see in that region, including major expansion of our applications lab capacity, which we use with our customers and our supply chain partners to co-develop these next-generation GaN fast chargers. We are also investing in Europe, building a world-class sales, tech support and applications design center in that region. Europe is key to our plans for EV, solar, energy storage and even broader industrial applications. We expect to announce significant new business in that region soon. And finally, I want to discuss the important topic of climate change and decarbonization. Today, only about 15% of our world's energy comes from sustainable sources utilizing electrical energy, while the balance is dependent on fossil fuels. We believe that ratio will reverse in the coming decades, and GaN is a critical element of this major energy transition. GaN makes electrical energy faster, more efficient, and lower cost, all of which will serve to accelerate the world's transition from coal-fired power plants to solar and wind electricity-based energy sources as well as transition energy applications from gas-powered transportation, buildings and industrial factories to clean electricity-based energy, where GaN can have a significant impact. GaN offers a carbon footprint that is up to 10 times lower than that of silicon and makes all electrical energy uses faster, cleaner, more efficient and lower cost. You can anticipate major announcements in this area from Navitas in the near future as we look to take a leadership role within the semiconductor industry in driving this energy transition and electrifying our world. With that, I'll hand it over to Todd Glickman, our CFO, for the financial update.

Todd Glickman, CFO

Thanks, Gene, and thanks to everyone for joining us today on our first public earnings call. Let me take you through our third quarter numbers and guidance for Q4. Revenue grew to $5.6 million, representing a 61% increase over the prior year's third quarter. Mobile demand remained strong. However, our customers were targeting over 1 million of additional demand in Q3, which they couldn't achieve due to non-GaN-related supply constraints. GAAP and non-GAAP gross margin was 46% in the third quarter, up from 38% in the same quarter of the prior year. We've been running about 4% to 6% on a non-GAAP basis during 2021, which is consistent with our strategy of delivering healthy margins and passing along cost reductions to our consumers during our high-growth early years and targeting a 55% gross margin long term. With regard to expenses, we have expanded our sales and marketing teams to support new markets in data centers, solar and EV while also expanding regionally into Europe. As such, our non-GAAP SG&A expense was $3.4 million in Q3, which is up from $2.2 million in the third quarter of 2020. Non-GAAP R&D expense was $5.7 million in the third quarter of 2021 compared to $2.9 million last year as we are developing multiple new generations of GaN ICs while also expanding our roadmap to include GaN ICs for data center, solar and EV. Putting all this together, non-GAAP net loss from operations was $6.5 million compared to a net loss of $3.7 million in the third quarter of 2020. Turning to the balance sheet. We ended the quarter with $11.1 million of cash on the balance sheet and inventory of $11.7 million compared to $2.2 million a year ago as we put in place significant inventories to prepare for customers' aggressive growth plans, some of which were constrained by non-GaN supply chain limitations. Moving on to guidance. For the fourth quarter of 2021, revenues are expected to be $7.4 million, plus or minus 5%, which represents approximately 60% growth compared to the prior year, over 30% sequential growth from Q3 and more than double our revenue from 2020 on a full year basis. Our guidance factors in continuing customer non-GaN supply chain challenges as we believe this will continue for the next few quarters. I'd also like to mention that we have posted an Excel spreadsheet showing our historical quarterly financials and seasonality. GAAP and non-GAAP gross margin is expected to be approximately 44% in the next quarter. We expect sales of our gen 3 GaNSense ICs to reduce costs as we move into 2022 and help offset some of the cost increases we have seen in our supply chain. A transition to gen 4 in the second half of 2022 should help with our margin expansion plans. In the long term, as our business grows and industry-wide supply and demand come back into a better balance, we continue to target 55% gross margins. Finally, after the quarter, we completed our de-SPAC business combination on October 19, with approximately 117.7 million shares outstanding. We expect our basic and diluted share count in Q4 to be approximately 97 million. The majority of our shares outstanding are held by major shareholders and executive management and are currently subject to a lockup for up to 1 year and up to 3 years, respectively. Cash, cash equivalents and investments post de-SPAC totaled approximately $260 million, net of deal-related expenses. Additionally, we have $30 million in restricted assets, which is expected to be converted to cash through a forward purchase agreement. We are pleased to now have the balance sheet in place to support our aggressive growth. In summary, I'm pleased with our growth, but we have only scratched the surface of moving the market from silicon to GaN and are excited about the future ahead. I add my thanks to our worldwide employees, partners and customers for their hard work in driving change and bringing us one step closer to electrifying our world.

Ross Seymore, Analyst

Gene, I appreciate your insights on the long-term drivers. I want to shift my emphasis to the short-term with my question. Todd, you mentioned some supply issues that aren't related to GaN. Could you elaborate on that? We've heard from others about a surplus of inventory, indicating too much supply in the charger sector, but it seems like you're suggesting the opposite. Additionally, regarding the duration you mentioned lasting for a few more quarters, could you clarify that as well?

Gene Sheridan, Chairman, President and CEO

Sure, Ross. I can handle that. Thanks for your question. This is Gene. I think there's a lot of components used inside of GaN chargers besides the GaN chip, of course. I'd say the primary shortages have been with the silicon controllers. There's actually multiple silicon controllers used on the primary side; on the secondary side, the PD controller. So that's where most of the limitations have been, although we see even nonsilicon, non-semiconductor challenges popping up from time to time. With all of that said, I think our customers are making really good progress to approve new sources of supply. So they have many options to ensure they can satisfy the need for those non-GaN chips and free up some of these constraints, but it's still our best guess and our customers' feedback that it's probably 2 or 3 quarters of constraints, which we factored into the guidance that Todd described.

Ross Seymore, Analyst

Great. I believe Todd mentioned there was demand for 1 million units that they were unable to ship due to size and duration issues. Is that correct? Did I hear you right, Todd? How long do you estimate it will take to resolve this? Is it likely to be another quarter or two? What’s your best estimate on that?

Todd Glickman, CFO

Yes, that is correct. It was 1 million units. Duration, we expect to sort of — to come back on track and going forward to all of our forecasts.

Tristan Gerra, Analyst

You talked notably during your Analyst Day that you expect price breakeven with silicon a couple of years from now. But clearly, adoption is waiting for that price breakeven. So clearly, your customers are realizing the benefits. Is this like silicon carbide where the adoption rate in automotive is happening because of the gain in performance despite the price premium? Or do you expect a further inflection point once you reach price parity because it's just going to accelerate demand? If you could just give us a sense of how many people are waiting just for price parity versus just using your technology for the advantages that it offers.

Gene Sheridan, Chairman, President and CEO

Yes. Great question, Tristan. And I would say certainly in the mobile market, the value is clearly high. And so even with a modest premium as we have today, we see a lot of growth in adoption. I'd say that's all of the premium market and a large percentage of the mainstream market. But I think as you get into the low end of mainstream and the really low end of the markets, they're going to be more price sensitive. At least from our view, to be confident that we get the full transition from silicon to GaN that we expect, that cost transition is important. I'd also say it's more important in the nonmobile consumer segment. In that case, of course, you're not carrying around the power supply. You're not charging a battery. So the value point is going to be a little tougher. It's going to be a little bit more price sensitive. For that reason, we've been pretty conservative in our outlook for the nonmobile consumer, but there's a lot of untapped potential there as we cut that GaN premium down lower and even match silicon and go below silicon in the next 2 years, as you described.

Tristan Gerra, Analyst

For my follow-up question, you mentioned gross margin and the impact of shortages. It seems this could continue in the first half of next year, with potential improvement in the second half, particularly with next-generation products. While I understand you won't provide guidance beyond this quarter, should we anticipate gross margin stabilizing in the range of 44% to 46% that you've shown this year for the next few quarters, with possibly an inflection point thereafter?

Todd Glickman, CFO

Yes. Good question, Tristan. We do expect to have more information for you after Q4 earnings, but we're currently projecting a flat to slightly better margin year-over-year as the margin expansion from the new generation of GaN ICs will be partially offset by the increase in supply chain cost. But our goal continues to be to drive the GaN premium from silicon to 0 in the next 2 to 3 years and achieve a long-term margin of 55%, and we're on track for that.

Richard Shannon, Analyst

Congratulations on a strong start to your public journey. I have a couple of tactical questions before moving on to some longer-term ones. Regarding your guidance for the fourth quarter, there's a notable increase in quarter-on-quarter growth observed over the last few quarters. Is this increase due to seasonality, new wins, or other factors? You mentioned earlier that supply chain issues may not be easing to support this growth. Could you elaborate on what is contributing to this sequential growth in the fourth quarter?

Gene Sheridan, Chairman, President and CEO

Sure. Yes. Richard, thanks for your question. Yes, it's driven really by both seasonality. I think we'll always expect, as we saw last year, the second half of the year will tend to be bigger, in particular, in Q4, than the first half. We'll see that pattern again this year and likely next year. But there are — and that's, of course, because of specific launches that tend to be holiday based in the mobile and consumer space, in particular, as we highlighted many new products, 24 new products launched in Q3. Of course, there are many more coming in Q4, but even the Q3 launch has helped to really drive a lot of the Q4 revenue. Those Anker products we talked about, the Baseus products, especially the Xiaomi ultrafast charger really leading a new category in that space. And as I said, there's many more coming that we can't announce but would cover in the Q4 earnings release.

Kevin Garrigan, Analyst

Congrats on the quarter and on the IPO. I just had 2 questions. The first on the product side. Can you kind of give us a sense of the expected life cycle for a smartphone power supply? Can it kind of be used over multiple generations? Or does the design need to be won with every kind of new iPhone or a new phone model?

Gene Sheridan, Chairman, President and CEO

Sure, Kevin. Good to hear from you. Yes, I'd say the life cycles are typically running 1 to 2 years on average. It can be a little less. It can be up to 3 years. That life cycle doesn't mean it's a completely new design. Oftentimes, there are refreshes, reusing a lot of the same architecture technology. Of course, GaN has created a disruption this market is not used to. So we're seeing major redesigns when you go from silicon to GaN. But once we get that first GaN design, there's, of course, a good strong likelihood and a pattern that we see of a reuse to proliferate that either in the refresh of that model or, of course, into many new models.

Natalia Sukhotina Winkler, Analyst

The question I had was on the automotive opportunity for you guys. Appreciate that the types of customers are a little bit different and the sales funnel is probably a little bit different from the fast charging market. So I'm just curious, how do you guys see your competition in that space? And specifically, how do you view the certification process for your devices, if that is something that plays into the timeline of the adoption as well?

Gene Sheridan, Chairman, President and CEO

Yes. Thanks, Natalia, for the question. As you alluded to, the development cycles are longer. The emphasis on reliability and certification testing is even more critical. From our view, that really plays into our strength. We've actually over-designed our GaN technology for the mobile market, which obviously is sort of 1-, 2-, 3-year life span. And that's reflected in the fact that we've shipped 30 million units without a single GaN-related reported failure. I mean that was designed that way, anticipating the higher reliability markets that we're now moving into. GaNSense, the new generation we've just announced, only adds to that strength with even more built-in protection, reliability, all of which is going to help us to pass any certification tests and automotive-specific tests that our customers might want to perform over time. And as we mentioned in the prepared remarks, some customers like Brusa had even said that silicon carbide and silicon can't meet their needs for the future. GaN is the answer in terms of pushing cost, performance and reliability. So it puts us in a good position to get through any of these certification tests and drive that adoption over the next few years. Thank you, operator, and thanks to everybody for joining our first public company earnings announcement. It's an exciting time for the company. And we want to wish you — to all, go GaN fast and electrify our world with us. Thank you for attending.