Ladies and gentlemen, thank you for standing by and welcome to the Cree Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Tyler Gronbach, VP of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Daniel, and good afternoon everyone. Welcome to Cree's second quarter fiscal 2020 conference call. Today, Cree's CEO, Gregg Lowe; and Cree's CFO, Neill Reynolds will report on the results for the second quarter of fiscal year 2020. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Cree's results internally. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook 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. During the Q&A session, we would ask that you limit yourself to one question and one follow-up so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now, I'd like to turn the call over to Gregg.

Thanks, Tyler, and good afternoon everyone. In the fiscal second quarter, we delivered revenue at the upper end of our guidance range. We were recently notified by the Department of Commerce that our license to ship to Huawei would not be granted. As such, we have taken an inventory reserve on Huawei-related products. If you adjust for the impact of the reserve, we exceeded the midpoint of the guidance for revenue, gross margin percentage, and EPS. Neill will provide some additional context on the inventory reserve in a couple of minutes. We continued our transformation to position Cree for the tremendous growth opportunities ahead of us. We are investing to support numerous growth opportunities across multiple industries, underscoring our confidence in our business and its prospects. Those of you who joined us at our November Investor Day were able to hear about some of these opportunities. And in the short time since then, we've continued to see growing momentum for silicon carbide adoption. Despite the Huawei license denial and the short-term headwinds related to the geopolitical and macroeconomic environment, the long-term outlook that we outlined at our November Investor Day remains unchanged. We continue to receive strong validation for our technology by many significant customers who are leaders in their respective industries. Cree's expertise in silicon carbide is unmatched, and we're building on this leadership to accelerate the transition from silicon to silicon carbide. I'll now turn it over to Neill to provide some additional color on our second quarter financial results and the outlook for next quarter.

Thank you, Gregg. For the second quarter of fiscal 2020, revenue decreased 14% year-over-year to $240 million due to 18% lower LED segment revenue amid ongoing soft market conditions and Chinese trade and tariff issues. Wolfspeed revenue declined 11% year-over-year due to ongoing weakness in power and RF device sales. On a consolidated basis, non-GAAP gross margin was 26.8%, which includes the Huawei inventory reserve of approximately $8.3 million or 350 basis points of gross margin impact. Let me take a moment to explain why we decided to take the reserve in the quarter. Recently, we received notice from the U.S. Department of Commerce that our license application to resume shipment of product to Huawei would not be granted. Considering this development and the fact that it has been eight months since the ban has gone into effect, we don't see any opportunity at this time where we will resume shipping any product we currently have on hand to the customer. As such, we felt it was best to record the write-down. We will continue to comply with the ban as it relates to Huawei and do not currently expect to record any RF revenue for this customer during fiscal 2020. Our non-GAAP net loss was $10.4 million or negative $0.10 per diluted share, below the midpoint of our target range due to inventory reserve, which had a negative impact of approximately $0.05 per diluted share. Excluding the impact of the reserve, our EPS was above the midpoint at minus $0.05 per diluted share. Our second quarter non-GAAP earnings exclude $42.4 million of expense, net of tax or $0.39 per diluted share for non-cash stock-based compensation, acquired intangibles, amortization, accretion on our convertible notes, transformation and transaction-related costs, factory optimization restructuring costs, and other items outlined in today's earnings release. By segment, our results were as follows. Wolfspeed quarterly revenue declined year-over-year and sequentially to $121 million, slightly below the midpoint of our target. While we continue to see growth in our materials business, our power business continues to be impacted by softness in electric vehicle sales in China, with a sharp decline seen in the second half of calendar 2019, following the withdrawal of government EV subsidies. In our RF business, we are experiencing continued delays in purchasing activity, as it relates to the rollout of 5G networks. Wolfspeed gross margin was 34.6%, which includes an $8.3 million impact, due to the previously discussed inventory reserve related to Huawei. Excluding the Huawei reserve, our Wolfspeed gross margin was approximately 41% within our targeted range. In addition, Wolfspeed's second quarter gross margin was also impacted by lower materials factory utilization and lower yields related to the ramp of our 150-millimeter MOSFET product. LED product revenue was above our target range at $119 million and grew 4% sequentially. LED gross margin was 22.2%, up 300 basis points sequentially, primarily due to improved factory utilization, lower impact from tariffs, improved product mix, and ongoing cost measures. Unallocated costs totaled $3.9 million for the second quarter of fiscal 2020 that are included in our overall cost to reconcile to our $64 million non-GAAP gross profit and 26.8% total gross margin for the company. Non-GAAP operating expenses for Q2 were $85 million, consistent with our target, and our non-GAAP operating loss was $21 million which includes the impact of the inventory reserve. Our non-GAAP tax rate was 43%. During the second quarter, cash generated from operations was $8 million. And capital expenditures were $61 million, resulting in a negative free cash flow of $53 million, as we continue to invest for growth to expand capacity in our Wolfspeed business. We ended the quarter with $952 million in cash and short-term investments, a zero balance on our line of credit, and convertible debt with a face value of $575 million. For the quarter, days sales outstanding came in at 39 days. And inventory days on hand improved to 84 days driven by the inventory write-off compared to 98 days last quarter. For fiscal 2020, we are now targeting capital investments of approximately $230 million, up from $200 million. Power device customers have recently indicated that their production schedules may be earlier than originally anticipated, which will require more manufacturing capacity than we have in our current plan. Given the time required to install and qualify these tools, we have decided to invest now to ensure we have maximum flexibility, in the event our customers need us to ramp our production sooner. These were tools we were planning to purchase in fiscal 2021, but have decided to invest now so we have some additional buffer for our planned ramp. Our capital allocation priorities remain focused on expanding capacity in our Wolfspeed business. Turning to the outlook for the third quarter of 2020, we are now targeting revenue in a range of $221 million to $229 million, based on the following segment trends: Wolfspeed revenue is expected to be flat to slightly down on a sequential basis, approximately $116 million to $120 million, as we continue to face external headwinds, softness in 5G network spending, and lower electric vehicle sales in China. In LED, on a sequential basis, we expect revenue at the lower end of typical Q3 seasonality between $105 million and $109 million. This range reflects the January 27 announcement by the Chinese government to extend the Lunar New Year holiday, due to the Coronavirus outbreak. The outlook does not account for any future measures taken by the Chinese government, in response to the health crisis that could further delay business from returning to a normal operating schedule. We target Cree's Q3 non-GAAP gross margins at approximately 30%, based on the following segment trends. We target Wolfspeed gross margin to be between 39% to 42%. As previously communicated, we are working through temporarily lower-than-expected yields on our 150-millimeter MOSFET product line. While we saw improvements during the previous quarter, yields have not yet fully returned to expected levels. In addition, given lower 5G demand, we have lowered our utilization in our RF business further impacting gross margin. Therefore, we expect our gross margin percentage to remain roughly flat versus the prior period. As we have said previously, we see these issues as temporary in nature and we expect to return to higher levels of gross margin once the yield improvements are implemented and the volumes increase. It may however take a full manufacturing cycle to see these results in our financial statements once the improvements take hold. We are targeting LED gross margin to be approximately 20% to 21%, down modestly quarter-over-quarter due to lower licensing revenue and lower volumes partially offset by improved cost execution. We are targeting non-GAAP operating expenses to grow to $88 million from $85 million as we continue to invest in our Wolfspeed business including an increased investment to prepare products for production in our Mohawk Valley fab, which we plan to ramp in 2022. We have stated previously that changes in operating expenses can vary from quarter-to-quarter for a variety of reasons including the timing of R&D projects, marketing spend around trade shows, and when IP cases go to trial. We target Q3 non-GAAP operating loss to be between $25 million to $17 million, and we target non-operating income to be approximately $2 million. We expect our non-GAAP effective tax rate to be approximately 30%. We are targeting Q3 non-GAAP net loss to be between $16 million to $10 million or a loss between minus $0.15 to minus $0.09 per diluted share. Our non-GAAP EPS target is lower by approximately $0.02 due to the ongoing impact of the tariffs. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, accretion on our convertible notes, transformation and transaction-related costs, factory optimization restructuring costs, and other items. Our GAAP and non-GAAP targets do not include the impact of any changes to the fair value of our Lextar investment. Our Q3 targets are based on several factors that could vary including overall demand, product mix, factory execution, and the competitive environment. I will now turn the discussion back to Gregg.

Thanks, Neill. I want to touch on some of the comments that Neill has made before I provide an update on our strategic transformation. First, the operating environment remains challenging in the near term. Our customers are cautious and awaiting further clarity with respect to future trade policy as the recent trade deal, while a positive development, didn't really do much for our sector. This lack of visibility, coupled with delays on the 5G side and softer EV sales in China, continues to impact us in the short term. Now the CapEx acceleration that Neill mentioned earlier is a result of some of our power device customers indicating their production ramp schedules may be earlier than they originally anticipated, which would require more manufacturing than we currently have in the plan. In the last 60 days, we've met with several important customers and discussed their production timelines, which has led us to make these additional investments now. This is a positive development and speaks to the growing demand for silicon carbide. The transformation of Cree remains firmly on track. We have a strong team in place to drive our company forward as we position ourselves for the multi-decade growth opportunities before us. We are investing for future growth and seeing early returns on these investments as demonstrated by the critical design wins we recently announced with industry leaders. Our $9 billion device pipeline is large and robust. And we are working hard to convert these opportunities into wins. Last quarter, we were awarded new design-ins for Wolfspeed products totaling hundreds of millions of dollars, further demonstrating our ability to compete and win in the marketplace. As we've mentioned previously, customers tell us that they expect to make decisions on about half of our $9 billion device pipeline over the next 6 months to 18 months. This is a tremendous opportunity and we're making the necessary investments to expand our capacity with our Mohawk Valley fab. We selected a construction company. Work is underway at the site and we expect the initial production ramp to begin in calendar year 2022. This highly automated facility will allow us to meet the growing demand for silicon carbide technologies with improved efficiency and scale. In automotive, the industry is transforming, driven by the transition from internal combustion engines to electric vehicles and from silicon to silicon carbide. In the beginning of January, I spent a few days at the Consumer Electronics Show, meeting with several of our OEM and Tier one automotive customers. The benefits of silicon carbide are clear and create significant value for automakers and customers alike. Our leadership and expertise in silicon carbide, coupled with our commitment to expanding capacity, position us well to capitalize on this opportunity. Additionally, while we've seen some near-term delays in the 5G rollout, the growth in mobile data is substantial and the speeds that are required for these applications are increasing every day, underscoring the market need for 5G. Beyond these markets, the applications for silicon carbide are broad across solar, aerospace, and defense, and industrials and we look forward to expanding our market-leading position as we drive the world's transition from silicon to silicon carbide. There is a high level of optimism at Cree that we have the right product set, a strong engagement with our customers to continue to drive this transition. With that, I'll turn it back over to the operator, and we'll begin our Q&A section.

Our first question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey guys. Thanks for taking the questions. Maybe just a simple one to start off. For the guidance for fiscal Q3, Neill, you're mentioning the Lunar New Year holiday. It was extended by three days, I believe. So, fair to assume the guide would have been something more like $230 million to $237 million or so to reflect about three days of lost revenue? Is that the way to think about it?

Yes, Brian, you're on the right track. For Q3, our LED revenue is expected to be down about 10% compared to the previous quarter. Historically, our LED business sees a seasonal decline of approximately 5% to 10% due to the Chinese New Year holiday. This year, the Chinese government has notified us that the holiday will be extended, and our LED factory in China will not reopen until February 10. As a result, we've adjusted our guidance to reflect the lower end of typical seasonality. The situation is still changing, so it's difficult to predict how further actions might impact it, but we will keep monitoring and respond as needed.

Okay, that's helpful. Regarding Wolfspeed, can you provide some insight or quantify the manufacturing cycle you mentioned? Many interpret the last few quarters as indicating we're just a few quarters into this. Are we aiming for gross margins in the high 30s to low 40s range for Wolfspeed for the remainder of fiscal 2020, assuming this is a one-year manufacturing cycle? How should we assess the timeline before we begin to see significant improvements in margins?

The improvement in yields for the 150-millimeter MOSFET product line is crucial. Last quarter, we addressed a scrap issue with this product line, which has since been resolved, and we are making progress. We are focused on increasing those yields, and we have observed some improvements throughout the quarter. However, these yields have not yet returned to the anticipated levels; they remain below expectations. We have implemented several fixes and are currently working through the process. It typically takes a manufacturing cycle or two for these adjustments to reflect in our financial results. Therefore, the timing of when these fixes take effect will influence our financials as we move forward. I expect fluctuations as we progress. Additionally, we face some utilization challenges, particularly due to the Huawei situation and slower 5G network rollouts, which has led us to reduce RF utilization. As yields improve and our volumes increase, we expect to enhance our margins. This does not change our long-term outlook, which pointed to gross margin opportunities for Wolfspeed in the low 50% range that we discussed on Investor Day.

Thank you. And our next question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Hi, thank you. My first question is somewhat open-ended. Given the ongoing situation in China, could you help us understand the overall exposure, not just related to Chinese customers, but also in relation to the extended Chinese New Year or from a supply chain perspective? What should we consider regarding the implications if U.S.-based customers can't travel there for procurement, beyond what has already been announced concerning the sub-cap?

Sure, Jed. Let me provide some context. When we consider our revenue in China, our LED business accounts for about 40%. It has been slightly higher, but we've adjusted that in our latest forecast. The Wolfspeed business represents a smaller portion, roughly 10% of our revenue comes from China. Currently, we are assessing the situation based on what we know, primarily focusing on the LED business and our factory in China. We also have some suppliers related to Wolfspeed in China, and as of now, that aspect seems to be functioning well. However, it's challenging to predict future management strategies given the unpredictability of the situation.

Sure, I appreciate that. It's helpful. Moving on to the device side of silicon carbide, I was wondering if you could help me understand the lead time we should expect for a ramp in your business once you secure a win or when one of your customers starts ramping up. If it's a new product entering the market, should we anticipate seeing that in one quarter, or will it take a bit longer for them to build inventory and launch their product? Thanks.

It really depends on the specific industry in which we've had successes. For instance, we recently announced design wins with Delphi and ZF, which were made a quarter ago. Both companies mentioned a ramp-up in 2022. You can view this as a timeline of just over two years from receiving the program award to the ramp-up. As we've mentioned previously, we’re now seeing signs that the ramp in 2022 might be steeper than we initially thought, which is why we are increasing our capacity. This serves as a solid example of the timeline involved, which can exceed two years from program award to ramp-up. Some customers may progress faster, while companies in the traditional auto sector can take longer due to their qualification processes.

Thank you. And our next question comes from Craig Irwin with ROTH Capital Partners. Your line is now open.

Hi. Good evening and thanks for taking my questions. So Gregg, another big picture question. We've all heard you say a few times over the last couple of years that the tempo of activity that you're seeing with automotive customers is really the highest that you've seen throughout your career, and that the visibility into the C-Suite are some of these big automotive OEMs and their prime Tier 1 suppliers has never been better. Can you maybe describe for us if anything is changing there the level of commitment that you're seeing on the part of customers the level of interest and attention? And what they seem to be learning about silicon carbide that's going to shape the future of adoption?

I believe the activity level at CES is extremely high, particularly among C-suite executives and CEOs of major Tier 1 companies I encountered. Just yesterday and today, we hosted more than half a dozen representatives from one of our significant customers for a strategic alignment meeting, indicating the ongoing high tempo in our interactions. Car manufacturers and Tier 1 suppliers are navigating a significant transition, one that many have not experienced in their careers, moving from internal combustion engines to electric vehicles. The most important factor for end customers is range, and silicon carbide technology enhances range while effectively reducing costs by minimizing battery size. This presents a straightforward advantage: silicon carbide enables them to achieve greater range with the same battery capacity, reduce battery size for equivalent range, or lower costs for similar range. Given that batteries constitute the largest expense in electric vehicles, this development is crucial. Therefore, I can confidently say that the high level of engagement persists, as demonstrated by the more than half a dozen professionals from procurement, engineering, and R&D visiting us for a workshop over a couple of days.

Great. And then my second question is really again sort of a longer-term related question. So, electric cars are a near-term application, and we're seeing a lot of evidence of adoption. Anything north of 600 volts, we know is silicon carbide. But there are some applications that are just starting to emerge around the edges these days. I had the opportunity to spend the day with the CEO of Airbus' Acubed, the electric flight division and some key people from Boeing from their electric plane side. And they're telling me basically they need very, very high-voltage systems. They estimate 2-kilowatt motors, but that means 3-kilowatt systems. Cree's history providing some of the military work that you've done some of the MOSFET that you've developed for the military and your experience producing 6,500 volt and higher volt MOSFETs kind of positions you uniquely to work with these potential huge longer-term partners. Can you maybe describe for us the emerging applications outside of EVs? I know these are probably a minimum of five years away. But do you see credibility to some of these applications actually coming in and driving the model over the next 10 to 20 years?

Certainly, Craig. There are a few key points to mention. First, we had ABB present at our Investor Day in November, where they discussed various applications, including grid connections. Our customers are developing solid-state circuit breakers that leverage our high-voltage capabilities. You're right that we've already demonstrated and delivered products capable of handling multi-thousand volts. As we scale up our silicon carbide operations, we are also able to reduce overall costs, which in turn opens up more opportunities. This past quarter, we recorded design-ins worth a couple of hundred million dollars, many of which were in industrial applications. Although these applications were small in size, their large number is encouraging. Electric vehicles are paving the way for the broader adoption of silicon carbide, but it's also benefiting multiple industries. Additionally, we've received feedback from several automotive customers who are shifting from a 400-volt system to an 800-volt system. While they are still deciding on the technology to implement, this transition significantly enhances the potential for silicon carbide in the automotive sector.

Thank you. And our next question comes from Gary Mobley with Wells Fargo Securities. Your line is now open.

Hey, guys. Thanks for taking my question. I want to go back to an earlier question about some of the – bringing in some of the capital spending to support the fruition of some of your power device win pipeline presumably with Delphi or ZF. And so if I'm not mistaken your CapEx that you're intending for those fiscal years went up roughly 60% over the prior year, obviously above your prior expectations. So I'm curious to know what sort of revenue you have in mind to support with this additional capacity specific to the Wolfspeed power device sales?

Hey, Gary, thanks for the question. Let me just kind of frame up the CapEx here for a second. Let me kind of talk about revenue and timing on those things. So to be clear, there's really – there's no change to our overall capacity expansion plans. What we're doing here is we're pulling CapEx in just to ensure we have enough buffer and kind of flexibility to meet our customers' needs based on the feedback that they've given us. So, we're going to take the CapEx spend up this year. And if you go back to Investor Day, what we said is, we'd spend $200 million this year. But for the next couple of years after this, we spend north of $200 million. And over time, as we build out the Mohawk Valley fab and we get the benefits of the incentives from that program, we're actually going to see that CapEx go down as that factory starts to ramp based on the partnership we have with the State of New York. And during that period, the 2020 and 2021 timeframe are very much kind of investment years. And that will drive some negative free cash flow in advance of those ramps. So from a CapEx standpoint, same capacity plan, we're just going to move some of that in to support some of these buffers. Now the other thing when you think about revenue for Wolfspeed, we talked about the business 2020, 2021 kind of investment years, we'll start to see the business ramp more substantially in 2022 and then gets kind of full. I think we talked about a $1.5 billion opportunity in Wolfspeed out in the 2024 timeframe. I think what we're talking about here is being ready for that kind of ramp in 2022 which potentially might be a little steeper than we had initially anticipated.

Okay. I want to switch over to the other business. It doesn't get much attention, but let's talk a little bit about the LED business. I'm hoping you can give us an update on where you stand with moving the LED business to a fab-lite model and sort of decoupling it from the Wolfspeed business?

Yeah. We're making – I think we're making good progress there. So, look, I think the LED business is obviously being impacted right now in China. But the plan we have is the same. We're going to focus on areas where we think our customers can drive value. In terms of the outsourcing model, we're on track, and that plan really happens in two stages. The first is to move from silicon carbide to sapphire-type wafers. And we expect to be largely done by – towards the end of this fiscal year and probably more so even towards the beginning of fiscal 2021. And then we'll have the fab outsourcing process that will kind of be worked after that, but partially in line and partially – part of that would be in line with the substrate outsourcing. So we're making good progress. The teams are working at it. And in line with what we just talked about on the capacity expansion that plays a big role to create more capacity for Wolfspeed. So, we're working on it. We're making good progress.

Thank you. And our next question comes from Edward Snyder with Charter Equity. Your line is now open.

Hi. This is Jack Egan on for Ed Snyder. Thanks for taking my question. So back in November, when you doubled the silicon carbide wafer supply agreement with STMicro, how did it affect the timeframe of the agreement? Did it significantly extend the existing contract? Or does near-term demand require ST to purchase more wafers? And also did the extension include another upfront cash payment like the original contract? Thanks.

Yeah. So, what I would describe this as when we announced this we described it as an expand and extension and so part of it was an increase in the amount that they would take on an annual basis and part of it was extending out a little bit. I would describe it more the former than the latter in terms of the two. So I don't think of it as a doubling of the timeframe or anything like that. I don't want to get into any further details beyond that.

Okay. No problem. Thanks for that. And also between the Huawei ban and the EV subsidy cuts in China last year causing headwinds in your device businesses and your comments in the last quarterly call about epi wafers being capacity constrained. I guess why shouldn't we assume wafers, whether bear epi accounts for the majority of Wolfspeed revenue? Thanks.

In Wolfspeed, we previously mentioned that the business could be divided into three equal parts for revenue. However, the materials segment has grown more quickly, so it now represents a larger share of Wolfspeed's revenue. We are currently facing challenges with the 5G rollout in our RF business and the impact of EV subsidies, which affects our overall outlook. Looking ahead, we anticipate significant growth opportunities in our device business as we see certain pipeline wins begin to materialize. Regarding capacity for materials and epi, we continue to invest in epi and have made progress in productivity, though lead times remain extended. Overall, we're optimistic about our capacity improvements.

Thank you. And our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Hello, everybody.

Hi Joe.

Hi, Joe.

Hi. Two longer-term questions. First, listening to ST the other day, I was kind of struck by how much time they spent talking about developing alternative sources of material supply. And if I were you, I'd be able to put off. So I'm kind of wondering, listening to that, is there perhaps in your business plan the intention in the device business to start competing with ST in the power MOSFET business at some point? And then, I have a follow-up.

Well, we absolutely compete in the power MOSFET business. And when we talk about device wins, we've been awarded those device wins against a number of different companies that also happen to be our customers from a materials perspective. So, absolutely, Joe, that's part of the equation. Our vision is to convert the power electronics industry from silicon to silicon carbide. I think there's a tremendous amount of tailwind right now in that with the EVs and the industrial markets that we have talked about as well as the 5G activity. So, I think, our view is we've got a tremendous opportunity in front of us. And that our materials customers who are our device competitors are going to see the opportunity that we see as well. And I think that the growth that we're anticipating is going to be so strong that we basically couldn't handle ourselves from a device perspective.

Okay. Thanks. And then the second question. At CES, I have to say, I was pretty impressed by some of the non-large OEM offerings in particular Rivian and Byton. And I'm just wondering if you can comment on what you're seeing in terms of inquiry or planned ramps or anything from some of these other startups preparing to return to the market this year and next?

I can't comment on specific companies, but I can say that we have engaged with many Tier 1 customers and OEM car manufacturers. As they explore the impacts of electrifying their drivetrains, they realize the necessity of shifting to higher voltages. The benefits of silicon carbide become evident as they transition from 400 to 800 volts, which has led to strong interest from these customers. We've built a device pipeline worth over $9 billion, with about half related to automotive, and we've developed this pipeline in a relatively short timeframe. The potential here is substantial, and there's considerable excitement. Both start-ups and traditional car manufacturers are recognizing these opportunities, and we're actively involved with them. Our customers expect to make final decisions regarding their MOSFET suppliers in the next six to 18 months, and there is significant momentum surrounding this.

Thank you. Our next question comes from Paul Coster with JPMorgan. Your line is now open.

Yes, thanks for taking the questions. So you brought forward the CapEx a little bit in response to some customer demand that you anticipate. Are there any incentives or penalties attached to those customers and their business in the event that the demand doesn't come through in the timeline that you anticipate?

Paul, no, I don't think we have anything like that in there. But typically in the device business, that's not something where we would have something along those lines. But we do work very closely with these customers. We've been in close contact with them very recently. And the indications we're getting from them and the requests we're getting from them is to be prepared for ramping some of these products earlier than we had anticipated. So we're working very closely with them to manage that.

Okay. And then my follow-up question is that you've obviously got pretty decent visibility into long-term revenue opportunities in the EV space now. Can you characterize the split between the regions of that visibility? I mean, I guess what I'm trying to get to is, is it primarily Europe? Or is it fairly balanced across the regions? And any numbers that you can provide would be helpful there.

There is very good activity right now from most European car manufacturers. Volkswagen has been very public about its ambitions in electric vehicles, and there is a significant change across all its various brands. BMW has also made recent announcements about its plans. Europeans are clearly moving rapidly, primarily driven by upcoming emission standards that are quite challenging. In the U.S., led by Tesla, the electric vehicle story is becoming very real and viable. We're now seeing other start-ups entering this market, along with traditional U.S. automakers aligning with the electrification of the powertrain. China has been pushing for electric vehicles for some time, but recent changes in incentives have paused the adoption of EVs. However, these new incentives encourage longer-range vehicles. As Chinese car manufacturers develop and launch longer-range models, this represents a good opportunity for us because we enable cars to travel further with the same battery capacity. Overall, the most intense focus on electrification of the powertrain appears to be in Europe, although there is also significant activity in the U.S. and China.

Thank you. Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much. So, obviously, Delphi is an important customer for you guys from a technology standpoint. And we understand at least part of the merger with BorgWarner is being driven by customer dissatisfaction with the current solutions on the market. So can you talk a little bit about the dynamics of a customer like Delphi going into a pretty substantial merger, which is going to consume a lot of time and energy along with the dynamics with customers really pressing hard but not getting what they want from those suppliers at this point in terms of preparedness for production level? Just initial comments on that.

That's probably a better question for Delphi. What I can say is that we are still in the early stages of this, and the initial feedback we've received from customers has been quite positive. The perception of the Delphi Viper module is very good. We've engaged with many different customers to discuss this, and we have a strong partnership with them. Therefore, we see this as BorgWarner expressing confidence in the capabilities within Delphi.

Okay. And then just talking about the yields that you've mentioned on the 150-millimeter. As you get into automotive-grade qualification, what sort of benchmarks are you going to be looking for? And can you talk about in terms of yields that we can point to as meaningful progress along the way in terms of progressing towards that full automotive-grade qualification for powertrains?

Maybe I'll take a first stab at it and Neill can talk a little bit about it as well. So automotive customers care about a lot of different things and quality is a super important aspect of that. And so in terms of getting product to them that is of high-quality and doesn't fail in their systems, that's a really important aspect. At this point, in terms of delivering products to our initial customers, the products that they're receiving are doing well in their testing and things are progressing along the plan. The yield is really impacting our internal supply if you will. And so we've got actions in place to improve those yields. And we have pretty good line of sight as to how that's going to transition. We feel pretty good about the analysis that we've done on that. And then the additional thing that I would say is one of the important aspects of improving yield is automation. And as we transition to the Mohawk Valley fab, which is opening in 2022 as the initial production ramps begin as well with most of these automotive customers, we're going to have a highly automated factory that's going to eliminate the traditional human error type things that are introduced anytime humans interact with stuff. So we've got really good line of sight on that. We've had many of our automotive customers come in and done audits and so forth. They understand what we're doing. We've hired folks that have come in to help us along this journey as well. The head of our quality organization ran automotive quality at another semiconductor company, and she's doing a bang-up job of putting things in place to be able to meet those expectations.

Thank you. And our next question comes from David O'Connor with Exane BNP Paribas. Your line is now open.

Great. Thanks for taking my question. Maybe two from my side. Maybe firstly, just going back to I think it was Joe's earlier question on ST. Earlier this month they announced another silicon carbide wafer supply agreement with SiCrystal, which comes on top of their acquisition of Norstel. And it's a much smaller deal than the supply agreement that you guys have. But I'm just wondering how you see the silicon carbide wafer supply landscape develop in the longer term? Is there a pull from OEMs to bring on more wafer suppliers? Or could trade tensions behind the scenes kind of be pushing chip makers to rethink their wafer supplier base from a geographical perspective? Any thoughts around that, Gregg would be helpful? And I have one follow-up as well on Huawei. Thanks.

I believe the primary focus here is on supply security as the industry shifts to silicon carbide. Everyone is concerned about how to ensure they can obtain what they need. Long-term agreements, like the ones we've established with ST, are beneficial in this aspect. Expanding capacity, as we've announced, is also extremely advantageous. With the rapid growth we see in silicon carbide, new competitors will inevitably enter the market, including some of our wafer customers. However, entering this industry is challenging due to numerous barriers. Some of these barriers stem from intellectual property and trade secrets, while growing crystals is inherently complex. The machinery required for crystal growth is often custom-built, making it impossible to quickly set up operations and produce quality crystals. Additionally, cutting and slicing the wafers is difficult because of the material's hardness, and applying epi is a challenge as well. We are aware of these difficulties, and we are actively enhancing our materials business to improve yields, reduce costs, and increase scale. As new entrants attempt to break into the materials side of the industry, they will face significant cost challenges. In a rapidly growing industry, it's natural for companies to seek assurance of supply, and diversifying sources is one way to address this. Our goal is to move down the cost curve faster than new entrants can ramp up. So far, this strategy has been effective.

That's very helpful. Gregg, and maybe as a follow-up on Huawei, I understand you've removed Huawei from the guide going forward. But just wondering about the design engagement for future projects or products with Huawei. Is there any discussion with Huawei on future road maps? Or has all engagement with Huawei stalled for now?

No. We have discussions obviously with them. In fact, I met with them in late December. So they are very interested in our technology and the capability we have. We've got products that meet their requirements. So again solutions that meet their requirements. We're just prohibited from selling from them. And the non-granting of the license if you will to Huawei, it says that for the near term they're out of the equation. Will that change in the future? Maybe. I think that if trade relations between the countries normalize again and things get into a better situation we have technology that they're very interested in putting into their systems. But for all intents and purposes right now we're not counting on that.

And let me just add to that. So if you think about it, I think you stated it correctly, Huawei is out of our short term plan as you mentioned. But I'd also consider them out of our long-term plan as well. And the reason for that is if you go back to the Investor Day, we said we would grow Wolfspeed revenue to $1.5 billion. And China represented roughly 10% or a little bit below 10% of that revenue. So you can just read that as China was really not included in that business plan. So both from a short-term perspective and a longer-term perspective, it's not in the plan. If something changes, I think that's great. But right now we're not planning on operating and having Huawei as a customer. And we believe we can still achieve the goals that we laid out at Investor Day under that scenario.

Thank you. And our next question comes from Jeff Osborne with Cowen. Your line is now open.

Hi, good afternoon. I actually had a follow-up on the materials line of questioning. Gregg, I was wondering is there any parameters you can put on as you doubled capacity and I think doubled again in materials over the past few years? Any historical frame or reference around cost reduction? Is there a way to quantify that as to what you've seen or maybe some future targets over the next few years what do you think you can take cost out?

We don't disclose that information mainly because we provide materials to customers, and there's significant sensitivity around pricing. What I can say is that it's been a steep curve, and we've already executed well on that steep curve with a good outlook for continued improvement. This trend indicates that the cost difference between silicon and silicon carbide is narrowing. While we don't expect the cost of silicon carbide wafers to match that of silicon wafers, I can foresee the cost of power generated from silicon carbide wafers coming close to that of silicon. This is largely due to the higher power density of silicon carbide, allowing for smaller chips to generate more power. Overall, this is exciting news, and I believe the steep curve is what drives enthusiasm among our materials customers, as they witness the growing adoption of silicon carbide technology.

That's good to hear. My last question is about the 150-millimeter manufacturing challenges and how they align with the timing for half of the $9 billion awards over the next six to eighteen months. Are these challenges still persisting or causing delays, especially since the New York facility isn't operational yet? I'm trying to understand your comfort level. Have you lost any opportunities in recent months due to this issue? What can you tell potential customers to assure them that you'll address this promptly?

I think they know we're going to be able to overcome this. And what I would say is, what we're needing to do now is throw more material at the wafer fab, so that we can get our customers what they need in a timely fashion. And as I said before, so far what we've gotten them and they've put into their systems, they're seeing pretty good results. So, we're feeling pretty good about that. And then finally, the real revenue ramp beginning in 2022 and accelerating through 2024 lines up pretty nicely with the ramp of our factory in Mohawk Valley. So, I think the issue is more our issue where we have to throw more material-like stuff. And that stresses things obviously, internally. But we'll get through the yield issues. We're pretty transparent with our customers on that, what the challenges are, but we'll get through those yield issues. We're already seeing some improvement in the factory. The scrap issue that we talked about last quarter is now fixed. And now it's just a matter of increasing yields and getting them back up to where we want them to be.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Gregg Lowe for any further remarks.

Well, thanks everybody for your interest and your participation in today's call, and we look forward to updating you at our next call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.