Wolfspeed, Inc. (WOLF) Q4 2020 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Cree Fourth Quarter Fiscal 2020 Earnings Conference Call. At this time, all participant 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, Head of Investor Relations. Please go ahead, sir.

Thank you and good afternoon, everyone. Welcome to Cree's fourth quarter fiscal 2020 conference call. Today, Cree's CEO, Gregg Lowe; and Cree's CFO, Neill Reynolds will report on the results for the fourth quarter of fiscal year 2020 as well as how the company is navigating the ongoing COVID-19 pandemic. 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. 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 including risks related to the spreading impact of a COVID-19 pandemic. 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.

Thank you, Tyler. Good afternoon, everyone, and thank you for joining us today. Before I begin, I'd like to take a moment to thank all of our employees around the world. I'm extremely proud of their efforts and solid execution during this unprecedented time. As we continue to address the impact of the pandemic on our operations, the health and safety of our employees, customers and partners remains our top priority and we are committed to operating safely. As a designated essential business, our facilities remained open throughout the quarter and we are routinely executing stringent testing, cleaning and safety protocols at all of our locations. We continue to closely monitor federal, state and local guidelines and adjust our business continuity plans as appropriate. Attendance in our factories has improved since the start of the pandemic, but is still below our normal operating level as we continue to operate with an abundance of caution requiring employees that have been possibly exposed to the virus to observe a mandatory quarantine period. In addition, we are also offering employees the flexibility to support the needs of their families at this time, which can also impact attendance. Turning to our performance. We delivered fourth quarter results in line with our targets on revenue, gross margin and EPS and are encouraged by the strengthening demand in the quarter to date despite the continued headwinds presented by COVID-19. In addition, we are pleased to see silicon carbide gaining traction in the market as evidenced by the recent announcement of Delphi's win for a new battery electric vehicle and our partnership with StarPower and the Yutong Group for an electric bus that will use silicon carbide in the powertrain. Our opportunity pipeline is growing, driven by the outstanding work of our sales team, working seamlessly on our digital selling platforms to drive new business and remain in constant contact with our customers and distribution partners. Fiscal 2020 was a transition year for us and we made good progress on becoming a global semiconductor powerhouse while at the same time addressing the unexpected challenges associated with the pandemic and ongoing geopolitical concerns. While the operating environment remains fluid, we are confident in the long-term growth opportunity ahead of us and firmly believe that Cree is uniquely positioned to capitalize on the industry's transition from silicon to silicon carbide. Despite the market uncertainty, the excitement of our customers about the next generation of semiconductor technology remains high, and we are committed to our capacity expansion plans to meet this growing demand. I'll now turn it over to Neill, who will provide an overview of our financial results and an outlook for the first quarter of fiscal 2021.

Thank you, Gregg, and good afternoon, everyone. Overall, as expected, our fourth quarter performance was impacted by softening global demand and some disruptions to our operations resulting from the pandemic. Revenues for the fourth quarter of fiscal 2020 were $206 million, a decrease of 18% year-over-year. Our LED segment revenue decreased 17% year-over-year, largely driven by global trade events and events related to the pandemic. And Wolfspeed revenue declined 19% year-over-year due to continued softness for China EVs in EV sales and supply and demand challenges tied to the pandemic. Our non-GAAP net loss was $20 million or $0.18 per diluted share. Our fourth quarter non-GAAP earnings excludes $19.5 million of expense, net of tax, or $0.18 per diluted share for non-cash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, project transformation and transaction-related costs, factory optimization restructuring costs, gain on partial debt extinguishment, changes in our Lextar investment and other items outlined in today's earnings release. Moving on to our fourth quarter performance by segment, Wolfspeed quarterly revenue declined 5% sequentially to $108 million. This was primarily due to lower demand from a non-semiconductor customer in our materials business as a result of the pandemic and some push out of product by several LTA customers, which more than offset improved performance in power and RF during the quarter. In power, we continue to see strong demand for our products, but it has been tempered by factory output related to COVID-19 safety measures. While our performance was softened by some supply constraints, we expect this to improve as we execute our previously announced capacity expansion plan. Positively, our automotive customers remain committed to their long-term plans and the need for our technology. And while the pandemic may impact the timing of some customer decisions, the industry shift from silicon to silicon carbide continues to build momentum. Further, in the industrial space, there has been broader awareness as a result of our partnership with Arrow Electronics, as our sales team have done a great job of showcasing the benefits of silicon carbide in new applications to their customers. In RF, we are seeing some improved performance, and we continue to grow our RF backlog. While this is encouraging, there are still certain markets that have delayed their 5G rollouts and the pandemic has also delayed auctions in key markets. Overall, we are encouraged by the early signs of strengthening demand in our power and RF device businesses despite continued near-term headwinds and limited visibility we have into the full impact of the pandemic. Moving on to materials, in line with our expectations, revenue declined sequentially as we were not able to ship to one non-semiconductor customer that was not designated as essential during the quarter. We also had a few of our wafer supply customers defer shipment of some product during the quarter, which is permitted under their agreement with us. Wolfspeed gross margin was 35.3%. The sequential decline was primarily driven by decreased factory efficiency due to the safety measures we put in place to protect our employees during the pandemic. In addition, lower yields and factory transitions also present some short-term challenges on gross margin performance and will continue to be a headwind until we shift production to our new Mohawk Valley Fab. LED product revenue was $97 million and decreased approximately 4% sequentially, reflecting supply constraints. Nonetheless, our business executed well despite challenges related to increased volatility in our markets. LED gross margin was 22.8%, primarily due to favorable product and customer mix. Unallocated non-GAAP costs totaled $6.1 million for the fourth quarter of fiscal 2020 and are included in our overall cost to reconcile the $54 million non-GAAP gross profit and 26.4% gross margin for the company. This includes some incremental costs that we incurred as a result of our COVID-19 response efforts. Non-GAAP operating expenses for Q4 were $83 million, and our non-GAAP tax rate was 30%. This reflects our efforts to continue to execute disciplined cost control by prudently balancing our operating expenses with the necessary investments for our long-term growth and the decision not to pay management bonuses and some other incentives for fiscal 2020. For fiscal 2020 revenue was $904 million, representing a 16% decline when compared to fiscal 2019. Non-GAAP net loss in fiscal 2020 was $49.1 million or $0.45 per diluted share. The non-GAAP loss excludes $142.6 million of adjustments net of tax or $1.32 per diluted share. Fiscal 2020 revenue and non-GAAP gross profit for our reportable segments were as follows. Wolfspeed revenue was $471 million and gross profit was $185 million for a 39% gross margin. Revenue declined 13% from fiscal 2019 as a result of softness in customer demand, as well as the COVID-19 pandemic and associated disruptions, which significantly impacted results. LED revenue was $433 million and gross profit was $91 million for a 21% gross margin. Revenues declined 20% from fiscal 2019 with ongoing market softness, trade and tariff concerns with China, and lower utilization primarily due to COVID-19. Unallocated costs totaled $16 million for fiscal 2020 are and are included to reconcile to our $259 million non-GAAP gross profit for a company gross margin of 28.7%. Now in light of the ongoing uncertainty related to COVID-19, I'd like to provide an update on our strong balance sheet and healthy cash position, which gives us the financial flexibility to navigate the current environment, support our business operations and maintain our capital expenditure plans to support future growth. We ended the quarter with approximately $1.3 billion in cash and short-term investments, zero balance on our line of credit and convertible debt with a total face value of $1 billion. For the fourth quarter, days sales outstanding improved to 37 days and inventory days on hand was 104 days. Cash generated from operations was $10 million and capital expenditures were $70 million in the fourth quarter, resulting in negative free cash flow of $60 million. We reported total capital investments of $244 million in fiscal 2020 as our capital allocation priorities remain focused on expanding capacity in our Wolfspeed business. Moving on to our CapEx outlook for fiscal 2021. As we discussed at our Investor Day last year, fiscal 2021 will be the peak investment year to fund our long-term growth ambitions. At this time, we anticipate CapEx of approximately $400 million to support our capacity investments, most notably the construction of our Mohawk Valley fab and the expansion of our Durham fab and materials factory. This level of investment reflects the slightly steeper customer ramp that we have discussed previously and keeps us on track to begin ramping production in the new fab beginning in calendar year 2022. It's also important to remember that there will be some variability in our CapEx and cash flow during fiscal 2021 as it is tied to the percentage of completion of Mohawk Valley and the timing of reimbursements from the state of New York. Now turning to our outlook. The COVID-19 situation remains very fluid, making it difficult to assess its impact on our near-term operations and overall demand environment. To account for this, we are again providing a wider than usual guidance range for the first quarter of fiscal 2021, along with our underlying assumptions based on what we know today. We're targeting revenue in a range of $203 million to $217 million based on the following segment trends. Wolfspeed revenue is expected to be between $107 million and $117 million. We are encouraged by the early signs of strengthening demand of the device business and our ability to improve fulfillment out of our factories while maintaining additional COVID-19 safety protocols we have in place. LED revenue is expected to be between $96 million to $100 million, mainly due to improving supply dynamics. Cree's Q1 non-GAAP gross margin is expected to be between 25% to 27%, which includes the impact of $4 million of unallocated costs relating to transitioning LED factory operations to Wolfspeed. We've targeted Wolfspeed gross margin to be approximately 35.5% to 37.5% due to better factory efficiency driven by higher attendance but still below normal expectations as we continue to maintain safety procedures related to COVID-19. In addition while we continued to make progress on our 150-millimeter MOSFET yields, they are still below expected levels. We target LED gross margin to be approximately 19.5% to 21%. We are targeting non-GAAP operating expenses between $88 million and $89 million for the first quarter. While we maintained tight cost controls during fiscal Q4 and did not pay management bonuses or institute merit increases, we will increase OpEx in fiscal Q1 2021. This reflects higher spending on R&D projects, including our Mohawk Valley Fab process development and resumption of accruing for management incentives. We expect that our operating expenses will gradually increase throughout the year, as our revenue normalizes. We target Q1 non-GAAP operating loss to be between $37 million to $29 million and we target a non-operating net loss to be approximately $1 million. We expect our non-GAAP effective tax rate to be approximately 30%. We are targeting Q1 non-GAAP net loss to be between $26 million to $22 million, or a loss between $0.24 to $0.20 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, accretion on our convertible notes, product transformation and transaction-related costs, factory optimization restructuring costs and other items. Our Q1 targets are based on several factors that could vary greatly, including the situation with COVID-19, overall demand, product mix, factory productivity and the competitive environment. With that, I will now turn the discussion back to Gregg.

Thanks, Neill. And building off of what Neill just shared, I'd like to discuss our recent performance in the current environment, as well as provide an update on our strategic plans. The operating environment remains challenging as the pandemic is ongoing. While it remains difficult to predict the full impact, it will have on our operations we are focused on maintaining business continuity to continue to deliver for our customers, while executing on our business plans. I continue to be impressed with how our sales team has adapted to a virtual environment, successfully pursuing and winning new business. We continue to connect with customers with approximately 4,000 leads generated during the quarter. And I'm impressed with the team's results in terms of winning new business. In the fourth quarter, we secured approximately $600 million in design awards, a nice improvement from the already excellent results the team delivered in Q3. Our partnership with Arrow Electronics continues to grow and we have identified approximately $1.6 billion of silicon carbide opportunities for our Wolfspeed business with Arrow's large and extensive sales footprint. Our coordinated efforts to support the launch of our new 650-volt product has been very well received and the opportunity pipeline is building nicely. As our sales team continues to deliver, we are very encouraged by the growth we've seen in our pipeline over the past few months as new opportunities continue to light up across key end segments, including automotive, energy, communications infrastructure, industrial and aerospace and defense. At the moment, the opportunity device pipeline is well above $10 billion. We are well-positioned to win opportunities as our diversified and growing product portfolio remains a key competitive advantage in the marketplace. We released more than 60 new Wolfspeed products during fiscal 2020. And looking ahead to next year, we are rapidly expanding our product portfolio with an emphasis on critical automotive applications. We look forward to building upon this momentum, as many design awards are expected to be made in the coming months. Despite the COVID pandemic, many of our customers and prospects remain engaged and committed to their future plans, which includes silicon carbide as a critical component. The strength of our long-term plan has been underscored by recent developments, including Delphi's recent win for a new battery electric vehicle, which is expected to ramp sometime between 2022 and 2023. In addition, we're also pleased to be working with StarPower Semiconductor and the Yutong Group on an industry-leading high-efficiency powertrain system for electric buses using Wolfspeed 1200-volt silicon carbide devices. These wins are tangible examples of the multiyear opportunity ahead of us in the automotive space. The benefits of silicon carbide are clear and recognized by OEMs and Tier 1s alike, and we continue to have many productive conversations with market leaders regarding how Cree can partner with them to bring forth next-generation technologies. In addition, we're following many new encouraging updates in the macro-environment. In late July, the European Commission reached an agreement regarding the EU's €1.8 trillion COVID-19 recovery fund. The EU has committed 30% of their total expenditures from this fund to address climate concerns with the goal of being climate neutral by 2050. This includes €20 billion designated to transport and €5 billion dedicated to energy, which we expect will be a positive catalyst for clean transportation and electric vehicle demand in Europe. In 5G, we continue to believe this is a multi-year expansion, with major traction coming. There have been a number of recent announcements coming out of Asia pointing towards growing 5G momentum in that region. While the global pandemic has further delayed some rollouts in other regions, we continue to be well positioned to support this global expansion. As we begin fiscal 2021, we are firmly committed to our long-term strategy. While we expect to continue to work through COVID-19-related headwinds in the near term, we are encouraged by the growing demand we're seeing and expect more opportunities to materialize in our device business throughout fiscal 2021. To ensure we can capitalize on this opportunity, we are reiterating our capacity expansion plans, which are well supported by our strong balance sheet and ample liquidity. Our capacity expansion plans are a key differentiator when going to market, which coupled with our superior technology and silicon carbide's demonstrated advantages is encouraging our customers to accelerate their adoption of silicon carbide. The investments we are making today are absolutely critical to us achieving our long-term goals and maintaining our leadership position. In conclusion, while the pandemic continues to create uncertainty in the near term, our confidence in the long-term growth opportunity for silicon carbide remains strong. I'm proud of how everyone at Cree rose to the challenges presented in fiscal 2020. The tremendous effort across the company is helping us win new business and drive the industry transition towards silicon carbide. Our strong balance sheet and financial position enables us to fund our operations in future growth. I'm very confident in our path forward and believe in the underlying trends we are seeing underscore the opportunity we have ahead of us. With that, I'll turn it back over to the operator, and we'll begin our Q&A session.

Our first question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Hi. Thanks for taking my question. I guess Gregg or Neill, the first question is around one of your largest, or if not the largest material customers saw a significant impact in their business due to COVID last quarter particularly in the French facility. So I'm just wondering how that flows through the business and whether or not the vast majority of that hit occurred last quarter or is actually trickling into this quarter in terms of your business? And then I have a follow-up.

I'll start, and maybe Neill can provide some additional insight. I prefer not to discuss any specific customer details. However, the contracts we have in place are performing as we intended, and we feel quite positive about that. Neill, if you would like to elaborate further.

I believe so. Jed, as you reviewed the last quarter, things unfolded pretty much as we anticipated. On the device front, we experienced strong demand, especially for our power products. We were certainly affected in our manufacturing facilities due to some safety protocols. Regarding materials, I would say we're maintaining our position. We're observing some fluctuations within the portfolio as we transition into the next period. Looking ahead, as the long-term agreements are structured, we might see an increase as we move beyond December, possibly into the March or June quarters. I think we have mostly reached the lowest point concerning materials, but I expect only modest improvements from this point on, along with some potential increase in the coming calendar year.

That's helpful. Regarding the capacity expansion, could you provide more details about the timing and cost expectations? The shift from 6-inch to 8-inch has significant cost reductions as well as automation implications. I know you outlined this opportunity well at Analyst Day, but as we approach 2021, which is key for that build-out, could you update us on the timing for both the fab and Mohawk? What expectations should we have? Should we view this as a straightforward cost reduction just related to the area, or is there more to consider? I assume there are additional benefits, so I'd appreciate your insights on that. Thanks.

Yes. Maybe I'll kick it off and then Neill can kind of unpack it a little bit more. A lot of great activity going on up in Mohawk Valley, the fab is now going vertical. So there are steel girders that have been installed and walls are being installed and so forth. We're really excited about that. There's been excellent work at the prototype line in Albany with some really good progress on that. The materials expansion that is part of our overall capacity expansion is going well, yields and costs and so forth are improving as well. In terms of the broader expansion though, I'll turn it over to Neill to talk a little bit about the various different pieces that we have going on.

Yes, it's Jed. It’s worth breaking this down a bit. As I mentioned earlier, we expect capital expenditures to grow to around $400 million in fiscal 2021, which we anticipate will be the peak spending year in our long-term plan. Let me highlight a few key points. First, as Gregg mentioned, the most significant portion is the Mohawk Valley Fab. I want to emphasize that we have made excellent progress to date. We have started pouring concrete, and vertical construction is currently in progress. We expect this fab to begin ramping up around the 2022 calendar year, which will support Wolfspeed's growth moving forward. However, there may be some variability in spending based on the build schedule and the timing of approximately $500 million in reimbursements we expect to receive through our partnership with the State of New York. A major project is in motion, and we expect to see significant developments over the next four to six quarters. The second aspect, which is worth mentioning, is the ongoing fab expansion in Durham. We are outsourcing the LED silicon carbide operations and upgrading to Wolfspeed capacity. This expansion is set to support increased capacity towards the end of this year and opportunities into fiscal year 2022. We anticipate the completion of this expansion by the end of the fiscal year. Finally, there’s the materials expansion, which can be viewed as a more linear growth initiative. These are the key components of our plan for fiscal 2021. There are several moving pieces to consider, but I believe this sets a solid foundation for our capacity, costs, and margins as we approach the business inflection point in 2022 and beyond. Regarding the 150 and 200 millimeter fabs, we have discussed building a 200-millimeter fab for Mohawk Valley, and we still plan to proceed with that. It would be easier to shift to a 150-millimeter setup if needed, and we will manage that transition. Overall, we are on track to increase capital expenditures this year, though we may see some adjustments in the coming quarters.

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

Hey, guys. Thanks for taking the questions. Maybe just first off, to follow up on Jed's question, I wanted to dig into CapEx budget here a little bit more. Neill, at the 2019 Analyst Day, you guys had talked about $720 million of CapEx from 2020 to 2024. With the $400 million here targeted for 2021 and what you've already spent to date, can you kind of update us on how much CapEx remains in the plan, I guess, for the 2022 to 2024 time frame? And then does this $720 million CapEx budget, is this increasing based on the 2021 outlook here, or are you just simply pulling it all forward? And then kind of what are you seeing out there to drive that acceleration, if that's the case? And then I had a follow-up.

Sure. And thanks, Brian. First of all, let me say that there's really no change to the expansion plan that we talked about, the $720 million. And as we've discussed before, there's also other CapEx in the company besides just the capacity expansion. So one of the things to recognize here is and I said there's a number of moving pieces. A lot of Mohawk Valley happens as you start to get into the end of fiscal 2021, into 2022, and that's us crossing fiscal years. So what you'll see here is just timing. It's more or less of a zero-sum game. If we spend more in 2021, you spend less in 2022. So if you think about that profile we've talked about before, peak year kind of here in 2021, and then we start seeing that CapEx starts to come down in 2022 and beyond. As we talked about also before, we expect the free cash flow to be negative in those periods as we have those significant investments. And then in 2022 plus, as the Wolfspeed business starts to ramp, we start to reap the benefits of that. So that's still kind of the same plan. I think you're just seeing the timing of the CapEx move around a little bit.

Okay. Fair enough. That's helpful. And then just a second question on the Power and RF side. Gregg, you made some positive comments around kind of what you're seeing in 5G. Could you also maybe provide us an update on your engagement with Huawei? There's obviously been some more restrictions put in place there. So wondering what, if any, exposure you have. And then what's embedded into both your near and long-term outlooks there with respect to that customer as well as, in general, around the China 5G base station opportunity, if you could? Thanks, guys.

Sure, Brian. In regard to Huawei, we have not shipped to them for nearly a year, and we do not have any revenue plans related to Huawei in our future projections. This has been the case since the ban was implemented. Therefore, they are not included in our plans. There may be some minor impact on material customers linked to Huawei, but we believe that any significant effects have been accounted for. We have built strong relationships with other global players and are adapting the technology initially developed for Huawei for these new customers. Last quarter, we announced several design wins in communications infrastructure. This quarter, our total design-ins amount to $600 million, a portion of which is also with communications infrastructure clients. Additionally, I'd like to note that this $600 million in design-ins this quarter is in addition to approximately $400 million from the previous quarter. Thus, over the last two quarters, we have achieved $1 billion in design-ins, all during COVID, showcasing outstanding results from our team.

Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.

Yes, thank you. A question for Gregg, just on the Delphi partnership and design win in China. Can you maybe just give a sense of the breadth of activity you're seeing as a result of that partnership? And you mentioned timing 2022, 2023, but any other color as we think about that business ramping in the coming years?

I want to be a little cautious about discussing specific customers. However, I can say that the Delphi announcement builds on our original announcement from September of last year. This is an additional win, showcasing the growing traction for silicon carbide. We're observing similar patterns across various sectors where a win with one customer leads to broader opportunities. That’s reflected in our pipeline, which has now surpassed $10 billion.

Got it. And then on the Arrow distribution kind of product launch and just given your long background in this industry and working with distribution, anything you'd call out that's unique in terms of, clearly silicon carbide there's a lot of interest in adoption. But it seems like that's gotten off to a very strong start. And just trying to kind of contextualize what's happening there versus what you typically see through distribution?

Well, we've got a very strong relationship with – and partnership with Arrow and they're doing a fantastic job of this – promoting the 650-volt silicon carbide MOSFET. Its thousands of customers have expressed interest. We're seeing everything from air conditioning motor drives, plasma generators, electrosurgical units, airplane galley power, even induction cooktops. And so we're just seeing lots of different opportunities. And I don't have the exact stat on me. But if you take a look at the number of countries where they've identified opportunity, it's something greater than half I think are generated in countries where we don't have any salespeople. So this is really the strength of Arrow's footprint and combines with the strength of our product portfolio is really a great win. We're really excited about it. The fact that they have $1.6 billion worth of pipeline for total Wolfspeed and are accelerating the 650-volt we're super excited about that. And so I think it's really doing something that we couldn't do on our own, just simply because the scale we have from a sales perspective just isn't there and quite frankly never will be there. We couldn't do that internally, I don't think. So leveraging their vast sales footprint has been a great win-win for both of us. And I think I've had plenty of time to sit down with the management team at Arrow too, and I think we both feel real good about where we're going, the results that we've gotten so far. And there is no letting off the so-called gas pedal, if you will.

Our next question comes from Edward Snyder with Charter Equity Research. Your line is now open.

Thanks a lot. Gregg a couple of questions. First off, you used to say that Wolfspeed was a third GaN, a third SiC, a third materials. But given the events in the last year or so with Huawei etc., just tailing off and then your pricing of epi to make it much more aggressive, I think it was capacity-constrained last quarter it seems to be the case that – or correct me, if I'm wrong the materials should be at least 50% of Wolfspeed at this point. And your RF business sounds like it's down hard. I mean, most of Huawei goes to Sumitomo now, which is a two Six customer. And I think over half of Qorvo's wafers for RF goes to two Six. So is it a case that you're kind of transitioning to more of a power customer given you've got that market almost to yourself at this point the only real wafer supplier out there? Or is it just an ebb in the RF – GaN RF business and you've got a plan to bring that back? And if so, maybe you could articulate that. And then I have a follow-up.

Over the last several years, our materials business has outpaced the device business in growth. The materials segment represents about half of Wolfspeed and has expanded significantly due to long-term agreements and the extensive reach of our customers. They've effectively penetrated their markets. Looking ahead, we expect our power business to be our fastest-growing segment through the 2024 long-range outlook we presented at Investor Day, primarily driven by the rise in electric vehicle adoption. Therefore, we anticipate substantial growth in the power device sector during this time. Regarding 5G and communications infrastructure, the challenges posed by Huawei have impacted us significantly. However, we have adapted our strategies to target non-Huawei customers. As mentioned, we secured some design wins in the previous quarter and continue to maintain close relationships with our customer base.

Okay. Let's discuss the materials business. Since you took over, the ePi sector has shown significant strength, particularly highlighted last quarter. If we look at the overall competitive landscape, you're essentially the only major supplier of ePi in crystal wafers for silicon carbide power. Neill has mentioned a single agreement with STMicro, but beyond that, there's really no one else offering at this scale. Is it reasonable to expect that the margins on the wafer business could be better than those in the device sector due to the lower competition and the complexity involved? If that's true, doesn't it position Cree as the primary wafer supplier for the industry, especially given the minimal likelihood of new competition and the stagnant growth in silicon carbide?

Well, I think we kind of are positioned that way in terms of a supplier of wafers to the industry. We've got a significant number of very large long-term agreements with people in the folks in the industry. We've announced most of those. And we're also expanding our capacity pretty substantially. We however believe that having vertical integration is another key factor and that's certainly helping us from a design-win perspective. The design-ins that we had talked about this past quarter or that we mentioned in our script this past quarter of $600 million and then the previous quarter of $400 million just to remind everybody, those are all device design-ins. And so I think customers that look at things like continuity of supply and quality of product and so forth they look to us as a very competent player in silicon carbide. And the fact that we have both device and materials capability play off on each other and I think give our customers a strong amount of confidence in that area.

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

Thank you very much. Can you provide more details about the supply chain issues you mentioned in the script? I would like to understand the costs involved and the expected duration of these issues.

Yes. So I think when you think about the supply chain issues what we've talked about before is we have these safety procedures we've put into the factories. And what that essentially means is, as you bring people in and out of the factory you need to take more time and space people out, take people's temperatures and do all those things in terms of ensuring employee safety. As we think about our kind of near-term challenges then health and safety of the employees is certainly number one. So what that's doing is it's putting pressure on efficiency within the factories and it's limiting some of the upside potential I think we have particularly in Wolfspeed power business right now. But it's also pressure in gross margins because they're not getting the same efficiency we would get normally. So it is pressuring us. But maybe the best way to answer that is kind of give a little context as to kind of how we think about not just the implication on supply, but also on the margins. This quarter we talked about margins being down under 40% at 35%. As you move to next quarter, we're talking about 36.5% at the midpoint. I would say normalized margin for Cree is just north of 40% or around 40% if you exclude COVID. And over the long term we think about 50% once we get to the Mohawk Valley fab. So there are several things that we need to do to get the margins back up and these safety procedures and questions you're going to ask about one of them. So the first one is you need to get kind of about that normal factory efficiency and that's just going to be a function of how long these procedures are in place. Right now, I don't see that changing anytime soon certainly for the end of the year likely into next year. The second thing, and let me just follow back up on that is on the 150-millimeter MOSFET yields. We talked about those before and we'll need to get some improvement there. And then lastly we'll have to get some visibility into volume. I think there was a question earlier on the materials business. While it was down in the last quarter, kind of holding ground as we move forward, we're making good improvement on the cost initiatives there but we're going to have to take down utilization. So in that we'll have to get good visibility to volume and take those up. So look I think that will have an implication on margins, have an implication on capacity. But I think as we continue to work through this we'll see where we end up. But I think over the long-term, the 50% plan as we get out to Mohawk is kind of the main event here at the full and if we can administer it.

Okay. Actually, the question was about the supply chain bottlenecks, but I'll take it offline with you guys. So the other thing we'd love an update on is with the manufacturing excursions that you guys had talked about a couple of quarters ago. You had talked about going through a number of cycles to get those things resolved. Can you talk a little bit about the cycles on those improvements and where you're at in terms of resolving those issues?

We are working very hard on these challenges, but we are not seeing the progress we expected. The issues you're referring to relate to the yield challenges, specifically with the 150-millimeter MOSFET yields. We're making some progress, but then facing setbacks as we navigate these obstacles. The pandemic has certainly made things more difficult, particularly with lab access and factory volumes. We will keep striving to improve these yields, which are essential for increasing our capacity, delivery, and margins. As we engage with auto customers on the required capabilities for shipping these products, I do see some progress. However, we should expect a gradual improvement, characterized by a two steps forward, one step back approach. There will likely be modest improvements throughout the year. A significant change will occur once we transition up to Mohawk Valley, which will provide us with a much different structure and capabilities as we move to a larger factory.

Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Hi, there. Thanks for taking my question. I've got two. First if we go back and look at your Investor Day deck you've got the business getting almost to free cash flow breakeven in FY 2022. And obviously things have changed a bit. But as you look at your pipeline and timing and so forth, does FY 2022 still look like the year you, kind of, turn the corner from a free cash flow standpoint?

Well, I think Joe it's going to depend on the timing of when we see the ramps happen. What we've talked about before is seeing the inflection point in the business happening in 2022. The large CapEx bill really happens this year and depending on what we spend this year that will come out of next year. So it's just going to be a timing function of those things. So it's a lot of moving pieces. Again the Mohawk Valley Fab itself is roughly a $1 billion project over five-plus years. There's $500 million of reimbursements. Some of those should come back in 2022 and help us on the free cash flow line. So I think it's just hard to say exactly what that would be. But I would expect that 2022 at some point, we'd see that inflection point and then we start to now turn the corner.

Okay. Thanks. And an unrelated question following on some of the earlier thoughts. You're doing so well in this ePi business. I look at Mohawk Valley and I ask myself, why go to 200-millimeter? Obviously, bigger wafers are better, but bigger wafers can be harder. Isn't there perhaps a business case here to just take that fab's operational attributes and just put 150-millimeter in there?

We clearly have the ability to do that, and it's a decision we'll make later. Constructing a 200-millimeter fab and reducing the handling equipment to 150 is a much better approach than starting with a 150-millimeter fab and trying to scale it up. So just consider it that way, and we can decide as we move forward.

Our next question comes from Craig Irwin with ROTH Capital Partners. Your line is now open.

Hi. Thank you. Thanks for taking my question. So Gregg I wanted to ask for your general thoughts around the puts and takes moving to 8-inch wafers. Can you maybe update us on where you might be with seeds, if you have seeds for commercial production? Where are you on the updated wafering technology that needs to be used? And what are your general thoughts around the SiC wafers and the probable yield losses on 8-inch? I mean, how do these all factor into your longer-term time line? And can you maybe share with us anything about that time line that might be pertinent to the ramp over the next couple of years?

Thanks. Thanks Craig for the question. I don't want to get into a lot of those kind of details. I will tell you that I have a monthly review on our 200-millimeter activity and in fact I had that review just yesterday. So I feel real good about the progress the team is making. Some of the items that you had talked about we're tackling. We're in really good shape on some of the ones you specifically called out, and we obviously still have some work to do there too. So I apologize, I don't want to get into a lot of detail on that, but I can tell you those items are very well front and center in terms of our thinking and I feel good about where we're at in terms of making progress on those.

Great. Thank you for that. My follow-up question is the semiconductor customer that was not designated as essential. Can you clarify for us was that impact mostly or entirely in the June quarter? Have they started up production again? Anything you can do to help us quantify the impact of them restarting? Thank you.

Hey, Craig, it's Neill. It was actually a non-semiconductor customer, and we haven't disclosed what that customer entails. However, I can share how we're managing it, as it's reflected in the forecast and the guidance we've provided. If you consider the materials business, there might be a modest improvement as we head into the next quarter. Furthermore, as the long-term agreements are structured, we expect to see some benefits beyond that timeframe.

That concludes today's question-and-answer session. I'd like to turn the call back to Gregg Lowe for closing remarks.

Well, thank you everybody for your interest in Cree. We look forward to talking to you next quarter. Thank you.

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