Good afternoon. Thank you for standing by, and welcome to the Wolfspeed Inc. Second Quarter Fiscal Year 2022 Earnings Call. At this time all participants are in a listen-only mode and all lines have been placed on mute to prevent any background noise. Please note, today's call is being recorded. I would now like to hand the conference over to your first speaker today, Tyler Gronbach, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Wolfspeed's Second Quarter Fiscal 2022 Conference Call. Today, Wolfspeed's CEO, Gregg Lowe; and Wolfspeed's CFO, Neill Reynolds, will report on the results for the second quarter of fiscal year 2022. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Wolfspeed'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, including risks related to the impact of the 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.

Thanks, Tyler, and good afternoon, everyone. Thank you for joining us today, and I hope you and your families are safe and healthy. I'm pleased to report that during the second quarter, we continued to execute and drive our business, delivering strong revenue and non-GAAP diluted earnings per share at the high end of our guidance. Now last November, we held an Investor Day at the New York Stock Exchange, where we outlined how the team is focused on driving the industry transition from silicon to silicon carbide by expanding our leading market position with innovative new solutions, building additional capacity in New York and North Carolina to support what we see as a steepening demand for silicon carbide solutions, growing our opportunity pipeline and converting to design-ins at a very robust pace. And finally, building out our bench of semiconductor leadership expertise to help us optimize operations and achieve our long-term growth objectives. Our strong results this quarter clearly demonstrate the progress we're making and the momentum we are building to support the multi-decade growth opportunity ahead of us. I'll now turn it over to Neill, who will provide an overview of our financial results for the second quarter and an outlook for the third quarter of fiscal 2022. Neill?

Thank you, Gregg, and good afternoon, everyone. We delivered solid results during the second quarter as we continued to see strong demand for our silicon carbide solutions. Revenue for the second quarter of fiscal 2022 was $173.1 million at the high end of our guidance range, representing an increase of 11% sequentially and 36% year-over-year. Our non-GAAP net loss was $18.6 million or $0.16 per diluted share, also at the top end of our range. Our second quarter non-GAAP earnings exclude $78.1 million of expense, net of tax, or $0.67 per diluted share for non-cash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, project transformation and transaction costs, factory optimization start-up costs, loss on debt extinguishment and other items outlined in today's earnings release. Looking at second quarter performance, we delivered our sixth consecutive quarter of sequential growth. We continue to see strong demand for our power device solutions, resulting in revenue growth of approximately 37% over the prior quarter and growth of more than 100% over the prior year as we saw significant growth in both direct and distribution channel customers. On the RF device front, we continue to see solid demand from a 5G and aerospace and defense perspective, which increased over the prior year, but was relatively flat over the prior quarter as we continue to increase capacity. From a materials perspective, demand for our 150-millimeter silicon carbide substrates remains very strong. This resulted in year-over-year growth of roughly flat versus prior quarter as we continue to increase capacity and better match supply with demand. Second quarter non-GAAP gross margin was 35.4% compared to 33.5% last quarter. The 190 basis point improvement was driven by improved output cost and yields from our Durham fab and Malaysia subcontractor, and lower depreciation expense resulting from the previously announced change in useful lives of certain assets, partially offset by the higher device product revenue mix at lower profitability. As Gregg mentioned earlier, adding to our management team with proven semiconductor leadership is a critical factor to our future success and the Durham fab team, now led by Missy Stigall, has made solid progress in a relatively short amount of time, already contributing to positive results. In addition, we recently added Joe Robel, who has more than 20 years of semiconductor manufacturing experience to lead our global back-end operations, including oversight of our subcontractor in Malaysia. Looking ahead, we expect continued operational improvements in our Durham fab and our Malaysia subcontractor will have a positive impact on gross margin and capacity for the remainder of the year. Looking at our consolidated results, non-GAAP operating expenses for Q2 were $86.6 million and our non-GAAP tax rate was 27%. The increase in our operating expenses was largely due to R&D, including investment in our 200-millimeter efforts and hiring to support our sales and marketing activities. For the second quarter, days sales outstanding was 48 days and inventory days on hand was 154 days. Cash generated from operations was negative $32 million and capital expenditures were $144 million, resulting in free cash flow of negative $176 million. We currently have approximately $700 million of cash and liquidity on hand to support our current plans. Additionally, in December, we completed the redemption of our 2023 notes, leaving us with convertible debt with a face value of $575 million. We believe this transaction better positions us to capitalize on increasing demand by strengthening the balance sheet, increasing optionality and preserving cash during our peak investment period. We will continue to be opportunistic from a capital market standpoint to ensure we have the flexibility to invest as we see fit to capitalize on a market-leading position and support continued growth. During the quarter, we incurred start-up costs primarily related to Mohawk Valley, totaling approximately $11 million. As we've discussed previously, we expect a total of $80 million of start-up costs in fiscal 2022, with the majority of these costs incurred in the second half of the fiscal year as we qualify and ramp the fab. We have provided a non-GAAP adjustment for the start-up costs as well as a reconciliation table in our earnings release. We are continuing to experience a much steeper demand curve from our customers for silicon carbide products than we had initially anticipated. This has led to supply constraints where some customer orders will not be fulfilled this fiscal year and channel inventory levels will remain low until we ramp production in our Mohawk Valley Fab. We are confident that we will be able to meet this demand once Mohawk Valley is up and running. But in the meantime, we continue to accelerate CapEx capacity investments and improve output in our Durham facilities. We are anticipating net capital expenditures of approximately $475 million this year, stepping down in the back half of 2022 as we receive more reimbursements for the Mohawk Valley construction. At Mohawk Valley, we have more than 60 tools in place, are currently testing equipment, and we expect to begin running wafers later this quarter. While we are encouraged with our progress to date, it's important to remember, we don't expect to realize any meaningful revenue from the facility until the second half of fiscal 2023. In the third quarter of fiscal 2022, we are targeting revenue in the range of $185 million to $195 million. We expect revenue to be driven by growth across all areas of the business, led by power and improved output from RF and materials. Our Q3 non-GAAP gross margin is expected to be in the range of 35% to 37%. As a reminder, the key to our gross margin transition for the mid-30s to 50% in 2024 is largely based on three elements: including optimizing Durham, transitioning from 150-millimeter to 200-millimeter wafers and driving revenue through Mohawk Valley. We are on track with all three elements and anticipate modest continued improvement in gross margin over time. We're targeting non-GAAP operating expenses of $88 million to $89 million for the third quarter. We anticipate operating expenses will continue to slowly increase over time as we continue to invest in R&D and sales and marketing resources but expect that it will become a smaller percentage of revenue as we enter the middle of the decade. That being said, we are also continuing to identify areas across the business to reduce costs and improve productivity, as we scale our global operations to better support our customers. For example, we will be opening a global capability center in Belfast, Northern Ireland, in partnership with the Northern Ireland government. This facility will operate as a shared services hub for Wolfspeed's IT organization, helping drive critical IT innovation and expansion of global digital capabilities. We target Q3 non-GAAP operating loss to be between $23 million to $18 million and non-operating net loss to be approximately $1 million. We expect our non-GAAP tax amount to benefit approximately $4 million. We're targeting Q3 non-GAAP net loss between $20 million to $15 million or a loss of $0.16 to $0.12 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, private transformation and transaction costs, factory optimization restructuring and start-up costs and other items. Our Q3 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. We are continuing our journey to transition the industry from silicon to silicon carbide. And I'm very excited for what's to come as we begin to ramp the Mohawk Valley fab. Our power business continues to see increasingly robust demand from the automotive markets, and we're also encouraged by rising demand across a number of industrial and energy customers. Our device opportunity pipeline continues to grow and is now well above $20 billion, underscoring the enormous demand we're seeing across all end markets. The pipeline also reflects more than 8,700 projects, and our team continues to identify new opportunities at a rapid pace. More importantly, the sales team continues to convert design-ins at a high rate across a wide range of applications. And this includes things like personal watercraft and snowmobiles, defense applications, trains, EV charging, a plasma generator, and an electric vertical takeoff and landing aircraft. As a result, we secured a record $1.6 billion of design-ins last quarter, which is an amazing accomplishment from the hard work of our sales team, product groups, and our channel partners. Our design-in total for the first half of fiscal 2021 is $2.1 billion, a 70% increase from the same period a year ago and well above our original plan for the first half of this year. At this pace, we are on a trajectory to significantly exceed our design-in total from fiscal 2021. This positive momentum is a direct result of customers adopting silicon carbide at a faster rate than we originally anticipated and is creating a stronger tailwind for our long-term revenue outlook than we showed at our Investor Day back in November. To support our rapid growth, it's critical that we continue to invest in people. We have attracted senior talent from a variety of exceptional companies and have demonstrated a tremendous ability to bring in people from the outside with substantial amounts of automotive experience or semiconductor wafer fab experience. The opportunity to join Wolfspeed as we drive the industry transition to silicon carbide is exciting, and we're taking advantage of this excitement to attract some of the industry's finest leaders and innovators. Earlier, Neill highlighted the impact that Missy Stigall is having on our Durham operations, and that Joe Robel has joined Wolfspeed to oversee our back-end operations. Joe's 20 years of global semiconductor operations and leadership experience is already making a big impact here at Wolfspeed. As we focus on executing across our business, our strategy is further supported by developments in the broader market. In early December, the Biden administration released an ambitious petrol strategy to build 0.5 million charging stations for electric vehicles across the country. The $1 trillion infrastructure law authorizes a nationwide network of charging stations and set aside $5 billion for states to build them. We are continuing to see automakers make big commitments to ramp their electric vehicle efforts. For example, GM made several announcements at CES regarding new EVs, including the Silverado and the Equinox, and that they have thousands of orders for its BrightDrop electric work vans. In addition, Toyota announced it would make 3.5 million EVs a year by 2030, citing the November Climate Summit in Glasgow, Scotland, in the Biden's administrative executive order aiming to increase EV sales. There is tremendous momentum in the marketplace, and we are well positioned to create a global semiconductor powerhouse here at Wolfspeed focused on silicon carbide. Wolfspeed is a pure play for silicon carbide, the game-changing technology that is beginning to transform the semiconductor industry. We have invested heavily not only in our products but in expanding our capacity and the talent needed to run it. The expected return on these investments is compelling, and we will continue to invest in both capacity and talent to ensure we meet the steepening demand from our customers. We're winning business at a very good pace, and I remain excited about the opportunities ahead, and I'm confident in our strategy and our path forward. And with that, we'll turn it back over to the operator, and we could begin our Q&A session.

Thank you. Our first question today comes from Gary Mobley of Wells Fargo. Gary, your line is open.

Hey, guys. Thanks for taking my question. Congratulations on the progress being made. I wanted to ask really about what has changed since the Analyst Day a little over two months ago. And specifically, with respect to the $2 billion increase in the pipeline and what seems to be a pretty good design and figure for the quarter. I'm curious specifically on that design and metric, how diverse the revenue pipeline or the revenue build was there?

The pipeline increase and the design-ins that we got represent while the pipeline increases thousands of different customers. So it's quite diverse. In fact, I think we said 8,700. So quite diverse there. And basically, the design-in number that we just nailed for this past quarter, the fact that the first half of this year is 70% up from where we were just a year ago, is what's really creating those tailwinds that we talked about. And really, if you go back to the Analyst Day, we were projecting $2.1 billion of total revenue at the company level and roughly $1.4 billion of device revenue. It's that device revenue, where we're seeing the momentum. What I would say is there are three things that are really driving all of this. The adoption rate of electric vehicles is well ahead of plan, and many people are seeing that. The adoption of silicon carbide inside both EVs and the industrial markets is well above any expectation we had. And then finally, our win rate in this business is actually ahead of our plan as well. And so I think we combine these three things and maybe I would describe it even slightly differently. It's not really just tailwinds, but really pretty significant upward pressure on those 2026 numbers. So it's, obviously, a good thing. We've got a pretty substantial growth in the opportunity pipeline. And as I mentioned, in the prepared remarks, our team is doing a fantastic job of winning in this market. So overall, market size is definitely heading in the right direction.

I appreciate that color, Gregg. In a follow-up, I want to ask about the trajectory of the revenue before Mohawk Valley ramps in the second half of fiscal year 2023, if I paraphrase that correctly? You're growing your revenue expected to grow at double-digit percent for the second consecutive quarter. And I'm wondering, just based on the manufacturing efficiencies you're getting out of Durham, North Carolina and additional capacity that's being brought on there. Can you continue to make those same double-digit percent sequential revenue strides, and as well, how should we think about the margin gains to be gained from just more efficiencies out of Durham?

Gary, this is Neil. As Greg mentioned, we are experiencing strong demand across the business, and our short-term revenue is primarily influenced by supply rather than demand. Even with projected revenue increases, we will still have over $100 million in unfulfilled demand this year. Our revenue will depend on how effectively we can enhance productivity within our current operations. For instance, in the last quarter, power device sales increased by 37% compared to the previous quarter and more than 100% year-over-year. This growth is largely due to the impact of our new operations leadership. Since we transitioned the Durham facility to focus on power devices, we have achieved record output there, and our Malaysian output is also contributing positively. Looking ahead to Q3, we anticipate continued productivity improvements and further ramp-up of power device production. We expect power device revenue to increase approximately 100% year-over-year as we progress into Q3. The team is making significant advancements in our manufacturing capabilities, and we are on track for revenue growth until the Mohawk Valley facility is fully operational.

The next question in the queue today comes from Jed Dorsheimer of Canaccord Genuity. Your line is open.

Hey, thanks for taking my question, and great job and nice to see that $2.1 billion design in number. So Gregg, I guess first question, with that level, I'm guessing you're sort of bumping up against capacity limitations as you look out. So I'm just wondering how do you stage concerns with potential customers that you'll have that capacity. And does this change at all the phased ramp of Mohawk Valley when we're in there, I think it was like a 20% or 25% phase over a period of time? Are you able to pull that forward at all? I do have a follow-up.

Yes. Thanks, Jed. What I would tell you is we are building the world's largest silicon carbide wafer fab, the world's first and only 200-millimeter wafer fab. So it's not lost on the customers that we have an enormous amount of capacity coming online. And just as a little bit of a backdrop. So the design wins we win right now or even last quarter, those are going to ramp in three, four years, something like that. So by that time, we will be in very full and very high production out of that Mohawk Valley fab. With all the pressure right now, this upward pressure on the demand for through 2026, we're obviously thinking through and I'll have Neill talk a little bit more about the detail but thinking through accelerating the phased ramp of that facility.

Yes. So if you think about the 2024 kind of $1.5 billion revenue plan, we talked about leveraging roughly 50% or a little bit more of the 4-wall capacity in Mohawk Valley kind of over that time frame. Given the demand curve, that continues to steepen, we’re obviously going to see a lot of opportunity to move that up, but we just want to be very careful with that number and I don’t think we’re ready to change that right now, Jed, just as we want to bring that factory up methodically. Bringing it up in a way that ensures we've got the capability and quality that we all expect out of that factory. So I'd say there’s potential we'll be capacity constrained as we move through that period. If you look out beyond that into like 2026 and even beyond, we'll start to leverage that second half of the 4-wall capacity in Mohawk Valley. Now we won't be fully utilized from a 4-wall perspective in that time frame, and we laid out kind of that $2.1 billion kind of revenue target plan, but that is something – that's clearly the factory has the opportunity to move above that. We could take the volume up beyond that, expand faster between 2024 and 2026, and that's certainly something that we're looking at and continue to manage as we see the demand curve continue to steepen.

Got it. For my follow-up, I want to shift gears a little bit in the non-auto related. And so a lot of the products are optimized around 650 volts and 1,200 volts for auto. But while a lot of the benefits in terms of reducing the impedance are applicable to other markets like solar, you name the trains, etc., any high voltage. Optimization from the best of or from my knowledge, hasn't necessarily been developed. So for example, a solar inverter, you're not seeing a lot of off-the-shelf 2,200 volt type products. So I guess my question to you, Greg, is if I look at your 8-inch platform and being the only one on 200 millimeters, larger area die should be extend our lead over the competition and quite frankly, change a lot of these markets. So my question to you is how are you without giving away what's coming from a product perspective, how are you thinking about optimization for some of these other markets that don't get as much attention as auto?

There are several different areas to discuss. Firstly, we have a product group with a clear strategy and a diverse product portfolio, including new products in the pipeline and various iterations. There's a significant amount of effort and research and development happening there. Additionally, we are putting considerable effort into the material aspects as well. What has particularly surprised me is the strong adoption rate of our current portfolio in non-automotive applications. This success is largely due to our partnership with Arrow, which helps distribute our products to customers and has a robust applications engineering team to assist them in product development. A year ago, I wouldn't have expected to see our products being used in areas like personal watercraft design, yet here we are with such design wins. The collaboration with Arrow and the access to their channel has revealed to many industrial customers the relevance of our current offerings to their needs. They’re also getting a preview of the new power product developments Jay and his team are working on. This is very encouraging. As I mentioned earlier, the adoption of silicon carbide in both electric vehicles and industrial markets is happening much more quickly than we anticipated, which is great news for us.

Our next question in the queue today comes from Samik Chatterjee of JPMorgan. Please go ahead.

Thank you. Hi, Gregg and hi Neill. Thanks for taking my questions. So a couple of quick ones. Just wanted to see if you can share a bit more color about the $2.1 billion of design wins or particularly the acceleration that you saw this quarter and the design wins. If you can break that down by either application or use cases. Like I'm just wondering, is it like you had a certain application and you found you were able to design in with more customers in the same vertical, or is it more about new applications really driving those acceleration design wins? If you can share some color on that?

The lion's share of that is going to be the inverters in electric vehicles, it's going to be something around 75% of that number, which crosses a lot of different customers, a lot of OEMs, Tier 1s, etc. So there's pretty good diversification of that, but it is in the vertical of electric vehicles. Outside of that, pretty good traction as well with RF and with the industrial markets. I mentioned some of those different end uses. Across that, though, like I said, it's 8,700 different projects. So there are lots of small ones associated with that. But for the first half of this year at $2.1 billion of design in, it's pretty heavily automotive-related. And then, like I said, industrial and RF wins as well.

Got it. Just a quick follow-up, and this might be more for Neill. Can you help me understand the gross margin bridge? You grew at 35.4, and I believe, based on your discussion, the change in depreciation should help you by about 100 basis points. Please correct me if I'm wrong. I'm trying to think about the gross margin bridge, considering you should see some organically better margins with the higher revenue. Could you walk me through the various factors affecting that?

Sure. Yes. If you look at the Q2 results, we saw about 190 basis points improvement in gross margin, which was, as you pointed out, at the end of the guidance range. So that was driven by a couple of things. First and foremost, underlying this, we're seeing better performance and better execution in our Durham fab and as well as at our Malaysia subcontractor. And similar to the revenue, it's really a direct result not only of the investments that we're making but of the leadership that we've put in there. What's offsetting that a bit as we grow is that the device business of a higher cost base is providing a kind of negative product mix. So you saw the power device business growing extremely fast, 37% quarter-over-quarter, 100% year-over-year. As that bleeds in faster, we're seeing some margin headwind as you look at that. Now the good news is that the profitability of the device business also improved significantly versus last quarter with the better factory performance. Over time, we would expect that kind of mix impact to dissipate. But right now, as we have that cost footprint differential, we'll see that kind of playing as we go. So those are kind of two, I'd say, operational factors that are in there. From a depreciation benefit standpoint, in Q2, I think we gave guidance last quarter of about one to two points. It was at the higher end of that range on higher revenue. As you look out into Q3, you can think about about a 0.5 point to 1.5 point range. And then I think of it being largely behind us after that. As you look out into Q3, we should see some additional benefit, but largely the same dynamics playing out. We anticipate seeing better performance in the fab and the back end, offset by some of that product mix. Even as you move out into Q4, we should see the margins flatten maybe even moving up from 36% as you kind of get into that timeframe or way out from that right now.

Our next question comes from Harsh Kumar of Piper Sandler. Your line is open.

Yes, hello everyone. First of all, congratulations on the strong results and good guidance. Gregg, I have a question for you. You mentioned that you'll begin your wafers in the March quarter. I would like to understand the timing dynamics involved. As you prepare to start in the March quarter, how long do you anticipate it will take to qualify the run of the wafers? Essentially, are you still aiming for the commercial first few wafers to be out around June or July? Any additional details you could provide would be appreciated, and I have a follow-up as well.

Yes. So maybe I'll hit the beginning and Neill can give a little bit more additional color. So I'll just remind everybody this wafer fab was a field of mud two years ago. We're going to be running wafers here pretty soon. We've done a really good job of running the pilot line in the SUNY Albany facility. Neill will give a little bit more color on how we've transitioned that. So we're feeling pretty confident about what we're able to do out of the Mohawk Valley fab. We have material staged in that fab today. As I mentioned, we'll be running back in really, I think, it's eight weeks, nine weeks, something like that, so sometime this quarter. Neill, maybe you can give just a little bit more color on how the process then goes from there?

So, Harsh, there isn't any significant change from what we've previously discussed. As Gregg mentioned, we will begin the qualification process this quarter and will quickly shift from internal qualifications to customer qualifications shortly thereafter. I thought it would be useful to explain our current approach. Currently, we are testing equipment that often has wafers loaded into the tools. We expect to be running full qualification lines later this quarter, which will seamlessly transition to customer qualifications. There is a strong demand from customers to have products coming out of this factory as quickly as possible. We've organized the line by utilizing the pilot line, as Gregg discussed, with staged inventory at various levels. When we start the line, we can begin with a full setup and will continue to add more customers throughout the year. Our expectation is that this will occur throughout the year, and while we will see some commercial revenue, the significant revenue impact is projected for the second half of the fiscal year, around mid-2023. That’s the current plan as it stands.

Understood. Very helpful, everyone. You addressed part of my next question earlier. I wanted to understand, considering the increasing demand, how long it will take to achieve acceptable utilization of the fab or even reach full utilization. You mentioned something interesting about four-wall capacity, which differs from the installed tool capacity. I'm curious about how long it will take, given the current demand trends, to reach a level of utilization that you deem acceptable, such as breakeven cash or profitability metrics. Additionally, when you refer to four-wall capacity, I assume you're suggesting there is potential for adding more lines, which I suspect is what you're indicating by that term.

Yes, that's correct, Harsh. I believe that when considering the factory's acceptable utilization, it's about reaching that initial 50%. If we can increase that, even without reaching full utilization, I think we'll be in a strong position regarding the fab's profitability and capabilities. Given the rising demand, I don't foresee this being a challenge, and we will continue to manage it closely. The key focus is on how much capacity we can add and how quickly. Right now, as mentioned earlier, we need to be cautious about ramping up the factory's initial capacity. It's a new role with the first silicon part for a 200-millimeter silicon carbide automated factory. We are operating a new factory with new technology, so we must proceed carefully. However, from 2024 to 2026, there should be some flexibility in terms of increasing revenue and capacity. Typically, it takes about a year to bring a new production line online in a fab, but it might take a bit longer now due to supply chain factors. That said, we have been strategic about ordering capacity for this factory well before the COVID-related supply issues. We are closely monitoring the situation and placing orders as we ramp up the factory, which gives us some flexibility in terms of timing.

The next question comes from Craig Irwin of ROTH Capital Partners. Your line is open.

Hi, good evening, and thank you for taking my questions. This touches on previous queries. If you continue to secure bookings and design-ins like you have this quarter, you will likely need a second facility soon. Can you discuss the considerations regarding future capital investment plans? Would you be more inclined to expand at an existing site, perhaps in North Carolina or New York, or might you consider other locations for expansion in the coming years?

Craig, this is Neill. First of all, thanks for the question. I think, look, we're talking about a steepening demand curve here. Clearly, at the levels of what we're talking about, that's certainly something we're considering. If you go even out beyond, we're going to bring up capacity in Mohawk Valley faster, you've got to think about looking out beyond 2026, which we do regularly. We believe that the demand for silicon carbide will continue out into the well into the second half of the decade. For us, that means, yes, we would need a second fab in addition to Mohawk Valley. That's something that we are continuing to evaluate. From a geography standpoint, I think those are just things that we continue to think about and evaluate over time, but we would be open to looking at various options there as it relates to ensuring that we're close to our customers and working with them on ensuring supply and those types of things. These are things that we're evaluating and monitoring but certainly want to have the best options to create the best opportunity for serving our customers.

Okay. And then the next question, I guess, as a clarification, right. You talked about having the tools in place for production at Mohawk Valley. There's not a lot of Epi reactors out there with 8-inch capacity for silicon carbide deposition. Can you maybe talk about broadly is this something similar to what you did years ago in the LED industry, or are these potentially commercially sourced units? Would you expect this to maybe be a competitive advantage for you over the next number of years similar to what it was in the early days of LEDs? Given that you already have a huge advantage in wafers and reactors would be an exciting addition to the technology mode?

Epi is one of our key advantages, and we're doing well in that area. Our current focus is on building a complete supply chain for 200-millimeter production, which involves significant work, including the furnaces required to grow the crystals. We have made good progress with Epi reactors and the overall supply chain. As demand continues to rise, we are dedicated to solidifying all aspects of this supply chain because it will require a substantial increase in our capabilities. This combination will provide us with a unique advantage. One of our customers appreciates our focus on 200-millimeter production due to the cost benefits and higher output per time unit. Running a 200-millimeter wafer takes the same time as a 150-millimeter wafer, which means a significant increase in productivity. As demand for their products grows, particularly with electric vehicles selling quickly, our 200-millimeter supply chain will respond more effectively and efficiently, delivering around 70% more output in the same time frame. These factors will enhance our competitive advantage, and we are committed to maintaining that edge.

The next question in the queue comes from Karl Ackerman of Cowen and Company. Your line is open.

Yeah. Thank you. Two questions for me as well, please. Neill or Gregg, I guess of the automotive design ins that you won this quarter, is there a way to distinguish the number of designs where you are the primary supplier rather than secondary, that may augur well for seeing those POs turn into design wins? As you address that question, may you also discuss whether there is a growing mix of 800-volt inverter designs in these automotive design wins? And then I have a follow-up.

Yeah. I can't give you the exact number, but I would say the vast majority of the design-ins we won, we’re the primary source. I don’t know exactly what that means but in fact, I would say off the top of my head, I couldn't name too many where we weren't the primary source. The vast majority of that is that we're the primary source. So I feel very, very good about that. In terms of 800 volts, I think we're seeing two things happen. One is we're seeing a broader adoption of 800 volts as people are seeing the advantages of 800 volts, both from a charging time and efficiency at the inverter level. We're seeing broader adoption of 800 volts, but we're also seeing...

We're seeing a pretty broad adoption at the 800-volt level. Many customers are indicating a shift from 400 volts, particularly some earlier models they designed in previously, but anything new that is coming online is predominantly 800 volts.

Understood. I appreciate that. For my follow-up, does inventory moderate over the next quarter or two as presumably 150-millimeter wafer sales improve as your customers service this step function higher in selling carbide demand? How should we think about that? Thank you.

Yes, in terms of inventory – thanks, Karl. In terms of inventory levels, I would see the days of inventory coming down, but the growth rates are pretty high. I would expect total working capital, including inventory to increase as time goes on, just naturally, to service a bigger business. But I think we'll get more efficient as we execute that. By the way, what we'll see there is the better execution in the fab that we talked about earlier that we're seeing improved cycle times and yields and all those things will drop WIP in the factories, and we should see better efficiency. But overall, over time, working capital pickup. We see some drain on inventory between quarters, but I think we're going to continue to need pretty significant inventory balances to service the growth and our customers as we continue to ramp up the business.

Our next question today comes from Pierre Ferragu of New Street Research. Your line is open Pierre.

Thank for taking the questions. This is Ben Harwood, standing in for Pierre. So I had a question on China and the competition that you're seeing there. So of course, on one hand, the manufacturing process of silicon carbide is extremely difficult to perfect. But then on the other hand, these Chinese competitors are announcing billions of dollars in investing into silicon carbide. So what I want to ask is what you're seeing from a competitive standpoint. Are there Chinese companies coming up for the bids in either the substrate or the device market? Then just secondarily, related to that, what do you expect in your 2024, 2026 guidance for revenues from China? Thanks.

Yes. Thanks for the question. I think I've got my voice back with the team in the room here. I think that, first off, we see this is an enormous growth that's happening in the industry right now. Whenever that happens, it attracts people who want to get into the market. It is not lost on us that there's going to be a lot of folks who want to get into the silicon carbide business. There are some, and that includes a number of different companies in China. We pay attention to all the announcements that are happening right now, all the investments and so forth. We don't sit back and relax about that. We are intensively improving our own operations, lowering costs, driving productivity and all of that kind of stuff. Now that being said, this business has some pretty substantial barriers to entry that don't bode well for the normal run of play if you will, of how China gets into a market. First off, there's not a whole supply or even an industry that supplies the silicon carbide growth furnaces in the industry. You have to build your furnaces yourself. To do that, you need the know-how. Typically, CapEx would be thrown at something like this from a China perspective, and there's really no CapEx well, there might be a lot of CapEx to throw at, but there's nothing to buy. You have to build your own furnaces and so forth to do that. The second thing is that sometimes they throw a lot of OpEx at it and go after hiring tons of people to go put together a plan. The supply of humans that understand in detail how to do silicon carbide is relatively small. There are lots of barriers to entry in this technology and the typical play is just difficult for that to happen. We don't take it lightly that we're going to have a lot of competition. We act very paranoid about everything, and the best thing that we can do is continue to run faster than anybody else.

I believe your second question was about the percentage of revenue from China. We see significant potential in industrial revenue, especially from opportunities in Asia. Looking ahead to our plans for 2024 and 2026, we anticipate an increase in automotive revenue. While we recognize the opportunities in both the automotive and industrial sectors, we've made some adjustments in our projections. We expect about 15% of our $1.5 billion revenue to come from China in 2024, and roughly 10% in 2026. We've moderated our projections a bit, although I think the actual figures may end up being somewhat higher.

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

Thanks. Thank you very much. Gregg, I'd like to talk about 8-inch for a little bit. I know you're launching on that, and you guys have guided the fact that 8-inch is going to have high. It already has higher yields than 6-inch. But given how much thicker those wafers have to be, 8-inch over 6-inch. Is the per millimeter cost of 8-inch today lower than 6-inch? If not, will you launch production with it as it is? What kind of efforts or what kind of progress you think you can make in getting it down, or is it 8-inch just a throughput play? Because you're going to have, like you said, 70% greater capacity for the same machines as just a throughput and not that focused on cost? Then I have a follow-up.

Thanks. Yeah, the cost per millimeter squared is not at the same level as 150 millimeters, but we obviously are attacking that pretty much daily here. We feel real good about where it is and where it can go to. Obviously, that's something we're going to be working on. But even with that, the throughput of the factory, as you mentioned, the yields and so forth, we're going to see an enormous advantage. Maybe Neil, you can kind of cover a little bit more of the detail there.

Yeah. Simply speaking, Ed, which is normally when you move to 200 millimeter, the benefits in the fab, not so much in the substrate, the substrate will cost more. So even while it's at a higher cost per millimeter squared right now, and may stay that way for some time. We'll see pretty nice benefits in the fab just from the improved yields and the cycle times that we've talked about previously. That more than offsets the cost per millimeter squared. In that sense, we're in a very unique position because we do have a fab to feed this into and get those cost benefits. Over time, it will probably take several years, but over time we'll see that crossover point come, and then that's all built in the plans. We'll be in good shape to continue to drive that cost out as we have done our 150-millimeter.

Great. Your performance and guidance are impressive. However, regarding your guidance for fiscal year 2024, it appears you have mentioned an even split between devices and materials, with minor fluctuations. If we assess the figures, it seems the North Carolina facility is projected to generate close to $350 million in revenue this year. Previously, you suggested its maximum capacity might be around $375 million. Given this, and considering we are currently in fiscal 2022, achieving your guidance of $1.5 billion by fiscal 2024, with $1 billion from devices, raises some questions. It seems Mohawk may not ramp up as quickly as anticipated, or perhaps your guidance is conservative compared to your current performance, particularly in devices. Could you clarify whether North Carolina's output will stabilize, or if the demand you're witnessing now continues to rise at this pace? I understand you might not adjust guidance at this time, but isn't there significant upward pressure on your fiscal 2024 targets? Additionally, for Greg, the results you're achieving are noteworthy, particularly the revenue growth primarily coming from industrial and RF markets. Is that correct? Considering the industrial markets are diverse and growing, as noted by TI's recent comments on their booming industrial business, it seems this sector might expand faster than expected, potentially utilizing much of the capacity you planned for Mohawk by the time it goes into production.

Yes, I'll hit the second part of that, and then Neill can go back at the first. We are definingly seeing strong growth in our industrial business very wins, and the industrial business tends to ramp faster than automotive. It's not dramatically faster, but it's definably faster. Over the next couple of years, we'll be ramping that very broad base of industrial customers that you referenced. The automotive guys that we've won, that's typically a four-year from when you win to when you really start hitting the higher volume production. You might have a little bit of introductory volumes before that. But yes, I feel real good about traction that we've gotten with the industrial business and our ability to go after that is largely tied to the great relationship we have with Arrow in terms of going after it.

Yes, regarding the revenue outlook, I agree with you, Ed. Our expectations for what we can achieve in Durham have likely increased, especially considering the positive performance we've observed over the past few months since we implemented new leadership in the factory. We anticipate seeing benefits in the latter part of the year, and we now have a clear path to reaching between $200 million and $210 million in revenue for Q4. This boost is due to improved operations at Durham and better performance in Malaysia. Looking ahead to 2024, we're expecting around $1.5 billion, which includes $1 billion in devices. This certainly adds upward pressure to our forecasts, and we’re considering this trend not just for 2022 but also for 2024 and 2026. In terms of our 2024 plan, we need to be cautious about how we increase capacity at Mohawk Valley, as this is a critical factor for us. If things go better than expected, we will have some opportunities. Clearly, demand is anticipated as we move into that timeframe, and we’ll continue to manage capacity effectively. We are seeing improved performance in Durham, which is a positive sign. There’s certainly more capacity available in Mohawk Valley than what we’ve planned for that period, but we need to be careful with the ramp-up of a new fab.

Our next question comes from Colin Rusch of Oppenheimer. Colin, your line is open.

Hey guys. This is Brendan on for Colin. First one for me. Given the strong demand environment, can you just speak to maybe how you're adjusting your pricing strategy for silicon carbide?

Sure. I'll address that. Our journey over the past four years has focused on transitioning the industry from silicon to silicon carbide through new technology, product offerings, and cost reductions. Additionally, we are securing business by committing to long-term pricing agreements. There has been no impact on our pricing from what you might be hearing in the silicon market. We remain committed to our strategy of driving industry conversion and we focus on selling based on value. The supply-demand mismatch affecting pricing is not something we are actively engaging with.

Our last question today comes from Brian Lee of Goldman Sachs. Please go ahead.

Hey guys. Thanks for squeezing me in. I just had one. I know the power device mix here is growing really fast, but you've consistently kind of called it out as a margin headwind. And devices are growing. It sounds like as per Neil’s comment, another 100% year-on-year again into 3Q. So on the margins, when does that narrative change where a device is at or maybe even above corporate average? Just any color there would be helpful. I don't have any follow-up.

Thanks, Brian. I think it's pretty consistent with what we've said before. The big differentiator is going to be running device products, power device products in Mohawk Valley. When you start changing the footprint that dramatically. Now clearly, we've seen some benefit out of Durham. I think we'll continue to see benefits out of the fab. I think the team is making really good progress. It may dissipate over time. But really, the game changer is going to be moving to Mohawk Valley, where you get the automated factory, you get the 200-millimeter wafer, and you get a pretty substantial cost advantage. It will take some time before you see that benefit. If you look out over the longer term period and from a device product versus material products type of mix, I don't see that all that much different as you get out into kind of 2024 and 2026.

Thank you. I'll now turn back to the management team for closing remarks.

Well, thanks, everybody for participating in the call today and your interest in Wolfspeed, and we look forward to updating you in our next earnings call. Thank you.

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