Good afternoon. Thank you for standing by, and welcome to the Wolfspeed, Inc. Q4 Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Please note today's call is being recorded. I would like to now hand the conference over to your first speaker today, Tyler Gronbach, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's fourth quarter and full year fiscal 2022 conference call. Today, Wolfspeed's CEO, Gregg Lowe; and Wolfspeed's CFO, Neill Reynolds, will report on the results for the fourth quarter and full year 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. 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. I'm pleased to share Wolfspeed's fourth quarter and full year 2022 results today. This year was a pivotal one for our company. We have achieved key milestones and made tremendous progress in several areas. First, we made strides in adding to Wolfspeed's footprint and capacity when we opened our Mohawk Valley Fab in Marcy, New York, in April of this year and continued with the expansion of our materials factories in North Carolina. The Mohawk Valley fab is the world's first fully automated 200-millimeter silicon carbide fab. This was a major accomplishment, and I'd like to especially thank the entire team at Mohawk Valley for their exceptional work leading to the construction and operations of this wafer fab. Since the opening, we've continued to run initial lots through the fab and remain on track to complete initial qualifications and ship products by the end of this fiscal year. We've also had several large customers visit the site prior to signing agreements with us, which is translating into stronger demand than we originally anticipated. As a result, we now have initiated work to tool out the remaining portion of the fab. We are also expanding the materials capacity to support the increased production planned in Mohawk Valley. We believe this is the best course of action to stay ahead of what we see as a steepening demand for silicon carbide. Second, our hard work that continues in devices and materials led to strong full year 2022 results. Annual revenues grew 42% year-over-year to $746 million, a significant acceleration of our growth compared to 2021. We also made progress in improving our gross margin, with full year non-GAAP gross margin coming in at 35.6%, a 140 basis point improvement over the previous year. Lastly, we continue to see a clear path for Wolfspeed to play an even bigger role as the world moves to greener energy sources and more efficient use of that energy. High-voltage applications continue to migrate from traditional silicon to silicon carbide, and our device opportunity pipeline is evidence of this transition. The opportunity pipeline for silicon carbide has more than doubled to $35 billion in a single year. Our fiscal 2022 design-ins totaled $6.4 billion, representing a 3x increase from our fiscal 2020 design-in total and a 119% increase compared to the prior year. We had another record-setting design-in performance of $2.6 billion in fiscal Q4. This included design-ins across automotive OEMs, auto Tier 1 suppliers, and industrial and energy customers, and we are looking forward to working with our new and existing customers in these markets. We now have secured approximately $11 billion of design-ins in just the last 12 quarters. As the market leader in silicon carbide technology, we are encouraged and excited by the growth in this market. I'll now turn it over to Neill, who will provide an overview of our financial results and our outlook for the first quarter of fiscal 2023. Neill?

Thanks, Gregg. And good afternoon, everyone. I'll start by providing an overview of the fourth quarter. We closed the year on a strong note, having generated revenue of $229 million in the fiscal fourth quarter of 2022, which represents a 22% sequential improvement compared to the $188 million in the third quarter of this year and growth of 57% from the prior year period. This is well above our midpoint guidance for the quarter and was driven by continued improvement in the Durham device staff and back-end operations. The expected multimillion dollar impact of the COVID-19 shutdowns in China eased and were more than offset by the improvements in the fab and back-end operations, and we expect this improved operating execution from a device perspective to continue moving forward. Moving to the P&L. Non-GAAP gross margin in the fourth quarter was 36.5%, compared to 36.3% last quarter and 32.2% in the prior year period, representing a 430 basis point improvement year-over-year. This performance improvement was driven by progress in Durham fab yield and cycle fabs. While there is still more work to be done, our operations team is encouraged by the progress they've seen so far. This also resulted in better revenue output and profitability in power devices, which was partially offset by some product mix shifts between devices and materials. We expect to continue to ramp our gross margin over time as a shift of device production from Durham to Mohawk Valley accelerates and we start to realize the benefits of our automated 200-millimeter wafer fab. From a revenue perspective, we continue to see strong demand across the business and the opportunity to grow revenue going forward is directly linked to available capacity. We exited fiscal year 2022 with more than $100 million of unfulfilled demand for power devices and expect this number to increase moving forward as we anticipate being capacity constrained for the foreseeable future. Similarly, from a materials perspective, we remain capacity constrained as demand for our 150-millimeter silicon carbide substrates continues to be very strong, resulting in meaningful year-over-year and quarter-over-quarter growth. In addition, RF results year-over-year are in line with our expectations. All of these dynamics led to much improved profitability. And as a result, we generated adjusted earnings per share of negative $0.02 in the fiscal fourth quarter compared to negative $0.12 a quarter ago and negative $0.23 in the same period last year. Notably, adjusted EPS this quarter was favorably impacted by approximately $0.04 of non-repeatable events on the other income and tax lines. Excluding these non-repeatable items from our earnings, our earnings per share would have been at approximately $0.06 loss per share during the quarter. For fiscal 2022, revenue was $746 million, representing a 42% increase compared to fiscal 2021 due to strong growth in our device businesses. Non-GAAP net loss was $59.6 million or $0.50 per diluted share. Non-GAAP loss excludes $58.9 million of adjustments net of tax or $0.48 per diluted share. Now before I discuss our guidance, let me provide a quick overview of our balance sheet position. We ended the quarter with approximately $1.2 billion of cash and liquidity on our balance sheet to support our growth plans. DSO was 50 days, while inventory days on hand was 137 days, which is 22 days lower than Q3, a direct result of less width than the fab, thanks to better yields and improved cycle times. Free cash flow during the quarter was negative $86 million comprised of negative $31 million of operating cash flow and $55 million of capital expenditures. During the quarter, we incurred start-up costs primarily related to Mohawk Valley, totaling approximately $30 million, in line with expectations communicated earlier. We expect $35 million of start-up costs in the first quarter of fiscal 2023, as we continue to ramp the fab. We expect start-up costs to modulate in the subsequent quarters as we shift to commercial production in the second half of fiscal 2023. There is a non-GAAP adjustment for these start-up costs and the reconciliation table and earnings release. Now moving on to our fiscal first quarter outlook. We are targeting revenue in the range of $232.5 million to $247.5 million. We expect revenue growth to be driven by continued improvement in our power device execution and strong demand in our materials business for our 150-millimeter silicon carbide substrates, where we also remain capacity constrained. Our Q1 non-GAAP gross margin is expected to be in the range of 35.5% to 37.5%, as we expect continued improvements in power device execution to be offset by product mix. We are also targeting non-GAAP operating expenses of between $93 million to $95 million for the first quarter of fiscal year 2023. We expect Q1 non-GAAP operating loss to be between $10 million and $2 million and nonoperating net loss to be approximately $1 million. We also expect approximately $0.5 million of non-GAAP tax benefit. We're targeting Q1 non-GAAP net loss to be between $10 million and $3 million or a loss of $0.08 to $0.02 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, project transformation and transaction costs, factory start-up costs, gain from arbitration proceedings, and other items as outlined in our press release today. 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. Given the positive momentum we're seeing and the progress that we've made from all the accomplishments Gregg spoke about earlier, we expect to exit this calendar year on a $1 billion revenue run rate and expect to generate more than $1 billion in revenue in fiscal 2023. This is a direct result of the upward pressure at revenue that we're continuing to see in the market and the current pace of design-ins we have secured in the last several quarters. As a result, we now believe that the long-term revenue outlook for 2026 is between 30% to 40% higher for the $2.1 billion we shared with you at our Investor Day back in November of 2021, primarily due to the increased demand for power devices. To meet this growing demand from a capacity standpoint, we are planning to tool out the rest of Mohawk Valley earlier than expected and continue to expand our materials footprint on the Durham campus. This expansion will require approximately $550 million of net capital expenditures in fiscal 2023. In addition, we are also planning further expansion of our materials and device capacity, and we are evaluating multiple avenues to finance these capital investments, including through upfront customer payments, capital markets, debt, government project funding, subsidies, and others, all while keeping a keen eye on our cost of capital and dilution for our current stockholders. The $550 million of net CapEx in 2023 is not inclusive of these additional items, and we will give further updates on both our CapEx investment and financing plans when we have more visibility to the nature and timing of these expansions. With that, I'll pass it back to Gregg.

Well, thanks, Neill. When I reflect on all we've accomplished at Wolfspeed this year, not only am I extremely proud of what our team has accomplished, I'm also very excited about how well positioned we are to capture a larger portion of the growing silicon carbide marketplace. Wolfspeed is leading the change in the high-power semiconductor market from silicon to silicon carbide as the world continues to push toward electrification. Electric vehicles opened up the doors to broad adoption of silicon carbide, and this will be our anchor market for decades to come. Now that being said, it's an important reminder that EVs are only a portion of total applications and end users for silicon carbide. Silicon carbide is a game-changing technology for renewable energy, rail, appliances, and heavy-duty equipment among many other industrial uses. In fact, in the last three years, we've generated more than 2,300 power device design-ins across a diverse non-automotive set of end equipment, including design-ins for medical imaging devices, air taxis, and electric static filtering devices. Additionally, we have more than 6,100 non-automotive power device projects in our opportunity pipeline, and we're only scratching the surface in the diverse range of these applications, and our team continues to find ways in which silicon carbide can help the world serve more energy. While there's been some discussion across the industry of the semiconductor slowdown, we see some strong secular trends that will directly benefit Wolfspeed. These include the movement to green energy sources and increased urgency on using those energy sources more efficiently. The rapid growth of electric vehicles, the build-out and expansion in the corresponding grid and charging support infrastructure for those vehicles, and finally, the growing customer viewpoint that silicon carbide is the right technology to drive all of these initiatives forward. Collectively, all of this provides a strong tailwind for silicon carbide through this decade and presents a great opportunity for Wolfspeed. A recent yield report supports this trend as they expect silicon carbide to reach 20% of the power market by 2027, up from only 5% now. To put that in perspective, that's a 4x increase in just five years. The growth opportunity is immense, and we have great confidence that as more customers realize the benefits of silicon carbide over legacy silicon chips, silicon carbide's share of the power market will only grow larger. We continue to see this sentiment being echoed and amplified, not only by businesses but also on the world stage. Just last week, I was at the White House with other semiconductor leaders to see the President sign into law the CHIPS Act and believe that this could provide some possible funding for the next phase of our expansion plans. We are working closely with local officials and multiple states on site selection on finalizing plans for a new materials factory and hope to have more details to share very soon. We're also seeing strong support from current and prospective customers outside the US. We have recently spent a great deal of time talking to our European customers, and they are extremely bullish on our offerings in all potential applications. The opportunities available for Wolfspeed in new and burgeoning geographies are exciting, and we are planning to be ready to capitalize on these in the coming years. All of these dynamics make us very confident in Wolfspeed's future prospects. We are building a powerful model with an excellent return on invested capital and are well-positioned to capture a greater share of the $35 billion opportunity pipeline. For the last five years, we've committed to transforming the company into a global semiconductor powerhouse. We are still in the early stages of a robust and growing opportunity as customers, the industry, and the world continue to embrace more energy-efficient technologies. We have a special opportunity to drive consistent growth and compelling investor returns for many years to come. In closing, I'd like to thank all of our stakeholders for your continued support. Before turning it back over to the operator for questions, I'd also like to announce that we will be hosting an Investor Day later this year. I hope to see many of you there. And with that, operator, we'd be happy to take any questions.

Certainly. The first question is from the line of Harsh Kumar with Piper Sandler. Please proceed.

Yes. Hey, guys. First of all, strong congratulations on the kind of numbers you guys are putting up on the guidance. Gregg, I apologize if I missed this. I missed about three minutes of your call earlier, but I was curious if you could tell us that Mohawk Valley is up and running and if you're actually producing anything there or maybe you could just enlighten us on the timeline for when we can expect commercial product to come out of there? And then I had a quick follow-up.

Yes. Thanks a lot, Harsh. We are running material in the fab. We are progressing through each of the various stages of manufacturing right now. We're not quite entirely through the fab, but we're pretty close at this point. We anticipate that full flow material will be coming out of the fab by the end of this quarter that we're in right now. And as I know you missed it at the beginning, but as we mentioned in some of our earlier statements, we are still on track to be qualifying material out of that factory in this fiscal year, the end of the fiscal year and shipping initial products out of the factory this fiscal year as well.

Fantastic, Gregg. Thank you for that clarification. And then I wanted to ask something you mentioned on the commentary about your plans for CapEx and the kind of money that you have on cash sitting on the balance sheet. It looks like you got $1.2 billion. Maybe a question for you, Neill, a $1.2 billion on the books in cash. But the way I understand you guys want to build in the future as you want government funding. My understanding is anything you do will be your application of Mohawk in terms of financing options. So, I'd be curious, why would the need for maybe financing come up? And if so, maybe some color around that topic.

I'm happy to provide an update on that. As we mentioned in our prepared remarks, we anticipate demand for our products in 2026 to be 30% to 40% higher than the $2.1 billion projected at our Investor Day last year. To meet this demand, we'll need significant capacity increases. The silicon carbide market is expanding, and the overall industry needs more capacity, which we must participate in. This includes potential additional facilities beyond Mohawk Valley and possibly a second materials facility. In terms of capital expenditures, we're looking at a roughly 2:1 CapEx to revenue ratio, encompassing all types of CapEx, including materials and facilities. We believe this ratio will support our growth while also ensuring strong returns. From a financing perspective, to support this increased investment, we'll pursue various funding options and apply for state reimbursements related to our Mohawk Valley project, with over $350 million remaining. We're exploring multiple financing avenues and will provide updates in the fall. It's important to note that we currently have $1.2 billion in cash on our balance sheet, and our CapEx has decreased over the last couple of quarters in line with our plans. Therefore, any new facility wouldn't require additional CapEx in the latter half of the fiscal year. We're taking a careful approach to financing, considering dilution and returns for our investors, and we'll keep investors updated as we move forward.

Hi, thanks for the question, guys. This is Joe Cardoso on for Samik. My first one here, you raised your expectation for fiscal 2026 revenue from roughly 2.1 to a range of 2.7 to 2.9. Just curious to understand, is that a function of demand trends over the past like 90 to 180 days or did you already have line of sight on that demand? And is it more about solidifying CapEx planned over the past 90 days? And then just to clarify, the 2.7 to 2.9 doesn't embed a new fab, correct?

Yes. So let me take the first part of that. So, thanks a lot for the question. Since our last Investor Day, we basically had three quarters in a row of record design-ins. We have $1.6 billion followed by a little bit higher than $1.6 billion, but another $1.6 billion, that $1.6 billion of record design-in at that time represented a 60% increase over the previous record. So there was a whole lot of excitement going on with that $1.6 billion worth of design-in. So, we had 2 quarters of $1.6 billion, followed by this quarter of $2.6 billion, almost double the previous record. So nearly $6 billion of design-ins have happened since our last Investor Day. We've been talking about upward pressure. And at this point, it's just gone to the point of – we just need to let everybody know what that's looking like. So, a 30% to 40% increase in the fiscal '26 number, largely driven by that tremendous growth of design-ins. And what I would say is happening and then I'll turn it over to Neill on the fab side of it. What I think is happening is: number one, the electrification of the automobile is happening at an earlier and steeper pace than we originally anticipated. Two, the usage of silicon carbide both in the auto and in the non-auto space is increasing and the adoption of silicon carbide is happening at a pace that is significantly more rapid than we originally had anticipated as well. And then number three, our design win rate is higher than we originally anticipated as well. So all of that combined is driving an increase in our revenue outlook for fiscal 2026 and that has us looking at expanding capacity as you had mentioned. I will turn it over to Neill for a little bit additional color.

Yes, regarding capacity, it's important to consider that the change in revenue projected for 2026 is primarily linked to power devices, which are expected to see significantly higher demand. In terms of Mohawk Valley, we've estimated that it could generate revenue between $1.5 billion and $2 billion. Even at the upper end of this estimate, with the anticipated revenue for power devices, we are approaching substantial utilization of the facility, though not necessarily at full capacity, depending on how much revenue we can generate within that range. As we approach higher utilization levels around 2026, we need to plan for additional capacity. With the design-in numbers we have observed, we are making various commitments to our customers, making it essential to have capacity for both the facility and the necessary materials and substrates that support it. This is what is driving not only revenue growth but also the need for additional capacity to come online.

Got it. That makes sense. I have a quick follow-up regarding the design-ins you've mentioned relating to the $2.6 billion this quarter. Could you provide more details about those figures? How much of that revenue was from the auto sector compared to the non-auto markets in the fourth quarter? Additionally, could you share insights on the average deal sizes versus the volume of deals being processed? Is there a specific trend contributing to these increasing numbers consistently each quarter? I’m interested in any further information you can share on that.

Thank you. I'll address that. The $2.6 billion is a significant figure, and we are very enthusiastic about it. Approximately 70% to 75% of that amount comes from the automotive sector, spanning various customers. However, I want to highlight that on the non-automotive side, our design-in figure for the quarter is a record for non-automotive design-ins and is double what we reported in the first quarter of this year for non-automotive designs in our power business, which is quite impressive. Over the past three years, we have achieved 2,300 non-automotive design-ins. Notably, about 47% of these design-ins have transitioned to design wins. To clarify our process, we categorize opportunities into three stages: first, the opportunity pipeline, where customers invite bids; then, the design-in stage, when we receive a confirmation of selection; and finally, the design win stage, where we record revenue based on 20% of the estimated first-year volume. The fact that 47% of our 2,300 design-ins are moving into production is a strong indicator of progress. Additionally, our opportunity pipeline has expanded to $35 billion, significantly increasing from around $5 billion a few years ago, marking a sevenfold growth. We've also seen a substantial increase in design-ins, with 2,300 recorded in the non-automotive category. This trend suggests that the adoption of electrification and silicon carbide is growing, as is our market share, as reflected by these numbers.

Thank you. The next question is from the line of Brian Lee with Goldman Sachs. Please proceed.

Hey guys. Good afternoon. Kudos on the nice execution here. A couple of questions from my end, I guess. It seems pretty evident, but I'll design-in activity over the past year and now the increase in fiscal 2026 targets, does this imply Mohawk Valley is fully sold out including the additional capacity for fitting out the entire factory? And then are there any implications for the fiscal 2024 targets? Any upside existing to those as well?

I'll start by addressing that and then hand it over to Neill for more details. We decided to build this factory over two and a half years ago, specifically when we broke ground in March 2020. Fortunately, we continued with our plans despite the global pandemic, allowing us to open the factory in April of this year. We're currently moving materials through it, and we expect full material flow by the end of this quarter, with initial production ramping up by the end of this fiscal year. Everything is progressing well. The need for additional wafer fab capacity indicates that Mohawk Valley won't suffice in the coming years. We still have time to start building a new fab and go through the usual construction and ramp-up phases before we reach full capacity. However, it's important to make those decisions soon. Now, I'll turn it over to Neill for further insights.

Yes, I think that's absolutely right, Gregg. I think if you look at the capacity required with the change of the 2026 revenue and again, that’s all power device for the most part, increase. It's going to have to run through the fab and if you look at the capacity in a factory and like I said before, we're talking about $1.5 billion to $2 billion of revenue potentially out of Mohawk Valley even at the high end of that range, we'd be running up against some pretty heavy utilization numbers at that point. In addition, we have seen some improvement in the Durham fab, I think that can help, as you've seen from an execution standpoint, yields and cycle-times are improving. So, I think that can play a role helping us manage through that. But I think to Gregg's point as you're looking out in time, if you think the growth rate out to the end of the decade is going to continue out beyond 2026, clearly going to have to have something out beyond 2026 that needs to come online or in that timeframe. And that’s really what we're looking at. So, I think Mohawk Valley, clearly we're seeing, tour the whole factory out, we kind of push it to the edges in terms of bringing tools into the factory. We'll leverage that as much as we can, but I think what that tells us we're going to need additional fab capacity even beyond Mohawk Valley in Durham and then secondly, we're going to need additional materials factory and likely somewhere outside of our current Durham site right now, we're going to need additional capacity for a second material site. So, putting all that together, that’s what we need to start coming online out in that timeframe.

Yes, that's great. My second question pertains to the upcoming capacity expansion, specifically regarding the materials side. Can you discuss the performance of long-term agreements related to materials? Although I understand you can't specify capacity today, do you expect growth concerning long-term targets as you implement new capacity plans? Will this approach be vertically integrated? I'm trying to understand whether, in light of the fiscal 2026 target increase—which primarily focuses on devices—you anticipate continued demand for wafer LTAs and if that will contribute positively in the coming years as new capacity becomes operational. Thank you.

Yes, thank you, Brian. I'll respond to that, and Neill, feel free to add your thoughts. We have strong long-term relationships and agreements with various suppliers and customers, which we've previously announced. In terms of the long-term agreements, we're currently about halfway through fulfilling those commitments, with another 50% still remaining in terms of volume and overall value. There's still a considerable way to go. Typically, customers place capacity requests with us, and we reach agreements based on those requests. What we've observed is that the final demand often exceeds their initial expectations, leading us to extend and expand these agreements regularly while closely monitoring their needs. We focus on maintaining long-term partnerships rather than engaging in spot market transactions. As silicon carbide technology continues to gain market share in the power electronics sector, moving from 5% to 20% of the market, we expect demand to increase. If this trend translates into additional opportunities for us, it would be highly beneficial. Neill, do you have anything else to add?

Nothing else. That's great, Gregg.

Thank you. The next question comes from the line of Matt Ramsay with Cowen. Please proceed.

Thank you very much. Good afternoon, everybody. Neill, I wanted to start with the raise of the 2026 revenue targets. You may be able to give us a little bit of color on how you see fiscal 2024 or 2025 on that ramp? What's the shape of the curve there as you guys see it? And you had laid out at the Analyst Day some gross and operating margin targets around that 2.1. How do you think about leverage into that higher number? Thanks.

Thank you. As we look at the model over time, we need to note that we are experiencing upward pressure. We currently have more than $100 million in unfulfilled demand. Execution at the Durham fabs has improved, and our back end is performing better, as evidenced by our Q1 results. This gives us confidence in our ability to achieve our $1.5 billion revenue target for 2024, supported by both demand and supply improvements as well as shipments from Mohawk Valley. However, we must remain cautious about adjusting our earlier forecasts since we are still ramping revenue in Mohawk Valley. That said, we are seeing an increase in demand, and as we increase capacity beyond 2024, we anticipate potential upside in 2025, 2026, and beyond. Additionally, we will provide more details during our investor update. Regarding gross margins, we aim for 50% by 2026, which appears solid. Our strategy involves utilizing a combination of 200-millimeter silicon carbide wafers in our highly automated Mohawk Valley fab, which is looking strong. As we see Mohawk Valley take shape, we are pleased with our cost profile and the execution on 200-millimeter wafers. Going forward, managing our operational expenses will be crucial to meeting our goals, and we expect a solid rate in the mid-20s, possibly even better over time. Overall, from a profitability perspective, our model is coming together, providing us with strong leverage as we look ahead. We have a clear blueprint for aligning our revenue trajectory with our topline and margins. Meanwhile, we have a lot of work ahead to bring this capacity online and keep pace with increasing demand.

Got it. Thank you for the color there, Neil. As my follow-up, Gregg, I wanted to ask about sort of the industry, you're seeing a lot of your peers in silicon carbide raised their outlook and revenue forecasts and whatnot along the lines of what you guys are doing. You may be a bit steeper than some of the raises out there, but everyone's kind of doing it. And the one question that I get from investors as you look and you raise the 2026 revenue target today. How firm are the programs? How firm are the commitments? Are there sort of LTAs in place with customers that give you firm backing on that revenue? I'm just trying to get an idea from just some perspective on sort of the hard visibility on order commitments from the customers that back up those numbers, because that's the question that I get from sort of investors in your shareholders pretty often? Thank you.

Let me start by providing some industry context. The adoption of silicon carbide is accelerating at a rate that exceeds expectations. A common question we receive is about our market share, but calculating that is quite difficult because the total addressable market keeps evolving; more customers are transitioning from silicon-based systems to silicon carbide systems mainly due to the need for energy conservation and efficiency. Across various applications, customers are aiming to enhance their product efficiency. This trend has been intensified by a silicon shortage over the past two years, leading many customers to explore silicon carbide solutions while redesigning their systems. Our company has been preparing for this transition since we established our capacity two and a half years ago. From my long experience in the industry, the process typically starts with opportunity pipelines where customers seek different solutions and issue bids before deciding on a supplier. This process leads to what we call a design-in, where customers select us as their supplier for a particular application. Following that, we can transition from design-in to design win. The conversion of 2,300 design-ins to design wins gives me strong confidence in our order book. Moreover, we have implemented assurance of supply programs with several companies, wherein customers provide upfront payments that secure their capacity. All of these factors combined—our opportunity pipeline expanding sevenfold to $35 billion, 2,300 design-ins with 47% advancing to design wins, and the assurance of supply programs—reinforce my confidence in our growth potential. Additionally, it’s noteworthy that various companies are revising their projections for silicon carbide, which highlights the adoption of this technology and the expanding total addressable market. Given how early we are in the shift from silicon to silicon carbide, it's challenging for anyone to accurately calculate their market share. Does that clarify things? Thank you.

Thank you. The next question is from the line of Colin Rusch with Oppenheimer. Please proceed.

Thanks so much guys. Given the landscape that you're talking about, can you talk a little bit about the optimal customer base and composition of that customer base as well as your pricing strategy as you think about addressing some more diverse needs that potentially would carry a little bit higher ASP?

We've experienced record design-ins last quarter within a more diversified customer base outside of automotive, which is very encouraging. These projects are typically smaller, and due to price sensitivity, they often have higher average selling prices. I want to acknowledge Arrow, who has been an exceptional partner over the past five years and has done an outstanding job promoting the market for silicon carbide. Much of the 2,300 design-ins we have can be attributed to our strong partnership with Arrow, and I want to thank their team for their excellent work. I believe this partnership will continue for a long time. However, I want to stress that we have been quite clear with our customers, particularly regarding significant opportunities. If they choose another company as their primary supplier, we would prefer to be that primary supplier ourselves. Our current focus is on being the primary source because our capacity is limited. We want to concentrate our efforts on customers that have committed to us rather than pursuing alternate sourcing options, which is not something we can effectively manage right now.

Okay. And then just around the equipment ordering and lead-time deposits seems like that. Can you just give us a sense of the cadence of that through the balance of this year as you build out the increment capacity?

Yes, Colin, we invested in our fab in New York over two years ago, allowing us to secure orders for long lead-time equipment early on. We have been proactive in this area and are considering additional capacity while managing lead times. Although equipment lead times are extending, we have accounted for this in our plans and have been handling it effectively.

Thank you. The next question is from Ashley with Wells Fargo. Please proceed.

Hi, this is Ashley on behalf of Gary Mobley. I'm interested in understanding the pricing environment for your materials business given the supply shortage. Are any of the long-term supply agreements with customers maintaining the original pricing terms, or is there additional pricing power in your materials business?

Well, we've had a very consistent strategy on our long-term agreements where we don't really want to play in the spot market, so to speak. So, we sit down with customers on those long-term agreements. We look at what their demand is going to be over the next, call it, decade or so. We look at what kind of capacity they would like to secure from us. There is kind of an upfront capacity reservation sort of fee associated with that and then we have negotiated pricing with them over the volume that they have. We stick with that pricing. We've stuck with that pricing through the entire period here. So, we committed to something, and we've stuck with it. And that's been our policy through this entire time that I've been at the company. So, in terms of pricing power per se, we stick with the long-term agreement pricing that we've got in place. And to the extent that the customers continue buying and doing more long-term agreements, we would have, again, new long-term agreements that we put in place that would have pricing associated with it, and we will stick with that pricing as well.

The next question is from the line of Ben Harwood with New Street Research. Please proceed.

Thank you for the questions. So you mentioned that your capacity constrained on your materials business today. What gives you the confidence that you can ramp the supply of your substrate to meet the 30% to 40% incremental demand just given the inherent complexities of ramping up substrate capacity? And then do you think you will still be constrained on the 2026 timeframe, just given how much demand is accelerating? Thank you.

Well, thanks a lot. It's a great question because ramping capacity and materials is not for the faint of heart. Silicon carbide is a very tricky material; it's something very finicky, so to speak. But the good news is we've got 35 years of experience in doing just that. And we've also got five years of substantial expansion that we've just delivered on. So we feel very good about it. We don't look at it and say, 'Hey, this is a short cut and don't worry everything easy because it's not. But what I would tell you, Ben, is that with the scientists we have in place, the engineering team that we've got in place, the manufacturing folks and so forth. When we run into the normal sets of challenges that you have when you ramp capacity, we've got a team that knows how to blow through those challenges and deliver a good result. So with that, we've got a lot of high confidence that capacity ramp will be something that we can handle. Like I said, it's definitely not for the faint of heart. It comes with a lot of challenges. I think I asked one of our manufacturing guys and materials what keeps them up at night. And I think the answer was yes. There's just a lot of challenges when you're ramping materials. But the team has 35 years of experience. We've got a ton of people that we can call on when we meet those different challenges. And I think the team has done a pretty good job of doing that to date. So I guess, longer-term, we know that we need to expand our materials business. We've already been doing that here on campus in the Durham facility. We're looking at a new facility that we hope we can make some decision on post-haste here. We've got a lot of discussions going on with several different states and local authorities in terms of what that could look like from an incentive perspective. We're super excited that the CHIPS Act was passed the last week or so because materials is definitely in that Act as well. So all of those things put together, what I would say is the combination of 35 years of experience, the fact that we've demonstrated substantial capacity ramp already to date, and the fact that there looks to be some pretty good government incentives to help us do that gives us confidence in that, Ben.

That’s great. Thanks, Gregg.

Thank you. Next question comes from the line of Edward Snyder with Charter Equity Research. Please proceed.

Thanks very much. I was hoping maybe, Neill, you could provide some color on how the shake down the Mohawk Valley proceeding, is it at below or in line with your expectations for this point? And I know you're running 8-inch through there, which is a first. And I know it's not a high volume yet, but any issues with handling those wafers, given how brittle they are, the much larger diameters, and much more sense, I'm sure and all the trouble you've had with breakage in Durham. I was just wondering what your first experience with 8-inch in Mohawk and then I had a follow-up?

With the automated factory, we're seeing better results in handling and those types of things. Although we're still working through a lot of, I think, what you call the kind of early kind of setup phases in the factory. So, there are still some annual processes as we kind of manage through that right now. But I would say things are kind of moving along more or less as you would expect with a new fab. I mean, we're running our first lots to the fab right now. We're learning. We're tweaking the process, and we take it through each step. And as we work through those steps, we'll continue to manage through that until we get kind of the capacity up and running fully and gets your qualification. But I think it's kind of the normal two steps forward one step back as it works through the factory. I'd expect some ups and downs here between now and kind of when we ramp the factory at the end of the year, but kind of in line with what I just said. So, I don't think there's any expectations, as Gregg said, we want to hit a bump in the road here or there, but I do think we're still on track for ramping revenue and having that revenue ramp in the back half of the fiscal year.

And then what quarter could we expect the material from Mohawk – the revenue from Mohawk to be material? And then also, you mentioned a new material factory with a ground-up new materials factory in Durham that will have a significantly different margin or throughput profile than your existing facility? And if I could squeeze one more in for Gregg. You put out a good revenue number today. Maybe give us a glimpse. I know you said 70%, 75% of design-ins are automotive. Generally, what's the breakdown in your current revenue number between automotive and non-automotive, if you could? Thanks.

In terms of the revenue ramp timing, I think it's consistent with what we said kind of back half the year, we'll start to see the revenue ramp. Obviously, as kind of goes on from Q3 to Q4 into '24, we'll see that kind of ramp more rapidly as we fab, but kind of in line with kind of some of the numbers we talked about recently. As it relates to new materials, it's probably too early to be talking in detail about that. We've been able to give you some update in November. But clearly, with the scale advantage that we get up a potential new facility and really primarily being used for 200-millimeter wafers for Mohawk Valley and for potentially a new fab, we feel good about what that would translate into from a cost perspective.

And then Ed, from a revenue perspective, and Neill touched me, if I got that wrong, definitely from a device perspective, greater than half of our revenue is non-automotive, and it's probably more like 75% area. Neill, is that about right?

That's about right.

Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed.

Thanks for taking my questions. Gregg, you mentioned some industry analysts projecting demand to grow 4x or so over the next several years. I'm curious, what's your sense of industry capacity growth in the same timeframe? Because we hear of a lot of incremental capacity coming online from several US, Korean, Japanese, and Chinese competitors. How do you think that supply-demand balance works out, not this year or next year, but in the outer years?

My viewpoint is that the growth of the silicon carbide market is likely to exceed demand for a considerable time. I have seen this echoed in some analyst reports. This is largely due to the challenges of ramping up capacity, especially in terms of materials. When we talk to customers, this is a significant concern for them. They observe our new factory, which we decided to build nearly three years ago, is now coming online after two and a half years of construction. If you visit our campus, you will notice ongoing construction and repurposing of office space into materials factories and other operational areas. Customers see this investment and realize we are backing up our commitments. As I noted earlier, often this is the final step before a customer decides to sign a contract with us. They visit to verify that we are genuinely working on capacity expansion. As we approach the announcement of a new materials factory, I believe this will provide customers with reassurance. It's essential to recognize that expanding materials factory capacity is no small feat, and I think customers are confident in our ability to handle these challenges.

Got it. And so my follow-up, Neill, on gross margins. So as you start selling products from Mohawk Valley, I believe you said in the first half of next calendar year, what happens to gross margins? Do they continue to move up, or do you think that they could perhaps take a step down first, given that maybe depreciation or other things? Just what are kind of the puts and takes of gross margins as you head into the first half of next year?

I believe it's fairly consistent with what we have previously outlined. If you examine the second half of this year, as revenue begins to come from Mohawk Valley, we should see a slight improvement in margins, potentially in the latter half of this calendar year. Moving into next year, as we start generating revenue through Mohawk Valley, we expect margins to begin increasing, and you might notice this in the latter part of the year. We have removed some start-up costs from the non-GAAP figures, and we anticipate those costs will decrease over time as we ramp up production at the fab. These factors indicate that, as more labor is utilized to provide additional capacity, margins should improve while start-up costs decline over time.

Thank you. Our next question comes from the line of Amanda Scarnati with Citi. Please proceed.

Hi, thanks for taking the question. Quickly on customers for the year, any 10% customers? Any shift in how your customers have been ordering or ability to meet customer demand in this fiscal year?

I'll start by highlighting that customer shipments are currently heavily reliant on enhancements at our Durham manufacturing facilities. Our team has adopted a fresh perspective on Durham as a manufacturing site. Missy, Rex, and the team deserve praise for their excellent work, and we have observed encouraging improvements in yields and cycle times. Although we still face challenges and have significant opportunities ahead, the near-term outlook appears more positive. We still contend with long lead times and customer demand that exceeds our current delivery capability, as Neill pointed out regarding the $100 million of unfulfilled demand. Nevertheless, as cycle times decrease and yields improve, our capacity to deliver products to customers in a timely manner is enhancing. I commend the manufacturing team, as well as our back-end operations and assembly test partners, for their contributions to this progress. The near term will focus on advancing these improvements. While our fabs aren't perfect, the teams are effectively maximizing their output. There is still much work to be done, and further advancements are expected, so it's encouraging to see some progress. Now, Neill, would you like to discuss the 10% customers?

Yes, we're not seeing much from the 10% customers, but it's important to note that we're observing strong demand across the business. The channel inventory numbers are still low, and our turnover rates are higher than our preferred model. We're effectively managing this situation. Over time, we'll see an increasing number of automotive customers coming online, as mentioned earlier. I don't anticipate a decrease in demand, despite the disconnect between demand and supply. While some shifts may occur, we expect to see more automotive clients joining us as we navigate through these challenges. Overall, demand remains quite broad-based given the supply issues we are facing.

And then just a quick follow-up on this. When you look at the upside that we saw in the June quarter and the guidance, member versus where the Street was looking. Can you talk about where that upside came from? Was it just a matter of being able to squeeze more out of Durham or are we seeing a greater demand profile that you saw?

Our revenue is primarily influenced by supply rather than demand. In the power devices sector, we've discussed the strengths in materials and capacity, with powered devices being a significant factor. This is closely linked to improved performance in the Durham fabrication facility and enhanced operations from our backend team. I believe this will continue to shape our progress moving forward.

Thank you. That concludes the question-and-answer session. I will now hand the call over to Gregg Lowe for closing remarks.

Well, thanks a lot, everybody, for participating today and being with us. We look forward to visiting you next quarter at our next earnings release and then later on in the year at our next Investor Day. Thank you very much, and have a great evening.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.