Wolfspeed, Inc. (WOLF) Q4 2023 Earnings Call Transcript

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's fourth quarter fiscal 2023 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 2023. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provides useful information to our investors. 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 as 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 mentioned important factors that could cause actual results to differ materially. During the Q&A session, we would ask that you limit yourself to one question and one follow-up so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now, I'll turn the call over to Gregg.

Thanks, Tyler, and good afternoon, everyone. As we close out fiscal 2023, we look back having made significant strides across all areas of our business. Our Mohawk Valley fab, which is the world's largest fully automated 200-millimeter silicon carbide fab, began shipping product and contributing revenue. Last October, we outlined our plans to construct the world's largest state-of-the-art greenfield silicon carbide footprint. Since then, we've secured $5 billion of the capital necessary to achieve these goals, allowing us to finish out the fit out of Mohawk Valley, expand our materials capacity at Durham and break ground on the world's largest 200-millimeter silicon carbide materials facility at JP in Siler City, North Carolina. Finally, we have made great strides in diversifying our device customer base across the automotive, industrial, and energy sectors, with flagship agreements with key OEMs and Tier 1s, including Jaguar Land Rover, Mercedes, BorgWarner, and ZF. We are also continuing to see growth in the traditional industrial and energy segments as customers make the transition to silicon carbide. We are seeing many opportunities in solar and energy systems, motor drives, UPS, heat pumps, air conditioning, and many more. The growth in these segments is primarily driven by the need for higher energy efficiency. In addition, emergent industrial applications such as e-mobility, electric vertical take-off and landing aircraft, are also integrating Wolfspeed silicon carbide within their initial designs to reduce system weight and improve range. From a materials perspective, we were very pleased to secure a long-term wafer supply agreement with Renesas Electronics Corporation. Widely recognized as a leader in automotive semiconductor devices, Renesas also understands the importance of having access to silicon carbide technology and has signed a 10-year wafer supply agreement with Wolfspeed. The agreement includes a $2 billion customer deposit, which is one of the largest deposits I have ever seen in my 30-plus years in semiconductors. This will secure a capacity corridor as they begin to ramp silicon carbide device production beginning in 2025. While this agreement is also expected to provide a significant revenue stream over the next decade, it has an even greater significance for the power semiconductor landscape. Securing this key customer was possible because of our forward-thinking investments in material capacity at the Durham campus and with the construction of the JP. We will be uniquely positioned to drive the industry transition from 150-millimeter to 200-millimeter silicon carbide wafers, which will help address some of the supply-demand mismatch, which currently exists today and potentially open up new markets for silicon carbide applications in the industrial and energy sectors. From a materials perspective, construction at the JP is well underway. Fully built out, the JP will add 10 times more capacity compared to our current operations in Durham, significantly increasing the world's total supply of silicon carbide materials. The building foundation is in place, and we've now started construction on the shell of the building. We remain on track to begin producing wafers at the site in the second half of calendar 2024. As far as our more immediate strategy to increase 200-millimeter materials production at Building 10 on our Durham campus, we have now installed more than 75% of the crystal growers in that facility. They are currently growing crystals, and we've been very pleased with the yields thus far. As it relates to Mohawk Valley and our device business, we have continued our ramp-up efforts and recorded approximately $1 million in device revenue out of the fab in fiscal Q4. Silicon carbide is a complex technology that's very difficult to master, and I'm proud of how our team has worked tirelessly to get us ramping device production in a brand-new, highly automated fab. We still have some work to do at Mohawk Valley as we scale device production, and expect a modest increase in device revenues in the first half of fiscal 2024, with a steeper increase in revenue beginning in the second half of 2024. From a device perspective, we are seeing continued strength across our end markets and we secured approximately $1.6 billion in design-ins for fiscal Q4. For fiscal 2023, design-ins totaled approximately $8.3 billion. And the cumulative total now stands in excess of $19 billion secured in the last four years. Our customer wins to date give us the confidence in the growth of our addressable market and our ability to capture meaningful share of the device market between now and the end of the decade. More than anything, we're proud of our role in building greater awareness for silicon carbide, at the same time, the world is realizing the importance of the global semiconductor industry. The secular trends that are driving the adoption of silicon carbide have started to receive widespread public recognition as a truly game-changing technology in the power semiconductor space. I'll now turn it over to Neill, who'll provide an overview of our financial results and outlook.

Thank you, Gregg, and good afternoon, everyone. Before I delve into our fourth quarter results and the outlook for fiscal Q1, I want to highlight some changes we are implementing in how we present our financial results. In recent years, we have categorized pre-production costs, mainly at Mohawk Valley, as factory start-up costs totaling $160.2 million for fiscal year 2023, and reported them under other operating expense on the income statement. At each earnings call, we updated and provided outlook on these costs, excluding start-up costs from our non-GAAP results. Moving forward, these costs will no longer be excluded from our non-GAAP results and forecasts, but will be pointed out in our commentary and footnotes to financial statements and filings. As we transition Mohawk Valley to an active production facility in the first quarter of fiscal 2024, these costs will be reclassified as underutilization costs and will be included in the cost of goods sold. We will omit neither start-up costs nor underutilization costs in our non-GAAP results. This change does not affect our long-term outlook for free cash flow generation and corporate non-GAAP gross margins exceeding 50%, as we believe our 200-millimeter silicon carbide technology will provide the necessary capacity and cost competitiveness to achieve these profitability levels. For the fourth quarter, we aimed for revenue between $212 million and $232 million, non-GAAP gross margin from 29% to 31%, and a non-GAAP net loss within the range of $21 million to $29 million, or a loss of $0.17 to $0.23 per diluted share. Against this guidance, our fourth quarter revenue reached $235.8 million; non-GAAP gross margins of 29%; and a loss of $0.42 per diluted share, which included $39.5 million of start-up costs or $0.26 per share, mainly related to Mohawk Valley and early phase start-up costs associated with our materials expansion for the JP materials facility in Siler City, North Carolina. In our fiscal Q1 2024 outlook, shared in our press release earlier today, we project OpEx to be around $120 million, including approximately $8 million in start-up costs tied to our materials expansion efforts. In our earnings release today and the Form 10-K we will file later this week, start-up costs will be presented as a separate line item on our quarterly income statement. I will elaborate on the quarter-over-quarter operating expense changes shortly. In fiscal Q1, as Mohawk Valley increases production, we expect gross margin at the midpoint to be roughly 14%, which includes about $37 million of underutilization costs, equating to approximately negative 16%, or 1,600 basis points of gross margin. We are making these adjustments in our presentation to align with the SEC's clarified guidance on non-GAAP measures for public companies. Additionally, in our upcoming 10-K filing, we will provide a breakdown of our revenue by our three product lines: power products, RF products, and materials products. This breakdown will also be included in future earnings releases and Form 10-Qs. Now, let me provide further details on the fourth quarter results. As previously noted, we finished the year strongly, reporting revenue of $235.8 million in the fiscal fourth quarter of 2023, reflecting a 3% sequential increase compared to the prior quarter and approximately 3% growth year-over-year. This outperformance relative to our guidance was mainly due to favorable timing of product shipments from our Durham production facilities. While production at Durham may vary, as mentioned last quarter, the incremental contribution from Mohawk Valley is the key factor influencing our future revenue growth. As Gregg stated, we reported $1 million in revenue from Mohawk Valley. While we still expect to reach 20% utilization at Mohawk Valley by the end of fiscal 2024, it's crucial to recognize that it may take until the second half of calendar year 2024 before we see $100 million of quarterly revenue from the fab, which this 20% utilization would represent, accounting for the time between fab starts and shipments to customers. Continuing down the income statement, non-GAAP gross margin for the fourth quarter was 29%, compared to 32.3% last quarter and 36.5% for the same period last year, marking a 330 basis point decrease from last quarter. Gross margin faced pressure from increased costs and a heavier automotive mix for customers initially intended to be produced from Mohawk Valley. As we ramp up production from Mohawk Valley, we anticipate improvements in gross margin in the future. We reported an adjusted loss per share of $0.42 in the last fiscal fourth quarter compared to a loss of $0.40 last quarter and a loss of $0.21 in the same period last year. As previously stated, the loss per share in the current period was affected by $39.5 million in start-up costs related primarily to Mohawk Valley, or $0.26 per share. Before I move on to the full-year results, I’ll quickly update you on our financing initiatives. Less than a year ago, we outlined a $6.5 billion capital expansion plan and its corresponding financing strategy. We indicated a flexible, low-dilution financing plan balanced across four pillars: public, private, customer, and government funding. Since then, we have raised low dilution capital across all four pillars, securing around $5 billion in the past nine months and strengthening our balance sheet to establish the leading silicon carbide manufacturing footprint in the industry. As we move forward, we will continue to explore all options regarding our capital structure and stay flexible for future financing as opportunities arise. However, securing financing is not our primary focus at this time. Now, for full-year results. For fiscal 2023, revenue totaled $922 million, marking a 24% increase compared to fiscal 2022 due to strong performance in both materials and power product lines. The non-GAAP net loss stood at negative $180.7 million or negative $1.45 per diluted share, excluding adjustments of $149.2 million, net of tax, or $1.20 per diluted share. Regarding our balance sheet, we concluded the quarter with around $3 billion in cash and liquidity to support our growth initiatives. Days sales outstanding (DSO) was 47 days, while inventory days on hand was 172 days. Free cash flow for the quarter was negative $455 million, consisting of negative $52 million in operating cash flow and $403 million in capital expenditures. Regarding our first quarter outlook, we are projecting revenue between $220 million and $240 million. As mentioned last quarter, the power device revenue capacity from our Durham fab is expected to be about $100 million per quarter, subject to variability, which had a positive impact in the fourth quarter. This does not alter our assessment of the factory's revenue-generating capacity, and we will consistently forecast the power device revenue capacity from Durham at approximately $100 million per quarter. While this will present a modest obstacle transitioning from fiscal Q4 2023 to fiscal Q1 2024, it aligns with our forecasts. As previously noted, the incremental revenue contribution from Mohawk Valley will be the main driver of future power devices revenue growth. We anticipate gross margins ranging from 10% to 18%, with a midpoint of 14%. At this midpoint, approximately $37 million represents negative 1,600 basis points of underutilization costs as we ramp up revenue from Mohawk Valley. We expect an underlying gross margin performance, excluding underutilization, to improve slightly during the quarter as we continue to serve a larger automotive customer mix from the Durham fab. For fiscal 2024's first quarter, we target non-GAAP operating expenses around $120 million, which includes $8 million in start-up costs associated with our materials expansion, primarily linked to the JP materials facility in Siler City, North Carolina. Excluding start-up costs, quarter-over-quarter OpEx increases stem from higher employee-related expenses as we enter the new fiscal year. We expect non-operating expenses for Q1 to be around $22 million, which factors in $55 million in interest expenses, including the recently concluded Apollo term loan and interest related to our Renesas customer reservation deposit. Non-operating expenses are anticipated to rise as the year progresses due to decreased interest income from our short-term investments as those funds are utilized for facility expansion investments. We project non-GAAP net loss for Q1 to range between $94 million and $75 million. As always, our Q1 targets rely on several factors that can significantly influence them, including supply chain dynamics, overall demand, product mix, factory productivity, and competitive pressures. Lastly, we expect capital expenditures to be around $2 billion for fiscal 2024 and maintain our forecast for fiscal year 2024 revenue to fall between $1 billion and $1.1 billion.

Thanks, Neill. The adoption of silicon carbide is driving the need for more capacity, and we are seeing continuous upward pressure on the demand for both devices and materials. The EV revolution continues to be the driving force of adoption, with recent developments further bolstering the EV landscape. Just recently, a consortium of OEMs, including BMW, General Motors, Honda, Hyundai, and Mercedes, announced their intention to create a new high-power charging network with at least 30,000 chargers in North America to meet the growing demand to charge electric vehicles. The explosive growth in EV production is just the start as the world continues to embrace more energy-efficient technology. As we close out this year and turn to fiscal 2024, we are better positioned strategically, financially and operationally. Wolfspeed wins this generational opportunity because we are vertically integrated, investing in purpose-built facilities and focused on doing so with 200-millimeter silicon carbide substrates. This is validated by Apollo, a global investment firm, who saw an opportunity to assist us with our capital requirements, and Renesas, who made a decisive commitment to next-generation silicon carbide technology and intends to do so at 200-millimeter. In closing, I'd like to thank all of our stakeholders for your continued support, and I'm excited for what's ahead. I'll now turn it over to the operator, and we'll take any questions you may have.

Our first question is from Harsh Kumar with Piper Sandler. Your line is now open.

Thank you, Gregg, for the opportunity to ask my question. It seems clear that the company's future growth is tied to Mohawk Valley. Could you discuss what your goals are for that facility to increase production? You mentioned generating $1 million last quarter, but you're aiming for $100 million in the second half of 2024. Will that achievement occur early in the second half, around March, or later, like in the June quarter? Additionally, what specific conditions do you need to meet at the fab to reach that target? Thank you.

Thanks, Harsh. I want to touch on a few points. First, as we ramp up the fab, we need to ensure that the necessary materials are flowing in. I can provide a quick update on this. The 200-millimeter crystal growth operation in Building 10 is progressing well and is producing high-quality material, leading to exceptional defect density wafers. The 200-millimeter epi is also performing excellently, and we are actively ramping that up. Additionally, we are now shipping products from the Mohawk Valley fab, where we currently have three products fully qualified in 200 millimeter, along with eight more that have passed all reliability tests and are in the final stages of qualification. Everything is looking positive. As we continue to ramp the fab, currently generating $1 million in revenue from a potential $2 billion capacity, we are still in the early stages. During this ramp-up, we will be fine-tuning the processes and equipment, which should increase our yields to reach our expected targets. The ongoing ramp-up of the new 200-millimeter crystal, coupled with the high crystal quality and excellent wafer defectivity, along with well-performing epis, gives me confidence in our fab's performance. With three qualified devices and eight that have passed reliability testing, I am optimistic that we will achieve our goals and the entire supply chain will perform as anticipated. In terms of production ramp-up and revenue expectations, we anticipate reaching 20% utilization by the June quarter. I will let Neill elaborate on the revenue expectations from this progress.

Just remember, as you think about utilization, there is a delay from when the wafers are loaded into the fab until they are produced, processed, and finally shipped to the customer. So, when we reach the 20% utilization level towards the end of the year, you shouldn't expect the revenue impact to be immediate. If we achieve 20% utilization by the June quarter, the revenue equivalent of $100 million will not be expected until sometime after that, likely in the second half of calendar year 2024. Regarding the fiscal year, this means we should look toward the first half of fiscal year 2025. Last quarter, we generated about $1 million, and we anticipate a modest increase in Q1, with a slightly higher uptick expected in Q2, followed by a more significant ramp-up in the latter half of the fiscal year, particularly in the March and June quarters. From there, we should continue on a positive trajectory.

Wonderful, guys. Very helpful. And then for my follow-up, so there were customers that were expecting to get product off of Mohawk Valley right now. I know that was part of the original plan. So, I guess, my question to you is how are you managing those expectations for those customers? And how important is that commitment to the customer and for you guys? And more importantly, how you're balancing that supply/demand game in the near term as you ramp Mohawk Valley?

Thank you for your question. In the short term, the delay in ramping up Mohawk Valley does have an impact. We are taking several steps to address this. Firstly, we have increased the amount of automotive products being shipped from Durham, shifting our mix there. We are communicating openly with our customers about their expectations and have adjusted those expectations to align with our Mohawk Valley ramp-up timeline. Our communication with customers is ongoing, with some interactions occurring weekly and others nearly daily. Many customers have visited Mohawk Valley and are encouraged by the production capacity we have planned. They certainly wish for the capacity to come online sooner, but they recognize that this level of production is not available elsewhere. Additionally, we are executing well in Building 10 and have had several customers engaged there as well; it is a substantial site. Our intention is to produce products there around this time next year, possibly even a bit earlier, which provides some encouraging signs that capacity is indeed coming online.

I also want to emphasize that customers have recognized our excellent management of the financing aspect, which has enabled us to pursue a significant capacity expansion. When they look ahead and see the opportunities that arise from the manufacturing footprint we are developing, they gain confidence in our ability to deliver parts in the future.

Thanks, guys. Thank you so much for the clarity. Appreciate it.

Hi, thanks for taking my questions. For my first question, I'm not sure if Neill or Gregg will address this, but I want to understand the reason behind the change in accounting at this time. You've spent the past year discussing the underutilization, and now, right at the beginning of the first quarter, you're making a change. What prompted this decision? Was it influenced by your auditors noticing something in the business? Any additional context would be helpful. I also have a follow-up.

Yes. Sure, Jed. So I think first of all, this is a presentation change only. This doesn't change our business plan or our long-term outlook for driving greater than 50% gross margin. It's a presentation change in terms of how we want to talk about the financials on a quarterly basis. So, a couple of things drove that in terms from a timing perspective. I think as I said in the prepared remarks, we updated our presentation of our results really just to adhere to updated guidance from the SEC. Also, if you think about Mohawk Valley, that's now transitioning from a pre-production facility to a full production facility, utilization of the fab will start to play a much bigger role in our margin trajectory going forward. So, putting those pieces together along with the fact that we're moving into a new fiscal year, just made this kind of the right time to make that transition.

So just to be clear, though, was this your decision to change the presentation? Or I guess I'm going to be getting asked these questions. What drove this? Was it SEC that you couldn't do the underutilization? That's what I'm getting at.

Yes. We received updated guidance from the SEC and have been in communication with them. Following that, we decided to update the presentations.

Got it. Thank you. I have a follow-up question. There are a lot of different figures, so please help clarify this for me. I heard that 75% of the growers in Building 10 are operational. Is that true? I'm asking because I want to understand the decrease in revenue guidance despite producing more materials for Mohawk Valley. How should I interpret that along with the six-month delay in achieving 20% utilization?

From a 20% utilization standpoint, we believe we are on track to reach that target by the end of the fiscal year. Everything appears to be in order. As we increase crystal growth in Building 10, we are observing positive results in both yield and output. So, that is progressing well. Now, our focus is on increasing substrate capacity at the fab and enhancing yields to match our targets, as Gregg highlighted, by fine-tuning the tools and processes. This is currently our main priority—to restore capacity. From a revenue perspective, we anticipate a slight increase. We expect to see some growth in Q2, and as we process more wafers through the fab, we foresee a significant upward trend in revenue as we move into the second half of the fiscal year.

So Neill, if that's picking up, though, what's dropping off?

So Jed, there are two pieces here. So, from a Q1 perspective, we saw better performance out of the Durham campus, both, I think, in power devices out of Durham and materials as well. So, it was just better performance in the quarter. So what we'll do is we'll forecast that back to the mean, so to speak. So Durham will have some good quarters and will have some good performance. There will be plus or minus. We saw a positive performance last quarter, that would be a bit of a headwind as we move into Q1. So that will come back to kind of a mean. But that's what we've always kind of forecasted and how we looked at Durham. It was an older campus, an older facility, there's going to be some variation there, it requires maintenance from time to time. So we'll forecast Durham just kind of back to what we've always kind of historically talked about like $100 million or so order for power devices. And we were ahead of that last quarter. And this quarter, we'll just kind of forecast back to that kind of normal mean. In the meantime then, if you look out to the future, any substantial growth from a revenue perspective really comes from the Mohawk Valley.

Hey, everyone. I appreciate the opportunity to ask a follow-up question. I wanted to clarify something regarding the Durham Building. You mentioned that 75% of the furnaces are installed. Does "installed" mean they are operational? It seems like you're nearing the point where you can support 20% utilization at Mohawk Valley, but that's not anticipated until the June quarter of 2024. Is this timeline typical for the transition from furnaces starting up to devices being produced at Mohawk Valley? Thank you.

Yes. Basically, yes, Joshua, is the answer to that. And I would point to a couple of different things. We are ramping the production of 200-millimeter crystals. We're ramping the production of turning those into wafers, wafering process, the epi process and then feeding that all into a brand-new fab. So all of that is kind of coming online. And the fact that we can go from $1 million worth of revenue to 20% utilized in basically a year is actually pretty good I think.

Hi. This is Blake Friedman on for Vivek. Thanks for taking my question. First, I just wanted to clarify an answer to a previous question. Just exiting this year, did you say that the gross margins would be somewhere in the mid-20%-s? I just want to make sure I heard that right, and it was for the full year? And then secondly as well, that 50% target that you mentioned that remains unchanged, if I look at the last Analyst Day, I believe you had a 50% to 54% gross margin target in fiscal '27. Is that still the timeframe you're working at? Or is that 50% target more aspirational longer term?

I think as you bring the facilities to capacity, you'll be well ahead of any underutilization challenges, obviously, because the facility will be utilized. So over time, it will dissipate. So I think the way you want to think about the timing of the gross margin is as you work into 2024 and 2025, there'll be a bit of an overhang from underutilization. As we start to bring the factories up, we'll start to see that come down somewhat. And then we'll see a faster ramp out in '26 and then to '27 as you start to utilize the factors more and get better substrate capacity both out of the Durham campus and outside of Siler City in this year, a trajectory that brings that back up to that level of north of 50% and to get after that '26 and '27 timeframe.