Wolfspeed, Inc. (WOLF) Q1 2024 Earnings Call Transcript

Hello, everyone, and welcome to the Wolfspeed First Quarter Fiscal 2024 Conference Call. My name is Nadia, and I'll be coordinating the call today. I will now hand over to your host, Tyler Gronbach, Vice President of External Affairs, to begin. Tyler, please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's first quarter fiscal 2024 conference call. Today, Wolfspeed's CEO, Gregg Lowe; and Wolfspeed's CFO, Neill Reynolds, will report on the results for the first quarter of fiscal year 2024. 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 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 mentioned important factors that could cause actual results to differ materially. Lastly, I would also like to note that during the quarter, we announced our intent to sell our RF business to MACOM. The results of our RF business will now be classified as discontinuing operations, and all discussions today will be on a continuing operations basis. During the Q&A, we would ask that you limit yourself to one question 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. It is an exciting time at Wolfspeed. With the pending sale of the RF business, we are now the world's only pure-play vertically integrated silicon carbide company. We are uniquely positioned to drive the industry transition from silicon to silicon carbide from both a materials and a device perspective. As we continue to scale our operations, we have overcome our fair share of challenges along the way, and I remain very confident around our long-term trajectory for three reasons. First, we've demonstrated the capability to consistently produce enough high-quality, high-yielding 200-millimeter wafers in Building 10, ahead of the needs of the Mohawk Valley fab. Second, we've assembled a team comprised of internal silicon carbide experts, including one of our co-founders and external advisors from our tool manufacturers to ensure that we will achieve 20% utilization at Mohawk Valley in the June quarter of 2024, and we've seen notable progress this quarter. And finally, customers continue to partner with Wolfspeed, as we secured our third highest quarterly total of device design-ins at $2.2 billion, and we converted more than $1 billion of device design-wins this past quarter as well. In addition, we've also posted record revenue for our 150-millimeter substrates in the first quarter, which is an indication that demand remains robust for our high-quality substrates. Our first quarter results demonstrate the initial returns on our capacity expansion investments that will pave the way for the rest of the fiscal year and beyond. Revenue, non-GAAP gross margin, and non-GAAP EPS all came in at the high end of our guidance range. Turning to Mohawk Valley where we continue to ramp production. This quarter, we generated $4 million in revenue from the fab, which compares to $1 million that was delivered in the previous quarter. In the coming quarter, we expect to more than double the output from the fab, as we continue to ramp device production. Because of the complex nature of silicon carbide technology, as we ramp the fab further, we are collaborating even more closely with our tool vendors to ensure maximum uptime, the best yields, and the most efficient use of all our tools. We've worked closely with them to develop optimal operating protocols, and as a result, we're seeing good improvement in the fab. I was just up in the fab last week, meeting with the leadership team, walking on the floor to talk with our technicians and seeing the progress firsthand that we're making in some of our bottleneck areas. We've now doubled the number of products qualified in the last 90 days, and all of those MOSFETs achieved qualifications on the first pass through the fab, which is a strong indication of the underlying capability of the fab. Finally, those products we have already qualified have sufficient demand to more than satisfy our short-term 20% utilization target. I am especially proud of this incredible effort by our team. It speaks to the advanced silicon carbide technical device capability we have assembled and the focused and detailed execution of our engineering and quality teams to ensure that we are ready to produce high-quality automotive devices at 200-millimeter, something nobody else in the world is currently doing. As I mentioned, we are ahead of plan in our ramp of Building 10 crystal growth for 200-millimeter substrates. By the end of this quarter, we will be producing enough material to support 15% utilization at Mohawk Valley, putting us nicely on track for our goal of 20% utilization by June of 2024. Turning to the JP, construction continues, and design schedule. We expect to be producing material in the first half of fiscal 2025, and we've already hired and begun training more than 100 people that will work at that facility. On the demand side, as I said, we recorded $2.2 billion of design-ins, the third-largest amount of any quarter in our history, ahead of record design wins of $1.4 billion illustrating our customers' willingness to move into volume production and projects that we've won over the past few years. Our design win record for the first quarter represents more than 230 projects, many of which are converting sooner than our original expectations. Most of these projects are in the automotive end market, and we are steadily ramping our design-ins to design-wins with major OEMs and Tier 1s. We remain confident that the demand from automotive customers will remain strong. While we are seeing some softness in the industrial and energy space, primarily in China and Asia. Additionally, we had a record quarter for 150-millimeter wafer revenue, a strong signal that the demand for materials remains solid. Wolfspeed is the first mover to 200-millimeter wafer volume production, which will be the silicon carbide industry's most advanced technology. As a result, we are well positioned to be the only company producing 200-millimeter at scale for the next few years and believe this competitive advantage will further extend our leadership position well into the future. Wolfspeed, as the undisputed leader in silicon carbide, will continue to play an industry-critical role in the coming years, as a supplier of merchant materials to leading power device makers. Demand for our materials remained strong, and we have extended some of our agreements with existing wafer customers and added new agreements, like the one with Renesas. That being said, we're not content with being the leading material supplier to the market. We also expect to be one of the top silicon carbide device suppliers in the years to come. In 2018, the silicon carbide device market was estimated to be about $400 million. Five years later, the market size is pegged at $6 billion, and the projected total addressable market for the end of the decade is north of $20 billion and continues to grow. This is part of the reason we announced and are now in the process of completing the sale of our RF business to MACOM, which we expect to close by the end of the calendar year. We've always said that the growth of Wolfspeed will come from our leadership in silicon carbide and power devices, and this marks a definitive milestone in allocating all of our investments, research and development, and technology into these business areas. There's a long road ahead of us here, which is why we invested the time and capital to develop the world's only purpose-built silicon carbide device fabrication facility. We're keenly focused on execution and firmly believe we are doing this right. Doing this at scale at 200-millimeter from the outset will result in gaining and sustaining significant market share in the coming decades. It is rewarding to see the pieces of our long-term strategy become a reality, albeit on a longer timeline than we originally anticipated. The remainder of this fiscal year and particularly the second half will prove the conviction that we've always had in our strategy, in our products, and in our team, and it is extremely exciting to see what's on the horizon. I'll now turn it over to Neill, who will provide an overview of our financial results and outlook.

Thanks, Gregg, and good afternoon, everyone. During the first quarter, we achieved revenue, gross margin, and EPS results all at the high end of our guidance range. In addition, we expect continued revenue growth and gross margin expansion as we transition into Q2'24. The outperformance in our financial results was underpinned by $4 million of revenue from Mohawk Valley during the quarter, up from $1 million in the prior quarter, and we expect to grow that to between $10 million to $15 million of revenue as we transition into Q2'24. While we expect some variability in the production ramp at Mohawk Valley, we remain on pace for the larger step-up in revenue as we transition into Q3'24. With that, let me review the financial results in more detail. I'll start by providing an overview of the first quarter. Revenue from continuing operations for the quarter was $197 million compared to our updated guidance range of $185 million to $205 million and growth of 4.2% year-over-year. Power device revenue was impacted by slower industrial and energy demand, primarily in China and the broader Asian market, partially offset by the revenue ramp in Mohawk Valley. Materials 150-millimeter substrate revenue achieved a record quarter, above our expectations, driven by continued strong demand and record manufacturing performance by our Durham materials operations team. As Gregg mentioned earlier, our historical design-in portfolio supported the first quarter revenue growth, and we secured $2.2 billion of new design-ins for power devices. Our design-in to design-win conversion rate is ahead of our original expectations. And based on the design-ins we've already secured, we have the next few years of expected revenue covered by our existing book of business. Non-GAAP gross margin from continuing operations in the first quarter was 15.6%. Underutilization costs for the quarter were $34.4 million, representing 17.4% or 1,740 basis points of gross margin. Outperformance was driven largely by improved materials manufacturing performance, resulting in better-than-expected 150-millimeter materials costs and yields. In addition, we saw lower-than-expected underutilization costs as we ramp Mohawk Valley. We generated an adjusted loss per share of $0.53 from continuing operations in the fiscal first quarter compared to a loss of $0.36 last quarter and a loss of $0.24 in the same period last year. Adjusted loss per share was a significantly lower loss in the high end of our guidance range as higher revenue, higher gross margin, and lower operating expenses all fell through to the bottom line. Before moving to the outlook, I'll touch on our balance sheet. We ended the quarter with over $3.3 billion of cash and liquidity on hand to support our ramp and growth plans. Days sales outstanding was 55 days, while inventory days on hand was 162 days. Free cash flow during the quarter was negative $517 million, comprised of $113 million of operating cash flow and $404 million of capital expenditures. Regarding our financing initiatives, we are pursuing funding from the chipset and should have more clarity on this by early next calendar year. We are constantly evaluating ways to optimize our balance sheet and capital structure and will continue to be opportunistic and flexible in our capital strategy. In the last year, we have raised approximately $5 billion of low-dilution capital across a number of vectors, including customers, governments, private financing, and capital markets. In conjunction with federal funding, we are in a good position to execute our capacity expansion plans, but we will remain nimble to optimize our capital structure for the long-term. Turning to the second quarter outlook, we are targeting revenue from continuing operations in the range of $192 million to $222 million, driven largely by the incremental revenue contribution we expect from Mohawk Valley in this quarter. We now anticipate roughly $10 million to $15 million of revenue to come from Mohawk Valley in Q2. This increase in Mohawk Valley revenue will be partially offset by continued softer demand for the industrial and energy products, primarily in the China and broader Asia markets. However, we will look to purpose the supply to where end demand remains strong. We are also expecting non-GAAP gross margin in the range of 12% to 20%, with the midpoint of 16%. At the midpoint, this includes approximately $35 million or negative 1,700 basis points of underutilization costs as we ramp up revenue at the Mohawk Valley fab. We are also targeting non-GAAP operating expenses of approximately $109 million for the second quarter of fiscal year 2024, which is inclusive of $11 million of start-up costs, primarily related to the JP materials facility in Siler City, North Carolina. We expect Q2 net non-operating expense of approximately $27 million. As I've mentioned previously, we expect non-operating expenses to increase as the year progresses as we earn less interest income on our short-term investments in connection with our continued investment in our facilities expansion. We expect Q2 non-GAAP net loss to be between $88 million and $71 million. Our Q2 targets are based on several factors that could affect them significantly, including supply chain dynamics, overall demand, product mix, factory productivity, and the competitive environment. As Gregg mentioned earlier, we are moving ever closer to the significant uptick in our ramp of the Mohawk Valley fab, and we expect a larger ramp in the back half of the fiscal year. We are still extremely confident in our ability to achieve 20% utilization in the fab by June. As we indicated on our last call, there will be a lag between 20% utilization and $100 million of quarterly revenue due to the time between fab starts and shipments to our customers. Lastly, during the quarter, we announced the intent to sell our RF business to MACOM, a path we have been pursuing for quite some time. When the sale is finalized, we will have completed the path towards portfolio optimization that we've been on since 2018, when we were predominantly a lighting company. We are happy to say that Wolfspeed is now the only pure-play silicon carbide business in the marketplace, and we can focus all our collective efforts on the silicon carbide materials and power device businesses. With that, I'll pass it back to Gregg.

As we close out the first quarter, I want to reiterate that fiscal 2024 is a pivotal year for Wolfspeed. We remain confident in our long-term vision and are seeing promising results. While I gave some color early on regarding design-ins, I think it's worth repeating that we had a record design-wins for this past quarter as customers ramp their programs. Demand has certainly attracted new entrants, and from our viewpoint and checks in the market, there is not a single player who can match our quality and our scale at 150-millimeter. And as I said earlier, no one is close to our position at 200-millimeter. This gap will only widen as we bring the JP online in the first half of fiscal 2025. Secondly, while there have been several new entrants to the materials market, including Chinese companies, the significant ramp required to create high-quality materials is still in front of them. It has taken us 35 years to master this technology, which we know first-hand can be incredibly difficult to work with, let alone scale and produce at the highest quality possible. While I've always said we are taking our competitors at their word regarding their stated capability to produce silicon carbide materials internally, it is highly unlikely that every competitor will be successful. And this will create an opportunity for those with additional materials capacity to secure long-term agreements with device producers or capture an even larger share of the device market. We are well-positioned to do both. Demand remained strong across the business outside of the industrial and energy markets, particularly in China and Asia. Overall, what we have said time and time again about the transition to the use of silicon carbide rings true: the EV transition remains the largest change in the history of the automobile. And with that comes winners and losers and potentially a bumpy path. However, there is no reverting to the internal combustion engine; that is the way of the past. Silicon carbide has shown that EVs can be pushed further with extended range, faster charge times, and competitive prices. Despite the current softness in China and Asia, demand remains high for our products, and customers' needs are higher than our current output levels. This is why we are keenly focused on ramping Mohawk Valley to 20% utilization. To close, we are excited about this year. Fiscal 2023 was not without its challenges, but those challenges come with being the first to pursue next-generation 200-millimeter technology in silicon carbide. However, the opportunity to be the leader of this transformative technology keeps us moving forward as quickly and purposefully as possible to execute and generate value for our stakeholders. Thank you, operator. And we're now ready for Q&A.

Thank you. Our first question goes to Samik Chatterjee of JPMorgan. Samik, please go ahead. Your line is open.

Hey. Thanks, guys. This is Joe Cardoso on for Samik. So for my one question, it sounds like qualifications in the Building 10 ramp are tracking well. So as we think about what is keeping you on the sidelines relative to Mohawk reaching 20% utilization earlier than the June quarter itself, can you just walk us through what the key drivers are at this point in the ramp? Just curious to hear your thoughts on that front. Thanks for the question, guys.

Yes, thank you for the question. First off, you're right, Building 10 is in great shape right now. We'll be producing material in this quarter that will be able to support 15% utilization, and obviously, we have two quarters after that to get to 20% utilization in Mohawk Valley. That's in really great shape. We qualified a bunch of different MOSFETs already in that fab. All of those MOSFETs qualified at our first half success, and we've actually qualified two modules as well that have come through on 200-millimeter, which I think is a really good sign for the quality of our backend operations. The fab itself is the world's first 200-millimeter fab, and as such, a lot of the machines that are in the fab are seeing volume ramp-up of 200-millimeter silicon carbide for the first time. So, we're working very closely with our tool vendor to ensure we have better uptime; one particular machine is seeing downtime more than it should be. We have a team that is completely focused on resolving that. As mentioned, I was in the fab last week. I met with the engineers from our team as well as those from the vendor's team. They're also extremely confident that this is a normal process going through as we ramp, and we will resolve this. We are on track to 20% utilization in the June quarter.

Thank you. And our next question comes from Harsh Kumar of Piper Sandler. Harsh, please go ahead. Your line is open.

Yeah, hey, guys. Had a quick timing question. So Mohawk Valley did $4 million of revenues in the March quarter. That implies that given the timing, the lead time difference, conversion, packaging, etc., that means that Mohawk Valley wafer runs in the March/April timeframe were about that $4 million. So my question really is, could you give us a glimpse into what Mohawk Valley wafer runs are looking like on a dollar basis today? That would be the color that I'm looking for. Thanks.

Hey, Harsh. Thanks for the question. This is Neill. So first of all, let me just, first thinking about utilization of the fab and how that relates to wafer starts. That's really what we're talking about here. So utilization in the fab is really a function of wafer start. So we've talked about getting to 15% out of Building 10; I think we are running wafers out of North Carolina silicon carbide 200-millimeter substrate out of North Carolina that could potentially support the fab at 15% utilization even by the end of this year. As you look out to the end of the year, we're still on target to get to 20% utilization. So what that means is we're seeing solid performance from a substrate perspective to meet that goal. After that, what that means is, it's again, it's about starts utilization. So what that means is, you have to put the wafers in the fab. You've got to run those through the fab; you've got that cycle time, and you've got to send it to the back end to be either sold as devices or as packaged parts that may have the various cycle times on that as well. So once we get to the 20% utilization, there'll be a bit of lag. Work through those cycle times, other than you see the revenue that corresponds to that. In this case, once we get to 20% in that June timeframe, we anticipate that being from a revenue perspective to about $100 million in revenue at the end of the December quarter next year.

I would just maybe add one comment to it. As material goes through these tools in the factory, we're seeing great results as they go through the tool. However, we're seeing that the downtime or the maintenance required is higher than it should be right now. I was in the fab last week. I met with the engineers on both the tool side as well as our side. There is a very good line of sight for what we need to do to get tool uptime where it needs to be. As soon as that happens, our ability to transition from relatively low utilization to towards this 20% should be very, very good.

Thank you. Our next question goes to George Gianarikas of Canaccord Genuity. George, please go ahead. Your line is open.

Good afternoon and thank you for taking my question. I just wanted to get your thoughts on some of the turbulence, to say the least, in recent discussions around EV plans at some of the big three European OEMs. What are your thoughts there? And I know you talked about your backlog being so robust that it didn't kind of matter for the next couple of quarters, but what are you seeing in your own business that may or may not reflect what we're hearing in the marketplace? Thank you.

Well, obviously, we would like our Mohawk Valley fab to ramp faster, and so would our customers. As such, I've been on pretty much weekly calls with CEOs and executives from major OEMs and Tier 1s. Their consistent message back to me was we need more and need it soon. The demand that we're seeing both near term and long term is very, very solid. I'll remind folks that many of the cars being sold today were not designed specifically for electric cars; they were designed five, six, or seven years ago and are equipped with silicon-based MOSFETs or IGBTs. Silicon carbide does three important things: it extends the range of the car, it allows the car to charge faster, and it reduces vehicle costs because you use fewer batteries with express cooling and different efficiencies. In fact, a report a few years ago stated that for every incremental dollar of silicon carbide spent over silicon, you get $3.5 to $7 back. Any of the noise you see today has no impact on our demand, both near term and long term. And by the way, there are OEMs and Tier 1s in the US, in China, and in Europe.

Thank you. And the next question goes to Brian Lee of Goldman Sachs. Brian, please go ahead. Your line is open.

Thank you. Hey, guys. Good afternoon. Thanks for taking the question. I guess you mentioned I think Neill during your prepared remarks that you're kind of implying a stronger step up in Mohawk in Q3. Does that imply that the total downtime issue that you guys have been referencing here is sort of done by that point? And then if I just look at the numbers, Q2 midpoint for Mohawk is up like three times sequentially in revenue terms. So is Q3 expected to be up at that level or above? Or are you talking more in absolute dollars when you're talking about this bigger step-up? Thanks, guys.

Thank you, Brian, for your question. As Gregg mentioned, there's a lot of attention on the 200-millimeter substrates, which are significantly supporting the fab ramp. Much of our focus is currently on the fab itself. We are collaborating closely with both the fab team and external vendors to address what we believe are manageable challenges in the fab, specifically in increasing throughput, improving uptimes and cycle times, and getting material into production. We anticipate an increase in revenues as we approach the latter half of the year. If we take a step back and analyze the components involved, typically, our revenue guidance includes about $100 million per quarter from Durham, along with $90 million to $95 million of available material capacity. The expected increase in the second half will come from Mohawk Valley. This quarter, we expect revenue between $10 million to $15 million, and we could potentially double that in the next quarter and into Q3 as well. Ultimately, this will depend on the outcomes related to uptime and throughput in the fab, but we are optimistic based on the current progress the teams are making in the fab and with the throughput ramp.

Thank you. Our next question goes to Joshua Buchalter of Cowen. Joshua, please go ahead. Your line is open.

Hey, guys. Thanks for taking my question and congrats on the progress. I wanted to ask about the timeline of the JP actually. So you mentioned it's on schedule to ramp in the fiscal first half of 2025. What should we, how should we expect the cadence of that ramp to look compared to Building 10? And the reason I ask is, it sounds like there's roughly a two-quarter lag between when you get utilization in Building 10 to when you generate revenue. Is that sort of indicative of what we should expect at the JP when that starts up and any initial indications of how much that can contribute in fiscal 2025? Thank you.

Well, I would say let me start, and Neill, please feel free to add some insights. The JP is a much larger facility than Building 10, so as we begin operations, it will have considerable capabilities right from the start. It is currently on schedule, and we aim to maintain that timeline. Everything looks promising, and I expect that as we ramp up the JP, we will see a significant amount of capability coming online. Neill?

Yeah, so on the timing, we said kind of back half of calendar next year '24 in terms of crystal growth out of the JP, which I think is in good shape. Right now, the timeline on our expansions are all on track from a timeline and budget perspective. So we feel good about right there. However, I'd also add to that, we're looking for ways to expand our current capacity beyond 20%, just above that over that time frame. We've invested in some satellite sites to help with back-end wafering operations that impact the operations to help with that. In addition, there's going to be opportunity, I think, over time. We've seen really good performance out of our operations manufacturing team. So yield opportunity, operations productivity improvements, and throughput capabilities could bring us beyond that 20% capability out of Durham. We're working through all those things now, putting in extra capacity where we can, looking for yield optimization and other opportunities from a productivity perspective to bring more capacity online in that period. So we're trying to take it from a number of angles and we'll give an update on that as we make more progress into next year.

So just to reiterate, JP is currently on schedule. We're working with our existing facilities in Durham to increase productivity to give us more than 20% utilization out of the Mohawk Valley fab. We're also utilizing satellite sites for backend operations to support the JP as well. So we're trying to create a little bit of belt and suspenders on JP.

Thank you. And our next question goes to Jed Dorsheimer of William Blair. Jed, please go ahead. Your line is open.

Hi. Thank you for taking my question. I have two related questions. First, it seems that things are improving at Mohawk Valley, and your underutilization costs of $37 million were actually better than your guidance of $34 million. I would like to know about the revenue implications. Is it a direct correlation, or is there a delayed effect as Mohawk scales? Additionally, I have a follow-up question.

Maybe I'll kick it off and then Neill can come talk a little bit about that. It's without a doubt we wanted to be ramping Mohawk Valley faster than we currently are, and our customers want that as well. We're not satisfied with the situation. We're intensely trying to work on it, and I think we've made a lot of really good progress. Obviously, Building 10 has been very, very successful. We are also prudently confident that we'll be able to get these tools operating the way they are supposed to, and we'll be able to ramp that fab to 20% utilization in the June quarter.

We did see some improvement in the margins due to lower utilization levels. However, based on the substrate performance we are observing on 200-millimeter, we will expedite bringing more capacity online, potentially faster than we initially expected within the fab. I mentioned earlier the significance of material satellite sites. You might observe the underutilization number increase throughout the year before it declines again in fiscal 2025. This is primarily tied to adding more capacity in response to the positive outlook for substrate performance, which will provide us with more opportunities to meet our customers' needs. We are currently experiencing high demand, especially in the automotive sector, and our discussions with customers are very active. We are exploring all possible ways to meet their demand by increasing our capacity over time.

Great. And then just as my follow-up, if I look at the last quarter, you saw a bump-up in inventory and raw material, which saw I think the greatest increase quarter-over-quarter. This quarter, you saw a slight increase, I think $13 million in inventory. I don't know the composition because the Q hasn't been filed. I'm assuming that most of that is work in process. Could you just give us some color on that? And where I'm going with this is just trying to back into the build-up of inventory from a wafer perspective. Thanks.

Yeah, thanks, Jed. Let me give kind of a high level on that. We began working with our raw material suppliers in May of 2019, getting ready for this big and transformative ramp in silicon carbide. We knew that we were going to need to have them invest in their capacity to support this ramp, and obviously, I think we've done a very good job of doing that. Some of this is just about getting material in place and capacity not to be bottlenecked upstream.

Yeah, and then from a numbers standpoint, Jed, that's right. I don't think there's any big pickup in finished goods, primarily related to raw materials and WIP. So raw is about ensuring we have enough raw material capacity to support the substrate ramp, as Gregg indicated. In addition, we're supplying a lot of wafers out of the Durham, Building 10 from a 200-millimeter substrate capacity and setting those up to Mohawk Valley. That's the other kind of increase in inventory as well. From a finished goods perspective, no, we're not seeing much growth there; we're still continuing to ship to customers, really in the automotive side basically.

Thank you. And our next question goes to Colin Rusch of Oppenheimer. Colin, please go ahead. Your line is open.

Thanks so much. Gregg, you mentioned the potential for folks to end up exiting the market. Can you talk a little bit about how discerning the customers are at this point around assessing that risk? And how impactful that is in terms of your design-wins and design-ins? Thank you.

Cash, can I ask you to repeat that? It was really hard to hear you.

Okay, no problem. You talked about some folks exiting the market or failing in the market. I'm curious about your customers' ability to assess the risk of folks not being able to deliver on some of their commitments. How impactful is that around your design-in and design-win performance?

Yeah, well, I would say that we are clearly the leader in silicon carbide technology, supplying substrates to nearly all the device manufacturers, and we feed those to ourselves as well. Having that strength really underpins their belief in our ability to ramp this technology. As I said, I've been on weekly calls with executives and CEOs from our Tier 1 partners, our OEM customers, etc., and their consistent messages are they need more and they need it faster. They see that we are ramping Mohawk Valley, and they want us to ramp Mohawk Valley faster. The one thing they see is that we have Mohawk Valley. We have the world's largest 200-millimeter wafer fab; they've seen that. We've been able to solve the crystal growth challenge for 200-millimeter and get Building 10 operating. That's probably the hardest task in getting silicon carbide MOSFETs is getting the wafer and the substrate right. So I think it's a matter of time for us demonstrating the 20% utilization out of Mohawk Valley. I think we're pretty close on that. As Neill said, Building 10 is feeding Mohawk Valley now obviously at a higher rate than we're utilizing out of Mohawk Valley. We've got plenty of inventory staged up there. As we knock out these last couple of bottlenecks, I think we're going to see a nice pickup in Mohawk Valley. Finally, I think it's worth mentioning again the fact that we've had first pass qualification on these MOSFETs coming out of a new wafer fab and new wafer diameter and so forth. This points to the fundamental capability of this fab. It is not normal that you would have a 100% first-pass success rate on all the MOSFETs, including a couple of modules. I think that really demonstrates our overall capability.

Thank you. Our next question goes to Vivek Arya of Bank of America. Vivek, please go ahead. Your line is open.

Thanks for taking my question. Gregg, I just wanted to get your perspective on the next one to two years. There is just a lot of concern about more capacity coming online. I understand, maybe it's not exactly the same quality as yours and maybe might not even have the same cost structure. But there is a significant amount of whether it's 150 or 200-millimeter capacity. How do you look at that? Are you assuming that the market stays under-supplied for the next one or two years? Is it just rightly supplied? What are your assumptions about industry capacity for the next one to two years?

I think from my viewpoint, there is going to be a supply-demand mismatch; there will be more demand than there will be supply certainly over the next couple of years, and probably longer than that. I would repeat something that I said in our prepared remarks; this past quarter, we recorded record materials revenue. There is a lot of noise about different companies coming online, but the demand for our materials is very strong. We are in constant communication with our materials customers; many of them are looking for extensions and expansions. We just reported the largest capacity reservation deposit in the history of semiconductors with our deal with Renesas. The feedback we're receiving is that China is making substantial investments in silicon carbide. However, the feedback we also receive is that they are not automotive-ready at 150, let alone 200. So I really don't anticipate demand being below supply for any time in the future, really the next couple of years for sure, and probably the next half a decade.

Thank you. Our next question goes to Christopher Rolland of Susquehanna. Christopher, please go ahead. Your line is open.

Thanks for the question. I guess today a competitor talked about a fairly large downtick in their revenues. My question for you is, and you might have just addressed it, but is your backlog covering all through 2024 and into 2025? Do you have any problems with customers that are looking for pushouts, etc.? Would those pushouts, if you experienced them, be fungible or transferable to someone else?

Yeah, let me start with an answer and then I'll kick it over to Neill for a little more detail. The only area of softness that we see is in industrial and energy, primarily in China and Asia. Everything else is pretty strong. In fact, when we wanted to just kind of give some of the numbers.

Yes, if you look at the revenue outlook as you go into the second half of the year, from an automotive perspective, as Gregg said, there’s very heavy demand, and I think that’s across the US, in Europe, and in Asia. So we're seeing that demand is ahead of expectations there. It's really a function of how fast we can ramp along that and ramp capacity. We are seeing some softness in the industrial and energy areas, particularly in China and Asia. China represents about 20% of our total revenue. Again, primarily in the industrial and energy space. But in discussions with customers, that's really about inventory timing rather than actual growth. We're still seeing growth and very heavy demand from automotive customers, including from China. So we're just working through revenue, and the outlook right now reflects that.

Thank you. The next question goes to Natalia Winkler of Jefferies. Natalia, please go ahead. Your line is open.

Hi, thank you. I wanted to ask about the new design-wins this quarter that you guys have seen. Could you possibly kind of help us figure out where most of them are? Is there a way to think about maybe an increase in industrial activity or automotive? And just broadly, any additional color would be really helpful.

Okay, so just from a clarification perspective, we call our design-ins when a customer awards us the business, and we say design-win when a customer transitions into production. Specifically, they have to get those purchase orders for 20% of the first year as anticipated volume that they declare during the design-in phase. So we had $1 billion worth of design-wins, which means customers were transitioning from awarding us the program to beginning to ramp into production. This is an incredible number, and it is happening faster than we anticipated. I believe that was 230 different projects, many of which were automotive projects; there are some sprinklings around industrial opportunities, but I would say the majority of those were automotive.

Thank you. And our next question goes to Matthew Prisco of Evercore. Matthew, please go ahead. Your line is open.

Thanks for taking the question, guys. How should we be thinking about the gross margin path from here? Particularly given the commentary on underutilization potentially taking higher, is low to mid-20% still the right range exiting the year, and what would be the primary risk drivers that figure at this point, either upside or downside? Thanks.

Thanks, Matt. Let me just… maybe I should have the gross margin outlook here. With that, if you look out beyond that, we will see an uptick in gross margin as you kind of get into Q2, we'll see continued solid performance offset a little bit by some of the auto mix that we'll see come into this business to continue to support that demand. We've talked about underutilization being $35 million at the midpoint; it might tick up again as we get out to the end of the year. But as we get out toward the end of the year, that 20% gross margin target for the end of the year still makes sense, I think, even with that in there, which is really going to depend on how much volume we can drive through Mohawk Valley. We've said many times it all needs to be driven by Mohawk Valley, and I think from a market perspective, that's the case as well. So I still think that's a good target to think about as we move into the back half of the year.

Thank you. Our next question goes to Edward Snyder of Charter Equity Research. Edward, please go ahead. Your line is open.

Thanks a lot. First, just to clarify, Neill, if you exclude the pro forma from the RF business and account for the underutilization charges, I'm calculating around a 30% gross margin. Additionally, it seems like the RF business last year had a pro forma gross margin of approximately 24%. I just wanted to confirm that. I also have a question about the materials.

Yeah, in Q4'24, we recorded 29% gross margin. The RF business was about a 200 basis point drag. So you can think about the ex-RF number remaining about 31%. So the baseline back in Q4 was about 31% and we just saw about 200 basis points of improvement in gross margin quarter-over-quarter when you exclude that underutilization. So overall, it was a good quarter from a gross margin perspective, and with that a little bit of a lower impact from underutilization. We might see that tick up a bit here as we bring on more capacity.

Yeah, and then from a numbers standpoint, Jed, that's right. I don't think there's any big pickup in finished goods, primarily related to raw materials and WIP. So raw about ensuring we have enough raw material capacity to support the substrate ramp, as Gregg indicated. In addition, we're supplying a lot of wafers out of the Durham, Building 10 from a 200-millimeter substrate capacity and setting those up to Mohawk Valley. That's the other kind of tick-up in inventory as well. From a finished goods perspective, no, we're not seeing much growth there; we're still continuing to ship to customers really in the automotive side basically.

Thank you. And that's all the questions we have time for today. I'll now hand back the call over to Gregg Lowe, CEO for any closing comments.

Just a few thoughts before we end the call. One, demand remains very strong for silicon carbide. And two, I am personally laser-focused on the Mohawk Valley ramp to 20% utilization in the June quarter. Thanks a lot for joining us today, and I look forward to updating you in our next quarter's results.

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