Wolfspeed, Inc. Q2 FY2025 Earnings Call

Hello, everyone. Thank you for joining today's Wolfspeed Incorporated Q2 Fiscal Year 2025 Earnings Call. My name is Sierra, and I will be your moderator. All lines will be muted during the presentation, with a chance for questions and answers at the end. I will now hand the conference over to our host, Tyler Gronbach, VP of External Affairs.

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's second quarter fiscal 2025 conference call. Today, Wolfspeed's Executive Chairman, Tom Werner; and Wolfspeed's CFO, Neill Reynolds, will report on the results for the second quarter of fiscal year 2025. Also in attendance is Jay Cameron, our Head of Power Devices; and Rick Madormo, our Head of Sales and Product Marketing. 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 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 our 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. Lastly, please note that all numbers presented today will be on a continuing operations basis. 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. Also, any discussions surrounding our work to strengthen our balance sheet at least initially will take place pursuant to confidential non-disclosure agreements. And therefore, we will not be addressing any specific questions on balance sheet initiatives involving Renesas, our convertible notes or Apollo during the Q&A session. 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 Tom.

Good afternoon, and thank you for joining me today. By way of introduction, I have been a member of the Wolfspeed Board for 19 years and have served as Chairman of the Board before assuming my current role. Throughout my years with the company, I've had the opportunity to support the business in its transition into an established leader in silicon carbide, and have developed a solid understanding of the business, the technology, employees and the market. Since stepping into the role as Executive Chairman in November, I've dedicated my efforts to examining every aspect of the company with a fresh perspective, aggressively executing against our plan to achieve our financial and operational targets and ensuring we are intensely focused and accountable to improve financial performance. I have visited both Mohawk Valley Fab and the Siler City locations multiple times. I'm impressed with the advanced capabilities of both facilities and with the Wolfspeed teams that run them. This work is reaching the first phase of completion and it is now time to leverage the advantage of these facilities. With that said, it is critically important that we continue to execute on the plan that was outlined on the last earnings call in early November to accelerate our path to profitability and optimize our capital structure. This will allow us to leverage the best-in-class assets and capabilities we have already built and capitalize on the long-term opportunities that lie ahead. I, the Board and the management team have aligned on an operating plan driven by the key priorities that will be our focus over the coming months. We believe focusing on these priorities in the immediate term will put Wolfspeed on a path toward long-term growth and profitability. First, we must dramatically improve the financial performance of the company and accelerate our path to generate positive free cash flow. Second, we will continue to take aggressive steps to strengthen our balance sheet. And third, we will continue our efforts to raise cost-effective capital required to support our long-term growth plan. Work on these initiatives is well underway, and I'd like to share some of the progress we've made thus far. By focusing on our purpose-built 200-millimeter greenfield facilities, this is an opportunity to simplify our operating footprint and focus on best-in-class execution to improve our financial performance. We are continuing with the closure of our Durham 150-millimeter device facility and the closure of our 150-millimeter epi Farmers Branch facility. We expect all these actions to be completed by the end of this calendar year supporting our plans to lower our breakeven point and accelerating our path to profitability. In addition, we are maintaining our outlook for reduced CapEx levels for fiscal 2025 at a midpoint of approximately $1.2 billion. This level of CapEx allows us to continue to grow the top-line while maintaining the capability to ramp supply rapidly should a sharp turn-in demand materialize. While we also minimized cash use for the remainder of fiscal 2025 to achieve our previously stated profitability goals. We expect further CapEx commitments to be close to zero. I credit the team with having the foresight to build these greenfield facilities in a modular manner, thereby allowing us to easily flex CapEx spend up and down with market dynamics. However, we reiterate that for now, we have adequate supply to service current demand from our customers. We have also started work on additional cost reductions that will further reduce our breakeven point. We expect to start implementing these during fiscal Q3. We will focus on operational efficiencies, lower manufacturing costs and stricter cash management. This will result in the restructuring of several supply contracts, securing additional savings going forward. Regarding our second initiative, our work to strengthen the balance sheet continues. We're scrutinizing every investment across the company to lower our cost structure and capital requirements, helping to accelerate our path to profitability. We are working closely with Apollo to look at ways to improve our overall capital structure and Renesas to account for the current market dynamics. In addition, we've also begun the work to address our convertible notes. We will be working with the financial advisers to advance these efforts in the very near term. Our plan is to complete this work as quickly as possible. Turning to the US government support, we're working to finalize both direct funding agreement announced last October and the disbursement of certain CHIPS Act related cash tax refunds. We're optimistic about achieving a definitive agreement particularly after completing our $200 million ATM earlier this month, an important milestone in the CHIPS funding process. We maintain frequent, constructive dialog with the CHIPS program office, narrowing the remaining milestones to reach a final arrangement. We believe that the recent OMB memos issued this week do not impact our anticipated timeline to receive the first tranche of CHIPS Act funding in mid calendar year 2025. We are actively monitoring the situation as it evolves. As part of our tighter cash management, we plan to have close to zero capital commitments until we have a direct funding agreement signed with the CHIPS program office. With existing committed capital, we will still complete construction at the JP and have the wafer capacity to support the continued ramp at Mohawk Valley. Our congressional champions remain unwavering in their support of Wolfspeed and we're equally encouraged by the administration's America First agenda and its emphasis on strengthening US supply chains, especially for silicon carbide technologies. Wolfspeed has long championed domestic manufacturing renaissance in semiconductors, particularly in North Carolina and New York, and we look forward to continuing alignment on these shared objectives. Putting it all together, when you combine US government support with the additional committed funding from our investor group, led by Apollo, Wolfspeed has access to a total of $2.5 billion funding package. At the same time, while we execute on these priorities, we continue to believe we are strategically undervalued, and the Board continues to examine ways to ensure that we are generating the most value for shareholders. That said, at this point, management's core focus is on executing against the priorities I've just outlined to improve our financial performance, strengthen the balance sheet and raise additional capital. Before I turn the call over to Neill, I would like to touch on our end markets and the competitive landscape. We acknowledge that over the past few quarters, both we and the entire market have faced challenges in demand. This quarter, revenue from Mohawk Valley was $52 million, which we expect will grow again in the third quarter with the continued ramp of our previously announced design wins. Similarly, we are making strong progress at the JP and we remain on track to receive a certificate of occupancy in the first half of this year. We are extremely pleased with the yields of our 200-millimeter wafers and the performance of our devices from these wafers. This is a key competitive advantage as we are the first to begin commercial production on 200-millimeter substrates. As these new facilities mature, and we see less impact from startup and underutilization costs on our financials, unit economics will improve significantly. For our key end markets, although broader macroeconomic pressures in a slower-than-expected EV ramp have challenged I&E and auto demand in recent quarters, we continue to aggressively pursue stronger markets, including renewables and AI data centers. Our previous design wins are ramping, and as such, our power revenue will continue to grow over the balance of the year, largely driven by our EV customers where companies like GM are investing in their EV programs to support the long-term transition taking place in automotive. Demand in industrial and energy applications is showing some green shoots, but visibility remains limited. While we're not out of the woods yet, we remain encouraged with what we are seeing so far. Our channel inventory has dropped significantly over the last few quarters and we have even more confidence given the long-term demand drivers behind AI and data centers where billions are being invested in renewable energy, which will continue to see demand as the need for electricity generation storage increases rapidly. Silicon carbide is homegrown. American innovation at its core, pioneered by Wolfspeed scientists nearly 40 years ago in Raleigh, North Carolina. Although the EV market propelled silicon carbide from a niche technology into a multi-billion dollar industry, we believe we're still in the early stages of realizing its full potential. Many of the world's most advanced technologies in markets ranging from consumer products to aerospace and defense to e-mobility increasingly require silicon carbide for high voltage solutions due to its ability to operate at higher voltages, with higher efficiency, and with higher power density and with greater ruggedness in extreme environments. In these critical applications, reliability is paramount. The risk of failure is simply too great to depend on lower-grade materials, and this is why customers rate performance and quality at the top of their list when selecting a silicon carbide device partner. And we are continuing to deliver more innovative device solutions to customers. Last week, we introduced our new Gen 4 MOSFET, a highly flexible platform that supports long-term roadmaps for high performance, application-optimized products. This new platform allows design engineers to create more efficient, longer lasting systems that perform well in tough operating environments at a better overall system cost. Our Gen 4 platform will be delivered via our highly-efficient 200-millimeter wafers, which will enable us to deliver products on the scale not seen in this industry before. Turning to the broader competitive landscape, we continue to track key industry developments, including the US Trade Representative's recent 301 investigation into China's semiconductors policies. We recognize that these issues remain front and center for our investors and stakeholders. And by participating in this process, we anticipate government actions will help level the playing field for American companies, making significant investments in advanced technologies. Silicon carbide is critical to our national security. Wolfspeed has been at the forefront of advanced silicon carbide programs for US security. We welcome the US government's efforts to safeguard American interests as these measures are vital to preserving our competitive edge in semiconductors. Silicon carbide is homegrown American IP that fuels economic growth and creates well-paying jobs. We stand ready to engage and assist the US government as it advances their investigation. Now, I'd like to turn the call over to Neill to discuss our quarterly financials and guidance in more detail.

Thanks, Tom, and good afternoon, everyone. Looking at our fiscal 2Q financial results, we generated $181 million of revenue for the quarter, slightly above the midpoint of guidance and down 7% sequentially. We recognized power device revenue of $91 million, down 6% sequentially, driven largely by ongoing weakness in the industrial and energy end markets. Despite the lower revenue levels, we saw our EV revenue grow 92% year-over-year and we expect to see increased revenue in EVs as we look out into the back half of fiscal 2025. Revenue contribution from Mohawk Valley was $52 million, up quarter-over-quarter, and we expect Mohawk Valley revenue to reach between $55 million to $75 million in the third quarter. We recognized materials revenue of $90 million, down 8% sequentially, driven by customers adjusting down their inventories to account for the current demand outlook. We expect materials revenue to trend in line with Q3 until end market demand begins to improve. Moving to our margins, non-GAAP gross margin for the second quarter was 1.8%, down 160 basis points quarter-over-quarter, but above the midpoint of our November guidance. This included $29 million or 1,600 basis points of underutilization costs, primarily related to Mohawk Valley. Gross margins were also impacted by lower factory production rates in our Durham wafer fab and Durham materials operations as we successfully executed a maintenance shutdown previously communicated last quarter and lowered factory output in line with a lower demand outlook. The financial impact of the maintenance shutdown and the lower factory production was in line with our expectations. This was partially offset by lower depreciation costs resulting from favorable 48D tax credit guidance issued during 2Q. Operating expenses were $108 million in the quarter, below the midpoint of our guidance and down $11 million quarter-over-quarter, as we continue to reduce costs as part of our restructuring and simplification efforts. Start-up costs in OpEx primarily associated with the JP materials facility were $23 million, an increase of $3 million versus prior quarter and in line with our outlook. Operating expenses, excluding start-up costs, are now down $23 million, or 21% in the first half of fiscal 2025, and we expect to continue to reduce these costs during the second half of the fiscal year. Adjusted EPS of negative $0.95 was better than the midpoint of our guidance. This included an increase of 1.6 million shares on a weighted average shares outstanding basis related to our ATM equity offering. Excluding the equity offering, our EPS would have been negative $0.96, just ahead of the midpoint of our outlook. Regarding our balance sheet, we ended the quarter with approximately $1.4 billion of cash and liquidity on hand. This included approximately $91 million of the total $200 million ATM equity offering that was completed in January of this year. Including the $109 million raised in January after the quarter closed, our starting quarterly cash balance was $1.5 billion. Free cash flow during the quarter was negative $598 million, comprised of negative $195 million of operating cash flow and $403 million of capital expenditures. Operating cash flow was impacted by higher net working capital due to the timing of shipments in the quarter, cash restructuring charges and higher cash interest costs versus prior quarter, partially offset by improved profitability, driven by our cost reduction efforts. We expect to see significant improvement in our operating cash flow as we move into the second half of fiscal 2025 as we anticipate our cost-out measures, improved revenue linearity, stricter cash management and inventory reduction efforts will result in improved profitability and working capital performance. CapEx was $403 million during fiscal 2Q, primarily comprised of facilities investments into the JP Materials facility. As we wind down the construction phase, we expect capital expenditures to fall-off sharply in the second half of fiscal 2025, and we forecast capital expenditures in fiscal 2025 to be approximately $1.2 billion, with dramatically lower CapEx in fiscal 2026. As Tom mentioned, these levels provide us adequate runway to deliver sustained revenue growth. Last quarter, we outlined our financing and liquidity plans in conjunction with the announcement of a $2.5 billion funding package in line with our CHIPS grant preliminary memorandum of terms. This included $750 million grant, $750 million of additional private secured term loan financing, and approximately $1 billion in 48D tax credits. In order to receive the funding tranches of the grants, we are required to achieve both financial and operational milestones. From a financial milestone perspective, absent reaching some other accommodation, based on the preliminary terms, we are required to raise $300 million of non-debt capital and a portion of that to receive the first funding tranche, which we achieved by executing the $200 million ATM equity offering. In addition, we will need to address our convertible debt, which will be our next primary focus. Also, we will need to achieve operational milestones, which we remain on track to achieve. As it relates to the 48D tax credits, we have already accrued $865 million as of fiscal 2Q, and we have already submitted returns for $186 million of cash refunds from the federal government. We expect to request significantly more cash tax refunds under the 48D program in calendar 2025 when the JP goes into service this year, which we expect to receive in calendar 2026. Also tied to improving financial performance, we continue to execute on our company's simplification and restructuring efforts that we expect to contribute to $200 million of annual cash savings as well as driving approximately $150 million of liquidity in conjunction with non-core asset sales. The following is a status of the various initiatives related to those plans. The closure of the Durham 150-millimeter wafer fab remains on track to close in the second half of calendar 2025. The Farmers Branch 150-millimeter epitaxy facility was closed at the end of December and is being prepared for sale. The non-factory workforce reductions contributing to a 20% reduction in total company employment, along with the factory closures, remains on track with most of the reductions already completed at the end of fiscal 2Q. Lastly, we continue to work on our divestiture of non-core assets, which we expect to generate approximately $150 million of cash proceeds in calendar 2025. At this time, we have a clear line-of-sight to approximately $325 million of liquidity from our 48D cash tax refunds and non-core asset sales. In total, if you combine this with the first tranche of the CHIPS grant and the additional funding committed by our lender group led by Apollo, we have up to three quarters of 1 billion of liquidity going forward, giving us ample opportunity to work on the three priorities Tom outlined at the top of the call. Restructuring charges related to our company simplification and restructuring efforts are expected to be in the range of $400 million to $450 million in fiscal 2025, consistent with our previous communications. This included $188 million in charges recorded in fiscal Q2. Please see the attachment in our earnings press release, which includes a table detailing the charges for this non-GAAP adjustment. The fiscal 2Q charges were comprised of severance costs, asset impairment costs, including write-offs related to the Farmers Branch facility and the previously proposed Saarland facility, accelerated depreciation, asset disposition costs and other-related expenses. We continue to expect restructuring activities to be cash neutral in fiscal 2025 and start generating a significant amount of the annualized $200 million of cash savings in fiscal 2026. Collectively, these measures allow us to improve our unit economics, deliver substantial annualized cash savings and enhance cash generation capabilities, reducing our non-GAAP EBITDA breakeven point to under $1 billion on an annualized revenue basis. Finally, turning to our Q3 2025 guidance, we expect Q3 2025 revenue to be between $170 million and $200 million. We expect Q3 2025 non-GAAP gross margin of minus 3% to 7%. We expect Q3 2025 non-GAAP OpEx of $104 million to $99 million. We expect Q3 2025 non-GAAP EPS loss of $0.88 to $0.76, which also accounts for the impact of issuing approximately 27.8 million shares of common stock under our ATM program. Going forward, we expect our weighted average shares outstanding to be approximately 155 million as we exit fiscal 3Q. Thank you. And I will now turn the call back over to Tom for closing remarks.

Thank you, Neill. Throughout the remainder of my tenure as Executive Chairman, I want to reiterate that our management team, Board and I are all aligned on executing against the key priorities I outlined earlier. Those are: dramatically improving the financial performance of the company and accelerating our path to generate positive cash flow from operations; second, aggressively pursue activities to strengthen our balance sheet; and third, raise the cost-effective capital required to support our long-term growth plan. Also, the Board continues to work on identifying a CEO to lead Wolfspeed in its next chapter of growth, and they are pleased with the current slate of candidates. We are confident that our collective focus will place Wolfspeed on a path towards long-term growth and profitability and to capture the multi-decade growth opportunity in silicon carbide, and therefore, more closely reflect the strategic valuation of the company. Thank you, and we will now move to Q&A.

We will now begin the Q&A session. Our first question today comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey, guys. Good afternoon. Thanks for taking the questions, and welcome back in the saddle. It's been a long time, but good to hear from you. First one I had was just on maybe the demand environment. A lot of folks worried about all the narratives around EV demand slowing and kind of long-term forecast. So, you guys have Mohawk ramping, maybe it's a bit slower-than-expected near-term, but I'd be curious, Tom, as you've been spending time with customers, what's the commentary been? What gives you confidence that medium- to longer-term demand will be there even as you fill Mohawk up to a fuller capacity level beyond where you're running right now? Then, I have a follow-up.

Thank you, Brian, it's great to be back working with you. First, let's discuss electric vehicles. We view the growth as slowing; it's still increasing but not at the pace we and others anticipated. Specifically, when we look at certain OEMs and models, some are ahead of our ramp plans, while others are ramping more slowly. Neill can provide insights into the models we’re involved with and the growth we’re witnessing. There are, however, specific models where we are observing increased demand. Regarding infrastructure and energy, as mentioned earlier, we are seeing some positive developments, particularly in AI, data centers, and energy markets. We're still in the early phases, but we have benefited from reducing our channel inventory over recent quarters, providing a strong advantage in the market. While we don’t expect a V-shaped recovery in infrastructure and energy, we do anticipate steady growth. Neill, would you like to add anything?

Let me just add a couple of comments there, Tom. We mentioned in the prepared remarks that EV growth in last quarter and the 2Q fiscal quarter grew 90% year-over-year. We should expect that to expand 20% to 30% from EV perspective going into 3Q that would also be over 90% growth year-over-year. If you take a step back, we just have a broad number of models going into production across a number of geographies. So, as Tom said, as the adoption rate is lower than we expected, our customer base essentially is broad and diverse, and that's what's driving kind of that significant year-on-year growth and kind of a weaker backdrop. What that does give us is a certain level of diversity. So, when the market does come back with a number of models that we're shipping into, we've got a nice broad set of customers that we can ship into and take advantage of the market, EV adoption rates start to pick up again.

Got it. One follow-up. I know you guys alluded to competition during the prepared remarks. I didn't hear anything maybe directly related to 200-millimeter SiC wafer capacity out of China. I feel like data points there continue to increase. So, I'd be curious again to hear your thoughts impact on the competitive environment given what's happening out there in China with respect to 200-millimeter. And then, what that does to your ability to sell merchant capacity out of Siler City? Are you kind of sort of behind peers at this point? Just any thoughts there would be helpful. Thank you.

So, we're acutely aware of what's going on in the competitive space or with competitors, and we're also acutely aware of developments in China. In terms of specifically 200-millimeter, we are the only volume producer of 200-millimeter wafers and we're shipping thousands of them to our Mohawk Valley Fabs and we know the performance of the wafers and it's exceptional. So, we have a technology lead and we have the credibility of shipping thousands of wafers per week. In addition to that, we have started to sample a number of customers and we are fully engaged with who you would expect us to be engaged with, the volume partners and the LTA partners. So, I think we're at the right place at the right time on 200. Neill, do you want anything?

Nothing else to add.

Our next question comes from Jed Dorsheimer with William Blair. Your line is now open.

Hi, thanks. Tom, I guess, first question is, I'm not sure if you caught any of the Senate confirmation. Sounds like you might have been busy on the operational side, but Howard Lutnick was getting grilled today and a lot of his commentary was around looking at CHIPS Act with respect to national security. And I know silicon carbide has been ruled that from a CFIUS perspective back in 2016. I'm just wondering if you could update us on, is obviously that's key to the liquidity part of the story, the transition phase and maybe share any context in terms of how that transition is progressing. And then, I have a follow-up.

Thank you, Jed, for your question. As I mentioned in my prepared remarks, we are frequently and constructively engaged with the CHIPS program office. It's important to highlight that we are narrowing down the issues, which is a positive development in this process. We have also begun working closely with the new administration. We listened to Howard Lutnick's testimony today, and he emphasized the significance of Wolfspeed as a representation of American technology and manufacturing, which creates thousands of American jobs and involves billions in investments, all crucial for national security, not to mention its relevance to AI and space exploration. If there is an ideal example of what the CHIPS program should expand in the U.S., it would be us. This gives us confidence as we collaborate with the new administration, as we believe we are completely aligned.

Great. As a follow-up, Neill, I want to focus on the theme of liquidity for a moment. It seems like spending has decreased, and you've managed to control that effectively. While you mentioned some potential sources of cash, I noticed the 200-millimeter supply agreement wasn’t mentioned. I'm curious if there have been any changes regarding that. Are you still negotiating for it? Could you provide an update on that or clarify if it was intentionally left out, as well as your expectations for an additional agreement? Thanks.

So, Jed, I'll share a few thoughts and then let Neill address most of the question. We are currently managing an inventory correction with our long-term agreement partners, and we expect that the volume commitments will be met over an extended period. Regarding the 200-millimeter wafers, we are collaborating with those same partners and others. As the only company producing 200-millimeter wafers at scale, we are the logical choice for partnership. They are also coming together in this effort. While there's nothing to announce right now about timing, we are engaging in positive work that we believe will yield results this calendar year. Neill, perhaps you can provide additional insights.

In terms of driving towards our liquidity goals, the first priority is improving our financial performance and execution, which Tom discussed in the prepared remarks. We are already seeing positive results from the restructuring and simplification program, which has helped reduce operating expenses. Looking into the second half of the year, we expect strong performance in operating cash flow due to our working capital management and stricter cash initiatives Tom outlined. Therefore, our primary focus is on maintaining consistent operational execution and financial performance. Additionally, we have clear visibility to about $325 million in liquidity from the completed 48D tax credits, which are currently being processed after discussions with the federal government. We're also making progress on $150 million from asset sales. Additionally, we are collaborating closely with the CHIPS office regarding the CHIPS grant, which could secure over $400 million in term loan financing. This gives us more than three-quarters of a billion dollars in visibility for liquidity. Thus, our step one is to enhance operational performance, followed by our focus on liquidity plans.

Great. Thanks, guys.

Our next question comes from George Gianarikas with Canaccord. Your line is now open.

Hello. Can you hear me?

Yeah, we can hear you, George.

I'm sorry about that. Thank you. So, thank you for taking my question. I'd just like to ask about your revenue breakeven. I think you said under $1 billion. If you could just sort of help us understand exactly when you think that's achievable, and how realistic you think those revenue targets are in the current environment? Thank you.

I'll address the first part and then Neill may want to add some insights. The initial cost reduction program is progressing ahead of schedule and is expected to generate $200 million in cash improvements for the company, bringing our breakeven point to below $1 billion. We have also started a comprehensive evaluation of the company, approaching it as if we were launching it from the ground up. We are focusing on our materials and powered business and considering what we would establish if we were building those operations anew. This process is likely to create efficiencies, though we are still in the early stages. We remain cautious regarding demand, even though we anticipate progressive growth in our power business throughout the year. Thus, we want to take a careful approach towards revenue projections and align our expenses accordingly, which is the focus of our second cost program. Neill, would you like to add anything?

No, I think that's exactly right. I think our first and primary focus is to execute our operational initiatives around simplification of the business, driving our device business on to 200-millimeter, simplifying the business and driving the cost-out initiatives and the stricter cash management. I think that's step one. And then, from a revenue perspective, we are seeing power device revenue grow into the back half of the fiscal year and we'll continue to see that grow. I agree though in terms of industrial energy, in terms of materials, the visibility is somewhat limited, but we are seeing growth into those periods. And as that revenue continues to grow along with these operational initiatives, that will give us a better kind of line of sight to breakeven points in operating cash flow out in time.

And maybe as a follow-up, you traditionally discuss design-wins and design-ins. How have those been trending and has the current state of your financials impacted customer interest? And thank you.

So, we have published a set of slides on our website regarding design-wins and design-ins. For the quarter, design-ins are $1.475 billion and design-wins are $795 million. Cumulatively, design-wins, which are defined as 20% of first-year revenue, total $12.2 billion. In response to your second question, we maintain complete transparency and continuous communication with our key customers, including OEMs and critical partners like Arrow. We are aligned on our company's future direction, including discussions on how to boost supply for essential parts of their operations. They recognize the value of our recent Gen 4 release and see the benefits of our R&D investments. It’s important to highlight that our capital expenditures are largely implemented, with close to zero new capital commitments. This means that our existing capital commitments can meet significant demand increases and fulfill our customers' needs. The overall profile of the company is substantially changed as we move forward, and we remain fully transparent and aligned with our customer partners.

And just to clarify, that's $1.5 billion of design-ins and almost $800 million of design-wins that have occurred this quarter. Tom mentioned the cumulative numbers we have. We see a significant number of those design-ins transitioning into design wins. However, our current focus is on operational execution and converting those into actual orders and shipments from our factories.

Our next question comes from Samik Chatterjee with JPMorgan. Your line is now open.

Thank you for taking my questions. To start, regarding the revenue contribution from Durham, which is being phased out, it seems to us that, compared to the guidance you provided last quarter, the revenue from Durham has tracked toward the higher end or exceeded your expectations on the power products side, while Mohawk has seen a more modest increase. My question is whether we are experiencing a slower transition for some reason than you anticipated 90 days ago and if there has been any change to the timeline concerning how the ramp-down of Durham might affect the rest of the year. For my follow-up, I want to ask about the CHIPS Act funding. You mentioned two areas you need to work on: the conversion and some operational milestones to achieve. Although you may not be able to discuss what those operational milestones are, could you provide an idea of the timeframe in which you expect to achieve them? Thank you.

Okay. Let me start by saying that we are on track to close the North Carolina fab in the second half of this year, as previously indicated. Additionally, the demand we have seen for the fab is higher than we anticipated. The positive news is that our team is doing an excellent job in achieving efficiencies as we meet this demand, and we are able to do so in a way that generates positive cash flow. Our plans to accelerate design conversions to our Mohawk Valley Fab are also being implemented, as we aim to work with these customers for the long-term and they will benefit from the more favorable economics of our Mohawk Valley Fab. If I haven’t addressed your questions, Neill will ensure we cover them. Regarding the CHIPS Act, Neill will provide more details, but a key milestone is the certificate of occupancy for Siler City, which we expect to obtain by mid-year. It’s essential to highlight that even with minimal new capital commitments, we will still complete Siler City. I wanted to emphasize that. Neill?

Yeah. So, just to clarify, just on the North Carolina to Mohawk Valley transition, I wouldn't read into the levels of revenue between Durham and North Carolina fab. There are parts that are transitioning now, so there are certain lots of inventory that are going to ship out of Durham that are co-qualified at Mohawk Valley. So, you could see a little bit of mix variation between the two factories. I think the thing to focus on though is a heavy amount of EV volume coming on quarter-over-quarter as you go from 2Q to 3Q, and a lot of that will come out of Mohawk Valley. And at the midpoint of the guidance we gave, that's a 20% or 25% increase in Mohawk Valley revenue quarter-over-quarter, which I think underpins the ramp that we're seeing there and the ramp that we're seeing on EV. So, continued process and progress that Tom mentioned in terms of qualifying and transitioning parts over to Mohawk Valley. And agree on the CHIPS milestones from an operational perspective, very high confidence to reach the operational milestones early in calendar 2025.

Our next question comes from Jack Egan with Charter Equity Research. Your line is now open.

Thank you for the question. Over the past few quarters, we've seen some fluctuations in our revenue mix between automotive and industrial. You mentioned that automotive will experience growth through 2025, and I'm curious about how your device revenue is currently distributed by end market and how that distribution might evolve as you consolidate your fabrication facilities into Mohawk Valley. I also have a follow-up.

Hey, Jack, consistent with the other questions, I'll say a few words and then turn it over to Neill. So, in fact, you're right, over the last year or two, the mix has gone from almost all I&E and a smaller percentage of auto to the inverse. I think we'll see that stabilize a little bit as we go forward as I&E, as we said, we're seeing some green shoots. I'll let Neill mention it a little bit.

I believe that's accurate. We've observed a transition from a heavy focus on I&E to a strong emphasis on automotive. Currently, at the North Carolina facility, we are reducing our EV presence and the shipments related to EV from that location. Most of our drivetrain components have already been shipped out from the North Carolina facility. We are still seeing some alternative applications outside of the drivetrain being shipped from there at this time, but expect those to decrease in the first half of 2025. Meanwhile, we anticipate an increase in EV production from Mohawk Valley, while also adapting the I&E portfolio there. As we begin to transition some of the I&E products and applications to Mohawk Valley and the market improves, we should see a gradual return to a 70-30 split between EV and I&E revenue over time.

Hey, Jack, I did want to mention, I forgot when I talked about I&E previously, that the artificial intelligence data center is a big driver, energy, in general, because demand load growth is the highest it's been in decades. And then, from my previous market that I was in, battery energy storage is another increasing market that's driving the I&E and that will result in the mix that Neill mentioned. And we're ready for your second question.

Great. Okay, thanks. That's helpful. I guess, a bit of a longer-term one here then. I was hoping you could talk a bit about wafer thickness. So, some competitors toward the end of last year announced that their 8-inches wafers will be 350 microns thick versus the typical 500 micron thickness. And I believe Wolfspeed has that product in development to thinner wafers and maybe potentially qualification, too. So, I'm just curious as to how Wolfspeed's progressing in the development or qualification of that. And then, I was wondering about the thinking there as it relates to both the wafers that you are using internally at Mohawk Valley as well as the external materials that you are selling to customers in the materials business.

Yes, I can provide some comments on that, albeit briefly as we want to keep some information limited. I can confirm that we are developing 350, we can sample it, and we plan to transition to 350 in our internal operations over time. However, we have not made that transition yet.

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

Thank you for taking my questions. So, Tom, it's nice to have your 19 years of history with Wolfspeed. I guess, the first decade you were on the Board, the silicon carbide power business, so there was a line item nobody really cared about. I guess, the company obviously cared, but there was a very interesting level of support, I guess, even from the early 90s, from the US government for that business. Is there any reason to think that the interest and support for that business has changed over the last year? I mean, we did see additional funding into that business from the US government this last year in form of a grant. Do you think the appetite for these customers is growing or shrinking given the general impact from power across all areas of the economy?

The company is experiencing significant growth. We have a long history of collaboration with the US government, which continues to benefit us as we understand how to partner effectively and navigate government processes to achieve results. Additionally, there is a shift in technology towards higher voltage, higher power, and higher switching frequencies, which align perfectly with our expertise. We essentially pioneered this market, having been established 40 years ago in North Carolina. Defense agencies clearly prefer an American supplier, and we have the credibility built over four decades along with the necessary technology for silicon carbide applications. This marks a definite broadening and strengthening of our position.

Thank you. My second question is about competitive dynamics. So, there's an assertion that's made out there that companies can switch suppliers. And I think it's oversimplified as far as the quality of product available at other OEMs, at other semiconductor OEMs. And the challenges in changing suppliers, I think, are underappreciated. Could you maybe give us some color on what makes Wolfspeed chips special? What the challenges are for requalifying with another supplier? And why we've seen your business be so sticky during this period of uncertainty as you work through repositioning the balance sheet? Normally other companies would see a fairly substantial drop in their revenue, but your revenue has actually held in pretty well, consistent with guidance and has actually surprised me for this quarter, given that the challenges have been very public.

Neill will likely want to follow up on this, so I'll add a few points. The significance of material quality to device performance is exceptionally evident, as they are closely linked. The quality of the wafer used to create a device directly influences its characteristics and can result in up to a 20% difference in yield. Changing material suppliers poses considerable risks because it can significantly affect yields. As we collaborate with customers and isolate the materials business, we can only improve these outcomes. We can relate material quality to device parameters, and our performance enhances over time through collaboration, increasing the costs associated with switching suppliers. Additionally, we have long-term agreements with nearly all of our 150-millimeter customers, reinforcing our partnerships. In some instances, the timelines may be extended, but that's the primary dynamic at play in that market.

Yeah, and I'd just add to that, Craig, if you look at devices that when we get these design-ins, we're working with these customers for several years on integration of our parts and the performance of those parts in either modules or in their systems. So, if you look at just the breadth of what we were talking about in terms of we are seeing growth through a tougher cycle. And part of that is that we've got good engagement and good integration with our customers based on the things that Tom talked about having good quality substrates, access to supply for those substrates over the long-term, having control over the integrated supply chain and having that capability across the portfolio. So, that does create some stickiness with our customers and I think the breadth of those things and the breadth of the customers that we're working with shines through even in a maybe a tougher backdrop from a demand perspective.

Operator, we have time for one more question.

Absolutely. Our final question will come from Harsh Kumar with Piper Sandler. Your line is now open.

Thank you for including me in this call. I have two questions for clarification. I believe Neill or Tom mentioned that the breakeven revenue is around $1 billion or just under it. Does the $250 million per quarter figure account for startup and underutilization costs? That’s what I wanted to clarify. Additionally, you mentioned that your capital expenditures will decrease significantly. Is it feasible for capital expenditures to approach zero next year, aside from maintenance costs? I have one more quick question.

Thank you for the question, Harsh. Yes, the figures I mentioned include the entire P&L. When discussing EBITDA and operating cash flow, that's the focus. Looking at CapEx for next year, we have set a target of $200 million to $600 million for fiscal year '26. Right now, we’re at the lower end of that range or even below, and we have the flexibility to reduce it further. As Tom indicated, we'll still have the capacity to significantly expand our device portfolio because we'll have ample utilization available from Mohawk Valley and the substrate following that. Additionally, regarding the 48D tax credits, we’ve talked a lot about the near-term returns we’ve submitted and expect payment for from the federal government soon. In the longer term, when JP starts operating in the first half of next year, we will invoice or include in our IRS return over $500 million of 48D tax credits as we look into 2026. So, considering these figures, there’s potential for considerable funding from the 48D credits to counterbalance our expenses. Therefore, we can indeed reduce our gross costs, and after accounting for federal incentives, it could go down to zero or even lower.

Okay. Got it. Thank you. And then, question on the underutilization charges on the start-up costs, at what point in time as a company in totality would you expect these to go away? Is that a function of time, or is that a function of revenues? And if it's a function of revenues, what number are we looking at for JP and Mohawk Valley combined?

It depends on both factors. The speed at which we ramp the company will influence this. As we increase revenue over time, we expect to see the underutilization costs from the startup begin to decrease. We anticipate that when we reach around 70% utilization, those costs will substantially subside, and we expect to see them gradually diminish as we reach those utilization levels.

Thank you, Neill.

Yeah, I want to end it here. We appreciate you joining us for the call. I'll end with a repeat that we're intensely focused on improving the financial performance of the company, improving our balance sheet and economic investment in the company and we look forward to updating you over the quarter and the next call. Thank you very much.

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.