Wolfspeed, Inc. (WOLF) Earnings Call Transcript & Summary

Thanks, Brandon. I'm Craig Irwin. I cover Cree here at ROTH. Today, with us, we have Tyler Gronbach and Cengiz Balkas. So Tyler, you all know from his Investor Relations role, and then Cengiz is the man behind, I guess, the Materials business now, formerly GM of Wolfspeed, but now Wolfspeed is the company. So GM of Materials, I think of it as the most important part, but it's all important. With that, I'd say my disclaimers have already been read. So we trade the stock. And I just wanted to jump right into it, if that's okay, guys.

Cengiz, you guys made a big decision recently, right, to jump and go straight to 200 million -- 200-millimeter for the Nuremberg fab, right?

That's right.

Do you guys have everything you need for production materials and fab products, all the equipment, all the technology already developed?

Yes. So Craig, maybe I'll take that in 2 pieces. Obviously, the materials side of the business is less known and you have much less companies producing material -- equipment for production and so on. I think the device fab that we're building in Mohawk Valley, there are certain equipment that will -- that is specific to silicon carbide that will basically come in time, not a problem, but the majority of the device fab equipment is -- overlaps with silicon. So there's really no issues there. It will be a highly automated fab, quite large, much larger than what we have in North Carolina. So I think that piece is moving ahead really well. We've announced we're going to go to 200 basically 18 months ago last time we had the announcement. So it's quite busy up there. Every week, we get pretty nice update on how well the construction and facilitation is going. Now the other piece of it is probably -- a bigger side of us the news was we said we will do it, we will start the fab with 200-millimeter rather than 150. When we first embarked on it, we kind of kept it flexible. It could be 150, it could be 200. But nevertheless, our materials team has been working relentless to get to 200-millimeter platform to a point where we can do some fab starts. So that has 2 pieces inside the crystal growth and wafering piece and also the epitaxy. So there is a lot of stuff that is quite heavily worked on. If you wanted to purchase a 200-millimeter epitaxial tool, there isn't one on the commercial market today. So that just gives you an idea on how fast the development needs to happen. But this is a particular topic our CEO stayed very close to. We have numerous updates throughout the weeks and the quarters. And before we made the announcement, we got together and looked at the line and said, okay, can we pull this off? And basically, we have check boxes on everything. It's a new platform, of course, but we -- on the flip side, we have a lot of experience doing diameter transitions in silicon carbide all the way from 1 inch to 6, now to 8. However, this is -- this has really hit the spot. So it's -- we feel good about it. So all of us gave it thumbs up, and we announced it, and we will continue to work the rest of the year to get the fab running on 200.

So the next question with that is you guys are moving faster than the market. Does this mean that the inflections may be a little bit sooner? Rather than '24, '25, we might see this as soon as '23 or sooner?

The inflection you mean for the 200-millimeter wafers? Or what's driving the...

Demand on the electric vehicle side, right?

Yes.

Electric vehicle demand is where a lot of people are really focused, significant silicon carbide content per vehicle. I know there's a lot of great markets out there. But many of us believe that, that's the market that has the most short-term demand.

Absolutely, Craig. So there is -- in the past years, and we've commented on this time to time, the momentum for silicon carbide for EVs has gone up. And also, EV adoption numbers are changing to the positive, right? Depending on the car company you pick, some are citing 40%, 50% EV production by 2030. You look at different market models in terms of total EV adoption from '25 to '30, the numbers are all getting better. So when you look at that, from our perspective, one thing the automotive customers are going to be focused on, qualifying different wafer diameters. So this was a factor when we made the call to go directly to 200 in our -- because Mohawk fab is going to be our key fab delivering into automotive, although we will continue from Durham in the meanwhile. But going directly to 200 actually takes a qual cycle for us and for our customers. So that was very key in our thinking as well. So I would say, for silicon carbide, all -- the momentum continues to go up in terms of the value it brings to EV. And of course, we also play into industrial and energy markets, and that's how we first started actually getting into the commercialization of the technology. And those are on a steady increase. They're not as big as the EV market, obviously. But -- so when we look at all these together, it made a lot of sense to put high capacity plans that started on 200. So that's how kind of it came together.

Craig, one more thing for you on that. What it feels like is it feels like the curve is starting to steepen '25 and beyond, so the back half of the decade. And the other thing is, Gregg Lowe, our CEO, his daughter had their first grandchild and she's based over in Germany, and he's got a chance to go back over there this week. He's quarantining. But next week, after visiting with family, he's going to get a chance to catch up with customers, and you would, Cengiz was just describing, get a feel for because it feels like what might be happening is that the OEMs want assurance of supply and want to start a dialogue with us about how they might think about doing that. So that's the interesting thing to watch as it relates to EVs.

That's interesting. That could create a really, really compelling opportunity. Maybe we can come back to that in just a minute. There is another question I wanted to ask you that bridges off your last response. Another one of the markets that seems to be doing a little bit better, a little bit faster might be GaN on silicon carbide. Can you maybe talk about what's happening with your RF power solutions and some of the 5G rollouts? I mean, is this a catalyst for demand right now?

Yes. No, absolutely. There is a -- of course, when you are in the GaN RF business, there was an important development related to China, of course. So we had to adjust for that. But regardless, we've done the adjustment and planning accordingly. But the rest of the world, the silicon to gallium nitride, and so [ product ] transition, is as strong as it's ever been. I mean you'll hear from different companies. I think latest report I read had the GaN adoption at 85% by 2025, one of the public reports we saw. So that's not only for the communications infrastructure business, but also the A&D, airspace and defense part of the business. GaN, also [indiscernible] is very, very strong. So I think technology itself is on a no-return adoption path. There's always ups and downs particularly in the [indiscernible] side of the business, depending on which region deployed what at what time. But right now, if you -- as you read the news, the investments are coming back in, 5G is a massive driver of this technology. And just like in the power side, right, when you have GaN on silicon carbide, your power density, your efficiency is very good. System size, consumption of electricity, everything gets better. So I think this is a fantastic market for our GaN products, and we're beginning to see some really good pull in the market.

Excellent. Then just to go back to the subject of EVs accelerating, Craig, I don't think the number of models that are anticipated by 2025 has gone up or maybe you can correct me if they have. I think the number was roughly 500 for North America and Europe by 2025. And it sounds like the confidence and overall volume expectations for those vehicles seems to be what's increasing the confidence on the part of the OEMs, and then them reading the tea leaves on customer preferences versus ICE vehicles. Can you maybe frame out for us how we should look at the drivers of the steepening growth curve? I mean, is this really an acknowledgment of the superiority of the technology longer term? Or is there something else going on underneath that's driving this transition?

No. I think there are multiple factors, right? There is maybe the 2 big ones, what the governments are trying to incentivize. And I think in the U.S., we've heard a lot of different announcements more than -- many of the states are looking at more energy-efficient solutions, abandoning the internal combustion engine cars and so on. And then you look at globally, similar trend, more than 20 countries have announced plans to increase their renewable energy activities, and also, of course, cars fall into that, very close to that category as well. So I think, in general, we're seeing it from multiple sides. Consumers, they love electric cars. I mean there's an incredible appeal to it. If you look at the models, it's not hard to guess why there's some really full stuff coming on, on the road. And then for us, particularly, of course, in that particular application, silicon carbide advantage is sustainably in there in terms of adding range, which is a big problem. You hear a lot of stuff about ranging [ sides ] and so on, or you can help the cost side by putting solar battery in because we use silicon carbide. So I think, really, all these -- our plan is coming together. And if you follow our design-in metrics that we put out last quarter, we had $600 million design-ins, and that was -- a good chunk of it was in automotive, and that was followed by 2 other quarters of similar numbers. So I think today, we're probably close to like $2 billion or so. Our funnel is increasing actually as well. That's over $10 billion at this point within -- half of it is on the EV side. So we can definitely feel both technology is hitting the right time, I think, in terms of what people and countries want to do with this cleaner way of transportation. I mean this -- I don't think this theme will go back. It's very appealing. And of course, the cost side needs to work out. That's why we're putting capacity in place, driving the costs down as fast as we can. But when we talk to our customers, math adds up, it's working. So...

Agreed, agreed. So this is kind of a big picture question, right? A lot of institutional investors don't fully appreciate how hard it is to grow defect-free crystals and then wafer those and deliver product that can be used to grow epi and then build up into devices. So your history is you came to Cree, I guess, about 15 years ago with the acquisition of CR INTRINSIC. The 0 micro pipe technology that you brought to the company was a real enabler back then of the LEDs business. And without speaking specifically about any of your competitors, we hear about micro pipes and one of the other leaders' wafers. We hear about other defect rates in other vendors' wafers. And these are incredibly hard to get down to commercial levels where you have yield rates high enough of the MOSFETs given the sheer size, 4, 5 millimeters on edge. Can you maybe talk about the cycles, hours, years of learning in the Cree technology platform at this point, how hard it is to replicate that, particularly given some of the speed bumps other companies have had over the last couple of years? And many are aggressively trying to chase you, but finding -- it's a lot harder, no pun intended, than many had anticipated.

Yes. I mean, for sure, Craig. So the silicon carbide production process, I think -- we often say this is a generation technology forces of our devices, something like this will come for every 30, 40, 50 years. But -- and then you start thinking why because it probably was known for a long time, the temperatures that are involved in growing the crystals are -- I think we said it in our Investor Day, is half of the sun surface temperatures, like 1,000 Fahrenheit or something. So it's a very difficult space to develop a product in, in terms of the technology stuff goes because almost all their measurements are indirect. You can't really -- if you want to look into a crystal growing, you can't see, there is white light coming up. So it kind of starts there and everything that you cited, whether it's micro pipes or dislocations or the next defect that can pop out at the device side of the business, you have to figure out how to eliminate, not create them, whatever your path is inside that crystal growth process. And it doesn't really end there. If you can get a good crystal now, the next immediate topic, of course, is can I expand it? So that's another topic that is very different than silicon, very different than most commercial crystal growth technologies. So you need to have some talent and experience there so you can get to a larger wafer size. And that gets followed, okay, you get the crystal out, it has to be ground, cut, polished. And remember here, you're dealing with, in theory, the third but practically the second hardest material that we know after diamond. So it is not an easy material to handle in terms of cutting, polishing and so on. So once you're done with that, then you have to go into power epitaxy. It also takes place at quite a high temperature, at 1,600 degrees. So this stack of processing that comes together is not easy to immediately replicate, and it's particularly difficult to add scale because if you can imagine as I'm describing this, the sensitivity of all these processes are quite high. So when you turn the volume knob up, you could get surprised. And we did in the past, too. We have a couple of advantages. We ran our LED business onto the [indiscernible] wafer. So we knew how to scale crystal growth and wafering operations quite well. But then there is just a sheer number from years that we've been at it, and we appreciate how difficult it is every day. There are no mistaking this lightly. So I think when you kind of put those together, it gives us definitely an advantage. And as you said, the EVs are driving quite strong silicon carbide adoption. And just the way the systems are, the inverters are going to the parts and number of devices that are needed and the amount of current these devices need to handle. When you look at it all together, you start staring at large chips. So large chips have one disadvantage. If you have a single micro pipe in the middle of your chip, that's going to fail, right? So you have to create almost defect-free, so to say, areas where your devices can come out. And then, of course, you have to do this in a high-yield fashion because it's no good if you run your wafer in your device fab and you get 5% yield out of it. So all these kind of stacked together, I think, that kind of gives us an advantage. It makes it difficult, but we're definitely feeling comfortable with our ability to scale this. And the numbers get big. So you have to do this right. And particularly, the automotive industry is quite, I would say, merciless in terms of quality and mistakes. That puts a lot of pressure on the teams, but we have a great team on board, and so far, so good.

Then maybe we could talk about cost implications of 8-inch versus 6-inch wafers or 200-millimeter versus 150. There's something like a 75% increase in area for an 8-inch wafer. That implies you basically cut your costs in half by working with the larger wafers versus the 6-inch. I'm not aware of anyone being close to following you on building a fab, let alone going 8-inch. You're the only source for 8-inch in the market, and nobody else has this. So you're going to be half the cost of the major competitors out there. What does this mean strategically for Cree? You did mention the qualification of automotive and the challenges in there. So I guess there's probably a couple of years of lead time for that plant to really scale up from a utilization standpoint. But how should we be thinking about this cost advantage?

Yes. I think the cost advantage you point to on paper, for sure, you can make that calculation then, we will be heading in that direction. But there are a couple of things. It's hard to gauge what our competition's cost structure is because they have -- I think all of them have silicon IGBT fabs there, and some either converting and they have a different infrastructure in place, I think. But again, also, we've said these wafers won't be available commercially, although we have a very strong interest and presence in the commercial side of Materials business because over the next couple of years, there's quite a bit of heavy lifting we will do in turn. And in the past, Cree has done similarly as we switched wafer diameters. Because it's a new product, it has to go through the fab, then cycles of learning begins and start getting feedback. And I think this is one of the advantages we have being vertically integrated, that cycle is very fast. If something is not working, even in our pilot line, we get a phone call that day. Forget about the customer [indiscernible] schedule next quarter. But -- so these cycles of learning will help us, of course, try to perfect the wafer, although we're quite happy when we gave the thumbs up on 200. We definitely checked all our major boxes. But the feedback will constantly come. And this is part of Cree's history of why our Materials business is so strong. I mean, I think we've already mentioned, we have about $1 billion or more of the contract on the Materials business is because we can ship at scale and add quality to customers. So -- and that piece is really important that we do some of the heavy lifting, the learning, turn it back into the -- put that back into the production of it. And then, of course, in the same time frame, the cost of this will start coming down as we scale the 200 up. So those are really the 2 backbones of the commercialization piece of the 200. It's not a light switch that will go on next January when we have 200 everywhere. So I think we'll see that play out nicely as we increase our internal usage. The quality will start getting some good feedback. And also, the cost structure will start heading towards how we can make this available to all our customers. But if you -- I think maybe a logical question will be when do you see that? And I think when you look at our customer base, obviously, they're all very high-quality semiconductor players there. You can look at our press releases and so on with them. And they have lines running at 150, quite heavy volumes, actually. We are running internally. They're running at their sites. Probably, this is a '24, '25 transition for most companies. But they will be at different stages because they have to manage the internal fab. To switch a diameter is not so easy. It's doable for sure. It's been done always. But that was again why we decided to go with 200 in Mohawk and just skip a transition phase. So we'll see how it plays out. But our 200 announcement is actually very, I think, an important announcement for everybody in the industry who's using silicon carbide because we're going to put tremendous amount of energy and start scaling the volume up internally, and all these will make our commercial customers a lot happier as they want to switch it to MOSFETs.

And then maybe this is a question for Tyler, but -- a lot of investors out there don't really appreciate the scale of experience here yet. I understand there's at least a few hundred thousand vehicles on the road that actually have some silicon carbide content in them today, all of it from Cree if it's MOSFETs, and then Cree is essentially 100% penetration on the diodes for fast-charging units on the EVs on the road, so millions of units. Are -- these numbers are accurate? This is consistent with the reality the company sees shipping product?

Craig, you've been great about kind of breaking down the industry over the years. And I think what you're seeing here is kind of the infancy stages of what you just described, where there was a commitment a couple of years ago by that company out in California called Tesla and -- to leverage the power of silicon carbide. The nice thing what we're seeing now is that others are turning towards improving range. And if you want to improve range, everyone has pretty much concluded that you've got to leverage silicon carbide in the vehicle.

Understood. Understood. Well, gentlemen, thank you both so much. Cengiz, Tyler, thanks for your time. Thank you to everyone in the audience. You can circle up with me if you have more questions or you can obviously circle up with Tyler, and he might be able to get your questions answered by Cengiz if you have some specifically for him. So thank you, everyone.

Thank you, Craig.

Thank you, Craig.