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

Well, good afternoon. Thank you for joining us. My name is C.J. Muse with Evercore ISI, senior analyst covering semiconductor, semiconductor equipment. I am very pleased to introduce Neill Reynolds, Chief Financial Officer for Cree; and Tyler Gronbach, Vice President, Investor Relations. We've got 35 minutes for Q&A. And first off, welcome. Thank you for [indiscernible] guys.

Thank you.

Thanks, C.J., and thanks for having us. It's been a good set of meetings so far, as we kind of talked about. And it's great to be here to continue to kind of talk about what's going on.

Excellent.

So I figured I'd kick-start it with kind of a big picture question. Cree has made a huge pivot from your prior legacy businesses in LED and lighting to now silicon carbide materials, power devices and RF devices. As a starting point, where are we in the evolution of Cree today?

It's funny to say that, C.J. If you go back a couple of years ago, as we kind of talked about, Cree had largely been a lighting and an LED business, and we kind of had this third piece called Wolfspeed. And over the last, I guess, 3.5 years since Gregg Lowe took over as CEO, as he talked about, it's been a big pivot. We've -- we divested of the lighting business. We closed the sale of our LED business earlier this year. And it's just been a complete focus on Wolfspeed as it relates to power, semiconductor and power -- and sorry, RF markets, as we look forward, whether that be in our device businesses or material businesses. But in terms of stages, I think we're still very much in the early innings of a kind of a multi-decade opportunity. So we're making progress towards that. A lot of activity, I'm sure, we'll get into today in terms of what we're trying to do to capitalize on that. But I would still say very early on in the evolution of our business, but also, I would say, of the industry at large as we move forward.

Excellent. I guess, I thought I'd start off with the automotive landscape. And so to kick-start the conversation, OEMs are becoming increasingly aggressive in their plans for ramping EVs. How do you view this dynamic evolving from here? And how should we think about the impact to Cree both short term and long term?

That's -- I think that's a very accurate statement. First of all, as we meet with customers, and we've had a chance to meet with them, both on a live basis, in fact, I'll be with Gregg out in Europe in a few weeks, meeting with some of our bigger European automotive customers. And what I would say is over the last several years, but even every 6 months or every quarter as we come out and we start talking to investors, I would say that, that momentum has increased. Many of the big customers that we have today that we're winning design-ins or competing for design-ins with are telling us that the -- we have to be prepared for steeper ramps as we get into that '23, '24 and then out and beyond that time frame, as you work out to 2030. Most customers today are saying that EV adoption rates will be kind of in that 30% to 40% penetration rate out by 2030. From the low percentages today and a model that we've got out in 2024, that's at about 5% to 10%. So there's a significant opportunity. I think those design-ins and the design activity is becoming more intense with customers. And I think you're seeing that activity in the pipeline and design-ins that we've seen over the last 4 or 5 quarters.

Got you. And as you think about that 5% to 10% in 2024, where are you? And I have a whole manufacturer and Q&A section. But where are you in terms of your current capacity [indiscernible] and ability to meet that type of penetration?

Well, first of all, that's really an important question. I think if you look across the entire semi landscape right now, I don't think it's lost on anyone that supply shortage and assurance supply is really an important thing. So we're investing heavily in capacity. And particularly, as we look down the road, whether that be materials or on the device side, where we're building a new state-of-the-art 200-millimeter factory in Upstate New York and Marcy, New York outside of Utica, what we call our Mohawk Valley Fab. So I think as we look out into the future, I think you see us as kind of taking a leadership position, ensuring that silicon carbide has capacity and capability and what many think will be a -- potentially a bottleneck area in the industry as you think about the next -- as that growth happens over the next 5 or 10 years. So I think we've got a very solid investment plan as it relates to driving that -- those capacity increases. In the meantime, we are expanding capacity in the shorter term as well, both on the material side, as we continue to expand capacity in the materials area, but also as we expand what we've got today, which I would call a relatively suboptimal footprint in our North Carolina factories from a fab standpoint and device side. So we are expanding some capacity there, but I see that mostly as bridge capacity until we get to our bigger factory and our bigger ambitions from a footprint standpoint as you think about the time frame over the next 2 to 3 years.

Very helpful. And I guess maybe on the component shortage side of things, can you kind of help us understand where we are today? Do you have issues? Do any of your suppliers have issues? Has that kind of weighed on the growth trajectory in the near term?

On the front end, it's not something that, I would say, affects us directly today. I mean, a lot of the automotive ramps in electric vehicles, you're going to see happen '23, '24 time frame in a big way. There are some ramps happening today. I think a lot of those are silicon-based applications. In the meantime, silicon carbide has been winning, I think, at a pretty high rate over the last couple of years. So I'd see that landscape changing over time. Over the long term, I think what that means for us is that supply assurance has just become completely top of mind with our customers, particularly in the automotive space. And I think they're looking for ourselves and others to have kind of an insurance policy around ensuring we can meet that demand out in time given those steep ramps. So I think a lot of customers are going through daily activities, managing through this supply shortage, wind downs like probably we've never seen in the industry from an automotive perspective and working with us on what we're doing. Our strategy has paid off in the sense that it might be better to be lucky than good. And a couple of years ago, we decided to go heavy investment in capacity ahead of demand, and that just happens to line up really well with the market right now, and I think that's resonating with customers. On the supply side, I would say, we are seeing some tightness out in the market. I think the good news for us is that we knew this was coming online. This factory was coming online well in advance. We placed orders very, very early on. So we haven't seen that effect of progress so far in our Mohawk Valley facility. In fact, just a couple of weeks ago, I think maybe 10 days ago, we saw our first tools enter the fab as we're building that out. So, so far, so good. I mean, there is some tightening in the industry, but thus far, we've been able to effectively manage through it.

C.J., just to add on to what Neill was saying there, though, I think this whole stock out situation has really changed the thinking of automotive OEMs. And like he said, there's some assurances that we're looking for in supply. So it's been very serendipitous for us that we're building this terrific facility in Upstate New York. At the same time, we're expanding capacity in the materials factory in Durham. So for us, the dialogue in the last 12 months has really changed to, should we be going silicon carbide? Should we be going something else to now, hey, I want to commit to silicon carbide in the design of my vehicle. And either I want a direct supply agreement with you or I want to make sure that the Tier 1 that I'm buying the inverter from has got that in place. So the dialogue has definitely changed in the last 12 months as we think about it from an auto OEM perspective.

That's really helpful. I guess as a follow-on to that. I believe roughly 10% of EVs include silicon carbide today. Curious how you see the rate of adoption going forward in light of what you just described in terms of customers, now looking ahead, realizing that they have to really think about future road maps through semiconductor sourcing.

Yes. I think what's changed, though, is -- C.J., is that in the automotive world and semiconductor, from the time you get a design-in or even get to design win, those are 3-, 4-, 5-year type of time lines from getting the design-in to the time it actually ramps in revenue. So I think over the last 2 to 3 years, silicon carbide has really reached a tipping point and, I think, has now passed out. I think when we get to deals that we're doing, and we're getting down to the final 4 or final 2, those, for the most part, are silicon carbide-based decisions. So there's a lot more [indiscernible], I think, than there was a couple of years ago about this kind of how would silicon carbide ramp. I think now that's pretty much silicon carbide. So what you're -- and particularly in the inverter, I think what you're going to see then is a timing of there's going to be some ramps in EVs now. Most of those are going to be IGBTs. And the reason for that is they were designed in many years before that. As time now was kind of coming along, you're going to see some more ramps, more silicon carbide ramps. But as you get out to '23 and '24 plus, you'll just see the content and the percentage of electric vehicles that are [indiscernible] silicon carbide continue to increase. So not only will EVs increase over that period, but the number of vehicles, just based on the design-in activity that we're seeing, not just us, but others in the industry are seeing [indiscernible] we'll start to see that transition over, I think, in a pretty heavy way over time. It will just take a few years for that transition to happen.

And how are you thinking about the content story? Curious, as you think about inverters versus onboard charges versus DC-DC converters, as well as any changes to complexity that might add more content to 1 or all 3 of those buckets, how do you see that progressing over the next 2, 5, 10 years?

I think, first of all, as you look at the vehicle, I mean, even as you get off the vehicle into charging stations, I think silicon carbide plays a role in all of those. However, the inverter is the biggest part of the market when you think about electric vehicle. And I think as you start to work your way down from the inverter, I think more to onboard charging and DC-DC conversion. So I really think of it as the biggest market opportunities in the inverter. That's why it's here garnering most of the attention. And then you start to work your way down. From a content standpoint, it starts to pair off a bit in terms of what those opportunities are. And you can start to see maybe more competition depending on what the voltage levels are and what you're trying to do. You start moving off the vehicle and then into like charging applications. Fast charging and -- is becoming obviously a big part of the equation. I think what's changed over the last maybe 18 months is silicon versus silicon carbide was a cost discussion. And I think now what it's changed into is an efficiency discussion around range on the vehicle, which is in the inverter. And then secondly, it's how fast can you charge the vehicle and can you get that comparable to what you would do in a gas station. A lot of these fast-charging applications that you're hearing about can charge 75 miles in 5 minutes. That's where silicon carbide comes in and makes a big difference. When you think about content, like an electric vehicle content would be say, $300 to $600 of content in electric vehicle, but a charging station is like $1,000 of content, so as you think about these different pieces, whether it be the 3 you mentioned inside the vehicle or the charging station, as you think about outside the vehicle, all of them play a role and all of them have different competitive aspects as you think about how you win business in those parts of the electric vehicle market.

Got you. Okay. Very helpful. I guess I want to hit on manufacturing. You talked earlier about getting first tools delivered today. Can you tell us where we are in terms of progressing over 200-millimeter, and how we should think about yields, commercial viability, qualifications and getting a true ramp at your Mohawk facility?

Yes. First of all, very happy to say we had our first tool installed into the factory, delivering the factory just before the Memorial Day holiday. So it's about 10 days ago or so. And I actually took a trip up there last week to kind of review the delivery schedule and take a look at the fab. And I think the team has just done a phenomenal job of getting us to where we're at today. Essentially, the Mohawk Valley Fab was rated dirt a year ago. And today, we're putting tools into the factory, which is really great to see. From a timing standpoint, I think what you'll see going forward is, during this year, we'll continue to do some of the fit out, enter the tools, power them up. Later this year, start to run some test wafers through a line we'll eventually have installed this year. And as you get into next year, I think that's the most important thing, what we've talked about is beginning to ramp the fab in the back half -- or the first half of calendar year '22. And what I mean by ramp is the first -- I think maybe that March quarter, maybe in that time frame, we're internally qualifying the fab. So we've got [indiscernible]. We've got the automation equipment in. We're managing through on bringing up the tools. So you'll see some qualification going on during that period. Then what we'll do is we'll work on what a pretty aggressive qualification period with our customers. And you'll start to see that happen based on the schedule, I mean, in the June quarter this -- next year. So you'll see lots of qualification activity in the first half of the year, both internally and then with customers. And we've got, I think, a pretty good lineup with our customers, and we're integrated with them in terms of how we want to go manage that. We will see probably some revenue coming off the line next year as you get into calendar year '22. But I think you're going to see the more substantial capacity changes happen in terms of the amount of revenue coming out of the facility in the second half of calendar year '22, and we'll start to see that really ramp, from a revenue standpoint, a more significant way over that time frame. And I think as you look at the business plan that we have, we talked about getting to $1.5 billion of revenue by 2024. That's in line with what we kind of had anticipated. So, so far, so good in terms of bringing in the fab. But those will be kind of some of the key milestones to think about. We start bringing up capacity of the Mohawk Valley.

Got you. So I guess a 2-part question. Can you kind of walk through what you're doing in terms of full automation, other efforts to enhance yields and output as well as the obvious benefits from going to a larger wafer size? And then the second part would be, at that point, you'll be the only player in silicon carbide with a 200-millimeter fab. How should we think about the impact of having, a, that capacity; and b, a lower price point? How will that impact your share on both materials and device businesses?

Well, first of all, I think if I take a step back, if you look at our fab capacity footprint today, and I talked about it a little bit earlier, our Durham fabs are really a bridge to get to Mohawk Valley. And -- but they are suboptimal and subscale. I don't think they're online with what our competitors are doing from a fab standpoint. Very manual processes. You can think about pretty vintage type of layout and tools and processes. So just from a pure, I would say, fixed cost scaling, the amount of labor required is just something that's, I'd say, older in terms of capability. As you look at Mohawk Valley, this is a fully automated 200-millimeter fab. And so you're going to get the benefits of seeing better scale, full automation, with overheads and loaders. And I mean, in most people's cases, they would expect to see a lot of automated fabs anyway, which I think is actually pretty normal in the industry. And to hit our business plan, what we've got to do is just take the parts going from antiquated facility and put it into what's, I'll call, state of the art, but it's a fab with automated capability like we see everywhere else. Now from a yield standpoint, on 200-millimeter, we're already seeing better yields on 200. We're seeing at 150 in Durham on our pilot line that we're running up in Albany outside of -- up in Upstate New York. And we'll eventually take that line and move it in. So I think part of our decision-making as related to moving fully to 200-millimeter to initially bring up the fab was related to the execution we've seen thus far on 200-millimeter. And Gregg and I have a monthly review on 200. The team has made pretty phenomenal progress in terms of bringing up the technology. And we look at the supply chain and think we've got that in good shape. So you pair that up with the 200-millimeter benefits, obviously, you get more service area from a capacity standpoint. And rule of thumb is you get about a 40% cost benefit as time moves on. Now early on, as we bring that up, and we feel really good about those things, the cost per millimeter square to the substrate is going to be a bit higher, right? It's a brand-new 200-millimeter substrate. As we're bringing those up, it just doesn't have the scale yet to get the cost down. We will see that come down over time, but we'll get the benefit of the wafer in the fab to kind of help offset that, which makes it, at the end of the day, I think, a better plan and maybe even a less risky plan when we had an issue. To answer your second question, as it relates to share, how does it impact our business, I guess what I would say is on 200-millimeter, we haven't said exactly what we're going to do and haven't decided in terms of selling that in the commercial market just a substrate. But by sending that up to Mohawk Valley at 200-millimeter, we'll have several years of experience on 200 by the time that would be a decision point. And I also think, as we think about this assurance of supply question, we're thinking about having a 200-millimeter factory that's already now run for several years. We'll bring that up to volume as we get out to 2024. And what our customers like is, that's a bigger surface area, normally is like 70% versus 150, and gives us the capability to respond to supply upsides in a faster way once we get that running. So I think regardless of how the market turns out and decision points on 200 commercially or keeping it internally, I think we were very, very well positioned with our substrate business at 200, building that cost and scale that capability, sending that into the fab at 200-millimeter and then running that over several years. So right now, we haven't said what's going to happen after 2024, but I think that further underpins our capability to achieve the margin targets we've got at 50% and the capacity runway out beyond '24 that we think is going to be critical for the industry.

Got you. And I guess as part of your kind of -- historically, how you run the business, you've had long-term supply agreements. And so how are you thinking about that today? And if you think about the [indiscernible] that we're seeing, particularly in the auto industry, is that driving improved visibility there such that -- to what your building capacity-wise to '24 and then beyond as well? Will that be covered completely by long-term supply agreements?

Well, the long-term supply agreements today are solely on the materials business. We do get design-ins with pricing out in those longer time frames. You have a pretty good visibility as to what the pricing outlook is. And then in the design-ins on the device side, our customers give us views of what they think those volumes will be over time when they bid the business. But I do think, though, that visibility is improving. I mean, even on the materials side, we extended another long-term agreement back in the earlier part of this year for $150 million. We continue to see signs of improvement, I think, in the materials business. And I think it's one of these things where it's early stages. So if you look at us today, there's a lot of ebbs and flows in terms of how this works, just kind of inventory timing with our customers as they've signed up for some of these agreements. But I think that the size of the pipeline and the trend on the device side, we are starting to see some pull there. In fact, we're capacity constrained right now in the device business. And I think as you look over time and look at the growth rates that us and others have kind of talked about in terms of device businesses, we are starting to see that pick up over time. You match that up with what we're seeing in the design pipeline to design-ins, we've done roughly $2.5 billion of design-ins over the last 5 quarters. It starts to really underpin visibility to '24. When I think of it, it's even more important than that. I mean, '24 is a nice snapshot in time. If you're thinking about 5% to 10% the adoption rate, and customers are telling us to be prepared for 30% to 40% adoption rate by the end of the decade, there's a lot of growth out beyond '24 that we need to prepare for. And it's really about getting the company to scale to support that over time. So there's a lot of activity. I think it continues to get underpinned. But the activity that we've announced thus far is right in line with achieving those goals.

Got you. Very helpful. I guess, I was hoping to move to the competitive landscape and maybe start off with the substrate side of the house. I think the last share number I saw was roughly 60% of market share. Is that consistent with what you're seeing and thinking? And how are you thinking about your competitive advantage here? It continues to be epi technology, patents performance moving to 200 millimeter. Would love to hear your overall thoughts vis-à-vis silicon carbide competitors?

One thing we have going for us is we built an LED business. We recently sold over 30 years on silicon carbide. So the team has deep -- I take deep domain expertise in this area. It's obviously attracting a lot of investment, which is understandable given the market opportunity as you look forward. However, I would say our materials business, as you look out in time, has a number of advantages, [ best days ] on that deep domain expertise. However, I think the most important thing for us to think about is not patting ourselves on the back. We have a nice share number at 60% as we pointed out, C.J. We certainly feel good about that. But we don't have to as if we've got some big lead or anything like that. We act like we've got to drive cost down. We've got to do that for a couple of reasons. One is adoption of silicon carbide is really predicated on the fact that we bring the pricing down over time. And for us to do that effectively, we've got to drive cost programs to do that. So we act like everyone is on our back every day, and we are actively pushing to drive that cost down. One is we've got to meet our business plans; and two, it's going to increase adoption rates of silicon carbide. So I think the biggest competitive advantage we're going to have is leveraging our scale and our domain expertise. Being the leader in the industry from a size and scale standpoint, we certainly had these long-term agreements, use those learnings to continually drive cost and efficiency benefits in our materials business. I don't just believe that for our own business. I believe that's important for the industry. And we're leading in that, but we drive it every day. In fact, Gregg and I have a monthly review on driving cost-downs in materials really for that exact reason. And it is those -- the driving of those type of activities and the expansion into 200 millimeter that's going to expand over time and underpin the industry's capability to drive cost down, bring pricing down. And that is not just for the EV market. As we start bringing that pricing down, the number of applications outside of electric vehicle starts to expand as well. I mean, our pipeline, we talk about as being -- a little over half of it being automotive, which means that a pretty significant chunk of that is not automotive. A lot of that's in the power business. So we're going to continue to drive cost down. I think that's our best as we think about things going forward. And remember, we're driving cost out of materials, not just on 150, what everyone else is doing today. We've already jumped over to 200, and I think competitors are going to eventually have to make that change as well.

And C.J., I think the other thing, at the base level, it's extremely hard to make silicon carbide. And I think this is not something that you can take manpower and money and accelerate the process. You've got to start with a good quality seed. You've got to be able to grow a crystal structure. There's 170 different crystal structures of silicon carbide, but only one that's optimized for power. So as Neill said, we're perpetually paranoid on what the competitive landscape is doing. We also know how difficult the material it is to work with. So we like the hand that we have to play. And as Neill suggested, the cost comes down on silicon carbide, the aperture gets bigger. So while we talk a lot about automotive and 5G and RF today, there are things like an electric motorcycle, a robotic arm, power supply for a military drone. And those are the things that silicon carbide are being designed in today. So we just feel like we've seen some estimates that at the end of the decade, the TAM can go from anywhere from about $10 billion today, upwards of $20 billion for silicon carbide as a market opportunity. So we're just going to continue to plug away on expanding the capacity, at the same time, working with partners like Arrow to open up more in the market.

Very helpful. I guess, how are you thinking about perhaps other materials as competition? So GaN on silicon as one has been discussed. What are your thoughts of their eventually competing with silicon carbide in the years ahead?

As I said before, I think the biggest area right now to focus on and the biggest market opportunity from an electric vehicle standpoint is in the inverter. And I think as we've gotten into our deals over the last couple of years, really, there was a lot of -- there was a little bit of IGBT in there, and maybe that was kind of the conversation, IGBT silicon versus silicon carbide. But that's really just transitioned into mostly silicon carbide-type debate as you get down into the final stages of these deals that we're in the middle of negotiating now. So that's -- and I think that's been that way for some time. I've had a major automotive customer tell me recently, they only want to see silicon carbide in a lot of the deals that they're looking at. I think there's going to be other applications as you look down the power spectrum. Silicon carbide is very effective at 650 volts and higher. And as you move below that, there can be some other niche applications or even onboard charging or some of the other places you mentioned on electric vehicle where some of those applications make sense and won't compete against them. But as it relates to kind of that core capability in the electric vehicle and some of the applications that Tyler had talked to, silicon carbide in our mind still remains the leader. But again, it's all going to be a function of cost and capability as time goes on, which makes us really want to continue to focus on that cost curve and ensure, one, we can deliver our business plan and also open up those markets and then make it a very easy choice for our customers.

Got you. I guess to follow on a comment you made earlier around only half of your pipeline is auto. Obviously, meaning the other half power RF. How are, I guess, you -- how are you thinking about your road map there and your ability to compete with other major power device players, particularly as you bring your costs down?

It's very interesting, C.J. We're -- if you look at our run rate today, we're a relatively small company. We've got, I think, a great road map to grow the company over the next several years and beyond. However, we don't have a huge sales team. So if you look at our OpEx today, we invest at a pretty high level. One reason for that is we're expanding R&D to invest in 200-millimeter and process technology fab and develop parts for a lot of different applications in the market. The other thing we're investing in the sales and marketing resources, and we're trying to grow our sales footprint so we can be calling on customers in an effective way. But I would say, right now, we're just too small to go head-to-head, actually, alone in every area. So what we've done is we've partnered up with Arrow. And if you think about the number of salespeople that they've got, globally, it just pales in comparison to what we have. So what we do is we team up with Arrow, and we've had a lot of success with this. We've done exclusive launches on different parts, and they're the premier distributor for us. And we leverage their footprint globally to help us. And it's been incredibly successful. We've had, I think, very effective design-in activity with them. We're well beyond what we had expected initially when we anticipated. I mean, if you look at -- we did a 650-volt launch last year in the middle of COVID and it well exceeded our -- what we had anticipated. And then the number of sockets that we are getting are beyond that as well. So I think what we've done with Arrow and the programs have been very successful. And as evidenced by the fact that if you look at the size of the design-ins that we've seen over the last 5 quarters, the number of those that have been through distribution has been pretty incredible. And I'll be actually out at Arrow in a couple of weeks from now, continuing to talk to them about continuing to expand our partnership. So it's been a very successful program. But right now, that's the kind of way we kind of see ourselves competing from a footprint standpoint with everyone else.

Very helpful. So we have 2 or 3 minutes. So I figure I'll ask you a longer-term question. We started the conversation talking about how Cree pivoted away from both LED and lighting. And so curious, as you think about 5 years where we've been talking all along here in terms of competitive advantage in silicon carbide how you're bringing on 200-millimeter capacity, you're going to drive down costs for the industry and particular focus on auto, but also power and RF, what do you think the challenges we're going to talk about 5 years from now? And what's that opportunity set that could emerge once you really solidified yourself in the auto substrate world?

Well, first of all, I think that's only the beginning. You talked to -- I think the first question I had was where are we in the stage of this. And I think we're -- Gregg would tell you, we're still in batting practice and trying to kind of get on the field. Maybe we're very early innings. So I think 5 years from now, I think of the business, like I said before, in 2024, '25 time frame. We're just getting the company to scale. We're just getting our capability and we're underpinning that. I think what's going to happen if you look out beyond '24, '25 is costs are going to continue to go down. EV adoption rates are going to continue to accelerate. I mean, you're talking 5% or 10% adoption rate, '24, '25, depending on which reports you look at. 30% to 40% by 2030, that's a significant amount of growth in just electric vehicles alone. And then if you think about the applications that Tyler had talked about, [indiscernible] around that. So I think this discussion around require capacity in the industry to supply these products is going to continue to be a discussion point between now and the end of the decade. And it's probably one of the few areas in semiconductors you can be part of something that has pretty clear visibility to multi-decade growth, which makes it an exciting time to be part of this. So I think we'll continue to -- we'll go through the transformation. We'll get to scale. But I think it will be continued dialogue around a lot of these and then expanding areas as pricing comes down.

Well, fantastic. Well, I think we're running out of time. But Neill, Tyler, really appreciate you making the effort to spend time with us today. Thank you.

Thanks, C.J. It's been great.

Thank you, C.J.

And be well, and hopefully, next time, this will be live.

Yes. I would hope so. Hope to see you later soon.

Take care.

Take care. Thank you.