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

Hi. Good morning, everyone. Welcome to Day 3 of Citi's Global Technology Conference. My name is Amanda Scarnati. I'm one of the semiconductor analysts here. I'm joined this morning by Cengiz Balkas, the Senior Vice President and General Manager at Cree; as well as Tyler Gronbach, the Director of Investor Relations at Cree. The format today is going to be a fireside chat. I have a bunch of prepared questions that I'm going to dive into. But please feel free to use that Submit Question button or send me an e-mail at [email protected]. I'd be happy to ask those questions a little bit later on.

Let's just dive right into some questions. I'm going to start with sort of the hard-hitting question that I always get asked by investors, and we'll just get that elephant out of the way, and that's pricing. And so we're seeing sort of an increase in competition on material side and better cost improvements on the devices side, in part based on sort of what Cree is doing, but also the competition. How do you look at pricing over the next couple of years, right? You previously said that automotive is like 250 to 300 in content per vehicle. But then beyond that, beyond 2024, the ASP declines. Is that the right way to look at it? Are you seeing any pricing pressure before that? Or how are you looking at the market?

No. I think you know with pricing, probably the first topic comes into mind is the value proposition, right, what value the devices provide to the application. And that conversation is a little bit different with each customer. I would say, on the device side of the business because architectures are different. Our levels are different. So that could vary some. But in the EV sector, obviously, there's a conversation that is a pretty long-term discussion. And so I think silicon carbide over the years have now come to a point where it could clearly offer a value proposition to the application that is still meant. So -- of course, that doesn't mean price pressure goes away. There is always the typical negotiations that will go on. But I think for a new technology and really incredibly high-performance technology, silicon carbide come into the market. And I think we'd be able to get into these conversations. I think that's a huge, huge turn. 10 years ago, this was absolutely not the case, silicon carbide versus silicon. Now if you look at the material side of the business, obviously, we go into the same supply chain with our pricing. But this time, we devise our competitors as our customers. And I can tell you there's a great data point. We have $1.3 billion under contract in the long-term material supply agreements with our customers. So obviously you could imagine that amount of material going in and the pricing has agreed with the customers will turn into predominantly production devices for their customers. So we see, in general, I would say silicon carbide with the value offers is at the right spot. Now as competition increases, you'll probably have regular market dynamics coming in. But for us, it was more important to establish this point where the products offer real value to the customers in their applications.

On those long-term contracts, do you build in a degree of pricing declines over time? I know these contracts are take or pay? Or is it sort of a set pricing today and then that's the price for the 3- to 5-year agreement?

No, absolutely. I mean our customers have highly competent, great semiconductor customers, so is their purchasing department. So we do have price declines built into those agreements. And that also we have a number of cost reduction programs internally. We're running as hard as we can to reduce the cost of silicon carbide as much as possible. And here, really the background theme is we want to replace silicon with silicon carbide. So we have an inherent desire to do this. And also in those agreements, we allow our customers some flexibility for upside volumes and so on. But no, they're definitely -- they're driving the right behavior for the technology of those contracts.

An interesting question I was asked by an investor recently was what's the sort of split between the cost of materials versus the cost of the device. So if you're looking at $250 to $300 in content per vehicle, how much of that is purely based on the material side versus how much is that sort of added benefit on the device side?

Yes. I think we don't break that out at this point. So I'll have to pass on that unless Tyler has something to add, but yes.

No, I think, Amanda, it's a great question we get asked quite a bit, but because we're also -- we're a competitor on the device front, but also we consume a portion of the wafers that we make. We're somewhat selective about that. But I'd say this that I think that we see some opportunity as it relates to devices on the competitive front, just with the diameter shift that we're talking about from 150 to 200 because traditionally with the diameter shift, you're going to be able to come to the market at about a 30% to 40% lower price on that device just because of the 70% more surface area that you have to make chips out of. So I think the pricing dynamics are an interesting one for us, but as Cengiz says, we don't get into too much detail on them.

Great. That makes sense. I like how you just sort of pass that poly right back over. Switching off of the pricing side for a bit, let's talk about some of the market dynamics that we're seeing, right? I think there's sort of this interesting play in the market where you've talked about the total devices SAM being about $5 billion in 2024. So if you look at sort of Gartner numbers and your old numbers, they expect the market to be closer to about like a $2.2 billion SAM in 2024. Can you talk about sort of what's included in your numbers and why there's sort of that 2x difference between what industry is saying and what you've been saying?

Tyler, maybe you want to take a swing at that?

Yes, sure. Yes, I think, Amanda, there's a couple of ways that we kind of come out of the market opportunity. We do a couple of different things. A, we look at what Cengiz is doing on the material side of the business and what our customers are expecting us to deliver in the way of wafers by the end of '24. Then at the same time, we look at the device opportunity pipeline and we kind of say to ourselves, okay, what's real in that pipeline? And how is that breaking down and rolling on? And I think that the way that we see the demand curve steepening for silicon carbide, gives us even greater conviction in terms of that split that you mentioned of devices seems to feel about right. Because if you look at market share and what we've all talked about, we've said that we expect to be about $900 million in devices by the end of '24. And if you look at our 2 largest competitors in devices, ST and Infineon, they've also mentioned that they expect to be around $1 billion in devices at around that same time, which would then lead you to believe that we're all probably gunning for market share in the high teens to low 20s, which would then you start to roll that up and you throw a few more people in there, that gets you more closer to the number that we've talked about from a market opportunity. It's hard for me to speak to. I've seen those data points, too, but we try and triangulate from multiple sources to get to that number, and that's why we feel pretty good about that.

Correct. You've also announced quite a bit of design wins over the last 4 quarters and it's about $3 billion in design wins over the last year with the majority being in automotive. Let's talk a little bit about what those opportunities are outside of automotive that you've been gaining and the growth trajectory there versus auto, which we know is sort of this 3- to 4-year horizon before those devices can convert?

Yes. So the 2 -- well, there are multiple sectors in there. So we have an RF business that serves the telecom and A&D, aerospace and defense opportunities. So that's part of that number. But also in the power side, there are very strong market segments, industrial power applications as well as the energy segment. And these 2 segments, of course, visibilities are going to be different than the automotive EV markets. But from a value proposition perspective, they were the first ones to adopt silicon carbide. There were numerous industrial applications that we went into. The same in the energy side, whether its sole inverters or on the industrial side, server power supplies and so on. So again, it kind of goes back to the value proposition of silicon carbide being really strong in these applications. But it's -- if you look at the number of customers in those markets, there are a couple of zeros next to the number versus the EV. So what we'll see there, I think, is a steady progression of growth for silicon carbide. We're absolutely very sure of the value that we bring in to those applications. But visibilities will be quite different than the EV side of it in terms of predicting where they are. But I would say they're very, very strong markets for silicon carbide.

When we look at sort of this $3 billion that you've won over the last couple of quarters. Is there sort of an expectation of a percentage that actually does get converted over more percentage that gets -- that's lost in the interim? Or do you expect to convert this full $3 billion?

Certainly in the typical description of this, you saw the pipeline then you go into design-ins and design wins. There will be new ones coming in and we will not win all of them. I think from in terms of conversion, as Tyler mentioned, for now, we're going to stick to the numbers that we have put out for 2024 in terms of our revenue outlook. And then hopefully, later on in this year, when we have our Investor Day, if there's an update, we will present that at that time.

Yes. I'd say this, Amanda. I think -- there's a level of stickiness in the design ins as it relates to automotive because you've already gone through a couple of years of tire-kicking on the performance of the product, but there will potentially be some leakage in that number -- in that $3 billion. But we know automotive is pretty sticky. The reasons why things would fall out would be they don't produce the product. There's a change in the spec. But it is a good indicator of what future revenue potentially can be. And I think the other thing that we've talked about is there's about $100 million of unmet demand that we talked about on our last call, just because we don't have the capacity. We're going to try and bring some additional capacity online, but it's hard at this juncture to kind of say what we think we can get after. And as Cengiz points out, we'll probably have an Investor Day before the end of the year, and we'll give everyone an updated outlook.

The next sort of hot topic question I get asked a lot is on the margins, right? There's been some margin impact the last 2 quarters, like you just mentioned some capacity issues on the devices side to potential loss revenue because you can't meet that. And building out devices in North Carolina is obviously more expensive. When you look at sort of what's happening near term, coupled with the shift to 200-millimeter at Mohawk Valley versus the original plans at 150, what is your -- what do you view as your sort of ability to reach the existing market targets that you have out in your 2024 model?

Yes. Listen, I think -- we've been talking about this a lot in the last several weeks. And what Neill said on the call is essentially, we think we're going to be in the mid-30s towards the back half of this fiscal year. We feel like what we've seen in Q4 -- fiscal Q4 '21 and a little bit now in Q1 of '22, represents kind of the trough and then we expect things to improve throughout the remainder of the year. Next fiscal year, which our fiscal starts in the summer in July, Mohawk Valley starts to come online. You're not going to see a huge step function improvement, but it will start to put us on a better trajectory. And at this point, where we sit, just as we talked about on the call, Mohawk Valley wafer costs are going to be 50% lower than they are in Durham. And cycle times are going to be about 50% better than what we can do in North Carolina. And then there's a 20- to 30-point lift on yield. So we think those factors, okay, contribute to our confidence of why we think we can get to the low 50s by 2024. And certainly understand it's a big move in a short amount of time, but we still think we're on that trajectory.

Then you -- when we were talking before the call started, you had mentioned that you were just up at the Mohawk Valley facility. Can you just talk a little bit about how that's progressing and sort of what you're seeing there and when the expectations are that you can start production?

Yes. Maybe I'll take that and ask Tyler to add. Yes, it was a very impressive visit at least from my perspective. I think all the visitors share the same motion there. The fact there is -- I mean, there's -- as soon as you get up to it, you can see the scale is absolutely there. And the technology that's gone into it in terms of automation and the method of technology is just fantastic. I mean, we've mentioned this a few times in North Carolina, fabs are not at the standards that we would want them or the size that we would want them to be. And -- but the Mohawk Valley is absolutely there. It will be, I think, one of a few fabs that is running 200-millimeter in a fully automated scheme. And we were also able to go take a demo of the automation that's going to go into the factory. In terms of human interactions with the wafers, this is a major step towards not touching the wafers. It's quite impressive the speed and scale at which the fact that it will run. So yes, I think the team has done a fantastic job over the last 18 months, and we're getting closer to opening it in early 2022. So -- And obviously, also from the North Carolina side, we have to supply 200 millimeters of fabs and wafers into this factory, and that activity is also going on track. So I don't know Tyler, maybe have a few other observations.

Yes. I think, Amanda, what's interesting is that you would have to go into probably a 300-millimeter silicon fab to find the similar -- to find the same level of automation that we're bringing into this facility. And there's about 8 miles worth of overhead track that's being installed to move the wafers around. And as Cengiz has pointed out, we're touching wafers in Durham more than 10,000 times a day. And what he and I saw yesterday is that no one's going to touch a wafer. And the amount of manpower you're actually going to need in this new clean room compared to what we have in Durham every day is night and day. And so I think from our perspective, as you start to see this come to life, it once again, back to your question on gross margin and improved performance, just the sheer operating scale of what we're going to gain up in Utica and New York compared to what we're working with today gives us that great confidence. But it's certainly very impressive, and we certainly feel like we've got a nice blueprint for what we've built there. And as we think about expanding capacity this will certainly serve as a focal point for us to kind of continue to scale our own business.

And maybe, Tyler, one last point on that is, this factory will spill from green papers to do silicon carbide MOSFETs and diodes versus our Durham factory, obviously, the heritages and LED business. So that really shows to be able to design the factory exactly to build products that we intend to produce. And that's just a fantastic layout we got off there.

Yes. And for the team to do it in 18 months, I mean, we were pushing dirt about 18 months ago up there and to see where we're at and the teams yesterday were installing equipment in the clean room and we did see -- we talked about the automation. So I think the challenge would be anyone that wanted to build something like that starting today, just given the tightness in the supply chains and construction cost, it probably would not go as fast as we've gone in this period of time. So we feel pretty fortunate.

Before I jump over to competition, which I think is sort of the last hot topic, I do have a couple of investor questions, a little bit more on the technical side as well. So the first one is there's some innovation taking place in the cutting of silicon carbide pools with a thought that current cutting processes waste precious material. Can you talk a little bit about Cree's capability in cutting and if there's room for improvement and what the road map in cutting it?

Yes. So I'll start with saying we typically don't talk much about our internal processes. So apologies there. With that said, maybe -- I can tell you, we have a team that is constantly looking at what's available in terms of different technologies that we can bring in and reflect a benefit to our customers. But at this point, we probably won't be able to get into any of the details that you're asking for internally. I think maybe the best predictor of what we make is again, you look at our long-term agreements and the costs, we can pricing we can offer to our customers and the volume that goes along with it. So -- and behind that, every year, we look at all sorts of different technologies and try to pick the best ones and improve them and bringing product that offers value. So...

And Amanda, I think it's fair to say, and Cengiz can back me up because he's been doing this longer than I have. We're not technology -- we're a little technology agnostic, meaning that we're not completely married to the way that we do things. We're constantly kicking the tires and looking at what others are doing in the marketplace, we feel good about our approach today, but that doesn't mean that we won't change something. So I think although we don't get into great detail of what we're up to, we are constantly testing external developments against our own internal capabilities to ensure that we're as Cengiz points out, best positioned to deliver both the materials and devices.

The next question I have here is on again, another tech question. I think this one you might be able to answer, but we'll see. Could you review the time line of moving from 4-inch to 6-inch and what some of the challenges were you faced in that transition? And if you were able to learn from those and apply that to your 8-inch transition now? And are you approaching 8 inch, maybe a little bit more confidence?

Certainly, our wafer transitions always create a good wealth of knowledge for the next one. So we started from 1-inch wafers to 2 to 3 to 4 to 6. Certainly, as the crystal size gets larger, you do get additional challenges. I think you're dealing with larger masses, larger -- more energy and so on. So answer to your first question is absolutely. I mean, in fact, those learnings we've had over the last 32 years, they are incredibly important, going to 8-inch substrates or crystals and wafers. And -- in terms of -- but here, obviously, we went through a more accelerated time frame, and that was really a combination of previous knowledge. We have a very strong team in place. And also, we put a very adequate capacity in place for our R&D people to do their jobs. Now 8-inch is, of course, a little more challenging in the sense that the wafers will be thicker than 6-inch wafers. So that means you have to make more crystal to get same number of wafers out. But I would say the team has done fantastic up to this point. And the quality of the wafers that we're getting and also to following epitaxial processes, they're absolutely far with what we've seen in the 6-inch side of the business.

Next question I have is Applied Materials recently discussed new equipment, specifically tailored to silicon carbide. Do you think this lowers the barrier of entry with your competition?

Yes. So I think if you look at production scheme for silicon carbide, there is really, I think, 2, perhaps 3 areas. The crystal growth and wafering side of the business, obviously, there is no standard equipments. Every company makes their own a little bit of a black box, and that's competitively is one of the great spots that we have. And then you get into epitaxy where there are epitaxial platforms you can buy, but then there's a fair amount of internal work that needs to go into. Then you come to the device fabrication side. Here, if you look at the equipment that is used for device fabrication roughly, probably of the processes, 80%, 90% is very similar to silicon industry. And there are a few areas where you need to take maybe equipment that is designed for silicon and you really need to work on make the silicon carbide process work. So I would say maybe, yes, at some level, it gets a little bit easier for the next company to make silicon carbide devices. But in terms of fab equipment plus or minus on the units, people have access to similar companies and similar technologies. I think there is still a little bit of internal work to be done because silicon carbide is not silicon. But I wouldn't think it is a -- we actually welcome to, I think, the activities in the market because, again, more people making silicon carbide versus silicon that actually works for us for sure, the pie gets bigger for silicon carbide, so -- but not a particular concern on that front.

Yes. And I think, Amanda, we were flattered by some of the commentary by Applied Materials in terms of our partnership and the fact that we are working together on the 200-millimeter technology because ultimately, it benefits, as Cengiz said, not only us, but the broader industry as we kind of make this diameter shift and people will move to 200 millimeters. So we're encouraged. We actually see it as a strong development for us in our own business but for the broader industry. So we feel good about that.

Given some of the semi-supply shortages and some of the tightness even in the equipment market, have you been having any difficulty in kind of building out the Mohawk Valley fab? Or are you getting able to source all the equipment that you need today?

No. I think as far as I know and Tyler can correct me, the timing was really the set in this area was great when we announced the fab. So we started a little bit earlier than when the supply challenges started. It's still -- I think the market is quite tight. It requires someone's attention on getting equipment in, but we're working with our partners there and at least I'm not aware of a particular road back there.

Yes, I'd say this, Amanda, I think we were just -- we were lucky. I think given we announced the expansion in May of 2019 and started work on that and started placing orders for equipment. And we know kind of where we sit today, supply is tight for 200-millimeter equipment, and it's going to require some thoughtfulness. And that's why we're paying very close attention to the demand curve and how things are trending there because that will give us kind of an early indicator of how much capacity we need to start bringing on maybe sooner than we originally thought. So we're keeping a close eye on it.

All right. Let's dive back into the hot topics. Jumping over to competition. There's obviously been some concerns in the market with competition number with materials and on the devices side, you have material suppliers like 2 Six and Global Wafers, expanded capacity and product offerings. We had 2 Six yesterday talking about -- they don't have devices in the market today, but they are bringing them and they will have them in the market soon. But then also from key customers like ON and STM and Infineon building out their own silicon carbide devices. You have the GTAT announcement that happened a week or 2 ago. And there's also concerns from China about ramping up capacity and potentially undercutting the market. So there's a lot of threat happening here. You just mentioned that you view competition as good that the pie becomes larger when there's more competition in the market. But how are you really viewing these competitive threats as you move forward over the next couple of years?

Yes. So I mean, our -- we have I would say the #1 view on this is we try to make our own development time lines and cost roadmaps and so on as aggressive as we can. So we're running as hard as we can. That's probably the best protection against what could happen. I think we mentioned this to you other times, we're not surprised at the number of announcements and activities that we see in silicon carbide. It is a large part. It is absolutely a great value proposition in all the markets that it's serving. So it definitely doesn't surprise us that there are more players coming in. Yes. With all that said, we've been at it for a long time, more than 3 decades. We've started this with tiny, tiny wafers, maybe 10 millimeters in size. And here we are ramping up with 200 millimeters to the fab today. So it does take some cycles of learning. And I think at our Investor Day, we pointed this out to while we do respect the competition, and we'll always keep an eye on it. When we looked at the number of wafers that the world has -- had produced at that time, I think Cree mostly had 96.5% of it. So that just gives you a large number of learning cycles. And I'll tell you, in the silicon carbide world, it's not just throwing money at it or capacity at it, you really need to get those cycles of learning under the belt to make sure your product is high quality and it meets the cost targets and also you can produce enough offer to your customers. So yes, I mean, we're absolutely keeping an eye on it for sure, but one also an interesting, I think, driving for us it is electric vehicles will drive a significant portion of the volume for silicon carbide in devices and also materials. And if you look at that particular application and how sensitive they are to being able to hit the quality metrics and also on-time delivery and volume, it is a tall order, I mean. So again, looking at our pipeline of design and looking at our long-term agreements, today, we feel pretty good about where we are in the market, but we're absolutely not resting. So we say this and then we go back to work and try to do it better.

Yes. I mean, we just came off of a record quarter for design-ins with more than $1 billion of design-in and one of which was with a major global OEM. But Greg -- the way that Greg kind of leads the team, there's just -- we're not spiking the ball in the end zone because we know that every day, our competitors are making progress with their own internal capabilities that we're competing on the device space, and we're a newer entrant, right? When we get into a competitive pitch with a global automotive company, we have the shortest cycle of -- shortest time span of serving that market. So we know that we've got to earn our keep -- we feel like we've been doing well. We feel good, maybe punching above our weight a little bit on the design-ins, which is great. But we also know, as Cengiz is pointing out, we've got to keep a very close eye on the market, and we have to be extremely thoughtful because there's a level of customer centricity that's coming to the market because customers are no longer just asking about price and technical capability. The bigger concern at this moment is assurance of supply. The stock out on silicon has created great concern. And if you're a CEO at a global automotive company and you're about to move your off of an internal combustion engine platform to an electrified drivetrain, one of the core -- one of the key essentials is your inverter technology, and we make devices that go into that. So it's really interesting in the last year how the nature of the conversation really starts with. Do you have the capacity to service my need as I start to bring models to market? So it's just an interesting dynamic.

I think the expansion of the agreement also with STM last quarter was sort of this positive sign that even despite increased competition and companies like STM were talking about going to 40% internal capacity, that still shows that they're really committed to continuing to grow with Cree. How solid are these long-term agreements? And do you view continued opportunities to expand on them, either with other customers in the market or continuing a long trajectory with companies like STM.

Yes, absolutely. And you're right, they have some public comments on internal capabilities. And I think from our perspective, that just validates how big the market is going to be in terms of our relationship with particularly with STM or Nextag, having these LTAs established gives us a really fantastic platform to share information, share future roadmaps, whether it's about volume or whether it's about what we can do on pricing and so on. I would say in the past 3 years, we found a new and a very productive platform to interact with these customers. And clearly, as EV drives some of this volume, the visibility to what is required is a good thing because it flows back to us in terms of time lines for ramps and so on. So I think we absolutely are -- we have a number of these 4 or 5 big ones, long-term agreements. And I think the information exchange inside those agreements are fantastic. And in terms of other customers, yes, if the volume warrants, if that's a great way to interact with the customers because silicon carbide demand, as we talked about, it is steepen, it is really critical to know what the volume expectations are so we can put the capacity in place. I think we've kind of over the last 3, 4 years, proven that. If we know what's the required capacity to put it in place, we can deliver the pricing that we promised. We can deliver the volume and the quality that we promised. But yes, it's just a great platform in terms of exchange of really important business information between the companies.

The last question I have is on sort of the revenue split today. So if you look at revenue split between materials, power devices, RF, what does that look like today? And where do you see the opportunities over the next 3 to 5 years?

I think on the revenue spread, obviously, as the industry is getting ready for ramps and getting signed into different device applications. We've certainly seen a very strong demand on the material side of the business. It's evident by the announcements that we make. I think as we progress through the design pipelines and so on, we do see the '24, '25 time frame from our business perspective. We'll be heavier on the device side, which is quite expected, I think, looking at the size of the market and how the value is divided up between those technologies. But yes, obviously, we're probably entering into some of the transition time frame on this. And it really rhymes well with what's happening in the industry. I don't know, Tyler, is that -- would you add anything?

I think, Amanda, the way that people should think about it as Cengiz says, we're transitioning. Device revenue is moving ahead of materials revenue and it will probably -- materials will continue to grow. It's -- but it won't grow at the same rate that we're going to see devices move. And that's why we're kind of making the investments that we are at this point. But that $900 million of device revenue in the end of 2024, looks good based on current trajectory, but that still also means that there's going to be Materials revenue of about $600 million in that same window.

Perfect. I think we are just about out of time, Cengiz or Tyler, do you have any final thoughts you'd like to leave investors with?

Yes. I think we've talked about many of them, but for those who've been in the silicon carbide side of the business, it's a really exciting few years behind us. I mean the demand towards the products and the value we bring to the applications, it's clear now, and we're seeing an acceleration in the adoption rate. And on our side, whether it's our Mohawk device fab or whether it's the expansion we're having at our North Carolina sites for materials, we're trying to get ready for the demand and everything is shaping up really nicely, I think.

The only thing, Amanda, that I'll add to that is that we expect to announce a date for our Investor Day later this year, very, very soon. So keep an eye out for that. And if we can be of assistance to anyone that listening to the call today, they should reach out to us. But thank you, Amanda, for the time.

Perfect. Thank you so much, everyone. Have a great day.

Thank you.

Bye-bye.