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

Good morning, everyone. I'm Samik Chatterjee. And I have the pleasure of hosting Wolfspeed for the next session. Gregg Lowe, President and CEO; and Neill Reynolds, CFO.

Let me kick it off quickly just in the interest of time. Gregg, we can get into more detailed discussions later, but do want to sort of set the stage here for any new investors and overall sort of talking about silicon carbide. And why should investors really be sort of looking at silicon carbide as a disruptor? And why should they be interested in investing in it as such?

Well, thank you very much for participating today and being here. Silicon carbide is an alternative to silicon for power electronics. So silicon, obviously, has been behind power electronics and all the semiconductor industry for the last 5 decades, I guess. Silicon carbide is an alternative to that. It is substantially more efficient than silicon. In an electric vehicle, what that translates into is very simple. For the same amount of battery, your car will go 5% to 15% further using silicon carbide instead of silicon. Batteries are the most expensive thing in an electric vehicle. And so getting the most out of it, range, is a huge care about. So silicon carbide is more efficient than silicon. It translates into substantial benefits in an electric vehicle. It also -- those same benefits occur in industrial applications, in solar farms and server farms and things like that. You get substantially more use of your energy. And for many of our customers who have ESG priorities or carbon-neutral dates and things like that, silicon carbide actually helps them get there faster because they are using energy and using their energy much more efficiently.

Great. So one of the questions I get asked most often from investors is the competitive moat in silicon carbide, right? And you are a leader in substrates, you are trying to build a bigger presence in devices. And the question often coming up is, where is the competitive moat in the process? Going from like crystal growth to device manufacturing, where is it the highest? And what's driving your interest in the device market?

The silicon carbide technology has been at the core of our company since its founding. The company has traditionally had an LED business that was all based on silicon carbide substrates. So we are a pretty substantial leader in silicon carbide technology. We've got something north of 60% share of the fundamental crystal growth. There are several barriers to entry and moats, if you will, in this technology. One is it's an incredibly difficult technology to master. Growing silicon carbide crystals, crystals grow at 2,500 degrees C. That is approximately half the temperature of the sun. So this is an extremely harsh environment. The machines you use to grow silicon carbide crystals are custom built by us. And so there's not like a third party, you can just go buy a bunch of machines and set up your crystal growth. It grows at these high temperatures, and it also grows -- it can form into 1 of 200-plus different crystal structures, and 1 of them works. So you're trying to grow this very difficult thing to grow and you're growing in a very specific way. Once you've grown silicon carbide crystals, you now have the second-hardest material on earth, and you have to slice it into wafers, very thin wafers. And you have to do that. Doing that is also not for the faint of heart. So just this business itself has lots of barriers to entry. Now we've had a device business for a number of years, dozens of years. So we're not new to the device business, but it's definitely the area that is ramping up very, very rapidly for us. When we talk about our design opportunity pipeline, which now is north of $25 billion; or our device wins, design-ins that we get, these are all based on devices. Our last 2 quarters, we've had record design-ins of $1.6 billion. This is -- this $1.6 billion, by the way, is 60% higher than any previous quarter. So it's a pretty substantial amount of growth right now happening in silicon carbide. And I think there's basically 3 things happening in our industry, or to us. One is the adoption of electric vehicles, which is one of the prime drivers for silicon carbide. The adoption is happening faster and at a steeper ramp than anyone anticipated. The second thing is the adoption of silicon carbide in an electric vehicles is happening faster. In fact, it's almost complete conversion to silicon carbide. I've had several customers tell me that they're actually not quoting any more silicon solutions for electric vehicles. It's 100% silicon carbide. And these are big Tier 1s. And we've had big OEMs also say they're not interested in silicon anymore. So you've got the adoption of silicon carbide happening faster as well. And then the third thing that's happening is our design-in or design win rate is higher than we originally anticipated. And that's obviously a good thing for us.

Good. Gregg, one of the questions that I get on that front is, how should an investor be convinced that the market leadership that you have in substrates translates into leadership in devices? And you just mentioned that you've been in the devices market for a while as well. So as we think sort of go forward, is it more of still sort of a bunch of capabilities that you need to add? Or is it more of just driving the go-to-market, getting out to customers and driving essentially the ramp in revenues? How should we think about that?

Yes. I think I would say a couple of things. Well first off, when a customer decides whose device they're going to put into their inverter, whether it's a solar inverter or an inverter for an electric vehicle, they look at multiple different things. There's sort of a mosaic of things that the customers look at. They look at the quality of the device and how it performs in the application. And in this part of the evaluation, we always land in the top tier. So if there's 3 tiers, we're always in the top tier. Our devices generally perform very, very well compared to anybody else's in that -- in the application. They look at your understanding of the underlying technology, silicon carbide. And in this case, we're not in the top tier, we're the #1. We have the most amount of experience in silicon carbide and we're a very clear #1 in this regard. They look at your understanding of their application, how long have you been associated with automotive and so forth. Here, we're definitely in the second tier because our device competitors have 30 years of experience with those folks. And there are 2 things happening here. One is our way to rectify that situation is we're hiring people that have automotive experience and that know the customers and so forth, and so have that kind of connection. And that's actually been pretty easy for us to do. I think power electronic folks are very aware that the world is moving from silicon to silicon carbide. So our ability to attract talent that understand the customers has been very high. And I think we've moved from an unknown to somebody that is known, and we've kind of rectified that. But the second thing that's happened in this regard, where having all these years of experience with the suppliers has actually kind of been a bit of a disadvantage to those same suppliers over the last 2 years because of these silicon shortages. So those same suppliers that have known and worked with these companies for dozens of years have had supply challenges and shut down car lines and things like that. So that shiny apple isn't quite so shiny anymore. And then the last thing the customers look at. Well, they always look at pricing, so you need to be competitive. But the last thing that they look at that has changed over the last couple of years dramatically is your capacity and your underlying capacity for being able to supply to their needs. And so we've had OEMs, we've had Tier 1s come visit us, our factory in New York, our factories in North Carolina. And they want to see the capacity expansion plans that you have in place for silicon carbide. And when they come and visit and they see the world's largest silicon carbide fab going into production, cutting the ribbon last month, going into production this year, they see a substantial amount of capacity coming online. And I think what that all translates into is 2 record quarters in a row of design-ins. And so I think our Board Chair said it the best. We do all kinds of competitive analysis all the time. We definitely don't stand around just patting ourselves on the back. We work very, very hard every day to continue driving forward on the competitive side of things. But basically, customers are voting with their pocketbook, saying we're awarding you this program and we're awarding you that program and so forth. And having 2 quarters in a row of record design-ins is, I think, a pretty good testament to the moat we've built seems to be pretty good.

Yes, great. So I'll start with a few questions here. And for anyone on the webcast, I'll be honest, we don't need more questions. We have like 11 or 12 here. So no need sending anymore, and I think we'll have Neill busy here for the next 15, 20 minutes. So let me start with a few of these. You announced CapEx plans for $550 million for fiscal '23, which compares to, I think prior, the range was about $200 million, $300 million. What's the incremental $300 million of CapEx being spent on?

Go ahead.

Yes. So we've talked about a couple of different things as it relates to capacity expansion. But when you look at the outlook that we've kind of talked about for the remainder or as you get into fiscal 2023, as you look at calendar 2022, going into '23 for us. That's really baked on seeing this higher demand curve, this higher demand profile, Gregg talked about the design-ins, and affecting that. So we did a convertible offering back in January to increase the cash amount. And our intention there was, as we saw the demand profile steepening, that we would put that capital to work, and that's exactly what we're doing. So you can think about the current footprint that we're working on, expanding faster the capital expenditures to meet higher demand. We've talked about this upward pressure on our model, not just in '24, '25, '26, but that's right in front of us now. So we're going to put that to work to expand Mohawk Valley, our new fab in upstate New York, expand that faster, but also expand our materials capacity faster to meet that demand. So essentially, what we're doing, within reason, as fast as we can do that, under the kind of technical constraints we would have in bringing up capacity with this type of technology, but bring that on as fast as possible to meet that steepening demand.

Yes. A follow-up here. And bear with me, this is a long one. Why wasn't there an increase to your 2024 to 2026 revenue targets commensurate to the pull-forward in CapEx? Should we be thinking about a pull-forward in revenue as well?

Yes. We've -- what we've described is we have upward pressure on our revenue projections for fiscal year '26. Fiscal year '26 revenue outlook that we gave in our last Investor Day was $2.1 billion, $1.4 billion of which was device revenue. We've got upward pressure on that $2.1 billion, and all of that upward pressure is on the device side of things. So we're seeing pretty substantial upward pressure on that. We're running through the modeling on that. And I would anticipate that later this year, we would come out with here's what that now looks like and here's the corresponding CapEx associated with it.

Okay. Great. So maybe a bit more medium term here. You've also talked about requiring a new fab. Just help us think about sort of the magnitude of the investment that will be required for that. What is the time line? Sort of like more particularly relative to Mohawk, what does the time line look like there in terms of starting something that's more greenfield and getting up and running?

First of all, if you look at Mohawk Valley in terms of how this has played out, what we're talking about now is expanding that as fast as we can. So with the higher amount of demand that we have, if you look at Mohawk Valley, for all intent and purpose, we've got very good line of sight to seeing that fully utilized over that time frame. So -- and again, it will be more of a timing of bringing on capacity. And the model that we've built around Mohawk Valley is to leverage our capability on 200-millimeter wafers and then filling the fab, building up our materials capability to have these 200-millimeter wafers and then fill Mohawk Valley with those as fast as we can. As we think about a second fab, now Mohawk Valley took about 2 years to go from, as Gregg says, essentially a field of mud to actually running wafers in there today. As we look forward, it would likely look like that would take longer today given some of the supply chain challenges. So you want to think about 3 years. Given the fact that the demand has increased in such a way that Mohawk Valley would essentially or potentially be utilized fully out in that time frame, as we talk to customers, we have to have capacity on the back end of that. So you're talking about kind of that maybe 2027 time frame, we'd have to have additional capacity outside of Mohawk Valley for customers to have in that type of time frame. And if we look from an investment standpoint, I think we've got that road map pretty well laid out. We've got a lot of confidence in what we're seeing in terms of the 200-millimeter technology and running that through a highly automated fab. And we would just take that blueprint that we've kind of discussed with Mohawk Valley and then we would take it over and we would do the same thing in terms of both materials and fab going forward, except as we've talked about, it would have to be even bigger. And that's fully related to the size of the demand curve and the change that Gregg has just kind of talked about.

And we're really confident in the return on investment for building that fab in terms of the revenue outlook that we would anticipate for the dollars of investment that we put in for the wafer fab itself. Substantially better than what you'd normally have in the semiconductor industry. So traditionally, it'd be 3 to 4x annual revenue for capacity expansion. We're more in the 1 to 1.5x revenue per dollar of CapEx input. So we feel pretty good about that. And then finally, we're very actively engaged with a number of governments around the world about getting support and funding for that activity. And so a lot of this will depend on getting that funding in place. And so depending on U.S. CHIPS Act and European IPSE process and so forth. We're engaged across the world in a number of different activities there.

So going back to the question and following up here, Neill. The reason I asked that is, so the increase in the CapEx guidance for fiscal '23 does not -- just to clarify, does not include anything relative to a new fab at this point, right?

That's right. That's under their current footprint. And it doesn't really change the revenue trajectory in the short term either because it will take time for that capacity to effect. So you want to be thinking outside of '23 at least in terms of effect of the additional capital.

Okay. And maybe one additional thing just from a clarification standpoint because Neill talked about expansion of the Mohawk Valley fab. What we're really talking about is fitting out of the fab. The building is a very sizable building. And we've got a partition halfway through the fab where some of the clean room space is not yet occupied. So what we're talking about is tearing down that partition and fitting out the fab to 100% over this period of time.

Yes. okay. Now in terms the -- you talked about the increase in CapEx, so the net CapEx bases. I think what the math investors are doing is on gross CapEx that you're spending, which is up slightly higher just because of the change in timing on subsidies, I believe. That comes to about $400 million. You just mentioned 1 to 1.5 being the sort of intensity in terms of CapEx -- translation of CapEx to revenue. I think the question we're getting a lot is, if that's the gross CapEx increase, should we be applying a similar multiplier in terms of what your revenue projections should be? Or is it a higher number because the 1 to 1.5 includes building like brick-and-mortar cost as well, right?

It does. But I think the -- it includes the brick-and-mortar costs, of course. But I think the blueprint for this is, as you look at Mohawk Valley is, let's take this, use that as an example. So Mohawk Valley, in order to -- we talked about a $1 billion capital expansion, I think, when we built the factory originally. So let's just kind of look at it in terms of the fab. That included $0.5 billion of incentives from the State of New York. So the gross spend was roughly $1.5 billion. To fit it out completely would be closer, on a gross basis, to say round numbers, $2 billion. And then you back off the incentives for about $500 million. So that gets you to about $1.5 billion net spend. On a revenue basis, as Gregg was kind of alluding to, Mohawk Valley can do between $1.5 billion to $2 billion of revenue. So the CapEx to revenue ratio and the return is very, very good. Now when you add on materials to that, of course, it creeps up a bit in terms of what you need to invest. So I think the blueprint for how to create return models by building these fabs. I think we've got a really nice way of approaching this. And as you start to think about a second fab, it would take on very much the same approach in terms of return. Now it would be bigger. We talked about that as well. The demand that we're seeing would indicate that we'd have to do something even larger than Mohawk Valley. But you can think about it in the same type of return model as what we've done there.

And that second fab would be, as Neill said, bigger than our fab in New York. So the fab in New York is the world's largest silicon carbide fab. It would become the world's second-largest silicon carbide fab. But the new fab would also be same kind of thinking of partitioned fit-out over a period of time as the demand continues to materialize.

Last one on CapEx, I promise, here. What's the ongoing capital intensity of the business outside of build-outs of capacity?

Well, I would say at this point, it's hard to say because I think we just talked about a new fab. I think we'll be in investment mode for a while. As you think about the moving pieces related to this. Obviously, we've got $1.3 billion of cash on the balance sheet or so today with the convertible that we've just done. So I think we're in great shape to leverage some of the money we've raised to put that to work to expand capacity. And then as you move forward, we'll continue to do that. So there will be a change, I think, in the model versus what we projected before because we'll have to kind of -- as we start to generate operating cash flow, and we've got a good light of sight to that I think in the next 12 months or so, you have to start reinvesting that back into the business as well. So you can really think about what we've done over the last 2 or 3 years in terms of investing ahead of demand and really taking that model and making it bigger. Now the results that we're seeing on the 200-millimeter wafers, the results we're seeing in the fab, are really terrific so far. So I think we've got the right blueprint to pull this all together and then leverage it again as we get into the next phase of that expansion we just talked about.

Okay. Great. So let me come back here to the long-term story a bit. You disclosed at the Analyst Day addressable market -- automotive addressable market of $4.6 billion, and the content per vehicle that it was contingent on is about $300. So how CPV tracking, content per vehicle, tracking relative to your expectation? How are you thinking about sort of upside to that? What are you seeing in terms of vehicle architectures that can drive that number higher?

I think on the content per vehicle, you're in the right ZIP code. So that's what we talked about, and that's what we generally model. I think what's happening is the adoption rate of electric vehicles is taking off faster than we anticipated and the adoption rate of silicon carbide inside of electric vehicles is substantially different from what we were anticipating. So I think that what -- that all translates into is the total addressable market is just a lot bigger than we originally expected because of that. The other thing that's interesting is that industrial customers are switching to silicon carbide pretty significantly. We had roughly 30 customers, I think, it was plus or minus a little bit, visit our Mohawk Valley fab about 2 months ago or so. And this came at the invitation of our partner, Aero. So they brought a bunch of their top-tier customers, and then Aero was with us as well visiting. I had a chance to meet with a lot of those different companies, and they make everything from solid-state circuit breakers to other industrial-type products. And one of the things driving their transition is this improved efficiency and this notion of they as a company have ESG goals and carbon-neutral dates and things like that, and they see this as a real good opportunity to help accelerate their plans in this regard. But the other thing is they can't get silicon. So they're looking at the situation and saying, "Okay. Supply shortage, I have a supply shortage of silicon. Instead of designing in some other silicon guy that maybe has some product, why not use this as an opportunity to redesign the system and go to silicon carbide? And they all visited that fab as well and saw for their own eyes, things are actually -- it does exist and there's new capacity coming online. And they view it as why not take this as an opportunity to redesign their systems? Go to silicon carbide, have more efficient systems and have access to the world's largest supply coming online. And so it's very -- the timing is very fortuitous for us in terms of this kind of thinking.

Gregg, you're referring to this as a sort of the broader industrial adoption as well. But I wanted to see if you can break it out in terms of like within -- because industrial is quite broad. Like which sort of verticals are you seeing more adoption? And outside of automotive, where are the biggest interest company areas?

The -- I would say this is very similar to the analog kind of market, which I have a lot of experience with, where there's not one application outside of automotive that's driving any particular thing. It's hundreds of different applications. Some of them are going to be 10,000 units a year and some are going to be 5,000 and some are going to be 1 million. They're just all over the place in terms of applications. So that's actually a really good thing, that's a highly fragmented customer base. And that generally is really good for a supplier in terms of how you deal with something like that. It's tough from an investor standpoint because investors are always saying, "Well, of all these thousands of customers, which one is the most important?" And there really isn't one because it's really just a proliferation of product across a whole bunch of different applications. We're designed into electric watercraft. We're designed into solid-state circuit breakers. We're designed into portable storage devices that are meant for sort of lumberjacks way in the middle of nowhere and they need some kind of generator, and they want that generator to last as long as possible, and that means efficient and silicon carbide. So we're designed into industrial mixer products, industrial cooktops. Just a whole bunch of different applications. And so that is the beauty of the industrial market, is that you can't just point to any one thing and say it's all dependent on this. That's also the bane of it because you all want to know which one thing. But I'll take a fragmented market any day of the week.

Let's open it up to the audience. Anyone in the room with a question? Yes. You can go ahead and...

[ Is there a component or part of the process that's coming from China and subject to lockdown? And I'm wondering what your strategy is to replace them if that's the case. ]

Yes, so -- sorry, go ahead.

Gregg, sorry. We'll need to repeat the question. Sorry. Is there a -- so the question is, is there a component coming from China? And if there's a strategy to sort of navigate that...

In terms of silicon carbide crystal growth and our wafer process and et cetera, all of that is done in the west and actually in the United States at this point. So we grow all of that here. In terms of raw materials and things like that, there's limited dependency there. The other -- we have very good relationships with customers in China, especially the electric car companies. But we've also been a little bit realistic on our conversion of opportunity into revenue in China in the out years, just with the anticipation that the trade tensions and the tensions in general across -- between the U.S. and China is probably going to stick around for longer than we anticipated. It's already been around a lot longer than I originally anticipated. So we've just attenuated our revenue aspirations out in time, just thinking maybe it doesn't turn into the amount of revenue that everyone is anticipating. In fact, in the out years, we're modeling that between 10% and 15% of our revenue in the out years would be China-based. And typical companies, that's more of a 40%, 45% number. So we've just kind of attenuated that back.

Please go ahead. No, there's no mic. Yes, sorry, go. There is not. Yes.

[ How do you see the industry evolving for materials? A lot of OEMs are trying to make their own. And where do you see in like 3, 4, 5 years? Like do you think the amount of will with inflation or... ]

Yes. Do you want to repeat it?

yes. So the question is, how do we see -- how does Wolfspeed see the materials market evolving? And is there more vertical integration over the next few years?

Most of our materials customers are companies making devices, and they're substantially all trying to build their own internal materials business. I think that makes a lot of sense. I think strategically, it's a smart move for them. The supply of -- the cost of a MOSFET is heavily dependent on the cost of the underlying materials. So I think that strategically makes sense. So no issue there. And we've actually, in our models for our revenue outlook in fiscal '26, assume that they're going to be successful in doing that. So we have no assumption that nobody can get there or anything like that. I think what most likely they'll find is that it's probably a little bit more challenging than they anticipate. This material grows at substantially high temperatures. You have to form it into one crystal structure. You have to have no defects in there of any size. You have to be able to slice it. You have to be able to polish it. You have to be able to do epitaxy on it. All of this stuff is stuff that we have mastered over the 35 years. And most of these companies are -- have relatively small exposure to actually the materials side of the business. So I think it makes sense, what they're trying to do. I think strategically, it's the smart move. I would do the exact same thing. I think they'll find it's probably a little bit more challenging than they're anticipating. But our model assumes that they're going to be successful.

[ Could you just speak to the competitive... ]

Yes. So the question is on the competitive landscape in devices.

Yes. So I'll probably refrain from getting into a lot of detail on that. We respect all of these companies. They're good companies. They're very good customers of ours in terms of the materials business. And just on that point, we treat them as such. So we don't grow a bunch of silicon carbide and take sort of top-shelf stuff and pull it in-house and give them the remains. We don't do that. We work really hard with their technical community to make sure that the materials that we're supplying them work in their applications and work in their manufacturing flows and things like that. And they've been very close partners with us. So I think what's happening is the world is transitioning from silicon to silicon carbide, which is dramatically expanding the opportunity for everybody. So the traditional constraint of, gosh, I've got one of my competitors actually as my supplier is less of a [ input ] these days because there's just so much growth out there, that everybody can basically show pretty substantial growth and not worry about that at this point. While at the same time, they're all attempting to build their own materials business. And again, I applaud them for that. I think that makes a lot of sense.

[ Is the China... ]

Yes. And then in terms of China, China has been trying to get into the semiconductor industry for decades. And I think the model that typically is used or the game plan that -- or the playbook that is typically used is take a bunch of money and throw CapEx at it, build out a huge amount of capacity, and then sell it. And that model doesn't work in silicon carbide because you can't buy silicon carbide machines, you have to make them yourselves. And to make a machine, you need to know how to grow silicon carbide crystal. And you can't grow the crystals unless you have a machine, and you can't make this machine unless you're growing the crystals. So the start-up process for doing this is long, iterative and expensive. And that generally isn't the playbook that is used in China in terms of going after a business. Typically, it's take a bunch of CapEx, buy a bunch of equipment, fill out a factory, run it very well and then drive the growth that way. And that just isn't available in this space.

Please go ahead. Yes.

How long will you take to run the 8-inch wafer on the same production yield as the 6-inch wafer?

Okay. you want to? You're good with repeating that one?

Go ahead and answer it. Yes.

Okay. So we are running -- we have been running 8-inch wafers in a pilot line at the State University of New York and Albany. We were -- we acquired this pilot line when we agreed to build our factory in New York. That pilot line was converted well over a year ago from 150-millimeter to 200-millimeter or 8-inch wafers. We've been running wafers for over a year in that pilot line and the yields are very good. So we're not going to do exactly this, but think about this kind of symbolically. So we're building up the factory and we're converting the pilot line from 150-millimeter to 200-millimeter. Once the factory is done, we sort of lift the pilot line and put it into the factory. It didn't work exactly that way because there's some different machines and a lot more automation and so forth. But in terms of the process itself, we're very comfortable running 200-millimeter wafers in a pilot line, getting yields that we were very happy with. So we're not actually anticipating that the ramp-up of the fab will meet substantial obstacles. There'll be a million little things that go wrong that we're going to need to fix as we ramp up the factory. But we're not anticipating some giant problem with the factory because we've already been running 200-millimeter wafers and running MOSFETs and creating MOSFETs on 200-millimeter wafers.

And that's why we've got a lot of confidence in the operating model as you go out in time to start to expand capacity because we really feel confident with the pilot line results, the -- what we've done on 200-millimeter. And now it's getting into scale. So will we have growing pains? Probably. But in terms of from a technology standpoint, I think we've got a very good line of sight to creating this type of capacity corridor.

Great. We've run out of time here. So thank you, everyone. Thank you, Gregg and Neill, thank you.

Thank you. Thank you for your time.