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

200 of them.

All right, 100% will be corrected on that happily. So -- like I believe the technical term is a cluster and so -- of things that could go wrong for growing this process. And you guys have demonstrated a very consistent level of market share in terms of your ability to grow the material and actually manage the material into wafers, right? Because there's a whole another level of complexity as you make those services where they need to be. And so I guess, just even before some of this wafer size and epi layers, like it seems like there's an awful lot going on in terms of how you grow the ingots and then how you wafer them. And so I'm wondering if you can talk about that and some of the competitive advantages around that, that really translate into better cost structure, better yield downstream from those processes.

Sure. So to your first point about the crystal structure. So there's 200-something different, what's called polytypes, different crystal structures for silicon carbide. And there's very, very little that separates them thermodynamically from a -- it's just about as easy to get 1 crystal structure as another like you don't really separate them with [ temp ] or pressure or anything. So one of the common problems is you'll get a polytype inclusion in the crystal. So what's that? That's an area maybe you were growing 4H silicon carbide, the one we want, and you'll get an inclusion of 6H carbide or 15R, which is around the neutral crystal structure. Any device on there is not going to work. And there's usually a large stress field around those defects and devices even around that, even if they're not on that polyblock, might not yield. So it's very easy to get those polycrystalline -- or excuse me, polytype Inclusions in your crystals. So you have to learn how to manage that. Even if you don't have those, there's a number of what I would call, killer defects in silicon carbide that will really nuke your device yield. The #1 is called the micropipe, which if you really want to have fun, it's the open core of a superscrew dislocation, not that anyone cares. It's a hole in the wafer. And -- the device will fail. So it's a yield killer. It's not a latent failure, it's an immediate fail. So that reduces your yield. So you've got to get rid of micropipes. After that one, you got to worry about things like screw dislocations which is a type of defect, basal plane dislocations. So you've got to get all these crystalline defects down after you've solved those other 2 really macro problems, you've got to get really low defect entities in order to get good yield and reliability on your devices, your MOSFET. And a lot of these things is like pushing on a balloon. Like I can do things that will make polytype inclusions better, but it increases defect densities, et cetera. So it's managing all those kind of competing processes. And one of the things you mentioned that is in no small part a challenge is what we call wafer shape. So you can do a lot of things in crystal growth to reduce defects or reduce polytype inclusions. And then when you cut a wafer, it'll turn into a potato chip. So you can't have that happen either because it's not usable. So just a lot of different things to manage, not to mention that silicon carbide is the third hardest material known to man. So wafering it, grinding it, polishing it is very difficult, and it's hard to get at that specular defect-free surface that you want for a semiconductor.

So this is a super exciting segue for me, because we've seen kind of a long cycle of folks that have been working with this material and trying to integrate them into the vehicles, right? And so like the complexity of the crystal growth into the wafering into the epi layer, into yields to get the performance and cost structure relative to some of the alternatives. As you look at this industry, this has been developing for a long time, to your point about 35 years of working on this, to a point where there's a fundamental shift in terms of power electronics and the efficiency of those power electronics that are helping enable what we think is a massive transformation around both the transportation fuel, but also the power and heating fuel market out there, right? Like this isn't just about EVs. This is also about renewables -- exactly, right? Like there's a whole other demand driver that's not getting discussed in many dialogues right now and the amount of efficiency that comes from silicon carbide. So as you guys look at kind of this long complex development of the technology and now moving into this point of inflection and the adoption cycle, I mean, I guess is through my coverage of Tesla, one of the things that happened was there was a real hardship for them around adopting silicon carbide into their vehicles from the manufacturers and their supply chain. Some of that's been -- kind of gone over the hump on 400-volt. And as you go to some of these higher voltages, there's another layer of efficiency that can be had. But I think as you guys look at the market and look at the complexity of the technology and your ability to leverage that expertise around quality and consistency into lower cost structure into this opportunity, can you talk a little bit about what's going on in the sales process around customer trust around the facilities, consistency of the units and what that really enables for them from a product design and a real cash flow downstream from you guys in terms of asset ownership and things like that?

Yes. So a couple of -- because we have several different businesses, but in terms of the materials business, we've been selling to these -- to our materials customers who couldn't be with us in the device market. We've been selling to most of these guys for 20 years or more so we have a very good relationship and a lot of trust there as -- because we've been the primary wafer supplier. And so I'd say that trust has come with experience and our ability to ramp, et cetera. In the device market, we're newer. We're not as well-known as, say, an Infineon or an [indiscernible] or ST. But we have been in this for quite some time. And I think where we've gotten a lot of trust from our device customers is the fact that we own the entire supply chain. And we are able to make progress and solve issues very quickly because we have everybody under one roof. So let's say there's an issue. Well, was it a fab issue, an epi issue, a crystal growth issue? We have everybody there to figure it out very quickly. And I'd say we're investing extremely heavily. So that plays, I think, very well with the OEMs that I think were kind of out in front in terms of the investment we've made in capacity. I can tell you, I think some of our silicon carbide competitors might have thought we were a little crazy when we announced Mohawk Valley back in 2019. And I think that's proven to be a very prescient decision that we made.

Yes. And can we talk about that? Because we just got some news over the weekend with the Inflation Reduction Act. And I don't know if you guys have had an opportunity to go through any sort of opportunities there. There's obviously hundreds of millions of dollars coming in the door to the company here over the next several quarters as you finish that facility from New York State. But are there additional benefits that you guys are really eyeing right now from an economics perspective by having that domestic facility here?

Well, yes, the CHIPS Act is what we're really targeting. We've been pretty open that we are going to need to build another fab, materials fab, et cetera, materials factory. So we, without a doubt, have an eye on the CHIPS act now that it's law. I'm very glad to see that happen. But you don't just go get in federal, you also have to work closely with state, local authorities, and we have been doing that as we plan for future expansion. So I'd say we're moving down that path and very excited to be able to have the potential to add CHIPS act money into that mix.

Let me just build on what John said, though. What we're really encouraged with is, since April when we announced the need-- we talked about the need for more capacity. And you look at the most recent Yole report, and they talk about the silicon carbide market is going to be capacity constrained until the end of this decade. So even with all the things that we're talking about here, there's still not going to be enough silicon carbide. So what's happening, though, is that these avenues of funding are opening up to us. So like John said, we've got federal and state funding here in the U.S. We've been talking with European officials about potentially what might be afforded to us out over there. Customers. We've got customers now that are willing to assign assurance of supply agreements where there's a tight exchange between the 2 of us on their forecast, some cash up front that allows us to align capacity based on their future needs, but there's also lots of other avenues that we're exploring for funding. So we feel right now while it did cause some people to kind of say, really, you're out of capacity in New York already? And when you look at the billions of dollars of design-ins that we've announced over the last several quarters, it does start to the math starts to work where you're running out of capacity in New York, our materials factory in Durham is probably at capacity, and we know that we need more 200-millimeter. So I think the takeaway for people that are listening today is that we're very encouraged with what we're seeing from a funding opportunity. So we do see a good line of sight that does get us to that next fab, that next materials factory. And I think, like John was saying, there's lots of levers that we can kind of pull on that. So I think that's what we're encouraged with.

That's awesome because -- and you're also making a really important point for me that I just want to emphasize with investors. As we go through a substantial amount of population growth and higher consumption growth and higher electricity use, the ability to leverage the basic materials that are going into all of these devices and have lower system losses is hugely important. And you guys are an enabler of efficiency. But also the scope and scale of the transformation that we're just getting started on is so substantial. It's very hard to understand right now and just in terms of the scale of what's going on, on the grid as well as through all these other applications. So with that in mind, you talked about the billions of dollars of design-ins and the customer activity, which has been, frankly, just pretty impressive here. And I know I'm a little late to the party on the upgrade. I wanted to see you guys get a little bit further down the road with capacity. But can you talk about the scope and scale of the customer discussions? And you were just alluding to this a little bit in terms of their willingness to do some prepayments for dedicated capacity. But also like just understanding how this business is going to grow over the next 3 years to 2025, but then this whole other kind of inflection point that we're expecting in the back half of the decade around some of this growth. Just want to get a sense of how those customers are talking with you now around kind of staging of some of this demand and sell-through and then kind of your sense of how big this business might ultimately get for Wolfspeed.

Tyler, I'll let you start, and then maybe I'll jump in.

Sounds good, John. Yes, I think, Colin, as I mentioned, we've seen a device opportunity pipeline. When we first started talking about the device opportunity pipeline, it was around $9 billion. Now it's north of $25 billion in about 3 years. And it's to the point that you just made. Couple of things have happened in the last couple of years during the course of the pandemic. And that was, number one, we've seen silicon substitution start to happen. So with the stock out of silicon -- of silicon devices, you had lots of customers that were saying, well, what is the art of the possible if I move to a silicon carbide-based solution. And what they started to find is that there was design efficiency, there was cost savings. So while there was a step-up in cost in moving to that device, what they started to find is, hey, I could make my battery smaller. My wiring harness got smaller. The weight of my vehicle or what have you got lighter. So we saw silicon substitution, which was great. But what we also started to see is through partnership with Arrow Electronics, we had a very finite amount of the market that we could cover, but Arrow's got 20,000 people around the world doing all kinds of interesting things. We've talked about in previous calls about an electric submarine, an industrial blender. There are just things that a couple of years ago, John and I never thought that we would be in that we're actually getting designed in now. So the aperture is continuing to open. So we'll give you an update next week on where we see the device opportunity pipeline. But what I would say is this, is that we see an exceptional amount of growth in the current areas of opportunity we serve in industrial and energy, in electric vehicles, in RF, but we also see -- John and I were having a conversation with some people doing some research with us this morning, where there are markets that we have yet to tap that are a complete fit for silicon carbide. And what we're working on is kind of the underlying math and science to show people, look at what you get when you move to a silicon carbide-based application. John, I don't know if you have any other thoughts.

You hit what I was going to say, which is we talk a lot about automotive, but a lot of the success we're seeing, it doesn't extend out into these really long-range forecasts because -- but we're getting a lot of success in industrial markets, which tend to forecast more out like 2, 3 years rather than 5, 6, 7. But the acceptance of silicon carbide in the industrial market has been kind of a surprise, and it's really, the entire industry is waking up to the advantages that we can bring. And a lot of it is stuff we've been in before, like server power supplies and solar inverters, et cetera, those are the things we knew about. But yes, aviation now is looking very seriously at it. Electric jet...

One of my favorite ones is vacuum cleaners. Like the [ C range ] of vacuum cleaners apparently is amongst the highest among any industrial applications. So obviously, you guys could be a facilitator on that. So this is super helpful. So what I'm hearing you guys say and just help me clarify if I'm not reflecting this, is you now have tens of billions of dollars in the pipeline of opportunities that have kind of developed over a few years. And that application set is continuing to grow. So we're not talking about silicon carbide being a $1 billion or $2 billion opportunity, this is a multibillion-dollar opportunity for you guys as this industry scales and changes shape. What should we be talking about that we're not talking about? We're coming up on the half hour of time here. Obviously, we're completely ignoring some critical parts of some of the business here, which admittedly, I'm less interested in, but I'm happy to address some of them with you. But what else should we be talking about and thinking about with the Wolfspeed story and the Wolfspeed technology platform?

John is going to have a point of view on this. I think we've talked about this with you, too. I think, listen, we take a very -- we are very encouraged with the competitive environment here because all things silicon carbide are good for the industry, for us. So a lot -- there's a lot of wanting to pit one against the other. Yes, we have rivals in the marketplace. But guess what, as I talked about a little bit earlier, we're going to be -- all going to be capacity constrained. We are counting on our customers on the material side of the business, that they're going to meet or beat their expectations with their silicon carbide operations because all of us are getting vertically integrated. So what I would say to all that is that we're counting on folks to kind of do what they say they're going to do. And at the same time, we're looking to expand our own capacity because of the size of the opportunity and kind of what we see out there. So I think all boats rise as it relates to silicon carbide. And I think I'll let John talk a little bit more about this, we are still very early stage in this market. This is not a mature market at all. So I think if you're new to silicon carbide or you've been in this for a long time, I think, John, it's fair to say we're still pretty early stage, right?

Yes, we absolutely are. And just to echo what Tyler said, I mean our silicon carbide competitors, they're not really the enemy. The enemy for us is silicon. And I would say we're winning pretty well in that battle. And it is driven by a lot of what I would call macroeconomic conditions, government incentives, the push for higher efficiency. The electrification of everything plays very much into our strengths, and we are seeing huge interest all across that. And markets that we're not in today but will be are higher voltage devices for things like train drives, traction control, smart power, grid management. Those are all the things that are cooking in the background that we are excited to see develop also.

Perfect. Well I love this part of the cycle technology development where we're in full co-opetition mode, where everybody is hugging and high-fiving on the progress. So looking forward to enjoying this for a couple of years. Guys, thank you so much for taking the time with us, sharing the expertise and your willingness to get into some of the technical details with us today. For everybody that's dialed in, we're more than happy to help if you want to spend some more time on the Wolfspeed story, share what we know and obviously, get you in touch with the company as it makes sense. John and Tyler, again, thank you for carving out the time for us today and sharing your expertise, and we'll look forward to catching up with everybody soon. Take care.

Sounds good. Thanks.