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

As just mentioned, my name is Gary Mobley. I'm one of the semiconductor analysts here at Wells Fargo Securities. And before I introduce the management from Wolfspeed, I wanted to mention that Gregg Lowe, the CEO of the company, will not be joining us today. He actually fell ill, but we do have some other members of management. And I wanted to also mention a little bit about my investment thesis for Wolfspeed and that is the battery electric vehicle market is real, it's happening. Don't deny it. And then two, silicon carbide will be the dominant substrate used in these electric vehicle inverters and various other components of an electric vehicle. And as a key element of that, I foresee Wolfspeed being a key beneficiary, a key market share leader in the marketplace, primarily because they're the low-cost producer. And so with that, I wanted to introduce Neill Reynolds, the CFO; and Tyler Gronbach, the Head of Investor Relations, to the stage.

The boys are back in town. We're back. We are back.

All right. Well, first of all, thank you both for joining us, and thank you all for joining us in the audience, here in person and online. I know it's the end of the day, especially on the East Coast. So again, thank you all for joining. And I had a prepared list of questions for Gregg because Gregg has got an incredible background, but I'll defer to you, Neill, and hopefully, you can give us an overview of the company and maybe a little bit of background on yourself.

Sure. So [indiscernible] from Wolfspeed. Wolfspeed has a long and rich legacy with silicon carbide technology. And to give you a little background on silicon carbide, we're probably seeing probably one of the biggest changes in semiconductors and certainly within power semiconductors in the last 30 to 40 years. And what that's being driven by is a technology that drives much higher performance capability in power electronics. And what that means is, if you look at, say, an electric vehicle, for instance, which has its greatest application, it drives a lot more efficiency in electric vehicle. It gives the opportunity for an EV to have a lot more range, a lot more efficiency and then drive lower cost into the vehicle, which are all key competitive differentiators when you think about OEMs who are making electric vehicles today and, really as Gary had mentioned in the opening, has become a really critical piece of the supply chain and the equation as you start to think about transitions from internal combustion engines to electric vehicles. And what that transition has done is driven a lot of volume into our sector. Historically, when you think about silicon carbide, it was -- it's kind of a higher cost material, but all of that volume has given the opportunity to take cost out of that product. And what that's done is on top of creating great markets for EV penetration and high growth. It's also opened up opportunities for additional applications now because that pricing scheme gives great efficiency for other type of nonautomotive applications that we've seen in a lot of different areas. And what that's translated into is an industry that's going to grow 30% to 40% certainly by the end of the decade and probably beyond that. And we see our growth as a company growing at 40% or even more than that as you look out over that same time frame. So obviously, a huge opportunity for growth in a company that has a rich legacy and history in making this type of product. As for me personally -- Tyler, sorry. I'll let Tyler hit himself here in a second or maybe add anything that I may have missed. Me, personally, I've been with -- I've been the CFO at Wolfspeed for over 4 years now. Prior to that, I've been in the semiconductor industry for about 10 years. I've been at companies that do very similar type of products in semiconductors previously at NXP and prior to that, at AMD and grew up actually at GE over 15 years of multiple industries. But I can say that there hasn't been a ride like this one that we've seen at Wolfspeed that I've ever seen anything like and I think I can speak for a lot of the folks on the team when you think about that. Tyler?

Yes. Thanks, Neill. I'm Tyler Gronbach, I head up Investor Relations for the company. I joined about 3 years ago, and I'm not a semi guy. I've come out of telecom and media and publishing, but I was always in high growth or an industry that's going through dynamic change. And to pick up on Gary's opening comments here, if you fundamentally like electric vehicles, a great derisking strategy is to play silicon carbide. And what Neill just kind of outlined for you -- I mean, when I joined the company a couple of years ago, the opportunity pipeline for silicon carbide was about $5 billion. Today, it stands at about $40 billion, and it's showing no signs of pulling back because what's happened is we've seen the cost of silicon carbide come down, and EVs are really driving a lot of that, but it's opening the aperture on industrial and energy and a whole range of applications that we didn't even think about that we were going to be able to play in a couple of years ago. So for Neill and I, we got here close around the same time. It's been explosive growth, and we just see a tremendous opportunity that we're really happy to talk about more today with you, Gary.

Sure. Thanks. As it relates to the evolution of electric vehicles, Toyota Priuses are yesterday and Tesla Model S Plaids are the present and who knows what we'll see in the future. But ultimately, what matters from a consumer's perspective is driving range and to get us over -- especially here in America are driving -- are our charging anxiety, right? And performance doesn't help, and they're both somewhat related. And so can you tell us in layman's terms, how silicon carbide makes the ownership experience of a pure battery electric vehicle better?

Yes. I think a couple of things and then Tyler, you can add on to -- and I'll kind of get started here. But if you think about does silicon carbide mean for an electric vehicle and, Gary, you hit on a couple of important points. By leveraging silicon carbide versus silicon, let's say, an electric vehicle and range being probably the #1 aspect of what drives the consumer decision around eventually going to an electric vehicle. Using silicon carbide over silicon usually resulted in between 5% and 20% increase in the range of the vehicle, depending on the power levels of the vehicle. And what that means then is it also drives the cost down per vehicle. So cost and range are important. For every dollar you spend additional on silicon carbide, you get about $3 to $7 back at the system level for the vehicle. So when you think about range and you think about costs from a consumer perspective, it's going to help drive down your cost of ownership. It's also going to increase the range. So a lot of people talk about range anxiety. So think about some of the silicon base inverters, you think about some vehicles that are out there today, maybe they run at 200-mile range. So you start the day off with about 200 miles. I think the latest lucid that's out there using a silicon carbide-based module and inverter can go over 500 miles. So you can typically get up in the morning, have your car charged overnight and really have very little range anxiety when you think about the transition when you make that transition to electric vehicle. The second area where it makes a big impression and impact is at the charging station itself. As you think about the speed at which you can charge, the efficiency silicon carbide drives, not just in the battery, in driving efficiency and getting range and cost out of the vehicle, it also speeds up charging time. So you can get, I think, in the latest fast chargers, you can get up to 75 miles in like 5 or 10 minutes and roughly that time frame. So both at the vehicle experience itself, you get a lot of benefit, but also in the charging infrastructure.

Yes. One of our founders, when I first joined the company explained it to me this way, think of silicon carbide and think of silicon -- think of you have 2 dams, and you're opening up the flow to let water out. And the silicon solution, it takes time for the dam to close and water kind of leaks out. But with silicon carbide, it opens and closes super efficiently. And the reason why that's important is it saves energy and it doesn't create heat because the minute that you're using that silicon solution, it creates heat. Now it needs to be cooled. And then there are just greater and greater inefficiencies with that structure. So back in 2019, Tesla talked about the importance of silicon carbide in their design solution for the reasons that Neill just outlined. And since that time, we have seen a rapid migration among the automotive set moving to not -- starting at 400-volt bus, now going to 800-volt bus. But the reason why they're doing that is they want to leverage silicon carbide for what I just described because it charges faster, it goes longer, and that's why you're just seeing all the technology migrate for the inverter to silicon carbide.

Well, I appreciate that, guys. So maybe the generalist audience that we have here might not fully appreciate the evolution of the chassis of a modern day electric vehicle and the powertrain related to that. But every automotive OEM is rolling out a dedicated EV platform, otherwise known as a skateboard design. And so many of these are higher voltage bus rails, 800 volts and higher, and so is that really the sweet spot or the tipping point for silicon carbide adoption in these next-generation EVs?

Yes, but with a small caveat, I think that any -- silicon carbide, it's a very unusual technology. In fact, it was first found at -- it was first found like in a meteor strike at one point. So it's a very unusual technology and our founders had to kind of identify this material in science labs, I think, about 35 years ago, and they've been kind of developing -- developed in that sense. So when you think about silicon carbide, the interesting part about it is as the voltages go up in voltage, silicon carbide starts to perform better. So you can't -- it wouldn't be good for something like a cellphone or something at low power. It's really for high-power applications. And as the world becomes more electrified and higher power applications of any kind or use, silicon carbide becomes more effective the higher you go up that voltage range. Now when you look at electric vehicle, people talk about 400-volt buses and 800-volt buses. Now what's happening now is that the industry is really migrating more towards the 800-volt bus, as Gary talked about. It's funny because if you talk about -- and why is that important because silicon carbide plays a better role as you continue to move up that trajectory. Now there's lots of business that we do at 400 volts as well, but the industry is really realizing that the 800-volt architecture is really the sweet spot, as Gary mentioned, for the type of efficiency that you want the vehicle. So think about driving costs down in the vehicle. The battery itself is the highest cost elements of electric vehicle. And at higher voltages, silicon carbide makes a better impact to help on that cost, leverage range, and really just drives system improvements for the vehicle. So as those voltages go up, we see silicon carbide playing a better role, but also we see it performing better as those voltages go up as well. So there really isn't, I don't think from a material perspective, a competitor out there from an EV application as you start to get into it, into the drivetrain. And that's why you're starting to see that tipping point happen. I think if you went back a year or 2 ago, you'd see silicon applications win in the drivetrain. You just don't see it anymore. In fact, when we compete at the drivetrain level for an electric vehicle, we are pretty much always now competing against a silicon carbide competitor, and that just wasn't the case a few years ago. So as you look out into the future, that gives us very good visibility as to what those revenue streams and market streams are because things are moving to higher voltages. Silicon carbide plays a better role with higher voltages. And I think OEMs and manufacturers are starting to see the benefits at the system level as they start to move up that -- as they start to move up at those different power levels.

Last June, we published a series of electric vehicle teardowns, looking specifically at the electric vehicle powertrain. And one of the key takeaways from that exercise for all 4 of these teardowns was our assessment that the market for silicon carbide, semiconductor-based materials is bigger than what most people think. And I think that came to light during your Analyst Day just on Halloween. And so maybe if you can walk us through the calculus that you guys use to size up the opportunity, give the audience here a sense of the content of silicon carbide per vehicle because it's enormous. And it by itself can increase the semiconductor content by multiples compared to today's vehicles.

Well, maybe I'll start with a little context on the market size and Tyler maybe will walk through a little bit of the calculus there that we think through. But if you just go back a year or 2 ago, but as you look out into the future, and again, if you think about automotive applications, the way that works normally is you get a design in. And that design in means that a customer has given you an award. And after we get an award for something automotive-based, it takes normally 2 to 4 years. And normally in automotive, it's closer to 4 years from the time you win to you actually start to generate revenue. And the reason for that is you're doing final design, qualification work, sampling, engineering integration. So you get the award and now your 2 teams are working together very closely for several years. And then the revenue starts, and you see that over about, I don't know, a 7-year time frame. So what that means for us is we get a lot of visibility, not just from our own view of the marketplace, but we also work with customers like Tier 1 suppliers to the market. We have very good visibility as to what's happening with all of the automotive OEMs, who are making electric vehicles and then we get feedback from those customers as well. And what we're seeing is just a dramatic shift in the last 18 months to -- in the market, shifting not just for higher electric vehicle adoption rates from all of these customers, but also higher silicon carbide rates within those vehicles. So what we're seeing is more EVs and a lot more silicon carbide. And what that's doing is that's translating into a market size that is just a lot bigger than what we had thought previously. If you go back a year ago, I think we were thinking, at '26 time frame, we're thinking about a $6 million-plus market. I think a couple of weeks ago, as you point out, Gary, we see that total opportunity, including both automotive and industrial applications being close to $11 billion by 2027 and $18 billion to $20 billion by the end of the decade at a 40% EV adoption rate globally. So huge opportunity to grow the market size and what's really needed now is capacity. I don't know, Tyler, if there's...

Yes. I think Neill kind of gave you a little bit of the math. I mean we're not assuming incredibly deep penetration rates by 2027 for the revenue guidance that we've given. We're talking about silicon car or BEVs, battery electric vehicles, in the low- to mid-20s in terms of penetration rate. But about 60% of those battery electric vehicles will be using silicon carbide in 2027. So what Neill just outlined to you, really, our message for the last several quarters has been capacity. There needs to be more silicon carbide capacity coming online. And we've done some recent fundraising activities to expand our capacity, but where we sit today, we don't see enough of it coming online. And we think based on the trend lines, we're going to see more investment. But that's why we're really leaning forward on our expansion of our materials production, capacity and our device production because we kind of see where the market is moving.

Yes. I mean, that brings up a point, I think many of your customers wanted the product yesterday. And that would be an ideal situation. GM Ultium, their platform is an announced design win for you. You recently announced Jaguar Land Rover. You have ZF as a customer, which for those people not familiar, is one of the biggest Tier 1s in Europe. You have BorgWarner announced as a customer and many more. And what I was amazed at your Analyst Day, you had a customer, Jaguar Land Rover, giving a testimony -- testimonial at your event. And they even said that they don't normally do that for a semiconductor supplier, which speaks to the importance that you guys have in the whole supply chain, in the whole product rollout time frame for a lot of automotive manufacturers. So my question to you is, how have you capitalized on that in some respects. And then as well, maybe if you can give us some other anecdotal confirmation of what I'm speaking about.

No, I think that's right, Gary. I think what you see is, more and more customers are seeing this big shift to electric vehicle adoption. And it's really life and death for a lot of the Tier 1s and the OEMs in this space, right? Because they see this transition happening and is becoming really important. I think a lot of people thought about they've been talking for several years about battery technology and the importance of securing their battery supply chain. I think what you're seeing now is the importance of alongside that battery, you really have to have silicon carbide. And I think pretty much the entire market has kind of come up with a conclusion that they have to have this as part of their competitive structure to have silicon carbide into the equation. Then you take a look at what we do. And I think if you look at the merchant market, meaning when we sell both wafers, substrates to some of our competitors and we do our own devices. And over the last number of years, 20, 30 years, we've had about 60% share in that merchant market. So we have a lot of experience in scaling this technology. And by the way, it's very difficult to do, and a lot of people say that, but silicon carbide is a material that you grow at half the temperature of the sun. It's the second hardest material on earth. So cutting it and slicing it starts to become a challenge as well. So -- and it takes many, many learning cycles to get it right. We've been doing it for a long time. So I think what happens is if you look at the supply chain and the infrastructure required and the capacity needed in the industry, I think a lot of customers come back and they do their due diligence on the supply chain, and they recognize that Wolfspeed has a long history in this technology. It's new and it's important. We have a long history. It's hard to do. And we've also then -- as Tyler pointed out, we've made the investments in capacity to take our domain expertise and then match that up with a very substantial capacity expansion plan. And that's important because I think we do play an important role, I think, in the industry as it relates to growing this technology. A lot of people working to grow it and we kind of think of all boats kind of rising with the sea here, but it's probably going to be harder for a lot of folks to do this a little bit harder than they think. And our role, I think, is going to be continue to be an important one, not just from this domain expertise, but also having the scale and breadth to bring this type of technology to the marketplace at scale over time. And that's how we think of the capacity investments that we're making.

Yes. It's for the audience, if you're not very familiar with our industry, what we've been talking about for the last couple of years is something called, it's the end of the ice age. The internal combustion engine car, we kind of see the light at the end of the tunnel. And what that translates into, to Gary's point about the Jaguar Land Rover relationship, if you've been making internal combustion cars forever, since inception. And now you're pivoting like they are, where they're going to electrify the entire line of cars. So you're going to take a car that today has a couple of thousand parts, and it's going to have a couple of hundred parts. And if -- at the core of that is the inverter, which is the engine of the car. You want to make sure you have chips to make that inverter work and you want to have high quality and high reliability. So I think we've been a little surprised with how strong the reaction is, but the partnerships with BorgWarner, with JLR, with GM is really because they're making a tremendous pivot in their own business and they really need key partners to support them.

Let me just add on. I think if you look at just a couple of weeks ago, you talked about Fort Water, Gary. They made a $500 million investment into us for a capacity corridor to ensure that they've got the capability to ensure they've got supply for this type of material over time. They won a lot of business. They've done a terrific job. They've got great products and great relationships across the industry. And what people really care about today at the OEM level and at the Tier 1 level, when you think about the automotive industry, particularly after they've gone through several years of semiconductor shortage is assurance of supply. So coming back to us and really thinking about how can they ensure that they're going to have their supply over time, what's really an incredible change in their companies going from basically many, many decades of focus on internal combustion engines in a relatively short amount of time changing -- in many cases, like JLR, Jaguar Land Rover, changing over their entire line in a relatively short amount of time to become a new company with a new product set with a different supply chain. So really going through a major transformation, and it's really important to them that they have the right supply and capability and support as you start to make those transitions.

Want to turn the discussion to the capital intensity of the business, and it's extremely capital-intensive today because, again, you're trying to bring up a supply chain that probably needed to be in place yesterday. And for the audience to fully appreciate that, maybe if you can give us a better understanding of how Wolfspeed is vertically integrated from materials all the way up to wafer processing.

I'll take a shot at this, and maybe, Tyler, you can jump in here. But -- so when you think about semiconductor manufacturing, most people think about wafer fabs and packaging and kind of back-end processing. Silicon carbide actually starts at the very beginning of the process from a vertical integration perspective. What that means is we grow crystals. And if you think about the most difficult part to do it's growing a crystal and doing that in a high-quality fashion. Now I think of silicon and it's a similar process in that you grow these long boules and they're really cost effective because of the length you can grow them at. Silicon carbide crystals are much smaller, and growing them is it's a different process and it's much more difficult. So you start at the beginning, and you got to grow really solid capable quality crystals. You move your way down and you have to have obviously a facility to go do this. Like I said earlier, it's the second hardest material on earth. So you have to have a wafering operation, you have to slice them, grind them, polish them and then add what we call an epitaxy layer, similar to silicon, but it's thicker and it's hotter. So it's a little bit more difficult to do. And then you start with the traditional kind of set -- what people think of as like a traditional semiconductor process, you put it into a wafer fab. You put that through the wafer fab. And then outside of that, then you kind of drive what we call the back-end packaging, assembly and test processes after that, which again are similar to silicon. But as you think about that end-to-end supply chain, you have to have the capability all the way at the beginning of growing the crystals, having high-quality crystals having that wafering operation, having the fab and having the back end. What it leaves you with is a pretty heavily and intense capital structure required to make all of this. And that's really what that looks like. So the thing about us, I think we have a -- what we've talked about is roughly a 2:1 CapEx to revenue ratio. So meaning that we require 2x the CapEx for 1 annual year of revenue as you look out into the future. However, when you look out in time, because we do have the vertical integration and if you feel confident in the volumes and as we talked about, we have good visibility to that, this also creates high cash flow generation capability out in the future, higher margins at over 50% plus gross margin and very robust cash generation capability over time. As Gary said, because the volume requirements and the demand is so high right now, it requires a lot of investment upfront to kind of reap the benefit of those cash flows down the line.

Yes. To pick up on what Neill was talking about, today, we make 60% of the world's supply of wafers. We've been at it for about 35 years. But our business originally started, we were making LEDs and the silicon carbide technology was really the chipset that supported the LED. So if you go back for the last 20 years, we've probably made 90% of the world's supply of silicon carbide. I point that out because this is more of a evolutionary process that's going to happen with silicon carbide. We're not going to wake up tomorrow in a couple of quarters, there's going to be 5 new entrants making material. It's just -- it's way too hard. It's done in a furnace that's 2,500-degree Celsius. It's a white light process. It's not like you can check underneath the hood to see if it's working. So it takes incredible knowledge and skill and capability. It doesn't mean that we don't believe that over the next several years, there will be new entrants into the market. But what we're doing is we're making wafers today at 150, and we're about to open a device fab or we've opened a device fab that we're ramping right now, but it's going to be on 200-millimeter wafers, and there are these incredible economies of scale that we'll gain for that. So we're going to continue to be pushing the market for the next couple of years, but it's going to be something that will happen over time from a competitive standpoint.

Okay. I appreciate that overview, so much I want to get in the time we have remaining, but I wanted the audience here in person and online to maybe gain a full appreciation of why perhaps you could be the low-cost producer as I referenced in my opening remarks. Diameter of the wafer certainly factors into that more die per wafer, less waste on the edge. But maybe if you can help us understand the cycle times that you have, the advantage you have in the materials side of the business, growing the crystals, the length at which you grow the crystals, the speed at which you grow the crystals and how that basically helps you win the business, being a total end-to-end soup-to-nuts supplier.

Well, I think it's important because I think it goes back, Gary, to this whole concept of the assurance of supply. Having trust and the capability to go have the experience and the breadth of capacity to go service those customers. So when you think about the supply chain upfront and the length of the boules, the diameter of the boule -- sorry, of the wafer as you to think about that, our ability to respond becomes more important. So if you think about us going, for instance, going from a 150-millimeter wafer to a 200-millimeter wafer. Why is that important? Generally, when you make that transition, it's the same math as silicon essentially. If you go from 150 to 200, you get about 70% more good die or more good product per wafer. So our ability to respond to supply increases becomes that much better, meaning each time a customer needs additional supply, we can respond with each wafer that we run with 70% more capacity per wafer. So all of those things start to play a factor. Now when you think about what is our advantage in that area, it's not just that we have the domain expertise, capability on boules and length and cycle times. But also, we were the first to go to market commercially with a 200-millimeter wafer. So as far as I know, we're the only supplier right now, building at 200-millimeter. And the factory that we're building in upstate New York, a state-of-the-art, highly automated facility which I think is the only automated facility for 200-millimeter in the world will be at the 200-millimeter wafer, which will be at high volume and commercial capability, which we've already proven out over the last 2 years and a pilot line over time and the initial yields and initial capability we've seen off of those wafers. It's actually been pretty terrific. We've seen them actually improve versus our older product line at 150. So not only does it drive better cost performance, it drives better capability as it relates to bringing on supply faster just because of that bigger diameter and the more die per wafer that you get off of it. So I think it all kind of fits together. So I think, Gary, you talked about at the opening about not just being the low-cost provider or at least capability from having that low cost due to the potentially longer boules and the longer or the wider diameter but also the capacity that we're putting in place is really capable of serving customers at a different level over time.

And in our last few minutes, I wanted to ask about the importance of your new materials facility in the central part of North Carolina. I recall the press announcement, it was with the Governor of North Carolina. And I think on that same day, President Biden called out Wolfspeed as he was cutting the ribbon in Ohio with Micron. And so you're obviously top of mind from a political standpoint and from a strategic standpoint. So maybe if you can just speak to the types of investments you're making in the central part of North Carolina.

Well, we are. I think that's an important investment because right now, we have the largest silicon carbide materials production factory in the world in Durham, North Carolina. The opportunity, as we've talked about, is pretty massive when you start to think about things moving forward. The new facility will be 10x bigger or have 10x more capability. So it's a really huge facility. But both that and our fabs play an important role. And why is that is because the products that we make, it's not just about serving the automotive industry, which is important, so that's good. It's also that it's electric vehicles, which is clean energy, which is good. And silicon carbide for nonautomotive applications is a net energy saver. So from a green technology, and as you think about all of those types of factors, those are all kind of like positive elements as it relates to where the world is going, where you see governments going around the world. And that's giving us the opportunity to create really deep relationships with various governments, including the State of North Carolina. Governor Cooper has been a terrific partner of ours. But same thing in Upstate New York, where we built our new factory, we have a tremendous relationship with the State of New York. We're involved at the federal level. You mentioned President Biden kind of calling out our opportunity there just because of the role that we play. And I think even beyond the United States, if you think outside in Europe and other places, we've made, I think, deep inroads as well because energy independence, energy savings is becoming, obviously, more and more critical topic as time goes on and silicon carbide is playing a more and more important role in all of these areas as you think about time moving on.

Guys, I wish we had more time, but we don't. And so I want to thank you, I want to thank the audience for attending this late afternoon session. Thanks again, everybody.

Thanks, Gary.

Thanks, Gary.

Cool. Appreciate it.