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

All right. Thanks, everyone, for being patient as we got them -- all mic'd up here. This next session is going to be pretty interesting. We're going to be talking about a Clean Tech area that may be not as front and center for a lot of you folks and has become kind of a key theme within the electric vehicle and charging as well as solar space just in the recent past. And we have the pleasure of hosting really the industry pioneers and leaders in the space, Wolfspeed, most called you guys Cree. But we have Elif Balkas, Vice President of Research and Development in the Materials segment as well as to her left, Head of Investor Relations, Tyler Gronbach, joining us on the stage. And really, we're just going to have a pretty open-ended discussion around silicon carbide technology, what Wolfspeed is doing and sort of one of the de facto sort of trends/ways that we think could be an opportunity to leverage into the EV ecosystem and theme. So thank you both for joining us.

Elif, I've never had the pleasure of hosting you at one of these conferences. Clearly, Clean Tech is becoming a key part of the Wolf end market opportunity. So I just wanted to kind of talk to the evolution you've seen in the company. You've been there for quite a while as well as the industry as you've kind of shifted to become more de facto materials and device leader in the EV supply chain amongst others in the clean tech space.

Thank you, Brian. Thank you. And it's the first time for me to attend this conference. I'm really excited to talking to you. And it's a great opportunity for me as well. So I'm coming from a very much the technology background, pretty much all of my life that I work with the wide bandgap materials, gallium nitride and silicon carbide. I've been with Wolfspeed for 15 -- a little over 15 years now, working primarily on the silicon carbide technologies, all the way coming from the crystal growth side of things and then heading to substrates, ready for -- with the good epitaxy and the device applications. During the time that I've been at Wolfspeed and at the time Cree, did these -- worked very heavy on the material side of things, as the silicon carbide technologies has been the core for us. But also working with the different applications that started with this amazing material that both can give us in terms of the applications that we work with the LEDs and the power electronics and the RF electronics. The evolution of things that then, of course, it is all like they have different challenges when you look at it from the silicon carbide substrates and the crystals. It's been an amazing journey for us that building on our 30-plus years of technology and then the maturation. And then more so within the last, I would say, 5 to 10 years, as we demonstrated technologies with the MOSFETs and the power electronics and the movement in the market and electrification of things is very exciting for us.

Great. Maybe we'll start off by talking about that amazing material you mentioned. So SiC, silicon carbide, I'll probably use it pretty synonymously throughout the conversation. Why is SiC better than silicon? And then why is Wolf the leader in that space?

Yes. That's a question we study a lot. And the silicon carbide is a fascinating material. The differentiation at the material level, I think, is coming from the intrinsic property of the -- how large is the bandgap. When we talk about the solid state physics that basically that what actually manages and drives the electrons movement in the material. Then you can -- with that material, you can create really strong power switches. And then those devices, it opens up so many opportunities. So that compared to silicon that a couple of EV of the larger bandgap, it gives you opportunity for higher voltage, higher power densities, much larger efficiencies compared to silicon. But at the same time, silicon carbide is so unique. When you look at the similar material systems, you see sometimes the good electrical properties, but the others are not as good. But in the silicon carbide, you see old properties, specific to power electronics that you see really good electrical performance, but really good thermal performance. So when you think about it in the system level that you get a much larger power density, but you also have a great heat dissipation. You can run the devices at a higher temperature and then you have the ability to remove the heat much efficiently. So you don't, at the system level, you don't need too much of the supporting circuits to manage the whole thing. And it's create great opportunity actually for us.

And I mean it might not be a simple answer, but Wolf's leadership, Tyler, you look like you want to jump in here a little bit, too. But why has it been the case that you've established such a big lead versus the rest of the industry when we look at your capacity growth, your revenue targets, clearly, you're much more ahead of peers. What puts you in that position?

I say a few things and then maybe you can jump in, Tyler. So when we look at the history of the company, so with our founders, some of them are still very active that they are -- they have the material science background and they studied silicon carbide. And so that this is like amazing material that -- the potential. And then we came from that end of it that it helped us also like the building the very strong technology foundation. But if you think about this was 35 years ago, and then we have like -- we stay as a very like the core technology company that when you look at our talent base that we are very hungry and excited about what can be -- the opportunities can be created with the material itself. And then over the years, that, of course, that we were the first ones to demonstrate and penetrated the market for the light-emitting diodes. But after that, the -- showing the potential with the Schottky diodes but also the release of the MOSFETs, it's actually showing the whole industry that what can be achieved. Of course, in parallel on the RF side of things that again on silicon carbide and then the potential there in terms of the wireless and the radar applications that it's just all in all that we are very rich in terms of the technology background. And so we kind of like building it over the history as well. So to me that when -- for us to take the lead, there's no other option for me. And then now that we mentioned -- show the potential and then when we match it with the market readiness and the demand readiness, then it's only putting the right pieces together with our manufacturing excellence, with our marketing team and then with our the applications teams and working with our customers. This is inevitable I see it as. But what do you think, Tyler?

Well, I want to give a shout out to Brian and the rest of the research team. If you haven't had a chance to digest some of the work that they've done on silicon carbide, it's very impressive. We agree with a lot of your assumptions. But just think of it this way. For every -- the Goldman team concluded, for every dollar of silicon carbide that goes into the electric vehicle, there's a $3.5 to $7 savings in the overall design. So wiring harnesses get smaller, you need less cooling, okay. And then you factor that in that with a silicon carbide-based solution, your range is going to increase anywhere from 5% to 10%. Your charging time is going to be less. So what you heard Elif talking about, what Brian is talking about is, we're seeing automotive players say, hey, listen, range and charge time are the 2 things that a consumer really thinks about before they purchase an electric vehicle. And this is where silicon carbide has made some incredible inroads. So if you like EVs and you're looking for a derisking strategy, silicon carbide is a really strong way to play.

And the technology sounds great, but it also what we've heard consistently is it's pretty difficult and hence why you probably have the lead you do. But I guess, what makes the technology so tough? We get this question all the time. Why can't others, especially, if you look at the activity levels in Asia, a lot of folks would like to enter into this market because it's such a big TAM and EVs are a huge growth opportunity. So is there a way to think about how Wolfspeed is ahead of everyone, whether it's yield, it's performance, just sort of a quantifiable measure or some sort of performance metric that gives you confidence that you are consistently going to be in the lead there?

When it comes to performance metrics internally, we have a lot, Brian. And I think for the external role that our method of delivery and the consistency is the biggest, I will say, a metric that we have -- I think that we have a pretty good reputation there in the market. When we talk about the difficulty of silicon carbide, it says, we talk about it's fascinating material, but it's also that the -- it's a hard material, it's also very brittle. And then it's very -- that hardness, it makes it very difficult to process. But when we take a step back, the silicon carbide material itself that for the power electronics and the electronics in general that we want to make it very pure, pure of all the other elements. We want to have a single pure silicon and carbon and then combine it in a -- into a single crystal so we can build devices on them. And then we need a certain crystal structure, but silicon carbide is very fascinating I call it, because it gives you the more than 200 possibilities. And then so the method to grow crystals of silicon carbide is, if you take your pure sources and you put it in a what we call crystal ball. And then you heat it up to transport the source to the [ seat ]. That transport mechanism doesn't begin until you heat the whole system up to about 2,000 degrees. So if you take in -- the regular person that just to understand, comprehend what it means that, I always give the example that is actually halfway to the temperature of the surface of the sun. This very high temperature is bright white. At that temperature, you can't even look at it. But if you think about for a minute that what it takes to -- what type of system does it take, where do you put that much of the heat? And also how do you control -- when you measure how do you control -- do you have the right temperature, do you have the right pressure, did everything go well? That's very challenging. It puts a lot of like challenges to the infrastructure itself. It's actually that we also call it like it's pretty much a black box because you can't open a port to look inside. You put everything to your best and you hope for the -- literally for the best. But we've done this for 30-plus years. And of course that every time we collect a lot of data, we learn a little bit and then we document that data. Since we're in the -- actually the energy conference, that I'll use an analogy that in the data science field that which we study a lot the data is oil. So it's our actually the energy that we rely on our past experience, that what we learned at accumulated data. And then we rely on a lot of the data science to kind of like to dial everything together. That 30 years, 30-plus years of commercial, the accumulation that it gives us a pretty good confidence. But I will say that it's very challenging and things go wrong. That's coming from the, number one, the temperature. Number two is how sensitive the material it gives you like 200 different possibilities even though you put everything to pretty to close to perfect. But then you can manage it. I mean we can manage it through our -- the accumulated knowledge and the database and the talent base. Then it becomes our -- it turns into our advantage, that is our strength.

Brian, if I could just add on to what Elif was talking about. I think what's good for everyone to also know is that, we make 60% of the world's supply of silicon carbide today. The next 2 closest competitors is Coherent, it's about 15% of the market. And then the next closest competitor is about ROHM at around 10%. So you've got 3 people or 3 entities that are making about 85% of the world's supply and then everybody else is kind of low to mid-single digits.

Right.

And so we fundamentally believe that over time, more people are going to gain or more companies are going to gain an ability to make material, but it's going to be more evolutionary versus revolutionary. And so we think about a moat that gives us a competitive advantage on materials. But at the same time, we're penetrating more of the device market. So we supply materials to device manufacturers at the same time that we're competing with them for sockets for [ wind]. So like I said, I think the -- it's very difficult to do. We're very good at what we do, but we also are paying very close attention to what competitors are doing.

I'm glad you brought that up, and it's a good segue into a discussion around kind of the competitive landscape. So just to level set everyone, you're the leader in the material space, but those materials are vertically integrated. You're also producing devices/chips that basically are going into the electric vehicles, the Jaguar Land Rover, the Mercedes-Benzes of the world. And so you've got a peer group, which you mentioned a couple of them in the materials space. My question to you on that would be, beyond the incumbents, what's your view on kind of new entrants? Again, I mentioned there's a lot of activity happening in China, in particular. So would love to take -- hear your view on that. And then who are your peers on the other side of the house? Some of them are your customers as well as you mentioned, but the chip guys, who are your peers there? And then kind of to roundup the conversation, do you see, in the future business models like yourself emerging, where they're vertically integrated companies doing both the upstream as well as the chip side. And so it looks very much like a Wolf model yet? But why or why not, why wouldn't that be the case?

Right. Yes, you go ahead, and I'll talk about the competitive side of things actually that...

Yes. I'd say this. I think to frame the market and then I'll let Elif talk more about the competitive landscape. But we work -- we have strong relationships with ST and Infineon and ON Semi on the wafer side or on the material side of the business. And then we are also competing with them on the device side. And you might say to yourself, why do that? And I go back to Brian's first question to Elif about, we're making the market for silicon carbide, and we're still very early stage. And electric vehicles are really driving the lion's share of penetration over the next decade. But industrial and energy and things like solar are going to benefit from all that. So that's where we feel today, it's important for us to make an ample supply of wafers for other device players at the same time that we're building a strong portfolio of devices. But maybe you want to talk a little bit more about the competitive landscape?

Competitive side of things. And yes, so thank you actually, Tyler, to add to that, that's actually that coming from our foundation and how we try to transition the industry from silicon also to silicon carbide. One of the things that we've done always is not new that supporting our peers in the device level with our materials with the idea of like expanding the market for silicon carbide. When you look at it a little bit even higher levels, not even silicon to silicon carbide in terms of the how limited we are with the renewable energy and then also the sustainability and then the environmental reasons that the electrification of things is important. So with that, at Wolfspeed that we are more about the supporting and serving to the market. And I think that we have a really good relationship with our customers. And then we have our full commitments to protecting their processes and their needs from us. And then keeping a good firewall between our -- in terms of our vertical integration. But creating that market, of course, it helps us. It actually touches us in terms of the environmental and sustainability reasons. But it's the market that we see that there's so much potential that is normal to expect the competitors. We're not surprised with that. We're actually that, when we talk about in the technical threshold and the conferences that with our peers that we say that we're in this altogether. We will now see silicon carbide successful. And then there's plenty of room. And actually, we will be very much like catch-up game for the next decade or maybe 2. So we expect, of course, the competitors in the field to get stronger. Our motivation on our side that keep pushing on what we built in terms of the technology foundation, look for the better ways to serve our customers in the field, get the increase are the -- and at the end of the dollars and then the quality and the reliability of our devices. But at the same time, of course to maintain our edge in terms of the competitive edge. Brian, you also asked about China as well. And then, of course, that we monitor and then we see the movements there too. There are a couple of the companies in the silicon carbide field that we see good material. But then coming from -- it's between the 100-millimeter diameter to more so recently to 150-millimeter. As a technologist today, I see it is more of a time catch. And then because as you see and as we talk about more in the public that we are more into ramping the 200-millimeter and all that with the quality and/or better quality and better yields. So I think the summary is that there will be competition as expected as normal. There will be room for like a lot. But then for us, it's how well we serve the market and with our competitive and technology age.

Maybe one last question on technology, and I'll shift gears to another topic.

Sure.

But since we're on the topic of technology, China does sound like they're a step behind, the wafer sizes are behind. We hear yields are low. But you are hearing about certain innovations like wafer, slicing, Soitec out in Europe. There's -- one of your peers/customers, ON Semi, which is doing something after an acquisition of some GT Advanced, which is growing crystal. So are there innovative silicon carbide technologies that kind of keep you up at night? Or you view as more of a competitive threat. And which ones would you be more focused on?

Right, yes. And as I mentioned that at Wolfspeed, we're very heavy on the technology. And then when you look at our talent base that -- they actually -- they love the technology thrive on it. I mentioned that we're very hungry. And it's the lifelong dedication and now we see that it's okay, we're at the edge, and it's happening. So we can convert the market and serve to that market actually. But that same culture comes with a lot of paranoia as well, that when you say, Brian, the -- there are a lot of things keeping me awake like at night. And within our body of research and development, we try a lot of the things, just to relate to what's happening externally. And then we test and have a good understanding of what's happening in the field. I personally, as a part of my job that I go and explore and then study those. But what -- the examples that you're mentioning about the slicing or it's -- I see that it's all about getting to the -- yes, number one is performance. But the performance, the scale and the economies of the things, it's all about that, how do we bring the cost -- overall cost -- the bill of materials at the end of the day down and then all the technology influences to that, I see it that way. But at the end of the day, all those technologies should yield to well-performing devices and reliable devices. Yes.

Fair enough. Let's shift gears a bit to the scale up that's happening at Wolf. There's clearly a lot going on. You've got the large wafer facility up in Upstate New York, Mohawk Valley. And then recently, you announced a new materials plant in Siler City in North Carolina. So maybe starting with Mohawk, what's the latest on the ramp up there? Are you into customer qual. What's the expectation for calendar '23? And if we think about milestones moving through the year, sort of, first half, midyear, second half, what should we be expecting in terms of updates out of Mohawk?