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

Good afternoon. Thank you for standing by, and welcome to the Wolfspeed Inc. Second Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] Please note today's call is being recorded. I would now like to hand the conference over to our first speaker today, Tyler Gronbach, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Wolfspeed's Second Quarter Fiscal 2023 Conference Call. Today, Wolfspeed's CEO, Gregg Lowe; and Wolfspeed's CFO, Neill Reynolds, will report on the results for the second quarter of fiscal year 2023. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Wolfspeed's results internally. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially, including risks related to the impact of the COVID-19 pandemic. [Operator Instructions] And now I'd like to turn the call over to Gregg.

Thanks, Tyler, and good afternoon, everyone. Before we get into the results of the quarter, I'd like to take a moment to remember our late founder and CTO, John Palmour. We had a celebration of life last weekend, during which we announced that we would dedicate our Siler City manufacturing facility in his memory, naming it The John Palmour Manufacturing Center for silicon carbide. All of us knew John, through his nickname JP, and so the nickname for our facility will be The JP. He worked for over 35 years to advance and promote silicon carbide and largely as a result of his efforts, the world is recognizing its potential. We believe that silicon carbide is on the cusp of mass adoption and that our long-term outlook remains on track. First, electric vehicles were the bright spot in the auto market in 2022 despite many headlines that auto sales have slowed. Global EV sales grew more than 65% year-over-year and represented 10% of all vehicles sold in the calendar year. We've seen this overwhelming demand play out at Wolfspeed as our recent partnerships with industry leaders such as Jaguar Land Rover and Mercedes-Benz point to the strength in the demand for EVs and our ability to take share in this space. We remain confident in the industry's strong long-term fundamentals and believe Wolfspeed is best positioned to capitalize on the rapidly growing demand. Second, our $1.5 billion of design-ins in the quarter point to continued robust demand for our power devices. To date, 46% of our design-ins have converted to design-wins, representing more than 1,800 projects. We are coming off multiple quarters of record design-ins with a total of more than $16 billion of design-ins over the last 3 years. Now of course, there will be some variability in our design-in numbers from quarter-to-quarter based on timing of new agreements and decisions by customers. We anticipate that as our manufacturing capacities expand with new facilities, we will continue winning in the device marketplace. Third, we continue our market leadership position in the materials business, the aspect of our business with the highest barriers to entry. We recently announced an expanded agreement with another leading supplier of silicon carbide materials, which illustrates the intense demand for silicon carbide. From where we sit, the industry remains supply constraint, and this will continue to be the case for the foreseeable future. It is clear to us that the opportunity in silicon carbide technology is generational given the pace of adoption we've experienced over the last few quarters. At our Investor Day, I remarked that I have not seen growth like this in my 30 years in semis, and that view has not changed. While customer interest remains strong across both materials and power devices, as we discussed previously, silicon carbide production and manufacturing can present challenges along the way. Our Durham crystal growth operation, which is the world's largest silicon carbide materials factory, currently supplies our entire device business and a significant share of the merchant market. However, that is still not enough to support the massive accelerating demand for silicon carbide. With the intense growth in demand for both captive and merchant wafers comes to challenges of growing our materials output as well. We've continued to refine our crystal growth operations and had a recent breakthrough in our ability to grow taller bulls. The initial challenges in managing these taller bulls in our back-end processing have been resolved, resulting in significantly higher yields. It will take a few months before we return to normal production schedule for these materials as the improved product makes its way through the WIP, but we are encouraged by the results that we've been able to achieve with these taller bulls. Long term, The John Palmour Manufacturing Center for Silicon Carbide is critical to addressing the supply-demand disconnect that will support our expanding device footprint at both Mohawk Valley and a soon-to-be announced fab as well as the ever-growing demand for merchant wafers. Construction of The JP is progressing well since groundbreaking in September, and things remain on track as we updated during our last Investor Day. Regarding the progress at Mohawk Valley, we previously said that we anticipate revenue flowing through the fab in the second half of fiscal 2023. We remain on a trajectory to meet that target, and that will largely depend on our ability to complete qualifications and ramp the supply of 200-millimeter wafers, which we believe we will achieve. We continue to successfully run test lots through Mohawk Valley, which gives us confidence that we're ready to begin scaling production and recognizing revenue from Mohawk Valley in the fourth quarter of this fiscal year. As a reminder, Mohawk Valley is a first-of-its-kind fab, purpose built to produce next-generation silicon carbide power devices. We're in the final stages prior to scaling production in Mohawk Valley and one of my top priorities over the next few quarters is to ensure that we execute on that plan. We have a strong team and clear strategy in place and are confident in our ability to deliver strong results for our shareholders. While there may be some variability in our short-term results as we qualify and scale the world's first 200-millimeter silicon carbide device fab while also scaling the first production of 200-millimeter silicon carbide wafers, we are well positioned to capitalize on the explosive growth that we see through the end of this decade. Now I'd like to turn the call over to Neill to discuss our quarterly results. Neill?

Thank you, Gregg, and good afternoon, everyone. During the fiscal second quarter of 2023, we generated revenue of $216 million at the low end of our guidance range, which represents a 10% sequential decline when compared to the $241.3 million in the fiscal first quarter of 2023 and growth of approximately 25% year-over-year. As Gregg mentioned, we continue to see strong demand for our silicon carbide solutions. However, the supply chain issues we discussed last quarter caused variability in our quarterly revenue in the second quarter with equipment spare part shortages limiting our Durham fab output, while at the same time, we continue to work through the ramp of our taller 150-millimeter bulls. I am pleased to report that we have made significant progress on both issues and they are currently processing these improvements through our production cycle. In terms of our power devices, which grew approximately 48% in the quarter versus last year, we saw strong performance ahead of our expectations, mostly resolving the Durham spare parts supply chain issue we discussed last quarter. From a power device supply perspective, we now believe that we have achieved full capacity in our Durham wafer fab and virtually all future top line growth for power devices will come directly from the Mohawk Valley fab. From a materials perspective, we made very significant progress in improving yields on our taller 150-millimeter bulls. These yields are now comparable to our historical yields on shorter bulls. However, back-end wafer processing cycle times recovered later in the quarter than anticipated, resulting in lower-than-expected Q2 revenues for our materials products. We believe this past quarter represents the bottom of the revenue trough related to this issue as we exited the quarter at yields, cycle times and shipping rates that will all support future materials revenue growth. During the quarter, we also saw weaker demand for RF products due to secular headwinds with recession-related pullback in 5G demand. This resulted in lower-than-expected revenue for RF devices, which we expect to remain weaker in the second half of this fiscal year. Non-GAAP gross margin in the second quarter was 33.6% compared to 35.6% last quarter, and 35.4% in the prior year period, representing a 180 basis point decline year-over-year. Gross margin was negatively impacted by the previously mentioned lower yields on the taller 150-millimeter bulls and lower output of the Durham fab due to the supply chain challenges. While we made significant progress on both issues in the quarter and expect to see improvement moving forward, they both represented a drag on gross margin during the second quarter. In addition, RF devices continue to be dilutive to our consolidated gross margin. As we discussed, because of the immense demand for our power devices, we have not been able to optimize the RF manufacturing footprint as we had previously planned. We expect our RF product line will negatively impact our consolidated gross margin by approximately [Audio Gap] basis points for the next few years. As a result of these items, we generated adjusted earnings per share of negative $0.11 in the fiscal second quarter compared to negative $0.04 a quarter ago and negative $0.16 in the same period last year. Notably, adjusted EPS this quarter was favorably impacted by approximately $0.05 of non-repeatable events in other income and tax. Excluding these nonrepeatable items from our earnings, we would have been at an approximately $0.16 loss per share during the quarter. Before I discuss our guidance, I'll provide a quick overview of our balance sheet position. We ended the quarter with approximately $2.5 billion of cash and liquidity on our balance sheet to support our growth plans. DSO was 62 days, while inventory days on hand was 161 days, which is 26 days higher than Q1. Free cash flow during the quarter was negative $171 million, comprised of negative $67 million of operating cash flow and $104 million of net capital expenditures. During the quarter, we incurred start-up costs primarily related to the Mohawk Valley fab ramp, totaling approximately $38 million. Moving forward, we expect overall start-up and underutilization charges for Mohawk Valley to wind down as we ramp the fab included a non-GAAP adjustment for these start-up costs in the reconciliation table in our earnings release. In terms of our capital needs, since we last spoke, we have made great progress in securing funding for our greenfield facility construction and long-term capacity expansion plan. In November, we announced a successful convertible note offering anchored by one of our largest strategic partners, BorgWarner. We were extremely encouraged by the demand we see in the marketplace and believe it sets us up well to secure further funding. Additionally, we are still evaluating other avenues of additional funding, including government funding in the United States and Europe as well as upfront customer payments or investments, the capital markets and debt. As we stated previously, cost of capital and potential dilution is top of mind for us when we are pursuing additional capital. Now moving on to our fiscal third quarter outlook. We are targeting revenue in the range of $210 million to $230 million. Our revenue guidance reflects continued strong demand as well as supply execution improvement in both our power device and materials product lines, partially offset by continued softness in RF demand. Our Q3 non-GAAP gross margin is expected to be in the range of 32% to 34% as we expect to see some improvement in both power device and materials products, offset by RF weakness due to the lower volumes. We expect non-GAAP operating expenses of approximately $98 million to $100 million for the third quarter of fiscal 2023. We expect Q3 non-GAAP operating loss to be between $22 million and $30 million and nonoperating net loss to be approximately $3 million. We believe that we will realize approximately $5 million to $7 million of non-GAAP tax benefits as a result and expect Q3 non-GAAP net loss to be between $15 million and $20 million or a loss of $0.12 to $0.16 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, project transformation and transaction costs, factory start-up and underutilization costs and other items as outlined in our press release today. As always, our Q3 targets are based on several factors that could vary greatly, including supply chain dynamics, overall demand, product mix, factory productivity and the competitive environment. With that, let me pass it back to Gregg for his closing remarks.

Thanks, Neill. Despite some macroeconomic pressures on the silicon semiconductor market, we are confident in our long-term outlook and the strong secular trend for the demand for silicon carbide. Our design-in number continues to be robust, and the opportunity pipeline remains at a staggering $40 billion. We have a strong pipeline of design-ins across a wide range of applications, including automotive, industrial and energy. We are increasingly well positioned to capture a significant share of this opportunity and are committed to investing in the necessary infrastructure to support our growth. As far as our infrastructure goes, our focus on ramping Mohawk Valley will allow us to better scale our power device production, while our 200-millimeter materials capacity also scales. The learnings from Mohawk Valley have given us a blueprint on how we'll approach the construction and ramp of our next fab. We should have an update for you on those plans very soon. The immense demand for both merchant and captive materials gives us further confidence in our decision to expand the Durham materials footprint and build The JP, dramatically expanding our materials capacity. This factory will be a game changer for our business and will allow us to increase supply at unprecedented levels compared to what is currently in the marketplace. We were encouraged by our convertible note offering in November, and we are focused on effectively deploying this capital to further our capacity expansion plans and generate returns for our shareholders. Now there will be challenges as we ramp our new facilities but we will [ tap ] them quickly and use our 35 years of experience to resolve them and keep progressing forward. And now I'd like to turn it over to the operator for questions.

[Operator Instructions] Our first question is from Harsh Kumar with Piper Sandler.

Gregg, I wanted to ask about the revenue levels that came into the December quarter relative to perhaps what we were thinking. You talked about a couple of things. You talked about some bull-related issues. There were some equipment issues with your older fab in Durham. And then you also talked about back-end issues in the materials business. I was curious if you could help us think about maybe what -- I'm not asking for exact splits, but what the contribution was, the revenue mesh from maybe each of these factors or if there was one that was materially bigger than the other? And also, I noticed that the cadence of guidance going forward is a lot smaller than what you typically give. Your midpoint is only $4 million, $5 million higher. Is that because you are being conservative? Or you want to get a bigger better handle on these issues before you go back to guiding sort of bigger increases? And then I have a follow-up.

Harsh, this is Neill. Let me take a shot here to start. There's a -- like you said, there's a lot of moving pieces here. Let me just unpack that a little bit and then maybe think a little bit about where we're headed moving forward just based on some of the comments you made there. So first of all, let me just say, overall, we're continuing to see very, very strong demand across both power devices and materials. And as we previously discussed, for both of those areas, that's going to be much more of a supply situation rather than it being a demand situation. So bringing on supply is really the critical focus there. But what we did see in the quarter was a weakening in RF. RF markets were weaker. We did see some orders pushed out in the quarter. I mean if you look back just to -- back to Q1 versus what our outlook is this quarter, it's approximately a 25% decrease. So as you look into Q3 and Q4 and even in the back half of the year, it's about a $15 million decrease in revenue versus what our prior kind of expectations are. So weakening from a demand perspective and RF is a piece of this. Now you pointed out a couple of other areas. We had 2 issues last quarter we talked about. One was the lower yield than the 150-millimeter bulls and the taller bulls on 150-millimeter. As we said in the prepared remarks, those issues have been resolved from a yield perspective. It took a little bit longer in the quarter to get to the cycle times and throughput. So we built a bit of inventory. So the shipping rates at the end of the quarter were a little bit slower. We saw that in increased inventory. But essentially, we are at the bottom of that issue, and we are on our way back up. The last one there was just on the Durham fab. So from a Durham fab perspective, we had some supply chain issues. This actually came in better than we anticipated. But for all intent and purpose now, the Durham fab is capped. We talked at Investor Day about a $400 million annual revenue coming out of Durham fab for power devices. That's about $100 million a quarter, and we're going to be capped on that until we start ramping up Mohawk Valley. So I would think about future significant builds in revenue from a power device perspective are going to be coming from ramping up Mohawk Valley.

And Harsh, I would just add to that. We're at an inflection point right now where we are running material through Mohawk Valley. We are planning for revenue coming out of that factory in the fourth quarter as we -- fourth quarter of this fiscal year as we qualify the product. The yields that we're seeing on the preproduction runs right now give us substantial confidence in being able to do that. And in fact, they're running higher than we would have anticipated at this point. So we're really, really happy with that. And I think as we ramp this facility, which, again, recall just 3 years ago was a field of mud, we're going to see a substantial increase in capacity coming online, which obviously will help us satisfy that substantial demand that's out there.

Very helpful guys. And for my follow-up, actually, it's a good segue into the Mohawk Valley schedule. So very pleased to hear fourth quarter, which is June quarter for revenue ramp. I've been already getting some questions from investors on how we should think about the revenue scaling to happen there. You've got a lot of pent-up demand, Gregg, and I think the industry relies on basically 2 or 3 guys for much of the production of the vertical production, 2 guys actually, you're one of them. And so help us think about, if possible, how the scaling will happen for that fab as the rest of the calendar year goes on?

Well, I'll kick it off and then Neill can talk a little bit more detail. So we're anticipating revenue from that fab kind of think of it in the single-digit millions of dollars in that June quarter in the fourth quarter. And then we would be ramping up beyond that. We're ramping up the supply of the 200-millimeter wafers for that at the same time. There's probably going to be some puts and takes, and we'll also ramp it up and I would describe it as a methodical process. So it's not just sort of turn on everything at once. But we're very, very pleased with what's happening with the yields, as I mentioned. Both the device yield and the process yields are looking really, really good right now. We expected that to eventually be the case. It's actually happening earlier than we anticipated.

Yes. And just to kind of frame up the revenue, as Gregg said, we thought we'd probably have around single-digit kind of millions of revenue, maybe even in Q3 and more substantial growth in Q4, we start to ramp up the fab. But we'll see that push out about a quarter at this point. But it's going to be a lot of moving pieces. Look, we're bringing up the first, as Gregg mentioned, the first 200-millimeter substrates, we're bringing up the Mohawk Valley fab for the first time. We're in the middle of qualification lots. We're matching that up with customer schedules in terms of qualification. So a lot of moving pieces, so that will probably create some variability here as we move forward. But from where we sit today, we really are on the cusp of bringing this project we've been working on for multiple years and bringing it to reality.

Our next question comes from Brian Lee with Goldman Sachs.

Maybe just a follow up on Harsh's question because there's been a lot of intense focus around the exact timing of Mohawk Valley ramp. Neill, you said there's a bit of a push out here. As you alluded to, I think people are expecting some minimal revenue in the March quarter and then ramping through the back half of fiscal '23. Now it's June, so it's a quarter behind. Is this a bull back-end processing issue? Is it customer calls taking longer? I guess just a sense of maybe pinpointing what the issues are. I know there's moving pieces, but it almost sounds like as you're navigating this, maybe frame for us kind of how you feel about the June quarter, these issues not repeating and maybe having even further push outs? And then I have a follow-up.

Yes. Thanks a lot, Brian. I would say that we're ramping this in kind of a conservative type way. We are bringing together, first off, the world's first 200-millimeter silicon carbide wafer fab on the world's first 200-millimeter silicon carbide wafers. So there's a lot of variability in here. We're very, very pleased with what's the results out of the fab right now. But the last thing we want to do after 3 years of hard work has sort of dropped the ball right as we go into the end zone. So we're going to ramp it up in a very methodical way. We've got material running through the factory right now. As I mentioned, it's looking really good. We anticipate qualifying it and then shipping this first few millions of dollars of revenue in the June quarter. We've got customers lined up for that, and then we'll be ramping in the following quarters as well. So I think we feel pretty confident at this point that we'll be able to do that. There's going to be some puts and takes. We still have to qualify. But based on all the data we see today, we feel pretty confident in that.

Okay. Fair enough. And then a follow-up for you, Gregg. I think you mentioned the design-ins, I call it a 46% kind of conversion number. I think you were talking about in terms of projects. So I'm taking that to assume its units. Is there somewhat of a kind of similar conversion metric you can provide in terms of design-ins to revenue, just whether that's in the quarter or something you've seen cumulatively, and if that's sort of the right framework to think about success on the design-in pipeline going forward?

Sure, Brian. So when we talk about that 46% number, that's the 46% of the design-ins that we have, have transitioned from design-in to design win, which means we're starting to ship initial production volume. So it's a percentage of the projects, it's not a percentage of the total dollars, it's a percentage of the project. So think of it as 46% of the projects that we've won, where customers have given us a design-in have now transitioned into that initial phase of production ramp, which is, it really remains an astounding percentage to me. It's a lot faster than I would have anticipated. Most of those are going to be more industrial-type projects because they typically have a shorter ramp profile compared to automotive. But we're seeing good traction on the automotive ones as well. So that's how to think about that.

Okay. But presumably, unless the project values, the project scope were to change, the projects converting at 46% or so would also translate pretty similarly on a dollar basis?

Yes. And what we do from a forecasting perspective is we start with, obviously, our overall opportunity pipeline and then we have design-ins. And when we look at going from design-ins to revenue, we put a pretty conservative filter on that, assuming some projects aren't going to make it all the way through. Some customers are going to not go into production with the project. A lot of things can happen in between now and then. So we have put a pretty conservative factor on there in terms of kind of framing the revenue compared to what the design-ins are. And that 46% number gives us a lot of confidence in the amount of conservatism we've had on that.

Our next question comes from Samik Chatterjee with JPMorgan.

I guess for the first one in near term, and then maybe a longer-term question on the second one. I know last quarter there was the guidance about sort of exiting fiscal 2Q or the December quarter at roughly $1 billion run rate of revenue. And based on sort of your commentary today, it seems more you're saying the scaling to that $1 billion sort of revenue run rate even when we think about fiscal 4Q, if you sort of put Mohawk aside, is maybe a bit difficult because RF demand has moderated and essentially, your turnover is a bit more gap in terms of power devices. Am I getting that right? In terms of even moving sequentially from higher from March to June, it sounds like you're saying it's a bit more limited in terms of getting to that $1 billion run rate? Or is that unchanged? And then I have a follow-up.

Yes. I think that's mostly correct. So let me just maybe just frame it up a bit just to make sure we're all kind of on the same page here. I think as we looked at this back in October and we were looking at this quarter, given the tolerable yield issues, the supply chain challenges and the Durham fab, our anticipation was to be maybe meeting that kind of $1 billion run rate, kind of $0.25 billion revenue number run rate sometime during Q3. As you can think about that as [ 2.25 -- between 2.25 and 2.50 ] sometime in Q3. Now RF has been a drag on that with the demand about $15 million a quarter. And we did anticipate having some revenue from Mohawk Valley, some smaller amounts potentially in the quarter, and that has now pushed out. So as you start to think about revenue timing going forward, with Durham now, I would say, essentially capped in what we had here, we see the RF numbers kind of staying lower. We're going to get a little bit of benefit off of the better yields and shipping rates in materials. So what we'll see here is it's really going to be a function of when and how we ramp Mohawk Valley. So essentially, our revenue and even our margins for that matter, will really be a function of the timing of Mohawk Valley. So it will be somewhat limited in the amount of revenue we can drive in the back half of this year outside of RF until we start bringing on more supply from Mohawk Valley, and that timing is -- I think all roads are going to lead to Mohawk Valley in that sense.

And for my follow-up, I saw in your press release, you announced the partnership that you have with ZF and their press reports out there indicating you have agreement in terms of a new plant in Germany. Sort of maybe sort of a 2 part, one, sort of, it seems like what you're indicating is you haven't really confirmed I made a decision yet on the new fab in Germany. And secondly, sort of, tilting more towards Tier 1 suppliers like ZF and BorgWarner with some of your capacity announcements, is that a change versus how you wanted to go to market with more sort of direct approach to the OEMs in the past? Just curious, sort of, given that more recently, you've been more sort of announcing engagement with the Tier 1s.

Yes. Thanks for the question. And recently, in fact, in early January, we made an announcement together with Mercedes. So we've had a consistent sort of theme of both Tier 1s and the OEMs in terms of announcements. OEMs that have been announced have been General Motors, Jaguar Land Rover, Mercedes, Tier 1s, of course, ZF, BorgWarner, number of others as well. So there's no change in that. I think we've been pretty consistent that we've been winning long-term agreements with both the OEMs and the Tier 1s. And as this transition from internal combustion engine to EV has such a dramatic change for the automotive makers, I think you're going to see a lot of engagement in both of those. In terms of our next fab, we mentioned at our Investor Day that the demand for our products is so strong that we need to have a new fab in place kind of ramping up in the 2027 time frame. If you subtract then from that the amount of time it would take us to build and ramp that factory. It says that we need to be starting to put that thing in place in 2023. And so what I would say is just kind of stay tuned for that. We've got a lot of work going on there. And as we make announcements on that, we'll be able to comment on it.

Our next question is from Gary Mobley with Wells Fargo.

I had a follow-up on the potential for new silicon carbide wafer processing facility since you brought it up in your prepared remarks, Gregg, I'll probe a little bit deeper. The potential for that with a joint venture. Would that mean the joint venture partner would take the bulk of the output of that facility, if not all of it, not too dissimilar from BorgWarner and Mohawk Valley? And how would such a build impact fiscal year '24 CapEx relative to prior communication?

Yes. So what I would say is we really can't get into a lot of details on that. I would say just kind of stay tuned on that, and then we can be very, very clear.

And I'll add there, Gary, just from a CapEx perspective, when we laid out the plan again of October as it relates to CapEx, I mean, as I've mentioned before, that really includes everything. We knew at that point we would need a second fab and a materials facility and what we've laid out from a capital planning perspective includes all of those things. And right now, we don't see that any differently.

Got it. Got it. For my follow-up, when you announced Siler City, I believe the communication was that all that 200-millimeter output would be consumed internally. Has that view changed at all? Or will you be supporting some of these merchant LTSA wafer supply agreements with some of that output. And then maybe if you can just give us a sense of the trajectory of your wafer-related shipments based on some of these new LTSAs?

Yes. So basically, we're at the early phase of really ramping up 200 millimeter, and we're doing all we can to ramp it up and feed the Mohawk Valley fab. And we're also doing all we can to drive the cost and the commercialization of that product to a point where we can decide at that point what makes sense from a long-term agreement perspective. At this point, it's looking like the vast majority of what we'll do at The JP now will be 200-millimeter. We do have the ability if we wanted to, to run 150-millimeter there. So if there was continued need and demand for 150-millimeter, we could do that at The JP facility. But yes, the vast majority of what we're going to be doing in The JP is going to be the 200-millimeter.

Our next question comes from Colin Rusch with Oppenheimer.

Folks are getting a little bit more mature in the auto industry around their platforms. Can you talk a little bit about the cycle times that you're seeing in terms of some of the design-ins as they look at scaling some of these platforms into multiple vehicles and moving into multiple geographies?

I would say we're seeing a couple of different things. First off, the cycle from when a customer begins thinking about implementing a new platform to when it goes into production, is still in that kind of that 4- to 5-year range, I would say. Some of the more startup-type companies can be a little bit faster, but that's kind of the range. What I would say is happening, though, is customers are taking the platform that they're going to use for vehicle X, and they're reusing it for vehicle Y. And so obviously, the cycle time for that is dramatically shorter to be able to just kind of rinse and repeat and reapply the same platform for another vehicle. And we've seen that numerous times across just about, I don't know, about all of our design wins, but many of our design wins, we've seen where we were in 1 platform and now we're in 2 and now it's 4. And I think that kind of is driving some of the steeper ramp that we're seeing in the demand for the product.

All right. That's super helpful. And then in terms of some of the industrial applications, are you seeing anything new on the horizon that are real accelerants in terms of demand for you guys? Are there areas outside of automotive that are real highlights that we could think about as demand overs for fiscal '24 and '25?

We're seeing a lot of different applications. They tend to all be small individually and collectively, they can be large. That's anything that's basically converting energy at a high-power or a high-voltage range is, is really making a move towards silicon carbide. We're seeing that in solar systems. Wind systems are doing the same thing in terms of green energy server farms. We've got design-ins into non-vehicle but other transportation applications like vertical takeoff and landing equipment. And personal watercraft is another example where people are -- customers are designing it in. So yes, we're seeing it across a large number of different kinds of industrial applications. And in this regard, it's really the exposure we have to that is really led by Arrow. That's done a really terrific job of getting us access to their footprint to be able to engage with customers. From a sales perspective, we have a relatively limited footprint in Arrow, that's the largest sales footprint in the world. And so they're able to go after customers across all different geographies and sizes to be able to penetrate that market and evangelize silicon carbide.

Our next question is from Jed Dorsheimer with William Blair.

Gregg, first one to you, if you would, and I don't want to trivialize how difficult it is in terms of what you're doing with 200-millimeter. But as you've sort of -- as we've gone through this process over the past 3 years and kind of forging this path, are there any lessons that you can share in terms of areas that things have kind of gone better in areas that maybe have gone a little bit worse that kind of gets you to the end result? And I'm asking this question kind of on the eve of -- or in the -- when you do announce that second fab, how to sort of gauge time line relative to this first fab? And then I have a follow-up question.

I would say a couple of things. First off, we built this fab during a crisis, and we weren't expecting that. And nevertheless, 3 years from when it was a field of mud to today, we're beginning production. It's actually quite astounding, I think, what the team has accomplished. So -- and I think they did that through really a good plan but probably more importantly, a good adjustment when we were thrown curve balls and so forth. And you guys remember all those curve balls were. The second thing that I would say is from a super positive side of things, the decision to go fully 200-millimeter and to go fully automated was really solid. Originally, we were saying, well, maybe we'll start it at 150-millimeter and then convert it to 200-millimeter, I think that would have been such a distraction. We had to get to a point where we were confident in 200-millimeter, but we did get to that point, oh, gosh, it was maybe 2 years ago, I think. And I think kind of thank goodness, we did that because I think it would have been really difficult to convert a 150-millimeter fab to 200-millimeter. And I think the automation has been just stunningly awesome for us. I was talking to the team about process yield expectations and so forth. And the fact that we don't have humans interacting with these wafers that can be pretty brutal has been really positive. So I would say that's all -- I think those are some of the positive things. I think we've had obviously a number of different challenges, but I think the experience of the team has allowed us to kind of clear those challenges quickly as well.

Got it. That's helpful. And [Technical Difficulty] for maybe you and/or Neill. But as we think about the ramp, there's -- and it sounds like your strategy -- some strategies are to build high buffer inventory and sort of ramp higher or harder, and it sounds like you're still taking a very methodical approach just by the [Technical Difficulty] in terms of the ramp-up. But I'm wondering if you could help us understand, if ramping on lower volume, you're going to be taking on the fixed cost and depreciation on a unit number, so -- or a unit basis, which I would think will have kind of a near-term headwind from a margin but how should we think about the crossover of those vectors because at 200 millimeters you're going to have a fundamentally lower cost basis. So is that sort of a 40% load or utilization or 60%? Or where do you see that crossover where what might be a little bit of a headwind all else equal, kind of becomes that tailwind to really accelerate things.

Yes, I'll kick it off and then kick it over. I'll start it and then kick it over to Neill. We're definitely taking a more methodical approach. And as I mentioned before, we're in really good shape right now. We've got yields that are looking really nice right now. And the last thing we want to do is just turn the accelerator too hard and kind of mess it up at the end here. So I think we're in the mode of let's do this in a methodical way, let's take it step by step. We're really pleased, I said, with the yields that we're seeing out of this, we'll be qualifying the product in the fourth quarter and shipping to customers, and then we'll turn on the fab kind of step by step.

Yes, that's from just the overall cost and I think fixed cost absorption, I think it's kind of where your question is going, Jed, in terms of bringing on factory for the first time. First of all, I think -- I don't know the exact number, but I think if you recall from the Investor Day, we said Mohawk Valley kind of breaks even, at least from a cash perspective, from kind of that 30% to 40% kind of utilization level, which I think is probably still valid. Everything we're seeing now from wafer cost yields to the overall cost structure of the fab all looks pretty good. As we move forward, I think I've talked about this before, what we'll do to manage through this kind of early stage ramp is we currently have a start-up cost that we back out that we give an update on every quarter. We'll also think about an underutilization adjustment going forward to get to get the fab being marked to about 70% utilization. And then we'll start to wind that down as we build inventory in the fab. So right now, I think what you see is kind of the peak start-up and underutilization number that will just start winding down over time. And that should give people a really good view of what the fab capability is from a cost perspective, even at a relatively low level of utilization. And what you see there is when we talk about the fab having die cost, it's 50% lower than our current cost in Durham, that's really based on the kind of lower utilization numbers. So we'll be able to kind of manage through that. We'll give an update on it every quarter, but we think we -- but I think everything I'm seeing from a cost perspective thus far, there's a lot of confidence in the margins that we'll see as we ramp up the fab.

Our next question is from Vivek Arya with Bank of America.