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

Thank you, everybody, for joining us. I'm Craig Irwin. I cover sustainability here at ROTH. Followed Wolfspeed for, gosh, I don't know, something like 15 years, a long time. And I've always had a lot of interest in the silicon carbide business, power electronics business, and it's really amazing what these guys have done over the last several years. Really happy to have Neill and Tyler here from the company today. And thank you for joining us.

Thanks, Craig, for having us here. It's a terrific conference, and we're happy to see everyone who've met with so far, and it's been terrific and it's always great to spend time with you as well.

Excellent. So the question on everybody's mind right now is you're moving from production in a facility that was really, I guess, you call it chase and bay, capacity constraints sold out, the margin headroom there is kind of limited. And you have a full-scale, world-class semiconductor plant that's slated to come online with 8-inch transformational technology. There's a lot that's going to go on with margins between here and there. Can you help us start to unpack the margin progress as Mohawk Valley starts to come online?

I think that's a great question, Craig. And I think if you look at -- from our perspective, when we talked about this on our last earnings call, I think we made the comment that all roads lead to Mohawk Valley at this point. And that's for several different reasons. I think from a capacity perspective, we have a small factory down in Durham, North Carolina, we referred to, which is really running wafers right now and running product at 150-millimeter substrates. And the capacity is limited there in the sense that it can do about $400 billion or so of revenue per year, $100 billion a quarter, and we're at capacity. So the next ramp up for us is going to be building out and ramping up the fab up in upstate New York in Mohawk Valley, and that's at 200-millimeter. And what that's going to do for us when you move from a 150-millimeter wafer size to 200-millimeter wafer size, as you know, you get about a 40% cost advantage at the product level, so at the die level, you get about a 40% cost advantage. So we're going to move from an older fab, although one that will still produce product for us for quite some time down in North Carolina to a state-of-the-art factory up in upstate New York, fully automated 200-millimeter facility. And as we ramp that fab, that will clearly start to take the margins up as we move to that new cost basis. And that's really where we're focused right now. We're running wafers in the fab. We anticipate having some revenue start to come out of it by the June quarter this year, maybe small amounts, maybe low single-digit amounts that come out by that point in time. And that's really what the ramp is going to be out. So from both a revenue perspective and a margin perspective, the more revenue we run through 200-millimeter through Mohawk Valley, the more we'll start to see the margins come up as well. Now I do caution people. This is the first time that anyone's ever brought up crystal growth at volume at 200-millimeter. So we've got a lot of things at the bleeding edge going on at the same time. We're also bringing up a new fab at the same time. So between here and potentially 20% utilization of the fab, there's going to be a few bumps along the way, I'm sure, but calendar year 2023 is going to be an exciting time for our company as we bring this kind of bleeding-edge technology to the market.

Excellent. So how should we think about sort of the step from 20% to 40% utilization? Does this really deliver material margin uplift? And I know the fab is sold out, but is this really a function of customer mix or any other considerations that we should look at to understand the progress on the P&L?

Yes. Well, first of all, I think that the important factor there is that at a roughly 20% utilization of Mohawk Valley, you more or less double our power device revenue in the company. So I think that first step of getting to 20% is probably the most important factor to look at first. We'll continue to work on that during this calendar year and as we get into 2024. But as you looked out beyond that, it starts to become a little bit simpler, right? I mean you're running a fab at utilization level where you get used to the cycle times, the yields, the cost structure, you're delivering -- consistently delivering product to customer, and then you just put that on a repeat over time. So it will be a function of a lot of things. I think the fab -- from a fab perspective, a lot of learning cycles will have happened already and as we start to bring the fab and expand it. But just as, or maybe even more importantly, we'll have started to deliver substrates at volume from a 200-millimeter perspective as you start to bring those online as well. So I think, as you think about 20% or even going to 40% or 50%, it's going to just continue to be a function of those things and putting that on repeat, so to speak, building more 200-millimeter crystal growth capability, putting that into the fab and then continuing to bring the fab up over time.

And Craig, to give you some props. I think there's a lot of folks that are trying to get underneath the story. But I think some of the insights that Craig has about the industry and where the market is moving. I think, everyone is trying to build 150-millimeter silicon carbide capability today. But as Craig has kind of pointed out in some of his recent coverage of Wolfspeed, 200-millimeter is where the action is really going to be at. And really, the thing to pay attention to is we've got an 18- to 24-month lead on 200-millimeter substrates for making devices that Neill just talked about. And I think that's really, as you think about the opportunity and where the growth can really kick in, 200-millimeter is an important thing.

That was generous. So the big question that a lot of investors have, and obviously, all your customers on the wafer side have is, would you consider merchant sales of those 200-millimeter wafers, right? You're the only game in town for commercial MOSFET production from what I understand. There's one that might be breakeven but with lower yields. What are your views on merchant sales? And even 6-inch wafers -- or sorry, 150-millimeter wafers are short now. What are you guys thinking about merchant sales and supply and demand seems like maybe price is an opportunity?

Yes, for sure. And I think first of all, just on the overall requirement, we think that from a device perspective, this market is going to grow at roughly a 40% CAGR to the end of the decade, at a 40% potential EV adoption rate. So there's going to be a significant amount of capacity required between now and then to bring a lot of these products and applications to the market that leverage high-power semiconductors for the high-power electronics industry, particularly around EVs and other things. So I think as we look forward from a substrate perspective, we'll continue to sell 150-millimeter wafers into the merchant market under the long-term agreements that we've signed up across a number of companies. But as you think about 200-millimeter, I think we're a little bit ways out from really making a decision there. And the reason for that is we're in the very early stages of this technology. So the costs are higher. So it really isn't a commercial opportunity at this point, and that's a decision we would make down the road. So first and foremost, I think our game plan is, let's continue focusing on the cost, on bringing 200-millimeter to scale, leveraging that in our internal factories that will -- obviously, that volume will help bring the cost down over time. And then we can determine what the right opportunities in the marketplace as it relates to potentially delivering that into the merchant market.

So then if we could talk a little bit about the merchant device sales, right, you've traditionally sold quite a bit through distribution. Is this something that's really a strategic focus of the company? Given that we're so short on devices right now, is this really what you're doing to fertilize the engineering talent out there and the understanding of the architectures?

Well, let me get started here. Maybe, Tyler, you have a couple of things to add. But normally, when you think about the opportunity for silicon carbide, first and foremost, it's really been made by the electric vehicle market. The volumes from electric vehicle opportunities, it's what's really bringing this opportunity to the market. And what that's doing is, over time, as you see these volumes come up and then costs come down over time, it's open the opportunity for many, many more applications on top of what we look at today. If you look at our pipeline, for instance, our sales pipeline is over $40 billion. But about 70% of that is EV, but the other 30%, a very significant size of that is for industrial energy opportunities across a number of applications.

Yes. And just to put that into perspective, the things we're talking about here are things like you might expect solar and wind. But then there are things like backup power supply and server farms, vertical takeoff and landing vehicles, there's a boat out front with an electric engine, and we were talking yesterday with the CEO of that company about opportunities for silicon carbide because that boat is going to go 100 miles an hour, but we think it can probably go 150 miles an hour if it was leveraging silicon carbide. So we're still so early stage. And I think the thing that gets us really excited is we have this partnership with our Arrow Electronics. They have a 20,000-person sales force around the world. And what they continue to bring to us are the things that I just mentioned. So like Neill said, EVs are going to drive the lion's share of the revenue for Wolfspeed, but where we see opportunity well into the next decade is people leveraging the economics of silicon carbide in industrial and energy applications.

So you're sold out for Mohawk Valley and the new fab you just announced in Europe. My instinct is, by the time we do this again next year, you'll probably almost be sold out, if not already sold out. Doesn't leave a ton of room for these other applications. And the U.S. CHIPS Act is here. Can you talk a little bit about your sort of strategy or your strategic approach around how you're allocating capacity in these plants as you build them out? Are you leaving a certain portion for that merchant end of the market for some of these other applications to mature? And then I guess as a second part of the question, I know there's diversification of the product list going up to 10 or 25 kV. How important is that for just unlocking the long-term potential of the market?

Well, first of all, silicon carbide is really great at driving efficiency for high-power electronics as we talked about. And I think that this industrial energy market is something that's been great. In fact, the lion's share of our revenue today, as we're waiting for a lot of these EV ramps to start, it comes from the industrial and energy markets through the distribution channel. We have a terrific partnership with Arrow Electronics, who's our global supplier from our global customer in that sense from a distribution perspective, who we sell to companies all over the world in various applications at various power levels for a lot of the applications that Tyler was talking about. And then from a capacity perspective, it is important. Look, the EV ramps are significant. It takes 3 to 5 years from the time you design in a vehicle to the time you start to see a ramping. So we have very good visibility out into the future as to what a lot of those ramps look like. So we have to be very disciplined internally to ensure that we also have capacity for all of these industrial energy opportunities. And the way we think about that is consistent with how I think the market is shaped, which is you only think about 70% or so of it being automotive versus some of these really terrific industrial energy applications.

Yes. If you're an investor that's thematically thinking about sustainability or ESG, silicon carbide is a terrific way to play that. Because -- I'll give you another example. We've been talking with a big aviation company. And ultimately, they are going to bring an electric plane to market, but what they're thinking about in the interim is green taxing. So there's large fuel consumption from the gate to the runway and from the runway back to the gate. So they're looking, how can they take the existing fleet and go hybrid with a battery in that plane. So as Neill said, we think, as we look to electrify more and more, this is where supply is super important. And I think, once again, Craig has kind of pointed out that capacity is not coming in fast enough. We've talked about a pretty significant capital investment program over the next several years, and that's only going to get us to, Neill, what about 20% to 25% of the market. We'll have device capacity of about $5 billion in 2027, and we're talking about a market that's probably $18 billion to $20 billion by 2030. So more capacity is needed for sure.

So just if we could kind of tap back to the short term, right, EVs and adoption EVs are a very important driver, obviously, to the customers. I've got a slightly different view than my peers. And I know that the ramp at Mohawk Valley is it's not going to flip all the switches at once, we go vertical. Can you maybe shape that out for us how this is likely to progress?

Look, I think it's going to be, as I said earlier, Craig, I think it's going to be an interesting ramp because we're doing many things for the first time, and we're leading the industry in terms of the transition to 200-millimeter. We are going to be ramping it for the very first time. So we're right at the bleeding edge. So I think it will continue to be somewhat of a -- maybe kind of claw our way through up to 20% utilization at Mohawk Valley. I think that will be function of the substrate and the crystal growth capability that we'll be bringing up this year. And but once -- again, once we get to that kind of 20% utilization, it's not just about the fab, which is 1 piece of it, it's about bringing up the substrates as well and bringing up the crystal growth capability. And I think that's what we're going to be working on this year. Now look, I think we've got the capacity installed to get to that 20% right now. So that is a matter of feeding the new capability that we've built over a number of years. And I got to tell you, it is incredibly exciting internally within our company. This is a program we've been working on, as you're familiar with, for a number of years. We did our first 200-millimeter substrate. We -- and we sampled it about, I think, 2015. So it was roughly 8 years ago. So from the time it took us to go from 200-millimeter crystal in 2015 to commercially ramping this at volume at the world's first 200-millimeter facility in the world, it's pretty exciting. So from an internal perspective, we're excited for what's ahead this year. But I think what it really means is, as you look out to the end of the year, it's about bringing stable supply to our customers. And I think that's a kind of a marker, in our mind, but we'll really start to be able to bring significant capacity to the industry, which is going to be needed, not just for us, but for our competitors and rivals as well.

I know you wouldn't say this, but I will. I know that was a real silicon carbide crystal not something grown on graphite. And I understand that might have been done by other people. So just to interject that. Capital, right? You've been getting a lot of questions about capital then you raised substantial capital to allow the European fab to be built. Can you maybe talk to us a little bit about capital management right now? What are your priorities?

Yes. First of all, thanks, Craig, for the question. From a capital perspective, we're actually in really good shape. I think we've north of $2 billion of cash on the balance sheet. We don't have any exposure to Silicon Valley Bank or any of the other banks that have been mentioned recently. Actually, we have a very strong capital preservation policy with relatively short durations in order to fund our growth. So I think we're in a very good position there. But secondly, because we have a very large cash balance, it gives us a lot of flexibility right now. From an investment perspective or a capital raise perspective, we'll look for opportunities to continue to advance that. But if we didn't raise capital this year, I think we'd be in okay shape. If we see the right deal in terms of the calendar year 2023, if we saw the right opportunity, we would go and execute it to continue to fund our plans going forward. But look, we've got a lot of flexibility. We've got a significant amount of cash on the balance sheet, and we'll continue to get ahead of it. Now if you go back and look over the last several years, we've been very far ahead of our capital management -- our capital raise requirements, and we'll continue to execute from that perspective.

And then the European fab, the expectation of the subsidy funding out of Europe. Is there any changes or any update that you can share with us on that?

Not really. And I think maybe it's important here to just kind of step back and look at the construct of how we think about investing in these things. So I maybe using Mohawk Valley as a kind of an example here. Mohawk Valley, from a gross perspective, is going to cost us about $2 billion to build the factory. We had a great partnership with the state of New York, where they'll fund about $0.5 billion of that. So net to us is about $1.5 billion of cash. And this is a fab that can generate potentially north of $2 billion of revenue per year with essentially 60% cash fall-through at an EBITDA level. So a tremendous cash generation vehicle. If you fast forward that and now look at another fab on top of that, so a terrific return model, cash on cash as it relates to the investment. We think of the same type of model for a potential European fab that we announced recently. That fab would be larger than Mohawk Valley. So -- but to think of the same construct, not $2 billion maybe add 25% or 30% to that, maybe add a bit for inflation, so maybe $3 billion or so to build a factory like that, but with a reimbursement model similar to what we set up for Mohawk Valley at around that 25% level. So I think the economics are there. I think now it's a matter of managing through what have been -- I think it's been good progress with the various institutions related to getting the funding from a government incentive perspective. We've managed that through the U.S. with the CHIPS Act and the investment tax credit. We're making similarly good progress, I think, with the -- on the European side. But at the end of the day, that all still needs to be finalized. We'll see how it plays out. But right now, I think we're in a good position. And we really like the economics as it relates to the fab for bringing on capacity as it relates to bringing on long-term supply capability for silicon carbide.

I know there are a few holders in the crowd. I was wondering if there were sort of burning questions. Otherwise, I can obviously keep going. All right. So my favorite is obviously the Fab 3. I know I'm kind of sticking my neck out a little bit, but you're going to be out of capacity pretty soon. I mean a year is not long. And come sort of '27, '28, I would suspect that you might be able to self-fund something like that, '27, '28, '29 somewhere in there. What are your long-term expectations for cash flow and reinvestment? I mean is this something where we -- I guess, do you share the view that in the next couple of decades, this is a $50 billion, $60 billion market, and you just want to invest and dominate?

Well, clearly, Craig, there's a huge opportunity for the market to grow. I think if you look at the end of the decade, we just talked about a roughly $18 billion to $20 billion market that would grow at a 40% kind of CAGR out to that time frame. If you look at the amount of capacity we're bringing on, and the fabs that we've announced, we're talking about $5 billion of capability or revenue capability out in the 2030 time frame versus a market that's at $18 billion to $20 billion. So you're talking a reasonable amount of share, but that also means that there's a significant amount of capacity that needs to be brought on by the rest of the industry as well, which is why we always say this is really somewhat of an all boats kind of rise with the tide situation where a lot of providers need to bring sustainable supply to the marketplace. And really that's what we're focused on right now. So we look at a capital investment model, and I think what we're focused on right now is Mohawk Valley. Secondly, we're focused on bringing on a potential second fab beyond that in Europe, as we talked about. And as it relates to additional capacity beyond that, that's not something we're actively thinking about. But if you look out into further on to the decade, absolutely more capacity will be needed in this decade and beyond by us and others. And I think that's just a testament to how strong both the short term, but especially the long-term demand looks like for this type of product, which drives incredible efficiency into anything that's moving towards electrification and energy savings.

Okay. And I'll try gently 1 more time, right? The world's short silicon carbide wafers, the world's short silicon carbide devices. You're obviously more focused on the long run, but is this maybe an intermediate term opportunity on price that we don't see the pricing curves take the shape that we thought originally? Or do you really have to get together with your customers and pricings out logically to where everybody wins in the long run?

Well, I think first and foremost, when we started this journey in silicon carbide several years ago, this is about making a market and transitioning to the industry, the high-power electronics industry -- power electronics industry from silicon to silicon carbide. One of the big challenges there was getting the price differentials that kind of come together. So silicon carbide became an opportunity where when a customer would look at a price silicon carbide opportunity, albeit a little bit higher than silicon, they would see the system benefits of all of the savings that silicon carbide brought to the forefront. And that's something we've absolutely been focused on is bringing products to market that transition the industry from silicon to silicon carbide. And if you look at what we've done over the last several years, us and others in the industry, that's really taken hold, right? If you go back over the last 3 to 4 years, there's a major transition in high-power electrification to silicon carbide. So I don't think of it so much as a pricing dynamic, but more about a market dynamic and changing the industry from silicon to silicon carbide.

Yes. And I think as you think about us, we're a pure play. We're not dealing with legacy technology. We're not dealing with an existing capacity footprint. We're going with a clean sheet of paper. And we think, ultimately, that helps drive the low-cost position. So I think, Craig, your thinking is good because I think, ultimately, if you're looking for one of the top players in the market that's going to have the strongest operating position, we have strong belief that will be Wolfspeed.

Excellent. With that, gentlemen, thank you so much for joining us. Thanks, everybody, in the audience.

Thank you, everyone. Thanks, Craig.