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

Apologies for the delay here. Now I'm Samik Chatterjee. I cover hardware companies at JPMorgan. With us for the next session, we have Wolfspeed, the pleasure of hosting Neill Reynolds, CFO; and Tyler as well from the Investor Relations team. Neill, Tyler, thanks for being here.

I did want to start with more of a background question. At your Investor Day last year, you outlined a $6 billion power device market by fiscal '24. That grows to about $11 billion by fiscal '27. And when we look back historically, it seems like the outlook does get raised as we sort of progressively make -- move forward. Just help us think about the drivers there. How much of that increase in the TAM has been more silicon carbide adoption versus electric vehicles in general sort of coming in better than expected? What's been sort of your experience of why that TAM has got raised over the last few years?

Yes. So thanks. First of all, Samik, thanks for having us here. Thrilled to be here at the conference again. And I would say, when you look at the growth for silicon carbide, it's been pretty broad-based, I think, both in terms of the market, but also obviously driven by -- mostly by electric vehicles, but also industrial and energy applications. But also silicon carbide within those markets has been growing tremendously as well. So in fact, even if you go out beyond 2027, and you go all the way out, maybe even to the end of the decade, I think most forecasts now have been raised up from electric vehicle adoption rates up to even 40%. So we talk about a TAM out in that kind of maybe even 2030 perspective, being $18 billion to $20 billion at a 40% EV adoption rate. Now it's not just the fact that you have drivetrains for electric vehicles driving that adoption rate, but also, as you mentioned, industrial and energy applications, which also are growing quite rapidly as well. So it really works in my mind, like as you start seeing the EV adoption rate pick up, you see more and more silicon carbide coming onto the market. That drives a lot more volume, that drives pricing down and then drive more and more opportunity for additional applications for the opportunity for silicon carbide to play a role and you start to see that conversion from silicon to silicon carbide. So we're seeing it, I would say, relatively broad-based for high energy applications and that continues to just be the case.

I guess where I was going with that is if we now sort of think about the likelihood that we see another increase in the TAM. We're seeing a confluence of different factors like EV forecast or something, for example, are coming down a bit. But we've also seen a lot more investment in silicon carbide from the entire ecosystem, you also have -- when we step out outside of automotive, we're seeing sort of your design wins showcase the opportunity beyond automotive as well. So as we think about the next driver of that increase in TAM, is it more likely to be the sort of less production airline and more driven by silicon carbide adoption across these markets rather than EV production itself. How do you think about that when you look at -- talk to your customers?

Yes, I think it's actually both. I mean if you look -- let's -- I'll break it down to both pieces. I'll unpack that a bit. But if you look at it from an EV perspective and you look at the design-ins that we've seen over a number of years, I said for a long time that when we look at those design-ins, sort of adding them up in an automotive application, it takes around 3 to 5 years from the time you sign the design and you see revenue and then beyond that time frame, it can last up to 7 years. So if you start adding up all of those design-ins and start looking at the revenue potential, we normally judge that back down a bit and say, well, something could change in terms of those applications. But what we've really seen inside of electric vehicles is ramps that are faster. In fact, it didn't judge down. We're seeing it come in faster, and we're seeing it come in at a higher level. So a lot more activity on the EV side. Now with that being said, the applications on the industrial energy side, and I'll let Tyler maybe talk to some of the applications here in a second, we're also seeing that expand as well. So as I said before, you start to see more and more opportunity or more and more increase in the volumes of silicon carbide in the drivetrain and electric vehicles, and we are seeing that accelerate. We're also starting to see a number of applications open up every day in the nonautomotive applications.

Yes. I think -- Samik, you asked a great question because I think if you go back 20 years ago, I think people would always tell you, silicon carbide from an efficiency and performance perspective, was always of keen interest. The driving factor or the obstacle was cost of device. So now all of a sudden, you're entering into a situation where you're seeing the cost curve on devices come down significantly in new markets, things like train and traction and vertical takeoff and landing and power management, solid-state circuit breakers made with silicon carbide technology. That's where we see the practical application or the aperture continue to get bigger and bigger. I think the interesting thing, though, is where the game will be played will be on 200-millimeter substrates. So like the legacy technology is 150 because when you move substrate diameters, you're going to see the cost of the device come down as much as 40%. So really, if you want to be competitive on the device front, you're ultimately going to want to move to a 200-millimeter substrate, which will be opened up to all these markets.

Okay. No, that's a good segue actually to one of things that I wanted to hit on next, which is historically, these automakers at least from the time I've looked at autos are very sticky to their incumbent Tier 1 suppliers. There's a natural inclination for them to stick to what they consider sort of the reliability of Tier 1s. When you think about your secret sauce for why you can position yourself in that ecosystem as a supplier, maybe talk us through sort of what the differentiation -- your differentiation in terms of go-to-market is with the automakers? And is it really 200 mm? Is that really the differentiation you're coming in? Or is there -- is it more broad than just sort of going to the next-generation technology?

I think it's more broad than that. I think if you look at Wolfspeed, for instance, and you go back in time, Wolfspeed was the first fully integrated silicon carbide manufacturer going all the way from substrate to modules. So we have a lot of deep domain expertise across the supply chain for silicon carbide. So I think that first and foremost, you think about a new technology that's ramping, I think that's an important element. You've got to have the capability. You have to have the product competitiveness. And I think we certainly have that for many, many years, more than 30 years of experience working with silicon carbide, particularly with our capability from a materials perspective, having that very, very deep domain expertise. I would say what's changing -- and we talked about it a little bit in terms of the TAM growth. We're seeing just a huge market opportunity here. And we're bringing on and making investments and bringing on capacity at a very significant rate. We're bringing on the world's first 200-millimeter fab for silicon carbide in upstate New York at Mohawk Valley. We're investing in the largest -- the world's largest silicon carbide materials manufacturing facility in The JP and Siler City, North Carolina. And we're putting -- and we're investing in a tremendous amount of that. And what that means is we have line of sight to future capacity for OEMs who have been through -- a pretty OEMs or Tier 1s who have been through a challenging period through the silicon shortage over the last several years. So having access to a deep level of supply capability from device all the way back through substrate is very important to them. And then on top of that, it's at 200-millimeter. Now what that means from a supply perspective is when you go from a 150-millimeter substrate to a 200-millimeter substrate, you're getting 70% more capacity per wafer. So there's 70% more service area. So every time you need to bring on capacity, your time to bringing on more capacity for every one in the fab is a lot shorter. So you can bring in a lot more a lot faster. And that's one of the advantages in addition to the cost having that 200-millimeter wafer. So I would say it's a number of things. I think supply certainly plays a part in looking at the OEMs or Tier 1s or automotive manufacturers, even in the industrial energy side are looking at. You look at the fab and look at what we're bringing on from that perspective. But also, I think that in combination with just the deep domain expertise and a technology that is growing and taking a foothold in the industry.

And let me move to digging in into a bit of the design-ins and design wins that you've announced. I think the cumulative design-ins that we calculated was 18 billion. Can you get into more details around the design-ins in terms of like how much of that is autos versus non-autos? And how in terms of timing or maybe when in terms of timing to do those translate into design wins? And I have a follow-up. So let's go through that first.

Sure. Let me start, and then maybe, Tyler, you have a couple of comments. But if you think about how the design-in phase works, it is a little bit different between automotive and industrial applications. So from an industrial application, it's usually about, let's say, you could think about roughly 2 years, maybe 1 to 3 years in terms of design-in transition to revenue adoption. And from an automotive application, that could be anywhere from 3 to 5 years depending on the customer and the application that you're working on. So once you sign a design-in, you're working on a number of integration activities. Your engineering teams are working very closely together over that integration period and also from a quality perspective on bringing those parts online.

And think about it this way. Automotive of the design-in total that Samik just mentioned, about 60% to 70% of that is for automotive. The remainder is for industrial and energy. But this past quarter, we set a record for design-ins for I&E for industrial and energy applications. So we continue to see good success or solid success in that market. I think the other thing that as you think about the ramp, stuff that we're selling today, as Neill mentioned, in the automotive space, you probably won't see it come on into the -- from a manufacturing standpoint until 4 years from now. So really, what we're servicing in the short term is a lot of I&E and we're ramping automotive. But beginning next fiscal year, that's where you'll really start to see the automotive ramp kick in.

Okay. I guess that maybe touches on somewhat the follow-up that I had is when I think about the conversion rate of design-ins to design wins, how is that tracking in automotive versus industrial? Can you give us some ballpark numbers in terms of how to quantify those? And is that based on your sort of last answer should we be assuming the conversion rate for autos picks up into next year? Is that sort of what you're implying?

Yes. Again, I'll let Tyler get into more of the specifics on that. But we've seen a conversion, about 40%,design-ins to design wins, and the design win being we're starting to ship kind of revenue off of that platform. So we are seeing that transition. I think if you go back, right now, the majority of our revenue from a power device perspective today, as an industrial and energy applications, is because of exactly what you said, we're seeing the shorter cycles from design-in to revenue for an industrial and energy application. However, we are starting to see some of the heavier automotive ramps. We always thought that in that '23 -- 2023, 2024 time frame, we'd start to see the big pickup from an EV or automotive perspective. We're starting to see that. we're starting to see the beginnings of that in terms of the transition for some of these automotive wins to come online. And that's consistent with if you go back since we've been in a -- I don't know how long time we've been announcing these. But since we've been announcing these design-ins, that's pretty consistent with that.

Yes. And I think Mohawk Valley is kind of the key to all that because that was always the intent to build the state-of-the-art facility to run a lot of this automotive revenue through. Now what we've talked about in the most recent quarter, given kind of the supply challenges that we have for 200-millimeter. We're going to be running some of that automotive revenue though Durham off of 150-millimeter substrates. But the intent is really what we built here is a purpose-built greenfield, state-of-the-art fab that actually is going to have incredible improvement in terms of cycle time and performance. So ultimately, we want to be driving as much automotive revenue through that new facility as possible.

Okay. Some of the OEMs you've announced the wins with or design-ins with, Mercedes, Jaguar, I think you said as well. What has been confusing to some investors is your competitors like ON Semi, ROHM. They've also disclosed some of the same OEMs, in some cases, a bit of an overlap. How do you see that sort of landscape? Is it that the OEM is going to work with 2 different sort of suppliers? Or is it more of like hedging your bet in terms of who might end up having the capacity eventually? How should we think about it?

Well, first and foremost, from a design-in perspective, when we work particularly with the OEMs or Tier 1s from an automotive perspective, we only take the first supply chair, so to speak. So we'll take -- we'll be the majority supplier. And the reason we do that is because we anticipate that the market is going to be supply-demand disconnected out to the end of the decade. And in order to be a good supplier to them, ensuring that our interests are aligned, and we're kind of the #1 supplier to that partner is really important to that customer is very important to us. So certainly, if you're an OEM or Tier 1, you're going to have multiple sources of supply. And we get that, and I think that makes perfect sense. But I think from our perspective, taking design-ins and doing business with partners as their kind of #1 supplier for silicon carbide, I think, is important from that perspective.

And I think capacity is an important question to be looking at as you look at the landscape. I mean we've committed to put $6.5 billion of capacity to work over the next 4 years because of what we see. And we're still only going to be able to service maybe about 1/4 of that market demand by the time we get this capacity online. So it's just -- I think the thing that's underappreciated about silicon carbide, it's incredibly hard to scale it. And so I think as you listen to people's intent to internalize, build capability and where they expect to be, I think it's really hard to call because you've got to put capacity in. And the only way you're going to learn how to work with the material is to go through cycles of learning. . And I think that's where the rest of the market is going to continue to learn as they scale their own operations. But we've had a lot of experience with working with material going back to the days of LEDs and when we were making LEDs on silicon carbide chips. So we think that, that gives us a competitive advantage in the market, and we're going to continue to leverage that.

Let me open it up and see if any questions in the audience. Any questions? Okay. Let me start taking a few that's come in over the system here. So the first one is 200 mm substrate seems to be critical to your success. Given the execution issues over the past -- last few quarters, push out at Mohawk Valley and slower and more methodical ramp of 200 mm supply, how can you assure investors that these are transitory issues and not a question of viability of scaling 200 mm?

Yes. So it's a good question. So I think what we're referring to here is we've had a delay in the ramp of our substrates for filling Mohawk Valley. So what that means is from a 200-millimeter perspective, we have a new building in our Durham campus, a new facility that is used to scale substrates for 200-millimeter. We had some supply chain challenges in getting that building certified to open. And we have since started growing crystals and we started that wafer in operation, but it's about 2 quarters delayed. So what we're saying is that, that ramp is about 2 quarters delayed. It's on the same, I would say, slope in terms of the ramp. It just pushed out a couple of quarters to account for the supply chain challenges and getting that facility released. From a 200-millimeter crystal capability, quality and yields, as we're ramping that facility, we're seeing very good performance from the crystal growth. We're seeing good wafer capability and yields, and it's all coming together in line. So no change to the crystal, for the bull heights or the wafer thickness or anything along those lines. All that's in line with what we initially anticipated. It's just on a delayed ramp. So what we have is a delay at this point. And I think that's what's reflected in the updated outlook related to delay in that facility. Otherwise, we're on track to kind of get on the slope and the numbers we gave out are related to the slope, we think we can achieve just based on a similar slope just delayed out a couple of quarters.

Okay. The next one that's come in is, how will factory startup and underutilization charges be accounted for in your financials? Will those be adjusted out of OpEx going forward? Or will they move to COGS and be adjusted out of gross margin?

Yes. So a very good question. So one of the challenges in bringing up these new facilities is that a lot of the facility isn't being used. So these are start-up costs related to ramping up new facilities. So you have a big infrastructure and you're leveraging a smaller percentage of the utilization of the factories as we bring those up. So what we attempt to do there is to give clarity to investors about how much of our ramp is related to the fixed cost, bringing up these facilities. And the way that we've adjusted for that to date is having what we call start-up costs. We will transition -- once we finish qualifying the factory and qualifying different lines in the factory, we'll start to account for that. We'll move that from -- as a question to ask, from OpEx to COGS. The way we do that is adjusting the start-up for about 70% utilization. It has a pickup marker that says we've had very, very high confidence in achieving over time to getting that utilization level. And what that should be able to do is give the investors both with and without a view on what that start-up cost is. You can get kind of a run rate view on what the margins would be at 200-millimeter as we start to ramp the fab. So we give regular updates on that, as you know, Samik, and the quarterly updates. So investors can see the margins with and without some of those start-up costs related to some of these big investments that we're making to bring on capacity.

Okay. Next one, what level of utilization at Mohawk Valley can be supported by Durham today? How much of the 20% utilization target that you have for fiscal 4Q of '24 will be supported by Durham?