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

Hi, everyone. We're happy to transition the conversation to Neill Reynolds and Tyler Gronbach, the CFO and Head of IR of Wolfspeed. I'm sure you both -- sure you all know Neill well. But for those who don't, he's been with the company for 5 years now and is a long-term finance executive and tech working, previously at NXP and General Electric. So Neill, thanks a lot for taking the time to participate in our conference.

Perhaps just an introduction to those who don't know. You had a historic leading position in manufacturing silicon carbide wafers. Can you explain to the audience really how you achieved this position and really, the competitive advantages that you have versus peers in manufacturing these wafers?

Sure. First of all, Ben, thanks again for having us here. It's great to be here with you again. And yes, so from a Wolfspeed perspective, we've been involved with silicon carbide for more than 30 years. Our founder started the company initially as Cree and really had a focus on being a lighting and LED business. But what that gave us the capability of doing was building a lot of silicon carbide wafers for that application over 30 years. So we've built, I think, 80% or 90% of all the world silicon carbide substrates during, let's say, the last 20 years or so. So we've had a long, long history in developing this industry, which has been terrific because I really think it's found a home in high-power electronics. And what we're seeing now is the leveraging of that substrates to really build out efficiency, high power, particularly around electric vehicles, which is really just expanding the market in a really historic way. And then we're seeing between 5% and 20% improvement in the efficiency in the battery and electric vehicle through silicon carbide-based semiconductors, but also faster charging times and other benefits as well. So great range and whatnot. So -- and that's -- what that's done is helping bring the cost down, and we're seeing the market expand into other applications as well. So we've got a long history in doing this. It's really finding its home, I think, here in the high-power electronics market. What that's allowed us to do then is continue to invest in the company and expand our scale. We're currently ramping up commercialization of our 200-millimeter substrates. We're really just using those internally now. We're getting a lot of efficiency out of those as well. So a long history in silicon carbide. I think we've had a great position in the substrate business for quite a long time, in average ramping from a semiconductor chip perspective and building off that, I would say, materials capability from a substrate perspective and expanding that into chips. We've had some legacy experience there as well. But now we're expanding into -- from a volume perspective.

And how do you really see yourself competing there, of course, is there are a lot of players that have been in the market for decades in the power and [ semiconductors ] market. They have a lot of experience, a lot of, say, commercial relationships. How do you see yourself competing and really moving down the supply chain to compete with these guys there?

Yes. Well, first of all, I think number one is having -- if you look at silicon carbide, it's not an easy technology to work with. You grow crystals at half of the temperature of the sun. Once you do that, the substrates are, I think, the second or third hardest material on earth. So they're very difficult to cut and polish and do the rest of the processing from a manufacturing perspective. So I think having a deep -- we talked about having a deep domain expertise in silicon carbide and manufacturing substrates and materials is, I think, number one, that's really important. We're also having the capacity, and I'll talk about that in a second. From -- looking downstream, though, when you think about transitioning to more of a volume chip supplier, we've also been making silicon carbide chips for quite a long time as well. In fact, I think maybe one other company, but ourselves are the first fully integrated silicon carbide company. We did our first silicon carbide MOSFET back in 2012. And our MOSFETs are very, very high quality and always rate well when we put under -- test from a customer perspective. So I think from a technology landscape view, I think we've got great expertise in both areas. And now it's really about driving to scale, driving semiconductors to scale. So -- and I think the next thing then is what that's caused is this kind of transition to silicon carbide is an incredible amount of demand. And we've seen -- I think Tyler around here, he can set me start, but it's about $18 billion of design wins over the last 4 years or so. So customers are kind of voting with their orders, and we're seeing a lot of orders come in from that perspective. So we've had a lot of experience on -- from a substrate perspective. We have a lot of technology experience on the device perspective. And now it's really a matter of driving that device side from a volume capability. Now secondly, given that demand, and you look at the customer base, there's obviously a pretty big supply and demand disconnect over the next several years as both start-ups and major OEMs are transitioning over to electric vehicles. So capacity plays a big role here as well. And I think there's -- we're leading, I think, the industry, not just an investment in substrates, but also in the device fabrication area. We put up a new factory that we're ramping now up in Mohawk Valley to do device fabrication. We're investing in Siler City, the JP, a big materials facility in North Carolina. And we're currently ramping substrates in our Durham, North Carolina campus as we speak from a 200-millimeter perspective. So a lot of investment, but also the capability to fulfill a lot of demand over time. So these are combination of those things, deep domain expertise, I think, in this technology that's aligned with a capacity [ that we're in ] that can serve customers over the long term.

And I think it's important for people to understand that we're a couple of years ahead on strategy and maybe a couple of quarters behind on the ramp of our business. And I think Neill and I, over the last 5 weeks, we kind of own some of the communication out there not to make it more clear for folks on what's going on inside the business. But I think as you think about our rivals on the device side, they're trying to ramp their internal capability at 150 today as we move into 200. So where we kind of see the mode at the moment is that we still have a couple of years lead before others are ready to make the move to 200, and we're going to continue to optimize our business, like Neill said, with the expansion of capacity at Siler City and Mohawk Valley. So we're really excited because we're on the cusp of something really big as we start to bring more devices to the market. So we like our competitive position. But at the same time, we know the industry is undersupplied for silicon carbide, and we're kind of -- we know that everyone is going to continue to ramp their own capabilities.

Yes. And you kind of mentioned it there. You're a couple of quarters delayed on perhaps the transition to 200 millimeters. Why is it so difficult to have this transition to -- from 150 to 200? And then if you do have such a difficult technology transition, why did you opt to go down this route a number of years ago? What benefits does it give you to manufacture these [ at Wolfs ] and devices on 200 millimeters versus your peers that you mentioned, say, they are still on 150?

Right. So from -- we moved from a 150-millimeter substrate to a 200-millimeter substrate. There's several benefits there. The first one is, as you think about a bigger diameter on the substrate, it's about 70% more service area. And this is basically the same economics as silicon. So when you have that much more surface area on every wafer you put through the fab, what that does is at the device level, at the die level or the chip level, it creates about a 40% cost improvement at that die level for everything that you move through. So that does 2 things. One is that means as you respond to supply, that means every product that you put through your factory has 70% more supply on it than 150 millimeter and then it also costs 40% less just on the transition from 150 to 200. So there's a pretty scale side benefit advantage to go along with the wafer diameter change that is -- that makes it very attractive to change diameters. And that's basically been the same as what we've seen in silicon over many, many years going eventually to 300-millimeter substrates. And so this next change for silicon carbide, it may be the only change is moving to 200 millimeters. That's really what brought it to fruition. As it relates to us, I mean, it is a challenging technology to work with. I think doing any dynamic or change is difficult, particularly on silicon carbide, given the nature of how difficult it is to work with. Our challenges haven't really been at this point from a technology perspective. We've got deep roots in material sciences and capability from that perspective, and I think the team has done a terrific job with the 200-millimeter technology. We have had some ramp issues, not so much related to the technology, more related to some supply chain issues on bringing up our new facility in Durham, but that's been delayed. We're going to continue to ramp that on the same slope. We had previously anticipated, just pushed out a bit and on the same slope. And as we talked about the earnings call, that's starting to come online right now. We're happy with what we're seeing from a capability perspective, what's coming out of the factory. And now just have to kind of drive that output up from a substrate perspective and then bring it up into the fab in Mohawk Valley. That's essentially what we'll do is take substrates, 200-millimeter substrates, send them to the fab up state New York and Mohawk Valley and then start bringing the fab up, and we're in the process of doing that right now.

Okay. That's very clear. And you mentioned you get the 40% cost advantage by being able to push through larger wafers through the fab. How does that, say, offset moving to 200 millimeter, which could be, say, a more -- a less mature technology versus 150 and perhaps have a higher cost associated with it? Are we still having a net benefit? Is there anything you can quantify there?

There is a net benefit. I mean, right now, we're using it internally. And our current capabilities in a small 150-millimeter wafer fab on our campus in North Carolina. And while that fab has played an important role for us in our customers, the future really is moving up to 200-millimeter at Mohawk Valley. So I think the critical piece here for us is to just kind of make that transition over to 200-millimeter and then again get the substrates up to the fab. So -- and that's really what we're working on. So it's really about driving capability on the 200-millimeter wafer now. We do not anticipate that the cost per millimeter square, let's say, on a substrate is going to match right now in terms of what that cost is going to be. There'll probably be some higher costs early on. And then over time, we'll bring that down now. Because we're currently generating revenue out of the smaller 150-millimeter fab in North Carolina, we'll get a lot of benefit when we move that 200-millimeter technology to the fab in New York. And generally, that's where you see the benefit. It's in the fab when you sort of take that substrate on. With moving that technology, look at the kind of unique benefit of seeing a nice margin transition in the fab even though the cost per millimeter square will be higher for a period of time, and we'll see that offset. So I think we're in pretty good shape to make that transition. Obviously, there'll be some bumps on the road, doing anything new for the first time, just the technology itself is 200-millimeter as the brand new fab the first -- the world's first 200-millimeter silicon carbide fab. So fully anticipate. We'll see some bumps along the way in terms of bringing up these new technologies and new facilities. But from a structural perspective, that should generate pretty significant growth and margin enhancement over time.

Yes, that's very clear. And if we we're just to take a step back and if we look at your, say, addressable market, I think it is fairly clear that the majority of vehicles that will be sold by the end of the decade will be electric. How do you think about penetration of silicon carbide today on the order of, say, 30%? And given all the benefits that silicon carbide offers in terms of performance, energy savings, how should we think about penetration, say, moving out towards the end of the decade? And what kind of opportunity is that for you as a company, both, of course, on the device side, but then, of course, you sell materials to the majority of the market as well?

Yes. Our primary focus -- look, let me take a step back. I think if you look at our capability, we talked about it being a material sciences company with, I think, great materials technology has allowed us to accelerate the capability into the 200-millimeter substrates. As you look out over time, though, and you look at it from a device perspective and what that means is there's going to be a lot of opportunity in our view for a lot of players. And the reason for that is the market size, in our view, could be $18 billion to $20 billion by the end of the decade, assuming a roughly [ 40% ] EV adoption rate. So if -- and you obviously leave some room for some industrial and energy customers there as well and some growth there as well as those markets continue to expand. So very significant market size, growing at, I think, a 40% CAGR to the end of the decade, just getting to 40% adoption rate. And you'd anticipate and you'd expect that, that would actually continue to grow after, say, 2030 timeframe and even beyond that. So very significant, I would say, market growth opportunity. As you start to look inside that and you think about how much of that is silicon versus silicon carbide, the majority of that, particularly as you look at the drivetrain applications, is in silicon carbide. And just because of the efficiency there. I think we modeled it something like 60% plus, 60%, 70% being silicon carbide in all electric vehicles. But all we've seen over the last -- particularly the last couple of years is when we do a deal that and we're down to the finish line, we're not really competing against silicon anymore. We don't really see that at the finish line. What we see is, particularly in the drivetrain and electric vehicle, we've seen silicon carbide versus silicon carbide. And the reason is for what you just said, we're just seeing the efficiencies and the benefits and really the competitiveness for some of the vehicle is a real requirement to go and make that happen. So the opportunity is big. The adoption rates on the -- from the EV front are large as well. But also that penetration rate continues to go up for silicon carbide within that. And I think it's kind of proven not just by the design, as we've seen for ourselves, but also that seeing the opportunity pipeline continue to accelerate as well for us and for others as well.

Yes, that's very clear. And I think that, that transitions quite well to my next question, which is I think it was in March this year, Tesla announced it's using 75% less silicon carbide in its next-generation vehicles, and that's been a very hot topic with investors and of course, with the industry. Our view is it that this perhaps actually expands the addressable market because your low-end cars that previously wouldn't adopt silicon carbide is now -- they can now be addressed because the content required is much lower, the cost for the OEM is much lower. What's your view on the situation? And have you started to see any customers start to talk to you about this architecture? Is it on a road map in, say, the next 5-year horizon for any of your customers?

Yes. So that announcement, as I understand it, is really about -- I think you mentioned it, Ben, as a kind of a low end, kind of low range, low-cost vehicle, low power vehicle. And I talked earlier about the overall silicon carbide market. So TAM in that $18 billion to $20 billion range, and we start breaking that down maybe seeing 60-plus percent being silicon carbide and the other 40 being silicon-based, may be for a second inverter or as you point out, a low-cost, low-power vehicle potentially. That's where that would play. So what we originally thought is a little bit counterintuitive when people saw that, that there was an issue or a challenge there. We actually saw the opposite. I think kind of where you're headed is that, that 40% that's silicon-based, now we've just gotten some validation that even in the lowest end vehicle, that you could argue or some could argue that maybe a silicon type-based inverter would be used is now going to be silicon carbide based. And that actually expands the TAM. So that 40% at silicon could shrink or it strengthens the 60% that we already had kind of in our numbers. So I think it's just a strengthening of the opportunity. From a customer perspective, I would say, actually, we see a trend towards higher power. I think that efficiency and range. So I take a step back in the way I think about it when I visit customers, this is an incredibly important transition for all of them. Whether you're a Tier 1 or an OEM, you're thinking about the next generation of vehicles that are going to be out in the marketplace to sell and have no one sold these in large -- outside of Tesla, no one sold these in large volumes before. So now it's getting down to competitiveness for an electric vehicle in the showroom. And most people believe that efficiency in the drivetrain is what could -- is going to be what tips customers over, right? You have longer range. You have faster charging times. That means more power and a higher voltage, and you need silicon carbide for both of those things. So we're seeing a trend towards -- driving towards better and more competitiveness from customers, where if you drive up the power curve, you can get better performance out of your vehicle and then you do that with simplified architectures. But generally, what we're seeing in the marketplace is a continued move towards higher power, more voltage, better -- and that translates into a better range of faster charging times. So that's really been a trend that we've been seeing continue and really hasn't changed with any announcements like that or otherwise.

I think, Ben, I'd also add on that. What's interesting is in the last couple of weeks, you've seen GM and Ford talk about standardizing their charging system to the Tesla standard so that they can share in kind of the charging network. So as Neill was kind of talking about, some of the barriers to entry or the things that people worry about, charge time, range and things of that nature, silicon carbide, both in the car and also in the supercharger, helps alleviate some of that. So you're really starting to see some really good momentum, which kind of translates back into the steepness of the curve that we've been talking about for a long, long time. But a couple of years ago, Gregg at an Investor Day, Capital Markets Day, talked about the transition where battery electric really is going to be the transition platform versus hybrid, and we kind of see that really playing out. So the trend lines are really favorable and what you're seeing out of some of the North American automotive companies give us hope or certainly give us some encouragement that this is going to possibly get even a faster transition.

Yes. That's very clear. If I could just, for the final few questions, just transition in terms of competition. I think there's been a lot of news on that front recently, especially around China ramping up silicon carbide supply. And I think a number of your competitors in the device business have signed agreements with Chinese wafer suppliers. So how do you view the ramp of Chinese suppliers as a risk to your business?

Well, first of all, let me say as we're talking about a massive TAM here and a huge amount of growth potential in this industry over a long period of time. I think if you think about what's required, I think if you look at all the Mohawk Valley plus where we've gotten Durham and then potentially another fab, that's kind of max potential of about $5 billion of device capacity. That's against the backdrop of like a $20 billion -- potential of $20 billion market by the end of the decade. So there's a huge amount of excess capacity outside of us that needs to be brought online. And the reason I kind of give that backdrop is because most people are going to be looking to get as much supply as they can. Silicon carbide is very difficult to do. So you'd expect that a lot of people are going to a lot of other companies and suppliers are going to look to get into the market whichever way that you can. So we've also seen people with their internalization efforts, et cetera. They said they're going to get to certain levels of internalization now maybe going out looking for different supply in China and maybe against that backdrop. So it's not surprising that people are looking for more supply or that other competitors are potentially trying to get into these states. What I will say is that it is very, very difficult to do. And as I understand it, look anywhere in the world, particularly in China or otherwise, the world is trying to produce 100 and 150-millimeter substrates. And that's really the challenge. And doing that at high quality is very difficult. So we've made that jump. And now we're jumping to 200-millimeter technology at a, like we said, at a 40% cost advantage. So from our perspective, that's natural that people are going to be looking for more supply. But the most important thing for us to do from a business perspective is to drive down our 200-millimeter internal cost, drive down 150. Now that's in the legacy technology. And then you move over to 200, the newer technology and drive that with that cost advantage, continue to drive that cost down. And that's the best competitive advantage to us for any -- when you think about competitive mode or any something along those lines. The best thing we can do is continue to drive 200-millimeter technology, leverage that diameter cost advantage, drive that cost down at volume, and it makes all these other points a little bit moot, to be honest with you. If we can be successful in driving down our own internal 200 and maintaining that advantage, then I think we'll be in a pretty good position once we drive up the scale.

So if I kind of read between the lines, I see that you're heavily invested in expanding your silicon carbide substrate supply. You have multibillion-dollar investments announced in North Carolina, and you want to use that to basically scale your device business with a very good cost position rather than maintain a leadership position to supply the rest of the market there.

I think -- I'm not sure if I caught 100% there, Ben, but I think that's basically it, drive the 200-millimeter cost position and continue to leverage our scale and our investment to drive that volume and drive that volume down. There's a lot of fixed cost investment when you think about expanding into anything semiconductor-wise. But when you think about our capital intensity, it's really all the way from substrate through back-end manufacturing for the most part. So there is a pretty heavy investment upfront. But at scale, it drives great -- really great cost, and we anticipate having this technology lead that drives a nice position that, that will -- that leverage will certainly stand to us over time.

And Ben, I think it's important to note that these wafer deals by our rivals, talks by others that are leaders in the material space, investing in more capacity. I think we want more silicon carbide. It's good for Wolfspeed. It's good for the industry. It's good for customers. So what we hope to see is continued investment in capacity and infrastructure. We're not shying away from our plans because we know supply will be tight, at least until the end of the decade. And I think that that's why we're going to continue looking for raising capital to fund our operations, but also encouraging our arrivals to continue to invest because we think it's what's best for customers.

Yes, that's very clear. And if I could just squeeze in a final question on the near term. Of course, there's a lot of focus on that at the current moment in time. How is your current ramp progressing? What were the kind of issues that you were facing? You said you had a couple of quarters delay. Where do we stand and say resolving these issues? And is everything still on track to meet the 20% utilization target that you put out there towards the end of the fiscal year?

Yes. As we laid out, Ben, that's the plan. It's -- we've had the delay. As I mentioned before, we have supply chain issues that caused a delay in ramping our 200-millimeter facility in Durham. That's since been running. We've up, we've been running that facility. The initial substrates and crystals that came out all looked very good. We're continuing to ramp that, not just from a crystal growth perspective, but also from wafering operations as well as epitaxy. We continue to bring -- continue to drive that ramp, and then the next stage will be bringing up Mohawk Valley. So I would say the plan is to do all of that. And then within this fiscal year, get Mohawk Valley to 20% utilization as we exit the year. So that's really the plan that we're working towards as you think about fiscal year '24 approach for us starts in -- which starts in a few weeks.

Excellent. Thanks, Neill. Thanks, Tyler. It's always a pleasure speaking. And we have a conversation with Infineon. It's a prerecorded session that my colleague Rolf had with the SVP of Automotive and opening exchange team, if you could please load the conversation. Thanks again, Neill, Tyler. Have a great rest of your day.

Thanks, Ben. Thanks, everyone.