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

I think we can get started. So thank you all for listening. I'm Francois-Xavier Bouvignies from the tech hardware SMID in Europe. And today, we're happy to have Neill, CFO of Wolfspeed; and Tyler, Head of Investor Relations. So thank you very much for being with us. So maybe let's get straight into it because we have only a half an hour.

Sure.

And maybe, if you can start with an overview, right? You wanted to give an overview of the market and how is it trending, and then we can move to Q&A.

Yes. Actually, I wanted to -- and thank you, first of all, Francois. Thanks for having us here. It's terrific to be back at the conference again. Three things I want to just talk about kind of upfront. Number one is a lot of questions about our Mohawk Valley fab ramp. We're on track for the 20% utilization by June. I'm sure we can get into that a bit. In fact, Gregg, our CEO was just up at the fab on the U.S. Thanksgiving holiday last week. And the teams are making terrific progress up there in terms of the ramp. The second thing is the JP, the Siler City substrate facility that we're building down in Siler City, North Carolina. That is on schedule and on budget, so we feel we should be able to start growing crystals out of that initially in the back half of calendar year 2024. Third thing is from a demand perspective. Our auto demand remains very, very strong. I'm sure we can get into that discussion as well. However, we are seeing some weakness as we flagged in our Q1 earnings call in the industrial and energy markets. We should see that continue for one or 2 more quarters, although we feel very comfortable with the guidance that we laid out for Q2. So that's really where we sit right now. Now what we also will do is maybe take that softness from a period of time. We'll do some maintenance and some infrastructure work on our Durham campus early in next quarter. But that's really where the lay of the land is right now.

Perfect. It's a good start. And if you want to ask a question in the audience, you can do it with the app. I will be able to see it here, and then I will be happy to ask the question for you.

So maybe, I mean, we can unfold a bit this kind of demand in terms of what you see. Can you -- like automotive, industrial, exactly what are the drivers of any weakness that you see? I know you have this kind of renewable parts, which is a bit -- we have mixed signals. You have big inventories may be slowing down, but some other players like Infineon are not seeing so much for now. Automotive, also very mixed signals, right, because in one way, you have players that think that to have full demand is way above supply. And then we have another player that you know decreased their targets for silicon carbide this year. So can you maybe tell us what you see here?

Look, I can give you some background from our perspective. I think when we started this journey in silicon carbide several years ago and with a number of design-ins that we've won over the last several years, over $22 billion just since 2020, I believe. So looking back over that time frame, we thought the ramp for automotive would be happening right around this time frame. That's exactly what we're seeing for silicon carbide-based businesses or based model vehicles. And that's what we're seeing ramp right now. So as you look out into what we're seeing right now, we have over $100 million of unfulfilled automotive demand right now. And maybe what we're seeing from a market perspective is some non-silicon carbide-based IGBT type of vehicles maybe backing up a bit. But the initial ramps of the silicon carbide-based drivetrains and electric vehicles, we're seeing -- we continue to see very strong demand. In fact, Gregg, our CEO, and I are on calls almost every day with Tier 1 and OEM executives just around production allocation and ensuring that we can ramp the factory and get them their products as soon as we absolutely can.

Okay. That's good. And I mean, how fungible it is? I mean from industrial and automotive, if you see a slowdown in automotive, can you reallocate quickly into the automotive business given that you have this buffer of demand versus supply?

For the most part, yes. So we have a lot of -- it really depends on part qualification. We have a significant amount of capacity that's coming online, both from a substrate perspective and a fab perspective. And as long as we have the parts qualified, we can move between products as required, and I think we can do that relatively quickly. From an automotive perspective, we do have a wide array of customers that we're working with globally. That's in the U.S., that's in the Europe, that's in Asia. So if there were some changes in customer demand, we would just shift one customer over to another. Maybe not part for part, we might take a production cycle, but that's how we would manage it.

And I think it's important to point out because I think some have kind of indicated that they're seeing some softness in their business. As Neill pointed out, that's probably on legacy designs. I mean, where we sit today, there are 2 factors that an OEM is looking for. High-quality devices, for sure, and we usually finish one or 2 in the bake-off with customers. And then the second thing is they are looking for capacity investment. And the -- this is a big reason why that we made the commitment to build Siler City to put Mohawk Valley in because you have to have capacity. And where we sit, that's the smartest thing and that's what OEMs are really looking for. So I know there's quality of device. Yes, that's important. But you also have scale, and that's really very important.

And speaking of which, I mean, if you look at all this capacity and plan that you have in mind, I mean, physically, how the ramp-up phase is looking? I mean, can you remember, like if you look 2, 3 years, what the maximum you can grow your business? And what's kind of the revenues that you are targeting from a capacity point of view?

So from a capacity standpoint, let's talk about devices a little bit. As I always say, all roads lead to Mohawk Valley for Wolfspeed. And the reason for that is, today, we have a very small fab in Durham. And that fab can do about $100 million a quarter from a capacity standpoint for devices. So think about $400 million a year. And this is an older fab, something that's building high-quality MOSFETs right now, but really smaller from a scale perspective. Now what we're doing is we're ramping up Mohawk Valley. Mohawk Valley is a much bigger, automated, fit-for-purpose silicon carbide in the world -- maybe the world's only fully automated 200-millimeter fab. That will have $2 billion of revenue capability out in time. And I think the way that will ramp up for us is we're starting the early phases now, so $4 million of revenue came out of the fab just last quarter. This quarter, 2Q, December quarter, we anticipate there being between $10 million to $15 million. Based on the work the team is doing in the fab right now, we have high confidence in that $10 million to $15 million. And based on the -- I talked about the substrate performance has been very good. Coming out of Durham, we've seen great qualification work in the fab. It's really about throughput at this point. So that will allow us to double that revenue as you look out into the March quarter and then again out into the June quarter. So once we get outside of 2024, we'll start to see a bit of a steeper ramp into '24 and '25. And then I think once the JP comes online, you have a lot of substrate capacity that will be available to us. We should see an acceleration in the revenue up to capacity for that full $2 billion out of Mohawk Valley. Obviously, you get out to the '27-plus time frame.

That's great. Thank you. And maybe as you move to 200-millimeter because it's going to be a key change for the industry, the industry has been working on 200-millimeter for some time. And it will give you the first, I think -- first, doing that will give great advantage in the industry. Can you remind us maybe what the cost advantage versus the 200 versus 150 you get? Also taking into account the automation element to it, that could be an extra. And more importantly, how do you want to price that? I mean how do you want to go to market with that advantage? I mean, do you want to share the value to your customers? Or you just say, okay, the price, I'm going to keep it the same, but you will have just more volume and more capacity for it, so you take the full advantage? If you see what I mean.

Yes. So on the first piece of that, from a cost perspective, the general math on a silicon carbide substrate moving from 150-millimeter to 200-millimeter is the same in silicon carbide as it is in silicon. It's a common yield. And generally, what that means is you have 70% more surface area. And with that 70% more surface area, you run it through the fab and you get a 40% benefit on cost at the chip level. So at the die level, you get about a 40% advantage. Now the other piece of that, you kind of mentioned that as well. We'll also get some nice efficiencies out of the fab. Our processing cost for a wafer in Durham is actually quite high. Now it's a small and subscale facility, high-quality, but small and subscale from that perspective. And what we'll see as we move over to Mohawk Valley, we'll get the 200-millimeter benefit on the 40% cost advantage, but we'll also see processing cost capability and some other benefits as well. So I think as you look out in time, I think we've got a very good cost road map and very clear road map as to where we want to be out in time. From a pricing perspective, I would say, look, this industry is going to be supply/demand disconnected from an automotive perspective, probably between now and the end of the decade. Of course, you can go through an inventory cycle or 2 as you kind of make those ramps. But generally speaking, it should be supply/demand disconnected as you get out to the end of the decade. So I think from a pricing perspective, all of the competitors are competing for value just based on what their capability is.

Great. Thank you. And if I try to look a bit more long term, I mean you have this Capital Markets Day. But can you remind us how you think -- you see the profitability going forward? You talked about the revenues. But how you want to develop the profitability with all that in mind, pricing and value base?

Yes. So from a profitability perspective, what we anticipate are a couple of different things. And I'll say it again, getting volume through Mohawk Valley fab, and this brand-new automated 200-millimeter fab is very important. So what we'll see there is we'll see some improvement from the margin structure as you get in and drive more volume. So as you see more volume come in just in next year, we should start to see the margin advantages come with that as well. And we just -- we should start to see structural improvement. The fab currently is underutilized. So we're talking about 10% or 20% utilization right now, meaning we want to get up to 70%, 80%, 90%. We'll see that utilization charge start to go away. We'll see benefit at the die level from 200-millimeter. And then over time, we'll just see structural improvement on the margin from a margin perspective as we sort of ramp the fab. I kind of think of profitability very much matching how the revenue ramp happens over time because the more volume we run through Mohawk, the more profitability you'll get. And then from an OpEx and cash perspective, what that translates into is we should be running in the low 20% OpEx at scale. And I think that creates a very nice profitable cash flow-generating business as you get out in time.

And maybe when you look at the substrate, you have also aspiration on the device side and more on the module side. What is the split today, substrate, device? And how you see it evolving based on your backlog? Because my understanding is you have a significant backlog and design wins that you need to deliver. How is it looking versus what you do today?

Look, we've had over $22 billion of design-ins just in the last 3-plus years. So significant -- and that's just on power devices. So our focus really is to grow that. And let's just talk about the capacity statement. The capacity we're talking about investing in is device capacity. So we'll see -- so right now, if you look at just last quarter, we did a little over $100 million of power device revenue. And we did, I think, $96 million, $97 million of material substrate revenue. The growth rate on devices will be much faster. And I think from a capacity perspective, we'll have $2.4 billion of revenue capacity that will be built in over time for devices. And I think the growth rate for substrates will just be a lot more attenuated as we really focus our efforts on driving that device expansion.

One of the important debate as well is this vertical integration, right? I mean, it's a bit trending to what you talked about. But you see different strategies in the market. You have the non-vertical part, which is basically on Infineon now. And you have vertical integrated, which is you, I mean, ON and of course, ST as well. It looks like it's changing a bit over time. When you look at the industry conversation, vertical integration was like the must because substrate was a big issue. And you then see less of a worry about this vertical integration right now than, I mean, than it used to be. Do you share that shift a bit in terms of market dynamics?

I hear that conversation but don't necessarily see the shift. And the reason for that is I think that there's a pretty big supply-demand disconnect right now on 150-millimeter silicon carbide substrates. And the reason I say that is because last quarter, we achieved record revenue on 150-millimeter substrates. The second piece of that is a lot of the customers are working with an LTA. They're coming back to us looking for additional agreements around getting more 150-millimeter substrates as well. In fact, Renesas came and did a large long-term agreement with us on substrates. And for the first 4 or 5 years, that will be primarily 150-millimeter substrates. They did the $2 billion customer reservation deposit to have access to that deal. So I'm seeing a lot of -- not just in the short term, but in the ordering patterns of our customers, more and more requirement to secure substrates because of the concern that maybe those substrates won't be there. And I think that's one competitive advantage that we really have is I think a lot of people, if you look out in time, are looking for ways to secure silicon carbide capacity. Today, in Durham, we are achieving high-volume manufacturing at high quality -- higher quality in our 200-millimeter substrates than our 150-millimeter substrates right now. We are achieving high-volume manufacturing on 200-millimeter silicon carbide substrates. And I think what that means is it gives us very high confidence in what we will be able to supply Mohawk Valley with down the line when we bring the JP because we've got the recipe for how to deliver 200-millimeter substrate. So I think vertical integration right now for us is very important because we can look customers in the eye and say, we have an absolute clear path to silicon carbide substrate capacity to fill our fabs and ensure that they're going to have supply as we get out into the second half of the decade.

And I think the other thing is Gregg said on the call a few weeks ago, our plans have always been that everybody is going to get to their target rate for vertical integration. And I think what Gregg now says is, is everybody really going to get there? And the answer is probably not. So where we sit with Siler today, the opportunity, we intend to take all the 200 out of Siler. But there is optionality for us. As the market needs more material, there are things that we can do. So I think that there's potentially upside on materials for us. It's going to be just something to watch, Francois, as people continue with their own vertical integration effort.

Great. Thank you. And maybe, I mean, one of the reason of this kind of shift that people have in mind in terms of vertical integration is China. I mean China is kind of the big topic for this year. I think it's #2 after AI, I would say. It's China. And we see as well, in the silicon carbide space, a lot of investment, a lot of different projects. I'm sure you see as well. And if I have to mention 2 tangible evidence that we saw last few quarters is Infineon partnering with SICC and TanKeBlue. You saw the JV. STM is doing a JV with Sanan in China. I mean even ON, I mean we saw it's much more open to the idea of using Chinese. There will always this debate of quality. But quality or not, they are -- they seem to make some market share again here. And obviously, they sell at much lower price than the market rate from what we understand. So how do you just see China coming to market here and trying to disrupt kind of the economics almost? And how do you plan to compete with them?

I don't necessarily -- from our perspective, it doesn't really change the economics. I think we've got very high-quality substrates from an automotive perspective. So when customers look at that, they know we have a lot of experience, 30-plus years of experience in doing this, and they can count on what we're saying but -- or what we're doing. But remember, again, we've had record output on 150-millimeter substrate revenue this last quarter. We are seeing -- despite you saying that, and we're hearing a lot of this as well about China, we are seeing customers come back and look for more deals on 150-millimeter substrates as well, as well as Renesas getting into that. And the last piece of that is that from our checks, from a 150-millimeter standpoint, what's coming out of China and other places really isn't ready for automotive yet. Let alone looking at 200-millimeter. So I think that's probably a bit of a ways off. Now that being said, going back to Tyler's point, it's not that we're unaware of this. Of course, over time, there's going to be a lot of investment. Chinese and other people will look to -- other competitors will look to try and be able to do this. It's probably going to be harder than they think. Some of them may succeed, and some of them won't. Our business plan has always been, we'll take them at their word. And we believe that may happen. For us, what's important is having vertically integrated 200-millimeter will always give us an advantage. And if we can fill our fab faster than the rest of the industry, then I think we'll be in great shape from a growth perspective and from a delivery perspective to our customers.

Thank you. And another debate is on the technology front. I mean you have this trench and planar as well. There is always 2 camps, I mean, the way it seems for any kind of things. But the trench and planar also is part of the strategy to go to market for some companies and you. So you are in the planar camp more, it seems, with like STM. And you have the trench camp, which is ROHM and Infineon. ON, a bit in the middle, but I'm not so sure. What's your view here and now? Do you think like -- what is your road map basically from a technology point of view? Is it planar still the way to go in terms of generation? And is trench a key differentiator, you think, going forward?

I would say this is a debate I hear about from time to time. And what I go back to is from a customer perspective, what do they really care about? They care about several different things. They care about quality of the device, performance of the device, pricing, capacity, a mosaic of different things that the customer is going to look at. From a planar or a trench perspective, I don't -- they generally -- in my opinion, the customers, I knew it, they don't really care. What they care about is performance. And I would say from a performance perspective, Wolfspeed has always been very high on the list in terms of device capability. And the reason for that is we did -- we issued the first -- the very first silicon carbide MOSFET, I think, back in 2012. So we have a deep legacy and experience, not just on the material side but also in doing devices for a long period of time. So we have a lot of expertise in this. What we're really focused now is developing our muscle around volume. So I don't think it's so much about planar or trench. We do have a planar MOSFET right now. People look at the silicon road map from power devices on planar and trench. And eventually, you could probably get to a smaller device by using a trench architecture down the line. We could elect to do that too and we can have that on our road map. But it's really about driving performance in the road map over time and having a really capable product for customers. And that's why we're winning today. I mean I think if you look at most of the deals we get into, we're normally #1 or #2 in terms of capability when we go out for a bid. And that's really one of the reasons we continue to win a lot of business.

Great. Thank you, Neill. We have a question from the room. I'm going to read out loud. No filter. What is the status of the Saarland fab? And what guidepost should we think about this opportunity as time goes on?

First and foremost, let me just say our -- I don't want to say sole focus but just about sole focus right now is driving Mohawk Valley to 20% utilization and getting the Siler City, the JP facility online and running. And I started out with that today because those 2 things are very, very important to us. From an additional fab perspective, we haven't received any funding notification on that. We're waiting to hear about that. And when we start hearing about the funding and we get the 20% utilization at Mohawk Valley, we can start thinking about what comes after that.

Okay. Thank you. One thing I have often as well is the GaN, gallium nitride. So it seems that also is a technology that is gaining some traction. You see some investment, M&A again. And also, if you compare with the peers, Infineon, with GaN Systems and Power Integrations, we hear talk a lot about GaN. And it seems like the onboard charger and data center seems to be like maybe the main application, whereas silicon carbide can be used and GaN can be adopted over time. How do you see this mix between GaN and silicon carbide over time? And do you see that as a threat for silicon carbide and such?

When we talk about the silicon carbide market, you get out to 2030, the TAM being north of $20 billion as you get out to the end of the decade. The vast majority of that is automotive demand. And inside that automotive demand, if you look at the automotive opportunity and you look at a vehicle, 85% to 90% of that opportunity is in the drivetrain. And just -- I don't want to say every deal, but -- I don't see every one of them. But in every new ICE in the last few years, it really comes down to silicon carbide winning in the drivetrain. We just don't see anything else. That being said, I think onboard charging, as you said, DC-DC conversion, it sounds like GaN may have some nice opportunities there. But generally speaking, from our perspective, is that as you get to 650 volts and above, where silicon carbide plays a -- silicon carbide continues to have really strong performance in that type of power zone or in that type of voltage zone. So as you get into that level, a drivetrain makes perfect sense. If you start getting into some of these crossover areas, you do start seeing things like GaN coming in and making a play in those spots in the marketplace. But that's just natural. It's an area where we do see it in some of those areas, and I think it's a good technology for those maybe mid-to-lower voltage categories.

Is that something you would like to increase investment over time like to do that? Even more GaN?

No. I think we're very much focused on silicon carbide right now. I think we've got our plates full with bringing up a new fab and bringing up brand-new first-of-a-kind 200-millimeter substrates and building out the world's largest silicon carbide substrate facility for 200-millimeter at the JP in Siler City and New York. So I think our real focus is driving that organic plan we have laid out. And we're making good progress on it. So I think that's what we'll continue to focus on.

Great. Thank you. Another question I have often is on the SmartSiC or laser like split technology. I don't know if it's something that you consider as well. But I'm talking about that because it could have important application for the sector as a whole, whether you would increase the output significantly in one go. Is it something that you're considering as well? I don't see it within your process, like split technologies at all. Or is it something that you don't think is valuable for now because of what the CapEx you are making and all?

Well, look, first of all, I was actually at a conference recently in Europe and a speaker before me was up at the screen. And I realize that, there were several of them, they're all talking about various silicon carbide projects that they were working on. And I was the next speaker that was out there, and he gets up there and he's talking about several times about how hard it is to do, to make silicon carbide, how hard it is to work with. So the -- why I'm saying that is I think it's going to attract a lot of investment, a lot of new ideas. I think that's one of them that I've heard about. But the other side of it, the flip side of that is one of the reasons we're known for our secrecy in this, because we've been doing it for a long time, is we have our own internal road maps around some of these opportunities. It's not that we don't look at that or respect it or -- I'm sure it's a good technology. But I also think we have a road map that we have internally that we're looking at to leverage our experience of working with silicon carbide. We're looking at different ways to drive down costs, to create efficiencies, to improve yields and really work with the technology. So we have a number of programs and things that we're working on to try and drive that efficiency over time.

Thank you. And in terms of fab location, I mean, I think it's kind of a strategic. And geopolitics nowadays, it's very as well -- it's important where you want to put your fabs. How do you think about putting a fab in the U.S. or Germany versus like Malaysia, for example, that the cost could be much lower for it given in a location? How do you think about the economics behind because you're in a location that you do it that [ sociopolitical ], economically, it's going to be difficult to compete? Is it like you have to rely on subsidies somehow? And maybe can you remind us so that -- any subsidies that you plan maybe to capture with this investment because silicon carbide is in the priority list?

I think that's number one. I think that we are ramping a pretty capital-intensive business. And what's very important for us is ensuring we get the right level of funding. We talked about it earlier. We're very engaged and Tyler can probably talk to it a little bit on the U.S. CHIPS Act. We've been engaging in that process for quite some time. So I think for us, there's a lot of good reasons from geographical disparity, being closer to customers. There's a lot of good reasons. But for us, number one is ensuring that we've got the right financial profile and the right investment profile from a -- not just from a build out the fab, what does it look like over the long term, and then netting out any potential incentives. We are making good progress on the incentives.

Yes, I know. I think we've had some very constructive dialogue with commerce and treasury and the CHIPS program office. And I think the other thing that they really have started to appreciate is there's a beachhead to be protected here on silicon carbide in the United States. So being -- for silicon carbide to be designated as a critical mineral by the U.S. geological service, I think, speaks to the level of attention that it's now getting. And so there's CHIPS Act funding, there's the Inflation Reduction Act, the Income Tax Act. And there's lots of avenues of funding from the U.S. perspective. And we should know more about that sometime next year, which will then factor into our fab strategy and our build-out strategy as it relates to Siler.

Thank you. And then what does it mean in terms of -- if you look at or try to wrap up all of this, you have a clear revenues, capacity, also strong CapEx, funding. How should we think about the free cash flow, of course, beginning the next few years? And the return to shareholders, how you think about that growing over time as you grow and you mature?

Yes. So I think if you take a look back at our business plan and you start to look out into the future, I think what's really important, number one, is that we drive our capacity through Mohawk Valley, as I talked about. And as we start to do that, what we'll see is -- and by the way, we did this when we first built Mohawk Valley. When we built Mohawk Valley, this is a gross $2 billion fab to build. We got $0.5 billion in incentives from the state of New York. And so it was less than, I think, $1.5 billion net out of our pocket to build a fab that can generate north of $2 billion a year. So that's a terrific setup, first of all. So we're modeling it after that. But the way that works is you've got to fund it yourself to get things off the ground. As you put these new assets into service, you start getting reimbursements either from the government. In this case, it was New York. And that worked out very well for us. We funded the fab. We built it, and then we got incentives over time. I expect our business plan to very much model that just at a different scale. So I think this year, from a CapEx perspective, this will be kind of our peak year of approximately $2 billion of CapEx. Probably see a modest step down as we get into our fiscal 2025, which starts after June next year. And as you start to see that ramp down, we'll start to see assets come into service. Less facilities being built, more tools, revenue-generating tools being added to these buildings. As we start to see those tools add and start to see that revenue come in, then as you get out into time, as Tyler talked about, you'll start to see some of these reimbursements come in. So the CapEx then will start coming down more steeply. So our goal then would be to drive towards operating cash flow positive as we get into the back half of fiscal 2025. And as we start to see these government incentives come in, there should be a steeper drop-off in the CapEx. I think free cash flow positive as you get out into that kind of '26 kind of plus time frame, modeling what we had done with the state of New York and Mohawk Valley from an incentives perspective.

Perfect. Thank you. We are running out of time now. Perfect timing. So thank you all for listening. And thank you, Neill and Tyler.

Thank you. Appreciate it.

Thank you.