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

Good afternoon, everyone. I'm Samik Chatterjee from JPMorgan. I have the pleasure of hosting Wolfspeed for the next fireside chat session. Gregg Lowe, President and CEO; Neill Reynolds, CFO, both are with us on the stage. Thank you both for taking the time to come to the conference.

I'll kick it off with questions. And as we get towards the end, we'll start taking questions from the audience as well. If you have any questions, we'll definitely be interested in taking that. I can see already some questions on the online forum here. So also, you had the option of putting some questions in the online portal if you need to, and we can ask it on your behalf. Gregg, I'll kick it off with a few questions. The first one is primarily on some of the concerns we're hearing from investors, and I wanted to give you the opportunity to tackle those more upfront. Investors have been concerned about Wolfspeed's ability to ramp and fund your operations in a sustainable manner. Can you walk us through why you believe those concerns are overblown and the value Wolfspeed has to offer, that is not being reflected in the current share price?

Thanks, and thanks for joining us today. Without a question, we faced a number of challenges and execution challenges ramping the world's first building and ramping and the world's first 200-millimeter silicon carbide fab. But over a year ago, we set out a number of different milestones. We illustrate -- we highlighted a number of different milestones for that fab, whether it was utilization or revenue generated out of that fab and so forth. And for over a year, we've hit every single one of those. So we feel like we've got some momentum right now. The fab is running, actually, quite smoothly. From a materials feeding that factory, perspective, a little over a year ago, we had nothing coming out of Building 10. And today, we're now confident that we can actually support 25% utilization in the fab itself. So pretty amazing work from the material side. The fab continues to get better every day. We anticipate we'll continue seeing improvements through the rest of the year. So what I would say for the -- a little over the last year or so, we've seen significantly better execution performance on the fab, and the materials itself has been stellar. I'll remind everybody that this is the first time anybody's has produced 200-millimeter silicon carbide MOSFETs or MOSFETs on 200-millimeter. The quality of our materials is stunning. We're very, very pleased with the defectivity of the crystals themselves. And I would add that that's probably of all of the things to produce a 200-millimeter silicon carbide MOSFET, the hardest thing is getting crystals right, and the team has done a superior job of that.

The upcoming funding announcements, a lot of investors are focused on the CHIPS Act, anything potentially from the Department of Energy. Give us your sort of view on timing of those? We've seen some companies announce CHIPS Act funding recently, how are you thinking about both magnitude and timing on both of those areas, Department of Energy and CHIPS Act?

Well, there's a couple of different aspects of that, and I'll let you talk about [ 48 ]. But from the CHIPS Act itself and the funding and the grants and the loans and so forth, we're actively engaged with the CHIPS program office. We have constant meetings with them, going through due diligence and so forth. We've applied obviously for it. And I think we continue to remain in the belief that we're going to hear relatively soon on that, probably sometime before the end of our fiscal year, which is June, we anticipate that we would hear back from them and have something more to highlight for investors on that.

Yes. And then just from a mechanic standpoint, as you think about the CHIPS Act as it relates to us at Wolfspeed, really two parts to that. The first one is the 48D tax credit reimbursements for semiconductor assets put into service. We feel like we're in good shape there. As you think about the size of the investment that we're making, the facilities that we're making, we've already accrued north of $0.5 billion of tax credits related to 48D, and we'll start to see a substantial amount of those start to kind of come into the zone for reimbursement in that fiscal year 2026 time frame. So our fiscal year ends in June, so fiscal year 2026. So you put that in combination with the ramp down [ and ] the CapEx. So we built a lot of facilities, we'll see these facilities kind of get built out and finish this year between the JP, the substrate facility in Siler City, North Carolina as well as Mohawk Valley. We'll start to see just a big dip down in our CapEx as you go into '26, at the time we'll start to see some of these reimbursements. So clearly, we'll not only see a step down in CapEx from a gross perspective in '25, but also '26 because we'll start to see some of those tax credits come in. In addition, as you think about fiscal year 2025, again, our fiscal year '24 will end here in June and start again fiscal year '25 in July. In that time frame, that's exactly what Gregg's talking about. We're working with CHIPS program office. So far, the discussions have been very constructive, and we hope to finish up our work with them in the near future.

Neill, just to follow up on that. You talked about the timing being fiscal '26 or June 2026. When you think about Mohawk ramping and the timing of these sort of funding is coming through more in 2026, rather than 2025, a lot of the questions I get from investors is the ability to ramp Mohawk as you've been doing for the last few quarters without or with the need of another capital raise. How should we think about whether 2025 is sort of that bridge year where you need more capital before you get to the benefit of these some of the funding programs coming through?

Yes. So thanks, Samik. So on that, so I get a lot of questions on this. I just want to be very, very clear, and we talked about this, I think, very clearly as well on the earnings call. So we'll finish this fiscal year with somewhere between $2.2 billion and $2.4 billion of cash on the balance sheet. So from that perspective, we're very, very well funded, and we feel confident there. As you work into next year, we'll see a significant drop off in the CapEx. We talked about between $1.4 billion to $1.6 billion, and that's on a gross basis, which means that, that does not include, really, anything for any federal incentives or brands or tax credits from that perspective. So that still has to be decided. That's why this discussion about funding from a federal perspective is important. So we have to see what happens there first, and that will kind of inform us as to what our next decision is from that standpoint. But if you do the math on that, I think we're in pretty good shape from how we're funded today to fund the CapEx from that perspective. So I think that's really kind of where we're headed. We'll let that next round of what's happening from a incentives perspective kind of inform us in terms of what the next steps are as we move forward. Now the other thing I'd like to add on top of that is, if you look at our company, you look at our margin structure and our cash structure, there's a pretty big difference between -- if you look at our gross margins reported today or if you start to look at what the Street numbers are out there for 2025, the difference between this year alone between our reported gross margins and our, what I call, our cash gross margins, what if you take out the depreciation is 20 points. So 2,000 basis points. As you move into next year, that's like roughly 2,500 basis points, so 25 points of differential. Most semiconductor companies run between 5 and 10 points of differential. So as we start to see a lot of this investment start to roll off, and it starts to become a bigger part of our cost structure, a lot of our cost structure becomes noncash. So that gives us a lot of confidence as we start to ramp these facilities that the cash operating structure is actually quite low. And as we start to ramp up volume, we'll start to see better performance from an EBITDA perspective. It also gives us a lot of confidence in terms of how does this model look like, how does -- what does this model look like over time? How are we going to ramp it not just for margin performance, but for cash performance. And I'd say looking at it from that perspective, as we start to see volume ramping and get more performance out of our 200-millimeter substrates at Mohawk Valley, it really starts to look like a really, really nice model out in time.

Let's talk a bit more longer term about demand because some of the concerns from investors are related to demand as well, where we've seen revisions to the global EV forecast. Just walk us through what you're seeing from customers in the EV market? How would you characterize the EV market demand outlook right now, even though some third parties have taken more [indiscernible] to their EV forecast.

Well, I'll start by saying we've actually won a pretty substantial amount of business over the last 5 years. And a lot of that is just in the early phase of transitioning to going into production. From an EV perspective, we've got, I think, 120 different car models from 30 different OEMs going into production over the next couple of years. So the talk about a slowing of existing EVs is not what we're in right now. We remain capacity limited. The demand for our product is higher than the capacity we have. And the adoption of silicon carbide has also been substantially higher than we originally anticipated. When I joined the company 7 years ago, there was precisely one company that was committed to using silicon carbide and inverter. And today, I can't name a company, I'm sure there is one, but I can't name a single car company that is not using silicon carbide, maybe not in all their cars, but in some of their cars for sure. Recently, I had a visit with a bunch of OEMs and Tier 1s in China, substantial adoption of silicon carbide across all the range of vehicles, whether it's "entry" levels or the more pricier ones. So pretty amazing there. And the last point I'd make is, just yesterday, Sunday, 1 p.m. I had a customer call, looking for more product this year, more product next year, more product in 2026. So an increasing demand. So we're at the early phase of the adoption. This is the most disruptive thing that's happened in the history of the automobile. So it will be the most disruptive event. There's going to be winners and losers. There's going to be companies that think they're going to sell 100,000, they're going to sell 1 million, there are going to be some that think they're going to sell 1 million and they're going to sell 100,000. So there's going to be a lot of turbulence on this take off. But I think with the substantial amount of design and activity we've had and the very high conversion from design-in to design win, which is that very initial production is very, very high. But the final thing that I would add is, we've got over 6,000 different types of customers and applications in our industrial and energy segment that we've won business with over the last couple of years. And of course, that segment is down right now, but it will come back. And when it does, it's a pretty wide proliferation of different end products, whether it's solar-related, energy storage, we've got server farms and things like that, there's tons of different applications that [ we've ] been designed into. And it will come back. The industrial business always comes back. It's down right now. And I think we said on our earnings call, we anticipate it will be down through the rest of this calendar year. But when it does come back, it will be pretty nicely accretive business for us.

Got it. Gregg, I'm seeing a lot of discussion come back towards hybrids as well. What do you sort of -- what are you seeing in terms of your engagement with customers? Is there a bit more reinvestment going back into the hybrid pipeline? And how would you think about the silicon carbide opportunity in a hybrid?

We just talked to a number of different OEMs about that. And it's still from a development standpoint, all the energy is on electric vehicles. I think they're trying to bridge a gap here, especially in the West. But I would note a couple of different things. Again, I was in China, visiting a number of different OEMs. That is the world's largest market for cars. And China has, if you look at the top 10 car manufacturers, China has 2 of the top 10 car manufacturers, and I believe they're #8 and #10. And they are using this transition from internal combustion engine to electric to become the dominant player worldwide for vehicle exports. And if you look at the top 10 electric vehicle manufacturers in the world, 5 of the top 10 are Chinese, including #1, #3 and #5, I think they are so. So 3 of the top 5. 40% of the cars that are being sold, new registrations in China right now are what they call new energy vehicle with the vast majority of those being electric. So I guess my point on all that is the world's largest market is moving to electric. And when that happens, the rest of the world can't just ignore that. I think from a European perspective, we still see pretty good strength there. We've had really good conversations with the U.S. OEMs in terms of what their plans are and so forth. And we remain in a situation where the demand for the silicon carbide chips from us remains ahead of what our supply is. So all eyes for us are focused on ramping Mohawk Valley. We're really pleased with what's been happening over the last -- over a year or so, the operations are substantially smoother than they were. Obviously, when we initially turned on the factory, yields continuously are getting better. Cycle time is improving. Utilization rates are improving. And as Neill has mentioned a couple of times, the cost bases at the chip level for a device out of Mohawk Valley is now better than what we see out of our Durham factory. And that is inclusive of all the burdens of under utilization. So we're feeling like that decision to go to 200 millimeters definitely paying off. I don't know if you want to add any color to that.

No, I think that's absolutely right. So if you look at the capability that we've had in the fab today, and I think I talked about it in the earnings call, I mean, we've seen even in the last couple of months, breakthrough performance from the operations team from a fab perspective in terms of both cycle times and yields, which has resulted in what Gregg said, a chip cost that is currently lower on our 200-millimeter. If you look at 1 chip coming off of 200-millimeter substrate today that is lower than what we have in Durham, even including the full burden of underutilization, and we expect that to accelerate. So I think the cost basis of the company, I talked about the cash margins earlier, but also the underlying cost performance as you move to the wider diameter substrate, is clearly picking up for us. So we feel like all those things are headed in the right direction. Secondly, I'm not sure if this gets enough attention is our materials business has been operating at a very, very high level. It represents about half of our revenue today. Now I don't expect that to be the case over time. We'll be more device-focused when we have a higher device revenue over time. But the materials -- wafer business has performed at or above expectations for over the last year, continue to drive great cost out, clearly have the best quality in the industry, and we continue to see great performance there. So I think that we're starting to see the benefits of the improved operational execution as Gregg mentioned earlier, since we kind of laid out those markers in terms of performance last year.

Relative to the comments that you had about each of the geographies in China, clearly, we've seen sort of the China market has been outperforming in terms of EV adoption. One of the questions that's come in here is, can you talk about exposure to China currently for Wolfspeed? And given the barriers to trade and the federal government's push to create more -- create supply chains for key industries, outside of China, is it fair to assume that the U.S. and European markets will be the key drivers for your growth over the next few years?

Yes. Well, we've got design-ins and design wins with customers all around the globe, including our OEMs and Tier 1s in China, but of course, in the West and other parts of Asia as well. So I think at this point, the demand for silicon carbide, in general, and specifically, remains ahead of supply. From a Western -- from a non-Chinese OEM perspective, there's a pretty strong desire to make sure that there's a supply capability coming from the West. And so obviously, that favors us. But I would say that we're pretty well balanced. I don't know if you have exact percentages or not, Neill.

Yes. I think anywhere around 20%, 25% of revenue on a total company basis. A lot of that's industrial energy revenue that runs through the distribution channel that runs out into Asia. We do have some direct business as well, but I think a pretty balanced portfolio in terms of how that plays out. When you look at our sales pipeline alone, the majority of that is outside of China. But we have very good relationships, I think, both industrial energy and within EVs that kind of balances our exposure.

Let's take another question from here and then we'll open up to the audience as well. It reads, you recently discussed silicon carbide use in AI data centers, what steps has the company taken to pursue this business opportunity and diversify the revenue base away from pure EV?

Yes. So in general, we've got a plan to get to -- I think it's about 30% industrial. We've got a pretty substantial amount of design-ins. AI data centers are definitely part of that. So we're pretty actively engaged. But it's across, as I mentioned, thousands and thousands -- 6,000 plus different applications where we're seeing industrial moving to silicon carbide. A lot of that began during COVID when there was the whole supply chain issue with silicon chips, where customers couldn't get enough of what they needed. And so they put their engineers to work on, well, if we can't get a silicon MOSFET, we might as well redesign, the system get better efficiency out of that system and convert to silicon carbide where the growth is. So a lot of that is now coming to fruition.

Let me open it up and see if anyone in the audience has a question.

Yes. And for those who do have a question, I might need him to translate. There's a bad echo here. I'm deaf in 1 ear, so sometimes I won't be able to hear you. .