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

Hi, everyone. My name is Francois-Xavier Bouvignies from the Ops Semi Team at UBS. So today, we're happy to have CFO of Wolfspeed, Neill; and Tyler, Head of Investor Relations to discuss about, of course, silicon carbide and the future of the company. So I will focus on 4 areas: first, top line; margins; market; and balance sheet. Is that okay with you? And then, of course, if you want to ask a question in the audience you have QR codes on your table, so you can take a picture and send a picture, and I will see -- a picture -- a question, and I will see it on the iPad. So don't hesitate to ask if you have any.

So maybe the first question, which is in tops of many people's mind, is when are you expecting the business to have passed the bottom of the down cycle given the current dynamic that we see in auto and industrial? This is the very important question that everybody has.

Yes, it's a really good question. And clearly, I think from our perspective, being very much exposed to the EV markets and industrial energy markets for high-power electronic applications, when we take a step back and look at things, clearly, this year and even looking at next year, has been a bit choppy, particularly from an EV perspective. Obviously, weaker backdrop from the EV side of things. However, when we also look at it from a longer-term perspective, Yole is still projecting 24%, 25% growth rate out to the end of the decade, even a higher growth rate for EVs. And you look at our performance, we have a very diverse set of design-ins that are starting to come into production right now. What that's resulted in is even in our last quarter, was 2x the revenue from an EV perspective year-over-year. So we are seeing pretty strong growth in EVs, albeit at maybe a lower level and a weaker backdrop than we had initially anticipated. That's really related to the breadth of the design-ins that we've seen start to come online over this time frame where we've seen a lot of growth from an EV perspective year-over-year. And that's really bolstered by the number of models that a Wolfspeed chip or die is in from a drivetrain perspective. Last year alone, that was up 4x. And in 2025, that will go up 75%. So while the backdrop is a bit weaker, we are seeing some growth from an EV perspective, and we're growing fairly strongly there. From an industrial and energy perspective, we talked about it earlier, the visibility isn't great. We are starting to see some green shoots and some areas of performance, but it has been weak for quite a long time. And for us, what that's resulted in is a pretty big mix shift from being heavier industrial energy revenue for our device business and that transitioning over to EVs.

And when you look at '25 then in this backdrop, you mentioned the 75% increase, how should we think about the recovery for you specifically? Do you think you could grow in '25? It's a possibility given this backdrop? Or how do you -- we should think about that?

We should. We're having a lot of customer conversations right now, both for 2025 and for 2026. What I would say is there has clearly been a reset from an overall adoption rate perspective or as you look out over the next couple of years. That's kind of made its way back, I think, through the supply chain. So from that perspective, things are starting to get, I think, a little bit calmer, although we do see a lot of push-outs and pull-ins across various geographies, and that's happening kind of as we speak right now. But as you look into 2025, we do see growth going into 2025 from an EV perspective, again, albeit at a weaker backdrop. But I would say, though, that it's really related to our diverse set of design-ins that we have and the number of models that we're seeing come online. And what that will mean for us is when the market does recover and like I said, the long-term outlook for this market still remains very, very strong, we'll have ample supply to respond, to be ready to respond from a supply perspective as we start to see that kind of diverse set of design-ins start to transition into revenue.

And if we look at the automotive and industrial side, can you explain the content opportunity in terms of an application that you see very strong? Separately auto, if you take like inverters, hybrid, in a hybrid model car or maybe a full EV onboard charger and then industrial, what is happening as well? What could drive the [indiscernible]?

I'll hit a little bit on the EV. Kind of if you think of share of wallet within EV and maybe, Ty, you can hit a little bit just on the industrial energy sectors. But from an EV perspective, a huge part of the bottom is really in the drivetrain. There's onboard charging, DC to DC conversion and several other kind of smaller applications that are kind of emerging in the vehicle. But the vast majority, 80%, 90%. really comes from the drivetrain of an electric vehicle. And when you look at the overall market, 60%, 70% of the overall market is EV driven when you look at silicon carbide. So those are really the applications that we're focused on. And if you go back again over the last several years, multiple years, we've really driven this very robust and diverse set of design-ins and it's really about seeing them translate into revenue. Now we've always thought that this kind of time frame 2023, 2024, we start to see these come online, just because you have a long -- got a long sight of visibility, and that is what we're seeing, albeit at lower levels of volume. But over time, what that will mean is we'll have a lot of models on a -- lot of new car models or EV models out there that will be starting production with us over this time frame. And when those EV adoption rates come up, we'll just have a very diverse set of applications to go ship into.

Yes. And I think on the I&E front, just to remind everybody, we've had about $11 billion of design-ins move to design wins and about 30% of those are for industrial and energy applications. And what we're seeing are things like energy storage, AI, data centers and aviation. There's this really long tail as we move towards the electrification of everything. And really, what's driving that is EV demand has brought down the cost of devices, which is opening up the aperture for all these other interesting applications. And we're winning our fair share, and we think there's some really great things on the horizon that relates to I&E as that market starts to recover.

So if we think about the move to 200 millimeter, seems to be an important shift as well for you guys and the shift from 150. Can you walk us through the transition of this? When it's going to happen? And when should we expect the revenues from 200 millimeter to come through?

Yes. So from a device perspective, we're going through a major simplification and restructuring to really move all of our device production to 200 millimeter. And that's really important because you get a very, very significant cost advantage as you shift from 150 millimeter to 200 millimeter. So we're going through a restructuring right now where we're closing our Durham 150-millimeter wafer fab, and we're simplifying the company by pushing everything to 200 millimeter. That means our footprint from a manufacturing perspective will be much simpler. Think about it from a device support. If you look at the materials of the substrates that start filling the fab, we'll have a material site in Durham. We'll have the Siler City JP facility in Siler City, North Carolina. And then from a device perspective, we'll be doing 200-millimeter wafers up at the Mohawk Valley fab. And that's already up and running. And I would say the performance at 200 millimeter at volume has been very, very good. The yield performance, both at the substrate and crystal level, has been very, very good on the material side. We're also seeing very, very strong yields in Mohawk Valley as well. So from a production perspective, much simpler, performing well and really now it's about end market demand and responding to that and getting to volume. I think as far as we know, we're the only -- by supplier, fully moving 200 millimeter at that point, and we're already ramping that at volume.

Great, Neill. So I have two questions from the audience. One is on balance sheet. So we'll talk about that later if you don't mind. One is on the -- the other one is on the -- in the most basic way possible, can you please tell me how design-ins and design wins translate into revenues over time? When does it show up on the income statement?

Sure. So a design-in means we've won the business. It means you go out and a customer goes out and does a bid and says, "I'm going to start to have a new model of a vehicle" or something along those lines. They go out to the various suppliers and they do a bid, they do sampling. They look at a mosaic of different things, including the performance of the chip, the pricing, the supply, et cetera, and you win that design-in. Typically, in an automotive application, it can take 3 to 5 years from the time you win that award to the time it goes into production. And the reason for that is you're doing a lot of integration work with the customer. You're looking at performance in their system and ensuring that it's working very well. So what that does is, from a design-in perspective, it gives you pretty good visibility out into the future that this design-in is going to go into production on a certain date. And then once you get to start up production, and that customer gives you 20% -- PO for 20% of the first year's volume, then you would move that to a design-win category. And what that means is you're -- essentially it's an indicator you're starting production. And that's what we're seeing right now. And that's why the EV revenue for us is growing pretty substantially year-over-year because we're seeing this backlog of design-ins start to transition to start of production now. And we've seen a number -- a pretty significant number of models and diversity in our design-ins going to design wins and start of production and that's all -- and we see the vast majority of those already shipping out of Mohawk Valley. So we're starting to see that transition, now it gives us good visibility. We'll see that aperture open. We'll see even more diverse number of these models start to ramp as you get into next year. It gives us another 75% increase in the number of models going into 2025 will open up as well, which will position us, I think, extremely well for when the backdrop improves and we start to see more and faster adoption rates.

Great. So moving on maybe to the margin side. I mean you spoke previously about the cost of 200 millimeter between to be 40% lower. I mean is it still the case today? Is that assumption? And how is it going to transfer your gross margin as you move to 200 millimeters?

It's a really important point. A couple of different things here. As you move to 200 millimeter generally speaking, silicon, silicon carbide, we get a very, very good cost advantage at the die level. Now for us, we were at 150 millimeter in an older fab that we've been running out of Durham and the costs were, I would say, uncompetitive there. As you start to move from that Durham 150-millimeter fab at low or even negative margins on some parts and move that to Mohawk Valley, where you get just -- not just better die cost from the transition to 200 millimeter but because you're running in a big automated factory that was purpose-built for this, you really start to see nice cost advantage. But even if you take a step back from all of that, that's just talking about like cost downs on a specific product. The biggest thing for us is just utilizing these factories. We built Mohawk Valley. We're going to finish construction on the JP and Siler City here as you get to the end of this calendar year into early next year. And it's really about driving volume through these factories. As we drive more volume through the factories, we'll start to see a nice margin pickup for both reasons. One is you get off the 150-millimeter platform, but also, you just start to start utilizing these factories more, and they were purpose built for scale. So if we can drive more volume through them, we'll see a sharp pickup in the margins as you start to drive more revenue over that supply base.

And one common question as well is on the pricing for '25. Obviously, we are in another kind of oversupply environment for now because of the demand slowdown that you mentioned. How should we think about the pricing in '25 and beyond? If you can elaborate your strategy here on the pricing and how you defend yourself.

Yes. So I think on the EV front, these are long-term design-ins where volumes and prices are kind of built into the design-in when you get it. And that's over a curve over a long period of time. Think of a model year being 7 years. So it's kind of predetermined. So we don't see a lot of change from what we had initially negotiated and how we've been working on these things from that perspective. So I think it's really just a matter of driving the volumes over the -- into the facility that we built and continue to see growth there as the backdrop when the market improves year out in '25 and '26.

Francois, if I could just add, I think it's important. When we go into discussions with an EV customer, it starts at quality. That pricing comes into the discussion, but it's not the first question because I think really, right now, where people are thinking about things, it's performance of the device. It's the quality and the reliability and then you get into that pricing discussion. So -- and that's where we always find ourselves. That's how the conversation starts. So I think as people are migrating, if you think about it, China is really trying to penetrate the market so they want to have high reliability and the others in Europe and the U.S., as they transition from internal combustion engine to BEV, reliability is going to be super important.

And then moving on to the P&L. I mean, on the EBIT side, I mean, when should we expect Wolfspeed to be profitable again on EBIT?

Yes. So first of all, we announced our restructuring plans on our earnings call recently and will drive a significant amount of savings as we start to exit the Durham wafer fab. We've also announced some reduction in our administrative costs. We'll start to see the OpEx levels come down as well pretty significantly. But to get to that more simplified model at reasonable levels of revenue, I would say, we talked about somewhere around a $1.1 billion run rate or even under that depending on what the margins look like, the business can perform at an EBITDA level, I think, pretty nicely. Because when you look at Wolfspeed, there's a significant amount of depreciation sitting in the business because you put a huge amount of investment into these assets. But versus some of the other companies in the industry, the gap between our EBIT and our EBITDA is actually pretty big. What that means is that the cash cost of running the business is actually a lot lower than what that represents. And what we'll see over time is if we can get volume into the business, we should be able to see profitability emerge even at those lower levels of revenue.

Moving to the market side of things. One of the key highlights recently is the China strength in terms of market dynamic. Can you explain what is your opportunity there? What is your market share in China? Obviously, a lot of the EV growth is coming from there, right? So do you have the same picture from your -- in terms of orders, backlog China is still a big part of it?

Yes. It's an interesting question. I think if you look at the overall EV backdrop, clearly, China's been a stronger spot than some of the other Western areas in terms of EV adoption rates and it's been a strength -- an area of strength. If you look -- as I mentioned it before, if you look at where we are starting production with various customers and what we're shipping into is very diverse and includes Chinese customers as well, and we have seen pretty significant growth there. But I would say, as you look across all the geographies, we are seeing a pickup in growth. Like I said earlier, the longer-term kind of structural demand over time remains. In the interim period, we have seen sharper growth in China than in some of the Western areas, but by the same token, if you look at the diversity of the design-ins that we've had and the revenue growth that we're seeing from an EV perspective year-over-year, that's been, I'd say, fairly diverse. Now with the caveat being that has been a bit choppy with some customers pushing out and some pulling in. So I think there's still some variability as you think about visibility moving forward just based on the absorption of the change in terms of the demand rates for EVs. But like I said, we're having good customer conversations right now. And I think that will reflect in kind of as time goes on here, a better understanding of what that outlook and the time frame is for that kind of rebound in revenue.

I think it's important for the audience and for those listening online, as we think about the EV opportunity, the industry experts are pegging it at a 30% CAGR between now and 2030. So we're going to continue to see growth on the electric vehicle front in China, in Europe, in the U.S. Maybe it's not as quick as we originally thought, but I think the takeaway, and I think a lot of the conversations that we've had there this week with investors has really focused on the fact the migration path is going to happen, probably not as fast as we originally thought, but it's -- we're going to get there.

And one driver, of course, in EV, our understanding is that China is mainly using IGBTs for now and the shift to 800 volts could be like a trigger to the adoption of silicon carbide. Is there a scenario that you see a very significant acceleration in your China business in '25 because the Chinese are moving to silicon carbide and 800 volts specifically? And if you could provide any data point on that.

I think just generally speaking, the higher voltages are just making more sense for most customers, whether that be in China or outside of China. And that's just because you get the performance advantages. And clearly, as you get into that type of level and that type of voltage range, it plays perfectly for silicon carbide. Typically in the drivetrains, you start to think about higher power levels. So I think all of those things are possible. We are seeing a shift to the 800-volt platform in China, as you mentioned, which certainly could provide opportunity. But I'd also say that if you look at the penetration rates for silicon carbide over time, I think it's probably in the low 30 percentages range. We had anticipated that being a bit higher earlier as we look back over time. But going forward, that's clearly going to continue to transition out beyond the low 30s and start to move its way back up. That will be in China and that will be in other places as well. And that's just because of the -- as you shift to these higher voltage platforms, silicon carbide just plays very, very well there. And what they get for that is the benefit of the increased range, the faster charging times and really just a better product. And I think that's what most customers are focused on right now.

And then on the competition side of things, China is also trying to build a lot of silicon carbide capabilities and capacity, both on the substrate and device. What's your view on the competition there in China at the moment? And if you could separate both substrate and device as well, it would be helpful.

Yes. So on the substrate side, as you know, we sell -- our materials business is a 150-millimeter materials business right now. We have one customer. We plan to ship 200-millimeter substrates but not out for a few years. So from a quality perspective, we are seeing the 150 millimeter in China make some progress from what we have seen. However, it's unclear at 200 millimeter where things stand. We understand there's some sampling out there that's going on. We haven't really seen anyone at the volume that we're doing and running at volume at 200 millimeter from that perspective. Now what I will say is from a materials perspective, we believe that the 200-millimeter platform is going to be the inevitable answer. And it's because of what we just said for our own performance, is that you get that cost per die benefit as you switch the diameters and start moving those larger wafers into the fab. And also, you start to see -- you get a significant amount more of good die per wafer on those larger substrates. So from a supply perspective, you're able to respond a lot faster as well. So while we are seeing some improvement in the 150-millimeter area as expected, a little unclear at 200, I think, at this point. And on the device side, we start -- we continue to see primarily Western chips going into early EV applications. We have seen some Chinese chips at the lower-end applications in industrial energy, but primarily Western chips providing the drivetrain solutions for chips.

Great. Now moving on to the balance sheet because I have a few questions as well on that front. Can you talk a bit about your access to funding over the next few years? What levers do you have to pull for liquidity and investment needs basically?

Yes. First of all, we finished the quarter with $1.7 billion of cash on the balance sheet, which didn't include a drawdown related to our chips announcement of our secured lending facility for $250 million. So in pretty good shape from that perspective. As you look forward, our focus right now is on our $2.5 billion CHIPS funding package that we announced in October. And what that consisted of was a $750 million CHIPS grant, an additional $750 million of secured lending and maybe most importantly, the 48D tax credits for $1 billion. And as a reminder, these tax credits are for reimbursement for semiconductor assets that are put into service at a 25% level. So we've already accrued $700 million or so of these credits onto the balance sheet, and we anticipate that growing to $1 billion as you get to the end of the decade. So very significant amount of capital that's going to be coming in the business. So a huge focus for us right now is taking that preliminary agreement we have with the CHIPS grant and that full funding package and translating that into a final agreement here as soon as we can, and we're very motivated and confident working with the CHIPS office and accelerating and working to get that done.

Great. And you don't see any risk of change with the change of administration and so forth?

We've pretty high confidence. I think if you think about the purpose of Wolfspeed and you think about how and why we got the CHIPS grant, this is an important technology for supporting the automotive supply chain and particularly in the United States. So the view is that this is an important technology that needs to get funded. And I think that's very much a bipartisan type of view both from a national and economic security perspective. And I think that's -- I think that will pass the test of time, regardless of administration change.

Yes, because I think it's important. The U.S. has had a considerable lead in silicon carbide technology. So the last thing that you want to do is underinvest and not have that, like Neill said, from a national security perspective. So where we sit, we kind of feel that there is an opportunity to continue to build the capacity here in the United States and to ensure that there's an ample supply as the automotive industry transfers to EVs, but all these other industrial and energy applications that we talked about, too.

I have two questions from the audience. Can you comment on balance sheet and efforts with customers and/or government CHIPS Act that are complicated by leverage?

Look, I think from a customer perspective, we continue to make really good solid gains. Obviously, as we worked with the CHIPS office and the government perspective, they're very familiar with the financial due diligence they're doing. We talk to them regularly. So I don't think there's really anything to report on that. And from a customer perspective, we just had I think $1.5 billion of design-ins or so last quarter, so an additional amount. And we've transitioned last quarter, I think, to our third highest amount of design wins. So we transitioned to production another $1.3 billion worth of business just in the last quarter. So I'd say as of now, particularly with the backdrop of the funding announcement with the CHIPS office, I think really all systems are around finalizing that agreement, executing our restructuring plan and simplifying the business. And then very, very much focused on just driving more revenue through the assets that we've built.

The other question is you have 3 convertible bonds outstanding and the 2028 and 2029 are trading below $0.50 to the dollar. The outstanding amount of the '26 convertible is $575 million. What kind of refinancing or restructuring plans do you have in mind?

So as part of the CHIPS announcement that we talked about, there were a couple of -- there's financial milestones and there are also operational milestones. From a financial milestone perspective, before receiving the first tranche of a grant, we have to do some work on the timing of the '26 convertibles and that's where we're focused. As it relates to the longer maturity convertibles, those things right now, regards to where they're trading, sit at nice -- I think nice coupon rates for us and our capital structure right now and with very, very minimal dilution risk on them. So I feel like those are in good shape. And what we're really focused on is kind of that first tranche of grant and finalizing things with the CHIPS office and then meeting the requirements to manage some of the earlier convertibles, the '26 convertible.

So can you talk about the CapEx side of things? With all the things going on, where the CapEx, what should we expect in terms of CapEx in the next 2, 3 years? How is it going to shape out?

So number one is we're very much moving now from, I would say, construction phase from a CapEx perspective, building the facilities and now transitioning over to production phase, so more tool based. What we're going to see this year at the end of this calendar year, moving into next year is a pretty sharp reduction in our CapEx. In fact, on the call, we talked about lowering our CapEx by about $100 million versus our previous forecast. And on top of that, I think you'll start to see a pretty steep decline in the CapEx levels as we shift away from building facilities and really just matching that up with tools and demand as we look forward. And we'll start to see that drop off here in that kind of March and June quarter of next year, which is kind of what the plan was. After that, as you look out in time, it's really just a matchup of what do we think the backdrop is, what is the demand that's sitting out there on EVs and industrial energy applications, conversations with customers and looking to invest and match up with what we think that revenue growth is going to be. But again, Wolfspeed is going to be a much simpler company from a production perspective. We're not really building out. We're just going to be really just matching up supply and demand and running that through our 200-millimeter platform.

And I mean you have been cutting as well some capacity plan on top of that. I mean, it's just not only the front end, you have also some change of capacity. How do you do the trade-off, of course, between free cash flow and also the long-term opportunity where it's something that requires a lot of investment ahead of time, if you see what I mean?

But the ratio requirement for investing in CapEx now with being tools based is much, much lower than it was previously. So the return on the incremental amount of CapEx moving forward is very, very beneficial. You put that in conjunction with that you have these scale facilities that require volume and a lot of capacity coming online, driving revenue through those assets is probably our best path and it is our best path to generating cash flow. So I think the balance on that is actually pretty terrific. And on top of that, if you add in the government incentives and start seeing the 48D tax credits start to get paid off in some time and offsetting that CapEx, it puts you in a very nice, I think, cash flow set up as you look out over the next several years with the amount of funding that's coming in that will match up off of our -- the CapEx investments that will match up versus what we're seeing from a demand perspective.

And the free cash flow? I mean, if we think about the prospect, let's say, in 1 year and in 2 years' time, 2, 3 years, what is the net gross free cash flow net of the CHIPS Act and all the help and the growth? How should we think about the free cash flow of the company?

So from a cash flow perspective, I think it's important to step back and look at job 1, which is -- and we talked about it on the call, is getting to EBITDA positive. And like I said before, it's a relatively simple path. I think you put some revenue through the assets, and we'll start to see those benefits in conjunction with the restructuring actions that we're doing that will allow us to achieve EBITDA positive in the not-too-distant future. As you look out beyond that time frame then, that will -- as we generate more revenue, we have a great basis, these are terrific cash-generating vehicles at volume, that will transition into operating cash flow. And then if you look at the return on capital for those incremental CapEx that goes into the business, that will eventually turn into nice free cash flow returns as well out over time. But it's really about how we've always talked about these assets. They were built for scale. And as you do that, they'll generate a lot of cash flow and free cash flow over time.

Great. On that note, we are running out of time. Thank you all for listening. Thank you, Neill. Thank you, Tyler. Thanks for your time.

Thank you. Appreciate it.

Thank you.