Wolfspeed, Inc. (WOLF) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Cree Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Tyler Gronbach, VP of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Daniel, and good afternoon everyone. Welcome to Cree's second quarter fiscal 2020 conference call. Today, Cree's CEO, Gregg Lowe; and Cree's CFO, Neill Reynolds will report on the results for the second quarter of fiscal year 2020. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Cree's results internally. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially. During the Q&A session, we would ask that you limit yourself to one question and one follow-up so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now, I'd like to turn the call over to Gregg.

Thanks Tyler and good afternoon everyone. In the fiscal second quarter, we delivered revenue at the upper end of our guidance range. We were recently notified by the Department of Commerce that our license to ship to Huawei would not be granted. As such, we have taken an inventory reserve on Huawei-related products. If you adjust for the impact of the reserve, we exceeded the midpoint of the guidance for revenue, gross margin percentage and EPS. Neill will provide some additional context on the inventory reserve in a couple of minutes. We continued our transformation to position Cree for the tremendous growth opportunities ahead of us. We are investing to support numerous growth opportunities across multiple industries, underscoring our confidence in our business and its prospects. Those of you who joined us at our November Investor Day, we're able to hear about some of these opportunities. And in the short time since then, we've continued to see growing momentum for silicon carbide adoption. Despite the Huawei license denial and the short-term headwinds related to the geopolitical and macroeconomic environment, the long-term outlet that we -- the long-term outlook that we outlined at our November Investor Day remains unchanged. We continue to receive strong validation for our technology by many significant customers who are leaders in their respective industries. Cree's expertise in silicon carbide is unmatched and we're building on this leadership to accelerate the transition from silicon to silicon carbide. I'll now turn it over to Neill to provide some additional color on our second quarter financial results and the outlook for next quarter.

Thank you, Gregg. For the second quarter of fiscal 2020, revenue decreased 14% year-over-year to $240 million due to 18% lower LED segment revenue amid ongoing soft market conditions and Chinese trade and tariff issues. Wolfspeed revenue declined 11% year-over-year due to ongoing weakness in power and RF device sales. On a consolidated basis, non-GAAP gross margin was 26.8%, which includes the Huawei inventory reserve of approximately $8.3 million or 350 basis points of gross margin impact. Let me take a moment to explain, why we decided to take the reserve in the quarter. Recently, we received notice from the U.S. Department of Commerce that our license application to resume shipment of product to Huawei would not be granted. Considering this development and the fact that it has been eight months since the ban has gone into effect, we don't see any opportunity at this time where we will resume shipping any product we currently have on hand to the customer. As such, we felt it was best to record the write-down. We will continue to comply with the ban as it relates to Huawei and do not currently expect to record any RF revenue for this customer during fiscal 2020. Our non-GAAP net loss was $10.4 million or negative $0.10 per diluted share, below the midpoint of our target range due to inventory reserve, which had a negative impact of approximately $0.05 per diluted share. Excluding the impact of the reserve, our EPS was above the midpoint at minus $0.05 per diluted share. Our second quarter non-GAAP earnings exclude $42.4 million of expense, net of tax or $0.39 per diluted share for non-cash stock-based compensation acquired intangibles, amortization, accretion on our convertible notes, transformation and transaction-related costs, factory optimization restructuring costs and other items outlined in today's earnings release. By segment, our results were as follows. Wolfspeed quarterly revenue declined year-over-year and sequentially to $121 million, slightly below the midpoint of our target. While we continue to see growth in our materials business, our power business continues to be impacted by softness in electric vehicle sales in China, with a sharp decline seen in the second half of calendar 2019, following the withdrawal of government EV subsidies. In our RF business, we are experiencing continued delays in purchasing activity, as it relates to the rollout of 5G networks. Wolfspeed gross margin was 34.6% which includes an $8.3 million impact, due to the previously discussed inventory reserve related to Huawei. Excluding the Huawei reserve, our Wolfspeed gross margin was approximately 41% within our targeted range. In addition, Wolfspeed's second quarter gross margin was also impacted by lower materials factory utilization. And lower yields related to the ramp of our 150-millimeter MOSFET product. LED product revenue was above our target range at $119 million and grew 4% sequentially. LED gross margin was 22.2%, up 300 basis points sequentially, primarily due to improved factory utilization, lower impact from tariffs, improved product mix and ongoing cost measures. Unallocated costs totaled $3.9 million for the second quarter of fiscal 2020 that are included in our overall cost to reconcile to our $64 million non-GAAP gross profit and 26.8% total gross margin for the company. Non-GAAP operating expenses for Q2 were $85 million, consistent with our target and our non-GAAP operating loss was $21 million which includes the impact of the inventory reserve. Our non-GAAP tax rate was 43%. During the second quarter cash generated from operations was $8 million. And capital expenditures were $61 million, resulting in a negative free cash flow of $53 million, as we continue to invest for growth to expand capacity in our Wolfspeed business. We ended the quarter with $952 million in cash and short-term investments, zero balance on our line of credit. And convertible debt with a face value of $575 million. For the quarter days sales outstanding came in at 39 days. And inventory days on hand improved to 84 days driven by the inventory write-off compared to 98 days last quarter. For fiscal 2020, we are now targeting capital investments of approximately $230 million, up from $200 million. Power device customers have recently indicated, that their production schedules may be earlier than originally anticipated, which will require more manufacturing capacity than we have in our current plan. Given the time required to install and qualify these tools, we have decided to invest now to ensure we have maximum flexibility, in the event our customers need us to ramp our production sooner. These were tools we were planning to purchase in fiscal 2021, but have decided to invest now so we have some additional buffer for our planned ramp. Our capital allocation priorities remain focused, on expanding capacity in our Wolfspeed business. Turning to the outlook for the third quarter of 2020, we are now targeting revenue in a range of $221 million to $229 million, based on the following segment trends: Wolfspeed revenue is expected to be flat to slightly down on a sequential basis, approximately $116 million to $120 million, as we continue to face external headwinds, softness in 5G network spending and lower electric vehicle sales in China. In LED, on a sequential basis, we expect revenue at the lower end of a typical Q3 seasonality between $105 million and $109 million. This range reflects the January 27 announcement by the Chinese government to extend the Lunar New Year holiday, due to the Coronavirus outbreak. The outlook does not account for any future measures taken by the Chinese government, in response to the health crisis that could further delay business from returning to a normal operating schedule. We target Cree's Q3 non-GAAP gross margins at approximately 30%, based on the following segment trends. We target Wolfspeed gross margin to be between 39% to 42%. As previously communicated, we are working through temporarily lower-than-expected yields on our 150-millimeter MOSFET product line. While we saw improvements during the previous quarter yields have not yet fully returned to expected levels. In addition given lower 5G demand, we have lowered our utilization in our RF business further impacting gross margin. Therefore, we expect our gross margin percentage to remain roughly flat versus the prior period. As we have said previously, we see these issues as temporary in nature and we expect to return to higher levels of gross margin once the yield improvements are implemented and the volumes increase. It may however take a full manufacturing cycle to see these results in our financial statements once the improvements take hold. We are targeting LED gross margin to be approximately 20% to 21% down modestly quarter-over-quarter due to lower licensing revenue and lower volumes partially offset by improved cost execution. We are targeting non-GAAP operating expenses to grow to $88 million from $85 million as we continue to invest in our Wolfspeed business including an increased investment to prepare products for production in our Mohawk Valley fab, which we plan to ramp in 2022. We have stated previously that changes in operating expenses can vary from quarter-to-quarter for a variety of reasons including the timing of R&D projects, marketing spend around trade shows and when IP cases go to trial. We target Q3 non-GAAP operating loss to be between $25 million to $17 million, and we target non-operating income to be approximately $2 million. We expect our non-GAAP effective tax rate to be approximately 30%. We are targeting Q3 non-GAAP net loss to be between $16 million to $10 million or a loss between minus $0.15 to minus $0.09 per diluted share. Our non-GAAP EPS target is lower by approximately $0.02 due to the ongoing impact of the tariffs. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, accretion on our convertible notes, transformation and transaction-related costs, factory optimization restructuring costs and other items. Our GAAP and non-GAAP targets do not include the impact of any changes to the fair value of our Lextar investment. Our Q3 targets are based on several factors that could vary including overall demand, product mix, factory execution and the competitive environment. I will now turn the discussion back to Gregg.

Thanks, Neill. I want to touch on some of the comments that Neill has made before I provide an update on our strategic transformation. First, the operating environment remains challenging in the near term. Our customers are cautious and awaiting further clarity with respect to future trade policy as the recent trade deal while a positive development didn't really do much for our sector. This lack of visibility coupled with delays in -- on the 5G side and softer EV sales in China continues to impact us in the short-term. Now the CapEx acceleration that Neill mentioned earlier is a result of some of our power device customers indicating their production ramp schedules may be earlier than they originally anticipated, which would require more manufacturing than we currently have in the -- more manufacturing capacity than we currently have in the plan. In the last 60 days, we've met with several important customers and discussed their production time lines, which has led us to make these additional investments now. This is a positive development and speaks to the growing demand for silicon carbide. The transformation of Cree remains firmly on track. We have a strong team in place to drive our company forward as we position ourselves for the multi-decade growth opportunities before us. We are investing for future growth and seeing early returns on these investments as demonstrated by the critical design wins we recently announced with industry leaders. Our $9 billion device pipeline is large and robust. And we are working hard to convert these opportunities into wins. Last quarter, we were awarded new design-ins for Wolfspeed products totaling hundreds of millions of dollars further demonstrating our ability to compete and win in the marketplace. As we've mentioned previously, customers tell us that they expect to make decisions on about half of our $9 billion device pipeline over the next 6 months to 18 months. This is a tremendous opportunity and we're making the necessary investments to expand our capacity with our Mohawk Valley fab. We selected a construction company. Work is underway at the site and we expect the initial production ramp to begin in calendar year 2022. This highly automated facility will allow us to meet the growing demand for silicon carbide technologies with improved efficiency and scale. In automotive, the industry is transforming, driven by the transition from internal combustion engines to electric vehicles and from silicon to silicon carbide. In the beginning of January, I spent a few days at the consumer electronics show, meeting with several of our OEM and Tier one automotive customers. The benefits of silicon carbide are clear and create significant value for automakers and customers alike. Our leadership and expertise in silicon carbide, coupled with our commitment to expanding capacity, position us well to capitalize on this opportunity. Additionally, while we've seen some near-term delays in the 5G rollout, the growth in mobile data is substantial and the speeds that are required for these applications are increasing every day, underscoring the market need for 5G. Beyond these markets, the applications for silicon carbide are broad across solar, aerospace and defense and industrials and we look forward to expanding our market-leading position as we drive the world's transition from silicon to silicon carbide. There is a high level of optimism at Cree that we have the right product set, a strong engagement with our -- and strong engagement with our customers to continue to drive this transition. With that, I'll turn it back over to the operator and we'll begin our Q&A section.

[Operator Instructions] Our first question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey guys. Thanks for taking the questions. Maybe just a simple one to start off. For the guidance for fiscal Q3, Neill you're mentioning the Lunar New Year holiday. It was extended by three days I believe. So, fair to assume the guide would have been something more like 230 to 237 or so to reflect about three days of lost revenue. Is that the way to think about it?

Yes, let me just kind of hit on that Brian that you're hitting on the kind of the right point there. So, the LED revenue at the midpoint of the guide for 3Q is down approximately 10% quarter-over-quarter. If you look at our LED business historically, seasonality runs down about 5% to 10% due to the Chinese New Year holiday. So, what we're seeing here is, we've got notification from the Chinese government that we're going to extend the holiday and our fab -- our LED factory in China is not going to reopen until February 10. So, what we've done there is, we've taken the guidance down to kind of the low end of normal seasonality. And that's kind of where we've ended up. So the situation there remains fluid. It's hard to say what would happen if additional actions were taken, but we'll continue to monitor the situation and respond accordingly.

Okay. Fair enough. That's helpful. And then on the Wolfspeed side, I know this -- the manufacturing cycle that you talked about. Can you give us some sense or quantify that time line to any degree? I mean, most people would take the past few quarters to mean that you're about just a few quarters into this. And so, are we doing for gross margins -- are in this high 30s to low 40s range and we'll speed for the remainder of fiscal 2020 if this is a kind of one year manufacturing cycle? Or how should we be thinking about I guess the time line here before we start to see some real improvement on the margin side?

It really depends on how the yields improve on the 150-millimeter MOSFET product line. So, I think if you go back to last quarter, we mentioned we had a scrap event there on that same product line. And we've since resolved that issue. So that is -- that has -- we fixed that and we're heading in the right direction. Now, what we're talking about is, driving those yields back up. And we have seen improvement in the yield. So, throughout the quarter, the yields improved and a number of the fixes that we put in place, we saw the result of that. But it didn't get all the way back up to the level we had expected. So, it's lower than we had expected. We do have a number of fixes in place right now and we're working through that. And I think, as we mentioned before, it takes a manufacturing cycle or two before you put the fix in and then it gets -- you kind of see it in the financial results. So, it will be a function of the timing of when those fixes get applied and when that manufacturing cycle or two begins to hit the kind of financials as we move forward. So, I would kind of expect us to bump around for a little bit as we move forward. Now, the second thing on that is, we also talked about some utilization challenges. If you look at the Huawei situation as well as the lower rollout in 5G networks and we've taken some of the RF utilization down as well to manage that. So, as the yields improve and the volumes come back up, we'd expect to get to the -- improve the margins. And this is in no way reflects our view on with the longer-term gross margin opportunities for Wolfspeed that we laid out in the Investor Day, which was in the low kind of 50% range.

Thank you. And our next question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Hi. Thanks. I guess, first question is one that is probably open-ended, but given the fluid and dynamic situation over in China, could you help us think through overall exposure not just in terms of Chinese customers, but in terms of an extension of the -- of Chinese New Year or from a supply chain perspective if U.S.-based customers managing procurement aren't able to go over there? How should we think of the implications beyond what's been announced in terms of the sub cap?

Yeah, Jed. So let me give you a little bit of a scope on this and then maybe we can lay that in with a little bit of color. If you think about the amount of revenue we have in China, the LED business you kind of think of it more like in the 40% range. It's been a little bit higher than that, but we've taken that down obviously in the latest forecast. The Wolfspeed business is a small amount less than 10% of the revenue or roughly 10% of the revenue is China based. So, today what we're seeing is -- what was laid in here is the impact of what we know today. And that's largely with the LED business and the factory for LED that we have in China. We do have some suppliers in China related to Wolfspeed. But right now as things stand today that seems to be working, okay. It's just hard given as you mentioned the fluidity of the situation to say how that would get managed going forward.

Sure. I really appreciate that. That's helpful. I guess just moving over in terms of the device side of the silicon carbide. I was wondering Gregg if you could just help me in terms of framing out once you get a -- or once you have a win or your customer is ramping with one of your wins, what is the lead time that we should expect to see the ramp in your business? Is that a -- if it's a new product for example that's coming into the market are we going to see that one quarter? Or a little bit longer than that in terms of their ability to build some inventory to launch their product? Thanks.

Well, it's definitely dependent on the industry where we've won. But as an example, we announced design wins with Delphi and with ZF. And those announcements were a quarter or so ago. And both of those companies and their announcements talked about a ramp in 2022. So you can kind of think of it as a little over two years to begin initial ramp. And as we talked about earlier, well, as we talked about in the prepared remarks, we're now getting indications that the ramp in 2022 is going to be possibly a little bit steeper than we originally anticipated. And so therefore, we're adding this capacity on board. So that's -- I think that's a very good example of -- that's a little bit over a two-year type window from being awarded the program to ramping. Some customers are faster than that. Some are quite frankly the -- some of them are traditional auto industries can be a little bit longer than that depending on what their qualification procedures are.

Thank you. And our next question comes from Craig Irwin with ROTH Capital Partners. Your line is now open.

Hi. Good evening and thanks for taking my questions. So Gregg, another big picture question. We've all heard you say a few times over the last couple of years that the tempo of activity that you're seeing with automotive customers is really the highest that you've seen throughout your career and that the visibility into the C-Suite are some of these big automotive OEMs and their prime Tier 1 suppliers has never been better. Can you maybe describe for us if anything is changing there the level of commitment that you're seeing on the part of customers the level of interest and attention? And what they seem to be learning about silicon carbide that's going to shape the future of adoption?

I think Craig the tempo remains super high right now at CES with C-suite type folks that -- and CEOs of big Tier 1s and that I met. And in fact, just yesterday and today, we had -- I'm going to guess based on the room that I was in we probably had a little over half a dozen folks from one of our big customers in town having a kind of a strategic alignment meeting. So the tempo is still very, very high. And basically, what the car manufacturers see and what the Tier 1s see is they're facing a tremendous transition is something that many of them haven't had throughout their career, and the internal combustion moving to electric vehicle. And range is the number one thing that end customers care about and silicon carbide improves the range and effectively lowers the cost by requiring less battery. So, I think that's really -- it's a very simple equation. They see that silicon carbide will allow them to extend the range for the same amount of battery or lower the battery for the same amount of range or lower the battery costs for the same amount of range. And with batteries being the most expensive thing in electric vehicle, this is a pretty key thing. So, I would say the tempo remains super high, and we're still highly engaged to have a little bit over half a dozen folks from procurement, engineering, R&D and so forth come visit us for a couple of day workshop, I think is another good example of that kind of high tempo of engagement.

Great. And then my second question is really again sort of a longer-term related question. So, electric cars or near-term application, and we're seeing a lot of evidence of adoption. Anything north of 600 volts we know is silicon carbide. But there are some applications that are just starting to emerge around the edges these days. I had the opportunity to spend the day with the CEO of Airbus' Acubed, the electric flight division and some key people from Boeing from their electric plane side. And they're telling me basically they need very, very high-voltage systems. They estimate 2-kilowatt motors but that means 3-kilowatt systems. Cree's history providing some of the military work that you've done some of the MOSFET that you've developed for the military and your experience producing 6,500 volt and higher volt MOSFETs kind of positions you uniquely to work with these potential huge longer-term partners. Can you maybe describe for us the emerging applications outside of EVs? I know these are probably a minimum of five years away. But, do you see credibility to some of these applications actually coming in and driving the model over the next 10 20 years?

For sure. Absolutely Craig. I'd say a couple of things. One is we had ABB at our Investor Day in November. They talked about a number of different applications including grid-type connection. We have customers that are developing sort of solid-state circuit breakers, utilizing the high-voltage capability that we're able to have. You're exactly right, and that we've demonstrated and have delivered to the market product with multi-thousand volt type capability. And so as we drive the scale of our silicon carbide activities up, it's helping us drive the overall cost down. And as we drive the cost down, it's enabling more and more of these opportunities. I mentioned that we had a couple of hundred million dollars' worth of design-ins that happened this quarter. Many of those design-ins were in industrial type applications where they were relatively small in size, but high in number, which is really good. And so, I think it's another good sign of -- EVs are certainly paving the way for the adoption of silicon carbide, but it's also enabling a lot more industries. The final thing that I would say is we've now gotten feedback from a number of our automotive customers that have now firmly moved away from a 400-volt bus to an 800-volt bus. They're still deciding on what technology to put in it. But as customers move to an 800-volt bus in the automotive world, it certainly gives a lot more viability to the silicon carbide story.

Thank you. And our next question comes from Gary Mobley with Wells Fargo Securities. Your line is now open.

Hey, guys. Thanks for taking my question. I want to go back to an earlier question about some of the – bringing in some of the capital spending to support the fruition of some of your power device wind pipeline presumably with Delphi or ZF. And so if I'm not mistaken your CapEx that you're intending for those fiscal years went up roughly 60% over the prior year, obviously above your prior expectations. So I'm curious to know what sort of revenue you have in mind to support with this additional capacity specific to the Wolfspeed power device sales?

Hey, Gary thanks for the question. Let me just kind of frame up the CapEx here for a second. Let me kind of talk about revenue and timing on those things. So to be clear there's really – there's no change to our overall capacity expansion plans. What we're doing here is we're pulling CapEx in just to ensure we have enough buffer and kind of flexibility to meet our customers' needs based on the feedback that they've given us. So we're going to take the CapEx spend up this year. And if you go back to Investor Day what we said is, we'd spend $200 million this year. But for the next couple of years after this we spend north of $200 million. And over time as we build out the Mohawk Valley fab and we get the benefits of the incentives from that program, we're actually going to see that CapEx go down as that factory starts to ramp based on the partnership we have with the State of New York. And during that period the 2020 and 2021 timeframe are very much kind of investment years. And that will drive some negative free cash flow in advance of those ramps. So from a CapEx standpoint same capacity plan, we're just going to move some of that in to support some of these buffers. Now the other thing when you think about revenue for Wolfspeed, where we talked about the business 2020, 2021 kind of investment years, we'll start to see the business ramp more substantially in 2022 and then gets kind of full. I think we talked about a $1.5 billion opportunity and Wolfspeed out in the 2024 timeframe. I think what we're talking about here is being ready for that kind of ramp in 2022, and potentially that ramp might be a little steeper than we had initially anticipated.

Okay. I want to switch over to the other business. It doesn't get much attention, but let's talk a little bit about the LED business. I'm hoping you can give us an update on where you stand with moving the LED business to a fab-lite model and sort of decoupling it from the Wolfspeed business?

Yeah. We're making – I think we're making good progress there. So, look I think the LED business is obviously being impacted right now in China. But the plan we have is the same. We're going to focus on areas, where we think our customers can drive value. In terms of the outsourcing model, we're on track and that plan really happens in two stages. The first is to move from silicon carbide to sapphire-type wafers. And we expect to be largely done by – towards the end of this fiscal year and probably more so even towards the beginning of fiscal 2021. And then we'll have the fab outsourcing process that will kind of being worked after that, but partially in line and partially – part of that would be in line with the substrate outsourcing. So we're making good progress. The teams are working at it. And in line with what we just talked about on the capacity expansion that plays a big role to create more capacity for Wolfspeed. So, we're working on it. We're making good progress.

Thank you. And our next question comes from Edward Snyder with Charter Equity. Your line is now open.

Hi. This is Jack Egan [ph] on for Ed Snyder. Thanks for taking my question. So back in November, when you doubled the silicon carbide wafer supply agreement with STMicro, how did it affect the timeframe of the agreement? Did it significantly extend the existing contract? Or does near-term demand require ST to purchase more wafers? And also did the extension include another upfront cash payment like the original contract? Thanks.

Yeah. So, what I would describe this as when we announced this we described it as an expand and extension and so part of it was an increase in the amount that they would take on an annual basis and part of it was extending out a little bit. I would describe it more the former than the latter in terms of the two. So I don't think of it as a doubling of the timeframe or anything like that. I don't want to get into any further details beyond that.

Okay. No problem. Thanks for that. And also between the Huawei ban and the EV subsidy cuts in China last year causing headwinds in your device businesses and your comments in the last quarterly call about epi wafers being capacity constrained. I guess why shouldn't we assume wafers, whether bear epi accounts for the majority of Wolfspeed revenue? Thanks.

Yeah. So in Wolfspeed, I think, if you think -- if you go back several years ago, we kind of had talked about the business being in kind of three pieces from rough order of magnitude, one-third, one-third, one-third for the revenue for Wolfspeed. Obviously, the materials business has grown faster than that over the period. So, I probably think about the materials business being a bigger portion of Wolfspeed right now considering that we have some challenges with the 5G rollout for your RF business and the EV subsidies and power. So, I think that's probably the way to think about the business right now. And as we see some of these longer-term opportunities that we've talked about some of these pipeline wins that we've had as those start to ramp, we should see over the longer term, device businesses having a pretty substantial opportunity to grow, out beyond the current period. As it relates to the capacity question, on materials and epi, we've continued to invest in epi. And we made good progress on productivity. I'd say the lead times there are still kind of extended. But we're making good progress there on the capacity side.

Thank you. And our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Hello, everybody.

Hi Joe.

Hi, Joe.

Hi. Two longer-term questions, first, listening to ST the other day, I was kind of struck by how much time they spent talking about developing alternative sources of material supply. And if I were you I'd be able to put off. So I'm kind of wondering, listening to that is there perhaps in your business plan the intention in the device business, at some point to start competing with ST, in the power MOSFET business? And then, I have a follow-up.

Well, we absolutely compete in the power MOSFET business. And when we talk about device wins, we're -- that we've been awarded. If we've been awarded those device wins against a number of different companies that also happen to be our customers from a materials perspective. So, absolutely Joe, that's part of the equation. Our vision is to convert the power electronics industry from silicon to silicon carbide. I think there's a tremendous amount of tailwind right now, in that with the EVs. And the industrial markets that we have talked about as well as the 5G activity. So, I think, our view is we've got a tremendous opportunity in front of us. And that our materials customers who are our device competitors are going to see the opportunity that we see as well. And I think that the growth that we're anticipating is going to be so strong, that we basically couldn't handle ourselves from a device perspective.

Okay. Thanks. And then the second question. At CES, I have to say, I was pretty impressed by some of the non-large OEM offerings in particular Rivian and Byton. And I'm just wondering if you can comment on, what you're seeing in terms of inquiry or planned ramps or anything from some of these other startups preparing to return to the market this year and next?

Well, I'll decline to talk about anybody specifically. But what I would tell you is we've met dozens and dozens of customers Tier 1s as well as the OEM car manufacturers. And as the companies dive deeper into the ramifications of the electrification of their drivetrains, and they see that they're really going to need to move to a higher voltage, and they see that, silicon carbide advantages over silicon dramatically improve as they go from 400-to-800-volt those customers are highly engaged with us. And obviously, we've developed a nine -- a little over $9 billion device pipeline of opportunity about half of that is automotive related. And that pipeline was generated over a relatively short period of time. So, what I would say Joe is the opportunity is relatively huge. And I think the excitement around it is very, very strong. Companies that -- start-up companies and Tesla not too long ago was a start-up company are seeing the opportunity and traditional car manufacturers are seeing those opportunities as well. So we're engaged pretty much across the board there. And as I mentioned in my prepared remarks and I've talked about several times, our customers are anticipating that they're going to be making final decisions on who they're going to go with from a MOSFET perspective over the next six to 18 months. And there's a lot of intensity around that right now.

Thank you. [Operator Instructions] Our next question comes from Paul Coster with JPMorgan. Your line is now open.

Yes, thanks for taking the questions. So you brought forward the CapEx a little bit in response to some customer demand that you anticipate. Are there any incentives or penalties attached to those customers and their business in the event that the demand doesn't come through in the time line that you anticipate?

Paul, no, I don't think we have anything like that in there. But typically in the device business that's not something where we would have something along those lines. But we do work very closely with these customers. We've been in close contact with them very recently. And the indications we're getting from them and the requests we're getting from them is to be prepared for ramping some of these products earlier than we had anticipated. So we're working very closely with them to manage that.

Okay. And then my follow-up question is that you've, obviously, got pretty decent visibility into long-term revenue opportunities in the EV space now. Can you characterize the split between the regions of that visibility? I mean, I guess what I'm trying to get to is, is it primarily Europe? Or is it fairly balanced across the regions? And any numbers that you can provide would be helpful there.

There's -- I would say there is very, very good activity right now from most of the European car manufacturers. Volkswagen has been very, very public about its ambitions in electric vehicles. You're seeing a pretty significant change across all of the various different brands inside of Volkswagen on that. BMW has recently made some announcements and so forth, and so Europeans are clearly moving very, very rapidly. And I think that's primarily driven by the oncoming requirements for them in terms of emission standards and those are pretty daunting. The U.S. obviously led by Tesla really are taking the electric vehicle and making it a very real and viable story. And so now you're seeing other start-ups as was mentioned earlier jumping into this business, as well as the U.S. traditional automakers getting more in line with the electrification of the powertrain. China has been pushing EVs now for quite some time. I think the change in incentives that have happened in China has caused a pause in that -- in the adoption of electric vehicles. But the change that's been put in place incentivizes longer-range vehicles. And so as the Chinese car manufacturers begin to develop and then release to the market longer-range vehicles, I think it's actually going to be a good opportunity for us because that's what we do. We allow the car to go longer with the same amount of battery. So I'd say those -- they're not necessarily all balanced. I would say there's a lot of -- there's probably the most amount of intensity around electrification of the powertrain in Europe. I think there is a tremendous amount of activity in the U.S. and China as well.

Thank you. Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much. So, obviously, Delphi is an important customer for you guys from a technology standpoint. And we understand at least part of the merger with BorgWarner is being driven by customer dissatisfaction with the current solutions on the market. So can you talk a little bit about the dynamics of a customer like Delphi going into a pretty substantial merger, which is going to consume a lot of time and energy along with the dynamics with customers really pressing hard but not getting what they want from those suppliers at this point in terms of preparedness for a production level? Just initial comments on that.

Well, that's probably a better question for Delphi. What I would say is we're really early in this and the initial feedback that we've got from talking to customers is actually quite positive. The view of the Delphi Viper module is actually very, very good. We've seen -- we've met with a lot of different customers to talk about. We're in a great partnership with them. So I would say that we view this as BorgWarner saying they believe that the capability inside of Delphi is strong.

Okay. And then just talking about the yields that you've mentioned on the 150-millimeter. As you get into automotive-grade qualification, what sort of benchmarks are you going to be looking for? And can you talk about in terms of yields that we can point to as meaningful progress along the way in terms of progressing towards that full automotive-grade qualification for powertrains?

Maybe I'll take a first stab at it and Neill can talk a little bit about it as well. So automotive customers care about a lot of different things and quality is super important aspect of that. And so in terms of getting product to them that is of high-quality and doesn't fail in their systems that's a really important aspect. At this point, in terms of delivering products to our initial customers, the products that they're receiving are doing well in their testing and things are progressing along the plan. The yield is really impacting our internal supply if you will. And so we've got actions in place to improve those yields. And we have pretty good line of sight as to how that's going to transition. We feel pretty good about the analysis that we've done on that. And then the additional thing that I would say is one of the important aspects of improving yield is automation. And as we transition to the Mohawk Valley fab, which is opening in 2022 as the initial production ramps begin as well with most of these automotive customers, we're going to have a highly automated factory that's going to eliminate the traditional human error type things that are introduced anytime humans interact with stuff. So we've got really good line of sight on that. We've had many of our automotive customers have come in and done audits and so forth. They understand what we're doing. We've hired folks that have come in to help us along this journey as well. The head of our quality organization ran automotive quality at another semiconductor company and she's doing a bang-up job of put things in place to be able to meet those expectations.

Thank you. And our next question comes from David O'Connor with Exane BNP Paribas. Your line is now open.

Great. Thanks for taking my question. Maybe two from my side. Maybe firstly, just going back to I think it was Joe's earlier question on ST. Earlier this month they announced another silicon carbide wafer supply agreement with SiCrystal, which comes on top of their acquisition of Norstel. And it's a much smaller deal than the supply agreement that you guys have. But I'm just wondering how you see the silicon carbide wafer supply landscape develop in the longer term? Is there a pull from OEMs to bring on more wafer suppliers? Or could trade tensions behind the scenes kind of be pushing chip makers to rethink their wafer supplier base from a geographical perspective? Any thoughts around that Gregg would be helpful? And I have one follow-up as well on Huawei. Thanks.

Well I think the former is really probably the more prevalent theme which is as the industry begins to transition to silicon carbide everybody is looking at what's going to be my supply security and how am I going to ensure that I'm going to be able to get what I need. And so things like long-term agreements that we've done with ST are helpful in that regard. Things like expanding capacity like we've announced are super helpful in that regard. We know that an industry that's expanding at the speed that we currently see silicon carbide expanding it's going to attract new entrants and there's going to be a lot of folks that are going to try to get into the silicon carbide business including some of our silicon carbide wafer customers. I think what the -- this industry is not an easy industry to get into. In fact, there are tremendous amount of barriers to entry. And then some of that is just intellectual property related. Some of it is trade secretly related. To grow a crystal is very, very difficult. The machines that you use to grow crystals tend to be hand built and so forth. So it's not like you can just run down the street and buy a machine and set up operation and have it producing quality crystals in any kind of short amount of time frame. To cut the wafers and to slice is difficult because the material is extremely hard. To put epi on it is difficult. So you have various degrees of difficulty associated with just the material side of the business. Now we know that. I think the industry knows that but we are not resting. And so what we're doing is we're driving improvements in our materials business which are increasing yields, decreasing costs, increasing scale and being able to do more. And so as folks try to enter the material side of this business, they're going to be chasing us down a relatively steep cost curve. And so that's – I would say it's very natural in an industry that's growing like this that you would want to have assurance of supply. And one way to do that is to get some alternative sources. Our objective is to be faster running down that cost curve then folks who are trying to get into it can ramp as well. And so far it's kind of playing out very well that way.

That's very helpful. Gregg and maybe as a follow-up on Huawei, I understand you've removed Huawei from the guide going forward. But just wondering about the design engagement for future projects or products with Huawei. Is there any discussion with Huawei on future road maps? Or has all engagement with Huawei stalled for now?

No. We have discussions obviously with them. In fact I met with them in late December. So they are very interested in our technology and the capability we have. We've got products that meet their requirements. So again solutions that meet their requirements. We're just prohibited from selling from them. And the non-granting of the license if you will to Huawei, it says that for the near term they're out of the equation. Will that change in the future? Maybe. I think that if trade relations between the countries normalize again and things get into a better situation we have technology that they're very interested in putting into their systems. But for all intents and purposes right now we're not counting on that.

And let me just add to that. So if you think about it I think you stated it correctly, Huawei is out of our short term plan as you mentioned. But I'd also consider them out of our long-term plan as well. And the reason for that is if you go back to the Investor Day, we said we would grow Wolfspeed revenue to $1.5 billion. And China represented roughly 10% or a little bit below 10% of that revenue. So you can just read that as China was really not included in that business plan. So both from a short-term perspective and a longer-term perspective it's not in the plan. If something changes I think that's great. But right now we're not planning on operating and having Huawei as a customer. And we believe we can still achieve the goals that we laid out at Investor Day under that scenario.

Thank you. And our next question comes from Jeff Osborne with Cowen. Your line is now open.

Hi, good afternoon. I actually had a follow-up on the materials line of questioning. Gregg I was wondering is there any parameters you can put on as you doubled capacity and I think doubled again in materials over the past few years? Any historical frame or reference around cost reduction? Is there a way to quantify that as to what you've seen or maybe some future targets over the next few years what do you think you can take cost out?

We don't give that detail and primarily because we sell materials to customers and there's a high sensitivity around pricing and so forth. What I would tell you is, it's a relatively steep curve and we've executed already at a relatively steep curve and we've got pretty good line of sight to continued improvement on that curve at a relatively steep ramp. And what this is driving then is the delta between silicon and silicon carbide from a cost perspective is decreasing. We don't anticipate that we'll ever get to the point where the cost of a silicon carbide wafer is going to be the same cost of a silicon wafer, but I could definitely see line of sight to the cost of the amount of power that you get out of a silicon carbide wafer getting pretty close to what you'd get out of silicon. And that's primarily because you get a lot more power for -- you have way higher power density. And so, a smaller chip can actually generate more power. So this is all really good news. I would just describe it as a relatively steep curve and I think that's what generates a lot of excitement from our materials customers because, they see the adoption of silicon carbide increasing based on that as well.

That's good to hear. And then the last question I had was just around the 150-millimeter manufacturing challenges and just reconciling that with the timing of -- I think you said half of the $9 billion awards over the next six to 18 months. I didn't know if these challenges that are lingering or putting you in the penalty box that coupled with not having the New York facility up and running. I'm just trying to get a sense of your comfort level? Or have you missed out on some opportunities over the past few months because of this challenge? What gives your potential customers the sense that you'll be able to overcome this in a timely manner?

I think they know we're going to be able to overcome this. And what I would say is, what we're needing to do now is, throw more material at the wafer fab, so that we can get our customers what they need in a timely fashion. And as I said before, so far what we've gotten them and they've put into their systems, they're seeing pretty good results. So, we're feeling pretty good about that. And then finally, the real revenue ramp beginning in 2022 and accelerating through 2024 lines up pretty nicely with the ramp of our factory in Mohawk Valley. So, I think the issue is more our issue, where we have to throw more material-like stuff. And that stresses things obviously, internally. But we'll get through the yield issues. We're pretty transparent with our customers on that, what the challenges are, but we'll get through those yield issues. We're already seeing some improvement in the factory. The scrap issue that we talked about last quarter is now fixed. And now it's just a matter of increasing yields and getting them back up to where we want them to be.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Gregg Lowe for any further remarks.

Well, thanks everybody for your interest and your participation in today's call and we look forward to updating you at our next call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.