Wolfspeed, Inc. (WOLF) Q1 2022 Earnings Report, Transcript and Summary

Good morning. Thank you for standing by and welcome to Wolfspeed Incorporated First Quarter Fiscal Year of 2022 Earnings Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] We ask to limit yourself to one question and one follow-up. Please note today's call is being recorded. I would now like to hand the conference over to the first speaker today. Tyler Gronbach, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Wolfspeed's First Quarter Fiscal 2022 conference call. Today, will speed CEO Gregg Lowe, and Wolfspeed CFO Neill Reynolds, will report on the results for the First Quarter of Fiscal year 2022. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures will speed the 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 2, and not a substitute 4 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 course of the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our news release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially, including risks related to the impact of the COVID-19 pandemic. 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. Thank you for joining us today and I hope you and your families are staying healthy and safe. I am pleased to report that during the first quarter, we continued to execute and drive our business, delivering strong revenue above our guidance and non-GAAP diluted earnings per share at the high-end of our guidance range. And this has been a momentous period for us, we changed our name to Wolfspeed, capitalizing on our 30-year plus heritage of working with silicon carbide. The next-generation in power semiconductors will be driven by silicon carbide technology with superior performance that unleashes new possibilities and positive changes to the way we live. As the original champion of this technology, we couldn't be more excited to compete and win in the rapidly expanding marketplace. As part of our move to Wolfspeed, we also are pleased to have joined the New York Stock Exchange earlier this month as we continue on our transformational journey of a pure-play global semiconductor powerhouse, leading the industry transition from silicon-to-silicon carbide. We look forward to discussing the strong progress we've made on our transformational journey and strategy and share more detail about this exciting long-term outlook during our Investor Day in New York City next month. If you haven't received the registration link, please reach out to Tyler. I will now turn it over to Neill, who will provide an overview of our financial results for the first quarter and our outlook for the second quarter of fiscal 2022. Neill.

Thank you, Gregg. And good afternoon, everyone. We delivered solid results during the first quarter as we continue to see increased demand for devices and materials. Revenues for the first quarter of fiscal 2022 were 156.6 million above the high-end of our guidance range, representing an increase of 7.4% sequentially and 35.6% year-over-year. Our non-GAAP net loss was 23.8 million or $0.21 per diluted share of the top end of our guidance range. Our first quarter non-GAAP earnings exclude 46.3 million of expense, net of tax, while $0.40 per diluted share for non-cash stock case compensation, acquired intangibles amortization, accretion on our convertible notes, project's transformation and transaction costs, factory optimization, startup costs, and other items outlined in today's earnings release. Moving onto the first-quarter performance, we delivered our fifth consecutive quarter of sequential growth. And power, momentum continued to build as our customers have a demonstrated need for our products, resulting in revenue growth up 57% over the prior year. For RF, we continue to see good activity on the 5G front but performance was slightly muted due to output challenges. As we discussed on our last call, we did see some supply constraints and some lower productivity during the quarter. As our Malaysian contract manufacturer continued to ramp activities backup following the recent COVID-19 outbreak. At this time, we do not expect any additional impact avoid the shutdown as a factory continues to ramp towards the normal production schedule. Moving to materials, we saw better order flow during the quarter, which we expect will continue for the remainder of the fiscal year. First quarter, non-GAAP gross margin was 33.5% compared to 32.3% last quarter. With sequential increase was driven by solid performance in materials and improving MOSFET cost and yields. As previously discussed, we knew the gross margin impact is short-term in nature could do a sub-optimal device production footprint we have in North Carolina and expected to modestly improve going forward as we work through factory transitions and improve yields. Looking at our consolidated results, non-GAAP operating expense for Q1 were 86 million and our non-GAAP tax rate was 27%. The increase in our operating expenses was largely due to R&D, including investment in our 200-millimeter pilot line supported the Mohawk Valley ramp for the first quarter, day sales outstanding was 53 days and inventory days on hand was 154 days. Cash generated from operations was negative 63 million and capital expenditures for 200. 9 million resulting in negative free cash flow of 272 million. We believe we are in solid position with approximately 850 million of cash and liquidity on hand to support our growth. However, we will be opportunistic from a capital market standpoint to ensure we can have the flexibility to invest as we see fit, to continue to underpin our position in the market and fuel future growth. As we continue our transition from a pure-play global semiconductor Company, we will update our disclosures as appropriate and necessary. A few things I'd like to highlight this quarter. First, we incurred start-up costs, primarily related to the ramp at Mohawk Valley, approximately 8.6 million was incurred in Q1 and we expect this to ramp throughout the remainder of the fiscal year. As noted previously, we expect a total of approximately 80 million of start-up costs in fiscal 2022, with the majority of these costs incurred in the second half of the fiscal year as we qualify and ramp up that. We have provided a non-GAAP adjustment for the start-up costs, as well as a reconciliation table in our earnings release. Second, as noted in the news release, and as you'll see when we file the 10-Q tomorrow, now that we have successfully transitioned the Company, the Wolfspeed, that are solely focused on our plans to be a leading global semiconductor provider, we've adjusted the expected useful lives of certain assets to better reflect their estimated economic lives for Silicon Carbide based semiconductor business versus a Company that was primarily focused on lighting and LED products. The changes resulted in a decrease in depreciation expense of 8.4 million for the first quarter. The impact on first quarter gross margin is relatively small, and we expect that to fade into the margins over the next few quarters. As we previously mentioned, we are continuing to experience a significantly steeper demand curve from our customers, for silicon carbide products than we had initially expected. This has led to supply constraints, for some customer orders will not be fulfilled in Fiscal year 2022, and channel inventory levels will remain low, until we ramp our production in our Mohawk Valley bad. We're confident that we will be able to meet the high demand. But in the meantime, we are continuing to accelerate capex capacity investments and our team is working hard to improve output in our Durham facilities. We are anticipating net capital expenditures of approximately 475 million for the year, with Q1 representing the peak investment period. We'll start to see a modest step-down beginning in 2Q and continuing throughout the second half of the year as we receive more reimbursements for the Mohawk Valley construction. We continue to pull capacity expenditures where we can at the fiscal year 2022 to better support with steepening demand curves. We remain on track to operationalize the world's largest Silicon Carbide fab in the first half of calendar year 2022. We know many of our customers are focused on assurance of supply, when it comes to Silicon Carbide, and we're committed to meeting that demand given the steeper ramps that we're now expecting. Looking to the second quarter, we are encouraged by the positive momentum and as a reminder, progress may not be linear over the next few quarters as we ramp production at Mohawk Valley. In the second quarter of fiscal 2022, we are targeting revenue in the range of 155 million to 175 million. We expect revenue to be driven by strength across all of our product lines, but by power devices. Our Q2 non-GAAP gross margin is expected to be in the range of 33.7% to 35.7%, which is an increase versus 1Q. As we have stated previously, the key to our gross margin transition from the low 30% to 50% plus relies heavily on our fab cost footprint transition from North Carolina to Mohawk Valley. As we transition to that new footprint and qualify the factory in 2022 and drive revenue growth into 2023 and beyond. We will see the benefits of increasing production from our advanced 200 millimeter fab. Wafer processing costs and Mohawk Valley are expected to be more than 50% lower than Durham, not fully including the benefit from the diameter change from 150 millimeter for 200 millimeter. In addition, we expect cycle times in Mohawk Valley to be more than 50% better than in Durham, and yields in Mohawk Valley to be 20 to 30 points higher than where we are in Durham today. We're already seeing good evidence from our Mohawk Valley pilot lines to support these projections, and anticipate a heavy margin improvement as we move to our new fab. We are targeting non-GAAP operating expense of 88 million for the second quarter. We expect operating expenses to continue to excrete modestly each quarter as we continue our investment in R&D and sales and marketing resources. We target Q2 non-GAAP operating loss to be between 32 million to 26 million and non-operating net loss to be immaterial. We expect our non-GAAP effective tax rate to be approximately 27%. We are targeting Q2 non-GAAP net loss to be between 19 million to 23 million or a loss of $0.16 to $0.20 per diluted share. The EPS outlook for 2Q includes approximately $0.02 of benefit for the previously mentioned change in estimate of useful lives. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, accretion on a convertible note, project transformation and transaction costs, factory optimization, restructuring, and start-up costs and other items. Our Q2 targets are based on several factors that could vary greatly, including the situation with COVID-19. Overall demand product mix, factory productivity, and the competitive environment. With that, I will now turn the discussion back to Gregg.

Thanks, Neill. We made remarkable progress on our transformational journey during our fiscal first quarter. Our power business continues to see strong demand from the automotive markets, and we are also encouraged by the increasing demand across a number of industrial and energy customers. The strength of our device opportunity pipeline, which now is about $18 billion underscores the significant demand we're seeing not only for automotive power, but also in RF, Industrial and Energy Solutions. Now if you recall, at our 2019 Investor Day, we showed a $9 billion device opportunity pipeline. So, we doubled the pipeline in the last 2 years and now have more than 8200 potential projects. And the team continues to identify additional opportunities at a rapid pace. Meanwhile, the sales team is converting these opportunities out at an impressive rate. With approximately $560 million of design-ins awarded during the last quarter. A significant portion of these were for automotive inverters, while we also continued to secure other interesting applications, including a low charger for electric vehicles, an elevator, energy storage products, and an induction cook top. Our massive device pipeline and continued success securing design-end continues to give us confidence in our ability to achieve our target revenue for fiscal '24 of $1.5 billion with current demand trends offering some potential upside. Based on the steepening demand for silicon carbide through 2024 and beyond. As we focus on executing across our business, we are pleased to see our strategy is further supported by developments in the broader market. Global electric vehicle sales are expected to be over 6 million this year according to consulting firm Wood Mackenzie. Electric vehicle sales in the first half of 2021 nearly tripled worldwide compared to the first half of last year. The share of electric vehicle sales and the global passenger car sales, doubled compared to the same period last year. This performance provides another proof point of the end of the ice age as consumers transition from internal combustion engine and embrace electric vehicles. And as more OEMs and Tier 1, leveraged Silicon Carbide based solutions for powertrain, onboard chargers, and off-board fast chargers, which increased the vehicle's range and reduce charge times. We expect the adoption rates to continue to increase. President Biden in his address last month to the UN General Assembly reiterated his intent to work with Congress to make critical investments in green infrastructure and electric vehicles. In mid-September, U.S. lawmakers proposed an expansion of tax credit for our electric vehicle that includes significantly higher subsidies for union made zero-emission models assembled in the U.S. We are continuing to see U.S. automakers make big commitments to ramp up their electric vehicle efforts. For instance, in late September, Ford announced that we'd spend billions of dollars to build 3 battery factories and an electric truck plant in the U.S., significantly increasing its commitment to electric cars and trucks. We remain well-positioned to capitalize on these opportunities as we are in the midst of an increasing manufacturing capacity, including bringing online the world's largest Silicon Carbide fab in a matter of months. In fact, we believe our capacity expansion efforts were a critical factor that led General Motors to choosing us to provide power device solutions for its future electric vehicle programs. Our silicon carbide devices will enable GM to install more efficient EV propulsion systems in several different models. That will extend the range of its rapidly expanding EV portfolio. The combination of Wolfspeed global leadership and silicon carbide, and GM's commitment to an all-electric future, including a plan to launch 30 electric vehicles globally by the end of 25 establishes a powerful partnership, pushing the boundaries of electric vehicle innovation together. Our Mohawk Valley 200 millimeter fab remains on track to start qualification runs in the first half of 2022. We now have more than 50 of the primary ballroom tools placed in the clean room. We've had an opportunity to host several global automotive executives at the site, and they were impressed with the level of automation and the overall scale of the operation. In Durham, we have major expansion underway right now to continue the growth of our materials capacity. The space, conversion, and reset up is actively being converted from an old lighting and office space, into industrial space for significant growth of our crystal growth, and EPI capability. Our expansion enabled us to increase the number of growers, and take advantage of our continued crystal growth technology improvements, which increased production yield. To avoid supply constraints, we've already ordered the majority of the long lead time items, including electrical substations and steel infrastructure. In terms of timing, we will start ramping phase 1 of this space in June of '22 in particular, is being built out in three phases and gives us adequate broke capability through 2025 or 2026, depending on realized demand. And some, as we move forward in our new capacity as Wolfspeed, we will continue to execute our strategy to create the global semiconductor powerhouse. We continue to win business at a very good pace while we're making necessary investments to deliver next-generation technology to our customers. We are excited about the opportunities ahead, [Indiscernible] confident in our strategy and our path forward. We look forward to discussing the progress we've made on our transformational strategy and share more details about our long-term outlook during our Investor Day in New York next month. And with that, I'll turn it back over to the Operator and we can begin the Q&A session.

[Operator Instructions] And as a reminder we are limiting question to 1 question and 1 follow-up, so please be mindful. The first question we have is from Vivek Arya with Bank of America. You may proceed.

Hi, this is Blake Friedman on for Vivek. I was just curious for my first question at the beginning of the month, I believe you announced a strategic supplier agreement with GM. Can you provide further details on the agreement or an overview of Wolfspeed assurance of supply program? And then relative to 90 days ago, can you mention how customer engagement with auto OEMs have had changed or progressed?

Sure. On October 4th, we announced jointly together with General Motors a partnership with them as we're providing the Silicon Carbide devices for their EV platforms. The program is slated to go into several different vehicles. And we'll be starting ramping after 2024. I can't get into a lot of other detail about that other than to say it's a really great partnership that we have together with GM. I think in terms of the assurance of supply program, this is a really -- I think this is what a really key item for GM and it's become a hot button for all of our customers that are currently experiencing a lot of supply issues in the silicon world. And as they integrated device manufacturer that has its own capabilities in materials, we're kind of in a unique position to be able to offer this kind of assurance of supply.

That's good to hear. And then just quickly for my follow-up, just with regards to the increasing the useful lives of certain assets. Just to make sure our math is correct. The kind of the net impact to GM this quarter, was it about 20 to 30 basis points? And if you can maybe clarify the impact moving forward for the next few quarters, that would be great.

Thanks. That's right. About 30 basis points, I think in 1Q. And then you could see it kind of bleeding into kind of the guidance into Q2 1 and 2 points. And you can think about maybe under 50 basis points or so for 2Q. And then another 1 to 2 points bleeding in to the back half of the year. and you got to think about that in terms of a revenue exit rate for the year of around 200 million or so. But I think we have very good line of sight too.

Very helpful. Thank you.

Thank you. The next question is from Pierre Ferragu with New Street. You may proceed.

Hi. Thanks for taking my question. Can you hear me fine?

Yes, we can. Thank you.

Okay. Great. I had a question about your 200-millimeter wafers and I was wondering how you're approaching the question of making these wafers available to your substrate clients. So how you're thinking about that. And then you know, how far you are in the process, so are you sharing -- have you already shipped some of these wafers to your clients so they can start playing with them. Look at whether they would like to adopt the new -- the new site. Thanks.

Thanks for the question. We're obviously focused on an internal ramp at this point, with our new 200-millimeter factory coming online. So that's really where the focus is. The result at Neill talked about running these wafers through our pilot line is actually very encouraging at this point so we feel really good about being able to ramp that, but it's really -- with the new factory coming online we're really focused on getting that factory up and running.

Okay. And in that case, do you have the sense -- what could be the earliest your competitors would -- on the device side could have a similar like 200 millimeters fab. What kind of lead times it would get based on what you see from a substrate perspective?

Hard to tell. Obviously, we began construction of our 200-millimeter factory almost 2 years ago. So, we're year-and-a-half, year-and-three-quarters ago or so it does take a while to actually get a Silicon Carbide factory up and running. There are some differences between silicon and Silicon Carbide in terms of the equipment that you need in the fab. And so, you have to kind of be thinking through that. So, I don't know exactly when that would be for everybody, but I know that for us going from not having a factory to having a 200-millimeter factory beginning to run qualification material. It's a two-year process and that was started of course, 18 months ago or so before there was all the supply issue. So, I would imagine if you're trying to build a factory today at 200 millimeters, it probably would be a lot longer than 2 years would be my guess.

Thanks Gregg.

You're welcome.

Thank you. Your next question is from Gary Mobley with Wells Fargo. You may proceed.

Hey, guys. Everybody. Thanks for taking the question. I wanted to ask about some of the supply constraints and the impact this has had on your unfilled backlog. If I'm not mistaken, last quarter, you identified roughly $100 million in revenue you were not able to fill and I presume that was mostly on the R upside related to some of the bottlenecks out of Malaysia. But now that we were sitting here late October, where does that unfilled backlog sit? And how would you characterize the trends in -- or the gap between demand and supply overall?

Thanks, Gary, for the question. I think if you think about the amount that we've gotten into the revenue numbers up, obviously in 2Q and the outlook for the rest of the year, as I said earlier, I think we've got pretty good line of sight exiting the year at 200, maybe a little bit north of revenue there. I think we're making progress on driving more capacity to the system, whether that be in Malaysia or here in Durham. But the challenge we've got is that demand keeps steepening. So, I think if you look into this year and you get into next year, and we always talked about that transition point being 23 or 24 and that demand curve continues to steepen and its right rate upon us right now. So, I still think that even with that revenue increase, we still have worth of a 100 million of unfulfilled demand. And we're really just pushing as hard as we can, whether it be capex or driving organic throughput, or bringing as much capacity online as we can to kind of close those gaps. As you know, the big transition for us is getting to Mohawk Valley. So, the faster we can make that transition and move into Mohawk Valley, we can, but we're looking at any and all solutions to try and close that gap as fast as we can.

And then Gary, maybe just a couple of other additional points. We made some changes here in North Carolina in terms of brought in some leadership for the wafer fabs here. We're seeing some early signs of good progress there. Customers are super excited about that. And then the additional thing that Neill mentioned -- with Mohawk Valley coming online, customers are obviously super excited about that. In fact, last quarter, we received our first official purchase order for products coming out of Mohawk Valley on 200-millimeter wafers. So, they're seeing that light at the end of the tunnel and it was great to get that first purchase order in.

Great appreciate that. And so, my follow-up, I wanted to ask you Gregg about China, if I'm not mistaken, your expectations in terms of revenue contribution from China as part of your 2024 plan is only about 10% of that 1.5 billion revenue forecasts. But as you know, Roman San'an (ph) seems to have a strong hold on some of the Chinese EV OEMs. But I'm wondering if you have any change in your outlook as it relates to China for better or for worse. It's a contribution to decree so to speak.

Yeah. We haven't changed at this point, and what I would say is the tension -- the global tensions between -- especially between the U.S. and China remains pretty high, I would say, and that doesn't seem to be a sign from my viewpoint of anything abating. So, we just think it's just prudent to dial it back a little bit. That being said, we've got a lot of activity in China and customers are evaluating products and design wins and so forth. But I think it's just prudent dial it back just in light of the increased tensions.

Thank you, guys, look forward to seeing you in a couple weeks.

Thanks, Gary.

Thank you. The next question is on the line of Jed Dorsheimer with Canaccord Genuity [Indiscernible]

Thanks. It's a tough one. So, hey guys, congratulations on a great quarter outlook. I guess first question, Gregg, maybe just shifting the conversation away from EVs is it seems like that's been most of the lines of questioning. But there's many more applications beyond EV. Solar inverters, grid forming, grid following inverters, wind turbines, just to name a few. I was wondering if you might be able to give an update. In the context of that, how has the assurance of supply specifically in some of the non-automotive, change the conversations of how some of your partners are looking at you? And then I do have a follow-up.

Sure. Jed, thanks for the question. As I mentioned in the prepared remarks, we've got the pipeline now over $18 billion has over 8200 projects in there. Of course, a lot of the value is automotive, but a lot a number of projects or are these other applications. I talked about an industrial cook top that we want a wall charger, an elevator. So, you're exactly right, we're seeing a lot of momentum in the broader industrial markets. And customers are switching from silicon-to-Silicon Carbide across a number of different end equipment, our partnership obviously with Arrow helps us reach those customers that continues to be a very strong relationship and strong partnership, and the momentum there is actually quite solid. So, I feel really good about that. And what I would tell you, Jed, in terms of the capacity coming online, those industrial customers are also paying attention to the fact that it was nearly 2 year -- well it was 2 years ago, we made the decision to invest in a new fab and then we broke ground and March of 2020 and they see that we've made those investments well ahead of this demand coming on online. And they are really appreciating that. And so, I would say start looking into designing in Silicon Carbide, they are definitely paying attention to who made those investments almost 2 years ago and is now bringing on capacity and we're looking pretty good from that perspective.

Awesome. Just as my follow-up, I'll just turn to Neill for a second and just going back to a previous question. Just by my math, if I kind of pull out some of the one time from the margin adjustment, it looks like yields in the wafer facility picked up a few points. Then Gregg mentioned not by name, but Rex Felton coming on sort of some of the management changes and I'm just wondering whether or not well, one is that in line with what you saw and so I'm assuming then that we've seen a bottom end margin, it yields seem like they're moving up down in Durham.

That's right, Jed. I think we've seen the bottom and we are starting to turn up the other way on margin, and I think there's a several components to that. 1 is, we could have bit of a drag with this kind of Malaysia subcontractor issue, the COVID-19 outbreak, and we've been recovering from that. So, I think that we've put that behind us, and the second thing Gregg mentioned it earlier, that we've seen some benefits just from some of the new staff and the management changes that we made. We are seeing good early returns on that, but it will take a little bit of time for that to work itself through inventory, and see itself into the results. So, as we move forward, I think we're going to see margin expansion both in the device and the materials business. But the one thing to be aware of is that the power device businesses is just going to grow faster. And we're seeing that order-flow right now. It's off that regardless of the improvement there, that's going to be kind of a negative mix for us, right? Just based on the North Carolina footprint. So, I think what you'll see is margin expansion in terms of the fundamentals of the business and we will see a little bit of that maybe held back a little bit just by the overall mix on device and then as we've talked about many times, once we ship that over to Mohawk Valley, that's really the solution. But I do think we'll see some strong margin improvement here as we move forward.

Great, thanks, guys.

Thanks, Jed.

Thank you. The next call is from Brian Lee with Goldman Sachs. Mr. Lee, you may proceed

Hey guys, thanks for taking the questions. I guess first one, just talking about the scale and the capacity given. It sounds like the demand environment is getting better, and there is potentially upside. Can you give us some thoughts around adding rawer materials capacity? Whether it'd be on timing, location, maybe anything on potential scale, versus what you have today in Durham. And then also may be related to that, how much it would cost and Neill you alluded to being open about accessing capital markets sort of how that would all fit into the strategy here going forward. And then I had a follow-up.

Yes. Thanks, Brian. So, we are doing that capacity expansion for the materials business as we speak, it's been something that we've actually been doing now for the last year and half or so inside of our current materials building, we've now gone across the street to a different building and are expanding that if you happen to come on our campus these days, you will see a lot of construction and fences up and things like that. And that's all the transitioning of that old lighting facility, and actually what used to be a basketball court, to a materials production operation. That's going very well. We're super excited about that. And that expands our capacity here on campus, but to a different facility. That's something that's been ongoing for the last couple of years in the existing building and now it's going on in a building across the street from us.

Then, Brian, just your second there, obviously, we've been working on this capital expansion for a couple of years now, 2 or 3 years. And we put a substantial amount of capex to work for us to essentially tripled the business over the next from last year out to 2024. So, ramping beyond what we've had, what we've done already is already kind of a challenge. So, I think as I've talked about many times, it's really. It becomes a supply side challenge. And we're trying to manage that and push it as fast and as hard as we can as. It relates to funding it, I mean, there's several different funding ways that we've been managing this. One of them that we haven't seen a lot of yet, but it's really starting to kick in is the reimbursements from New York for Mohawk Valley, so from a capex standpoint, we're going to spend 475 million or so this year, and that's going to step down in the back half of the year if you see more of those reimbursements coming in. As you look out over that time frame, obviously we'll be opportunistic just around can we look for opportunities to increase the revenue between now and that time, but still I would say it's a supply side challenge thing and we're somewhat limited in the options that we have, although we're looking for solutions always within the 4 walls that we have right now to kind of go manage that. And again, if that were part of being opportunistic, something I would look at. But right now, I think we're in pretty good shape from cash and liquidity standpoint to kind of manage where we're at. But again, we'll be opportunistic looking forward.

And just real quick addition on that. Obviously, anything from a supply perspective, near-term, before we get Mohawk Valley would be out of our Durham wafer fabs and that's where we brought in some new leadership you mentioned [Indiscernible], but also [Indiscernible] has come in last quarter. And it's already making an impact, a pretty strong and positive impact in terms of how the fab operates. We still have -- we still have a way to go, but we're seeing really good early indications of some good progress that she is going to make.

Appreciate that context. Just second one for me on the VW framework agreement, I mean, I think this is one of your original points on the board, if you will, a couple of years back. I know you've talked about customer developments accelerating of late, especially on the automotive side, and then you had some nice Tier 1 one wins like GM here recently. So just wondering, can you update us a bit on kind of what's the latest at VW where you are in terms of reaching any stage of commercialization and revenue opportunity there. Thanks, guys.

Nothing specifically to announce on any additional customers. We obviously were able to announce the GM deal through a joint press release, so we win business and sometimes we're able to announce specifics about it, and sometimes we're not. So, at this point, we don't have anything to announce on that. What I would tell you is we've had a number of automotive OEMs and a number of Tier 1s that have come visited us over the last -- well, we visit with them a lot, but over the last quarter we had a number of come visit with us here in North Carolina and also go visit the wafer fab and Mohawk Valley and they leave quite impressed and quite satisfied with what we're doing. As many of you know, I've been in Europe multiple times, even during COVID, visiting with customers doing my 5-day quarantine to start that off, but then visiting with customers and that's kept the level of engagement quite high. Both Neill and I were in Europe couple of months ago and we're actually going back in the first two weeks of December for more customer visits. And of course, the week before October 4th, I within Detroit, visiting with folks including General Motors and preparing for that announcement. So, we've stayed high on the engagement list in terms of engaging with customers both virtually and live with them. And we're feeling really good about the development of the relationships we have. They see the fact that two years ago we made the decision to increase output in March of 2020, we started moving dirt in Mohawk Valley and they see that in a matter of a couple of months here, we are going to be running production, well qualification runs in n the first half of 2022 calendar 2022, and then getting our first customer purchase order for -- specifically for Mohawk Valley 200-millimeter equipment is really encouraging. So, all of that is tied up pretty nicely. I think that's helped us win the business that the 560 million that we just got this last quarter, the 2.9 billion that we've got in fiscal '21, that's all really positive. And it's also helped us increase the pipeline, and that device pipeline doubling in the last two years. It technically it's more than doubled because the $9 billion that we referenced at our last Investor Day had LED in it and obviously it doesn't anymore. We're just feeling like there's a really nice transition happening with Silicon Carbide in the industry, and the fact that we were pretty far ahead of anybody in terms of expanding capacity is proving to be a very positive thing for us.

Thanks, guys. [Indiscernible]

Thanks, Brian.

Thank you. The next question is from Edward Snyder with Charter Equity. Should I proceed?

Thank you very much. First off, if I could Gregg, looking at all the math, if you go through all the details of where you are in both the device fab in North Carolina and the materials business and your plans for Mohawk Valley. It's hard to escape the reality that Mohawk won't be up and running in material revenue really until probably early 2023. I know you're going to ramp. I know the plans for ramping, but in terms of really starting to impact the top-line, it doesn't show up until probably 23, and that gives you about maybe 18 months to hit your financial targets. So, I just want to check some reality. You're going to need to be growing revenue, at least, at least 50% a year-on-year every quarter and maybe even as high as 100% in the early stages in order to get there. And at the same time, isn't it also the case that the device business over the device fab, in North Carolina is going to have to get their margins. leased is in the high 30s, probably even the low 40s in the fiscal year 2014 to hit the targets you have laid out here. Does that ballpark make sense to you?

Well, our target remains $1.5 billion in 2024. And as we mentioned in the prepared remarks, we're feeling pretty good about that. The steepening of the demand curve is that certainly there, the demand isn't I would say an issue at all, relative to that target. We're feeling very, very good about that. We have obviously a lot of effort in terms of getting Mohawk Valley going. And just recall, we as part of the deal in New York, we got a pilot line, that pilot line with converted to 200-millimeter Silicon Carbide a long time ago, maybe a year ago or something like that. So, we've been running 200-millimeter wafers through that pilot line for quite some time. We are seeing the initial [Indiscernible] and [Indiscernible] out there, the yield is looking pretty good, so we feel like when we get the fab up and up and running, it's going to be in -- it will have a running start, so to speak. I think from a North Carolina perspective, we made the change with Mitzy (ph) to joining the team, she's made tremendous amount of progress in a very, very short amount of time in terms of changing how the factory operate s, the metrics that they're looking at and so forth. And initial indications that really positive, and so we've got good hope for some continued very strong progress out of that factory as we were ramping Mohawk Valley.

Let me just add to that at I think if you look at the North Carolina fab, while the cost foot print higher, we've also transitioned the fab. And I've talked about before we did stabilize that, we put over 100 tools into it over the last years. Last year or so, and we haven't really seen all the benefits of that. So, I think we will get better, more improvement out of North Carolina as we move through the remainder of the year, the differences of talking about different diameter and bigger scale factory in Mohawk Valley. But I think that Durham still plays a very important role for us, and the improvement that we can see out of it between now and that time frame, you're talking about.

Great. Thanks. If I could follow-up with you, Neill. I mean, you mentioned again this quarter you're 50% little wafer costs in Mohawk Valley than in Durham and that didn't include the full benefit of 200 millimeter. But you also said 50% lower cycle time in 20 to 30 points better yield. The 50% lower wafer costs have caused quite a bit confusion, not just among us, but some of your larger investors, we spent quite a bit of time in the quarter going through it with IR. And really you are the guy we've been trying to get a hold of in order to explain the specifics of that. So, if I could just set the stage on the debate that's been raging all quarter is, if the 50% faster cycle time already captures them at your relation of fixed cost across the wafers, so you kind of capture that in a few [Indiscernible] cycle time. And the 20%-30% point yield improvement captures the lower breakage and better process control that you're going to get in this automated fab. Where does the 50% lower wafer cost come from? Talking to Tyler through the quarter, on maintaining that didn't include any at a 150 millimeter versus a 150 millimeter. But your comments seem to suggest there's something that 200 millimeters. So maybe you could explain for us finally, what goes into that 50%, is it 200 millimeters? Is it something we're missing or is it captured in some of the other metrics? Thanks.

No, the cycle time obviously is part of the wafer processing costs, but there's a lot more costs in the model obviously than just the wafer processing costs. Okay. So, if you think about it going from 150 to 200, normally, wafer processing costs would go up just by the nature of it. In this case, we're saying just on a nominal basis, it's going down and if you take into account that your 200-millimeter benefits, well, above 50%, significantly above 50%. So, I think more than 50% is a fair way to talk about it in that sense. And then of course, then you have to add the yield benefit on top of that, right? So, the number of good guys that we're getting off every wafer is 20 to 30 points higher. So just from a pure cost benefit standpoint, if you go down to the die-level, that's well over 50% when you start bringing those 2 things together. So, I think 50% -- greater than 50% I think is a reasonable way to talk about it at this point. And I think you've got line of sight, obviously to even better numbers than that in terms of the die-level.

So, the 50% lower wafer cost does capture to a large extent, the large amount of breakage that you have on 150-millimeter in Durham, and how that won't occur in Mohawk Valley. That's where a lot of it comes from. So even with a bigger wafer, you're still getting better wafer costs on it.

That's right. The processing costs at 200 is better than 150, which definitely doesn't take into account the change, right? So, there's an improvement right there and then you get the benefit of going to 150 to 200. On top of that, not only do you get the bigger wafer with more Die on it, you get the yield off that Die it better, so you get a better cost.

Great. Thank you.

Thanks, Ed.

Thank you. The next question is from Craig Irwin with ROTH Capital Markets. You may proceed.

Good evening, and thanks for taking my questions. Gregg, I was hoping you could help us understand the composition of the $560 million in awards in the quarter. Can you maybe talk a little bit about how much of that is automotive versus distribution? And how much of that is likely to turn as revenue within the next, let's say, maybe 12 months, versus being a contribution to demand in the 24 or 24 plus timeframe?

And thanks, Craig. So let me hit the second question first. So, a very small percentage of any of that 560 will turn into revenue in the next 12 months. And that's industrial applications definitely have a longer gestation period from design end to revenue ramp. and so, it will be maybe some, but it will be relatively small. Not much, is what I'm saying. There is not a whole lot of consumer applications. Industrial is definitely a couple of years. Automotive, typically is 4 or 5 years, so a little bit longer period. And then in terms of the design ends, I don't have the exact numbers, but I recall it to be about half is automotive for the 560. And then the rest we've got some nice RF design to wins that we've gotten our design-ins that we've gotten. And then a very strong industrial play. And I've mentioned a couple of ease industrial cook top and induction crept up a wall charger elevator, and elevator application. Things that we wouldn't normally be able to cover. But with the partnership we have with Arrow now for a couple of years, we're able to reach those customers as well.

That actually bridges very well to my second question. Yes, you've had an excellent relationship with Arrow and your distribution partners over the last many, many years, and it's helped you cost-effectively serve emerging customers, emerging applications. The EV charging application, I would not call that emerging. There's a super customer out there in charging, a real pioneer that you've served from Day 1. And most of the hardware guys we talk to either have silicon carbide in their designs, are coming into their next-generation designs. But when we talk to them, a lot of them really are buying through distribution. Do you expect this to play a major role in how the maturation of these relationships occurs? In, it has there been sort of a process of companies getting to a certain size and then maybe being shared with distribution or moving over to direct purchases. How does this possibly evolve for you?

I think we have a distribution strategy that's playing very well for us, and I don't see any change of that strategy. I think we've got a really strong partnership. And I think that plays very well for the strength that Arrow brings to the party in terms of the channel and the strength that we bring in terms of product breath, and so forth. I don't see that changing. Some companies have changed their model. They do their own demand creation across these thousands of customers, but Craig, our footprint is just so small. It just wouldn't be viable for us. We had an opportunity to have one of our sales folks in Europe actually present to our Board of Directors about an opportunity that she won with a customer in Spain. and if they did that through Arrow. And Arrow had Arrow 's footprint in Spain. I believe it's larger than our footprint in Europe. And we have 0 employees and Spain, so it just, in fact we don't have anybody to look after France. So, I think there's only one person at brand, so our footprint is really, really quite small. So, we're I think we've got a great strategy. We're sticking with it. And I think we're going to have this partnership for quite some time.

Well, congratulations on the strong quarter. Thank you.

Thank you. Craig.

Yours next question is from Samik Chattererjee with JP Morgan. You may proceed.

Thanks for taking my question. I guess just to start off with one on competition that have been getting from a few investors. That's in relation to -- on semiconductor and their purchase of GB, a silicon carbide provider. And just wanted to get your thoughts on how that changes the competitive landscape and where do you see them in the -- in terms of capabilities? And if you can just share your thoughts on that, that'll be helpful. And I have a follow-up. Thank you.

Sure. Silicon Carbide is obviously a super attractive space right now and there's a lot of companies that are getting into this space. We are the largest provider of Silicon Carbide wafer materials to the customer base and we have long-term agreements with many different customers in this space. And basically, all of our long-term agreements -- well, the vast majority of the long-term agreements that we have, are with customers that are also have some kind of internal capability or an internal desire or capability, desire to have an internal capability. And that's true with the vast majority of our long-term suppliers or customers. And I think strategically it probably makes sense for them to try to do that. I think what this business of silicon carbide materials tends to be a lot harder than a lot of people think. And so, what we're finding typically happens is we've had a couple of instances already where we have a long-term agreement with a -- with a customer and then they extended and expand it and extend it and expand it again, and as they see their -- the internal effort just really is difficult. I don't think that changes at all. I think if I were them, I would do the same thing and I think their strategy makes sense. But I think it's growing of silicon carbide is not for the faint of heart. There's lots of tricky things associated with the technology. We spent 30 years doing only this, and I think we've grown the scale pretty nicely.

Okay. And a quick follow-up with Neill. Neill, you mentioned some revenue push out on the RF side because the slower ramp on the contract manufacturer there. I don't -- I didn't hear anything. If you I don't know if you mentioned it, but can you quantify the amount of revenue that's getting pushed out in your estimate because of that store ramp?

It was it was in 1Q. We saw if you think of it as just like a few million bucks, not a huge amount of. However, I think we've been caught that back up and I think in the estimate that we're looking at, we're seeing some forward progress on RF kind of in line what we thought previously. So that kind of gets caught back. But I think in the new estimate, we'd given.

Thank you.

Sure.

Okay. Your next question is from Karl Ackerman with Cowen. You may proceed.

Good afternoon. [Indiscernible] filling on for Karl Ackerman, can you hear me, okay?

Actually, no, it sounds very scrambled or maybe something with your Bluetooth.

Is this better?

Yeah, that's way better. Thank you.

Okay. Great. I have 2 questions for you both. The first one going back to the GM contract. You've mentioned some of the most EV cars that it will be put into. Could you provide a few more comments on the number of platforms or product designs? And then as a follow-up to that, given the increasing amount of designing that you've been awarded, including GM, would you expect to more rapidly build out plan capacity at Mohawk?

Thank you for the question. And we can't give any more detail on the GM announcement other than what's out in the press. So, I apologize for that. We're excited about it. It is across a number of different vehicles and it's a really solid announcement for us. In terms of the ramp-up of capacity, and maybe I'll let Neill talk to a little bit more. Obviously, we're seeing a steepening of the demand right now and we are working really hard to satisfy that demand. It's basically a pull-in and a steeper ramp than we originally had anticipated. And quite frankly, I think that originally than anyone who had anticipated with the demand growing very, very rapidly for not only electric vehicles, but for silicon carbide solutions and EVs and across the industrial markets. So maybe Neill, if you want to give a little bit more color on that.

Yeah. In terms of like what we think we can do in terms of bringing on capacity faster. One thing we got to remember. And I said it earlier is we're going to triple the business here just over a two-year period. And if you think about bringing up new factory is purely like Mohawk Valley, which is a brand new fab. Just want to be really careful in terms of the time frame on which you bring those tools up and start to expand capacity. So, between now and 2024, we feel like the plan we've got is the right one and balances the risks in terms of bringing up a new fab, obviously at a new diameter, but clearly as we look out beyond that, there is space in Mohawk Valley, just a little bit over 50% of the clean room would utilize or met 2024-time frame. And obviously, we would look to fill in the rest of that capacity beyond that. In the meantime, I think as we talked about earlier, we really got to look for ways to the solution. The capacity constraints within the four walls that we already have. That's really where we're focused right now.

My second question. Could you just got on the opportunities that you see to pass along pricing or mitigate input of freight cost increases that we've seen across the industry, especially with your expanded relationship with Arrow?

I would say there is minimal impact here and we're in the very early phase of a pretty massive ramp. Most of our design wins we have either even with the LTA agreements that we have in place and so forth. Our longer-term pricing agreements, I'd say the minimal impact there.

Great. Thank you and congrats again.

Thank you.

Thank you. The next question is from Ambrish Srivastava with BMO. You may proceed.

Thank you. May we have a clarification on the depreciation impact, the positive impact from longer depreciation. Is that going to flow through for the next two quarters and beyond as well, and then I have other clarification,

Yes, just let me just reiterate so that we can be clear as we can on that. Q1, roughly 30 basis points, and incremental 1 to 2 points as you get into 2Q, so think about a 150 basis points, and then an additional 1 to 2 points that will bleed in in the back half of the year.

Got it. Thank you. And then I just wanted to come back to the capex and the capacity. I just want to make sure I understood. In the Durham fab, you're adding capacity as well, right? But the 475 million capex, it primarily for Mohawk? And there's additional for Durham or that's the total that you will be spending in? It wasn't very clear to me.

For exporting at 475 in total. A big piece of that is the final kind of I'll call them outlays for Mohawk Valley. So, remember, we outlay and then we get reimbursements. We've seen about 60 million or so of reimbursement of the 500 million so far. in Durham, just remember there are 2 pieces of this. There's the materials factory expansion, and there is a Durham fab. And the Durham fab, we've largely completed that execution in terms of bringing up the factory from MOSFET standpoint and the investment we're making now, but showing up for the remainder of the year is really around the materials expansion for 200 millimeter and the facility that Gregg mentioned earlier.

Got it. So, by 2024 Durham would have what percent of capacity would be Mohawk Valley versus Durham. And did I hear you say correctly that you would have 50% additional clean room space by then to hit the 1.5 billion? You feel you have sufficient capacity, but then beyond that you have 50% additional clean room capacity, correct?

Yes. I think it's a little more than 50%, I think, Ambrish, we have -- we'll have filled out and we'll have -- and a little less than that for the remainder of the that Mohawk. So, there was a period beyond them, we could fill in more tools into the cleanroom in Mohawk Valley. And then in Durham, we continue to try and drive as much capacity as we can through. We'd expect a little north of 70% of the device revenue, that's total device revenue coming out of Mohawk Valley as you get out to that 2024-time frame.

Got it. And material?

All materials will be full -- It's fully out of Durham. So, we have materials capacity that we have today, and then we we're building a new -- we are fitting out a new facility here on-campus. As we talked about the prepared remarks that will support essentially to 200 millimeters. So, when we're done, what we'll have is a 150-millimeter small amount of that fab work will be done here in Durham. The materials will be driven through a 150 millimeter that we've got today, but a much larger expansion on 200 millimeters. So, we have a pretty significantly size 200-millimeter supply chain to materials in Durham and then valving through Mohawk Valley.

Got it. Thank you very much. Appreciate the color.

Got it.

Thank you, Mr. Srivastava. The next question comes from the line of Colin Rusch with Oppenheimer. You may proceed.

Thanks so much for sneaking us in here, guys. Can you just give us a sense of the mixed event device opportunity number of how much of that is 400 for devices and how much of that is 800+ within net $18 billion number that you're talking about.

Yeah. So, from an automotive perspective, what you're really talking about there, I believe it's the voltage for the car manufacturers bus that's either a 400-volt bus or an 800-volt bus, and then our devices are actually higher than that to support those kinds of levels of devices. They can be 750 volts or 1200 volts or variants thereof. What I would say is we are winning a business both at 400 volts and 800 volts. And I would say that a lot of our customers are moving and transitioning from a 400-volt bus to an 800-volt bus for automotive applications. And that's primarily because they get better efficiency and they get way better charging capability as well. So, there is kind of a transition going on. But we've got wins in both of those areas.

Just in terms of the qualification process you gave some detail on just starting to work with the tools. But in terms of full-on automotive Gregg, qualification on the factory, how far along are you guys with that and how is that progressing here? Can we talk about you guys really shipping the material out of Mohawk Valley that's been fully qualified for the customers?

We will begin qualification. Our internal qualification will be in the first half of the year. And when we do that internal qualification, that will pass the automotive qualification requirements. So, we'll be doing that -- those internal qualifications to the automotive customers requirements. And then in the back half of the year, the customers will do their own qualification. And that's where they take qualified devices and put them in there into their inverters or their equipment and run whatever tests that they need to do on that. So that's kind of the process that will go through.

Perfect. Thanks so much, guys.

Thank you. I will now turn the call back to Gregg Lowe for closing remarks. You may proceed, Mr. Lowe.

Well, thanks a lot everybody for taking the time to visit with us today and we look forward to continuing to work with you on November 17th at our Investor Day in New York. Thank you very much and have a good evening.

Wolfspeed Incorporated, First Quarter Fiscal year 2022 Earnings call. Thank you for your participation and enjoy the rest of your day.