4 May 2023
Wolfspeed’s revenue growth constrained by 200mm SiC material capacity ramp
For its fiscal third-quarter 2023 (to end-March), Wolfspeed Inc of Durham, NC, USA – which makes silicon carbide materials as well as silicon carbide (SiC) and gallium nitride (GaN) power-switching & RF semiconductor devices – has reported revenue of $228.7m, up 6% on $216.1m last quarter and up 22% on $188m a year ago, and at the high end of the $210–230m guidance range.
“Looking at RF products, we continue to see weaker demand, but within range of our prior estimates [about $15m lower than initially expected],” says chief financial officer Neill Reynolds.
Power device product revenue grew more than 50% year-over-year. “We have achieved full capacity in our Durham wafer fab,” notes Reynolds. During the quarter, Wolfspeed recognized initial revenue from its new Mohawk Valley fab (opened in April 2022). “While it’s a relatively small number of devices shipped to an industrial off-board charging customer, it’s an important proof point that we are now producing product on 200mm [SiC] substrates,” says CEO Gregg Lowe. “The learnings from this first shipment will inform our ramp in devices as we continue to expand our capacity to address increasing demand,” he adds.
“We saw strong revenue growth from our merchant 150mm silicon carbide substrates as we solved many of the production challenges we had on the taller boules, albeit at higher-than-expected costs,” says Reynolds. “This results in a one-time inventory drain, and we expect revenue levels to return to more steady-state run-rate levels in fiscal Q4 and beyond.”
Impacted by lower yields and higher costs on the firm’s taller 150mm boules, plus a heavier mix of high-volume automotive customers running on the smaller 150mm wafers in the Durham fab, gross margin (on a non-GAAP basis) has hence fallen further, from 36.3% a year ago and 33.6% last quarter to 32.3% (near the low end of the 32–34% guidance range).
As the revenue growth was offset by lower gross margins and higher investments in OpEx, net loss was $16m ($0.13 per diluted share), up from $14.2m ($0.11 per diluted share) last quarter and $14.3m ($0.12 per diluted share) a year ago.
Net cash used in operating activities was $11m (cut from $67m last quarter and $28.4m a year ago). However, capital expenditure (CapEx) has more than doubled from $102.8m a year ago and $104.1m last quarter to $233.9m. Free cash outflow was hence $245m (up from $171.1m last quarter and almost doubling from $131.2m a year ago). During fiscal Q3/2023, cash, cash equivalents, and short-term investments therefore fell from $2484.4m to $2248.2m.
During the quarter, Wolfspeed incurred start-up costs (related primarily to the Mohawk Valley fab) of about $45m. “Moving forward, we expect overall start-up and underutilization costs for Mohawk Valley to start winding down as we ramp the fab,” says Lowe. For full-year fiscal 2023, Wolfspeed targets about $160m of start-up and underutilization costs.
“Producing more silicon carbide epiwafers out of our Durham facility will be the governor on our Mohawk Valley ramp in the short term, and our longer-term outlook is supported by the ramp of the JP [John Palmour Manufacturing Center for Silicon Carbide, in Siler City, NC],” notes Lowe. “To support capacity expansion efforts, we’ve realigned the team with operations leaders now reporting directly to myself and Neill,” he adds. “Missy Stigall is overseeing devices and our wafer fabs, while Adam Milton will lead the materials production for the company. This will provide greater visibility into the ramp of substrates as well as our device footprint expansion.”
Design-ins in fiscal Q3/2023 were $1.7bn. Complementing $700m for automotive applications, this includes a new quarterly record for non-automotive designs, which included a heat-pump application and an electric vehicle (EV) off-board charger. Year-to-date design-ins for fiscal Q1–Q3/2023 are $6.7bn (greater than full-year fiscal 2022’s record). Wolfspeed’s cumulative total for design-ins secured since fiscal 2020 is now about $18bn.
Reflecting the low single-digit revenue (about $2m) from the Mohawk Valley fab, for its fiscal fourth-quarter 2023 Wolfspeed expects revenue of $212–232m (slightly down quarter-on-quarter at the mid-point).
“We are essentially capped in Durham from a power device capacity perspective. Going forward, much of the incremental revenue we will generate will be from Mohawk Valley,” notes Reynolds. “In addition, we will see lower materials revenue related to the one-time inventory drain in Q3 as we improved output on our taller 150mm boules that will not repeat in Q4,” he adds.
As Wolfspeed continues to work through the cost recovery on the taller 150mm boules, and after shifting the Durham fab mix to higher-volume automotive customers that were initially slated to be produced in Mohawk Valley, gross margin is expected to fall to 29–31%.
With operating expenses of $105–106m, operating loss should rise to $34–43m. Including a non-operating net gain of about $5m and after realizing $8-10m of tax management, net loss is expected to rise to $21–29m ($0.17–0.23 per diluted share).
Scaling up SiC materials manufacturing to feed the Mohawk Valley is being slowed by two things, notes Lowe. “One is some infrastructure delays that we had – things like switchgear and things like that – as we expanded in our Building 10 facility in Durham, so basically supply chain issues with electrical infrastructure. That’s been resolved, and we’re now expanding inside Building 10. The second is a more methodical approach to growing the capacity.”
Due primarily to the timing of facility spend related to the 200mm substrate expansion (particularly on the Siler City project), Wolfspeed has reduced its forecast for CapEx in fiscal full-year 2023 from $1bn to $775m.
“In terms of our capital needs, we continue to evaluate multiple avenues of additional funding, including upfront customer payments or investment debt instruments and government funding in the USA and Europe. While we cannot comment on the timing or certainty of any government funding, we believe we have made great progress in this regard,” says Reynolds. “In addition, we believe we need to secure approximately $1bn of additional non-government financing between now and the end of the calendar year to support an approximate $2bn of CapEx in fiscal 2024. The majority of this investment will be for 200mm substrate facility construction and tool capacity both at JP in Siler City and our Durham campus in North Carolina, with the intention of leveraging this investment to ramp the Mohawk Valley fab as fast as possible,” he adds.
“Given that our growth will be governed by how quickly we ramp 200mm substrate capacity and, in turn, the Mohawk Valley fab, we will target fiscal 2024 revenue between $1–1.1bn [reduced by 35%from the $1.6bn forecast given at last’s October Analyst Day],” says Reynolds. “This outlook assumes we achieve 20% capacity utilization at Mohawk Valley by the fourth quarter of fiscal 2024, while our epi materials product line revenues remain closer to current levels as we focus our efforts and resources on ramping 200mm substrates in Mohawk Valley. Additionally, as a result of the ramp time-line and continued focus on customer time-lines, we plan to run more auto-related products at a smaller 150mm diameter in the Durham fab for the foreseeable future,” he adds. “As we are in the early stages of these critical EV ramps, it is important to support our customer ramp schedules. This will flatten the gross margin trajectory for the next several quarters until Mohawk Valley reaches critical mass. That said, as we reach 20% utilization at Mohawk Valley [beyond end-fiscal 2024], we would expect the trajectory for gross margin to improve because the unit economics are significantly more favorable than Durham.”
“While we are currently investing a modest amount of design work for the German Saarland fab [announced in February], we don’t expect to see significant facility-construction-related CapEx until calendar year 2024 while we await final incentive notification from European authorities,” says Reynolds. “However, we have made good progress on this front and, as of now, expect final notification later this calendar year.”