5 February 2024
Wolfspeed’s quarterly revenue grows 20% year-on-year, as design-wins hit a record $2.9bn
For its fiscal second-quarter 2024 (to end-December 2023), Wolfspeed Inc of Durham, NC, USA — which makes silicon carbide (SiC) materials and power semiconductor devices — has reported revenue of $208.4m, up 5.6% on $197.4m last quarter and up nearly 20% on $173.8m a year ago, and above the midpoint of the $192–222m guidance range.
N.B. All figures are for continuing operations, after Wolfspeed completed the sale (announced on 22 August) of its radio frequency business Wolfspeed RF to MACOM Technology Solutions Holdings Inc of Lowell, MA, USA for $75m in cash plus 711,528 shares of MACOM common stock (valued at $50m based on its 30 trading day trailing average closing price through 21 August).
Power Device revenue was a record $107.7m, up 6.4% on $101.2m last quarter and 12.2% on $96m a year ago, driven by strong demand for products and the contribution from the new Mohawk Valley Fab in Marcy, NY (the world’s largest 200mm SiC wafer fab) tripling to $12m from $4m the prior quarter as it ramped up utilization (after starting revenue-generating production at the end of the fiscal Q4/2023 June quarter). “We saw a sharp increase in electric vehicle (EV) revenue quarter-over-quarter [up 30%], fueled by the additional EV device products shipping out of Mohawk Valley,” notes chief financial officer Neill Reynolds. “So far we’ve qualified over a dozen customer parts, including two of our most complicated automotive devices as well as the largest device we are currently producing at the facility… All of these MOSFETs qualified first-pass,” says CEO Gregg Lowe. “We expect to continue to qualify more parts between now and the end of June, further supporting the Mohawk Valley revenue ramp,” he adds. Also, Mohawk Valley has received its IATF automotive certification (on its first attempt). “However, this was partially offset by lower demand and persistent weakness in our industrial and energy markets, particularly in China and across Asia,” says Reynolds.
Materials Products revenue was a more-than-forecasted $100.7m, up 4.7% on $96.2m last quarter and 29% on $77.8m a year ago. This was due partly to an additional week of product shipments compared to the prior quarter and prior year, but growth was also aided by continued strong manufacturing execution.
The new Building 10 at Wolfspeed’s Durham campus — converted in less than a year from a basketball court, squash court and offices — was started up in March 2023 and is now producing 200mm SiC crystal boules and wafers with high quality and yield. “We’ve now installed all crystal growers necessary to achieve 20% utilization at the Mohawk Valley Fab by June,” says Lowe, and probably about 25% by the end of calendar 2024 (well above original expectations).
On a non-GAAP basis, gross margin has risen from 15.6% last quarter to 16.4% (above the mid-point of the 12–20% guidance range), driven by increased revenue from Mohawk Valley and solid execution in the materials business. This is still less than half the 35.8% a year ago, but it includes a 1700-basis-point impact from $35.6m of under-utilization costs during the ramp-up of the Mohawk Valley Fab (which began revenue-generating production at the end of fiscal 2023, so operating it is now reflected in cost of revenue rather than factory start-up costs). “Excluding the under-utilization over the last couple of quarters, we’ve seen strong underlying gross margin improvement,” says Reynolds. “We’ve seen the cost on the 200mm substrate, the yields on those as well as the initial costs in Mohawk Valley on a unit basis be very much in line with what we had anticipated.”
Operating expenses have risen from $119.6m last quarter to $125.9m. However, this is partly due to increased factory start-up costs of $10.5m from Wolfspeed’s materials expansion efforts, primarily related to the John Palmour Manufacturing Center for Silicon Carbide (JP) that is being built in Siler City, North Carolina (named in memory of the firm’s late founder & chief technology officer, who passed away on 13 November), which is having crystal growers installed starting early February and should begin qualifying furnaces in the September quarter, for boule production by the end of this year. “All the learnings with 200mm crystal growth at Building 10 will better position us to hit the ground running in Siler City, which we purposely kept less than an hour’s drive from our [Durham] campus,” says Lowe. “We wanted the same people who ramped Building 10 to ramp the JP, a purpose-built facility.”
Net loss has hence risen from $66.6m ($0.53 per diluted share) last quarter to $69.6m ($0.55 per diluted share), almost doubling from $35.9m ($0.29 per diluted share) a year ago. However, this was better than the guidance of $71–88m ($0.56–0.70 per diluted share), due to the sequential gross margin improvement as well as tighter cost controls and higher interest income.
Operating cash flow was –$182.9m in net cash used in operating activities (up from –$112.7m last quarter and –$63.2m a year ago). Capital expenditure (CapEx) has risen further from $103. 6m a year ago and $404m last quarter to $572.3m. Free cash flow has hence risen further, from –$166.8m a year ago and –$517m last quarter to –$755.2m.
During the quarter, cash, cash equivalents and short-term investments hence fell from $3348m to $2635.7m on hand to support the firm’s ramp and growth plans.
“Given our strong cash and liquidity position, our current focus is on government funding to further support our capacity expansion plans,” says Reynolds. “We continue to have constructive discussions and correspondence with government authorities, including US CHIPs Act officials. We are on track with all necessary incentive considerations and are targeting to have our full applications complete within this quarter. As always, we will continue to seek out ways to manage and optimize our balance sheet and capital structure,” he adds.
“Our successful scale-up of 200mm wafer production and continued qualification of high-quality EV products on 200mm substrates are critical steps in meeting the continued customer demand,” says Lowe.
“We achieved $2.1bn in [power device] design-ins this quarter, marking our third highest quarter on record, which clearly indicates continuing and growing robust demand for silicon carbide,” says Lowe.
“Our steadfast commitment to our long-term goals is bolstered by the conversion of our design-ins into significant design-wins,” he adds. Quarterly design-wins were a record $2.9bn, over 75% related to EV applications in the automotive sector.
This includes 28 different EV models, for which Wolfspeed is the prime source on at least 27. “This diverse customer base across the global electric vehicle industry with multiple OEMs and tier-1s gives us confidence to continue with our expansion plans and further illustrates why we believe our supply will be continuing to work to catch up with demand over the next few years,” says Lowe. “Over the next five years, based on our current design-ins, the number of EVs leveraging Wolfspeed devices will increase to nearly 120 different models across 30 different OEMs. This represents a significant growth from the small number of vehicles on the road using our silicon carbide devices today and demonstrates the opportunity ahead for us,” he adds. “This solidifies our confidence in the electrification trend, which increasingly depends on the widespread adoption of silicon carbide technology.”
Outlook – doubling of revenue from Mohawk Valley offset by flat revenue from Durham device fab and materials
For fiscal third-quarter 2024 (to end-March), Wolfspeed targets revenue of $185–215m, with both Power Devices and Materials up year-on-year.
At the midpoint of this guidance, Power Device revenue will be relatively flat sequentially on fiscal Q2, as a further 30% increase in EV revenue supported by a doubling of output from the Mohawk Valley Fab (to $20–30m) will largely be offset by revenue from the Durham fab falling by about 15%, below the $90–100m/quarter capacity, due to the continued softness and uncertainty in the industrial and energy markets in China and across Asia (and is expected to remain $80–85m until at least calendar second-half 2024). “Much of the product we slated to ship there has a match elsewhere in our pipeline, and we continue to work through that inventory now,” notes Reynolds.
Materials Product revenue will be at the previously stated capacity range of $90–95m (down from fiscal Q2’s $101m, which benefited from an extra week of shipment in combination with strong operating execution). “Our production line is now balanced in that capacity, therefore we anticipate this being our materials capacity capabilities for the immediate future,” says Reynolds.
Aided entirely by revenue growth from the Mohawk Valley Fab, gross margin should remain flat at 13–20%. However, at the midpoint of 16.5%, this includes $36m (1800 basis points) of under-utilization related to the Mohawk Valley Fab.
Target operating expenses are $109m, including increased factory start-up costs of $13m, primarily related to the materials manufacturing capacity expansion at the JP. Net loss is expected to rise to $71–87m ($0.57–0.69 per diluted share).
Despite 200mm SiC materials production capacity at Durham’s Building 10 ramping up ahead of schedule (towards supporting 25% utilization at the Mohawk Valley Fab), the ramp cadence at Mohawk Valley has not changed. “The ramp normal challenges of ramping a brand new 200mm fab remain… this ramp will not be linear,” notes Lowe. “Our Mohawk Valley team continues to work on optimizing factory tool utilization and availability. This is the first time these tools have processed 200mm silicon carbide wafers, and tool integration is a critical step as we ramp production,” he adds. “About 75% of the tools have second-of-a-kind tools, and we anticipate that the vast majority of the tools will have second-of-a-kind tools by the June quarter of this year. So that will help debottleneck things because, if a tool goes down, it basically stops production if there’s not a second-of-a-kind tool.”
“Under-utilization [cost] will be a little bit of a drag for us… up to a peak of about $38m as you get into fiscal Q4 [to end-June],” says Reynolds. “While we are on track for 20% utilization at Mohawk Valley by the end of the June quarter, the full revenue benefit of $100m per quarter from that 20% utilization level will be realized only in the December quarter [fiscal Q2/2005]. There is roughly a two-quarter lag between wafer starts and revenue contribution,” he adds. “As Mohawk Valley Fab utilization increases, we’ll start to see incrementally less under-utilization [cost],” says Reynolds. Gross margin should be in the mid to high teens in the fiscal Q4/2024 June quarter (rather than the previously forecasted 20%) and then pushing back up to 20% or so in the September quarter (fiscal Q1/2025) after under-utilization peaks as Wolfspeed starts to push more product through the Mohawk Valley Fab, he adds.
“However, as the JP moves towards being ready for production, we will see incrementally more start-up costs [rising to about $15m exiting the fiscal Q4/2024 June quarter] which hit different lines in our P&L [profit and loss]. Once the JP Phase 1 construction is complete, those start-up costs will come down and we will start to incur under-utilization costs at the JP [as it begins production, probably entering fiscal second-half 2025, i.e. calendar first-half 2025], similar to what has occurred at Mohawk Valley.” The under-utilization costs (which go into gross margin) could rise from $15m exiting the fiscal Q4/2024 June quarter to as much as $25m.