21 August 2023
Wolfspeed’s margins fall further while 200mm SiC device fab ramp-up lags
For its fiscal full year (to end-June), 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 growth of 24%, from $746.2m in 2022 to $921.9m for 2023, due to the strength in both materials and power device product lines.
Fiscal fourth-quarter revenue of $235.8m exceeded the $212–232m guidance, due mainly to favorable timing related to product shipments out of the Durham production facilities (which are constrained by running at full capacity for power devices). However, this was up just 3% on both last quarter’s $228.7m and $228.5m a year ago. RF revenue continued to be weak, as expected, while revenue from the new Mohawk Valley silicon carbide device fabrication facility in Marcy, NY (opened in April 2022 to produce SiC power devices on larger, 200mm wafers) was just $1m.
On a non-GAAP basis, quarterly gross margin has fallen further, from 36.5% a year ago and 32.3% last quarter to 29% (at the low end of the 29–31% guidance). This was impacted by lower yields and higher costs on the firm’s taller 150mm SiC boules as well as a heavier mix of products for high-volume automotive customers that were initially slated to be produced in the Mohawk Valley 200mm SiC device fab but had to be run on the smaller-diameter 150mm wafers in the Durham fab. Fiscal full-year gross margin has hence fallen from 2022’s 35.6% to 32.6% for 2023.
Net loss from continuing operations was $52.8m ($0.42 per diluted share), more than tripling from $16m ($0.13 per diluted share) last quarter and doubling from $26m ($0.21 per diluted share) a year ago. This was also more than the expected $21–29m ($0.17–0.23 per diluted share). However, the non-GAAP now includes $39.5m ($0.26 per share) of impact from factory start-up costs, related primarily to Mohawk Valley and includes early-phase start-up costs related to the firm’s materials expansion, primarily for the JP materials facility (John Palmour Manufacturing Center for Silicon Carbide) in Siler City, NC.
Likewise, fiscal full-year net loss has grown from 2022’s $115.4m ($0.96 per diluted share) to $180.7m ($1.45 per diluted share) for 2023, but this was impacted by $160.2m of factory start-up and under-utilization costs.
“When a new facility begins revenue-generating production, the operating costs of that facility that were previously expensed as start-up costs [excluded from non-GAAP results] will instead be primarily reflected as part of the cost of production within the cost of revenue, net line item [and hence included in non-GAAP results] in our statement of operations,” says Lowe. “For example, our new silicon carbide device fabrication facility in Marcy, New York began revenue-generating production at the end of fiscal 2023 and the costs of operating this facility going forward will be primarily reflected in cost of revenue, net in future periods,” he adds. “We are making these changes in our presentation to align with the Securities and Exchange Commission, which has clarified its guidance related to non-GAAP measures for public companies,” says chief financial officer Neill Reynolds.
Net cash used in operating activities was hence $51.9m (up from $11m last quarter). Capital expenditure (CapEx) has risen further, from $55.4m a year ago and $233.9m last quarter to $402.9m. Free cash outflow was hence $454.8m (up from $245m last quarter and $86.2m a year ago).
Nevertheless, in late June Wolfspeed announced a $1.25bn secured note financing from an investment group led by Apollo Global Management Inc, with an accordion feature for up to an additional $750m. Cash, cash equivalents and short-term investments hence rose during fiscal Q4/2023 from $2248.2m to $2955m.
“Last October, we outlined our [$6.5bn] plans to construct the world’s largest state-of-the-art greenfield silicon carbide footprint,” says CEO Gregg Lowe. “Since then, we’ve secured $5bn of the capital necessary to achieve these goals, allowing us to finish out the fit out of Mohawk Valley, expand our materials capacity at Durham, and break ground on the world’s largest 200mm silicon carbide materials facility at JP in Siler City, North Carolina,” he adds.
“As far as our more immediate strategy to increase 200mm materials production at Building 10 on our Durham campus, we have now installed more than 75% of the crystal growers in that facility… and producing excellent quality material, which is translating into very nice and very excellent defect-density wafers,” says Lowe. “Epi at 200mm is also excellent, and we are ramping that.”
Customer design-ins were $1.6bn in fiscal Q4, amounting to $8.3bn for full-year 2023. The cumulative total is now more than $19bn over the last four years.
“We have made great strides in diversifying our device customer base across the automotive, industrial and energy sectors, with flagship agreements with key OEMs and tier-1s, including Jaguar Land Rover, Mercedes, BorgWarner, and ZF,” says Lowe. “We are also continuing to see growth in the traditional industrial and energy segments as customers make the transition to silicon carbide. We are seeing many opportunities in solar and energy systems, motor drives, UPS, heat pumps, air conditioning, and many more. The growth in these segments is primarily driven by the need for higher energy efficiency. In addition, emergent industrial applications such as e-mobility, electric vertical take-off and landing (VTOL) aircraft, are also integrating Wolfspeed silicon carbide within their initial designs to reduce system weight and improve range,” he adds.
“Our customer wins to date give us the confidence in the growth of our addressable market and our ability to capture meaningful share of the device market between now and the end of the decade,” says Lowe.
For its fiscal first-quarter 2024 (to end-September), Wolfspeed targets revenue of $220–240m, with power device revenue from the Durham fab remaining capacity-constrained at about $100m per quarter. RF revenue will be flattish for fiscal first-half 2024 (before perhaps a modest pickup in the second half).
Gross margin is expected to fall to 10–18% in fiscal Q1, since this will now include about $37m of under-utilization costs (–16% of gross margin) as the Mohawk Valley fab (which will be capable of generating $2bn in revenue at full capacity) continues to ramp up production. “We have three products that are currently fully qualified at the Mohawk Valley fab, and we have eight additional products that now pass all reliability testing and are working through the final end of qualification for that,” says Lowe. “As we transition Mohawk Valley from pre-production to an active production facility in the first quarter of fiscal 2024, these costs will be categorized as under-utilization costs and will be part of cost of goods sold,” he adds.
“We expect underlying gross margin performance, excluding under-utilization, to improve modestly in the quarter as we continue to serve more automotive customer mix out of the Durham fab,” stresses Reynolds.
Operating expenses should rise to about $120m in fiscal Q1. However, this will include about $8m of factory start-up costs in connection with the materials expansion efforts (primarily related to the JP materials facility in Siler City, NC). Excluding start-up costs, OpEx increases quarter-over-quarter are driven by higher employee-related expenses.
Net loss is hence expected to rise to $75–94m ($0.60–0.75 per diluted share).
“We still have some work to do at Mohawk Valley as we scale device production, and expect a modest increase in device revenues in the first half of fiscal 2024, with a steeper increase in revenue beginning in the second half of 2024,” says Lowe.
Given that growth will be governed by how quickly Wolfspeed ramps up 200mm substrate capacity and, in turn, the Mohawk Valley fab, for fiscal full-year 2024 Wolfspeed hence continues to expect revenue of $1–1.1bn (reduced in May by 35% from the $1.6bn forecast given at last’s October Analyst Day).
CapEx should be about $2bn, mostly related to the build-out at JP. “Customers are continuing to select Wolfspeed for their future silicon carbide device needs, so we must remain keenly focused on scaling our materials and device capacity in fiscal 2024,” concludes Lowe.
From a materials perspective, in early July Wolfspeed has signed a 10-year wafer supply agreement with automotive semiconductor device maker Renesas Electronics Corp. “The agreement includes a $2bn customer deposit, which is one of the largest deposits I have ever seen in my 30-plus years in semiconductors. This will secure a capacity corridor as they begin to ramp silicon carbide device production beginning in 2025,” says Lowe. “Securing this key customer was possible because of our forward-thinking investments in material capacity at the Durham campus and with the construction of the JP. We will be uniquely positioned to drive the industry transition from 150mm to 200mm silicon carbide wafers, which will help address some of the supply–demand mismatch which currently exists today and potentially open up new markets for silicon carbide applications in the industrial and energy sectors,” he adds.
“Fully built out, the JP will add 10 times more capacity compared to our current operations in Durham, significantly increasing the world’s total supply of silicon carbide materials,” says Lowe. “The building foundation is in place, and we’ve now started construction on the shell of the building. We remain on track to begin producing wafers at the site in the second half of calendar 2024,” he adds.
“While we are still aligned on previous expectations that we will reach 20% utilization out of Mohawk Valley by the end of fiscal 2024, it will be the second half of the calendar year 2024 before we see $100m of quarterly revenue from the fab that the 20% utilization would represent. This accounts for the time between fab starts and shipments to our customers,” notes Reynolds. “As we shift to higher levels of production out of Mohawk Valley, we anticipate future improvements in gross margin [to more than 50%, since the unit economics are significantly more favorable than the Durham fab].”