6 February 2023
Wolfspeed’s quarterly revenue falls 10% due to spare parts supply chain constraints plus weak 5G RF device demand
For fiscal second-quarter 2023 (to 25 December 2022), 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 $216.1m, up 25% on $173.1m a year ago but down 10% on $241.3m last quarter and at the low end of the $215–235m guidance range.
“We are continuing to see very, very strong demand across both [silicon carbide] power devices and materials. However, the supply chain issues we discussed last quarter caused variability in our quarterly revenue in the second quarter, with equipment spare part shortages limiting our Durham [power device] fab output, while at the same time we continue to work through the ramp of our taller 150mm [material] boules,” says chief financial officer Neill Reynolds. Wolfspeed recently made a breakthrough in its ability to grow taller boules, as it has continued to refine its crystal growth operations. “For both of those areas [SiC materials and power devices] that’s going to be much more of a supply situation rather than it being a demand situation. So bringing on supply is really the critical focus there,” he adds.
“We have made significant progress on both issues and they are currently processing these improvements through our production cycle,” Reynolds notes. “It took a little bit longer in the quarter to get to the cycle times and throughput. So we built a bit of inventory [which rose by 26 days to 161 days of inventory (DOI) on hand]. So the shipping rates at the end of the quarter were a little bit slower.
“In terms of our power devices, which grew 48% versus last year, we saw strong performance ahead of our expectations, mostly resolving the Durham spare parts supply chain issue,” says Reynolds. However, with the Durham fab operating at full capacity [about $400m per year], power devices revenue is now effectively capped at about $100m per quarter. So, any significant further power device revenue growth will only come after Wolfspeed starts ramping up production at its new Mohawk Valley Fab in Marcy, NY.
“From a materials perspective, we made very significant progress in improving yields on our taller 150mm boules. These yields are now comparable to our historical yields on shorter boules,” says Reynolds. “However, back-end wafer processing cycle times recovered later in the quarter than anticipated, resulting in lower-than-expected Q2 revenues for our materials products. This past quarter represents the bottom of the revenue trough related to this issue as we exited the quarter at yields, cycle times and shipping rates that will all support future materials revenue growth,” he adds.
“We also saw weaker demand for RF products due to secular headwinds with recession-related pullback in 5G demand [with some orders pushed out in the quarter],” says Reynolds. RF device revenue was hence down by about 25% ($15m) from last quarter’s peak.
RF devices continue to be dilutive to consolidated gross margin. “Because of the immense demand for our power devices, we have not been able to optimize the RF manufacturing footprint as we had previously planned,” says Reynolds.
Due to this, plus the lower yields on the taller 150mm boules and lower output of the Durham fab due to the supply chain challenges, gross margin (on a non-GAAP basis) was 33.6%, down from 35.6% last quarter and 35.4% a year ago. “While we made significant progress on both issues [SiC materials and power devices] in the quarter and expect to see improvement moving forward, they both represented a drag on gross margin,” says Reynolds.
Net loss for fiscal Q2/2023 was $14.2m ($0.11 per diluted share), cut from $18.6m ($0.16 per diluted share) a year ago but up from $4.9m ($0.04 per diluted share) last quarter.
Net cash used in operating activities has more than doubled from $32.5m a year ago to $67m. Total capital expenditure (CapEx) was $104.1m (down from $143.9m a year ago). Free cash outflow was therefore $171.1m (cut slightly from $176.4m).
For fiscal third-quarter 2023 (to end-March), Wolfspeed targets revenue of $210–230m, reflecting continued strong demand, as well as supply execution improvement in both the power device and materials product lines, partially offset by continued weak demand for RF devices, for which revenue will remain about $15m lower than previously expected in both fiscal Q3 and Q4.
Gross margin should be 32–34%, as weakness in RF devices due to the lower volumes is offset by some improvement in both power device and materials products. “The initial challenges in managing taller boules in our back-end processing have been resolved, resulting in significantly higher yields,” says Lowe. “It will take a few months before we return to normal production schedule for these materials as the improved product makes its way through the WIP [work-in-process].”
Operating expenses should be $98–100m. Net loss are expected to rise slightly to $15–20m ($0.12–0.16 per diluted share).
During fiscal Q2/2023, cash, cash equivalents, and short-term investments rose from $1197.2m to $2484.4m, due largely to the completion in November of a convertible note offering of $1.75bn anchored by strategic partner BorgWarner.
“Our power devices continue to penetrate more of the market, with strong customer demand and new partnerships with large multi-national auto manufacturers, such as Jaguar Land Rover and Mercedes, and automotive tier-1s such as BorgWarner and ZF,” says Lowe. Quarterly design-ins in fiscal Q2/2023 again exceeded $1bn, at $1.5bn (70–75% of which is automotive related). “We are capitalizing on the immense opportunity in next-generation power devices by expanding our capacity footprint,” says Lowe.
“We have made great progress in securing funding for our greenfield facility construction and long-term capacity expansion plan,” notes Reynolds, referring to construction of the new materials factory in Siler City, North Carolina and the ramp-up of the Mohawk Valley device fab.
“We continue to successfully run test lots through Mohawk Valley [with yields above expectation], which gives us confidence that we are ready to begin scaling production and recognizing revenue from Mohawk Valley in the fourth quarter of this fiscal year [of the order of single-digit millions of dollars, albeit a quarter later than originally hoped],” says Lowe. “Mohawk Valley is a first-of-its-kind fab, purpose built to produce next-generation silicon carbide power devices. While there may be some variability in our short-term results as we qualify and scale the world’s first 200mm silicon carbide device fab while also scaling the first production of 200mm silicon carbide wafers, we are well positioned to capitalize on the explosive growth that we see through the end of this decade,” he adds. “Our focus on ramping Mohawk Valley will allow us to better scale our power device production, while our 200mm materials capacity also scales. The learnings from Mohawk Valley have given us a blueprint on how we will approach the construction and ramp of our next fab [since announced as an SiC device fab to be constructed in Saarland, Germany, with ZF as a minority partner].”
“While customer interest remains strong across both materials and power devices, silicon carbide production and manufacturing can present challenges along the way. Our Durham crystal growth operation, which is the world’s largest silicon carbide materials factory, currently supplies our entire device business and a significant share of the merchant market. However, that is still not enough to support the massive accelerating demand for silicon carbide. With the intense growth in demand for both captive and merchant wafers comes challenges of growing our materials output as well,” says Lowe.
“The immense demand for both merchant and captive materials gives us further confidence in our decision [back in September] to expand the Durham materials footprint and build The John Palmour Manufacturing Center for Silicon Carbide [in Siler City, named in memory of the firm’s late founder & chief technology officer, who passed away on 13 November], dramatically expanding our materials capacity [by more than 10x],” says Lowe. “This factory will be a game changer for our business and will allow us to increase supply at unprecedented levels compared to what is currently in the marketplace,” he adds.
“Long-term, The John Palmour Manufacturing Center for Silicon Carbide is critical to addressing the supply–demand disconnect that will support our expanding device footprint [at both Mohawk Valley and the planned fab in Germany], as well as the ever-growing demand for merchant wafers. Construction of The JP is progressing well since groundbreaking in September and things remain on track,” says Lowe.
“Despite some macroeconomic pressures on the silicon semiconductor market, we are confident in our long-term outlook and the strong secular trend for the demand for silicon carbide,” says Lowe. “Silicon carbide is on the cusp of mass adoption.”
“First, electric vehicles were the bright spot in the auto market in 2022, despite many headlines that auto sales have slowed. Global EV sales grew more than 65% year-over-year,” says Lowe. “Our recent partnerships with industry leaders such as Jaguar Land Rover and Mercedes-Benz point to the strength in the demand for EVs and our ability to take share in this space. We remain confident in the industry’s strong long-term fundamentals,” he adds.
“Second, our $1.5bn of design-ins in the quarter point to continued robust demand for our power devices. To-date, 46% of our design-ins have converted to design wins, representing more than 1800 projects. We are coming off multiple quarters of record design-ins, with a total of more than $16bn of design-ins over the last three years. Our design-in number continues to be robust and the opportunity pipeline remains at a staggering $40bn,” remarks Lowe. “We have a strong pipeline of design-ins across a wide range of applications, including automotive, industrial and energy. We are increasingly well positioned to capture a significant share of this opportunity and are committed to investing in the necessary infrastructure to support our growth,” he adds.
“Third, we continue our market-leadership position in the materials business, the aspect of our business with the highest barriers to entry. We recently announced an expanded agreement with another leading supplier of silicon carbide materials, which illustrates the intense demand. The industry remains supply constrained, and this will continue to be the case for the foreseeable future.”
“The opportunity in silicon carbide technology is generational, given the pace of adoption we have experienced over the last few quarters. I have not seen growth like this in my 30 years in semis,” remarks Lowe.