Wolfspeed, Inc. Q1 FY27 Earnings Call - WOLFSPEED INC

Hello, everyone. Thank you for joining us and welcome to the Wolfspeed Inc. First Quarter Fiscal Year 2027 Earnings Call. On the call today from the Wolfspeed team is Chief Executive Officer Robert Furley, Chief Financial Officer Gregor Van Eesem, and Dan Whalen, Vice President Investor Relations. After today's prepared remarks, we will host a question and answer session i will now hand the conference over to dan whalen dan please go ahead thank you operator and good afternoon everyone welcome to wolfspeed's first quarter fiscal 2027 conference call we encourage you to reference the slides that were published on our ir website today please note that we will be presenting non-gap financial results during today's call which we believe provide useful information to our investors 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 as a supplement to, and not a substitute for, financial statements prepared in accordance with GAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Best Relations section of our website, along with a historical summary of our other key metrics. Today's discussion includes forward looking statements about our business outlook and we may make other forward looking statements during the call such forward-looking statements are subject to the numerous risks and uncertainties our press release today and the sec filings noted in the release mentioned important factors that could cause actual results in different materials with that i'll turn the call over to robert thank you and good afternoon everyone we appreciate you joining us today we continue to build momentum with each passing quarter my conviction our strategy and team grows stronger first quarter revenue of 155 million marks another quarter of delivering on the commitments we've made in this case above the midpoint of all guidance range our progress is anchored on our four strategic objectives advancing technology leadership diversifying our revenue and customer base driving operational excellence and maintaining financial discipline Together with our strength and leadership team, these are translating into financial traction. Let me start with financial discipline. In October, we announced a conditional 30-year, $1.5 billion loan commitment from the U.S. Department of War to advance the domestic wide bandgap supply chain. Upon closing, this would mark another significant milestone in optimizing our capital structure and financial foundation. Gregor will elaborate on this later, but at the high level, Tranche A would refinance our outstanding higher cost first lien senior secured notes due in 2030, significantly reducing our cost of capital, increasing cash flow generation, and extending the maturity of the refinance debt to 2056. The tranches beyond Tranche A would give us the flexibility to fund a multi-year strategic investment investment program on a project basis, including scaling our established silicon carbide platform, establishing and expanding domestic GaN power device capabilities, advancing GaN on thick RF materials technology, and developing the domestic radiation hardening capabilities. To be clear, this is not a program to build additional size or square footage. It's about capitalizing our existing capabilities, IP, tooling, and customer relationships we already have, which is fully aligned with the strategic objective we've discussed for several quarters. Importantly, our manufacturing capacity is highly fungible and synergistic between SICK and GAN, and outside of targeted tooling investments, we can pivot existing capacity as appropriate and as needed. Put simply, this would broaden our portfolio to spend both SICK and GaN, two complementary power technologies that address different points on the voltage spectrum. SICK anchors the high voltage, high power applications where we lead today, while GaN extends our reach into lower voltage designs. Together, they give us two engines to drive high utilization across our sites and ultimately fuel both revenue growth and gross margin expansion. To elaborate, we believe GaN is the next power technology of the future beyond silicon, with major growth drivers emerging in data center power devices and humanoids. Given our physical assets, our existing GaN IP position, and operational synergies in manufacturing, we believe we've earned the right to compete in this market. Regarding our AI data center or super intelligence opportunity, our dedicated data center team is becoming more deeply integrated into our go-to-market efforts and is leveraging our long-standing customer relationships in silicon valley to drive medium and long-term sustainable growth we are already engaging directly with hyperscaler customers on product innovation we continue to view ai data centers as our highest growth end market consistent with last quarter revenue more than doubled year over year on a trailing performance basis and our order book is accelerating, reinforcing its position as our fastest growing market. Of course, our top AI data center OEMs relationships are building and the trajectory keeps moving higher as these programs mature. We are also gaining share in HVDC high voltage direct current adoption as the architecture of the industry is moving towards a disaggregated power architecture. So high power density can be driven from a smaller footprint. The architecture is evolving from a single rack carrying both GPU and power to a dedicated two rack design, one rack for compute and a dedicated sidecar power rack alongside it. Our technology is at the core of enabling high power density with high efficiency. This opens up more space for power content in place directly to our strength as our components convert incoming power enable backup power through conversion protect against fault and step voltage down to what the ai data center servers require mid-september mac meet an emerging customer in the ai datacenter market presents us with the highest honor the strategic partner award this underscores the strength of the partnership we are building we see significant growth potential here on actively providing technical commercial supply support to ensure a smooth ramp in automotive we continue to make strides in this long value time high volume market as automated scale next generation ev platforms silicon carbide is increasingly essential to the efficiency power density and performance these architectures demand further separating sick from silicon which is directly aligned with advancing our technology leadership and doubling down on core markets notably we recently signed a majority share long-term supply agreement supporting borg warner's next generation 800 volts link carbide inverter platform this deepens a long-standing collaboration while providing borgwarner reliable long-time supply of high performance sick for next generation evs which is directly aligned with advancing our technology leadership and dumping down on corn markets in aerospace in defense we continue to leverage our established leadership in high voltage stick which is anchored by the industry's first commercially available 10 kilovolt mosfet into a new class of ultra higher voltage high current bipolar device architecture our industry leading materials expertise and advanced device capabilities to develop power semiconductors operating at unprecedented voltage and current levels continues to position as well to support of the increasingly demanding power conversion applications. In materials, we continue to serve a broad range of power and RF customers. As you may have seen, we recently announced the expansion and extension of our long-term thick wafer supply agreement with Infineon. The expanded agreement adds 200 millimeter wafers to the existing 150 millimeter supply, building on a relationship spanning multiple decades. also further cements our position as a leading investment materials manufacturer and highlights the value customers place on multiple suppliers across reliable geopolitical regions. We also recently announced the commercial introduction of our proprietary transparent silicon carbide technology, further expanding growth potential of silicon carbides. This proprietary T-SIG technology coupled with our extensive IP portfolio will enable breakthroughs across augmented reality quantum computing and other emerging markets a true testament to silicon carbide's versatility and transformative potential i want to take a moment to further elaborate where this technology can go beyond our core markets for years the industry vision of truly immersive all-day augmented reality classes has collided the hard limits of optical materials You simply could not deliver a wide field of view, high image quality, and lightweight wearable form factor all at the same time. We believe silicon carbide changes that equation. Its exceptionally high refractive index allows a single layer waveguide to do the work that once required stacked optics. A kind of step change that can move AR from a novelty into everyday eyewear our work on optical grade t6 is exactly the type of materials innovation that underscores the versatility of silicon carbide in the long-term optionality of our platforms in this powerful example of how the material leadership that defines our power business can open entirely new markets over time with that i will turn it over to gregor thank you robert and good afternoon everyone as you heard we're making strong progress on multiple fronts and we remain in the early stages of translating that into revenue growth and margin expansion as noted we generated 155 million in total revenue for the quarter slightly above the midpoint of our guidance materials revenue was approximately 38 million our revenue was approximately 117 million up 10 percent sequentially living largely by growth in the ine and market which includes our data center business we believe fiscal 2027 will be a turning point and the start to more meaningful longer-term growth in both revenue and profitability adjusted non-GAAP gross margin was negative 12.8 percent a 710 basis point sequential improvement on a slightly higher revenue base reflecting the benefits of our operational improvement initiatives this margin improvement was primarily driven by higher utilization as we largely completed our inventory reduction with a secondary benefit from a more favorable product mix in power Underutilization remains the primary driver of our cross-margin profile and improving tractor utilization is one of the most important near-term levers to drive margin expansion. Non-GAAP operating expenses were $64 million versus $62 million in the prior quarter as we positioned the company for growth. non-GAAP EBITDA was negative 55 million, an 8 million or 12 percent improvement sequentially. Cross-capital expenditures were approximately 11 million. Turning into cash flow, which remains a top priority, our operating cash flow was negative 84 million, including 32 million of interest paid during the quarter. Changes in working capital contributed approximately 60 million to cash in the quarter partially from further inventory reduction over the past five quarters working capital improvements have contributed approximately 235 million to cash at this point we believe we have largely completed the working capital optimization initiatives we launched shortly after i joined wolfspeed before turning to the outlook i'll elaborate on robert's comments regarding the conditional 30-year 1.5 billion loan commitment from the U.S. Department of War. This is an important milestone that would provide long-term capital to support our strategy while strengthening our capital structure and one we believe is reflective of the importance of wall speed silicon carbide to the U S national and economic security. The initial 600 million tranche, tranche A, is expected to refinance the remaining balance of our high-cost first lien senior secured notes due in 2030. This builds on the reduction we completed in March which lowered our first lien debt from 1.1 billion to approximately 630 million and would complete our planned refinancing of these notes. The refinancing is expected to deliver more than 50 million in annual interest savings and given the first five years of interest payments will be paid in kind, annual cash interest savings are expected to be approximately 100 million. Ultimately, we see this as a start of a meaningful financing partnership. This is a conditional milestone-based commitment that supports our existing strategy, improves our capital structure, and funds the next phase of growth as we position the company to become the partner of choice in critical end markets, benefiting customers, shareholders, and national security. The additional tranches are intended to support the strategic objectives Robert previously outlined. For more details, please see the presentation posted to the events and presentation section of our website. Turning to our outlook, we continue to see growth and are targeting second quarter fiscal 2027 revenue in the range of $155 to $175 million. We expect non-GAAP gross margin to improve sequentially and approach break-even for the second quarter. Operating expenses are expected to be in the range of 65 to 69 million, a modest sequential increase driven primarily by the investments to support anticipated AI data center growth. I'll also note that this quarter we completed the previously planned workforce reduction of approximately 6% further streamlining our organization. Before turning the call back to Robert, I'll echo his growing conviction in our strategy and long-term outlook. With that, I will turn the call over to Robert for his closing remarks. Thank you, Gregor. Before we open the call up for questions, let me reinforce my enthusiasm and conviction for what lies ahead. Our leadership additions are becoming more integrated across every level, we'll continue to deepen customer partnerships across the widening scope of the market. We're taking every necessary step to return Wolfspeed to a path of long-term growth and success, and that is the source of our increased conviction in Wolfspeed's future. With that, operator, we're ready to take questions. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. Ifyou are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Joshua Buchalter with T.D. Cohen. Joshua, your line is now open. Please go ahead. Hi. Good evening, gentlemen. This is Sam on for Josh. Congrats on the quarter of results. I was just curious if you could remind us the milestones for the $1.5 billion commitment that you're getting from the government. What hurdles do still have to clear and roughly what timing should we think about in terms of that the refinancing occurring this year and then secondarily how is that dynamic shape the relationship with your customers either ongoing or new ones you know perhaps using your borg warner deal as an example of how that's given potential customers more confidence in your ability as a long-term supplier thank you yeah thanks let me take it let me get the first question on the oversea zone obviously a lot of work has been done by the government already before we went into the announcement that led to a very detailed li however during this period the government is further completing its detailed decisions and that's all well on track and we expect that this takes another couple of weeks to be able to do that as well as in parallel finalizing the credit agreement as such around the actual drawing of the tranches there are several financial commitments limited equity days and smaller de-risking measures that we have to take on the balance sheet that's something we're looking at and discussing together with the us government that all in all we look we have to be well on track to be able to do this ideally before end of the year and that video is robert here let me quickly comment on your question on the customer side i mean i would say this has been received very very positively across the globe so i talked a lot of customers both in you know the united states europe but also you know asia pacific and i think you know the feedback has been um very well received and they really support kind of you know that strategy Excellent. Thank you for the color there. And then my follow-up, your gross margin guidance is approaching breakeven, obviously, as you said. Could you give us some guideposts to think about what breakevens look like in terms of Mohawk Valley utilization or what kind of revenue levels we're talking about here, just so we can kind of range-bound when we might be breakeving on the gross margin line? Thank you. yeah let me comment on that so last call I mentioned that you should think the company is being around 200 million a quarter to be breakeven given the improvements we are making and the favorable and market mix we think that break-even point is a little bit lower than the 200 million we'll have to see exactly how that plays out but we think we're really well on track utilization of mobile valley um to be able to achieve that i would say wall to wall would be around 25 to 30 only equipment utilization we believe we're well on track to be able to do that that's a bit more difficult to comment on because the question is how do you measure that at all but i would say we are well within um capabilities more valid to be able to achieve that. Thanks so much. Your next question comes from the line of Christopher Rowland with Susquehanna. Christopher, your line is now open. Please go ahead. Hey, guys. Thank you for the question. Some Some of our data around the silicon carbide market has actually shown an increase in lead times as well as an increase pricing. So I guess my question for you guys is do you think the market has kind of bottomed here in terms of both pricing, it seemed like it was a race to the bottom for a while there, also this overcapacity situation and, you know, if you could address maybe both the materials market and the device market and your perspective would be greatly appreciated. That's true, Mr. Robert. So let me answer that question. So what we see clearly is, you know, that the build out of the power infrastructure for AI data centers has created a very large additional you know consumer your socket or end application for saline carbide and i think this really helped here kind of to make sure that the you know the capacity which was built over the last years here kind is getting more and more absorbed in kind of two two large end markets one is automotive this is a you know a very important market and especially you know you know with the high gas price out there high energy prices a lot of you know evs are getting bought And the other one is, again, the AI data center build-out, especially with the 800-volt systems getting deployed, will drive additional demand for civilian commerce. I think this is something which a lot of people didn't have on their radar screen, let's say, two years ago, and I think it will help you to get the market into a better supply-demand balance. And on the material side, what we clearly see is here also the RF business is something which is very interesting. We see a lot of announcements around satellite communication and these type of applications. And of course, us being here in a position in the United States with our unique capabilities is putting us in a pretty good situation for the materials business. Excellent. And for my second question, you know, your entry into the GAN market seems really interesting. When might you have products coming? What end markets, products or applications are you targeting for GAN as well? Let's start with the market and what we see is two markets driving the demand for GANONs with a low-voltage GANon. One is the robotics, specifically the humanoid robotics. The other one is, of course, the voltage step-down for the data centers covering the voltage range, you know, what silicon carbide can do. And if you look at the air-to-volt speed from a capability perspective, perspective, we have core assets involved, and the tools are pretty fungible. Of course, there are some additional tools needed here to go around the dedicated Gantt map, but a lot of tools are fungibles between Gant and Gant. And then we have a very broad IT portfolio on Gant, as well, and I believe it's a good way for us to expand pretty much to 10 or 14 as a general direction, in addition to REGARDLESS OF THAT MARKET. EXCELLENT. THANK YOU. AS A REMINDER, IF YOU WOULD LIKE TO ASK A QUESTION, PLEASE PRESS STAR 1 TO RAISE YOUR HAND. THERE ARE NO FURTHER QUESTIONS AT THIS TIME. THIS CONCLUDES TODAY'S CALL. THANKS FOR ATTENDING. YOU MAY NOW DISCONNECT. Thank you.