Cree, Inc. (CREE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Cree Fourth Quarter Fiscal 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Tyler Gronbach, Head of Investor Relations. Please go ahead, sir.
Tyler Gronbach: Thank you and good afternoon, everyone. Welcome to Cree's fourth quarter fiscal 2020 conference call. Today, Cree's CEO, Gregg Lowe; and Cree's CFO, Neill Reynolds will report on the results for the fourth quarter of fiscal year 2020 as well as how the company is navigating the ongoing COVID-19 pandemic. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Cree's results internally. 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 a supplement to and not a substitute for financial statements prepared in accordance with GAAP. Reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website along with a historical summary of 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 numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially including risks related to the spreading impact of a Covid-19 pandemic. During the Q&A session, we would ask that you limit yourself to one question and one follow-up, so that we can accommodate as many questions as possible during today's call. If you have any additional questions, please feel free to contact us after the call. And now, I'd like to turn the call over to Gregg.
Gregg Lowe: Thank you, Tyler. Good afternoon, everyone, and thank you for joining us today. Before I begin, I'd like to take a moment to thank all of our employees around the world. I'm extremely proud of their efforts and solid execution during this unprecedented time. As we continue to address the impact of the pandemic on our operations, the health and safety of our employees, customers and partners remains our top priority and we are committed to operating safely. As a designated essential business, our facilities remained open throughout the quarter and we are routinely executing stringent testing, cleaning and safety protocols at all of our locations. We continue to closely monitor federal, state and local guidelines and adjust our business continuity plans as appropriate. Attendance in our factories has improved since the start of the pandemic, but is still below our normal operating level as we continue to operate with an abundance of caution requiring employees that have been possibly exposed to the virus to observe a mandatory quarantine period. In addition, we are also offering employees the flexibility to support the needs of their families at this time, which can also impact attendance. Turning to our performance. We delivered fourth quarter results in line with our targets on revenue, gross margin and EPS and are encouraged by the strengthening demand in the quarter to-date despite the continued headwinds presented by COVID-19. In addition, we are pleased to see silicon carbide gaining traction in the market as evidenced by the recent announcement of Delphi's win for a new battery electric vehicle and our partnership with StarPower and the Yutong Group for an electric bus that will use silicon carbide in the powertrain. Our opportunity pipeline is growing, driven by the outstanding work of our sales team, working seamlessly on our digital selling platforms to drive new business and remain in constant contact with our customers and distribution partners. Fiscal 2020 was a transition year for us and we made good progress on becoming a global semiconductor powerhouse while at the same time addressing the unexpected challenges associated with the pandemic and ongoing geopolitical concerns. While the operating environment remains fluid, we are confident in the long-term growth opportunity ahead of us and firmly believe that Cree is uniquely positioned to capitalize on the industry's transition from silicon to silicon carbide. Despite the market uncertainty, the excitement of our customers about the next generation of semiconductor technology remains high, and we are committed to our capacity expansion plans to meet this growing demand. I'll now turn it over to Neill, who will provide an overview of our financial results and an outlook for the first quarter of fiscal 2021. Neill?
Neill Reynolds: Thank you, Gregg, and good afternoon, everyone. Overall, as expected, our fourth quarter performance was impacted by softening global demand and some disruptions to our operations resulting from the pandemic. Revenues for the fourth quarter of fiscal 2020 were $206 million, a decrease of 18% year-over-year. Our LED segment revenue decreased 17% year-over-year, largely driven by global trade events and events related to the pandemic. And Wolfspeed revenue declined 19% year-over-year due to continued softness for China EVs in EV sales and supply and demand challenges tied to the pandemic. Our non-GAAP net loss was $20 million or $0.18 per diluted share. Our fourth quarter non-GAAP earnings excludes $19.5 million of expense, net of tax, or $0.18 per diluted share for noncash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, project transformation and transaction-related costs, factory optimization restructuring costs, gain on partial debt extinguishment, changes in our Lextar investment and other items outlined in today's earnings release. Moving on to our fourth quarter performance by segment, Wolfspeed quarterly revenue declined 5% sequentially to $108 million. This was primarily due to lower demand from a non-semiconductor customer in our materials business as a result of the pandemic and some push out of product by several LTI customers, which more than offset improved performance in power and RF during the quarter. In power, we continue to see strong demand for our products, but it has been tempered by factory output related to COVID-19 safety measures. While our performance was softened by some supply constraints, we expect this to improve as we execute our previously announced capacity expansion plan. Positively, our automotive customers remain committed to their long-term plans and the need for our technology. And while the pandemic may impact the timing of some customer decisions, the industry shift from silicon to silicon carbide continues to build momentum. Further, in the industrial space, there has been broader awareness as a result of our partnership with Arrow Electronics, as our sales team have done a great job of showcasing the benefits of silicon carbide in new applications to their customers. In RF, we are seeing some improved performance, and we continue to grow our RF backlog. While this is encouraging, there are still certain markets that have delayed their 5G rollouts and the pandemic has also delayed auctions in key markets. Overall, we are encouraged by the early signs of strengthening demand in our power and RF device businesses despite continued near-term headwinds and limited visibility we have into the full impact of the pandemic. Moving on to materials, in line with our expectations, revenue declined sequentially as we were not able to ship to one non-semiconductor customer that was not designated as essential -- as an essential business during the quarter. We also had a few of our wafer supply customers defer shipment of some product during the quarter, which is permitted under their agreement with us. Wolfspeed gross margin was 35.3%. The sequential decline was primarily driven by decreased factory efficiency due to the safety measures we put in place to protect our employees during the pandemic. In addition, lower yields and factory transitions also present some short-term challenges on gross margin performance and will continue to be a headwind until we shift production to our new Mohawk Valley Fab. LED product revenue was $97 million and decreased approximately 4% sequentially, reflecting supply constraints. Nonetheless, our business executed well despite challenges related to increased volatility in our markets. LED gross margin was 22.8%, primarily due to favorable product and customer mix. Unallocated non-GAAP costs totaled $6.1 million for the fourth quarter of fiscal 2020 and are included in our overall cost to reconcile the $54 million non-GAAP gross profit and 26.4% gross margin for the company. This includes some incremental costs that we incurred as a result of our COVID-19 response efforts. Non-GAAP operating expenses for Q4 were $83 million, and our non-GAAP tax rate was 30%. This reflects our efforts to continue to execute disciplined cost control by prudently balancing our operating expenses with the necessary investments for our long-term growth and the decision not to pay management bonuses and some other incentives for fiscal 2020. For fiscal 2020 revenue was $904 million, representing a 16% decline when compared to fiscal 2019. Non-GAAP net loss in fiscal 2020 was $49.1 million or $0.45 per diluted share. The non-GAAP loss excludes $142.6 million of adjustments net of tax or $1.32 per diluted share. Fiscal 2020 revenue and non-GAAP gross profit for our reportable segments were as follows. Wolfspeed revenue was $471 million and gross profit was $185 million for a 39% gross margin. Revenue declined 13% from fiscal 2019 as a result of softness in customer demand, as well as the COVID-19 pandemic and associated disruptions, which significantly impacted results. LED revenue was $433 million and gross profit was $91 million for a 21% gross margin. Revenues declined 20% from fiscal 2019 with ongoing market softness, trade and tariff concerns with China and lower utilization primarily due to COVID-19. Unallocated costs totaled $16 million for fiscal 2020 are -- and are included to reconcile to our $259 million non-GAAP gross profit for a company gross margin of 28.7%. Now in light of the ongoing uncertainty related to COVID-19, I'd like to provide an update on our strong balance sheet and healthy cash position, which gives us the financial flexibility to navigate the current environment, support our business operations and maintain our capital expenditure plans to support future growth. We ended the quarter with approximately $1.3 billion in cash and short-term investments, zero balance on our line of credit and convertible debt with a total face value of $1 billion. For the fourth quarter, days sales outstanding improved to 37 days and inventory days on hand was 104 days. Cash generated from operations was $10 million and capital expenditures were $70 million in the fourth quarter, resulting in negative free cash flow of $60 million. We reported total capital investments of $244 million in fiscal 2020 as our capital allocation priorities remain focused on expanding capacity in our Wolfspeed business. Moving on to our CapEx outlook for fiscal 2021. As we discussed at our Investor Day last year, fiscal 2021 will be the peak investment year to fund our long-term growth ambitions. At this time, we anticipate CapEx of approximately $400 million to support our capacity investments, most notably the construction of our Mohawk Valley fab and the expansion of our Durham fab and materials factory. This level of investment reflects the slightly steeper customer ramp that we have discussed previously and keeps us on track to begin ramping production in the new fab beginning in calendar year 2022. It's also important to remember that there will be some variability in our CapEx and cash flow during fiscal 2021 as it is tied to the percentage of completion of Mohawk Valley and the timing of reimbursements from the state of New York. Now turning to our outlook. The COVID-19 situation remains very fluid, making it difficult to assess its impact on our near-term operations and overall demand environment. To account for this, we are again providing a wider than usual guidance range for the first quarter of fiscal 2021, along with our underlying assumptions based on what we know today. We're targeting revenue in a range of $203 million to $217 million based on the following segment trends. Wolfspeed revenue is expected to be between $107 million and $117 million. We are encouraged by the early signs of strengthening demand of the device business and our ability to improve fulfillment out of our factories while maintaining additional COVID-19 safety protocols we have in place. LED revenue is expected to be between $96 million to $100 million, mainly due to improving supply dynamics. Cree's Q1 non-GAAP gross margin is expected to be between 25% to 27%, which includes the impact of $4 million of unallocated costs relating to transitioning LED factory operations to Wolfspeed. We've target Wolfspeed gross margin to be approximately 35.5% to 37.5% due to better factory efficiency driven by higher attendance but still below normal expectations as we continue to maintain safety procedures related to COVID-19. In addition while we continued to make progress on our 150-millimeter MOSFET yields, they are still below expected levels. We target LED gross margin to be approximately 19.5% to 21%. We are targeting non-GAAP operating expenses between $88 million and $89 million for the first quarter. While we maintained tight cost controls during fiscal Q4 and did not pay management bonuses or institute merit increases, we will increase OpEx in fiscal Q1 2021. This reflects higher spending on R&D projects, including our Mohawk Valley Fab process development and resumption of accruing for management incentives. We expect that our operating expenses will gradually increase throughout the year, as our revenue normalizes. We target Q1 non-GAAP operating loss to be between $37 million to $29 million and we target a non-operating net loss to be approximately $1 million. We expect our non-GAAP effective tax rate to be approximately 30%. We are targeting Q1 non-GAAP net loss to be between $26 million to $22 million, or a loss between $0.24 to $0.20 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, accretion on our convertible notes, product transformation and transaction-related costs, factory optimization restructuring costs and other items. Our Q1 targets are based on several factors that could vary greatly, including the situation with COVID-19, overall demand, product mix, factory productivity and the competitive environment. With that, I will now turn the discussion back to Gregg.
Gregg Lowe: Thanks, Neill. And building off of what Neill just shared, I'd like to discuss our recent performance in the current environment, as well as provide an update on our strategic plans. The operating environment remains challenging as the pandemic is ongoing. While it remains difficult to predict the full impact, it will have on our operations we are focused on maintaining business continuity to continue to deliver for our customers, while executing on our business plans. I continue to be impressed with how our sales team has adapted to a virtual environment, successfully pursuing and winning new business. We continue to connect with customers with approximately 4,000 leads generated during the quarter. And I'm impressed with the team's results in terms of winning new business. In the fourth quarter, we secured approximately $600 million in design and award’s, a nice improvement from the already excellent results the team delivered in Q3. Our partnership with Arrow Electronics continues to grow and we have identified approximately $1.6 billion of silicon carbide opportunities for our Wolfspeed business with Arrow's large and extensive sales footprint. Our coordinated efforts to support the launch of our new 650-volt product has been very well received and the opportunity pipeline is building nicely. As our sales team continues to deliver, we are very encouraged by the growth we've seen in our pipeline over the past few months as new opportunities continue to light up across key end segments, including automotive, energy, communications infrastructure, industrial and aerospace and defense. At the moment, the opportunity device pipeline is well above $10 billion. We are well positioned to win opportunities as our diversified and growing product portfolio remains a key competitive advantage in the marketplace. We released more than 60 new Wolfspeed products during fiscal 2020. And looking ahead to next year, we are rapidly expanding our product portfolio with an emphasis on critical automotive applications. We look forward to building upon this momentum, as many design awards are expected to be made in the coming months. Despite the COVID pandemic, many of our customers and prospects remain engaged and committed to their future plans, which includes silicon carbide as a critical component. The strength of our long-term plan has been underscored by recent developments, including Delphi's recent win for a new battery electric vehicle, which is expected to ramp sometime between 2022 and 2023. In addition, we're also pleased to be working with StarPower Semiconductor and the Yutong Group on an industry-leading high-efficiency powertrain system for electric buses using Wolfspeed 1200 volt silicon carbide devices. These wins are tangible examples of the multiyear opportunity ahead of us in the automotive space. The benefits of silicon carbide are clear and recognized by OEMs and Tier 1s alike, and we continue to have many productive conversations with market leaders regarding how Cree can partner with them to bring forth next-generation technologies. In addition, we're following many new encouraging updates in the macro-environment. In late July, the European Commission reached an agreement regarding the EU's €1.8 trillion COVID-19 recovery fund. The EU has committed 30% of their total expenditures from this fund to address climate concerns with the goal of being climate neutral by 2050. This includes €20 billion designated to transport and €5 billion dedicated to energy, which we expect will be a positive catalyst for clean transportation and electric vehicle demand in Europe. In 5G, we continue to believe this is a multi-year expansion, with major traction coming. There have been a number of recent announcements coming out of Asia pointing towards growing 5G momentum in that region. While the global pandemic has further delayed some rollouts in other regions, we continue to be well positioned to support this global expansion. As we begin fiscal 2021, we are firmly committed to our long-term strategy. While we expect to continue to work through COVID-19-related headwinds in the near term, we are encouraged by the growing demand we're seeing and expect more opportunities to materialize in our device business throughout fiscal 2021. To ensure we can capitalize on this opportunity, we are reiterating our capacity expansion plans, which are well supported by our strong balance sheet and ample liquidity. Our capacity expansion plans are a key differentiator when going to market, which coupled with our superior technology and silicon carbide's demonstrated advantages is encouraging our customers to accelerate their adoption of silicon carbide. The investments we are making today are absolutely critical to us achieving our long-term goals and maintaining our leadership position. In conclusion, while the pandemic continues to create uncertainty in the near term, our confidence in the long-term growth opportunity for silicon carbide remains strong. I'm proud of how everyone at Cree rose to the challenges presented in fiscal 2020. The tremendous effort across the company is helping us win new business and drive the industry transition towards silicon carbide. Our strong balance sheet and financial position enables us to fund our operations in future growth. I'm very confident in our path forward and believe in the underlying trends we are seeing underscore the opportunity we have ahead of us. With that, I'll turn it back over to the operator, and we'll begin our Q&A session.
Operator: [Operator Instructions] Our first question comes from Jed Dorsheimer with Canaccord Genuity. Your line is now open.
Jed Dorsheimer: Hi. Thanks for taking my question. I guess Gregg or Neill, the first question is around one of your largest or if not the largest material customers saw a significant impact in their business due to COVID last quarter particularly in the French facility. So I'm just wondering how that flows through the business and whether or not the vast majority of that hit occurred last quarter or is actually trickling into this quarter in terms of your business? And then I have a follow-up.
Gregg Lowe: I guess, I'll start and maybe Neill can add a little bit of color to it. I don't want to get into specifics about any particular individual customer.
Jed Dorsheimer: Understood.
Gregg Lowe: I would say that -- yes, they -- obviously, the dynamics of our -- and the contracts that we have in place are working kind of according to the plans that we had for them. So we feel pretty good about that. Maybe Neill if you want to give a little bit more color on that.
Neill Reynolds: Yeah, I think so. Jed as you looked at the last quarter, I think things kind of played out as we expected. On the device side we saw some strong demand particularly for our power products. We were obviously impacted in the fab in terms of some of the sticky procedures. And then on the materials side, we anticipated some slower ordering both from I would say, LTA customers and some of the non-LTA customers as people manage through the pandemic, manage inventory levels and those types of things. But I'd say that largely played out as expected. As you look into next quarter, I think it's -- from a device standpoint what we're seeing is continued demand for the power products. I think we're seeing strong backlog there. On the material side, I guess, what I'd say is, we're kind of holding ground. We're seeing some push and pull within the portfolio as you move into the next kind of period here. So I think -- and then as you think longer-term as these LTA contracts are structured, we maybe expect to see some pickup as you start to move into outside of December maybe into the March or June quarter. So I think we've largely hit the bottom as it relates to materials, but I think we're just going to see modest improvement from here and probably some potential pickup I think in the next calendar year.
Jed Dorsheimer: That's helpful. Just as it relates to the capacity expansion, I was wondering if you could give maybe some further color in terms of the timing as well as cost expectations. The move from 6-inch to 8-inch is a pretty significant cost down not to mention the impact on the automation associated with that equipment. And I know you did a good job at the Analyst Day of kind of framing that opportunity. But as you're moving closer to the -- and '21 is kind of the year for that build-out I was wondering if you could just give an update in terms of timing of both fab as well as Mohawk. And then what the expectations are? Should we think of that as just a linear cost down in terms of just doing the area? Or how should we be thinking about that? I would assume there's additional benefits, but I was wondering if you could frame that a bit more for me. Thanks.
Gregg Lowe: Yes. Maybe I'll kick it off and then Neill can kind of unpack it a little bit more. A lot of great activity going on up in Mohawk Valley, the fab is now going "vertical." So there are steel girders that have been installed and walls are being installed and so forth. We're really excited about that. There's been excellent work at the prototype line in Albany with some really good progress on that. The materials expansion that is part of our overall capacity expansion is going well yields and costs and so forth are improving as well. In terms of the broader expansion though, I'll turn it over to Neill to talk a little bit about the various different pieces that we have going on.
Neill Reynolds: Yes. So it's Jed it's probably worthwhile kind of breaking this down a little bit. So as I mentioned in the prepared remarks, the CapEx is going to grow to roughly $400 million in fiscal 2021 and we expect that to be the peak year of spending during the long-term plan that we previously announced. So let me just break that down into a couple of pieces. First as Gregg said the first and foremost the biggest piece to that is the Mohawk Valley Fab. And again I would reiterate that. I think to-date we've made excellent progress. We poured concrete. As Gregg mentioned the vertical construction is underway. We expect that fab to begin ramping sometime in the 2022 calendar timeframe. And I think what that does is it supports the Wolfspeed growth in '22 and beyond. However -- this is an area that could have some variability in it in terms of spend. It's going to be a function of the timing of the build schedule and the timing of roughly $500 million of reimbursements we expect to receive in conjunction with our partnership in the State of New York. So a big project is underway and we're going to see some big moving pieces here over the next four to six quarters as we start to make what we think is going to be significant progress there. The second piece is -- I don't want you to overlook this is that we also have an expansion going on down in Durham right now and that's a fab expansion. We're outsourcing the LED silicon carbide and fab operations and kind of upgrading that replacing it with Wolfspeed capacity. This is going to support some of the capacity ramp at the end of this year and as we see some opportunity into fiscal year '22. So we expect that expansion to be complete towards the end of this fiscal year. So that's kind of the second piece. And the last piece is the materials expansion and you can kind of think of that more in terms of a linear basis in terms of growth. So those are kind of the -- that's kind of the plan we've got. There's a lot of moving pieces as you look here in fiscal 2021. But I really believe that that's what gives us a great basis for our capacity and our cost and our margins as we move out into when the business actually hitting inflection point in '22 and get to '22 plus. Now as it relates to 150 and 200, look I think we've talked about building a 200-millimeter fab for Mohawk Valley. We're still planning to do that. Obviously it's easier to downgrade that down to 150 as we talked about previously and we'll still manage through that. But again, overall on-track, we'll up the CapEx this year and there could be some moving pieces as we look into the next following quarters.
Operator: Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.
Brian Lee: Hey, guys. Thanks for taking the questions. Maybe just first off, to follow up on Jed's question, I wanted to dig into CapEx budget here a little bit more. Neill, at the 2019 Analyst Day, you guys had talked about $720 million of CapEx from 2020 to 2024. With the $400 million here targeted for 2021 and what you've already spent to date, can you kind of update us on how much CapEx remains in the plan, I guess, for the 2022 to 2024 time frame? And then does this $720 million CapEx budget, is this increasing based on the 2021 outlook here, or are you just simply pulling it all forward? And then kind of what are you seeing out there to drive that acceleration, if that's the case? And then I had a follow-up.
Neill Reynolds: Sure. And thanks, Brian. First of all, let me say that there's really no change to the expansion plan that we talked about, the $720 million. And as we've discussed before, there's also other CapEx in the company besides just the capacity expansion. So one of the things to recognize here is and I said there's a number of moving pieces. A lot of Mohawk Valley happens as you start to get into the end of fiscal 2021, into 2022, and that's us crossing fiscal years. So what you'll see here is just timing. It's more or less of a zero-sum game. If we spend more in 2021, you spend less in 2022. So if you think about that profile we've talked about before, peak year kind of here in 2021, and then we start seeing that CapEx starts to come down in 2022 and beyond. As we talked about also before, we expect the free cash flow to be negative in those periods as we have those significant investments. And then in 2022 plus, as the Wolfspeed business starts to ramp, we start to reap the benefits of that. So that's still kind of the same plan. I think you're just seeing the timing of the CapEx move around a little bit.
Brian Lee: Okay. Fair enough. That's helpful. And then just a second question on the Power and RF side. Gregg, you made some positive comments around kind of what you're seeing in 5G. Could you also maybe provide us an update on your engagement with Huawei? There's obviously been some more restrictions put in place there. So wondering what, if any, exposure you have. And then what's embedded into both your near and long-term outlooks there with respect to that customer as well as, in general, around the China 5G base station opportunity, if you could? Thanks, guys.
Gregg Lowe: Sure, Brian. So in terms of Huawei, we have not been shipping to Huawei for the better part of a year, and we have no Huawei revenue plans in any of our future projections or forecasts or what have you. So that's been out since the ban went in place. And then -- so they're not in. And in terms of -- possibly, there might be some small impact to materials customers associated with Huawei. But we think the large -- any large impact we've basically taken it out of the picture. So we have developed good relationships with other players around the world and are repurposing the technology that we had developed for Huawei for those customers. Last quarter, we announced that we had some communications infrastructure design wins. This quarter we've talked about our total design-ins at $600 million. We had a portion of that also with communications infrastructure customers. I guess the last part that I would say is that when you think about that $600 million of design-in that we just got this quarter, that's on top of $400 million or roughly $400 million of design-in that we got in the quarter before that. So in the last two quarters, we've racked up $1 billion worth of design-in. And I would just remind everybody, that was all during COVID, so pretty phenomenal results from our team there.
Operator: Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.
Craig Hettenbach: Yes, thank you. A question for Gregg, just on the Delphi partnership and design win in China. Can you maybe just give a sense of the breadth of activity you're seeing as a result of that partnership? And you mentioned timing 2022, 2023, but any other color as we think about that business ramping in the coming years?
Gregg Lowe: Well, I want to be a little bit cautious about talking about specific customers. I will say that the Delphi announcement is incremental to the -- our original announcement that we had announced in September of last year. So this is an additional win, which is great to see the traction for silicon carbide. And I think we're seeing that across many different spaces, too, where one customer wins with us in some particular area or some particular customer and that opens up a broader opportunity. I think that's why you saw our pipeline now over $10 billion.
Craig Hettenbach: Got it. And then on the Arrow distribution kind of product launch and just given your long background in this industry and working with distribution, anything you'd call out that's unique in terms of, clearly silicon carbide there's a lot of interest in adoption. But it seems like that's gotten off to a very strong start. And just trying to kind of contextualize what's happening there versus what you typically see through distribution?
Gregg Lowe: Well, we've got a very strong relationship with – and partnership with Arrow and they're doing a fantastic job of this – promoting the 650-volt silicon carbide MOSFET. Its thousands of customers have expressed interest. We're seeing everything from air conditioning motor drives, plasma generators, electrosurgical units, airplane galley power, even induction cooktops. And so we're just seeing lots of different opportunities. And I don't have the exact stat on me. But if you take a look at the number of countries where they've identified opportunity, it's something greater than half I think are generated in countries where we don't have any salespeople. So this is really the strength of Arrow's footprint and combines with the strength of our product portfolio is really a great win. We're really excited about it. The fact that, they've got $1.6 billion worth of pipeline for total Wolfspeed and are accelerating the 650 volt we're super excited about that. And so I think, it's really doing something that we couldn't do on our own, just simply because the scale we have from a sales perspective, just isn't there and quite frankly never will be there. We couldn't do that internally, I don't think. So leveraging their vast sales footprint has been a great win-win for both of us. And I think, I've had plenty of time to sit down with the management team at Arrow too, and I think we both feel real good about where we're going, the results that we've gotten so far. And there is no letting up – letting off the so-called gas pedal, if you will.
Operator: Our next question comes from Edward Snyder with Charter Equity Research. Your line is now open.
Edward Snyder: Thanks a lot. Gregg a couple of questions. First off, you used to say that Wolfspeed was –a-third GaN, a-third SiC, a-third materials. But given the events in the last year or so with Huawei et cetera, just tailing off and then your pricing of epi to make it much more aggressive, I think it was capacity-constrained last quarter it seems to be the case that – or correct me, if I'm wrong the materials should be at least 50% of Wolfspeed at this point. And your RF business sounds like it's down hard. I mean, most of Huawei goes to Sumitomo now, which is a two Six customer. And I think over half of Qorvo's wafers for RF goes to two Six. So is it a case that you're kind of transitioning to more of a power customer given you've got that market almost to yourself at this point the only real wafer supplier out there? Or is it just an ebb in the RF – GaN RF business and you've got a plan to bring that back? And if so, maybe you could articulate that. And then I have a follow-up.
Gregg Lowe: Yeah. So, first off, over the last several years our materials business has grown faster than the device business. And you're in the right ZIP code in terms of the materials business roughly half of Wolfspeed. And that's primarily been growing fast because of the long-term agreements we have and the channel reach that those customers have. They've obviously done a good job of getting reach into their customer base. I think that as it relates to the longer-term outlook, we would anticipate that our power business would be our fastest-growing business through the 2024 long-range outlook that we shared at our Investor Day and that's simply, because of the adoption of electric vehicles and so the power device business. And so we would see that ramping up pretty strong through that period. As it relates to the 5G and the communications infrastructure, yeah, obviously the Huawei situation was a pretty significant setback for us. But we've adjusted our plans, we've adjusted our focus to go after non-Huawei customers. And as I mentioned, Ed we secured some design wins last quarter. We -- previous quarter and then last quarter as well and we remain in pretty close contact with that customer base.
Edward Snyder: Okay. And then maybe we can talk a bit more on the materials business. I know that since you've taken over the ePi business has gotten particularly strong and I think you were in the spike last quarter on that. If we take a bigger picture view of the whole competitive dynamic, you're really the only major supplier of ePi in crystal wafers for SiC power. I know Neill has talked about selling any of it and have got one agreement with STMicro. Outside of that, we don't see anybody out there really offering on the scale of this. Is it fair to assume that the margins -- why shouldn't we assume that the margins on the wafer business would be better from the device business because there's less competition and it's a much more difficult piece of the puzzle? And if that's the case, wouldn't Cree be better positioned as the de facto wafer supplier of the industry given the likelihood of new competition and SiC growth is pretty much nil?
Gregg Lowe: Well, I think we kind of are positioned that way in terms of a supplier of wafers to the industry. We've got a significant number of very large long-term agreements with people in -- the folks in the industry. We've announced most of those. And we're also expanding our capacity pretty substantially. We however believe that having vertical integration is another key factor and that's certainly helping us from a design-win perspective. The design-ins that we had talked about this past quarter or that we mentioned in our script this past quarter of $600 million and then the previous quarter of $400 million just to remind everybody, those are all device design-ins. And so, I think customers that look at things like continuity of supply and quality of product and so forth they look to us as a very competent player in silicon carbide. And the fact that we have both device and materials capability play off on each other and I think give our customers a strong amount of confidence in that area.
Operator: Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.
Colin Rusch: Thanks so much. Could you guys speak a little bit in a little bit more detail about the supply chain issues that you were seeing and mentioning in the script? Would love to understand kind of how expensive those are and how much duration you're expecting them to -- or how long they're expected to last?
Neill Reynolds: Yes. So I think when you think about the supply chain issues what we've talked about before is we have these safety procedures we've put into the factories. And what that essentially means is, as you bring people in and out of the factory you need to take more time and space people out, take people's temperatures and do all those things in terms of ensuring employee safety. As we think about our kind of near-term challenges then health and safety of the employees is certainly number one. So what that's doing is it's putting pressure on efficiency within the factories and it's limiting some of the upside potential I think we have particularly in Wolfspeed power business right now. But it's also pressure in gross margins because they're not getting the same efficiency we would get normally. So it is pressuring us. But maybe the best way to answer that is kind of give a little context as to kind of how we think about not just the implication on supply, but also on the margins. This quarter we talked about margins being down under 40% at 35%. As you move to next quarter, we're talking about 36.5% at the midpoint. I would say normalized margin for Cree is just north of 40% or around 40% if you exclude COVID. And over the long term we think about 50% once we get to the Mohawk Valley fab. So there are several things that we need to do to get the margins back up and these safety, kind of, procedures and questions you're going to ask about one of them. So the first one is you need to get kind of about that normal factory efficiency and that's just going to be a function of how long these procedures are in place. Right now, I don't see that changing anytime soon certainly for the end of the year likely into next year. The second thing, and let me just follow back up on that is on the 150-millimeter MOSFET yields. We talked about those before and we'll need to get some improvement there. And then lastly we'll have to get some visibility into volume. I think there was a question earlier on the materials business. While it was down in the last quarter, kind of, holding ground as we move forward, we're making good improvement on the cost initiatives there but we're going to have to take down utilization. So in that we'll have to get good visibility to volume and take those up. So look I think that will have an implication on margins, have an implication on capacity. But I think as we continue to work through this we'll see where we end up. But I think over the long-term, the 50% plan as we get out to Mohawk is kind of the main event here at the full and if we can administer it.
Colin Rusch: Okay. Actually the question was about the supply chain bottlenecks, but I'll take it offline with you guys. So the other thing we'd love an update on is with the manufacturing excursions that you guys had talked about a couple of quarters ago. You had talked about going through a number of cycles to get those things resolved. Can you talk a little bit about the cycles on those improvements and where you're at in terms of resolving those issues?
Neill Reynolds: Well, clearly we're making -- we're working extremely hard on these things and we're not making the progress that we had anticipated. I think what you're talking about is the yield challenges, the 150-millimeter MOSFET yields. And I guess what I would say is we're making two or three steps forward and then we've got a step back as we're working through these things. The pandemic certainly has not helped. Maybe think about access to labs, volumes in the factory these types of things these have been a challenge for us in terms of driving that improvement. So look we're going to continue to work through this. We're going to continue to try and drive those yields. That will be a key function of getting our capacity and our delivery up as well as margins up. But as we continue to work through these auto customers on different capabilities that are required to ship these products I see some progress as we move forward. But again it's going to be one of these, kind of, two steps forward, one step back. So there's probably going to be modest improvement as we move out into the rest of this year, and we kind of just see that slow modest improvement as time goes on here. Again the big change for us will be when we get up to Mohawk Valley. I think we'll have a much different structure and capability set there as we transition up to the bigger factory.
Operator: Our next question comes from Joseph Osha with JMP Securities. Your line is now open.
Joseph Osha: Hi, there. Thanks for taking my question. I've got two. First if we go back and look at your Investor Day deck you've got the business getting almost to free cash flow breakeven in FY 2022. And obviously things have changed a bit. But as you look at your pipeline and timing and so forth, does FY 2022 still look like the year you, kind of, turn the corner from a free cash flow standpoint?
Neill Reynolds: Well, I think Joe it's going to depend on the timing of when we see the ramps happen. What we've talked about before is seeing the inflection point in the business happening in 2022. The large CapEx bill really happens this year and depending on what we spend this year that will come out of next year. So it's just going to be a timing function of those things. So it's a lot of moving pieces. Again the Mohawk Valley Fab itself is roughly $1 billion project over five-plus years. There's $500 million of reimbursements. Some of those should come back in 2022 and help us on the free cash flow line. So I think it's just hard to say exactly what that would be. But I would expect that 2022 at some point, we'd see that inflection point and then we start to now turn the corner.
Joseph Osha: Okay. Thanks. And an unrelated question following on some of the earlier thoughts. You're doing so well in this epi business. I look at Mohawk Valley and I ask myself, why go to 200-millimeter? Obviously, bigger wafers are better, but bigger wafers can be harder. Isn't there perhaps a business case here to just take that fab's operational attributes and just put 150-millimeter in there?
Gregg Lowe: We obviously have the capability of doing that and that will be a decision that we make later on. Building a 200-millimeter fab and downsizing the handling equipment to 150 is a way better idea than building 150-millimeter fab and trying to upsize it if you will. So it's really -- just think about it that way Joe and then we obviously can make that decision as we move forward.
Operator: Our next question comes from Craig Irwin with ROTH Capital Partners. Your line is now open. Craig, your line is on mute
Gregg Lowe: Craig?
Craig Irwin: Hi. Thank you. Thanks for taking my question. So Gregg I wanted to ask for your general thoughts around the puts and takes moving to 8-inch wafers. Can you maybe update us on where you might be with seeds, if you have seeds for commercial production? Where are you on the updated wafering technology that needs to be used? And what are your general thoughts around the SiC wafers and the probable yield losses on 8-inch? I mean, how do these all factor into your longer-term time line? And can you maybe share with us anything about that time line that might be pertinent to the ramp over the next couple of years?
Gregg Lowe: Thanks. Thanks Craig for the question. I don't want to get into a lot of those kind of details. I will tell you that I have a monthly review on our 200-millimeter activity and in fact I had that review just yesterday. So I feel real good about the progress the team is making. Some of the items that you had talked about we're tackling. We're in really good shape on some of the ones you specifically called out, and we obviously still have some work to do there too. So I apologize, I don't want to get into a lot of detail on that, but I can tell you those items are very well front and center in terms of our thinking and I feel good about where we're at in terms of making progress on those.
Craig Irwin: Great. Thank you for that. My follow-up question is the semiconductor customer that was not designated as essential. Can you clarify for us was that impact mostly or entirely in the June quarter? Have they started up production again? Anything you can do to help us quantify the impact of them restarting? Thank you.
Neill Reynolds: Hey, Craig, it's Neill. Yeah, they're -- it actually was a non-semiconductor customer and we have not really disclosed in terms of what that customer means. But I can tell you is how we're managing that is built into kind of the forecast and the guidance we've given. If you think about the materials business like I said maybe modest improvement holding ground as we kind of go into next quarter. And then as the LTAs are structured we should see some benefit out beyond that time frame.
Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Gregg Lowe for closing remarks.
Gregg Lowe: Well, thank you everybody for your interest in Cree. We look forward to talking to you next quarter. Thank you.
Operator: Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
