Wolfspeed, Inc. — Q2 Fiscal 2023 Form 10-Q
Reporting period: Three and six months ended December 25, 2022. The company develops and manufactures silicon carbide (SiC) and gallium nitride semiconductors for power and RF applications, including electric vehicles, charging, renewable energy, 5G, and aerospace and defense. Unaudited results are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $216.1 million | $173.1 million | $457.4 million | $329.7 million |
| Gross profit / margin | $66.9 million / 31.0% | $57.0 million / 32.9% | $146.8 million / 32.1% | $106.4 million / 32.3% |
| Operating loss | $91.3 million | $60.9 million | $167.0 million | $126.6 million |
| Net loss | $90.9 million | $96.7 million | $117.1 million | $166.8 million |
| Diluted loss per share | $0.73 | $0.82 | $0.94 | $1.42 |
- Quarterly revenue increased 25%; six-month revenue increased 39%. Management attributed growth to stronger demand across product lines and increased power and materials capacity. Gross margin declined in both comparisons, primarily due to product mix, partly offset for the six-month period by a prior useful-life estimate change.
- Operating loss widened as operating expenses rose, particularly factory start-up costs. These costs were $37.6 million for Q2 and $76.0 million for the six months, largely related to ramping the Marcy, New York facility. Total other operating expense was $42.6 million and $85.0 million, respectively, for those periods.
- Six-month net loss improved partly because of a $50.3 million arbitration gain and higher interest income; the prior-year period included a $24.8 million loss on extinguishment of convertible notes. These items make net loss less representative of operating performance.
- Cash, cash equivalents and short-term investments totaled $2.484 billion at December 25, 2022, versus $1.199 billion at June 26, 2022. Operating cash use was $79.7 million for six months, compared with $95.0 million a year earlier. Investing cash use was $722.0 million, including substantial net purchases of short-term investments; financing provided $1.437 billion, primarily from the 2029 notes offering.
- Capital expenditures were $237.8 million gross for six months; after $70.7 million in reimbursements, net property and equipment purchases were $167.1 million. Property and equipment, net, rose to $1.650 billion from $1.481 billion.
- Net carrying value of convertible notes was $3.021 billion, up from $1.022 billion at fiscal year-end; principal outstanding was $3.075 billion. The company issued $1.75 billion principal amount of 1.875% convertible notes due 2029, receiving approximately $1.719 billion net proceeds and spending $273.9 million on capped calls. A $125 million revolving credit facility was undrawn and available.
- Current assets were $3.084 billion and current liabilities $460.0 million at period-end. Liquidity includes short-term investments, which may fluctuate in value; the filing reported $26.4 million of unrealized losses on those investments.
Changes, outlook and material items
- Q2 design-ins were $5.0 billion, compared with $2.2 billion a year earlier. Management cautions that design-ins are not firm orders and may not convert to revenue.
- Management targets approximately $125 million of fiscal 2023 start-up and underutilization costs, primarily for the Marcy facility, versus $70 million incurred in fiscal 2022.
- Management targets approximately $1.0 billion of net capital investment in fiscal 2023, including an estimated $150 million in New York reimbursements. It expects to invest approximately $2.0 billion in the Marcy facility through fiscal 2024, with roughly $500 million expected to be reimbursed over time. The planned Siler City, North Carolina materials facility is expected to require approximately $1.3 billion net from late fiscal 2023 through fiscal 2024; timing and amounts of federal incentives are uncertain. Management says additional funding will be needed to complete planned long-term expansions and is evaluating customer deposits, private funding, public markets, government reimbursements and transferable tax credits.
- Management reported tight supply of certain materials and equipment, expected to persist for at least the next few quarters, and said constraints may limit near-term shipments. It cited softening RF demand alongside significantly higher demand for power products, and noted economic, inflation, geopolitical and trade-policy uncertainty.
- The company is ramping new capacity and working to improve manufacturing yields. Execution, qualification, utilization and yield risks could pressure costs and margins; lower-than-expected demand could also leave new capacity underutilized.
- A $50.3 million six-month arbitration gain followed a former customer’s failure to meet purchase obligations; final payment was received in Q2. The company also received $101.8 million in the first quarter from prepayment of an LED-business earn-out note.
- Purdue University patent litigation remains pending; the company disputes the remaining allegation, and the filing says the possible loss is not estimable. Trial was scheduled for August 2024. Management says outcomes in legal proceedings are inherently uncertain.
- After quarter-end, the company reported that its 2026 notes became convertible at holders’ option through March 31, 2023, following the stock-price test being met through December 31, 2022. The filing also reports amended bylaws adopted January 23, 2023, including revised shareholder nomination and proposal procedures.
Key facts investors should verify
- Whether revenue growth and $5.0 billion of design-ins translate into customer orders, shipments and cash collection, particularly given supply constraints and the nonbinding nature of design-ins.
- Marcy ramp progress, manufacturing yields, utilization and start-up costs against management’s fiscal 2023 target.
- Funding plans and actual reimbursement or tax-credit receipts for the Marcy and Siler City expansions, and whether planned capital spending changes.
- Gross-margin trajectory and the contribution of product mix, start-up costs and capacity utilization.
- Convertible-note conversion, dilution and repayment implications, including the 2026 notes’ temporary conversion eligibility and the capped-call limits.
- Developments in the Purdue litigation and any changes in the company’s assessment of legal exposure.