Wolfspeed, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 26, 2023, and the nine months then ended; comparisons are to the periods ended March 27, 2022. The filing is for fiscal 2023 Q3, notwithstanding the request metadata’s “2022 Q3.” Figures are in U.S. dollars.
Business context
Wolfspeed develops and manufactures silicon carbide (SiC) and gallium nitride semiconductors and materials for power and radio-frequency applications, including electric vehicles, charging, renewable energy, telecommunications, and aerospace and defense. The company is expanding manufacturing capacity, including its new SiC device facility in Marcy, New York.
Key financial metrics
| Metric | Quarter ended March 26, 2023 | Nine months ended March 26, 2023 | Prior comparable period |
|---|---|---|---|
| Revenue | $228.7 million | $686.1 million | $188.0 million quarter; $517.7 million nine months |
| Gross profit / margin | $68.1 million / 29.8% | $214.9 million / 31.3% | $64.0 million / 34.0%; $170.4 million / 32.9% |
| Operating loss | $101.9 million | $268.9 million | $62.3 million; $188.9 million |
| Net loss | $99.5 million | $216.6 million | $66.5 million; $233.3 million |
| Diluted loss per share | $0.80 | $1.74 | $0.54; $1.96 |
| Operating cash flow | Not stated for quarter | Cash used: $90.7 million | Cash used: $123.4 million |
At March 26, 2023, cash and cash equivalents were $795.1 million and short-term investments were $1,453.1 million, totaling $2,248.2 million. Convertible notes, net, were $3,023.3 million; aggregate principal was $3,075.0 million. The $125 million revolving credit facility was undrawn and fully available. Current assets were $2,848.8 million and current liabilities $607.2 million.
For the nine months, investing activities used $1,000.7 million, including $530.2 million of property and equipment purchases, partly offset by $131.0 million of reimbursements. Financing activities provided $1,437.0 million, principally from the 2029 convertible notes offering.
Changes versus prior comparable periods
- Revenue rose 22% for the quarter and 33% year to date, primarily from higher power and materials production to meet demand; lower factory output and softer RF demand were offsets.
- Gross margin declined 4.2 percentage points for the quarter and 1.6 points year to date. Management cited higher production costs and unfavorable product mix.
- Operating loss widened to $101.9 million for the quarter and $268.9 million year to date. Factory start-up costs increased to $44.7 million for the quarter and $120.7 million year to date, versus $21.4 million and $41.0 million, respectively.
- Year-to-date net loss narrowed despite the higher operating loss. Results included a $50.3 million arbitration gain in fiscal 2023; the prior-year period included a $24.8 million debt-extinguishment loss.
- Cash used in operations decreased year to date. Cash and investments increased by $1,049.4 million from June 26, 2022, substantially reflecting issuance of $1.75 billion principal amount of 2029 notes. Net convertible-note carrying value increased by about $2.0 billion.
- Customer design-ins were $6.7 billion, up from $3.8 billion. The company cautions that design-ins are not firm revenue forecasts and may not convert into sales.
Outlook, commentary, risks and unusual items
- Management expects current working capital, available credit and anticipated operating cash flows to support daily operations and capital expenditures for at least 12 months, but says additional funding will be needed to complete planned long-term expansions.
- Fiscal 2023 targets include approximately $160 million of factory start-up and underutilization costs, primarily for the Marcy facility, and approximately $775 million of net capital investment. The capital-investment target depends on construction timing and includes about $150 million of expected New York reimbursements.
- The company expects approximately $2.0 billion of investment in the Marcy facility through fiscal 2024, with approximately $500 million expected to be reimbursed over time by New York. It also anticipates approximately $1.3 billion of net investment in the Siler City, North Carolina materials facility beginning in late fiscal 2023 and continuing through fiscal 2024; expected federal incentives and grants are uncertain. A Germany facility is also planned.
- Management cited tight supply for some inputs and equipment, near-term shipment constraints, strong power-product demand, softer RF demand, and execution and yield challenges as facilities ramp. Other risks include economic and geopolitical uncertainty, inflation, trade restrictions, customer concentration, competition, and the ability to secure funding and government incentives.
- A new supplier agreement requires at least $200 million of take-or-pay purchases over five years; $3.5 million had been purchased under it during the quarter and nine-month period. Capacity reservation deposits are expected to total $60 million and are refundable through future purchase credits.
- The Purdue patent case remains in fact discovery; trial was scheduled for August 2024. The company could not estimate a possible loss range. Management said legal outcomes are inherently uncertain and an adverse ruling could materially affect the business.
- The company recognized a full valuation allowance against U.S. deferred tax assets. It also adopted convertible-debt accounting guidance in fiscal 2023, affecting the presentation of debt and equity components.
Important facts for investors to verify
- Whether revenue growth converts into improved gross margins as factory utilization, yields and product mix evolve.
- Actual ramp costs, output, qualification progress and capital spending at Marcy and Siler City, compared with management’s targets and timelines.
- How the company will fund expansion beyond its stated 12-month liquidity outlook, including the timing and realization of grants, reimbursements and tax credits.
- Convertible-note conversion and refinancing exposure, potential dilution, interest costs, and the availability and terms of future financing.
- Whether design-ins become customer orders and revenue, given supply constraints, customer demand variability and the disclosed customer concentration risks.
- Developments in the Purdue litigation and any changes to the company’s estimated exposure or other commitments.