Brian Lee: Hi, guys, good afternoon, and thanks for taking my questions. I guess the first one just on all this additional granularity and the updates on Mood Value, I appreciate that. But with the target to kind of get to 20% utilization by end of fiscal ’24, can you kind of talk about where you’d be targeting or happy with gross margin performance across the business by that point in time? Are we talking about a four handle when you’re at 20% utilization in Mohawk or back to the high 30s? And then just the broader implications of this pushout in Mohawk, the more methodical ramp on — you do have fiscal ’26 and ’27 outstanding financial targets in the model, wondering what the implications are for those? And then I had a follow-up.
Neill Reynolds: Brian, it’s Neill. So yes, so I appreciate the question. So just looking at the kind of the staging of gross margin as we move forward, so 3Q kind of landed within the range. But as you look forward, with some of the delays we’re seeing in Mohawk Valley, and as I mentioned earlier, we’re just going to run some more of the higher volume automotive customers through Durham to try and support those ramps. We always kind of thought that kind of the ’23, ’24-time frame, we would see some of these automotive ramps start to come online, and that’s exactly kind of what we’re seeing. So, we’ve really got to support our customers through this period as we start to get the fab ramped up. But what that’s going to do is that’s going to flatten out margin for the next couple of quarters until we start to see Mohawk Valley start to ramp up.
So, you kind of think of margin as kind of flattish for the next couple of quarters. And then as Mohawk Valley starts to see utilization improvement, we’ll start to reap the benefits of the margin, the cost structure that you get out of Mohawk Valley as you start to get closer to that 20% utilization mark. So, I’ve said it before, kind of all roads point to Mohawk Valley, both for revenue and margin. I think that’s exactly the case here.
Brian Lee: Okay. I guess, then just any thoughts on your bigger picture fiscal ’26 and ’27, given the change to the viewpoint for ’24? And I guess, when do you — maybe just to cut to the chase, just when do you think you can get back to some of your prior gross margin targets? I think you had been talking about like 45% in ’24. Is there a chance we see the 40% margin level at all in fiscal ’24 at the end of the year, exiting the year?
Neill Reynolds: So, as you look at — as it gets to the back half of ’24, you can think of some of those targets pushing out. Think about 25% — as you start to turn the corner on some of those things, you get north of 20% utilization in Mohawk Valley. But we’re not going to do is get like a full guidance update as you think about the long-term model. And the reason for that is, as you get through ’24, we start seeing Mohawk Valley start to get to a trajectory where we get supply coming from Siler City for 200-millimeter to feed Mohawk Valley. There’s a pretty good likelihood we will be able to accelerate out beyond that time frame. So, I wouldn’t necessarily take the ’24 kind of numbers being somewhat lower than we talked about previously as a reflection on the total plan.
I think just a different trajectory, particularly as you get outside of ’24, you start seeing some of the Siler City materials come on, you start seeing Mohawk Valley out in that ’25, ’26-time frame, really be fed and start to see some of the utilization rates pick up. So, I think we’ll start to see an acceleration outside of ’24. I don’t see that inside of ’24.
Brian Lee: Okay. Excellent. I’ll take the rest off-line.
Neill Reynolds: Thank you.
Operator: Next question comes from Gary Mobley of Wells Fargo. You may proceed.
Gary Mobley: Hi, guys. Thanks for taking my question. I wanted to revisit something Greg addressed earlier, and that is the revision to fiscal year ’24 revenue. So back in October on Halloween at your Analyst Day, I think the projection was $1.6 billion in revenue in fiscal year ’24, and we’ve walked that down, I think, for the past few quarters. And at that October Analyst Day, I don’t think there was really anticipation of having much contribution from Siler City to support that fiscal year ’24 revenue. So, I’m just curious where we’ve seen that 35% reduction in revenue forecast. Is it all just because you’re having a hard time ramping specifically in Durham 200-millimeter and now it’s a pure contingent on Siler City?
Neill Reynolds: Thanks, Gary. And I think it’s not so much about Siler City, it’s about the timing of the ramp of what we call Building 10. This is where — on our Durham campus. So, bringing up 200-millimeter on the Durham campus back in October was supporting the plan we talked about then. So, this is really about the timing of bringing that facility up. So, I think it’s really two things. One is the kind of delay some of the items Gregg talked about earlier around facilities bring up. But the second piece is, I think, really about bringing up a more methodical pace. So, you got — I think you got a little bit of a delay and then I think the curve will take on bringing that up will be very methodical with. Obviously, we’ve seen the challenges in bringing up silicon carbide capacity.
As we’ve talked about many times, it’s difficult material to work with, and we’ll bring it on in a way that we think is in a thoughtful, methodical way to ensure that we bring up that capacity in a reasonable manner.
Gary Mobley: Okay. And my follow-up, I wanted to ask about your design-in conversion rate, Greg, I think you mentioned $18 billion of cumulative design-ins, $1.7 billion for the quarter. Does this slower-than-expected ramp in 200-millimeter substrates and related to that, Mohawk Valley, does that reduce the outlook for the conversion rate on these design-ins? And maybe if you can just give us a general sense of how that conversion rate has been trending?
Gregg Lowe: Well, the conversion rate is actually — we’ve been very, very positive. So, over the first three quarters of this year, we’ve actually converted $1.7 billion of design-ins to design wins. So that conversion rate is actually quite good. And so, I don’t think it slows that down at all. In fact, the conversion rate that we’ve seen over the last couple of years has been substantially stronger than we anticipated or I’ve seen before. And I think it’s a reflection of the demand for the product from a customer’s perspective, the demand is pulling in and steepening. From an electric vehicle perspective, there was an article out a couple of weeks ago that suggests that by 2032, greater than 60% — and I think they actually said 62% of vehicles in the United States would be electric.
And that’s substantially faster than anyone anticipated. You heard us getting designed into heat pumps and to other applications. We actually had a record quarter this year on design ends for nonautomotive with nearly $700 million of design-ins just for automotive. So, I think the design-in rate continues to be very, very strong. In fact, our design-ins for first three quarters of this year are greater than all of last year, and all of last fiscal year was a fiscal record and the design-in conversion is happening faster. That obviously puts a lot of stress on customers looking for more product. And universally, they point to Mohawk Valley. They see a light at the end of the tunnel. They see us running wafers in there right now. They saw that we shipped product out of that facility to a customer.
We’re going to have a couple of million dollars’ worth of revenue out of that facility right now. So, while they like more product sooner, they also note that we’ve invested several billion dollars in the world’s largest silicon carbide fab. So, there’s sort of the proverbial light under the tunnel.
Gary Mobley: Thanks, guys.
Operator: We now have Matt Ramsay of TD Cowen.
Matt Ramsay: Gregg, I wanted to kind of backtrack the clock 6 months or so, you guys had the Analyst Day back at Halloween and revised some of the fiscal ’24 targets and added the fiscal ’27 model at that point. And I guess I’m trying to understand some of the variables around 200-millimeter output to feed Mohawk Valley that were considered then, and I think the bull heightening issue on 150 was already sort of known publicly at that point, and I would imagine you guys had risk-adjusted the 200-millimeter ramp for that. So maybe you could just walk us through, I guess, the chain of events since then that’s now allowing Durham on 200-millimeter to ramp more slowly on materials and just what those variables were over the last 6 months and the model was adjusted the last time. Thanks.
Gregg Lowe: Thank you. it’s very straightforward. Number one is some supply chain issues that we had with infrastructure-type things for the expansion of Building 10. And again, this is switchgear, basic electrical infrastructure, where lead times on the product and capability to get it all in and get it all turned on was just longer than we had anticipated. And in fact, it’s lengthened during the time that we were actually in between the October time frame and the beginning part of the year. So, it was just — that’s pretty straightforward. The amount of time it took us to actually get those infrastructure pieces of equipment in and turned on and give certificate of occupancy was longer than we anticipated. And then the second thing is that we’ve made a decision to be more methodical and ramp the product in a more methodical way as opposed to just going from sort of 0 to 60 real, real quick, taking it a step at a time.
This is a very, very tricky technology. We have great output in terms of quality from the crystal growers right now. We have quite a few crystal growers now turned on in that Building 10 facility. The quality of the crystals, it’s really good. The yield that we’re getting is really good. The taller bull challenge that you had referenced on 150-millimeter was actually, in some respects, good to have that problem on 150 because we’ve already kind of designed around that for 200, and the team is already working and has already essentially solved that problem at 200. And so, it’s just — we’ve just made a decision to — that things are going really good and to try to go — to just amp it up too quickly is probably just not prudent. So, it’s a combination of those two things that are driving that.
Matt Ramsay: Got it. I guess as my follow-up question, it sounds like with the 200-millimeter limitations on how quickly Mohawk Valley will ramp, and you guys have been very clear for a while that the Durham device fab was sort of tapped out in terms of capacity, but it sounds like now prioritizing some of the automotive customers that were going to be served out of Mohawk Valley and pulling some of those devices back to 150 and serving them out of Durham, I guess my question is, if that facility was going to be full before on devices, what happens to the customers that were depending on that capacity that is now going to sort of be backfilled on the automotive side? There were — if it was going to be full the whole time, presumably, you had customers for all those devices. What’s happening there? And what’s sort of the ramifications of the non-auto business over the next couple of years from those decisions?
