WOLF - Wolfspeed: DHL Shipping Is Still A Lot Cheaper Than A $2B Fab Close To A German Customer

2023-06-28 14:05:34 ET

Summary

• Wolfspeed is a year behind schedule in getting their current fab into production.
• The company has high debt, with a debt-to-equity ratio of 1.77, and is adding more debt to build new fabs.
• Wolfspeed has not been profitable in any of the last seven quarters.
• Wolfspeed is building a new fab in Germany when they can drop-ship wafers to the customer from existing wafer production facilities in the U.S.

Wolfspeed's Expansions

On March 2, 2023, I wrote a Marketplace Semiconductor Deep Dive article entitled " Wolfspeed: DHL Shipping Is A Lot Cheaper Than A $2B Fab Close To A German Customer ." The reasoning for the title was an announcement from Wolfspeed (WOLF) announcing on February 1, 2023 it plans to build a highly sophisticated wafer fabrication facility in Saarland, Germany. Wolfspeed and ZF announced a strategic partnership that includes the creation of a joint innovation lab to drive advances SiC systems and devices for mobility, industrial and energy applications.

The European fab is part of Wolfspeed's broader $6.5 billion capacity expansion effort.

Now WOLF wants to build another fab in Germany at a time when its fab in Mohawk Valley, NY is one year behind schedule and a second fab for SiC wafers is being constructed in Silar, North Carolina.

This partnership includes the creation of a joint innovation lab and also includes a significant investment by ZF to support the planned construction of the world's most advanced and largest 200mm SiC device fab in Ensdorf, Germany.

This strategy is not being thought out correctly, in my opinion. The facilities in the U.S. already have a supply-chain infrastructure - North Carolina for wafers and devices, New York for devices. WOLF would still need to ship wafers to Germany for the devices to be built, why not make the devices in the U.S. and drop ship them to the company in Germany by DHL?

Wolfspeed's Current Fab Problems

Wolfspeed wants to build another fab when it's having significant delays with its current fab construction. In the earnings call , CFO Neill Reynolds noted:

"We recognized our initial revenue from our Mohawk Valley fab in the third quarter and continue to expect low single-digit millions of revenue in the fourth quarter with a greater ramp in fiscal 2024."

As a point of reference, I alerted readers in my September 21, 2022, Seeking Alpha article entitled " Wolfspeed: Separating Automotive SiC Hype From Reality :"

"According to my sources, WOLF's Mohawk Valley plant opened in April 2022 with production scheduled for July, but that has been postponed to the end of 2022 or early 2023. If true, it will set back WOLF's schedule by almost one year at a time when Infineon and ST Microelectronics are shipping products to EV customers."

The Mohawk fab was supposed to start production in July 2022 and I alerted readers to a delay until early 2023.

CFO Reynolds further added during the earnings call:

"As we look forward to the fourth quarter of fiscal 2023 and beyond, we recognize that, especially recently, there has been variability in our financial performance compared to our forecasted growth trajectory. While predominantly related to the challenges of the timing of the ramp of Mohawk Valley and our 200-millimeter materials production."

Fabs Are Expensive And Will Increase Debt

For fiscal 2023, WOLF targets approximately $775 million of net capital investment, which is primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities. Its target net capital investment figure is net of approximately $150 million of expected reimbursements from the State of New York.

This is a result of:

• Expansion of its Marcy, NY facility, where WOLF expects to invest approximately $2.0 billion in construction, equipment and other related costs for the new facility through fiscal 2024, of which approximately $500 million is expected to be reimbursed over time by the State of New York.

• WOLF's intention to build a new materials manufacturing facility in Siler City, North Carolina. Starting in late fiscal 2023 and through fiscal 2024, the company expects to invest approximately $1.3 billion in construction, equipment and other related costs for the new facility, net of estimated refundable federal investment tax credits and capital grants we expect to receive through the U.S. CHIPS and Science Act of 2022.

Wolfspeed's Debt And Liabilities

As of March 2023 according to the company's recent 10-Q , Wolfspeed had $3,023.3 million of debt, a big increase from $1.01 billion one year earlier. However, it has $2,248.2 million in cash, leading to net debt of about $775.1 million.

Wolfspeed had total current liabilities of $607.2 million due within a year, and long-term liabilities of $3,140.7 million. Offsetting this its $2,248.2 million in cash and $164.0 million in receivables that were due within 12 months. So its liabilities total $1,335.7 million more than the combination of its cash and short-term receivables.

Taking on More Debt

With a liability of $1,335.7 million and $775 million in fiscal 2023 capital investments, debt can grow to $2,111 at the end of 2023. With Wolfspeed's assets of $5,454.7 million, the company has been able to raise capital to shore up its balance sheet.

On June 26, 2023, Wolfspeed announced a $1.25 billion secured note financing from an investment group led by Apollo ( APO ), with an accordion feature for up to an additional $750 million. The debt financing comes at a cost - 9.875% notes that will mature in 2030 and are optionally prepayable by the company.

Profitability Will Decide If Wolfspeed Can Strengthen Its Balance Sheet

Despite the top line growth, Wolfspeed still had an earnings before interest and tax (EBIT) loss over the last year.

Chart 1 shows revenue for WOLF on a quarterly basis from FQ1 2022 (ending September 2021) through FQ3 2022 (ending March 2023) after total divestiture of its lighting and LED businesses.

Chart 1

In Chart 2, however, non-GAAP EPS on a quarterly basis showing that for the entire period, Non-GAAP EPS has been negative and getting worse with recent fiscal Q3 at -$0.13.

Chart 2

Also, at the last earnings call WOLF reported that free cash flow during the quarter was negative $245 million, comprised of negative $11 million of operating cash flow and $234 million of net capital expenditures. Yet anticipated net CapEx for fiscal 2023 is expected to be approximately $775 million.

CFO Reynolds further added:

"In terms of our capital needs, we continue to evaluate multiple avenues of additional funding, including upfront customer payments or investments, debt instruments, and government funding in the United States and Europe. While we cannot comment on the timing or certainty of any government funding, we believe we have made great progress in this regard.

In addition, we believe we need to secure approximately $1 billion of additional nongovernment financing between now and the end of the calendar year to support an approximate $2 billion of CapEx in fiscal 2024."

Investor Takeaway

Semiconductor content in automobiles is increasing at a CAGR (compound annual growth rate) of 9.6% between 2015 and 2025, as shown in Chart 3, according to The Information Network report entitled " Hot ICs: A Market Analysis of Artificial Intelligence ((AI)), 5G, Automotive, and Memory Chips ."

Chart 3

SiC has established itself as a technology over the last three to five years. It now dominates silicon-based power semiconductors in EVs, according to The Information Network's report entitled Power Semiconductors: Markets, Materials and Technologies . This strong growth has resulted in a transformation of the market, as silicon power suppliers move to SiC, and as startups enter the SiC power market.

There are 47 companies making Power Semiconductor companies, and the majority of companies make SiC chips, as shown in Table 1. Also detailed in the report are 13 companies making SiC wafers, some of which like WOLF make wafers and ICs.

Just in the past two months, there were four agreements among chip manufacturers to collaborate on SiC manufacturing:

• On May 3, 2023, Infineon (IFNNY) is diversifying its silicon carbide supplier base and has signed a long-term agreement with Chinese SiC supplier TanKeBlue to secure additional competitive SiC sources. TanKeBlue will supply the Germany-based semiconductor manufacturer with competitive and high-quality 150-millimeter SiC wafers and boules for the manufacturing of SiC semiconductors, covering a double-digit share of the forecasted demand in the long term.

• On May 9, 2023, Infineon signed an agreement with Chinese silicon carbide supplier SICC to diversify Infineon's SiC material supplier base and to secure additional competitive SiC sources. SICC will supply Infineon with competitive and high-quality 150-millimeter wafers and boules for the manufacturing of SiC semiconductors,

• On June 2, 2023, Coherent (COHR), signed an agreement with Mitsubishi Electric to collaborate on a program to scale manufacturing of silicon carbide power electronics.

• On June 7, STMicroelectronics (STM) and China's Sanan Optoelectronics announced they will form a joint venture in Chongqing, a tech collaboration that promises to boost China's EV industry.

Chart 4, shows WOLF's debt to equity ratio of 1.771 through the last quarter, which has increased 4.4X in the past year.

Chart 4

Chart 5 shows that Wolfspeed's share price has been below its 200-day moving average for the better part of the last year, typically a bearish signal.

Chart 5

Taking a page from the book of AMD's (AMD) founder and CEO Jerry Sanders who said "Real Men Have Fabs," Wolfspeed wants to continue its expansionary plan of building SiC plants (chips and wafers) using governmental subsidies to help mitigate costs. I have no problem with that except:

1. Wolfspeed is a year late in getting their current fab into production
2. Wolfspeed has high debt and is adding more debt to build the fabs
3. Wolfspeed has not had a profitable quarter in its last seven
4. Wolfspeed is building a new fab in Germany when they can drop ship wafers to the customer from existing wafer production facilities in the U.S.

I reiterate my Strong Sell on Wolfspend, err Wolfspeed.

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