Wolfspeed: Power's Gem, Will Silicon Carbide Step Down from the Throne?

WOLFSPEED(WOLF.N) released its Q2 FY2023 earnings report (ending December 2022) after Longbridge's US stock market closed on January 26, Beijing time. The highlights are as follows:

1. Core metrics: $ Wolfspeed.US realized revenue of USD 216 million in Q2 FY2023, lower than market expectations (USD 225 million). After experiencing growth of over 50% for 2 consecutive quarters, the company's revenue growth rate dropped to 24.8% this quarter; the quarter-on-quarter growth was mainly driven by power devices, while there was pressure on RF products. The company's gross profit margin was only 31% this quarter, lower than market expectations (34.9%), mainly due to increased manufacturing-related expenses under the influence of production and sales slowdown and inflation.

2. Operating expenses: In Q2 FY2023, Wolfspeed's operating expenses reached USD 113 million, a YoY increase of 14.8%, lower than the revenue growth. Looking at specific operating expenses, the proportion of sales, general, and administrative expenses decreased, indicating that the company still had behavior to control expenses, while R&D expenses still maintained a high proportion of 25.8%.

3. Net profit: Wolfspeed's net loss (GAAP) in Q2 FY2023 was USD 91 million, and the loss continued to expand. The main reason for the continued expansion of the company's loss this quarter was that the gross profit margin had a significant decline, and the expenditure also increased at the same time.

4. Guidance for next quarter: Wolfspeed's revenue guidance for Q3 FY2023 is USD 210-230 million, lower than the previous market expectation (USD 252 million). The company's net loss (GAAP) target is USD 81-88 million, also lower than the market expectation (a net loss of 53 million).

Overall, Wolfspeed's Q2 FY2023 earnings report did not meet market expectations. Although the company's final revenue and profits this quarter are within the company's guidance range, they are both near the lower limit. This earnings report has begun to reflect some issues, as revenue growth began to slow down in the company this quarter, while cost growth has also been affected. The company is also focusing on controlling expenses.

Although the company's performance this quarter did not meet expectations, it barely completed the guidance given by the company. And the next quarter guidance that the market is most concerned about is also bleak. The revenue and profit guidance for the company in the next quarter has not shown any signs of warming up and is lower than market expectations. This also makes the previous explanation of "only production and supply problems" begin to become untenable, and there may be signs of demand weakness.

"After power comes down," after separating from the LED business, Wolfspeed has become a pure silicon carbide company. As the downstream is currently mainly used for power device fields, the company benefits greatly as the upstream leader in power devices in the wave of the rise of new energy vehicles. But with the slowdown in the growth of the new energy vehicle sector, the market's expectations have been lowered, and the company's mid-to-long-term growth expectations have also been lowered.

Wolfspeed is still an absolute leader in the field of silicon carbide. Dolphin Analyst maintains the view: "For high-growth stocks like Wolfspeed, the high valuation of the company comes mainly from the market's expectations for the company's future, as the company is not yet profitable. And whenever there is a movement in the market, it will also bring significant fluctuations to the company's stock price. Dolphin Analyst believes that if the shortage only affects spare parts for old equipment, the impact will only be in the short term of 1-2 quarters. As long as downstream demand remains tight, the company and the track still have a long-term belief. As for the timing of buying, Dolphin Analyst believes that when there are signs of the company's performance returning to the right track or the stock price is far below the target range.."

The decline in US bond yields has pushed up the stock prices of high-growth tech stocks. If the industry shows signs of fatigue, there may be pressure on the rebound. However, if the industry shows signs of recovery or maintains high growth, it will be subject to "double impetus".

On the specific financial report performance, Dolphin Analyst analyzed the following aspects in detail:

1. Will Wolfspeed's revenue be affected as downstream demand in the new energy sector begins to show signs of weakness?

2. The company had previously given a 50% long-term gross margin guidance, can the gross margin for this quarter be increased?

3. With the new energy sector beginning to show signs of weakness, whether Wolfspeed also has measures to reduce costs and control expenses, and whether the company's losses this quarter can be narrowed?

4. What is Wolfspeed's outlook for the operating side of next quarter?

Dolphin Analyst came to the financial report seeking answers to these questions:

I. Revenue end: significant slowdown in growth, demand showing signs of weakness

Wolfspeed achieved revenue of USD 216 million in the second quarter of fiscal year 2023, a year-on-year growth of 24.8%, lower than the market's expected USD 225 million.

Combining the company's previous quarter's financial report communication, although the company barely met its revenue target of USD 215-235 million this quarter, the company's revenue growth rate fell to 24.8% this quarter. The company's growth is mainly due to the growth in the new energy sector, while there is some pressure on RF demand in the 5G sector.

This quarter's revenue end still meets expectations, and the market is more concerned about the company's situation next quarter. The company's guidance for revenue next quarter is USD 210-230 million, and the year-on-year growth rate continues to fall to about 20%. On a quarter-on-quarter basis, it is basically the same as this quarter, but the company's mid-to-long-term demand expectations have been weakened.

Section 2: Gross profit: Dragged down by unexpected gross profit margins

Wolfspeed achieved a gross profit of $67 million in Q2 of fiscal year 2023, an increase of 17.4% YoY. The growth in gross profit mainly came from the increase in revenue.

However, the company's gross profit margin this quarter fell to 31%, a YoY decrease of 1.9 percentage points, but slightly lower than market expectations (34.9%). With the expansion of production capacity, the company's gross profit margin is showing an overall upward trend. But due to the increase in manufacturing-related expenses (affected by inflation, among other factors) and a slowing trend in production and sales, the gross profit margin this quarter was lower than market expectations.

Section 3: Operating expenses: Moderate increase in expenses, R&D spending still high

Wolfspeed's operating expenses in Q2 2023 were $113 million, a YoY increase of 14.8%. As the company is still in the early stage of high growth in the industry, its operating expenses (especially on the R&D side) have already exceeded 50%. After disposing of assets, Wolfspeed's operating expenses rate fell back below 50%. The previously 60% operating expenses rate was due to the sudden impact of asset disposal, and now Wolfspeed's operating expenses rate will maintain a reasonable level of around 50%.

1) R&D expenses: This quarter's expenditure was $57 million, a YoY increase of 13.5%. After disposing of assets such as LEDs, the company's increased investment in R&D mainly focused on SiC. Dolphin Analyst expects the company to continue to attach importance to R&D investment, with R&D expenses accounting for more than 20% of total expenses.

2) Sales, general, and administrative expenses: This quarter's expenditure was $56 million, a YoY increase of 16%. The company controlled this expense to a certain extent this quarter, and the QoQ growth was not significant.

Despite the anticipated impact of a recession, the company has already begun to control costs this quarter but has not relaxed its investment in R&D. Dolphin Analyst expects the company to continue to control sales and administrative expenses, while R&D expenses will continue to grow.

Section 4: Net Profit: Loss continues to widen

Wolfspeed's GAAP net loss for Q2 of fiscal year 2023 was $91 million, a further widening of losses.

In fact, Wolfspeed's profit was only realized in the middle of 22, mainly because of nearly $100 million in non-recurring changes at that time. After excluding it, the company has always been in a loss position. However, from an operational perspective, the company's performance this quarter was still acceptable, and the reason for the continued widening of losses was mainly due to the decrease in gross profit margin and the slight increase in expenses. From this quarter's report alone, Wolfspeed's revenue and profit are both below market expectations. However, what the market is most concerned about is the next quarter. Wolfspeed's guidance for the next quarter indicates a loss of $81-88 million, with a loss margin of over $80 million. Dolphin Analyst believes that the risk of losses in the next quarter remains significant, partly because the company's revenue has not shown obvious signs of recovery, and partly because the company's expenses remain high, which also affects the release of profits.

Dolphin Analyst's research on WOLFSPEED and the SiC industry:

October 27, 2022, Financial Report Review: "Wolfspeed: Is Short-Term Performance the Next Sacrifice for Long-Term SiC Belief?"

September 23, 2022, Company In-Depth: "Wolfspeed: Hard Currency in the SiC Industry, with High Prices as the "Original Sin""

September 15, 2022, Company In-Depth: "Wolfspeed: The Secret "Hard Currency" Set Afire by Tesla"

June 14, 2022: "Jumping on the Safety Pad to Create a New Era of Electrical Engineering with IGBT?"

May 16, 2022: "Powering the Future of Electric Transportation: Riding with IGBT or Other Options?"

March 7, 2022: "Behind the Fast-evolving New Energy Era, the SiC Race - Who Will Be the Next King?"

January 18, 2022: "Powering Solar and New Energy Alongside IGBT - What Makes It So Attractive?"

January 6, 2022: "Riding the Fast Train of New Energy with IGBT, Fueling Automotive Semiconductor Hard Core Race?" Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure