Navitas Semiconductor Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 14, 2023

There are 13 speakers on the call.

Operator

Good day, and thank you for joining Navitas Semiconductor Second Quarter 2023 Earnings Call. I'd like to turn the call over to Steven Oliver. You may begin, sir.

Speaker 1

Good afternoon, everyone. I'm Steven Oliver, Vice President of Corporate Marketing and Investor Relations. Thank you for joining Navitas Semiconductor's Q2 2023 results conference call. You. I'm joined today by Gene Sheridan, our Chairman, President, CEO and Co Founder and Ron Shelton, our CFO and Treasurer.

Speaker 1

A replay of this webcast will be available on our website approximately 1 hour following this conference call And the recorded webcast will be available for approximately 30 days following the call. Additional information related to our business is also posted on the Investor Relations section of our website. Our earnings release includes non GAAP financial measures. Reconciliations of these non GAAP financial measures with the most directly comparable GAAP measures are included in our 2nd quarter earnings release you and also posted on our website in the Investor Relations section. In this conference call, we will make forward looking statements about future events Haire about the future financial performance of Navitas, including acquisitions.

Speaker 1

You can identify these statements by words like we expect or we believe We wish to caution you that such forward looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from expectations expressed in our forward looking statements. Important factors that can affect Navitas business, including factors that could cause actual results to differ from our forward looking statements are described in our earnings release. Please also refer to the Risk Factors sections in our most recent 10 ks and 10 Qs. Our estimates or other forward looking statements may change and Navitas assumes no obligation to update forward looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. And now over to Gene Chardan, CEO.

Speaker 2

Thanks a lot, Steve. In We saw continued growth in revenues and margins along with significant customer pipeline progress across all market segments. Q2 revenue increased to $18,100,000 up 110% from the Q2 of 2022 and up 35% sequentially from the Q1 of 2023 with gross margins climbing to 41.5%, up from 41.1% in Q1. Despite continued global softness in the broader consumer market and also some slowdown in the growth of the solar market given a rise in interest rates, I am very pleased that we are delivering this robust growth across all markets and in particular a nice rebound in the mobile market With solid shipments in Q2 and continued momentum into Q3, we are excited to announce that as of today, we have shipped a cumulative 100,000,000 GaN devices and over 12,000,000 silicon carbide devices. In our electric vehicle business, we are seeing strong growth, particularly in both onboard chargers and roadside fast chargers.

Speaker 2

Recently, a consortium of 7 global car manufacturers, including GM, BMW and Stellantis announced plans to install 30,000 fast chargers across North America. This translates to an additional opportunity of up to $100,000,000 for our silicon carbide business in the next few years. As a reminder, our silicon carbide technology is already used in over 50% of non Tesla roadside chargers in the U. S. Overall, the opportunity in EV roadside chargers has a market potential of over $600,000,000 per year by 2028.

Speaker 2

Based on recent developments in the generative AI market, power demand have been doubling every 3.4 months an AI and edge computing with the latest chips such as NVIDIA's GH200 consuming up to 1,000 watts just for a single GPU. When considering data centers may utilize many thousands of processors, this translates into a significant opportunity for our GaN Power ICs as silicon based designs struggle to meet these dramatic increases in the required power, efficiency and density. We recently announced a 3.2 kilowatt server power supply platform, which delivers an industry leading 100 watts per cubic inch with over 96% energy efficiency to meet the challenging titanium plus efficiency standard as required by the European Union. This platform is enabling customers to rapidly develop these power supplies with our GaNICs and has already translated into a doubling of our customer data center pipeline as compared to Q1. In the Appliance and Industrial segment, we are also seeing a doubling of our customer projects in our pipeline based on the growing need for high efficiency electrified motor drive applications across home appliances, which includes dishwashers, dryers, refrigerators, washing machines, air conditioners, heat pumps along with hair care products and also includes industrial In solar, despite some market softness, we are experiencing a rapid increase in both the GaN and silicon carbide planned adoption into the solar inverters themselves

Speaker 3

as well

Speaker 2

as a dramatic increase in the energy storage attach rates, which have more than doubled in recent years. 1 installer is reporting over 60% attach adding battery backup to the solar panel installations for residential California customers and we anticipate such attach rates will approach 90% in coming years. Given these favorable dynamics, the revenue potential for each customer project has increased over 100% in our pipeline for the Solar and Energy Storage segment. In the mobile market, despite the broader global consumer softness, we are experiencing significant growth, Samsung and a number of others are expanding GaN adoption from performance models to mainstream models, translating into a significant increase in both the number of a total customer pipeline increase from $760,000,000 in Q1 to over $1,000,000,000 in Q2 With important growth in both customer projects and revenue potential across all of our target markets. I'm also very pleased with our progress in expanding manufacturing capacity for both Gallium Nitride and Silicon Carbide to ensure we can fully capitalize on this fast growth of our customer pipeline.

Speaker 2

As previously announced, we are in the midst of ramping our silicon carbide capacity by 5x throughout this year and next as we continue to ship all the silicon carbide devices we can produce. In addition, we're on track with our announced $20,000,000 investment for silicon carbide in house EPI, which will start with the first EPI reactor installed in Q1 of next year. In aggregate, over the next 3 years, this investment is expected to EPI capacity of $200,000,000 per year in revenue and it will provide appreciable cost reduction and margin expansion. Last year working closely with our GaN fab partner TSMC, we are benefiting from a 3x increase in capacity that ensures we have plenty of headroom to support our Objectives in the next 2 to 3 years. With the benefits of a $92,000,000 follow on offering in May, We continue to have a very strong balance sheet that can enable additional strategic manufacturing investments to support even higher growth rates in a highly capital efficient manner.

Speaker 2

You. Today, we are also pleased to announce the 1st Navitas Investor Day to be held at our new global headquarters in Torrance, California on November 30. Investors and analysts are invited to participate in a comprehensive agenda that will include our new Electrify Experience Center that will detail the past, the present and an exciting vision for the future in the world of electrified power applications. This agenda will also include the announcement of 4 major new GaN or silicon carbide technology platforms, which we believe will transform many of our target markets. We will also provide a detailed review of our customer pipeline, showcase some exciting surprise guest speakers and provide a high level view on our 2024 outlook.

Speaker 2

In summary, I'm very pleased with our accelerating progress across financial results, customer pipeline, market adoption, technology development and manufacturing capacity expansion. We're excited about the significant opportunities in front of us, which are reflected in our results. Navitas is the only pure play next generation power semiconductor company. And with our vision and our capability to electrify our world, we believe we'll continue to be one of the fastest growing semiconductor companies in the industry. Now let me turn it over to our CFO, Ron Shelton to update on those financial results as well as our guidance.

Speaker 4

Thank you, Gene. In my comments today, I'll first take you through our Q2 results and then I'll walk you through our outlook for the Q3 and some of the market dynamics we're seeing. Revenue in the Q2 of 2023 was well above our guidance, growing 110% year over year and 35% sequentially to $18,100,000 The beat was driven primarily by strong growth in the mobile market, tempered somewhat by slower growth in the high end consumer market attributable to macroeconomic factors. Nevertheless, we had record bookings during the quarter and exited the quarter with record levels of backlog, increasing by more than 50 So we continue to see strong momentum across the business. Before adjusting expenses, I'd like to refer you to the GAAP the non GAAP reconciliations in our press release earlier today.

Speaker 4

In the rest of my commentary, I'll be referring to the non GAAP measures. Non GAAP gross margin in the 2nd quarter increased to 41.5% from 41.1% in the Q1 of 2023 and compare to 41.6 percent in the Q2 of 2022. Non GAAP gross margins in the 2nd quarter quarter of 2023, which is slightly lower than the Q1 and below our guidance as we experienced lower audit related fees and consumed fewer materials for research and development. As we've mentioned in the past, we continue to invest in our business in a disciplined manner, the results of which you have seen in the Q2. Our non GAAP SG and A expense was $7,200,000 and non GAAP R and D was $9,800,000 Putting all of this together, the non GAAP loss from operations was $9,600,000 Compared to a loss from operations of $8,900,000 in the Q2 of 2022, as we continue to invest simultaneously across new markets and focus on growth opportunities.

Speaker 4

Our weighted average basic share count for the Q2 was 165,600,000 shares. Turning to the balance It remains very strong with high levels of liquidity and continued improvements in working capital. Cash and cash equivalents As part of our successful public offering in the Q2, we issued 11,500,000 shares for net proceeds of $86,500,000 Leveraging those proceeds, we announced the first in a series of strategic manufacturing investments to increase control over our supply chain, reduce costs, expand margins and enhance our capacity to meet the needs of our growing backlog and pipeline. The first $20,000,000 investments Enables a silicon carbide epi facility at our Torrance headquarters. This facility enables epi Cassidy that can support over $200,000,000 in annual revenue while making a meaningful contribution to improved gross margins.

Speaker 4

Accounts receivable were $15,200,000 compared to $7,400,000 in the prior quarter, reflecting higher sales during the quarter, which was weighted towards the last month of the quarter. Inventory was flat at $18,900,000 End days of inventory improved nicely as we continue to drive inventory levels to more closely align with the business going forward. Over time, we believe our inventory levels will trend towards our long term target for inventory turns of better than 3 times. You. Moving on to guidance.

Speaker 4

For the Q3, we currently expect revenues of $21,000,000 plus or minus 2%. At the midpoint, this represents substantial year over year growth of approximately 105% over the $10,200,000 we recorded in the Q3 of 2022 and an expected 16% Crenshaw increase over the Q2 of 2023. Our guidance is based on an increasing supply of silicon carbide products Anh expected continued recovery in the mobile market. Throughout the year, we've indicated that our goal was to double revenue this year. Our recent performance adds to our confidence and we remain comfortable with that guidance.

Speaker 4

Gross margins for the 3rd quarter expected to be relatively flat compared to the 2nd quarter, given the upside in the mobile business, which will also translate to a moderation in our gross margin expansion in the short term. In total, our non GAAP operating expenses in the 3rd quarter We will continue investing in growth, But expenses will generally decline as a percentage of revenue as we continue to scale. For the Q3 of 2023, we expect our weighted average Basic share count to be approximately 175,000,000 shares. In closing, We're extremely pleased with the results for the quarter and our near term and long term outlook. We saw strength in the mobile market where we are the leading supplier of GaN ICs.

Speaker 4

We ended the quarter with record backlog. Our customer pipeline has grown to an unprecedented level And we ended the quarter with nearly $180,000,000 of cash and no debt. Operator, let's begin the Q and A session.

Operator

Thank you.

Speaker 5

You.

Operator

Thank you. Your first question comes from the line of Quinn Bolton from Needham and Company. Your line is open.

Speaker 6

Hey guys, congratulations on the very strong revenue growth. I hate to focus on a negative, but gross margin sounds mostly due to mix, but coming in perhaps a little bit lower than you thought previously. Can you give us just spend a minute just sort of talking about how you see the mix between mobile, consumer, data center, and some of the higher margin, silicon carbide markets as you look into second half. Ron, when do you think you might be able to get margins into the kind of mid-forty percent range, which I think was your prior target by year end of 2023. Yes.

Speaker 5

Hey, Quinn. Thanks for the question. Yes, you. Fundamentally, the business is very strong right now. And we talked about pipelines over $1,000,000,000 and backlog was up more than 50%.

Speaker 5

You. And the good news is, I think mobile market is strong. It seems to be recovering. We have a great position in it. And the other end markets in terms of pipeline revenue and backlog continue to grow.

Speaker 5

So what we've indicated in our comments Yes. Just based on mix, we see a little bit of a moderation in the growth of gross margins, but we seem to be not seem to be we are in all areas to drive margins. So when we talked earlier this year about what would drive margins, talked about transition to Gen 4, That's happening right now. We talked about diversifying end markets. If you look at our pipeline, it's not only growing, but that's happening.

Speaker 5

And those generally have higher margins. And then costs, we're driving costs. We talked about strategic manufacturing and we're putting in place. The first step is the Epi facility. So we're executing in all those areas.

Speaker 5

I think it's just a bit of a not even a pause, I think it's just a moderation in How quickly margins would grow and we'll be back on track. I would look at it and I think we look at it as maybe a couple of quarter slowdown in terms of the rate of growth in margins, but there's no fundamental shift here in terms of our margin profile.

Speaker 6

You. Hey, Ron, maybe sort of a follow-up on that question. Is the sort of gross margin sort of pause really just driven by stronger than expected growth or stronger than expected recovery in the mobile charger market, consumer appliance market, which I think you referenced on the call. Or is the gross margin pause? I guess, are you seeing any to pause or not slowdown, but maybe just the delay in the silicon carbide side of the business that's accounting for the mix?

Speaker 6

Or is the margin really affected that the mobile charger markets coming back perhaps stronger than you thought earlier in the year and that mix shift just to mobile charger is really what's behind the kind of the flattening in the Q3?

Speaker 5

Yes. It's nothing more than that, Right. So this is really a product mix issue. It says nothing about the strength in silicon carbide. Again, I think it's silicon carbide is the kind of business Where supply is catching up, but we're still having we're a little bit supply challenged and we ship everything we can make right now.

Speaker 5

So it's a bit of a mix issue. And again, I suppose I wouldn't characterize it as a pause. I mean, I think it's just a slowdown in the rate of growth in gross margins and the expansion of margins. And like I said, I think it's a couple of quarters a slowdown and or moderation, but there's nothing we're doing from an execution standpoint. I think we're doing everything to we should be doing to drive margin expansion going forward.

Speaker 6

Gavin, maybe if I could sleep in one quick one just on the data center business. You announced the 3 the new 3.2 kilowatt platform. Is that data center business now starting to ramp to production here in the second half of twenty twenty three. Are you starting to see revenues from the data center power supply market this year?

Speaker 2

Yes, we actually the revenue start in Q4. Most of that ramp is next year. We're just releasing the high power GaN ICs targeted for data centers to production Later this quarter and then the customer revenues start next quarter.

Speaker 6

Perfect. Okay. Thank you very much.

Speaker 7

Thank you. You.

Operator

Thank you. Your next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open.

Speaker 8

Hi, guys. This is Melissa Weathers on for Ross. Thanks for letting us ask the question.

Speaker 9

Could you give us

Speaker 8

a high level summary on where you believe industry inventory levels are today by end market and maybe particularly in the appliances and industrial end market. And how do you guys see that inventory situation impacting your pace of market share And some penetration of new markets in the midterm in like the medium term.

Speaker 2

Sure. Thanks Melissa. Yes, the industry levels from our view are pretty much in line with what we would expect in the channel. We don't report specific channel inventory, but we did see certainly a buildup in the mobile and consumer space last year. As reported in Q1, we saw an unexpected upside in mobile.

Speaker 2

We couldn't actually deliver, which A lot of those inventory levels being depleted and now we're shipping in part from inventory and apart from brand new builds. So I'd just highlight that particular market where we've seen a nice reduction in channel inventory, a nice pickup in demand. Budd, I think from the broader markets we see things pretty balanced and reasonable. If anything as Ron highlighted silicon carbide we're shipping everything we can build. We have pretty limited inventory both at Navitas and in the channel.

Speaker 8

Okay, great. And then kind of building off of that, for your September quarter guide. You guided to mid teens sequential revenue growth. Can you talk about what you're expecting By end market and how much of that should be driven by the mobile, kind of refill or recovery there versus your other end markets?

Speaker 2

Yes, it's pretty broad based actually. Mobile certainly the mobile growth continues into Q3 that's seasonally a pretty strong quarter. We see that Even into Q4, but we really see good stability and growth in the other markets. The one exception being data center where we're not shipping yet. But as we commented earlier, those data shipments data center shipments start in Q4 and then grow strongly throughout next year.

Speaker 8

You. Great. Thank you so much.

Speaker 2

Thank you, Melissa.

Operator

Thank you. Your next question comes from the line of Kevin Cassidy from Rosenblatt. Your line is open.

Speaker 7

Yes. Thank you. Thank you for taking my question and congratulations. Great quarter, great outlook. Well, Wondering if you could give us a little more details around the industrial and even appliance market, the white goods, if that's just starting to ramp and to what areas, what geographies are they ramping and if you can give us an idea of the average dollar content you would have?

Speaker 7

You.

Speaker 2

Yes, great questions, Kevin. Thanks for that. It's pretty broad based. I listed a number of the applications from the home appliances, washers, dryers, refrigerators, air conditioners, HVAC. We're particularly excited about fuel pumps, which are fundamentally moving from fossil fuels to more electrified electricity and clean energy semiconductors like gallium nitride, sugar, silicon carbide.

Speaker 2

As you look at the Industrial segment that tends to be more about automation, HVAC using, selling carbide technology. So very broad based across both gallium nitride and silicon carbide across lots of different applications and even regions. We've talked about it before. Europe is really the starting point for us. There's a big focus and a big strength in Europe in these segments, but we're now seeing that picking up into more customer projects In revenue opportunities across Asia and across U.

Speaker 2

S, we highlighted the fact that the number of customer projects has more than doubled just in the quarter. Most of those are ramping, some are ramping in 2024, many more are ramping in 2025. So it's not the fastest growing segment, But brings great stability and certainly a lot of growth in conversion from silicon to gallium nitrate or silicon carbide over the next couple of years.

Speaker 7

You. Okay, great. Thanks for the details. And on the Gallium Nitride Gen 4, can you say is that tracking as expected and which end markets do you think will adapt it faster?

Speaker 2

Yes. No, great question. Generation 4 is our next major platform. We launched it late last year. This year is expected to be a big transition from generation 3 to Gen 4 and that's exactly what's happening.

Speaker 2

It's actually being adopted by all of our gallium nitride markets even customers in production are switching over from Gen 3 to Gen 4 getting performance advantages cost reductions and margin enhancement for us. All of the high powered GaN chips that I mentioned that we're launching into data center, solar, EV and other markets are also launching directly into Gen 4. So we actually expect virtually all of our shipments in Gen 4 will have transitioned to Gen 4 by the end of the year or Q1 at the latest.

Speaker 7

You. Great. That sounds good. Thank you.

Speaker 2

Thank you, Kevin.

Operator

You. Thank you. Your next question comes from the line of Blake Friedman from Bank of America. Your line is open.

Speaker 3

Hi, thanks for taking my question. I just want to focus on the mobile market. You've highlighted strong traction with OEMs in Korean China. I was just hoping anything you can comment on developments or relationships with North American OEMs would be helpful.

Speaker 2

You. Yes, you bet. Thanks, Blake. We're seeing pretty broad based adoption. We highlighted the fact that this year and we predicted this for the last couple of years, this is a big year For Gallium Nitride to achieve system cost parity with silicon based power systems that's true for many of the charger markets and it's true of many of the others.

Speaker 2

In particular, what we're seeing is a transition from the high end flagship or performance based mobile charger models to more mainstream models. In particular, we highlighted China and Korea with companies like Xiaomi, Oppo and Samsung because these are a few that we can publicly talk about. That's not to say we aren't seeing similar transitions and successes in North America and around the world, but in some cases some customers are more sensitive to disclosing those public names, so we tend to shy away from them. So it is broader based than we spoke about and announced for the reasons I described. And we're also looking for A lot more details on the customer profile, the specific products, and the major product launches, at our Investor Day in late November.

Speaker 2

So more details will be coming. You.

Speaker 3

Great. Thanks for that. And then just as a quick follow-up, following the capital raise that occurred in the quarter, just curious about your thoughts on cash position?

Speaker 2

You broke up a bit. Could you repeat the last part?

Speaker 7

Capital Yes,

Speaker 3

I was just curious about thoughts on your cash position following the capital raise and thoughts about raising capital in the future.

Speaker 5

Yes. Hey, Blake, it's Ron. In a nutshell, we feel really good about the balance sheet and our cash position. I think the equity raise as we've indicated was for targeted reasons, strategic manufacturing being 1. I think going forward when you think about us and our capital needs and planning, what I would say right now is To the extent we raised capital going forward, it would be for strategic reasons.

Speaker 5

We've been active in M and A in the past Or additional strategic manufacturing, but it would be strategic and accretive. But in terms of the business and ongoing operations, we don't see a need right now to raise

Speaker 2

Scott.

Operator

You. Thank you. Your next question comes from the line of Jack Egan from Charter Equity Research. Your line is open.

Speaker 10

Hey guys, thanks for taking the questions. I had a few on silicon carbide. So recently there's been a bit of talk about falling prices for silicon carbide wafers and just more suppliers entering the market. So I was curious what are you guys seeing just in terms of wafer pricing or the broader supply landscape right now?

Speaker 2

You. Thanks, Jack. I think in general, silicon carbide supply chains are still reasonably tight. As we mentioned and highlighted, we're shipping everything we can Bill. We're in the midst of a pretty significant ramp up with XFAB.

Speaker 2

We signed a 500% increase in capacity With XFAB that includes materials, so substrates or bare wafers as you alluded to as well as the epi wafers and we're going to be adding our own in house epi wafers Shir as Ron described in the call. With all of that said, I do think it's improving. I think we're seeing pockets of improved material availability. I think that's true with the Bayer wafers or substrates as we call them, as you said. And I think we're seeing prices start to come down.

Speaker 2

I wouldn't call it very dramatic at this point. And there are new suppliers coming on board, but quality, yield, the ability to use those for higher performance MOSFETs all has to be evaluated. So I think these things take time, but I think the trends are favorable in terms of getting a more balanced demand and supply for

Speaker 10

Sure. Okay, that's helpful. And then on the device side, so your devices can be above 50% gross margin, which is a bit higher than what some of the large device manufacturers are at right now. And so how much of that is due to Navitas just being fabless and having a lower fixed cost base versus other factors like end market or product mix? You.

Speaker 2

Yes, it's hard to say. Obviously, we don't have the benefit of knowing cost structures of other suppliers. Many don't break out their detailed silicon carbide business, let alone Gross Margins and Cost Structures. I think we feel good about our cost structure. We benefit from our technology being very robust as a trench assisted planar silicon carbide technology that can mix and match with different substrates, different epi vendors.

Speaker 2

So I think that gives us more flexibility, especially as prices come down as we talked about on the substrates and maybe on the epi and using our own in house epi. So I think all of that gives us a pretty good cost structure, but actually I think the main reason we might be doing better on margins than others is because of the performance of the technology. We have the best high performance in circuit test results of anybody. We did heavy benchmark testing a year ago before we bought Genesysk. We also had the most robust Avalanche rated 100 percent Avalanche tested to the highest values in the industry.

Speaker 2

And we also offer the widest voltage range from 650 to 6,500 volts in that upper voltage range there is very, very few competitors that can technically do that and allows our customers to use fewer high voltage chips In place of multiple stacked lower voltage chips making their systems more cost effective but also giving us higher gross margin. So I think it's more about the performance and capability technology that's translating into maybe above average gross margins in the industry.

Speaker 10

Got it. That makes sense. Thanks so much.

Speaker 2

Thank you, Jack.

Operator

You. Thank you. Your next question comes from the line of Natalia Minkler from Jefferies. Your line is open.

Speaker 9

Hi. Thank you so much for taking my question. Gene, I wanted to ask about the epi, the in house Epi capabilities that you guys are going to be investing in. Could you please speak a bit more about how you view them? Is that going to be a cost the improvement and to the extent you have a time horizon that we should think about that project going forward.

Speaker 2

You. Yes, definitely. Thanks, Natalya. So it's a $20,000,000 investment over a 3 year period. The first phase is the 1st EpiRactor.

Speaker 2

It's on order to be Received late this year, early next year and we expect it to be fully operational and contributing to revenue by middle of next year. I said the first half next year. It will both give us incremental capacity that's very important as the market is still tight, but it also will give us incremental cost reduction, Which can allow us to be more aggressive on price and drive even more top line, but also put some of that cost reduction into enhanced gross margin Throughout next year, which Ron alluded to earlier, I did say 3 years, so we expect additional reactors to be involved in years 2 years 3. We'll be placing those orders as we see the demand and time it to fit that demand profile and we'll continue even once it's online to use a blend of outsourced epi as well as in sourced epi to maximize kind of the cost and capacity profile.

Speaker 9

You. Understood. Thank you. That's very helpful. And then the second question I had was on the data center.

Speaker 9

Jean, could you please explain how should we think about the GaN and silicon carbide applications In data center, it sounds like I think historically, we always thought about GaN kind of being the first to be designed into those markets, but I believe you just mentioned silicon carbide as well. So could you please speak about those the different types of program you have in that end market? You.

Speaker 2

Yes, it's a great question. Obviously, it's a very, very dynamic one with generative AI fundamentally changing the processors that will be used in the future, the power profile, the efficiency demand. So it's pretty exciting. It's also the newest because we're not shipping into it yet. But our data center is already bringing out system level design centers as we highlighted one of them, the 3 point 2 kilowatt just announced.

Speaker 2

That particular one uses all GaN ICs inside, but we do continue to do advanced system R and D work looking at the combination actually of silicon carbide compared to GaN or in combination with GaN. You. So I don't want to preannounce something, but that's one of the benefits of Navitas is the only pure play next gen power semiconductor Guy. We have the world's leading GaN, world's leading silicon carbide. In a very objective way, we can evaluate what's going to be best for the system depending upon customer priorities around efficiency, density, power delivery, cost, reliability, etcetera.

Speaker 2

So I think there is a potential for silicon carbide to be used In combination with GaN, but we definitely see data center being heavily a GaN IC market and we expect you'll see that as we announce more products and ramp that revenue

Operator

you. Thank you. Your next question comes from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Speaker 11

You. Hi, thanks for taking my question. My first one just going back to the gross margins. I was wondering, Ron, how should we think of margins exiting 23 or exiting Q1 of next year just based on the mix forecast and the adoption of next gen products. And when you look further out with the addition of the EPI equipment, is your target margin changing there?

Speaker 11

And when should we expect that to be incremental to, I guess, the margin versus if you didn't have that equipment at all.

Speaker 5

Yes, good questions. Thanks, John. So getting back to the near term, As we indicated in the comments, we talked about a short term moderation in the growth of margins. So I think that gives you some indication that we expect them to grow off Q3, just not the rate of our previous guidance, which was mid-40s. You.

Speaker 5

I think over time, again, it looks to us like a couple of quarter push out effectively from what we had previously indicated on margin growth. So we feel very good about the margin growth. We feel very good about the margin profile. It's just that in the very short term here, we had This pause or moderation in our margin growth. With respect to the epi, as Gene said, I'll just echo Gene's comments.

Speaker 5

To part of the benefit of Epi is lower cost. But again, I think we're we don't want to get that granular. I think the way to look at our margin and our margin profile Is a little bit of a pause right now, a little bit of moderation in the growth, but again, nothing's changed in our longer term thesis. And we have an Investor Day again at the end of November and I'm sure we'll touch on it. And at that point, we'll give indications of a longer term model and where you should expect to see margins go longer term.

Speaker 11

Okay, great. And then Jean, just wondering on the pipeline. Where are the areas that you're seeing the click is conversion from pipeline to orders to being able to deliver, whether it's by end market, by customer type, could you just give us a little more color on where you see the most immediate strength in that pipeline you're developing?

Speaker 2

You. Yes. I mean, if you look at the development cycles, those are pretty predictable by market. Of course, mobile consumer converts fast from an opportunity to a revenue ramp that could be 12 months or less. Data center is the 2nd quickest 18 month development cycles are common from opportunity creation to shipping and revenue.

Speaker 2

Renewables tends to be about 3 years and EV is forward trending back down to 3. So you're in that sort of Range 2 to 3 years, I should say, on Renewables. With that said, many of the opportunities in our $1,000,000,000 pipeline are well along in terms of development stage. They're obviously not all at the early stage. So we'll see them kicking in throughout this year next year.

Speaker 2

Even EV, some of those programs our late stage development programs contributing to short term growth, same thing with solar. So it's a little hard to characterize when you've got a $1,000,000,000 pipeline that's expanding so quickly across so many different markets and so many different customers. But that gives you a little bit of flavor about the rough timelines converting from pipeline early opportunity to actual shipping and revenue ramping.

Speaker 11

Great. Just if I could, another one. The increase from Q1 Q2 in the pipeline opportunity was pretty sizable. Was that mostly from existing customers changing their forecast and maybe adding some new applications? Or did you actually add a lot of new customers or applications in there?

Speaker 2

Yes, we actually added in the solar space. Let me specifically highlight. Appliance Industrial more than doubled the customer projects within that pipeline. Data centers, we more than doubled the number of customer projects within that pipeline. Solar actually saw nearly a doubling of revenue Per project, which is an interesting dynamic.

Speaker 2

While it didn't diversify as fast, we see more people looking to sort of double down or go bigger As they convert from silicon to either GaN or silicon carbide. So it varies a little bit by market, but those are a couple of facts and figures to give you a sense of the dynamic. It's certainly broadening Quite dramatically in terms of number of customer projects, while the overall revenue pipeline grew of course from 30% to over $1,000,000,000

Speaker 11

Great. Thank you so much.

Speaker 2

Thanks, John.

Operator

Thank you. You. The last question comes from the line of Shadi Midwali from Craig Hallum. Your line is open.

Speaker 2

Any question there from Craig Hallum?

Operator

Hey, can you hear me?

Speaker 2

Yes, we can. Thank you.

Speaker 12

Hey, congrats on the solid quarter. I just got a question on how far from prior highs are GaN gross margins? And do you have any visibility into them returning near those levels either through mix or cost declines?

Speaker 2

Yes. We don't break out our gross margins by Technology or in further granularity, but it's fair to say that gross margins took some hit with the TSMC price increases that we spoke about over the last 1.5 year 1st one and was 20% almost 1.5 year ago another 6% at the start of this year and we made the strategic choice to continue to drive towards system cost reduction and revenue growth. With that said, we don't anticipate further price increases. We have a lot of cost reductions coming. We highlighted a number of them pipeline that Ron went through including the in house epi on the silicon carbide side, but we're also completing a major transition from Gen 3 to Gen 4, Which is very important to driving incremental gross margins to that business, bringing it much closer to the average corporate and ultimately driving towards our long term model.

Speaker 2

So I think some of that gross margin adjustment or negative impact is certainly behind us and we see a pretty attractive path of incremental gross margin improvement on the GaN business going

Speaker 12

forward. Thanks, Bill. That was very helpful.

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Earnings Conference Call
Navitas Semiconductor Q2 2023
00:00 / 00:00