Industry Dynamics and Trends

The company’s potential for growth depends significantly on the continued adoption of silicon carbide materials and device products in the power markets. Demand fluctuates based on various economic and market cycles, evolving industry supply chains, trade and tariff terms, and competitive dynamics. The company has been experiencing softening demand recently, though it continues to see increased mid- and long-term demand for power products designed for electric vehicle applications.

Competition in the industries the company serves is intense, with many companies making significant investments in product development and production. To remain competitive, the company has invested in new production facilities, research and development, and systems to improve customer experience. The company’s growth also depends on a stable trade, political, and regulatory environment, as changes in trade policy could impact demand. Technological innovation and advancements continue to expand the potential commercial applications for the company’s products, though new technologies could also reduce demand.

Overview of the Six Months Ended December 29, 2024

The company’s year-over-year revenue decreased by $30.6 million to $375.2 million. Gross margin decreased to -19.6% from 12.9%, with gross profit decreasing to -$73.4 million from $52.5 million. This was impacted by underutilization costs related to the start of production at the Mohawk Valley Fab and restructuring and closure-related costs associated with the Durham Fab.

Operating loss was $553.1 million compared to $193.0 million, and diluted loss per share was $5.12 compared to $1.99. Combined cash, cash equivalents, and short-term investments decreased to $1,404.8 million from $2,174.6 million, and long-term debt, net increased to $6,423.8 million from $6,161.1 million. Cash used in operating activities was $327.1 million compared to $295.6 million, and purchases of property and equipment, net were $796.8 million compared to $972.8 million.

Design-ins were $3.0 billion compared to $4.3 billion, and design-wins were $2.1 billion compared to $4.4 billion.

Business Outlook

The company is committed to investing in its business and increasing production capacity, as indicated by the Mohawk Valley Fab and expansions of its materials factories. It is focused on investing to expand the scale of production, further develop technologies, and accelerate growth opportunities of silicon carbide materials, devices, and modules.

The company is also focused on improving yields as manufacturing processes become more complex, and it expects to continue improving yield levels to support future growth. During the first quarter of fiscal 2025, the company initiated a headcount reduction and facility consolidation plan to further optimize its cost structure as it transitions from 150mm to 200mm silicon carbide devices.

The company believes it has the ability to navigate the current environment while maintaining its capital expenditure plans to support future growth. For fiscal 2025, it has targeted approximately $1.1 billion to $1.3 billion of net capital investment.

Design-ins and Design-wins

Design-ins are customer commitments to purchase the company’s products and are used to forecast long-term demand and future revenue. Design-wins reflect each project’s entire commitment when a customer issues a purchase order for at least 20% of the expected first year revenue. Design-ins and design-wins should not be taken as absolute indicators of future revenue, as they do not always convert to future revenue for various reasons.

Results of Operations

Revenue for the three and six months ended December 29, 2024 decreased compared to the same periods in the prior year, primarily due to softening demand in industrial and energy applications, partially offset by growth in automotive applications. The decrease in materials products revenue was driven by weakening demand across end markets.

Gross profit and gross margin were impacted by a less favorable product mix resulting from the softening of demand, with production capacity shifting from industrial and energy products to automotive products, which have a higher production cost. Gross profit also included costs related to the 2025 Restructuring Plan and underutilization costs from the start of production at the Mohawk Valley Fab.

Research and development expenses increased for the six-month period due to increases in product material costs, partially offset by a decrease in salary and benefits costs related to the reduction in headcount. Sales, general, and administrative expenses decreased for the three and six-month periods due to reduced headcount and cost optimization.

Factory start-up costs increased for the three and six-month periods due to increased costs incurred in connection with the construction of the materials manufacturing facility in Siler City, North Carolina. Loss on disposal or impairment of long-lived assets primarily related to write-offs of fixed assets and impaired or abandoned patents, largely due to the 2025 Restructuring Plan.

Other operating expense increased significantly, primarily due to restructuring and other closure-related costs associated with the 2025 Restructuring Plan.

Non-operating expense, net increased, primarily due to higher interest expense, net of capitalized interest, partially offset by lower interest income and a decrease in the loss on the Wafer Supply Agreement.

Liquidity and Capital Resources

The company requires cash to fund its operating expenses, debt service, working capital, and capital expenditures. Its principal sources of liquidity are cash on hand and marketable securities. The company believes its current working capital will be adequate to meet its cash needs for at least the next 12 months.

The company has obtained additional funding of $250 million through the issuance of additional senior secured notes due 2030 and has the ability to issue an additional $500 million under the same indenture, subject to certain conditions. It is also actively evaluating options to refinance its outstanding 1.75% convertible senior notes due 2026, including through the near-term issuance of equity-linked securities and/or other financing options.

The company’s capital expenditures are primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities, including the completion of the manufacturing facility in Siler City, North Carolina and the expansion of the Mohawk Valley Fab. For fiscal 2025, the company has targeted approximately $1.1 billion to $1.3 billion of net capital investment.

The company believes it will be able to fund its daily operating expenses, debt service, working capital, and capital requirements for at least the next 12 months, but expects to need additional funding to complete its previously announced expansion initiatives. It plans to pursue additional funding through the CHIPS Act, equity offerings, and debt financings.

Conclusion

The company is facing a challenging industry environment with softening demand in some of its key markets, leading to decreased revenue and profitability. However, it remains committed to investing in its business to expand production capacity and develop its silicon carbide technology, which it believes will support long-term growth opportunities, particularly in the electric vehicle market.

The company’s liquidity position remains strong, with significant cash and access to additional financing. However, it will need to carefully manage its capital expenditures and explore various funding options to complete its planned capacity expansions. Successful execution of its strategic initiatives and ability to navigate the current market conditions will be critical for the company to return to profitability and deliver shareholder value over time.