Q1 2024 Wolfspeed Inc Earnings Call

Participants

Gregg A. Lowe; President, CEO & Director; Wolfspeed, Inc.

Neill P. Reynolds; Executive VP & CFO; Wolfspeed, Inc.

Tyler D. Gronbach; VP of IR; Wolfspeed, Inc.

Brian K. Lee; VP & Senior Clean Energy Analyst; Goldman Sachs Group, Inc., Research Division

Christopher Adam Jackson Rolland; Senior Analyst; Susquehanna Financial Group, LLLP, Research Division

Colin William Rusch; MD & Senior Analyst; Oppenheimer & Co. Inc., Research Division

Edward Francis Snyder; MD; Charter Equity Research

George Gianarikas; Analyst; Canaccord Genuity Corp., Research Division

Harsh V. Kumar; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Jonathan Dorsheimer; Group Head of New Energy and Sustainability Vertical & Equity Research Analyst; William Blair & Company L.L.C., Research Division

Joseph Lima Cardoso; Analyst; JPMorgan Chase & Co, Research Division

Joshua Louis Buchalter; Director; TD Cowen, Research Division

Matthew Patrick Prisco; Associate; Evercore ISI Institutional Equities, Research Division

Natalia Sukhotina Winkler; Equity Associate; Jefferies LLC, Research Division

Vivek Arya; MD in Equity Research & Senior Semiconductor Analyst; BofA Securities, Research Division

Presentation

Operator

Hello, everyone, and welcome to the Wolfspeed First Quarter Fiscal 2024 Conference Call. My name is Nadia, and I'll be coordinating the call today. (Operator Instructions) I will now hand over to your host, Tyler Gronbach, Vice President, External Affairs to begin. Tyler, please go ahead.

Tyler D. Gronbach

Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's First Quarter Fiscal 2024 Conference Call. Today, Wolfspeed CEO, Gregg Lowe; and Wolfspeed CFO, Neill Reynolds, will report on the results for the first quarter of fiscal year 2024. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provides useful innovation to our investors.
Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as supplement to and not as substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook, and we may make other forward-looking statements during the call.
Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially.
Lastly, I would also like to note that during the quarter, we announced our intent to sell our RF business to MACOMV. The results of our RF business will now be classified as discontinuing operations, and all discussions today will be on a continuing operations basis. (Operator Instructions)
And now I'd like to turn the call over to Gregg.

Gregg A. Lowe

Thanks, Tyler, and good afternoon, everyone. It is an exciting time at Wolfspeed. With the pending sale of the RF business, we are now the world's only pure-play, vertically integrated silicon carbide company. We are uniquely positioned to drive the industry transition from silicon to silicon carbide from both a materials and a device perspective. As we continue to scale our operations, we have overcome our fair share of challenges along the way, and I remain very confident around our long-term trajectory for 3 reasons.
First, we've demonstrated the capability to consistently produce enough high-quality, high-yielding 200-millimeter wafers in Building 10 ahead of the needs of the Mohawk Valley fab; second, we've assembled a team comprised of internal silicon carbide experts, including one of our co-founders and external advisers from our tool manufacturers to ensure that we will achieve 20% utilization at Mohawk Valley in the June quarter of 2024, and we've seen notable progress this quarter. And finally, customers continue to partner with Wolfspeed. As we secured our third highest quarterly total of device design-ins at $2.2 billion and we converted more than $1 billion of device design wins this past quarter as well.
In addition, we've also posted record revenue for our 150-millimeter substrates in the first quarter, which is an indication that demand remains robust for our high-quality substrates. Our first quarter results demonstrate the initial returns on our capacity expansion investments that will pave the way for the rest of the fiscal year and beyond. Revenue, non-GAAP gross margin and non-GAAP EPS all came in at the high end of our guidance range.
Turning to Mohawk Valley, where we continued to ramp production. This quarter, we generated $4 million in revenue from the fab, which compares to $1 million that was delivered in the previous quarter. In the coming quarter, we expect to more than double the output from the fab as we continue to ramp device production. Because of the complex nature of silicon carbide technology, as we ramp the fab further, we are collaborating even more closely with our tool vendors to ensure maximum uptime, the best yields and the most efficient use of all of our tools. We've worked closely with them to develop optimal operating protocols. And as a result, we're seeing good improvement in the fab. I was just up in the fab last week, meeting with the leadership team, walking the floor to talk with our technicians and seeing the progress firsthand that we're making in some of our bottleneck areas.
We've now doubled the number of products qualified in the last 90 days, and all of those MOSFETs achieved qualification on the first pass through of the fab, which is a strong indication of the underlying capability of the fab. Finally, those products we have already qualified have sufficient demand to more than satisfy our short-term 20% utilization target.
I am especially proud of this incredible effort by our team. It speaks to the advanced silicon carbide technical device capability we have assembled and the focused and detailed execution of our engineering and quality teams to ensure that we are more than ready to produce high-quality automotive devices at 200-millimeter, something nobody else in the world is currently doing.
As I mentioned, we are ahead of plan in our ramp of Building 10 crystal growth for 200-millimeter substrates. By the end of this quarter, we will be producing enough material to support 15% utilization at Mohawk Valley, putting us nicely on track for our goal of 20% utilization by June of 2024.
Turning to The JP. Construction continues and is on schedule. We expect to be producing material in the first half of fiscal 2025. And we've already hired and began training more than 100 people that will work at that facility.
On the demand side, as I said, we recorded $2.2 billion of design-ins, the third largest amount of any quarter in our history. It had a record design wins of $1.4 billion, illustrating our customers' willingness to move into volume production on projects that we've won over the past few years. Our design win record for the first quarter represents more than 230 projects, many of which are converting sooner than our original expectations. Most of these projects serve the automotive end market, and we are steadily ramping our design-ins to design wins with major OEMs and Tier 1s. We remain confident that the demand from automotive customers will remain strong while we are seeing some softness in the industrial space, primarily in China and Asia.
Additionally, we had a record quarter for 150-millimeter wafer revenue, a strong signal that the demand for materials remains solid. Wolfspeed is the first mover to 200-millimeter wafer volume production, which will be the silicon carbide industry's most advanced technology. As a result, we are well positioned to be the only company producing 200-millimeter at scale for the next few years and believe this competitive advantage will further extend our leadership position well into the future.
Wolfspeed as the undisputed leader in silicon carbide will continue to play an industry critical role in the coming years as a supplier of merchant materials to leading power device makers. Demands for our materials remain strong, and we have extended some of our agreements with existing wafer customers and added new agreements like the one with Renesas. That being said, we're not content with being the leading material supplier to the market. We also expect to be one of the top silicon carbide device suppliers in the years to come.
In 2018, the silicon carbide device market was estimated to be about $400 million. 5 years later, the market size is tied at $6 billion, and the projected TAM for the end of the decade is north of $20 billion and continues to grow.
This is part of the reason we announced and are now in the process of completing the sale of our RF business to MACOMV, which we expect to close by the end of the calendar year. We've always said that the growth of Wolfspeed will come from our leadership in silicon carbide and power devices. And this marks a definitive milestone in allocating all of our investments, research and development and technology into these business areas. There is a long road ahead of us here, which is why we invested the time and capital to develop the world's only purpose-built silicon carbide device fab. We're keenly focused on execution and firmly believe we're doing this right.
Doing this at scale at 200 millimeter from the outset will result in gaining and sustaining significant market share in the coming decades. It is rewarding to see the pieces of our long-term strategy become a reality, albeit on a longer time line than we originally anticipated.
The remainder of this fiscal year and particularly the second half will prove the conviction that we've always had in our strategy, in our products and in our team. It is extremely exciting to see what's on that horizon.
I'll now turn it over to Neill, who will provide an overview of our financial results and outlook. Neill?

Neill P. Reynolds

Thanks, Gregg, and good afternoon, everyone.
During the first quarter, we achieved revenue, gross margin and EPS results all at the high end of our guidance range. In addition, we expect continued revenue growth and gross margin expansion as we transition into 2Q '24. The outperformance in our financial results was underpinned by $4 million of revenue from Mohawk Valley during the quarter, up from $1 million in the prior quarter, and we expect to grow that to between $10 million to $15 million of revenue as we transition into 2Q '24. While we expect some variability in the production ramp at Mohawk Valley, we remain on pace for a larger step-up in revenue as we transition into 3Q '24.
With that, let me review the financial results in more detail. I'll start by providing an overview of the first quarter. Revenue from continuing operations for the quarter was $197 million compared to our updated guidance range of $185 million to $205 million and growth of 4.2% year-over-year.
Power device revenue was impacted by slower industrial and energy demand, primarily in China and the broader Asia market, partially offset by the revenue ramp in Mohawk Valley. Materials 150-millimeter substrate revenue achieved a record quarter, above our expectations, driven by continued strong demand and record manufacturing performance by our Durham materials operations team.
As Gregg mentioned earlier, our historical design-in portfolio supported the first quarter revenue growth, and we secured $2.2 billion of new design-ins for power devices. Our design-in to design win conversion rate is ahead of our original expectations. And based on the design-ins we've already secured, we have the next few years of expected revenue covered by our existing book of business.
Non-GAAP gross margin from continuing operations in the first quarter was 15.6%. Underutilization costs for the quarter of $34.4 million, representing 17.4% or 1,740 basis points of gross margin. Outperformance was driven largely by improved materials manufacturing performance, resulting in better-than-expected 150-millimeter materials costs and yields. In addition, we saw lower-than-expected underutilization cost as we ramp Mohawk Valley.
We generated adjusted loss per share of $0.53 from continuing operations in the fiscal first quarter compared to a loss of $0.36 last quarter and a loss of $0.24 in the same period last year. Adjusted loss per share was a significantly lower loss in the high end of our guidance range as higher revenue, higher gross margin and lower operating expenses all fell through to the bottom line.
Before moving to the outlook, I'll touch on our balance sheet. We ended the quarter with over $3.3 billion of cash and liquidity on hand to support our ramp and growth plans. DSO was 55 days while inventory days on hand was 162 days. Free cash flow during the quarter was negative $517 million comprised of $113 million of operating cash flow and $404 million of capital expenditures.
Regarding our financing initiatives, we are pursuing funding from the CHIPS Act and should have more clarity on this by early next calendar year. We are constantly evaluating ways to optimize our balance sheet and capital structure, and we'll continue to be opportunistic and flexible in our capital strategy.
In the last year, we have raised approximately $5 billion of low dilution capital across a number of vectors, including customers, governments, private financing and capital markets. In conjunction with federal funding, we are in good position to execute our capacity expansion plans but we will remain nimble to optimize our capital structure for the long term.
Turning to the second quarter outlook. We are targeting revenue from continuing operations in the range of $192 million to $222 million, driven largely by the incremental revenue contribution we expect from Mohawk Valley in this quarter. We now anticipate roughly $10 million to $15 million of revenue to come from Mohawk Valley in Q2. This increase in Mohawk Valley revenue will be partially offset by continued softer demand for industrial and energy products, primarily in the China and broader Asia markets.
However, we will look to repurpose the supply to where end demand remains strong. We are also expecting non-GAAP gross margin in the range of 12% to 20% with a midpoint of 16%. At the midpoint, this includes approximately $35 million or negative 1,700 basis points of underutilization costs as we ramp up revenue at the Mohawk Valley fab.
We are also targeting non-GAAP operating expenses of approximately $109 million for the second quarter of fiscal year 2024, which is inclusive of $11 million of start-up costs primarily related to the JP materials facility in Siler City, North Carolina. We expect Q2 net nonoperating expense of approximately $27 million.
As I have mentioned previously, we expect nonoperating expense to increase as the year progresses as we earn less interest income on our short-term investments in connection with our continued investment in our facilities expansions. We expect Q2 non-GAAP net loss to be between $88 million and $71 million. Our Q2 targets are based on several factors that could affect them significantly, including supply chain dynamics, overall demand, product mix, factory productivity and the competitive environment. As Gregg mentioned earlier, we are moving ever closer to the significant uptick in our ramp of the Mohawk Valley fab, and we expect a larger ramp in the back half of the fiscal year.
We are still extremely confident in our ability to achieve 20% utilization in the fab by June. As we indicated on our last call, there will be a lag between 20% utilization and $100 million of quarterly revenue due to the time between fab starts and shipments to our customers.
Lastly, during the quarter, we announced the intent to sell our RF business to MACOMV, a path we have been pursuing for quite some time. When the sale is finalized, we will have completed the path towards portfolio optimization that we have been on since 2018 when we're predominantly a lighting company. We are happy to say that Wolfspeed is now the only pure-play silicon carbide business in the marketplace, and we can focus all our collective efforts on the silicon carbide materials and power device businesses.
With that, I'll pass it back to Gregg.

Gregg A. Lowe

As we close out the first quarter, I want to reiterate that fiscal 2024 is a pivotal year for Wolfspeed. We remain confident in our long-term vision and are seeing promising results. While I gave some color earlier on design-ins, I think it's worth repeating that we had a record design wins for this past quarter as customers ramp their programs.
Demand has certainly attracted new entrants and from our viewpoint and checks in the market, there is not a single player who can match our quality and our scale at 150 millimeter. And as I said earlier, no one is close to our position at 200 millimeter. This gap will only widen as we bring The JP online in the first half of fiscal 2025.
Secondly, while there have been several new entrants to the materials market, Chinese and others, the significant ramp required to create high-quality materials is still in front of them. It's taken us 35 years to master this technology, which we know firsthand can be incredibly difficult to work with, let alone scale and produce at the highest quality possible.
While I've always said, we are taking our competitors at their word regarding their stated capability to produce silicon carbide materials internally. It is highly unlikely that every competitor will be successful. And this will create an opportunity for those with additional materials capacity to secure long-term agreements with device producers or capture an even larger share of the device market, and we are well positioned to do both. Demand remains strong across the business outside of the industrial and energy markets, particularly in China and Asia.
Overall, what we have said time and time again about the transition to the use of silicon carbide rings through. The EV transition remains the largest change in the history of the automobile. And with that comes winners and losers and potentially a bumpy path. However, there's no reverting to the internal combustion engine. That is the way of the past. Silicon carbide has shown that EVs can be pushed further with extended range, faster charge times and competitive prices.
Despite the current softness in China and Asia, demand remains high for our products, and customers' needs are higher than our current output levels. And this is why we are keenly focused on ramping Mohawk Valley to 20% utilization.
To close, we are excited about this year. Fiscal 2023 was not without its challenges. But those challenges come with being the first pursue next-generation 200-millimeter technology in silicon carbide. However, the opportunity to be the leader of this transformative technology keeps us moving forward as quickly and as purposely as possible to execute and generate value for our stakeholders.
Thank you, operator, and we're now ready for Q&A.

Question and Answer Session

Operator

Our first question goes to Samik Chatterjee of JPMorgan.

Joseph Lima Cardoso

This is actually Joe Cardoso on for Samik. So for my one question, it sounds like qualifications in the Building 10 ramp are tracking well. So as we think about what is keeping you on the sidelines relative to Mohawk reaching 20% utilization earlier than the June quarter itself, can you just walk us through what the key drivers are at this point in the ramp? Just curious to hear your thoughts on that front.

Gregg A. Lowe

Yes. Thanks for the question. First off, you're right, Building 10 is in great shape right now. We'll be producing material in this quarter that will be able to support 15% utilization. And obviously, we have 2 quarters after that to get to 20% utilization in Mohawk Valley. So that's in really great shape.
We qualified a bunch of different MOSFETs already in that fab. All of those MOSFETs have qualified at first half success, and we've actually qualified 2 modules as well that have come through on 200-millimeter, which I think is a really good sign for the quality of our back-end operation.
The fab itself is the world's first 200-millimeter fab. And as such, a lot of the machines that are in the fab are seeing volume ramp of 200-millimeter silicon carbide for the first time. And so we're working very closely with our tool vendor to ensure we have better uptime with their machine.
One particular machine is seeing downtime more than we would -- than it should. We have a team that is completely focused on resolving that. As I mentioned, I was in the fab last week. I met with the engineers from our team as well as the engineer from the vendors team. They are also supremely confident that this is a normal process of going through as you ramp, and we will resolve this and we are on track to 20% utilization in the June quarter.

Operator

Our next question goes to Harsh Kumar of Piper Sandler.

Harsh V. Kumar

Had a quick timing question. So Mohawk Valley did $4 million of revenues in the March quarter. That implies that given the timing -- the lead time difference conversion packaging, et cetera, that means that Mohawk Valley wafer runs in the March/April time frame were about that $4 million. So my question really is, could you give us a glimpse into what Mohawk Valley wafer runs are looking like on a dollar basis today? And that would be the color that I'm looking for.

Neill P. Reynolds

Harsh, thanks for the question. This is Neill. So first of all, let me just -- we start thinking about utilization of the fab and how that relates to wafer starts. Essentially what we're talking about here. So utilizations in the fab is really a function more of wafer starts. So we talked about getting to 15% out of Building 10, that's for reference you're running wafers out of North Carolina, silicon carbide 200-millimeter substrate out of North Carolina that could potentially support the fab at 15% utilization even by the end of this year.
As you look out at the end of the year, we're still on target to get to 20% utilization. So what that means is we're seeing solid performance from a substrate perspective to meet that goal. After that, what that means is -- again, it starts utilization. So what that means is you have to put the wafers in the fab, you've got to run those through the fab. You got that cycle time. You got to send it to the back end. It'd be either sold as devices or as packaged parts that may have other packages. So there are various cycle times on that as well.
So once we get to the 20% utilization, there'll be a bit of a lag as you work through those cycle times and then you see the revenue that corresponds to that. So in this case, once we get to 20% in that June time frame, we anticipate that being translating from a revenue perspective to about 100 million in revenue. As we get to December quarter next year.

Gregg A. Lowe

I would just maybe add one comment to it. As material goes through these tools and the factory, we're seeing great results as they go through the tool. What we're seeing, though, is that the downtime or the maintenance required is higher than it should be right now. And again, I was in the fab last week. I met with the engineers at both the tool side as well as our side. And there's a very good line of sight for what we need to do to get the tool up time where it needs to be. And as soon as that happens, our ability to transition from relatively low utilization to -- towards this 20%, it should be a very, very good snap as we fix that. As I mentioned was in the fab last week. I will be in fab 2 more times in November, including on Thanksgiving Day to continue the focus of Mohawk Valley Ramp to 20% utilization.

Operator

And our next question goes to George Gianarikas of Canaccord Genuity.

George Gianarikas

I just wanted to get your thoughts on some of the turbulence to say the least in recent discussions around EV plans at some of the big 3 European OEMs. What are your thoughts there? And I know you talked about your backlog being so robust that it didn't kind of matter for the next couple of few quarters. But what are you seeing in your own business that may or may not reflect what we're hearing in the marketplace.

Gregg A. Lowe

Well, obviously, we would like our Mohawk Valley fab to be [ramped] faster and so with our customers. And as such, I've been on pretty much weekly calls with CEOs and executives from major OEMs and Tier 1s. And basically, their consistent message back to me is we need more and need it soon. So the demand that we're seeing both near term and long term is very, very solid. I'll remind folks that many of the cars that are being sold today were -- electric cars that are being sold today were designed 5, 6, 7 years ago and are with silicon-based MOSFETs or IGBTs. And what silicon carbide does is 3 important things.
One is it extends the range of the car; two, it allows the car to be charged faster from -- and then three, at the vehicle level, using silicon carbide allows the vehicle to be less expensive because there are lots -- you use less battery, less cooling and different things.
In fact, there was a report a few years ago that said for every incremental dollar of silicon that you spend on silicon carbide over silicon, you get $3.5 to $7 back.
So basically, silicon carbide is enabling longer range. It's enabling faster charging, and it's enabling lower systems cost. And that's kind of a trifecta for EVs. So any of the noise that you see today, it certainly has no impact on our demand, both near term and long term.
And by the way, that's OEMs and Tier 1s in the U.S., in China and in Europe.

Operator

And the next question goes to Brian Lee of Goldman Sachs.

Brian K. Lee

I guess you mentioned, I think, Neill, during your prepared remarks that kind of implying a stronger step up in Mohawk in 3Q. Does that imply that the tool downtime issue that you guys have been referencing here is sort of done by that point? And then if I just look at the numbers 2Q midpoint for Mohawk is up like 3x sequentially in revenue terms. So is 3Q expected to be up at that level or above? Or are you talking more in absolute dollars when you're talking about this bigger step-up?

Neill P. Reynolds

Well, thanks, Brian, for the question. So I think as Gregg mentioned, there's obviously a lot of attention now that we're seeing 200-millimeter substrates supporting the fab, the fab ramp in a very good way at this point. So a lot of the attention is on the fab itself. We're working very closely with the fab team, with external vendor teams and whatnot to try and solve what we think are very solvable challenges in the fab right now to try to get more throughput through the system, through the uptimes and cycle times and start getting material out of the fab.
So our anticipation is that we would see uptick in revenues as you kind of get to the back half of the year. If you take a step back and look at the pieces, maybe just unpack those a bit. Normally, when we think about revenue guidance, we've got about $100 million a quarter out of Durham. $90 million, $95 million -- sorry, $100 million a quarter out of Durham for power devices. $90 million or $95 million of material capacity that we've got. So the step-up in the back half would be from revenue from Mohawk Valley.
You have $10 million to $15 million this quarter. You could see us doubling that again next quarter as well to get into Q3. So it really will just depend on how things play out from an uptime perspective and throughput perspective in the past, but we feel like we've got good confidence right now based on the way the teams are working through the fab throughput ramp.

Operator

Our next question goes to Joshua Buchalter of Cowen.

Joshua Louis Buchalter

Congrats on the progress. I wanted to ask about the timeline of The JP actually. So you mentioned it's on schedule ramping in the fiscal first half of 2025. What should we -- how should we expect the cadence of that ramp to look compared to Building 10? And the reason I ask is it sounds like there's roughly a 2-quarter lag between when you get utilizations in Building 10 than when you generate revenue. And is that sort of indicative of what we should expect at the JP when that starts up? And any initial indications of how much that could contribute in fiscal 2025.

Gregg A. Lowe

Well, I would say let me maybe kick it off, and Neill, if you might add a little bit of color to it. The JP is a substantially larger facility than Building 10. And as such, as we turn it on, it will turn on pretty decent capability kind of right from the start. It's on schedule at this point. And obviously, we want to keep it on schedule. So that's all looking pretty good. But basically, I would anticipate that as we ramp up The JP is I think the amount of capability that will be coming online will actually be quite substantial. And Neill, if you want to talk about the timing.

Neill P. Reynolds

Yes. So on the timing, we said kind of back half of calendar year next year '24 in terms of crystal growth out of The JP, which I think will be in good shape. For right now, the timeline on our expansions are all on track from a timeline and budget perspective. So we feel good about we're out there. However, I'd also add to that, we're looking for ways to expand our current capacity out beyond 20%, just to buffer that a bit over that time frame. We've invested in some satellite sites to help with back-end wafering operations that impacted operations to help with that.
In addition, there's going to be opportunity, I think, in time. We've seen really good performance out of our operations and manufacturing team. So the yield opportunity, operations productivity improvements and throughput capability that could bring us down that 20% or so capability on Durham.
So we're working through all of those things now, putting in extra capacity where we can, looking for yield optimization and other opportunities from a productivity perspective to bring more capacity online in that period. So we're trying to dig from a number of angles and we'll give you an update on that as we make more progress as we get into the next year.

Gregg A. Lowe

So just to reiterate, JP is currently on schedule. We're working with our existing facilities in Durham to increase productivity to give us more than 20% utilization of the Mohawk Valley fab. And we're also utilizing satellite sites for back end operations to support The JP as well. So we're trying to create a little bit of belt and suspenders on The JP.

Operator

And our next question go to Jed Dorsheimer of William Blair.

Jonathan Dorsheimer

I guess 2 parts or really 2 questions, I'll break the rules again. I guess first is your -- it sounds like things are going better at Mohawk Valley, and your underutilization costs of $37 million are actually better than what you guided for or $34 million better than what you guided in terms of $37 million. So I was wondering if you can maybe just talk about the revenue implications in terms of is it a direct 1 for 1? Or is there a lagging effect in terms of as Mohawk scales? And then I have a follow-up too.

Gregg A. Lowe

Maybe I'm going to kick it off and then Neill can talk a little bit about that. It's -- without a doubt, we wanted to be ramping Mohawk Valley faster than we currently are, and our customers wanted that as well. So we're not satisfied with the situation. We're intensely trying to work it so forth. I think we've made a lot of really good progress on it. Obviously, Building 10 has been very, very successful. We are also extremely confident that we'll be able to get these tools to operate in the way that they are supposed to, and we'll be able to ramp that fab to 20% utilization in the June quarter.

Neill P. Reynolds

Yes. And then just from a numbers perspective, Jed, yes, we did see some benefit on the margin just because of the lower utilization level. Although I did mention, we're going to be -- based on what we're seeing from the substrate performance on 200 millimeter, we're going to move a quickly as we can to create -- put more capacity online maybe even faster than we thought initially within the fab and then at the material satellite sites I mentioned earlier. So you could see that underutilization number tick up throughout the year until you start to see it come down back in fiscal 2025.
And that's just really relating to adding more capacity given the outlook we're seeing from a substrate performance perspective, just to give us as many opportunities to supply our customers as we look out in time. As Gregg said, very heavy demand particularly in the automotive side right now. Had very intense discussions with customers. So we're looking for all the ways we can to satisfy their demand with putting in more capacity as we look out in time here.

Jonathan Dorsheimer

Great. And then just as my follow-up. If I look at the -- last quarter, you saw a bump up in inventory. And raw materials, I think the greatest increase quarter-over-quarter. This quarter, you saw a slight increase, I think, $13 million in inventory. I don't know the composition because the Q hasn't been filed. I'm assuming most of that is work in process. Could you just give us some color on that? And where I'm going with this is just trying to back into the buildup of inventory from a wafer perspective.

Gregg A. Lowe

Well, let me -- yes. Thanks, Jed. And let me give kind of a high level on that, then Neill can work through the details on this. We began working with our raw material suppliers in May of 2019, getting ready for what is this big transformative ramp in silicon carbide. We knew that we were going to need to have them investing in their capacity to support this ramp. And obviously, I think we've done a really good job of doing that. So some of this is all just about getting material in place and capacity in place so that we're not bottlenecked kind of upstream, if you will.

Neill P. Reynolds

Yes. And then from a numbers standpoint, Jed, that's right. I don't think there's any big pick up in finished goods, primarily related to raw materials and WIP. So raw -- about ensuring we have enough raw material capacity to support the substrate ramp as Gregg indicated. In addition, we're supplying a lot of wafers out of the Durham Building 10 from the 200-millimeter substrate capacity and sending those up to Mohawk Valley. That's the other kind of tick up in inventory as well. From a finished goods perspective, we're not seeing much growth there. We're still continuing to ship to customers in the automotive side as quickly as we can.

Operator

And our next question goes to Colin Rusch of Oppenheimer.

Colin William Rusch

Gregg, you mentioned the potential for folks to end up exiting the market. Can you talk a little bit about how discerning the customers are at this point around assessing that risk and how impactful that is in terms of your design wins and design-ins that you've announced.

Gregg A. Lowe

Colin, could I ask you to repeat that? It was really hard to hear you.

Colin William Rusch

Okay. No problem. You talked about some folks exiting the market or failing in the market. And then I'm curious about your customers' ability to assess the risk of folks not being able to deliver on some of their commitments. And I'm wondering how impactful that is around your design-in and design win performance.

Gregg A. Lowe

Yes. Well, I would say that we are clearly the leader in silicon carbide technology, supply substrates to nearly all of the device folks out there and obviously feed those to ourselves. So having that as a -- having that strength really underpins their belief in our ability to ramp this technology. Like I said, I'm on weekly calls with executives and CEOs from our Tier 1 partners, our OEM customers, et cetera, and their consistent message is they need more and they need it faster. And then they see that we're ramping Mohawk Valley. They'd like us to ramp Mohawk Valley faster.
But the one thing they see is that we have something called Mohawk Valley. We have the world's largest 200-millimeter wafer fab. They've seen that we've been able to solve the crystal growth challenge for 200 millimeter and get Building 10 operating. That's probably -- it's not probably, that is the hardest thing to do in getting a silicon carbide MOSFET is getting the wafer and the substrate right. So I think it's a matter of time for us demonstrating the 20% utilization out of Mohawk Valley. I think we're pretty close on that. As Neill said, the Building 10 is feeding Mohawk Valley now obviously at a higher rate than we're utilizing out of Mohawk Valley. We've got plenty of inventory staged up there. So as we knock out these last couple of bottlenecks, I think we're going to see a pretty nice tick up in Mohawk Valley.
And then finally, I think it's worth mentioning again, the fact that we've had first pass qualification on these MOSFETs coming out of a new wafer fab or new wafer diameter and so forth really points to the fundamental capability of this fab. It is not normal that you would have 100% first pass success rate on all the MOSFETs that you qualified including a couple of modules, and I think that really, again, underpins the fundamental capability.

Operator

Our next question goes to Vivek Arya of Bank of America.

Vivek Arya

Gregg, I just wanted to get your perspective on the next 1 to 2 years. There is just a lot of concern about more capacity coming online. I understand maybe it's not exactly the same quality as yours and maybe might not even have the same cost structure. But the fact of the matter is, there is a significant amount of whether it's 150 or 200-millimeter capacity. So how do you look at that? Are you assuming that the market stays undersupplied for the next 1 or 2 years? Is it just rightly supplied? What are your assumptions about industry capacity for the next 1 to 2 years?

Gregg A. Lowe

I think from my viewpoint, there is going to be a supply-demand mismatch. There will be more demand than there will be supply certainly over the next couple of years and probably a lot longer than that. I would repeat something that I said in our prepared remarks. This quarter, this past quarter, we recorded a record materials revenue.
So there's a lot of noise about different folks coming online, but the demand for our materials is very, very strong. And where -- and obviously, constant communication with our materials customers, many of them are looking for extensions and expansions and things like that. And then obviously, we just reported the largest capacity reservation deposit in the history of semiconductors with our deal with Renesas. The feedback we're getting from folks is that China is doing a lot of investing in silicon carbide. They're doing that in silicon as well. But the feedback we're also getting is that they're not automotive ready at 150, let alone 200. So I really don't anticipate a demand being below supply for any time in the future, really the next couple of years for sure and probably the next half of the decade.

Operator

Our next question goes to Christopher Rolland of Susquehanna.

Christopher Adam Jackson Rolland

I guess today, a competitor talked about a fairly large downtick in SiC for them. I guess my question for you is -- and you may have just addressed it, Gregg, but is your backlog covering all through 2024 and into '25. Do you have any problems with customers that are looking for pushouts, et cetera? And would those pushouts if you experience them, would they be fungible or transferable to someone else?

Gregg A. Lowe

Yes. Let me start with an answer and then I'll kick it over to Neill for a little bit more detail. The only area of softness that we see is industrial and energy basic and primarily that's China and Asia. Everything else is pretty strong. In fact, we wanted to just kind of give some of the numbers.

Neill P. Reynolds

Yes. So if we look at the revenue outlook as you go into the second half of the year, in fact, from an auto perspective, as Gregg said, very, very heavy demand. I think that's across U.S., that's in Europe, that's in Asia. So we're seeing the heavy demand there.
And that's really a function of how fast we can ramp Mohawk Valley, ramp capacity. We are seeing some softness in industrial and energy areas, particularly in China and Asia. Right now China represents about 20% of our total revenue, again, primarily in industrial and energy space. But in conversations with customers, that's really just kind of I think inventory timing, we're still seeing growth there. I'm still very heavy demand from automotive customers from China as well. So we're really just working through the revenue -- sorry, the inventory timing if you look out into the industrial side.
And the third piece to that is on material side, as Gregg mentioned, we're still seeing very strong demand for 150 millimeter wafers as well. So we're seeing, I think, demand heavy in automotive devices demand heavy in 150-millimeter substrates, a little bit of softness in industrial energy perspective. But we're just slipping to match up supply and demand there right now. So there are pockets where we can take that supply, match it up to where the demand still remains strong in industrial energy. And that's really what we're looking at right now in terms of the outlook.

Operator

The next question go to Natalia Winkler of Jefferies.

Natalia Sukhotina Winkler

I wanted to ask about the new design wins this quarter that you guys have seen. Could you possibly kind of help us figure out where most of them are. Is there a way to think about maybe kind of an increase in industrial activity or automotive? And just broadly, any additional color would be really helpful.

Gregg A. Lowe

Okay. So just from a clarification perspective, we call our design-ins, and that's when a customer awards us the business. And then we say design win. And that's when a customer transitions into production. Specifically, they have to give us purchase orders for 20% of the first year as anticipated volume that they declared during the design in date. So we had $1 billion worth of design wins, which means customers were transitioning from they awarded us the program to they're beginning to ramp into production. That's an incredible number, by the way, and it's happening faster than we anticipated.
I believe that was 230 different projects. Many of those were automotive projects and the others sprinkled around industrial opportunities. But I would say the majority of those were quite robust.

Operator

The next question goes to Matthew Prisco of Evercore.

Matthew Patrick Prisco

How should we be thinking about the gross margin path from here particularly given the commentary on underutilization potentially ticking higher. Is low to mid 20% still the right range exiting the year? And kind of what would be the primary risk drivers to that figure at this point, either upside or downside?

Neill P. Reynolds

Thanks, Matt. Let me just -- maybe I should unpack the first more a little bit as we look here. So obviously, in 1Q, we had a good quarter from a gross margin perspective, at the high end of the guidance range. It's just really driven by strong performance from a materials operations team and just some very, very good cost yield outperformance both on 150-millimeter and 200-millimeter substrates. So that was solid. And if you go back to 4Q '24, we reported gross margin of approximately 29%. And when we divested RF, we picked up of 200 basis points of improvement, excluding the RF business. So the baseline back in 4Q was about 31%. And we just saw about 200 basis points of improvement in gross margin quarter-over-quarter when you exclude that underutilization. So I'd say overall, good quarter from a gross margin perspective. And with that, a little bit of the lower impact from underutilization, although as I said earlier, you might see that tick up a bit more towards the end of year as we bring on more capacity.
So with that, as we look out beyond that, we will see an uptick in gross margin as you kind of get into 2Q. We see continued solid performance, offset a little bit by some of the auto mix that we'll see come into the business to continue to support that demand. We talked about underutilization being $35 million at the midpoint, might tick up again as you get out to the end of the year. But as we get out towards the end of the year, 20% or so gross margin target for the end of the year still makes sense. I think even with that in there. It's really going to be a function of how much volume we can drive through Mohawk Valley. We said it many times all roads lead to be at the Mohawk Valley and I think from a margin perspective, that's the case as well. So I still think that's a good target to think about as you move into the back half of the year.

Operator

The next question goes to Edward Snyder of Charter Equity Research.

Edward Francis Snyder

Maybe first a housekeeping just to check, Neill. The quarter, if you back out -- obviously, you've gotten performing out the RF business and given your underutilization charges, I'm getting around 30% gross margin if you get all that out of it. And then it looks like the RF business last quarter, give you -- I'm sorry, last year because you pro forma that was running around 24% gross margin. Just want to check on that. And then I had a question about the materials.

Neill P. Reynolds

Yes. And so in 4Q '24, we recorded 29% gross margin. The RF business was about a 200 basis point drag. So you can think about the ex RF number remaining about 31%.
So it's about 200 basis points of pickup there. If you exclude the underutilization, we saw about 200 basis points pickup 4Q into 1Q. So you recorded 15.6% with that 17.4% of underutilization in the quarter. As you move into Q3, and we'll see a little bit of an uptick in the underutilization just related to some of that capacity that we're bringing on.

Edward Francis Snyder

Great. And then in kind of the detailed survey we did of all the new competitors in China and talking to folks on the ground there. It seemed -- and the feedback we got from the conference in Italy. The feedback seems to be pretty consistent that on a die basis, Wolfspeed is still the preferred vendor even some of your competitors tell us that too. And module, you -- there's work that needs to be done because you're kind of early in modules to begin with. But the vast majority of everything you're going to be shipping provided by Wolf or by Mohawk Valley is going to be die anywhere, right? So as that ramps up, some of these deals, Gregg, just looking for your opinion, some of these deals were -- some of your vendors are cutting deals to get any kind of die they can get now because the demand is -- far exceeds supply could revert back to higher demand once they see that Mohawk is up and has the capacity to supply. Isn't that a fair assessment?

Gregg A. Lowe

I think the ramp of Mohawk Valley will largely be a die story for the near term. We've won some good module business as well. But many of our customers are basically building their own inverters and their own modules. So that certainly is going to be a ramp mostly on the die side of things, I would say, for the near term.

Operator

Thank you. that's all the questions that we have time for today. I will now hand back the call -- hand the call back over to Gregg Lowe, CEO, for any closing comments.

Gregg A. Lowe

Just two thoughts before we end the call. One, demand remains very strong for silicon carbide; and two, I am personally laser-focused on the Mohawk Valley ramp to 20% utilization in the June quarter. Thanks a lot for joining us today and look forward to updating you in our next quarter's results.

Operator

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.