Navitas Semiconductor Corporation (NVTS) CEO Gene Sheridan on Q2 2022 Results – Earnings Call Transcript


Navitas Semiconductor Corporation (NASDAQ:NVTS) Q2 2022 Earnings Conference Call August 15, 2022 5:00 PM ET

Company Participants

Stephen Oliver – Vice President of Corporate Marketing and Investor Relations

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Gene Sheridan – Chairman, President, CEO and Co-Founder

Ron Shelton – CFO and Treasurer

Conference Call Participants

Kevin Cassidy – Rosenblatt Securities

Tristan Gerra – Baird

Blake Friedman – Bank of America

Ross Seymore – Deutsche Bank

Sam Peterman – Craig Hallum

Jon Tanwanteng – CJS

Mark Lipacis – Jefferies

Quinn Bolton – Needham and Company

Operator

Good afternoon. My name is Denis and I will be your conference operator today. At this time I would like to welcome everyone to the Navitas Semiconductor’s Second Quarter 2022 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Stephen Oliver, Vice President of Corporate Marketing and Investor Relations. Please go ahead.

Stephen Oliver

Good afternoon, everyone. I’m Stephen Oliver, Vice President of Corporate Marketing and Investor Relations. Thank you for joining Navitas Semiconductor’s second quarter 2022 results conference call. I’m joined today by Gene Sheridan, our Chairman, President and CEO and Co-Founder; and Ron Shelton, our CFO and Treasurer.

A replay of this webcast will be available on our website approximately one hour following this conference call. And the recorded webcast will be available for approximately 30 days following this conference call. Additional information related to our business is also posted on the Investor Relations section of our website.

Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures with the most directly comparable GAAP measures are included in our second quarter earnings release and also posted on our website in the Investor Relations section.

In this conference call, we will also make forward-looking statements about future events or about the future financial performance of Navitas including acquisitions. You can identify these statements by words like we expect or we believe or similar terms. 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 affecting Navitas discussed in our SEC filings, including pour annual reports on Form 10-K for 2021 and our second quarter form 10-Q filed today with the SEC. 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 Sheridan, CEO.

Gene Sheridan

Hello, and welcome to our Q2 earnings call. We have exciting news today with the acquisition of GeneSiC Semiconductor a highly profitable, fast growing pioneer in silicon carbide. We will talk about our recent acquisition of VDD Tech while reviewing our second quarter results and our business outlook.

First, let me welcome Ron Shelton, our new CFO who will cover financial details later in the call. Ron brings rich experience as a public company CFO in semiconductors, in M&A and other strategic transactions which will be invaluable in our mission to become the leading next generation power semiconductor company. Ron has hit the ground running and was instrumental in our acquisitions of GeneSiC and VDD tech.

Let me start by talking about why Navitas purchased a silicon carbide company. Navitas

has the mission to electrify our world as we accelerate our planet’s transition from fossil fuels to clean electrical energy. GaN and SiC carbide are both advanced technologies that enable greater energy savings, faster charging, smaller size, lighter weight, and lower system costs when compared to traditional silicon based power systems. Taking together GaN and SiC solid carbide make electrical energy more efficient, more reliable, and lower costs across a broad range of applications [indiscernible] to accelerate our plaintiffs transition from fossil fuels to electrical energy and accelerate our company’s mission. While both GaN and SiC carbide offers similar physical advantages to silicon, they do have some fundamental differences.

Silicon carbide has better voltage and temperature capabilities making it ideal for applications over 1000 volts. GaN offers higher frequency operation and higher integration, making it the ideal choice for applications below 1000 volts, particularly those that can take advantage of its higher switching speeds. With the GeneSic acquisition Navitas becomes the world’s first pure play next generation power semiconductor company with proven leading edge GaN and silicon carbide technologies and the capability to address a full range of applications from 20 watt smartphone charger to 20 kilowatt EV charging to 20 megawatt grid infrastructure power systems and everything in between as we look to address an aggregate opportunity that we expect will grow to over $20 billion per year by 2026.

GeneSic is both a great silicon carbide company and more specifically an ideal silicon carbide partner for Navitas. Their technology offers industry leading performance, world class robustness, the widest portfolio and a broad and synergistic customer base with impressive revenue growth and profitability. Based on Navitas testing, GeneSic delivers the industry’s best silicon carbide performance under high temperature and high switching speeds. This is essential to maximize customer benefits and energy savings, size, weight and cost for the end application. Also of critical importance is the ability to survive harsh electrical environments.

GeneSic technology offers industry leading robustness with the highest 100% tested avalanche ratings and world class short circuit capability both of which work together to ensure the greatest ruggedness and reliability in customer applications. In addition, GeneSic offers the widest portfolio of silicon carbide devices in the industry ranging from 650 volts to 6500 volts, serving the broadest set of applications possible.

All of this market leading technology has led to over 500 customers in production or development across solar, EV, energy storage, wind and grid installations. Existing GeneSic markets are diverse, but also synergistic with Navitas existing and targeted customers. In electric vehicles for example, Navitas GaN is optimized for 400 volt battery systems while GeneSic technology is best suited to address 800 volt architectures. GeneSic has existing revenue and development customers including BYD the world’s number one EV supplier, Land Rover, Mercedes AMG, Jieli, Shinwari, LG Magna, [indiscernible] our EV focused design center will immediately add developments with GeneSic technology and accelerate its success into an even broader range of EV customers and applications.

In solar Navitas targets residential applications while GeneSic is already shipping into higher power, commercial solar and energy storage customers, including alpha power solutions, advanced energy, [indiscernible] and Exide. Another area of GeneSic strength is an even higher voltage and higher power markets including rail, UPS, wind, grid distribution, industrial and medical imaging, all immediate revenue expansion areas for Navitas.

In terms of talent, we’re delighted to welcome a very innovative and experienced technical GeneSic to Navitas. Founder and President Dr. Ranveer Singh has dedicated his life to the mission of high performance, high reliability silicon carbide devices, including 20 years in founding and leading GeneSic. Dr. Singh is highly respected in the power semiconductor community with several awards, over 200 journal and conference papers and over 30 U.S. patents. He joins Navitas as an Executive Vice President for the GeneSic business and expect to retain all GeneSic employees. As the GeneSic team has focused heavily on core silicon carbide design process and technology, Navitas has invested heavily in global sales and operations, strong technical support and system design centers in bringing our GaN IC technology to market. These capabilities are a perfect complement to GeneSic and will serve to further accelerate their growth trajectory.

This GeneSic acquisition is also a great combination with a recent acquisition of VDD Tech. This Belgian startup has developed high speed robust digital isolators, which are critical safety barrier circuits that interface low voltage logic to the high voltage power required in virtually all power systems. This digital isolator technology has already been optimized for the high switching speeds of GaN and silicon carbide and will allow Navitas to offer complete power stage chipsets or integrated solutions and delivering more value and content to our customers in each target market, including datacenter, solar energy storage, EV and others. We expect digital isolators will add up to $4 of content per system and open up an additional estimated $1 billion per year market opportunity for Navitas. We anticipate first products to launch in 2023 and appreciable revenue contribution in 2024.

Let me now turn to our second quarter results with a focus on the existing GaN business. We are pleased with Q2 revenues that were in line with guidance and increased 58% year-on-year also gross margins came in on the upper end of our guidance. The future of mobile charging is GaN and Navitas has a leadership position to nine of the top 10 mobile OEMs in production today, and 10 of those 10 in development with Navitas NIC for their next generation chargers. In Q2 alone, our customers launch over 20 GaNFast and ultra fast chargers. The number of GaN chargers in the market is expanding rapidly with new OEM launches that include Vivo’s X-fold Motorola Edge plus, Oneplus 10 R and 10t models, including charging power levels that reach up to 200 watts, setting a new industry benchmark of zero to 100% charging in less than 10 minutes. New aftermarket GaN charger launches include anchors new GaN Prime series at 120, 140 and 150 watts and Belkin’s new 108 watt 4-port GaNFast charger which is now available in the Apple Store. Q2’s inbox laptop charger launches include Xiaomi Redmi, Lenovo’s Legion and the Dell XPS 13 Pro models.

In Q2, we have also made excellent progress in our expansion markets. We have four data center power platforms in development that meet or exceed the new demanding titanium plus efficiency standard and are supporting eight customer projects with projected revenues ramping next year. In addition, we expect the GeneSic acquisition will accelerate our revenue plans and data center.

In solar we now have two major solar residential customers committed to a broad transition from silicon to GaN, which is anticipated to drive significant revenue growth in 2024. And GeneSic gives us immediate revenue with many synergistic solar and energy storage customers as they accelerate their adoption of silicon carbide. And in electric vehicles we have three new onboard charger platforms in development, which we expect to set new industry standard benchmarks in charging speed, efficiency and power density and are supporting five major customer programs expected to ramp revenues by 2025.

Here again GeneSic not only brings us immediate additional EV revenues and synergistic customers that will be accelerated by our EV design center but also opens up new opportunities for our GaN technology into many of those same GeneSic customers.

Looking forward to Q3 while our GaN position in the mobile market has never been stronger, we do see significant headwinds given the softness in the China’s smartphone market. We see a combination of supply chain disruptions from shutdowns and shortages, but also now excess smartphone inventories which are impacting the timing and sell through of new model options. While visibility is limited, we anticipate this softness will likely continue through Q4 and possibly into early ’23.

As noted last quarter, we are making very good progress in regional and market diversification as we’re ramping a significant program with a leading home appliance customer in Europe. This new program represents the first of many anticipated in an entirely new market for Navitas which uses GaN ICs in motor drives for home appliances and a broad array of industrial motor applications. We will share further details on this exciting new market expansion in upcoming investor events and our Q3 earnings call. The addition of the GeneSic revenue together with this [Europe] motor drive business helps to mitigate some of the China mobile softness in the second half of the year.

To conclude despite near term challenges in the China mobile market Navitas has established an extraordinary position as the GaN IC leader and we’ve combined that with an industry leading highly accretive silicon carbide company that creates a diversified high growth business and forms the industry’s only pure play next generation power semiconductor company. We are well-positioned to electrify our world and accelerate the transition of our planet from fossil fuel to clean electrical energy.

With that, let me turn it over to our CFO, Ron Shelton to discuss our financial results for GeneSic acquisition and our forward looking guidance in further detail.

Ron Shelton

Thanks, Gene and thanks, everyone, for joining us today. In my comments today, I’ll first take you through our second quarter results. I’ll then walk you through the details on the GeneSic transaction and then we’ll wrap it up with our guidance for Q3. GAAP revenue for the quarter grew to $8.6 million. That represents 58% growth from the second quarter of 2021. This was in line with our guidance while we began to see the impact of the slowdown in China during the quarter. This was offset by gains we made in diversifying our end markets and customer base. GAAP gross margin was 42% in the second quarter and at the high end of our guidance. As we’ve discussed before, and as was expected, gross margins have come down about 400 basis points on a year-over-year basis primarily due to TSMC’s 20% wafer price increase earlier this year.

With regard to expenses, we continue to make investments in our research and development field applications and sales and marketing teams as we build out our capability to penetrate new markets and expand into new regions. We’re beginning to see the results of that activity now as we began to see meaningful revenue outside of the mobile space. At the same time, we are taking a disciplined approach to overall spending in the business. As a result, our operating expenses were essentially flat on a sequential basis, with total non-GAAP operating expenses of $12.5 million for both the first and second quarter of 2022. Our non-GAAP SG&A expense was $6.0 million, and non-GAAP R&D was $6.5 million in the second quarter of 2022. Putting all of this together non-GAAP net loss from operations was $8.9 million compared to a net loss from operations of $5.8 million in the second quarter of 2021 as we invest simultaneously across new markets into our company’s growth. Our basic share count at the end of the second quarter was 124 million shares and our diluted share count was $132.1 million shares.

Turning to the balance sheet. It continues to remain very strong with high levels of liquidity. Cash and cash equivalents at quarter end and prior to the acquisition we announced earlier today were $240.5 million. Accounts receivable was $9.4 million compared to $9.6 million in the prior quarter reflecting the improved day sales outstanding. Inventory rose slightly to $14.0 million compared to $13.1 million in the prior quarter given softness in the China mobile market.

We’re confident that as the China mobile market recovers over time, our inventory levels will trend towards our long term target for inventory turns of three to four times. Turning to the GeneSic acquisition. As we noted, it is highly accretive to our business in all respects it is a high growth and highly profitable business with greater than 25% EBITDA margins and we expect to realize those benefits immediately. Total consideration consisted of approximately $100 million in cash, $24.9 million shares of Navitas stock and up to $25 million in cash amount subject to achieving substantial GeneSic revenues over the four quarters ending September 30, 2023.

After the acquisition, we continue to have an exceptionally strong balance sheet with approximately $140 million of cash and virtually no debt. As we indicated earlier, a major benefit of this GeneSic acquisition is its high profit margins, which will accelerate our path to overall profitability and positive cash flow. So to summarize, we are in continue to be well capitalized and have sufficient capital available to us to fund and grow the combined business and capitalize on the opportunities we see in front of us.

Now moving on to guidance. For the third quarter of 2022 GAAP revenues are expected to be between $9 million and $11 million and that’s compared to $5.6 million in the third quarter of 2021. Our guidance for the quarter includes a partial quarter of operations for the GeneSic business and while we are beginning to see growth outside of the mobile market, we do expect revenues to continue to be adversely impacted by softness in the China mobile space. Gross margin for the third quarter is expected to be approximately 40% plus or minus 2%.

We expect continued impact from the shift in the mix of our products away from mobile as we invest in expanding into new markets which initially have lower gross margins. As we noted last quarter, we believe this impact on gross margins is temporary. We expect that gross margins will improve over the next few quarters as we transition to our generation for products and the China mobile market begins to improve.

In total our non-GAAP operating expenses in Q3 which include a partial quarter of expenses for GeneSic are expected to be approximately $14 million plus or minus 3%, which excludes stock based compensation and amortization of intangible assets. Our preliminary outlook for revenue in the fourth quarter of 2022 ranges from $13 million to $16 million. And that reflects continued softness in the China mobile market and our outlook for gross margins is in the range of 43% plus or minus 2%.

In summary, we’re excited about the growth opportunities in front of us and how the combination Navitas and GeneSic accelerates our vision of becoming the industry’s next generation power semiconductor leader. Operator, let’s begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Kevin Cassidy with Rosenblatt Securities. Please go ahead.

Kevin Cassidy

Yes. Thanks for taking my question. Congratulations on the acquisition. Maybe if you could tell us a little more details about GeneSic what the revenues might be or how many employees are you acquiring?

Gene Sheridan

Sure. Yes Kevin, thanks for your call. And it’s GeneSic to help on that pronunciation as well. But it’s about 19 people and we’re estimating this year’s revenue at about $25 million.

Kevin Cassidy

Okay, and I think in the press release is growing at 60%?

Gene Sheridan

That’s right. Annualized demonstrated growth rate.

Kevin Cassidy

Okay, great. And on your generation for is that shipping for revenue now? Or is it going to be just ramping in the third quarter?

Gene Sheridan

Yes, we’re releasing our first customers in Q3. It’s not material in Q3. It’s more appreciable in Q4 and the biggest impact will be next year.

Kevin Cassidy

Okay, great. Okay, I’ll get back in the queue.

Gene Sheridan

Thanks, Kevin.

Operator

Your next question is from a line of Tristan Gerra with Baird. Please go ahead.

Tristan Gerra

Hi, guys. Good afternoon. Also, some follow-up questions on GeneSic. How much cash flow impact you think you would incur from manufacturing equipment purchases as you build capacity? And would you be potentially a recipient of the chips act, if you build or if you just expand your capacity for that company and silicon carbide?

Gene Sheridan

Ron may comment, but I’ll just explain it is a fabulous model just as the Navitas fabulous model while Navitas on GaN works with TSMC, who takes care of the bulk of the CapEx investments. In the case of GeneSic they’re working with [Xpat] who is aggressively expanding their silicon carbide capacity in their Texas facility, just like TSMC has been rapidly expanding theirs for us on gallium nitride in Taiwan. In addition, in silicon carbide, it has the added dimension of critical and substrate and epi-layers and that GeneSic team has done a great job of qualifying, approving and using multiple substrates and epi suppliers in combination with [Xpat]. So it’s a very flexible and robust supply chain, but also doesn’t require significant CapEx in the short term.

Tristan Gerra

Okay, and then, as a quick follow-up then, how should they be looking at GeneSic gross margin at scale? Is it going to be similar to current levels? Or is there any changes that we would expect as the world continues to want 25 million this year?

Ron Shelton

Yes. Hey this is Ron. So the way to that, that we think about it again, is we’re guiding as a single number as the single company right now of about Q3 was $9 billion to $11 billion, and margins around $40 million. And then going forward, in my comments, you saw that we were guiding margins up a little bit to $43 million plus or minus 2%. So that’s the trend in margins. And again, over time they’ll march in lockstep, I mean, we kind of look at it that way. So we’re just looking at this as a single company. We’re a power semiconductor company, and we’re going to report on a consolidated basis. I will point out and we put in the comments and the releases that this business is very profitable. So we refer to it as being accretive, it’s a accretive immediately. It’s got 25% plus EBITDA margins. So we’re very excited about it. We think it’ll generate cash. So, net-net-net, when you add all that up, we think it’s a really good financial transaction and business transaction.

Tristan Gerra

Great. Thank you very much.

Ron Shelton

Yes.

Operator

Your next question is from the line of Blake Friedman with Bank of America. Please go ahead.

Blake Friedman

Hi, thanks for taking my question. I just kind of wanted to further go into the GeneSic acquisition. I know in the past few years, there have been several players who are beginning to enter the silicon carbide landscape. So I was curious if you could further elaborate on the competitive advantages GeneSic holds relative to existing vendors in the industry.

Gene Sheridan

Yes. Definitely Blake. Thanks for the question. Yes, we’re super excited about it. We’ve done, of course, a lot of due diligence, some intensive testing of their technology compared to others. And in fact, we share some of those findings, in an investor presentation that’s going to be posted online. But the findings there, as we highlighted in some of the prepared remarks, are really extraordinary performance, particularly in high temperature, high frequency switching applications, which is really how you want to use these devices. Of course, that’s the benefit of wide GaN technologies began or silicon carbide.

So excellent in circuit switching performance, but they also went a step further, and develop some of the best robustness we’ve ever seen. Parameters like avalanche and short circuit, are really world class. And if that combination of reliability, robustness in circuit performance, that’s impressive and hard to achieve, and a real credit to the GeneSic team and Dr. Ranveer Singh and his work over the last 20 years that his company and really his whole career. So it puts him in a very strong, industry leading performance position. And I think it speaks to and explains why they’re growing faster than the market and gaining share in the market, even though it’s a later entrant to the market.

Blake Friedman

Good to know. Thanks for that. And then just kind of quickly, following up on the legacy business, I know you called out softness in China smartphone market similar to peers. I just wondering if you can kind of quantify that weakness both maybe in Q3 and Q4.

Ron Shelton

Yes, this is Ron. So the way to think about the business is as Gene pointed out, is this a little soft. And so relative to the first half of this year, we think about it, it’s flat to slightly down off the first half for the second half. And again, the right now, visibility is limited similar to what you’ve seen in other companies. So it’s really kind of a two to three quarter thing where we’re looking at it and say, it’s just going to be a little bit limited. So revenues out of China are muted right now and expect to be certainly through the rest of this year.

Blake Friedman

Great, thank you.

Ron Shelton

Yes.

Operator

Your next question is from the line of Ross Seymore with Deutsche Bank. Please go ahead.

Ross Seymore

Hi, thanks to letting me ask question. Ron, welcome to Navitas. Just wanted to go into GeneSic as far as the revenue growth rate side of things. I know you talked about the proven revenues are demonstrated, I assume that’s kind of backwards looking. What sort of growth rate should we think of forward looking at that 60% number is incredibly impressive, but I’m not sure if that applies going forward just as much as it has looking backwards.

Gene Sheridan

Yes, thanks, Ross. Good question. You’re right. It’s the demonstrated annual growth rate of 60% or more. We’re not giving any official guidance for ’23 just yet, we plan to do that in our next quarterly announcement in November. And that’ll give us some time to better judge the poor visibility with the China smartphone business, as well as do some more deeper integration and financial planning with the GeneSic team. But at this point, I think we’re still bullish that growth rate should be in that same ballpark going forward. And we’ll tell you more in November.

Ross Seymore

Got it. And then the core business, Ron, you gave that half over half that color was helpful to a prior question. But generally, Gene and/or Ron what do you see as the core problem here? Was it excess inventory? Is it anything that’s specific to Navitas? Obviously, we all know the markets weak, but was there excess inventory of your components on top of the customers side of things, and I guess what I’m really getting at is, you guys are gaining share, you’ve gone from six to eight to nine of the top 10 vendors. It doesn’t seem like the share gains are significantly offsetting the weakness in the broader market. So I just want to kind of get a little bit more color on the interaction between those two dynamics.

Gene Sheridan

Yes. I could add our design position in the charger market globally and in China has never been better. 20 brand new launches some really amazing brands, benchmark, fast charging experiences, we’ve not lost a single design. So there’s no loss in market share. We’re just continuing to game share against silicon and even against other discrete GaN. So I think the real dynamic is that the existing models built up some inventory of the smartphones themselves. And when that happens, we see the major players hitting the brakes on new model launches, because they don’t want to launch the new ones while they push the sell through on the existing models.

And when you’re in a very strong print position on the new models, all those premium new models, those 20 years, so a lot of them are in China, that feels an impact there. The good news is though all of those wins are done. They’re queued up. They are launched and either have limited volume in the early stages, or they’re holding them back to launch them until they complete the sell through on some of the existing production models. So I think we’re in a very strong position, but stronger than we’ve ever been before. And as that market recovers, we’ll see significant revenue gains to go with it.

Ross Seymore

Perfect, thank you.

Gene Sheridan

Thanks Ross.

Operator

Your next question is from the line of Sam Peterman with Craig Hallum. Please go ahead.

Sam Peterman

Hi, guys. Thanks for taking my question. I kind of a two part question. But I wanted to ask first, just to clarify, on those three electric vehicle onboard charger programs on the five customers. Just want to clarify, those are all from GeneSic and not from Navitas. And I’m curious kind of onboard charger seem like just in the industry like a place where, again to potentially win against silicon carbide. So curious kind of how you think about where GaN your products could slide in an EV as you go to market now with kind of both solution.?

Gene Sheridan

Yes. Thank you Sam and to clarify, the three EV platforms in development supporting those five major customers are actually just on the GaN side. And those programs are tracking really well, probably a little bit ahead of schedule for us. But as we’ve said in the past, those would probably start really contributing significant revenue out in 2025. But the GeneSic acquisition, we’re immediately shipping to dozens of EV customers. We named a few of them in the prepared remarks, Mercedes, AMG, BYD, many others. So those are really all additive. And effectively, we’ve just accelerated our participation in some of our target high power markets like solar, like EV, and energy storage by two to three years compared to our prior plans. So those all rolled together.

Sam Peterman

Got you. Okay. Thanks for clarifying that. And then second, I want to ask on the acquisition earlier in the quarter of VDD. Can you describe a little bit more kind of what that technology brings to Navitas and then can you elaborate a little bit on the thing you said an additional 1 billion a year on market opportunity? Is that across GaN and silicon carbide and kind of is that across all your markets? Any color and that would be helpful.

Gene Sheridan

Yes, definitely, Sam. And we’ve talked about it since the IPO to become our mission in next generation power semiconductor. While we’re not investing in legacy silicon power devices, there are silicone controller, or complementary chips that are very important to get the most out of GaN and silicon carbide, silicon digital isolators, like developed by VDD Tech are exactly that. In fact, these little isolators are needed in almost all these high power systems, sometimes 6 10, even 12 of these little digital isolators are needed. Here again, we’re releasing an investor presentation, which gives some more details, not only on the GeneSic presentation or acquisition, but also on the VDD Tech one.

We love that company in particular, because they’ve already optimized those digital isolators for the high speed, high frequency capability of GeneSic, silicon carbide technology and GaN. So it’s a perfect fit for us. And we’ll be integrating and commercializing products with that technology to launch next year and then we’ll be ramping. shortly after that. We did estimate that it could be up to 12 of these isolators in every system, as I mentioned, that could be up to $4 of content. And as you said up to a billion dollar market potential that is really separate and additional or incremental to the GaN phone COVID device tamps and market opportunities that we’ve described.

Operator

Your next question is from the line of Jon Tanwanteng with CJS. Please go ahead.

Jon Tanwanteng

Thanks for taking my question. And congrats on the acquisition. I wanted to ask you, Gene, how the regions are doing outside of China? Did you get some color last quarter that you’ve actually picked up some wins outside? Can you just give us a little more detail how everything’s going by geography?

Gene Sheridan

Yes, definitely, we’ve certainly been very successful in diversifying into other regions. That’s obviously been accelerated by the softness in China. But in particular, Europe is the one to highlight. We see good stability in all of the regions and growth and almost all of the regions but Europe in particular is that major program we highlighted last quarter and now we’ve given more color, that this is a major premium home appliance company that’s adopting GaN ICs for the first time for motor drive applications. And that’s really put Europe as a significant percentage of our overall total revenues. So it’s a pretty balanced view now across China, the broader Asia, U.S. customers who are generally building in Asia, and then the Europe business.

Jon Tanwanteng

Got it. And then second, I was wondering if you could just talk a little bit about how you model growth going forward in these high power markets, not the charger market, but EV, solar, in light of the climate bill that’s passing, how that’s going to move a lot of units of these types of applications? Have you done any work as to how much they would actually move the needle for you guys?

Sam Peterman

Yes, that’s a great question. And obviously, that world is still unfolding as that climate clean energy act gets passed and implemented. But between the Chips Act in the U.S. to encourage semiconductor companies in manufacturing, and now this dramatically larger $300 billion plus Clean Energy Act, this is perfect for what we do. And especially as we become the only pure play next generation power semiconductor company that both GaN and Sic I’m sure our customers, our markets, and our businesses really going to benefit from those investments. In fact, if you break down what we know of those bills, they’re very focused in two key areas driving energy efficient home appliances in the home, and electrifying the applications like heating, which is commonly gas based and not electric based, to move to things like heat pumps, but also, of course, continuing to incentivize and accelerate electric vehicle and e-mobility more broadly.

Those are all obviously right up our alley, not just with GaN, we’re already working on in the next few years, but now immediately going to benefit our silicon carbide business we’re already shipping into those markets. So we’re very excited on the government initiatives. And we’re looking forward to learning more and quantifying how that exactly translates into an acceleration of our business.

Jon Tanwanteng

Great. One more, if I could, with the combination with GeneSic what market can you go after or application can you go after the neither of you could do by yourselves? Is there any platform that requires both GaN or Sic or some way that one helps you get into another?

Gene Sheridan

Yes because both an interesting diversity to GaN synergistic nature, it’s opening up all new customers and applications that we wouldn’t have done GaN only and conversely, I think the same for GeneSic on the silicon carbide side, but also there’s good overlap and synergies. I’m probably most excited about the overlap and synergies because a lot of these markets, there’s choices to be made by the customer. And a lot of suppliers show up either with GaN technology, but not silicon carbide, or maybe trying to push the older legacy silicon devices, or conversely might have silicon carbide, but not GaN. Novitas is going to show up with leading edge GaN leading edge silicon carbide, and really help the customer find the right technology.

And I think there’s overlap there. That’s a great opportunity for Navitas to be the one who delivers the best technology, whatever that might be. I think there’s a lot of overlap in electric vehicle, whether it’s a 400 volt battery, or 800 volt battery. There is a lot of overlap on opportunity and solar and an energy storage. So having this unique combination is I think, going to pay a lot of dividends to guide the customer to the right, optimized next generation solution. And no matter what is the winner in any of these sort of overlap markets, of course Navitas is going to be there to benefit.

Jon Tanwanteng

Great. Thanks.

Operator

[Operator Instructions] Your next question is from the line of Mark Lipacis with Jefferies. Please go ahead.

Mark Lipacis

Hi, great. Thanks for taking my questions. I had two. So Gene just I wanted to make sure I understood that last comment, which I think was very clarifying. So this is not necessarily in R&D cost synergy reduction opportunity. And then refocusing. You had a before we picked up GeneSic you had like kind of a roadmap for higher voltage applications on your GaN product, you’re pushing forward with onboard chargers, you have solar roadmap, and you completely expects to extend that and then you have the silicon carbide portfolio that was sitting on top of it. And that would be a portfolio of products. Is that the right understanding?

Gene Sheridan

Yes, I think that’s definitely the right way to think about it Mark. As you said, with GaN it was going to take us two to three years, these are long development cycles. We’re optimizing our technology for the higher power. We’re doing great and on track are even a little bit ahead of schedule in that regard. But with GeneSic this puts us immediately in production with significant relationships and revenue, a lot of those same EV customers, solar customers, energy storage customers, and that we show up very quickly with not only leading edge silicon carbide, but leading edge GaN to make sure we’ve got the right tool in the toolbox to deliver whatever is going to get them the very best next generation power system capability. So it’s a real game changer for accelerating and diversifying our business completely in line where we’re intending to go, but it’s a real accelerant to that plan.

Mark Lipacis

Got you. Okay, that’s helpful. And then the follow-up question on the slowdown in China and I don’t know, Ron you started to talk about this. I don’t think I was able to take the notes fast enough. What is your own inventory strategy on this? Is this a market you believe in? And so therefore you just continue to expect to build inventories because it’s going to be there or do you do kind of try to tap down on the wafers getting produced for you, and then wait until the market comes back? And then kind of trying to manage the working capital that way? And in line with that, is there a risk of a write down on any of the inventories that you’re carrying? Thank you.

Ron Shelton

Yes, sure. Good question. So with respect inventory, I think what we’re want to go is will align inventory over time with the state of the business. And by that I mean our inventory turns about one and a half times right now. And as we go forward, we’ll target three to four times a year. So it’s just we’ll keep inventories on hand that align with our outlook at any point in time. I mean. So put it another way the intent is not to just keep building inventory to build inventory, we’re going to align it with the market and our outlooks as we go forward.

The second part of your question about write downs. And there’s no reason for us to think about write downs right now. I think those are the kinds of things we look at every quarter. And a lot of it’s based on outlook in the state of the market. So we do that every quarter and we didn’t have any this last quarter.

Mark Lipacis

Got you. Thank you.

Ron Shelton

Yes.

Operator

Your next question is from the line of Quinn Bolton with Needham and Company. Please go ahead.

Quinn Bolton

Yes. Just wanted to follow up and Mark’s question there about inventory writedowns. I guess the current designs, current chargers sort of inventory it up. You’ve got a slew of new designs sitting behind them possibly based on your fourth generation products. Why wouldn’t there be a risk that some of this gen-3 stuff might have to see a write down just given the lower overall demand for those older generation chargers?

Gene Sheridan

Yes. I think there may be lower demand currently for it. But again, I think it’s not as if the product is bad per se, I think it’s — we have existing inventory. We have outlooks and forecasts and ideas certainly not to write anything off. And at this point, again, what I can tell you is we will look at it every quarter, it’s based on outlooks at that period of time. When we looked at it in Q2, there wasn’t any write offs, like I said, and we’ll look at it again in Q3 and we’ll look at it again in Q4, and so on.

Ron Shelton

Then I can add a little color too. In terms of where our real volumes are, it’s really spread over maybe a dozen part numbers. So we’re not looking at a real high mix situation, we’re looking at clearly a delay in consumption in the China market in particular, but not a really high mix. Generation-4 in particular, each generation can be different generation-4 in particular, is what we call a die shrink and a pin to pin replacement. So the good thing is there if customers want to move to Ge-4 they’re required to do it, we have flexibility in whether we’re shipping them Gen-3 or generation-4 even if they’ve designed in one versus the other. So generationally that helps to reduce risk. And the fact that we’re our volumes are spread over no more than about a dozen partner results to help to reduce inventory risk related to mix.

Quinn Bolton

Got it. And then just wondering, follow up. Maybe I missed and apologize if I did. Did you say what date you close the GeneSic acquisition?

Gene Sheridan

Today.

Ron Shelton

Today.

Quinn Bolton

Today, okay. All right. So you’ve got about half a quarter of GeneSic then in your third quarter guidance, roughly speaking.

Ron Shelton

Right.

Quinn Bolton

Got it. So if I just do some quick math, you give us a $25 million run rate for GeneSic.

They are probably about $6 million to $6.5 million in revenue to Q4 which would imply your GaN revenue probably increases sequentially. Is that sort of being driven by the non-mobile markets or this European motor driver opportunity? And sort of related question does the margin increase to 200 basis points margin? Is that really more of a reflection of just getting the full quarter of GeneSic or you seeing an improvement in GaN margins as well in Q4?

Ron Shelton

Yes, this is Ron. Let me start. So yes, there’s a few questions in there. So let me start at a high level. So we did say GeneSic about $25 million a year. We also talked about the GaN business being flat to down sequentially, kind of from the first half to the second half. I think when you look at margins going forward and they starting to move up in Q4 it’s really a part of it is mix on the GaN side, both end market and customer base And then also Gen-four, we’re introducing Gen-four, and the full quarter of GeneSic. So there are a few things leading into the margin improvement in Q4. But again, it’s at a high level of that. It’s again, does this, like I said, it’s flat to down second half. That’s fine. Gene I don’t know —

Gene Sheridan

No, I think that’s right. Those are the main drivers that are leading to some incremental margin improvement in Q4 and we expect that will continue into next year.

Quinn Bolton

Great. And then last one for me, Gene, I know you’ve given us sort of the update, timing with Gen-4. I think previously, you’d expected Gen-5 which brings you to price parity with silicone to sort of ship or to be introduced by the end of calendar ’23. Just wondering, are you guys still sort of tracking to that late ’23 introduction to Gen-5 that brings you to price parity with silicone?

Gene Sheridan

Yes, no, that’s good memory and good notes Quinn and no change to that guidance.

Quinn Bolton

Great. Thank you very much.

Gene Sheridan

Thanks Quinn.

Operator

[Operator Instructions] Your next question is a follow up from the line of Tristan Gerra with Baird. Please go ahead.

Tristan Gerra

Hi, guys, thanks again for the opportunity. So I understand GeneSic accelerates and diversify your business very synergistic. How should I look at your positioning what it is to some analog companies that are ramping silicon carbide, but they’re the targeting billion plus in silicon carbide, whatever you next year, if I kind of look at let’s say you do $65 million in three years. And if I divide this by the average silicon carbide content in EVs, we obviously get a fairly low unit number. So how differentiated you’re going to be relative to those higher volume guide in silicon carbide? Or are you going to be targeting lower volume applications within those markets?

Gene Sheridan

Yes thanks, Tristan. Yes, to give a little bit more color, as I stated before we’re starting with a very impressive capability. GeneSic is not well known, it’s kind of the new kid on the block has not been aggressively marketed. We’re about to change all of that. But with that said, that technology is already driving that fast, faster than market growth adoption and market share gains. And I think that’s all a reflection of the significant performance and robustness differentiation that’s already been designed into the silicon carbide by the GeneSic team and Dr. Ranveer Singh.

With that said, Navitas is going to bring a whole lot of capabilities, system innovations, circuit innovation, package innovation, and further device innovation, that we think are going to combine together, including other technologies like the digital isolators, from the VDD Tech acquisition. So we have a lot of variables. We have a lot of other layers of value, that Navitas has already been demonstrating and integrating GaN technology. And we’re very anxious to do the same with the GeneSic technology. So all of those I think are going to layer in over time, adding to the strong starting point we have with technology differentiation, for the GeneSic, silicon carbide [indiscernible].

Tristan Gerra

Great. And then earlier this year, I think you talked about how your Gen-4 product in gallium nitride was going to be an offset to the higher wafer pricing for TSMC. So to the extent that the Gen-4 migration potentially gets delayed a little bit as you continue to reduce your inventories in Gen-3. How should I look at the gross margin over the next several quarters as a result?

Tristan Gerra

Yes. I think we’re quite on track first of all, with our Gen-4. We’ve mentioned it before we started sampling in Q2 we’re releasing to first customers in Q3 and then seeing that ramp and some material contribution to the margin reduction, margin improvement and cost reduction in Q4. As we talked about, we’ve been pretty conservative in our outlook in the China market, as we talked about, while we want to wait and make sure that we see that recovery can better judge it. So I think all of those things are pretty well baked into the guidance we’ve shared today. And again, we’re in pretty good shape here in terms of hitting our plans, or even running a little bit ahead of our plans on Gen-4 rollout and customer adoption.

Tristan Gerra

Great. Thanks again.

Gene Sheridan

Thanks, Tristan.

Operator

This concludes the question and answer portion of today’s call. I’ll turn the call over to Gene Sheridan for any closing remarks.

Gene Sheridan

Thank you very much, operator. And thanks to all of you who joined this call. It’s a really extraordinary time in our company’s history after just one year since our IPO to have completed some of the acquisitions that we alluded to in our company strategy of not just being a GaN leader, but being that next generation power semiconductor leader. Now adding silicon chips with the VDD digital isolators, now adding an extraordinary company with GeneSic and the silicon carbide capability, really positions us to follow our strategic plan very well and positions us as the only pure play next generation power semiconductor company. So we’re very happy about our position and very happy all of you could join us today. Thank you very much.

Operator

This concludes today’s conference call. Thank you all for your participation. You may now disconnect.



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Navitas Semiconductor Corporation (NVTS) CEO Gene Sheridan on Q2 2022 Results – Earnings Call Transcript

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