Transphorm, Inc. (NASDAQ:TGAN) Q2 2024 Earnings Call Transcript

Transphorm, Inc. (NASDAQ:TGAN) Q2 2024 Earnings Call Transcript November 10, 2023

Operator: Thank you for standing by, and welcome to Transphorm’s Second Quarter Fiscal 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder today’s program is being recorded. And now I would now like to introduce your host for today's program, Mr. David Hanover of Investor Relations. Please go ahead, sir.

David Hanover: Good afternoon, and welcome to Transphorm’s second quarter fiscal 2024 earnings conference call. Joining us today from Transphorm are Primit Parikh, CEO, President and Co-Founder; and Cameron McAulay, Chief Financial Officer. Before we begin, I'd like to point out that there is a slide presentation associated with today's prepared remarks, which management will be referencing during the conference call. These slides can be accessed through the live webcast link in the Investors section of Transphorm's website where they will also be posted and available as a link to a PDF subsequent to today's conference call. Additionally, during the course of this call, the company may make forward-looking statements regarding the company's financial position, strategy and plans, future operations, specific end markets and other areas of discussion.

An automated manufacturing production line of semiconductor components on an assembly line.

It's not possible for the company or management to predict all risks nor can the company assess the potential impact of all factors on its business or the extent to which any factor or a combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed during this call may or may not occur, and actual results could differ materially and adversely from those anticipated or implied. Any projections as to the company's future performance represent management's estimates as of today, November 9, 2023. Neither the company nor any person assumes responsibility for the accuracy or completeness of the forward-looking statements.

The company also undertakes no obligation to publicly update forward-looking statements for any reason as to the date of this call to conform such statements to actual results or to the changes in the company's expectations. For a more detailed information on risks associated with the company's business, we refer you to the risk factors described in Transphorm's most recent annual report on Form 10-K and other subsequent filings with the SEC. With that said, it is now my pleasure to turn the call over to Transphorm's CEO, Primit Parikh. Primit?

Primit Parikh: Thank you and good afternoon to everyone on the call. We are pleased to report a strong second quarter of fiscal 2024 as year-over-year revenue grew 36% to $5 million, and product revenue increased 18% over the prior quarter to $3.6 million, exceeding our expectations. We also delivered higher gross margin and reduced cash burn, each exceeding our expectations. The design in momentum continues to be very strong, having grown our pipeline further by over 5% since our last Investor Call. Our product pipeline today is over $475 million dominated by high-powered products where Transphorm has a clear advantage in quality and reliability, performance and IP differentiation. Q2 revenue was comprised of about 70% in product revenue with government revenue just under $1.5 million.

The government portion at the lower end of our targeted range due to the timing of our key government contract negotiations. Overall, more than 70% of the product revenue mix came from high-power areas, where Transphorm continues to be the world's number GaN company with superior high performance and reliability over every other GaN competitor, most notably e-mode GaN. A white paper was recently published that outlines the superiority of Transphorm's GaN technology. We continue to make new advances, unlocking more capability of the GaN to address larger market segments as evidenced by strong product offerings that now include high-power surface mount packages like the TOLL and the TOLT, the topside cooled package, another first by Transphorm in gallium nitride.

We now have also started sampling pin-to-pin as well as other high-performing high-power products that a drop in replacement to silicon carbide MOSFETs. We continue to have additional wins in the lower power area, especially our recent system in package SiP strategy, enabling multiple customer wins. Now going through Slide 3. I will first start with a high-level corporate update. Our leadership in high-power GaN remains strong as we grew our pipeline to over $475 million and our products surpassed more than 200 billion hours in the field, further demonstrating our superior reliability. We are expanding leadership in three key high-power verticals: computing power for data centers, AI machines and blockchain; energy and industrials, including micro inverters, UPS and servomotors; and electric vehicles, initially with two and three wheelers followed by four wheelers.

We continue to increase our penetration in the low-power side as well with a system in package partnership as well as growth in notebook chargers that benefit from the superior reliability delivered by the physics-based benefits of our GaN versus e-mode GaN. Having delivered strong product revenue growth over the previous quarter, coupled with our robust pipeline, we expect to see continued sequential product revenue growth in the current third quarter. Second, we recently engaged Bank of America, BofA Securities, to act as our financial adviser in connection with our previously announced and ongoing strategic review to enhance stockholder value. Given both inbound interest we have received from third parties, coupled with continuing strong macro interest in GaN power with the help of Bank of America, we are systematically pursuing multiple options that may include the merger or sale of the company.

As we previously discussed, we are working on securing non-dilutive debt financing as well as having in-depth discussions on certain licensing possibilities as we work to secure our financial runway well into fiscal 2025. Now moving on to Slide 4. I will next review our key vectors and execution metrics for the quarter. We reported $5 million revenue in Q2, 70% of which was from product sales that exceeded our expectations, with the majority coming from high-power, which is more than 300 watts for us. It is worth noting that competing e-mode GaN has not realized yet end product customer ramps due to unclear full voltage reliability of e-mode GaN, at least from offerings from the leading e-mode GaN Foundry. For fast chargers in the low-power space, we secured 15 new design-ins, taking the total to more than 115 with over 30 now in production.

Notable is our multiple wins at two of the top three worldwide lap of OEMs due to the performance and reliability of d-mode normally off that delivers higher efficiency from an effectively smaller die due to its superior dynamic characteristics. We are gaining rapid traction with our SiP, our system in package strategy with more and more integrated controller and driver companies and the strong ecosystem partners now who are increasingly preferring to design-in Transphorm's pure-play GaN chips with more than five products now in design-in and two SiP products released. To the best of our knowledge, Transphorm still is the only GaN company with broad-based customers in the high-power across segments from 300 watts to over 4 kilowatts who have ramped in the market, and now we are addressing 7.5 kilowatt power levels from a single chip.

Since our last update, we've had a record of 33% sequential increase in design-ins for high-power that stand today at over 100 of which over 35 are in production. Adding to our already diversified package portfolio, we introduced several new products, notably the high-power surface mount TOLL and TOLT topside cooled packages, a first for GaN. We are working with leading customers in the server, energy and microinverter space for this high-reliability high-performance parts. We are also sampling a 4-pin TO-247 high-power GaN, something e-mode GaN cannot do due to the inherent gate weakness – and these 4-pin TO-247 are pin-to-pin compatible with silicon carbide MOSFETs while exhibiting 25% lower losses at 5 kilowatts versus the latest silicon carbide MOSFETs from global top three supplier.

Recent high-temperature full voltage stress testing on the SuperGaN products revealed superior reliability and the dynamic performance over e-mode GaN from the leading foundry that exhibited 400% increase in resistance, i.e., losses for the e-mode GaN case after just 500 hours of reliability testing. Where is this may be acceptable for low-power adapters, it certainly is not for high-powered server, industrial and automotive. And this is where Transphorm GaN especially excels. These, coupled with the ecosystem partnerships with IC companies for Transphorm GaN that can be used with standard controllers and drivers will also contribute to our anticipated sequential product revenue growth. Our 1200 volts GaN has progressed well with models and data sheets that are drawing significant interest from EV customers, some of who are even starting to view GaN as a possible future replacement for silicon carbide.

With automotive qualified products today at 650 volts and then having 1200 volts in the future with the promise of a simpler supply chain and an attractive cost structure with gallium nitride. Our efforts to improve operational capacity and costs led to continued higher productivity from our Japan epireactors, while further capacity from qualification at our global wafer reactors is expected by the start of fiscal year 2025. We added high-volume packaging subcontractors for both our high-power and low-power products, a move aimed towards improving margins as well as capacity as we target aggressive growth over the next few quarters. Moving on to Slide 5 now. Let me turn to our partnerships in key manufacturing and customer initiatives. Our manufacturing scale expansion efforts remain ongoing with global wafer reactors now in qualification.

And expect it to be done by the end of fiscal year 2024 to ramp in fiscal 2025. We now have six out of eight of our MOCVD reactors installed and running at various levels of production or development. And consistent with previous updates, about $50 million [ph] of annualized product revenue comprising both wafer and package products can be supported. Our AFSW wafer fab continues to operate on target and has sufficient capacity plans in place for fiscal year 2024 and 2025. With incoming interest of third parties in the AFSW wafer fab joint venture, we are also potentially looking to add a third partner that could reduce our ownership to roughly half of the current levels in fiscal 2025, while maintaining IP ownership for our technology in the fab.

Transphorm has the only GaN offering with three and five micro-seconds short-circuit rating, developed under a funded effort from Yaskawa, a worldwide leader in motion control and robotics. We also achieved 12 kilowatts from a single device in a half-bridge topology without any paralleling, which promises over 30- to 60-kilowatt scale inverters when used in three-phase single and parallel mode, an important step towards enabling EV in wafers with gallium nitride. We also came one more step closer to achieving our targeted growth in the EV two-wheeler and three-wheeler charging space, with the release of 300 watt and 600 watts two- and three-wheeler EV charger power supply designs. We have successful ongoing design-ins at two of the top five India-based OEMs that we expect to ramp next calendar year.

As stated before, with the automotive exclusivity behind us now, we progressed on worldwide customer engagements with EV four-wheeler customers for charger and converter applications, with 650-volt automotive AECQ one-on-one qualified products. And we are in early discussions regarding our 1,200-volt technology. Some manufacturers, including a leading U.S. OEM have engaged in efforts to develop gallium nitride as a potential future replacement of silicon carbide. We received payments of a little bit more than $1.4 million in Q2 on our NSTXL Epi wafer government program that was awarded to Transphorm in the fiscal first quarter of FY 2024. And thus far, we have received about $4.4 million of payments from performance under this award. We are also in meaningful discussions for licensing with various parties, some of whom are planning for GaN fab manufacturing under the U.S. chipsets.

This would result in significant non-dilutive capital that could be in place in fiscal 2024. Last but not least, Transphorm is also part of the micro electronics common chipset trust through our participation in the coalition led by University of Southern California to enhance production of 5G and 6G semiconductor manufacturing, where we expect to secure support for funding through this program for enhancing some of our rf GaN epi trust. Now on to Slide 5. Our core capabilities, again, from low power to high-power wafers and package products are captured in our large and growing pipeline. In line with our strategic emphasis and revenue profile, about 70% of our power products pipeline applications are for high-power defined as over 300 watts.

Across the full spectrum, Transphorm's gallium nitride is fundamentally superior to other GaN like e-mode GaN and typical foundry offerings, the impact of high reliability and robustness getting even more evident in the higher public areas. This, coupled with growing ecosystem partnerships with IC companies, both in the low-power and high-power space, we expect to convert larger portions of this pipeline into production, hence, supporting our targeted product revenue growth both near term and long term. In closing, our priorities will be on the following areas. First, progressing through the strategic review process now with the assistance of Bank of America, BofA Securities, to systematically identify the best options to enhance shareholder value, including the potential merger or sale of the company.

And to secure non-dilutive debt and other capital, such as licensing, meaningfully extending our cash runway well into fiscal year 2025. Second, continuing sequential product revenue growth in the current fiscal Q3. And growing our worldwide sales and application footprint to enable faster conversion of our growing design-ins into revenue. All are based on our superior performance, high reliability, and cost effectiveness of SuperGaN products, as well as our ecosystem of strong solution partners in the IC space, SiPs notably, for lower power and system level solutions for higher power. Third, continue to improve margins through achieving higher volumes, transitioning to lower cost packaging subcontractors, and following our technology road map to improve performance while reducing costs.

Fourth, accessing new markets like 800-volt battery EV systems. And adding new offerings, like the 1,200-volt GaN and motor-drive products with short-circuit capable GaN, as well as other novel topologies like the four-quadrant bidirectional switch all first enabled by Transphorm GaN. Overall, as one of the only pure-play GaN power semiconductor companies in the world, with volume production in both the low-power and high-power segments, we are well positioned to progress towards our long-term model in fiscal year 2024 and beyond. With that, I will hand it over to Cameron to walk you through our financials. Thank you.

Cameron McAulay: Thank you, Primit. And hello to everyone joining us today. Let me now start my remarks with a brief recap of our financial results for our most recently completed quarter. For my remarks, I will refer both to GAAP and non-GAAP results, which are reconciled to GAAP in our press release tables. Non-GAAP results exclude stock-based compensation, depreciation, amortization, and other income and expenditure. Starting with the income statement. Total GAAP and non-GAAP revenue comprising product and government was $5 million in the quarter. This represents a decrease of 15% to the prior quarter and an increase of 36% over the same quarter last year. Product sales were $3.55 million in the quarter, in excess of our expectations.

And an increase of 18% from the prior quarter and 12% from the same quarter last year. Our product revenue is being driven across a broad range of power conversion applications, including fast chargers and adapters, and gaming and data centers. As noted by Primit, we continue to see positive momentum with our customers and production. Looking to the immediate future, the company anticipates a continuation of our sequential product revenue growth in the current quarter. Government revenue was $1.45 million in the quarter, a decrease of $1.45 million in the prior quarter and an increase of $1 million from the same quarter of last year. This year-on year-increase has been driven by the successful award and execution of our new $50 million government program.

We will continue to see solid revenue from this program over the year, with flattish revenue anticipated in the coming quarter. The reduction from the prior quarter is attributable to pre-work done at the inception of the contract that increased revenue particular to Q1. The gross margin in the quarter was 23%, down from 35% delivered in the prior quarter. And higher by 11%, when compared to the same quarter last year. The train driver here from the prior quarter was the reduced overall revenue from our higher margin government business. Direct margins for a product business remained largely stable in the quarter. We anticipate company gross margins will remain largely stable in the coming quarter for our product and government businesses. We continue to progress towards our long-term model of gross margins in excess of 40%.

A number of actions, including new product introduction, ongoing cost efficiency activities, and benefits that we will receive as we continue to grow and scale are expected to contribute to this increase. Operating expenses on a non-GAAP basis were $6.4 million in the current quarter, down 6% from the prior quarter. Spend for the current quarter is anticipated to remain largely flat. Coming to EPS, I will focus my remarks here on the non-GAAP results. The non-GAAP EPS loss in the quarter was 8%, flat when compared to the prior quarter. From an operational perspective, we continue to see solid traction in our targeted markets as evidenced by our improvement in both customers and production, and design and activity. As mentioned earlier, the company anticipates sequential product revenue growth in the current quarter.

Our short-term focus is on product execution and enabling capacity expansion to support medium- to long-term growth. We also continue to invest in the long-term growth engine of the company. Coming out of the balance sheet our shareholders’ equity was $23.7 million at the end of the quarter, an increase from $19.6 [ph] million as of March 31, and $22.8 million in June. Operational cash burn excluding capital investment, decreased significantly in the quarter from $6.8 million to $5.1 million. This was driven primarily by improved collections, including receipts from our government business and ongoing tight spend management procedures. As noted in the prior quarter, the company has no debt on its balance sheet. Cash and cash equivalents were $6.2 million at quarter end, enabled largely through the $8 million received from our rights issue.

We continue to progress towards completion on debt facilities and expect to conclude these facilities in the near term. Looking ahead, we continue to remain open to opportunities to further strengthen our balance sheet in order to ensure that we are able to continue to invest in our growth. A growth made possible through our continued progress with the design wins and production customers. Concluding now with a few key highlights. Transphorm publicly listed on the NASDAQ Exchange, is a global leader in robust GaN, the future of next-generation power systems. Our disruptive, best-in-class technology is addressing a large growing market opportunity. We are commercially ramping with a strong pipeline in place. We have established a strong network of blue-chip partners and have a comprehensive product offering to-date that meets our customers' needs across a wide range of power levels and segments.

All of this is underpinned by the industry's strongest IP position, a vertically-integrated supply chain and a deep and talented team. That concludes our prepared remarks on materials, and we would now like to open the call to any questions. Operator, please proceed with the Q&A portion of the call.

See also Top 20 Most Valuable Esports Companies and 10 High Risk High Reward Businesses in the US.

To continue reading the Q&A session, please click here.