Transphorm, Inc. (NASDAQ:TGAN) Q4 2023 Earnings Call Transcript
Transphorm, Inc. (NASDAQ:TGAN) Q4 2023 Earnings Call Transcript June 27, 2023
Transphorm, Inc. misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $-0.11.
Operator: Thank you for standing by, and welcome to the Transphorm’s Fourth Quarter and Full Year Fiscal 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to David Hanover with Investor Relations. Please go ahead.
David Hanover: Good afternoon and welcome to Transphorm’s fourth quarter and full year fiscal 2023 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 website, where they will also be posted and available as a link to a PDF subsequent 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.
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 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, June 27, 2023. Neither the company nor any person assumes responsibility for the accuracy or complete of the forward-looking statements.
The company also undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform such statements to actual results or to the changes in the company's expectations. For 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 over the call to Transphorm's CEO, Primit Parikh. Please go ahead, Primit.
Primit Parikh: Thank you, David, and good afternoon, everyone. Welcome to Transphorm's fiscal fourth quarter and full year 2023 conference call. We continue to be pleased with our increased design-in momentum, both low power and high power areas with growth in our power products pipeline to over $440 million and the total pipeline now nearing $600 million, dominated by high powered products. Q4 revenues were $3.2 million, almost 100% comprised of product revenue, which was on target. This total revenue of $3.2 million was lower than the estimated $4.5 million, largely impacted by the delay in the award and commencement of a key $15 million government contract and deliverables on another smaller [indiscernible] government contract, both of which were pushed out into the current quarter.
We are happy to report that the new $15 million program is now fully in place. The overall product revenue of about $15 million in FY 2023 represents a healthy 20% increase year-over-year. Furthermore, more than 70% of the product revenue mix came from high power, where Transphorm is the number one GaN player with high performance and high reliability over every other GaN competitor notably emod GaNs. Going on to Slide three now. Before going into our key operating metrics, I want to address our recent announcement regarding a review of strategic opportunities and alternatives for enhancing stockholder value, as well as our client rights offering. As many of you are aware, the GaN power semiconductor sector has recently generated a tremendous amount of interest from leading power semiconductor companies who have silicon and silicon carbide, but not necessarily GaN power.
This interest has been evidenced by the recent announcement of a large acquisition in the GaN space by the top power semiconductor company, as well as capital raises and other announcements of interest in GaN or GaN strategy. Transphorm is one of the few pure play GaN companies operating at scale. It is an established leader, especially in high power GaN with best-in-class technology and reliability outperforming emode GaN or the TSMC GaN in pretty much every GaN topology and power level today. This is backed by Wafer Manufacturing Ownership and our strong power GaN IP portfolio of more than 1,000 owned or licensed patents. Given this activity, coupled with Transphorm progress in GaN, we believe it is an appropriate time to undergo this strategic review with the single objective of enhancing shareholder value.
Based on multiple opportunities, including various levels of inbound interest we have received, our review will include, but not be limited to financing, both from strategic partner or investor and/or traditional debt and equity financing alternatives, licensing opportunities in the U.S. and Asia and potential M&A opportunities. We also recently announced a rights offering, which has support from key shareholders, and we are pursuing conventional asset based debt, both of which will give us runway well into fiscal 2025. Moving on to Slide four and coming back to our key vectors and metrics for the quarter. We achieved a 22% increase year-over-year in product revenue, nearing about $15 million in FY 2023 with majority contribution from high power GaN, which is more than 300 watts, and in key segments like computing and energy, while growing our presence in fast chargers with demonstrated performance over multiple GaN flavors in the market.
For fast chargers in the low power space, where we now address 25 watts to 300 watts, we secured 10 new design wins, taking the total over 90 and ramped three new designs into production. Notably, we announced in March at the APAC trade show and conference that we entered the SIP or the system in package market with integrated controller and driver with our partner [indiscernible], the leading player in USB PBICs. We have repeatedly seen that our SuperGaN FET delivers higher performance over the typical TSMC style emod GaN. Recently in fact showing over 10% lower loss and running well over 30% cooler in a 280 watt charger. Also as reported in Power Electronics News and validating the physics based benefit of our GaN versus emod GaN. Given this design-in momentum and continued superior performance, we see the beginning of an increased ramp in the second half of the fiscal year.
Transphorm has leadership in high power and to the best of our knowledge, it is the only GaN company with customers across segments from 300 watts to 4 kilowatts who have ramped in the market with their end products. We had a 25% sequential increase in design-ins in this area that now stand over at 60 out of which 30 are in production. We also believe we are the only GaN company to have ramped in the microinverter segment with several 1 million parts already sold and targeting $1 million with our lead customer over the coming 12 months with several other design-ins with market customers in progress. To accelerate revenue in the second half of the fiscal year, we introduced a series of industry standard pin-to-pin compatible surface mount packages in the low power area but also applicable to high power over 300 watts, notably with the higher performance of our SuperGaN FETs versus emod GaN across the range which has been quantitatively validated.
Clearly, we need to take this momentum and the 45% increased product SKUs into increased revenue by enhancing our sales and application outreach worldwide, as well as continuing to partner with strong IC and controller companies with our GaN that can be used seamlessly with standard drivers and controllers. We also released at PCIM, our 1,200 volt GaN FET simulation kits, generating significant interest from EV customers who have begun to look at Transphorm GaN as future proof, 650 volt today, 1,200 volt in future, directly taking on silicon carbide at 1,200 volts. On the operations side, we intensely focused on initiatives to increase capacity as well as direct margin improvement. Our Japan Epi reactors are now well into production, and we are pleased to report new reactors as global wafers are released into development and on track for completing qualification and released to production in the fiscal fourth quarter.
We have put in place lower cost packaging partners for our flagship high powered [TO] (ph) products from which we expect to see solid margin improvements in the coming quarters. Let me now turn to Slide five, to our partnership and key initiatives. Including our global wafer partnerships, we now have six out of the eight MOCVD reactors we have installed with four running at various levels of production or development, and we are on track for eight reactors in production by the second half of fiscal 2025, setting us up for around $50 million of annualized product revenue with just these reactors. Our AFSW wafer fab is running well, and we will be addressing incremental capacity add-ons in our fiscal 2024 to be ready for fiscal 2025. We made sound progress with our industrial and automotive customer shareholder partners.
Photo by Jonas Svidras Unsplash
Our team completed development for the next round of GaN servo motor products and secured $0.5 million funding this month. We have also streamlined our partnership with Nexperia who remains an important long term customer for the supply of wafers. Notably, we completed their exclusivity in the four wheeler automotive space after paying off the remaining debt in April and have now launched a worldwide initiative for EV four wheelers with focus in China, EU, North America, India and continuing in Japan. In all of these areas, our high power GaN products are already well recognized in non-automotive segments, something we hope to leverage from. We are also reiterating our commitment to two and three wheeler EV design win by end of this year for ramp in calendar year 2024.
To that end, we are newly sampling solutions to our customers from 300 volt to 2 kilowatt power levels for EV two and three wheeler onboard chargers and portable chargers. Although delayed from fiscal Q4 2022 to fiscal Q1 of 2023, we have secured and are now executing on our new $15 million government program for enhancing Epi wafer manufacturing for the U.S. DOD ecosystem and in future also applicable to the commercial RF GaN space. We also have significant interest from companies pursuing GaN manufacturing with the U.S. chipset program, which could materialize into licensing revenue and non-dilutive cash for us in fiscal year 2024. Moving to Slide five now, our core capabilities from low power to high power, wafers and packaged products are all reflected in our large and growing pipeline that now stands over $440 million in power products, a growth of about 7% from our last update and well over $500 million including power device wafer sales and our government contracts business.
The probabilistically weighted pipelines are about 40% approximately of the total number that again will increase as more design-ins move towards the finish line. By power levels, high power, which overall is everything more than 300 watts, where other GaN like emod today is weaker, represents the largest piece of our pipeline. By market area, industrial, power adapters and chargers, data center, renewables and microinverters are some of the key segments. The EV pipeline is growing and now with the worldwide push since our exclusivity constraint is no longer there, we expect rapid increases in this area. Also, it should be noted that a significant portion of wafer sales pipeline to Nexperia is already towards electric vehicles. Moving over to Slide seven now.
In summary, we continue to be in a unique and differentiated position among the GaN suppliers with our core platform spanning a wide range of the power spectrum. Products in the market today that address a $3 billion plus market opportunity, GaN TAM for power conversion that is expected to double over $6 billion GaN TAM in the next three years. From lower power adapters and chargers to higher power computing comprising of server, AI, blockchain and datacom power to industrial and energy and PV inverters, including microinverters, all areas we are either already in production or ramping towards production. In the mid to long term, large growth opportunities with automotive electric vehicles, both EV two and three wheelers first in calendar year 2023 followed by EV four wheelers expect to further continue GaN and Transphorm's growth beyond 2024, 2025.
Our customers have confidence in both GaN and Transphorm, evidenced by our end products having been in the field for over 175 billion hours now with very low 0.1 field failure or fit rates rivaling those of traditional silicon devices. This is an exciting proof point for what lies ahead for us, along with the fact today that we are still the only GaN offering with products in the market ramped in our customer systems from 30 watt fast chargers to 4 kilowatt energy and server products. Our immediate focus will be on: One, completing the rights offering, meaningfully extending the cash runway well into fiscal year 2025 and undergoing the strategic review process identifying the best options for enhanced shareholder value; Two, expanding sales and application footprint, converting more design-ins into ramped production and significant design-in expansion based on our superior performance, high reliability SuperGaN products, as well as our ecosystem of strong solution partners in ICs. Three, scaling capacity, improved margins with higher volumes, lower cost packaging and our technology roadmap improving performance while reducing cost, as well as accessing new markets like 800 volt battery electric vehicle systems with new offerings like 1,200 volt GaN.
We remain well positioned to tackle the near term headwinds and progress towards our long term model in FY 2024 and beyond. With that, I will hand over to Cameron to walk you through our financials and details.
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 both our most recently completed quarter and fiscal year. For my remarks, I will refer both to GAAP and non-GAAP results. which have reconciled to GAAP in our press release table. 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 and in the fiscal year licensing was $3.2 million in the quarter and $16.7 million for the fiscal year. This represents an increase of 3% year-on-year, excluding the oneoff licensing revenue transaction in the prior financial year.
For product revenue, both for the quarter and the fiscal year, it now forms the majority of our total revenue number, virtually 100% in the quarter just completed and close to 90% for fiscal 2023. The majority of this product revenue being generated in higher power applications. The higher percentage specific to Q4 is driven partially by a strong delay in the company being awarded a new government contract. This was awarded in the current calendar quarter and we expect to see revenues from this from Q1 FY 2024. Product sales were $3.2 million in the quarter $14.7 million for FY 2023. This is an increase year-on-year of 21%. This revenue has been driven across a broad range of power conversion applications, including fast chargers and adapters, gaming and data centers.
As noted by Primit, we now have over 55 customers in production, a solid increase from the prior quarter. Government revenue was under $50,000 in the quarter and $1.8 million for the year. This was a decrease of $2.1 million from the prior fiscal year. The driver here being reduced activity in our prior contract, together with a one quarter lag between the successful completion of this prior contract and the award of our new $15 million government program. As mentioned earlier, this will drive revenues in Q1 FY 2024. The gross margin in the quarter was 5%, a negative 6% for the fiscal year. The gross margin for the fiscal year was impacted as discussed in our prior earnings call by a strategic nonrecurring dispositioning of AP wafer with subassembly inventory.
Excluding this onetime strategic write off, the company would have reported stronger positive gross margins for the year. The 5% gross margin for the quarter is primarily a function of volume, indirect costs such as staffing do not scale with revenue and therefore result in a larger drive at lower revenue numbers. As we resume our growth trajectory, our expectations are the margins will follow soon, including reaching 30% gross margins in the June quarter. Our direct margins remain consistent and we continue to progress towards our long term model of gross margins in excess of 40%. A number of actions including new product introductions, ongoing cost efficiency activities, and benefits that we will receive as we continue to grow in scale are expected to contribute to this increased gross margin.
Operating expenses on a non-GAAP basis were $7.5 million in the coming quarter and $24.2 million for the fiscal year. The increase in the quarter was driven by three key factors, a significant reduction in government activity, which reduces absorption of our R&D costs, increased costs to bring our reactors up to capacity and an increase in G&A costs to support ongoing compliance activities. Similarly, in FY 2023, as we as compared to FY 2022, the primary increase was an increase in the company's headcount to support our operations. Turning to EPS, I will focus my remarks here on the non-GAAP results. The non-GAAP EPS loss in Q4 was $0.13 and $0.44 for the fiscal year. Excluding a onetime inventory write off, the EPS for the quarter was $0.02 of the non GAAP EPS for the prior quarter.
The reduce overall revenue and increased OpEx were the primary drivers for this change. Looking ahead to the June quarter, the company guides to the below. Revenue between $5.8 million $6.2 million, gross margin of between 30% and 34% and EPS loss between $0.10 and $0.13. From an operational perspective, we continue to see solid traction on a targeted market as evidenced by our improvement in both customers and production and design-in activity. 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. Turning now to the balance sheet, our shareholders' equity was $19.6 million at the end of the quarter. Operational cash run, excluding capital investment, increased in the quarter to $9.4 million.
This was driven primarily by reduced revenue attributable to the timing of the government contract being awarded, an increase in DSO driven by non-linear sales in the quarter together with weak collections. Collections have improved significantly in the current quarter. Cash and cash equivalents were $16.1 million at quarter end, we expect our cash fund to reduce in the current quarter moving forward. We continue to invest in CapEx as we look to enable additional capacity to support our growth. Other assets and liabilities remained largely stable. As announced, the company has made strong progress towards a rights issue, together with an asset backed nondilutive debt. We expect to conclude these facilities in the near term. A fully subscribed rates issued together with proceeds from the asset backed debt will give the company financial runway deep into fiscal year 2025.
Looking ahead, we will continue to remain open to opportunities to further strengthen our balance sheet in order to ensure that we're able to continue to invest in our growth. A growth made possible to our continued progress with the design-ins and production customers. Turning now to our target operating model. Transphorm is in the process of building a high growth cash generative business. From a revenue perspective, as you know, we have three different streams of income, licensing, government, and product. In the current fiscal year, product has amounted for the majority of our total revenues. And as we look forward, we expect this trend to continue. The company anticipates rapid top line growth and GaN adoption across multiple end markets with a five year expected CAGR in excess of 50%.
We are confident that the company can achieve an overall gross margin of over 40%. All segments will be able to benefit now from the improved cost structure in our [indiscernible] products. In addition, a number of actions including new product introductions, discreet ongoing cost efficiency activities, and scaling will also help our gross margins to increase. With respect to operating margin, the company will continue to invest to support all aspects of our core operations. We have a stable OpEx structure and environment that will ultimately allow us to translate our gross margins into an operating margin model that will deliver over 20% to the bottom line. From a cash perspective, additional CapEx will be deployed for increased scale in medium to long term.
But with a strong manufacturing footprint already in place, we expect to be able to generate free cash flow in excess of 10%. Concluding now with a few key highlights, Transphorm publicly listed on the NASDAQ Exchange is a global leader in 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 today that meets our customers' needs across a wide range of power levels and segments. All of this is underpinned by the industry's strongest IT position, a vertically integrated supply chain, and a deep and talented team.
That completes our prepared remarks and materials, and we would now like to open the call to any questions. Operator, please proceed with the Q&A portion of the call.
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