Transphorm, Inc.
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

Good afternoon. My name is Jason, and I will be your conference operator today. I would like to welcome everyone to the Transphorm, Inc. Business Update Conference Call. Please be advised that today’s conference is being recorded. I would now like to turn the call over to Brett Perry of Shelton Group Investor Relations. Brett, please go ahead.

[Brett Perry:]

Good afternoon, and good morning to some, and welcome to Transphorm’s Quarterly Business Update Conference Call. Joining us today from Transphorm are Mario Rivas, Chief Executive Officer; Primit Parikh, Co-Founder and Chief Operating Officer; and Cameron McAulay, Chief Financial Officer.

[Mario Rivas:]

Thank you, Brett, and welcome, everyone, to today’s call. Now thank you very much for joining us today. Now Transphorm continues to lead the GaN revolution with disruptive technologies, large market opportunities in electric vehicles and 5G, commercially ramping very quickly on this year with best-in-class GaN technology and industry’s strongest IP portfolio. Now we have validation not only from blue chip partners and customers, but also by the Department of Defense through the Office of Naval Research. And we have a team that is led by world-renowned GaN experts with an accumulated experience of 300 years in gallium nitride.

[Primit Parikh:]

Thank you, Mario, and good afternoon, everyone. Transphorm has made very exciting progress in the last quarter, particularly market penetration and ramping product revenue. Before delving into it, I will first reiterate some of the overall GaN value, market and business opportunities in front of us and our IP and manufacturing capability that is opening new doors for us and at the end, walk you through execution and focused priorities to grow our business. For those who are new to the field, the reason gallium nitride is becoming the future of power semiconductors is because existing silicon has reached its physical limits in powering what we termed the so-called Moore’s Law of power conversion. Intrinsically, gallium nitride performs at higher efficiency, lowest losses versus silicon or silicon carbide and much faster switching, for example, 4 to 5x that of silicon. In terms of cost and scalability, GaN on silicon is cheaper and compatible with the silicon wafer fab manufacturing world, paving the way for lower system cost versus silicon and strong road map for approaching silicon cost parity in future. The end result is highly efficient, cooler, compact and cost-effective power conversion system value proposition. Another reminder for TGAN approach is our in-house capability of innovation across the entire value chain. With what we call the asset-light vertically integrated model, we own the key portions of manufacturing, the core epi wafer technology and manufacturing, which is a key in our opinion; wafer fab in which we had a joint venture partner and control our IP and manufacturing; package manufacturing through subcontractors but where we still control our IP in the package; and a strong emphasis on application-driven resources, both internally and externally with quality partners, like you may have seen in the press release we did yesterday with the new full adapter design.

[Cameron McAulay:]

Thank you, Primit, and hello to everyone joining us today. Let me start with a brief recap of our most recently completed quarter. Please note that these numbers are preliminary as the audit procedures pertaining to the quarter remain ongoing. Total revenue for the 3 months to March 31, 2021, is approximately $2.4 million. This is in excess of our target and represents a 20% sequential increase from the prior 3 months and is more than double the total revenue when compared to the March quarter in 2020. Focusing specifically on product revenue, the 3 months to March 31 saw our second successive quarter of doubling shipments fueling continued growth and resulting in our highest quarterly production revenue number to date. This is our fifth successive quarter of product revenue growth, and we anticipate a continuation of this trend going forward. This will be driven across several segments, including the consumer adapter space, industrial, crypto mining, data centers and our epi vertical. Turning to operating expenses. We are projecting an increase of approximately 10% in the quarter. Firstly, we have increased our employee base across several areas of the company, manufacturing to support our revenue ramp, sales and applications to build and execute on our expanding customer base and G&A to continue to ensure that we maintain our robust compliance and governance environment. Compliance costs were higher due primarily to our year-end procedures. R&D costs increased modestly due to lower absorption with respect to our government programs. Comparing this quarter to Q1 2020, the OpEx increase is primarily driven by increased COGS due to our revenue ramp. We also saw an increase in noncash items such as stock-based comp. G&A is lower due to a number of one-off costs associated with the 2020 transition from private to public. Moving to the next slide. On the balance sheet, the company exited the quarter with just over $9.5 million in cash. In addition to our increased staffing investment, the company has increased spend in working capital to support our product revenue growth. We also secured the final $1 million from Marelli as part of their overall $5 million investment into the company. Other assets and liabilities remains largely stable in the quarter. During the quarter, the company changed its fiscal year-end from December 31 to March 31. We are currently progressing through our audit procedures and anticipate this audit being concluded well in advance of the filing deadline. As previously stated, the company is targeting an uplift onto NASDAQ, and this fiscal year-end change is a stepping stone toward that. The company continues to perform due diligence internally as we work towards this goal. I’m also very pleased to say that the company effective from today is now trading on the OTCQX. This is the highest tier of the OTC markets and demonstrates the company’s abilities to meet high financial standards, follow strong governance and compliance practices and maintain current disclosures. Coming now from the current year to reiterate our long-term business model. We are in the progress of building a high-growth, cash-generative business. The company has 3 distinct revenue streams

[Operator:]

Your first question comes from the line of Craig Ellis from B. Riley Securities.

[Craig Ellis:]

I appreciate the color on the business with the nice growth that you’re seeing there. Guys, I wanted to start just with an inquiry on the design-in and design win funnel and get a better sense of what you’re seeing as it relates to activity that could come in either in the back half of the year or maybe a little bit further out by application area. And then wall chargers were mentioned a number of times. To what extent is that really aftermarket activity versus OEM in-box activity that could ship out with the device, whether it’s a smartphone or something else?

[Primit Parikh:]

Sure. Thank you, Craig, and I’ll take that. This is Primit. So on the first, on the spot charger adapters, we have a lot of aftermarket activity, mid volume to some of the very high volume addressing some of those aftermarket, Craig, addressing name brand customers -- name brand large customers. And among the design-ins that I mentioned we have ongoing, there are a number of in-box opportunities that we are targeting there.

[Craig Ellis:]

And just on that point, Primit, as you get more experience ramping your manufacturing capability to higher volume, can you provide us with some color on what you might be looking at beyond the fourth quarter where I think the business could scale to 1 million a month? But as you look at flexing manufacturing up to some of these higher volume needs, what are some of the milestones that would exist beyond the fourth quarter that would give investors some visibility on the degree of growth potential in the business?

[Primit Parikh:]

Sure. No. As you see, it’s a very exciting area. And first things first, we want to be very solid with that 1 million per month capacity and then grow from there. We’re definitely preparing, like I said, multiple packaging suppliers for growth. We -- obviously, Transphorm owns our own wafer manufacturing, both on the epi wafer side as well as the wafer fab. So that’s in our hands to plan to continue to ramp. So we -- yes, we continue. You saw a nice doubling and actually tripling this quarter. So we hope to be reached at 1 million a month and then continue rapidly up from there. We have certainly -- when we talk to these OEMs and in-box, we have to give a strong picture of our manufacturing, our supply chain. And so far, we are successfully doing that right now.

[Craig Ellis:]

Good for you. And then lastly, for you, Primit, before I shoot a few at Cameron. We’ve clearly seen cryptocurrency activity in the news a lot. The company had a press release out, I think, in the March time frame, talking about the suitability of its power conversion capability to gaming charging and some of the charging requirements of that market. As you look at the funnel, as you look at the engagement activity that you and your agents have, to what extent is crypto coming in as a demand driver? And how significant is it with the funnel activity that you have right now?

[Primit Parikh:]

Sure. So in the Q1, actually, when we -- the design that we announced earlier, that has already ramped in production. And when I talked about our higher-power TO247 doubling from Q4 to -- calendar Q4 to calendar Q1 ‘20, the crypto -- the new crypto win and our existing win was an important part of that. So we have a couple of customers there who in turn are working with the larger end providers of these mining rigs.

[Craig Ellis:]

Got it. And then, Cameron, over to you. So thanks for the additional color on some of the income statement balance sheet items. So one, maybe just a timing question, housekeeping question. When do you expect to have audited financials published for the March quarter?

[Cameron McAulay:]

Sure. Sure. So we’re in the middle of it right now, Craig. Where we’re looking at, it’s a 90-day deadline, which is the end of June, and we’re certainly targeting to be making a mid-June time frame. So somewhere around the middle of June is our current target.

[Craig Ellis:]

Okay, mid-June. And then $9.5 million in cash exiting the calendar first quarter, I think I heard you say. Any notable either uses of cash in the calendar second quarter or anything on the horizon from partners or strategics that would supplement the cash balance?

[Cameron McAulay:]

Nothing to report specifically on that, Craig. I think what we look for in Q2 is a continuation of investing in the team, a continuation of obviously supporting our inventory position. We’ll see the higher revenue numbers, obviously, increasing receivables, and we’ll work towards that over the course of the Q2. We will see in the Q2 time frame, obviously, the continuation of the investment from Yaskawa relative to the development agreement that we signed with them last year.

[Craig Ellis:]

Yes. And then on operating expense, I know we’ve got some unusual items in the first quarter and probably the second quarter just related to the change in the fiscal year. Obviously, there’s a higher level of audit expense that goes along with that. But you also mentioned in your comments that there were investments in both sales and finance. Would we expect then that the business, at least for how we’re looking at calendar ‘21, would be appropriately provisioned with new resources? Or should we expect incremental resources to be added through the year? And to what extent and what does that do to OpEx by the time we get to the end of the year?

[Cameron McAulay:]

Sure. Sure. I think we added in the quarter manufacturing resource, sales resource. We added to the finance team to support it. And I think that we’ll continue to add, but it’s going to be one here, one there, Craig. This isn’t going to be a situation where we’re adding significant headcount. So I think as we think about the OpEx going forward and the staffing going forward, it may increase, but it’s not going to increase materially because the additions we’ve got are very targeted, because we’ve got a very stable team in place.

[Craig Ellis:]

Got it. And then just lastly, a lot of helpful color on the financials. Any color you can provide on gross margins and what you’re seeing in the business? There’s -- obviously, input costs are moving in this environment. And anything that’s notable either in the quarter or that we should bear in mind as we think through the middle to the back half of the year?

[Cameron McAulay:]

Nothing specific. I don’t think -- Craig, I think that we continue, obviously, to increase our volume, and we’re looking to do that over the course of the year. From a margin perspective, there’s nothing I would say that would be particularly surprising. And again, we’ll see when the final audit results come out in mid-June at this point, I think, from a business perspective. We were -- the overall blended margin that we’re looking to achieve in 2021, we’re still very comfortable with that.

[Operator:]

Your next question comes from the line of Richard Shannon from Craig-Hallum.

[Richard Shannon:]

Primit, maybe I’ll start with the first one for you on the fast charger market here. You talked, I think, for Transphorm here, on the order of a couple of dozen wins or at least wins in process, nice improvement there. We’ve also seen, and as you -- as I think Mario mentioned briefly in his prepared statements, you mentioned another GaN company who’s -- tend to come to market here via SPAC and their presentation talks about a number of designs. I think it’s 3 figures. Even Power Integrations, who’s also been here has talked about a fair number here. Can you kind of give us some color into this market here in terms of whether this is still kind of a greenfield opportunity or you’re bumping against where you’re seeing others here. And then if we look forward 1 to 2 to 4 quarters, how many designs could we ultimately see Transphorm being involved with?

[Primit Parikh:]

Thanks, Richard. And I think this is really -- it’s still -- to be honest, it’s still like a so-called greenfield opportunity as we see it. The growth has just started, right? And there is a very, very strong opportunity. What I like to say is this is like the -- my favorite analogy is this is like the early days of the GaN LED industry, which just exploded for a number of years through worldwide penetration. And the transformation of the industry took place and companies with strong product, strong IP, strong manufacturing. There are 4 or 5 or 6 companies that were required to satisfy and sustain our market. So we see strong growth going on. Like we said, we are in a fortunate place to have a product portfolio across the entire power range, not just 45 watts, 65 watts but from adapters to automotive. And as we fully dove into this adapter charger market, over the last several quarters, the progress has been very fast. So we hope to yet continue to increase that number, those 10-plus wins and 10-plus design-ins, we hope to double -- triple that as we go forward, right, in the next year or so. And we are -- Transphorm surely will get more than our fair share in this segment. But all those good companies you mentioned, it will be needed to sustain this very rapidly -- rapid growing and large market.

[Richard Shannon:]

Okay. That’s a helpful perspective, Primit. While you talked about the 1 million month per goal capacity, the adds in your last quarter, you confirmed that now. I mean if we talk about the number of designs tripling here and increasing attention here, I mean, you’ve got to be targeting a capacity goal that’s got to be getting 2 million, even higher in the not too distant future. Is that something that you’re looking for to getting to some point next year calendar or even early calendar next year?

[Primit Parikh:]

Yes. Those are the -- when I talk about the tripling of the designs. Those are exactly the things for next year calendar that we do. And hand in hand with that goes the capacity, obviously. The wafer capacity is in our own control. Package capacity, we work very closely with our packaging subcontractors well in advance now with the lead times and associated things that we are seeing in the entire semiconductor industry. So yes, those are the kind of things that we would look to be in sometime in 2022.

[Richard Shannon:]

Okay. A quick question on the gen 5 product. I think you mentioned your -- the commercial version that is being released to the market here in the third quarter calendar. When should we expect to see design wins and then the noticeable revenues from that? Is that a calendar ‘22 story or would that be after that?

[Primit Parikh:]

We are targeting actually the first one in the second half of calendar ‘21 itself. So sometimes, we don’t wait until a full release when we start early -- strategic early sampling to a few chosen customer partners. So we’ve been doing that, and we expect the first production to be sometime before end of 2021 itself. And then obviously, we try to grow that more in 2022.

[Richard Shannon:]

Okay. That’s helpful. Let’s see here. Following up on one of the -- I think I heard a comment a couple of times about end market splits here. I wonder if you can provide a little bit more specificity here, maybe even quantifying the end markets here in terms of contribution or at least a rank order here. I know you talked about several and they went by kind of fast, but I’m wondering if you can provide a little more detail to that, please.

[Primit Parikh:]

Correct. So a lot of the recent growth at the top level, a lot of the recent growth when we talked about doubling and then 2 quarter-over-quarter and then tripling this quarter, that has come from the adapters and fast chargers. And -- but still, the solid TO247, which is a unique high-power product that Transphorm GaN has, that has also doubled. So I would say, unit volume wise, the adapter and charger definitely is dominant when you -- if you look at the large product, right, one large die that we have to put in perspective. For example, our largest -- our 35 milliohm die when talking about the largest product, can we like -- 6 to 7x the area of a small device. So that is equivalent to shipping like one unit, is equivalent to shipping 7 units. So it’s difficult to make an exact unit comparison there. But fair to say that a lot of the rapid growth the last 2 quarters has come from adapters chargers.

[Richard Shannon:]

Okay. That is helpful. My last question, kind of a 2-parter here. One of the slides showed a line chart over time here, and I think they had an estimate for the June quarter, and I think it was measured by units. If I caught the numbers right, it was 2.3x extra last quarter and then 3.8x for this quarter, which would, if my math is right, would suggest 65% growth quarter-on-quarter in units. Did I catch that? Is that the right interpretation of those numbers? And how do we then take that to think about a revenue number for this current quarter?

[Primit Parikh:]

Yes. So yes, when say it’s relative, right, so we normalized it to Q3. So on a kind of Q4 ‘20 calendar to Q1 ‘20 was 2.3x. And Q1 ‘20 to Q2 ‘20, 3.8x. So we are -- those revenues, we are comfortable with the models out there on the street. We have not given formal guidance, but safe to say that we are quite comfortable with the numbers out there.

[Operator:]

Your next question comes from the line of David Williams from Loop Capital.

[David Williams:]

Congrats on the progress. Just want to ask maybe a little bit about the epi wafer business and what you’re seeing there. Obviously, you’re making some really nice traction. But can you talk about maybe what your total expectations are in maybe the epi business on the RF side? Just thinking about how you’re ramping the product side.

[Primit Parikh:]

Sure. Our RF epi wafer business is twofold, right? One is what -- for the DoD government. So we have this Navy program, which is excellent for us in enhancing our manufacturing capability as a supplier -- as a U.S.-based supplier, which we are doing. And that also helps us -- separate from that is the supply of epi wafers to DoD PRIMS , DoD customers for that activity. So that’s additional to the Navy contract. The Navy contract itself is an epi wafer revenue opportunity. The DoD PRIMS is additional catalyzed and held by the Navy contract, but a separate business opportunity that we are growing. And then the third is the commercial -- the existing commercial GaN RF market. Like I said, we have a sample pilot -- for pilot production to one of the large established players of GaN RF makers in the U.S. So we look forward to nailing that standard GaN RF epi wafer supplier design win by end of the year.

[David Williams:]

Okay. And then maybe on some of the new design wins, I guess, when you’re talking with customers, what is really the, I guess, deciding factor? What is making them choose you versus maybe one of your competitors? Is it performance? Is it -- I guess, how are you winning and what’s really driving that?

[Primit Parikh:]

Sure. So like we separated into the adapter charger space and the higher power space, right? So in the higher power space, actually, we are one of the only ones with solid reliable GaN products out there. There are other companies, but we are leading that pack very significantly. On the adapters and charger space, there are good companies, like I mentioned, the Power Integration, Navitas, all doing well. And there, like we have said before and what we are consistently seeing is -- and now, like I said, third parties have validated this. Our GaN product technology is fundamentally better, the chip itself. And that allows customers to do more with less. So a smaller GaN die performs more efficiently than a competing GaN die. So they are seeing more performance with the smaller GaN die, the reliability and quality reputation that we have, again, from our high-power products, from the adapter products, now we have a field FIT rate failure in time of less than 0.5 with close to 14 billion hours of operation in the field. So reliability and quality performance. And then ease of use, right? Our products, as I didn’t lay it out specifically this time, but we have standard drivers. Our product architecture allows for the use of standard drivers without any, what I’d like to term, a shrubbery around that to add biasing circuits and whatnot. So one can allow for a smaller footprint and eliminate their certain bond components also from the reference designs like the Silanna reference design, for example, that we showed. So those are the 3 or 4 things that are allowing us to penetrate the customers.

[David Williams:]

Great. Very good color there. And then maybe lastly, just if you could -- as we think about the hurdles or constraints maybe towards the -- as we get to the end of the year, obviously, things are ramping very nicely. What are the biggest, I guess, hurdles that you’re -- got to overcome maybe as we -- just with some of the growth that you’re seeing here?

[Primit Parikh:]

Sure. As you know, David, doubling or this quarter, tripling quarter-over-quarter is not easy, never been easy. So we got to keep our focus on execution and scaling. We got to manage our external suppliers carefully with plenty of lead time. And then we need to partner closely with our customers as we have always done and open up new designs with the partner network that we have set up. So 2022 is even more robust than 2021.

[Operator:]

There are no further questions. I’ll now turn the call back to management for any closing remarks.

[Mario Rivas:]

Thank you, operator. Before closing out today’s call, I want to highlight that we plan to participate in a series of upcoming investor events. Later this week, we will be presenting and hosting meetings at the Needham Virtual Technology Conference. We will also participate at the Craig-Hallum Institutional Investor Conference in June 2 and then the Cowen Annual TMT Conference on June 3. For those of you interested in meeting with us as part of one of these events, I encourage you to contact either of the hosting firms or reach out to the Shelton Group in order to schedule a meeting. I want to thank you again for joining us on today’s call, and we look forward to reporting on our continued progress over the coming months and quarters. Operator, you may now disconnect the call. Thank you.

[Operator:]

That concludes today’s conference call. You may now disconnect.