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Cree (NASDAQ:CREE)
Q1 2021 Earnings Call
Oct 28, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cree first-quarter fiscal-year 2021 earnings conference call. [Operator instructions] I'd now like to hand the conference over to your host today, Mr. Tyler Gronbach, vice president of investor relations. Please go ahead, sir.

Tyler Gronbach -- Vice President of Investor Relations

Thank you, and good afternoon, everyone. Welcome to Cree's first-quarter fiscal 2021 conference call. Today, Cree's CEO, Gregg Lowe; and Cree's CFO, Neill Reynolds, will report on the results for the first quarter of fiscal-year 2021. Please note that we will be presenting non-GAAP financial results during today's call, which is consistent with how management measures Cree's results internally.

Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted on the Investor Relations section of our website, along with a historical summary of other key metrics. Today's discussion includes forward-looking statements about our business outlook, and we may make other forward-looking statements during the call.

Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially, including risks related to the spread and impact of the COVID-19 pandemic. [Operator instructions] If you have additional questions, please feel free to contact us after the call. And now I'd like to turn the call over to Gregg.

Gregg Lowe -- Chief Executive Officer

Thank you, Tyler. Good afternoon, everyone, and thank you for joining us today. I hope you and your families are staying safe and healthy during these uncertain times. The COVID-19 situation continues to evolve, and I'm extremely proud of our team's effort to deliver for our customers.

Despite the short-term headwinds of the pandemic, we are pleased to see a sequential improvement in our business compared to the fourth quarter, and we remain focused on our long-term strategic goals. Turning to our first-quarter performance. Our revenue and non-GAAP EPS were both at the high end of our guidance. While we have continued with our stringent protocols to ensure the safety of our team and keep our facilities operational, our results demonstrate how silicon carbide is building momentum across key end markets.

We believe we remain well-positioned to execute on our growing Wolfspeed pipeline. Importantly, we accomplished a critical milestone in our transformational journey with the recent announcement of a definitive agreement to sell Cree LED to SMART Global Holdings for a total consideration of up to approximately $300 million. This includes $50 million in cash; a $125 million seller note maturing in August of 2023; and up to another $125 million in earn-out, depending on the performance of the LED business in the four quarters post close. This divestiture establishes Cree as a pure-play, global semiconductor powerhouse with a strong financial profile and positions us well to continue to lead the industry transition from silicon to silicon carbide.

This transaction sharpens our focus exclusively on our innovative Wolfspeed business and will allow us to deliver long-term value for our shareholders. We're very excited about the future of Cree and the tremendous opportunity we have ahead of us. The conversations we're having with our customers reaffirm the need for our technology and underscore our commitment to our strategy. Our capacity expansion plans remain on track and will help us in our overall effort to drive the industry transition from silicon to silicon carbide and GaN.

I'll now turn it over to Neill, who will provide an overview of our financial results and an outlook for the second quarter of fiscal 2021. Neill?

Neill Reynolds -- Chief Financial Officer

Thank you, Gregg, and good afternoon, everyone. Overall, we delivered solid performance in the first quarter despite ongoing macroeconomic headwinds. Revenues for the first quarter of fiscal 2021 were $217 million at the high end of our guidance, representing a sequential increase of 5% and a decrease of 11% year over year. Wolfspeed revenue improved approximately 7% sequentially and declined 10% year over year as global demand remains soft, largely related to the pandemic.

LED revenue increased approximately 4% sequentially and decreased 12% year over year. Our non-GAAP net loss was $21.3 million or $0.19 per diluted share. Our first-quarter non-GAAP earnings exclude $163.1 million of expense, net of tax, or $1.49 per diluted share for noncash stock-based compensation, acquired intangibles amortization, accretion on our convertible notes, project transformation and Cree LED divestiture transaction-related costs, factory optimization restructuring costs, changes in the value of our Lextar investment and other items outlined in today's earnings release, as well as a $106 million impairment charge associated with the divestiture of our LED business. Moving on to our first-quarter performance by segment.

Wolfspeed quarterly revenue totaled $116 million. This was largely driven by continued demand for our power business and some better performance in our materials and RF businesses. In power, we are pleased by the momentum we are seeing for our products as well as the improving supply dynamics we experienced in the quarter, which are still below normal levels. Our technology continues to gain traction, particularly in the automotive industry.

We're seeing a number of positive developments in the space and continue to have productive dialogues with current and prospective customers. Further, our partnership with Arrow Electronics is continuing to drive broad awareness and the benefits of silicon carbide across numerous industrial and other applications. We are particularly pleased with the demand traction we're seeing from our coordinated efforts around the release of our new 650-volt silicon carbide MOSFET platform. Turning to RF, we continue to execute and build our backlog.

We're pleased by the early signs of strengthening demand that we're seeing and remain confident in the 5G transition despite delays in certain regions. Moving to materials, we saw some better order flow in the quarter, and we'd expect this trend to continue modestly throughout the remainder of fiscal 2021. Wolfspeed gross margin was 36.6%, compared to 35.3% last quarter. The sequential increase was driven by yield and cost improvements in our power and RF businesses, partially offset by lower utilization in our materials business as we continue to balance significant efficiency and output improvements like market demand requirements.

Gross margin performance also continues to be dampened by our continued COVID-19 safety measures. Health and safety remain our top priority in all aspects of our business, and we anticipate the safety measures we're taking to protect our employees will continue to impact factory outputs in the near term. Longer term, we expect our capacity expansion plan will help drive scale and margin expansion. LED product revenue was $101 million, and LED gross margin was 22.2%.

LED executed well despite ongoing challenges in the market. Unallocated non-GAAP costs totaled $6.1 million for the first quarter of fiscal 2021 and are included in our overall cost to reconcile the $59 million non-GAAP gross profit and 27.1% gross margin for the company. Non-GAAP operating expenses for Q1 were $87 million, and our non-GAAP tax rate was 30%. We remain focused on prudent expense control as we look to balance our operating expenses with investments to fuel future growth.

Our balance sheet remains strong in the face of an uncertain environment with more than $1 billion in liquidity to support our targeted R&D and sales and marketing spend, as well as our capacity expansion plans. We have zero withdrawn on our line of credit and convertible debt with a total face value of $1 billion. For the first quarter, days sales outstanding was 33 days, and inventory days on hand was 104 days. Cash generated from operations was $400,000, and capital expenditures were $115.9 million, resulting in negative free cash flow of $115.5 million.

Turning to our capex outlook for the remainder of the fiscal year. We remain committed to investing in our growth and continue to expect net capex of approximately $400 million to support our capacity expansion plans. As we've previously stated, we expect fiscal 2021 to be our peak investment year to ensure we can ramp production and meet supply needs as EV deployments commence beginning calendar 2023. Our Mohawk Valley Fab, a materials facility in Durham, will allow us to scale our business, improve productivity and deliver on our customer commitments.

It is important to note that our capex and cash flow during fiscal 2021 are subject to variability, depending on our Mohawk Valley construction progress, as well as reimbursement timing from the state of New York. Now turning to our outlook for the second quarter of fiscal 2021. Please note, given our pending sale of Cree LED to SMART Global Holdings, LED is now classified as discontinued operations. And therefore, our second-quarter guidance reflects our continuing operations in Wolfspeed only.

For the second quarter of fiscal 2021, we are targeting revenue from continuing operations to be in the range of $118 million to $124 million. We expect the momentum we are currently experiencing in our power business to continue and be supported by our capacity expansion initiatives. From an RF and materials perspective, we do expect some modest improvements while maintaining the COVID-19 safety protocols we have in place. Cree Q2 non-GAAP gross margin from continuing operations is expected to be between 34% to 36%, which includes the impact of $4 million of corporate items.

Wolfspeed gross margin is expected to be between 37% to 39%, driven by continued improvement in yields, factory efficiency and increased utilization in our materials business. We are targeting non-GAAP operating expenses from continuing operations between $77 million and $79 million for the second quarter. The gradual ramp in our operating expenses is fueled by our investment in R&D, including development projects at our Mohawk Valley Fab, as well as increased sales and marketing expenses as we pursue new opportunities. We target Q2 non-GAAP operating loss from continuing operations to be between $32 million to $38 million, and we target nonoperating net loss from continuing operations to be approximately $1 million.

We expect our non-GAAP effective tax rate to be approximately 23%. The non-GAAP effective tax rate decreased due to the jurisdictional mix of our forecasted earnings on a continuing operations basis. We're targeting Q2 non-GAAP net loss from continuing operations to be between $25 million to $30 million or a loss between $0.23 to $0.27 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, noncash stock-based compensation, accretion on our convertible notes, project transformation and LED transaction-related costs, factory optimization restructuring costs and other items.

Our Q2 targets are based on several factors that could vary greatly, including the situation of COVID-19, overall demand, product mix, factory productivity and the competitive environment. With that, I will now turn the discussion back to Gregg.

Gregg Lowe -- Chief Executive Officer

Thanks, Neill. We've made incredible progress on our transformational journey over the past few years. Our deep domain expertise in silicon carbide has driven significant growth in our Wolfspeed business, further solidifying our leadership position. We've secured key device design-ins across high-growth, innovative industries and have secured several long-term wafer supply agreements with customers which further fortify our business.

Once we close the LED divestiture, Cree will be a pure-play, global semiconductor company with high-growth and high-margin potential and capable of significant cash generation as we execute to our long-term plans. To support this effort, we will continue to invest in innovation and R&D initiatives, as well as sales and marketing activities. Our sales team continues to convert pipeline opportunities at an impressive rate. And in Q1, we secured approximately $700 million worth of design-ins for Wolfspeed, exceeding our companywide performance of $600 million from the fourth quarter of fiscal 2020.

Over the last three quarters, more than half of the design-ins are for automotive customers, and the rest are spread across communications infrastructure, aerospace and defense, energy and industrial applications. As Neill mentioned earlier, our partnership with Arrow for our 650-volt platform continues to generate positive results. We've already exceeded our target of $750 million of increased pipeline identification as customers are looking to leverage the benefits of this technology across a wide range of end products, ranging from plasma generators to electric motorcycles and electrosurgical instruments. The Arrow team is also helping us extend our sales reach into new markets.

For example, they've identified opportunities in 43 countries for the 650-volt platform. And in more than half of those countries, we did not have a dedicated salesperson. We look forward to continuing to execute on our growing pipeline, which is now well over $10 billion for our Wolfspeed business alone, anchored by opportunities in the automotive, communications, industrials and energy industries. In support of this effort, we continue to expand our product portfolio with the launch of 13 new products in the first quarter alone.

We are pleased by the recent developments that underscore the long-term opportunities ahead. Importantly, we are seeing a tremendous traction in automotive, which represents approximately half of our device pipeline. We are encouraged by the continued regulatory momentum for electric vehicles. More than 20 countries have plans to begin phasing out sales of new gasoline-powered vehicles over the next two decades.

Additionally, this month, the EU parliament voted to increase their goal of cutting emissions from a 40% reduction to now a 60% reduction in emissions by 2030. We expect this to be a positive catalyst for clean transportation and electric vehicle demand in Europe. Ride-share companies, Lyft and Uber, are committed to having 100% electric vehicle fleets by 2030 and 2040, respectively. Turning to 5G.

While regulatory delays and headwinds related to the pandemic impacted some rollouts in Europe and the U.S., momentum is building across the globe for this next-generation technology which delivers greater performance for bandwidth-intensive applications. Now we're still in the early phases of what we expect to be a multiyear growth opportunity for GaN as 5G momentum picks up. Outside of auto and 5G, we're seeing growing applications for silicon carbide. As we continue to scale our business and drive the cost of silicon carbide down, our potential customer base is growing to include different industries and end markets that are interested in utilizing the advantages of our technology.

Our plans to expand silicon carbide capacity are progressing on schedule. Our balance sheet is solid, and we remain well-positioned to both fund our operations, as well as make the necessary investments to grow our business. In summary, we are executing well in an uncertain environment. With our pending LED sale, we reached a critical milestone in our transformational journey.

Our device opportunity pipeline continues to grow, and we are performing well in converting opportunity to design-in. We are excited for the opportunities ahead for our technology and look forward to helping our customers deliver their next-generation solutions. And with that, I'll turn the call back over to the operator, and we'll begin our Q&A session.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Hi. Thanks. First question, Gregg, and you may have mentioned that. I came on a little bit late.

But in terms of backlog, I was wondering if you could -- or sorry, not backlog, but the -- sort of the RFQs that you're working on and the backlog that you are building. The breakdown between EV versus, say, for example, 5G inquiries, as well as just other power electronics, I'm not looking for the exact amounts, but could you talk about rough ranges? And then how has that shifted at all this quarter? And then I do have a follow-up.

Gregg Lowe -- Chief Executive Officer

Yeah. So thanks a lot, Jed. So really, it's a pipeline we're talking about here, the opportunity pipeline for our device business. And we grew, obviously, the pipeline as well.

It's now well over $10 billion. In terms of the split out of that, a majority of that is automotive and therefore electric-vehicle-related. So that's going to be north of 50%. It's actually north of 60% right now.

And in terms of decisions that were made in this past quarter, the majority of those -- of that $700 million of design-in, the vast majority of those were also automotive-related design-ins. In terms of the pipeline, the rest of the pipeline is a mix of industrial-type applications and a pretty significant growth of those industrial-type applications with the activities that we're doing together with Arrow on the 650-volt platform. We have some aerospace and defense activities, and we have some communications, infrastructure opportunities as well. So it's kind of a mix of those for the rest of it.

But the pipeline, the device pipeline, really is pretty solidly automotive related and electric vehicle related.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Got it. Just as my follow-up question, just pivoting to manufacturing and the increase of R&D. Should we read into that in terms of that bump-up is 8 inch related or 200 millimeter related? Or are there any other milestones that you might be able to articulate so that we can best track that development?

Gregg Lowe -- Chief Executive Officer

Yeah. Thanks, Jed. We're obviously continuing to work on future-generation technologies like the 200-millimeter activity. So some of that is going to be related to that, for sure, but it's also related to new product interactions that we've got planned out and new technologies that we'll be introducing.

So I would say it's a combination of those.

Operator

Our next question comes from Edward Snyder with Charter Equity. Your line is now open.

Edward Snyder -- Charter Equity -- Analyst

Thanks a lot. Gregg, maybe we could touch on bottlenecks. Your epi wafer production was a bottleneck for a couple of quarters there. Is that freed up? Is there any bottlenecks at all? This is a starting point.

And then you mentioned $700 million pipeline. How far does that stretch? Are we talking about three years, two years? What is the likely flow to revenue? I'm not looking for guidance, but how far out is that pipeline stretched? And same kind of question for last quarter, $600 million. And then I have a follow-up.

Gregg Lowe -- Chief Executive Officer

Yeah. OK. So let me maybe hit the second question first, and maybe I'll talk a little bit about the first question. But Neill can probably hit that better than me.

On the $700 million design-ins that we got this past quarter, most of the -- as I mentioned, well over 50% of that and more north of 60% of that is automotive related. Most automotive designs are sort of three to four years out when you go -- when you get it designed in and it goes into production. Neill had talked at the -- our last investor day about it, and we're starting to ramp some of these products in 2022. We'd see really a steeper ramp in '24, '25, an acceleration of that ramp, if you will.

So the automotive ones are typically three to four years out. It depends a little bit on whether it's more of a newcomer in automotive. The companies like Tesla, for example, or some of the ones that are more historically automotive related, there's different kind of processes that follow. But I think three or four years is a pretty good bogey for that.

And just to remind everybody, the $700 million of design-ins that we just printed for this quarter is obviously $100 million than -- and more than we did last quarter, but last quarter was company wide. So it's a nice step for Wolfspeed to now have design-ins at $700 million just for Wolfspeed. And in terms of epi, I'll let Neill cover that one.

Neill Reynolds -- Chief Financial Officer

Yeah. Ed, on the epi side, customers still continue to look for relatively heavy epi mix as part of the capacity expansion, the capex that we're investing. Part of that has to bring up additional epi capacity. So I think we're kind of turning the corner there, and I think we're making good progress as it relates to closing the gap on epi capacity versus demand.

Edward Snyder -- Charter Equity -- Analyst

And as my follow-up, if I could. So the preponderance of all your revenue now will be Wolfspeed and continuing operations. But the preponderance of that, not the vast majority, is in industrial and solar. Is that a fair statement given that your RF -- I mean, you were kind of heavy into some of the 5G stuff going to Huawei, but that's been shut down.

ZTE has probably picked up. And then overall, maybe you can make some comments on 5G because it's been strong. We've seen it through a bunch of other companies, but it's primarily been China's rollout of 5G as an industrial policy which has been the big driver. But even that is starting to seem to slow a bit as they move from like urban MIMO sites to more suburban and rural macro sites.

Are you seeing that reflected in order patterns now?

Gregg Lowe -- Chief Executive Officer

Yeah. I think you're right in terms of the overall 5G rollout. It's been primarily China related. And obviously, there's -- we're unable to engage with Huawei at this time, so we don't have that in any of the plans and so forth.

We're seeing a pickup in some of the RF business. We are seeing a pickup in that, but I think you're right that the -- it's really been kind of a China-dominated-type story.

Operator

Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Thanks for taking the questions. Maybe first one, just following up on the earlier question here on the automotive wins and timing cadence. Gregg, it sounds like the ramp is steeper in 2024 and 2025, if I heard you correctly, although it does begin in '22.

So should we also take that to mean device revenue specifically being supplied out of Mohawk Valley doesn't really become meaningful for you guys until fiscal 2024? I'm just trying to triangulate the capacity ramp in Mohawk Valley's impact overlaid against some of your comments around the automotive wins you're seeing today and when those really ramped into production and volume for you guys.

Gregg Lowe -- Chief Executive Officer

Yeah. Thanks, Brian.

Brian Lee -- Goldman Sachs -- Analyst

And then I have a follow-up.

Gregg Lowe -- Chief Executive Officer

No problem. So Brian, thanks for the question. Yeah, we are ramping Mohawk Valley beginning in 2022. It won't be a substantial part of the volume in 2022.

But we believe, by 2024, as these automotive customers are coming online, it will be actually a pretty substantial part of the equation in 2024. So we'll see that. And just before you get to your follow-up, Brian, Ed did ask about the fragmentation. I didn't hit that part of the question as well.

And so Ed, the Wolfspeed business is actually quite fragmented today, and so it's a lot of industrial-type customers, a lot of aerospace and defense-type customers as well. So as we sit today, it's very, very fragmented. As we move toward the future, it will be more of an automotive-type play. So sorry about that, Ed.

I didn't hit that last time. So Brian, you had a follow-up.

Brian Lee -- Goldman Sachs -- Analyst

Yeah. That's a pretty good segue for the follow-up I had. I was trying to maybe better understand the diversification/fragmentation in the Wolfspeed mix. You guys have talked about being flat for fiscal '21 based on some of the disclosures you updated around the LED unit sale a couple of weeks ago.

So as we think about Wolfspeed mix, a lot has clearly changed over the past 12 months with EV trends in China, Huawei, etc. So is there any way you can level set us a bit as to what was the mix of Wolfspeed revenue in fiscal 2020? And then what should we sort of be expecting in fiscal '21? And I'm kind of thinking about the broader buckets. You guys talk about materials, silicon carbide, power devices and then RFs. Just it would seem like things have changed a bit.

And so how should we be thinking about, on a flat revenue base, roughly what that mix has shifted to now?

Gregg Lowe -- Chief Executive Officer

I'll take a crack at it and if, Neill, you want to add a little bit of color. So in terms of the split of the business between our device business and our materials business, you can kind of think of those as roughly 50-50. And that wasn't the case four years ago. We were -- the materials business has grown faster than the device business over the last four years to have now kind of a 50-50 mix.

As we look to the future and point -- I'll point specifically to 2024, between now and 2024, we anticipate our device business will grow substantially faster than the materials business as we start knocking down some of these opportunities and converting opportunities in the design-ins. So you'll see a steeper ramp of the revenue so that the device businesses will be greater than 50% and nicely greater than 50% of the revenue by 2024. Neill, I don't know if you want to add any additional color to that.

Neill Reynolds -- Chief Financial Officer

Well, I think that's right. I think one thing, Brian, to think about here in the shorter term, as you're trying to compare last year to this year, there has been a lot of changes with COVID and timing of recovery of customers and inventory movements. You just move things around. I think what Gregg said is accurate in terms of the sizing of what the revenue looks like.

And then look, we're seeing a lot of demand right now for our power MOSFETs on the device side. I think in the materials front, we've seen a little bit of movement as people manage inventory here in the short term as we recover from the pandemic. But I think as you look over the medium and longer term, as Gregg had said, you're able to see the device business grow faster, but there'll be periods where we'll see pretty substantial growth in materials as well. So as we move out of these, I'd say early stages of growth in the business, there's always going to be fits and starts in different areas.

And I'd say -- but over time, the device business will kind of outpace the materials business.

Operator

Our next question comes from Paul Coster with JP Morgan. Your line is now open.

Paul Coster -- J.P. Morgan -- Analyst

Yeah. Thanks for taking my question. I guess I'm looking at what's happening in the EV space at the moment, and there seems like a lot of innovation around commercial vehicles in large but nonetheless niche markets rather than the passenger-vehicle market. So it feels like that -- those sectors are going to go first.

Total cost of ownership comes sort of -- makes those more compelling than the sticker price for a passenger-vehicle EV. Do you concur? And does that mean that sort of in the next couple of years, that's the kind of -- those are the lead indicators that we should be watching, the sort of the truck and bus end markets rather than the passenger-vehicle markets as proxies for where your demand is coming from on the EV side?

Gregg Lowe -- Chief Executive Officer

Well, Paul, I'd say both. We announced the Yutong Group design win. Yutong is the largest electric bus manufacturer in China. We announced that design win last quarter, I believe.

But what I would say is I've seen reports that say there's going to be a crossover point on the cost of electric vehicles kind of mirroring or matching the cost of internal combustion engine by 2024. I had a real nice set of visits with some European customers last week, and one of the comments that -- one of them mentioned to me was that they were going to -- the European Union is looking at increasing the reduction, if you will, of greenhouse gases from a 40% reduction to 60% reduction over the coming years and so forth. And basically, from an internal combustion engine, what this customer said is, "We are witnessing the end of the ice age." And so the internal combustion engine is going away. And based on the design activity I'm seeing, based on the fact that we just closed $700 million worth of design-ins last quarter, most of those being automotive, it sure seems to be reflective of that.

So I think it's both, Paul, that seem to be moving forward.

Paul Coster -- J.P. Morgan -- Analyst

OK. Got it. And the other observation, Gregg, is that there's a lot of innovation still taking place, right, whether it's hybrid motors, whether it's using green or gas -- sort of gray fuels that generates and sort of fueling an electric powertrain or whether -- I mean -- or whether it's new battery technologies that are coming to market. All of them seem to be kind of converging on the market in the middle of the decade.

Does it matter to you that this change is happening? Does your product just go into every and any of these electric vehicles, regardless of the technology changes that are happening with powertrains and fuel sources?

Gregg Lowe -- Chief Executive Officer

I think in terms of a fuel cell versus a battery electric vehicle, I don't think there's really much of a difference because you're converting that energy and turning it into electric energy for the motors. There's definitely a bigger opportunity for those than there would be in a hybrid, as an example. And that's typically because the power that you're requiring is substantially less. But what I would say -- and again, this is based on -- and again, I visited with just last week with several OEMs and then several Tier 1s in Europe.

And the feedback that I'm getting or what they're saying to me is plug-in hybrids are probably just a transition. And the reason for that is they don't really solve the problem of emissions especially in places like Europe because there's not a lot of places to plug in, and a lot of people just park on the street. There's not a lot of infrastructure there. Whereas with electric vehicles, they are starting to do these high-capacity electric chargers.

You're seeing cars now coming out with 500-mile ranges and for -- and again, this is what -- one of customers was telling me. If you just plugged in once a week, now all of a sudden, you've got a whole week's worth of going to and from work and so forth. So I think there's sort of a sense that, really, the transition is going to be from internal combustion to electric. There might be some stops along the way with a transition through hybrid, but I think most of them are thinking it's going to be fully electric.

And then the final thing that I would say on that is the European regulators are starting to understand that there are incentives for people to buy plug-in hybrids. And people are, therefore, taking advantage of those hybrid -- of those incentives, but then they're not plugging in the car. And so that actually is going the opposite way in terms of emissions because you have a substantially less efficient powertrain. And if you're not plugging it in, it's kind of going worse.

So there's some talk that those incentives are going to be taken off the table at some point.

Operator

Our next question comes from Craig Irwin with ROTH Capital Partners. Your line is now open. Craig, your line may be on mute.

Craig Irwin -- ROTH Capital Partners -- Analyst

Thank you. I wanted to ask a little bit about the LED business. Now that it's going behind us, can you maybe share with us some of the mechanics of how this sunsets for us? Were you previously costing overhead for this business based on revenue or floor space or some other metric? And is part of this small increase in losses we're expecting in the second fiscal quarter due to expectations that you take over the full cost of the real estate or some other overhead as that business transitions to really a virtual-fab-type business?

Neill Reynolds -- Chief Financial Officer

Craig, yeah. So on that, I won't get into all the details on the costing, but I think it's pretty well segregated between LED and Wolfspeed, as we've previously reported. As you look forward, some of the -- there is some dilution in the deal as you start to move forward. There's a little bit of stranded cost in there from an opex standpoint that we're going to have to manage through, and we'll manage over the next 18 months.

But by and large, obviously, the deal, what it does for us is it gives us a lot more focus on the really important pieces of Wolfspeed, whether that be pipeline activity, continued execution on the capacity expansion and working through a lot of the investments that we've got. So the schedule in terms -- if we talk about outsourcing a lot of that business as well from a capacity standpoint, that schedule all remains the same. And SMART will take that over as we move forward and after we close the deal. And so by and large, it's pretty much on the same plan that we had before moving forward.

Craig Irwin -- ROTH Capital Partners -- Analyst

OK. Excellent. And then as far as efficiency of the overall fab, one of the things Gregg discussed at the last analyst day was the challenges with the -- I believe you called it chase-and-bay layout of the ground facility. Can you maybe talk about whether or not the LED business vacating its footprint there creates an opportunity for improved layout or improved efficiency in the rest of the fab?

Gregg Lowe -- Chief Executive Officer

Thanks, Craig. Yeah. That's a -- bay and chase is the format of both our fabs here in North Carolina, and our RTP fab is a substantially smaller fab than the Durham fab. And the Durham fab is where the LED operation is.

So it won't convert the fab to what's called a ballroom-style design. The ballroom style is what -- is going to be in New York, so it won't create a new sort of form of space, if you will. But it definitely is going to allow us to increase our capacity for Wolfspeed as we transition the LED business to an outsourced model. And that, of course, was an ongoing activity that we had prior to the definitive agreement that we signed with SMART Global.

So that's just kind of continuing on schedule. So no, it doesn't change the style of wafer fab to the more modern ballroom style. That's what we're building up in New York. But again, the transition of LED to an outsourced model increases our capacity in Durham for Wolfspeed.

Operator

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thanks so much, guys. Can you talk a little bit about the competitive dynamics on the device side and what you're seeing in terms of evolution of the product? As you sort of get to these design wins, I'm assuming that you're going to have to expand the price of the product a little bit as you get a little bit closer with the customers but wondering how the competitive dynamics are evolving and what the cadence is for some of those evolutions.

Gregg Lowe -- Chief Executive Officer

Yeah. So the competitive dynamics are pretty straightforward. Customers look at their design, and they do an analysis of our technical capability as it relates to what they need in their design. They do that with competitors as well.

They look at things like supply continuity and your ability to manufacture and so forth. They look at things like -- well, of course, pricing is a key part of that as well. So it's a typical, I would say, mosaic that they look at. We typically score pretty nicely on most of these different items.

And especially when it comes to the supply dynamics, the fact that we've got internal capability on silicon carbide gives us extra points as well. And I think in terms of the design win -- the design-in activity, delivering $700 million this past quarter was actually pretty nice accomplishment for us, and it really lines up pretty nicely with what will translate into a $1.5 billion business in 2024. So we feel pretty good about that. I think the cadence of designs have basically -- or design decisions have been pretty much along the lines of what we thought they were going to be.

And if you think about it, over the last three quarters, we went from $400 million to $600 million to $700 million worth of design-ins. So that's $1.7 billion of design-ins on a little bit over a $10 billion device pipeline. So it feels, to me, like the decisions are coming down pretty much in accordance with what we thought. Now there's going to be some puts and takes every quarter and so forth, but we feel pretty good about that.

Colin Rusch -- Oppenheimer and Company -- Analyst

I think my question was really more about the evolution of the product design, but I'll take that off-line. Just separately on just -- maybe just a housekeeping question on the payables growth. What's going on there? And is that -- is there going to be an unwind on that at some point here over the short term? How should we think about kind of steady state on those payables going forward?

Neill Reynolds -- Chief Financial Officer

Yeah. So some of that's related to the fact that we have larger invoices as we execute capacity expansion, particularly in Mohawk Valley. That brings the DPO up. You could see it come back to the kind of more normal levels, I think, in the 70-plus days as we've had previously.

Gregg Lowe -- Chief Executive Officer

Outside of the New York expansion.

Operator

Our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes. Thank you. Gregg, just as we come up on a year of the analyst day and the targets that you laid out for fiscal '24, since that time, are there any particular developments you'd point to in terms of the traction that you're seeing and to kind of get on that path to the $1.5 billion over that time?

Gregg Lowe -- Chief Executive Officer

Yeah, a couple of things. So thanks for the question, Craig. So as I mentioned, the fact that we've been able to deliver $1.7 billion worth of design-ins in the last three quarters gives us -- bolsters, obviously, our confidence that we'll be able to get to that number out in 2024. And then the other thing, I was just on a panel today -- discussion and they were talking about the impacts of COVID on our industry and what do we think is going to happen and so forth.

And I've had a lot of really good conversations with our customers about this. And basically, the OEMs and the Tier 1s that we're talking to in the auto industry have basically all said the same thing, and that is the impact of COVID is an acceleration of the adoption of electric vehicles. And that's for a couple of different reasons. One is that the consumers are seeing blue skies for the first time in a lot of different cities because of the shutdown.

And global warming is a hard thing to see, but a blue sky is an easy thing to see. And so consumers are saying, "I don't want to go back to a polluted Los Angeles or a polluted Delhi or what have you. We want to be able to have clean air and healthy air and so forth." So you've got this consumer pull, if you will. And then on the flip side of it, you've got big countries and the European Union staring at, "We are going to spend money to do a recovery.

Why wouldn't we dedicate a bunch of that to a green recovery?" And Europe is clearly leading that with 30% of it really going toward climate-type initiatives. And so -- and that also is driving the auto industry toward electric vehicles. So the one -- I mean, there's lots of silver linings in COVID. There's lots of bad things about COVID.

But what I would say is it's really hitting the accelerator, if you will, for the adoption of EVs. And I think that's the thing we didn't anticipate at the analyst day, Craig

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. And then if I could follow up, just maybe an extension of this. When I think about your go to market, just how significant are the partnerships? I know you've announced things with Delphi. You've talked a lot about Arrow.

Is Arrow going to remain exclusive over time? Or how should we think about how much of an impact these partnerships are having as you kind of reach toward that target model?

Gregg Lowe -- Chief Executive Officer

Yeah. We -- so Arrow is our exclusive global distributor for the Wolfspeed products. We do have some local distributors, but they're the exclusive global, and I don't see that changing any time. I think the results that we've just gotten together on the 650-volt platform is astounding.

And when you think about it, we launched that program in April, which is probably the worst part of the pandemic. China was still sort of down. Europe and U.S. were on their knees.

It was just -- we were really in pretty bad lockdown. And despite that, the team was able to deliver and hit our goal of $750 million worth of pipeline identification, and they did that one quarter early that -- earlier than the goal, so they're doing a fantastic job. We've got a very strong partnership with them, and I anticipate that will last for a very long period of time. And then in terms of customers like Delphi -- and we've announced ZF.

We've had an announcement with Danfoss, with Yutong, with the Volkswagen FAST program, ABB. These are all good relationships, and we're working together with them to bring products to market. I met with many of those customers just last week. So these -- the automotive industry especially and industrial customers as well, when they bring you on as a supplier, they're bringing you on for a very long period of time.

It's three or four years to go from -- they bring you on to when you begin to ramp. And then those products stay in production for five or six years, and then there's an end-of-life process for their end product where you got to support aftermarket and so forth. So this is a marriage that lasts 10, 15 years. And so these are good, long-term customers to have.

Operator

Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is now open.

Gary Mobley -- Wells Fargo Securities -- Analyst

Hey, everyone. Thanks for taking my question. Wanted to ask you about the way to think about -- well, I guess first off, I appreciate you gave us a baseline as to how the Wolfspeed business should operate in the December quarter. And so off of that baseline of $77 million to $79 million in non-GAAP opex, how do you see that being affected by the LED sale? I think you mentioned once that business is separate, $10 million to $15 million per quarter in quarterly opex savings.

So that's presumably a benefit to that run rate you gave for the December quarter. But at the same time, you're going to be ramping up opex for other reasons in preparation for capacity expansion and whatnot. So how should we think about the different moving pieces with an opex off of that December quarter baseline?

Neill Reynolds -- Chief Financial Officer

Thanks. And I think that's a really good question. So as we move forward, I think opex is going to accrete modestly as we start to move forward. There is an element related to the divestiture kind of you indicated.

That's really not the primary driver of the elevated opex here kind of in the short term. As Gregg mentioned earlier, we have substantial projects that we're investing in. I think that's what you're alluding to, R&D investments related to a number of things, including ensuring we're ready to ramp the Mohawk Valley Fab and kind of move through that process, as well in addition to an increase in our sales and marketing spend as we continue to go identify opportunities and execute on the pipeline. There is an element of -- look, we have a divestiture to go through.

There's going to be some -- a lot of work to do on that within our G&A functions. But I really think of it -- the large portion of the elevated opex is really related to the R&D and the sales and marketing spend. And by the way, this is the same plan we had laid out before. I think what we're just getting visibility now to is the -- just the Wolfspeed cut of this as we move forward.

Gary Mobley -- Wells Fargo Securities -- Analyst

OK. And related to that, it looks like you've got about 300 basis points of unallocated expenses in your cost of goods sold line. Post LED divestiture, do you see an opportunity to bring that down? That's it from me.

Neill Reynolds -- Chief Financial Officer

Well, I think what that is, a lot of that's related to is kind of whether that be benefits or management incentives, a lot of these types of things. I don't think the cost necessarily goes away. What I do think is that it scales over time. And when we talked about the LED divestiture last week, we kind of said there's about 2 to 3 points that kind of sits in that corporate bucket from a gross margin standpoint.

I think what we will do is evaluate how we manage this post close and how we talk about the company and think about the company. But here, as we look forward in the shorter term, you can kind of consider that at those same levels.

Operator

Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Joseph Osha -- JMP Securities -- Analyst

Hello, everyone. Just following up a little bit on the previous question. If we think about what the pure Wolfspeed target operating model looks like given all of this conversation about operating cost absorption and so forth, what would that be? And in order to get to that target operating model or -- do we need to be at that sort of $1.5 billion run rate that we talked about? And then I have a follow-up.

Neill Reynolds -- Chief Financial Officer

Well, first of all, Joe, as we talked about earlier, the $1.5 billion is predicated on, what, 5% relative EV adoption rate. And as we talked about earlier, everything we're seeing kind of supports that. We'll see where the timing is as it looks like that. As it relates to fall-through, it really depends on how we manage this and how we see the inflection point as you get up to that kind of '22, '23 time frame.

Obviously, we can modulate as we go forward, but I'll tell you I think our anticipation right now is that we're kind of a full go here. The opportunity out beyond that period is pretty large, and we think we have to be in a position to capture it. So I still think we'll see some accretion in terms of the opex as we kind of move forward, and then we'll kind of grow into it.

Joseph Osha -- JMP Securities -- Analyst

But is there -- in the past, you'd kind of put some specific markers out there in terms of what a gross margin, operating margin business might look like. Are you willing to sort of talk about what that might look like for pure Wolfspeed?

Neill Reynolds -- Chief Financial Officer

Yeah. So I think if you go back and look at the announcement last week, what we said is Wolfspeed to be -- the 2024 time frame, between 50% and 54% gross margin. We just talked about a little bit of corporate cost. So that's roughly about a 50% company level and then about a 25% opex level as you get out to '24.

Joseph Osha -- JMP Securities -- Analyst

OK. And then I don't know if you can answer this or not. I heard you refer to the FAST relationship with Volkswagen. Are you able to say at this point whether you are in the MEB platform there? And then actually, just a quick third one.

When Wolfspeed is an independent business, given how SEC segment reporting works, might we expect to see the business carved up into more than one reporting segment? And that's it from me.

Gregg Lowe -- Chief Executive Officer

Yeah. In terms of the FAST program, that is a program that is targeted at a small subset of Volkswagen suppliers. They have something on the order of 50,000 suppliers, and they have something on the order of 65 suppliers that are designated as FAST. And FAST stands for Future Automotive Supply Tracks.

And basically, they use the English acronym FAST as you would think its intention, which is they're trying to figure out a way to get these suppliers into their designs quickly. They give -- Volkswagen gives us -- gives FAST suppliers access to different levels of engineering that you normally wouldn't get access to. They give access to different projections for their new vehicles and so forth. It is not an award of any specific program.

Neill Reynolds -- Chief Financial Officer

And then, Joe, just from a segment reporting standpoint, look, we're -- we just signed the definitive agreement to sell the LED business very recently, and we're working through managing how we're going to look as we move forward. We'll give more updates on that as we get into the new year.

Operator

Our next question comes from David O'Connor with Exane BNP Paribas. Your line is now open.

David O'Connor -- Exane BNP Paribas -- Analyst

Great. Thanks for taking my question. I have a question on the pipeline. Gregg, at the analyst day about a year ago now, you said 50% of $9 billion pipeline at that time would be decided within 12 months.

So one year on from that now, is half the pipeline already decided? And I have a follow-up.

Gregg Lowe -- Chief Executive Officer

All right. I would say the decisions are moving pretty nicely. They're moving pretty closely to that track. And I think if I recall correctly, I said 12 to 18 months.

And certainly, we've had now $400 million worth of design-ins three quarters ago, $600 million two quarters ago, and then $700 million, Wolfspeed alone, one quarter ago or this past quarter. And those are design-ins that we won. There's obviously some things that we didn't win as well. So I would say, David, that it's actually tracking that pretty nicely.

And that's actually kind of amazing when you think about it because we made that prediction pre-COVID, and customers basically went into lockdown mode and then very quickly got back into getting their designs continuing to move in a different kind of way. So I think it is kind of tracking pretty much what we thought.

David O'Connor -- Exane BNP Paribas -- Analyst

OK. Great. That's quite helpful. And then maybe one on the materials side.

You talked about materials, better order flow in the quarter. And if I think back to last quarter, you mentioned that there was some deferred shipments. So my question is have they all been pulled back in though again?

Neill Reynolds -- Chief Financial Officer

Yeah. I think -- yeah. Thanks. That's a good question.

So the way that -- to think about that is there has been some inventory management by some of the customers. We kind of talked about that last time. And what I could say is I think in the guidance that we're giving this quarter, that largely resolves itself. And then when you start to look forward, you should start seeing some modest improvement, particularly as you think about some of the LTAs, long-term agreements, we have with customers and the dynamics of how that kind of kicks in going forward.

Operator

Our next question comes from Ambrish Srivastava with BMO. Your line is now open.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Hi. Thank you very much. I had a question on the sequential growth, Gregg. If you look at the device auto -- the device companies that sell into the auto industry, we're seeing very large Q-over-Q increases, 40%, 50%.

And some of those businesses -- as an example, TI is back to where it was a year ago. So I was just curious. Is it because of the composition of the Wolfspeed business that half is materials and obviously that has a much longer lead time before that turns into devices? Is that the primary reason? And also, is it fair to assume that the device side is -- has a pretty meaningful contribution from the RF side so that would explain that? Am I right in assuming those two factors in why the Q-over-Q growth in auto, you're not seeing the rebound that the, and I'll use that word, legacy auto companies are seeing? And then the second question is on the RF business. You talked about some kind of stabilization that you're seeing.

So Huawei is out of the numbers. Where exactly are you seeing these -- are these new wins that you have with non-Huawei customers that are beginning to ramp? And if you could talk to that, please, that would be helpful.

Gregg Lowe -- Chief Executive Officer

OK. So first, on the first question, just to kind of baseline things. Automotive is something less than 10% of the revenue of Wolfspeed, and so -- and that's even a year ago as well. So automotive was down, but we're not a substantial automotive -- it's not a substantial part of our revenue like it would be at a place like TI or to NXP or what have you, where they have a substantial footprint in automotive.

So that's number one. Number two is our activity in automotive is all -- a lot of it is in design-ins that we won. We announced a couple of design-ins last year that are going into production in 2022, '23, '24. So I think that the near-term up and down in automotive doesn't have a dramatic swing either way for us.

In terms of RF, there's a handful of non-Huawei customers that are out there. We're engaged with all of them, and we're winning -- we've got some wins in there as well. I can't give more color than that, but we're engaged with all of the non-Huawei RF manufacturers.

Operator

Our next question comes from the line of Edward Snyder with Charter Equity. Your line is now open.

Edward Snyder -- Charter Equity -- Analyst

Thanks for the follow-up. I'm sorry to kick it to death, but we talked a lot about design-ins and wins. Gregg, can you give us some clarification on that? I mean, is that a firm PO? Or is that more like a frame agreement that tries to scale the opportunity for you, depending on unit sales? Because it will make -- obviously makes a difference in terms of projecting onto revenue in the out periods and whether or not you can count on this. Or do you have to wait to see how the automotive sales play out? And then I had a follow-up on RF.

Gregg Lowe -- Chief Executive Officer

Yeah. So the way it works is we have an opportunity pipeline where we're bidding on stuff, working with customers, etc. And when it moves to design-in, that's when the customer has made a decision and they've chosen us. And that can come in different kinds of forms.

Typically, it's an award letter where they say, "Congratulations. You've been awarded this. Here is the projected volume. Here is the pricing that we've agreed to," and things like that.

So they've made a decision that they're going with us. When it goes into production, we classify that as a design win. So you go from design-in to design win. And typically, in an automotive -- and that production is first.

I think it's $1,000 of revenue that we get out of that. And so that's typically a lot closer to when they start ramping into production. So there is some amount of leakage that happen from opportunity to design-in and design-in to design win. But we're very, very comfortable with the numbers that we have put in, the points that we've kind of put on the board, if you will, with the $400 million going to $600 million going to $700 million in design-ins that we have.

And so it's a commitment from a customer. It's an agreement that they're going to go with us. And then from there, it's all about how is their end product viewed in the marketplace and how do they ramp.

Edward Snyder -- Charter Equity -- Analyst

Right. It's all excellent news. Cree is really rolling it up here, too. But this is a long way from actually top-line growth for Cree, primarily because you got to get the design-in and the other sort of shipping.

And to be frank, the EV industry has got to solve the problem of people not wanting to buy these, especially BEVs, because a lot of the best-laid plans haven't shown up in actually unit volumes because of the profile of performance versus cost for most folks. Of course, there's several years and the incentive programs change over time. So I just want to make sure we had a crisp understanding. And then on RF, I mean outside of Huawei, ZTE is probably the only other big one shipping into China at this point.

I expect you're shipping to them. Are you seeing increased competition because Sumitomo was a big funnel for Huawei? So when everybody got cut off, they kept shipping there. Huawei is now running into other problems with other components. They can't get to do these.

Is Sumitomo starting to increase their competition in other areas as you've not seen before in the commercial? And then just as a marker here. Is it fair to say that in terms of RF, your RF product, defense and aerospace is still markedly significantly larger than your commercial? Is that a fair statement?

Gregg Lowe -- Chief Executive Officer

I don't have the exact numbers in front of me, but we have a very nice defense and aerospace business there. So it's going to be a pretty good portion of that RF business. And we see that as a really nice growth opportunity. I don't want to comment on Sumitomo as a competitor.

They're a good company. They're a good competitor. I don't want to talk about them. But what I would say is we're engaged with the -- with ZTE and the other non-Huawei customers around the world, and we're beginning to see some pretty good traction.

And then, Ed, just to kind of flip back to your first part of the comment, the one thing that I would say is recall that we have a baseline of 5% adoption of EVs in our model. It's not a heroic assumption, and so I think most pundits out there feel like that's a pretty short put. So I hear what you're saying on the adoption rate, but we're not baking into the plan some heroic assumptions.

Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Gregg Lowe for closing remarks.

Gregg Lowe -- Chief Executive Officer

Well, thanks, everybody, for your interest in Cree, and we look forward to talking to you at our results call next quarter. Thank you.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Tyler Gronbach -- Vice President of Investor Relations

Gregg Lowe -- Chief Executive Officer

Neill Reynolds -- Chief Financial Officer

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Edward Snyder -- Charter Equity -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Paul Coster -- J.P. Morgan -- Analyst

Craig Irwin -- ROTH Capital Partners -- Analyst

Colin Rusch -- Oppenheimer and Company -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Gary Mobley -- Wells Fargo Securities -- Analyst

Joseph Osha -- JMP Securities -- Analyst

David O'Connor -- Exane BNP Paribas -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

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