While the actions of wolf speed (NYSE: WOLF) soared following its fiscal third-quarter earnings report, the company still faces serious problems. The question is: Could the company go bankrupt again?
Surprisingly, Wolfspeed stock is up almost 170% this year, as of this writing. The company emerged from bankruptcy last fall with reduced debt and a new management team. However, the operational problems that the company has faced have not yet been resolved.
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Serious problems remain
Two of Wolfspeed’s biggest problems before bankruptcy were negative gross margins and operating cash flow, and those problems haven’t gone away. For the fiscal third quarter, Wolfspeed posted a gross margin of -27%, while its adjusted gross margin was -21%. That means you’re selling your silicon carbide components for less than it costs to make them.
This pricing crisis is largely due to the underutilization of its manufacturing facilities, which it said contributed approximately $46 million. However, even if you exclude that, its gross margins would still be a paltry 4.6%. The company has struggled with performance issues in the past. On the earnings call, management said it is “advancing the qualification of the 200-millimeter material.” Wolfspeed is still trying to prove to its customers that its 200-millimeter wafers are reliable and defect-free.
At the same time, Wolfspeed’s sales have struggled, which likely also contributes to its underutilization issues. In the fiscal third quarter, its revenue fell 19% to $150.2 million. Electric vehicles (EVs) were supposed to be the big market for its silicon carbide chips, but the company has struggled in this segment despite the growing adoption of electric vehicles. As a result, it is trying to enter other markets, such as artificial intelligence data centers, but it is still early.
Meanwhile, the company continues to burn cash. It produced negative operating cash flow of $84 million in the quarter. It ended the quarter with $1.2 billion in cash and short-term investments against $1.7 billion in debt, of which $798.3 million was in the form of convertible debt. In May, following the quarter, it closed a private placement of shares, convertible notes and pre-funded warrants and redeemed nearly $476 million in senior secured notes. He said the move will save him $62 million a year in interest expenses.
Looking ahead, Wolfspeed indicated its fiscal fourth-quarter revenue would be between $140 million and $160 million. That’s down from $197 million last year.
