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24 January 2008


Cree considers adding Asian chip fab in next few years

For its fiscal second-quarter 2008 (to end-December 2007), Cree Inc of Durham, NC, USA has reported revenue of $119m, up 5% on the previous quarter’s $113.4m and up 34% on $88.8m a year ago.

LED revenue was $98.9m, up 6% on $93.4m last quarter and up 51% on $65.5m a year ago, as Cree made ‘significant’ progress on increasing capacity, according to chief financial officer John Kurtzweil.

Materials revenue (including silicon carbide wafers and gem-stone products) was $7.5m (6% of revenue).

RF and high-power microelectronic product revenue (including wide-band gap microwave devices) showed double-digit growth to $4.8m (4% of revenue). This was mainly due to increased orders for Schottky diodes for power supply application (where energy efficiency is becoming a more important product requirement).

Contract revenue was $7.7m (6% of revenue).

Gross margin grew from 31% of revenue last quarter to 35% (exceeding the target range) due to: yield improvements across several product lines (particularly Xlamp LEDs); higher factory utilization in Durham (through increased internal component manufacturing); expanded production in Asia at China-based Cotco (acquired last year) to support increased packaged XLamp LED demand and to reduce cost; and the transition of power products to 100mm wafers.

Increased expenses were due mainly to patent-related litigation expenses, as well as expanding the sales force (focusing on serving a broader range of application and a more global customer base for Cotco’s high-brightness LEDs, including recently hiring a regional VP of sales for Europe and adding field application resources (both internally and at distributors) to ramp up high-brightness LED sales outside China over the next two quarters).

On a non-GAAP basis, net income was $12.2m ($0.14 per diluted share), up from $7.2m ($0.09 per diluted share) a year ago. Despite capital expenditure of $9.9m, cash and investments grew by $29.4m to $361.9m.

“Q2 was a strong quarter for Cree, as we continued to execute our strategy and delivered revenue and earnings at the high end of our previously announced target range,” says chairman and CEO Chuck Swoboda. “Revenue growth was driven by higher LED sales, with XLamp orders and shipments growing double digits sequentially as we were successful in bringing on-line additional XLamp capacity in China.” Cree exited the quarter with an improved ability to meet near-term customer requirements, he adds.

During the quarter, Cree:

  • commercially released zero micropipe ZMP 100mm, n-type silicon carbide (SiC) substrates;
  • revealed plans to convert all lighting at its Durham headquarters and manufacturing facility to LED lighting (energy usage has decreased by 48% in phase one);
  • announced that Ann Arbor, MI is joining Raleigh, NC and Toronto, Canada in the LED City initiative (Ann Arbor aims to be the first US city to convert 100% of its downtown streetlights to LEDs - full implementation is projected to halve its public lighting energy);
  • launched the Cree Solutions Providers network (offering a full range of LED lighting-system solutions and design assistance to help accelerate time to market and reduce product development costs).

“Looking ahead, the global momentum for sustainable, energy-efficient lighting products continued to build with the passage of the new US Energy bill, which will require the use of more-efficient lighting technology [by 2012] and should further accelerate the adoption of LEDs,” says Swoboda. “This legislation is important and will force the lighting industry - which has been relatively slowed to adopt new technologies in the past - to change,” he adds.

For fiscal third-quarter 2008 (to end March), Cree expects revenue to rise to $120-125m (mainly due to continued double-digit XLamp LED sales growth). This, combined with increased sales of RF and high-power microelectronic products (including SiC Schottky diodes) should offset lower material product sales (i.e. gem-stones) and lower contract revenues. “We are working on several new power products to expand a range of applications we can serve which are targeted to be introduced over the next two quarters,” says Swoboda. “We are focused on continuing to expand our gallium nitride product offering for broadband wireless applications with WiMAX,” he adds. “We have started to see the benefit from converting our power products to four-inch wafers.”

Non-GAAP earnings are expected to be $0.14-0.16 per diluted share. Cree is also targeting gross margin of 34-36% through continued yield gains in LEDs, the initial ramp up of 100mm wafers for LED chips, and increased XLamp production in Asia. The first phase of the new XLamp line has been installed and qualified at the China factory, significantly reducing major XLamp capacity constraints. “We are now in a better position to support the plan growth of this product line,” Swoboda says.

Further XLamp capacity should come online over the next two quarters. “We are on the planning stages for extra capacity additions for fiscal 2009 and fiscal 2010,” says Swoboda. “We believe that the LED business will further consolidate over the next several years and we continue to evaluate ways to leverage our strong balance sheet to provide additional scale in terms of customers, channels, technology, people and manufacturing capability.” He adds, “at some point and not in the too distant future, we have got to look at a second factory for packaging and in the next couple of years we are going to have to bring online an Asian-based die fab.”

See related item:

Cree’s rising expenses lead to operating loss

Cree to triple white XLamp LED capacity

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