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23 October 2008


Cree grows 24% year-on-year to record $140m revenue

For its fiscal first-quarter 2009 (ended 28 September), Cree Inc of Durham, NC, USA has reported record revenue of $140.4m, up 3% on last quarter and up 24% on $113.4m a year ago.

The increase is due to LED revenue of $123.3m, up 6% sequentially and up 32% on $93.4m a year ago. This was led by double-digit growth in both XLamp sales (boosting LED components further as a proportion of overall revenue) and Cree LED Lighting Solutions (LLS) products (although the latter was at the lower end of the targeted range, constrained by delays in ramping up of several new products as orders increased faster than shipments).

This growth more than offset non-LED products and government contract revenues being down 12% sequentially to $17.1m. In particular, commercial power and RF product revenue fell 14% due to lower silicon carbide (SiC) Schottky diode power device sales as two major power supply customers reduced orders in response to anticipated slower demand in the IT sector.

Due mainly to higher utilization in the LED chip plant and improved XLamp yields, gross margin has grown strongly from 30.6% a year ago and 33.7% last quarter to 35.2%.

Operating expenses were a higher-than-targeted $44.7m (up from $35.7m a year ago). This is due mainly to R&D spending growing from $12.8m to $17.3m (largely for new LED chip development and LLS products).

Net income was $5.9m, down on $8.4m last quarter. Nevertheless, free cash flow (cash flow from operations of $42.1m minus capital expenditure of $11.9m) was $30.3m (up from $18.5m last quarter). Cash and investments consequently total $339.1m. “We don’t need to raise capital,” says chairman & CEO Chuck Swoboda. “We can use that to drive our business.”

Earlier this month, Cree entered into a long-term strategic agreement for lighting fixture firm Zumtobel Group to supply Cree’s LED downlights through their sales channels in Europe, with shipments starting this quarter (accelerating the firms’ business relationship, which is expected to expand into other high-volume lighting categories in 2009). “While the current economic uncertainty has made forecasting the business more challenging, we continue to target growth driven by increased demand for our XLamp LED and LED lighting solution products,” says Swoboda.

During the quarter, Cree released the new XP and MC series of XLamp LEDs to initial production, bringing lighting-class performance to new package form factors (addressing a wider range of lighting applications). Initial production in Durham will transition to high-volume production at Cree's factory in Huizhou, China in fiscal second-half 2009.

For fiscal second-quarter 2009 (ending 28 December), Cree expects revenue to grow further to $142-146m, driven again by double-digit growth in both XLamp LEDs and LLS products, offsetting slight drops in LED chip, materials and contract revenues. Gross margin should be 35-36%, with slight improvements from current products being offset by higher costs on the ramp-up of several new products coming on line. To improve margins over the next year, Cree remains focused on further yield improvements at the chip and package level, capacity additions in Asia, volume benefits due to increased factory loading, and the transition of LED chip production to four-inch wafers, says Swoboda.

“We’ve seen some signs of lower demand for our power products and IT-related application, but current customer forecasts for LED product remain pretty solid,” says Swoboda. However, Cree is becoming more cautious about fiscal Q3, which is historically a seasonally slower quarter for the firm. “We anticipate that the economic uncertainty and lack of consumer confidence will eventually have some impact on the markets we serve,” says Swoboda. “As a result, we are taking a more conservative approach to operating expenses and capital spending in the near term,” he adds.

For more than a quarter now there has been excess capacity and low utilization rates among LED chip makers in Taiwan, which already compete very aggressively on low-to-medium end consumer applications, says Swoboda. By comparison, Cree is impacted less impacted by consumer issues, he reckons. Apart from the conversion of PC notebook backlighting to LEDs helping revenues, over the last couple of years Cree's strategy has been to focus its LED chip business more on the higher-end lighting applications. Cree is therefore well positioned to take advantage of the growing trend for energy-efficient lighting. Demand has continued to grow for Cree’s flagship LR-6 product, and has already seen strong initial orders for the soon-to-be-released LR-24.

However, to better serve the growing LLS customer base, Swoboda recognizes that Cree needs to increase its finished goods inventory levels in North America. The firm is working to resolve the manufacturing bottlenecks, he says. “We still plan to make new investments to support the targeted growth in LED components and lighting product sales as the LED lighting revolution continues to gain momentum.” Cree is targeting capital expenditure of $15-18m in fiscal Q2, mainly for additional capacity, new product introductions, and the continuing transition of LED chip production to four-inch SiC wafers - the firm is on track to have all its major product lines fully converted by the end of its fiscal 2009 (the end of June).

Cree also aims to transition the commercial power and RF product line from its slight quarterly loss to adding to the bottom line in fiscal 2010. The firm recently received its largest order ever for commercial RF devices, which should provide a solid base of RF business over the next year and help offset some of the fluctuations in demand on the power side of the business. Cree’s goal over the next year is to realize more potential from SiC Schottky diodes from a broader customer base, so it is working to increase both direct and distribution sales coverage to improve customer reach.

See related items:

Cree grows 25% to record $493m revenue for fiscal 2008

Cree sustains growth through focus on LED lighting

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