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22 April 2009


Cree’s revenue falls 11%, but 5-9% rebound expected this quarter

For its fiscal third-quarter 2009 (ended 29 March), Cree Inc has reported revenue of $131.1m, up 5% on $125m a year ago but down 11% on last quarter (or 8%, excluding one-time licensing revenues last quarter).

LED revenue grew 7% on a year ago but fell 11% sequentially to $112.4m, driven by lower LED component and chip sales (attributed to a more conservative inventory approach at customers and distributors, a longer Chinese New Year shutdown for a number of customers, and lower sales for automotive, mobile and consumer application). This was partially offset by double-digit growth for LED lighting applications, led by sales of Cree’s LR6 downlights and its new LR24 luminaire (despite lower demand for architectural and portable lighting applications). Also, although sales to distributors fell, distributors' sales to customers grew slightly, indicating growing end-customer demand for LED components (led by PC notebooks and TV back-lighting).

Non-LED product and contract revenues of $18.7m were down 4% on a year ago but up 22% sequentially. In particular, revenues for power and RF microelectronic devices grew a greater-than-expected 70% sequentially due to spot orders for silicon carbide (SiC) Schottky diodes. Revenue from materials (SiC substrates) and government contracts were similar to last quarter (in line with expectations).

Gross margin was 36.1% (up on 34.8% a year ago and almost level with last quarter’s 36.8%, despite the challenging economic environment and lower volumes). This is at the high end of the targeted range due to a favorable product mix and higher yields in LED components plus a lower bill-of-materials cost in LED lighting that more than offset lower factory utilization and the more aggressive pricing environment for LED chips and components.

Net income was $4m, down from $5.7m a year ago and $10.7m last quarter. However, during the quarter, cash and investments grew by $39.4m to $404.9m, with cash flow from operations of $49.9m and free cash flow (cash flow from operations minus capital expenditure of $9.3m) of $40.5m.

For Cree’s fiscal fourth-quarter 2009 (ending 28 June), order backlog is up on last quarter and in line with historical booking rates. The firm is now targeting stronger-than-expected revenue of $137-143m (up 5-9% sequentially).

Although the global recession continues to impact near-term demand in mobile automotive and some consumer applications, this will be offset by positive trends that Cree is seeing in LED components. Although the rate has slowed due to lower spending and new construction, the firm forecasts continued double-digit growth in LED lighting, driven by its continued adoption. “LED lighting is in position to benefit from the federal government’s focus on energy-efficient products as part of the economic stimulus package,” says chairman & CEO Chuck Swoboda. “We are seeing continued momentum in LED lighting adoption, as evidenced by recent LED street-light projects announced in both Los Angeles and Pittsburgh,” he adds. Cree’s LED component revenue is targeted to rebound, with double-digit growth in both the XLamp and high-brightness LED component product lines, driven by commercial lighting and incremental sales for LED video screens.

However, Swoboda says that success in fiscal Q4 will be partially contingent on Cree’s ability to ramp up production for several targeted high-growth LED component and lighting product areas (after receiving Energy Star qualification from the US Department of Energy and Environmental Protection Agency in early April for its LR6, LR5, and LR4 families of LED downlights). Hence, to support new product introductions and capacity expansion, during the quarter Cree is planning to increase both R&D spending (by about 10%) and capital spending (up to $10-15m, mainlly for capacity increases in China and the continuing transition of LED chip production to 4-inch wafers). Cree explains that it is planning to increase inventories in LED components and lighting products to be in a position to take advantage of spot business opportunities.

Swoboda says that, to further reduce product costs, Cree is continuing to focus on several key activities, including further yield improvements at the LED chip and component level, the introduction of lower-cost LED product designs, and the transition of LED chip production to 4-inch wafers (on track to account for over half of chips made by the end of fiscal Q4).

To further boost gross margin, Cree is also targeting higher factory utilization and increased off-shore production (in China). This should help to offset a less favorable LED component product mix and a more aggressive pricing environment as competitors try to shift their focus from mobile and automotive to new applications such as LED lighting.

Regarding non-LED products, revenues for power and RF devices are expected to fall by about $2m from the exceptionally high level in fiscal Q3. Neveretheless, Swoboda says that Cree’s focus over the next couple of quarters is to continue to build the customer base for SiC power devices as it focuses more on new products, which should improve the operating margins for this sector.

See related items:

Lighting products sustain Cree's record revenues

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

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