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21 January 2009


Lighting products sustain Cree's record revenues

For its fiscal second-quarter 2009 (ended 28 December 2008), Cree Inc of Durham, NC, USA has reported record revenue of $147.6m, despite the challenging economic conditions.

Product and contract revenue was $142m (up 1.3% on last quarter and 19% year-on-year), excluding $5.6m in up-front patent licensing fees (not factored into previously announced targets). During the quarter, Cree granted Japan’s Mitsubishi Chemical Corp an exclusive license to manufacture and sell freestanding GaN substrates. Cree also settled patent infringement litigation involving granting a license to patents belonging to Cree and Boston University in exchange for a license fee and royalties from LED maker Bridgelux Inc of Sunnyvale, CA, USA, as well as Cree becoming a significant supplier to Bridgelux.

Non-LED product and contract revenues were $15.3m, down 11% sequentially and 23% on a year. Materials revenue (silicon carbide substrates) and government contract revenue were both in line with expectations, but power and RF business fell about 5% sequentially (with lower SiC Schottky diode device sales offsetting higher RF revenue).

This decline was more than offset by LED revenue of $126.7m, up 3% sequentially and 28% on a year ago. This was driven by double-digit growth for XLamp LED components and lighting fixtures (led by sales of LR6 downlights and the first shipments of Cree's LR24 recessed LED luminaire). This growth was despite a single-digit decline in LED chip and high-brightness component sales due to lower demand in consumer, mobile, and automotive applications.

Excluding the benefit of license deals, gross margin rose from 35.2% last quarter to 36.8%, due mainly to higher LED chip and wafer fab utilization, improved yields for both LED chips and XLamp LED components, and a more favorable LED product mix (with above-average profit margins for XLamp LED components). This helped to offset increasingly aggressive pricing pressure from Asian rivals for both LED chips and components.

Net income rose from $5.9m last quarter to $10.7m. However, this included $4.4m related to the patent licensing fees plus a franchise tax benefit. During the quarter, cash and investments grew by $26.5m to $365.5m, with cash flow from operations of $40.7m and free cash flow (cash flow from operations minus capital expenditure of $17.8m) of $22.9m.

“As we start the third fiscal quarter [ending 29 March], we are facing reduced visibility from both our customers and distributors,” says chairman & CEO Chuck Swoboda. Overall backlog is down from this point last quarter but in line with the seasonal booking pattern a year ago. “We do not expect visibility into the quarter order trends to improve until mid-February, at the earliest, after the Chinese New Year holiday [when Asian LED packagers are closed],” he adds.

But sales should show a single-digit decline for LED components, as stronger demand for commercial lighting products and China video screens will be offset by a recession-driven drop in demand for consumer, mobile and automotive applications, a shorter sales quarter due to a longer Chinese New Year shutdown, and reduced inventory levels at both customers and distributors. Power and RF revenue should be flat on fiscal Q2, and material and contract revenue flat to down single digits.

Cree expects overall fiscal Q3/2009 revenue to fall 5-10% to $128-135m. Cree is hence aiming for lower factory utilization to limit inventory growth. Gross margin will fall back to 34-36% as recent gains will be offset by the lower factory utilization and increased pricing pressure. Swoboda says that Cree remains focused on activities to reduce costs over the next several quarters, including further yield improvements at the LED chip and component level.

In particular, Swoboda says that Cree is continuing to closely manage both operating expenses (targeting a reduction of $1m) and capital spending (targeting $10-15m in fiscal Q3, mainly for accelerating the transfer of XP and MC XLamp manufacturing to its plant in Huizhou, China by about one quarter to fiscal Q3 in order to boost profit margins). Cree also aims to fully transition most high-volume LED chip products to 4-inch wafers by the end of fiscal 2009 (at the end of June). However, while cutting R&D spending for materials and LED chips, Cree is maintaining LED component R&D levels and increasing LED lighting product R&D. “We continue to make capital investments to support new product introduction, but we have reduced our overall capital spending for the year by over 25%,” says Swoboda.

For 2009, Cree is in a better position than many competitors due to its focus on the LED lighting market, Swoboda reckons. The firm is targeting for LED lighting adoption to continue to gain momentum as product availability increases and as recognition of the benefits grows, due in particular to new installations of the LR24 such as at the US Federal Reserve in Washington DC (as part of its ongoing energy-efficiency program) and the planned Pentagon renovation (involving installing 4200 of the luminaires in an entire wing, with a payback of less than four years).

In addition, regarding SiC power devices, Cree says that the priority over the next couple of quarters is to build sales momentum for Schottky diodes from a broader customer base beyond the server power supply market, which should increase the factory loading and improve operating margins.

See related items:

Bridgelux and Cree settle patent infringement litigation

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

Search: Cree LEDs


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