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22 October 2015

Cree's quarterly revenue rises 11%, driven by growth in commercial lighting

For fiscal first-quarter 2016 (ended 27 September 2015), Cree Inc of Durham, NC, USA has reported revenue of $425.5m, down 1% on $427.7m a year ago but up 11% on $382.2m last quarter (and towards the high end of the targeted $410-430m), led by strong demand for commercial lighting and a solid quarter for the firm's LED business.

Fiscal Q1/2015 Q2/2015 Q3/2015 Q4/2015 Q1/2016
Revenue $427.7m $413.2m $409.5m $382.2m $425.5m

Specifically, Lighting Product revenue was $248m (58% of total revenue), up 8% on $229m last quarter (led by continued growth in commercial lighting) and up 11% on $223m a year ago. LED Product revenue was $148.2m (35% of total revenue), down 15% on $173.6m a year ago but up 21% on $122.2m last quarter (allowing Cree to further reduce channel inventories). Revenue for Power & RF Products (now named Wolfspeed) was $29.3m (7% of total revenue), down 5% on $30.8m last quarter and 6% on $31m a year ago (due mainly to lower RF demand related to delays in the rollout of LTE networks in China). "Wolfspeed, our recently rebranded Power & RF division, is working through some near-term softness in the RF side of the business due to macro headwinds," notes chairman, president & CEO Chuck Swoboda.

Although still down on 32.4% a year ago, non-GAAP gross margin has rebounded to 31.7% following a low of 21% last quarter (which was hit by charges from the restructuring of Cree's LED business – announced on 24 June – to reduce excess factory capacity and overheads by consolidating two fabs in Durham into one by the end of December). Specifically, although still below 39% a year ago, LED Product gross margin rebounded from just 7% last quarter to 35.5%, as Cree saw the initial benefits of lower cost due to the LED business restructuring, supplemented by patent license income. Lighting Product gross margin has rebounded from 24.8% last quarter to 27.9% (up on 24.9% a year ago), due mainly to improved factory execution. However, Power & RF Product gross margin was 49%, down from 52.5% last quarter and 57.6% a year ago due to product mix.

Operating expenses were $105m, less than $108m last quarter (and less than expected due to lower-than-expected IP litigation spending). "We made progress towards our goal to deliver operating leverage," notes chief financial officer Mike McDevitt. Operating income was $29.4m (driving operating margin up to 6.9% of revenue), above the middle of the targeted range.
Compared with a net loss of $20.5m ($0.19 per diluted share) last quarter (due to the LED business restructuring), Cree rebounded to a net profit of $22.1m ($0.21 per diluted share), although this was still down on $29.6m ($0.24 per diluted share) a year ago. However, this excludes $15.9m of charges related to the LED factory capacity and overhead restructuring (following $84m of charges in the June quarter).

Cash generated from operations has fallen from $88m last quarter to $46.8m. In addition to patent spending of $4.3m, spending on property, plant & equipment (PP&E) has risen from $48m to $49.9m, raising total capital expenditure from $53m to $54.2m. Free cash outflow was hence -$7.4m. However, Cree also spent $70m to repurchase 2.7 million of its shares (following $160m spent last quarter) plus $13m to complete the acquisition in early July of power module provider Arkansas Power Electronics International Inc (APEI) of Fayetteville, AR, USA (aiming to accelerate the market for its Power & RF business' SiC power modules). Therefore, during the quarter, cash and investments fell by $81.1m, from $713m to $632.1m. Cree ended the quarter with $207m outstanding on its line of credit.

"Fiscal 2016 is off to a good start, with Q1 revenue and profits above the middle of our targeted range, driven by strong demand for commercial LED lighting and a solid quarter for our LED business," says Swoboda. "We are confident in our strategy and optimistic about the future, as the commercial lighting business is growing, the LED results recovered nicely in Q1 and Power & RF design momentum is strong," he adds. During the quarter, the US Air Force awarded a follow-on contract to Cree that will enable qualification of a power electronic module for the F-35 Joint Strike Fighter.

During the quarter, Cree expanded its LED downlight portfolio with the introduction of the KR8, its first 8-inch downlight, and the newest-generation LR6 downlight. It also launched the new Cree LED bulb (with improved performance, longer life and greater energy savings). In addition, Cree released its new XLamp XQ-E High Intensity LEDs (claimed to be the industry's first family of high-power color LEDs optimized for optical performance).  

"Our innovation momentum remains strong across all three business segments," says Swoboda. "The commercial lighting business is growing and our transition to the new Cree Better Bulb is on plan," he adds. "The LED restructuring is on track and the business results recovered nicely in fiscal Q1."

For fiscal second-quarter 2016 (ending 27 December 2015), Cree targets revenue of $425-445m, driven by further growth in commercial lighting. Gross margin should be level at 31.7%, rising in each product areas but offset by lower non-recurring LED license-related revenue. Operating expenses are targeted to be $106m (up $1m due mainly to variable sales cost associated with higher lighting sales). Net income is targeted to be $21-27m ($0.21-0.26 per diluted share). The remaining $3m of LED business restructuring charges should bring the total to $102m.

Factory utilization is improving in LEDs, with 85% targeted by the end of December, when factory consolidation is completed. "Factory execution continues to be critical to achieving our targets," comments Swoboda.

For full-year fiscal 2016, Cree targets revenue growth of about 10% from fiscal 2015's $1.63bn to $1.8bn, with increased operating margin of 8%. The firm also targets spending on property, plant & equipment (PP&E) to be lower than fiscal 2015, at $150m (primarily in the first half of the year, to complete existing infrastructure projects and to provide incremental capacity for Lighting and Wolfspeed, as needed). The firm also continues to target free cash flow of about $85m.

See related items:

Cree's quarterly LED product revenue falls 21% amidst restructuring

Cree restructuring LED Products business due to higher-than-expected ASP erosion

Cree reports better-than-expected quarterly LED sales

Cree's quarterly revenue level year-on-year as 33% growth in LED lighting offsets drop in LED demand from China

Cree's quarterly revenue falls 2% to $428m, as lower LED sales outweigh Lighting and Power & RF growth

Tags: Cree LED

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