27 April 2016

Cree's revenue falls 15.8% to $367m

For fiscal third-quarter 2016 (ended 27 March), Cree Inc of Durham, NC, USA has reported revenue of $366.9m, down 10.4% on $409.5m a year ago and 15.8% on $436m last quarter (and 11.5% below the originally targeted $400-430m).

Fiscal	Q3/2015	Q4/2015	Q1/2016	Q2/2016	Q3/2016
Revenue	$409.5m	$382.2m	$425.5m	$435.8m	$366.9m

Specifically, Lighting Product revenue was a lower-than-targeted $187.7m (51% of total revenue), down 16% on $224.1m (55% of total revenue) a year ago and down 26% on $255m (59% of total revenue) last quarter. This is due primarily to lower commercial lighting revenue, driven by three main factors: customer service disruptions related to converting to a new enterprise resource planning (ERP) system; delays in new product introductions (which prompted some customers to delay their projects or switch to other products); and weaker market conditions than forecast.

LED Product revenue was $150.2m (41% of total revenue), down by just 3% on $154.4m (38% of total revenue) a year ago and 2% on $153m (35% of total revenue) last quarter.

Wolfspeed Power & RF Product revenue was $29m, down 6% on $31m a year ago but up 6% on $28m last quarter.

On a non-GAAP basis, gross margin is down from 31.6% last quarter to 30.6% (below the expected 31.7%). Specifically, Lighting Product gross margin fell back from 28.5% to 26%, due to lower lighting factory utilization, an inventory write-down on LED tubes, and a higher relative mix of consumer sales. However, the LED Product business continue to execute well, with gross margin level at 34.7%. Wolfspeed Power & RF Product gross margin has fallen from 52.2% last quarter to 46.4%, at the lower end of the targeted range due to an unfavorable product mix while new products ramp up.  

Operating expenses were $96m, below the targeted $100m (due mainly to lower variable costs on the lower Lighting sales) and cut from $103m last quarter.

Operating income has more than halved from $35.5m (operating margin of 8.1% of revenue) last quarter to $16.5m (operating margin of 4.5% of revenue). Likewise, net income was $16.9m ($0.17 per diluted share), almost halving from $30.5m ($0.30 per diluted share) last quarter, and below the originally targeted $0.22-0.29 per diluted share (but above the $0.13-0.15 forecasted on 5 April).

Cree generated $15m in cash from operations (down from $77m last quarter). This was offset by capital expenditure (CapEx) of $21.3m (down from $35.2m as planned). Free cash flow was hence -$6.3m (compared with +$41.7m last quarter). Also, Cree spent $17.8m to repurchase an additional 600,000 Cree shares (taking total repurchases to $150m for 5.8 million shares, leaving $350m remaining on the share repurchase program). However, Cree borrowed $20m on the firm's line of credit (leaving $225m outstanding) and received $6m from common stock issuances and fixed-asset sales. Hence, overall, cash and investments rose by $3m to $620m.

"Operating results were in-line with the preliminary estimates we provided on 5 April," says chairman & CEO Chuck Swoboda. "We've addressed the root causes that led to our recent Lighting business challenges, but recognize it will take time to rebuild sales momentum," he believes. "We improved customer responsiveness in March, and we're optimistic that this, combined with new product momentum [with the release of several new commercial lighting products and two new LED products], will drive sequential growth in fiscal Q4."

"In the last several weeks, we've released the expanded family of RSW streetlight products, the Essentia by Cree track and downlight product lines, and SmartCast Manager for our new PoE [Power over Ethernet] intelligent lighting products," says Swoboda.

"Over the next two months, we're scheduled to release performance upgrades and product line extensions for our XSP streetlights, CPY canopy lights and OSQ area lights," continues Swoboda. "We also target releases of SmartCast LN for suspended fixtures, next-generation high-bay fixtures and a troffer performance upgrade in the quarter. We recently released our next-generation XLamp XP-G3 platform, which delivers 31% more lumens than our previous generation as well as improved lumen density, voltage characteristics and reliability. We've upgraded LED performance in Q3 with new versions of our XPL and XP-G2 products that incorporate SC5 technology. We released a new family of XLamp CXA2 high-density LED arrays that double lumen output and deliver the most lumens in the industry for their lightning emitting surface size. We recently announced TrueWhitePlus Technology, which will be available in upcoming LED components as well as new high-end lighting products. The first products are being shown to customers this week at LIGHTFAIR, and take our industry-leading TrueWhite color technology to the next level by optimizing the spectral content of light."

For fiscal fourth-quarter 2016 (ending 26 June), Cree expects revenue to rise to $370-395m, driven by Lighting Products as commercial sales grow (more than offsetting lower targeted consumer sales as Cree ramps down the current generation products in advance of launching a new family of bulbs this Fall). Wolfspeed sales should also grow further, driven by growth in both Power & RF product lines. LED Product sales should be similar to or slightly lower than fiscal Q3 as competitive market dynamics offset typical seasonal demand improvement. Gross margin should rebound to 31.5%, driven by gross margin improvement in Lighting and Wolfspeed. Operating expenses should rise by $2m to $98m, due primarily to variable sales costs from the targeted higher commercial lighting sales. Improved gross margin and operating leverage are expected to drive operating profit up from $16m to $22m. Net income is targeted to be $16-22m ($0.16-0.22 per diluted share).

"While we believe the Lighting ERP implementation issues are mostly behind us, we believe near-term commercial orders will take time to fully recover as we are regaining our customers' confidence," says chief financial officer & executive VP Mike McDevitt. "The commercial lighting business lost order momentum in Q3, but I believe we've addressed the delivery issues and new-product momentum has started to improve," notes Swoboda. "Our consumer lighting business is working on a new generation of premium LED bulbs that are targeted for release during the Fall lighting season," he adds. 

"As we enter our fourth fiscal quarter, we remain focused on taking advantage of the growing market opportunities in Lighting and Power & RF," says Swoboda. "Our LED business has performed well over the last several quarters, but we need to continue to innovate and expand the number of applications for a high-power technology to help offset a very challenging competitive environment." 

See related items:

Cree expects quarterly revenue of $367m, 11.5% below targeted $400-430m

Cree revenue growth led by commercial lighting, as OpEx cuts drive higher-than-expected earnings

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

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

Tags: Cree LED

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