30 January 2017

Cree reports higher-than-expected quarterly revenue growth of 8% and doubles profits

For fiscal second-quarter 2017 (to 25 December 2016), Cree Inc of Durham, NC, USA has reported revenue of $401m, down 8% on $435.8m a year ago but up 8% on $371m last quarter (and well above the $360-380m guidance).

Fiscal	Q2/2016	Q3/2016	Q4/2016	Q1/2017	Q2/2017
Revenue	$435.8m	$366.9m	$388.4m	$371m	$401m

Of this, discontinued operations contributed $54m (exceeding the expected $50m), rising further, by 8.2% on $49.9m last quarter and by 28.6% on $42m a year ago. In July 2016, Cree agreed for Germany's Infineon Technologies AG to buy its Wolfspeed business (which includes the Power & RF product lines that had historically been reported as a separate operating segment, plus the non-LED materials product line previously reported within the LED segment).

Continuing operations contributed $347m, down 11.9% on $393.8m a year ago but up 8% on $321.3m last quarter (and exceeding the expected $310-330m). Specifically, Lighting Product revenue (mainly LED Lighting systems and bulbs) was $208.9m (60% of total revenue), down 18% on $255m (65% of total revenue) a year ago but up 13.7% on $183.8m (57% of total revenue) last quarter (rather than flat, as expected). LED Product revenue (chips and components) was $138m (40% of total revenue), roughly level with $137.5m (43% of total revenue) last quarter and $138.8m (35% of total revenue) a year ago.

In fiscal Q2, Cree announced expanded lighting product offerings and improved performance in its LS surface ambient product family, its IG parking luminaires, and its Essentia by Cree family. In LEDs, the firm launched what is claimed to be the industry's most efficient horticulture LEDs and its new XHP 50.2 LED (claimed to deliver the highest lumen density in its class).

On a non-GAAP basis, gross margin has risen from 28.9% a year ago and 28.8% last quarter last quarter to 32.7% (rather than being level quarter-to-quarter, as expected). Despite consumer lighting revenue declining, margins improved as Cree met its overall lighting targets. Gross margin for continuing operations rebounded further, from 27.7% last quarter to 32%, up on 28.2% a year ago. Specifically, Lighting Product margin has rebounded from 26.8% last quarter to 35.8%, up on 28.5% a year ago (improving for both commercial and consumer lighting). This sharp increase was counteracted slightly by LED Product margin falling further, from 30.9% a year ago and 30.4% last quarter to 29.2%.

Operating expenses (OpEx) for continuing operations have risen from $80m last quarter to $88m (above the target, due to contingent legal costs associated with settlement of the patent infringement and false advertising lawsuit against lighting company Feit Electric Company Inc of Pico Rivera, CA, USA).

Net income was $29.9m ($0.30 per diluted share), up slightly from $28.5m ($0.28 per diluted share) a year ago but doubling from $15.2m ($0.15 per diluted share) last quarter, and well above the expected $13-19m ($0.13-0.19 per diluted share). Correspondingly, income from continuing operations was $19.9m ($0.20 per diluted share), down from $21.6m ($0.21 per diluted share) a year ago but doubling from $9.5m ($0.09 per diluted share) last quarter and exceeding the expected $4-10m ($0.04-0.10 per diluted share). Income from discontinued operations was $10m ($0.10 per diluted share), up from $5.7m ($0.06 per diluted share) last quarter, and exceeding the expected $9m ($0.09 per diluted share).

"Revenue and non-GAAP earnings were significantly above our targeted range due to the settlement of our patent infringement and false advertising lawsuit with Feit Electric," notes chairman & CEO Chuck Swoboda.
Spending on property, plant & equipment (PP&E) has been cut further, from $31.9m a year ago and $19.3m last quarter to $15.9m, while patent spending of $3.6m is up on $2.3m last quarter. The total capital expenditure of $20m was up slightly on $21m last quarter (again including $10m for Wolfspeed).

Cash flow from operations was $101.6m, up from just $18.1m last quarter. Free cash flow was therefore $82.2m, compared with -$3.5m last quarter.

During the quarter, Cree spent $63m to repurchase 2.7 million shares (making $98m spent repurchasing 4.2 million shares in fiscal 2017 year-to-date).

Overall during the quarter, consolidated cash and investments hence rose by $19m from $402m to $421m. At the end of the quarter, Cree had $170m outstanding on its line of credit.

For fiscal third-quarter 2017 (ending 26 March), Cree targets combined revenue (including both continuing and discontinued operations) of $340-370m. For discontinued operations (Wolfspeed), revenue is expected to be roughly level at $55m. For continuing operations, revenue is expected to fall to $285-315m, as growth in new commercial lighting products partially offsets seasonal slowness related to both weather and holidays. This, combined with the consumer lighting revenue remaining level, will result in overall core lighting revenue falling a few percent from fiscal Q2. "We target our LED business to be 10% lower sequentially, which is slightly more than the typical seasonal decline due to the holiday timing impact [two major holidays in the quarter]," notes Swoboda.

Cree expects increased lighting gross margins to be the primary driver to improve operating margins over time. "We target the combination of higher-value new products and lower costs to drive improved core lighting gross margins," says Swoboda. However, this will be will be partially offset by LED margins falling slightly due to seasonally lower volumes and higher costs associated with the ramp up of new products.

Operating expenses from continuing operations are expected to be $7m lower than fiscal Q2 due to lower legal spending on IP litigation and reduced brand marketing spending, partially offset by higher R&D spending for new LED product development.

Combined net income is expected to fall to $10-18m ($0.10-0.18 per diluted share), as income from continuing operations falls to $1-9m ($0.01-0.09 per diluted share) while income from discontinued operations (Wolfspeed) is roughly steady at $9m ($0.09 per diluted share).

For full-year fiscal 2017, Cree continues to target Lighting and LED capital spending of $55m to support continuing operations. "Until the sale of Wolfspeed is completed, we will continue to invest capital to support the Wolfspeed business," says chief financial officer Mike McDevitt. Cree targets Wolfspeed capital spending of $15m for fiscal Q3 (up from $10m in fiscal Q2). "Overall, we now target fiscal 2017 free cash flow of $120m [up from the prior target of $100m], which may change depending on the timing of the Wolfspeed sale," says McDevitt.

Regarding the LED business, the market "remains very competitive, and we continue to focus our technology on the applications where we can add the most value to the customer," says Swoboda. "We continue to work on some mid- to longer-term programs that are targeted to expand the LED business in both existing and new applications. One of the new applications that we have been pursuing is automotive lighting, where we believe our high-power LED technology can enable emerging exterior vehicle applications. We have been an LED chip supplier to automotive for two decades and target releasing our first new automotive-qualified XLamp LED components by the end of fiscal 2017," he adds.

"We continue to evaluate lighting growth opportunities through potential mergers & acquisitions," says Swoboda. "We are early in the process and taking a very measured approach as we look for the right business to complement our current product portfolio and enhance our channel relationships. We have the balance sheet to act when the right opportunity is available and we have the flexibility to be patient," he adds.

Update on sale of Wolfspeed to Infineon

Since Cree agreed last July to sell the Wolfspeed business to Infineon, the parties are continuing to work together to obtain the customarily required regulatory approvals in various jurisdictions, including foreign and domestic anti-trust approvals, as well as approval from the Committee on Foreign Investment in the United States (CFIUS). Cree aims to close the transaction within fiscal third-quarter 2017. "Closing Wolfspeed will further strengthen our ability to fund share repurchases and pursue inorganic lighting growth in the medium to longer term," says Swoboda.

See related items:

Cree and Feit settle patent dispute and reach license agreement

Cree's quarterly margins aided by improvements in Lighting

Cree's double-digit growth in commercial lighting offsets slowdown in consumer lighting prior to launch of next-gen bulb

Infineon to acquire Wolfspeed for $850m

Cree's revenue falls 15.8% to $367m

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

Tags: Cree LED

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