2 February 2018
Cree’s growth in Wolfspeed Power & RF products and LED products offsets drop in Lighting revenue
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For fiscal second-quarter 2018 (ended 24 December 2017), Cree Inc of Durham, NC, USA has reported revenue of $367.8m, down 8% on $401.3m a year ago but up 2% on $360.4m last quarter - and exceeding the targeted $340-360m - driven by strong demand for Wolfspeed and LED Products.
Revenue for the Wolfspeed business (Power & RF devices and silicon carbide materials) was an above-target $70.6m (19% of revenue), up 7% on $66.2m (18% of revenue) last quarter and up 30% on $54.4m (14% of revenue) a year ago. “While we were capacity constrained during the quarter, we achieved the higher revenue by managing our front-end wafer factory capacity between Wolfspeed and LED production,” says chief financial officer Mike McDevitt.
Revenue for LED Products (chips and components) was an above-target $152.7m (42% of revenue), up 6% on $144.5m (40% of revenue) last quarter and up 11% on $138m (34% of revenue) a year ago, due to strong demand in the automotive after-market, video screen, general lighting and specialty lighting applications.
Revenue for Lighting Products (mainly LED lighting systems and lamps) was $144.6m (39% of revenue), at the upper end of the targeted range but down 3% on $149.7m (42% of revenue) last quarter and down 31% on $208.9m (52% of revenue) a year ago. Commercial lighting revenue was down a little less than targeted, despite continued weakness in the North American market. Consumer sales were in line with target.
Wolfspeed gross margin was 48.4%, down from 49% last quarter but up from 47.7% a year ago.
LED product gross margin was a below-target 25.3%, down from 26.9% last quarter, due mainly to higher chip costs resulting from managing the front-end wafer factory production between Wolfspeed and LED.
Lighting Product gross margin has fallen further, from 35.8% a year ago and 21.3% last quarter to 15.9%, due mainly to larger-than-expected warranty reserves (for quality issues identified on certain products) and lower commercial factory utilization.
Overall company gross margin has fallen from 35% a year ago and 27.8% last quarter to 25.2%. On a non-GAAP basis, gross margin has fallen from 35.8% a year ago and 28.3% last quarter to 25.7% (below the targeted 28.5%).
Operating expenses (OpEx) were $97m (below the targeted $100m), due mainly to lower-than-expected variable performance-based compensation and lower IP litigation spending, as activity in some cases was delayed to fiscal Q3.
Net loss was $0.66m ($0.01 per diluted share, at the low end of the targeted range), compared with net income of $4.1m ($0.04 per diluted share) last quarter and $29.9m ($0.30 per diluted share) a year ago. However, excluding the additional warranty costs (for quality issues identified for certain commercial lighting products), earnings would have shown a profit of $3m ($0.03 per share, at the top end of the targeted range).
Cash flow from operations was $51.7m (down from $54.1m last quarter and $101.6m a year ago). Spending on property, plant & equipment (PP&E) has risen further, from just $15.9m a year ago and $36.5m last quarter to $48.8m, while patent spending was steady at about $2.5m. So, total capital expenditure (CapEx) was $51.3m. Free cash flow was hence just $461,000 (down from $15.2m last quarter and $82m a year ago).
However, Cree received $46m from the exercise of employee stock options. Hence, during the quarter, cash and investments (net of line of credit borrowings) rose by $42m from $484m to $526m. At the end of the quarter, Cree had $124m outstanding on its line of credit.
For fiscal third-quarter 2018 (ending 25 March), Cree expects revenue to fall to $335-355m, as 5% sequential growth for Wolfspeed (as additional wafer capacity starts to come online) will be offset by LED Product revenue being seasonally lower by 10% (due to the timing of the Chinese New Year, Christmas and New Year’s holidays), and Lighting Product revenue falling by 10% (due to outdoor product seasonality and continued North American market softness).
Nevertheless, gross margin should rise to 28%, due to Lighting being targeted to have more normal warranty reserves, cost improvements, and a more favourable product mix. Gross margin will be positively impacted by higher Wolfspeed revenue mix, despite lower targeted Wolfspeed margins associated primarily with the cost of ramping the new wafer capacity. LED Product margin should be slightly lower due to lower seasonal factory utilization.
Operating expenses should rise by $1m to $98m, including incremental spend related to the delayed IP legal costs, Wolfspeed R&D and trade show costs, partially offset by lower variable sales costs.
Net income should range from a loss of $3m ($0.03 per diluted share) to a profit of $3m ($0.03 per diluted share).
Capital priorities remain focused on expanding capacity in the Wolfspeed business, where demand exceeds the firm’s current ability to supply. The initial set of tools for wafer capacity expansion came online as Cree exited fiscal Q2. “We are on target with our plan to double wafer capacity for external material customers by the end of calendar 2018,” notes McDevitt. “We were also on target with our additional Power & RF device capacity starting to come online in fiscal Q4. This plan is intended to double our power device capacity by the end of calendar 2018 from where we exited fiscal 2017,” he adds. “As we ramp this new capacity, we anticipate we could have some variability in our initial production yields and factory utilization that may reduce our near-term Wolfspeed gross margins.”
For full-year fiscal 2018, Cree continues to target CapEx of $220m, driven mainly by expanding Wolfspeed’s production capacity to support forecasted customer demand.
Due to accelerating the Wolfspeed capacity investments to support the substantial growth opportunity forecasted over the next several years, Cree continues to target overall fiscal 2018 free cash flow being negative $20m.
Last quarter Cree announced that it was implementing a strategic review of its businesses, aiming to determine which areas offer the best opportunities for growth in both revenue and profitability. “We have a few more things to work through, but I believe we’ll be in a good position to roll out our direction before the end of this quarter,” says CEO Gregg Lowe. “Over the last few months, I’ve traveled extensively to meet with customers, partners and employees, and I come away from that convinced there is meaningful upside for each of our businesses,” he adds.
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