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9 September 2019

Cree’s revenue falls 5% in June quarter

For full-year fiscal 2019 (to 30 June), Cree Inc of Durham, NC, USA has reported revenue of $1.08bn, up 17% on fiscal 2018’s $0.925bn, after excluding (as discontinued operations) the Lighting Products business unit (LED lighting fixtures, lamps and corporate lighting for commercial, industrial and consumer applications), which Cree sold on 13 May for about $310m to IDEAL Industries Inc of Sycamore, IL, USA..

Fiscal Q4/2018 Q1/2019 Q2/2019 Q3/2019 Q4/2019
Revenue $409.5m $408.3m $413m $274m $251.2m

By segment, revenue for Cree’s Wolfspeed silicon carbide (SiC) materials, power and gallium nitride (GaN) RF device business grew 64% from $328.6m to $538.2m (rising from 36% to 50% of total revenue). In contrast, revenue for LED Products fell 9% from $596.3m to $541.8m (shrinking from 64% to 50% of total revenue), due to softer LED market conditions as well as ongoing trade and tariff concerns with China.

On 11 June – in response to (1) softer-than-expected demand for LED Products (as global trade uncertainties persist) and (2) the US Department of Commerce’s Bureau of Industry and Security on 15 May adding China’s Huawei Technologies to its ‘Entity List’ prohibiting the sale to Huawei of products covered by the Export Administration Regulations (EAR) without obtaining a license – Cree reduced its guidance (provided on 1 May) for fiscal fourth-quarter 2019 revenue from $263-271m to $245-252m (including revenue from Huawei being down by about $10m from an expected $15m per quarter).

Fiscal fourth-quarter revenue was in fact $251.2m, down 5% on $265.8m a year ago and 8% on $274m last quarter, but at the high end of the revised guidance range.

Wolfspeed revenue was $134.2m (53.4% of total revenue), up 22% on $110m (41% of revenue) a year ago (and at the high end of its $132-135m guidance range) but down 5% on $141.3m (51.5% of revenue) last quarter due to the impact of the Huawei export ban as well as market softness in Power products for industrial and automotive applications.

LED Products revenue has fallen further to $117m (46.6% of total revenue), at the top of its $113-117m guidance range but still down 11.9% on $132.8m (48.5% of revenue) last quarter and 25% on $155.8m (59% of revenue) a year ago, due to the continued global trade uncertainties.

On a non-GAAP basis, full-year company gross margin has risen from 2018’s 33.9% to 2019’s 37.3%, as a direct result of higher factory utilization in the first half of the fiscal year, cost reductions, and a continued focus on target markets where Cree believes that its customers value its technology. This was despite Wolfspeed gross margin being flat year-on-year at 48% (due to cost-reduction efforts being offset by product mix shifts within the business), since LED Product gross margin has risen from 26.5% to 27.7%.

However, despite being up from 36% a year ago, fiscal Q4/2019 company gross margin of 36.6% is down from 37.9% last quarter (and below the targeted 37%). Wolfspeed gross margin has grown further, from 47.9% a year ago and 48.7% last quarter to 50.2% (better than the targeted 49%, as the firm stopped shipping lower-margin products when the Huawei ban went into effect). But LED gross margin of 24.1% is down on 27.4% a year ago and 27.8% last quarter (and below the expected 25%), due primarily to lower factory utilization.

Operating expenditure (OpEx) for fiscal Q4 was $82m (32.6% of revenue), up from $80m last quarter and slightly above the targeted $81m.

Full-fiscal-year net income has more than doubled from 2018’s $36.9m ($0.37 per diluted share) to 2019’s $76.9m ($0.74 per diluted share). However, quarterly net income was $11.5m ($0.11 per diluted share), down from $14.5m ($0.14 per diluted share) a year ago and almost halving from $20.4m ($0.20 per diluted share) last quarter. This is below the original guidance range of $12-17m ($0.12-0.16 per diluted share). However, it exceeds the midpoint of the revised target range of $8-13m ($0.08-0.12 per diluted share) due to the better-than-expected Wolfspeed gross margin.

During the fourth quarter, cash from operations was just $2.9m (down from $60.7m last quarter). Capital expenditure (CapEx) was level at $37m (contributing to $153m for the full year). Free cash flow was hence negative $34.5m (compared with +$24m last quarter), as Cree continues to invest for growth to expand capacity in the Wolfspeed business.

During the quarter, cash and short-term investments rose from $789m to $1.05bn, which include the proceeds from the sale of the Lighting business, zero balance on the firm’s line of credit, and convertible debt with a face value of $575m. Capital allocation priorities remain focused on expanding capacity and the Wolfspeed business to fuel future growth. For fiscal full-year 2020, Cree targets capital investment of about $200m.

“We continue making progress on the strategic transformation of Cree, as evidenced by the key milestones we achieved during the quarter. We announced plans to expand our silicon carbide and GaN capacity significantly, with the development of a state-of-the-art, automated silicon carbide and GaN fabrication facility, and a mega factory for materials. This represents the largest capital investment in the history of silicon carbide and GaN technologies and will support the growing demand we expect from automotive, communications infrastructure, and industrial segment,” notes Lowe.

“Second, we were selected as the exclusive silicon carbide partner for the Volkswagen Group’s Future Automotive Supply Tracks (FAST) initiative. The goal of the FAST program is to foster even greater collaboration among VWs key partners and accelerate the delivery of new electric vehicles to the marketplace. Volkswagen has committed to launch almost 70 new electric vehicles in the next decade, which by itself presents a great opportunity for Cree,” he adds.

“We announced a multi-year $85m supply agreement with ON Semiconductor, making this the fourth long-term agreement we have announced in the past year and a half. These four wafer supply agreements, which now total close to $600m, demonstrate how our technology is helping to drive the transition in the power semiconductor industry, from silicon to silicon carbide,” Lowe continues.

“Lastly, we closed the sale of Cree Lighting to IDEAL Industries, which will allow us to channel more of our energy and expertise into growing our Wolfspeed business.”

“The current operating environment is very challenging; geopolitical and macroeconomic issues impacted our financial results in the fourth quarter,” summarizes CEO Gregg Lowe. “We expect them to present some additional headwinds in Q1 of 2020 and perhaps beyond.”

For its fiscal first-quarter 2020 (to 29 September 2019), Cree targets revenue of $237-243m. Wolfspeed revenue is expected to be down slightly by 5-7% due to the full-quarter impact of the Huawei ban and soft selling conditions in China, as it appears that the Chinese government’s reduction in incentives is impacting electric vehicle (EV) sales. LED revenue is expected to be down 2-4% sequentially due to continued market softness and tariff concerns.

“Regarding Huawei, we are not shipping product at this time, and we will continue to comply with US Federal Law. We have applied for licenses from the government to potentially resume certain shipments to our customer but have not yet received a response,” notes chief financial officer Neill Reynolds. “We are proactively managing the situation and taking a more conservative approach by lowering our factory utilization as well as lowering our inventory levels both internally and in the channel. We believe this will better align us with current market conditions.”

Gross margin is expected to fall to 30.8%. Wolfspeed gross margin is targeted at 46.3%, down from 50.2%, due to product mix shifts resulting from the Huawei ban. LED margin is targeted at 17.5%, down from 24.1%, driven primarily by the lower factory utilization and lower sales volume.

Operating expenses should again rise slightly, to $83m, to support continued growth in the Wolfspeed business. Net loss is targeted to be $3-7m ($0.03-0.07 per diluted share, lowered by about $0.03 due to the ongoing impact of the tariffs).

“While the Huawei ban and softness in the LED market will continue to impact the sector in the short-term, our long-term outlook remains unchanged - there is a significant opportunity to help customers make the shift from silicon to silicon carbide solutions for their next-generation applications,” concludes Lowe.

See related items:

Cree cuts June-quarter revenue guidance from $263-271m to $245-252m

Cree completes sale of Cree Lighting to Ideal Industries

Cree investing $1bn to expand SiC materials production and power & RF fab capacity by up to 30-fold

Cree’s quarterly revenue grows 12% year-on-year, driven by Wolfspeed’s organic growth of over 50%

Cree and ST sign multi-year SiC wafer supply agreement

Cree’s quarterly revenue grows 13% year-on-year, driven by Wolfspeed’s organic growth of 50%

Cree signs long-term SiC wafer supply deal with leading power device maker

Cree’s quarterly revenue grows 15%, driven by 40% organic year-on-year growth from Wolfspeed

Cree acquires Infineon RF Power business for €345m

Cree signs $100m long-term deal to supply 150mm SiC wafers to Infineon

Tags: Cree LED Wolfspeed GaN RF SiC Power electronics

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