24 August 2020
Cree’s revenue down a less-than-expected 5% in June quarter
For full-year fiscal 2020 (to 28 June), Cree Inc of Durham, NC, USA has reported revenue of $903.9m, down 16% on fiscal 2019’s $1080m.
By segment, revenue for Cree’s Wolfspeed silicon carbide materials and silicon carbide (SiC) power device & gallium nitride (GaN) RF device business fell 13% from $538.2m to $470.7m (52% of total revenue), as a result of softness in customer demand as well as a significant impact from the COVID-19 pandemic and associated disruptions. Revenue for LED Products (chips and components) fell 20% from $541.8m to $433.2m (shrinking from 50% to 48% of total revenue), due to ongoing market softness, trade and tariff concerns with China, and lower utilization primarily due to COVID-19.
Fiscal fourth-quarter 2020 revenue was $205.7m, down 5% on $215.5m last quarter and 18% on $251.2m a year ago. However, this was $5.7m above the mid-point of the $185-215m guidance.
Wolfspeed revenue was $108.4m (52.7% of total revenue), down 19% on $134.2m a year ago (due to continued softness in sales of electric vehicles in China, plus supply & demand challenges tied to the pandemic) and down 5% on $113.9m last quarter (as improved performance in RF and, in particular, power devices was more than offset by lower shipments to one non-semiconductor customer in the SiC materials business that was not designated as an essential business during the pandemic plus the deferral of shipments to a few SiC wafer customers, as permitted under their long-term agreements with Cree).
LED Product revenue was $97.3m (47.3% of total revenue), down 4% on $101.6m last quarter (reflecting supply constraints) and down 17% on $117m a year ago (driven largely by global trade events and the pandemic), but near the top of the $85-100m guidance range.
On a non-GAAP basis, full-year gross margin has fallen from 37.3% in fiscal 2019 to 28.7% for fiscal 2020, including Wolfspeed falling from 48% to 39% and LED Products from 28% to 21%.
Quarterly gross margin declined further, from 37% a year ago and 29.8% last quarter to 26.4% in fiscal Q4/2020.
Wolfspeed gross margin has declined further, from 50% a year ago and 40% last quarter to 35.3%, due mainly to decreased factory efficiency resulting from the safety measures to protect staff during the pandemic, as well as the challenges of continuing low yields (related to the 150mm SiC MOSFET product ramp-up in the Durham fab) plus factory transitions that will continue to be a headwind until production is shifted to Cree’s new Mohawk Valley Fab. However, Wolfspeed gross margin is above the expected 33-35%.
LED Product gross margin was 22.8%, down from 24% a year ago, but up from 20% last quarter (and above the forecasted 19-21%) due primarily to favorable product and customer mix.
Operating expenditure (OpEx) for Q4/2020 was $83m, cut from $86m last quarter. “This reflects our efforts to continue to execute disciplined cost control by prudently balancing our operating expenses with the necessary investments for our long-term growth and the decision not to pay management bonuses and some other incentives for fiscal 2020,” says chief financial officer Neill Reynolds.
Nevertheless, net loss for fiscal Q4/2020 was $20m ($0.18 per diluted share), up from $15.5m ($0.14 per diluted share) last quarter and compared with net income of $11.6m ($0.11 per diluted share) a year ago. Full-year net loss was $49.1m ($0.45 per diluted share) for fiscal 2020, compared with net income of $76.9m ($0.74 per diluted share) in fiscal 2019.
For fiscal Q4/2020, cash generated from operations was $10.5m (an improvement on cash used of $27.7m last quarter). Capital expenditure (CapEx) was $70.2m (roughly level with last quarter, taking full-year CapEx to $244.3m – above the target of $240m, which had been increased from $200m in November then $230m in February – as capital allocation priorities remain focused on expanding Wolfspeed’s capacity). Free cash outflow was hence -$59.7m (cut from -$97.5m last quarter).
In mid-April, Cree issued $575m of convertible notes (due 2026) and used part of the net proceeds from the offering to repurchase $150m of the $575m of convertible notes (due 2023) issued in August 2018. The repurchase resulted in a gain on extinguishment of convertible notes.
During the quarter, cash and short-term investments hence rose from $853m to $1251.7m. Cree has zero balance on its line of credit, and convertible debt with a total face value of $1bn.
“Our performance in the fourth quarter demonstrates solid execution despite the unprecedented challenges presented by the ongoing pandemic and geopolitical concerns,” says CEO Gregg Lowe.
“Fiscal 2020 marked a transition year in our journey to become a global semiconductor powerhouse,” says Lowe. In May 2019, Cree began a multi-year factory optimization plan, anchored by an automated 200mm SiC wafer fabrication facility (a $1bn project over five-plus years), which in September it said would be built in Marcy, NY (Mohawk Valley) to complement the ‘mega materials’ factory expansion underway at its US campus headquarters in Durham (forming a ‘silicon carbide corridor’ on the East Coast of the USA). “We also have a fab expansion going on down in Durham,” notes Reynolds. “We’re outsourcing the LED silicon carbide and fab operations and upgrading that, replacing it with Wolfspeed capacity. This is going to support some of the capacity ramp at the end of this year [fiscal 2021] and as we see some opportunity into fiscal year 2022. So we expect that expansion to be complete towards the end of this fiscal year.” Cree will incur restructuring costs associated with the movement of equipment as well as disposals on certain long-lived assets.
“The COVID-19 situation remains very fluid, making it difficult to assess its impact on our near-term operations and overall demand environment. To account for this, we are again providing a wider-than-usual guidance range for the first quarter of fiscal 2021, along with our underlying assumptions based on what we know today,” says Reynolds. “In addition, while we continued to make progress on our 150mm [SiC] MOSFET yields, they are still below expected levels,” he adds. “The pandemic certainly has not helped. Access to labs, volumes in the factory: these types of things have been a challenge for us in terms of driving that improvement.”
For fiscal first-quarter 2021 (to end-September 2020), Cree targets revenue of $203-217m, including LED Product revenue of $96-100m (due mainly to improving supply dynamics) and Wolfspeed revenue of $107-117m.
“We’ve largely hit the bottom as it relates to materials [SiC wafers],” Reynolds believes. “As these long-term agreement (LTA) contracts are structured, we maybe expect to see some pickup as you start to move outside of December maybe into the March or June quarter,” he adds.
“We are encouraged by the early signs of strengthening demand of the device business [particularly power products] and our ability to improve fulfilment out of our factories while maintaining additional COVID-19 safety protocols we have in place,” says Reynolds.
“Having vertical integration is another key factor and that’s certainly helping us from a design-win perspective,” notes Lowe. Device design-ins amounted to $400m in fiscal Q3 and $600m in fiscal Q4/2020, respectively. The latter includes an 800V SiC inverter, co-developed with Delphi Technologies plc of London, UK, for battery electric vehicles (BEVs) for vehicle propulsion systems in the Chinese market (adding to the initial design win with a “a premium global automaker” announced with the Delphi partnership in September 2019). This cumulative $1bn of design-ins in fiscal second-half 2020, despite COVID-19, boosts Cree’s SiC device pipeline to about $10bn (including $1.6bn via distributor Arrow).
Fiscal Q1/2021 gross margin should be 25-27%, which includes the impact of $4m of unallocated costs relating to transitioning LED factory operations to Wolfspeed. Wolfspeed gross margin is expected to rise to 35.5-37.5% due to better factory efficiency driven by higher staff attendance, but still below the normal 40%+ as the firm continues to maintain COVID-19 safety procedures. LED gross margin is expected to fall back to 19.5-21%.
Net loss should rise to $22-26m ($0.20-0.24 per diluted share).
“While we maintained tight cost controls during fiscal Q4 and did not pay management bonuses or institute merit increases, we will increase OpEx in fiscal Q1/2021 [to $88-89m],” says Reynolds. “This reflects higher spending on R&D projects, including our Mohawk Valley fab process development and resumption of accruing for management incentives. Our operating expenses will gradually increase throughout the year, as our revenue normalizes,” he expects.
“We remain firmly committed to our capacity expansion plans to capitalize on what we believe to be a multi-decade growth opportunity for silicon carbide,” says Lowe.
“Fiscal 2021 will be the peak investment year to fund our long-term growth ambitions. We anticipate CapEx of about $400m to support our capacity investments, most notably the construction of our Mohawk Valley fab and the expansion of our Durham fab and materials factory,” Reynolds continues. “There will be some variability in our CapEx and cash flow during fiscal 2021 as it is tied to the percentage of completion of Mohawk Valley [for which vertical construction is now underway, with steel girders installed and walls being installed] and the timing of roughly $500m of reimbursements we expect to receive in conjunction with our partnership in the State of New York [which involves a SiC prototype line at the State University of New York (SUNY) Albany, to de-risk the Mohawk Valley fab start-up],” he adds. “This level of investment reflects the slightly steeper customer ramp that we have discussed previously and keeps us on track to begin ramping production in the new fab beginning in calendar year 2022 [supporting Wolfspeed’s growth, and driving its gross margin towards the targeted 50%].” Nevertheless, during the period of significant CapEx investment (beyond the end of fiscal 2021), Cree expects free cash flow to still be negative, before an inflection point in the business happening in fiscal 2022 (aided by some of the $500m reimbursements from the State of New York).
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