4 May 2020
Cree’s quarterly revenue falls 10%
For fiscal third-quarter 2020 (ended 29 March), Cree Inc of Durham, NC, USA has reported revenue of $215.5m, down 10% on $239.9m last quarter and 21% on $274m a year ago (and below the expected $221–229m).
“Performance was negatively impacted by softening global demand and some disruptions to our manufacturing operations arising from the Covid-19 pandemic,” says chief financial officer Neill Reynolds. However, manufacturing facilities in the USA continue to operate as essential businesses, adds CEO Gregg Lowe.
Revenue from LED Products (chips and components) was $101.6m (47% of total revenue), down 15% on $119.2m last quarter and 23% on $132.8m a year ago (and below the expected $105–109m). This was driven largely by the slowdown of the Chinese economy in light of the Covid-19 coronavirus outbreak and associated disruption to Cree’s manufacturing facilities. “While the third quarter is usually seasonally weak, this was further amplified by the extended Lunar New Year holiday in China and subsequent global developments in response to Covid-19,” says Reynolds.
Revenue for Cree’s Wolfspeed silicon carbide (SiC) materials, power and gallium nitride (GaN) RF device business was $113.9m (53% of total revenue), down on $120.7m last quarter and 19% on $141.2m a year ago (and below the expected $116–120m). This was due primarily to ongoing softness in power and RF sales that have been negatively impacted by the lower China electric vehicle (EV) demand and slower-than-anticipated 5G base-station installations outside China, and a shutdown of Wolfspeed’s facility at Morgan Hill in San Jose, CA (formerly the main facility of the Infineon RF Power Business, acquired in mid-2018) for about two weeks in March to comply with county guidelines prior to receiving an essential business designation from the state of California. The facility resumed operations on 30 March after implementing several measures to ensure employee safety. Regarding the SiC materials business, it “continues to be fortified by our strategic long-term agreements and the business performed as expected in the quarter,” notes Reynolds.
On a non-GAAP basis, gross margin was 29.8% (down from 38% a year ago). By sector, Wolfspeed gross margin has fallen from 48% to 40%, driven mainly by lower utilization caused by the Morgan Hill factory shutdown and by lower-than-expected yields related to the ramp of the new 150mm SiC MOSFET product. LED Products gross margin has fallen from 28% to 20%, due primarily to lower factory utilization given the extended shutdown of Chinese operations.
Operating expenses were $86m, up slightly on $85m last quarter (but better than the expected $88m). “In light of the ongoing Covid-19 situation, we are managing our operating expenses prudently, optimizing what needs to be done now to support future growth while deferring non-essential costs,” says Reynolds.
Net loss from continuing operations has risen from $10.4m ($0.10 per diluted share) last quarter to $15.5m ($0.14 per diluted share), compared with net income of $20.5m ($0.20 per diluted share) a year ago.
Cash used in operations was $27.7m. Capital expenditure (CapEx) was $69.8m. Free cash outflow was therefore $97.5m.
During the quarter, cash and short-term investments hence fell from $952m to $853m. Cree has zero balance on its line of credit and convertible debt with a total face value of $575m.
“Considering the uncertainty surrounding the Covid-19 pandemic, we elected to maximize our financial flexibility with our successful convertible notes offering [completed in mid-April, raising $500m, and maturing on 1 May 2026],” notes Reynolds. “We decided to take advantage of favorable market conditions to de-risk all possible scenarios by securing extra capital to ensure we can meet our commitments regardless of the pace and duration of recovery post Covid-19,” he adds. “Importantly, our new convertible debt structure lowers and extends our maturities [from 2023 to 2026] after a period of heavy CapEx investments at our Mohawk Valley fab [in Marcy, NY] and Durham materials factory [at Cree’s headquarters in North Carolina].”
“While we expect the Covid-19 crisis will continue to adversely affect our performance this quarter [fiscal Q4/2020, to end June], it remains difficult to fully evaluate its impact on the overall demand environment and our manufacturing operations,” notes Reynolds. “To account for this heightened level of uncertainty, we are providing a wider-than-usual guidance range.”
For fiscal fourth-quarter 2020, Cree expects revenue to fall to $185-215m. Specifically, LED Product revenue should fall to $85-100m. However, this is due mainly to supply constraints. “We have started to see a recovery in LED demand and we are encouraged by the improving order flow in the first few weeks of the fourth quarter, even though we expect the Covid-19 crisis to have a lingering effect on some customers,” says Reynolds. Wolfspeed revenue should fall to $100-115m. “While the underlying demand for our power and RF devices is improving, we continue to navigate near-term headwinds including the impact of Covid-19 related to more stringent safety measures that we implemented to protect our employees, which will lower factory utilization and productivity,” says Reynolds. The SiC materials business is expected to see a decline in revenue in the short term as one non-semiconductor customer was not designated as an essential business and is not operating at this time. Cree has stopped shipping to them, which will cause revenue to decline in fiscal Q4.
Gross margin is expected to fall to 25-28%, including LED Product gross margin remaining low at 19-21% (due to lower volumes) and Wolfspeed gross margin falling to 33-35% (mainly reflecting lower factory utilization and productivity due to the safety measures, as well as continuing low yields on the 150mm MOSFET product line that have not yet fully returned to expected levels).
Operating expenses should shrink further to $83-84m as Cree continues to prudently manage costs while executing its planned investments in the Wolfspeed business (preparing products for production on the Mohawk Valley fab that should ramp in 2022). Net loss is targeted to be $16-25m ($0.15-0.23 per diluted share).
“In 5G [RF business], we continue to be impacted by ongoing delays and in infrastructure rollouts,” says Reynolds. “While there continues to be significant uncertainty in these markets, customers who want to leverage the higher frequencies and higher-efficiency output possible from gallium nitride and silicon carbide solutions for their 5G infrastructure products were very interested in our technology… We are encouraged to see early indications and improving demand for our products, despite overall near-term headwinds,” he adds.
“In our Power business in the near-term we expect Covid-19 to impact our customers operations as overall auto sales will be weaker in calendar 2020, but our customers tell us they remain committed to their EV investments and are planning to maintain their original ramp schedules,” says Reynolds.
“Despite the uncertainty, we are currently seeing a strengthening in our backlog related to both power and RF customers. However, we remain cautious in our outlook as it is not yet clear how the pandemic will impact and customer demand in the coming quarters,” he adds.
“We stand before a multi-decade growth opportunity for silicon carbide adoption and remain committed to investing in our capacity to meet this long-term demand,” says Lowe. “Importantly, many of our customers have indicated that their long-term plans remain in place, including our long-term wafer supply agreements, the delivery of electric vehicles to the market, and the rollout of 5G,” he adds. “We’re expecting decisions on a significant portion of our roughly $9bn [SiC] pipeline in the coming 12-months.”
About half of the pipeline relates to the EV market. “The most recent report in Goldman Sachs suggests a 4x increase in the total number EVs sold in 2025 versus 2019,” notes Lowe. “There’s also been considerable discussion about how the stay-at-home orders around the world have significantly reduced pollution in many major urban markets. This could be another catalyst for easy adoption as countries look to reduce automotive CO2 emissions. For example, several environmental ministers from EU countries have circulated an open letter recommending that any Covid-19 stimulus package must have a green component specifically referencing sustainable mobility,” he adds. “Further, we’ve been maintaining an ongoing dialogue with our customers to support them through this tough crisis. While our automotive customers are addressing near-term challenges including some temporary shutdowns of their operations due to the outbreak, most have indicated they remain committed to delivering electric vehicles to the market with silicon carbide on their original timelines. Additionally, design-in activity for the longer-term programs remains very robust.”
For fiscal 2020, Cree is now targeting CapEx of $240m, a slight increase from the $230m announced in mid-February (which had been an increase from the $200m announced at the firm’s Investor Day last November). This reflects the purchase of some tools at favorable pricing that will be used as part of the capacity expansion. “While near-term market conditions are fluid, we haven’t seen any changes in the long-term outlook at this time, which is why our long-term strategy to increase our silicon carbide capacity and related capital expenditure plans remain intact,” says Reynolds. “Having our new New York Mohawk Valley fab up and running by 2022 and expanding our materials factory in Durham, NC is critically important to deliver on our customer commitments and win additional business currently in the pipeline.”