17 May 2021
Cree’s quarterly revenue growth of 21% year-on-year driven by 50% growth for devices
For fiscal third-quarter 2021 (ended 28 March), for continuing operations, Cree Inc of Durham, NC, USA has reported revenue of $137.3m, up 8% on $127m last quarter and up 21% on $113.9m a year ago, and above the $127-133m guidance range.
“We are building solid momentum, and during our fiscal third quarter we continued to execute and drive our strategy, delivering strong top-line performance as customers continue to realize the benefits of silicon carbide,” comments CEO Gregg Lowe.
On 1 March, Cree completed the divestiture of its LED Products business (announced in October) to SMART Global Holdings Inc for up to $300m. This follows Cree’s sale in May 2019 of its Lighting Products business unit.
“With the sale of our LED business now complete, we accomplished a critical milestone in our journey to becoming a pure-play semiconductor powerhouse [focused on the silicon carbide (SiC) and gallium nitride (GaN) power & RF solutions of the continuing business Wolfspeed] and have an even greater focus on converting opportunities in our pipeline and expanding our manufacturing capacity,” says Lowe.
“In power, we delivered a solid performance driven by continued momentum of our solutions across a number of sectors,” says chief financial officer Neill Reynolds. “Looking at RF, we are encouraged to see improving trends driven by increased 5G activity as communications infrastructure providers expand their activities,” he adds. “The strong demand across our device portfolio showed a notable year-over-year revenue increase of more than 50%.”
On a non-GAAP basis, gross margin has fallen, from 39% a year ago and 35.4% last quarter to 35% (slightly below the midpoint of the 34.5-36.5% guidance), due to temporarily higher factory costs as Cree ran up capacity in its Durham fab (ramping up new products - including some RF products – in manufacturing space vacated by the now outsourced LED products) as well as ongoing COVID-19 safety measures.
Operating expenses were $80m, up slightly from $78m (61.4% of revenue) last quarter. “As we invest in our operations to capitalize on the tremendous growth opportunity ahead, we will remain disciplined in our cost control across the business,” notes Reynolds.
Net loss was $24.7m ($0.22 per diluted share), up from $18.4m ($0.17 per diluted share) a year ago but cut from $26.6m ($0.24 per diluted share) last quarter, and towards the positive end of the guidance range of $23-28m ($0.21-0.25 per diluted share).
Net cash used in operating activities was $26.8m (cut from $29m last quarter). Including patent spending of $1.7m, capital expenditure (CapEx) was $138.2m (down slightly from $144.7m). Free cash flow was hence -$165m (cut from -$173.7m, although still up on -$93.3m a year ago).
During the quarter, cash, cash equivalents and short-term investments rose from $969m to $1293m. So, Cree has a strong balance sheet, with liquidity to support its growth strategy, zero withdrawn on its line of credit, and convertible debt with a total face value of $1bn.
“We further bolstered our financial position this quarter with the successful completion of an at-the-market equity offering with gross proceeds of approximately $500m. This equity offering provides us with additional liquidity as we grow the Wolfspeed business, particularly our capacity expansion efforts,” notes Reynolds.
“We are seeing more demand in our core automotive and RF markets, as well as additional interest in new areas across energy, industrials, and aerospace & defense,” says Lowe. “Our device pipeline stands at more than $10bn and our team is identifying more opportunities at a rapid pace. Additionally, our sales team continues to generate new business, securing more than $580m in design-ins during the quarter. A significant portion of these were for automotive products and the rest were spread across industrial, communications infrastructure, energy, and aerospace and defense,” he adds. This represents a total of about $2.5bn in design-ins secured over the last five quarters, including applications such as air conditioners, compressors, motor drives and a robotic arm.
“A year ago, we launched our portfolio of 650V silicon carbide MOSFET products, exclusively with [distributor] Arrow Electronics,” notes Lowe. “We are extremely pleased with the success of this partnership, which has since generated an opportunity pipeline of more than $800m, with dozens already in the design-in stage and some even transitioning to design win. Our sales team continues to partner closely with Arrow to execute on these opportunities, including the introduction of our 1200V WolfPACK module portfolio. And we remain well positioned to continue to sell our superior solutions to customers across industrials and geographies through this partnership,” he reckons.
“At the end of March, we launched four new multi-stage, high-efficiency X-band GaN-on-SiC devices, which are used in a diverse array of applications, including marine, weather surveillance and unmanned aerial system radars,” Lowe adds.
“We expect the momentum we’re seeing in our Power and RF device product lines to continue as we enter the final quarter of the fiscal year,” says Reynolds. “Our [order] backlog underscores the growing opportunity we have as 5G rolls out across the globe,” he adds. “Our materials product line is expected to post modest improvements, supported by a better order flow.”
For fiscal fourth-quarter 2021 (to end-June), Cree expects revenue to grow to $142-148m. Nevertheless, gross margin is expected to fall further, by about 200 basis points to 32-34%. About 150 basis points of that drop is from an unfavorable product mix, due to the growth in demand for devices that currently have lower profitability. “We view the gross margin impact as short-term in nature due to the suboptimal [higher-cost] production footprint we have in North Carolina and expect it to modestly improve going forward as we work through factory transitions and eventually shift production to our new Mohawk Valley fab in calendar year 2022,” says Reynolds. Also, in the early stages of increasing capacity in the device business, productivity is lower while hiring and training staff (before picking back up to the mid-30s in the second half of the year).
Operating expenses should rise to $82-83m, fueled by investments in R&D including development projects underway at the Mohawk Valley pilot line in order to support the firm’s 200mm SiC wafer launch as well as increased sales & marketing expense as Cree pursues new business opportunities.
Cree hence expects net loss to rise back up slightly, to $25-30m ($0.22-0.26 per diluted share).
“We continue to expect fiscal 2021 to be our peak investment year, with capital expenditures of approximately $550m to support our capacity expansion plan, including the launch of our Mohawk Valley Fab at 200mm,” says Reynolds. “We are making great and steady progress in this development, which will be critical to ensure we are able to support our long-term strategy, particularly given the steepening demand curve for silicon carbide that we are seeing in 2024 and beyond,” he adds.
“As we focus on executing across our business, we are pleased to see our strategy is further supported by developments in the broader market,” says Lowe. “Just a few months ago, the European Commission unveiled its mobility strategy as part of its $2 trillion green deal, aiming to have at least 30 million zero-emission cars in operation on European roads by 2030. At the same time, European automakers are pushing for new taxes on gasoline and diesel vehicles to promote the competitiveness and the adoption of electric vehicles. Finally, new European regulations could also lead to the potential phasing out of plug-in hybrid vehicles, further benefiting full-electric vehicles. In the USA, the administration recently unveiled a proposed $2 trillion infrastructure plan, of which a significant portion has been directed towards electric vehicles, including sales rebates, tax credits and charging stations. We anticipate this will have a significant impact on the adoption of electric vehicles. We are now seeing US automakers make big commitments to ramp their EV efforts. For instance, General Motors and LG Chem recently announced plans to invest $2.3bn to build a battery cell plant to support the automaker's efforts to expand its electric vehicle. We’ve had a number of conversations with our customers regarding these developments. And the enthusiasm reinforces the long-term opportunity here, as well as the necessity of our capacity expansion investments to ensure we can deliver on the increased demand that we are seeing,” Lowe adds.
“Additionally, in the USA, the proposed infrastructure plan also includes $100bn dedicated to increasing broadband access with a special emphasis on 5G infrastructure. This development, combined with strong sales of 5G smartphones during the pandemic, underscores how 5G is continuing to gain momentum and offers a global opportunity in the years ahead.”
“We remain well positioned to capitalize on these opportunities,” reckons Lowe. “Importantly, we’re on track with our investment plans to begin production in Mohawk Valley’s 200mm fab in early 2022, which will support increased adoption across a wide range of industry sectors [as well as driving gross margin up to the targeted 50% in the 2024 time frame]. We are very pleased with the strong progress we’ve made in our R&D projects that are fueling our 200mm development as well,” he adds.
“Additionally, with the equity raise we completed earlier in the quarter, we are further bolstering our financial position through this period of increased investment. By making these investments in our operations now, we are securing our long-term leadership position in silicon carbide,” Lowe reckons.