7 September 2021
Cree’s quarterly revenue up 34.5% year-on-year
For full-year fiscal 2021 (ended 27 June), for continuing operations, Cree Inc of Durham, NC, USA has reported revenue of $525.6m, up 12% on fiscal 2020’s $470.7m, due to growth in its device businesses (particularly in power devices), partially offset by lower materials revenue.
Most recently, fiscal fourth-quarter 2021 revenue was $145.8m, up 6.2% on $137.3m last quarter and 34.5% on $108.4m a year ago. This was despite losing $3-5m through supply constraints due to a COVID-19 outbreak causing a seven-day closure at the firm’s contract manufacturer in Malaysia. This was the fourth consecutive quarter of sequential growth for Cree’s Wolfspeed silicon carbide (SiC) and gallium nitride (GaN) power & RF device business. Year-on-year, RF device revenue grew largely due to increased 5G activity as communications infrastructure providers continue to support the rollout by carriers. Power device revenue grew 46% (including automotive devices in particular more than doubling).
“Customers are ramping up production earlier and steeper than originally anticipated,” says CEO Gregg Lowe. “We continued to grow and convert opportunities in our device pipeline, further establishing our industry leadership position in silicon carbide,” he adds.
On a non-GAAP basis, gross margin was 32.3%, up on 30% a year ago but down from 35% last quarter, due primarily to the growth in the firm’s device products and higher manufacturing costs in the short term. “In addition, we were negatively impacted [by about one percentage point] by the production shutdown at our contract manufacturer in Malaysia, which resulted in gross margin being at the lower end of our [32-34%] guidance range,” notes chief financial officer Neill Reynolds. “We view the gross margin impact as short term in nature due to the sub-optimal device production footprint we have in North Carolina and expect 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,” he adds.
In May 2019, Cree began a multi-year factory optimization plan. As well as expanding crystal growth and wafer production capacity to a second building in Durham, NC (part of a plan to increase materials capacity by 30x), in September 2019 Cree announced that the plan is being anchored by a new automated 200mm silicon carbide device fabrication facility at Marcy in Mohawk Valley, New York State.
Operating expenses rose to $82m, fueled by investments in R&D including development projects that are well underway at the Mohawk Valley pilot line in order to support the firm’s 200mm SiC wafer launch as well as increased sales & marketing expenses as Cree pursues new business opportunities.
Net loss for full-year fiscal 2021 was $104.7m ($0.93 per diluted share), compared with net income of $76.6m ($0.71 per diluted share) for fiscal 2020.
Quarterly net loss has increased slightly from fiscal Q3/2021’s $24.7m ($0.22 per diluted share) to $26.9m ($0.23 per diluted share), but this is cut from $28.9m ($0.27 per diluted share) a year ago.
This excludes a $73.9m write-down expense related to a modification of Cree’s long-range plan regarding part of its campus in Durham – originally intended for expanding LED production capacity – which Cree had subsequently considered using to expand the manufacturing footprint for its silicon carbide materials product line. After Cree completes its ongoing SiC materials production capacity expansion in Durham, it now plans that – rather than completing construction of the new buildings – it will expand further elsewhere. The carrying value of the abandoned assets has been reduced to an estimated salvage value.
Additionally, subsequent to Cree’s sale of its LED Products business unit to SMART Global Holdings Inc in March (for up to $300m), the firm liquidated its approximately 3.3% common stock ownership interest in ENNOSTAR Inc (formerly Lextar Electronics Corp) and received net proceeds of $66.4m.
Cash outflow from operations has doubled from the prior quarter to -$53.6m. Capital expenditure (CapEx) has risen to $168.1m. Free cash outflow has hence risen to -$221.7m. Fiscal 2021 required a significant amount of investment in CapEx, totalling a record $566m. “We expect this to represent the most significant period of investment between now and 2024 as we execute our capacity expansion plan including the launch of our Mohawk Valley fab at 200mm in the first half of 2022,” notes Reynolds.
Overall, during fiscal Q4/2021, cash, cash equivalents and short-term investments fell from $1293m to $1154.6m. Cree summarizes that it still 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.
Quarterly design-ins were a record of slightly more than $1bn. This took full-year fiscal 2021 design-ins to about $2.9bn, representing more than 1100 customer projects. Automotive represents roughly two thirds of this, including a major award from a leading global automotive manufacturer, while the rest is spread across a wide variety of applications including an electric farm tractor, residential energy storage systems, and an electrical vertical takeoff and landing (VTOL) aircraft for passenger and cargo transport.
“Demand in the automotive and RF markets continues to be very good, while at the same time we are encouraged by growing interest across a variety of industrial and energy customers,” says Lowe. “Our device opportunity pipeline is now above $15bn and the team is continuing to uncover new opportunities at a very good pace.”
For fiscal first-quarter 2022, Cree expects revenue of $144-154m, driven by the continued demand in power devices, partially offset by the current supply constraints plus lower productivity as Cree’s Malaysian contract manufacturer continues to ramp activities following the recent COVID-19 outbreak (an impact of $5-7m).
Gross margin is expected to be 31.5-33.5%, flat to slightly up on fiscal Q4/2021 as modest improvements in productivity at the Durham site are offset by higher costs in Malaysia as a team works through COVID-19-related challenges (an impact again of about one percentage point, due to lower staffing levels imposed by the local government). “As previously noted, lower yields and factory transitions in our Durham fabs will continue to present some short-term challenges on gross margin performance and will remain a headwind until we ship our production to our new Mohawk Valley fab,” says Reynolds.
Operating expenses are expected to rise to $85m due to R&D spending and including plant growth at Mohawk Valley to support the 200mm wafer launch.
Net loss is targeted to be $25-29m ($0.21-0.25 per diluted share).
“We are experiencing a significantly steeper demand curve from our customers for silicon carbide devices than we had previously anticipated. This has resulted in supply constraints. For some customer orders will not be fulfilled in fiscal year 2022 and channel inventory levels will remain low until capacity comes online in our Mohawk Valley fab,” says Reynolds. “In the meantime, we are working to accelerate capacity, CapEx investments, improve output in our Durham facilities, and manage through the COVID-related challenges with our contract manufacturer in Malaysia. As we remain in the midst of a rapid capacity expansion for both materials and our wafer fabs, we anticipate CapEx (net of expected reimbursements from the state of New York) to be approximately $475m in fiscal 2022,” he adds.
“We expect CapEx to be more heavily weighted to the first half of the fiscal year, with Q1 representing the peak investment period as we ensure a ramp at Mohawk Valley remains on track. We are still on schedule to operationalize the world’s largest silicon carbide fab in the first half of calendar year 2022 [when it will begin device qualification production runs]. Access to capacity and semiconductors is top of mind for many of our customers and we want to be ready to meet that demand, given the steeper ramps that we are now experiencing for devices.”
Cree will incur restructuring costs from the movement of equipment to the Mohawk Valley fab as well as disposals on certain long-lived assets in Durham. Also, start-up and pre-production-related costs associated with the ramp-up at Mohawk Valley for fiscal 2022 will be about $80m, of which $60m will be cash-related costs. “We anticipate more than 50% of these costs will be incurred in the second half of fiscal year 2022 as we qualify and ramp up,” says Reynolds.
“Our massive pipeline and record design-ins give us further confidence in our ability to achieve our target revenue for fiscal 2024 of $1.5bn [comprising about $600m in materials and $900m in devices], based on the steepening demand curve for silicon carbide devices through 2024 and beyond,” says Lowe.