19 January 2011

Cree’s sales falls 4% after standards-induced pause in China LED streetlights

For its fiscal second-quarter 2011 (ended 26 December 2010), Cree Inc of Durham, NC, USA (which manufacturers LED chips, lamps and lighting fixtures as well as gallium nitride and silicon carbide power-switching and RF/wireless microelectronic devices and SiC substrates) has reported revenue of $257m. This is up 29% on $199.5m a year ago but down 4% on $268.4m last quarter (and 5% below the targeted $270–280m).





In particular, although Power and RF device revenue rose 13% sequentially to $27.3m (mainly from the Power product line), LED product revenue fell 6% to $229.7m.

On a non-GAAP basis, gross margin has risen slightly from 47.5% a year ago to 47.7%, but fallen from 49% last quarter. Net income of $60.7m is up 51% on $40.2m a year ago but down 8% from $66.3m last quarter, due to the lower revenue and higher operating expenses. R&D expenses were $2.1m more than targeted (and up $4.1m sequentially) as Cree launched a large number of new products and increased its spending on 150mm LED wafer development. Cash flow from operations was $57.2m. However, capital expenditure was $64.7m, so free cash flow was –$7.5m (compared with +$26.9m last quarter). Nevertheless, during the quarter cash and investments rose $12m to $1110.8m.

“Q2 results reflected continued growth in our LED lighting product line, but revenue and earnings were lower than our targets due primarily to lower sales to our LED component distributors in Asia,” comments chairman & CEO Chuck Swoboda.

While Power device product sales and LED chips were in line with targets, LED Lighting Product business again showed greater-than-expected double-digit growth due to sales to Home Depot, Zumtobel and continued growth in commercial downlight products. LED component sales to direct customers also showed double-digit growth, driven by new design wins and increased demand in Asia. However, LED component sales to distribution fell 30%, due mainly to an inventory correction at LED streetlight and bulb customers in Asia.

The over-supply of LED components has been caused by a pause in the China LED streetlight demand and lower-than-expected growth in LED bulb applications.
In particular, the LED bulb slowdown is related to Asian distributor customers working off inventory bought the prior quarter ahead of end-customer demand. The application is growing, but not as fast as customers had anticipated, resulting in the short-term inventory correction.

The China streetlight slowdown is related to a pause as new specifications were being developed by the government. These were published during the quarter, and a number of firms have recently been approved under the new guidelines. “We have design wins at the majority of these companies, and expect new projects to start being awarded after the Chinese New Year,” notes Swoboda.

Cree’s factory plan was based on shipping more distribution orders for LED components, which were rescheduled into fiscal Q3 very late in the quarter as distributors and their customers worked through the inventory correction, so LED component inventory ended higher than planned.

With backlog running behind Q2’s order rate, for its fiscal third-quarter 2011 (ending 27 March), Cree expects revenue to be flat on Q2 at $245–265m due to seasonality (the Chinese New Year holiday) and the on-going inventory correction at LED component distribution customers in Asia offsetting growth in LED lighting product sales and increased direct LED component sales. Meanwhile, lower RF device sales will offset growth for power devices.

Gross margin should fall to about 46%, due to a more price-competitive environment and lower factory utilization, partially offset by yield improvements. Factory execution will be critical, given the shorter lead-time environment, says Swoboda.

“Although revenue growth has slowed in the near term, we are still in the very early stages of the LED lighting revolution, and we continue to invest in our business to drive LED lighting adoption,” he notes.

Operating expenses are expected to rise by about $7m to $73m, due to R&D spending rising by $3m (to support 150mm wafer qualification and new product developments in LED components and LED lighting fixtures) and SG&A spending rising by $4m (mainly in sales & marketing of LED components and lighting to expand field sales and application resources, in order to drive demand creation). Non-GAAP net income should correspondingly fall to $42–50m.

“We are actively managing our capital additions in light of our near-term revenue targets, while continuing to invest in long-term growth,” says chief financial officer John Kurtzweil. “We continue to invest in our strategic priorities such as the 150mm production line in the US and building out our back-end operations at our new factory in China.” Cree’s targeted capital expenditure for the fiscal year therefore remains at $250–260m.

“The opportunity in LED lighting has not changed,” believes Swoboda. “Based on the market trends we are seeing, and the success of our own LED lighting business, we are more confident that we will see continued adoption of LED lighting over the next several years,” he adds. For example, during the quarter, Cree announced that US-based Denny’s Corp has chosen its LED lights as the preferred lighting standard for all its new and remodeled stores across the USA.

“Although the China streetlight slowdown has affected our revenue growth in the short term, we continue to believe this is a net positive for Cree as the new requirements raise the efficiency and lifetime standards, which should favor higher-performance LED designs,” says Swoboda. “We target increased demand for China streetlights starting in Q4, as well as new designs for indoor commercial applications.”

During the quarter, to accelerate adoption of indoor LED lighting, Cree introduced the XLamp CXA20 (the first lighting-class LED array that can enable a 60W A-Lamp equivalent). In addition, the firm launched the XLamp XP-E High Efficiency White (HEW), the first high-power LEDs featuring its new Direct Attach LED technology (which enables fixture designs to use up to 50% fewer LEDs). Cree also launched the XLamp XM-L, which is claimed to be the industry’s brightest, highest-performance lighting-class LED (delivering 1000 lumens with 100 lumens per watt efficacy at 3A, and efficacy of 160lm/W at 350mA).

Swoboda notes that Cree’s transition to 150mm wafer production has been accelerated by the increased R&D spending in fiscal Q2 (which should increase again in fiscal Q3). This has supported additional wafer turns for both process development and new tool qualifications. The new 150mm tools for the firm’s Research Triangle Park (RTP) wafer fab are currently being installed. Although there has been some tool delivery delays, says Swoboda, Cree is still on track to qualify its first 150mm products by the end of fiscal 2011, with the first production volumes starting in early fiscal 2012.

“The near-term increase in R&D spending will pay for itself in fiscal 2012, with new design wins and lower LED costs,” Swoboda believes.

See related items:

Cree’s quarterly revenue rises 1.5% to another record of $268m

Cree reports annual revenue up 53% as LED lighting sales double year-on-year

Record, above-target performance at Cree from buoyant lighting market

Cree reports record revenue up 18% sequentially to $199.5m

Tags: Cree LEDs LED streetlights

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