28 August 2017
Cree’s quarterly revenue down 8% year-on-year
For full-year fiscal 2017 (ended 25 June), Cree Inc of Durham, NC, USA reported revenue of $1.47bn, down 9% on fiscal 2016’s $1.62bn.
Specifically, Lighting Products (mainly LED lighting systems and lamps) fell by 21% from $889.1m (55% of total revenue) to $701.5m (48% of total revenue) due mainly to fiscal Q2 commercial product holds and lower consumer bulb sales. LED Products (chips and components) were roughly flat at $550.3m (rising from 34% to 37% of total revenue) as higher product sales offset lower license revenue. The Wolfspeed business (Power & RF devices and silicon carbide materials) grew strongly by 25% from $176.3m (11% of total revenue) to $221.2m (15% of total revenue).
Fiscal fourth-quarter 2017 revenue was $358.9m, down 8% on $388.4m a year ago but up 5% on $341.5m last quarter (and towards the top of the $340-360m guidance range).
Wolfspeed contributed a more-than-expected $60.8m (17% of revenue), up 8% on $56.1m (16% of revenue) last quarter and up 30% on $46.7m (12% of revenue) a year ago. “While our current Wolfspeed capacity is constrained, we did achieve additional throughput in Q4 due to productivity improvements,” notes chief financial officer Mike McDevitt.
LED Product contributed $143.4m (40% of revenue), at the high end of the target range, up 9% on $131.3m (39% of revenue) last quarter due to strong demand, and up slightly on $143.3m (37% of revenue) a year ago.
Lighting Product contributed $154.7m (43% of revenue), down 22% on $198.4m (51% of revenue) a year ago but up slightly on $154m (45% of revenue) last quarter, led by a solid recovery in US commercial and industrial (C&I) business, offsetting lower sales in the contractor value segment of the business, as well as seasonally lower consumer sales.
“While the US lighting market has been slower than forecast over the last two quarters, our internal fundamentals continued to improve in Q4, specifically in North American C&I business, driven by an improvement in service levels,” notes Danny Castillo, executive VP & head of the Lighting Business.
On a non-GAAP basis, full-year gross margin has fallen from 31.1% for fiscal 2016 to 30.2% for fiscal 2017. Lighting Product gross margin has risen from 27.2% to 28%, due mainly to patent license revenue received during fiscal Q2/2017 related to the settlement with Feit Electric Company Inc. However, LED Product gross margin fell from 31.5% to 27.6%, due to lower license revenue and costs associated with the new LED chip ramp-up. Wolfspeed gross margin fell from 53.7% to 46.8%, due mainly to costs associated with new product ramp-ups and changes in product mix.
For fiscal Q4, company gross margin was 28%, below the expected 29% and down on 30.8% a year ago but up on 25.9% last quarter. Specifically, Lighting Product gross margin was 23.8%, down from 25.8% a year ago but up from 23% last quarter, due mainly to a higher mix of commercial sales plus better factory utilization and lower warranty costs. LED Product gross margin was 25.9%, down from 32.2% a year ago but up from 24.7% last quarter, due mainly to product mix. In contrast, Wolfspeed gross margin fell further, from 50.6% a year ago and 47% last quarter to 45.5%, due mainly to product mix.
Operating expenses have risen from $94m last quarter to $97m in fiscal Q4, due mainly to non-recurring costs associated with right-sizing the Lighting Products business plus start-up costs for the new joint venture Cree Venture LED Company Ltd with San'an Optoelectronics Company Inc of Xiamen, China (to produce and deliver to market mid-power lighting-class LEDs in an exclusive arrangement to serve the expanding markets of North and South America, Europe and Japan).
Full-year net income has fallen from $87.5m ($0.86 per diluted share) for fiscal 2016 to $49.7m ($0.50 per diluted share) for fiscal 2017. However, despite still being down from $18.9m ($0.19 per diluted share) a year ago, quarterly net income has rebounded from just $749,000 ($0.01 per diluted share) last quarter to $3.8m ($0.04 per diluted share).
During the fourth quarter, cash generated from operations was $52.7m (down from $64.6m a year ago but up from $43.4m last quarter). In addition to patent spending of about $3.5m, spending on property, plant & equipment (PP&E) was $30m (bouncing back further, from $21.7m last quarter). So, total capital expenditure (CapEx) has risen further, from $24.7m last quarter to $33.5m. Hence, despite still being down on $40.8m a year ago, free cash flow has risen from $18.7m last quarter to $19.2m. Overall during fiscal Q4, cash and investments rose by $27m, from $439m to $466m.
For the full fiscal year, cash generated from operations has risen from $203.3m for 2016 to $215.9m for 2017. Spending on PP&E was cut from $120m to $86.9m, and patent spending from $14.4m to $12.4m, so total CapEx was cut from $124.4m to $99.3m . Free cash flow hence rose from $68.8m to $116.6m. During fiscal 2017, Cree spent $104m to repurchase 4.4 million Cree shares (with no repurchases in Q4). At the end of the fiscal year, Cree had $145m outstanding on its line of credit.
For fiscal first-quarter 2018 (ending 24 September 2017), Cree forecasts revenue of $353-367m (slightly up sequentially at the mid-point). Lighting revenue is expected to be down slightly due to seasonally lower consumer lighting sales, but LED Product revenue should be similar sequentially, while Wolfspeed revenue should grow by 4% as some productivity gains offset near-term factory capacity constraints (Wolfspeed is fully booked for Q1 and will be capacity limited in Q2, with lead times now stretching into fiscal Q3).
Gross margin should rise to 29%, driven by both Wolfspeed and Lighting Products (due to operating improvements and a higher mix of commercial lighting sales) offset by LED Product margin falling slightly (due to product mix).
Operating expenses are expected to rise by $4m to $101m, due mainly to costs associated with the Wolfspeed factory expansion, incremental legal costs on defensive IP cases, and CEO search cost. The new joint venture has a nominal impact as Cree is just beginning to ramp its operations (although it is targeted to have a larger impact beginning in fiscal Q2).
Net income is targeted to be $2-6m ($0.02-0.06 per diluted share).
“We plan to grow the LED products business by expanding our product offering with new high-power and mid-power products that leverage our market leadership to increase our share of existing LED customers, while also opening new applications for our technology,” says Swoboda. “We recently started shipping to our first tier-1 automotive forward lighting customer. Our JV has started sampling the first mid-power LED products with target customers. Both the automotive and JV activities should expand the market opportunity for our LED business,” he adds. “In addition, we continue to innovate with the introduction of our new RGBW lighting-class LEDs for architectural applications,” Swoboda continues.
“Capital allocation priorities are focused on expanding capacity in our Wolfspeed business and possible lighting-related mergers & acquisitions (M&A) to expand our product portfolio,” notes McDevitt (Cree’s board has approved a fiscal 2018 stock repurchase program of not exceeding $200m). For fiscal 2018, Cree is targeting capital spending of $220m, including $150m to expand Wolfspeed’s production capacity to support forecasted demand.
“We’re investing in the Wolfspeed business to increase capacity and further develop the technology to support longer-term growth opportunities in silicon carbide materials, silicon carbide power devices and modules, and gallium nitride RF devices,” says Swoboda.
“We’re now starting to see significant growth due to our investment in these areas over the last 30 years. The combination of growth in electric vehicle systems and battery storage plus other industrial applications is quickly bringing silicon carbide power into the mainstream and putting pressure on the supply chain in the near-term,” he adds.
“We target additional materials capacity to start coming online in our fiscal Q2, with a plan to double wafer capacity for external materials customers by the end of calendar 2018,” notes Swoboda. “We target additional Power and RF device capacity to start coming online in fiscal Q4 due to the time required to qualify the 150mm line both internally and at our customers. This plan should double our current power device capacity by the end of calendar 2018.” Nevertheless, Wolfspeed is likely going to be capacity limited through fiscal 2018.
Due to accelerating Wolfspeed capacity investments (to eliminate current capacity constraints and support the substantial growth opportunity forecasted over the next several years), Cree’s free cash flow is expected to be -$20m in fiscal 2018.