19 October 2017
Cree quarterly revenue rises despite Lighting Product sales falling and Wolfspeed capacity constraints
For fiscal first-quarter 2018 (ended 24 September 2017), Cree Inc of Durham, NC, USA has reported revenue of $360.4m, down 3% on $371.2m a year ago but up slightly on $358.9m last quarter.
Revenue for Lighting Products (mainly LED lighting systems and lamps) was $149.7m (42% of revenue), down 3% on $154.7m (43% of revenue) last quarter and 19% on $183.8m (50% of revenue) a year ago. Commercial lighting revenue fell slightly from last quarter, primarily due to continued weakness in the North America market, the lingering near-term effect of the quality hold that occurred during fiscal 2017, and project delays due to the hurricanes in Florida, Texas and Puerto Rico. Consumer lighting sales were seasonally lower, as expected.
Revenue for LED Products (chips and components) was $144.5m (40% of revenue), up slightly on $143.4m (40% of revenue) last quarter and up 5% on $137.5m (37% of revenue) a year ago.
Revenue for the Wolfspeed business (Power & RF devices and silicon carbide materials) was $66.2m (18% of revenue), up 9% (more than the expected 4%) on $60.8m (17% of revenue) last quarter and up 33% on $49.9m (13% of revenue) a year ago.
“While our current Wolfspeed capacity continues to be constrained, we continue to have success in achieving additional throughput due to productivity improvements that enable us to ship higher revenue,” says chief financial officer Mike McDevitt.
Wolfspeed gross margin was hence 49%, rebounding from 45.5% last quarter (and above the 47% a year ago), due to a more favorable product mix, higher factory utilization, and improved production.
LED Product gross margin was 26.9%, up from 25.9% last quarter (due mainly to a more favorable product mix) but down from 30.4% a year ago.
Lighting Product gross margin has fallen further, from 26.8% a year ago and 23.8% last quarter to 21.3%, due to lower commercial sales, lower factory utilization, and higher warranty costs.
Overall company gross margin was 28.3%, up from 28% last quarter but down from 30.4% a year ago (and below the expected 29%).
Operating expenses (OpEx) have risen further, from $80m a year ago and $97m last quarter to $99m. However, this is lower than the expected $101m, due primarily to lower variable performance-based compensation.
On a non-GAAP basis, net income was $4.1m ($0.04 per diluted share), down from $15.1m ($0.15 per diluted share) a year ago but up slightly from $3.8m last quarter.
Cash flow from operations has risen further, from $18.1m a year ago and $52.7m last quarter to $54.1m. Although patent spending has been cut from $3.5m last quarter to $2.5m, spending on property, plant & equipment (PP&E) has grown further, from $19.3m a year ago and $30m last quarter to $36.5m. So, total capital expenditure (CapEx) has correspondingly risen, from $21.6m a year ago and $33.5m last quarter to $39m. Free cash flow was hence $15.2m, falling back from $19.2m last quarter but a contrast to -£3.5m a year ago.
During the quarter, cash and investments (net of line-of-credit borrowings) rose by $18m, from $466m to $484m. At the end of the quarter, Cree had $141m outstanding on its line of credit.
For fiscal second-quarter 2018 (ending 24 December 2017), Cree targets revenue of $340-360m, with Wolfspeed growing incrementally (as additional productivity gains provide some upside to near-term capacity constraints); LED Product revenue level sequentially; and Lighting Product revenue falling by 8% (due to the current North American market softness and possible short-term impacts from the recent hurricanes).
Gross margin should be about 28.5%. Wolfspeed and LED Product margins are expected to be slightly lower sequentially due to forecasted customer and product mix, while Lighting Product margin is targeted to rise slightly due to cost-improvement initiatives.
Operating expenses are expected to rise by just $1m to $100m (similar to fiscal Q1). There will be only a nominal impact from the new joint venture Cree Venture LED Company Ltd with San’an Optoelectronics Company of Xiamen, China (formed to produce mid-power lighting-class LEDs), in which Cree has a 51% stake and acts as exclusive sales agent for North America, South America, Europe and Japan. However, the JV is targeted to have a larger impact beginning in fiscal Q3 (when its contribution to overall revenue will start to become significant, as more products are introduced and qualified by customers, says McDevitt).
Net income is targeted to range between a loss of $1m ($0.01 per diluted share) and a profit of $4m ($0.04 per diluted share).
For full-year fiscal 2018, Cree continues to target CapEx of $220m, driven primarily by expanding Wolfspeed’s production capacity to alleviate existing supply constraints.
Due to accelerating the Wolfspeed capacity investments to support the substantial growth opportunity forecasted over the next several years, Cree continues to expect overall fiscal 2018 free cash outflow of -$20m.
Cree continues to target bringing additional materials capacity on line as it exits fiscal Q2, doubling SiC wafer capacity for external materials customers by the end of calendar 2018. The firm is also on target for additional Power & RF device capacity to start coming on line in fiscal Q4 (to double Power device capacity by the end of calendar 2018, compared with the end of fiscal 2017). “We are internally qualifying going to the larger wafer size on 150mm and then have to qualify that with customers,” says McDevitt.
“We’re going to work on three things in the near-term, first evaluating and focusing the strategy and the direction of the company; second, improving execution in our existing business; and third, engaging the workforce and getting everyone pulling in the same direction,” states new CEO Gregg Lowe. “We will evaluate all the areas where we’re investing resources and ask four key questions. one, what is our unique differentiation; two, which customers care about this differentiation; three, what are the dynamics of the market for these customers; and four, can we be a top player,” he adds.