24 October 2011

Cree grows revenue 11% in Q3, driven by Ruud Lighting acquisition

For its fiscal first-quarter 2012 (ended 25 September 2011), Cree Inc of Durham, NC, USA (which makes 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 $269m, up 0.2% on $268.4m a year ago and 11% on $243m last quarter.

Growth was driven by about $20m from just over a month’s revenue from outdoor LED lighting firm Ruud Lighting Inc of Racine, WI, USA (acquired on 17 August for $525m, with the aim of accelerating LED lighting adoption and expanding the market for LED components). Cree has hence promoted Norbert Hiller to executive VP for LEDs and Ty Mitchell to executive VP for Lighting (both new positions). Also, starting this quarter, it is presenting revenue broken down into three categories: $196.8m for LED products (components, chips and materials); $51.7m for Lighting products (indoor lighting and Ruud Lighting); and $20.5m for Power & RF products.

In particular, Cree saw strong growth in sales of indoor LED lighting products as well as solid growth for XLamp LED components across lighting applications. However, this was offset by lower sales for LED chips and for Power & RF devices (which fell due to lower market demand for solar inverters and high-efficiency power supplies).

On a non-GAAP basis, operating expenses rose from $61.4m last quarter to $67.9m, although this was below the expected $69m. In particular, although R&D expenses rose $4.1m ($1.1m higher than targeted, due mainly to increased spending on the 150mm wafer program), selling, general & administrative (SG&A) expenses rose just $2.3m ($2.7m lower than targeted, due mainly to lower-than-expected acquisition integration costs and selling expenses).

Gross margin has fallen further, from 49% a year ago and 38.8% last quarter to 37.4% (below the targeted 38%). This was due to several factors including: factory utilization that was slightly higher but still relatively low overall; sales of higher-cost LED inventory produced in Q4; an increased percentage of LED lighting products (with slightly lower margins); and the continuing competitive LED pricing environment; partially offset by yield improvements and other cost reductions.

Sales through LED component distributor partners grew again in fiscal Q1, and Cree was able to further reduce channel inventories. “Although demand has improved over the last two quarters, we continue to operate in a competitive environment with short lead times and limited visibility, which makes it challenging to forecast the business,” says chairman & CEO Chuck Swoboda. “We continue to manage factory starts to reduce inventory while also trying to maintain flexibility to respond to short lead-time expectations in the market,” he adds. “As a result, non-Ruud-related inventory declined from Q4 [by $11m].”

Net income has fallen further, from $66.3m a year ago and $30.6m last quarter to $28.1m (at the low end of the targeted $28-31m). Operating cash flow has fallen from $65.4m last quarter to $41.6m. After capital expenditure of $34m (down from $47.9m), free cash flow was $8m (down from $16.6m). During the quarter, cash and investments fell by $453.6m (from $1085.8m to $632.2m) due to using $457m for the Ruud acquisition.

While still operating in a short lead-time environment with limited visibility, order backlog is tracking ahead of fiscal Q1’s run rate, and overall demand trends are similar, says Swoboda. Growth in demand is coming from LED components and LED lighting, including both indoor products and BetaLED outdoor products. “The strength in lighting demand reflects the growing reality that LED lighting adoption is happening now,” he believes.

During fiscal Q1, Cree launched TEMPO evaluation services, claimed to be the industry's first complete testing service and designed to leverage the firm’s experience in LED systems design to help lighting OEMs speed time-to-market and overcome common design challenges. Cree also launched a new XLamp XP-G LED that delivers luminous efficiency of up to 140 lumens per watt. “We secured significant new business in Q1 based on the merits of our lighting technology and ability to deliver products with compelling payback to the customer,” says Swoboda. “The buying decisions on these large commercial products do not rely on government subsidies. Rather, they are decided on the quality of the light and standard ROI [return on investment] or payback calculations that take into account energy and maintenance savings,” he adds. “Although we have seen tremendous growth in LED lighting sales over the last few years, it is clear that we have only scratched the surface of LED lighting adoption, and there is growing demand for products that offer innovative solutions and good payback,” he comments.

“There are some concerns about the health of the global economy that have caused other semiconductor companies to forecast a potential slowdown in the December quarter. We see a similar trend in our LED chip and Power product lines,” notes Swoboda. “However, we continue to forecast growth in lighting and LED components based on our current sales trends and forecasts.”

For fiscal second-quarter 2012 (ending 25 December 2011), Cree expects revenue to grow to $300–320m, driven by solid growth in lighting from indoor LED lighting products, BetaLED outdoor lighting products and the addition of Ruud Lighting revenue for an entire quarter, and flat-to-higher LED product sales (including growth in LED components), despite slightly lower LED chip sales and lower Power & RF sales.

Gross margin should be 37–38%, with benefits from yield-improvement and cost-reduction programs offsetting the competitive pricing environment. Operating expenses are targeted to rise by $10m to $78m. In particular, selling expense should rise by $7.5m and G&A (general & administrative) by $2m, due mainly to a full quarter of expenses from Ruud Lighting and about $1m of integration costs. R&D expense should rise by $1m to further support LED chip development, 150mm LED chip product qualifications (after shipping the first chips from 150mm wafers in Q1), new LED component platforms, plus continued investment in LED lighting products. Net income is expected to rebound to $29–33m.

“We continue to work in qualifying additional 150mm products over the next several quarters. The conversion is on track,” notes Swoboda. “However, the cost benefit is largely a function of factory utilization which remains relatively low. We currently target cost benefits in the second half of fiscal 2012 as we come off the learning curve,” he adds.  

See related items:

Cree acquires Ruud Lighting

Cree’s quarterly revenue grows 11%, driven by LED lighting

Tags: Cree LEDs

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