18 January 2012

Cree’s 13% quarterly growth driven by lighting acquisition

For its fiscal second-quarter 2012 (ended 25 December 2011), Cree Inc of Durham, NC, USA has reported revenue of $304.1m, up 18% on $257m a year ago and 13% on $269m last quarter, but at the low end of the targeted $300–320m.

Compared with last quarter, revenue from LED Products (components, chips and materials) fell by $2.6m to $194.2m due to a challenging competitive environment (as slightly higher XLamp LED component sales were offset by lower high-brightness LED and chip sales). Power & RF sales fell by $6m to $14.2m. In particular, Power device sales fell mainly due to continued weakness in solar inverter demand, while RF device sales fell due to a delay in a military program (primarily a timing issue).

Growth was driven by Lighting Product revenue (indoor & outdoor LED lighting products plus traditional lighting systems) rising by $44m (85%) from $51.7m to $95.7m. However, as well as double-digit organic growth in both indoor & outdoor products, this included the first whole quarter of sales from subsidiary Ruud Lighting of Racine, WI, USA (acquired about a month before the end of fiscal Q1/2012).

“The current business environment has reinforced the value of our market leadership position in LEDs and lighting as well as the power of having truly innovative products that change the market and drive adoption,” says chairman & CEO Chuck Swoboda.

During the quarter, Cree introduced: the next-generation XLamp XB-D LED (which doubles the lumens-per-dollar of lighting-class LEDs); high-voltage XLamp XT-E and XM-L LEDs (which enable the use of more efficient, smaller drivers to lower cost for compact lighting applications); and the LMH2 LED module family (which features Cree TrueWhite technology and delivers 80lm/W system efficacy combined with a color rendering index greater than 90). Cree also licensed remote phosphor patents to five LED lighting makers through its recently launched remote phosphor licensing program.

Also during the quarter, Cree transferred CR troffer production to Racine (which should provide cost leverage starting in fiscal Q3) and also transitioned all lighting-related customer service activities to Racine (which will provide a common interface for indoor and outdoor products, and should improve Cree’s ability to respond to customer requests). Cree has announced a 208,000 square-foot facility expansion at Ruud.

“Our second-quarter results demonstrated the strength in our expanded lighting product line, with strong growth in sales of both indoor and outdoor products,” says Swoboda. “While the business environment remains challenging, our results demonstrate that our strategy is working.”

On a non-GAAP basis, operating expenses rose from $67.9m to $76m, with R&D expenditure up $1.3m and SG&A (selling, general & administrative) expenditure up $7m ($2.5m less than targeted, due mainly to lower-than-expected selling expenses and legal fees).

Gross margin has fallen further, from 47.7% a year ago and 37.4% last quarter to 35.3% (below the targeted 37–38%). This is due to lower LED margins (from increased pricing pressure and factory utilization of just 60% due to a $17m reduction in WIP, as finished goods inventory was reduced across product lines). This offset the progress on yield improvement and cost-reduction programs. Indoor and outdoor lighting product margins improved, driven mainly by cost reductions. Power & RF margins fell due to lower factory utilization.

“We continue to take a conservative approach on factory starts to reduce inventory while also trying to maintain flexibility to respond to short lead-time expectations in the market,” says Swoboda. As a result, inventory declined by $16.3m to $187.4m. “While this increases short-term margin pressure, it puts the factory in a better position to realize cost reduction and respond to future demand,” he adds.

Net income was $28.7m, down from $60.7m a year ago but up slightly on $28.1m last quarter (although below the expected $29–33m). Cash from operations of $81m minus capital expenditure of $23m (down from $34m last quarter) yielded free cash flow of $58m. Due to the solid profitability, improvements in working capital and reduced capital spending, cash and investments rose by $55m during the quarter to $687.2m.

“With the productivity and yield improvements that we have made over the last several quarters, we're spending a fraction on CapEx versus previous years as our current LED chip factory has the capability to increase output 60-70% from current levels with minimal incremental investments,” says Swoboda.

“We continue to qualify additional products on 150mm wafers but have slowed the rate of transition to take advantage of existing excess [100mm] capacity,” says Swoboda. “With some additional investment in 150mm tooling and equipment, our current LED chip factories should be able to increase output by another 100%,” he adds. “In total, we have the ability to more than triple LED chip production output from current levels, and are well positioned to support significant growth in LED lighting over the next 12-24 months.”

LED orders are tracking behind last quarter, as customers and distributors are trying to minimize their inventory and utilize short lead-times. “We saw a similar pattern in our fiscal Q3 each of the last two years for LED products, as the Chinese New Year holiday effectively reduced demand in the beginning of the quarter before a strong rebound post-Chinese New Year,” notes Swoboda. “We’re currently targeting a good second half of the quarter, once again driven by end demand, which will be a significant variable for the quarter,” he adds.

Lighting order backlog is slightly ahead of last quarter. “This is a typically slower quarter for outdoor products due to lack of installations in the winter months,” says Swoboda. “We see a strong pipeline of new projects for both indoor and outdoor products, and target overall growth in Q3, as we remain very encouraged by the success of this product line and our ability to drive adoption in the market,” he adds.

For its fiscal third-quarter 2012 (ending 25 March), Cree targets revenue of $290-310m, with single-digit growth in lighting (driven by strong growth in indoor sales, with flat to seasonally lower outdoor sales); LED product sales down a few percent (which includes XLamp LED sales flat to down a few percent, plus seasonally lower high-brightness LED chip and material sales); and flat Power and RF sales. Gross margin should be level at 35-36%, as cost-reductions are offset by the competitive pricing environment in the LED product line and low factory utilization. Operating expenses are expected to rise by $3-4m, including selling expenses rising by $1-2m (mainly higher commissions, due to increased sales of lighting products through lighting agent channels, as well as new-product introductions) and G&A expenses rising by $1m (due mainly to the timing of patent-related litigation). Net income should be $21-29m.

“Our future business outlook remains very optimistic based on our belief that innovation drives payback, payback drives LED lighting adoption, and adoption expands the market for both Cree and our customers,” concludes Swoboda.

See related items:

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

Cree acquires Ruud Lighting

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

Tags: Cree LEDs

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