23 October 2014

Cree’s quarterly revenue falls 2% to $428m, as lower LED sales outweigh Lighting and Power & RF growth

For its fiscal first-quarter 2015 (ended 28 September 2014), Cree Inc of Durham, NC, USA has reported revenue of $427.7m, up 9% on $391m a year ago but down 2% on $436.3m last quarter (and below the $440-465m forecasted in mid-August).

Fiscal	Q1/2014	Q2/2014	Q3/2014	Q4/2014	Q1/2015
Revenue	$391m	$415.1m	$405.3m	$436.3m	$427.7m

“We have good momentum in our Lighting and Power & RF segments, although fiscal Q1 results were below our targeted levels [$440-465m, forecasted in mid-August] due primarily to lower-than-expected LED demand [down 13% sequentially],” says chairman & CEO Chuck Swoboda.

Power & RF Product revenue was $31m, up 8% on $28.6m last quarter and 24% on $25.1m a year ago (remaining 6-7% of total revenue).

Lighting Product revenue was $223.1m (the upper end of the target range), up 7% on $208.2m last quarter and 51% on $147.9m a year ago (rising from 38% of total revenue through 48% to 52% of total revenue). Growth was driven by stronger-than-expected demand in LED fixtures and LED bulbs (as Cree’s retail partner shipped some orders from fiscal Q2 into Q1 to support its stocking requirements for the fall lighting season).

However, LED Product revenue (LED components, LED chips, and silicon carbide materials) was $173.6m, down 13% on $199.5m last quarter and 20% on $218m a year ago (falling from 56% of total revenue through 46% to 41% of total revenue). This is due primarily to lower global LED demand from both direct and distribution customers (with China business declining the most).

Power & RF Products gross margin has risen further, from 53.7% a year ago and 56.9% last quarter to 57.6%, due to a more favorable product mix. However, LED Products gross margin has fallen from 46.6% a year ago and 45.1% last quarter to 39%, driven by weaker LED demand which resulted in higher revenue reserves (to reflect the more aggressive LED pricing environment) and higher inventory reserves (related to the factory over-build). In addition, despite rising from 26.9% a year ago to 29.1% last quarter, Lighting Products gross margin has fallen to 24.9%, driven by a higher mix of LED bulb products, a less favorable mix within LED fixtures, and Lighting factory execution challenges related to the firm’s growth.

Overall gross margin has fallen further, from 39.2% a year ago and 37.9% last quarter to 32.4% (below the targeted 37.5%), due primarily to a lower mix of LED sales, a higher mix of Lighting sales, and the lower gross margin within these two segments.

Operating expenses were cut sequentially from $108m to $103.5m ($4m lower than targeted, due to lower LED sales commissions and lower discretionary spending). However, this was not enough to offset the drop in gross margin. Operating margin has hence fallen further, 15% a year ago and 13.1% last quarter to just 8.2%.

On a non-GAAP basis, net income was $29.6m ($0.24 per diluted share), down on $51.3m ($0.42 per diluted share) and $47.3m ($0.39 per diluted share) a year ago, and well below the expected $48-55m ($0.40-0.45 per diluted share).

During the quarter, operating cash flow was $13.3m (down from $91.1m last quarter). Spending on property, plant & equipment (PP&E) has risen further, from $58.9m last quarter to $63.4m (almost doubling from $33.7m a year ago), related primarily to capacity-expansion projects begun in fiscal 2014. Meanwhile, patent spending was roughly level at $4.8m. So, total capital expenditure was $68.2m (up from $64.3m last quarter). Free cash flow has hence fallen further, from $30.8m a year ago and $26.8m last quarter to -$55m. Cash and investments therefore fell by $57.6m from last quarter from $1.162bn to $1.105bn.

During the quarter, inventory rose by $26m to $310.8m (from 94 days worth to 96 days, on the high side of the 90-day target), due primarily to the factory over-build in LED products compared with the weaker-than-forecasted LED demand.

Order backlog for fiscal Q2 is similar to last quarter, as higher Lighting backlog is being offset by the continued weakness in LEDs (with component customers and distributors continuing to operate on short lead-times).

For its fiscal second-quarter 2015 (ending 28 December 2014), Cree expects revenue to fall to $400-420m. Lighting Product revenue will see single-digit growth (with strong LED fixture growth partially offset by a 12% drop in LED bulb revenue since Cree’s retail partner is reducing inventory to normal levels towards the end of the calendar year as the lighting season slows down). However, this growth will be offset by LED Products revenue falling by about 12% sequentially due to lower overall demand plus channel inventory reductions. Power & RF Product revenue should be level.

Despite the lower LED Product revenue, gross margin is expected to rebound slightly to 33.5%, as Lighting Products mix is targeted to shift more favorably back from bulbs to fixtures in fiscal Q2 while Lighting factory productivity is forecast to improve over the next several quarters. Operating expenses are expected to rise by about $2m, due primarily to higher sales expense from fixtures sales plus higher legal spending (as Cree funds its IP licensing strategy). Operating margin should hence fall slightly. Net income is targeted at $24-29m ($0.20-0.24 per diluted share.

“We target positive free cash flow for Q2 due primarily to reducing our working capital balances and lower capital spending,” says chief financial officer Mike McDevitt. “Our targeted working capital improvement will be primarily driven by reducing our LED factory production to reduce our inventory levels to a line with near-term LED demand,” he adds.

“With our revised LED Products outlook, we are reducing our LED factory capacity investments. However, we target continued investment for infrastructure projects to support our longer-term forecasted growth for fiscal 2016 and 2017,” says McDevitt. “As a result, we target property, plant & equipment spending to be $200m plus or minus for fiscal 2015 [up 10-12% on fiscal 2014],” he adds.

“The LED competitive environment is currently very challenging, especially in lighting applications where mid-power and high-power LEDs compete for designs,” notes Swoboda. “There is a lot of available mid-power LED capacity chasing customer designs at very low LED margins. We believe this market will rationalize over time as the LED semi-cycle matures and capacity is more fully utilized,” he adds. “When that will happen is difficult to forecast, however we believe that our LED technology delivers fundamentally more lumens per wafer, which positions Cree for long-term success.”

In particular, recent developments include:

• introducing the ZR high-efficacy (HE) LED troffer (the first commercially available 150 lumens-per-watt LED troffer on the market);

• launching the XLamp MH-B LED (a new generation of high-power LEDs that delivers better performance and a more-effective way to achieve low-cost systems than mid-power LEDs);

• announcing a cooperation agreement with Taiwan’s Lextar Electronics Corp (whereby Cree is investing $83m to take a 13% stake in Lextar, in exchange for the supply of sapphire-based LED chips, targeting the mid-power market segment).

“While the LED industry conditions are challenging, were confident that innovation is still the key to leading the market and driving growth in all of our businesses,” says Swoboda. “Given our technology leadership, new product pipeline and strong balance sheet, we remain uniquely positioned to capitalize as the industry transitions to LED lighting,” he believes.

See related items:

Cree to invest $83m in 13% stake in Taiwanese LED maker Lextar

Cree lowers quarterly revenue forecast from $440-465m to $428m

Cree's quarterly revenue up 8% to record $436m, driven by 18% growth in lighting products

Cree's quarterly revenue grows 16% year-on-year to $405m, driven by 35% growth in lighting products

Cree’s quarterly revenue grows 20% year-on-year to record $415m

Cree's quarterly revenue grows 24% year-on-year to record $391m

Tags: Cree LED

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