23 April 2015

Cree reports better-than-expected quarterly LED sales

For fiscal third-quarter 2015 (to 29 March), Cree Inc of Durham, NC, USA has reported revenue of $409.5m, down about 1% on $413.2m last quarter but up 1% on $405.3m a year ago (and on the higher end of the targeted range of $395-415m), as better-than-forecast LED product demand offset worse-than-expected weather-related seasonality in LED lighting.

Power & RF product revenue was $31m, similar to last quarter but up 13% on $27.4m last year (remaining about 7% of total revenue). Power & RF gross margin was 53.1%, down on 55.5% last quarter and 57.1% a year ago (due to product mix).

Lighting product revenue (LED lighting systems and bulbs) was $224m, up 27% on $176.7m a year ago but down 3% on $230m last quarter (falling back slightly to 55% of total revenue, after rising from 44% a year ago to 56% last quarter), as the severe winter weather in north-eastern USA delayed commercial LED fixture sales (although commercial fixture demand rebounded in late March and should grow in fiscal Q4). Lighting gross margin was 26%, down on 28.1% last quarter, due to an unfavorable product mix (as LED bulbs rose as a proportion of total sales, and commercial LED lighting projects suffered weather-related delays) and factory under-loading in the first half of the quarter (driven by inventory reductions and the timing of orders).

LED product revenue (LED components, LED chips and silicon carbide materials) was a better-than-expected $154.4m, down 23% on $201.1m a year ago but up slightly on $152m last quarter (rebounding slightly to 38% of total revenue, after falling from 49% a year ago to 37% last quarter). This was due to external customer demand stabilizing, offsetting the normal decline related to the Chinese New Year holiday. However, LED gross margin fell further, from 45.6% a year ago and 39.1% last quarter to 35.9%, due mainly to Cree slowing LED factory utilization further (reducing internal LED shipments, as part of the effort to reduce Lighting inventory). LED pricing was also slightly lower than forecast as Cree reduced channel inventory for certain older-generation LED products.

As a result of the lower LED and Lighting margins, overall gross margin (on a non-GAAP basis) was 31.4%, down on 33.9% last quarter and 37.8% a year ago (and below the expected 33.5%). "We burned $33m or 10% of inventory in the quarter, which is faster than expected and resulted in a larger margin impact than targeted," says chairman & CEO Charles Swoboda.

As part of the firm's targeted inventory reduction plan, inventory was reduced by $33.2m during the quarter, from $332.5m to $299.4m (improving from 108 days to 95 days, nearing the 90-day target). "Although the inventory reduction is causing some near-term gross margin pressure, we believe it is the prudent choice and in line with our strategy to continue to innovate and rapidly bring new products to market to meet the evolving demands of our customers," says Swoboda.

During the quarter, Cree added to its XLamp MH family of LEDs by launching the MHD-E and MHD-G, which leverage the Cree SC5 Technology platform to combine the high lumen density and reliability of a ceramic chip-on-board LED with the design and manufacturing advantages of a surface-mount package.  It also added to its CXA LED array family by launching the CXA2, which delivers up to 33% higher efficacy in the same form factors by utilizing elements of the SC5 Technology Platform. Cree also expanded its LED bulb portfolio with the TW Series LED T8 Tube Replacement for consumers (designed for simple, wire-free installation). Cree also launched the LED Rural Utility Light (RUL) Series for the estimated 10-13 million rural street and areal light fixtures currently installed in North America.

Operating expenses were reduced from $106m last quarter to a better-than-expected $102m ($3-4m lower than targeted). However, due mainly to the lower gross profits in LEDs and Lighting, operating income was $26.1m (operating margin of 6.4%, on the low end of the target range), down on $34m (8.2% margin) last quarter and $53.6m (13.2% margin) a year ago.

Net income was $25m ($0.22 per diluted share), down on $37.9m ($0.33 per diluted share) last quarter and $47.7m ($0.39 per diluted share) a year ago, as the lower tax rate (9%, less than the 17% target due to lower forecasted earnings for fiscal 2015) has offset the reduced gross profit due to lower factory utilization.

Cash generated from operations has risen from $14.8m last quarter to $65.6m. As well as the regular patent spending of about $5m, spending on property, plant & equipment has been cut from $50m to $44.9m, reducing total capital expenditure from $55m to $50m (in line with the plan to reduce property, plant & equipment spending to $200m for full-year fiscal 2015). Free cash flow hence improved from minus $40m last quarter to +$15.8m. In addition, Cree spent $70m to repurchase 1.9 million shares of its common stock (totaling $390m spent to repurchase 11.2 million shares – equal to 10.6% of Cree's outstanding stock - during the first nine months of fiscal 2015's $550m authorized share repurchase program). During the quarter, cash and investments hence fell by $47.9m, from $829.9m to $782m.

For fiscal fourth-quarter 2015 (ending 28 June), Cree expects revenue to grow to $420-440m, consisting of strong growth in Lighting revenue (led by higher commercial fixture sales), growth in Power & RF revenue, and stabilizing LED sales. The more favorable product mix in Lighting should drive a slight rise in overall gross margin to 32%. Lighting factory utilization remains high, while LED factory utilization is targeted to remain low. "We plan to continue to closely manage inventories in Q4, which may create some additional near-term margin headwinds," says Swoboda. Operating expenses are expected to rise by $5m, due primarily to higher patent and litigation spending and higher sales commissions related to greater Lighting revenue. Net income is expected to be $26-31m ($0.24-0.28 per diluted share).

"LED volumes are targeted to improve in fiscal 2016, driven by new design wins for SC5 LED products and growth in our lighting business," says Swoboda. "With the external LED business stabilizing over the last two quarters and inventory levels moving back towards our target range, we are well positioned to deliver incremental operating leverage in Q4 and into fiscal 2016," he adds.

See related items:

Cree's quarterly revenue level year-on-year as 33% growth in LED lighting offsets drop in LED demand from China

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Tags: Cree LED

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