26 January 2016

Cree revenue growth led by commercial lighting, as OpEx cuts drive higher-than-expected earnings

For fiscal second-quarter 2016 (ended 27 December  2015), Cree Inc of Durham, NC, USA has reported revenue of $435.8m, up 2% on $425.5m last quarter and 5% on $413.2m a year ago, led by growth in commercial lighting and a solid quarter for the firm's LED Product sector, offsetting lower Power & RF Product revenue.

Specifically, Lighting Product revenue was $255m (59% of total revenue), up 3% on $248m (58% of total revenue) last quarter and up 11% on $230.2m (56% of total revenue) a year ago. Consumer lighting revenue was similar to fiscal Q1.

LED Product revenue was $153m (35% of total revenue), up 3% on $148.2m (35% of total revenue) last quarter and up 1% on $151.9m (37% of total revenue) a year ago, led by continued growth in commercial lighting (offsetting lower year-on-year consumer lighting sales). This allowed Cree to further reduce channel inventories to a level that should enable a higher-turns model in fiscal second-half 2016.

Wolfspeed Power & RF Product revenue was $28m (6% of total revenue), down 6% on $29.3m (7% of total revenue) last quarter and 12% on $31.1m (7% of total revenue) a year ago, due to the continued lower RF demand.

Although down on 33.9% a year ago, gross margin was level with last quarter, at 31.7%, led by gains in lighting, as the firm's strategy to better balance lighting revenue and profit growth has started to deliver results.

Specifically, although down from 39.1% a year ago and 35.5% last quarter, LED Product gross margin of 34.7% was slightly better than core business (excluding the one-time license benefits from last quarter). Core LED margins also improved as Cree saw additional benefits from LED factory consolidation. During the quarter, Cree completed its LED business restructuring, recognizing $3m of expense for factory capacity and overhead costs reductions (bringing total LED restructuring charges to $102m). "The overall LED market remains very competitive, but our business has become more manageable in the near term as we continue to focus on high-power applications where SC5 technology drives system cost advantages," says Chuck Swoboda.

Lighting Product gross margin was 28.5%, up from 27.9% last quarter (due to better factory execution and a more balanced approach to revenue and profit growth) and 28.1% a year ago.

Wolfspeed Power & RF Product gross margin was 52.2%, down on 55.5% a year ago but up from 49% last quarter.

"Our lighting business continues to grow, the LED business has stabilized, and our Wolfspeed Power & RF division continues to make progress," says chairman & CEO Chuck Swoboda.

Operating expenses (OpEx) have been cut from $105m last quarter to $103m, below the targeted $106m due mainly to expense management and operational efficiencies.

Operating income was $35.5m (operating margin of 8.1% of revenue), at the upper end of the targeted range and up on $29.4m (operating margin of 6.9%) last quarter.

On a non-GAAP basis, net income was $30.5m ($0.30 per diluted share), down from $38m ($0.33 per diluted share) a year ago but up from $22.1m ($0.21 per diluted share) last quarter, and above the targeted range of $21-27m ($0.21-0.26 per diluted share), due mainly to the lower OpEx spending and the retroactive reinstatement of the US R&D tax credit that reduced the firm's effective tax rate. However, even excluding the impact of the R&D tax credit reinstatement and the Lextar share price increase, EPS would have been $0.27 per diluted share (still above the targeted range).

"We delivered on our goal of building financial momentum in Q2, with earnings that exceeded our targets driven by solid revenue growth, good margins and operating expense leverage," says Swoboda.

Cash generated from operations has rebounded from $46.8m last quarter to $77m (up five-fold on $14.8m a year ago). In addition to patent spending of $3.3m, spending on property, plant & equipment (PP&E) has been cut from $49.9m last quarter to $31.9m, reducing total capital expenditure (CapEx) from $54.2m to $35.2m. Free cash flow has hence rebounded from -$40m a year ago and -$7.4m last quarter to an above-target +$41.7m. However, Cree also spent $62m to repurchase 2.5 million of its shares (following $70m to repurchase 2.7 million shares last quarter). Hence, during the quarter, cash and investments fell by $15m, from $632.1m to $617m (compared with $713m a year ago). Cree ended the quarter with $205m outstanding on its line of credit.

"Overall, we had a good first half of fiscal 2016 and are well positioned for a strong second half," comments Swoboda. 

For fiscal third-quarter 2016 (ending 27 March), Cree expects revenue to fall to $400-430m, taking into account the typical seasonal decline of 5% in the Lighting and LED markets, offset partially by incrementally higher Wolfspeed Power & RF Product sales. Gross margin should be 31.7%, driven by improvement in commercial lighting due primarily to factory cost improvements, offset by the seasonally lower LED margins (with Wolfspeed Power & RF Product margin in a similar range). Operating expenses are targeted to be $100m, down $3m due primarily to lower variable LED and Lighting sales costs. Net income is expected to fall to $22-29m ($0.22-0.29 per diluted share).
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After CapEx spending of $89m in fiscal first-half 2016 and with second-half CapEx targeted to be $46m, Cree is now expecting CapEx for full-year fiscal 2016 of $135m (lower than the previous target of $150m) in order to complete existing infrastructure projects and to provide incremental capacity for Lighting and Wolfspeed. Also, the firm has now raised its target for free cash flow from $85m to $100m.

See related items:

Cree's quarterly revenue rises 11%, driven by growth in commercial lighting

Cree's quarterly LED product revenue falls 21% amidst restructuring

Cree restructuring LED Products business due to higher-than-expected ASP erosion

Cree reports better-than-expected quarterly LED sales

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

Tags: Cree LED

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