20 October 2016

Cree's quarterly margins aided by improvements in Lighting

For its fiscal first-quarter 2017 (to 25 September 2016), Cree Inc of Durham, NC, USA has reported revenue of $371m, down 4% on $388.4m last quarter and down 13% on $425m a year ago, but in the upper half of the $356-378m target range.

Fiscal	Q1/2016	Q2/2016	Q3/2016	Q4/2016	Q1/2017
Revenue	$425.5m	$435.8m	$366.9m	$388.4m	$371m

Of this, discontinued operations contributed $49.9m (up on $30.9m last quarter and $43.9m a year ago, and above the targeted $46-48m). In July, Cree agreed for Germany's Infineon Technologies AG to buy its Wolfspeed business (which includes the Power & RF product lines that had historically been reported as a separate operating segment, plus the non-LED materials product line previously reported within the LED segment).

Continuing operations contributed $321.3m (down 10% on $357.5m last quarter and 16% on $381.5m a year ago, but in line with the expected $310-330m). Specifically, Lighting Product revenue (mainly LED lighting systems and bulbs) was $183.8m (57% of total revenue), down 7.4% on $198.4m last quarter and 26% on $248m a year ago. LED Product revenue was $137.5m (43% of total revenue), down 13.6% on $159.1m last quarter but up 3% on $133.5m a year ago.

On a non-GAAP basis, gross margin was 28.8%, down from 30.8% last quarter. Gross margin from continuing operations fell from 28.2% to 27.7%. Specifically, LED Product margin was 30.4%, down from 35.1% last quarter, but at the upper end of the targeted range. However, Lighting Product margin was 26.8%, up from 25.8% last quarter (with gross margins for commercial lighting and consumer lighting both improving).

"We delivered solid results in fiscal Q1, as Lighting, LED Products and Wolfspeed all achieved revenue and gross margins that were in line with our targets," says chairman & CEO Chuck Swoboda. "We made progress improving lighting margins in both our commercial and consumer product lines in the quarter."

Operating expenses (OpEx) for continuing operations were $80m (at the low end of the target range, primarily due to lower variable sales cost and the timing of IT litigation cost, some of which is expected to shift to Q2).

Net income has fallen further, from $21.3m ($0.21 per diluted share) a year ago and $18.9m ($0.19 per diluted share) last quarter to $15.2m ($0.15 per diluted share). However, this is towards the upper end of the $10-16m ($0.10-0.16 per diluted share) guidance range.

Net income from continuing operations was $9.5m ($0.09 per diluted share), down from $14.7m ($0.14 per diluted share) a year ago, but in the upper half of the targeted range of $6-11m ($0.06-0.11 per diluted share). Net income from discontinued operations was $5.7m ($0.06 per diluted share), down from $6.6m ($0.07 per diluted share) a year ago, but above the targeted range of $4-5m ($0.04-$0.05 per diluted share).

Cash generated from operations has fallen from $64.6m last quarter to $18.1m. In addition to patent spending of $2.3m (down further, from $4.3m a year ago and $3.4m last quarter), spending on property, plant & equipment (PP&E) has been cut further, from $49.9m a year ago a year ago and $20.3m last quarter to $19.3m. Total capital expenditure has hence been cut further, from $34.7m a year ago and $23.7m last quarter to $21m, including $10m for Wolfspeed. Free cash flow was therefore -$3.5m (an improvement on -$7.4m a year ago). During the quarter, Cree spent $36m to re-purchase 1.5 million shares and about $3m for the year-one earn-out achieved from the acquisition of APEI. Overall, consolidated cash and investments fell by $16m to $589m or, net of line of credit borrowings, by $43m to $402m. At the end of the quarter, Cree had $187m outstanding on its line of credit.

During fiscal Q1/2017, Cree launched the following new LED products: the next-generation higher-power XLamp XP-L2 LED (with twice the lumens-per-area); the XLamp XQ-E and XP-E High Efficiency (HE) Photo Red LEDs; the QLS6A and QLSB6 LEDs; and brighter MHB LEDs (for commercial outdoor lighting applications).

Cree also launched lighting products including the HXB LED Industrial High Bay fixture (which uses SC5 LED technology); a new 130lm/W ZR troffer product; the Essentia by Cree LED Surface Wrap; a high-performance version of the CPY canopy fixture; and the new GEN4 family of next generation LED bulbs.

For fiscal second-quarter 2017 (ending 25 December 2016), Cree targets revenue of $360-380m and net income of $13-19m ($0.13-0.19 per diluted share).

For continuing operations, revenue is targeted to be steady at $310-330m, with both Lighting and LED roughly level as Cree continues to rebuild commercial lighting order momentum and operate in a very competitive LED market. Gross margin should also be similar to fiscal Q1, with improvement for Lighting offset slightly by LED Products due to lower targeted production volumes in Cree's LED factory (to help rebalance its commercial lighting inventory). Operating expenses should rise by $2m due to promotional spending related to Cree's GEN4 bulb launch and incremental IP litigations spending, as well as $1.5m of shared service costs supporting Wolfspeed operations (which will be mostly reimbursed for a period of time after closing, under a transition services agreement with Infineon). Net income is targeted to be $4-10m ($0.04-0.10 per diluted share).

For discontinued operations, Cree expects revenue to be steady at $50m, and net income to be $9m ($0.09 per diluted share), including a $4m benefit net of tax ($0.04 per diluted share) from the full impact of not including any depreciation or amortization expense from long-lived assets.

"The business fundamentals are improving in Lighting as we see improved customer service levels, increased channel coating activity and better gross margins," notes chief financial officer Mike McDevitt. "But it will take several quarters to see the full benefit in our financial results."

"We're still working to earn back share with our lighting agent and distribution channel partners and translate that effort to new projects and increased orders," says Swoboda. "The leading indicators are encouraging, and we're making investments in people and systems to further improve commercial lighting performance," he adds.

Accordingly, Cree has appointed Danny Castillo as president, Lighting (effective 7 November), responsible for both commercial and consumer lighting business. In addition, David Elien (a lighting industry veteran who has led the commercial lighting business for the last two quarters) will continue to run this business as part of the new lighting organization reporting to Castillo. "We're expanding our team, bringing in experienced leaders who understand the unique aspects of the traditional lighting industry and sales channels and complement our strength and innovation," says Swoboda.

"While we forecast the short-term increase in Q2 OpEx, in general we target company operating expenses to grow slower than our revenue over the next year, which should drive some incremental margin leverage," says Swoboda. "To enable our revenue and profit goals, we must continue to innovate in all business segments to differentiate our products in the market and improve the customer experience and service levels across the company."

For fiscal 2017, Cree targets Lighting and LED capital spending of $55m to support continuing operations. Until the sale of Wolfspeed is completed, Cree will continue to invest capital to support the business, including capital spending of $10m for fiscal Q2 (in line with previous guidance).

Cree continues to target fiscal 2017 free cash flow of $100m, which may change depending on the timing of the Wolfspeed sale.  

Cree and Infineon are continuing to work together to obtain the customarily required regulatory approvals in various jurisdictions, including foreign and domestic anti-trust approvals, as well as CFIUS approval. In late September, the parties received a second request for additional information from the US Federal Trade Commission (FTC). Cree and Infineon still aim to close the transaction around the end of 2016. "This will further strengthen our balance sheet to fund share repurchases in the near-term and pursue inorganic lighting growth in the medium to longer term," says Swoboda.

"Our second priority is driving top-line growth for our LED lighting business. Over the next year, we target growing core commercial lighting revenue from current levels and in line with the market, while potentially adding to that growth through product line expansion," says Swoboda. "Our corporate development team is working to evaluate lighting growth opportunities through potential M&A. But we don't target any deals in the next few quarters, as we give the new lighting leadership team time to build momentum for the core business," he adds.

"Customer service fundamentals in commercial lighting have clearly improved over the last two quarters, which is the first step to rebuilding order momentum," continues Swoboda. "The new products we released in [fiscal] Q4 are starting to gain initial project wins. But it typically takes nine-months to actually gauge market traction for new products," he adds.

"The consumer product transition to GEN4 is proceeding as expected with the initial loading orders combined with demand for our previously generation a little higher than forecast. Our new GEN4 LED bulb continues to provide the premium light and quality that consumers expect from the Cree brand, but at a lower price point and better value than our previous generation. The new bulb is targeted to provide some incremental margin improvement for the consumer product line, which we are using in the near-term to fund an expanded marketing program to support the new product launch," Swoboda says. The new bulbs have been shipped to stores, but are still in the process of being fully merchandised.

"The LED business has performed well over the last year," notes Swoboda. "The market remains very competitive and we continue to focus our efforts on the applications where our technology can add the most value to the customer. We're also working on some mid-to-longer term programs that could expand the LED business in future years for both existing and new applications," he adds.

See related items:

Cree's double-digit growth in commercial lighting offsets slowdown in consumer lighting prior to launch of next-gen bulb

Infineon to acquire Wolfspeed for $850m

Cree's revenue falls 15.8% to $367m

Cree expects quarterly revenue of $367m, 11.5% below targeted $400-430m

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

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

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

Tags: Cree LED

Visit: www.cree.com