20 August 2018

Cree’s quarterly revenue grows 15%, driven by 40% organic year-on-year growth from Wolfspeed

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For full-year fiscal 2018 (to 24 June), Cree Inc of Durham, NC, USA reported revenue of $1.494bn, up 1% on $1.473bn for fiscal 2017.

Fiscal	Q4/2017	Q1/2018	Q2/2018	Q3/2018	Q4/2018
Revenue	$358.9m	$360.4m	$367.8m	$356m	$409.5m

Revenue for Lighting Products (mainly LED lighting systems and lamps) fell 19% from $701.5m to $568.8m (from 47.6% to 38.1% of total revenue), due to softness in the North America commercial lighting market, the impact of product quality issues, the legal settlement with Feit Electric Company Inc leading to patent license revenue in fiscal 2017 that did not reoccur in fiscal 2018, and lower consumer product sales as Cree shifted emphasis to the premium lamp category.

Revenue for LED Products (chips and components) grew 8% from $550.3m to $596.3m (from 37.4% to 39.9% of total revenue), due to strong demand in high-power general lighting, video screen and specialty lighting applications, plus the addition of mid-power joint venture (JV) product sales. “The business is performing well against the objective of driving value through greater focus,” comments CEO Gregg Lowe.

Revenue for the Wolfspeed business (Power & RF devices and silicon carbide materials) grew 49% from $221.2m to $328.6m (from 15% to 22% of total revenue). However, this included the first full quarter of results from the Infineon RF Power business (acquired on 6 March). Even without this, organic growth was 35% year-on-year, with strong growth in both materials and devices.

For fiscal fourth-quarter 2018, revenue was $409.5m, up 15% on $356m last quarter and 14% on $359m a year ago, and at the upper end of the targeted range of $390-410m.

Revenue for Lighting Products was $143.7m (35.1% of total revenue), down 7% on $154.7m (43.1% of total revenue) a year ago but up 10% on $130.8m last quarter, as the business continues its recovery. “Q4 represented another step forward towards the objective of fixing the business,” reckons Lowe.

Revenue for LED Products was $155.8m (38% of total revenue) - the highest in almost four years - up 9% on $143.3m last quarter and $143.4m a year ago

Revenue for Wolfspeed was $110m (26.9% of total revenue), up 34% (more than the expected 27%) on $81.9m (23% of total revenue) last quarter and up 81% on $60.8m (16.9% of total revenue) a year ago. Even without the full quarter of results from the Infineon RF Power business, organic growth was still a strong 40% year-on-year.

“Wolfspeed, which is our primary growth driver, continued to deliver on its objective of achieving high growth and strong gross margins,” comments chief financial officer Mike McDevitt. “We completed the successful integration of the Infineon RF Power business and delivered accretive non-GAAP results for the quarter,” adds Lowe. “That was less than three months after closing the acquisition - a remarkable timeline for such a large integration that comprised 12 sites and roughly 260 employees around the world.”

On a non-GAAP basis, full-year company gross margin has fallen from 30.2% in fiscal 2017 to 28.1% for fiscal 2018. However, fiscal Q4 gross margin was 30% (above the targeted 29.7%), up from 27.8% last quarter and 28% a year ago.

Wolfspeed gross margin rose from 45.5% a year ago to an above-target 47.9% (only slightly down on last quarter’s 48%) even while Cree managed the challenges of ramping new capacity and integrating the acquired Infineon RF business (which exceeded targets). This helped full-year Wolfspeed gross margin to rise from 46.8% in fiscal 2017 to 48.2% for fiscal 2018, due primarily to changes in product mix and successfully managing factory execution.

Full-year LED Products gross margin has fallen from 27.6% for fiscal 2017 to 26.5% in fiscal 2018, due mainly to a shift in product mix, including the mid-power JV product sales (which generally have lower gross margin). However, quarterly LED Products gross margin has recovered further, from 25.9% a year ago and 26.4% last quarter to an above-target 27.4%, due primarily to strong product demand, improved factory execution, and a more favorable product mix.

Full-year Lighting Products gross margin has fallen from 28% in fiscal 2017 to 19.2% for fiscal 2018, due mainly to non-recurrence of the Feit legal settlement, higher warranty-related costs, and lower sales reducing factory utilization. However, although still down on 23.8% a year ago, quarterly Lighting Products gross margin has recovered further, from 19.1% last quarter to 20.3% (the second consecutive quarter of more than 100 basis points improvement), due mainly to lower warranty-related cost, better process controls and incremental improvement in factory operation.

Operating expenditure (OpEx) has risen from $97m last quarter to $108m (26.4% of revenue), but this is slightly lower than forecasted (27.5% of revenue) due to early realization on some of the targeted Lighting right-sizing savings and lower IT litigation spending. “Over time, we target reinvesting these Lighting savings back into our Wolfspeed business to support its long-range targeted growth,” says McDevitt.

Full-year net income has fallen from $49.7m ($0.50 per diluted share) in fiscal 2017 to $18.8m ($0.19 per diluted share) for fiscal 2018. However, quarterly net income has continued to recover, from $3.8m ($0.04 per diluted share) last quarter to $11.5m ($0.11 per diluted share), exceeding the targeted $5-9m ($0.05-0.09 per diluted share).

“Fiscal year 2018 finished with good momentum, with fourth quarter non-GAAP earnings per share that exceeded the top end of our range driven by Wolfspeed growth and gross margin improvement,” notes Lowe.

Cash flow from operations has rebounded from $19.6m last quarter to $41.9m. Spending on property, plant & equipment (PP&E) has been increased further, from $43.2m to $57.3m, while patent spending has dropped from $3m to $2.2m. So, total capital expenditure (CapEx) has risen from $46m to $59.5m (taking full-year CapEx to $195.8m). Free cash flow improved from -$26.5m to -$17.5m. Overall, cash and investments fell from $401m to $387.1m.

“Capital allocation priorities remain focused on expanding our capacity on Wolfspeed business,” says McDevitt.

“Demand for silicon carbide and gallium nitride technologies continues to grow, as evidenced by the excellent results of our Wolfspeed business,” says Lowe. “We aim to keep reducing the gap and cost compared to silicon by leveraging scale, executing engineering efforts to improve yield, and pushing the limits of material science to achieve the next breakthrough. This combination of greater availability and lower cost will speed up and expand the adoption of SiC and GaN RF technologies across a wide range of markets,” he adds. “We are expanding our manufacturing footprint and broadening our product portfolio to extend our leadership position in this market and drive growth.”

In June, Wolfspeed launched its C3M third-generation 1200V silicon carbide MOSFET family, targeted at helping to foster the adoption of electric vehicles (EVs) by delivering higher efficiency and hence increasing driving range and reducing system costs. In August, the firm launched the E-Series, the first commercial family of SiC MOSFETs and diodes to be automotive AEC-Q101 and PPAP (production part approval process)-capable. Cree reckons that the rollout establishes Wolfspeed as first in the industry to launch a full suite of MOSFETs and diodes that are capable of withstanding high-humidity environments while offering the reliability and system-level value needed to drive widespread adoption of silicon carbide among auto makers for the next generation of EVs.

For fiscal first-quarter 2019 (ending 23 September 2018), Cree targets revenue of $395-415m, including Lighting Products revenue down 6% sequentially (as Cree focuses on increasing gross margins by improving the mix in its business); LED Products revenue down 6% (due to shifting some of the fungible capacity to Wolfspeed, normal European market seasonality, and order delays from certain customers as the industry evaluates how best to navigate the US and China tariffs); but Wolfspeed revenue up 13% (based on solid growth across all product lines). With the additional growth targeted for Q1, Wolfspeed’s annual revenue run rate is now $0.5bn. “While we are encouraged that the restriction on selling to [China-based] ZTE was lifted in July, we target just a small amount of revenue from them in Q1 as they rebuild their supply chain,” says McDevitt. “The business could ramp steadily beyond Q1, but it’s too soon to say when it would be back to prior levels.”

Gross margin is expected to rise to 30.6%. This is mainly because more of the revenue mix will come from Wolfspeed (despite Wolfspeed’s margin falling slightly due to its product mix). Also, Lighting Products margin should improve. “As a result of new product introductions, improved relationships with our channel partners and continued progress on quality, we see continued gross margin improvement,” says Lowe. This will be offset partially by an impact of 50 basis points from the 6 July tariffs, mainly affecting LED Product margin (which would otherwise remain level). “Momentum is building in our focused areas like automotive lighting and application-optimized solutions that are stickier and have an opportunity for us to create more value,” says Lowe. “The results should be a business that generates strong free cash flow through modest revenue growth, gross margin expansion and lower CapEx.”

Operating expenses should be similar to fiscal Q4/2018, including incremental spend related to semiconductor R&D projects, higher IP litigation costs and CFO transition costs (with Neil Reynolds replacing McDevitt on 27 August), offset by the targeted Lighting right-size initiative savings.

Net income is targeted at $10-14m ($0.10-0.14 per diluted share, reflecting the negative impact of $0.02 per diluted share from the China-related tariffs that went into effect on 6 July).

The impact of the China-related tariffs is expected to be $0.03 per diluted share per quarter starting in fiscal Q2. “If the upcoming 23 August tariffs are applied the same way as the 6 July tariffs, we would anticipate the impact to be nominal,” says McDevitt.

For full-year fiscal 2019, Cree still targets a 40/20/20 business model (40% gross margin, 20% OpEx and 20% operating margin). Targeted capital spending is $220m, driven primarily by expanding Wolfspeed’s production capacity to support forecasted long-term customer demand. Free cash flow is expected to be -$10m, due to the timing of the Wolfspeed’s capacity investments to alleviate current constraints and support the substantial growth opportunity forecasted over the next several years. “We are slightly ahead of our target to double wafer capacity for external material customers and double our power device capacity by the end of calendar 2018 from where we exited fiscal 2017,” notes McDevitt. “As we continue to ramp this new capacity, we could have some variability in our initial production yields and factory utilization that may reduce our near-term Wolfspeed gross margins,” he adds.

“Our target is to quadruple the size of the Wolfspeed business from fiscal 2017, which was a little north of $200m, to around $850m,” says Lowe.

See related items:

Wolfspeed’s E-Series first family of SiC MOSFETs and diodes to meet automotive AEC-Q101 standards

Wolfspeed’s new third-generation 1200V MOSFET extends SiC-based power conversion into EV drivetrains

Cree’s quarterly revenue driven by Wolfspeed’s SiC materials and Power & GaN RF devices

Cree acquires Infineon RF Power business for €345m

Cree signs $100m long-term deal to supply 150mm SiC wafers to Infineon

Cree’s growth in Wolfspeed Power & RF products and LED products offsets drop in Lighting revenue

Cree quarterly revenue rises despite Lighting Product sales falling and Wolfspeed capacity constraints

Cree’s quarterly revenue down 8% year-on-year

Cree and San’an forming Hong Kong-based JV to produce mid-power lighting-class packaged LEDs

Tags: Cree LED Wolfspeed

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