Cree’s quarterly revenue grows 13% year-on-year, driven by Wolfspeed’s organic growth of 50%

For fiscal first-quarter 2019 (to 23 September 2018), Cree Inc of Durham, NC, USA reported revenue of $408.3m, down slightly on $409.5m last quarter but up 13% on $360.4m a year ago, led by its Wolfspeed business (Power & RF devices and silicon carbide materials).

Fiscal	Q1/2018	Q2/2018	Q3/2018	Q4/2018	Q1/2019
Revenue	$360.4m	$367.8m	$356m	$409.5m	$408.3m

Revenue for Wolfspeed was $127.4m (31.2% of total revenue), up 16% (more than the expected 13%) on $110m (26.9% of total revenue) last quarter and up 93% on $66.2m (18.4% of total revenue) a year ago. Even excluding the Infineon RF Power business (acquired on 6 March), organic growth was still a strong 50% year-on-year.

Although down 6% on $155.8m (38% of total revenue) last quarter, revenue for LED Products of $146.8m (36% of total revenue) is up 2% on $144.5m (40.1% of total revenue) a year ago.

Lighting Products revenue was $134.1m (32.8% of total revenue), down 7% (more than the expected 6%) on $143.7m (35.1% of total revenue) last quarter and 10% on $149.7m (41.5% of total revenue) a year ago.
On a non-GAAP basis, gross margin has risen further, from 28.3% a year ago and 30% last quarter to 32.1% (above the targeted 30.6%).

Wolfspeed gross margin was 47.4%, down from 49% a year ago but only slightly from 47.9% last quarter as Cree managed the challenges of ramping new capacity and integrating the acquired Infineon RF business. “We accomplished our goal of doubling capacity for power devices and material sales a full quarter ahead of plan,” notes president & CEO Gregg Lowe. “The result is a business where revenues have more than doubled, and gross margins have improved by roughly 20 basis points over the five quarters since we embarked on the expansion plan [from 45.5% for fiscal Q4/2017].”

LED Products gross margin has grown further, from 26.9% a year ago and 27.4% last quarter to a better-than-targeted 28.1% (its highest level in almost 2 years), as the effects of lower revenue and tariff-related costs were more than offset by strong factory execution, favorable mix and better-than-expected average selling prices (ASPs). “LED Products business demonstrated further progress relative to its objective of driving value through greater focus,” says Lowe. During the quarter, Cree introduced the XLamp XP-G3 S Line of LEDs (optimized for connected lighting). “Through innovations and component architecture, this new line can withstand double the number of switching cycles compared to competing LEDs in its class,” claims Lowe. “This is significant because connected lighting systems will dim or switch off lights up to 10x more often than standard lighting systems.”

Lighting Products gross margin has recovered further, from 20.3% last quarter to a better-than-targeted 23.2%, the third consecutive quarter of more than 100 basis points improvement (and up on 21.3% a year ago), demonstrating “continued progress in the path to fixing this business”. This is attributed to better mix, product cost reductions, improved operational efficiencies and being more selective with respect to the business pursued. “The team has done an outstanding job of improving quality through improved processes. Over the last three quarters, we have released 21 new products and shipped over 220,000 of those new products with excellent quality metrics that demonstrate our new processes are paying off,” says Lowe.

Operating expenditure (OpEx) was $104m (25.5% of revenue), cut more than expected from $108m (26.4% of revenue) last quarter, due mainly to good discipline around discretionary spending and the timing of certain R&D projects. “Our plan is to reinvest the OpEx savings from our Lighting restructuring into Wolfspeed, so you shouldn’t consider this OpEx level to be the new baseline,” notes chief financial officer Neill Reynolds.

Driven by the continuing robust growth in Wolfspeed combined with strong gross margin improvement in LED Products and Lighting Products, net income has continued to recover, from just $4.1m ($0.04 per diluted share) a year ago and $11.5m ($0.11 per diluted share) last quarter to $22m ($0.22 per diluted share), far exceeding the targeted $10-14m ($0.10-0.14 per diluted share). This is despite the negative impact of $0.02 per diluted share from the China-related tariffs that went into effect on 6 July, as well as the challenges presented by Hurricane Florence in the USA and Typhoon Mangkhut in Asia.

Cash flow from operations has fallen further, to $34m. However, capital expenditure (CapEx) has been cut from $59.5m to $39.7m. So, free cash flow has improved from -$17.5m last quarter to -$5.8m.

In late August, Cree raised $575m in a private offering to qualified institutional buyers of its 0.875% convertible senior notes due 2023 (a conversion premium of 31% or $59.97 per share). “It allows us to reduce interest expense, lock in at fixed rate, add cash to the balance sheet, and is accretive,” notes Reynolds. “As a result of the increased cash available to invest and a lower interest rate relative to our working capital line of credit, we will move from a position of incurring net interest expense each quarter [$575,000 in fiscal Q1] to earning net interest income [targeted at about $1m in fiscal Q2]. Also, the risk of dilution is quite modest as our stock price could double from the issue price and the additional shares required would only amount to a few percent compared to the current share count.”

With zero borrowed on the firm’s line of credit and convertible debt with a face value of $575m, overall cash and investments rose during the quarter from $387.1m to $665.5m.

“Fiscal year 2019 is off to a strong start, with first quarter non-GAAP earnings per share that exceeded the top end of our target range driven by another quarter of robust growth in Wolfspeed combined with strong gross margin improvement in LED Products and Lighting,” says CEO Gregg Lowe. “This is an excellent result given the headwinds facing the businesses related to tariffs and global trade tensions. While these headwinds may persist for some time, we remain optimistic about the opportunity to increase shareholder value over the long term by executing our strategic plan,” he adds.

“The company has a clear strategic vision, employee engagement has improved materially, and execution is improving in all three of the businesses,” says Lowe. “One terrific example of that is in our materials business where we exited Q1 achieving record output, improved yield and shorter cycle times.”

For fiscal second-quarter 2019 (to 30 December 2018), Cree expects revenue to be roughly level sequentially at $398-418m, with 5% growth in Wolfspeed revenue counteracting slight declines in LED Products revenue (as the positive growth trends in the firm’s four focus areas are more than offset by softer demand in China related to the latest round of tariffs) and Lighting Products (as Cree focuses on increasing gross margins by improving product mix).

“There are numerous headwinds facing our businesses in the short term,” notes Lowe. “These include direct and indirect impacts of tariffs in our LED and Lighting business, the impact of trade tensions on the global economy, and the seasonality that our LED and Lighting businesses typically experience in the March quarter.”

However, net of a targeted 75 basis point reduction from the tariffs, gross margin should rise for all three business segments.

OpEx is expected to rise to $111m, due mainly to higher Wolfspeed R&D spending and a greater number of days in the quarter as well as a full-quarter impact of the annual merit increases that went into effect in September. “While changes in OpEx can vary from quarter-to-quarter for a variety of reasons, including the timing of R&D projects, marketing spend around trade shows and when IP cases go to trial, our long-term objective remains to drive OpEx lower as a percent of sales, even as we increase our investments in growth initiatives,” stresses Reynolds.

Cree expects a drop in net income to $15-19m ($0.15-0.19 per diluted share). This includes a reduction of $0.03 from the impact of the tariffs that went into effect in fiscal Q1. Tariffs applied to some Lighting Products (coming in from China) that went into effect on 24 September are expected to increase this impact to $0.05 per share in fiscal Q3. “We are evaluating ways to further mitigate the impact of these tariffs,” says Reynolds.

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 Wolfspeed’s capacity investments to alleviate current constraints and support the substantial growth opportunity forecasted over the next several years. “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,” cautions Reynolds.

“The Wolfspeed sales funnel is growing rapidly for power devices, materials and RF,” says Lowe. For example, Cree has just signed another strategic long-term agreement worth more than $85m to produce and supply 150mm silicon carbide substrates and epiwafers to “one of the world’s leading power device companies”. “In power devices alone, we are engaged with dozens of partners working on projects with a total opportunity well in excess of $1bn. These projects, which span the time frame of our long-range plan, include segments such as electric vehicle drivetrain, on-board charging, DC-to-DC conversion and charging infrastructure,” Lowe adds. “The number of customers that we’re working with that are committed to silicon carbide is significantly higher than it was a year ago.”

“We plan to double our materials and power device capacity again over the next couple of years [quadrupling capacity from 18 months ago] to meet growing demand for our products and to expand our leadership position in these technologies,” Lowe concludes.

See related items:

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Tags: Cree LED Wolfspeed GaN RF SiC Power electronics

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