Cree’s quarterly revenue grows 12% year-on-year, driven by Wolfspeed’s organic growth of over 50%

For its fiscal second-quarter 2019 (ended 30 December 2018), Cree Inc of Durham, NC, USA has reported revenue of $413m, up 1% on $408.3m last quarter and 12% on $367.9m a year ago.

Fiscal	Q2/2018	Q3/2018	Q4/2018	Q1/2019	Q2/2019
Revenue	$367.8m	$356m	$409.5m	$408.3m	$413m

Revenue for the Wolfspeed business (Power & RF devices and silicon carbide materials) was a record $135.3m (32.8% of total revenue), up 6% on $127.4m (31.2% of total revenue) last quarter and up 92% on $70.6m (19.2% of total revenue) a year ago (or more than 50% on an organic basis, excluding the Infineon's RF Power business, acquired on 6 March 2018).

LED Products sales were $145.2m (35.1% of total revenue), down 1% on $146.8m (36% of revenue) last quarter and 5% on $152.7m (41.5% of revenue) a year ago, but slightly ahead of target.

Lighting Products revenue was $132.5m (32.1% of total revenue), down 1% on $134.1m (32.8% of total revenue) last quarter and 8% on $144.6m (39.3% of total revenue) a year ago, but slightly ahead of target.

On a non-GAAP basis, gross margin has risen further, from 25.7% a year ago and 32.1% last quarter to 33.3%, and well above the target.

Specifically, Wolfspeed gross margin was 47.8%, down from 48.4% a year ago but up from 47.4% last quarter, “in line with our targets as the team continues to do an excellent job balancing the challenges of rapidly increasing capacity while maintaining yields,” says president & CEO Gregg Lowe.

LED Products gross margin has risen further, from 25.3% a year ago and 28.1% last quarter to an above-target 30% despite slightly the lower LED revenue, driven by strong execution and higher licensing revenue.

Lighting Products gross margin has also risen further, from 15.9% a year ago and 23.2% last quarter to an above-target 25.7% (the fourth consecutive quarter of improvement by more than 100 basis points). This is attributed mainly to product cost reductions, improved operational efficiencies, and being more selective with the business pursued.

“In terms of Lighting, the team delivered another solid result towards the objective of fixing the business as both revenue and gross margin were better than expected,” notes Lowe. “The team has done an outstanding job improving quality through improved processes. Over the last four quarters, we've released 30 new products and shipped over 270,000 units of those new products, with excellent performance in the field and high levels of customer satisfaction.”

Operating expenditure (OpEx) has risen from $104m (25.5% of revenue) last quarter to $111m (26.9% of revenue), 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.

Compared with a net loss of $0.66m ($0.01 per diluted share) a year ago, net income was $23.2m ($0.23 per diluted share), up from $22m ($0.22 per diluted share) last quarter and well exceeding the targeted $15-19m ($0.15-0.19 per diluted share). This was driven by another record quarter for Wolfspeed combined with gross margin improvement in all three businesses.

Cash flow from operations was $92.3m (rebounding from $34m last quarter, and up on $51.7m a year ago). Capital expenditure (CapEx) was $39m. Free cash flow was hence $53.3m (compared with just $0.5m a year ago and -$5.8m last quarter), driven by strong working capital management as well as an upfront payment related to wafer supply agreements.

With zero borrowed on the firm’s line of credit and a convertible debt with a face value $575m, cash and investments rose during the quarter from $665.5m to $723.7m. Capital allocation priorities remain focused on expanding capacity in the Wolfspeed business.

“This performance is particularly gratifying when considering the current challenges associated with tariffs and global trade tensions,” says CEO Gregg Lowe. “While we’re certainly not immune to the turmoil in our served markets, our business is demonstrating a resiliency that we believe shows we are on the right track with our strategy.”

For fiscal third-quarter 2019 (ending 31 March), Cree targets revenue of $385-405m, with Wolfspeed up a few percent sequentially as the adoption of silicon carbide (SiC) and gallium nitride (GaN) continues, but LED Products down 5% and Lighting Products down 10% (both due to normal seasonality).

Gross margin is expected to drop slightly to 32%, with Wolfspeed at 48% (up both year-on-year and sequentially), LED Products at 27% (up year-on-year, but down sequentially due to seasonally lower volume and lower licensing revenue) and Lighting Products at 24% (up about 500 basis points year-on-year, but down sequentially due mainly to seasonally lower revenue).

Operating expenses should be cut sequentially to $109m, even as growth investment increases in Wolfspeed. “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,” notes chief financial officer Neill Reynolds.

Including a $0.03-0.04 decrease from the impact of the tariffs, net income is expected to fall to $13-19m ($0.13-0.19 per diluted share).

“For fiscal 2019, we still target capital investments of about $220m [14% of revenue], primarily driven by expanding Wolfspeed’s production capacity to support forecasted long-term customer demand,” says Reynolds. “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 margin,” he cautions.

“We’ve reached the tipping point in the adoption of electric vehicles and the adoption of silicon carbide. Nowhere was this more evident than at the Electronica and CES trade shows where I met with numerous automotive OEMs and tier-1 suppliers who are expanding their electric vehicle product lines,” says Lowe. “A recent analysis by Reuters noted that carmakers have announced plans to spend at least $300bn on electrification projects. Within the EV market, the interest in silicon carbide is extremely high because the value proposition is so strong. Utilizing silicon carbide saves space, reduces cooling requirements, and allows for a smaller, lower-cost battery. These benefits far outweigh the incremental cost,” he adds.

“With this becoming better understood, the conversation is shifting from the merits of utilizing silicon carbide to ensuring that an adequate supply will be available as EV production ramps,” Lowe continues. “These trends are being validated by our long-term [150mm-diameter silicon carbide] wafer supply agreements, which now total in excess of $450m. Our most recent announcement with STMicro alone is worth over a $0.25bn.”

“Our Power products business continues to develop with a sales funnel that is building very nicely. In Q2, we saw good growth in the total value of projects in the pipeline compared to Q1,” notes Lowe. “In RF, the wireless telecom market is moving towards GaN, which enables faster 4G and the transition to 5G given the wider bandwidth, higher frequency and higher efficiency… We are in the process of adding GaN production capacity to meet the increasing demand that we're seeing,” he adds.

Cree has already doubled capacity for its Power business and its Materials business one quarter ahead of schedule. It is also doubling capacity again, and is working to try to pull that in within the previously stated 24-month timeframe.

“This past quarter, we reached an agreement with Arrow Electronics, positioning Arrow as the largest global distributor of our SiC power and GaN RF product portfolios. Arrow’s global salesforce allows us to reach more markets and customers quicker and more efficiently through a proven partner solution,” concludes Lowe.

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Tags: Cree LED Wolfspeed GaN RF SiC Power electronics

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