Cree’s quarterly revenue grows 22% year-on-year, driven by Wolfspeed’s organic growth of 40

For its fiscal third-quarter 2019 (to end-March), Cree Inc of Durham, NC, USA has reported revenue from continuing operations of $274m, down on $356m a year ago. However, this is up 22% on $225.2m excluding (as discontinued operations) the Lighting Products business unit (LED lighting fixtures, lamps and corporate lighting for commercial, industrial and consumer applications), which Cree agreed on 14 March to sell for about $310m to IDEAL Industries Inc of Sycamore, IL, USA. (After receiving early termination of the waiting period under the Hart-Scott-Rodino Act in April, the transaction is expected to close by the end of fiscal Q4.)

Fiscal	Q3/2018	Q4/2018	Q1/2019	Q2/2019	Q3/2019
Revenue	$356m	$409.5m	$408.3m	$413m	$274m

LED Product sales were $132.8m (48.5% of total revenue), down 8.5% (more than the expected 5%) on $145.2m last quarter and down 7% on $143.3m (63.6% of total revenue for continuing operations) a year ago. LED gross margin was 27.8%, down from 30% last quarter but up from 26.4% a year ago (and above the targeted 27%) as a result of strong execution and a strategy to focus on business where the firm thinks its products are differentiated and valued.

Revenue for the Wolfspeed business (Power & RF devices and silicon carbide materials) was $141.3m (51.5% of total revenue), up 4% on last quarter’s record of $135.3m and up 72% on $81.9m a year ago (just 36.4% of total revenue for continuing operations) – or up over 40% organically (excluding revenue from the Infineon RF Power business, acquired on 6 March 2018). Wolfspeed gross margin was 48.7% (better than the targeted 48%), up from 47.8% last quarter and 48% a year ago, as it continues to balance rapidly increasing capacity while maintaining yield. “Wolfspeed is now our largest business and represents two-thirds of our gross profit from continuing operations,” says CEO Gregg Lowe.

Overall gross margin (on a non-GAAP basis) was 37.9%, up from 34% a year ago (for continuing operations). “We are also very pleased to have recorded gross margin improvements across the business while addressing some softness within our LED business,” says Lowe.

Operating expenses were a slightly better-than-targeted $80m. Net income was $20.4m ($0.20 per diluted share), up from $16.7m ($0.17 per diluted share) a year ago, and exceeding the midpoint of the targeted range due to the record revenue combined with margin improvement for Wolfspeed.

Operating cash flow was $60.7m. Capital expenditure (CapEx) was $37m. Free cash flow was hence $24m, driven by strong working capital management as well as an upfront payment related to Cree’s silicon carbide (SiC) wafer supply agreements. With zero borrowed on the firm’s line of credit and convertible debt with a face value of $575m, cash and short-term investments rose during the quarter to $789m.

“With the anticipated completion of the Lighting divestiture during this quarter, Cree will be well positioned for faster growth and higher margins with a cash balance approaching $1bn upon closing. This transaction will allow us to sharpen our focus to accelerate Wolfspeed’s growth,” says Lowe. “This transaction benefits all stakeholders as it unlocks value, increases management focus on the core business and supports our mission to accelerate silicon carbide and gallium nitride adoption,” he adds.

For its fiscal fourth-quarter 2019 (to end-June), Cree expects revenue to fall slightly to $263-271m. Wolfspeed revenue should still grow nearly 30% year-on-year (due to strong materials and RF demand) but only about 1% quarter-to-quarter. “In our power device business [while still seeing strong growth year-on-year], we are seeing some near-term softness due to the uncertainty around the reduction in EV [electric vehicle] incentives in China, but we remain confident in the EV market and we’ll continue to grow over the long-term,” reckons chief financial officer Neill Reynolds. “LED revenue is expected to be down about 5% sequentially due to market softness, primarily in Asia [versus normal seasonal growth of 5-10% coming out of Chinese New Year].”

Cree targets gross margin of 37%, based on the following segment trends: Wolfspeed margin of 49% (up both year-on-year and sequentially) and LED margin of 25% (down from fiscal Q3, driven mainly by lower sales volume and lower factory utilization).

Operating expenses should rise slightly sequentially to $81m to support continued growth in the Wolfspeed business. Cree expects net income to fall to $12-17m ($0.12-0.16 per diluted share, including a $0.02 decrease from the ongoing impact of trade tariffs).

“The LED market is experiencing softness in demand as global trade uncertainties persist,” notes Lowe. “We remain focused on our target markets, where we believe our customers value technology. We work with these customers to continue bringing innovations to the market,” he adds. “If needed, we will shift manufacturing capacities to Wolfspeed, should the LED market continue to soften.”

“For fiscal 2019, we target capital investment of about $175m, primarily driven by expanding Wolfspeed’s production capacity to support forecasted long-term customer demand,” notes Reynolds. “The underlying investment plan for fiscal 2019 remains unchanged, but the investment is below our prior target [of $220m], primarily due to the timing of receipts and payments for equipment orders,” he adds. “As we continue to ramp this new capacity, we expect some variability in our initial production yields and factory utilization that may reduce our near-term Wolfspeed gross margins,” he cautions.

“Over the last 18 months or so, we’ve made great progress towards our goal of creating a semiconductor powerhouse in silicon carbide and gallium nitride technologies. We’ve grown Wolfspeed by more than 100%, acquired the Infineon RF Power business, more than doubled our manufacturing capacity of silicon carbide materials, jointly announced with Valeo an innovative forward lighting solution for the automotive industry and signed multiple long-term silicon carbide materials agreements [with major customers, including STMicro and Infineon], which in aggregate should generate revenues in excess of $500m… We’re currently discussing long-term supply agreements with additional partners and hope to finalize a few over the coming few quarters,” says Lowe. “Our materials business continues to grow, as the shift from silicon-based power and RF products move to silicon carbide and GaN technologies at an accelerating pace,” he adds. “We are well positioned to meet the growing demand for next-generation silicon carbide solutions over the next five years that support a variety of mega trends including the auto industry’s transition to electric vehicles and the rapid deployment of faster 5G wireless networks.”

“In RF, the wireless telecommunications market is rapidly moving towards GaN, which enables faster 4G and the transition to 5G. This is driven by GaN’s inherent ability to provide wider bandwidth, higher frequency and higher efficiency and the outlook is very promising,” continues Lowe. “Recent reports suggest momentum is building for 5G rollouts in North America, China, Latin America and South Korea. As such, we are in the process of adding GaN production capacity to meet the increasing demand we are seeing. We will work very hard to expedite this capacity addition, but we anticipate demand exceeding supply for the next few quarters.”

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Tags: Cree LED Wolfspeed GaN RF SiC Power electronics

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