Cree’s LED revenue down 22% year-on-year due to soft market and China trade and tariff concerns

For its fiscal first-quarter 2020 (ended 29 September 2019), Cree Inc of Durham, NC, USA has reported revenue of $242.8m, down 3% on $251.2m last quarter and 11% on $274.2m a year ago, after excluding (as discontinued operations) the Lighting Products business unit (LED lighting fixtures, lamps and corporate lighting for commercial, industrial and consumer applications), which Cree sold on 13 May to IDEAL Industries Inc of Sycamore, IL, USA.

Fiscal	Q1/2019	Q2/2019	Q3/2019	Q4/2019	Q1/2020
Revenue	$408.3m	$413m	$274m	$251.2m	$242.8m

The drop in continuing business was because LED Products revenue of $115.1m (47.4% of total revenue) was down 22% on $146.8m (54% of total revenue) a year ago due to soft market conditions and the ongoing trade and tariff concerns with China. However, this is down only 1.6% on $117m last quarter (better than the expected 2-4% decline) and an increase from 46.6% of total revenue.

Revenue for Cree’s Wolfspeed silicon carbide (SiC) materials, power and gallium nitride (GaN) RF device business was $127.7m (52.6% of total revenue), up fractionally on $127.4m (46% of total revenue) a year ago, but down 5% on $134.2m (53.4% of total revenue) last quarter, as Cree continues to see softness in China related to the change in electric vehicle (EV) subsidies earlier this year. “This marks the third consecutive month of weaker automotive sales trends in China,” notes chief financial officer Neill Reynold. “In our RF business, in addition to Huawei, we are seeing some push outs and delays in purchasing activity as it relates to the rollout of 5G networks,” he adds.

On a non-GAAP basis, gross margin has fallen further, from 37% a year ago and 36.6% last quarter to 31% (although this is above the expected 30.8%). By sector, Wolfspeed gross margin was 46.3%, down from 47.4% a year ago and falling back from 50.2% last quarter, impacted by customer mix related to the Huawei ban. LED gross margin has fallen further, from 28% a year ago and 24.1% last quarter to 19.2%, due mainly to lower factory utilization, but exceeding the expected 17.5%, driven by improved customer mix and cost execution.

Operating expenses (OpEx) were $84m (34.6% of revenue), up from $82m (32.6% of revenue) last quarter and above the targeted $83m.

Compared with net income of $23.2m ($0.23 per diluted share) a year ago and $11.5m ($0.11 per diluted share) last quarter, net loss from continuing operations was $3.6m ($0.03 per diluted share), but this was better than the midpoint of the targeted range of $3-7m ($0.03-0.07 per diluted share) due to the better-than-expected gross margin in the LED business.

Cash from operations was an outflow of -$20m. Capital expenditure (CapEx) was $43m (up from $37m last quarter) as Cree continues to invest for growth to expand capacity in its Wolfspeed business. Free cash outflow was hence -$63m (up from $34.5m).

During the quarter, cash and short-term investments fell back from $1051m to $994m. Cree has zero balance on its line of credit and convertible debt with a face value of $575m.

“Cree’s strategic transformation remains on track. We continue to see strong momentum and growing interest in our silicon carbide and GaN technologies,” says CEO Gregg Lowe. “We delivered results that met or exceeded the upper end of the ranges we set for revenue, gross margin and EPS,” he adds.

“We continue to confront some headwinds related to geopolitical and macroeconomic issues, and we don't expect this to change in the near term,” says Lowe. “Customers are being more cautious as trade concerns linger, the rollout of 5G is delayed and EV sales in China are down,” he adds.

For its fiscal second-quarter 2020, Cree targets revenue of $234-240m. “LED revenue is expected to be flat on a sequential basis, as we don't see any material change in the LED market outlook,” says Reynold. Wolfspeed revenue is expected to be down 3-6% sequentially as Cree continues to deal with the impact (on RF business) of the Huawei ban and softness in 5G network spending and (on the Power business) of lower EV sales in China. “We continue to comply with US federal law as it relates to Huawei and we have applied for licenses from the government to potentially resume certain shipments to our customer, but we are still awaiting a response,” says Reynold.

Gross margin is targeted to be about 30%. This includes LED gross margin of 19.5-20.5%, up modestly on a sequential basis. Wolfspeed gross margin are expected to be down about 400 basis points sequentially to 41-44%, driven by lower factory utilization to manage short-term inventories, a significant scrap event, and lower-than-expected yields as Cree ramps its 150mm SiC MOSFET product. “As we significantly increased our capacity, we are bound to face some manufacturing challenges,” says Lowe. “We had a significant scrap event and overall lower yields on our 150mm ramp in our Durham fab, impacting our gross margin in the near term. We have a clear understanding of the issue, and are implementing improvements as we speak and expect to resolve these issues and get the yield back to target in short order,” he adds. “Utilization effect should reverse when volumes recover, and we have plans in place to improve the 150mm MOSFET yields,” says Reynold. “However, it will take one to two quarters for margins to improve once volumes increase and improvements are implemented on 150mm MOSFET yields,” he adds.

OpEx should rise slightly sequentially in fiscal Q2/2020, to about $85m, as Cree continues to invest for growth in the Wolfspeed business and align its LED cost structure to the current environment.

Net loss is expected to be $8-12m ($0.07-0.11 per diluted share), impacted by about $0.02 due to the ongoing impact of the tariffs.

For fiscal 2020, Cree continues to target capital investment of about $200m. “Capital allocation priorities remain focused on expanding capacity in our Wolfspeed business to support anticipated demand,” says Reynold.

“We are continuing with our efforts to increase the availability of silicon carbide as customers look to leverage the benefits of our [Wolfspeed] silicon carbide and GaN solutions to drive innovation,” says Lowe.

In May, Cree started a significant, multi-year factory optimization plan, to be anchored by an automated 200mm silicon carbide wafer fabrication facility, which in September it announced would be built in Marcy, NY (Mohawk Valley), complementing the ‘mega materials’ factory expansion underway at its US campus headquarters in Durham (forming a ‘silicon carbide corridor’ on the East Coast of the USA).

“The mega materials factory expansion has been ongoing for some time, as we have installed new crystal growers, shifted more LED growers to Wolfspeed, and drove improved productivity across the entire fleet of growers,” notes Lowe. “While we are at the early stages of the creation of the Mohawk Valley fab, the teams have already shifted the prep work into high gear and we expect the work on the site to begin soon,” he adds.

“Just two weeks after we announced our partnership in New York, we successfully ran our first silicon carbide test wafers at State University of New York (SUNY) Albany. The prototype line in Albany was part of the overall incentive package and allows us to de-risk the start-up of a new fab,” Lowe continues. “This is a very capital-efficient way to build two high-quality modern facilities to support the growing demand we expect from the automotive, communications infrastructure and industrial segments.”

Also, in September Cree announced a partnership for automotive propulsion technology provider Delphi Technologies to use Wolfspeed SiC-based MOSFETs in their 800V inverter for EVs, with production beginning in 2022. “The auto industry represents one of the most significant multi-year opportunities for silicon carbide, and this partnership is a strong endorsement for Cree in the device area,” says Lowe.

“Beyond electric vehicles, the benefits of silicon carbide carry over to other end markets including telecom, infrastructure, solar, industrial and other applications,” he adds. “Across our end markets, Cree is engaging with innovative companies who are running up against the limitations of silicon to help them break through and deliver the promise of their next-generation applications, and our leadership and expertise positions us well with many of these innovators.”

See related items:

Delphi partnering with Cree for automotive silicon carbide devices

Cree’s revenue falls 5% in June quarter

Cree completes sale of Cree Lighting to Ideal Industries

Cree investing $1bn to expand SiC materials production and power & RF fab capacity by up to 30-fold

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

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

Tags: Cree LED Wolfspeed GaN RF SiC Power electronics

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