For fiscal second-quarter 2015 (ended 28 December 2014), Cree Inc of Durham, NC, USA has reported revenue of $413.2m, down 3.4% on $427.7m last quarter but similar to $415.1m a year ago and in the upper half of the target range of $400-420m due to strong growth in LED lighting.
Power & RF product revenue was $31m, level with last quarter but up 18% on $26.4m a year ago (remaining about 7% of total revenue).
Lighting product revenue was $230m, up 33% on $173.7m a year ago and up 3% on $223.1m last quarter (rising from 42% of total revenue through 52% to 56% of total revenue). Double-digit growth in LED fixtures more than offset the expected lower LED bulb sales).
LED product revenue (LED components, LED chips, and silicon carbide materials) was $152m, down 29% on $215m a year ago and 13% on $173.6m last quarter (falling from 52% of total revenue through 41% to 37% of total revenue). The drop was due to lower LED demand (primarily from China).
"Growth in lighting and power & RF has been offset in the first half of fiscal 2015 by the decline in sales of LED products," notes chairman & CEO Chuck Swoboda.
Although still down on 38.2% a year ago, on a non-GAAP basis, gross margin has rebounded from 32.4% last quarter to 33.9% (above the targeted 33.5%). This is due primarily to the lower mix of LED sales being more than offset by Lighting product gross margin rising from 24.9% to 28.1% (driven by improved lighting execution and a more favorable mix). LED product gross margin rose only slightly from 39% last quarter to 39.1% (due to strong factory cost management being offset by significantly lower factory utilization). Power & RF product gross margin fell slightly from 57.6% to 55.5% (due to product mix).
Operating income was $34m (operating margin of 8.2%, down on 14% a year ago but level with last quarter and 50 basis points higher than targeted). This was despite operating expenses rising from $103.5m last quarter to $106m. This "reflects the improvement in our lighting business and ability to offset the slowdown in LEDs," says Swoboda.
Net income was $37.9m ($0.33 per diluted share), down from $56.8m ($0.46 per diluted share) a year ago but up on $29.6m ($0.24 per diluted share) last quarter. However, without an $0.08 per share tax benefit (related to the retroactive reinstatement of the US federal R&D tax credit at the end of December), net income would have been $29m ($0.25 per diluted share, still above last quarter, and above the targeted $0.20-0.24).
Cash generated from operations was $14.8m (down from $98.8m a year ago but up from $13.3m last quarter). Capital expenditure was $55m, comprising the regular patent spending of about $5m plus property, plant & equipment spending of $50m (roughly level with $49.8m a year ago but down from $63.4m last quarter, and in line with the lower spending planned for fiscal 2015). Free cash flow was hence minus $40m.
In addition, Cree spent $266m to repurchase 8.1 million shares of its common stock, plus $80.5m in December to purchase a 13% stake in Taiwan-based LED epitaxy, chip and packaging firm Lextar Electronics Corp.
Altogether during the quarter, after also drawing $105m on its line of credit, Cree's total cash and investments fell by $274.9m to $829.9m.
Based on the view that Cree is well-positioned to continue to grow the company and increase profits over the next several years, in October the board of directors authorized an increase in the stock repurchase program to $550m in fiscal 2015 (in the fiscal year to date, Cree has spent $320m to repurchase 9.3 million shares). Subsequently, in January, Cree closed on a $500m working capital line of credit facility (having repaid the original $150m facility). Its purpose is to fund share repurchases, capital expenditures and other general business needs, as well as providing short-term flexibility to optimize returns on the firm's cash and investment portfolio.
Free cash flow was negative $40m due primarily to a $59m working capital build resulting mainly from a $43m decrease in accounts payable (related to higher purchases earlier in the quarter versus last quarter) and a $21.8m increase in inventory to $332.5m (rising from 96 days to 108 days) as LED inventory reductions were offset by an increase in lighting inventory.
The lighting inventory build was higher than forecast due to a combination of increased in-transit inventory (to account for recent increases in shipping times from Asia) and a short-term increase as Cree qualifies and ramps up two new subcontractors. Excluding these two items, overall inventory was similar to last quarter. For fiscal Q3, Cree targets lower inventory levels as new subcontractors come online (which should bring inventory back down to the 90-day target) as well as lower capital expenditure, which should support positive free cash flow.
"The market for LED lighting is still in the early stages, our new product pipeline is strong, sales momentum is building and our brand is growing in the market," says Swoboda. "As evidenced by our significant share repurchases in Q2, we believe we are on the right track to continue to grow the company and increase profits over the next several years," he adds.
Business highlights during the quarter include the following:
introducing the SC5 Technology Platform for lighting-class high-power LEDs (which doubles light output, enabling system costs to be cut by up to 40% in most lighting applications), leading to the launch of the XLamp XHP50 and XHP70 LEDs (the first Extreme High Power LEDs based on the SC5 Technology Platform); launching the third-generation ('GEN3') Cree LED Bulb (which looks more like an incandescent light bulb due to the new 4Flow filament design); acting to protect Cree's intellectual property by filing lawsuits at the US International Trade Commission (ITC) and the US District Court for the Western District of Wisconsin against Feit Electric Company Inc and its Asian supplier Unity Opto Technology Co Ltd.
For fiscal third-quarter 2015 (ending 29 March), Cree targets revenue of $395-415m, consisting of lighting sales flat to slightly higher sequentially (as higher indoor LED fixture sales offset seasonally lower outdoor sales), LED sales down by single digits (due to normal seasonality and the Chinese New Year holiday), and Power & RF sales similar to fiscal Q2. "We should start to see the impact of the GEN3 bulb on our Q3 sales as it gains more shelf space and rebates become available in more markets," says Swoboda. Gross margin is expected to fall slightly to 33.5%, with Lighting product gross margin improving due to factory productivity improvements and cost reductions, while LED and Power & RF product margins fall slightly due to lower factory loading. Operating expenses should be similar to fiscal Q2, as increased spending to fund Cree's IP enforcement strategy is offset by reductions in other areas. Net income is expected to be $23-28m ($0.21-0.25 per diluted share).
"The LED business seems to have stabilized in the current revenue range, and we target overall company revenue growth in our fiscal Q4," says Swoboda. "We are optimistic about the long-term growth prospects for LEDs based on initial customer feedback and our new SC5 based products and overall increased LED lighting adoption, but it will take time to work through the design cycles and current market conditions," he adds.
