Cree has released its fiscal first-quarter 2020 results that ended 29 September 2019. The company has reported revenue of $242.8 million, down 3% on $251.2 million from last quarter and 11% on $274.2 million from 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). Cree sold the business on 13th May to IDEAL Industries Inc of Sycamore, IL, USA.
According to Cree, the recorded 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 between the US and 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. According to Cree’s Chief Financial Officer, Neill Reynold, this marks the third consecutive month of weaker automotive sales trends in China. In RF business, in addition to Huawei, Cree is seeing some push outs and delays in purchasing activity as it relates to the rollout of 5G networks.
On a non-GAAP basis, the company’s 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 in US. 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. The company has zero balance on its line of credit and convertible debt with a face value of $575m.
CEO Gregg Lowe believes, the company’s strategic transformation remains on track as they continue to see strong momentum and growing interest in their silicon carbide and GaN technologies. According to him, the company has delivered results that met or exceeded the upper end of the ranges they set for revenue, gross margin and EPS. Cree continues to confront some headwinds related to geopolitical and macroeconomic issues, and don't expect this to change in the near term. Customers are being more cautious as trade concerns linger, the rollout of 5G is delayed and EV sales in China are down, Lowe said.
For its fiscal second-quarter 2020, Cree targets revenue of $234-240m. LED revenue is expected to be flat on a sequential basis, as the company does not sees any material change in the LED market outlook. 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. The company continues to comply with US federal law as it relates to Huawei and has applied for licenses from the government to potentially resume certain shipments to customers, but is still awaiting a response.
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. According to Lowe, they had a significant scrap event and overall lower yields on their 150mm ramp in the Durham fab, impacting the gross margin in the near term. Lowe expects the utilization effect should reverse when volumes recover, and has plans in place to improve the 150mm MOSFET yields. However, it will take one to two quarters for margins to improve once volumes increase and improvements are implemented on 150mm MOSFET yields.
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.
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 Cree has installed new crystal growers, shifted more LED growers to Wolfspeed, and drove improved productivity across the entire fleet of growers. While the company is 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.
Just two weeks after Cree announced its partnership in New York, it successfully ran its 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 them to de-risk the start-up of a new fab. According to Lowe, this is a very capital-efficient way to build two high-quality modern facilities to support the growing demand they 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, mentioned Lowe.
According to Lowe, beyond electric vehicles, the benefits of silicon carbide carry over to other end markets including telecom, infrastructure, solar, industrial and other applications. Across 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 leadership and expertise positions them well with many of these innovators.