Cree Surpasses Earnings Estimates In Q1, Misses Revenues

Cree Inc. (NASDAQ:CREE) reported non-GAAP earnings of 4 cents per share in fiscal first-quarter 2018. The figure beat the Zacks Consensus Estimate by a penny but was significantly down from 15 cents reported in the year-ago quarter.

The company’s revenues totaled $360 million, down 2.9% year over year. The figure missed the Zacks Consensus Estimate of $361 million by a slight margin.

The company noted that it is on track to increase material capacity that includes doubling wafer capacity as well as increasing power production and capacity of RF device, which is expected to be completed by the end of fiscal 2018.

Cree stock has gained 18.5% year to date, underperforming the 20.5% rally of the industry it belongs to.

Quarter Details

Cree has three reportable segments – Lighting Products, LED Products and Wolfspeed.

Lighting Products revenues of $149.7 million, which accounted for 42% of total revenue, were down 19% on a year-over-year basis. Revenues were down 3% sequentially and met the lower end of the guided range.

Lighting Products gross margin decreased 250 basis points (bps) sequentially. Due to continued weakness in the North American market, commercial lighting revenues were down. Additionally, the effect of the hurricanes and quality issues took a toll. Warranty costs were also high.

LED Products revenues were $144.5 million, up 5% a year-over-year basis, and accounted for 40% of total revenue. The segment saw a 1% sequential increase in revenues, which met the upper end of the guidance. There was a 100 bps sequential increase in gross margin for this segment, primarily attributable to a good product mix.

Wolfspeed revenues surged 33% year over year to $66.2 million and accounted for 18% of total revenue. Revenues grew 9% on a sequential basis and were ahead of the guidance. Gross margin saw a 350 bps increase from the prior quarter, which was backed by optimized utilization of the factories and production improvement.

Non-GAAP gross margin was 28.3%, which contracted roughly 200 bps on a year-over-year basis. Non-GAAP operating margin contracted 400 bps from the year-ago quarter to 0.8%.

Balance Sheet & Cash Flow

Cree exited fiscal first-quarter 2018 with cash, cash equivalents & short-term investments of $624.8 million. Inventory days on hand declined two days from June to 96 days at the end of September. Cree’s near-term inventory target remains at 90-100 days.

During the quarter, cash from operations was $54 million and capital expenditures were $39 million including patents, which resulted in free cash flow of $15 million.

Guidance

For fiscal second-quarter 2018, Cree expects revenues in the range of $340-$360 million. Non-GAAP earnings are projected to be 4 cents per share.

Lighting revenues are projected to decline sequentially by around 8% owing to weakness in the North American market and impact of the recent hurricanes.

LED revenues are projected to be in the same range as in the first quarter. Wolfspeed segment is expected to gain traction, with capacity constraints being offset by increased productivity.

Non-GAAP gross margin is targeted at approximately 28.5%. Lighting margins are expected to increase due to certain cost related improvements, while Wolfspeed and LED margins are anticipated to decline.

Non-GAAP operating expenses are projected to be more or less $100 million, in line with the first quarter.

For fiscal 2018, Cree projects capital spending of almost $220 million for the expansion of Wolfspeed's production capacity. The company targets fiscal 2018 free cash outflow of $20 million due to increased expenses.

Zacks Rank

Currently, Cree has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology space are Vishay Intertechnology (NYSE:VSH) , sporting a Zacks Rank #1 (Strong Buy) and Applied Materials, Inc. (NASDAQ:AMAT) and Guidewire Software, Inc. (NYSE:GWRE) , both with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Vishay Intertechnology, Applied Materials and Guidewire Software are currently pegged at 20.6%, 17.1% and 15.8%, respectively.

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