Despite Global Trade Tensions and Tariffs, Cree Reports Solid Q2 of Fiscal Year 2019

February 04, 2019 by Scott McMahan

Cree, Inc. announced robust second quarter results of fiscal 2019, which ended December 30, 2018. Revenue for the second quarter of fiscal 2019 increased 12% from $368 million of the same quarter of 2018 to reach $413 million. The company posted a GAAP net loss for the second quarter of fiscal 2019 of $2 million, or $0.02 per diluted share. This loss compares to a GAAP net income of $14 million, or $0.14 per diluted share, for the second quarter of fiscal 2018.

On a non-GAAP basis, Cree reported a net income for the second quarter of fiscal 2019 of $23 million, or $0.23 per diluted share, compared to a non-GAAP net loss for the second quarter of fiscal 2018 of $1 million, or $0.01 per diluted share.

"We delivered excellent results in the second quarter, with non-GAAP earnings per share that exceeded the top end of our target range driven by another record quarter for Wolfspeed combined with gross margin improvement in all three businesses," stated Gregg Lowe, Cree president and CEO. "This performance is particularly gratifying when considering the current challenges associated with tariffs and global trade tensions. While we're certainly not immune to the turmoil in our served markets, our business is demonstrating a resiliency that we believe shows we are on the right track with our strategy."

Business Outlook

For the third quarter of fiscal 2019 ending March 31, 2019, Cree targets revenue of $385 million to $405 million. The company's GAAP net loss is projected at $5 million to $13 million, or $0.05 to $0.12 per diluted share. Non-GAAP net income is predicted to be from $13 million to $19 million or $0.13 to $0.19 earnings per diluted share.

The targeted non-GAAP income excludes a total of $25 million in expenses and the net of tax, related to stock-based compensation expense as well as the amortization or impairment of acquisition-related intangibles, the interest accretion of the issue costs and fair value adjustments on its convertible notes, and executive severance. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree's Lextar investment.

Discussion of Performance

One year ago Cree, on an investor day, outlined its plans for the next fiscal year. They included having Wolfspeed serve as the growth engine for the company, focusing their LED business onto more differentiated markets, and fixing the lighting business.

Greg Lowe stated, "In the year since we have made tremendous progress on all three initiatives. Wolfspeed achieved record results in Q2 as revenue increased 92% year over year and more than 50% on an organic basis. Wolfspeed growth margins improved quarter on quarter and were in line with our targets as the team continues to do an excellent job balancing the challenges of rapidly increasing capacity while maintaining yields."

From our vantage point, it is pretty clear that we have reached a tipping point in the adoption of electric vehicles and the adoption of silicon carbide. Nowhere was this more evident than at the Electronica and CES trade shows where I met with numerous automotive OEMs and tier-one suppliers who are expanding their electric vehicle product lines."

Greg added, "Within the EV market the interest in silicon carbide is high because the value proposition is so strong. Using silicon carbide saves space, reduces cooling requirements, and allows for a smaller, lower cost battery. These benefits far outweigh the incremental cost. And with this becoming better understood the conversation is shifting from the merits of using silicon carbide to ensuring that an adequate supply will be available as EV production ramps.

He said, "these trends are being validated by our long-term wafer supply agreements which now total in excess of $450 million dollars. Our most recent announcement with STMicro alone is worth over a quarter billion dollars.

Our power products business continues to develop with a sales funnel that is growing very nicely.

In Q2 we saw good growth in the total value of projects in the pipeline compared to Q1."

Greg noted, "In RF the wireless telecom market is moving towards GaN, which enables faster 4G and the transition to 5G given the wider bandwidth, higher frequency, and higher efficiency. The outlook is very promising, and we are in the process of add GaN production capacity to meet the increasing demand that we are seeing.

Finally, this past quarter we reached an agreement with Arrow Electronics, positioning Arrow as our largest global distributor of our silicon carbide power and GaN RF product portfolios."