Wolfspeed is Primary Growth Driver & Projected to be Largest Division at Cree
Cree, Inc. announced revenue for the third quarter of fiscal 2018 was $356 million, which represents a 4% increase compared to revenue of $342 million for the third quarter of fiscal 2017. GAAP net loss for the third quarter of fiscal 2018 was $241 million, or $2.40 per diluted share, which includes impairment charges of $247.5 million attributable to Cree's Lighting Products segment.
This compares to a GAAP net loss of $99 million, or $1.02 per diluted share, for the third quarter of fiscal 2017. Non-GAAP net income for the third quarter of fiscal 2018 was $3.8 million, or $0.04 per diluted share, compared to non-GAAP net income for the third quarter of fiscal 2017 of $0.7 million, or $0.01 per diluted share.
"The third quarter revenues and gross margins were at the top end of our targeted range, and non-GAAP earnings per share exceeded the top end of our range, with each business showing progress," stated Gregg Lowe, Cree CEO. "While we still have a lot of work to do and the progress won't happen in a straight line, Q3 was a good first step and we are committed to executing our new strategic direction going forward."
"From a strategic perspective, our Wolfspeed silicon carbide materials, power and GaN RF businesses are the primary growth drivers of the company. Wolfspeed's performance in Q3 illustrates the tremendous potential of the business with organic revenues increasing nearly 40% year-on-year and gross margins increasing almost 100 basis points.
Gregg Lowe, Cree CEO
"The team is working hard ramping new production to meet growing demand and engineering and production teams are working together to quickly resolve challenges associated with rapid production expansion. The demand signals for Wolfspeed remained strong with the adoption rate of electric vehicles, the increasing use of silicon carbide and GaN technologies in communications, solar and industrial markets received substantial opportunity for the coming decade.
"We are also excited to have acquired Infineon's RF Power business during the quarter which will expand our leadership in RF to increase scale, a broader product offering and additional domain expertise. We are still in the early stages of the integration process, but the management team and the employees are committed to making this a success. Now while the sales restriction with ZTE is creating some short term headwinds in this business it doesn't change the long term strategic benefit of this acquisition.
"For LED Products we concluded from the strategic review process that the business could drive value through greater focus. We have an incredible brand, a great channel, and a tremendous amount of IP positioning us as a leader in high power technology. Going forward, we're going to take those capabilities and focus them in areas like automotive lighting and application optimize solutions that are stickier and have an opportunity for us to create more value, enabling us to deliver modest revenue growth and gross margin expansion and resulting in great free cash flow generation.
"In Q3 the business performed well against these goals with both revenue and gross margin increasing year-over-year. This was driven by solid end demand and good factory execution as we reallocate some manufacturing capacity from LEDs to Wolfspeed.
"Moving on to Lighting, the single objective coming out of the strategic review process was to fix the business. We've made significant changes to our design and product release methodologies resulting in great initial revenue traction on new products and lower warranty claims. We've also improved relationships with our channel and distribution partners giving us a larger footprint and a better customer facing presence.
"In Q3 the hard work of the past year has started to pay off and while it's still early, it feels like the business is turning the corner. Gross margins improved more than 300 basis points quarter-over-quarter and we target higher revenue and additional margin improvement in Q4. This is being driven by a combination of factors; continued improvements in quality, better channel engagements, and increasing demand for our new products.
"The company's new strategic plan will create a pretty significant transformation. Wolfspeed, our smallest and most profitable business today will become our largest and most profitable business over the timeframe of the long-range plan, roughly quadrupling in revenue by 2022. Our LED business will see modest growth by focusing on stickier segments and our Lighting business will also see modest growth from where we're at today with a focus on improving quality and margins.
"This companywide mix shift, combined with some efficiency improvements, will enable us to drive significant growth in gross margins about 1500 basis points of improvement to around 40% establishing a 40/20/20 business model, 40% gross margins, 20% OpEx, and 20% operating margins.
"To help facilitate this model, we've made some organizational changes. Our semiconductor manufacturing assets which were split between the Wolfspeed operation and LED have been combined under one leader. Rick McFarland, who has been with Cree for seven years and has extensive experience from Freescale before that, will be running the combined operations. Putting them under one leader will give us an enormous opportunity for efficiency improvements, yield improvements, and equally important, will allow us to capitalize on the fungibility of those asset as we shift towards our higher-margin type opportunities.
"We've also combined our sales team in the Wolfspeed and LED semiconductor organizations under the leadership of Thomas Wessel. Thomas has tremendous experience in the semiconductor industry working for many years at Texas Instruments and more recently as the Global Sales and Marketing lead for Analog Devices. He brings to Cree a significant amount of experience in automotive, communications, industrial and distribution.
"All-in-all, we still have a lot of work to do and the progress won't happen in a straight line. Fixing the lighting business, focusing the LED business and substantially growing Wolfspeed will require tremendous execution in the face of multiple challenges. Q3 is a good first step and we're committed to executing the new strategic plan going forward," concluded Lowe.