Fast-Growing Wolfspeed Segment In Focus As Cree Reports Fiscal Q1 Results

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Cree (NYSE:CREE) is expected to publish its Q1 FY’19 results on October 16, reporting on a quarter that is likely to see earnings improve on a year-over-year basis, driven by the Wolfspeed business and potential cost improvements in the lighting space. Cree has guided for revenues of between $395 million to $415 million for the quarter, marking a 12% year-over-year increase at the midpoint, with adjusted EPS projected to come in between $0.10 to $0.14. In this note, we take a look at some of the key factors that we will be watching when the company publishes results Tuesday.

Wolfspeed Is Becoming Increasingly Important To Cree 

While Cree operates in three core segments, namely Lighting, LED and Wolfspeed, it has been steadily reducing its reliance on the competitive and commoditized lighting space, which was once its bread-and-butter. During FY’18, lighting sales accounted for just 38% of total revenue, down from about 55% two years ago. On the other hand, the Wolfspeed segment, which makes power and RF products, is playing a growing role in the company’s business, accounting for 22% of revenues up from 11 % two years ago and Cree is looking to make Wolfspeed its largest business segment, quadrupling sales to about $850 million by 2022. The segment’s products – which include silicon carbide material, power switching devices, and RF components – cater to high-growth markets including electric vehicles, military and aerospace applications.

While overall shipments from the business have been growing, ASPs have also been rising (up 21% last year), due to a greater mix of a higher priced material substrate and RF products, and it’s likely that the trend will continue into Q1. The company has also been expanding its manufacturing footprint for these products while broadening its product portfolio. For instance, Cree’s has been a leader in commercializing silicon carbide products which are used in high-voltage applications, including electric vehicles, solar PV and 5G base stations, helping to improve efficiency and cut costs for these end products. On the capacity front, Cree is looking to double wafer capacity for external material customers while doubling its power device capacity by the end of calendar 2018, compared to the end of 2017. That said, the company’s gross margins for Wolfspeed’s products could see some pressure in the near term, on account of the variability of its initial production yields and utilization of this new capacity.

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