Cree Q1 Review: Strong Wolfspeed Growth, Lighting Margins Expansion Drive Results

by Trefis Team
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Semiconductor and lighting company Cree (NYSE:CREE) published its Q1 FY’19 results on Tuesday, October 16. The company reported a stronger than expected set of results that were driven by robust revenue growth in its Wolfspeed segment, which makes power and RF products, as well as gross margin expansion in its LED Products and Lighting segments. Below, we provide some of the key takeaways from the company’s quarterly results and what lies ahead.

Our interactive dashboard analysis on what’s the outlook like for Cree details our forecasts and estimates for the company, as well as our valuation estimate. You can modify any of the key drivers to gauge the impact of changes on the company’s results and valuation.

Wolfspeed Segment Drives Growth

Revenue from the Wolfspeed segment grew by about 93% year-over-year to $127.4 million, accounting for about 31% of the company’s total revenues. Cree has been doubling down on the power and RF products space, considering the higher gross margins and lower levels of commoditization compared to the lighting market. In particular, Cree has been a leader in commercializing silicon carbide (SiC) products which are used in high-voltage applications, including electric vehicles, and the company noted that it had signed a long-term agreement valued at over $85 million to produce and supply SiC wafers to one of the world’s leading power device companies. However, gross margins for Wolfspeed saw a slight decline over the quarter, likely due to the company’s ramp-up of new production capacity.

Lighting Revenues Decline, But Margins Inch Higher

Cree’s lighting business had a relatively mixed quarter, with revenues declining by about 10% to $134 million, as the company was more selective in the businesses it pursued, with an emphasis on improving profitability. However, gross margins increased by almost 200 bps year-over-year to 23.2%, driven by the product mix improvements, cost reductions and improvements in operational efficiencies.

For Q2 FY’19, the company has guided revenues of between 398 million to $418 million with an adjusted EPS of between $0.15 to $0.19. While Cree expects Wolfspeed revenues to rise by approximately 5% sequentially, the lighting and LED businesses are likely to see declines. The company is dedicating a bulk of its $220 million in projected capital expenditures for this year towards expanding its Wolfspeed’s production capacity. The company intends to make the Wolfspeed its largest unit by 2020, targeting annual sales of about $850 million.

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