Cree Narrows Losses on Successful Restructuring

GAAP net loss for Q4 FY16 narrowed to $11 million from $88 million

c1Lighting products manufacturer Cree Inc. (NASDAQ: CREE) announced its Q4 FY16 and full year FY16 financial results on August 16th, 2016. Cree reported revenue of $1.63 billion in FY15. Read more about Cree’s financial results below.

The Durham, North Carolina-based Company is the largest manufacturer of lighting-class light emitting diode (LED) products, lighting products, and semiconductor products for power and radio-frequency (RF) applications. The Company’s provides indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems. The Company operates through three segments: Lighting Products, LED Products, and Power and RF Products. The Company’s Lighting Products segment offers LED lighting systems and bulbs. The Company’s LED Products segment offers LED components, LED chips and silicon carbide (SiC) materials. The Company’s Power and RF Products segment offers power devices and RF devices.

Q4 FY16 financial highlights

c2During Q4 FY16, Cree reported a 2% growth in revenue to $388 million compared to $382 million in the year-ago period, and a 6% increase compared to Q3 FY16. The results reflect the successful restructuring of its LED business, improved commercial lighting fundamentals refocused on premium LED bulbs, and the significant unlocking of value with the agreement to sell its Wolfspeed Power and RF division to Infineon Technologies AG.

On a GAAP basis, Cree’s gross margin widened to 29.1% in Q4 FY16 from 20.1% in the year-ago quarter. On a non-GAAP basis, gross margin expanded to 30.8% in Q4 FY16 from 20.9% in the prior-year period.

As a result of the restructuring efforts, Cree’s GAAP net loss for Q4 FY16 narrowed to $11 million, or $0.11 per diluted share, due to operating margin improvements as well as one-time items, compared to net loss of $88 million, or $0.83 per diluted share, in the year-ago period. On a non-GAAP basis, net income for the reporting quarter was $19 million, or $0.19 per diluted share, compared to net loss of $21 million, or $0.19 per diluted share, in the year-ago period.

For FY16, Cree’s revenue slipped 1% to $1.62 billion compared to revenue of $1.63 billion for FY15. The Company’s GAAP net loss narrowed to $22 million, or $0.21 per diluted share, compared to net loss of $65 million, or $0.57 per diluted share, in FY15. On a non-GAAP basis, net income grew to $88 million in FY16, or $0.86 per diluted share, compared to $71 million, or $0.63 per diluted share, a year ago.

Segmental highlights

Lighting Products: This segment’s revenue fell by 13% Y-o-Y to $198.41 million during Q4 FY16. The segment accounted for 51% of the overall revenue during the reporting quarter, down from 60% in the year-ago period.

For the full year FY16, this segment’s revenue fell by 2% Y-o-Y to $899.13 million, and accounted for 55% of the overall revenue.

LED Products: This segment’s revenue grew by 30% Y-o-Y to $159.07 million during Q4 FY16. The segment accounted for 41% of the overall revenue during the reporting quarter, up from 32% in the year-ago period.

For the full year FY16, this segment’s revenue grew by 1% Y-o-Y to $610.83 million, and accounted for 38% of the overall revenue.

c3Power and RF Products: This segment’s revenue was almost flat at $30.9 million in Q4 FY16 versus $30.7 million in the year-ago period. The segment accounted for 8% of the overall revenue during the reporting quarter, constant as compared to the year-ago period.

For the full year FY16, this segment’s revenue fell by 6% Y-o-Y to $116.65 million, and accounted for 7% of the overall revenue.

Other highlights

Cash and investments: During Q4 FY16, Cree’s cash and investments decreased by $15 million to $605 million versus Q3 FY16. Accounts receivables decreased by $13 million to $166 million versus Q3 FY16, with days sales outstanding of 38. Inventory increased by $2 million to $300 million versus Q3 FY16 and represents 98 days of inventory. Free cash flow increased $47 million to $41 million as compared to Q3 FY16.

Divestment of Wolfspeed: On July 4th, 2016, Cree announced that it has entered into a definitive agreement with Infineon Technologies AG to sell its Wolfspeed Power and RF division for $850 million in cash.

In 2015, Cree announced its plans to become a more focused LED lighting company, and also announced the proposed IPO of Wolfspeed to create a more focused Power and RF division. Subsequently, Cree was approached by several parties, including Infineon, that were interested in acquiring the business directly. Divesting Wolfspeed is targeted at reducing short-term profits, but increasing free cash flow.

Wolfspeed generated pro-forma revenue of $173 million in the 12 months ended March 27th, 2016. Both Cree’s Board of Directors and Infineon’s Supervisory Board have approved the transaction. J.P. Morgan Securities LLC served as the company’s financial adviser on the transaction, which is expected to close by the end of calendar year 2016, and is subject to customary closing conditions and regulatory approvals. The Company targets approximately $585 million of net proceeds after tax and other deal related costs.

Litigations: Cree received a favorable Initial Determination ruling from the U.S. International Trade Commission in the company’s case against Feit Electric and its Asian supplier, Unity Opto. Cree also reached favorable agreements to settle patent disputes with Harvatek and Kingbright.

Guidance for FY17

For Q1 FY17, Cree targets consolidated revenue, which includes both continued and discontinued operations, in a range of $356 million to $378 million. Consolidated GAAP net income is targeted at $5 million to $6 million, or $0.05 to $0.06 per diluted share. Consolidated non-GAAP net income is targeted in a range of $10 million to $16 million, or $0.10 to $0.16 per diluted share. Targeted consolidated non-GAAP earnings exclude $23 million of expenses related to stock-based compensation, amortization or impairment of acquisition-related intangibles, and transaction costs related to the sale of the Wolfspeed business.

For continuing operations, Cree has forecasted revenue in the range of $310 million to $330 million. GAAP net income from continuing operations is targeted at $2 million to $3 million, or $0.02 to $0.03 per diluted share. Non-GAAP net income from continued operations is targeted in a range of $6 million to $11 million, or $0.06 to $0.11 per diluted share. Non-GAAP earnings from continuing operations exclude $20 million of expenses related to stock-based compensation and the amortization or impairment of acquisition-related intangibles.

Stock Performance

c4Cree’s stock ended the day at $24.23, gaining 0.96%, at the close on Monday, August 29th, 2016, having vacillated between an intraday high of $24.38 and a low of $24.01 during the session. The stock’s trading volume was at 868,283 for the day. The Company’s market cap was at $2.42 billion as of Monday’s close.

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