For its fiscal first-quarter 2013 (ended 23 September 2012), Cree Inc of Durham, NC, USA has reported record revenue of $315.8m, up 3% on $306.8m last quarter and 17% on $269m a year ago (and in the middle of the $305-325m targeted range, with LED, Lighting and Power & RF revenues all in line with the firm’s forecast).

Fiscal	Q1/2012	Q2/2012	Q3/2012	Q4/2012	Q1/2013
Revenue	$269m	$304.1m	$284.8m	$306.8m	$315.8m

 
Although Power & RF product revenue fell 4% from last quarter’s $21m to $20.1m, LED product revenue rose 1.4% from $185m to $187.6m. Lighting product revenue was $108.1m, up 7% on $101m last quarter due to continued good growth from both agent and direct sales channels. In fiscal Q3/2012, Cree transitioned to new agents during the integration with Ruud Lighting Inc of Racine, WI, USA (acquired in August 2011), causing greater-than-expected disruption to the project pipeline. However, last quarter saw a recovery in revenue via momentum with sales agents.

On a non-GAAP basis, gross margin has risen from 36.3% last quarter to 37.5% (up slightly on 37.4% a year ago, and above the targeted 37%). Again, it was driven by a combination of factory cost reductions, slightly higher factory utilization, product mix and lower-cost new products. By sector, gross margins were 40.2% for LED products, 31.6% for Lighting products, and 51.8% for Power & RF products.

Operating expenses have fallen from $81.4m last quarter to $80.9m ($1m less than targeted due to lower R&D spending). Hence, although still down from 12.2% a year ago, operating margin has continued to recover, from 9.8% last quarter to 11.9%.

“We continue to closely manage inventory across our factories, while working to respond to short lead-time expectations in both LED and lighting markets,” says chairman & CEO Chuck Swoboda. Overall, inventory was reduced by $9.2m to $179.7m (representing 81 days, down from 85 days), due mainly to a reduction in work-in-process inventories.

Net income has continued to rise, to $31.8m, up on $29.2m last quarter and up 13% on $28.1m a year ago.

“We started the year strong in our fiscal first quarter with record revenue and non-GAAP earnings per share at the high end of our target range due to improvement in gross margins and lower-than-targeted operating expenses,” summarizes Swoboda. “Our results are beginning to demonstrate the enormous leverage we have in our fully integrated vertical lighting model as we continue to increase performance and reduce costs in LED components,” he adds. “We are seeing the positive impact these gains have on our LED and Lighting businesses.”   

Cash flow from operations grew again, from $72m last quarter to $86m. Capital expenditure has been cut again, from $25m to $18m ($13m in property, plant and equipment additions, plus $5m related to patents). “The last several quarters have demonstrated our ability to convert R&D investments into innovations that result in strong free cash flow [of $68m, up from $47m last quarter],” says Swoboda. “This is a different model than most other companies in the LED or lighting industry today, and our balance sheet gives us the ability to continue to invest in growing our business and the market for LED lighting.”

During the quarter, due to good working capital management, focused capital spending and higher profitability, cash and investments rose by $71.8m, from $745m to $816.3m.

“Overall, company backlog is ahead of this point last quarter, with lighting and LEDs trending higher and Power & RF at similar levels,” says Swoboda. “We are focused on using new product innovation to drive growth through share gains against traditional technologies and opening new applications for LED lighting,” he adds. During the quarter, Cree launched the XLamp XP-E2 LED (delivering higher lumens per watt and more lumens per dollar to lower system costs); announced THE EDGE High Output LED luminaires delivering performance and saving improvements for area and flood light applications; and introduced a new 10-year warranty covering the industry’s broadest range of products. “We continue to be encouraged by our progress in LED lighting, but the macroeconomic environment is a headwind on our growth outlook and our customers’ outlook,” Swoboda cautions.  

For its fiscal second-quarter 2013 (to end-December 2012), Cree expects revenue to grow to $320-340m, comprising solid growth in lighting, LED product sales flat to slightly higher, and Power & RF sales flat to slightly higher. Non-GAAP gross margin should rise to 38.5% (building on momentum from the last several quarters by delivering higher revenues from a similar fixed cost base and a higher mix of lower-cost new products). However, operating expenses should rise by $5m, due partly to increased sales & marketing to support the higher revenue as well as new product promotion. Nevertheless, net income should be $31-36m.

“For fiscal 2013, we are continuing to actively manage our capital spending,” says interim chief financial officer Michael E. McDevitt. “In the near term, we target similar levels of investment as Q1 to support our strategic priorities to lead the market, drive adoption of LED lighting, accelerate cost reductions and support incremental capacity as needed.”