RESULTS
Cree came in above Street on 4Q18 top (+2% above) and bottom (+3% above) line with the biggest disappointments coming on 1Q19 topline guidance for LED (-7% below Street) and Lighting (-8% below Street).
THIS IS WHERE WE ARE WITH CREE
There is a once in a generation change in the materials used in analog electronics. Cree is the dominant IP holder, the largest supplier, and has the best technology. Long term risks include mainly technology diffusion, and in the near term, lack of cash flow and uneven results from LED and Lighting. We are bullish that LED will not create negative value from here and that Lighting can improve off of a terrible base.
The long-term outlook of either becoming the next ADI or the next Qimonda would not be worth the risk on its own but the presence of Greg Lowe tips the scales into positive outcome. Lowe’s biggest challenge is technology diffusion. Why? Because for SiC to be a success, diffusion must happen. The base elements may have to commoditize, and the supply growth has to be astronomical over the next decade. How to achieve these aims while harvesting growth and FCF for Cree? That’s what we are all watching and waiting to see. My bet is in Greg’s favor and in the technology’s favor, but I know this stock will be volatile especially around results.
Let’s just take one snapshot forward picture in our minds to think this through. By the March Quarter 2019 the WS division will be closing in on 35% of revenue changing the margin, growth profile, and future cash flow characteristics of the company. The promise cometh…bit by bit.
WHAT ELSE WE LIKED
- Lighting GM%: lower warranty costs + factory improvements = slow and steady increases on GM% (+120 bps sequentially this Q and expected to continue at similar quarterly cadence).
- Wolfspeed Capacity: ahead of schedule in doubling wafer & power device capacity by end of CY18 from where they exited FY17.
- FCF: expecting -10MM for FY19 ahead of street which was looking for -35MM (on lower capex expectation – company guided F19 capex of 220MM vs. street at 205MM).
WHAT ELSE WE DIDN’T LIKE
- WS GM% forward commentary: warning of potentially lower n-t GM% on Wolfspeed while company ramps capacity.
- Tariffs: EPS guidance for Q1, although still 2 cents above street at the midpoint, includes 2 cent negative impact from July tariffs, bumping up to $0.03/quarter negative impact starting in Q2. However, being the biggest US-based manufacturer of LEDs, tariffs are likely less severe in terms of impact to Cree vs. competitors.
- Q1 Lighting guide: sequentially down -6% attributable to focus on improving GM%. In light of management’s commentary around new product releases and innovation cadence over the last 6 months as the company began to move past warranty issues, and the fact that there is no attributed tariff impact on this segment, the 6% negative expectation leaves much to be desired.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
