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Cree, Inc. (CREE - Snapshot Report) reported fourth-quarter fiscal 2013 earnings per share of 29 cents, which missed the Zacks Consensus Estimate by a penny. However, earnings of 29 cents were above the year-ago quarter earnings of 16 cents.

Revenues

The company reported revenues of $375.0 million, up 7.5% sequentially and 22.2% year over year and at the midpoint of management’s guidance of $365.0 million to $385.0 million. The increase was due to strong sales of the company’s LED bulb and LED components.

Revenues by Product Line Segments

The LED Products segment comprised 58% of Cree’s sales in the last quarter, up 17.5% from the year-ago quarter to $217.4 million. This segment includes LED chips, LED components, and SiC materials.

Cree’s Lighting Products segment generated 36% of its sales, up 32.5% from the year-ago quarter to $133.6 million attributable to strong sales of commercial indoor fixtures and lighting products. This segment consists of both LED and traditional lighting systems, with its primary focus on LED lighting.

Cree’s Power and RF Products segment generated the remaining 6% of its sales, up 14.3% from the year-ago quarter to $24.0 million. This segment includes power devices and RF devices.

Margins

Reported gross margin for the quarter was 37.5%, down 60 basis points (bps) sequentially but up 270 bps year over year. The sequential decrease was due to an unfavorable product mix.

Operating expenses (SG&A and R&D) of $101.1 million were up 13.3% from $89.2 million in the year-ago quarter. The reported operating margin was 8.2%, up 540 bps from 2.8% in the year-ago quarter. Both research & development (R&D) and selling, general & administrative (SG&A) expenses decreased as a percentage of sales.

The quarter’s GAAP net income was $28.2 million or earnings per share of 23 cents compared with $10.0 million or 9 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expenses, adjusted net income was $34.7 million or earnings per share of 29 cents compared with $18.9 million or 16 cents a share in the year-ago quarter.

Balance Sheet

The company ended the fourth quarter with cash, cash equivalents and short-term investments balance of $1.0 billion, up from $937.1 million in the year-ago quarter. Trade receivables were $192.5 million, up from $181.9 million in the prior quarter.

Cash flow from operations was $61.0 million, up from $45.8 million in the year-ago quarter. Capex was $27.0 million versus $24.9 million in the year-ago quarter. Free cash flow was $34.0 million versus $15.0 million in the year-ago quarter.

Guidance

For fiscal first quarter of 2014, Cree expects total revenue in the range of $380–$400 million, representing a sequential increase of 4.0% at the mid-point.

GAAP gross margin is likely to be approximately 38.5% whereas non-GAAP gross margin is likely to be around 39.0%. Operating expenses are expected to increase by approximately $3 million and the tax rate is likely to be 23.0%.

GAAP earnings per share are expected in the range of 23 to 28 cents, while non-GAAP earnings per share are likely to be in the range of 36 to 41 cents.

Conclusion

Light emitting diode (LED) manufacturer Cree’s earnings missed the Zacks Consensus Estimate by a penny. However, both revenues and earnings were above the year-ago quarter figures.

The company’s focus on product innovation to drive growth is quite encouraging. In the quarter, Cree ramped up its LED bulbs and implemented a series of cost reductions measures in an effort to improve its margin profile.

Management gave a strong first quarter revenue guidance, which reflects strong demand for its products and global growth in LED lighting adoption. Additionally, the company expects better gross margin in the near term led by improvements across product lines due to cost reductions, increased volume and lower cost of new product designs.

We believe that the increasing use of LED technology, its penetration into the domestic market and global push toward energy conservation will increase sales of Cree LED bulbs, helping revenue growth in the near future.

Currently, Cree has a Zacks Rank #2 (Buy). Other stocks that are performing well at current levels include SanDisk (SNDK - Analyst Report), Syntel Inc. (SYNT - Snapshot Report), and Gartner Inc. (IT - Snapshot Report), all carrying a Zacks Rank #1 (Strong Buy).

 

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