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Cree, Inc.’s (CREE - Snapshot Report) fourth-quarter fiscal 2014 earnings per share of 33 cents exceeded the Zacks Consensus Estimate by 2 cents driven by strong demand for lighting products.

Revenues

The company reported revenues of $436.3 million, up 7.6% sequentially and 16.3% year over year. The increase was due to strong sales of LED (Light emitting diode) fixtures and LED bulbs. However, revenues were at the lower end of management’s guidance of $430.0 to $460.0 million and missed the Zacks Consensus Estimate of $445.0 million.

Revenues by Product Line Segments

The LED Products segment comprised 46% of Cree’s sales in the last quarter, up 8% from the year-ago quarter to $199.5 million. This segment includes LED chips, LED components and SiC materials.

Cree’s Lighting Products segment generated 48% of sales, up 56% from the year-ago quarter to $208.2 million attributable to strong sales of LED fixtures and lighting products. This segment includes both LED and traditional lighting systems, but focuses primarily on LED lighting.

Cree’s Power and RF Productssegment generated the remaining 6% of sales, up 19% from the year-ago quarter to $28.6 million. This segment includes power devices and RF devices.

Margins

Reported gross margin for the quarter was 37.2%, up 20 basis points (bps) sequentially but down 30 bps year over year. The sequential increase was due to higher revenues and a favorable product mix.

Total operating expenses of $130.5 million were up 18.8% from $109.9 million in the year-ago quarter. As a percentage of sales, research & development expenses increased, while selling, general & administrative expenses decreased. The net result was an operating margin of 7.3%, down 90 bps from 8.2% in the year-ago quarter.

The quarter’s GAAP net income was $29.8 million or earnings per share of 24 cents compared with $28.2 million or 23 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expenses, adjusted net income was $37.8 million compared with $34.7 million in the year-ago quarter.

Balance Sheet

The company ended the fourth quarter with cash, cash equivalents and short-term investments balance of $1.16 billion, down from $1.22 billion in the prior quarter. Trade receivables were $225.2 million, up from $222.3 million in the prior quarter.

Cash flow from operations was $91.1 million, up from $60.2 million in the prior quarter. Capex was $58.9 million versus $36.2 million in the prior quarter. Free cash flow was $26.8 million versus $19.3 million in the prior quarter.

Guidance

For fiscal first-quarter 2015, Cree expects total revenue in the range of $440–$465 million, representing a sequential increase of 3.7% at the mid-point.

GAAP gross margin is likely to be near 36.9%, whereas non-GAAP gross margin is likely to be around 37.5%. Operating expenses are expected to be flat sequentially and the tax rate to be 21.5%.

GAAP earnings per share are expected in the range of 25 to 30 cents, while non-GAAP earnings per share are likely to be in the range of 40 to 45 cents. The Zacks Consensus Estimate for the upcoming quarter is pegged at 37 cents.

Conclusion

LED manufacturer Cree’s top-line numbers exceeded our expectations and also compared favorably on a year-over-year basis.

Cree’s focus on product innovation to drive growth is quite encouraging. In the quarter, Cree ramped up many new lighting products including the CXB High-Bay, OSQ parking, LED T8 replacement and SmartCast light fixtures. The company also implemented a series of cost reduction measures to improve the margin profile.

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

Currently, Cree has a Zacks Rank #3 (Hold). Stocks that have been performing well and are worth a look include Analog Devices (ADI - Analyst Report), Agilent Technologies (A - Analyst Report) and Garmin Ltd. (GRMN - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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