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Cree (CREE) Q1 Loss Narrower Than Estimated, Revenues Beat

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Cree Inc. (CREE - Free Report) reported first-quarter fiscal 2021 non-GAAP loss of 19 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 22 cents. Notably, the company had reported loss of 3 cents per share in the year-ago quarter.

Revenues of $217 million surpassed the consensus mark by 3.5%. However, the top line fell 11% year over year on declining Wolfspeed and LED Products revenues.

On Oct 18, 2020, Cree inked deal to sell the LED Products business unit to SMART Global Holdings, Inc. (SMART) for $300 million. The transaction, expected to close in the first calendar quarter of 2021, is subject to regulatory approvals. The deal is projected to aid Cree support the industry’s transition from silicon to silicon carbide (SiC).

As a result of the pending divestiture of Cree LED to SMART, LED segment will be classified as discontinued operations starting from the fiscal second quarter. The guidance for fiscal second quarter reflects continuing operations in Wolfspeed.

Quarter Details

Wolfspeed revenues declined 10% year over year to $115.5 million, accounting for 53% of total revenues. The downside was due to coronavirus crisis induced lower demand. The company's Wolfspeed segment's products comprise power devices and RF devices, and SiC and gallium nitride (GaN) materials. In materials business, lower utilization affected performance in the fiscal first quarter. Strength in the power and automotive business, and improved sales of RF devices and gains from 5G transition failed to offset the decline in revenues.

Management is banking on synergies from partnership with Arrow Electronics (ARW - Free Report) , and incremental adoption of SiC products in new applications.

The company’s expertise in SiC technology and expanding clientele despite coronavirus-induced headwinds is instilling confidence in the stock. Shares of Cree have returned 43.5% year to date, compared with the industry’s growth of 18%.

LED Products revenues were $101.1 million, down 12% on a year-over-year basis. Notably, it accounted for 47% of total revenues. The company's LED Products segment's products consist of LED chips and LED components.

Non-GAAP gross margin contracted 600 basis points (bps) to 25% on a year-over-year basis. Segment wise, LED Products gross margin expanded 300 bps to 22% year-ago quarter.

Wolfspeed gross margin contracted 900 basis points (bps) to 37%. Wolfspeed gross margin was impacted by lower utilization in materials business and reduction in factory efficiency on account of the pandemic triggered safety measures. Improving yield and cost benefits in power and RF businesses could not offset margin decline.

Non-GAAP operating loss during the quarter was $28.3 million compared with operating loss of $8 million in the year-ago quarter.

Balance Sheet & Cash Flow

Cree had cash, cash equivalents & short-term investments of $1.14 billion as of Sep 27, 2020 compared with $1.25 billion as of Jun 28, 2020.

During the fiscal first quarter, cash provided by operating activities was $0.4 million compared with $10.5 million in the prior quarter.

Free cash outflow was $115.5 million, compared with free cash outflow of $59.7 million in the prior quarter. Capital expenditure amounted to $115.9 million in the fiscal first quarter.

Cree, Inc. Price, Consensus and EPS Surprise

Cree, Inc. Price, Consensus and EPS Surprise

Cree, Inc. price-consensus-eps-surprise-chart | Cree, Inc. Quote


For second-quarter fiscal 2021, Cree expects revenues in the range of $118 million to $124 million. The Zacks Consensus Estimate is currently pegged at $217.6 million.

The top line is anticipated to gain from ongoing momentum in the power devices business and improving factory utilization in materials business. Also, strength in RF vertical holds promise.

Non-GAAP loss is projected to be 23-27 cents per share. The Zacks Consensus Estimate is currently pegged at loss of 20 cents per share.

Non-GAAP gross margin is expected in the range of 34-36%. Wolfspeed margins are expected to be 37-39%.

Zacks Rank & Stocks to Consider

Cree currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Qorvo (QRVO - Free Report) and Skyworks (SWKS - Free Report) . While Qorvo sports a Zacks Rank #1 (Strong Buy), Skyworks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Skyworks is set to release quarterly results on Nov 2, while Qorvo is scheduled to report earnings on Nov 4.

Long-term earnings growth rate for Skyworks and Qorvo is currently pegged at 12.66% and 12.35%, respectively.

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