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Cree (CREE) Q2 Loss Narrower Than Estimated, Revenues Beat

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Cree Inc. (CREE - Free Report) reported second-quarter fiscal 2021 non-GAAP loss of 24 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 25 cents. Notably, the company had reported loss of 20 cents per share in the year-ago quarter.

Revenues of $127 million surpassed the consensus mark by 4.48%. The top line grew 5.2% year over year on improving Wolfspeed revenues.

On Oct 18, 2020, Cree inked deal to sell the LED Products business unit to SMART Global Holdings, Inc. (or 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 is classified as discontinued operations starting from the fiscal second quarter.

The company also intends to change the name of the company to Wolfspeed and expects the procedure to be complete in the next few quarters.

Quarter Details

Wolfspeed products comprise power devices and RF devices, and SiC and gallium nitride (GaN) materials. In materials business, improving order flow was a positive. Management expects order flow to improve through 2021.

Cree, Inc. Price, Consensus and EPS Surprise

Cree, Inc. Price, Consensus and EPS Surprise

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

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, hold promise.

In power domain, management witnessed solid demand for 650-volt MOSFET platform across a number of industry verticals. Although supply levels are below normal due to COVID-19 safety guidelines in place, Cree made progress in the quarter and expects to enhance its capacity expansion plan.

In RF businesses, increased 5G activity and traction across communications infrastructure providers drove the top line. Moreover, backlog growth driven by 5G roll outs globally, remains encouraging.

Supply constraints owing to continued COVID-19 safety measures weighed on Cree’s non-GAAP gross margin for continuing operations, which came at 35.4%, expanding 90 basis points (bps) on a year-over-year basis.

Wolfspeed gross margin expanded 190 bps sequentially to 38.5% driven by yield and cost improvements in the company’s power and RF businesses.

Non-GAAP operating loss during the quarter was $57.6 million compared with operating loss of $63.4 million in the year-ago quarter.

Balance Sheet & Cash Flow

Cree had cash, cash equivalents & short-term investments of $968.7 million as of Dec 27, 2020 compared with $1.14 billion as of Sep 27, 2020.

During the fiscal second quarter, cash utilized by operating activities was $29 million compared with $5.5 million used in the year-ago quarter.

Free cash outflow was $173.7 million, compared with free cash outflow of $64.9 million in the year-ago quarter.

Guidance

For third-quarter fiscal 2021, Cree expects revenues in the range of $127 million to $133 million. The Zacks Consensus Estimate is currently pegged at $128.2 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 and order flow in materials product line remain encouraging.

Non-GAAP loss is projected to be 21-25 cents per share. The Zacks Consensus Estimate is currently pegged at loss of 21 cents per share.

Non-GAAP gross margin is expected in the range of 34.5-36.5%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader technology sector are Synaptics Incorporated (SYNA - Free Report) and Microchip (MCHP - Free Report) . Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Synaptics and Microchip are scheduled to report their quarterly results on Feb 4.

Long-term earnings growth rate of Synaptics and Microchip is pegged at 10% and 14.9%, respectively.

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