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Cree Revises Fourth-Quarter Outlook on Huawei Headwinds

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Cree, Inc. (CREE - Free Report) recently provided an update on fourth-quarter fiscal 2019 outlook.

On May 15, 2019, the Bureau of Industry and Security (BIS) added Huawei Technologies Co., Ltd. and 68 of its affiliates to the “Entity List” maintained by U.S. Department of Commerce.

This decision bars Cree from supplying products to Huawei and its affiliates, which compelled the company to trim guidance. Further, weaker-than-expected demand for the company’s LED products impacted the outlook.

Notably, Huawei is one of the most prominent customers of Cree’s products and materials. In the fourth quarter of fiscal 2019, the company expects revenues from products and materials in connection with Huawei’s wireless infrastructure to be up to $15 million. This dependence on Huawei is anticipated to weigh on the company’s performance in the days ahead.

Following the news, shares of the company went down around 1.4% on Jun 11.

Updated Guidance

Cree now anticipates fourth-quarter fiscal 2019 revenues to be in the band of $245 million to $252 million(mid-point of $248.5 million), down from its prior range of $263-$271 million (mid-point of $267million). It suggests a decline of 6.9% considering the mid-point.

The Zacks Consensus Estimate is pegged at $266.6 million.

Non-GAAP earnings per share have been forecast to be in the range of 8-12 cents per share, down from the previous guidance of 12-16 cents. The Zacks Consensus Estimate for earnings is pegged at 14 cents per share.

LED product revenues are now projected to be in the range of $113 million to $117 million. The company previously expected LED revenues to be down 5% in fourth quarter owing to weakness in Asian market.

Wolfspeed business is now anticipated to be between $132 million to $135 million in the fourth quarter.

Cree refrained from issuing fiscal 2019 guidance owing to the uncertainty as to when the company will resume supply of products to Huawei.

Q3 Results Sneak-Peak

Cree reported non-GAAP earnings of 20 cents per share in the third quarter of fiscal 2019. The figure surpassed the Zacks Consensus Estimate of 16 cents and was significantly up from 4 cents reported in the year-ago quarter.

Revenues came in at $274 million, up 22% year over year. The figure was also better than the Zacks Consensus Estimate of $275 million.

Bottom Line

Cree operates in a highly competitive market. The company faces significant competition in most of its operating markets such as electric vehicles and LED lighting which might negatively impacts the top line.

Further, increasing investments to enhance Wolfspeed segment is likely to limit margin expansion in the near term.

However, Cree is benefiting from the acquisition of assets of Infineon Technologies’ RF Power Buisness. The buyout expanded its Wolfspeed portfolio with robust power and RF GaN-on-SiC power solutions.

We also note that the buyout of RF Power business will aid to the company in enhancing its competitive position against peers in power solutions market like Analog Devices (ADI - Free Report) , Qorvo (QRVO - Free Report) , among others. Furthermore, this acquisition will position the company well in aiding faster 5G networks, which bodes well.

Zacks Rank & Key Picks

Cree currently carries a Zacks Rank #4 (Sell).

A better-ranked stock in the broader technology sector is Match Group, Inc. (MTCH - Free Report) , flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Match Group has a long-term earnings growth rate of 15.2%.

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