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Cree (CREE) Down 7.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Cree (CREE). Shares have lost about 7.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cree due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Cree Q2 Loss In Line With Estimates, Revenues Fall Y/Y

Cree Inc. reported non-GAAP loss of 10 cents per share in second-quarter fiscal 2020, which matched the Zacks Consensus Estimate. The company had reported earnings of 21 cents per share in the year-ago quarter.

The loss can be attributed to a $8.3 million (or 5 cents per share) reserve on inventory related to Huawei. The reserve was included due to the ban on shipment of products to Huawei by the U.S. Chamber of Commerce.

Revenues came in at $239.9 million, which beat the consensus mark by 1.6% but fell 14% year over year.

Quarter Details

Post the divestiture of its Lighting segment, Cree now has two reportable segments — Wolfspeed and LED Products.

Wolfspeed revenues declined 11% year over year to $120.7 million and accounted for 50.3% of total revenues. The drop in revenues was due to weakness in the power business, owing to a decline in electric vehicle sales in China after the withdrawal of government subsidies.

LED Products revenues were $119.2 million, down 18% on a year-over-year basis and accounted for 49.7% of total revenues. Softness in China amid the U.S.-China trade war affected LED revenues.

Non-GAAP gross margin was 27%, which decreased from 38% in the year-ago quarter. This includes the Huawei inventory reserve, which had a 350 basis points gross margin impact.

Segment wise, LED Products gross margin was 22% compared with 30% in the year-ago quarter, while Wolfspeed gross margin decreased from 48% in the year-ago quarter to 35%.

Non-GAAP operating loss during the quarter was $20.8 million against operating income of $25.1 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

Cree had cash, cash equivalents & short-term investments of $951.5 million as of Dec 29, 2019 compared with $993.9 million as of Sep 29, 2019.

During the second quarter, cash used in operations was $11.8 million and free cash outflow was $53 million.

Guidance

For third-quarter fiscal 2020, Cree expects revenues in the range of $221-$229 million.

Non-GAAP loss is projected in the range of 9-15 cents per share.

LED revenues are projected in the range of $105-$109 million, reflecting the extension of the Lunar New Year holiday due to the coronavirus outbreak.

Wolfspeed business is anticipated to be flat or slightly down sequentially on account of the softness in 5G network spending and lower electric vehicle sales in China.

Non-GAAP gross margin is expected to be approximately 30%. Wolfspeed and LED margins are expected to be in the range of 39-42% and 20-21%, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Cree has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cree has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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