Cree, Inc. (CREE) reported second-quarter fiscal 2014 earnings per share of 34 cents, which surpassed the Zacks Consensus Estimate by 3 cents.
Revenues
The company reported revenues of $415.1 million, up 6.2% sequentially and 19.9% year over year, which was also above the mid-point of management’s guidance of $400.0 million to $420.0 million. The increase was due to strong sales of LED (light emitting diode) fixtures and LED bulbs.
Revenues by Product Line Segments
The LED Products segment comprised 52% of Cree’s sales in the last quarter, up 7% from the year-ago quarter to $215.0 million. This segment includes LED chips, LED components and SiC materials.
Cree’s Lighting Products segment generated 42% of sales, up 42.0% from the year-ago quarter to $173.7 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 Products segment generated the remaining 6% of sales, up 17.0% from the year-ago quarter to $26.4 million. This segment includes power devices and RF devices.
Margins
Reported gross margin for the quarter was 37.5%, down 110 basis points (bps) sequentially and 100 bps year over year. The sequential decrease was due to an unfavorable product mix.
Total operating expenses of $120.4 million were up 11.1% from $108.4 million in the year-ago quarter. The reported operating margin was 8.5%, up 130 bps from 7.2% in the year-ago quarter. Both research & development and selling, general & administrative expenses decreased as a percentage of sales.
The quarter’s GAAP net income was $35.7 million or earnings per share of 29 cents compared with $20.4 million or 18 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expenses, adjusted net income was $42.4 million or earnings per share of 34 cents compared with $26.1 million or 22 cents a share in the year-ago quarter.
Balance Sheet
The company ended the second quarter with cash, cash equivalents and short-term investments balance of $1.18 billion, up from $1.09 billion in the prior quarter. Trade receivables were $213.5 million, up from $209.3 million in the prior quarter.
Cash flow from operations was $98.8 million, up from $69.2 million in the prior quarter. Capex was $55.0 million versus $38.4 million in the prior quarter. Free cash flow was $43.7 million versus $30.8 million in the prior quarter.
Guidance
For fiscal third-quarter 2014, Cree expects total revenue in the range of $390 million–$420 million, representing a sequential decrease of 2.4% at the mid-point.
GAAP gross margin is likely to be approximately 37.7%, whereas non-GAAP gross margin is likely to be around 38.5%. Operating expenses are expected to be flat sequentially and the tax rate is likely to be 21.0%.
GAAP earnings per share are expected in the range of 19 cents to 26 cents, while non-GAAP earnings per share are likely to be in the range of 34 cents to 41 cents.
Conclusion
LED manufacturer Cree’s top-line numbers for the quarter surpassed our expectations.
The company’s focus on product innovation to drive growth is quite encouraging. In the quarter, Cree ramped up its LEDway HO series and implemented a series of cost reduction measures to improve its margin profile.
Though management gave a weak third-quarter revenue guidance due to expectations of lower LED bulb sales for channel partner, it expects better gross margin in the near term led by improvements across product lines due to cost reductions and lower cost of new product designs.
We believe that the increasing use of LED technology, its penetration into the domestic market and global push toward energy conservation will increase sales of Cree LED bulbs, helping revenue growth in the near future.
Currently, Cree has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Waddell & Reed Financial, Inc. (WDR), Kemper Corporation (KMPR) and Western Digital Corporation (WDC). All these stocks carry a Zacks Rank #2 (Buy).
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