Cree's 3Q Earnings Miss by a Penny

Zacks Equity Research

Wed, Apr 24, 2013, 9:40 AM

Cree, Inc. (CREE) reported third-quarter fiscal year 2013 earnings per share of 24 cents, missing the Zacks Consensus Estimate of 25 cents.

Revenues

The company reported revenues of $348.9 million, up 22.5% year over year and 0.75% sequentially and toward the high end of the management’s revised guidance of $335.0 million to $350.0 million. The increase was due to strong sales of lighting products and lower cost per lumen at the LED chip, package and systems level.

Revenues by Product Line Segments

The LED Products segment comprised 56% of Cree’s sales in the last quarter, up 8.0% from the year-ago quarter to $195.6 million. This segment includes LED chips, LED components, and SiC materials.

Cree’s Lighting Products segment generated 37% of its sales, up 51% from the year-ago quarter to $130.7 million due to strong sales of commercial indoor fixtures and lighting products. This segment consists of both LED and traditional lighting systems, with its primary focus on LED lighting.

Cree’s Power and RF Products segment generated the remaining 7% of its sales, up 31% from the year-ago quarter to $22.7 million. This segment includes power devices and RF devices.

Margins

Reported gross margin for the quarter was 38.1%, up 320 basis points (bps) year over year and within the management guidance, driven by higher volumes and cost reduction activities.

Operating expenses (SG&A and R&D) of $101.1 million were up 17.4% from $86.1 million in the year-ago quarter. The reported operating margin was 6.7%, up 490 bps from 1.8% in the year-ago quarter. Research and development (R&D) expenses decreased as a percentage of sales but selling, general and administrative (SG&A) increased.

The quarter’s GAAP net income was $21.2 million or earnings per share of 19 cents compared with $9.5 million or 8 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expenses, adjusted net income was $28.8 million or earnings per share of 24 cents compared with $14.7 million or 13 cents a share in the year-ago quarter.

Balance Sheet

The company ended the third quarter with cash, cash equivalents and short-term investments balance of $937.1 million, up from $885.8 million in the year-ago quarter. Trade receivables were $181.9 million, up from $144.6 million in the prior quarter.

Cash flow from operations was $45.8 million, down from $48.3 million in the year-ago quarter. Capex was $24.9 million versus $22.2 million in the year-ago quarter. Total free cash flow was $15.0 million versus $22.3 million in the year-ago quarter.

Guidance

For the fiscal fourth quarter of 2013, Cree expects total revenue in the range of $365–$385 million, representing a sequential increase of 9.5% at the mid-point.

GAAP gross margins are likely to be approximately of 39% whereas non-GAAP gross margin is likely to be around 39.5%. GAAP operating expenses are expected to increase by approximately $4 million and non-GAAP operating expenses by $5 million. The tax rate is expected to be 20.0%.

GAAP earnings per share are expected in the range of 20 to 26 cents, while non-GAAP earnings per share are likely to be in the range of 34 to 40 cents.

Conclusion

Light emitting diode (:LED) manufacturer Cree’s earnings missed the Zacks Consensus Estimate by a penny. However, both revenues and earnings were above the year-ago quarter.

Management gave a strong fourth quarter revenue guidance, which reflects solid demand for its products and global growth in LED lighting adoption. Additionally, the company expects better gross margin in the near term led by improvements across product lines due to cost reductions, increased volume and lower cost of new product designs.

The company’s focus on product innovation to drive growth is quite encouraging. Last month, Cree introduced three LED light bulbs, available through The Home Depot, Inc. (HD) outlets throughout the country. Management stated that prices will range from $9.97 to $13.97 and the bulb will be 84% more energy efficient than a traditional light bulb.

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 the Cree LED bulbs, helping revenue growth in the near future.

Currently, Cree has a Zacks Rank #2 (Buy). Investors should look out for some other stocks with positive Zacks Rank and Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method).

Applied Materials, Inc. (AMAT), Earnings ESP of +7.69% and Zacks Rank #2 (Buy)

Fiserv Inc. (FISV), with an ESP of +3.79% and a Zacks Rank #2 (Buy)

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