Cree Research Q4
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Cree Research Q4
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(FOOL CONFERENCE CALL
SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
Cree Research, Inc. Q4 Results BUFFALO, NY, August 2, 1996/FOOLWIRE/ --- Cree Research, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREE)") else Response.Write("(Nasdaq: CREE)") end if %> today announced record revenues of $5,127,000 for the quarter ended June 30, 1996 and $16,846,000 for the year-end. The revenues represent a 51% increase over year-end results for 1995. While all revenue categories showed an increase year over year production, volumes of Cree's light-emitting-diode (LED) product were lower than planned in the fourth quarter, resulting in higher unit costs and a net loss for the quarter.
The company generated a profit of $444,000 or $0.04 per share for the year ended June 30, 1996 versus a loss of ($17,000) or $0.00 per share last year. However, Cree reported a net loss of ($776,000), or ($0.06) per share for the quarter ended June 30, 1996 which compares with earnings of $207,000 or $0.02 per share for the fourth quarter of the previous year. The company had previously announced an expected range for the net loss, with a maximum of $0.05 per share. An additional penny loss resulted from an inventory miscalculation and the adjustment of accruals in Q4. The primary reason for the loss is attributable to the per unit cost for Cree's LED product which was higher than expected due to production problems in the Company's epitaxial process resulting in a lower number of LED wafers being produced.
Neal Hunter, President and CEO, remarked, "1996 has been a critical transition year for Cree as we move from a research and development company to one that is increasingly driven by product revenue as we devote resources to refining our manufacturing processes. We are allocating substantial resources to improve our epitaxial process and achieve a reliable and consistent production process for the super-bright blue LED. The Company's ability to ship slightly over 3 million LEDs in the fourth quarter, which was an increase from the 1.5 million shipped in the third quarter, is a step in the right direction."
"We are not focusing our energies on balancing the unit cost to produce against the selling price to our customers. With this in mind, we are stabilizing the price offered to our customers at levels higher than contemplated earlier, while increasing the productivity of out epi systems to bring down unit costs. With this strategy in place, an increase in margins should follow. Revenue from LED shipments in the quarter totalled $1.4 million, up from $1.1 million in Q3. Q4 LED sales were 57% higher than LED sales of last year. Sales of wafers increased 27%, to $4.3 million for FY 96, from $3.4 million last year. This signals the increased visibility of silicon carbide as an enabling semiconductor technology. We continue to count companies such as Westinghouse, Seimens, Asea Brown Bovieri, and Motorola, among others, as key customers for our world-class materials."
"Display cells improved sequentially in the fourth quarter to $644,000 from $207,000. Year/year, these sales increased 11% as our Real Color Display division shifted product focus from our moving message sign business to a business primarily based on our cutting edge LED module product. We have been marketing this new product over the last quarter and a half, and are pleased with order flow and the excitement surrounding this product...this product allows us to capture substantial additional value for our blue LED chip."
"Revenues from contracts for the year increased to $5.7 million from $5.2 million last year. I expect contract revenues to increase again this year as we start work on recently awarded programs. Specifically, I would remind you of the recent award of $5 million in additional funding for our blue laser project with Philips, which will absorb a lot of the development cost in our ongoing epi process improvement project. This work will directly benefit our LED product."
Blended gross margins were down substantially in Q4 because of epi process problems, which resulted in lower LED epi wafer production. Operating expenses should stabilize at current levels as the company believes that the current infrastructure is sufficient to sustain increased production levels. In July, yield per wafer has already improved 40% with chips/wafer increasing to 5,000 from 3,500 last quarter.
1996 was a year of large additions to capital capacity at CREE, so 1997 investment should slow. Cash stands at $11.9 million with working capital of $18.8 million and no long-term debt. Cree also reported that it may take advantage of a prior authorization by its board to buy back shares of its common stock. The authorization would allow the Company to buy back up to 500,000 shares. Company officials noted that 10,000 shares had previously been repurchased.
The long-term strategy of the company is to reduce price per chip to enter into new applications. However, the company does not foresee radical price drops as they will focus more on process improvement. One of the upcoming process improvements is the inclusion of a conductive buffer layer which will remove photolithography steps, improving efficiency. The company has also made substantial progress in controlling electrostatic discharge, the attenuation or elimination of which would create a competitive advantage for Cree. The buffer layer is also involved in eliminating ESD issues.
One of the company's machines was down for almost all of June, which hurt revenues and margins. The epi machine is now back in operation without problems and the company learned from the process difficulty.
Their microwave product has completed design and prototype stages and is nearing power levels which should be attractive to the market. Cree expects to receive additional development funding for this project over the coming year. Blue laser development will get a significant lift from the company's increased R&D capacity. Applications for their Real Color display modules are expanding. While they are not committing to contracts at certain price levels before they are assured of being able to reach the right gross margin/volume mix, the company is in production with what they believe to be the most cost effective blue LED in the market.
Backlog is much higher than a year ago. Material and LED backlogs at the end of the quarter were higher than going into the quarter.
The plant is open 7 days a week, 3 shifts, including R&D.
Requalification for LEDs takes about 3-4 months once design changes have been made, which effects the chips with the new buffer layer. For displays, orders come in at spot intervals with no-design in cycle. Much of the spot business comes from China.
In the first two weeks of July, production was thin, but went to record levels in the second two weeks. On questions of increasing capacity, the company is still proving up their current equipment's efficiency levels and would only add as they are able to climb the learning curve on profitability of marginal output. The capacity of their epitaxial wafer unit is 3-4 million chips per quarter (under currents specifications) and is running at capacity right now. Full capacity, reached through additional R&D investigation, is about 30 million chips per quarter. Cree hopes to hit that capacity number in the next year. The conductive buffer, which will enable the wafer size to increase approximately 40%, should be included in the chip sometime in Q2.
Cash flow from operations for the year was about negative $1.5 million. Most of cash outflow for the year was devoted to capital additions. The company has been debt-free for the past year or so.
In the past quarter, costs per chip were around $0.90 per chip and have trended down to $0.55 under higher production. Margin should turn positive within Q1 and the LED side of the business should pass breakeven in Q1. Bookings in display modules, which is a segment that has never entered a quarter with a backlog, are $800,000+.
Upcoming R&D efforts are microwave, blue laser, power products, and high temperature sales. Blue laser R&D should be happening sometime in the coming year. The company is also concentrating heavily on green LED.
This conference call replay will run on the 2nd and 5th of August at 402-222-9904. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |