Cree Reports Slight Revenue Decline for 2Q15

Cree, a market leader in LED lighting, today announced revenue of $413.2 million for its second quarter of fiscal 2015, ended December 28, 2014, which is similar to revenue of $415.1 million reported for the second quarter of fiscal 2014. GAAP net income for the second quarter was $12.2 million, or $0.10 per diluted share, a decrease of 66% year-over-year compared to GAAP net income of $35.7 million, or $0.29 per diluted share, for the second quarter of fiscal 2014. On a non-GAAP basis, net income for the second quarter of fiscal 2015 was $37.9 million, or $0.33 per diluted share, a decrease of 33% year-over-year compared to non-GAAP net income for the second quarter of fiscal 2014 of $56.8 million, or $0.46 per diluted share. The second quarter of fiscal 2015 GAAP and non-GAAP earnings benefited from the retroactive reinstatement of the U.S. R&D tax credit at the end of December. Excluding the R&D tax credit benefit, our GAAP and non-GAAP earnings per diluted share for the second quarter of fiscal 2015 would have been $0.08 and $0.25, respectively.

“We made solid progress in Q2 with operating margin higher than targeted due to an improvement in gross margins in our lighting business,” stated Chuck Swoboda, Cree Chairman and CEO. “The market for LED lighting is still in the early stages, our new product pipeline is strong, sales momentum is building and our brand is growing in the market. As evidenced by our significant share repurchases in Q2, we believe we are on the right track to continue to grow the company and increase profits over the next several years.”

Q2 2015 Financial Metrics

(in thousands, except per share amounts and percentages)                                                   

Second Quarter                                              

2015                     2014                      Change

(unaudited)             (unaudited)                                            

Revenue, net           $      413,157                   $      415,086                   $      (1,929      )               —    %

GAAP                                                                                              

Gross margin          33.1 %             37.5 %                                            

Operating margin           2.5   %             8.5   %                                            

Net income             $      12,151                     $      35,681                     $      (23,530    )               (66   )%

Earnings per diluted share             $      0.10                 $      0.29                 $      (0.19        )               (66   )%

Non-GAAP                                                                                              

Gross margin          33.9 %             38.2 %                                            

Operating margin           8.2   %             14.0 %                                            

Net income             $      37,949                     $      56,774                     $      (18,825    )               (33   )%

Earnings per diluted share             $      0.33                 $      0.46                 $      (0.13        )               (28   )%

Gross margin increased 130 basis points from Q1 of fiscal 2015 to 33.1% on a GAAP basis, and increased 150 basis points to 33.9% on a non-GAAP basis.

Cash and investments decreased by $274.9 million from Q1 of fiscal 2015 to $829.9 million.

Accounts receivable, net decreased by $18.0 million from Q1 of fiscal 2015 to $219.0 million, with days sales outstanding of 48.

Inventory increased by $21.8 million from Q1 of fiscal 2015 to $332.5 million and represents 108 days of inventory.

Recent Business Highlights:

Redefined high-power LEDs for lighting with the new SC5 TechnologyTM Platform, which doubles light output to radically lower system cost. We released the Cree® XLamp® XHP50 and XHP70 LEDs, which are the first Extreme High Power LEDs based on this platform;

Introduced the New Cree® LED Bulb, delivering superior light performance while looking just like an incandescent light bulb at an even more affordable price;

Acted to protect Cree’s intellectual property by filing lawsuits at the U.S. International Trade Commission and the U.S. District Court for the Western District of Wisconsin against Feit Electric Company, Inc. and its Asian supplier, Unity Opto Technology Co., Ltd.;

The board of directors authorized an increase in the amount of the Company’s stock repurchase program. Pursuant to the program, the Company is now authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $550 million for all purchases in fiscal 2015.The Company spent $266 million to repurchase 8.1 million shares of its common stock during the second quarter of fiscal 2015;

The Company closed on its previously announced investment in Lextar and acquired approximately a 13% common stock ownership interest for $80.5 million during December 2014.

Business Outlook:

For its third quarter of fiscal 2015 ending March 29, 2015, Cree targets revenue in a range of $395 million to $415 million with GAAP gross margin targeted to be 32.6%+/- and non-GAAP gross margin targeted to be 33.5%+/-. Our GAAP gross margin targets include stock-based compensation expense of approximately $3.4 million, while our non-GAAP targets do not. Operating expenses are targeted to be similar to fiscal Q2. The tax rate is targeted at 17.0%+/- for the third quarter of fiscal 2015. GAAP net income is targeted at $3 million to $8 million, or $0.03 to $0.07 per diluted share. Non-GAAP net income is targeted in a range of $23 million to $28 million, or $0.21 to $0.25 per diluted share. The GAAP and non-GAAP net income per diluted share targets are based on an estimated 112.4 million diluted weighted average shares. Targeted non-GAAP earnings exclude expenses related to the amortization of acquired intangibles, changes in the fair value of our Lextar investment, stock-based compensation expense and asset retirement charges of $0.18 per diluted share.

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