“So we’re very hopeful that the world’s two largest trading economies will figure out a good solution.” – Cree CEO Gregg Lowe
DURHAM – One big Triangle tech firm is caught up in the trade war with China – and it’s suffering casualties.
Time after time in a conference call lasting nearly one hour on Tuesday, Cree CEO Gregg Lowe and CFO Neill Reynolds were on the front lines, caught in the China-US crossfire, facing Wall Street analysts’ tough questions. From the impact of tariffs to the ban on China tech giant Huawei which has forced Cree to stop sales to that company worth $15 million a quarter, to the big question: What happens if there is no cease fire and the world’s two largest economies settle into never-ending conflict?
Cree
“I just, I’m trying to understand broadly if Cree and Chinese market completely disengage what your business looks like,” Joseph Osha of JMP Securitiesa sked Lowe after earlier comments from the Cree execs made clear their business in semiconductors, radio frequency devices and LEDs were taking a variety hits.
“Joe, I think that’s a great question. And it’s one that we certainly are addressing internally as well. And what I would say is any semiconductor company has to ask that same question because a substantial portion of the semiconductor market is in China, and a substantial percentage of the growth is there as well,” Lowe replied.
“So obviously, I think nobody would be fair to say, well, it wouldn’t matter if we – just China never came back.
“Of course, it would matter. It’s a big percentage of the semiconductor market, and a growing percentage of it. So it’s – it certainly would have an impact. I think there’s no question about that.”
Cree isn’t the only North Carolina chip firm taking hits from the US-China-Huawei war. Greensboro-based Qrovo also has suffered.
And sales are taking a hit. Looking ahead, Cree (Nasdaq: CREE) expects revenue from $237 million to $243 million, below analysts’ expectations of $260 million, according to financial firm Zacks. But Cree shares are still up 36 percent so far this year and at $58 are up 25 percent over the last year, the Associated Press notes. And overall Lowe remains positive.
Lowe pointed out what he sees as Cree’s advantages in the chip market from its silicon carbide technology, its Wolfspeed’s growing strength as a technology provider for the growing electric vehicle market, and its ability to compete in the US and rest of the world with a $9 billion demand for products.
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“What I would say from a competitive position standpoint is, there’s really – this technology, as we’ve mentioned several times is a difficult technology to replicate.
“From an automotive perspective, specifically, I’d say we’ve got a ton of interest across the globe, including a ton of interest outside of China in silicon carbide,” Lowe added. “And I think there’s a tremendous amount of growth opportunity for us there. We’d like to have the entire world as part of what we’re going after.
“So we’re very hopeful that the world’s two largest trading economies will figure out a good solution. But I think, we’ve got a lot of opportunity outside of that as well.”
Osha then asked – what is the risk to Cree’s $9 billion sales pipeline from “China exposure.”
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“I don’t have that broken out. Just from a gut feel perspective, I’d say it’s not as high as you would anticipate,” Lowe said, according to a transcript of the call from financial news site SeekingAlpha.
“We’ve got a lot opportunity over there, but we’ve got a substantial amount of opportunity outside that. But Joe, I don’t have that number specifically, but I’m pretty comfortable saying it’s going to be well less than half.”
The Cree execs also said that electric vehicle demand was declining in China as subsidies were being reduced.
The Wolfspeed, chip factory issues
So other questions and comments emerged about factory utilization for Cree’s chips and products with Cree’s $1 billion investment in a “megafactory” to be built in Durham as a future factor.
“On the LED side, obviously the market situation, that’s been impacted by China and the tariffs has muted the business from a top line standpoint, as you suggest,” Reynolds said.
“So what we’re doing is we’re taking the conservative approach there. And we’re taking down our, as you talked about our utilization, we’re taking down our inventory, to kind of go manage that. And I think that’s going to set us up for any kind of any medium term, either demand declines and kind of position us in the event, favorably should upside happen. Our view outside of this quarter, on LED, it’s difficult to call. We kind of just think at this point, we don’t see any kind of recovery in the near term, and we’re kind of managing ourselves in a way to kind of handle that.”
But Wolfspeed – on which Lowe has built the company’s future, leading to his decision to sell of Cree’s lighting business – has wounds to be addressed, too, since its tech can’t be sold to Huwaei under President Trump’s ban based on national security concerns. And Lowe said Cree would continue to observe the ban.
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“On the Wolfspeed side, it’s not really utilization impact. On the Wolfspeed side, we have a little bit of elevated inventory, obviously, with the little bit of the effect of the Huawei ban, we’re carrying some additional inventory,” Reynolds said.
He then noted that “I think we’ve got a handle on both businesses [chips and Wolfspeed] on how to manage that going forward.”
Yet what happens if Cree doesn’t get Huawei – one of its largest customers – back? The US has extended some exceptions to Huawei trade but much of the overall ban remains in effect.
“[E]ven when you get the license approved, do you think you can get back to that $15 million run rate pretty quickly?” asked one analyst.
“As we move forward, let’s say, the ban was lifted, I think it could take some time before that’s snapped back. So, the supply chain would have to readjust again,” Lowe said. “And, certainly, Huawei is very likely looking for alternative suppliers. It’s difficult to say how much of that would be pointed to us if the ban lifted. So the visibility in terms of what that would mean to us is kind of difficult to call at this time.”
Cree’s earnings
In its financials, Cree reported a loss of $133.7 million in its fiscal fourth quarter but earnings, adjusted for one-time gains and costs, came to 11 cents per share.
The results surpassed Wall Street expectations. The average estimate of six analysts surveyed by Zacks Investment Research was for earnings of 10 cents per share.
Despite the China and Huawei story lines, revenue of $251.2 million in the period, also surpassing Street forecasts. Four analysts surveyed by Zacks expected $248.3 million, the Associated Press reported.
For the year, the company reported that its loss widened to $375.1 million, or $3.62 per share. Revenue was reported as $1.08 billion.
For the current quarter ending in October, Cree expects its results to range from a loss of 7 cents per share to a loss of 3 cents per share.
