Cree’s Growth May Not Hold As Sluggish Macro Leads To Slowdown

August 9th, 2012 by Trefis Team
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CREE: Cree logo
CREE
Cree

Cree (NASDAQ:CREE), a leading innovator of LEDs, LED lighting and semiconductor solutions for wireless and power applications, announced its Q4 2012 results on August 7. Registering revenue growth of 26% y-o-y and 8% q-o-q, Cree posted a stellar year closing its FY 2012 at $1.2 billion. The growing LED lighting adoption and regained agent momentum contributed to a 16% sequential increase in lighting sales, while new product innovations contributed to an increase in LED components, power and RF products revenue.

At $10 million, the company’s net income declined by 49% compared to $19.8 million in Q4 2011. Higher R&D spend to support new product development, growing competition and an industry shift in product mix toward lower margin fixtures led to gross margins declining sequentially to 34.8%. However, despite the plunging profits this quarter, we believe that Cree posted solid Q4 results.

The company remains committed to drive LED adoption by optimizing performance and lowering costs to close the gap with conventional lighting. We believe that Cree’s focus on new product development and initiatives to drive product sales will help it continue with the growth momentum.

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See our complete analysis for Cree

What we can expect in the coming quarters

While Cree claims to have a strong order backlog, the adverse macroeconomic environment could impact its short-term outlook. Keeping in mind the economic headwinds, the company maintained a flat outlook for revenue next quarter, though it does expect to witness strong growth in the lighting segment backed by an increase in sales of indoor and outdoor lighting. Cree’s acquisition of Ruud Lighting, a leader in outdoor lighting, in mid-2011, allows it to extend its leadership in indoor as well as outdoor lighting.

As the growing LED adoption contributes to higher sales, we believe Cree would witness a slight improvement in margins as it earns higher revenues on similar cost levels. Additionally, the company remains focused on factory cost reduction, process improvement and higher factory utilization, which would further ease pressure on margins.

With a focus on driving growth through innovation, Cree had a number of new product launches this quarter and remains committed to continue the momentum for the rest of the year. We expect to see higher R&D initiatives by the company to support new product development with emphasis on marketing and advertising initiatives to increase its reach to new customers globally.

Despite the current roadblocks, Cree is making the most of the tough LED market. We feel that a strong balance sheet gives it the added potential to continue expanding its market and driving LED growth in the future.

We are in the process of updating our current price estimate of $27.50, post the Q4 2012 earnings.

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