LED Fixtures & LED Bulbs Drive Cree’s Growth In Q2’14

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CREE: Cree logo
CREE
Cree

Leading innovator of LEDs Cree (NASDAQ:CREE) reported its Q2 2014 earnings on January 21. At $415 million, its revenue grew by 19.9% annually and 6.2% sequentially, which was at the high end of its target range. For the first half of fiscal 2013, Cree’s revenues are up 22% compared to the same period last year. While LED sales declined marginally, lighting sales were up 17.4% sequentially and the power and RF business witnessed a marginal sequential growth in Q2 2014. However, due to the rising proportion of lighting sales, Cree’s gross margin declined from 38.5% and 38.6% in Q2 2013 and Q1 2014, respectively, to 37.5% in Q2 2014. Nevertheless, the incremental gross profit from higher sales offset Cree’s increased investment in marketing.

Cree is one of the leading players committed to driving global LED adoption and closing down the price gap with conventional lighting through innovation. In the long run, the company aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers. In 2014 and beyond, the company aims to build the Cree brand and focus on select market segments where it can upgrade existing lighting. The company continues to make significant investments in new products and new channels to build on its brand.

In line with seasonal trends, LED demand is expected to decline sequentially in the current quarter due to the Chinese New Year holiday. However, we believe in its long-term growth potential. LED penetration is expected to increase in the future and being one of the leading global LED manufacturers, Cree will benefit from the trend, in our view.

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Our price estimate of $61 for Cree stock is almost in line with the current market price. We are in the process of updating our valuation.

See Our Complete Analysis for Cree Here

Lighting Remains An Untapped Opportunity: LED Fixtures & LED Bulbs Drive Demand

The general lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. LED lighting accounts for 15%-20% of the global lighting market at present and the LED market share is expected to rise at a rapid pace over the next decade. [1] Improving economic conditions, innovative new products (such as the LED bulb available for $10), and the narrowing price gap between LEDs and conventional technologies are all key factors driving LED adoption.

Cree has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. This places the company in a strong position to leverage the growth in LED adoption. Product innovation in the last few quarters has opened new applications and improved LED returns, in turn driving demand for Cree’s products.

Cree’s LED lighting division grew by 17.4% sequentially and 41.5% annually in fiscal Q2 2014. The company claims it saw sales growth in both indoor and outdoor segments with the biggest gains in outdoor lighting. Driven by a full lighting season, utility rebate, new products and increased marketing activities, Cree’s LED bulb sales to consumers doubled sequentially in Q2 2014. Cree expects lighting sales to be at a similar level in Q3 2014 as fixture sales remain strong but are offset by lower LED bulb sales into Cree’s channel partners as they look to re-balance inventory levels.

Higher LED Adoption & Operational Efficiency To Improve Gross Margins

Despite a very competitive market environment, Cree’s gross margins in 2013 improved due to better factory utilization on account of higher LED volumes, process improvements and new lower-cost product designs. However, the rising proportion of lighting sales puts pressure on Cree’s overall gross margin as lighting products offer lower profit margins compared to LED components.

In Q2 2014, Cree earned 27.9% gross margin on lighting products as compared to 45.4% gross margin on LED components. However, the company claims that the gross margin earned on LED bulbs is improving. The company saw its lighting gross margin improve from 26.9% in Q1 2013 to 27.9% in Q2 2013.

We believe that higher LED volumes combined with lower new cost products, cost reductions and higher factory utilization will help increase Cree’s overall gross margin in the future.

Q3 2014 Outlook

– Revenue in the range of $390 million to $420 million.

– Lighting sales as well as Power and RF sales to remain flat sequentially. LED product sales seasonally down 5% to 7% due to Chinese New Year.

– GAAP and non-GAAP gross margin of 37.7% and 38.5% respectively.

– Operating expenses to be flat sequentially.

– Tax rate of 21%.

– GAAP and non-GAAP net income between $24 – $32 million and $42 – $51 million, respectively.

– GAAP and non-GAAP EPS between $0.19 – $0.26 and $0.34 – $0.41, respectively.

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Notes:
  1. Can LEDs Brighten Investor Portfolios?, Investopedia, August 29, 2013 []