Cree’s Q2’15 Earnings Highlighted By Lighting Revenue & Margin Growth
Leading LED manufacturer, Cree (NASDAQ:CREE) witnessed an approximate 9% jump yesterday in its stock price as its Q2 2015 earnings beat analysts consensus estimates. At $413 million, revenues were at the upper end of company guidance, due to strong growth in LED lighting. Gross margins increased 1.3 percentage points sequentially, which, along with the retroactive reinstatement of the federal R&D tax credit, increased net income by 28% sequentially. Even after excluding the tax benefit, both GAAP ($0.10) and non-GAAP ($0.33) earnings per share were higher than Cree’s guided range.
Lower LED demand and margin pressure are two keys trends which have impacted Cree’s growth prospects in the last few quarters. However, the company continues to see strong growth in its lighting segment, and it does not foresee any change in the trend as the segment still remains a largely untapped opportunity.
In fiscal 2015 (years end with June), Cree plans to focus on the following key priorities: 1) leverage its technology to lower up-front customer cost and further improve payback; 2) continue to drive LED lighting growth and build the Cree brand in both the consumer and commercial markets; 3) expanding its work with manufacturing partners to enable growth in LEDs and lighting; 4) allow its factories to focus on the newest technologies that are not otherwise available in the market: and, 5) generate incremental operating margin increasing revenue growth and incremental operating leverage across the business.
Our price estimate of $41 for Cree is at a significant premium (~30%) to the current market price. We are in the process of updating our model for the Q2 2015 earnings release.
See Our Complete Analysis for Cree Here
New Products Can Help Cree Leverage The Untapped Growth In LED Lighting
At $230 million, Cree’s lighting business increased 3% sequentially and 33% year on year, as the double-digit growth in LED fixtures more than offset the lower LED bulb sales. LED component revenue, on the other hand, declined 29% year over year and 13% sequentially on account of lower LED demand, primarily from China.
A general shift to LED lighting in the lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. LED lighting market is anticipated to grow 45% per year through 2019, driven by the declining price points and the rising interest on the part of the channel in pushing LEDs to consumers. LED lighting is expected to account for 80% of the entire lighting market by 2020, creating a market that will be as big as $94 billion. [1]
Cree is confident that it is well positioned to continue to win in LED lighting. Though the company has made significant progress growing both the volume and product base of its lighting business over the last several years, it believes that there is still a lot of untapped potential in terms of both revenue and profitability. Cree claims that it continues to gain share in the commercial lighting market, while the Cree LED bulb shapes the consumer lighting category and creates awareness for the Cree brand. It has a strong product pipeline and is building good sales momentum for the same. Though the LED landscape remains highly competitive, Cree believes that its high power LED technology positions the company for long term success in high performance LED lighting applications. The company closed its Lextar investment in Q2 2015 and is working with the team to supply LED chips as well as testing some initial lighting products. The collaboration with Lextar can help Cree expand its presence in the mid-power segment.
In Q2 2015, Cree announced its new SC5 technology platform, which doubles light output to enable radically lower system costs by up to 40% in most lighting applications. The company also announced the commercial availability of XLamp extreme high power LEDs, which are the first LEDs powered by Cree’s SC5 technology platform. The XLamp XHP50 and XHP70 LEDs provide twice the lumen output and improved reliability compared to previous LEDs of the same size. Based on initial customer feedback, the company is confident that the new technology is capable of driving the next major innovations in high performance LED lighting system design.
Cree also introduced the third generation Cree LED bulb in Q2 2014. The bulb offers superior light performance while looking even more like an incandescent light bulb. This new design provides the same cost savings and 25,000 hour lifetime that made the original Cree bulb America’s best-selling LED bulb. The bulb is now available at the Home Depot for $7.97, and it’s currently available for as low as $2.97 in certain markets with rebates. [2]
Though Cree is optimistic about its long-term prospects in the LED lighting segment, it admits that it will take time to work through the new products design cycles and current market conditions.
Improving Lighting Profitability Lift Cree’s Overall Gross Margin
A higher proportion of revenue from the fast growing lighting LED market, which offers comparatively lower gross margin, combined with declining LED revenue has impacted Cree’s overall gross margin in the last few quarters. However, Cree’s gross margin improved from 31.8% in Q1 2015 to 33.1% in Q2 2015, primarily due to improved lighting margins which more than offset the lower mix of LED sales.
Driven by improved lighting execution and a more favorable mix (more commercial & less consumer), lighting segment gross margin increased to 28.1% in the quarter. Cree targets incremental lighting gross margin improvement in the current quarter on account of factory productivity improvements and cost reductions. Despite the lower factory utilization, LED gross margin remained flat (at 39.1%) due to strong factory cost management.
Q3 2015 Outlook
– Revenue in the range of $395 million to $415 million. Lighting sales to be flat to slightly higher sequentially as higher indoor LED fixture sales offset seasonally lower outdoor sales. LED sales down single digits due to normal seasonality and the Chinese New Year holiday. Power/RF sales to be flat sequentially.
– Non-GAAP and GAAP gross margin at 33.5% and 32.6% respectively.
– Operating expenses to be flat sequentially.
– Tax rate of 17%.
– GAAP net income between $3 million to $8 million. GAAP EPS to be between $0.03 to $0.07 per diluted share.
– Non-GAAP net income of $23 million to $28 million, or $0.21 to $0.25 per diluted share.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:
- Why Investing In Cree Looks Like A Bad Idea, Seeking Alpha, December 3, 2014 [↩]
- Cree’s Q2’15 Earnings Call Transcript, Seeking Alpha, January 20, 2015 [↩]