CREE’s Q3 2015 Earnings Preview: Continuous Innovation and Portfolio Expansion Can Drive Better Results in 2015

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Cree

Leading LED manufacturer, Cree (NASDAQ: CREE) is set to report its Q3 2015 earnings on April 21st. (Fiscal years end with June.) Driven by strong growth in its LED lighting business, CREE reported revenues of  $413 million in Q2 2015, beating analysts consensus estimates. 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. For Q3 2015, the company estimates revenue in the range of $395 million to $415 million, with lighting sales flat to slightly higher (as lighting factory utilization remains very high and execution continues to be a critical factor), LED sales down single digit (due to normal seasonality and the Chinese New Year holiday), and power and RF in a similar range as Q2 2015. Cree anticipates EPS for the quarter in the range of $0.21-$0.25, versus the consensus estimate of $0.21.

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. CREE has remained a top performer in the LED industry for many years. The company’s revenue growth has averaged 18.6% over the past three years, while the industry has seen its top line increase at a far lesser rate of 3.4% [1].

Going forward, 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 profits by increasing revenue growth and incremental operating leverage across the business.

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Our price estimate of $37 for Cree is marginally higher than the current market price. We will update our valuation after the Q3 2015 earnings release.

See Our Complete Analysis for Cree Here

Continuous Innovation To Drive CREE’s Growth

Cree is one of the leading LED players committed to driving global LED adoption and closing down the price gap with conventional lighting through innovation. Product innovation over the last few years has opened new applications and improved LED returns, in turn driving demand for Cree’s products. The company has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products.

CREE introduced a new LED Lighting module, stated as “the industry’s highest performing LED module” that will deliver 30% better performance than the previous generation in the same form factor. Providing efficacy of 125 lumens per watt with color-quality greater than 90 CRI, the so-called LMH2+ is the only LED module that allows lighting manufacturers to achieve a system efficacy of 100 lumens-per-watt with high light quality. CREE argues that its offerings are unique in allowing lighting makers to attain highest light quality results. The product is an attempt by CREE to bolster its position in an intensive LED component market that remains a strong point for the company as it deals with tough Asian competition.((Cree’s(CREE) CEO Chuck Swoboda on Q2 2015Results – Earnings Call Transcript, Seeking Alpha, January 20th, 2015))

Cree continues to relentlessly expand its leading LED bulb portfolio. It recently introduced the TW Series LED T8 Tube Replacement for consumers. Available as 32-watt replacements, the TW Series LED T8 Tube Replacements are sold at the stores starting at just $21.97 and consuming up to 42% less energy than the 32W fluorescent tubes. Outperforming fluorescent tubes and other popular LED replacements, the Cree TW Series LED T8 Tube Replacements turn on instantly, are dimmable with most standard dimmers, last 50,000 hours and feature a durable, shatter-proof design to deliver high-quality light for years, all backed by a five-year warranty.

CREE has also come up with a new innovation in the solar power inverter and the company claims that the new product reduces power loss by 50% and operates at 3 times to 5 times the switching frequency of silicon-based solutions. It will eventually translate into a unit-cost reduction approaching 15%.

Untapped Growth In The LED Lighting Market

The market for LED lighting is still in the early stages and largely untapped in terms of installed lighting sockets. The company 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. ((Cree’s(CREE) CEO Chuck Swobodaon Q2 2015Results – Earnings Call Transcript, Seeking Alpha, January 20th, 2015)). Although the LED market remains challenging, it is expected to grow rapidly over the next few years. Supporting  the projected growth are the economies of scale leading to lower prices, advertisements by lightning suppliers and the cost-saving benefits of LED products. Optimists see the possibility that LED lighting will completely eliminate the use of conventional bulbs in the market. Governments of several countries are replacing conventional street lights with LEDs and, in some jurisdictions, discouraging use of incandescents.  As prices fall further,  LED lighting should extract additional significant market share in the long run.

In 2013, LED lights occupied 18% of the $66 billion global lighting market. According to industry data cited by GE, this share of LEDs is expected to rise to 70% by 2020, and the global lighting market is forecast to reach about $100 billion.((GE Lighting Sees Brighter Future With LED Growth, Forbes, June 11th, 2013))

In the near term, CREE has adjusted its LED factory costs to operate more efficiently at current utilization levels, and the company continues to make investments both at CREE and with its manufacturing partners to support the longer term growth in the business. The company’s game-changing technologies, its new product pipeline, and its brand momentum gives it great confidence in achieving the long term customer goal of 100% upgrade to LED lighting.

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Notes:
  1. Cree Has A Bright Future Ahead, Seeking Alpha, February 23rd, 2015 []