Cree’s Q4’15 Earnings Review: Restructuring Efforts Can Reignite Growth In Fiscal 2016

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Leading LED manufacturer Cree (NASDAQ:CREE) reported its Q4 2015 and fiscal 2015 earnings on August 11th. (Fiscal years end with June.)  While the company continued to see strong growth in the LED lighting and the Power and RF segments, its performance in Q4 2015 was impacted by the ongoing weakness in its LED Products business. Cree’s profitability in the LED business is suffering from excess supply and the resulting dramatic price reductions, to the point that the company had to cut back its manufacturing operations. Cree announced its LED restructuring plan last quarter, to reduce excess capacity and overhead to improve its cost structure going forward.

Cree claims that it will take a few quarters for the company to realize the full benefit of its cost optimization efforts. The LED landscape remains intensely competitive, and Cree expects its LED product business to remain weak in fiscal 2016. However, the company believes that new products and lower costs from its restructuring initiatives will help improve its revenue and profitability in fiscal 2016. Driven mainly by its continued success in the commercial lighting business, the company anticipates revenue growth of approximately 10% in fiscal 2016 with operating margins increasing for the year.

Though it faced severe challenges in the LED industry, Cree expanded its lighting and Power and RF business in  fiscal 2015. Continuously innovating in all business segments, stabilizing the LED business, and executing the recently announced restructuring plan, remain key focus points for the company going forward.

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We are in the process of updating our $35 price estimate for Cree.

See Our Complete Analysis for Cree Here

Quick Snapshot of Fiscal 2015 Earnings

Cree’s revenue in fiscal 2015 ($1.63 billion) was down 1% compared to 2014. While lighting products and Power and RF products grew 28% and 15%, respectively, the LED products revenue declined 28% year on year. The gross margin declined considerably as well, from 37.6% in 2014 to 29.1% in 2015, primarily due to lower LED bulb margins on account of the more competitive pricing environment and the company’s  decision to restructure the business to reduce excess capacity and overhead. Cree’s non-GAAP net income declined to $72 million or $0.64 per diluted share.

For Q4 2015, revenue declined 7% sequentially and 12% annually as solid growth in commercial lighting was offset by lower LED revenue related, primarily to the restructuring and lower consumer bulk sales. Cree reported net loss of $20.5 million or $0.19 per diluted share, in Q4 2015. Despite the grim earnings, Cree reported its  highest quarterly free cash flow ($35 million) in a year and a half. (Read Cree’s Q4 2015 and Fiscal 2015 Press Release)

Lower Cost Structure & New Products Can Reignite Growth

In an effort to adjust capacity, reduce overhead and increase LED reserves, Cree decided to restructure its LED business last quarter. As a result, the company incurred $84 million of restructuring charges in Q4 2015, and targets  $18 million of additional charges in fiscal 2016 as it completes the consolidation of its LED factories. Cree believes that after the completion of its restructuring efforts (expected in Q2 2016), its LED business will benefit from a renewed focus on new market leading high power products with a reduced cost structure.

Cree says that its LED factory utilization is improving as its executes its restructuring plan, and aims to improve factory utilization to 85% by the end of December. The company successfully added manufacturing partners for LED chips and LED lighting in fiscal 2015, which it believes will provide long-term cost leverage and enable factories to focus on new product introduction and technology.

Cree has staked its entire research and development efforts on the ascent of the LEDs as well as 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. It continues to gain share in the commercial lighting market and remains confidence of its ability to continue growing in LED lighting.

The company recently announced the worldwide patent cross-license agreement with Epistar for LED chips. The agreement was a result of Cree’s effort to more aggressively enforce its LED intellectual property and its decision to follow several patent losses over the last year. As per the agreement, each party receives a license to the other’s nitride LED chip patents and has granted certain right to non-nitride LED chip patents. Over the lifetime of the agreement, Cree will receive license and royalty payments from Epistar.

Q1 2016 Guidance

– Revenue in the range of $410 to $430 million, with solid growth in lighting sales, relatively flat LED sales (excluding the impact of the revenue restructuring reserves) and incrementally higher power and RF revenue.

– GAAP and non-GAAP gross margin of 31.3% and 32%, respectively.

– GAAP and non-GAAP operating expense of $142 million and $107 million, respectively.

– Tax rate of 25%.

– GAAP net loss in the range of $16 million to $22 million, or $0.16 to $0.21 per diluted share.

– Non-GAAP net income between $19 million to $24 million, or $0.18 to $0.23 per diluted share.

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