Cree’s Q1’16 Earnings Instill Confidence That Revenue & Profitability Could Improve In 2016

-22.09%
Downside
80.07
Market
62.38
Trefis
CREE: Cree logo
CREE
Cree

Leading LED manufacturer Cree (NASDAQ:CREE) marked a good start to fiscal 2016 with a strong Q1 2016 (reported on October 21st). (Fiscal years end with June.)  The company’s performance in fiscal 2015 was impacted by the ongoing weakness in its LED Products business, even though the LED lighting and the Power and RF segments remained strong. Cree reported flat revenue growth in fiscal 2015, while its bottom line contracted significantly on account of the dramatic price reductions in LEDs. However, the company saw an improvement in its LED business in Q1 2016, led by higher patent license income).  This, combined with continued growth in LED lighting, helped Cree report a solid Q1 2016.

Cree’s key priorities for fiscal 2016 are:  1) to build its financial momentum, 2) continue to innovate in each of its business segments; and, 3) to promote future growth in Power and RF products, so as to allow Cree shareholders to better realize the full value of this business. Cree is confident that new products and lower costs from its restructuring initiatives will help improve its revenue and profitability in fiscal 2016.

Quick Snapshot of the Q1’16 Earnings

Relevant Articles
  1. 9% Drop In Cree Stock A Buying Opportunity?
  2. Strong Demand Revival Could Help Cree Stock Regain Recent Highs
  3. Cree Stock Seems Overpriced After 2.5X Move
  4. Could Cree Stock Drop To $80?
  5. What’s The Downside On Cree Stock?
  6. Cree Stock To Drop More Than 20%?

At $425 million, Cree’s Q1 2016 revenue increased 11% sequentially, led by strong demand for commercial lighting and a solid quarter for the LED business. While lighting products and LED products grew 8% and 21%, respectively, Wolfspeed Power and RF products revenue declined 5% sequentially.

The company’s non-GAAP gross margin rebounded to 31.7% in the quarter, due to improved margins in lighting and lower cost in LEDs as Cree realized some of the initial benefits from its LED restructuring initiative. Cree’s Q1 2016 operating income increased to 6.9%, and the company reported non-GAAP earnings per share of $0.21, well within its target range.

We are in the process of updating our $33 price estimate for Cree.

See Our Complete Analysis for Cree Here

Commercial Lighting To Be The Strongest Growth Driver 

Cree’s commercial lighting business continued to grow in Q1 2016 and the company made good initial progress with its plans to improve margins for this business. Though Cree expects the consumer lighting business to be an important part of its growth strategy, its believes that much of the growth will be driven by its expansion in commercial lighting, which is the fastest growing division of its lighting business.

LED lighting market is anticipated to grow 45% per year through 2019, driven by declining price points and rising interest on the part of the channel in pushing LED products. 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 continues to gain share in the commercial lighting market and remains confident of its ability to continue growing in LED lighting. The company recently introduced new KR8 and LR6 LED downlights, which further enhance its product leadership in the commercial downlight market. These products are designed to deliver better lighting performance and better value for new and existing commercial spaces.

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.

LED Restructuring To Improve Profitability In 2016

In an effort to adjust capacity, reduce overhead and increase LED reserves, Cree decided to restructure its LED business in Q3 2015. 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. The company recognized $16 million of restructuring cost in Q1 2016. The LED restructuring and factory consolidation is expected to be completed by the end of the current quarter.

Once the restructuring is complete, Cree’s LED business will benefit from a renewed focus on new market leading high power products with a reduced cost structure. Cree claims that its LED factory utilization is improving, and the company targets improving the same to approximately 85% by the end of calendar year 2015. 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.

Spining-Off The Power & RF Business To Unlock Its Full Value

 

Cree admits to seeing some near term revenue softness in the Power and RF business due to macroeconomic weakness. However, the company claims that the overall design activity remains very strong for both Power and RF products. It expects growth in this segment to pick up in the second half of fiscal 2016.

In May this year, Cree announced its decision to spin off its Power & RF business into a separate publicly traded company. Last month, the company announced a new company name (Wolfspeed), brand identity and purpose for the spun-off division, in advance of its IPO which it plans to execute in fiscal 2016. Cree expects the spin-off to help it focus exclusively on restructuring its LED business and unlock the full potential of its Power and RF business. The company claims to have already started  seeing the benefits of a Power and RF focused management team.

Cree is a leader in silicon carbide (SiC) power products and gallium nitride (GaN) radio frequency (RF) devices. It is the only player in the industry with a fully commercialized, broad portfolio of the most field-tested SiC and GaN power and wireless technologies and products in the market.

Cree estimates the market addressed by its power diodes and transistors exceeds $5 billion today, and the RF products is targeting a market that currently accounts for $1.5 billion to $2 billion in sales. The company forecasts its Power and RF business to grow at a 12% to 15% annual pace over the next several years.

Q2 2016 Outlook

– Revenue in the range of $425 million to $445 million, driven by growth in commercial lighting and LED bulbs.

– Non-GAAP and GAAP gross margin of approximately 31.7% and 30.9%, respectively.

–  Non-GAAP and GAAP operating expense of approximately $106 million and $129 million, respectively.

– Tax rate of 25%.

– GAAP net income between $1 million to $7 million. GAAP EPS target is between $0.01 and $0.06 per diluted share.

– Non-GAAP net income in the range of $21 million to $27 million. Non-GAAP EPS between $0.21 to $0.26 per diluted share.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. Why Investing In CREE Looks Like A Bad Idea, Seeking Alpha, December 3rd. 2014 []