Is Cree’s Operational Efficiency Getting Better Amid Aggressive Pricing Pressure?

Cree (NYSE:CREE) has experienced diminished revenue growth due to significant expansion of LED production capacities in China in the recent years that has resulted in a significant decline in the prices of LED lights and components. In the wake of this trend, which is beyond the company’s  control, it is imperative to adjust expenses so as to lessen the impact of falling revenues on net cash profits. To this end, revenue generated per dollar spent on operating expense can be regarded as a key metric of how well Cree has leveraged its operating expenses.

From $6.75 generated in revenues per dollar of SG&A in 2014, the figure came down to $6.11 in 2015, as Cree’s revenues continued to suffer from declining LED prices due to the oversupply situation. Looking at the near future, we don’t expect the figure to improve. With growing competitive pressure from Chinese players, Cree’s top line is likely to remain under pressure going forward. However, a slight improvement in the company’s operating efficiency is likely to come from the expansion of LED market, which should offset the negative impact of revenue decline resulting from the fall in Cree’s market share.

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