Cree’s Stock Price Declines By 12% On Weak Q1’15 Preliminary Results

by Trefis Team
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Leading LED manufacturer, Cree’s (NASDAQ:CREE) stock price declined by approximately 12% after the company announced its preliminary results for Q1 2015, ended September 28. The company lowered its revenue estimate to approximately $428 million, from its initial guidance of $440 million to $465 million. It also expects GAAP earnings to be below its previously announced target range of $0.25 to $0.30 per diluted share. Cree’s overall gross margin is expected to be below the company’s previously announced target of 36.9%. Cree will announce its full Q1 2015 earnings on October 21. The company stated that it has limited order visibility for Q2 2015.

Weak LED Product Sales Lower Revenue Growth

Cree expects its LED products revenue to decline 20% year to year and 13% quarter to quarter in Q1 2015, due to weaker than expected global demand. However, it expects continued growth momentum in its lighting sales, which it expects to increase 51% annually and 7% sequentially (which is at the higher end of its guidance) driven by growth in both LED fixtures and LED bulbs. It also expects its Power and RF Products revenue to come in at the higher end of its initial guidance.

Cree has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. While its lighting sales have shown strong growth so far this year, its LED component sales have slowed down. Cree reported a 156% annual growth in lighting products, while its LED products revenue declined by 8% in Q4 2014 (ended June). The contribution of lighting sales to Cree’s total revenue has risen significantly in the last few years, from 33% in June 2012 to almost 48% as of Q4 2014. The general LED lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation.

Higher Lighting Sales Will Impact Gross Margins

The lower than expected LED products revenue and higher than targeted LED bulb revenue will have a negative impact on Cree’s overall gross margins. Lighting products offer lower profit margins compared to LED components. LED Products and Lighting Products segment gross margins are expected to be lower sequentially primarily due to the product mix within each segment. The LED bulb price reductions offset a more favorable lighting mix. The company has lowered the prices of the Cree LED Bulb product line by as much as 23%. [1]

Although margins will remain under pressure in the short term, we believe Cree can manage to increase its gross margin in the future. Higher volumes combined with lower new cost products, cost reductions and higher factory utilization can help increase Cree’s overall gross margin.

Our price estimate of $58 for Cree is at a considerable premium to the current market price. We will update our model after the full Q1 2015 earnings release. (Read: Here’s Why We Believe Cree Is Still Worth $58)

See Our Complete Analysis for Cree Here

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  1. Cree Makes The Biggest Thing Since the Light Bulb Brighter and More Affordable, Cree Press Release, March 12, 2014 []
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