Customer Service Disruptions Likely To Drag Down Cree’s Top-Line In Q1’17 Too

by Trefis Team
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Leading LED manufacturer, Cree (NYSE:CREE) is set to report its Q1 2017 earnings on October 18th.   (Fiscal years end with June.) Going by the company’s guidance for the quarter, we can expect its revenues and margins to decline in Q1’17, both sequentially and on a year-over-year basis. The primary reason for the decline can be attributed to the customer service disruptions caused by an ERP system upgrade that was initiated by Cree in fiscal Q3’16. It is worth noting that the company’s sales cycle lasts around two to three quarters, and for this reason we can expect the negative impact of service disruptions caused in Q3’16 to last into Q1’17 as well. Furthermore, Cree expects its operating revenues to remain flat in FY 2017, even though it forecasts the overall market size to expand during this period. Fierce competition in the LED industry, and its impact on pricing, are the reasons behind sluggish revenue growth for the company.

In the table below, we note the key metrics as expected for the company in Q1’17.  As can be seen, revenues as guided would be down 5.4% sequentially and 13.9% year to year.  Via the same comparisons, the consensus revenue estimate is down 16.8% and 24.2%, respectively. Clearly, Cree is operating in a grim marketplace.

Screen Shot 2016-10-13 at 3.49.23 PM

Cree Focussed On Expanding Its Product Offering

Though Cree’s performance in the past year has been significantly affected by the heightened competition in the LED market, it is focused on expanding its product offering to drive its top-line growth higher going ahead. In Q4, the company hinted of having an increased focus on smart lighting related products, which could be the key to its long term growth. Increased demand for energy efficient and intelligent lighting solutions is likely to drive this market. The company is also likely to consider M&A opportunities as they arise, to expand its business inorganically.

Power & RF Division Sale Expected To Close Soon

In Q4, Cree announced the sale of its Power and RF division to Infineon with the aim to become a more focused LED lighting company. This transition is expected to close by the end of this calendar year. It should help Cree improve its cash position and accelerate the growth of its lighting and LED businesses. The company’s core LED business was significantly hit in the past year due to severe decline in margins, as a result of heightened competition from Chinese players in the industry.

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