Cree’s Q3’17 Earnings Preview: Future Course Of Wolfspeed & Margin Improvement In Focus


Leading LED manufacturer, Cree (NYSE:CREE), is set to report its fiscal Q3’17 earnings on April 25th. The company has seen its top line and profitability decline drastically in the last few years owing to the fierce competition in the LED industry, which in addition to reducing Cree’s market share has also suppressed LED prices. While the company’s revenue and bottom line continued to decline in Q2’17, the figures were above consensus estimates and Cree’s previously guided range for the quarter, primarily on account of Cree’s settlement of patent infringement and a false advertising lawsuit with Feit Electric. Q3 is a seasonally slow quarter, but the company is targeting incremental gross margin improvements driven by the lighting segment.

Further, operating expenses in Q3 will be lower because of lower promotional and IP litigation spending. The operating margin improvement is likely to be slightly offset by higher R&D spending for new LED product development.

See our complete analysis for Cree

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Termination of the Wolfspeed Sale

In February this year, Cree announced the termination of the definitive agreement to sell its Wolfspeed Power and RF division to Infineon Technologies. The company decided to sell off its Power and RF business to increase its resources and become a more focused LED lighting company. In May 2015, Cree decided to spin-off its Power & RF business into a separate publicly traded company, and expected to execute an IPO for the same in fiscal 2016. However, the company decided to instead sell off the division as it was approached by other companies.

Cree and Infineon have been unable to identify alternatives which would address the national security concerns of the Committee on Foreign Investment in the United States (CFIUS). The Wolfspeed business has been performing well and Cree is confident of further reaping the benefits of the business together with its LED business. A cash inflow of $850 million from Infineon could have drastically improved Cree’s shrinking cash base. However, the company is confident that with its improving operating cash flow it can continue to invest to grow all three businesses. Also, since Power and RF earned the company the highest gross margin, compared to other divisions, retaining the business can help uplift profitability.

Competition In LED Products Business To Prevail In 2017

Though Cree claims that the fundamentals of its businesses have improved, we believe that competitive pressure is likely to prevail in 2017 as well. According to a report by LEDInside, the global LED market was estimated to grow by a mere 3.4% annually to US$14.8 billion in 2016. The report also states that the LED industry is likely to be under tremendous competitive pressure in 2017. Another report by LEDInside states that Chinese LED packaging manufacturers have rapidly scaled up their operations since the second half of 2016. Clearly, these factors are indicative of increased pricing pressure on Cree’s LED products business, which can have negative implications on its overall margins in 2017.

Cree expects its operating revenues to remain flat in FY 2017. However, the company is focusing on the following goals to drive its long-term growth.

 

  • Driving top-line growth of the LED lighting business. To achieve this target, Cree is focused on high growth smart lighting products. Also, the company is evaluating growth opportunities in the lighting segment through potential M&A.
  • Improving overall operating margins. Cree believes that improvement in lighting gross margins will primarily drive overall operating margins. The company expanded its lighting product portfolio recently by launching new high-value products, which it believes will help in improving margins going forward.
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