Key Takeaways From Cree’s Q4 Earnings

LED manufacturer Cree‘s (NYSE:CREE) stock price dropped nearly 5% as the company posted another soft set of quarterly results. The company’s top line and profitability continued to decline in the quarter, owing to fierce competition in the LED industry, which has suppressed LED prices as well as Cree’s market share. It is worth noting that Cree’s performance, in terms of both revenues and margins, did dramatically improve on a sequential basis. This comes as a source of respite for management, which is expecting a turnaround in its business in the upcoming quarters.

Factors That Could Help Drive Growth In The Future

– Building capacity in the Wolfspeed business: Cree is working on increasing its capacity and further developing the technology to support longer-term growth opportunities in silicon carbide materials, silicon carbide power devices and modules, and gallium nitride RF devices. The company is seeing significant demand in silicon carbide and is currently working on improved capacity.

– Expanding LED product portfolio: Cree is expanding its LED product offering with new high-power and mid-power products that leverage its market leadership. The company has entered into a joint venture with San’an, which can help Cree increase its presence in the mid-power LED component market.

– Growing Lighting revenue and increasing margins: The company is looking to boost revenues and margins by investing in channel relationships, improving execution, and continuing to deliver innovative lighting solutions.

Lighting Business Will Take A Few Quarters To Build Any Significant Growth Momentum

As mentioned above, Cree’s lighting business performed worse than expected because of two primary factors. First, Cree claims that the commercial lighting market in the U.S. was seasonally slower than anticipated, which resulted in under-utilization of its capacity which – combined with higher warranty reserves – led to a decline in lighting gross profit. Cree believes that even though its fiscal Q4 was soft, the non-residential construction market will pick up in subsequent months. With an expanded product range, the company hopes to get into new applications, which can drive growth going forward.

Given the current state of the Lighting business, Cree has reevaluated the business to identify spending that is not aligned with its current growth strategy. As a result, it plans to take actions to remove certain costs that are targeted to yield an $8 million annual benefit.

Despite the above-mentioned steps, it will take several quarters to rebuild significant growth momentum in the Lighting business, and thus we expect muted performance in this business in the year ahead.

For Q1, the company is expecting revenues between $353-367 million. Lighting revenues are likely to be to be lower than the previous quarter, primarily due to seasonality. Meanwhile, the Wolfspeed business is expected to grow by around 4%.

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