Cree LED results reflect challenging business environment

Jan. 18, 2012
Cree’s LED-component revenue fell in the last quarter compared with the previous year, and the company is delaying its conversion to 150-mm wafer manufacturing in order to increase its factory utilization rate.
LED lighting manufacturer Cree, Inc. (Nasdaq:CREE) had revenues of $304.1 million for its second quarter of fiscal 2012, which ended December 25, 2011. This represents an 18% increase compared to the same quarter last year, and a 13% increase compared with the previous quarter. This is the first set of results that includes a full quarter’s contribution from Ruud Lighting, acquired by Cree in August 2011.

GAAP net income for the second quarter of $12.1 million, or $0.10 per diluted share, decreased 76% year-over-year compared to GAAP net income of $49.8 million, or $0.45 per diluted share, for the second quarter of fiscal 2011. Both the revenue and income figures were less than predicted by analysts.

"Our second quarter results demonstrated the strength in our expanded lighting product line, with strong growth in sales of both indoor and outdoor products," said Chuck Swoboda, Cree chairman and CEO. "While the business environment remains challenging, our results demonstrate that our strategy is working. Our future business outlook remains very optimistic based on our belief that innovation drives payback, payback drives LED lighting adoption, and adoption expands the market for both Cree and our customers."

For the December 2011 quarter, LED products comprised 64% of Cree’s revenue at $194.2 million, with lighting products contributing a further 31% at $95.7 million.

Revenue from LED products (chips and packaged LEDs) decreased approximately 8% compared with the same quarter last year. Cree said that the decline was “primarily due to generally weaker demand and downward pricing pressure.” The blended average selling price (ASP) for LED products increased by 22.4% year-on-year, due to a higher product mix of LED components versus chips.

Revenue from lighting products increased approximately 386% compared with the same quarter last year, mainly due to the acquisition of Ruud Lighting. The ASP for lighting products increased by 24.9% year-on-year. Cree’s gross profit decreased approximately 13% to $105.1 million compared with the same quarter last year, while gross margin decreased to 35% from 47% year-on-year. Factors contributing to the decrease in gross profit and gross margin were an aggressive pricing environment for LED chips and components, and overall lower factory utilization, said Cree.

In its quarterly report, Cree said it planned to “continue to invest in both our LED lighting and LED component product lines to increase performance, enable lower lighting system costs with shorter paybacks and find new ways to drive the market and [render] obsolete old, energy-wasting lighting technology.”

Slower conversion to 150-mm wafers

Cree also said that it would continue with its conversion to manufacturing on 150-mm wafers (silicon carbide) but at a slower rate than previously planned. This is because there is a greater short-term benefit, in terms of LED cost reduction, in maximizing the productivity of existing manufacturing lines. Cree says that the “aggressive pricing environment” and low factory utilization are offsetting cost reductions that can be achieved through new lower-cost product designs, yield and productivity improvements, and the conversion to 150-mm wafers.

“We are delaying the rate of conversion to 150-mm wafer production to take advantage of existing 100-mm capacity to optimize the current factory to deliver the lowest cost in the near term,” said the company. “We are continuing work to enable the full conversion as business needs warrant over the next three to six quarters.”