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Cree slips again on weak guidance

22 Oct 2014

Stock price slides further as the LED lighting firm's outlook disappoints Wall Street.

LED chip manufacturer and lighting firm Cree has disappointed the stock market with predictions of falling revenues in the closing calendar quarter of 2014.

The Durham, North Carolina, company, which had already warned of lower-than-expected sales and profits in what was the first quarter of its fiscal year 2015, posted sales of $428 million for the three months ending September 30.

But despite the general increase in demand for solid-state lighting products – rival Philips has just reported sustained rapid growth in its own LED-related business – Cree said it expected sales to fall to between $400 million and $420 million in the quarter leading up to Christmas.

News of that and a much lower net income sent Cree’s stock sliding as much as 15 per cent in after-hours trading. Opening October 22 at around $30, the company has now lost half of its stock value since the start of 2014, when it was trading well above $60.

Competitive environment
Long-term CEO Chuck Swoboda told investors that weak sales of LEDs, which were down 13 per cent sequentially, were behind the reported decline in both revenues and net income.

At the same time, Cree’s lighting product sales, which command much lower profit margins than its LED chips and components, are up some 51 per cent compared with last year.

“The LED competitive environment is currently very challenging, especially in lighting applications where mid-power and high-power LEDs compete for designs,” Swoboda said by way of explanation.

“There is a lot of available mid-power LED capacity chasing customer designs at very low LED margins. We believe this market will rationalize over time as the LED semi-cycle matures and capacity is more fully utilized.”

New LED chips and bulbs
He added that while Cree was unable to control the competitive environment, it would continue trying to shape it to its advantage by developing improved LED technology.

“The semiconductor business has been defined for almost 50 years by a principle of innovation known as Moore's law that led to doubling transistors per wafer every two years,” said Swoboda. “The same principle applies to the LED industry in the form of increasing lumens per wafer.”

The CEO believes that while some companies are merely filling their factories in the short term, it will be the likes of Cree who win out over the longer term by concentrating on improving the efficacy of their high-power light emitters.

And some much-improved chips are in the pipeline, it seems. Swoboda said that “next-generation” technology with double the lumens per LED – thanks to advances in the epitaxial structure that actually emit the blue light within the semiconductor devices, and better white-light conversion – will begin sampling by the end of 2014. Production devices should begin shipping in early 2015.

“We are also developing a next-generation consumer LED bulb that delivers even better light, looks even more like a regular light bulb and at a price that gives even more people a reason to switch to LED,” he added.

Despite that focus on high-end performance, Cree is still planning to invest $83 million in the Taiwanese LED maker Lextar, with Swoboda explaining that the deal represented something of a hedge at a time when there is excess supply of mid-power LEDs in the market.

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