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Cree banks on LED lighting as income falls

14 Aug 2006

Profits tumble as Cree invests in new technologies that the company believes will bring financial reward over the next few years.

Cree has achieved record revenues for its 2006 financial year, but both revenues and profits have been hit in the last three months. Sales fell by 1% on the prior quarter to reach $106.7 m, while net profit tumbled from $24 m in the third quarter to just $13.2 m for the last three months.

Cree CEO Chuck Swoboda attributed the fall in income to "growing pains" currently being endured by the company as it invests in new product development. However, Swoboda acknowledged that both Cree's sales and gross profit margins are under pressure from increased competition, particularly in the LED market.

At $84.5 m in the latest quarter, LED revenue still accounts for almost 80% of all Cree's revenues. But that figure has essentially been flat for the past four quarters, and represent a decline of 2% on the third quarter. Significantly, shipment volumes have grown by 33% compared with its June 2005 quarter, but average selling prices (ASPs) have fallen by 24%.

With its LED chip business appearing to be at saturation point, Cree is increasingly focused on diversifying its product offering. According to Swoboda, this will be achieved by moving up the food chain in the LED lighting business and by commercializing its power and RF products.

Cree is investing heavily in this development strategy at the moment. In the latest fiscal year, it spent $50.8 m on research (not including stock-based compensation expenses), compared with $40 m in the previous year. While this higher research spend is impacting gross margin in the short term, Swoboda believes that the investment will drive revenue up by 60-70% over the next three years. "We are in the middle of an exciting transition," the CEO told investors. "We are trying to build a much larger business."

In the LED business, Cree is looking to "Colorwave", its large-area display backlight product, as well as its XLamp LED lighting components. Scaling up XLamp has proved to be a challenge and, although Colorwave has been a technological success, producing the large backlight modules at a viable cost has proved more of a headache. Meanwhile, revenue from high-power electronic products jumped by 29% in the latest quarter to $5 m, compared with just $1.8 m a year ago.

The company posted total revenues of $423 m for the 2006 fiscal year, a 10% increase on the $384 m recorded in 2005. But net income fell to $76.7 m, a drop of almost 16% on the $91.1 m profit in the previous year.

Cree currently estimates that revenues for the first quarter of its fiscal 2007 will be in the range of $102 m to $106 m.

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