Earning $375 million in revenues in Q4 2013, a 7% sequential and 22% annual growth, leading LED manufacturer Cree (NASDAQ:CREE) closed its fiscal 2013 on a strong note. Backed by strengthening demand across all business segments-- LEDs, Lighting and Power, and RF -- the company reported $1.4 billion in revenue for fiscal 2013 (19% annual increase). In addition to strong sales, the improving operational efficiency increased gross margins from 34.8% in Q4 2012 to 37.5% in Q4 2013. For fiscal year 2013 Cree saw its gross margins climb by 2.6%.
Despite continuing its growth momentum in Q4 2013, Cree's stock price declined by over 10% in late trading as the company's Q1 2014 outlook (see below) was slightly below analysts' expectations. While Cree expects to see solid growth in lighting, driven by LED fixtures and LED bulbs, it anticipates flat sequential growth for LED products for Q1 2014. It expects power and RF sales to come in slightly higher compared to Q4 2013. We believe that the flat outlook for LED components is more on account of seasonal factors. Though the lighting segment remains the key growth driver in the LED market, we expect the improving market dynamics along with rising LED adoption to help drive demand for LED products in the long run.
Cree's product innovation has opened new applications and improved LED payback, in turn driving demand for its products. The company remains committed to driving LED adoption and closing down the gap with conventional lighting through innovation. In the long run, it aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers. Closing fiscal 2013 with more than $1 billion in cash and no debt, it has a strong balance sheet, which gives it the ability to invest in growing its business and respond to new opportunities in the market.
Strong Lighting Demand to Drive Growth
Cree reported strong sales in lighting as well as LED components in Q4 2013. While it saw a 17% year-over-year rise in LED sales, it marked a robust 33% year-over-year growth in its lighting segment. As the demand from the backlight market nears saturation, the general lighting market is expected to be the primary growth factor in the LED industry. According to LED Inside, the LED lighting segment is estimated to increase from around $1.5 billion in 2012 to approximately $8 billion by 2015, a CAGR of over 70%. While LEDs currently account for only 10% of the total lighting market, the percentage contribution is estimated to increase to as high as 60% by 2020.
Cree believes that it is still as a nascent stage of transition in LED lighting and thus the segment offers tremendous growth opportunity to the company. It made great progress ramping up its LED bulb and implementing a series of cost reductions during the quarter. Available for as low as $10, Cree's LED bulbs consume 84% less energy and provide similar levels of brightness compared to traditional bulbs. Though LEDs and fixtures account for a majority of Cree's revenues, the LED bulb is of strategic importance for the company to drive LED adoption. There are around 5 billion light bulbs currently being used in houses in the U.S. alone that can be converted to LEDs.
Cree recently launched two new breakthrough products it believes will open significant new markets to LED lighting. Its UR Series linear upgrade kit enables customers to convert their existing fluorescent fixtures to LED for less than $100 without removing the fixture. On the other hand, Cree's XSPR Series Street light is the first $99 LED streetlight that is designed to compete head-on with low-cost, high-pressure sodium streetlights in residential applications, while delivering 65% energy savings and a significant upgrade in light quality.
Cree is a market leader in both LEDs and LED Lighting products. With new innovative products, the company intends to take advantage of the global shift to LED lighting through both lighting as well as new LED products.
Higher LED Adoption and Operational Efficiency to Improve Gross Margins
Despite very competitive market environment, Cree's gross margins in 2013 improved due to better factory utilization on account of rising LED demand, process improvements, and new, lower-cost product designs. Though gross margin improved year over year in Q4 2013, it was on the lower side of Cree's expected range as the company saw a growing shift in lighting product mix. LED bulb sales were higher than targeted, whereas fixture sales were lower. LED bulbs currently offer lower gross margins compared to the overall lighting segment.
Cree continues to make incremental R&D investment each quarter and anticipates higher operating expenses in the current quarter. In order to compete against other players, it will have to continuously invest in its R&D capability and incur higher marketing expenses, which can shrink its bottom line. Also, the pricing pressure in LED chips and components restrict growth in margins.
However, we expect Cree's marketing expense to decline in the future. The full quarter benefit of LED bulb cost reductions implemented during Q4 2012 and increasing shift in product mix toward higher-margin LED fixture sales will lift margins. Additionally, the company claims that the gross margins earned on LED bulbs is improving. Higher LED volumes and lower cost from new product designs will help improve gross margins in the future.
Q1 2004 Outlook
- Revenue in the range of $380 million to $400 million.
- GAAP gross margin of 38.5%. Non-GAAP gross margins to improve to 39%.
- Operating expense to increase by approximately $3 million sequentially.
- Net interest income of $2.3 million.
- Tax rate of 23%.
- GAAP net income in the range of $28-$34 million.
- GAAP EPS and non-GAAP EPS (per diluted share) between $0.23 and $0.28 and $0.36 and $0.41, respectively.
We are in the process of updating our price estimate of $63.61 for Cree.
Disclosure: No positions.