Cree Inc. (NASDAQ:CREE) is leading the LED lighting revolution and rendering the energy-wasting traditional lighting technologies obsolete through the use of energy-efficient and mercury-free LED lighting. Cree is a market-leading innovator of lighting-class LEDs, LED lighting, and semiconductor products for power and radio frequency RF applications.
Cree's product lines include LED fixtures and bulbs, blue and green LED chips, high-brightness LEDs, lighting-class power LEDs, power-switching devices and RF devices. Cree's products are creating improvements in applications such as general illumination, electronic signs and signals, power supplies and inverters.
Net Revenue Performance
Source: annual report fiscal 2013
The company's revenue increased 19% to $1.4 billion in fiscal year 2013 up from $1.2 billion in fiscal year 2012. The year-over-year increase was due to higher sales across all three of its reportable segments but was mostly driven by the positive performance of the lighting products segment. The revenue of the lighting products segment increased primarily due to an increase in sales of existing products, the sales of new products introduced during the fiscal year and the revenues from the Ruud Lighting acquisition.
Source: annual report fiscal 2013
The revenue of the LED products segment represents the largest portion of Cree's revenue. The LED products segment represented approximately 58% of total revenues for fiscal year 2013, 65% of total revenues for fiscal year 2012 and 82% of total revenues for fiscal year 2011. The revenue of LED Products was $801.5 million in fiscal year 2013, $756.9 million for fiscal year 2012, and $808.2 million for fiscal year 2011. The revenue of LED Products increased by approximately 6% to $801.5 million in fiscal year 2013 which is up from $756.9 million in fiscal year 2012. This increase was the result of an overall increase in the number of units sold, primarily from its newer products, and partially offset by a decline in selling prices. The average selling prices for the LED products segment decreased by 8% in fiscal year 2013 compared to the ASP of the segment in fiscal year 2012. This was due primarily to the sales of new lower-cost products and pressure from competitive pricing.
The revenues of the lighting products segment represented approximately 36% of total revenues for fiscal year 2013, 29% of total revenues for fiscal year 2012,and 8% of the total revenues for fiscal year 2011.The revenue for the lighting products segment was $495.1 million in fiscal year 2013, $334.7 million in fiscal year 2012, and $81.8 million in for fiscal year 2011.The revenue for the lighting products segment increased to 48% or $495.1 million in fiscal year 2013 compared to $334.7 million in fiscal year 2012. This increase was the result of an overall increase in the number of units sold, including sales from re-designed products as well as the recognition of a full year of sales in fiscal year 2013 for products acquired from Ruud Lighting. The overall ASP of the lighting products segment decreased by 27% in fiscal year 2013, compared to fiscal year 2012, due to a change in product mix.
The revenue of the power and RF products segment represented approximately 6% of the total revenues for fiscal year 2013, 6% of the total revenues for fiscal year 2012, and 10% of the total revenues for fiscal year 2011. The revenue of the power and RF products segment was $89.4 million in fiscal year 2013, $73.0 million in fiscal year 2012, and $97.6 million in fiscal year 2011.The revenue of the power and RF products increased approximately 22% to $89.4 million in fiscal year 2013 which is up from $73.0 million in fiscal year 2012.This increase was the result of higher RF product unit sales in fiscal year 2013. The overall ASP for the power and RF products segment decreased by 9% in fiscal year 2013, in comparison to fiscal year 2012, primarily due to the sale of new lower-cost power and RF products.
Research and Development Intensity
As competition increases the company needs to continue to develop new products that meet or exceed the needs of its customers in order to continue to grow its business. Therefore, the ability to continually produce more efficient, brighter and lower-cost LEDs and lighting products to meet the growing needs of its customers will be critical to the company's success.
Over the years the company has invested significant resources in its research and development department. Most of its research and development is focused on efforts to increase the level of product quality by creating innovative new products as well as improving on existing product lines. Examples include the manufacturing of higher power diodes/switches and higher power/higher linearity RF devices. The company also seeks to improve the performance of its manufacturing processes.
Source: annual report fiscal 2013
The company has invested a substantial amount of money into producing future products and refining its manufacturing processes in order to improve its current market share and increase operating efficiency. The company has invested 11.25% of its sales into research and development in fiscal year 2013, 12.31%of its sales into research and development in fiscal year 2012, and 11.65% of its sales into research and development in fiscal year 2011. The technology sector often has higher research and development intensity in order to stay competitive so that will not be surpasses by its competitors and result in a loss of market share.
According to the "Chinese Lighting Market Report (2013 version)" released by LED inside, a research division of Trend Force, the Chinese government successfully passed a series of domestic policies in 2012 that will not only cause an LED lighting demand but will also strengthen the entire LED lighting market. A few of the key policies worth noting include the proposed spending of 2.2 billion RMB on the promotion of CFL and LED lights. There will also be a ban on the sale of 100 Watt and above incandescent light bulbs, along with those of halogen lamps whose efficiency levels fall below required standards. This ban took effect on October 1st, 2012. This is the reason why the company has become more aggressive in its sales efforts in China enabling it to gain a share in the LED components market. China represented 28% of Cree's total revenue in June 30, FY13 and more than 45% of its LED product segment sales.
Moreover, the real estate and infrastructure developments in India have recorded a growth of over 10% during the last five years due to an increasing number of residential and commercial projects across various cities. With the growing middle income population and large government investments in rural electrification programs such as Rajeev Gandhi Grameen Vidyutikaran Yojana and the Restructured Accelerated Power Development and Reforms Program are expected to drive the lighting fixtures market in India. According to "India Lighting Fixture Market Forecast & Opportunities, 2018" the lighting fixture market in India is expected to grow at a CAGR of 17% during 2013-2018. This means the there exists a huge growth opportunity for the company to into.
Due to rising electricity costs and expenditures in government sectors many countries in emerging and developed markets have been changing their lighting policy from traditional bulbs to LED lighting. This effect has been prominent in Asian regions. The potential for overall growth in the LED market is very high. There exists a great opportunity for the company to expand its business in the Asian region. Moreover, the company's acquisition of Ruud Lighting, which already boosted the performance of the company, will help to attain a higher number sales of designer lighting fixtures in urban. I believe that because of higher demand for LED products the future prospects of the company is quite bright.
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