CREE Cuts Sales Outlook for LED chips in face of pressure of mid-power LED market squeeze

Cree a market leader in LED light,has announced restructuring in its LED bulb manufacturing business that has been driven by higher than anticipated drop on packaged LED bulb selling prices. Meanwhile, the company announced a poor fiscal year 2016 (FY2016) operating plan and also said that it will start a $500M (million) share buyback plan in FY2016. Still, the company is clearly being impacted by the rise in use of mid-power LEDs although Cree has remained primarily focused on high-power components in its LED bulb business.

In the short term, the restructuring will primarily focus on a reduction in LED bulb manufacturing capacity in what are presently underutilized production lines. The company was already facing the need to begin separating LED bulb manufacturing in factories from the manufacturing of power and RF products after announcing in March a plan to separate the power and RF businesses in an initial public offering (IPO). The company said it will consolidate LED bulb manufacturing into single factories in the US and China, and that the move would make the utilization rates up in the 80% to 90% range.

CEO and chairman Chuck Swoboda said, "We are trying to right-size the LED bulb factory for the level of business and environment that we are competing in so that we can compete more successfully over the next fiscal year." Now the company will move LED bulb manufacturing out of the impacted factories before the IPO.

Swoboda repeatedly said during a conference call that sales of components in terms of unit volume remained on the previously projected track, but that the aforementioned price drop is more serious than expected. Swoboda said other major LED bulb manufacturers are suffering from similar pressure. He said the root was in the backlight-application sector, but that price drops instigated by vendors in that space spread the impact to the general lighting sector.

The main influence of the restructuring will be charges totaling $45M that will primarily be absorbed in the current fiscal quarter. Swoboda said those charges will primarily consist of fixed-asset decreases. But Cree also said it was reducing revenue expectations in the current 4Q2015 period to $375M, effective adding $27M to the total. A charge in inventory reserves brings the true impact to $85M.

It was a challenge to find any indication that mid-power components may be in part responsible for the restructuring, but one statement makes that influence clear. Swoboda said, "The restructuring will enable us to improve the cost structure of our high-power LED factory and better position the company to take advantage of low-cost LED chips available in the market for mid-power applications."

Indeed, Cree had used mid-power LED chips -- the manufacturer hasn been identified -- in its most recent LED-based T8 tube as we covered in a recent feature evaluating LED-based alternatives to linear fluorescent products. Those tubes are also the product that is involved in a major recall, although the LEDs don specifically appear related to the recall.

Swoboda also briefly discussed the LED lights division at Cree. In one word, he said the company would reduce its focus on LED components and general consumer lighting and shift focus to higher-end consumer and commercial lighting products. He said lower LED and consumer LED bulb revenue is the reason for lower projections.

"Our LED bulb business is about building brand to drive the commercial business long term," said Swoboda. He said Cree would not focus on low-price applications but focus on value-added features, adding the company is confident that customers will continue to pay for value-added products.

Swoboda passed the current environment off as "Just a cycle." He claims that Cree is surving better than most LED manufacturers but there has been a clear industry shift in component pricing.

Optimism about the future was hard to expect. The FY2016 plan is targeting a revenue increase to around $1.8 billion. Swoboda said the company will enjoy free cash flow of $75M. And of course the $500M buyback indicates that the board is confident in the future direction.