What’s Going on With Cree?

Earlier this week Cree announced its 2016 fourth quarter fiscal year performance.  The following are notes from their investor call but, the end result was essentially “what’s going on with Cree?” given that the stock essentially tanked thereafter.

From their call …

• Goal is to build a “more focused and valuable LED lighting technology company”
• “Refocused consumer business on premium LED bulbs”
• Sales flat at $1.6 billion.
• Commercial lighting growth offset  by lower consumer lighting sales (comment – which makes one question why invest / develop premium LED bulbs for the consumer market given Cree’s relationship with Home Depot (not a niche marketer for premium products) and consumer LED bulbs continue to decline in price as costs decrease and to stimulate residential usage.  Perhaps Cree is betting on benefiting from utility rebates?)
• Commercial lighting improved due to 9 new products, customer service improvements, order increases (comment – distributors, what has your experience been in working with Cree and selling their products.  Distributor friendly? Readily accepted by your contractors and end-users?)
• Reduced retail inventory in preparation for next generation bulb launch (comment – distributors, is Cree willing to accept “old” product when they launch new LED products? As many know, LED obsolescence is a key concern for distributors when considering how much to inventory. And if they maintain it, the value of the inventory declines due to next generation product frequently being at lower costs of they need to discount to move the items.  Are manufacturers in this product category proactively removing old products at their expense? It also makes one wonder how Cree is disposing of the “old” product?)
• Lighting products revenue down 2% to $889M (which makes lighting about 56% of 2016 sales)
• Commercial lighting increased double digits vs Q3 as “service” improved (they had “ERP” issues earlier in the year)

For 2017 …

• Project commercial LED lighting products market will expand.  Considering, perhaps, some M&A as well as product line expansion.
• Targeting the consumer LED bulbs market to be similar in 2017 as it was in 2016 … highly competitive (which is interesting as would expect residential to continue to grow given increased awareness.  As an industry light source, LEDs will grow, but perhaps dollars will remain the same due to a decline in price? Or is Cree restricted by its channel choices?)
• “Distribution business improved in Q4 and looks solid for Q1; working to rebuild the agent-driven U.S. project pipeline which is running behind Q4” (comment – is “agent-driven” the term for selling direct?)
• Company appears to be becoming more conservative. It’s lowering its operating expenses to a rate lower than revenue growth and the overall tone of the report was more “conservative”,
• Cree believes it is the product innovation leader and that buyers (end-users) seek premium performing products and that this differentiation / positioning will drive their growth.  Their mantra appears to be “we bring ‘better’ light“
• Expanding roadway offering; expanding IoT offering. Strong focus on Smart Lighting (distributors and customers have the challenge of understanding the offerings from various providers!  This is an opportunity for distributors, through lighting / lighting control specialists, to provide unbiased input to their customers.)
• Just introduced a product for the industrial high bay, which is a new market segment for them.  They’ll be looking to expand into the industrial segment (new products and possibly acquisitions)
• Commercial lighting could be down 5-10% in Q1 due to need to rebuild sales / project pipeline, which reportedly is a 2-3 quarter sales cycle.
• Interestingly the company did not provide any 2017 LED commercial lighting projections / guidance; and no reason why not.

And we’ve also heard that there have been some distribution sales management changes.

But, the question appears to be, “what’s going on?”  In conversations with distributors we rarely hear the word “Cree” but yet they are generating almost $900 million in LED lighting (granted, a percent to retail).  It begs the question of what % is direct vs electrical distribution channel vs other distribution channels.  As a distributor, how are they supporting you?