Cree FY Q4 Results … Confirms Challenging Lighting Market

Cree’s FY 2017 4th quarter results while disappointing, especially on the lighting side of the business, do, to some degree, correlate with feedback from other major lighting manufacturers that, at least for major companies, the market is “challenged”.  It appears that much of this is related to new construction as feedback from distributors is that lighting continues to be a growth market and that their purchases of non-Big X companies continues to grow.

Key comments from Cree’s analyst call:

• Danny Castillo, Cree’s EVP and head of lighting was on the call, which highlights the importance of lighting to the companies growth (could also be an indication that Danny could become next CEO of Cree. Danny, as many remember, was President of Cooper Lighting before Eaton’s acquisition and is used to running a $1B+ company.  With Swoboda retiring, this would send a message about Cree’s commitment to lighting and the channel and be a positive sign for growth prospects for the company.)
• FY 2017 company-wide revenues were $1.5B with lighting revenue of $702M, a decline of 21% with a gross margin of 28%, an 80 basis point increase. (would be interesting to know what the # of unit decline was given that price erosion is, unfortunately, the norm in lighting.)
• Lighting revenue down due to product “holds” in Q2 and lower consumer bulb sales (with the continuing price erosion in lamps and retailers offering private label, the consumer lamp business will probably be challenged longer term … and the long-life cycle of LEDs cannibalizes the consumer replacement market.  There is only so much that consumer utility rebate programs can do … and I recently received a mailer from Duke Energy about them selling a 6 pack of LED lamps!)
  • Q4 lighting revenue increased sequentially to $359M due to commercial lighting which was $155M
  • Doesn’t expect tne consumer business to really grow in total dollars, commenting “I think at the lever we’re at today this is a baseline for what I’ll call a premium category with the current channel partners we have.” (channel partners here typically relate to big boxes.)
  • Saw lower sales in the “contractor value market” (don’t know if this is a product line or Econolight, which is a catalog direct business.)
    • Launching new product line for “value market” which has recently started to ship. Expecting growth in this segment in FY 2018 (which highlights that manufacturers still see the market looking for price for a sufficient product for the renovation market with more “premium” product for new construction. Also infers that manufacturers expect continued price erosion with brand name companies hoping that their name, which they hope represents quality, will enable them to take some of this market at an acceptable margin / price point and perhaps contractors would prefer XYZ brand for a few percent more than a no-name brand.  Hubbell’s recently announced TradeSelect offering follows this similar approach.)
  • Feel that the C&I growth is coming from “progress making to rebuild momentum with our channel partners.” (Distributors – are you seeing change from Cree? Are you supporting them more? if so, why? Are their lighting agents more supportive of you or still seeking to compete with you?)
    • Strengthened agent network in certain markets
    • Launch of CLEC product family with 150 SKUs
    • Increased partnership with key distributors in strategic markets
  • US lighting marekt slower than forecast over last two quarters
• At end of year company had $466M in cash and investments and is reportedly seeking some lighting acquisitions.
• Other aspects of Cree’s business reported sales increases for the quarter.
• Targeting Q1 total company revenues of $353M-367M but tracking slightly behind so far and expect slight sequential decrease in lighting, which would be seasonal in nature and a consistent trend vs other years. Also expecting lower consumer sales.
• Have an expectation that distributors will stock their new C-Lite product line which is a contractor value line. (Aside from distributors being cautious about stocking LED lighting products, Cree will have the challenge that this isn’t the forte for most lighting agents and will also need to have a robust return policy and consider credits for price declines. Additionally, rebates will need to be competitive vs other lines in marketing groups … and can they get to the price point … will they have the merchandising tools to compete against Rab, Atlas, TCP, Satco, etc?)

In reading the call, Cree’s Wolfspeed and LED business seem to be performing well.  Lighting has had challenges but they feel that they are righting the ship and have a path to growth on the C&I side via a value-line, “premium” / new products and better channel relationships that will gain them some preference and stocking positions. Will it happen … it will be a challenge given incumbents, increased competition in the “value” segment and displacing others for channel relationships.

Your thoughts re Cree? Experiencing anything new with their focus on channel relationships?