Cree at a Directional Crossroads?

We’re into earnings season again and time to selectively review transcripts from companies.  First up is Cree where we’ll focus on the feedback they provided regarding their lighting business.

As many know, Cree recently hired a new CEO who has a tech background. Some thought that Cree’s board may staff the role with someone with lighting experience given Cree’s expressed interest in accelerating their lighting business to become a more robust player in the market.  Instead they went with an individual who had success with a turnaround at Freescale (a company he helped sell for $11.8 billion).  From his input during the call (albeit nominal as he’s only been on the job for about two weeks) and in looking where Cree’s growth, and profitability is (Wolfspeed and LEDs) and the expansion of the LED technology into other areas), the result of the call is the stock jumped double digits as “investors” are projecting a turnaround and one analyst commented afterwards that he could foresee Cree disposing of the lighting business (just his conjecture) and that Cree may have more opportunities as a tech company (it has faster growth) and, based upon the new CEO’s business evaluation criteria, the lighting division could be “challenged” (we’ll discuss later).

To the earnings transcript

• Lighting down 19% YoY to $149.7M with a 21.3% gross margin.  It was down 3% sequentially (i.e. vs last quarter)
  • Cree does not provide insights into what percent is lamps, fixtures or what is sold via channel (retail, distribution, direct) or Cree-branded vs e-Conolight (direct).  But, given the various elements of the business, it’s only a $600M business but with the brand cache of a larger player.
  • Down reportedly due to “continued weakness in North America market. Said that “a fair amount of economic report data out there that basically talks about non-residential construction activity being kind of slow down at this point and more recently decline in the recent months. A variety of reasons that are being positive for that whether it’s tighter lending standards or lower, leaner public sector budgets, wondering — people wondering on how to spend money in advance of potential tax reform.”  (would distributors agree with this or is Cree not participating much in the segments of the market as well as the lamp market has become more commoditized with price erosion?)
  • Other reasons for being down were:
    • Project delays due to hurricanes in FL, Texas and Puerto Rico
    • “Lingering near-term effect of the quality hold that occurred during fiscal 2017” (was this a Cree product quality issue or referring to distributors hesitancy in purchasing / supporting Cree due to prior experience … it wasn’t clear?)
  • Gross margin decline was 250 basis points and “due to lower commercial sales, lower factory utilization and higher warranty costs” (so more sales of current products will help but interesting that their gross margins are significantly different than Acuity’s, which we reported on)
    • Their gross margin goal is in the mid-30’s
• The company has 5000+ patents (definite indicator it is tech company and innovative. Question becomes, how much does the electrical / lighting industry value, defined as a premium and a willingness to sell (in the case of distribution) and purchase (contractors) based upon technological prowess?)
• Overall company revenue was $360M (so lighting was 41.7% of sales in the quarter)
  • Wolfspeed grew 9%, although it was $66M in the quarter.  It has a gross margin of 49%.  Tthey are investing to increase capacity.
    • Some areas where Wolfspeed products are involved include electric vehicles, solar, battery storage, motor controls, power supplies, telecommunication (hence 5G).
  • LED products grew 1% to $144M for the quarter with a gross margin of 26.9% (so, about the same size as lighting by 5 points more on margin)
• They’ve rolled out their C-Lite product offering which is supposed to be more of a “contractor value line”.  Reportedly roll-out is “good” but in ramp up phase. (Have any distributors had experience with this that they can share? Acceptance level? Marketing support?)

Establishing a Vision

Gregg Lowe, the new CEO, (here’s his LinkedIn profile and an interesting tidbit is he is a Board Member of the Rock and Roll Hall of Fame as well as being a EE) shared the process he plans to use to establish “a clear vision” for Cree.  The steps include:

1. evaluating and focusing the strategy and the direction of the company
2. improving execution in our existing business; and
3. engaging the workforce and getting everyone pulling in the same direction.

He plans on spending significant time with team and customers (hopefully he meets with a number of Cree and non-Cree distributors for him to understand the channel perspective as they can share what channel experience was and what is needed to make Lighting more viable.)

He will be seeking to determine the answer to 4 questions:

1. What is our unique differentiation?
2. Which customers care about this differentiation?
3. What are the dynamics of the market for these customers?
4. Can Cree be a top player?

With the NAED Eastern coming up, perhaps an opportunity for distributors to share their thoughts (or feel free to share your thoughts below or perhaps email Gregg).

So, the question to distributors is, where do you see Cree as a supplier to your business?  Is it one of the top 4-5 lighting companies? Should Cree “double down” on the lighting business? Can it earn more distribution support?

With the business review, the question becomes, will Cree refocus to being a tech company and hence an OEM to others, focus on lighting or remain the same?  Is Cree at a directional crossroads that will be answered within the next 6 months as they review the business?