Cree … Strategically Changing

When Gregg Lowe joined Cree late last year a key element of his platform, and rightfully so, was conducting a strategic review to understand what he was now managing and to evaluate the path forward.  Since he’s learned the business and worked with his team to develop a strategic plan, which was shared with analysts, last week, a number of announcements have been made that shed some light on the potential direction.

These include:

A couple of poor lighting revenue and profitability quarters. Some of this may be attributable to product quality and perhaps production; some sales execution and it appears issues of channel conflict based upon the desire for better channel relations being mentioned in the strategic plan.

• Lighting leadership and sales leadership left the company in December. The company has experienced other lighting turnover.
• A new SVP Sales and Marketing was introduced for Wolfspeed and the LED (chip) elements of the business. It was specifically mentioned that the person would not have lighting responsibility.
• During the quarterly analyst calls there is “excitement” about the Wolfspeed opportunities in the areas of electric vehicles, autonomous vehicles and more. And remember, Wolfspeed is the division that Infineon, a German company, was going to buy for $850M … so others see a growth potential.
• This week Cree purchased a division of Infineon RF Power for 345 million euros. The division has revenues of $155M euros
• Which brings us to Cree’s strategic plan which provides the guideline through FY 2002 … so 5 years (they compared FY 2017 vs FY 2022). According to the Triangle Business Journal, “Cree (Nasdaq: CREE) announced a big corporate pivot Monday – one that puts more focus on its smallest, albeit most profitable business unit: Research Triangle Park-based Wolfspeed.”

Some highlights from their investor presentation:

• Wolfspeed – high growth potential, strong gross margins, planned investments to expand scale and accelerate growth, large multi-decade growth opportunities.
• LED – modest growth and gross margin expansion, joint venture, application-optimized solutions, seek to differentiate and be valued for high-power solutions.
• Lighting – Fix the business, improve channel position and relationships, modest growth, gross margin in line with industry, focus on higher specification and smart intelligent features

Notice a difference in tonality / opportunities? The above terms come from their slides.

From a revenue perspective

• Wolfspeed – a little over $200M in 2017, about $850M for FY 2022 (don’t know if the recent acquisition was planned in this)
• LED – about $550M in 2017, $793M in FY 2022
• Lighting – $701M in 2017 (includes lamps), $700M in FY 2022 (so, 5 years later, flat revenues!)

So, from a lighting business, the objective is to “fix the business” so that 5 years from now revenues are flat … doesn’t seem like a winning proposition, or an invest-able proposition for a publicly held company. (IMHO)

Lot’s of slides dedicated to highlighting the Wolfspeed opportunity.  About 10 focused on LED.  9 lighting slides said:

• Fix quality through improved processes
• New product developments
• Improve channel position and relationships / channel engagement
  • Distributor partnerships and growth programs
  • Stock & flow penetration
  • Service and lead time enhancements
• New product innovations for focus on higher specifications and smart intelligent features
• Modest growth, improved margins (grow from 28% to 33%)

Key questions

So, from a lighting agent and distributor viewpoint:

• Did Cree outline the right solutions?
• What do they need to do to improve their channel position?
• To gain discretionary business?
• Will flat revenues over 5 years result in unit growth and market share growth due to price erosion or will remaining flat mean loss of share?

And then there was the note that GE was going to target some companies to get them interested in GE Lighting and/or Current.  Would this be a positive move for Cree? Should they be “doubling down” in lighting at this point?

While Cree is obviously focused, and rightly so, on Wolfspeed due to the growth and margin potential, which will drive the stock price, and they have some product and process issues to fix within the lighting group, what do they need to do to:

• Gain channel support?
• Compete in a changing lighting market to create demand at the end-user level and be supported versus “value-engineered” by the channel?
• Convert business?

If they asked you, what would your recommendation be to help them grow?