Intelligent Energy

More tough LED business: Cree slumps

More tough LED business: Cree slumps

Posting in Energy

LEDs may represent lighting's energy efficient future, but it's a rocky present. For the second time this week, profits sink at a leading lighting vendor. Cree's quarterly income collapses 78 percent.

LEDs may represent the energy efficient future of lighting, but for the second time this week a leading manufacturer has demonstrated that it’s a rocky business at present.

Durham, N.C.-based Cree Inc. reported that first quarter sales ending Sept. 25 sales nudged up a mere 0.2 percent to $269 million, compared to the same quarter a year ago, even though this year’s results include sales from Ruud, the Racine, Wisc. outdoor LED specialist that Cree acquired for around $525 million in August.

Cree’s profits plunged 78 percent, to $12.8 million, echoing a profits squeeze that lighting giant Philips also reported earlier this week.

The industry has faced a fall-off in demand for LED chips from the backlit TV market, and consumers are balking at paying the likes of $40 for LED bulbs.

According to analyst Brian Colello of investment firm Morningstar, Cree actually recorded “healthy growth” in sales of lighting fixtures and components (packaged lamps that other manufacturers build into things like signs and indicators), but suffered from a retrenchment in the TV and mobile device markets.

The shrinking profit margins alarmed Colello and other analysts.

Cree's gross margin dipped 170 basis points to 36% because of a shift in product mix toward lower-margin LED fixtures, as well as ongoing pricing pressure in LED chips and components,” Colello said in an investment brief. “In turn, the operating margin declined to 5%, down from 8% in the June quarter and 27% in the year-ago quarter.”

Stock analyst Jeffrey Bencik of Kaufman Brothers in New York was equally unimpressed. According to a Bloomberg report, he lowered his price target by nearly 20 percent, to $19 from $23, and recommended selling the stock. “With the overall global economy in a seriously compromised situation, you don’t have consumers willing to spend even $25 on an LED light,” he said.

Morningstar’s Colello did not anticipate a near-term turnaround. He forecasts mid-single-digit second quarter revenue growth in Cree’s non-Ruud business. “Cree's gross margin forecast of 37%-38% is troubling,” he wrote. “Even though the firm's product mix has shifted toward faster-growing but lower-margin LED fixtures, Cree generated gross margins in the high 40s just a year ago. The firm hinted that it might take some time for it to revert to its long-term target of gross margins in the low 40s.”

LED lightbulbs are built around light emitting diode chips. They augur a tremendous reduction in end-user energy bills and CO2 emissions because they use about 20 percent of the electricity of an incandescent bulb. Although prices are declining, they remain well above the price of incandescents. Vendors say they are worth the extra money because they slash utility bills and last as long as 25 years, virtually eliminating the need to ever replace them.

But critics note that LED bulbs can fail within a year, as components other than the diode break. They also complain that LED bulbs do not provide the same warmth as traditional lighting.

Photo: Cree

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Mark Halper

Contributing Editor

Mark Halper has written for TIME, Fortune, Financial Times, the UK's Independent on Sunday, Forbes, New York Times, Wired, Variety and The Guardian. He is based in Bristol, U.K. Follow him on Twitter. Disclosure