A Lesson in Pricing and Competitive Aggressiveness

 

August 31, 2107

By Paul Eitmant

A leader in LED technologies reports an 8% decrease in revenue ending June 2017.

Cree first brought the blue LED to market in 1989, and today Cree’s XLamp LEDs have continually exceeded industry standards for brightness and efficiency. Indeed, XLamp LEDs were the first “lighting-class” LEDs — bright enough to be used in general-illumination applications, such as desk lamps, ceiling fixtures and streetlights. In addition, Cree’s extensive line of high-brightness LEDs are also introducing new performance levels to outdoor video displays and decorative lighting.

After pioneering developments in the LED indoor-lighting market, Cree expanded into outdoor lighting, in 2011, with the acquisition of Ruud Lighting, Inc., a leader in outdoor LED lighting. Ruud added an extensive LED-lighting product line to Cree’s portfolio, including the BetaLED and LEDway brands.

DURHAM, N.C.— Cree, Inc. announced revenue of $359 million for its fourth quarter of fiscal 2017, ended June 25, 2017. This represents an 8% decrease compared to revenue of $388 million reported for the fourth quarter of fiscal 2016, and a 5% increase compared to the third quarter of fiscal 2017 (all figures in US$). GAAP net loss for the fourth quarter was $6 million, or $0.06 per diluted share, compared to GAAP net loss of $11 million, or $0.11 per diluted share, for the fourth quarter of fiscal 2016. On a non-GAAP basis, net income for the fourth quarter of fiscal 2017 was $4 million, or $0.04 per diluted share, compared to non-GAAP net income for the fourth quarter of fiscal 2016 of $19 million, or $0.19 per diluted share.

For fiscal year 2017, Cree reported revenue of $1.5 billion, which represents a 9% decrease compared to revenue of $1.6 billion for fiscal 2016. GAAP net loss was $98 million, or $1.00 per diluted share, compared to net loss of $22 million, or $0.21 per diluted share, for fiscal 2016. On a non-GAAP basis, net income for fiscal year 2017 was $50 million, or $0.50 per diluted share, compared to $88 million, or $0.86 per diluted share, for fiscal 2016.*

In the press release, Chuck Swoboda, Cree Chairman and CEO states, “We made progress in Q4, with good results in each business and non-GAAP earnings per share that were in the middle of our target range… We built a solid foundation for growth in all three businesses over the last year. In the near term, we will have some incremental spending to expand capacity and are excited about the opportunity for Cree to grow revenue and profits in the year ahead.”

Business outlook

For its first quarter of fiscal 2018 ending September 24, 2017, Cree targets revenue in a range of $353 million to $367 million. GAAP net loss is targeted at $20 million to $25 million, or $0.20 to $0.25 per diluted share. Non-GAAP net income is targeted in a range of $2 million to $6 million, or $0.02 to $0.06 per diluted share. Targeted non-GAAP income excludes $18 million of pre-tax expenses related to stock-based compensation expense and the amortization of acquisition-related intangibles. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree’s Lextar investment.

This represents a textbook example of pricing policies, new product development, and the aggressiveness of global competitors. We can remember when LED products were introduced in 1989, and during the 1990s we found the products in an expanding channels of distributions. At the same time, we had to use our calculators to figure out the payback due to the sticker price.

The prices continued to drop when more competitors entered the market place. Then we witnessed product improvements and innovations that brought new competitors, and the price continued to drop.

When Cree announced a decrease in sales this year and a loss of market share, it confirmed the notion that to keep the top position in the market place takes 110% effort on product development and competitive advantage. At the same time, competition may still take market share using pricing as weapon.

Paul Eitmant is President and CEO of IP Group International, which serves the needs of business-to-business enterprises in over 30 countries worldwide by adding specialized expertise to the business planning and implementation process; Tel: 480.488.5646; paulipgroup@cox.net.

* Cree Reports Financial Results for the Fourth Quarter and Fiscal Year 2017, published online August 22, 2017; http://investor.cree.com/releasedetail.cfm?ReleaseID=1037949