News Article

"Growing Pains" Hit Cree's Strategic Transition

Revenue and profit take a dip at Cree as the company invests heavily in the new technologies that it believes will bring financial reward over the next few years.

LED, RF and power chipmaker Cree saw its quarterly revenue decrease 1 percent to $106.7 million for the quarter that ended on June 25.

With net profit also dipping way below expectations from $24 million in the prior quarter to $13.2 million, Cree CEO Chuck Swoboda said that the company was enduring some "growing pains" in relation to its new product development as it looks to expand beyond current offerings.

Swoboda highlighted that both Cree's sales and gross profit margins were under pressure from increased competition and that the fall in average selling price for its LED chips used in cell-phone keypads and display backlights now outweighed the increase in volumes shipped.

At $84.5 million in the latest quarter, LED revenue was still Cree's key driver, but that figure was down 2 per cent sequentially and has been flat for the past four quarters.

With its LED chip business appearing to be at saturation point, Cree is increasingly focused on diversifying its product offering through moving both up the food chain in the LED lighting business and by commercializing its power and RF products.

These new product developments are central to the company's future strategy, and are where the growing pains mentioned by Swoboda are apparent.

Cree is investing heavily in this development strategy at the moment, as evidenced by the research and development costs in its annual financial statement. In the latest fiscal year, it spent $50.8 million on research (not including stock-based compensation expenses), compared with $40 million in the previous year.

Although this higher research spend is impacting gross margin in the short term, Swoboda is hoping that the investment will drive revenue up by between 60 and 70 percent over the next three years.

"We are in the middle of an exciting transition," the CEO told investors. "We are trying to build a much larger business."

There are signs that this is beginning to happen already - revenue from high-power electronic products jumped 29 percent in the latest quarter to $5 million, compared with just $1.8 million one year ago.

In the LED business, Cree is looking to "Colorwave", its large-area display backlight product, as well as XLamp LED lighting components. Scaling up XLamp has proved to be a challenge, and although Colorwave has been a technological success, producing the large backlight modules at a cost that its key customer can swallow is proving to be more of a headache.

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