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LED Market Teeters On Recovery

Do Cree's rising sales finally signal sustained growth for the LED industry, asks Compound Semiconductor.

As Cree's lighting sales rise, its LED lights shine bright on Central Park, US. [Cree]

Amid slow market trends, US-based LED developer, Cree, recently posted refreshing earnings. Year-on year, revenues rose 14 percent to a record $346 million, while net income increased 69 percent to $20.4 million

The company's strong start to fiscal year 2013 comes at a time when industry's equipment manufacturers, substrate, components and product developers alike, have been anxiously waiting for a massive LED surplus to clear. Put at 45% in 2011, and led by oversupply from Chinese manufacturers, growth in demand has been slow.

At the same time, saturated demand from the backlight market and a sluggish general LED lighting market, have only added to pressure on average LED selling prices. Do Cree's positive results signal the beginning of the end of these trying times?

Cree's chief executive and president, Charles Swoboda, thinks so. Witnessing rising orders across all his business's segments, LED components, LED lighting, and power and RF products, he says: “We still continue to deal with excess capacity in the LED market, but growth in lighting has started to improve the supply and demand dynamic.

Jonathan Dorsheimer, managing director of Lighting and Solar Equity Research at Canaccord Genuity believes the company has also benefited from timely product introductions to the Chinese market, including its recent GaN on SiC LEDs.

Cree's Xlamp MK-R LEDs, based on SC3 technology, boast a luminous efficacy of up to 200 lm/W (at 1W , 25°C) [Cree]

“This SC3 product family is cost effective and competitive," he says. “Its simpler design allows for a lower cost structure so Cree has been seeing a lot of margin expansion as a result of traction in the China, and wider Asia Pacific market, with this product."

Indeed, following eight quarters of consecutive declines in gross margin, the end of 2012 offered respite to Cree's margins, which then bounced back to 37.5% in the last quarter, and rose again to 39.2%, in the latest quarter.

And as Dorsheimer highlights, the company has also taken advantage of recent rapid growth in the solid state lighting market. Its lighting product line grew 14% sequentially in this quarter. “The company is known for its 'TrueWhite' technology which gives them an advantage," he adds.

But Cree's technology wins aside, Dorsheimer reckons the LED industry is actually picking up, saying: “[We're at] the cusp of beginning a multi-year bullish secular growth scenario."

As government policies eradicate incandescent and halogen bulbs, and demand for LED alternatives rises, the gap between conventional and LED lighting prices will close. Indeed, Dorsheimer anticipates a price competitive product by 2014. “This is only natural," he adds. “The price gap will close and an inflection [in LED lighting uptake] will take place at this time."

But as the market matures, longer term challenges will also surface. While Cree is a clear leader alongside other LED manufacturers, including Osram, Nichia, LumiLEDs and Epistar, competition will also come from entrenched fixture companies.

“Incumbent lighting companies such as Acuity and Cooper, have distribution [channels] and brand awareness from a traditional lighting perspective," points out Dorsheimer. “Now they are developing [LED] technology and pulling it in."

Clearly the competition in the LED market will remain intense for some time yet, but Swoboda reckons Cree will hold its own. As he puts it: “We're going to keep pushing, and I think there's lots of technology to be developed... We want to make sure we position Cree as one of the [companies] out there that people should be thinking about first."

But while Cree drives new products and innovations into the LED lighting and components markets, what about its RF and power electronics business segment? Late last year, the business unveiled the industry's all-SiC high frequency power module. And now sales across this business segment are reported to have increased more than $2million from the first quarter with revenues coming in at $22.6million.

The future looks bright and as Swoboda says, Cree will now expand its SiC power module family in the coming year. But while he expects sales to continue to rise, without a doubt, the LED market is where the action will be.

“In the LED industry we are going from basically 0% penetration to [as much as] 80% penetration over the next ten years, a multi-billion dollar industry is being created," says Dorsheimer. “In contrast, the power and RF market is very fragmented with chips going into, say, electric cars and solar inverters. A company such as Cree might get a pop at one of these markets, but the long-term sustainable growth isn't there yet."

Following pleasing earnings, Cree's Chuck Swoboda has high hopes for future growth in LED industry. [Cree]

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