Cree: power plans

Cree has released a statement of intent to spin out its Power and RF business, but little else. Compound Semiconductor talks to Lux Research analyst, Pallavi Madakasira, to find out more.

A better focus: Cree is to spin off its Power and RF business to realise its potential

Last month, Cree unveiled plans to spin out its Power and RF business, filing the paperwork to initiate a public offering process for the new company, with the US Securities and Exchange Commission.

At the time, details were scant. Cree intended to remain the majority stockholder of a future company, board member and telecoms industry veteran, Frank Plastina, would take the lead and the subsidiary was to raise cash to invest in the business to support future growth.

In a company release Cree simply stated: "The offering will enable management to focus on Cree's LED and Lighting businesses, while also creating a dedicated focus on the Power and RF business."

Today, despite requests from Compound Semiconductor for further comment, the only response from a company spokesperson, Cameron Reed, is: "This decision demonstrates the success and market opportunity, positioning both the LED/Lighting business and the Power and RF business with increased focus to better take advantage of the opportunity to accelerate growth."

"We do not have additional details available to share at this time, but will keep you appraised of updates as we have them," he continues.

Still, amid the silence, investors applauded the move with Cree shares jumping shortly after the announcement, and industry consensus, to date, supports the decision.

As Lux Research analyst, Pallavi Madakasira, highlights: "Cree's RF and Power business unit has been overshadowed drastically by its LED business. For the fiscal year ending in June, it's the most profitable line for Cree, but still only accounted for 6% of Cree's overall $1.65 billion revenue."

Clearly, a firmer focus on each business segment will benefit both. In recent months, Cree has been making more of its power module line, with Madakasira highlighting how the company has been busy pushing its business model downstream.

"The company now wants to offer power modules as well as just discrete devices and is really trying to compete with the likes of Infineon and ST, to get into that module game," she says.

And, as always, making a success out of LEDs isn't easy. The consumer LED market is super price-sensitive while margins are, as Madakasira puts it, 'razor thin'.

The Cree LED bulb: branding has been expensive but crucial to success. [Cree]

Just as Cree released its $10 LED light bulb, vice president of corporate marketing, Mike Watson, told Compound Semiconductor: "We didn't think this segment was moving fast enough so we're giving consumers a reason to switch to LED lighting."

"They love the shape and the light that comes out of an incandescent," he said. "So we've given them a bulb that they are used to at a price point they will try."

Cree, recently released a bulb priced at less than $10, but as Madakasira points out: "From what we know of Cree's first [$10] LED bulb, the company was essentially wrapping cash around the bulb, and receiving very little return for every bulb sold."

"Cree has spent a tonne of money on just marketing its LED business as ultimately nobody had associated a LED bulb with the Cree brand," she asserts. "For them to have driven this traction into a consumer market, they've spent a lot of money."

Factor in industry developments, such as Dutch electronics giant, Philips, spinning off LED production and automotive lights operation - Lumileds - from its lightings systems business, so each could better grow, and a similar move from Cree was inevitable.

"Anyone in the LED business cannot considerably think about trying to combine LEDs with another business," says Madakasira. "Making money in LEDs today is so challenging, I think this is the smartest thing for Cree [to do]."

High regard

Of course, the RF and power industry is a different beast. Sales are not made on the back of a brand, but rather on reliability and performance, as devices can be easily sampled and tested by customers.

And despite its former LED and lighting leaning, this spells good news for Cree. "Cree's SiC technology is widely acknowledged to have some of the best properties and quality overall," says Madakasira. "And let's not forget that the company is one of a handful of global suppliers of SiC substrates today, so it can really wield its wand and work out how to control the market."

So the future looks bright for a more tightly focused RF and Power business company from Cree. According to Madakasira, conversations with end-customers across Asia, Europe and the US confirm that the company's RF GaN and SiC power products are held in wide regard.

Still, the analyst also highlights concerns over Cree's recent move towards power modules. "Cree needs to sharpen its focus on who it wants to bring on board as an inverter player," she says.

The analyst asserts the company has recently worked with 'no-name' companies, that are keen to enter the inverter space, and is essentially teaching these new players the business.

But as she adds: "Considering Cree will be going head to head with the likes of ABB as well as Infineon and STMicroelectronics, which know exactly how to work the module business, I just wonder if this strategy is going to pay off."