Leading LED manufacturer Cree ( CREE ) reported its Q4 2014 and full year 2014 results on August 12. Driven by strength across its product portfolio, particularly the lighting segment, which reported 43% annual growth, the company witnessed a 19% increase in its 2014 revenue ($1.65 billion). A higher revenue base improved GAAP and non-GAAP net income to $203 million and $124 million in 2014, compared to $155 million and $87 million in fiscal 2013. For Q4 2014, Cree reported an 8% sequential increase in revenue ($436 million) and 5.6% growth in net income, which was well within company guidance.
Product innovation in the last few quarters has opened new applications and improved LED returns, in turn driving additional demand for Cree's products. The continued growth momentum combined with a strong balance sheet gives Cree the flexibility to respond to new opportunities in the market. LED penetration is expected to increase in the future, and being one of the leading global LED manufacturers, Cree will benefit from the trend, in our view. The company believes that it is well positioned to continue growing its business in fiscal 2015 as LED adoption increases.
Cree plans to continue investing in R&D and SG&A to support its growth and other strategic initiatives. It expects revenue to increase faster than its operating expenses as it starts to get incremental benefits from the investments made over the last several years. The expanding product pipeline and growing brand momentum puts the company in a strong position to meet its goal of 100% upgrade to LED lighting.
Our price estimate of $62 for Cree is at a significant discount to the current market price. We are in the process of updating our valuation for the company.
Lighting Sales Driven By Strong Growth In LED Fixtures and LED bulbs
At $208 million, Cree witnessed an 18% sequential growth in lighting sales in Q4 2014 . For full year 2014, the segment grew 43% annually. The general LED lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. Cree has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. This places the company in a strong position to leverage the global shift to LED lighting. LED lighting accounts for 15-20% of the global lighting market at present and the LED market share is expected to rise at a rapid pace over the next decade.
Rapid product innovation in the last few quarters has opened new applications and improved LED returns, in turn driving demand for Cree's products. The company claims to have made tremendous progress creating awareness for the Cree brand with consumers over the last year. It is seeing strong growth in lighting which Cree believes will drive growth in both the high power and mid power LED-based lighting applications.
Cree hit a milestone in driving LED adoption a year back by launching an LED bulb for as low as $10. The LED bulb is considered one of the biggest industry innovations in years and has seen tremendous success at Home Depot stores. Cree's bulb is the best selling LED bulb in the U.S. and has helped establish the Cree brand as the leader in LED consumer lighting. Cree continues to innovate and add new bulb products to cater to increased consumer demand in the fall lighting season.
The company expects strong growth in LED fixtures and LED bulbs to drive growth in the lighting segment. To serve growth in these segments, Cree's internal LED chip team is focused on the high performance, high power LED chips that differentiate its LEDs in the market. Its LED manufacturing partners are focused on building some of the higher volume products, which gives the company the flexibility to utilize its internal factory to support new product ramps and shorten the time to market for new technologies.
Cree Can Increase Its Gross Margin
At 37.9%, Cree reported a slight sequential increase in its Q4 2014 non-GAAP gross margin (which includes stock-based compensation) backed by a combination of higher sales, lower-cost new products, cost reductions and higher factory utilization. While the LED and Power and RF margins were in line with company guidance, the lighting gross margin was slightly better due primarily to cost reductions and productivity improvements for LED fixtures. However, gross margin was lower year-over-year due to a full year of lower margin LED bulb sales.
The rising proportion of lighting sales puts pressure on Cree's overall gross margin as lighting products offer lower profit margins compared to LED components. A higher proportion of revenue from the fast growing lighting LED market is expected to put additional pressure on Cree's gross margin in the future. The LED bulb price reductions offset a more favorable lighting mix. The company has lowered the prices of the Cree LED Bulb product line by as much as 23%. However, Cree claims that the gross margin earned on LED bulbs will improve as it focuses on reducing the LED bulb cost.
Though margins could remain under pressure in the short term, we believe Cree can manage to increase its gross margins in the future. Higher LED volumes combined with lower new cost products, cost reductions and higher factory utilization will help increase Cree's overall gross margin.
Q1 2015 Outlook
- Revenue in the range of $440 million to $465 million, driven by strong growth in the lighting segment.
- GAAP and non-GAAP gross margin at 36.9% and 37.5%, respectively.
- Operating expenses to be similar to Q4 2014.
- Tax rate of 21.5%.
- GAAP and non-GAAP net income between $30 million to $37 million and $48 million to $55 million, respectively.
- GAAP and non-GAAP EPS target between $0.25 to $0.30 and $0.40 to $0.45, respectively.
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