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Light-emitting diode maker Cree (NASDAQ: CREE) has had a mixed year so far. Declining prices of LED products, stiff competition and a sluggish economic environment took their toll on the company’s shares a few months back. But, over the past few months, Cree has started turning things around. Its results have more or less satisfied the Street for the last two quarters, and Cree put icing on the cake by improving its earnings in its latest quarter.
Shining Bright Like an LED Light
In the first quarter of fiscal 2013, Cree’s top line growth momentum continued. It recorded a 17% year-over-year revenue jump, clocking $315.8 million. In addition, Cree’s non-GAAP earnings jumped 13% from last year, coming in at $31.8 million, or 27 cents a share. The results missed top line estimates but brushed past on the bottom line. Moreover, Cree’s outlook for the ongoing quarter was a welcome change this time as the company guided in line with expectations.
The jump in earnings comes as a huge positive. Cree snapped a four-quarter streak of profit declines this time as it managed costs efficiently. Despite facing declining prices, Cree improved its gross margin by 120 basis points on a sequential basis, primarily driven by higher factory utilization, low cost products, and reduction in factory costs. This displays Cree’s efficiency, as improving gross margin in the wake of falling prices is a solid achievement.
Cree exited the quarter with a better order backlog, which isn’t surprising as the company’s products have been gaining acceptance at a good pace. Cree oversaw the largest municipal street lighting project in China earlier this year, wherein 1.9 million of its LEDs were used for setting up street lights. Moreover, Oyster Bay, NY, will also be using Cree’s LEDs due to low energy and maintenance costs associated with Cree’s products.
Cutting-Edge Products to Fight with the Best
The company’s innovative products have helped it improve its top line despite facing competition from bigger names such as Philips Electronics (NYSE: PHG) and General Electric (NYSE: GE). Cree’s products, such as the XLamp LED, THE EDGE LED and LEDway street lights deliver more lumens per dollar, cutting down costs in the process.
Offering a competitive solution is really important for Cree’s prospects as bigger players such as Philips and GE enjoy economies of scale, which enables them to mass produce at lower costs. LED adoption is growing at a fast rate, driven by the low cost of LEDs, phasing out of the light bulb due to harmful CO2 emissions, and a large number of benefits that LED lighting brings along with it.
In order to capture this burgeoning market, Philips is working hard to position itself as the leading LED lighting company. The company aspires to become the biggest player in this nascent industry and is marketing its products with vigor across continents. It recently improved its LED offerings in various countries and has won orders in Egypt, New Zealand and is focusing aggressively on the Asia Pacific region.
GE, on the other hand, is a behemoth in the lighting industry and is putting a lot of effort behind promoting its LEDs. The company has an impressive portfolio of LED lights, such as the energy smart bulb, and is ramping up production of LED lights. GE recently announced that it will manufacture LED lights in Hungary from the fourth quarter and is also engaged in the development of innovative lighting solutions.
The Specialist
But what separates Cree from these two conglomerates is that it is a “pure play LED lighting company with a fully integrated vertical model,” in the words of CEO Charles Swoboda. This means that it carries the tag of a LED specialist that can work in Cree’s favor. The company is whole-heartedly into innovation of better and more efficient LED products that would lower costs for consumers, corporations, states and governments and also be environment friendly in nature.
The Foolish Bottom line
I have been a Cree bull for a long time, as it plies its trade in the fast-growing LED lighting industry and also tries to keep costs low. Its cutting-edge innovation has enabled it to record solid revenue gains over the years and the company still has a lot of room to run in the future. However, Cree’s growth has not been without challenges, like those mentioned earlier. But, on a positive note, the company has managed to fight through its troubles so far and, in my opinion, would make for a great long-term investment.
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