My longest lasting "read between the lines" impression after listening to the CC Wednesday relates to what I think Chuck is saying to us about how he views unit volume, ASPs, revenue, and the gross margins of Cree's LED business next year. He did not actually say this, but this is what I think he implied. Become a Complete Fool
First, lets go back exactly a year and recall that revenues were at a cyclical low last March quarter. Earnings went to zero if we discount the merger and new product line engineering write-offs. At the time I considered this positively because just about every semiconductor company was experiencing continued and increasingly negative pro forma earnings then. It was either at that CC or an update shortly afterwards that Chuck told us that he had made a strategic decision to lower the price of the Megabright line in order to gain market share. I think it was in conjunction with the announcement of last year's Sumitomo deal.
The results of the last year prove that he was right, in my opinion. Unit volume shipments grew faster than Cree could manage and it is only now that they are not talking about capacity constraints anymore and are hinting about a temporary dip in Gross margins -- because he plans a big price cut again, I think, -- to the mid forties. It dipped last year to about 40% and then grew all year to the high forties once again, for the LED business.
I think Swoboda is planning to repeat the same script next year. I think that is why Sumitomo is planning to increase contract revenue fourfold next year: Chuck offered them a price reduction that they just could not refuse. He will probably offer similar deals to others.
Think about it: if Cree can get five fold increases in volume, four fold in revenue, by lowering GM to the mid 40s instead of letting them rise to 50% on a smaller ramp in volume, (in a situation where there is plenty of never used plant floor space available and anticipated productivity and yield improvements to be realized), this may be as wise a decision this year as it was last year. I think we are seeing a temporary lull in revenue growth, down to 5% (conservatively guided) for about a quarter or so in calendar time as Cree begins to execute this plan. Two or three quarters ago (Sept. CC, I think) Chuck guided 5% growth in revenue and gave us three times that much (from memory, I did not actually look that up again.) I don't expect that much to kick in entirely by June, but expect more than 5% in June and then a burst for another few quarters after that. Chuck is trying to perform the same magic with the XBrights that he showed us was possible with the MegaBrights last year.
Whether this expands the bottom line next year as much as it did this year depends (IMO) on the yield and productivity improvements he implied and the dollar/yen relationship over the next year. Just like last year, there is now unused capacity once again with plant and infrastructure available. And once again there is a higher brightness (and higher GM) line of product to shift to (i.e. XBrights are somewhat immune to the price cuts that will happen for the Megabrights) in order to temper the effects of the lower prices, while stealing even more market share, mainly from Nichia. And the total market is still growing fast.
LEDs are almost 75% of Cree's business. I think they can get us through at least one more year before any new product lines are absolutely necessary. With any luck, more than another year.
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My longest lasting "read between the lines" impression after listening to the CC Wednesday relates to what I think Chuck is saying to us about how he views unit volume, ASPs, revenue, and the gross margins of Cree's LED business next year. He did not actually say this, but this is what I think he implied.
Become a Complete Fool