The last time I wrote about LED manufacturer Cree (NASDAQ:CREE), I suggested that the LED market was in a trough, and that new applications would rev up growth over the next couple of years. Nonetheless, I wrote that I didn't expect better performance anytime soon. Cree proved that statement all too correct, delivering dismal Q3 results on Thursday.
Revenue dropped to $90.3 million from $100.8 million last year, and gross margin declined precipitously -- 32% this quarter, compared to 48% last year. This performance led to just a whisker of operating income -- $206,000 this year, compared to $26 million a year ago. The bottom line looks better -- $21 million, or $0.27 per share -- thanks to a tax benefit and income from discontinued operations.
There were some positive developments on a sequential basis, although you had to dig to find them. The inventory problem that began to rear its head last year still isn't solved, but days of inventory dropped by one to 74 days, compared to Q2. It might not be getting much better, but at least it's stopped getting worse. In addition, days sales outstanding fell to 61 days, from 65 days in Q2.
The average LED selling price rose by 7% from the previous quarter, no doubt influenced by high-brightness LEDs' increase to 52% of the company's sales mix, from 48%. Unfortunately, costs per LED outpaced the selling price increase, rising 10%. I was also disappointed to see that sales of Cree's high-power products fell a bit sequentially, compared to strong growth last year. Hopefully, there are broader industry factors at work, rather than a specific problem at Cree.
Overall, it was a pretty lousy performance, but nothing too unexpected. On the bright side, Cree has a strong balance sheet. With $266 million in cash and short-term investments, it shouldn't face the kinds of questions that dog AMD (NYSE:AMD). Also, its acquisition of Cotco gives it a stronger toehold in China.
We'll have to wait and see whether an upturn in demand can lift Cree. Given the current uncertainty, though, I'd recommend holding this stock only if you have a strong stomach.
Creepy-crawly further Foolishness:
- Interested in LEDs? Consider Color Kinetics (NASDAQ:CLRK).
- There may be light at the end of the tunnel for Cree.
Fool contributor Dan Bloom has no financial interest in any company mentioned in this column. The Fool has a disclosure policy.
