Last month, Cree announced it was restructuring its LED products business. The board also authorized a $500 million stock buyback for 2016.
The restructuring charges, including capacity and overhead cost reductions, are expected to total about $85 million. Cree expects 2015 Q4 revenue to be roughly $375 million, down from previous targets of $420 million to $440 million. Various market analysts cut their stock price targets for Cree after the news broke.
Cree is restructuring because of low prices and an under-utilization of its LED factories. Cree declined to be interviewed about the restructuring, but it did issue a statement.
“The plan will improve our efficiencies and cost structure in order to position Cree for our next stage of growth. Cree’s market demand and volume is in line with our projections. The changes are aligned with our strategy for driving continued competitive success of the LED chip and component business while advancing our mission to obsolete bad light and achieve 100 percent LED adoption," wrote the company.
As light-emitting diodes become commodities, Cree won't be able to compete exclusively on technological innovation.
“This is just the next level of maturation,” said Jon Guerster, CEO of Groom Energy Solutions.
But it could be more serious. Cree is facing tough competition from mid-power LED components and consumer bulb giants like Osram, GE and Philips.
“The problem for Cree will get worse,” said Ludo Carnotensis of Carnotensis Consultancy, who is a former CEO of Philips Lighting.
Cree will have to compete in the mid-power market for LED components, but that is part of what the restructuring should allow for, said Cree CEO Chuck Swoboda during a conference call in June.
To better align itself in the competitive market for components, the North Carolina-based company will consolidate its manufacturing facilities in China and North Carolina.
Cree is not only being squeezed on the components side. The company has spent years building consumers' awareness of its brand, but it will now shift focus to more high-end applications for consumer and commercial projects, where it can find more value for its high-power products. That may include architectural lighting, as well as specialty lighting for retail outlets and restaurants.
Cree was one of the first consumer bulbs to dip below $10. However, that price point was quickly surpassed -- GE now sells a three-pack of consumer LEDs for $10.
Swoboda said the older-generation bulbs have declined in sales faster than the company had anticipated, according to the Raleigh News & Observer.
High-end luminaires and automated controls could be one path forward as Cree cuts down its components business. “In the rest of the world, if they only make the LED chip, they will only get more and more into trouble,” said Carnotensis.
“They still have an opportunity,” he added, “but the fizz is certainly out of the bottle with respect to the sexiness of their shares.”