Cree (CREE) guided lower for Q4 (Jun) this morning (see 8:02 comment for details). The company makes silicon carbide (SiC) semiconductors for power and RF device designs and LED chips/component, Cree is following in the footsteps of some other companies, including Lumentum (LITE) and Acacia Communications (ACIA), in saying it will comply with the Trump Administration's export restrictions on component sales to Huawei Tech, which were put in place in May 2019. The company is citing the Huawei issue as well as softer than originally expected demand for its LED products.
The company expects that it would have generated $15 mln in revenue from Huawei's wireless infrastructure build-out. Cree does not expect to ship any additional products in JunQ for the Huawei build-out and cannot predict when it will be able to resume shipments. On its LED Products side, Cree says the softness is being caused by softer than originally expected demand, as global trade uncertainties persist.
Cree does not specify in its 10-K filing what portion of its total sales comes from Huawei, however, it's apparently less than 10% as Cree says it has only one customer above 10%, which is Arrow Electronics at 13% of total FY18 revenue. Cree has not yet filed its 10-K for FY19, so we cannot say for sure about this year.
What we can say is that Cree's JunQ prior guidance on May 1 was for revenue of $263-271 mln, so $15 mln was about 6% of revenue in the quarter. That's a pretty large percentage and enough to be the primary cause of a revenue shortfall in JunQ. However, it's still less than 10%. Just as a means of comparison, Huawei represented 15% of LITE's sales in FY19 18% in MarQ, according to a recent press release.
In terms of competitors on the SiC side of the business, Cree lists Dow Corning, II-VI (IIVI), SiCrystal and Showa Denko in its 10-K. IIVI is the only one that trades publicly in the US. Also, this is a Huawei-specific issue so it's not clear how much exposure they have to this customer.
Issues were not just caused by Huawei as the LED Products segment also showed weakness with segment revenue now expected at $113-117 mln. As a quick side note, Cree recently announced it will sell its Lighting Products business to IDEAL Industries. Removing that still leaves its LED Products segment, which includes LED chips/components.
According to Cree's 10-K filing, competitors on the LED Products side include Nichia Corp., OSRAM Opto Semiconductors, Samsung LED, Seoul Semi, Lumileds, and Nationstar. Cree goes on to says that there are a large number of other companies, primarily based in Asia, that offer LED products.
Bottom line, we have been following Cree for years and we have noticed that the company's financial results tend to be pretty volatile on a quarter-to-quarter basis. In terms of sympathy plays, it's difficult to find direct competitors that may trade down with Cree on this guidance. Cree is sort of a one-off company, not a lot of others with such LED exposure. Most LED companies are part of larger electronics companies.
However, it's a reminder to be cautious of any stocks with Huawei exposure and China exposure generally. Unfortunately, Cree has exposure to both and it's impacting near term results. Hopefully, a China trade deal can get worked out but if it takes a long time and the Huawei issue lingers, Cree may be guiding down again in FY20. As to why the stock is higher today, it seems to be overall market strength or perhaps investors had been expecting a warning.