BANGALORE Higher customer inventories and pricing pressure forced Cree Inc to cut its third-quarter revenue and margin forecast, signaling another disappointing quarter from the LED maker.
Supply of light-emitting diodes, used to light mobile phones and television screens, has jumped in recent times mainly due to generous subsidies in China. That, along with pricing pressures, have led Cree to post revenue below market expectations in the last two quarters.
Cree shares fell 12 percent to $42.92, their lowest in more than a year on Wednesday morning on Nasdaq. Shares of smaller rivals Rubicon Technology, Veeco Instruments and Taiwan's SemiLEDs Corp were also hit.
"Investors will continue to remain cautious on the stock over the next 2-3 quarters, as we believe Cree needs to show better execution on managing its channel," Piper Jaffray analyst Ahmar Zaman said.
Morningstar analyst Brian Colello said aggressive entry by competitors and weaker-than-anticipated LED television demand have led to the inventory pile up. "They had the worst of both worlds."
Cree forecast January-March revenue of $215-$220 million, compared with its prior view of $245-$265 million. Analysts on average had expected $254.8 million, according to Thomson Reuters I/B/E/S.
"Our customers had more inventory than we had expected," Cree Chief Executive Chuck Swoboda said on a conference call.
Piper Jaffray's Zaman said lighting demand in China, which contributed 40 percent to Cree's sales last fiscal, is taking longer to recover.
Durham, North Carolina-based Cree, however, is targeting revenue to grow 10-12 percent in the fourth quarter, from the third.
Swoboda said higher demand for lighting applications would be the main driver in the April-June quarter.
Cree, with a market value of $5.4 billion, expects gross margin for the third quarter to fall to about 43 percent, from its prior target of nearly 46 percent.
Wunderlich Securities analyst Theodore O'Neill, however, thinks the fears of rapid margin compression are overblown.
"When we get to the day where a single LED can replace a 60-watt light bulb, the margins will be awful but it currently takes 50 or more LEDs in a highly engineered electronic device."
The CEO did not see any immediate impact from the disaster in Japan.
"We do obviously have some suppliers, generally secondary or third on our list, and we're monitoring that ... a lot of people still evaluating what might happen over the next quarter or so," he said.
Cree shares were down $5.93 at $43.06 in afternoon trade. Nearly 16 million shares changed hands, about four times their normal volume.
(Reporting by Krishna N Das; Editing by Maju Samuel, Unnikrishnan Nair)