The main issue, though, is CREE's Q1 guidance -- specifically its EPS guidance, which was sharply below consensus at $0.02-$0.06 vs. the $0.12 expectation. The disappointing guidance is the main reason why shares are trading lower by about 9%.
Before diving into its guidance, here is a closer look at its Q4 results. Revenue declined 7.6% year/year to $359 million. This marked the fourth quarter in a row, and fifth out of six, in which revenue has declined. As noted above, the primary issue is weakness in its lighting division. For this quarter, lighting products fell by 22% year/year to $154.7 million. This was primarily due to lower sales caused by disruptions related to commercial product holds, as well as lower consumer bulb sales. Gross margin did improve slightly by 80 basis points sequentially, but it seems the expectation was for a more robust improvement there.
The clear positive was its Wolfspeed segment, which include power and RF products used to build electronic systems. These components are used in a variety of applications, including renewable energy, telecom, industrial motor control, automotive, and power management. Revenue for this segment was up 30% year/year to $60.8 million, with strong growth in each of the three areas: power, RF, and materials. This was despite being capacity constrained, which CREE is currently working to resolve.
During the conference call last night, management commented that the Wolfspeed business is fully booked for Q1 and its limited capacity has stretched lead times into Q3. The company has, and continues to invest significant resources into building out capacity and is currently working through the qualification process. It is specifically targeting additional capacity to come online in fiscal Q2 with a plan to double wafer capacity for external materials by the end of calendar 2018.
That's the good news. The not-so-good news is its aforementioned guidance. Revenue guidance for Q1 was inline at $353-$367 million, but, its EPS guidance was certainly a disappointment. One factor behind the softer EPS guidance is that Q1 operating expenses are now expected to be about $4 million higher than anticipated, due to costs associated with the Wolfspeed factory expansion, as well as incremental increases in legal costs for defensive IP cases. And, again, CREE is forecasting its lighting business to decline sequentially, offsetting some of the strength in Wolfspeed.
All in all, it was a disappointing performance from CREE, with the lone bright spot being its Wolfspeed business. As that business becomes a larger portion of the total, the weakness in its lightning segment will be offset somewhat. But, with lighting being about 150% larger than the Wolfspeed business, it will take some time for it to become a main driver of its financial results.