Overall Take on Quarter

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By Wildhart
January 12, 2001

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Overall, from what was stated at the conference call, Cree has and will be experiencing slower growth. Management is now anticipating 7 - 10% per share sequential earnings growth for the rest of the FY. This is quite a bit slower then what we have been used to around here.

My interpretation of this, which has the support of a certain analyst I have consulted out in Sante Fe and about whom I have referred on this board in the distant past, is that the inability of Cree to execute the 3" wafer is resulting in slower sales growth. My assessment is that being unable to produce that wafer is causing a less then expected decrease in asp which in turn is slowing down Cree's penetration into the overall led market. They are now endeavoring to extract as much as they can out of the 2" wafer but efficiencies of the 3" will not be expected for what sounded like another year.

While this is something of a set back, for those with a long-term horizon this shouldn't be of great concern. There is a silver lining in this interpretation, which is the reminder that SiC is an extraordinarily difficult substrate to fabricate. The very difficulty presenting itself to Cree also creates significant barriers to entry for competitors. Hence, we hear Neil's reference to "Vapor Product" i.e. competitors who are unable to produce what they said they could make. SiC wafer sales bear out this interpretation as sales grew with unexpected robustness even as margins and prices rose! Demand is increasing and supply is not keeping up so prices rise. No one else is out there, and no one else will ever be out there, producing high-grade SiC wafers. Cree market share on wafers has now probably exceeded the 95% level.

Other good news included improving ROA and ROE, 20% more revenue expected from UltraRF over the next 6 months than had been initially forecast and an unexpected penetration of the ultra hbLEDs, which surprisingly made up 8% of total led sales

Cree has significant challenges ahead in navigating the integration of a number of important acquisitions and deals which have occurred over the last 6 months as well as all the other technological milestones it must achieve to keep growth on track. However, I have tremendous confidence in management's ability to execute to the benefit of shareholders. Nothing, not one detail that has emerged from or about this company, including the startlingly sophomoric drivel of Cohodes, has altered my appreciation for this management team.

My long-term expectation has not changed and I will restate it. SiC, in its various forms, will insinuate itself into the economic and social fabric of western civilization over the next 10 years such that our society will not be able to function without it. SiC, in that regard, will have achieved commodity status. The only difference between SiC and other commodities is that for SiC there will be only one source, Cree. This extraordinary position of being a monopoly for a product that is a societal functional necessity will result in great returns for we shareholders.