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Cree dependency on "Economic Recovery"

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By redfox444444
March 21, 2002

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I must confess I have been at a loss to understand how the economic downturn is at the root of Cree's present problems. But since management and so many posters say it is, I'd like to throw out my take for rebuttal.


LED's:


First, auto industry sales have held up through this recession like it wasn't even there, so can't see much to blame on the recession here. The origin of the Osram stallout is still unknown, but Microsemi is said to be getting some auto design wins (re Needham piece on MSCC), maybe MSCC's integration/heat sinking technology is shutting Osram out of new design wins. But Cree is the bet to pick up this Microsemi business based on known MSCC press releases. But hardily anything here is recession based.

Second, the handset industry has held steady at 400 million sets and Cree has only 1% penetration so we've always been dependant on new design wins and new backlighting applications; new designs are materializing and LED backlighting is rapidly taking market share from CCFL backlighting in handsets, PDA's and Laptop screens, a huge market. Cree's had product here (white) possibly a little late, but sales and application engineering critical mass seem far more relevant than the recession or being late.

Third, green traffic light conversion is proceeding rapidly and outdoor signage is also. While the latter may be mildly impacted by the recession the green traffic light conversion doesn't appear to [be] affected at all. The fact that Cree just hasn't had product these markets are taking seems far more relevant than the recession. This is compounded by the difficulty in muscling out entrenched competitors now that Cree has recently announced product availability. A 5% price differential might not dislodge an entrenched competitor, where it would at the beginning.

Maybe what Chuck said when asked about the difference between Jan 2001 and Jan. 2002 on the warning conf. call is more relevant in Cree management thinking: "In Jan 2001 our major competitors were maxed out on production...." Both TG and Nichia subsequently put major production capacity increases on line as did Cree, and the days of industry under capacity are over. But this cause is different from a recessionary cause where demand falls off a cliff. Furthermore, the big new LED markets materializing out there now require engineering hand holding and partnering to a degree not present before, for instance PDA and laptop screen backlighting for sure: ref. the Nichia/Citizen and Lumileds/Samsung tie up in backlighting. I sure hope Cree management isn't suggesting that Jan. 2001 industry under capacity/sellers market must reappear for revenues and profits to surge, as I think that's a very low probability. Cree must first continue to turn out leading edge products as they have been for the past 6 months and beef up the applications engineering staff to get into the huge but highly specialized emerging markets out there.

Blue Laser:

No material revenues were expected, but technical progress and joint venture both seem on schedule at this point. 10k hour at 3mw but not at 30-40mw. The tea leaves say Cree is far enough along on the latter for the Blu Ray crowd to commit big bucks to bring out product, betting that they won't have to sole source Nichia. Laser progress a big plus for Cree. But no recession effect here either. Significant revenues a good ways off.

Ultra RF: Both recession and technology effects here as customers haven't have the money for rapid build out and the technology problems with LDMOS and price/performance with SiC amps have been well documented. Some recession effect here but technology effect nearly as great or greater than recession effect. Gilder said a year or so ago that LDMOS technology was difficult.

Power Semis:


Maybe some small recession effect but mostly a price/performance issue in the market. Maybe some need for engineering designer hand holding here, I'm not sure what the situation is with respect to hand holding vs. design wins here.

Materials: Who knows how this interacted with recession either way.

Have a go at where I missed the where the recession is a bigger effect than product introduction delays vs. competitors due to inadequate spending on R@D in 2000 and first half 2001, and need for application (sales) engineering critical mass now.

Obviously I think Cree's going to get it together (beginning in third quarter) as I haven't sold any stock. I just think management's blaming the recession paints an inaccurate and self serving picture unless they're suggesting a return to industry undercap. and sellers market will occur when we come out of recession. May-be, but I don't think so. The competitive landscape is much more complicated now, and Cree will have to do a lot more than produce flat out and sell to 18 assemblers and a few wafer customers


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