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Cree Inc.
How I See the Blue LED Market

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By brasschaat
May 6, 2003

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1. The blue LED market is growing at around 40% y/y in revenue terms (my estimate) although some others have estimated the growth rate at around 25%. Pick your own number if you don't like mine.

2. Cree is targeting a 25% drop in LED ASP y/y.

A key aspect to sustain this growth rate is for continued improvements in brightness and reduced cost of LEDs. Better price/performance ratios will allow penetration into new markets and allow demand to grow.

Depending on the growth rate one chooses and taking into account decreasing ASPs, capacity (number of LEDs produced) should increase in the industry as a whole by either 87% (40% revenue growth rate) or 67% (25% growth rate) y/y to keep supply vs demand in relative stability. Alternately, the number of LEDs produced should double at around every 13 or 15 months depending on the growth rate one chooses.

Now, how does Cree and other companies go about increasing capacity? Cree does it by increasing their yields and by adding capital equipment. It is of course impossible to get an accurate estimate of yields of companies in the business, as this type of information is of course proprietary. Still, yield improvements only go so far in increasing capacity, so Cree and other companies must increase their capital expenditures in order to increase production. Other things being equal, I believe a good estimate of how capacity is increasing in the industry is possible by looking the number of MOCVD reactors that are sold. The major producers of MOCVD reactors are Aixtron and Emcore. Nichia, TG and Cree of course do not say where they get their reactors, but it seems reasonable to assume from one of the above.

Aixtron's revenue has gone from 47M(Q1 2003) to 19M (Q1 2002) euros in the last year. Aixtron now claims to have approximately 67% of the MOCVD market where in the past I believe Emcore's share of the market was either as large or larger than Aixtron's. The above numbers pale in comparison to their numbers for 2000 and 2001 when Nichia, TG and Cree were rapidly expanding while the Taiwanese were just entering the picture. Admittedly, not all of Aixtron's revenue is associated with MOCVD reactors for blue LEDs. Also, the newer reactors can provide a higher throughput compared with reactors sold several years ago. Still, I believe the number of reactors sold serves as a good proxy for growth in capacity.

A lot has been made by UBS and OWS of how the Taiwanese are cornering the market by increasing their capacity. According to Jo Ann McDonald there are maybe 200 reactors in Taiwan of which only 15 to 20 are either delivered or on order in the last 12 months. So, it does not appear that the Taiwanese are significantly increasing production at the present time. Also, from CS at ML conference, the Taiwanese LEDs are at the pehaps the middle to bottom of the brightness scale.

So this is how I see the blue LED market. Capacity is of course increasing. But, if capacity were to keep pace with demand (a double of LEDs produced every 13 to 15 months), then one would expect to see the number of MOCVD reactors being sold to continue to increase in number while Aixtron and Emcore should be showing record revenue. But just the opposite has occurred in both the last year and compared with the 2000 and 2001 timeframe. The number of MOCVD reactors sold has gone down rather than up. I see the LED manufactures currently increasing LED capacity at a rate far less than the expected growth rate of demand.

For Cree to succeed in this environment, they need to continue to reduce costs and increase the brightness of their LEDs in order to drive demand. This is indeed what Hunter and CS have said for years and continues to say at each CC. I do not believe the capacity of the other LED manufactures is of paramount concern.

At the same time, I believe LED performance is now finally reaching a level sufficient to target niche general illumination markets. These niche markets are potentially huge and explosive growth may well now occur.

I see literally a bright future ahead for Cree.

fwiw

Rich


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