Cree Inc.
My Impression of Cree's ASM

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By Imshaken
November 5, 2004

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I just attended this years Cree annual shareholder meeting, my fifth. I haven't contributed much here in the way of Cree as of late I thought I would try and make that up by sharing my impressions of this trip. During the last five years we've had informal gatherings of some of the old yahoo posters the night before the meeting. For my first annual meeting the gathering was rather large and nearly coincided with the market's top. This year we saw the return of an old friend, Wildcat. Seeing him and his bride again was pleasant and filling since he brought me a BBQ sandwich. (Thanks). I missed not having time to spend with jozarc or Redfoxx as in the past because of flight scheduling. In fact, I didn't even have time to see Cree's new permanent display room, which I'm sure contained some juicy treasures but the plane was leaving and so was I. Despite these disappointments this year was perhaps my favorite experience because of Chuck Swoboda's outstanding presentation describing Cree's path to success in the last nine quarters and what it will take to continue on that path. Cree is obviously maturing as a company, and is currently on a path which should maximize its chances to succeed. Since my retirement is primarily invested in this company days like today are reassuring to me.

I didn't take notes and so will offer my recollections of Swoboda's presentation and of some of the things I learned from other attendees who asked better questions than I.

CS displayed a chart demonstrating that wafer sales, and other non-LED revenue had remained relatively constant over the last nine quarters. Then adding on a layer of sales of Standard brightness LED sales, which were also relatively constant. Then adding on a layer of sales of midbrightness LED sales, which as with standard brightness were also fairly constant. So the nine bars were, at this point, fairly evenly elevated, then sales of high brightness LEDs were added to the bars at which point it became clear that Cree's revenue gains are being driven by high brightness LED products. CS then claimed these high brightness products were the most recently developed. This was a cogent display illustrating what has been driving Cree's growth.

CS then graphically illustrated how Cree's volume increases, combined with lowering ASPs, and lowering production costs have increased Cree's gross profits. These gross profits gains are what drive the gross margin gains Cree has been enjoying.

Another chart illustrated how Cree's revenues have increased by 122% during the same time period Taiwanese LED manufacturers gained 66%. This is evidence of Cree's gaining market share against the Asian competition. While I'm on the subject, it was mentioned that TG may or may not have been licensing Taiwanese manufacturers. There seems to be a question of how much value that licensing can be to the Taiwanese since TG is losing more market share than anyone else.

CS indicated he believes Cree is receiving tremendous benefit from the IP portfolio. The fact that Cree's gaining market share while the Taiwanese are losing it is evidence. It's interesting to note that Cree is maxed out production wise, while there is at least one Taiwanese LED company apparently having their LED producing equipment auctioned off by the equipment leaseholder. Apparently, Cree's IP is providing considerable protection against dirt-cheap Asian labor.

CS also described how Cree has been selling LEDs for fifteen years and has developed very good relationships with their customers, which is paying dividends. To emphasize the value of Cree's relationship CS demonstrated a headlamp, which is being designed by a Cree customer with the intention of being installed in a 2008 high-end automobile using Cree's XB900 PowerChips. I can attest this was a very bright headlight. CS mentioned that they are using the very best chips available today because of the design lead time where it's expected Cree's chips will increase in the interim years.

Perhaps the most dramatic part of the presentation was the comparison of two LCD televisions. One with traditional CFL backlighting, and the other with LED backlighting. The difference is dramatic and the LED backlit TV screen was far brighter with vivid and intense colors.

CS believes these two devices, the automobile headlamp, with 50 million autos manufactured a year with up to 100 HB LEDs, and the LED LCD TV with 30 -300 LEDs per TV and up to 200 million TV's made a year are the next large markets. These markets are not included in current market growth estimates provided by Strategies Unlimited, which forecast sales in 2005 of $4 billion. The first LED backlit TV will be out by December for the geeks who have to have the latest and greatest. In a year there will be many more models available. Swoboda indicated that the work is difficult and Cree must come to understand the backlighting system as well as the TV manufacturer in order to best provide needed devices to that product. He mentioned that automobile design cycles are 3-5 years so the headlights are coming, but it won't be tomorrow.

Swoboda has also made it clear, as he has for the past year, that Cree will, at some point, expand some production overseas. That day is coming. As Cree grows larger and competition increases Cree will be forced to have some backend production near end users. (non critical technologies like test and package). Cree core technology will be the last thing to ever leave Durham. Cree believes that once in Asia trade secrets and intellectual knowledge would be given away.

Regarding power switching device sales Cree has design wins in computer server power supplies. These power supplies do take some advantage of SiC characteristics but are not specifically designed around the SiC schottkys so don't take full advantage. Cree is continuing to work to educate designers about the advantages of SiC based schottkys but Cree must overcome acceptance hurdles. Persuading conservative engineers to try new, as yet unproven to them, when Si technology is a known quantity is a barrier that will fall with time and device longevity. He doesn't expect a sudden ramp at some point. (As I've hoped) but rather a continuous ratcheting up of sales and design wins. Cree is working on penetrating the motor control market.

Some tidbits I picked up here and there:

1. Cree's cross licensing with Nichia apparently also covers laser diode IP.

2. Cree's LED luminous efficiency levels may be approaching the point where they will overcome Nichia's phosphor efficiency advantage. Also, Nichia's phosphor technology is older technology and it's possible efficiency could be improved using another approach.

3. The moving of Schottky wafer production to Sunnyvale will greatly increase Cree's capacity.

4. Cree is adding capacity continuously between installing new capital equipment and yield improvements, while physically expanding the current plant.

5. Cree may also be searching for properties with developed infrastructure. (A bargain like the current site was). So keep your eyeballs peeled.

I guess that's about it for now. My main impression is that Cree's management knows what combination of factors, specifically, is making Cree successful, and Cree won't stray from that path.

All this is not to say that Cree doesn't have some challenges, but that's for another post.

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