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A/R looks unusually high.

Actually, A/R look well in line with Cree's history. Last quarter, they had a sharp drop in receivables, which they never explained very well, so compared to last quarter it would seem that this quarter is out of line. However, look at DSOs for the past few quarters:

Q1 2001: 49
Q4 2000: 34
Q3 2000: 76
Q2 2000: 71
Q1 2000: 77
Q4 1999: 84
Q3 1999: 80

I think the market reaction is pretty typical of most participants' short term mentality. First, market didn't like the top line growth. While the top line growth rate has not begun to accelerate, the announcement of the ultra bright LED, coupled with the additional capacity coming online in the second half of the fiscal year, bode well for acceleration of growth later this year. The company cited reports that the new LEDs are as bright as sapphire, but much much cheaper. And you still have the blue laser and RF product potential a bit further out.

Also, the market is probably reacting to gross margins in the sense that they stopped growing. This is the first quarter in several that Cree's overall GM stayed constant, which looks to me to be the result of of somewhat greater ASP erosion than the company experienced last year. It doesn't help when CNBC reports that Cree guided margins lower, which they didn't do. It's pretty clear that they've had some trouble with 3-inch wafers (it was evident in last quarter's CC) but Hunter reported very good progress over the past few weeks and it sounded to me that they have come a long way in solving whatever issues they had.

While this quarter wasn't the blowout that is required to hold your own in these market conditions, I can't find any longer term justification for the sharp reaction of the market.


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