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No. of Recommendations: 30
I just finished listening to the conference call. It was a pretty good call. It wasn't the giddy experience of the Oct02 call, but business isn't going badly.

The biggest problem was the guidance for the current quarter. CS stated that Cree is getting positive feedback from all of their major customers except for one. So they are forecasting flat revenue. They have 65% of that booked, which is a lower number than previous quarters. Business still looks good, but they don't have as much visibility as the last few quarters.

Cree also said its tax rate was going to rise to 31%. When I plugged that into my spreadsheet (assuming 6% sequential growth for each quarter in FY04), the EPS dropped from $0.77 to $0.72. The tax rate change makes at least a penny a quarter difference. I still don't understand why they guided down to $0.11-$0.12 for the quarter.

Cree came in at the low end of their guidance of $0.15-$0.16. The reason they didn't make $0.16 is that their interest income was down significantly, from $1,170k in Mar03 to $254k in Jun03, almost $1,000k. The operational numbers where almost identical to guidance. Cree made their estimate, but didn't provide investors with an upside surprise that most of use were hoping to see.

Cree discussed the lower interest income on the CC, but didn't talk about its affect on EPS.

Gross profit margins on the LED business declined from 46.5% in the previous quarter to 45%. No problem here.

CS said that there is limited supply in the high-end of the market (Cree, Nichia and TG), but no capacity problems on the low-end.

Cree has now doubled their LED capacity, so they shouldn't be constrained going forward. There was no discussion of capacity problems at Cree and CS talked about selling products into the low-end market. It is possible that Cree couldn't manufacture all of the high-end chips it needed in the last quarter and this problem still remains.

Probably the best news is that the rectifier and RF amp markets are getting traction and will become a positive factor in the Cal04. CS stated that Cree has rectifier orders from a customer going into production. Cree Microwave is also getting some positive feeback from its customers.

The bottom line is that visibility for the current quarter is not too good, but CS and Cree are very positive about the entire year.

I get a $0.72 EPS for FY04 when using just a 6% sequential (26% annual) growth rate and a 31% tax rate for Cree. $0.72 is a 57% increase over FY02's $0.46. At this growth rate, with a discount rate of 25%, Cree's NPV is $96. Using the PEG formula, Cree is worth 57 times next years earnings, or $41.

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