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July 29, 2004...Historically, just when outsiders start to question Cree's capability to withstand their latest round of challenges, that Durham, North Carolina USA compound semi leader always tends to surprise everyone. I've been inside the wide bandgap field so long now, that I've learned from experience... never underestimate Cree's capability, nor their will to win.

After over 20 years in business, Cree is now employing 1100 people, and I've had the pleasure of tracking the company since it emerged as the brainchild of fresh grad students out of North Carolina State University. That original "can do" spirit and youthful optimism continues to pervade every facet of the company. I've never in my 30 years of following advanced semiconductor companies seen anything to compare with them, including Intel and Apple. Cree is in a class by itself. So when the pressure started to mount over the past year as more and more competitors in the blue spectrum LED business made their presence known... and their intentions to turn this business into a low price commodity business, I just kept a "wait and see" attitude. Traditionally, every time rumbles start up about how Cree won't be able to stand up to the competition, they not only stand up to the challenge, Cree actually starts quietly writing a fresh new playbook for the advanced LED industry... confidently filling the quarterback role.

Believe it or not, the advanced LED business, especially those wearing the blue spectrum colors, are an international team. And, contrary to what you may perceive as the truth, Cree is a team player. They've supported every technical conference devoted to the wide bandgap (WBG) materials and device development since wide bandgaps came into play in the greater worldwide arena. The international technological synergy fostered by technical leaders like Cree's co-founders, Calvin Carter, John Palmour and John Edmond, cannot be measured by anyone on the outside. But the techs who have attended SiC technical conferences like ICSCRM and the various GaN meetings know well of their individual and collective contributions. That's why we honored them with our Pioneer Awards. They are major team players.

The fact that Cree reported an outstanding year didn't surprise me at all (ref: our July 29 headline news). Neither were any of the analysts who routinely track them surprised (they're catching on). As a longime industry insider, Cree's performance this time gave me a feeling of personal pride, because, over the years, I've come to feel like part of that global WBG team. Cree's blue spectrum LED unit shipments increased a whopping 65% while their "blended average sales price" declined only 7% since the fourth quarter of FY '03 and those results were offset by a 19% reduction in their average LED costs, which contributed to their profitability. And what's possibly even more exciting to those of us who have such faith in the importance of wide bandgap devices for electronic applications, the people at Cree Microwave met their goal by turning the corner to profitability... reporting a record $41,000 in profit as compared to a negative gross profit of $370,000 in Q-3. As Cree's CFO said in their conference call, "At the end of our FY 2004, our balance sheet was outstanding!" And the topper for their year was the acquisition for $10.7 million of ATMI GaN business which is sure to pay off handsomely in the years ahead. If I could invest in the companies I report on (which I can't... and won't) Cree would be the first one I'd put my personal bets on.

And outsiders best not forget that this unique company, which continues to maintain 100% of their manufacturing in the USA, enjoyed an increase of 41% in USA government contract revenues. What I find even more interesting... and worthy of a spot on CNN's "Lou Dobbs Show" (a major supporter of American companies who figure out how to compete effectively without going offshore) as yet another heroic USA success story during tremendously "challenging" economic times in this country, is that blue spectrum LED sales to Cree's Japanese distributor, (Sumitomo Corporation) represented 33% of total revenues and four of Cree's top 10 end customers were located in Japan. In addition, Osram (Germany) and Agilent (much of whose business now comes from the German arm) each accounted for 13% of Cree's revenue.

Those not in the know may wonder: "What's the significance of moving to 3" wafers and the continued expansion in capacity?" One clearcut goal: continued leadership in all sectors. They admittedly will have yield challenges as they move to 3" (Cree traditionally thrives on yield challenges), but the pullers can take it and the MOCVD epiwafer reactors are already geared to take the larger diameters. Cree's knowledge of SiC substrate growth and GaN epi technology is unsurpassed. Behind 3" SiC and further guaranteeing their place in the fast-paced technology world are 4" SiC wafers and the early iterations of native GaN substrates as Cree incorporates one of the true world class GaN growth groups into their team, under the direction of George Brandes.

And Cree's President and CEO, Chuck Swoboda, has his eyes wide open to the challenges. As he said in the conference call, "While it will take us at least four quarters to complete, we have started the conversion of the three-inch wafers which we expect will more than double the number of chips per wafer, and should result in a significant cost reduction once we have worked through the transition. We need to continue to develop new LED products with increased brightness and lower costs to maintain our leadership position in a very competitive market. We must work with our customers to get our new products designed into the key applications, and insure that they can win the market with these products. Although we must continue to overcome these and other obstacles in our business, we look forward to the challenge and building on our past success. We realize that we compete with a number of companies around the world who are investing in the LED market, and we continue to evaluate the competitive situation, and factor it into our expansion plans and targets for the year ahead." Chuck also mentioned that "We are evaluating several options for expansion on our current site, as well as other U.S. and international locations."

In order to position Cree's Shottky diode business for long-term success and help give their LED manufacturing some additional growing room, Cree announced that they have decided to qualify their Sunnyvale, California fab to able it to produce three-inch, SiC Shottky diode products and to transfer production there over the next several quarters. "This move should also provide us the facilities, equipment and people to convert to four-inch wafers and expand the silicon carbide power device business for the next several years, and enable us to better utilize our Sunnyvale capabilities," said Chuck Swoboda in the conference call. Cree has already done the pilot release of their first 60 watt SiC MESFETs and have garnered favorable feedback from customers. "Although this is longer term opportunity, we believe the SiC and GaN microwave devices we are developing could potentially be disruptive technologies for the next-generation wireless infrastructure in communication systems." In the laser area, Cree continues to extend the lifetimes for both their 405 nanometer products as well as the very short wavelength devices which are part of our government funded SUVOS (ultra violet lasers) development contract.

Chuck confided that, due to the rapid expansion of their LED business, that activity on the near term 405 nm product has slowed a bit, but that Cree is now making the investment to get that development back to full speed, with the target of a commercial 30 milliwatt design by the end of FY '05 and that the 30 milliwatt product would "raise the bar" even higher... (which Cree loves doing). "To put this in perspective," he said, "a 30 milliwatt chip should enable us to produce a greater than 100 lumen per watt, white LED which is believed to be one of the critical technical milestones to commercialized LED lighting." Cree's newly announced XLamp LED product (see news story, Cree Wraps Up FY-04 on an All-Time High & Launch of XLamp, this issue) is the company's first step in their strategy to be a leader in the market for LED based lighting. "As we demonstrated with our results over the last few quarters, our value proposition continues to win in the market, especially in applications where the combination of performance, costs, quality, and IP are important factors in the customer's decision process," said Chuck. And as he did when delivering the keynote address at our Blue 2004 meet in Taiwan last May, Chuck again underscored that... "In addition to our focus on increasing performance and in reducing costs, our legal team in actively putting companies on notice of potential infringement issues regarding Cree's nitride chip and white LED IP. We believe that this effort is important to reinforce the value of our intellectual property in the market which we believe is an important differentiator."

So my advice to those on the outside looking in is... whether you're an observer, an investor, or prospective player in the wide bandgap field, take the advice I'm sure is shared by their wise colleagues and competitors alike, and never underestimate Cree.

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