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To: Donald Wennerstrom who wrote (53163)	8/10/2011 11:10:40 AM
From: Donald Wennerstrom	1 Recommendation Respond to of 95616

Cree Starting to See Brighter Days Ahead 9:36 AM ET 8/10/11 \| Morningstar Cree ( CREE) reported fiscal fourth-quarter results and gave investors a first-quarter outlook that was ahead of our tempered expectations. After three straight disappointing quarters, revenue from the light-emitting diode maker was $243 million this quarter, at the high end of the firm's outlook of $225 million-$245 million provided in April. Sales were up 11% sequentially but down 8% from the year-ago quarter. Cree saw healthy growth from LED lighting fixtures and components. Meanwhile, sales of LED chips used in high-definition televisions and mobile devices continued to decline. We're not as concerned by this slide, however, as we view LED chips as a more commoditylike area of the LED industry, and we anticipate that much of Cree's profitability will stem from LED components and lighting fixtures. Cree's gross margin dipped 360 basis points to 38% because of lower factory utilization as well as ongoing pricing pressure in LED chips. Nonetheless, Cree held operating expenses in check to generate an 8% operating margin in the quarter. For the September quarter, Cree expects revenue of $245 million-$255 million, which would represent a 1%-5% sequential increase. While we're pleased by the revenue outlook, especially in light of a shaky macroeconomic environment, we're mildly disappointed by the company's flattish gross margin forecast. Cree has seen aggressive price competition in recent months, and although it tentatively thinks that prices are starting to decline at a lower, more normal pace, we are beginning to question whether the firm can overcome this pressure in the years ahead. Whereas the firm previously stated a long-term gross margin target of the mid- to high 40s, Cree conceded that its current focus is merely to get back to the low 40s in the near term, then perhaps around 45% in the long-term. We'll be keeping a close eye on Cree's progress in expanding its gross margins in the coming months; we've modeled mid-40s gross margins in the long term, and (all else equal) we'd probably trim our fair value estimate if Cree can't reach the 45% plateau in the next couple of years. Nonetheless, we're pleased to see the firm return to sales growth in the quarter, and we remain optimistic about the LED lighting industry in the long term, as well as Cree's position in it as a technological leader.