CREE Punished, No Beheaded 24%

Cree falls on downgrade, Q2 shortfall Demand slows in key business; Q3 guidance disappoints

By Dan Gallagher, CBS MarketWatchLast Update: 10:23 AM ET Jan. 14, 2005
SAN FRANCISCO (CBS.MW) -- Shares of Cree Inc. took a spill Friday morning after an analyst for Wells Fargo Securities downgraded the chipmaker, citing "soft" results for its second fiscal quarter and a disappointing outlook for the current period.
The Durham, N.C.-based company (CREE: news, chart, profile) saw its shares lose $8.15, or 23 percent, to trade at $26.90 in early Friday trading.
In a note, Wells analyst Chris Montaño said the company's results "may spark investor concerns" regarding near-term growth in the market for light-emitting diodes, or LEDs - the company's main business line.
"While we remain confident that the LED market's long-term prospects are very promising, given the downside surprise and guidance we think it is prudent to take a more cautious view regarding near-term LED growth," wrote Montaño, who now rates the stock "hold."
In a conference call Thursday afternoon, Cree executives said demand for LED products was slowing because of "a variety of factors," including seasonal slowdowns in production of mobile phones that use Cree's technology.
A more positive view came from CIBC analyst Matthew Smith, who predicted that while growth in the mobile phone market is slowing, the company has potential to win business in the growing space for LCD TVs.
"We believe that the first opportunity for Cree to achieve product design-in will occur within the next 6-8 months, most likely in high-end LCD TVs in 37" to 40" segments," Smith wrote. "This could set the stage for product roll-outs early as [the first half of 2006]."
Second-quarter results below expectations
For the quarter ended Dec. 26 the company reported revenue of $97.5 million compared to $72.7 million in the same quarter last year. Analysts were expecting revenue of $100.2 million, according to consensus estimates from Thomson First Call.
Net income for the quarter was $25 million, or 32 cents per share, compared to net income of $13 million, or 17 cents per share, for the same period last year.
The company said earnings for the period got a boost of 5 cents per share from "net non-operating and other tax adjustments." The EPS number was also negatively impacted by a penny because of an increase in the number of fully diluted shares outstanding.
Analysts were expecting earnings of 32 cents per share.
Gross margin for the quarter was 50.4 percent of revenue, compared to 46.6 percent in the same period last year but down from 56 percent in the previous period. The company blamed the sequential decline to increased LED costs associated with the three-inch wafer conversion, product ramp ups and lower-than-expected shipments and sales prices in December.
For the current period, Cree said it expects revenue in the range of $94 million to $98 million -- below analysts' expectations of $103.5 million in revenue. Earnings for the period are expected to come in between 24-27 cents per share compared to 32 cents per share expected by analysts.