UBS Outlook for LED Chip, Package, and Light Source Manufacturers in 2014

LED package industry anticipated to integrate in the next two years. LED light source sector focuses on consumer channels and brand building. Chip production in 2013 was limited. LED lighting to grow rapidly in 2013-2015, benefiting manufacturers with newly expanded production capacity....

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LED chip supply and demand has balanced out, increase in shipment volume and gross profit possible in the future.

Expansion of chip production in 2013 was limited and around 20-30 percent produced was invalid. With LED lighting rapidly growing, supply and demand for the domestic LED chip industry has already balanced out. We anticipate that LED chips will increase both in shipments and gross profit in 2014. Leading manufacturers with advantages in scale and cost and with government backing have the potential to increase competitiveness.

LED package industry anticipated to integrate in the next two years

The structure of the LED package industry is disorderly. Within the next two years, the industry is predicted to begin integration. The manufacturers that will come out victorious are those with the production scale suited for handling lighting demands and who have a close cooperation with downstream and upstream companies. The current stage looks favorable for manufacturers specializing in package production.

LED light source sector focuses on consumer channels and brand building

For the LED light source industry, market looks optimistic for stable growth-oriented companies with better production scale, production quality, production control, and brand building. Future sales channels will become more diversified.

The LED chip and lighting source sector is the most likely to produce large manufacturers. LED industry supply chain includes the sectors of chips, packaging, light source, and fixtures. The preconditions for a business to be able to produce a large manufacturer include product standardization and large scale production capabilities. The sector also requires large demand. Looking at the entire supply chain, upstream chip and downstream light source sectors have the possibility to produce large manufacturers.

Chip production in 2013 was limited

The Chinese government offered a lot of backingto the LED industry from 2010-2012. Blind investment in the LED chip industry led to a surplus in supply.

Around 20-30 percent of MOCVD production is invalid. China has over 1000 units in total but only around 700 units are used for production. The main reason for this is that MOCVD technological advancements have been rapid over the past two to three years. Older second hand units cannot compete. At the same time, prices have dropped dramatically. Leading manufacturers who are expanding production can receive subsidies which mean they will not consider purchasing older MOCVD units.

Local Chinese governments after 2013 will no longer blindly support all LED chip manufacturers, but rather select a small percentage they find to be higher-caliber. Due to this, production expansion in 2013 was very limited for the LED chip industry, with only leading manufacturers able to expand during this stage, which mainly depended on volume of demand. According to public information released by market listed companies, HC SemiTek was the main company to expand production capacity. After the company became listed in 2012, they initiated large scale production expansion. San’an Opto anticipates beginning expansion towards the end of 2014.

LED lighting to grow rapidly in 2013-2015, benefiting manufacturers with newly expanded production capacity

Domestic LED chips have already reached a balance between supply and demand in 2013H1, with utilization rate for leading manufacturers reaching more than 90 percent. This could cause a structural shortage of supply for LED chips in 2Q14.

Over the past few years, LED chip luminosity has increased 20-25 percent every year. If prices remain the same, then LED chip profit margins will increase. We therefore estimate that LED chips will see an increase in shipment volume and net profit in 2014.

Competition drops for small manufacturers in LED chip sector

It is estimated that after 2014, small manufacturers with 40 MOCVD units and below will experience production difficulties. Main reasons include:

1. 1. Strong demand from upstream LED chips and tight supply of sapphires resulting from increased demands for application in iPhone home buttons. Only large manufacturers can guarantee suppliesfor upstream material companies.


2. 2. The lowering of local government support for second and third tier LED chip manufacturers.


3. 3. The high technical barrier for LED chip production and increased focus on product stability and consistency. A constant production operator and team of engineers are needed for technical support. Only large manufacturers are able to constantly provide R&D.

The LED package industry is estimated to start integrating within the next two years with manufacturers specializing in packaging estimated to come out on top. Over the past two years, the LED package industry has clearly benefitted from lowered prices of LED chips. As integration in the LED chip industry is drawing to a close, LED package industry will benefit less and less from price drops in LED chips.

Manufacturers specialized in packaging to come out on top

The LED light source sector focuses on consumer channels and brand building. The structure of the industry is more disorderly than the packaging industry layout. Stable growth-oriented manufacturers with definite production scales, quality production, production control, and brand building are to fare best. LED lighting source channel construction is more varied than that of traditional lighting source channels. LED light source manufacturers specializing in electronics will seek out traditional sales channels that are not light fixtures, such as the electronics market, household appliances, and electricity suppliers.

Electricity supplier channels help lower cost of electrical current. The difference between LED lighting factory price and retail price is currently huge, mainly due to cost of electrical current. LED lighting companies are establishing electricity supplier channels and starting direct marketing to lower sales costs, which boosts LED lighting penetration rates.

Government support for LED lighting is huge, both nationally and locally. In Guangdong Providence for example, policies require that office lighting is switched to LEDs within the next 3-5 years.

Central and local government subsidy policies for LED lighting energy consumption includes commercial subsidies of around 10 percent and civilian used subsidies of around 30 percent.

We are optimistic about the following three sectors：

1. 1. LED chip sector: optimistic about leading companies who can increase shipment volume and net profit.


2. 2. LED package sector: Optimistic about manufacturers specializing in packaging. Those that will come out on top after integration remains to be seen.


3. 3. LED light source sector: Optimistic about growth-oriented manufacturers with stable growth, definite production scales, quality production, production control, and brand building.

UBS Outlook for LED Chip, Package, and Light Source Manufacturers in 2014

J.P. Morgan Forecast Increased Bargaining Space as LED lighting Demands Surpass Backlight in 2014

The industry is focusing its attention on LED lighting market growth performance in 2014. The demand for LED lighting will surpass that of LED backlight during the beginning of 2014.

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The industry is focusing its attention on LED lighting market growth performance in 2014. The demand for LED lighting will surpass that of LED backlight during the beginning of 2014, according to a recent report by J.P. Morgan. The dispersed LED lighting market is rewriting market game rules. LED manufacturers are hoping to overcome consumer congestion which led to limited bargaining space. With the arrival of a new era in LED lighting, manufacturers hope to enjoy more stable gross profit performance and larger space for price negotiations.

LED lighting demand is estimated to surpass that of LED backlight in 2014. LED product price drops have contributed largely to increased consumer usage, said the financial service firm. Current cost recovery for commercial luminaries A19 and PAR28 has already been reduced to a year or less. LED bulb price has room to drop 30 percent by 2015 which will attract more consumers to replacement LED bulbs economic benefits. The LED industry welcomes the new lighting era. J.P. Morgan forecasts penetration rate in Nov. 2013 will reach around 11 percent, and only reached 5 percent last year. LED lighting penetration is hoped to be over 20 percent before 2015.

LED lighting demands will bring structural changes to the LED industry, said J.P. Morgan. The LED lighting market is more dispersed than the LED backlight market where consumers are highly concentrated. The top three global lighting manufactures Philips, Osram, and GE make up 30spercent of the global market share. This dispersed nature if the LED lighting market will bring more revenue and bargaining space than LED backlight products in the past.

J.P. Morgan Forecast Increased Bargaining Space as LED lighting Demands Surpass Backlight in 2014

Taiwan IC vendors to count on smartphone, tablet and LED lighting segments in 2014

Taiwan-based IC design houses will target the smartphone, tablet and LED lighting sectors in order to ramp up their sales and earnings in 2014, according to industry observers.

Taiwan-based IC design houses will target the smartphone, tablet and LED lighting sectors in order to ramp up their sales and earnings in 2014, according to industry observers.

Taiwan IC vendors to count on smartphone, tablet and LED lighting segments in 2014[/caption]

The performance of most IC vendors has been better than expected in the fourth quarter of 2013 so far, and the current wave of sales momentum is likely to continue in 2014 based on the industry’s previous experience, commented the observers.

Those IC design houses which have been cooperating with MediaTek are set to enjoy continued brisk sales in 2014 as MediaTek is expected to be able to continue boosting its share in the smartphone solution markets in China and other emerging markets in 2014, said the sources, adding that MediaTek has taken over 50% of these markets in 2013.

Taiwan-based IC design houses will also manage to ramp up shipments of their Wi-Fi chips, ambient light and proximity sensors, power management ICs, LCD driver ICs and touchscreen controller ICs to the white-box tablet sector in 2014, noted the sources, adding that tablet sales in China and other emerging markets combined are expected to reach 180-200 million units in the coming year, estimated the sources.

LED driver IC suppliers including On-Bright Electronics, Macroblock and Silergy, as well as analog IC vendors Richtek Technology, Global Mixed-mode Technology (GMT) and Leadtrend Technology will focus on boosting sales of their LED driver ICs to China, where the LED lighting industry will continue to grow robustly in 2014, commented the sources.

Taiwan IC vendors to count on smartphone, tablet and LED lighting segments in 2014

Cree Q1 2014 Financial Results - revenue increase 24% to $391 million - net income increase 89% to $30.5 million

Cree Reported its Financial Results for the First Quarter of Fiscal Year 2014 on October 22, 2013: revenue of Q1 2014 is $391.0 million. This represents a 24% increase compared to revenue of $315.8 million reported for the first quarter of fiscal 2013, and a 4% increase compared to the fourth...

Cree Reported its Financial Results for the First Quarter of Fiscal Year 2014 on October 22, 2013: revenue of Q1 2014 is $391.0 million. This represents a 24% increase compared to revenue of $315.8 million reported for the first quarter of fiscal 2013, and a 4% increase compared to the fourth quarter of fiscal 2013. GAAP net income for the first quarter was $30.5 million, or $0.25 per diluted share, an increase of 89% year-over-year compared to GAAP net income of $16.1 million, or $0.14 per diluted share, for the first quarter of fiscal 2013.

On a non-GAAP basis, net income for the first quarter of fiscal 2014 was $47.3 million, or $0.39 per diluted share, an increase of 49% year-over-year compared to non-GAAP net income for the first quarter of fiscal 2013 of $31.8 million, or $0.27 per diluted share. “Fiscal 2014 is off to a good start, as we delivered solid Q1 revenue and earnings growth in line with our targets,” stated Chuck Swoboda, Cree chairman and CEO. “The strong performance was primarily due to increased sales of our lighting products, higher gross margins and improved operating leverage across the business. Based on our backlog, current sales activity and project forecasts, we are targeting growth in all product segments in Q2, led by growth in LED fixtures and the Cree® LED Bulb. Even with our success, LED lighting remains a largely untapped opportunity and we remain focused on investing in new products, new channels and building the Cree brand to grow our company and lead the market.” Q1 2014 Financial Metrics (in thousands, except per share amounts and percentages)

Q1 2014 Financial Metrics

(in thousands, except per share amounts and percentages)

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• Gross margin increased 110 basis points from Q4 of fiscal 2013 to 38.6% on a GAAP basis and increased 100 basis points to 39.2% on a non-GAAP basis.


• Cash and investments increased by $64.9 million from Q4 of fiscal 2013 to $1.1 billion.


• Accounts receivable (net) increased by $16.7 million from Q4 of fiscal 2013 to $209.3 million, with days sales outstanding of 48.


• Inventory increased $20.3 million from Q4 of fiscal 2013 to $217.3 million, with days of inventory of 81 days.

Recent Business Highlights:

• Introduced Cree TW (TrueWhite®) Series LED Bulb, which emits natural LED light with a Color Rendering Index (CRI) of 93, making Cree the first company to meet the California Energy Commission (CEC) LED bulb specification;


• Earned ENERGY STAR® qualification for the game-changing soft-white Cree LED Bulbs;


• Introduced the XLamp® CXA 1520 LED array, the industry’s first High-Density (HD) LED Array. This breakthrough technology delivers double the lumen density to enable the next generation of LED spot lights;


• Launched the XLamp XQ-E LEDs, a new generation of lighting-class LEDs that deliver big performance in a tiny package;


• Announced that the National Aeronautics and Space Administration (NASA) headquarters in Washington, D.C., has been outfitted with energy-saving CR Series LED Troffers by Cree.

Business Outlook:

For its second quarter of fiscal 2014 ending December 29, 2013, Cree targets revenue in a range of $400 million to $420 million with GAAP gross margin targeted to be 37.8%+/- and non-GAAP gross margin targeted to be 38.5%+/-. Our GAAP gross margin targets include stock-based compensation expense of approximately $2.8 million, while our non-GAAP targets do not. Operating expenses are targeted to increase by approximately $5.5 million on both a GAAP basis and non-GAAP basis to promote the Cree LED Bulb and take advantage of ENERGY STAR® qualification and associated utility rebates to drive increased sales momentum. The tax rate is targeted at 23.0%+/- for the second quarter of fiscal 2014. GAAP net income is targeted at $26 million to $32 million, or $0.21 to $0.26 per diluted share. Non-GAAP net income is targeted in a range of $44 million to $50 million, or $0.36 to $0.41 per diluted share. The GAAP and non-GAAP net income per diluted share targets are based on an estimated 123 million diluted weighted average shares. Targeted non-GAAP earnings exclude expenses related to the amortization of acquired intangibles and stock-based compensation expense of $0.15 per diluted share.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. Eastern time today to review the highlights of the fiscal 2014 first quarter results and the fiscal 2014 second quarter business outlook, including significant factors and assumptions underlying the targets noted above.

The conference call will be available to the public through a live audio web broadcast via the Internet. For webcast details, visit Cree’s website at investor.cree.com/events.cfm.

Supplemental financial information, including the non-GAAP reconciliation attached to this press release, is available on Cree’s website at investor.cree.com/results.cfm.

About Cree, Inc.

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Cree is leading the LED lighting revolution and making energy-wasting traditional lighting technologies obsolete through the use of energy-efficient, mercury-free LED lighting. Cree is a market-leading innovator of lighting-class LEDs, LED lighting, and semiconductor products for power and radio frequency (RF) applications.

Cree’s product families include LED fixtures and bulbs, blue and green LED chips, high-brightness LEDs, lighting-class power LEDs, power-switching devices and RF devices. Cree’s products are driving improvements in applications such as general illumination, electronic signs and signals, power supplies and inverters.

For additional product and Company information, please refer to www.cree.com.

Non-GAAP Financial Measures:

This press release highlights the Company’s financial results on both a GAAP and a non-GAAP basis. The GAAP results include certain costs, charges and expenses which are excluded from the non-GAAP results. By publishing the non-GAAP measures, management intends to provide investors with additional information to further analyze the Company’s performance, core results and underlying trends. Cree’s management evaluates results and makes operating decisions using both GAAP and non-GAAP measures included in this press release. Non-GAAP results are not prepared in accordance with GAAP and non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

Forward-Looking Statements:

The schedules attached to this release are an integral part of the release. This press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. Actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that we may experience production difficulties that preclude us from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; our ability to lower costs; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved LED chips, LED components and LED lighting products; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the Securities and Exchange Commission (SEC), including our report on Form 10-K for the fiscal year ended June 30, 2013, and subsequent reports filed with the SEC. These forward-looking statements represent Cree’s judgment as of the date of this release. Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

Cree Q1 2014 Financial Results - revenue increase 24% to $391 million - net income increase 89% to $30.5 million

Global LED lighting market could grow by half in 2014

The global market for light emitting diode (LED)-based lighting solutions could see its value soar by nearly one-half over the course of next year, as the technology continues to improve and consumer awareness grows, a market advisory firm has projected. Market value for LED lighting will soar...

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The global market for light emitting diode (LED)-based lighting solutions could see its value soar by nearly one-half over the course of next year, as the technology continues to improve and consumer awareness grows, a market advisory firm has projected. Market value for LED lighting will soar to US$35.3 billion in 2014, a 47.8 percent year-on-year increase.

The research firm attributed the “fast growing market” to a change in purchasing habits, as LED lighting is beginning to overtake conventional lighting in the mindset of many consumers.

Global LED lighting penetration is also expected to increase to 32.7 percent from this year’s 26 percent, the research firm predicted, while penetration of LED bulbs and tubes will reach 20 percent and 15 percent of their respective markets.

The increase in demand suggests competitive LED chip manufacturers will continue to expand production capacity in 2014, said Jack Kuo, a senior analyst with LEDinside.

Aside from raising yield rates and machine operation time, Kuo said LED chip manufacturers will be acquiring more metalorganic chemical vapor deposition (MOCVD) equipment — a major part of optoelectronics manufacturing — to expand production capacity.

MOCVD is a chemical process for the production of thin films used in semiconductors and optical equipment, which promises higher reliability and fewer imperfections in the manufacturing process.

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Global LED lighting market could grow by half in 2014