Cree Inc.

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Cree Inc.

4600 Silicon Drive
Durham, North Carolina 27703
U.S.A.
Telephone: (919) 313-5300
Fax: (919) 313-5452
Web site: http://www.cree.com

Public Company
Founded: 1987
Employees: 893
Sales: $155.4 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: CREE
NAIC: 334413 Semiconductor and Related Device Manufacturing; 334419 Other Electronic Component Manufacturing; 327910 Abrasive Product Manufacturing; 421610 Electrical Apparatus and Equipment, Wiring Supplies, and Construction Material Wholesalers

Cree Inc. develops and produces semiconductors made from silicon carbide (SiC). Among the breakthroughs Cree’s research on SiC made possible was the world’s first blue light-emitting diode (LED), which, when used with existing types of LED’s, made possible a variety of full-color electronic displays. Cree markets its LED’s to various original equipment manufacturers in the United States, Malaysia, Japan, and Europe, including Osram Opto Semiconductors GmbH, Spectrian, and Sumitomo Corporation. The LED’s are used in a broad variety of products, including indoor and outdoor arena video boards, billboards, traffic signals, interior automotive lighting, and liquid crystal displays in wireless devices. The company’s subsidiary, Real Color Displays, produces full-color LED modules for large area video screens. Cree also manufactures SiC wafers, which it sells to the government, private industry, and universities for use in optoelectronic and microwave research, as well as silicon carbide crystals for use as gem stones in fine jewelry. Since the acquisition of its UltraRF subsidiary in 2000, Cree has produced components for power amplifiers used in base stations that transmit signals from wireless devices. Ongoing research at Cree is aimed at the development of LED’s of ever-greater power and efficiency. Sixty-five percent of all Cree’s sales in 2002 were made to international customers; the Malaysian market alone accounted for 23 percent in 2002, supplanting Japan as Cree’s largest national market. Sixteen percent of Cree’s 2002 revenue came from U.S. government agencies.

Beginnings and Breakthrough Products

The scientific work that eventually led to the founding of Cree Inc. was begun in the early 1980s at North Carolina State University (NCSU), where brothers Eric Hunter and Neal Hunter, along with Calvin Carter, began investigating the physical and electronic properties of silicon carbide (SiC), a rare, naturally occurring material. Their first work was funded by the Office of Naval Research (ONR), which hoped to develop processes for the production of microwave transistors from SiC that would supply the basis for higher power electronic systems for military aircraft. SiC’s physical characteristics led researchers to believe that the material possessed significant advantages over the semiconductor materials being used at the time, such as silicon: SiC-based devices, it was thought, would be able to operate at much higher temperatures, much higher power and voltage levels, and much higher frequencies than those made from silicon. Furthermore, it was believed that LED’s that emitted blue light could be produced from SiC. Unfortunately, the same properties that made SiC a good semiconductor material also made the material difficult to work with. It is extremely hard material, and its crystals have to be grown at very high temperatures, over 3,500 degrees Fahrenheit. In addition, crystals have to be grown very carefully because SiC can crystallize in more than 100 different atomic arrangements, many of which render the end product unusable. Once crystals have been grown, the hardness of the material makes it difficult to cut into wafers and etch with circuits.

The NCSU team found ways around many of these barriers; it developed proprietary processes for growing bulk SiC in single crystalline form, for applying SiC films, and for dry etching the material. In July 1987, armed with exclusive and perpetual licenses to ten NCSU patents they had developed, the core group of scientists left NCSU and formed Cree Research Inc. Despite interest from California companies in seeing the company locate in the Silicon Valley area, Cree Research established its headquarters and laboratories in North Carolina’s Research Triangle Park, a research community that included three major universities—NCSU in Raleigh, the University of North Carolina at Chapel Hill, and Duke University in Durham—various laboratories of the U.S. government, and a number of new high-tech corporations. There the firm continued its groundbreaking research, and soon had developed and patented a number of new discoveries. These included a process for reducing the levels of impurities in SiC thin films, equipment which was able to operate at the very high temperatures needed for the production of SiC materials, a process for the production of SiC wafers, a process for growing significantly larger SiC crystals, and a process for preparing the surface of SiC wafers.

In October 1989, Cree completed the development of its first products, the world’s first blue light-emitting diode. Inventing a blue light LED was like finding the holy grail of electronics. Previously only red, green, yellow, and orange LED’s were available. Combining these colors alone was not sufficient to produce the full spectrum of color. The addition of blue, the third primary color, made full-color billboard and arena-sized video and other displays possible for the first time. The new LED went into production in the summer of 1990, and by October Cree was shipping one million of them every month. Cree continued to work on new applications of the device. For example, the firm hoped to use a blue LED to develop a blue laser. With a much shorter wavelength than other lasers, a blue laser could be used could also be used for high-volume data storage media such as CD-ROMs and DVD’s. Work on that particular application of the blue light LED would continued until into the 2000s.

Cree established a joint effort with the Microelectronics Center of North Carolina and the Office of Naval Research in May 1991 to develop another first: a high-power silicon carbide MESFET transistor that could function in the gigahertz range, an area significantly beyond the capability of conventional silicon and gallium arsenide transistors. The breakthrough was expected to lead to new transistors that could operate in power ranges up to 500 percent higher than older types. Cree’s other research and develop programs in the early 1990s included work on new optoelectronic devices; larger, more homogeneous SiC wafers; and SiC semiconductors that could function at high temperatures.

By the early 1990s, Cree was also manufacturing SiC wafers, primarily for use in research; depending on the needs of Cree’s customers, some wafers came with special epitaxial coatings. Such sales to researchers were part of a Cree strategy to increase future markets for its wafers by encouraging research that might result in the development of new SiC-based products. For its first five years, commercial interest in Cree’s products was limited. Most of the company’s revenues came from U.S. government contracts. In 1992, for example, federal government monies accounted for around 72 percent of the $595,000 Cree spent on research and development. Cree’s government contractors included Defense Advanced Research Projects Agency (DARPA), the Office of Naval Research, the National Institute of Standards, and the U.S. Air Force. At the beginning of 1993, Cree also had research contracts with private industry, including Motorola and General Electric Corporation.

The Financial Side of Cree Research

During its first five years, Cree reported large operating losses. The first quarter of fiscal year 1993, in fall 1992, Cree announced its first profitable quarter. By 1993, the company revenues had increased to the point that about 40 percent came from sales, primarily SiC wafers, to researchers; the remainder of its revenues were from commercial product sales. In the first half of that year, 51 percent of Cree’s commercial sales were in foreign markets, including Europe, Taiwan, and Korea. The lion’s share of sales were to Japanese companies, however, primarily Shin-Etsu, a manufacturer of electronics materials, and Sumitomo Corporation, a distribution firm that served the Japanese optoelectronics market. Sales to Sumitomo alone accounted for 37 percent of Cree’s total revenues in the first half of 1993.

In late 1992, Cree Research announced plans for a public stock offering. Wall Street skeptics discounted the company’s chances, pointing out that Cree had lost money—lots of money—for most of its history. More significantly, they questioned whether or not it was healthy that Cree, a company whose production processes were extremely complex, was dependent on a small group of commercial customers, mainly General Electric and its Japanese distributors. Nonetheless, in February 1993 Cree floated what the Portland Oregonian called “the country’s hottest initial public offering” of the early year. Opening at $8.25, the stock hit $25 a share before it finally came to settled in around $18. Within three months, it was selling at almost triple its opening price, while no other share launched in the early year had even managed to double its opening price. In all, Cree raised $13.28 million, most of which it planned to use to expand its production facilities in North Carolina.

Company Perspectives:

Cree, Inc. is the world leader in the development, manufacturing, and marketing of electronic devices made from silicon carbide (SiC). The Company incorporates its proprietary technology to produce compound semiconductors for use in automotive and liquid crystal display (LCD) backlighting; indicator lamps; full color light emitting diode (LED) displays and other lighting applications. The Company also manufactures SiC crystals used in the production of moissanite gem-stones and SiC wafers for research directed toward optoelectronic, microwave and power applications.

Company Growth

Cree spent the middle 1990s refining its SiC technologies and expanding its international presence. In 1994, it acquired the Hong Kong-based Color Cells International and transformed it into a new Cree subsidiary, Real Color Displays. The following year, it signed a pact with Germany’s Siemens AG for joint work to develop LED’s that utilized Cree technology. Siemens also agreed to purchase LED chips and SiC wafers from Cree. Working under a new DARPA contract, Cree began intensifying its research into blue laser diodes for covert communication systems for the military, as well as for high-density optical recording and playback devices, such as CD-ROMs and DVD’s—a market that was expected to be worth more than $2 billion by the middle of the 21st century. The company reported a milestone in its blue laser research in June 1997 when it successfully built an electrically pulsed gallium nitride-based blue light laser with a lifetime of more than an hour. It was but a small first step, however, since a commercially successful blue laser would have to have a lifetime of thousands of hours. If a blue laser still lay in the future, Cree’s achievement at least showed that SiC was a viable material for its manufacture.

Cree opened up an entirely new market for its silicon carbide in October 1997 when it began selling the diamond-like SiC crystals as gem stones for jewelry. Cree’s primary customer in this area was a firm called C3 led by Jeff Hunter, the brother of Cree’s then-president and CEO, Neal Hunter. So enthusiastic was Wall Street for the venture that when C3 announced its intention to go public, Cree stock shot up to a 52-week high of $22.18. A year later, in November 1998, Cree was flying even higher. It reported a quarterly profit of $2.36 million, an increase of 100 percent over the same quarter a year earlier. Furthermore, its stock was selling for $27.50 a share, its production facilities were running at about 80 percent capacity, and the company had grown to approximately 275 employees and expected to add more in the 1999. Cree’s success was due in part a new process that increased wafer size and quality. As if in recognition of its commercial successes, in February 2000 Cree Research changed its name to Cree Inc.

Challenges and Opportunities in the New Century

Taking advantage of its sterling reputation, Cree made a second stock offering in early 2000. Analysts continued to urge caution to investors. In their eyes, the fortunes of the company seemed precariously balanced on just a few sources of revenue. A mere five customers accounted for four-fifths of Cree’s sales; 37 percent was from one company, Siemens AG. Because Cree had just forged a new contract with Siemens subsidiary, Osram GmbH, its future with Siemens looked secure. However, another large account, artificial gem stone firm C3—since renamed Charles & Colvard—was experiencing lower sales than expected and had delayed some shipments from Cree. As a result, Cree had to revise its projected revenues for 2001.

Although the firm was still heavily dependent on the U.S. government as well, these problems seemed to hurt Cree not at all. The offering raised $266 million. The latter half of 2000 had been one of the best half years in Cree’s short history, with sales rising by 67 percent and net income doubling. In mid-February, Cree shares were selling for as high as $139. According to Fortune magazine, Cree was the 11th fastest growing company in the United States in 2000.

Cree began growing and expanding its semiconductor expertise in 2000. In May, it acquired acquisition of Nitres, Inc. for $233 million in stock. Based in California, Nitres developed nitride-based semiconductors, primarily for the U.S. Commerce Department and the military. Nitres became a wholly owned subsidiary, Cree Lighting Company. In November 2000, Cree made another important acquisition, UltraRF, the semiconductor division of linear power amplifier maker Spectrian Corp., for $95 million in stock. UltraRF later became Cree Microwave, a wholly owned subsidiary. As part of the same deal, Cree and Spectrian also agreed to conduct joint research into laterally diffused metal oxide semiconductors (LDMOS) and SiC MESFET components.

Cree continued to develop new products in 2000. In June, it introduced a line of low power LED’s that operated at 50 percent of the power used by Cree’s other LED’s. At the end of the year, it announced a new lighting system for automobile dashboards that would never burn out. The system was slated for incorporation into Volkswagen and Audi models. The gallium nitride technology could also be used to boost the range and capacity of cell phone transmission towers.

Between 1999 and 2000 Cree’s Japanese distributor, Sumitomo Corporation, was the target of a series of lawsuits in Japan brought by another Japanese firm, Nichia Corporation. Nichia claimed that Cree’s LED’s, which Sumitomo was selling in Japan, violated Nichia patents. Cree intervened in the suits, and by December 2001 Tokyo District Court had dismissed all charges ruling that no infringement had taken place. Nichia later appealed the ruling to the Tokyo High Court. Turning the tables on Nichia, Cree, together with NCSU, sued Nichia and its North American subsidiary Nichia America Corporation, for allegedly infringing patents for lateral epitaxial overgrowth technology. A round of countersuits ensued, including a claim by Nichia that Cree had misappropriated Nichia trade secrets—in essence committed industrial espionage—by means of a former Nichia employee who was employed by Cree lighting. The suit was still in litigation in summer 2002.

Key Dates:

1987:: Cree Research Inc. is founded
1989:: The company introduces world’s first blue light-emitting diode (LED).
1993:: Cree Research makes a public stock offering.
1994:: Cree acquires Color Cells International of Hong Kong and establishes from it a new subsidiary, Real Color Displays.
1998:: The conductive eye buffer LED is introduced; HB blue and Green LED’s are launched.
1999:: Cree demonstrates its four-inch silicon carbide (SiC) wafer.
2000:: The company changes its name to Cree Inc.
2001:: Cree introduces MegaBright blue and UV LED’s and the Schottky diode.

The U.S. government continued to be a major supporter of Cree Inc., in 2002. In February, it was the recipient of a $14.5 million contract to create LED’s and laser diodes that could be used to detect biological agents such as anthrax. Later that summer the Navy awarded two contracts to Cree with a value of $14.4 million. The contracts were in conjunction with the so-called wide bandgap semiconductor initiative sponsored by DARPA. Cree’s role was to develop semi-insulating substrates for microwave devices. It received $26.5 million more for work for the ONR and the Air Force Research Laboratories. Cree had a number of products under development in summer 2002. These included high efficiency LED’s that might replace incandescent and fluorescent lighting in conventional lighting systems; high power, SiC-based devices for power transmission; and SiC-based transistors able to function at microwave frequencies.

Principal Subsidiaries

Cree Microwave, Inc.; Cree Lighting Company; Cree Research FSC, Inc.; Cree Funding, LLC; Cree Employee Services Corporation; Cree Technologies, Inc.; CI Holdings, Limited; Cree Asia-Pacific, Inc.; Cree Japan, Inc.

Principal Competitors

AXT Inc.; Agilent Technologies; Hitachi Ltd.; Philips Electronics N.V.; LG Electronics Inc.; Matsushita Kotobuki Electronics Industries Co., Ltd.; Mitsui & Co. Ltd.; Motorola Inc.; NEC Corporation; Nitronex Corporation; Planar Systems Inc.; Sony Corporation; Sumitomo Electric Industries Ltd.; Telefonaktie-bolaget LM Ericsson; Three-Five Systems Inc.; Uniroyal Technology Corporation.