Cree Reports Financial Results for the Second Quarter of Fiscal Year 2011

Cree, Inc. (Nasdaq: CREE), a market leader in LED lighting, today

announced revenue of $257.0 million for its second quarter of fiscal

2011, ended December 26, 2010. This represents a 29% increase compared

to revenue of $199.5 million reported for the second fiscal quarter last

year and a 4% decrease compared to the first quarter of fiscal 2011.

GAAP net income for the second quarter increased 47% year-over-year to

$49.8 million, or $0.45 per diluted share, compared to GAAP net income

of $33.8 million, or $0.32 per diluted share, for the second quarter of

fiscal 2010. On a non-GAAP basis, net income for the second quarter of

fiscal 2011 increased 51% year-over-year to $60.7 million, or $0.55 per

diluted share, compared to non-GAAP net income for the second quarter of

fiscal 2010 of $40.2 million, or $0.38 per diluted share.

“Q2 results reflected continued growth in our LED lighting product line,

but revenue and earnings were lower than our targets due primarily to

lower sales to our LED component distributors in Asia,” stated Chuck

Swoboda, Cree chairman and CEO. “We are managing through an inventory

correction in Asia in the near term, but the opportunity in LED lighting

has not changed. Quarterly revenue increased 29% year-over-year and

based on the market trends we are seeing, and the success of our own LED

lighting business, we are more confident that we will see continued

adoption of LED lighting over the next several years.”

Q2 2011 Financial Metrics:

• Cash and investments increased $12.0 million from Q1 of fiscal 2011 to

  $1,110.8 million.

• Cash flow from operations was $57.2 million. Free cash flow (cash flow

  from operations less capital expenditures) was ($7.5) million as we

  spent $64.7 million on capital expenditures.

• Accounts receivable (net) increased $12.1 million from Q1 of fiscal

  2011 to $135.1 million, resulting in days sales outstanding of 47, an

  increase of 6 days from Q1 of fiscal 2011.

• Inventory increased $19.6 million from Q1 of fiscal 2011 to $145.5

  million and represents 96 days of inventory, an increase of 14 days

  from Q1 of fiscal 2011.

• Effective tax rate for Q2 was 13.7% primarily due to the benefit from

  an extension of the R&D tax credit.

Recent Business Highlights:

• Announced that Denny’s Corporation has chosen energy-efficient LED

  lights from Cree as the preferred lighting standard for all its new

  and remodeled stores across the United States.

• Shattered LED industry performance standards with the release of the

  Cree XLamp^® XM-L LED.

• Introduced the LED industry’s first lighting-class LED array, the Cree

  XLamp CXA20, to accelerate indoor LED lighting.

• Released the XLamp XP-E High Efficiency White (HEW), the first

  high-power LEDs featuring Cree’s new Direct Attach^TM LED

  technology.

Business Outlook:

For its third quarter of fiscal 2011 ending March 27, 2011, Cree targets

revenue in a similar range as the second quarter at $245 million to $265

million due to seasonality and the on-going inventory correction in

Asia. Q3 GAAP and non-GAAP gross margin is targeted at +/- 46%. GAAP

operating expenses are targeted to increase by approximately $7 million

to $73 million, or $62 million on a non-GAAP basis, due to increased

spending to support new product development, 150mm qualification and

additional sales and application resources. The tax rate is targeted at

21% for fiscal Q3. GAAP net income is targeted at $32 million to $40

million, or $0.29 to $0.36 per diluted share. Non-GAAP net income is

targeted in a range of $42 million to $50 million, or $0.38 to $0.45 per

diluted share, based on an estimated 110.6 million diluted weighted

average shares. Targeted non-GAAP earnings exclude expenses related to

the amortization of acquired intangibles of $0.02 per diluted share, and

stock-based compensation expense of $0.07 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 second quarter 2011 results and the

fiscal third quarter 2011 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. Log on to Cree’s website at www.cree.com

and go to “Investor Relations — Financial Events and Presentations” for

webcast details. The call will be archived and available on the website

through March 1st, 2011.

Supplemental financial information, including the non-GAAP

reconciliation attached to this press release, is available in the

“Investor Relations” section of Cree’s website, under “Financial

Information”, “Quarterly Results”, at www.cree.com.

About Cree, Inc.

Cree is leading the LED lighting revolution and making energy-wasting

traditional lighting technologies obsolete through the use of

energy-efficient, environmentally friendly LED lighting. Cree is a

market-leading innovator of lighting-class LEDs, LED lighting, and

semiconductor solutions for wireless and power 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 radio-frequency/wireless devices. Cree

solutions are driving improvements in applications such as general

illumination, electronic signs and signals, variable-speed motors and

wireless systems.

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 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. Actual

results, including with respect to our targets and prospects, could

differ materially due to a number of factors, including risks associated

with the ramp-up of production of our new products, as well as

production at our new Huizhou facility; the risk that, due to the

complexity of our manufacturing processes, we may experience production

delays that preclude us from shipping sufficient quantities to meet

customer orders or that result in higher production costs and lower

margins; the risk that our distributors are not able to accurately

anticipate demand from their end customers, which can result in

increased inventory and reduced orders; ongoing uncertainty in global

economic conditions 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, in

response to tight credit and negative financial news; our ability to

complete development and commercialization of products under

development, such as our pipeline of brighter LED chips, LED components

and LED lighting products; our ability to lower costs; increasing price

competition in key markets; 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; 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 27, 2010, and subsequent reports filed with the

SEC. Except as required under the U.S. federal securities laws and the

rules and regulations of the SEC, Cree disclaims any 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, the Cree logo, and XLamp are registered trademarks, and Direct

Attach is a trademark, of Cree, Inc.

Cree, Inc.

Non-GAAP Measures of Financial Performance

To supplement the company’s consolidated financial statements presented

in accordance with generally accepted accounting principles, or GAAP,

Cree uses non-GAAP measures of certain components of financial

performance. These non-GAAP measures include non-GAAP net income,

non-GAAP earnings per diluted share, non-GAAP gross margin, non-GAAP

operating expenses and free cash flow.

Reconciliation to the nearest GAAP measure of all historical non-GAAP

measures included in this press release can be found in the tables

included with this press release. In this press release, Cree also

presents its target for non-GAAP operating expenses, which is operating

expenses less stock-based compensation expense and charges for

amortization or impairment of acquired intangibles.

Non-GAAP measures presented in this press release are not in accordance

with or an alternative to measures prepared in accordance with GAAP and

may be different from non-GAAP measures used by other companies. In

addition, these non-GAAP measures are not based on any comprehensive set

of accounting rules or principles. Non-GAAP measures have limitations in

that they do not reflect all of the amounts associated with Cree’s

results of operations as determined in accordance with GAAP. These

non-GAAP measures should only be used to evaluate Cree’s results of

operations in conjunction with the corresponding GAAP measures.

Cree believes that these non-GAAP measures, when shown in conjunction

with the corresponding GAAP measures, enhance investors’ and

management’s overall understanding of the company’s current financial

performance and the company’s prospects for the future, including cash

flows available to pursue opportunities to enhance shareholder value. In

addition, because Cree has historically reported certain non-GAAP

results to investors, the company believes the inclusion of non-GAAP

measures provides consistency in the company’s financial reporting.

For its internal budgeting process, and as discussed further below,

Cree’s management uses financial statements that do not include

stock-based compensation expense or amortization or impairment of

acquired intangible assets, and the income taxes associated with the

foregoing. Cree’s management also uses non-GAAP measures, in addition to

the corresponding GAAP measures, in reviewing the company’s financial

results.

As described above, Cree excludes the following items from one or more

of its non-GAAP measures when applicable:

Stock-based compensation expense. This expense consists of

expenses for stock options, restricted stock and employee stock

purchases through its ESPP. Cree excludes stock-based

compensation expenses from its non-GAAP measures primarily because they

are non-cash expenses that Cree does not believe are reflective of

ongoing operating results.

Amortization or impairment of acquired intangible assets. Cree

incurs amortization or impairments of acquired intangible assets in

connection with acquisitions. Cree excludes these items because they

arise from Cree’s prior acquisitions and have no direct correlation to

the current operating results of Cree’s business.

Income tax effects of the foregoing non-GAAP items. This amount

is used to present each of the amounts described above on an after-tax

basis consistent with the presentation of non-GAAP net income.

Cree expects to incur stock-based compensation expense and amortization

of acquired intangible assets in future periods, including income taxes

associated with all of the foregoing.

In addition to the non-GAAP measures discussed above, Cree also uses

free cash flow as a measure of operating performance. Free cash flow

represents operating cash flows less net purchases of property and

equipment. Cree considers free cash flow to be a liquidity measure that

provides useful information to management and investors about the amount

of cash generated by the business after the purchases of property and

equipment, which can then be used to, among other things, invest in

Cree’s business, make strategic acquisitions, strengthen the balance

sheet and repurchase stock. A limitation of the utility of free cash

flow as a measure of financial performance is that it does not represent

the total increase or decrease in the company’s cash balance for the

period.