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SemiLEDs Delivers Another Disappointment

Stocks in this article: LEDS CREE

SemiLEDs went public with two key "stories": it had a vertical chip structure enabling higher power LED components, a process that put it in the technology ranks of exclusive suppliers like Cree. Second, SemiLEDs had a sapphire reclamantion process - sapphire substrate is a raw material in LED production - which gave it a cost advantage.

The company also showed some eye-popping 2010 numbers in its pre-IPO days. SemiLEDs' net revenue grew 209.6% to $35.8 million in 2010, compared with a year earlier, according to the original IPO filing. In the filing the company reported gross profit increased significantly from $0.5 million for the year ended August 31, 2009 to $16.1 million for the year ended August 31, 2010. The company reported a gross margin increase from 4.6% for the year ended August 31, 2009 to 45.1% for the year ended August 31, 2010, "primarily due to improved capacity utilization as we operated at or near full capacity as a result of increased customer demand for our LED chips and LED components, a change in our product mix to higher margin products and improved production yields," it stated in the filing.

The story has changed considerably since then. SemiLEDs' GAAP gross margin clocked in at just 9% for its latest quarter, down from 51% a year ago. SemiLEDs also said it expects gross margin to be negative in the fourth quarter.

Whether the SemiLEDs results and outlook will have any impact on the wider LED sector isn't clear. Shares of Cree (CREE) were down 2% in after-hours trading on Thursday, but Cree shares remain near a 52-week low and during regular trading on Thursday had gained 5%.

After its first earnings miss, the market still gave some credence to SemiLEDs as a potential read on the sector but it's debatable whether this latest poor performance will be seen as reflective of the group's fortunes or as evidence of the souring fortunes of an underperforming niche player. Avian's Abrams opts for the latter.

Ben Schuman, an analyst at Pacific Crest Securities said LED sector analysts and investors were listening to the call to get data points that could be a read-through for the sector as a whole. There were key points that could make Cree vulnerable to a pull back, even if the SemiLEDs missteps seem to be first and foremost company-specific issues. First, SemiLEDs mentioned that the Chinese street lighting market has been weak. This market is a key one for Cree, and has been one of the major issues for Cree in the previous quarterly misses. Second, SemiLEDs said pricing is stabilizing, which would be a positive sign amid a sea of negativity in the LED sapce. Pacific Crest's Schuman said he believes the read-through from SemiLEDs should be limited if trading were ruled by logic, and noted that the company's revenue base is 2% of Cree revenues.

"I never could understand what the excitement was about, in all honesty," he says. "Everyone in the industry that was a big player said they don't show up on a map of tertiary suppliers."

-- Written by Eric Rosenbaum from New York.


>To contact the writer of this article, click here: Eric Rosenbaum.

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