Cree expects less profit

Chip maker had production trouble

Cree wasn't kidding when it warned that its fourth quarter would be tough.

The Durham semiconductor company reported Wednesday that its revenue and profits missed expectations for the fiscal period that ended June 25.

The news sent Cree shares down as much as 25 percent in after-hours trading, to their lowest point in about three years.

The shortfall in Cree's sales stemmed primarily from production challenges that limited its ability to meet customer orders for the quarter, Cree said in a statement released after the close of regular stock market trading.

Cree makes tiny chips used to illuminate cell phones, signs and other products.

"This was a transitional quarter, and we were making investments," CEO Chuck Swoboda said. "The difference was that it was more challenging than we expected."

In addition to struggling to meet production goals for some of its semiconductor chips, Cree also had higher costs than expected on its new product lines, he said.

Swoboda warned investors months ago that the fourth quarter would be difficult as the company moved some of its manufacturing into a new plant in Research Triangle Park, ramped up production to meet higher demand for its products in mobile phones and raced competitors to bring new products to the market.

Revenue was about $106.7 million in the fourth quarter, at the low end of its earlier expectations of $106 million to $110 million. Earnings will fall below Cree's prediction of 22 cents to 24 cents per share.

All of Wednesday's numbers are preliminary, Swoboda said.

Analysts were expecting sales of $107.3 million and earnings of 23 cents per share. The shares, which were trading above $30 this spring, fell 11 percent in April when Cree lowered its fourth-quarter guidance to reflect the challenges.

The shares closed at $22.59 Wednesday, down 53 cents. In after-hours trading, the shares fell as low as $16.90.

But the alternative would be worse, said Ronald Williams, an entrepreneurship professor at UNC-Chapel Hill's Kenan-Flagler School of Business.

"If they are kind enough to let the Street know in advance, the Street will be less hard than if they announce it at the time of earnings," he said. "Even if it looks like they got hammered ... in the long run they'll be less punished for it."

Cree will release its full earnings report Aug. 10.

"When you think that your numbers are going to be significantly different than what Wall Street expected, it's always healthy to get the information out there and let people work through it," Swoboda said.

Cree's gross margin for the quarter also dropped to 42 percent from an anticipated 46 percent to 47 percent. Gross margin is a measure of how cheaply a company produces the items it sells.

And the near-term outlook isn't great. A recent slowdown in demand for mobile products may drive light-emitting chip sales lower in Cree's first quarter than in the fourth. However, the company said sales of other products should mostly offset the drop.