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  • 1. MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated Joshua Paradise Joshua.Paradise@morganstanley.com +1 (1)212 761 4014 Smittipon Srethapramote Smittipon.Srethapramote@morganstanley.com +1 212 761 3914 Timothy Radcliff October 15, 2010 Timothy.Radcliff@morganstanley.com +1 (1)212 761 4139 Stock Rating Cree, Inc. Overweight Industry View Earnings Preview: Pricing In-Line Pressure Intensifying Key Ratios and Statistics Reuters: CREE.O Bloomberg: CREE US Clean Tech / United States of America What's Changed Price target $65.00 Price Target $75.00 to $65.00 Shr price, close (Oct 14, 2010) $55.86 Mkt cap, curr (mm) $6,253 52-Week Range $83.38-39.37 Cree is scheduled to report F1Q/11 earnings Tues 10/19 after the close. Our channel checks show Fiscal Year ending 06/09 06/10 06/11e 06/12e accelerating LED lighting adoption (good news), but also ModelWare EPS ($) 0.34 1.45 2.26 2.83 more pressure on pricing (bad news). We see little risk P/E 85.4 41.3 24.7 19.7 EPS ($)** 0.62 1.71 2.60 3.27 to the Sept quarter and are above consensus, but are Consensus EPS ($)§ 0.66 1.71 2.40 2.86 concerned that margin guidance may disappoint. Rev 3-yr CAGR (%) 46.1e 41.5e 37.3 34.2 EPS nom 3-yr CAGR (%) 101.8e 37.4e 32.8 35.9 Fears of declining margins will continue to weigh on Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework (please see explanation later in this note). the stock. To reflect our concerns about pricing § = Consensus data is provided by FactSet Estimates. ** = Based on consensus methodology pressure, we are reducing our GM forecast for F3Q and e = Morgan Stanley Research estimates 4Q/11 by 200 bps to 45%. This lowers our FY11 EPS to $2.60 and our target price to $65 from $75. Quarterly ModelWare EPS Adoption is accelerating. From warehouses to retail 2011e 2011e 2012e 2012e Quarter 2010 Prior Current Prior Current sites such as Simon Property Group’s malls, more Q1 0.23 - 0.53 0.70 0.65 businesses are choosing LED lighting. Retailers such Q2 0.32 0.56 0.54 0.74 0.69 as Home Depot are also carrying a wider variety of LED Q3 0.41 0.61 0.57 0.79 0.73 bulbs (77 LED bulbs now online at Home Depot). Q4 0.48 0.67 0.62 0.84 0.77 e = Morgan Stanley Research estimates Earnings: Oct 19 after the close. On the call, we’ll be looking for updates on four questions: (1) How much of Cree’s above-average margins are due to price premium and how much are due to a cost advantage? (2) How competitive is Cree on a lumen per dollar basis? (3) What are plans for the $1 billion cash pile? (4) Is Cree gaining scale downstream in bulbs and fixtures? Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may Our EPS forecast of $0.60 for the Q is $0.02 ahead of have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors consensus. Our revised FY11 EPS forecast of $2.60 is should consider Morgan Stanley Research as only a $0.21 ahead of consensus and our $65 price target single factor in making their investment decision. offers 16% upside. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  • 2. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Risk-Reward Snapshot: Cree (CREE, $55.86, Overweight, PT $65) LED Lighting Demand Drives Upside Why Overweight? $120 • Cree is a technology leader in the high-growth LED market. It is 100 $100 (+79%) especially focused on lighting applications, a transformational 80 secular growth opportunity. $65.00 (+16%) • Strong balance sheet provides $ 55.86 60 flexibility: $1 billion of cash and no debt. 40 $35 (-37%) • Patent portfolio and cross- licensing agreements impede new 20 entrants. • Production on silicon carbide 0 substrates reduces sapphire Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 constraints. Price Target (Oct-11) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~CREE.O~ • Low reliance on government Source: FactSet, Morgan Stanley Research subsidies in contrast to other clean Price Target $65 25x our F2011e base case EPS of $2.60. tech stocks such as solar. Bull 31x LED lighting takes off. Cree is able to meet increased demand Key Value Drivers Case Bull Case for lighting applications through better yields and efficient capex. $100 F2011 EPS Top line growth is 50%. Gross margins stabilize at 48%. • R&D keeps Cree at the leading of $3.21 edge of LED performance, Base 25x Continued strong growth. Revenues grow 47% in FY11 and efficiency, and cost reductions. Case Base Case 37% in FY12 but gross margins fall to 46% in FY11 and 43% in • We forecast gross margins $65 F2011 EPS FY12. Secular growth and product leadership supports the high declining to ~42% from nearly 50%. of $2.60 multiple. Higher margins would provide upside to our forecast. Bear 18x Execution missteps / pricing pressure. Lower gross margins • Capacity expansion to meet Case Bear Case as competitors gain ground on product quality. Top line growth demand. We forecast $300 million $35 F2011 EPS falls to 30% in FY11 and 20% in FY12. Multiple compresses of $1.91 further as growth disappoints and margins contract. of capex in F2011 and $375 million in F2012, above ~$170 million in F2010. Top Line Growth, Strong Margins, and Capacity Expansion Drive Value Where Could We Be Wrong? 140 120 • Margins: New entrants and 20 commoditization could push prices 100 15 100 down faster than Cree can reduce 80 15 price target: 65 costs. 60 15 65 • Lighting market adoption depends 40 on cost reductions of 50-75%. 20 35 Slower price declines = slower all values in $ 0 adoption. Bear Competition Pricing Base Case Cree Faster Bull Case Takes Share Pressure Maintains Lighting Case Potential Catalysts Increases Pricing Adoption Premium • F1Q11 earnings October 19, 2010. Source: Morgan Stanley Research 2
  • 3. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. What We’re Hearing Seoul Semiconductor, for example, has introduced the “STW” line that is packaged in a silicone resin. Total light output is We’ve spoken to Cree’s customers, competitors, participants lower at ~32 lumens per package compared to 100-140 lumens through the LED supply chain, and to investors in the space. for Cree’s XP-G line, but Seoul Semiconductor claims to offer Three major themes emerge: pricing that is ~50% lower on a per lumen basis – well under $0.01 per lumen 1) LED adoption is accelerating Customers also report that they are buying more LEDs from 2) Competitors are gaining ground Nichia, Citizen, and Lumileds. Although Cree typically leads in lumens per watt, competitors are raising the bar on lumens per 3) Investors’ biggest concern is margins dollar. LED Adoption is Accelerating There are applications where LEDs make economic sense today and businesses are installing LED lights. Digital Lumens, Investors’ primary concern is margins for example, is able to offer 87% energy savings on lighting in At an industry level, investors are concerned about capacity warehouses through a combination of LED lights and motion coming online (Veeco and Aixtron are both selling record sensors that turn lights down or off when not in use. Traditional numbers of MOCVD machines) and about the slowdown in energy-efficient high bay lights have warm-up times and demand from backlighting. With respect to Cree specifically, starters that make motion sensors impractical. Digital Lumens investors’ biggest concern is how much margins will decline. claims that payback periods are typically less than two years – Cree provides very limited visibility into their capacity, a level that convinces many commercial and industrial utilization, or cost structure so it is difficult to forecast margins customers. Digital Lumens uses Cree chips for their high light with confidence. Management has guided to gross margins output and color consistency. With complex systems, LEDs above 45% medium-term, and 48-49% near-term – well above are only 25-40% of the total cost. LED competitors. Exhibit 1 Simon Property Group, a mall owner and the largest real estate Cree has Higher Margins than Competitors company in the US, has plans to replace all lights in mall kiosks, common areas, and parking garages with LEDs – mostly over Gross Margin the next six months. Retailers often use halogen lights for their 60% high light quality or Color Rendering Index. But halogens have low efficiency of 15-20 lumens per watt. LED retrofit bulbs offer 40% ~4x energy savings and longer lifetimes, reducing maintenance costs and electricity bills. 20% Home Depot continues to expand its offering of LED bulbs and 0% now carries 77 products online, including 55 under $50. The EcoSmart 40 Watt replacement A19 bulb is now $18.47 – still -20% well above the level that will drive significant adoption, but Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 similar bulbs were over $35 last year. CREE Epistar Everlight Seoul Semi Toyoda Gosei Source: Company data, FactSet, Morgan Stanley Research These are only a few data points but the trend is clear: LEDs for lighting are moving from bleeding edge to leading edge. Cree is usually considered a semiconductor company, although the secular trend in lighting and their move downstream may challenge that categorization. Tech Competitors are Gaining Ground investors, and semi investors especially, fear declining margins Cree is still the gold standard for high power lighting, but our and semi stocks tend to underperform when margins are channel checks show that for general lighting products that do falling. not require the highest power levels, competitors are gaining ground on both quality and pricing. 3
  • 4. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 2 Cree’s Shares Roughly Track Gross Margins $80.00 55% $70.00 $60.00 $50.00 45% $40.00 $30.00 35% $20.00 $10.00 25% $0.00 Sep-99 Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10 GAAP GM Stock Price Source: FactSet, Company data, Morgan Stanley Research The “rule” that tech stocks don’t work if margins are declining breaks down when EPS growth is high enough. We compared share price performance across a wide group of tech and industrial companies when margins are falling. For industrial companies, share prices tend to rise with EPS growth (see the chart below), even if margins are falling. For tech companies, when margins are falling, stocks tend to be flat unless EPS growth exceeds 25%. For Cree, we forecast average EPS growth of 35% per year for the next three years, implying that the stock can work even if margins are declining. Exhibit 3 Tech Companies with Declining Margins Only Work if EPS Growth is High Average Share Price Change 30% 25% 20% 15% 10% 5% 0% -5% Industrials -10% Tech -15% (35%) <(30%) (25%) (15%) (5%) 5% 15% 25% 35% 45% >40% Annual EPS Growth Source: FactSet, Company data, Morgan Stanley Research 4
  • 5. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 4 Valuation Cree Trades at 65% Valuation Premium to Global LED Peers CREE has underperformed peers and the market, but still Relative NTM P/E (Cree vs. Global LED Peers) trades at a 65% valuation premium. In the last three months, Cree NTM P/E vs. Peers Cree has underperformed Everlight by 10%, Seoul 3.0x Semiconductor by 13%, Epistar by 27%, and the S&P 500 by 2.5x 28%. Despite the underperformance, Cree still trades at a 68% 2.0x valuation premium to global LED peers. 1.5x Cree’s current multiple of 23x FY11 earnings is near the low 1.0x end of its five-year range (see Exhibit 7 below). In the last six 0.5x months, the NTM P/E multiple has fallen more than 50%, even 0.0x as Cree’s NTM P/E relative to LED peers has increased. Ja 05 Ap 06 Ju 6 O 6 Ja 06 Ap 07 Ju 7 O 7 Ja 07 Ap 08 Ju 8 O 8 Ja 08 Ap 09 Ju 9 O 9 Ja 09 Ap 10 Ju 0 0 r-0 l-0 r-0 l-0 r-0 l-0 r-0 l-0 r-1 l-1 - n- - n- - n- - n- - n- ct ct ct ct ct O Cree vs. Peers 5-Year Avg. Source: Company data, Morgan Stanley Research Exhibit 5 Global LED Comps FactSet MS Local Share Market P/E PEG Price/Sales Price rel to 52-Wk Hi / Lo Ticker Rating Currency Price (LC) Cap ($MM) CY10e CY11e CY12e CY11e CY10e CY11e CY12e High Low Cree* CREE-US OW USD 55.86 6,253.4 28.2x 20.6x 15.6x 0.5x 5.8x 4.2x 3.0x (33%) 44% Avago* AVGO-US OW USD 22.42 5,537.7 10.1x 9.6x NA NA 2.5x 2.5x NA (5%) 56% Aixtron AIXA-DE NA EUR 32.65 3,300.5 13.1x 12.5x 11.0x 0.3x 3.1x 2.9x 2.6x (20%) 34% Toyoda Gosei* 7282 EW JPY 22.33 2,889.2 12.1x 10.6x 9.8x 2.7x 0.5x 0.4x 0.4x (38%) 9% Epistar* 2448-TW OW TWD 3.13 2,462.8 16.1x 15.0x 13.7x 0.5x 3.8x 3.1x 2.8x (22%) 22% Seoul Semiconductor 046890-KR NA KRW 37.94 2,212.1 20.5x 13.7x 10.2x 0.3x 2.7x 1.9x 1.5x (17%) 22% LG Innotek* 011070-KR OW KRW 120.17 2,058.4 10.6x 10.7x 9.2x 0.3x 0.5x 0.4x 0.4x (32%) 69% Veeco VECO NA USD 40.85 1,669.8 9.8x 8.7x 14.2x 0.3x 1.7x 1.5x 2.0x (25%) 79% Everlight* 2393-TW OW TWD 2.74 1,243.6 11.5x 9.9x 9.0x 0.4x 2.1x 1.8x 1.6x (31%) 5% Rubicon RBCN-US NA USD 19.80 454.2 21.7x 11.5x 10.4x 0.1x 6.4x 3.0x 2.3x (45%) 57% Edison Opto 3591-TW NA TWD 4.71 366.6 NA NA NA NA NA NA NA (17%) 83% Median 12.6x 11.1x 10.4x 0.3x 2.6x 2.2x 2.0x (25.0%) 43.6% Average 15.4x 12.3x 11.4x 0.6x 2.9x 2.2x 1.8x (25.9%) 43.6% Source: Company data, Morgan Stanley Research; Epistar and Everlight are covered by Sharon Shih; non-covered company estimates are FactSet consensus 5
  • 6. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 6 Our Residual Income Model Supports a Valuation of $65 per Share $ millions except per share info 2007A 2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E 2016E 2017E Compounding Period - - - - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 Handicap Factor - 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Discount Factor - - - 1.00 0.90 0.82 0.74 0.67 0.61 0.55 0.50 Revenue 394.1 493.3 567.3 867.3 1,274.4 1,767.7 2,455.1 3,297.8 4,276.9 5,212.7 6,157.1 % change 25.2% 15.0% 52.9% 46.9% 38.7% 38.9% 34.3% 29.7% 21.9% 18.1% Net Income (NI) 27.3 21.8 30.7 152.3 250.1 314.7 422.2 595.7 803.3 1,008.2 1,220.9 Net Margin 6.9% 4.4% 5.4% 17.6% 19.6% 17.8% 17.2% 18.1% 18.8% 19.3% 19.8% Shareholders' Equity 1,016.0 1,145.7 1,224.7 2,028.0 2,322.2 2,506.7 2,755.7 3,100.1 3,557.7 4,126.3 4,809.2 ROE 2.7% 2.0% 2.6% 9.4% 11.5% 13.0% 16.0% 20.3% 24.1% 26.2% 27.3% Required Return on Equity (RRE) 106.7 120.3 128.6 212.9 243.8 263.2 289.3 325.5 373.6 433.3 Required Return Percent 10.5% Terminal Value Residual Income (NI-RRE) 27.3 (84.8) (89.7) 23.7 37.2 70.8 159.0 306.4 477.8 634.7 787.7 7,501.6 Residual Income Growth (y/y) -410.3% 5.7% -126.4% 56.8% 90.7% 124.4% 92.7% 56.0% 32.8% 24.1% PV Residual Income - - - - 33.6 58.0 117.8 205.5 290.0 348.6 391.6 3,729.2 Residual Income Valuation Beginning Equity 1,925.3 Sum of PV Residual Income 1,445.2 PV of Terminal Value (c) 3,729.2 Total 7,099.7 Shares Outstanding (MM) 109.7 Residual Income per share $64.69 Source: Company data, Morgan Stanley Research 6
  • 7. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 7 Cree is Near Five-Year Lows on Price to NTM Earnings CREE 225447101 2232351 NASDAQ Stock Market Common stock 14-Oct-2005 to 14-Oct-2010 (Weekly) Average: 36.3 High: 66.2 Low : 19.5 Latest: 22.1 Price Price to Earnings - NTM 70 90 80 60 70 50 60 50 40 40 30 30 20 20 10 10 0 05 06 07 08 09 10 Exhibit 8 Cree Has Beat Sell-Side Expectations the Last 13 Quarters, but the Magnitude of Beats has Fallen Price -19.6 -2.3 -19.2 3.8 -5.0 4.8 16.9 -14.6 13.7 -15.1 10.9 -1.7 8.4 7.9 11.3 -1.1 -20.7 Im pact(%) 90 300.0 80 70 250.0 Price (U.S. Dollar) 60 55.86 200.0 50 Sales 40 150.0 30 20 100.0 10 0 50.0 '06 '07 '08 '09 '10 No Surprise Negative Surprise Positive Surprise Price Estimate Range Source: FactSet 7
  • 8. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 9 Cree’s Implied Growth Rate of 5.4% is Near Its Lows and is Lower than Epistar at 7.5% Cree Inc : What long-term growth is in the price? Price Target 65.00 Stock (Industry) Rating Overweight (In-line) The market's current view of long-term growth (+5.9%) is lower The current price implies that the market is attributing 45.0% than over the past 6 years (+8.2%) of the current value to growth post-2013 CREE INC- Price Implied long - term growth rate Value of 80 14.0% current earnings QQQQQQQQQQQQQQQQQQQQQQQQ 17.91 70 12.0% 60 10.0% Value of growth 50 in next 3 years 12.57 8.0% 40 6.0% 30 Implied value (1) 4.0% of long-term growth 25.38 20 10 2.0% Current price 0 0.0% 55.86 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 * 2002 2003 2004 2005 2006 2007 2008 2009 2010 The current price implies Cree Inc's earnings will grow 6.0% post-2013 Mean consensus EPS Implied MS Long - Term Current Price Cost of Forecast Terminal (2) FY0 FY1 FY2 FY3 Ticker Company name Growth Rate price Target equity Value Value CREE Cree Inc 6.0% 55.86 65.00 9.55% 1.71 2.40 2.86 3.83 21.19 34.67 AIXA-DE Aixtron 3.6% 23.18 NA 10.12% 0.48 1.77 1.86 2.01 7.44 15.74 2448-TW Epistar Corp 7.5% 96.10 NA 10.19% 2.37 6.14 6.32 6.88 49.86 46.24 VECO Veeco Instruments Inc 7.3% 40.85 NA 10.49% 0.27 4.27 4.68 2.91 15.62 25.23 2393-TW Everlight Electron 3.3% 84.00 NA 10.06% 4.61 6.62 7.02 7.62 43.53 40.47 046890-KR Seoul Semiconductor 4.2% 42,150.00 NA 10.44% 536.42 1,998.09 2,787.57 3,717.00 12,248 29,902 NA (1) The implied value of long-term growth is the value of earnings growth post-2013 implied by the current stock price. (2) The implied long-term growth rate is the earnings growth post-2013 implied by the current stock price, assuming a constant capital structure. Source: Company data, Morgan Stanley Research 8
  • 9. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 10 Quarterly Consolidated Income Statement 2009A 2010A 2011E 2012E Income Statement Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 GAAP Total Revenues 140.4 147.6 131.1 148.1 169.1 199.5 234.1 264.6 282.9 304.0 330.2 357.3 388.3 422.0 458.7 498.7 LED products 123.3 126.7 112.4 131.1 156.0 182.0 211.8 240.1 258.1 278.8 302.5 328.2 357.7 389.9 425.0 463.3 Power and RF products 5.2 4.9 8.6 7.8 13.1 17.5 22.3 24.5 24.7 25.2 27.7 29.1 30.6 32.1 33.7 35.4 Other 11.9 16.0 10.1 9.2 - - - - - - - - - - - - Total Sequential Growth Rate 3.3% 5.2% (11.2%) 12.9% 14.2% 17.9% 17.3% 13.0% 6.9% 7.5% 8.6% 8.2% 8.7% 8.7% 8.7% 8.7% Total Annual Growth Rate 23.8% 24.1% 4.9% 9.0% 20.5% 35.1% 78.5% 78.7% 67.2% 52.4% 41.1% 35.0% 37.3% 38.8% 38.9% 39.6% LED Product Sequential Growth Rate 5.8% 2.8% (11.3%) 16.6% 19.0% 16.6% 16.4% 13.4% 7.5% 8.0% 8.5% 8.5% 9.0% 9.0% 9.0% 9.0% LED Product Annual Growth Rate 32.1% 28.1% 6.6% 12.5% 26.6% 43.6% 88.4% 83.2% 65.4% 53.2% 42.8% 36.7% 38.6% 39.9% 40.5% 41.2% Power and RF Product Sequential Growth Rate (18.5%) (5.2%) 74.1% (9.8%) 68.7% 33.5% 27.3% 9.9% 1.0% 2.0% 10.0% 5.0% 5.0% 5.0% 5.0% 5.0% Power and RF Product Annual Growth Rate 29.2% 3.9% 39.3% 21.4% 151.2% 253.6% 158.7% 215.1% 88.7% 44.2% 24.6% 19.0% 23.7% 27.3% 21.6% 21.6% GAAP Cost of Revenue 91.0 91.1 83.8 89.4 95.4 105.4 121.9 133.5 147.1 162.6 181.6 196.5 216.5 238.4 262.6 289.2 Less: Stock-based Comp in Cost of Revenue (1.3) (0.9) (1.0) (1.1) (0.8) (0.7) (0.5) (1.1) (0.6) (0.7) (0.7) (0.8) (0.9) (1.0) (1.1) (1.2) Non-GAAP Cost of Revenue 89.7 90.2 82.8 88.4 94.5 104.7 121.4 132.5 146.5 162.0 180.9 195.7 215.6 237.5 261.6 288.1 GAAP Gross Profit 49.4 56.5 47.4 58.7 73.8 94.1 112.2 131.1 135.8 141.4 148.6 160.8 171.8 183.6 196.1 209.4 GAAP Gross Margin 35.2% 38.3% 36.1% 39.6% 43.6% 47.2% 47.9% 49.5% 48.0% 46.5% 45.0% 45.0% 44.3% 43.5% 42.8% 42.0% Non-GAAP Gross Profit 50.7 57.4 48.4 59.7 74.6 94.8 112.7 132.1 136.4 142.0 149.3 161.6 172.7 184.5 197.2 210.6 Non-GAAP Gross Margin 36.1% 38.9% 36.9% 40.3% 44.1% 47.5% 48.1% 49.9% 48.2% 46.7% 45.2% 45.2% 44.5% 43.7% 43.0% 42.2% Expenses Research and Development 17.3 18.4 17.1 18.6 20.2 19.3 20.4 21.5 24.4 26.1 27.7 29.5 31.5 33.6 35.9 38.3 Sales, General and Administrative 22.9 21.8 21.0 21.1 23.6 25.6 29.0 37.5 31.6 33.9 36.5 39.3 42.4 45.9 49.6 53.6 Amortization of acquisition related intangibles 4.1 4.1 4.1 4.1 3.0 3.0 3.0 3.0 2.7 2.7 2.7 2.7 3.2 3.2 3.2 3.2 Loss on disposal or impairment of long-lived assets 0.4 0.6 2.3 3.5 0.3 0.1 3.3 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 GAAP Total Expenses 44.7 45.0 44.4 47.2 47.1 48.0 55.7 62.5 59.2 63.2 67.4 72.0 77.6 83.2 89.2 95.6 Less: Stock-based Comp and Amortization (8.2) (8.3) (8.3) (8.3) (7.8) (8.4) (8.3) (8.6) (10.6) (11.2) (11.9) (12.6) (13.9) (14.9) (15.9) (17.0) Non-GAAP Total Expenses 36.5 36.7 36.1 38.9 39.3 39.7 47.3 53.9 48.6 52.0 55.5 59.3 63.7 68.3 73.3 78.7 GAAP Operating Income 4.7 11.5 2.9 11.5 26.7 46.0 56.6 68.5 76.6 78.2 81.2 88.8 94.2 100.4 106.9 113.8 GAAP Operating Margin 3.4% 7.8% 2.2% 7.7% 15.8% 23.1% 24.2% 25.9% 27.1% 25.7% 24.6% 24.9% 24.3% 23.8% 23.3% 22.8% Non-GAAP Operating Income 14.2 20.7 12.2 20.8 35.3 55.1 65.4 78.2 87.7 90.0 93.8 102.2 109.0 116.2 123.8 131.9 Non-GAAP Operating Margin 10.1% 14.0% 9.3% 14.1% 20.9% 27.6% 27.9% 29.6% 31.0% 29.6% 28.4% 28.6% 28.1% 27.5% 27.0% 26.5% Total Other Income (Expense) 3.0 2.4 1.9 1.8 1.8 2.0 2.2 1.8 1.8 1.7 2.6 2.6 2.6 2.6 2.4 2.3 Pre-tax Income 7.7 13.9 4.8 13.3 28.4 48.0 58.7 70.3 78.4 79.9 83.8 91.4 96.8 102.9 109.4 116.1 Taxes, Recurring 1.8 3.2 0.8 3.3 7.4 14.2 14.1 17.5 19.6 20.0 20.9 22.8 25.2 26.8 28.4 30.2 Effective Tax Rate 22.9% 23.1% 16.0% 24.7% 26.0% 29.6% 24.0% 24.9% 25.0% 25.0% 25.0% 25.0% 26.0% 26.0% 26.0% 26.0% GAAP Net Income (excl. Discontinued Operations) 5.9 10.7 4.0 10.0 21.0 33.8 44.6 52.8 58.8 60.0 62.8 68.5 71.7 76.2 80.9 85.9 Plus: Stock-based Comp (A/T) 4.2 3.9 4.4 4.0 4.2 4.3 4.4 5.0 5.5 5.9 6.4 7.0 7.6 8.2 8.9 9.7 Less: Amortization and Other (A/T) 3.1 3.1 3.4 2.3 2.3 2.1 2.3 2.3 2.0 2.0 2.0 2.0 2.3 2.3 2.3 2.3 Non-GAAP Net Income 13.2 17.8 11.8 16.3 27.4 40.2 51.3 60.1 66.3 67.9 71.3 77.5 81.6 86.7 92.2 98.0 Non-GAAP Net Income Margin 9.4% 12.0% 9.0% 11.0% 16.2% 20.2% 21.9% 22.7% 23.4% 22.3% 21.6% 21.7% 21.0% 20.6% 20.1% 19.6% GAAP Net Income 5.9 10.7 4.0 9.7 21.0 33.8 44.6 52.8 58.8 60.0 62.8 68.5 71.7 76.2 80.9 85.9 Fully-diluted EPS GAAP EPS $0.07 $0.12 $0.05 $0.11 $0.23 $0.32 $0.41 $0.48 $0.53 $0.54 $0.57 $0.62 $0.65 $0.69 $0.73 $0.77 Sequential Growth (29.2%) 81.2% (62.6%) 138.4% 110.5% 39.8% 29.7% 17.4% 10.5% 1.8% 4.6% 8.9% 4.4% 6.2% 6.1% 6.0% Annual Growth (54.6%) 58.5% (29.0%) 14.3% 239.9% 162.3% 809.3% 347.7% 135.1% 71.3% 38.2% 28.2% 21.1% 26.3% 28.1% 24.6% Non-GAAP EPS $0.15 $0.20 $0.13 $0.18 $0.30 $0.38 $0.47 $0.55 $0.60 $0.61 $0.64 $0.70 $0.74 $0.78 $0.83 $0.88 Sequential Growth (1.0%) (0.2%) 0.4% 1.3% 3.1% 15.0% 1.9% 0.9% 0.6% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Annual Growth 2.5% 1.9% (0.1%) 0.4% 4.5% 20.4% 22.2% 21.8% 18.9% 3.6% 1.9% 1.1% 0.6% 0.6% 0.6% 0.6% Source: Company data, Morgan Stanley Research estimates 9
  • 10. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 11 Annual Consolidated Income Statement Fiscal Year Income Statement 2005A 2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E 2016E 2017E GAAP Total Revenues 384.5 423.0 394.1 493.3 567.3 867.3 1,274.4 1,767.7 2,455.1 3,297.8 4,276.9 5,212.7 6,157.1 LED products ND 342.1 307.3 414.3 493.5 789.9 1,167.6 1,635.9 2,290.3 3,091.9 4,019.4 4,903.7 5,786.4 Power and RF products ND 15.1 17.4 21.4 26.5 77.3 106.8 131.8 164.8 206.0 257.5 308.9 370.7 Other 384.5 65.7 69.4 57.6 47.2 - - - - - - - - Total Growth Rate (6.8%) 25.2% 15.0% 52.9% 46.9% 38.7% 38.9% 34.3% 29.7% 21.9% 18.1% LED Products Growth Rate (10.2%) 34.8% 19.1% 60.1% 47.8% 40.1% 40.0% 35.0% 30.0% 22.0% 18.0% Power and RF Product Growth Rate 15.0% 22.8% 24.2% 191.4% 38.1% 23.4% 25.0% 25.0% 25.0% 20.0% 20.0% GAAP Cost of Revenue 173.0 222.1 257.1 327.5 355.3 456.2 687.9 1,006.8 1,422.8 1,912.7 2,480.6 3,023.3 3,571.1 Less: Stock-based Comp in Cost of Revenue - (4.4) (3.3) (2.9) (4.3) (3.1) (2.8) (4.0) (5.7) (7.7) (9.9) (12.1) (14.3) Non-GAAP Cost of Revenue 173.0 217.7 253.8 324.6 351.1 453.1 685.1 1,002.7 1,417.1 1,905.1 2,470.7 3,011.3 3,556.8 GAAP Gross Profit 211.4 200.9 137.0 165.8 211.9 411.1 586.5 761.0 1,032.3 1,385.1 1,796.3 2,189.3 2,586.0 GAAP Gross Margin 55.0% 47.5% 34.8% 33.6% 37.4% 47.4% 46.0% 43.0% 42.0% 42.0% 42.0% 42.0% 42.0% Non-GAAP Gross Profit 211.4 205.3 140.3 168.7 216.2 414.2 589.3 765.0 1,038.0 1,392.7 1,806.2 2,201.4 2,600.3 Non-GAAP Gross Margin 55.0% 48.5% 35.6% 34.2% 38.1% 47.8% 46.2% 43.3% 42.3% 42.2% 42.2% 42.2% 42.2% Expenses Research and Development 40.0 54.9 57.9 58.8 71.4 81.4 107.7 139.2 181.0 212.7 244.6 271.5 295.9 Sales, General and Administrative 31.5 44.8 53.1 75.6 86.9 115.6 141.2 191.5 259.9 340.9 431.4 512.7 590.2 Amortization of acquisition related intangibles - - 4.2 17.1 16.2 12.2 10.8 12.6 11.7 9.6 8.0 7.0 6.5 Loss on disposal or impairment of long-lived assets 0.9 2.4 1.2 1.2 6.8 4.1 2.1 2.2 2.4 2.6 2.8 3.0 3.3 GAAP Total Expenses 72.3 102.1 116.4 152.8 181.3 213.3 261.8 345.6 455.0 565.7 686.8 794.3 895.9 Less: Stock-based Comp and Amortization - (8.7) (12.6) (30.2) (33.1) (33.2) (46.3) (61.6) (79.7) (100.8) (126.4) (151.3) (177.0) Non-GAAP Total Expenses 72.3 93.3 103.8 122.6 148.2 180.2 215.5 284.0 375.3 464.9 560.4 643.0 719.0 GAAP Operating Income 139.1 98.8 20.6 13.1 30.6 197.8 324.8 415.3 577.3 819.4 1,109.5 1,395.0 1,690.0 GAAP Operating Margin 36.2% 23.4% 5.2% 2.6% 5.4% 22.8% 25.5% 23.5% 23.5% 24.8% 25.9% 26.8% 27.4% Non-GAAP Operating Income 139.1 111.9 36.5 46.2 68.0 234.0 373.8 481.0 662.6 927.9 1,245.8 1,558.5 1,881.3 Non-GAAP Operating Margin 36.2% 26.5% 9.3% 9.4% 12.0% 27.0% 29.3% 27.2% 27.0% 28.1% 29.1% 29.9% 30.6% Total Other Income (Expense) 6.1 12.9 23.0 14.9 9.1 7.7 8.7 9.9 9.1 8.0 6.2 5.3 5.7 Pre-tax Income 145.2 111.8 43.6 28.0 39.7 205.5 333.5 425.2 586.3 827.4 1,115.7 1,400.3 1,695.7 Taxes, Recurring 38.7 32.2 16.3 6.1 9.0 53.2 83.4 110.6 164.2 231.7 312.4 392.1 474.8 Effective Tax Rate 26.6% 28.8% 37.4% 21.8% 22.7% 25.9% 25.0% 26.0% 28.0% 28.0% 28.0% 28.0% 28.0% GAAP Net Income (excl. Discontinued Operations) 106.6 79.6 27.3 21.8 30.7 152.3 250.1 314.7 422.2 595.7 803.3 1,008.2 1,220.9 Plus: Stock-based Comp (A/T) - 8.2 7.6 10.9 13.8 17.8 28.7 39.2 47.9 64.3 83.4 101.6 120.1 Less: Amortization and Other (A/T) - - 2.7 11.7 10.6 9.0 8.1 9.3 8.4 6.9 5.8 5.1 4.7 Non-GAAP Net Income 106.6 87.8 37.7 44.4 55.1 179.2 286.9 363.3 478.5 666.9 892.5 1,114.9 1,345.7 Non-GAAP Net Income Margin 27.7% 20.8% 9.6% 9.0% 9.7% 20.7% 22.5% 20.5% 19.5% 20.2% 20.9% 21.4% 21.9% GAAP Net Income 91.1 76.7 57.3 33.4 30.3 152.3 250.1 314.7 422.2 595.7 803.3 1,008.2 1,220.9 Fully-diluted EPS GAAP EPS $1.18 $0.98 $0.72 $0.38 $0.34 $1.45 $2.26 $2.83 $3.77 $5.29 $7.10 $8.85 $10.66 Growth 54.3% (17.0%) (26.4%) (47.4%) (10.3%) 327.3% 55.6% 25.1% 33.4% 40.3% 34.0% 24.8% 20.4% Non-GAAP EPS $1.38 $1.12 $0.47 $0.50 $0.62 $1.71 $2.60 $3.27 $4.28 $5.93 $7.88 $9.79 $11.75 Growth 80.5% (18.7%) (57.8%) 6.4% 22.6% 176.7% 51.7% 25.9% 30.9% 38.6% 33.0% 24.2% 20.0% Source: Company data, Morgan Stanley Research estimates 10
  • 11. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 12 Annual Consolidated Balance Sheet Fiscal Year Balance Sheet 2005A 2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E 2016E 2017E Current Assets Cash and cash equivalents 70.9 88.8 93.9 261.6 290.2 397.4 381.9 195.4 100.0 100.0 100.0 139.3 265.8 Short-term investments 102.5 167.5 148.8 50.8 127.5 669.0 669.0 669.0 665.0 492.4 402.3 402.3 402.3 Total Cash 173.5 256.2 242.7 312.4 417.7 1,066.4 1,050.8 864.4 765.0 592.4 502.3 541.5 668.1 Accounts receivable, net 35.2 68.4 79.7 110.4 103.0 117.5 179.5 253.3 336.3 451.8 585.9 712.1 843.4 Income tax receivable 9.9 0.2 7.9 9.8 1.5 - - - - - - - - Inventories, net 31.2 30.0 71.1 80.2 78.8 112.2 169.1 249.4 311.8 419.2 543.7 660.8 782.7 Deferred income taxes 23.5 10.1 23.6 4.6 10.0 18.8 20.4 22.1 23.8 25.7 27.8 30.0 32.4 Prepaid expenses and other current assets 8.1 11.2 8.9 12.9 18.4 40.2 59.1 87.0 122.9 165.2 214.3 261.2 308.5 Assets of discontinued operations - 0.4 0.3 2.6 - - - - - - - - - Total Current Assets 281.4 376.5 434.1 532.9 629.4 1,355.2 1,478.8 1,476.1 1,559.8 1,654.3 1,873.9 2,205.7 2,635.1 Property, Plant and Equipment, net 341.4 342.2 372.3 348.0 320.1 419.7 631.3 895.1 1,134.6 1,482.6 1,830.0 2,169.3 2,527.6 Long term investments 103.8 119.4 68.4 58.6 29.6 - - - - - - - - Other Assets Goodwill - - 141.8 244.0 304.8 313.0 326.2 326.2 326.2 326.2 326.2 326.2 326.2 Intangible assets, net 28.9 30.3 96.1 126.0 113.3 106.1 95.3 82.7 71.0 61.4 53.4 46.4 39.8 Other assets 21.9 31.8 3.5 3.9 7.3 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 Total Other Assets 50.8 62.1 241.4 373.9 425.5 424.3 426.7 414.1 402.4 392.8 384.8 377.7 371.2 Total Assets 777.4 900.2 1,116.2 1,313.4 1,404.6 2,199.2 2,536.9 2,785.2 3,096.9 3,529.7 4,088.7 4,752.8 5,533.9 Liabilities and Stockholder's Equity Current Liabilities Accounts payable, trade 23.5 23.2 32.9 37.4 38.8 63.8 101.7 150.7 194.9 262.0 339.8 413.0 489.2 Accrued salaries and wages 9.2 8.8 10.2 13.5 16.7 26.2 27.5 37.5 50.9 66.8 84.5 100.5 115.7 Income taxes payable - - 4.5 5.3 8.1 14.4 15.6 16.8 18.2 19.6 21.2 22.9 24.7 Contingent payment due related to acquisitions - - - 60.0 57.1 - - - - - - - - Other current liabilities 3.4 5.3 6.8 8.5 8.0 15.6 15.6 15.6 15.6 15.6 15.6 15.6 15.6 Total Current Liabilities 36.0 37.4 54.4 124.7 128.7 120.1 160.4 220.7 279.7 364.1 461.2 552.0 645.2 Long-Term Liabilities Deferred income taxes 28.5 33.3 38.8 38.0 42.8 39.4 42.6 46.2 49.9 53.8 58.1 62.8 67.8 Other long-term liabilities - 1.9 7.0 4.9 8.4 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 Total Long-Term Liabilities 28.5 35.2 45.8 43.0 51.1 51.0 54.3 57.8 61.5 65.5 69.8 74.4 79.5 Stockholders’ Equity Common stock 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Additional paid-in capital 548.3 580.8 713.8 811.0 857.4 1,507.4 1,551.5 1,610.1 1,690.3 1,796.4 1,932.7 2,097.9 2,292.5 Accumulated other comprehensive income, net of taxes 6.2 11.8 9.8 8.9 11.2 12.2 12.2 12.2 12.2 12.2 12.2 12.2 12.2 Retained earnings 158.3 235.0 292.3 325.7 356.0 508.3 758.4 884.3 1,053.1 1,291.4 1,612.8 2,016.1 2,504.4 Total Stockholders' Equity 712.9 827.6 1,016.0 1,145.7 1,224.7 2,028.0 2,322.2 2,506.7 2,755.7 3,100.1 3,557.7 4,126.3 4,809.2 Total Liabilities 64.5 72.6 100.2 167.7 179.8 171.1 214.6 278.5 341.2 429.6 531.0 626.5 724.7 Total Liabilities and Stockholders’ Equity 777.4 900.2 1,116.2 1,313.4 1,404.6 2,199.2 2,536.9 2,785.2 3,096.9 3,529.7 4,088.7 4,752.8 5,533.9 Source: Company data, Morgan Stanley Research estimates 11
  • 12. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Exhibit 13 Annual Consolidated Cash Flow Statement Fiscal Year Cash Flow Statement 2005A 2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E 2014E 2015E 2016E 2017E Operating activities Net income 91.1 76.7 57.3 33.4 30.3 152.3 250.1 314.7 422.2 595.7 803.3 1,008.2 1,220.9 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 69.7 74.4 80.5 82.2 80.3 78.2 92.6 109.0 126.3 144.2 163.0 178.9 192.6 Amortization of acquisition related intangibles - - 4.2 17.1 16.2 12.2 10.8 12.6 11.7 9.6 8.0 7.0 6.5 Stock-based compensation - 13.1 11.7 16.0 21.1 24.1 38.2 53.0 73.7 98.9 128.3 156.4 184.7 Excess tax benefit from share-based payment arrangemen 23.0 - (0.7) (5.5) (0.7) (21.7) - - - - - - - Impairment of inventory or loss (gain) on disposal of long-l 7.4 5.6 1.2 (1.6) 6.8 4.1 2.1 2.2 2.4 2.6 2.8 3.0 3.3 Gain on sale of investment in securities (2.7) (0.6) (19.2) (14.1) (0.1) (0.0) - - - - - - - Amortization of premium/discount on investments 4.2 1.0 (0.8) (1.2) 1.9 9.5 - - - - - - - Deferred income taxes 11.2 2.2 (2.4) 0.8 (10.8) (11.0) 1.7 1.8 1.9 2.1 2.2 2.4 2.6 Others - - 1.4 1.3 1.0 0.7 - - - - - - - Changes in operating assets and liabilities Accounts and interest receivable 12.2 (35.1) 10.7 (31.0) 6.2 (15.3) (61.9) (73.8) (83.0) (115.5) (134.1) (126.2) (131.3) Inventories (12.5) 1.9 (14.6) (9.3) 0.8 (33.1) (56.8) (80.3) (62.5) (107.4) (124.5) (117.1) (121.9) Prepaid expenses and other current assets (10.9) 8.1 1.5 (7.2) 14.6 (18.1) (18.9) (27.9) (35.9) (42.3) (49.1) (46.9) (47.3) Accounts payable, trade (1.9) 0.8 (2.2) 2.4 1.3 15.7 37.8 49.0 44.2 67.1 77.8 73.2 76.2 Accrued expenses and other liabilities (15.3) 3.5 (17.6) 19.4 8.8 53.0 2.4 11.3 14.7 17.3 19.3 17.6 17.0 Net Cash Flow from Operating Activities 175.6 151.5 110.9 102.8 177.9 250.6 298.0 371.7 515.7 672.4 897.1 1,156.6 1,403.3 Investing activities Purchases of property and equipment (141.8) (77.3) (82.6) (55.7) (55.3) (168.6) (306.3) (375.0) (368.3) (494.7) (513.2) (521.3) (554.1) Payment of contingent consideration related to acquisition - - - - (64.4) (65.8) (13.2) - - - - - - Acquisition of business, net of cash acquired - (0.3) (123.1) (7.2) - - - - - - - - - Purchase of investments (181.8) (212.2) (167.6) (413.7) (217.1) (660.8) - - - - - - - Proceeds from maturities of investments 122.6 128.7 254.8 507.1 134.6 121.8 - - - - - - - Proceeds from sale of property and equipment 0.9 1.2 0.6 1.5 0.2 0.2 - - - - - - - Proceeds from sale of available-for-sale investments 10.8 2.9 26.6 17.0 35.8 19.1 - - 4.0 172.6 90.1 - - Purchase of patent and licensing rights (10.8) (4.1) (6.4) (7.6) (8.7) (9.3) - - - - - - - Others 0.0 - - - - - - - - - - - - Net cash used in investing activities (200.1) (161.1) (97.7) 41.3 (174.8) (763.4) (319.5) (375.0) (364.2) (322.1) (423.1) (521.3) (554.1) Financing activities Proceeds from issuance of common and SBC 54.4 27.4 10.6 62.2 26.7 598.1 5.8 5.6 6.5 7.2 8.0 8.9 9.9 Repurchase of common stock (35.3) - (18.7) (51.3) (2.7) - - - - - - - - Dividend Payments - - - - - - - (188.8) (253.3) (357.4) (482.0) (604.9) (732.6) Others - - 0.1 5.5 0.7 21.7 - - - - - - - Net cash (used in) provided by financing activities 19.1 27.4 (8.1) 16.4 24.7 619.8 5.8 (183.2) (246.8) (350.3) (474.0) (596.1) (722.7) Effect of Exchange Rate Changes - - (0.0) 7.3 0.8 0.3 - - - - - - - Net Change in Cash and Cash Equivalents (5.4) 17.8 5.1 167.8 28.5 107.3 (15.6) (186.4) (95.4) - - 39.3 126.5 Cash and cash equivalents at beginning of the year 76.4 70.9 88.8 93.9 261.6 290.2 397.4 381.9 195.4 100.0 100.0 100.0 139.3 Cash and cash equivalents at end of year 70.9 88.8 93.9 261.6 290.2 397.4 381.9 195.4 100.0 100.0 100.0 139.3 265.8 Source: Company data, Morgan Stanley Research estimates 12
  • 13. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. 13
  • 14. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings. Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary. 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  • 15. MORGAN STANLEY RESEARCH October 15, 2010 Cree, Inc. Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1115 42% 394 43% 35% Equal-weight/Hold 1146 43% 413 45% 36% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 381 14% 99 11% 26% Total 2,656 910 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . 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  • 17. MORGAN STANLEY RESEARCH The Americas Europe Japan Asia/Pacific 1585 Broadway 20 Bank Street, Canary Wharf 4-20-3 Ebisu, Shibuya-ku 1 Austin Road West New York, NY 10036-8293 London E14 4AD Tokyo 150-6008 Kowloon United States United Kingdom Japan Hong Kong Tel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200 Industry Coverage:Clean Tech Company (Ticker) Rating (as of) Price* (10/14/2010) Joshua Paradise Cree, Inc. (CREE.O) O (10/15/2010) $55.86 Energy Conversion Devices, Inc U (03/24/2010) $5.13 (ENER.O) Tesla Motors Inc. (TSLA.O) E (08/09/2010) $20.75 Smittipon Srethapramote Evergreen Solar Inc (ESLR.O) E (03/24/2010) $1.03 First Solar Inc. (FSLR.O) O (03/24/2010) $142.27 SunPower Corporation (SPWRA.O) E (10/08/2010) $14.52 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. © 2010 Morgan Stanley