Today, Cree is where Neal Hunter expected it to be six or seven years ago.

"We produced an [innovative] core technology, and any time you do that, you are up against a lot of variables that are unclear. At that time, I was too young and too stupid ... to know," Neal Hunter says of the company's progress, laughing at himself all the while.

The 35-year-old Hunter, who succeeded older brother Eric as president and chief executive officer three years ago, can afford to be relaxed about Cree's being behind schedule. Because things are starting to go Cree's way.

For one thing, Cree -- which produces super-bright blue light-emitting diodes, or LEDs, used as indicator lights and electronic signs -- has developed into a fairly substantial company. It has 205 employees at two Durham locations and, for the nine-month period ended in March, posted a profit of $2.8 million on revenue of $20.5 million.

More importantly, Hunter and analysts alike think that publicly held Cree has the potential for explosive growth.

Short term, the company is perfecting a production process for its blue LEDs that is expected to double capacity and, therefore, sales. That also will enable Cree to lower prices and compete with the billions of red, green and amber LEDs that competitors produce each year.

Blue LEDs are especially important because they represent the missing primary color in the LED mix. That makes them essential for producing full-color electronic signs and video displays.

Cree is selling all of the blue LEDs it can make -- mostly to one customer. About 75 percent of Cree's blue LEDs last quarter went to industrial giant Siemens AG, which uses them to create dashboard lighting for an unidentified German car maker. Even that is an improvement from a few quarters ago, when more than 90 percent of all blue LEDs went to Siemens, according to Hunter.

The Siemens contract gives Cree a solid revenue base, something it has lacked until recently, says Lehman Brothers analyst Carlos Valeiras. Siemens signed a $6 million contract in September and expanded it significantly in April, although details were not divulged.

"It is at a new point in its life," Valeiras says of Cree. "I think earnings can double in the next year and double in the year after that."

But most analysts, including Valeiras, say Cree's real potential lies in the wafers made from silicon carbide -- the same material used as grit on sandpaper -- that Cree uses to form the base of its LEDs.

Cree is thought to be the only company capable of producing commercial quantities of silicon carbide wafers, which have several advantages over silicon wafers currently used for transistors and computer chips.

Their ability to operate at higher temperatures and higher voltages makes them ideal for electric motor controls and devices in automobiles, wireless communications, and space and military equipment.

Cree already has developed wafers suitable for many of those applications, while for others it is still developing higher-quality wafers.

Herbert Jackson, managing director of Renaissance Research Group in Richmond, Va., says the potential demand for silicon carbide wafers is so great that he is reluctant to publish long-term earning projections for the company. The reason: The numbers would look irrational. But Jackson did write in a recent report that "Cree can achieve over a billion dollars in sales in five to seven years."

Several giant companies, including Motorola, Honeywell and Phillips Electronics, are experimenting with silicon carbide-based transistors and chips. Westinghouse Electric Corp. is gearing up to use Cree semiconductors for a high-power transmitter that will broadcast high-definition television. None of those companies has gone into production.

"In the last quarter of this calendar year, I expect to see a pickup in the shipment of wafers," Jackson says. Cree doesn't break down sales of silicon carbide wafers, but Jackson estimates they amounted to $2 million in the most recent quarter.

Analysts expect Cree stock, which has been extremely volatile ever since the company went public in early 1993, to jump along with sales and earnings. Cree stock closed Wednesday at $12.125, up 25 cents.

Although Cree holds enormous promise, Valeiras says investing in Cree is not for the faint-hearted.

It is worrisome that the company depends on a single customer -- Siemens -- for a hefty chunk of its revenue, he says.

Cree also has experienced production problems. Last summer, the company's stock plummeted 16 percent in one day after the company announced a glitch that produced higher-than-expected production costs.

Given that the company plans to switch manufacturing processes, more glitches are conceivable. But analysts are confident that management has learned from its mistakes.

"It is the same learning curve Intel went through a generation ago," Jackson says.

Indeed, Hunter says, the company already has been producing prototypes with its new production process for nearly six months, and will continue to do so until all the bugs are eliminated. The company's hefty investment in new equipment -- more than $16 million over the past 21 months -- allows it to continue to produce blue LEDs under the old process while it perfects the new one.

"It's been a heavy investment period, and we are seeing dividends on that investment now," Hunter says.

Hunter does not dispute that analysts' optimistic projections for the company could come true. But he is making no such projections himself.

After years of the company lagging behind where he thought it should be -- not to mention a pending shareholder lawsuit that claims Cree made overly optimistic production forecasts -- Hunter says his outlook has become much more conservative.

"We want to set these things up so we can deliver an upside surprise," he says. "That is what investors want."



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