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Commentary: CS/SSL Stock Portfolio Update for August
 
... It's "quarterly earnings" time again for many of the companies that trade over their various national stock exchanges. Of those included in the representative stock portfolio of 13 compound semi (CS) and solid state lighting (SSL) related companies that are covered periodically in The McDonald Report, Color Kinetics, Anadigics,...
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Construction Begins on High Power Solid State Laser Facility
CompoundSemi News Staff

August 3, 2006...The U.S. Military is one step closer to developing high powered solid state lasers for missile defense and weapons systems. Construction has begun on a U.S. Research center dedicated to high-powered lasers for the military. The Directed Energy Production Facility will be constructed at Northrop Grumman’s Space Park campus in Redondo Beach, California. The new, 11,000 square foot Redondo Beach facility will house a Class 10,000 clean room and solid state sub-labs for work on system components. Northrop Grumman, a major defense contractor with headquarters in Los Angeles, California USA, says it expects to complete renovations to an existing building by the end of 2006.

After construction, the researchers will begin Phase III of the Joint High-Power Solid-State Laser (JHPSSL) program, which hopes to develop solid state lasers powerful enough to protect against cruise missiles. A portion of the workload will include integration of laser systems and military platforms such as armored vehicles. A company with a 30-year history of working with lasers, Northrop Grumman received $58 million last year after successfully demonstrating a 27 kW laser for 5 minutes and 50 seconds. While the researchers have developed solid state lasers running at about 25kW, they hope to increase that to 100 kW soon to enable use against rockets and artillery shells. "Northrop Grumman is on track to be the first ever to build and demonstrate a 100 kW electric laser,'' Alexis Livanos, president of Northrop Grumman Space Technology, said Tuesday, "This facility demonstrates our tremendous confidence in the potential for laser weapons." Company News Release

Anadigics Cuts Sweet Deal With LG Electronics
CompoundSemi News Staff

August 3, 2006...Anadigics, a wireless and broadband solutions provider headquartered in Warren, New Jersey USA reports making the first shipments of its new EV-DO power amplifiers to LG Electronics for its chocolate phone. The Chocolate, a sleekly styled phone with camera, MP3, Streaming Video, and Bluetooth capability, is exclusively offered through Verizon Wireless. The phone utilizes Anadigics’ AWT6310 dual-band CDMA power amplifier (PA) based on Anadigics’ InGaP HBT technology. The AWT6310 features independent RF paths which the company says ensure optimal performance for each band and 25 percent space savings over solutions requiring two single-band PAs. Anadigics News Release

Emcore Corporation, Group4 Labs, and Air Force Research Laboratory Demonstrate GaN-on-Diamond Transistor
Scott McMahan

August 2, 2006...Emcore Corporation located in Somerset, New Jersey USA, announced that a team from Emcore's EMD divison, Group4 Labs and engineers at the U.S. Air Force Research Laboratory (AFRL) have successfully demonstrated a gallium nitride (GaN)-on-diamond high electron mobility transistor (HEMT). According to Emcore, the aluminum gallium nitride (AlGaN) on GaN transistor layers were grown using metal-organic chemical vapor deposition (MOCVD). The MOCVD process was completed at Emcore, and then Group4 Labs attached their CVD-produced diamond substrate using their patented technology. Finally, the AFRL fabricated the transistors.

Emcore said, that demonstration proved the feasibility of making GaN-based radio frequency (RF) devices thermally coupled to diamond substrates for maximum heat extraction. The team expects to be able to pack more devices in less space due to better heat dissipation. Additionally the improved heat dissipation will allow more devices to be placed close to the active device area. The team expects that the novel packaging and foundry process could be used for high performance GaN-based RF devices, high brightness LEDs and Laser Diodes. "We are excited by the promise of this technology combining the most robust semiconductor material with the best heat spreader," commented Dr. Ivan Eliashevich, Director of R&D at Emcore Corporation's EMD division. Emcore News Release.

This demonstration was the result of years of work during the compound semiconductor industry’s on-again/off-again love affair with diamond substrates. While diamond substrates have been made before, it took the advances of Group4 Labs to allow successful thermal coupling of GaN-on-diamond. It took the perseverance of the military to continue researching a technology many had given up on. The advance also required the MOCVD innovation of Emcore. The demonstration, while impressive, is still far from the commercial success some diamond substrate pioneers hoped for. If diamond substrates are ever a commercial success, it will take many more breakthroughs and the right market conditions for the team and especially the military to be vindicated for their choice of continuing research on diamond substrates. –Scott Mc

Emcore Teams with Sandia on Terrestrial Solar Product Development
Compound Semi News Staff

August 1, 2006...Emcore of Somerset, New Jersey, which has a major solar product facility in Albuquerque, New Mexico USA, is teaming with its longstanding technology development partner, Sandia National Labs of Albuquerque, to develop what are called "concentrator photovoltaic power systems." The joint effort is part of both entities ongoing terrestrial solar project that puts compound semi-based high efficiency solar cells to work on ground-based systems. Until recently, high efficiency CS solar cells, which employ GaAs on Ge technology, have been confined to satellite applications. The vast majority of terrestrial solar is silicon based, but Emcore aims to change that.

According to the contract signed by Emcore and Sandia, the prestigious USA government-owned lab will provide technical support for Emcore's terrestrial solar systems products, lending Sandia's +25 years of experience in the development of photovoltaics for grid-tied, utility scale power generation. Emcore's president and CEO, Reuben Richards, explained the goals of his company's new terrestrial thrust. "Emcore is already the leading supplier of GaAs, multijunction solar cell technology for power generation on satellites. We're adapting our state-of-the-art solar cell technology as a base for the development of large scale, concentrator photovoltaic power systems with the goal of becoming the leader in solar energy power systems. We have a very successful track record in commercializing next generation technologies, as we have done in the satellite market. Sandia has long been a valuable partner in technology development for Emcore and we look forward to their contributions to our program in terrestrial power systems." Dr. Jeff Nelson, manager of the Sandia Solar Technologies Group, will be point person on the joint development project. Company news release

Agilent Technologies to Acquire Xpedion Design Systems
CompoundSemi News Staff

July 31, 2006...Agilent, a communication electronics and measurement company headquartered in Palo Alto, California USA, has signed a definitive agreement to acquire Xpedion Design Systems, a maker of radio frequency (RF) simulation software. Xpedion is a privately held company whose RFIC simulation software is used in high-speed digital circuit and systems design in communications. The terms of the acquisition were not disclosed. Agilent says that as companies move towards RF CMOS technology with greater levels of integration, the technology requires more complete verification and testing methods. The addition of Xpedion will allow Agilent customers to perform simulations of full transceiver chains and analyze design solutions at the transistor level more accurately. According to Agilent, this results in shorter design cycles, reduced silicon spins, and higher-performing products. Xpedion is repotedly a member of the Ready for IBM Technology Program, Cadence Connections Program, the Mathworks Connections Program, and the Platform Partners Program. Xpedion is also a Sun Microsystems development partner. Agilent News Release

SMI Awarded Air Force Phase II Development Award for Silicon Photonics
CompoundSemi News Staff

July 31, 2006...Structured Materials Industries reports being awarded a small business technology transfer program grant to develop a low power, high bandwidth, high speed, and ultra-small multi-channel WDM transponder on a single optoelectronic silicon chip. The company says that despite advances in optical integration, creating single packages housing multiple functions is difficult, and the resulting devices are often large and incompatible with silicon CMOS technology. According to the company, ultimately, the optical circuits will be directly integrated with the microelectronic memory and logic devices required to fully control operation of the transponder chip. SMI indicated that the reduction in the number of packages decreases the size and cost of the devices. SMI did not disclose the amount or terms of the research funding award. Company News Release

IQE Could be Profitable as Soon as 2007, Strategy Analytics Says
CompoundSemi News Staff

July 31, 2006...Compound semiconductor market analyst company, Strategy Analytics (SA), says that after IQE’s successful acquisition of Emcore’s Epitaxial Substrate Division, IQE could become profitable by 2007. According to SA, IQE will increase its share of the commercial substrate market. SA says that the acquisition will allow IQE to offer a one-stop shop for MOCVD and MBE for GaAs device manufacturers. SA predicts that the overall market for epitaxial substrates will grow 40 percent year-on-year in 2006 and 30 percent in 2007, but it cautions that commercial demand for MBE substrates is restricted by regional preferences for MOCVD and captive capabilities. "This is a very positive move by IQE," notes Stephen Entwistle, Vice President of the Strategic Technologies Practice at Strategy Analytics. "However, IQE will still need to overcome several commercial challenges to achieve its target of becoming the world's leading commercial supplier of SI GaAs epitaxial substrates." Strategy Analytics News Release

RFMD EDGE PAs to be in 15 Samsung Handsets

July 31, 2006...RFMD, a radio systems solution developer in Greensboro, North Carolina USA, announced the shipment of the mass produced EDGE power amplifiers (PAs) to Samsung Electronics. Samsung will reportedly place the RF3159 linear EDGE power amplifiers in at least 15 of its handset models. According to RFMD, the RF3159 is a high linearity quad-band GSM/GPRS/EDGE PA designed to support multiple EDGE transceiver platforms, and it is optimized for use with either direct in-phase and quadrative or small signal polar modulation. The module is designed to be the final amplification stage in a dual-mode GSM/GPRS/EDGE mobile transmit lineup operating in the 824MHz to 915MHz and 1710MHz to 1910MHz bands. RFMD News Release

BluGlass to Raise Funds for GaN Process Development Facility
CompoundSemi News Staff

July 28, 2006...A company based in Syndney, Australia, BluGlass, hopes to raise money to develop processes for manufacturing and epitaxy of gallium nitride (GaN), according to an article from business news source, NineMSN. The company says it has technology which allows GaN to be spread onto cheaper materials such as silicon or glass. BluGlass plans to raise money by selling 30 million shares at 20 cents under its IPO price on August 4, ahead of its proposed IPO on September 7. The funding will reportedly go towards establishing a pilot factory for GaN manufacturing and epitaxy. BluGlass claims to have already demonstrated its production processes on two inch wafers and is ramping up to six inch types. The company is in an early stage and hasn't decided whether it will make the LEDs itself, enter into a joint venture or license its intellectual property. The company says its technology allows it to use glass or silicon substrates instead of more costly sapphire or silicon carbide (SiC). BluGlass says their research suggests that the company’s GaN processes might be scalable to 8-inch or greater wafer sizes, which would substantially improve production efficiencies.

EU Antitrust Officials Probe Next Gen DVD Technology Licensing
CompoundSemi News Staff

July 27, 2006...A European Union executive told Reuters that European Commission antitrust officials are seeking more information about licensing for next generation DVD technology from the makers of Blu-ray and its rival, HD-DVD technology. HD DVD was created by Toshiba Corp, while Blu-ray Disc was developed by a Sony-led consortium which includes Philips, Samsung and Sharp Corporation. Blu-ray was released last month in the United States, and HD DVD was released in April. Both technologies rely on solid state blue lasers.

The Commission reportedly wants to know whether the licensing the both products to hardware manufacturers and DVD producers could break European Union competition rules. The Commission indicated it was not the start of a formal investigation. According to the Commission, after receiving and examining more information from the companies concerned it could decide to either open a formal investigation or drop the case. Sony and its Blu-ray consortium companies began some licenses in 2003, according to the official Blu-ray web site. The site lists over 100 licensees in 6 categories, including Hitachi, Pioneer, Samsung, TDK and LG Electronics. Both Sony and the maker of its DVD format rival, Toshiba are members of the DVD forum.

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Commentary & Perspective...

CS/SSL Stock Portfolio Update for August

August 3, 2006...It's "quarterly earnings" time again for many of the companies that trade over their various national stock exchanges. Of those included in the representative stock portfolio of 13 compound semi (CS) and solid state lighting (SSL) related companies that are covered periodically in The McDonald Report, Color Kinetics, Anadigics, and Emcore appear to be weathering the most recent tech stock downturn reasonably well. And Spire, AXT, TriQuint, RF Micro Devices, and JDSU seem to be hanging in there. The rest have been pulled down substantially by the severe tech stock drop that continues to plague North American exchanges.

First off, let me remind you of the intent of this modest, model portfolio. If you're new to the topic of my meager holdings in a cherry-picked handful of stocks, please take a look at my "Stock Ownership Disclosure Statement," a link to which is now permanently affixed to the end of this, and each and every posted McD Report column. I now hold a modest number of shares in each of the following CS/SSL companies as industry barometers: Emcore (EMKR), Cree (CREE), TriQuint (TQNT), Color Kinetics (CLRK), Anadigics (ANAD), JDS Uniphase (JDSU), Spire (SPIR), RF Micro Devices (RFMD), Kopin (KOPN), WJ Communications (WJCI), Vitesse (VTSS.PK) and Aixtron (AIXG) which are traded on the USA's Nasdaq exchange, and TIR Systems which is traded on the Toronto exchange in Canada (TIR.TO). The collection periodically provides good column fodder.

None of the above "bakers dozen" or "lucky 13" are performing as they were last time I reviewed them (ref: March 20th column). They continued to rise into May, but even then, most still hadn't yet approached their original IPO entry levels, not to mention the glory years of old when some went through the roof! (Emcore's original IPO entry price, for example, was $10/share and its all time high was $150.) If I was a serious investor in tech stocks, and given the depths of the downturn, I'd have been thrilled at the nice climb this spring. By July, every tech stock on the USA exchanges, including the established silicon based companies, took a severe dip in an icy pool... maybe they just needed a break from the summer heat.

Bear in mind that, although I covered the silicon and compound semi industries for 30 years as a tech journalist, I'm a rank amateur in the personal investment game. I starting buying the above stocks about a year ago as part of my semi-retirement, and at a time when I thought they'd surely hit rock bottom. Holding these 13 makes me actually climb out of my 'industry-insider' advanced technology mindset and look at our CS and SSL industries from the perspective an outsider might have. What I fail to understand is why the investment community takes their global or national confusion or worries or concerns out on our poor innocent tech stocks? Nothing changes much within the companies involved, and with the exception of Vitesse, which recently got delisted from the Nasdaq and is now trading as VTSS.PK on the "pink sheet" penny exchange, there's nothing but great news about new products, fresh alliances and great R&D out of these companies. Business is picking up for all of them since the really hard times of the last few years.

Ever wonder where the term "pink sheet" or "PK" came from? According to my broker, back before computers took over the exchanges, brokers used to be sent weekly listing of penny stocks and the lists were actually on pink paper. For those unfamiliar with the term "penny stocks" and "delisting" from the bigger exchanges, when a company doesn't meet its obligations to file the proper financials with the SEC at the proper times, and/or the stock continues to trade below $1 per share, the stock is moved over to the "PK" listings. Once they've re-complied with the SEC rules, they most often return to their original slot. Vitesse which has strong roots in CS technology but really only does a bit of InP these days, appears to be moving in the right direction. The new CEO Chris Gardner reported in their quarterly earnings report that the company has closed new funding and looks to be headed back to positive cash flow soon by improving their yields, cycle times, operational efficiencies and possibly trimming some of their numerous product offerings. Chris replaced Lou Tomasetta who is on administrative leave while issues of stock options get sorted out. Headcount at Vitesse is now at 620 somewhat nervous employees. I'll happily hang on to my Vitesse stock because they're likely to weather the storm. Besides, they're located in Camarillo, California and who wouldn't want to work in Camarillo?

Cree, on the other hand, was a major disappointment this quarter, at least in the eyes of their fickle investors. According to my press peers, they've had blue spectrum LED "production issues" which, in my opinion, is no big deal, but Cree warned that profits would fall short of expectations and their stock price dropped. At the heart of the matter may well be what all American and European die suppliers face: aggressive competition from their Asian competitors that continues to force declining prices for blue spectrum and white LEDs. That's good for the consumer, but it pressures companies like Cree to reduce manufacturing costs even further. Cree's quarterly earnings report is August 11th when we'll learn more.

To me, the most eye-catching of the batch this quarter is Emcore, which held its conference call this morning (Aug. 3rd) where much was revealed. The sale of the Emcore's epiwafer and device foundry (EMD) to IQE will likely go through in August when IQE goes to their investors for approval to raise the money. The yes vote is essentially in the bag. Just in case, and FYI as to how these deals go down, Emcore negotiated a "break" (or cancellation) fee of $700K towards which IQE has already anted up $200K. Yesterday's news about GaN on diamond transistors was exciting, but that will soon be a triumph for IQE with the sale of EMD to the Cardiff, Wales based publicly held company. That's good for IQE but begs the question whether or not the USA's DARPA agency can keep funding that project when ownership passes over to a British company? We'll see. For sure all EMD employees will be retained and they get to stay put in Somerset with all their nice, high end MOCVD toys.

The most exciting Emcore news to me is the push into terrestrial applications for their exceptional high efficiency GaAs concentrator solar cells. The recently announced development pact with Sandia for concentrator photovoltaic power systems is the first hint we've received about what's involved in the rollout on earth (vs. their traditional satellite apps). Emcore's president/CEO Reuben Richards explained to analysts that all the photovoltaic operations are now in Albuquerque and that they've already shipped to Sharp, but that these aren't yet commercial revenue levels. Sharp is evidently developing a line of site project in Europe. Commercial terms and production systems can be expected in calendar Q4 this year. The price for GaAs solar now is about $5/watt for fully installed concentrator cells. Reuben underscored that the first to market (which looks like Emcore) will get to set the standards. It seems silicon cells are actually getting more expensive but GaAs solar cell prices are decreasing, so there's hope for a terrestrial takeover... eventually. Reuben also told analysts, specifically Jed Dorsheimer, that Emcore's JV with GE, GELcore, "isn't strategic to our vision" he said,d mimicking Jed's words. GELcore, Reuben explained, is now basically a break even stand-alone company. "We and GE don't bring a lot to them now." He added that, "both near and long-term, Emcore's resources will go to businesses they own and operate." Emcore owns 49% of the GELcore JV and is no longer requiring significant subsidity from either of its parents. Now that it's approaching profitability, I wouldn't be surprised if GELcore either spins off, or if it's smart, becomes fully owned by GE and starts really competing with Philips and Osram for SSL ultimate dominance.

The most typical report thus far (July 26th) and most uplifting for the overall CS space was from Ralph Quinsey, president/CEO of TriQuint. Ralph said that, as of the end of June, "TriQuint delivered another solid growth quarter, gained share in handsets and exceeded expectations. This was our fifth consecutive quarter of revenue and gross margin growth and our largest operating income quarter since March of 2001. Our net earnings more than doubled this quarter as compared to the previous quarter. We set new revenue records for both our innovative transmit modules and our power amplifier modules. Bookings for transmit modules were up 48% over the first quarter as a result of extending this leadership form factor into the CDMA and 3G markets. I am also pleased we were awarded additional contract R&D dollars from the Office of Naval Research (ONR) to invest in leadership technology for future military applications. We remain on track to our long term goals of innovation, profitable growth and share gains in our targeted markets and are seeing the results of our execution evidenced by the increase in our earnings outlook for the year.”

The most exciting report from the SSL side was from Color Kinetics (CK) in early June when they announced that they were one of five companies selected by the USA's Department of Energy (DoE) to receive funding to help in the effort to replace incandescent lamps with our industry's advanced LED technology. DoE is spreading $7 million around CK, GE, Eastman Kodak, Osram Sylvania and SRI International for LED-based solid state lighting (SSL). CK conducts their quarterly earnings conference call Aug. 3rd.

And finally, there's one company that leaves everyone in the summer dust, Spire. Why? Not so much corporate performance, but personal performance by its founder, president/CEO Roger Little who for the 9th time, has qualified for the upcoming grueling Iron Man triathlon competition (ref: news release). Roger's exactly my age: 67 and shames us all. Congrats, Roger! Don't keel in Hawaii in October!!! I could probably survive the swim portion, but that'd be all. In closing, if you want to get the straight scoop direct from any of the above companies, tune in to the live or replays of their calls which are generally accessible easily over each company's website. And if you're an investor, keep you fingers crossed that things will again pick up soon. It takes an iron will to thrive these days.

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