Wolfspeed Inc (WOLF) 2002 Q4 法說會逐字稿

Good afternoon. My name is Matthew and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cree fourth-quarter year-end fiscal 2002 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question herein this time simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. Ms. [Barkey] you may begin your conference.

Our Chief Financial Officer will report on our fourth quarter and fiscal year 2002 results. Today's presentations include forward-looking statements about our business outlook and management may make other forward-looking statements during the call. These may includes comments concerning strength and revenues, gross margins and earnings, plans for new products and other foreword-looking statements indicated by the words like "anticipate", "expect" or "estimate". Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the FVC filings noted in the release mention important factors that could cause actual results to differ materially. We note also that this call is being recorded on behalf of the company, but the presentation and the recordings of this call are copy righted property of the company and that no other recording or reproduction is permitted unless authorized by the company in writing,, consistent with our pervious conference calls we are requesting that only analysts ask questions during the q-and-a session. Invertors may continue to contact me directly at 919-313-5397 or via e-mail. We are also web casting our conference call to allow more flexibility for our conference call attendees. This webcast will be available through August 6. Now I would like to turn the call over to Cindy.

Thank you France. For our fiscal fourth quarter revenue increased to $37,800,000 or 13 percent over the prior sequential quarter, up from our guided range of 8-11 percent. LED revenues for the quarter improved 18 percent over our March quarter results as we believe our rebalanced customer base is now positioned for longer term growth. Revenues for the 12 months ended June 30 2002 was $155,443,000. The majority in the increase in LED sales from the fourth quarter was generated by new design wins particularly in the handset market. Most major manufacturers now offer blue or white back-light designs many of which include Cree products. These new design wins have improved our overall customer diversification. For the 12 months ending June 30, 2002 [Ultran], [Bectran], [Simetolol] and the Department of Defense were all greater than 10 percent of revenues, at 18 percent, 16 percent, 14 percent, and 12 percent of sales respectively. During the fourth quarter two new accounts were included in our list of our four largest customers. We believe that the new handset design wins have positioned our LED business for growth as today's mostly blue designs are targeted to migrate to white/black lighting in 2003 for new full-color screen applications. Today we announced net income before non-operating adjustments which I will later discuss of $975,000 or 1 cent per share for the most recent 3-month period, which was in line with June 10 guidance for earnings. For the 12 months ending June 30, 2002 that income before intangible amortization and non-operating adjustments was $15,796,000 or 21 cents per share. As mentioned previously, LED revenues for the fourth quarter increased 18 percent sequentially. As our units volume rose 37 percent and marked the highest quarterly volume sold in our history. The majority of this increase was attributable to the strong demand from the handset market. For the fourth quarter, LED average sales prices declined 14 percent sequentially. For fiscal year 2002 averag e sales prices had declined 24 percent compared to the average achieved in fiscal 2001. We plan for average sales price reductions of 25% per year. During the quarter our MegaBright chip showed the strongest demand and made up 51 percent of our LED revenue. We intentionally repositioned the price of this product over the past two quarters as our as our [mid bright] is designed and as a result gained market share. Our high brightness and also bright products made up 37 percent of LED revenue in the June quarter while our standard brightness products [indiscernible] 11 percent of LED revenue. During the fourth quarter, our XBright chip made up only 1 percent of LED revenue compared to 5 percent in the March quarter. We continue to work with our customers and have made modifications to our chip design as a result of their feedback as the packaging [yield] using our new chip technology was not meeting their told targets. As a result of these changes, we agreed to allow our customers to return approximately $500,000 of products and we wrote down through cost of sales $690,000 of inventory. We target to wrap production of these improved devices in the first half of fiscal 2003. Customer demands of the products is very strong and we believe the XBright chip is the brightest nitride LED available in the market place.

For fiscal 2003, we will combine our reporting of [high brightness] and UltraBright devices with our MegaBright product line. Therefore LED results will be reported in three product categories, standard brightness, mid brightness, and XBright chips. The midnight brightness devices will include our high brightness, UltraBright and MegaBright devices and will be targeted as our high volume competitive product in the market place. For fiscal 2002, we saw significant shift in end user applications for our LED products. Due to the recessionary environment and recently a strong trend in blue LEDs being utilized more heavily enhance that. For the year, we estimate that 34 percent of our chips were used in handset applications, 24 percent in automotive lighting, 14 percent in display and traffic signal signage and the remaining 28 percent in general indicator lights, entertainment devices such as Sony Playstation II and gaming machines, white lighting and other applications. For fiscal 2003, we believe the handset market will continue to be a strong outlook for our chips and may be more than 40 percent of our LED revenue. Revenues from Cree microwave Sunnyvale was $3.85 million during the fourth quarter which increased 10 percent sequentially. For the quarter, LDMOS-7 products made up 63 percent of revenue while Bipolar Devices were 35 percent of sales. Volume remained flat while average sales prices increased to 11 percent due to mix. During the June quarter we were focused on the qualification of our new LDMOS-8 devices. We were able to meet performance specifications on some devices with our primary customer but did not complete full product qualification in time to ship LDMOS-8 products during the quarter. We have made significant improvements to our products and are continuing to work with Spectrian to deliver devices that meet all applicable specifications. If we are unable to complete the qualification of LDMOS-8 devices during the September quarter, our revenue from this year will largely decline in this quarter and in future quarters. We repositioned this operating unit in the March quarter to operate at a break even level with $5 million revenue run rate. The successful qualification of LDMOS-8 is critical to meet this run rate in the second quarter.

Silicon carbide material sales were stable sequentially and silicon carbide wafer volume decreased 29 percent while the average sales price increased 26 percent due to shift in product mix and fewer sales to author it. In addition sales of [indiscernible] continue an upward trend but are still not significant to overall revenue. Contract revenue rose 16 percent sequentially due to work that began on two new significant awards that will add nearly $40 million to contract revenue over the next three years. Gross margin for the June quarter was reported at 42 percent, however, cost of sales included a $690,000 write down for packaged XBright devices in inventory and a $257,000 reduction in gross profit due to the XBright product returns from our customers. We also took an additional $110,000 in net write-downs to inventory. Without these charges, gross margin from operations would have been $44 percent.

For the fourth quarter, average LED cost decreased 21 percent including the write-downs discussed above. Due to improved yields and significantly higher throughput as our chip volume increased 37 percent over the third quarter. Due to the fixed nature of factory costs, higher volume significantly reduces our average cost per LED. Therefore, the 21 percent reduction in LED cost more than offset the 14 percent decline in average sales prices for the quarter resulting in improved LED profitability. For the three months ending June 2002, gross margin at [indiscernible] was 33 percent due to the lower utilization of the factory as the LED [indiscernible] parts were being qualified. Contract gross margin was 27 percent in the June quarter prepared to 34 percent in March as prior period rate adjustments were recorded in third quarter. We target contract margin to return to a historical range at the lower-to-mid- twenty to the percentage of contract revenue over the next few quarters. Operating expenses excluding intangible assets amortization and non-operating charges as a percentage of sales were lower at 41 percent for the fourth quarter compared to 48 percent reported for the March quarter. These expenses are comprised of research and development and SG&A costs. During the June quarter spending for research and development decreased $1.5 million or 16 percent sequentially as resources were rotated from R&D to production due to the LED volume increase and release of the megaBright and XBright products to production. In addition, in the March quarter results included $700,000 of R&D scrap cost associated with LV [indiscernible] phase development. SG&A cost increased 19 percent sequentially due primarily to the timing of legal expenses associated with patent litigation. During the fourth quarter of fiscal 2002, interest income increased 20 percent sequentially as more of our cash was invested in longer-term securities to improve the interest rate received in our investments. During our fiscal fourth quarter , we took non-operating charges related to our investments in public and privately held securities. We have reviewed our investments made in publicly traded equity securities for other than temporary declines in market values due to significant sustained decline in the overall stock market. While [indiscernible] balance sheet already we requested these investors at market price the company re-classified unrealized losses determined by the market value these securities as of June 28, 2002 from comprehensive items to non-operating charges. In addition, as part of our regular process we also reviewed our investments in privately held securities and determined that the fair value some of these investors have been impaired based on market conditions and the difficulties from the companies had experienced in raising additional capital. The combined write-down of investments was recorded at $30.1 million pre-tax. As of June 30, 2002 our net remaining investment in public and privately held securities stands at $22 million. We also recorded a $71,000 [indiscernible] for the disposal of assets that were written off in December 2001. As of June 30, 2002 all of the assets have been sold or destroyed. For the 12 month ending June 2002, cash flow from operations was $39.1 million. Year to date cash flow would have been $70 million without a $31.3 million increase in the per tax assets generated by one-time charges. We expect to reduce the per tax asset over the next several periods. Cash from operations was also impacted by inventory increases of $2.8 million during the year. For the fiscal year 2002 capital spending totaled $41.6 million. At the end of fiscal 2002, our balance sheet remains at an enviable position. Our cash and investments were $170 million, down from $174 million in March, as we repurchased $6.6 million of company stock in the fourth quarter. Cash generated from operations from the quarter was offset by additional purchases of equipment. Accounts receivable has decreased by $4 million during the quarter and is now even with June 2001 balances. The improvement in our accounts receivable balance has resulted in day sales outstanding decreasing 16 days to 69 days from 85 days in March. Inventory days on hand was 74 days which is below our industry average of 78 days. Inventory increased by $3.2 million during the fourth quarter due to a ramp of product expected to be shipped in early July and higher balances being maintained at off-site locations to better serve our customers. During the fourth quarter of fiscal 2002, we repurchased 559,000 shares of our common stock for approximately $6.6 million on an average price of $11.99 per share. Since January 2001, we have now repurchased 3,339,000 shares of our company's stock. We will continue to evaluate additional share repurchases based on market conditions. We are very optimistic about the outlook for nitride LEDs. We believe that our products are priced appropriately to move significant volume. At this time, we are ramping capacity from our factory and believe that our first quarter of fiscal 2003 will deliver record volumes for LED shipments. Our customers have secured many new hands at designs with major name brand manufacturers and our automotive business is improving with recent new design wins as well. We also have seen an increase in demand for LED [fine edge] applications including the opening of the new Seattle Seahawk Stadium next month which will feature the world's first high definition LED display board and it will incorporate Cree chips. At this time we have visibility for LED devices for the December 2002 quarter with some orders from [indiscernible] Sumitomo extending to fiscal 2003.

As at June 30th, 2002, we had our largest sales backlog ever year-end at $138 million, which includes over $52 million in government contract backlog assuming our current contracts are fully funded. As we look to the new fiscal year, we target first quarter leverage to grow by 20 percent over our fourth quarter results. We believe that much of this growth will come from LED products. In addition, as we have not yet completed our qualification of LDMOS-8 products, this guidance assumes less than $1 million revenue contribution from Cree Microwave. We are targeting growth margins to fall on the similar range with a low 40s in our first quarter. While [indiscernible] factory will increase to record levels in order to meet our revenue goals. Our gross margins targeted since low utilization of the factory in Sunnyvale, Cree Microwave. We continue to evaluate our cost structure in the near term for that division. For fiscal 2003, we intend to continue our focus in R&D including further spending of high brightness LEDs, blue lasers, solid state illumination products, microwave devices, and point silicon, silicon carbide, and gallium nitride and further Schottky Diode development.

We target Q1 spending to be similar levels from Q4. We believe SG&A spending will be relatively flat with June results. Therefore, operating expenses for the first quarter are targeted at under 40 percent of revenue. Our tax provision is estimated at 26 percent for fiscal year 2003 and arranged per share for the first quarter targeted at 4 cents with an estimated 74.7 million fully diluted shares outstanding. For second quarter fiscal 2003, we target sequential revenue growth over the first quarter. Capital expenditures for the fiscal year 2003 are targeted to increase to a range of $50 to $60 million.

Cree remains focussed on a plan. In fiscal 2002, gross R&D spending before customer and government funding and including the cost of government contracts, we have had a rate of 33 percent of revenue or $51.2 million, which was the highest spending on R&D in our history. Our R&D efforts from fiscal year 2002 have allowed us to introduce several new products that should drive growth over the next several quarters. We are particularly pleased with our customer demand for LEDs in general and specifically our new hands at normal application. This research since in demand, ramp more rapidly than we anticipated one quarter ago. Our team is dedicated and prepared to ship record levels of products from our [indiscernible] facility this quarter. Our focus will be to continue innovative yield improvements in our factory and to ramp up capacity to meet our customer demands. We must also fully qualify LDMOS-8 products so that our factory utilization at Sunnyvale facility improve and that we are able to offer state of the art products at Cree microwave's [indiscernible] present and future customers.

Our customer demand and momentum is greater than any point over the past 18 months and our backlog is at a record year-end. Our goal continues to be to the [indiscernible] exceptional products that will drive strong profits while still investing in our R&D for our future. We believe we will be able to do that while generating free positive cash flow. Thank you and I would now like to turn the discussion over to Chuck.

Thank you Cynthia. We have just completed a good fourth quarter and positioned the company for a successful start in the new fiscal year. We do over 37.8 million in revenue and 1 million in operating earnings or one cent per share which is stronger than expected demand for LED products. We recorded a non-operating charge due to the sustained decline in the stock market for public and private company investments, which has opened in a GAAP loss of $22.5 million for the quarter. Gross margins were solid at 42 percent and cash from operations was 13.7 million for the fourth quarter. We recently signed several new government contracts providing up to $40 million in R&D funding over the next several years to develop materials and process technology and support our efforts to commercialize future microwave and power products. When combined with our recent contract for [indiscernible] Nitres we have announced more than 54 million in new government contracts over the last six months. Crees internal R&D expenses declined 16 percent in the fourth quarter to 7.8 million as we started to redirect certain resources back in the manufacturing support to increase in LED demand. The R&D investment we have made in the last year continues to produce strong results with improved deals in performance for LED products. Higher power laser diodes, new power devices, improved silicon carbide microwave transistors and our first prototype gallium nitride microwave products. As we move into physical 2003, we are planning to fund R&D as a similar dollar amount through out the physical year to enable us to continue to create new technologies in products to fill our growth in 2003 and beyond. While LED demand continues to grow, we still have number of challenges, which we need to manage to keep the business on track to achieve our target. In LED business, we need to satisfy our customer's increasing demand, ramp up our factory, continue to make progress and yield improvement and stage focus on developing key new pro duct features. We have made progress with Cree microwave in the last quarter but we still work to do get our LDMOS-8 products qualified. As demand increases on the LED front it is critical that we continue to respond and conquer these challenges in order to sustain the momentum that we have started the build over the last quarter. As we look towards Q1 in the new fiscal year our business outlook is the strongest it has been in more than a year. We are targeting overall Cree revenue to increase approximately 20 percent in Q1 from Q4 to $45 million for the quarter. Earnings from operations are targeted to more than triple from the previous quarter that is 4 cents per share. These targets take into consideration enormous growth in LED sales and give us a window of opportunity to complete our LDMOS-8 developments without the necessity of significant revenues from that division. We are dedicated in the short-term to complete the necessary qualifications for Spectrian and other customers. But our financial targets do not rely on any meaningful contribution in the first quarter from these activities. We currently have orders for more than 80 percent of our targeted revenue in Q1 with customer forecast that exceed our current capacity and give us some visibility in the Q2. Our backlog has increased significantly with the recent government contract bookings, new Osram agreement and other LED orders to more than $138 million. This backlog includes only the next four weeks of demand from our largest customer and we work with on a rolling forecast basis with only the first four weeks of their forecast being considered from orders. Although we are not giving specific guidance for Q2 at this time, our current outlook is for revenue in Q2 to be sequentially higher than Q1. The strength in our demand is coming primarily from LEDs where business has rapidly evolved over the last quarter from relatively low order disability and excess capacity to a scenario where lead times are increasing as we work to increase capaci ty and hire additional employees. On the LED front, demand for our products is the strongest it has been in the last 18 months. We set a chip volume shipping record in Q4 and we should surpass that milestone by a wide margin in Q1. As we have introduced new products of lower prices, we believe we have now only grown our market share, but increase demand by reducing the overall cost of using blue, green, and white LEDs which is expanded their use in a number of applications. LED sales increased 18 percent sequentially in Q4 and are targeted to increase approximately 50 percent in Q1. This tremendous increase in demand is being driven both by the two new large customers that we had targeted and our new demand from our traditional large customers. Although these two new customers were not 10 percent customers for the entire fiscal year at a projected run rate, we expect they would be for fiscal 2003. Osram remained a 10 percent customer for fiscal year 2002 even though we worked with them over the last six months to push a significant portion of their demand in the fiscal 2003. We recently signed a new agreement with Osram through September 2003 with the firm scheduled for orders we push out of fiscal 2002 in additional new demand. We are targeting that shipments for the 12 months ending September 2003 will be 30 percent higher than the 12 months ending September 2002. Based on the new agreement, we target Osram to remain a greater than a 10 percent customer in fiscal 2003. The current demand increase has been driven primarily by our MegaBright family products. The major application driving this demand is mobile phones. We are seeing increase in blue and white as new colors for both keypad and display backlighting from almost all the cell phone manufactures. While we cannot disclose specific models, we believe that our chips been used to some degree by most of the major manufactures. Due to the broad demand for this technology many of the manufactures are now using multiple vendors for LED's which ma y not have been the case in the past. With the increase of color screens in the new generation of phones the white LED is becoming an important functional element [back] like the color LCD screen. Our customers are using both blue LEDs with a fast way to create white and red, green, and blue combinations LED to make white in the new cell phone design. In addition of cell phones we are seeing an overall increase in demand for blue and green LED's in a number traditional applications including video screen, entertainment and automotives. We recently [indiscernible] that LEDs will be used as a white backlight in the dashboard of a new 2003 model from a major Asian automaker. We continue to work closer with our customers on XBright and we have made a number of refinements to the chip design to meet their specific packaging needs. [indiscernible] customers underestimated how long we take to develop the manufacturing processes to utilize this revolutionary new design. Despite the extra time and effort is required we believe our customers remain committed to this chip for the new generation high brightness products and we expect the first significant production orders in Q1 with volume [indiscernible] targeted for Q2. We are focused on getting [XB] design in the next generation products while responding to the evolving needs of the market with smaller chips and improved performance. We continue to make progress on lasers in Q4 and we sampled our 3 mega watt devices to additional customers. As we have continued to work with our partners to define the required performance of these devices it is becoming clear that the initial production applications are now targeted to be read write instead of read only. Our current 3 mega watt device is designed primarily to serve the read application and our customers are now requesting a 30 mega watt device for the read write application. As a result of these new requirements we have shifted our R&D focus to developing a 30 mega watt laser diode. Although we have achieved this power level on R&D basis with limited lifetimes, we have lot of work head of us to develop our production grade 30 mega watt device. We are currently targeting at engineering samples available for our key customers by the end of the calendar year. The chains we have made at Cree Microwave over the last quarter are beginning to yield positive results. We have recently delivered 1900 megahertz transistor samples of our new LDMOS-8 devices for Spectrian which we believe are competitive in their amplifier with their current Motorola devices. We are in the process of finishing engineering on the 2100 megahertz parts and we except to deliver these devices within the next several weeks for sign off by the customer. LDMOS-8 qualification in reliability testing is underway and it is targeted be completed in early September. Although the development and qualification of these devices has taken longer than we originally planned, we are making important strides with this new technology which should enable us to better serve both Spectrian and our other target customers. Assuming that there are no delays or setbacks in our current qualification schedule we try to beginning to [indiscernible] production in this new technology in September. These delays may reduce the revenue of Cree Microwave to less than $1 million this quarter and we are putting in place the appropriate cost containment measures in the short term as we remain focused and committed to getting this exciting new technology into the market place. In addition to meeting Spectrian's requirements we are making progress with several major power amplifier manufactures, initial volumes may be small, our prospects are good for adding a couple of new customers before the end of the calendar year, an additional LDMOS-8 product we have received strong interest in Silicon carbide and gallium nitrate products we demonstrated at MTT trade show from a number of customers. Only devices will not have a large impact on our shipment in the next few quarters. Our c ustomers have indicated that they believe that as we commercialize these products their technical capabilities can have enabling impact on the infrastructure market. We are continuing on our R&D investment for both Silicon and white band [indiscernible] products and we believe we are well positioned to grow this business as our new technology comes online and the wireless infrastructure market begins to recover. In the power device area we made steady progress at the last quarter. And now officially we have been design into a customer power supply product. Although this is a small volume design, it is a tremendous milestone for both Cree and Silicon Carbide Power Devices. We are targeting to ship tailored production quantities in Q1 with a first production shipment scheduled for the end of the calendar year. We are working on a number of other designs and we hope to be able to report additional wins over the next several months. We continue to push our development activity to expand our silicon carbide Schottky diode product line, and we are in the process of finishing internal qualification on a new 20 amp device and expect to be sampling customers in August. We are also working on our first 1200 volt devices for motor control applications, and we should have customer samples available later this quarter. Although last quarter we had started to see the benefits of the investments we made over the last year, we developed an array of new products that are changing the competitive landscape in our favor, and these products are gaining acceptance in the market place. We have challenges and we must remain diligent with our R&D efforts to keep our new product [indiscernible] LEDs and expand the results in our microwave, power, and laser businesses. We delivered good operating results in Q4 with a 13 percent increase in revenue and earnings that were inline with our guidance. We continued to maintain a strong balance sheet with more than 170 million in cash investments and no debt. Our backlog is the stron gest it has been in more than a year. We are targeting 20 percent revenue growth in Q1 of which more than 80 percent is already booked or shipped and we are starting to get visibility in the Q2. Although we recognize that the last six months have been a challenging time for investors, we have staged focused on our plan and the fundamentals, we are much more optimistic about the future. We are looking forward to continuing to tackle the challenges, building our business, and creating shareholder value. We will now take analyst questions.

At this time I would like to remind everyone in order to ask questions please press star then the number 1 on your telephone keypad or pause for just a moment to compile the Q&A roster. Your first question comes from [Delo].

Hi it's Earl Lem for Dale. Congratulations on the nice quarter everyone -- thank you. Couple of quick questions. In terms of the lasers, they shipped the higher-powered 30 milliwatt? I am assuming because it is an end application shipped, is pretty much everyone in the same boat now trying to get to the 30 milliwatt?

Yeah, I think its fair to say that we are all chasing a kind of a new target. In the end there really will be read applications and read-write. I think the difference is that, the initial indications we had was that the read would come first and now it looks like the first prototype systems are actually going to be read-write. So I would think all of the suppliers are going chasing the new target and I would say though that the [Chea] for one has demonstrated this result in the past, so they probably are still a little bit ahead of us in this area.

Right, but you are expecting to have [indiscernible] samples by the end of the December quarter, right?

That's correct.

Okay So, we are not looking at the significant amount of delay so to speak in terms of you know 10x power level increase in the diode.

We demonstrated in the past, it's a matter of working through the various technical issues to make the lifetimes where they need to be.

Okay, so are the [indiscernible] samples that are scheduled to ship out will they be initially lower than the expected lifetime for a commercial product or where do you expect those the kind of being line with what the commercial markets looking for final reliability?

We are definitely shooting ahead good lifetimes on those, but its really too early to tell all because that's really what the next six months are all about.

Okay, then if I shift over to the -- on the automotive application, you mentioned that there is a potential new application for [agent] manufacture. Is this something that is new opportunity in terms of penetrating into that market versus where you been on the European side?

Yes, this is a new packaging customer force that is winning us business at an Asian automaker, this is not a design we had in the past.

Okay, and then if you look at where your guiding for the first quarter on LEDs, you mentioned revenues up 50 percent sequentially. Where do you expect volumes to be and what do you add in terms of your current capacity on terms of utilization and how much new equipment are you expecting to install in the first quarter?

Let me see if I can get all those, so we are targeting 50 percent given our current order backlog and the forecast we had, I actually indicated that the combination of [indiscernible] exceed our current capacity so worthfully utilize today we are expanding capacity not only from an equipment standpoint, but we are trying to implement some pretty aggressive yield improvement as well as for hiring additional employees. So we are in production-expansion mode and in terms of what our volume shipments going to go up, I think the best way to say it is you know fully expect to set a new shipment record this quarter. I think by towards earlier were by a wide margin. So you can expect significant volume increase to achieve that 50 percent revenue increase.

Okay and if you had to take a guess at the word you think your overall market shares now relative to your competition given the strong order patterns that you are seen going into the Q1. Could you give us some idea as to where do you think you ended at least the June quarter?

Yeah, I will tell you what Earl that is a tough one because the business had changed so quickly on us. I am not sure I can give you an accurate estimate other than we are pretty confident our market shares is increasing pretty quickly here, but in terms of how that shapes out and there is overall demand in the market place so I think it is increasing, but I can't give an accurate number, its just changing too quickly right now.

Okay, and it sounds like -- could you give us some idea as we look into Q1 the general indicator lighting segment is that expected also increase sequentially or what you see in that particular segment and this is more of a general purpose type of lighting?

Yes, I think obviously cell phones are driving the majority of the demand, but actually all of our traditional applications whether be it video screens, signals, automotive or even the general indicator lighting, we are seeing increased demand actually in all those areas, just not to the degree we are seeing in the cellphone type of business.

Okay, then as we look into the ASP, certainly your plan is for 25 percent year over year decline, are you still expecting that in the first quarter and further I get the second half for the calendar year?

You know, I think it is a -- we actually -- that was [indiscernible] reports for last fiscal I think it came to 24 versus our original goal of our 25, so I am not sure we are going to be much more accurate than that in the future. In terms of going forward, I think you know obviously if demand increases ASP tends to stabilize, at the same time we were pretty committed to taking our cost reductions and driving those into the market place, that is really how we think we are driving some of those growths in the market. You know, we have got to lower the prize to increase the opportunity to sell these LEDs in a new application, so we will continue to move that and you know I think it will be aligned with normal trends from the past, but we are going to keep going down that road and also provides the [indiscernible] entry your competitors.

And further - and also sounds like finally from my last question, you have two new customers that you are expecting to be potentially 10 percent customers in fiscal '03, obviously it looks like you are getting Q1 customers from these two new customers given the amount the volume that they are going to buy. Would you expect that they would be above 10 percent per quarter in the first quarter?

Yes.

Great. Thank you and congratulations again.

Thank you [indiscernible].

Your next question comes from John Bell.

Thank you, hi [Cindy], hi [Chuck].

Hi John.

Hi.

Okay, and a couple of questions. There was some recent press releases on the [indiscernible] and their agreement with Osram. I was wondering if you could comment on the impact in the current business with Osram and then follow that up with another reason announcing by [indiscernible] on some new LED epistructures. I was wondering if this would be a different type of technology then it is out today and how it effect the competitive landscape? Thank you

All right, let me check the first one John. Osram Nichia are cross licensed what it was, so they had actually had some litigation between the two companies and they recently announced that they had settled their litigation agreed on a cross license for the technology. You know, overall, I think it is a fairly positive trend for Cree and the market in general. I think what it acknowledges is that you know, contrary too much of the hype over the last years and Nichia has dozen of them in the past in the market place and there is actually lots of other valid intellectual properties, so I think would likely do is that it should enable Osram to be more successful in growing their business and we think that is good for us. In terms of materially what is that mean that you know, you can see from our guidance and the forecast we have with Osram, we are working at September 2002 to 2003 to be up 30 percent over the [indiscernible] period this year, so we see that is like you know relatively speaking, we think it is a good time.

In terms of the announcement from Coven, you know we were familiar with that release and they also released an information in several scientific papers. To put in perspective one, we take our competitors our potential competitors seriously, but I think we need to remember that this is an R&D results, but if you look at what they have got, is effectively about a Toyoda Gosei grade blue LED and they talked about some interesting structures in terms of you know putting various defects in the structure, I think [indiscernible] I think this is what they call them. That information is actually been around in the literature. There has been various people talking about it for a few years now. I don't know how much of it has been invented in Coven or elsewhere. I think the important point to note though is they make a claim that they have so much more efficiently to make LEDs and I think that given with results they have put out, they are given the brightness of forward voltage. They are not even in the same league, as what we have demonstrated either a production or an R&D results or [indiscernible]. It is an interesting result, we are going to keep an eye on it, but you know I think they are still in the early stages.

Okay, certainly back to chief question does not mean that they are offering now that they have the product licensing of those patterns, are you implying that they will continue to use the CREE dye, but now they are able to use [indiscernible] patterns on some of the packaging with that?

I think, it gives some advantage on packing I think it also gives us an ability to use CREE dye and really has no issues with any other potential patterns. So I think they are very able to avoid any litigation that were currently involved [indiscernible].

Yes, is this is not a supply agreement then?

Not that I am aware of

I will just end it up with one problem question that I missed that in the beginning, but what were the LED revenues of the quarter?

We did not give specific numbers for LED revenue.

Oh, Okay thank you.

Thank you.

Your next question comes from [Audrey Snell]

So, a few brief questions. You gave us at least first look at Q2 revenue it being sequentially higher than Q1, do you think that earnings will also be sequentially higher than Q1?

If the revenue continues to grow up, that would be our expectation, but again we -- do not have any firm guides on that at this point. The visibility is getting better. Just not there yet though.

Okay, and would you also expect gross margins to continue to improve due to your yield improvement programs and your volumes?

Clearly, as we put more LED volume in this factory -- combined with the other improvements. We would expect to see only gross margin improved going forward.

Can you size that gross margin or will it resemble past performance by the company?

You know, I am not sure I can give you projection of what we are going to back at the day's, I think we at least have gross margins in about 58 percent I think was our best quarter or in mid high 50s, that's definitely the target we are working towards, but at the same time we are in a different market environment today so I think one of the things that to recognize part of our objective is that's we drive cost down is to really offer this cost savings in to the market place as we are trying to drive further part of penetration in this technology and the end goals [indiscernible] global world market opportunity. So I think there will be a different balance that was in the past, but you know at the same time we do expect a gross margin to grow up from more they are today.

Okay, are you happy with the changes that have been made in [indiscernible] in terms of packaging and price performance and yields such that we should start factored in to some modeling for fiscal '03?

I definitely [indiscernible] will be a factor and '03 I just don't think it will be a significant one, in Q1 it will be a fairly small piece I really think that will start the factor ending Q2 and then in the second half it will ramp up, the interest is so strong as just of matter of, frankly, we have got a lot of interest still following through [indiscernible] that's naturally driving lot of these demands I think to some extent people are just trying to get those ramp ups done as much as [indiscernible]

But, as soon as [indiscernible] shift in volume it should improve the margin wouldn't it [indiscernible]?

[indiscernible] will be positioned fairly aggressively as well. I think you know it can have a positive effect in the margin, but again [indiscernible] function of how we place it in the market place and again the heart of the objective is to grow the business. We want to use our ability to reduce cost really to try to drive market growth and so there will be a balance whereas we go forward.

Okay, I just wanted to clarify something on CREE microwave you said that essentially finished with the qualification program on 19 MHz [indiscernible]

There are two pieces to this, we have got to deliver parts that may all - necessary specifications these are how does it perform in a circuit things like that. In parallel to that [indiscernible] we are working under qualification, these are the basic qualification reliability testing that [indiscernible] device that meets the technical aspect. You then have to perform the qualification tests that are pretty industry standard that we have to go through that process. We are right on the 1900 MHz we believe we have competitive products in the spectrum application with the Motorola devices. We think we are several weeks away of the 2100 MHz products and in parallel to those two things we are running the qualifications, so we need all three of those things to come together this quarter.

I see, okay and the final question is this new packager that helped to win this automotive application for the dashboard can you give us some sense of how that segment might develop over the next 12 months?

In terms of just in automotives or in terms with that packager?

Not only automotives, but taking more and more applications within automotives.

Yeah, I think that you know we have a number of packagers that we are working with today that has various designs for automotives whether they be dashboard or other parts of the vehicle and we have numerous different packagers working on that with various companies. I think over the next -- it will probably more like the next 12 to 18 months we will start to see additional applications. It does not mean we won't have design wins between now and then, but the [indiscernible] design cycles relatively slow. So over bit over the next year or so I think we would continue to see new applications for all of these pop-up in automotives and work through [indiscernible] obviously keep people informed. So we see it as a long-term growth opportunity.

Are you sampling in Detroit?

We still sample our chips to packagers who are working in Detroit.

Okay, thank you.

Your next question comes from [Pierre McCardino].

A good quarter. Chuck could you talk about the brightness requirements for LEDs for handsets you know specifically, you think there is going to be a demand for the extra bright in the handsets, and just explain that a little bit more.

Yeah, so right now I would -- it is a very hard question to answer because it really depends on how the handset manufacturer wants to build their phone. Some manufactures go for the lowest cost LED and use an extra numbers of them in their applications. Other handset manufacturers want a very few number LEDs but at the highest brightness. We are working on or have designs for cell phones that use I think everyone of our various grades of LED, so XBrights, Megabrights, UltraBrights, standard brightness, I think all those have some application in the handset market place. What we are seeing today is the one that tends to be driving most of the demand though is the MegaBright class device.

I mean currently on an average there is a 10 LEDs per phone, I mean [indiscernible] they go to [extrabright]. They are not using less number of LEDs?

Not necessarily. You know we the example might be is that some might be doing a blue keypad and for that keypad they need -- you know they need six LEDs no matter how many they have to, they want to spread the light out. So they will take the best cost performance. At the same time someone might be building a display, you know a white backlight for a color LCD screen and in that case depending on what kind of space they have available they might want either to spread the LEDs out. They may use less bright ones and they want to use just a couple of them and have the brightest ones possible. So really just [indiscernible] by exactly how they are going about doing the design.

Okay, and finally how is the development of the 4 inch silicon carbide when do you think you know ramping the use of the area [indiscernible]?

Today we are still doing all of our productions and LEDs on to and we have got a power devices on a 3 inch platform. Most our effort is actually at ramping up 3 inch although we will start the transition that some of that development activity in a match just to [indiscernible] feature to 4, but really the primary goal is 3 right now. We have demonstrated 4, but you know really the demand is first thing to get the 3 inch online and then we will take that next step.

And that would allow you to decrease cost significantly I would imagine?

Yes and what we are looking at the 3 inches step to do that [indiscernible] next step first and then 4 inch will beyond that.

When do you think you are going to have the 3 inch?

We already have in our minds our power device production. We are in the process of working and improving the material quality that's part of our government funding so that we can support the microwave products and at some point in the not-too-distant future we will start to transition some of our LED production on the 3 inch [board], but [indiscernible] specific time limit on that yet.

Okay, thank you very much.

[indiscernible]

You next question comes from Hans Moserspen.

Hi Chuck in [indiscernible] [indiscernible]. I terms of [indiscernible] and contract how should we be modeling this? Your guys are giving guidance for you know less than $1 million next quarter that would suggest at least by my calculations that is fairly heavy ramp into the end of fiscal '03.

Yeah. So I think your are familiar that the contract calls for about $5 million per quarter. This quarter, next quarter, the following quarter and then I believe our fiscal Q4 it is a lower amount. I want to say it is about the $1 million to 2 million dollar range. So right now with a delay we were obviously not be able to fulfill that at least for the next couple of months, once it come down line though you know we would expect a fairly rapid ramp up and it is really a matter of how quickly we get the finish getting [indiscernible] signed off [indiscernible] getting the qualification done. You know that comes online I think you could see a fairly significant ramp in Q2 but you know we got to get the qualification done first and how quickly we do that really affects the timing.

Okay, so do you think the existing contract right now is in jeopardy, you know how confident are you that you are not going to have to you know renegotiate terms there, and I am sorry, in addition, you had mentioned 1 to 2 million into fiscal 04?

unidentified: No, no, I believe that our fiscal Q4 in fiscal 03, so that would be of the June quarter next year, I believe the contract calls for 1 to 2 million, but let me just kind of step back. The contract numbers do not need to be renegotiated. I do not expect any further renegotiation on this at all. Its just a matter of once we get the qualification finished and we meet the specifications required then the contract kicks in and we start shipping to those numbers. Its really a matter at this point of us getting you know our development finished getting the product online and then we will turnout, but I do not see any -- you know, there really is no further discussion about the contract as matter of us getting the products online and then make it happen.

Okay, and in terms of the Osram contract, is it possible to quantify how large that contract is?

That thing I can tell you that what I gave you earlier which is September 2002 to 2003 it will be 30 percent higher than the previous 12 months, and in both cases in both fiscal years we expect them to be a greater than 10 percent customer beyond that I do not feel comfortable giving out those details.

Okay that was 30 percent higher in terms of shipments or revenues.

Yes.

Shipments?

Yes.

and revenues?

And revenues. Okay and then when should we expect meaningful revenue from the Laser diodes?

You know we have actually generated small amount of revenue for the past couple of quarters, you know selling really pilot production quantities I think even the shift to 30 mega watt you know it is going to be relatively small volume and I would not expect any ramp up, you know if you look at what the projection, there is an overall ramp up in significant demands for the players until sometime in our fiscal Q4. Our fiscal '04, I should say.

Okay, thanks.

Sure.

Your next question comes from [Ram Dusargard]

Hi Chuk.

unidentified: Hi, Rams.

Hi, I am very curious because I also follow this wireless sector of the market and I want to congratulate you on your strong LED shipments into the wireless handset markets. Do you have any idea how much of this LED growth that you are seeing there is going into the large screen 3G phones and what happens you know what are your contingency plans if these 3G phones do not take off, because all the wireless carriers are bearing in the market place like they going broke right now?

Right.

[indiscernible] your thoughts on that?

Yeah, when we look at 3G, we you know our projection is that the 3G is pretty far out there like everyone else is. I think what you are seeing though if you go out today, there is no 3G infrastructure in place but there is a whole lot of full color cell phones hitting the market place, because frankly you do not need 3G to get the benefits. What you need is you know a GSM system that is running GPRFs gives great data rate today. I know that you know if you just use the CDMA technology, I think that the spread provides you know that is their color phones in the marketplace. So I think if you look across we do not need 3G to drive the demand for color screens. What we really need is just data rates and products that are out there that may people want those features, and what we are seeing in the marketplace is that the trends started with a trend of move towards the blue color and that really appears to be mostly a marketing move in terms of differentiating and getting a more high tech look, and then that is going on and they were now starting to see the white displays hit the marketplace, and you know I think once people get used to using the functionality of having those colors and really having a much for usable display. You know I think that is a long-term trend for the market.

Secondly, what I would like to ask you Chuck is it looks like you know, the two parts of your business that are doing fairly well right now, the LEDs, and your contracting business. It appears you still have some uncertainties in your microwave business as it stands today. You know what happens number 1, if come the end of September and then there are delays in you qualifying LDMOS-8 with Spectrian. What happens to your relationship at that point in time, and secondly, you know when [Cindy] talked about the guidance you know you guys are pretty confident about the outlook for this quarter and clearly this quarter Spectrian is going to hurt you because they are running at a $1 million run rate for you guys. How much you is Spectrian hurting your bottom line right now, how much is the UltraRF microwave business hurting you at the bottom line, and is that what is creating you to be a little bit cautious in going beyond the first quarter in giving us some guidance?

Now, let me tell, -- let me kind of fact that up a little bit firstly, Spectrian and -- sometimes intermingable words, Spectrian is doing nothing that's harming our business. It is really our ability to deliver our LDMOS products. So this is really a pre-microwave issue and our ability to get these products online. In terms of the relationship I think we have a very good relation with Spectrian these days, I think we are being very open. They understand where their qualifications are at and we are giving them plenty of visibilities so they can plan their business appropriately, and that when the LDMOS-8 does come online that may be we will be prepared to deliver to and may know when it is kind of come in. So I think we got that relationship in the right place, I think we will be in pretty open with them, and you know the fact of the matter is that they do have another supplier if we do not supply. So I think their business is [indiscernible] going forward. In terms of you know what happens if we do not bring it online, you know what we are going to do something this quarter to try to trim the cost there to really get the cost model down, we lower our rate even points. Being more frankly from the results we have seen Ram whether LDMOS-8 is down in the first day of September or in the middle of September, the technology is very competitive with Motorola from what we have seen. We think there is a tremendous opportunity to sell this in the market place. So you know as we deliver the technology if Spectrian wanted to, no, we haven't but as the same time I do not think it has reduced our commitment to this market place. This is the core piece of our strategy, we just got to go to make the technology happen and position ourselves not only for silicon based business but you know we sell have a future with silicon carbide and GaN. So I still think the model works, we just got to make it execute the short-term. In terms of you know hurting our guidance, I think it has in some respect on our gu idance but I think the other thing you have to realize is that you know our cell phone business does not have long-term backlog. It is very much we only have limited visibilities, so while we are feeling better about our business. You know there is still a large amount of next quarter that perhaps to come in and so we want to make sure that before we go giving the guidance we have better feeling for that.

Thanks a lot Chuck.

Sure.

Your next question comes from [Pierre McCardino]

Well, how much of your business was turns business this quarter for the LEDs?

I think we came into the quarter to saying that I believe we were about 75 percent booked, so we have seen that our revenue so that terms would have been greater than 30 percent.

Okay, thanks.

Sure.

At this time there are no further questions, are there are any closing remarks?

Thank you for participating in our conference call today. We do appreciate your interest and support and look forward to reporting our first quarter fiscal 2003 results on October 17.

Thank you.

This concludes today's conference call, you may now disconnect.