Wolfspeed Inc (WOLF) 2003 Q3 法說會逐字稿

Good afternoon.

Welcome to the Cree Q3 conference call.

At this time, all participants have been placed on a listen-only mode.

The floor will be opened for questions and comments following the presentation.

Now, I will introduce your host, Fran Barsky.

You may begin.

Thank you and good afternoon.

Welcome to Cree's third quarter fiscal 2003 earnings conference call.

You should have all received a copy of the press release.

If you did not receive a copy, call 919-313-5300 and we will be pleased to assist you.

Today, Chuck Swoboda, President and CEO, and Cindy Merrell, Chief Financial Officer will report on third quarter of fiscal 2003.

Today's presentations include forward-looking statements about our business outlook and management may make other forward-looking statements during the call.

These may include comments concerning trends and revenues, gross margin and earnings, plans indicated by words like anticipate, expect, and estimate.

Such forward-looking statements are subject to numerous risks and uncertainties.

Our press release today and the SEC filings noted in the release mention important factors that could cause results to differ materially.

Also, we would like to note that as a result of recently affected SEC rules, we will be limiting our comments regarding Cree's third quarter results to discussion of the information included in our earnings release and the materials posted on our website, which you can find at www.cree.com, by clicking on investor information and click on Q3 '03 financial metrics.

We will not answer questions that involve providing additional financial information about the quarter.

We note this call is being recorded on behalf of the company, the presentation is copyrighted material of the company and no other recording or reproduction is permitted until authorized by the company in writing.

We are requesting that only analysts ask questions during the Q and A session.

Investors may continue to contact me directly at 313-5397 or via e-mail.

We are web thereto casting the conference call to allow flexibility for the attendees.

The web thereto cast will be available through April 30th.

Now, I would like to turn over to Cindy.

Thank you.

Our business continues to accelerate as we posted record revenue of $60,223,000 and $165,761 for the three and nine months ended.

During fiscal third quarter product revenue grew 9 percent sequentially and nearly doubled over the same period last year.

LED revenue increased 9 percent over the December quarter as our customers demand continued to grow for LEDs across our product line.

Today we reported net income of $10,632,000 for the most recent three-month period, which increased 18 percent over the prior sequential quarter.

Earnings per share grew to 14 cents per share from 12 cents reported in the December quarter.

Product margin and gross margin were our highest in five quarters at 50 percent and 47 percent of revenue respectively, despite negative growth contribution of 1.7 million dollars from Cree Microwave.

Net income was reported at $23,511,000 or 31 cents per share.

LED revenue continued to grow as unit shipments increased nine percent sequentially, the highest quarterly volume sold in our history.

For our third quarter, LED average sales prices remain flat sequentially and were 10 percent lower as compared to the third quarter of last year.

Over the next 12 months, we target average sales prices to decline at traditional level of approximately 25 percent per year, as we plan to drive the market with high performance and lower cost LEDs.

During the third quarter, our Mid Brightness chips comprised the largest part of our revenue at 86 percent of our LED sales, as compared to 91 percent in our second quarter.

Our standard bright products were 10 percent and 4 percent of LED revenue respectively.

The increase in revenue for standard Bright from 7 percent in December, reflects greater automotive and other indicator business from a number of customers, including Osrin (ph).

We are pleased with the growth of x-Bright from 2 percent to 4 percent and LED sequentially as we have been able to qualify additional customers through these devices.

We believe the successful ramp of X-Bright products over the next few quarters will be critical to enable LED revenue to continue to grow into fiscal 2004.

As we are able to move customer base to high Brightness end of the market, we anticipate increased opportunity, especially in white back lighting.

During the March quarter, we saw greater diversity in customer base and applications they serve with our LED product.

As a result, we will no longer provide specific breakdown of end-user product by application.

For the three months ended March 30, 2003, we shifted some of the capacity away from keypad business to other higher-value applications.

However, mobile appliance business was still our largest end-user market.

This shift in mix contributed to strength in our average sales price.

We also increased our shipments to the white backlight display and flash applications for mobile appliances.

We target the trend for white LEDs used in these applications to continue into fiscal 2004.

During the March quarter, our automotive and display business remained steady as percentage of LED revenue.

We saw increase in higher value applications such as gaming equipment, consumer products, office automation and lighting, as examples.

During the third quarter, silicon carbide wafer sales increase wafer volume doubled over the December quarter, increasing 110 percent.

This was partly offset by 39 percent decrease in average sales prices due to product mix.

Sales to Osrin (ph) increased during the quarter, which affects our overall volume and mix, as they tend to order lower priced wafers.

Sales to Charles and Covar (ph) remained steady in the March quarter.

Revenue from Cree Microwave Sunnyvale was $644.000, which was slightly below our target due to some of the delays in customer programs.

We continue to work with a number of customers and hope to gain incremental design wins over the next several months.

Contract revenue declined 14 percent sequentially, due to slow down work performed for certain contracts and prior period rate adjustment that reduced revenue by $436,000.

We target contract revenue to trend slightly lower in the fourth quarter.

Gross margin for third quarter improved from 41 percent to 47 percent sequentially due to higher through-put in the Durham factory and increased customer diversity.

In addition, December quarter margins were negatively impacted by 1.3 million dollar write-down of pre-microwave inventory.

During the third quarter, the most notable margin improvement occurred with our LED product.

Average sales price was stable and average cost decreased 5 percent sequentially.

As compared to third quarter of fiscal 2002, our LED average sales price was 10 percent lower while our average LED cost was reduced by 29 percent.

Over the last few quarters LED costs have benefited from productivity gains as we continue to produce record unit necessary our factory.

As a result, fixed expenses lower cost per unit.

During the fourth quarter, we target to increase capacity through capital additions, productivity gains and yield improvements to meet our customer demand going into fiscal 2004.

The gross margin of wafer business also increased as wafer average sales price declined 39 percent while average cost was reduced by 57 percent, due to change in product mix and increased through-put.

Contract gross margin was 20 percent in March quarter, compared to 24 percent in the prior sequential period, due to the $436,000 reduction in revenue from prior period rate adjustment.

Operating expenses as percentage of sales decreased to 25 percent for the March quarter, compared to 27 percent reported for the December quarter.

These expenses are comprised of R&D and SG&A costs.

In the December quarter, we reported a $1.4 million write-down for fixed assets associated with Novel epitaxy (ph) equipment we discontinued.

During the March quarter, spending for R&D increased $471,000 dollars or 6 percent sequentially, to 14 percent of revenue as greater resources were focused on LED improvement and other projects, including silicon carbide microwave devices.

SG&A costs increased $238,000 or 4 percent to 11 percent of revenue to support overall increase in business.

As of march 30th, 2003, Cree's balance sheet remains strong.

Cash invests stood at $189 million up from 177 million December.

Perhaps the best indicator of Cree's financial strength was $12.2 million increase to free cash flow during the third quarter.

Year-to-date free cash flow was $13.2 million.

We calculate free cash flow as cash flow from operations less capital equipment expenditures.

Please visit our website for further details of the calculation.

Our cash flow from operations in March was $28.2 million, bringing year-to-date cash flow to $69.4 million.

Our third quarter capital expenditures were $16 million or $56.2 million for the first nine months of fiscal 2003.

The majority of these expenditures were from the Durham facility to support recent ramp-and targeting higher output in future quarters.

Our accounts receivable balance declined by $4.7 million sequentially.

This decrease is more significant given the trends in the overall market and increase in the business in southeast Asia, where collection periods are frequently in excess of 90 days.

Days sales outstanding is calculated in trailing monthly revenue profile was 51 days, down from 55 days in the December quarter.

Inventory increased by $2.5 million, due to higher sales, while days sales on hand stood at 50 days, well below the industry average.

We did not repurchase company stock in the third quarter, but will continue to reevaluate it based on market conditions.

For our fourth quarter, we continue to see momentum for LED products from growing customer base.

Therefore, we target revenue to increase to approximately $62 to 64 million, which would position Cree's revenue in range of $228 to 230 million for the fiscal year or 47 to 48 percent increase in sales over fiscal 2002.

Based on these estimates, we are targeting gross margin to remain in the range of mid-40s as percentage of revenue for our fourth quarter.

We target R&D to continue in a range of 7 to 8 million dollars, and we believe SG&A spending will be slightly lower as percentage of revenue in a range of 9 to 10 percent for the fourth quarter.

We estimate that our tax provision will remain at 26 percent for fiscal year 2003, and therefore, earnings per share for the fourth quarter is targeted in range of 15 to 16 cents per share.

For fiscal 2003, we targeted capital expenditures in range of $70 to $75 million and free cash flow at $24 to $30 million.

As Cree enters fourth quarter of fiscal 2003, I believe we are positioned well financially.

Our revenue has reached record levels and customer demand is targeted to grow.

Our business has increased with traditional customers, such as purchase commitment for $100 million from Sumitomo and we have had success in other markets.

Many of these customers are buying a range of products which we believe shows the strength of the market, our product offering and our value proposition is working.

As a macro trend in cell phones to produce phones with full color display continues, we believe our X-Bright ramp up should give us additional opportunity to grow in the markets.

Our profitability increased as product margins increased sequentially to 50 percent of product revenue.

Net margins were reported 18 percent of revenue for the third quarter, or 14 cents per share.

This was our highest net income mark over the past 8 quarters.

In addition, our business is free cash flow positive, enabling us to generate cash while maintaining no debt.

In an environment where many technology companies are struggling, we target that we can continue to produce record revenue and increasing profitability in the current quarter.

Thank you and I would like to turn the discussion over to Chuck.

Thank you.

We have just completed another great quarter with the highest revenue in the history of the company.

Revenue increased 6 percent sequentially to 60.2 million, and earnings increased 18 percent to $10.6 million, or 14 cents per share.

These results were generated primarily by continued strength in the LED business, which grew 9 percent from Q2.

Success in LEDs has resulted from combination of high-performance products and aggressive pricing, which show volume and leverage our cost advantages enabling gross margin to increase to 47 percent.

R&D expenses were at upper end of the target range at 8.1 million.

This investment continued to deliver strong results.

During the quarter, we made good progress in several key areas, which included more robust X-Bright chip, proprietariness (ph) gain Blue Mid Brightness chips and laser and higher power silicon shocky (ph).

On the sales front we recently obtained a $100 million purchase commitment from Sumitomo, which is a tremendous achievement for Cree and our sales team in Japan and strong signal of the success we have had in this key market.

Our ability to grow revenue and improve margins over the last several quarters demonstrates Cree's ability to compete in a tough environment.

As we build on success from Q3, we remain focused on managing a number of challenges across the company.

We have made good progress on X-Bright, but need to expand the number of customers with qualified packages and must aggressively secure new business to utilize the capacity we brought on line over the last few quarters.

We need progress on improving yields to reduce cost and provide additional capacity for growth.

We have to stay focused on delivering new products, especially in LED, where the products are critical to accessing new business over the next several quarters.

We must also find way to overcome hurdling to accelerate momentum for shocky diodes and transistors.

These challenges are not new for Cree.

This is what we need to do to be successful.

Our track record gives us confidence in the global marketplace.

As we look at Q4, revenues targeted to increase to approximately $62 to $64 million, driven by growth in LED business.

Earnings are targeted to grow from 15 to 16 cents per share.

We have approximately 75 percent of our revenue target booked for Q4, which is similar to where we have been going into previous quarters.

Investments we made at capacity continue to come on line.

We now have capability available to react to an upside in demand during the quarter.

This capacity should give us additional flexibility in reacting to customer requirements and give our sales team the ability to pursue additional business which we could not support during recent quarters when we were capacity limited.

We are not providing financial targets beyond Q4, our current demand outlook and order pattern lead us to believe we can continue to grow the LED business into the first half of fiscal 2004.

LED Sales remain strong in Q3 with revenue increases 9 percent sequentially, as we set another record for chip shipment.

We continue to expand production capability in Q3 and we are now targeting to increase capacity in Q4 through combination of capital addition, productivity gains and yield improvement to support target growth.

Our ASPs were steady in Q3.

We have strong demand across our product line.

More importantly, our LED gross margins increased in Q3.

They are targeted to remain in similar range in Q4 as we aggressively pursue new business and increase marketshare, while working on yield and productivity to extend the advantage of our cost structure.

Q3 LED shipments were driven by increased demand from number of customers in several markets.

Business in Japan is at record levels, as demonstrated by recent announcement of a $100 million purchase commitment from Sumitomo.

We are having success in Taiwan with third quarter sales doubling from Q2 while seeing growth in Korean business as we penetrated the market with mid-Brightness and X-Bright products.

Overall our customer base continues to expand and we had 10 customer purchases more than 1 million dollars in the third quarter.

The LED development team has made great strides in the last quarter.

We recently qualified robust version of X-Bright chip and we are in the process of sampling a number of customers for their package qualification.

At this stage, we have already received preliminary approval for the new chip from a key customer and target to bring a number of additional customers on line for X-Bright as we ramp up production during Q4.

Demand remains strong.

We target the combination of customers for standard X-Bright and the new more robust version should drive overall X-Bright sales to approximately 8 to 10 percent of LED revenue in Q4.

We have also raised the bar on Brightness for blue Mid Brightness chips and X-Bright products.

We plan to officially introduce a Mega Bright Plus and X-Bright plus version within the next month which are approximately 30 percent brighter than the standard chip and targeted at white LED market.

We built white LED using the chips which delivered 60 units per watt using commercially available phosphor.

We believe this sets a new standard for white LEDs and we anticipate over the next few months our customers will be able to achieve even greater performance by using X-Bright plus chip necessary combination with their own phosphor.

The Mid Brightness chips plus chip has started chipping to several select customers and appears to be gaining quick acceptance in the backlight market.

We are continuing development on both the thin LED and improved power chip and anticipate we should be able to release both products during Q4.

Development efforts do not end with these products.

We plan to continue to invest resources and extend the boundary from performance standpoint, while developing value-added products for customer application.

In recent months, there has been speculation within the high brightness LED industry about how companies newly entering the market can overcome the intellectual property challenges of patent portfolios held by more established competitors.

We believe our patent portfolio gives us an advantage in this area.

We are in the process of analyzing whether other companies' products are infringing our patents and plan to take appropriate action.

On the laser front, we continue to make progress toward our goal of a commercially viable 30 mill watt laser chip at 405 nanometers and have recently made advances on the material front which have significantly reduced operating current of our devices at 30 milowatts.

To give you perspective on these advances, we have demonstrated more than 450 milo watts of CW operation from single stripe using the improvements.

These are important technical milestones, but we must convert them into devices.

A 30 milo watt production release is probably several quarters away, but we plan to sample new devices as part of the ongoing development activity.

Despite the excitement surrounding the release of blue standard, there seems to be uncertainty within the optical storage industry, on when there will be high volume demand for blue systems .

It appears it will take sometime before commercial development.

Despite this uncertainty, we remain focused on the 30 milowatt chip and target having it available by the time the market is ready.

At Cree Microwave Sunnyvale we continue to move ahead despite slowness in the market for wireless infrastructure.

Q3 revenue for Cree microwave was below target, we made progress with a number of key customers.

When the designs move into production, we should see growth in the business.

We have recently had discussions regarding potential strategic arrangements involving our microwave business.

We will continue to evaluate how tow make this business more successful for shareholders, customers and employees.

On the microwave front, we made good progress and recently qualified next-generation 10 watt meth(ph) design.

It has increase in efficiency from 39 percent to 44 percent.

This is a tremendous improvement over the previous generation and we plan to release the product to production over the next several weeks.

Although the market for these devices may take sometime to develop.

We are also working on 60 watt product based on this new design which we plan to sample this summer.

These new wideband devices in combination with LD modules are critical piece of our strategy to deliver disruptive capabilities to the wireless market.

In our power business, we expanded product offering during the third quarter to include our first 1200 volt products which have enabled us to see designs.

We are in the early stages of working with these customers.

The initial results are encouraging.

We have received some small orders with these products.

We continue to pursue a number of designs for power supply applications.

To date, we have several small volume wins for custom power supplies.

We also have had success in getting our devices qualified in several high programs.

These projects have not yet been released to production.

We've expanded our sales activity in a number of countries around the world and are on the right track to get wins for the next quarter which could lead to production orders in the first half of fiscal '04.

On the personnel front, Rob Glass has recently assumed responsibility for managing all Cree Durham operation on interim basis while we continue the recruiting process to fill this position permanently.

In the third quarter, we delivered strong financial results with record revenues of 60.2 million.

Earnings grew 18 percent sequentially to 14 cents per share, which is at the high end of target range, while gross margins increased to 47 percent.

We made good progress managing the challenges of ramping our factory during the quarter and must stay focused in Q4 on developing critical new products while increasing capacity through yield improvement and productivity gains.

Our success in adding capacity over the last quarter has given us capability to support potential upside demand.

We signed $100,000 LED purchase agreement with Sumitomo, which is largest commitment of this type in the history of the company while increasing business in Taiwan and Korea.

Our balance sheet got stronger.

Cash and investments grew to 189 million, providing additional resources to support continued growth.

We are optimistic about LED demand for Q4 and targeting revenue to increase from 62 to 64 million with earnings increasing from 15 to 16 cents per share.

Cree has distinguished itself over the last fiscal year and we want to build on this success in the fourth quarter and moving into fiscal 2004.

Now, back over to Fran.

Thank you.

As a reminder for those who joined late, due to recently affected SEC rules we will limit our comments regarding third quarter results to discussion of the financials of the information included in our earnings release and the material posted on our website.

You can find it at www.cree.com by clicking on investor information and click on Q3 '03 financial metrics.

We will not be able to answer questions that would involve providing additional financial information about the quarter.

Stephanie; we will take questions.

The floor is open for questions.

If you have a question or comment, press 1, followed by 4 on your touch-tone telephone at this time.

If at any point your question has been answered you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they are received.

We do ask that while posing a question, pick up the handset to ensure proper sound quality.

Hold the line while we poll for questions.

The next question comes from John Lau of RBC Capital Markets.

Pose your question.

Thank you, Chuck and Cindy, you mentioned the Sumitomo contract.

Can you give us more color, what was revenue over the past 12 months and what it will be over the next five quarters and the reason I ask is your guidance for June was conservative and is that a result of the capacity constraints or is that the Sumitomo contract kicking in further down maybe in fiscal Q1 of '04?

I have a follow-up.

John, I can't give you specific numbers for Sumitomo.

I can tell you as of the end of last fiscal year, Sumitomo is little bit over 20 percent of sales, combination of LEDs and wafers.

That should give you perspective on where they were.

The new contract is $100 million contract.

It has specific commitments by quarter.

It is probably fair to assume it does have ramp-up provisions in it.

I think the most important thing to note, though, is that if you look at year-over-year this is a four-x increase in their commitment.

There is ramp-up provision in it, it is important to understand this is tremendous signal from the strength in our Japanese business and how far we have come in a short time.

As far as guidance going forward, I think you know we are coming out of a period of growth where we have grown over 60 percent in the last three quarters.

Up until recently, we are limited by how fast we could add capacity.

Going forward, we have given the best visibility we have and at the same time, as I said, our sales team has the opportunity to pursue incremental business.

We couldn't serve previously.

I guess following up on that comment, with regard to the forecast, if you were to look further into second half of '03, is the capacity that you see coming on line at Cree enough to beat the forecast the customers are giving to you or is that still just a constraint against demand that continues to grow?

You have to look at how much we have been investing.

We made tremendous investments, about 65 million for the first half of the year.

We continue to invest.

The first six months of the year the ramp-up was fairly high level.

Now, we are looking to get gains from capex, but we have tremendous upside on the yield productivity front.

We are counting combination of those things to give us capacity to drive growth into the first half of next year.

Based upon following up with that with regard to what customers are telling.

Is demand continues to remain strong through second half of the year driven by end markets you participate in?

Yeah, given the customer demand and order pattern, we are optimistic about Q4 and first half of fiscal year.

Thank you.

The next question comes from Dale Pfau of CIBC.

Congratulations, pretty substantial improvement in margins.

Could you talk a bit about that?

I mean, you obviously noted ASPs have not dropped as fast as we thought cost would come down.

This cost drop, is this strictly on yields or is it absorption?

Can you give us an indication of where that comes from and whether we have room to continue to expand margins here?

Yeah, I think it would be fair to say the majority of cost reduction is coming from leveraging through-put in the factory and productivity gains.

We are still targeting pretty good opportunities for us to improve on the yield front.

That is a function of working through significant ramp-up over the last nine months.

So, I would say that is kind of our guidance going forward.

If you look at gross margin guidance we gave you, we are talking about in the similar range next quarter.

That is a function of we want to continue to be aggressive from a price standpoint.

We are in a opportunity with a good product line right now and with the additional products bringing into the market, it puts us in a better position.

We want to drive volume and marketshare and continue to get the benefits.

I think what you are seeing going forward is really reflection of our strategy to try to take cost and drive marketshare.

And when I look forward into the next quarter, I think Cindy mentioned you expect to see ASPs drop 25 percent, over the next 12 months or in the next fiscal year?

Give us some thought about where you see ASTs in Q4?

We estimate it will be some ASP decline in Q4.

The 25 percent is our target for FY '04 based on historical metrics of what we have seen in the past.

You can see, depending on technology mix and where the product mix goes and actually, we are able to continue to bring higher performance products that has the ability to have an effect on that and offset it.

We haven't seen any effect from some of the new products, we are either in the process of announcing or should come out next quarter.

And on the X-Bright, first of all, on the X-Bright relative to Mid Brightness chips can you give us indication what kind of premium you give for that?

What you target for premium for X-Bright plus and Mid Brightness chips plus?

Dale, it is probably -- I don't have a good number for you on the premium, probably in 20 to 25 percent premium range.

The idea is to make it a better value proposition than the previous products.

That is pretty much our traditional strategy.

That is the way we are driving that product.

What was the second part of the question?

Premium you expect to see from Mid Brightness chips plus and X-Bright plus over your current family?

I really can't comment on that at this point.

We haven't publicly gone out with that strategy.

What I can tell you is that you can assume we will continue to take our performance improvements and be aggressive to drive marketshare.

One final question, when you look at the end market, you know you will not tell us where they are going anymore, that probably is relative to not being able to see where some of your customers are spending money.

From what your customers are telling you, where is the biggest end market demand, is it still handset or improved penetration in other markets?

I think it is always easier to talk from a product strategy right now.

I think we think there is upside in handsets, very much on the light side.

We think there is additional upside on automotive, frankly.

It is a market that continues to be strong for us.

It doesn't get a lot of press, but the big piece of the business.

You really only penetrated a percentage of the European market.

There is lots of markets we haven't gotten to and application in the vehicles we haven't served.

I would say high brightness LED for markets we today and specifically white LED is becoming a bigger piece of the business.

Last quarter we saw a shift that the white LED section of our handset business picked up relative to keypad business.

One final question, you mentioned you are now shipping directly into packagers in Taiwan.

Could you tell us about how many guys are there and are the packages there 10 percent customers yet?

I can't give you those specifics.

We have actually had Taiwan customers for a period of time, traditionally some amount of business in Taiwan.

The most important digit doubled in the last quarter, which is fairly interesting trend.

I being think it is based on strength of the product offering.

It shows good value in terms of price performance is really what we are seeing now drive the marketplace.

Great.

Thank you.

The next question comes from Pierre Maccagno of Needham & Company.

Sir, please pose your question.

Hi, Chuck.

Is the industry capacity still constrained?

When do you think a (inaudible) level will be reached?

I think even last quarter I got a similar question.

The industry capacity is difficult to figure out.

There is lots of "capacity" out there.

There has been.

The question is how much capacity can build the products customers are trying to buy.

The other thing people find confusing and I noticed on my trip last month to Taiwan, there is a lot of discussion about theoretical capacity.

That is take a machine and assume every wafer works, that is not reality in our business.

There is some confusion that could use the concept of theoretical capacity to yield capacity and what people are shipping.

My feeling is that overall, I think that the market has increased capacity in the last nine quarters.

Many companies are adding additional capacity going forward, but I still think there is finite number of companies who can supply the products that we are seeing heavy demand for at this time.

The problem is if you look at segment for the brighter LED.

Probably that sector has the most capacity constraints.

Right?

It would be fair to say there is much more capacity on the low end of the market.

So, definitely more constrained moving up.

It is quite difficult given the nature of the people who supply the business and lack of public information to figure out exactly where the market is at.

From our perspective, if anything, there is little bit better supply situation in the market today than six months ago.

OK.

In terms of your own capacity, would it be fair to say that you have increased about 80 percent capacity year over year?

I think if you look at the metrics we put on our website, you can get an idea.

I don't like to talk about capacity.

Let's talk about shipments.

You can see if you look at year-over-year growth in LED shipments, we are talking about 158 percent increase year-over-year.

So, it is actually probably twice your number you just quoted in terms of what we are shipping out of our factory.

OK.

Your customers, how many 10 percent customers do you have?

I can't comment on that, we will give that at end of the fiscal year.

We have seen an increase in diversity of the number of significant customers.

OK.

Is Agilent one of them?

Can't comment on that.

Can you talk a bit more about the problem in terms of ramping X-Bright has been the yield to your customer?

If you look at the data we presented earlier we saw X-Bright sales double quarter-over-quarter.

It went from 2 to 4 percent.

The product we have been selling has done well and getting traction with a number of customers.

We have been talking about, though, there is a segment of customers depending on their package or specific application, needed a more robust design to help them out.

I think what we are seeing we have a new version qualified and hopefully can address additional customers in the area and have on preliminary basis, good progress.

I think we can't forget that our standard X-Bright is already ramping up and becoming an important part of the business.

With the addition of new robust design, it can only help that this quarter and next year.

What is the gross at this point.

Last quarter you were expecting 10 percent of sales, correct?

Is it the customer and the yields?

No, actually I don't think the last quarter, for the quarter we just completed we targeted X-Bright sales would grow modestly until we were able to get the more improved version on line.

If anything, we have seen more success with the standard version than we expected at that time.

OK.

Can you give us a percentage of your LEDs?

How many end up as white LEDs?

I can't actually give you a good number there.

I would say I think you could say increasing.

OK.

Thank you very much.

Your next question comes from Tom Supensus (ph) of Saint Equity Partners (ph).

Thanks.

Couple quick questions.

Do you have any idea what your market share might be in the handset market at this point?

Tell you what, that is a great question and one we spend a lot of time trying to answer.

I don't have a good answer for you.

Last quarter, we did see some decline on the keypad side of the business.

That was a choice we made to redirect capacity to higher-value products.

We saw increase on the light LED side of the business.

To pull it all together for you and give you a good number, I don't have an accurate number to share with you.

OK.

In terms of the yields, you know, how much room do you think you have to grow here in terms of more benefit to the gross margin?

I guess on -- you would have to go on product-by-product basis, but in general terms across the board, do you think you have a lot of room to grow in terms of yield improvement?

Yeah, the way to think about that, newer products have the most opportunity to increase yield.

I would say it is fair to say on both Mid Brightness chips and X-Bright product we have significant opportunity to increase yields.

But, you connected that to margin and I want to make sure to remind you our strategy is really to leverage the cost gains to drive marketshare.

So, that is really why we gave the guidance we gave on gross margin for next quarter.

OK.

As far as X-Bright is concerned you ironed out the kinks here in shipping and --

I would say, the standard version we have had up for a couple of quarters is continuing to ramp up.

The new more robust version, we qualified it internally and are in the process of ramping it up and getting qualified with customers.

We started sampling it over the last few weeks here, so, I would say the fact we have one customer who has given us preliminary qualification, that is a good sign.

Great.

Thanks.

One last question.

Did you say what capex you expected in fiscal '04?

We do not give guidance on fiscal '04 yet.

The next question comes from Alex Gauna of UBS Warburg.

Please pose your question.

This is Brent Stevens (ph) for Alex.

Quick question on auto.

Could you maybe expand on where that is coming from?

From new customers or more penetration in applications within the auto?

It is interesting.

I would say probably most of the success in the last six months has been on whether they have been new customers.

There still is a opportunity to increase penetration where we have designs, as well.

Mostly from newer designs or companies adopting LEDs.

OK.

On the blueware products we are starting to hear news about market forming at end of 2003, do you think that is -- are we going to start seeing things at end of 2003 or wait into '04?

What we are targeting and hearing from the industry, this is second-hand industry information.

It tends to be there will be some systems put on the marketplace.

But, based on the conversations with various people in the market, there is not the market doesn't believe that in the next year or so there is any high volume demand for these systems.

We are really in the stage of putting systems out there and doing getting a standard established.

I think you will see systems, but not volume demand for systems.

You know for at least a year at this point.

Brent Stevens (ph) Last question, By these Taiwan infringements, why do we think this is going to end up any different that what we experienced with Muchia (ph) and don't you have to do there products coming in?.

I think the strength of the portfolio can be different.

So, as far as specific things and how we might go about it or what actions we might take or not, I can't get into that.

Thank you very much.

The next question comes from Audrey Snell (ph) of Brean Murray (ph)..

Please pose your question.

Hi, congratulations on a nice quarter.

Couple of questions on LEDs.

At the LED mobile computing screens expand in size, do you anticipate they will use more LEDs per unit?

As a general rule, yes, I think there is always a trade-off of using higher brightness LEDs and trying to spread the light out.

At some point, as the area gets larger, it tends to be more practical to add additional LEDs.

There will be some people who will use just the same number of LEDs but high yest brightest ones.

Either way, do you anticipate your dollar content per unit rising?

Uh, for a larger screen phone, I think it is accurate to say it would have higher dollar content for LEDs, that would be fair.

Just taking it one step beyond phones, when it becomes mobile computing screen, will it increase its capacity again?

So, I think if you are talking about screens between what we see in a cell phone today up until what we see in PDAs, I think those generally follow those rules.

If you try to go larger, you may see more novel packaging schemes and different approaches.

I think it will be more LED content because it will take more light.

The approach to doing that will probably change because you are dealing with larger area screen.

)) Audrey Snell (ph): Is it too simplistic to assume if you maintain or grow market share in brightness, the content dollar should increase over time as that product expands?

Yes, but I think what you have to consider on the other side, this is the semiconductor business.

They are also counting on every year trying to get a better value than they got the before.

There is offset just on traditional normal erosion and increase in price performance that the customer can get year-over-year.

OK.

Does the same hold true in LED screens, are they applicable in the dashboard of autos or GPS in auto and if so, are you planning on marketing it there?

You mean backlight?

Yes.

I think today, when we say automotive a tremendous amount is backlighting things in the dashboard.

To give you an example, in the higher LED content cars, you can see LED backlighting the LCD in radio and backlighting instrument cluster, two slightly different variations on the same thing, but all backlogging applications.

I think it is already being done.

What we are projecting for that application is just we would expect a number of manufacturers and people who have LED-based dashboards to increase over time to get the benefit of the reliability LEDs bring to the cars.

OK.

Thank you.

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Thank you for participating in the conference call today.

We appreciate your interest and support and look forward to reporting fourth quarter fiscal year-end results on July 29th.

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