Wolfspeed Inc (WOLF) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Cree Incorporated First Quarter Fiscal 2004 Financial Results Conference Call.

At this time all participants have been placed on the listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Ms. Fran Barsky.

Ma'am, the floor is yours.

Good afternoon.

Welcome to the Cree's first quarter fiscal year 2004 Earnings Conference Call.

By now you should have all received the copy of the press release.

If you did not receive the copy please call our office at 919-313-5300 and we will be pleased to assist you.

Today Charles M. Swoboda, our President and CEO and Cinthia Merrell, our Chief Financial Officer will report on our first quarter, 2004 fiscal year.

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 in revenues, gross margins and earnings, plans for new products and other forward-looking statements indicated by the words by anticipate, expect, target, and estimate.

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

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

We will not be able to answer any questions regarding our litigation with our (inaudible) and related matters other than what Cree have previously stated in prior press releases or provided during the narrative portion of this conference call.

Also, we would like to know as a result of the SEC rules, we will be limiting our comments regarding Cree's first quarter results to a discussion of the information included on our earnings release and the materials posted on our Web site, which you will find at www.cree.com, by clicking on investor information, and then click on financial metrics.

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

We also note that this call is being recorded on behalf of the company that the presentations and the recording of this call are copyrighted property of the company and no other recording or reproduction is permitted unless authorized by the company in writing.

Consistent with our previous conference calls, we are requesting that only analysts ask questions during the Q & A session.

Investors may continue to contact me directly at 919-313-5397, or via e-mail.

We are also web casting the conference call to allow more flexibility for our conference call attendees.

The Web cast will be available through October 30, 2003.

Now I'd like to turn the call over to Chuck.

Thank you, Fran.

In the first quarter, we delivered record revenue of $66 million and net income at the high end of the target range at $8.9 million or 12 cents per share.

Revenue increased 3 percent from Q4, and was up 36 percent from the first quarter of fiscal 2003.

The growth in revenue was again led by LED sales, which grew 3.5 percent from Q4 to 50.7 million.

Gross margins were 43 percent, while SG&A spending increased 48 percent to $7.9 million.

The SG&A increase was driven by legal fees, which increased $1.8 million from Q4, primarily as a result of a Hunter litigation, class action lawsuit, special investigation and the informal SEC enquiry.

The R&D was slightly lower than Q4 at $8.3 million, which somewhat offset the increase in legal fees.

Our R&D investment was once again an important piece of our success in Q1 as we were able to deliver several new LED products during the quarter, which contributed to the record LED revenue while continuing to raise the bar on LED chip performance.

We target R&D funding to increase over the next several quarters as we fund new LED products in addition to further advances in materials, microwave, lasers and power.

Despite the distractions of the last several months, our team has stayed focus on executing our plan and once again delivered record financial results and enabling new products.

As we start the second quarter, we look to build on our success from Q1 while managing the ongoing challenges of growing our business.

From an operational perspective, we must drive cost reductions across our product lines through yield improvement and productivity gains from a combination of process redesign and simplification as well as automation.

With the tremendous number of new products we have released in the last several quarters we need to work with our customers to get these products qualified while working through the internal challenges of ramping new designs and processes through high school.

We need to build on our new product development momentum and continue to deliver new products and secure design wins for the critical applications from LED lighting, power switching, wireless infrastructure and optical storage.

In addition to managing these business challenges, we must not let the recent lawsuits and related activities distract us from running our business.

We are confident that we can with deal with these challenges and build upon our success from Q1 in the quarter ahead.

We are optimistic about continued sales growth in Q2 and their targeting revenue to increase to approximately (inaudible) based on forecasted growth in LED's as well as modest growth in both microwave and power.

The target growth in our LED business is spread across applications but especially oriented towards recent increases in demand for blue and white LED's for mobile phones.

We currently have approximately 80 percent of our target revenue booked for Q2, which is the strongest start in several quarters.

We are forecasting gross margin in a range of 43 percent to 44 percent as a percentage of revenue, although this may fluctuate up or down depending on the product mix.

R&D spending is targeted to increase to approximately $9 million.

SG&A expenses will continue to be higher than normal as a result of the ongoing litigation, which is difficult to predict, we forecast some reduction in Q2, as certain activities are concluded.

Therefore, we target Q2 earnings of 13 to 14 cents per share.

LED sales grew again in Q1, with unit shipments increasing 16 percent to record levels, while ASP's decline 10 percent from Q4.

This ASP decline included sales of non-spect dye that we sold at a steep discount to our normal prices as we were evaluating a new channel for this type of product.

Excluding the non-spect sales, ASP trends were this line with our expectations and primarily driven by a mix shift due to a significant increase in sales of lower price mid brightness chips for the keypad backlight application.

We are continuing to pursue this business on an opportunistic basis and although margins are lower on the products compared to the high brightness products, we are targeting aggressive cost reductions to yield improvement and productivity gain, which should provide benefit in the next several quarters.

Megabyte sales remain strong as Megabyte position is nearly doubled while XBright remains steady at 4 percent of LED sales.

We are working on several new products, which we believe should drive increase, XBright sales going forward.

For certain surface mount application predictions, we are working on a lower temperature dye attached version, which should enable our customers to expand the use of the XBright chips to more of their packages and we have recently started shipping green versions of our improved XBright, which should open up applications for signs and signals.

With the introduction of our new X-thin chip, we also expect some customers will shift their focus to this version to get the benefits of a thinner design as well as the lower forward voltage.

We see this new chip as an important piece of our product strategy to win new designs for white LED's.

Overall, we continue to see strong demand for the high brightness products and expect this will continue to become a larger part of our business.

From a customer standpoint, demand increased from our large end customers in Japan as well as other parts of Asia.

We recently announced a new agreement with Osram (ph) to supply 500 million chips over the next seven quarters, which is an important part of building our business with this important long-term customer.

Osram will continue to be a major customer, our business with other customers has grown faster and several customer purchases were larger than Osram's in Q1.

This is a great indication as to the overall strength and diversity of the customer base.

The strongest growth for the new products has been in Japan and we continue to target our product development activity at specific customer identified applications.

Overall, we saw an increase in mobile phone business ranging from mid brightness products for keypad backlights to high brightness products for color LCD's and LED flashes for camera phones.

Asia cell phone demand seemed to rebound in Q1 and we saw an increase in demand from packagers in Japan, Korea and Malaysia.

Although we continue to see aggressive pricing from Taiwan chip suppliers for the keypad application, we were successful in winning this type of business at acceptable margins at several of our major customers during the last quarter.

And there has been some speculation that this could be the result of the recent litigation between Nokia and some Asian suppliers.

We believe this could have an effect on the market, it is too early to draw any firm conclusions.

Our LED development activity delivered several new products in Q1, which are already resulting in sales.

We launched our first low voltage thin chip products with the introduction of laser thin and we delivered over 10 million of these devices during the quarter.

We expanded our XBright product offering with the introduction of the green XBright, which should benefit this product family for the (inaudible) application.

We recently, we introduce our X-thin products, which combined the thin low voltage features of laser thin with the brightness of XBright.

This product has already received preliminary approval of the largest customers and is targeted for use in LED's for mobile alliances.

As we move into Q2, our R&D priorities are focused on ramping up these new products, drives cost reduction for the current products and further extensions of these product families.

From a technology stand it point our Santa Barbara technology center, formerly called Cree Lighting has demonstrated 74 lumens per watt in low power laboratory packages using our XBright technology, which is the highest reported efficiently for white LED's.

In addition they have demonstrated 70 lumens from a single XB 900 power chip, using a prototype package while operating the chip at approximately 3 watts of electrical power.

These are technology demonstrations at this point, we believe that these results illustrate what is possible in terms of LED lighting, if we were able to commercialize this technology over the next several years.

In the laser area, we remain focused on solving the critical technology hurdles to commercialize at 30-milliwatt laser.

At this point, our best lasers have lifetimes of 3- to 4,000 hours but the results are still inconsistent.

As we tackle the technical challenges, we are monitoring the overall trends for optical storage.

Based on the recent analysis, we believe the market is still several years away from commercial volumes but that in general, blue laser based systems are on track to become a reality.

There has recently has been some indication that while a 30-milliwatt laser is good enough to get this application started, higher power devices will be required to fully commercialize this technology.

Our silicon microwave business delivered a solid quarter with financial results that were slightly better than expectation.

Overall, revenue -- Microwave grew approximately 50 percent from Q4 to $1 million as we saw increased demand for the older products as well as our LED mass products from several different customers.

Our primary success for the new business is coming from tier two cellular amplifier manufacturers who are serving the even the China or European markets.

We are also starting to have some success in the mill arrow market, primarily for avionics applications.

In the wide band gap area, we are winning business for the 10 watt silicon carbide messfit (ph) as well as foundry business.

We have recently achieved our first silicon messfit design win as well as the first orders for silicon carbide mimic foundry work, which we expect to deliver in the next several quarters.

We are working on higher power silicon carbide messfit, which is targeted to be released over the next few months and we continue to make progress in our the galleon Nitride and microwave development efforts.

We have demonstrated 20.4 watts per millimeter at 51 percent power added efficiency for our galleon Nitride hemp devices at 4 gigahertz, which is three times the power density typically reported in the industry.

These are R&D results, if we were able to overcome the reliability challenges can galleon Nitride microwave devices they could have a tremendous impact on the Microwave market longer-term.

Overall, we are targeting at our combined silicon and silicon carbide microwave business to grow to more than $2 million in revenue in Q2.

In the power device area, our focusing in Q1 was on ramping up production for the silicon carbide shocky diodes, as demand for our first design was higher than we originally expected.

We continue to work through the challenges associated with bringing a new product and technology online, we have made good progress over the last quarter, and we targeted that sales should incrementally increase again in Q2.

The current business is being driven primarily by a single power supply design win and we are in the process of working with several additional customers on new designs that are forecast to go into production into early calendar 2004.

We remain focused on expanding the Sarkey product offering and target additional products over the next quarter.

Regarding the hunter lawsuit, there have been several developments since the last update.

On August 14, the judge denied the hunters' request for the preliminary injunction and stated there was not enough evidence for the court to even infer that Cree or (inaudible) were behind the threats that Eric hunter claims happened.

On September 19, we filed an amended motion to dismiss all of the claims made by the hunters in their last amended complaint.

In response to the motion, the hunters have dismissed some of their claims, although they continue to pursue the remaining claims.

The court has not yet set a date for the hearing on the motion to dismiss.

In a related matter, Cree special investigation committee, which consisted of two independent outside directors, who engaged the independent law firm of Lathe (ph) and Watkins has recently completed their extensive investigation of the hunters and alligation, and concluded based on their analysis, this claims are without merit.

The first quarter once again demonstrated the strength of Cree's operating model, and ability to convert R&D into enabling new products.

We delivered record revenue of $66 million with earnings at $8.9 million or 12 cents per share.

As we move into the second quarter, we are looking to build on the success in Q1 while managing the challenges of ramping up the new products, reducing the costs on the current products and maintaining the momentum of developing new products and getting them designed in by our customers.

Our balance sheet remains strong at $195 million in cash and investments and we generated $18.5 million in cash from operations.

We are targeting continued revenue growth in the second quarter, to approximately $70 million with earnings of 13 to 14 cents per share.

Our operating model continues to deliver strong results and we look forward to building on our recent success in the second quarter.

I will now turn the call over to Cynthia.

Thank you, Chuck.

Before I begin my remarks on the earnings results, please keep in mind that the reference to cautionary statements made at the beginning of this call will also apply to my comments.

For our first quarter, revenue grew 3 percent sequentially, to a record of $66,211,000.

This result was greater than our target range of $62 to $64 million as our business accelerate during the quarter.

Primarily due to increased sales of nitride LED's for mobile appliance applications.

We also announced net income on the high end of our target range of $8,879,000, or 12 cents per share for our first quarter.

LED revenue, which made up 76 percent of our overall revenue, grew 3 percent sequentially and exceeded $50 million for the first time in our history.

For the first quarter, our unit shipments increased 16 percent over the June, 2003 quarter, to a new record, while our LED average sales prices decreased 10 percent sequentially.

Compared to a year ago, the average sales price for LED's has declined 20 percent.

We continued to target average sales price declines of 25 percent, for our higher brightness devices for fiscal 2004.

During the first quarter, we noted two significant trends in our sales.

We were successful in shipping increased volumes of our new products, including greater than 7 percent of our LED revenue being generated by the Megabright plus and laser thin devices.

We increased sales of lower brightness products, as we shipped in excess of 25 percent of our volume for keypad backlighting and toy applications.

During the first quarter, we tested a new sales channel for the toy market, where we sold Nan spect products that would otherwise be scrapped.

These sales lowered the average sales price of the LED products, for example, our sequential average sales price reduction of 10 percent, included more than 2 percent impact from non-spect chip sales.

Even though the non-spect products lowered the average sale price, this business does benefit our overall profitability.

During the September quarter, we saw stronger demand for mobile appliances, entertainment and decorative lighting applications while automotive sales seasonally declined.

We estimate that mobile alliance and automotive end markets still make up more than 50 percent of our LED sales.

During the first quarter, on mid brightness chips made up 87 percent of the LED revenue and standard brightness and XBright parts were 9 percent and 4 percent of revenue respectively.

We continue to see our best opportunity for growth over the next few quarters for products that require white LED's.

And we target to gain more design wins for these applications with our new X-thin Megabright-plus and XBright devices.

In order to provide our shareholders with more detailed information about our LED business, beginning in our second quarter, we will break our LED products into three new categories based on brightness, which we believe will provide a better indication of end markets being served with our products.

The new classification will separate high brightness devices to include our Megabright and XBright product family, while the mid brightness devices will include previous highbright and ultrabright products.

Our standard brightness category will remain as it was before.

In general, our high brightness category will include chips sold for solid-state illumination, outdoor displays, traffic signals and mobile appliance displays, including white light applications.

Our mist brightness devices will target automotive dashboards, cell phone keypad business, entertainment and in door displays, while the standard brightness chips are used mostly for automotive and indicator light applications.

We believe this breakdown will provide more insight into market trends of our products, as our Megabright parts have been very successful in competing in the high brightness end of the market.

Silicon carbide wafer revenue decreased 14 percent sequentially to $5.421 million or 8 percent of the overall revenue.

During the first quarter, our wafer volume decreased 18 percent, while our average sales price increased 4 percent over the June quarter.

The lower volume resulted from reduced sales to R-Gem, which buys wafers in high volume and therefore they receive a lower average sales price.

Gemstone materials declined 16 percent, in the September quarter, to $1.321 million or 2 percent of total revenue, due to lower yields of usable material per crystal which reduced the average sales price received from Charles and Covard (ph).

Cree microwave (inaudible) sales increased 50 percent sequentially to $1.051 million which was approximately 2 percent of our total revenue for the first quarter.

We were particularly pleased that over one-third of this revenue came from newer LDMOS and Module products.

We target the Creemicrowave's business will nearly double in the December quarter due to design wins received with newer customers.

Contract revenue increased 13 percent sequentially, due to additional funding awarded on an older contract.

This one-time adjustment totaling $529,000 was received this quarter, while the expense of associated were incurred in a prior year.

Contract revenues were 11 percent of total revenue for the three-months ending September 28 2003.

Gross margin for the first quarter was 43 percent of revenue as compared to 45 percent reported in June 2003.

Our average LED cost decreased 4 percent sequentially, due to higher throughput in the Durham factory and improved yields.

However, this decrease in cost was more than offset with a 10 percent reduction in our LED average sales price.

Overall, the greatest margin reduction came from the increase in sales of chips, for the keypad market where sales price reductions were faster than cost declines.

We also experienced lower yields as we ramped up our newer products during the quarter.

We are currently executing a plan to reduce our costs across all of our product lines through productivity gains, improving yield and other measures.

These cost reductions are especially targeted for our products use in the keypad market.

We have planned to focus on yield improvements and other cost reductions as one of the highest priorities of the second quarter.

During this September quarter, we also wrote down some of our older LED inventory, which was also sold during the quarter, and lowered our gross margin by $365,000.

Gross margin for materials business improved sequentially during the first quarter as the average sales price for Waifers increased by 4 percent and the average cost declined by 33 percent due to mix.

Margins on gemstone materials were reduced in the September quarter due to lower yields of usable material per crystal, which reduced the average sales price.

Cree microwave reported negative gross profit of $1,744,000, compared to negative gross profit of $1.553 million in the June quarter due to a change in product mix as we ramped up our newer products during the first quarter.

Contract margins increased to 22 percent of revenue in the September quarter result of the receipt of additional funding awarded on older contracts.

This one-time adjustment totaling $529,000 was received this quarter while the expenses associated with were incurred in a prior year.

Operating expenses is a percentage of sales were higher at 25 percent for the first quarter, compared to 22 percent reported for the June quarter.

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

During the September quarter, spending for R&D declined $507,000 or 6 percent sequentially as more resources rotated to support production and were reflected in costs of sales as we ramped up the newer products.

Including our Megabright-plus, and laser thin chips.

As we anticipated, the SG&A costs increased by $2.6 million, or 48 percent sequentially, primarily due to legal fees associated with a hunter and class action litigation and related matters.

These expenses totaled over $1.8 million during the quarter.

Of this amount, approximately $900,000 was associated with a now concluded special committee investigation, and other expenses that are not targeted to occur going forward.

SG&A costs were also higher due to the funding of the employee profit sharing program during the first quarter and other expenses.

For fiscal 2004, our income tax provision increased from 26 percent to the 31 percent, as favorable tax planning strategies benefited us in fiscal 2003 are no longer available.

In addition our tax provision is increasing due to our target for higher profitability in fiscal 2004.

This change in tax rate to 31 percent rather than 26 percent increased our expenses by mother than $800,000 for the quarter.

At the end of the first quarter our cash and investments were $195 for the three months ending September, 2003, cash flow from operations was $18.5 million, due to higher profitability, which was partly offset by a $13.9 million billed in our accounts receivable.

As a result, our day sales outstanding, which is calculated on our trailing monthly revenue profile increased to 71 days from 57 days.

We are focusing on collections during the second quarter and target that we will reduce our day sales outstanding by the end of December.

Our inventory balance was reduced by $1.4 million sequentially, and inventory days on hand with the lowest point in several quarters at 39 days, which is down from 46 days reported in June.

Our cash flow from operations also benefited from a $3.9 million reduction of deferred tax assets and a $3.3 million increase in accrued expenses.

Our capital expenditures for the first quarter were $18.1 million primarily for capacity expansion in the Durham facility to support a ramp-up of LED production and target higher volume for fiscal 2004.

As a result, we generated free cash flow of $400,000 during the first quarter.

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

Please visit our Web site for further details of the calculation.

Our capitalized patents increased by $3.6 million primarily due to our acquisition of the Silicon Carbide patent portfolio from ABV research.

We did not repurchase company's stock in the first quarter, however, we will continue to evaluate share repurchases based on market conditions in the future.

For our second quarter, we target revenue to increase 6 percent to approximately $70 million due to expected growth in LED sales for mobile appliance and automotive applications.

We also anticipate an increase in sales of new products including the Megabright-plus, laser thin and X thin devices.

In the December quarter, we targeting gross margin in a range of 43 percent to 44 percent as a percentage of revenue.

At this time, we are planning on an increase in spending for R&D costs, as we believe it is critical for us to continue to fund new LED programs, in order to stay competitive in the marketplace and create new designs.

As a result, we target R&D spending to increase in our second quarter to approximately $9 million.

SG&A expenses are targeted to decrease to 10 percent to 11 percent of revenue in the second quarter, as approximately $900,000 of expenses incurred in our first quarter were non-recurring costs connected with the hunter litigation and related matters.

However, these savings will partly offset by rising costs associated with the growth of our business.

Therefore, EPS is targeted in a range of 13 to 14 cents per share for the second quarter, with an estimated $76.4 million fully diluted shares outstanding.

Capital expenditures for our fiscal year 2004 are targeted in a range of $50 to $60 million as we intend to focus more heavily on productivity gains and yield improvements during the year for our capacity needs.

We continue to see strong demand for our product and mobile appliance applications as several phone manufacturers are reporting positive sales trends.

We also target our automotive markets to seasonally increased and we are focused on a plan to drive our costs down to enable us to maintain our margins while lowering price into the market.

While many of our peers are currently reporting losses, we are targeting record revenue and increased earnings in our second quarter while generating positive free cash flow.

Thank you, and I would now like to turn the discussion back to Chuck.

Thank you, Cynthia.

The entire Cree team has once again responded to the challenges by delivering Q1 results that were ahead of expectations and we are off to a strong start to fiscal 2004.

We will now take analysts' questions.

Thank you.

The floor is now open for questions.

If you do have a question, you may press "1" followed by "4" on your touch tone phone.

If you have on a speakerphone, we do ask you please pick up your handset to minimize background noise.

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

The first question is coming from Chris Versace from FBR.

Good afternoon.

One of the things I'm trying to wrestle with here is your LED volumes were up 16 percent quarter-over-quarter.

You reduced the cost 4 percent sequentially and ASP's fell 10 percent, so I'm just trying to based on the sheet that you have out there, understand the math that gets us to only up 3 percent quarter-over-quarter.

It sounds like it should be a little higher.

Well, you know, Chris, I'll be honest with you, let me have to run the math to figure it out.

Generally speaking, you know, we did see a significant volume increase, but you know, there was a mix shift where we picked up a lot of the handset business.

I understand your question, but let me sit here and just crank through it here, and if we find that those numbers, we'll let you know, but I'm sure they're right.

That could be--but I just want to make sure that I understand it, and hopefully, answer the question ahead of some other people asking it.

The volume was definitely up, and we did see that price -- we saw the price erosion that we showed you there, so -- you know I believe in the numbers are dead on in what the revenue was up.

Chris, the volume was up 16 percent, average sales price is down 10.

Do you understand that?

Yes.

I do.

You wants to know, though, why 3.5 percent, is that what your question was?

Yes.

It seems if you are up 16 percent, you reduce the costs by 4, but the ASP's are down only 10, it sounds like it should be up more than 3, 3.5, is what I'm wondering.

You have to take costs out.

We are talking about the revenue numbers, so the cost number is going to factor into that equation.

It's going to be a combination of pricing and volume, right?

OK.

Good.

Fair enough.

Two other quick one, then.

Sure.

Gross margin, 43 percent to 44 percent going forward.

Does that mean that you will continue to do this non-spect LED sales that you are trying in the new channel going forward?

Yes.

At this point, we're going to continue to evaluate it, I mean, it -- it's an opportunity for to us take advantage of products that we probably otherwise wouldn't be selling, so at this point, it makes sense.

It doesn't conflict with the other customers, so that's nice.

This is business that, you know, generally Cree -- this is not typical Cree customer stuff, so we'll continue to do that.

I think the message is that we feel like at this point, you know, we have to kind -- we have a good base here, and we think with the cost reductions, that gives us the opportunity to start driving the gross margins back up and it's a function of how quickly we can execute those.

The break-even at Cree microwave.

Still several quarters out at this point.

I believe the operating plan says by the end of the fiscal year, probably in our in Cree's Q4, based on the Q1 numbers and the targets for Q2 at this point we're on track.

Is there a dollar amount that you can share for the revenue line.

I cannot give that to you.

And then just -- one last one you know, you come in and you hit on it your commentary that a lot of the revenue guys -- the suppliers for the handset market are benefiting by really strong up-side given that market.

Just wonder, did you see in terms of pricing pressure, I realize down 10 percent is an average.

Did you see greater pricing pressure there, and just as a follow-up so that quickly, did pricing pressure get worse throughout the quarter in general?

In general, I would say that the pricing effect we saw was really just a function of how much extra business we were able to take in the handset.

We were successful gaining a lot of new business on the handset side of it.

Pricing pressure for new products, no, I don't think that that was -- generally speaking, I think ASP trends were in line with our expectations are.

Given that the business -- the strengthening of the business recently and the fact that we're going into this quarter with 80 percent of it already booked, you know, that's a good signal that -- I don't think that we have been that -- this booked up this early in the quarter in probably a year.

So, I think that is a good sign that ASP's are pretty much where we have expected them to be other than obviously than mix effect and with some of the design activity on the new higher brightness stuff, at least optimistic going forward.

So you didn't see the ASP's, you know, start off down, you know, low single digits and worsen throughout the quarter, then?

I hope.

Thank you.

The next question is coming from Tom Spenzis, of Think Equity Partners.

Hello, just real brief on the XBright it, looks like it was actually down sequentially in terms of sales, is that correct?

No, that's a percentage number, is actually pretty much the same as the previous quarter because the LED business grew overall it didn't grow significantly and in the well thought barriers is that we have seen just a tremendous growth in the near term in the Megabright-Plus, which going to overlaps the XBright category.

Those slots that at one point we thought early on would go to XBright at least in the near term are going to the Megabright top product lines but with the additional expect price to bringing on line, we see that product line picking up here at the next several quarters.

and (inaudible) I think you said you had seen your first preliminary approval for white LED's.

Is that going into the display of the handset or?

It is definitely a white LED.

I do not know for sure if that is backlighting, keypad or fix in a LED flash application, but it's one of those types of applications.

But, you know, in general, we are winning other XBright designs for white LED's.

So I think in general the technology is starting to get some attraction.

So, you think you can actually start to take a little bit of share in the display side going forward?

I think we already have.

I think in the last quarter, the reason our Megabright-Plus almost doubled quarter over quarter is that we are already having success in the white LED's for both the keypad -- not the keypad -- the keypad, but also the displays and also the flash modules.

And that's what you want to show by breaking it out differently as we go into the next quarter?

Yes, I think unfortunately, what you cannot see is that Megabright-Plus continues to be an important growth driver for us, in fact really trying to do is give you insight that the, based on what we can tell today, we're already winning designs.

I think our estimate right now is that there's -- at least several different phone manufacturers that have models that have white backlights of color screens that use Cree chips already.

And so that's what's helping with the comfort level of gross margins improving in the December quarter.

Yes, I think definitely getting the attraction on the higher brightness products is definitely where -- feeling like we have a good base here and we can go forward and we had a huge product mix change last quarter.

So I think we really have to factor that in, and in general it, was a huge success.

We took -- we won a lot of business in the keypads that we were not getting previously.

I think, overall, that's a success story.

And lastly, can you just talk a little bit about the legal dispute out there in Taiwan between Epistar and CHI (ph) and how you think that might affect the ASP trends next year?

Well, you know, as a general statement, it's probably - though in life (ph) we have positive (inaudible) effects on Cree.

You know, I think that it does a couple of things that I think it reminds not only the suppliers, but the people who buy those chips and have to worry about where they sell their products.

It's going to remind them that I.P. is a factor and something they have to factor into the purchase decisions.

In general, that could lead to increased potential market demands for to us to access or potential support on the ASP side.

Despite the optimism, it's really too early to tell.

I think that the -- that's a really recent event and if we're going to see it effect, we really probably won't see that effect until the quarter we're in right now.

Great.

Thanks very much.

Thank you.

The next question is coming from Pierre Maccagno of Needham and Company.

Hello, Cynthia and Chuck.

Do you have the number for the depreciation in the quarter?

Unfortunately, Pierre, we're no longer able to give that out in the conference call.

We'll be filing the 10Q in the next couple of weeks and you'll see it then.

You mentioned that you are selling into the flash market for the handsets.

How large do you see that market and what brightness levels are needed for that application?

The size of the market is going to be a function of the size of how quickly camera phones catch on.

It's clearly a trend that's a growing one right now.

I think that you don't have to look to my comments from that.

You can look to the comments from the cell phone manufacturers themselves.

Most of them have been optimistic about camera phone demand.

As far as the chip technology required, the products we are seeing being used in flash modules are really the high brightness stuff, the Megabright plus, XBright class devices.

That's an application that's going to be driven primarily by performance based on what we have seen today.

I see.

In terms of your capacity, where are you now?

Well, we exited the quarter pretty much running at capacity with the -- the increase in demand we saw, you know, and given the fact that you can see by our bookings at this point, we're running pretty heavy early in the quarter that we exited at capacity, we have a plan to quarter to add additional capacity to combination of CAPEX and productivity improvements to help us continue to grow, but right now, the factory is running fully utilized.

OK.

And regarding the extra bright, can you comment with more?

I mean, is that product -- did we even start ramping up, or what are the difficulties, because in previous calls, there were some comments as to this program ramping up faster than it has, so you know, what are your comments regarding that?

Yes, I mean -- I think that -- I wouldn't call them difficulties.

I think it's -- the fact that we have a brand new chip technology that is asking -- asking, you know, this customer base to, you know, implement something that's different than they traditionally have used in the last 20 years.

We're really just continuing to work through that learning curve.

You think the other thing you have to realize is we really only have the blue XBright products out recently.

Some of the things we are doing, we have got our blue XBright product.

We have the blue XBright plus.

We have the green that we just recently released.

We have the XBright family available for display in signal applications.

We're working on a low temp version.

That is for certain package, the customer needs a chip that's compatible for lower (inaudible) processes.

So, we have got a new version that we're working on this quarter and we have X-thin, which again is designed for that market but also comes in a thinner design, and a little fuller voltage.

I think the combination of the products we have got, the learning curve we have already gone through and this extension of the other product, I remain optimistic.

I think at the end of the day, if we can produce a chip from a price performance standpoint is superior to what else is out there, I think it's going to win.

It just takes time.

We're working through that, you know, probably a little additional insight, we have gone so far as to start working with the vendors for the equipment for dye attach equipment.

We have termed that part of what we have to do is also make sure that our customers can go to their equipment vendors and get chips -- get technology that will work for them.

We're working all angles.

I definitely.

I think it's fair to say that, you know, people had expectations this would ramp up faster, but we are winning in the short term with the Megabright plus, and XBright, based on everything we should see, it should happen in the next few quarters.

OK.

Regarding the first question, there, I mean, in terms of ASP's dropping 10 percent and units up 16 percent, I mean, shouldn't we have expected a gross in sales of about 6 percent?

But you got 3 percent, maybe you can clarify that a little bit more?

Pierre, I think if you do the math, we gave you the LED revenue number.

You can see what it went up.

If you look at the mix, take it out on the units and go backwards.

It was 3.5 percent.

If I I'll be happy to go with you the math 101, and just try to figure it out.

I don't have it in front of me at this time.

More questions, regarding the Osram agreement of 500 million LED chips over the next 21 months, I'm just assuming on ASP of 13 to 14 cents for you, and that would come to an estimate of $5 to $70 million, which is $37 to $40 million per year, that's somewhat lower than the 38 million in sales that you had to Osram in fiscal '03.

Could you comment on that?

I mean, is this like a lower estimate that you think, you know, could increase more?

Yes.

Pierre, I think that first of all, it's -- I think you shouldn't underestimate the fact this is 500 million chips over seven quarters.

We have never had an agreement, you know, at this level, you know, with Osram over a period of time.

So, I think first of all, you have to realize, this is a very important step for us, especially the fact that we are putting something longer term together.

The pricing is only fixed in the first six months of the contract.

You cannot apply any general ASP.

It's going to vary depending on the mix.

That mixes anything from the standard brightness products that go into dashboards to some of our brand new technology not only on the Megabright and the XBright, but also on the technology that's going to end up in things like power chips.

So, you just cannot calculate the estimate.

I think at this point, I think our business with Osram is good and I expect it to continue to be a major customer going forward, and, you know, it's just not practical to try to model the exact dollars at this point.

The gossip with Osram going towards Safire, that doesn't seem to be the case, correct?

They're just doing some products with Safire, but they will continue long term with silicon carbide.

You can look at the comments that Osram made in the press release where the head of Osram came out and said this is an important part of -- you know, of what they're doing here is, you know, an important --silicon carbide is an important part of the long term strategy.

So, it's fair -- if you look at it, you know, they are still -- they're comments say they're betting on silicon carbide.

While they have their program it's an R&D project.

At the end of the day, every customer -- the critical piece is going to be, does the customer, or are they able to, you know, win use our chips.

It's no different for Osram or any other company.

If we continue to build new products like XBright and X thin and continue to extend brightness and drive costs and price down over time, I think we'll continue to win and I don't think this contract was really affected at all by the R&D efforts at this point in time.

That's future type stuff.

OK.

My final question here is regarding Taiwan, I believe there's going to be two outcomes either they start paying the leasing fees or they go out of business.

Financing fees or they go out of business.

Could you comment as to what outcome will be the one, and how will that affect Cree long-term?

Look, I cannot predict the future.

I think that -- I think what we have seen is that, you know, there is two schools of thought six months ago, one was, hey, none of the Asian suppliers have ever been sued, so, since they have never been sued, IP must not matter, and, you know, none of the Asian chip supply verse to worry.

I think that's been disproven.

I mean, the fact is that a Korean supplier was sued and now one of the major Taiwanese suppliers was sued.

I think that's going to be up to NOCHIA and they're hard to predict.

Given the nature that I would expect the Taiwanese would be happy to take a license if one was available.

The fact that they got sued, I think it doesn't appear that one is available.

It's hard to predict.

I think you need to realize also that it's not just NOCHIA's I.P to stop there, there are several companies that good core I.P., and until the market sorts through all of that, I don't think we can figure out where that's going to go.

If they get licensed, then, you know, they will be able to compete with you worldwide, that could affect you a little bit, correct?

That would assume that they don't need any I.P. from suppliers other than NOCHIA.

OK.

Pierre, just one other thing as we were talk, I was thinking about your question, I would just take some random volume number and do the math.

Because I'm pretty sure if you can see the volume can go up 16 percent and the ASP's can go down that much and the LED revenue works out if you just work the math backwards.

I cannot give you the exact numbers because we haven't already released them.

Doing the quick math while we're talking here, it does appear to work out.

Thank you very much.

Thank you.

The next question is coming from Harsh V. Kumarof Morgan Keegan.

Hi, Chuck, Cynthia and Fran.

A couple of questions.

I'll try to keep it fairly short.

Quick explanation here, you guys have always had some level of keypad business.

Are you finding in the marketplace that you have to drop prices to retain whatever business you had, or are you dropping prices willingly to add incremental market share in the marketplace?

Well, boy.

It's hard to give you exact market share numbers.

I can tell that you we had a significant higher percentage of sales for the keypad application last quarter.

So, clearly, we took more business in that application.

So, I don't -- I think that's the best way to describe this.

As far as overall market share that's hard to calculate.

The best number that I can give you, strategies and limited said the high brightness LED market was supposed to go 25 percent this year.

If you look at Cree's Q3 numbers and make an estimate using the target we gave you today.

The overall -- Cree's on pace to grow the LED business something like 65 percent for this year.

Strategies right, that gives you a perspective on what our business is doing relative to the market, but those are our numbers.

Fair enough.

You are talking about a plan that you want toed implement soon to bring the costs down for the loaned LED's.

When does it kick in and when do you expect to see benefits out of this, or is this additional capacity you are throwing in?

No.

This is really a function of, you know, we're always working on cost reduction, but you know, we have had so many new products coming online in the last several quarters.

It's just a matter of adding additional focus and resources to drive some interesting new ideas for us really to look at things.

Everything from yield improvement to process simplification, automation, products that go beyond some of the things we have tried in the past.

I think I said earlier that we would hope to get some benefit here in the next several quarters, and you can see that based on our near term guide Dale Pfau, that would lead you to believe it's probably late this quarter or early into the first part of next calendar year.

Got it.

And just another follow-up clarification type question, we keep hearing rumors about where the Taiwanese competition is, sometimes we hear it's the mid end or sometimes it's the high end.

Can you clarify for us, could do you see them in the mid end, the high end or across the board, or however you want to categorize it?

I would say that today when we compete with Taiwan, first of all in, major customer, we have been successful.

I think that's the first key point.

Second is that it is generally -- it is really at the -- in the low -- low to midpoint of the mid brightness category.

It's not at the end of the product range.

OK.

That is it.

Thank you very much.

Sure.

Thank you.

Our next question is coming from Dale Pfau of CIBC Oppenheimer.

Good afternoon.

This is Dale Pfau here.

Hey, Dale Pfau.

Good to hear from you.

Couple questions just so I make sure my notes are correct.

You said ASP has declined 2 percent, but I mean -- 10 percent but 2 percent was selling the off spect parts, is that correct?

Correct.

Correct.

More than 2 percent.

More than 2 percent.

Yes.

The rest of it could I assume that it's probably more has to do with mix as you increase your penetration into the keypad business relative to last quarter, because we saw it strong ASP decline again last quarter?

Absolutely, Dale Pfau.

I would say that when we looked and did the analysis, it's really more of a function of mix than anything else.

I would say that generally speaking, other than the shift in mix towards that keypad application, ASP trends were generally in line with the expectation.

And on a quarter over quarter basis on the keypad business, were ASP's in that business down as much as your overall ASP's were down?

It was probably about the same, but I don't think I have -- I don't have the exact numbers here.

About the same.

Was it more of a mix shift.

And on your -- particularly on your megabyte-plus, which looks like it's --Megabright-plus, the product that's seeing nice growth on the market share gains, ASP declines in the quarter in that group is that in line with the expectations, down 4 percent or 5 percent or stronger than that?

I can't give ant percentage of this Dale Pfau, it was in line with the expectations.

If I look across our product line, ASP has met the expectations.

What you just saw is a large percentage of the business, a lot of that unit growth was on the keypad side, at least in the near term, which affected the mix, the ASP as a blended average.

And can we talk about your strategy going forward here because obviously with the new Megabright and the X-thin and so on, that should allow you to take some market share in that portion of the business.

And have you just been opportunistic taking share in the keypad business of late?

Since you had the capacity, is that part of your overall strategy here?

Yes.

I think if you look at comments I made a quarter ago, we said we would be opportunistic about going after the keypad business and go after it where it made sense, given the various constraint, including capacity, I think we have done that and we saw nice growth in the segment of the marketplace.

As far as the other products go I think that I don't want to under-- I shouldn't underestimate, we are already seeing good traction on the Megabright plus and it really is in the high end applications.

So, I think we are starting to have the success, starting to see the color screens backlit with white LED's using our chips and things like that.

To me, we starting to get traction not just in the keypad but in the color screens and flash modules.

And last question, you are working on any larger format dye for the solid state white lighting application right now?

Yes.

One of the things we talked about, I gave you one of the technology results was the XB-900 where we delivered, we demonstrated we could do 70 -- 70 lumens from a single chip.

So, that's a pretty big number operating at 3 watts and we're continuing to work on the XBright-900 and related products on the whole power chip family.

At this point, though, while we have -- continue to make progress on the chip side and sample customers and even have sold some prototype quantities of the devices, we really don't have any customers out there yet we will have a high volume package in production, we are really kind of limited by that at this point but this continues to be tremendous interest in that product family.

Back to the Off-Spekt (ph) parts that you sold, Cynthia, if I remember you mentioned that you actually took it right down on finished goods as you sold those, so the implication here is that even though it was incremental revenue it -- you took a hit to the margin line in the quarter because of that, is that correct?

No.

I did not necessarily identify that as the Non-Spekt.

What I said was the Non-Speck in previous periods would be scrap.

So, during this quarter, we took advantage of selling things that we wouldn't have put inventory in the past, and found a market in the toy market for it.

So, we -- the things that we took a write down for were other items that we had in inventory, motor parts.

and that amount was again, please?

It was a little over $300,000.

Great.

OK, Thanks.

Thank you.

The next question is coming from John Lau from Banc of America.

Actually, this is Michael Coles, standing here for John Lau.

Just a quick question.

Can you give a status update of the packaging of the XBright dye and the second question too is in terms of where the market is heading, is there -- what's the next level of brightness after the XBright and are any of your competitors working on that?

All right XBright dye.

I think that we have a number of our customers that have XBright qualified and are already purchasing the dye.

I think we have other companies coming along.

So I think we will making progress there again in this function of time and learning curve.

So, I think we're continuing to have success getting people up that learning curve.

As far as I think your question was - what's the second part of it?

The second part just where the market is heading in terms of the next level of brightness after XBright?

In general, the market is going up.

I think that right now, XBright is -- XBright and really with the X-thin, we are pushing and envelope them.

For what we see in the marketplace, our XBright plus and XThin products really set the standard for brightness.

As far as where the market is going, in generally there's a trend that people want brighter parts because that really means efficiency and other things and you will continue to see us push along those lines but at least in the near term.

Really our XBright and XThin products are really at the high end of what's possible right now, at least commercially.

OK, great.

Thanks.

Thank you.

The next question is coming from Blaine R. Carroll from Adams, Harkness & Hill.

Thank you.

Hello, everybody.

Chuck, couple of quick ones, I hope.

On the XBright, did you say what the volumes were down the quarter?

No.

I just said it was at similar level at last quarter.

Similar level and the volumes and than even though if you do the math, the 5 percent on last quarter and the 4 percent, on this quarter, you -- you get somewhere around $2.4 to $2 million, you are saying it actually was flat on a dollar basis as well?

It's in the -- within the error of -- it's approximately the same.

I'm sure if I did the exact math I could come up with it, it's basically, it didn't change much quarter over quarter.

On the revenue side, what volumes for that matter?

Yes, that's right.

It was pretty much stable.

It did not change significantly quarter over quarter.

and than Cynthia, did you talk about DSO's.

Yes.

I said they increased to 71 days this quarter.

and what was the reason for that, Cynthia, was it a back-end loaded quarter?

No.

The majority of it is, you know, just due to timing.

You know, in fact, we received quite a bit of money, the week after our quarter ended.

So, sometimes, you know, you run into quarters where customers are a little bit slower paying.

So I think I would attribute it mostly to that.

But with overall, our confidence level is pretty high that should come back in line here this quarter.

It was more of a timing phenomenon than any issues that we were concerned about at this point.

Timing of payment versus timing of linearity of sales down the quarter.

Yes, actually this quarter and last quarter were not all that different, so it is more of a payment phenomenon.

How -- how much was your turns business during the quarter?

You saying you're 80 percent booked right now, Chuck, so how much --

Let me give you -- turns is kind of a -- it's a little bit different because some of the customer, even major customers basically, you know, we work on kind of a very short lead time, so while we have large customer, they're not giving us long visibility.

I think the best way to think about that, last quarter when we did the call, which was about four weeks into the quarter, we were 65 percent booked or shipped after about a month -- after the first month.

This quarter, two-and-a-half weeks in, we're at 80 percent.

It should give you a some sense that the business is booking up faster and stronger and on a relative basis this is probably the highest level at this point of a quarter in almost about a year.

OK, I know you're not giving projections for March, but typically, would the December quarter be the stronger quarter, because the seasonality, you were saying somehow decoder (ph) lights as well as what's going on in the cell phone market?

You know in our business, we have not in the past other than maybe a little about the of automotive seasonality in the summertime slow down.

We have generally the conversion of applications to using more white or blue LED's or more applications simply converting has offset any phenomenon related to seasonality.

Could that happen at, could but that is not a penetrated trend in our business.

Generally speaking, the first quarter of the calendar year has been generally higher when the business was growing.

OK, and then I guess last one, Cynthia I don't mean to noodle wording too much, but I think the comments were on the higher brightness product, you're still forecasting a 25 percent price reduction year over year.

What are your pricing assumptions on some of the lower brightness products, maybe standard brightness?

I don't think standard brightness is necessarily any different than that type of a range.

I'm just saying that, you know, we usually get a lower visibility on some of the handset keypad business.

That's why the comments are what they are.

So, you know it, could be less, it could be more, but we're not making any comments per se, about the keypad business right no

OK, and than if I can sneak in one more, just in general, growth margin on the materials business and on gemstones today, above or below corporate average.

The materials business is very good.

It's the highest margin business.

It always has been sort of that trends a little bit higher, the gemstone business is similar to the averages in general.

OK, Great.

Thank you.

Thank you.

The next question is coming from Nathan Churchill of Sidoti & Company.

(inaudible) could you give us an idea if there's anything that you can do on this Non-Spect product given that you know you might be selling it in the future, is there anything you can do to lower the costs or help boost the margins.

I want to clarify what the Non-Spect product is.

This is basically product that if we didn't have orders for it, we would throw it away.

So it's effectively dye that otherwise we would just not manufacture.

So, because much of our business is sorted dye, we're able to create this bid of Non-Spekt products for certain applications that frankly don't require the same things at general market.

That's all we're doing.

It's not -- the way to look at it is purely opportunistic business, and, you know, it's just out there as a way to take advantage of some product that's otherwise, you know, we just wouldn't be selling.

So -

OK, what would you say your biggest opportunity in the next year for LED's outside of hand sets?

Boy!

Outside of handsets, I would say the easiest way to think about it is, I think, to see this biggest trend will continue to be things that use white LED's.

So, it's really the concept of take the things that you see in LED and then the hand set and apply it to other applications.

Across other types of electronic devices.

The color screen in your hand set, there's no reason that same color screen couldn't be backlit screen in your video camera.

Or it could be, you know, as screens get larger, more of the PDA's convert to the technology.

So similar types of things like that.

It's other places where they want to backlight keypads or dashboards or other things with white LED's.

It doesn't mean there won't be interesting green and blue.

They are definitely is but the white LED is pretty interesting because it goes after all kinds of other lighting technologies, as, you know, as an alternative, and a little hard to predict where that is and longer term, you know, I think that if you want to know beyond a year, I think that you know, as LED's continue to get brighter, there's more and more applications and things like cars.

I believe someday, you know, it's not unrealistic to think we'll have LED's as part of the forward lighting solution in your car.

That's further out, but it gives you a perspective of where the market is going.

OK, lastly, could you give us any insight as to what you're expecting your product mix to be for the microwave business for the fourth quarter relative to or in regards to older products versus newer products?

I Think that we're -- most of the growth is coming in the new LDMOS and Module products.

I don't have an exact mix for (inaudible) and I have seen LDMOS and Modules will continue to grow as a percentage based on, what we're working on today.

The growth is really coming from new design wins.

So that's where the focus is.

OK, sorry, I had one thing -- one other thing.

Did you see more of a pickup late in the quarter?

It seems lot of other manufacturers reported pickup August/September.

Yes, I think one of the things that I said earlier is that we exceeded the quarter at running at capacity.

So, -- capacity, I think we're seeing a similar trend definitely as I hopeful tried to indicate earlier is that mobile phones is definitely a growing trend in our business.

It is probably one of the contributors to the fact we're seeing ourselves 80 percent booked this year in the quarter relative to where we have been in the last couple of quarters.

I think it's fair to say we are seeing a similar trend driven by mobile sense.

OK, how about microwave business?

The microwave products are really only on the base station and infrastructure side of the business.

They don't affect any of the handsets.

That business is really a much longer term design cycle.

You're talking about designs that we work on for 18 months before they going to production.

The success of microwaves is really a function of taking the designs we have been working on and working with those customers and making sure that those designs get into production.

Some of that is within our control and some of that isn't.

OK, thank you.

Thank you.

The next question is coming from Hans Mosesmann of Soundview technologies.

This is Susan Shin calling in for Hans.

Actually, I just you just have a couple of questions.

I was wondering how much of the 6 percent quarter over quarter growth you expect will come from LED's sales.

I was wondering if you could quantify that somewhat.

I don't know if I have a good percentage.

I can tell you the majority.

Sues, the only thing we did say is that the micro business is expected to double.

So, if it was a million this quarter, you might get a million of the growth out of microwave rather than that it should be the LED business.

OK, and than just one final question, could you give us an update on blue lasers.

I think last time you said that you had some problems getting blue lasers to operate continuously at 30 megawatts.

Could you give us an update on this?

One of the things that I said earlier we were trying to make 30 miliwatt blue lasers; the challenge is how to get to 10,000 hours.

Our current results are in the 3,000 to 4,000 hour range.

While that's good, it's inconsistent and we're working through the technical challenges to make that happen.

Quite more importantly is that, the reality in the blue laser market.

The volume market for blue lasers, the best we can estimate based on our research is still several years away.

We have got to keep making progress from the technology standpoint, but it really doesn't have a tremendous impact from a sales stand it point in the next year or two.

You said that it would have more of an impact at 70 Megawatts.

No, I said that 30 was where we are at today and there's an indication that while that would get the application started, even higher power lasers will be required over time.

OK.

Great.

Thanks.

Thank you.

The next question is a follow-up from Chris Versace of FBR.

Two quick questions.

The first would be out of the $50 million you did in LED revenue in the quarter, what was the percentage of it that came from the non-speck relating to the toy market that you talked about.

A small percentage because we don't get a lot of money for it.

It's very small.

Less than 5 percent.

Absolutely.

Much less than that.

Ok.

Great.

And then Chuck, I was curious, since you are talking about the applications you are looking to go after, maybe if you could take a minute and give us your view on the competitive landscape for similar technologies like OLED's and some other's that are coming into the market by guys like Sony, Sharp as those hit next year.

It's interesting, we have heard about the OLEDs from a variety of companies.

Some of the companies are the biggest promoters of color LCD screens with backlights today.

We have to always keep an eye on disruptive technologies.

There are people talking about, you know, bringing factories online, but when all is said and done, based on what we can tell from talking to the manufacturers and what's going on, OLED's still have some bugs that have to be worked out.

And that at least in the next 12 to 18 months, the indications we're getting from the market is that the color LCD with the white backlight is going to continue to be the dominant technology, that can always change, OLED's still have a few hurdles to overcome to get there and then again they still have to chase the cost model on the color screen and back light method which is not -- it's a moving target they're chasing.

If I remember correctly, one of the biggest hurdles the had in the past was delivering a good lifetime for blue.

Do you know if they have overcome that or is that still one of those hurdles?

My understanding is there's several different variations of OLED, there's large molecule and small molecule and a few different varieties.

The net result is I think all of them still have an issue of when you try to make full color screen, where you have to have red, green and blue, is that the ability to build the screen that over time is consistent, and remains its colors.

So, I think that one of the technologies is still struggling with blue.

The other one is struggling with the fact they change very differently.

So, while you may have a full color green in the beginning, it's quite different full color screen after some numbers of hours of operation.

OK, and this one, last one for Cynthia.

Based on the comments you just made to the prior question that the growth is coming out of the LED business quarter over quarter, we should not read into that and think that some of the other businesses other than microwave will be flat, right?

No.

I think that all of our business areas are growing.

I'm just saying that LEDs is probably growing at a more rapid rate.

Just wanted to double check.

Thank you.

Thank you and the next question is from Cliff Josephie of H.D.

Brown (ph).

Thanks for taking my question.

I just wanted to make sure that --

Excuse me.

This is for the analysts to ask questions.

OK.

I'm with H.D. browse, a brokerage firm.

I can ask a question?

No, we have mentioned in our opening comments that we were restricting it to analysts only.

Did any of the analysts ask about the $529,000 benefit you got on the contract if that helped you make the number by a penny.

Disconnect the caller.

Disconnect.

There appears to be no further questions at this time.

We have one additional announcement today, we will be Web casting our annual meeting on October 28.

Further details will be forthcoming and available on the Web site in the next week.

We do thank you for participating in our conference call today.

We do appreciate your interest and support and look forward to reporting the second quarter fiscal year 2004 results in mid January.

Thank you.

Thank you.

Thank you, Ladies and Gentlemen this does conclude today's conference.

You may disconnect your lines at this time and have a wonderful day.