Wolfspeed Inc (WOLF) 2004 Q3 法說會逐字稿

Good afternoon.

My name is Brenda and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Cree third quarter fiscal year 2004 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

I would now like to turn the call over to Ms. Fran Barsky.

Ma'am, you may begin.

Thank you, Brenda, and good afternoon.

Welcome to Cree's third quarter fiscal year 2004 earnings conference call.

By now, you should have all received a copy of our press release.

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

Today, Charles Swoboda, our President and CEO and Cindy Merrell, our Chief Financial Officer, will report on the third quarter.

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 margins and earnings, plans for new products and other forward-looking statements indicated by words like anticipate, expect, target and estimates.

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 actual results to differ materially.

Also, we'd like to note that as a result of SEC rules, we will be limiting our comments regarding Cree's third quarter to discussions that are 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 then clicking on financial messages.

We will not be able to answer any questions that would involve providing additional financial information about this quarter or answer any questions about pending litigation or other legal proceedings beyond the comments made in the prepared remarks.

This call is being recorded on behalf of the Company, that the presentation and recording of this call are copyrighted property of the Company and that no other recording or reproduction is permitted unless authorized by the Company.

Consistent with our previous call, we are requesting that only sell-side analysts ask questions during the Q&A session.

However, we recognize that other investors may have additional questions and we welcome you to contact us after the call by e-mail or phone at 919-313-5300.

We are also webcasting our conference call to allow more flexibility for our conference call attendees.

The webcast will be available through April 30, 2004.

Now I would like to turn the call over to Chuck.

Thank you, Fran.

For the third quarter, we delivered impressive financial results with record revenue and earnings that exceeded our targets and analysts' consensus expectations.

Revenue increased 6 percent sequentially and 28 percent over the third quarter of fiscal 2003 to $77 million, while net income increased 16 percent sequentially and 42 percent from the comparable quarter in 2003 to $15 million, or 20 cents per share.

The growth in revenue was led by LED sales, which grew almost 10 percent from Q2 to $62 million.

Overall gross margins increased to 50 percent as LED pricing increased slightly while our cost reduction activities were on-track for the quarter.

R&D spending increased to $10.5 million, which was higher than our target, but adjusted to support our rapidly growing business and increased activity in the LED area for brighter LEDs chips, three-inch process development and excellent qualifications.

SG&A expenses were in line with Q2 at $7.9 million and we benefited from approximately $600,000 of non-operating income in the quarter, primarily from a onetime technology license fee.

Our R&D investment continues to pay back as new products were key to our revenue growth in the quarter.

We target R&D funding to increase slightly over the next several quarters, in-line with the growth of our business to fund development of larger wafers, brighter LEDs, more efficient power chips, the excellent LED product family, new product offerings in power and microwave and materials capabilities to support these product areas.

We have continued to deliver record financial results, driven by sales of our new products and we're targeting a strong Q4 to complete a record fiscal year.

As we recently announced, we completed the acquisition of the gallium nitride substrate and epitaxy business from ATMI for $10.2 million.

The acquisition brings us core technology in the gallium nitride substrate and epitaxy area and a strong technical team that we plan to relocate to our Durham, North Carolina headquarters over the next year.

The gallium nitride technology is in an early stage of development but could potentially be an important longer-term for lasers and microwave devices.

As part of the transaction, we also acquired 17 U.S. patents and additional patent applications which complement our existing intellectual property portfolio.

These patents include a pioneering U.S. patent for white LEDs and related technology.

We believe this patent, which has a priority dating back to 1996, has broad applicability for white LED conversion technology.

We believe that these patents strengthen the foundation of our XLamp LED business and will help Cree drive the market for LED-based lighting.

As we look to the fourth quarter, we the need to remain focused on challenges that come with the rapid growth in our business.

We must work with our LED customers to make them successful with our new products while building on the growth in sales for our existing products.

With the growth in LED chip volumes, we have to continue to expand our capacity while increasing yields and simplifying our processes to ensure that we can support customer demand with better efficiency than we're delivering today.

We need to accelerate our sales growth for both power and microwave products and overcome the hurdles to meeting these new customer requirements.

Our R&D teams need to continue to create new products that maintain our technology leadership position while delivering lower-cost products to enable us to continue to win business, both on the high-performance end of the market and in the high-volume, lower-cost market.

We recognize that we operate in a highly competitive global market which we anticipate will continue to create new challenges for our company, but these are the types of challenges that drive innovation and we believe play to Cree's strength as a technology later.

For the fourth quarter, we see continued strength in our LED chip business.

We're targeting revenue to increase 8-10 percent in Q4 to a range of $83-$85 million, driven by growth in LEDs, as well as incremental contributions from microwaves and power.

Based on current customer order patterns and forecasts, we believe that blue and white LED demand for mobile phones will remain strong during the quarter, driven by overall demand for phone, conversion to color screens and increasing content for blue and white LEDs used within the phone.

In addition to mobile phone demand, we to strength in other LED applications, such as automotive and video screens.

We currently have more than 80 percent of our target revenue booked or under contract for Q4.

We are forecasting gross margins in the fourth quarter to be in the high 40s as a percentage of revenue, which may fluctuate up or down, depending on the product mix.

This target anticipates a ramp-up of our UT230 product for the cost sensitive keypad market and may result in blended ASP shift lower and in-line with historical trends.

Q4 R&D spending is targeted to remain at approximately $10.5 million, while SG&A expenses to be in a similar level to Q3.

Therefore, we target Q4 earnings of 20-22 cents per share.

The growth in LED sales was driven by a 7 percent sequential increase in unit shipments and a 3 percent increase in ASPs due to the favorable mix shift to our premium high-brightness products.

X Class products were the fastest-growing part of our high-brightness segment and accounted for almost 20 percent of LED revenue, while sales of mid-brightness chips for the blue keypad market remains strong.

The increase in sales of our high-performance chips was driven by white LED applications with success in mobile phones for white keypads and LCD backlights.

White LEDs with our chips are currently designed in at several major manufacturers for multiple mobile phone platforms and our customers have indicated that they target to expand their success to additional models and platforms over the next year.

We have also won business with several different customers for automotive applications for several new Japanese models and sales for LED video screen applications are growing.

We continue to see strong demand for our high-brightness products and expect that this category will be an important growth driver in future quarters.

During the third quarter, we extended our LED brightness capabilities with the development of our XT-21 blue LED chip product, which we have recently started shipping to several of our major customers.

We have a significant R&D effort in both epi-development and device design to enable further performance increases for both the XT product line and target releasing additional brighter versions over the next several quarters.

We also continue to work on new X Class products with expanded compatibility for a wider range of packaging processes.

For the high-volume price-sensitive keypad market, we're in the final stage of product location for the UT230 with several customers and we target to have this product released during the fourth fiscal quarter.

We are working on the final steps to release our LED power chip product on three-inch wafers.

We've demonstrated the capability to build branch products, but we still need to work through the qualification on a product-by-product basis, as well as solve the process and technology issues associated with scaling up our manufacturing line for three inch.

This conversion will be an ongoing initiative over the next year as we migrate most of our products to the larger wafers and is an important step in our longer-term cost reduction plan.

From the nitride LED market perspective, demand has continued to be strong.

Based on our check within the industry and feedback from our customers, we continue to see our market segmented by performance and concerns with IP.

Our major customers, including those in Taiwan, continue to express to us that IP is an important consideration for their business and their customers outside of the China-Taiwan market.

We believe that performance and technology will be the dominant competitive factors in this industry, but that IP is a key differentiating factor in the short to midterm.

Our strategy is to continue to invest heavily to drive our technology while maximizing the value of our IP portfolio.

We've succeeded in resolving our dispute with AXT in Q3 and we're now moving ahead with a more aggressive campaign to notify companies of potential infringement issues.

We believe that there are still a number of misconceptions about IP in the marketplace and we hope to educate not only the chip manufacturers, but also the packagers and their end customers.

Our Taiwan competitors continue to be aggressive on pricing and several companies are promoting brighter nitride chip product.

We continue to monitor the various new product claims, some of which appear to be real and some that appear to be more hype than substance.

The key to our success is still about delivering the best value to the customer, in terms of price and performance.

Although we cannot slow down our development pace based on our analysis of the market, we remain confident in our competitive position.

Although LED chips are the major driver of our growth today, we target our XLamp LEDs, Schottky diodes and microwave transistor product lines to emerge and help fuel the growth engine as we move into fiscal 2005.

Our excellent product development team continues to make progress towards our goal to release our first high-powered packaged LED products to production by the end of Q4.

Most of the manufacturing equipment has been installed in our Durham facility and we're in the process of completing tool and product qualification.

We have continued to sample one one-watt, 70/90 XLamp to key customers and the feedback on our design and performance remains positive.

We have recently begun accepting sample orders for the 70/90 and we target to start shipping initial products in the current quarter.

We're also finalizing our half-watt 45/50 XLamp design and target to also release this product in the fourth quarter.

The further we get into this business, the more it becomes clear that the market opportunity goes beyond what we traditionally do as lighting.

While creating an LED replacement for the light bulb is still the long-term objective, I'm convinced that several very large markets are developing which will play an important role in driving the growth in our industry over the next 2-5 years.

Although they're still in early stages, we believe that automotive forward lighting and larger LCD backlights will become important markets for our LED product that will enable the industry to go far beyond the current applications in mobile phones, automotive dashboards and large video screen.

The power device business grew nicely in Q3, driven by demand for our Schottky diodes and server power supplies.

We are starting to have success in related applications at several different customers and expect this business to continue to grow in Q4.

Our pipeline of design activity remains strong for our 600-volt products and customer interest in our 1200-volt products is gaining momentum.

We continue to expand our product offering and the market excepting of silicon carbide is broadening, which should enable us to build on our sales momentum in the first half of fiscal 2005.

Cree microwave sales increased to $2.2 million in the quarter, which is a 10 percent increase from the previous quarter.

Although we made progress in the quarter, we had anticipated higher growth in Q3 and we need this business to grow faster in order to get to our breakeven target over the next several quarters.

Based on our current customer orders and forecast, we target this business to grow to more than $3 million in revenue in the fourth quarter.

In addition to our silicon products, we are making technical progress on our wide-band gap microwave devices and we're planning to start sampling our first gallium nitride products during the first half of fiscal 2005.

Although more development is required to commercialize this technology, it is a critical piece of our strategy to build Cree Microwave into the market leader for next-generation high-powered microwave transistor products.

As we look at our business longer-term, we continue to investment in R&D to develop a blue laser for the optical storage market.

This remains an important product initiative and we're still working to solve several critical technical issues for our 10,000 hour, 30 miliwatt laser diode.

Our current estimate is that we are at least three quarters away from having the manufacturing capability to produce devices with the target specifications, but this timing still supports our estimate that the volume market for these types to devices is still a couple of years away.

For our third quarter, we delivered record revenue of $77 million with record earnings of $15 million, or 20 cents per share that exceeded both our targets and consensus expectations.

For the expansion of our business and growth in our new product areas, we need to remain focused on the many challenges in building momentum with our customers while executing at operations and R&D.

Our balance sheet grew to $240 million in cash and investments and we generated $30 million in cash from operations.

We're targeting a strong Q4 with revenue growing to $83-$85 million with earnings of 20-22 cents per share.

These targets would enable Cree to finish our year at record levels and position the Company for continued success in fiscal 2005.

I will now turn the call over to Cindy.

Thank you, Chuck.

Our third quarter results were exceptional as revenue increased to a new quarterly high of $77,113,000, which was above our revenue targets announced in January and represents a 6 percent increase sequentially.

For the nine-month period ended March 28, 2004, revenues also reached a record level of $216,008,000.

During the third quarter, our LED revenue grew 10 percent sequentially, largely due to our customers' ability to gain new business in mobile phones using our products for both blue and white illumination, as well as higher volumes for automotive dashboards, displays and other applications.

Today, we also reported record net income of $15,089,000 for the most recent three months period, which was a 16 percent increase from the prior sequential quarter and above our targets discussed in January.

Our after-tax net margins grew from 18 percent to 20 percent of revenue sequentially and earnings per share was 20 cents compared to 17 cents reported in the December quarter.

For the nine-month period ended March 28, 2004, net income was also a record at $36,975,000, or 49 cents per share.

During our third quarter, LED revenues made up 80 percent of our overall sales and increased to $62,032,000.

Our unit shipments grew 7 percent over the December 2003 quarter, while our blended average sales price again increased 3 percent sequentially due to a favorable customer mix and a shift in demand to our higher priced X Class products.

As we look to the pricing environment in the fourth quarter, we again target lower average sales prices on a product-by-product basis while we continue to aim for an increase in sales of our X Class products.

At this time, we target that our blended average sales price may be lower for our fourth quarter based in part on customer product mix.

During the March quarter, we saw strong demand for our higher brightness products, which include our Mega Bright and X Class product families that targets customer applications for solid-state illumination, outdoor displays, automotive dashboards and white LEDs for LCD backlights and camera flashes.

As a percentage of LED revenues, this category increased from 46 percent in the December quarter to 51 percent in the March quarter.

Our mid-brightness devices, which target automotive, cell phone keypad backlights, entertainment and indoor displays, declined sequentially from 46 percent to 42 percent as LED revenue, despite overall growth in the blue keypad business.

The standard brightness chips, which are used mostly for automotive and indicator lights applications, remained stable at 7 percent of LED revenues in the March quarter.

Silicon carbide wafer revenue was 6 percent of our overall revenue for the quarter, declining 19 percent sequentially to $4,841,000.

During the third quarter, our wafer volume decreased 17 percent, while our average sales price declined 2 percent over the December quarter.

The lower volume resulted in part from declining sales of wafers with epitaxy layers for research customers.

The average sales price of these products declined 1 percent due to the lower volume of epiwafers sold during the quarter and a change in customer mix. (indiscernible) material sales were 1 percent of total revenue for the March 2004 quarter and increased 9 percent to $1,150,000.

Microwave sales were 3 percent of total revenues for the third quarter as Cree Microwave's Sunnyvale results increased 10 percent sequentially to $2,175,000.

Despite the sequential increase, pre-microwave sales were below our revenue targets for the March quarter due to customer delays to implement new design wins.

The majority of this increase in sales resulted from higher average sales prices due to a favorable customer mix, combined with increase in mill aero (ph) business.

Contract revenue was 7 percent of total revenue in the third quarter, decreasing 6 percent sequentially as we continued to see a shift to more cost share programs.

We also recorded a $116,000 prior period rate adjustment that lowered our revenue.

During fiscal 2004, we began to recognize shipping and handling costs billed to our customers as revenue in accordance with generally accepted accounting principles.

This revenue amounted to 27,000 and $87,000 for the three and nine months ended March 28, 2004.

The balance of our revenue for the third quarter was generated by sales of our advanced device products, which include Schottky diode and silicon carbide microwave devices.

During the March quarter, these products accounted for $1,158,000 of revenue.

Gross margin for the third quarter increased to 50 percent of revenue, as compared to 47 percent reported in the December quarter due to greater profitability on our LED products.

For our microwave business, our 10 percent revenue increased, combined with a 10 percent cost decline in the March quarter, also contributed to our improved margins.

Our blended average LED costs decreased 6 percent sequentially due to higher productivity and improved yields in the Durham facility.

In addition, our LED blended average sales price increased 3 percent in the same period due to favorable customer and product mix.

Compared to the third quarter of last year, blended LED average sales prices have declined 16 percent.

However, those results were more than offset by a 23 percent reduction in our average cost, which resulted in our improved profitability.

I believe this illustrates our prospective that our gross margin, rather than our blended average sales price, is a more appropriate measure of the trends in our business.

Gross margin for our materials business was slightly lower than the third quarter as average sales price for wafers declined by 2 percent sequentially, while our average cost grew 35 percent as a result of customer and product mix.

Margins on gemstone (ph) materials were improved in the March quarter due to improved yields.

Cree Microwave reported negative gross profit of $370,000 for the third quarter, compared to a negative gross profit of $806,000 in the December quarter.

If Cree Microwave is successful in achieving a $3 million revenue target for the fourth quarter, we believe that the business will generate a positive gross profit for the first time in over two years.

Contract margins increased to 12 percent of revenue in the March quarter, which was up from 8 percent of revenue in the December.

For the next few quarters, we target contract gross margins to fall in a range of 10-15 percent of revenue as we expect to work on a higher percentage of cost share programs.

Operating expenses as a percentage of revenue increased to 23 percent for the third quarter, compared to 22 percent reported for the December quarter.

These expenses are comprised of research and development and SG&A costs.

During the March quarter, we increased our spending for research and development by 26 percent to $10,533,000 in order to meet our goals for new LED products with higher brightness and lower costs.

In addition, we also increased efforts in our new power chip products.

Our SG&A costs remained flat at $7.9 million as legal fees associated with a class-action litigation and related matters continued during the quarter, as well as higher costs for Sarbanes-Oxley compliance and other expenses.

SG&A costs also included a higher level of funding for our employee profit-sharing program during the third quarter.

During the March quarter, we reported an $80,000 charge to write down equipment.

In addition, we also reported a $597,000 gain as other non-operating income for a combination of a onetime technology license fee and a favorable foreign currency adjustment for our contract with one of our larger customers.

Several years ago, Cree's Board of Directors established a stock repurchase program to enable the Company to buy back up to 7 million shares of its common stock.

In February of 2004, this program was extended to allow the Company to repurchase up to 2,997,000 shares remaining under the program through February 2005.

We did not repurchase any shares for our stock during the quarter ended March 28, 2004.

However, we will continue to evaluate additional share repurchases based on market conditions and other factors.

On April 6th, we announced the completion of our acquisition of the gallium nitride substrate and epitaxy business from ATMI, Inc.

The acquisition will be accounted for under the purchase method of accounting.

Under the terms of the agreement, we acquired the assets of the business, including related intellectual property, (indiscernible) staff (indiscernible) inventory in exchange for $10,250,000 in cash.

Based on our estimates, we believe that the fair market value of the assets acquired was in excess of the purchase price.

Therefore, we target no results in goodwill for the transaction.

The anticipated excess of the fair market value over the purchase price of the assets will be allocated as a pro rata reduction to the value of the long-term assets in accordance with FAS statement number 141.

We also intend to relocate this business to Durham over the next year.

In accordance with generally accepted accounting principles, we will recognize these estimated move costs as a liability at the time the business combination in our fourth quarter.

Therefore, these costs will not impact our operating consensus in future quarters.

The gallium nitride team is currently working on a government contract in addition to product revenue generated from material sales.

We target total revenue from this business to be approximately $1 million during our fourth quarter with breakeven earnings results.

We believe that this acquisition is synergistic with Cree's existing business and we anticipate that the contributions from this team may enhance our research in lasers and microwave devices.

During our third quarter, our balance sheet strengthened as cash and investments increased by $23 million sequentially to $241 million.

For the three and nine months ended March 28, 2004, cash flow from operations was $30.5 million and $101.5 million, respectively.

Our days sales outstanding, which is calculated in our trailing monthly revenue profile, decreased from 44 days to 36 days, which is well below industry average.

We target our days sales on hand to normally be between 45 and 60 days.

As of March 28, 2004, our inventory balance remained low at $17.1 million and inventory days on hand was calculated at 41 days.

Our third quarter cash flow from operations benefited from our greater profitability, a $6.5 million reduction in deferred tax assets and a $1.3 million decrease in accounts receivable due to timing.

Capital expenditures for the third quarter and nine months ended March 28, 2004 were $11.3 million and $48.7 million, respectively.

These expenditures were primarily for equipment at our Durham facility to support the continued ramp-up of our LED production.

With these expenditures, we generated free cash flow of $19.2 million and $52.8 million for the three and nine months ended March 28, 2004.

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

As we enter our fourth quarter of fiscal 2004, we target revenue to increase to approximately $83-$85 million for the quarter due primarily to our estimated growth in LED sales.

We also target Cree Microwave revenue to increased by more than $800,000 in the June quarter due to new design wins and the gallium nitride business acquired from ATMI is expected to add approximately $1 million to our revenue.

Based on our target, we should close fiscal year 2004 with approximately $300 million in revenue.

We are also targeting our overall gross margin in a range of the high 40s as a percentage of our revenue during our fourth quarter as we anticipate a small shift in customer and product mix for our LED sales as compared to our third quarter.

Research and development and SG&A expenses are targeted to be in the same range for the June quarter at approximately $10-$11 million and $8 million, respectively.

Therefore, earnings-per-share is targeted at a range of 20-22 cents for the fourth quarter with an estimated 76.9 million fully diluted shares outstanding.

These targets would bring our fiscal year 2004 earnings to approximately 70 cents per share, which would be greater than a 50 percent increase in earnings-per-share year-over-year.

Our capital expenditure targets for our fiscal year 2004 remain at $65-$75 million.

I am very pleased to report these results for our most successful quarter ever in terms of revenue, net income and earnings-per-share.

As we move into our final quarter of this fiscal year, we continue to see robust demand for our LED products, particularly in mobile appliance and automotive applications.

We are also encouraged by our recent success in lowering our production costs, which has enabled us to deliver lower prices to the market and may drive future customer design wins.

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

Thank you, Cindy.

We will now take analyst questions.

(Operator Instructions).

John Lau, Bank of America.

Hi, Chuck.

I had two questions -- one technical for you one and a financial one for Cindy -- I couldn't leave her out.

Chuck, there has been a lot of talk about this new ITO layer for LED die.

I was wondering if I could get your comments on that?

And that particular type of technology -- is that the subject of patents from anyone?

And is that a type technology that you can actually use in your die?

The ITO technology is a top contact technology that's on some of the new die that are being promoted out of Taiwan.

It really doesn't have any applicability at this point to Cree's design.

There is some talk about whether -- who might have some IP coverage on it, but I think that the thing you have to remember, John, is that while people might have some IP around the ITO, one, it doesn't apply to our chip design, and two, it doesn't mean they still have don't have IP issues with many of the other aspects of those same chip designs.

And based on our analysis of those chips, there are still issues out there with a number of other companies' patents.

Okay.

And Cindy, I may have missed some of your introductions.

So, in terms of housekeeping, you mentioned the range for the R&D, but you also mentioned that it would stay at that level for a period of time.

If you take a look at the $10-$11 million guidance that you gave, it's about that 13 percent range.

Do you anticipate going forward that in that range as a percentage, or is -- do you see that coming down?

I think that we would only give guidance for our fourth quarter.

But I think as we think about fiscal year 2005, we're just starting our budgeting process now.

I think a fair range for R&D as a percentage of our revenue is going to be somewhere in the 11-13 percent.

So I think these ranges will be maintained going forward, because it has been very helpful for us to grow revenue by increasing R&D.

And in your final comment with regards to the customer shift that you had, if you're factoring the midpoint of your guidance, it looks like you're anticipating gross margins to be in that 48 percent range.

Was that the guidance that you gave for us?

I said a high 40s as a percentage of our revenue.

Okay, thank you.

Dale Pfau, CIBC World Markets.

Good afternoon, congratulations on another nice quarter, guys.

Several questions here.

Let's talk first about the UT230.

Do you have orders for those products?

What percentage of revenue might we see in the fourth quarter?

And gross margins -- will they be within the corporate average for that, or above or below?

And I have some more questions.

Let's see if I can take those in the right order there.

At this point, we're the process of final qualification with our customers and we expect to release that product in Q4 and I would expect that we would have some amount of orders for this quarter.

I will tell you at this point, since we have more than 80 percent of the quarter booked, it will have some impact on the quarter.

Obviously, it is an important part of our long-term strategy at the same time.

Overall, the demand for the products we already have released is quite strong.

I think your next question, Dale, was about the margins on that product?

Yes.

The margin on UT230, it is designed to be a low-cost product that also we can then sell at a low price and have margins very much in-line with our normal margin level.

So it's really designed for good performance and very low-cost and targeted directly at the keypad market.

And so this product could conceivably keep pace with the price reductions that we keep hearing claims about in the keypad market, but yet give you margins commensurate with your corporate margins?

Is that what I'm hearing?

I think I would actually say it a little bit differently.

I think this product may cause some of the price reductions in the market.

Okay.

Now, let's talk about your X Class.

Obviously, we had nice, nice growth in that this quarter.

And I assume that since we saw that taking a larger share of business, that also helped your ASPs.

Could you talk about where specifically your X Class products are going?

Or can you give us any kind of indication of what percentage of those went into white light applications?

I don't think I can break it out that way, but I can probably give you a sense.

So, we had success in white LEDs for LCD backlighting, we had success with that product in the both blue and green LEDs for things like the LED video screen market, and we are also seeing just a number of other applications, whether it be architectural lighting or elsewhere, where those chips are, we believe, the highest performance products available in the marketplace, and I think that is really driving us wherever there is a high-performance demand out there.

And we had heard some chatter that, particularly your X Bright products, were requiring some major redesigns or something out there.

Can we assume by the growth here that that is nothing more than chatter, and probably not to be paid attention to?

Actually Dale, I think we talked about that as well.

I think for a number of applications, we're having good success with that.

At the same time, we're working on some things, and I tried to mention that in my comments earlier, where we think there are additional variations of that chip that will actually expand its applicability to the marketplace.

So I would actually look at us today as the success we're having is with a subset of the total applications we would target.

And we would hope that over the next quarter, we will actually expand the number of applications we can penetrate really on the low-temp packaging side.

Now on your XLamp product, which it looks like maybe you will be sampling some toward the end of this quarter, could you give us an idea of what the ASPs are going to be like on those products and where gross margins on your XLamp products are expected to be?

In the beginning, I think on any new product when we ramp it up, Dale, we're not targeting, at least in the first quarter, to anything significant on the gross margin side.

Really, that's just a ramp-up phase.

I think over time, we would hope that XLamp will come in probably near our LED chip business, maybe a little bit lower overall when we get into high-volume.

That's probably not for a year from now.

And I think that from an ASP standpoint, XLamps will sell in the dollars, but I cannot be more specific than that.

When you give us ASPs going forward, will you break out XLamp, or are you going to blend that in with everything else?

Once XLamp becomes measurable, Dale, we will actually break that out for you so you can see that separately.

It would just confuse the chip business otherwise.

Okay, very good.

I will talk to you later.

Thanks, guys.

Harsh Kumar, Morgan Keegan.

Hi, guys.

Congratulations again, great quarter, great guidance.

Couple of quick questions.

If you look at your end markets, Chuck, can you give us a sense of maybe the top two or three end markets that drove your business in the manner that they did this quarter?

The number one market driver in our business is mobile phones.

I think that if you look at our LED business by application, we don't break it out -- we don't have good specifics for you.

But it's probably about the 50 percent of our LED sales.

So that was definitely driving the growth and that is everything from the keypad segment where we continue to have strong demand for blue keypads, we had good growth in white keypads and we had success in white LEDs for the LCD backlights and the LED flash modules.

So generally speaking, we had -- all of that mobile phone business was growing well for us.

The other thing, though, at the same time, we saw things like the video display, you know video screen board market and automotive as well continue to grow during the quarter.

So while mobile phones is definitely our largest market, we are having success in these other areas and I think it has a lot to do with the fact as we get these brighter products out there, it allows us to go after additional application.

Sure.

Another question on your gross margins.

Great job on that this quarter.

How much do you think of the spike in gross margin, or the uptick in it, was utilization versus improvement in yields?

I would say the majority probably had to do with yields.

Obviously, we're getting a benefit because the factory is growing.

But at this point, we've been running pretty much near capacity for the last quarter or so.

We're growing that capacity and increasing it each quarter so we can achieve our growth targets.

But I would say we probably got more from yields than we did from just spreading fixed cost last quarter.

Great.

Thanks for that clarity.

And then, ASPs were up pretty nicely again.

Was that just from the mix of products that you sold to the cell phone market, or were there any other (indiscernible) new customers and new applications in there?

I would really just say it's a function of the mix of the business.

I think the weight shifted towards the high brightness.

That's always going to help the ASPs, just from the blended average.

So that was probably the biggest factor.

One last question, coming back gross margins.

The highest gross margin, if I remember you guys had, was back in September of 2000.

It was roughly 54 percent.

Do you think there is any possibility of your getting up there as your business continues to ramp and your yields continue to improve?

You are asking a question beyond our current target horizon.

I would say that, obviously, anything is possible at this point in time.

No, we're targeting high 40s for the upcoming quarter, and that is really a function of the mix again.

(indiscernible), guys.

Thank you.

Great quarter again.

Pierre Maccagno, Needham & Company.

Congratulations on the quarter.

Chuck, could you give us an idea of how the market is evolving regarding the content of LEDs for handsets?

Okay.

So there's three factors going on.

One, obviously, is handset sales are strong in general, so that helps us.

But really, the two bigger factors for Cree are -- as the market continues to convert to color, it's driving light LEDs to backlight those color screens.

And with those color screens tend to be a lot more phones that have either blue or white.

So I guess you could look at that and say -- that is by definition, that increases the LED content because the blue and white LEDs are a higher value product than the green LEDs they would be replacing in some of the older models.

The other thing we're seeing, though, is that the camera flash is definitely a growing application.

We're having some success there.

And we're also seeing some other kind of unique things, like an actual flashlight built into the phone, and as well, the second LCD screen on the outside of the phone is oftentimes being backlit now.

So I would say, in general, if you look at the mobile phone market overall, because more of the funds are going to color and many of them have blue and white, I would say LED content is increasing.

And aren't OEMs becoming more efficient in the number of -- in the use of LEDs to light the backlight?

And so, then the number of LEDs perhaps is really reducing?

Here, there are definitely some models where they've tried to squeeze the number of LEDs down a little bit.

But I think if you look at how that business is segmenting, definitely the mid- to high-end of the mobile phone market, what we're seeing is actually as many or more at this point in time, because it is really about -- is it worth a slight amount of extra cost to really change the look of that phone?

And that's at least the trend we're seeing at this time.

Regarding the flash market, is that something that you really are getting into right now, because that requires very high brightness?

Also, the ASPs tend to be much higher, correct?

We've actually been selling products for the camera flash market for the last couple of quarters.

So it has been a market we've been servicing for the last few quarters.

And I think it places the strengths of our X Class products.

And any trend that you can talk about in the auto market?

I think -- the trend I would say that is driving our business is just the continued adoption of LEDs as -- what is starting to appear to me is really the preferred lighting technology for the interior of the car.

So we saw Europe really led the charge.

We're starting to see some amount of growth in the U.S. business, and really the Asian markets, especially Japan, is using a lot more LEDs in the dash.

So that is probably just the general conversion to LED technology.

Finally, any comments on competition from Asia, in terms of pricing, or anything there?

As I said in my comments earlier, our competitors, whether they be in Japan or they are in Taiwan, they continue to be aggressive.

Obviously, we're all fighting to grow our businesses.

And so we're keeping an eye out on them.

But at the same time, we have to watch what they're doing but we really have to execute our plan.

Our plan's about driving higher performance products into the marketplace, so we keep pushing on the performance side and also getting our new lower-cost products so we can compete across the entire range.

And at least at this point in time, based on the results of the last few quarters and what we're targeting for the quarter ahead, the plan seems to be working pretty well.

Thank you very much.

Tom Supinsus (ph), Think Equity Partners.

Hi, guys, congratulations on another great quarter.

I just wanted to ask -- most of my questions have been answered -- but can you talk a little bit about the visibility in the RF microwave business?

It's supposed to be about 3 million this quarter;

I think that's what you're targeting now for the June quarter?

Can you talk about your confidence level there and what you're seeing in that market?

I would say that that business -- obviously, it did not grow quite as fast as we wanted last quarter, but we feel pretty good about the numbers for this quarter.

We've got a reasonable percentage of that already build up and we've got some work to do.

But I think that, based on the trends we're seeing and the fact that our customer base is expanding, I think that is really what is giving us the confidence that a customer that may have been relatively small last quarter, we're really looking just to kind of expand the number of platforms we're supplying and things of that nature.

So I would say we're optimistic.

We still have work to do, but we're pretty optimistic.

And I think that business in general and the market it serves is pretty healthy at this point.

Great, thanks so much.

(Operator Instructions).

Hans Mosesmann, Schwab Soundview.

Hey, guys, how are you?

Good quarter.

A couple of questions.

You guys split out the LED business by high brightness and mid-brightness and standard.

Can you do that again for this quarter?

What we just did for the last quarter?

I think you had 46 and 8 percent.

Hans, for Q3, we were 51 percent high brightness.

I believe it was 42 percent mid brightness and 7 percent standard.

Great.

And do you have any sense what part of your LEDs are going into white applications versus blue or green?

You mean, which products go into which ones, or -- give me that question again.

I'm assuming that most of your high brightness products are geared towards light.

Is it safe to say half of those products are going into white?

So you really have to look at blue and green a little bit differently, right, because green obviously is only for green related applications.

I would say for the blue market, probably about half of the blue goes to blue related applications and about half goes to white.

But I would tell you that white is the faster growing segment of those two at this time.

Fair enough.

The last question -- can you split out your business by geographic location, your LED business?

A can't give it to you.

I can tell you that I don't think it's a whole lot different than it was when we gave it to you I think last year in the K, which says it's really Asia-dominated.

Our business is really driven by sales to places like China, Taiwan, Korea, Malaysia and Japan, and Japan being the biggest.

And I'd say that continues to see strength pretty much throughout Asia.

So, you think the split between, say, Japan and non-Japan is say, half and half?

Is that a good way to look at it?

I can't really give it to you at that level.

I can tell you they both are growing, though.

Thanks a lot.

At this time, there are no further questions.

Ladies and gentlemen, are there any closing remarks?

yes.

Thank you for joining us today and we will be reporting our fourth quarter and year-end at the end of July.

Thank you.

This conclude today's Cree third quarter 2004 financial results conference call.

You may now disconnect.