Wolfspeed Inc (WOLF) 2004 Q4 法說會逐字稿

Good afternoon, my name is Shala and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Cree fourth 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.

If you would like to ask a question during this time, simply press star (*) then the number one (1) on your telephone keypad.

Should anyone need assistance at any time during this conference, please press star (*) then the zero (0) and an operator will assist you.

As a reminder ladies and gentlemen, this conference is being recorded today, July 27, 2004.

Thank you.

I would now like to introduce Ms. Fran Barsky, Manager of Investor Relations and Corporate Communications.

Ms. Barsky you may begin your conference.

Thank you Shala and good afternoon.

Welcome to Cree's fourth quarter and fiscal year end 2004 earnings conference call.

By now you should have all received a copy of the press release, and if you did not receive a copy, please call our office at 919/313-5300 and we will be pleased to assist you.

Today, Chuck Swoboda, our President and CEO, and Cynthia Merrell our CFO, will report on our fourth quarter and 2004 fiscal year end.

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 transit revenues, gross margin and earnings, plans for new product and other forward-looking statements indicated by words like anticipate, expect, target and estimates.

Such forward-looking statements are subject 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 fourth quarter and fiscal year end results to a discussion of the information included in our earnings release and the materials posted on our website which you can find at www.cree.com by clicking on investor information, and then click on financial metrics.

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

The presentations in the recording of this call are copyrighted property of the Company and no other recording or reproduction is permitted unless authorized by the Company is writing.

Consistent with our previous conference calls, we are requesting that only [inaudible] analysts ask questions during the q-and-a session.

However, we recognize that other investors may have additional questions, and we welcome you to contact us after the call or 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 August 10, 2004.

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

Thank you, Fran.

For the fourth quarter and fiscal 2004, we delivered record financial results with the highest revenue and earnings in the history of the Company.

Revenue and earnings exceeded our targets and analyst consensus expectations for both the fourth quarter and fiscal year.

Revenue for the quarter increased 18% sequentially to $90.9m, while net income increased 39% sequentially to $21m or 28 cents per share.

For the year, revenue increased 34% to $307m, while net income increased 66% to $58m.

Overall gross margins increased to 52% which was led by soaring LED sales and a mix shift towards our high-brightness products for mobile phones and LED displays.

We continued our new product development momentum as we released several new LED products during the fourth quarter, including brighter XT LEDs, lower cost UT LEDs, XB500 power chips, and our new X lamp family of high-power packaged LEDs.

In addition to our record financial results and new product pipeline, we put ourselves in position for a strong start to the new fiscal year as we signed a new contract with Sumitomo for $160m of LED chips, expected to be delivered during our fiscal 2005.

This new agreement is the largest purchase commitment in Cree's history and highlights the strength of our partnership with Sumitomo and our Japanese customers.

As our business has grown, the challenges are evolving.

We execute more running at capacity and we need to expand our production capability in Q1 through yield improvements, head count additions, and new equipment to meet the growing demands for LED chips, schottky diodes, X lamps LEDs and wafer products, while starting to build subversive capability for the future.

We have started the process to convert or LED production to three-inch wafers to increase capacity and reduce costs.

The initial three-inch ramp-up may cause some short-term yield challenges which we need to manage while we increase volume.

We need to continue to develop new LED products with increased brightness and lower costs to maintain our leadership position in a very competitive market.

We must work with our customers to get our new products design into the key applications, and insure that they can win the market with these products.

Although we must continue to overcome these and other obstacles in our business, we look forward to the challenge and building on our past success.

For the first quarter, we are targeting Company revenue to increase 4% to 6% to a range of $95m to $97m.

LED demand is targeted to grow faster than this rate, but may be partially offset by a $1.5m decline in government contract revenue due to the timing of contract funding and the effect of an end-of-year adjustment in Q4.

We currently have more than 85% of our target revenue booked or under contact for Q1.

Based on current customer order patterns and forecasts, we believe that LED demand will continue to be strong and we are targeting ASPs to decline less than 5% in Q1 as we yield the benefit of the mix shift towards our high-brightness products.

As a result, LED gross margin is targeted to remain strong in Q1, although there is some yield and cost risk associated with our new product ramp-up and conversion to three-inch.

Overall Company gross margins are targeted to be in the 50% range as we anticipate that the growth in LED chips will be somewhat offset by higher costs associated with the initial ramp-up of our Xlamp product line, and lower margins from government contracts.

Operating expenses are targeted to increase approximately $1.2m in Q1, as R&D is projected to growth to support expanding development activities for brighter LED chips, Xlamp product expansion, and materials development for larger wafer sizes.

With our overall tax provision estimated at 31%, we are targeting Q1 earnings of 26 cents to 28 cents per share.

We realize that we compete with a number of companies around the world who are investing in the LED market, and we continue to evaluate the competitive situation, and factor it into our expansion plans and targets for the year ahead.

Despite the evolving competitive pressures and additional capacity that is forecast to come on-line in the next year, we believe that Cree can continue to win by developing high performance, low-cost LED chips.

Our proprietary silicon carbide platform and vertically integrated factory puts Cree in an enviable position and sets us apart from the competition.

This strategy has enabled Cree to develop the brightest nitride LED chips in the world, with cost benefits due to chip size, vertical integration and scaling to larger wafer diameters, while leveraging our strong customer partnerships and intellectual property position.

Our track record at executing this strategy over the last several years would suggest that we are one of the best in the world at what we do.

Based on our confidence that we can continue to deliver innovative new products for the key applications, we are targeting to spend between $100m and $120m in capital additions over the next fiscal year, primarily for equipment to double our LED chip production capacity.

We are evaluating several options for expansion on our current site, as well as other U.S. and international locations.

Assuming that the overall market demand remains strong, and we continue to meet our other objectives, we target gross margins in fiscal 2005 to be in a similar range as recent quarters.

The LED business grew 16% sequentially in Q4 as LED demands were very strong, especially for our newer products.

The increase in high-brightness sales was driven by strong demand for MB and XT for mobile phone, as well as increased sales of XB for the LED video screen market.

While we were having some success for white LEDs and mobile phones, we currently have a modest share in the white keypad application, and a relatively small market share in LCD backlights.

As we develop higher brightness, blue LED chips, we target strong growth and increased share in both of these white applications.

Mid-brightness sales declined as a percentage of LED revenue, but grew overall, led by our thin products such as RazorThin.

We are targeting to continue to win in this segment as the UT product is designed as a new application.

The overall market for LED chips continues to evolve with demand still strong, especially in higher performance applications, like mobile phones with color screens.

Our R&D Team remains focused on increasing our lead in overall chip performance.

During the fourth quarter, we released the UT230 product for low-cost keypad applications, and we have started winning business in Asia with this product.

While it will take us at least four quarters to complete, we have started the conversion of the three-inch wafers which we expect will more than double the number of chips per wafer, and should result in a significant cost reduction once we have worked through the transition.

Production of XT18 and XT21 chips is going well, and we are now qualifying a lower-cost version of this product family.

We have started pilot production of XT24 chips and we target sampling XT27 by the end of Q1.

We believe these new chips are brighter than any comparable nitride chip product we have measured from our competitors, and we are on-track to raise the bar even higher with a 30 millowatt LED chip by the end of this calendar year.

To put this in perspective, a 30 millowatt chip should enable us to produce a greater than 100 lumen per watt, white LED which is believed to be one of the critical technical milestones to commercialized LED lighting.

As we demonstrated with our results over the last few quarters, our value proposition continues to win in the market, especially in applications where the combination of performance, costs, quality, and IP are important factors in the customer's decision process.

In addition to our focus on increasing performance and in reducing costs, our legal team in actively putting companies on notice of potential infringement issues regarding Cree's nitride chip and white LED IP.

We believe that this effort is important to reinforce the value of our intellectual property in the market which we believe is an important differentiator, especially with the young customer.

As we look beyond the growth of our LED chip business, we are starting to recognize the potential of our emerging business areas.

We announced today that we have officially entered the race to replace the light bulb, with the release of our 70/90 series of Xlamp LEDs which are the first in a family of high-powered, packaged LED products which utilize our XB900 power chips.

This product release is the first step in our strategy to be the leader in the market for LED based lighting.

We know that applications like mobile phones, automotive interior, and video screens have been tremendous growth drivers, and should continue to provide growth for our high-brightness LED chip business.

However, the markets for automotive headlights, large-scale LCD TV backlights, and specialty lighting are fast emerging, and combined could be up to 10 times larger than the current market for high brightness LEDs.

These new markets require low-cost technologies at the very high-end of today's performance capabilities, which plays to Cree's strengths in technology, scale, and intellectual property.

Our new Xlamp product line gives us the opportunity to participate in these markets, not only as a power chip supplier, but also as an LED component supplier which should enhance our ability to drive this market.

We have already received strong, positive feedback from our initial sample shipment, and we are focused on the challenge of ramping-up this product line, while continuing to increase performance and expand the product offering.

Our power device product line continues to gain traction in the market as well.

Although overall sales for these products are still relatively small, we continue to add new customers in the server power supply.

As demands have increased, we are developing a production bottleneck in our wafer fab where the increased schottky diode volume is competing for capacity with advanced device development and the growing LED business.

In order to position the schottky diode business for long-term success and get LED some growing room, we have decided to qualify our Sunnyvale fab to produce three-inch, silicon carbide, schottky diode products and transfer production there over the next several quarters.

This move should also provide us the facilities, equipment and people to convert to four-inch wafers and expand the silicon carbide power device business for the next several years, and enable us to better utilize our Sunnyvale capabilities.

Our silicon microwave business made strides in Q4 and was able to reach the goal to break even on a gross profit basis.

We are pleased with the success in getting the business back to this stage.

As we move forward, we are continuing to work with customers on new designs for our LDMOS products in both the wireless infrastructure and mill arrow markets.

With our success, we are starting to recognize that our growth strategy impacts several other companies already in this market.

While we remained focused on continuing to win new designs, we are in the early stages of evaluating some potential strategic partnerships with these companies to better leverage their market position and our capabilities in silicon LDMOS technology.

From a longer term perspective, we continue to make progress on the wide-band [inaudible] microwave front.

As we expanded our capabilities with the pilot release of our first 60 watt silicon carbide MESFETs.

We have received favorable feedback from our customers, and although this is longer term opportunity, we believe the silicon carbide and gallium nitride microwave devices we are developing could potentially be disruptive technologies for the next-generation wireless infrastructure in communication systems.

In the laser area, we continue to work on extending the lifetimes for both our 405 nanometer products as well as the very short wavelength devices which are part of our government funded [suvos] development contract.

With the rapid expansion of our LED business, we slowed some of our activity on the 405 nanometer product in the near term, but we are making the investment to get the development back to full speed, with the target of a commercial 30 millowatt design by the end of our fiscal year.

In the fourth quarter, we delivered record financial results which put an exclamation point on a record year in which we grew revenue 34% to $307m, and earning 66% to $58m.

While these are tremendous financial results, our outlook going forward is even more positive, despite a number of challenges facing our business.

Our LED chip business remains strong and is poised for good growth in the first half, based on the strength of our existing product line and our expanding family of high-brightness and XT products.

We are on track with our R&D plan to develop a 30 millowatt LED by the end of this calendar year, and our business is starting to growth beyond our success in LED chips.

We announced today that we have officially launched our Xlamp LED product line which will give Cree a new platform to expand our business in the emerging market for LED lighting.

These high-powered, packaged LED products combined with our expanding family of LED chips, puts Cree in a strong position to take advantage of the very large potential markets which are fast emerging for LED lighting.

Our power and microwave products are starting to get traction in the market, and we are increasing our investment in R&D across the Company to fund the product pipeline to drive our future growth.

As a result, we are targeting another strong quarter in Q1 with revenue increasing to $95m to $97m with earnings of 26 cents to 28 cents per share.

I will now turn the call over to Cindy.

Thank you, Chuck.

Revenues for our fourth quarter were [$___________].

These results exceeded our June updated guidance primarily because our LED customer demand continued to be strong, while our factory execution was excellent, especially for high-performance products.

Government contract revenues also increased 41% sequentially, due to the benefit of a year-end rate adjustment and beginning work under new contract.

For our fiscal year 2004 year-end revenue increased 34% year-over-year to $306,870,000.

Sales to our Japanese distributor Sumitomo increased to $102,800,000 or 33% of total revenues.

In fact, four of our top-ten-end customers were located in Japan and their sales were included in our revenues from Sumitomo.

Other customers comprising 10% or more of our revenue in fiscal year 2004 were OSRAM and Agilent.

Each had 13% of revenue, respectively.

Net income was $20,985,000 in our fourth quarter which was a 39% increase sequentially.

Our after-tax net margin grew from 20% to 23% of revenues sequentially, and earnings per share were 28 cents compared to 20 cents reported in the March quarter.

But our fiscal year ended June 27, 2004, net income was $57,960,000 or 77 cents per share which was a 66% increase year-over-year.

LED revenue for our fourth quarter grew to $72,168,000 and made up 79% of our overall sales.

Unit shipments increased 19% over the March quarter, while our blended average sales price per LED declined 2% sequentially due to our normal quarterly price reductions being offset by a shift in mix to our higher-brightness products.

For our fiscal year, LED units shipments increased 65% while our blended average sales price has decline only 7% since the fourth quarter of fiscal 2003.

The stability of our blended average sales price reflects our success in migrating our customers to higher performance chips that allow us to maintain a relatively even average sales price.

Our high-brightness products increased to 54% of LED revenue in the June quarter as compared to 51% in the March quarter.

Our mid-brightness devices declined sequentially to 40% from 42% of LED revenues, despite a significant increase in RazorThin sales targeted in the blue keypad market.

Our standard brightness chips decreased to 6% from 7% of LED revenue in the March quarter.

During our fourth quarter, we estimate that sales from mobile phone applications made up slightly less than one-half of our LED revenue, and that sales for display applications increased, while our automotive sales declined slightly due to seasonal trends.

For our fiscal year, LED revenue was 79% of total sales.

Our overall material sales, including wafers and gemstone materials were 8% of our revenue for the June quarter, increasing 16% sequentially to $6,970,000.

Our wafer volume remained even while our average sales price for wafers increased 13% compared to the March quarter.

Material revenue also included $398,000 in sales of gallium nitride wafers which were part of the business acquired from ATMI in April.

For our fiscal year, material sales made up 9% of the total sales.

Microwave sales were 3% of total revenue for the fourth quarter as Cree microwave Sunnyvale results increased 15% sequentially to $2,508,000.

For our fiscal year, Cree microwave sales increased 176% due to new design wins.

However, despite this solid growth, results for the past two quarters were slightly below expectations.

For fiscal year 2004, pre-microwave sales were 3% of total revenues and sales to [Remick] for legacy spectrium products up 43% of that amount.

During fiscal 2005, we target Cree microwave quarterly silicon business will remain in the same range as our fourth quarter results, as we anticipate that new customer revenues will be offset by declining business from [Remick].

Contract revenue increased 41% to $8,070,000 due to a combination of an $822,000 year-end rate adjustment, approximately $782,000 of revenue recorded on a contract that was acquired in April from ATMI, and approximately $700,000 of revenue under other new contract awards.

Contract revenue was 9% of total revenues for the fourth quarter and fiscal year ended June 27, 2004, respectively.

The balance of our revenues for the fourth quarter was mostly generated by sales of our advance device products which include schottky diode and silicon carbide microwave devices, which accounted for 1% of our sales.

Gross margin for the fourth quarter increased to 52% of revenue as compared to 50% recorded in the March quarter, and was our highest gross margin in fourteen quarters.

This increase was led by greater profitability on our LED products as our blended average LED costs decreased 5% sequentially due to greater scale and improved yield in the Durham facility, while our LED blended average sales price decreased 2% due to relative price stability caused by a shift by our customers to higher brightness products.

Compared to the fourth quarter of last year, blended LED average sales prices have declined only 7% and those results were more than offset by a 19% reduction in our LED average costs which improved our profitability.

For the fourth quarter of fiscal 2004, Cree microwave met their goal by achieving a gross profit, as we reported $41,000 in profitability as compared to a negative gross profit of $370,000 reported in the third quarter.

During the fourth quarter, Cree microwaves cost of sales benefited from adjustments totaling $286,000 for the true-up of standard costs and a prior year reversal for a warranty expense accrual.

Contract margins increased to 23% of revenue in the June quarter which was up from 12% of revenue in March as a direct result of the benefit of the year-end rate adjustment that increased revenue without any corresponding costs.

Operating expenses declined to 19% of revenue for our fourth quarter, compared to 23% reported in the March quarter.

These expenses are comprised of research and development, and SG&A costs, and in the June quarter included a $790,000 charge for the disposable fixed assets.

Research and development expenses decreased 8% sequentially to $9.7m, while SG&A costs remained merely flat at $8m as our additional funding for the employee profit sharing program was offset by lower legal fees due to limited activity associated with a class action litigation and related matters.

Our actual tax provision for FY 2004 was calculated at 30.7% rather than 31% that was previously estimated.

As a result, we received a $281,000 benefit to our tax expense in the fourth quarter.

Therefore, for the June quarter our net income was increased by a change in our year-end tax provision as well as the $822,000 year-end rate adjustment for our government contracts, and a $286,000 benefit for Cree microwave's costs of sales.

Net income for the fourth quarter was also reduced by a $790,000 write-off of fixed assets.

Therefore, combined, these year-end adjustments benefited earnings by approximately $500,000 net of tax or 1 cent per share.

During the fourth quarter of fiscal 2004, one of the companies that we made a private equity investment in a few years ago, Color Kenetics, went public.

As a result, we will begin to account for this investment as a marketable security which is available for sale under SFAF Statement #115.

Therefore, our current unrealized gain in the securities was not recorded through earnings, but was accounted for as a comprehensive income item.

In May 2004, our Board of Directors authorized an additional 5.1m shares to be repurchased under out stock repurchase program.

During the June quarter, we repurchased 1.2m shares of our common stock for $23.2m, for an average price per share of $19.95.

For our 2004 fiscal year, we have repurchased a total of 1.8m shares for $34.7m, for an average price of $19.01 per share.

As of June 27, 2004, we have 6.9m shares remaining that have been authorized for repurchase.

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

Under the terms of the agreement, we acquired the assets of the business including related intellectual property, fixed assets and inventory in exchange for $10,250,000 in cash plus approximately $400,000 in closing fees and other expenses.

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

Therefore, we recorded no goodwill from the transaction.

The excess of fair market value over the purchase price of the assets was allocated as a prorated reduction to the value of the long-term assets in accordance with SFAF Statement #141.

During the fourth quarter, we recorded approximately $1,180,000 of product and contract revenues associated with this business, and these operations generated approximately $74,000 of pretax profit.

At the end of our FY 2004, our balance sheet was outstanding!

During our fourth quarter, we paid $10.7m for the purchase of the ATMI gallium nitride business, and spent $23.2m to repurchase our common stock.

As a result, our cash and investments decreased from $241m to $231m, sequentially.

For the fourth quarter and year-ended June 27, 2004, cash flow from operations was $51m and $152.3m, respectively.

While we normally target our day-sales-outstanding to be between 45 and 60 days, our day-sales-outstanding decreased from the June quarter to 34 days from 36 days based on our trailing, monthly revenue profile.

Our inventory balance also remained low at $19.4m with days-on-hand calculated at 41 days.

Our fourth quarter cash flow from operations increased primarily due to our higher profitability.

However, we also benefited from a $6.6m reduction in deferred tax assets, a $3.1m benefit for income tax on stock option exercises, and a net $3.3m increase in short-term liabilities over short-term assets.

Capital expenditures for FY 2004 were $77.3m.

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

Even with this high level of investment, we generated free cash-flow of $22.4m and $75.1m for the three and twelve months ending June 27, 2004.

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

As of June 27, 2004, we had a strong backlog of approximately $248.5m, all of which we target to ship in FY 2005 with the exception of $33.7m of government contract revenue.

Our reported backlog includes the Sumitomo contract which is subject to end customer demand, and other terms and conditions that could affect what we actually ship to Sumitomo in fiscal 2005.

As we begin fiscal 2005, we target first quarter revenue to increase to approximately $95m to $97m due primarily to our estimated growth in LED sales.

Based on an estimated 76m fully diluted shares outstanding, earnings per share are targeted in a range of 26 cents to 28 cents which exceeds the current first-call estimate of 23 cents per share for the first quarter.

We closed fiscal 2004 in a strong financial position on our balance sheet, our income statement, and our statement of cash flows.

Our targets for Q1 are solid and we look forward to another record year in FY 2005.

Thank you and I'd now like to turn the discussion back to Chuck.

Thank you, Cindy.

In a year where our company faced numerous challenges from competitors, a former employee, securities litigators, and financial analysts, we once again showed the world how the Cree team responds to challenges as we delivered record revenue and earnings which increased 34% and 66%, respectively.

Given the disruptive nature of the products we are developing, the large potential market opportunities for these products, in an ever-changing, competitive landscape, it is difficult to forecast future results.

You've seen our confidence in the future demonstrated in our actions as we utilized our strong balance sheet to buy back Cree stock.

We plan to continue to do this when able for we believe that it is a [Cree of de] earnings and a discount to a reasonable market value based on our performance and future outlook.

While our business will continue to face challenges, we look forward to the year ahead and the opportunity to continue to create new technology that creates solutions for our customers, and drives our ability to grow the business and build an even more successful company for the future.

I will now take analysts' questions.

At this time, I would like to remind everyone, in order to ask a questions press star (*) then the number one (1) on your telephone keypad.

We'll pause for just a moment to compile a q-and-a roster.

Thank you.

Your first question comes from Jed Dorsheimer of Adams, Harkness & Hill.

Thanks for taking my question.

No problem.

Your - the LEDs used in handsets - could you just - what is the average surface area of those chips?

It varies by product type.

So, you know, we have a range of products.

We have our standard size chips and then we have our 230 product line, and then actually in certain applications for like the flash, they can actually use a larger area chip which is more of a power-type chip.

So, I would say there is - it covers the range of our products and handset just depending on the application.

Would it be fair to say around 300 micron or some that are somewhat under that, squared to what, 400 micron squared?

I'd say it goes above that.

It goes below that.

You know, I'd say - we obviously have our UT230 product which is significantly less than that and then we have things like our XB500 power chip.

So I'd say it's a pretty wide range and it really depends on the customer's need for performance and cost.

Alright.

Quick question just on the manufacturing.

Are you using a diamond scribe or laser scribe for - when you scribe the products?

The chip?

When we scribe the chips - that's proprietary, we don't disclose that.

Alright.

And then your transition to three-inch is that going to be across all LED products or how should we look at that?

Is that going to be toward one product first?

Obviously, it will take us approximately a year to get the whole product line converted, but it will start out with certain of our newer products and then transition across the product line over the next year.

So that's kind of the outlook.

Alright.

And then, you commented briefly on this during the scripted portion, but recently we've seen several of your competitors including [Lumilet, Azram, Nechia] that have either talked about or have actually licensed with some of the low-cost Asian suppliers.

Yet, Cree continues to go at the market alone; could you give a little bit more color on that?

Is that a result of you having silicon carbide and some of the low-cost Asian suppliers being on sapphire or how should we look at this?

Well, I'm not sure exactly what you're referring to but let me take a guess. [Azram] it was, I think you're referring to some of the white stuff, that actually happened several quarters ago, and I think that's a case of--we've seen the results of that which is [Nechia] putting more pressure on people.

So, I'm not really sure what you can read into what that implication is in the market.

That was really at the packaging level. [Lumilet's] recent licensing, if you read the press release carefully, is actually not for nitride technology, it's for red chip technology and it's the resolution of a several year-old lawsuit.

Actually, if you look at what they licensed, they didn't license the good stuff, they actually licensed the old technology, and it's called [ASLNGAP].

So, I think what you see - and they had done that a couple years ago with UEC so that's not surprising, and we've all heard that [Nechia's] obviously -that discussion's been going on, are they're out talking and who are they talking to?

Yes, I don't think it's illogical to think that on the very low-end of the market they may look to see if there is a way they could participate in the China-Taiwan market which really doesn't affect their business and so we'll see what happens there.

But, from our perspective those are all logical extensions of other people's strategies.

Ours' is based on a vertically integrated factory which gives us both a performance and cost advantage, and that's the path we are running down.

We just don't see an obvious other licensing opportunity that we would want to pursue at this time.

Alright, thank you.

And then, just turning to-I guess the future markets-non-handset related that you mentioned with your XB lamp product, that product that you released today is that available in all colors or is it only a white product?

Or is it available in blue and green, and are all available in volume production or where are we at there?

Yes.

I think it says right in the release.

It's available in all three major colors as well as white.

Right.

And then one last question, Cindy.

R&D fell this quarter, and historically, I think you guys have mentioned that R&D's a good proxy for future revenue, is that just a one-time event and should we model R&D increasing throughout this year?

Yes, Jed.

I think the guidance we gave for Q1 would suggest that R&D is probably going to increase about $1m.

What happened in Q4 is we released a lot of new products in the quarter, and we had to meet some explosive demand, we had some customers.

In order to meet those requirements, some of guys normally in development had to help out in the production area.

So that's what happened in Q4 timeframe.

Thank you, guys, and I'll pass it on.

Thanks.

Thank you.

Your next question comes from John Lau of Banc of America.

Thanks.

Hi Chuck, Cindy.

Hi, John.

Hi

Hey listen, on the two to three-inch conversion that you had mentioned, is the capital expense that you're projecting for new equipment or is there a provision there for you to start converting the existing reactors to that three-inch size?

Thank you.

Yes, John.

I would say that our capital expense plan accounts for - a little bit of it is designated for the actual physical factory expansion and most of it is due to equipment, to frankly just to ramp-up capacity to be able to double our chip capacity over the next year.

There are obviously some costs associated with the three-inch conversion, but a lot of it is just pure capacity.

OK.

And, that's mainly equipment.

Are the existing reactors that you have there; can they be retrofitted to that three-inch wafer size in the chambers?

Or, is that something that you are going to take the opportunity to go to a bigger reactor to do?

Without getting into too many specifics, we basically have been planning for a three-inch conversion several years ago.

So, what you should assume is that many, much of the equipment purchases we've made over the last several years were designed knowing that larger wafer diameters would be coming and not just three-inch.

We've really built a plan that assumes that after we go through the three-inch conversion that the next opportunity would be then to go down the four-inch path.

That's still out in our future, but that's the next logical step that we'll be looking at and our equipment purchases are designed around those constraints.

Great, thank you.

Sure.

Thank you.

Your next question comes from Earl Lum of CIBC World Market.

Yes, congratulations Chuck and Cindy for a great quarter.

Thank you.

A couple of quick questions.

On the Sunnyvale fab transfer, I'm not sure if you mentioned it, how long would you expect that to take in terms of fully qualifying in transferring the product in and freeing up some of that fab capacity?

Well, we started the initial process already and it will take several quarters, we think, to get production up and running over there.

So, I look for sometime early next calendar year to have most of the capacity there, most of our schotty running there, and by the end of the fiscal year hopefully to have it fully transferred.

OK.

And then, on the X plan product, on the 70/90, since you have reds available is that going to be a product that you're manufacturing or is that going to be a product where you're going to be procuring that device and then packaging it?

Now, we just-the red chips are available from a couple of suppliers to meet our needs for the applications we're going after, so we're just going to procure those chips to one of the vendors in the market.

OK, great.

That's what I thought, just wanted to double-check on that.

No problem.

And then, as we go forward, with the price drop that you're looking at in the September quarter, if you look historically in the past are we at a point where we're within the historical range of price decline of that magnitude in that quarter?

Certainly that would imply almost your standard 20% price drop per year or is this something where it's a little bit different and we can't really gauge into that particular drop relative to the less than or 2% drop that you just had in the current quarter that you completed?

Yes.

What I think I said was that our targets based on the current orders and forecasts say it's going to be less than 5%, and I think that if you do that that would put us on an annual rate that's below the historical kind of benchmark we've used which is 25%.

And, I think that's an important point which-what is shows is that as we invent brighter products which drive higher value in the market that, that conversion to higher brightness really offsets, you know, the part number by part number ASP and allows us to have an lower overall blended ASP decline for the year.

So, you know, kind of our historical number has been 25% a year.

I would say if you look at the last few quarters and take that and what we're targeting for Q1 and it would show you that given our current outlook it doesn't look to be at that level for the next year.

That great.

And then, Cindy, just a quick question - you mentioned the revenues that you had in the quarter from the ATMI acquisition.

Could you repeat that again, please?

Yes.

We had some material revenue of $398,000 and we got about $800,000 in government contracts.

It was about $1.1m combined.

OK, great.

Thanks, again, and congratulations.

Chuck Swoboda and Cindy Merrell: Thank you.

Thank you.

Your next question comes from Harsh Kumar of Morgan Keegan.

Yeah, hi guys, congratulations again, great quarter, excellent guidance.

A couple of housekeeping type questions.

Your 85% booked for your guidance at the midpoint; can you give us a frame of reference?

How booked you were for the June quarter at this time frame?

Boy, it's hard to give you June quarter.

When we did our April call I think we said we were at about 80%, and I actually went back and looked at where we were a year ago this time, and we were only 65% a year ago.

So, I would say that 85% is probably the highest level we've had in some number of quarters.

OK, great.

And, gross margins, Chuck, what should we be modeling for 2005?

I think you eluded to like a 50% kind of a number.

Is that a pretty fair number to be at for next year as you go through your three-inch conversion and the fab ramp?

Yes.

Obviously, there is quite a number of variables between all the products we've got in the pipeline coming out and then at the same time, you know, a number of different things on the cost-reduction front.

I think what I said earlier, is we target them to be in a similar range as the recent quarters.

Other than our 50% range number we gave you for Q1, I don't think I can be any more specific than that for the next year, but you get a sense for our outlook.

OK, great.

And, can you give us a little bit of color on the end mark that you talked about just a bit?

Would it be fair to assume that a lot of your growth, you know, 18% sequential growth is pretty big number, a lot of came from handsets.

Could you maybe go into a little bit with respect to other end markets of yours?

Yes, actually if you look at our end market breakout, handsets did not grow any faster than any of our other areas.

I think what we're seeing is that whether it be a handset application being blue or the white keypad or the LCD backlight, well that's going as we bring up the brighter chip technology and come out with the Thin product we're seeing additional success in things like automotive and also the LED video screen market.

So, you know, we're actually getting the benefit kind of across our product line which to us is a real healthy - provides a healthy basis going forward.

OK, thank you very much, again, great quarter and very good guidance guys.

Thanks.

Thanks.

Again, I would like to remind everyone, in order to ask a question, please press star (*) then the number one (1) on your telephone keypad.

The next question comes from Tom [Supenz] of Banc Equity Partners.

Hi, I'll reiterate the congratulations on another great quarter.

Chuck Swoboda and Cindy Merrell: Thanks, Tom.

I'm a little bit confused.

I thought, Cindy that you had said that automotive was actually down sequentially?

In the Q4 timeframe it was cause seasonally automotive is usually slower in the Q4 and Q1 timeframes.

What I wanted to point out is that we are still seeing new product design wins there, so as these new products come out we're seeing additional success in all three applications.

Great.

And, I'm sorry, Cindy, also the cash flows, could you just go through the cash flow again for the year and for the quarter?

Yes.

Our cash flow from operations for the quarter was about $51m and for the twelve months it was $152.3m.

That's great.

Thanks very much.

Sure.

Thanks.

Thank you.

Your next question comes from Earl Lum of CIBC World Market.

Yes.

I just had a follow-up, Chuck.

On the higher power 30 millowatt device that you're looking to achieve by the end of this calendar year, that would equate to 100 lumen per watt, how does that relate to specifically to the current X lamp products that you have?

Because once packaged, what would be kind of a package [inaudible] is that the chip level of [inaudible] and not the package?

Yes, what I've done is converted that.

That is a 30 millowatt Cree chip in a package with a phosphor on it.

So that's how I get the 100 lumens per watt, so I'm using existing, white LED technology to get you to that number.

OK.

So relative to kind of the current X lamp products that are out today, where are they in terms of the lumen per watt.

You know, depending on the vendor, lumens per watt range from 20 to 30 lumens per watt.

I will tell you that our X lamp is in the 25 to 30 lumens per watt range.

So, you know, what you're going to see is-what we're going to be able to demonstrate on the small chips is really where we lead in technology first and then we try to transition that technology across to our power chip product line.

And so, 00 lumens per watt is a pretty tremendous number.

What Cree has previously demonstrated which I don't believe we've seen any better results on was about 75.

So that kind of raises the bar again and I think it's a good demonstration of where we're at in terms of chip technology and some of the benefits we're getting from out platform.

OK.

So is it safe to say that as we go into calendar 2005, are we looking at a potential 4X increase in output?

You have to differentiate between the small chip and the power chip marketplace.

We're not - I don't think anyone including Cree is projecting to get our X lamp to 100 lumens per watt in the next year.

OK.

I think what we'll see is, we'll raise the bar on the small chip and then we'll transfer - transition that same technology and we'll attempt to bring that over to the power chip.

But, there are actually two slightly different varia-two [dumers] we're talking about.

Got it.

OK.

I just wanted to make sure I understood that.

Thank you, again.

Sure.

Thank you, your next question comes from Hans Mosesmann of Soundview Technology Group.

Thank you, good quarter guys.

Thanks, Tom.

Couple of questions.

Inventories went up about 13% or 14%.

What the composition of those inventories relative to - are they going into power handset applications, LEDs, so forth?

Thanks.

Hans, I think the majority of that increase was due to growing LED inventories across - from raw materials all the way up to finished goods - just a means to reach our growing sales numbers.

Basically, the way to think about it is LED units, I think were up something like 19%, so it's linked to that and just, building a factory to do that.

But, wouldn't there be upside to your September quarter guidance of like mid-single-digits, when you have that kind of inventory?

That is not - you should not consider that to be necessarily finished goods inventory, that's a lot of raw materials and work-in-progress as we scale the factories.

So, you know, I did comment earlier that the revenue targets we gave you are company overall and that we're actually projecting LEDs to grow faster than that and will be offset to some extent by lower government contract revenues.

So, obviously, we do think LEDs is growing faster than that rate, we didn't give out a specific range.

OK, fair enough.

And, Cindy, can you go through the commentary you made on Color Kenetics, I didn't catch that, you had some of a way of looking at that that I didn't quite catch.

Sure, Color Kenetics was one of our privately held investments that went public in June and, as a result, we had to reclass on our balance sheet how we classified Color Kenetics.

It's no longer shown as one of our private investments, it's now called a marketable security.

So, under Accounting Statement #115, we now mark that market value every quarter, and for the most recent quarter, we had an unrealized gain, but we did not take it to earnings because we're classifying this as an available, for-sale security, it is instead shown as a gain in comprehensive income that appears only on our balance sheet and our statement of shareholders' equity.

Oh, I see.

OK.

And then, lastly, just for modeling purposes, tax rate for fiscal 2005 should be 31%?

That's correct.

Great, thanks a lot.

Chuck Swoboda and Ciny Merrell: Sure.

Thank you.

Your next question comes from Jed Dorsheimer of Adams, Harkness & Hill.

Hey guys, just one follow-up here.

Chuck, [Azram], is it correct to look at [Azram] as a customer - the end market is primarily non-handset related such as auto and display screens?

You know, [Azram's] business, and again, this is obviously the information I get from them, I would say it actually varies over time.

Obviously, we know that they have a very strong base business in automotive and I think that their business fluctuates from quarter to quarter and year to year depending on where their product focuses.

So, I can tell you that over the years they've had some higher success in handsets and some lower as well as in video screens.

As of what their current mix is right now, I'm not sure - I don't have the data to give you any better insight on that.

I would tell you, it's probably auto first and then a combination of those other two depending on what packages they have in the market and where they're winning.

The reason I ask, could you just give a little bit of color on conversation you may or may not have had to share?

Your strategy for X lamp, you're obviously pulling the packaging internally, and that historically has been done by [Azram].

When you sold your chips to them, is there any risk with that business at all going forward, I guess, in penetrating some of the automotive forward lighting in the other markets that you had mentioned.

Yes, well, you know, we've actually tried to talk about this a little bit in the past.

We thought a lot about how do we balance those two?

First of all, our current business today is really unaffected, you know, what's driving our business now is really not had a major impact by these emerging applications, and what X lamp really does, it gives us a chance to kind of go toward this new application.

At the same time, some of these applications are things that [Axram] is interested in, and from our standpoint, our objective if we can address the market better, then we want to do that with - you know, if the chip is the best chip is the best way to serve it with [Azram] and they have the customer relationships we're going to sell them power chips and - we do that today - and if they have the right relationship that's how we'll service that market.

And, at the same time, there are situations where our package design which is different may be better for other applications - we're gonna service that.

And, you know, from a going forward standpoint, we feel pretty comfortable with that.

Obviously, we've discussed it with our key customers and we know what they're thinking, and it comes down pretty simply to at the end of the day they buy our chips and they give them a price performance advantage in the market, and if we keep doing that then I think we can continue to be successful.

Great, thanks for the color there, Chuck.

No problem.

Thank you.

Again, I would like to remind everyone, if you would like to ask a question please press star (*) then the number one (1) on your telephone keypad.

At this time, there are no further questions.

Do you have any closing remarks?

Thank you and we appreciate your interest and support, and look forward to reporting our first quarter fiscal year 2005 results in mid-October.

Thank you.

Thank you.

This concludes today's Cree fourth quarter and 2004 fiscal year financial results conference call.

You may now disconnect.