Wolfspeed Inc (WOLF) 2005 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Cree, Inc. first-quarter 2005 fiscal year 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).

As a reminder, ladies and gentlemen, this conference is being recorded today, October 14, 2004.

Thank you.

I would now like to introduce Cynthia Merrell, Chief Financial Officer of Cree.

Ms. Merrell, you may begin your conference.

Thank you and good afternoon.

Welcome to Cree's first quarter of fiscal 2005 earnings conference call.

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

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

Today, Chuck Swoboda, our President and CEO, and I will report on the results of the first quarter of fiscal year 2005.

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

These may include comments concerning trends in revenue, gross margin and earnings, plans for new products and other forward-looking statements indicated by words like anticipate, expect, target and estimate.

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

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

Also, we would like to note that as a result of SEC rules, we will be limiting our comments regarding Cree's first quarter of fiscal year 2005 to a discussion of the information included in our earnings release and the materials listed 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, beyond the comments made in the prepared remarks.

This call is being recorded on behalf of the Company.

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

Consistent with our previous conference calls, we are requesting that only 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 by phone at 919-313-5300.

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

This webcast will be available through October 28, 2004.

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

Thank you, Cindy.

For the first quarter of fiscal 2005, we again delivered record financial results, with revenue in line with our plan and earnings that exceeded both our target and analysts' consensus expectations.

Revenue for the quarter increased 6 percent sequentially to $95.9 million, while net income increased 16 percent sequentially to $24.4 million or 32 cents per share.

Overall gross margin increased to 56 percent, which was led by strong LED sales across both the mid-brightness and high-brightness categories.

The increase in margin was driven by LED chips, where prices were stable, while costs declined 11 percent from the previous quarter as we benefited from a highly utilized factory and a number of productivity improvements.

The conversion of our LED line to 3-inch wafers is on track, with a little less than 10 percent of LED wafer production on 3-inch as we exited Q1.

Although we did not realize much of a benefit from 3-inch in Q1, as the conversion ramps up over the next several quarters this will be an important cost reduction opportunity.

The new products we have developed over the last several quarters have been an important part of our sales success, and we continue to focus on development efforts, on brighter and lower-cost LED chips, brighter power chips, higher-output XLamp LEDs and further expansion of our silicon carbide power device product line.

With the growth in our business, we continue to face a number of challenges and opportunities.

We operated the factory at capacity for most of Q1, and we need to expand our production capability in Q2 through a combination of process improvements, additional hiring and new equipment to meet the target demand for LED chips as well as our other product lines.

Although we converted the first LED chip products to 3-inch wafers in Q1, this is only the first step of our plan to convert the majority of our LED chip production to 3-inch by the end of our fiscal year.

While we are on track as we head into Q2, we have a lot of work ahead of us, and we need to continue to manage the challenges, complexity and risks associated with the conversion.

We need to continue to develop new low-cost LED products that are brighter, more efficient and easier to use, in order to maintain our leadership position in a very competitive market.

We must also continue to work with our customers to overcome the technical and business hurdles to get our new products designed into the key applications like LCD backlights for mobile phones.

Overcoming these types of challenges is part of the innovation culture at Cree, as we continue to refine our ability to find creative solutions.

Before the second quarter, we are targeting company revenue to increase to a range of $98 to $100 million.

Based on current customer order patterns and forecasts, LED chip demand is targeted to grow approximately 4 to 6 percent in Q2.

We currently have 80 percent of our target revenue booked or under contract for the second quarter, which is on pace with last quarter and at the high end of historical levels.

We are targeting blended ASPs to decline approximately 10 percent in Q2, due to a combination of a near-term mix shift to mid-brightness as the UT230 product ramps up substantially, and product-by-product price reduction in line with historical levels.

We are also implementing a more aggressive pricing strategy, to take advantage of our target cost reductions from the 3-inch conversion and other projects to drive additional growth in future quarters.

We target high-brightness product demand to remain strong and drive the overall growth in chip sales over the next several quarters, as we continue to expand the product family and increase the performance of our products.

Based on our target product mix, pricing trends and cost reductions from yield improvements and the conversion to 3-inch, LED gross margin is targeted to remain strong in Q2.

Overall company gross margin is targeted to be in the mid-50's as a percentage of revenue.

We target some additional costs in the second quarter to expand manufacturing capacity and capability, to try and get ahead of the LED demand curve and continue to ramp up our XLamp and Schottky diode products.

Operating expenses are targeted to increase approximately 6 percent in Q2, as we continue to increase R&D spending to support brighter LED chips, 3-inch process development, XLamp product expansion and 4-inch wafer research.

As a result, we are targeting Q2 earnings of 30 to 32 cents per share.

Based on our current business outlook and confidence that we can continue to deliver innovative new products for the key applications, we remain on track to spend between $100 and $120 million in capital additions over this fiscal year, as we expand our facility and add equipment to double our LED chip production capacity.

We have started the next phase of building expansion on our current site, and we are evaluating additional options, both domestically and abroad, to support targeted future growth.

The LED business grew 9 percent sequentially in Q1, as LED demand remained strong.

The growth in demand was driven by a number of applications, with mobile phones growing slightly faster than the others.

RT and UT, our new thin, small-footprint, lower-voltage mid-brightness products, increased dramatically for a variety of applications including blue keypads for mobile phone's, and we target strong growth in UT demand for the second quarter.

We saw an increase in high brightness demand for white keypads, as well as incremental success in white LEDs for LCD backlights.

We remain focused on expanding our high-brightness family, with a number of new products to try and increase our penetration for the model appliance LCD backlight application, which our customers have identified as a tremendous growth opportunity.

Although our customers' market share is still relatively small for this application, compared to Nichia's, we are encouraged that several of our key customers have indicated that they are able to close the gap on white LEDs with our new high-brightness chips.

The overall market for LED chips continues to evolve, with demand still strong for higher-performance products.

There has been some speculation in the industry about softness in component demand for the China handset market and related inventory concerns.

While we have heard similar comments from some of the Taiwan LED chip suppliers and packagers, our major customers have indicated that their inventories are currently within traditional ranges.

To put this in perspective, Sumitomo inventory is lower today than it was six months ago.

Our business is more focused on customers in Japan than China, and goes beyond mobile phones into a wide variety of other applications.

We believe that our business strategy of leveraging our proprietary silicon carbide platform, customer relationships, intellectual property and vertically integrated factories to deliver high-performance and low-cost LED chips continues to differentiate Cree and drive our success in the market.

We remain focused on increasing our leadership in chip performance.

During the first quarter, we converted the first products to 3-inch and ramped up the UT230 product for low-cost applications.

We continue to increase the brightness across our product families, and we recently released the XT-24 chip and have started sampling the XT-27 version to select customers for white LCD backlighting applications.

Our development team is driving to further raise the bar for performance and demonstrate a 30-milliwatt chip by the end of this year.

We have also started to get traction in the market for our XB-900 power chips, and we are working on extending our recent brightness gains in small chips to the power chip family.

Our efforts to raise awareness of our IP in the market, by putting companies on notice of potential infringement issues, have started to yield positive results.

Based on customer feedback, we believe there are a number of packagers, including those in Taiwan, that order our chips on behalf of OEM customers that specify either IP3 or, in many cases, Cree die specifically.

We intend to continue to reinforce the value of our intellectual property, which we believe is an important differentiator for Cree in the market.

Our high-power packaged LED products got off to a good start in the first quarter, with the release of the XLamp 7090 series.

We were successful in getting some initial wins in a number of small-volume specialty lighting applications including flashlights, appliance lighting and channel letters.

We have made steady progress ramping up our automated packaging line, and we will need to continue to increase our throughput to meet target demand in the first half of calendar 2005.

We are working on several development projects to increase the performance of our 7090 series by leveraging improved LED power chips and new package designs to expand our product offering for other applications.

The recently announced government contracts will further support this activity.

We have started building our applications capability, and we will need to continue to grow our expertise in this area to support the design activity for LCD TV backlights and automotive forward lighting.

We are targeting near-term growth to come from specialty lighting applications, while we actively work with LCD TV customers to try and make the large-scale LCD backlight application a commercial reality, either by selling XLamp-packaged LEDs directly or selling chips through our current customers.

Although we are still in the early stages of the design process, this could become a very significant volume opportunity in the first half of our fiscal 2006.

The power device business continues to make incremental gains, as we increase sales of Schottky diode products at most of the major server power supply customers.

The primary design slot for silicon carbide diodes is still the power factor correction circuit, but we are working on several design opportunities to expand silicon carbide into other stages of the power supply.

We are also working on new designs which are targeted for motor control applications that include both industrial motors and hybrid electric vehicles.

We are targeting continued incremental growth in our base Schottky diode business over the next several quarters, driven by the current power supply application, and we estimate that designs for motor controls could begin production within the next several quarters.

Our silicon microwave sales declined in the first quarter, as we struggled to increase sales from new customers to offset the reduced shipments to Remack (ph), as most of the lifetime buy business was fulfilled with previous in the previous quarter.

We continue to win new designs, especially for 1-GHz applications, but these designs have not ramped up as we expected.

We remain focused on working with our customers to get both these designs and new designs into production for both the cellular and (indiscernible) markets.

We continue to evaluate several strategic alternatives for the silicon part of our microwave business, but we have not yet identified a mutually beneficial cooperation.

On the wide-bandgap microwave front, our business has gained momentum, as we continue to make good technical progress on both silicon carbide and gallium nitride based devices.

Our silicon carbide MIMIC and discrete sales are growing for military applications, and we are working on a number of opportunities to grow this business further in the next several quarters.

Although the commercial opportunities for wide-bandgap products are still further out, this business is clearly aligned with our core technology strengths and supports our longer-term plan to grow our microwave business.

In the laser area, we are getting the resources back in place to get our development effort back to full speed, after we had redirected some R&D resources to LED chip development.

The market opportunity is becoming better defined, although there is still not a clear winner between the competing standards.

We remain focused on working through the issues with our current design and increasing the lifetime over the next several quarters.

We delivered record financial results in the first quarter, with revenue of 95.9 million and earnings of 24.4 million or 32 cents per share.

While many of our Asian competitors struggled over the last several months, our business continued to grow, as we not only increased revenue but our product mix and cost reductions resulted in gross margins increasing to 56 percent.

Our outlook going forward remains positive, although we must continue to increase our new product momentum, while driving cost reductions to maintain our leadership in the market.

This is not a new focus for us, but rather one that we have faced successfully many times in the past.

We are targeting a more aggressive pricing strategy in our LED chip business, to take advantage of our target cost reductions from the 3-inch conversion to drive incremental revenue growth in the first half of calendar 2005, while still delivering strong gross margins.

Our fundamentals remain strong, and the balance sheet got stronger, as cash and investments increased to $253 million.

We are targeting another strong quarter in Q2, with revenue increasing to $98 to $100 million, with earnings of 30 to 32 cents per share.

I will now turn the call over to Cindy.

Thank you, Chuck.

We began our new fiscal year with outstanding results.

Our first-quarter sales increased 6 percent sequentially to $95,897,000, due to the growing demand for our LED products.

Our LED revenue increased 9 percent over the June quarter, due to higher sales, particularly for mobile appliance applications.

Our growth in LED revenue was offset by a 29 percent decline in contract revenue.

Contract revenue was lower sequentially, as our fourth-quarter results included the benefit of a year-end rate adjustment, and we slowed work being performed on some of our older contracts as they neared completion.

Net income was $24,428,000 for the three months ended September 26, 2005, which was a 16 percent increase over our fourth-quarter results.

Our after-tax net margin grew from 23 percent to 25 percent of revenue sequentially, and earnings per share was 32 cents, compared to 28 cents reported in the June quarter.

For the first quarter of fiscal 2005, LED revenue grew to $78,898,000 and made up 82 percent of our overall sales.

Our unit shipments increased 10 percent over the June quarter, while our blended average price per LED declined 1 percent sequentially, due to changes in product mix.

During the first quarter of fiscal 2005, we began shipping commercial quantities of our XLamp family of products.

The impact of our new XLamp sales to our blended average sales price was minimal, as this represents a small percentage of LED sales.

As compared to the first quarter of fiscal 2004, our blended average sales price has increased 3 percent, and reflects our continued success in migrating our customers to higher-performance products.

During the first quarter, our three LED product lines grew proportionately.

Our high-brightness products increased from 54 percent to 55 percent, while LED revenue for our mid-brightness devices declined sequentially to 39 percent from 40 percent of LED sales.

Our standard-brightness chips remained at 6 percent of LED revenue.

During our first quarter, we estimate that sales from mobile phone applications were slightly less than 40 percent of our total revenue.

Material sales were 9 percent of revenue for the September quarter, increasing 16 percent sequentially to $8,299,000.

Material sales includes revenue for wafer and gemstone products.

Our wafer volume increased 38 percent, while our average sales price for wafers declined 10 percent compared to the June quarter, due to changes in our product mix.

Our gemstone materials revenue was nearly even quarter over quarter at $1,525,000.

During the September quarter, revenue of Cree Microwave Sunnyvale decreased 43 percent sequentially to $1,436,000 as sales to Remack for legacy Spectrian products declined substantially and was not replaced by new customers as anticipated.

As a result, we have lowered our revenue targets for this business to a range of $1,500,000 to $2 million for the next few quarters.

Contract revenue made up 6 percent of our overall sales in the first quarter of fiscal 2005.

Contract revenue decreased 29 percent sequentially to $5,711,000, due to a fourth-quarter rate adjustment and a slowdown in spending on contracts nearing completion.

September quarter results also included a $422,000 rate adjustment, which lowered revenue but was mostly offset by a one-time $337,000 gain for a license fee granted to a third party for use of certain technology owned by us that is not a part of our core technology focus.

The balance of our revenue for the first quarter was generated by sales of our advanced device products, which include Schottky diode and silicon carbide microwave devices and accounted for approximately 2 percent of our sales.

Gross margin for the first quarter increased to 56 percent of revenue, as compared to 52 percent reported in the June quarter, and was the highest gross margins in the history of the Company.

This increase was led by greater profitability on our LED products, as our blended average LED cost decreased 11 percent sequentially, due to greater process automation, increased scale and other productivity improvements, while our blended average sales price decreased 1 percent over the fourth quarter.

During the first quarter, we made progress in starting the conversion of our LED production to 3-inch wafers.

However, less than 10 percent of our LED wafer production was on the 3-inch platform as we exited the quarter.

We believe the transition to 3-inch wafers will provide us a unique opportunity to substantially reduce our costs over the next few quarters, by more than doubling the number of chips for wafer, and allow us more price flexibility for our products in the marketplace while maintaining strong gross margins.

For the three months ended September 26, 2005, Cree Microwave lost $3.2 million pretax, as revenue declined 43 percent compared to the June quarter, while operating costs increased 10 percent due to the fourth-quarter benefits of $286,000 for the true-up of standard costs and a prior-year reversal of a warranty expense accrual.

Since the Sunnyvale factory has significant fixed costs, a lower revenue base has a substantial impact on the segment's overall profitability.

During the second half of fiscal 2005, we target that the Sunnyvale fab will be running a high percentage of our power products, as we plan to move production from Durham.

This should allow us to spread more of the fixed costs to other products and improve the profitability of the Cree Microwave segment.

Contract margins increased to 25 percent of revenue in the September quarter, which is up from 23 percent of revenue in June.

We target contract revenue to increase slightly in the second quarter, as new contracts are set to begin for solid-state lighting and other initiatives.

We also target contract margins to approximate 20 percent of contract revenue.

Operating expenses remained even at 20 percent of revenue for the September quarter.

These expenses are comprised of research and development and SG&A costs, and in the first quarter included a $78,000 charge for the disposable fixed assets, as compared to a $790,000 disposal charge in the fourth quarter.

During the first quarter, research and development expenses increased 14 percent sequentially to $11 million, while SG&A costs declined 4 percent to $7.7 million, as expenses for the employee profit-sharing program are now distributed into their respective cost centers rather than being reflected as an SG&A bonus expense.

This reduction in SG&A expense was partly offset by higher costs for public company expenses, including work performed in preparation for the Sarbanes-Oxley Section 404 implementation.

Interest income increased 21 percent sequentially to $1.1 million in the September quarter, due to higher interest rates available on our cash investments.

Our actual tax provision for the first quarter of fiscal year 2005 was increased by 1.5 percent to 32.5 percent, rather than the 31 percent rate that was previously estimated, due to our higher overall profitability and the timing of the congressional passage of tax legislation for federal R&D tax credits.

At this time, we target that our fiscal year 2005 tax provision will be approximately 32 percent of revenue.

However, this position may change, as we are still evaluating our tax provision impact from the recent legislation, which includes anticipated declines in our corporate tax ceiling rate, balanced with reduced tax benefits associated with our foreign sales.

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

During the September quarter, we did not repurchase any shares authorized under this program.

Therefore, as of September 26, 2004, we have 6.9 million shares remaining that have been authorized for repurchase.

As of the end of the first quarter, our balance sheet was in an enviable position, as our cash and short-term investments increased from $231 million to $253 million.

Our cash flow from operations increased to $53.8 million, due to our higher profitability.

As of the September quarter, our days sales outstanding remained low at 37 days, based on our trailing monthly revenue profile, while our inventory was increased to 49 days on hand to meet the growing needs of our customer base.

Capital expenditures for the first quarter were $34.7 million to support the capacity build for our LED production.

Even with this high level of investment, we generated free cash flow of $19.1 million for the September quarter.

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

As we begin the second quarter of fiscal 2005, we target revenue to increase to approximately $98 to $100 million, due to our estimated growth in LED sales.

We target gross margin in the mid 50's as a percentage of revenue, as we plan a more aggressive pricing strategy to gain additional market share and take advantage of our production efficiencies and continued migration to 3-inch wafers for LED products.

We target depreciation expense to increase somewhat faster than revenue in the second quarter, as we bring some capital equipment on line ahead of the curve.

Operating expenses, which include R&D and SG&A, are targeted to increase by approximately 6 percent, due to greater focus on brighter LEDs and LED production efficiencies and higher administrative costs for Sarbanes-Oxley 404 implementation and other expenses.

During the September quarter, our EPS also benefited from $460,000 of transactions that are not expected to recur going forward.

These transactions include $337,000 of license revenue reflected in contract revenue and a $123,000 nonoperating gain recorded on the sale of a portion of our cash portfolio investments.

Therefore, based on an estimated 76 million fully-diluted shares outstanding, earnings per share is targeted in a range of 30 to 32 cents, which exceeds the current First Call estimate of 28 cents per share for the second quarter.

On a personal note, I want to mention that after eight years of service to Cree, that I have adopted a prearranged stock option trading plan in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934.

This plan was put in place to meet my obligations under a marital property settlement.

These prearranged stock option trading plans are a common practice, and have been entered into by a number of other executive officers.

This action does not reflect my opinion of the future financial prospects for the Company.

We are very pleased with the outstanding financial performance in our first quarter, as we establish new records for revenue, gross margin and net income.

We believe that these results put us in a unique position when compared to other technology companies.

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

We will now take analysts' questions.

(OPERATOR INSTRUCTIONS).

Pierre Maccagno, Needham.

Congratulations, Chuck and Cindy, on the quarter.

That's a great quarter.

Could you comment on the overall industry conditions for LEDs, specifically for the handset market?

And I guess, two of the points I wanted you to touch on is this that we hear, that there is an inventory buildup of LEDs for handsets in China.

How do you think that will affect Cree?

And also, do you see any inventory buildup of LEDs anywhere else, in any other markets?

And the second point is Nokia mentioned today that about 60 (ph) percent of their handsets have color displays.

And when do you estimate that this full migration to color displays will be accomplished?

Let me start backwards, and if I don't get them all, just remind me of what they were.

As far as color screens, I think that Nokia's number is about as good.

I hear a range of numbers from a variety of people, but I would say that their number is probably as good as any.

And at this point in time, we would estimate that that percentage will continue to go up in calendar 2005.

As far as inventory goes, I discussed it pretty much in my comments earlier.

I've heard the same concerns, especially related to the China market, and I have heard what the Taiwanese chip guys and packagers have been saying.

When we talk to our major customers, they don't have inventory that is outside the normal levels.

And I even gave you the data point where Sumitomo's inventory today is less than it was six months ago.

So from that standpoint, we feel like our business is pretty healthy and inventory is at pretty normal levels.

Why don't you walk me through -- what were the other parts of the question?

Well, I think that was about it.

I guess I'm just wondering if in the future, with UT230, for example, that is a chip that will be competing with the Taiwanese.

Do you see any possibilities of problems there, with -- because are you going to be targeting sales into China, or into the same markets as the Taiwanese are having sales?

Well, Pierre, we already compete there.

I think UT230 has already seen growth in our business, and it competes head to head in that market.

And I can tell you that, based on our current customer orders and forecasts for this upcoming quarter, we think UT230 will be a significant growth driver.

It will grow, though, in all our markets; it will grow in the China/Taiwan market, and it will grow as well elsewhere.

You have to remember, though, that our products are different than the run-off-the-mill Taiwanese.

Our customers tend to buy our products for -- they tend to buy our products because there is a differentiation, in terms of performance and/or IP and ESD or some other factor.

So as I said earlier, I think our overall business strategy and how we differentiate ourselves is working pretty well, whether it be in the -- no matter which market it is in right now.

Do you think you might be taking market share there with that UT230?

I would be surprised if we are not taking market share.

Based on what I can tell, if you look at our LED numbers and what we have reported and what everyone else has been reporting, it is apparent that we are one of the few guys that is reporting LED sales going up, at least as I have seen.

So I would say that would mean we are gaining market share.

Jed Dorsheimer, Adams, Harkness & Hill.

I guess maybe just a follow-up on the previous question, with respect to inventories.

I was wondering if we could talk a little bit more about the inventories on your books.

It looks like they grew about 17 percent sequentially.

Last quarter they grew 13 percent, when you were 85 percent booked, and revenues actually grew 18 percent.

So when we look at this quarter, bookings -- at least it seems to be a little bit lower.

Inventories are growing at a faster rate, and the guidance is for 4 percent.

So I guess my question is, is business falling off, or did it fall off at the end of the quarter?

Is there any share shifting here, or is margin growth coming as a result of the building of inventory?

I would say no to all those things.

I would say what is going on is that, if you look at the growth in our business and how tight we have been running, we have been trying to get the capacity ramped up.

We are doing a number of things in parallel right now.

If you look at our total inventory, I still think we are somewhere in the mid to high 40 level in terms of days.

That's a pretty normal level for Cree, and frankly it's a lot lower than what would be normal in the industry.

Most of that inventory was actually in our -- within the line; it's what we would call width.

And that is part of as we try to scale up both in the larger wafers on the one side and managing a mix of 2- and 3-inch wafers, frankly, our sales last quarter -- we pretty much ran at capacity the entire quarter, including at the end.

So I would say that, if anything, we were probably a little capacity limited even at the end of the quarter.

And hopefully, the capital investments we are making, we have been making and will continue to make will hopefully get us ahead of that curve.

But current inventory is about where we expected it would be for this quarter, and we feel pretty good about that.

So, if you were capacity constrained last quarter, and you were booked for a greater proportion of your guidance, which into this quarter turned out to be about 6 percent, and it looks as if going into next quarter to the midpoint of your guidance is about 4 percent -- it would seem that something is falling off at some point.

No.

I am not sure I follow your train of thought there.

Well, let me ask it a different way.

Are you just being extra conservative in your guidance?

No, you still lost me.

So last quarter we ran pretty much at capacity.

We were ramping the factory throughout most of the quarter.

And you entered the quarter at 85 percent, up to the midpoint.

Sure.

Right.

And then we ended the quarter, and so this quarter we are coming in.

We are at 80 percent, which is two weeks earlier, so it's almost at the exact same rate we were last quarter.

We are targeting LEDs to grow about 4 to 6 percent, and so we have got to continue to ramp up the factory to be able to deliver an additional 4 to 6 percent for that business.

And so we have got to continue to bring on more capacity.

Just, I guess, shifting gears here, the ASP decline in the -- I don't see the XLamp broken out.

That's not part of the high-brightness, right?

XLamp is in our overall LED numbers, but it's a relatively small number at this point.

I would say, in fact, it is less than 1 percent of sales in the first quarter.

It won't become significant, at the earliest, until the second half of our fiscal year.

And once it becomes significant, we will probably actually at some point break that out, but at this point in time, it's just part of LEDs.

So, if it is 1 percent of --

It's less than 1 percent.

-- sales -- oh, less than 1 percent.

But that doesn't skew the ASP if you are -- I mean, what is that product selling for?

I mean, multiple of dollars versus sort of cents on the other stuff, right?

Yes.

Well, if you do the math, 1 percent -- you can take a pretty big number; it doesn't have much effect on the ASP.

I don't have the math in -- I don't have the numbers in front of me, but I did it before the call, and it's pretty much insignificant.

And then, I guess, lastly, and then I will pass it on, I was wondering on the XLamp, we have actually taken a peek at that.

And I was wondering if you could just sort of give maybe an overview of what differentiate that from, I guess, your competition, being mainly Lumileds, and then also the Nichia with the Rigel and the Jupiter product.

Yes, and I would actually put OSRAM as well.

So I would say those are the three other guys in the marketplace.

Well, Lumileds -- let's face it; they have been in this market for a couple of years ahead of the other three of us, so they are in the market today, and the other three of us are trying to get out there by introducing new product.

I would say that Cree's product -- I would say it's probably more similar in overall size and shape to kind of the Lumileds size product, and I would say our major differentiator is we have tried to design it to be easier to use in terms of volume manufacturing.

And the other thing is we think that by having access to our chip technology we will be able to combine that with a package design that we think is going to be easier to use.

And that's really how we're going to drive a price performance value proposition over time.

So it's a combination of price performance by utilizing our chips.

And then on the other side it will be hopefully -- we intend it to be easier to use.

Initial customer feedback would confirm that that's working pretty well.

But I'll be honest; we are in the very early stages.

We only released that product three months ago, if that long.

And so we are really just getting our feet wet in terms of sampling customers.

We have got some initial nice early sales, but it's going to take us a couple of quarters to get the design wins to really get out there and try to get that business rolling.

Do you have the same benefits that you talk about with respect to Silicon carbide from a thermal perspective, requiring only one wirebond and the thermal conductivity of directly attaching it in the XLamp products as well?

I think silicon carbide gives us -- it's definitely we have a one wirebond chip.

But I think, as much as anything, the silicon carbide gives us some thermal advantages.

I think the biggest advantage we're getting today is just our ability to get good performance out of it, in terms of we feel like we've got a fairly efficient in terms of lumens-per-watt chip, and we think that there is a lot of things we have done over the last six to nine months in the small chip that we will be able to translate into the power chip over the next six to nine months.

And so we are pretty optimistic we can drive up the performance there, as well.

And so that is really how we're playing it.

There are definitely some -- if you get into the actual package design, we think thermally our package is as good or better than what we have seen that's out there.

But, again, I think time will tell if we can translate that into design wins in the applications.

And to me, that's always the proof's in when we get the design wins.

And you only have to use one wirebond on your XLamp products?

Yes.

It's still a single-top contact device.

Earl Lum, CIBC Oppenheimer.

It's Earl Lum from CIBC World Markets.

Again, congratulations on the quarter.

Chuck, as we have looked on this 3-inch conversion, you were less than 10 percent as we exited the first quarter.

Can you give us some idea when we would expect you to be halfway through?

Are we talking kind of closer to the end of the March quarter, where you're going to be at least halfway along?

Are you aggressively going to be doing the ramp in the December quarter, as well, and could be closer than further out on this conversion?

Without getting into too many specifics, the plan is from here to the end of our fiscal year to get the majority of our products converted over.

Some of that timing along the way will depend on how fast we get which products qualified and get them rolled out and through our customer base.

I would say that we will still be less than half at the end of December, and then we will cross over the halfway point somewhere in the second half of our fiscal year.

Where exactly that is, I am not prepared to estimate that right now.

But I would imagine we will make good progress this quarter, as well as the next several quarters, until we get to kind of that end point.

And then, as you look onto this 10 percent blended ASP drop that we are looking at in the December quarter, as you shift to the mid-brightness product, is this something where -- obviously, you are still targeting your 20 to 25 percent annual price drop that you have had in the past.

This seems like it is an aggressive play to really push the UT230 product directly into the Asian markets, where you could pick up significant share.

Am I reading this correctly?

There is a part of it, though, that is normal ASP decline that we would expect in any quarter along our historical levels.

So it's a combination of both, really.

So I would say it's part mix and part the normal ASP declines, and obviously our goal is -- as we talked about not only this quarter, but really going into the next part of next year -- is getting even more aggressive, to take the fact that our cost reductions are actually ahead of plan at this point.

Obviously, with our 56 percent gross margins, you want to use that and the anticipated -- our targets of getting 3-inch online to get even more aggressive and kind of go after share as we exit this quarter and go into the first half of next year.

Great.

And then, just shifting to Cindy, given, obviously, the significant jump in gross margins, as we look longer-term with the potential for being fully converted to 3-inch, are we looking at -- do we have a new, longer-term guidance target for gross margin, Cindy?

(multiple speakers).

No. we gave an update for Q2 that we think we can still be in the mid-50's in Q2, but this is going to be a balance with ASPs, what we give back to our customers with the benefits we get from 3-inch.

Earl, the way I would think about it is it's a combination of at these gross margin levels, we are asking ourselves how -- we are thinking market share at this point.

And then just finally, Chuck, if you can talk about non-global (ph) appliance markets, certainly there's a lot of other things that are happening in LCD plasma, flat-panel display backlighting and architectural lighting and, of course, solid-state.

Can you at least give us some idea as to what is happening in automotive and some of these other non-handset applications as you see them developing as we exit '04 and entering into '05?

Yes.

I think automotive is kind of -- it's a long-term trend, right?

It's basically I think we will continue to see additional car companies use LEDs as an interior light source.

But that's not going to be one big jump;

I think that's a longer-term transition.

But we still feel like the use of nitride -- whether it be blue, green or white -- is going to continue on.

On the display side, we actually this last quarter -- displays was probably a little slower than it has been.

It's about even, maybe a little bit slower, and I think you'll see that business continue -- I think overall it will be fine longer-term, but it probably was not as strong as recent quarters.

And then when you start looking out at some of these specialty lighting things, there are more -- the problem is there is no one easy-to-model application.

Specialty lighting, as an application, is really a combination of thousands of different things.

And so we are seeing LEDs get used in all kinds of different places.

It's a little hard for us to predict where that well end up, short of -- you know, when we look at the big apps, which is the LCD backlight or the car forward lighting -- those, I would say, between now and the end of next calendar year we are going to find out how far we can get LCD TV backlighting.

I think that applications is going to be figured out over that period of time, and then we will see where we stand, either as an XLamp provider or as a power chip provider to our customers.

And then, on the other front, I think automotive forward lighting -- I'm pretty confident it will happen, but we are still probably a couple of years away from any mass production type quantities.

And so it's kind of -- we really still see additional sales growth in mobile for us, because we are relatively small share in this LCD backlight, and as we continue to get our brighter chips out there and our customers have success, we think we can grow share in the mobile phone segment, as well.

Great.

And again, congratulations.

John Lau, Banc of America Securities.

Chuck, Cindy, I wanted to take a step back and bring a couple of data points together.

Focusing on your guidance for next quarter, you mentioned that LEDs are going to be up around 4 percent, I heard you say?

Yes, 4 to 6 percent.

So ASPs are going to be down about 10 percent.

So units are going to be up around that 14 percent range, approximately?

Yes, somewhere in that range.

And I wanted to bring another thought together which is quite interesting.

You mentioned that you were at near capacity constraint this past quarter?

Pretty much constrained the whole quarter, yes.

And looking forward, it looks like you are probably going to be, if I am getting this (technical difficulty) pretty tight next quarter, as you're doing a lot of the conversion.

Am I correct in saying that?

I would say at this point we will be tight, but we really think with more 3-inch coming online, we will start to get ahead of that curve.

So, between the investments we are making -- we are really trying to get some of that CapEx we have been buying online, and if that comes online and we get a higher percentage of 3-inch, at some point those two things should come together and start to give us a little bit of upside, from a capacity standpoint.

And that is really where we would like to be, because as we get more aggressive on the pricing front, we need to get ahead of that curve.

And that's the reason why I was thinking about this, because it looks like you are running it pretty hard and you have a lot of business that you need to support.

So part of that plan is -- are you actually taking down reactors to migrate the 3-inch, and that is that fine balance that you are trying to do right now for next quarter?

No, no, no.

We really don't have -- obviously, our reactor strategy has been thinking about 3-inch for a few years now.

So it's really not taking them down; this is more about as 3-inch comes online in a lot of parts of our factory, that is going to give us essentially some free capacity.

And so any wafer-driven operation, when we go from 2- to 3-inch -- there is essentially a capacity gain -- if you put a 3-inch wafer and a 2-inch wafer, and it can handle either one, that's like getting double that die through that step.

As that becomes a larger percentage, that starts to free up capacity in a number of different areas.

And so that's kind of what we're looking for, that crossover to start giving us a little more breathing room.

So that gets to my two final thoughts.

It looks like your guidance is based upon trying to get that capacity online and what you could support in the quarter.

Am I correct?

You know what, John?

I cannot quite hear what you just said.

Can you repeat it?

It looks like your guidance is really driven by how fast and what your plans are for your capacity expansion in the next quarter.

And is that (technical difficulty) to support that, just in case?

I missed the back end of that, but the targets are based on -- we obviously have a balance of a conversion going on and a ramp-up at the same time.

And part of this is managing which products get qualified when, and which ones we convert over.

So it is a bit of a -- I would call it -- maybe a "wafer ballet" is the wrong thing, but there is quite a thing going on in our wafer fab, and the back end, trying to balance these two types of products coming through the line.

So some of this is capacity-based, some of it is based on our current customer orders and forecasts and what we think makes sense out there in the marketplace, and really just trying to blend those two.

So when you bring those together, and then you add in the fact that we are trying to bring on CapEx a bit ahead of the revenue curve -- we are frankly one edge (ph) at the quarter ahead, then obviously that will bring a little bit more depreciation expense faster than the revenue.

Chris Montano, Wells Fargo Securities.

Thank you.

Very nice quarter.

A question regarding the white backlighting for mobile handsets.

As, Chuck, you mentioned, it was a pretty important component of growth going forward.

Could you talk a little bit about your strategy, as you work with your customers and distributors, on how to penetrate that market, given that Nichia has a fairly dominant position at this point?

Yes.

I would say that, obviously, Nichia has developed a dominant position, and they did it two ways.

They, for a long time, had a performance advantage.

They were able to stay ahead on the white front, and they had a two-pronged approach there.

One was they had some pretty good white technology that they, through IP, didn't let other people have access to.

And their chip technology is good, as well.

What we have been focused on is what we can control as the chip side.

And so we have been running pretty hard here to really push up the brightness with brighter products -- you know, started with XT-18, XT-21, we just released 24, we are sampling 27.

And the thought is if we can bring up the brightness there, that really helps on the whole technical front.

And what we're seeing from our customers is that they are indicating that with our recent products we are getting out there, they can compete with Nichia on a performance basis, assuming that their phosphor technology is relatively competitive.

And I would say the longer -- as this market continues to evolve, it appears that our major customers are getting better at phosphor, either working with the ones they have, or getting access to ones that -- they are getting more comfortable, frankly, with going out and competing with Nichia and less worried about the IP -- not that IP isn't real, but they have developed alternatives, I think, that help them feel comfortable going after that.

So it's really a combination of we have got to keep driving the chip, in terms of performance and cost, to help them come up with a better price-performance-value proposition, and they have got to make sure that their phosphor side of it they are taking care of.

And I would say that each quarter we are making some progress.

Obviously, we still have relatively small share, but it is growing.

And obviously, our plans are to keep doing our part and hopefully continue that momentum into the first part of calendar '05.

If I could follow up real quickly on that, so you are doing your part, which is driving the brightness factor in your chips.

Is it important for Cree to be involved in those competitions for design-ins?

Or is that something that is completely left up to the customers?

Do they want you involved?

Talk a little bit about that dynamic, and your perspective in view into that.

That's an interesting balance.

Obviously, our customers want to manage their customer relationships as much as they can.

But at the end of the day, in a lot of these situations, it's Cree and our customer trying to beat Nichia for these design wins.

So I would say, over the last six to nine months, especially on high-profile deals, we tend to get more involved with what do we need to do to the chip, how are we going to balance these two things.

And I would say we are getting better visibility than we have gotten in the past.

We're not controlling that relationship, but I would say that we are taking more of a partnering approach.

As far as we are concerned, when we talk to our customers, between the two of us, what do we have to do to make this thing work?

And let's go figure it out.

And it's not the traditional, here's our chip, good luck to you.

So I think we are getting much more involved in trying to understand what it takes, and we probably can -- I think there's a place we can continue to put even more energy in to help them win in the future.

But that's time and energy.

Jason Tsai, ThinkEquity Partners.

Good quarter.

Just a quick question here.

On your new low-end UT-class products, are you seeing any cannibalization off of that with your existing product line, or is that going to an entirely different market?

No.

I would say that in some cases, we are seeing some cannibalization of our old conductive buffer product, which has been out for a few years.

So we definitely have seen a little bit of that.

I would say it's part that and part -- I would estimate, given the growth we are forecasting, it's part market share gain against other people.

So it's a combination of both, but it definitely has done that, and frankly it was intended to do that.

If we want to win those applications long-term, it's about price performance.

And our strategy is generally, if we can obsolete ourselves, great;

I would rather obsolete ourselves than wait for my competitor to do it.

So that has kind of been our approach, and it is a balance.

In this case, we are getting some of both.

And is the UT-class product going to your normal packagers, as well, the OSRAM and Sumitomo and those guys?

It generally goes to the same customers we sell our other products to.

Harsh Kumar, Morgan Keegan.

Hi, guys.

Great quarter.

Just a couple of questions.

I looked at your product mix between high, mid and, I guess, the low-end or the standard brightness products.

Your ASPs were down about 1 percent; your mix is relatively unchanged.

I am trying to figure it out and understand the market.

ASPs as such, overall, globally stay more or less the same, or how did you manage to come out ahead?

Well, I certainly would not want to tell my competitors that.

I think you are right; the mix was relatively the same.

One of the things to keep in mind is that we have different products within those categories, so depending on -- while the mid-brightness/high-brightness mix might stay the same, we might be selling one of a more high-end, mid-bright product in one case and, depending on the mix, you are going to see fluctuations even within those categories that can affect that.

But clearly, our ASP pressure last quarter was not as high as even we expected it and, frankly, is not in line with what we hear, at least the rumors that are going on in the marketplace.

I think that's because -- I think we tend to compete with customers that are not buying our products solely for price.

It's a combination of factors, as we have said in the past.

They are buying for a variety of reasons, which tend to include a combination of whether it be price and performance, quality, ESD, IP -- all those things tend to factor in, and I think that makes our markets -- while we obviously have to continue to plan for ASP erosion, I think it gives us the opportunity to maybe not be quite as susceptible to some of the swings quarter to quarter.

Got it.

And I think this will be the third time in a row that I will be asking this question about gross margin.

You guys keep delivering fantastic gross margin improvements, which is great.

But are we getting to the point where it will be difficult for you to put together something better than this?

Well, obviously, we have been more successful on the cost reduction front, frankly, than even our internal plans.

We expected to drive costs down this year, but we have actually had more success, especially as we've loaded our factory and really gotten some benefits, whether it be from a fixed cost spreading, some optimization in terms of some productivity improvements.

It's interesting; when you run at capacity, there's a lot of innovation that occurs in our factory.

And the fact of the matter is there's lots of opportunity to continue to do that going forward.

So I won't say never.

I think our business strategy, as we said, is to target kind of the mid-50's for this upcoming quarter, because we really want to find a balance between not only what we are able to do on the gross margin line, but how fast can we grow this business, not only this quarter but as we go into the next year.

So we are trying to find that balance, and mid-50's is the best estimate we have got for this upcoming quarter.

And a housekeeping question.

When would you be done with your capacity expansion to double capacity?

Would that be the March or the June timeframe?

That milestone is a milestone for this fiscal year, so that would be in June.

But frankly, we have been adding capacity, I believe, every quarter now for eight or nine straight quarters.

So this is not a one-time thing; that's just kind of a benchmark for people to track.

I would expect that, if we are successful, we will have to continue to expand even beyond that.

And in the past, Chuck, do you think you have been leaving revenue behind for the last one or two or three quarters, as you have been capacity constrained?

Have you turned business away?

Definitely, in our Q4 and Q1, there have been opportunities we could not take advantage of because of capacity constraints.

I think we have tried to prioritize and make sure that the core part of our business is what, obviously, we prioritize.

And some of the spot orders we were not able to service.

Obviously, going forward, if we can get ahead of that curve, that gives us some flexibility that we would like to have back in our plan, and to be able to go out and go after incremental business in the quarter.

And hopefully, if we get the capacity online this quarter, and get enough of the 3-inch converted, we should at least exit this quarter with a little bit more flexibility.

And last question -- on your UT230, is that classified as a standard-brightness product?

No; it's a mid-brightness product.

And that is the one that is going up in Taiwan.

Are you getting a price premium relative to -- because it's IP compliant -- relative to the Taiwanese manufacturers on that product?

Yes.

Great quarter, guys.

Hans Mosesmann, Schwab Soundview.

Chuck, a clarification -- or Cindy -- regarding ASPs in the LED area, are you including XLamp products in the ASP calculation?

Yes, we have, for this quarter.

It was a relatively small percentage, Hans; it was less than 1 percent.

Obviously, at some point, as that becomes significant we will have to break that out.

But it's just not big enough yet to do that.

And then, when you say that ASPs are going to be down 10 percent in the December quarter, does it include or not the XLamp product line?

It includes it as well.

It's just not -- you realize, XLamp for the September and the December quarter is really a relatively small part of our business.

We are not targeting -- we estimate that we are probably about a six-month design cycle for any significant design wins.

And we just got the product released beginning of this quarter.

So we are really not looking for that to start to get the momentum in the ramp-up until our March quarter.

And then the last question.

You didn't bring up the issue of intellectual property, and it has been an issue that has been debated a lot over the past couple of years.

Is Cree going to consider licensing folks in China or Taiwan some of your technology at the chip level?

Boy, I can't say that we haven't been approached a lot, because we are.

I would say at this time the business case has not been made as to why that is a better deal for our shareholders than us scaling up our factory ourselves, and going out and selling who we are and what we do.

So I think we are always going to consider if there's a better way to maximize the value here, but at this point in time we feel like us building and expanding ourselves into Asia at some point is a better way to do it than just going out and licensing someone.

Chris Versace, Friedman, Billings, Ramsey.

Congratulations on the quarter.

Just a couple questions for you.

I was wondering if you can kind of talk about ASP trends in the different segments of the LED categories you guys reported?

I would say that -- you mean in terms of mid-brightness/high-brightness, or in terms --

Well, and in standard (ph).

I would say that last quarter, if you look across them, they are all about the same.

There was not a significant difference.

It doesn't mean, by the way, that there are not part number by part number -- there is still product-by-product price declines quarter over quarter.

But what's happening is that, as the mix shifts, whether it be between the three categories or even within, we keep keep coming out -- our goal has been to continue to innovate, whether it be at the mid-brightness level or at the high-brightness level.

And that innovation, whether we have a UT230, which, while it is low cost is actually as good or better performance than the product it replaces.

So there's lots of things we are doing that help to offset those trends.

But, on a part-number-by-part-number basis, we don't mean to imply that there isn't still kind of the traditional amount going on; that still is happening.

And then just one other one.

It sounds like, if I heard you right, you are saying that there is a lot more to go in the mobile phone arena for you guys.

But above and beyond that, what would you say the next big opportunity is for a real volume application in, say, 2005?

You mean as something different than what we are always talking about, kind of?

Yes, exactly.

Obviously, mobile phone -- we still see upside.

There's the traditional markets, which we think will continue to grow.

And if you go beyond that, this concept of specialty lighting and what it means -- it doesn't just mean flashlights.

It means many, many different things, and we're seeing all kinds of applications.

I think we are going to start to see some of those define themselves into something we can measure.

And so I know it doesn't help anybody much (ph) to call it specialty lighting, but I think that as a segment and what it represents, whether it be architectural lighting, whether it be channel letters, things related to that are -- those markets are real, and they are starting to emerge.

And our goal is to service them either with small chips, because there is definitely lots of them that can use a standard chip.

There are some that use our power chips, and we are starting to see that business grow, as well, and then on the XLamp front.

And so really, our approach is we are looking to benefit, to try to grow in that market.

But we have got kind of a three-pronged approach, whether it be the small chips, the power chips or the XLamp.

And we are happy as long as we can win in one of those three approaches.

And then just one quick one for Cindy.

Cindy, did you mention what the tax rate should be or could be for the next quarter?

Yes.

I said that for this fiscal year, right now we are estimating 32 percent, but I do want to caution we're still going through the new tax legislation that was passed this week to see if there is any impact.

Pierre Maccagno, Needham & Co.

A couple of follow-ups here.

One, regarding your yield in 3-inch, how does that compare with the 2-inch?

I am not going to be able to give you a specific there.

I can say it is on target at this point.

Is there a little room for improvement?

It is on target.

But I would also say that, like all of our products, I think that there's yield opportunities -- there's still yield opportunities on 2-inch and on 3-inch, as well.

Regarding the market for Flash in handsets, is that going to be accomplished with the XLamp, or with what type of (indiscernible)?

When do you plan to enter that market (indiscernible)?

That's a sizable market.

We sell our chips today -- some percentage of the chips we sell to mobile phones are already in handsets.

Some customers use larger chips, some use a combination of our standard chips.

And we have had people request samples of our XLamp for that application, as well.

But we are not there yet from an XLamp; that product has just been released.

So we actually service it three different ways.

We are already participating in that market.

We will continue to service it.

It just depends; there's different ways to go about it, and different customers are trying different things.

And just to get a little bit more clarification of as you gain share in the LCD backlight, is it that with the XT-24 and XT-27, is it with those chips that you are going to be gaining market share, or do you need even brighter chips?

We think that we can continue to gain market share with the chips we released last quarter, as well as the ones we have just released, the 24.

The 27 we have just really started sampling.

So what we are targeting here, at least in the near-term, is the product line we already released.

And then hopefully, as we go forward, we can continue to drive that and really take ourselves not just to be on par with Nichia, but hopefully raise the bar on them, as well.

How fast do you think you can gain some substantial share there?

Well, we are targeting that to be a significant growth opportunity, as we go into the first half of next year.

And finally, do you have any breakdown by geography?

Breakdown by geography?

In terms of --

Of the LEDs.

Obviously, our largest market is Japan, and that's primarily through our distributor Sumitomo.

And then we have a number of other top customers.

We report that both Agilent and OSRAM are 10 percent customers.

And then I would say it's pretty much spread among primarily other Asian markets, whether it be Taiwan, China, Korea.

It's kind of spread in that market, but definitely Japan is our biggest market.

Robert Lerner (ph), Sidoti.

Great quarter.

I just have one question.

You have indicated in the call that you plan to go after Nichia, just in the previous question, through your chip technology.

What about phosphor technology, which you acquired from ATMI?

Do you plan to leverage that at all?

Without getting into specifics, I can tell you that that is part of our IP awareness strategy that I mentioned earlier that we are trying to raise awareness for our IP.

I don't think it would be appropriate to get into more specifics but, yes, it is part of our overall strategy.

And one other follow-up, too.

With the XLamp, you are starting to get into packaging.

Do you see that filtering back down into the smaller LED chips?

That question is we have thought about a lot over the years.

At this point in time, I will say we have been real successful as a chip supplier.

I think what we have been able to do is leverage a lot of packaging expertise that has been around this industry for the last 15 or 20 years, and a lot of really good customer partnerships.

I think at this point in time, for the smaller LEDs, we still think that is the best way to approach that marketplace.

I won't say never, because we're going to continue to evaluate our options and make sure we're doing the right thing.

But if we can grow the business, as long as we can grow the business into those key applications through those customers, that's probably a lot more efficient than having to build that channel.

And we are going to focus, then, our efforts more on the power side of the business.

But again, you never know what we might -- that could change in the future, but that is our strategy today.

Harsh Kumar, Morgan Keegan.

The question has been answered.

At this time, there are no further questions.

I would like to turn the call back over to Ms. Merrell and Mr. Swoboda for closing remarks.

Thank you.

We appreciate your interest and support, and look forward to reporting our second-quarter fiscal year 2005 results in mid-January.

This concludes today's conference call.

You may now disconnect.