Wolfspeed Inc (WOLF) 2005 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Cree Incorporated fourth 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, August 11th.

Thank you.

I would now like to introduce Mr. Raiford Garrabrant, Director of Investor Relations.

Please go ahead, sir.

Thank you, Shayla.

And good afternoon.

Welcome to Cree's fourth quarter 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'll be pleased to assist you.

Today Chuck Swoboda, our Chairman and CEO, and Cindy Merrell, our CFO will report on results for the fourth 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 and 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 fourth quarter fiscal year 2005 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 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 our investors may have additional questions and we welcome you to contact us after the call by email or phone at 919-313-5300.

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

The replay of the Webcast will be available on our website through August 25, 2005.

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

Thank you, Raiford.

For fiscal 2005, we reported revenue of $389 million and earnings of $91 million, or $1.18 per share.

This growth was driven by our LED business and represents a 27% increase in revenue over the prior year, and an impressive 57% increase in net income.

Based on our analysis of recent sales data, we believe that Cree's LED revenue grew faster over the last year than our top competitors in Japan or Taiwan, which highlights the strength of our business model in a very competitive market environment.

For the fourth quarter of fiscal 2005, we reported revenue of $99 million and net income of $21 million, or $0.27 per share.

The results include the initial shutdown costs for our Cree microwave facility in Sunnyvale, California, which were partially offset by a benefit from end-of-year tax adjustments that resulted in a $1.7 million reduction of net income, or $0.02 per share.

Gross margin remains strong at 51% in the fourth quarter, as the LED business continued to grow.

A little more than 40% of LED chips were produced on 3-inch wafers in the quarter, which is an increase from Q3 and was a function of product mix and customer qualifications.

Based on our current forecast, we expect a 3-inch percentage to continue to increase over the next two quarters.

Q4 R&D expenses were about $2 million lower than our original target for the quarter, as resources and priorities were focused on managing productivity and new product ramp-ups.

This is a temporary shift, as we target increased R&D spending in the first quarter back to normal levels as we focus development resources on several new LED chip projects, as well as high-power LED components, and larger wafers.

As we start our new fiscal year, I am optimistic about the emerging opportunities for our products, but we have to continue to manage with the challenges facing our business.

We need to drive the development of larger wafers, brighter LED chips, and better packages to enable us to win business in the near-term, while providing a low-cost, high-performance product line to enable us to win longer-term.

We must continue to build our worldwide sales and marketing teams to drive the next phase of growth for the LED chip and XLamp businesses, as well as the high-power product business, which includes our silicon carbide power switching products and wide bandgap RF products.

We need to expand our customer relationships for LED chips, while forging new partnerships and alliances to better position Cree to win in the LED lighting and power switching markets.

We need to remain aggressive and find ways to use our technology to increase market share in key applications for wide LEDs, while managing the challenges of competing with an entrenched competitor.

We need to continue to reduce costs through productivity gains, yield improvements, and a continued conversion to 3-inch production for LEDs, especially our very high brightness products, which are still produced primarily on 2-inch wafers.

In addition to these near-term challenges, we cannot lose site of the big picture and we need to increase our investment in R&D to drive the technology, while developing partnerships and channels for the emerging markets over the longer term.

In the first quarter of fiscal 2006, we are targeting Company revenue to increase to a range of 101 to 104 million due to incremental growth from LEDs, microwave products, and government contracts.

One of the key factors to meeting our targets will be our ability to work with our LED chip customers to enable them to increase their market share in white applications, such as, mobile phone backlights.

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

We target Q1 LED sales growth to come primarily from high brightness products and as we have discussed previously we anticipate that our white market share strategy may put some pressure on LED pricing over the next few quarters.

In the near-term, we target blended LED chip ASPs to decline 3 to 5% in the first quarter, which we aim to be mostly offset by cost reduction.

Based on our current forecast product mix, pricing trends, and target cost reductions overall Company gross margin is targeted at approximately 50% for the first quarter, plus or minus a couple of points, and includes approximately $1 million due to stock option expenses.

Q1 operating expenses are targeted at approximately 25% of revenue, as we estimate approximately $3 million of expenses due to stock options, R&D spending returning to historical levels, and we incurred some additional costs as part of the shutdown of our Sunnyvale operation.

Based on these assumptions, we are targeting Q1 earnings of $0.22 to $0.24 per share, which includes $0.04 per share for our estimates for the cost of expensing stock options, and $0.01 per share for severance costs associated with the shutdown of our Sunnyvale operation.

We continue to invest for the future.

In addition to our target of getting R&D spending back to normal levels in Q1, we are valuating further increases across the fiscal year, as we drive to be the first to enable the emerging applications in lighting, power, and RF.

The Durham Campus expansion is on track and should be ready for initial use by the end of the calendar year.

We target bringing the new RTP wafer fab online sometime during calendar 2006, and we will adjust the schedule, depending on overall demand, capacity needs, and the rate of productivity and yield improvements in the interim.

Our agent subcontractor for backend die fab operations is online and should provide us with valuable [burst] capacity for our LED business in fiscal 2006.

We target strong capital spending again in fiscal 2006 in a range of 90 to $100 million to meet near-term requirements and position us to serve the emerging markets in the mid to longer market.

With the strength of our balance sheet and operating cash flows we are also valuating strategic investments to expand and strengthen our product portfolio and better position Cree in terms of access to markets and channels.

We do not need these investments to meet our operating goals in the near-term, but we see potential opportunities to accelerate our growth longer term and plan to actively explore our options.

LED sales for Q4 increased 4% sequentially and were led by growth in several mid-brightness products and a strong increase in XT chip sales.

High brightness LED demand was driven by white mobile phone applications for LCD backlighting and outdoor video display applications, while our mid-brightness products saw increased demand for entertainment and mobile phone keypads.

This increase helped offset some decline in demand for our older high brightness products.

As we look ahead to the first quarter, we target overall demand to grow for our high brightness products, especially for white LED applications, which should offset lower mid-brightness sales.

In LED chip R&D, we continue to deliver improved performance in the fourth quarter with a number of new products, including our Second-Generation MegaBright chips, brighter XT290 Green, and brighter Blue and Green XB900 power chips.

The mobile phone market continues to demand even brighter white LEDs, which require brighter blue chips that are optimized for side-looker packages.

Although our major customers are winning business today with our high-end MB and XT products we cannot rest on our recent success and we are working on improvements to further increase the performance of the MB and XT chip platforms in the near-term.

We are still working to convert our very high brightness products to 3-inch wafers and this project remains a high priority for our team.

We are working on a brand new high brightness chip platform that we target to begin sampling over the next several months that should enable us to continue to push the limits for nitride chip performance for both standard and high-power applications.

We had incremental success increasing sales for our high-power XLamp LED product line in Q4, while we focused on building our sales and marketing team to drive this business.

This business represents a small percentage of overall LED sales today, but we are slowly winning new business and building momentum for fiscal 2006.

We recently announced a white 3-watt XLamp product which sets a new standard for higher-power lighting application, and we continue to work on additional products and performance improvements for this product line.

In the fourth quarter, we continue to make progress in developing our new lighting component platform for LCD-TV and monitor applications.

At the Society of Information Display Conference, held in Boston in May, we demonstrated a major breakthrough with a prototype LED backlight system for an LED monitor that required only 40-watts of electricity as compared with 100-watts for our competitor's power LED-based system and 45-watts for our comparable CCFL-based system this.

This demonstration not only established that Cree's technical approach has significant benefits over competing LED systems, but more importantly, demonstrated that it is possible for LEDs to deliver a superior color spectrum within the existing case design and save energy when compared to today's CCFL technology.

We remain focus on pushing the performance and cost limits of this technology to deliver not just a better LED solution, but a better overall display system, to enable this application to go from the current technology demonstration phase into real commercial applications.

We continue to work on several prototype designs with potential customers, and expect the market opportunities to be better defined over the next several quarters.

This product area does not represent large near-term revenue for Cree, but clearly has the potential to be a very large market over the next several years.

The power device business is still in the early stages of technology adoption, and the demand for our Silicon Carbide Schottky products and the power supply applications has somewhat slowed.

We are working to build our power device sales and marketing team to expand our presence around the world, and to help us overcome the hurdles to expand our penetration in both power supply and motor control applications.

We are also working on product enhancements that should offer greater performance and lower costs, which are key factors for the target applications.

As we previously announced, we have decided to exit the silicon RF business and close our Sunnyvale operation.

We evaluated a number of strategic alternatives over the last year, and determined that the most cost effective solution was to exit the business and close the facility.

While we work through the issues with exiting the silicon part of our RF business, we remain very committed to the RF market and are shifting our product and marketing focus to wide bandgap silicon carbide and gallium nitride products and applications where Cree can deliver enabling benefits to the customer.

We recently were awarded a $15 million development contract with the Department of Defense to transition our silicon carbide MIMIC line to 100mm wafers in the years to come in order to drive further cost reductions for our MIMICs, as well as our discreet silicon carbide MESFETs for commercial applications, such as, the rapidly emerging WiMax market.

Overall, we believe that although we are still in the early stages of developing the high-power product business, our silicon carbide power switching products and wide bandgap RF products are positioned to provide another platform for growth to compliment our success in the LED market.

Our laser team continues to work on substrate and device development for our UV laser diodes product.

With the focus of resources in Santa Barbara on the project, our team is optimistic that we could make good technical progress over the next several quarters.

Although we are not where we need to be from a performance standpoint, we still have time to work through the technical hurdles and position ourselves to win in this market.

Until the standards issues are resolved, we believe the volume applications will be limited, and we simply need to get a reliable laser diode into the market before this happens.

On the legal front, the securities class-action lawsuit that started back in 2003 has come to an end, as the judge entered an order on August 2, 2005, which granted our motion to dismiss the case in its entirety with prejudice.

Though the plaintiffs could still file an appeal, we are pleased with his ruling that supports our position from the beginning that the claims were without merit.

In the fourth quarter we delivered revenue of $99 million and earnings of $21 million, or $0.27 per share.

For the year, revenue increased 27% to $389 million, while earnings increased 57% to $91 million, or $1.18 per share.

We were able to grow our LED business and increase margins, despite a very tough competitive environment.

As we head into fiscal 2006, we see a number of opportunities for growth, and we need to stay focused on the key execution issues, such as, developing brighter LED products, reducing costs, improving yields, and increasing our sales and marketing efforts for the new businesses, while we invest in the product, technology and partnerships for the emerging applications in both LEDs and our high-power product business.

Our balance sheet is strong.

We were able to make capital investments of $142 million in fiscal 2005, buy back $35 million in stock, and still increase cash and investments to $277 million.

We are targeting a good first quarter with revenue increasing to 101 to 104 million and earnings of $0.22 to $0.24 per share, including the effect of expensing stock options and severance costs associated with the shutdown of our Sunnyvale operation.

I want to take this opportunity to explain to our shareholders that we pride ourselves in our ability to execute on our operating plan and deliver good quarterly results, but our real mission is finding ways to leverage our technology and take advantage of the truly unique opportunity to change industries and how people use light and energy.

We are working on tremendous growth opportunities for the -- for LED lighting and specialty and commercial applications, backlighting for TVs and monitors, and automotive forward lighting, as well as the longer-term high-power markets, and we have planned to accelerate our R&D funding to enable these applications.

You cannot estimate our future based on our past results because the market opportunities we are pursuing far exceed what we can measure today.

We are pleased with our success in fiscal 2005, but more importantly, I want you to understand that we believe we are just getting started.

I will now turn the call over to Cindy.

Thank you, Chuck.

For our fourth quarter revenue increased 2% sequentially to a record of $98,883,000, which was within our guidance at the beginning of the quarter.

The majority of this increase was due to higher LED sales, resulting from greater demand for our XT chips, as well as an increase in demand for our mid-brightness products.

For our 2005 fiscal year, revenue increased 27% year-over-year to a record $389,064,000.

In addition, sales to our Japanese distributor, Sumitomo, increased to $160,974,000, or 41% of total revenue and represented sales to over 20 end customers, including four of the Company's top ten end customers.

OSRAM was the only other 10% customer in fiscal 2005 with sales at 11% of total revenue.

Net income for our fiscal fourth quarter was $21,010,000, which was a 2% increase sequentially and included approximately $6.7 million in pretax write-downs and expenses, or $4.6 million aftertax for the planned winding down of Cree's microwave California facility.

These write-downs were partly offset by $2.9 million of tax adjustments that resulted from tax benefits from the change in the market value of our investment in Color Kinetics and other tax items.

The combination of these adjustments reduced net income by $1.7 million, or $0.02 per share for the fourth quarter of fiscal 2005.

Overall, earnings per share was $0.27 and $1.18 per share for the fourth quarter and fiscal year end June 26, 2005 respectively.

LED revenue grew 4% sequentially to $83,639,000 and made up 84% of overall sales in the June quarter.

Revenues from our LED product lines grew evenly in the fourth quarter, as sales of our high brightness, mid-brightness and standard brightness chips remain nearly unchanged from the prior quarter at 65%, 32% and 3% of LED revenue respectively.

Unit shipments increased 10% over the March quarter, but were offset by 6% sequential decline in blended average LED sales price due to our price reductions, which were in-line with previous quarters.

For our fiscal year, LED unit shipments increased 53%, while our blended average sales price has declined 13%, and LED revenue was 83% of total sales.

Our material sales, which includes wafer and gemstone materials were 8% of revenue for the fourth quarter, increasing 4% sequentially to $7,925,000.

Our wafer volume decreased 6%, while our average sales price for wafers grew 3% compared to the third quarter due to changes in our product and customer mix.

Our gemstone materials revenue increased 25% quarter-over-quarter to $2,566,000, due to increased demand from Charles & Colvard.

For our 2005 fiscal year, material sales made up 8% of total revenue.

For the fourth quarter, revenue of Cree microwave Sunnyvale declined 27% sequentially to $700,000, as we announced our exit from the silicon-based RF business in June.

Revenue from our high-power products business, which includes silicon carbide Schottky diode and wide bandgap microwave sales, remained even sequentially at $2,061,000 and made up 2% of our overall revenue for both the fourth quarter and fiscal year of 2005.

In the June quarter contract revenue declined 18% sequentially to $4,503,000, as some of our older contracts continued to wind-down.

And we recorded $1,220,000 of contract funding as a reduction in research and development expenses, rather than contract revenue.

As direct costs under two of our contracts exceeded the contract funding.

When we anticipate that over the life of the government contract, that the direct cost of the program will exceed government funding, it is our policy to record the funding as a reduction in R&D expenses and the cost of the program as an R&D expense rather than contract revenue and cost of contract revenue.

We target our Q1 '06 contract revenue to increase by more than 25% sequentially, due to new contracts that were awarded, such as, our new program with DARPA and other projects.

Contract revenue made up 5% and 6% of our overall revenue in the fourth quarter and fiscal year ended June 26, 2005 respectively.

Gross margin declined from 53% of revenue in the March quarter to 51% reported in the fourth quarter.

Gross margin in the March quarter was improved by approximately 2 percentage points due to two accounting adjustments totaling $2.2 million that were associated with the change in accounting for sales returns that occurred in the third quarter.

During the fourth quarter, LED profitability declined as the average sales price decreased 6% sequentially, while average costs were unchanged compared to the March quarter due in part to the $2.2 million benefit recorded to cost of sales in the third quarter.

For the June quarter, gross margin was also negatively impacted by a $651,000 write-down for Cree's microwave Sunnyvale inventory that was impaired.

For fiscal year 2005, blended average LED sales price declined 13% and was more than offset by a 21% reduction in our LED average cost, which improved our overall profitability.

Contract margins increased to 33% of revenue in the June quarter.

As we recorded $1.2 million of contract funding as a reduction to R&D expense, and $1,475,000 of expenses for contracts as research and development expenses in accordance with our accounting policy.

This improved contract gross profit by $255,000.

For the three months ended June 26, 2005, Cree microwave lost $10 million pretax due primarily to the $6.7 million charge for the plant closure of Cree microwave Sunnyvale facility, which included a $651,000 reserve for inventory discussed above, a $5.5 million impairment of long-lived assets, and a $519,000 in severance charges incurred in the first -- fourth quarter of fiscal 2005, as well as negative results for the Cree microwave segment.

The Cree microwave segment is expected to operate at a loss over the next two quarters as a complete last time buyer for its customers.

As a result, we were required to write all equipment down to a carrying value of $707,000, which is the estimated salvage value to the equipment that is expected to be held for sale in the second quarter of fiscal 2006, which results in the $5.5 million long-lived asset impairment.

We still target additional write-downs over the next two quarters of 6 to $8 million as Cree and Cree microwave are liable for lease expenses from the expected December 2005 closure of the Sunnyvale facility through November 2011 expiration of the lease.

We calculate lease obligations, assuming that Cree microwave can sublease their facility beginning in fiscal 2007.

We also expect to pay additional severance costs in connection with the winding down of Cree microwave's segment business in the first half of fiscal 2006.

During the fourth quarter, research and development expenses declined by 16% sequentially to $9.7 million due to our focus on meeting a variety of production goals.

We target R&D expenses to return to 13 to 14% of revenue during the first quarter of fiscal 2006 when you factor in the impact of expensing our stock options.

SG&A expenses increased 9% from the March quarter to $9.8 million in the June quarter due to a combination of factors, including higher recruitment and relocation fees for our employees, greater accounting service fees, and other expenses.

In addition, in the June quarter, our Sarbanes-Oxley 404 implementation costs increased by $296,000 sequentially.

Besides the impairment charge for the write-down of fixed assets and severance expenses for Cree microwave, operating expenses also included a $576,000 loss on the disposable of fixed assets during the fourth quarter of fiscal 2005.

Net interest income increased from $1.4 to $1.7 million in the June quarter due to our greater cash balance and higher interest rates in our investments.

During the fourth quarter of fiscal 2005, our income tax expense included several adjustments that lowered our overall expense by approximately $2.9 million.

Cree made a pre-IPO investment in Color Kinetics, which went public in June 2004.

Because Cree had a prior year lifetime capital loss that were carried forward for tax purposes under Generally Accepted Accounting Principals, we were required to reverse a portion of the tax reserve associated with the capital losses that were recorded in the prior year.

As a result, Cree reduced its income tax expense by $814,000 in the fourth quarter of fiscal 2005.

For fiscal year 2005, Cree has recorded a net reduction in its tax expense of $4.6 million as a result in the change in the market value of its investment in Color Kinetics.

Going forward, the Company will be required to continue to record the tax effective -- any increase or decrease in the value of its investment in Color Kinetics as a reduction or increase to our tax expense.

Cree has also recorded a total of $2.1 million in other adjustments in the fourth quarter that were necessary to close out our year-end tax provision.

For fiscal year 2005, the effective rate for our tax provision was approximately 28% of revenue.

At this time, for fiscal year 2006, we estimate an effective rate for our tax provision at approximately 33% of revenue.

In May 2004, our Board of Directors authorized an additional 5.1 million shares to be repurchased under stock repurchase program, which has now been extended through June 2006.

During the June 2005 quarter, we did not repurchase any shares authorized under this program.

Therefore, as of June 26, 2005, we have 5.5 million shares remaining under the program that have been authorized for repurchase.

At the end of fiscal year 2005, our balance sheet was remarkable.

During the fourth quarter, our cash and short-term and long-term investments grew from 229 million to $277 million sequentially, due to our strong cash flow from operations of $66.3 million.

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

However, we also benefited from a $15.1 million decrease in net accounts receivable and a $23 million annual benefit from stock options that was reflected in our fourth quarter.

In fiscal 2006, we will be required to reflect tax deductions in excess of recognized compensation costs associated with stock option exercises as a financing activity rather than an operating activity under SFAS No. 123R.

This requirement will have the effective reducing operating cash flow and increasing net financing cash flow.

For the fiscal year ended June 26, 2005, operating cash flow was a record at $175.6 million.

Because of the significant reduction in our accounts receivable balance due to the timing of our collections, our days sales outstanding, which is based on our trailing monthly revenue profile, was the lowest in the past 10 years at 32 days.

Our inventory days on hand increased from 57 to 59 days during the fourth quarter.

The majority of the $1.9 million sequential rise in inventory resulted from an increase in work in progress items for LED products and our newer business areas, including solid-state packaged LEDs and our high brightness -- our high-power products.

In the fourth quarter, our sales return reserve, which reduces accounts receivable and our deferred product asset account remained even sequentially at $9.6 million and $1.7 million respectively.

Capital expenditures for fiscal year 2005 were $141.8 million.

These expenditures were primarily for equipment for our Durham facility to support the capacity increases over the long-term of our LED production for equipment and EPI, wafer fab, and die test areas of the factory.

In addition, we purchased an existing wafer fab facility in Research Triangle Park, North Carolina and expanded our manufacturing facility at our main campus in Durham.

Even with this record level of investment, we generated free cash flow of $44.3 million and $33.8 million for the three and 12-months ending June 26, 2005 respectively.

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

As of June 26, 2005, we had strong backlog of approximately $303 million, all of which we target to ship in fiscal 2006, with the exception of $58 million in government contract revenue.

Our reported backlog includes the purchase commitment under Sumitomo contract, which is subject to end customer demand and other terms and conditions that could effect the way we actually ship to Sumitomo in fiscal 2006.

As we begin fiscal 2006, we target first quarter revenue to increase to a range of 101 to $104 million.

We target gross margin at approximately 50%, as a percentage of revenues we expect that a change in accounting for the expensing of stock options will add approximately 1% to our cost of sales as a percentage of revenue, and we target depreciation expense to again increase as we continue to bring capital in-line over the long-term.

These factors may be partly offset by our ability to manufacture more of our LED products from 3-inch wafers.

Research and development expenses are targeted to increase the 13 to 14% of revenue as we focus on developing our next-generation of LED chips and SG&A expenses are targeted to be 10 to 11% of revenue as we anticipate higher sales and marketing expenses for our newer business units and other higher costs to support the growth of our Company.

During the first quarter of fiscal 2006, we will begin to expense stock options for the first time under FASB No. 123R.

As a result, our overall pretax expenses are targeted to increase by approximately $4 million and reduce our earnings per share by approximately $0.04 during the first quarter.

In addition, we target that we will incur approximately $500,000 in severance expenses associated with the wind-down of Cree's microwave California facility that we estimate will reduce earnings per share by approximately $0.01.

Therefore, based on an estimated 77.4 million shares outstanding, earnings per share is targeted in a range of $0.22 to $0.24 for the first quarter of fiscal 2006.

For the close of this 2005 fiscal year, Cree is required to report for the first time on the effectiveness of the Company's internal control system, as required by Section 404 of Sarbanes-Oxley Act of 2002.

We have prepared for this assessment for the past two years and are pleased to report that we will believe we will be in the position to report in our Form 10-K that we have determined and that our independent auditors will concur that our internal control over financial reporting is effective as of the end of fiscal year 2005.

We are also pleased that the Court of the Middle District in North Carolina granted our motion to dismiss in the securities class-action case, bringing an end to the lawsuit, subject to any appeal that the plaintiffs may file.

With the successful completion of the first assessment of our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002, and with the dismissal of the securities lawsuit last week, on a personal note, I have notified Chuck and our Board of Directors that I intend to resign from my position as Cree's Chief Financial Officer, effective when a replacement can be found.

I have been with Cree for almost nine years and have served as Chief Financial Officer for almost eight of those years and have watched the Company grow by 23-fold during that period, from revenue of 17 million to $389 million.

It was a difficult decision to leave Cree, as I have truly enjoyed my experience at Cree, and can't imagine a better place to have grown both personally and professionally.

I have been associated with the talented group of people at Cree and have always enjoyed working with Wall Street and the investment community as a whole.

I will miss the excitement as the business continues to unfold, but at this time, with the tremendous changes in the public corporate environment in recent years and my desire to spend more time with my family, I have decided to pursue new challenges for the next part of my career.

I intend to stay with Cree for the next several months as it transitions to find my replacement and we put a new accounting organization in place.

My decision in no way reflects my opinion of Cree's future business and I feel that now is a good time to step aside as Cree continues to enjoy its great financial success.

We closed fiscal 2005 in a strong financial position on our income statement, balance sheet, and our statement of cash flows.

Our cash generating capability and financial condition give us ready access to grow our business with our principle source of liquidity being operating cash flow, which was derived from net income.

This cash generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, financing, and investing needs.

Thank you.

And I would now like to turn the discussion back to Chuck.

Thank you, Cindy.

I want to personally thank Cindy for her tremendous contribution to Cree's success over the last nine years.

I respect her choice to step back and change course with her career and I appreciate her commitment to support a smooth transition.

We have started the process to search for a new CFO and I believe that Cree is in amiable position to recruit a strong person to join our team and help us take the Company through the next phase of our growth.

We will now take analyst questions.

[OPERATOR INSTRUCTIONS].

Thank you.

Your first question comes from Michael Smith, CIBC Oppenheimer.

Yes, good evening, Chuck and Cindy.

And Cindy, very sorry to hear about your decision to move on there, but I wish you all the best for the future and that goes for myself and Mary Brixie too.

But just asking a few questions here.

I was wondering if you could, with respect to this first quarter revenue guidance, just talk us through where you see the growth coming from exactly.

Do you see growth across LEDs, wafers, gemstones, collectively or is it sort of less linear than that?

And within LEDs, I suppose, where do you see the major growth for the quarter?

And then I have a follow-up as well.

Thanks.

Yes, from a growth standpoint kind of what we see is the growth coming from LED chips, as well as from the -- both a little bit of incremental growth from the microwave and also the government contract side of the revenue.

I think your other question was within LEDs, and I think what we're seeing there is in the high brightness business is very strong for us right now and that's where we see the growth.

And what we're seeing is that that growth is being somewhat offset by some slowness for our older products in both the mid-brightness and the older high-brightness products as well.

Is it possible for you to give us any granularity on how much growth you're getting within the handsets, LCD backlight market?

Yes, I can't give you a percentage at this point.

What I can tell you is that -- at first -- please realize, we really are still in the early stages of that program to really drive market share.

But what I can say is that based on what we're seeing right now, I think we're having the success we had originally targeted, but we're still in the beginning.

So obviously we need to build on what we did last quarter and what we're targeting for this quarter.

But we're starting from a fairly small market share position, so it's going to take us a while to build up some momentum there.

But I would say at this point we're generally on plan and we feel pretty good about where we're at.

Okay.

And from a cost perspective, I noticed in the supporting information to the accounts, the -- in terms of the sequential movement in cost per unit it looked pretty flat quarter-on-quarter.

I was wondering if you can just talk about that.

Does it reflect the 3-inch line?

And perhaps the fact that yields are still -- you still have a way to go there on yields.

Could you just talk about that a little bit for us?

Thanks.

Yes, no, I think what you have to watch in the sequential numbers, you got to realize that as Cindy mentioned in her comments, Q3 we had a $2 million benefit to cost of sales.

So that was not operating.

That had to do with some of the reclasses we went through that quarter.

So if you take that out, you realize that actually cost per units actually went down.

I think if you take that out, it's probably in the 5% range quarter-to-quarter.

So what you need to realize is that actually we did continue to make progress.

The other thing to realize, though, is that as we start to push more towards high brightness, you know, what we're trying to do is we're actually bringing on higher end products, and generally speaking, they are going to cost us a little more than the mid-brightness products.

You're going to get some mix effect.

But in reality, if you were to do -- could do an apples-to-apples comparison, the cost per unit were actually down about 5% quarter-to-quarter.

Would you expect the same rate of cost reduction again in the September quarter?

I will tell you that we're not really changing at kind of our -- more of our long-term outlook has always been we target about 25% a year ASP erosion and we try to target about that much or more in cost reduction side.

And we're going to stick with that from -- as an annual-type target at this point.

All right, great.

Thanks a lot.

Sure.

Thank you.

Your next question comes from Harsh Kumar of Morgan Keegan.

Hi, and I think I echo everybody's sentiments.

We wish you the best of luck in the future.

Couple of questions.

First of all, Chuck, maybe you can address the ASP declines, just following up on the earlier question.

You gave some data earlier on to answer that question.

Would you predominantly say it's mix or market pressure that's driving the 6% decline, or something else?

I would say it's a combination of normal pricing declines.

Our general pricing estimates for the year are about 25% a year, so that's not all that out of line.

At the same time, there is obviously a mix effect there.

If you notice, our mid-brightness category stayed right with our high-brightness category.

So we continued to have success in the keypad segment with some of our lower cost products, which had some effect there.

But I wouldn't say it's out of line of a range we would normally expect.

Okay.

And maybe switching gears a little bit, 3-inch conversion, you were at 40%.

When can we expect you to be closer to like greater than 90% or closer to 100% is that -- can you guesstimate or estimate for us how long that's going to take?

Yes, well, as I said over the last couple of quarters, 100% is probably not in the near future because we've got some products, especially our older standard brightness stuff that we don't intend to go through the cost of trying to qualify it.

There's no benefit to that.

But what we're looking for is to make incremental progress each quarter and it's going to vary a little bit, depending on where the demand is and what the mix is.

But obviously, we've had success over the last couple of quarters and we're going to try to stay on that track.

I don't have any specific time or targets.

And as long as we keep making progress, Harsh, we're pretty happy because we think it supports what -- the overall business model and I think the gross margin kind of would tell you that that's -- it's working as well.

Got it.

And kind of switching gears, also a little bit maybe different way to ask, one of the questions asked earlier, trying to gauge your success in the wide design win market.

Can you give us a number of design wins last quarter versus this quarter so we can get a gauge of how well you're doing in that space?

Now, Harsh, I'm not going to be able to break that out for you at this point.

Frankly, we know that we're having success, but we frankly can't break it down for you by model numbers or types because we're generally working with volumes of products going to certain customers for these applications.

And so we don't have -- we don't break it down that way.

Okay, and last question and I'll move on and let somebody else take it.

I think you said you're going to be spending about 90 million in CapEx in the coming year; is that correct?

90 to 110 is our current estimate.

Okay.

That's after roughly I think a pretty significant chunky CapEx number last year.

Can you tell us what you're spending this money on, the 90 to 110, is this predominantly equipment or fabs?

No, I would say it's a combination.

We obviously have some fab upfit work to be done with both our current building that's coming online, as well as the new RTP fab that we've bought that we're going to want to bring online at some point.

So some of it's fab-related.

I would say the vast majority is equipment and there's two pieces of that.

Part of it is capacity-related and the other part is as we continue to drive new products and new technologies, we have to continue to invest in equipment to support that kind of stuff.

So part of it's process capability and part of it's pure production capacity and part of it's fab.

But the majority would be equipment-related.

Got it.

Thank you very much.

Sure.

Thank you.

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

Congratulations on the quarter.

Thanks, Pierre.

I have a couple of questions.

How is your capacity utilization this quarter?

We don't break out specifically, but what I can tell you is that we do have some available capacity in the factory at this point.

So, if you go back about six to nine months ago we were pretty much at capacity.

We continue to make investments and at this point, we have some burst capacity across the factory, but we don't break it out specifically.

Okay.

But I mean in terms of the amount, you have enough capacity -- you will not be limited for capacity, correct?

Capacity, I would -- right now based on our current forecast, I don't think capacity is going to limit us here for the upcoming quarter or probably even the next couple of quarters.

Okay.

And then for the fiscal year '05, do you have a breakdown by applications?

You used to do that in the past, like your wireless handsets and signs.

Yes, we don't break it down into specific percentages.

What I can tell you is that for the year mobile phone handsets continues to be the biggest application.

It's probably a little less than half of our LED revenue.

And then if you go from there, the other three big applications, and these kind of move around, are entertainment, the outdoor display business, and then as well is the automotive interior-type backlighting business.

And those kind of vary from period to period.

And so we don't break them out specifically, but those four together are the vast majority of the business.

Don't you expect some level of slowdown in the handset business?

Because most of the transition to color display has occurred, correct?

So I mean at this point, your [indiscernible] business should be going in tandem with unit growth and handsets?

And you're absolutely right, Pierre.

Obviously, the color screen conversion is -- most of that happened.

There obviously is still some of that and there's still some unit growth driving the market place.

Probably for Cree, the most important thing is, is our strategy is more focused on the white LED segments, specifically for the backlighting, the LCD display.

That is a segment that, up until about six months ago we did not have much success in it.

We've really focused on that over the last six to nine months, and really developing our product line to try to enable our customers to do that.

So our goal is market share growth within the handset by trying to win more of the white LED business through our customers for that particular application because we have a relatively small market share and we see it as probably our best near-term growth opportunity.

Okay.

And your long-term strategy with the XLamp or the power chips, I mean right now you're both selling chips and packaged.

In a way you are competing with your customers, but it's a small percentage of revenue, but later on it could pose some problem.

So what is your long-term plan there?

The logic of what we did was, we only -- our packaging business is really limited to the power chip and the power package side of our business.

For most of the revenue in our high volume products, we don't compete with our customers in those applications.

So there's really not a lot of conflict at that point.

When you go to the other side of it and the power side, we are actively selling power chips and having success there and we're also out selling XLamp.

And the reason I think it works there is it's a pretty different market place.

There really aren't any established power LED companies or sales channels or applications.

And so I think in that -- we have an opportunity there to where we can be out with our XLamp, which does some things better than other companies and has a different form factor.

And so we're -- yes, while we're in the power LED business, we're all kind of attacking the applications a little bit differently.

So at this point, we're happy to enable our customers to win where their strong and focus our resources on where we think the XLamp has its own benefits.

And at this point we think it's pretty complimentary.

And then regarding the stock option expense, did I understand we'll -- that you're going to charge 1 million to cost of goods sold and 10 million to R&D?

1 million to cost of goods sold and about 3 million to OpEx, so that's across R&D and SG&A.

Okay.

And my final question regarding, I think the next two growth opportunities are Flash for handsets and LCD backlighting.

When do you think those two will start to represent a large volume for you?

Yes, what we should realize is, is that we've been participating through our chip business in the Flash segment for some period of time.

So I think we're already -- we've already seen that and that's part of our ongoing business.

There's obviously emerging Flash applications for beyond the phone and actually into actual cameras and things like that.

So there's some opportunity there.

More importantly, it's short-term.

It's the white LEDs for LCD backlighting in the mobile phone segment, as well as some of the emerging applications.

We're starting to see demand for both selling chips and our package LEDs for some of the emerging white lighting-type applications.

And so we see that as one of the growth drivers.

A little bit longer-term obviously, the larger scale LCD backlighting and probably within another hopefully year to two, we should start to see some demand grow on the power chip side to support the whole automotive forward lighting.

And those would be kind of the things we see on the LED front.

And then obviously we've got our Schottky diode business, that hopefully will start to get some traction here later in the fiscal year.

Okay.

Thank you.

Sure.

Thank you.

Your next question comes from Matthew Smith, CIBC Oppenheimer.

Mr. Smith, you may state your question.

Sir, your line is open.

Oh, sorry, I was on mute.

With respect to the backlighting and the mobile handset, what sort of barriers do you think you're facing at the moment in terms of trying to accelerate the penetration and market share gains in that particular segment?

Are you seeing any particular resistance from customers, or OEMs?

Is it a question of performance here or price?

And what sort of timing do you think it will be before we start to see a noticeable impact to revenues as a result of your move into that segment?

Could we expect it to maybe the December quarter or March quarter of next year?

If you could just give us some guidance on that, that would be great.

Yes, I think what we're seeing right now, and remember, we sell chips to packagers who go out and compete in that business.

And what we're seeing is -- and we have several of those packagers that are starting to have pretty good success.

At the same time based on what I know about the market size, we're still a relatively small percentage of that.

So I think that probably the biggest issues, and again, this is secondhand information.

We're not sitting in those meetings with the customer -- with the end customer.

But what we're hearing is that a lot of it's just their confidence in bringing on a new supplier and going through does the product meet all the requirements and specifications that they need for that application because their other supplier obviously has a very dominant supply position in those things.

So it's kind of those types of dynamics.

Generally speaking, though, as most markets that buy a lot of products, there's definitely an interest in multiple suppliers for that, so that's actually working to our advantage.

I think as we get a little bit farther along, we expect that you've got someone in that application, which is primarily Nichia, who has got a pretty dominant position.

And I would expect that they will continue to be pretty aggressive from their standpoint to try to protect their market share.

So at this point it's really come up with a competitive price performance solution with our customers, offer a legitimate alternative, and continue to push performance to not only -- not just be competitive with Nichia, but to try to move the bar.

And that will be really where we go.

How do we take and continue to raise the bar on what's possible in terms of performance in that application, and then that's kind of how we intend to drive it.

What do you think the size of the market is?

Have you got an estimate for that?

I think if you look at, again, there aren't great estimates out there.

I know that Nichia publishes that their sales last year in '04 were -- I think the LED portion of the sales were somewhere around 1.5 billion, maybe a little more than that.

That's packaged LEDs, of which my understanding is the majority of that is white LEDs for these types of applications.

So that should give you some idea.

It's probably well over $1 billion a year for white LEDs, and so that's the -- and it could be significantly more than that.

So that's the type -- that's the size of that segment.

Now, remember, that's the packaged white LED.

We're only providing the chip piece of that to our customers.

And what sort of market share do you think you're getting just in the chips at the moment?

I don't have a good number for it.

What I can tell you is I think we're a relatively small percentage at this point still, but I just don't have a good way to quantify that for you at this time.

No single digits, obviously.

Yes, maybe getting near double, but it's hard for me to give you a good number.

Okay, great.

Thank you.

Sure.

Thank you.

Your next question comes from Jed Dorsheimer of Adams Harkness.

Hi, thanks.

Couple questions.

Did you have any Pachinko business last quarter, did that bleed into your fiscal Q4, the June quarter?

Yes, I believe -- I don't have the specific breakout, but it's a part of our business, Jed.

Although, it obviously has -- we talked about it before, Jed, it has cyclicality to it.

There is some amount of year round demand there.

So there is definitely some Pachinko business there, as well as other things we put in entertainment, which were more consumer product indicator-type applications.

But we got some benefit from Pachinko last quarter.

Although, I don't have the numbers in front of me, but my sense is it was definitely lower than the previous quarter.

Gotcha.

And then the last quarter, the reversal of the deferred, it looks like the sales were warranty, I guess, sales were term reserve -- excuse me, I had to find that -- was 9.6 million.

That looks like it's picked up a little bit.

I was wondering, Chuck, if you could just give us a little bit of color on what inventories are like at Sumitomo.

Yes, I actually think the sales return reserve from Q3 to Q4 is pretty close to unchanged.

I don't think there was a significant change there quarter-to-quarter.

But in terms of -- I think your real question is how the inventory looks?

Yes.

And from that standpoint, I would say overall, obviously, we had -- depending on where we're at and who we are talking to you get some amount of visibility.

I would say at this point, it's not something that's impacting orders.

And where the Sumitomo contract is designed, is it's basically got provisions in it that are designed around inventory levels that they consider kind of the cap.

And I can tell you that we're operating within those guidelines at that point.

So I think it's -- I think we're at least within the boundary conditions of kind of a healthy business at this point.

But I don't have a specific number for you.

Great.

Looking at the XLamp, could you give us an idea of what capacity is for that product right now?

Oh, from a -- what we could support?

Yes.

Cree could probably -- it's in the single-digit millions of dollars per quarter right now.

I don't have an exact number.

But that's -- we could probably support something with our current line up to -- not quite to the double digits.

That would be capacity.

Great, and with respect to the 3-inch.

Chuck, are you seeing any distribution issues with the binning?

I know a lot of the customers have been somewhat spoiled by tight bends and as you go to the 3-inch the variation of the EPI growth differs on the wafer.

And I was wondering if there's any issues with respect to distribution and if that's effecting you at all?

It's a great question because, Jed, I would have told you that that would have been one of the bigger risks when we started the conversion.

That has probably -- of all the things we've worked on to get 3-inch going, that has probably not been one of our bigger hurdles.

That has gone pretty well for us.

I would say the uniformity of the EPI on our 3-inch is very equivalent to what we're getting on 2-inch in terms of binning and meeting those types of needs.

Probably the bigger challenge is for us, and I said earlier, is some of our really high-end products.

We still have been primarily making on 2-inch, and so we need to get the 3-inch line to that level as well.

So I would say it's not really a binning issue.

It's more of a top-end performance issue.

Great.

Two more questions, if I could.

The -- I was wondering if there was any change in the way that Cree looks at options.

And the reason that I ask is, if looking back at the 10-K and maybe, Cindy this is better for you.

Is looking at last year's 10-K, it looked like the Black-Scholes had options expensing a bit above what they are coming in with at the $0.04.

So I was wondering, has there been any change with respect to the way that Cree looks at options or giving out options to its employees?

I'll -- we can let Cindy -- if, Cindy, I get this wrong, I'll let Cindy correct me.

But I'm pretty sure when we accelerated the vesting of options last quarter, Jed, of all the out-of-the-water -- all the underwater option, that's probably the major difference.

So if you look at last year's 10-K, there's a bunch of options that we accelerated the vesting on last quarter, that when we did that, by accelerating the vesting, those are no longer part of the expenses going forward.

And then we expensed the out of the money options.

Gotcha.

And so I think that's the discrepancy that you're looking at.

All right.

And then lastly, on the microwave business, you might have explained it, but if you could just maybe explain it for me once again.

Microwave was a losing business with margins that really dragged down, yet when we look at the guidance and now that this business is being written-off, we're not seeing a real benefit in margins or EPS.

So I was wondering if you could just walk me through; what am I missing here?

You're not missing anything other than you got to wait until January because we still have to run that business through the end of December.

What we ended up doing -- see you're on -- you're right.

We expect to get a benefit as well, but we won't see it until the January quarter because what we did is when we announced the closure, we went out and offered all our customers lifetime buys.

And we'll be spending the rest of this quarter and the December quarter going through, fulfilling those lifetime buys.

So we're going to have to -- we will be living with the operating expense, the margin hit, for another two quarters and then we should get that benefit as we get into the January quarter.

Gotcha.

And could you give us an idea on what that benefit would be?

Cindy, I don't know -- is it -- I think-- is it in the financial statement, Cindy?

Yes, in the operating segment information we give you, you can see, for example, net income before taxes for fiscal year 2005, premicrowave loss $19.2 million.

All right.

Thank you.

All right.

At this time, there are no further questions.

Mr. Garrabrant, do you have any closing remarks, sir?

Yes.

We appreciate your interest and support and look forward to reporting our first quarter fiscal year 2006 results on October 20, 2005.

Please note that this date is one week later than when we have usually held our quarterly conference call.

Because going forward we want to be able to complete all of our requirements under the Sarbanes-Oxley 404 law prior to releasing our financial information.

Thank you.

Thank you.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.