Wolfspeed Inc (WOLF) 2006 Q4 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Cree Incorporated fourth quarter 2006 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, Thursday, August 10, 2006.

Thank you.

I would now like the introduce Raiford Garrabrant, Director of Investor Relations of Cree Incorporated.

Mr. Garrabrant, you may begin your conference.

You may begin your conference.

Thank you, April, and good afternoon.

Welcome to Cree's fourth quarter fiscal 2006 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 pleased to assist you.

Today, Chuck Swoboda, our Chairman and CEO, and Mike McDevitt, Cree's Interim CFO, will report on our results for the fourth quarter of fiscal year 2006.

Today's presentations includes 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 mentioned important factors that could cause actual results to differ materially.

Also, we'd like to note that as a result of SEC rules we will be limiting our comments regarding Cree's fourth quarter of fiscal year 2006 to a discussion of the information included in our earnings release and materials posted on our Web site 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 copywrited property of the Company and no other recording or reproductions 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 to you to contact us after the call by e-mail or phone at 919-313-5300.

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

A replay of the webcast will be available on our Web site through August 24, 2006.

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

Thank you, Raiford.

For the fourth quarter of fiscal 2006 we delivered revenue of $106.7 million with net income of $13.2 million, or $0.17 per share.

Our results include $0.02 per share of additional net tax expenses related to our investment in Color Kinetics and other year-end tax adjustments.

Revenue for the quarter was on the low-end of our target range as lower LED revenue was somewhat offset by an increase in government contract revenue.

The lower LED revenue was primarily attributable to internal production issues that affected LED chip shipments and external production issues associated with the ramp-up of our XLamp LED products.

Gross margin declined to 42% for the quarter due to the lower LED revenue as a percent of total revenue, a less profitable mix within LEDs, and higher costs associated with the XLamp and Schottky ramp-up.

Although we knew it was going to be a transition quarter for the Company, the short-term execution issues were clearly more challenging than we expected.

For the fiscal year we delivered record revenue of $423 million with earnings of $76.7 million, or $0.98 per share.

Although we did not grow the LED chip business as much as we would have liked in fiscal 2006, given the relatively flat market for high brightness LEDs, we did fairly welcome compared to the overall industry.

The XLamp product line grew nicely as we increased sales every quarter of the year and raised the bar for high power LED brightness and efficiency.

We remain on track to meet our goal of making XLamp LED products at least 10% of our overall LED sales by the end of this calendar year.

In fiscal 2006 we also started to gain design win traction with our Schottky diode products for power supply applications.

This product line ramp-up is still in the early stages, but the progress we are making is very encouraging, and it should help drive our growth over the next several years.

As we start the new fiscal year we continue to move ahead with our strategy to expand our business by leveraging our strengths in LED chips and silicon carbide materials technology to broaden our product line with higher value, component level products for the emerging opportunities in lighting and power.

While this transition is key to growing our Company, it takes time to build up these new product lines and the sales channels to support them.

In the near-term we are facing lower LED chip revenue based on forecasts from our customers due to reduced mobile demand and increased competition in the market.

Although we believe we can offset some of this weakness in chip demand with incremental XLamp and Schottky diode sales, we are targeting slightly lower overall revenue in the first quarter.

This will put additional pressure on our margins in the short-term because the new product lines are still in the early stages and do not have the scale to deliver the same level of profit as the LED chip products.

The next few quarters are difficult to forecast and our results will be heavily dependent on what happens with overall high brightness LED market demand, but we are going to continue to invest in R&D and SG&A.

This may reduce our earnings in the near-term, but we must continue to make these investments and build momentum for our new products.

We target product margins to level off over the next several quarters with operating margins starting to improve in the second half of our fiscal year based on higher LED chip sales and the ramp-up of the new LED lighting and power product line.

To support our strategy and achieve our targets for the fiscal year, we are focused on five key area to drive revenue growth and increase profits.

Our first priority is to ramp-up our new EZ Bright chip product family and regain sales momentum in our LED chip product line.

We recently demonstrated record white LED efficiency of 131 lumens per watt using our EZ Bright chip technology that puts us ahead of our competitors and is changing industry perceptions about how quickly LEDs may be used in commercial lighting applications.

While this is an R&D result, initial customer feedback on our production EZ chips has also been very positive.

For the mobile white market the EZ chip gives us a much stronger product offering to compete at the high-end of performance.

For the lighting market our new EZ power chip samples are enabling both our XLamp team and our external customers to demonstrate more than 60 lumens per watt of white performance, which not only exceeds what is available in the market today, but also starts to really make the case for energy savings with LEDs.

In this market our technology is starting to redefine what is possible with the high power LEDs.

Our goal for the next six months is to get the EZ bright chip family fully qualified at our customers and help them build sales momentum in the high-end white markets.

We plan to work through the new product ramp-up issues during this time and target having the EZ Bright product line in position to start to drive chip revenue growth and support our new XLamp products in the second half of the fiscal year.

Our second priority is to continue to build sales momentum for our lighting and power components with new design wins while we work through the growing pains associated with ramping up these new products.

While the combined revenue from these product lines is currently a relatively small percentage of our overall sales, they are the key pieces of our growth strategy as a vertically integrated, value-added components company.

We anticipate that our LED lighting product line growth will be driven by our new, brighter EZ base XLamp products which are targeted for release over the next few months.

If we stay on track with our current plan and continue to increase sales each quarter, the lighting product line should start to contribute incremental operating profit in the second half of fiscal '07.

In addition to XLamp our lighting team continues to make progress with our Colorwave backlight product.

We've made great progress on the product design and systems development over the past six months and are on track technically to meet our goal to have a product released for commercial applications by the end of this calendar year.

Although the technology is on track, we are still working through cost and pricing issues which may delay the commercial product release in the calendar 2007.

Our power product line is making good progress but it will take time to build scale in Schottky diodes and get through the ramp-up curve.

To put this in perspective, the power product line is approximately where our XLamp product line was at this time last year.

We target increasing Schottky sales each quarter over the next year as well as the release of our first MOS set products.

We target this product line will start to make a meaningful revenue and profit contribution in fiscal 2008.

Our third priority is to accelerate our cost reduction programs for our LED chip, lighting components and power products to help offset the competitive pricing dynamics in the LED chip market and give us more flexibility to open new markets in lighting and power.

The first step is to increase our efforts to develop and qualify LED and Schottky production on 4" wafers.

This should give us some cost leverage and increase our overall capacity.

Our goal is to start qualifying Schottky diode production in the first half of fiscal 2007 and then start qualifying a portion of our LED production beginning in the second half of this fiscal year.

In addition to 4" we plan to continue to expand our production capabilities in Asia at the chip and package level which could provide additional cost leverage.

Our fourth priority is to expand our sales, marketing and channel capabilities for lighting and power components.

We are actively building our global sales team and negotiating distribution arrangements to expand our coverage in the U.S., Europe, and Asia.

This will add SG&A costs in the short-term, but the investment is critical to driving growth in these component product lines.

The marketing efforts we launched over the last six months have had a positive impact in terms of both brand awareness and lead generation.

It is important that we continue this effort to position Cree as both an LED chip and components company.

We know that building the sales team, channel and brand will take time, but we target significant progress in the year ahead.

Our fifth priority is to identify and develop strategic opportunities to expand our product offering for the lighting and power components market, which can leverage our investments in the enabling technologies, intellectual property and sales channels.

On the technology front we recently acquired INTRINSIC Semiconductor, which was a small silicon carbide technology company that had demonstrated the first zero micropipe, or ZMP, silicon carbide wafers in the industry.

We believe that the combination of our silicon carbide technology and manufacturing expertise with INTRINSIC's ZMP technology can accelerate the commercialization of higher quality, large diameter substrates which are critical to enabling the large area devices needed for both the power markets as well as the lighting market.

We are currently looking at additional opportunities to expand our component product offerings but are not prepared to discuss specific ideas at this time.

These priorities reflect a company in the middle of an exciting transition.

It will challenge our team in many aspects, some of which I have outlined and others that will develop as we move through the year.

The recent operational challenges are part of this transition, but they have neither deterred us nor reduced our outlook for what we think we can accomplish in both lighting and power.

If anything, they've helped us focus on the critical priorities needed to make them happen.

While the combination of LED chips, lighting and power is targeted to drive our growth over the next few years, we continue to invest in longer term products and technology that go beyond these markets and applications.

Our Microwave team continues to develop new, wideband GaN products and technology for both military and commercial applications.

Although we expect it will take several years for this market to really develop, some of these products are already finding ways to contribute as they get deployed in some new applications to support our troops in Iraq.

On the laser front we have reduced our internal development activity and are working to expand our cooperation with development partners to leverage their products and applications expertise to start delivering development samples to customers by the end of this calendar year.

This should enable us to increase our internal focus on lighting and power development.

Although fiscal Q4 was not as successful as we would have liked, we are working through the transition issues of building a much larger business by expanding our traditional LED chip and silicon carbide product lines to include LED lighting and power components.

This transition is going to affect our operating results in the near-term, but we must continue to make these investments and put Cree in a position to capitalize on the tremendous emerging market opportunities.

Our goal is to win in these new markets and increase annual revenue by 60 to 70% in three years with operating margins increasing into the low 20% range.

As we pursue these financial goals, we are also looking to use our technology to change the way people use light and deliver real energy savings for a wide range of everyday applications.

I'll now turn the call over it Mike McDevitt to review our Q4 financial results and targets for the upcoming quarter.

Thank you, Chuck.

For the fourth quarter of fiscal 2006 we reported revenue of $106.7 million with net income of $13.2 million, or $0.17 per share.

These results included $1.8 million, or $0.02 per share of additional tax expense related to our investment in Color Kinetics and other end of year tax adjustments.

The end of year tax expense was $1.7 million lower than the Company previously estimated in our press release on July 12, 2006.

Additionally, the fiscal fourth quarter of 2006 includes stock compensation expense of $2.3 million net of tax, or $0.03 per share.

Fourth quarter revenue was at the low-end of our target range due to lower LED revenue.

As Chuck mentioned earlier, the LED revenue shortfall stemmed primarily from production challenges which limited the Company's ability to meet customer orders for the quarter.

Lower LED revenues were partially offset by slightly higher revenue from government contracts.

During the fourth quarter LED revenue decreased 2% from the third quarter to $84.5 million and was 79% of our total revenue.

Despite the LED production challenges XLamp revenue increased from the third quarter.

LED unit shipments increased 6% over the March quarter while our blended average sales price per LED declined 8%.

In the June quarter our mix of high brightness products increased from 33% to 38% of our LED revenue while our mid-brightness devices decreased from 67% to 62% of LED revenue.

Our high brightness LED revenue was greater in the June quarter due to increased demand for white mobile applications and XLamp.

Despite the increased percentage of high brightness products, average selling prices declined due to increased competition for both our mid-and high brightness chips and a higher mix of lower priced mid-brightness chips for the mobile keypad market.

Material revenue, which includes wafer and gemstone products, was 9% of revenue for the fourth quarter, decreasing 6% sequentially to $9.4 million.

Wafer revenue decreased 7% to $5.8 million due to lower unit volume and a change in product mix.

Gemstone revenue decreased 5% sequentially to $3.6 million due to lower unit volume.

High power products revenue, which includes Schottky diode and wideband GaN Microwave sales, increased 29% from the third quarter to $5 million and represented 5% of fourth quarter revenue.

Contract revenue was $7.7 million, or 7% at the June quarter.

During the fourth quarter gross margin declined to 42% which was below our target of 46 to 47% of revenue.

The gross margin decline was primarily attributable to lower LED revenue as a percent of total revenue, a less favorable mix within the LED product line, and higher production costs associated with our newer products.

For the fourth quarter the less favorable LED mix primarily related to greater sales of lower priced mid-brightness chips sold into the mobile keypad market.

A second factor for LEDs was low factory throughput early in the quarter resulting in higher production costs per unit.

Additionally, we had higher external costs in ramping up our XLamp and Schottky product lines, primarily due to lower yields at our subcontractors and raw material supplier issues.

During the fourth quarter contract margins increase to 38% of revenue, primarily due to a normal end of year update of our contract overhead rates.

During the fourth quarter operating expenses were in line with our target at 25% of total revenue.

Research and development expenses increased $.6 million to $14 million.

The increased research and development spending was primarily focused on EZ Bright, XLamp and Colorwave LED product development.

SG&A expenses decreased by $.4 million to $11.4 million.

Other operating expenses increased to $1.5 million and included the write-off of plant hook-up costs at our main Durham facility when certain equipment was relocated to our new RTP facility, plus other fixed assets disposed of by the Company.

Net interest income increased $.6 million from the March quarter to $4.1 million due to greater invested cash balances and increasing interest rates earned on our investments.

As mentioned earlier, the fourth quarter net income includes $1.8 million, or $0.02 per share of additional tax expense related to our investment in Color Kinetics and our other end of year tax adjustments.

Income tax expense from continuing operations included an additional $1 million, or $0.01 per share of expense which was offset by an equivalent tax benefit and discontinued operations.

This was due to a reclassification of certain tax benefits associated with Cree Microwave.

At this time we estimate our fiscal year 2007 effective tax rate will be approximately 34%.

The increase to our estimated effective tax rate is primarily related to the expiration of the federal research tax credit.

Our estimate effective tax rate does not include any impact related to our investment in Color Kinetics.

For the fiscal year 2006 we reported record revenue of $423 million which represented a 10% increase over revenue of $384.5 million for fiscal 2005.

Net income was $76.7 million, or $0.98 per share compared to $91.1 million, or $1.18 per share in fiscal 2005.

Our fiscal 2006 results included stock compensation expense of $8.9 million net of tax, or $0.011 per share.

In June 2006 our Board of Directors approved the extension of our stock repurchase program through June 2007.

During the June 2006 quarter we did not repurchase any common shares outstanding under the program, therefore, 5.5 million shares remain authorized for repurchase as of June 25, 2006.

As of June 25, 2006 our balance sheet remained solid.

Our cash, short-term and long-term investments grew $9 million to $376 million from the March quarter.

Cash flow from operations was $28.8 million for the fourth quarter and capital expenditures were $23 million resulting in free cash flow of $5.8 million for the fourth quarter.

Our day sales outstanding, based on our trailing monthly revenue profile, increased from 41 days to 47 days sequentially due to a $10 million increase in our accounts receivable balance.

Although our inventory balance increased $1.2 million during the fourth quarter, our cost of goods sold increased as well resulting in a decrease of inventory days on hand to 44 days.

The increased inventory was in raw materials to support the growth of our newer product lines.

For the first quarter of fiscal 2007 we target revenue in a range of 102 to $106 million as LED chip sales are expected to decline slightly from the June quarter due to a slowdown in the demand for mobile products.

This decline is targeted to be somewhat offset by increased sales from our XLamp and Schottky diode products.

We target gross margin in the range of 39% to 41% of revenue as the mix of our first quarter sales is more heavily weighted towards our newer products that generally have lower margins.

We target building some inventory to support our newer product ramps and bring our inventory days on hand closer to our historical level of 50 days.

The targeted increase to days on hand should provide the Company flexibility to react more quickly to changes in mix or demand.

Operating expenses are targeted to be approximately 26% of revenue.

Research and development expenses will continue to be focused on EZ Bright, XLamp and Colorwave LED product development, SG&A expenses will increase as we expand our investment to build a global component salesforce, and add Tier 1 distributors to drive growth for our lighting and power products.

Based on an estimated 78.3 million shares outstanding, we target earnings per share in a range of 14 to $0.17 for the first quarter of fiscal 2007.

Thank you.

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

Thanks, Mike.

We will now take analyst's questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Amit Kapur with Piper Jaffray.

Great.

Thanks a lot, guys.

I was wondering if, Chuck, you mentioned talking about some near-term pressures on operating margin.

How should we think about it going forward?

Should September quarter levels implied in your guidance be thought of as a trough or is it too early to tell whether it might go lower still?

Yeah, you know, I think from our perspective we obviously have our September targets out there now.

What we're looking at is, at least from a product margin standpoint, that's kind of the range we're looking at in the near-term, and then what we're looking for is, as we get the revenue growth going from both an LED chip standpoint and the new XLamp and the Schottky products in the second half of year, we're actually looking to see, hopefully, operating, a little operating leverage in the second part of the year.

The gross margin targets are kind of in the range we're in right now, but we're looking to see the operating margin maybe get a little leverage in the second part of the year.

Okay.

Great.

And you kind of talked about the pricing environment maybe being a bit challenging with some of the competition.

Could you give a little bit of color in terms of the pricing environment you saw for the display backlighting solutions versus the keypad backlighting and maybe also the pricing environment you're seeing in white LEDs?

I think what's happened is that, obviously, the keypad business has been competitive for a while and we've continued to have success there.

When the market's not growing you've obviously got people fighting for share.

I think what's happened over the last couple quarters is that we're seeing that on the white end, or the higher end of the market, especially in Japan, that as the market, as the new applications have not turned on as fast as some people may have thought, you've got Nochia defending share on one side and you got Toyota [Go Side] trying to get in the market on the other side and so I think that we've seen competitive environment put a little pressure on pricing on the high-end as well as the low-end, and I think that's probably the biggest change.

It's a trend more than a digital change, but it's definitely something that we're working through, and that's why the EZ Bright is so important to get that online because that really gives us some leverage.

Great.

And maybe one final question before turning it over, I didn't hear a lot of commentary on gallium nitride.

Can you maybe kind of update us on some of your thoughts in that space and what timeframe you're looking at for it to become more meaningful?

When you say gallium nitride, what are you referring to?

Just the components going through.

So I mean on the RF side specifically?

Yeah, yeah.

On the RF side, the way we view the next few years is the strategy that we laid out today is really about getting the new products going on the chip side and making that business health and driving some incremental growth and then really building upon that with the lighting and power.

The RF piece is what I would put that as, that's kind of the three-plus year mark.

Now we're going to have some success in the short-term.

We obviously have some government oriented customers driving some of that now but I really think that market is going to take a few years from a gallium nitride RF standpoint to get going.

I think we'll see some incremental benefit but from a Cree perspective, the bigger drivers are going to be LED chips, the LED lighting and power piece.

Great.

Thanks, guys.

Sure.

Your next question comes from the line of Jed Dorsheimer with Canaccord Adams.

Jed Dorsheimer.

Thanks.

Hey, guys, just a couple questions.

Chuck, first, utilization rates on the LED side of the business, are those under 80% or could you give us an idea of where those are at?

Yes.

It's not as, unfortunately, it's not that simple to give you that answer.

If you look at Q4, basically what happened was, was we were fairly underutilized early in the quarter, and then when we saw that spike in demand, we ramped up to being very fully utilized by the end of the quarter.

Unfortunately, that's not a real efficient way to operate the factory which has definitely contributed to some of the gross margin pressure we saw in the quarter.

I'd say as we go into this quarter, I can't give you an exact number, but I wouldn't say we're running at full capacity, but we're definitely operating a much better utilization rate as we start this quarter and so, obviously, if we're able to continue to do that, that should give us a little bit of a benefit for the quarter.

Got you.

And then, as you go through this transition and you start migrating over to more of the XLamp products, I'm curious how, if you could give us maybe some metrics on distribution so we can judge your success there.

There seems to be, you know, that seems to be the weak points is you've got a fairly strong product, but your ability to get that in the hands of a lot of the targeted buyers of these products, so should we be looking at sort of a headcount addition or what are some of the metrics we can measure this success there?

Obviously, probably the ultimate metric in the end, as we all know, will be how we're able to drive the revenue side of it.

I think in the short-term probably not necessarily headcount.

There will be some headcount additions that we have to add, but, Jed, I think more importantly is, can we put the right distribution team, in other words not Cree employees but distributors, together to really make sure we have stronger coverage in the U.S., Europe, and even in Asia.

We actually have a fairly nice position that we're building in China, but we don't have necessarily the technical support infrastructure, so it's kind of a combination of some direct sales, definitely the back end technical support for the distribution team, and then getting some contracts in place so that we can go from what I would call, really more of a Tier 2, Tier 3 set of distributors, which is what we have today, into some of the big guys to really go out and compete with the, basically use distribution to really expand our scale.

And so you should, you know, over the next six months that's when we're really trying to bring on some bigger coverage and, hopefully, if we're able to do that, then you can look for kind of that's what we hope to feed the second half of the year.

All right.

Thanks.

And then, I jumped on the call late.

Did you talk about the Asian partner that you have over in, I think it's Hong Kong, for the packaging of the XLamp?

What is -- are they now qualified?

How much has -- I think that will hurt your margins a little bit, so how do we look at that?

What's your timing expectation that you think that this packager will be up and running and in the -- it won't be weighing on things?

Definitely, obviously, that ramp hurt us last quarter.

I would say that as we're, you know, about, I guess we're about six weeks into this quarter, I'd say for the first six weeks they've done a great job, and I feel they're qualified for a number of the products.

We don't do 100% of our products there but they're qualified for a pretty wide range at this point.

And I think as we give them additional volume and go up this quarter, that, obviously, we'll always have some, you know, we have to continue to watch that pretty closely, but would say my confidence is pretty high that they're not going to be the limiter this quarter.

I think at this point we've got to, I think we're going to move the, the challenge is going to move almost more back to getting the new products out and getting the sales momentum as much as it was last quarter it was more of an operational execution issue.

All right.

Great.

That's it for me, and I'll pass it on.

Thanks.

Thanks, Ed.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Harsh Kumar with Morgan Keegan.

Hi, guys, a couple of questions.

First of all, Chuck, I'm trying to understand your comments about mobile demand.

We've heard from most of the cell phone guys and I think what they're saying, what most of them are saying is, things are still growing although they're not maybe at the same rate they were in the June quarter.

I'm trying to understand, are you maybe losing some share in the cell phone market or can you maybe just shed some light on it, maybe something going on between the keypads versus the white light side?

Harsh, I think that I've read the same comments that some of the mobile guys feel good, although if I look at the total numbers and add up all the different players, it definitely looks as though the combined outlook has slowed if I add them all up.

Now, I would say there's definitely certain guys that are winning more now than others, but if you aggregate it all together, which is really what affects chip demand, I think what we're seeing, and if you look at some of the comments made by a number of the different Taiwan packagers, it looks like they're seeing it as well, is that the bump in demand that we were all reacting to in our Q4, the June quarter, seems to have cooled off here in this quarter.

I don't know if they got ahead of themselves a little bit, that they overloaded the supply chain, so I don't know that it's a significant issue.

I think it's a timing issue right now that we have to work through, but I don't know that -- I don't think Cree's the only one that sees this at least at the LED level, and hopefully, we'll see that we work through this and maybe we'll get a little bit of a bump as we get into the fourth quarter of the calendar year.

I think it's too early to call that but that's kind of why.

The other thing, Harsh, to keep in mind is that although our revenue was down a little bit last quarter, unit demand was still up, and if I look at it this quarter, I don't see unit demand really falling off that much.

I can only comment on what we're seeing and what the other guys are talking about based on that looks like a bit of a slowdown.

Fair enough.

And next a tough question, Chuck, scratching my head as to why you're not buying back stock at these levels.

It would seem like that'd be the right thing to do.

Harsh, as you know, maybe you don't know that Cree acts just like we treat our employees.

We close our window when we get near the end of a quarter and then we do not reopen it until after we have announced results, and so Cree has essentially been in a lockout mode for over two months at this point in time, so I think that we'll wait and see happens this quarter.

Clearly, that's an option for us.

We have a healthy balance sheet, and I think what we're looking at is with the strategic opportunities, how much are we going to need for that versus how much we might have to leverage the, on a potential buyback, and we're going to evaluate that and we'll see where it goes over the next quarter here.

That's very helpful, Chuck.

Thanks for that clarity.

And then finally, could you maybe shed some light on XLamp yields, where they are and what timeframe do you think you might be able to get, you need, what timeframe do you think you need to get XLamp yields up to the rest of your kind of high volume products?

You know, Harsh, yield is a piece of it, but it's more than that.

Part of it's just scale, and not a lot of leverage.

Whether XLamp has piece parts involved so as we get scale-up we get some leverage there and so we really just need the volume.

I think right now our outlook is, if we stay on track and continue to build the revenue in XLamp each of the next several quarters, that by the time we get to the second half of our fiscal year we're looking to start to get some incremental operating profit contribution from the XLamp line.

And that doesn't mean it will be at the Company average, but we should continue to make progress over those quarters.

And so that's kind of our outlook, and if we stay on track, that's why we're more optimistic about the second half of the year.

Got it.

Thanks, Chuck.

Sure.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Mike Burton of ThinkEquity.

I might have missed it, but did you make any comments about the Colorwave product and if we're on track for end of calendar year this year?

And then maybe your thoughts on that market as it's kind of shaping up right now.

Yeah, Mike, what I said earlier was that, so Colorwave, from a technical standpoint, and when I say technical, both the LED light engine that we're developing and the systems pieces that go with it, we are on track to be able to make that happen by the end of the year.

But that's a technical standpoint.

I think what we're working through right now is on some of the projects we've been working on, it's really coming down to cost/price issue.

In other words, we can definitely do it.

We can meet the technical requirements, the power requirements, the form factor requirements, and I think that puts us in a pretty unique position.

At the same time to do that we are talking about a fairly expensive technology, and so it's really going to have to be someone that wants to come out with a premium product, and I think we're working through that.

Given what I know today, I can't say, you know, it's unclear based on those issues what the customer is going to decide, whether they're going to still launch by the end of this year or if they're delay until we can work through those issues because they're not just LED related, they're overall product requirement issues.

And so it's a little bit hard to call.

That's kind of on the specific project.

I think overall based on what I'm seeing out there, I think Cree from being able to execute the technology is probably as good as anyone we're seeing out there.

I think the challenge really is that now that we've been able to solve all those other issues is where -- when are we going to get to a point where the value proposition works.

I think we'll see some launches, at least in calendar '07.

Whether or not we get one out here by the end of the year or not is a little bit up in the air.

Okay.

Thanks.

And then, I think you broke it out in the past, if you could give us the percentage of sales into mobile applications and then also within that the percent into for backlighting for keypads versus displays.

I don't have the exact number in front of me but I think it came in just about 50% of the business, maybe right around that number so I don't know that that's changed a lot.

Maybe a little higher than it was the previous quarter.

And then the one thing it has it is, is that the keypads probably a little less than half, and the light kind of backlighting for the display is a little more than half of that.

Okay.

Thanks.

Sure.

At this time there are no further questions.

Okay.

Thank you, April.

We appreciate your interest and support and look forward to reporting our first quarter of fiscal year 2007 results on October 19, 2006.

Thank you.

Thank you.

This concludes today's Cree Incorporated fourth quarter 2006 fiscal year financial results conference call.

You may now disconnect.