Wolfspeed Inc (WOLF) 2008 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Cree Incorporated first quarter 2008 fiscal year financial results conference call.

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

After the speaker's remarks there'll be a question-and-answer period.

(OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, October 18th, 2007.

Thank you.

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

Mr.

Garrabrant you may begin your conference.

Thank you, Pasha, and good afternoon.

Welcome to Cree's first quarter fiscal 2008 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 John Kurtzweil, Cree's CFO will report on our results for the first quarter of fiscal year 2008.

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

These may include comments concerning trends in our 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'd like to note that, as a result of SEC rules, we will be limiting our comments regarding Cree's first quarter of fiscal year 2008 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 recording of this call are copyrighted property the Company and no other recording is permitted unless authorized by the Company in writing.

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

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

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

A replay of the webcast will be available on our website through November 1st, 2007.

Now I would like turn the call over to Chuck.

Thank you, Raiford.

We got off to a good start in the first quarter of fiscal 2008.

Revenue increased to a record $113.4 million with earnings of $12.7 million, or $0.15 per diluted share.

Earnings included various benefits and expenses from several non-operating items that John will explain in his comments.

On a non-GAAP basis, which is reconciled in our press release, our results were in line with our previously announced targets.

The increase in revenue was driven by LEDs, where we continued to make progress in all three product categories, led by our XLamp LED products.

Although XLamp growth was limited by capacity in Q1, we made good strides addressing the key bottlenecks and are now in a much better position heading into Q2.

Our LED chip business also grew sequentially due to stronger demand from our top customers for our high power EZBright chip as well as some of our new high performance small chip products for backlighting.

Cotco LED sales were also in line with our targets for the quarter.

Our Power and RF products grew sequentially in Q1, which offset lower sales for our silicon carbide wafers and lower government contract revenue.

Overall, our strategy to increase sales by growing our LED component product lines while maintaining the current level of LED chip sales is on track.

As we look ahead, we forecast that our LED business will continue to gain momentum as LED lighting applications emerge in response to the rapidly growing, global demand for sustainable energy-efficient lighting products.

Less than one year ago, LED street lights and parking garage lights were still concepts relegated to slide presentations.

Today there are a growing number of LED installations around the world and an even larger number of new projects specifying LED lighting solutions, like the parking decks for the new Raleigh Convention Center.

The LED city initiative continues to gain traction with recent addition of Ann Arbor, Michigan.

As part of this initiative, Ann Arbor is installing more than 1000 LED street lights using our latest XLamp LEDs.

This program has also led to discussions with several major power companies to evaluate LED lighting solutions for their customers and a collaboration with Duke Power on the LED lighting recently installed in our own parking lot.

Governments around the world continue to move ahead with regulations to drive energy efficiency and in some cases, ban traditional light sources.

Commercial and residential indoor lighting applications are starting to emerge.

The Friendly's restaurant chain has recently converted one of their Massachusetts stores to LED downlights from LLF and reduced the energy consumption 82%, from 5,135 watts to 950 watts.

I personally installed LED light fixtures in my home that have reduced the energy consumption of the downlights in my kitchen from 750 watts to 100 watts, while actually increasing the light levels.

To borrow a quote from the Mayor Meeker of Raleigh about LED lighting, this was a "win, win, win" decision.

It saves electricity, it eliminates the cost and hassle of buying replacement bulbs, and it is good for the environment.

I will now turn the call over to our CFO, John Kurtzweil, to review our first quarter financial results and our targets for Q2.

Thank you, Chuck.

For the first quarter of fiscal 2008, we reported revenue of $113.4 million with GAAP net income of $12.7 million or $0.15 per diluted share, which includes $3.9 million, or $0.05 per diluted share of net income due to certain items as follows: $10.8 million net of tax, or $0.12 per diluted share of additional income from the sale of the final portion of our investment in Color Kinetics, $3.1 million net of tax or $0.03 per diluted share for amortization of acquired intangibles.

$2.5 million net of tax, or $0.03 per diluted share of stock-based compensation expense, and finally, an incremental property tax expense MG&A amounting to $1.3 million net of tax or $0.01 per diluted share.

On a non-GAAP basis adjusted to exclude these items, net income for the first quarter was $8.8 million, or $0.10 per diluted share.

These non-GAAP results are consistent with one of the ways management internally measures Cree's results.

However, non-GAAP results are not in accordance with GAAP, and may not be comparable to non-GAAP information provided by other companies.

Non-GAAP information should be considered a supplement to, and not a substitute for financial statements prepared in accordance with GAAP.

Please see the reconciliation of non-GAAP information to the comparable GAAP measures posted in the investor relations section of our website at www.cree.com under Financial Metrics, quarter ending September 23rd, 2007, and also quarter ending June 24, 2007.

Overall, LED revenue increased to $93.4 million in Q1.

These results include all the LED-based revenue associated with our LED chip and LED component sales.

XLamp product line sales increased single digits, and were constrained by limited capacity during the quarter.

LED chip sales also grew sequentially while Cotco component revenue was slightly lower, but within its targeted range.

Q1 materials revenue, which included wafers and gemstone products was $8.5 million, or 7% of sales.

High power products revenue, which includes Schottky diodes and wide bandgap microwave sales grew to $4 million as compared to $2.6 million in Q4.

Contract revenue of $7.4 million or 7% of revenue in Q1 and was down slightly from Q4 due to lower funding from various government entities.

Q1 GAAP gross margin was 31%, which included stock-based compensation of $0.9 million or one point of margin.

We were able to deliver good gross margins despite the fact we ran the LED factory at lower utilization rates in the quarter and cut our WIP and finished goods inventory by $7.7 million.

During the quarter, there was also more manufacturing effort directed to new products transitioning to production which diverted costs from R&D to cost to goods sold.

Contracts gross margin declined to 18% of revenue compared to 21% in Q4 as we finished some older contracts with a higher cost share component.

GAAP R&D expenses were $13 million in Q1 and included stock-based compensation expense of $0.9 million.

Total R&D expenses were lower than we had targeted as several new products moved to production and out of R&D earlier than expected during this quarter which shifted some additional expense from R&D to cost to goods sold.

We target to increase our R&D efforts back to plan levels in Q2.

GAAP SG&A expenses were $18 million for the first fiscal quarter and included $1.4 million of stock-based compensation and $1.7 million related to a property tax audit.

Non-GAAP SG&A expenses were $15 million, as compared to $14.4 million non-GAAP SG&A expense in the fourth quarter.

This increase primarily reflects the planned spending from the acquisition of Cotco and patent-related litigation expenses.

Also during the quarter we recorded $4 million of charges for amortization of acquired intangibles, which we do not include in our non-GAAP results and $0.7 million of obsolete after write-offs which we do include in our non-GAAP financials.

During the quarter, we sold our remaining investment in Color Kinetics for $17 million and recorded an after tax gain of $10.8 million, which we do not include in our non-GAAP financials.

Net interest income of $3.7 million increased from Q4 as a result of the increased cash flow from operations and the sale of the Color Kinetics stock mentioned earlier.

GAAP income tax expense for the quarter was $3.9 million for an effective tax rate of 24%.

The tax rate was impacted by 2 points as we are being somewhat conservative in assuming that the R&D tax credit which will lapse on December 31st 2007 and may not be reinstated.

When you take into account the non-GAAP adjustments mentioned above, the tax expense is $2.7 million.

Our balance sheet has continued to strengthen with cash, short-term and long-term investments of $332 million as of the end of Q1, an increase of $38 million from Q4.

Cash flow from operations was $25.6 million for Q1, and capital expenditures were $11.2 million for a free cash flow of $14.4 million during the quarter.

For fiscal 2008, we continued to target our total capital expenditures to be between $35 million and $45 million.

Although, we may increase spending in the second half of the fiscal year if the LED business continues to gain momentum.

This past quarter, over $7 million of the capital expenditures were for our factory in China to expand capacity for both XLamp and Cotco LED component product lines.

Accounts receivable were $86.1 million at quarter end, an increase from $6.4 million from Q4 which is primarily related to a customer mix shift and not a change in customer terms or conditions.

Our days sales outstanding increased to 68 from 64.

We expect this to come down slightly in the December quarter.

Inventory was $64.7 million at quarter end, A decrease of $6.3 million or 9% from Q4.

Our days of inventory fell to 74 and inventory turns rose to 4.9.

We believe that our base inventory has stabilized, although we are targeted to increase inventory for our XLamp product line in the second fiscal quarter to support customer lead time requirements and position us for future growth in the third fiscal quarter.

Now I will give you an update regarding our outlook for the second fiscal quarter which ends December 30th.

Please note that our second fiscal quarter would be 14 weeks versus the normal 13 weeks, which will result in a slightly higher expense ratio due to the extra week.

This will effectively be a 13 week quarter in terms of selling days due to the year-end holidays that fall in the 14th week of the quarter.

We are targeting revenue to be in the range of 115 to $119 million.

As we look ahead to our second quarter, we're targeting higher overall LED sales with XLamp product revenue targeted to grow double digits as we bring online additional capacity of both our subcontractor and in our factory in China to meet our customer demands that are already in backlog that exceed what we shipped in the first fiscal quarter.

The Cotco product line is targeted to be in a similar range as Q1 and the LED chip revenue is also targeted to be in a similar range to last quarter and in line with our planned range.

Materials revenue is targeted to be down from decreased sales for gemstones, which is partially offset by an increase in high power products and contracts revenue.

Gross margin is targeted to be in a range of 32 to 33% on a GAAP and non-GAAP basis with approximately $900,000 of stock-based compensation.

This target includes improvement from yield gains in LEDs, increased XLamp production in Asia and 4 inch ramp up for our high powered products.

GAAP R&D and SG&A are expected to increase in the aggregate by approximately $2 million over GAAP expenses in the prior, from the prior quarter.

This increase is primarily in R&D as we are increasing spending to support two new LED chip platforms, one targeted at chip customers for display backlighting and the second program targeted to simplify our XLamp manufacturing process and reducing production costs.

Non-GAAP R&D and SG&A expenses are targeted to be approximately $29.5 million excluding non-cash stock-based compensation of $3.5 million and amortization of intangibles of $4 million.

Interest income is targeted to be flat at $3.7 million, based on an increase in our cash balances and lower yielding investments due to lower interest rates from the Federal Reserve in September.

We are estimating the effective tax rate to be 24% and based on an estimated 87 million diluted shares outstanding, our GAAP EPS targets for the second fiscal quarter 2008 are expected to be in a range of $0.03 to $0.05 per diluted share when amortization of acquired intangibles and stock-based compensation are included.

We target non-GAAP earnings per diluted share to be in a range of $0.10 to $0.12 for the second quarter of fiscal 2008.

As mentioned earlier, our non-GAAP basis EPS targets exclude amortization of acquired intangibles in the amount of $0.03 and non-cash stock-based compensation in the amount of $0.04.

Thank you, I will turn the discussion back to Chuck.

Thanks, John.

We remain focused on several key areas to continue to drive our transformation into a global leader of LED components.

Our first priority is to continue to grow our XLamp product sales and enable the LED lighting revolution.

As I mentioned in my opening comments, we are clearly making progress in this area.

Orders for XLamp products grew double digits in Q1 and our latest forecast for the next year suggests that we are just getting started.

Our distributors are reporting record levels of new business opportunities related to LED lighting, ranging from small customers to potential projects with some of the biggest players in the lighting industry.

Although our capacity ramp up took a little longer than we'd have liked and limited Q1 shipment growth to single digits sequentially, we exited the quarter in good shape in terms of both throughput and yields which are targeted to drive improved margins over the next few quarters.

We're on the right track in terms of order growth for this product line and our near term focus is on executing our expansion plans to get ahead of the capacity curve over the next several quarters.

Our second priority is the integration of Cotco.

We had no solid quarter in Q1 in terms of both our financial performance and continued progress with the integration.

As we outlined last quarter, Cotco sales have historically been project driven and have fluctuated from quarter-to-quarter with the projects.

We have been focused on reducing some of this variability by expanding both the product offering and the customer base.

We made good progress in Q1 as sales for new customers in video screen and lightning applications were able to offset lower sales into gaming applications.

We continue to work on new gaming projects and have won some new designs that should start to go into production towards the end of Q2.

Since these projects are unpredictable and effectively turns business with very short lead times and large volume swings, we are not including a significant increase in gaming sales in Q2 targets.

We continue to work with our distribution partners to expand the market for Cotco products outside of Asia and we currently target some incremental sales growth in these markets in the second half of our fiscal year.

Based on my recent meetings with our major LED chip customers in Asia, the Cotco integration is not limiting our ability to meet our planned level of LED chip sales.

We actually saw an increase in LED chip demand in Q1 and our customers are currently forecasting stable demand over the next several quarters.

We've also recently had some discussion with some of the major systems companies that indicate they believe that the very high performance small LED chips for backlighting could be in short supply in the year ahead.

While this is currently a small segment of the overall market and we are not changing our outlook for LED chip sales in the near term, this could obviously benefit our LED chip product line over the next calendar year.

Our third priority is to continue to develop sales coverage and drive growth with our partners.

As I commented earlier, the distributors have reported an impressive volume of new business opportunities.

We continue to invest in our global field sales force to it manage key direct accounts and work with global distribution teams.

We are investing in additional technical support to provide more solutions assistance to the customer.

We are also working with our distribution partners to coordinate additional resource investments on their side to convert the tremendous number of identified business opportunities into firm orders.

We target these partners to be major drivers of forecasted sales growth over the next several years.

Our fourth priority is to further expand our manufacturing capabilities in Asia to support increased package LED capacity requirements and reduce costs.

We increased production at our subcontractor in Q1 and we're in the process of qualifying the new XLamp production line in China.

We've started to see some of the cost benefits of increasing production at our subcontractor and we target additional cost savings as the China capacity starts to come on line.

This is the first increment of XLamp capacity in China, and we plan to bring online additional equipment over the next several months.

Our target is to triple our white XLamp capacity by the end of our fiscal year.

We have also recently decided to go ahead and further expand the production floor space in China to accommodate additional XLamp capacity for fiscal 2009.

On the cost front, we have recently converted all the high volume silicon carbide Schottky wafer starts to 4 inch.

With the increase LED chip demand from our internal packaged LED product line, LED factory utilization is starting to increase.

And we are planning to take the next step in the 4 inch conversion for LEDs in our third fiscal quarter.

Our fifth priority is to continue to develop our power and RF product lines to drive incremental growth in high value energy efficient applications.

Our power Schottky business grew nicely in Q1 due to new design wins, including a number of new power supply and inverter applications outside of the traditional server power supply markets that we have been serving.

RF revenue was also up due to higher discrete device sales and stronger mimic foundry sales.

Although these are still early stage new product lines, but our recent success further supports our belief that these are enabling technologies for energy efficient next generation applications.

We see the opportunities for LED lighting growing by the day.

We could also see the realities of what it will take to drive this exciting new market.

We're focused not only on on expanding our channels and our factories but also our leadership team to build and manage a global business.

We continue to believe that the LED business will further consolidate and we are constantly evaluating ways to leverage our strong balance sheet with $323 million in cash and no debt to build additional scale in terms of customers, channels, technology, people, and manufacturing capability.

As we look ahead to fiscal Q2, we target continued growth in XLamp LED component sales while maintaining the current level of LED chip sales to drive higher overall LED revenue as component sales are targeted to nearly equal LED chip revenue in Q2.

In total, the growth in LEDs is forecast to offset slightly lower sales from materials product line to result in revenue increasing to a range of 115 to $119 million, with non-GAAP earnings per diluted share of $0.10 to $0.12 as we increase R&D spending back to targeted levels.

These non-GAAP targets exclude amortization of intangibles, stock-based compensation expense and related tax effects.

Any technology revolution will have it's naysayers, but from our perspective, this only helps to increase the business opportunity for Cree by giving us a bigger head start.

We remain focused on driving this LED lightning revolution and we can see LED lightning is real and it is now.

We will now take analyst questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Harsh Kumar.

Hey guys.

Couple of questions.

Chuck and John, beginning to see some gross margin improvement, at least in the guidance.

Can you talk about how much of that is yield versus China.

I've got a couple other questions.

Yes, Harsh, I'd say it's a combination of three things.

I think it is yield, but it's also China and it's also, we're starting to see some better utilization rates.

It's really a combination of all three things.

That's pretty good.

And then you talked about kind of, on being somewhat capacity strained on XLamp, could you quantify or help us out on how much it hurt you in the September quarter.

How much did you have to leave behind, possibly?

I don't know if I can give you a dollar amount, I can tell you we had very solid double digit order growth for the quarter and we only shipped in the single digits.

You can get an impression that most of the growth we were not able to deliver due to capacity constraints.

We made some progress, but really, the capacity limited us last quarter.

Fair enough and two more questions, Chuck and John, either one feel free to answer it, getting a fair bit of questions since you bought Cotco, there's been some speculation you're seeing, maybe you are or aren't seeing customers look to other sources as potentially getting into competition with your customers.

Can you comment if you're actually seeing that if you wish to?

Yes, I think there's obviously a lot of speculation going on out there.

I think it's something you probably know since you followed us for a long time.

Our customer mix is constantly evolving.

Some of the confusion may be coming from some information that's been around a while.

We said about six months ago our business was down in Japan.

We factor that into our targets.

That may be leading to some of the confusion.

Contrary to the speculation, LED chip revenue was actually up in Q1.

There was some concern it might go down.

What we can see at this point is that Cotco is clearly something that we needed to discuss with our customers, but given where we stand today, we have similar visibility for Q2 as we had at this point in Q1 based on their forecasts, but to me, it really comes down to how much you believe those forecasts.

There's always risk in that, but at the end of the day, our sales team is spending a lot of time with our customers every week, and they're willing to sign up for these targets and it affects their pay.

That's the ultimate litmus test.

We've got our targets out there.

I think we obviously believe that that's what makes sense for us at this point at this quarter.

Fair enough and one or two more, I'll let somebody else jump in and come back in a little bit--

Okay.

Your next question comes from the line of Daniel Gelbtuch.

Hey guys, congratulations on a pretty solid quarter.

Just wondering if you guys could give me some sort of indication what your exposure to low power, low size, mid brightness products during the quarter in terms of revenue?

I think overall, I don't have a specific number, I would tell you that within, that's mostly something that's going to affect the chip category for us.

Within chips we definitely saw a move towards more of the high end products last quarter.

I don't have the specific breakout for you, Daniel, but I can tell you that the chip business is shifting, fairly healthfully towards the higher end products, so that's probably why we saw a bit of an uptick last quarter.

So it'd be safe to say your exposure to the commodity portion of the business is lower sequentially?

It is definitely declined in absolute units and it's a percentage relative to where we were last quarter and in the previous quarter.

Excellent.

Now you mentioned there could be some opportunity because there may be some opportunity in that segment in the mid brightness or even high brightness small size segment this coming year due to supply issues in the market.

Can you give us better color on that?

What do you see going on in the market?

Yes, it would really be not in the mid bright.

That was the color I was trying to give you was focused on the high end of the high brightness segment.

These would be small chips, but these would be the very high performance ones, really focused on the backlighting application primarily.

So what we're seeing is that today, that application is starting to get some momentum, it's obviously still at only the first set of models, but there's definitely a concern when the systems companies are looking at some of their projections of how they're going to get enough of these, the chips to build the LEDs over the next year and so it's a little too early to change kind of our forecast in the near term, but it's definitely a positive sign that they're looking at supply concerns in the next year.

Now which applications would we be talking on specifically?

Large LCD back lights.

So for laptops, et cetera?

Laptops TVs.

Got you.

In that space, obviously there's a very important IP focus.

Who else do you imagine is going to be supplying this sector other than --?

Right now I would tell you Nokia has the leadership position, I don't think I'm telling anyone anything we don't already know, then TG, and our customers using our chips are probably the three out there.

They have very high performance requirements and not just Cree, but frankly some of our competitors have done a great job of making IP an important value proposition in that segment.

So we shouldn't expect to see the Taiwanese in this space?

I'm sure there'll be some activity around there.

From what we're hearing right now though, I think the combination of performance and IP is at least going to make it hard for them to break in in the near term.

I'm sure some applications will use them in some segments, but for the higher end markets today, at least what the suppliers are telling us, they're really focused on high end IP-free solutions.

To switch gears again.

As far as XLamp capacity, when should we see that stuff function in terms of supply, your ability to supply the demand?

Is that something we should expect in the summer of '08 or is this even earlier?

You should, so we should get some improvement this quarter so that we can we're projecting double digit both order and revenue growth this quarter so we need to get some of that on this quarter.

We should see additional capacity come on line in Q3 and by the end of Q4, if we hit our targets, we'll have tripled the light capacity and then what we're talking about now is we're going ahead and making the facility investments now so that we can look to start adding additional capacity for '09.

We don't have a specific projection on that yet.

And final question, obviously your move to 4 inch wafers is definitely substantial, can you give us an idea when you expect to see a crossover in terms of gross margin and yield?

I guess, from that, from that transition.

So really we're going to get, we're going to really start ramping up the volume in a more significant way.

It'll be in our Q3, is when that will start.

My guess is that benefit, usually there's at least a quarter lag until we get enough volume through that learning curve.

We have qualified it on our high volume product lines previously, we're just not running it.

So I think we're going to have minor, I don't think it will hurt our costs a lot in the beginning, but it will take a quarter or two before we start seeing the benefits of them.

Job well done.

Thanks a lot.

Your next comes from the line of Andrew Huang.

Can you hear me?

Yes.

Great.

Over the past few weeks your stock has been whacked pretty hard down like 20% from some very negative analyst calls that short your stock and rumors your business is coming under pressure.

Based on our checks, these calls and rumors just don't make sense.

To us, it seems like they're based on sketchy, incomplete and inaccurate data.

So now that you're no longer constrained by the quiet period, I think it's the right to time to address the following rumors and concerns.

First, could you tell us if you're seeing any evidence at all of a reported order pushout at Sole Semiconductor?

Second, can you please explain how Cree can be cost competitive using silicon carbide while the rest of the industry is on sapphire?

And yield issues related to use silicon carbide?

And third can you comment on the current rates of adoption on the LEDs and general lighting.

If you need me to repeat I would be happy to do so, and then I have a couple of quick follow ups.

I'm going to take the first one.

I wrote that down.

You may have to remind me what the next two are.

Let me start with that one.

I think your question was you wanted me to comment on evidence of pushouts at Sole Semiconductor, right?

That's right.

So I think Andrew, we're not in our quiet period, we really try not to and are diligent about not commenting on specific customer situations.

I think what I can tell you is that we obviously spend a lot of time with our customers trying to understand not only their forecasts, but any of the business dynamics going on there and we put that into our targets.

I think what I'll say at this point is we also routinely try to stay linked and make sure that, see if there's any changes.

I can tell you as of today they are not reporting any pushouts at this time in their, in any of our customers businesses.

Whether it be at SSC or anywhere else.

We're not seeing that at any customer checks.

Give me the second question now.

So the second question was on silicon carbide and whether or not you can be cost competitive using that technology while the rest of the industry is on sapphire?

Yes, so I heard some of these comments and frankly it's disappointing to see how much time and energy people waste speculating on this, since I'm not really sure people know the facts of what we're doing inside of Cree.

Here's what we know.

We know we have world class LED chip performance, I think not only we believe that but our competitors have confirmed it and we are very confident that our yields are competitive with the best in the industry.

Now, the fact of the matter, people don't understand how we do what we're doing in my mind is a good thing.

We're not interested in sharing what we're doing with our proprietary technology, that's our advantage.

Now that being said, I heard that out there, I'm kind of wondering, I think people are confusing that issue with the fact we're working to improve yields on XLamp.

We have discussed a need to improve the packaging yields, but these are really at the packaging level.

The XLamp is a fairly sophisticated LED, it's not a simple product.

As we're ramping up our production volumes, we're doing things to make progress each quarter.

We had some improvements last quarter.

We're targeting more this quarter, and we'll need to continue to do that in the year ahead.

I guess, just to clarify, this just might be confusion in the market, but the improvements and the things we're really focused on today are not related at all to the substrates we used to make our LED chips.

They're really at the packaging level.

I'm not sure where that confusion comes from but hopefully that clarifies that one.

What was the third one?

The third was on general adoption for LEDs and general lighting applications.

What we're seeing, I think the best signal to that is growth of our XLamp portfolio in terms of orders.

So despite the fact we had capacity constraints last quarter, we saw the orders continue to grow.

I think John mentioned in his comments earlier, we got more backlog this quarter than we shipped last quarter.

So obviously pretty optimistic about that rate continuing at least into this quarter and the applications range, there'll still personal lighting and other applications no doubt.

We're definitely seeing more of what I'll call the general lighting type applications.

Some of these are direct customers, a lot of this is distribution.

I think one of the things I'd point out is that the fact that our distributors are reporting just a tremendous number of new business opportunities, again they're not orders yet, but the rate they're reporting shows that we're somewhere, we're not where we were a year ago.

Any time a new market and new industry converts, I think even us as a company are conservative about what we thought is possible and what we're seeing today is that there's a lot of industrial commercial lighting applications that we're able to start to address and saving energy has become a bigger deal in driving conversions more than we thought even six months ago.

Okay, great and just a couple quick follow-ups if you don't mind.

Can you provide additional insight into some of these recent LED city initiatives and whether or not yours subsidizing any of these projects?

The two most recent LED city things that got announces is Raleigh announced for their new Convention Center they're going to use beta LED to provide LED fixtures for the parking deck, and the other is Ann Arbor joining the LED city in announcing they're going to install I think over 1,000 LED street lights.

In both of these cases, Cree is providing no incentive whatsoever.

I think it kind of really gets back to my point I made a minute ago.

We're not there anymore.

I think LED lightning is really, is starting to become an application that can stand on its own.

It's not for every home screw and bulb application yet.

But we clearly can address especially outdoor municipal lightning in a cost effective manner.

Look at what the cities are saying.

They're saying it pays for itself.

From my standpoint, to clarify, we're not providing any subsidies, I think in both of those cases, those were straight up competitive bidding processes by both cities to do those jobs.

I don't have the details and we weren't anything other than a supplier of LEDs.

Got it and then on the Duke Energy announcement, can you provide a little color there, and maybe what the opportunity is?

Duke's a unique one.

We've been doing some testing on our own.

We see the same results everyone else does, so we've been doing work in our parking lot to prove that LED lighting works and Duke actually came to us and asked for help in trying to address their customers needs for how we do things to save energy.

They're looking at the bigger picture other than lighting.

They've obviously seen the LED city activity in a couple of different places, and they came to us and said "can we collaborate?" And the collaboration is around them understanding how does, how can you buy, how do you take a commercial fixture and make this business case work and how does it drive energy efficiency so they can then help to say "hey, here's a viable alternative." They have a very active program to try to provide energy-saving real solutions to their customers.

Our interest, collaborating with them, obviously it's good to have them out promoting LED lighting, but more importantly, what we're trying to do with Duke and some other companies is, our goal is if we can demonstrate that LED lightning really can save energy today and is cost effective, then we believe we can encourage them to add LED lighting to their energy efficiency programs, which we're hoping will further help the adoption.

We don't have Duke there yet, but that's the goal of the program from our side.

Excellent thanks and one last detailed question for John, on the receivables.

I know you mentioned it did uptick a little bit, but is that because of the nature of the business in China with Cotco or what is going on with receivables?

As we have said in the past, our business in Japan has gone down a little bit over the last couple of quarters and it's really a mix issue.

The Japanese customers tend to pay a little bit quicker and there's been no change in terms of terms and conditions with customers, it's primarily just a mix shift.

Okay, excellent.

Thanks very much

Your next question comes from the line of Amit Kupur.

A lot of my questions have been answered.

Going back to XLamp, you've been having a nice steady growth in XLamp over the last few quarters, if I remember right last calendar year, you guys asserted XLamp volume was roughly 10% of total sales, are you able to comment on XLamp as a percentage of LED revenue at this time?

Or what's the expectation going out of calendar 07?

We're not breaking out specifically.

We're trying to more trend the growth trajectory.

I think what I can tell you is that Q2 exiting this fiscal year, maybe the better benchmark is that XLamp plus Cotco for the components business will be nearly equal in size in terms of revenue to the chip business.

That'll be the first time it catches up.

That'll give you a perspective on components versus the other part.

We're not breaking XLamp out separately for competitive reasons.

Sure, that's fair.

Can you comment on maybe the, I remember a few quarters ago, XLamp was trending below the corporate average in terms of gross margins, are you with the current yield and current levels apply, are you at or near the corporate average, above below, can you qualitatively tell us about that?

In Q1 we started to get very close, we're not quite there yet, but we saw of some of the things as we got the capacity improvements, those also help the costs.

As we exited the quarter, we saw additional improvements.

I would expect as we go through the quarter, get additional volume and once we really get Cotco online, I would expect XLamp will start to deliver at the corporate average and hopefully in the not too distant future start to raise it a little bit.

We really need to give ourselves a quarter to bring Cotco on.

I think they're doing a great job, but any time you bring up a new product line, I want to be a little conservative until we have a quarter or two under our belt there.

So with the XLamp improvements, China, yield growth, all the exceptions, decent gross margins expansion over the next few quarters I guess --

You saw, our targets were raising them.

We're basically targeting 32 to 33 in this next quarter.

Yeah, if we're able to keep doing those things, hopefully start to get some benefit in the second half for ForEx and some other things, there's definitely opportunity.

As there's execution risk to all of those, but at least we've got leverage to go work on.

Still using the LED flashlights, works like a champ.

I love it.

Glad you're enjoying it.

Your next question comes from the line of Seth Dadds.

Hi guys.

Hey, Seth.

I also wanted to let I bought one of the XLamp flashlights at Lowes this past weekend.

It's great to see the XLamp displayed on the package and touting the performance.

Could you give an update on where you stand with branding strategy for XLamp going forward and where else we might, what other applications, where we might see the Cree brand advertised?

Yes, you saw something that you've already seen with some of the activity of what we're doing here, right?

You've seen us take our take the XLamp and work with, on the Lowes product.

I think if you've also seen, you may not have seen this recently, but you'll also find some Coleman products in some other retail channels and some of the new ones, you'll also be seeing the XLamp name on there.

It's kind of a co-marketing activity.

I'll be honest, this is kind of a new area for the LED guys, but I think that as long as we can provide a product that helps our customers differentiate theirs, there are some opportunities there.

I'm happy as long as we're making LED lightning win because we'll take our chance on this side, but I think the ingredient branding stuff, we're in the early stages.

We've got a lot of things we want to try, and I'll be honest, we'll be testing a few different things as we go forward.

We'll keep the ones that work good, we may not keep all of them though.

Okay, you might have mentioned it but how much of your chip production is on EZBright platform?

We don't break that out, but EZBright is probably, not quite, less than half but it's a large percentage.

But not half.

That's helpful.

And finally, I was wondering if you could give background on cross license agreement with Nokia.

Did it have anything to do with Nokia's Japanese lawsuit against Sole Semiconductor related to blue chip patents?

Discussion with Nokia is something we have as a regular basis, a forum to discuss those topics with them.

This was more prompted by our purchase of Cotco and so I think it provided a good opportunity to clarify some issues they had previously raised with Cotco before we had bought the Cotco business and also then, go ahead and solidify patents on the other sides, but I think, frankly only helped to reinforce both of our position in the market.

What geographies are the cross license agreements applicable to?

Global.

Okay.

Europe, Japan, United States.

They're worldwide, there's no geographic limitations.

Okay, and so now that you have the cross license agreement with Cotco, could we start to see maybe some sales momentum there as a result?

Obviously it should only help the Cotco business going forward.

Would it have impact on the handset or notebook market?

On the handset and notebook market, our real focus there is as a chip supplier.

We have some very good customers that service that segment, and today that is not where we're focusing Cotco's resources and activities.

Doesn't mean that we wouldn't look at those in the future, but right now our chip team is really focused on working with some of our packaging partners to help them be successful.

They have good customer relationships, they have good packaging capability.

Excellent, thank you.

Sure.

Your next question comes from the line of Jed Dorsheimer.

Hi, thanks for taking my question.

Hey Jed.

I never heard primary diligence referred to as sketchy, but I guess there's a first for everything.

I have a few questions for you, Chuck, maybe you can help me understand the 14 weeks and why that wouldn't have an impact in sales.

So basically the way we look at our sales quarter, that last week is kind of a dead sales week.

I guess, in theory, it could, but essentially it's been traditionally been a non-selling week for us.

In theory it could, but that's not how we're planning for the quarter.

We're trying to run as close to a 13-week quarter as we can right now.

Obviously if there's areas of capacity constraint, we can keep those open, but from a sales standpoint, it just isn't -- it's really not an effective week for us in selling.

We really need to finish our selling prior to Christmas the way it works, at least in our business.

Got you.

So is the factory shut down?

Parts of it will and parts of it won't.

We'll base that on depending on if there's areas needed to address capacity constraints, we'll leave them open.

Other areas we'll absolutely use it to run maintenance or do, there's a lot of things we get done in that week.

This year, we'll be able to do it without hurting the core 13 weeks of production.

So you don't do these things in the prior years when there's 13 weeks in the December quarter though?

We've had to squeeze in a one or two day shut down and also try to basically adjust the production plant around that.

It gives us a lot more flexibility this year, and just makes it easier.

Got you, so it'll be a front end loaded quarter then?

It'll be a quarter where the 14th week will not be significant other than to catch up on things that need to get done if we need to do that.

Got you.

All right and then was wondering in terms of your distributors, because you brought a decent amount on and did a good job with your XLamp in getting this product out, do you recognize revenues on a sell in or sell through basis with them?

Jed, we're recognizing that on a sell in basis.

Got you and in terms of--

Just to clarify that, I will tell you right now what we're seeing is sell in and POS are matching pretty well.

And then just looking at the business, looks like the LEDs increase by about $1 million and I -- does the chip business increase by more than a million dollars this quarter?

What it was, XLamp was up, chips was up, Cotco was down a little bit.

That's how it netted out.

We didn't break out which one was up how much.

Chips up, XLamp up, Cotco down a little bit.

That's how you net to that, I think it was about $1.5 million increase.

All right, Cotco's going to -- can you talk about why Cotco was down?

Yeah, basically Cotco's primarily some gaining business.

So that's I think you know that, you followed it pretty closely.

It depends on what models you're in, when you're in and what their sell through is.

I think Cotco is doing a pretty good job of winning the designs but trying to forecast when what models are going to ship and where that goes.

That's some additional variability that we were working through and I think that's why we're taking a more conservative approach to our forecasting of that as we get into Q2.

Got you, all right.

And then Chuck, can you, I just actually got back from over in Asia.

I was in Japan for a week as well, I was wondering if you can you help me with that particular market.

It looks like in '06 you have the Sumitomo, and I think you had about, what, $235 million in product backlog in June of '06 and then it looks like this year that actually dropped off to $33 million of product backlog and then in the 10-K the issue I'm asking is I just want to better understand, in the 10-K I think you specifically attribute that critical to Cree's future is actually the success of your business in Japan.

So I'm just wondering, as you talk about being able to keep the chip business flat and the Sumitomo product backlog declining, how should we look at this business going forward?

There's actually two different pieces to that.

The backlog going down is, we used to put the Sumitomo agreement in backlog to start the year.

Independent of the fact that it had all the same provisions they could adjust it up or down depending on sell-through inventory levels.

That's how we used to do it.

Now we were not, we took most of that out.

We put it in our backlog in a different manner.

We try to reflect it much more as just orders on the books to drive the business.

So we look at that differently.

That's part of the reason why you see a big change in numbers.

That being said, there's no doubt our Japan chip business is smaller than it was 12 months ago.

I think you saw a lot of the change last year.

The December quarter, you saw us going in the -- you see September quarter, going at a certain rate, then the December quarter, the chip business fundamentally got smaller.

While that happened everywhere, Japan was a big chunk of that.

I think you do see Japan as a small er business.

What we've done is focus on the customers where we can drive applications with our chips that give them some benefit in the market.

Whether that be an application for lighting or side view LEDs for a different market or other places where our ESD for gaming is better, we've really focused on the places where we think , we fundamentally have advantages from a chip standpoint and where the customer wants those advantages.

It is smaller than it used to be.

But what we've seen in the last quarter and a half and the forecast for this quarter, we've kind of gotten it down to a new lower level.

It seems at least at this point of stabilized here and the activity level is definitely better now going forward than it was a year ago going forward.

We'll have to see where it goes, but at least the near term outlook says it looks relatively stable at the current levels, but your point is, is it smaller than a year ago?

All right, but you don't see any I guess what I'm trying to better understand Chuck and since a lot of the call has revolved around this, I was wondering, as we look at your outlook and your basis for keeping the chip sales flat, how much weight is Japan?

Is it, is it de minimus for you or is it your pay wouldn't imply that.

Japan is important for us, but not nearly as significant as it was 12 months or or 24 months ago.

So, no.

Japan is an important market, we've not reduced sales effort or activity there whatsoever, we have some 10 plus year relationships and we're going to support those guys, we just happen to be in a cycle where we're not as successful this year as we were a year ago.

We baked that into our plans.

If Japan was running at historical levels, the chip business would be significantly larger right now, and so we're going to keep working it, it's an important part, and so we -- that's kind of where our flat outlook is.

We're not trying to grow it a lot.

We're trying to take the new chips, win new applications.

If some of the lower-end business falls off along the way and the customer mix changes, we're prepared to deal with that because we've got other things to drive the growth of the business, but we do want to try to maintain at these levels, at least for right now, it appears Japan is relatively stable and the other customers are running the rest of it.

And I did have a question on XLamp yields and your technology.

Yes.

Are you removing, last year you saw a pretty big performance jump.

This is really the 60 to 70, up to like the 80 lumens per watt.

From what I can tell from just sort of dismantling the chip and taking a look, it almost appears as if you're removing the silicon carbide substrate and is that where a lot of the gains came from, from an external quantum efficiency perspective?

There were some gains related to the chip design changes.

We actually, I know you look at these pretty close Jed, but I'm still not going to be able to comment on specifically how we do it or what we do.

But you're right, at the end of the day we got some gains from that.

I'll be honest with you, we probably have more improvements from the combination of fundamental materials improvements, we've been continuing to work on the epi side of it, but also the extraction, so the EZBright chip design does a great job with the surface patterning we've done to get light out of it.

That's probably where we got the biggest gain in the last year, but definitely the chip design, by taking it, by changing it and putting it on a different kind of a substrate at the end has definitely helped it, but I would say of the three factors, it's probably three of the three things we did.

But it was important.

Got you and just as you talk about EZBright and some of the backlighting type applications it appears both [Nichay] and Toyota-[Gosai] are both qualified for the LED BLU markets .

Do you have any qualifications for your chips in that particular market right

Yes.

And is that in Korea or in Japan?

We're not prepared to disclose the details.

All right.

And then a couple final questions for John.

You said R&D was going to grow, what level is that going to grow back to this quarter?

It's going to grow maybe up about $2 million.

All right and then the prepaid expenses on the could you explain what was going on there?

It looks like they grew a little bit?

Let me, I'll get back to you on that one with the details, Jed.

All right, and then did you say, I thought that Cotco was done.

Why did goodwill actually increase this quarter?

Goodwill increases as we go along.

We make adjustments in terms of finding things after the fact.

Part of it was for tax stuff.

There'll be adjustments in the goodwill all the way through March.

And one last, did Cotco have any R&D at all?

They have, they have a little bit of R&D but not as much as core R&D in the U.S.

So how did they develop any of the, I guess I'm trying to understand, when I meet with a lot of the packagers and you look at their P&Ls, they actually, while it's less than the chip manufacturer, they still have R&D, so how did Cotco develop the sort of the eutectic bonding in sort of the package technology without any of R&D?

I think what you have to realize is Cotco would probably call that manufacturing development, not R&D.

They do a lot of stuff traditionally on the line with the same engineers that will run in the process.

And those aren't capitalized though, correct?

No, those costs are not capitalized.

They're expenses of P&L occurred.

All right, thanks, I'll jump back in the queue.

Your next question comes from the line of Jiwon Lee.

Hi, just two quick questions.

Chuck, how would you characterize your Cotco integration so far?

Including, I guess, you're expending XLamp out there and you've had a little bit of it seems like the timing delay, so I mean you know, if you think about where you thought you would be when you bought this business and where you are now, how would you qualitatively characterize the Cotco business?

So there's probably three or four areas I'd look at.

How do we integrate in terms of systems, culture, getting the teams to work together.

I think that is as good or better than we would have hoped when we did the, made the acquisition.

I think the two teams are working very well together.

I think in terms of their ability to execute their own plans, I think from a manufacturing standpoint, we've seen some great, they're doing a great job.

On the sales front, we've seen it have some success and we had some challenges.

The challenges is the timing of the gaming business, but I think they've done a nice job of dealing with the challenges and really working hard to expand their other business in China to really offset that.

So I thought that's worked out pretty well.

And the last piece is XLamp and I'd say XLamp in China, don't be confused, our capacity delay in Q1 was not Cotco related.

It was related to improvements we were trying to bring online in Durham and at our subcontractor.

Cotco is actually on track for the XLamp, bringing that on line.

The line is installed we've built the qualification units and they're currently on qual.

Hopefully at some point later this quarter, if we pass qual we'll be actually able to start shipping someone before the end of this quarter.

The plan is, once China is expanded you would move some of the Durham and subcontracting work to Cotco, no?

Actually given the current forecast, even by tripling the white XLamp capacity, I would imagine at the end of this year that Cotco will be running, the subcontractor will still be running and so will Durham just because of the current forecasts that we're getting.

Okay, and my last question is, are you still expecting sort of an $85 million level contribution from Cotco?

Cotco, the Cotco I think targets we gave you were 60 to $80 million of incremental revenue for the year.

They're definitely still on track for that.

And so we'll see how they go the second half of the year.

So far we're on track.

Okay, that's all for me.

Thank you.

Your next question comes from [Mike Herdin].

Chuck, first if you could help out by giving a break down by end market.

What's related to mobile versus larger LCD backlighting, general illumination and automotive.

So our LED business would be lighting, I believe lighting is now all in the largest segment, but it's very closely followed then by the video screen market and the mobile market.

So those are both also still two important markets and then following those would be gaming and automotive.

And I think, I don't have the specific percentages, but that gives you a sensitivity to kind of how it's shaping up, obviously the lightning's the one growing the most.

Okay, and I missed the comment that John said about the $7.7 million decline in inventories.

Was that in finished goods versus the overall decline of 6.3?

What that was WIP and finish goods were down 7.7.

There was an increase of raw materials that offset that.

That's where that came from.

Okay, and on taxes, obviously came up a little more than the 20% in guidance.

Should we expect that 24% going forward?

Yeah, I would expect that and part of it is it research and tax credit that hasn't been renewed yet and you know, we're just forecasting's not going to happen until after sometime the calendar year's over.

I would keep it at 24%.

Okay, great and then one last modelling question.

So, I've seen some speculation that we're going to be seeing lower gross margins as we see the market.

If that is the case and the target models change, you know we used to be thinking about Cree in the 45 to 50% gross margins, 20 to 25% OpEx, how should we think about target models into 08 and 09?

Our target is gross margins would start to pick up in Q2.

Targeting 32 to 33.

Then we're working on leverage to drive that.

That's fab utilization, that's going to be yields, going to be 4 inch and additional manufacturing in Cotco and Asia and other activities at the subcontractor.

Those are the levers.

Don't have a specific model to give you with the timing on that.

Those are the things we're doing to get gross margin back up.

Back into the 40s and as far as OpEx goes, when we're able to get gross margin up there, we're still targeting the operating margins are going to be about 20%, I think.

Okay, great, thanks.

Your next question comes from Harsh Kumar.

Quick follow-up.

You mentioned Chuck that you're taking LED production over to 4 inches, can you give us an idea of the competitive landscape to the Taiwanese, bigger ones at least if anybody's at 4 inches right now or 3 inches, what'd the landscape looking like from a production standpoint?

It's my understanding that 3 inch is probably the most anyone is at.

I know we've recently been in a couple factories in Taiwan.

The only wafers I've seen them producing are 2 there.

They have a different cost structure.

They're approaching it a little differently.

So I think 3 inch is pretty much the best anyone's doing in volume production today.

I'm sure some of the more sophisticated guys are looking at 4, but I don't know anyone else has gone there yet.

Thank you.

Sure.

Your next question comes from the line of Carper Shoop.

Couple quick questions.

Can we talk about the expense structure associated with 14 week versus 13 week quarter and the impact on that as a sequential basis in the December quarter and would we see a complete reversal in the March quarter then?

That's a good question.

Yes, we think that's probably close to $750,000 to $1 million of extra expenses for that week.

We don't expect to see that again, because we're paying people for holidays and such.

Okay great.

And then in regards to the acquisitions, it sounds like you guys might be looking at a couple deals here.

Can you talk about the available management bandwidth right now to do another deal?

Do we need a new more quarters to do a similar sized deal effectively today?

I don't think we're trying to do another deal in the next quarter, but I think over, at some point here out over the next four quarters, we're looking at some things where we think we do have the bandwidth to do that.

I'll tell you, it probably got lost in my comments, you'll probably see us do things to expand our existing management bandwidth.

So one of the things we're very cognizant of is adding additional management bandwidth to our team here over the next quarter or two is probably going to be beneficial to driving some of these strategies.

So you'll see us actually probably do the management bandwidth first before we do the next deal.

Okay, thanks, that's helpful.

In regards to tripling the XLamp capacity, what base is that off?

That's based off how much XLamp capacity we had entering the fiscal year.

We'll triple XLamp capacity that's all in Cotco.

Okay, what's the strategy with triple it now versus maybe ramping up slower?

The challenge is we knew going in we had a capacity problem.

We're trying to get ahead of the curve.

It already hurt us last quarter.

Part is catch-up capacity.

If we could have we would have had it online sooner.

I think if you look at some of the product lines, remember the XLamp, there's more than one version of XLamp out there.

We have a lower cost version and we have a premium version.

As you start looking at the additional mix, getting additional capacity online is critical to being able to respond quickly to mix issues.

Are we going to see an associated overhang with the excess capacity for XLamp as we go from tight situation to excess capacity in the second half of this year?

Right now, that's not what we're targeting, I think we believe the benefits we get of going to Asia will offset any small overhang associated with that.

The nice part of XLamp capacity compared to fab, it's relatively low cost.

Okay, and last question for you, when we talk about lightning applications for XLamp, how much is torches or flashlights versus other applications?

Personal lighting is probably, boy through Q1, personal lighting is probably the largest single segment, but I'd say it's not significantly larger than the architectural segment or the emergency vehicle segment.

The other thing is more general illumination of municipal lightning.

That's kind of where we were in Q1.

What we're seeing is general illumination segment that's probably the bigger growth driver over the next few quarters.

So maybe going out two to four quarters.

Maybe see general lighting be as big.

It'll be things, applications like you've seen.

Municipal applications.

It's really, we got to be careful.

General lighting is a large word.

Examples of things we've shown you in the LED city projects, things like that.

Okay and then do you feel like that market would be as big or bigger than the personal lighting market?

Long-term that'll be the biggest market.

And lastly on gross margins for the actual quarter here, September, below 32% guidance, can we go over some of those factors again?

If you look at COGS and R&D, you see that R&D was low and COGS was high.

As we got through the quarter, we made enough progress and had enough interest from some of our customers.

We were able to bring those into at least initial pilot production which really just shifted some of those over.

I think if you move that million bucks across, you'll see we're in line with what we thought.

It's also why R&D was down.

Net net it's about what we thought.

We frankly just really thought a couple of those projects were going to take longer.

So, I guess in the end it's a good thing, but it wasn't exactly how we forecasted going in.

Great, thank you very much.

Sure.

Your next question comes from Jed Dorsheimer.

One more follow up, Chuck.

The 20% operating margin, what revenue level would that be based off of?

I don't know that we have put that revenue level target out there yet, Jed, but I think it's more of a longer term target.

I don't know if John's put that out yet.

We don't have that out there to go with it yet.

Those are more just targets to give you an idea of what we're shooting for.

All right, thank you.

And your next question comes from Andrew Huang.

I had a quick follow-up.

To clarify, are you seeing your white XLamp capacity by the end of the June '08 quarter should be triple of what it was at the end of the June '07 quarter?

Yes.

And is that strictly from this new line coming onto Cotco or do you have to add an additional out source partner for that.

No that's what we're really putting in Cotco.

So the follow-up question would be, do you have enough chip capacity in place to meet the increased XLamp capacity?

Yes.

Okay, great.

And beyond the tripling of capacity, what would -- could you give us a sense of what your next plans would be?

It's starting to happen now versus I think when most of us were thinking it was further out.

We're going to have to react a little to where the forecasts go.

What we're going to try to do is get the building infrastructure ready.

If we have to expand beyond what we already put in the plan, we'll have a relatively shorter lead time.

It's a little too early to call exactly what that expansion might look like.

We're going to need to do something, but we're just not, we just need to see how the next couple quarters come together.

We're going to get the building ready, and as the next quarters come together, we'll be able to figure out what that needs to look like for next year.

One last question, you've been working with aero and world peace a year now, can you give a report on their progress?

I'll give you two report cards.

Cree has pretty objective goals, so we're always trying to motivate them to go faster and really try to tack these applications.

I think from their standpoint and I had a chance to talk to both of them, I don't know that I can quote them, but the impression they give us is that XLamp has probably exceeded their expectations in terms of generating new customer interests.

Now that's the first step.

We got to turn it into orders.

Really where we're focusing now is how does Cree provide enough for the technical resources on our side to support the solutions they need but also how we help build their teams at their level.

That's going to be an ongoing process.

One year in, it's as good as we could have expected a year ago but in the year ahead.

We obviously got to take it to the next level.

There's a lot of work to do on both sides.

Okay, thanks very much.

Sure.

Your next question comes from Jiwon Lee.

Hi.

Jiwon Lee.

Chuck, XLamp, that's very expensive product.

I think the ASP is just about $1 or so.

Has there been ASP changes, whether as result of pricing changes or mix shift.

So the XLamp is actually a family of LED products.

They actually have ASPs that range from, in the dollar range, lower in very higher volumes in the several dollar range for the ones that are the highest efficiency ones out there.

There's definitely been ASP changes over the year.

Nothing different than we would have expected.

Part of what's going on is the performance is going up relatively quickly so it's not really the AS-- the ASP has moved some, but it's more of a mix in between which product lines.

We have two families, XRE and XRC.

One is a lower cost version.

Depending upon what the mix does, it can move around a lot.

It's less individual part number ASP changes and more mix within those.

As we increase performance, we are, we generally are offering a better value in terms of lumens per dollar every time we make a performance improvement.

Effectively the customer is getting part of the price reduction by buying more LEDs that give them more light per dollar.

That's part of what's going on right now

Okay, thank you.

Sure.

Your next question comes from Mike Herdin.

Just a follow-up on the last comment, Chuck.

Have we hit the point where we started to see the ASPs increase because of the mix going to XLamp and perhaps actually some of the uh, the number of LEDs being shipped actually start to come down?

Clearly overall ASPs are going up, but you know, so yeah, clearly the overall ASP as a product line with additional XLamps and additional Cotco is going up from where it was.

We're definitely moving down that road, remember that's nice, but really what's important is how we manage that gross margin line.

Right and then actually I was following up with that, as it relates to inventories, I think John you said you're comfortable now with you know, we're now at 74 days, I think you're at targeted closer to 70, uh, previously it sounds like we're going to have a little bit of a build in the December quarter.

What is kind of the normal level now that you know, now with Cotco?

Yeah, you know, this is Chuck and I'll let John jump in as well.

I think one of the things we're trying, we are still trying to determine is that it's not just Cotco but it's also with the XLamp business.

So we're trying to figure out how much inventory we need to have where to make sure we can meet some of the design windows and also some of the larger companies delivery expectations.

So we're still trying to figure that out.

I think we feel what we need to do is we know that with the XLamp business, we know that we did not exit Q1 with the inventory levels we'd like to really drive that market.

We're working pretty hard to get ahead of that curve.

I don't know if you want to add John.

Yeah, we're growing inventory to have it in place to feed Q3 as you start right off the window.

So that's an important area we're going to be looking at.

And lastly, if you can, as it relates to, finished goods versus raw materials, can we get a sense of different carrying costs for the different buckets?

The carrying costs is higher within the finished goods, but our objective is to turn that pretty fast.

Okay, thanks again, guys.

Sure.

At this time there are no further questions.

All right, thank you.

We appreciate your interest and support and look forward to reporting our second quarter fiscal year 2008 results on January 22nd 2008.

Thank you.

Thank you.

This concludes today conference call.

You may now disconnect.