Wolfspeed Inc (WOLF) 2008 Q4 法說會逐字稿

Good afternoon.

I will be your conference facilitator today.

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

fourth quarter 2008 fiscal year financial results conference call.

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

After the speakers remark there is will be a question-and-answer period.

(OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded, today, Tuesday, August 12, 2008.

Thank you.

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

Mr.

Garrabrant, you may begin your conference.

Thank you, and good afternoon.

Welcome to Cree's fourth 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 919-287-7895 and we will 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 fourth quarter of fiscal year 2008.

Please note that we will be presenting both GAAP and non-GAAP financial results in our remarks during today's call which are reconciled in our press release which is posted in the investor relations section of our website at www.cree.com under financial metrics quarter ending June 29, 2008.

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

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

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

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

Also we would like to note that we will be limiting our comments regarding Cree's fourth quarter of fiscal year 2008 to a discussion of the information included in our earnings release and the metrics posted on our website.

We will not be able to answer any questions that would involve providing additional 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 recording of this call are copyrighted property of the Company and no other recording, reproduction or transcription 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.

Also since we plan to complete the call in the allotted time of one hour, we recognize that other investors may have additional questions and we welcome you to contact us after the call by email or phone at 919-287-7895.

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 August 26, 2008.

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

Thank you, Raiford.

We finished fiscal 2008 with record revenue of $493 million, a 25% increase from fiscal 2007 as we successfully executed our strategy to drive top line growth from our LED components product line, non-GAAP net income from continuing operations increased 33% from fiscal 2007 to $47.3 million or $0.54 per diluted share.

In Q4, revenue increased to a record $135.9 million with non-GAAP net income from continuing operations of $14.5 million or $0.16 per diluted share.

These results include a $0.03 per share benefit primarily due to a state franchise tax credit that reduced G&A for the quarter.

On a comparable basis to our previously announced target range, which excludes this $0.03 per share benefit non-GAAP earnings would have been in the middle of our target range at approximately $0.13 per diluted share.

Gross margin was 34.2% for the quarter, which was on the lower end of our target range.

The gross margin was affected by three primary factors.

Despite higher sales we have lowered utilization in our LED chip and wafer factory as we hose to manage down inventory levels.

We were successful in improving XLamp deals, but the improvements came on line later in the quarter than we had forecast and RF product and Government contract costs were higher than targeted.

Overall these results were within the normal operating range of our business and illustrate the significant margin progress we have made when compared with a year ago.

We also made good progress in managing working capital as we reduced inventory days on hand and accounts receivable which contributed to strong cash flow from operations of $36.7 million for the quarter.

Revenue growth in the quarter was led by higher LED sales which included another double digit increase in XLamp LED sales, stronger than expected growth in high brightness LED components, LED chip sales in line with our target at a few percent lower than Q3 and LS sales in our targeted range.

Overall, LED component revenue for the quarter was approximately 30% higher than LED chip revenue and illustrates the tremendous progress we have made in building our LED component product line while still maintaining a strong merchant LED chip business.

Our non-LED business was flat sequentially and higher power device sales offset slightly lower RF and Government contract revenue.

I'm also pleased to report that we made great progress on all five of the key objectives that we had outlined for fiscal 2008.

We grew XLamp sales more than 140% from the previous year and continue to drive the LED lighting revolution through our acquisition of LED lighting fixtures and the growth in our LED sitting and LED University market development initiatives.

We successfully integrated COTCO which has become a high brightness LED product line and achieved the first year revenue and profit objectives.

We continue to expand our global sales coverage and drive growth with our partners as component distribution sales more than doubled over the previous year.

We expanded our manufacturing capabilities in Asia as we transition most of our XLamp LED production to China during the year which reduced manufacturing costs and position these products for improved margins in fiscal 2009.

We grew power and RF product sales 23% year-over-year.

As we look ahead to fiscal 2009, we are targeting to build on the momentum we created over the last year.

The LED lighting revenue continues to gain traction and our excellent LED component and LED lighting solution product lines are well positioned to benefit from the growing demand for energy efficient LED lighting.

I will now turn the call over to John Kurtzweil to review our fourth quarter financial results in more detail and our targets for Q1.

Thank you, Chuck.

I will be providing commentary on our financial statements on both a GAAP and non-GAAP basis which is consistent with how management internally measures Cree's results; however, non-GAAP results are not in accord dance 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.

A reconciliation of the non-GAAP information for all quarters mentioned in this call is posted on our website.

For fiscal year 2008, revenue was $493 million as compared to $394 million for the prior year.

This is an increase of 25% year-over-year.

GAAP earnings were $33.4 million $0.38 per diluted share for fiscal 2008.

Non-GAAP earnings increased 33% to $47.2 million $0.54 per diluted share.

Cash provided by operations was $102 million, free cash flow was $47 million and we exited fiscal 2008 with $370 million -- $371 million in cash and investments and continue to be debt free.

For the fourth quarter of fiscal 2008, we reported revenue of $135.9 million which is above our targeted range for the quarter of 129 million to $133 million.

A 9% sequential increase over Q3 and a 22% increase over Q4 of fiscal 2007.

Q4 is the first quarter we have a meaningful comparison to a prior year quarter since the acquisition of COTCO and illustrates the solid progress we have made in growing revenue and earnings.

GAAP net income from continuing operations was $6.6 million or $0.07 per diluted share which is above our targeted range of $0.04 to $0.06.

GAAP net including discontinued operations was $8.4 million or $0.09 per diluted share and includes a one time gain related to the sale of several patents related to the discontinued Cree microwave operation.

On a non-GAAP basis, net income from continuing operations for the fourth quarter was $14 .5 million or $0.16 per diluted share which excludes $7.9 million of net expense or $0.09 per diluted share from the amortization of acquired intangibles and stock-based compensation expense.

Non-GAAP earnings included a $0.03 per share benefit primarily due to a state franchise tax credit that reduced G&A for the quarter.

Excluding this $0.03 per share benefit, non-GAAP earnings were consistent with the Company's previously announced target range of $0.12 to $0.14.

Non-GAAP net income has grown 95% when compared to the fourth fiscal quarter of 2007.

LED revenue increased 11% sequentially to $116.6 million and by 27% when compared to the same period last year while non-LED product and contract revenues were flat sequentially at $19.2 million, LED revenue growth was led by double digit growth in XLamp product sales for wedding application and higher than targeted demand for our high brightness product which also increased double digits during the quarter based on the strength of the China video display market.

LLS revenue was within the target range of 2.5 million to $3 million and LED chip sales line with our targets for a few percentage points lower than Q3.

Q4 GAAP gross margin was 33.6% and non-GAAP gross margin was 34.2% which excludes stock-based compensation of $0.7 million or about 50 basis points of margin.

Non-GAAP gross margin was at the low end of our range of 34 to 36% due to several factors, despite higher sales we had lower utilization in our LED chip and wafer factory as we chose to manage down inventory levels.

We were successful in improving XLamp yields but the improvements came on -- came online later in the quarter than we had forecasted and our products and RF products and Government contract costs were higher than targeted.

Operating expenses were $40.4 million on a GAAP basis and $31.7 million on a non-GAAP basis.

Non-GAAP expenses exclude approximately $4 million of stock-based compensation expense and $4.8 million of charges for amortization of acquired intangibles.

This is lower than our targeted range as we recorded approximately $3 million or $0.03 per share benefit to SG&A expense primarily due to a state franchise credit.

This is partially offset by increased selling expense of approximately $0.6 million and increased litigation expense of approximately $1 million during the quarter as we had targeted.

R&D expenses increased slightly to $15.8 million in Q4 and were in line with our targets.

Net interest income decreased to $2.5 million from Q3-and was below our targets so we used $51 million in cash to repurchase approximately 2 million shares of the Company's stock at an average price of $25.96 per share during the quarter.

We have also taken a more conservative position with our investment portfolio over the past two quarters given the recent uncertainty in the debt market and as such our average return has declined since Q3.

The tax rate for the quarter was 16.9% and for the year it was 22.5%.

The integration of LED lighting fixtures which we acquired in March has progressed as expected, revenue last quarter was in the target range and is forecasted to grow double digits in Q1.

That business was approximately $0.02 dilutive for the business and as the year progresses it is targeted to become less dilute each quarter for the target to be accretive by the fourth quarter of fiscal 2009.

The COTCO acquisition was accretive in 2008 and the earnout requirements for fiscal 2008 were met per the purchase agreement.

As a result, we will be paying the $60 million earnout in cash this quarter.

During fiscal 2008 we had two 10% customers, Sumitomo, and Sole Semiconductor.

Sumitomo revenue was relatively stable throughout this past year and ended at 13% of revenue.

Sole Semiconductor revenue increased 16% for the year and ended at 13% of total Company revenue.

In fiscal 2008, we had two related party customers as a result of the COTCO acquisition, Light Engine Ltd.

and Conwind Technology Limited.

Light Engine Ltd.

is a subsidiary of United Luminus Holdings which is owned by Paul Lo.

And is a former sister Company of the COTCO LED business.

Light Engine is primarily focused on value added modules and systems for lighting products.

Sales to Light Engine were $35 million in fiscal 2008 or 7% of total Company revenue.

Con Wind Technology Ltd.

which is primarily focused on LED modules for video displays is a related party due to Paul Lo's family minority ownership in Gold Peak Industries resulting in an indirect beneficial ownership of approximately 11% of Conwind.

Sales to Conwind were $30 million in fiscal 2008 or 6% of total Company revenue.

These two customers grew in line with the overall growth in lighting and video display applications.

The balance sheet strengthened over the quarter as we made great progress on-working capital.

Days sales outstanding declined 9% to 73 days, from 80 days the prior quarter and accounts receivable decreased by $1.2 million to $110.4 million on a $10.9 million increase in revenue.

We also decreased our days on hand of inventory 13% to 80 days from 92 days last quarter and inventory declined by $3.2 million to $80.2 million.

As we become more vertically integrated we are continuing to refine the appropriate amounts of inventory within our internal global supply chain.

Cash flow from operations is $36.7 million and capital expenditures were $18.2 million for a free cash flow of $18.5 million during the quarter.

For the first fiscal quarter, which ends on September 28, we are targeting revenue to increase to a range of $138 million to $142 million due to higher LED sales which are targeted to offset a 10 to 15% decline in non-LED products and contract revenue.

XLamp and LOS product revenues are both targeted to grow double digits again.

High brightness LED components and LED chips are targeted to be in a similar range as Q4.

Sales of our non-LED products are targeted to be down this quarter, primarily due to lower sales for both our power and RF product lines and lower Government contract revenue.

Power customers have pushed out orders to rebalance their inventory while some of our RF foundry jobs have been delayed.

Despite these challenges we win new designs and are optimistic about the potential for these product lines.

While we expect there will continue to be some fluctuation in these product lines over the next year, we target that growth in the LED business to more than offset this variability.

Gross margin is targeted to be in a range of 34 to 36% on a GAAP and non-GAAP basis, with approximately 700,000 or 50 basis points of stock based compensation expense in the G&A target.

We are targeting some improvement in gross margin as we get the full quarter benefit from new product yields that we made in the last -- made at the end of last quarter and slightly higher factory utilization to offset negative impact of lower power and RF revenue.

As we grow our business, we will continue to introduce new products into the factory and with that there's an enhanced variability in our cost structure.

For example this quarter we are introducing two new XLamp products and two new LOS products into production and we estimate that it will take time to work through the new product launch challenges and for the product yield to achieve targeted production levels.

GAAP operating expenses are targeted to be approximately $43 million and include approximately $4 million of noncash stock based compensation and $4 million of charges for amortization of acquired intangibles.

We target increase R&D slightly and continue to increase our investment in sales and marketing.

Litigation expenses targeted to be flat with the previous quarter as the [Bracelux] trial has been delayed until after the first of the calendar year, at which time we forecast an increase in litigation expenses.

Interest income is targeted to be approximately $2.3 million based on lower cash balances and lower yields from our investment portfolio.

We are targeting our effective tax rate to be 22.5%.

Based on an estimated 89.5 million diluted shares outstanding our GAAP EPS target for the quarter -- for the first fiscal quarter of 2009 is expected to be in a range of $0.06 to $0.08 per diluted share when amortization of acquired intangibles and stock-based compensation are included.

We target non-GAAP earnings per diluted share in a range of $0.13 to $0.15 for the first fiscal quarter of 2009 which includes approximately $0.01 loss related to the lower power RF and contract revenues.

Our non-GAAP basis EPS target exclude amortization of acquired intangibles in the amount of $0.03 and noncash stock-based compensation, in the amount of $0.04.

Receivables are targeted to increase in relation to our revenue growth while days sales outstanding should be in the current range plus or minus.

Inventories are expected to also increase slightly.

Yet days are targeted to remain in the current range plus or minus.

We are targeting capital expenditures for the quarter to be in the range of 18 million to $20 million, primarily for capacity additions, new product introductions and the continuing transition of LED chip production to 4 inch wafers.

For fiscal 2009, we target our growth to come from our LED components and LOS product.

We target the rest of our product lines to be in a similar range in fiscal 2008.

We target progress in gross margin yet it is not expected to be linear throughout the year as we will be introducing new products which based on our experience typically have lower margins to start and then improve as yields increase over time.

Gross margin improvement is targeted to be the key driver to building operating leverage in fiscal 2009 as operating expenses are forecasted to grow as we invest in R&D, sales, marketing and the additional cost of intellectual property litigation expenses in the second half of the year.

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

Thanks, John.

As we start fiscal 2009, we recognize that there is a growing uncertainty around the world regarding the near term global economic environment especially in businesses that are affected by trends in consumer spending.

While this is a challenge that all companies will need to manage in the year ahead we continue to target growth opportunities for Cree in fiscal 2009, due to the increased adoption of LED lighting.

We are focused on four key areas to continue to driver our transformation into a global leader of energy efficient LED components and solutions.

Our first priority is to drive top line growth for Cree through higher sales of LED components.

For the year, we are targeting strong growth in XLamp LED sales as well as incremental gains in high brightness LEDs.

To achieve this we need to continue to expand our global sales team with the biggest investment in Europe to improve both our direct and distribution sales coverage.

Our second priority is to build upon our market leadership in LED lighting by driving LED adoption through higher sales of our LED lighting solution products, continuing to develop new products that raise the bar for lighting class performance and expanding Cree's brand awareness through our market development activity.

In terms of our LED slighting solution products, more than 100,000 LR 6 down lights have been sold since the product was released a year ago.

And this is for a lighting product category that didn't exist prior to the LR 6.

This product has won numerous awards and established a new standard in LED down lights.

We plan to build upon the success of this first product in fiscal 2009, as we add the LR 4 and LR 24 products to our no compromise energy efficient LED lighting solutions product offering.

Much of our success in establishing Cree as a leader in LED lighting has come from our new product invasions and we need to continue to build upon our performance leadership in fiscal 2009.

We have recently announced two new lighting class additions to the XLamp product family that should enable us to address a wider range of lighting application.

The XP Series of XLamp LEDs is targeted at applications needing lighting class performance similar to our XRE Series product but with a smaller footprint.

The MC Series of XLamp LEDs is targeted at applications needing very high in a single package such as MR 16s bald retrofits.

We have started initial production for both of these products in Durham and plan to transition them to high volume production at our China factory in the second half of this fiscal year.

Our third priority is to increase new product margins and build operating leverage.

While we made a lot of progress in growing the business over the last year, we recognize the need to improve our gross margin as a Company.

This starts with our new product line.

These products made significant progress last year in gross margin but are still below the corporate average.

We target to increase new product margins in fiscal '09 through a combination of cost reduction activities over the next year, including yield improvement at the chip and package level, capacity additions in Asia, volume benefits due to increased factory loading and the completion of a transition of LED chip production to 4-inch wafers, gross margin improvement is targeted to be the key driver to building operating leverage in fiscal 2009 as we plan to continue to invest in R&D, sales, marketing, infrastructure and the additional cost for IP litigation.

Our fourth priority is to continue to grow our commercial power and RF product revenue and transition this product line from the current level of a slight quarterly loss to adding to the bottom line in fiscal 2010.

Despite the tremendous potential of these products for high efficiency power switching, RF and microwave applications, this business is still in its early stages.

Although we've had success in winning new designs in volume applications such as server power supplies we still have a limited number of customers, which can cause demand to fluctuate pretty significantly from quarter to quarter.

Our goal over the next year is to begin to realize more of the potential from a broader customer base with new design wins for our Schottky diodes and Solar Inverters and new business for our GaN RF product and a range of military and wireless applications.

Additional sales should reduce our reliance on Government contract revenue and provide the increased volume to reduce costs and improve margins on these products.

As we look ahead to the first quarter we target revenues to increase to a range of 138 million to $142 million driven primarily by double digit growth in XLamp LED and our LLS products.

We also target LED chip and high brightness component sales to be at a similar level as Q4.

The growth in LED sales is targeted to more than offset an estimated 10 to 15% decline in power, RF, and contract revenue for the quarter.

We target non-GAAP earnings in Q1 of $0.13 to $0.15 per diluted share as we target slightly higher factory loading and the full benefit of our XLamp yield improvement to more than offset the negative impact of lower power and RF sales.

Please note our that non-GAAP targets exclude, amortization intangibles, stock-based compensation expense and related tax effect.

Our strategy to drive revenue growth by focusing on LED lighting worked well in fiscal 2008 and we target to build on this success in fiscal 2009.

We made an impressive transition over the last 18 months in converting Cree from an LED chip Company driven by mobile phone market trend to a broad-based LED Company with chips, components and systems that are leading the LED lighting revolution.

While we recognize that there's caution in the market about the global economic environment, we remain optimistic about the year ahead and believe we can continue to grow our business as the momentum continues to build for our new products and energy efficient LED lighting.

We will now take analysts questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Harsh Kumar from Morgan Keegan.

Good numbers, congratulations, a couple of questions, based on your commentary Chuck, you said you were going to draw down an inventory, and that was basically what led to the margins.

How long will you be doing that?

In other words, is that something that we should expect a reversal in?

And I have got a couple of more questions.

Yes, what happened last quarter was as we were really rebalancing the overall inventory across the business.

Now that we are vertically integrated from wafers to chips to components to systems, and we are global, we have been working through how to best balance that.

From what we saw last quarter our target for this quarter is to have factory utilization at a fairly similar level, a little bit higher maybe than last quarter, and so that I don't think there will be a change affect in the numbers.

Our targets for inventory are slightly higher inventory in line with revenue growth which would keep our gate in a similar range plus or minus.

Got it.

So this is the end of the rebalancing, looks like you are back to normal level it sounds like?

Well, Harsh, yes, but keep in mind we are not going to see a significant increase in LED, fab or wafer fab loading in the next quarter either.

It is not really a rebound it's more of a stabilization at this point and slight improvement as we go forward here.

Fair enough.

Second point related to gross margin was XLamp transition to China, can you just Chuck maybe give us a general update, is that something that you are done with, or how far along are you?

Just any color would be very helpful.

Yes, the majority of all o four XRE products are now produced in China.

In fact, essentially, we have essentially zero production left here in Durham other than for special requests.

We are now ramping up a pilot production of both our XP and our MC products here in Durham and we will be doing that over the next couple of quarters and once we get through that initial pilot production phase, we will start to transfer those to China in the second half of the fiscal year.

All in all if I look back on the past year, the transition to China went really well.

The challenge now is to keep driving yields up and look for that improvement on the gross margin front.

Okay.

Then a question, I guess for John, John you you mentioned you will be paying COTCO the $60 odd million, is that built into your guidance because, I was coming up with roughly a $0.02 impact to EPS.

Maybe I'm a little bit off.

Is that something that is built into your guidance/

It is built into our guidance and I've taken that into account in my calculation for the interest income.

It only really affects interest.

Right.

There is no share impact whatsoever.

Thank you.

I will let somebody else come on and come back in, I'll get back in queue.

Thanks guys.

Good numbers..

Your next question comes from the line of Andrew Huang from American Technology.

Hi guys, can you hear me okay?

We can hear you Andrew.

So it looks like there was some good news and some bad news.

First on the good news, I am pretty sure your LED revenue was well ahead of what anyone else had modeled.

So I am curious within LED revenue, which segment kind of surprised you the most?

Well, if you look at the targets we had set out I would tell you that we have predicted double digit growth in XLamp and that came in pretty much on plan, maybe slightly better, a little ahead of plan.

LOS was right in the targeted range and it was really the high brightness business that gave us probably the most upside in the fourth quarter.

So that was, we had targeted a little bit of incremental growth and instead we actually got double digit growth there.

Okay.

And then, just to be clear, on the chip business, was that kind of down a couple of points sequentially as you had expected.

Yes, it was in line with our target down a few percent from the previous quarter but right in line with how we modeled the quarter going in.

Okay.

Just a follow-up there, on the high brightness, did that strength come any -- was that a result of the Olympics at all or is that totally independent of the Olympics?

The high brightness business, the Olympic effect we got really pretty much ended in Q3.

We had a very little, if any impact on our Q4 numbers from the Olympics.

I will tell you though it was strength in China and it is really the video display business that's driving it.

I would attribute it more to overall infrastructure investment in China that are driving the whole video screen market.

It was not Olympic-related.

All of the stuff you saw at the Olympics most of those products we sold well before Q4.

In fact most of those we sold well before Q3.

So what you are seeing now is infrastructure build out in China and it was a nice upside for us last quarter.

Right.

So it seems like you are guiding that business flat for the September-quarter that basically means you expect that high level of activity to remain the same; is that right?

Based on the outlook we have today it looks like it should in Q1 stay in a similar range as where we finished Q4.

It is nice to have the upside but it is also nice to have it coming back this quarter to similar level.

Got it.

One last question on the chip revenue.

It seems like a lot of people were under the impression that your chip business would be under a lot of pressure this quarter and it seems like it was just in line.

Can you kind of address that.

Well, we probably were first Andrew to come out and say we saw a little weakness heading into the quarter.

When we provided our targets back in early April, we had said we thought it would be down a few points sequentially and I think -- so we were probably sensing that a little bit of softness then and it came in pretty much what we thought.

Part of the difference might be our customer mix.

We have changed the business a lot.

If I look at some of the talk in the marketplace especially amongst the Taiwanese guys it is a lot of talk about trends related to mobile and some of those other very consumer driven applications.

Even in our chip business today we have a lot of exposure to things -- still significant business in automotive, and gaming, in the video screen market and in the lighting segment.

So, I think at this time, it is really the fact that we have a relatively broad base of applications and the fact that the new products continue to kind of help us keep that business going.

That's probably helped us have maybe a little bit more of a positive outlook than some of the competitors.

Got it.

Okay.

And then, on the bad news, your non-GAAP gross margin was clearly a disappointment.

It has been down two quarters in a row.

My question is you have two new XLamps that are ramping this quarter.

You have two new LOA (inaudible) ramping, so it seems like it might be tough for you to deliver even a slight bit of sequential improvement on the gross margin.

Can you just talk about how you are going to get there?

Yes, Andrew, so if you look at what happened last quarter, we obviously had hoped that gross margin would come in a little higher than it did, but if you look at the, what is it off by, from the middle of our range we were probably off by 80 basis points and if you look at it on a non-GAAP basis, and then when I look at that, it is really a couple of phenomenons, I don't think most people thought we would be able to grow revenue $10 million and take inventory down.

The fact that we reduced the utilization in the chip factory and the wafer factory I consider that to be good prudent business.

I don't consider that to be a disappointment.

We are actually pretty happy about the fact we are able to do both at the same time.

The reality is that is going to have some impact on the gross margin.

Second thing is we were hoping to get the XLamp yield improvements.

The stuff we saw, the improvements we saw at the end of the quarter the last couple of weeks and we're still seeing as we head into this quarter we really hoped to get those online earlier in the quarter.

That would have also given us a little bit more leverage.

The other thing we can't -- that is variability in the business is when the RF and contract costs come in a little higher that business has some variability to it.

Net-net, I feel like we understand what happened there and so the challenge this quarter is what we are targeting is slightly higher revenue, it should help factory loading a little from last quarter and we should get the full quarter impact of better XLamp deals.

If you take those things, realize that the power RF business is going to be down sequentially so that's going to offset that somewhat.

That's why we are looking for a little bit incremental -- a little bit of improvement this quarter in gross margin.

If we do that I think that's a real healthy sign for our business.

Okay.

Thanks a lot.

Sure.

Our next question comes from the line of Jen -- just one minute, I'm sorry, we have a technical difficulty.

Just one moment.

Our next question comes from Jed Dorsheimer from Canaccord Adams.

Your line is open.

Congratulations on the WaterCube it showed pretty well at the Olympics.

Thanks.

A couple of questions.

The first one, I appreciate you breaking ut the related party in the Light Engine.

I was wondering a little bit of a surprise though, and John maybe you could explain the $35 million is, it would appear that based on the contract outlined in the addendum that it should be closer to $50 million.

So, where is the delta, the $15 million given the guaranteed sales?

So, Jed, let me take a shot and John and I will handle this one together maybe.

If you look at the way the contract was written, they'll have to make an attempt, I think if you look at -- I think it was in our proxy last year, if you look they have to use their best efforts to try to grow the business but there's no requirement for them to buy product if there isn't a need for it, what you are seeing is the flow of their business and demand for it.

John, is there anything you want to add to that?

No, that's exactly right.

All right.

I'm just surprised.

So but you, they still, still got the earn out?

Yes, because you have to remember the earn out wasn't just on what they bought.

It was on the overall performance of the business and actually the business came in, did real well in terms of both our revenue and our profit targets for the year.

It was overall a strong year for that product line.

All right.

A couple of, I guess housekeeping questions, looking at the goodwill writeup of the $56 million, is that all LF related and -- or is there something else in there?

What that is, is that because at the end of the quarter, what we did is we accrued the earnout payment to the goodwill.

All right.

You are seeing the earnout payment $60 million in there, plus other year end adjustments.

That's why it is only at $57 million instead of $60 million.

So you're classifying the earnout as goodwill?

Yes.

All right.

So there will be no P&L impact on that and no amortization of it.

All right.

And then, the CapEx, the $18 million, but your property, plant, and equipment actually came down $3 million and D&A also came down $1 million.

Can you help me better understand how those moving parts work?

We also had during the quarter is that we had some writeoff some assets that went directly to the P&L.

All right.

Overall what you have got going on Jed is remember we were making pretty heavy capital investment if you go back five years ago so we have a chunk of roll off that is actually at this point you are seeing the roll off rate and the addition rate vary a little bit from quarter to quarter but it's not changing total depreciation by a lot at this current time.

All right.

We are getting the benefit of some of the investments made five years ago that are starting to roll off, as well as we're investing -- but it happens to be a duplicate timing five years period, we're investing at about or slightly lower rate recently than were five years ago.

And that's a lot because it is not just a chip business right, because there's not as much CapEx required for some of the components side of the business.

Got you.

All right.

And then two more questions and I will jump back in the queue, Sumitomo, 13% for last year?

Yes.

All right.

And that was down from 27; correct?

24.

24.

All right.

Last question and will jump back in the queue.

The other related party, is it Curwin?

Conwind.

Conwind, sorry, it is associated with Gold Peak, is that related in any way to Lighthouse or I'm not familiar with Conwind.

Yes, it is part of -- they actually provide LED modules to Lighthouse and actually Gold Peak owns Lighthouse which owns Conwind is how it works..

All right.

I will jump back in.

Thank you.

Sure.

Our next question comes from the line of Carter Shoop with Deutsche Bank.

Your line is open.

Goods afternoon.

good afternoon.

So, a couple of housekeeping questions.

First, I am actually on the road here, I haven't quite finished the model yet but it looks like the tax rate was about $0.01 benefit relative to expectations on a non-GAAP basis, is that the case and if so what drove that downward revision?

What that is, is basically due to true ups at the end of the year, and for the year the total ax rate was 22.5% versus our target of 24 and going toward as you're building your model, use the 22.5%.

Okay.

And about the share count, over the past two quarters it looks like it was up about 3 million over the past two quarters while LOS about 2 million and you bought back 2 million this quarter.

Can you help me understand why that increased?

Is it partially due to timing of the buybacks in this last quarter?

Part of it is timing of buybacks, we have an employee stock purchase plan and some other option exercises over the last six months.

Okay.

That's helpful.

In regards to the $0.03 benefit you mentioned it's mostly from the franchise tax credit.

But you also mention there's some other drivers in there.

Would you be willing to explain what the drivers are and then what that benefit was on a pre and post tax basis?

On that topic it was $3 million in total for that and everything else.

It is a bunch of smaller things, what we wanted to do is just call out and give you guys directionally where we are going so you can compare it to our forecast for the next quarter as well.

Within our target range..

That's helpful.

One more housekeeping question here.

It looks like SG&A was at $1 below expectations if you take that out of the equation, that franchise tax credit, was that mostly due to lower than expected litigation or is there something else there that helps drive SG&A a little bit lower than expectations?

We continue to try and manage our G&A expenses and litigation came in slightly lower but not appreciably.

There is just overall management on the sales side.

It is just we are adding expenses we are investing in a lot of areas and I think what you sea is that although we had targeted some incremental expenses at a higher rate we frankly didn't add them as fast as we were going.

We were talking about a fairly sizable increase and just didn't all happen last quarter.

Okay.

That's helpful.

Linearity in the quarter, was it kind of as you expected or was the first half a little but stronger?

Could you expand on that a little bit.

Traditionally we start out a little slower and get stronger as the quarter goes.

I would say that our Q4 was pretty similar to Q3 and the way our Q1 is shaping up it looks to be about the same.

So it's kind of similar.

I would say we are always a little more on the back half of the quarter than the front half but I would say it is not drastically out of whack.

It is pretty similar, it's not a big change from quarter to quarter.

Okay.

Did you mention XLamp sales are up 140% year-over-year.

I just wanted to make sure that was a correct number.

That's correct.

Would that be all organic or is there some accounting from accounting from LOF, was there anything involved in that?

No, actually if we would have actually not bought LOF it would have been up higher because we don't get to count those sales anymore.

That's helpful.

Thinking about '09, obviously keeping that type of growth rate would be very difficult, and any way to add some color about how you are thinking about XLlamp sales, the commentary on sequential basis is always helpful but maybe for modeling purposes do you think that could be up 40, 50% on a year-over-year basis?

The way I would think about it right now is we have been doing this double digit, it obviously varies.

As the numbers get bigger it's -- we would like -- the goal would be to try to keep it at double digits.

I'm sure it would be on the lower end of the double digit range than the higher one, but don't really have good enough visibility to give you a full year number on there but at least in the near term, based on the sales fall that we're seeing we are obviously targeting double digits again here in Q1, and just to give you a perspective of a similar rate as last quarter and as the numbers get bigger, my guess is, is that will come down a little bit but still looking for healthy growth throughout the year.

That would be the target.

So maybe coming down a little bit on a sequential basis but it is possible to see double digit sequential growth throughout the next three quarters?

At least for the next couple.

We'll have to see for the second half.

It's a little hard to just lay out -- here's the trick for that one, right, we obviously don't have visibility into the second half of our fiscal year.

We also have these two new products coming online and so those are wildcards, generally speaking they take 6 to 9 months to get traction but depending on what kind of traction we get there it is a little hard to give you real good granularity on that at this point.

Two more quick ones.

On the buildout in Europe both in regards to direct sales and distribution will that be from an LLF and for XLamp?

And can you talk about when that would be an impact?

It is built in.

We are starting that now.

We started a little bit in Q4.

You will see some of that in our targets -- some of that is already built in our targets for Q1 but it's for LED components in total.

So it will actually even support LED chips so it will really be something that will primarily XLamps and High Brightness components product line.

We will actually be also putting at least a little bit of infrastructure to support our chip business in Europe as well.

That is not really to drive our Europe LLF at this point.

Okay.

Great.

Last question, in regards to LLF, do you still feel comfortable with the original target for the sales there going out a year?

Do you feel that's doable?

Do you feel like there could be some upside there?

Yes.

So on that one we had said originally we thought it would add about $30 million for the year.

That was a combination of incremental sales from LLF products plus some incremental sales from the XLamp.

What we can see right now is the XLamp piece looks to be on target and the LLF piece as well.

Keep in mind that LLF is coming from a pretty small base right, so we are looking at having to deliver pretty healthy growth each of the next several quarters to do that.

With that being said, we are going from one product to the end of this quarter, we have launched the LR 4 and targeting to get the LR 24 out as well.

It is all within the range of -- our targets have a change for nest year.

There's a lot of moving pieces but I will tell you that given the success we've had in the first year with the LR 6 we're pretty optimistic about being able to achieve those targets next year.

As far as any upside it is too early to make a call on that one.

Let's get -- ask me six months into the year after we get these two new products released and we'll have a better sense for that.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from [Yar Reiner] with Oppenheimer..

Your line is open.

Hello.

Good afternoon.

First of all, are you able to show us your backlog number exiting the year?

We will put that in our 10-K.

I don't think we have that available today, but it will be in our 10-K as soon as it comes out.

I don't have that handy at the moment.

On XLamp can you talk a little bit about what is driving demand in the end market and to what extent the growth is being driven by broader macro trends and to what extent is the share gain playing out?

What I would tell you right now is that on the XLamp front the end market today, if you look at the revenue in Q4, the majority of the revenue if a combination of portable architectural lighting and vehicle lighting.

So we have got those as kind of a majority but the fastest growing segment is what we call indoor/outdoor commercial.

The stuff most people call general lighting.

That has been the last couple quarters, that's the section of our XLamp business that's growing the fastest, but as we go into next year, if you look at the deals and the opportunities we're working on it is really more the general illumination.

It doesn't mean we see a fall off in portable or architectural I will tell you right now, general lighting is much more macro trends so this indoor/outdoor it is really not a share gain it's more macro.

In terms of the winning in the portable and the architectural that has been a little bit of a share gain over the last year but I would be surprised if the other companies in the high powered LED business aren't seeing relatively reasonably good business at this point.

I don't know that they're growing at the same rate but I would be surprised if they're not seeing similar positive market dynamics.

This is John.

I found the backlog number here, at the end of June it was $89.3 million the prior year it was $69.8.

Great.

Thanks for that.

Going back to your large customers for year, are you able to give us the year ago numbers for Light Engine and Conwind?

We don't have those.

We have them for Sumitomo.

Well, so Light Engine and Conwind were only related parties for the one quarter of last year and it was $9.7 million for Q4, our fiscal Q4 of last year but we don't have it from before that because we didn't acquire them until it was late in March.

Okay.

I guess I am trying the get how important they were in terms of growth drivers for the COTCO business during FY '08.

They were part of the growth for COTCO so the way it works is Light Engine is really more on the lighting side, of the business, value added models and product for the lighting market and Conwind is a separate company and is really doing -- is really connected to the video display side of the business.

We actually saw generally in our business, in both XLamp and our High Brightness growth in both of those market segments and they kind of parallel that growth.

I would say they saw a similar trend in the markets they were strong.

We also had growth in our other customers as well.

It is fairly I would say a track relatively with the other trends in the business.

Great.

Thank you very much.

Sure.

Our next question comes from the line of Harsh Kumar, with Morgan Keegan, your line is open.

Hi, guys you mentioned LLF was $0.02 dilutive in the quarter.

I am curious if you could reiterate what your plans are for accretion for that Company?

And then I have one more.

Harsh, John mentioned earlier what we are trying to do is we're looking for it to become less dilutive each quarter and targeting the exit Q4, fiscal Q4 with it becoming slightly accretive.

So it should reduce each quarter in an amount of delusion but it will take three in targeting, go through become breakeven and even slightly accretive as we exit.

And then I had a quick question.

I was somewhat surprised, John, I have not seen this before, goodwill sort of being characterized in -- sorry, earnouts, sorry, being characterized.

Is that fairly common?

Have you come across that before, John?

Yes.

When grow back and look at it, we have goodwill, we had acquired intangibles, related to it and anything over the purchase price and the acquired intangibles goes to goodwill.

This is incremental cost for the purchase which goes directly to goodwill.

So it is.

Fair enough.

And then last just sort of housekeeping question, when you say high brightness, Chinese high brightness, that's basically billboards; right.

It could be billboards.

It could be replay boards, stadium screens, things like that but it is very much, the video screen business is definitely being driven by the advertising business.

Got it.

Should we be reading into your currently saying that you're still seeing traction despite the fact the Olympics business is done, business is hanging in there flat to modestly up??

I would claim it as pretty much flat quarter to quarter right now.

Is what we are seeing for this quarter.

When you are in the video screen business you are talking big capital projects and in China they don't plan anything super far in advance but that being said the current targets say that we should be flat quarter to quarter.

Fair enough, guys.

Our last question comes from Andrew Huang with American Technology Research.

Your line is open.

Thanks, guys.

One last question on XLamp.

I think your plan for the June quarter of this year was to triple your wideband capacity in China.

And I am just curious if you can comment on your future plans for XLamp capacity additions?

Sure, Andrew.

So we were able to get the tripling of capacity in place.

So that we went well this last year.

We started last quarter a facility expansion in China to prepare ourselves for this years capacity needs and right now the plan we are going with for fiscal '09 as we are planning to more than double our total XLamp capacity for fiscal '09.

That will be a combination of both our XRE products and our new XP&MC products, but we are targeting more than doubling packaging capacity.

Wow.

Okay.

Great.

For that as as good segment of the business.

Just one clarification on Sumitomo, I think you mentioned that it was 13% of sales which is down significantly from the prior year but I just want to be sure so I know how to understand this.

Sumitomo is one of your chip customers; correct?

Yes.

Sumitomo is a distributor in Japan that sells to most of the major Japanese chip customers of ours.

And although it is down year-over-year, keep in mind that that trend is actually very consistent with how we finished lars fiscal year.

So the Sumitomo revenue has been essentially in the same range plus or minus 5, 10% quarter to quarter for the last four or five, maybe even six quarters at this point.

So what happened was remember at the beginning of that previous fiscal year we were running chip business much heavier.

So then we reduced the chip business and they have been pretty consistent at the same level since we went through that.

I would also tell you, Andrew, that we have renewed the Sumitomo agreement for fiscal 2009 and it is at a similar level as where we finished last year.

The business is pretty stable right now.

Okay.

That's all basically consistent with our growl of keeping that chip business flat, so basically going forward?

Yes, the idea is to keep the chip business in a similar scale level as it is today.

We like that business.

Merchant chip sales is good for us.

We have customers that can get to markets we can't get to.

And it builds scale for us, from an overall factory standpoint and at the same time, we are not afraid of designing in a new product and letting some of the old business get away.

That's kind of the strategy.

Is there any time for one last follow-up.

On LLF, I think you said in a press release on IHOP, I am just curious, are there any new major customer wins or nationwide chains you are talking to?

What I can tell you, Andrew, is there is testing going on at most, many of the nationwide chains you might be familiar with to test the products.

The IHOP test, just so you know, was a test by one of their franchisee in Virginia.

What we are working on is how is do we take those tests and convert those into more of a national level roll out.

We are having continued success in getting tests but we don't have anything -- we are not prepared to announce anything on a national rollout but we are absolutely working on it and I would imagine if the tests are successful tha that's part of the sales plan for fiscal '09, we need to turn some of those tests into bigger roll outs.

That's our goal for the year.

At this point we remain optimistic that we should be able to make that happen.

Excellent.

Thanks.

Sure.

Thank you.

Thank you for your time today and we appreciate your interest and support and look toward to reporting our first quarter of fiscal 2009 results on October 22, 2008.

Good night.

Thank you.

This concludes our conference call for today.

You may now disconnect your lines.