Wolfspeed Inc (WOLF) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Cree Inc.

fiscal 2009 fourth quarter and year end financial results conference call.

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

After the speakers remarks, there will be a question and answer period.

(Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded today Tuesday August 11.

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, and good afternoon.

Welcome to Cree's fourth quarter fiscal 2009 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 2009.

Please note that we will be presenting both GAAP and non-GAAP financial results in our remarks during today's call, which are reconciled on our press release and financial metrics posted in the financial relations section of our website at www.Cree.com under FY 2009 financial metrics.

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

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

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

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

Also, we'd like to note we will be limiting our comments regarding Cree's fourth quarter, fiscal year 2009 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 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 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 25, 2009.

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

Thank you, Raiford.

Fiscal 2009 was a good year for Cree despite a challenging global economic environment and reflects the success of our strategy to drive growth in LED and lighting related applications.

Revenue for the year increased 15% to a record $567.3 million, while non-GAAP earnings increased 23%, to $59.2 million, or $0.66 per diluted share.

For fiscal Q4 revenue increased 13% from Q3 to a record $148.1 million.

With non-GAAP net income of $16.3 million or $0.18 per diluted share.

Revenue was at the high end of our revised targets for the quarter, while profits exceeded the targets.

The revenue growth in Q4 was driven by higher XLamp and HighBright LED sales for lighting related applications, higher LED chip sales due to increased demand in notebook back lighting and sequential double digit growth in LED lighting product sales.

Non-GAAP gross margin increased to 40% in Q4, which was 340 basis points better than Q3 and higher than our revised target range for the quarter.

The better than expected results were due to a combination of factors including better cost leverage from higher factory utilization, better than planned progress on the four inch conversion, a more stable pricing environment in LED chips, and improved performance in our power and RF product line.

These cost improvements more than offset pricing declines in LED components due to increased competition and lighting application.

Working capital was in line with our targets and we further strengthened our balance sheet as cash and investments grew to $447 million.

We made good progress building momentum in our business and delivering on our four key objectives for fiscal 2009.

We were able to drive top line growth through higher sales of LED components.

We extended our market leadership in LED lighting with higher performance XLamp LEDs and lighting products, created new categories for LED lighting with our LR24 recess tougher and PAR 38 LED bulb, and launched strategic relationship with ZoomTotal to bring our LED technology to the European market.

We increased new product margins and built operating leverage in the business and we also started to make progress improving the yields and cost structure of our power and RF product line.

Our Q1 backlog is at the highest level in our Company's history due to increased demand across our LED product lines, most new orders are currently being booked into fiscal Q2, with some exceptions in LED components, where customers and distributors in and the product driven applications such as lighting and large video screens, continue to expect short delivery times and remain cautious about placing longer term orders due to economic uncertainty in their business.

Overall, the growth in LED demand has shifted our near term focus to factory execution, which we are addressing through increased capital spending at our factories in both the US and Asia.

I will now turn the call over to John Kurtzweil to review our fourth quarter and year end financial results in more detail as well as our targets for the first quarter of fiscal 2010.

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 measures Cree's results internally, however non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provide bid 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 on this call is posted on our website as well as a historical summary of other key metrics.

For fiscal 2009 revenue was $567 million as compared to $493 million, for the prior year.

This is an increase of 15% year-over-year, GAAP earnings were $30.3 million, and $0.34 per diluted share, for fiscal 2009, while non-GAAP earnings increased 26%, to $59.2 million and $0.66 per diluted share.

Non-GAAP earnings exclude $28.9 million of expense, net of tax, or $0.32 per diluted share from the amortization of acquired intangibles and stock based compensation expense.

Cash provided by operations was $178 million, free cash flow was $123 million, and we exited fiscal 2009 with $447 million in cash, and investments and continued to be debt free.

For the fourth quarter of fiscal 2009, revenue was $148.1 million, and within our updated target range for the quarter, of 143 million to $150 million.

This represent as 9% increase over Q4, of fiscal 2008, and a 13%, increase sequentially.

GAAP net income was $9.7 million or $0.11 per diluted share, and exceeded our updated target range of $0.07 to $0.09 per diluted share.

On a non-GAAP basis, net income for the fourth quarter was $16.3 million or $0.18 per diluted share.

This was above our updated target range of $0.15 to $0.17 per diluted share excludes $6.6 million of expense net of tax, or $0.07 per diluted share from the amortization of acquired intangibles and stock based compensation expense.

LED product revenue for the fourth quarter increased 12% when compared to the same period last year, and increased 17% sequentially to $131.3 million while nonLED product and contract revenues were in line with our expectations at $16.8 million.

Which was down 12% from the same period last year, and down 9% sequentially.

Q4 GAAP gross margin was 39.6% while non-GAAP gross margin was 40.3%.

Which excludes stock based compensation of $1.1 million.

This was above targeted non-GAAP range of 36 to 38%.

Operating expenses for Q4 were $47.2 million, on a GAAP basis, and $38.9 million on a non-GAAP basis, which was higher than our target.

R&D and SG&A expenses were generally in line with our target.

However, we had higher than targeted fixed asset impairment charges of $3.5 million, due to the write down of manufacturing equipment.

Non-GAAP operating expenses exclude approximately $4.3 million of stock based compensation expense and $4.1 million of charges for amortization of acquire intangibles.

Net interest income and there for Q4 decreased year-over-year to $1.7 million which is in line with our targets.

Given the low interest rate environment the average return on our cash is forecasted to decline again in the fist fiscal quarter as we continue to emphasize cash preservation, over yields.

The GAAP tax rate for the quarter was 25%, which was higher than our 23% target, primarily due to the sales mix in higher taxing jurisdictions than we had forecasted.

The final earnout payment under the COTCO acquisition agreement resulted in $57.1 million versus a maximum potential of $65 million.

This will be paid in cash in August.

This amount has been accrued for as an increase in goodwill, and a current liability and as of the end of fiscal Q4, 2009s, financials.

During fiscal 2009, we had two customers greater than 10% of total Company revenue.

Arrow Electronics and Sole Semiconductor.

Sole Semiconductor revenue was 13%, and Arrow has become our largest distributor at 11% of total Company revenue.

In fiscal 2009, Cree had two related person transactions as result of the COTCO acquisition.

With Light Engine limited and win Conwyn Technology Ltd.

Sales to Light Engine were $40 million in fiscal 2009, or 7% of total Company revenue.

And sales to Conwyn were $38 million, in fiscal 2009, or 7% of total Company revenue.

Sales to these two customers combined grew in line with the growth in our overall LED revenue.

Please take note that as of the beginning of fiscal 2010, Light Engine and Conwyn are no longer related persons to Cree as we have been notified that Paul Lo's ownership level is now below 5%, at 4.2 million shares.

Our debt free balance sheet grew stronger during the quarter due to strong cash flow from operations.

We ended June with $447 million in cash, short-term, and long-term investments, and continue to be debt free.

Accounts receivable were flat at $103 million, while day sales outstanding declined to 63 days from 71 days at the end of March.

Inventory increased by $1.4 million, nd days on hand decreased to 79 from 83 days at the end of March.

Cash flow from operations during the fourth fiscal quarter was $43 million, and capital expenditures were $14.7 million.

Resulting in free cash flow of $28.3 million during the quarter.

We continue to make capital investments to support new product introductions and capital expansion.

In Q1, we target capital additions to be in the range of 25 million to $30 million, primarily for LED component capacity increases in China.

And LED chip capacity in the US.

At this time, we target Q1 revenue to be in the range of 160 million to $166 million.

GAAP gross margin is targeted to be approximately $1 million, or 60 basis points less than our non-GAAP target of 40%.

Plus or minus.

As our GAAP targets include stock based compensation expense and non-GAAP targets do not.

Chuck will provide additional insight into our targets in a few minutes.

Beginning with our fiscal Q1, we will be reporting our revenue by product line in a more consolidated manner.

LED product revenue will include materials revenue plus LED related contract revenue.

Power and RF products will include contract revenue related to those products.

For operating expenses we are targeting a slight increase in R&D expense, while SG&A expenses are targeted to increase by approximately $3 million.

For increased marketing, higher sales commissions, initial staffing costs for our new applications centers, and increased compensation expense.

We target asset impairment to decline to approximately $500,000 for the quarter, and our GAAP targets include approximately $4.9 million, of non-cash stock based compensation and $3.1 million of charges for amortization of acquired intangibles.

Please note, that our amortization of acquired intangibles declined $1 million sequentially and is targeted to stay at this level each quarter in fiscal 2010.

Interest income and other is targeted to be flat to down slightly.

We target our tax rate to increase to 26%, for fiscal 2010, due to several changes in tax rates and various jurisdictions both domestically and internationally.

Based on an estimated 91 million diluted shares outstanding our GAAP EPS target for the first fiscal quarter of 2010 is expected to be $0.14 to $0.16 per diluted share, when amortization of acquired intangibles and stock based compensations expense are included.

We target non-GAAP earnings per diluted share in a range of $0.21 to $0.23 for the first quarter of fiscal 2010.

Our non-GAAP basis EPS targets exclude amortization of acquired intangibles in the amount of $0.02 and non-cash stock based compensation in the amount of $0.05.

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

Thanks, John.

As we begin fiscal 2010 we are focused on four key areas to continue to drive our business.

Our first priority is to build on our leadership in LED lighting and further disrupt existing lighting markets.

Our strategy is to be a catalyst for LED lighting adoption by developing innovative new LED lighting products to lead the market and open up new lighting applications for LED technology.

This has generated incremental lighting product sales for Cree, expanded the market for our LED components customers and helped motivate traditional lighting companies to embrace LED lighting for their products.

For example, the recent launch of our PAR 38 LED bulb has allowed us to address high end retail lighting applications with LEDs for the first time, while creating momentum with the traditional lighting companies to begin promoting their own LED bulb products.

Over the next year we plan to further develop our channels to make LED lighting products more accessible to a broader base of customers while continuing to expand our product offering to address new lighting applications which are currently not served with energy efficient LED technology.

Our second priority is to further enable our lighting customers to help grow LED component sales, although the LED components business was the primary growth driver in fiscal 2009, LED lighting adoption still represents a very small fraction of the overall lighting market.

Time will help the rate of adoption but we are planning to try and accelerate LED penetration through new, more efficient LED components, more integrated products that are easier to use for traditional lighting companies as well as increase investment in our technical support capabilities by opening several new LED lighting application centers around the world.

Our third priority for fiscal 2010 is to maintain the product margin levels we achieved in Q4 and start to build operating leverage in the business.

We saw the benefit of very high factory utilization and yield improvements in Q4 and we need to try and maintain these gains as we add capacity and introduce new products in the year ahead.

There are some supply constraints in the LED chip market which are helping margins in the short-term, however, the overall LED market remains highly competitive an we remain focused on both cost reductions and increasing the value of our products by providing new capabilities to the customer.

We target operating improvement throughout fiscal 2010, although this will be somewhat offset by our increased investment in marketing and technical support during the year.

Our fourth priority is to build on the recent progress in our power and RF product line to further refine our product offering and market focus to deliver incremental contribution to Cree's bottom line.

There is still significant variability in this product line from quarter to quarter as demand fluctuations change its factory loading and therefore its cost structure.

We plan to expand our customer penetration into new, higher value applications for both power and RF, with products such as new Zereck line of diodes which should improve overall demand and help deliver more consistent quarterly results for this product line.

We completed the COTCO earnout agreement in Q4 which result in a final payout of $57 million in our fiscal Q1.

This has been a successful acquisition.

This product line has become an integrated part of our LED components business.

Paul Lo informed us that he has recently reduced his Cree equity holdings below 5%, although he is no longer a related party he remains a valued Cree shareholder and customer as Light Engine recently renewed its LED supply agreement for another two years as its business continues to benefit from increased demand for LED lighting.

As we look ahead to Q1, our factories are currently operating near maximum capacity, and we recently increased capital spending to support the growth in demand.

Although we will likely be capacity limited in some product lines in Q1, we target overall revenue to increase to a range of 160 million to $166 million based on the following factors.

Double digit growth in LED lighting product sales, double digit growth in LED component revenue for lighting applications, double digit growth in LED chips to support notebook and TV backlighting demand and power RF materials and contract revenue in a similar range as Q4.

We target Q1 non-GAAP margins in a similar range as Q4 at 40% plus or minus.

As increased volume and improved yields are offset by continued aggressive pricing environment for LED components.

We target higher spending in R&D to accelerate new product development in LED's as well as increased spending in sales and marketing as we start to staff several new global customer service and application centers.

As a result we target non-GAAP earnings in Q1 of $0.21 to $0.23 per diluted share.

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

Fiscal 2009 was a good year for Cree and we have strong business momentum as we head into fiscal 2010, we are well positioned to benefit from the growth in LED lighting which remains our strategic focus.

At the same time, the rapid adoption of LED back lighting for notebook computers and TVs has changed the market dynamics for small chip based white LEDs, and increased demand for high end Blue LED chips.

This has created near term supply constraints, extended lead times across the industry and resulted in a more favorable LED chip pricing environment.

In the short-term, we need to manage our capacity constraints as we continue to invest in new capital to expand our factories.

Our current business trends are positive, but the macroeconomic environment is still a major risk factor that we will need to continue to monitor.

We also must continue to invest in new products, channels and technical support infrastructure, to truly enable the LED lighting revolution as we are still just getting started.

With that, we will now take analysts questions.

(Operator Instructions).

Your first question is from Yair Reiner of Oppenheimer and Company.

Congrats first of all on the nice quarter and good guidance.

So first on the LED lighting components, sounds like business is very strong there.

Is this largely a reflection of the growing demand for street lighting in China and if so, how large a portion of your business does that represent today?

So LED components for lighting applications is clearly one of the growth drivers.

I would say it's broader than street lighting in China.

I would say that outdoor commercial lighting, which would include street lighting but go beyond that, in both China, the US and some in Europe is actually a strong segment for us.

The other thing that we are seeing is that the indoor market is also starting to get some momentum.

Whether it be indoor based fixtures or even some of the new indoor bulb based products I would say that that category in general was driving the growth.

It's more than just China.

It's pretty broad based across the regions, with probably most strength in North America, China and Europe being a follower at this point.

A quick follow-up to that, we've heard recently some of your traditional competitors in Asia competed with you on the low end are trying now to get in to some of the outdoor lighting applications how do you see the competitive landscape shaping up now versus maybe few months ago?

Yes, I would say that when you talk about the broad markets, the competitive landscape, whether it be for mobile or notebook or those types of applications, it's fairly similar that it's been over the last couple of quarters the only difference on that side of the market is with demand up in the back lighting you obviously see a slightly different supply/demand dynamic.

When it comes to lighting I would say in all our markets it still remains pretty much a battle between Cree and Nachia and Osram and Lumula depending on the market.

I would say we see Lumula as the most, in some cases we see Nachia in certain segments and we see Osram, but probably we still see Lumula as the most and haven't seen a significant impact by really any of the Asian players in the lighting related segment.

When I say lighting I'm talking about indoor and outdoor commercial, the bulb segments those types of areas.

One last questions then I ill cede the floor.

On back lighting for notebooks and TVs, I think you've traditionally or over last couple of years have talked about the EC market as being opportunistic, obviously the opportunity today is very large, how long do you think there is going to be a role for you to be able to get the type of margins you want from that market?

When you do think the supply constraint is going to be over?

And how long do you think this is going to be an opportunity that's worth pursuing for Cree?

So I would tell you that it is still opportunistic, if you look at with we focus on here each day it's clearly lighting first and servicing that business opportunity second, with that being said it's a nice market it's clearly provided some scale in the chip business and helped load our factory.

It's a positive near term driver which gives us both incremental revenue and some incremental margin eleven.

The way I view that though is that given how much of our business has already shifted to LED components lighting related application it's a complementary piece of it.

I think for the next several quarters I think you are going to see demand remain pretty solid in that segment.

Does it continue beyond that, I think it's hard for me to predict.

You have to remember that today notebooks is driving that but we haven't really seen the effect of the TV market yet.

Although you hear a lot of splash, TV is still really probably a year behind notebooks maybe more on that conversion, so I think there is another wave of that coming, with all that being said our ideas, service those markets, because they are performance driven they provide an opportunity for us and help us upscale that over time we are going to need to drive the lighting business anyway so it's very complementary for where we are at and where we are trying to take the business long-term.

Next question is from Harsh Kumar with Morgan Keegan.

Couple of questions, sounds like you left revenue behind in this current quarter, John.

Could you tell us if you want to tell us how much it was and if you are -- if it comes down to it, would you be leaving revenues behind in your opinion in the September quarter?

I will actually take them.

I don't think we left significant revenue behind last quarter, I think demand picked up we were able to ramp up to meet that.

I think maybe a little bit here or there, but I don't think that was a significant factor in our business last quarter.

I think you see us having some fairly significant growth in our revenue targets for this quarter and although we might be a little bit capacity constrained in certain product lines this quarter we are also trying to add capacity at a pretty high rate.

It will have a small affect on us, but I think the thing to keep in mind is that definitely we get some benefit from the notebook and back lighting markets but remember our business is still -- over 50% of the LED business is still lighting driven.

That's really the biggest driver in our marketplace.

We've been in a pretty good position to take advantage of some of the swings while till driving the core market.

Great.

Question for -- actually, that's a good lead into what I was going to ask next, growth in September as you look in to your backlog which is the market that is growing the fastest for you for your September business in September revenues.

I think lighting is the biggest growth drive but we are also seeing some nice growth as well from the back lighting segment.

But lighting would still be the biggest driver.

I meant within lighting, Chuck, is there a subset within lighting that's better than the others?

It's actually fairly broad based.

So I think we are seeing the traditional segments are pretty strong right now, so all the things that we started out, whether it be architectural portable lighting those are solid I would say probably the segment, it's that broad category I like to call commercial indoor and outdoor lighting.

It's everything from outdoor street lighting, parking garages, municipal lighting segment on one side to the indoor lighting and again that's both a fixture and the replacement bulb market, I'd say all of those are really growing nicely right now but it's pretty broad based it's not anyone niche segment right now.

We are seeing good demand across the lighting applications, the way I would describe it is that I think the activity that we have been working on for the last one plus years to really get lighting rolling we are starting to see it show up in a lot of different places.

We want to see a more broad based growth.

We are early but I think the breadth of the applications is actually growing.

And the customer base as well.

And my last question before I leave the floor, I think I heard you correctly, you said you're taking backlog for fiscal Q2 which would be the December quarter?

Yes, most of the new orders we are getting are being booked in to Q2.

Is this typical for you guys or is this something new, in other words is the lead time stretching out or what's going on there?

Earlier I mentioned this is the biggest backlog in the history of the Company, Harsh.

I would say that we probably have as good of visibility right now for this quarter and next as we've had at any time in the recent years that I can remember.

Great, thanks, Chuck, congratulations, guys.

Yes.

Your next question comes from Jesse Pichel of Piper Jaffray.

Good evening, gentlemen, thank you for taking my questions.

Also congratulations on a great quarter in margins.

We recently met with the efficiency leaders at the DOE and confirmed allocations for state level efficiency programs how specifically may this translate to orders for Cree and what would the timing be for be potential orders?

It doesn't seem like you are benefiting from any spending yet.

Perhaps you could just tell us when do you think that will hit and what's the size of that potential pipeline?

I would tell you -- your comment is accurate, right.

There is a ton of activity at the state and municipal level where people got stimulus money and projects.

But really, we haven't seen any of that money or any significant amount of it flow in the -- all the way through the system to where they are able to buy product yet.

I would say it's a fiscal 2010 benefit whether that happens in Q1, Q2, or a little later in the year, I'm not sure.

I'm pretty sure we will see it in this fiscal year.

I will be interested to see what happens after we get through the summer period.

My sense is as we get in to the fall and winter time we will see more of those dollars show up in real projects and real orders.

It's clearly a benefit.

The most specific places, there is lots of what I would call municipal lighting type applications that I know are part of that program that should result in higher component sales at some point.

Again, exact timing I'm not sure I know exactly when that's going to happen.

The activity level remains high which is all I can measure at this point.

Could you size that opportunity up for us I mean, I heard some numbers thrown around there for the total efficiency spend and I can't really pin down how much of that would be for lighting efficiency.

I don't have a great number for you because what I'm finding is that it's not just efficiency spend we are seeing it in pure infrastructure spending as well.

It's hard to put a number.

What we are trying to to do is bake it in to the overall revenue targets we've laid out.

I think it's part of the growth of our lighting business more than it is a one time blip.

What you will see it do is become part of that overall -- the rollout of LED lighting.

Margins, obviously margins are fantastic and should we assume then we are seeing already the full benefit of both full utilization and transition to 4-inch and thus the margins have really peaked?

Maybe if you could give us some color there in relation to that, what are your CapEx targets there for 2010 and where are you going to spend it?

Margins, we definitely got the benefit of utilization, we seen that flow through.

That should continue since we got a strong backlog here as we go in to Q1, but I think we have seen a lot of that impact in the Q4 numbers -- we basically more than halfway through the 4-inch conversion and got ahead of plan there, that helped us in Q4.

I think it will benefit us, not necessarily in margin expansion but really as a cost reduction lever to hopefully help us maintain these margins in this level in the near term.

In terms of I think you asked more of a longer term view, we are not changing longer term targets on that because I still think that although you'll see some swings from quarter to quarter we still think that that low 40% number kind of makes sense for the business mix we are targeting.

You had a second question I don't know if I answered that.

You did with the CapEx spending would be for 2010.

Yes.

So do we have an annual target out there, yet, John?

We don't have an annual target for you.

I think what you can see is we have ramped it back up.

The way to think about that is we had a more aggressive I heading in to last year, we obviously slowed it down in the end of the year time frame as the recession hit.

We started ramping it up this quarter.

As we get along we will break out a bigger target for you.

We are starting to spend money.

Where that is going it is equal parts chip capacity, so to get additional chip capacity to people their external business but really also to see our internal businesses and also a lot of components capacity.

So we are expanding the equipment to make more LED components across our product line, not only XLamp and the high power products but even our high brightness product line.

Thank you.

Your next question is from Dale Pfau of Cantor Fitzgerald.

Good afternoon, gentlemen, good quarter.

Couple of questions here.

First of all, you just said that you're more than halfway through on your 4-inch conversion, when do you expect to be finished with your 4-inch conversion?

It will be in the high 90% range by the end of the calendar year, so pretty much in the next two quarters we should get it pretty much to the end.

Okay, can we talk a little bit about pricing, Chuck.

You mentioned that you didn't see too much in components you saw a little bit of pressure on the chips.

So can you give us a little bit more color.

How much you are out of the normal we are expecting 20% a year, are we on those two, and do you think that's going to change over the next couple of quarters?

I want to clarify, what I said was that actually LED chips pricing stabilized.

Components continues to be competitive.

You might have had that backwards a little bit.

Components market continues to be competitive.

There is a lot of people trying to win share of business there and so I think that market is kind of under the normal trend.

I wouldn't change any targets.

I'm not sure we've actually given an annual target but I wouldn't say it's changed significantly but I also want to make sure it continues to be competitive.

Chips is a little different.

We started to see chip pricing firm up last quarter, and with the current demand levels I think that's actually providing us some short-term benefit there, helping overall is that that pricing has stabilized.

I'm not sure I can give a lot more color than that.

In other words chips is probably not moving down the same curve.

The thing to keep in mind components is clearly the largest chunk of the LED business, our business is more affected by what components does, chips adds to that but it's not the driver anymore.

Okay.

And can we talk a little bit about fixtures, how much sequential growth can you see in fixtures and how is the demand profile and are you able to meet the demand out there for your current fixture products?

I can't give you more color, all of it was double digit quarter to quarter again, sequential.

We target that again this quarter.

In terms of the demand, we are not capacity limited, but I can't say that -- I think we balancing that, I think we are able to add capacity to meet th demand right now.

I think that -- I've actually been fairly pleased.

That's a market that in theory is pretty construction dependant in other areas.

We've been able to continue to see the LED adoption continue even through what is otherwise a pretty lousy time in the lighting fixture business.

I'm fairly encouraged.

In terms of going forward I think we have a plan to bring capacity on line to match the growth in demand and our case what it's about is continue to expand the product line, more channels and get the awareness up it's amazing to me how much projects happen that LED lighting is not seriously considered yet.

We got a long way to go on getting awareness and education in the industry up there.

That's what some of our projects will be over the next year.

One last question, your distribution revenues for the year were pretty good.

How is that channel looking right now for you?

It's looking very solid.

I would say that we are probably -- we are probably having some very different trends than the rest of their normal business over the last six months.

Distribution is growing.

Our direct business is growing as well.

They are actually both running pretty solid and I think it's good to see that it's broad based at this point.

Thanks very much.

Sure.

Next question is from Bill Ong from Merriman Curhan Ford.

Good afternoon, gentlemen.

Nice execution on the quarter.

Meeting with President Obama, where there any specific discussions that can accelerate LED adoption further either through additional government funding or federal buildings making LED conversions maybe color on your discussion with him?

Yes.

The discussion was in general about how we combine the idea of a green economy, energy efficiency, clean tech and innovation and use it to not only benefit Cree but also as how does that public policy help the overall economy.

So that was the high level discussion.

The specific discussion about LED lighting was how do we get the standards raised so that we can really drive some innovation.

One of the challenges we are having is traditional lighting companies, and in some cases even the power companies are out there frankly, pushing back trying to limit efficiency standards because they are worried it's going disrupt their business.

Some of the discussion was about how does the current policy and some of the new legislation being proposed drive the behavior that I think we are all looking for.

It wasn't more specific than that.

It was kind of at a high level.

I think I got a chance to get a sense of what they were thinking abut that and obviously always push my agenda which is we want higher efficiency standards.

Thanks very much.

Sure.

Next question is from Hans Mosesmann of Raymond James.

Good quarter, guys.

Just a question on Light Engine.

You mentioned, Chuck, that that agreement was redone.

What did they end up purchasing over the past couple of years just to get a frame work, and what's the new agreement if you can give us any detail there?

I don't have the last couple of years, Hans, I know that last year John through that number out.

They bought last year, John, 78 million.

And so I think the ideas on the current supply, it is demand based.

Hans, the way that works is it's going to be a function of what their demand is, so really what we do is renew that.

But I know that in FY '09 it was 78.

I don't have the FY '08 number handy here but I know that it grew year-over-year.

I want to say it grew probably somewhere 15 to 20% year-over-year.

Is there an earnout mechanism like the previous arrangement?

That's all gone.

The only thing left -- all we did is that with then earnout gone and other things, their business continues to be very strong and we wanted to make sure from their standpoint and ours we had a supply agreement in place that should have had the supply needed to continue to drive their business.

It was really -- the only thing that continues at this point is just the commercial side of the agreement.

It's really just a supply agreement.

When would the supply situation in the industry get better?

A lot of people are adding capacity, you guys are adding capacity, is it a one quarter thing or two quarters based on what you can tell?

So, Hans, here is the trick to this.

I think that at least in the next couple of quarters there is going to be some constraints.

The question, and obviously everyone wants to know, I'm going to say I don't have the answer, here are the factors.

If it continues beyond that, it's somewhat a function of how far they continue to push this conversion over.

So the notebook industry is not fully converted and as they try to fully convert that basic technology to LED base we are going to continue to get a growth driver so I know you've been around the story long enough to remember the cell phone conversion.

It's effectively one of those types of phenomenons.

The interesting thing about this one though is that the use of LED's in TV is kind of the next question for the LCD back lighting market, and obviously TV is a much larger market than notebook, so the question will be how fast and how far does that part of the business go.

I can't give you the answer because it depends on what happens next.

So I think we are looking at a fairly solid demand picture for at least the next couple of quarters.

It could go beyond that.

Then the question will be is what about TV.

From a Cree specific standpoint, I think the thing you have to remember is we are just as focused on the growth in LED lighting.

I think that's the other piece for us, the growth in LED lighting will actually have a bigger impact on our overall revenue growth over the mid to long-term than even this notebook market.

We get some benefit from selling additional chips and having a loaded factory but really, the major driver to our business is going to be how the LED lighting market converts and how fast we can grow the component side of the business.

Thank you.

Sure.

Next question comes from Daniel Amir of Lazard Capital Markets.

This is [Lauren Silver] in for Daniel.

Thank you for taking my call.

No problem.

Congratulations on the quarter.

Thanks.

What are the main growth drives that we should focus on for the next 12 months.

The biggest growth driver will be LED lighting adoption, and how fast we can grow the components business, LED components is the biggest piece of the LED business, it's what drove most of the growth in fiscal '09 and it's really the key to fiscal '10.

So that's going to be lighting adoption, commercial indoor, outdoor, those types of applications.

If you could break it down little bit further.

I know that you are saying they are both taking off at somewhat the same rate.

It seems that you guys have greater concentration in say outdoor lighting.

Actually I would say we probably have equal concentration.

If you -- depending on the applications you look at we obviously have a lot of success that you hear about here in the US in the outdoor lighting applications but we are having probably equal success, whether it be LED replacement bulbs, new indoor lighting fixtures, I would say our power LED business is pretty broad based on both sides of the application, it really varies by the specific customer and application and the problem they are trying to solve.

As you get in to some of the other indoor stuff, some of the more high brightness based applications we participate there probably not at the same level because there are more competitors but I would say we are pretty much across those applications.

Sorry go on.

Then obviously we have the LED lighting business itself.

Which although it's not a huge part of the overall revenue it's an important growth driver because, well, it contributes incremental revenue growth it mostly helps us push the market which has been real helpful for the component side of the business.

The third piece is chips, and frankly, the LED chip business in Q1 will be about the same size as it was roughly a year ago.

It's not really a growth driver as much as it is it gives us some leverage in terms of driving factory utilization and building some scale that I think then benefits the overall Company over time.

While we are going to get some -- we are getting some benefit there, it's more incremental and it's really not the long-term growth driver it's more of a complementary piece of the business.

Okay.

And when we look at your capacity expansion, is this -- like what percentage of your current capacity is expansion or is is there any way that you can quantify the expansion so that we know approximately what your maximum revenue potential could be per quarter?

I don't have a great way to quantify that for you because what we have to do is we have to expand a chip factory, because then that feeds the internal customer which is the components business which then has to feed the lighting business.

I can tell you that we have fairly aggressive expansion plans, maybe a rough way to think about it is, we have plans in place that would probably roughly double our LED components capacity year-over-year and that's a rough estimate.

It gives you some idea of the type of scale we are looking at adding over the next year.

So -- that's on a unit basis.

Okay.

So the expansion then, the chip expansion is basically just to feed the internal business, it's not really to sell externally in to the notebook and TV market?

Basically it will support internal but actually some of that capacity will absolutely help service some of our external customers only because it's complementary, right.

It's a great way for us to run a more balanced factory.

Primarily internal but there will be some benefit as well for external customers.

Okay.

Then are you guys looking at transition to 6-inch wafers from the 4-inch for next year?

I think that's a longer term goal but I think that 4-inch will be our primary platform here in the near term.

Thank you very much, that's all for now.

Sure.

Next question is from Jed Dorsheimer from Canaccord Adams.

Congratulations first off on managing a solid quarter and outlook, and thanks for taking my question.

No problem, Jed.

Just digging in to the capacity question in more detail.

Curious one, given that you have a proprietary process with the silicon carbide, are you looking at increasing the furnace capacity at this point?

At some point we will be expanding also the need to make more silicon carbide.

The good news is is that we made a fairly sizable investment a couple of years ago, Jed, so we have quite some capability.

The other thing is we have been continuously improving that process so we have been able to take our capacity and convert it from two to three and three to four and also find a way to get more product per system.

We've been doing lots of things from both a productivity and a yield standpoint and really be able to take the physical plant here and generate a lot more area with essentially the same resources.

All right.

And then I guess similar question on the reactor side.

It's been a little while, a few years I think, in terms of expansion on the reactor or chip side of the business.

Two questions there.

Any percentage of the CapEx that you could tie to that and then second question, would be, I assume this is all staying in North Carolina but I'd just like to clarify on that.

I can tell you that our Epi process is going to stay focused here in North Carolina for the foreseeable future.

I think that we have actually been investing in reactor technology and capacity here for actually over the past years.

You maybe don't see it, we don't necessarily break that out specifically, Jed, but we have been making some investments probably more than the market would perceive and we will continue to be making those investments.

We basically when we saw the demand start to come back we accelerate our investments there even into last fiscal year the last couple of quarters there.

It's probably not -- we're probably not very public about what we are doing but we've definitely been -- we have made investments over the last couple of years to increase our capacity and we have a plan to continue to do that over the next year or two.

And the -- I would assume then you've gone away from purchases from any of the traditional vendors out there in the market place, knowing that you've done a lot of modifications historically, when you did purchase from one of the two suppliers, is it safe to assume that you are -- are you building these essentially from ground up?

Jed, I can't answer how we are going about expanding our capacity, we view that as a bit of a trade secret in the industry.

We like to it be a mystery with everyone.

I would tell you, we maintain active relationships with most of the major reactor suppliers but we obviously as you know have a fairly proprietary view of how to do that process so you should assume we probably have a combination of relationships that are in place.

Understand.

Then you had mentioned the 4-inch conversion going better than expected.

Is it safe to assume sort of flat yields in terms of transition from 3 to 4 or just not as big of a drop as what you've seen in past transitions from I think the 2 to 3?

Actually in 4-inch, Jed, I think our yields were as good or better than on the 3-inch.

It's interesting as we go -- as we made this next size conversion I would say that although you always budget in the beginning some yield loss to get started I would say in this case where we are at 4-inch is as good or better than our 3-inch, so I think that's why you see us a little ahead of the curve.

I think our team internally was real excited about pushing 4-inch been harder.

They are obviously getting a secondary benefit.

That's helping on the capacity side.

Great.

Last question, for either you or John, just curious, decision to sort of roll the contract revenues in to -- the contract sales in to overall sales, why are you doing that at this point?

It's down to about $4 million a quarter, which is about 2% of revenue.

Most of it is powered RF related.

Instead of making it a mystery it's a function of power RF, there's a little bit of that that's LED related but it just didn't make sense that with revenues targeted to be in the 160 to 166 range, talking about $4 million is something that's really, especially with Power RF just felt real silly at this point.

Thank you.

Next question is from [Steve Plinovic] of Merrill Lynch.

How much of your business is from China?

Steve, I think, John, might have that number handy.

Do we know what it was?

It's going to be in the K coming up in the next week.

Roughly I want to say 25 to 30%, but we are going to give you a specific number here if John has got it handy or we can give that to you after, it's coming out in the K next week.

So I know we have it available somewhere.

Do you have a rough sense of how fast that's growing relative to the rest of the business?

I have not looked at it, like year-over-year, I think China probably grew a little faster than the rest of our business but I would say the two best markets for us from a -- LED components is the biggest driver of lighting driven, probably Asia was the biggest drive, and second was North America.

I don't have the breakout for you at this point.

Okay.

You indicated that your business is not so much export driven it's domestic economy, can you talk about how that is playing out right now?

I'm not sure I know where you are heading with that question.

In the past you've said that despite the economic recessions and so forth that China is less exposed to that because it's driven by domestic demand for the most part and I'm just curious given the kind of ups and downs of the Chinese economy how that is working?

I would tell you that the China economy had the least blip related to recession of any of our markets that we service.

I just spent a couple weeks in Asia and after spending a week in China, their economy on a domestic basis seems very healthy to me at this point.

I would say their investments and infrastructure building and those things frankly are, maybe not prerecession levels but definitely strengthened faster than any other market we are dealing with.

Okay.

Finally could you comment about some of these start up companies like Luminous and others who are targeting your marketing or trying to leapfrog or whatever I guess how seriously do you take some of those companies and did you see them at all in the market at this point?

We don't see any of those guys in the market at this point.

Luminous has been around for quite a few years..

They started out as LED chips for LCD projectors or something.

There is a bunch of other smaller companies.

I'll be real honest, Steve, at this point when it comes to lighting and driving that market, the people that we see are the (inaudible) we see Osram, we see Nachia and frankly, you could add everyone else up and they wouldn't add up.

They are pretty small rest of the players out there.

In lighting what we are finding in the lighting market specifically is it takes a pretty significant investment in channel in support and those things to really access that market and drive it.

Right now I always take new -- all competitors seriously, but a reality is we don't see much activity from those guys in our business on a day-to-day basis.

Thank you.

Next question is from Carter Shoop of Deutsche Bank.

Good afternoon guys and congratulations also on a good quarter.

First a clarification you talked about doubling capacity for components on a year-over-year basis are you talking about 4Q 2010 versus 4Q '09?

Are you talking about full year-over-year?

It was more of -- it's more meant to be a relative benchmark for you, I think what we will do is we'll probably from where we exited last year to where we exit next year, we will double it, will it be double for the year probably not far off, but again, those are some high level estimates at this point.

In regards to the amount of revenue you generated in fiscal quarter from the notebook and LCD TV back light unit, could you verify that as a percentage of sales or a percentage of the LED chip business?

Yes.

So if you look at application based notebook grew a little bit.

It grew last quarter relative to chips but it's still not even the biggest application there I don't believe.

In terms of the overall LED business lighting still dominated.

It was some incremental sales in Q4, it will be some additional incremental sales in Q1 but on a relative basis it's still if you just look at our business on an applications basis, I think notebook back lighting or back lighting is probably about the size of our mobile business at this point.

Still our business is primarily lighting first, the video screen business second and notebook has grown from essentially zero to be similar in size to mobile.

Those two are vying for the third and fourth place spots at this point.

That's helpful.

In the chip business can you comment on how long lead times got in fiscal Q4 compared to fiscal 3Q?

I'm not sure I got a good historical looking basis.

The best way to give it to you right now is where we are at today.

So most of the orders are booking onto the December quarter.

I think depending on the product line obviously in components we have to be careful there because you got some market segments that frankly are not designed to operate with really long lead times.

Obviously our distributors help cover parts of that.

In terms of chips, we're probably looking at lead times that are stretching out three months plus.

Maybe a quarter ago those were closer to one month.

Is that a correct--?

That's probably close.

I don't remember what they were a month ago, it definitely moved out.

It at least doubled.

How about that.

It probably wasn't one month.

I think we probably went from six to eight weeks to 12 plus, something like that.

That's helpful.

Can you help us what your distribution and technology license strategy is in Europe and how aggressive you can be on those two fronts over the next year?

Well, on distribution we have our same distributors we use everywhere else, so we basically work with Arrow, we have a set of regional distributors for Europe as well as then we really don't use WTI much there, it's really focused on those other guys, we also have direct sales capability.

That's how we approach the components business.

When it comes to the LED lighting business, we've partnered up with (inaudible) and they are really the primary driver in Europe for our LED system level products and that's arrangement where we provide products to them and they actually sell them on their brand and their Thorn brand in Europe.

That's gone real well.

In terms of licensing strategy I think that -- we've done a few license deals in the last year really in some areas that weren't completely -- I would say there are probably some tangential areas to our core technology.

I think there's definitely a lot of discussion about some of our Cree LED lighting systems level IP, whether it be color changing or wide IP or other things especially for the lighting fixture market.

At this point we don't have a formal strategy there, although I can tell you there is lots of discussion going on.

It's a stay tuned kind of discussions I would say at this point.

One last question for you.

When you think about the LED lighting revolution and your place in that market over the next couple of years, where do you see the biggest risk to the Company and to that theme, and is more risk from some of the incumbents on the (inaudible) and other technology side show some modest improvements, is it weak efficiency mandates by the federal government -- similar to wat we saw for fuel efficiency mandates associated with the Cash for Clunkers in the auto industry.

Possibly large (inaudible) companies like Samsung, getting involved in the market or is it something else that keeps you up at night?

The thing that keeps me up the most at night is we are still trying to take a technology that frankly, an industry is -- to an industry that's not used to new technology.

A huge amount of our effort -- one of the reasons we are making the big marketing and applications center investment is we have to spend more time and money to frankly help the lighting industry learn how to use an LED and be successful with it.

Because today some of things that happen frankly, make the product either less efficient more costly than it needs to be and I think we can play a role really with our channel and by investing on that side of it to where we can really help enable that industry.

That's part of it.

The other side is I think our product strategy needs to evolve to make them easier to use.

The entire LED industry still thinks about LEDs like we are semiconductor guys.

And the lighting industry thinks about them a little different.

We are looking at some ideas of how can we frankly make LED's easier to use.

We took a really low tech example last year, we came out with the MCLED, which is put four chips in to one package so they don't have to figure out to deal how to deal with the four and deal with the OpEx,we did it for the.

I think we need to look at some more things like that.

I think we need to look at some more things like that.

I worry more about us not pushing things we know fast enough and frankly losing the momentum in the industry.

We are going to have government regulation, it's never going to be as good as we want.

But frankly, we were trying to convert the market long before there were mandates around it.

Our issue is making it easier to use for the customer, building a channel that's better able to drive it and frankly continuing to make it more cost affective.

Those would be the three things.

That's very helpful.

Just a quick follow up in regards to making it easier for your customers to use your technology, is there any acquisitions that you are looking at to accelerate the easy to use therapy, driver company or someone else that would accelerate that development?

I think right now when it comes to drivers we think we can do that through cooperative efforts and really partner with a lot of people trying to help in that area.

I think it's more of a -- I don't know there is a great acquisition out there.

I will tell you we are always -- that would absolutely be something that we are going to think about and look at if there is a nice complementary piece to make it easier for the customer.

At the same time our primary focus in the short term is really on what we can do ourselves.

With the acquisition of LOF, we brought a lot of technology and knowhow in house, how do we leverage that to make it easier on our customers.

Thanks again.

Your next question comes from Ilya Grozovsky of Morgan Joseph.

Just a question on the linearity in the quarter.

Can you just talk about that a little bit?

You mean in Q4?

Yes.

So I would say Q4 started out a little better than normal and finished very linear.

So I would say that business has gone from one that over the last few previous quarters was probably more back end loaded to one that's become very linear at this point.

Do you expect that trend to continue in Q1?

Based on what we've been seeing Q1 it should, and obviously with the backlog we have it makes that a lot easier.

Thanks.

Sure.

Our final question is from Ramesh Misra with Brigantine Advisors.

Good job on the quarter.

First question related to your CapEx modulation, is there a target level utilization level that you plan on running the business at as you add up CapEx through the year?

Well, I think the answer is yes, we have models that we build around that.

The challenge we have right now is, is frankly you can tell from our own targets that the demand has picked up probably a little faster than even we were expecting a couple of months ago.

I think right now we are pushing up against the rate of expansion that we had built into the plan.

I would expect we are going to be running a little higher utilization in the next quarter or two.

We're obviously ramping up the capacity expansion.

I don't know that I have a great target for you just because things are moved a lot lately.

Ideally it's great we run it fully loaded.

But ideally we'd like to have a little bit of gap in there just to respond to customer needs and demands, but I think at least for the near term we are going to be running pretty close to the limit.

That's helpful.

Any updates on your work with LG at this point?

No real comment on that.

I can tell you obviously the whole back lighting market is pretty broad based.

We are actually servicing that through our most -- primarily through most of our traditional packaging companies and there then access in the panel guys, but no real update on specifically what we're doing with those guys at this point.

May I have one other one since that was so short?

I'm just trying to understand the relative slowness in the European market.

I would have thought that since them being more aggressive in relation to mercury contamination and stuff like that, I would have thought they would be more rapidly adopting LED back lighting.

I just wanted to get to your thoughts in the adoption process over there?

Two factors, one of them is a macro factor, if you -- right now in Europe it feels like they are having a delayed reaction to the recession that I think we haven't seen in other industries, so it feels like Europe is struggling generally with the recession more now than they were even at the beginning of it.

That's kind of a macro piece.

The other thing to keep in mind is there are two really big companies in Europe that sell a lot of CFLs that are in the lighting business that have a lot of influence on regulations and standards, I frankly think there was initially some resistance to allow the technology to happen so fast.

I don't know that they are there anymore.

In fact, I think that as those guys have increased their investment in LEDs they are becoming more proponents of the technology.

I frankly think it slowed it down a little bit for a period of time.

That's very helpful, guys, thanks very much.

Thank you.

This concludes the question-and-answer portion of today's call.

I will now turn the conference over to John Kurtzweil for closing remarks.

Thank you for your time.

We appreciate your interest and support, and look forward to reporting our first quarter of fiscal year 2010 results on October 20, 2009, good night.

Thank you.

This concludes today's conference you may now disconnect.