Wolfspeed Inc (WOLF) 2010 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Cree Incorporated fourth quarter 2010 fiscal 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).

I will now turn the call over to the Director of Investor Relations, Mr.

Raiford Garrabrant.

Thank you, Amanda, and good afternoon.

Welcome to Cree's fourth quarter fiscal 2010 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 2010.

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 under financial metrics posted in the Investor Relations section of our website at www.Cree.com, under FY2010 financial metrics.

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 the SEC filings noted in the release, mention important factors that could cause actual results to differ materially.

Also, we would like to note that we will be limiting our comments regarding Cree's fourth quarter fiscal year 2010 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 the 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 e-mail or phone at 919-287-7895.

We are also webcasting our conference call, and a replay will be available on our website through August 24, 2010.

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

Thank you, Raiford.

Fiscal 2010 was a record year for Cree, as the LED lighting revolution gained momentum.

Revenue increased 53% to $867 million, while non-GAAP earnings increased 203% to $179 million or $1.71 per diluted share.

For fiscal Q4, revenue increased 13% from Q3, to a record $265 million, and non-GAAP net income increased 17% sequentially to a record $60 million or $0.55 per diluted share.

Revenue was at the high end of our target range, while profits exceeded our targets for the quarter due to strong gross margins and favorable end of year tax adjustments that were partially offset by the [Newmark] patent litigation settlement.

The revenue growth in Q4 was driven primarily by strong growth in XLamp LED component sales for outdoor lighting and LED bulb applications, incremental growth in LED lighting products for indoor commercial applications, and incremental growth in power sales for solar inverter applications.

Non-GAAP gross margin was 50% in Q4, which was on the high end of our target range for the quarter of 48% plus or minus.

The gross margin was driven by several factors, continued strong execution in our factory ramp, and the benefits of higher volume and scale, better than forecast cost reductions due to higher yields, and continued improvement in our power and RF product lines.

Cash and investments increased to nearly $1.1 billion, and we remain in a strong position to continue to invest in our business, and lead the adoption of LED lighting.

We made good progress building momentum in our business, and delivering on our four key objectives for fiscal 2010.

We grew the LED lighting components business more than 100% year-over-year.

We further established our leadership in LED lighting, and disrupted the market with customer wins like Walmart.

We turned power and RF into a profitable and growing product line, and we increased non-GAAP operating profit 244% from fiscal 2009.

We have a solid order book for Q1, and are tracking ahead of last quarter's order level.

Demand for lighting-related products is targeted to grow double digits sequentially, driven by the US and Asia, while European demand is seasonally slow.

LED chip demand is down due to weakness in consumer related backlighting applications.

We see this as a short-term correction, and still believe the long term trend to LED backlit TVs will continue.

The capacity investments made in fiscal 2010 are allowing us to reduce LED lead times to more normal levels, and pursue near term opportunities more aggressively.

Sales through our distribution partners continued to grow, and channel inventories are at target levels in terms of days on hand.

I'll 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 2011.

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 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 on this call is posted on our website, as well as a historical summary of other key metrics.

For fiscal 2010, revenue increased 53% year-over-year to $867 million, as compared to $567 million for the prior year.

GAAP earnings were $152 million and $1.45 per diluted share for fiscal 2010, while non-GAAP earnings increased 203% year-over-year to $179 million and $1.71 per diluted share.

Non-GAAP earnings exclude $27 million of expense net of tax, or $0.26 per diluted share, from the amortization of acquired intangibles and stock based compensation expense.

Cash provided by operations was $251 million.

Free cash flow was $82 million, and we exited fiscal 2010 with $1.1 billion in cash and investments, while continuing to be debt free.

During fiscal 2010, we had two customers who represented greater than 10% of total Company revenue, both distributors.

Arrow Electronics at 19%, and World Peace at 11%.

For the fourth quarter of fiscal 2010, revenue was $264.6 million, which was at the high end of our targeted range of $255 million to $265 million.

This is a 13% increase sequentially, and 79% increase year-over-year.

GAAP net income was $52.8 million, an increase of 18% sequentially.

GAAP diluted earnings per share were $0.48, and exceeded our targeted range of $0.41 to $0.44.

On a non-GAAP basis, net income was $60.1 million and non-GAAP diluted earnings per share were $0.55, which exceeded our targeted range of $0.48 to $0.51, primarily due to higher gross margins and a lower tax rate.

Non-GAAP net income excludes $7.3 million of expense net of tax, or $0.07 per diluted share, from the amortization of acquired intangibles and stock based compensation expense.

We continued to strengthen our balance sheet, and ended the quarter with $1.1 billion in cash and investments, which has increased $75 million since the end of March.

Cash provided by operations was $94.9 million, which included $23.6 million of depreciation and amortization.

We spent $40.8 million on capital expenditures in Q4, which resulted in free cash flow of $54.2 million.

I will now provide more details on the results of the fourth quarter.

LED products revenue increased 13% sequentially to $240.1 million, while Power and RF revenues increased 10% sequentially to $24.5 million.

Q4 GAAP gross margin increased to 49.5%, while non-GAAP gross margin increased to 49.9%, which excludes stock based compensation of $1.1 million.

This was at the high end of our targeted non-GAAP range of 48% plus or minus.

The increase in gross margin versus our target was a result of several factors, including continued strong execution in our factory ramp along with the benefits of higher volume and scale, better than forecasted cost reductions due to higher yield, and continued improvement in our Power and RF product lines.

Operating expenses for Q4 were $62.5 million on a GAAP basis, and $53.9 million on a non-GAAP basis.

R&D was $0.8 million below our targeted spending, and SG&A expenditures were $5 million over our targeted range.

During the quarter, we settled the Newmark litigation, which resulted in higher SG&A expenditures.

The balance of SG&A expenditures were slightly below our target due to lower IP litigation costs and slower headcount additions.

Excluding legal costs, our core SG&A expenditures increased sequentially, as we continued hiring to support the growth of the business.

Non-GAAP operating expenses exclude approximately $5.6 million of stock based compensation expense, and $3 million of charges for amortization of acquired intangibles.

Our Q4 GAAP operating margin increased 170 basis points sequentially to 25.9%, and non-GAAP operating margin increased sequentially to 29.6%.

Net interest income and other for Q4 was $1.8 million.

The effective tax rate for the quarter was 24.9%, and for the fiscal year was 25.9%.

Days sales outstanding were 40 days as compared to 48 at the end of March, as we continued to benefit from very linear shipments throughout the quarter.

Net accounts receivable decreased by $8.3 million to $117.5 million, as revenue increased $30.5 million.

We targeted DSO to move back towards the upper 40s over the next two quarters, as we move back into a more typical shipment pattern.

Inventory days on hand were 76 days, as compared to 79 days at the end of March.

Net inventory increased by $5.2 million to $112.2 million during the quarter, and finished goods inventory accounted for half this increase.

We target our days of inventory to increase slightly going forward, closer to the upper 70s, as we build WIP and finished goods inventory to respond more quickly to customers' needs.

For fiscal 2010, we authorized capital additions at the high end of our range of $240 million to $260 million.

From a cash flow standpoint, capital additions were $168 million in fiscal 2010, with the balance of the equipment that was ordered targeted to arrive, and be installed and qualified, in the first half of fiscal 2011.

Please note this difference from when capital is authorized and when it is received, qualified, and ultimately paid for.

Our capital authorization target for fiscal 2011 is approximately $300 million to support targeted growth in LED lighting applications, by more than doubling our LED XLamp capacity by the end of the fiscal year, support the initial capacity to develop and qualify our 150-millimeter LED products, and position the factory to support additional growth in fiscal 2012.

At this time, we target Q1 revenue to be in a range of $270 million to $280 million, as growth in LED lighting related products is partially offset by softer LED chip demand for consumer backlighting applications.

GAAP and non-GAAP gross margins are targeted to be 48% to 49%.

Our GAAP gross margin targets include stock based compensation expense of approximately $1 million, while our non-GAAP targets do not.

For operating expenses, we are targeting GAAP and non-GAAP R&D expenses to increase by approximately $3 million, while GAAP and non-GAAP SG&A expenses are targeted to decrease by approximately $6 million.

The R&D increase is primarily related to a significant ramp in our 150-millimeter development program, and several new LED component programs.

The decrease in SG&A is primarily due to lower anticipated legal costs, as a result of the settlement of the Newmark litigation.

If you exclude the change in legal costs, we anticipate increasing core SG&A spending as we continue to grow the business.

We target asset impairments to be approximately $0.5 million for the quarter, and our GAAP targets include approximately $8.7 million of non-cash stock based compensation, and $2.7 million of charges for amortization of acquired intangibles.

Interest income and other is targeted to be approximately $1.8 million.

We target our tax rate to be 25% next quarter and next year.

The decrease in the tax rate is primarily due to a higher percentage of profits targeted to be earned in lower tax jurisdictions, such as Asia.

GAAP net income for Q1 is targeted at $52 million to $56 million, and based on an estimated 110.2 million diluted shares outstanding, our GAAP EPS target is $0.48 to $0.51 per diluted share.

Non-GAAP net income is targeted to increase quarter-over-quarter to $62 million to $65 million, for a non-GAAP EPS target of $0.56 to $0.59 per diluted share.

Our non-GAAP EPS targets exclude amortization of acquired intangibles and non-cash stock based compensation in the amount of $0.08 per diluted share.

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

Thanks, John.

As we begin fiscal 2011, we are focused on four key areas to continue to drive our business in the year ahead.

Our first priority is to build on our leadership in LED lighting, and continue to challenge people's addiction to old energy wasting technologies.

We want to be a catalyst for LED lighting adoption by developing innovative LED components and lighting products that lead the market, and turn on new applications.

We are currently focused on getting the CR6 product, our new residential LED downlight, ramped up for a broad market release later this quarter.

The CR6 sets a new benchmark by providing the benefits of energy efficient non-toxic and long lasting LED performance at CFL downlight prices.

The CR6 product is also featured in our partnership with Habitat for Humanity, where we have committed to provide LED downlights for the kitchens of new Habitat homes built in the US over the next three years.

This program allows us to bring LED lighting to homeowners who can truly benefit from its long lifetime and low operating costs, and will also provide firsthand experience with LED lighting to the thousands of people involved in building these homes.

We are working at adding new channels to complement our existing commercial channels to make this product more readily available to consumers.

In fact, Home Depot just introduced online, the Echo Smart LED downlight, a store brand version of our CR6 downlight.

This product is scheduled to be in Home Depot stores nationwide later this Fall, and we see this as an important milestone in bringing high quality LED lighting to the consumer market.

Our second priority is to further enable lighting fixture companies to develop and introduce their own high quality LED system products to drive demand for LED components.

In fiscal 2011, we target increased spending to fund several approaches to try and accomplish this goal.

We need to continue to develop new, high performance LED components that improve the value proposition for LED lighting, and reduce the initial cost.

This includes higher performance versions of our existing XLamp products, new platforms like the XM family, and new products for specific lighting applications.

We have to make the customer's job easier with more highly integrated products like the new Easy White LMR4 LED module family that was announced last week, as well as new Easy White components for tight color bidding requirements.

We need to continue to expand our customer application support to provide more capabilities, and better serve a growing customer base.

Our third priority is to further invest in capacity expansion to drive scale and accelerate our transition to 150-millimeter wafer production.

We target to more than double XLamp LED component capacity as we exit fiscal 2011, and we are also putting in place the initial 150-millimeter capacity to start to develop and qualify the process.

R&D spending will increase to support this activity over the next year, and we believe this investment is critical to keep Cree at the forefront of the technology curve.

We target the first 150-millimeter products to be qualified by the end of the fiscal year, with the first production volumes to start in early fiscal 2012.

We are also adding new pilot production and testing capabilities to reduce the time to market for LED component and lighting system products.

Our fourth priority is to further develop our silicon carbide power product line, with investments in new products and capacity to drive growth.

We finished Q4 with another record quarter for silicon carbide Schottky diode sales, as we were able to make operational improvement to squeeze incremental capacity out of our existing tools, as we work to bring online new equipment later this fiscal year.

We target releasing our first silicon carbide switch product in the first half of fiscal 2011, which will be a significant milestone in the power market, and should expand the market opportunity for our products.

We continue to see growing demand for energy efficient power switching technology, and believe this product line is well positioned to grow over the next several years.

The LED industry continues to benefit from two large macro trends, LED backlighting for TV and LED adoption for general lighting.

At Cree, we benefit indirectly from the LED TV backlighting trend, as this drives overall LED demand, and provides incremental revenue opportunities for our LED chip product lines.

Although these consumer markets can sometimes be unpredictable from quarter to quarter, as we are seeing in Q1, we believe the long term trend is intact, and see further adoption over the next couple of years.

In terms of general lighting, we remain confident that we are in the early stages of broad adoption to LED lighting over the next 10 to 15 years.

This is a regional business that is not one application, but the combination of many different lighting applications, which each require unique solutions to specific lighting problems.

Our focus is to be the company that enables this market.

As we look ahead to Q1, demand looks solid across our LED component and lighting product lines, and we continue to invest in our factories to support the increased adoption of LED lighting.

We target Q1 revenue to increase to a range of $270 million to $280 million, led by double digit growth in LED components and lighting products, which is partially offset by lower LED chip sales for consumer backlighting applications, and Power and RF at similar levels due to capacity constraints.

Factory execution will continue to be an important factor to achieving our targets.

It is also critical that we continue to drive adoption for LED lighting at new customers, and for new applications to drive our growth in both the short and long term.

We target Q1 non-GAAP gross margins at 48% to 49%, as we look to maintain our recent gains but operate the factory at a more sustainable level of utilization.

We target increased investment in R&D to support new product development in LEDs, including 150-millimeter development, as well as increased spending in sales and marketing.

As a result, we target non-GAAP earnings in Q1 of $0.56 to $0.59 per diluted share.

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

Fiscal 2010 was a very successful year for Cree and the LED lighting revolution, but in the context of the overall lighting industry, we are still just getting started.

Consequently, there is both a tremendous opportunity, and a lot of challenges ahead of us.

As the leader in LED lighting, we have gotten the attention of both the industry and our competitors.

As a result, we need to stay focused on extending our leadership position, while we build the scale, cost structure and channels to win in the market longer term.

We will now take analyst questions.

(Operator Instructions).

Your first question comes from Steve Milunovich from Merrill Lynch.

Your line is open.

Great.

Thank you very much.

How are you doing, Chuck?

I'm doing great Steve.

So the margin is obviously very good.

It's hard to complain about this revenue but I think some people were expecting a little bit more particularly in the guidance.

Could you talk about what's going on at the top line?

Are you capacity constrained?

When are the new plants coming on, and I assume you are seeing an actual sequential decline in chip sales this quarter and the next quarter.

Yes, so obviously last quarters growth was quite robust, if you think about Q1 what you're looking at is double digit growth again in both LED components, and lighting so the lighting business continues to grow well both as a component and a system strategy.

The offsets coming really in the fact that in the chip business, while the core base chip business is doing fine what we're seeing is the incremental piece of the business which is really the strategy we laid out a year ago which is, if the demand is hot we'll go ahead and take some of that capacity and go ahead and service that market.

The backlighting side of it is down a little bit this quarter.

I don't think it's a long term trend.

I think from my standpoint, the core growth drivers are there in terms of lighting and we're seeing a little bit of chip adjustment.

The other challenge we have is that in Power and RF, we just don't have the capacity in the next couple quarters to grow that very much, so that business is going to stay in a similar range until we get new capacity online here, really probably third quarter of the fiscal year.

Could you talk a bit more about the new capacity?

Is it coming on about the same time in North Carolina and China?

Is it going to be a step function or pretty gradual?

So actually we have a plan to bring capacity down pretty much continuously throughout the year from an LED standpoint.

The Power and RF is more back loaded to the second half of the fiscal year.

That's really North Carolina-based capacity but in terms of the LED capacity, we're adding that both here in Durham and in China and it's really across the product line.

Okay, and finally could you talk about the percentage of business from China and specifically, what kind of growth are you seeing in street lights in China?

Yes, I would say that China continues to be about the same percentage as it has been the last couple of quarters.

It grew with the business overall and within that you really got to think about that business as both there's the China business for China and then there's the export.

We estimate that the China business is over half of it and that's really outdoor, probably street lighting is the single biggest application.

We continue to see additional adoption there, so we're actually, that's continued to grow.

It looks pretty good for this quarter as well so we remain optimistic that it's really an adoption argument of LED versus alternative technologies as they build out infrastructure within the China market.

Thank you.

Sure.

Your next question comes from the line of Chris Blansett at JPMorgan.

Your line is open.

Thanks, guys.

Chuck, I wanted to talk about what you said in your comments.

You mentioned that demand was strong and you had a solid book for the first fiscal quarter, but then you kind of mentioned that your lead times are coming in.

Could you kind of talk about that delta there?

Yes, so as we've been trying to get the lead times under better control the last couple of quarters, we finally I think we have our main runners in LED components into a more reasonable level.

We're probably somewhere in the six to eight week range depending on the products.

It doesn't mean we still have a few high end products that were out longer than that but that's really critical to start to meet customer needs.

It's pretty clear the lighting market does not expect even those are considered long lead times for them at this point, and so what I think we're seeing is that the order or the backlog is ahead of, is today ahead of where we were at this point last quarter, but the difference is because the lead times will come down, you're getting those orders a little bit later in the quarter, because the customer is responding to our lead times, so I think it's a pretty natural result of what we're doing, but I think we have to do it.

If we're going to drive this market we have to be able to respond to these projects as they come on line and get better lead deliveries than we had three to six months ago.

Second question I had was related to where you think your mix of revenue on the LED side was that you really went into general lighting even if you aggregate it between the chip and components business and where do you think that might end up at the end of this fiscal year?

Well so in terms of the LED business, general lighting obviously last year went through the 50% point, and it's obviously continues to grow as a percentage of the total.

I don't have a specific break out for you, but I would tell you last quarter, essentially all of the growth in the business that you see in the Q4 numbers is lighting-driven and I would imagine that will be the same case this quarter, so I would imagine by the end of the year, we're going to be looking at something probably in the 70% to 80% of the companies revenue or at least the LED revenue for sure and probably the companies revenue will be up over that two-thirds, three-quarter mark, somewhere in that range.

One last one for me.

In prior conversations and earnings calls you talked about supplying a light engine to the lighting market and with your modules business, you have the first kind of product that does that, so how does that product affect the margin profile for the Company?

Should we see good top line growth, maybe a little bit of margin impact?

How do we think about this, because it's a lot of pieces put together in assembly here?

And I would also tell you that's pretty early so that module product has been really out since the April/May time frame, we launched in Europe and then at the US in those lighting shows, and we're really just getting our customers to get their products out in the market and actually not just sample them, so I think we'll learn a lot more in the year ahead.

I would tell you that we do have a number of people that have put it in their slots.

The thing to keep in mind is the customers are typically going to be making fixtures, not retrofit products, so they're typically going to be focused ongoing out and winning new spec business or new designs, which is going to have a longer runway so in terms of its effect on the margins in the next year, probably pretty minimal because I don't think it's a large amount of revenue in 2011.

I think you'll see much of an impact in 2012 because that's cycle time to take a new lighting fixture product, get it released, get it out there, get it designed, and then start to drive some volume.

In terms of what its margin profile is, I think it will be in the range of what we're seeing across our LED businesses today.

I think we're to some extent, setting the model for what the value of those products are with our own systems business and I think it's up to us to figure out how to put the modules out there in a way that makes sense, both for us financially and for our customers and I feel like we'll be able to make that happen within our targeted range.

All right, thank you.

Sure.

Your next question comes from Stephen Chin at UBS.

Your line is open.

Thank you for answering my questions.

Just a quick question on the pricing trend for LEDs.

I was just wondering if you could give us a trend on how the pricing was in Q2 and how it looks in Q3 and then I have a follow-up.

Yes, I would tell you that you have to break that out into two pieces.

If you look at the LED business related to lighting so components and lighting systems and across that product line, it was pretty much the same trend that we saw Q1, Q2 as we're projecting into this quarter as well so that is a market that it's all about how do we as well as our competitors continue to come up with products that reduce the up front cost really to enable more adoption but I haven't seen a big shift there one way or another in the business at this point in time.

We're all trying to find a way to drive new applications and again no significant change.

At least not last quarter or as we target for this quarter.

Now when you look at outside that, when you look at the chip business, the chip business was followed a pretty traditional trend in Q2.

The difference in Q3 is that for the incremental piece of that business, so remember there's a base chip business and then there's kind of this opportunistic incremental piece that's really focused on servicing some of these backlighting markets.

That's the part that's going to fluctuate with the market and I can tell you as the demand has reduced there, that probably has had the most price erosion but again it's a fairly small piece of the total and that's why you see the overall targets not changing dramatically in terms of margin or otherwise.

That's helpful, thank you.

Sure.

Just the follow-up was on the CR6 product.

You said you will introduce later this fiscal year.

I'm just trying to figure out what kind of gross margin should we think about for that product line?

That product should be similar to our other lighting products so it should be within the normal realm of that product line and I want to clarify, the CR6 is Cree's downlight.

There is a version of that product that is slightly different that is released as of now online through Home Depot under the EcoSmart brand so it's really two products.

There's The Home Depot version which they have started selling and the CR6 will be the version we will sell-through our own channels.

Thank you.

Your next question comes from Dale Pfau of Cantor Fitzgerald.

Your line is open.

Good afternoon.

Congratulations and nice quarter, gentlemen.

Thanks, Dale.

A couple of questions here.

You mentioned you felt your backlog was as good as it was at this period last quarter, but yet this is mitigated a little bit by softness in Europe, and this chip business.

Can you make up for those two, Chuck, in your outlook here, and the softness in Europe, this is usually a seasonal kind of thing, and you see that generally pick up around September don't you?

Yes, so what I would tell you is that I think we've factored, we've taken into account the factors I talked about into the target so the target says that has adjusted for chips and for Europe.

In terms of Europe, Dale, this is classic slow quarter for us in components there.

I think that in terms of the basic trends there, we've continued to see increasing design activity.

We had a good year there overall, so I would expect that once we get everyone there back and operating in September, I'm optimistic that market will continue to grow in the year ahead.

And as far as your capacity coming online, were you a little constrained in the fourth quarter and how do you feel about your total manufacturing capacity, excluding power and RF in Q1?

Yes, so look, we continued to have capacity constraints on a number of products.

It's not on every product, but generally speaking we were still limited, although we did make some progress getting the lead times down, and that's been a big focus here over the last couple of quarters.

I think as we go into this quarter, let's say if last quarter, we operated near 100% utilization, my guess is this quarter, when I say a more sustainable level, it's still going to be high utilization.

My guess is we'll be able at least from a chip fab standpoint operate closer to that 90% range, which frankly, and I think you know this is a whole lot more sustainable way to manage the business and deal with product mix shifts and customer demand changes so that's kind of where we're thinking in the targets for Q1.

And one last question and I'll jump into queue.

How do you think you're sitting relative to market share in your component business, Chuck?

Oh, I feel like we've done well.

I think we have, I would, our best estimate is we performed with the market, if not a little bit better.

I think that, and again that's a broad statement.

I think you have to look at the applications we're strong in, and we continue to feel good about those and I think there's some for example, some of the linear lighting where we've never had a lot of that share that I think we're targeting, trying to make some progress there and the year ahead as well.

Great.

Thank you very much.

Sure.

Your next question comes from [Amiara Simmons] from Piper Jaffrey.

Your line is open.

Hi, Chuck, congratulations on a good quarter.

Most of my questions have been answered.

I guess focusing on the 150-millimeter trend initial qualification in this fiscal year, can you talk a little bit more about that?

How should we think about the effect on yield and gross margins?

What are you expecting, what are your targets there?

I know there was a meaningful improvement in yield and gross margins with the move to four inch, so as we get to six inch, how should we think about those metrics?

Yes, so the way to think about it is keep in mind, the way I would position 150 is we're making an investment this year to get it qualified but essentially, we're not building into the targets for this fiscal year.

150 being part of production, right?

So it's really an R&D development, get it ready for production for the fiscal year and you'll see that impact in 2012.

In terms of our expectations of what success looks like, I would target that by the time we get 150 ramped up, now maybe not in the very initial ramp, but once we get some reasonable volume shifted, we would target yields as good as we have today at 100-millimeter, if not better.

That's what we saw in the last transition, and I would expect once we get up the learning curve we'll see something similar there, and that's really just a function of, we're moving into more traditional equipment tool sets, very well proven and I think those will have an advantage to us from a fab standpoint.

The trick to that technology is everyone in the industry knows is really you have to develop the technology to get there first, frankly the fab parts of the engineering technology is the Epi technology that will be the trick.

Okay, thank you and then just one quick question on your sales break down by region.

What percentage of your sales were to the European region this quarter?

We didn't break it out by market I don't think.

My guess is that it's probably hasn't changed much.

China is the biggest, then the US and Europe is probably low double digits but I don't have that specific number in front of me.

If I may squeeze in one last one.

We recently heard some news about China potentially slowing in subsidies or changing its subsidies for outdoor lighting.

Can you comment on that a little bit, what are you hearing there?

I've read, I've actually read some of the same speculation.

I don't hear it directly from our team there as much as I read it in some of the speculation that you're probably reading as well.

At this point I would tell you that I think the driver that really, that we're watching is as long as, remember that there's a lot of infrastructure going in, in China and that the key for us is that LED lighting adoption continues to win an increasing share so we're still winning a very small percentage of the new projects so it's much more about making sure the LED value proposition wins share and look we'll have to deal with the overall market factors but if we keep driving share growth against conventional technology then I think we'll be successful and my sense is that we're still in a good position to do that.

What I see is a technology continues to be lower cost in a country that truly understands they've got an energy cost issue they've got to deal with, so I feel like I'm sure there will be some fluctuation in that market but we remain optimistic about China outdoor demand.

Just I'm actually in Shanghai right now, and last night when I came in it seemed like the whole city was lit up with lights so I was wondering how many of those lights were actually LED.

I would imagine a very small percentage today.

I mean for all of the success we're having, I think overall, LED lighting is still a very small percentage of the overall market, so that's why adoption is so important to understanding the demand versus just the total demand.

Great.

Thank you very much and congratulations.

Sure.

Thanks.

Your next question comes from [Andrew Hong] of Sterne Agee.

Your line is open.

Thank you.

So first I'm sorry if I missed this but did you have a comment on the utilization for the June quarter?

You know what, Andrew, we ran pretty much close to flat out so I would put it at approximately 100% is what I said earlier in one of my other answers to a question and my guess is this quarter and that's really a fab number and I think this quarter that will probably be closer to 90% plus or minus range.

Okay, and then second, can you explain in a little more detail how the cross-license agreement with Phillips will help accelerate the LED lighting market?

Yes, so I think if you look at the questions that were in the industry previously, there was Cree out talking about some of our IP and Phillips talking about theirs and I think there was some confusion in the market so I think what it says is one, we have to get a cross-license and it does two things.

It supports the strength of what we think both companies IP portfolios are but also tells the market that in terms from at least our two companies perspective, we're committed to providing products that don't have these issues so that they can go out and be successful in the market.

So I think it really just removes some of the doubts they may have had prior to that.

I see, okay.

And then next question, can you talk about your sales by end market and then specifically I'd like to know what general lighting is as a percentage of total sales and then maybe backlighting?

Yes, so backlighting is a very small percentage.

I would tell you that I don't have specific numbers, but I can get you kind of to there.

Lighting is well over half the LED business overall.

The next biggest market is either going to be, it kind of varies from quarter to quarter but it's between the automotive/transportation market and the video screen market, and then in fourth and fifth and this is a relatively small percentage of the total is both mobile and/or the LCD backlighting markets so they are incrementally interesting markets for us but they aren't the drivers to the overall business.

Within general lighting, what we saw last quarter was is that continue to see strength across the markets but probably the ones that we saw the most growth in would have been the outdoor segment and the vault segment.

Okay, and then I see that the CR6 or The Home Depot version of the CR6 is already on The Home Depot website, but you mentioned that the gross margins there are kind of in line with your fixtures business, so can you comment on the gross margins of the fixtures business?

Is it above or below the corporate average gross margin?

Yes, this has remained steady from the last couple quarters so components is a little above the corporate average and then followed by chips and the lighting systems is still a little bit below the corporate average but they are all kind of tracking together.

So just to clarify, chips is the chip business below the corporate average or in line with the corporate average?

I didn't answer that question.

I said it was between the two.

Okay, and then the last question.

It looks like World Peace is entering the 10% customer range for this quarter or for this fiscal year, so is World Peace selling just XLamps or lighting components or how would you characterize that?

They sell LED components primarily XLamp but they also have at least in some Markets they are selling our high brightness component.

Thanks a lot.

And really Aero's primarily selling LED components as well.

Really those are both component customers.

Got it.

Okay, thanks.

Sure.

Your next question comes from Harsh Kumar at Morgan Keegan.

Your line is open.

Hi guys, a couple of questions.

Want to get more into your LED business guidance for next quarter.

I want to understand the impact that maybe the weakness in Europe that you talked about, Chuck, versus what's going on in the backlighting.

Which one is a bigger factor for you for the September quarter?

Yes, so Europe is just not growing, right?

It's seasonally slower but it's not like it's going down.

It's really chips is actually declining, which is offsetting the double digit growth in the lighting products.

When I say lighting products, I mean both our LED components as well as the actual lighting systems business.

Okay, so backlighting is relatively, you said it's a small percentage.

It doesn't look like that's a big factor for September?

Well, it's a small percentage of the total but it's going down so I think it is affecting the overall numbers so we're having to offset that negative with the positive growth in the LED component side of the business, so really you have double digit on one side and you have a negative on the other and that's how we're getting to our targets.

I got you and your gross margin, you're running, you ran just flat out 100% and you're going to be at 90 plus you're adding a bunch of new capacity.

What would be, Chuck if I was to think about gross margins, what would be the new normal for Cree for gross margins, just not even in the near term, but longer term.

Yes, we still have our long term model Harsh but I think it's going to be a function of really how fast is does the business grow, what happens on the lighting side of it in terms of adoption, right?

So we know the components has risen traditionally above the corporate average there and it's becoming a larger percentage.

At the same time we're running a little less utilization than in the past so if I had to guess obviously you have our targets for Q1.

They are in the 48% to 49% range and I think we'll, we probably won't be too far outside this range at least for the next quarter after that, but it's a little too early to give you any specific targets.

I think we'll see where that goes.

If we can continue to drive LED lighting adoption and grow that side of the business, then I think that continues to give us some levers there, but again, no targets yet for Q2 but hopefully that gives you a flavor for what we are thinking.

You guys have done a great job in the margins anyhow, and then last question is also sort of margin related.

Chuck, on your power and RF, I'm trying to get a point of reference maybe relative to corporate margins where that business is and how should we think about that business, let's just say when it settles down a little bit.

Is it above corporate or below corporate and how should we think about it?

It's actually very similar to the corporate average and that's how I think about it going forward.

Obviously it's a new product, so you can occasionally have a little bit of variable quarter to quarter but the expectation is that should run at these corporate levels here over the next year.

The key really there is we've got to get additional capacity online and enable it to grow a little more than we have.

So the other thing to keep in mind when you look at the targets that business is its growth really can't in the short-term so it affects the overall total percentage growth.

Okay guys.

Thank you, very helpful, thanks.

Sure.

Your next question comes from Lauren Stoller at Lazard Capital Markets.

Your line is open.

Hi, thanks for taking my question.

Most of my questions have been answered but maybe if you could touch again on the backlighting slowdown, what gives you the confidence that it's just a supply chain issue?

Well, basically what we're hearing from the customers.

The way to think about that is that we only participate within the chip business and it's this incremental kind of opportunistic piece of business, so when demand is strong we'll go ahead and utilize some of our capacity to go after that and demand adjust and then we'll let that happen.

It's not part of the long term strategy.

It's really a way to just run the fab utilization a little higher than it would otherwise normally be.

Based on what our customers are telling us and frankly what we can sense from the other suppliers in the market, it looks to us like you basically got the Supply Chain trying to balance inventory and demand here a little bit right now and I don't think the macro trend that's driving this, which is going to be the continued conversion of LED backlit TVs, I think that's intact so as long as that happens it may bounce around from quarter to quarter but I think as long as we're at a low level of adoption there and it's going to go to a higher one and I still think there's a lot of demand that will drive that market over the mid to longer term.

And you think this is going to last one to two quarters?

Boy, it's funny.

I'm not sure I don't know that I have a great guess there.

Right now it feels pretty short-term, but again it's a market that we are, it's really not what drives our business, so we're reacting a little bit with the supply and demand thing is out in the marketplace there, but my sense is that LED TV adoption converting to LED backlit TVs, that adoption curve will continue into next year, and so I think as that happens, I don't think this will continue for real long but at this point that's a guess.

There's no great visibility of that supply chain.

Okay, so it's not impact from a switchover to less LEDs per TV or anything like that?

That's not what we're seeing right now, no.

Okay, great.

Excellent execution.

Congratulations on the quarter.

Thanks.

The next question comes from Jed Dorsheimer at Canaccord.

Your line is open.

Hi, thanks.

Nice job on the quarter and thanks for taking my question.

Thanks, Jed.

Chuck, I think John mentioned that you're going to, that the budget is approved for basically a 2X capacity expansion of XLamp, and I think you also said that you're going to start the qualification process for the 150-millimeter.

Is the 150-millimeter at all in that 2X capacity expansion?

No.

So the way to think about that is the goal is actually to exit the year with more than 2X.

It's actually a little more than 2X XLamp year-over-year.

The 150 is kind of think about it as almost a parallel investment, Jed, that really is R&D in 2011 and that will turn into production capacity available for FY 2012 assuming we stay on schedule so now it's an R&D development project.

It will then turn into capacity that is part of actually will be the FY12 growth targets.

And do you think you would convert over your existing capacity by the end of 2012?

I don't know that it will go that fast.

That's always one of those things that's going to be a function of demand in the market and how quickly we need to move.

I think we're set up to do that so our 100-millimeter capacity can be converted to 150.

I think the idea now is let's get it processed fully developed and qualified, ready for production and I think we'll just manage that with what's going on in the market at the time but obviously that gives us additional capacity by converting the existing 100-millimeter toolset to continue to grow at least the chip capacity.

Great, and then assuming flat yields on the conversion, you would see a 2.3 increase of capacity from the 100 to 150; correct?

Yes, whatever the area there is.

I haven't done that number recently but whatever R squared gives you, you got it.

All right, and I assume that but I just want to ask, that the 150 is done on the silicon carbide process, correct?

Yes, what we were currently doing is we are developing it actually on both platforms but the plan is to ramp it into production right now in silicon carbide, although we have our parallel Sapphire program and I would expect the goal will be over time is to have, the goal is to be able to run it on both.

All right, and then any impact at all in terms of the MO sources?

I assume you have the longer term contracts but obviously we're seeing a tightness on the metal organics right now.

Any comments there?

Hasn't really, I've seen the same things but in terms of at least our supply chain, we've been able to manage that.

It hasn't affected us at this point and feel pretty good about how we're set up at least going into the next year.

Great.

And congrats on The Home Depot.

I'll jump back into the queue.

Thanks, Jed.

Your next question comes from Bill Ong at Merriman & Company.

Your line is open.

Yes, hi, good evening, gentlemen.

Given that your revenues came in at the high end of guidance and it sounds like if backlighting was strong you could perhaps beat your revenue by let's say a few million bucks, but since backlighting was a little soft is it safe to say general lighting had modest upside by let's say a few million dollars versus maybe a year ago we have a much more explosive growth in general lighting?

I don't know if I'd characterize it that way.

I think that I don't think there's, I think there is tremendous opportunity in the general lighting market.

I think we may be overreacting to two to three months trends here.

I think if you look at what we target for adoption, I think when you're in a small percentage of the market, we can continue to drive significant growth.

The exact timing of that is, as you know, pretty tricky because we're trying to take very large industry segments and one by one, show people LED lighting works, and start that process, so a year ago there was no real talk about an LED bulb and that's an application that's now turned on.

A year ago it was pretty much all about street lights so we keep coming after application by application.

It's really a function of when do we crossover those key cost points to start that conversion and then as that happens, that tends to feed more applications, so I think our Q1 targets are our best estimate but if you want to look out beyond that I really still think that LED lighting adoption for general illumination and various applications is the growth driver and look when you're in a couple percent of a market adoption rate for your technology and you think it's going up, then I think the upside is significant.

The timing of that is tough to understand and we've got to continue to execute to be successful there because it counts on new products, driving the cost down and all of the things we normally talk about.

Okay, thank you and then my last question is what's your planned depreciation schedule on your MOCV tools today versus say five years ago and 10 years ago and the reason I ask is whether or not the schedule accelerated which reflects the faster tool obsolescence or accelerated technology adoption so how would that have an impact on gross margins?

I don't know that we break out our specific schedule.

I can tell you we are probably already on the end of where we're probably depreciating as fast as anyone else is and is it different than 10 years ago?

Absolutely.

Is it different than five years ago?

Yes.

But I think right now we're in a position where we've been doing this a really long time and even with the changes I think if we look at our investments, I think we've got a pretty good understanding of how long these tools can last and I feel pretty good about where we're at.

And any numbers you could share maybe eight years ago, 10 years ago and maybe recently five years obsolescence?

Yes, we're not going to break out what the specific years are but I can tell you that over the last several years, they've been at a lower number for a while.

We probably started thinking about this problem at two inch.

We didn't just start getting there in other words.

We probably made these adjustments a while ago.

Okay, great.

Thank you very much gentlemen.

Your next question comes from Alex Gauna JMP Securities.

Your line is open.

Thanks very much for taking my question and nice quarter congratulations.

Thanks.

I was wondering, Chuck, if you could comment I know it's a market of opportunity for you, the backlighting portion of your business, but what do you think the risk is for those companies out there that it's a major part?

Can they try to dump product into the general lighting market or is that market a little bit more sensitive to quality?

Can you comment on that?

Yes, I don't see any significant short-term impact there.

What we're seeing in general lighting is so much of these applications is still about can I get enough lumens per watt to even make this thing work and I'll give you the simplest application, so everyone wants to talk about an LED bulb.

If you don't use at least high enough quality in terms of lumens per watt, it won't work.

There's only so much heat an LED bulb can dissipate and you can't just jam more low-efficiency LED's in there and make it work.

It will just fail, so when I look at the market that's probably the simplest example.

When you get into some of the other applications, you're talking about standards being set around the technology.

You're talking about, for example, a design cycle that it's probably a good 18 months in some cases three years from when you get a design out there to when it really starts to pick up traction in the marketplace, and that's just looking at our own history, so I think we should always take competition seriously and what people might do in the marketplace but in terms of what we've seen at least the behaviors in the market, I think general lighting is fairly slow to be able to move to new technologies, and I think at least at this point, the technology barriers are still relatively significant to even making these applications work.

And obviously that can change over time but I think that's where we're at, at least in the near term.

And getting to that a little deeper, my understanding from talking to some experts is that really you and Nichia are in a class by yourselves in terms of the lumen efficacy for general lighting.

Maybe Ozram an arguably competitively fast follower there.

Is that accurate in your opinion or would you say that there are others in that field that can compete with you?

You want to look at who is setting the standard in terms of efficacy I would say that in the power LED business, Cree, we've done a great job of that and I think if you look at our published results we continue to move that bar up.

I think when it comes to small LEDs, Nichia is also very good in that area and they probably continue to set the standard on small form factor LEDs and in between us we battle pretty good on trying to go at each others expertise.

I think when you look at the next tier, I think really I would put both Ozram and Phillips compete in that, I'll call that, fast follower category so they make products that can be used in these lighting applications, but they are kind of fast follower is probably as good a name as any, and I'd say there's a gap to the next level and that's what we see on a day-to-day basis competing for new designs, and it's going to vary by region as well, so different suppliers have different strengths in different regions.

Okay, last one if I could.

On the Power and RF front, you've gotten to $100 million run rate.

That strikes me as getting towards one of those critical mass areas, you mentioned getting into switching.

Can that portion of your business be almost what I call standard Semicon portion of your business, really mushroom from here and what are your engineers asking to try to do in that area?

Yes, so way to think about that is be careful that it's one business, right?

It is, it shares some technology platforms but they are two very different markets.

You have power which is really server power supplies driving efficiency and you have solar inverters and really being driven by one set of applications, and then you've got while it's a similar technology platform, quite a different market in RF driving those applications, and so they're both, so you have to think about the fact that the critical mass idea, while it applies internally, it also applies to how big you are in the market so I think we're getting there.

I think we still have a little work to do to build that critical mass and my guess is we're likely to see it empower first just because if I look at the applications we're winning in silicon carbides shocky diodes, they are really starting to become more mainstream volume applications and I think that's the one.

If we were going to see one start to get that traction it would be there first.

I still like RF, but I think that's going to take us a little longer to move out of the middle era and into the high end more commercial application.

Okay, thanks very much.

Congratulations again.

Sure.

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

Your line is now open.

First question on the cash on the balance sheet, over $1 billion in net cash now.

Can you highlight what some of your priorities are right now for deploying that cash?

Frankly the priority is mostly to continue to execute the plan, right?

Obviously we continue to invest capital at a fairly significant rate, we've also done a great job in the operating model, so we're able to fund that, and I think if you want to look at more strategic things, we keep our eyes open, what can we do to become more successful in driving LED lighting adoption, what can we do to push our leadership but right now, I'll be honest.

The near term focus is to continue to execute the plan.

There's driving LED lighting and growing the Company support, that is really where our near term focus is.

Okay, that's helpful and in regards to your distribution strategy, there's component distributors, World Peace and Aero are getting increasingly large.

Given that's such a large percentage of your sales are going through those channels would you be willing to break out what the ship in versus ship out is on a quarterly basis?

We're not planning on doing that right now but I can tell you that one of the things we are managing very closely is one of the reasons I comment on their inventory levels as well as to try to make sure we're balancing those two, so although we record revenue on a shift in we are very closely monitoring their sales as well as those inventory levels and feel like we're managing that within a pretty normal range right now.

Okay, last question.

On the inventory do you expect to be building in the September quarter, could you give us a break down in regards to what type of product that's going to be built?

Is it mostly chips or also XLamp and fixtures?

Yes, so it's going to be WIP which is everything from chips up through partially assembled products all the way up through the product line.

My guess is most of it will be either chip inventory to feed the XLamp line or it will actually be trying to get enough of the business filled with the XLamp inventory to be able to meet customer demand.

We're actually on a percentage basis, that number continues to shrink and its frankly made it pretty challenging to try to meet our delivery targets with these inventory levels.

Great.

That's helpful.

Congratulations on a nice quarter.

Thanks a lot, Carter.

Our last question comes from the line of Jiwon Lee from Sidoti & Company.

Your line is open.

Good afternoon.

Just two quick questions.

What was the rough sales to your top five customers in fiscal 2010?

We only have the two top 10 customers that are out there, we gave you Aero and World Peace.

We don't break out the rest of them.

Fair enough and what was the fixture sales as a percentage of sales in the last quarter and with the new capacity and the distribution, what's your expectation for that business in fiscal 2011?

Yes, we don't break out specific revenue but I can tell you the expectation is that we're targeting from quarter to quarter to try to continue to drive double digit growth.

Now it's starting at a small base but that would be kind of the rough expectation, is to try to get double digit growth there quarter to quarter.

Okay, thank you.

Sure.

There are no further questions at this time.

I'd like to turn the call back over to the presenters.

Thank you very much for your time today.

We appreciate your interest and support and look forward to reporting our first quarter fiscal year 2011 results on October 19.

Thank you and goodnight.

Thank you.

This concludes today's conference call.

You may now disconnect.