Wolfspeed Inc (WOLF) 2014 Q2 法說會逐字稿

Good afternoon.

My name is Sayed and I'll be your Conference Facilitator today.

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

fiscal year 2014 second-quarter financial results conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, January 21, 2014.

Thank you.

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

Mr. Garrabrant, you may begin your conference at this time.

Thank you, Sayed, and good afternoon.

Welcome to Cree's second-quarter fiscal 2014 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 of 919-287-7895 and we will be pleased to assist you.

Today Chuck Swoboda, our Chairman and CEO, and Mike McDevitt, our CFO, will report on our results for the second quarter of fiscal year 2014.

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

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 the revenue, gross margin and earnings, plans for new products and other forward-looking statements indicated by words like anticipate, expect, target and estimate.

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

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

Also we'd like to note that we will be limiting our comments regarding Cree's second quarter of fiscal year 2014 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 ask that analysts limit themselves to one question and one follow up.

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're also webcasting our conference call and a replay will be available on our website through February 4, 2014.

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

Thank you, Raiford.

Q2 was another strong quarter as revenue increased 6% sequentially to a record $415 million and non-GAAP net income increased 20% sequentially to $57 million, or $0.46 per diluted share.

Revenue and operating income were in line with our target range, net income was higher than our target range due to tax benefit from the recent 48C award.

The sales trends in Q2 were as follows.

Lighting sales were on the high end of our target range growing 17% sequentially to $174 million, driven by strong sales of LED fixtures and LED bulbs.

LED sales were on the lower end of our targets at $215 million and Power and RF sales were in line with our targets at $26 million.

Non-GAAP gross margin was 38.2% in Q2, which was within our target range for the quarter and reflects the higher mix of lighting sales.

On a segment level, we delivered good improvement in both lighting and Power and RF gross margin while LED gross margins were in a similar range as Q1.

Non-GAAP operating profit was $58 million in Q2, which is in line with our targets for the quarter, as the incremental gross profit from higher sales offset our increased investment in marketing to promote the LED bulb.

These results once again demonstrate our ability to leverage our technology to drive growth and continue to invest in building the Cree brand.

Cash and investments increased $96 million to $1.2 billion due to solid execution across the product lines.

Company backlog for Q3 is below this point last quarter, but in line with seasonal trends in LEDs and lighting.

We are forecasting lighting revenue in a similar range in Q3 as strong growth in fixtures is offset by lower LED bulb sales to our channel partner.

The fixture forecast is better than expected as the growth in new projects is more than offsetting the typical winter slowdown in outdoor lighting.

The current fixture forecast is somewhat backend loaded, which may push some demand into our fiscal Q4.

Consumer LED bulb demand remains strong and we target higher store sales in Q3.

However, our shipments are forecast to be lower as the channel reduces buffer stock levels to utilize the increased scale of our factory to respond to spikes in demand.

LED component demand is forecast to be lower in Q3 and in line with typical seasonal trends due to the Chinese New Year holiday.

As the leader in LED lighting, we continue to take advantage of the global shift to LED lighting and our strategy to use new product innovation to drive our growth by taking share from traditional technologies.

The lighting product line has continued to grow driven by both LED fixtures and LED bulbs.

Our LED component product line has also grown during the first half of fiscal 2014 and is enabling much of our success in LED lighting.

We are well positioned to continue growing this product line in calendar 2014 as LED adoption continues.

Our brand investments have already produced good results and we plan to continue to invest in this area.

I'll now turn the call over to Mike McDevitt to review our second quarter financial results in more detail, as well as our targets for the third quarter of fiscal 2014.

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 to the corresponding GAAP measures for all quarters mentioned on this call is posted on our website along with a historical summary of all other key metrics.

For the second quarter of fiscal 2014, revenue increased 6% sequentially to a record $415 million, which was on the high end of our targeted range of $400 million to $420 million.

GAAP earnings increased 17% sequentially to $36 million, or $0.29 per diluted share for the second quarter of fiscal 2014.

And non-GAAP earnings increased 20% sequentially to $57 million, or $0.46 per diluted share.

Non-GAAP earnings exclude $21 million of expense net of tax, or $0.17 per diluted share from the amortization of acquired intangibles and stock-based compensation.

Revenue and pretax income for were in line with our targeted ranges while GAAP and non-GAAP earnings per share exceeded the high end of our targets, primarily due to the catch-up tax benefit realized from our recent 48C award.

In November, we were notified of being awarded up to $30 million in Federal tax credits for qualified capital investment as part of Phase II of the American Recovery and Reinvestment Act of 2009.

As a result, we immediately earned credits on qualified investments we made beginning in fiscal 2013 year through the first quarter of fiscal 2014.

The earned tax credits will continue to benefit our tax rate through our fiscal 2018 year.

At the 23% tax rate in our guidance, non-GAAP EPS would have been $0.39, which was above the midpoint of our targeted range.

Q2 GAAP gross margins were 37.5% and non-GAAP gross margins were 38.2%, which excludes $2.8 million of stock-based compensation.

This was in line with our non-GAAP target of 38.5% plus or minus and reflects a higher lighting mix.

Fiscal 2014 second quarter revenue and gross profit for our reportable segments were as follows: LED products revenue was slightly lower sequentially at $215 million and gross profit decreased 4% to $98 million for a 45.4% gross margin.

Our Q2 LED gross margin was similar sequentially after excluding the higher licensing payments we received in Q1.

Lighting products revenue grew 17% sequentially to $174 million and gross profit grew 22% sequentially to $49 million for a 27.9% gross margin which was 100 basis point increase sequentially.

We had strong revenue growth in both LED fixtures and bulbs.

Gross profit and margin improvement was due to a combination of lower new cost products, cost reductions and higher factory utilization.

Power and RF products grew 5% sequentially to $26 million and gross profit grew 14% sequentially to $15 million for a 58% gross margin.

The revenue and gross profit growth were due to higher sales, cost reductions and product mix.

In determining gross profit for our segments, we do not allocate certain employee benefit costs, stock-based compensation and acquisition-related costs.

These non-allocated costs totaled $6 million for the second quarter of fiscal 2014 and are included to reconcile to our $156 million GAAP gross profit.

Operating expenses for Q2 were $120 million on a GAAP basis and $100 million on a non-GAAP basis, both of which were within our targeted range.

Non-GAAP operating expenses exclude approximately $13 million of stock-based compensation expense and $7 million of charges from amortization of acquired intangibles.

Net interest income and other for the quarter was $3.4 million.

Our Q2 GAAP and non-GAAP tax rate was 8% for the quarter which was less than our 23% target for Q2, primarily due to the cumulative tax benefit from our recent 48C award.

We ended the quarter with $1.2 billion in cash and investments, a $96 million increase sequentially which resulted from higher profitability, good working capital management and proceeds from common stock issued in connection with option exercises that was partially offset by capital spending.

For the quarter, cash from operations was $99 million and capital expenditures were $55 million, including $5 million related to patents, which resulted in free cash flow of $44 million.

Days sales outstanding were 46 days as compared to 48 days at the end of September.

Inventory days on hand remained unchanged at 81 days from the end of September.

Both metrics are in line with our target ranges of 50 days plus or minus for days sales outstanding and 80 days plus or minus for inventory days on hand.

Our December ending inventory includes increased raw materials and WIP to support our targeted lighting growth.

Property plant and equipment additions were $50 million in the second quarter.

For fiscal 2014, we have raised our target to approximately $145 million of property plant and equipment spending to support our new product priorities and provide incremental capacity as needed.

This increase is from -- this increase from the previous forecast is to make capacity investments to support forecasted growth in the business over the next year.

At this time we target Q3 revenue to be in a range of $390 million to $420 million, which is comprised of lighting sales similar to Q2 as fixture sales remain strong but are offset by lower LED bulb sales into our channel partner as they look to balance inventory levels, LED product sales seasonally down 5% to 7% due to Chinese New Year, and Power and RF sales similar to Q2.

We target Q3 non-GAAP gross margins to be 38.5% plus or minus and GAAP gross margins to be 37.7% plus or minus as we target incremental lighting gross margin improvement.

This Q3 target is based on a number of factors that could vary including overall demand, product mix, factory execution and the competitive environment.

Our GAAP gross margin targets include stock-based compensation expense of approximately $3.2 million while our non-GAAP targets do not.

We are targeting Q3 operating expenses to be flat sequentially.

Our GAAP operating expense targets include non-cash stock-based compensation expense of approximately $14 million and charges for amortization of acquired intangibles in the amount of $7 million.

Loss on disposal of assets is targeted to be similar to Q2.

Net interest income and other is targeted to approximately $3.4 million in Q3.

We target our tax rate to be 21% for Q3 and Q4.

The Q3 and Q4 targeted tax rate includes the benefit of our recent 48C award and the expiration of the US Research and Development Credit.

Our fiscal 2014 and quarterly tax rates will fluctuate based on our overall earnings, the tax jurisdictions in which the income is actually earned, the potential reinstatement of the US R&D tax credit and other tax benefits that may or may not become available to Cree in future periods.

GAAP net income for Q3 is targeted to be between $24 million to $32 million.

Based on an estimated 123.5 million diluted shares outstanding, our GAAP EPS target is between $0.19 to $0.26 per diluted share.

Non-GAAP net income is targeted to be $42 million and $51 million, or $0.34 to $0.41 per diluted share.

Our non-GAAP EPS target excludes amortization of acquired intangibles and non cash stock-based compensation in the amount of $0.15 per share.

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

Thanks, Mike.

We are focused on four priorities to drive our growth in fiscal 2014.

Our first priority is to continue to lead with innovation across our product lines and drive the cost parity with conventional technology.

In lighting, we continue to make great progress on both fixtures and bulbs.

Our new lighting fixture products continue to gain traction in the market which helped drive sales growth in the quarter.

We saw good sales growth in both indoor and outdoor, with the biggest gains in outdoor.

We introduced the LEDway HO series in Q2, which enables us to deliver more than 50% energy savings as compared to 400-watt HPS Roadway luminaires.

In the last week, we opened a whole new application to LED lighting with our CXB High-Bay luminaire.

This product eliminates the need for energy wasting, high maintenance fluorescent and HID High-Bay luminaires, cuts energy costs in half, nearly eliminates maintenance costs and pays for itself in less than three years with industry-leading lumen per dollar performance.

We continue to expand the LED bulb product line in Q2 with the introduction of the 75-watt warm and cool light replacement bulbs.

LED bulb sales to consumers doubled sequentially in Q2 driven by the fall lighting season, utility rebates, new products and increased marketing activities.

Please note that this is different than our sales or shipments to our retail partner, which grew, but at a lower rate.

We better understand consumer buying habits for LED bulbs with every passing week and it is clear that the two primary drivers are product quality and price with brand also becoming a more relevant buying criteria.

Product quality is a combination of the look, feel and performance of the LED bulb.

Based on consumer feedback and many third-party reviews, I think we have done a great job setting the standard in the market.

Price is the other important factor which is affected by our price to the retailer, their price to the consumer and utility rebates.

We know how to innovate and are developing lower cost next-generation bulbs.

We continue to work with our retail partner to test the price to consumers and the trade-off between volume and margin, and we've learned there is significantly more opportunity to drive LED adoption.

The other piece is rebates and we continue to work with utilities around the country to get rebate dollars assigned to the Cree LED bulbs.

While I'm confident we will continue to bring on new rebates in Q3, how much money will be available, the size of the rebates per bulb, and other products competing for utility dollars make this difficult to predict.

Our focus remains on product innovation to deliver generational improvement that enables new price points and additional marketing investment to generate more awareness than the Cree bulb -- that the Cree bulb pays for itself.

In LEDs, we continue to set a higher standard with new products like the higher output XLamp CXA products.

The two new XLamp LED arrays enable high lumen applications ranging from wall packs to canopy lighting.

The new CXA 3590 LED array delivers up to 68% more lumens than our previous brightest array and is designed to last twice as long and use 40% less power than current 250-watt metal halide fixtures.

We believe this product line is well positioned to continue growing with the growth in LED lighting.

In Power and RF, we continue to make incremental sales progress and win new designs that validate the benefit of silicon carbide for power application and gallium nitride for wireless.

While we've not yet uncovered a volume application to drive the next level of growth, the increased activity across a range of applications indicates we are on the right track.

Our second priority is to build the Cree brand and selling the Cree bulb is the foundation of our brand strategy.

Our brand strategy and marketing investment is unlike anything that has been done in lighting over the last several decades.

As I mentioned earlier, bulb sales to consumers doubled in Q2, so I think it is clear that this strategy is working.

Although the product has been more successful than either Cree or our partner would have predicted 10 months ago, this is an opportunity to go faster and not rest on our success.

With the new insight into price elasticity that we've gained from the rebate activity over the last few months, we plan to become more aggressive in the market.

This means leveraging LED bulb cost reductions to position the product line for new price points this spring, which we believe will drive increased sales volumes at margins similar to current levels.

We plan to continue to reinvest incremental bulb profits in marketing to further build the Cree brand.

Our partnership with the Home Depot has been very successful in changing the consumer LED lighting category and we look forward to continuing to work together to enable the next wave of adoption.

Q3 will be a transition quarter for LED bulbs as we work through the inventory rebalancing in the channel and position the product line to access a broader customer base.

Our third priority is to focus on select market segments where we can upgrade existing lighting and drive adoption.

We're making good progress on new focused applications like automotive dealership lighting where our products are able to deliver better quality light and significantly lower operating costs that pay for the cost of the upgrade in about 24 months.

We also continue to test some new channel approaches to engage lighting owners with complete solutions.

While we are still developing this activity, our initial test suggests there are significant opportunities available if we can simplify the process to convert to LED for current lighting owners.

Our fourth priority is to build on our new product momentum and continue to grow revenue and profits.

For the first half of fiscal 2014, we continue to demonstrate that we are on the right track with revenue up 22% from the first half of fiscal 2013 and non-GAAP operating profit up 38%, while making significant investment in the Cree brand.

As I mentioned earlier, Q3 total Company backlog is below this point last quarter, but in line with seasonal trends in LEDs and lighting.

We are targeting lighting revenue similar to Q2 as growth in fixtures is offset by lower LED bulb sales.

Factory utilization remains high and while we are expanding capacity, execution is a critical factor to supporting the higher targeted demand in lighting.

Our LED and lighting businesses continue to operate with short lead times, which adds variability to our forecast for the quarter.

Based on our current backlog, forecast and seasonal trends in the business, we are targeting Q3 revenue in a range of $390 million to $420 million, which is comprised of lighting sales similar to Q2 as growth in fixtures offset lower LED bulb sales to our channel partner, LED sales 5% to 7% lower and in line with seasonal trends, and Power and RF sales in a similar range of Q2.

We target non-GAAP gross margins to be slightly higher in Q3 at 38.5% plus or minus, as operational improvement and a more favorable lighting mix offset lower LED sales in the quarter.

We target non-GAAP operating expenses in a similar range in Q3, and as a result we target non-GAAP earnings of $0.34 to $0.41 per diluted share.

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

As a technology Company, we are passionate about fundamentally changing the customers' lighting experience for the better.

Our strategy is working.

The business is growing and we've made great initial progress building the Cree brand.

Looking beyond Q3, the trends in our business suggest that we are in a good position to grow LED fixtures, LED bulbs and LED components in fiscal Q4.

LED lighting remains a largely untapped opportunity and we plan to continue to make significant investments in new products, new channels and building the Cree brand to grow the Company as we remain focused on our long-term customer goal of 100% upgrade to LED lighting.

We will now take analyst questions.

(Operator Instructions)

Brian Lee, Goldman Sachs.

I had two.

First off, can you provide any updates on the consumer strategy as you near the end of exclusivity with Home Depot?

Is it fair to assume you're leaning toward re-upping with HD and if so would you anticipate similar terms for product placement and margins, and any color on that would be helpful?

Yes, Brian, what I can tell you at this point is that I would expect that we will continue to work with the Home Depot in the next year.

That has been obviously a very successful relationship and we look forward to continuing to work together.

With that being said, I think we'll also look at other complementary channels that really give us access maybe to customers that aren't typically in a Home Depot or in other places.

So I think we will look for some complementary pieces, but right now with the momentum we've had and the success over the last year it just seems to make the most sense that continue to work with them.

As far as the specific terms and how that will work, there's nothing I can give you specifically on that at this point.

Okay, fair enough.

And then my follow up was just on Chuck, your comments around Q3 being a transitional quarter for the bulb segment.

Can you quantify how much of an inventory rebalance needs to occur and whether that's all complete in Q3?

And also is there an actual product refresh that's going to happen in the spring or is it simply going to be a new pricing strategy?

Thanks.

Yes, I don't have a specific number for you but maybe I can give you a little bit more color on that, Brian.

It's a -- so the way to think about it is when we started out 10 months ago, we were launching a brand-new product for a new category and from Home Depot's perspective from a vendor they never worked with at this level.

So what we did is as we scaled of the business, in addition to what they would normally do they also carried what I would call a buffer or a strategic inventory.

Obviously the sales have grown pretty quickly and with the combination of that and rebates it was a little unpredictable.

So they carried inventory that the best way to describe is buffer.

At this point, we have scaled up our factory to a level where we can respond to that, so this is just a pretty logical next step in the process.

The other thing that's important and it gets to your second part of your question, is we, both Cree and the Home Depot, want to get to the right level there because we want to make sure that as we get cost reductions and bring those to the market, that together we can get them there sooner rather than having a lot of inventory between us and the customer.

So I still -- I also think it plays better for this idea of continuing innovation and continuing to move the market going forward.

Andrew Huang, Sterne, Agee.

So my first question is with respect to lighting.

Within lighting, I know you don't break it down between bulbs and fixtures, but my sense is that for the past few quarters the non-light bulb business has had some challenges.

And this quarter I think the sequential improvement in gross margins for lighting suggests that that business is finally coming back.

So can you talk generally about what's going on with the non-bulb business?

Yes, Andrew, so last quarter we obviously saw good growth in lighting overall.

There was growth in LED bulbs, but the majority of the growth was from the fixtures.

And really what you're seeing is we've been, over the last year we've done a lot of product innovation, and I think we're starting to see the benefit of having those products in the market for a few quarters having had a chance to get out there, get them bid on projects and just starting to see some of the fruits of that.

As well as the ongoing investment both in the high level brand, but also in the specific sales activities within Lighting.

So I think you're just -- I think you're starting to see some pay off in the investment we've been making over the last year plus.

Great.

And then my follow-on question is on the component side of the business.

So I know that for the past several quarters you've said that ASP pressure on components is better than last year, but still worse than normal which I think you've characterized as 25% historically.

So can you give us a feel for your outlook for ASP pressure on components for calendar 2014?

Andrew, what I would say is the last three, four quarters we've seen a similar what I would call a competitive environment.

Obviously not what it was a couple years ago, but still relatively competitive, and I would imagine that at least for the near term, that's what we would expect to continue, as well.

So I don't see a big change in that dynamic in either direction at least in the short term.

Paul Coster, JPMorgan.

Chuck, perhaps you could give us some sense of your capacity utilization both within the product area, but at the nearly the product area and in the lighting area both by bulb and fixture and whether you face any constraints in any of those segments?

Yes, Paul.

I would say that last quarter we were running pretty fully utilized, both in the LED chip components and the lighting segment.

Just a function of the growth in the lighting area and the bulb that's driving that.

And one of the reasons you saw in our targets that you see some incremental increase in our CapEx outlook is we have started to make some incremental investments to try to get a little bit ahead of the curve.

So I would imagine that we will be fairly -- I think we're in an okay position this quarter although I will say still the factories are pretty darn full with the growth in lighting that's targeted.

So it's an ongoing investment and execution will remain pretty darn important here for the foreseeable future.

Okay.

Against that backdrop, how much control do you actually have over the mix shift?

Because I think it's clear to everyone that your ability to maintain these gross margins implies, given the mix shift, that you have some control over that mix shift.

Are you talking about at a total Company level, or within the segment, Paul?

If you were just simply responding immediately to demand and your ability given the fact that you're operating at full capacity everywhere to control your gross margins would be compromised.

It seems to me that you are able to select where you deploy resources.

Yes.

So one way to think about it is that so there's really two pieces to that puzzle.

If you think about it in a -- at a total Company we have a mix shift between LEDs and lighting that's going on.

And then in our targets for Q3, you see what happens that even though lighting will grow fa -- and LEDs will be down a little bit, you see that the targets are still incrementally up.

That's mix shift within the lighting segment.

The LED piece, one of the ways that we've had I think more success is that one, we're pretty focused on what I would call the high-performance applications, whether it be our high-power products or our array products.

And if you just use our gross margins in our LED segment as a benchmark against what the rest of the industry talks about, I think we're in a different part of that market.

It also means we don't get in the middle of a lot of that really low end, what I would call very low price mid-power business.

But I think it's part of the reason why our mix is a little bit different.

And the challenge and the opportunity for us going forward is as lighting grows, is how do we continue to make incremental progress within lighting that we then are able to deliver the overall margins we're targeting?

Jed Dorsheimer, Canaccord.

Thanks for taking my question and congratulations on the quarter.

Thanks, Jed.

Maybe a follow up on that previous one, Chuck, to maybe take a slightly different angle at this, as 2014 starts to -- looks as if it's somewhat similar or shaping up like 2009, so if we look into the future a little bit, I want to try and get into the mindset is Paul was asking about your ability to control margins.

It would seem as if your focus is really on the goal of converting over to 100% LED, or said differently, socket focused in terms of going after these opportunities.

That should put you in a very good position in terms of having the upstream capacity where others are exposed to commodity price rises or leverage at the components.

Is that how we should look at that that we see more stable type margins for you but going after or enabling greater lighting adoption with your own socket penetration?

Yes that -- so Jed, I didn't appreciate Paul's question from that angle.

So, one of the things I think you're alluding to is that in a market dynamic where the LED is in over supply, there is a whole lot of flexibility to use supply and demand to your benefit.

But I think as you've seen in this business long enough, this is a semiconductor business, but at the end of the day LED is a semi.

And if you look at the lack of capacity investment in our industry in the last two plus years and you look at the growth, at some point I think we all know eventually there's a cycle that typically happens, and I think that's when you're talking about 2009; you're alluding to that.

I think it will give Cree, I think not just from a margin standpoint, from an ability to have a little bit more control over our own destiny in terms of also enabling next-generation products.

I think the benefit of that internal capacity plays for itself when you get to the other side of the semi-cycle.

So, I guess, yes, to some extent.

That being said, we're still coming out of such a competitive cycle, I'm going to be a little cautious that we get too -- get ahead of ourselves too quickly.

But as far as having seen these cycles before, there should be a semi-cycle coming that we're going to get a supply-demand dynamic that's different than what we've seen the past couple years.

Great.

Just as a follow up as you mentioned Home Depot and the renegotiations, as I go into -- it was interesting to actually go into a Home Depot store and see that the incandescents in this particular store were completely gone.

But as I look at the number of SKUs that -- of Cree products that are carried, it doesn't match up with the number of offerings that you have.

So is your goal to expand the product breadth that Cree now offers in some of the other channels at the Depot, in particular: MR16 and maybe some more of the commercial downlights?

Thanks.

Yes, so Jed, we obviously will look for other products that make sense in that channel.

But with that being said, I think the near-term focus is continuing to add what I would call the high runner bulbs is where our short-term focus is.

Part of -- with this goal of driving adoption, we know that those are the ones that move the market and really give us the ability to impact the consumer experience faster.

So we have definitely tested some other products with Home Depot, and we've done it actually in some other channels and I think we'll look for those opportunities.

But frankly right now, I still think there's additional bulb SKUs that are probably a little bit higher on the priority list in the near term.

Look, at the end of the day 40 and 60 are going to be the biggest volumes, that's the nature of the bulb business.

But there are still a few other ones out there I think that we can add to complement the category that maybe move the needle more in the near term and then we get to fixture proliferation maybe in the more of -- a little bit after that.

Brandon Heiken, Credit Suisse.

You guys made some comments about being impressed with the demand elasticity after the rebates in this past quarter.

I was wondering if you're able to quantify how much of the success in lighting in that quarter you would attribute to the rebates?

Yes.

So, if you look at the quarter obviously we saw a big jump, about double the sales from the previous quarter in terms of the units.

I'd say there's three factors.

So one, we shouldn't underestimate that it was lighting season.

So we know that in general the lighting category sees some uplift when you get into the fall and into the winter.

Second, we have a pretty big investment, really unlike what's been seen in the industry in a while in terms of promoting the bulb and the brand and those things.

So I think that has a factor.

And then the third piece is utility rebate.

And it's hard for me to tell you exactly which one of those -- I would say they were from our standpoint, they are all important.

What was interesting about the rebates though, is that with rebates you start to get a sense of where is consumer buying behaviors and what kind of price elasticity is out there as not just the products with rebates but the products themselves we start to achieve different price points in the future.

And I think that was the encouraging sign, that we can see even when the consumer still had the choice last quarter of still buying 40 to 60 incandescent, how many we could get to buy an LED bulb at different price points.

And I think that's what I'm trying to signal, is there's a -- I think we're encouraged that we have a sense of where those markets start to get to the next level in volume.

And it looks like you think OpEx may be flat here in the March quarter.

What do you think for the rest of the calendar year given your plans on the bulb advertising?

Look, I don't -- we don't have a full calendar year number right now.

I would say that this quarter we'll still be investing at a pretty good rate, similar to last quarter.

And then as we get ready for Q4, it's going to vary a little bit from quarter to quarter.

The timing of new opportunities to promote things and new products potentially could change the timing of that.

But overall I'd say that in the near term it's similar to what it is now.

And as the business would grow, one of my comments earlier is we would look to reinvest some of the incremental profits from higher bulb sales back into building the brand.

So the two working together as we go forward, but no specific numbers for you right now.

Thank you.

Edwin Mok, Needham.

Chuck, wanted to follow up a question regarding the light bulb you mentioned that you guys are looking at this different price points especially with the data you got from the rebate.

I was wondering does that mean that that's going to be focus, to see if you can develop a new bulb that can equal a lower price point?

And if you launch a new bulb, do you need to wait until you get energy star certified before you get the bulb actually out in the channel?

Yes, so look, there's really two things.

I think we want to test some incremental changes as we go forward.

And I think we'll do that.

And then, obviously, we continue to remain focused on can we develop a next-generation and a next-generation?

And the timing of that's always hard to predict, but we do think there are lots of things that can be done from an innovation standpoint over time to fundamentally lower the costs.

We're looking at both those things.

And the way to think about it, the bulb is a product, but at Cree it really represents an ability of us to engage the market and the consumer in a conversation about LED lighting that we couldn't ever do before.

So that's one of the benefits.

And then it is a brand strategy.

So we're going to think about the bulb a little bit differently, because it's really trying to accomplish, in addition to selling bulbs, it's really trying to accomplish those other strategic objectives.

I see, okay.

Great, that's helpful.

And then I when I look at your component side of the business you mentioned that you're running at pretty high capacity utilization and you're adding some capacity, right?

But did you have new capacity come online and more demand from fixture?

Wouldn't that still prevent your component business from growing much?

I imagine you extract more value by putting components into light fixture.

Am I thinking of it the right way?

It could -- if we -- if both businesses grew at the same time and we didn't plan ahead, you obviously could get into that situation.

I think the way we would think about it is is for us to continue to be successful in LEDs we have to have a serious commitment to that business, as well as to lighting.

And I think we look at lighting as a customer, but the LED business has a large range of customers that we have to deliver to.

So I think we look at those -- yes, you can make the argument that there is an internal synergy and why not get that benefit?

But that's pretty short term.

I think we would look at trying to balance between both of those and what we're trying to do from a capacity standpoint is enable growth in both of them.

Jeff Osborne, Stifel.

Two quick questions for me.

I was wondering, Chuck, if you can comment on the lower cost bulb in the spring.

Is it something you're doing on the chip side that drives the costs down or is it on a manufacturing location as you're sitting at a CapEx increase associated with bulb manufacturing capacity, was the first question.

The second question was just any thoughts on as you look to broaden the customer base, as the Home Depot exclusivity expires, with the recent passage of the omnibus bill overturning the incandescent bulb ban, is that impacting any of the negotiations or discussions you're having?

Yes.

So in terms of cost reductions, two things we're doing.

We are doing what I'll call incremental cost reductions.

Some of those are lower -- finding a way to get the LED costs down.

But also the rest of the bill of materials of the product.

So there are an ongoing effort to how can we re-optimize parts of the design and qualify new components, try different things.

And essentially not change the performance of the product so the customers' look and feel is really important to us.

But on the inside are there things that we can do?

So that would be one of the theories of things we're doing and that's more near term.

But we are looking at some generational improvements where hey, how would we deliver this value and maybe change a lot of the pieces at one time?

Where we manufacture, we will continue to look at that.

But given the amount of changes we continue to make, we don't think the slight incremental cost difference of building it in Durham actually hurts us in the long run because it allows us to go faster.

And until the designs become more stable and we'll run them the same one over time, if we were to transfer that somewhere else we'd be adding four to six weeks just of inventory to move things around and it would slow us down.

So I think for us this is more about innovation, redesigning the product, whether it be incremental innovation or really relooking at the whole design.

It's our key cost driver.

As far as broadening the customer base, and I'm trying to think, I think you were poking a little at the -- Mike where was he going with that, I just want to make sure I get it right here, Jeff.

It was on the omnibus spending bill that was signed on Friday that overturned George's 2007 law.

No, problem on that one.

So on that one, we doubled the bulb sales last quarter and there was no bulb ban.

And I think we did it because I think we're at the very early stages but we're actually proving to people that the old bulbs are a bad deal, that you can buy an LED bulb that has no compromise, your light quality is as good or better as what you had and it really does pay for itself.

And as we continue to make cost reduction, I think that's the key to driving the market.

There clearly is political things both sides of this.

Honestly it's a -- I think it's more political -- consumers are already speaking in terms of what we've seen in the growth and I think to us it's about more innovation to make that an even easier choice going forward.

Vishal Shah, Deutsche Bank.

This is Jerimiah Booream-Phelps on the line for Vishal, thanks for taking my question.

I was hoping you could speak to the utility rebates and specifically, how many you've seen, where they might be coming from and where they could be headed?

Yes, okay.

So utility rebates are a -- there is no one answer to that question.

Every utility is different and they all have different priorities.

And so it is an ongoing activity to work with utilities that range from the Northeast to the South, to the Midwest, to the West Coast and there's just each one has different priorities.

They have different pools of money.

The pools of money have different -- they come and go at different times and it's an ongoing effort and so you're constantly working with them.

What I would tell you today is that if there is a bias the Northeast and the West Coast really probably are the two best markets, but we've had success in other parts of the country.

And it's a -- the challenge there is that some rebate programs could last for two or four weeks.

Some could last longer.

Some -- they last as long as the money is there until it runs out and there may have been opportunity to renew it.

As far as the overall impact, what I would tell you is that on average it is a significant number of -- the way we think about it is a significant number of the Home Depot stores in the US have rebates, but it's less than half.

And that's the most clarity I can give you there.

So significant, but less than half.

Okay, that's helpful.

And then one other question on your tax rate going forward.

I believe you guided to 20%.

Is that indicative of where we could see this play out beyond next quarter?

What I guided to was 21% for Q3, Q4.

So I think it's representative for this year.

But as we go into FY 15 it's going to be dependent upon how fast we're growing, where we're growing, and some other things.

So I think near term, 21% is good.

Yes and the way to think about that is if it ends up being a lot of US growth that rate's going to probably creep up, and if we get more Asia growth or other places we could see some benefits.

It's really going to be a function of mix and where that growth is.

Craig Irwin, Wedbush.

Good evening and congratulations again on the quarter.

Thank you.

The first thing I wanted to ask about was the transition to 6-inch wafers.

Obviously you've made up a lot of progress there over the last several quarters.

Can you update us roughly on where you stand now and approximately how many quarters give or take it might be before this is complete?

Yes.

What I would tell you is that it is -- we are still executing to the plan to increase 150 each and every quarter.

It's definitely over half.

I don't have the specific number here in front of me.

So, I think we'll get some incremental benefit going forward, but we're past the halfway point and it is only one of the levers.

So it will get some benefit going forward, but it's also as much about other things we're doing to reduce cost and product innovation that are going to drive that, at least in the near to mid-term.

Great.

And then my follow-up question was about the tax rate.

I was hoping you might be able to get a little more granular with us.

The puts and takes around 48C, and then the R&D tax credit.

Can you give us an order of magnitude of the relative contribution of the R&D tax credit, as far as headwind offsetting some of the benefit from 48C?

And if the tax credit was to be reinstated, would that push us back to something closer to what we saw in this last quarter?

Let me give you the non-CFO answer and I'll let Mike jump in and see if I can get it right here.

The 48C last quarter -- the way to think about it is it's $0.39 without the 48C [40] -- it was [46] with the 48C and [39], did I get that right, Mike?

Yes.

All right, and so then going forward it's the 21% rate you got.

The R&D tax credit is something we're not getting right now and if it was reinstated it would be a benefit to us.

Did I get that correct, Mike?

Yes.

And as far as how to think about that going forward.

So I think the big thing going forward is for the R&D, it might be about another point as we go forward depending on when that happens.

When it happens there'll be a catch-up.

But right now the short way is what's the benefit left?

Q2 we guided to 23%.

And Q3, Q4 we're guiding 21%.

So effectively the ongoing benefit of the 48C and some other minor things is about 2 points.

Mehdi Hosseini, SIG.

Chuck, looking at the bigger picture, and then the problem that we're facing in the investment community is trying to have a better assessment of how you're going to be able to capture opportunities from LED lighting.

So to that extent, is there any metric or anything else you can provide us with having an ability to assess where overall FY14 or calendar year 2014 revenues or overall trend is going to look like?

And again, I'm trying to change the focus from modeling or estimating one quarter out to one or two years out given the secular trend in LEDs.

And I have a follow up.

Wow, that's -- it's a great question and it's one that's tough to answer because we're -- I think we all agree and we all know that we're really early stages of LED lighting adoption, whether you look at it from a fixture standpoint or you look at it from an LED bulb, we're in the very low percentages of what is a significant industry transition.

The rate and speed of that transition has been something I think we've all been trying to guess at for the last three or four years right now.

And what I would tell you is we see more adoption and the reason we believe there's more adoption is we can see what the new products do, we believe there's continued cost reductions and innovations that make it even more viable.

And so if the technology continues to become even more competitive against the incumbent, it should win more share.

And so there is growth but exactly how fast that turns on, you're talking about an industry with literally thousands of applications.

In terms of lighting fixture companies, it's a completely -- the markets are very regional.

It's just hard to give you any one number or benchmark, because it's not like trying to model a consumer market.

There's lots of moving pieces to the puzzle.

So the way I think about it is I don't try to figure out exactly what the size of the business is next year.

I try to work on the things that drive adoption.

And so far that's worked pretty well, and it takes care of itself as long as we continue to innovate and bring better products to market.

Sure.

But the problem I have with comparing this to 2009, or referring to the semiconductor cycle is your business success has changed, and now you're doing more LED lighting fixture and it's very different than semiconductor.

Now if let's say hypothetically if there was there were to be a shortage on the component side, how are you going to be able to prioritize servicing your component customers where you may get some pricing power back versus your general lighting, which is pretty much an industrial or commodity?

Can you help us understand how you're going to do that?

Yes.

So look, the 2009 is -- I think the reason that's an interesting analogy is that there has been an assumption in some parts of the markets that LED prices go down every year and people just keep adding capacity for no reason, which you study the business long enough, that's not been the nature of it.

It goes in cycles like a semi-part and what that'll do is it will affect LED costs and supply and demand and affect -- it will affect the market a bit when that happens.

For Cree that affects us two ways.

Obviously getting some pricing power back in the LED business will be healthy for Cree overall.

And having our own factory and capability to drive that gives us lots of flexibility to figure out what parts of the market we want to prioritize.

With that being said what I would tell you is you can't -- we're not going to try to be too shortsighted in that.

We're going to try to do things that are going to support our LED component customers because they're our customers and if you want to be a good -- if you want to have that business over the long run, you got to have a consistent approach to that market.

So I think we'll do that on one side and at the same time we're obviously going to use the fact that we have our own LED supply to make sure that our own lighting products get the benefit of not only the cost reduction, but the access to that technology.

So it's a balancing act but it's the nature of the business.

I think for us the challenge is making sure we're thinking out 6, 12 months 18 months and making sure our capacity planning is anticipating some of the things that could happen in the market.

Harsh Kumar, Stephens.

I had two questions.

Chuck, I wanted to shift gears a little bit and talk about the chip business.

I noticed that your chip business has been flattish since the June quarter of 2013, more or less flattish within $1 million.

And that's unlike the typical semiconductor seasonality.

I'm curious A, if you can explain that or B, if you're taking capacity away from that and diverting it towards the lighting business and if you can clarify that?

Yes, so Harsh, the first thing I'd say is I look at that more on a year-over-year basis.

There actually is growth there year over year.

So I'd be a little careful looking at that straight sequential.

And I don't know that I have the numbers, Mike you might have it.

It's up 11%.

So we're actually up 11% first six months versus first six months.

Also keep in mind that we are not trying to limit capacity of that business, but we are focused on certain segments.

So where Cree really participates in the components business is the high-power segment and what I'd call these array products.

So we're going to be more oriented towards the higher performance side and -- because we're going to try to focus on customers that see the value in what we do versus just chasing some of what I'll call the mid-power back lighting type applications that just don't add a lot of value to us.

But we are not changing our LED component sales strategy at all.

We're just focused on the applications that can drive it.

What you've seen if you take the six months growth, the 11% year over year that's actually a lot more on units but we continue to do things with SD3 to bring down the cost per lumen.

So what you're seeing is unit growth is being somewhat offset by the fact that there's ongoing cost reductions and that's what leads to the revenue growth you have seen.

But -- so a little different than in the past, Harsh, but I think if you step back a little bit, there is some decent growth there on a year-over-year basis.

Got you.

Thanks, Chuck, very helpful.

And then a statement you made somewhere in your commentary was, you tend to -- you intend to be somewhat aggressive on lighting.

Is that in reference, if you can clarify, in reference to your bulb strategy.

I.E., when you come out -- should we expect a different price point for the bulb soon?

Yes, so what I was talking about in that section was really about a little bit about bulbs.

And what we've learned is we have some better insight in the price elasticity, so what I want to really set the expectation is our goal is to drive adoption and expand the market.

And so I don't want to set the expectation we're going to sit back here and try to -- we're not satisfied with where we're at.

The point of this is to drive the market and drive the volume and so I think our -- my message to you is that we're going to continue to stay aggressive.

What it means is there will be over time some different price points in the market.

Not every product necessarily, but we will do things to essentially try to find those points where more volume can be turned on at the consumer level based on the price to them at the store.

And so we are -- so that's what I mean by that.

It's mostly bulb is what I was talking about.

But from a macro standpoint, we're still committed to doing product innovation across our lighting product line to deliver more lumens per dollar.

So that's a broad strategy but what I -- my specific comments were about the bulb.

Avinash Kant, D.A. Davidson.

The first question I had, Chuck, was do you see people buying fixtures from somebody else and then getting the lighting from you?

What percentage of your fixtures that you came with are the cross-pollination?

Yes so we don't -- we -- most of our fixtures are integral lighting.

And so it's not like the old days where you'd buy a fixture and you buy a separate light source.

Essentially what happens is our fixture business, these are integrated with LEDs in them.

So if you buy our fixture you get everything you need, it's an integrated LED light source.

And so there's really not a connection to the bulb.

The bulb is an opportunity to sell LED lighting to people who don't want to change their fixture.

And it's really focused on the consumer segment and really primarily today the vast majority of this is residential.

People put these in lamps and in the light fixtures in their house where they're less likely to do any type of a fixture upgrade, at least in the short term.

But in the industrial applications would you see people do the cross-pollination or that will still be the same like the consumer?

So in industrial what we're there selling is primarily integrated fixtures.

So I would say the majority of what we do there is you're buying the whole LED lighting fixture.

There wouldn't be a bulb required once you buy it.

With that being said, we do actually have some crossover products.

They're not bulbs, they're not fixtures.

For example, our UR Linear series that we introduced about 6 to 9 months ago is a retrofit product that allows someone to leave their existing fluorescent troffer in the ceiling and simply convert the driver and the LEDs.

And so there are crossover products that are in between, but there's really not a lot of -- once you buy an LED fixture from us, there would be no need to buy another light source.

Mark Heller, CLSA.

Chuck, I was wondering if you could give us a little bit more color on the bulb sell in for Cree.

I know you said that sounds like sales volume has doubled but was it up -- is there any type of number you can give in terms of was it up 20%, 30%, 50%, any type of color on that?

You mean how much we sold to the channel last quarter?

Right.

Yes, the only thing I can tell you, Mark is that we said out -- sales to consumers was double and I said while our sales increased to the channel it was less than what our sales out were, but I didn't break that out specifically.

Yes, the percentage increase was less and I didn't break that out.

Okay, got it.

And then my understanding is that most of Cree's fixture business is currently focused on the US North America market.

Is there any type of change in strategy that might be you guys are thinking about in terms of more international expansion for the fixture business?

Yes, it is definitely primarily a North American focused business today and that was on purpose.

We do have a Cree European headquarters based in Italy that does some fixture business, but it's a really smaller scale.

And as of right now, we focused most of the R&D on products that are really designed for North America.

I think we'll look at that as kind of a next phase over time.

The challenge for us has been do you keep trying to drive a market where you have all the rest of the investment or do you basically start to dilute that?

I don't think we're quite at the point where we want to go there yet, but I could imagine that over the next one to two years opening up some of these other markets will probably become a higher priority for us.

Thank you.

And now for closing remarks, I would like to hand the conference over to Mr. Mike McDevitt.

Thank you for your time today.

We appreciate your interest and support and look forward to reporting our third-quarter results on April 22.

Good night.

Good night.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes our program.

You may all disconnect, and have a wonderful day.