Wolfspeed Inc (WOLF) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cree FY14 fourth-quarter earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Raiford Garrabrant, Director of Investor Relations.

Thank you, Patrick, and good afternoon.

Welcome to Cree's fourth-quarter FY14 earnings conference call.

By now, you should've 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 Mike McDevitt, our CFO, will report on our results for the fourth quarter of FY14.

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 posted in the Investor Relations section of our website at www.cree.com under quarterly results in the financial information tab.

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

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

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

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

Also, we'd like to note that we'll be limiting our comments regarding Cree's fourth quarter of FY2014 to a discussion of the information included in our earnings release.

We will not be able to answer any questions that would involve providing additional financial information about the quarter beyond our 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 email or phone at 919-287-7895.

We are also webcasting our conference call, and the replay will be available on our website through August 26, 2014.

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

Thank you, Raiford.

FY14 was another great year as revenue increased 19% to a record $1.65 billion, and non-GAAP net income increased 31% to $203 million or $1.65 per diluted share.

All three product segments grew year-over-year led by 43% growth in lighting.

The growth in non-GAAP net income was driven by higher revenue and a 26% increase in non-GAAP operating income due to improved operating leverage across the business.

Cash and investments increased $139 million to $1.2 billion for the year, due to increased profitability and solid execution that more than offset $300 million in capital spending and share repurchases.

The combination of our earnings momentum and strong balance sheet continues to give us the ability to invest in growing our business and the flexibility to respond to new opportunities in the market.

Fiscal Q4 revenue increased 8% sequentially to a record $436 million with non-GAAP net income of $51 million or $0.42 per diluted share.

Revenue and non-GAAP earnings per share were within our target range for the quarter.

The sales trends for Q4 and FY14 were as follows.

Q4 lighting revenue increased 18% sequentially to $208 million, and increased 43% for the year to $706 million.

Q4 LED revenue was flat sequentially at $200 million and increased 4% of the year for $834 million, and Q4 power and RF revenue increased 4% sequentially to $28.6 million and increased 20% for the year to $108 million.

Q4 non-GAAP gross margin increased slightly to 37.9% which was on the high end of our target range for the quarter.

LED and power and RF margins were in line with their targets while lighting was slightly better due primarily to cost reductions and productivity improvements for LED fixtures.

Q4 non-GAAP operating margin was similar to Q3 at 13.1%, as operating expenses were on the upper end of our target range due to higher R&D spending to support increased development activities in both LEDs and lighting.

Company backlog for Q1 is slightly behind this point last quarter, due primarily to lower LED bookings.

Lighting and power and RF are on track for Q1 and despite the current booking trend in LEDs, we target overall growth in Q1.

We made great progress on all four of our key objectives for FY14.

We continue to lead with innovation across our product lines at drive closer to cost parity with conventional technology by delivering next-generation products that are 30% to 40% lower cost than the previous generation.

We demonstrated technology innovation that set new benchmarks for performance, such as the first 200 lumen per watt LED lighting system and the first 300 lumen per watt LED component.

We released breakthrough lighting products including this CXB High-Bay, OSQ parking, LED T8 replacement, and our SmartCast light fixtures.

The Cree bulb has become the best selling LED bulb in the US and established the Cree brand as the leader in LED consumer lighting.

We made good progress with focused effort on targeted applications like automotive dealership lighting, and we are building the capability to better serve existing lighting owners across a range of applications with complete solutions to upgrade their lighting.

We delivered good revenue growth and operating leverage for the year while making significant investments for the future.

We are well-positioned to continue growing our business in FY15 as LED adoption increases.

I will now turn the call over to Mike McDevitt to review our fourth quarter and year end financial results in more detail, as well is our targets for the first quarter of FY15.

Thank you, Chuck.

I'll be providing commentary on our financial statements on both the 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 other key metrics.

For FY14, revenue increased $262 million or 19% year-over-year to a record $1.65 billion.

GAAP earnings increased 43% year-over-year to $124 million and $1.01 per diluted share, and non-GAAP earnings increased 31% to $203 million and $1.65 per diluted share for FY14.

Non-GAAP earnings excludes $79 million of expense net of tax or $0.64 per diluted share from the cost of acquired intangibles and stock-based compensation.

FY14 revenue and gross profit for our reportable segments were as follows.

LED products revenue grew 4% to $834 million, and gross profit grew 11% to $381 million for a 45.7% gross margin, which was a 270-basis point increase year-over-year.

Our FY14 gross profit and margin growth was due to a combination of higher sales, lower cost new products, cost reduction, and higher factory utilization.

Lighting products revenue grew 43% to $706 million, and gross profit grew 32% to $197 million or a 27.9% gross margin.

We had some growth of both LED fixtures and LED bulbs.

Gross margin was lower year-over-year, due primarily to changes in product mix as we had a full year of lower margin LED bulb sales.

Power and RF products revenue grew 20% year-over-year to $108 million, and gross profit grew 26% year-over-year to $61 million for a 56.5% gross margin which was a 270-basis point increase year-over-year.

The gross profit and margin growth was due to a combination of higher sales, cost reductions, and higher factory utilization.

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 $20 million for FY14, and are included to reconcile to our $619 million GAAP gross profit.

For the year, while we invested $198 million in capital expenditures, and $100 million to repurchase Cree stock, we increased our cash and investments by $139 million to $1.2 billion.

Cash provided by operations was $319 million, and free cash flow was $121 million for the year.

For the fourth quarter of FY14, revenue increased 8% sequentially to a record $436 million, which was within our targeted range of $430 million to $460 million.

GAAP earnings increased 6% sequentially to $30 million or $0.24 per diluted share for the fourth quarter of FY14, and non-GAAP earnings increased 8% sequentially to $51 million or $0.42 per diluted share.

Non-GAAP earnings exclude $21 million of expense net of tax, or $0.18 per diluted share from the amortization of acquired intangibles, stock-based compensation, and the write-off of an acquired tradename.

Revenue, pretax income, and GAAP and non-GAAP earnings per share were all within our targeted ranges in the quarter.

Q4 GAAP gross margins were 37.2%, and non-GAAP gross margins were 37.9%, which excludes $3 million of stock-based compensation.

These were on the high end of our target ranges, as our lighting segment gross margin was slightly better than targeted.

FY14 fourth quarter revenue and gross profit for our reportable segments were as follows.

LED products revenue was flat to the third quarter at $200 million, and gross profit decreased 2% to $90.1 million for a 45.1% gross margin which was in line with our target for the quarter.

Lighting products revenue grew 18% sequentially to $208 million, and gross profit grew 25% to $60.6 million for a 29.1% gross margin, which was a 170-basis point increase quarter-over-quarter.

We had double-digit revenue growth for both LED fixtures and LED bulbs.

Gross profit margin growth was due primarily to cost reductions and productivity improvements for LED fixtures.

Power and RF products revenue grew 4% sequentially to $28.6 million, and gross profit grew 4% to $16.3 million for a 56.9% gross margin, which was similar to last quarter, in line with our target.

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 cost totaled $4.7 million for the fourth quarter of FY14, and are included to reconcile to our $162 million GAAP gross profit.

Operating expenses for Q4 were $130 million on a GAAP basis and $108 million on a non-GAAP basis, both of which were on the higher end of our targeted range.

Non-GAAP operating expenses exclude approximately $12 million of stock-based compensation expense, $7 million of charges for amortization of acquired intangibles, and $3 million for write-off of and acquired tradename.

Our non-GAAP operating income grew 7% sequentially to $57 million, and our operating margin was similar to Q3.

Net interest income and other for the quarter was $3.9 million.

Our Q4 GAAP and non-GAAP tax rate was 16.3% for the quarter, which was less than 21% target for Q4, primarily due to the impact of tax benefit true-ups for the year and the acquired tradename write-off in the quarter.

Day sales outstanding was 46 days as compared to 49 days at the end of March and in line with our 50-day plus or minus target range.

Inventory days on hand increased to 94 days, as compared to 89 days from the end of March, also in line with a 90-day plus or minus target range.

Our inventory growth is primarily due to the factory ramp to support our targeted lighting growth.

For the quarter, cash from operations was $91 million, and capital expenditures was $64 million including $5 million related to patents, which resulted in free cash flow of $27 million.

For FY15, we are targeting property plant and equipment spending to be similar to FY14 at $200 million plus or minus to support a new product priorities, provide incremental capacity, and add infrastructure to support longer-term forecasted growth.

The amount we invest will vary based on forecasted revenue demand and the degree to which we expand the use of third-party manufacturers to support our growth in lighting and LEDs.

Additionally, we entered into a $150 million unsecured revolving line of credit facility that our Board of Directors previously authorized the Company to secure.

As we announced back on May 8, 2014, this facility provides the Company short-term flexibility to optimize the net investment return on our cash and investments while funding working capital, capital expenditures, acquisitions, or other general corporate needs.

At this time, we target Q1 revenue to increase to a range of $440 million to $465 million, which is comprised of solid growth in lighting sales, LEDs' flat to single-digit growth, and single-digit growth for power and RF.

We target Q1 non-GAAP gross margin to be similar to Q4 at 37.5% plus or minus, and GAAP gross margins to be 36.9% plus or minus.

This Q1 target is based on a number of factors that could vary, including overall demand, product mix, factory execution, and a competitive environment.

Our GAAP gross margin targets include stock-based compensation expense of approximately $3 million, while our non-GAAP targets do not.

We're targeting Q1 operating expenses to be similar to Q4 as we start to see some incremental operating leverage from the investments we've been making over the last two years.

As a result, we target both GAAP and non-GAAP operating profit to grow faster than revenues sequentially.

Our GAAP operating expense targets include approximately $14 million of non-cash stock-based compensation expense and $6 million for amortization of acquired intangibles.

While some disposal of assets is targeted to be similar to Q4, net interest income and other is targeted be approximately $3.3 million for Q1.

We target our Q1 tax rate to be 21.5%.

The Q1 tax rate is higher than Q4 as we target a higher percentage of US earnings for FY15, due to a higher percentage of lighting sales and lower discrete tax benefits year-over-year.

As a reminder, our Q1 and FY15 tax rates will fluctuate based on our overall earnings, tax jurisdictions in which are 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 Q1 is targeted to be between $30 million to $37 million.

Based on an estimated 122 million diluted shares outstanding, our GAAP EPS target is between $0.25 to $0.30 per diluted share.

Non-GAAP net income is targeted to be between $48 million to $55 million, or $0.40 to $0.45 per diluted share.

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

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

Thanks, Mike.

We're focused on four priorities to drive our growth in FY15.

Our first priority is to drive innovation to lower upfront customer costs and further improve payback.

The LED lighting market has been enabled with tremendous innovation over the last decade with technology improvements in LEDs and LED lighting systems.

We see many applications today where LED lighting offers a clear payback over conventional lighting products, whether it is for new construction or for lighting retrofits installed in existing buildings.

Part of the challenge is to enable further growth is simply the time it takes to change old habits and build awareness for LED lighting, but we believe we can also accelerate adoption by continuing to innovate to lower the upfront costs and make the paybacks even more compelling.

This means LEDs and LED lighting systems designed for specific applications, with more lumens per watt and more lumens per dollar at the system level.

The same idea applies to our power and RF product line where today our technology has tremendous technical benefits but a higher upfront cost.

We need to continue to develop the next-generation devices that improve payback and expand the market for these products.

Our second priority is to continue to drive LED lighting growth and build the Cree brand, in both the consumer and commercial market.

We're targeting strong growth in both the LED fixture and LED bulb product lines, driven by the new products we released over the last year and continued innovation in the year ahead.

Consumer purchases of the Cree LED bulb were significantly higher year-over-year, but only slightly higher sequentially due to the traditional slower summer lighting sales trend.

We continue to innovate and add new bulb products as we prepare for targeted increased consumer demand in the fall lighting season.

We have made tremendous progress creating awareness for the Cree brand with consumers over the last year, and need to continue to drive awareness for Cree and LED lighting in the market.

Despite our success, much of our consumer research suggests that one of the challenges for LED bulb adoption is consumer apathy towards the lighting category, which we need to continue to address in our marketing.

We're also focused on extending our consumer brands success to the commercial markets.

Our third priority is to expand our work with third-party manufacturers to enable growth in LEDs and lighting.

These partners are a key piece of our growth strategy as they enable Cree's factories to focus on the newest technology that are not available in the market.

As we have said in the past, we see strong growth in LED lighting and believe this will drive growth in both high-power and mid-power LED-based lighting applications.

To serve growth in both these lighting markets, our internal LED chip team is focused on a high-performance high-power LED chip the differentiates Cree LEDs in the market, and we're working with LED chip partners on mid-power Sapphire LED chips.

In both cases, we currently utilize Cree packaging technology to meet our LED performance requirements for the lighting market.

We also have LED lighting manufacturing partners which are focused on building some of the higher volume products which gives us the flexibility to utilize our internal factory to support the many new product ramps and shorten the time to market for new technologies.

This approach gives Cree additional financial flexibility to optimize Cree's internal factory utilization and focus capital spending on higher value products.

We target expanding production at both our internal factories and manufacturing partners over the next year to better leverage our sales and brand investments to support the targeted growth in our Business.

Our fourth priority is to generate incremental operating margin to revenue growth and incremental operating leverage across the business.

We made good progress growing revenue and delivering operating leverage in FY14, and our goal is to do this again in FY15.

We target revenue growth of all three product segments with LED lighting being the biggest growth driver.

We target incremental revenue growth for LED components with our primary focus on high-power high-value applications but also some incremental revenue from lighting applications that are currently served by high-end mid-power LEDs.

We plan to continue to invest in R&D and SG&A to support our growth and other strategic initiatives, but not at the expense of operating margin improvement for the year.

Revenue is targeted to increase faster than OpEx as we start to get incremental benefit from the investments we have made over the last several years.

As I mentioned earlier, Q1 total Company backlog is slightly behind this point last quarter, due primarily to lower LED bookings.

Lighting and power and RF bookings are on track for Q1.

Our LED component customers and distributors continue to operate on short lead times, even though the merchant Sapphire LED chip market is reporting stronger demand and longer lead times.

We believe the increased demand is primarily driven by mid-power LEDs for consumer lighting and lower end indoor commercial, which is aligned with the trends we see in our own lighting business.

If this trend continues, it is possible this could benefit high-power LED demand and lead times at some point over the next several quarters, but there is likely to be a time lag based on lighting system design cycles.

Factory utilization remains high, and execution continues to be a critical factor to supporting the growth in all three product lines.

This adds variability to our forecast for the quarter.

Based on our current backlog forecast and trends in the business, we're targeting good Q1 revenue growth in a range of $440 million to $465 million which is comprised of solid growth in lighting sales, driven by strong growth in LED fixtures and LED bulbs in a similar range as in Q4, flat to slightly higher LED sales, and single-digit growth in power and RF sales.

We target non-GAAP gross margins to be similar to Q4 at 37.5% plus or minus, even with an increased lighting mix.

We also target non-GAAP operating expenses in a similar range as Q4 plus or minus.

As a result, we target incremental non-GAAP operating leverage in Q1 and higher operating margins.

Our tax rate is projected to increase to 21.5%, due primarily to the targeted increase percentage of US profits, and as a result, we target non-GAAP earnings in a range of $0.40 to $0.45 per diluted share.

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

As a technology Company, we remain focused on fundamentally changing the customers' lighting experience for the better.

To our customers, this means better light that pays for itself and makes it easier to switch to LED, which applies to both LEDs and LED lighting systems.

The strength of our operating model gives us the flexibility to make investments to support our goal to grow the business and increase operating margins.

Our new product pipeline, brand momentum, and strong balance sheet put us in a great position to enable our long-term customer goal of 100% upgrade to LED lighting.

We will now take analyst questions.

(Operator Instructions)

Your first question comes from the line of Brian Lee of Goldman Sachs.

Your line is open.

Hi, guys.

Thanks for taking the question.

First one I had was just around the near-term trends last quarter.

You mentioned backlog.

It was actually ahead of the same point versus the prior quarter, and this is the first time as I look at the model in two years that you're top line has come closer to the low-end versus the midpoint of the range.

I'm just wondering what transpired over the last two months of the quarter that you lost some momentum versus your outlook, and if the weakness was all concentrated in LED products?

Then had a follow-up.

Yes.

Brian, the weakness is LED-driven, at least what we saw last quarter.

As I said the revenue was relatively flat with the previous quarter.

At one point when we gave our targets, we would've expected there to be some incremental growth in that business.

As we said in April, we have very short lead times in that business which adds variability.

The other thing to give in mind is that at the high utilization rates that our factories are running because we had to give in mind that our internal lighting demand for has been going up, that high utilization limits our ability to react to some of the short lead time business in LEDs.

I think there's an incremental downside in the quarter from that as well.

I think those major factors is what's driving the business right now.

Given how we're positioned going forward, I still see good growth overall in LED lighting.

I think if this can be both mid-power and high-power-based growth, and the end of the day where we have the most of value is in high-power.

I think we're well-positioned to benefit as that part of the market grows.

We still believe that will happen here over the next year.

That's helpful.

Chuck, you mentioned the utilization rates may be impacting your ability to service shortly time demand, but if I look at the inventory days, they've been up here for about five straight quarters.

I know some of the driver, maybe the major driver, is in the lighting business.

Wouldn't that position you to be able to service some of that short lead time demand given the inventory build?

Also given the build, is there any risk that we should be budgeting for that?

This could actually impact your utilization rates in future quarters if the needed to start drawing down.

Thanks a lot, guys.

In the near-term I would expect the battery to remain highly utilized.

In terms of the inventory, if you look at where we came in last quarter, it was a little over 90 days.

Our target was 90 days plus or minus.

It's primarily lighting driven, so we're having to make the decisions of where to focus that capacity.

We've essentially been focusing, since we had better visibility to our own lighting business, that's where internal factory is focused so we have a build not only in lighting, but also in LEDs for those lighting customers which does inherently then, while inventory's going up, does limit our ability to react to some of the short-term demand in the external market.

We're trying to get that better balanced right now, but that's the nature of having a fairly long vertical supply chain within the Company.

Our next question comes from Vishal Shah with Deutsche Bank.

You line is open.

Hi.

Thanks for taking my question.

I just wanted to follow-up on the inventory situation.

If you look at where the target will be, if you consider the prior calls, you've made some comments about where you targets will be.

Can you update us as to how we should think about inventory levels on a go-forward basis with the new lighting mix?

Also considering the impact of some of the demand trends in lighting business, how should we think about the operating expense and operating leverage in 2015?

Can you assume similar leverage, or the leverage improvement in 2015?

Thank you.

On inventory, our target remains 90 days plus or minus.

I think you'll see some variation quarter-to-quarter as we ramp up factory product mix.

There's going to be some variation, but we still believe that's the right target for the business, even with an increasing mix of lighting.

Obviously, it adds some complexity to what we have to manage internally, but that remains our target.

In terms of OpEx and operating leverage with the growth in lighting, we believe that we are going to be able to grow revenue faster than operating expenses.

We have been making significant investments over the last several years, and we think that although we're going to continue to invest, there is an opportunity to start to get some benefit from the investments we have been making.

It's really a ratio of where we think that while we will invest the rate we'll be able to slow lower than revenue growth which gives us operating margin for the year.

Again, likely quarterly variation in our business if the mix changes, but if I look at the business year-over-year, our target or goal for the year is to actually increase operating leverage and operating margin percentage for the year.

Our next question comes from Jed Dorsheimer from Canaccord.

Hi.

Thanks for taking my question.

Chuck, I think you alluded to this, but I just wanted to confirm and maybe ask a different way.

The change in LED gross margin, it was down sequentially.

I'm wondering, is that attributable to a mix between merchant versus captive?

I know you were talking about your high utilization and your captive limiting some upside there.

More specific, I guess, is gross margin ticked down a direct function of that?

No, Jed.

Actually the LED margins came in very much about what we were planning for the quarter, and it's really a product mix related within the LED business.

It's not an internal chip versus external chip.

Mike, I don't know if there's any other color you had add to that?

No, that's the basic color there.

No, this is not a function of the use of Sapphire or not, at this point.

Okay.

Then as my follow-up, two parts to it, I know this is your year end, so would you be kind enough to provide Home Depot as a percentage of sales, or do we have to wait for the K?

Then my second part, Home Depot on the bulb imposed the cost down, or you agreed to the cost down in the March timeframe.

I think that was a headwind last quarter.

I'm just curious if had achieved that running change, and how much did that affect the margin increase in the lighting products business?

Yes, Jed, I think the way -- we have to wait until the K for you to see what the percentages of the 10% customers are.

That will obviously be in the Ks.

As far as Home Depot goes, that price change which was implemented in the springtime, by the way, we were a very willing to participant in that because we agreed it's one of the ways to drive the market, but with that price change, you saw the impact, a bit of a negative impact, from our Q3.

One of the reasons you see lighting margins getting better in Q4 is we have time to implement some of the cost reductions that we're anticipating.

Although, I would tell you that most of the margin benefit in the quarter was lighting fixture driven.

We did get the benefit of the time to work through the cost reductions that were planned on the bulb side.

Our next question comes from Edwin Mok with Needham and Company.

Hi.

Thanks for taking my questions.

First question, I want to dive into lighting revenue for the quarter and for your guidance.

On your comments, you mentioned that bulbs may be growing less than fixtures in the June quarter.

Can you confirm that?

On your guidance, I think you said you expect solid growth.

Is that in the similar trend for both fixture and light bulb, or do you expect light bulb growth necessary in the September quarter?

Let me see if I can help you out there.

What we broke out is, we don't give specific numbers, but what we said is that we had sequential growth in fixtures and bulbs in our fourth quarter.

For our Q1 targets, we're targeting bulbs to be relatively flat with Q4, and most of the growth in lighting to be coming from the fixture side of the business.

I see.

Okay, thanks for clarifying.

That's very helpful.

Then Chuck, going back to the margin discussion there as well, right, if I come back on your commentary on the light bulb, it sounds like you're fixture margin has been expanding over the last few quarters.

Is that mostly just coming from stable price [or] costs improvement?

Do you expect that trend to continue?

I think previously you guys were talking about fixtures can potentially be in the mid-30% gross margin.

Is that the target we should be shooting for in the next few quarters?

Any color you can provide on that?

Yes, so I think it's accurate to say the fixture business margins have been improving over the last few quarters.

I would say it's a combination of things.

As we release new products, I think we get the benefit of new products that are designed inherently to be lower costs.

I think we have a lot of cost reduction activities and a lot of productivity work within our factories to try to gain incremental cost leverage on our whole portfolio of products.

I think that's what's the biggest driver.

As far as going forward, we don't break out a specific target, but what I would say for the year, one of our goals would be to continue to increase fixture margins year-over-year.

Our goal is to continue to do things to improve those margins.

I think we don't want to break it out into specific quarterly targets, but on an annual basis that would be the right goal.

Our next question comes from Harsh Kumar with Stephens.

Hi, guys.

I just had a couple of quick questions.

First of all on the LED business, Chuck, it was up 4% year-over-year, and also it looks like it's flattish in September also June.

Those have traditionally been up quarters in that business.

I'm curious if you could shed some light on it?

Are you using more of your internal capacity in limiting the outside sale, or is there something else going on?

Yes, Harsh, what I would say is that there is some incremental business that when it's a short lead time market and utilization's high, we're not getting.

I don't believe that's a major driver.

I think what we're seeing in our LED business is we are primarily in the high-powered segment.

If you actually look at the commentary from other LED companies that are talking about high power, what we've actually seen recently that the positive growth signal we saw was merchant LED chip manufacturers who make Sapphire started to report higher utilization.

From what we see in our own lighting business and what we've read from other people, this is primarily being driven by consumer and low-end commercial markets.

I believe that is a near-term trend.

I think that over time, we will see growth both in high-power and mid-power, and frankly, our focus is on the high-power side because that's where we add value.

What we want to do is spend our time on LEDs that help make a difference in the customer, and frankly, that's also reflected in the profitability of that business for us.

Thanks for the color, Chuck.

As my follow-on, your OpEx will -- you said flattish in September.

Will -- is that the level, Mike or Chuck, that we should think about for the rest of the year?

Or just maybe some color on how we should think about OpEx for the rest of the year?

Think about as we will continue to invest.

There will be some growth throughout the year, but the goal for the year is to have revenue grow faster than OpEx.

We should be able to deliver for the year incremental operating margin improvement.

If you think about it, Harsh, this is similar to what we did last year.

What we accomplished in fiscal 2014, we have a goal to try to drive operating leverage again in 2015.

Our next question comes from Colin Rusch with Northland Capital.

Thanks so much.

Can you talk about your lighting fixture road map?

Areas that you're targeting as we look out over the next 12 to 24 months?

Yes, Colin, we don't break out specific products that we're working on, but what you should assume is that we compete in several market segments.

We have a fairly important outdoor lighting business that's both a street municipal lighting business.

We have, I would call an outdoor canopy parking garage business, and then in the indoor, we have these area lights as well as a downlight business.

If you look at those major fixture areas, we will continue to innovate next-generation products in those areas.

Those areas we want to continue to focus on.

In the last year, we added the industrial segment.

We came out with a High-Bay fixture.

We will look for incremental market opportunities, but I would say most of our effort is next-generation or products to better serve the markets we're already in.

Then the third piece to keep in mind is that within the lighting segment, we have the bulbs.

We have things like the T8 replacement lamp that just came out that really allows us to keep in the indoor space, but much more from a retrofit standpoint.

Then, the consumer bulbs are also something we can bring into the commercial market.

It's really where the bulbs are focused, and those five major areas is how I would think about the lighting market.

Potential to go after another segment, but we wouldn't want to put that out there until the time we're ready to announce that.

Can you just give us a sense of the T8 payback periods that you're seeing out there right now?

It's widely a function of where they're located and what they're replacing.

It's a function of electricity rates.

Here in North Carolina, it's going to be relatively long.

I think if you go to places where you have a T12 system that's up there today, or you have a higher electricity rate, we're seeing people in the two- to three-year range, I've seen numbers on.

It's a fairly rapid payback for a product that comes with a 10-year warranty.

Our next question comes from Sven Eenmaa of Stifel Nicolaus.

Yes.

Thanks for taking my question.

First, I wanted to ask in terms of the growth metrics in the current quarter, what is the growth in indoor versus outdoor applications?

We don't break out the growth in indoor versus outdoor.

What I can tell you is both segments grew the quarter, but I don't have the specifics for you.

Got it.

The second question I had is in terms of a cost margin dynamic from June quarter to September quarter, is that purely mix driven, or do you expect sequentially lower margins in one of the segments?

No, what really we were talking about is we're just looking at the fact that lighting will increase as a percentage of the total.

That's really the driver in those targets.

Our next question comes from Krish Sankar with Bank of America Merrill Lynch.

Hi.

Thanks for taking my question.

Chuck, my first question is a longer-term question.

You guys have done a great job on the high-power LED business.

If you look at longer term, and if there's more of the opportunity in indoor, is the industry moving towards medium-power?

If so, do you think it makes sense for you guys to have a footprint in that longer-term?

I also had a follow-up.

I don't think the industry is converging.

I think there are applications evolving on both sides.

I recognize that when the quarterly numbers move around, they vary between, we're really excited about high-power, and we're excited about mid-power.

While I understand that the reality is both applications I believe will grow over time, we're at relatively low adoption levels in all market segments.

I would expect we're going to see not only outdoor, but what I would call focused and directional lighting, which is very high-power centric, and then you're going to see the indoor/area lighting, which is going to be more mid-power centric.

There will clearly be crossovers in both segment, and I would expect both to grow over time.

We believe that we add value in the high-power, so that's why we want to focus there.

Frankly, when there's growth in mid-power, that's part of the reason for the increased emphasis on our partner strategy which is we can access the appropriate shifts in the market to service that as we need to.

I'd rather spend Cree's people assets and financial assets investing in the parts of the business where we add the most value and buy what we can for the rest of the market.

Got it.

That's very helpful.

As a follow-up, either for you or Mike, how much of your cash is on-shore?

Do you have any updated thoughts on M&A, in terms of does it make sense to look more vertical, horizontal?

Any of that would be helpful.

Thank you very much.

On the cash, most of our cash is on-shore.

It's accessible to us.

Then from a strategic opportunity, we evaluate opportunities but nothing specific to talk about at this time.

The way to think about what we would think strategically is we have a list of priorities the Company, and if we would look at something ideally it would somehow be focused on one of those priorities that we've already laid out for you.

(Operator Instructions)

Our next question comes from Mark Heller with CLSA.

Thanks for taking my question.

Chuck, a high level question, for the past I guess three fiscal years the Company has grown around 18%, 19% per year, top line.

I'm wondering, do you think there's an opportunity to grow the Company faster than that?

Are there any roadblocks to keeping the Company?

Now that we're getting to the inflection point for LED lighting, should the Company grow faster than what we've seen?

Mark, obviously over Cree's history we've seen years where we have grown faster than that.

It doesn't ever tend to work out to be quite as smooth as it looks.

Yes, I think there's opportunities.

At the same time, in many cases we're talking about scaling up a manufacturing business which is people-centric, which is there's inherent time constant to that.

I do think as we are able to build up our capabilities in terms of working with partners, that will give us some flexibility to enable our growth.

I think it's both a financial advantage to be able to put our asset on where we have the most value, but I also think it gives us some flexibility in terms of supporting growth by leveraging the activities of the partners.

I think in the mid to longer term, there's opportunities.

In the near term, there's a lot of piece by piece approach to the growth right now.

Okay.

Then back on the M&A theme, we've seen some consolidation within the components sector recently.

I'm just wondering what your view is on the merits of maybe acquiring another LED component company?

From Cree's standpoint, we're a bit uniquely positioned.

Obviously, we've always had a big focus on being vertically integrated, being a market leader driving innovation; I think that's worked out really well.

The most recent example, the LED bulb which the Cree bulb changed that market here in North America and gained momentum for the whole industry.

With that being said, I think we also see, as I laid out of my earlier comments, the opportunity to work with partners to access technologies that are, frankly, available in the marketplace.

We don't comment on specific ideas.

If we were going to do something, it would be more focused, I think, on our key priorities.

At this point, no specific insight to offer you other than that general view of the world.

Our next question comes from Paul Coster with JPMorgan.

Your line is open.

Thanks.

Chuck, I think we all agree that we're at an inflection point, and would be expecting this market to perhaps even accelerate at the moment.

You sound like you're just a little bit more cautious, and I can't quite figure out if it's to do with the fact that the mid-power LED guys have done a better job of ramping up supply and getting into your space, or whether it relates back to your prior comment earlier on in the presentation around doing a better job of reaching out and conveying the message.

Can you talk to us about all of those factors, and am I right in assuming that things have slowed a little bit relative to your expectations?

If you want to talk about the LED segment specifically, I think one of the things you have to unwrap is that what is happening in mid-power space in terms of the growth without profit.

What I'd say is if you look at that segment over the last couple of years, a lot of capital was invested.

There wasn't a lot of customers, and so those companies were willing to sell at extremely low margins and in many cases at a loss.

It created an artificial price value dynamic on the mid-power side which I think did a good job of actually getting some applications moving there.

I think high-power actually has been going first, and it actually stands on its own a little the better in terms of for the application.

We're trying to make money inventing and selling LEDs as well as helping our customer.

I think you had a slightly different dynamic there that's a function of semi-market cycles in supply and demand.

I think you look out over a longer period of time, there are merits in some applications to use high-power.

There are merits to use mid-power.

If you neutralize it to what short-term supply and demand/pricing dynamics are, I think we really will see both grow.

From a Cree standpoint, it would be great if high-power would grow faster, but I think we're still positioned in the best place to get a return on the investments we're making in terms of inventing products and getting paid for it in the marketplace.

So I like where we're at, it's just not giving some of the short-term growth that I think a lot of people had expected in LEDs.

Our strategy is enabling, I think, what continues to be a very successful lighting strategy.

I think we sometimes lose sight of the fact that this LED has enabled one of the more successful LED lighting businesses out there.

It helped us create a market and drive a lot of growth here over the last two years.

Okay.

You expect the market to come around to you in the high-power space in the next several quarters, I think you said.

What is it that you would be watching?

What's the proprietary lead indicators that you have that will give you the confidence that it's finally there?

It's not really coming around to us.

I expect them both to grow.

If I look at activity, the number of customers doing designs, the overall market adoption rates, I would expect the applications that are [tracked] -- primarily high-power based to grow over the next year.

I'd expect the applications that are mid-power, so I would think demand for both of those would grow.

On a quarter-by-quarter basis it's a little harder to predict that, but I would think we'll see both of that in the year ahead.

Our last question comes from Hans Mosesmann with Raymond James.

Your line is open.

Thanks.

Chuck, a couple of questions, can you give us a sense on the retail dynamic besides Home Depot?

Are you getting some new guys lined up?

I have a follow-up.

Our main focus is still with the Home Depot.

What we've found is that in the work we've done and others with Home Depot, they have really established a very successful LED lighting business.

That remains where the majority of our focus is.

We have looked at some complementary things.

We recently did bring on a small online partner that will access some different customers.

In terms of scale, Hans, Home Depot, their volume and their capability is just at a different level than what we're seeing in some of the complementary channels.

While we're going to develop them, the numbers are going to be driven by what we do there for now.

Okay, thanks.

Then for modeling purposes in how you guys look at the world going forward, what is the growth rate of the lighting industry from your perspective?

Hans, I don't have a great number for you right now because the lighting industry itself is not growing, at least not significantly.

It's LED lighting that's really growing.

Conventional lighting's shrinking, and the net result is some incremental growth.

As far as LED lighting goes, I don't have a good industry number because is really a function of applications.

What's happening in outdoor street versus canopy, those segments move differently than what we see, for example, in indoor [troughers].

Even there, there are different dynamics whether you're in a retrofit business, a low-end new construction, or high-end architectural.

I don't have a one good number for you.

I would say is they're moving at different rates in the grand scheme of things.

What we see overall is good growth pretty much across the segments.

In terms of timing quarter-to-quarter, it's very hard to predict right now because a lot of it is project based.

Thank you.

Our next question comes from Andrew Huang with Sterne Agee.

Thanks.

When I look at my model, LED components have been up sequential for the June quarter, I think, every year since 2007.

Normally, you should see a sequential improvement.

Maybe you could give us some additional color on what happened here.

Is it share loss?

Is it ASP pressure?

Or is it market shift to mid-power?

What I would say right now, Andrew, is that it's more of a market dynamic.

The high-power business is relatively flat.

I think you probably see that same dynamic in some of the other companies that have reported in this segment recently.

I think that high-power, we haven't seen the same kind of growth there recently, but again I think that is a timing dynamic.

I do think that we have seen mid-power have success in the consumer and the low-end commercial markets.

Frankly, that's not surprising, given that those markets are the ones those companies focus on with extremely aggressive pricing.

I think it works itself out over a longer period of time, but they're definitely short-term dynamics at work here.

The business is relatively flat with last quarter.

I still like how we're positioned because the goal here is not just to sell LEDs.

It's to actually sell LEDs and make some money.

I think what we've proven is that focusing where your products add value is a key long-term strategy.

Okay, and then here's my follow-up.

This is the first quarter in your history that lighting is bigger than components.

That may be a mixed blessing.

Should we assume that overall gross margin pressure for the overall Company is going to get worse going forward?

Or do you have enough cost on opportunities in lighting to offset that?

Andrew, I don't have a longer-term Company gross margin target for you.

I think lighting growing is actually, there's no mixed blessing.

That's a great thing.

We started out in this thing seven or eight years ago, trying to create in LED lighting business.

We've done, and it's quite successful.

I think we have to continue to do things to reduce cost in those product to hopefully add incremental cost leverage as that mix goes up.

I think if you look at what we did over the last year, we've been relatively successful.

There's clearly going to be quarterly variation, but I think that at least year-on-year, we can do things to make some incremental progress in lighting margins.

How that mix works out is going to be a little bit of function of demand, and I just don't have a good enough crystal ball right now to tell you how that mix shakes out.

At the end of the day though, our core goal is revenue growth in these market segments with operating profit growth that's at a faster rate.

I think if we do that, we're going to be successful at creating overall value for the business.

Your next question comes from Mike Ritzenthaler with Piper Jaffray.

Thanks.

Just one question for me that hadn't already been asked, on the cost reduction side of things, it sounds like a there is some positive impact of what you've been able to accomplish so far.

My question is, if you have a sense at this point of how much of that might be eaten up in the marketplace by erosion, price erosion, versus what's a little bit more sustainable?

I think there's a blended answer there.

We are always coming out with products that are fundamentally lower cost.

What we have primarily done until now in LED lighting is we generally pass most of that lower cost on to our customers in terms of lower price.

Our strategy going forward is as LED lighting becomes much closer to the conventional technology, it becomes more competitive, it's to make incremental progress in terms of gaining some incremental profit leverage there, but still doing things to open the market.

I think one of the challenges we have is, is that LED lighting is still pretty early stages and that we want to continue to be aggressive in terms of the driving market adoption.

I think we're still in a relatively low percentage adoption rate, and we still need to get the market to really make this crossover.

It is great that the business is growing, but the fact is the majority of lighting today is still not LED, the vast majority of it.

I think we still of some work to do, and we don't want to slow down the adoption rate while we have this momentum.

Thanks.

Our next question comes from Avinash Kant with DA Davidson & Company.

Good afternoon.

Just two questions actually, could you talk about your utilization of 6-inch wafers?

Where are you?

Are you 100% 6-inch by now?

150 mm is increasing every quarter.

We'll be about as close to 100%, as we're going to try to get to in a short-term by the end of the fiscal year, so there still are some incremental conversions going on.

What I would tell you, we'll keep some percentage of older products we won't bother to convert.

There just won't be a payback on that.

The primary cost leverage actually in the LED side now is not just conversion, but so much of it is new products and innovation and the cost of actually the process costs that is where we think the bigger leverage here is over the next year or two.

You mean end of fiscal year 2015, right?

Yes, end of fiscal 2015, we'll be mostly converted to 150 mm with a small percentage left on some of the older products just because we're not trying to convert them.

I would not overestimate that.

That is only one of many cost drivers in the business right now, I think it's important to note.

Could you give us the depreciation and amortization for the quarter?

Mike might have that.

I don't have that in front of me.

I don't have it off the top of my head.

We'll get back to you on it.

Ladies and gentlemen, this ends the Q&A session for today.

I'll turn it back to Mike McDevitt for closing remarks.

Thank you for your time today.

We appreciate your interest and support, and look forward to reporting our first quarter results on October 21.

Good night.

Good night.

Thank you.

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

This concludes the program.

You may all disconnect.