Wolfspeed Inc (WOLF) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cree Inc.

FY16 quarter one earnings conference call and webcast.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Raiford Garrabrant, Director of Investor Relations.

Please go ahead.

Thank you, Abigail, and good afternoon.

Welcome to Cree's first-quarter FY16 conference call.

Today, Chuck Swoboda, our Chairman and CEO, and Mike McDevitt, our CFO, will report on our results for the first quarter of FY16.

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.

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

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

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

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

Also, we'd like to note that we will be limiting our comments regarding Cree's first quarter of FY16 to a discussion of the information included in our press release.

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.

If you have additional questions, please contact us after the call by e-mail or phone at 919-287-7895.

We are also webcasting our conference call, and a replay will be available on a website through November 3. Now, I'd like to turn the call over to Chuck.

Thank you, Raiford.

Fiscal Q1 revenue increased 11% sequentially $425 million, which was on the higher end of our targets for the quarter, led by strong demand for commercial lighting, and a solid quarter for our LED business.

This resulted in a Q1 non-GAAP net income of $22 million or $0.21 per diluted share, which was in the middle of our targeted range for the quarter.

Q1 non-GAAP gross margin rebounded to 31.7%, due to improved margin in lighting and lower costs in LEDs, as we realized some of the initial benefits from the LED restructuring.

Lighting margins improved primarily due to improved factory execution.

LED margins also improved, driven by a combination of patent license income and lower costs in the quarter.

Power and RF margins were slightly lower due to mix, but within our targeted range.

The LED restructuring and factory consolidation remain on track with our previously announced plans, and should be completed by the end of fiscal Q2.

Company backlog for Q2 is slightly ahead of this point last quarter, and tracking to our targets for the quarter.

Our commercial lighting business continued to grow in Q1, and we made good initial progress with our plans to improve margins.

The LED business also made solid progress, as demand and pricing was in line with our targets for the quarter.

Wolfspeed, our recently-rebranded Power and RF division, is working through some near-term softness in the RF side of the business due to macro headwinds.

But we continue to build new design win momentum, which should drive good revenue growth in the second half of the year.

Overall, we are off to a solid start to achieving our goals in FY16.

I'll now turn the call over to Mike McDevitt to review our first-quarter financial results in more detail, as well as our targets for the second quarter of FY16.

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 an historical summary of all other key metrics.

For the first quarter of FY16, revenue increased 11% sequentially to $425 million, which was at the higher end of our targeted range of $410 million to $430 million.

Non-GAAP earnings were $22 million or $0.21 per share, and in the middle of our targeted range of $0.18 to $0.23 for the quarter.

We had a GAAP loss of $24 million or $0.23 per share, which was slightly above our targeted loss range of $0.16 to $0.21 for the quarter.

Non-GAAP earnings exclude $46 million of expense net of tax, or $0.44 per share from restructuring cost, amortization of acquired intangibles, asset retirement charges, net charges associated with our Lextar investment, and non-cash stock-based condensation.

Our Q1 non-GAAP adjustments were higher than targeted due to a larger decline in Lextar's share price for the quarter.

Regarding the restructuring of our LED business, we recognized $16 million of cost in the first quarter of FY16, for targeted factory capacity and overhead cost reductions.

These capacity and overhead charges are included in our GAAP results only.

We are targeting an additional $3 million of restructuring cost in our second quarter, as we complete our factory consolidation process.

This will bring our total LED restructuring charges to $102 million, which is in line with what we announced last quarter.

FY16 first-quarter revenue and gross profit for our reportable segments were as follows: lighting product revenue grew 8% sequentially to $248 million, and gross profit increased 21% sequentially to $69 million, for a 27.9% gross margin, which was a 310 basis point increase quarter-over-quarter.

LED products revenue increased 21% sequentially to $148 million, and gross profit increased to $53 million, for a 35.5% gross margin for the quarter.

Wolfspeed Power and RF products revenue declined 5% sequentially to $29 million, and gross profit declined 11% sequentially to $14 million, for a 49% gross margin for the quarter.

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

These non-allocated costs totaled $4 million for the first quarter of FY16, and are included to reconcile to our $132 million GAAP gross profit.

Q1 GAAP gross margins were 31%, and non-GAAP gross margin was 31.7%, which excludes $3 million of stock-based condensation.

Both our GAAP and non-GAAP gross margins were in line with our targets for the quarter.

Operating expenses for Q1 were $140 million on a GAAP basis, and $105 million on a non-GAAP basis, both of which were below our targeted range for the quarter, primarily due to lower than targeted IP litigation spending.

Non-GAAP operating expenses exclude approximately $16 million capacity and overhead restructuring charges, $12 million of stock-based competition expense, and $7 million of charges for amortization of acquired intangibles.

Our non-GAAP operating income was $29 million, and above the middle of our targeted range.

We have made progress towards our goal to deliver operating leverage, as operating income increased to 6.9% of revenue for the first quarter of FY16.

Our Q1 GAAP to non-GAAP tax rate was 25%, which was in line with our target for the quarter.

We ended the quarter with $632 million in cash and investments, an $81 million decrease sequentially.

The sequential decrease was primarily due to spending $70 million to repurchase 2.7 million Cree shares, $54 million of capital expenditures, and $13 million net to complete the acquisition of Arkansas Power Electronics International, Inc, which was partially offset by $47 million of cash provided from operations.

Free cash flow was a negative $7 million, and in line with our targets for the quarter.

For FY16, we are targeting property plant and equipment spending to be lower than FY15 at $150 million plus or minus, which will primarily occur in the first half of the fiscal year to complete certain existing infrastructure projects, and provide lighting and Wolfspeed incremental capacity as needed.

We continue to target approximately $85 million of free cash flow for FY16.

Additionally, we ended the quarter with $207 million outstanding on our line of credit.

Days sales outstanding was 41 days, as compared to 44 days at the end of June.

Inventory days on hand increased to 89 days, as compared to 83 days at the end of June.

This increase was primarily commercial lighting related, to support targeted growth, and is in line with our 90 day plus or minus target range.

At this time, we target Q2 revenue in a range of $425 million to $445 million, which is driven by growth in commercial lighting.

We target Q2 non-GAAP gross margins to be similar to Q1 at 31.7% plus or minus, and non-GAAP gross margins to be 30.9% plus or minus.

We target incremental gross margin improvement in each of our product areas, however this will be offset by lower non-recurring LED license revenue.

These Q2 targets are 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 million, while our non-GAAP targets do not.

We are targeting Q2 non-GAAP operating expenses to be approximately $106 million, a $1 million sequential increase due primarily to variable sales costs associated with targeted lighting sales growth.

We are targeting Q2 GAAP operating expenses to be approximately $129 million, which includes approximately $3 million of restructuring charges, $13 million of non-cash stock-based compensation expense, and $7 million for amortization of acquired intangibles.

Q2 non-GAAP net interest income and other is targeted to be similar to Q1, as interest income is offset by foreign exchange losses.

We target our Q2 and FY16 tax rate to be 25%.

The Q2 and FY16 tax rate is in line with our previous targets.

As a reminder, our Q2 and FY16 tax rates will fluctuate based on our overall earnings, the tax jurisdictions in which our income is actually earned, tax credits, and other tax benefits that may or may not become available to Cree in future periods.

We target GAAP net income for Q2 to be between $1 million to $7 million.

Based on the estimated 103 million diluted shares outstanding, our GAAP EPS target is between $0.01 and $0.06 per diluted share.

Non-GAAP net income is targeted to be between $21 million to $27 million, or $0.21 to $0.26 per diluted share.

Our non-GAAP EPS target excludes restructuring charges, amortization of acquired intangibles, net changes associated with our Lextar investment, and non-cash stock-based compensation in the amount of $0.20 per share.

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

Thanks, Mike.

We are focused on several key priorities in FY16, to take advantage of the growing market opportunities for all of our products, while responding to the competitive environment.

Our first priority is to build financial momentum.

We target overall Company revenue growth of approximately 10% in FY16, with operating margins increasing for the year.

Lighting revenue grew 8% sequentially in Q1, led by commercial lighting, and we forecast growth again in fiscal Q2.

Lighting gross margins improved 310 basis points, primarily due to better factory execution, which helped drive improved Company margins.

Consumer lighting revenue was similar to fiscal Q4, and in line with our targets.

LED revenue improved 21% in Q1, as demand was in line with our targets for the quarter.

This allowed us to further reduce channel inventories.

Margins also improved as we saw the initial benefits of lower cost due to the restructuring.

The overall LED market remains very competitive, and we continue to focus on applications where our SC5 technology drives system cost advantages.

Wolfspeed Power and RF revenues declined about 5% sequentially in Q1, primarily due to lower RF demand related to delays in the rollout of LTE networks in China.

Operating expenses declined 3% in Q1, which was better than our target for the quarter, as legal expenses were lower than forecast.

The improvement in OpEx, combined with the gains in gross margin, led to non-GAAP operating income of $29.4 million or 6.9% of revenue.

We target incremental operating leverage gains again in Q2.

Our second priority is to continue to innovate in each of our business segments.

We recently introduced our new KR8 and LR6 LED downlights, which further enhance Cree's product leadership in the commercial downlight market.

These products are designed to deliver better lighting performance and better value for new and existing commercial spaces.

The new KR8 downlight is Cree's first 8-inch downlight, and features our market-leading WaveMax and TrueWhite technology.

The newest generation LR6 downlight provides even better light quality, at a lower price.

As the number of consumers buying LED bulbs continues to increase, the quality of their experience becomes more important.

The key characteristics of LED bulbs are light quality, longevity, and of course, energy efficiency.

Despite this, some manufacturers seeking to cash in on the technology's popularity are driving LED bulbs to CFL-like performance, life times and light quality.

In contrast, we recently produced a better LED bulb.

Unlike compromised bulbs, the new Cree LED bulb delivers better light with better performance, more energy savings, and an industry-leading 27-year projected lifetime.

We released our new XLamp XQ-E high intensity LEDs, which are the industry's first family of high power color LEDs optimized for optical performance.

The LEDs are built on Cree's breakthrough SC5 technology platform, and provide a drop-in upgrade for proven XQ-E high density designs, which enables lighting manufacturers to double the candela performance with minimal redesign.

Our third priority is to promote future growth in Power and RF, and allow Cree's shareholders to better realize the full value of this business.

We recently renamed this business unit Wolfspeed, which allows the Power and RF division to build brand equity, while operating as a separate business.

The name acknowledges Cree's inception at North Carolina State University, and highlights speed, which is both a differentiating attribute of our technologies, and a promise to our customers and partners.

As I mentioned earlier, there is some near-term revenue softness in RF due to macro headwinds, but overall design activity remains very strong for both Power and RF products, and we target good growth in a second half of our fiscal year.

We continue to position Wolfspeed for an IPO, and we are already seeing the benefits of a Power and RF focused management team.

The timing is being driven by market conditions for IPOs, and trends within the business.

This is likely a calendar 2016 event, as we're going to be patient and get the timing right.

As I mentioned earlier, Q2 total Company backlog is tracking with our targets for the quarter, as commercial lighting is slightly ahead of Q1.

LEDs and Wolfspeed orders are in a similar range.

The LED business remains very competitive, and we continue to work with our LED distributors to increase inventory turns.

Factory utilization is improving in LEDs, and we target reaching 85% plus or minus by the end of December, when our factory consolidation is completed.

Factory execution continues to be critical to achieving our targets.

Based on our current backlogs, forecast, and trends in the business, we are targeting Q2 revenue in a range of $425 million to $445 million, which is comprised of growth in lighting sales driven by growth in commercial lighting, and LED bulbs in a similar range, core LED revenue in a similar range as Q1, but incrementally lower overall due to lower license-related revenue, and Wolfspeed sales in a similar range as Q1.

We target Q2 non-GAAP gross margins in a similar range at 31.7% plus or minus.

This target includes incremental margin improvement in lighting, the core LED business and Wolfspeed, which should offset incrementally lower overall margins in LEDs due to nonrecurring license revenue from Q1.

We target Q2 non-GAAP operating expenses to increase approximately $1 million, driven by variable costs associated with higher lighting sales.

We target incremental non-GAAP operating leverage in Q2, and incrementally higher operating margins.

As a result, we target non-GAAP earnings in a range of $0.21 to $0.26 per diluted share.

We are off to a good start in FY16.

Our innovation momentum remains strong across all three business segments.

The commercial lighting business is growing, and our transition to the new Cree better bulb is on plan.

The LED restructuring is on track, and the business results recovered nicely in fiscal Q1.

Wolfspeed design momentum is growing and the targeted IPO provides a great opportunity to create shareholder value over the next several years, with a more focused team and dedicated capital to grow the business.

We are confident in our business strategy and optimistic about the future.

As result, we continued to buy back stock in Q1 and target additional repurchases across the fiscal year.

As a reminder, our annual shareholders meeting is on October 27.

We will now take analyst questions.

(Operator Instructions)

Brian Lee, Goldman Sachs.

Chuck, just on your commentary around the capacity utilization getting up to 85% by year-end, can you walk us through the puts and takes of what margin trends could look like?

I know you are talking about a little bit of the licensing revenue coming off here and that being an offset in the very near term.

Does that come back based on higher utilization as you move through the next several quarters, or should we actually be thinking you're going to be exiting the year at a higher level than what you had here this quarter, with some of the licensing revenue baked in?

And then I had a follow-up.

Thanks.

Yes, Brian, I think if you look at capacity utilization, we won't really see the full effect until we get to our Q3.

What we target in Q2 is that even without that, you should see some improvement in the core LED margins.

Probably not enough to fully offset the loss of license, but definitely going in the right direction.

As far as next year goes, look, I think there's things we can do.

We should get some cost benefits from the restructuring, I think that the new products also give us some support in the market.

With that being said, it is a pretty competitive market environment, so I think it is premature to put out any targets on the margins for LEDs in the second half of the year at this point.

Okay, fair enough.

My follow-up was just a bigger picture question, also an area where you've seen some margin headwinds, but the consumer bulb it has been about 2.5 years since you launched that effort.

I think we've all been surprised at how quickly pricing has come down in this segment, and how competitive it has become.

I know you had always talked about branding and cross-sell into the commercial channel as being some of the strategic rationale for being in that segment, but wondering if that still holds, given the changing landscape, and if you had any updated thoughts on potentially restructuring that segment, or monetizing it differently than the go-to-market strategy you have had to date?

Thank you.

So look, I think we're still getting branding benefits from that business, but at the same time, we have to do a better job by making some incremental improvements in margins.

When you look at our lighting margin, the gains we made in our first quarter, we had improvement both on the commercial side and the consumer side.

Now, that being said, consumer is still relatively low margins.

I think it is a good business for us, because with the premium strategy, I think we are actually reinforcing what Cree's all about, which is better light, right?

We want people to buy bulbs that want better light, longer lifetimes, more efficiency.

That translates directly to the commercial strategy.

If anything, it translates even better now, because as the other competitors try to devalue the LED bulb category, I think our products stand out more.

So I think it still works.

That being said, I think there's a balance.

So if you think about what we're doing going forward, it is a premium category product.

I think it will more than pay for itself.

At the same time, the business is really going to be driven by commercial lighting, both on the top line and the profit line.

Paul Coster, JPMorgan.

Yes, the first question Michael, is, can you give us some sense of magnitude of this licensing revenue put and take, and how we should model it moving forward?

Yes, let me take a shot at that, Paul, and then Mike can clarify if I get it wrong.

But I think what you should assume is it was an incremental benefit to both revenue and margin in our Q1, and then you can see in our targets for Q2, it is not in there.

So it's relatively incremental, but with the improvement we are targeting in margins in the three businesses, we will be able to get back to a similar gross margin in the quarter.

So we didn't break it out specifically, but it puts the order of magnitude in shape.

And as far as going forward, most of the benefit was in the quarter.

There were some residual incremental, but most of it was in Q1.

Then my follow-up is just following up on Brian's question.

Can we at least assume that from a mix perspective, the consumer bulb now is diminishing as a percentage of overall unit shipments and revenue?

It is definitely diminishing as a percentage of the revenue.

I think units, it is a much higher volume business, so it is also likely diminishing units, I don't actually have that number in front of me, Paul.

But yes, think about consumer as a business that operates in this range and then commercial is where the growth is.

I think we get that balance right, and we can get both the brand benefit and also get more operating leverage that way.

Mike Ritzenthaler, Piper Jaffray.

It seems after the 4Q call, that 10% top line growth was mainly on the back of lighting, but now it seems as though LEDs may not quite be as soft as originally projected.

And I guess my question is, what's the right way to think about the mix of that 10% growth in FY16?

And as an extension of that, I'm curious if the strength in outdoor or some other commercial projects are being masked by results from retail?

I think Mike, the way to think about it is, when you look at that growth in the quarter, keep in mind that almost all that growth was driven by commercial lighting.

So consumer is actually down on a year-over-year basis, and commercial was up.

So the commercial business was growing much more in line with the LED lighting industry, at a much higher clip.

If you were thinking about what drives the growth of the business for the year, that is the major driver.

Commercial lighting growth and it drives both the revenue line, and it drives the profit line.

LEDs, I think right now, we came in pretty close to what we thought last quarter.

It should be in a similar range this quarter, at least at a core revenue level, so I think it is an okay spot.

I think as we set ourselves up for next year, I think it is really going to be a function of what happens in the market.

We like the fact that we have a more cost effective, this platform to start with, and we like the new products.

At the same time the industry and competitive environment is a bit of wild card, so I'm trying not to get ahead of ourselves on the second half of the year on LEDs, until we see how that comes in.

Sure, that makes sense and as a follow-up, I just wanted to make sure I understood something you said, Chuck, in your prepared comments.

I think previously the operating margin target for the full year was 8%, and with 1Q coming in at a little bit ahead of where we had modeled at 6.9%, is 8% still a reasonable target for the full year?

Yes, we have not changed our targets for the year.

Obviously, there is would be some puts and takes, but I think we're directionally heading in the right area, and obviously, with Wolfspeed being a little lower in the first half, we've got a little work to do in the second half there, but overall, we are heading in the right direction.

Okay, thanks, Chuck.

Harsh Kumar, Stephens.

Chuck, it is Harsh, just really quickly, I think you mentioned that you are now targeting a 10% growth rate for the next 12 months.

I wanted to ask you about your comfort level, given all the moving parts and pieces, particularly with the LED business?

And then also, why not a higher growth rate, since you are more and more commercial lighting now, which I believe is growing greater than 20% CAGR, maybe 20% or 30% CAGR, why not target a higher number than that?

Yes, I think, what's our comfort level?

I think we are heading in the right direction.

I think, given the uncertainty in the LED market, and we still have some work to do in the second half on Power and RF, I think there's a couple variables there we don't fully control.

I feel very good about commercial lighting.

Keep in mind though, that it is commercial lighting driving the growth, and you have essentially LEDs in a similar range, plus or minus.

You've got consumer lighting in a similar range.

And relatively year-over-year, that actually will be down likely, so you have to factor those two in.

I think we are on the right track, and I think the math still generally works.

Of course, we are one quarter in, so there's going to be puts and takes across the year.

Got it.

And as my follow-up, Chuck, would you be willing to take a shot at what profitability might look like, once you attain your December restructuring, and let's say you're greater than 85% utilization, or greater than that, past December?

Yes, we are not ready to give out targets for the second half of year, Harsh, just because there's a few variables going on.

Obviously, you've got an idea of what we are thinking.

We have said for the year, we are targeting not only to grow the top line but get the operating margin into the 8% range.

So you can back into what we are thinking we can do for the year, but I don't want to break it down any more specifically yet, just because it is a little premature.

We just don't have that good of visibility.

Again, commercial lighting trends we like, but we just have to work through some of the variables in the other parts of the business right now.

Edwin Mok, Needham and Company.

My first question, just talk about commercial lighting business by itself.

I remember last quarter, you had some mix issues that might have impacted the margin, and seems like margin has improved, even in commercial itself.

I wonder if there was any kind of mix benefit you get out this quarter, and as you look out, how you're seeing growth in certain areas, or not as much?

Just give some color on that?

Yes, what I would say if I look at the margin benefit in the lighting segment, the majority that came from commercial, though we did make incremental progress in consumer.

And if you break down commercial a little more, what's behind that, I'd say the biggest driver is factory execution.

There was some overall mix benefit, but I would say the single biggest improvement is, we did a great job in terms of factory execution, supply chain management over the quarter.

We have been making some investments in that area, and while there is still work ahead of us, I think we started to see the initial benefits from that activity that we have been focused on over the last six months.

That would be, if I look at the biggest impact, it's really that execution piece.

Okay, that's helpful.

Then on the LED product business, you said that I think, you said that you expect business to be stable, but pricing environment remains pretty challenging.

So I'm trying to understand, does that factor in lower pricing in the coming quarters, but you're able grow because of new products, or if you can give some color around that, how we think about the overall revenue for that business?

And this counts for one piece into that, also, and how much of that production are you using internally?

Do we expect more and more production being used internally, therefore you actually have less product being sold to the marketplace?

Yes, let me maybe take the second part first.

I will expect our mix of that external sales and internal sales to track pretty similarly going forward.

So I don't see -- our model for the next year does not show a shift more internal or less internal, it's actually, the percentage-wise is pretty similar.

My comments about the market remain competitive.

I think if you just read the commentary from anywhere out there, it is a competitive market now.

Our LED business does have pretty industry-leading gross margins relative to what else is out there.

So when we look at the second half, and we really don't have specific targets for it.

What we are saying is there's things we can work on, the restructured factory that's been consolidated, that will help our cost platform.

We've got the new product.

At the same time, we would expect pricing to continue to come down on a quarterly basis.

I don't think that trend is changing.

It is not getting worse, it hasn't gotten better, but it still remains what I would like to call competitive.

So in that dynamic, I think that things in LEDs went as expected in Q1.

They are on track for Q2, but at this point, I think we're going to continue to maintain a fairly cautious tone until we get a few more quarters under our belt, and see how the market evolves there.

Colin Rusch, Oppenheimer.

Thanks so much.

Can you talk a little bit about the potential for expanding the commercial lighting portfolio, particularly into the controls area in a little bit more robust way?

So commercial lighting, I think we have a couple things.

One, we have, our R&D is always looking at expanding the product line, and so there's -- it is within categories, so whether it be new troughers or downlights or new streetlights, we are continuing to expand products within certain categories.

At the same time, we do look for parts of the market that are underserved that we enter.

So last year, we've got into the high bay business for the first time.

That's mostly being driven by our internal R&D efforts.

The controls piece, we have taken a different approach, so we have several partners that make controls, and we make lights that work with them, and so we try to support existing controls investments that are out there, and we have a number of partners in that area.

At the same time, about a year ago, we came out with something called SmartCast and what SmartCast is, is controls without controls.

In other words, it is what we think is the easiest to install smart lighting system, it is easier to install, cheaper to install, and you get the maximum benefit with the least user input.

And so we think there's a different way to think about smart lighting controls.

Doesn't mean that people won't go down the other paths, we actually think there's a lot of ways to solve this problem, but where our partners aren't focused, we are trying to do some pretty innovative R&D and solve this problem a different way.

I think we are early, but the initial returns on -- the initial reviews on that have been quite positive for our approaches, especially in what I'll call the commercial building market.

Great, then just as you deemphasize some of the consumer products, have you looked at how much you might end up saving, in terms of marketing dollars?

Certainly that was a focus for a little while.

Curious how you think about that over the next 12 to 18 months?

I think of it as, when I say deemphasize consumer, think of it more that we are overemphasizing commercial.

I would expect the consumer business to continue to be a piece of the strategy, it is just on a relative basis.

Commercial is going to grow a lot faster.

I think that if you look at the advertising, that will still be a part of our plan, but it's really going to be balanced with that, within the consumer business, and what we can afford and what makes sense from a return on our investment.

So you should expect to see us continue to advertise, you'll probably see some of that this quarter, but I just think it's a more balanced approach given the new premium strategy, and the fact is that the brand has a lot of momentum.

So it is going to be focused more now on really consumer specific than just overall brand building, although we are happy to have that benefit as well.

Jed Dorsheimer, Canaccord Genuity.

I guess first question, Chuck just on, I want to make sure I'm looking at this correctly, on the LED business and the restructuring.

Prior to the restructuring, I think it was somewhere around less than 50%, but around that 40% to 50% mark, was consumed internally.

Then you wrote down the business basically by half.

So in terms of what can be sold externally to the market, versus what's consumed by your lighting business, has there been a major change, or should we look at that as somewhere still around that 70% to 80% being consumed internally, or transferred internally, I guess?

Yes, Jed, I don't know that we've ever broken out the specific internal consumption.

What I will tell you is your estimate that it was 50% would be more than, that is an over-estimation of how much is consumed internally.

It is definitely an important, it is our biggest customer, but if you look at the mix overall, that even before the restructuring, that percentage, I don't think was that high.

I don't think with the restructuring that we've changed that balance at all.

So I would say that maybe slightly more internal now, but honestly, overall, I would say it is a pretty similar mix.

And before, and in fact if anything, with our focus on high power, we are really driving where customers value high-power LEDs.

And if that's internal, great, they obviously have a lot of designs that use that, but at the same time, if an internal customer needs to use a different LED for a different application, we've been doing that for a while as well.

So I would say there's no real change in the mix of LEDs, post restructuring.

Okay, good.

Seems like there's some margin headroom there.

I guess on the lighting side, maybe more higher level question strategically.

If we look out at the competitive landscape, what we have seen from some of your lighting peers, not necessarily just LED peers but more lighting, fixture -- and mainly fixture, we have seen some consolidation in the market.

Additional acquisitions, and I know you were busy integrating Ruud, as well as LLF and COTCO in the past.

But more recently, we've seen a shift in the use of capital used to be more aggressive in buying back shares.

I'm just wondering, the message I read into that, is that you one not seeing things that necessarily fit with the strategy to grow.

I'm curious as to whether or not that is the message that we should be interpreting, or basically whether or not you still see holes to the business that strategically could be filled out, IE, on the controls or more of a systems approach, I guess?

Yes, look, I think that over the last year, you did see us focus on really improving our execution in the lighting business.

Frankly, Jed, that business has grown at a tremendous rate, and scaling up a business and people and all the systems and processes, that's what we needed to focus on.

I think as that business matures here, and when I say matures, as those processes mature, as we get better at running a larger lighting business, roughly $1 billion business at this point, I think we will have the opportunity to look more at strategic opportunities out there.

Now what those pieces are and how they fit, I think, I don't want to divulge where we are looking or where we might go, but I think it is reasonable to think that over the next or two, we may add some pieces to the puzzle, if they make sense.

I think we're going to continue to be pretty picky, we want things that fit with the product strategy, as well as with the culture, but I think there are things we can do over the next year or two, especially now that we have made some progress, really getting the lighting business scaled up.

And by the way, I still think there's good organic growth opportunities.

I just think organizationally, we will be in a position to take that on more now than we were over the last year.

Mark Heller, CLSA.

Chuck, you maintained the guidance for FY16, about $1.8 billion.

Then you gave the guidance for December.

For March, typically you see some seasonality there, so should we assume a very strong June quarter to meet that full $1.8 billion for the year?

I think what I reiterated was the 10%, but you are close to the right number.

I think you come out right in that range, and then the 8% operating margin.

Mark, I think we're going to be directionally correct.

Plus or minus, we should get close to that.

But yes, the math says that we going to have to have a pretty good second half of the year.

I think there are some variables in that.

I think that we are starting out a little slower for the year, just because of some things in the Power and RF side of the business, but I think if we don't hit that target, I think we're going to come pretty darn close.

So that's why I feel like we can keep putting it out there, because the business is heading in that direction.

So I think it is our best estimate at this time.

Okay.

And can you provide any color on the China market, particular to LED?

I know that's been weak over the past few quarters, but have you have seen any pick-up lately for street lighting projects?

Mark, we haven't seen any significant change in China.

There is definitely more talk about projects, but I would say China continues to be a pretty tough part of the market.

Not any worse than it was a couple quarters ago, but actually, I haven't seen any significant improvement.

It remains a very competitive piece of the market, and just with so much activity and speculation about infrastructure spending or not-infrastructure spending, our business is doing okay there, but I don't see a big change one direction or another, right now.

Jeff Osborne, Cowen.

I've just got two lines of questioning.

Chuck, I was wondering if you could touch on the SC5 product portfolio and what the design win activity has been, and then if you have any sense of outside of your own captive consumption of that product line, what the addressable market of that is trending?

Is it getting bigger, smaller, just with the competitive dynamics, and then I had a follow-up.

I don't have specific design wins to really offer you, but I can tell you that this is something we track each month and each quarter.

We continue to have success.

Really the places you're going to see SC5 winning today are typically outdoor or directional indoor applications.

So places where you have a high density of light that you need to put in a certain application, in places that have thermal limitations.

I would say the market is about what we thought so far.

It hasn't gotten, I don't know that we have -- we are pretty optimistic about it, but I think we are also realistic about the application, and where there's real value.

Now, I think the one subtlety to that is, there's the SC5 products, and then there's the technology that was invented as part of it.

We are starting to put that technology into other areas, so one of the products I mentioned in my prepared remarks was a new XQ-E product, and that's really, that product existed before, but we were able to use some of the components of SC5 to essentially upgrade the performance of it.

So I think with SC5, it is more than just a set of products, it is really a technology platform that we can use pieces of it in other products to keep really refreshing the whole product line.

So I feel good about where we're at.

It is not a magic bullet, but it's definitely trending in the right direction.

Great, thanks for the detail there, and then the second question I had was just on the bulb itself, it's bigger picture.

But with your discussion with Home Depot and other partners, I guess A, what are -- have you been able to verify that there actually is a premium shelf positioning in this space, given that GE and Philips are obviously brand names that people are familiar with?

So I would be curious what your sense on verification of your hypothesis, that there is a premium segment to this market?

And then B is, what are the cost reduction plans?

I think you are on your fourth generation bulb at this point or maybe it is the third.

But I asked you this a year ago but some of your competitors used contract manufacturing for the bulb, as opposed to making it.

Where do you stand given the gross margin performance over the last year with the bulb, potentially looking to either restructure that, I think as Brian alluded to earlier on the call, or using contract manufacturing?

Yes, so can we verify it as a premium market?

Yes.

The product, as we have been launching it here over the last few months, the sales data says that there is a significant, not the majority, but a significant subset of consumers that want bulbs that have better light quality, that have longer lifetimes and are more energy efficient, and we see that in the sales data.

So we know that in the same store against those cheaper bulbs, our bulb still does well.

And I think it is a combination of there is a subset of customers that want the best product, because they want them to last a really long time.

To some extent, it seems kind of crazy to me that you would build an LED strategy around bulbs that don't last a long time, but maybe I'm just old-fashioned when it comes to inventing technology that actually works.

So I think we are on the right track there.

I think it is a subset of the market, and more importantly, it applies to the same values that we think translate to the commercial lighting market.

What I wouldn't want to have is a branded bulb that says, hey, buy this cheap bulb that kind of works, and then convince someone to buy them on a commercial lighting product.

I think we are staying true to the brand, and what we stand for there.

As far as the next generation, so the new bulb that's out there is actually, we internally call it gen 3.5 so it is improvement on the previous generation.

I think that we have more work to do though, to not only create value, real value that drives the premium positioning, but we also have to keep working on the cost.

And what I will tell you is that manufacturing strategy has evolved from where we started three years ago.

It continues to evolve, but I think we are being pretty open-minded about what parts we should make, where we can use partners, and I think we're going to get -- that balance is constantly changing, but I think we are in a pretty good spot to continue to move down that, and have a reasonably good business there.

Although it is a consumer margin-style business, but a better business there over the next year.

And I think we can continue to innovate as well.

Sven Eenmaa, Stifel.

First, I wanted to clarify your commentary on the 8% operating margin target for a year.

Then the improvements you expect from the first half of the year to the second half of the year.

If the improvement you need to hit the 8% target just driven by RF business, or do you require further cost reductions, improved pricing, or is there something else?

To hit our operating margin targets, we have to have improvement in gross margin in the product line, so we are targeting gross margin improvement in Power and RF, we're targeting it in lighting, and we need LEDs to at least stay in a similar range as it is today.

And then we are looking at getting operating leverage.

It is both a gross margin side, and also the fact is, we made big investments over the last few years, and the idea is, as we drive revenue growth, that we can scale revenue faster than the OpEx line, and get some leverage there, as well.

Got it.

Second question I had is, in terms of a 10% growth target, what are -- how do you see the pricing on your commercial lighting market for this year and on your consumer side, what are the underlying market assumptions?

Yes, what I will tell you is that the consumer strategy is a premium one, so I think while our pricing will probably be adjusted over time, it is likely to be positioned higher than the rest of the market there, and also plan to deliver more value.

On the commercial side, I think there will be some price erosion, but I think the market is shifting now.

It is less about cost just the price of the products, and it's going to be much more about what value can we deliver.

So can you save the customer more energy, can you deliver products that work better in their application?

What is the total value delivered?

We spent four or five years chasing how do we get LEDs close enough in price for them to be considered?

They are being considered.

Now it is about how do we create the most value with our products versus the alternatives that are in the market?

Tom Sepenzis, Northland Securities.

Congratulations on the good quarter.

Just wondering if we could talk little bit about Wolfspeed, and when you think you're going to see a little bounce there in the infrastructure market, and in particular if you could provide us with any color on what you are seeing in China right now, and India as well, which is starting to roll out its LTE network.

Yes, I'm a little, I try not to forecast what those roll-outs will be, because I tend to be -- know for sure whatever I throw out there will probably not be accurate.

I think our design activity puts us in a good position, that when the infrastructure rolls out, we'll be able to participate.

But Wolfspeed's growth strategy in the second half is goes far behind beyond RF.

RF is really the reason that the revenue's a little lower than we thought this quarter and next.

If I look at the whole portfolio, and the design activity is not just RF, but really on the Power side, we are getting good momentum.

We've always had a good Schottky business but the silicon carbide MOSFET is probably the fastest-growing product line we have in that business, and that's not a single customer, that's a broad range of applications.

So our target for growth in a second half is really a combination of improved RF, but also continued growth in the Power side.

Would you expect that to potentially grow, March is seasonally weak, so is that something that could actually be a return to growth in the March quarter, or is that all back-end loaded in June?

No, I think for Wolfspeed specifically, that is really design-win driven and project driven.

I think there's an opportunity to see some growth in our fiscal Q3.

Obviously, that's typically a slightly lower quarter for the semi business, but we are really going to be -- we're probably going to trend more on design wins than the market at this point, because we're still a relatively low percentage share of the overall market.

Steven Chin, UBS.

Just curious, how do you characterize the level of channel inventory with distributors for LED?

It's lower in Q1 than it was in Q4, and it was lower in Q4 than it was in Q3, and we are targeting that we'll probably be lower again even in this quarter.

So we are actually actively working with our distributors to take a pretty conservative view and increase their turns.

So I guess the way I would characterize it is, it's probably as lean as it has been in several years, and I think that's a really healthy position for us to be in, especially with new products, and really gets us focused on driving those new design wins.

Got it.

Then just on the overall supply-demand balance.

I know you said that ASPs are continuing to decline.

Just curious if you are seeing the rate of decline either increase or decrease or stay the same?

Is there any indications we can see some stabilization?

Yes, the LED business over the last 10 or 15 years, there's always decline every year.

I don't remember a year that wasn't some decline, right?

It is the nature of that business.

I would say right now, in the segments we are focused on, so Cree's perspective is probably more focused on the high-power markets.

It's -- the rate of decline is similar to what we saw the previous quarter, so I would say, we had in our Q4, there was a more significant decline.

I think that resolved itself, and I think we are seeing a more normal competitive environment.

So it is not getting, I wouldn't say pricing declines have slowed significantly, I also wouldn't say they are accelerating.

They're more at a normal rate from we would project for the business at this point.

(Operator Instructions)

Krish Sankar, Bank of America.

I had two questions.

First one, maybe on the Wolfspeed, Chuck, at a time when semi companies are consolidating, due to need for scale, I'm curious, does Wolfspeed have enough scale to remain robust as a standalone entity?

It is interesting, obviously, we follow what's going on in the semi business.

What makes Wolfspeed unique is, the reason I think the industry's consolidating is the rate of innovation has slowed.

And I think Wolfspeed is the exact opposite of that.

I think if you are in the RF business or the Power business we have two pieces of technology that let you do pretty dramatic things, whether it be RF infrastructure on the mil-aero side there, and on the Power side, if you are in the silicon IGBT business, our silicon carbide MOSFET is going to be quite disruptive.

So I think it is unique in that yes, it is obviously smaller scale, but it is incredibly disruptive technology.

So I think that's why it can stand alone at this time, and I think it is a pretty unique business, and I think being focused on disrupting those markets is what's going to make it successful.

Got it, and just as a follow-up, clearly your restructuring is progressing well.

Is there a way to hypothetically explain the impact -- for example, if I take your September quarter revenues and your gross margin, what does the growth margin look like once restructuring is completed, at the same revenue run rate for the LED and the lighting division?

We are not, I can't give you any guidance beyond Q3, other than the color.

What I could think about, but maybe this will help you think about it.

In Q2, we are targeting incremental improvement, and it is enough improvement to get us to a similar range, 31.7 plus or minus, and we're going to do that without the benefit of the license income that we had in Q1.

So to give you some idea, we're continuing to get incremental benefit in each of the businesses.

Now I know you asked specifically about LEDs.

I would expect the core business to improve incrementally, probably not enough to offset all the benefit of the license revenue, but at least partially offset that in Q2.

So I think we are on the right track, and that we really won't see the full benefit until we get through Q3, because we're really still consolidated the LED factory.

So while the packaging factories our consolidated, we still have work to do this quarter to get our chip factory.

So until that is done and we can run it for a quarter, I don't know we fully can project the impact of that, other than it should get better.

I'm showing no further questions at this time.

I'd like to turn the call 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 second-quarter results on January 19.

Good night.

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

This does conclude the program, and you may all disconnect.

Everyone have a great day.