Wolfspeed Inc (WOLF) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cree Fiscal Year 2017 Fourth Quarter Earnings Conference Call and Webcast.

(Operator Instructions) As a reminder, this conference is being recorded.

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

Please go ahead, sir.

Thank you, Karen, and good afternoon.

Welcome to Cree's Fourth Quarter Fiscal 2017 Conference Call.

Today, Chuck Swoboda, our Chairman and CEO; Mike McDevitt, our CFO; and Danny Castillo, EVP and Head of our Lighting business, will report on our results for the fourth quarter of fiscal year 2017.

Please note that we'll be presenting non-GAAP financial results during today's call, and a reconciliation to the corresponding GAAP measures is 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.

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 fourth quarter of fiscal year 2017 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.

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 1 hour, we ask that analysts limit themselves to 1 question and 1 follow-up.

If you have additional questions, please contact us after the call.

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

Thank you, Raiford.

Fiscal 2017 revenue was $1.5 billion, with non-GAAP EPS of $0.50 per share.

Wolfspeed revenue grew 25% year-over-year to $221 million due to strong growth in Power, RF and Materials.

LED revenue was similar to FY '16 at $550 million as higher product sales offset lower license revenue.

Lighting revenue declined to $702 million due to lower sales caused primarily by disruptions related to Q2 commercial product holds and lower consumer bulb sales.

Q4 revenue increased 5% sequentially to $359 million with non-GAAP EPS of $0.04 per share, which was in the middle of our target range.

We made good progress in Q4 as all 3 businesses were within their target range.

Wolfspeed grew 8%, and LEDs grew 9% sequentially from Q3, while commercial lighting sales increased to offset the seasonal decline in consumer sales.

Our Wolfspeed business continues to perform very well despite being capacity constrained.

We're fully booked for Q1 and our capacity limited in Q2, with lead times now stretching into fiscal Q3 for materials, power and RF.

Our focus is on expanding capacity for all 3 product lines while closely managing execution to optimize output from our existing capacity through yield and process improvements.

We started making significant capital investments last year and are working through the qualification process.

We target additional materials capacity to start coming online in our fiscal Q2, with a plan to double wafer capacity for external materials customers by the end of calendar 2018.

We target additional power and RF device capacity to start coming online in fiscal Q4 due to time required to qualify our 150-millimeter line, both internally and at our customers.

This plan should double our current power device capacity by the end of calendar 2018.

The significant increase in demand for both materials and power devices is being driven by new design wins related to electric vehicle systems and battery storage applications.

Based on the projections we're getting from our customers, we see substantial growth in this market over the next several years, and we are planning for additional capacity expansion to support the targeted growth beyond calendar 2018.

LED revenue was on the high end of our target range in Q4 due to strong demand and is currently tracking to a similar level in Q1.

The market remains competitive but the supply and demand balance improved over the last quarter.

The growth in demand is coming from both lighting and video screen applications.

In addition, we recently started shipping our first automotive LED components to a Tier 1 Ford lighting supplier.

The automotive business is just getting started, but we're working on several projects that are forecast to turn on over the next 18 months.

We have finalized the details of our mid-power JV with San'an, and we started sampling the initial products to select customers.

While we'll take several months before we have a full mid-power LED product line qualified and available, we're optimistic about the growth potential from this new venture.

Lighting sales grew slightly in Q4, led by solid growth in our U.S. C&I business.

The growth in C&I offset lower sales in the contractor value segment of our business as well as seasonally lower consumer sales.

We made progress improving margins in Q4 due to better factory execution and a favorable product mix.

We target additional progress on lighting margins in the year ahead.

We're encouraged by the growth in C&I and believe that it's a good indication of the progress we're making to rebuild momentum with our channel partners.

We're addressing the softness in our contractor value segment with our new C-Lite product line.

This product line was announced in May and is generating good initial interest but it has only recently started shipping to customers.

As a result, we target growth in the value segment of our business during fiscal 2018.

The consumer business has performed as expected, and we're focused on preparing for lighting season, which should start to ramp up in early fiscal Q2.

We built a solid foundation for growth at all 3 businesses over the last year, and I'm excited about the opportunity for Cree to grow revenue and profit in fiscal 2018.

I'll now turn the call over to Mike McDevitt to review our fourth quarter and year-end financial results in more detail as well as our targets for the first quarter of fiscal 2018.

Thank you, Chuck.

I will be providing commentary on our financial statements on a 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 periods mentioned on this call is posted on our website or provided in our press release, along with a historical summary of other key metrics.

For fiscal 2017, revenue was $1.5 billion and non-GAAP earnings were $50 million or $0.50 per share, which were in line with our most recent targets.

Non-GAAP earnings exclude $148 million of expense net of tax or $1.50 per share from our noncash stock-based compensation, acquired intangibles amortization, tax valuation allowances and other items.

Fiscal 2017 revenue and non-GAAP gross profit for our reportable segments were as follows.

Lighting Products revenue declined 21% to $702 million and gross profit was $196 million for a 28% gross margin, which is an 80 basis point increase year-over-year.

As Chuck mentioned earlier, our lower lighting revenue was caused primarily by Q2 commercial product holds and lower consumer sales.

Gross margin improved year-over-year due primarily to patent license revenue related to the Feit settlement, which was received during the second quarter of fiscal 2017.

LED Products revenue was similar year-over-year at $550 million, as higher product sales offset certain fiscal 2016 license issuance fees that did not reoccur in fiscal 2017.

Gross profit was $152 million for a 27.6% gross margin.

Gross profit and margin were lower year-over-year due to lower license revenue and cost associated with the new LED chip ramp.

Wolfspeed revenue grew 25% year-over-year up to $221 million, and gross profit was $103 million for a 46.8% gross margin.

We had robust growth in our material, power device and RF device product lines.

Gross profit grew on all product lines due to the higher overall sales, while gross margins were lower due primarily to costs associated with new product ramp ups and changes in product mix.

Non-allocated costs totaled $6 million for fiscal 2017 and are included to reconcile to our $445 million non-GAAP gross profit for a 30.2% gross margin.

For the fourth quarter of fiscal 2017, revenue increased 5% sequentially to $359 million, which was at the upper end of our targeted range.

Non-GAAP earnings were $4 million or $0.04 per share, which was in the middle of our target range for the fourth quarter.

Non-GAAP earnings exclude $10 million of expense net of tax or $0.10 per diluted share from noncash stock-based compensation, acquired intangibles amortization and other items, which were partially offset by a noncash gain in the fair value of our Lextar investment.

Fiscal 2017 fourth quarter revenue and non-GAAP gross profit for our reportable segments were as follows: Lighting Products revenue was similar sequentially at $155 million, which was in line with our targets.

Commercial lighting revenue improved from Q3 with solid domestic C&I growth that was offset by lower non-U.

S. sales and seasonally lower consumer sales.

Gross profit increased 4% sequentially to $37 million for a 23.8% gross margin and 80 basis points sequential increase.

The gross profit and margin increase was primarily due to better factory utilization and lower warranty cost.

LED Products revenue grew 9% sequentially to $143 million and was above our targeted range due to solid customer demand.

Gross profit increased 15% sequentially to $37 million for a 25.9% gross margin, a 120 basis point sequential increase.

The gross profit and margin increase was primarily due to product mix.

Wolfspeed revenue grew 8% sequentially to $61 million and was above our targeted range.

While our current Wolfspeed capacity is constrained, we did achieve additional throughput in Q4 due to productivity improvements that enabled us to ship higher revenue.

Gross profit was up 5% sequentially at $27 million for a 45.5% gross margin, a 150 basis point sequential decrease.

The lower gross margin was primarily due to product mix.

Non-allocated cost totaled $1 million for the fourth quarter of fiscal 2017 and are included to reconcile to our $100 million non-GAAP gross profit for a 28% gross margin.

Non-GAAP operating expenses for Q4 were $97 million and in line with our targets for the quarter.

Our non-GAAP operating income was $3 million, which was in our targeted range.

We ended the year with $466 million in cash and investments, net of line of credit borrowings, a $27 million increase from Q3.

At year-end, we had $145 million outstanding on our line of credit.

During the fourth quarter, cash from operations was $53 million and capital expenditures were $34 million, including patents, which resulted in free cash flow of $19 million.

For the year, we generated $216 million of cash from operations and spent $99 million for capital expenditures, which yielded free cash flow of $117 million, which was in line with our targeted range.

During fiscal 2017, we spent $104 million to repurchase 4.4 million Cree shares with no repurchases in Q4.

Our current capital allocation priorities are focused on expanding capacity in our Wolfspeed business and possible lighting-related M&A to expand our product portfolio.

For fiscal 2018, we're targeting capital spending of $220 million, plus or minus, primarily related to expanding Wolfspeed's production capacity to support forecasted customer demand.

Overall, we target 2018 free cash flow being a negative $20 million, plus or minus.

The negative free cash flow was due to accelerating the Wolfspeed capacity investments to eliminate current capacity constraints and support the substantial growth opportunity forecasted over the next several years.

While stock repurchases are not a current capital allocation priority, our board did approve a fiscal 2018 stock repurchase program not to exceed $200 million, so that we have that program in place if needed.

Days sales outstanding declined to 2 days from March to 37 days at the end of June.

Inventory days on hand declined 5 days from March to 98 days at the end of June.

The inventory decrease primarily relates to our targeted reductions in lighting finished goods.

Our near-term inventory target is 90 to 100 days.

Q1 total company backlog is tracking slightly behind this point last quarter.

We target Q1 company revenue in the range of $353 million to $367 million.

We target lighting revenue to be down slightly sequentially as commercial is similar to Q4, and we expect seasonally lower consumer sales.

We target revenue from our LED business to be similar sequentially, and our Wolfspeed business to grow 4%, plus or minus, as some productivity gains offset our near-term factory capacity constraints.

We target Q1 non-GAAP gross margins increasing to 29%, plus or minus.

This increase will be driven by incremental improvement in lighting and Wolfspeed, with LED margins slightly lower due to product mix.

Lighting margins are targeted to improve due primarily to operating improvements and a higher mix of commercial sales.

We are targeting Q1 non-GAAP operating expenses to be $101 million, plus or minus, which is $4 million higher than Q4, primarily due to cost associated with our Wolfspeed factory expansion, incremental legal cost on defense of IP cases, and CEO search costs.

The joint venture has a nominal impact to our Q1 targets as we are just beginning to ramp its operations, but is targeted to have a larger impact beginning in fiscal Q2.

We target Q1 non-GAAP operating income to be between $2 million to $6 million.

We target a 22% Q1 non-GAAP effective tax rate, and we target Q1 non-GAAP net income to be between $2 million to $6 million, or $0.02 to $0.06 per diluted share.

Our non-GAAP EPS target excludes acquired intangibles amortization, noncash stock-based compensation and other items.

Our Q1 targets are based on several factors that could vary, including overall demand, product mix, factory execution and the competitive environment.

I'll now turn the discussion back to Chuck.

Thanks, Mike.

We're uniquely positioned as a market-leading innovator in all 3 businesses and target growth in each of these segments over the next several years.

We're focused on the following priorities to support our strategy to deliver higher revenue and profits.

We're investing in the Wolfspeed business to increase capacity and further develop the technology to support longer-term growth opportunities in silicon carbide materials, silicon carbide power devices and modules, and gallium nitride RF devices.

We're now starting to see significant growth due to our investment in these areas over the last 30 years.

The combination of growth in electric vehicles systems and battery storage, plus other industrial applications is quickly bringing silicon carbide power into the mainstream and putting pressure on the supply chain in the near term.

With all 3 product lines on allocation, our challenge is to maximize our existing capacity to meet current customer needs.

This is a very exciting time for the Wolfspeed business as the increased demand validates the importance of this technology for current and future applications.

That being said, we're likely going to be capacity limited through fiscal 2018.

We plan to grow the LED Products business by expanding our product offering with new high-power and mid-power products that leverage our market leadership to increase our share at existing LED customers, while also opening new applications for our technology.

As I mentioned earlier, we recently started shipping to our first Tier 1 automotive forward lighting customer.

Our JV has started sampling the first mid-power LED Products with target customers.

Both the automotive and JV activities should expand the market opportunity for our LED business.

In addition, we continue to innovate with the introduction of our new RGBW lighting class LEDs for architectural applications.

The LED business continue to execute well in Q4 and is in a good position heading into fiscal 2018.

We target growing lighting products revenue and increasing margins in fiscal 2018.

I'm now going to turn the call over to Danny Castillo to provide insight how we plan to do this in our lighting business.

Thanks, Chuck.

We made progress in Q4 investing in channel relationships and improving execution, while continuing to bring innovative new products to the market.

As we discussed last quarter, we continue to invest in talent, with industry relationships and experiences.

With respect to channel relationships, we have strengthened our agent base in certain key markets, launched the C-Lite product family, which represents over 150 new products for the C&I distribution channel, and increased our partnership with key distributors in strategic markets.

While the U.S. lighting market has been slower than forecast over the last 2 quarters, our internal fundamentals continue to improve in Q4, specifically in North American C&I business, driven by an improvement in service levels.

With respect to new products, we launched a high-output area lighting product family, OSQ, that is first to market and an industry leader in performance in its category.

Additionally, we expanded our indoor lighting product portfolio to further strengthen our commercial project-based offering.

Lastly, our smart lighting PoE platform won the EC&M Product of the Year Award in the Controls category, and we launched our IoT application, SmartCast Advisor, which provides smart building solutions.

Q1 commercial lighting revenues are targeted to be similar to Q4, with consumer lighting slightly lower prior to a targeted seasonal increase in Q2.

We continue to target incremental improvement in lighting margins.

And I'm confident that our focus on service, execution and innovative new products can drive solid revenue growth and deliver improved profits during fiscal 2018.

I will now turn the call back to Chuck.

Thanks, Danny.

This is an exciting time at Cree as we are making good progress in all 3 business areas.

The LED business is positioned to gain share with new customers as well as opening new markets for our products.

We're expanding capacity to support the growing demand for our Wolfspeed product lines.

And the commercial Lighting business is regaining momentum as our service levels improve.

The strength of our balance sheet gives us the ability to invest in capacity for Wolfspeed, while also pursuing potential acquisitions in lighting.

I believe we are well positioned to grow revenue and earnings in the year ahead.

On a personal note, I want to thank the many investors for their support over the last 16 years.

It's been very rewarding to lead Cree as we've grown from a small blue LED chip and silicon carbide wafer company to a global leader in LEDs, lighting and power and RF devices and built a global brand as a market innovator.

During my time as CEO, we set out to build a great company for our shareholders, customers and employees by inventing new technology to make the world better.

I believe we've made excellent progress on all aspects.

But when you're in the innovation business, there is no finish line, there's only the future.

While the CEO often gets most of the credit, I want to make it clear that our success is the result of great teamwork by many talented people across the company, and I'm confident that they are poised to continue to deliver exciting innovations and grow the company in the years ahead.

I look forward to continuing to lead the company in the interim and supporting a new CEO as they lead the company to the next level of success.

We'll now take analyst questions.

(Operator Instructions) And our first question for today comes from the line of Brian Lee with Goldman Sachs.

A couple of questions.

Maybe first off, housekeeping one.

The free cash flow guidance, it implies cash flow from operations is going to be down a smidge year-on-year.

So wondering why that would be the case, given that the view for better revenue and profits across all 3 segments, at least at a high level, that seems to be what you're inferring?

So Brian, let me take that.

So if you think about it, as we grow throughout the year, we'll be deploying a little bit more on working capital as we exit FY '18 would be our target versus this year where we generated some cash from working capital.

So just as the business grows, we have a little bit more on working capital.

Okay, fair enough.

That's helpful.

And then I guess 2 quick things just around the model.

You alluded to some increasing impact from the San'an JV.

Can you quantify a bit, Mike, as to, starting from fiscal Q2, what we should be thinking about in terms of that?

And then on Wolfspeed specifically, you're capacity constrained but you're still annualizing to about $250 million in revenue and you're doubling capacity on both the substrates and devices side.

So by the end of calendar '18, fair to assume you're going to be running at the $500 million revenue capacity in that segment?

Just wondering if that's the right way to think about it.

Yes, Brian, let me take the Wolfspeed one first.

So we are planning to double capacity in materials for external sales as well as in our power device fab.

That's wafer capacity, so there obviously could be some ASP erosion.

So I think doubling might be a little aggressive.

But we are planning to double the capacity.

So if you put in some factor for whatever you want on ASP erosion over that time, you've got the right sense of the order of magnitude.

There's significant growth opportunity in Wolfspeed in both power and materials, and the other thing I would tell you is we're also targeting, not at the same level, but RF should also grow over that period of time.

As far as the impact of San'an, at a high level, what we're talking about now is we're really just starting to sample those products.

So I think we should see some initial revenue in Q2, but really, it's going to be more of a second half of the year.

And what we said originally on San'an is we would target generating some incremental revenue as well as accretive, both from a gross profit and an operating profit standpoint, but it will have lower gross margins than our current business today.

Now in terms of next quarter, I think what Mike was suggesting is we will start to see some of the revenue in the OpEx in next quarter for the first time.

But I don't know if we have a specific target or not at this time.

Mike?

Yes.

We don't have a specific target but think of it as incremental.

And our next question comes from the line of Harsh Kumar with Stephens.

Chuck, again, in case this is your last call, I've worked with you over a decade, we'll miss you.

Question for you.

So we've got kind of a, I'll call it a modest or a booming recovery, whatever you want to call it depending on who you are, but there's pretty good activity in commercial real estate that's going on.

And I'm curious why you're not able to see better than a flat pick up on a sequential basis, or perhaps even on a mid-term basis?

Why are you not more optimistic about everything coming back that you've lost in the last 6 or 7 quarters?

Yes.

So Harsh, a couple of things.

First of all, if you look at overall market, actually the projections right now that we're seeing, that are -- so the lighting industry is generally talking a fairly conservative outlook over the next couple of quarters.

Mostly, we'd say flat or up slightly, and that's really being driven off a lowered outlook for non-resi construction.

So that's actually what's driving that.

From a Cree standpoint, we've got a couple of things going on.

First of all, in Q4, we actually had a nice recovery in the C&I business.

And I would say that's the best leading indicator.

Obviously, there's some softness in the value segment and the consumer is seasonally down.

But I think if you take those 2 out, the core C&I, we started to see that recovery.

Now this quarter, it's probably going to be on a similar range as last, that's more of a timing issue, but I think we're on the right track overall to seeing that grow.

And then as well as by the time we get into our Q2, we should see consumer start to come back a little bit seasonally as well.

The third piece of that strategy, from a lighting standpoint is, although we were softer in the value segment, we really haven't had a significant product line for that.

So one of the things we announced in May was the C-Lite business and that's really our first time to have a real product offering for that distributor stock and flow business.

So I think that's an opportunity.

So if I look out over the next year, it is a little softer in the short term, and I think that's more of an industry dynamic.

But when we look at the lighting business, we would expect that the combination of a seasonal rebound in consumer, some benefit from C-Lite as we go over the next year, but most importantly, the C&I business and rebuilding momentum there like we saw in Q4, we think that would be the growth driver.

And I do think we'll see some growth over the next year, maybe a little slower to start out with, but I still remain optimistic that the lighting business should definitely grow from this point forward over the next year.

Understood, Chuck.

And then for my follow-up, I'm just curious on Wolfspeed.

Initially, you were going to IPO it and then you try to -- then there was almost a deal that didn't quite happen.

Is it fair for us to assume that you intend -- with all the actions that you've outlined today, that you intend on keeping it at this point in time?

Yes.

Harsh, look, when we -- the Infineon deal was not approved, we made a decision then we were going to reintegrate it and run the business.

Obviously, I think, at some point here, we're going to have a new CEO in place and I'm sure that the board and that CEO will have discussions about what they want to do with the portfolio long term.

In the near term, we have the business that has incredible demand right now.

I think something that's really changed -- that IPO was announced a little more than 2 years ago, what really changed is over the last year, a couple of major applications, really, the ones that are driving it that have changed the most is both electric vehicle and battery storage have really started to move and silicon carbide's been a key part of both of those applications.

And I'd say that is the driver that's really changed the trajectory of that business, really, mostly over the last couple of quarters.

So the great news is, is we have a growth business that has an exciting opportunity.

We're going to invest in it to grow it.

But I think long term, as far as what the company may do from a portfolio standpoint, that will really be a question that will be best answered by the next CEO and the board at that time.

Our next question comes from the line of Tom Sepenzis with Northland Capital.

I was wondering if you could talk a little bit about the margin weakness in Wolfspeed?

I think you said it was -- that had to do with the mix.

I'm just wondering what the mix was there that caused that weakness.

Yes.

So what we have going on at Wolfspeed, there's really 4 major products lines.

There's obviously, our wafer business, our RF business.

And then within power, we have both diodes and MOSFETs, and it's really -- as that mix -- there's different margins between those 4, we don't break them out.

But as that mix shifts from quarter-to-quarter, we're getting some different blending.

I'd say each of those product lines remains relatively steady, but you saw just -- there was a little higher volumes on the stuff that is, on average, a little bit lower margin.

So no real change in any of those 4 product lines, it was really the mix between them.

And I think you'll see some of that fluctuation going forward because being at capacity, we're really doing everything we can to maximize customer needs to keep them going as we go through this -- the allocation period right now.

So I think that a little bit of variability probably in this range, plus or minus, for the next few quarters.

And then I think if you look out beyond fiscal '18 and you start looking at the beginning of fiscal '19, as we get the 150-millimeter product line online, it probably gives us some opportunity that will not only address the demand at a -- more fully but also have some flexibility from a margin standpoint.

Great.

And then in terms of the excess capacity, I think you mentioned it would be Q4 of '18.

Is it ramping up into Q4?

Or is it all online at once at the end of the year?

Yes.

So you have to break out materials or the silicon carbide wafer business versus the power business.

So the silicon carbide wafer business, that, actually, we are doing things right now, and we should start to see some additional capacity coming online by the end of our -- end of calendar Q4 or our fiscal Q2.

So I think in our fiscal Q3, we'll start to see some opportunity on materials, in that quarter, and that will ramp over the next 12 months through calendar '18 to get into that doubling of capacity for external materials sales.

As far as the power business goes, that has a longer lead time so we're making -- we've been making the same investments, but there's a lag.

So what's happening is most -- that capacity that's coming online, it's 150 millimeter, so we've qualified it on diodes.

But our customers have a period of time until they'll qualify it.

So we'll see the diodes likely start to get qualified by the end of our fiscal Q2.

So we'll get a little bit of benefit in fiscal Q3.

And then MOSFETs, which is the bigger part of that, they're likely be qualified by the customer by the end of our fiscal Q4.

So there's a lag to the power device and that's mostly just based on qualification times.

And our next question comes from the line of Edwin Mok with Needham & Company.

Just quickly, just a follow-up on Wolfspeed.

You mentioned EDN batteries, storage being the end market, and the undermarket has seen growth.

And if I understand that correctly, then wouldn't power will be growing faster than RF and maybe faster in material?

So power is growing faster than RF, I think, from an overall industry standpoint.

We happen to be capacity constrained on both, Edwin, so there's a muting of the actual demand and that's just based on our ability to deliver.

RF actually though is also growing.

So I wouldn't underestimate it, but it's not to the level we're seeing in power.

On the materials side, materials is primarily for power.

Yes, we saw materials for RF, but RF devices consume silicon carbide wafers at a fraction of what power devices do.

So really what you're seeing is both the materials and the power device, whether it'd be MOSFETs or diodes, are being driven by the same market dynamic overall.

Okay, great.

Thanks for clarifying that.

And then just moving on to lighting, you talk about you're strong this quarter on your C&I business.

I'm just curious, how much of that is driven by kind of new products and the launch of LIGHTFAIR or new product you launched in last 6 or 12 months versus just -- you guys had some issue with the channels and recovery from that.

How much is there from recovery versus new kind of new product ramping?

Edwin, I would say it's probably what we're seeing in the short term or what we saw in Q4 is probably more of a recovery in terms of getting the benefit of having service levels come back up, some of the things we've done on the channel investment side and some of the people investment that we're making.

We really think all 3 of those things is really, I would call it rebuilding some of that base momentum.

I think the new products, we have been announcing them, but typically, in lighting, a new product is probably 2, 3, maybe 4 quarters from when you see a real significant uptick, especially if it has to be specified.

If it's specified, it could be 6 quarters.

So I think C-Lite maybe has a better short term opportunity just because it's more of a stock and flow product, but a lot of those new products at LIGHTFAIR, you really won't see the benefit until probably early calendar '18.

And our next question comes from the line of Vishal Shah with Deutsche Bank.

Chuck, just curious to hear your thoughts on what's going on with the stock and flow business?

Are you assuming that business remains soft in the next couple of quarters, or do you see a recovery there?

And then maybe you can talk a little bit about the auto win that you talked -- mentioned in your prepared remarks, around the traction you're seeing in the auto segment and the expectations for that part of the business over the next 12 to 18 months?

Sure.

So on the stock and flow side, what I would tell you is that what we saw is, really, I would clarify it as we have a set of more value-oriented products, that some of them are sold in stock and flow, some are sold in other channels, that's where we saw the weakness.

For us, really, our challenge in stock and flow is that we haven't really had a product line dedicated to what I'll call the value segment for distribution.

So we sell that grade of product, but we haven't had a big presence in distribution in the past.

So for us, C-Lite's an opportunity to address the gap in the product line.

I think that in terms of demand there, I don't know that stock and flow was any softer than any other part of the business.

I'm sure it's not growing a lot but, really, our strategy there is a little different, which is we're going to go try to use C-Lite to gain some share in that application.

In the other parts of the channels where we sell the value stuff, we did some softness although I think that some of that is just a normal seasonal pattern.

And some of that is, frankly, just product selection, which we'll be able to address.

So I'm pretty optimistic if you take our overall value part of our business, that the combination of what we're doing in the core part of it, plus what we're going to do at C-Lite, that should be a segment that we should see some growth in over the next 12 months.

As far as shifting gears there to the LED business, it's great for us to -- we started a couple of years ago getting qualified for automotive and having our first LED shipping to a Tier 1 Ford lighting supplier is important.

But we're -- really, that's the first project and for that business to be significant, it's going to take a series of design wins.

We have those projects in the queue.

I'd say it's really an 18-month cycle before we see a significant impact.

We should see some incremental impact, probably in the second half of our fiscal year.

But really, this is more of a fiscal '19 because, as you know in automotive, you're a couple of years into the process of design wins before they start to ramp up.

And so I'd say, given the queue of things we're working on, I'd say the bigger impact will be in fiscal '19.

But the encouraging thing there is it's a new segment we haven't significantly participated in the past and it really gives us another area to use our high-power technology to grow that business.

So the combination of that plus the San'an JV, we think, really puts LEDs in more of a growth scenario than it has been over the last few years.

Our next question comes from the line of John Quealy from Canaccord Genuity.

First question just following up on the automotive win, congratulations on that.

Was it a competitive win?

And then Chuck, when you talk about '19, is this headlamps, tail in cabin or could you give us a scope of that initial design win?

The initial design win is forward lighting.

I can't get any more specific than that.

And I would say most of the activity we're focused on is exterior right now.

So really, the idea is that our high-power technology fits better with the exterior, although I will say we will certainly -- and now that we're going through the process to get qualified for automotive, I think interior will be a natural extension but it's really secondary to the work we're doing right now on the exterior of the car.

Okay.

And then the follow-up, in terms of M&A, would you let the next CEO take the strategy there?

Or do you have a pipeline that you might be able to grab a couple of small ones before you head out?

Sure, John.

I would say that M&A in lighting is something we've been working on.

We have a pipeline.

We really have been hesitant to push that pipeline over the last few quarters because, really, we were focused on giving Danny a chance to get the team in place and really start to improve some of the basic service levels and build some momentum with the channel before we went down that path.

Given the progress we've made over the last couple of quarters, I think we're in a much better position to look at some M&A in the near term.

So if a project is -- if a smaller project is able to be done here in the near term, we'll certainly consider that while I'm still the CEO, and then we'll let the next CEO take it from there.

But I think strategy is sound enough that if there's an opportunity here over the next 1 or 2 quarters, we'll be prepared to act on it, if it presents itself.

And I think that's where the board's head is as well.

And our next question comes from the line of Jeff Osborne with Cowen and Company.

Just 2 quick ones here.

On the consumer side, Chuck, can you just talk about what the year-over-year change was?

I think the last 10-K, you mentioned that consumer was down about $50 million versus the prior fiscal year?

Can you just discuss what that is, and the expectations for the next 4 quarters?

Do you think we've kind of reached a flat line there?

Or do you still expect that to erode?

Yes, Jeff, look, I don't have the specific number in front of me right now but I will tell you that it was down year-over-year.

But I think at the level we're at today, plus or minus, this is kind of the baseline for what I'll call a premium category with the current channel partners we have.

It could fluctuate up a little bit from here in the high quarters and back to these levels, I would say, in a more seasonally slower quarters.

But we're in the right range.

I don't see it growing a lot from here though.

So if you think about the lighting portfolio a year from now and 2 years from now, consumer will remain a piece of it, but will likely -- because I don't expect it to grow in terms of total dollars, it will be a declining percentage but it'll still remain our key part of the overall strategy and complementary because I think that in addition to how we sell it in consumer, I think with Danny's been working on some things, there's an opportunity to bring those products into the commercial channel.

And I think that's an area we really haven't been able to take advantage of in the past.

Got it.

And that kind of leads into my follow-up question, just as we think about fiscal '18 for the lighting segment as a whole, certainly mix will play a -- so you mentioned gross margins would expand for that segment, so certainly mix will be a tailwind for you if consumers are less, I imagine warranty expense will be less.

But can you just talk about what the other initiatives or other priorities are for yourself and Danny to expand gross margins and any quantification about how to think about that moving forward, especially as you try to march towards your mid-30s gross margin target?

Yes, let me give a high-level view of that and then maybe if Danny wants to add something there.

What I would tell you is that, clearly, as commercial grows versus consumer, there's a mix benefit.

I think obviously, as we improve execution, we should see some benefits there, as you pointed out.

And then I think, really, as we generate -- as we increase the volume, there's a scale benefit, both on the operations side and on the purchasing side that we have not really been able to take advantage of over the last year just because of the change in the business.

So I would say those will be the 3 areas that are likely to give us the leverage.

Obviously, mix is straightforward.

Obviously, as we improve the warranty side of it, that's an obvious one, but I think that the volume leverage is another important piece and the purchasing that goes along with it, that will take a little longer, but I think that's probably as big a lever.

Danny, any further thoughts on that?

No, I think the only thing I would add is around the new products.

It will be around the intelligent lighting and SmartCast.

Yes.

So the new products are likely to have higher margins as well.

So there's a secondary mix benefit -- while as the new products we're introducing, especially the higher-end ones are likely to have more margin than our average portfolio of today.

And our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

Chuck, congrats on an illustrious career.

I had 2 questions.

I don't know if you can call -- say it's steady state but is there a way to think about what the long-term or steady state gross margin for the LED lighting in Wolfspeed business are going to be?

So how about I give you a -- I don't have a specific number but let me give you a way to think about it.

I think LEDs right now are likely to be in a similar range, plus or minus.

I think there's some leverage on the high end of LEDs.

So as we push into some higher end applications, I think those are better margins and give us some upside.

But the JV, as we said before, while it will be accretive from an operating margin -- an operating profit standpoint, it will have lower gross margins.

So I think net-net, I think about LEDs over the next couple of years in a similar range as we're running today, plus or minus, because we have the high-power stuff being offset by the JV.

But net-net, it's accretive overall.

On lighting, I think we should be seeing -- we're targeting incremental improvement over this year and probably the year after that, based on the factors we just said.

So I don't have a specific target for you, but I think we've said in the past, the industry has demonstrated that the lighting business, when it's up and running and has a good portfolio balance, should be able to operate in the mid-30s, plus or minus.

So I think that remains our target.

No time line for you but that is still what we're shooting for here.

And then in terms of Wolfspeed, I think we have a lot of moving pieces right now.

We're pushing very hard to ramp up new products, technology, bring capacity on.

I think the current level may be slightly higher over the next year as an opportunity but I would model kind of where we're at today, but I think if you look out a little bit longer-term, as we get a little bit of scale in that business, we get fully onto 150, there's probably a couple of points of upside there.

But I wouldn't imagine that -- I think that's more of a fiscal '19 than a fiscal '18.

And again, that will depend a little bit on the market dynamics but if demand continues to be strong, that, obviously, as you know, plays in the favor of the semi guys, when demand exceeds capacity, that's a good pricing situation.

Got it, got it.

That's very helpful, Chuck.

And then as a follow-up, you kind of argued the fact that based on demand in Wolfspeed, which kind of makes sense.

I mean, you get into it like autos and eventually, 5G down the road, and you have a pretty good unit growth on the lighting side.

Well, it looks like there's still more ASP erosion, much higher than the Wolfspeed side.

Is it fair to assume that, like, 2, 3 years down the road, Wolfspeed, from a revenue or maybe a profit dollar standpoint, could be much bigger than LED and lighting?

Boy.

So I think if you look at Wolfspeed versus LED, obviously, it's a significantly smaller business today.

I think the profit -- the margins are obviously significantly higher.

So depending on how fast Wolfspeed grows, it could over time generate more profits than the LED business.

That being said, I think with the growth initiatives in LEDs, it's not -- it's a moving target, right?

We are doing things whether it'd be the stuff on automotive, on the high end, or the JV on the other side to drive those profits up.

So I think the Wolfspeed team can grow fast but they have some work to do to catch the LED guys, and I think that's a great opportunity for us in both cases.

Lighting.

I think in lighting, we certainly have margin leverage there.

And I think the growth there will be both organic and a little bit of M&A.

So it's a little hard to call that one because it's going to be a part of what we do -- what we control ourselves in terms of execution, but also part of what happens from an M&A strategy, in terms of bringing in new parts of that portfolio.

So I think lighting, it's a little harder to just give you a linear projection there because there's some inorganic opportunities that could change the math.

I don't know if you want to add anything to that, Mike?

No, that's a good answer.

And our next question comes from the line of Daniel Baksht with KeyBanc.

I just had a quick -- I just want to get a quick clarification on the lighting margins.

So your target is to increase -- just whether you're targeting gross margin to increase, including or excluding the impact from the Feit upfront licensing agreement in fiscal 2017?

So overall margins for the segment in '18, we would expect it to be incrementally higher than '17's.

Including Feit.

Including Feit, yes.

Great.

And then a question on your CapEx for fiscal 2018.

So can you just provide just a little bit of additional color on where you plan to allocate that, like, whether it's brick and mortars?

Or any amount or certain percentage you're planning to allocate the Wolfspeed or just timing in general around that?

So the 220 is heavily weighted to Wolfspeed, there's some incremental stuff for lighting and LED for capabilities and all that, but the bulk of it is Wolfspeed and think if it as -- there's a chunk of it that's infrastructure to be able to put future capacity in as well as the existing to stuff that we have now and then there's the tool sets itself.

So some of it is longer range that will fuel growth in '19 and beyond, from an infrastructure standpoint, and -- but I'd say you're talking about 150-plus is Wolfspeed.

And Mike, what percentage of that is likely bricks and mortar versus CapEx?

By half, 50-50?

It's probably close to 50-50, 40-60.

And our next question comes from the line of Colin Rusch with Oppenheimer.

Given the growth in the Wolfspeed side of things, are you seeing anything within the supply chain that you're worried about at this point or preparing for just to make sure that you run into a bottleneck as you go through this ramp?

Nothing specific.

I'd say any time that a market, an industry, something ramps up, you're obviously going to put pressure on everything, from equipment suppliers to the raw material suppliers, but there's no one area specifically that I'd be concerned about.

I'd say we're putting the pressure on the entire supply chain to ramp up.

But so far, I think it's just a matter of time to work through it.

I don't see any specific items I would call out that are an area of concern, just general ramping up the supply chain.

Okay, great.

And then just with the auto opportunity, I see those design wins are big and then they have a pretty long tail around them.

With where you're at now, can you just talk a little bit about the activity around early-stage designs and which sorts of -- what percentage of some of the automotive demand is really moving into production over the next year?

And where you're expecting over the next year 2 or 3 years, understanding fully that you're not guiding to anything, I just want to get a sense of the production order that you're looking at versus the design wins that you're starting to see with the design cycle.

Yes.

So look, this is really our first -- this is the first project that's using our LEDs.

It's for a single project so I would say -- I want to make sure we keep it a -- it's relatively a small initial one.

It's really -- what this does though is by now being qualified and in the queue, we have a whole list of additional projects that we're working on that can come online.

I would say that there's probably an incremental impact in FY '18, a more significant one in '19.

And if I look at the queue, the ramp is really more in '19 and then into '20, if you look at the projects we're working on right now.

And again, obviously, there's -- that is a lot of different activity right now.

It's primarily focused with one major lighting supplier.

Obviously, there's work being done to expand that to other ones, but the way I think about automotive is this is an investment that -- we've been working on it for a few years.

It's a good first tangible initial sign but it's really a multiyear benefit that it's going to take to see this.

I think it's just -- it's a really good complement though to the overall portfolio going forward.

But I would want to temper that it's not a -- the significant benefit is not an FY '18 one.

You'll start to see it more significant in FY '19, based on the projects we have in queue today.

(Operator Instructions) Our next question is a follow-up from the line of Harsh Kumar with Stephens.

Hey, Chuck, on Wolfspeed side, I was curious are you guys -- you guys are obviously doing these silicon carbide wafer, but are you actually putting, again, epi or some kind of other epi material on top before you sell it?

Could you just help me understand that piece?

Yes.

So in the materials or the silicon carbide wafer business, we sell bare wafers, so silicon carbide wafers, both 100-millimeter and 150, and then we also sell wafers with epi.

And we sell both power epi, which is silicon carbide epi on a silicon carbide wafer.

We're growing that epi ourselves and selling those.

And then on the RF side, RF customers are buying gallium nitride epi on a silicon carbide wafer.

So actually, we're offering that as well.

I would say the growth is in more on the bare wafers than on the epi but there's also an increase in epi demand.

So typically, what happens is some customers, they buy all their epi, and some, in-source some of their epi and buy some of their epi.

So we're servicing customers in both situations today, both for power and RF.

So when we're making capital investments, it's not just to grow the wafers but we're also having to expand capacity to grow epi for those 2 applications.

Got it.

And then competitively, who do you guys see in the -- it's such a niche, kind of like such a small marketplace, with you guys being a pretty big player, but who else is out there?

Yes.

Harsh, it just depends, right?

The epi business is very niche.

I don't know that there's anyone I would call out there.

On the substrate side, today, we believe we have the largest market share in substrates.

I know there are other players out there, but there is no data that tell you what size they are.

So there's at least one other major supplier in the U.S. and there's some smaller ones around the world.

But I would say today, it's probably Cree plus another larger one in the U.S. that make-up the -- they're probably the largest noncaptive supplier of the silicon carbide and even the captive ones are relatively small scale today.

So there are some other players of a different scale around the world, but I would say that the 2 of us probably make-up the majority of the demand that's being consumed out there today.

And that concludes our question and answer session for today.

I'd like to turn the floor back over to Mike McDevitt for any closing comments.

Thank you for your time today.

We appreciate your interest and support and look forward to reporting our first quarter results on October 17.

Good night.

Good night.

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

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

Everyone, have a great day.