Wolfspeed Inc (WOLF) 2018 Q3 法說會逐字稿

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

Third Quarter 2018 Earnings Call.

(Operator Instructions)

I'd now like to introduce your host for today's conference, Mr. Raiford Garrabrant, Director of Investor Relations.

Sir, please go ahead.

Thank you, Liz, and good afternoon.

Welcome to Cree's Third Quarter Fiscal 2018 Conference Call.

Today, Gregg Lowe, our CEO; and Mike McDevitt, our CFO, will report on our results for the third quarter of fiscal year 2018.

Please note that we will 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.

(Operator Instructions)

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

Thanks, Raiford, and good afternoon, everyone.

For today's call, I'll briefly discuss our financial results, after which Mike will provide more detail regarding Q3 and our Q4 outlook.

After that, I'll provide a quick recap of the strategic plan we presented at our Investor Day in February along with some color on how each business is performing against that plan.

Our results for Q3 were an initial step in the right direction as we execute on our strategy.

Revenues and gross margins were at the top end of our range and EPS exceeded the top end of our range, with each business showing progress versus our targets.

While we're in the very early stages of our new strategic plan, it is encouraging to see the 3 businesses coming out of the gates with positive momentum.

I'll now turn the call over to Mike to provide more details on the quarterly results and the outlook for next quarter.

Thank you, Gregg.

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 historical summary of other key metrics.

For the third quarter of fiscal 2018, revenue decreased 3% sequentially and increased 4% year-over-year to $356 million and non-GAAP earnings were $4 million or $0.04 per share, all of which exceeded our targeted ranges in first call consensus.

These Q3 results include less than a month's activity from the Infineon RF Power business we acquired on March 6, 2018.

Excluding the acquired RF Power business, our fiscal 2018 third quarter revenues were $352 million, which was at the upper end of our target range and above first call consensus.

Non-GAAP earnings remained at $4 million or $0.04 per share, exceeding our target in first call consensus.

On February 26, 2018, we announced our long-range business strategy.

As part of this transformation plan, we adjusted the outlook of our Lighting Products segment to be focused on fixing the business and providing modest growth.

We consider this a triggering event and therefore performed an impairment test on our Lighting Products segment in connection with the financial close of our fiscal 2018 third quarter.

From this testing, we concluded that the fair value of our Lighting Products segment was less than its carrying value, which resulted in a $247.5 million goodwill impairment charge taken in the third quarter.

This is the largest driver in our GAAP loss of $241 million or $2.40 per share for the third quarter of fiscal 2018.

Overall, our non-GAAP earnings exclude $244 million of expense net of tax or $2.44 per diluted share from our Lighting Products segment goodwill impairment, our Lextar investment fair value decrease, noncash stock-based compensation, acquired intangibles amortization, the RF Power acquisition transaction and transition costs and other items.

Fiscal 2018 third quarter revenue and non-GAAP gross profit for our reportable segments were as follows: Wolfspeed revenue grew 16% sequentially and 46% year-over-year to $82 million and was above our targeted range.

Organic growth was 10% sequentially and 38% year-over-year and above our targeted range due to better-than-anticipated factory execution.

Our team has done a great job of beginning to bring new capacity online during the quarter and managing the expansion ramp, which yielded gross profit growth of 15% sequentially and 49% year-over-year to $39 million for a 48% gross margin, which was above our target.

LED Products revenue declined 6% sequentially and increased 9% year-over-year to $43 million (sic) [$143 million], exceeding the upper end of our targeted range due to strong demand in high-power general lighting, video screen and specialty lighting applications.

Gross profit was down 2% sequentially and up 17% year-over-year at $38 million for a 26.4% gross margin, a 110 basis point sequential increase.

The gross profit and margin increase was primarily due to strong demand for our products and a more favorable product mix.

Lighting Products revenue was down 10% sequentially at $131 million, which was in line with our targeted range.

Gross profit increased 9% sequentially to $25 million for a 19.1% gross margin, a 320 basis point sequential increase.

The gross profit margin increases were primarily due to lower warranty-related costs and incremental factory improvements.

Non-allocated costs totaled $1 million for the third quarter of fiscal 2018 and are included to reconcile through our $101 million non-GAAP gross profit for a 28.3% gross margin that was at the upper end of our 28%, plus or minus, target.

Non-GAAP operating expenses for Q3 were $97 million and slightly lower than our target primarily due to lower R&D, which is timing related.

Our non-GAAP operating income was $4 million, which exceeded the upper end of our target in first call consensus.

Our non-GAAP tax rate was 7% as targeted.

We ended the quarter with $401 million in cash and investments and had $316 million borrowed on our line of credit.

On March 6, 2018, we spent $427 million to acquire certain assets of the Infineon RF Power business that is reported as part of our Wolfspeed segment.

During the third quarter, cash from operations was $20 million and capital expenditures were $46 million, including patents, which resulted in negative free cash flow of $26 million that was in line with our target.

Additionally, we received $16 million from the exercise in employee stock options in the quarter.

Our current capital allocation priorities remain focused on expanding capacity in our Wolfspeed business as demand for these products exceed our current ability to supply.

In fiscal 2018, we target capital spending of $190 million, plus or minus, primarily driven by expanding Wolfspeed's production capacity to support forecasted customer demand.

While our efforts to increase capacity are in line with plan, the current cash outflow forecast is lower than previously announced due solely to timing.

Overall, we target fiscal 2018 free cash flow being a negative $15 million, plus or minus.

As mentioned previously, the negative free cash flow is due to accelerating the Wolfspeed capacity investments to support the substantial growth opportunity forecasted over the next several years.

We are on target with our plan to double wafer capacity for external materials customers by the end of calendar 2018.

We are also on target with our additional power and RF device capacity to start coming online in fiscal Q4.

This plan is intended to double our power device capacity by the end of calendar 2018 from where we exited fiscal 2017.

As we ramp this new capacity, we anticipate we could have some variability in our initial production yields and factory utilization that may reduce our near-term Wolfspeed gross margins.

Days sales outstanding decreased a day from December to 36 days at the end of March.

Inventory days on hand increased to 109 days at the end of March as inventory increased $37 million to $310 million.

$26 million of this increase relates to the RF Power inventories acquired, inclusive of a $5 million preliminary purchase accounting basis step-up.

The remainder of the inventory increase is primarily Wolfspeed work in process to support business growth and lighting finished products goods.

We target Q4 ending inventories at less than 100 days, which is within our inventory target range of 90 to 100 days.

Q4 total company backlog is tracking ahead of this point last quarter and Q4 last year.

We target Q4 company revenue in a range of $390 million to $410 million based on the following segment trends: Wolfspeed revenue up 27%, plus or minus, sequentially based on strong organic growth and having the RF Power acquisition included for the full quarter; LED revenue up 7%, plus or minus, sequentially due to solid growth in high-power LED components with modest growth in our mid-power JV components; lighting revenue up 9%, plus or minus, sequentially back to Q2 levels as we come out of a seasonally slow Q3.

We target Wolfspeed revenue and gross profit to grow sequentially despite the impact of the recent export ban on Chinese technology company, ZTE.

Due to the current ZTE export ban, we now target the non-GAAP earnings of the acquired business to be dilutive by $0.01 per share over the next several quarters.

Additionally, we have inventory that is custom-made for ZTE, which could become unsellable at some point.

In the future, if we determine the inventory has become impaired, we would need to record a onetime charge equal to approximately $0.01 per share.

Despite the near-term impact of the export ban, we remain confident that the long-term strategic benefit is still intact for this acquisition.

We target Cree's consolidated Q4 non-GAAP gross margins to be 29.7%, plus or minus.

The sequential improvement is primarily due to Wolfspeed being a higher portion of the total revenue mix.

Wolfspeed margins are targeted sequentially lower as the RF Power business just acquired has lower margins than the rest of our Wolfspeed portfolio and we have lower near-term RF Power factory loading due to the ZTE export ban.

Sequentially, we target incremental lighting margin improvement and similar LED margins.

During Q4, we are implementing a plan to rightsize our Lighting Products resources to align with our business strategy.

We target incurring a $7 million, plus or minus, GAAP restructuring charge as part of this effort that will be excluded from our non-GAAP targets.

The restructuring plan is aimed to be fully implemented before the end of the September 2018 quarter, after which we target fully realizing $15 million in annual operating expense reductions.

We are targeting Q4 non-GAAP operating expenses to be 27.5% of revenue, plus or minus, which is similar to Q3.

Our operating expense target includes the full quarter spend of our RF Power acquired business, incremental spend related to Wolfspeed R&D, IT legal costs, semiconductor sales team additions, trade show costs and higher variable comp related to higher sales, which are partially offset by slightly lower lighting OpEx as we begin to implement our rightsizing initiatives.

We target Q4 non-GAAP operating profit to be between $7 million to $11 million.

Q4 invested cash and revolver borrowings are targeted to be at similar levels to where we exited Q3.

And as a result, we target net interest to be an expense of $1.5 million, plus or minus.

We target a 7% Q4 non-GAAP effective tax rate and Q4 non-GAAP net income to be between $5 million to $9 million or $0.05 to $0.09 per diluted share.

Our non-GAAP EPS target excludes acquired intangibles amortization, noncash stock-based compensation, acquired business transaction and integration cost, the lighting restructuring charge and other items.

Our GAAP and non-GAAP targets do not include any potential reserve for the ZTE specific inventory.

Additionally, our Q4 GAAP targets outlined in our earnings press release include $5 million, plus or minus, of RF Power acquisition and integration cost and $5 million, plus or minus, in amortization of the acquired inventory basis step-up.

These costs are excluded from our non-GAAP targets.

Lastly, like many global manufacturers, we are monitoring the Office of the United States Trade Representative's notice and request for public comment published in April 2018 on the potential tariffs on certain goods imported from China, including certain of our LEDs.

At this point, we are working to fully understand the potential impact on our customers, our suppliers, our business and to determine our response within the USTR's published time frame.

Our Q4 GAAP and non-GAAP targets do not include any impact from a potential Chinese LED tariff.

Our Q4 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 Gregg.

Thanks, Mike.

Q3 was a busy one for us as we completed our strategic review process, held an Investor Day to present the transformation plan, signed a supply agreement in excess of $100 million for silicon carbide materials, and acquired the Infineon RF Power business.

From a strategic perspective, our Wolfspeed silicon carbide materials, power and GaN RF businesses are the primary growth drivers of the company.

Wolfspeed performance in Q3 illustrates the tremendous potential of the business, with organic revenues increasing nearly 40% year-on-year and gross margins increasing almost 100 basis points.

The team is working hard ramping new production to meet growing demand, and the engineering and production teams are working together to quickly resolve challenges associated with rapid production expansion.

The demand signals for Wolfspeed remain strong.

With the adoption rate of electric vehicles, the increasing use of silicon carbide and GaN technologies in communications, solar and industrial markets, we see a substantial opportunity for the coming decade.

We're also excited to have acquired Infineon's RF Power business during the quarter, which will expand our leadership in RF through increased scale, a broader product offering and additional domain expertise.

We're still in the early stages of the integration process, but the management team and the employees are committed to making this a success.

Now while the sales restriction with ZTE is creating some short-term headwinds in this business, it doesn't change the long-term strategic benefit of this acquisition.

For LED Products, we concluded from the strategic review process that the business could drive value through greater focus.

We have an incredible brand, a great channel and a tremendous amount of IP, positioning us as a leader in high-power technology.

Going forward, we're going to take those capabilities and focus them in areas like automotive lighting and application-optimized solutions that are stickier and have an opportunity for us to create more value, enabling us to deliver modest revenue growth and gross margin expansion and resulting in great free cash flow generation.

In Q3, the business performed well against these goals with both revenue and gross margin increasing year-over-year.

This was driven by solid end demand and good factory execution as we reallocate some manufacturing capacity from LEDs to Wolfspeed.

Moving on to lighting.

The single objective coming out of the strategic review process was to fix the business.

We've made significant changes to our design and product release methodologies, resulting in great initial revenue traction on new products and lower warranty claims.

We've also improved relationships with our channel and distribution partners, giving us a larger footprint and a better customer-facing presence.

In Q3, the hard work of the past year started to pay off.

And while it's still early, it feels like the business is turning a corner.

Gross margins improved more than 300 basis points quarter-over-quarter, and we target higher revenue and additional margin improvement in Q4.

This is being driven by a combination of factors, continued improvements in quality, better channel engagement and increasing demand for our new products.

The company's new strategic plan will create a pretty significant transformation.

Wolfspeed, our smallest and most profitable business today, will become our largest and most profitable business over the time frame of the long range plan, roughly quadrupling in revenue by 2022.

Our LED business will see modest growth by focusing on stickier subsegments.

And our lighting business will also see modest growth from where we're at today with a focus on improving quality and margin.

This company-wide mix shift, combined with some efficiency improvements, will enable us to drive significant growth in gross margin, about 1,500 basis points of improvement to around 40%, establishing a 40-20-20 business model, 40% gross margin, 20% OpEx and 20% operating margin.

To help facilitate this model, we've made some organizational changes.

Our semiconductor manufacturing assets, which were split between the Wolfspeed operation and LED, have been combined under one leader.

Rick Mcfarland, who's been with Cree for 7 years and has extensive experience from Freescale before that, will be running the combined operation.

Putting them under one leader will give us an enormous opportunity for efficiency improvements, yield improvements and, equally important, will allow us to capitalize on the fungibility of those assets as we shift towards our higher-margin-type opportunities.

We've also combined our sales team in the Wolfspeed and LED semiconductor organizations under the leadership of Thomas Wessel.

Thomas has tremendous experience in the semiconductor industry, working for many years at Texas Instruments and more recently as the global sales and marketing lead for Analog Devices.

He brings to Cree a significant amount of experience in automotive, communications, industrial and distribution.

All in all, we still have a lot of work to do and the progress won't happen in a straight line.

Fixing the lighting business, focusing the LED business and substantially growing Wolfspeed will require tremendous execution in the face of multiple challenges.

Q3 is a good first step, and we are committed to executing the new strategic plan going forward.

With that, I'd like to turn it back over to the operator so we can take any questions you might have.

(Operator Instructions) Our first question comes from the line of Joe Osha with JMP Securities.

On the -- looking at the silicon carbide business, I'm wondering what kind of lead times you have for tools at this point if you were to decide that you wanted to add even more capacity, for example.

How long would it take for that to filter through the process?

We're in the midst of ramping that -- the silicon growth capability right now, doubling that capacity by the year-end, and that is going exceptionally well.

The one thing, Joe, to -- just to remind everybody, it's not like we can go down the street and buy the tools.

A lot of these tools are kind of -- we're getting piece parts and we build them basically ourselves.

So it's a very proprietary process.

And there is some limit in terms of the speed of bringing these things up online.

We're currently on track right now to continue to grow the capacity as planned, and we're anticipating that we'll continue growing that capacity next year.

In terms of lead time, Mike, do you want to add a couple?

Yes, some -- it depends on the tool set, but effectively, we factor that into our buying.

And as Gregg was saying, to some extent, we customize a bunch of stuff when it comes in, and then there's the bandwidth of the team that's getting it up and operational.

So -- but there are some tool sets that take anywhere from 9 to 12 months to get in.

And just as a quick follow-up, Mike, for you.

Would you -- or are you planning on sharing some of the divisional gross margin contributions to that 40% number that we heard about?

For the long-range goals?

That's correct.

Yes.

Our intent is to continue, like we lined out at the Investor Day is that Wolfspeed would be the margin leader, and that would be approximating over the long haul, call it, in the 50% range.

And then both the lighting and the LED businesses would be in the low 30s.

Our next question comes from the line of Brian Lee with Goldman Sachs.

First one was just on the Infineon acquisition.

Appreciate you breaking out what was organic and nonorganic in Q3.

Just wondering, can you give us a sense for the revenue contribution you're expecting for Infineon in Q4?

It just seems like you were implying about a $30 million full quarter contribution based on the run rate you guys described at the time of acquisition, but maybe there's some seasonality or timing issues.

If Wolfspeed is set to grow organically into fiscal Q4, it would imply the Infineon pick-up is doing a much lower run rate than that.

So wondering how we could reconcile.

Yes, Brian.

I'll start off and then Mike will give you a little bit more detail.

The biggest impact is the impact of the restriction on selling to ZTE.

We normally don't break out customer percentages specifically, but I think in this case, it probably is helpful.

So ZTE was a large customer, approximately 20% of the revenue from the Infineon power business.

So obviously, not being able to ship to them created a headwind.

And I think when we announced the acquisition, we talked about anticipating or targeting $115 million of annual revenues, but it wasn't a flat line.

So to get to the $30 million, you basically had to divide by 4, and it was going to ramp up.

So think of it starting out lower and then building over time is how people should model that.

Okay, all right.

That's helpful.

I'll follow up offline with some follow-ups there.

Just on the margins quickly, Mike, the consolidated margins at 29.7%.

I suppose if you have LED flat and Wolfspeed down a smidge, it would imply lighting is going to be up another probably 300 basis points sequentially.

Is that kind of a fair math?

Or is there something that maybe I'm missing in the margin walk there?

Yes.

What we would be kind of targeting is a couple hundred basis point improvement sequentially on lighting.

Our next question comes from the line of Paul Coster with JPMorgan.

Mike, you mentioned that the product mix might weigh on the Wolfspeed margin.

It's -- but I may have confused that with the ZTE commentary.

Are there -- is it one and the same?

So 2 pieces to it.

So the first part is the RF Power business that we bought, its component packaging.

So it has lower systemic margin than our broader Wolfspeed portfolio but still accretive to Cree overall.

So that's one part of it.

And then the second part is we do have some factory unloading just with not being able to make and ship ZTE parts.

Okay.

And then a quick follow-up.

The largest EV market in the world will probably be China, right, at least unit volume-wise.

And I'm wondering, are you already selling into that market, nurturing relationships?

And how does this trade dispute play into that?

Paul, it's Raiford.

Yes, we're selling into the EV market around the world, and we don't break out the number of design wins we have here or there, but we've seen, generally speaking, an acceleration in activity from design wins to road map discussions, capacity discussions with OEMs and Tier 1s around the world.

And we'll have to continue to assess with what the USTR is doing and fully understand the potential impact for our customers, but that's -- we believe the intent is not to punish U.S. companies and hope we can get a decision that doesn't hurt Cree.

Our next question comes from the line of Jeff Osborne with Cowen.

Just 2 quick ones.

On the acquired Infineon business, I was curious if you could share just roughly what percentage of the packages you're making are silicon-based versus silicon carbide.

And then as you move to more silicon carbide over time, which I assume is the strategy in using your own materials, what happens to margins as that progresses?

And then...

Yes.

Most of the business -- I'm sorry.

Yes, I would say most of the business is traditional silicon LDMOS technology today, and we certainly bought it with the intent to capitalize on our position with gallium nitride.

So obviously, we'll be transitioning that business based on the demand that -- for more bandwidth at 4G and then the near necessity for gallium nitride with 5G base stations.

So we would anticipate that, that business would migrate from predominantly an LDMOS silicon-based capability to a predominantly GaN-based capability.

As we -- and we certainly anticipate that we'd be able to make gross margins go up as we make that transition.

Got it.

Is there any thought in possibly giving some context as to the mix within Wolfspeed as it relates to materials, RF and power?

Is there any color that you can provide on that?

I think at this time, we're not contemplating breaking it out that specifically.

We think it's better and more representative just to talk about the overall whole of the business.

Our next question comes from the line of Harsh Kumar with Piper Jaffray.

Gregg, I was curious of the market you mentioned for silicon carbide.

Which one do you see as the fastest grower in the near to midterm?

And then I have a follow-up.

Well, I think certainly mid to long term, the largest market is, for sure, the electric vehicle market.

It's got a huge amount of potential.

I would also say that even in the near term, that's driving a lot of the activity as well.

Just the efficiency improvements that you get, the power density capability that you get really aligns nicely with what people are looking for in terms of electric vehicle.

It helps car manufacturers either reduce the amount of batteries they use for a certain amount of range or increase the amount of range they get for a certain amount of battery.

And so -- and those are things that are high on the list of people buying electric vehicles.

So I think that's really the driver.

The good news is that we've got a lot of other sort of lines in the water, if you will, and we've got a lot of interest in solar and industrial and so forth.

And so our -- with the new sales team coming onboard, trying to expand that footprint is an additional objective we have.

And then, Gregg, for my follow-up, I'm not sure if you mentioned, but the $15 million OpEx reduction in lighting, when do you complete that?

And when can we start to think of modeling that into our models?

So we're rolling out that plan as we speak.

So we expect to have it fully implemented within the September 2018 quarter, so our Q1 of our fiscal '19.

And then coming out of that quarter is when you can expect that we have that fully baked in.

I guess the only thing I'd like to put out there for the long models is some of the savings, we may choose to reinvest into Wolfspeed and funneling that growth as well.

So...

Our next question comes from the line of Edwin Mok with Needham.

So the first question I have on the -- I guess, on the composition side on the silicon carbide material market.

Given the growing demand -- you guys added capacity, have you seen your competitor add any capacities?

And some of those device manufacturer actually also have their own kind of wafering capacity.

Have you seen any of those captive guys also adding capacity?

Well, I'll start and maybe Raiford can add a few comments and so forth.

There's a tremendous amount of demand, and we're certainly engaged with a lot of customers at this point.

And what I would say is the customers are pretty impressed when they come on campus and they see a whole bunch of cranes around here, expanding the capacity.

And they also see that we've got a tremendous technology base.

Our ability to ramp this capacity so far has been demonstrated to be very, very solid.

The $100 million, the greater than $100 million supply agreement that we inked last quarter, I think, is a good indication of that.

And what I would tell you is the amount of discussions that we're having right now relative to how do we -- how do our customers get more capacity and how do they secure more capacity, the amount of those discussions have simply increased over the period of time.

Yes.

And to Gregg's point, based on the data we contract from others and the market, clearly, others are adding some capacity as well, but I think we're starting off with a scale lead relative to where others are both in terms of what we sell externally and make internally.

And then the rate at which we're adding capacity is what's leading to customers wanting to enter into large, long-term supply agreements with us.

Okay, great.

That's helpful color.

And then I guess on the Infineon acquisition, just kind of longer-term question, I guess.

Now that you guys bought the business, you have some views or have better insight into the -- how the packaging facility is working, right.

Is there a way to kind of think about how much that will benefit your margins, long term, in terms of driving or improving your margins now that you're packaging in-house?

And do you see a need, long term, to invest in that capacity to increase packaging facility to support your business growth?

So a couple of things.

The -- I would say that we're now 2 months in the -- owning this operation.

So we're kind of at the early stage.

It's a great team.

It's a great leadership team.

It's an incredible engineering workforce.

It's great operations team.

So we're really excited about that.

The factory they have is a highly automated factory.

At this point, it's underutilized.

And obviously, the ZTE situation hurts that.

So we certainly have an ability to grow that capacity.

I think in terms of margin, as we transition the business from a silicon LDMOS to more of a gallium nitride or GaN business, it will certainly be incremental.

It will be increases in gross margin, and it will certainly be substantially accretive to Cree's overall business.

So we feel real good about that.

We also see that there's a -- we've got a nice growth trajectory ahead of us.

The demand for bandwidth continues to be high, and the transition for -- towards 5G being sort of GaN is kind of in the sweet spot of that transition.

So overall, feel really good about it.

It's -- I mean, it's a bummer we started off -- the thing with the ban on selling to one of our bigger customers.

I think that's a -- that's certainly a short-term headwind.

But like I said, it doesn't change the strategic rationale around what we're doing, and we're really excited about the potential.

Yes.

Also, I would add, Edwin, is just it doesn't change our long-term range model that it's actually in support of the 40-20-20 model.

Our next question comes from the line of Daniel Baksht with KeyBanc Capital.

Could you talk about how you're targeting a sequential improvement in LED Products for both revenue and gross margin in light of some reallocated capacity to Wolfspeed?

Is the growth mix related or JV related?

So as I mentioned in my comments, we've got some good demand in our high-power products.

So we're expecting good growth sequentially in the quarter and then some modest growth in the JV.

Actually, our target for gross margin is similar to last quarter, so kind of staying level with that by getting good demand growth.

And right now, in the near term, with what we've seen, backlog is in a good position as we started this quarter versus last quarter and the same period a year ago.

So at least in the near term, we're winning in those high-power general lighting, video screen and specialty lighting applications.

Okay, great.

And then on CapEx, you previously mentioned you'd spend less year-over-year in 2019.

Now that the 2018 CapEx is $190 million this year, if I heard that right, does that statement about 2019 CapEx still stand?

Yes.

And just think of it as the $190 million, the effort that we're undertaking that originally align with the $220 million is still the same effort.

It's just the timing of the cash outflow, so all the plans on what we're initiating and projects and that is still in line with plan.

So FY '19's targets that we kind of talked macro about at the Investor Day are still in place.

Our next question comes from the line of Craig Irwin with Roth Capital Partners.

So Gregg, there's a fairly lively conversation out there among all the customers of your silicon carbide wafers.

A lot of them have opinions about where wafer prices need to head to unlock the multibillion-dollar TAM that we're all looking at, where investors are looking at to make Cree attractive over the next number of years.

Can you maybe share with us your thoughts on pricing strategy for wafers, whether or not you believe some of the more aggressive prices that your customers are hoping for, whether you believe those are necessary?

And any other color that you think we should factor as far as what will support sustained gross margins on the wafer side over the next few years.

Well, Craig, we certainly are very much active in terms of driving the cost of our silicon carbide technology down over the time period.

And part of this -- combining our operations was to get better efficiency out of the manufacturing operations as well.

We're in the early stages of looking at what those numbers might be, but we're obviously attacking that pretty rigorous -- vigorously.

It's interesting.

Right now, if you take a look at the cost of silicon versus silicon carbide and you kind of integrate it with the efficiency gains that you get out of it, there is good reason why people are moving towards silicon carbide.

If you add to that then and a pretty good and intensive cost programs that we're working on inside the business, I think it's just that, that cost value analysis thing is just going to get a lot better.

So it's obviously something that we're working on.

I'm not going to share any numbers right now, but we're not just standing still saying, "Wow, this is a really great market and let's just stay where we're at." We know that if we continue driving cost down that it will drive the demand for silicon carbide up and it will expand the SAM, if you will, for the use of silicon carbide.

And that's absolutely what the intention is, so a lot of very hard work going on right now at the company that's focused on driving cost down.

Good to hear, good to hear.

So my follow-up question is on the license agreement with Nexperia, GaN on silicon, GaN on silicon carbide.

It's really nice to see Cree pulling in other participants into this market, helping create additional customers.

Can you maybe give us color on whether or not you'd expect to pull in other silicon carbide producers potentially in the future?

Should we see similar licenses to other GaN power chip producers?

Would you expect this to take similar momentum to what Cree achieved in the lighting business, maybe licensing some of its technology for fixtures and chips over the last many years?

Well, I think, Craig, the approach that we've had on silicon carbide is really having a materials business that works with other folks out there.

We inked the greater than $100 million deal with Infineon exactly for that purpose.

So we are absolutely of that same mindset that there's a real opportunity for us to take the -- what I think is kind of a tipping point, if you will, in the silicon to silicon carbide movement and really expand that pretty substantially.

So yes, we're absolutely doing that.

I think the GaN licensing deal with Nexperia was sort of a separate thought process.

But I think as it relates to silicon carbide, we're working with a lot of folks to try to make silicon carbide the technology of choice for the power electronics industry.

(Operator Instructions) Our next question comes from the line of Colin Rusch with Oppenheimer & Co.

Just following on, on that.

Just thinking about the long-term customer interest and the product mix interest from the automotive customers, can you talk a little bit about how many of those are actually looking at wafer supply?

And how many of them are looking at the devices that you guys are selling?

I think it's a combination.

As we've talked about, the reason we're expanding the capacity for both our materials capacity sales to third parties as well as the wafer fab and ability to make power devices is for these reasons.

We're having discussions with automotive companies and Tier 1s globally who are interested, and we're having conversations with device makers who are having similar conversations in need of a sure source of supply.

So from what we're seeing, the reason we're making the significant investments we are and the reason you're seeing the business growth is because we're participating in both ways.

And can you talk a little bit about the lumpiness potentially of gross margins as you ramp capacity?

How much drag do you expect as you bring some of this capacity up?

That's hard to -- it's hard to model.

What I would tell you -- I've been through a lot of capacity ramps and there's always -- it seems like the crisis of the day.

And that is very, very normal.

What I would tell you, I was very impressed with the Cree manufacturing and engineering operations this past quarter.

We faced a couple of challenges.

We were able to get a team together.

We fixed them and so forth.

I think by and large, that great teamwork and cooperation across the organization will allow us to resolve most of these things going forward, but there'll be some issues going forward.

I don't anticipate it anything big.

I'm not trying to foreshadow anything big.

I'm just saying it's very, very normal that as you're ramping capacity like we are that something is going to come up and we're going to have to put a team together.

And the good news is the team really did a great job of executing this past quarter.

And I'm showing no further questions in queue at this time.

I'd like to turn the call back to Mr. Lowe for any closing remarks.

Well, thanks, everybody, for your time today and your interest in Cree.

We appreciate your interest and support, and we look forward to reporting our fourth quarter results in August.

Thank you.

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

This concludes the program, and you may now disconnect.

Everyone, have a great day.