Wolfspeed Inc (WOLF) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Cree's Fourth Quarter 2018 Earnings Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

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 Fourth Quarter Fiscal 2018 Conference Call.

Today, Gregg Lowe, our CEO; and Mike McDevitt, our CFO, will report on our results for the fourth 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) If you have additional questions, please contact us after the call.

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 Q4 and our Q1 outlook.

After that, I'll provide an update on how each business is performing, along with some highlights from the quarter.

Fiscal year 2018 finished with good momentum, with fourth quarter non-GAAP earnings per share that exceeded the top end of our range, driven by Wolfspeed growth and gross margin improvement.

The demand for silicon carbide and GaN technologies continues to grow, as evidenced by the excellent results of our Wolfspeed business.

We are expanding our manufacturing footprint and broadening our product portfolio to extend our leadership position in this market and drive growth.

I'll now turn it 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 a historical summary of other key metrics.

For fiscal 2018, revenue was $1.5 billion and non-GAAP earnings were $19 million or $0.19 per share.

Non-GAAP earnings were above first call consensus estimates due to our strong Q4 performance.

Non-GAAP earnings excluded $300 million of expense net of tax, or $3 per share from the lighting segment goodwill impairment charge in Q3, noncash stock-based compensation, acquired intangibles amortization, the Infineon RF Power acquisition transaction and integration cost, and our lighting segment rightsizing cost and other items that are outlined in our earnings press release.

Fiscal 2018 revenue and non-GAAP gross profit for our reportable segments were as follows: Wolfspeed revenue grew 49% year-over-year to $329 million and gross profit was $158 million for a 48.2% gross margin, which is a 140 basis point increase year-over-year.

Organic growth was 35% year-over-year with strong growth in materials and devices.

The additional growth was related to the RF Power acquisition, which is included in our segment results for the last 4 months of the year.

Gross profit grew at all product lines due to higher overall sales.

And gross margins increased due primarily to changes in product mix and successfully managing our factory execution while we were significantly increasing our production capacity.

LED Products revenue grew 8% year-over-year to $596 million, and gross profit was $158 million for a 26.5% gross margin, which is a 110 basis point decrease year-over-year.

Revenue increased due to strong demand in our high-power general lighting, video screen and specialty lighting applications, along with the addition of the mid-power product JV sales.

Gross profit increased year-over-year due to higher sales, while gross margin was lower primarily due to shift in product mix, including the mid-power JV sales, which generally have lower gross margin.

Lighting Products revenue declined 19% to $569 million and gross profit was $109 million for a 19.2% gross margin, which is an 880 basis point decrease year-over-year.

Lighting revenue was down due to softness in the North America commercial lighting market, the impact of prior product quality issues, the Feit settlement received in fiscal 2017 that did not reoccur in fiscal 2018, and lower consumer product sales as we shifted emphasis to the premium lamp category.

Gross profit and margins were down primarily due to nonrecurrence of the Feit settlement, higher warranty-related cost and lower sales reducing factory utilization.

Non-allocated costs totaled $5 million for fiscal 2018 and are included to reconcile to our $420 million non-GAAP gross profit for a 28.1% gross margin.

For the fourth quarter of fiscal 2018, revenue increased 15% sequentially and increased 14% year-over-year to $409 million, which was at the upper end of our targeted range and above first call consensus.

Non-GAAP earnings were $12 million or $0.11 per share, which exceeded our targeted range and first call consensus.

Our non-GAAP earnings exclude $45 million of expense net of tax, or $0.44 per diluted share from noncash stock-based compensation, acquired intangibles amortization, the RF Power acquisition transaction and integration costs, and lighting rightsizing costs and other items.

Fiscal 2018 fourth quarter revenue and non-GAAP gross profit for our reportable segments were as follows: Wolfspeed revenue grew 34% sequentially and 81% year-over-year to $110 million and was above our targeted range.

We continue to have strong organic growth in addition to the RF Power business results for the full quarter.

Gross profit grew 34% sequentially and 90% year-over-year to $53 million, for a 47.9% gross margin, which was above our target range.

The team continued to do a great job executing in the factory, which enabled the gross margin expansion.

Additionally, the acquired business results exceeded our targets and were slightly accretive to Q4 non-GAAP earnings.

LED Products revenue increased 9% sequentially and year-over-year to $156 million, which was at 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 up 13% sequentially and up 15% year-over-year to $43 million for a 27.4% gross margin, which was above our target range.

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

Lighting Products revenue was up 10% sequentially at $143 million, which was in line with our targeted range.

Gross profit increased 17% sequentially to $29 million for a 20.3% gross margin, a 120 basis point sequential increase.

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

Non-allocated costs totaled $2 million for the fourth quarter of fiscal 2018 and are included to reconcile to our $123 million non-GAAP gross profit for a 30% gross margin that was at the upper end of our 29.7% plus-or-minus target.

Non-GAAP operating expenses for Q4 were $108 million and slightly lower than our target due primarily to earlier realization on some of the targeted lighting rightsizing savings and lower IP litigation spending.

Over time, we target reinvesting these lighting savings back into our Wolfspeed business to support its long-range targeted growth.

Our non-GAAP operating income was $15 million, which exceeded the upper end of our target and first call consensus.

Our non-GAAP tax rate was 8%, which was slightly higher than targeted due to the greater income.

We ended the year with $387 million in cash and investments and had $292 million borrowed on our line of credit.

During the fourth quarter, cash from operations was $42 million and capital expenditures were $59 million, which resulted in negative free cash flow of $17 million.

For the year, we generated $167 million of cash from operations and spent $195 million for capital expenditures, which yielded negative free cash flow of $28 million, which was in line with our targeted range.

Additionally, we spent $429 million to acquire certain assets of the Infineon RF Power business, and we received $93 million from the exercise of employee stock options during the year.

Our capital allocation priorities remain focused on expanding our capacity in our Wolfspeed business.

For fiscal 2019, we target capital spending of $220 million plus or minus, primarily driven by expanding Wolfspeed's production capacity to support forecasted long-term customer demand.

Overall, we target fiscal 2019 free cash flow to be a negative $10 million plus or minus.

The negative free cash flow is due to the timing of the Wolfspeed capacity investments to alleviate current constraints and support the substantial growth opportunity forecasted over the next several years.

We are slightly ahead of our target to double wafer capacity for external material customers and double our power device capacity by the end of calendar 2018 from where we exited fiscal 2017.

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

Day sales outstanding decreased 2 days from March to 34 days at the end of June.

Inventory days on hand decreased to 91 days at the end of June as we reduced inventory balances $14 million to $296 million.

$5 million of this decline was related to the amortization of the basis step up on the acquired RF Power inventory during Q4.

With respect to the tariffs that went into effect on July 6, the team has worked diligently to minimize the impact on Cree.

As a result, we target that July 6 tariffs will reduce Q1 earnings by approximately $0.02 per diluted share and will cost $0.03 per diluted share, plus or minus, per quarter starting in Q2.

Any potential impact of any tariffs that go into effect on August 23 or later are not included in our Q1 targets.

However, if the upcoming August 23 tariffs are applied the same way as the July 6 tariffs, we would anticipate the impact to be nominal.

We are evaluating ways to further mitigate the impact of the July 6 tariffs and the upcoming August 23 tariffs as well as any additional tariffs that may be enacted in the future.

We target Q1 company revenue in a range of $395 million to $415 million based on the following segment trends: Wolfspeed revenue up 13% plus or minus sequentially based on solid growth across all product lines; LED revenue down 6% plus or minus sequentially due to shifting some of the fungible capacity to Wolfspeed, normal European market seasonality and order delays from certain customers as the industry evaluates how best to navigate the U.S. and China tariffs; lighting revenue down 6% plus or minus sequentially as we focus on increasing gross margins by improving the mix in our business.

Regarding ZTE.

While we're encouraged that the restrictions on selling to ZTE was lifted in July, we target just a small amount of revenue from them in Q1 as they rebuild their supply chain.

The business could ramp steadily beyond Q1, but it is too soon to say when it would be back to prior levels.

We target Cree's consolidated Q1 non-GAAP gross margin to be 30.6% plus or minus net of the targeted 50 basis point reduction from the tariffs.

The sequential improvement is primarily due to Wolfspeed representing a higher portion of the total revenue mix, which is partially offset by the impact of the July 6 tariffs.

Sequentially, Wolfspeed margins are targeted to be slightly lower due to mix; LED margins are targeted lower due to the tariffs, but would be similar, excluding tariffs; and we target incremental lighting margin improvement.

We are targeting Q1 non-GAAP operating expense to be similar to Q4 plus or minus.

Our operating expense target includes incremental spend related to semiconductor R&D projects, higher IP litigation costs and CFO transition costs, which are offset by the targeted lighting rightsize initiative savings.

We target Q1 non-GAAP operating profit to be between $13 million to $18 million.

Q1 invested cash and revolver borrowings are targeted to be at similar levels to where we exited Q4.

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

We target a 17% Q1 in fiscal 2019 non-GAAP effective tax rate, and Q1 non-GAAP net income to be between $10 million to $14 million, or $0.10 to $0.14 per diluted share.

Our non-GAAP EPS target already includes a $0.02 decrease from the impact of the tariffs that went into effect on July 6. Our non-GAAP EPS target excludes acquired intangibles amortization, noncash stock-based compensation, lighting restructuring charges and other items.

Our GAAP and non-GAAP targets do not include the impact of any changes to the fair value of our Lextar investment.

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

I will now turn the discussion back to Gregg.

Thanks, Mike.

In addition to the strong financial results we delivered for the quarter, excellent progress was made in other areas.

We completed the successful integration of the Infineon RF Power business and delivered accretive non-GAAP results for the quarter.

That was less than 3 months after closing the acquisition, a remarkable time line for such a large integration that comprised of 12 sites and roughly 260 employees around the world.

Turning to the businesses.

Wolfspeed, which is our primary growth driver, continued to deliver on its objective of achieving high-growth and strong gross margins.

Q4 revenues increased 81% year-on-year, which included the first full quarter of the Infineon RF Power business, with organic revenues increasing around 40% year-on-year.

Gross margins increased 240 basis points year-on-year as we successfully managed the normal challenges associated with ramping new capacity and integrating the acquired business.

With the additional growth targeted for Q1, Wolfspeed's annual revenue run rate is now $0.5 billion.

In early June, I had the pleasure of attending PCIM, the power electronics trade show, and was struck by the number of companies promoting silicon carbide products.

Hardly a booth was present that didn't have something pertaining to silicon carbide on display.

Based on what I saw by walking the floor and meeting with customers, I believe the transition to silicon carbide continues to accelerate in the power electronics market, and Cree has been a pioneer and the leader in commercializing silicon carbide products.

At the show, we introduced a third-generation 1,200-volt silicon carbide MOSFET family that will help foster the adoption of electric vehicles by delivering higher efficiency to increase the driving range and reduce system cost.

We also recently announced the E-Series, the first commercially -- commercial family of silicon carbide MOSFETs and diodes to be automotive AEC-Q101 and PPAP-capable.

The rollout of the E-Series family establishes Wolfspeed as the first in the industry to launch a full suite of MOSFETs and diodes that are capable of withstanding high-humidity environments while offering the reliability and system-level value needed to drive the widespread adoption of silicon carbide among automakers for the next generation of EVs.

Given the enormous growth opportunity for silicon carbide and GaN RF over the next decade and beyond, we continue to expand capacity at a rapid pace to meet the growing demand.

In fact, we're on track -- we are tracking slightly ahead of our goal of doubling capacity for power devices and external materials sales by the end of Q2.

Additionally, we aim to keep reducing the gap in costs compared to silicon by leveraging scale, executing engineering efforts to improve yield, and pushing the limits of material science to achieve the next breakthrough.

We believe this combination of greater availability and lower cost will speed up and expand the adoption of silicon carbide and GaN RF technologies across a wide range of markets.

For LED Products, the business is performing well against the objective of driving value through greater focus.

Q4 revenues grew 9% to the highest level in almost 4 years, while gross margins improved 150 basis points year-on-year and 100 basis points quarter-on-quarter.

Momentum is building in our focus areas like automotive lighting and application optimized solutions that are stickier and have an opportunity for us to create more value.

The result should be a business that generates strong free cash flow through modest revenue growth, gross margin expansion and lower CapEx.

Moving on to lighting.

Q4 represented another step forward towards the objective of fixing the business.

For the second quarter in a row, we improved gross margins by more than 100 basis points, driven by better process controls and operational improvements.

As a result of new product introductions, improved relationships with our channel partners and continued progress on quality, we see continued gross margin improvement into Q1.

As we recently announced, we're delighted that Neill Reynolds will be joining us as -- joining Cree as CFO on August 27.

Neill is an exceptional leader with vast experience within markets that Cree serves.

We believe his semiconductor industry knowledge will help position Cree for continued success and support our growth plans.

I'd also like to thank Mike for his many years of hard work and dedication here at Cree.

He's made substantial contributions to Cree over the past 16 years, and we're grateful for his support during the transition.

In summary, it's really exciting to see the results trending in the right direction.

It's going to take a lot of work to reach our business model targeting 40% gross margin, 20% OpEx and 20% operating margin, and there are sure to be some bumps along the way.

That said, our recent results are indicative of what can be accomplished when the strategy is clear and all employees are pulling in the same direction.

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

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

The first one was just kind of on the side of the LED and Wolfspeed being kind of under one umbrella now.

And if you guys could kind of outline further efficiencies we might see there, or furthermore as Wolfspeed kind of picks up speed, if we might see some of that capacity switch over to Wolf's side and away from LED?

Well, yes, I'll take that one.

Certainly, having them both under the same umbrella is a huge benefit for us across multiple different areas.

One is the manufacturing assets are together under one leader, Rick Mcfarland is doing that.

And we're able to now leverage things that we're learning in terms of yield improvement in LED that we can move into Wolfspeed and vice versa.

There's already been a lot of really great work done there, and I think Rick and the team have really just done a fabulous job of that.

We've been increasing the capacity of the silicon carbide crystal growth in the materials business.

That's been very, very helpful as well.

And then finally, there is some fungibility, especially in both the materials and in the wafer fab, between the LED business and Wolfspeed.

And as we see the LED business transitioning some of its products to sapphire, it gives us an opportunity to move that silicon carbide capability primarily to our power businesses.

So it's a good trade off and it's a good situation to have.

I think both businesses are working very closely together.

And I think you can continue to see this kind of -- these kinds of efforts in the future.

Okay, great.

And then just one on the lighting side.

In terms of margins, do you expect it to kind of be this slow and steady improvement?

Or is there possibly like a short-term target you might put out there as we make progress towards that longer-term gross margin?

I don't anticipate things turning overnight.

We've had 2 quarters in a row of over 100 basis points improvement.

And I think it's that kind of ZIP Code that I would have in mind.

I think this business has a lot of improvement still ahead of it, and I think we'll take it sort of 3 yards at a time.

Our next question comes from Jed Dorsheimer with Canaccord Genuity.

Just I guess first question, Gregg, is on the lighting business.

Have you provided -- have you given an analysis or done an analysis, I should say, on the impact that you think that might be negatively having on the LED components?

I think your predecessor didn't see a lot of risk around being competitive with your customers, but that would seem that there might be some latent demand should that business -- if you were to wind down or divest of that business at some point?

I don't know how strong of an issue that is.

Obviously, I don't know a lot of the history.

I've met a number of our LED customers that have sort of competitive footprint with the lighting business.

And I don't think it's a loud and screaming kind of thing at this point.

I think the focus on -- the focusing of the LED business in the 4 areas that we had outlined at our Analyst Day, I think it's really an important kind of target for us, and I think we're making really good progress there.

So I don't know how much of an impact that would have had, but what I would tell you is it's not -- it doesn't really come up as a loud screaming type issue at this point with customers.

Okay.

And then as my follow-up question.

The way that I interpreted some of your description on silicon carbide to the high-power market for EVs, charging stations, base stations, et cetera, very similar to the way that I heard manufacturers in the gallium arsenide space back in the early 2000s -- so I guess I'm dating myself here -- but describe gallium arsenide for power amplifiers in cellphones.

While the Holy Grail was always to get to silicon, it didn't happen in the time frame that anybody expected, and GaAs is still around.

Do you see this silicon carbide market in a similar way?

And are you trying to basically enable many more players to come into this market?

I'm not an expert on the gallium arsenide side of things.

What I would tell you is the end markets, the primary growth driver for our silicon carbide power business is the automotive market.

And the automotive market is way different than a handset market in terms of reliability requirements, quality requirements, the heat dissipation that you have to handle and all of this kind of stuff.

And there's just an inherent significant advantage that silicon carbide has in all of those areas, in addition to the fact that it's -- an electric vehicle will go further using silicon carbide than using silicon.

So I think there's sort of some fundamental differences between the 2. We're certainly driving the adoption of that.

We're doing that through expanding our footprint, expanding our capacity, driving our cost down and all of that, and I think it's a really good opportunity.

And I think that based on -- it's been, what, almost a year that I've been here, I think the interest and excitement in the market for silicon carbide has just simply grown since I've been here, and I don't mean to say it that way.

But my observation is, the market over the last 12 months has certainly become more -- has adopted silicon carbide in a much more quicker fashion.

So it's an exciting time for us.

I think the opportunity is fantastic, and we're trying to capture most of it that we can.

Our next question comes from Hank Elder with Goldman Sachs.

This is Hank Elder on for Brian.

You mentioned that the core Wolfspeed business is holding around 40% year-over-year growth.

And is this the level that we should expect the segment -- the core Wolfspeed to do in fiscal '19?

Or as capacity comes online, you're moving through the rest of the calendar year, could that accelerate?

Well, what I would tell you is we're forecasting next quarter and we're forecasting some pretty decent growth, 13% sequentially for next quarter on the Wolfspeed business.

We certainly have capacity coming online.

And as we had indicated, it's coming online slightly ahead of the original plan.

We're going to continue bringing capacity online next year and we're going to be doing that through a couple of different mechanisms.

One, obviously, is we've got a CapEx spend, which will be increasing capacity.

That's mostly targeted at the Wolfspeed business.

But the second thing that's really happening right now is we've doubled the output of the capability of Wolfspeed, the manufacturing capability at Wolfspeed.

And what that's doing is it's significantly increasing the learning we're getting in manufacturing, the learning cycles that we're getting in manufacturing, which is then being fed back into the manufacturing processes, which is increasing yield.

And so we're getting increasing yields off of existing capability, and then we're increasing the number of machines that are producing this stuff.

So it's kind of a double effect.

So I think our target is to drive the -- is to quadruple the size of the Wolfspeed business from fiscal '17, which was a little north of $200 million to around $850 million.

And I think we've got good line of sight to do that, we're working really hard on that.

That's going to include manufacturing capacity increases that I just talked about, and the adoption that we had talked about earlier.

So while I don't want to get into a quarter-by-quarter type forecasting thing, we're really excited about our position in the market, the scale we have, the kind of accelerated learning that we're getting from that scale.

And quite frankly, the performance of the manufacturing organization in bringing this stuff up is simply unbelievable.

We've got cranes all over the campus here bringing things in, and these guys have really brought this technology up in a pretty clean fashion.

It's amazing, actually.

Okay.

No, that's very helpful context.

And then maybe switching gears quickly on the tariffs.

From what you can tell, is this potentially a larger impact for your competitors?

I guess, given your U.S. manufacturing, could it be a competitive benefit even though it's still a small P&L headwind?

I don't know.

I guess, what I would say is we are the largest manufacturer, U.S.-based and U.S. manufacturing-based producer of LEDs, and that's certainly helped us as we work through the impact of the tariff.

We're really focusing that business in the 4 key areas.

And I think to the extent that we're successful, and as I mentioned in my prepared remarks, we've got really good indications that we are getting some good traction in those 4 areas, I think it'll help the business deliver to our objective of modest growth and incremental gross margin improvements and good free cash flow.

Our next question comes from Harsh Kumar with Piper Jaffray.

This is Matt on for Harsh.

My first question was, could you kind of walk us through an EPS bridge here into Q1?

I think you'd previously talked about there being $0.01 dilutives from ZTE.

But now that ban's lifted, and now, we have a $0.02 impact from the tariff, and the Infineon kind of being -- acquisition being accretive.

Could you kind of just maybe give us some more color about how we think about that and how we think about that moving into the rest of fiscal '19?

Well, I guess from a tariff standpoint, based on what we know today and from my comments, is that the thing that's kind of certain right now is what's the July 6 tariffs.

So in Q2, Q3, Q4, we're targeting kind of a 3% EPS hit to that, plus or minus from that tariff.

On ZTE, like I said, in this Q1, it's a nominal amount.

Don't know -- don't have enough visibility right now as to how quickly that business could come back and what it would ramp to within the fiscal '19 from that standpoint.

And now, we kind of look at the Infineon RF Power acquisition just as part of our overall Wolfspeed results, which we're targeting to grow 13% plus or minus quarter-over-quarter.

So -- and as Gregg just mentioned, you look at Wolfspeed's growth, if you think about that longer-term model growing to $850 million and kind of the path on that over the next couple years, is probably a reasonable basis at this time.

Yes.

And I'll just add a little bit of color on ZTE.

Our teams have met with them a number of times since the ban was lifted.

We've had excellent conversations with them.

There's a lot of good discussion going on.

And ZTE is certainly highly -- it's quickly reengaging in the market.

That all being said, the outfit has been -- ZTE has been basically shut off for several months.

So we're being a little bit cautious on the actual impact for this quarter.

We have a nominal amount of revenue anticipated for this quarter, just simply thinking, gosh, it's going to be hard to get the entire supply chain up and running so quickly.

So we'll see how it goes.

The good news is that they're excited to reengage with us.

And I think from a future standpoint, it's fine.

What happens in the near term, I think, it's probably going to be little tougher to ramp-up than they would anticipate.

Got you.

And then as a follow-up, just a question on, as you add capacity in the Wolfspeed business, how hard is it to find people with the experience necessary with the Wolfspeed technology in order to fully ramp up the business as fast as you guys want given that everyone in the industry is kind of looking to add capacity?

And is that something -- now that the manufacturing is all under one roof, is that something that can kind of be added internally from other segments of the business?

Yes.

So certainly yes on that latter one.

As you can imagine, as we're ramping this capacity, there's a million things that you have to worry about, and half of them go sideways at some point.

And so there's the emergency call trying to get a team to go fix something.

And I would tell you, our team has done a fantastic job of just coalescing the resources and kind of walking into it with one badge of, yes, I work in LED, or yes, I work in Wolfspeed, but we're going to go solve this problem.

They've done just a marvelous job on that.

And so yes, we're able to do some of that sourcing internally, if you will.

I think that's a pretty good way of describing it.

And industry-wide, I think there's obviously, not a whole lot of knowledge about this technology.

And that's one of the advantages that we have, is that we have a lot of people that have a lot of capability here.

And so we're ramping up the capacity, it's coming online very nicely.

The equipment is being assembled and built and coming online.

And like I said, we knew we'd get some of this, but we're really pleased with the rapid learning cycles that we're getting, or the more learning cycles we're getting with the added capacity.

It's certainly a benefit we were thinking about, but it's certainly come to fruition a lot faster than we anticipated.

So the fact that we're a lot bigger means we have a lot more data that says here are a couple ways we can squeeze a few more wafers out or improve yield and so forth.

And that's basically free capacity.

Our next question comes from Colin Rusch with Oppenheimer.

As you look to the lighting business in the portfolio of products, could you talk about a potential re-design of products or cadence of new product introductions as we go forward?

Well, as we had talked about historically -- I'll kick it off and maybe Raiford or Mike can add some color to it.

The team, I'll describe it as sort of -- I'm going to just say most of fiscal '17 was really kind of shut down on new product development because we were repairing the new product development process.

That started coming off and the repairs were kind of complete as we got into fiscal '18.

And I would say the back half of '18, we've been in the mode of releasing new products.

We've released a number of new families out to the market already.

They're getting very nice acceptance.

We've had well over 100,000 products out in the market.

We've had no warranty or quality kind of issue in any kind of large capacity at all.

They've really ramped very, very nicely.

So I'd say that team is now back in the mode of where we'd like them to be, which is developing innovative products that are high quality and high reliability that customers are excited about and that we can drive growth and good margin on.

Colin, just one other point on this, so the 100-plus-thousand new products have been across categories including high bays, low bays, streetlight and area lights.

And then we've also, in the most recent quarter, the June quarter, achieved some cost-outs, which is also an area of focus within product development.

And those new cost-reduced products will be flowing through the P&L in the quarters to come.

So that's another area of emphasis.

Great.

And then just switching gears to silicon carbide and the competitive dynamics there.

Obviously, it's still early days with this.

And we're seeing some new competitors enter into the market, a lot of different approaches to producing the material and then producing devices.

As you guys look forward over the next 2 to 3 years, what's the strategy around maintaining the competitive edge?

Is it really just about time-to-market, availability of material?

Are there quality materials that you're seeing as key?

Or are there some other dynamics that we should be thinking about?

I've been in the technology world for a long time, in semiconductors for over 30 years.

And every business that I've ever been associated with has had a similar kind of competitive dynamic where kind of everyday, you got some competitor going after your customer's mind share and market share.

So I think this is kind of the norm in the industry.

We're in kind of a unique situation right now because we have a pretty substantial scale advantage in a market that's growing very, very rapidly and in an industry that has -- and I'm talking about automotive, electric vehicles, which has a good decade and more of growth potential.

So it's a really fascinating market for us.

I think for us, the most important thing for us to do right now is drive that scale advantage, increase the capacity and the output, improve the yields and drive down costs and increase the adoption of silicon carbide across more markets.

And so that's what we're focused on right now.

It would be real easy for everyone to, I don't want to say just sit back, but sort of say, wow, we're in this great position, let's just accept it as it is.

We're not doing that at all.

We're saying we're in a great position.

We've got great markets and potential, and we need to double down our efforts in terms of expanding capacity and reducing cost so that we can increase the adoption of silicon carbide across the power electronics industry.

Our next question comes from Jeff Osborne with Cowen and Company.

I just had 2 quick accounting ones.

I think I read somewhere that you sold your plane for $5 million.

Is there a onetime gain that either happened in the quarter or is going to happen in the upcoming quarter?

We did sell it for a little bit less than $5 million, and we basically bookkept that all.

And when we did it, we had to write it down to its fair market value, so there wasn't a gain.

Got it.

And then, Mike, can you just touch on the tariff impact to the lighting segment, if any?

Are you securing any components from China?

That, I would tell you is still a TBD.

They weren't covered under U.S. list 1 or U.S. list 2. They are part of U.S. list 3, which is not effect, it's under evaluation now.

So we're kind of continuing to evaluate that.

And just to clarify, are you asking about lighting products from China or LEDs that would be coming from China?

Fixtures that you're selling branded by Cree.

Any component procurements from China that would be impacted, having a higher bill of materials?

Yes, nothing to add versus what Mike said.

Yes, nothing at this point.

So...

Or the transfer pricing of your own packages that are produced in China that wouldn't impact the lighting business with the current July tariff?

Well, yes.

To the extent under list 1 that there's U.S. content, we get -- you qualify for an exclusion on that value.

So...

Our next question comes from Krysten Sciacca with Nomura Instinet.

First question's on silicon carbide.

You guys aren't really the only one in the industry adding capacity for silicon carbide wafers.

A lot of your competitors are as well.

At what point do you become concerned that the industry's going to go from a supply constraint situation to excess supply?

Well, I think you got to look at the growth drivers in the industry, and you start with electric vehicles.

And I think at our Analyst Day, we had mentioned that from the October time frame through to the Analyst Day, which was in February, car manufacturers and people in the auto industry had announced investments of about $60 billion in the electric vehicle arena.

And since then, it's grown to over $100 billion of investments.

More and more companies have announced that all their models are going to be EV by a certain date, or they're going to have 20 models by a certain date and so forth.

So more and more of that is happening.

So I think the demand, the growth of the demand of this industry is likely going to outstrip the supply for some time.

We're obviously trying to alleviate that ourselves by increasing the output.

But we're a pretty big player in this space.

And the fact that we've doubled over the last year and a quarter or so, I think it likely says we've become an even bigger market share type player in this space.

So as I mentioned earlier, we always worry about competition.

We're paranoid about it every day.

And what we're doing is we're bringing on the manufacturing capability as quickly as we can, while at the same time, driving costs out so that we can increase the adoption.

So I don't know how to answer it, other than that.

You always have to worry about this stuff.

But I think the key drivers are really pretty solid.

That's helpful.

And then sticking on the silicon carbide topic.

So have you seen any impact at all of the recent tariffs, particularly since -- especially EVs and solar, there's a lot of consumption in China?

Or there is assumed to be a lot of future consumption in China?

Or have -- there's been so much demand that it's pretty much just not been an impact at all?

I don't know of any impact of the tariffs on the silicon carbide or the appetite for silicon carbide in electric vehicles.

I'm unaware of any of that.

We've got great engagements around the world with the vehicle manufacturers, the Tier 1s and so forth.

And basically, there's been no change in the adoption rate.

If anything, it's gotten more accelerated.

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

Mike, it's been a pleasure working with you and good luck with everything.

First question, actually, a longer-term question.

I guess on silicon carbide performance advantage versus its higher cost versus silicon, right.

Just curious, Gregg, is that a tipping point or something that you can point to that -- or one thing or multiple things that you can point to that might bring that -- close that gap that allows, potentially, a wider adoption?

For example, do you think a 6-inch wafer is necessary for industry to adopt, for it to get to a cost competitive point?

Any kind of color you can provide around that?

Well, I would tell you that -- thanks for the question, Edwin.

I would tell you that we're absolutely focused on continuing to drive the cost down in silicon carbide and drive the gap between silicon and silicon carbide more narrow as well.

We've got a number of different efforts in doing that.

One is, obviously, we get cost reductions just simply because of the scale advantage we have, and so that's a pretty simple equation.

The second is a number of what I would describe as engineering efforts.

These are projects where we have a couple of people working on a couple of different techniques, which will increase yield and improve throughput and output.

And so I would describe those as we've got pretty good line of sight for some pretty decent cost reductions associated with that.

And then we've got more further out type things where we're looking at challenging materials science and moving to things like 8-inch wafers and so forth that are a little bit further out.

But we're actively engaged on all of these different things because we know that to the extent that we can continue narrowing the gap between silicon and silicon carbide, it's going to be better for us, it's going to be better for the industry.

That tipping point has already sort of begun to happen in the auto electronics -- electric vehicle industry.

And obviously, as we narrow that gap and we drive costs down, we'll continue driving the adoption.

Yes.

And, Edwin, just one thing to add there, we're trying to narrow that price differential assuming silicon wafer prices are stable, when in fact, over the past couple of years, silicon wafer prices have risen pretty meaningfully and forecasts suggest that's going to continue in the coming years.

Okay, great.

That's very helpful.

And then just -- I guess just a housekeeping question.

On the first quarter, you said LED is going to be down.

And you -- I think you highlighted 3 reasons behind the tariff, kind of fungibility or the capacity.

Any way you can kind of quantify -- at least talk about which one is the biggest driver for this sequential decline in LED?

And then how much did the power contribute to sort of fourth quarter revenue?

So on the LED side, kind of the breakdown on the -- there's -- I would say they're kind of in a similar range among the 3 pieces and the impact on the revenue.

And the mid-power, while the demand was up pretty nicely quarter-over-quarter, the overall mix of that business is still a small part of the overall LED business.

Our next question comes from Craig Irwin with Roth Capital.

So, Mike, when you initially gave us guidance for incorporating the Infineon RF Power business into the model, you were pretty cautious about the outlook given the storm clouds around ZTE.

Now that many of those issues are clearing, hopefully done by the end of your first fiscal quarter, would you expect those assets to have organic growth year-over-year and contribute to the overall level of growth within the core business by the end of '19?

Well, I guess if you're talking about -- Craig, if you're talking about ZTE specifically, like we mentioned earlier, it's in there for a small amount in Q1.

And then it's kind of we'll wait to see how that develops.

We're having discussions with ZTE, but it remains to be seen how quickly they'll ramp-up.

So don't have any systemic estimates for them for the rest of the year.

Okay.

Second question is about LED headlights.

So there was quite a lot of optimism that you could be heading into one of the higher-margin areas that might be a match for your traditional higher output, higher brightness silicon carbide LED chips.

Can you maybe update us on where we stand for new programs?

What you're looking at as potential opportunities for Cree over the next handful of quarters?

Sure, Craig.

In the most recent quarter, we got a nice number of new design-ins.

We've got an active design-in project funnel that's up meaningfully from where we were before.

We've got our first win with an American brand, which will be ramping in the fall.

So those products will be hitting the road there.

So I would say it continues to build upon what we talked about at the Investor Day, which is we think that automotive could be a $100 million opportunity over the time frame of the long-range plan that we laid out, and we're seeing good progress there.

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

I'd like to turn the call back to management for closing remarks.

Well, thank you, everyone, for your time today.

Again, I want to thank Mike for his service to the company.

And we were chatting earlier, this is his 25th earnings call, and really appreciate everything he's done for the company over this time.

We do appreciate all of your interest and support and look forward to reporting our first quarter results in October.

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.