Cree Inc. at Morgan Stanley Technology, Media & Telecom Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Joshua Paradise - Morgan Stanley - Analyst : <_ALACRA_META_ABSTRACT>Hey, good afternoon, everybody. I'm Joshua Paradise, I co-cover CleanTech at Morgan Stanley, and I'm really pleased to have John Kurtzweil from Cree here today. Cree as I think everybody knows is a product leader in LED lighting. LEDs are really starting to transform the lighting industry. We're seeing a lot of growth even though we're at a pretty small penetration rate today. So John, maybe we can start with, I think you've said we're at 4% adoption today. What are the biggest barriers that you're seeing in terms of near term adoption?

Question: Joshua Paradise - Morgan Stanley - Analyst : So you talked some about your product leadership on the lighting design for the bulbs and the fixtures. I think you're also known as a product leader for the packaged LEDs. So can you talk about what differentiates your package LEDs and what you do to maintain leadership?

Question: Joshua Paradise - Morgan Stanley - Analyst : Now, I know it's very early days because that product only launched I think a week or two ago.

Question: Joshua Paradise - Morgan Stanley - Analyst : But what's the initial feedback from customers on that?

Question: Joshua Paradise - Morgan Stanley - Analyst : And on the margin side, I think when you talk about pricing, you don't typically think of yourselves, my understanding is, as a premium price product. But when you come out with something like the MTG, there's no other product that you directly compete against in the market. So how much better are your margins on that product then for your average corporate margin?

Question: Joshua Paradise - Morgan Stanley - Analyst : I think broadly speaking, one of the major questions or concerns that investors have about Cree is what will happen with the margins over time. And you, I believe, over time and through the cycle target 45% to 48%, the high 40s gross margin. Some of that comes from being able to hold price and some of that comes from a cost advantage. Now, you don't have visibility into your competitors' costs, but can you talk about what you're doing to lower your costs and what that cost roadmap looks like?

Question: Joshua Paradise - Morgan Stanley - Analyst : As the CFO, you have very good insight into what your current costs are and what your historical costs are, but for the public investor market, I think most people don't have as good insight. So what metric can investors use to try to get a sense for what's happening with your cost and whether you hit that 30% reduction or whether you beat it?

Question: Joshua Paradise - Morgan Stanley - Analyst : Okay. On the fixtures and the bulbs side, thinking about the whole business and the whole LED lighting market, you mentioned that lighting, I think, will be a $108 billion industry a few years out. And I think one of the other things that you guys have talked about, and a lot of people have talked about, is that lighting broadly is roughly 25% bulbs and 75% fixtures. And obviously, Cree is moving into more of the bulbs and the fixtures part of the market. So longer term, the way you moved from chips to components, do you think we should look at a 25/75 split for Cree where maybe 75% of the revenues comes from the fixtures side of the business?

Question: Joshua Paradise - Morgan Stanley - Analyst : And to clarify what you mean by the module, that is the heat sync, the driver, the secondary optics, and the LED?

Question: Joshua Paradise - Morgan Stanley - Analyst : And you mentioned this rabbit strategy and you're showing people what can be done. I think part of showing people what can be done is on the technology side and part of it is showing that it can be done that's affordable on the cost side. And the technology, obviously, you're working on is core competency of Cree. The cost side is going to come partly through scale. So how do you feel it can be done on the cost side without building the scale?

Question: Joshua Paradise - Morgan Stanley - Analyst : I think a lot of people are very comfortable with the long-term story and the long-term strategy, but have some concerns around the short-term, the immediate term, and have looked at a couple weak quarters. So can you give an update on what's going on with inventory in the channel now at all?

Question: Joshua Paradise - Morgan Stanley - Analyst : So when do you think you start to see that revenue growth? Because the guidance that you gave, the revenue guidance for the next quarter of $245 million to $265 million, that's roughly in line with the average of the last four quarters, right? Because I think people think of Cree as a growth company, but the growth has been, very near term has been flat. All right, and you did mention that in the December quarter you are seeing an up tick in the sales for lighting products in direct customers. So when does that result in top line growth, and what can people expect sort of over the next 12 to 18 months?

Question: Joshua Paradise - Morgan Stanley - Analyst : A lot of semiconductor companies do give real data at the end of the quarter on what kind of inventory they're seeing in the channel. Cree I think has not done that. Would you consider doing something like that to get people a little more comfortable with what's going on with the inventory situation?

Question: Joshua Paradise - Morgan Stanley - Analyst : We are just about out of time, but I do want to leave time for questions from the audience. If anyone has one, take those now. If you could just wait for the microphone. Unidentified Audience Member You said that you were focusing on reference designs and addressing customer issues. Can you talk about whether anything can be done around dimi -- dimmable LED lighting?

Question: Joshua Paradise - Morgan Stanley - Analyst : Okay. John, thank you so much. This was great.