Cree Inc. Q1 2011 Earnings Conference Call Summary

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

Question: Steve Milunovich - BofA Merrill Lynch - Analyst : Thank you. Good afternoon. On the backlighting side, I think you said total chip sales were down 20%, so could you review for us again how much of total revenue backlighting represents? It seems like you've talked in the past about that being maybe 10% or less, and yet to get a 20% decline in chips assuming most of it's in back lighting it looks like it almost has to go to zero. Were there other things in the chip side going on besides backlighting? Is backlighting bigger than what you've told us in the past? Just trying to get a little clarity on that.

Question: Steve Milunovich - BofA Merrill Lynch - Analyst : And then, second, could you just talk a little about the competition? You mentioned pricing maybe increasing a little bit. You said mostly on the backlighting side, but can you talk about it in the core general illumination side, what's going on there and which competitors you see today?

Question: Steve Milunovich - BofA Merrill Lynch - Analyst : Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Chris Blansett - JPMorgan Chase & Co. - Analyst : Hi, guys, a quick question related to the demand side on the backlighting consumer electronics. You mentioned it's a buyers' market right now. Is that really affecting the volumes in addition to the pricing or is it really just a pricing issue at this moment?

Question: Chris Blansett - JPMorgan Chase & Co. - Analyst : Chuck, what I was trying to get at is, obviously you've had pretty strong demand for the general lighting side and I wasn't sure how much of your capacity this potentially opens up for lighting versus maybe selling into that opportunistic backlighting market.

Question: Chris Blansett - JPMorgan Chase & Co. - Analyst : One quick last one for me is could you give an update on how much of your revenue for the quarter was for general lighting, just so we can keep track of how this is trending?

Question: Chris Blansett - JPMorgan Chase & Co. - Analyst : Thanks, Chuck, appreciate it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Good afternoon, gentlemen. First of all, what is the specific reason for the slight down tick in the CapEx guidance for the year?

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Could you just review for us again as you bring higher luminosity chips on, about how long before you see the big knee in the uptake, and then how long before you start seeing ASP competition in those product families?

Question: Dale Pfau - Cantor Fitzgerald - Analyst : One last question. Power margins and your lighting products, Chuck? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Yes, the systems business.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Okay, great. Thanks, Chuck.

Question: Yair Reiner - Oppenheimer & Co. - Analyst : Good afternoon. My question is about looking past December. Seasonality for the business has been a bit hard to model, partly because last year has been so strong. As you look out to the first half of calendar 2011, do you expect there to become negative seasonality in March or do you think the trend will continue to be up and to the right?

Question: Yair Reiner - Oppenheimer & Co. - Analyst : Great. Geographically, can you give us a sense of the degree to which China ticked down? And then if you can also give us maybe a flavor of how you see the lighting market panning out in the US and Europe. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Yair Reiner - Oppenheimer & Co. - Analyst : Thank you.

Question: Ahmar Zaman - Piper Jaffray - Analyst : Hi. Thanks for taking my question. Historically we've seen almost double-digit growth in your components business and now we're looking at about mid- to high single digit growth in the lighting component business. Is that the new normal in that business or how should we think about that going forward?

Question: Ahmar Zaman - Piper Jaffray - Analyst : Thank you for that. And just on your operating margins, your operating margins continue to grow sequentially and there's been some concern in the past about operating margins, and you've guided them to be around the 25% range with increasing OpEx. In the near term in the next few quarters should we continue to expect strong operating margin performance or with increasing OpEx should that start to slow?

Question: Ahmar Zaman - Piper Jaffray - Analyst : Great. Thank you.

Question: Andrew Wang - Sterne, Agee & Leach - Analyst : Chuck, how are you? Just a couple questions. First, there was an earlier question on general lighting pricing specifically. My question, to be more specific. is would you say that the ASP erosion in general lighting, is the rate of erosion accelerating or staying the same?

Question: Andrew Wang - Sterne, Agee & Leach - Analyst : Okay. Now, it looks like you're scaling back your CapEx plans a little bit. I think originally you were saying $300 million, and now you're saying $270 million to $280 million. Is that correct? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Andrew Wang - Sterne, Agee & Leach - Analyst : Oh, $250 million to $260 million. So my question is, at that level of CapEx, at $250 million to $260 million, will you still be able to double your XLamp capacity?

Question: Andrew Wang - Sterne, Agee & Leach - Analyst : There's been a lot of talk about the ability of some of your competitors to transition from backlighting to general lighting. And I was wondering if you could go back a couple years maybe to the late '90 s when Cree started getting into the general lighting market and maybe remind us of some of the biggest challenges that you faced to get into the general lighting market, and maybe specifically from the perspective of channel.

Question: Andrew Wang - Sterne, Agee & Leach - Analyst : Got it. Okay. One last question. I think it was in the March quarter when you actually raised your long term gross margin goals to the mid- to upper 40s and then operating margins to low to mid-20s. So then my question is whether or not your long term margin targets take into account these periods of where there might be some oversupply.

Question: Andrew Wang - Sterne, Agee & Leach - Analyst : Okay. Thanks.

Question: Joshua Paradise - Morgan Stanley - Analyst : Hi, guys, thanks for taking the question. You've talked a bunch about competing on a lumen per dollar basis. Can you maybe give a little bit of color on are your prices at a price premium, but there's advantages on a system level to using Cree or are you pricing at parity with competitors? How does that work in the search day, and then for the 6 to 12, 18 months out that people are quoting?

Question: Joshua Paradise - Morgan Stanley - Analyst : Okay, thanks. That's helpful. And just one more, if I could. It seems like you still have a lot of costs that you can take out of the system because as prices are coming down margins will stay pretty stable. Can you give a little bit of color? I know you don't give utilization levels or yield levels, but what are you doing that enables you to take cost out continually and rapidly?

Question: Joshua Paradise - Morgan Stanley - Analyst : Okay, great, thanks a lot.

Question: Harsh Kumar - Morgan Keegan & Co ., Inc. - Analyst : Hi, guys. Can you talk about maybe what your utilization was in the September quarter? And, Chuck, as you bring this another $250 million to $260 million of capacity out, when does a big part of that hit us? How should we think about the timing of that and what will it do to your utilization in this kind of slowdown market that we're in? And then I've got a follow-up.

Question: Harsh Kumar - Morgan Keegan & Co ., Inc. - Analyst : Got it. That's very helpful. And a lot of my other questions have been asked, but let me ask you this one. With the CR6 product, obviously a great product, seems to be doing really well. Could you discuss maybe the ideal price point to make that a mainstream product? I still think at $50 maybe it's a little bit high, but I'd love to get your thoughts on it.

Question: Harsh Kumar - Morgan Keegan & Co ., Inc. - Analyst : Got it, Chuck. Thank you very much, appreciate it.

Question: Daniel Amir - Lazard Capital Markets - Analyst : Thanks a lot. A couple questions here. First of all, on the LEE chip business, just to understand it better, if we assume that the market stays soft the way it is on the backlighting side from now on it's going to have a much more minimal impact. Is that fair to say that?

Question: Daniel Amir - Lazard Capital Markets - Analyst : Okay. And then the second is on the China outdoor lighting side, can you give us an idea how much this really impacted you? Has it been as big of an impact as the LED chip decline? And also, when do you think that you're going to resume growth in that market?

Question: Daniel Amir - Lazard Capital Markets - Analyst : Okay. Thanks a lot.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Thanks for taking my questions here, guys. Two questions for you. One, on the lighting side I'm glad you're talking about dollars per lumen. Do you think that you can get to $0.005 to lumen sometime by the middle of next year? The reason I'm asking, I'm just trying to get a better understanding of hitting the key inflection points in terms of the adoption.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Sure. And then I just wanted to dig a little bit into some of the yields benefits. You did a great job on gross margins this quarter, but inventories grew, it looks like, by about $11 million. So if I keep days of inventory flat, it looks like gross margins would have been 45% range. And so with that in mind it looks like the margin expansion is based on some yield benefits, as you mentioned. As we look at the coming quarters, can you give us any indication on where the costs savings is coming from? Is this mostly from the start of the transition to the 150-millimeter? Although it sounds a little bit premature on that. Or are you seeing some other area in the packaging? Could you give us any better visibility into that?

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Great. That's helpful. Thank you very much.

Question: Carter Shoop - Deutsche Bank - Analyst : Great. Thanks for taking my question. I just wanted to clarify a comment you made earlier, and make sure I'm understanding this correctly. As it relates to pricing for the components business, it sounds like the rate of ASP erosion hasn't changed much for the business that you're shipping today, but you do expect it to accelerate going forward based on the design bids that you're putting in today. Is that accurate?

Question: Carter Shoop - Deutsche Bank - Analyst : Yes, that makes sense. The newer business coming on is going to be a little bit more aggressive, but then you have the whole mix shift to factor into.

Question: Carter Shoop - Deutsche Bank - Analyst : Okay. You made an earlier comment also that the business that you're shipping today in the components, you're competing primarily with Nichia, Lumiled, Osram, et cetera. Can you comment about how the competitive dynamics have changed for the design business, and who are you competing against today for the design business that maybe you weren't six months ago on the general lighting applications?

Question: Carter Shoop - Deutsche Bank - Analyst : That's very helpful. I appreciate the clarification. One last question, if I may. Without giving too much information to competitors who might be listening to the call, can you help us understand the size of the chip business? We've talked about the backlighting market, we've talked about general chip trends, but is there a way to comment on the overall merchant chip business?

Question: Carter Shoop - Deutsche Bank - Analyst : Fair enough, thanks.