Cree Inc Q1 2012 Earnings Conference Call Transcript

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

Question: Chris Blansett - JPMorgan - Analyst : First question was tied to the six-inch transition. I know, Chuck, you gave some commentary that we're on our way. Some of your peers who reported earlier this week indicated they're fully transitioned to six-inch. So maybe could you give a little more color on that? And at some point in time, do you expect a big -- I guess, don't want to use hockey stick, but inflection point of production from six-inch?

Question: Chris Blansett - JPMorgan - Analyst : The second question was tied to your guidance. So if I just look at the $20 million that Ruud provided in the last quarter, which was one month, and I just amortize that to the current quarter, that kind of implies I should have about $40 million of additional Ruud revenue, which doesn't seem REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. to imply any real growth from that business. I mean, I just want to understand this, because it just seems like it's kind of in the middle of your guidance range, unless maybe the power side when the chips are down quite a bit, which is -- be offsetting this?

Question: Steve Milunovich - BofA Merrill Lynch - Analyst : Could you talk a bit about any blowback that you're seeing? I've heard that some of your customers are shifting component orders to competitors. And similarly, there's some pressure potentially on the fixture side. I know you expected some of that. I was just curious if you can quantify it at all, or indicate how it's coming in relative to your expectations, and how long it might last?

Question: Steve Milunovich - BofA Merrill Lynch - Analyst : That's great. And can you talk a little bit about Asian demand? And specifically, what's going on with China's Street Lamp and where that is in terms of potential recovery?

Question: Steve Milunovich - BofA Merrill Lynch - Analyst : Great, thanks.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Can you talk -- we've now seen two quarters of growth in your components business and you've guided for flat to up-growth in that business in general, in spite of having low visibility. Is that business still about 50% distribution? And could you talk a little bit about how you expect that to evolve over the next year? And then I've got a follow-up.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : And you told us last quarter that you expected to burn channel or burn inventory both at Cree and in the channel. Do you expect that to do that again in the second quarter? And then can you talk about whether ASP pressures are moderating about where you expect? A little commentary there, please.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Great, thank you.

Question: Harsh Kumar - Morgan Keegan - Analyst : A quick question. Gross margin looks like it's coming down again, John; 38.8 changed to about 37 and change, if I take the midpoint of your guidance. I'm curious if you could help us look at the gross margin decline in the angle of how much of it is Ruud and how much of it is market

Question: Harsh Kumar - Morgan Keegan - Analyst : Got it. If I can follow-up on that thought, I think the ultimate [thought] when Ruud was bought was that Ruud's margins are pretty easily fixable, if you will, in a short period of time and can be brought up to snuff in your own business. I guess your answer begs the question -- when do you think you will be in a position to have comparability across Ruud's margins and your own business?

Question: Harsh Kumar - Morgan Keegan - Analyst : Got it, Chuck. Thanks. 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 Huang - Sterne, Agee & Leach, Inc. - Analyst : Can you first give us a ballpark percentage of your wafer starts at 150-millimeter?

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : And maybe instead, can you give us a sense of where you might be exiting this fiscal year?

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : Okay. Great. And then, let's see. Maybe you could talk a little bit about your direct attach chip technology and the traction you're getting with components using that chip technology?

Question: Ahmar Zaman - Piper Jaffray - Analyst : Thanks for taking my question. My first question is about your acquisition of Ruud Lighting and any -- think about synergies, cost synergies, specifically around OpEx as you go forward -- integration. You guided for an OpEx in the range of $95 million [and] the GAAP, $75 million -- $78 million non-GAAP (technical difficulty) -- next two quarters as you do integrate Ruud Lighting with Cree.

Question: Ahmar Zaman - Piper Jaffray - Analyst : Thanks. And then my follow-up is on phosphor and phosphor prices. We're hearing phosphor prices are going up due to rare earth prices. Are you impacted by that at all? And how should we think about your exposure there?

Question: Ahmar Zaman - Piper Jaffray - 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: Joshua Paradise - Morgan Stanley - Analyst : Thanks for taking the question. You said a couple of times that utilization is still lower than you'd like. Can you quantify a little bit more where utilization is now and how much it's improved since last quarter?

Question: Joshua Paradise - Morgan Stanley - Analyst : And as a follow-up to that, if I can. You talked a lot in the past about how your different specific LED components for different types of lighting. Can you talk about which of those components are seeing more strength, in which product areas? And whether the capacity that you have is fungible, so you could produce either the XP-Gs or the XP-Es, or the MT-Gs -- anywhere in the factory? Or whether that's dedicated capacity?

Question: Joshua Paradise - Morgan Stanley - Analyst : Great. Thank you very much.

Question: Carter Shoop - KeyBanc Capital Markets - Analyst : I wanted to clarify a point to start, in response to a question from a previous caller, you mentioned that it was going to take a few quarters to improve gross margins. Was that comment related to the LED fixtures business? Or the entire Company, including the LED products?

Question: Carter Shoop - KeyBanc Capital Markets - Analyst : That's helpful. And another question here -- can you walk us through some of the opportunities and some of the challenges Cree is going to have in building out your sales channel for the LED fixtures business? And in particular, can you touch on how the SG&A is going to change a little bit as you use more of an agent network? And then also, what about future acquisitions on the fixtures side to broaden out your product offering?

Question: Carter Shoop - KeyBanc Capital Markets - Analyst : Great. Thank you.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Thanks for taking my question, Chuck. I guess, so first question is -- if I take the $20 million of the Ruud for 40% of the quarter, annualized, that gets me to $200 million, which I think is consistent with what you said when you acquired the Company about, you said a little over $200 million in sales. So I guess my question comes down to the margin of the Ruud product line. And if we look at the margin guidance of Ruud being slightly dilutive, did this already include and account for the transfer margin? And if not, then Ruud must have grown fairly significantly in the quarter, which my first question is then, why isn't it growing next quarter? And then I have a follow-up.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Fair, thanks for that clarification. And then as my follow-up, if we look at other lighting companies, so on the fixtures side -- Acuity, Cooper, Hubble, to name a couple, even Zumtobel that you're partners with -- if we look at their margin structure, it's actually I think the low 40s for some of the LED product, is what we've seen out of them. So why I guess aren't Ruud's margins higher, particularly now that you are vertically integrated and have the advantage where those other lighting companies don't have that advantage. And my understanding of Ruud's business is that it was more of a direct and didn't have some of the same channel or national account channel costs associated with that. Could you just help me -- it would seem as if it should be pretty easy to get Ruud's margins up to above the component margins.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : That's helpful. Thanks, 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: Mark Heller - CLSA - Analyst : Most of my questions have been answered but, John, I was wondering if you could estimate the margin penalty in terms of percent or basis points from under-utilizing the LED chipset.

Question: Mark Heller - CLSA - Analyst : Any color you can give also on the LED business as far as the split between chip and component revenues at this point?

Question: Mark Heller - CLSA - Analyst : Okay, thank you.

Question: Daniel Amir - Lazard Capital Markets - Analyst : Thank you for taking my question. A question here on Ruud Lighting again. Part of the business is non-LEDs in Ruud. So how should we be looking at that business going forward? Is that a business you're going to defocus? Is there a risk there that business falls off? I mean, obviously, all that growth is in beta LED, but how should we look at that other part of the business? 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: Daniel Amir - Lazard Capital Markets - Analyst : Okay. And my last question is just in terms of the industry outlook at the moment, what's your best guess where we are in terms of the industry recovering here after a very tough year in terms of pricing? Do you still expect it to remain a challenged environment here for the next number of quarters? Or what needs to change?

Question: Daniel Amir - Lazard Capital Markets - Analyst : Okay, thanks.