Cree Inc. Q1 2015 Earnings Conference Call Transcript

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

Question: Mark Strauss - JPMorgan - Analyst : Yes, hi. This is Mark Strauss on for Paul. Thanks for taking our questions. We wanted to talk about the visibility that you guys have. I think this is the first quarter, at least since we've been covering the stock, that you've come in below your initial guidance expectations. I was just wondering if there is anything that is changing in your modeling approach, your forecasting approach? And really, if you look at the range for next quarter, the $20 million -- yes, the $400 million to $420 million range, historically it has been $20 million to $30 million or so. So what kind of gives you the confidence to go out kind of towards the low end of your historical kind of spread there?

Question: Mark Strauss - JPMorgan - Analyst : Got it. Makes sense. 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: Jed Dorsheimer - Canaccord Genuity - Analyst : Thanks for taking my question. I guess with respect to the Lextar deal, Chuck. I hear you in talking about how you want to maximize the lumens per wafer, but it would almost seem like the decision or the actions to make the investment, whether this is strategic or merely a hedge between high-power and mid-power, doesn't really support what you're saying. Or maybe you could help clarify, because it doesn't seem, to me, support what you're saying with trying to drive the lumens per dollar, I guess, with your high-power solution.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : That's helpful. Thank you for clarifying. Just as a follow-up, so with that in mind, in this transitional phase it would seem then that barring a major pick-up in high power in the marketplace, that the LED business -- LED segment of yours would largely be contracting to the point where it's primarily a captive supplier to Cree for your lighting products. Is that a correct way to look at that?

Question: Mike Ritzenthaler - Piper Jaffray - Analyst : Good afternoon. How poor is the visibility in the LED products business right now compared to the recent two or three quarters? And I guess the spirit of the question is what gives you the confidence that gross margins can be 100 basis points higher sequentially, given that visibility challenge?

Question: Mike Ritzenthaler - Piper Jaffray - Analyst : Okay. How does, I guess this is more of a philosophical question. How much does Cree's valuation influence the decision-making process on things like M&A in terms of what you're targeting and valuations that you're looking at?

Question: Edwin Mok - Needham & Company - Analyst : Thanks for taking my question. Sorry about the [noise] REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. First question, I guess, on the Lextar deal, with the deal expect to close end of this year, how much incremental revenue do you expect to generate from using the LED chips? If you look longer term, like a year or two out, how do you kind of think your mid-power to high-power mix could become as we look longer term?

Question: Edwin Mok - Needham & Company - Analyst : Great. That is helpful. Question on the LED gross margin. Actually if I look at your guidance, you kind of imply that your LED gross margin probably gets you kind of, let's say, the high 30%s range, right? If I went back to look at the last two cycles, it kind of bottomed at mid- to high-30%s. You're not that far away from what we have seen on the bottom of the last two cycle. Is that the right way to think about where your margin can trend, as in we're approaching a bottom? Or do you think that the industry has fundamentally changed because of this increased demand in mid-power? Any kind of color you can provide around that?

Question: Jim Unrein - Deutsche Bank - Analyst : Hi. This is Jim [Unrein] on for Vishal. Thanks for taking our questions. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. You had spoken about some new product introductions on the Lighting side. Particularly for the consumer bulb, how much of the incremental margin improvement would you expect to pass along to the consumer versus keeping, and hope to raise said margins?

Question: Jim Unrein - Deutsche Bank - Analyst : That is helpful. And also on the CapEx side, as you guys have changed your investment plans, do you see that as longer term? Something that you can maintain, given the improvements that you're seeing, or would you expect to, have to add a lot of capacity, maybe next year?

Question: Mark Heller - CLSA - Analyst : Thanks. Quick question. Can you just tell us what the chip utilization levels were in the third -- the September quarter, and what you're thinking for the December quarter? And also, when do you expect inventory levels to sort of normalize?

Question: Mark Heller - CLSA - Analyst : Okay. And back on your China-related comments, do you think this is -- sort of indicates a broader demand issue, or do you think it is more Cree-specific?

Question: Harsh Kumar - Stephens Inc. - Analyst : Chuck, I think you sort of just touched upon the question I was going to ask about what happened in the quarter. So if the projects didn't happen, I would have expected your revenues to take a hit, which they sort of did. But I'm also trying to triangulate on the sudden decrease in gross margin on the chip side, or the LED side of the business. Is there a competing product that is out there that is pressuring you, or what happened suddenly to make the margins go down so much?

Question: Harsh Kumar - Stephens Inc. - Analyst : Okay. Fair enough. That is helpful. And then in terms of the factory production issue that you're talking about on the, I believe it's on the fixture side, Chuck, could you maybe talk about what is going on there? What happened that you're trying to fix this, or you're hoping to fix this quarter?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : First of all to ask in terms of the incremental margins in the Lighting business, how should we think about that? I understand there is a factory efficiency improvement component, but there is also is scale component. Could you quantify, please?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Got it. And the second question I have is in terms of, I look at the next quarter's gross margin guidance, what kind of -- does that imply similarly inventory provisions in the current quarter, or how should we think about that? 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: Jeff Osborne - Cowen and Company - Analyst : Great, guys. Two quick ones from me. I was wondering, Chuck, you mentioned a next-gen bulb. Can you talk about the timing on that and some of the attributes it might have? The second question I had was if you could touch on what you're seeing in terms of mix shifts on the lighting product side between the C&I business as well as the outdoor? I got your commentary about the outdoor Chinese market, but I was just curious about just from a broader perspective how your agency force is doing on the C&I side relative to some of the outdoor RPs that are out there?

Question: Andrew Hunt - BofA Merrill Lynch - Analyst : Andrew Hunt for Krish. One question. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. Chuck, you mentioned the sort of the available capacity that has opened up internally, given some of the challenges in the LED market. Just curious if there has been any consideration given to changing some of that internal capacity around to mid-power for captive use in bulbs?

Question: Andrew Hunt - BofA Merrill Lynch - Analyst : Great. Thanks. And then understanding that next quarter's revenue guidance is impacted significantly by some challenges in the de-segment. But for the longer term, do you expect -should we expect, sorry, the seasonal revenue trends in the business to change as Lighting becomes a larger component of revenue over LEDs?

Question: Mehdi Hosseini - Susquehanna Financial Group / SIG - Analyst : My first one has to do with the operating costs. When I look at your September quarter revenue is up 9% on a year-over-year basis, but OpEx is up 10%. Should I expect -- looking forward should I expect OpEx to grow similar to revenue, or the trend of the last year should extend into the next year, OpEx growing at a faster rate?

Question: Mehdi Hosseini - Susquehanna Financial Group / SIG - Analyst : Sure. And then on the CapEx of $200 million for FY15, is it still about 10%, 12% higher compared to FY14. But you have some excess capacity and underutilized asset. How should I think about your capacity decision, especially as you try to manage, stabilize utilization rate and margin profile?