Cree Inc Q2 2015 Earnings Call Transcript

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

Question: Brian Lee - Goldman Sachs - Analyst : Hey, guys. Thanks for taking the questions, I had a few quick ones. First, Chuck, on the factory cost improvements that you mentioned that help the LED products' gross margin in the face of lower utilization, can you help us understand a little bit more what exactly is going on, in terms of those factory cost improvements? And then is there any way you can quantify the gross margin impact? And lastly, how sustainable are some of those initiatives, if you continue to see a relatively he depressed utilization backdrop of the LED segment? And then I had a follow-up.

Question: Brian Lee - Goldman Sachs - Analyst : Okay. That's helpful. And then my follow-up was just, again on the LED products segment. I'm not sure if you would agree, but it does seem like there's some structural headwinds emerging in that segment for you, not just cyclical. And yet gross margins have held up relatively well compared to prior troughs. But when I look at your R&D spending, it's up over 150% over that time period, so wondering what triggers you might be looking for to rationalize costs there, and if you're thinking it's still reconciled bunch, if you get to the opportunity, given the revenue declines you've seen. 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. JANUARY 20, 2015 / 10:00PM, WOLF.N - Q2 2015 Cree Inc Earnings Call

Question: Paul Coster - JPMorgan - Analyst : Just want to focus on utilization a little bit more, if you don't mind. Sounded like you have some capacity constraint as it relates to fixtures. I don't know what to make of bulbs and lamps. And then I'm right in thinking here that you're not making incremental investment in the LED capacity at this time, and that you're just waiting until current utilization starts to spike?

Question: Paul Coster - JPMorgan - Analyst : My follow-up question relates to Lextar. So we're only a short time into this relationship. What is it that you are using them for? And I'm assuming

Question: Vishal Shah - Deutsche Bank - Analyst : Chuck, on the lighting business, I know you've seen some nice improvement in margins. How should we think about margins in the longer term? Can you get back to the corporate average levels that you've talked about in the past in that business, especially considering the mix changes?

Question: Vishal Shah - Deutsche Bank - Analyst : That's helpful. Thank you. And then just on the LED business, again if you think about the pricing environment right now, how much more leverage do you have to maintain margins in that business, and where are you with the 6-inch transition? Thank you.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Thanks for taking my question. Two. I guess Chuck, maybe you could -- maybe a little bit of, I guess medium-term type question, with respect to the LED components business. There's been a clear shift from high power to mid-power. And the relative difference seems let's just call it -- if a high power chip costs or a component costs $0.50, a mid-power might cost about $0.15. So taking two mid-powers, the relative difference might be somewhere between $0.30 and $0.50, but you need secondary optics in that mid-power type solution, which has been more appealing to some of the consumer type bulb applications. So my questions, with that said, is do you see a shift over the medium term where the high power products will be -- that you'll see that come back, based on technology criteria? Or because of yields, where they are, between mid and high, do you think that this is the new normal that we will be in, sort of in perpetuity?

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : That's fair. Just as a follow-up question, just housekeeping. On the $500 million line of credit, is that being used primarily for buyback purposes? Or are there other intentions for opening that line of credit?

Question: Mike Ritzenthaler - Piper Jaffray & Co. - Analyst : Just a couple from me. On pricing within lighting products, I was curious about whether it's possible to bifurcate some of the margin lift that we saw this quarter from less pricing pressure, versus cost-outs? It sounded like in your prepared remarks you highlighted the cost-outs and some of the raw material efficiencies. Just wondering if there's less pricing pressure, or if we saw less pricing pressure in the fourth quarter, within the lighting products.

Question: Mike Ritzenthaler - Piper Jaffray & Co. - Analyst : That's fair. My follow-up is on the lawsuit initiated this quarter comes, I guess, after a piece of -- or a period of relative peace in the industry, and I'd just be curious about your view, I guess why now and why this potential strategy may not beget a costly back and forth?

Question: Edwin Mok - Needham & Company - Analyst : Thanks for taking my questions. First one, just quickly on the LED component side. I think you talk about 4Q, you expect business to recover. Is that seasonal? Is that any -- how's channel inventory right now? Is any contract generally filled you expect in that quarter, any kind of color, you can provide either on channel or the demand.

Question: Edwin Mok - Needham & Company - Analyst : Okay. And then just quick question on CapEx. How much of your CapEx that you are now spending on related to the lighting side on fixtures and stuff that you've mentioned? And I think you have ramped up CapEx over the last few quarters and do you have any kind of access, LED or MOCVD equipment that you have not turned on, and therefore haven't impacted depreciation yet? Should we expect some of those to come in later on?

Question: Mark Heller - CLSA - Analyst : Thanks for taking my question. Chuck, I was wondering if you could talk about what your expected mix will be, maybe this quarter and over the next few quarters, for the SC5 platform? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 20, 2015 / 10:00PM, WOLF.N - Q2 2015 Cree Inc Earnings Call

Question: Mark Heller - CLSA - Analyst : For a quick follow-up, for the lighting business for the March quarter, is mix still helping you, meaning the bulbs business would still be down sequentially or flat? And any expectations for the June quarter for the bulb business?

Question: Mark Heller - CLSA - Analyst : Thank you.

Question: Harsh Kumar - Stephens Inc. - Analyst : Chuck, first question. I think some at point in time in your commentary you made a statement that the LED business for Cree, your own, is stabilizing, your business is stabilizing at current levels of revenues. I'm curious about the color. Would you be able to give us some color around that statement, and/or also maybe throw in some color on the markets themselves, and the LED global markets?

Question: Harsh Kumar - Stephens Inc. - Analyst : I got you. Okay. Thanks for the color. And then secondly, there's been a dramatic shift in your buyback mentality. I'm curious why now, why here, and what are you seeing in your business? Of course, we're not complaining obviously about this buyback. What are you seeing that makes you so optimistic about a couple hundred million dollars a quarter, in terms of buyback?

Question: Jeff Osborne - Cowen and Company - Analyst : Thank you. Good afternoon. Just two questions. Just wondering, Chuck, if you can talk about the shift or mix between indoor and outdoor as it relates to second quarter that you just completed. You certainly highlighted the trends or expectations for the third quarter. That was question one. Question two is, just how should we think about the impact to gross margins as the Gen 3 bulb starts hitting the shelves in the second half of your fiscal year, relative to the impact or negative impact that the Gen 2 bulb had? Should there be less of a negative drag there, or similar trends, given the $2 lower price point?

Question: Jeff Osborne - Cowen and Company - Analyst : And just a quick follow-up. Would the Gen 3 bulb use your own chips or would you be potentially qualifying third-party chips for that? And just trying to impact what the utilization impact would be on the semiconductor side.

Question: Jeff Osborne - Cowen and Company - Analyst : Okay. 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. JANUARY 20, 2015 / 10:00PM, WOLF.N - Q2 2015 Cree Inc Earnings Call

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Thanks for taking my questions. I wanted to ask about the Lextar, and what are your plans of using Lextar chips in the lighting product portfolio?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Got it. A second question I have regarded to Home Depot. When are the pricing discussions occurring there, and how should we think about pricing adjustments with that customer?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Great. Thank you.

Question: Avinash Kant - D.A. Davidson & Co. - Analyst : Just a quick question, Chuck. If you look at the revenues that you have seen in the LED products business, they have declined significantly since the last year level. Now, hypothetically, if revenues were to come back to the same level where they were more than a year ago, do you think you will be able to get to the same margins that you had at the time?

Question: Avinash Kant - D.A. Davidson & Co. - Analyst : I'll just follow up on the same line. The thing we're trying to figure out is that the decline in margins, is that directly proportional to the volume decline that you have seen, or there's something else, clearly more pricing there?

Question: Krish Sankar - BofA Merrill Lynch - Analyst : I had two quick questions. Chuck, is there a way you can quantify how much of your output from the LED products goes to the downstream lighting business?

Question: Krish Sankar - BofA Merrill Lynch - Analyst : Got it. Then a follow-up. More of a theoretical question, but I'm just wondering, if it ever comes to it how easy is it to split the LED component business from the lighting products business, if you were to split the two businesses, or split it into two different companies?