Cree Inc Q3 2011 Earnings Conference Call Transcript

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

Question: Chris Blansett - JPMorgan Chase & Co. - Analyst : Good afternoon, guys. Two quick questions here. One is you have a pretty wide range for revenue for the second calendar quarter. Wonder if you can give some idea of what puts you to the high end or the low end as far as your outlook is. And secondly, if you could give us some color on how much inventory you expect to burn off during the quarter and how that translates down to utilization rates? 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 : All right, thank you.

Question: Steven Milunovich - BofA Merrill Lynch - Analyst : Thank you. Regarding your gross margin guidance, John, I think you said there were 200 to 300 basis points of benefit from over-absorption in the quarter. So, if you take that out of last quarter's results, and given that you have to burn off inventory, you're going to have clearly lower utilization rates and so forth. How confident are you in the 40% gross margin, and isn't there some risk in that?

Question: Steven Milunovich - BofA Merrill Lynch - Analyst : And then Chuck, you commented that you think you held share in the applications and customers that you're targeting. Can you elaborate a bit on that? You also said you saw pricing pressure. Was it double-digit sequentially decline? 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: Steven Milunovich - BofA Merrill Lynch - Analyst : The rate of price decline, was it double-digit sequentially in the quarter?

Question: Steven Milunovich - BofA Merrill Lynch - Analyst : You've seen that pricing pressure coming from the traditional competitors, or are you seeing back lighting vendors trying to move up into that low end of the general lighting business?

Question: Steven Milunovich - BofA Merrill Lynch - Analyst : Thank you.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Good afternoon, gentlemen. Couple of questions.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : First of all, when you --

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Okay, sorry. When you take a look out at your designs and what you're designing for, could you talk about what kind of luminosity people are looking for in your new designs? And the second part of the question is when -- in your move to the 150-millimeter, how much of an improvement in gross margin do you think you're going to get out of that move?

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Yes.

Question: Dale Pfau - Cantor Fitzgerald - Analyst : One final thing, what are you seeing the uptick in the components business for the current quarter?

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Yes, generally, what's driving that increase?

Question: Dale Pfau - Cantor Fitzgerald - Analyst : Great. Thank you.

Question: Yair Reiner - Oppenheimer & Co. - Analyst : Yes, thank you. Assuming you get to the midpoint of your guidance, do you expect inventories to be worked down to what you consider a normal level? Or if not, how long do you think you're going to be kind of working uphill to try to reduce your inventories and have that as a headwind to margins? 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 : Okay. And then I know it's tough question at this point in the cycle, but any thoughts right now about your long-term business model?

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

Question: Harsh Kumar - Morgan Keegan & Co., Inc. - Analyst : Hey, guys. Question for Chuck. Chuck, do you think outside of the inventory build in the marketplace, do you think that maybe the market for LED components and other things, chips, et cetera, has slowed down some? Have you noticed anything relative to the total demand or forecast? 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: Harsh Kumar - Morgan Keegan & Co., Inc. - Analyst : Chuck, very helpful. And then just looking at your commentary, looks like components finally looking better, lighting looking good. Chips, small decline. Would you say -- I know you said the backlog's constrained. Is this the best kind of circumstances that you've seen in the a couple of quarters, would you say this is the start of growth for you guys or would you say it's still kind of limited visibility?

Question: Harsh Kumar - Morgan Keegan & Co., Inc. - Analyst : Fair enough, thanks, Chuck.

Question: Joshua Paradise - Morgan Stanley - Analyst : Hey, guys, thanks for taking the 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.

Question: Joshua Paradise - Morgan Stanley - Analyst : Can you talk about the volume growth and the price decline assumptions that are baked into the June guidance?

Question: Joshua Paradise - Morgan Stanley - Analyst : Yes. It would be nice if you could put some numbers around that. But if you can't --

Question: Joshua Paradise - Morgan Stanley - Analyst : Okay. And then maybe one separate question. You talked about specific products that get customers to a low total system cost. Can you put some numbers around where your customers are today with the specific high quality products on maybe a dollar per kilolumen basis for the system and where you think that goes in 2011 and 2012?

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

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : Hey, Chuck.

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : So first question, if your pre-announcement, I think you indicated that the June quarter revenue would be up 10% to 12%. And I think based on the midpoint you're now guiding to up 7%. So I'm wondering, is that shortfall a function of units, or is it pricing?

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : Okay, and then can you give us a little more color on your expectations for yield improvements? And then separately, cost reduction as you go

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : Okay. And then for the March quarter that you just reported, can you say whether or not your LED component units increased sequentially compared to the December quarter?

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : Okay. And then the last question, it seems to me, I think you addressed this in your prepared remarks, you talked about why does LED lighting continue to grow while LED components continues to come under pressure? It seems to me that there's a lot less ASP erosion in lamps and luminaries. So, if that's the case, should you be driving the Company more towards that business instead of components?

Question: Andrew Huang - Sterne, Agee & Leach, Inc. - Analyst : Okay. 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: Unidentified Participant - Piper Jaffray - Analyst : This is Shawn, actually, for Ahmar. I wondered if you guys could just give us a little bit more of the timeline of the 150-millimeter ramp. Chuck, I think you said that we'll start ramping in September. You're on schedule for that. You guys have talked about that in the September quarter. When should we look for a full ramp and for 150-millimeter?

Question: Unidentified Participant - Piper Jaffray - Analyst : And in terms of this quarter in 3Q, are you guys able to split out the percentage of revenues that components and chips comprise of total revenues?

Question: Unidentified Participant - Piper Jaffray - Analyst : Thanks. And one final one. Just in terms of the commentary on the call here, do we think in this current quarter and 4Q that we're going to be basically bottoming out from the pressure that you guys have seen in the LED market? 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: Olga Levinson - Barclays Capital - Analyst : Hi, thanks for taking my question. My first question is around the conversion to 150-millimeter. Beyond the guidance that you provided for OpEx in the June quarter, can you talk about what impact to OpEx the conversion will have, assuming that you do see relatively reasonable revenue growth that would drive the full conversion by the end of the fiscal year?

Question: Olga Levinson - Barclays Capital - Analyst : Got it. And then in terms of your LED lighting and fixture products, as they get to a larger proportion of your business, is there a specific limit of what you want to cap that at and what impact that would have on the gross margins and the OpEx going forward?

Question: Olga Levinson - Barclays Capital - Analyst : Got it. Thank you.

Question: Daniel Amir - Lazard Capital Markets - Analyst : Thanks a lot, thank you for taking my call. Couple questions here. First of all, how do you see what's going on currently in China impacting your business in terms of the big growth that we're seeing on the LED chip production side? And if you are seeing that's impacting your business, how are you addressing that here going forward? Because that does seem like a going trend here that we're going to see in the next couple of years.

Question: Daniel Amir - Lazard Capital Markets - Analyst : Now, on the chip -- thank you. On the chip business, you've guided down here. What needs to happen for the chip business to actually turn around? What's -- what are we looking for? What should we be expecting here for whether to see it turn around here in that business next quarter maybe? 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 : No, Q1, excuse me, in the September quarter.

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

Question: Jesse Pichel - Piper Jaffray & Co. - Analyst : Good evening. Thank you for taking my questions. My first question is can you give us some idea of what your cost down target would be by transitioning to the 150? I remember back in '09 when you went to 4-inch it had a positive effect on your margins, but of course that was a much better demand environment.

Question: Jesse Pichel - Piper Jaffray & Co. - Analyst : And my second question is, can you give us some additional color on the China market in particular, what you're seeing there, you have operations there, and what really needs to happen for that market to recover? Is it some structural change, or is it just more Chinese projects?

Question: Jesse Pichel - Piper Jaffray & Co. - Analyst : That's helpful. Thank you.

Question: Bill Ong - Merriman Curhan Ford & Co. - Analyst : Good afternoon, gentlemen. Thank you for taking my question. I would like to get your view on the strategic leadership in the LED market. We saw historically past chip leaders such as Intel and Broadcom, these leaders commanded high gross margins (inaudible) tough environment because of technical superiority. Clearly, an industry leader but with less control on pricing, facing much more numerous players. My question is that in this current competitive environment, can an LED industry leader also be a profit leader, just making demand more inelastic based on features for the price and subsequently, better gross margins?

Question: Bill Ong - Merriman Curhan Ford & Co. - Analyst : That's insightful, thank you very much.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Hey, thanks for squeezing me in here, Chuck. Just two questions. First, on the technology, I know you've been pretty agnostic in terms of silicon carbide versus sapphire, and we saw that you recently signed a cross license with Osram. Just curious, the 150-millimeter transition, is that going to be on silicon carbide, or will it be grown on a sapphire based product?

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Great, and then secondly, on the transition to 150-millimeter, just looking at the capacity increase, it gets to about 30% just on an area basis. And so with utilization coming down sort of 10% to 15%, and with a quarter of inventory on the books now, as you manage through this transition, do you expect gross margins to sort of be in this range unless pricing increases or at least flattens? It would seem to me that while the longer term targets still remain, as you go through this transition it's going to be tough to get those to increase, even with the cost reduction.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Great, thanks. Look forward to seeing you at Lightfair.