Cree Inc Q3 2015 Earnings Call Transcript

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

Question: Brian Lee - Goldman Sachs - Analyst : Hi, guys. Thanks for taking the questions. The first one I had was just on the impact that you mentioned on LED margins this quarter. Can you elaborate on how much that was? And was that just sell-through on legacy products, or did you have a bigger shift to mid-power outsourcing this quarter than you might have originally anticipated? And then the second question I had was also on the gross margins. What are you embedding into the view for June on LED factory utilization quarter on quarter, because unless mix is changing a lot, it seems like you're implying similar levels to what you had in March. Wondering if that means you're targeting another round of inventory workdowns over the course of the quarter. Thank you.

Question: Harsh Kumar - Stephens Inc. - Analyst : Hi, guys. Chuck, I just wanted to again go back to the question that was just asked. We're trying to understand how this inventory affects margins. Is this inventory at an inherently higher price? Is that why you're taking a big chunk -- is that why you're taking a big hit, or is it just all factory utilization related and the inventory costs are the same as the new product?

Question: Harsh Kumar - Stephens Inc. - Analyst : Chuck, I appreciate the color as always. And then my other question was on OpEx. I was surprised to see the $5 million OpEx increases, given the numbers and the results. Curious if, as your Lighting business grows, if you think you can attain some leverage where these kind of variations simply go away and become meaningless. In other words, I'm trying to get to the operating margins of the Lighting business. Are they meaningful enough or can they go up meaningfully enough once you achieve scale?

Question: Edwin Mok - Needham & Company - Analyst : Great, thanks for taking my questions. The first question on the LED components side, you said you expect stabilized in the fourth quarter. But historically you get some seasonal uptick in your fiscal fourth quarter. Do you have any pull in of demand? That's why you have the stronger 3Q and maybe just flattish on 4Q -- or any color you can provide on that?

Question: Edwin Mok - Needham & Company - Analyst : That's actually great color, thank you. And then on the Lighting product gross margin, you talk about partially the results are the seasonal related affect on that on the quarter. Does the mix of light bulbs have an effect on that, as well? And how is the new light bulb coming along and should we expect that to have a positive effect on your gross margin?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Thanks for taking my question. I just wanted to clarify the LED product gross margin commentary for the next quarter. With the Lighting utilization improving and you presumably having reduced some of the inventories already, why is that margin expected to be sequentially flat? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 21, 2015 / 9:00PM, WOLF.N - Q3 2015 Cree Inc Earnings Call

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : How should we think about the SE5 impact on margins on LED on the product side as we go into the next year?

Question: Paul Coster - JPMorgan - Analyst : Thanks for taking my question. The first one, in respect to incremental operating margin, Chuck, you talked about being at the bottom of the cycle. Is it a cycle that's specific to Cree or is it an industry cycle that you're referring to? Then I have a quick follow-up.

Question: Paul Coster - JPMorgan - Analyst : So it's in the LED Lighting segment, how next-generation products will move you up the value chain, in some respects. I'm not quite sure how I'd get there. It seems that your products are still in the high-power category and thus far that's proven to be a tough segment of the market. Can you explain what's happening there in terms of value creation?

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Hi. Thanks for taking my question. Maybe just stepping away from some of the details, maybe higher level. About a decade ago, Chuck, you and I spent a considerable amount of time talking about the benefits of vertical integration, which in hindsight has certainly helped you through the second cycle between 2009 and 2011. As we're seeing more and more companies -- I think Osram today announced that they will be looking to possibly spin out or break up the components in the bulbs business, Phillips with Lumileds divestiture divestitures -- or spin out, I should say. Could you maybe elaborate on what the benefits are to Cree, and why you see the need to continue to have or operate the components in the Lighting business, as they seem to be diverging more and more over time? Thanks.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Okay. Thank you.

Question: Mark Heller - CLSA - Analyst : Thanks for taking my question. Chuck, I just had a question on the competitive environment in China. I know that the leading player there is adding a lot of LED capacity. So, I'm just wondering if you are seeing increased competition in the China market. And, secondly, would you consider using Chinese-made LEDs within Cree?

Question: Colin Rusch - Northland Securities, Inc. - Analyst : Thanks so much. Can you guys just expand a little bit more on your thought process, your luminaire product expansion. It seems to me like there's a big opportunity here, still, with commercial construction growth to take a bit more share there. Can you see yourselves accelerating that product development in the near future?

Question: Colin Rusch - Northland Securities, Inc. - Analyst : Great. And then just a quick follow-up. On the marketing spend, historically, you've given some updates in terms of the effectiveness of those campaigns. Can you just give us your quick thoughts on how those things are going at this point?

Question: Krish Sankar - BofA Merrill Lynch - Analyst : Thanks for taking my question. I've a two-part question and let me ask both of them up front. First, Chuck, within the Lighting segment, can you give us some color on what the split is, either qualitatively or quantitatively, between the consumer bulb and the Commercial Lighting fixture? And also a follow-up either for you or Mike. It looks like you would have $160 million left on the share buyback. And I think the buyback has to be used by June, but based on the share count guidance it looks like you don't plan to fully complete the buyback. So, curious on what the thought process is on using the rest of the buyback by end of the quarter. Thank you.

Question: Melissa Fairbanks - Raymond James - Analyst : Hi, guys. It's Melissa [Fairbanks] for Hans. Thanks for taking my question. I just had a quick one. I'm not sure if you covered different trends that you are seeing by geography. I believe that some of the big downturn in Lighting business a couple quarters ago is related to big projects in China being pushed out. Just wondering what you're seeing on a geographic level, if you could give some more detail on that.

Question: Melissa Fairbanks - Raymond James - Analyst : Okay, great. Thanks so much. You're absolutely right, I was confused -- the LED business. Thanks very much, guys.

Question: Mike Ritzenthaler - Piper Jaffray & Co. - Analyst : Good afternoon. Sorry to join late here. I know you don't break out pricing specifically with any of your businesses, but I'm wondering if you could at least qualitatively comment on pricing within Lighting and the competitiveness that you're seeing as you work on bids within the C&I channel in particular.

Question: Mike Ritzenthaler - Piper Jaffray & Co. - Analyst : Okay. That's helpful. And then more of a philosophical question around R&D. Does progress year on year in any given quarter in revenue growth color what types of R&D projects Cree engages in or how much is allocated to R&D? I know historically it runs 10% to 12% of sales. But as you look out, investing in projects now for revenues a year from now, how does that philosophically change what you're working on today?