Cree Inc. Q4 2003 Earnings Conference Call Transcript

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

Question: Earl Lumm - CIBC Oppenheimer - Analyst : Yes, good afternoon. A couple of quick questions, Cindy. You talked about average selling prices down 12% in the quarter and then cost down being 9. For fiscal 04, I guess we're looking at the standard 25% ASP reductions. As we go into Q1, has the pricing within the last weeks of exiting the fourth quarter and entering into Q1, has that changed at all in any direction or can you comment on that?

Question: Earl Lumm - CIBC Oppenheimer - Analyst : If you look at the XBright in particular, you say that unit volumes had doubled from a revenue perspective on a sequential basis, can you give us an idea as to how much the revenues had increased on a similar level?

Question: Earl Lumm - CIBC Oppenheimer - Analyst : Ok. And then what exactly are some of the issues that you're seeing right now in terms of really getting that product to ramp, or can you give us some insight into what is going on in terms of some of the feedback that you're getting from your customers on that product?

Question: Earl Lumm - CIBC Oppenheimer - Analyst : Ok. And then one other follow-up question with regards to the lasers, it seems like you're trying to make a leap now from the thousand hour to the 10,000 hour. Is part of the R&D increase devoted to tackling that issue at this point from what your guidance is for the first quarter?

Question: Earl Lumm - CIBC Oppenheimer - Analyst : Thank you.

Question: Nathan Churchill - Sidoti and Company - Analyst : Could you guys give us some idea of where you think you're at as far as market share in the handset market and what you think your overall penetration of color displays is in that market?

Question: Nathan Churchill - Sidoti and Company - Analyst : Ok. Another question. On the ABB patents, are there any particular areas of weakness that you are looking to solve by getting those, and how do you think that those are going to benefit you and what kind of time frame are we looking at?

Question: Nathan Churchill - Sidoti and Company - Analyst : Ok. Cindy, do you have the cash flow for option issuance for the quarter?

Question: Nathan Churchill - Sidoti and Company - Analyst : Ok. Thank you.

Question: Hans Mosesmann - Sound View - Analyst : It's not clear to me if the issues are end demand related or your ability to produce this product consistently, so if you can explain what is going on with. XBright once again?

Question: Hans Mosesmann - Sound View - Analyst :

Question: Hans Mosesmann - Sound View - Analyst : One last follow-up. What specifically is different with XBright that it requires different die attach, if you can explain that very briefly?

Question: Hans Mosesmann - Sound View - Analyst : Great. Thanks a lot.

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Yeah. A couple of questions here, Chuck and Cindy. First of all, on the contract revenue, what are you targeting contract revenue at for the first quarter and for next year?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Ok. And we've got margins going down on the contract side, margins going down a little bit on the materials side, but it looks like we're going to get the improvement in margins on Cree Microwave. You indicated you had about a 5K pop, is that right, Cindy?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Right. Ok. And back just to make sure I understood, Cindy, the lower interest income in the fourth quarter was specifically because you adjusted for some interest income in prior quarters? 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: Dale Pfau - CIBC Oppenheimer - Analyst : So that's why we saw a lower interest income in the fourth , and you're targeting about a million dollars per quarter going forward?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Ok. Now, back to -- Chuck, back to this ASP issue on the LEDs, we saw ASPs come down about 12%, costs come down about 9%, but yet your mix was obviously skewed and it was skewed a little bit different than we had anticipated coming into the quarter. Did you see the ASP erosion at 12% across the product line or, as you mentioned, primarily at the low end of your mid bright category, and could you talk about ASPs in your standard brights?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : So the ASP -- was not quite as strong in those segments?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Would you consider the 12% you saw in the quarter anomalous? Were you responding to market pricing or were you being a market leader in pricing in that low end of the mid bright category?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Ok. You know, as we head forward here, first of all, it looks like your turns business in the fourth quarter was a little bit better than we expected. Your revenues came in slightly better than what we were looking for, and your turns business, it looks like your modeling for the first quarter is consistent with the low end of what you expected last quarter. Could you talk a little bit about anything you've seen in the first few weeks of this quarter supporting or not supporting those trends in turns business?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : But at the same time, you're getting mixed messages from some of your larger customers?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Ok. And on your new chips, could you give us the price differential between the MegaBright-Plus and your XBright?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : Ok. But the pricing between those two chips is comparable, so if you had some cannibalization, it shouldn't affect your overall ASPs?

Question: Dale Pfau - CIBC Oppenheimer - Analyst : How about on margins between the two? 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: Dale Pfau - CIBC Oppenheimer - Analyst : Ok. Thank you.

Question: Harsh Kumar - Morgan Keegan - Analyst : Hi, Chuck. Hi, Cindy. Gross margins were down on a sequential basis. Can you give us qualitatively maybe some color on yields or was there something else in the cost of goods sales there?

Question: Harsh Kumar - Morgan Keegan - Analyst : SG&A this quarter was 5.3 going to $7 million sequential basis. Is that pretty much all legal or are you ramping anything on the G&A side?

Question: Harsh Kumar - Morgan Keegan - Analyst : Ok. And just one final question. Talking about your long-term model here, you gave us some sense of what SG&A and -- R&D in the 14 to 15% range, SG&A in the 11 to 12. This is valid, I take it, for the next year. Question number one, and is that also pretty much what you're targeting your long term operating expense model to be? Maybe you can provide us some color on 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: Harsh Kumar - Morgan Keegan - Analyst : Got it. Thanks. Thanks for the clarity.

Question: Pierre Maccagno - Needham and Company - Analyst : Hi, Chuck and Cindy. Could you comment on the industry and is if still capacity-constrained for the higher brightness LED products?

Question: Pierre Maccagno - Needham and Company - Analyst : Ok. Well, thanks.

Question: John Lau - RBC Capital Markets - Analyst : Yes, thanks, Chuck, Cindy. Circling back to the litigation issue, more specifically on the patents litigation, could you give us an update on the outstanding litigation versus the competition in the industry? I think specifically there was a case in Korea and in the U.S. with AXTI, and I wanted 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 see if you could give us not only the specifics on the AXTI but the overall industry perspective of what's happening in terms of that litigation on patents. Thank you.

Question: John Lau - RBC Capital Markets - Analyst : As this continues to evolve, not only for the -- you mentioned this Korean issue and AXTI, they're beginning to exit the industry. If you would take a look at the competition that's out there for the LEDs, especially from the competition that you're getting that's pressuring the low end of the mid brightness, are they also at risk for this litigation? Are they in violation? I mean, how many of these manufacturers out there specifically in Asia could potentially be infringing?

Question: John Lau - RBC Capital Markets - Analyst : Ok. Let me try to rephrase it another way. It seems that with the issues of patent, whenever that's brought up, it is very successfully defended in the marketplace. Now the question is, will Nichea have taken that next step, although it's a very difficult process to go to Korea to address those issues, I think -- is it your intention or Nichea's intention in that matter to continue to pursue that into the Taiwan market or China market?

Question: John Lau - RBC Capital Markets - Analyst : Great. Thank you.

Question: Blaine Carroll - Adams, Harkness and Hill - Analyst : Thank you. Chuck, if we can look at another piece of your business, if you'll look at the wafer revenue, you know, it's actually been increasing very nicely sequentially over the last couple of quarters, and I was wondering how much of that growth is being fueled out of some work you're doing on the defense side.

Question: Blaine Carroll - Adams, Harkness and Hill - Analyst : Wasn't there some news out there about you winning a contract with the government for some radar products?

Question: Blaine Carroll - Adams, Harkness and Hill - Analyst : Ok. And then I guess just, you know, to back up a little bit, just from 20,000 feet, if we're looking for revenue, total revenue to be flat to maybe down a little bit sequentially into the quarter, and if the LED revenue, you know, you're saying is going to be roughly flat, you know, which pieces of the businesses are going to negatively impact the revenue growth?

Question: Blaine Carroll - Adams, Harkness and Hill - Analyst : Ok. Great. I'll pass on.