Cree Inc. Q4 2014 Earnings Conference 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 question. First one I had was just around the near-term trends last quarter. You mentioned backlog. It was actually ahead of the same point versus the prior quarter, and this is the first time as I look at the model in two years that you're top line has come closer to the low-end versus the midpoint of the range. I'm just wondering what transpired over the last two months of the quarter that you lost some momentum versus your outlook, and if the weakness was all concentrated in LED products? Then had a follow-up.

Question: Brian Lee - Goldman Sachs - Analyst : That's helpful. Chuck, you mentioned the utilization rates may be impacting your ability to service shortly time demand, but if I look at the inventory days, they've been up here for about five straight quarters. I know some of the driver, maybe the major driver, is in the lighting business. Wouldn't that position you to be able to service some of that short lead time demand given the inventory build? Also given the build, is there any risk that we should be budgeting for that? This could actually impact your utilization rates in future quarters if the needed to start drawing down. Thanks a lot, guys.

Question: Vishal Shah - Deutsche Bank - Analyst : Hi. Thanks for taking my question. I just wanted to follow-up on the inventory situation. If you look at where the target will be, if you consider the prior calls, you've made some comments about where you targets will be. Can you update us as to how we should think about inventory levels on a go-forward basis with the new lighting mix? Also considering the impact of some of the demand trends in lighting business, how should we think about the operating expense and operating leverage in 2015? Can you assume similar leverage, or the leverage improvement in 2015? Thank you.

Question: Jed Dorsheimer - Canaccord Genuity - Analyst : Hi. Thanks for taking my question. Chuck, I think you alluded to this, but I just wanted to confirm and maybe ask a different way. The change in LED gross margin, it was down sequentially. I'm wondering, is that attributable to a mix between merchant versus captive? I know you were talking about your high utilization and your captive limiting some upside there. More specific, I guess, is gross margin ticked down a direct function of 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: Jed Dorsheimer - Canaccord Genuity - Analyst : Okay. Then as my follow-up, two parts to it, I know this is your year end, so would you be kind enough to provide Home Depot as a percentage of sales, or do we have to wait for the K? Then my second part, Home Depot on the bulb imposed the cost down, or you agreed to the cost down in the March timeframe. I think that was a headwind last quarter. I'm just curious if had achieved that running change, and how much did that affect the margin increase in the lighting products business?

Question: Edwin Mok - Needham & Company - Analyst : Hi. Thanks for taking my questions. First question, I want to dive into lighting revenue for the quarter and for your guidance. On your comments, you mentioned that bulbs may be growing less than fixtures in the June quarter. Can you confirm that? On your guidance, I think you said you expect solid growth. Is that in the similar trend for both fixture and light bulb, or do you expect light bulb growth necessary in the September quarter? 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: Edwin Mok - Needham & Company - Analyst : I see. Okay, thanks for clarifying. That's very helpful. Then Chuck, going back to the margin discussion there as well, right, if I come back on your commentary on the light bulb, it sounds like you're fixture margin has been expanding over the last few quarters. Is that mostly just coming from stable price [or] costs improvement? Do you expect that trend to continue? I think previously you guys were talking about fixtures can potentially be in the mid-30% gross margin. Is that the target we should be shooting for in the next few quarters? Any color you can provide on that?

Question: Harsh Kumar - Stephens, Inc. - Analyst : Hi, guys. I just had a couple of quick questions. First of all on the LED business, Chuck, it was up 4% year-over-year, and also it looks like it's flattish in September also June. Those have traditionally been up quarters in that business. I'm curious if you could shed some light on it? Are you using more of your internal capacity in limiting the outside sale, or is there something else going on?

Question: Harsh Kumar - Stephens, Inc. - Analyst : Thanks for the color, Chuck. As my follow-on, your OpEx will -- you said flattish in September. Will -- is that the level, Mike or Chuck, that we should think about for the rest of the year? Or just maybe some color on how we should think about OpEx for the rest of the year?

Question: Colin Rusch - Northland Capital - Analyst : Thanks so much. Can you talk about your lighting fixture road map? Areas that you're targeting as we look out over the next 12 to 24 months?

Question: Colin Rusch - Northland Capital - Analyst : Can you just give us a sense of the T8 payback periods that you're seeing out there right now?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Yes. Thanks for taking my question. First, I wanted to ask in terms of the growth metrics in the current quarter, what is the growth in indoor versus outdoor applications?

Question: Sven Eenmaa - Stifel Nicolaus - Analyst : Got it. The second question I had is in terms of a cost margin dynamic from June quarter to September quarter, is that purely mix driven, or do you expect sequentially lower margins in one of the segments?

Question: Krish Sankar - BofA Merrill Lynch - Analyst : Hi. Thanks for taking my question. Chuck, my first question is a longer-term question. You guys have done a great job on the high-power LED business. If you look at longer term, and if there's more of the opportunity in indoor, is the industry moving towards medium-power? If so, do you think it

Question: Krish Sankar - BofA Merrill Lynch - Analyst : Got it. That's very helpful. As a follow-up, either for you or Mike, how much of your cash is on-shore? Do you have any updated thoughts on M&A, in terms of does it make sense to look more vertical, horizontal? Any of that would be helpful. Thank you very much.

Question: Mark Heller - CLSA - Analyst : Thanks for taking my question. Chuck, a high level question, for the past I guess three fiscal years the Company has grown around 18%, 19% per year, top line. I'm wondering, do you think there's an opportunity to grow the Company faster than that? Are there any roadblocks to keeping the Company? Now that we're getting to the inflection point for LED lighting, should the Company grow faster than what we've seen?

Question: Mark Heller - CLSA - Analyst : Okay. Then back on the M&A theme, we've seen some consolidation within the components sector recently. I'm just wondering what your view is on the merits of maybe acquiring another LED component company?

Question: Paul Coster - JPMorgan - Analyst : Thanks. Chuck, I think we all agree that we're at an inflection point, and would be expecting this market to perhaps even accelerate at the moment. You sound like you're just a little bit more cautious, and I can't quite figure out if it's to do with the fact that the mid-power LED guys have done a REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. better job of ramping up supply and getting into your space, or whether it relates back to your prior comment earlier on in the presentation around doing a better job of reaching out and conveying the message. Can you talk to us about all of those factors, and am I right in assuming that things have slowed a little bit relative to your expectations?

Question: Paul Coster - JPMorgan - Analyst : Okay. You expect the market to come around to you in the high-power space in the next several quarters, I think you said. What is it that you would be watching? What's the proprietary lead indicators that you have that will give you the confidence that it's finally there?

Question: Hans Mosesmann - Raymond James & Associates - Analyst : Thanks. Chuck, a couple of questions, can you give us a sense on the retail dynamic besides Home Depot? Are you getting some new guys lined up? I have a follow-up.

Question: Hans Mosesmann - Raymond James & Associates - Analyst : Okay, thanks. Then for modeling purposes in how you guys look at the world going forward, what is the growth rate of the lighting industry from your perspective?

Question: Hans Mosesmann - Raymond James & Associates - Analyst : Thank you.

Question: Andrew Huang - Sterne Agee - Analyst : Thanks. When I look at my model, LED components have been up sequential for the June quarter, I think, every year since 2007. Normally, you should see a sequential improvement. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. Maybe you could give us some additional color on what happened here. Is it share loss? Is it ASP pressure? Or is it market shift to mid-power?

Question: Andrew Huang - Sterne Agee - Analyst : Okay, and then here's my follow-up. This is the first quarter in your history that lighting is bigger than components. That may be a mixed blessing. Should we assume that overall gross margin pressure for the overall Company is going to get worse going forward? Or do you have enough cost on opportunities in lighting to offset that?

Question: Mike Ritzenthaler - Piper Jaffray - Analyst : Thanks. Just one question for me that hadn't already been asked, on the cost reduction side of things, it sounds like a there is some positive impact of what you've been able to accomplish so far. My question is, if you have a sense at this point of how much of that might be eaten up in the marketplace by erosion, price erosion, versus what's a little bit more sustainable? 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: Mike Ritzenthaler - Piper Jaffray - Analyst : Thanks.

Question: Avinash Kant - DA Davidson & Company - Analyst : Good afternoon. Just two questions actually, could you talk about your utilization of 6-inch wafers? Where are you? Are you 100% 6-inch by now?

Question: Avinash Kant - DA Davidson & Company - Analyst : You mean end of fiscal year 2015, right?

Question: Avinash Kant - DA Davidson & Company - Analyst : Could you give us the depreciation and amortization for the quarter?

Question: Mike Ritzenthaler - Piper Jaffray - Analyst : I don't have it off the top of my head. We'll get back to you on it.