Cree Inc. CEO Discusses F1Q2010 Earnings - Call Transcript

Cree Inc. CEO Discusses F1Q2010 Earnings - Call Transcript
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Cree Inc. (

CREE

)

F1Q2010 Earnings Call

October 19, 2010 05:00 pm ET

Executives

Raiford Garrabrant - Director of IR

Chuck Swoboda - Chairman of the Board, President, CEO

John Kurtzweil - CFO, EVP- Finance, Treasurer

Analysts

Steve Milunovich - Bank of America-Merrill Lynch

Chris Blansett - JPMorgan

Dale Pfau - Cantor Fitzgerald

Yair Reiner - Oppenheimer & Company

Ahmar Zaman - Piper Jaffray

Andrew Wang - Sterne Agee

Joshua Paradise - Morgan Stanley

Harsh Kumar - Morgan Keegan

Daniel Amir - Lazard Capital

Jed Dorsheimer - Canaccord

Carter Shoop - Deutsche Bank

Presentation

Operator

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Good afternoon. My name is Amanda, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cree Inc. 2011 First Quarter Earnings Release Conference Call. (Operator Instructions)

And as a reminder ladies and gentlemen this conference is being recorded today October 20, 2010. Thank you I would now like to introduce Raiford Garrabrant, Director of Investor Relations for Cree Incorporated. Mr. Garrabrant, you may begin your conference.

Raiford

Garrabrant

Thank you, Amanda, and good afternoon. Welcome to Cree's first quarter fiscal 2011 earnings conference call. By now you should have all received a copy of the press release. If you did not receive a copy, please call our office at 919-287-7895 and we will be pleased to assist you.

Today, Chuck Swoboda, our Chairman and CEO, and John Kurtzweil, Cree CFO will report on our results for the first quarter of fiscal year 2011. Please note that we will be presenting both GAAP and non-GAAP financial results in our remarks during today's call, which are reconciled in our press release and financial metrics posted in the investor relations section of our website at www.cree.com under quarterly results in the financial information tab.

Today's presentations include forward-looking statements about our business outlook and we may make other forward-looking statements during the call. These may include comments concerning trends in revenue, gross margins and earnings, plans for new products and other forward-looking statements indicated by words like anticipate, expect, target and estimate.

Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially. Also, we'd like to note that we'll be limiting our comments regarding Cree's first quarter for fiscal year 2011 to a discussion of the information included in our earnings release and the metrics posted on our website. We will not be able to answer any questions that would involve providing additional financial information about the quarter beyond the comments made in the prepared remarks.

This call is being recorded on behalf of the company. The presentations and the recording of this call are copyrighted property of the company, and no other recording, reproduction or transcription is permitted unless authorized by the company in writing. Consistent with our previous calls, we are requesting that only sell side analysts ask questions during the Q&A session.

Also since we plan to complete the call in the allotted time of one hour, we recognize that other investors may have additional questions, and we welcome you to contact us after the call by email or phone at 919-287-7895. We are also webcasting our conference call and a replay will be available on our website through November 2

nd

, 2010.

Now I'd like to turn the call over the Chuck.

Chuck Swoboda

Thank you Raiford. Fiscal Q1 was another record quarter for Cree as revenue increased 1.5% from Q4 to $268 million and non-GAAP net income increased 10% sequentially to $66 million or $0.60 per diluted share. Revenue in lighting, LED components and power but in total was on the low end of our target range of $270 million to $280 million due to an almost 20% decline in LED chip sales as a result of weakness in notebook and monitor backlighting demands. The growth drivers remained on track with strong double-digit growth in LED lighting product sales for both our commercial products and the initial rollout of LED downlights for Home Depot. Growth in LED component sales driven by outdoor lightings and LED bulb application and growth in power products.

Net income exceeded our targets for the quarter due to solid growth margin lower than planned operating expenses and a favorable tax rate. Non-GAAP gross margins was 29% in Q1, which is on the high end of our target range for the quarter of 48% to 49%. Gross margin was driven by solid execution across the factory.

Higher yields and a heavier mix of components which mostly offset slightly lower factory utilization and increased LED pricing pressure especially in the LED chip product line.

Cash and investments increase to $1.1 billion and we remain in the strong position to continue to invest in our business and made the adoption of LED lightings. Our QC backlog is running behind last quarter's order rate primarily due to soft LED chip demand, as the business has shifted from a capacity constrained environment, to short lead times and terms oriented business.

LED chips were targeted to be down about 10% in Q2 due to a continuing inventory correction related to back loading applications. As we had explained in the past chip sales to backlighting are opportunistic and not part of our core lighting strategy. This trend is inline with historical LED chip business pattern and we expect demand to begin to increase again in the first half of calendar 2011, driven by lighting demand and renewed up momentum in the conversion to LED backlit TVs.

Looking beyond the LED chip effects, LED lighting and power orders remained strong and ahead of last quarter, while LED component orders are booking a little slower we believe this is primarily function of our customers and distributors using shorter lead times to manage their inventory.

And with the lighting adoption continues to gain momentum and we continue to see strong design activity. The growth rate of this new light applications are converting to LEDs fluctuates from quarter-to-quarter, but this is not surprising, given the early stage of adoption and its disruption being caused by LED technology. Our own lighting business is probably the best leading indicator for indoor commercial applications, is positive to continue to grow at a strong rate again in Q2. LED components is also targeted to continue to grow primarily in outdoor lightning and bulb retrofit in the short term where we expect to start to see growth in indoor commercial application over the next few quarters based on the trends we see in our own lighting product lines.

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