Cree (CREE)

Q1 2012 Earnings Call

October 18, 2011 5:00 pm ET

Executives

Raiford Garrabrant - Director of Investor Relations

Charles M. Swoboda - Chairman of the Board, Chief Executive Officer and President

John T. Kurtzweil - Chief Financial Officer, Chief Accounting Officer, Executive Vice President of Finance and Treasurer

Analysts

Carter B. Shoop - KeyBanc Capital Markets Inc., Research Division

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Andrew Huang - Sterne Agee & Leach Inc., Research Division

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

Steven Milunovich - BofA Merrill Lynch, Research Division

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Christopher Blansett - JP Morgan Chase & Co, Research Division

Farhan Ahmad

Joshua Paradise - Morgan Stanley, Research Division

Mark Heller - Credit Agricole Securities (USA) Inc., Research Division

Presentation

Operator

Good afternoon. My name is Matthew, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cree, Inc. Q1 Fiscal Year 2012 Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, October 18, 2011, at 5:00 p.m. Eastern time. Thank you. I would now like to introduce Raiford Garrabrant, Director of Investor Relations of Cree, Inc. Mr. Garrabrant, you may begin your conference.

Raiford Garrabrant

Thank you, Matthew, and good afternoon. Welcome to Cree's First Quarter Fiscal 2012 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's CFO, will report on our results for the first quarter of fiscal year 2012. 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 margin 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 will be limiting our comments regarding Cree's first quarter for fiscal year 2012 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 will 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 conference 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 ask that analysts limit themselves to one question and one follow-up. We recognize that other investors may have additional questions, and we welcome you to contact us after the call by e-mail or phone at (919) 287-7895.

We are also webcasting our conference call, and a replay will be available on our website through November 1, 2011. Now I'd like to turn the call over to Chuck.

Charles M. Swoboda

Thank you, Raiford. We got off to a good start in the first quarter as our LED lighting and LED component product lines continued to deliver solid growth. We also took the next step in our strategy to lead the LED Lighting Revolution with the acquisition of Ruud Lighting. Ruud, with their well-known BetaLED brand, is one of the most successful companies in outdoor LED lighting, and the combination puts Cree in an even better position to lead the market and drive LED lighting adoption.

Q1 revenue increased 11% from Q4 to $269 million, while non-GAAP net income decreased 8% sequentially to $28 million or $0.25 per diluted share. Both revenue and earnings were in line with our updated target range for the quarter. The revenue growth in Q1 was driven by approximately $20 million in net sales from our acquisition of Ruud Lighting in the second half of the fiscal quarter, strong growth in sales of Cree's indoor LED lighting products to our commercial and retail customers and solid growth in XLamp LED component sales across a range of lighting applications, which offset lower LED chip and Power sales.

Non-GAAP gross margin was 37.4% in Q1, which was in line with our post-acquisition targets. Consistent with our plan for the quarter, the gross margin was driven by several factors: factory utilization that was slightly higher but still relatively low overall; sales of higher-cost LED inventory that was produced in Q4; increased percentage of LED lighting products, which currently have slightly lower margins; and the continuing competitive LED pricing environment, which was partially offset by yield improvements and other cost reductions.

We continue to manage factory starts to reduce inventory while also trying to maintain flexibility to respond to short lead time expectations in the market. As a result, non-Ruud-related inventory declined from Q4.

Cash and investments decreased to $632 million as a result of the Ruud acquisition. Free cash flow was $8 million in Q1, and we are in a strong position to continue to invest in our business and lead the market and accelerate the adoption of LED lighting.

Orders are tracking ahead of this point last quarter, and overall demand trends are similar to Q1. The growth in demand is coming from LED components and LED lighting, which includes both our indoor products and our BetaLED outdoor products. The strength in lighting demand reflects the growing reality that LED lighting adoption is happening now.

We secured significant new business in Q1 based on the merits of our lighting technology and ability to deliver products with compelling payback to the customer. The buying decisions on these large commercial products do not rely on government subsidies. Rather, they are decided on the quality of the light and standard ROI or payback calculations that take into account energy and maintenance savings.

Read the rest of this transcript for free on seekingalpha.com