Cree (CREE) Q3 2012 Earnings Call April 17, 2012 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 Brian K. Lee - Goldman Sachs Group Inc., Research Division Christopher Blansett - JP Morgan Chase & Co, Research Division Jesse Pichel - Jefferies & Company, Inc., Research Division Dale Pfau - Cantor Fitzgerald & Co., Research Division Andrew Huang - Sterne Agee & Leach Inc., Research Division Ahmar M. Zaman - Piper Jaffray Companies, Research Division Vishal Shah - Deutsche Bank AG, Research Division Vidya Adala - Morgan Stanley, Research Division Mark Heller - Credit Agricole Securities (USA) Inc., Research Division Daniel L. Amir - Lazard Capital Markets LLC, Research Division Carter B. Shoop - KeyBanc Capital Markets Inc., Research Division Colin W. Rusch - ThinkEquity LLC, Research Division Jonathan Dorsheimer - Canaccord Genuity, Research Division Amir Rozwadowski - Barclays Capital, Research Division Satya Kumar - Crédit Suisse AG, Research Division Presentation Operator
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Today, Chuck Swoboda, our Chairman and CEO; and John Kurtzweil, our CFO, will report on our results for the third 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 third quarter of 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 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 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 before re-entering the queue. 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're also webcasting our conference call and a replay will be available on our website through May 1, 2012.
Now, I would like to turn the call over to Chuck.Charles M. Swoboda Thank you, Raiford. Q3 revenue was $285 million with non-GAAP net income of $23 million or $0.20 per diluted share. Revenue was slightly below our target range as LEDs and Power and RF were in line with our targets, but the lighting product line was lower than expected as our move to new agents during the integration with Ruud caused more disruption to the project pipeline than we had anticipated. All 3 product lines saw improved order rates in March, and we target solid growth in our fiscal Q4. Non-GAAP earnings per share were in the middle of our target range for the quarter as strong factory execution offset lower revenue. The revenue trends in Q3 were as follows: $9 million decrease in lighting sales as both product lines lost short-term momentum due to the agent transition, but indoor sales were most affected due to shorter project cycles and the availability of traditional alternatives. This transition is targeted to drive revenue synergies in the first half of fiscal 2013. We do not believe that the decrease in lighting sales was an indication of lower end user demand. $13 million decline in LED sales, which was in line with our seasonally lower targets. LED component sales improved post-Chinese New Year and we target improve market demand in Q4. $3 million increase in Power and RF sales as demand in both product lines started to improve. Non-GAAP gross margin was 35.6% in Q3, which was 30 basis points higher than Q2 and within our target range due to solid execution across the company. Factory utilization increased slightly in Q3, which combined with cost reductions, productivity and yield improvement offset the pricing declines in the quarter. The LED market remains very competitive, but we target improved margins as our new products gain traction in the market.
We continue to closely manage inventory in LEDs, Power and RF to similar levels as Q2 while working to respond to short lead time expectations in the market. We increased inventory in lighting in anticipation of new product launches and higher demand in Q4. As a result, overall inventory increased by $9 million to 96 days.Cash and investments increased to $710 million due to solid execution and reduced capital spending. We continue to be in a strong position to significantly increase LED chip production from current levels with modest capital spending, and we are well positioned to support significant growth in LED lighting. Free cash flow was $22 million in Q3, and our ability to generate solid free cash flow in a challenging market bodes well for the company as we target increased revenues in Q4. Read the rest of this transcript for free on seekingalpha.com