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Cree, Inc. (NASDAQ:CREE)

F4Q09 Earnings Call

August 11, 2009 5:00 pm ET

Executives

Raiford Garrabrant – Director of Investor Relations

Charles M. Swoboda – Chairman and Chief Executive Officer

John T. Kurtzweil – Chief Financial Officer

Analysts

Yair Reiner - Oppenheimer & Co.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Jesse Pichel - Piper Jaffray

Dale Pfau - Cantor Fitzgerald

William Ong - Merriman Curhan Ford

Hans Mosesmann - Raymond James

[Lauren Fuller] for Daniel Amir – Lazard Capital Markets

Jonathan Dorsheimer - Canaccord Adams

Steven Milunovich - BAS-ML

Carter Shoop - Deutsche Bank Securities

[Elliott Grosovsky] – Morgan Joseph

[Ramesh Misra – Burgansy Advisors]

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cree, Incorporated fiscal 2009 fourth quarter and year end financial results conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, August 11. Thank you.

I would now like to introduce Raiford Garrabrant, Director of Investor Relations of Cree, Incorporated. Mr. Garrabrant, you may begin your conference.

Raiford Garrabrant

Thank you, Paula, and good afternoon. Welcome to Cree’s fourth quarter fiscal 2009 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 fourth quarter and fiscal year 2009. 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 FY 2009’s financial metrics.

Today’s presentation includes 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 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 fourth quarter fiscal year 2009 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 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 web casting our conference call to allow more flexibility for our conference call attendees. A replay of the webcast will be available on our website through August 25, 2009.

Now I would like to turn the call over to Chuck.

Charles M. Swoboda

Thank you, Raiford. Fiscal 2009 was a good year for Cree despite a challenging global economic environment, and reflects the success of our strategy to drive growth in LEDs and lighting related applications. Revenue for the year increased 15% to a record $567.3 million, while non-GAAP earnings increased 23% to $59.2 million or $0.66 per diluted share. For fiscal Q4 revenue increased 13% from Q3 to a record $148.1 million, with non-GAAP net income of $16.3 million or $0.18 per diluted share. Revenue was at the high end of our revised targets for the quarter while profits exceeded the targets. The revenue growth in Q4 was driven by higher XLamp and high-bright LED sales for lighting related applications, higher LED chip sales due to increased demand in notebook backlighting, and sequential double digit growth in LED lighting product sales.

Non-GAAP gross margin increased to 40% in Q4, which was 340 basis points better than Q3 and higher than our revised target range for the quarter. The better than expected results were due to a combination of factors including better cost leverage from higher factory utilization, better than planned progress on the four inch conversion, a more stable pricing environment in LED chips, an improved performance in our Power and RF product line. These cost improvements more than offset pricing declines in LED components due to increased competition in lighting applications.

Working capital was in line with our targets and we further strengthened our balance sheet as cash and investments grew to $447 million. We made good progress building momentum in our business and delivering on our four key objectives for fiscal 2009. We were able to drive top line growth through higher sales of LED components, we extended our market leadership in LED lighting with higher performance XLamp LEDs and lighting products, created new categories for LED lighting with our LR24 Recessed Troffer and PAR 38 LED bulb, and launched a strategic relationship with Zumtobel to bring our LED technology to the European market.

We increased new product margins and built operating leverage in the business, and we also started to make progress improving the yields in cost structure of our Power and RF product line. Our Q1 backlog is at the highest level in our company’s history due to increased demand across our LED product lines. Most new orders are currently being booked into fiscal Q2, with some exceptions in LED components, where customers and distributors in the project driven applications such as lighting and large video screens continue to expect short delivery times and remain cautious about placing longer term orders due to economic uncertainty in their business.

Overall the growth in LED command has shifted our near term focus to factory execution, which we are addressing through increased capital spending at our factories in both the U.S. and Asia.

I’ll now turn the call over to John Kurtzweil to review our fourth quarter and year end financial results in more detail, as well as our targets for the first quarter of fiscal 2010.

John T. Kurtzweil

Thank you, Chuck. I will be providing commentary on our financial statements on both a GAAP and non-GAAP basis, which is consistent with how management measures Cree’s results internally. However, non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. A reconciliation of the non-GAAP information for all quarters mentioned on this call is posted on our website, as well as a historical summary of other key metrics.

For fiscal 2009, revenue was $567 million as compared to $493 million for the prior year. This is an increase of 15% year-over-year. GAAP earnings were $30.3 million and $0.34 per diluted share for fiscal 2009, while non-GAAP earnings increased 26% to $59.2 million and $0.66 per diluted share. Non-GAAP earnings exclude $28.9 million of expense net of tax, or $0.32 per diluted share from the amortization of acquired intangibles and stock-based compensation expense.

Cash provided by operations was $178 million. Free cash flow was $123 million and we exited fiscal 2009 with $447 million in cash and investments and continued to be debt free. For the fourth quarter of fiscal 2009 revenue was $148.1 million, and within our updated target range for the quarter of $143 to $150 million. This represents a 9% increase over Q4 of fiscal 2008 and a 13% increase sequentially. GAAP net income was $9.7 million or $0.11 per diluted share, and exceeded our updated target range of $0.07 to $0.09 per diluted share. On a non-GAAP basis, net income for the fourth quarter was $16.3 million or $0.18 per diluted share. This was above our updated target range of $0.15 to $0.17 per diluted share, and excludes $6.6 million of expense net of tax or $0.07 per diluted share from the amortization of acquired intangibles and stock-based compensation expense.

LED product revenue for the fourth quarter increased 12% when compared to the same period last year, and increased 17% sequentially to $131.3 million, while non-LED product and contract revenues were in line with our expectations at $16.8 million which was down 12% from the same period last year and down 9% sequentially.

Q4 GAAP gross margin was 39.6% while non-GAAP gross margin was 40.3%, which excludes stock-based compensation of $1.1 million. This was above our targeted non-GAAP range of 36 to 38%.

Operating expenses for Q4 were $47.2 million on a GAAP basis and $38.9 million on a non-GAAP basis, which is higher than our targets. R&D and SG&A expenses were generally in line with our targets. However, we had higher than targeted fixed asset impairment charges of $3.5 million due to the write-down of some manufacturing equipment. Non-GAAP operating expenses exclude approximately $4.3 million of stock-based compensation expense and $4.1 million of charges for amortization of acquired intangibles.

Net interest income and other for Q4 decreased year-over-year to $1.7 million, which is in line with our targets. Given the low interest rate environment, the average return on our cash is forecasted to decline again in the first fiscal quarter as we continue to emphasize cash preservation over yields. The GAAP tax rate for the quarter was 25%, which is higher than our 23% target, primarily due to the sales mix in higher taxing jurisdictions than we had forecast.

The final earn-out payment under the COTCO acquisition agreement resulted in $57.1 million versus a maximum potential of $65 million. This will be paid in cash in August. This amount has been accrued for as an increase in goodwill and a current liability, and as of the end of fiscal Q4 2009’s financials.

During fiscal 2009, we had two customers greater than 10% of total company revenue, Arrow Electronics and Seoul Semiconductor. Seoul Semiconductor revenue was 13% and Arrow has become our largest distributor at 11% of total company revenue. In fiscal 2009, Cree had two related person transactions as a result of the COTCO acquisition with Light Engine Limited and Conwin Technology Limited. Sales to Light Engine were $40 million in fiscal 2009 or 7% of total company revenue, and sales to Conwin were $38 million in fiscal 2009 or 7% of total company revenue. Sales to these two customers combined grew in line with the growth in our overall LED revenue.

Please take note that as of the beginning of fiscal 2010, Light Engine and Conwin are no longer related persons to Cree as we have been notified that Paul [Low’s] ownership level is now below 5% at 4.2 million shares.

Our debt free balance sheet grew stronger during the quarter due to strong cash flow from operations. We ended June with $447 million in cash, short term and long term investments, and continue to be debt free. Accounts receivable were flat at $103 million, while days sales outstanding declined to 63 days from 71 days at the end of March. Inventory increased by $1.4 million and days on hand decreased to 79 from 83 days at the end of March.

Cash flow from operations during the fourth fiscal quarter was $43 million and capital expenditures were $14.7 million, resulting in free cash flow of $28.3 million during the quarter. We continue to make capital investments to support new product introductions and capital expansion. In Q1 we target capital additions to be in the range of $25 to $30 million, primarily for LED component capacity increases in China and LED chip capacity in the U.S.

At this time, we target Q1 revenue to be in the range of $160 to $166 million. GAAP gross margin is targeted to be approximately $1 million or 60 basis points less than our non-GAAP target of 40%, plus or minus, as our GAAP targets include stock-based compensation expense and our non-GAAP targets do not. Chuck will provide additional insight into our targets in a few minutes.

Beginning with our fiscal Q1, we will be reporting our revenue by product line in a more consolidated manner. LED product revenue will include materials revenue plus LED related contract revenue. And Power and RF products will include contract revenue related to those products. For operating expenses, we are targeting a slight increase in R&D expense, while SG&A expenses are targeted to increase by approximately $3 million for increased marketing, higher sales commissions, initial staffing costs for our new application centers and increased compensation expense.

We target assets and impairments to decline to approximately $500,000 for the quarter and our GAAP targets include approximately $4.9 million of non-cash stock-based compensation and $3.1 million of charges for amortization of acquired intangibles. Please note that our amortization of acquired intangibles declined $1 million sequentially and is targeted to stay at this level each quarter in fiscal 2010.

Interest income and other is targeted to be flat to down slightly. We target our tax rate to increase to 26% for fiscal 2010 due to several changes in tax rates in various jurisdictions, both domestically and internationally. Based on an estimated 91 million diluted shares outstanding, our GAAP EPS target for the first fiscal quarter of 2010 is expected to be $0.14 to $0.16 per diluted share when amortization of acquired intangibles and stock-based compensation expense are included. We target non-GAAP earnings per diluted share in the range of $0.21 to $0.23 for the first quarter of fiscal 2010. Our non-GAAP basis EPS targets exclude amortization from acquired intangibles in the amount of $0.02 and non-cash stock-based compensation in the amount of $0.05.

Thank you. And now I will turn the discussion back to Chuck.

Charles M. Swoboda

Thanks John. As we begin fiscal 2010, we are focused on four key areas to continue to drive our business. Our first priority is to build on our leadership in LED lighting and further disrupt existing lighting markets. Our strategy is to be a catalyst for LED lighting adoption by developing innovative new LED lighting products to lead the market and open up new lighting applications for LED technology. This has generated incremental lighting product sales for Cree, expanded the market for our LED components customers and helped motivate the traditional lighting companies to embrace LED technology for their products. For example, the recent launch of our Par 38 LED bulb has allowed us to address high end retail lighting applications with LEDs for the first time, while creating momentum with the traditional lighting companies to begin promoting their own LED bulb products.

Over the next year, we plan to further develop our channels to make LED lighting products more accessible to a broader base of customers, while continuing to expand our product offering to address new lighting applications which are currently not served with energy efficient LED technology.

Our second priority is to further enable our lighting customers to help grow LED component sales. Although the LED components business was the primary growth driver in fiscal 2009, LED lighting adoption still represents a very small fraction of the overall lighting market. Time will help the rate of adoption, but we are planning to try and accelerate LED penetration through new, more efficient LED components, more integrated products that are easier to use for traditional lighting companies, as well as increased investment in our technical support capabilities by opening several new LED lighting application centers around the world.

Our third priority for fiscal 2010 is to maintain the product margin levels we achieved in Q4 and start to build operating leverage in the business. We saw the benefit of very high factory utilization and yield improvements in Q4, and we need to try and maintain these gains as we add capacity and introduce new products in the year ahead. There are some supply constraints in the LED chip market, which are helping margins in the short term. However, the overall LED market remains highly competitive and we remain focused on both cost reductions and increasing the value of our products by providing new capabilities to the customer. We target operating improvements throughout fiscal 2010, although this will be somewhat offset by our increased investment in marketing and technical support during the year.

Our fourth priority is to build on the recent progress in our Power and RF product line, to further refine our product offering and market focus to develop incremental contribution to increase bottom line. There is still significant variability in this product line from quarter to quarter, and as demand fluctuations change its factory loading and therefore its cost structure. We plan to expand our customer penetration into new, higher value applications for both Power and RF with products such as our new Z-Rec line of diodes, which should improve overall demand and help deliver more consistent quarterly results for this product line.

We completed the COTCO earn-out agreement in Q4, which will result in a final payout of $57 million in our fiscal Q1. This has been a successful acquisition and this product line has become an integrated part of our LED components business. Paul [Low] informed us that he has recently reduced his Cree equity holdings below 5%, and although he is no longer a related party he remains a valued Cree shareholder and customer as Light Engine recently renewed its LED supplier agreement for another two years, as its business continues to benefit from increased demand for LED lighting.

As we look ahead to Q1, our factories are currently operating near maximum capacity and we have recently increased capital spending to support the growth in demand. Although we will likely be capacity limited in some product lines in Q1, we target overall revenue to increase to a range of $160 to $166 million based on the following factors. Double digit growth in LED lighting in product sales, double digit growth in LED component revenue for lighting applications, double digit growth in LED chips to support notebook and TV backlighting demand, and Power RF materials and contract revenue in a similar range as Q4.

We target Q1 non-GAAP margins in a similar range as Q4 at 40% plus or minus, as increased volume and improved yields are offset by continued aggressive pricing environment for LED components. We target higher spending in R&D to accelerate new product development in LEDs, as well as increased spending in sales and marketing as we start to staff several new global customer service and application centers. As a result, we target non-GAAP earnings in Q1 of $0.21 to $0.23 per diluted share. Please note that our non-GAAP targets exclude amortization of intangibles, stock-based compensation expense and related tax effects.

Fiscal 2009 was a good year for Cree, and we have strong business momentum as we head into fiscal 2010. We are well positioned to benefit from the growth in LED lighting, which remains our strategic focus. At the same time, the rapid adoption of LED backlighting for notebook computers and TVs has changed the market dynamics for small, chip based white LEDs and increased demand for high end blue LED chips. This has created near term supply constraints, extended lead times across the industry, and resulted in a more favorable LED chip pricing environment. In the short term, we need to manage our capacity constraints as we continue to invest in new capital to expand our factories.

Our current business trends are positive, but the macroeconomic environment is still a major risk factor that we will need to continue to monitor. We also must continue to invest in new products, channels and technical support infrastructure to truly enable the LED lighting revolution, as we are still just getting started.

We will now take analysts questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Yair Reiner - Oppenheimer & Co.

Yair Reiner - Oppenheimer & Co.

First on the LED lighting components, it sounds like business is very strong there. Is this largely a reflection of the growing demand for street lighting in China? And if so, how large a portion of your business does that represent today?

Charles M. Swoboda

Yes, so LED components for lighting applications is clearly one of the growth drivers. I would say broader than street lighting in China, I would say that outdoor commercial lighting which would include street lighting but it would go beyond that in both China, the U.S. and even some in Europe is actually a strong segment for us. The other thing that we’re seeing is that the indoor market is also starting to get some momentum. So whether it be indoor based fixtures or even some of the new indoor bold based products, I would say that that category in general is driving the growth. And it’s more than just China. It’s pretty broad based across the regions, with probably the most strength in North America and China, and Europe being you know kind of a follower at this point.

Yair Reiner - Oppenheimer & Co.

So a quick follow up to that, we’ve heard recently some of your traditional competitors in Asia who competed with you on the low end are trying now to get into some of the outdoor lighting applications. How do you see the competitive landscape shaping up now versus maybe a few months ago?

Charles M. Swoboda

Yes, so I would say that when you talk about the broad markets, the competitive landscape whether it be for mobile or notebook or those types of applications is fairly similar than its been over the last couple of quarters. The only difference on that side of the market is obviously with demand up in the backlighting, you obviously see a different supply demand dynamic. When it comes to lighting, I would say that in all our markets it still remains pretty much a battle between Cree and Nichia and OSRAM and Lumileds depending on the market. I would say we see Lumileds the most and in some cases we see Nichia in certain segments and we see OSRAM, but probably we still see Lumileds the most, and haven’t seen a significant impact by really any of the Asian players in the lighting related segment.

So when I say lighting, I’m talking about indoor and outdoor commercial, the bulb segments, those types of areas.

Yair Reiner - Oppenheimer & Co.

On backlighting for notebooks and TVs, I think you’ve traditionally or over the last couple of years have talked more and more about the EC Market as being opportunistic. Obviously the opportunity today is very large. How long do you think there’s going to be a role for you to be able to get the kind of margins you want from that market? When do you think the supply constraint is going to be over and for how long do you think this is going to be an opportunity that’s worth pursuing for Cree?

Charles M. Swoboda

Yes, so I would tell you that it’s still opportunistic. If you look at what we focus on here, you’d see it’s clearly lighting first and servicing that business opportunity second. With that being said, it’s a nice market. Its clearly provided some scale in the chip business and really helped load our factories. So it’s a positive near term driver which gives us, you know, both incremental revenue and some incremental margin leverage.

The way I view that though is that given how much of our business has already shifted to LED components lighting related applications, it’s a complementary piece of it. And the way I look at that is I think for the next, you know I don’t know, next several quarters I think you’re going to see demand remain pretty solid in that segment. Does it continue beyond that? I think it’s hard for me to predict because you have to remember that today notebooks is driving that, but haven’t really seen the effects of the TV market yet. So although you hear a lot of splash, TV is still really you know probably a year behind notebooks, maybe more in that conversion. So I think there’s another wave of that coming.

With all that being said, our idea is service those markets. I think because they’re performance driven they continue to provide an opportunity for us, and they help us build scale that over time we’re going to need to drive the lighting business anyway. So it’s very complementary for where we’re at and where we’re trying to take the business long term.

Operator

Your next question comes from Harsh Kumar - Morgan, Keegan & Company, Inc.

Harsh Kumar - Morgan, Keegan & Company, Inc.

A couple of questions. Sounds like you left revenue behind in this current quarter, John. Could you tell us if you want to tell us how much it was and if it comes down to it, would you be leaving revenues behind in your opinion in the September quarter?

John T. Kurtzweil

Yes. [I’ll] actually take them. I don’t think we left significant revenue behind last quarter. I think demand picked up. We were able to ramp up to meet that. I think maybe a little bit here or there, but I don’t think that was a significant factor in our business last quarter. I think you see us having some fairly significant growth in our revenue targets for this quarter. And although we might be a little bit capacity constrained in certain product lines this quarter, we’re also trying to add capacity at a pretty high rate. So you know it’ll have a small effect on us, but I think the thing to keep in mind is that definitely we get some benefit from the notebook and backlighting markets, but remember our business is still over 50% of the LED business is still lighting driven. And that’s really the biggest driver in our marketplace.

So I think we’ve been in a pretty good position to take advantage of some of the swings while still driving the core market.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Growth in September as you look into your backlog, which of the market that is growing the fastest for you for your September business and September revenues?

Charles M. Swoboda

I think lighting is the biggest growth driver, but we’re also seeing some nice growth as well from the backlighting segment. But lighting would still be the biggest driver.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Well I meant within lighting, Chuck, is there a sub-sector within lighting that’s better than the others?

Charles M. Swoboda

It’s actually fairly broad based, so I think we’re seeing the traditional segments are pretty strong right now. So all the things we started out, you know, whether it be architectural portable lighting, those are solid. I would say probably the segment, it’s that broad category I like to call commercial and indoor and outdoor lighting, it’s everything from outdoor street lighting, parking garages, kind of that municipal lighting segment on one side to the indoor lighting. And again that’s both the fixture and the replacement bulb market. And I’d say all of those are really growing nicely right now. But its pretty broad based. It’s not any one niche segment right now.

We’re seeing kind of good demand across the lighting applications. I guess the way I would describe it is that I think the activity that we’ve been working on for the last one plus years to really get lighting rolling, we’re starting to see it show up in a lot of different places, which is actually what we’re hoping to, right? We want to see a more broad based growth. So we’re early but I think the breadth of the applications is actually growing and the customer base as well.

Harsh Kumar - Morgan, Keegan & Company, Inc.

And my last question before I leave the floor, I think I heard you correctly. You said you’re taking backlog for fiscal Q2 which would be the December quarter?

Charles M. Swoboda

Yes, most of the new orders we are getting are being booked into Q2.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Is this pretty typical for you guys, or is this something new? In other words is the lead time stretching out or what’s going on there?

Charles M. Swoboda

Earlier I mentioned, this is the biggest backlog in the history of the company, Harsh. I would say that we probably have as good a visibility right now for this quarter and next as we’ve had at any time in the recent years that I can remember.

Operator

Your next question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

We recently met with the efficiency leaders at the DOE and confirmed allocations for state level efficiency programs. How specifically may this translate to orders for Cree? And what would the timing be for potential orders? It doesn’t seem like you’re benefiting from any spending yet, and you know perhaps you could just tell us when do you think that will hit and what’s the size of that potential pipeline?

Charles M. Swoboda

Yes, so I would tell you your comment’s accurate, right? There is a ton of activity at the state and even the municipal level where people have got stimulus money and projects, but really we haven’t seen any of that money or any significant amount of it flow all the way through the system to where they’re actually able to buy product yet. I would say that that it’s a fiscal 2010 benefit. Whether that happens in, you know, Q1, Q2 or a little later in the year I’m not sure. I’m pretty sure we will see it in this fiscal year.

And you know I’ll be interested to see what happens after we get through the summer period. You know my sense is as we get into the fall and the winter time I think we’ll see more of those dollars show up in real projects and real orders. So it’s clearly a benefit. I think the most specific places there’s lots of what I would call municipal lighting type applications that I know are a part of that program, that should result in higher component sales at some point. Again the exact timing, I’m not sure I know exactly when that’s going to happen but the activity level remains high, which is all I can measure at this point.

Jesse Pichel - Piper Jaffray

Could you size that opportunity for us? I mean, I’ve heard some numbers thrown around there for the total efficiency spend and I can’t really pin down how much of that would be for lighting efficiency.

Charles M. Swoboda

I don’t have a great number for you because what I’m finding is that, you know it’s not just efficiency spend, we’re seeing it in just pure infrastructure spending as well. So I think it’s hard to put a number on. I think what we’re trying to do is bake it into kind of the overall revenue targets we’ve laid out and I think its part of the growth of our lighting business more than it is a one time blip, right? I think what you’ll see it do is become part of that overall, you know the rollout of LED lighting.

Jesse Pichel - Piper Jaffray

And on margins, obviously margins are fantastic and should we assume then we’re seeing already the full benefit of both full utilization and transition to four inch? And thus the margins have really peaked? And maybe if you could give us some color there in relation to that, you know what are your CapEx targets there for 2010 and where are you going to spend it exactly?

Charles M. Swoboda

Yes, so on margins, so we definitely got the benefit of utilization. We’ve seen that flow through and that should obviously continue since we’ve got a really strong backlog here as we go into Q1. But I think we’ve seen a lot of that impact in the Q4 numbers. We basically are more than halfway through the four inch conversion and we actually got ahead of plan there, so that helped us in Q4. I think it will benefit us but not necessarily in margin expansion but really as a cost reduction lever to kind of hopefully help us to maintain these margins and this level in the near term.

As terms of, you know I think you asked more about a longer term view, we’re not really changing our longer term targets on that, because I still think that although you’ll see some swings from quarter-to-quarter, we still think that that low 40% number kind of makes sense for the business mix we’re targeting. Now you had a second question. I don’t know if I answered that.

Jesse Pichel - Piper Jaffray

You did, just what the CapEx spending will be for 2010.

Charles M. Swoboda

Yes, so do we have an annual target out there yet, John? We don’t have an annual target for you. I think what you can see is we’ve ramped it back up. And the way to think about that is, we had a more aggressive plan heading into last year. We obviously slowed it down in the end of the year timeframe as the recession hit. We started ramping it back up this quarter. I think as we get a little further along, we’ll probably break out a bigger target for you but you can see that just from John’s numbers for this quarter we’re starting to spend money. Where that’s going, it is equal parts chip capacity, so to get additional chip capacity to feed both our external business, but really also to feed our internal businesses, and also a lot of components capacity. So we are expanding the equipment to make more LED components across our product line, not only XLamp and the high power products but even our High Brightness product line.

Operator

Your next question comes from Dale Pfau - Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald

First of all, you just said that you’re more than halfway through on your four inch conversion. When do you expect to be finished with your four inch conversion?

Charles M. Swoboda

You know it’ll be in the high 90% range by the end of the calendar year. So the next two quarters we should get it pretty much to the end.

Dale Pfau - Cantor Fitzgerald

Could we talk a little about pricing, Chuck? You mentioned that you didn’t see too much in components. You saw a little bit of pressure on the chips, so could you give us a little bit more color? How much out of the normal, we’re expecting 20% a year, are we on those two? And do you think that’s going to change over the next couple quarters?

Charles M. Swoboda

Yes, Dale. I want to clarify. What I said was is that actually LED chips pricing stabilized and components continued to be competitive. So you might have that backwards there a little bit. So what we see is the components market continues to be competitive. You know there’s a lot of people still trying to, you know win share of business there and so I think that market is kind of under the normal trend. I wouldn’t change any targets. I’m not sure we’ve actually given an annual target, but I wouldn’t say it’s changed significantly, but I also want to make sure it continues to be competitive and that’s out there.

Chips is a little different. We started to see chip pricing firm up last quarter and you know with the current demand levels I think that’s actually, you know, providing us some short term benefit there that’s you know helping overall is that that pricing has stabilized. So I’m not sure I can give a lot more color than that. In other words, chips is probably not moving down the same curve.

I think the thing to keep in mind though is components is clearly the largest chunk of that LED business today. So our business is more affected by what components does. Chips adds to that, but it’s not the driver anymore.

Dale Pfau - Cantor Fitzgerald

And do we talk a little bit about fixtures? How much sequential growth did you see in fixtures and how was the demand profile and are you able to meet the demand out there for your current fixture products?

Charles M. Swoboda

Yes, so I can’t give you any more color other than that it was double digit quarter-to-quarter again sequential, and we target that again this quarter. In terms of the demand, we’re not capacity limited but I can’t say that, you know, I think we’re balancing that. I think we’re able to add to capacity to meet the demand right now. I think that, you know, I’ve actually been fairly pleased, right? That’s a market that in theory is pretty construction dependent and some other areas and you know we’ve been able to continue to see the LED adoption continue even through what is otherwise a pretty lousy time in the lighting fixture business. So I’m fairly encouraged.

I think in terms of going forward I think we have a plan to bring capacity online to kind of match the growth in demand. And in our case really what it’s about is continuing to expand the product line, more channels and really get the awareness up. It’s still amazing to me how many projects happen that LED lighting’s not ever really even seriously considered yet. So we’ve still got a long way to go in getting the awareness and the education in the industry up there, and that’s what some of our projects will be over the next year.

Dale Pfau - Cantor Fitzgerald

And one last question, distribution revenues for the year were pretty good. How is that channel looking right now for you?

Charles M. Swoboda

It’s looking very solid. I would say that we are probably having some very different trends than the rest of their normal business over the last six months. So distribution is growing. I would tell you our direct business is growing as well, so they’re actually both running pretty solid and you know, I think it’s good to see that its broad based at this point.

Operator

Your next question comes from William Ong - Merriman Curhan Ford.

William Ong - Merriman Curhan Ford

In your meeting with President Obama, were there any specific discussions that can accelerate LED adoption further, either through additional government funding or further buildings making LED conversions? Maybe some color on your discussion with him?

Charles M. Swoboda

Yes, the discussion was in general about how we combine the idea of a green economy, energy efficiency, clean tech in innovation and use it to not only benefit Cree but also as how does that public policy help the overall economy. So that was the high level discussion. The specific discussion about LED lighting was is that how do we get the standards raised so that we can really drive some innovation? And one of the challenges that we’re having is traditional lighting companies, and in some cases even the power companies, are out there frankly pushing back, trying to limit efficiency standards because they’re worried that it’s going to disrupt their business.

And so some of the discussion was about how does the current policy and some of the new legislation being proposed drive the behavior that I think we’re all looking for. It wasn’t more specific than that. It was kind of at a high level, and I think I had a chance to get a sense of what they’re thinking about that. And obviously I always push my agenda which is we want higher efficiency standards.

Operator

Your next question comes from Hans Mosesmann - Raymond James.

Hans Mosesmann - Raymond James

Just a question on Light Engine, you mentioned, Chuck, that that agreement was re-done. What did they end up purchasing over the past couple of years, just to get a framework? And what’s the new agreement like, if you can give us any detail there.

Charles M. Swoboda

You know I don’t have the last couple of years, Hans. I know that last year, John threw that number out, they bought last year John $78 million. And so I think the idea is on the current supply agreement, it is demand based, right? So Hans the way that works is its going to be a function of what their demand is. So really what we did is renew that. But I know that in FY ’09 it was $78. I don’t have the FY ’08 number handy here, but I know that it grew year-over-year. I want to say it wanted to grew probably somewhere 15 to 20% year-over-year.

Hans Mosesmann - Raymond James

Is there an earn-out mechanism like the previous arrangement?

Charles M. Swoboda

No. That’s all gone. The only thing we did is with the earn-out gone and the other things, their business continues to be very strong and we wanted to make sure from their standpoint and ours we had a supply agreement in place to insure they had the supply needed to continue to drive their business. So it was really, the only thing that continues at this point is just the commercial side of the agreement and it’s really just a supply agreement.

Hans Mosesmann - Raymond James

And then one just observation is if you can, when will the supply situation in the industry get better? A lot of people are adding capacity. You guys are adding capacity. Is it a one quarter thing or two quarters, based on what you can tell?

Charles M. Swoboda

So, Hans, here’s the trick to this. I think that at least in the next couple of quarters I think there’s going to be some constraints. The question, and obviously everyone wants to know it and I’m going to say I don’t have the answer. I can tell you here’s the factors. If it continues beyond that, it’s somewhat a function of how far they continue to push this conversion over. So you know the notebook industry is not fully converted, and as they try to fully convert that basic technology to LED based, we’re going to continue to get a growth driver. So I know you’ve been around the story long enough to remember the cell phone conversion. Its effectively one of those types of phenomenon’s.

The interesting thing about this one, though, is that the use of LEDs in TV is kind of the next question for the LCD backlighting market. And obviously TV is a much larger market than notebook. And so the question will be is how fast and how far does that part of the business go? So I can’t give you the answer because it depends on what happens next. So you know I think we’re looking at a fairly solid demand picture for at least the next couple of quarters. It could go beyond that. And then the question will be is what about TV?

From a Cree specific standpoint, I think the thing you have to remember is we’re just as focused on the growth in LED lighting. And I think that’s the other piece. For us the growth in LED lighting will actually have even a bigger impact on our overall revenue growth over the mid to long term than even this notebook market. So we get some benefit from selling additional chips and having a more loaded factory, but really the major driver to our business is going to be how the LED lighting market converts and how fast we can grow the components out of the business.

Operator

Your next question comes from [Lauren Fuller] for Daniel Amir – Lazard Capital Markets.

[Lauren Fuller] for Daniel Amir - Lazard Capital Markets

So what are the main growth drivers that we should focus on for the next 12 months?

Charles M. Swoboda

So the biggest growth driver will be LED lighting adoption and how fast we can grow the components business. So you know LED components is the biggest piece of the LED business. It’s what drove most of the growth in fiscal ’09 and it’s really the key to fiscal ’10. And so that’s going to be lighting adoption, commercial indoor and outdoor, those types of applications.

[Lauren Fuller] for Daniel Amir – Lazard Capital Markets

If you could break it down a little bit further. I know that you’re saying that they’re both taking off at somewhat the same rate. But it seems that you guys have greater concentration in the outdoor lighting.

Charles M. Swoboda

Actually I would say we probably have equal concentration. I think if you, depending on the applications you look at, we obviously have a lot of success that you hear about here in the U.S. in the outdoor lighting applications. But we’re having probably equal success whether it be LED replacement bulbs, new indoor lighting fixtures, I would say our power LED business is pretty broad basically on both sides of the application. It really varies by the specific, you know, customer and application and the problem they’re trying to solve.

As you get into some of the other indoor stuff, maybe you know some of the more high brightened space applications, we participate there probably not at the same level just because there’s more competitors. But I would say that we’re pretty much across those applications.

[Lauren Fuller] for Daniel Amir – Lazard Capital Markets

Okay. Sorry. Go on.

Charles M. Swoboda

And then obviously we have the LED lighting business itself, which although it’s not a huge part of the overall revenue, it is an important growth driver because while it contributes incremental revenue growth, it mostly helps us push the market, which has been real helpful for the component side of the business. And then the third piece is chips, and frankly you know the LED chip business in Q1 will be about the same size as it was roughly a year ago. So it’s not really a growth driver as much as it is, it gives us some leverage and some driving factory utilization and building some scale that I think then benefits the overall company over time.

So while we are getting some benefit there, it’s more incremental and it’s really not the long term growth driver. It’s more of a complementary piece of the business.

[Lauren Fuller] for Daniel Amir – Lazard Capital Markets

And when we look at your capacity expansion, like what percentage of your current capacity is the expansion? Or is there any way that you can quantify the expansion so that we know approximately what your maximum revenue potential could be per quarter?

Charles M. Swoboda

Yes, so I don’t have a great way to quantify that for you because what we have to do is we have to expand the chip factory, because then that feeds the internal customer which is the components business which then has to feed the lighting business. I can tell you that we have fairly aggressive expansion plans. Maybe kind of a rough way to think about it is, you know we have plans in place that would probably roughly double our LED components capacity year-over-year. And that’s a rough estimate, but it gives you some idea of the type of scale we’re looking at adding over the next year. And that’s on a unit basis.

[Lauren Fuller] for Daniel Amir – Lazard Capital Markets

So the expansion then, the chip expansion is basically just to feed the internal business? It’s not really to sell it externally into the notebook or TV business, the notebook or TV market?

Charles M. Swoboda

It will basically, it will support internal but actually you know some of that capacity will absolutely help service some of our external customers, only because it’s complementary, right? It’s a great way for us to run a more balanced factory. So primarily internal, but there will be some benefit as well for our external customers.

[Lauren Fuller] for Daniel Amir – Lazard Capital Markets

Are you guys looking at transition to six inch wafers from the four inch for next year?

Charles M. Swoboda

Oh, I think that’s a longer term goal, but I think that four inch will be our primary platform here in the near term.

Operator

Your next question comes from Jonathan Dorsheimer - Canaccord Adams.

Jonathan Dorsheimer - Canaccord Adams

I guess just digging into the capacity question in a little bit more detail, curious one, given that you have a proprietary process with the silicon carbide, are you looking at increasing the furnace capacity at this point?

Charles M. Swoboda

At some point we will be expanding also the need to make more silicon carbide. I think the good news is that you know we made a fairly sizable investment a couple of years ago, Jed, so we have you know quite some capability. The other thing is we’ve been continuously improving that process so we’ve been able to take our capacity and convert it from two to three and three to four and also find a way to get more product per system. So I think we’ve been doing lots of things from both a productivity and a yield standpoint, and really been able to take the physical plant here and generate a lot more area with essentially the same resources.

Jonathan Dorsheimer - Canaccord Adams

And then I guess a similar question on the reactor side. It’s been a little while, a few years I think in terms of expansion on the reactor chip side of the business. Two questions there, you know any percentage of the CapEx that you could tie to that? And then second question would be I assume this is all staying in North Carolina, but I’d just like to clarify on that.

Charles M. Swoboda

I can tell you that our FE process is going to stay focused here in North Carolina for the foreseeable future. I think that we have actually been investing in reactor technology and capacity here for actually over the past years. You maybe don’t see it, and we don’t necessarily break that out specifically, Jed, but we have been making some investments, probably more than the market would perceive. And we will continue to be making those investments. We basically when we saw the demand start to come back, we accelerated our investments there even into last fiscal year, the last couple of quarters there. So we’re probably not very public about what we’re doing at FE capacity, but we have made investments over the last couple of years to increase our capacity and we have a plan to continue to do that over the next year or two.

Jonathan Dorsheimer - Canaccord Adams

I would assume then you’ve gone away from purchases from any of the traditional vendors out there in the marketplace, you know, knowing that you’ve done a lot of modifications historically when you did purchase from one of the two suppliers. Is it safe to assume that you are, are you building these essentially from ground up?

Charles M. Swoboda

Jed, I can’t answer how we’re going about expanding our capacity. We kind of view that as a bit of a trade secret in the industry, so we’d kind of like it to be a mystery with everyone. I would tell you we maintain active relationships with most of the major reactor suppliers, but we obviously as you know have a fairly proprietary view of how to do that process. So you should assume we probably have a combination of relationships that are in place.

Jonathan Dorsheimer - Canaccord Adams

And then you’d mentioned the four inch conversion going a little bit better than expected. Is it safe to assume sort of flat yields in terms of transition from three to four or just not as big of a drop as what you’ve seen in past transitions from I think the two to three?

Charles M. Swoboda

You know actually in four inch, Jed, I think our yields were as good or better than on three inch. It’s interesting. As we made this next size conversion, I would say that although you always budget in the beginning some yield loss to get started, I would say in this case where we’re at the four inch is as good or better than our three inch. And so I think that’s why you see us a little ahead of the curve. I think our team internally was real excited about pushing four inch even harder because they’re obviously getting a secondary benefit, and that’s helping on the capacity side.

Jonathan Dorsheimer - Canaccord Adams

And then last question for either you or John, just curious, decision to sort of roll the contract revenues into the contract sales into overall sales. Why are you doing that at this point?

Charles M. Swoboda

Well, it’s down to about $4 million a quarter which is about 2% of revenue. And most of it’s really Power and RF related so instead of making it a mystery it’s really a function of Power and RF. There’s a little bit of that that’s LED related, but it just didn’t make sense that you know with revenues targeted to be in the $160 to $166 range, talking about $4 million is something that’s really associated with Power and RF just felt a little silly at this point.

Operator

Your next question comes from Steven Milunovich - BAS-ML.

Steven Milunovich - BAS-ML

How much of your business is from China?

Charles M. Swoboda

You know, Steve, I think John might have that number handy. Do we know what it was? I know it’s going to be in the K coming up here in the next week. Roughly I want to say 25 to 30%, but we’re going to give you a specific number here if John’s got it handy or we can give it to you, it’s coming out in the K next week so I know we have it available somewhere.

Steven Milunovich - BAS-ML

Do you have a rough sense of how fast that’s growing relative to the rest of the business?

Charles M. Swoboda

You know I have not looked at it year-over-year. I think China kind of probably grew a little faster than the rest of our business, but I would say the two best markets for us from an, you know LED components is the biggest driver in lighting driven, I’d say probably Asia was the biggest driver and second was North America. But I don’t have the breakout for you at this point.

Steven Milunovich - BAS-ML

And even though you indicate your business there is not so much export driven, it’s domestic economy, could you talk about how that’s playing out right now?

Charles M. Swoboda

Well, I’m not sure I know where you’re heading with that question.

Steven Milunovich - BAS-ML

Well in the past you’ve said that you know despite the economic recessions and so forth that China is less exposed to that because its driven by domestic demand, for the most part. And I’m just curious given the kind of ups and downs of the Chinese economy how that’s working.

Charles M. Swoboda

I would tell you that the China economy had the least blip related to the recession of any of our markets that we service. I just spent a couple weeks in Asia and I just spent a week in China. I’ll tell you their economy on a domestic basis seems very healthy to me at this point. I would say their investments in infrastructure building and those things frankly are maybe not pre-recession levels but have definitely strengthened faster than any other market we’re dealing with.

Steven Milunovich - BAS-ML

And then finally could you comment a bit about some of these start up companies like Luminus and others who are targeting your market, either trying to leapfrog or whatever I guess. How seriously do you take some of those companies and do you see them at all in the market at this point?

Charles M. Swoboda

We don’t see any of those guys in the market at this point. You know Luminus has been around for quite a few years. They started out as LED chips for I think LCD projectors or something. And there’s a bunch of other smaller companies. I’ll be real honest, Steve, at this point when it comes to lighting and driving that market, you know, the people that we see are the Philips Lumileds, we see OSRAM, we see Nichia and frankly you could add everyone else up and they wouldn’t add up. They’re pretty small, rest of the players out there. What we’re finding in the lighting market specifically is it takes a pretty significant investment in channel, in support and those things to really access that market and drive it. So right now, and I always take all competitors seriously, but you know and our reality is we don’t see much activity from those guys in our business on a day to day basis.

Operator

Your next question comes from Carter Shoop - Deutsche Bank Securities.

Carter Shoop - Deutsche Bank Securities

First a clarification. You talked about doubling your capacity for components on a year-over-year basis. Are you talking about kind of 4Q 2010 versus 4Q ’09 or are you talking about the full year, year-over-year?

Charles M. Swoboda

You know its more meant to be a relative benchmark for you. I think what we’ll do is we’ll probably from where we exited last year door to exit next year we’ll double. Will it be double for the year? Probably not far off, but again those are some high level estimates at this point.

Carter Shoop - Deutsche Bank Securities

In regards to the amount of revenue you generated in through some quarter from the notebook and LED TV backlight unit, could you characterize that as sales or as a percentage of the LED chip business?

Charles M. Swoboda

Yes, so if you look at application based, notebook grew a little bit. I mean it grew last quarter relative to chips, but it’s still not even the biggest application there I don’t believe. And in terms of the overall LED business, lighting still dominated. So it was some incremental sales in Q4. It will be some additional incremental sales in Q1, but on a relative basis it’s still, if you just look at it you know our business on kind of an applications basis, I think notebook backlighting or backlighting is probably about the size of our mobile business at this point. It’s still our business is primarily lighting first, the video screen business second and notebook has grown from essentially zero to be similar in size to mobile, but really those two are kind of vying for the third and the fourth place spots at this point.

Carter Shoop - Deutsche Bank Securities

In the chip business, can you comment on how long lead times got in fiscal 4Q compared to fiscal 3Q?

Charles M. Swoboda

Boy, I’m not sure I’ve got a good historical looking basis. Probably the best way to give it to you right now is where we’re at today, right? So most of the orders are booking onto the December quarter so you know I think depending on the product line, obviously in components we have to be careful there because you’ve got some market segments that frankly are not designed to operate with really long lead times. Obviously our distributors help cover parts of that. In terms of chips we’re probably looking at lead times that are stretching out you know three months plus.

Carter Shoop - Deutsche Bank Securities

And maybe a quarter ago those were closer to one month? Is that an accurate calculation?

Charles M. Swoboda

That’s probably close. I mean I don’t remember what they were a month ago, but it definitely moved out. It at least doubled. How about that? It probably wasn’t one month. I think we probably went from six to eight weeks to 12 plus, something like that.

Carter Shoop - Deutsche Bank Securities

Can you help us in what your distribution and technology licensing strategy is in Europe and how aggressive you can be on those two fronts over there next year?

Charles M. Swoboda

Well, in distribution we have our same distributors we use everywhere else. So we basically work with Arrow. We have a set of regional distributors for Europe as well. We really don’t use WPI much there, so its really focused on those other guys. We also have direct sales capability. And that’s kind of how we approach the components business.

When it comes to the LED lighting business, we partnered up with Zumtobel and they’re really the primary driver in Europe for our LED system level products. And that’s an arrangement where we provide products to them and they actually sell them under their brand and their Thorn brand in Europe. So that’s gone real well.

In terms of licensing strategy I think that you know we’ve done a few license deals in the last year really in some areas that weren’t completely, I would say they’re probably some tangential areas to our core technology. I think there’s definitely a lot of discussion about some of Cree’s LED lighting systems level IP, whether it be color changing or white IP or things like that, especially for the lighting fixture market. I think at this point you know we don’t have a formal strategy there, although I could tell you there’s lots of discussion going on. And it’s kind of one of those stay tuned kind of discussions I would say at this point.

Carter Shoop - Deutsche Bank Securities

When you think about the LED lighting revolution and your place in that market over the next couple of years, where do you see the biggest risk just to the company and to that theme? Is it more risk from some of the incompetence on how the other technology side showing some modest improvements? Is it weak efficiency mandates by the federal government similar to what we saw for fuel efficiency mandates associated with the Cash for Clunkers and the auto industry? Possibly large [technology] companies like Samsung getting involved in the market? Or is it something else that keeps you up at night?

Charles M. Swoboda

The thing that keeps me up the most at night is we’re still trying to take a technology that frankly to an industry that’s not used to new technology. And so one of the reasons we’re making the big marketing and application center investment is we have to spend more time and money to frankly help the lighting industry learn how to use an LED and be successful with it. Because today some of the things that happen frankly make it the products either less efficient, more costly than it needs to be, and I think we can play a role really with our channel and by investing more on that side of it to where we can really help enable that industry. So that’s part of it.

And then the other side of it is I think our product strategy needs to evolve, so frankly make them easier to use, you know? The entire LED industry still thinks about LEDs like we’re semiconductor guys and the lighting industry thinks about them a little different. So we’re looking at some ideas of how can we frankly make LEDs easier to use, you know? We took a really low tech example last year. We came out with the MC LED which is put four chips into one package so they don’t have to figure out how to deal with the four and deal with the optics. We did it for them. I think we need to look at some more things like that.

So I worry more about us not pushing I think things we know fast enough, and frankly losing the momentum in the industry. I think we’re going to have government regulation. It’s never going to be as good as we want, but frankly we were trying to convert the market long before there were mandates around it. So I think our issue is make it easier to use for the customer, building a channel that’s better able to drive it and frankly continuing to make it more cost effective. Those would be the three things.

Carter Shoop - Deutsche Bank Securities

Just a quick follow up in regards to making it easier for your customers to use the technology. Is there any acquisitions that you’re looking at to accelerate the ease of use there, be it a driver company or someone else that would accelerate that development?

Charles M. Swoboda

You know I think right now when it comes to drivers we think we can do that through cooperative efforts and really partner with a lot of people trying to help in that area. I don’t know that there’s a great acquisition out there but I will tell you that would absolutely be something that’s something we’re going to think about and look at if there’s a nice complementary piece to make it easier for the customer. At the same time, our primary focus in the short term is really on what we can do ourselves. I think with the acquisition of LLF you know we brought a lot of technology and know how in house. I think the idea is how do we leverage that to make it easier on our customers?

Operator

Your next question comes from [Elliott Grosovsky] – Morgan Joseph.

[Elliott Grosovsky] – Morgan Joseph

Just a question on the linearity in the quarter. Can you just talk about that a little bit?

Charles M. Swoboda

You mean in Q4?

[Elliott Grosovsky] – Morgan Joseph

Yes.

Charles M. Swoboda

So I would say Q4 started out a little better than normal and finished very linear. So I would say that business has gone from one that over the last few previous quarters was probably more back end loaded to one that’s become very linear at this point.

[Elliott Grosovsky] – Morgan Joseph

And do you expect that trend to continue in Q1?

Charles M. Swoboda

Based on what we can see in Q1 it should. And obviously with the backlog that we have it makes that a lot easier.

Operator

Your last question comes from [Ramesh Misra – Burgansy Advisors].

[Ramesh Misra – Burgansy Advisors]

First question related to your CapEx modulation, is there a target level, a utilization level that you plan on running the business at as you add up CapEx to a year?

Charles M. Swoboda

Well I think the answer is yes we have models that we build around that. I think the challenge we have right now is frankly and you can just tell from our own targets that the demand has picked up probably a little bit faster than even we were expecting a couple of months ago. So I think right now you know we were pushing up against the rate of expansion that we had built into the plan. So I would expect we’re going to be running a little higher utilization in the next quarter or two. We’re obviously ramping up the capacity expansion. I don’t know that I have a great target for you, just because things have moved a lot lately.

Really you know it’s great to be running at fully loaded, but ideally we’d like to have a little bit of gap in there just to respond to customer needs and demands. But I think at least for the near term we’re going to be running pretty close to the limit.

[Ramesh Misra – Burgansy Advisors]

Any update on your work with LG at this point?

Charles M. Swoboda

You know no real comment on that. I can tell you that obviously the whole backlighting market’s pretty broad based. We’re actually servicing that primarily through our most traditional packaging companies, and they’re the access and panel guys. But no real update on specifically what we’re doing with those guys at this point.

[Ramesh Misra – Burgansy Advisors]

You know just trying to understand the relative slowness in the European market. You know I’d have thought that since them being more aggressive in relation to mercury contamination and stuff like that, I would have thought that you know they would be more rapidly adopting LED backlighting. I just wanted to get your thoughts in the adoption process over there and [inaudible].

Charles M. Swoboda

Yes, I think there’s two factors. I think one of them’s a macro factor. Right now in Europe it feels like they’re having a delayed reaction to the recession that I think we haven’t seen in other industries. So it feels like Europe is struggling generally with the recession, more now than they were now even at the beginning of it. So I think that’s kind of a macro piece. I think the other thing to keep in mind is there’s two really big companies in Europe that sell a lot of CSLs that are in the lighting business that have a lot of influence on regulations and standards. And I frankly think there was initially some resistance to a lot of the technology that happened so fast. I don’t know that they’re there anymore. In fact I think that as those guys have increased their investment in LEDs they’re becoming more proponents of the technology. But I frankly think it slowed it down a little bit for a period of time.

Operator

This concludes the question-and-answer portion of today’s call. I will now turn the conference back over to John Kurtzweil for closing remarks.

John T. Kurtzweil

Thank you for your time today, and we appreciate your interest and support and look forward to reporting our first quarter of fiscal year 2010 results on October 20, 2009. Good night.

Charles M. Swoboda

Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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Source: Cree, Inc. Q409 (Qtr End 06/28/2009) Earnings Call Transcript
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