Cree's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

| About: Cree, Inc. (CREE)

Cree, Inc. (NASDAQ:CREE)

F2Q 2014 Earnings Conference Call

January 21, 2014 17:00 ET

Executives

Raiford Garrabrant - Director of Investor Relations

Charles Swoboda - Chairman, President, Chief Executive Officer

Michael McDevitt - Chief Financial Officer, Executive Vice President

Analysts

Brian Lee - Goldman Sachs

Andrew Huang - Sterne, Agee

Paul Coster - JPMorgan

Jed Dorsheimer - Canaccord

Brandon Heiken - Credit Suisse

Edwin Mok - Needham

Jeff Osborne - Stifel

Jerimiah Booream-Phelps - Deutsche Bank

Craig Irwin - Wedbush

Mehdi Hosseini - SIG

Harsh Kumar - Stephens

Avinash Kant - D.A. Davidson

Mark Heller - CLSA

Operator

Good afternoon. My name is Saeed, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the Cree Incorporated Fiscal Year 2014 Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, January 21, 2014. Thank you.

I'd now like to introduce Mr. Raiford Garrabrant, Director of Investor Relations of Cree Incorporated. Mr. Garrabrant, you may begin your conference at this time.

Raiford Garrabrant

Thank you, Saeed, and good afternoon. Welcome to Cree's second quarter fiscal 2014 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 Mike McDevitt, our CFO, will report on our results for the second quarter of fiscal year 2014. 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 on 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 and 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 second quarter of fiscal year 2014 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 analyst 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 email or phone at (919) 287-7895. We are also webcasting our conference call, and a replay will be available on our website through February 4, 2014.

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

Charles Swoboda

Thank you, Raiford.

Q2 was another strong quarter as revenue increased 6% sequentially to a record $415 million and non-GAAP net income increased 20% sequentially to $57 million or $0.46 per diluted share. Revenue in operating income were inline with our target range, net income was higher than our target range due to tax benefit from the recent 48C award.

The sales trends in Q2 were as follows; lighting sales were on the high end of our target range growing 17% sequentially to $174 million driven by strong sales of LED fixtures and LED bulb. LED sales were on the lower end of our target at $215 million and Power and RF sales were in line with our target at $26 million.

Non-GAAP gross margin was 38.2% in Q2, which were within our target range for the quarter and reflects the higher mix of lighting sales. On a segment level, we delivered good improvement in both Lighting and Power and RF gross margin, while LED gross margins were in a similar range as Q1.

Non-GAAP operating profit was $58 million in Q2 which was inline with our targets for the quarter as the incremental gross profit from higher sales offset our increased investment in marketing to promote LED bulb. These results once again demonstrate our ability to leverage our technology to drive growth and continue to invest in building the Cree brand.

Cash and investments increased $96 million to $1.2 billion due to solid execution across the product line. Company backlog for Q3 is the lowest point last quarter but in line with seasonal trends in LEDs and Lighting. We are forecasting Lighting revenue in a similar range in Q3 as strong growth in fixtures is offset by lower LED bulb sales to our channel partner.

The fixture forecast is better than expected as the growth in new projects is more than offsetting the typical which are slowdown in outdoor lighting. The current fixture forecast is somewhat backend loaded, which may push some demand into our fiscal Q4. Consumer LED bulb demand remain strong and we target higher store sales in Q3. However, our shipments are forecast to be lower as the channel reduces buffer stock levels to utilize the increased scale of our factory to respond to spikes in demand.

LED component demand is forecast to be lower in Q3, and in line with typical seasonal trends due to the Chinese New Year holiday. As the leader in LED lighting, we continue to take advantage of the global shift to LED lighting and our strategy to use new product innovations to drive our growth by taking share from traditional technology. So lighting product line as continued to grow driven by both LED fixtures and LED bulbs.

Our LED component product line has also grown during the first half of fiscal 2014 and is enabling much of our success in LED lighting. We are well-positioned to continue grow into this product line in calendar 2014 as LED adoption continues. Our brand investments have already produced good result and we plan to continue to invest in this area.

And I will now the turn call over to Mike McDevitt to review our second quarter financial results in more detail as well as our targets for the third quarter of fiscal 2014.

Michael McDevitt

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 as supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation of the non-GAAP information to the corresponding GAAP measures for all quarters mentioned on this call is posted on our website along with a historical summary of all other key metrics.

For the second quarter of fiscal 2014, revenue increased 6% sequentially to a record $415 million, which was on the high-end of our targeted range of $400 million to $420 million. GAAP earnings increased 17% sequentially to $36 million or $0.29 per diluted share for the second quarter of fiscal 2014. And non-GAAP earnings increased 20% sequentially to $57 million or $0.46 per diluted share.

Non-GAAP earnings excluded $21 million of expense, net of tax, or $0.17 per diluted share from the amortization of acquired intangibles and stock-based compensation. The revenue in pre-tax income were in line with our targeted ranges, while GAAP and non-GAAP earnings per share exceeded the high-end of our targets primarily due to the catch-up tax benefit realized from our recent 48C award.

In November, we were notified of being awarded up to $30 million in federal tax credits for qualifying capital investment as part of base 2 of the American Recovery and Reinvestment Act of 2009. As a result, we immediately earned credits on qualified investments we made beginning in fiscal 2013 year through the first quarter of fiscal 2014. The earned tax credits will continue to benefit our tax rate through our fiscal 2018 year as the 23% tax rate in our guidance, non-GAAP EPS would have been $0.39 which was above the mid-point of our targeted range.

Q2 GAAP gross margins were 37.5% and non-GAAP gross margins were 38.2% which excludes 2.8 million of stock-based compensation. This was in line with our non-GAAP target of 38.5% plus or minus and reflects a higher lighting mix.

Fiscal 2014 second quarter revenue and gross profit for our reportable segments were as follows; LED products revenue was slightly lower sequentially at $215 million and gross profit decreased 4% to $98 million for a 45.4% gross margin. Our Q2 LED gross margin was similar sequentially after excluding the higher licensing payments we received in Q1. Lighting products revenue grew 17% sequentially to a $174 million and gross profit grew 22% sequentially to $49 million for a 27.1% gross margin, which was a 100 basis point increase sequentially.

We had strong revenue growth in both LED fixtures and bulbs. Gross profit and margin improvement was due to a combination of lower new cost products, cost reductions and higher factory utilization. Power and RF products grew 5% sequentially to $26 million and gross profit grew 14% sequentially to $15 million for a 58% gross margin. The revenue in gross profit growth were due to higher sales, cost reductions and product mix.

In determining gross profit for our segments, we do not allocate certain employee benefit cost, stock-based compensation and acquisition related costs. These non-allocated costs totaled $6 million for the second quarter of fiscal 2014 and are included to reconcile through a $156 million GAAP gross profit.

Operating expenses for Q2 were $120 million on a GAAP basis and $100 million on a non-GAAP basis both of which were within our targeted range. Non-GAAP operating expenses exclude approximately $30 million of stock-based compensation expense and $7 million of charges from amortization of acquired intangibles.

Net interest income and other for the quarter was $3.4 million. Our Q2 GAAP and non-GAAP tax rate was 8% for the quarter which was less than our 23% target for Q2 primarily due to the cumulative tax benefit from a recent 48C award.

We ended the quarter with $1.2 billion in cash and investments a $96 million increase sequentially, which resulted from higher profitability, good working capital management and proceeds from common stock issued in connection with option exercises that was partially offset by capital spending. For the quarter, cash from operations was $99 million and capital expenditures were $55 million including $5 million related to – which resulted in free cash flow of $44 million.

Days sales outstanding were 46 days as compared to 48 days at the end of September. Inventory days on hand remained unchanged at 81 days from the end of September. Those metrics are in line with our target ranges of 50 days plus or minus days at the sales outstanding and 80 days plus or minus for inventory days on hand. Our December ending inventory includes increased raw materials and width to support our targeted lighting growth.

Property plant and equipment additions were $50 million in the second quarter. For fiscal 2014, we have raised our target to approximately $145 million of property, plant equipment spending to support our new product priorities and provide an incremental capacity as needed. This increase from the previous forecast just to make capacity investments to support forecasted growth to the business over the next year.

At this time, we target Q3 revenue to be in a range of $390 million to $420 million which is comprised of lighting sales similar to Q2 as fixture sales remain strong but are offset by lower LED bulb sales into our channel partner as they look to balance inventory levels.

LED product sales seasonally down 5% to 7% due to Chinese New Year and Power and RF sales similar to Q2. We target Q3 non-GAAP gross margins to be 38.5% plus or minus and GAAP gross margins to be 37.7% plus or minus as we target incremental lighting gross margin improvement. This Q3 target is based on a number of factors that could vary including overall demand product mix factory executions in a competitive environment.

Our GAAP gross margin target includes stock-based compensation expense of approximately $3.2 million, while our non-GAAP targets do not.

We are targeting Q3 operating expenses to be flat sequentially. Our GAAP operating expense targets include non-cash stock-based compensation expense of approximately $14 million and charges for amortization of acquired intangibles in the amount of $7 million.

Loss of disposal of assets is target to be similar to Q2. Net interest income and other as target to be approximately $3.4 million in Q3. We target our tax rate to be 21% for Q3 and Q4. The Q3 and Q4 targeted tax rate includes the benefit of our recent 48C award and the expiration of the U.S. Research and Development Credit.

Our fiscal 2014 and quarterly tax rates will fluctuate based on our overall earnings to tax jurisdictions to which the income is actually earned, the potential restatement of the U.S. earned, the potential reinstatement of the U.S. R&D tax credit and other tax benefit that may or may not be come available to Cree in the future periods.

GAAP net income for Q3 is targeted to be between $24 million to $32 million. Based on an estimated 123.5 million diluted shares outstanding our GAAP EPS target is between $0.19 to $0.26 per diluted share. Non-GAAP net income is targeted to be between $42 million and $51 million or $0.34 to $0.41 per diluted share. Our non-GAAP EPS target excludes amortization of acquired intangibles and non-cash stock-based compensation in the amount of $0.15 per share.

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

Charles Swoboda

Thanks Mike. We are focused on four priorities to drive our growth in fiscal 2014. Our first priority is continue to lead with innovation across our product lines and drive the cost parity with conventional technology. In lighting, we continue to make great progress on both fixtures and bulbs. Our new lighting fixture products continue to gain traction in the market, which help drive sales growth in the quarter. We saw good sales growth in both indoor and outdoor with the biggest gains in outdoor.

We introduced the LEDway HO series in Q2, which enabled us to deliver more than 50% energy savings as compared to 400 watt HPS Roadway Luminaires. In the last week, we opened a whole new application to LED lighting with our CXB High-Bay Luminaire. This product eliminates the need for energy wasting, high maintenance fluorescent and HID high bay luminaire, cuts energy costs in half nearly eliminates maintenance costs and pays for itself in less than three years with industry leading lumen per dollar performance.

We continue to expand the LED bulb product line in Q2 with the introduction of the 75 watt warm and cool white replacement bulb. LED bulb sales to consumers doubled sequentially in Q2 driven by the fall lighting season, utility rebate, new products and increased marketing activities. Please note that this is different than our sales or shipments to our retail partner, which grew but at a lower rate. We better understand consumer buying habits for LED bulbs with every passing week and it is clear that the two primary drivers, our product quality and price with brand also becoming a more relevant buying criteria. Product quality is a combination of the look, feel and performance of the LED bulb.

Based on consumer feedback and many third party reviews, I think we have done a great job setting the standard in the market. Price is the other important factor, which is affected by our price to the retailer, their price to the consumer and utility rebates. We know how to innovate and are developing lower cost next generation bulbs. We continue to work with our retail partner to test the price to consumers and the tradeoff between volume and margin and we’ve learned there are significantly more opportunity to drive LED adoption.

The other piece is rebate and we continue to work with utilities around the country to get rebate dollars assigned to the Cree LED bulb. While I'm confident, we will continue to bring our rebates in Q3, how much money will be available, the size of the rebates per bulb and other products competing for utility dollars make this difficult to predict.

Our focus remains on product innovation to deliver generational improvement that enables new price points and additional marketing investment to generate more awareness than the Cree bulb that the Cree bulb pays for itself.

In LEDs, we continue to set a higher standard with new products like the higher output XLamp CXA product. The two new XLamp LED arrays enabled high lumen applications ranging from wall packs to canopy lighting. The new CXA3590 LED array delivers up to 68% more lumens than our previous brightest array and is designed to last twice as long and use 40% less power and current 250 watt metal-halide fixtures. We believe this product line is well-positioned to continue growing with the growth in LED lighting.

In Power and RF, we continue to make incremental sales progress and win new designs that validate the benefit of silicon carbide for power application and gallium nitride for wireless. While we have not yet uncovered a volume application to drive the next level of growth, the increased activity across a range of application indicates we are on the right track.

Our second priority is to build the Cree brand and selling the Cree bulb is the foundation of our brand strategy. Our brand strategy and marketing investment is unlike anything that has been done in lighting over the last several decades. As I mentioned earlier bulb sales to consumers doubled in Q2, so I think it is clear that this strategy is working. Although the product has been more successful than either Cree or our partner would have predicted 10 months ago this is an opportunity to go faster and not rest in our success.

With the new insight into price elasticity that we’ve gained from the rebate activity over the last few months, we planned to become more aggressive in the market. This means leveraging LED bulb cost reduction to position the product line for new price points for spring, which we believe will drive increased sales volumes at margin similar to current levels. We plan to continue to reinvest incremental bulb profits in marketing to further build the Cree brand. Our partnership with the Home Depot has been very successful in changing the consumer LED lighting category and we look forward to continuing to work together to enable the next wave of adoption. Q3 will be a transition quarter for LED bulbs as we work through the inventory re-balancing in the channel and position the product line to access a broader customer base.

Our third priority is to focus on select market segments where we can upgrade existing lighting and drive adoption. We’re making good progress on new focused applications like automotive dealership lighting where our products are able to deliver better quality light and significantly lower operating cost that pays for the cost for the upgrade in about 24 months.

We also continue to test the new channel approaches to engage lighting owners with complete solution. While we are still developing this activity, our initial test suggests there are significant opportunities available if we can simplify the process to convert to LED for current lighting owners.

Our fourth priority is to build on our new product momentum and continue to grow revenue and profits. For the first half of fiscal 2014, we continue to demonstrate that we are on the right track with revenue up 22% from the first half of fiscal 2013 and non-GAAP operating profit up 38% while making significant investment in the Cree brand.

As I mentioned earlier Q3 total company backlog is below this point last quarter but in line with seasonal trends in LEDs and lighting. We are targeting lighting revenues similar to Q2 as growth and fixtures is offset by lower LED bulb sales, factory utilization remains high and while we are expanding capacity execution is a critical factor to supporting the higher targeted demand in lighting.

Our LED and lighting businesses continue to operate with short lead time which adds variability to our forecast for the quarter. Based on our current backlog forecast and seasonal trends in the business we are targeting Q3 revenue in a range of $390 million to $420 million, which is comprised of lighting sales similar to Q2 as growth in fixtures offset lower LED bulb sales for channel partner, LED sales 5% to 7% lower and in line with seasonal trend and Power and RF sales in a similar range of Q2. We target non-GAAP gross margins to be slightly higher in Q3 at 38.5% plus or minus as operational improvement and a more favorable lighting mix offset lower LED sales in the quarter. We target non-GAAP operating expenses in a similar range in Q3 and as a result we target non-GAAP earnings of $0.34 to $0.41 per diluted share.

Please note that our non-GAAP targets exclude amortization of intangibles, stock-based compensation expense and the related tax effects. As a technology company, we are passionate about fundamentally changing the customer’s lighting experience for the better. Our strategy is working. The business is growing and we’ve made great initial progress building the Cree brand. Looking beyond Q3, the trends in our business suggests that we are in a good position to grow LED fixtures, LED bulb and LED components in fiscal Q4. LED lighting remains a largely untapped opportunity and we plan to continue to make significant investments in new products, new channels and building the Cree brand to grow the company as we remain focused on our long-term customer goal of 100% upgrade to LED lighting.

We will now take analyst questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Brian Lee from Goldman Sachs. Please go ahead sir. Your line is open.

Brian Lee - Goldman Sachs

Hey guys thanks for taking the questions. I had two. First off, can you provide any updates on the consumer strategy as you near the end of exclusivity with Home Depot? I guess, is it fair to assume you're leaning toward re-upping with HD and if so would you anticipate similar terms for product placement and margins, and any color on that would be helpful?

Charles Swoboda

Yes, Brian, what I can tell you at this point is that I would expect that we will continue to work with the Home Depot in the next year that has been obviously a very successful relationship and we look forward to continuing to work together.

With that being said, I think we’ll also look at other complementary channels that really give us access maybe to customers that aren’t typically in a Home Depot or another places. So I think we’ll look for some complementary pieces but right now with the momentum we’ve had and the success over the last year, it just seem to make the most sense to continue work with them. As far as the specific terms and how that will work just there is nothing I can give you specifically on that at this point.

Brian Lee - Goldman Sachs

Okay. Fair enough. And then my follow up was just on Chuck, your comments around Q3 being a transitional quarter for the bulb segment. Can you quantify how much of an inventory rebalance needs to occur and whether that's all complete in Q3? And also is there an actual product refresh that's going to happen in the spring or is it simply going to be a new pricing strategy? Thanks.

Charles Swoboda

I don’t know the specific number for you, but maybe I can give you a little bit more color on that Brian. It’s a -- so the way to think about it is, when we started out 10 months ago we were launching a brand new product for a new category and in from Home Depot’s perspective from a vendor they never – worked with at this level. So what we did is as we scaled up the business in addition to what they would normally do they also carried what I would call a buffer or a strategic inventory.

Obviously, the sales have grown pretty quickly and with the combination that rebate is a little unpredictable. So they carried inventory that best way described is buffer. At this point, we have scaled up our factory to a level where we can respond to that so this is just a pretty logical next step in the process.

The other thing that’s important and it gets to your second part of your question is we both Cree and the Home Depot want to get to the right level there because we want to make sure that as we did cost reductions and bring those to the market that together we can get them there soon or rather than having a lot of inventory between us and the customer. So I still, I also think it plays better for this idea continuing innovation and continuing to move the market going forward.

Operator

Thank you. And our next question comes from Andrew Huang from Sterne, Agee. Your line is open. Please go ahead.

Andrew Huang - Sterne, Agee

Thanks. So my first question is with respect to lighting. Within Lighting, I know you don't break it down between bulbs and fixtures, but my sense is that for the past few quarters the non-light bulb business has had some challenges. And this quarter, I think the sequential improvement in gross margins for lighting suggests that that business is finally coming back. So can you talk generally about what's going on with the non-bulb business?

Charles Swoboda

Yes, Andrew. So last quarter, we obviously saw a good growth in lighting overall, there was growth in LED bulb but the majority of the growth was from the fixtures. And really what you're seeing is, we've been over the last year we’ve done a lot of product innovation. And I think we're starting to see is the benefit of having the products in the market for few quarters having had a chance to get out there getting bit on projects and just starting to see some of the fruits of that as well as the ongoing investment both in the high level brand, but also in the specific sales activities within lighting. So I think you're just, I think you're starting to see some payoff and the investment we've been making over the last year plus.

Andrew Huang - Sterne, Agee

Great. And then my follow-on question is on the component side of the business. So I know that for the past several quarters you've said that ASP pressure on components is better than last year, but still worse than normal which I think you've characterized as 25% historically. So can you give us a feel for your outlook for ASP pressure on components for calendar 2014?

Charles Swoboda

Andrew what I would say is the last three, four quarters, we’ve seen a similar what I would call a competitive environment. Obviously not what it was a couple of years ago but still relatively competitive and I would imagine that at least for the near term that’s what we would expect to continue as well. So I don’t see a big change in that dynamic in either direction at least in the short-term.

Operator

Thank you. And our next question comes from Paul Coster from JPMorgan. Your line is open. Please go ahead sir.

Paul Coster - JPMorgan

Hi, thanks for taking the question. Chuck, perhaps you could give us some sense of your capacity utilization both within the sort of product area, but at the nearly the product area and in the lighting area both by bulb and fixture and whether you face any constraints in any of those segments?

Charles Swoboda

Yes, Paul I would say that last quarter we were running pretty fully utilized both in the LED chip components and the lighting segment just a function of the growth in the lighting area and the bulb that’s driving that. And one of the reasons you saw in our targets that you see some incremental increase in our CapEx outlook is, we have started to make some incremental investments to try to get a little bit ahead of the curve.

So I would imagine that we will be fairly I think we’re in an okay position this quarter although I would say still the factories are pretty darn full with the growth in lighting that’s targeted. So it’s an ongoing investment and execution will remain pretty darn important here for the foreseeable future.

Paul Coster - JPMorgan

Okay. Against that backdrop, how much control do you actually have over the mix shift? Because I think it's clear to everyone that your ability to maintain these gross margins implies, given the mix shift, that you have some control over that mix shift?

Charles Swoboda

You’re talking about, as a total company level or within the segment Paul?

Paul Coster - JPMorgan

If you would just simply responding immediately to demand and your ability given the fact that you're operating at full capacity everywhere to control your gross margins would be compromised. It seems to me that you are able to select where you deploy resources.

Charles Swoboda

Yes. So one say to think about it is, is that so it’s really two pieces to that puzzle. If you think about it in a -- at a total company we have a mix shift between LEDs and lighting that’s going on. And then in our targets for Q3, you see what happens that even though while lighting will grow and LEDs will be down a little bit you see that the targets are still incrementally up. That’s mix shift within the lighting segment.

The LED piece, one of the ways that we had I think more success is that, one, we’re pretty focused on what I would call the high performance applications whether it would be our high power products or array products. And if you just kind of -- if you just use our gross margins in our LED segment as a benchmark against what the rest of the industry talks about, I think we’re in different part of that market. It also means we don’t get in the middle of a lot of that really low-end or what I would call very low priced mid power business. But, I think its part of the reason why our mix is a little bit different and then the channels and the opportunity for us going forward is that lighting grows and how do we continue to make incremental progress in lighting that we’ve been able to deliver the overall margins for target.

Operator

Thank you. And our next question comes from Jed Dorsheimer from Canaccord. Your line is open. Please go ahead sir.

Jed Dorsheimer - Canaccord

Hey thanks for taking my question and congratulations on the quarter.

Charles Swoboda

Thanks Jeff.

Jed Dorsheimer - Canaccord

Maybe just a follow up on that previous one, Chuck, to maybe take a slightly different angle at this, as 2014 starts to -- looks as if it's somewhat similar or shaping up like 2009, so if we look into the future a little bit, I want to try and get into the mindset as Paul was asking about your ability to control margins. It would seem as if your focus is really on the goal of converting over to 100% LED, or said differently sort of socket focused in terms of going after these opportunities. That should put you in a very good position in terms of having the upstream capacity where others are sort of exposed to commodity price rises over leverage at the component. Is that how we should look at that that we see more stable type margins for you but going after or enabling greater lighting adoption with your own socket penetration?

Charles Swoboda

Yes that’s, so Jeff you, I didn’t appreciate Paul’s question from that angle. So one of the things I think you’re eluding to is that in a market dynamic where the LED is an over supply there is a whole lot of flexibility to use supply and demand to your benefit. But, I think as you’ve seen in this business long enough this is a semiconductor business. At the end of the day, LED is a semi and if you look at the lack of capacity investment in our industry in the last two plus years and you look at the growth at some point I think we all know eventually there is a cycle that typically happens and I think that’s when you’re talking about 2009 eluding to that.

I think it will give Cree, I think not just from a margin standpoint from an ability to have a little bit more control over on destiny in terms of also enabling next generation products I think the benefit of that internal capacity plays for itself when you get to the other side of the semi cycle. So I guess, yes, to some extent that being said, we're still coming out of such a competitive cycle. I want to be a little cautious that we did too hard get ahead of ourselves too quickly but as far as having seen these cycles before there should be a semi cycle coming that we’re going to get a supply demand dynamic that’s different than what we’ve seen in the last couple of years.

Jed Dorsheimer - Canaccord

Great. Just as a follow up as you mentioned Home Depot and the renegotiations, as I go into -- it was interesting to actually go into a Home Depot store and see that the incandescents in this particular store were completely gone. But as I look at the number of SKUs that -- of Cree products that are carried, it doesn't match up with the number of offerings that you have. So is your goal to expand the product breadth that Cree now offers in some of the other channels at the Depot, in particular: MR 16 and maybe some more of the commercial downlights? Thanks.

Charles Swoboda

Yes. Jed, here we obviously will look for other products that makes sense in that channel. But with that being said, I think the near term focus is continuing to add what I would call the high runner bulbs is where our short-term focus is. Part of with this goal driving adoption we know that those are the once that move the market and really and give us the ability to impact the consumer experience faster. So we have definitely tested some other products with Home Depot and we've done it actually in some other channels and I think we'll look for those opportunities but frankly right now I still think there is additional bulb SKUs that are probably a little bit higher on the priority list than the near term.

Look at the end of the day 40 and 60 are going to be the biggest volumes, that’s the nature of the bulb business. But there are still few other ones out there I think that we can add to complement the category that maybe move the needle more in the near term and then we get fixture proliferation may be in the more -- a little bit after that.

Operator

Thank you. And our next question comes from Brandon Heiken from Credit Suisse. Your line is open. Please go ahead sir.

Brandon Heiken - Credit Suisse

Hey guys thanks for taking the question. You just made some comments about being impressed with the demand elasticity after the rebates in this past quarter. I was wondering if you're able to quantify how much of the success in Lighting in that quarter you would attribute to the rebates?

Charles Swoboda

Yes, so if you look at the quarter, obviously, we saw a big jump right but double the sales from the pervious quarter in terms of the units. I'd say there are three factors. So one we shouldn't underestimate that it was lighting season right. So we know that in general the lighting categories sees some uplift when you get into the fall and into the winter. Second, we have a pretty big investment really unlike what’s unseen in the industry in a while in terms of promoting the bulb and the brand and those things. I think that has a factor. And then the third piece is utility rebate.

Then it’s hard for me to tell you exactly which one of those. I would say they were -- from our standpoint they're all important, what's interesting about the rebate was that with rebates you start to get a sense of where is consumer buying behaviors and what kind of price elasticity is out there as not just the products with rebate but the products themselves we start to achieve different price points in the future. And I think that was the encouraging sign that we can see even when the consumer still have the choice last quarter still buying 40 and 60 incandescent, how many we could get to buy an LED bulb at different price points. And I think that's what I'm trying to signal is there is a, I think we're encouraged that we have a sense of where those markets start to kind of get to the next level and volume.

Brandon Heiken - Credit Suisse

And it looks like you think OpEx may be flat here in the March quarter, what do you think for the rest of the calendar year given your plans on the bulb advertising?

Charles Swoboda

Look I don't, we don't have a full calendar year number right now. I would say that this quarter, we’ll still be investing at a pretty good rate similar to last quarter and then as we get ready for Q4. It's going to vary a little bit from quarter-to-quarter the timing of new opportunity to promote things of new products potentially could change the time. But overall I’d say that in the near term it’s similar to what it is now and as the business would grow. One of my comments earlier is, we would look to reinvest some of the incremental profits from higher bulb sales back into building the brand it’s kind of the team working together as we go forward. But no specific numbers for you right now.

Brandon Heiken - Credit Suisse

Thank you.

Operator

Thank you. And our next question comes from Edwin Mok from Needham. Sir, your line is open. Please go ahead.

Edwin Mok - Needham

Hi. Great. Thanks for taking my question. Chuck just wanted to follow up a question regarding the light bulb you mentioned that you guys are looking at this different price points especially with the data you got from the rebate. I was wondering does that mean that that's going to be focus, to see if you can develop a new bulb that can equal a lower price point? And if you launch a new bulb, do you need to wait until you get energy star certified before you get the bulb actually out in the channel?

Charles Swoboda

Yes. There is really two things, I think that you want to test some incremental changes as we go forward and I think we’ll do that. And then obviously we continue to remain focused on, can we develop a next generation, next generation and the timing of that always hard to predict, but we do think there are lots of things that can be done from an innovation stand point over time the fundamental lower the cost. We're looking at both of those things and a way to think about it is the bulb is a product but at Cree it really represents an ability of us to engage the market and the consumer and the conversation of utility lighting that we couldn't ever do before so that's one of the benefits. And then it is a brand strategy. So we are going to think about the bulb a little bit differently because it's really trying to accomplish an addition to selling bulb its really trying to accomplish those other strategic objectives.

Edwin Mok - Needham

Thank you. Okay, great. That’s helpful. And then I when I look at your component side of the business you mentioned that you're running at pretty high capacity utilization and you're adding some capacity, right? But did you have new capacity come online and more demand for fixture? Wouldn't that still prevent your component business from growing much? I mean I imagine you extract more value by putting components into light fixture. Am I thinking of it the right way?

Charles Swoboda

If both businesses grew at the same time and we didn't plan ahead, you obviously could get into that situation. I think the way we would think about it is, is for us to continue to be successful in LEDs, we have to have a serious commitment to that business as well as the lighting. And I think we look at lighting as a customer. But, the LED business has a large range of customers that we have to deliver to.

So I think, we look at those, yes, and you can make the arguments that there is an internal synergy and why not get that benefit, but that's pretty short-term. I think, we would look and trying to balance between both of those and what we are trying to do from a capacity standpoint is enable growth of both of them.

Operator

Thank you. Our next question comes from Jeff Osborne from Stifel. Your line is open. Please go ahead sir.

Jeff Osborne - Stifel

Great. Good evening. Just two quick questions from me. I was wondering Chuck, if you could comment on the lower cost bulb in the spring, is it something you are doing on the chip side that drives the cost down or is it on a manufacturing location, is just any other CapEx increase associated with bulb manufacturing capacity, was the first question.

And the second question, was just any thoughts on – as you look to broaden the customer base as the Home Depot facility expires with the recent passage of the omnibus still overturning the incandescent bulb ban, is that impacting any of the negotiations or discussions you are having?

Charles Swoboda

Yes. So in terms of cost reductions, two things we are doing. We are doing what I will call incremental cost reductions. Some of those are finding way to get to the LED cost down, but also the rest of the building material for the products. So there are an ongoing effort to – how can we reoptimize parts of the design and qualify new components, try different things. And essentially not change the performance of the products, so the customers' look and feel is really important to us. But on the inside of those things we can do.

So that will be kind of one of the series of things we are doing and that’s more near term. But we are looking at some generational improvements where, hey, how will we deliver this value and maybe change a lot of the pieces at one time where we manufacture. We will continue to look at that given the amount of changes we continue to make, we don't think the slight incremental cost difference of building in Durham actually hurts us in the long run because it allows us to go faster and total designs become more stable and run in same one over time. If we were to transfer that somewhere else, we would be adding 46 weeks just of inventory to move things around and it would slow us down.

So I think, for us this is more about innovation, redesigning the product whether it would be incremental innovation or really relooking at the whole design is our key cost driver. As far as broadening the customer base and I'm trying to think – you were – I think you were poking a little bit at the Mike – where is he going with our – I just want to make sure, I get it right here Jeff.

Jeff Osborne- Stifel

Thanks. That was on the omnibus spending bill?

Charles Swoboda

Yes. So –

Jeff Osborne - Stifel

On Friday that overturned George Bush’s 2007 law?

Charles Swoboda

Yes. No problem on that one. So on that one, we doubled the bulb sales last quarter and there was no bulb ban. And I think we did it because I think that was a very early stages but we were actually proving the people that the old bulbs are a bad deal. That you can buy an LED bulb that has no compromise, right. Your light quality is good or better what you had and it really does pay for itself and as we continue to make cost reductions I think that's the key to driving the market.

There clearly is political things both sides of this, honestly it's a – I think it's more political and consumers are already speaking in terms of what we are seeing in the growth and I think that tells us about more innovation to make that and even easier choice going forward.

Jeff Osborne - Stifel

Okay. Thank you.

Operator

Thank you. And our next question comes from Vishal Shah from Deutsche Bank. Your line is open. Please go ahead.

Jerimiah Booream-Phelps - Deutsche Bank

Hi, guys. This is Jerimiah Booream-Phelps in line for Vishal. Thanks for taking my question. I was hoping you could just speak to the utility rebates and specifically how many you have seen, where they might be coming from and where they could be headed?

Charles Swoboda

Yes. Okay. So utility rebates are a – there is no one answer to that question, every utility is different and they are all different priorities. And so it is an ongoing activity to work with utilities that range from the Northeast to the South, to the Midwest to the West Coast. And there is just -- each one has different priorities, have different pools of money. The pools of money had different, they come and go at different times and it's an ongoing effort. See you are constantly working with them. What I would tell you today is that, if there is a bias to Northeast – the West Coast really probably have the two best markets but we have had success in other parts of the country. And it's a – the challenge there is that some rebate programs could last for two or four weeks, some could last longer, some – they last as long as money, until it runs out. There may be an opportunity to renew it.

First, the overall impact what I would tell you is that on average it is a significant number of the way we think about is the significant number of the Home Depot stores in the U.S. have rebates but its less than half. And that’s the most clarity I can give you there so significant but less than half.

Jerimiah Booream-Phelps - Deutsche Bank

Okay. That's helpful. And then just one other question on your tax rate going forward. I believe you got it at 20%, is that indicative of where we could see display beyond next quarter?

Michael McDevitt

What I gave is 21% for Q3, Q4. So I think its representative for this year, but as we kind of go in there by 15, its going to be depending up on how fast we are growing, where we are growing and some other things, so I think near term 21%, its good.

Charles Swoboda

Yes. And the way to think about that is, it ends up being a lot of U.S. growth and rates going to probably creep up and if we get more Asia growth or other places, we could see some benefits. It's really going to be a function of mix and where that growth is.

Operator

Thank you. Our next question comes from Craig Irwin from Wedbush. Your line is open sir. Please go ahead.

Craig Irwin - Wedbush

Good evening and congratulations again on the quarter.

Charles Swoboda

Thank you.

Craig Irwin - Wedbush

First thing I wanted to ask about was the transition to 6-inch wafers. Obviously you've made a lot of progress there over the last several quarters. Can you update us roughly on where you stand now and approximately how many quarters give or take, it might be before its just complete?

Charles Swoboda

Yes. What I would tell you is that it is, we are still executing the plan to increase some 150 each and every quarter, its definitely over half, I don't have the specific number here in front of me. So I think we will get some incremental benefit going forward, but we have passed the halfway point and it is only one of the levers, so it will get some benefit going forward but this is also is much about other things we are doing to reduce cost and product innovation that we are going to drive at least in the near to mid-term.

Craig Irwin - Wedbush

Great. And then my follow-up question is about the tax rate, was just hoping you might be able to get a little bit more granular with us the puts and takes around 48C and then the R&D tax credit. Can you give us a sort of order or magnitude of the relative contribution of the R&D tax credit as far as headwind offsetting some of the benefit from 48C. And if the tax credit was to be reinstated would that push us back to something close to what we saw in this last quarter?

Charles Swoboda

Let me give you the non-CFO answer. And I will let Mike jump in and see if I can get it right here. The 48C last quarter the way to think about it is, its $0.39 without the 48C. It was 46 with the 48C and $0.39. Is that right, Mike?

Michael McDevitt

Yes.

Charles Swoboda

All right. And then going forward, if the 21% that you have got the R&D tax credit is something we are not getting right now and then if it was reinstated, it would be a benefit to us. Did I get that correct, Mike?

Michael McDevitt

Yes.

Charles Swoboda

And as far as how to think about that going forward?

Michael McDevitt

Yes. I think that the big thing going forward is for the R&D, it might be about another point as we go forward depending on when that happens, when it happens there will be a catch-up. But right now the short way is, what’s the benefit, Q2 we guided to 23% and Q3 and Q4, we are guiding 21%, so effectively the ongoing benefit of the 48C and some other minor things is about 2 points.

Operator

Thank you. Our next question comes from Mehdi Hosseini from SIG. Your line is open. Please go ahead.

Mehdi Hosseini - SIG

Thanks for taking my question. Chuck looking at the bigger picture and then the problems that we are facing, investment communities trying to have a better assessment of how you are going to be able to capture opportunities from LED lighting, to that extent, is there any mixed shape or anything else you can provide us with having an ability to assess where overall fiscal year 2014 or calendar 2014 revenues or overall trend is going to look like?

And again, I’m trying to change a focus from modeling or just maybe one quarter out to one or two years out given the secular trend in LEDs? And I have a follow-up.

Charles Swoboda

Yes. Well, that's a – it's a great question and it’s one that's tough to answer because we are – I think we all agree and we all know that we are really early stages of LED lighting adoption when you look at it from a fixture standpoint or you look at it from an LED bulb. We are in the very low percentages of what is a significant industry transition. The rate and speed of that transition is something I think we have all been trying to guess out for the last three or four year’s right now.

And what I would tell you is, we see more adoption and the reason we believe there is more adoption is, we can see what the new products do, we believe there is continued cost reductions and innovations that make it even more viable and so if the technology continues to become even more competitive against the incumbent, it should win more share. And there is growth but exactly how fast that turns on you, you are talking about an industry with literally thousands of applications in terms of lighting fixture companies, it's a completely, the markets are very regional, its just hard to give you any one number or benchmark because its not like trying to model our consumer market. There is just lots of moving pieces to the puzzle.

So the way I think about it is, I don't try to figure out exactly what the size of the business is next year, I try to work on things that drive adoption and so far that's worked pretty well and takes care of itself as long as we continue to innovate and bring better products to market.

Mehdi Hosseini - SIG

Sure. But, the problem I have with comparing this 2009 or referring it to as a semiconductor cycle is, your business people has changed and now you are doing more LED lighting fixture and it is very different than semiconductor. Now, if let's say hypothetically, if there was to – if there were to be a shortage on a component side, how you are going to be able to prioritize the servicing your component customers where you may get some pricing, power back versus the original lighting which is pretty much an industrial or commodity. Can you help us understand how you are going to do that?

Charles Swoboda

Yes. So look, the 2009 is, I think the reason that's an interesting analogy is that there has been an assumptions in some parts of the market that LED prices go down every year and people just keep adding capacity for no reason, which you studied the business long enough that's not been the nature of it, right. It goes in cycles like ascending part. And what that will do is, it will effect LED cost and supply and demand and effect, it will effect the market when that happens. So Cree, it effects two ways, obviously, getting some pricing power back in the LED business will be healthy for Cree overall. And having our own factory and capability to drive that gives us lots of flexibility to figure out what parts to market we want to prioritize.

With that being said, what I would tell you is, you can't – we are not going to try to be too short sighted in that. We are going to try to do things that are going to support our LED component customers because there are customers and if you want to be a good – if you want to have that business over the long run, you got to have a consistent approach to that market. So I think we will do that on one side and at the same time we will obviously going to use the fact that we have our own LED supply to make sure that our own lighting products get the benefit of not only the cost reduction but the access to that technology. So it's a balancing act. But it’s the nature of the business.

I think for us the challenge is making sure, we are thinking out 6, 12 months, 18 months and making sure our capacity planning is anticipating some of the things that could happen in the market.

Operator

Thank you. Our next question comes from Harsh Kumar from Stephens. Your line is open. Please go ahead sir.

Harsh Kumar - Stephens

Hey, guys. I have two questions. Chuck I wanted to shift gears a little bit and talk about that chip business. I noticed that your chip business has been flattish since the June quarter of 2013 more or less flattish call it within $1 million. And that's unlike the typical semiconductor seasonality. And two is, a) if you can explain that or b) if you are taking capacity away from that and diverting it towards the lighting business and if you can clarify that.

Charles Swoboda

Yes. The first I would say, look that more on a year-over-year basis, there actually is growth there year-over-year, so I would be a little careful just looking at that straight sequential. And I don't know that I have the numbers Mike you might have it, it's up 11%.

So we are actually up a 11% first six months versus first six months. Also keep in mind that we are not training to limit capacity of that business. But we are focused on certain segments. So where Cree really participates in a component business is the high power segment and what I would call these are ray products. So we are going to be more oriented towards the higher performance side. And because we are going to try to focus on customers that see the value on what we do versus just chasing some of, what I will call the mid-power bath lighting type applications they just don't add a lot of value to this.

But, we are not changing our LED component sales strategy at all. We are just focused on the applications which can drive it. What you have seen, if you take the six months growth, the 11% year-over-year that's actually a lot more units but we continue to do things because we are keen to bring down the cost per lumen. So what you are seeing is unit growth is being somewhat offset by the fact that there is ongoing cost reductions and that's what we said the revenue growth we are having. But so, a little different than in the past, first I think you just step back a little bit there is some decent growth there on a year-over-year basis.

Harsh Kumar - Stephens

Hey, got you. Thanks Chuck really helpful. And then a segment you made somewhere in your commentary was – you intend to be somewhat aggressive on lighting. Is that in reference, if you can clarify and reference to your bulb strategy i.e., when you come out should we expect a different price point from the bulb soon?

Charles Swoboda

Yes. So what I was talking about in that section was really about -- a little about bulbs and what we have learned is, we have some better insight in the price elasticity. And so what I want to really just set the expectation is, our goal is to drive adoption and expand the market. And so I don't want to set the expectation. We are going to sit back here and try to – we are not satisfied with where we are at and point of this is to drive the market and to drive the volume. And so I think our message to you is, is that we are going to continue to stay aggressive, what it means is, there will be over time some different price points in the market not every product necessarily, but we will do things to essentially try to find those points where more volume can be turned on at the consumer level based on the price to them at the store.

So we are – that’s what I mean by that, it's mostly bulb is what I was talking about. So from a macro standpoint, we are still committed to doing product innovation across our lighting product line to deliver more lumens per dollars. So that's a broad strategy but my specific comments were about the bulb.

Operator

Thank you. And our next question comes from Avinash Kant from D.A. Davidson.

Avinash Kant - D.A. Davidson

Thank you for taking my question. The first question, I had Chuck was do you see people buying fixtures from somebody else and then getting the lighting from you. What percentage of your fixtures that you came with are the cross-pollination?

Charles Swoboda

Yes. We don't – most of our fixtures are integral lighting, right. So it's not like the old days, where you would buy a fixture and you would buy a separate light source. Essentially what happens is, our fixture business these are integrated with LED in them. So if you buy our fixture you get everything you need. It's an integrated LED light source.

And so there is really not a connection for the bulb. The bulb is an opportunity to sell LED lighting people who don't want to change their fixture. It is really focused on the consumer segment and really primarily today the vast majority of this is residential. People put these in lamps and in the – light fixtures in their house, where they are less likely to do any type of a fixture upgrade at least in the short-term.

Avinash Kant - D.A. Davidson

But in the industrial applications, would you see people do the cross-pollination or that will still be the same like the consumer.

Charles Swoboda

So in industrial, what they were selling us primarily integrated fixtures, so I would say the majority of what we do there is, you are borrowing the whole LED lighting fixture, there wouldn't be a bulb required once you buy it. With that being said, we do actually have some cross-over products, they are not bulbs, they are not fixtures for example, our UR linear series that we introduced about 6 to 9 months ago is a retrofit product that allows someone to leave their existing fluorescent troffer in the ceiling and since we convert the driver and the LEDs.

And so there are crossover products that are in between but there was really not a lot of – once you buy an LED fixture from us, there would be no need to buy another light source.

Operator

Thank you. And due to the allotted time, our final question comes from Mark Heller from CLSA. Sir, go ahead. Your line is open.

Mark Heller - CLSA

Thanks for including me. And Chuck, I was just wondering if you can give us a little bit more color on the bulb sell in for Cree and I know you said that sounds like sales volume has doubled but was it up, is there any type of number you can give in terms of was it up 20%, 30%, 50% any type of color on that?

Charles Swoboda

You mean, how much we sold to the channel last quarter?

Mark Heller - CLSA

Right.

Charles Swoboda

Yes. Only I can tell you Mark is that we said our sales to consumers was doubled and I said while our sales increased to the channel it was less than what our sales out were, but I didn’t break that up specific. Yes, there were percentage increase was less and I didn't break that out.

Mark Heller - CLSA

Okay. Got it. And then, my understanding is that most of Cree's fixture business is currently focused on the U.S. North America market, is there any type of change in strategies that might be – you guys are thinking about in terms of, I guess more international expansion for the fixture business?

Charles Swoboda

Yes. It is definitely primarily a North American focused business today and that was on purpose. We do have a Cree European headquarters based in Italy that does some fixture business but its really smaller scale. And as of right now, we focus most of the R&D on products that are really designed for North America. I think we will look at that as kind of a next phase over time, the challenge for us is that, do you keep trying to drive a market where you have all of the rest of the investment or do you basically start to dilute that? I don’t think we were quite at that point were we want to go there yet, but I can imagine that over the next one to two years, opening of some of these other markets will probably become a higher priority for us.

Mark Heller - CLSA

Thank you.

Operator

And now for closing remarks, I would like to hand the conference over to Mr. Mike McDevitt.

Michael McDevitt

Thank you for your time today. We appreciate your interest and support and look forward to reporting our third quarter results on April 22nd. Good night.

Charles Swoboda

Good night. Thank you.

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!