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Cree, Inc. (NASDAQ:CREE)

F4Q10 (Qtr End 06/27/10) Earnings Call Transcript

August 10, 2010 5:00 pm ET

Executives

Raiford Garrabrant – Director, IR

Chuck Swoboda – Chairman and CEO

John Kurtzweil – CFO, EVP of Finance and Treasurer

Analysts

Steven Milunovich – Merrill Lynch

Christopher Blansett – JP Morgan

Stephen Chin – UBS

Dale Pfau – Cantor Fitzgerald

Amar Zaman – Piper Jaffray

Andrew Young [ph] – Carnegie

Harsh Kumar – Morgan Keegan

Lauren Stoller – Lazard Capital Markets

Jed Dorsheimer – Canaccord

Bill Ong – Merriman & Co.

Alex Gauna – JMP Securities

Carter Shoop – Deutsche Bank

Jiwon Lee – Sidoti & Co.

Operator

Good afternoon. My name is Amanda, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cree Incorporated’s fourth quarter 2010 fiscal year end financial results conference call. (Operator instructions) I will now turn the call over to the Director of Investor Relations, Mr. Raiford Garrabrant.

Raiford Garrabrant

Thank you, Amanda, and good afternoon. Welcome to Cree’s fourth quarter fiscal 2010 earnings conference call. By now you should have all received a copy of the press release. If you did not receive a copy, please call our office at 919-287-7895 and we will be pleased to assist you.

Today, Chuck Swoboda, our Chairman and CEO, and John Kurtzweil, Cree CFO will report on our results for the fourth quarter of fiscal year 2010. 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 under financial metrics posted in the investor relations section of our website at www.cree.com under FY 2010 financial metrics.

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

Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially. Also, we’d like to note that we’ll be limiting our comments regarding Cree’s fourth quarter for fiscal year 2010 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 and a replay will be available on our website through August 24, 2010.

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

Chuck Swoboda

Thank you, Raiford. Fiscal 2010 was a record year for Cree as the LED lighting revolution gained momentum. Revenue increased 53% to $867 million, while non-GAAP earnings increased 203% to $179 million or $1.71 per diluted share. For fiscal Q4 revenue increased 13% from Q3 to a record $265 million and non-GAAP net income increased 17% sequentially to a record $60 million or $0.55 per diluted share. Revenue was such at the high-end of our target range while profits exceeded our targets for the quarter due to strong gross margins, and favorable end of year tax adjustments. They were partially offset by the New Mark [ph] patent litigation settlement.

The revenue growth in Q4 was driven primarily by strong growth in XLamp LED components sales for outdoor lighting and LED bulb applications, incremental growth in LED lighting products for indoor commercial applications, and incremental growth in power sales for solar inverter applications. Non-GAAP gross margin was 50% in Q4, which was on the high-end of our target range for the quarter of 48% plus or minus. The gross margin was driven by several factors, continued strong execution in our factory ramp and the benefit of higher volume and scale, better than forecast cost reductions due to higher yields, and continued improvement in our power and RF product line.

Cash and investments increased to nearly $1.1 billion. We remain in the strong position to continue to invest in our business and lead the adoption of LED lighting. We made good progress building momentum in our business, and delivering on our four key objectives for fiscal 2010. We grew the LED lighting components business more than 100% year-over-year. We further established our leadership in LED lighting and disrupted the market with customer wins like Wal-Mart, we turned power and RF into a profitable and growing product line and we increased non-GAAP operating profit 244% from fiscal 2009.

We have a solid order book for Q1 and are tracking ahead of last quarter’s order level. Demand for lighting related products is targeted to grow double digits sequentially, driven by the US and Asia, while European demand is seasonally slow. LED chip demand is slow due to weakness in consumer related backlighting applications. We see this as a short-term correction and still believe the long-term trend to LED backlit TVs will continue.

The capacity investments made in fiscal ’10 are allowing us to reduce LED lead times to more normal levels and pursue more near-term opportunities more aggressively. Sales through our distribution partners continued to grow and channel inventories are at target levels in terms of days on hand.

I will 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 2011.

John 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 2010, revenue increased 53% year-over-year to $867 million, compared to $567 million for the prior year. GAAP earnings were $152 million and $1.45 per diluted share for fiscal 2010, while non-GAAP earnings increased 203% year-over-year to $179 million and $1.71 per diluted share. Non-GAAP earnings exclude $27 million of expense net of tax, or $0.26 per diluted share from the amortization of acquired intangibles and stock based compensation expense.

Cash provided by operations was $251 million. Free cash flow was $82 million and we exited fiscal year 2010 with $1.1 billion in cash and investments, while continuing to be debt free. During fiscal 2010 we had two customers, who represented greater than 10% of total company revenue, both distributors, Arrow Electronics at 19% and World Peace at 11%.

For the fourth quarter of fiscal 2010 revenue was $264.6 million, which was at the high end of our targeted range of $255 million to $265 million. This is a 13% increase sequentially and 79% increase year-over-year.

GAAP net income was $52.8 million, an increase of 18% sequentially. GAAP diluted earnings per share were $0.48 and exceeded our targeted range of $0.41 to $0.44. On a non-GAAP basis, net income was $60.1 million, and non-GAAP diluted earnings per share were $0.55, which exceeded our targeted range of $0.48 to $0.51, primarily due to higher gross margins and a lower tax rate.

Non-GAAP net income excludes $7.3 million of expense net of tax or $0.07 per diluted share from the amortization of acquired intangibles and stock based compensation expense.

We continue to strengthen our balance sheet and entered the quarter with $1.1 billion in cash and investments, which have increased $75 million since the end of March. Cash provided by operations was $94.9 million, which included $23.6 million of depreciation and amortization. We spent $40.8 million on capital expenditures in Q4, which resulted in free cash flow of $54.2 million.

I will now provide more details on the results of the fourth quarter. LED products revenue increased 13% sequentially to $240.1 million, while power and RF revenues increased 10% sequentially to $24.5 million.

Q4 GAAP gross margin increased to 49.5% while non-GAAP gross margin increased to 49.9%, which excludes stock based compensation of $1.1 million. This was at the high end of our targeted non-GAAP range of 48% plus or minus.

The increase in gross margin versus our target was a result of several factors including continued strong execution in our factory ramp along with the benefits of higher volume scale, better than forecasted cost reductions due to higher yields, and continued improvement in our power and RF product line.

Operating expenses for Q4 were $62.5 million on a GAAP basis and $53.9 million on a non-GAAP basis. R&D was $0.8 million below our targeted spending and SG&A expenditures were $5 million over our targeted range. During the quarter, we settled the New Mark litigation, which resulted in higher SG&A expenditures. The balance of this SG&A expenditures was slightly below our target due to lower IP litigation cost and slower headcount additions. Excluding legal costs, our core SG&A expenditures increased sequentially as we continued hiring to support the growth of the business.

Non-GAAP operating expenses exclude approximately $5.6 million of stock based compensation expense and $3 million of charges for amortization of acquired intangibles. Our Q4 GAAP operating margin increased 170 basis points sequentially to 25.9% and non-GAAP operating margin increased sequentially to 29.6%.

Net interest income and other for Q4 was $1.8 million. The effective tax rate for the quarter was 24.9% and for the fiscal year was 25.9%.

Day sales outstanding were 40 days as compared to 48 days at the end of March, as we continued to benefit from very linear shipments throughout the quarter. Net accounts receivable decreased by $8.3 million to $117.5 million, as revenue increased $30.5 million. We targeted DSO to move back towards the upper 40s over the next two quarters, as we moved back into a more typical shipment pattern.

Inventory days on hand were 76 days as compared to 79 days at the end of March. Net inventory increased by $5.2 million to $112.2 million during the quarter and finished goods inventory accounted for half this increase. We target our days of inventory to increase slightly going forward, closer to the upper 70 as we build WIP and finished goods inventory to respond more quickly to customer’s needs.

For fiscal 2010, we authorized capital additions at the high end of our range of $240 million to $260 million. From a cash flow standpoint, capital additions were $168 million in fiscal 2010, with the balance of the equipment that was ordered targeted to arrive and be installed and qualified in the first-half of fiscal 2011. Please note this difference from when capital is authorized and when it is received, qualified and ultimately paid for.

Our capital authorization target for 2011 is approximately $300 million to support targeted growth in LED lighting applications by more than doubling our LED XLamp capacity by the end of the fiscal year, support the initial capacity to develop and qualify our 150 mm LED product, and position the factory to support additional growth in fiscal 2012.

At this time, we target Q1 revenue to be in a range of $270 million to $280 million as growth in LED lighting related products is partially offset by softer LED chip demand for consumer backlighting applications. GAAP and non-GAAP gross margins are targeted to be 48% to 49%. Our GAAP gross margin target includes stock based compensation expense of approximately $1 million, while our non-GAAP targets do not.

For operating expenses, we are targeting GAAP and non-GAAP R&D expenses to increase by approximately $3 million, while GAAP and non-GAAP SG&A expenses are targeted to decrease by approximately $6 million. The R&D increase is primarily related to a significant ramp in our 150 mm development program, and several new LED component programs. The decrease in SG&A is primarily due to lower anticipated legal costs as a result of the settlement of the New Mark litigation.

If you exclude the change in legal costs, we anticipate increasing core SG&A spending as we continue to grow the business. We target asset impairments to be approximately $0.5 million for the quarter, and our GAAP include approximately $8.7 million of non-cash stock based compensation, and $2.7 million of charges for amortization of acquired intangibles.

Interest income and other is targeted to be approximately $1.8 million. We target our tax rate to be 25% next quarter, and next year. The decrease in the tax rate is primarily due to a higher percentage of profits targeted to be earned in lower tax jurisdictions such as Asia.

GAAP net income for Q1 is targeted at $52 million to $56 million and based on an estimated 110.2 million diluted shares outstanding, our GAAP EPS target is $0.48 to $0.51 per diluted share. Non-GAAP net income is targeted to increase quarter-over-quarter to $62 million to $65 million, for a non-GAAP EPS target of $0.56 to $0.59 per diluted share.

Our non-GAAP EPS targets exclude amortization of acquired intangibles and non-cash stock based compensation in the amount of $0.08 per diluted share.

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

Chuck Swoboda

Thanks, John. As we begin fiscal 2011, we are focused on four key areas to continue to drive our business in the year ahead. Our first priority is to build on our leadership in LED lighting and continued challenge people’s addiction to old energy wasting technologies. We want to be a catalyst for LED lighting adoption by developing innovative LED components and lighting products that lead the market and turn on new applications.

We are currently focused on getting the CR6 product, our new residential LED down light, ramped up for a broad market release later this quarter. The CR6 sets a new benchmark by providing the benefits of energy-efficient, non-toxic and long-lasting LED performance at CFL down light prices. The CR6 product is also featured in our partnership with Habitat for Humanity. We have committed to provide LED down lights for the kitchens of new habitat homes built in the US over the next three years.

This program allows us to bring LED lighting to homeowners, who can truly benefit from its long lifetime and low operating cost, and will also provide first-hand experience with LED lighting to the thousands of people involved in building these homes. We are working and adding new channels to complement our existing commercial channels to make this product more readily available to consumers. In fact, Home Depot just introduced online the EcoSmart LED down light, a store brand version of our CR6 down light. This product is scheduled to be in Home Depot stores nationwide later this fall, and we see this as an important milestone in bringing high-quality LED lighting to the consumer market.

Our second priority is to further enable lighting fixtures companies to develop and introduce own high quality LED system products to drive demand for LED components. In fiscal 2011, we target increased spending to fund several approaches to try and accomplish this goal. We need to continue to develop new high-performance LED components, then improve the value proposition for LED lighting and reduce the initial cost. This includes higher performance versions of our existing XLamp products, new platforms like the XM family, and new products for specific lighting applications.

We have to make the customer’s job easier with more highly integrated products like the new EasyWhite LMR4 LED module family that was announced last week, as well as new EasyWhite components for tight color fitting [ph] requirements. We need to continue to expand our customer applications support to provide more capabilities and better serve the growing customer base.

Our third priority is to further invest in capacity expansion to drive scale and accelerate our transition to 150 mm wafer production. We target to more than double XLamp LED component capacity as we exit fiscal 2011, and we are also putting in place the initial 150 mm capacity to start to develop and qualify the process. R&D spending will increase to support this activity over the next year, and we believe this investment is critical to keep Cree at the forefront of the technology curve.

We target the first 150 mm products to be qualified by the end of the fiscal year, with the first production volumes to start in early fiscal 2012. We’re also adding new pilot production and testing capabilities to reduce the time to market for LED component and lighting system products.

Our fourth priority is to further develop our Silicon-Carbide Power product line with investments in new products and capacity to drive growth. We finished Q4 with another record quarter for Silicon-Carbide Schottky Diode sales, as we were able to make operational improvement to squeeze incremental capacity out of our existing tools, as we work to bring online new equipment later this fiscal year.

We target releasing our first silicon carbide switch product in the first-half of fiscal 2011, which will be a significant milestone in the power market, and should expand the market opportunity for our products. We continue to see growing demand for energy-efficient power switching technology, and believe this product line is well positioned to grow over the next several years.

The LED industry continues to benefit from two large macro trends, LED backlighting for TV and LED adoption for general lighting. At Cree we benefit indirectly from the LED TV backlighting trend as this drives overall LED demand and provides incremental revenue opportunities for our LED chip product line. Although these consumer markets can sometimes be unpredictable from quarter-to-quarter as we are seeing in Q1, we believe the long-term trend is intact and see further adoption over the next couple of years.

In terms of general lighting, we remain confident that we are in the early stages of broad adoption to LED lighting over the next 10 to 15 years. This is a regional business that is not one application, but the combination of many different lighting applications, which each require unique solution to specific lighting problems. Our focus is to be the company that enables this market.

As we look ahead to Q1, demand looks solid across our LED component and lighting product line, and we continue to invest in our factories to support the increased adoption of LED lighting. We target Q1 revenue to increase to a range of $270 million to $280 million led by double-digit growth in LED components and lighting products, which is partially offset by lower LED chip sales for consumer backlighting application, and power and RF at similar levels due to capacity constraints.

Factory execution will continue to be an important factor to achieving our target. It is also critical that we continue to drive adoption for LED lighting at new customers, and for new applications to drive our growth in both the short and long term. We target Q1 non-GAAP gross margin at 48% to 49% as we look to maintain our recent gains, but operate the factory at a more sustainable level of utilization.

We target increased investment in R&D to support new product development in LED, including 150 mm development, as well as increased spending in sales and marketing. As a result, we target non-GAAP earnings in Q1 of $0.56 to $0.59 per diluted share. Please note that our non-GAAP targets exclude amortization and intangible stock based compensation expense and related tax effects.

Fiscal 2010 was a very successful year for Cree and the LED lighting revolution. But in the context of the overall lighting industry, we are still just getting started. Consequently, there is both a tremendous opportunity and a lot of challenges ahead of us. As the leader of LED lighting, we have got the attention of both the industry and our competitor. As a result, we need to stay focused in extending our leadership position, while we build the scale, cost structure and channel to win in the market longer term.

We will now take analyst questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Steven Milunovich from Merrill Lynch. Your line is open.

Steven Milunovich – Merrill Lynch

Great. Thank you very much. How are you doing Chuck?

Chuck Swoboda

I’m doing great Steve.

Steven Milunovich – Merrill Lynch

So, the margin is obviously very good. I think, tired to complain about this revenue, but I think some people were expecting little bit more, particularly in the guidance, could you talk about what is going on at the top line, I mean are you capacity constrained, when are the new plants coming on, and I assume you are seeing an actual sequential decline in chip sales this quarter and the next quarter?

Chuck Swoboda

Yes, obviously last quarter’s growth was quite robust. If you think about Q1, what you are looking at is double-digit growth again in both LED components and lighting. So the lighting business continues to grow well, both as a component and a system strategy. The offset is coming really in the fact that in the chip business, while the core base chip business is doing fine, what we are seeing is that incremental piece of the business, which is really the strategy we laid out a year ago, right, which is if the demand is high, we will go ahead and take some of that capacity, and go ahead and service that market.

The backlighting side of that that is down a little bit this quarter. I don’t think that is a long term trend. I think it is frankly that supply chain kind of fixing itself, but from my standpoint the core growth drivers are there in terms of lighting, and we are seeing a little bit of chip adjustment. The other challenge we have is that in power and RF, we just don’t have the capacity in the next couple of quarters to grow that very much. So that business is going to stay in a similar range until we get some new capacity online here, really, probably third quarter of the fiscal year.

Steven Milunovich – Merrill Lynch

Can you talk a bit more about the new capacity, is it going to come on at about the same time in North Carolina and China, is it going to be step function or pretty gradual?

Chuck Swoboda

So, we have a plan to be bringing capacity on pretty much continuously throughout the year from an LED standpoint. The power and RF is going to be more back loaded to the second half of the fiscal year. That is really North Carolina-based capacity, but in terms of the LED capacity, we are adding that both here in Durham and in China and it is really across the product line.

Steven Milunovich – Merrill Lynch

Okay and then finally can you talk about the percentage of business from China, and specifically what kind of growth are you seeing in streetlights in China?

Chuck Swoboda

Yes, I would say that China continues to be about the same percentage as it has in the last couple of quarters. It grew with the business overall, and within that you really got to think about that businesses, both there is the China business for China and then there is the export.

We estimate that the China business for China is over $0.5 billion, and that is really outdoor, probably street lighting is the single biggest application. We continue to see additional adoption there though. So, that is continuing to grow. It looks pretty good for this quarter as well. So, we remain optimistic that it is really an adoption argument of LED versus alternative technologies as they build out infrastructure within the China market.

Steven Milunovich – Merrill Lynch

Thank you.

Chuck Swoboda

Sure.

Operator

Your next question comes from the line of Christopher Blansett at JP Morgan. Your line is open.

Christopher Blansett – JP Morgan

Thanks guys. Chuck I wanted to kind of talk about what you said on your comments. You mentioned that demand was strong and you had a solid book for the first fiscal quarter. But then you kind of mentioned that your lead times are coming in, could you kind of talk about the delta are?

Chuck Swoboda

Yes, so what – as we have been trying to get the lead times under better control for the last couple of quarters. We have finally – I think we have our main runners in LED components into a more reasonable level. We are probably in that somewhere in the 6 to 8 week range depending on the products now. That doesn’t mean we don’t still have a few high end products that are out longer than that, but that has really been critical to start to meet some customer needs.

It is pretty clear the lighting market does not expect, even those are considered long lead times for them at this point. And so, what I think we are seeing is that the backlog is today ahead of where we were at this point last quarter. But the difference is it is because the lead times have come down, you are getting those orders a little bit later in the quarter just because the customer is responding to our lead time.

So I think it is a pretty natural result of what we are doing, but I think we have to do it. If we are going to drive this market, we have to be able to respond to these projects as they come on line and get better deliveries than we had let us say 3 to 6 months ago.

Christopher Blansett – JP Morgan

And then second question I had is related to where you think your mix of revenue on the LED side was that you really went into general lighting even if you aggregate it between the chip and the components business and where do you think that might end up at the end of this fiscal year?

Chuck Swoboda

So, in terms of the LED business, general lighting obviously last year went through the 50% point, and it obviously continues to grow as a percentage of the total. I don’t have a specific breakout for you, but I would tell you last quarter essentially all of the growth in the business that you see in the Q4 numbers is lighting driven, and I would imagine that that will be the same case this quarter. So, you know, I would imagine by the end of the year, we’re going to be looking at something probably in the 70% to 80% of the company’s revenue is going to be or at least the LED revenue for sure, and probably the company’s revenue will be up over two thirds three quarter mark, somewhere in that range.

Christopher Blansett – JP Morgan

All right. Then one last one from me, I mean in private conversations in earnings calls you talked about supplying a light engine to the lighting market, and with your modules business you have the first kind of product that does that. So, how does that product affect the margin profile for the company, you know, should we see good top line growth, maybe a little bit of margin impact? You know, how do we think about this because it is a lot of pieces put together in assembly here?

Chuck Swoboda

Yes, and I would also say that it is pretty early. So that module product has been really out since the April May timeframe. We launched it in Europe and then in the US at those lighting shows. And we’re really just getting our customers to get their products out in the market and actually not just to sample them, but to be able to say they have a quality price [ph]. I think we are going to learn a lot more in the year ahead. I would tell you that we do have a number of people that have put in their slots. The thing to keep in mind is the customers are typically going to be making fixtures, not retrofit products.

So there are typically going to be focused on going out and winning new spec business or new design, which is going to have a longer runway. So, you know, in terms of its effect on the margins in the next year, probably pretty minimal, because I don’t think it is going to be a large amount of revenue in ’11. I think we are going to see much more of an impact in ’12, because that is just cycle time to take any lighting fixture product, get it released, get it out there, get it designed, and start to drive some volume.

In terms of what its margin profile is, I think it will be within the range of what we’re seeing across our LED businesses today. I think we are to some extent setting the model for what the value of those products with our own systems business, and I think it is up to us to then figure out how to put the modules out there in a way that makes sense both for us financially and for our customers, and I feel like we are going to be able to make that happen within kind of our targeted range.

Christopher Blansett – JP Morgan

All right. Thank you.

Chuck Swoboda

Sure.

Operator

Your next question comes from Stephen Chin at UBS. Your line is open.

Stephen Chin – UBS

Thank you, my question, just a quick question on the pricing trend for LEDs, I was just wondering if you could give us a trend on how the pricing was in 2Q and how it looks in 3Q, and then I have a follow up?

Chuck Swoboda

Yes, I have to tell you that you have to break that out into 2 pieces. If you look at the LED business-related to lighting for components and lighting systems, and across that product line it was pretty much the same trend that we saw in Q1, Q2 as we are projecting in this quarter as well.

So that is a market that it is all about how do we as well as our competitor continue to come up with products that reduce the upfront cost, really to enable more adoption. But I haven’t seen a big shift there, one way or another in the business at this point in time. We are all trying to find a way to drive new applications, and again no significant change, at least not last quarter or as we target for this quarter.

Now, outside that when you look at the chip business, the chip business was to follow a pretty traditional trend in Q2, and the difference in Q3 is for the incremental piece of that business. So, there is a base chip business, and then there is kind of opportunistic incremental piece that is really focused on servicing some of these backlighting markets.

That is the part that is going to fluctuate with the market, and I can tell you that as the demand has reduced there that that probably has had the most price erosion. But again it is a fairly small piece of the total, and that is why you see the overall targets not changing dramatically in terms of margin or otherwise.

Stephen Chin – UBS

That is helpful. Thank you.

Chuck Swoboda

Sure.

Stephen Chin – UBS

And just a follow up was on the CR6 product, you say you are going to introduce later this fiscal year, I’m just trying to figure out what kind of gross margins should we think about for that product line?

Chuck Swoboda

Yes, that product should be similar to our other lighting products. So it should be within the normal realm of that product line, and I want to clarify that the CR6 increased outline is a version of that product. It will be slightly different than what is released as of now online through Home Depot onto the EcoSmart brand. So, it is really two products. There is the Home Depot version, which they have started selling and the CR6 will be the version that we will sell through our own channels.

Stephen Chin – UBS

All right. Thank you.

Operator

Your next question comes from Dale Pfau with Cantor Fitzgerald. Your line is open.

Dale Pfau – Cantor Fitzgerald

Good afternoon. Congratulations on a nice quarter gentlemen.

Chuck Swoboda

Thanks Dale.

Dale Pfau – Cantor Fitzgerald

A couple of questions here, you mentioned that you felt your backlog was as good as it was this period last quarter, but yet this was mitigated a little bit by some softness in Europe. And this chip business, can you make up for those too Chuck in your outlook here, and the softness in Europe, this is usually a seasonal kind of thing, and you see that generally pick up around September, don’t you?

Chuck Swoboda

Yes. What I would tell you is that I think we factored – we have taken into account the factors I talked about into the target. So the targets have been adjusted for chips, and for Europe. In terms of Europe, this is classic slow quarter for us in components there. I think that – I think in terms of the basic trends there, we have continuing to see increasing design activity, we have had a good year there overall.

So, I would expect that once we get everyone there back and operating here in September, I’m optimistic that that market will continue to grow in the year ahead.

Dale Pfau – Cantor Fitzgerald

And as far as your capacity coming online, were you a little constrained in the fourth quarter, and how do you feel about your total manufacturing capacity, excluding power and RF in Q1?

Chuck Swoboda

Look, we continue to have capacity constraints on a number of products. It is not on very product, generally speaking we were still limited, although we did make some progress getting the lead times down, and that has been a big focus here over the last couple of quarters. I think as we go into this quarter, you know, let us say if last quarter we operated near 100% utilization, my guess is this quarter when I say a more sustainable viable, it is still going to be high utilization. My guess is that we will be able to at least from chip fab standpoint operate closer to that 90% range, which frankly, I don’t know you know this; it is a whole lot more sustainable way to manage the business and deal with product mixtures and customer demand changes. So that is kind of where we are thinking in the targets for Q1.

Dale Pfau – Cantor Fitzgerald

And one last question, I will jump into queue. How do you think you are sitting relative to market share in your component business Chuck?

Chuck Swoboda

I feel like we have done well. I think we have – our best estimate is we performed with the market if not a little bit better. I think that is a broad statement. You know, I think you have to look at the applications we are strong in and we continue to feel good about those, and I think there is sometolook, you know, for example, some of the linear lighting, where, you know, we have never had a lot of that share, but I think we are targeting to try to make some progress there and go ahead as well.

Dale Pfau – Cantor Fitzgerald

Great. Thank you very much.

Operator

Your next question comes from Amar Zaman from Piper Jaffray. Your line is open.

Amar Zaman – Piper Jaffray

Hi Chuck. Congratulations on a good quarter. Most of my questions have been answered, I guess focusing on the 150 mm initial qualification in this fiscal year, can you talk a little bit more about that. How should we think about the effect on yield and gross margin, what are you expecting, what are your targets there. I know that there was a meaningful improvement in yield and gross margins with a move to 4 inch, as we get to 6 inch, how should we think about those metrics?

Chuck Swoboda

Yes, so the way to think about it is keep in mind the way I would position 150 is we are making an investment this year to get it qualified. But essentially, we are not building into the targets for this fiscal year, 150 being part of production, right. So, it is really an R&D development, get it ready for production for the fiscal year, and you will see that impact in ’12.

In terms of our expectations of what success looks like, I would target that by the time we get 150 ramped up, now maybe not in a very initial ramp, but once we get some reasonable volume shifted, we would target yields as good as we have today of 100 mm if not better that that we saw in the last transition, and I would expect that once we get up the learning curve we will see something similar there. And that is really just a function of we’re moving into more traditional equipment tool sets, very well proven. I think those will have an advantage to us from a fab standpoint.

You know, the trick to that technology as everyone in the industry knows is really you have to develop the Epi technology to get there first. Frankly the fab part is an engineering problem; it is the Epi technology that will be the trick.

Amar Zaman – Piper Jaffray

Hi, thank you. And then just one quick question on your sales break down by region, what percentage of your sales were to the European region this quarter?

Chuck Swoboda

You know, we didn’t break it out by market. I don’t think -- my guess is that it probably hasn’t changed much. You know, so China is the biggest, then it is the US and Europe is probably low double digit. But I don’t have that specific number in front of me.

Amar Zaman – Piper Jaffray

And then if I may squeeze in a last one, you know, we recently heard some news about China potentially slowing its subsidies -- are changing its subsidies for outdoor lighting. Can you comment on that a little bit, what are you hearing there?

Chuck Swoboda

You know, I have actually read some of the same speculation. I don’t hear it directly from our team there as much as I read it, and some of the speculation that you are probably reading as well. At this point, I would tell you that I think the driver that we’re watching is as long as – remember that there is a lot of infrastructure going on in China, and the key for us is that LED lighting adoption continues to win an increasing share. So, we are still getting a very small percentage of the new projects. So I think it is much more about making sure the LED value proposition wins share.

And look, we’re going to have to deal with the overall market factors, but if we keep driving share growth sense that gives conventional technology, then I think we will be successful. And my sense is that we are still in a good position to do that. What I see is our technology; it continues to be low-cost in a country that truly understands they have got an energy cost issue they got to deal with.

I feel like, I’m sure there will be some fluctuation in that market, but we remain optimistic about China to our demand.

Amar Zaman – Piper Jaffray

Yes, just to give you some color, I’m actually in Shanghai right now and last night when I came in it seemed like the whole city was lit up with lights. So, I was actually wondering how many of those lights were actually LED.

Chuck Swoboda

I would imagine a very, very small percentage today. I mean, for all the success we are having I think overall LED lighting is still a very small percentage of the overall market. So that is why adoption is important to understanding the demand versus just the total demand.

Amar Zaman – Piper Jaffray

Thank you very much and congratulations.

Chuck Swoboda

Sure, thanks.

Operator

Your next question comes from Andrew Young [ph] at Carnegie. Your line is open.

Andrew Young – Carnegie

Thank you. So first, I’m sorry if I missed this, but did you have a comment on the utilization for the June quarter?

Chuck Swoboda

You know, Andrew we ran pretty much close to flat out. The output in approximately 100% is what I said earlier in one of my other answers to a question, and

My guess is this quarter, and that is really a fab number and I think this quarter, that will probably be closer to the 90% plus or minus range.

Andrew Young – Carnegie

And then second, can you explain in a little more detail how the cross license agreement with Philips will help accelerate the LED lighting market?

Chuck Swoboda

Yes, so I think if you look at the questions that were in the industry previously, you know there was Creo talking about some of our IP, and Philips talking about theirs, and I think there was some confusion in the market, and so I think what it says is one, we have to get a cross-license and it does two things. I think it supports the strength of what we think both companies IP portfolios are, but also tells the market that, in terms of from at least our two companies' perspective, we are committed to providing products that don’t have these issues, so that they can go on and be successful in the market. So I think it really just removes some of the doubt they may have had prior to that.

Andrew Young – Carnegie

I see. Okay. And then next question, can you talk about your sales by end market, and then specifically I like to know what general lighting is as a percentage of total sales and then maybe backlighting?

Chuck Swoboda

Yes, the backlighting is a very small percentage. I would tell you that I don’t have specific numbers, but I can get you kind of to there. So, lighting is well over half the LED business overall. The next biggest market is either going to be, it varies from quarter to quarter, but it is between the automotive/transportation market, and the video screen market. And then in fourth and fifth, and this is going to be a relatively small percentage of the total is going to be both mobile and/or the LCD backlighting markets.

So they are incrementally interesting markets for us, but they are not the drivers to the overall business. Within general lighting what we saw last quarter is that continue to see strength across the markets, but probably the ones that you saw the most growth in would have been the outdoor segment and the bulb segment.

Andrew Young – Carnegie

Okay, and then I see that the CR6 or The Home Depot version of the CR6 is already on The Home Depot website, but you mentioned that the gross margins there are kind of in line with your fixtures business, so can you comment on the gross margins of the fixtures business? Is it above or below the corporate average gross margin?

Chuck Swoboda

Yes, it has remained steady from the last couple of quarters. So components is a little above the corporate average, then followed by chips, and the lighting systems are still a little bit below the corporate average, but they are all kind of tracking together.

Andrew Young – Carnegie

So just to clarify, chips – is the chip business below the corporate average or in line with the corporate average?

Chuck Swoboda

I didn’t answer that question. I said it was between the two.

Andrew Young – Carnegie

Okay, and then the last question. It looks like World Peace is entering the 10% customer range for this quarter or for this fiscal year, so is World Peace selling just XLamps or lighting components or how would you characterize that?

Chuck Swoboda

They sell LED components, primarily XLamp, but they also have at least in some markets there are also selling our high brightness components.

Andrew Young – Carnegie

Okay, thanks a lot.

Chuck Swoboda

And really Aero's primarily selling LED components as well. Really those are both component customers.

Andrew Young – Carnegie

Got it. Okay, thanks.

Chuck Swoboda

Sure.

Operator

Your next question comes from Harsh Kumar at Morgan Keegan. Your line is open.

Harsh Kumar – Morgan Keegan

Hi guys, a couple of questions. Want to get more into your LED business guidance for next quarter. I want to understand the impact that maybe the weakness in Europe that you talked about, Chuck, versus what's going on in the backlighting. Which one is a bigger factor for you for the September quarter?

Chuck Swoboda

So, Europe is just not growing. Right, it is seasonally slower, but it is not like it is going down. Chips is actually declining, which is offsetting the double-digit growth in the lighting products. When I say lighting products I mean both our LED components, as well as the actual lighting systems business.

Harsh Kumar – Morgan Keegan

Okay, so backlighting is relatively, you said it's a small percentage. It doesn't look like that's a big factor for September?

Chuck Swoboda

Well, it is a small percentage of the total, but it is going down. So, I think it is affecting the overall number. So, we are having to offset that negative with the positive growth in the LED component side of the business. So, really you have double-digit on one side and you have a negative on the other, and that is how we are getting to our target.

Harsh Kumar – Morgan Keegan

I got you, okay, and your gross margin, you're running, you ran just flat out 100% and you're going to be at 90 plus you're adding a bunch of new capacity. What would be, Chuck if I was to think about gross margins, what would be the new normal for Cree for gross margins, just not even in the near term, but mid to longer term?

Chuck Swoboda

Yes, we still have our long-term model Harsh, but I think you know it is going to be a function of really how fast does the business grow, you know, what happens on the lighting side of it in terms of adoption, right. So, I mean, we know the components are ones traditionally above the corporate average there, and it is becoming a larger percentage. At the same time we’re running a little less utilization than in the past.

So you know, if I had to guess, obviously you have our targets for Q1. They are in the 48% to 49% range. And you know, I think we will – we probably won’t be too far outside this kind of range at least for the next quarter and after that. But it is a little too early to give you any specific targets there. I think we will see where that goes. If we can continue to drive LED lighting adoption and grow that side of the business, then I think that continues to gives us some leverage there, but again, no targets here for Q2, but hopefully that gives you a little bit of a flavor for what we’re thinking.

Harsh Kumar – Morgan Keegan

No, no that is helpful, and you guys have done a great job in the margins anyhow, and then last question is also sort of margin related. Chuck, on your power and RF, I'm trying to get a point of reference maybe relative to corporate margins where that business is and how should we think about that business, let's just say when it settles down a little bit, if you will. Is it above corporate or below corporate and how should we think about it?

Chuck Swoboda

It is actually very similar to the corporate average, and that is how I would think about it going forward, right. Obviously it is a new product. So occasionally you can have a little bit of variability quarter-to-quarter, but you know the expectation is that should be at these corporate levels here over the next year. The key really there is we have got to get some additional capacity online, and enable it to grow a little more than we have seen.

The other thing to keep in mind when you look at the target that business, its growth really can’t in the short term – it affects the overall total of percentage growth.

Harsh Kumar – Morgan Keegan

Okay guys. Thank you, very helpful, thanks.

Chuck Swoboda

Sure.

Operator

Your next question comes from Lauren Stoller of Lazard Capital Markets. Your line is open.

Lauren Stoller – Lazard Capital Markets

Hi, great, thanks for taking my question. Most of my questions have been answered, but maybe if you could touch again on the backlighting slowdown, what gives you the confidence that it's just a supply chain issue?

Chuck Swoboda

Well, basically what we are hearing from the customers, we just think about that as you know, we only participate within the chip business and it is this incremental kind of opportunistic piece of business. So, when demand is strong we are going to go ahead and utilize some of our capacity to go after that, and demand adjusts, and we’re going to let that happen.

It is not part of the long-term strategy; it is really a way to run the fab utilization a little bit higher than it would otherwise normally be. Based on what our customers are telling us, and frankly what we can sense from the other suppliers in the market, it looks to us like we basically got the supply chain trying to balance inventory and demand here a little bit right now. And you know, I don’t think that the macro trend that is driving this, which is going to be the continued conversion of LED backlit TVs, I think that his intact.

So as long as that happens it may bounce around from quarter to quarter, but I think as long as it is still – we are at a low level of adoption there, and it is going to go to a higher one. And I still think there is a lot of demand that will drive the market over the mid to longer term.

Lauren Stoller – Lazard Capital Markets

And you think this is going to last one to two quarters or…

Chuck Swoboda

Boy, it is funny. I’m not sure I have, I don’t know that I have a great guess there. Right now it feels pretty short term, but again it is a market that we are – it is really not what drives our business. So, we are reacting a little bit to just what the supply and demand thing is out in the marketplace there. But I sense is that LED TV adoption, converting to LED backlit TVs, that adoption curve will continue into next year, and so I think as that happens, I don’t think this will continue for real long, but at this point that is a guess. There is no great visibility about supply chain.

Lauren Stoller – Lazard Capital Markets

Okay, so it's not impact from a switchover to less LEDs per TV or anything like that?

Chuck Swoboda

That’s not what we’re seeing right now. No.

Lauren Stoller – Lazard Capital Markets

Okay, great. Excellent execution. Congratulations on the quarter.

Chuck Swoboda

Thanks.

Operator

Your next question comes from Jed Dorsheimer with Canaccord. Your line is open.

Jed Dorsheimer – Canaccord

Hi, thanks. Nice job on the quarter and thanks for taking my question.

Chuck Swoboda

Hi, thanks Jed.

Jed Dorsheimer – Canaccord

First question, Chuck, just digging into, I think John had mentioned that you're going to, that the budget is approved for basically a 2X capacity expansion of XLamp, and I think you also said that you're going to start the qualification process for the 150 mm. Is the 150 mm at all in that 2X capacity expansion?

Chuck Swoboda

No. So the way to think about that is the goal is actually to exit the year with more than 2X. It’s actually a little more than 2X XLamp year-over-year. The 150 is kind of – think about it as almost a parallel investment Jed, that really is R&D in ’11 and that will turn into production capacity available for FY12 assuming we stay on schedule. So it’s kind of a, now it’s an R&D development project. It will then turn into capacity that – it is part of actually will be the FY12 growth target.

Jed Dorsheimer – Canaccord

And do you think you would convert over your existing capacity by the end of 2012?

Chuck Swoboda

I don’t know it will go that fast. You know, that’s always one of those things. It’s going to be a function of demand in the market and how quickly we need to move. I think we’re set up to do that. So our 100 mm capacity can be converted to 150 mm. I think the idea right now is let’s get it processed, fully developed and qualified, ready for production, and then I think we’ll just manage that with what’s going on in the market at the time, but obviously that gives us additional capacity by converting the existing 100 mm toolset to continue to grow at least the chip capacity.

Jed Dorsheimer – Canaccord

Great, and then assuming flat yields on the conversion, you would see a 2.3 increase of capacity from the 100 to 150; correct?

Chuck Swoboda

Yes, whatever the area there is I haven’t done that number recently but yes, whatever R squared [ph] gives you, you got it.

Jed Dorsheimer – Canaccord

All right, and I assume that but I just want to ask, that the 150 is done on the silicon carbide process, correct?

Chuck Swoboda

Yes, what we are currently doing is we are developing it actually on both platforms, but the plan is to ramp it into production right now on Silicon-Carbide, although you know, we have our parallel Sapphire program, and I would expect the goal will be over time is to have capable – the goal will be to be able to run it on both.

Jed Dorsheimer – Canaccord

All right, and then any impact at all in terms of the MO sources? I assume you have the longer term contracts, but obviously we're seeing tightness on the metal organics right now. Any comments there?

Chuck Swoboda

Hasn't really, I've seen the same things, but in terms of at least our supply-chain we’ve been able to manage that, it hasn’t really affected us at this point and feel pretty good about how our setup at least going into the next year.

Jed Dorsheimer – Canaccord

Great. And congrats on The Home Depot. I'll jump back into the queue.

Chuck Swoboda

Okay. Thanks Jed.

Operator

Your next question comes from Bill Ong at Merriman & Co. Your line is open.

Bill Ong – Merriman & Co.

Yes, hi, good evening, gentlemen. Given that your revenues came in at the high end of guidance, and it sounds like if backlighting was strong you could perhaps beat your revenue by let's say a few million bucks, but since backlighting was a little soft is it safe to say that general lighting had some modest upside by let's say a few million dollars versus maybe a year ago we have a much more explosive growth in general lighting?

Chuck Swoboda

I don’t know if I will characterize it that way. I think that I don’t think there is, I think there is tremendous opportunity in the general lighting market. I think, you know, we may be overreacting to a 2 to 3 months trend here. I think if you look at what we target for adoption, I think, you know, when you are at a small percentage of the market, we can continue to drive significant growth. The exact timing of that is, as you know, pretty tricky because we are trying to take very large industry segments, and one by one show people LED lighting works, and start that process.

So, you know, a year ago there was no real talk about an LED bulb, and that’s an application that’s now turned on. A year ago it was pretty much all about just street lights, and so we kind of keep coming after application by application. It’s really going to be a function of when do we crossover those key cost points to start that conversation and then as that happens that tends to feed more application.

So, you know, I think our Q1 targets are our best estimate, but if you want to look out beyond that I really still think that LED lighting adoption for general illumination of various applications is the growth driver, and look when you are at a couple of percent of a market adoption rate for your technology, and you think it’s going up, then I think you know, the upside is significant, but timing of that is tough to understand and, you know, we’ve got to continue to execute to be successful there because, you know, accounts on new products, driving the cost down, and all the things we normally talk about.

Bill Ong – Merriman & Co.

Okay, thank you and then my last question is what's your planned depreciation schedule on your MOCVD tools today versus let us say five years ago and 10 years ago, and the reason I ask is whether or not the schedule has accelerated, which kind of reflects the faster tool obsolescence or accelerated technology adoption so how would that have an impact on gross margins?

Chuck Swoboda

You know, I don’t know that we breakout our specific schedule. I can tell you that we are probably already on the end of where we’re probably depreciating as fast as anyone else is, and you know, is it different than 10 years ago, absolutely the different than five years ago, yes, but I think right now we’re in a position where you know, we’ve been doing this for really a long time and even with the changes I think if we look at our investments, you know, I think we’ve got a pretty good understanding of how long these tools can last and I feel pretty good about where we’re at.

Bill Ong – Merriman & Co.

And any numbers you could share, let us say, maybe 8 years ago, 10 years ago, 8 years, and then maybe recently maybe 5 years obsolescence?

Chuck Swoboda

Yes, we’re not going to break out what the specific years are but I can tell you that, you know, over the last several years they, I mean, they then have a lower number for a while. We probably started thinking about this problem at 2 inch. We didn’t just start getting there in other words; we probably made these adjustments a while ago.

Bill Ong – Merriman & Co.

Okay, great. Thank you very much gentlemen.

Operator

Your next question comes from Alex Gauna at JMP Securities. Your line is open.

Alex Gauna – JMP Securities

Thanks very much for taking my question and nice quarter congratulations.

Chuck Swoboda

Thank you Alex.

Alex Gauna – JMP Securities

I was wondering, Chuck, if you could comment I know that it's a market of opportunity for you, the backlighting portion of your business, but what do you think the risk is for those companies out there that it's a major part? Can they try to dump product into the general lighting market or is that market a little bit more sensitive to quality? Can you comment on that?

Chuck Swoboda

Yes, I don’t see any significant short-term impact there. What we’re seeing in general lighting is so much of these applications is still about, can I get enough lumens per watt to even make the thing work, and I’ll give you the simplest application, right. So everyone is talking about an LED bulb, well, if you don’t use at least a high enough quality in terms of lumens per watt, it won’t work. There is only so much heat an LED bulb can dissipate. And you can’t just jam more low efficiency LEDs in there and make it work. It’ll just fail.

So you know, when I look at the market you know, that’s probably the simplest example. When you get into some of the other applications, you’re talking about standards being set around the technology, you’re talking about, you know, for example a design cycle that you know, it’s probably a good 18 months in some cases, three years from when you get a design out there to when it really starts to pick up traction in the marketplace, and that’s just looking at our own history. So, you know, I think we should always take competition seriously than what people might do in the marketplace, but in terms of what we’ve seen at least the behaviors in the market, I think it’s a fairly – general lighting is fairly slow to be able to move to new technologies, and I think at least at this point the technology barriers are still relatively significant even making these applications work. And obviously that can change over time, but I think that’s where we’re at, at least in the near-term.

Alex Gauna – JMP Securities

Okay, and getting to that a little deeper, my understanding from talking to some experts is that really you and Nichia are in a class by yourselves in terms of the lumen efficacy for general lighting, maybe Osram arguably competitively fast follower there. Is that accurate in your opinion or would you say that there are others in that field that can compete with you?

Chuck Swoboda

Yes, if you want to look at who’s kind of setting the standard in terms of efficacy, I would say that in the power LED business Cree has done – we’ve done a great job of that, and I think you can just look at our published results. We continue to kind of move that bar up. I think when it comes to small LEDs, Nichia is also very good in that area, and they probably continue to set the standard on kind of a small form factor LEDs and between us we battle pretty good on trying to you know, go at each other’s expertise.

I think when you look at the next year, I think really I would put, you know, both Osram and Philips compete in that I’ll call that fast follower category. So they make products that you know, can be used in these lighting applications but they’re kind of the, you know, fast follower it’s probably a good name as any. And then I would say there is a gap for the next level, and that’s really what we see on a day-to-day basis competing for new designs what we see and it’s going to vary by region as well. So different suppliers have different strengths in different regions.

Alex Gauna – JMP Securities

Okay, last one if I could. On the Power and RF front, you've gotten to $100 million run rate. That strikes me as getting towards one of those critical mass areas, you mentioned getting into switching. Can that portion of your business be almost what I call standard Semicon portion of your business, really mushroom from here and what are your engineers asking to try to do in that area?

Chuck Swoboda

You know, we just think about that is be careful that it’s one business right. You know, it is, it shares some technology platforms but they’re two very different markets. You have power which is really you know, server power supplies driving efficiency and you have solar inverters and really being driven by one set of application, and then you got while it’s a similar technology platform, quite a different market you know, RF driving those applications, and so they’re both you know, so you have to think about the fact that that critical mass idea well applies internally.

It also applies to how big you are in the market. So I think we’re getting there. I think we still have a little work to do to build that critical mass, and my guess is we’re likely to see it in power first just because if I look at the applications we’re winning in Silicon-Carbide Schottky Diodes, they really start to become some more mainstream volume applications and I think that’s the one. If we were going to see one start to get that traction it would be there first. I still like power RF, but I think that’s going to take us a little longer to move out a kind of the middle era and kind of a high end into the more commercial applications.

Alex Gauna – JMP Securities

Okay, thanks very much. Congratulations again.

Chuck Swoboda

Sure.

Operator

Your next question comes from the line of Carter Shoop from Deutsche Bank. Your line is now open.

Carter Shoop – Deutsche Bank

First question on the cash on the balance sheet, over $1 billion in net cash now. Can you highlight what some of your priorities are right now for deploying that cash?

Chuck Swoboda

You know, frankly the priority is mostly to continue to execute the plan right. Obviously, we continue to invest capital at a fairly significant rate, you know, we’ve also done a great job in the operating model. So we’re able to fund that and then I think if you want to look at more strategic things, I think we keep our eyes open, you know, what can we do to become more successful in driving LED lighting adoption, what can we do to push our leadership, but right now the near-term focus is to continue to execute the plan. There is, you know, driving LED lighting and growing the company support that is really where our near-term focus is.

Carter Shoop – Deutsche Bank

Okay, that's helpful and in regards to your distribution strategy, those component distributors, World Peace and Aero are getting increasingly large. Given that's such a large percentage of your sales are going through those channels would you be willing to break out what the ship in versus ship out is on a quarterly basis?

Chuck Swoboda

And we’re not planning on doing that right now, but I can tell you that one of the things we are managing very closely is, you know, one of the reasons I comment on their inventory levels is well is to try to make sure we’re balancing those two. So although, you know, we record revenue on a shipped in, we are very closely monitoring their sales as well as those inventory levels, and feel like we’re managing that within a pretty normal range right now.

Carter Shoop – Deutsche Bank

Okay, last question. On the inventory do you expect to be building in the September quarter, could you give us a break down in regards to what type of product that's going to be built? Is it mostly chips or also XLamp and fixtures?

Chuck Swoboda

Yes, so it’s going to be – there will be WIP, which is everything from chips up through partially assembled products all the way up through the product line. My guess is most of it will be either chip inventory to feed the XLamp line or we’ll actually be trying to get enough of the bins filled with the XLamp inventory to be able to meet customer demand. We’re actually you know, on a percentage basis that number continues to shrink, and it’s frankly made it pretty challenging to try to meet our delivery targets with these inventory levels.

Carter Shoop – Deutsche Bank

Great. That's helpful. Congratulations on a nice quarter.

Chuck Swoboda

Okay. Thanks a lot, Carter.

Operator

Our last question comes from the line of Jiwon Lee from Sidoti & Co. Your line is now open.

Jiwon Lee – Sidoti & Co.

Good afternoon. Just two quick questions, what was the rough sales to your top five customers in fiscal 2010?

Chuck Swoboda

You know, Jiwon we only have the two top 10 customers that are out there, and we gave you Aero and World Peace. We don’t break out the rest.

Jiwon Lee – Sidoti & Co.

Okay, fair enough and what was the fixture sales as a percentage of sales in the last quarter and with the new capacity and the distribution, what's your expectation for that business in fiscal 2011?

Chuck Swoboda

Yes, you know, we don’t break out specific revenue, but I can tell you the expectation is that we’re targeting from quarter-to-quarter to try to continue to drive double-digit growth. Now, starting on a small base but that would be kind of the rough expectation is to try to get double-digit growth there quarter to quarter.

Jiwon Lee – Sidoti & Co.

Okay, thank you.

Chuck Swoboda

Sure.

Operator

There are no further questions at this time. I like to turn the call back over to you the presenter.

Raiford Garrabrant

Thank you very much for your time today. We appreciate your interest and support and look forward to reporting our first quarter fiscal year 2011 results on October 19th. Thank you and goodnight.

Chuck Swoboda

Thank you.

Operator

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

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Source: Cree, Inc. F4Q10 (Qtr End 06/27/10) Earnings Call Transcript
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