Raiford Garrabrant - Director-Investor Relations Charles M. Swoboda - Chairman, President & Chief Executive Officer Michael E. McDevitt - Chief Financial Officer & Executive Vice President.

Brian K. Lee - Goldman Sachs & Co. Vishal Shah - Deutsche Bank Harsh V. Kumar - Stephens, Inc. Edwin Mok - Needham & Co. LLC Andrew Hughes - Bank of America Merrill Lynch Colin Rusch - Oppenheimer & Co., Inc. (Broker) Sven Eenmaa - Stifel, Nicolaus & Co., Inc..

Good day, ladies and gentlemen, and welcome to the Cree, Inc. Third Quarter Fiscal Year 2016 Earnings Call and Webcast. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Raiford Garrabrant, Director of Investor Relations. Please go ahead, sir..

Thank you, Abigail, and good afternoon. Welcome to Cree's third quarter fiscal 2016 conference call. Today, Chuck Swoboda, our Chairman and CEO; and Mike McDevitt, our CFO, will report on our results for the third quarter of fiscal year 2016.

Please note that we'll be presenting both GAAP and non-GAAP financial results in our remarks during today's call, which are reconciled in our press release and posted in the Investor Relations section of our website.

Today's presentations include forward-looking statements about our business outlook, and we may make other forward-looking statements during the call.

These 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 third quarter of fiscal year 2016 to a discussion of the information included in our press release.

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. Consistent with our previous conference calls, we're requesting that only sell-side analysts to ask questions during the Q&A session.

Also, since we plan to complete the call in the allotted time of one hour, we ask that analysts limit themselves to one question and one follow-up. If you have additional questions, please contact us after the call by email or phone at 919-287-7895. Now, I'd like to turn the call over to Chuck..

customer service disruptions related to our ERP conversion; new product delays; and weaker market conditions than forecast. Q3 non-GAAP gross margin was 30.6% due to lower Lighting margins resulting from lower lighting factory utilization and an inventory write-down on LED tubes.

The LED business continue to execute well with margins in line with our targets, while Power and RF margins were on the lower end of their target range due to an unfavorable product mix. Operating expenses were lower than targeted due primarily to lower variable sales costs, and our tax rate was also lower.

This resulted in Q3 non-GAAP net income of $16.9 million or $0.17 per diluted share. This is higher than the range we provided on April 5, primarily due to the catch-up impact of the reduction in our estimated tax rate for the fiscal year.

Company backlog for Q4 is slightly ahead at this point last quarter, led my incremental growth in commercial lighting orders. I believe we've addressed the root causes of our recent Lighting business challenges, but recognize it will take time to rebuild sales momentum.

We improved customer responsiveness in March, and new product momentum is off to a good start in fiscal Q4 with the release of several new commercial lighting products and two new LED products.

I'll now turn the call over to Mike McDevitt to review our third quarter financial results in more detail as well as our targets for the fourth quarter of fiscal 2016..

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 to the corresponding GAAP measures for all quarters mentioned on this call is posted on our website along with the historical summary of other key metrics.

For the third quarter of fiscal 2016, revenue was $367 million, which was in line with our preliminary results announced on April 5. GAAP earnings were breakeven for the third quarter of fiscal 2016, and non-GAAP earnings were $17 million or $0.17 per diluted share.

Non-GAAP earnings exclude $17 million of expense, net of tax, or $0.17 per diluted share from non-cash stock-based compensation, amortization of acquired intangibles, a gain on the sale of equipment related to our LED restructuring and net changes associated with our Lextar investment.

The non-GAAP earnings per share were higher than our preannouncement range due primarily to the catch-up impact of the reduction in our estimated tax rate for the year. Fiscal 2016 third quarter revenue and gross profit for our reportable segments were as follows.

Lighting Products revenue was $188 million, a decline of 26% sequentially and in line with our revised outlook. Gross profit was $49 million or 26%, which was a decrease from Q2 due to lower factory utilization and inventory write-down on LED tubes and a higher relative mix of consumer sales.

LED Products revenue was $150 million, a decrease of 2% sequentially and in line with our targets for the quarter. Gross profit was similar sequentially at $52 million or 34.7% for the quarter. Wolfspeed, Power and RF Products revenue was $29 million, a 6% sequential increase and in line with our targets for the quarter.

Gross profit was down 6% sequentially at $13 million or 46.4% due to an unfavorable mix with new products ramping up. In determining gross profit for our segments, we do not allocate certain employee benefit costs, stock-based compensation and acquisition-related costs.

These non-allocated costs totaled $5 million for the third quarter of fiscal 2016 and are included to reconcile to our $109 million GAAP gross profit. Q3 GAAP gross margin was 29.7% and non-GAAP gross margin was 30.6%, which excludes $3 million of stock-based compensation.

Operating expenses for Q3 were $114 million on a GAAP basis and $96 million on a non-GAAP basis. Both of which were below our targeted range for the quarter, primarily due to lower variable costs on our lower lighting sales.

Non-GAAP operating expenses exclude approximately $12 million of stock-based compensation expense and $7 million of amortization expense of acquired intangibles, which were partially offset by a gain on the sale of equipment related to our LED restructuring. Our non-GAAP operating income was $16 million, and in line with our preannouncement estimate.

Our GAAP and non-GAAP tax rates benefited from the catch-up impact of our revised fiscal 2016 pre-tax earnings forecast. As a result, our Q3 GAAP tax rate was 104% and our non-GAAP tax rate was 3%. Our revised fiscal 2016 non-GAAP tax rate is 16% and our GAAP tax rate is 45%.

We ended the quarter with $620 million in cash and investments, a $3 million increase sequentially.

During the third quarter, we generated $15 million of cash from operations, borrowed $20 million on our line of credit and received $6 million from common stock issuances and fixed asset sales, which were mostly offset by spending $18 million to repurchase an additional 600,000 Cree shares and $21 million of capital expenditures.

Through Q3, we have spent $150 million to repurchase 5.8 million Cree shares and had $350 million remaining on our share repurchase program. Our capital spending decreased in Q3 as planned. For fiscal 2016, we are targeting capital spending at $120 million plus or minus and approximately $70 million in free cash flow.

We ended the quarter with $225 million outstanding on our line of credit. Days sales outstanding were 44 days as compared to 38 days at the end of December, and at the lower end of our targeted range. Inventory days on hand were 104 days as compared to 84 days at the end of December.

This increase was lighting-related and puts us in good position to service customers in Q4 post-ERP system implementation. We target inventory days moving back in line with our 90-day plus or minus target range over the next several quarters.

At this time, we target Q4 revenue in a range of $370 million to $395 million, which takes into account Lighting being incrementally higher as commercial sales growth more than offsets lower targeted consumer sales. LEDs in the similar range, just slightly lower and incrementally higher Wolfspeed sales.

We target Q4 non-GAAP gross margins to be 31.5% plus or minus and GAAP gross margins to be 30.7% plus or minus. We target incremental gross margin improvement in Lighting and Wolfspeed. These Q4 targets are based on a number of factors that could vary including overall demand, product mix, factory execution and competitive environment.

While we believe the Lighting ERP implementation issues are mostly behind us, we believe near-term commercial orders will take time to fully recover as we're regaining our customers' confidence. Our GAAP gross margin targets include stock-based compensation expense of approximately $3 million, while our non-GAAP targets do not.

We're targeting Q4 non-GAAP operating expenses to be approximately $98 million, a $2 million sequential increase due primarily to variable sales costs associated with the target of higher commercial lighting sales.

We're targeting Q4 GAAP operating expenses to be approximately $117 million, which includes approximately $12 million of non-cash stock-based compensation expense and $7 million of amortization of acquired intangibles.

For Q4, we target sequential improvement in our non-GAAP and GAAP operating profits due to improved gross margins and operating leverage. Q4 non-GAAP operating profit is targeted to be $22 million plus or minus as compared to $16 million for Q3. Q4 GAAP operating profit is breakeven plus or minus as compared to a $5 million loss for Q3.

Q4 non-GAAP net interest income and other is targeted to be $700,000. We target Q4 GAAP tax rate to be 19% and our non-GAAP tax rate to be 16% based on a revised fiscal 2016 forecast.

As a reminder, our Q4 and fiscal 2016 tax rates will fluctuate based on our overall earnings, the tax jurisdictions in which our income is actually earned, tax credits and other tax benefits that may or may not become available to Cree in future periods. We target non-GAAP net income for Q4 to be between $16 million to $22 million.

Based on an estimated 101 million diluted shares outstanding, our non-GAAP EPS target is between $0.16 to $0.22 per diluted share. GAAP net income is targeted to be between a $3 million loss to $3 million of income, excluding any net changes associated with our Lextar investment. Our GAAP EPS target is between a $0.03 loss to $0.03 per diluted share.

The low end of our Q4 net income and EPS targets are below Q3 due to the benefit we recognized in Q3 related to the year-to-date tax rate catch-up. Our non-GAAP EPS targets exclude amortization of acquired intangibles, net changes associated with our Lextar investment and non-cash stock-based compensation in the amount of $0.19 per share.

Thank you, and I'll now turn the discussion back to Chuck..

Thanks, Mike. As we enter our fourth fiscal quarter, we remain focused on taking advantage of the growing market opportunities in Lighting and Power and RF, while continuing to adapt our business to the evolving LED competitive environment.

We've demonstrated, over the last seven years, as we built the fastest-growing lighting company in North America that our strategy of leading with innovation works. We pushed the technology to deliver products that redefine what is possible and deliver new capabilities.

Sometimes the development takes longer than expected, but this is one of the risks of being in the innovation business. As I said earlier this month, we believe we've turned the corner on lightning new product momentum.

In the last several weeks, we've released the expanded family of RSW streetlight products, the Essentia by Cree track and downlight product lines, and SmartCast Manager for our new PoE intelligent lighting products.

Over the next two months, we're scheduled to release performance upgrades and product line extensions for our XSP streetlights, CPY canopy lights and OSQ area lights. We also target releases of SmartCast LN for suspended fixtures, next-generation high-bay fixtures and a troffer performance upgrade in the quarter.

We recently released our next generation XLamp XP-G3 platform, which delivers 31% more lumens than our previous generation as well as improved lumen density, voltage characteristics and reliability. We've upgraded LED performance in Q3 with new versions of our XPL and XP-G2 products that incorporate SC5 technology.

We released a new family of XLamp CXA2 high-density LED arrays that double lumen output and deliver the most lumens in the industry for their lightning emitting surface size. We recently announced TrueWhitePlus Technology, which will be available in upcoming LED components as well as new high-end lighting products.

The first products are being shown to customers this week at LIGHTFAIR, and take our industry-leading TrueWhite color technology to the next level by optimizing the spectral content of the light. The technology sets a new standard for what is possible with LED light.

We remain focused on promoting future growth in our Wolfspeed, Power and RF business to enable Cree shareholders to better realize the full value of this business. Revenue improved in fiscal Q3 due to higher demand, and we target additional growth in fiscal Q4.

We target incrementally higher overall sales in Q4 as total company backlog is slightly ahead of this point last quarter. Factory execution in all three businesses continued to be critical to achieving our target.

Based on current backlogs, forecasts and trends in the business, we are targeting Q4 revenue in a range of $370 million to $395 million, which is comprised of Lighting sales incrementally higher as growth in commercial lighting is partially offset by lower consumer sales as we ramp down the current generation products in advance of our new bulb family launch in the fall, LED sales in a similar to slightly lower range as competitive market dynamics offset typical seasonal demand improvement, and Wolfspeed sales incrementally higher than Q3 driven by growth in both Power and RF product lines.

We target Q4 non-GAAP gross margins to improve to 31.5% plus or minus. This target is driven by incremental margin improvement in Lighting and Wolfspeed and LEDs in a similar range. We target Q4 non-GAAP operating expenses at $98 million, primarily due to higher variable lighting related sales costs.

We target operating margins to improve driven by higher revenue. As a result, we target non-GAAP earnings in a range of $0.16 to $0.22 per diluted share. The LED and Lighting markets continue to evolve.

Our LED business has performed well over the last several quarters, but we need to continue to innovate and expand the number of applications for our high power technology to help offset a very challenging competitive environment.

The commercial lighting business lost order momentum in Q3, but I believe we've addressed the delivery issues and new product momentum has started to improve. Our consumer lighting business is working on a new generation of premium LED bulbs that are targeted for release during the fall lighting season.

As lighting technology continues to advance, the art of the possible is expanding, and the overall business opportunity is growing. Innovation drives our ability to access this opportunity. It sets Cree apart in a crowded lighting market that is still dominated by traditional players.

They have history, experience and years of relationships with the channel on their side. We bring something new and different to the market, such as truly intelligent lighting with Cree SmartCast and SmartCast PoE products.

We offer unrivaled lighting quality, optical control and color temperature capability for outdoor with our RSW street lighting, and market-leading efficiency, optical control and cutting-edge form factors with our IG parking and LN4 suspended fixtures, enabled by our WaveMax Technology. We are early in the development of the LED lighting industry.

And in many cases, the technology is ahead of demand. But customers are starting to recognize that LED means more than just lower cost and energy savings. We're focused on bringing them better light, light that makes your environment better and is intelligent by design, light that enables you to see better, feel better and do more.

This is how we plan to win in the market and grow our business. We will now take analyst questions..

Thank you. Our first question comes from Brian Lee with Goldman Sachs. Your line is open..

Hey, guys. Thanks for taking the questions. Just first one quickly, can you quantify the impact on front-end (18:55) utilization from the lower sell through in commercial lighting in the quarter? Just trying to get a sense for the interplay between your component segment and what it feeds into your captive commercial lighting business.

And I guess, related to that, just curious if you did see some inventory build in chips here recently given the softness in Lighting. And then I had a follow-up..

Yeah. Sure, Brian. So, I think that there's a relatively minor impact on the chip business from the Lighting slowdown.

I'm sure there's very slightly incremental, but the reality is that since we restructured the business last summer, that business is pretty well balanced and really driven much more by our external customers than it is by the internal ones. So, I'd say it's minor at most.

Then I would say as far as inventory goes, there really wasn't any build in inventory in LED business. In fact, if anything, I think, overall and chips were actually down a little bit quarter-over-quarter. What you're really seeing is, raw materials and WIP is really the vast majority of that inventory. It's in Lighting.

And it's really as we were building a supply chain targeting a higher number, and that's really what drove that quarter-to-quarter..

Okay. Thank you. That's helpful. And a follow-up for you, Chuck, just you mentioned during the prepared remarks, one of the three drivers of the shortfall this quarter was the weaker-than-expected market condition.

Can you remind us which end markets are vertical, if this was concentrated in? And then how you're seeing those markets trend near-term, whether there's been just a temporary shift in the business environment or if there's been something more structural going on there? Thank you..

the ERP, the new products and the market conditions. And ERP was the majority of it. New products secondary and market conditions was really a third order problem. I'd say that a combination. One of them it's a forex issue. So, we saw some weakness in Mexico and Canada. And that's really more about exchange rate than it was overall demand.

Those were delayed projects. As far as the weakness, what we saw is, in some of our retrofit business, more oriented towards what I would call the industrial segment is where we saw some softness quarter-over-quarter.

So, it was really limited more to one part of the business than overall, and really didn't see – the project side of the business seemed to be pretty darn healthy. So, it seems to be retrofit and within retrofit, more the industrial piece. But again, think of it as a third order of the GAAP. Most of that pieces was really ERP and the new products..

Thank you. Our next question comes from Vishal Shah with Deutsche Bank. Your line is open..

Yeah, hi. Thanks for taking my question. Can you talk about your consumer lighting business? You mentioned that you were working on some advanced bulb technology. What kind of margins do you envision in that segment once you launch the product? And also, you've got $350 million of buyback authorization left.

Can you talk about your plans around share buyback, the balance sheet items? Thank you..

Sure. On the consumer, so, we are working on a next-generation bulb that should be launched in the fall. Don't want to give away too much before we get the product out there, but it's really designed around reinforcing our premium market position and really built around the idea of better light.

In terms of its financial model, I think we'd better off waiting to kind of share those as we get a little bit closer and give you some targets, but I would expect it to be at least as good, if not slightly better than where we're at today. As far as the buyback goes, we do have about $350 million left.

And we're going to continue to evaluate the opportunities in the market. And I would expect that depending on various market conditions, we would continue to target to be active in the market there..

Our next question comes from Harsh Kumar with Stephens. Your line is open..

Hey, Chuck. Question for you. Now that the ERP issue is resolved and you said you're seeing some positive signs from your customers on the commercial side. I'm curious what your expectation is with regards to getting back to the level that you were at.

How long do you think it'll take to get all of that business back and then start to be on that 20% CAGR number that you guys talk about for commercial lighting..

Yeah, Harsh. Look, I think that we saw the improvement start in March, and it's continued in terms of customer service levels as we get into April. So, I feel like the day-to-day blocking and tackling is back on track.

I think we've seen the order rate start to get better in March, and it looks reasonable here in April, but again it's going to take a couple quarters, I think, to get back to the levels we were. Now that being said, I think the new products over the next couple quarters are also going to help. So, I think it's really two things, right.

As we get the customer service levels back up that comes back over a couple quarters plus the new products should start to drive the growth in the business. I don't have a specific quarter for you, because honestly, in my mind, it's not when do we get back to a level we were at, but how do we drive it beyond that.

So, as we head into FY 2017, we're going to target fairly healthy growth. I think it's going to take three things. It's going to be the new products. We also have to do things like Essentia by Cree to expand that business overall.

I think if we do those two things, we'll be at a reasonable growth rate and then we're going to still look to see if there are some strategic opportunities that could be complementary. We're not in a hurry there, but I think that would be the other piece I would think about as we get into FY 2017..

Got it. And as my follow-up, I think, I want to hit upon something that was maybe asked a little bit earlier. You talked about some pressure on the LED side. It's just been, I think, four months, five months since the re-org was completed there.

Is it just commentary that you're providing relative to the market and you feel like you're well positioned or is it actually hurting you guys on the LED side?.

No. Harsh, as you saw, I think honestly, our LED numbers probably are a little better than people expected in Q3. So, we started the restructuring last year in end of June, early July; so it's been nine months. I'd say last quarter things came in as good, maybe even a little better than what the expectations would have been.

The commentary is really just to provide the dynamic that it remains a competitive marketplace. And so, we're going to keep focusing on innovation. That's what drives that business. But at the same time, I think, it's important that we're just acknowledging that market remains very competitive..

Thank you. Our next question comes from Edwin Mok with Needham. Your line is open is open..

Great. Thanks for taking my questions. First question on margin on your guidance of 41.5%. If your LED business is kind of flat to down, and I think you said margin is flattish, that kind of implied your Lighting margins bounce quite a bit.

Does that all come from just no inventory write-down this quarter or what is driving the Lighting margins rebound? And how much was the inventory?.

Yeah. So, look, on the margins side what we would expect is, is that, if LEDs is in a similar range and then as we start to get additional volume in Lighting, that's going to give us some incremental margin and we're going to also get some better factory utilization.

So, keep in mind that one of the headwinds in last quarter was when we had less overall revenue in Lighting, there is some incremental factory underutilization. And that when the revenue starts to come back on commercial, we're going to get at least most of that back in the quarter. So that's what's driving that probably more than anything else.

Not sure what your question on inventory or how you want me to address that, as I didn't get quite the full question there..

Yeah. Sorry about that. You guys mentioned there was some inventory write-down last quarter.

How much was that? Did that impact your 3Q gross margin?.

Yeah. Edwin, we didn't break it out specifically. I would tell you, the margin was more factory underutilization than anything else, but the write down was incremental on top of that. Obviously, if you don't have that, that would help us as well. But the bigger swing factor in the numbers is getting the utilization back up in the lighting factory..

Great. If I can squeeze one in..

Sure. Go for it..

Just on OpEx trend, when I go back, I noticed that your OpEx has been bouncing around this high $90 millions to low $100 million range.

Assuming business improved and your new products started to take off on Lighting, do you think you can maintain this range of OpEx, even if, let's say, your revenue is up quite a bit from here?.

Yeah. Edwin, what I'd actually tell you that I think if you look at over the last four quarters, OpEx has actually come down from the company. So, I think, we've actually done a pretty good job. I think it was up in the low $100 millions and now this quarter is below $100 million. So, I think we've actually made pretty good progress on the expense side.

As we go forward, what I would expect is, there'll be some variable increase at OpEx. So, as commercial lighting goes, there is variable costs on the OpEx side related to that. But in a bigger picture, if you just put OpEx aside, I think, as we think about FY 2017, we're thinking overall we're hoping to get some operating margin leverage.

So that net-net between the combination of what we can do on the gross margin side and managing operating expenses, the combination of those two combined with what we targeted, some revenue growth specifically in the commercial lighting side, we would target at least preliminarily, operating leverage for next year..

Thank you. Our next question comes from Krish Sankar with Bank of America-Merrill Lynch. Your line is open..

Hi. Thanks, guys. This is Andrew Hughes on for Krish Sankar. Someone touched earlier on the LED restructuring.

Just curious, is there more margin tailwind or upside left on that program or do you think most of that is baked in with the margins in that segment essentially starting to recover a little bit?.

Yeah. Look, I would actually say that it's relatively neutral at this point. So, I think early on in our Q1, we got some benefits, probably most of it, from the restructuring. We got some incremental benefits in our Q2. At the same time, Andrew, we were actually reducing inventory in the channel. So, we were somewhat offsetting that.

I think Q3 is a relatively reasonable estimate of how the business was. I don't think there's a big swing factor one way or another in that quarter. So, Q4, if demand hangs in there and the market conditions are roughly the same, I would expect it to be in a similar range plus or minus, no tailwind or headwind at this point.

But again, the market is dynamic, and so we'll just have to adapt to what's going on there..

Great. Thanks for that, Chuck.

And then just in terms of those market dynamics, can you just give us a little commentary on pricing trends you're seeing in both the high power and medium power categories in the LED product side?.

Yeah. So, look, obviously, we're a lot more focused on the high power, that's where the majority of our business is. I think the best thing I can say is that right now this quarter and last quarter were similar to the previous two. So, it hasn't gotten better, but it hasn't changed, gotten significantly worse either in the last few quarters.

So, I'd say that trend continues to be competitive. Price continues to come down sequentially, but plus or minus a similar range we've seen for the last few quarters. Mid-power, I'd say it's been also similar over the last several quarters.

I'm sure there's some fluctuation up and down, and I know that it ebbs and flows a little bit with demand in terms of what the back lighting market is doing. But I'd say, overall, they're both been trending in a similar range for the last few quarters.

And again, I'm sure there's quarter-to-quarter variation, but if you look at it over a three quarter or four quarter, I would say, they're both similar trend lines..

Thank you. Our next question comes from Colin Rusch with Oppenheimer. Your line is open..

Thanks so much.

Can you talk about your historical experience with cycle time on product update, both for the commercial lighting as well as with the new bulbs? How long does it typically take from introduction to really seeing a meaningful ramp on the revenue line?.

Yeah, Colin. So, what I'd say is, on the bulbs, you put a new bulb in the market and it's pretty much a pretty quick reaction, right? It's on the shelf and that's what consumers are generally buying.

So, I'd say that impact will be – if we launch in the fall, we'll start to see the effect of that probably in our Q2, but keep in mind, I think we're thinking about a premium bulb positioning there. So, the way I'd characterize that is, we want to be the best bulb out there in the marketplace.

We're not trying to make that as – that's not intended to be a significant revenue growth driver year-over-year. On the commercial lighting side, typically what we see is for a brand new platform that's breakthrough, it's going to be two, three quarters before you get significant uptake.

There's obviously some near-term projects that you can get early on, but it takes a little while to get those specked in. So, the more of a specification product, think of it as two, three quarter. The more I'd say contractor grade product or something that can be used in a variety of jobs, then you can probably pull that in a quarter.

So, example I would give you is that some of our newer stuff it's more of a Q1, Q2 type phenomenon. And Essentia by Cree, I would expect to even start seeing some incremental sales from that in this quarter and early next quarter, as I would characterize it..

Right. And then just in terms of incremental operating margin on those Lighting products.

Is there a target margin that you guys are looking for in those things, and how should we think about the incremental growth and how that drops down to the bottom line in the model?.

Yeah. I don't have a specific number for you. What I would say is, is that, as we grow the business there's probably variable, call it, sales and marketing costs to support the larger business. So that'll scale more likely with the revenue line. And I would imagine, we'd get leverage on the G&A and a little bit on the R&D side as well.

We'll want to continue to invest more in R&D, but not as fast as R&D. So, I'd say, think about leverage on those two sides and sales and marketing get a little bit, but it'll have more of a variable component..

Thank you. Our next question comes from Sven Eenmaa with Stifel. Your line is open..

Yes. Thanks for taking my questions. First question, I wanted to ask your visibility on the LED Products business.

How does it compare to the same quarter last year?.

Last year, Sven, I would say that I don't have a great answer for you right now. I would say that for the last couple quarters, it's pretty similar. So, I'd say, at this point of the quarter, LEDs is roughly about the same place plus or minus as we were sitting in Q2 and Q3..

And the second question I have is, in terms of your new product introductions, how do you think using high power chips packages you produce versus using third-party mid-power? Is there a place for mid-power in your new product introductions as well? Or you remain focused on conveying house production?.

Yeah, actually. So, maybe there's some misunderstanding. We've been going with the right product for the right application in our Lightning business here for a couple – probably almost two years now.

So, while a many of our high-end products are high-power driven because it gives us some unique advantages, there are other product lines where we have utilized both mid-power. We have products based on the array technology. And so, I would say, we're open minded.

We really believe that where the technology drives a system advantage, we're going to do it. And when it's better to provide system advantages through other things, other than the LEDs, we do that as well. And I'd say that's already part of our overall Lighting Products strategy..

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to management for closing remarks..

Thank you for your time today. We appreciate your interest and support, and look forward to reporting our fourth quarter results on August 16. Goodnight..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day..